A firm’s strategy, innovation, and sustainability practices are linked, which helps businesses to achieve their long-term goals and become successful. Strategy is essential to drive innovation, and innovation is essential to achieve sustainability. Strategy, innovation, and sustainability affect each other and create an interlocking mechanism, or fit together. These activities complement and reinforce each other in a manner that generates economic and strategic value and hence competitive advantage for the company. Thus, when innovation drives sustainability, it creates real economic value because innovation is emphasized, and sustainability creates added value because of its secondary importance; however, this value is less in amount than what innovation creates for the customers. When sustainability drives innovation, sustainability creates more or equal value for customers compared to what innovation can create alone. This difference in value creation distinguishes innovation from sustainability under the two conditions described above. Strategic management integrates these two components: sustainability and innovation in such a way that maximizes firm value. However, “sustainable innovation” will generate more economic and strategic value for the company under the same conditions than “innovation sustainability” can create.

When strategic management is used to manage innovation and sustainability, it creates all three types of synergies: operational, managerial, and financial. Since the goal of innovation and strategic management is to maximize profitability, the highest form of financial synergy can be achieved by strategically managing sustainable innovation.

Designing Products and Services by Including Sustainability

In innovation, designing products related to sustainability can be disaggregated into innovation sustainability and sustainability innovation. In innovation sustainability, we design new or redesign existing products by incorporating limited or partial sustainability specifications into product design requirements, and in sustainability innovation, we design entirely new products that emphasizes adding more sustainability requirements to the design to meet eco-friendly requirements first. To achieve this, the firm should understand consumer needs and preferences, examine product life cycles, have expertise in managing strategic change, and develop the required complementary resources and capabilities to design and commercialize the innovation. The complementary resources and capabilities can also be acquired externally through mergers, acquisitions, and strategic alliances. These two types of innovations with sustainability, as described above, are elaborated below:

When Innovation Drives Sustainability (Innovation Sustainability)

When innovation drives sustainability, it is called “innovation sustainability.” It creates new technologies, products, and practices that may reduce the environmental footprint, simultaneously creating social and economic benefits. It emphasizes innovation first and only partially or limitedly emphasizes sustainability and therefore provides fewer sustainable benefits and reduces environmental impact to a lesser extent.

Examples of Innovation Sustainability:

• Innovation-based companies emphasize innovation but have a narrow scope for value creation, which may result in providing only limited or partial sustainable solutions. For example, electric vehicles considerably reduce emissions but provide little environmental benefit because their environmental benefits will depend on sustainable battery production and proper waste disposal.
• Product innovation-based companies are now trying to integrate sustainability practices into their operations to provide eco-friendly products, to become more competitive, and to generate more added value for customers. For example, automotive manufacturers are undertaking initiatives to improve fuel economy to reduce carbon footprints, use recycled materials, and reduce waste to reduce their environmental footprint.
• Biodegradable Packaging: This type of packaging naturally decomposes and therefore reduces landfill waste and pollution. These products are mostly made from plant-based materials; however, they may require certain conditions to decompose. Their environmental benefits will depend on proper waste disposal and effective pollution management.
• Eco-friendly electronic products: These products are designed with recyclable components and non-toxic chemicals, are energy efficient, and reduce carbon emissions during production.

When Sustainability Drives Innovation (Sustainable Innovation)

In today’s competitive and changing business environment and globalization, firms are being compelled to adopt sustainable practices because of environmental issues, regulatory requirements, and shifting consumer preferences toward eco-friendly products.

When sustainability drives innovation, it is called sustainable innovation or eco-innovation and refers to developing new products or modifying existing products, services, processes, and business models that significantly satisfy environmental requirements, including reducing environmental harm, and creating monetary and social value. Sustainability innovation emphasizes sustainability first and focuses on creating monetary and strategic value for customers through sustainability.

Examples of Sustainable Innovation:

• When Procter & Gamble made a life-cycle assessment of its U.S. detergent products, and calculated that the detergents use too much electricity for washing clothes with hot water. Following this finding, they launched Tide Coldwater in the U.S. in 2005, which considerably reduces the electricity consumption and proportionately reduces the carbon dioxide emissions associated with generating electricity required for cold water washing.
• Smart grids and energy management systems emphasize sustainable innovation that reduces total energy consumption by optimizing electricity use and improving efficiency. For example, Siemens, Cisco, and IBM use smart grid and energy management systems to regulate electricity.
• Precision agriculture emphasizes sustainable innovation that reduces land and water use in farming, making farming efficient and reducing environmental impact considerably. Deere & Company and AGCO Corporation are two examples of precision agriculture manufacturers that use advanced farming techniques for farming.

References and Further Reading

1. Ashok N., Role of Strategic Management in Achieving Sustainability, A&N Strategy Consulting (August 21, 2023).
2. Michael E. Porter, “What Is Strategy,” Harvard Business Review (November-December 1996), pp. 1-21.
3. Ashok N., Importance of Strategic Management in Managing Innovation, A&N Strategy Consulting (November 5, 2018).
4. Evelyne Hoffman, How Innovation and Sustainability Work Together for a Better Future, Wins Solutions. Org., May 21, 2025.
5. Ram Nidumolu, K.C. Prahalad, and M. R. Rangaswami, Why Sustainability is Now the Key Driver of Innovation, Harvard Business Review, September 2009.
6. Mark M. Davis, Fundamentals of Operations Management (Ryerson: McGraw-Hill Ltd., 2005).
7. Wikipedia, Sustainable Electronics.
8. Wikipedia, Sustainable Innovation.

The post How Strategic Management Drives Sustainable Innovation and Maximize Firm Value first appeared on A&N Strategy Consulting.

Types of Changes

Change management is a complex process, and to manage it, change can be divided into two key categories: transformation and realignment, based on the final results or the desired goals and objectives a firm is pursuing. Realignment and Transformation are described in more detail below:

Realignment

Realignment is a non-transformational change in which the change process does not involve any re-evaluation of the primary assumptions and beliefs held within the organization. However, it involves slight adjustments or tuning to the firm’s strategy, structure, culture, systems, and processes that are built on its business model. Its fundamental purpose is to realign the firm’s strategy with its operating environment. Restructuring and adaptation are components of realignment. When the realignment change is implemented gradually or step-by-step, it is called adaptation. When the change is implemented much faster and suddenly, it is called restructuring or reconstruction.

Transformation

Transformational change is a fundamental change that is hard to implement. There has to be a major reason for transformation, and it should only be undertaken when the firm has exhausted all other strategic alternatives to restore the firm to its competitive position. Managing strategic transformation typically involves redefining the mission, goals and objectives, and strategies that will give the firm a new direction in response to the perceived environmental threats.

Realignment and Transformation can further be subdivided into evolution and adaptation, and revolution and restructuring, respectively, based on the nature of the change desired. The nature of change can be incremental, delivered over the long term (4 to 10 years), or big bang or rapid change delivered in the short to medium term (1 to 3 years). These four types of changes are briefly described below.

Adaptation

Adaptation is a less fundamental change implemented slowly in stages. The firm may not be in financial trouble; however, to resolve companywide other important issues, such as frequent customer complaints, low morale, performance, and corporate social responsibility (CSR), the firm may undertake multi-stage programs over several years to resolve the issues. Examples of companies that delivered adaptations are Nampak Plastics Europe, a manufacturer of plastic milk bottles, and Tesco, a British multinational grocery retailer in Europe.

Restructuring

Restructuring is a forced, reactive, and less fundamental change. It is implemented much faster than adaptation, mostly to realign the firm with its competitive environment, to restore performance. The firm’s weak competitive position causes lower sales and profits, resulting in poor performance. Restructuring can be small or large-scale. Restructuring is implemented in phases such as contraction, consolidation, and growth. Contraction involves reducing the workforce, cutting costs, and selling off assets to reduce losses and financially stabilize the firm. In the consolidation phase, programs are implemented to operationally stabilize the remaining lean organization. To achieve this, plans are developed to reduce overhead costs and improve functional productivity and efficiency. If the company is successful, it focuses on the third phase to grow and become profitable again. Many restructuring programs, such as the ones performed at Air-France KLM, Siemens, ITV, and Delta, were needed to restore performance in a relatively short period, for example.

Evolution

Evolution is a transformational change in which change is implemented gradually through different stages. It’s a proactive transformation in which activities are most likely planned and implemented based on the needs of anticipated future change. Prospectors and analyzers are two basic types of strategically oriented companies that focus on this type of change through innovation and emphasize exploring new market opportunities. Examples are product innovation in the automobile and personal computer industries. From 1890 to 1912, rapid innovation took place in the auto industry. Over time, the product innovation cycle and the industry life cycles have constantly shortened. Patterns of evolution also differ based on the product’s industry and geographical location. Some more popular examples of evolution are Fiat, GE, and British Airways, which have delivered fundamental evolutionary transformational change through cultural change.

Revolution

Revolution is a large-scale transformational change that is implemented rapidly within a short period, typically within 1 to 3 years. Forced reactive transformational measures are undertaken when the firm’s performance is declining because of its competitive environment. The need for this type of transformational change arises when a company determines that it can no longer pursue its old or current strategy and needs a new strategy to fill the strategic gap in performance, and therefore, forces a fundamental change in a short period to accomplish the required change. General Motors (GM) and Kodak attempted revolution at one time, but both got entangled initially in the downward spiral of restructuring. Later, GM realized its mistakes and finally delivered a revolution through innovation in its new car models. Kodak failed to deliver a revolution and finally filed for bankruptcy.

Change Path or Strategic Roadmap to Implement Change

Designing the strategic roadmap or change path to achieve the final results of the change is not only the most important but also the challenging aspect of change, because many organizations cannot differentiate between transformation and realignment. As a result, they cannot determine exactly the category and type of change they require. In fact, there is no clear separating line between realignment and transformation. The final result of change can be placed on a continuum: at one extreme, it is realignment with the less-fundamental shift in goals and business model, and on the other extreme, the change approaches complete transformation that involves a fundamental change in goals and business model.

The first step in managing change is to define the goals or final results (transformation or realignment) of change and the strategic roadmap of change. Then, based on the complexity of the scope of change, the roadmap can be disaggregated into core phases or stages to achieve the final results. The four types of changes (adaptation, restructuring, evolution, and revolution) described above are used as stages or phases, or building blocks to design the strategic roadmap. More phases can be added to the roadmap as desired. Each phase or stage can be further disaggregated into sub-stages or phases.

The process of roadmapping can help to identify the right change phases or stages, and select, sequence, and prioritize the change initiatives. Here, the process of roadmapping focuses on selecting the right types of changes required in terms of these four types, as described above, the sequence of the selected types, and the timing required for each type or phase. The strategic roadmap can be delivered through a single phase or multiple phases, which may involve only an alignment, or transformation, or both realignment and transformation, and their components. The number of phases required in terms of the types of changes, as described above, would be based on the context-related issues the organization is facing. Selecting the right design (nature of change) and roadmap, and the number of phases required is essential when planning for an appropriate change for the organization. Additionally, to manage change, the organization should have skills in strategic management because any roadmap of change is related to the change context. Additionally, the change agents should possess analytical and judgmental skills. When contemplating a change, it is always essential to assess and evaluate whether the final new strategy is about realignment or transformation. Here are some strategic roadmap sequence examples companies have used to implement change:

• Restructuring followed by evolution

British Airways followed a restructuring program between 1981 and 1982. It was only after completing the restructuring in the fall of 1982 that it started focusing on changing the image and culture from a transportation-based company to a customer-based company through an evolutionary transformational change. The phase one restructuring program generated the required money and time to implement phase two of the cultural change of the turnaround.

• Restructuring followed by evolution

In the process of transforming General Electric (GE), and after delivering a series of restructurings, GE CEO Jack Welch realized that a cultural change was also required at GE, and that could not be delivered through restructuring alone. Therefore, he extended the initial transformational change efforts through the 199os with a 10-year program (through evolution) known as “work out.”

• Multiple restructurings followed by revolution

After several unsuccessful restructuring attempts, GM finally realized that it needed a transformational change that could only be delivered through technological innovation (revolutionary transformation) in new car models. As a result, by the end of 2013, GM’s revenues reached new highs.

• A large-scale restructuring program in two phases

This is a large-scale example of a three-year restructuring program delivered in two phases by Air France KLM; however, it was named “Transform 2015” by the company. After suffering through the negative impact of the financial crisis of the Great Recession of 2008-2009, KLM realized that to regain its competitiveness and return to sustainable growth, it needed a transformation. Indeed, this was a two-phase restructuring program. Phase one focused on cost-cutting and downsizing, and phase two focused on structural change to the company.

References and Further Reading

1. Balogun, V. Hope Hailey, and S. Gustafsson, Exploring Strategic Change (United Kingdom: Pearson Education Ltd., 2016), Chapters 1, 2, and 4.
2. Ashok N., Internal Sources of Strategic Transformation: Competitive Advantage through Innovation, A&N Strategy Consulting, August 7, 2018.
3. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice Hall, 2000), Chapter 3.
4. L. Wheelen et al., Strategic Management & Business Policy (Malaysia: Pearson Education Ltd., 2018), Chapter 7.
5. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), Chapters 8 and 9.
6. Robert G. Cooper and Scott J. Edgett, Product Innovation and Technology Strategy (USA: Product Development Institute Inc., 2009), Chapters 6 & 7.
7. Ashok N., Design and Management of the Transition State of Strategic Change, A&N Strategy Consulting, October 29, 2019.

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Today’s rapidly changing business environment is influenced by political, economic, and technological forces and many other external interventions. These environmental forces, particularly the impact of disruptive digital technologies and international competition, have slowly or abruptly destabilized the industry structures of many industries. According to Rich D’Aveni, the general feature of industries today is hyper-competition: “intense and rapid competitive moves, in which competitors must move quickly to build (new) advantages and erode the advantages of their rivals.” If industries are hyper-competitive, their structures are unstable, and competitive advantage is temporary. However, research shows that disruptions with rapid structural changes are not limited to the high-technology sector—the oil and gas, financial, and taxi services have also experienced the same disruptions in the recent past.

Because of the advances in computer sciences, the time-to-market (between idea generation and launch) for a new product is getting shorter and shorter every year in the software development industry. In the same way, rivals can quickly imitate the strengths of AI software development companies. Moreover, because software development skills are less tacit and tend to become more explicit, they can be duplicated quickly. In contrast, to develop and manufacture AI hardware (chips, computer systems, etc.), more time and tacit knowledge is required, and therefore, these hardware skills are difficult for competitors to imitate. Additionally, the higher investment needs for AI hardware, such as semiconductor manufacturing, will provide strong barriers to new entrants.

The news coming out from Deep Seek indicates that the stability of the US Generative AI (GenAI) industry structure might get eroded rapidly by the disruptive impact of Deep Seek. The hypercompetitive move from Deep Seek, which rapidly built a strong competitive advantage using graphics processing unit (GPU) chips from Nvidia, might erode the competitive advantage of rival firm Open AI’s Chat GPT in the long run. Open AI and other similar companies in the US will still face international competition even if Deep Seek is banned in the US.

Currently, the US is the rational leader in AI innovation and the various groups within the AI industry are in between the introductory and growth stages of the AI industry evolution. Since the relationship between R&D and innovation output is very weak, no one can predict the amount of value the US AI industry will create in the long run and who will capture the maximum value from AI innovation output, the innovators or the consumers. Currently, there are an enormous number of new entrants into AI innovation, including some backed by heavy investments, which will cause intense rivalry and high exit barriers, respectively. Intense price competition will bring down the AI product prices, which will result in lower profitability, and therefore some companies will find difficulties in recouping their investments, however, customers will capture the maximum value, particularly in the Generative AI industry.

Innovation generates a temporary competitive advantage that offers an opportunity in terms of time for the innovative company that can be used to build capabilities quickly and defend its market position to remain successful. For example, Intel and Nvidia successfully used lead times to generate advantages in manufacturing, quality, and market position. In contrast, the electric vehicle (EV) manufacturers in the US failed to develop a cost leadership market position in their available lead times to compete successfully in the US auto market with Chinese EV manufacturers. Therefore, to stay ahead of the competition in the AI industry, a firm must continuously innovate with a robust innovation strategy, upgrade its resources and capabilities, gain and sustain its market position, and make imitation harder for competitors by developing slow-cycle resources (patents, brand name, etc.).

Strategic management is the backbone of innovation. Without it, start-ups and established innovative companies can have difficulty in generating and sustaining their competitive advantage. Because of the high attractiveness of the AI industry, an exceptionally large number of innovative firms globally have been entering the global market to capture market share and therefore are facing hyper-competition. Most startups possess only a single strength in innovation, which is not enough to sustain a competitive advantage in today’s dynamic business environment. Successful first movers should build complex competitive advantages in their initially available lead times to sustain their competitive advantages in the marketplace. This requires building strengths in multiple areas, including strategic management, to compete effectively and create customer value for their products.

References and Further Readings

1. Ashok N., The Effect of Changing External Environment on Industry Structure, Competition, and Profitability, A& N Strategy Consulting (December 23, 2022).
2. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 4, 9, and 15.
3. A. D’Aveni, Hyper-competition: Managing the Dynamics of Strategic Maneuvering (New York: Free Press, 1994): 217-218.
4. A. D’Aveni, G.B. Dagnino, and K.G. Smith, “The Age of Temporary Advantage,” Strategic management Journal 31 (2010): 1371-1385.
5. Ashok N., Creating and Delivering High-Performance Innovation, A& N Strategy Consulting (December 9, 2024).
6. Ashok N., Successful Innovative Companies Exploit Complex Sources of Competitive Advantages, A&N Strategy Consulting (April 21, 2020).

The post Signs of Hyper-competition in the Generative AI Industry first appeared on A&N Strategy Consulting.

Innovation generates a temporary competitive advantage for the innovative company that can be used to fast build and defend its market position on this lead-time advantage to remain successful. For example, Intel, Cisco, and Nvidia successfully built lead time advantages in manufacturing, quality, and market position. In contrast, the electric vehicle (EV) manufacturers in the US failed to develop a cost leadership market position to compete successfully in the US auto market with Chinese EV manufacturers. Therefore, to stay ahead of the competition, a firm must continuously innovate with a robust innovation strategy, upgrade its resources and capabilities, gain and sustain its market position, and make imitation harder for competitors by developing slow-cycle resources (patents, brand name, secrecy). Innovation has a broad meaning that encompasses all value-creating functional activities of product design and development (or R&D), manufacturing, and marketing of a new (or improved) product or manufacturing process. Innovation occurs when knowledge from all three functional areas interact and combine in an integrated manner.

A firm’s long-run profit or its equivalent enterprise value is considered an indicator of the firm’s performance and a guide to the strategy formulation process. Some other profitability performance measures include market capitalization, operating margin, return on assets (ROA), and return on equity (ROE). Thus, the fundamental goal of the strategy is to maximize performance by maximizing profits over the long term. Here are some important aspects of the innovation components: the three functional strategies described, that are imperative in creating and delivering high-performance innovation.

Marketing Strategy

A Firm’s marketing and innovation strategy are subsets of its business strategy. Marketing involves all aspects of developing a product that is to be sold in the market. It encompasses all business activities, including facilitating selling. Some of the most important aspects of marketing in managing innovation are business model generation, gaining market position, and sustaining market position, which are briefly described below.

Business Model Generation

A business model by definition shows the logic or architecture of value creation. Innovation by itself or in isolation has no commercial meaning. It becomes important only when it creates utility and value for all the stakeholders of the firm. To innovate successfully, a firm should be able to produce and market a product successfully. For this reason, new product development (or R&D) and marketing become the two most crucial functions of the business to create, deliver, and capture value. From the marketing viewpoint, the role of the business model is indispensable in creating market value for the innovative product. The core of marketing is in the business model.

Gaining and Sustaining Market Position

The company’s market position focuses on two key aspects: gaining a market position and defending a market position or sustaining growth in a competitive environment.

Gaining Market Position

The company can gain market share by using three strategies: (1) attracting competitors’ customers or selective demand strategy, (2) attracting new customers, and (3) tapping into new markets or creating new markets.

Defending Market Position

Gaining a market position to achieve growth is not enough, the company should also be able to sustain its profitable growth. Sustainable growth can be achieved in three simple ways: take no action, reposition the offering, and add new offerings. Taking no action means ignoring competitors’ price moves. Repositioning the current offering means reducing costs, moving up/downscale, or increasing or decreasing benefits. Besides adding value to the current customers, to further reposition, a company can add new offerings to better address the needs of new customers. Here, repositioning means changing the value proposition of the new offering in any of the two ways- vertical or horizontal. Vertical repositioning refers to changing the value proposition to a different price range (either higher or lower). Horizontal repositioning also refers to changing the value proposition, but only by altering the product benefits without changing the prices.

Product Innovation and Technology Strategy

The firm’s product innovation and technology strategy is a subset of its business strategy. Most innovation strategies are based on strategic intent: those ambitious goals and objectives that are the passions of the innovators with an intention of what they want to achieve and are not driven by profitability goals. Today, the most successful firms at creating shareholder value are those that give priority to purpose over profit. Samsung Electronics emerged as the world’s largest company based on undertaking a few big ambitious innovative projects that involved an enormous commitment of financial and human resources. The innovation strategy identifies and defines innovation goals and objectives, direction, and areas in which the new product development (NPD) efforts should focus. Focus is one of the most vital strategic themes leading to high-performance innovation. It can be increased by undertaking a strategic analysis of all the options. Focus provides direction for idea generation, criteria for idea screening and project selection, and targets for resource acquisition. The product innovation and technology strategy can be implemented through strategic and tactical portfolio management, which is indispensable in managing the new product development process, to create value and maximize R&D return on investment (ROI).

New Product Development

The implementation process or new product development process begins by transforming the firm’s innovation goals, objectives, and strategy into initiatives (project identification, selection, and prioritization process) to establish portfolios of programs and projects. Further, programs and projects are evaluated for technical performance and against the selection criteria.

Strategic portfolio management involves making high-level investment decisions: where to allocate a firm’s scarce resources (people and funds) and how to split and allocate these resources across project types, markets, technologies, and product types. Tactical portfolio management focuses on deciding on individual projects. This includes decisions about project selection, prioritization, and resource allocation. The benefits of implementing innovation strategies through portfolio management are summarized below.

• Portfolio management helps to bridge the gap between strategy formulation and implementation.
• Aligns strategic goals and strategies to projects, portfolios, and programs.
• Helps in the effective allocation and use of scarce resources.
• Portfolios can be balanced to reduce risk and create the best value for the organization.
• Helps to generate synergies, integrate activities, and enhance business success.

The fundamental purpose of any business is to create value, and through value profit, portfolio management also contributes towards value creation to the firm by choosing and doing the right activities. From the profitability standpoint, portfolio management is used to select and manage portfolios of projects and programs to realize two important additional benefits: it improves the efficiency of investment by eliminating wasteful projects: through prioritizing and selecting the right projects and programs, that is doing the right thing, and also by choosing what not to do. Second, by making investments in high-return portfolios.

Manufacturing or Operations Strategy

During the 1950s and 1960s, the goal of manufacturing, or operations strategy, was to minimize manufacturing costs. After this time, companies have constantly looked for and added additional sources of competitive advantages to remain competitive in the marketplace. Today, due to increased competition and globalization, the goal of operations strategy has shifted from minimizing production costs to maximizing the value added. Value is added through competitive priorities or priorities that we select to support the operations strategy. These priorities are cost, quality, delivery, flexibility, and service. However, the fact is that the firm cannot focus and excel on all competitive priorities simultaneously. Therefore, the management should decide which priorities are critical to the firm’s success. For example, if a company wants to focus on speed of delivery, then it may not be possible for it to remain flexible in its ability to offer a broad range of products. McDonald’s offers a fast delivery service but offers a limited menu of standard products. In contrast, some restaurants prepare on order but take longer time to deliver. Moreover, firms should develop their operations strategy in such a way that complements R&D, marketing, manufacturing, and all other functional strategies.

The firm’s competitive priorities are achieved through core capabilities. Core competencies allow the firm to create market value and achieve competitive advantage. Today, competitive priorities are not restricted to operations strategy. All functional strategies have the potential to generate added value if the priorities support the business strategy. However, we only implement a few depending on the competitive priorities we select and focus on, which are industry and customer-specific. The selection of the functional strategies will also depend on the prevailing key success factors (requirements for success) and trends in the industry. For example, some companies such as Zara, Intel, and Pfizer have developed capabilities in research and new product development to design new products and bring them faster to the market than the competitors, giving them a competitive advantage. One of the best ways to choose and develop an effective functional strategy, including an operations strategy, is to understand customers’ additional needs and satisfy those needs better than the competition by creating and maximizing added value for them.

References and Further Reading

1. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters1, 2, 7, 9 and 13.
2. Ashok N., Linking Innovation and Competition to Acquisitions, A&N Strategy Consulting (December 30, 2019).
3. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (NJ: Prentice Hall, 2000), Chapters 4 and 5.
4. Paul Trott, Innovation Management and New Product Development (United Kingdom: Pearson Education Ltd., 2017), Chapters 1 and 4.
5. Robert G. Cooper and Scott J. Edgett, “Product Innovation and Technology Strategy (U. S.: Product Development Institute Inc., 2009), Chapters 1, 3, 4, 5 and 6.
6. A. Chernev, Strategic Marketing Management (USA: Cerebellum Press, 2014), Chapters 1, 2 and 14.
7. Ashok N., A New Business Model Structure, Innovation Strategy, and Competitive Advantage, A&N Strategy Consulting (April 8, 2018).
8. Ashok N., Implementing Strategies through Portfolio Management, A&N Strategy Consulting (December 15, 2014).
9. Ashok N., Managing Innovation through Dual Planning Systems, A&N Strategy Consulting (June 1, 2017).
10. Mark M. Davis, Fundamentals of Operations Management (Ryerson: McGraw-Hill Ltd, 2005), Chapter 2.
11. Ashok N., Developing Multiple Sources of Added Value for Customers, A&N Strategy Consulting (December 27, 2023).

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In the 21^st century, technological forces are reshaping the business environment in which Artificial Intelligence (AI) technologies are transforming all aspects of businesses, including commerce, production, and social interaction.  The combination of existing knowledge from electrical engineering and computer science created a new knowledge area known as “Artificial Intelligence (AI),” which, when further combines with decision-making principles, can help businesses make intelligent decisions. By combining the components and knowledge from these areas such as algorithms, big data, transducers, sensors, and AI, creates external intelligence—not present in the firm’s workers but outside the firm’s boundaries in the virtual economies’ algorithms and intelligence machines. AI tools are used to support business operations in optimizing workflow and enhancing productivity. The benefits of AI can be achieved through automating repetitive tasks, generating information, big data processing, and predicting future performance based on data analysis.

A more creative form of AI is Generative AI (GenAI) which descends from AI and can generate original content, such as text, audio, video, images, and software codes in response to a demand or request. It depends on more advanced forms of machine learning models known as deep learning models, such as large language models (LLMs). GenAI offers several benefits, including productivity improvement, enhanced efficiency and creativity, and can improve the decision-making capability of an organization.

Here are some important areas of strategic management in which AI technologies, such as GenAI, including large language models (LLMs) can help in enriching firms’ strategic management capability:

Scenario Analysis or Scenario Planning

In developing strategic plans and managing strategic change, it becomes imperative to explicitly address and understand the strategic implications of uncertainty in more detail. Scenario analysis or scenario planning is a powerful tool for systematically identifying and analyzing the sources of uncertainty facing an industry or a firm and converting them into useful scenarios. A scenario is a firm’s consistent view of how the future might unfold in light of current trends and uncertainties in the firm’s external environment. Scenario planning is also called contingency scenario planning (CSP). However, CSP is explicitly used to address rapid or sudden changes in the firm’s external environment.

The environmental uncertainties that exist in the firm’s external environment pose a threat to strategic managers because it constrains their ability to develop strategic plans and make strategic decisions to keep the firm in equilibrium with the external environment. For example, increased globalization creates additional markets, which increase the number of strategic factors and complexity for the firm in making decisions.

Scenario analysis or scenario planning can identify threats and opportunities, evaluate current strategies, generate new alternative strategies, build consensus, and develop flexible thinking. We can further evaluate the generated strategies under different scenarios to identify the most robust strategies. Historically, governments, businesses, and the military have used scenarios for a long time as a powerful tool to mitigate the consequences of uncertainty. However, because of the increased intensity of uncertainty in the business environment in the past two decades, the effectiveness of scenarios has been reduced. Traditional tools available for scenario analysis fall short in identifying trends and external strategic factors, are time-consuming, and limit the number of scenarios they can handle.

However, new AI technology-based tools, such as GenAI, can overcome the challenges faced by traditional CSP or scenario planning. It is expected that generative AI can substantially improve a firm’s capability to perform CSP much faster and at a lower cost than conventional methods. To further improve the effectiveness of CSP, firms can use advanced generative tools such as large language models (LLMs) which can help in identifying and generating innovative ideas for scenarios, evaluating and combining scenarios, and formulating scenarios based on trends.

Measuring Firm’s Long-term Performance

The primary purpose of strategic management is to maximize the firm’s performance in the long-run, maximize the long-run profit, or maximize the enterprise value in the long-run. However, to improve or maximize performance, it is imperative to measure and control it. There is a saying if you cannot measure, you cannot control. To improve or maximize performance through strategic management’s performance management system, strategic goals are translated into performance targets, and then performance results are monitored, evaluated, and controlled against the targets. To become successful, performance targets must be clear and consistent with long-term goals and linked to the firm’s strategy. However, the typical strategic management model’s evaluation and control element uses a feedback control system that is not appropriate to measure and control long-term performance, because a feedback control system can only measure short-term performance successfully. Therefore, the performance targets should be measured and monitored over the short term only. The other problem in the performance management system is that disaggregating long-term goals into short-term performance targets and key performance indicators (KPIs) remains an enormous challenge. Moreover, integrating or rolling up the short-term targets does not meet the goals specified in the plan for several reasons. However, these anomalies can be corrected.

GenAI and LLMs data analytics capability: data analysis, processing, iterations (in feedback-tuning), mining, and predictive capability can successfully resolve long-term performance measurement issues.

Enriching Idea Generation, Focus, and Strategic Decisions Making

Making strategic decisions involves deciding on which issues to focus on. Without focus, things you want to do can be spread across many areas of activity. Focus provides direction for strategy and helps in targeting those areas where the return is maximum. Focus can also provide direction for idea generation in innovation, idea screening, project selection, and resource commitment and deployment.

Generative AI tools such as LLMs can help in identifying, generating, and evaluating new ideas and areas (arenas), generating alternative strategies, and enriching focus and organization’s strategic decision-making capability.

Risks and Challenges of Generative AI

GenAI offers enormous potential to create additional sources of value and profitability for firms in all industries. From the above discussion, we see that GenAI can become an indispensable tool in the future for strategic management. However, currently, it is still in its infancy stage and not fully commercialized, and therefore, presents considerable risks and challenges to users, developers, and society. It faces complex operational and external issues, such as hallucinations, inconsistent outputs, unwanted bias outputs, deepfakes, and threats to privacy, security, and intellectual property.

To mitigate the risks and challenges of hallucinations in GenAI, for example, firms should consider the use of GenAI as an external optional complementary resource that can augment the firm’s strategic decision-making capability. Because using GenAI involves high risks, subject matter experts should review the GenAI output for content reliability and accuracy and should not blindly implement the strategic decision outputs generated by GenAI.

References and Further Reading

1. Camilo Quiroz Vazquez and Michael Goodwin, What is Artificial Intelligence (AI) in Business? IMB (February 20, 2024).
2. Ashok N., Digital Strategy, Digital Marketing Strategy, and Tactics, A&N Strategy Consulting (September 15, 2016).
3. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 2 and 15.
4. Cole Stryker and Mark Scapicchio, What is Generative AI? IBM (March 22, 2024).
5. Ashok N., Combining Scenarios and Real Options to Address Uncertainty in Strategy Formulation, A&N Strategy Consulting (April 17, 2022).
6. Daniel J. Finkenstadt et al., Contingency Scenario Planning using Generative AI, California Management Review (Jan 22, 2024).
7. L. Wheelen et al., Strategic Management & Business Policy (Malaysia: Pearson Education Ltd., 2018), Chapter 4.
8. Ashok N., Effective Performance Measures of Corporate Control, A&N Strategy Consulting (December 31, 2020).
9. Robert G. Cooper and Scott J. Edgett, Product Innovation and Technology Strategy (U. S: Product Development Institute Inc., 2009), Chapters 3 and 4.
10. Alexa Trachim, How LLMs for Data Analysis can Support Businesses? In Data Labs (April 16, 2024).
11. Daniel J. Finkenstadt et al., Use GenAI to Improve Scenario Planning, Harvard Business Review (November 30, 2023).
12. Mostafa Sayyadi and Luca Collina, How to Adapt to AI in Strategic Management, California Management Review (June 6, 2023).

The post Role of Artificial Intelligence (AI) in Enriching Firms Strategic Management Capability first appeared on A&N Strategy Consulting.

Strategy is a means in what an organization particularly does or intends to do to achieve its business objectives and superior performance. The strategy-making process is a purposeful behavior in which action is preceded by intention, and intention is preceded by thought. Here, we see that there is a clear relationship between identity (an individual’s thinking or an organization’s collective thinking about their existence) and doing (strategy). Therefore, the firm’s identity takes precedence over strategy.

When a firm’s external environment is changing, some dimensions of the firm’s identity, such as culture, self-image, and relationship, can provide an important stable basis upon which it can define and establish its strategy. A firm’s identity implies who we are, what we do, and what we stand for. Today, strategy is not much concerned with forecast-based planning, but it is more and more about a firm’s identity, direction, and finding additional sources of competitive advantages. The company’s ideals-its values and principles- can be important parts of the firm’s identity. When these values and principles are shared among people within the firm, they become the primary part of the corporate culture.

A firm’s identity and culture can be intangible resources that can strongly influence the capabilities an organization develops and uses. A firm’s resources can be combined to develop organizational capabilities. Using an organizational capability with the right strategy in light of key success factors generates a competitive advantage.

From a marketing point of view, a firm’s core capabilities (also called core competencies) allow it to create market value and achieve a sustainable competitive advantage. Core competencies can be developed on the supply side and the demand side. However, supply-side core competencies will provide the firm with the required stability under changing environmental conditions. Based on six core competencies: business innovation, operations management, marketing management: product development, brand management, and service management from a marketing point of view, a firm can define its identity or corporate identity. Some of these competencies are described below.

Brand Building

From the competitive viewpoint, there are two important tools of brand management to build brands: brand identity- which describes the uniqueness and value part of the brand, and brand positioning: distinctive characteristics that make the brand different from competitors’ brands. For the firm’s existing brands, brand identity is the source of brand positioning. A Firm’s identity is embedded in the memory of its products and advertisements, acts like DNA, and does not decay easily. For example, the value conveyed by famous brands such as Tesla, Red Bull, and Virgin is related to conveying identity rather than promising quality and reliability.

Product Development

A firm can develop product development capabilities to develop products to create customer value. Developing core competency in this area can provide the firm with the strategic benefit of product leadership. For example, companies such as Apple, Microsoft, and Samsung have shown capabilities in this area.

When the firm’s external environment is more turbulent (higher rate of change), basing strategy upon the firm’s internal resources and capabilities (developed based on a strong identity), instead of the external market focus, will provide a stable basis for the firm’s strategy in the long run. In technology-based industries, developing strategies based on core competencies can help companies to extend their products’ life cycles. Microsoft developed capabilities in marketing, software development, and collaborating services when it developed the MS-DOS operating system for PCs and later Windows-graphical operating systems, which permitted it to diversify and expand into internet services, application software development, and cloud-based computing.

In contrast, firms that did not change their market focus, in light of a technological change, had difficulties in building new capabilities required to fulfill customer needs. The tales of the woes of Eastman Kodak and Nokia are typical examples.

Business Innovation

Core competency in business management reflects the firm’s capability in managing business processes such as identifying business goals and objectives, designing a collaborator network, and designing and implementing strategies to achieve company goals and objectives. This capability can help the firm achieve the strategic benefit of business model leadership. For example, companies such as McDonald’s, IKEA, and Netflix have shown competency in the area of business innovation.

Technology Development

Core competency in this area reflects a firm’s ability to invent new technological solutions. Developing this competency can provide the firm with the strategic benefit of technological leadership. For example, companies such as Motorola, Intel, and Google have developed and proven this competency. However, a firm’s competency in developing new technologies does not mean the company has competence in developing successful new products. For example, Xerox invented various new technologies such as Ethernet, graphical user interface, and laser-printing, but was slow in transforming these new technologies into viable products.

An organization’s strong identity provides long-lasting stability at the core of an organization, which helps it deal with its business environment with high confidence. However, organizational identity, because of its long-lasting nature, can impede the implementation of strategic change. Organizational capabilities that reflect highly developed organizational routines resist developing new routines. As a result, the organization gets into competency traps in which core competencies become core rigidities that resist change. Therefore, to initiate and implement a change, it is the responsibility of organization leaders to review organizational identity carefully, understand the issues, and use the tools of strategic change management in such a way that can facilitate change. Some firms such as Disney, IBM, and Danone initiated and implemented important strategic changes but within the long-lasting stability of their companies’ identity.

Creating an identity for a multibusiness firm can be more daunting compared to a small business firm whose identity is decided by the few products it offers. However, if the multibusiness firms base their identity on vision, mission, values, and principles, it can provide long-lasting stability to the firms. For example, Danone underwent multiple strategic changes before it emerged as a successful dairy products and baby food multinational company because of its commitment and consistency based on a set of values and principles that emphasized corporate social responsibility and employee welfare.

References and Further Reading

1. Davide Ravasi, Mary Tripsas, and Ann Langley, Exploring the strategy-identity nexus, Strategic Organization, 2020, Vol. 18(1) 5-19.
2. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 1, 2, 5, 6, 7, 8, 13 and 15.
3. N. Kapferer, The New Strategic Brand Management (London: Kogan Page Limited, 2013), Chapter 7.
4. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (NJ: Prentice-Hall, 2000), Chapter 4.
5. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice-Hall, 2018), Chapters 5 and 6.
6. A. Chernev, Strategic Marketing Management (USA: Cerebellum Press, 2014), Chapter
7. Ashok N., Developing Multiple Sources of Added Value for Customers, A&N Strategy Consulting (December 27, 2023).
8. Corporate Identity-Wikipedia, https://en.wikipedia.org› wiki › Corporate_identity.

The post Linking Strategy to Identity and Culture to Cope with the Changing Environment first appeared on A&N Strategy Consulting.

There are two primary sources through which a firm can add value to its products: external (natural, societal, and task) environmental change and internal (strategy, structure, culture, and resources and capabilities) environmental change. For example, any external change in the political-legal part (i.e., change in factors such as tax laws, antitrust regulation, global warming legislation, etc.), economic part (i.e., change in factors such as interest rates, demand, price, etc.), sociocultural part (i.e., change in factors such as health care, unionization, social values, etc.), technological part (i.e., change in factors such as new products, digital transformation, patent protection, etc.), or/and natural environmental part (i.e., change in factors such as climate, weather, pollution, etc.) can create opportunities, however, the value or added value creation to generate competitive advantage will depend on the firm’s ability to take advantage of the opportunities and respond to them through its resources and capabilities.

 Competitive Priorities or Priorities

Functional strategies required to create added value are developed from the competitive priorities or priorities which may include low cost, differentiation, high quality, delivery, flexibility, service, and the environment. Today, competitive priorities are not restricted to operations strategy. The selection of the functional strategies will also depend on the prevailing key success factors (requirements for success) and trends in the industry. The firm’s competitive priorities are achieved through core capabilities.

One of the best ways to choose and develop an effective functional strategy is to understand customers’ additional needs and how to satisfy those needs better than the competition by creating additional value for customers. Value can be added through competitive priorities that we can choose to support on an already decided functional strategy. All functional strategies have the potential to generate added value, however, we only implement a few depending on the competitive priorities we select and focus on, which are industry and customer specific. Below, I will describe competitive priorities and functional strategies that contemporary firms use to create added value.

Marketing Strategies

Updating Business Model

The changing external environment and the firm’s target market, defined by five crucial factors: company, customers, collaborators, competitors, and the context, can render the firm’s business model obsolete. Therefore, to succeed, the firm must constantly update its business model as needed to adapt to the changing environment. For example, to satisfy customer needs in response to the external change, several fast-food restaurants, including McDonald’s, redefined their products and added healthier options to their menu. Healthier options can add psychological value in the domain of customer value. And, in response to competition from internet-based firms, many brick-and-mortar retailers, such as Best Buy, Barnes & Noble, and Macy’s, redefined their business models and became established as multichannel retailers.

Protecting Market Position

When a product becomes successful in the market, it attracts competition, in which the firm loses its market share to the competitive firms. Therefore, to protect its market position, the firm should develop marketing strategies to continuously add value to its current products to make them more appealing to customers. There are two ways by which the firm can add more value to its existing products: repositioning (reducing costs or by increasing benefits), and by adding new products.

Repositioning the Current Product

The firm can reposition its product in two ways: by modifying the product’s value proposition (VP) to make it more attractive to the current customers or by increasing the attractiveness of the offering to a different customer segment.

Repositioning to add more Value to the Product for the Current Customers

This can be achieved in two ways: by adding more value (increasing benefits) and by reducing the product’s cost.

Reposition to Attract New Customers

Besides serving current customers, the firm can reposition its current products to serve the needs of different target customers. Repositioning means modifying the VP through vertical or horizontal repositioning or both ways. In vertical repositioning, the firm can respond to customer needs by changing the VP of the offering by varying the prices (high or low) and proportionately increasing or decreasing the benefits. In horizontal repositioning, the firm can change the VP of an offering by modifying its benefits without changing its price.

Strategies to Enhance Customer Value

To become successful, a firm’s product should keep on adding value to maximize its advantage on certain attributes that are most important to customers. Based on the customer value equation (V = f (w_i, a_i)) a firm can use the following three strategies to add more value to its products and therefore enhance the product’s customer value to sustain its competitive advantage in the marketplace:

1. Enhance Product’s Performance on a Particular Characteristic

With respect to the customer value equation, this strategy implies enhancing the product’s performance (ai) on a particular characteristic (i). For example, to make computer software more appealing to performance-savvy customers, the firm can consider increasing the software speed.

2. Add a new Feature on which the Product has an Advantage

With respect to the customer value equation, we add more attributes (i ranges from 1…n) to the product on which customers assess the product. For example, a software firm can differentiate its product from rivals by introducing a new attribute that is seen as more valuable by customers.

3. Enhance a Product’s Attractiveness on a Characteristic on which the Firm Already has an Advantage

Another way to make a product more appealing is to change the perceived importance of some characteristic of a product in such a way that enhances that feature on which it is already much better than the rival’s product This strategy focuses on improving the w_i function where i is the compatibility. For example, if a software product is slow in speed but is compatible with other software products, it communicates the importance of compatibility to prospects and customers.

Differentiation

When a firm cannot compete based on price, it can provide more value-added products and services through differentiation to compete effectively. Differentiation provides something unique that is more valuable to the customers than offering a lower-price product. When the products of competing firms are similar, the product becomes undistinguishable and becomes a commodity. Therefore, the product’s price becomes the primary basis of competition. Intense price competition erodes industry profitability, and the customers capture the larger share of the value created.

Differentiation opportunities depend on a product’s features and functions. Some products and services such as an automobile or a restaurant can offer an ample amount of differentiation than simple products such as sugar, salt, and wheat. Products that lack physical differentiation are called commodities. However, by adding more value to these products or services, they can be transformed into value-added products or services. For example, Bookselling through the Worldwide Internet is a commodity business. However, Amazon generates additional information to provide several value-adding services, such as reviews, best-seller lists, and customized recommendations to achieve a differentiation advantage.

Differentiation can be created on the supply side and/or on the demand side. On the supply side, the firm should know about its distinctive competencies through which it desires to create uniqueness. Creating additional value on the supply side is typically more complex, and costly, but more sustainable. On the demand side, understanding the customers and their needs and preferences is imperative. Creating value on the demand side is less costly and less time-consuming.

Differentiation encompasses all aspects of the product or service if that aspect can influence the customer value and the firm’s relationships with customers that generate the overall customer experience.

Undertaking Social and Environmental Responsibility

In the 21^st century, businesses have social responsibilities towards their customers, employees, and local communities, and have an obligation to keep their environmental footprint as minimal as possible. During the end of the 20^th century, firms perceived that undertaking social and environmental responsibility would add costs to their products and result in lower profits or even losses. However, during the first decade of the 21^st century, the practical experience of firms shows that by creating value by undertaking social and environmental responsibility, a firm can achieve a sustainable competitive advantage. Many large companies, such as Unilever, 3M, Procter and Gamble, and Marks and Spenser, have become extremely successful in generating long-term profitability. These companies have successfully addressed the sustainability issues of corporate social responsibility and the environment.

Usually, undertaking social and environmental programs does not add monetary value to customers, but they add non-monetary strategic (functional and psychological) value, which can be converted into monetary benefits. For example, Dofasco, a Hamilton, Canada-based steel company before 1990, successfully competed based on a lower-cost strategy. But in the early 1990s, its status was reduced to a commodity provider, as it was struggling to compete profitably. After 1992, it followed a turnaround strategy to refocus on providing high-quality steel solutions and focused its efforts on technology and innovation, operational excellence, and intimate customer relationships. By 1999, it became the most profitable steel company in North America.

One reason behind Dofasco’s success was that it also incorporated social and environmental program initiatives in its 1992 turnaround strategy. This included a variety of training and development programs for company employees. Additionally, it invested in health, safety, and wellness programs in the workplace. These programs considerably improved productivity, reduced costs, and added value to the company’s products. As a result, the company reduced its workforce from 13,000 to 7,000.

Dofasco also addressed environmental quality issues by achieving ISO 14001 certification (International Environmental Standard) in 2002. Today, Dofasco is a subsidiary of ArcelorMittal, which is the world’s largest steel producer and has earned a leadership position in environmental sustainability.

References and Further Reading

1. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 4, and 15.
2. Ashok N., Successful Innovative Companies Exploit Complex Sources of Competitive Advantages, A&N Strategy Consulting (April 21, 2020).
3. Mark M. Davis, Fundamentals of Operations Management (Ryerson: McGraw-Hill Ltd, 2005), Chapter 2.
4. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice-Hall, 2018), Chapter 4.
5. A. Chernev, Strategic Marketing Management (USA: Cerebellum Press, 2014), Chapters 2, 5, and
6. Ashok N., Role of Strategic Management in Achieving Sustainability, A&N Strategy Consulting (August 21, 2023).
7. Nicole Voigt et al., Solving Steel’s Value-Added Riddle, Boston Consulting Group, May 8, 2018.
8. Sustainability Report 2021, “Smarter steels for people and planet-ArcelorMittal North America.”

The post Developing Multiple Sources of Added Value for Customers first appeared on A&N Strategy Consulting.

During the last decade of the 20^th century, the primary goal of strategic management was to maximize the long-run profitability of the firm to maximize shareholder value to achieve superior financial performance was quite appropriate because during that time social and environmental factors were not considered in the description of sustainability of competitive advantage. This view of the firm implies that the management should act solely in the interest of shareholders and that the success of the market economy depends on how firms respond to profit incentives. Therefore, when the firm focuses on maximizing long-term profits, it best serves the interests of both society and the shareholders. The stakeholder theory of value maximization suggests that the firm should act in the interest of all its stakeholders (including society). However, before the end of the 20^th century, this contrasting view of stakeholder theory was perceived as a threat to the shareholder value maximization principle, because pursuing the interest of stakeholders would ruin shareholders’ interest. During the same period, it was perceived that a firm could be extremely successful without considering the cost of taking on environmental and social responsibilities, which could eventually reduce shareholder value. Furthermore, during the 21^st century, the reputation of shareholder value maximization faded because of several drawbacks connected to firms’ short-term orientation, financial manipulation, and avoidance of risk management that caused the 2008-09 global financial crisis. There is still an ongoing debate over whether companies should act in the interest of their shareholders or stakeholders. The adoption of shareholder or stakeholder value maximization also depends on which geographical location the company is operating. In the United States, Canada, and the United Kingdom, firm boards act to support shareholder value maximization, and in Asian countries, company boards endorse stakeholder value maximization.

During the current decade, particularly after the great recession, the focus of strategic management has largely shifted from maximization of shareholder value to follow the interests of stakeholders (including social and environmental responsibilities) which implies maximizing the total value creation (or enterprise value) and its fair distribution to stakeholders. The practical experience of firms shows that when firms act in favor of stakeholders and consider wider sets of interests, including that of society and environment, in creating value achieve superior financial performance.

Creating Stakeholder Value

The company creates value for its customers in such a manner that enables the company to capture part of that value for itself and its stakeholders to achieve sustainability goals. A company’s offering can create company value in three different domains: monetary, functional, and psychological.

Monetary Value

Monetary value relates directly to a firm’s financial performance goals, such as return on investment (ROI), profit margins, and earnings per share (EPS).

Functional Value

The functional and psychological value relates to the firm’s strategic goals and creates non-monetary strategic value for the company in the long run. Functional and psychological goals are not directly related to profits however, they can be converted indirectly into monetary value through economic value analysis. A firm’s product can create functional value when it affects other offerings in the firm’s product portfolio. For example, a software program can be used as a technological platform to design various high-margin products.

Psychological Value

A company creates psychological value for its employees and stakeholders when its corporate social responsibility (CSR) efforts generate results that are of psychological importance. For example, when a company undertakes distinct programs to preserve the natural environment and promote different social causes, it can help to build the company’s brand and culture.

Sustainability

The word sustainability, as mentioned above, was often used until the end of the 20^th century in relation to competitive advantage, and not involving the environment and social responsibility. During the current century, sustainability is extensively used to describe the “triple bottom line (TBL).” TBL was first introduced by John Elkington in 1994 as a proposed new accounting framework that included social and environmental dimensions of performance. After the dawn of the 21^st century, the goal of strategic management has shifted from maximizing the firm’s long-term profitability (in one dimension of performance) to incorporating performance in three dimensions called sustainability: financial, social, and environmental. The TBL dimensions are also known as the 3Ps: profits (the traditional profit/loss account), people (the social responsibility account), and planet (the environmental responsibility account).

Firm’s Profit/Loss Responsibility

The firm’s long-term responsibility is to maximize the total value creation for its stakeholders. This implies that the firm remains successful in the long run irrespective of changes in its external environment, including the social and physical environment.

Firm’s Social Responsibility

The company that uses the sustainability framework for its business has a social responsibility towards its employees, customers, and local communities. Archie Carrol proposed four primary responsibilities of a business: economic, legal, ethical, and discretionary. A firm must first make a profit to fulfill its economic obligations, and in doing so, it must also follow the laws to satisfy its legal responsibilities. After satisfying the legal and economic responsibilities, the firm should focus on satisfying its social responsibilities: ethical and discretionary. Ethical responsibilities usually are accepted beliefs about a firm’s behavior in society. Beliefs are a set of values, such as commitment to a particular standard, stakeholder interest, and a set of moral rules that guide the decisions and actions of people in an organization. Discretionary responsibilities are voluntary and not an obligation. Examples are charitable donations and providing day-care centers. Both responsibilities, ethical and discretionary, are equally important in fulfilling a firm’s social responsibility.

Firm’s Environmental Responsibility

Two decades ago, companies were not held responsible if they were polluting the environment. Companies dumped their waste in forests, lakes, or rivers and polluted the air by emitting and releasing gases containing hazardous materials and smoke into the atmosphere. These past practices not only polluted the environment but also caused harm to the local population. Based on complaints, the governments finally passed laws preventing the firms from polluting the environment. Therefore, environmental responsibility has become an obligation to the companies to keep their environmental footprint as minimum as possible.

Today, the scope of sustainability has broadened, which also includes Carrol’s four responsibilities, as mentioned above. Therefore, to survive and remain successful over the long run, or to be sustainable, a firm must conform to its economic, legal, social, environmental, and other stakeholder responsibilities.

Examples of Companies that use the Triple Bottom Line Framework

Here are some examples of businesses that use the triple bottom line framework to achieve sustainability goals in renewable energy, reducing carbon footprint, and renewable or recyclable materials.

Unilever’s Sustainability Program

Unilever, a multinational company that supplies food, personal, and household products, launched a sustainability program in November 2010. The company successfully achieved its strategic goals of sustainability by reducing its environmental footprint, increasing sales, and increasing its long-term profitability. As a result, the company became the global leader in sustainability. To achieve this success, Unilever embedded ambitious sustainability performance target measures into its strategic, operational, and human resource management system. The plan was monitored by the board and performance-based incentive bonuses were linked to quantitative targets to be achieved for emission and waste reduction, and energy and water conservation.

Mark and Spencer become 100% Carbon Neutral

Marks and Spencer, a clothing and food retailer in the UK, announced in June 2012 that it had achieved its goal of going “carbon neutral”. To achieve this goal, the company launched its ambitious environmental sustainability strategy, called Plan A, in 2007, which transformed the company. Since 2012 it is 100% carbon neutral and its operational waste going to landfills is also 0%.

Ecologic Brands Creates a Better, Cheaper, and Eco-Friendly Bottle

Jolie Corbett, the founder, and CEO of Ecologic Brands created the world’s first paper bottle that addresses a few social and environmental challenges caused by plastic. The hybrid paper and plastic bottles use 30% plastic material compared to regular ones and the shells use 100% recyclable cardboard and newspaper, therefore, the bottle sends less plastic waste to landfill operations. The bottles can reduce a product’s packaging cost and can also create strategic value, which can be converted into monetary value in the long-run.

Achieving Strategic Sustainability: Competitive Advantage Sustainability

Some firms, particularly in stable industries, can sustain their competitive advantage over the long run. However, in today’s dynamic business environment, it is becoming increasingly difficult to sustain a competitive advantage for a very long. Intense competition can erode the competitive advantage over time and cause companies to give more importance to short-term tactics over long-term value-creation goals. An excessive short-term orientation of the firm can further cause more focus on building short-term advantages which are not enough to achieve long-term strategic goals and objectives and generate a sustainable competitive advantage. As a result, a company must constantly work to improve its competitive advantage, not only by cascading short-term advantages but also by finding additional sources of complex competitive advantages to achieve strategic sustainability. Some companies such as Toyota, Canon, Walmart, and Samsung Electronics have achieved strategic sustainability in both profitability and market share by developing many-layer of long-term competitive advantages using low-cost, differentiation, and innovation strategies. Additionally, these companies have developed responsiveness and adaptability to their social and natural environments.

References and Further Reading

1. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 2, 4 and 15.
2. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice-Hall, 2018), Chapters 1, 3, 6 & 10.
3. A. Chernev, Strategic Marketing Management (USA: Cerebellum Press, 2014), Chapters 3, 5 and 6.
4. Timothy F. Slaper, The Triple Bottom Line: What Is It and How Does It Work? Indiana University Kelley School of Business, Indiana Business Research Center.
5. Jabil Inc. acquires Ecologic Brands, February 17, 2021.
6. Ashok N., The Effect of Changing External Environment on Industry Structure, Competition, and Profitability, A&N Strategy Consulting (December 23, 2022).

The post Role of Strategic Management in Achieving Sustainability first appeared on A&N Strategy Consulting.

Brief History of Mutibusiness Firms

According to Alfred Chandler, multi-business firms emerged before 1950. These companies were forced to decentralize and adopt divisional structures because they had grown too large and complex over conventional functional structures to be managed. Some companies, such as General Motors, Du Pont, and Standard Oil, were forced to use the divisional structure and therefore became the first divisionalized multibusiness companies. These large firms were overloaded because they had been offering a wider range of products to several different markets. Therefore, they found that to avoid overload at the corporate center, decentralization was needed. Subsequently, the newly created divisional structures first time realized the distinction between business-level decisions (divisional management responsibility) and corporate-level strategy decisions (corporate-level responsibility). Therefore, decentralization became the dominant corporate strategy for the newly created multi-business corporations in the 1950s.

From 1960 to 1980, the corporate goals of multi-business firms shifted to diversification. The basic motive for diversification was driven by two basic objectives: growth and risk reduction. Before the 1980s, diversified firms were well known to build corporate empires and gave less importance to value creation. One advantage of diversification is that it keeps the firm free from operating in a single industry. However, the major disadvantage is that it has destroyed more value than any other strategic initiative in the past. From 1980 to 2000, the diversification trend reversed from growth to restructuring (the 1980s) and then shifted again to refocus on core businesses (1990s) with a commitment to the creation of shareholder value.

By the end of the 1990s, multibusiness firms were highly disappointed with the returns from the shareholder maximization value model and cost-cutting measures. These companies also failed to generate new sources of value, which again resulted in a major shift in the corporate strategies of multibusiness firms. During the first two decades of the 21^st century, the multibusiness firm’s focus shifted to improving responsiveness to external environmental changes and the pace of the firm’s evolution. Therefore, more and more multi-business firms today are incorporating change to add new sources of value creation by identifying new opportunities for innovation, including new product development, new business models, developing new capabilities to compete, and exploiting internal and external linkages.

How Corporate Headquarters Can Create Value Through Incremental Change

A multibusiness firm can change incrementally or step-by-step or in stages over several years, or rapidly over a short period, typically less than two years. It can incrementally change to keep pace with the changing environment when it expects the need for a preemptive change to meet external challenges.

There are two aspects of change: the end result of change and the nature of change. The nature of change has two dimensions: incremental and big-bang or rapid change. There are two types of incremental changes: 1) Adaptation which is part of the realignment, and 2) Evolution which is part of the transformation. Adaption is a less important change, implemented gradually, step-by-step, or through stage-by-stage initiatives. The organization may not be in any financial trouble, but it puts measures in place by spreading them over several years to deliver change and to add value, but is not transformational change. The advantage is that the level of investment required is less compared to evolution and can be spread over several years. Evolution is an important, transformational change implemented gradually step-by-step, or in phases over several years. It is a planned proactive transformation that is undertaken to cause change before to fulfill future needs. However, this requires an extensive commitment to financial and human resources. Here are a few approaches and examples that promote incremental change through corporate adaptation and evolution in multi-business firms:

Evolutionary Transformation  

Before implementing any change program, the organization must assess the scope of change: in terms of breadth (one part or complete organization) and depth (transformation or realignment) of change to determine how much change is needed, and the time to change: how much time does the organization require to delivering change? For example, cultural change is a fundamental transformational change, and therefore cannot be delivered in a short period. In 1988, Jack Welch, CEO of GE, noticed the need for a cultural change at GE and admitted that if a fundamental transformation was to be realized, it could only be delivered through a planned evolution and not through restructuring. As a result, GE’s initial change effort was initiated in 1988 and was extended into the 1990s—in a 10-year program known as “Work-out.” Another recent example is Fiat, which followed an evolution to deliver a fundamental cultural transformation for the company.

Overcoming Organizational Inertia

There are many sources of organizational inertia or resistance to change that generates a slower response to internal and external change. There are also several approaches to counteracting organizational inertia. Some sources of inertia in multi-business firms are cultural inertia, organizational complexity, and poor resource reallocation. One part of the difficulty in resource reallocation is that multibusiness firms tend to keep the same and even equal levels of allocated capital expenditures among their business in response to external change among their businesses. Another aspect of resource reallocation is that corporate management tends to inflate return on investment to maximize shareholder return by reallocating lower levels of resources to projects in response to external change. In both cases, this lowers productivity, demotivates employees, and generates a slower response to the required change. To counteract inertia, research shows that companies that reallocated adequate resources to projects performed better compared to those that did not. Additionally, having product champions to lead the teams can succeed in overcoming resistance to change. Product champions are creative individuals who embed creativity that motivates team members within the organization. Because organizational inertia is part of the corporate culture as described above, it can only be delivered through evolutionary incremental change.

Institutionalizing Incremental Change

The multibusiness’s strategic planning system can be redesigned to sense external changes to pinpoint opportunities and then respond by implementing the plans gradually over the long-range planning period or through staged initiatives to deliver incremental change. IBM has a long history of incorporating incremental change. It successfully evolved from a tabulating company to computers, to information technology, to a cloud computing company. Its pace of evolution also accelerated due to support from its strategy formulation and implementation processes.

Large Scale, Top-Down Initiatives

The term “strategic intent” plays a vital role in shaping the long-run success of an organization. Strategic intent is an expression of high-level long-term goals and objectives which the organization intends to achieve. Samsung Electronics evolved to become the world’s largest electronics company, based on a series of long-term large-scale ambitious corporate initiatives that were driven by a very strong top-down commitment to resources. It successfully completed a few very large ambitious development projects that involved an enormous commitment of financial and human resources.

Adaptation to Changing Circumstances

Adaptation to changing situations sometimes does not require a fundamental transformation but slight gradual changes to the operational systems, processes, and structure. For example, in 2010, Amey, a UK-based infrastructure manufacturing company, implemented a change program to realign the organization through adaptation to sustain its inefficiency and effectiveness in the market, because its organizational structure was overloaded. The company’s fragmented organizational structure required the elimination of many jobs, job titles, and management layers. To address this issue, a change program was designed to deliver more gradual change over several years.

References and Further Reading:

1. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 6, 8, 9, 12, and 13.
2. Goold, A. Campbell, and M. Alexander, “Corporate-Level Strategy: Creating Value in Multibusiness Company (New York: John Wiley & Sons Ltd., 1994), Chapter 4.
3. Balogun, V. Hope Hailey, and S. Gustafsson, Exploring Strategic Change (United Kingdom: Pearson Education Ltd., 2016), Chapters 2, 4, and 8.
4. Ashok N., Design and Management of The Transition State of Strategic Change, A&N Strategy Consulting (October 29, 2019).
5. Derek F. Abell, Managing with Dual Strategies (N.Y. The Free Press, 1993), Chapter 7, and 16).
6. Romanelli and M. Tushman, Organizational Transformation as Punctuated Equilibrium: An Empirical Test, Academy of Management Journal (October 1994), 37 (5), pp. 1141-66.
7. Ashok N., Organizational Barriers to Transformational Change, A&N Strategy Consulting (March 5, 2019).

The post Value Creation through Incremental Change in Multibusiness Corporation first appeared on A&N Strategy Consulting.

The external environment of a business comprises the societal and task environment. The societal environment comprises political, sociocultural, economic, social, and technological forces and other external influences that rarely affect the short-term activities of the firm but often affect its long-run decisions. And the task environment comprises elements or groups such as customers, competitors, suppliers, employees, distributors, creditors, and others that affect the firm and, in turn, are affected by it. Industry structure is a subset of the industry’s task environment, which comprises five basic competitive elements: buyers, suppliers, new entrants, substitutes, and competitors. The resultant intensity of these elements’ forces determines the profit potential in the industry, where the profit potential is defined as a long-run return on invested capital (ROIC).

The external environment of a business can be characterized as stable or unstable. The external environmental forces, such as technology and consumer preferences, and the firm’s strategies, can affect the industry structure. These forces can change the industry structure moderately or severely or can also render the structure obsolete, which in turn, can affect the industry competition and profitability. The industry structure can also change from within. A stable external environment, in most situations, maintains a stable industry structure. Therefore, changes in the industry structure can enhance the industry’s future profit potential or reduce it. Based on this characterization, I will describe how the changing external environment affects the industry structure.

A two-dimensional chart as shown in figure 1.0 is constructed to describe the impact of the changing external environment on industry structure and consequently the effect of structure on competition and profitability. In figure 1.0, the “external environmental change” is shown on the horizontal (X) axis—described as stable and unstable. The “industry structure” is shown on the vertical (Y) axis—described as stable and unstable. 

 Figure 1.0

Stable Business Environment/Stable Industry Structure (Q1)

Quadrant 1 (Q1) in Figure 1.0 refers to firms operating in a stable external environment and having a stable industry structure. In this environment, firms follow similar strategies with similar resources and capabilities and have fewer opportunities for generating competitive advantage than in industries in which external change is rapid and firms largely differ from each other. Examples of industries that operate in a relatively stable external environment and stable industry structure are beer brewing, food processing, can manufacturing, and soft drinks. Because the industry structure is stable, the five forces that drive competition will determine the profitability of the industry. In these industries, the five forces of competition are weak, therefore many firms are profitable, and interfirm differences in profitability within strategic groups tend to remain small and stable over the long run.

Stable External Environment/Changing Industry Structure (Q2)

In quadrant (Q2) of figure 1.0, the firm’s external environment is stable, but the industry structure experiences a gradual change to one or all of the five forces. Some activities, such as building new capabilities, acquiring, or losing a patent, and mergers and acquisitions, can alter the magnitude of the five forces and change the industry structure. This change can positively or negatively affect the industry’s profit potential. For example, if the threat from new entrants is changing (if any of the seven barriers to new entry are changing), it can raise or lower or eliminate the threat of new entrants. When Merck’s patent for its cholesterol reduction drug Zocor expired, three similar drug makers entered the market.

Changing External Environment/Stable Industry Structure (Q3)

Quadrant Q3 in figure 1.0 refers to firms when their external environment is changing but their industry structure is stable. The changing external environment depicted in quadrant Q3 can generate different competitive advantages among companies because of their differences in resources and capabilities or strategic positioning. For example, in 2017, the US Congress passed a tax bill that reduced the subsidies for renewable energy. This enhanced the competitive advantage for fossil fuel power producers, such as AEP and Duke Energy, compared to Terra-Gen and Caithness Energy, the wind and solar power producers. In this situation, the external environment forces a modest change to an otherwise stable industry structure.

The potential to generate competitive advantage depends proportionately on the magnitude of external change and differences in firms’ strategic positioning. The changing external environment can alter the industry structure in a way that can increase or decrease industry profitability. Some toy companies, such as Hasbro, Mattel, and MGA Entertainment, have experienced sudden changes in consumer preferences in the recent past that resulted in unusual variances in profitability.

Changing External Environment/Changing Industry Structure (Q4)

Quadrant Q4 in figure 1.0 refers to firms when both their external environment and industry structure are changing. The rapid change in today’s new business environment is driven by political, economic, and technological forces and many other external interventions. These environmental forces, particularly the impact of disruptive digital technologies and international competition, have slowly or abruptly destabilized the industry structure of many industries. According to Rich D’Aveni, the general feature of industries today is hypercompetition: “intense and rapid competitive moves, in which competitors must move quickly to build (new) advantages and erode the advantages of their rivals.” If industries are hypercompetitive, their structures are unstable and competitive advantage is temporary. However, research indicates that disruptions with rapid structural changes are not limited to the high-technology sector, but the oil and gas, financial, and taxi services have also experienced the same disruptions in the recent past.

Because the structural change is rapid, the five-force framework is not adequate for predicting competitive behavior and profitability. However, in practice, hypercompetitive firms do not reduce the importance of the five-force framework. For example, in analyzing the structural changes that have taken place in the solar panel industry, pharmaceutical industries, and retailing, the five-force framework shows us how changes in the industry structure will affect the competitive forces and profitability.

In some industries, the differences in profitability between firms are exceptionally large, which causes us to believe that industry attractiveness is not so important in accepting it as a source of superior profitability. For example, during the years 2015-2017, Apple earned a return on equity (ROE) of approximately 30% on mobile devices, but its competitors incurred huge losses. In the video game industry, the console maker, Nintendo, and Sony have captured a major portion of the industry’s profit. In most situations, a firm with market share leadership takes resources away from its competitors. This condition is known as the winner-take-all industries. In these industries, the firm that captures a large market share achieves the privilege of generating a large amount of competitive advantage. This huge competitive advantage is generated through positive feedback loops (network effects) and not through usual scale economies and stable industry structures. Therefore, in analyzing these winner-take-all industries, we first analyze network externalities before we conduct an industry analysis, to identify the sources of competitive advantage. Complementary products play a significant role in generating network externalities.

References and Further Reading

1. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 3, 4, 6, 7, 8, 9, and 10.
2. L. Wheelen, J. D. Hunger, Alan N. Hoffman, and Charles E. Bamford, Strategic Management & Business Policy (United Kingdom: Pearson Education Ltd., 2018), Chapter 4.
3. E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review 57 (January 2008): 57-71.
4. Daft, Organizational Theory and Design, 12^th edition, p. 151.
5. Ashok N., Important Elements of Value Creation in an Ecosystem, A& N Strategy Consulting (May 29, 2021).
6. A. D’Aveni, Hyper-competition: Managing the Dynamics of Strategic Maneuvering (New York: Free Press, 1994): 217-218.
7. A. D’Aveni, G.B. Dagnino, and K.G. Smith, “The Age of Temporary Advantage,” Strategic management Journal 31 (2010): 1371-1385.
8. Ashok N., A New Business Model Structure, Innovation Strategy, and Competitive Advantage, A& N Strategy Consulting (April 8, 2018).

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