by Mark W. Sickles
Impact Systems is brain food for executives!
Once a firm becomes convinced of the value of strategic planning, the question becomes, How should we do it - outside-in, or inside-out. The issue of procedural interdependencies helps to work through this version of “which comes first, the chicken or the egg?”. Our question is, ”which comes first, the core competencies or the industry selection?” Answer: Both, reflecting the reality that management is a paradox, and that paradox management is a source of sustainable competitive advantage. To achieve this advantage, it is useful to have an understanding of two different and complementary planning models.
Industrial Organizational (I/O) ModelThe I/O planning model begins with an analysis of the External Driving Forces (EDF) being imposed upon industries. These EDF are what they are, whether you like it or not, and you better see them as they are. This discipline is reflected in one of Welch’s six rules to live by: “Face reality as it is, not as it was or as you wish it were”.
Procedurally, the general flow of this model is:
1. Identify the EDF. These include interventions from governmental and regulatory agencies, technological trends and developments, economic conditions, customer demands and expectations, competitive factors and labor market conditions. Michael Porter’s Competitive Force Framework Analysis is useful to apply during this step:
3. Based on the strategic imperatives, determine the critical success factors (CSF) - abilities requiring a standard of excellence - to carry out the strategic imperatives, succeed against the EDF’s, and achieve a state of competitiveness. If the CSF required to achieve competitiveness are sustainable, they become your firm’s core competencies - the combination of inimitable resources and capabilities producing above-average returns.
Now and only now do you begin to focus on your firm. The first step at this firm-level focus is:
4. Assess your current level of performance relative to the CSF, and perform a gap analysis.
5. Develop a plan to close the gap in the time frame being imposed upon your firm. If you don’t like being imposed upon, practice another one of Welch’s rules: Change before you have to. Relatedly, Porter stresses that the ultimate goal is to first cope with, and then change the rules of competition to your favor.
Resource-Based Planning Model:This model works in the opposite direction as the I/O model.
1. Analyze your firm’s resources - capital, technology, materials, and people.
2. Look for capabilities your firm has by virtue of any combination of these resources. Capabilities in this context means the capacity for a set of resources to integratively perform a set of activities.
3. Analyze these capabilities against the criteria for competitive advantage:
4. Analyze the market place to seek out opportunities where your core competencies could be leveraged to produce sustainable above average returns and shareholder wealth.
And/BothWhich planning method should you apply? Both. Why? Because the fundamental purpose of the strategic management process is to match the conditions of the EDF with the firm’s continuously evolving resources, capabilities, and competencies (Hitt, Ireland, Hoskissson) As is frequently the case in high performance management, the game is one of and/both and not either/or: Never pass up an opportunity to leverage a pre-existing core competency in a manner consistent with your strategic intent and shared values; conversely, never fail to factor in the EDF’s into your business strategy even when the strategy is built around pre-existing core competencies.