Contemporary Strategic Management (Robert Grant, 6e)
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Transcript of Contemporary Strategic Management (Robert Grant, 6e)
Contemporary
Strategic
Management (6 ed.)
Robert M. Grant
1
Quotes
Strategy is the great work of the organization. In situations of life or death, it is
the Tao of survival or extinction. Its study cannot be neglected- Sun Tzu, The Art of War
The strategic aim of business is to earn a return on capital, and if in any
particular case the return in the long run is not satisfactory, then the deficiency
should be corrected or the activity abandoned for a more favorable one- Alfred P Sloan, My Years with General Motors
Diversification is like sex; its attractions are obvious, often irresistible. Yet, the
experience is often disappointing.
- Robert Grant
2
Definitions
The term strategy derives from the Greek word strategia, meaning
‘generalship’
Strategy is not detailed plan or program of instructions; it is underlying theme
that gives coherence and direction to the actions and decisions of an
individual or an organization
3
Index
The Concept of Strategy
Goals, Values and Performance
Industry Analysis: The
Fundamentals
Further Topics in Industry and
Competitive Analysis
Analyzing Resources and
Capabilities
Organizational Structure and
Management Systems
The Nature and Sources of
Competitive Advantage
Cost Advantage
Differentiation Advantage
4
Industry Evolution and Strategic
Change
Technology-based Industries and
Management of Innovation
Competitive Advantage in Mature
Industries
Vertical Integration and the Scope
of the Firm
Global Strategies and
Multinational Corporation
Diversification Strategy
Managing Multi-business
Corporation
Current Trends in Strategic
Management
The Concept of Strategy (1/…)
Characteristics of a strategy Simple, consistent and long term
goals
Profound understanding of
competitive environment
Objective appraisal of resources
Effective implementation
Internal environment Goals and values
Resources and capabilities
Structure and systems
External environment Customer, competitors and
suppliers
5
Strategic fit Link between firm and external
environment
Problem with SWOT analysis (too
simplistic a classification)
Commonality between strategy in
military and business Are important
Involve a significant commitment
of resources
Not easily revisable
The Concept of Strategy (2/…)
1950s- 60s (Financial Budgeting) DCF- based capital budgeting
Financial control through operating
budget
1960s- 70s (Corporate Planning) Medium term economic forecasting
Formal corporate planning
Diversification and quest for
synergy
Creation of corporate planning
departments
1970s- 80s (Strategy as
Positioning) Industry analysis
Market segmentation
The experience curve
PIMS Analysis
Planning through portfolios
6
1970s= 80s (Quest for Competitive
Advantage) Analysis of resources and
capabilities
Shareholder value maximization
Restructuring and re-engineering
Alliances
1990s- 2000s (Strategy for the
New Economy) Strategic innovation
New business models
Disruptive technologies
2000s (Strategy in the New
Millennium) CSR and business ethics
Competing for standards
Winner-take-all markets
Global strategy
The Concept of Strategy (3/…)
Two questions of strategic choices Where to compete?
How to compete?
Levels Corporate strategy (domain selection)- industry attractiveness
Business strategy (domain navigation)- competitive advantage
Strategy: Design vs Emergent Intended, Realized & Emergent (Mintzberg, 1979)
Planned emergence
Roles of strategy: As decision support (constraining range of decisions; acting as heuristics; pooling
of knowledge; and use of analytical tools)
Coordination device (communication device; consensus development)
Target (strategic intent)
7
Tools for Strategy Analysis (1/…)
Primary sources of value Production
Commerce
Distribution of firm’s value among various stakeholder Employees (wages and salaries)
Lenders (interest)
Landlords (rent)
Government (taxes)
Owners (profits)
Economic Profit (economic rent) Economic Value Add (EVA)= Net Operating Profit After Tax (NOPAT)- Cost of Capital
Selecting strategy with highest Net Present Value (NPV)
Strategy and Real Options Modeling uncertainty
Real options valuation
Forward looking performance measure (stock market value)
Backward looking performance measure (accounting ratios)
Values and Social Responsibility
8
Industry Analysis (1/…)
Determinants of firm’s profit Value of product to customers
Intensity of competition
Bargaining power of produced relative to their suppliers
Industrial Organization (IO) Economics: How industry structure drives competitive behavior and determines industry
performance
Industry structure drives competition, which, in turn, determines industry
profitability
Porter’s Five Force Model
Horizontal competition
Rivalry among existing firms
Threat of new entrants
Threat of substitutes
Vertical competition
Bargaining power of suppliers
Bargaining power of buyers
9
Industry Analysis (2/…)
Threat of entry (entry barriers) Capital requirement
Economies of scale
Absolute cost advantage
Product differentiation
Access to channels of distribution
Government and legal barriers
Retaliation
Rivalry between established
competitors (determining factors) Concentration
Diversity of competitors
Product differentiation
Excess capacity and exit barriers
Cost conditions: Scale economies and
ratio of fixed to variable costs
Bargaining power of buyers/
suppliers Buyer’s price sensitivity
Relative bargaining power 10
Industry boundary defined by
group of companies that compete
to serve the same market
A market’s boundary is defined by
substitutability Demand side
Supply side
Key success factors of a firm What do customer want?
What does the firm need to do to
survive competition?
Critique of Porter’s Model Complementary relationships?
Impact of technology on rate of
change
Competition as dynamic,
personalized process
Levels of competition
Competitive Analysis (1/…)
Industry factors account for a minority of inter-firm difference in profitability
(less in 20%)
Complementary goods/ services (The 6th Force) Profits builds for suppliers that have strong market positions
Reduces the value contributed by others
Dynamic competition; Creative destruction and Hypercompetition
Contribution of Game Theory Framing of strategic decisions
Predict the outcome and identify optimal strategies
Game Theory applications Cooperation?
Deterrence? (imposing cost of a unfavorable move)
Commitment (hard or soft)
Changing structure of the game (agreements with competition; self-created competition)
Signaling (deter or mislead competitors )
Limitation of Game Theory: Good for historical analysis, not future; and good
for limited number of firms in concentrate industries
11
Competitive Analysis (2/…)
Competitive intelligence (from publically available info) Forecast competitors’ future strategies and decision
Predict competitors’ likely creation to firm’s strategic initiatives
Determine how competitors’ behavior can be influenced to make it more favorable
Porter’s Model of Predicting competitors’ behavior Competitors'’ current strategy
Competitors’ objectives
Competitors’ assumptions about the industry
Competitors’ resources and capabilities
Segmentation analysis (stages) Identify key segment variables (partition the markets most distinctly)
Construct a segment matrix
Analyze segment attractiveness (apply Five Forces Model)
Identify segment’s key success factors
Select segment groups (specialist vs generalist)
Strategic groups (similar broad strategies, but may not compete)
12
Analyzing Resources & Capabilities (1/…)
Focus of strategy shifted from external environment to internal environment Internal resources and capabilities are more secure source of advantage
Competitive advantage, rather than industry attractiveness is primary source of superior
profitability
Resource based view Firm specific capabilities are more stable source of profitability
Going being serving market needs or leveraging competencies to explore new markets?
Exploiting differences
Profit types Superior marketing power (Monopoly rents)
Superior resources (Ricardian rents)
Resource vs Capabilities Resources: Productive assets owned by the firm
Capabilities: What the firm can do
Resources need to work together to create organizational capability
Intangible vs Tangible Resources
Human Resources
13
Analyzing Resources & Capabilities (2/…)
Organizational capabilities Distinctive competencies: What organization does particularly well relative to the
competitors
Core competencies: Capabilities fundamental to firm’s strategy and performance
Classification approaches: Functional analysis
Value chain analysis (Porter’s Value Chain- Primary & Support activities)
Architecture of capabilities Capabilities are routine
Routinization is essential step in translating direction and operating practices into capabilities
Learning by doing, hence difficult to copy
Trade-off between efficiency and flexibility
Difficult to respond the novel situations
Hierarchy of capabilities
Cross- functional capabilities
Broad functional capabilities
Activity based capabilities
Specialized capabilities
Single- task capabilities
14
Analyzing Resources & Capabilities (2/…)
Appraising resources and capabilities (sources of profit)
Establishing competitive advantage Scarcity
Relevance (to key success factors)
Sustaining competitive advantage Durability
Transferability (extent of mobility between companies)
Replicability (asset mass efficiencies & time compression diseconomies)
Appropriating the return on competitive advantage Owners or employees
Relative bargaining power
Advent of ‘team-based capabilities’
15
Analyzing Resources & Capabilities (3/…)
Ways of leveraging resources Converging resources to a few, clearly defined goals. Focus and target.
Accumulating resources through mining experience or borrowing from other firms
Complementing resources through blending and balancing
Conserving resources through recycling and co-opting
Replicating capabilities Replicating them internally
Systematization of knowledge that underlies capabilities
Creating Standard Operating Procedures (SOPs)
Developing new capabilities
Capabilities as a result of early experiences Path dependence
Organizational capabilities: Rigid or Dynamic? Core capabilities become core rigidities with changing environment
Dynamic capabilities: Firm’s ability to integrate, build, and reconfigure internal and
external competencies to address rapidly changing environments
Routines
16
Analyzing Resources & Capabilities (4/…)
Approaches to capability development Acquiring capabilities: Mergers & Acquisitions
Integrating issues
Cultural and personality clashes
Accessing capabilities; Strategic alliances
Sharing of resources in pursuit of common goals
Creating capabilities
Acquiring necessary resources
Integrating these resources
Housed within dedicated organizational units
Search, experimentation and problem solving
Creation of organizational routines
Management of motivation and incentives
Role of ‘Knowledge Management’
Incubating capabilities into separate organizational unit
17
Analyzing Resources & Capabilities (5/…)
Framework for analyzing resources and capabilities
Identify the team’s resources and capabilities
Explore the linkages between resources and capabilities
Appraise the firm’s resources and capabilities on Strategic importance
Relative strength
Develop strategic implications In relations to strengths
How can these be exploited more effectively and fully
In relation to weaknesses
Identify opportunities to outsource activates that can be better performed by other organizations
How can weakness be corrected through acquiring and developing resources and capabilities
18
Org. Structure & Management System (1/…)
Ways of organizing production in capitalistic economy Markets (by price mechanism)
Firms (by managerial direction)
If Administrative Cost is lesser than Transaction Cost, transaction will be
organized within the firm than across markets
Emergence of modern corporation (critical transformations) Line- and –staff structures Complex functional structures (19th century) and Holding
Companies
Multi-divisional corporation (1920s): DuPont (increasing size and widening product
range), General Motors (weak financial control and confused product line)
Centralization Coordination and Decentralized Operation
Matrix organization
Shared service organization
19
Org. Structure & Management System (2/…)
Specialization vs. Coordination and Cooperation Stable environment eases division of labor (specialization)
Coordination mechanism
Price mechanism (transfer price between divisions; arms-length coordinator)
Rules and directives ()
Mutual adjustments
Routines (regular and predictable sequence of coordinated actions)
The cooperation Problem Incentives and control
Agency problems (owners and managers)
Managerial supervision (positive and negative incentives)
Financial incentives (pay-for-performance)
Shared values (clan control)
20
Org. Structure & Management System (3/…)
Hierarchy in organizational design
Essence of hierarchy is creating specialized units coordinated and controlled
by superior units
Hierarchy as coordination: Modularity (exists in all complex systems) Economizing on coordination (communication)
Adaptability (loosely-coupled systems)
Hierarchy as a control; Bureaucracy (Max Weber) Specialization (systematic division of labor)
Hierarchical structure (one supervisor, one subordinate)
Coordination and control (rules and SOPs)
Standardized employee rules and norms
Separation of management and ownership
Separation on job and people
Rational-legal authority
Formalization (written rules)
21
Org. Structure & Management System (4/…)
Mechanistic and organic form (Burns and Stalker)
22
Feature Mechanistic Organic
Task definition Rigid and highly specialized Flexible and less narrowly
defined
Coordination and
control
Rules and directives vertically
imposed
Mutual adjustment, common
culture
Communication Vertical Vertical and horizontal
Knowledge Centralized Dispersed
Commitment and
loyalty
To immediate supervisor To organization and its goals
Environmental
context
Stable with low technological
uncertainty
Unstable with significant
technological uncertainty and
ambiguity
Org. Structure & Management System (5/…)
Basis of defining organizational units Tasks
Products
Geography
Process
Based upon required and possible coordination intensity
Levels of interdependence (Thompson) Pooled interdependence (least)
Sequential interdependence
Reciprocal interdependence (most intense)
Factors impacting efficiency of organizational arrangements Economies of scale
Economies of utilization
Learning
Standardization of control systems
23
Org. Structure & Management System (6/…)
Alternative structural forms
Functional structure Exploring economies of scale, promoting learning and capability building, and
deploying standardized control systems
Problems of coordination and cooperation
Problem arises when firms grow in product range
Multi-divisional structure Response to diversification
Loosely coupled modular organization
Business level strategy and operating decisions made locally and planning,
budgeting and common services are central
Three levels: corporate center; the division; and individual business units
Matrix structure Often complex, slow and conflict pro structure
Companies move away from matrix structure
Alternative forms: Adhocracies; Team-based and project-based
organizations; and Networks. Characterized by focus on coordination rather
than control; by mutual adjustment; and individual playing multiple roles. 24
Org. Structure & Management System (7/…)
Management system for coordination and control
Information system Collect, organize and communicate information
Information feedback and information networking
Strategic planning system For achieving coordination within the company
Ensures consistency and commits managers
Three to Five years; combining top-down initiatives and bottom-up business plans
Assess the goals set assumptions and forecasts qualitative statement
specific action steps set of financial predictions
Financial planning and control systems Capital expenditure budget
Operating budget
Human resources management system Implementation of employee contracts
Corporate culture as control mechanism
25
Nature and Source of Competitive
Advantage (1/…)
Emergence of competitive advantage
External sources of change Changing customer demand
Changing price
Technology change
Magnitude of change and Resource heterogeneity leading to different impact
Competitive advantage from responsiveness to change Information + Flexibility
Time based competition
Competitive advantage from innovation Competitive process as a gale of creative destruction
Strategic innovation (not products and services)
Sustaining competitive advantage Imitation is more direct form of competition
Competitive advantage depends upon ‘isolating mechanisms’
Competitive imitation (Identification Incentive Diagnose Resource acquisition)
26
Nature and Source of Competitive
Advantage (2/…)
Emergence of competitive advantage
Diagnosing competitive advantage Causal ambiguity (arising from multiple attributes of competition)
Uncertain imitability (for an imitator)
Acquiring resources and capabilities Build vs buy (depends upon transferability of resources; transaction cost)
Based upon organizational routines, accumulated learning and coordination
First mover’s advantage
Competitive advantage in different market settings
Trade markets Imperfect availability of information (information asymmetry)
Transaction costs (economizing on research and market analysis)
Systematic behavioral trends (e.g. January effect; week-end effect, etc)
Overshooting (bandwagon effect)
Production markets Difference in resource endowments
27
Nature and Source of Competitive
Advantage (3/…)
Industry conditions conducive to competitive advantage Information complexity
Opportunities for deterrence and preemption
Difficulties of resource acquisition
Types of competitive advantage
28
Generic
strategy
Key strategy elements Resources and organizational requirements
Cost
leadership
Scale-efficient plants
Design for manufacture
Control of overheads and R&D
Process innovation
Outsourcing (especially overseas)
Avoidance of marginal customer accounts
Access to capital
Process engineering skills
Frequent reports
Tight cost control
Specialization of jobs and functions
Incentives linked to quantitative targets
Differentiation Emphasis on branding advertising,
design, service, quality, and new product
development
Marketing abilities
Product engineering skills
Cross-functional coordination
Creativity
Research capability
Incentives linked to qualitative performance
targets
Cost Advantage (1/…)
Cost Leadership: Must find and exploit all sources of cost advantage
and sell a standard, no-frills product
Historical focus of strategy management was on cost advantage
Experience Curve (relation between cost and accumulated experience) The unit cost of value added to a standard product declines by constant percentage
(typically 20 and 30%) each time cumulative output doubles
Firm’s primary objective to be expand market share
Pricing based upon anticipated cost (not current cost)
Sources of cost advantage Economies of scale (technical input-output relation; indivisibilities; specialization)
Economies of learning (increased individual skills; improved org. routines)
Production techniques (process innovation; BPR)
Product design (standardization of design and components; design for mfg)
Input costs (location advantage; ownership of low-cost inputs; non-union labors;
bargaining power)
Capacity utilization (ratio of fixed to variable cost; fast and flexible capacity
adjustments)
Residual efficiency (organizational slack; motivation and organizational culture;
managerial effectiveness) 29
Cost Advantage (2/…)
Stages of Value chain analysis
Disaggregate firm into separate activities
Establish the relative importance of different activities in the total cost of the
product
Compare cost by activity
Identify cost drivers
Identify linkages
Identify opportunities for reducing costs
Cost advantage is a prerequisite for success, though may not guarantee long term
profitability.
30
Differentiation Advantage (1/…)
Differentiation: Providing something unique that is valuable to buyers
beyond a low price
Depends upon the industry type
Not just about ‘what’ you offer, but also ‘how’ you offer it Supply side: Understanding of key resources and capabilities
Demand side: Customer insight
Differentiation variables Tangible and intangible dimensions (differentiation opportunities)
Differentiation (how) vs. segmentation (where) Differentiation is firm imperative while segmentation is market characteristic
Differentiation decisions are closely linked to segmentation
Low cost advantage is less secure than differentiation
Cost advantage are vulnerable to new technologies and strategic innovation
31
Differentiation Advantage (2/…)
Analyzing differentiation: The demand side
Product attributes and positioning Customer perception mapping
Multi-dimensional scaling
Conjoint analysis (strength of preference for different attributes)
Hedonic price analysis (combination of attributes)
Value curve analysis (competitive benchmarking of values offered)
Role of social and psychological factors Relations of customers’ lifestyle and aspiration with product
Observation, more than listening
Formulating differentiation strategy Select product positioning in relation to product attributes
Select target customer groups
Ensure customer/ product compatibility
Evaluate costs and benefits of differentiation
32
Differentiation Advantage (3/…)
Analyzing differentiation: The supply side
Drivers of uniqueness (Porter) Product feature and product performance
Complementary services
Intensity of marketing activities
Technology embodied in design and manufacturing
The quality of purchase inputs
Procedures influencing the conduct of each of the activities
The skills and experience of employees
Location
Degree of vertical integration
With increasing competition, offerings become ‘un-bundled’.
Product integrity Internal and external
Value embedded in the images with which its products are associated
Signaling and reputation Search goods vs experience goods
Depends upon ease of performance assessment 33
Differentiation Advantage (4/…)
Brands Serves as guarantee
Incentive to maintain quality and customer satisfaction
Embodiment of identity and lifestyle
Cost of differentiation Limits potential of economies of scale
Hampers exploitation of learning economies
High investment in brand, quality, employees, and services
Successful differentiation requires a combination of astute analysis and
creative imagination
34
Differentiation Advantage (5/…)
Value chain analysis of differentiation Construct a value chain for the firm and the customer
Identify the drivers of uniqueness in each activity
Select the most promising differentiation variable for the firm
Locate linkage between value chain of the firm and the buyer
35
Industry Evolution & Strategic Change (1/…)
Competition is a Dynamic Process Firm lifecycles are much more shorter than that of industries
Lifecycle get compressed over time (1800s 1900s 2000s)
36
Industry Lifecycle
Key driving forces:
Demand Growth (4 stages)
1. Novel technology/ lack of
experience
2. Standardization and price
fall
3. Replacement demand
4. Substitution products
Production and Diffusion of
Knowledge (for customers)
Emergence of “Dominant Design”. May or may not embody a technical standard.
“Network Effects” determine technical standards.
Shift in focus during the lifecycle:
Radical Product Innovation Incremental Product Innovation Process Innovation
Industry Evolution & Strategic Change (2/…)
Organizational demographics and industry structure: Organizational
Ecology: Evolution of industries as Darwinian process
Rapid increase of number of firms during initial early stage (de novo or de
alio)
Onset of maturity leads to declining number of firms (shakeout phase)
With concentration, new firms look for peripheral markets (resource
partitioning)
Location and international trade
Demand of new products first emerge in advanced industrialized countries
With maturity, products require fewer inputs of technology and sophisticated
skills
Nature and intensity of competition
Shift from non-price to price competition
With growing intensity, margins shrink
37
Stage Key Success Factor
Introduction Product innovation, manufacturing
capabilities, vertical integration
Growth Scaling-up, distribution,
Maturity Cost efficiency,
Decline Destructive price competition
Industry Evolution & Strategic Change (3/…)
Organizational adaption and change
Strategy and structure must keep pace with the change in external
environment
Evolutionary theory: Variation, Selection (competitive process) and Retention
Importance of ‘Organizational Routine’ (creation and abandonment)
Changes upset patterns of social interaction and requires coordinated action
among multiple individuals
Barriers to change Organizational capabilities and routines (competency traps)
Social and political structures
Conformity (institutional isomorphism)
Complementarities between strategy, structure and system (idiosyncratic combinations)
Limited search and blinkered perceptions (bounded rationality)
‘Innovators’ that pioneer the creation of new industry are typically different
companies from the ‘consolidators’ that develop it
Adapting to Technology Competency enhancing/ Competency destroying (component or architecture level
change)38
Industry Evolution & Strategic Change (4/…)
Managing organizational change
Dual strategies and separate organizational units Firm’s capability to simultaneously pursue multiple strategies
Bottom-up process of decentralized organizational change Senior management establishing ‘stretched targets’
Issuing specific company-wide directives
Promotion of ‘strategic dissonance’ by adopting divergent strategic directions
Change in organizational structure (centralized to de-centralized)
Imposing top-down organizational change CEO manufactures a perception of impending crisis within the company
Scenario planning (Rand Corp/ Shell) Value of scenario is not in the result, but in the process
Address ‘what-if?’ question
Shaping the future Revolution must be met by revolution
Competitive advantage depends on the deployment of superior
organizational capabilities and these capabilities develop slowly!
39
Management of Innovation (1/…)
Competitive advantage in Technology- intensive industries
Innovation Process Basic Knowledge Invention Innovation Diffusion (Imitation/ Adoption)
Profitability of innovation Across companies, R&D intensity and frequency of new product introduction tend to be
negatively associated with profitability
Regime of appropriability: Condition that influence the distribution of returns
to innovation. Appropriation to innovator depends upon Who owns property rights
Tacitness and complexity of the technology
Lead-time, and
Complementary resources.
Patent protection is of limited effectiveness as compared with lead-time,
secrecy, and complementary manufacturing and sales/ services resources
Great majority of patented product and processes are duplicated within three
years.
40
Management of Innovation (2/…)
Strategies to exploit innovation
Alternative strategies Licensing
Outsourcing certain functions
Strategic alliances
Joint ventures
Internal commercialization
Choices depends upon Characteristics of innovation (advantages of licensing)
Resources and capabilities of the firm (Open Innovation)
Timing innovation: to lead or to follow? Depends upon Extent of protection for the innovation by IP or lead time advantage
Importance of complementary resources
Potential to establish a resource
The risk of pioneering are greater for an established firm with a reputation
and brand to protect, while to exploit its complementary resources effectively
typically requires a more developed market
41
Management of Innovation (3/…)
Managing Risk
Sources of uncertainty in emerging industries Technology uncertainty
Market uncertainty
Risk limiting strategies Cooperating the lead users
Limiting risk exposure (strategic alliances and joint ventures)
Flexibility (keeping options open and delaying commitment)
Competing for standards
Types of standards (allows interoperability) Public (open) or Private (proprietary)
Mandatory (regulations) or De facto (can take long time)
Network Externalities: Need for standards (creates positive feedback) Products where usage linked to a network
Availability of complementary products and services
Economizing on switching cost
Creates winner-takes-it-all markets and creates lock-in for the customers42
Management of Innovation (4/…)
Creating conditions for innovation
Conditions for creativity Personality traits
Environmental traits (human interactions, experimentation, creative abrasion, whole-
brain teams)
Balancing creativity and commercial direction Direction, discipline and integration
Link between creative process and market needs
Creation Nets- network of collaboration
From invention to innovation (Innovation upsets established routines and threatens
status quo)
Cross-functional product development (heavyweight product managers)
Product champions (an idea finds a champion or dies)
Buying innovation (acquiring small pioneers of innovation)
Incubators (corporate funds/ incubators)
Key to success innovation is not resource application decision, but creating
the structure, integration mechanism, and organizational climate conducive
to innovation. 43
Mature Industries (1/…)
Competitive advantage of mature industries
Impact of maturity Reduce the number of opportunities for establishing competitive advantage
Product standardization
Increased buyer knowledge
International competition
Shift these opportunities from differentiation-based factors to cost-based factors
Diffusion of process technology
Difficult to attack established firms with strong distribution presence
Over-investment in capacity
Slow place of technology change
Sources of low cost: Economies of scale (strong association b/w market share and ROI)
Low-cost inputs (low cost of capital, late entry w/o legacy lock-ins)
Low overheads
Corporate restructuring Asset and cost surgery
Selective product and market pruning
Piecemeal productivity moves 44
Mature Industries (2/…)
Competitive advantage of mature industries
Segment and customer selection Creating niche in unattractive/ stagnant markets
Disaggregation of markets- down to individual customer level (through IT)
Target more attractive customers
Quest of differentiation Trend towards commoditization narrows the scope for differentiation and reduces
customer willingness to pay a premium for differentiation
Product standardization and increasing differentiation in complementary services
Brand promotion (e.g. cola and cigarettes)
Innovation Strategic innovation (when product and process innovations fade out)
Redefining markets and market segments
Embracing new customer groups
Adding products and services that perform new but related functions
45
Mature Industries (3/…)
Strategy implementation
Efficiency through bureaucracy (traditionally popular) Machine bureaucracy (centralize, well-defined roles, vertical communication)
Highly routinized operations and application of highly detailed rules and procedures
Beyond bureaucracy Increased role of business level managers in decision making (autonomy)
Shrinking corporate staff
Less emphasis on economies of large scale production
Increased emphasis on teamwork
Profit incentives to motivate employees
46
Declining Industries (1/…)
Strategies for declining industries
Causes of movement from maturity to decline: Technological substitution
Change in customer preference
Demographic shifts
Foreign competition
Adjusting capacity to declining demand depends upon Predictability of decline
Barriers to exit (durable and specialized assets; cost incurred in plant closure; and
managerial commitment)
Strategies of surviving firms (roll-ups through acquisition)
In segmented markets, general pattern of decline can obscure the existence of
pockets of demand that are not only competitively resilient, but also price inelastic.
Strategies for declining industries Divest or harvest (in industry is unprofitable), otherwise
Gaining leadership (showing commitment, acquisition, raising stakes)
Identify niche (inelastic demand)
47
Vertical Integration & Firm’s Scope (1/…)
Transaction cost and scope of the firm
Components of capitalistic economy Market mechanism (decisions guided by market prices) – invisible hand
Administrative mechanism (decisions made by firm)- visible hand
Internalization of activities if Transaction Cost is higher than Administrative
cost. Administrative costs fell because of: Technology
Management techniques
From an ear of integration, last 20 years have seen firms refocusing on core
strengths (flexibility and specialization)
Types of vertical integration: Backward/ Forward; and Full/ Partial
Concerns driving vertical integration Opportunism and strategic misinterpretation (due to bargaining power)
Hold-up
Factors determining vertical integration decision: Allocation of risk and Incentive
structure
48
Vertical Integration & Firm’s Scope (2/…)
Admin cost of internalization depends upon
Differences in optimal scale between different stages of production
Developing distinctive capabilities (and partner for rest)
Managing strategically different businesses (vertical de-integration)
Incentive problem (not market driven as buyer- seller incentives)
Competitive effects of vertical integration (monopoly effect discouraging customers
and suppliers to do business)
Flexibility (vertical integration for system-wide flexibility)
Compounding risk (domino effect)
Designing Vertical relationships
Long-terms contracts (inflexible)
Vendor partnership (relational contracts, w/o written contracts)
Franchising (flexibility and high power incentives)
Spot sales/ purchase; Agency agreements; Informal supplier/ customer relationship;
Joint Ventures, (in increasing level of commitment)
49
Multi-national Corporation (1/…)
Patterns of internationalization
Trade or Direct Investment
Industry types: Sheltered industry (served exclusively by indigenous firms)
Trading industries (trade, i.e. exports and imports)
Multi-domestic industries (direct investment)
Global industries (both trade and direct investment)
Impact on competition Intense competition and lower industry profitability
Lower entry barriers
Increased rivalry amongst existing firms
Lowering seller concentration
Increasing diversity of competitors
Increasing access capacity
Increasing bargaining power of buyers
Global sourcing
Internet-based markets
50
Success factors of Joint
Ventures and Alliances
Strategic intent of partners
(Competition for
competence)
Appropriability of
contribution (need for
gatekeepers)
Receptivity of company
(clarity of synergies)
How do national cultures
differ? (Hofstede, 1984)
Power distance
Uncertainty avoidance
Individualism
Masculinity/ femininity
Multi-national Corporation (2/…)
Analyzing competitive advantage
Theory of Comparative Advantage Relative efficiency of nations in producing different
products
Porter’s National Diamond Factor condition (home-grown resources, highly
specialized resources, constraints)
Related and supporting industries (industry clusters)
Demand conditions (domestic tastes)
Strategy, structure and rivalry (intense domestic
competition)
Strategy and national conditions Sync b/w firms’ organizational capabilities and the
national culture and social structure
Determinants of geographical locations National resources availability (cost arbitrage)
Firm-specific competitive advantages (location)
Tradability (mobility)
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Benefits from fragmenting the
value chain must be traded off
against the added cost of
coordinating globally dispersed
activities. Transportation costs are
one consideration .
Multi-national Corporation (3/…)
Options of overseas market entry
Transactions Exporting (spot sales; long-terms contracts; foreign agent/ distributors)
Licensing (licensing patents and other IPs, franchising)
Direct investment Joint venture (marketing and distribution only; fully integrated)
Wholly owned subsidiary (marketing and distribution only; fully integrated)
Issues relevant in decision of overseas options Is the firm’s competitive advantage based on firm-specific or country- specific resources.
Is the product tradable and what are the barriers to trade
Does the firm possess the full range of resources and capabilities for establishing a
competitive advantage in the overseas market
Can the firm directly appropriate the returns to its resources (licensing/ legal protection)
What transaction costs are involved (negotiating, monitoring and enforcing terms)
Brand and technology are important
Exporting is subjected to transactions cost
Customer preferences are reasonably similar across countries
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Multi-national Corporation (4/…)
Multinational strategies
Assumptions of global strategy Globalization of customer preference (technology homogenization)
Sales economics (development, manufacturing and marketing)
Benefits of global strategy Cost benefits: scales and replication (esp. product development)
Exploiting national resources efficiencies (quest for knowledge, beyond raw material)
Serving global customers (esp. in services)
Learning benefits (deepening and widening of capabilities)
Competing strategically (cross-subsidization, predatory pricing, tidal power)
Need for national differentiation Country specific unique customer requirements
Laws and government regulations
Distribution channels
Presence of lead countries (level of innovation adoption among counties)
National cultures
Trade-off between global integration and national adaptation
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Multi-national Corporation (5/…)
Strategy and organization within multinational corporations
Evolution Early 20th century: Era of European multinationals (Multinational federation, autonomous
national subsidiary; e.g. Unilever, Shell, ICI and Philips)
Post WWII: Era of American multinational (dominant position of US parents; e.g. GM, Ford,
Coca Cola, P&G)
The 1970s and 1980s: The Japanese challenge (globally standard products; e.g. Honda,
Toyota, NEC)
Reconfiguring the MNCs: The Transnational Corporation Changing organizational structure (creation of worldwide product divisions)
New approaches to reconciling localization and global integration (integrated network of
distributed and interdependent resources and capabilities)
Organizing and new product development (local innovations and global integration)
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Diversification Strategy (1/…)
Trends in diversification over time
Ear of diversification: 1950- 1980 Expansion of companies across different product markets
Rise of conglomerates in 1970s (multiple, unrelated acquisitions)
Refocusing: 1980- 2006 Divestment of unprofitable non-core business
Leverage buyouts
Trend towards specialization Emphasis on shareholders value (shift from growth to profitability; threat of leverage
buyouts; conglomerate discount)
Turbulence and transaction cost (agility of specialized companies; efficient external
factory markets)
Trends in management thinking (core competencies)
Motives for diversification Growth (going beyond industry’s growth limits)
Risk reduction (imperfectly correlated cash flows of businesses; CAPM)
Profitability (Essential Tests: attractiveness test; cost-of-entry test; better-off test)
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Diversification Strategy (2/…)
Competitive advantage from diversification
Economies of scope in common resources across multiple products Tangible resources (avoiding duplication; shared services)
Intangible resources (brand extension)
Organizational capabilities (general management capabilities)
Economies from internalizing transactions Relative efficiencies of transaction cost or administrative cost
Diversified firms as internal markets Internal capital markets (diversification and information access)
Internal labor markets (esp. managers and technical specialists; rewarding exposure)
Diversification and Performance (research evidence)
Beyond a point, high level of diversification results in poor performance
Related diversification is more profitable than unrelated diversification
Ambiguity in definition of (perceived) relatedness (similarity between industries in
technologies and markets; possibility of operational or strategic synergies)
Role of ‘dominant logic’ in defining synergies
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Multi-business Corporation (1/…)
Structure of multi-business company
The theory of M-form (efficiency advantages) Adaptation to bounded rationality (M-form permits dispersed decision making)
Allocation of decision making (strategic vs operational)
Minimizing coordination cost (local decision making)
Avoiding goal conflict
Multi-divisional firms solve two problems large firms have Allocation of resources (operating internal capital markets)
Resolution of agency problem (corporate focused shareholder goals; divisions focus on
profit maximization)
Though divisionalized corporations reconcile the benefits of decentralization
with those of coordination, chief executives operating their companies as
personal fiefdoms are found among diversified, divisionalized corporations
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Multi-business Corporation (2/…)
Structure of multi-business company
Problems of divisionalized firms Constraints on decentralization (partial freedom for the divisions)
Standardization of divisional management (strangles addressing unique needs)
Role of corporate management (corporate parenting) Managing corporate portfolio (acquisition, divestment and resource allocation)
Contribution of GE (portfolio planning model; strategic business unit; and PIMS database)
Exercising guidance and control over individual businesses
Managing linkages among businesses
58McKinsey Restructuring Pentagon
Multi-business Corporation (3/…)
Managing individual business
Ways of control a division Control decisions (input control)
Control performance targets (output control)
Strategic planning system (trade off between business initiatives and corporate
control) Strategic planning systems (rational) don’t make strategy (rather it’s continuous decision-
oriented planning)
Weak strategy execution (advice adoption of: milestones, balanced scorecards, strategy
maps)
Performance control and budgetary process Strategy planning (long term) + financial planning (short term)
Performance targets: financial, strategic and operational
Balancing strategy planning and financial control
Adoption of PIMS (Profit Impact of Market Strategies) Setting performance targets for business units
Formulating business unit strategy
Allocating investment funds between businesses
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Multi-business Corporation (4/…)
Managing internal linkages
Common corporate services Corporate management unit
Shared services organization
Business linkages and Porter’s corporate strategy types (corporate strategy
types, in increasing order of central involvement) Portfolio management (holding company, limited interference)
Restructuring (acquire companies to restructure)
Transferring skills (personal exchange and best practice transfer)
Sharing activities (economies of scope)
Corporate role in managing linkages Cross-divisional task forces (transfer resources and capabilities)
Movement from formal to informal control
Simultaneous pursuit of differentiation and integration
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Trends in Strategic Management (1/…)
Trends in external environment of business The Third Industrial Revolution (knowledge revolution; casino of technology)
Societal pressures (CSR; sustainable business)
Decline of public corporation
New direction in strategy thinking Complexity Theory (unpredictability and self- organization)
Real Options
Capability based structure of organization
Team based
Project based
Process based
Organizing for adaptability
Identity
Modularity
Networks
Emotional Intelligence in leaders
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