Building for the future

(1)

Building for the future

Rijksuniversiteit Groningen Faculteit Bedrijfskunde

Author: M.G.Hoogland Studentnumber: 0947492

Supervisors Rijksuniversiteit Groningen Dr. Th.J.B.M. Postma

Drs. H.C. Stek November 2002

(2)

Preface

For confidentiality reasons names and words in this reports have been changed. For example, ‘’limo business’’ replaces the real name of the business area that is under investigation and the company name is replaced by Company Y.

Originally the research was aimed at finding the optimal product portfolio for the limo business for Company Y. However it grew out to become a much broader research, namely on the strategic options that could be pursued with the limo business in the future business environment, based on scenario planning. This change in research focus lead to some delay and frustration, nevertheless I found my internship a very enlightening and valuable experience. During my study I unknowingly developed views and ideas about organisations that were challenged during my research period. Furthermore, I now understand that my role as researcher/ consultant is most valuable as sparring partner of the client. The insights resulting from this research should be seen as a way to challenge the views of the managers of Company Y and thereby lead to better decision making. It does not provide ready-made answers to the problems of the decision makers.

Subsequently, I would like to use this opportunity to thank the people who have supported, and challenged me during my research project. First of all, I would like to thank my supervisor.

Furthermore, I would like to thank my professors, Dr. Postma and Drs. Stek, for their expert advice and comments that have enabled me to reach a higher level. I experienced our cooperation as very pleasant and stimulating.

I thank my friends for all the fun times we had during my study. Groningen would not have been the same without them.

Finally, I would like to thank my family and girlfriend Marjan for their support and attention during my the entire study and especially this research project.

Utrecht, November 2002

(3)

Management Summary

Company Y is wondering if they are pursuing the right strategy with the limo business to face the future. This because the business environment is highly uncertain and complex due to several political, technological economic and societal factors. Based on this the main question of this research is:

What strategic options with respect to distinctive competencies could Company Y pursue to be competitive with the limo business in the future business environment?

This question is answered by using scenario planning of van der Heijden (1996). The scenario planning of van der Heijden (1996) provides a way to test how the strategy of an organisation might win (or loose) across a range of plausible future worlds (the scenarios). The scenarios are used to discover problems and difficulties with a strategy before things start to go wrong and to develop ideas for a new strategy.

Since the developments in the environment are highly uncertain it is very hard to make one sound forecast for the future. The scenarios are a way of dealing with this uncertainty since several equally likely pictures of the future will be developed.

To come to strategic recommendation for the future several steps are taken. First the key driving forces for the success, also called distinctive competencies, of the limo business are analysed. This is done by using the concept Business Idea. The other main step is to construct the scenarios which are four equally likely pictures of the future. The confrontation between the scenarios and the Business Idea will lead to insight to what degree the limo business has the right distinctive competencies to face the different futures. Based on these insights

strategic options can be generated which are again confronted by the scenarios to evaluate them on their robustness.

Growth for the future does not appear to be sustainable since most of the competencies (limo product development know how, reputation, service, local adaptability) on which growth and profit is based are not distinctive. This because other companies also possess the competencies on which Company Y realises its profit potential and can use them for the same purpose. From a different perspective the distinctiveness of the competencies are further analysed but now with Porter’s five forces model. Based on this several conclusions were drawn. Market growth poses opportunities for further growth. However the increasing competition and the bargaining power of the customers is threatening future profitability.

Based on the environmental analysis four scenarios are constructed. The two main elements of the scenarios are trade liberalisation and disease outbreaks. These are highly uncertain and can highly impact the limo business . When confronted with the scenarios the current Business Idea does not seem highly robust. Therefore attention turned to the question what strategic options should be pursued to develop new distinctive competencies or strengthen the old ones.

The first recommendation is to develop distinctive and sustainable competencies, like competencies in speed of developing new products and getting them as soon as possible on the market. This requires competencies in R&D and competencies to get quick authorisation to register the new products. Competencies in R&D should be strengthened from within but also by engaging in new partnerships.

The environment is very uncertain mainly caused by disease outbreaks and the possibility of the phasing out of the subsidies for the farmers in the EU. The main consequence of this is the highly precarious situation of farmers in general but

(4)

especially the EU. At the same time costs are increasing exponentially, due to the high investment that have to be made in product development. This indicates that the profitability of Company Y could drop. From this perspective the option to diversify in new areas and lever the existing competencies is an escape from the gradual drop of profitability. Furthermore the flexibility of the organisation should be remained to be able to deal with the uncertainty in the environment.

A further recommendation is to regard the scenarios and the strategic options of this report as a means to start the strategic conversation in the company regarding the limo business . The scenarios are not pictures of the actual future but more like perception devices to think about the future. Company Y should ask itself: what could happen if scenario 1 or 2 became true? Would Company Y be able to deal with this? What actions could be taken? Besides this the scenarios can be used as devices to pick up signals early on. I strongly recommend Company Y to think over these issues to become prepared to face the future and to proactively deal with it.

A recommendation for further research is that more people from outside the company are consulted to get a more objective picture on the distinctiveness of the competencies. A more objective insight could lead to a better understanding of the sustainability of profit and growth for the future.

Also further research should be done by taking into consideration the other business areas since they are to a certain degree interrelated. This was not done in this research.

This research led to the conclusion that most of Company Y ’s competencies were not distinctive and therefore not a source of sustained competitive advantage. A solid explanation of its ‘’success’’ was not really found. Further research should be done since only when the sources of success are understood they can be actively discussed, modified and improved, otherwise there is a chance to slip into a spiral of decline. Therefore I recommend Company Y , to further conduct research on the sources of its success.

(5)

Chapter 1 Introduction

The environment of limo business one with great uncertainty and complexity.

Increasing rate of innovation offer reason for optimism and concern. It has increased the availability of better products which are reasons for concern, however new innovations also pose opportunities for further growth. These technological forces also increase the need to develop and diffuse innovations much quicker than before.

Reasons for optimism are that legislation in European Union. This has lead to the increased market potential of the limo products, which is caused by a ban on certain antibiotics for which limo products can be a substitute.

A reasons for uncertainty is the economic instability with farmers. They are the ones who finally pay the bill. Due to forces in the environment their future is uncertain.

Proposals of subsidy cuts, environmental legislation and the outbreak of diseases combined with food safety concerns have made their future very uncertain.

All these forces add to the complexity and uncertainty of the limo business. The main problem that Company Y is facing is that it has little overview over its limo business in relation to its present and future business environment. Company Y has spotted trends in the environment that could be very important for the business, but it does not exactly know how this can and will influence them. Due to this they are wondering whether they are properly equipped to deal with the future.

Apart from limo products Company Y is also active in other business areas. However Company Y is especially interested in the future of their limo business. This because Company Y is facing an important decision namely the degree of investments that this part of the business requires. One of these decisions deals with new investments in the production. However this investment plan is not the area of this research.

Before investments are made Company Y is interested to see whether they are properly equipped to face to future. Therefore this report deals with strategic recommendation on how Company Y should proceed with their limo business.

In chapter two a company description is given. Chapter three discusses the problem definition, theories and research methods. Chapter four further discusses the theories and methods used for this research and their value for this research. The scenario methodology will have a central place in this discussion.

In chapter five Company Y’s sources of success, its ability to grow and make profit, will be analysed. This is achieved by using the concept of “Business Idea”. In chapter six the “Business Idea” will be further tested on its sustainability by analysing the competitive forces. Chapter seven discusses the main political, economical, sociological, technological and ecological developments trends and developments.

The identification of important element from the environment leads to the next chapter, the scenario. In the next chapter this will lead to a confrontation of the scenarios and the “Business Idea”. Here will be tested if Company Y is properly equipped to deal with the future. Based on this strategic options will be generated and tested. In the final chapter this leads to conclusion and recommendation for the limo business of Company Y.

(8)

Chapter 2. Research strategy

2.1 Introduction

In this part of the report the research strategy will be discussed. First, will be discussed how this research started and how it involved into the research that I finally conducted and now lies before you. In the second part the problem definition, which is constituted by the research goal, question and limitations will be discussed. The research goal explains what the report has to produce to be successful. The research question indicates how this will be achieved. This will be further split up into separate parts, which are the sub-questions. Furthermore, it will be explained what will and what will not be taken into account. Limiting the research will achieve this.

Subsequently, the concepts and theories will be outlined, which leads to the conceptual model. In the research design will be discussed how the individual sub- questions will be answered. Finally, in the last section will be discussed what the reader can expect in each chapter.

2.2 Pre research phase

In the beginning of this project I was asked my supervisor, Manager International Production Co-ordination and Logistics, to conduct research on the product portfolio of limo. His department’s main responsibility is to co-ordinate the world-wide production and logistical flows. Besides this, the department has a general co- ordinating and planning function to support the board of Company Y. With the portfolio research I would have to advice what the most preferable product portfolio of limo products would be for the future. The research started with some preliminary interviews with people involved in limo products of Company Y. These were people involved in marketing and sales, finance and accounting and production (for an overview see appendix 1). After the research proposal was constructed I could start with my research. More interviews were held and data collected (see appendix 1).

However in the fifth month the research radically changed. My supervisor decided that I could not receive the sales and financial data that I was waiting for quite some time. Background of the reason was the matter of confidentiality. The conclusion was no product portfolio research, because I could not make any well founded recommendation without this critical data. Since I had to write my final thesis I started to think what I had learned in the past few months and how I could be of added value to Company Y. During this period it became apparent that Company Y was very interested in the future of the limo business. In mutual agreement with my supervisor I came to a new research. This new research is aimed at providing insight into the future business environment, how this could effect the limo business and how Company Y could deal with this. How this new research focus came about will be discussed in the next section.

2.2.1. Main problem

The main problem was identified during interviews that had already taken place for the portfolio research. A major problem that Company Y is facing is that it has little overview over its limo business in relation to the future business environment.

Company Y has spotted developments in the environment that could be very important for the limo business , but it does not exactly know what the consequences will be. Due to this they are wondering whether they are properly equipped to deal with the future. Properly equipped in this case means to what degree Company Y has the right strategic competencies to survive and grow in the future.

(9)

The reason to focus this research on the limo business is because, my supervisor’s main interest went out to this area of the business. Moreover, special interest went out to this part of the business since there were important developments in the environment, especially related to the limo business . Besides this, taking the other business areas into account would have made this research to extensive.

In the next section the causes and consequences of lack of overview over its limo business in relation to its present and future business environment will be further explained.

2.2.2 Causes and consequences of the main problem

During the interviews for the previous research several times I was confronted with the fact that Company Y has to operate in an environment with a high degree of uncertainty and complexity. Fedesa, the European animal health branch organisation also acknowledges this: ‘’the animal health market is a complex and uncertain environment in which to do business.”¹ This means that it is very hard to predict the future and that many factors have to be taken into account. Examples of factors causing complexity and uncertainty are the ban of antibiotics and increasingly strict regulations for production and registration of new products. Also economical factors like the deterioration of the agricultural industry in Western Europe is regarded as a source of great uncertainty. Other factors which complicate matters is the distribution of animal populations, the diverse methods of production, and variations in climate across the continent. The effect is that countries differ very much from each other in market characteristics. Uncertainty is further increased due to possible outbreaks of epidemic diseases (BSE and FMD) and due to technological developments like genetic engineering, which in the future could make animal health products redundant. The people interviewed acknowledged that Company Y has to operate in a complex and uncertain environment that can highly impact the performance of Company Y. The consequences of such a complex and uncertain environment is that there is a need for a robust strategy that can deal with a variety of alternative futures (Van der Heijden, 1996:17).

Another element that became apparent during the interviews, and can be attributed to the lack of insight, is that Company Y’s approach towards the future is rather reactive and short-sighted. Reactive means that Company Y less tries to anticipate on future events and development and less tries to think of ways how to deal with this. A good example of the short-term orientation was the decision to close down a production plant after a merger, while after only two years Company Y realised they needed the production capacity. The short-sightedness is also well illustrated by the following quote made of an interviewee: ‘’At Company Y decisions are made quickly and only afterwards it is taken into account if it was a profitable decision.’’ Of course this will not always be the case, however it very well illustrates how Company Y approaches the future in the general. A consequence could be that Company Y is surprised by certain developments and may even get out of business. Company Y now acknowledges this danger and would like to approach the future with a more proactive mindset.

Summary

The main organisational issue is that there is a lack of insight how environmental developments could influence the limo business . This is mainly caused by the complex and uncertain environment of Company Y’s limo business and its reactive attitude. Due to this Company Y would like to have more insight into its future

(10)

business environment. Furthermore due to the uncertainties in the environment there is a higher need for a (robust) strategy that can deal with several futures. Therefore this report is aimed at providing recommendation regarding the strategic competencies that should be developed or strengthened to be competitive in the future.

2.3 Problem definition

The problem definition can be divided into the main research goal, the main question and limitations. The research goal deals with the ‘why’ of the research, in other words, the final result of the research. The main question deals with the ‘what’ of the research, in other words, the exact insight that may be gained from the research.

2.3.1 Main goal

This research is conducted for Company Y to support their strategic decision-making.

Since Company Y has little insight in the future business environment in relation to their limo business this report will provide insight into this situation and will recommend how they could proceed with this part of the organisation. The main goal for this research is:

To provide the head of the department IPCL² and the board of Company Y with recommendations regarding the strategic options that could be pursued with the limo business in the future business environment.

2.3.2 Main question

In order to achieve the previous stated goal, the main question for this research is:

What strategic options with respect to distinctive competencies could Company Y pursue to be competitive with the limo business in the future business environment?

2.3.3 Sub-questions

To be able to answer the main question it is divided into sub-question. The structure of the sub-questions is based on the scenario methodology and the theoretical concept the ‘’Business Idea’’ of van der Heijden (1996). Why these were chosen will be explained in section 2.4.

1. What is Company Y’s Business Idea related to the limo business ?

2. What is the strength of Company Y’s Business Idea considered against the

‘transactional environment’?

3. What are the main trends and developments in the contextual environment?

4. What will the future business environment, related to limo business , look like?

5. What is the fit between Company Y’s Business Idea related to limo business and the future environment ?

6. What strategic options could be pursued in the future business environment?

2.3.4 Limitations

2 IPCL= International Production Co-ordination and Logistics. The main responsibility of this department is to co-ordinate the world-wide production and logistical flows. Besides this, the

(11)

To make the research feasible it has to be limited. The limitations can be split up into, the limitations regarding the research results and the limitations regarding the process. This deals with limitations regarding the scope of the research and includes the requirements of Company Y for the research and the final results.

Result limitation:

• The research is limited to three geographic regions, Europe, Asia and Latin America. Other geographic regions are not taken into account. The US, Canada and Australia are separate entities, because no limo products can be imported into these countries. Therefore these countries have their own strategies and local facilities. Africa is left out since hardly any product is sold there and this region has little future potential.

• The future will be a period of ten years. This determines the relevant time horizon. This period is chosen since today’s decision will mainly have an impact in this period of time.

Process Limitations:

• The research has to be finished at the end of August 2002 2.4 Concepts and theories

The concepts and theories indicate what relations are taken into account and what perspective is chosen for this research. Only the main concepts and theories that form the basis of this report will be elaborated. Other supporting theories and concepts are mentioned but not extensively discussed. For a complete discussion regarding the theories the reader is referred to chapter four.

This report aims to provide recommendation regarding the strategic options that could be pursued with the limo business in the future business environment. I started to look into literature, relating to strategic management and ‘’predicting’’ the future, for suitable theories and models in this situation. From a course that I had taken during my study in Management and Organisation I already had some idea which models and theories could be useful in this situation ³. A very suitable method for this research is scenario analysis. I came to this conclusion because strategic management literature indicates that scenario analysis is very useful in circumstances where it is important to take a long term view of strategy ( a minimum of five years), and where there is are high level of uncertainty about the factors influencing the success of that strategy (Johnson and Scholes,1999:111). These circumstances are also present in this research since it deals with environmental factors that are very uncertain and have a high impact on the success of the organisation (see section 2.2.2) and there is a long term view on strategy namely a period of ten years (see section 2.3.4).

For this research the method of van der Heijden (1996) is chosen since it discusses scenario analysis in relation to strategy development and puts it in a form suitable for strategic consideration. The scenario method of van der Heijden (1996) provides a way to test how the strategy of an organisation might win (or lose) across a range of plausible future worlds (the scenarios). The benefit according to van der Heijden (1996) is that the scenarios can be used to discover problems and difficulties with a strategy before things start to go wrong and to develop ideas for a new strategy.

Since this research should not only provide insight into the future but also give strategic recommendations this method seems very useful. Many other scenario

3 This course was called ‘’Contextverkenning’’, Professors: Dr. L. Weeda. Drs. R. Julien and

(12)

approaches deal more with the development of scenarios but leave out strategic considerations and are therefore less suitable. As becomes clear from the above is that this research will provide insight into the future environment through scenarios.

A concept developed by van der Heijden (1996) to analyse the organisation and to articulate the essentials of the organisation, that can later on be tested against the scenarios’, is the ‘’Business Idea’’. This concept seems highly useful since we have to make clear what the strategy is of Company Y related to the limo business before recommendations can be given. This Business Idea is regarded as the organisations success formula, measured in terms of survival and growth. The concept ‘’Business Idea’’ is more or less equivalent to the concept ‘’Strategic Vision’’. Thus this will indicate what the main elements are on which Company Y achieves its business success. These main elements are called the ‘’distinctive competencies’’. Another reason why the concept of the Business Idea in the scenario planning is very useful is because it forces the scenario planner to first focus on the essential elements of the organisation for growth and profit. Later on when these have been made explicit they can be tested against the scenarios.

A framework presented by van de Heijden (1996) that can further assist in the analyze of the ability of the organisation’s to survive and grow is Porter’s five force model (1979a). Since further insight can be gained through this analysis on what actions could be taken to sustain growth and survival, this framework seems useful to come to strategic recommendations. For a more elaborate discussion on the concept and theories used in this research the reader is referred to chapter 4.

2.5 Conceptual model

Based on the previously identified problem definition, the concepts and theories the conceptual model can be formed. The conceptual model indicates the way of looking at the problem definition and how the research is going to deal with this to come to the recommendations.

Figure 2.1 Conceptual Model

In this report the strategic fit between the Business Idea and the scenarios will be considered. Based on this insight recommendations can be given how the

Future Contextual Environment

(Scenario’s)

Company Y’s limo business (Business Idea)

Robustness Business Idea

Opportunities Distinctive Competencies

+ -

Transactional Environment

(13)

and grow under a range of possible futures. This is expressed in the term robustness of the Business Idea. When the conclusion is drawn that the Business Idea is not robust (in the model this is indicated with a minus) strategic recommendations turn to the distinctive competencies underlying the Business Idea that should be developed or strengthened. When the Business Idea turns out to be strong under the range of scenarios (in the model this is indicated with plus) the strategic recommendations turns to the opportunities open to the organisation to further exploit the Business Idea.

2.6 Research design

In this section the research design will be discussed, which indicates how the different sub-question will be answered.

1. What is Company Y’s Business Idea related to the limo business ?

The first sub-question deals with surfacing the business idea and the underlying elements. Van der Heijden suggests that a process facilitator role. In his experience this leads to the best results since management concerns can best be surfaced in this way.

Van der Heijden suggests two methods for elicitation of views and insights. One is a group workshop in which the management team discusses strategic insights in the form of a SWOT analysis. Since commitment is not that high it is unlikely that I can persuade the management team to spend their time on workshop sessions. The second approach is more in-depth and uses individual interviews followed preferably by a team feedback. This seems more appropriate for this situation since individual interviews are more easier arranged than a workshop. Furthermore there is more chance to go indepth on certain issues. Thus in this research the data will be collected by open ended in-depth interviews with the decisions makers.

Furthermore other people throughout the organisation will be interviewed. These interviews will be fed back to the interviewees to see whether the processed data was still correct. Later on the decision makers will again be consulted to get an agreement on the business idea. Besides posing questions regarding the Business Idea this chance is taken to pose questions regarding the relevant environmental issues. These answers will be put into a large data base (where internal and external issues are separated) which also can be used during other stages of the research project. Since also other interviews for a previous research were held, these interviews will be scanned on their relevance for this research and important data will be put into the database.

Furthermore several sites will be visited to get a clear picture of the situation and to get acquainted with the limo business. The main place of residence during the research will be the headquarters of Company Y. This also gives the opportunity to get acquainted with the informal organisation and company culture. Also presentations and meetings will be visited.

2. What is the strength of Company Y’s Business Idea considered against the

‘transactional environment’?

This is the part were the Business Idea will be analysed on the degree that growth and profit can be sustained. This analysis is based on the Porter’s five forces model.

The interviewees will be asked how they think that these five forces will impact the business. To collect the relevant data interviews will be held with people from marketing and sales since they are closest to the market. Also secondary data will be collected from the department Market Intelligence. Furthermore, industry reports, internet sites of competitors, branch organisation reports will be used. Because such

(14)

little secondary data is available on Asia and Latin America extra interviews will be held.

3. What are the main trends and developments in the contextual environment?

By answering this question the main environmental issues influencing the future will be discussed, which is also called the scenario agenda. These are the areas of major uncertainty were the client is interested in / concerned about. Van der Heijden indicates (1996) that not too many areas should be covered. As advised, at most five themes will be addressed. As discussed in sub-question one, the environmental areas of concern are elicited in the first round of interviews. Furthermore based on secondary data these areas of interest will be further analysed. A very multiform view on the environment is of great importance in scenario planning (van der Heijden, 1996) therefore a diverse range of sources will be used. Examples are:

• Industry reports like Animal Pharm reports, Wood Mackenzie reports on animal health industry, Fedesa reports (EU branch organisation).

• Reports on trends and events in the field of culture, technology, politics and economy. Examples are World Bank reports and Euromonitor reports.

• Articles from industry literature.

• Magazines like ‘’the Economist’’.

• Newspapers.

• Internet.

4. What will the future business environment, related to limo business , look like?

To answer this question several scenarios will be formulated. To achieve this several steps will be taken. The method used to structure the scenarios is the deductive method. The main advantage of this method compared to methods is that it offers a more codified step by step approach, it takes less time to develop the scenarios and helps widen thinking into new areas. Since the scenario approach is very new to me I am very much attracted to the step by step approach since it will hopefully lead to less confusion. Furthermore since time is very limited the deductive method also posses a lot of benefits.

In the previous part already the main elements from the environment were identified.

The next step is to find the main driving forces behind the areas of interest in the business environment. These will be analysed on the degree that they are predetermined or uncertain, but also on the impact that they have on the organisation. Based on this an uncertainty-impact matrix can be constructed (see figure 2.2 next page).

(15)

Figure 2.2 Uncertainty – impact matrix

Source: Johnson and Scholes, 1999

Two elements are chosen with high impact and high uncertainty as the basis for the scenarios. These elements are the letters X and Y in figure 2.3. The two scenario elements (called variable X and Y in figure 2.3) are each expressed in two opposite ways in which they could play out in the future. This creates a 2 X 2 scenario matrix ( see figure 2.3), indicating 4 scenario end-states for the scenarios.

Figure 2.3 Scenario Matrix

Source: Fahey & Randall, 1998

The next step that will be taken is to fill in the details, and to create a story how the end-states are reached. To achieve this story lines will be developed. Furthermore several elements with low uncertainty, called predetermined, and high impact are chosen and will be reflected in all the scenarios.

According to van der Heijden (1996) two main points have to be kept in mind when developing the scenarios, namely internal consistency and plausibility of the scenarios. Plausibility will be established as van der Heijden indicates by anchoring the scenarios in the past, with the future emerging from the past and the present in a seamless way. Internal consistency implies that there is underlying structure in each scenario. This structure will be developed in the phase before the scenario construction. To create this structure, influence diagrams will be used. Furthermore as advised by Wack (1985a) to ensure internal consistency ‘’actor-testing’’ will be used. First, the main actors/stakeholders are identified. Second, we have to put

Uncertainty Potential impact

High Low

Low High

X Y

Variable X Low Variable Y

High

Variable X High

Variable Y Low

Scenario 4 Scenario 3

Scenario 1 Scenario 2

(16)

whether the detail of the story line is consistent with the behaviour that might be expected. Based on this inconsistencies can be discovered.

Preferable the scenarios are formed by a scenario team in workshop sessions (Van der Heijden, 1996). One of the advantages is that a multidisciplinary team can be formed which promotes new ideas about the future. Unfortunately I have to do this project on my own. This is a limitation but should not be a problem. Moreover, the client prefers not to be too much involved. However as van der Heijden (1996) indicates there is a great danger of losing relevance to the client. Relevance is ensured by setting a scenario agenda. Moreover through regular talks with the client I will try to make sure that the scenarios remain relevant to them. Another issue that is very important is to introduce novelty since the scenarios should challenge mental models of the client. To achieve this, besides interviews in the organisation, a wide range of secondary data will be consulted (as also discussed in sub-question 3).

5. What is the fit between Company Y’s Business Idea related to limo business and the future environment ?

By answering this sub-question we will see how well prepared the organisation is to deal with the uncertainties in the future and is able to survive and grow. To achieve this the Business Idea is confronted with the scenarios, visualised in figure 2.4. (The part of ‘’review’’ presented in figure 2.4 is discussed in the next sub-question)

Figure 2.4 Confrontation of Business Idea with scenarios

Source: Van der Heijden, 1996

For each of the scenarios the following questions will be asked:

• To what degree will the system of distinctive competencies continue to be socially efficient?

• To what degree will there be a continuing demand for the current offerings, and for any new offering Company Y is planning to introduce?

• To what degree will Company Y be able to exploit the competitive advantage?

• To what degree is Company Y able to defend the distinctive competencies against the competition?

• To what degree Company Y can protect its uniqueness?

• What are the continuing barriers to entry in this future?

Based on this conclusions can be drawn if the Business Idea can stand up under a range of futures. No new data sources will be used in this phase. Van der Heijden

Scenario 1 Scenario 2 Scenario 3

Business Idea

Outcome 1

Outcome 2

Outcome 3

Review

(17)

series of workshops through this phase. Preferably the management team is highly involved in this phase, however the client expects from me to provide with the strategic insights with little involvement from their side. This means that a process facilitator role is not very appropriate in this situation. Therefore an expert role is chosen in this phase and the following phases.

However Van der Heijden (1996) indicates that these is a danger involved in this way of working, because the members in the organisation are not familiar with the thinking related to the scenario and the ideas that have been generated by the scenario planner. We will try to overcome this by regular talks with the client regarding the progress of the research. Moreover in the final presentation further explanation will be given on the strategic options that are generated, but also how the scenarios should be regarded and used. This is not an optimal situation but we will have to work with it.

7. What strategic options could be pursued in the future business environment?

To answer this question first strategic options have to generated. Subsequently they have to be evaluated. The strategic options are either capability options or portfolio options depending on the degree of fit between the Business Idea and the scenarios.

When the Business Idea is strong attentions turns to the portfolio options and deal with how to further exploit the Business Idea. When the Business Idea is weak attentions turns to the capability options and deal with how to make the Business Idea stronger. The scenarios will be used as the main device to generate new options for the future. Besides this previously collected data will be scanned if they contain any suggestions for future strategic options. Furthermore weaknesses in the Business Idea discovered in sub-question one and two can also be used to generate options.

A second step that has to be taken is option evaluation. The scenarios will be used to evaluate the options. To make sure that the options are evaluated against the full range of scenarios a scenario/option matrix will be constructed (see table 2.1).

Table 2.1 Scenario/ option matrix

Scenarios Strategic Options

Scenario I Scenario II Scenario III Scenario IV

Strategic Option 1 + _ _ _

Strategic Option 2

Strategic Option 3

_

+ + +

Strategic Option 4 _ _ _ _ + + +

As indicated in the figure above, only a crude distinction will be made by symbols ranging from + + + to - - - indicating the degree of robustness of the options. The purpose is not primarily to reject or to accept an option, but to further improve them in such a way that the outcomes are as robust as possible over a range of scenarios.

This final step leads us to the recommendations that can be given on the strategic options that could be pursued with the limo business in the future business environment.

(18)

2.7 Reliability and validity

Reliability means that the research results are as less as possible influenced by coincidence (Saunders et al, 2000). These coincidences can be due to the situation, the interviewer, the questions, or the persons interviewed.

Saunders (2000:251) gives several suggestions that will be used during this research to ensure the reliability. Notes will be made regarding the design of the research, the reasons underpinning the choice of strategy and methods, and the data obtained.

The justification of the choice of research strategy and methods will initially be discussed in the research proposal. This will enable Company Y but also other people to understand how the research was conducted. Furthermore as much as possible will be indicated what information sources are used.

Another point that will be used to ensure reliability are that open-ended not suggestive questions are posed. Also the answers from previous interviews will be verified during other interviews. Also during the interviews the answers of interviewees will be summarised to see if the answers were understood correctly.

Also the worked out interviews will be fed back to the interviewees to insure reliability.

Interviews will be held with many people form different functional areas, at different levels, from in-and outside Company Y, which will prevent a bias in the data and enhance the reliability. This is especially important when developing the scenarios since most of the time the organisation is stuck in a mental model, which is hard to break out of (van der Heijden, 1996:135). So ideas about the development from outside of Company Y are very important.

Saunders (2000) suggest several issues to ensure the validity. The following will be used in this research. A high level of validity is obtained by using the open interviews, since the opinions of the interviewee may be probed, topics to be covered from a variety of angels and questions made clear.

Also a thorough introduction of the subject will be given, when starting the interview, which will ensure that the interviewee understands what the goal of the interview is.

Apart from this the questions will be stated as unambiguously as possible. Data regarding competition is always difficult to collect. This could contribute to a loss of validity. Validity in this area will be tried to be kept high by using industry reports and looking at internet pages. When only insufficient data regarding competition can be gathered conclusions will be regarded as less valid and will be cautiously dealt with.

Moreover, there is theoretical validity, which will be ensured by a discussion in chapter three of the theories and their applicability for the problem situation.

2.8 Reporting

This section addresses what will be discussed in the following chapters. In chapter three an elaborate discussion of the theories and concepts used will be given. In chapter four Company Y’s Business Idea will be addressed. In chapter four the transactional environment will be analysed to confront the Business Idea with the competitors and other players in the field. Subsequently, in chapter five the business environment and the related trends will be discussed. In chapter six the scenarios will be developed. In chapter seven strategic options will be generated and evaluated.

Chapter nine addresses the conclusions and recommendations and the areas for further research. Finally, in chapter ten a reflection will be given on the research project.

(19)

Chapter 3 Theoretical framework

3.1 Introduction

In this chapter the theories and models that will be used during the research will be further elaborated. It will be explained what theories are used and how appropriate they are to achieve the main goal of this research. The following theories that comprise the theoretical framework of this research will be discussed;

• Scenario planning of van der Heijden (1996).

• Business Idea of van der Heijden (1996).

• VRIO Framework Barney (2002).

• Porter’s five forces model (1979a).

3.2 Scenario planning

This research should provide insight into the future therefore the question has to asked: ‘’What methods and theories are available to understand the future business environment in which Company Y has to compete?’’ Two of the most commonly use approached will be discussed.

3.2.1 Forecasting and scenarios

The traditional way of analysing the future is by forecasting. The future is predicted and a most likely picture of the future is developed. The long-range forecasting methods of Armstrong (1985) are a good example of this. However since the oil shock upset the business world in the 1970, many people started to promote the use of scenario analysis to deal effectively with the many uncertainties that an organisation is confronted with (Bood and Postma, 1997).

The popularity of this method is caused by the failure of traditional forecasting techniques that could not provide credible forecasts (Wack, 1985a; Bood and Postma, 1997 and van der Heijden, 1996), because the environment is full of changes that are unexpected. In situations where the future is highly uncertain as in this research scenario analysis is more useful. The scenario analysis takes a different perspective on uncertainty in the environment than the traditional forecasting techniques. Forecasting techniques try to ignore uncertainty in the environment by offering managers one forecast, the scenario analysis presents several different pictures of the future and thereby confronts management with uncertainty forecasts (Wack, 1985a; Bood and Postma, 1997 and van der Heijden, 1996). Johnson and Scholes (1999) indicate that scenario analysis is very useful in circumstances where it is important to take a long term view of strategy ( a minimum of five years), and where there is a high level of uncertainty about the factors influencing the success of that strategy. These circumstance are also present in this research. Due to the high degree of uncertainty in the environment scenario analysis seems the right tool to understand the future and relate this to the strategy of the organisation.

This brings us to one of the main assumptions of scenario planning, namely the presence of uncertainty. Three types of uncertainty can be identified (van der Heijden, 1996: 83):

• Predictable risks, ‘’where is enough historical data, in the form of similar events, which makes it possible to estimate probabilities for various possible outcome’’

• Structural uncertainties, ‘possibilities of an event which is unique enough not to provide us with an indication of its likelihood. The possibility of the event presents itself by means of a cause/ effect chain of reasoning, but we have no evidence for judging how likely it could be

(20)

• Unknowables, we cannot even imagine the event. From previous events we know that they can happen and therefore we can only assume that this will continue in the future. But we do not have a clue what these events could be.

The scenarios deal with the first two types of uncertainty. Based on the predetermined and two to four uncertain elements scenarios can be formulated.

Now will be further explained what a scenario is. Scenarios play in the contextual environment which is defined as: ‘’That part of the environment which has important repercussion for the organisation but in which it has little influence.’’ ( Van der Heijden, 1996:6).

Figure 3.1 Company Y in its environment

This means that the company does not play a role in the scenarios. Furthermore scenarios are value free, which means that they are not good or bad. Moreover each scenario is equally likely to occur (Van der Heijden, 1996:5).

Scenarios can be used for several reasons. In the next section will be discussed what the functions are, and how they can contribute to this research.

3.2.2 Functions of scenario planning

The functions of scenario planning are very diverse. The most important ones are described below (Wack, 1985a; Bood and Postma, 1997; van der Heijden, 1996):

• Evaluation and selection of strategies.

• Integration of various kinds of future orientated data.

• Exploration of the future and identification of future possibilities.

• Making managers aware of environmental uncertainties.

• Stretching the managers mental models.

• Triggering and accelerating processes of organisation learning.

Yet, the purpose of scenario planning is not to pinpoint future events but to highlight large-scale forces that push the future in different directions. It's about making these forces visible, so that if they do happen, the planner will at least recognise them. It's about helping make better decisions today.

Technological

Political

Societal

Economical

Contextual environment

Company Y

Transactional environment

Buyers Competitors Suppliers

Driving forces

Ecological Potential

entrants

(21)

Many of these functions will also benefit this research. First of all recommendations should be given on what strategic options to pursue. The scenario’s can help in the decision making phase to chose and evaluate alternative strategies.

Second, scenario’s can deal with several kinds of data in an integrated way (Bood and Postma, 1997). This means quantitative and qualitative data together. Since this also will be the case, the scenario analysis is very valuable.

Third, the research should provide insight into the future and how Company Y should deal with this. This also fits the function of scenario analysis. According to several authors scenario are a means of exploring the future and identifying what might happen and how the organisation can act or react upon future developments (Bood and Postma, 1997; and Van de Heijden, 1996). By exploring the future and anticipating what might happen scenarios can help to identify important changes or strategic problems, but also to generate strategic options to deal with the environment effectively.

Apart from these three functions, which belong to the first generation scenarios, the last three functions mentioned above have been added as experience grew with the use scenario analysis. These last three functions deal with the perception of managers on reality.

The scenarios are used to confront the decision with different futures and to make them more aware of the environmental uncertainties (Wack, 1985a). This increased awareness can contribute to improved decision making.

Furthermore, the use of scenarios is seen as a way to stretch the managers mental models, which can be achieved by offering the decision makers challenging fundamentally different pictures of the future (Wack a, b; van der Heijden, 1996). This can enrich the mental models of managers and thereby enhancing decision makers, because they are less trapped in their own perception. The final function ascribed to scenarios is organisational learning. By using scenarios managers can be made aware of how biased and subjective their opinions and perceptions are. The confrontation of the scenarios could lead to learning as managers try to incorporate new perspectives that are given in the scenarios (Van der Heijden, 1996).

These functions of scenario planning seem to contribute to the overall goal of this research, namely to support decision making, since they assist in improved decisions making of managers. For this reason we argue that scenario analysis is very much applicable for the situation at hand.

3.2.3 Developing scenario’s

For this research the scenario metrology of van der Heijden (1996) is used. The starting point is to establish the scenario agenda. These are areas in the contextual environment that need to be looked at. These are based on in-depth interviews and with the success formula of the organisation in mind.

From the analysis of the environmental factors has become apparent what the main driving forces are in the environment. These factors have to be classified as either constant, predetermined or uncertain. This is a very important step since the uncertainty determines the differences between the scenarios while at the same time the predetermined and constant elements for each scenario are the same. Based on this the scenarios can be formed. Another step is testing the scenarios whether they are feasible, understandable and internally consistent. When they are not, they will not be accepted by the decision makers. Finally, these scenarios can be used as tested conditions for the strategic issues under consideration.

Since the scenarios should challenge the mental models of managers one of the most crucial elements in scenario planning is to take the existing mental models of

(22)

Besides this, insight and knowledge used should not be too close otherwise nothing new will be learned. When they are too far away the scenario will be classified as science fiction. Furthermore literature indicates that scenarios only have meaning against a certain background (Emery & Trist, 1965; Wack, 1985). They should be test conditions for something in particular. This brings us to the concept of the Business Idea.

3.3 Business Idea

To be able to provide Company Y with recommendation on what strategic action to take we have to understand what the current basis is to grow and make profit. To operationalize this, the concept of the ‘’Business Idea’’ of van der Heijden (1996) is used. He argues that underlying every successful organisation lies an idea that acts as the main source for its success. The Business Idea is defined as: ‘’the organisation’s mental model of the forces behind the current and future success’’

(van der Heijden, 1996:59). In other words an explanation of the success of an organisation of the past and the future. An advantage of using the Business Idea is that it helps to focus the discussion on the main source of success of the company (van der Heijden, 1996). When these have been made clear the scenarios can be developed to especially target these main elements of the Business Idea.

To develop strategic recommendation this Business Idea of Company Y has to be identified and considered against multiple scenarios (see figure 3.2).

Figure 3.2 Confrontation of Business Idea with scenarios

When based on the confrontation of the scenarios and the Business Idea the conclusion is drawn that the Business Idea is not robust, attentions turns to the capability options. These options will be categorised as follows:

Inside out focus (investment in organic growth)

• Market development (developing new relational distinctive competencies, in the market).

• Product development (developing new generational distinctive competencies, leading to new product ideas).

Scenario 1 Scenario 2 Scenario 3

Business Idea

Outcome 1

Outcome 2

Outcome 3

Review

(23)

• Innovation (Applying new combinations of distinctive competencies, changing the

‘rules of the commercial game’).

Outside in focus (investment in growth through partnerships, joint ventures, mergers and acquisitions)

• Vertical integration (buy the competencies that leverage the existing Business Idea upstream or downstream of current activities)

• Conglomerate diversification (buying the competencies that leverage the Business Idea in new business areas).

If based on the analysis the conclusion is drawn that the Business Idea is robust the question becomes how to further exploit it. These are called the portfolio options and can be categorised as follows:

In-side out focus (investment in organic growth):

• Concentrated growth (expansion into similar markets).

• Market development (investment in the expansion of market share).

• Product development (spreading the Business Idea across a wider range of products).

Outside in focus (investment in growth through partnerships, joint ventures, mergers and acquisitions):

• Horizontal integration (expand to adjacent markets similar markets by mergers or acquisitions).

• Concentric diversification (expand into different, but closely related markets by mergers or acquisitions

There are some underlying principles and elements of the Business Idea that will be discussed below.

3.3.1 Profit potential

Most of the firms establish success by creating value for their customers for which they are prepared to a price (van der Heijden, 1996: 59). Firms can achieve this by creating a surplus for their stakeholders (for example customers or the parent company), which the stakeholder can use for its own purpose. Second, a firm can create the ‘expectation’ among the existing or potential stakeholders that they will be able to create a surplus and grow in the future. However only creating value for the customer is not good enough to achieve profit potential. A firm should be able to appropriate part of the value that is created, otherwise all efforts are lost. This is achieved by providing a unique contribution. The definition of structural profit potential: ‘’an attribute of a system capable of creating value for customers in a unique way that others find difficult to emulate (Van der Heijden, 1996:61).

3.3.2 Distinctive competencies

The main element of the Business Idea through which profit potential can be achieved and sustained is the system of distinctive competencies. Thus by analysing these competencies of Company Y and their degree of distinctiveness we can determine to what degree these competencies have the potential to realise and sustain growth and profitability. Moreover it provides an indication on what strategic options could be pursued.

Because Van der Heijden remains very vague on what a distinctive competence really is, other literature was consulted. Barney’s VRIO framework makes very clear how distinctive competencies can be analysed. For a competency to be distinctive it

(24)

must be valuable, it must be rare among a firm’s current and potential competition, it must be costly to imitate, and must be organised is such a way by the organisation that it can be exploited. This will be further explained below

Table 3.1 VRIO Framework

Valuable? Rare?

Costly to imitate?

Exploited by organisation?

Strengths and weaknesses

No - - No Weakness

Yes No - Strength

Yes Yes No Strength and

Distinctive competence

Yes Yes Yes Yes Strength and sustainable

distinctive competence Source: Barney, 2002

Valuable

When a competency is valuable it enables a firm to respond to environmental threats and opportunities. Thus we have to ask ourselves whether a certain competency enables Company Y to react to changes in the environment.

Rare resources

A competency should also be rare otherwise other firms would have the capability to exploit that competency in the same way. How rare a competency should be is a difficult issue. It may be possible for a small number of firms in an industry to possess a particular valuable competency and still generate a competitive advantage.

According to Barney (2002) as long as the number of firms that possess a particular valuable resource (or a bundle) is less than the number of firms needed to generate perfect competition dynamics in an industry, that resource has the potential of generating competitive advantage.

Costly to imitate

Firms with valuable and rare competencies have the potential to distinguish themselves from their competitors, since they can engage in strategies that other firms cannot because they lack the competencies. However, valuable and rare organisational competencies resources can only be sources of sustained competitive advantage if firms that do not posses these competencies cannot obtain them.

Barney (2002) calls these competencies imperfectly imitable. These firm competencies can be imperfectly imitable for one or a combination of following three reasons:

(a) The ability of a firm to obtain a competency is dependent upon unique historical conditions.

The ability of a firm to acquire and exploit some resource depends upon its place in time and space (Barney, 2002). Once this particular unique time in history passes, firms that do not have space-and-time dependent competencies cannot obtain them, or have to acquire them at a significant cost disadvantage.

(b) The link between the firm’s competency is causally ambiguous.

Causal ambiguity is present when the link between the competency controlled by a form and a firm’s sustained competitive advantage is not understood or understood imperfectly. When this is the case it is hard for a firm to duplicate the success.

(c) The competency that is generated by a firm’s advantage is socially complex.

(25)

A third reason for a firm competency to be imperfectly imitable is that they may be very complex social phenomena, beyond the ability of firms to systematically manage and influence. Than the ability of firms to imitate this is very much constrained.

Organisation

In the analysis regarding the distinctive competencies a fourth question has to be asked, namely are a firm’s policies and procedures organised to support the exploitation of the valuable, rare and costly to imitate competency? Only when this is the case the company has the potential to fully exploit this competency.

3.3.3 Competitive advantage

If the Business Idea and its distinctive competencies are effective it creates competitive advantage. Competitive advantage can create profit potential in two ways (Van der Heijden, 1996; Porter, 1985):

• The distinctive competencies are used to create an offering that is different from the rest. The competitors cannot match this and the customers are prepared to pay a premium price compared to the competition. This means that the profit potential is generated by a premium price. This competitive advantage is called differentiation

• The second competitive advantage is based on distinctive competencies that create a low cost. Through this a company can offer a product or service that is competitively priced. The profit potential is achieved from cost leadership.

For the research this means that the competitive advantage had to be identified.

3.3.4 Positive Feedback loop

Another element of the Business Idea is the positive feedback loop, which is shown in figure 3.3. The positive feedback loop works as follows: a company has a certain system of distinctive competencies leading to competitive advantage, leading to profit potential , leading to resources which can again be invested to maintain or to renew the distinctive competencies.

Figure 3.3 The Business Idea

Resources System of

distinctive competences

Profit potential Competitive

Advantage

Entrepreneurial invention

Understanding evolving needs

In society

(26)

Distinctive competencies depreciate over time. This is due to the changes in the environment. The competitors find a way of emulating the competencies or value of the customer change, which means that the distinctive competencies always have to be updated (van der Heijden, 1996:65). This means that new investments have to be made in resources, which form the basis of the distinctive competencies. These resources are its assets, capabilities, organisational processes, firm attributes, information, knowledge, etc controlled by a firm (Barney, 1991). An example is a company that renews its distinctive competency, ‘’company know-how’’, by investing in education of its employees.

From the above can be concluded that to identify the Business Idea the following aspects have to be analysed:

• The customer that Company Y serves.

• The nature of the transaction between the organisation and the customer.

• How the customer derives value from the interaction.

• The competitive advantage.

• Uniqueness in the interaction, deliverable only by the organisation.

• The distinctive competencies of the organisation allowing it to produce this element of uniqueness.

• Resources applied to maintain the distinctive competencies.

• Resources applied to renew the distinctive competencies.

(27)

3.4 Porter’s five forces

Porters five forces model (see figure 3.4) can assist in analysing the forces that determine the degree of competition in an industry. A better understanding of these forces and how they can affect a company helps to identify ways of dealing with these forces (Porter, 1979a). Thus by analysing the transactional environment in relation to the Business Idea we can understand how a company is able to grow and what it’s profit potential is. This also brings us closer to understanding how well equipped Company Y is to deal with the future and what actions should be taken. For this reason this model seems very applicable for this research. Now the five forces model will be further explained.

The transactional environment will be analysed by using Porter’s five forces model (Porter, 1979a). The five forces are:

• Competition among existing firms

• Threat of potential entrants

• Threat of substitutes

• Bargaining power of suppliers

• Bargaining power of buyers Figure 3.4. Porters Five forces

Source: Porter, 1979:141

• Competition among existing firms

The competition among the existing players is determined by: the number of competitors, concentration of players, commitment to the market, differentiation in strategies and market growth.

• Threat of potential entrants

The seriousness of the threat depends on the barriers present and the reaction from existing competitors. Barriers are created by:

• Economies of scale

• Product differentiation

• Capital requirements

• Cost disadvantages independent of size

Bargaining Power Customers Threat of

Potential Entrants

Bargaining Power Buyers

Threat of Substitute

Products Competition

Existing Firms

Building for the future