Essentials of Strategic Management E-Book

Thomas Wunder

• Herausgeber: Schäffer Poeschel
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 1155

Veröffentlichungsjahr: 2023

Beschreibung

Written in English, this practice-oriented textbook covers all stages of the strategy process. Besides strategic analysis, strategy formulation, and business model innovation, the true challenges of strategic management will also be explained in detail: strategy execution and transformation.  The context of strategy is currently experiencing radical changes in the world economy, planetary health, and socio-political foundations. In the era of sustainability, corporate leaders need to rethink their strategic management approach to effectively deal with these new and disruptive market situations. Sustainable strategizing is considered essential for future-proofing today's enterprises, transforming markets, and leading the way toward a sustainable future for both business and society.  As a response to these developments, this updated and expanded edition continues to present the essentials of contemporary strategic management, but it also identifies, explores, and integrates ecological and social sustainability considerations to a great extent. As a result, key concepts of sustainable strategizing from mindsets, impact, materiality, and purpose to business cases, sustainable business models, regeneration, and transformation have been embedded and enhanced in the entire book. Other advancements are in the areas of dynamic capabilities, organizational ambidexterity, open strategy, the business ecosystem perspective, and strategic control. - Including a wealth of real-life strategy practice examples and strategic snapshots - Including a hands-on "strategy workout", exercises and review questions for students - Including teaching aids for lecturers In summary, students and practitioners will find many insights that will assist them in adding value to their organizations and society during the turbulent years ahead.

Leseprobe

[13]Table of contents

ImpressumPreface1 Strategic Management Foundations1.1 What Is Strategy?1.1.1 Origins and Views of Strategy1.1.1.1 Roots of Strategy1.1.1.2 Business Views of Strategy: the 5 P’s1.1.2 Understanding Strategy with Six Principles1.1.2.1 Quest for Competitive Advantage1.1.2.2 Fit of Markets and Resources1.1.2.3 Being Different and Making Choices1.1.2.4 Path to a Destination1.1.2.5 Consistency in Behavior1.1.2.6 Multiple Level and Theme Alignment1.1.3 Measuring Competitive Advantage and Company Performance1.1.3.1 Economic Value1.1.3.2 Accounting Performance (Profitability)1.1.3.3 Economic Performance and Shareholder Value1.1.3.4 Corporate Sustainability Performance1.2 Strategic Decision Making1.2.1 Foundations of Decision Making1.2.1.1 Rational Model1.2.1.2 Bounded Rationality1.2.1.3 Intuition1.2.2 Strategic Decision Situations1.2.2.1 Characteristics of Strategic Decision Situations1.2.2.2 Dealing with Strategic Decision Situations1.2.2.3 Cognitive Biases and How to Counter Them1.3 What is Strategic Management?1.3.1 Evolution of Strategic Management1.3.2 Schools of Thought and Paradigms in Strategic Management1.3.3 The Wheel of Strategy Framework1.3.3.1 Strategy Process1.3.3.2 Structure and Corporate Culture1.3.3.3 Strategic Leadership1.3.4 Making Strategic Management Effective1.4 SummaryPART I Developing Strategies: Strategic Analysis, Ideation, and Choice2 Strategic Analysis2.1 Understanding the Initial Strategic Situation2.1.1 The Company and Its Stakeholders2.1.2 Developing a Strategic Analysis Framework2.2 External Strategic Analysis2.2.1 Macroenvironment 2.2.2 Industry2.2.2.1 Defining the Relevant Market2.2.2.2 Industry Profitability Analysis and Competitive Forces2.2.3 Competitive Arena2.2.3.1 Markets and Customers2.2.3.2 Competitors and Strategic Groups2.2.3.3 Other External Stakeholders2.3 Internal Strategic Analysis2.3.1 Analyzing Resources, Capabilities, and Competencies2.3.1.1 Strengths and Weaknesses Profile2.3.1.2 Value Chain Analysis2.3.1.3 7-S-Model2.3.1.4 Additional methods for internal strategic analysis2.3.2 Identifying Core Competencies2.4 Consolidating Strategic Key Insights2.4.1 SWOT-based Strategic Analysis Summary2.4.2 Portfolio-based Situation Assessment2.4.3 Focal Points for Strategy Formulation2.5 Summary3 Strategy Formulation3.1 Strategic Guideposts3.1.1 Vision3.1.2 Mission and Purpose3.1.3 Values3.2 Corporate Strategy3.2.1 Corporate Parenting3.2.2 Scope of Business3.2.2.1 General Directional Strategies3.2.2.2 Diversification Strategies3.2.2.3 Vertical Integration Strategies3.3 International Strategy3.3.1 International Business Expansion3.3.1.1 Whether to Go: Internationalization Motives3.3.1.2 Where to Go: Country Market Selection3.3.1.3 How to Go: Entry and Go-to-Market Strategy3.3.2 Transnational Management3.3.2.1 Strategy Postures in Multinational Corporations3.3.2.2 Transnational Strategies3.4 Business Strategy3.4.1 Intensive Growth Strategies3.4.1.1 Market Penetration3.4.1.2 Product Development3.4.1.3 Market Development3.4.2 Generic Competitive Strategies3.4.2.1 Best Product3.4.2.2 Lock-in3.4.2.3 Complete Customer Solution3.4.3 Breaking Out of Traditional Competition3.4.3.1 Cooperative Strategies3.4.3.2 Blue Ocean Strategies3.4.3.3 Sustainable Strategies3.5 Business Models3.5.1 Conventional Business Models3.5.1.1 Business Model Frameworks3.5.1.2 Key Building Blocks of a Business Model3.5.1.3 Business Model Innovation3.5.1.4 Business Model Patterns3.5.2 Sustainable Business Models3.5.2.1 Characteristics of Sustainable Business Models3.5.2.2 Design Methodologies for Sustainable Business Models3.5.2.3 Sustainable Business Model Patterns3.5.3 Benefits and Pitfalls for the Business Model Approach3.5.4 Business Ecosystems3.6 Strategy Option Evaluation and Choice3.6.1 Key Criteria for Evaluating Strategy Options3.6.1.1 Plausibility3.6.1.2 Consistency3.6.1.3 Performance Impact3.6.1.4 Business Risk3.6.1.5 Stakeholder Compatibility3.6.1.6 Internal Readiness3.6.2 Strategic Choice—Selecting Strategy Options3.7 SummaryPART II Bringing It into Reality: From Strategy to Action and Control4 Strategy Execution4.1 Making Strategies Happen: Barriers and Drivers4.1.1 Barriers to Strategy Execution4.1.2 Strategy Execution Excellence4.2 Organizational Design4.2.1 Culture—How Things are Done Around Here4.2.1.1 Key Dimensions for Analyzing Organizational Culture4.2.1.2 Integrating Strategy and Culture4.2.2 Structure—the Managerial Underpinning4.2.2.1 Organizational Structure4.2.2.2 Business Processes4.2.2.3 Managerial Systems4.2.2.4 Integrating Strategy and Structure4.3 Strategy Execution System4.3.1 Developing a Strategy Execution System4.3.2 Describe Strategy4.3.2.1 Deriving Strategic Goals4.3.2.2 Developing a Strategy Map4.3.2.3 Benefits and Pitfalls of Strategy Mapping4.3.3 Cascade and Align Strategy4.3.3.1 Applying Strategic Themes4.3.3.2 Identifying Strategy Alignment Needs4.3.3.3 Sequencing Goals, Metrics and Actions4.3.3.4 Setting Cascading Paths4.3.3.5 Choosing Cascading Methods4.3.3.6 Aligning Vertically and Horizontally4.3.3.7 Benefits and Pitfalls of Strategy Alignment4.3.4 Make Strategy Measurable4.3.4.1 Developing a Balanced Scorecard4.3.4.2 Setting Targets4.3.4.3 Benefits and Pitfalls of Measuring Strategy4.3.5 Plan Strategic Actions4.3.5.1 Developing and Prioritizing Strategic Actions4.3.5.2 Refining and Aligning Strategic Actions4.3.5.3 Benefits and Pitfalls of Strategic Action Planning4.3.6 Align Organization to Strategy4.3.6.1 Resources4.3.6.2 People4.3.6.3 Management Information4.3.6.4 Benefits and Pitfalls of Organizational Alignment4.3.7 Execute and Control Strategy4.3.7.1 Control Execution: Strategic Performance Reviews4.3.7.2 Control Assumptions and Observe Environment4.3.7.3 Test and Adapt Strategy4.3.7.4 Benefits and Pitfalls of Strategic Control4.4 SummaryAppendix: Strategy Workout and Review QuestionsStrategy WorkoutKick-offFirm selectionCompany backgroundBrief strategy reviewStrategic analysisStakeholders and strategic analysis frameworkExternal strategic analysisInternal strategic analysisConsolidation of the initial strategic situationStrategy formulationStrategic guidepostsCorporate strategyInternational strategyBusiness strategyStrategy option evaluation and choiceStrategy executionOrganizational designDescribe the strategyCascade and align the strategyMake strategy measurablePlan strategic actionsAlign organization to strategyExecute and control strategyReview QuestionsChapter 1: Foundations of Strategic ManagementChapter 2: Strategic AnalysisChapter 3: Strategy FormulationChapter 4: Strategy ExecutionReferencesIndexThe Author

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Thomas Wunder

Essentials of Strategic Management

2nd, updated and expanded edition, April 2023

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[7]Preface

Welcome to the 2nd edition of Essentials of Strategic Management—Effective Formulation and Execution of Strategy in the Era of Sustainability. The context of strategizing is currently experiencing radical changes in the world economy, planetary health, and social foundations. Climate change, biodiversity loss and environmental degradation are leading to intense and cascading global challenges ranging from human crises including hunger and thirst to eroding human security regarding health and safety as well as migration and conflicts on the horizon. At this time in the 21st century, we are conducting business in the Era of Sustainability, or in the Anthropocene as some might say. This is indicated in the refined subtitle of the 2nd edition. Sustainability, resilience, and regeneration have become strategic issues to a degree where socio-ecological disruptions are mentioned in the same breath as technological disruptions. Corporate leaders need to rethink their approach to strategizing to either effectively deal with this new disruptive market situation or play an active and rewarding role in transforming the market toward a sustainable future for both business and society. Sustainable strategizing is considered essential for future-proofing today’s businesses.

As a response to these developments, this book continues to present the essentials of contemporary strategic management but identifies and explores ecological and social sustainability considerations for strategy at a greater and more comprehensive extent than in the first edition. As a result, the context of sustainable strategizing has been embedded and enhanced in the entire book, alongside other supplementations such as dynamic capabilities, organizational ambidexterity, and the business ecosystem perspective in various sections. The relevance of sustainability for strategy is highlighted at the beginning of this book.

As a major advancement in chapter 1, the section on corporate sustainability performance has been completely updated. It now includes the evolution of sustainable strategizing mindsets as well as the topics of sustainability performance and impact measurement in the context of the Anthropocene, Planetary Boundaries, and the Great Acceleration. Furthermore, behavioral sustainability considerations have been supplemented to the section on cognitive biases. In chapter 2, the stakeholder and materiality perspectives have been advanced. The topic of corporate purpose has been introduced to the strategic guideposts section in chapter 3, and the concepts of sustainable strategies have been added. The coverage of sustainable business models and associated business model patterns has been extended. In chapter 4, methods to drive organizational transformation toward sustainability have been supplemented. These are the main new features of this book which come with a variety of new strategic snapshots, strategy practice examples as well as minor adjustments and updates.

[8]How this Book is Different from other Strategy Textbooks

Regardless of their position, career aspiration, role or department, most practitioners must deal with aspects of strategic management either in making or in supporting strategic decisions. This book provides the essentials to master this task successfully. It is written for students who are on their way to becoming practitioners as well as for practitioners who want to look—again or for the first time—at the most essential and practical aspects of strategic management.

A general trend for textbooks on strategic management is that authors try to address all theories and research areas and skip nothing which is covered by other textbooks on this subject. Furthermore, the sustainability context is rarely fully integrated but typically covered in special literature or a separate chapter on this topic. Finally, there is a general tendency in mainstream strategic management textbooks to focus more on strategic analysis and on formulating strategies but less on executing them. This book takes a different approach in three ways:

First, the guiding principle in deciding what to include and what to leave out is to answer two key questions. Is it actionable and does it have a significant impact? Instead of providing an overview over all theories and aspects of the academic field, the book provides a selection of scientifically grounded approaches, methods and ideas that promise to be practical and to make a difference in business and society.Second, the topic of ecological and social sustainability is covered in depth and integrated in various chapters throughout this book. This reflects the increased relevance of sustainable strategizing for achieving economic prosperity, ecological integrity, and social equity. In mainstream strategic management, there has been relatively little concern for a company’s impact on sustainability matters of the socio-ecological environment.Third, knowing that a great portion of strategies fail due to bad execution, great emphasis is put on this area. In practical strategy work and literature, strategy execution and transformation typically get relatively little attention—sometimes even viewed as »graveyard of strategy«—although it is one of the biggest strategic management challenges of today and key to make corporate transformation happen.

This book is intended to provide students and practitioners with a selection of practically applicable methods at a level of detail that is necessary to make a positive impact in their future or current job situations. With this focus, the book should be particularly relevant for students of applied sciences. For practitioners the book provides actionable approaches to deal with their strategic situations in a systematic and comprehensive, yet pragmatic way. I focus on the essentials of strategic management drawing from state-of-the-art literature and own experience aided by the fortune of spending more than 20 years supporting leaders of mainly large and medium size multinational companies to refine and execute strategies. Having spent more than half of my professional career in the United States of America, I had the chance to not only consult on the topic but to practice [9]it myself at the helm of a small U. S. subsidiary where I had to develop and execute my own business strategy. For six years I was a direct report to the CEO of an international management consulting firm, from whom I learned many essentials about strategy and leadership.

During this time, I also had the opportunity to learn from two inspiring U. S. consulting firms we were affiliated with. Working two years in Lincoln, Massachusetts, surrounded by the excellent consultants of the Balanced Scorecard Collaborative (later »Palladium Group«) helped me to understand how to innovate continuously and make intellectually highly sophisticated ideas actionable. Key management concepts for successful strategy execution originally developed by the two founders, Harvard Business School Professor Robert S. Kaplan and David P. Norton, and further advanced by Horváth & Partners with some bestselling publications in Europe, are drawn on in the second part of this book. During another four years as an affiliate to the North Highland Company in Atlanta, Georgia, I was fortunate to learn what true customer dedication, sales excellence and effective business development are like. I was fortunate to gain a lot both professionally and personally being exposed to their unique company culture, their business spirit, and the outstanding strategic leadership skills of their CEO.

How this Book Works

The book is designed to be actionable and user-friendly. One of the most important principles that I learned during my career is the power of simplicity. When dealing with complex organizations and facing complex strategic challenges the worst thing to do is adding complex strategic management processes, tools, and methods. I tried to focus on the essentials and to illustrate many ideas with about 200 easy to understand charts. Throughout the book there are »Strategy Practice« boxes presenting real-life examples from globally renowned companies such as Apple, BAYER, Beiersdorf, BMW, Bosch, DB Group, FlixMobility, Henkel, Hewlett-Packard, Hilti, Nestlé, Procter & Gamble, PUMA, Quiagen, Recaro, SAP, Siemens, Toyota, Unilever, Volkswagen, and ZEISS. I am grateful that many of those companies gave permission to present their examples in its original company format. This makes strategy approaches and methodologies tangible for readers and underlines their relevance and way of application in company practice today. Although many examples relate to large multinational firms, methods are generally applicable to businesses or non-profit organizations of any size and industry. Historical, anecdotal, more academic, or other adjacent elaborations that I consider helpful will be briefly explained in »Strategic Snapshot« boxes. If you are a student, these boxes are detailed enough to contain valuable information for a better comprehension of the topic or for encouraging further readings. If you are a time-lacked practitioner and want to focus fast on key methods that you need to consider for your strategy work, you might skip those boxes.

The book is based on the idea that people and organizations that engage in the essentials of a systematic strategic management process are generally more likely to outperform [10]those that do not. The foundations of strategic management are laid in chapter one. Key approaches for strategic analysis and for formulating strategies including the more recent approach of business modeling are presented in the following two chapters. The fourth chapter of this book is dedicated to one of the biggest challenges in today’s strategic management: strategy execution and transformation. It is intended to help you understand why even the best strategies might not come true and how to get it right. Detailed guidelines will demonstrate how to build an effective strategy execution system. Throughout the book there are a number of management approaches and examples which relate to the important link of strategic management and sustainability. They illustrate practical ways of how to integrate economic with ecological and social considerations or so-called ESG (environment, social, governance) factors. At the end of this book there is an exercise designed to facilitate an application of the essentials of strategic management explained in the various chapters from analysis through strategy formulation to execution and control: the Strategy Workout. With this exercise, readers will be able to take what they have learned in each step of the strategy process and apply it to their own or any other company in a seamless and integrated way.

In order to capture the key components and relationships of the strategic management approach presented in this book I developed a simple application-oriented strategy framework which I called »Wheel of Strategy« (WOS). It is meant to provide coherent and illustrative guidance of how to bring strategic management with its essential methods and ideas to life in company practice. It is a bird’s eye perspective on the set of integrated elements required to develop strategies and make them happen. Review questions for each chapter are summarized in the appendix at the end of this book, which provides students in particular an opportunity to reflect what they have learned and prepare for an exam.

Strategy can be fun, so, enjoy yourself, work hard and use your imagination.

Origins of this Book and Acknowledgements

The initial roots of this book were laid in 1995 at the University of Birmingham (UK) where I was fortunate to visit a Strategic Management class taught by an inspiring strategy practitioner. His hands-on ideas on how to devise and implement strategy and what can go wrong particularly related to, what he called, »the abnormal psychology of senior leaders« inspired me to further pursue this topic. Many ideas in this book are drawn from my experience gathered during the 25 years as a management consultant, doctoral student, business leader, and finally full professor of strategic management since then. The practical foundations were laid at Horváth & Partners Management Consultants where I had the chance to work strongly with their global strategy practice. Multinational corporations facing the challenge of executing corporate strategy and aligning their international subsidiaries, strategic business units and functional areas around common strategic themes gave me the opportunity to conduct strategy sessions in more than 20 countries and learn [11]from strategy discussions in highly intercultural management teams. During my doctorate in strategic management at the European Business School (EBS), I was fortunate to build on that experience and work on the question of how to implement transnational strategies effectively. Coming from a highly planning-based strategy approach from management consulting, it was particularly inspiring to discuss this topic with academics that fundamentally questioned the controllability of companies and approached strategic management in a completely different way, that is complexity and evolutionary management. Some of those thoughts are addressed in this book although, for practical reasons, most of it is definitely more on the planning side.

I would like to thank some special people without whom this book would not have been possible. First and foremost, I sincerely appreciate the sacrifice writing two editions of this textbook has meant for my wife and our two children. In preparation of these books, I spent more hours on conducting research, writing texts and developing charts than when I was a consultant or graduate student. Therefore, I dedicate this book to my family. I was also fortunate to work with Schäffer-Poeschel publishing house that approached me with the idea to write an application-oriented, concise, and innovative strategic management textbook in English leveraging my practical experience and academic background. In addition to the entire Schäffer-Poeschel team, I would like to particularly thank my current editor, Dr. Frank Baumgärtner, for his great support and the opportunity to publish a second edition of this textbook. With the first edition being sold out, I am also very thankful to the initial editor, Martin Bergmann, for his appreciated ideas and flexibility to make this project possible in the first place. I would also like to thank Traudl Kupfer and Claudia Dreiseitel for professionally proofreading my manuscript and for their useful feedback. The Neu-Ulm University of Applied Sciences (HNU) provided a conductive environment and outstanding institutional support to make this project possible. I am grateful to the University Executive Board and the Dean of the Department of Business and Economics for providing their appreciated support. I would also like to thank my students at HNU and other international universities where I teach sustainable strategizing at master and undergraduate levels as well as executive MBA programs. They provided lots of useful insights with their intellectual curiosity, perspectives, opinions, and questions. Last but not least, I wish to thank the reviewers both in Germany and the United States who shared their expertise with me. I am very grateful to John H. Grant, one of the founding members of the Strategic Management Society, who offered valuable advice and encouragement particularly for the integration of sustainability considerations in this book. Knowing that any list of acknowledgements will almost always be incomplete, I am grateful to all people who supported this project and helped to make it happen. I feel truly gifted by their sophisticated feedback and support.

Thomas Wunder

[19]1Strategic Management Foundations

Learning Objectives

After studying this chapter, you should be able to:

explain triggering events for companies to rethink their strategic orientationunderstand the roots of strategy and their applicability for management todaydescribe different business views of strategy and how they can be linkedexplain the six principles of strategy and their relevance for strategic managementexplain ways for measuring competitive advantage and company performancedescribe the different mindsets to corporate sustainability and how to measure itoutline foundations of decision making and apply them to strategic situationsunderstand the behavioral impact of cognitive biases for strategic decision makingexplain the evolution, schools of thought and paradigms of strategic managementdescribe the wheel of strategy framework and explain its interrelated componentsexplain how to make strategic management effective and describe its expected benefits

1.1What Is Strategy?

Outperforming competitors and long-lasting survival

How does a company outperform its competitors and win in the market? How can it perform well for a prolonged period of time and ensure long-lasting company survival? These are definitely not easy questions to answer. Only few companies have remained in the market and been successful forever and a day. An example is the Bavarian state brewery Weihenstephan, which celebrated its 980th birthday in 2020 and is the oldest company in Germany. Another long-term performer is the Merck Group. Founded in 1668, it is not only the oldest pharmaceutical and chemical company in the world but also ranks among the world’s leading firms in this industry today. Other multinational companies like BASF, Bosch, Daimler, Danone, Ford, Henkel, Louis Vuitton, Marks & Spencer, Procter & Gamble, Siemens, DuPont, and Yamaha have been writing their success stories for more than 100 years. On the other hand, firms such as AEG, Agfa, Blockbuster, Chrysler, Compaq, Kodak, Nixdorf Computers, Nokia, and Toys R Us that used to be famous and successful in times past have gone out of business, were swallowed up by others or had to sell major divisions.

Strategic Snapshot 1.1

»Few large corporations live even half as long as a person«

»Few large corporations live even half as long as a person. In 1983, a Royal Dutch/Shell survey found that one third of the firms in the Fortune ›500‹ in 1970 had vanished (de Geus 1988). Shell estimated that the average lifetime of the largest industrial enterprises is less than forty years, roughly half the lifetime of a human being! The chances are fifty-fifty that readers of this book will see their present firm disappear [20]during their working career. In most companies that fail, there is abundant evidence in advance that the firm is in trouble. This evidence goes unheeded, however, even when individual managers are aware of it. The organization as a whole cannot recognize impending threats, understand the implications of those threats, or come up with alternatives.« (Senge 1990: 17)

According to McKinsey, 75 % of the companies currently quoted on the S&P 500 index will have disappeared in 2027. They will be bought-out, merged, or will go bankrupt like Enron and Lehman Brothers. Some companies manage to escape this mass destruction. General Electric, Exxon Mobile, Procter & Gamble, and DuPont are among the oldest companies on the New York Stock Exchange. Nevertheless, firms with the largest market capitalizations today have new names: Apple, Alphabet, Meta (formerly known as Facebook), Microsoft, or Amazon (Source: Hillenbrand et al. 2019).

Only 32 of the Fortune’s 100 Fastest-Growing Companies of 2018 list made it to Fortune’s 100 Fastest Growing Companies of 2019. The persistent 32—companies that have survived multiple recessions, including the COVID-19 recession, and continue to grow—have lessons to teach, although there is no silver bullet or secret formula, even within the same industry. It was found that in the group of 32, the average company lifespan is 28.75 years. Companies that persist make unique strategic resource choices. They postpone expenditures on marketing and sales, fixed assets, or R&D—or all three depending on their needs—rather than fit with industry. They continue to invest in future growth. Their people are not expendable: Employee retention during a recession has been a familiar strategy for the top growers covered in this investigation throughout the period (1999–2020). They cut cost of goods and services produced (COGS). The persistent 32, loathing the idea of cutting COGS in the face of earlier recessions or recessionary threats, are cutting expenses other than personnel expenditures now. Amazon, Nvidia, Stamps.com, Lam Research, Supernus Pharmaceuticals all continue to rein in costs while simultaneously reinvesting in growth. They communicate their concerns and plans to their constituents (Source: Connell et al. 2022).

It is forecasted that the average tenure of the companies is getting shorter and shorter and will shrink down to 12 years by 2027. Corporate longevity remains in long-term decline (Source: Viguerie et al. 2021).

Average life span of companies

Looking at the average life span of major companies reveals a sobering picture. For example, less than 15 % of the largest companies in the US listed in 1917 in Forbes Magazine still exist today. The rest vanished from the business landscape because they either have been taken over by other companies or gone out of business. Looking at even so-called world-class companies identified by Peters and Waterman or by Collins and Porras in their bestselling books »In Search of Excellence« or »Built to Last« reveals a similar picture. Only a minor portion of all companies perform well over several decades (Watson 2012: 287; [21]Foster/Kaplan 2001: 7 f.). The average life span of companies in Europe is about 12 years, 28 years if they are publicly listed on a stock exchange, and 48 years if they are large corporations with more than 10,000 employees or $5 billion market capitalization (Stadler/Wältermann 2012: 10). Most companies that were high performers at a certain time are not able to remain superior in the long run, for example, for 10 years or more (Wiggins/Ruefli 2005 and 2002). Why did so many prominent companies vanish from the business landscape or lose the superior performance level they had at a certain time? They have failed to adapt their strategy or effectively transform their organization to the changing environment and had to learn that past performance is no guarantee of future success.

S-Curve Leaps: Technological and socio-ecological disruption

In his book »The Innovator’s Dilemma«, Clayton M. Christensen describes why even well-established firms lose their competitiveness and viability by underestimating and misjudging the process of disruptive change in their environment. He characterizes disruption in an industry with S-curve leaps. The S-shaped curve illustrates how a business, product or industry will grow over its life cycle following the phases of experimenting, growth, maturity (and decline). Disruptive technological change may lead to a situation, where it is not possible to grow the existing business with incremental adjustments anymore. To get to a higher level of performance, a leap to the next S-curve is necessary (Christensen 2016). Figure 1-1 illustrates such a situation caused not by technological but socio-ecological disruption. Like with technological changes, new environmental, social or governance (ESG) requirements of regulators, investors, banks, customers, or other stakeholders may require a leap to the next S-curve. In the past, businesspeople assumed that the use of natural capital and social capital along the value chain were free and mainly non-transparent, i.e., business models were developed under the (implicit) assumption that natural (and social) resources are available without limitation and constraints. Given the magnitude and scope of socio-ecological global problems such as climate change, biodiversity loss or inequality today, we are moving to a World where natural and social capital is expensive and where business is expected to step up and deal with these problems. Given this new strategy context, business-as-usual may not be a viable option to remain competitive in the future (Henderson 2020a).

Organizational sustilience

In this new strategy context, companies must increasingly measure, disclose, and directly or indirectly pay for their externalities. These are external costs (if negative) and refer to the situation when producing or consuming goods causes an impact on a third party (e.g., people or biosphere) that is not directly related to the production or consumption and that is not reflected in the market price (e.g., human health, air and water pollution). There are new and evolving sustainability disclosure requirements such as the global standards currently developed by the International Sustainability Standards Board (ISSB) or the Corporate Sustainability Reporting Directive (CSRD) and EU-Taxonomy driven by the European Commission as a key element of the European Green Deal. Firms will have to disclose the ecological and social impacts they are causing through their strategies and business models covering various scopes in their entire value chain including upstream and down[22]stream activities (see chapter 1.1.3.4). Consequently, it will be in the economic self-interest of companies to effectively contribute to socio-ecological sustainability for various reasons such as to mitigate the risk of losing their license to operate as well as to capture the significant business opportunities related to providing solutions for sustainability issues (see chapters 3.4.3.3). In addition to striving for sustainability, companies must establish business resilience to rebound after major external shocks caused by economic, ecological, or social disruptions, which refers to the concept of organizational sustilience (Grant/Wunder 2021). Both elements must be addressed to future-proof business models and business ecosystems for the decades ahead (see chapter 3.5.2).

Fig. 1-1: Leap to the next level of business sustainability

Triggering events to rethink strategy

When do companies typically rethink their strategic orientation and engage in a (re-) definition of their strategy? Some triggering events that may act as stimuli for changes in strategy are (Wheelen/Hunger 2010: 24):

Performance gap (unmet performance expectations): Many companies with revenues or profits that are no longer increasing, falling behind major competitors or even decreasing, rethink their strategic orientation to get back on course in the long term. This may also be the case for anticipated future performance issues caused by, for example, advancing competitors from emerging countries or disruptive technologies.Changes in ownership: New shareholders may alter financial and strategic expectations of the company and require a new strategic orientation. For example, family-owned companies differ significantly from private equity firms when it comes to risk aversion, short- and long-term profit orientation or the desire for appreciation in the community.New anticipated trends: New trends such as new technologies or changes in customer preferences may make existing strategies ineffective and require new strategic ap[23]proaches. For example, Nokia underestimated the trend from cell phones to smart phones and was forced to rethink its strategic position once companies like Apple introduced their new innovations such as the iPhone.New CEO or executive leadership team: New executives at the helm of companies usually bring in new strategic ideas and approaches (see Strategy Practice Example 1.1). This is similar to what frequently happens in sports when a new coach or manager comes in and fundamentally changes the strategic thrust.Intervention from other external stakeholders: Interventions from other external stakeholders than customers and competitors such as governments, non-governmental organizations, banks, etc. may have a significant impact on the company. For example, recent decisions of the German government to exit nuclear energy until 2022 and increase the share of renewable energy sources for supply in Germany to 80 % by 2050 triggered significant changes in corporate strategy at some German energy corporations such as E.On.More unstable environment: More and more companies are facing unstable environments with a high degree of volatility, uncertainty, complexity, ambiguity, and dynamic (VUCAD). For example, some firms are required to advance their strategic agility and adapt their strategies more frequently than they used to. Other companies such as ZEISS may foster diversification to get a balanced risk profile of their business portfolio with regard to turbulence in the global economy (see chapter 3.2.2.2).

STRATEGY PRACTICE EXAMPLE 1.1

CEO Eras and Strategy at Daimler

Diversification was one of the key corporate strategic thrusts of Edzard Reuter in his era of being CEO of Daimler from 1987 to 1995. He wanted to transform the company into an »integrated technology corporation« and diversified Daimler with acquisitions in the aerospace and electrical industries such as MBB, MTU, Dornier, and AEG. His successor, Jürgen Schrempp, changed this diversification strategy and refocused the group onto the automobile business during his 10 years as CEO. He wanted to refocus the corporation and create a world auto giant with a strong shareholder value orientation. Under his leadership, the Daimler-Benz AG merged with the US corporation Chrysler in 1998. Due to unsatisfactory results, the era DaimlerChrysler was finished in 2007 by Dieter Zetsche, who has become CEO in January 2006. During his era, the company was renamed to Daimler AG. Zetsche’s achievements include leading the Group out of a recession after the financial crisis, growing the China business, and expanding the model range. He modernized the brand Mercedes-Benz, which attracted younger buyer groups and helped to regain the world lead in premium car sales in 2016. In 2017, however, Zetsche was in the headlines because the company was accused of emissions manipulations by the German Federal Ministry of Transport. In May 2019, the Swede Ola Källenius was appointed Zetsche’s successor. As of February [24]2022, Daimler AG was renamed to Mercedes-Benz Group AG to focus on the return to the core of the company—building the world’s most desirable automobiles with the Mercedes Star as a promise for the future: changing the existing to make it better. It is supposed to underline the strategic focus on taking the lead in electromobility and vehicle software.

1.1.1Origins and Views of Strategy

Multiple applications of the strategy term

Nowadays, the term »strategy« is used in all kind of areas ranging from computer gaming, gardening, Poker as well as food to sports, dating or even housecleaning. This variety of applications makes it hard to develop a common and shared understanding. The same is true in a business context. The range of strategy interpretations reaches from anecdotal statements like »strategy is what makes money«—a perspective of the CEO of a Fortune 500 company in a strategy workshop—to more philosophical understandings like »strategy is revolution; everything else is tactics« (Hamel 1996: 70). Furthermore, the strategy term is frequently related to its origin in military history. How relevant this might be for tackling today’s management challenges will be discussed first followed by a brief overview of some actual views of strategy that can be applied to company practice today.

1.1.1.1Roots of Strategy

»Stratos« and »agein«

The etymological roots of the term »strategy« go back to ancient Greek (6th/5th century BC) where—based on the terms stratos (army, military force) and agein (to lead)—stratégos was an expression for an army leader or military general. Later on in history, various military leaders referred to militarily motivated strategies in their renowned publications, such as:

»The Art of War« written by the Chinese military strategist and mathematician Sun Tzu (544–496 BC). Nowadays it is considered the first strategy book in history. One of his important strategy principles is the idea of victory without fight.»The Prince« and »About the Art of War« written by the Italian Renaissance political philosopher and historian Niccoló Machiavelli (1496–1527).»The Book of Five Rings« written by Miyamoto Musashi (1584–1645), a Japanese swordsman and samurai. One of the important strategy principles he refers to in his famous publication is the importance of situation assessment from a bird’s eye perspective.»On War« written by the German-Prussian general and military theorist Carl von Clausewitz (1780–1831). He defined strategy as the use of combat for the purpose of war.

[25]Relevance of military strategy principles for business

Figure 1-2 provides some fundamental principles of historic military strategies that seem to be timeless and relevant also for business management today (Kotler/Berger/Bickhoff 2010: 7): Concentration of resources strongly relates to one of the key challenges in management, that is the effective allocation of limited resources. The element of surprise is leveraged by companies in a variety of ways such as establishing a first mover advantage with their products in certain markets or by unexpected mergers, acquisitions, etc. Furthermore, companies elaborate very carefully on which competitive arenas they are playing in, based on their strengths and core competencies. Communication between the top leadership team and the employee base is a key pillar of any modern strategy execution system. The precise coordination of strategic objectives and resources relates to the management approach of strategy and organizational alignment which is vital for making strategies happen effectively. Finally, how companies can gain a substantial advantage through innovation can be seen over and over again by innovative companies launching new technologies, products or business models.

Fig. 1-2: Applicability of military strategy principles for business management

Limitations of military principles for business management

Anecdotally speaking, strategy »arranges strengths, means, time, space and methods in a guiding principle of action. It is, therefore, nothing else but an efficient success plan, whose fundamental elements What do I want?—What can I do? and What do I do? have not been changed since Seneca’s ›Want—Can—Dare‹ (Note: Roman philosopher, 4 BC–65 AD)« (Werle 2005: 197). Historical insights from warlords may provide simple and highly generic inspirations for staying on target and capturing new perspectives—that might be [26]useful in, for example, dynamic situations or when competing in multiple markets. However, based on a more critical evaluation, those principles provide hardly any answers for solving strategic challenges today. Although many ideas are timeless and valid, they lack uniqueness. The insights are revolutionary for its time but self-evident for most managers today. Most historic strategy ideas are on a high level. They particularly lack precise recommendations for one of the biggest challenges in strategic management, that is execution. Furthermore, »big names« are frequently used for marketing purposes (see Strategic Snapshot 1.2).

Strategic Snapshot 1.2

Return of the »Warlords«

Although the relevance of military principles for solving today’s business challenges can be questioned, there are a number of popularized business publications of the last 25 years leveraging historical strategy perspectives. Examples are:

»The Influence of Military Strategies to Business« (2017)»Hannibal and Me: What History’s Greatest Military Strategist Can Teach Us About Success and Failure« (2013)»Miyamoto Musashis Book of Five Rings. 52 Brilliant Ideas for Your Business« (2012; published in German)»Sun Tzu and The Art of Business. Six strategic principles for Managers« (2011)»Sun Tzu. The Art of War for Managers. 50 Strategic Rules Updated for Today’s Business« (2010)»Clausewitz on Strategy. Inspiration and Insight from a Master Strategist« (2001), a publication of the Strategy Institute of the Boston Consulting Group»The New Machiavelli. The Art of Politics in Business« (1999).

Practitioners might be inclined to use the supposed credibility of historic military leaders for reducing complexity in strategic decision-making situations. One of the key limitations of military strategies for business is its traditional focus on opponents which is equivalent to focusing only on competitors in markets. Not only does this neglect cooperative strategies for the most part, but also the customer as most important stakeholder for business is not addressed at all. And finally, translating certain rules of war into business is inappropriate today if the recommendations are not compliant with law or ethical principles (Werle 2005).

1.1.1.2Business Views of Strategy: the 5 P’s

To better understand what strategy means in a business context, it is helpful to recognize different interrelated views of strategy that can be found in management practice and science alike (Mintzberg 2000: 23–29, 1987 and 1978). Understanding and integrating those [27]different views is supposed to reduce some of the confusion that comes with the strategy term and establish a foundational terminological framework that will be applied in this book:

Most practitioners are likely to define strategy as a plan that specifies what the company intends to do and when. It is made purposely in advance of the actions to which it applies.Others may understand strategy more as a specific competitive move or ploy to preempt an opponent’s response in a head-on competitive situation. In this understanding it is also a plan but more in a sense of outmaneuvering an opponent in a 1:1 business setting.Another understanding of strategy is specifically related to the position in the environment that allows an organization to generate sufficient »rent«. In practical terms this might be a particular industry or the financially most promising product-market combination within the competitive arena a company focuses its resources on.Whereas the position is outside the organization, the understanding of strategy can also be based on a more internal view. Here, strategy is seen as a collective perspective in people’s minds. It is a kind of shared mental model that builds the strategic orientation of the company.A final understanding of strategy as a pattern is not related to the intention of people but to the resulting behavior of an organization. Here the key is consistency in behavior, whether intended or not. Successfully realized strategies are not always planned in advance and planned strategies are not always realized (see also chapter 1.1.2.5).

Integrating the 5 P’s of strategy

Figure 1-3 provides an attempt to integrate the different views of strategy in a hierarchical order following the strategic planning logic of this book. Strategic guideposts are established by a company’s vision, mission and values. They provide a high-level normative direction and strategic context. This is a view of strategy as perspective. Framed by the strategic guideposts the company has to decide where and how it wants to compete based on industry and market attractiveness and dynamics as well as its own resources and capabilities. This is the core of formulating corporate and business strategies and reflects a view of strategy as position. Once certain strategy options have been decided on and strategy is set, it is refined with strategic goals, quantified with metrics and targets, and translated into strategic action programs as well as corresponding budgets and incentives. This is related to the view of strategy as plan. Some of those goals or actions may capture certain moves to outwit rivals or fight competitive threats, that is viewing strategy as ploy. Finally, strategy is what really happens. The strategic behavior of an organization may have been planned according to the process described or it may emerge unplanned through learning and trial and error. In any case, it is a consistent stream of actions and decisions. This is strategy as pattern. By describing how companies like Ikea, Starbucks, Apple or others present themselves in the market, key strategic elements can be clearly identified as they reflect consistency in behavior of those companies. Corner[28]stones of their strategies are visible for everybody without knowing whether they were ever planned in formal strategy sessions or just emerged over time.

Fig. 1-3: 5 P’s of strategy and strategic planning logic (Source: following Simons 2000: 18)

1.1.2Understanding Strategy with Six Principles

Strategy is a multifaceted phenomenon about how to compete.

Strategy is a multifaceted phenomenon that can hardly be described with a single definition. The 5 P’s described before are a practical and a frequently used consolidation of various views of strategy. Different authors emphasize different elements when they provide their understanding of strategy. A common theme that can be found in most strategy definitions is the idea of competition. Consequently, strategy can be seen as an approach of how to compete. To shed additional light on what strategy is, selected aspects from various understandings of strategy are pointed out. According to certain authors, strategy is about

the creation of competitive advantage (Ohmae 1982: 36)the determination and pursuit of basic long-term goals (Chandler 1962: 13)the idea of being different and choosing what to do and what not (Porter 1996: 70)the description of a »path« from a current to a targeted future state (Kirsch 1991: 301)the integration of an organization and its environment based on consistent patterns of organizational decisions over time (Mintzberg 1978)the definition of businesses in which to compete on a corporate level and how to compete on a business level (Andrews 1980: 18 f.).

[29]Instead of trying to formally define what strategy is, these elements are used to derive the six principles shown in figure 1-4. They are supposed to sharpen the strategy concept that is relevant for moving forward and will be explained next.

Fig. 1-4: Six principles of strategy

1.1.2.1Quest for Competitive Advantage

Strategy is about gaining, sustaining and renewing competitive advantage

Most people will agree that strategy makes a major difference between winning and losing in any competitive situation whether it is in business, sports, politics, or others. In business, it helps a company to establish some sort of advantage relative to its competitors that is crucial for outperforming them. As illustrated in figure 1-5, the strategy a company pursues is supposed to lead to competitive advantage, and thus, ultimately to superior performance in a given competitive arena. Strategy is about gaining, sustaining and renewing competitive advantage as a base for superior performance. The question what »superior« performance means is discussed more in detail in chapter 1.1.3.

Fig. 1-5: Relation of strategy, competitive advantage and performance

Gaining competitive advantage—the strategic triangle

Firms that are capable of providing their customers goods and services that are better, cheaper or delivered faster than those of their competitors are generally more likely to outperform their rivals and win in the market. Companies take strategies to achieve such a competitive advantage, and thus, ultimately superior performance compared to their competitors in the same industry or to the industry average. The competitive advantage a [30]company wants to realize always needs to be assessed relative to other companies competing in the same—clearly defined—competitive arena or market and with respect to the needs and wants of the customer. Simply put, competitive advantage can be created when companies are able to utilize their resources and capabilities for meeting customer needs and delivering customer value in a way their competitors cannot, given the specific context in which they compete. This can also be referred to as the »strategic sweet spot« (Collis/Rukstad 2008: 89). A key principle of any business strategy is to consider these three main players—the so-called »strategic three C’s« or »strategic triangle« (Ohmae 1982: 91 f.)—and identify the strategic sweet spot as illustrated in figure 1-6.

Fig. 1-6: The strategic sweet spot

Sustaining competitive advantage

Companies typically try to keep their advantage relative to their rivals over a prolonged period of time. In those cases, the companies would have a sustainable competitive advantage (Porter 1985: 11). This can be pursued, for example, by making the advantage difficult to understand and hard to imitate by rivals through, for example, a unique business model (see chapter 3.5) or by protecting it from imitation with patents, for example. However, a company can typically sustain its competitive advantage only for a certain period of time. As rivals work hard to imitate and neutralize it, protection might only last for a while and then expire. Furthermore, changes and discontinuities in the environment such as technological leaps might erode the advantage. For example, Leica Camera has been renowned for its high-quality cameras over a long time. The firm ignored the trend of digital photography technology in the 1990s and tried to compete with high-class analog cameras. This strategy did not work out and lead to a competitive disadvantage. The company—meanwhile recovered—faced a severe crisis, had to look for investors and realized losses of more than €15 million in 2005.

Renewing competitive advantage

[31]Given today’s highly volatile and dynamic environment, companies might not be able to or do not strive to sustain competitive advantage for a long time. They focus on continuously building temporary competitive advantage—that is a competitive advantage that lasts only for a very short period of time—based on speed, organizational agility and innovation. For example, in the food industry only a few companies focus on radical (breakthrough) innovation based on new to the world products that are proprietary and become blockbusters. Most companies have to work hard to continuously establish temporary advantage based on incremental innovation or so-called renovations, that is slight changes in taste, packaging, or size, for example (Wunder/Bausch 2014a). Also, some companies seek new products or technologies through acquisition strategies as they lack own capabilities to develop true breakthroughs. Firms may even purposely avoid long-lasting competitive advantage or alter their competitive advantage after a while. They do not strive to sustain competitive advantage as it makes them predictable and vulnerable from the perspective of their aggressive competitors. Instead, there are pursuing strategies directed toward continuously renewing their competitive advantage (D’Aveni 1994; see also Strategic Snapshot 1.3).

Strategic Snapshot 1.3

Competitive Advantage—Illustrated with Soccer

In the 2012/13 European soccer season, FC Bayern Munich became the first German team that won the so-called »Triple«, that is the National Championship, the National Cup and the European UEFA Champions League. This means that—in this season—Bay-ern Munich gained a competitive advantage over its rivals based on different sources such as individual players, the total team composition, the coach, as well as effective alignment of what the coach wanted and what the team delivered. The club was able to execute a strategy that led to this competitive advantage, and thus, to superior performance. However, one can also say that the club has been able to realize sustainable competitive advantage as, until the 2021/22 season, they won the National Championship 31 times in 59 years since the foundation of the »Bundesliga« in 1963. The second-best teams in this ranking won only five times. Although the players and coaches of Bayern Munich have been continuously changing over the past 51 years, the club was able to outperform its competitors for such a prolonged period of time. In the 2013/14 German soccer season, FC Bayern Munich—now with a new coach named Josep (»Pep«) Guardiola—won the German Championship at the earliest time ever in German Bundesliga history, that is with 77 points at the 27th of 34 games. The new coach did not try to merely sustain the competitive advantage the team gained in the previous season. He changed the strategic system fundamentally in a way that there seem to be no fixed positions for the players anymore. In and between matches, players that used to be excellent in certain positions and play well in »traditional« formations have now been changed continuously. Based on this new agility of the team and an outstanding squad, the coach continuously creates temporary competitive advantage that makes it very hard for competitors to anticipate their ploys and come up with an effective game plan.

[32]1.1.2.2Fit of Markets and Resources

Outside-in versus inside-out

In the quest for competitive advantage, a company has two key options for elaborating on strategies. First, it can take an outside-in perspective and try to identify sources for competitive advantage in the industry or market. Hereby, the market a firm decides to compete in and its strategic positioning in this competitive arena are considered key determinants for success. Second, the company can focus on its resources and develop strategies following an inside-out perspective. Hereby the key drivers of success are seen in the company’s resources, capabilities and competencies. These two perspectives are expressed in the market-based view of strategy and the resource-based view of strategy. They are traditionally used for explaining differences in competitive advantage, and thus, the ultimate performance of companies.

Market-based view of strategy (MBV)

The market-based view of strategy has its origins in the 1980s and is strongly linked to the work of Michael Porter (Porter 1985 and 1980; see also Porter 2008). It is theoretically grounded in industrial economics. Following the so-called structure-conduct-performance paradigm (SCP-paradigm), the success of a company (performance) is primarily determined or limited by the characteristics of an industry (structure), which strongly determine the company’s behavior (conduct). According to the market-based view of strategy, the firm’s operating environment is considered the most important factor for achieving competitive advantage, and thus, superior performance. Consequently, the company is well advised to identify and focus its business activities on the most attractive industries and markets. Furthermore, it needs to have a strong position in those industries to achieve above normal profits. This position can be analyzed and measured relative to competitive forces that are used to characterize the industry: bargaining power of buyers, bargaining power of suppliers, threat of new entrants, threat of substitutes, and the rivalry among established firms (competitors). The application of an enhanced framework of those competitive forces to analyze an industry structure is explained more in detail in chapter 2.2.2.2. Based on their evaluation, the company decides to remain in or enter an industry. If the company is part of the industry, it leverages competitive strategies to establish an optimal shield against those competitive forces as a foundation for realizing competitive advantage. Some companies may be in a position to even influence and shape the industry structure in a way that provides them with new sources of competitive advantage. Cost leadership, differentiation or focusing on market niches are examples of generic strategies for positioning a firm in a specific industry or market and realizing competitive advantage (see chapter 3.4.2).

Although the market-based view provides a wealth of insights and guidelines for strategy formulation, it also has its limitations (Chandler/Werther 2014: 52):

Narrow view on only three stakeholders: Only the firm’s customers (buyers), suppliers and competitors are focused on. However, there are many other stakeholders that may influence the competitive environment and can squeeze the performance [33]of a company. Thus, the requirements and relative power of other stakeholders such as governments, nongovernmental organizations (NGOs), local communities, unions, creditors, etc. need to be thoroughly considered as well.Confrontational perspective on stakeholder relationships: The general relationship with particularly buyers and suppliers is considered primarily combative. In order to gain competitive advantage and survive, it is suggested that a firm needs to analyze the power of buyers and suppliers and ultimately »beat« its stakeholders. More cooperative strategic approaches such as collaboration between business competitors (coopetition) or creating shared value with suppliers are not considered.Neglecting internal organizational characteristics of companies: Internal resources and capabilities of a company that are likely to predict how a firm is able to compete are neglected. Competitive advantage, and thus, performance is primarily related to the external industry structure. Strengths and weaknesses of a company and its corresponding strategic behavior are considered only of minor relevance.

Additionally, the neoclassical economics assumptions of the market-based view with its core concepts (see chapter 2.2.2.2) such as the Five Forces Model (Porter 1980) or the Value Chain Analysis (Porter 1985) are challenged. Particularly the closed-system perspective with well-defined industry boundaries provides only narrow and static pictures of the current and future business reality in which the societal and ecological context has become highly relevant for strategy (Stead/Stead 2019).

Resource-based view of strategy (RBV)

Based on criticism of the strong outside-in success logic in the market-based view, a different perspective on strategy emphasizes the role of an individual firm’s resources, capabilities and competencies for gaining and sustaining competitive advantage (Barney 2001 and 1991; Hamel/Prahalad 1994; Wernerfeldt 1984; Peteraf 1993). Anecdotally speaking, whereas the market-based view suggests establishing a market position, and thus, answers the question of »where to be«, the resource-based perspective suggests leveraging resources and capabilities, and thus, answers the question of »what to be«. This does not mean that the importance of understanding the industry is neglected in the resource-based perspective. However, companies within an industry are advised to exploit their individual resources and capabilities—or core competencies (Prahalad/Hamel 1990)—to make a difference in competition when compared with other firms. According to this view, it is not the general availability of resources and capabilities that provide competitive advantage but their combination in a way that is a particular strength or competence relative to rivals. To provide such a competitive edge in the long run, a firm’s competence (i.e., the combination of resources and capabilities) needs to fulfill the following criteria (Barney 1991: 105–114; Barney/Hesterly 2010: 68–83; see also chapter 2.3.2):

Value: It must enable a firm to exploit an opportunity or neutralize a threat in its environment.Rarity: It must be available for and controlled by only a small number of competitors.[34]Imitability: It must be expensive and a cost disadvantage for another firm that lacks and wants to obtain it.Substitutability: There must be no strategic equivalent available, that is no substitute competence that allows implementing the same strategies.Organization: The firm’s organization must be designed in a way that enables exploiting the resources and capabilities for competitive advantage. For example, even when firms are competing with similar product and service offerings, one may have a competitive advantage because it is able to put together marketing and sales programs, technology such as billing systems, incentives, and training in a way other firms struggle with.

According to the resource-based view of strategy, a company can expect to enjoy a sustainable competitive advantage when it has particular resources and capabilities that are valuable, rare, in-imitable and non-substitutable, and when it is organized in a way to exploit these resources. A more detailed description of what resources, capabilities and competencies are and how to apply the corresponding framework (VRIN) is provided in chapter 2.3. When applying a resource-based view of strategy in company practice, it needs to be considered that there are also some fundamental limitations of this approach:

Neglecting a firm’s operating environment: Competitive advantage is primarily related to a unique combination of resources and capabilities and the resulting customer and economic value. Changing industry conditions and market dynamics are mainly ignored although they are likely to have a strong impact on a company’s ability to develop and exploit competencies for competitive advantage (Chandler/Werther 2014: 48 f.). A more situational perspective emphasizes the role of a specific company context on performance and suggests a basic »fit« between the firm’s internal configuration and its external environment.Lack of core competences: