Problem Set 71. Calculating Net Asset Value. Given the info.docx

Problem Set 7
1. Calculating Net Asset Value. Given the information below,
calculate the net asset value for the Boston Equity mutual fund.
Total assets
$225,000,000
Total liabilities
5,000,000
Total number of shares
4,400,000
2. Calculating the Rate of Return of Investment Using
Financial Leverage. Suppose Shaan invested just $10,000 of his
own money and had a $90,000 mortgage with an interest rate of
8.5 percent. If after three years he sold the property for
$120,000.
a. What is his gross profit?
b. What is his net profit/loss?
c. What is the rate of return on investment?
3. Shelly’s assets include money in the checking and savings
accounts, investments in stocks and mutual funds, personal
property, such as furniture, appliances, an automobile, coin
collection and jewelry. Shelly calculates that her total assets
are $108,800. Her current unpaid bills, including an auto loan,
credit card balances, and taxes total $16,300. Calculate
Shelly’s net worth.
4. Barry and his wife Mary have accumulated over $4 million
during their 45 years of marriage. They have three children and
five grandchildren.
A- How much money can Barry and Mary gift to their children

in 2008 without any gift tax liability?
B- How much money can Barry and Mary gift to their
grandchildren?
C- What is the total amount of estate removed from Barry and
Mary’s estate?
5. Dave bought a rental property for $200,000 cash. One year
later, he sold it for $240,000.
A- What was the return on his $200,000 investment?
B- Suppose Dave invested only $20,000 of his own money and
borrowed $180,000 (interest free from his rich father). What
was his return on investment?
Managing Innovation, Design and Creativity, Second edition
Chapter 6: Strategy – emergent or planned, and other issues
ISBN: 9780470510667 Author: Bettina von Stamm
copyright © 2008 John Wiley & Sons Inc.
Strategy – emergent or planned, and other issues
In the ihavemoved.com case study the attitude of the four
founders towards the development of their company’s strategy,
and the flexibility they showed in responding to emerging
opportunities were quite important to the success of the
company. The decision to allow other companies to brand the
website, acknowledging ihavemoved.com only through a
reference to ‘powered by’ was not an easy one but essential for
the company’s financial well-being and growth. Flexibility and
open-mindedness were required though and, in fact, the new
offering did not distract from the founders’ vision but rounded
it.
In the first chapter of his book Contemporary Strategy

Analysis Robert M. Grant introduces three stories of
outstanding corporate success proposing that in each case
success was due neither to access to superior resources nor
accounted for by sheer luck. Though he continues, “In all three
stories lucky breaks provided opportunities at critical junctures.
But none of the three organisations was subject to a consistent
run of good fortune. More important was the ability of all three
[organisations] to recognise the opportunities when they
presented themselves and to have the clarity of direction and the
flexibility necessary to exploit these opportunities.” (1991, p. 3)
It is the openness towards opportunities, the mental and
organisational flexibility that allows taking advantage of them,
that are part of what differentiates innovative organisations
from their less innovative counterparts.
In this chapter we first expand on the differences between
emergent and planned approaches to strategy and what this
means for innovation. We then take a closer look at what an
innovation strategy is, what innovation best practice in the
context of strategy looks like and follow up by discussing a few
strategy frameworks that:
1. help companies to define their starting point and context
(Porter’s five forces)
2. provide insights for how companies can align their
organisation to an innovation ambition (Higgins’ application of
Peters and Waterman’s 7S framework to innovation)
3. suggest an approach that helps strategy implementation
The chapter concludes with taking a closer look at design from
a strategic perspective.
Strategy – Emergent or Planned?

The strategic aim of a business is to earn a return on capital,
and if in any particular case the return in the long run is not
satisfactory, then the deficiency should be corrected or the
activity abandoned for a more favourable one.
Alfred P. Sloan Jr (1963)
There are probably two distinctive approaches to strategy
development, the first is planned – top management devises the
strategy, middle management translates it, and supervisors and
employees implement it. This approach is also referred to as the
rational model of the strategy process. The problem with this
approach is that it represents a linear process, not allowing for
feedback to be integrated in a flexible and timely fashion.1 The
second approach on the other hand combines top-down planning
with structures that allow for reactions to insights and activities
from all levels of the organisation. This approach is also
referred to as an emergent strategy. Table 6.1summarises the
description of the sections on ‘strategy as rational decision
making’ (planned strategy) and ‘emergent strategy’.
1An approach to strategy development that addresses issues of
nonlinearity, taking a more holistic and dynamic approach is
called ‘strategy dynamics’.
Table 6.1 Planned versus emergent strategy
Planned strategy
Emergent strategy
Starting point
External and internal context of the organisation (traditional
SWOT analysis)
Action within the organisation, trial and error learning though
still aimed at implementing an overriding strategy
Leading to
Identification of key success factors (external) and distinctive

competencies (internal)
Insights from experiments that in turn influence future action
Resulting in
The creation, evaluation and implementation of a strategy
Review and revision of the overriding strategy
Flow
Top down
Bottom up as well as top down
Level of uncertainty (driven by complexity and rate of change)
Low
High
Source: Based on Hatch, M.J. (1993). The dynamics of
organizational culture. Academy of Management Review, 18,
657 and Mintzberg, H. (1990). The design school: reconsidering
the basic premises of strategic management. Strategic
Management Journal, 11, 171–95.
One could argue that in today’s fast-moving environment there
is little choice but to follow an emergent strategy development
process. It is important to point out that emergent strategy
should not be confused with not having a direction or strategy at
all. When embracing the white-label strategy ihavemoved.com
did not change what their company was all about. They knew
what they wanted to provide: a web-based offering that would
provide a one-stop-shop address changing service to home
movers. Had they insisted on providing the website itself that
was offering the services they would not have entered into
collaborative agreements with other companies. In a way, what
they have changed is the way they deliver their service, not
what the company stands for. So it is not only the ability and
willingness to respond to unforeseen opportunities that lie at the
core of innovative organisations but also a strategy that is
formulated broadly enough to allow flexibility when necessary.
It is probably the lack of a broad enough vision that prevented
Xerox from exploiting the inventions coming out of its research
lab in Palo Alto (seeChapter 1).

By the way, it is often the shift from a product to a service
based strategy that can make the difference and create a
competitive advantage. Think about train operators in the US.
Had they thought of themselves as being in the business of
transporting people from one place to another rather than being
in the train business their chances for survival would have been
much higher. Another example is Castle Cement, a UK-based
provider of cement. In the past customers had called Castle
Cement if and when their silos were empty or nearly empty.
This required an immediate response and delivery from Castle
Cement, often leading to half empty trucks racing around the
countryside to ensure fast delivery. Rethinking the way it sold
its product Castle Cement turned the process on its head:
instead of delivering on demand they started to offer a
guarantee that ‘your silo will always be full’. This meant that
they were monitoring their customers’ silos, planning deliveries
well ahead which meant that load rates of their delivery
vehicles went up, and routes could be planned to maximise
efficiencies.
However, being flexible and responsive can also be quite
threatening. What if the new opportunity threatens the core of
the existing business? In an interview by the
magazine QuisicPeter Skarzynski, co-founder and CEO of the
strategic consultancy Strategos, was asked, “You’ve been
quoted as saying that for companies to innovate, they may have
to stop doing some things that made them successful in the first
place.” His response was, “They have to critically look at the
things that have made them successful and understand which of
those keep them from radical growth, keep them from
transforming the industry. So yes, sometimes it means stopping
or changing the very thing that drove the success.”2 The larger
the organisation, the larger the part of the organisation that is
under threat, the less likely it is that the opportunity will be
taken up.

2For full interview see http://www.quisic.com/cgi-
bin/ic/ic_article_display.pl?nav=2&channel_id=1&content_id=1
04.
It seems to me that the description of characteristics of a
success generating a new product development process given by
Robert G. Cooper (1994) is equally appropriate for a company’s
strategy. The four characteristics identified by Cooper are:
· Fluid: it is fluid and adaptable, constantly reviewing the
company’s environment to enable early identification and fast
response to changes or opportunities.
· Fuzzy gates: it features conditional Go decisions (rather than
absolute ones) which are dependent on the situation.
· Focused: it builds on the company’s skills and capabilities
(rather than on existing products and markets) and focuses
resources on the ‘best bets’.
· Flexible: it does not stick religiously to its formulated strategy
if changes in the wider environment render it obsolete.
I would also like to emphasise that one approach does not
exclude the other and argue that both are needed. A company
needs to have its overriding goal or ambition, but needs to be
flexible in how it achieves it. No good in insisting in the
production of typewriters when the world has moved on to
personal computers – unless one wants to become a specialist
and niche player. As has been pointed out, sometimes
organisations need to give up what has made them successful in
the past to be able to succeed into the future.
Companies aiming to become more innovative have to embrace
the thought of allowing their strategy to emerge. To be

innovative is to pursue opportunities that were neither known
nor available before, and which cannot possibly be planned or
scheduled. As research by Slevin and Covin (1997) found,
“Planned strategies are positively related to sales growth among
firms with mechanistic structures and operating in hostile
environments. Emergent strategies, on the other hand, are more
positively related to sales growth among firms with organic
structure and operating in benign environments.”3
3See also Table 3.2 in Chapter 3 for a comparison between
different types of organisational structure whereby ‘mechanistic
structure’ corresponds with ‘functional structure’ and ‘organic
structure’ with ‘matrix structure’.
These are fundamentally issues of whether or not companies are
ready to embrace discontinuous or disruptive change and we
will take a closer look at this topic in Chapter 31.
Strategy and Innovation
Before looking at strategy best practice in the context of
innovation in particular, some more general insights into
strategy best practice in general. In his aforementioned book on
strategy analysis Grant (1991) identifies the following four
characteristics of successful strategies:
· They are directed towards unambiguous long-term goals.
· They are based on insightful understanding of the external
environment.
· They are based on intimate self-knowledge of the
organisation’s capabilities.
· They are implemented with resolution, coordination and
effective harnessing of the capabilities and commitment of all
members of the organisation.

To become a successful innovator the first and last points are
the most important. We have just discussed the importance of
flexibility while maintaining an overall strategic direction. The
first point also implies clarity and sharedness, and we will come
back to that in a moment. The last requires determination and
commitment – something that research by Repenning (2002) has
found to be fundamental to innovation success. His research
into understanding the dynamics of innovation implementation
led him to the following conclusion, “Managers should not
adopt an innovation unless they are prepared to be both fully
committed to the effort and patient in the month between
adopting the innovation and crossing the motivation threshold.
A half-hearted approach or early termination can severely limit
the value of an otherwise useful innovation” (See Box 6.1).
What is true at the project level is equally true for the company
level. Managers should not embark on the journey of creating a
more innovative organisation unless they understand the
implications, and are prepared to continue on the path and
commit the necessary resources.
Box 6.1. Repenning’s experiment
Repenning conducted two experiments concerning the
implementation of an innovation that were identical up to a
certain point in time, and the only aspect varying after that was
the level of senior management commitment. In one scenario
visible senior management commitment was discontinued after
24 months, under the other scenario it was continued. Perhaps
not surprisingly, in the first scenario the commitment among
employees dropped to zero in a short period of time, leading to
a failure, whereas in the second scenario employees remained
committed, leading to a successful implementation of the
innovation.
To clarify, in a vision a company states its goal. Its strategy is,
as defined by James Brian Quinn in Strategies for Change:

Logical Incrementalism (1980), “The pattern that integrates an
organisation’s major goals, policies, and action sequences into a
cohesive whole. A well-formulated strategy helps to marshal
and allocate an organisation’s resources into a unique and
viable posture based upon its relative internal competences and
shortcomings, anticipated changes in the environment, and
constant moves by intelligent opponents.” Or in much simpler
terms, a strategy is a plan for action. So if to become more
innovative is part of an organisation’s goal, managers will have
to develop a plan of action to achieve this. Putting it into the
annual report and adding it to the company’s values is not
sufficient. Most importantly, it ignores that becoming (more)
innovative is about changing behaviour, and an innovation
strategy provides ‘a plan for action’ on how to achieve this.
Such a plan for translation of innovation intent into action is
often made explicit in an organisation’s innovation strategy.
In order to be effective an innovation strategy should provide
the following:
· An explanation of how it fits in and feeds into the overall
business strategy.
· A definition of what is meant by innovation in general and
further definitions and information on different types and levels
of innovation (see Box 1.2 in Chapter 1); it should further
provide information in which of these different types and levels
of innovation the organisation wants to engage in.
· A company-wide portfolio that outlines what types and levels
of innovation the organisation wants to pursue, and what kind of
resources, time frames, responsibilities, success criteria etc. are
associated with each of the different portfolio segments.
· A structure through which innovation is managed and
executed.

In order to develop such a strategy and reap its benefits it is
essential that it is well communicated, and that buy-in is
ensured early on in the process. Once such a strategy has been
developed it will serve as a decision framework for the
selection of project and the allocation of resources (people,
time, money etc.). Box 6.2 outlines the three stages of
innovation strategy development.
Box 6.2. Innovation strategy development
Definitions and framing (why and what)
· Situational analysis – to understand the context for innovation
within the organisation as well as the external environment.
· A clear link to company vision and strategy – how does
innovation help us to achieve our ambition? Innovation is
ultimately a means to help an organisation achieve its goals and
ambitions.
· Goals and objectives – what we want to achieve through
innovation.
· Definition of innovation (with types and levels); definitions
are often organisation specific, they also help to create a shared
language.
· Define ‘focus areas for innovation’ (or platforms/themes)
around which innovation should be focused (often tie in with
trends or insights/deductions from trends).
Portfolio and structures (how)
· Approaches to idea management – where do we get our ideas
from (internal/external), how do we collect, assess and manage
them, who is reviewing and responding to them?
· Different dimensions and clusters of the portfolio, outlining in

which innovation types/levels (innovation fields) the
organisation plans to engage; how much of
overall resources will be allocated to each innovation field; the
result is highly organisation specific.
· What kind of people and capabilities do we need for each of
the different innovation fields and how do we build this up over
time? How do we recruit (for diversity), assess (for creativity,
different team roles and skills, e.g. Belbin, MBTI, KAI, IDEO
10 faces of innovation etc. – see appendices), train, reward,
remunerate, incentivise people (careful with financial rewards).
· Metrics and measures of success, varying and specific to the
different innovation fields (see appendices for more).
· The processes through which innovation is managed, e.g. idea
management, stage gate, prototyping, capturing and
sharing learnings from success and failure.
· The structures through which innovation will be managed, e.g.
innovation roles, reporting relationships and responsibilities,
where and how decision making takes place.
· Information on how innovations (of different kinds)
are transferred into mainstream business.
Creating a receptive and fertile ground
· A strategy for how buy-in and involvement will be assured,
particularly among middle and senior managers
· Identifying aspects of corporate culture that help or hinder
innovation, and how they might be migrated/changed over time.
· How the physical work environment be used to encourage and
foster innovation.
Such a strategy can also be used to develop a time-bound plan

for culture change (with the aim of creating an innovative
organisation), defining steps towards the ultimate goal.
While this book focuses on innovation, I do not want to ignore
the fact that there are other positioning strategies companies can
pursue. Jones (1997) identifies four different types of new
product strategies (see Table 6.2), each of which will require a
different approach, structures and strategies to realise its
respective ambition.
Table 6.2 Product strategies
Type
Characteristic
Examples
Offensive
Innovators
Pilkington – float glass
Research intensive
Du Pont – Teflon
High risk/uncertainty
Polaroid – instant film
Current information
Hoover – vacuum cleaner
Defensive
Followers
Matsushita – VHS video
Incremental innovation
IBM – personal computers
Production quality
WordPerfect – computer software

Market focus
Nissan – cars
Imitative
Low-cost manufacture
Compaq – computers
Licensed technology
Molson – dry beer
No R&D
Daewoo – cars
Localised markets
Samsung – microwave ovens
Traditional
Established markets
Barbor – clothing
Constant demand
Aga – cookers
Niche market
Zippo – cigarette lighters
Low technology
Mont Blanc – pens
Source: Jones, T. (1997). New Product Development, an
Introduction to a Multifunctional Process. Oxford: Butterworth
Heinemann. Reproduced by permission of Butterworth
Heinemann; T. Jones.
Looking back at the characteristics of planned and emergent
strategy (Table 6.1) and comparing them to the characteristics
of the four different new product strategies shown in Table
6.2 we find that an emergent strategy is much better suited for

achieving innovation.
However, somethings even the most innovative organisations
need to balance are the diverging need of innovation on the one
hand and operations on the other. It is the conflict between
creativity and implementation introduced in the first
chapter. Table 6.3 compares aspects of an operating
organisation with those of an innovating organisation. However,
how many organisations that claim to be innovative truly have
all characteristics of the innovating organisation? And another
question is, is there an innovative organisation that could
survive long term without also providing the conditions of an
operating organisation?
Table 6.3 Comparing operating and innovation organisations
Operating organisation
Innovating organisation
Structure
Bureaucratic, specialisation and division of labour; hierarchical
control
Flat organisation without hierarchical control; task oriented
project teams
Processes
Operating units controlled and coordinated by top management
which undertakes strategic planning, capital allocation and
operational planning
Processes directed towards generation, selection, funding and
development of ideas; strategic planning flexible, financial and
operating controls loose
Reward systems
Financial compensation, promotion up the hierarchy, power and
status symbols
Autonomy, recognition, equity participation in new ventures
People

Recruitment and selection based upon the needs of the
organisation structure for specific skills, functional and staff
specialists, general managers, and operators
Key need is for idea generators who combine required technical
knowledge with creative personality traits; managers must act
as sponsors and orchestrators
Source: Based on Jay R. Galbraith and Robert K. Kazanjian
(1986) as adapted by Grant, R.M. (1991). Contemporary
Strategy Analysis: Concepts, Techniques, Applications.
Cambridge, MA: Basil Blackwell, p 240. Reproduced by
permission of Professor R. Grant.
What does this mean for managers? For one it means that large,
operating-orientated organisations that also want to be
innovative have to find a way to balance the demands of both
the operation and the innovating company which I have
emphasised before. It might also mean that large operating
organisations are just incapable of dealing with radical
innovation – in the existing structures – and that in order to
allow truly radical innovation to flourish they have to create
alternative structures that meet the requirements of an
innovating organisation. Again this is an issue we will return to
in Chapter 31.
Finally, some insights into strategy best practice for innovation.
Research into innovative organisation tends to highlight three
aspects about strategy and vision that differentiate the
innovative from the less innovative organisation:
· clarity
· sharedness
· attainability
If having a clear and shared vision and strategy is important for

any organisation that wants to achieve an ambition, it is
essential for an organisation aspiring to change – and what does
the ambition to become more innovative imply but the need for
change. While the implications of ‘clarity’ and ‘sharedness’ are
quite straightforward – everyone in the organisation needs to
know and understand, and share the same interpretation of the
strategy – attainability is a bit more ambivalent and without
explanation might be interpreted wrongly.
One could understand this third aspect either to read: it has to
be easily achievable or, it has to be just about achievable.
Theresa Amabile, whose framework was introduced in Chapter
1 refers to this with ‘pressure’ (represented by workload
pressure and challenging work). The goal set needs to be
attainable, but at the same time it needs to provide a stretch, a
challenge. Something too easily attained does often not seem
worth pursuing, whereas something too unrealistic puts people
off. Having said this, if the external pressure is sufficient it is
surprising what people can achieve. Think about the public
pressure to perform created by Kennedy’s public announcement
that he wanted to put men on the moon, or the challenge to
engineers at NASA during the Apollo 13 flight, when the lives
of their colleagues and the entire mission depended on their
ability to create a pump that could convert carbon dioxide into
oxygen out of the most bizarre array of objects imaginable. It is
often that need, the urge, the crisis, however you would like to
call it, that is missing in organisations wanting to become more
innovative, companies where people tend to think, ‘everything
is going just fine, thank you, why change?’
People need a reason to change – and not just one that appeals
to their minds. Kotter and Cohen (2002) emphasise, “People
change what they do less because they are given analysis that
shifts their thinking than because they are shown a truth that
influences their feelings.” It is ‘getting people’s hearts as well
as their minds’ that matters and management writer Charles

Prather has translated this into a formula for change:4
4‘Leading Innovation: enabling your organisation’, presentation
given at the 2002 Innovation Network conference in
Minneapolis, 22–25 September 2002.
Change = Vision × X × Felt need to change
Change only happens when there is a vision of where to go,
when there is a felt need for change, and when there are some
specific steps to be taken (‘X’). If any part of the equation is
zero, there is no change. This also enforces the point made
earlier, that a clear strategy and vision is so important in
realising an innovative organisation.
By the way, Rosabeth Moss Kanter’s book The Change
Masters (1985) explores the dilemma of change, and provides a
host of useful insights as to why change may not be happening,
and how to overcome the hurdles. Though the list of ‘rules for
stifling innovation’ she provides in her book (see Box 6.3)
might make you smile, I am sure there are some – if not many –
that are true for organisations that you know.
Box 6.3. Rosabeth Moss Kanter’s ‘Rules for Stifling
Innovation’
1. Regard any new idea from below with suspicion because it’s
new, and because it’s come from below.
2. Insist that people who need your approval to act first go
through several other levels of management to get their
signatures.
3. Ask departments or individuals to challenge and criticise
each other’s proposals (that saves you the job of deciding; you
just pick the survivor).
4. Express your criticism freely, and withhold your praise (that

keeps people on their toes). Let them know they can be fired at
any time.
5. Treat identification of problems as signs of failure, to
discourage people from letting you know when something in
their area isn’t working.
6. Control everything carefully, make sure people count
anything that can be counted, frequently.
7. Make decisions to reorganise or change policies in secret,
and spring them on people unexpectedly (that also keeps people
on their toes).
8. Make sure that requests for information are fully justified
and make sure that it is not given out to managers freely (you
don’t want data to fall into the wrong hands).
9. Assign to lower level managers, in the name of delegation
and participation, responsibility for figuring out how to cut
back, lay off, move people around, or otherwise implement
threatening decisions you have made. And get them to do it
quickly.
10. And above all, never forget that you, the higher-ups, already
know everything important about this business.
So attainability means finding a balance between realistic but
boring and unrealistic but exciting, and providing people with a
motivation and ambition to achieve it.
One final point on innovation and strategy; there is often a
debate as to whether it is better to be a first mover or fast
follower – and the verdict is still out. In order for it to make
sense to be first mover the reward needs to justify the risk. In
some industries being a first mover has distinct advantages, for

example, if this helps to set an industry standard or creates
other significant barriers to entry. Exclusive access to a key
resource can be such a barrier. In other situations, where the
first mover can be easily and quickly copied, it might pay to be
a fast follower and let the first mover establish and educate the
market. We talk of a fast follower advantage when an
organisation entering a market as second or third develops a
leading position despite a later entry.
Hence there are advantages and disadvantages associated with
each strategy and which are summarised below.
First mover advantages
· Technological leadership; e.g. through patent registration; this
can be observed in the pharmaceutical industry.
· Pre-emption of scarce assets; e.g. geographical or shelf space;
an example of the former might be if there is only room for a
few competitors as for example for particular ferry routes.
· Scale effects; e.g. reducing unit cost through large production
runs.
· Network externalities; e.g. the product is part of a wider
offering, e.g. phones for free as part of buying network
services.
· Buyer switching cost, e.g. the learning is specific to the first
mover’s product/the user has to make an up-front investment
that would have to be repeated when switching, e.g. switching
from one software to another.
· Brand loyalty; e.g. the first mover shapes and influences tastes
and expectations of the users.

· Experience effects; e.g. the first mover moves up the learning
curve and followers have difficulties catching up.
Two obvious disadvantages to being the first mover are cost,
e.g. investment in R&D and market education, and risk, e.g.
there are no knowledge and mistakes of others to learn from.
Fast follower advantage5
5The advantage of the fast follower is explored in detail in the
book Fast Second by Constantinos Markides and Paul Geroski –
see book recommendations at the end of this chapter.
· Free-rider effect; taking advantage of the learning and
education of the market that has already taken place; the fast
follower can focus on improving the product.
· Technological or market uncertainty have been resolved; it is
often the fast follower who takes a product from niche to mass
market.
· Government interference; e.g. change in subsidies to avoid
monopoloes or introduction of deregulation.
· Resource homogeneity; if resources are the homogeneous and
available to all then a first mover cannot establish a resource-
based advantage
Table 6.4 gives examples of successful first movers as well as
successful fast followers.
Table 6.4 To follow or to lead?
Product
Innovator
Follower
Winner

Jet airliner
De Haviland (Comet)
Boeing (707)
Follow
Plate glass
Pilkington
Corning
Lead
VCRs
AMpex/Sony
Matsushita/Panasonic
Follow
Diet cola
R.C. Cola
Coca-Cola
Follow
Instant camera
Polaroid
Kodak
Lead
Disposable nappy
Procter & Gamble
Kimberley-Clark
Lead
Paper copier
Xerox
Canon
?
Web browser
Netscape
Microsoft
Follow
Useful Concepts and Frameworks for Strategy Development
With all the above, managers are still facing three important
questions:

1.
Outward looking – no organisation operates in a vacuum. How
do we understand our context and define our starting point?
2.
Inward looking – what are the aspects that our innovation
strategy should address?
3.
Once we have established our innovation strategy, how do we
ensure implementation?
The three frameworks I am suggesting are:
1.
Porter’s five forces to help companies to define their starting
point and understand their industry context.
2.
Higgins’ application of Peters and Waterman’s 7S framework to
innovation to provide some insights for how companies can
align their organisation to an innovation ambition.
3.
Hay and Williamson’s strategic staircase to provide valuable
insights into strategy development and implementation.
Before developing an innovation strategy for their organisation
managers should make sure that they understand the context in
which they operate and what their position in the playing field
is relative to other players. Porter’s (1980) five forces
framework allows organisations to do just that by requiring
managers to take a closer look at customers, suppliers, possible
new entrants, possible substitutes for existing products and its
industry’s overall competitive position. Figure 6.1summarises
the aspects to be considered for each of the five forces. The
insights gained from the analysis can inform both the
company’s overall as well as its specific innovation strategy.
Figure 6.1 Porter’s five forces.

Source: Porter, M.E. (1980). Competitive Strategy: Techniques
for Analyzing Industries and Competitors. New York: Free
Press. Reproduced by permission of The Free Press.
Once context and positioning have been established the
company’s overall strategy can be developed. Closely linked to
the overall strategy should be the company’s innovation
strategy. The 7S framework developed by McKinsey consultants
Peters and Waterman in 1982 provides a useful reference point
to make sure that all aspects of the organisation are aligned to
the innovation ambition.
Higgins (1996) used the 7S framework to suggest how to
implement an innovation strategy. He states that “Everything in
business must start with strategy. Your organisation’s
innovation strategy reflects the demands of its future
environment, and how the organisation plans on reacting to or
changing that environment to meet its needs. Strategy leads to
everything else. The other S’s must be pointed in the same
direction as strategy.” He too suggests that the strategy
determines and must be supported by values, which need to be
set by top management and shared throughout the organisation.
Based on the strategy and values, managers then need to set to
work to develop and select the right structure, the right systems,
the right style, and the right staff with the right skills. Table
6.5 lists what managers need to consider for each of the seven
‘S’.
Table 6.5 The 7S framework
7S
To consider
Strategy
Should reflect the demands of future environment, and how the
organisation plans to react to or change that environment to

meet its needs; everything else must follow
Structure
Teams, innovation centres, lines for communication, alliances,
idea evaluation
Systems
Align rewards and remuneration, management information
systems, celebration of innovation and creativity, idea
assessment beyond – financial evaluation, systems for
implementing process, marketing, and management innovations
Style
Accepting of failure, suspending judgement, transformational
leaders
Staff
Recruit creative people, develop innovation champions, train
people, provide time for reflection, provide physical facilities
Shared values
Strategy determines the shared values; changing existing values
will take time
Skills
Create opportunities, improve and innovate continuously, start
knowledge management and organisational learning initiatives,
invest in R&D
Source: Based on Higgins, J.M. (1996). A plan for
innovation. R&D Innovator, 5. Reproduced by permission of
Innovative Leader.
Once the context is understood, and plans have been made for
how to change the organisation’s 7S to reflect the innovation
ambition, there is still the most difficult step – there are still
two problems. First, how to develop the strategy from which the
other six ‘S’ follow, and second, how to implement it and fill
the strategy with life.
I would like to refer to two articles written by Michael Hay and
Peter Williamson in 1991 and 1997, respectively. Both articles
investigate why strategy often fails at the implementation stage,

and suggest an approach that might help to overcome the
problems.
In their first article the authors identified lack of clarity, a
preference to continue in accustomed ways and the fact that
most organisations seem to use the past as predictor for the
future as the main reasons underlying implementation failure.
They found that many organisations describe a large number of
priorities, each with several key performance measures, which
means that it is difficult for managers to prioritise their efforts.
If everything is first priority, where to focus resources? If
innovation is not top priority innovative projects tend to get
axed at the first signs of difficulties, partly because they are
seen to be high risk, partly because benefits cannot be reaped in
the short term.
In addition Hay and Williamson found that the different
priorities can stay in direct conflict with each other, which they
felt made implementation efforts even more difficult. In her
book When Giants Learn to Dance Rosabeth Moss Kanter
(1989) picks up on some of the contradictions managers face:
· Think strategically and invest in the future – but keep the
numbers up today.
· Be entrepreneurial and take risks – but do not cost the
business anything by failing.
· Know every detail of your business – but delegate more
responsibility to others.
· Speak up, be a leader, set the direction – but be participative,
listen well, cooperate.
· Continue to do everything you are currently doing even better
– and spend more time communicating with employees, serving

on teams, and launching new products.
While I agree that the contradictions are difficult to manage, I
also believe that increasingly innovative companies and
individuals have learned to do just that. Innovative
organisations manage their existing business through structured
and efficient processes while at the same time providing some
flexibility and slack for creativity and innovation to flourish.
But back to strategy development. In their second article Hay
and Williamson probe deeper into possible causes of
implementation failure. Interviewing managers about strategy
and delving into statements made about strategy they found that
managers’ perception of what strategy means and involves is the
true show-stopper to implementation (see Table 6.6).
Table 6.6 A deep-seated scepticism characterises the view from
below
On the surface
Revealed below
Strategy is about the long term
Far enough in the future so that you don’t need to do anything
about it now
Strategy depends on forecasts
Strategy is about crystal ball gazing
Strategy influences profitability
Budgets are about profitability, strategy is about mountains of
paper and thick folders
Strategy is about a common mission, pulling together
Everyone agrees we should have a strategy as long as it doesn’t
constrain any of our individual departments
Strategy needs periodic review
Strategic planning is a comfortable part of the corporate ritual;
a once-a-year ‘binge’ and it’s back to the in-tray
Realising that what seems to get distilled from the strategy are

targets and forecasts they comment, “but what often gets lost in
this distillation process is the broader strategic perspective”.
And it is just this broader perspective that is essential to
innovation. From the above they distil three reasons for
implementation failure:
1. Confusion about what exactly a ‘strategy’ is and,
specifically, the difference between the various levels at which
it operates. How, for example, should a mission, individual
objectives and the budget be linked?
2. An abiding sense that episodic bouts of strategy and the
reality of managerial life rarely connect. How therefore is one
to link strategy to action?
3. Frustration that the constituent parts of the organisation more
often pull apart than together with department X thwarting the
best efforts of department Y and vice versa. In other words, can
strategy be coordinated and made consistent across the
organisation?
The approach they suggest involves the following sequential
approach:
· Step 1: Provide clear definition of goals, explain what they
actually mean for day-to-day management, be specific about
actions and targets.
· Step 2: Establish what the specific goals mean in terms of
requirements on the firm’s resources.
· Step 3: Think about what your company would look like when
the strategy has been achieved. Then identify what specific
actions you need to take to achieve your goal, working back
from the future and considering all resources, skills, capacity,
structure etc. required (now also known as ‘backcasting’).

With that process in mind they then suggest that companies
develop the following in a strictly ordered fashion:
· A vision – that has two dimensions: external and internal;
defining a vision provides the firm with an essential set of
bearings: a map of the changing terrain on which it is
competing; underpinning the vision there has to be a set of
guiding beliefs and values.
· A mission – that should encapsulate an organisation’s raison
d’être or guiding purpose; the destination to which that purpose
leads; and the rationale behind the purpose.
· A plan – that focuses on how it is to be done, identifying
specific steps.
· Key initiatives – each step of the plan needs to be broken
down into specific initiatives.
· Individual objectives – employees’ objectives need to be
derived from the set of initiatives being pursued; where
individual objectives and strategic requirements are at odds
with each other, then strategy will surely fail.
· Budgets – the revenues and costs identified in a budget have
to be linked to individual initiatives.
In order to qualify what Hay and Williamson call a ‘first-class
strategy’ it should provide the following:
· Inspiration in the form of a worthwhile, relevant goal.
· A linkage that helps individuals to connect their own task with
the initiatives being undertaken elsewhere in the company.

· Guidance to individuals about the trade-offs and prioritisation
decisions they have to make on a daily basis.
· Discretion for the individual to manoeuvre by loosening some
existing constraints and generating some new options.
· The facilitation of communication by establishing a common
language which everyone in the company can use.
If a strategy fulfils the criteria above it should provide a sound
foundation from which managers can build an innovative
organisation.
Design and Strategy
A design strategy is the effective allocation and coordination of
design resources and activities to accomplish a firm’s objectives
of creating its appropriate public and internal identities, its
product offerings, and its environments.
Olson et al. (1998)
In the final section of this chapter I would like to talk about
design’s role in and connection with business strategy. For the
last 20 years management gurus have promoted the strategic
value of design, starting with Kotler and Rath declaring in 1984
that design is “a powerful but neglected tool” quoting
companies such as IBM or furniture maker Herman Miller as
examples for companies that have used design to achieve a
superior market position. Tom Peters (1995) soon joined the
ranks of the illustrious promoters of design – and slowly it
seems that their arguments are being taken on board.
Sony – one of the first companies to put design at the core of its
strategy
For years Sony has been able to charge a premium of around
25% over competitors’ products with similar technology. Design

is widely acknowledged to have been the enabler of this. Norio
Ohga, successor of Sony’s legendary co-founder Akio Morita,
had set up a centre as early as 1964 to bring together the
product planning group and the design centre, the first Japanese
company to do so.
There still remains some confusion about what design actually
means, what its use involves, and how it can actually contribute
to a company’s competitiveness. However, as examples of Sony
for some time and Procter & Gamble more recently show, more
and more companies are starting to understand its potential and
contribution in the context of innovation. Fewer organisations
confuse design with styling – the latter being something that is
applied to an existing product towards the end of its
development process whereas the former is an integral part of a
product’s development process right from the outset.
Having said that, differences in education, resulting in different
mindsets and different approaches to problem solving, are still
to blame for a slow take-up of design’s offerings. Managers are
taught to think rationally, to analyse and measure. They are
taught to avoid risk and focus on answering questions.
Designers on the other hand are taught to express themselves
(be emotional), to explore and experiment. They have a great
tolerance for ambiguity and focus on understanding the
question. Managers are concerned with facts and figures
whereas designers are driven by intuition and inspiration. The
lack of acknowledgement and understanding of the differences
leads many managers to view design and creativity as something
close to a black art, something that cannot be managed and is
therefore better left alone. Creating an awareness for the
differences and bringing designers on board as early as possible
can help to maximise the benefits that can be gained by
harnessing the differences.6
6For a comparison of designers’ and managers’ preference
please refer to Table 1.3, Chapter 1.

It also helps to communicate clearly the benefits that design and
designers can bring to a business. Kotler and Rath explain that
design and the conscious management of design can add value
by:
· Creating corporate distinctiveness in an otherwise product and
image surfeited marketplace.
· Creating a personality for a newly launched product so that it
stands out from its more prosaic competitors.
· Reinvigorating product interest for products in the mature
stage of its life cycle.
· Communicating value to the consumer.
· Making selection easier (standing out) and increasing
consumer satisfaction.
· Helping to inform consumers in a more efficient way.
Kotler and Rath continue to identify what constitutes effective
design, namely performance, quality, durability, appearance,
cost benefits but state that to achieve this it is necessary that
senior management recognises and understands the contribution
design can make, and that designers are an integral part of the
new product development team, right from the outset.
Considering the above and referring back to the Porter
framework design can hence help:
· To create barriers to entry by providing product differentiation
and creating emotional switching costs.
· To reduce suppliers’ bargaining power by high levels of

differentiation, enhancing product quality, increasing hurdles
for possible substitutes.
· To reduce buyers’ bargaining power by higher levels of
differentiation, increased desirability and product quality, and
decreasing price sensitivity by preventing direct comparability
(due to differentiation and quality).
· To reduce customers’ receptivity to substitutes and decrease
price sensitivity.
· To reduce the impact of the number of players and excess
capacity, e.g. Apple computers are less likely to be affected by
excess capacity than bog standard computers.
But even if management realises the value of design, the next
questions then are, how can it be harnessed, where does it apply
and what part can design play in realising a company’s
strategy? Cooper and Press (1995) have identified three
distinctive areas of design activity in an organisation and
associate specific design strategy issues with each:
Corporate identity is the reality of what the company says and
does, be this visual, verbal, environmental or behavioural.
Corporate image is how the organisation is perceived. These
perceptions may not necessarily reflect the reality.
Corporate identity is translated into corporate image via direct
(advertising, corporate literature, etc.) and indirect (employee
behaviour, service quality, etc.) corporate communications.
Tangible elements of corporate identity are the physical
manifestations of visual identity and communications, e.g.
corporate logo/name, publications, web site, exhibitions,
buildings. Intangible elements are management style,

procedures, general attitude and service quality. Intangible and
tangible messages have to be consistent whereby the intangible
ones are the most important as people will trust their experience
more than what they are told.
Summary of design management process
(based on Olson et al., 2000):
1. Clearly articulate the firm’s competitive strategy to designers
and design managers.
2. Develop a detailed understanding of the design requirements
inherent in the adopted competitive strategy.
3. Ensure open lines of communication among the design group
and other functional units.
4. Create, review and approve design briefs.
5. Compare performance outcomes against the objectives
established in design briefs.
· The development of corporate identity – this is about
communications and of course identity; it requires the
understanding of the corporate values, the relationship between
corporate image and corporate goals, whether the focus lies on
the corporation, the division or the product line, what the
necessary design competencies are, and what the intangible
messages of the corporation are. To implement these strategic
issues designers need to work with members of the PR,
advertising, HR, finance, R&D, marketing and IS departments.
· The design of saleable products and services – this is about
the relationship between the factors involved in product or
service design (price, quality, standardisation) and corporate
goals and requires the understanding of price point constraints

and production costs and capacities, about having insights into
the features that are valued by customers, about having the
competencies necessary to design and deliver the planned
products, and understanding the intangible messages that
designed products and services carry. To implement these
strategic issues, designers need to work with members of the
marketing, R&D, operations, and, to a lesser extent, finance and
accounting departments.
· The design of operating environments – this is about the
relationship between corporate values, image, environment and
goals. It requires the understanding of the competitive strategy
adopted by the firm or division, knowing how work is
conducted within the firm and the critical interrelationships
between functions, understanding consumer shopping
preferences, having the competencies necessary to design
corporate environments, and understanding the intangible
messages that corporate environments carry. To implement
these strategic issues, designers need to work with members of
the marketing, operations, and HR departments, as well as
architectural firms and public zoning agents.
However, having said all that, and emphasised the contributions
design can make, I would like to give voice to a designer (!)
who, while many seem to suggest that design should take over
the world, suggests that “In a successful relationship, you will
often find a dominant partner and a quiet one – a leader and a
supportive follower. In the business–design relationship,
business must be the leader, and design must be the supportive
follower.” For that to happen, Turner (2000) realises, design has
to redefine “its relationship with business – not in terms of
design strategy versus business strategy, but at a much more
fundamental level”. He suggests that design takes the role of
coordinator, facilitator and interpreter, rather than that of the
leader it often aspires to. He also suggests that, as design
touches so many parts of a business, “It can bridge the gap

between a company’s ambitions and the things that go on every
day in the factory, the showroom, or the office in a way a
mission statement never can.” This certainly is a strong
argument for design, and for the potential to become reality
companies need to integrate design into their DNA – or treat
design as, what Gorb and Dumas (1987) refer to as ‘design as
infusion’ (see Table 1.3
HYPERLINK "javascript:findAnchor('ch01')" Chapter 1),
which means everyone in the organisation understands and
values the contribution design can make.
I would like to conclude this section with some questions senior
management might want to ask about design that I have
extracted and adapted from the British Standard 7000, ‘Guide to
Managing Product Design’:
· Have the corporate objectives for design and new product
development been properly defined and, thereafter, periodically
reviewed?
· Are these corporate objectives understood by all involved and
have they inspired enthusiasm?
· Is the company’s product strategy compatible with its
corporate objectives?
· Have significant resources been provided to match the product
strategy?
· Are procedures in place to ensure that up-to-date information
about market requirements are available to the design and
development team?
· Are the collaborative, information and evaluation links
between the design and development team and other parts of the

organisation operating properly?
· Are the organisational policies and procedures for managing
the design and development process adequate?
· Is there a sincere and visible commitment to high standards of
product design?
· Are achievements and expenditure being monitored against
time?
· Are results being properly evaluated and is this evaluation
being communicated to all concerned?
Reading Suggestions
On strategy
Grant, R.M. (1991). Contemporary Strategy Analysis: Concepts,
Techniques, Applications. Cambridge, MA: Basil Blackwell.
Comment:
Introduction to strategy analysis and development, it makes
several references to innovation and the innovating
organisation.
Markides, C. & Geroski, P. (2004). Fast Second: How Smart
Companies Bypass Radical Innovation to Enter and Dominate
New Markets. San Francisco: Jossey Bass.
Comment:
Arguing for and elaborating on the fast follower advantage.
Warren, K. (2007). Strategic Management Dynamics.
Chichester, UK: John Wiley & Sons, Ltd.
Comment:
A book on the theory and practice of applying system dynamics

to strategy development in a business context.
On change
Moss Kanter, R. (1985). The Change Masters. New York:
Touchstone Books.
Comment:
One of the classics on change, with particular insights for and
emphasis on innovation.
Moss Kanter, R. (1989). When Giants Learn to Dance. New
York: Simon & Schuster.
Comment:
On how large organisations manage to become innovative, and
thrive on change.
Some Useful Websites
www.strategos.com
Comment:
Strategos is the consultancy set up by management guru Gary
Hamel, site provides a listing of its publications as well as
insights into its research findings
www.smsweb.org
Comment:
This is the website of the Strategic Management Society which
provides a list of useful links
(www.smsweb.org/reference/web_sites.html), as well as
influential books on strategy
(www.smsweb.org/reference/inf_books.html)
http://www.systemdynamics.org.uk/(UK)
http://www.systemdynamics.org/(US)
Comment:
Websites of the organisations promoting a dynamic approach to

strategy development. As they state, “System dynamics is a
methodology for studying and managing complex feedback
systems, such as one finds in business and other social
systems.”
Problem Set 6
1. For each of the following situations, what amount would
the insurance company pay?
a. Wind damage of $835; the insured has $500 deductible.
b. Theft of a stereo system worth $1,300; the insured has a
$250 deductible.
c. Vandalism that does $425 of damage to a home; the
insured has a $500 deductible.
2. Beverly and Kyle Nelson currently insure their cars with
separate companies paying $650 and $575 a year. If they insure
both cars with the same company, they would save 10 percent
on the annual premiums. What would be the future value of the
annual savings over ten years based on an annual interest rate of
6 percent?
3. As of 2008, per capita spending on health care in the
United States was about $8,000. If this amount increased by 5
percent a year, what would be the amount of per capital
spending for health care in 10 years?
4. Sarah’s comprehensive major medical health insurance plan
at work has a deductible of $750. The policy pays 85 percent of
any amount above the deductible. While on a hiking trip, she
contracted a rare bacterial disease. Her medical costs for
treatment, including medicines, tests, and a six-day hospital
stay, totaled $8,893. A friend told her that she would have paid
less if she had a policy with a stop-loss feature that capped her
out-of-pocket expenses at $3,000. Was her friend correct? Show
your computations. Then determine which policy would have

cost Sarah less and by how much.
5. The Kelleher family has health insurance coverage that pays
80 percent of out-of-hospital expenses after a $500 deductible
per person. If one family member has doctor and prescription
medication expenses of $1,100, what amount would the
insurance company pay?
6. You are the wage earner in a “typical family,” with $40,000
gross annual income. Use the easy method to determine how
much life insurance you should carry.
Problem Set 5
1. Tammy Monahan is considering the purchase of a home
entertainment center. The product attributes and weights she
plans to consider are:
portability .1
sound projection .6
warranty .3
Tammy rated the brands as follows:
portability
sound projection
warranty
Brand A
6
8
7
Brand B
9
6
8
Brand C
5
9

6
Using the Consumer Buying Matrix presented in Chapter 8,
conduct a quantitative product evaluation rating for each brand.
What other factors is Tammy likely to consider when making
her purchase?
2. Based on the following, calculate the costs of buying and of
leasing a motor vehicle.
Purchase Costs
Leasing Costs
Down payment $1,500
Security deposit $500
Loan payment $450 for 48 months
Lease payment $450 for 36 months
Estimated value at
End of loan $4,000
End of lease charges $600
Opportunity cost interest rate: 4 percent
3. You can purchase a service contract for all of your major
appliances for $180 a year. If the appliances are expected to last
for 10 years, and you earn 5 percent on your savings, what
would be the future value of the amount you would pay for the
service contract?
4. You estimate that you can save $3,800 by selling your own
home rather than using a real estate agent. What would be the
future value of that amount if invested for five years at 7
percent?
5. John Walters is comparing the cost of credit to the cash price

of an item. If John makes a $60 down payment, and pays $34 a
month for 24 months, how much more would that be than the
cash price of $695?

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