CHAPTER 5

Analyzing a Company’s Strategic Resource Base

Introduction

An assessment of strategic resources and capabilities—and of pressures for and against change—is critical when determining what strategies a company can successfully pursue. An organization’s strategic resources include its physical assets; relative financial position; market position, brands, and the capabilities of its people; and specific knowledge, competencies, processes, skills, and culture.

Consider the rapidly increasing reliance of U.S. corporations on analytics to improve data analysis. Data has become a critically important corporate knowledge resource. Data is critical in enabling executives to evaluate their internal processes, their competitors, and the markets in which they operate. Consequently, the demand and availability of data is growing exponentially, with a projected rate of data generation of 40 percent per year through 2020, totally 1,054 percent growth in the period of 2014 to 2020.¹ Firms at the foreground of using this data to analyze their performance and formulate their strategies are estimated to have 6 percent higher profits and 5 percent higher productivity than their competitors.² These advantages are widening as the leaders in data utilization see higher growth rates in revenue accompanied by a greater ability to control costs. McKinsey & Company advises that in the retail industry, a company that makes full use of the available data could increase their operating margins by 60 percent.³ They estimate that a better exploitation of data could add $300 billion a year in value to the U.S. health care industry.

Data acquisition and analysis requires the investment in a lot of bandwidth. While high-speed Internet connections currently allow the transfer of about 25 megabits of data per second, analysts forecast that companies will need connection speeds of 1 gigabit per second by 2020 keeping pace with usage trends.⁴ Data storage needs will increase at similar rates. Businesses are increasing their data storage capacity at a rate of 53 percent per year.

Analyzing a company’s internal strategic environment has two principal components: (1) cataloging and valuing current resources, including data, and core competencies to create a competitive advantage and (2) identifying internal pressures for change and forces of resistance.

In this chapter, we characterize a company’s strategic resource base in terms of physical, financial, human resource, and organizational assets, and describe techniques for analyzing a company’s strategic resource base. In the second section, we look at internal organizational change drivers and counterforces that have a major influence on the feasibility of exercising particular strategic options and introduce the company life-cycle model.

Strategic Resources

A company’s strategic resource base consists of its physical, financial, human resource, and organizational assets. Physical assets such as state-of-the-art manufacturing facilities or plant or service locations near important customers can materially affect a company’s competitiveness. Financial strength—excellent cash flow, a strong balance sheet, and a strong financial track record—is a measure of a company’s competitive position, market success, and ability to invest in its future. The quality of a company’s human resources—strong leadership at the top, experienced managers, and well-trained, motivated employees—may well be its most important strategic resource. Finally, strategic organizational resources are the specific competencies, processes, skills, and knowledge under the control of a corporation. They include qualities such as a firm’s manufacturing experience, brand equity, innovativeness, relative cost position, and ability to adapt and learn as circumstances change.

To evaluate the relative worth of a company’s strategic resources, four specific questions should be asked:

Physical Assets

A company’s physical assets, such as state-of-the-art manufacturing facilities and plant or service locations near important customers, can materially affect its competitiveness. For airline companies, the average age of their fleet of aircraft is an important concern. It affects customer perceptions, routing flexibility, and operating and maintenance costs. Infrastructure is a key issue for telecommunication companies. It determines their geographical reach and defines the types of customer service they can provide. In retailing and real estate, the old adage “location, location, location” still applies.

Physical assets do not necessarily need to be owned. Judicious use of outsourcing, leasing, franchising, and partnering can substantially enhance a company’s reach with a relatively modest commitment of resources.

Analyzing a Financial Resource Base

At the corporate level, an evaluation of a company’s financial performance and position involves a thorough analysis of the company’s current and pro forma income statement and cash flows at the divisional or business unit level, with additional consideration of the balance sheet at the corporate level.

Financial ratio analysis can provide a quick overview of a company’s or business unit’s current or past profitability, liquidity, leverage, and activity. Profitability ratios measure how well a company is allocating its resources. Liquidity ratios focus on cash-flow generation and a company’s ability to meet its financial obligations. Leverage ratios may suggest potential improvements in the financing of operations. Activity ratios measure productivity and efficiency. These ratios can be used to assess (1) the business’s position in the industry, (2) the degree to which certain strategic objectives are being achieved, (3) the business’s vulnerability to revenue and cost swings, and (4) the level of financial risk associated with the current or proposed strategy.

The DuPont formula for analyzing a company or business unit’s return on assets (ROA) directly links operating variables to financial performance. For example, ROA is shown to be computed by multiplying earnings, expressed as a percentage of sales, by asset turnover. Asset turnover, in turn, is the ratio of sales to total assets used. A careful analysis of such relationships allows pointed questions about a strategy’s effectiveness and the quality of its execution.

Accounting-based measures have generally been found to be inadequate indicators of a business unit’s economic value. Shareholder-value analysis, in contrast, focuses on cash-flow generation, which is the principal determinant of shareholder wealth. It is helpful in answering the following questions: (1) Does the current strategic plan create shareholder value, and, if so, how much? (2) How does the business unit’s performance compare with the performance of others in the corporation? (3) Would an alternative strategy increase shareholder value more than the current strategy?

The use of accounting-based financial measures to assess current performance, such as return on investment (ROI), has been supplanted by that of the broader shareholder-value-based measures of economic value added (EVA) and market value added (MVA). EVA is a value-based financial performance measure that focuses on economic value creation. Unlike traditional measures based on accounting profit, EVA recognizes that capital has two components: the cost of debt and the cost of equity. Most traditional measures, including ROA and return on equity (ROE), focus on the cost of debt but ignore the cost of equity. The premise of EVA is that executives cannot know whether an operation is really creating value until they assess the complete cost of capital.

In mathematical terms, EVA = profit – [(cost of capital) (total capital)], where profit is after-tax operating profit, cost of capital is the weighted cost of debt and equity, and total capital is book value plus interest-bearing debt. Consider the following example. When buying an asset, executives invest capital from their company and borrowed funds from a lender. Both the stockholders and the lender require a return on their capital. This return is the “cost of capital” and includes both the cost of equity (the company’s investment) and the cost of debt (the lender’s investment). The company does not generate any meaningful profits until returns generated by the investment exceed the weighted capital charge. Once this occurs, the assets are contributing a positive EVA. If, however, the returns continue to lag the weighted cost of capital, EVA is negative, and change may be needed.

Varity, Inc. used EVA as a basis for reinvigorating its corporate culture and reestablishing its financial health. The company focused employees’ attention on its negative $150 million EVA. It established clear objectives to turn EVA positive within a 5-year timeframe. These objectives included revising the firm’s capital structure by initiating a stock buyback program, considering strategic opportunities with high EVA prospects, and efficiently managing working capital. By establishing a 20 percent internal cost of capital, managers found attractive strategic opportunities, including the construction of a new manufacturing facility, establishing an Asian presence through a joint venture, and divesting its door-lock actuator business.⁵

Following are two additional benefits of EVA: (1) it can help align employee and owner interests through employee compensation plans and (2) it can be the basis for a single competitive performance measure called MVA. Under EVA-based incentive programs, employees are rewarded for contributing to profits through the efficient use of capital. As employees become conscious of the results of their capital-use decisions, they become more selective in the ways they spend shareholder investment. MVA is equal to market value less capital invested. Thus, EVA can be used as a metric for various internal functions, such as capital budgeting, employee performance evaluation, and operational assessment. In contrast, external shareholder value is measured through MVA, which is equal to the future discounted EVA streams. 

Although some analysts have reservations, EVA portrays the true results of a company’s strength by considering the cost of debt and equity.⁶ Tools such as ROE, ROA, and EPS (earnings per share) measure financial performance, but ignore the cost of equity component of the cost of capital. Therefore, it is possible to have positive earnings and positive returns but a negative EVA. By encouraging an operation to manage indebtedness, a firm that uses EVA maximizes capital efficiency and allocation. If, for example, a business can conserve its assets by improving collections of receivables and inventory turnover, EVA will rise.

Cost analysis deals with the identification of strategic cost drivers—those cost factors in the value chain that determine long-term competitiveness in the industry. Strategic cost drivers include variables such as product design, factor costs, scale, scope of operations, and capacity use. To assist in strategy development, cost analysis focuses on those costs and cost drivers that are of strategic importance because they can be influenced by strategic choice.

Cost benchmarking is useful in assessing a firm’s costs relative to those of competing firms, or for comparing a company’s performance against best-in-class competitors. The process involves five steps: (1) selecting areas or operations to benchmark, (2) identifying key performance measures and practices, (3) identifying best-in-class companies or key competitors, (4) collecting cost and performance data, and (5) analyzing and interpreting the results. This technique is extremely practical and versatile. It allows for direct comparisons of the efficiencies with which different tasks in the value chain are performed. It is dangerous, however, to rely heavily on benchmarking for guidance, because it focuses on similarities rather than differences between rival firms’ strategic designs and on proven, versus prospective, bases of competitive advantage.

A complete evaluation of a company’s financial resources should include a financial risk analysis. Most financial models are deterministic. That is, managers specify a single estimate for each key variable. Yet, many of these estimates are made with the recognition that there is a great deal of uncertainty about their true value. Together, such uncertainties can mask high levels of risk. It is important, therefore, that risk be explicitly considered. This involves determining the variables that have the greatest effect on revenues and costs as a basis for assessing different risk scenarios. Some of the variables that are commonly considered are market growth rate, market share, price trends, the cost of capital, and the useful life of the underlying technology.

Human Capital: A Company’s Most Valuable Strategic Resource 

Companies are run by and for people. Although some strategic resources can be duplicated, the people who comprise an organization or its immediate stakeholders are unique. Understanding their concerns, aspirations, and capabilities is, therefore, key to determining a company’s strategic position and options. 

Continuous employee development, through on-the-job training and other programs, is critical to the growth of human capital. FedEx develops its homegrown talent through a commitment to continuous learning. The company puts 3 percent of its total expenses into training—six times the proportion of the average company. All line and staff managers attend 11 weeks of mandatory training in their first year. More than 10,000 employees have been to the “Leadership Institute” and have attended weeklong courses on the company’s culture and operations.⁷ Many other companies are adopting similar strategies and reaping the benefits. Motorola executives report that their company receives $33 for every $1 invested in employee education.

Organizational Strategic Resources 

A firm’s organizational resources include its knowledge and intellectual capital base; reputation with customers, partners, suppliers, and the financial community; specific competencies, processes, and skill sets; and corporate culture.

Knowledge and intellectual capital are the major drivers of competitive advantage. A firm’s competitive advantage comes from the value it delivers to customers. Competitive advantage is created and sustained when a company continues to mobilize new knowledge faster and more efficiently than its competitors. Recognizing the importance of knowledge as a strategic asset, Skandia, NASDAQ, Chevron, and Dow Chemical have established director-level positions in charge of intellectual capital.

Additional evidence of the growing importance of knowledge and intellectual capital as strategic resources is provided by the financial markets. Although intellectual capital is difficult to measure and not formally represented on the balance sheet, a company’s market capitalization increasingly reflects the value of such resources and the effectiveness with which they are managed. Netscape, before being acquired, had a $4 billion market capitalization based on its stock price, even though the company’s sales were only a few million dollars per year. Investors based the high stock price on their assessment of the company’s intangibles—its knowledge base and quality of management. 

The number of patents issued in the United States each year has doubled in the last decade. Increasingly, patents are global. Through a new international patent system organized by the United Nations World Intellectual Property Organization, through the World Trade Organization, and through growing demand from inventors for patents that are protected throughout the world, patenting systems are converging. Landmark court decisions have also made new areas of technology patentable in the United States. A 1980 case opened biotechnology- and gene-related findings for patenting, a 1981 case allowed the patenting of software, and a 1998 case spawned more business method patents.

Strong patent protection can be of great strategic value.⁸ For example, to protect its intellectual property and preserve its competitive advantage in the manufacturing and testing processes involved in its build-to-order system, Dell secured 77 patents protecting different parts of the building and testing process. Such protection pays. IBM collected $30 million in a patent infringement suit from Microsoft.

Increasingly, patents are exploited strategically to generate additional revenue. Licensing patents has helped build the market for IBM technology and boosted its licensing revenues. An increasing number of firms practice “strategic patenting”—using patent applications to colonize entire new areas of technology even before tangible products are created. 

The largest part of a company’s intellectual capital base, however, is not patentable. It represents the total knowledge accumulated by individuals, groups, and units within an organization about customers, suppliers, products, and processes, and is made up of a mixture of past experiences, values, education, and insights. As an organization learns, it makes better decisions. Better decisions, in turn, improve performance and enhance learning.

Knowledge becomes an asset when it is managed and transferred. Explicit knowledge is formal and objective and can be codified and stored in books, archives, and databases. An intriguing story of how revealing proprietary knowledge resulted in a major strategic blunder is based on Xerox’s sale of insider information to Apple.⁹ In the early 1970s, Xerox developed world-changing computer technology, including the mouse and the graphical user interface. One of the devices was called the Xerox Alto, a desktop personal computer that Xerox never bothered to market. A decade later, several Apple employees, including Steve Jobs, visited the Xerox PARC research and development facility for 3 days in exchange for $1 million in Apple’s still-privately held stock. That educational field trip was well worth the price of admission, given that it helped Jobs build a company worth $110 billion in 2008, using Xerox technology in its Macintosh computers.

Implicit or tacit knowledge is informal and subjective. It is gained through experience and transferred through personal interaction and collaboration.

A study about how Xerox repair technicians refined their knowledge illustrates the difference.¹⁰ The company’s assumption had been that the technicians serviced companies’ copying machines by following the documented diagnostic road maps that Xerox provided. Research, however, revealed that technicians often went to breakfast together and, while eating, talked about their work. They exchanged stories, posed problems, offered solutions, constructed answers, and discussed the machines, thereby keeping one another up-to-date about what they had learned. Thus, the approaches that the technicians used to repair the Xerox machines were actually based as much on their informal exchanges as on their formal training. What was thought to be a process based on explicit knowledge was, in fact, based on tacit knowledge, experience, and collaboration.¹¹

The Importance of Brands 

A brand is a name, sign, or logo that is identified with the characteristics of a particular good or service. A brand can add value to goods and services and create goodwill through positive associations. Brands are visual shorthand for shoppers that can provide the company with a competitive advantage, simplify and accelerate the customer’s buying decision, and reassure the consumer after the purchase.¹² Brand names are a primary cue to consistency and quality for a consumer. Once a brand becomes recognized and trusted by consumers, it becomes a powerful asset that can help build revenues and allow firms to pursue growth opportunities.

A firm’s reputation with customers, partners, suppliers, and regulatory agencies can be a powerful strategic asset. Physical distance between customers, distributors, and manufacturers created the need for brands. They provided a guarantee of reliability and quality. In a global and Internet-based economy, they build trust and reinforce value. Consumers might be reluctant to use their credit cards to purchase products over the Internet if it were not for the trust they accord to companies such as Amazon, Dell, and eBay. Because consumer trust is the basis of all brand values, companies that own the brands have an immense incentive to work to retain that trust.

Thus, brands are strategic assets that assist companies in building and retaining customer loyalty. A strong brand can help maintain profit margins and erect barriers to entry. Because a brand is so valuable to a company, it must constantly be nourished, sustained, and protected. Doing so is becoming harder and more expensive. Consumers are busier, more distracted, and have more media options than ever before. Coca-Cola, Gillette, and Nike struggle to increase volumes, raise prices, and boost margins. In addition, failure in support of a brand can be catastrophic. A mistargeted advertising campaign, a drop-off in quality, or a corporate scandal can quickly reduce the value of a brand and the reputation of the company that owns it.

The Nestlé Corporation relies on its company name and logo to generate sales for many of their new product offerings. Nestlé produces a wide variety of products and many of their new offerings are branded with the recognized Nestlé name. However, using the company name may not always be the most effective branding tactic. Field research provided evidence that products carrying the Nestlé brand name generate higher sales volumes than the company’s non-Nestle branded products. Many of Nestlé’s products with substantially lower comparative sales were less recognizable as Nestlé products.¹³ This survey suggested that in Nestlé’s case, utilizing a brand name and/or logo to boost sales would be a feasible strategy. The downside of this approach, however, is that a company name can also deteriorate the value of this same wide variety of products if their brand image is damaged.

Using a single company brand can also enable a firm to combine offerings under the same umbrella and project the image of a global firm, which adds a status and prestige to the brand.¹⁴ This survey of consumers worldwide measured the esteem in which consumers hold a particular brand. The results showed that global brands received a higher mean average esteem score than domestic only brands. The study further suggests that global branding creates familiarity and differentiation.

An opposing philosophy is held by global firms with multiple products that choose to market their products under a variety of brand names. To gain market share, these firms apply a tactic of multibranding, which assumes that greater market share can be obtained from multiple offerings that appear to be in competition with one another. This tactic can be effective. Research on consumer behavior shows that few consumers are completely loyal to a specific brand name within a product category. Rather, they choose to select from a variety of select trusted brands.¹⁵

Brand extension is another tactic for a firm that wants to extend its reach and stimulate new sources of revenue. MK Restaurants, a Southeast Asian company, uses brand extension to provide a separate product offering that is aimed at a different market segment than its existing MK Classic restaurants. Its MK Gold restaurants are targeted at a wealthier demographic that desires an upscale dining setting.¹⁶

The corporation utilized the same brand extension strategy to reach a younger demographic when they opened MK Trendy. This new line of restaurants was decorated differently, and offered unique aspects that were geared toward a younger demographic, such as a station for downloading free music. Through the Trendy and Gold brand extensions, MK was able to tap into different demographics and broaden their opportunities for revenue growth. 

A branding strategy that is gaining popularity is private branding. When a retailer manufactures its own goods rather than relying on outside vendors, it can sell them under a store brand, usually for an increased profit. For example, Wal-Mart sold McCormick brand spices for many years before switching out McCormick’s spices for their own lower priced private label spices.¹⁷ The move to private brands is not isolated to this one case. Private-brand labeled sales made up 17 percent of a basket of U.S. groceries in 2009, up from 13.4 percent in 1994.

Core Competencies 

Core competencies represent world-class capabilities that enable a company to build a competitive advantage. 3M has developed a core competency in coatings. Canon has core competencies in optics, imaging, and microprocessor controls. Procter & Gamble’s (P&G) marketing prowess allows it to adapt more quickly than its rivals to changing opportunities. The development of core competencies has become a key element in building a long-term strategic advantage. An evaluation of strategic resources and capabilities, therefore, must include assessments of the core competencies a company has or is developing, how they are nurtured, and how they can be leveraged.

Core competencies evolve as a firm develops its business processes and incorporates its intellectual assets. Core competencies are not just things a company does particularly well; rather, they are sets of skills or systems that create a uniquely high value for customers at best-in-class levels. To qualify, such skills or systems should contribute to perceived customer benefits, be difficult for competitors to imitate, and allow for leverage across markets. Honda’s use of small-engine technology in a variety of products—including motorcycles, jet skis, and lawn mowers—is a good example. 

Core competencies should be focused on creating value and be adapted as customer requirements change. Targeting a carefully selected set of core competencies also benefits innovation. Charles Schwab, for example, successfully leveraged its core competency in brokerage services by expanding its client communication methods to include the Internet, the telephone, branch offices, and financial advisors. 

There are three tests for identifying core competencies according to researchers Hamel and Prahalad. First, core competencies should provide access to a broad array of markets. Second, they should help differentiate core products and services. Third, they should be hard to imitate because they represent multiple skills, technologies, and organizational elements.¹⁸

Experience shows that only a few companies have the resources to develop more than a handful of core competencies. Picking the right ones, therefore, is the key. “Which resources or capabilities should we keep in-house and develop into core competencies and which ones should we outsource?” is a main question to ask. Pharmaceutical companies, for example, increasingly outsource clinical testing in an effort to focus their resource base on drug development. Generally, the development of core competencies should focus on long-term platforms capable of adapting to new market circumstances; on unique sources of leverage in the value chain where the firm thinks it can dominate; on elements that are important to customers in the long run; and on key skills and knowledge, not on products. 

Global Supply-Chain Management 

In the global economy, a firm’s sourcing approach must be an integral part of its overall corporate strategy. Global competition forces a company to abandon the simplistic approach of developing and producing a product in one country and then taking a country-by-country approach to marketing the product over time. If it took such an approach, global competitors would launch a competing product and with their global reach would be quicker to reach the markets. 

Global sourcing captures the benefits of a worldwide integration of engineering, operations, procurement, and logistics into the upstream portion of a firm’s supply chain. It involves decisions that determine locations, facilities, capacities, technologies, transportation modes, production planning, the company’s response to trade regulations, local government requirements, transfer pricing, taxes, and financial issues. The benefits include improved inventory control, delivery service, quality, and development cycles. 

The Importance of Global Supply-Chain Management 

The process of supply-chain management involves a company’s coordination of the operations of the suppliers that contribute to the creation and delivery of its product or service. These suppliers can be the providers, distributors, transporters, warehouses, and retailers of a manufactured good, product, or service. The globalization of supply chains, defined as the ratio of a company’s value creation outside the home county, is accelerating. 

The development and management of an integrated global supply chain is a formidable challenge. An Accenture survey in 2009 found that 95 percent of senior executives doubt that their companies have a global operating model that is fully capable of supporting their international strategy.¹⁹ The most common causes of supply-chain failures are stock-outs, excessive inventories, new product failures, increased product markdowns, and wasted time in engineering and R&D.²⁰ Reasons for supply-chain dysfunction include poor communication, latent functional silos, short-term perspectives, lack of resources, and ill-defined organizational boundaries. Compounding factors, such as fluctuating materials and logistic costs, increased supply-chain security and quality-control requirements, and dramatic changes in demand patterns add to the complexity of managing a global supply chain.

The market leaders in many industries are companies that have lean and flexible supply chains, end-to end visibility across those supply chains, fair-but-flexible contracts with service providers, and an understanding of how best to monitor and manage supply-chain risks. 

Challenges of a Complex Global Supply-Chain Management 

The traditional role of a supply chain was essentially purchasing and inbound logistics to serve manufacturing, shipping, and outbound logistics to fill orders. However, in the new global competitive landscape, supply-chain professionals view the ability to effectively plan for demand, sourcing, production, and delivery requirements as core components of a core competence in supply-chain management. The role of supply-chain management in strategy formulation is evidenced by the results of a survey of leading supply-chain professionals²¹:

To address competitive pressures, market instability, and increased complexity of globalization, companies develop agile supply-chain practices to respond, in real time, to the unique needs of customers and markets. These practices address the top challenges facing supply-chain professionals: cost containment, visibility, risk management, and globalization.²²

The focus on controlling costs results from rising logistics, labor, and commodity costs. For instance, between 2006 and 2010, transportation costs increased by more than 50 percent. In turn, inventory-holding costs increased by more than 60 percent as companies tried to take advantage of economies of scale by shipping large quantities. During the same years, labor costs in China increased 20 percent year by year on average, causing companies that made production–sourcing decisions 5 years ago based on labor costs to revisit their decisions.²³

Visibility is another significant challenge to competency in supply-chain management. Although connectivity is easier than ever and more information is available, in many organizations proportionally less information is being effectively captured, managed, analyzed, and made available to people who need it. The most effective initiatives focus on leveraging technology to develop and enhance the extended supply chain. To achieve this goal, companies are deploying advanced modeling tools that consider all costs and provide optimized strategies across a comprehensive supply-chain network of distribution centers, plants, contract manufacturing partners, sourcing options, logistical lanes, and consumer demand. 

The use of the reverse logistics process has become an important way for companies to improve visibility and lower costs across the supply chain. Reverse logistics is the process that involves the return/exchange, repair, refurbishment, remarketing, and disposition of products. The process of moving product back through the supply chain to accommodate overstocks, returns, defects, and recalls can cost up to four to five times more than forward logistics.²⁴ Companies can also leverage the intelligence they gain through reverse logistics to detect or prevent product quality and design problems and to better understand their customers’ buying patterns.

The third challenge facing executives is risk management and risk mitigation. As supply chains have grown more global and interconnected, they have increased their complexities and exposure to shocks and disruptions. Dealing effectively with these challenges requires a robust risk monitoring and mitigation process. 

The criticality and vulnerability of a core competency in a global supply chain was revealed by the impact of the 2007 to 2009 global recession. The negative impacts included decreased sales volumes, increased supply volatility, elevated risk of supplier defaults, and major strains on cash flow involving difficulty in both inventory management and collections. To mitigate the impact of the resulting instability, supply-chain managers moved to reduce the complexity of global supply chains by simplifying their sales and operations planning, shrinking their global physical footprints, and reducing their product complexity.²⁵ Additionally, their increased utilization of risk analysis tools helped to refine their assessment of supplier financial viability, through inclusion of bank ratings, liquidity analysis, and business volume. The result was reduced exposure to losses caused by the bankruptcy of key customers and suppliers.

Strategic Supply-Chain Models 

The most commonly used models for organizing and standardizing supply-chain processes are the Supply-Chain Operational Reference (SCOR) model and the Global Supply-Chain Forum (GSCF) model. 

The SCOR model prescribes a set of process templates that managers can decompose into a more detailed set of tasks. At the first level of detail, managers classify processes within the supply-chain domain as source, make, deliver, return, plan, or enable processes. The second level gives a list of configurable process templates (e.g., “make-to-order”) for modeling a specific supply-chain instance. Level three processes specify task inputs and outputs (process interdependencies), business metrics, and best practices for task implementation. 

The GSCF model focuses on collaboration techniques and illustrates the relationships among member firms so they can integrate activities. The relationships outlined include customer-relationship management, customer-service management, demand management, order fulfillment, manufacturing flow management, supplier-relationship management, product development, commercialization, and returns management. 

The focus of the SCOR model is to propose efficient management of product flows, whereas the focus of the GSCF model is to provide a structure for stable relationships across the supply chain. Although the underlying process structures are similar, the SCOR model includes an integrated metrics framework while the GSCF model does not. The advantages of the metrics include providing a benchmarking tool that provides a process map and best practices as well as enabling the decomposition of strategic objectives in order to lay a foundation for causal analysis. The main disadvantage is that the complexity required in collecting data might cause an error that would lead to significant differences in the analytical results. 

Supply-Chain Technology Hosting 

Outsourced-technology hosting is gaining acceptance globally based on On-demand and Software as a Service (SaaS) or on-demand models. Also called cloud computing, these platforms use supply-chain analytics and Business Intelligence (BI) to help managers make better decisions faster. Specifically, they are able to improve externally oriented processes such as transportation management, supply-chain visibility, collaborative forecasting, inventory optimization, and demand–supply synchronization. 

BI refers to computer-based software applications that analyze raw business data that will help companies make decisions. The analytics applications focus on uncovering hidden relationships, identifying the root cause of a problem, and understanding relationships in the data. The result of the analysis leads to knowledge about why a particular business condition occurs. 

BI-as-a-service offerings typically import business data in a common format, put a structure around them, apply the appropriate data models, and generate a web-based user interface that allows for the creation and distribution of standardized reports and dashboards across the supply chain. The result enables end-to-end supply-chain visibility and improves the ability to take action with close to real-time access to information. 

Strategic Alliances to Build a Core Competence 

With development of global industries and the demands of global sourcing, strategic alliances have become an essential element of many corporate global strategies. Strategic alliances are partnerships of two or more companies that work together to achieve mutually beneficial strategic objectives. They are generally intended to establish and maintain a long-term contractual relationship between the firms and allow them to compete more effectively with external competitors. Alliances are established to allow the alliance partners to share risk and resources, gain knowledge, and obtain access to markets.  

There are four principal motivations for companies to form strategic alliances. The first is to combine resources to develop new business or reduce investment. To engage in the global market, a firm needs strategic alliances to help defray the high local fixed costs. In practice, this may mean that rather than investing in an overseas sales force, a firm may utilize an alliance partner’s sales force and in exchange use its own sales force to market their partner’s products in countries where it has an existing sales force. The second motivation is to eliminate or minimize risks by sharing costs with a partner who possesses a valuable competitive advantage. The third reason is to learn from other members of the alliance, and the fourth motivation is to change the competitive landscape through the alliance of important competitors. 

Forces for Change 

Internal Forces for Change 

In Chapter 3, we discussed change forces that emanate from a company’s external strategic environment. A second set of drivers for strategic change comes from within the organization or from its immediate stakeholders. Disappointing financial performance, new owners or executives, limitations on growth with current strategies, scarcity of critical resources, and internal cultural changes are examples of drivers that give rise to pressures for change. 

Because internal resistance can reduce a company’s capacity to adapt and chart a new course, it deserves a strategist’s careful attention. Organizational resistance to change can take four basic forms: (1) structural, organizational rigidities; (2) closed mind-sets reflecting support for obsolete business beliefs and strategies; (3) entrenched cultures reflecting values, behaviors, and skills that are not conducive to change; and (4) counterproductive change momentum that is not in tune with current strategic requirements.²⁶

The four forms of resistance represent very different strategic challenges. Internal structures and systems, including technology, can be changed relatively quickly in most companies. Converting closed minds to the need for change, or changing a corporate culture, is considerably harder. Counterproductive change is especially difficult to remedy because it typically involves altering all three forms of resistance—structures and systems have to be rethought, mind-sets must change, and new behaviors and skills have to be learned. 

Company Life-Cycle Forces for Change 

The forms and strengths of organizational resistance that develop highly depend on a company’s history, performance, and culture. Nevertheless, some patterns can be anticipated. Companies go through life cycles. A cycle begins when a founder or founding team organizes a start-up. At this time, a vision or purpose is established, the initial direction for the company is set, and the necessary resources are marshaled to transform this vision into reality. In these early stages, the identities of the founders and that of their company are difficult to separate. 

As companies grow, formal systems are needed to handle a widening variety of functions. The transition from informality to a more formal organizational structure can stimulate or hinder strategic change. This passage to organizational maturity, often described as the “entrepreneurial–managerial” transition, poses a dilemma familiar to many companies: How to maintain an entrepreneurial spirit while moving toward an organizational structure increasingly focused on control. 

Growth makes organizational learning a requirement for continued success. The evolution of management processes, such as delegation of authority, coordination of effort, and collaboration among organizational units, can have an increasing influence on a company’s effectiveness in responding to environmental and internal challenges. In younger companies, the internal operating environment is frequently characterized by greater ambiguity than in established organizations. Often, the ambiguity that encouraged entrepreneurship and innovation also results in a lack of control in a rapidly growing company, which can cause the firm to lose its strategic focus. 

Evolving and established companies share the pervasive challenge of finding strategies to manage growth. For some evolving companies, uncontrolled growth is a major concern. As they try to cope with rapid growth, they find that success masks a host of development problems. Dilemmas of leadership can develop, loss of focus becomes an issue, communication becomes harder, skill development falls behind, and stress becomes evident. In established companies, the pressure to grow faster can skew strategic thinking. Ill-considered acquisitions or market expansions, forays into unproven technologies, deviations from developing core skills, and frequent exhortations for more entrepreneurial thinking are indicatives of the challenges experienced in more mature companies. 

Strategic Forces for Change 

The increased importance of a firm’s capacity to effectively deal with change has made a strategic perspective on this issue essential. As we have seen, a host of internal factors can reduce a company’s capacity for change. Sometimes change is inhibited by structural rigidities, a lack of adequate resources, or an adherence to dysfunctional processes. Most often, however, resistance to change can be traced to cultural factors. 

One of the early arguments in favor of analyzing the interactive nature of organizational factors such as structure, systems, and style with strategy is the so-called 7-S model, developed at McKinsey & Company.²⁷ Its central idea is that the organizational effectiveness stems from the interaction of a number of factors, of which strategy is just one.

The model includes seven different variables: strategy, structure, systems, shared values, skills, staff, and style. Intentionally, its design is not hierarchical; it depicts a situation in which it is not clear which factor is the driving force for change or the biggest obstacle to change. The different variables are interconnected—change in one will force change in another, or, put differently, progress in one area must be accompanied by progress in another to effect meaningful change. Consequently, the model holds that solutions to organizational problems that invoke just one or a few of these variables are doomed to fail. Therefore, an emphasis on “structural” solutions (“Let’s reorganize”) without attention to strategy, systems, and all the other variables can be counterproductive. Style, skills, and superordinate goals—the main values around which a business is built—are observable and even measurable, and can be at least as important as strategy and structure in bringing about a fundamental change in an organization. The key to orchestrating change, therefore, is to assess the potential impact of each factor, align the different variables in the model in the desired direction, and then act decisively on all dimensions. 

Stakeholder Analysis 

In assessing a company’s strategic position, it is important to identify the key stakeholders inside and outside the organization, the roles they play in fulfilling the organization’s mission, and the values they bring to the process. External stakeholders—key customers, suppliers, alliance partners, and regulatory agencies—have a major influence on a firm’s strategic options. A firm’s internal stakeholders—its owners, board of directors, CEO, executives, managers, and employees—are the shapers and implementers of strategy. 

In determining the company’s objectives and strategies, executives must recognize the legitimate rights of the firm’s stakeholders. Each of these interested parties has justifiable reasons for expecting—and often for demanding—that the company satisfies its claim. In general, stockholders claim competitive returns on their investment; employees seek job satisfaction; customers want what they pay for; suppliers seek dependable buyers; governments want adherence to legislation; unions seek member benefits; competitors want fair competition; local communities want the firm to be a responsible citizen; and the general public expects the firm’s existence to improve their nation’s quality of life. 

The general claims of stakeholders are reflected in thousands of specific demands on every firm—high wages, pure air, job security, product quality, community service, taxes, occupational health and safety regulations, equal employment opportunity regulations, product variety, wide markets, career opportunities, company growth, investment security, high ROI, and so on. Although most, perhaps all, of these claims represent desirable ends, they cannot be pursued with equal emphasis. They must be assigned priorities in accordance with the relative emphasis that the firm will give them. That emphasis results from the criteria that the firm uses in its strategic decision making. 

Creating a Green Corporate Strategy 

Seldom do the diverse stakeholders of a corporation coalesce around a mandate as energetically as they have in encouraging companies to improve their action to protect the ecology and provide environmentally friendly products through pollution-reduced processes. Corporate response has been directly forthcoming. Forrester Research found that 84 percent of companies were actively pursuing a “green” strategy, involving environmentally and socially responsible projects. The key drivers for the companies to join the green movement were energy efficiencies, government regulations, and rising consumer demand. 

Popular approaches to becoming a green company include adopting sustainability as a core component of the business strategy, embedding green principles in innovation efforts, including green principles in making major decisions, and integrating sustainability into corporate brand marketing. 

Many companies have chosen to elevate environmental sustainability to the level of a core component of its strategic plan. In 2005, General Electric (GE) created a green initiative to promote green technologies. By 2006, GE’s “Ecomagination” program included a portfolio of 80 new products and services and delivered $100 million in cost savings to GE bottom line. 

In 2007, Michael Dell announced his commitment to leading the company to become the “greenest technology company on the planet.” By 2008, the carbon intensity of the company was the lowest among Fortune 500 companies and was less than half of that of closest competitor.

HP demonstrated its commitment to a green company with carefully developed goals, such as reducing combined energy consumption and the greenhouse gas emissions of its products and services to 25 percent below 2005 levels by 2010, improving energy efficiency of servers by 50 percent, and improving recycling and reuse of its electronic products. 

Investors Appreciate Internal Green Initiatives 

Companies in diverse areas of operation are making efforts to improve sustainability and reduce adverse effects on environment that results from corporate operations.²⁸ The purpose of this effort is twofold: Reducing environmental footprint improves the company image and appeals to green consumers; and higher sustainability in operations saves resources. Since the application of green ideas differs greatly within companies, there results are also different. However, as examples illustrate, the outs are often very beneficial for the company.

A company committed to implementing eco-efficient operations is Aetna. Aetna is controlling its carbon footprint by instituting the “telework” program, which involves asking its employees to work at home. Aetna believes that the program will reduce the combined driving of its employees by 65 million miles, save over 2 million gallons of gasoline, and prevent 23,000 metric tons of carbon dioxide emissions per year. 

FedEx approach to green is to implement services that are more efficient. The company is investing in renewable energy technology for its operations and shipping facilities. More than 50 percent of the vehicles in FedEx’s delivery fleet are powered by hybrid-electric engines. These trucks reduce FedEx’s annual fuel usage by 150,000 gallons and its carbon dioxide emissions by 1,521 metric tons. 

The efforts of Wal-Mart to eliminate waste by reducing, recycling, or reusing everything that comes into its 4,100 American stores are a good example. Wal-Mart is introducing recyclable and biodegradable packaging and sends its compostable goods to rot in boxes that are turned into mulch. Other efforts include the exclusive use of LED lights and improving the efficiency of heating and air-conditioning units used in all stores. Roofs of all Wal-Mart stores are now painted white to reflect sun light better, since it is more costly to cool buildings in the summer than to heat during winter. 

In 2007, Cadbury Schweppes PLC launched its “Purple goes Green” initiative and specified its green targets on its website. The targets included a 50 percent reduction of net absolute carbon emissions by 2020 with a minimum of 30 percent from in-company actions, a 10 percent reduction in packaging used per ton of product, conversion of 60 percent of packaging to biodegradable and environmentally sustainable sources, a 100 percent of secondary packaging being recyclable, and requirement of all “water scarce” sites to have water reduction programs. By 2010, Cadbury was making headway on its goals. For example, its Eco Easter Eggs used 75 percent less plastic than previously, thereby reducing its annual plastic use by 202 tons. 

Toyota created a new product with its 2010 Prius car model. It offered carbon dioxide emissions that were 37 percent less than that of a comparable diesel or gasoline vehicle. To achieve the improvement, Toyota evaluated every step of its product design and devised an array of innovative and environmentally friendly features, like a new vehicle design featuring 20 percent lighter drive components, and recycled plastics. 

Companies can also become “greener” without incurring the costs of altering their supply chain by making changes internal to their organizations. Common steps include paper recycling or conservation, refurbishing and recycling old equipment, consolidating servers, server virtualization, instituting a lights-out policy, and replacing old equipment with more energy-efficient models.²⁹

Many companies enjoy financial benefits of this approach. For example: 

Governments Mandate Adherence to Green Regulations 

Regulations in several countries require some companies to adhere to specific green mandates. For example: 

Customers Endorse External Green Initiatives 

Adopting an external green strategy involves analyzing the company’s entire value chain to go beyond complying with regulations, reducing their energy use, or marketing ecologically safe products. The goal is to engage their stakeholders in a coordinated program to benefit the environment. 

Once a company has defined what it means by the term green means, it has to build processes and products around that vision, it is important to have a marketing strategy to attract consumers’ attention. A survey of 6,000 global consumers found that 87 percent believed it was their “duty” to contribute to a better environment, and that 55 percent would pay more for a brand if it supported a cause in which they believed.³⁰ In turn, retailers and manufacturers are demanding greener products and supply chains. Therefore, marketing strategies are structured and communicated in ways that bolster the corporation’s green credibility.³¹

Using its external green strategy, P&G found that 80 percent of the energy used to wash clothes comes from heating the water. P&G calculated that U.S. consumers could save an estimated $63 per year by washing in cold water rather than in warm water. They then created Tide Coldwater, an extension of the Tide brand, which they positioned as a product that would enable customers to save on energy bills. Marketing efforts also reassured consumers of the product’s efficacy. P&G designed a dedicated website on which consumers could calculate the amount of energy they could save by using the product. As evidence of the success of the approach, Tide Coldwater generated $2 billion in sales in its first year. 

Society Learns of Sustainability Efforts through Marketing 

Companies incorporate their environmental position into communication messages to improve organizational reputation and to attract and inform customers, partners, and investors. 

Coca-Cola makes stakeholders aware of its environmental position by issuing news release to the public of its efforts to support of recycling and launch of “Give it back” marketing effort to support recycling. In 2009, Coca-Cola opened the world’s largest bottle-to-bottle recycling plant, pledging to recycle 100 percent of its bottles and cans and to ensure sustainability in packaging. The plant produces 100 million pounds of food-grade recycled PET plastic each year, which is equivalent to 2 billion 20-ounce plastic bottles. Additionally, over 10 years, the plant will reduce its emissions of carbon dioxide by 1 million metric tons. 

Sustainability reports are used to discuss green activities and highlight strategies and progress. For example, Johnson & Johnson sustainability report has a separate section devoted to environment. The environment section covers how design solutions are used to minimize the size and weight of product packaging and increase the recycled content in packaging. The company also highlights its water management strategy, compliance issues, carbon emissions, waste reduction, and ozone-depletion plans.