Fundamentals of Strategy, 2nd edition

Citation

Augusto Felício, J. and Rodrigues, R. (2012), "Fundamentals of Strategy, 2nd edition", Management Decision, Vol. 50 No. 10, pp. 1917-1921. https://doi.org/10.1108/00251741211279684

Fundamentals of Strategy by Gerry Johnson, Richard Whittington and Kevan Scholes, currently in its 2nd edition, is a book aimed at students – principally those on short courses focused on strategy analysis – where the authors aim to provide a “clear understanding of the fundamental issues and techniques of strategy”. It draws on the authors' book Exploring Strategy (9th edition) and allows interested students to easily “go deeper into particular topics” and facilitates the work of the teachers who are already accustomed to Exploring Strategy permitting them to “teach courses using the different books in parallel” given the consistency between both publications.

Across a total of ten chapters, complemented with additional materials for teachers and students (such as the on‐line key concept audios and video cases), the authors guide the readers from the introduction to strategy to how to put strategy into action. At the end of each chapter, the readers are invited to do some additional reading, usually scientific papers or other books, and to reflect on the topics covered through a case example. A helpful glossary is also available at the end of the book.

The literature emphasizes the essence of strategy implementation (e.g. Freedman, 2003). Ronda‐Pupo and Guerras‐Martin (2012) point out that since the 1960s, strategy became “one of the most taught and studied concepts” but, at the same time, a proliferation of definitions both in the terms used and the underlying ideas, makes it “one of the least understood” concepts. The question “How do strategies form in organizations?” was addressed by Mintzberg and Waters (1985), who focused on their importance, highlighting how this is a difficult question to answer. More recently Zajac et al. (2000) refer to strategic fit as being central for models of strategy formulation. With the Blue Ocean Strategy (BOS), Kim and Mauborgne (2004) evaluate how successful companies are able to create change in business models that provide a basis for the creation of new value for the market, which is vital for competitive advantage. However, Parvinen et al. (2011) relate the concept of Blue Ocean Strategy as being similar to the generic strategy of Ansoff (1965), in the sense of engendering new value through the creation and recreation of new business models. A greater understanding of the strategy continues to raise questions. This book by Johnson et al. is an important document for understanding the strategy.

This book, based on the ninth edition of Exploring Strategy, follows the Exploring Strategy Model that comprises understanding the strategic position of an organisation (environment, capability, and purpose), assessing strategic choices for the future (business, corporate and diversification, international, innovation, and mergers, acquisitions and alliances) and managing strategy in action.

1 Topics to develop fundamentals of strategy

Johnson, Whittington and Scholes start the book by discussing in the first chapter the concept of strategy and define it as “the long‐term direction of an organisation”, but stress that “strategies do not always develop in a logical sequence of analysis, choice and action” and present the rational‐analytic view that is characterised by a linear sequence and the emergent strategy where strategies “tend to emerge … as a result of ad hoc, incremental or even accidental actions”. The authors go on to state that, inside an organisation, strategies can exist at a corporate level, a business level, and an operational level, and discuss the main themes of strategy statements that are the mission, vision and objectives. Another important topic presented is the Exploring Strategy Model with their elements “as overlapping circles, each closely interlinked with the others”.

The second chapter focuses on the environment, which is “what gives organisations their means of survival” and is decomposed by the authors in the layers: macro‐environment, industry or sector and competitors and markets. The emphasis is on the presentation of “frameworks for analysing changing and complex environments”, starting with the PESTEL framework, and the concepts of key drivers and scenarios as “interrelated tools for analysing the broad macro‐environment of an organisation”. In this regard, Lee et al. (2012) provide a list of seven new forces, including the short life span of competitive advantage, ever shortening product life cycle and the groundswell effect that illustrate the possible implications for organisations.

For the assessment of industries and sectors, Johnson et al. propose Porter's five forces framework (yet the authors note that some analysts advocate a sixth force related to “organisations supplying complementary products and services”) and in order to analyse its dynamics, the authors suggest the industry life cycle and the comparative industry structure analyses. They recognise that “an industry or sector analysis may be at too high a level to provide a detailed understanding of competition” which implies the identification of strategic groups, defined as “organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases”, market segments and the adoption of Blue Ocean thinking aiming at finding or creating “market spaces that are not currently being served”. In this sense, Parvinen et al. (2011) consider that “the enforcement‐orientation is the main concern in the potential creation of blue ocean market opportunities”, and Cassia and Colombelli (2010) emphasize the importance of growth factors. As a result of the adoption of the frameworks and concepts presented in this chapter, the authors conclude by underlining the importance of drawing “from the environmental analysis specific strategic opportunities and threats for the organisation”. As the authors state, “the goal is to reduce identified threats and take advantage of the best opportunities”.

The third chapter is concerned with strategic capabilities. Johnson et al. highlight the “resource‐based view (RBV) of strategy” (though they consider it could have been labelled as the capabilities view) to support the idea that the capabilities of organisations can become strategic and contribute to “long‐term survival or competitive advantage”. Pertusa‐Ortega et al. (2010) suggest an indirect influence through competitive strategy. These strategic capabilities (or core competences, as also pointed out) incorporate both resources, “assets that organisations have or can call upon”, and competences, that are “the ways those assets are used or deployed effectively”. Hormiga et al. (2011) refer the intangible assets as an important resource for success of newly‐created organizations, and Tolstoy (2010) mention that the knowledge combination is a critical requisite for seizing business opportunities in foreign markets. However, the “capabilities that were the basis of competitive success may, over time, be imitated by competitors” and this puts the focus on dynamic capabilities in order “to meet the needs of changing environments”. Drnevich and Kriauciunas (2011) also support this view but these authors highlight the fact that dynamic capabilities can enhance performance in dynamic environments, but this effect is not automatic. Liu and Hsu (2011) state that capabilities will exert a positive influence on corporate diversification. But there are also factors that lead to poor performance (Franco and Haase, 2010).

The authors maintain that capabilities can be assessed according to the criteria of value, rarity, inimitability and non‐substitutability (VRIN). To understand and diagnose strategic capabilities, they focus on the value chain and the value network, considered useful for understanding the strategic position of an organisation, on the analysis of the activity systems and on the SWOT analysis to gain an overall picture of a company's strategic position, aiming to “identify the extent to which strengths and weaknesses are relevant”.

The fourth chapter considers strategic purpose. The authors start by bringing to the readers' attention the concept of stakeholders, those “that depend on an organisation to fulfil their own goals and on whom, in turn, the organisation depends”, and highlight their influence on the strategic purpose that, in turn, is also influenced by the governance structure, social responsibility and organisational culture. The emphasis is then placed on the importance of the statements of mission, vision and value and the definition of objectives as “statements of specific outcomes that are to be achieved”. The issues of corporate governance and corporate social responsibility are also addressed, as is the importance of identifying stakeholder groups and proceeding to stakeholder mapping considering their expectations and power, which is regarded as useful for understanding political priorities. In the process of stakeholder mapping the authors note the importance of interest and power of each stakeholder. However, as Adams and Sagiv (2011) point out, other variables influence directors' decisions.

In terms of organisational culture, emphasis is placed on how it influences “the development and change of organisational strategy”, with attention to national cultures and to organisational culture and subcultures. It is assumed by the authors that “aligning strategic positioning and organisational culture is a critical feature of successful organisations”, thus requiring the organisation's culture be analysed using, as proposed, the cultural web that “shows the behavioural, physical and symbolic manifestations of a culture”. The role of managers and their personal characteristics are also supported by Ramírez et al. (2010).

The fifth chapter looks at “strategic choices at the level of strategic business units”. The authors focus on two topics, generic competitive strategies and interactive strategies. The generic competitive strategies are based on Michael Porter's work which, based on the dimensions of competitive advantage and competitive scope, distinguishes the cost‐leadership strategy, the differentiation strategy and the focus on strategies that, additionally, “come in two variants … cost or differentiation”. In this context, Aspara et al. (2011) indicate that “central business units feed strategic alternatives”. Additionally Johnson et al. introduce the Strategy Clock that differs from Porter's perspective because it is based on prices, not costs and, having a circular format, allows for more continuous choices. The Strategy Clock, based on price and on perceived product/service benefits, presents four zones, one comprising non‐competitive strategies and the others comprising differentiation strategies, hybrid strategies and low‐price strategies. The authors conclude that the Strategy Clock allows for “a more dynamic view on strategy than Porter's generic strategies”.

Appropriately, the authors point out that “business strategy choices interact with those of competitors” and, in this context, they specifically address “interacting price and quality strategies” and the cooperative strategy. In the context of cooperative strategies, the authors illustrate the benefits of adopting Michael Porter's five forces model.

The sixth chapter concerns “choices of products and markets for an organisation to enter or exit”. To assist in this process, the writers refer to the Ansoff product/market‐growth matrix that allows the generation of “four basic directions for corporate strategy”, namely market penetration, new products and services, market development and conglomerate diversification. The authors call attention to the fact that the diversification decision process must consider potentially value‐creating drivers, including economies of scope, stretching corporate management competences, exploiting superior internal processes and increasing market power. Besides diversification, the chapter also focuses on vertical integration processes in the form of backward integration and forward integration, and the alternatives of outsourcing “activities previously carried out internally” and subcontracting certain activities. According to the authors, the integration or subcontracting/outsourcing decisions depend on the balance between the relative strategic capabilities and the risk of opportunism.

However, despite decisions on diversification or integration, the authors note that “corporate parents can both add and destroy value”. The value‐adding activities include envisioning, coaching and facilitating, providing central services and resources and intervening, while the value‐destroying activities comprise adding management costs, adding bureaucratic complexity and obscuring financial performance. The roles of corporate parents can be of three main types:

1. 1.

   portfolio manager;

2. 2.

   synergy manager; or

3. 3.

   parental developer.

Finally, the chapter focuses on the well‐known BCG matrix “used by managers to consider financial investment and divestment” and its advantages and problems, highlighting the need for “a balance within the portfolio, so that there are some low‐growth businesses that are making sufficient surplus to fund the investment needs of higher‐growth businesses”.

The seventh chapter deals with international strategy. One possible alternative for market development considers internationalisation drivers and geographical advantage which lead to international strategy that, in turn, leads to the themes of market selection and entry mode. For the assessment of the internationalisation drivers, the authors refer to Yip's globalisation framework, considering the market drivers, cost drivers, government drivers and competitive drivers and thus determine international strategy potential.

Another important topic addressed by Johnson et al. deals with the global‐local dilemma that “relates to the extent to which products and services may be standardised across national boundaries or need to be adapted to meet the requirements of specific national markets”, to which companies can respond through the selection of the most adequate international strategies, considering the coordination of activities and configuration of activities, thereby leading to the following international strategies: simple export, multidomestic, complex export and global strategy.

When managers need to decide which countries to enter, besides the already known PESTEL framework and the industry five forces, the authors stress the importance of analysing “the intrinsic characteristics of the market and the nature of the competition” and the need to choose the most appropriate entry modes that “differ in the degree of resource commitment … and the extent to which an organisation is operationally involved in a particular location”. In the staged international expansion model, considering tradability and competitive advantages, international market entry modes are therefore, exports, franchise licensing, joint ventures and wholly owned subsidiaries. However this staged approach is now challenged by born‐global firms and emerging‐country multinationals. The dynamics of emerging countries is also pointed out and considered a mega trend by Lee et al. (2012), referring to the fact that “many outsourcing‐trained global firms in these countries have become global leaders in their respective industries”.

The eighth chapter is about innovation strategies. To the authors, “innovation involves the conversion of new knowledge into a new product, process or services and putting this new product, process or service into actual use”. Various dilemmas are identified and addressed, as innovations driven by technology push or market pull, product or process innovation, open or closed innovation and technological or business‐model innovation. Cáceres et al. (2011) point out the influence of size and sector of activity on innovation and present seven important sources of variability.

The diffusion of innovations is also presented by the authors in terms of the pace of diffusion and the diffusion S‐curve, highlighting evolution considering the timing of the tipping point to the tripping point. Finally, the authors focus on first‐mover advantages and disadvantages, the decision of being first or second and the incumbent's response. Concerning innovation, Lee et al. (2012) state that is currently “the imperative key factor for organizations to develop competitiveness and succeed in the market”. These authors additionally introduce the concept of co‐innovation that, in their view, “can help gain and sustain competitive advantage”. This co‐innovation is considered the 4^th stage and follows the third stage of open innovation presented by Johnson et al. This debate is also applicable to the services sector.

The ninth chapter deals with mergers, acquisitions and alliances. As the authors point out, companies can pursue their strategic options through organic development, mergers and acquisitions or strategic alliances. In the book, different types, motives and processes for mergers and acquisitions are presented, ending with an acquisition integration matrix that considers strategic interdependence and the need for organisational autonomy to summarise three main approaches to integration (absorption, preservation, and symbiosis) and a fourth residual approach (holding). The study of indebtedness, credit and venture capital can also contribute to better understand (Krasniqi, 2010; Smolarski and Kut, 2011; Ullah et al., 2010) mergers and acquisitions. The discussion on the strategic alliances focuses on the types of strategic alliance, the motives for alliances and the strategic alliance processes.

Finally, the last chapter deals with the element “managing strategy in action” of the Exploring Strategy Model. Johnson et al. emphasise organisational structure, organisational systems and leading strategic change. As the authors point out, it is important to be able to “identify the ‘levels’ and roles in an organisation and who is responsible for what” and “because structural reporting lines shape patterns of communication and knowledge exchange”. They go on to present the basic structural types: functional, multidivisional and matrix, highlighting the advantages and disadvantages of each one. Pertusa‐Ortega et al. (2010), propose that organisational structure is relevant in the implementation of strategy but “may also be an important source of competitive advantage”.

Johnson et al. point out that organisational systems (both formal and informal), support structures. They emphasise planning systems to “plan and control the allocation of resources and monitor their utilisation”, performance targeting systems and cultural systems, reinforcing the approach described in chapter 4 to organisational culture. Both the structure and the systems are part of the McKinsey 7‐S framework that reflects the issue of organisational configuration, referring to the “compatibility between the structures and systems of organisations”.

Finally the authors focus the topic of leading strategic change and the types of strategic change (including adaptation, reconstruction, revolution and evolution), and special attention is given to the strategic change programmes. These programmes provide the basis of reconstruction or turnaround strategy, revolutionary strategic change and evolutionary strategic change and, for each, the authors provide details on the implications. In terms of leadership, as the process of influencing and organisation and considering that “strategic leadership is therefore central to strategic change”, the authors refer to the roles and styles of leadership in the context of change.

In conclusion, the value of this book Fundamentals of Strategy is unquestionable. The authors have been successful in providing a sound learning instrument that is clearly structured and well supported by up to date references. The students will certainly appreciate these fundamentals. For teachers, especially those that are familiarised with the other book on strategy by the same authors, this book can be a useful resource and, with minimum effort, it will enable them to teach different courses without the problem of recommending excessive materials to students of shorter courses. The increasing number of short courses that cover strategy is an opportunity that Johnson et al. have been able to seize and will, for sure, maintain a relevant position in this market.