Business strategy dynamics

In a world of accelerated change, established approaches to strategy development prove too static to be useful. This flaw encourages many people to completely abandon analysis, and instead look to good vision and leadership. Unfortunately, the speed of change creates, if anything, an even greater imperative to make good strategic choices.

To enable better informed strategic decision-making in these demanding circumstances, this article summarizes a rigorous series of structures that capture strategic behavior over time.

The method described in this Overview is consistently fact-based, and requires managers a willingness to investigate in great detail the fundamentals of how their business operates and interacts with others in the same industry. The approach empowers managers to design a strategic architecture for their organization that can build, sustain, and extend their competitive advantage. The component structures that make up this strategic architecture have been developed and evaluated over several years, in a series of companies and consultancies. This evaluation has allowed the ideas to be refined and presented in a way that has proven to be intuitive for managers of all types of organizations, be they commercial, public service or non-profit.

The approach is based on the importance of strategic resources as "deposits" of useful factors, a principle already established in the field of strategy. These reservoirs of resources are built and depleted over time, and this behavior is true both for "soft", and yet critical factors, such as morale and reputation, and for "hard" aspects, such as personnel or the clients. The growth and fall of each resource over time depend on other business resources.

There are several possible developments from this principle. A company's skills determine how quickly it can build the strategic resources it needs, and these skills in turn grow or weaken depending on how well the organization learns. The rivalry itself manifests itself as the struggle between competitors to develop and maintain strategic resources over time. Finally, structures can be extended to explain the interaction between business units within larger corporate structures, including those effects generated by diversification, acquisition, alliances, business networks, and so on.

This article is addressed to two audiences. Executives and consultants have a need for practical but powerful tools to address important strategic challenges, so these tools are illustrated in the context of various common situations. At the same time, academics and students need to be aware of the connections to the concepts and established theory of the Strategy, so that a minimum number of references to these documents are provided.

The articles and other related material from which this article is taken are described in the appendix.

(C) Kim Warren. The free distribution of this article, in physical or electronic form, is recommended, provided it is not altered in any way. Excerpts may be freely cited provided authorship is acknowledged. More documents - articles, book chapters, and simulation-based learning material - are available at www.strategydynamics.com.

1. The time pattern of strategic performance

There are three questions that impose a requirement on all executives, regardless of the size of their companies' sector (figure 1).

1. Why has the historical behavior of my business followed this time pattern? Where will the future behavior pattern lead us, if we continue in this way? How can we alter that future for the better?

While managers typically have some freedom to adjust short-term behavior, they face considerable uncertainty about medium and long-term results. However, managers are expected to commit to confident projections. Vague approximations about what has happened or where the business is headed, or fuzzy ideas about future plans are not adequate. The same is true when entrepreneurs seek speculative capital or finance acquisitions: investors expect to see well-justified forecasts of future earnings.

Senior managers themselves ask no less of their subordinates when they seek help with forecasting, business plans, and new initiatives. Executives at all levels are expected to confidently say that performance leads to failure.

Figure 1

The time pattern of strategic behavior

CASE A - A leading retail bank faces the challenge of streamlining its branch network in the face of declining transaction volume. Like traditional banks in many countries, this company is losing business to new banking services offered through the Internet, telephone and mail.

Figure 2

Chart of time streamlining implications of retail bank branches

This trust must be underpinned by clear intentions about what needs to be done, when, and to what extent, across all major business functions, in order to achieve promised performance.

Examples of dynamic strategy challenges

The following three studies, taken from recent cases, illustrate the difficulty and critical importance of the three issues listed above.

Although the Case A bank is itself a protagonist in the growth of new service channels (Internet, telephone and online banking services), it still faces the tricky challenge of deciding how quickly to rationalize its branches. Many high-value network customers are particularly attracted to the new services, but at the same time, other long-established and valuable customers expect to continue to use the branches. The bank knows that every time a branch closes, a proportion of its clients pass on to competitors, including some of the clients who have been with the bank for many years and never before considered leaving it. The bank's traditional competitors are going through the same process,so it is possible to get some of your customers disappointed.

The bank faces difficult decisions about the scale and timing of its actions. If you cut the branch network too slowly, you will break away from it at uncompetitive costs, and you will be left behind by helping your staff transition from the old banking style to the new. On the other hand, if you close branches too quickly, the bank will accelerate the reduction of its customer base, leaving less that can be achieved for new services.

The General Manager of the pharmaceutical company for Case B faced an attack on the most profitable product in his portfolio, which contributed 30% to the profits of his division. This product had enjoyed almost a monopoly for many years, but the largest competitor had developed a virtually identical product and was expected to take a large share of its market segment. The competitor had good reason to trust - and the CEO had good reason to be concerned - because just twelve months earlier, the same had happened in another sector, and 25% of the market had been acquired by the competitor. The company's sales force, already discouraged by this previous damage, feared yet another setback in its bonuses, and top clients (doctors) were seeking to have some influence on the price of the product.

CASE B - A pharmaceutical supplier faces an attack on the market for its main product by a rival who is about to launch an almost identical product. The CEO of this £ 200m business unit learned that he had exactly four weeks to prepare for an onslaught from the company's dominant rival.

Figure 3

The rival's attack on the leading position of a pharmaceutical supplier

Case C describes an attractive opportunity facing BBC Worldwide, the corporation's commercial weapon, to sell its high-quality programming on the international market. However, you must be careful with the speed at which the opportunity develops. If the BBC simply sells as much programming as it can, the bookstore will run out quickly and its customers (cable distributors) will have little choice but to fill their schedules with less attractive material. The poor mix resulting from the programming will leave the audience disappointed, the growth of the market, and the sales of the BBC will be restricted before reaching its long-term potential. This will make it difficult to justify investing in more new programming to replace the depleted material library. On the other hand,If the BBC is too slow to deliver its shows for sale, the growth of its high-value audience segment will slow, competitors will seize the opportunity, and sales will take time to develop. Again, it will be difficult to get investment in new programming.

CASE C - The BBC has one of the best high-quality television programming libraries in the world, and wants to build a strong market for its material in the cable distribution sector in South America. The programming has been built over many years, and is known to be popular with certain high-value audience segments in many countries. This is attractive to cable companies and encourages high ad revenue.

Figure 4

The expected sales of the BBC in high-quality programming for South American cable channels

The critical elements of defining the effects of dynamic strategy

The three situations outlined above raise deep concerns about the administration involved. What is the perspective of the company under current policies? What lessons and resources from past experience can be incorporated into the problem? What can be done to improve this perspective? Each of the descriptions illustrates three critical characteristics of a properly defined dynamic effect:

In each case there is a substantial and defined scale of the problem or opportunity, and the difference between success and failure is considerable. The bank will inevitably lose millions of customers, but the difference between the gradual decline and the too rapid closure of branches is worth trillions of euros in profit. The pharmaceutical company is on the verge of losing tens of thousands of sales units in its key product segment, with the consequent damage to future earnings in that entire division of the company. The BBC is in dire need of the considerable revenue that will come from reselling a certain number of hours of programming from its bookstore, but it has yet to nurture this valuable resource for the longer term.

Alongside these three dilemmas, there is also a time scale on which the strategy must operate, and achieving sufficient speed in progress is vital. The bank should expect to gradually lose customers from its branches over a decade or more, but early decisions will cumulatively influence its decline. The battle for the pharmaceutical market, although it will continue for several years, will indeed have to be decided in just a few weeks. The BBC has to get the desired schedule distribution rate in the first four to six weeks.

Finally, each example exhibits a time pattern in its progress.. A company's business does not simply start and end at specific points, but rather develop at a variable rate, as its future becomes visible. The bank must balance its streamlining program in the most careful way to ensure that customer loss is slow and stable, rather than occurring as a dire collapse. The pharmaceutical supplier will soon see a dramatic gap between its sales and those of its rival, while the highly motivated sales force goes to its older and more persuaded customers more easily. The BBC must achieve a minimum rate of growth in programming sales in the first few months, in order to reach the possible penetration in the medium term, and maximize the income in the longer term. At the same time,A too rapid increase in sales could plausibly follow a cycle of failure in the next two years.

1. How strategic resources contribute to competitive advantage

Most managers understand the importance of building and conserving the resources of their business. These resources can be “hard”, tangible aspects, such as capital, plant, customers, products or personnel, or “soft”, intangible factors, such as product quality, staff morale or service standards.. Furthermore, managers know that resources are interdependent. Consistent product quality helps build a strong reputation with customers, and a strong customer base attracts the best employees. Sorting resources by importance, or searching for "core" resources is useless: if any key resource is in poor condition, the entire business is in jeopardy.

The characteristics that resources must possess, if they are to provide a sustainable advantage, are well established in the strategy literature.1,2

• Resources must be durable: they must not "age" quickly. Employee customer service skills can be improved through training, but they can all be forgotten very soon. Resources should not be mobile or marketable. If a company's rivals can simply buy the resources, or otherwise persuade them to leave, the business will not enjoy lasting benefits. For example, teams of professionals, in sectors as diverse as investment banks, advertising and information technology, often move from company to company in response to offers and the best pay. Resources should not be easy to access. copy for rivals. New products in financial customer services can win customers quickly,But the time required to develop and offer an almost identical product is, in this sector, extremely short for any of the numerous rivals, or for all of them. It must be difficult for rivals to find a substitute for the resource. Many PC vendors have avoided the problems of persuading retailers to buy their products by creating sales systems that make it possible to sell directly to the end consumer. Finally, the resources must be complementary: able to work well together. A great new technology product is of little use, for example, if the company's distributors lack the capacity to support it and have no access to customers who may want it.Or for all of them. It must be difficult for rivals to find a substitute for the resource. Many PC vendors have avoided the problems of persuading retailers to buy their products by creating sales systems that make it possible to sell directly to the end consumer. Finally, the resources must be complementary: able to work well together. A great new technology product doesn't do much good, for example, if the company's distributors lack the capacity to support it and don't have access to customers who may want it.Or for all of them. It must be difficult for rivals to find a substitute for the resource. Many PC vendors have avoided the problems of persuading retailers to buy their products by creating sales systems that make it possible to sell directly to the end consumer. Finally, the resources must be complementary: able to work well together. A great new technology product is of little use, for example, if the company's distributors lack the capacity to support it and have no access to customers who may want it.resources must be complementary: capable of working well together. A great new technology product is of little use, for example, if the company's distributors lack the capacity to support it and have no access to customers who may want it.resources must be complementary: capable of working well together. A great new technology product is of little use, for example, if the company's distributors lack the capacity to support it and have no access to customers who may want it.

Limitations to the criteria established on strategic resources

These established criteria may seem like reasonable evidence of whether any strategic resource will be able to offer an advantage, but they suffer from two problems.

First, none of the criteria is always simply true or false; each is valid to some degree. Few resources are totally durable, absolutely not disposable, or impossible to copy or replace.

Second, whether a particular resource is durable or mobile, whether it can be replicated or replaced is fundamentally a dynamic question. Companies must always understand, and manage, how quickly they and their rivals can change the level of each important resource.

Established, but static, criteria for resource advantages limit the value of another common idea in strategy (albeit taken from the economy); Namely, that owning resources creates “barriers to entry” against rivals and, conversely, that not owning them is a barrier that prevents us from taking new opportunities. Characterizing resource tenure as a barrier to entry is a desperately poor depiction of reality. Companies often participate to some degree in an industry with a little of each strategic resource, compete more strongly with more of each resource, and build competitive advantage by growing these resources. Strategic resources are obviously not so much barriers to entry as “hills” of variable height and slope,that companies must rise and from which they can compete to a greater or lesser degree, depending on how far they have risen.

Strategic resources and performance over time

In this way, the “resource-based” vision of the strategy suggests that behavior depends on the strategic resources we have. But there is a problem here: current behavior can be calculated from just a few (mostly tangible) resources and some external conditions. Today's revenue depends on today's customer base and price, through the volume of sales that follows, and so on (Figure 5).

Figure 5

The strategic resources and the behavior of the company

Figure 5 hardly surprises anyone. Our accountants can tell us precisely, from the information about our resources, the rate of profit at any particular moment. Indeed, they have been doing this task for thousands of years. The consequences seem profound. Nothing but these simple aspects are needed to explain the company's behavior - intangible resources, skills, strategic vision and leadership all seem irrelevant. However, this is clearly absurd: such aspects must make a difference, so we need to explain how they influence the resources that directly determine behavior.

The solution to this problem lies in the fact that the immediate connection between tangible resources and behavior is merely a snapshot of the company at a particular time. If the amount of these few tangible resources that we have today precisely determines our profitability today then its scale yesterday counted for our behavior then, and its scale tomorrow will also explain our profitability at that time (figure 6). The missing element in a comprehensive explanation of behavioral dynamics is therefore an understanding of how the level of each resource changes over time.

(Arrow and word diagrams like the one in Figure 5 stand out in contemporary management writing, but arrows and words have a wide variety of meanings. In contrast, each element in our structure has a specific meaning. Boxes simply denote containers that have the current amount of a particular resource. Curved arrows do not mean there is a vague relationship between two aspects. Arrows state that one item can be calculated directly from another. Similar charts are used throughout this article., and always have these specific meanings.)

How resources behave over time

Fortunately, there is one way to explain the resource building process, depicted in Figure 6. Strategy writers recognize the challenge management faces in trying to build and maintain the level or quantity of each resource. Resources accumulate by encouraging the flow of new resources into the business: winning customers expands a customer base; promoting products and services increases market attention; training increases the average skill level of staff; and so on. Often, however, management hesitates to prevent the loss of resources, as customers move on to competitors, resignations reduce the number of employees and the accumulation of experience of the organization,and higher customer expectations reduce the value of current product effects.

Managers typically want to build and sustain resources to make a business bigger and stronger. These imperatives are taken in the structure of "accumulation and flow" (stock and flow) as the core of a method known as System Dynamics. Although the name of this approach may not instantly catch your eye, most people can understand it well enough to gain a true understanding of facts such as those described in the examples above.

Figure 6

Strategic resource levels determine behavior at any time, past, present, or future

A usual analogy for this accumulation and emptying process is to think of a resource as water flowing to or from a bathroom. Figure 7 illustrates this for the gain or loss of a customer base. The resource time pattern reflects the history of all the gains and losses that have occurred. Note that the units of these incoming and outgoing flows are always the units of the resource “per period of time”, and that the scope of the resource is the network of incoming and outgoing flows (initially +10 per quarter). Figure 7 shows some important data:

This fundamental fact of resources - which accumulate and escape over time - occurs all the time in life. It happens in all contexts, and not just in business. The water level in a tank rises and falls as the rain falls and water is consumed; Public debt rises and falls as annual budgets go from deficit to surplus; the quantity of fish increases and decreases in response to breeding and fishing rates.

The idea that the level of any resource increases and decreases over time is therefore not a portion of abstract theory, but a basic truth of reality. The number of clients (or other resource) we have today is not "correlated" with anything. It is simply the sum of all those customers ever won, minus all lost at some point. Consequently, there is no amount of statistical analysis or 2-by-2 grids to explain the current state of business resources or the profit behavior they generate.

Since the resource levels we have today are the consequence of our entire history of profit and loss, the trajectory of future performance is already "decided" to some degree. Resource levels are often hard to move (either to increase or decrease), just as it is difficult to achieve an instantaneous rise in the level of the bath water.

The human mind is neither designed nor trained to estimate these accumulation processes. Since accumulation and emptying take place constantly and simultaneously, in all company resources, human intuition will find it almost impossible to anticipate the wide variety of behavioral trajectories that can occur: exponential growth or collapse, the limits of growth, the recurring cycles of successes and failures, etc.

These simple truths hold good for anything that is filled and emptied, be it capital, customers, staff, skills, reputation, or morale. What's more, this process has profound consequences on business performance, and offers one reason why conventional strategic analysis tools provide so little help:

• If the behavior depends on the levels of the resources, and they increase and decrease, there is no way to understand the behavior over time, except knowing all the gains and losses of all the resources all the time. Similarly, there are no way to produce a reliable vision of future behavior, without estimating how these gains and losses will develop., The only way to alter the strategic behavior that the administration has is through actions and decisions that change the speed of growth and the loss of resources (although the behavior in the short term can be changed through simple reassignments, especially between declared earnings and expenses).

Figure 7

Construction, and loss, of the customer base

The first observation is not as intimidating an obstacle as it might seem. First, we generally know, or can find out, resource levels at relatively recent points in our history. So it is not necessary in practice to go back to the origins of time! Second, if we do not know them, it is often possible to estimate the gains and losses of key resources during the recent past. All that is needed then is the effort and patience to calculate the net profit or loss, or the reasons for today's resource levels and the behavior becomes clear. Even estimates of future rates of profit and loss for strategic resources will give good forecasts of resource levels and profits; in fact,these are the only means of obtaining such forecasts.

Feedback between resources leads to growth

Stationary rates of change are common in key resources, and this in itself can cause complex patterns of behavior over time. On the other hand, however, feedback extends across resources as well, and can create scaled growth, or dizzying downward spirals, or impose limits on growth.

One sector in which numerous cases illustrate the power of such feedback is that of retail banks. Many companies have discovered that by performing a simple, low-cost service operation, they can offer attractive interest rates and quickly win customers. New customers often convince their friends or colleagues of the benefits of these new services, leading to a rapidly growing customer base. It is possible to put numbers to this customer base, estimate how many new customers can be gained each month, and thus achieve growth for the business over time. This is illustrated in Figure 8, where the "R" in the middle of the frame indicates "reinforcing" feedback.

Feedback also imposes limits on growth, retaining the company's ability to build its resources. Figure 9 illustrates this process in a bank, whose service capacity can cope with a maximum of only 50,000 customers. Booster feedback has been removed, so the business is gaining customers at a stationary rate of 10,000 per month. The "B" at the heart of the structure indicates "balance" feedback. Any growth creates pressure that pushes back, bringing resources into balance and limiting their growth.

Figure 8

The time pattern of growth reinforced by word of mouth among retail bank customers

Figure 9

Threats to capacity limit customer base growth

1. The company as a resource system

In any complete company, reinforcement and equilibrium feedback occur together, and generate complex dynamic behavior, due to the rapid penetration of new products in emerging markets, to the decrease in returns that can be achieved, as companies drive growth beyond its capacity for service demand.

Having grasped the dynamics of a single strategic resource, it becomes possible to represent the mechanisms and scale of interdependence between resources. Without this step, the resource-based vision cannot adequately explain how, or how quickly, resource-poor companies can quickly and powerfully assemble them to outperform dominant rivals.

This integration can be accomplished by recognizing an important truth: managers use the resources they have to build others they need.

This is not a matter of choice. Resources can be developed only using what is already at hand. Marketing personnel build a strong customer base from the existence of a credible product; sales people get sales if manufacturing has cost-effective production capacity; it is possible to pay the staff if the company has a good reputation in the employee recruitment market; and so on. This is true even in new ventures, where the entrepreneur seems to start with nothing but some vital intangible resources, such as credibility with investors.

Figure 10 shows a simple case of interdependence in a consumer brand business. The company has only three resources: (1) the number of stores, (2) the size of the sales force, and (3) the interest of consumers. Intense advertising in the beginning leads to rapid consumer perception but, not until interest has grown to some extent, does the sales force become capable of persuading retailers to store the brand. It still takes a long time to maintain sales volume, as early interest among consumers doesn't match availability - consumers want to buy the brand, but can't find it.

How exactly this business will behave over time will depend on price decisions, advertising forecasts, and the size of the sales force. This is misleading, because managers have to judge the effect of each decision on the speed at which each resource will be built.

The brand resource system in figure 10 contains the mechanisms of self-reinforcing growth: the number of consumers leads to an increase in the stores that resell the product, which, in turn, leads to an increase of consumers. Why then does the business behavior not exhibit the accelerated growth pattern suggested in Figure 8? There are two main reasons. First, the availability of the product in stores does not keep pace with the interest of customers. Secondly, a powerful limit to growth materializes as potential consumers and businesses are exploited - the more of both are achieved, the less remains to be achieved. However, without reinforcing the presence in the shops of the product,growth of this brand would be substantially slower.

Figure 10

Quantification of how quickly a brand is built, based on advertising and sales policies

More details

Figure 10 is a considerable simplification of a brand's actual business but provides a solid structure - known as a strategic architecture - to start with. Formally, this is known as the Dynamic Resource System View (DRSV).

Similar structures are easily adapted for any type of undertaking in any sector. A more complete picture of the strategic architecture of an organization requires further development. The following sections will describe how rivalry, intangible resources, skills, and management control are added. Before turning to these issues, it is necessary to note two other consequences of the tangible central resource system.

Figure 12

Developing employees through business

First, a single resource must often be divided into different groups or segments. Many large organizations, such as telecommunications providers, need to consider separately the growth or decline of their private consumers, small businesses, and large corporate accounts. This is easy to do by replicating the structures in Figures 8 and 9. Not only will the scale and rate of change differ between these consumer segments, but a variety of forces will drive the dynamics of each (see Figure 11).). The administration can then choose to follow different growth policies for each group with the same resource. The decision, here, is to initially focus on winning large corporate clients,hitting the target later in small businesses and consumers.

The second additional detail to consider is the distinction between the stages of development in the life of a resource. Employees move from apprentices to juniors to senior staff; the products go from being specialized and of high value to the massive and price sensitive market; and consumers stop being buyers for the first time to become regular and loyal customers. Resource development is illustrated by showing the flow of resources from stage to stage, as shown for employees in Figure 12.

1. Intangible resources

In section 1, it was argued that while behavior is explained precisely by current levels of tangible resources, intangible aspects such as morale and reputation must inevitably have some impact. A misperception of product reliability slows down the speed with which a sales force can win customers; poor morale in service teams depresses their performance and drives customers away; and a history of poor treatment of staff makes it difficult to recruit more people.

Intangible resources matter, because they have a powerful impact on construction and the loss of tangible aspects.

To be of practical use, then, the DRSV must capture intangible resources as well as the more "hard" factors. Intangibles are crucial for competitive behavior; however, managing them successfully is often a challenge. It may not take long to raise capital from investors, buy production facilities, or hire staff. It is more difficult, and time consuming, to build and sustain the morale of a workforce, the support of investors, a reputation in the marketplace, or a cost advantage over rivals - and these things can rarely be bought. Not only are intangibles difficult to build:

• they can be easily destroyed, often become apparent only when their role as “hygiene” factors is exposed (eg, reputation for safety or environmental responsibility), and they can have powerful and immediate effects on tangible resources critical, for example, when reputation for quality or safety is destroyed, causing a catastrophic loss of customers.

Simple changes in the levels of intangible resources can be directly manipulated through management effort (for example, training efforts increase the level of staff experience: Figure 13). Unfortunately, returns commonly begin to decline, limiting the benefit that can be achieved by trying to build resources as diverse as morale, reputation, cost efficiency, and product functionality.

Resources are associated with intangible attributes

In many cases, tangible resources have a corresponding intangible attribute (the capacity of a plant with the cost of the plant, the customer base with the average size of customer accounts, the number of personnel with their experience). The intangible attribute is often as important as the quantity of the resource. Furthermore, it is possible that changes in the tangible resource will be achieved only in tandem with changes in its associated characteristic. Figure 14 shows the damage caused when a business loses relatively few customers, but the lost ones are the best. Here, the customer base has dropped less than 40% in four years, but revenue is down more than 80%.

Figure 13

Limits to growth of an intangible resource: staff skills

Figure 14

Representation of the “co-flow” of a tangible resource with its corresponding intangible attribute, for example the loss of the best clients

This mechanism is known as “co-flow”, since the quality of the interest and the tangible resource to which it is associated “flow together”. Co-flows typically last as resources move through the business (see Figure 12, above). Professional services companies depend on maintaining a strong level of experience among their staff. One person-year of experience is accumulated each year an individual stays with the company, but it is also carried when she moves from one position to another. Losses of staff from senior positions cause harm, not only because of the number of people lost but, more seriously, because resignations of senior staff deprive the firm of its experience. The mechanism illustrated in Figure 14 works the same way for staff experience,and it extends to regulating the accumulation and loss of experience as people move in the business.

This co-flow process can be actively used to improve the "quality profile" of a business. Different clients typically offer varying levels of profitability, and it is often necessary to deal with a "queue" of unsatisfactory businesses (Figure 15). The senior team assesses the scale of the problem, using only such a quality profile, and arrives at a streamlining program applying the principle illustrated in Figure 14. However, great care is required in how expenses are handled. in such cases, to avoid creating a new queue of unprofitable accounts.

Applying this method to all key resources in the organization goes far beyond simply eliminating unnecessary cost. Enabling each resource to make a more competitive contribution to the entire enterprise can dramatically accelerate the rate at which the entire system grows, making it possible to dramatically improve performance.

1. Skills

If behavior depends on the tangible resources we have, then skills can also play a role only if they allow us to build and sustain resources. Although there is some inconsistency between the different ways in which the authors use the term "fitness", a starting point for present purposes is: "The ability of a company to deploy resources, usually in combination, using organizational processes."

A little more clarity is required to properly integrate “aptitude” into the company's strategic architecture. Two observations from the discussion are helpful.

1. The speed at which key resources accumulate is crucial to competitive advantage, and each resource can only be created using other resources already available.

Figure 15

The quality profile of a customer base

Figure 16

Ability to build sales in brand management

Skills must, therefore, have something to do with the company's ability to build and sustain resources, not simply to develop them. There will be, in any given situation, practical limits to the speed at which any resource can accumulate. These observations imply that any capacity is more correctly thought of as connected to a specific resource, leading to a new definition:

The capacity of a company in any activity is the speed with which it is capable of building a specific resource, compared to the highest possible speed, given the other resources that are needed for that task.

(The term "competence" is sometimes used "capacity" interchangeably. It will not be used in that sense here, but will be reserved solely to describe the ability of senior management to design and operate the business as a whole.)

Some legendary cases bring new definition to life. Coca Cola's marketing capabilities have brought it to an apparently unattainable level of customer loyalty, Hewlett Packard's product development capabilities have led to a stronger product range than that of lesser rivals., and (as noted earlier) the BBC's program production capacity has created it a strong content resource.

This definition allows to make the aptitude real and incorporate it into the strategic architecture of the company. For any resource in the system, it is possible to identify the other resources that are needed, and show the relative success of the company in building that particular resource with a factor that defines the capacity of the company. Furthermore, it is possible to reflect the learning -or building skills- that is obtained from the company's continuous experience in managing the resource.

The impact of sales capacity on the consumer brand company is shown in Figure 16. Assuming that all customers are interested in the product, all the sales force needs is to sell it to merchants. For starters, the new sales force doesn't understand how to better persuade merchants to buy the new product. In Case A, the team learns nothing from their experience actually selling the product, and the brand's distribution grows steadily, but slowly: after three years, the product is still only in 20,000 stores. In Case B, the sales force learns better ways to sell the product with each successful sale (the "increase in sales capacity" results directly from "sales achieved"). Team fitness is built quickly at first,But as you become more experienced at the task, it becomes more difficult to get more improvements. However, the improved fitness is enough to win trades at increasing speed, so that after three years the structure is in nearly 40,000 trades.

Organizational skills and learning

Skills also determine how successful the business is in sustaining resources, not just building them. If poor after-sales service drives customers away, successful sales performance will be devalued. The structure for the fitness building of Figure 16 is easily adapted to capture this mechanism.

It may be thought that this is a somewhat stylized representation of aptitude, and that such reliable and quantified measures of aptitude are rarely available. In fact, executives can generally estimate the performance of the various teams in their business very well. Comparisons can be made with rival companies asking "if our best competitor's sales force had our brand, how quickly would they get merchants?" Other useful benchmarks are the best performing companies in other industries, the best regions within the company itself, or “perfect” ideal behavior (for example, that every sales attempt is successful).

Section 3 explained how reinforcing growth among a firm's resources can lead to rapidly accelerating performance. If skills are operated in the manner described in Figure 16, some important consequences become apparent:

• Ensure that the organization builds strong skills throughout the construction of key resources and that resource-sustaining activities allow for exceedingly powerful behavior. This enterprise-wide skill building is a concrete, practical manifestation of organizational learning. Capabilities can "make water," just as resources do, through loss of staff or simply becoming obsolete. Consequently, it is important to prevent forgetfulness in the organization at the same time as it fosters organizational learning. Learning can also come from failure as well as from success, so it is vital to understand, for example, why staff or customers are defecting or why a product launch failed.The interdependence between resources means that capacity in any major resource-building task can have a broad impact on the rest of the business. Similarly, a weakness in any function undermines the entire system. This leads to questioning the value of seeking “core” skills, since a competitor who is exceptionally good at a key activity will still fail if his other skills are inadequate.

Since the company operates as an integrated system of interdependent resources, it is easy to do great harm with seemingly well-intentioned actions.

1. Control of objectives and policies

It was explained in sections 1 to 5 how the resources and capacities of an organization combine to determine its behavior. The next question is how the administration drives the development of the company over time. It has already been noted that since behavior depends on resources that are built and depleted over time, the only way to make a difference is by influencing these resource flows.

Companies generally have some roughly defined progressive targets for their resource and performance indicators, along with policies by which deviations from those targets are reflected in changes in the processes of building and distributing resources. A dynamic mechanism exhibiting "control" characteristics has already been described at the end of section 2, above - equilibrium feedback. The same structure can be developed to illustrate strategic objective-based control, through policies, for any resource in the business. Figure 17 illustrates this principle for a business trying to build its number of employees.

The business plan included an aspiration to constantly increase staff levels throughout the year: In month 7, the business expected to have 240 people on its pay list.

This objective seemed to be followed for the first six months. The company did not expect to complete its personnel needs in a single month, so although it was often below target, the gap was not very serious.

Unfortunately, the competitors got quite manned in month 6, and left the company in month 7 with just 173 people - a brief drop of 67 against its target. The gap is now desperately wide, so the wage policy changes and the hiring target rises from 35 to 70 people per month, to fill the gap quickly and allow for the expected proximity between companies. This example probably looks somewhat like a cartoon of any real company's policy to control how it builds its resource. However, when executives are asked to explain exactly how they decide about such effects, the responses are often very imprecise. We all find it difficult to explain how we decide about even greater effects. However,There remains the fact that we make such decisions, and that we have some guidelines that roughly determine how we make them. All we ask here is that management be explicit about how it thinks it decides about important effects so that we can understand the consequences.

Figure 17

Balancing feedback to control staff growth

Although Figure 17 is a simplification of actual decision making, it illustrates the important elements of an administration control structure:

• A goal for the resource, which changes over time, as the needs of the rest of the system evolve, the pattern of how the same level of resources changes over time, some mechanism that diverges the level of resources from its objective (in this case, by competition) the gap between the desired and actual levels of the resource, and a policy, or guideline, to decide on the scale of adjustment to be made in order to close the gap.

As well as such resource-focused goals, there are always goals for high-level aspects (such as market volume and profitability). These higher level aspects are the benchmarks that are used to ensure that individual decisions continue to support an overall plan of progress. When the complete set of indicators is collected and applied to the company resource map (see Figure 10), the map constitutes a balanced, robust and reliable map for the entire company. There are two important points to note, however:

1. Since resources determine behavior, and as these resources accumulate and are depleted, the critical indicators should be these gains and losses (the “flows” in each of the figures in this article). As long as our concern addresses the pattern of behavioral time, we need to see how these indicators change over time - hence the use of graphs as a function of time throughout this article.

The structure of Figure 17 easily extends to capture such performance indicators. A market volume target may unleash a discount policy, with the intention of expanding the customer base, and hence support the volume target. Unfortunately, such objectives frequently conflict with each other (the discount policy damages the profit margin, for which there is a separate objective). Extending the structure of objectives and policies in Figure 17 to address these conflicts provides the means to balance the dynamic consequences of competent policy responses.

1. Rivalry

The framework described thus far makes it possible to build a rigorous and quantified picture of how the company's resources and skills combine to create strong behavior. To complete the understanding of the dynamics of competitive strategy requires an accurate and comprehensive picture of the dynamics of rivalry. Rivalry is part of the battle for diverse scarce and valuable resources - dealers or experienced staff, plausibly - as well as customers.

Focusing first on customer rivalry, only three different modes of competition are sufficient for all eventualities:

1. The battle to exploit a potential customer base tug-of-war between rivals over existing customers, and the fight for a number of sales to existing customers.

Purely destructive strategies, designed to sabotage the ability to assemble a functional resource system, can be added to these three, but in practice, such sabotage is generally manifested in one of the mechanisms cited.

First type of rivalry - Exploitation of potential resources

The set of customers that may spark interest is simply represented as a potential resource: a population of people and companies to whom the product or service offered by ourselves and our rivals may provide some benefit, but who are not currently buying from anyone. For a completely new product, the customer pool is entirely in the “potential” box, and substitute providers compete primarily to attract those customers to their active customer base. In the mobile phone industry, for example, this race has to do with attracting users for the first time (a race that runs again every time a new technology is introduced).

The dynamic behavior of the rivalry to exploit a market can be illustrated with the case of digital terrestrial television. Suppose industrial research found that some two million viewers of regular broadcasting services can subscribe to such a service, at the best price and with the widest spread. Figure 18 shows how this battle unfolds, if our service is attractive enough to earn 5% of the rest of the total audience each month, while our rival earns only 2% (line A). We build a stronger audience base, but both companies are soon reaching the limits of growth using all available customers.

But this cannot be the end of the story. In the early life of a market, it is common to find that the same potential set is, as here, very small. At first, few customers consider that the new product or service could even "be for them." As the price drops, and the functionality of competing providers improves, previously uninvolved customers gain interest, and join the "potential" pool. Line B in Figure 18 shows that both firms experience continuous growth. What's more, the latent market grows, too, as new consumers become interested more quickly than both providers are able to turn them into active customers.

These mechanisms have two interesting consequences:

• Rapid and quick customer capture generates a double benefit: it builds our own business, as well as denies sales to our rivals. “Word of mouth” feedback can generate a reinforced exploitation rate for ourselves, as well as the growth of general market The further benefits come from stimulating such feedback, due to savings in the scale of production and distribution, and faster product improvement.

Early marketing efforts inevitably contribute to expanding the market possible, as well as securing active customers for ourselves. This poses a dilemma, since it is entirely plausible that the potential customers we stimulate decide to buy from competitors rather than from us.

It is not a simple matter to decide on time, expenses and efforts, based on the many common options in such cases. If we are to push product too soon, before functionality and cost enhancements have resulted, there is a risk that the first buyers will reject the product and leave our customer base. These exclientes become once again a good game for the rivals, who, meanwhile, may have offered a better offer than ours. Consequently, the simple structure of Figure 18 needs, in practice, to be extended to include the precise relative, functionality, suitability, unit cost, distribution channels, and so on, before the time pattern of the growth can be estimated with confidence.

Second type of rivalry - The fight to move established customers

Only in the early stages of market development is rivalry entirely limited to untapped customers, although the structure in Figure 18 may still be applicable as customers claim and others become inactive, returning to the “potential” set. " Companies often worry, in pairs, about avoiding the direct movement of customers to their rivals; in fact, to encourage the opposite process. This battle is a tug-of-war, in which each company tries to remove customers from its rival's resource system.

Figure 19 shows the structure of the resource system for this problem, as it works for the rivalry between two specialized paint suppliers. In a recent innovation, the two providers have recruited between them all 500 potential customers. When the story begins, we have 200 clients and a competitor has 300, although a major product upgrade by our rival means that they are stealing our clients very quickly, at a rate of 35 per month (the beginning of the network client movement diagram is equal to –35 / month).

Figure 19

The dynamics of rivalry for potential customers

The lower left diagram shows our own research and development efforts making constant improvements to our product, at the speed driven by customers on the criteria they consider important (adhesiveness, color strength, etc.). Consequently, we are narrowing the gap behind our rival's product and, within a few months, the benefits of the product are so small that our client's losses stop.

For some time, from about the 7th to 13th month, there is little to choose between the two providers - certainly not enough for customers to bother with costs and deal with switching companies. However, our research and development efforts continue to keep up with the competitor, until we open too large an advantage to start recovering clients very quickly: the network client movement diagram turns positive. Eventually, the maturing technology undermines the differences between the two providers, and their respective customer groups stabilize, with a small new move around month 36.

An interesting observation about this case has to do with the timing of the long-term outcome. If our company had only had six more months to make the improvements in research and development, the competitor would have captured so much of the market, and had time to continue fine-tuning its product, which we would never have perceived. As it is, the modest advantage in the effectiveness of our research and development has enabled us to surpass our rival and, when there are hardly any innovations left to discover for the product, to leave it inexorably behind.

Third type of rivalry - Competition for sales to own customers

Although a few product and service markets have customers that can only be with one provider at the same time (it is rare, as a rule, for customers to use two mobile phone services simultaneously), not many companies face such an oily market. So we need to reflect the sales fight to a customer base that is stocked with other suppliers: a common situation among producers of fast-moving consumer goods (FMCGs), such as food, drinks, cleaning supplies, etc. This form of rivalry occurs alone, or in combination with one of the two customer base mechanisms described above, and is easily represented as a sales rate per customer that reflects the attractiveness of each vendor's product.

In many cases, sales volumes to a customer who is with a competitor still reflects a pool of resources that a supplier has accumulated. Rival providers of these types of products battle for each retailer's resources. Similarly, PC peripheral manufacturers compete for space and prominence in mail order catalogs. In such cases, the rivalry structures of types 1 and 2 apply.

Rivalry for resources that do not depend on customers

The problem of gaining and retaining resources that do not depend on customers can be represented in exactly the same way as rivalry for the customer base. The professional services markets, to take one example, exhibit rivalry for the scarce talent of specialized staff that is as fierce as the competition for clients. When integrated with rivalry for the customer base, such extensions allow a comprehensive representation of competition between two or more firms in any market.

Rivalry between many companies and industrial dynamics

It is possible to extend the rivalry structures described above to deal with competition between various rivals. It is only necessary to measure the relative success in accumulating and retaining resources for each company. This process can be continued to match the rivalry between complete “strategic groups” of competitors, where the groups have similar series of resources and follow similar policies.

Furthermore, the resulting enriched structure makes it possible to find the scale and speed of change that occurs in the substantial portions of the industry structure. The rapid growth of UK Internet Service Providers (ISPs) in 1999 caused a disaster in previous provider groups, with those precisely geared to serve private consumers who were particularly threatened. Many providers sought new roles in the industry, such as "affinity" services geared to the needs of specific user groups, while others failed and died. The vision resource system not only describes the fact of this structural disaster, which is somewhat self-evident, but,Most importantly, it explains the step of the change process.

A later example of insight into industrial dynamics is evident in the recurring cycles that typically occur in capital-intensive sectors such as construction, petrochemicals, and computer component manufacturing. Explaining the scale and time period of these industry cycles has enabled executives to understand the impact of their decisions on price, inventory levels, and investment opportunity, thereby adjusting policies to favor their own behavior and even improve the dynamics of your industry.

1. Wider consequences

This article has summarized the main concepts of the strategic vision of the dynamic resource system, and illustrated them with simplified cases. These structures capture three critical aspects of business reality:

• Firstly, this behavior depends on the strategic resources, whose behavior over time depends on the profit and loss rates. Secondly, this behavior of the entire strategic architecture reflects the complex network of interdependencies between these resources, in a completely specific way. to each business at a precise moment and in the context of its particular industry, and thirdly, that intangible factors have a strong influence on the growth pattern of any undertaking, and, therefore, on its strategic behavior in the weather.

It is worth noting that since most of the strategic plans made by management teams, and most of the reports from strategy consultants, do not address any of these fundamentals, the strategies of most companies are ready to be seriously damaged. That many businesses manage, in one way or another, how to act reasonably well is a tribute more to the intuition of experienced managers than to the value of any strategic tools.

But the challenge of strategic management is complex, and failure is common. This is not merely avoidable for stock owners. The current practice of expecting managers to somehow learn about the “working” strategy is an ongoing experiment with the careers and confidence, health, and family stability of ordinary people. We no longer rely on the intuition of airline pilots to safely transport us from one continent to another, but instead expect them to receive careful training for a variety of difficult circumstances. Similarly, we can expect managers to go through some education and training in developing the fact-based strategy,to prepare them for the inevitable complexity of the strategic challenges they will have to face when they lead the companies on which people's lives depend.

Although many companies are discovering that the dynamic resource system is a powerful approach to building a rigorous, fact-based strategy, two important precautions are necessary:

1. Like any analytical method, DRSV reflects the perception of the team that is using it. It is perfectly possible that this perception is inaccurate, so it is vital that evidence is sought, and constantly updated, to confirm the accuracy of the team's vision. There are always alternative strategies that are based on different relationships between different resources. These rival approaches can really be more effective, so it is vital to constantly review and compare the strategy with your alternatives. This precaution applies especially when there is a risk of fundamental changes occurring in the industry, whether driven by other companies, technology or external forces.

Finally, it should be noted that this article has only dealt with the strategy for commercial companies and for individual business units. The focus is not limited to these cases.

All dynamic resource system structures are equally applicable to government, public sector, and non-profit situations, although the “behavior over time” diagram we started with (Figure 1) could focus on non-financial aspects. Even the competition structures in section 6 are relevant: Non-commercial organizations also compete for scarce resources, such as staff or donations.

We could also deal with the multiple activities of major corporations. Diversification, vertical integration, acquisitions, alliances, and geographic expansion can be addressed, along with the control and coordination mechanisms that guide the strategies of large complex entities.

1 A managerial discussion of these ideas can be found in many strategy texts; see for example Grant RM (1995) Contemporary Strategy Analysis. 2nd ed. (Chapter 5). Cambridge, Massachusetts, Blackwell.

2 A more in-depth discussion of these concepts can be found in the literature on strategic resources, for example, in Wernerfelt B (1984) "A Resource-Based View of the Firm" Strategy Management Journal, 5: 171-180; Barney JB (1991) “Firm Resources and Sustained Competitive Advantage” Journal of Management 17: 99-120, Mahoney J and Pandian JR (1992): “The Resource-Based View within the Conversation of Strategic Management” Strategic Management Journal 13: 363 -80, and Peteraf MA (1993) “The Cornerstones of Competitive Advantage; a Resource-Based View ”Strategic Management Journal 14: 179-192.

Dierickx I and Cool K (1989) "Asset stock accumulation and sustainability of competitive advantage" Management Science 35: 1504-1511.

Forrester JW (1961) Industrial Dynamics. Pegasus Communications, Boston, Massachusetts.

This principle, and the subsequent developments that emerge from it, have a solid theoretical basis originally published by Forrester (1961); see note 4.

The dynamics of customer base growth and capacity threats can be exploited using the Mobile Pone Subscribers Mini-Microworld, a simple and friendly PC simulation available at www.strategydynamics.com.

The dynamics of this brand building structure can be explored using Brand Management Mini-Microworld, a simple and friendly PC simulation, available at www.strategydynamics.com.]

The dynamics of this human resource development challenge, along with its impact on a company's overall strategy, can be explored using the Professional Services Microworld, a PC simulation, with case study and supporting study guide, available at www.strategydynamics.com.

Arnit R and Schoemaker P (1993) "Strategic Assets and Organizational Rent" Strategic Management Journal 14 (1): 33-46.

An introduction to established thinking about skills and competencies can be found in Hamel G and Heene A (ed.), (1994) Competence-Based Competition Chichester: Wiley and Sanchez R, Heene A and Thomas H (eds.), (1996), The Dynamics of Competence Based Competition Pergamon: Oxford.

The objective and policy perspective is found in the work of Morecroft JDW, which includes (1983) System Dynamics; Portraying Bounded Rationality. Omega 11 (2): 131-142, (1985) The Feedback View of Business Policy and Strategy. System Dynamics Review: 4-18, and (1988) System Dynamics and Microworlds for Policy-Makers. European Journal of Operational Research 35: 301-320.

Kaplan RS and Norton DP (1996) The Balanced Scorecard Cambridge MA: Harvard Business School Press.

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