Strategic Network Management on the example of the company Unaxis Data Storage

Table of Contents

1 Introduction and research question

2 Traditional strategy approach
2.1 Introduction
2.2 The strategy process
2.2.1 Outline and definition
2.2.2 Strategy formulation
2.2.3 Strategy implementation
2.3 Strategic concepts
2.3.1 Outline and definition
2.3.2 Market-based view
2.3.3 Resource-based view
2.3.4 Other concepts
2.3.4.1 Strategic integration models
2.3.4.2 Concept of strategic intent
2.4 Evaluation
2.4.1 The strategy process
2.4.2 Strategic concepts

3 Network approach to strategy
3.1 Introduction
3.1.1 Classification of networks
3.1.2 Strategic networks
3.2 The strategy process in networks
3.2.1 Introduction
3.2.2 Suitability of the traditional strategy process
3.2.2.1 Formulation of strategy
3.2.2.2 Strategy implementation
3.2.3 Specific strategy process for application in a network environment
3.3 Strategic concepts in networks
3.3.1 Suitability of traditional strategic concepts
3.3.1.1 Market-based view
3.3.1.1.1 Strategic groups
3.3.1.1.2 Value Chain
3.3.1.2 Resource-based view
3.3.1.3 Other concepts
3.3.1.3.1 Integration models
3.3.1.3.2 Concept of strategic intent
3.3.2 Specific strategic concepts for application in a network environment
3.3.2.1 Co-opetition
3.3.2.2 The relational view
3.3.2.3 Creating network competence
3.3.2.4 Network governance
3.3.2.5 Management of heterarchical networks
3.4 Evaluation

4 Case study: Unaxis Data Storage
4.1 Introduction
4.2 The company
4.3 Analysis of the traditional strategy approach
4.3.1 Strategy process at Unaxis Data Storage
4.3.2 Strategic concepts at Unaxis Data Storage
4.3.2.1 Market-based view
4.3.2.2 Resource-based view
4.3.2.3 Other concepts
4.4 Analysis of the network approach to strategy
4.4.1 The network of Unaxis Data Storage
4.4.2 Strategy processes in the network management of Unaxis Data Storage
4.4.2.1 Application of the traditional strategy process in networks
4.4.2.2 Specific strategy process for application in a network environment
4.4.3 Strategic concepts in the network management of Unaxis Data Storage
4.4.3.1 Application of traditional strategic concepts
4.4.3.1.1 Market-based view
4.4.3.1.1.1 Strategic groups
4.4.3.1.1.2 The value chain
4.4.3.1.2 Resource-based view
4.4.3.1.3 Other concepts
4.4.3.1.3.1 Integration models: Markets-as-networks
4.4.3.1.3.2 Strategic intent
4.4.3.2 Specific strategic concepts for application in a network environment
4.4.3.2.1 Co-opetition
4.4.3.2.2 The relational view
4.4.3.2.3 Creating network competence
4.4.3.2.4 Network governance
4.4.3.2.5 Management of heterarchical networks
4.5 Future outlook
4.6 Evaluation

5 Conclusion and outlook

6 Appendix

A List of interviews

B List of acronyms

7 Bibliography
7.1 Books
7.2 Essays and articles
7.3 Electronic sources

Table of Figures

Figure 1: Structure of the diploma thesis

Figure 2: Three interconnected aspects of strategy

Figure 3: The formulation and implementation process

Figure 4: Internal versus external analysis

Figure 5: Matching company’s opportunities to the competencies

Figure 6: The levels of strategy

Figure 7: Five forces: summary of key drivers

Figure 8: The value chain

Figure 9: A resource-based approach to strategy analysis: a practical framework

Figure 10: Integrated strategy

Figure 11: Strategic triangle – company, customers, and competitors

Figure 12: Strategic integration model

Figure 13: Modes of alignment

Figure 14: Two perspectives on shaping the business system

Figure 15: Networks as an organizational form in between market and hierarchy

Figure 16: Determining network strategy in three phases

Figure 17: The value net

Figure 18: Supplier and customer network of Unaxis Data Storage

List of Tables

Table 1: Strategic topics, paradoxes and perspectives

Table 2: Network management qualifications and tasks

Table 3: Market size and market share of Unaxis Data Storage in January 2005

1 Introduction and research question

Strategic planning and management of today’s companies is considered to be challenged by the increasing integration in networks. Especially for companies that are situated in turbulent markets as in the electronic industry, networks play an important role. As Unaxis Data Storage is such a company, it was chosen as an example to illustrate the subject of this thesis.

Generally, traditional strategic planning seems to be insufficient in those markets.^[1] Reasons for this include, amongst others, resource interdependencies, de-integration of activities, increasing volatility of the environment and shorter product life cycles.^[2]

“[…] the image of atomistic actors competing for profits against each other in an impersonal marketplace is increasingly inadequate in a world in which firms are embedded in networks of social, professional, and exchange relationships with other organizational actors.”^[3]

Therefore, the success of a company cannot be explained solely by focusing exclusively on the firm. Interdependencies with network members have to be taken into account to explain the company’s achievements. Consequently the strategic management of a company has to consider the relevant network aspects.

This work aims at analyzing the strategy requirements that arise through the integration in networks. This is done by applying the traditional strategy processes and strategic concepts to the strategic network approach. The cooperation with Unaxis Data Storage facilitates the comparison of the theoretical insights with the real business world. This diploma thesis could serve as a basis for further work to support Unaxis Data Storage in their strategic network management development.

Based on the problem formulation and the objectives as outlined above, the following research question was developed:

How do business networks influence a company’s strategy?

This diploma thesis is divided into three parts as seen in figure 1. Each part is further separated into the strategy process and strategic concepts.

illustration not visible in this excerpt

Figure 1: Structure of the diploma thesis (source: own illustration)

The traditional strategy approach (chapter 2) provides an outline over the main strategy processes and strategic concepts. In an evaluation, those theories are further assessed.

The network approach to strategy (chapter 3) identifies theories that are more suited for a modern highly de-integrated company that operates in a turbulent market. This chapter is as well divided into the strategy process and strategic concepts. The theories from the traditional strategy approach are evaluated for their adaptability in a network context. Self-contained network strategy theories are developed that represent the state of the art. Chapter 3 as well closes with an evaluation.

In the case study with Unaxis Data Storage (chapter 4) those findings are compared with the status quo at Unaxis Data Storage. The present operations concerning strategic network management at Unaxis Data Storage are shown. It is assessed, to which degree the presented theories are currently in use at Unaxis Data Storage. This is done with respect of the strategy process (chapter 4.4.2) and the strategic concepts (chapter 4.4.3) that have been identified in this work. Finally, future scenarios of the industry are developed and possible network strategic responses of Unaxis Data Storage are suggested (chapter 4.5). In the evaluation, the results are summarized and possible improvements are shown (chapter 4.6).

2 Traditional strategy approach

2.1 Introduction

Simon uses an overall definition of strategy: “Strategy is the science and art of developing and employing all the resources of a company in such a way as to guarantee the most profitable, long-term survival.”^[4] This definition is one of many possibilities. There is large disagreement on a common definition of the term strategy, so this definition has to be seen more as an orientation than universally valid. De Wit/Meyer for example resign to give a clear definition of strategy because of misleading effects.^[5]

According to De Wit/Meyer every real life strategy problem can be viewed from three perspectives: The strategy process, content and context.^[6] This separation is also the basis of this diploma thesis. In the following, the three dimensions are explained.

Strategy process: Those theories analyze the way strategies are accomplished. The relevant question is: “How is, and should, strategy be made, analyzed, dreamt-up, formulated, implemented, changed and controlled; who is involved; and when do the necessary activities take place.”^[7]

Strategy content: The strategy content is the outcome of the strategy process. The adequate question is the “what” of strategy. “What is, and should be, the strategy for the company and each of its constituent units?”^[8] In the following chapters, the strategy content is treated in the chapters about strategic concepts.

Strategy context: Stands for the circumstances that determine the process and the content.^[9] The strategy context will be treated indirectly in this diploma thesis. No separate chapter is assigned to this dimension.

2.2 The strategy process

2.2.1 Outline and definition

The goal of this chapter is to present the main concepts of the strategy process. Later, those theories will be evaluated for their capability in a network context.

According to De Wit/Meyer, three interconnected aspects of the strategy process can be identified as seen in figure 2.

illustration not visible in this excerpt

Figure 2: Three interconnected aspects of strategy (source: De Wit/Meyer (2005), p. 7)

“Strategic thinking” represents the analytical phase, in which the threats and opportunities in the environment are identified and the strengths and weaknesses of the organization are clarified. “Strategy formation” represents the strategy formulation process. In this phase, the different strategic options are listed, evaluated and finally chosen. The implementation process is integrated in the phase of “strategic change”. During this phase, the strategy that has been decided on, is carried out with concrete actions. De Wit/Meyer point out that these three topics are not completely separate subjects and cannot be understood in isolation. Those elements are strongly linked and overlapping. De Wit/Meyer emphasize that very controversial views exist to each phase. Some authors argue that strategic thinking in traditional concepts is seen too rational and that creativity should drive the strategy process.^[10] For example, Mason/Mitroff illustrate the complexity of the world that strategy makers are facing and state that there is a need for alternative methods.^[11]

Further there exists disagreement on the question whether the strategy process can be seen as a sequence of phases, or if those phases are going on all the time and cannot be viewed separately.^[12] Andrews, for example, is a representative of the classical approach that sees the strategy process as a sequence of phases. He makes the distinction between the formulation process and implementation process.^[13] Each phase consists of several steps. In strictly following the instructions to each step the company should run an optimal strategy process. Strategy is seen as an active decision making process. Top management mainly drives the strategy process.^[14] This strategic planning approach encourages long-term thinking and commitment. In making strategic plans, managers might even be able to create the future.^[15] Others criticize this approach to see the strategy process as a predominantly logical activity, which requires well-developed analytical skills.^[16] Simon argues that bounded rationality restricts this approach because of incomplete information and imperfect cognitive abilities. Simon explains bounded rationality through the fact that “[…] people act intentionally rational, but only limited so.”^[17] Further critic comes from the supporters of the strategic incrementalism perspective. They argue that strategic planning is counter-productive for solving wicked strategic problems. A master plan has to be very sophisticated and the implementation requires highest coordination in order to solve those problems. Their approach is to encourage managers to work together proactively to decide on a viable course of action or be reactive in adapting to emerging developments.^[18] The strategy is not figured out in advance, but it is found through “[…] doing and gradually blending together initiatives into a coherent pattern of actions.”^[19] In their view, strategy making involves alternative processes, e.g. like sense-making, reflecting, learning and experimenting.^[20]

Finally the comprehensiveness of the strategy process is questioned. The planned, coordinated and revolutionary change that is aimed by the traditional view is impractical in the opinion of a few strategists. They argue that it is unrealistic to think that it is possible to direct the whole company towards a new strategy at the same time. The variety in an organization and the different timetables restrict this approach. In addition, cultural, political and cognitive aspects might be a barrier against the radical change. Kirsch criticizes this traditional approach as well. He argues that the strategy process is not an individualistic process but a collective one. The focus has to be set on the political dimension of collective and individual interests for a better understanding of the strategy process.^[21]

Thomas brought the general discussion to the point during the IMD-St. Gallen SMS conference in 2001: “[…] good strategy process research must be multi-period, multi-level, multi-context and multi-disciplinary; if it has to catch reality that is in flight.”^[22] Chakravarthy et al. argue that researches should apply existing frameworks from social science and organizational theories into the strategy process research.^[23]

Although the distinction of the strategy process into different phases is criticized, this separation is made here for the purpose of analysis. The framework of Mintzberg et al. seen in figure 3 is used in the following. The analysis phase and the formulation phase are merged in this concept. Figure 3 represents the structure of the following chapters 2.2.2 and 2.2.3.

illustration not visible in this excerpt

Figure 3: The formulation and implementation process (source: Mintzberg et al. (2005), p. 75.)

2.2.2 Strategy formulation

In figure 3, the first step in the formulation process is the “identification of opportunities and risks” in the environment of the company. In deciding on a choice, the strengths and weaknesses of a company have to be clarified and appraised with the resources available. Therefore “determining the company’s material, technical, financial, and managerial resources” is necessary. Two different strategic concepts can be used for this analysis as seen in figure 4. The “resource-based model” represents the internal analysis and shows the strengths and weaknesses of the company. The “environmental models of competitive advantage”, also called market-based view, conduct an external analysis with an identification of opportunities and threats. Those concepts and their interconnections will be presented in chapter 2.3.

illustration not visible in this excerpt

Figure 4: Internal versus external analysis (source: Barney (1991), p. 100.)

The result of this analysis of opportunity and capability at a certain risk level is called the economic strategy.^[24] The final decision on a certain strategy is dependent on “personal values and aspirations of senior management”. The point “acknowledgement of non-economic responsibility to society” in figure 3 expresses the ethnical aspect of the decision process.^[25] The different elements are presented in detail in the following.

Identification of opportunity and risk

The relevant environmental influences can be of various kinds on different levels. In making strategies, managers are at least aware of these influences in an intuitive way. Technology changes in the environment usually do not appear very quick but their influence is strong. Today, it is more and more important to assess the impact of economic activity on ecology. Changes in the law and the impact of planned expansion on ecology have to be assessed. The impact of the world economy can be large and therefore those developments have to be watched as well. In the assessment of the industry, managers feel quite secure that they know what the developments in the industry are. Therefore they have to be critical about their perceptions. Changes in society can have large impacts on business. Those changes include for example, changing patterns of work and leisure, effects of urbanization and the changing composition of the world population. Political changes can be very strong, but do not always have to be as consequential as the change from communism to capitalism.

Changes in the value system will lead to different expectations about the role of businesses. Wherever the change in the environment takes place, the impact on the strategy of the company can be considerable.^[26]

Determining the company’s material, technical, financial, and managerial resources

Having identified the possible opportunities, the next task is to verify that the company possesses all necessary resources and capabilities to execute the strategy successfully. Generally speaking, the capabilities depend on the experience of a company in making and marketing a product line or providing a service. In detail, a company has to be successful in developing individual capabilities and applying them to a common task. An effective coordination of individual and group effort has to take place. To identify the strength of a company, one has to look on the tasks it performs particularly well concerning the functions it serves in its markets. It is important not to look on the product just from the engineering specifications but in terms of market needs.^[27] Those issues will be further discussed in chapter 2.3.

The next step is to match opportunities to the competencies of a company. This combination establishes the mission of the company and its position within the environment. The goal is to minimize weaknesses and maximize the strengths. Figure 5 illustrates the process of balancing “environmental conditions and trends” with the “distinctive competence” of the company. The “consideration of all combinations” is the result of matching “opportunities and risks” with the available “corporate resources”. An evaluation determines the best match of opportunities and resources. The final outcome is the “choice of products and markets” representing the “economic strategy”.^[28]

illustration not visible in this excerpt

Figure 5: Matching company’s opportunities to the competencies (source: Mintzberg et al. (2005), p. 79)

Personal values and aspirations of senior management

The corporate strategy is also influenced by non-rational factors like personal values, ideals and aspirations of the chief executive. So the final decision has to be evaluated with respect to the preference of the chief executive. These influences are apart from economic considerations and should be observed according to Mintzberg et al.^[29]

Acknowledgement of non-economic responsibility to society

This point refers to the question what a company “should do” in terms of its responsibility to society. The ethical aspect of a strategic choice can have strong influence in some industries. Therefore the alternatives have to be evaluated based on the possible responses and expectations of the society.^[30]

2.2.3 Strategy implementation

A series of sub activities that are mainly administrative form the implementation process. The implementation process focuses on the achievement of results. Figure 3 identifies four elements of the implementation process. “Organization structure and relationships” have to be implemented in the right manner for the efficient performance of the required tasks. In detail, the “division of labor”, “coordination of divided responsibility” and “information systems” have to be installed in an adequate way. “Organizational processes and behavior”, like “standards and measurement”, “motivation and incentive systems”, “control systems”, “recruitment and development of managers” have to be adjusted in a way that lead the behavior towards the organizational purpose. “Top leadership” refers to the important role of personal leadership in the strategy implementation.^[31] The implementation process is not the main focus of this diploma thesis so this chapter closes at this point.

2.3 Strategic concepts

2.3.1 Outline and definition

Strategic concepts are the second important perspective of strategy. Similar to the plurality of theories that exists for the strategy process, a great amount of controversial works exists about the content of strategy. Those works can be assigned to four different levels of strategy as seen in figure 6 of De Wit/Meyer.

illustration not visible in this excerpt

Figure 6: The levels of strategy (source: De Wit/Meyer (2005), p. 230.)

The “functional level” strategy items treat subjects like operational strategy, marketing strategy and financial strategy. Those functional level strategies are required at the “business level” for a certain product or service specialized on a group of customers. When a company operates in more businesses, an alignment of business level strategies to a “corporate level” strategy is required. Detached from the individual organization, the “network level” represents groups of organizations that collaborate.^[32] This level is the focal point of this diploma thesis and will be treated in chapter 3. In chapter 2, the focus is on the business level. The main issue concerning this level is the question whether companies should be market-driven or resource-driven to gain competitive advantage.

To gain competitive advantage over other companies can be viewed as the main purpose of strategic management.^[33] “Business is all about achieving strategic competitive advantages, which must fulfill three criteria: they must be important for the customers, be perceived by them, and be sustainable.”^[34] A firm has a competitive advantage when it is implementing a value creating strategy that is not simultaneously being implemented by any current or potential competitor. The competitive advantage is sustained when other firms are unable to copy the benefits of the strategy.^[35] The following chapters, 2.3.2, 2.3.3 and 2.3.4 discuss the different concepts about the sources of competitive advantage.

2.3.2 Market-based view

“The essence of formulating competitive strategy is relating a company to its environment.”^[36]

The market-based view sees the strategy process as being externally orientated. The strategic concepts are based on market forces and include portfolio management, competitive advantages, generic strategies and diversification.^[37] The market-based view is mainly based on the work of Porter. He states that the essence of strategy formulation is to deal with competition. Porter introduced a new way of thinking about strategy with his books “competitive strategy” (1980) and “competitive advantage” (1985).^[38] Porter’s Positioning school, as Mintzberg named it, was in domination in the strategy field for more than a decade.^[39] That is the reason why this school deserves an appropriate treatment in this diploma thesis.

The position in the industry determines the competitive advantage of a company. Imperfections in the product market lead to monopoly rents. The task of the manager is to select an industry that has the potential to provide monopoly rents. The main strategic decision is to be either a leader in costs or to differentiate the products. The sources of profitability are imperfections in the product markets that lead to monopoly rents.^[40]

In a structural analysis of industries, Porter identifies five forces of competition shown in figure 7.^[41]

illustration not visible in this excerpt

Figure 7: Five forces: summary of key drivers (source: Porter (1991), p. 101. adapted from Porter (1980), p. 4.)

The goal of strategy is to find a position providing optimum defense against those forces or to influence them favorably. Every industry has its own structure that builds the forces of competition.^[42] Porter makes the assumption that there is a direct relationship between the strength of competitive forces and the industry profitability.^[43]

“Threat of new entrants” summarizes the potential danger of new entrants with new capacity and the desire to gain market share and substantial resources. Porter identified six barriers to entry. The changing momentum of entry barriers has also to be considered. Factors like new technologies or expiration of patents can decrease the barriers of entry. Strategic decisions of a group of industry players can affect the barriers of entry as well.^[44]

The two forces “bargaining power of suppliers” and “bargaining power of buyers” explain the importance of knowing about the factors creating supplier and buyer power. Porter shows several factors creating supplier and buyer power and derives some strategic implications. The decision of a buyer to buy from, or of a supplier to sell to, must be seen as strategically important. The company should select those suppliers or buyers that have the least power. It is possible that a supplier sells to powerful buyers and still has a good profitability. This requires that the supplier is a low-cost producer in its industry or that his product has unique features.^[45]

The forth force, “threat of substitute products or services” can reduce the profitability of an industry. Attractive price-performance offers of substitute products put the profits in an industry at risk. Therefore a company has to watch out for substitute products that are improving their price-performance trade-off, especially if this industry is earning high profits.^[46]

The force, “rivalry among existing competitors” stands for the internal competition in an industry. Porter lists a number of factors leading to intense rivalry in an industry that provokes tactics like price competition, product introduction and advertising campaigns.^[47]

After this competitive analysis, a company has to identify its strengths and weaknesses against the different forces. Porter states that three possible actions should be included in the strategy process:

1) Positioning the company with its competencies to optimally defend against the competitive forces. This approach takes the industry structure as given and the strategy formulation process is seen as a defensive instrument.^[48]
2) Trying to influence the balance of the forces with strategic moves. The balance of the forces is partly seen as a result of the company’s actions and thereby within its control.^[49]
3) Predicting changes in the factors and taking an early strategic response for the new competitive situation. The industry-evolution taking place has to be analyzed for trends that change the forces of competition most.^[50]

After the structural analysis, a firm’s relative position within its industry is the second relevant question. Porter argues that a firm has to choose between two basic generic competitive strategies to achieve a long-run sustainable competitive advantage. Cost leadership or differentiation is the clear positioning paradigm of Porter. These two strategies can be further differentiated whether they have a broad or a narrow scope concerning industry segment.^[51] Cost leadership is the clear statement of becoming the low-cost producer of the industry. Possible sources of the cost advantage strategy are economies of scale, proprietary technology or favored access to raw materials.^[52] Running a differentiation strategy, a company has to try to become unique along the dimensions that are valued by the customers. The uniqueness is rewarded by a higher achievable price.^[53] With “stuck in the middle”, Porter terms the unfavorable situation of a below-average performance because of unsuccessfully engaging in both generic strategies. Porter shows just a few exceptions of successful firms that are “stuck in the middle”.^[54] Hill argues that with the help of differentiation a firm can become an overall cost leader. In some cases a firm has to perform a low-cost and differentiation strategy to obtain a sustained competitive advantage. Hill states that there are more situations that justify being “stuck in the middle” than Porter refers to.^[55]

Porter introduced the value chain for a detailed analysis of the activities that lead to competitive advantage. The concept of the value chain will be combined with the transaction cost theory within a network context in chapter 3.3.1.1.2. The value chain of Unaxis Data Storage is researched for network relevant questions in chapter 4.3.2.1.

The value chain identifies strategically important activities, which allows to comprehend costs and the potential sources of differentiation. In performing these activities at less cost than its competitors, a firm can gain a competitive advantage.^[56] The value chain represents the total value creation, consisting of value activities and margin. A value activity needs purchased inputs, human resources and technology. Additionally, it creates and uses information and may also create financial assets. Value activities can be divided into primary activities and support activities as shown in figure 8.^[57]

illustration not visible in this excerpt

Figure 8: The value chain (source: Porter (1979), p. 35.)

The performance of each activity determines the firm’s cost structure relative to its competitors. In analyzing the value chains of the firm and its competitors it is possible to obtain possible competitive advantage.^[58]

2.3.3 Resource-based view

The resource-based view is based on internal aspects of strategy. Concepts like the core competencies, resource-based management and reengineering constitute the resource-based view.^[59] The roots of the resource-based view go back to the classic works of Penrose (1959) and Selznick (1957) and became the focus of the strategic management scene in the mid-1980s.^[60]

The argumentation of the resource-based view is, that unique internal resources are the reason for a company’s competitive advantage. The company is viewed as a “bundle” of resources.^[61] Every company is different due to different sets of experiences, assets, skills and organizational cultures.^[62] Barney includes assets, capabilities, organizational processes, information and knowledge controlled by a firm in his definition of resources. He further emphasizes the heterogeneity of strategic resources a firm possesses. Due to the fact that resources are not perfectly mobile across firms, the heterogeneity can be long lasting. Thus, the resource-based view is an alternative explanation for the sources of competitive advantage.^[63] The resource-based view does not ascribe strategic investments or advantages from product market positioning for higher profitability but lower costs or high quality due to scarce firm-specific resources.^[64]

Nicolai/Robertson define the resource-based perspective as followed:

“The key ideas in the resource-based perspective are that successful firms possess heterogeneous collections of resources, that these varied collections of resources allow firms to implement different strategies and that their associated return streams are sustainable to the extent that they are prohibitively costly to imitate.”^[65] This definition will be explained in detail in this chapter. In the following, the resource-based view framework for strategic analysis by Grant is introduced.

Grant sees his theory as a development from the market-based view of the 1980s. He criticizes other works on the resource-based view for lacking implications for strategic management. Grant argues that the various contributions lack a single integrating framework and that little work has been done to develop practical implications.^[66]

Resources and capabilities are seen as the foundation of strategy. Resources, the inputs to the production process, are the basis of capabilities, which are the sources of competitive advantage.^[67] According to Grant, resources can take a physical form, like production equipment, or they can be intangible, like brand names or technological know-how.^[68] Grant states that the productivity is not derived from single resources but from the cooperation and coordination of teams of resources: “A capability is the capacity for a team of resources to perform some task or activity.”^[69] Resources and capabilities should be the basis for the long-term strategy formulation because internal resources provide the basic direction of a firm’s strategy and they are the primary source of profit. The reason why a company should search for strategy internally is that the identities of the customers and the technologies are continually changing so external focused orientation isn’t a secure source of information for long term strategy formulation. Grant identifies the attractiveness of an industry and the ability of a company to establish competitive advantage over its rivals as the two sources of profit. Grant proposes to see business strategy less as a strife for monopoly rents than a strife for Ricardian rents. Those rents are returns to the resources, which lead to a competitive advantage.^[70]

Grant suggests using a five-step framework to strategy analysis shown in figure 9.

illustration not visible in this excerpt

Figure 9: A resource-based approach to strategy analysis: a practical framework (source: Grant (1991), p. 115.)

The first step deals with the problem of identifying resources as management systems provide an incomplete picture of the firm’s resource base.^[71] As Rajan/Zingales point out, human capital is becoming the most important asset.^[72] Intangible assets are still left in financial balance sheets. In identifying resources, the question arises how to maximize the profitability of resources and how to use existing assets more intensely.^[73]

Having identified the resources, the next step is to identify the capabilities, which are teams of resources working together. Grant states that only if the company is able to achieve cooperation and coordination within teams, its network of routines will result in capabilities. Resources are not forming capabilities per se. Another significant insight concerning capabilities is the trade-off between efficiency and flexibility.^[74]

The third step deals with the issues of sustainability and appropriability of competitive advantage. The sustainability of the competitive advantage is determining the rent gathering potential. The rents coming from competitive advantage in a market diminish over the long run due to imitation by rivals and the depreciation of resources and capabilities. The durability of resources and capabilities differs. The rapid technological change reduces the competitive advantage coming from capital investments and technological resources. On the other hand, corporate reputation and firm capabilities are more durable. Therefore capabilities have to be managed through maintenance and renewal. One possibility of maintaining capabilities is the socialization of new employees. The sustainability of competitive advantage is dependent on the transparency of competitive advantage that is determined by the availability of information about the nature of the competitive advantage compared to a rival. Therefore a superior performance that is reasoned in multiple capabilities is more difficult to imitate than an obvious single performance variable. IBM is an example for a company whose success strategy was difficult to understand and to imitate due to multiple connected capabilities in different fields. The rents earned depend next to the sustainability of the resources and capabilities on the ability to appropriate the return coming from them.^[75]

According to Coff, competitive advantage does not always lead to higher levels of firm performance: “It all depends on how much of the rents created by the competitive advantage are appropriated by stakeholders.”^[76] This gets relevant when property rights are not fully defined. Due to unavoidable incomplete contracts, companies have to negotiate all the time about rights and contracts.^[77] Those issues also play an also an important role in network relationships.

According to Grant, the goal of the forth step, the strategy formulation, is to “[…] design a strategy that makes the most effective use of these core resources and capabilities.” Knowing about the sustainability of resources and capabilities allows adjusting the strategic planning process over time.^[78]

Grant recommends in the fifth step to analyze existing resource gaps and fill them through constant development of the resource base.^[79] The challenge is to balance the exploiting of existing resources and the development of future capabilities and resources. Therefore strategy has to push the development of future capabilities at any time. Grant mentions Matsushita as an example for a successful company in the sequential development of strategy and capabilities.^[80] In some cases, the external acquisition of resources is necessary to complement the existing resource base.^[81] This external acquisition of resources will be analyzed in chapter 3.3.1.2.

Miller et al. show with three imperatives how to build capability-creating organizations. The first imperative is to discover asymmetries and their potential. The goal is to discover asymmetries that underlie an edge, as unrecognized resources or capabilities. Asymmetries can exist in a number of ways. They serve as starting points for the creation of competitive advantage. In searching these asymmetries, the focus has to be set on their inimitability. This approach requires a deep understanding of the differences to the firm’s competitors. After the discovery of the resources they have to be evaluated for their potential performance contribution. The second imperative suggests creating capabilities configurations by design. Like Grant is emphasizing the importance of multiple connected capabilities, Miller et al. are as well accentuating the advantage of a cohesive combination of resources and capabilities concerning inimitability. Capability configurations have most value when they are embedded in an organizational design infrastructure that helps to develop and sustain them. Design configurations can create virtuous cycles of capability enhancement that lead the potential asymmetry into a capability. The third imperative recommends to purse market opportunities that build on and leverage capabilities. To yield return, capabilities have to be adapted to market opportunities.^[82]

Kay agrees on the importance of distinctive capabilities to create added value. The first primary source of distinctive capabilities according to Kay is architecture in the sense of creating organizational knowledge and routines, responding flexible to changing circumstances and achieving easy and open exchanges of information. The architecture has to be protected from imitation by a framework of relational contracts that are built and sustained through long-term relationships and through an environment that prevents opportunistic behavior.^[83] The second primary distinctive capability of Kay is reputation. He qualifies this point for not being equally significant for all markets. Creating reputation requires delivery of high quality in repeated trials.^[84] The third distinctive capability is innovation. Kay emphasizes the challenge of working together in complex cooperation with other firms and to establish common technical standards.^[85]

2.3.4 Other concepts

Chapter 2.3.4.1 begins with criticisms on the two strategic concepts that just have been presented. Several models are shown that try to develop an integrated approach to strategy in combining both concepts. In chapter 2.3.4.2, the concept of strategic intent will show that having a vision is essential to get personal effort and commitment.

2.3.4.1 Strategic integration models

The two described concepts “[…] lack constructive dialog between them for the development of a unique dynamic theory of strategy.”^[86] The authors that support the resource-based view argue, that the activities are based on resources, which is ignored by the market-based view. On the other hand, authors like Porter argue that the resource-based view does not take the environment of the firm into account. He points out that competitive advantage only arises when resources are combined with activities.^[87] Simon blames the resource-based view and the market-based view for being one-sided. The market-based view is criticized for the simplification of the attractiveness of a market in terms of size, growth or profitability. These parameters are not telling about the chances of a company to be successful in this market. Simon argues that the main reason for failure is the illusion that a company that enters an attractive market with a diversification strategy will be successful. Simon supports his critique with examples like BASF’s failure in the music business, Volkswagen’s in information technology and Kodak’s in pharmaceuticals. All those failures are caused by a lack of necessary skills and know-how for those markets. The resource-based view on the other hand is not paying attention to the market forces. Thus, its application can lead to failure of companies despite having outstanding competencies.^[88] Modern approaches are trying to combine external potentials and internal skills in a balanced way which makes the process of strategy more complex.^[89]

Because of criticism on the two models, this chapter develops an integrated approach of strategy. Three different models are presented in the following. The model of Simon shows in a simple way how the two concepts have to be balanced. Fuchs et al. follow this approach, but explain the specific internal and external elements that have to be aligned more into detail. Finally, the model of Cuervo-Cazurra is presented. The process of combining both concepts to gain competitive advantage is explained here from a different perspective. Those concepts have high value for the theories below.

Simon suggests using an integrated strategy approach, combining the external (market-based view) and internal (resource-based view) basis. The challenge is finding a balance between those two concepts expressed through figure 10.^[90]

illustration not visible in this excerpt

Figure 10: Integrated strategy (source: Simon (2003), p. 56.)

Many companies fail in transforming the company’s knowledge and skills into competitive advantages in the market. The standard war for video recorders is an example for such a failure. Experts showed that the Video 2000 system of Philips/Grundig is technically superior to the VHS system of Matsushita. However, the European companies were not able to transfer their technical advantage into a competitive advantage and win the world race for leadership.^[91] A similar standard war is coming up right now in the DVD market. The two new standards, Blue Ray and HD DVD are fighting for the US$ 20-billion DVD hardware industry market.^[92] To avoid failing in this challenge, a company has to operate successfully within this the triangle of company, customers, and competitors.^[93] Figure 11 shows the three parts of the strategic triangle, which a company should be aware of.

illustration not visible in this excerpt

Figure 11: Strategic triangle – company, customers, and competitors (source: Simon (2003), p. 86.)

Simon identifies two main principles of strategic competitive advantage. He calls the first principle “know your opponent principle.” A company has to know its opponent with his strengths and weaknesses. This information about the competition should be collected in a professional way and assigned to the strategic triangle. The second principle, called the “concentration principle”, states that strategic competitive advantage can be realized if the company focuses on a few areas only. This is proved by numerous studies that show that companies never hold more than three strategic competitive advantages. Those advantages can be created only through focus and careful selection.^[94]

Also Fuchs et al. see the integration of the two concepts as essential. Compared to the integration model of Simon, the alignment is described more in detail. Fuchs et al. state that companies have to understand all elements of strategy and must carefully align these elements to achieve the highest comprehensiveness with each other. An optimal alignment can be seen as a key capability. The elements that are most critical to be identified for the business strategy are shown in figure 12.^[95]

illustration not visible in this excerpt

Figure 12: Strategic integration model (source: Fuchs et al. (2000), p. 124.)

The “Positioning” school is represented through “direction” and “product-market focus”. The resource-based view is integrated with the elements “resources” and “operational capabilities”. “Organizational culture” is a central concept of the strategy process school.^[96] In sample firms, Fuchs et al. show the importance of each of these groups.^[97]

Fuchs et al. identified three basic types of alignment shown in figure 13. In this model, a manager can create synergies within five groups. If no alignment takes place, a firm has to take losses in performance into account.^[98]

illustration not visible in this excerpt

Figure 13: Modes of alignment (source: Fuchs et al. (2000), p. 129.)

“Element alignments” is the first mode of alignments that has to be considered. It emphasizes the importance of aligning the elements within the five groups. In “group alignments”, three different types are shown. The alignment between the “positioning groups”, more precisely between “direction” and “product/market focus”, have to be proved for being mutual complementary. The target markets and product features have to be reflected through the value proposition. Alignment among the “execution groups” is achieved through well-planned adjustment of “resources” and “operational capabilities” and through the support of adequate “organizational culture” and structures. The alignment between “positioning and execution” is the already mentioned missing link between the resource-based view and the market-based view. Fuchs et al. end the outside-in versus inside-out discussion with the statement that both have to be constantly adjusted to one another.^[99] The point, “external alignments” emphasizes the importance of the alignment of all groups of the model with the environment.^[100]

Cuervo-Cazurra makes a different attempt to combine the two dominant concepts, namely the “bidirectional co-evolutionary transformation model”. She carried out an inductive study in order to gain knowledge about the relationship between resources and activities. She reasoned this study with “[…] the division within existing strategy and the lack of a dynamic view of the transformation process that enable firms to develop a competitive advantage.”^[101]

The study analyzed the behavior of firms facing radical changes in environment and tried to identify the successful strategies that lead to competitive advantage. Transformation processes concerning changes in the dimension of resources or activities and the interactive changes in both dimensions have been inspected. According to the research, the motives for an entry in a new activity can be grouped in “[…] the desire to take advantage of opportunities and make money in the new activity, or the need to protect current activities that are rent generators.”^[102] It has to be noted that not all motives are associated with the objective of increasing competitive advantage. Motives for starting an activity are new environmental conditions, loss of competitiveness, lack of necessary complementary resources and financial problems. Discontinuation of activities can lead to an improvement in competitive advantage especially when it is motivated in a redefinition of strategy. The development of ongoing activities can be encouraged through efficiency improvements in new competitive conditions and through the desire to control certain activities in order to achieve nation-wide dominance. Efficiency improvements can be derived from the possession of resources that are valuable, rare and difficult to imitate or from the development of innovative capacity.^[103] Cuervo-Cazurra describes in detail the whole transformation cycle of processes, interactions and competitive advantage. The analysis showed that there exists a diverse relationship between resources and activities.^[104] The common strategy analysis of single events misses the interactive relationship between resources and scope. The co-evolutionary model of Cuervo-Cazurra shows this relationship. The model proposes a guided transformation to gain competitive advantage.^[105]

illustration not visible in this excerpt

Figure 14: Two perspectives on shaping the business system (source: Cuervo-Cazurra (2003), p. 42.)

As figure 14 illustrates, in the unidirectional “resource-based” transformation model, the resources enable activities. Contrary, in the unidirectional “activity-based” (market-based) transformation model, activities drive changes in resources. In the “atemporal” model, the time component is neglected. In the “temporal” model, it is considered where the change first occurs. Cuervo-Cazurra develops the bidirectional “co-evolutionary” transformation model in which “[…] resources and scope induce each others’ transformation.”^[106]

2.3.4.2 Concept of strategic intent

With their concept of strategic intent Hamel/Prahalad propose the importance of having the vision of winning in the marketplace.^[107] They leave the discussion about internal and external view, and look at the gaining of competitive advantage from a different perspective.

Strategic intent is expressed through high targets that require personal effort and commitment. They criticize that many companies use strategic planning instead of strategic intent. Their argument is that you cannot plan for global leadership so you have to commit goals that lie outside the range of planning. Strategic intent forces the company to gain new capabilities and resources in order to reach the goals.^[108] They show that history is full of examples of apparently impossible intentions that have been successfully accomplished. The discovery of America, the first man on the moon, Ford’s T-model affordable for everybody or Honda’s success in the motorcycle market are proven examples for the idea of strategic intent.^[109] Hamel/Prahalad list some concrete measurements that help to develop a climate of strategic intent. One is to create a climate of urgency with the help of weak signals in the environment that show the need for improvement. Every employee has to benchmark his efforts against the best-in-class competitor. Skill development and establishing milestone and review mechanisms are other practical implications. Reciprocal responsibility, meaning, “shared pain shared gain”, is an effective way of getting support of employees to obtain strategic intent.^[110]

2.4 Evaluation

2.4.1 The strategy process

In the introduction of chapter 2.2, the strategy processes were already evaluated on several levels. The chapter 2.2 introduced some of the existing strategy paradoxes and strategy perspectives seen in table 1. In order to get a comprehensive overview of all strategy process perspectives, the study of the references is necessary.

illustration not visible in this excerpt

Table 1: Strategic topics, paradoxes and perspectives (source: De Wit/Meyer (2005), p. 14.)

The presented strategy processes will be further discussed in chapter 3.2.2 for their suitability in a network context. In chapter 4.3.1, the presented theories are compared with the status quo at Unaxis Data Storage.

2.4.2 Strategic concepts

The presented strategic concepts are briefly evaluated for their contribution for answering the research question. The issue of inside-out versus outside-in is also a topic at the network level. The decision of taking part in a network can be driven by both, the need for rare resources or capabilities, or by the considerations about the right positioning within the network. Therefore the market-based view and the resource-based view are important concepts concerning the strategy in networks. The developments and possible combinations of both concepts to combine their strengths and minimizing their weaknesses that were presented will also be useful for the following chapters. The concept of strategic intent of Hamel/Prahalad seems to be as well an issue in the network context.

The presented concepts explain the sources of competitive advantage by the resources and capabilities available and/or the right positioning in an industry. It will get obvious, that networks are another source of creating competitive advantage and thus the right strategic decisions have to be made. Therefore, chapter 3.3.1 deals with the extension of the presented theories by a network perspective. In chapter 4.3.2, those concepts are applied on Unaxis Data Storage.

[...]

---

^[1] Halinen/Moeller (1999), p. 423.

^[2] Erfurt (2004), p. 5.

^[3] Gulati/Nohria/Zaheer (2000), p. 203.

^[4] Simon (2003), p. 24.

^[5] De Wit/Meyer (2005), p. 3.

^[6] De Wit/Meyer (2005), p. 5.

^[7] De Wit/Meyer (2005), p. 5.

^[8] De Wit/Meyer (2005), p. 5.

^[9] De Wit/Meyer (2005), p. 5.

^[10] De Wit/Meyer (2005), pp. 6.

^[11] Mason/Mitroff (1981) quoted in De Wit/Meyer (1998), pp. 41.

^[12] De Wit/Meyer (2005), pp. 6.

^[13] Andrews (1987), p. 18.

^[14] Chakravarthy et al. (2003), p. 3.

^[15] De Wit/Meyer (2005), p. 118.

^[16] De Wit/Meyer (2005), pp. 62.

^[17] Simon (1957) quoted in De Wit/Meyer (2005), p. 63.

^[18] De Wit/Meyer (2005), pp. 121.

^[19] De Wit/Meyer (1998), pp. 154.

^[20] De Wit/Meyer (1998), pp. 154.

^[21] Kirsch (1997), pp. 21.

^[22] Chakravarthy et al. (2003), preface XV.

^[23] Chakravarthy et al. (2003), p. 238.

^[24] Mintzberg et al. (2005), p. 73.

^[25] Mintzberg et al. (2005), pp. 73.

^[26] Mintzberg et al. (2005), pp. 74.

^[27] Mintzberg et al. (2005), pp. 77.

^[28] Mintzberg et al. (2005), pp. 78.

^[29] Mintzberg et al. (1999), p. 53.

^[30] Mintzberg et al. (1999), p. 53.

^[31] Mintzberg et al. (2005), p. 74.

^[32] De Wit/Meyer (2005), pp. 230.

^[33] Cuervo-Cazurra (2003), p. 19.

^[34] Simon (2003), p. 85.

^[35] Barney (1991), p. 102.

^[36] Porter (1980), p. 3.

^[37] Simon (2003), p. 55.

^[38] Simon (2003), p. 35.

^[39] De Wit (1997), p. 7.

^[40] Cuervo-Cazurra (2003), p. 19.

^[41] Porter (1985), pp. 1.

^[42] Porter (1979), p. 137.

^[43] De Wit (1997), p. 9.

^[44] Porter (1979), pp. 138.

^[45] Porter (1979), pp. 140.

^[46] Porter (1979), pp. 142.

^[47] Porter (1979), pp. 142.

^[48] Porter (1979), pp. 143.

^[49] Porter (1979), p. 144.

^[50] Porter (1979), p. 144.

^[51] Porter (1979), pp. 11.

^[52] Porter (1979), p. 12.

^[53] Porter (1979), p. 14.

^[54] Porter (1980), pp. 16.

^[55] Hill (1988), p. 401.

^[56] Porter (1980), pp. 33.

^[57] Porter (1980), pp. 38.

^[58] Porter (1980), pp. 38.

^[59] Simon (2003), p. 55.

^[60] Nicolai/Robertson (2000), p. 1.

^[61] Simon (2003), p. 61.

^[62] Collins/Montgomery (1995), p. 119.

^[63] Barney (1991), p. 101

^[64] Teece/Pisano/Shuen (1997), p. 514.

^[65] Nicolai/Robertson (2000), p. 1.

^[66] Grant (1991), pp. 114.

^[67] Grant (1991), pp. 116.

^[68] Collins/Montgomery (1995), p. 119.

^[69] Grant (1991), p. 119.

^[70] Grant (1991), pp. 117.

^[71] Grant (1991), pp. 115.

^[72] Rajan/Zingales (1998), p. 1624.

^[73] Grant (1991), pp. 119.

^[74] Grant (1991), pp. 122.

^[75] Grant (1991), p. 128.

^[76] Coff (1999), p. 119.

^[77] Rajan/Zingales (2000), p. 205.

^[78] Grant (1991), pp. 129.

^[79] Grant (1991), pp. 131.

^[80] Grant (1991), p. 132.

^[81] Grant (1991), p. 133.

^[82] Miller/Eisenstat/Foote (2002), pp. 267.

^[83] Kay (1998), pp. 66.

^[84] Kay (1998), pp. 87.

^[85] Kay (1998), pp. 101.

^[86] Cuervo-Cazurra (2003), p. 19.

^[87] Cuervo-Cazurra (2003), p. 20.

^[88] Simon (2003), p. 55.

^[89] Simon (2003), pp. 55.

^[90] Simon (2003), pp. 56.

^[91] Simon (2003), p. 85.

^[92] Snider (2005), p. 36.

^[93] Simon (2003), p. 86.

^[94] Simon (2003), pp. 91.

^[95] Fuchs et al. (2000), p. 119.

^[96] Fuchs et al. (2000), p. 124.

^[97] Fuchs et al. (2000), pp. 125.

^[98] Fuchs et al. (2000), pp. 129.

^[99] Fuchs et al. (2000), pp. 129.

^[100] Fuchs et al. (2000), pp. 134.

^[101] Cuervo-Cazurra (2003), p. 20.

^[102] Cuervo-Cazurra (2003), p. 29.

^[103] Cuervo-Cazurra (2003), pp. 29.

^[104] Cuervo-Cazurra (2003), p. 38.

^[105] Cuervo-Cazurra (2003), pp. 40.

^[106] Cuervo-Cazurra (2003), p. 41.

^[107] Hamel/Prahalad (1989), p. 64.

^[108] Hamel/Prahalad (1989), p. 66.

^[109] Hamel/Prahalad (1989), pp. 70.

^[110] Hamel/Prahalad (1989), pp. 67.