MBA Strategy: Session One Michaelmas...
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MBA Strategy: Session One Michaelmas 2006 Introduction to Strategy Christopher McKenna Thomas Powell
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MBAStrategy: Session One
Michaelmas 2006
Introduction to Strategy
Christopher McKennaThomas Powell
Strategic Management
Course Objectives
The ability to apply strategy theory and frameworks to the analysis and diagnosis of strategy problems
Understanding how organizations align internal resources and capabilities with external conditions to produce business and corporate strategies
The capacity to formulate and defend arguments in support of strategy proposals, using theory and evidence
Course Structure
1. Introduction to Strategy
2. Competitive Advantage
3. Industry Strategy
4. Strategy and Change
5. Diversification
6. Global Strategy
7. Managing the Multibusiness Company
8. Strategy Process
Text Books and Readings
Main:
Grant R. (2005), Contemporary Strategy Analysis, Blackwell (5th Edition).
Supplements:
Johnson G, Scholes K and Whittington (2004), Exploring Corporate Strategy, Prentice Hall (7th Edition).
Besanko D, Dranove D, Shanley M. and Schaeffer S. (2004) Economics of Strategy, Wiley (3rd Edition)
Also: Selected classic articles
Course Assessment
Practical work (30%)Three group assignments, 10% each. Each assignment should answer the questions for the week’s case. The word limit is 500 to 1000 words (everything included). You must include a word count, including all words in diagrams, footnotes, and appendices. Exceeding the word limit will result in your mark being reduced. Assignments are due by 11pm on Sunday, in weeks 2, 4 and 5.
Examination (70%)A two-hour examination paper: three compulsory questions based on a case.
Week 2: Ben & Jerry's Ice Cream - due Sunday, October 15 at 11pm
Week 4: Cirque du Soleil - due Sunday, October 29 at 11pm
Week 5: The Walt Disney Company - due Sunday, November 5 at 11pm
Practical Work Cases
Practical Work Criteria
Practical work should:
Offer a clear view with regard to the set question
Draw on relevant concepts and techniques to develop this view
Draw on the case to provide evidence and analysis in support of this view
A good piece of practical work would justify its final view in the light of any key alternatives, uncertainties, trade-offs or contingencies, as appropriate.
We do not believe there is one ‘right’ view, only well- supported views. We recognise the constraints imposed by the word limit and the timing of thesubmission.
FINAL EXAMINATION
STRATEGY
Tuesday, 13 December, 2005 - 9.30 a.m. - 11.30 a.m.
Case Study: Cirque Du Soleil: Can It Burn Brighter?
1 hour reading time.
During the first hour you may read the case, use pens and make notes of the case.
The questions will be distributed for the second hour of the case.
Students must answer ALL questions.
All questions carry equal marks.
Materials: CalculatorsThe Case Study must not be removed from the Examination Room
Please do not turn over until told that you may do so.
Sample Examination Instructions
All questions carry equal weight
Case Study: Cirque du Soleil: Can It Burn Brighter?
1. Does Cirque du Soleil have a sustainable competitive advantage? If so, what is it? If not, can it create one?
2. What are the growth options available to Cirque du Soleil? What is your assessment of the firm’s diversification strategy?
3. What are the most important strategic issues now facing Cirque du Soleil? What are your strategy recommendations?
Sample Examination Questions
Office Hours
By email appointment with stream teachers:
[email protected]@sbs.ox.ac.uk
All queries regarding group assignments should initially go through Panayotis Dessyllas
Teaching Assistant: [email protected]
Key Concepts and Techniques
Session 1: Introduction to Strategy Defining strategyVision, mission, goalsStrategy content and process Business and corporate strategyStakeholder view
Session 2: Competitive AdvantageCompetitive positioningResource-based advantageValue innovationX-factors
Key Concepts and Techniques
Session 3: Industry AnalysisIndustry structure (five forces)Key success factorsValue chainProfit poolsValue net
Session 4: Strategy and ChangeMacro-environment (PESTLE)Industry life cycleDominant designStrategic uncertainty
Key Concepts and Techniques
Session 5: DiversificationHierarchy of growthPortfolio modelsSynergyRelated diversificationCore competence
Session 6: Global StrategyModes of international expansionGlobal productsDiamond of national advantage
Key Concepts and Techniques
Session 7: Managing the Multibusiness CompanyDominant logic Corporate parentingMerger & acquisition integration
Session 8: Strategy ProcessStrategic planningEmergent strategyLogical incrementalism
SEIB
Strategy
Entrepreneurship
InternationalBusiness
STRATEGY, ENTREPRENEURSHIP & INTERNATIONAL BUSINESS (SEIB)
Michaelmasterm
Entrepreneurshipelectives
IBelectives
Strategyelectives
Technology & Innovation
Strategy
Strategy track
Entrepreneurship track
IB track
Introduction to Strategy
(core)
Hilaryterm
Trinityterm
Entrepre-neurshipProject
IB& Global
Governance
TRINITY TERM ELECTIVES:STRATEGY TRACK
- Strategy Implementation (Ventresca)
- Competition, Strategy & Performance (Powell)
- Strategy & Complexity (Reed-Tsochas)
TRINITY TERM ELECTIVES:ENTREPRENEURSHIP TRACK
TECHNOLOGY ENTREPRENEURSHIP- Entrepreneurship & Technology Ventures (Seidel)- Risk Management of Technology & Science (Tansey)
SOCIAL ENTREPRENEURSHIP-
Introduction to Social Entrepreneurship (Nicholls)
- Institutional Design in Social Entrepreneurship (Nicholls)- Social Entrepreneurship & New Business Models (Leadbetter)
ENTREPRENEURIAL FINANCE-
Entrepreneurial Finance (Chambers)
TRINITY TERM ELECTIVES:INTERNATIONAL BUSINESS TRACK
-
Business in China (Thun)
-
Global Production in Emerging Markets(Brown, Sako, Thun)
- Corporate Responsibility (McBarnet)
-
Managing Business-State Relations and Political Risk (Brown)
Outline for Today
Introduction to the Strategy Module
Defining strategy
Business and corporate strategy
Strategy content and process
Stakeholder view
Vision, mission, goals
The Cautionary Tale of Robert McNamara: A Man Who Had One of The Greatest CVs in History
1916 Born in San Francisco1937 Receives his MBA from the Harvard
Business School at the Age of 211946 Joins Ford Motor Company1957 Appointed Board Member at Ford;
Subsequently Made President of Ford1961 Appointed US Secretary of Defense
under Presidents Kennedy and Johnson1968 Appointed President of the World Bank1981 Retires at the Age of 65
Robert McNamara was the Original ‘Whiz Kid’:
Leader of Three of the World’s Largest Organisations
Ford Motor Company The World Bank
United States Department of Defense
Robert McNamara Knew Every Quantitative Technique
But His Strategies Always Failed in Practice
At Ford (with Henry Ford II) in the 1950s
With Dean Rusk and President Kennedy in
the White House in 1962
At the World Bank in the late 1970s
For Robert McNamara was the Ultimate Disaster;
He Plunged Ford, the U.S., and the World Bank into Crisis
Under McNamara’s Leadership, Ford
Introduces the Edsel;GM Dominates the
American Automobile Market
Robert McNamara Persuades President Kennedy to Start
the Vietnam War
At the World Bank,McNamara Masterminds
the LDC Debt Crisis
In the End, Robert McNamara’s Failures Cost Us All,From Ford’s Problems, to the Vietnam War, to LDC Debt
The Lesson from Robert McNamara’s Failure is Clear:Good Strategy is Crucial for Any Organisation
A Definition of “Strategy”
“The determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.”
Alfred Chandler, Strategy and Structure, (MIT Press, 1962), Page 13.
3/9/03
1999 2000 2001 2002 20030
20
40
60
80
100
120
140
160
VIVENDI UNIVERSAL - OPENING PRICE (~E )
HIGH 141.00 7/3/00, LOW 11.05 11/3/03, LAST 16.30 2/9/03Source: DATASTREAM
“The share price hasn't moved for a reason: no one knows where they're going. Is there more value in Vivendi than €15 per share? Yes. But the market is not going to buy into that until
there is a strategy. Becoming investment grade is not a strategy, it's an outcome. The market is not going to reward you materially for simply becoming investment grade, when you have no
strategic direction and remain an amalgam of assets that
makes no sense.“
Edgar Bronfman, FT 1/9/03
Strategy Versus Tactics
‘Strategic decisions are concerned with the long-term health of the enterprise. Tactical decisions deal more with the day-to-day activities necessary for efficient and smooth operations’
Chandler, Strategy and Structure, Page 11
Corporate versus Competitive Strategy
Competitive and Corporate Strategy
Competitive (Business) Strategy• How should a business compete in its industry?
Corporate StrategyWhat businesses should be included in the corporate portfolio?How should these businesses relate to one another?How should these businesses relate to the corporate parent?
Strategy as Content
Vision, mission, goalsProducts and servicesCustomer groups Geographic coveragePrice, cost, quality positionsResourcesCompetitorsKey issues and how to address them
Strategy as Process
VisionVision GoalsGoals AnalysisAnalysis DecisionDecision ActionAction
ExternalExternal InternalInternal
SynthesisSynthesis
• Values• Purposes
• Mission• Goals• Objectives
Industry analysisKey success factorsCompetitive positionOpportunities & threats
• Resources and capabilities• Functional area analysis• Financial analysis• Strengths & weaknesses
• Risk Analysis• Negotiation• Strategic
Choice
• Structure• Culture• Processes• Systems• Deployments
Competitive AdvantageStrategic Alternatives
DATADATA
Formulation Implementation
Defining Strategic Vision
VisionVision
IdeologyIdeologyIntentionIntention
Core PurposeCore PurposeCore ValuesCore ValuesStrategic IntentStrategic IntentMissionMission
Guiding Principles;
Only a Few in Number (3 to 5)
Reason for Being;Outlives
Strategies
Definition of the Business;
Inspiring Stretch Goals
Vivid Description of Success
Craig Conway, CEO Peoplesoft: “I can imagine no price or combination of price and other conditions to recommend the offer.” The offer is “diabolical and atrocious;” Larry Ellison is a “sociopath.”
Larry Ellison, CEO Oracle: “In this new era of corporate governance, we would think (Peoplesoft’s) management and the board of directors would be careful to put shareholder interests before their own”
Oracle Bid for Peoplesoft, July 2003
Two Views of the Firm
Return on Capital
Sales/Capital
Profit/Sales
Investors
Employees
Suppliers
CommunityCustomers
Shareholder View of the Firm
Simpler Criteria?Safer Externally? Same in Long-Term?
Responds to Complexity?Managerially Safer?Same in Long-Term?
Stakeholder View of the Firm
Complexity of the Stakeholders
Multiple Audiences Multiple Purposes
Investors Persuade & RetainManagers Direct & ControlEmployees Motivate & GuideCustomers Attract & AssureCompetitors Advise & WarnConsultants Inform & Steer
Vision and Mission (Strategic Intent)
Vision/Strategic Intent:
Inspiring Goals that Stretch the Firm
“What can we become?”
Mission:
Vivid Description of Achieving that Goal
“Where will we go?”
Vision & Mission at Coca-Cola
Vision A view of a desired future state for the company:
“The letter C on taps will stand for Coke”Not:
“Giving our customers what they want all the time, every time, on time”
Mission A statement of what needs to be done in order to achieve the envisioned state, preferably quantified:
“No urban citizen will ever be more than 100 yards from a Coke…”
Not:“To deliver long-term growth in earnings per share and shareholder value.”
Objectives Measurable targets which relate to the achievement of the mission
NASDAQ: “To build the world's first truly global securities market. A worldwide market of markets built on a worldwide network of networks, linking pools of liquidity and connecting investors from all over the world, assuring the best possible price for securities at the lowest possible costs.”
Canon: “Beat Xerox”
Blur Studios: “To work on cool projects, with cool clients and cool employees, not political and corporate bullshit”
Amstrad: “Pan Am takes good care of you. Marks and Spencers loves you. Securicor cares. At Amstrad, we want your money.”
Enron: “The World’s Leading Company”Q: “How will you know?”Skilling: “It’s like pornography.
You know it when you see it.”
Strategic Goals
Unilever’s PurposeOur purpose in Unilever is to meet the everyday needs of people everywhere – to anticipate the aspirations of our consumers and customers and to respond creatively and competitively with branded products and services which raise the quality of life.
Our long-term success requires a total commitment to exceptional standards of performance and productivity, to working together effectively and to a willingness to embrace new ideas and learn continuously.
Our deep roots in local cultures and markets around the world are our unparalleled inheritance and the foundation for our future growth. We will bring our wealth of knowledge and international expertise to the service of local consumers – a truly multi-local, multinational.
We believe that to succeed requires the highest standards of corporate behaviour towards our employees, consumers and the societies and world in which we live. This is Unilever's road to sustainable, profitable growth for our business and long-term value creation for our shareholders and employees.
Dilemmas in Strategic GoalsHow Much Stretch?
“In a stretch environment, the team is asked to come in with plans that reflect their dreams – the highest numbers the think the had a shot at: their ‘stretch.’ The discussion revolves around new directions and growth – energising stuff … Stretch targets keep them reaching”
(Jack Welch, General Electric)
“If you draw the curve of where your growth is headed, and you draw the curve at where 10-15 per cent (growth) is, there's a thing called 'The Gap‘. And you run around trying to do things to fill that gap, and you lose focus on the core business”
(James Cantalupo, CEO of McDonalds, after abandoning the double-digit growth targets)
How Much Balance?
“Most companies' operational and management control systems are built around financial measures and targets, which bear little relation to the company's progress in achieving long- term strategic objectives. Thus the emphasis most companies place on short-term financial measures leaves a gap between the development of a strategy and its implementation.”
Robert Kaplan & David Norton, The Balanced Scorecard, 1996
How Much Profit?
“The Only Real Goal of a Company is to Making a Profit.”
Or
“A company, besides making a profit, also has the goal of attaining the well-being of various stakeholders, such as employees, customers, etc.”
Driven US UK Germany France Japan
by Profit 40% 33% 24% 16% 8%
The Problem Facing Managers
Charles Hampden-Turner & Fons Trompenaars, The Seven Cultures of Capitalism, 1994.
The Anglo-Japanese Divide?
The Financial Times, 26 September 2005
Sir Howard Stringer, CEO, Sony(BA, History, Merton College, Oxford)
“There's a cultural divide. The Japanese investors say don't touch headcount, the western investors say I haven't done enough.” Sir Howard concedes that, ideally, he would have gone much further in streamlining Sony's businesses, no fewer than half of which he estimates are losing money.
“But I have to win hearts and minds. I cannot go in with English jackboots,” he says, looking down at his leather shoes.
The Assumptions of Different Strategies
Planning Darwinian
Chameleon Crafting
Outcomes
Processes
Profit-Maximising
Deliberate Emergent
Plural
Rationality RulesAdapt to Markets
Rationality Fails& Markets Adapt
Plural RationalitiesMarkets & Society
Plural Irrationalities,Sticky Markets & Orgs.
How Does the World Really Work?
Source: Richard Whittington, What is Strategy - and Does it Matter?
Key Topics for Today
Defining strategy
Business and corporate strategy
Strategy content and process
Stakeholder view
Vision, mission, goals
Competitive Advantage
Christopher McKenna
MBAStrategy: Session Two
October 2006
Course Structure
1. Introduction to Strategy
2. Competitive Advantage
3. Industry Strategy
4. Strategy and Change
5. Diversification
6. Global Strategy
7. Managing the Multibusiness Company
8. Strategy Process
How to Explain the Success of the Ipod?
Apple iTunes softwareBelkin Media Reader photo storage4 Gigabyte Samsung Flash Memory Apple manufactured touch wheel Phillips power management unit Wolfson Microelectronics for audio codecSilicon Storage Technology 8 Megabytes utility flash memory for system codeSamsung S5L8701B05 ARM Core DSP, with Flash Disk ControllerCypress CY8C21424 Mixed-Signal Array with On-Chip Controller for touch wheel
http://www.isuppli.com/news
Key Concepts & Techniques
Competitive Positioning
Resource-Based Advantage
Value Innovation
X-Factors
What Causes Superior Performance?
X PShareholder returnsTotal profitProfit rates (ROA, ROE)Market shareGrowth rateMarket capitalizationEmploymentSocietal contributionEtc.
US Industry in 2005 Return on Equity Banks 12.2% Cable TV -0.2% Computers 15.6% Grocery Stores 5.2% Hotels 9.2% Household Products 37.5% Natural Gas Production 13.4% Newspapers 10.3% Precious Metals 2.0% Tobacco 29.9%
Industries Vary Enormously in Their Profitability
Is Profitability a Function of Industry or Not?
Total Investors’ Return, 1988-98%
Computers:
IBM 15Compaq 36Apple 1Dell 80
General Merchandisers:
Wal-Mart 27Kmart 2Sears Roebuck 15Dollar General 40
If Profitability Doesn’tCome AutomaticallyFrom Your Industry,Then How Can You Achieve ExtraordinaryProfits on a RegularBasis?
The Central Question:
Two Views of Competitive Advantage
“Competitive Positioning”Sustained superior performance requires effective product-market positioning
Market shareProduct featuresCost positionBrand positioningGeographic scopeVertical integration
“Resource-Based”Sustained superior performance requires unique resources & capabilities
Technological skillsTeamworkBusiness processesLeadershipInnovationOrganization culture
Sources of Competitive Advantage
FirmFactors of Production
Products & Services
Output MarketsTechnology productsIndustrial productsConsumer productsAgricultural productsServices
Resource-Based View
Input MarketsPeopleTechnologyCapital equipment BuildingsLand
Competitive Positioning View
Competitive Strategy: Michael Porter’s Generic Strategies
At the level of the business unit, there are just two ways of achieving superior performance, the “generic strategies” of:
Cost LeadershipDifferentiation
The scope of cost leadership and differentiation can be broad or narrow. But Porter warns that the two strategies can’t be mixed. His message is:
Identify your advantage - your “reason for being”Know your competenceDon’t get “stuck-in-the-middle”
Porter’s Generic Strategy:When Selling Commodities, Cut Costs;
Or Sell Specialized Goods…
Your ChoiceIs Either to Take The Market PriceOr Charge What You Want…
But is it Really that Easy?
The Generic Strategy Trap?On the Face, This Strategy Sounds Good, But Is Anyone
Ever Just Low Cost or
Differentiated?
So How Do You Decide the Right
Strategy?
Market Scope
Niche Broad
Many Market SegmentsWide CoverageNo Market Specialization
SpecializedMarket SegmentationGeographicDemographic
MixedServes few marketsSome market Specialization
Generic Competitive Positions
Cost Leadership
Differentiation
Niche Broad
Cost/Niche
Diff/Niche
Diff/Broad
Cost/Broad
Market Scope
Gen
eric
Str
ateg
y
Instead of Generic, Be Specific.
In This Industry, What is the Basis of Competition?
Access to CapitalCost StructureCustomer ServiceDistribution ChannelsEnvironmental AwarenessGeographic BreadthInnovationMarket Segments ServedMarket ShareNovelty/Fashion Parent Company Affiliation
PriceProduct FeaturesProduct Line BreadthQualityReputationSocial ConsciousnessTechnologyTime/ConvenienceVertical Integration
How to Discriminate Among Groups:
Identify the High and Low Performers
What are the ‘Key Strategic Factors’ that define these Groups?
What are the ‘Strategic Spaces’ that differentiate these Groups? Which Ones are Available?
How are different Strategic Groups affected by Environmental Change?
What Mobility Barriers Exist to Moving into ‘Strategic Spaces’?
The Resulting Analysis Will Resemble a Venn Diagram
Target Customer Segment
KeyStrategicDimension
Less Competitive Group
Specialist orBoutique Firms
Highly CompetitiveGroup
An Example: Strategic Groups in Foods in Europe
MultinationalMajor Branders
MajorNationalBranders
MinorNationalBrandersNational
Own-Labellers
Marketing Intensity (% of Sales)15%0%
GeographicCoverage
Low cost production,Local knowledge
Low costsRetailer switching costs
Brand loyalty,Proprietary skills,R&D capability,Economies of scaleMarketing skills
Brand loyalty,Proprietary skills,Marketing skills,Local knowledge
The Strategy Web
Access toCapital
CostEfficiency
Customer Service
Breadth of Product Line
Product Innovation
Market Share
Brand Recognition
GeographicCoverage
+
-
+
+
+
+
+
+
+
The Firm as a Portfolio of Attributes
OperationalOperational
CompetitiveCompetitive
OrganizationalOrganizational
FinancialFinancial
InstitutionalInstitutional
MarketingMarketing
Costs Markets
Vertical Strategic Integration Group
Assets Revenues
Returns to Financial Investors Structure
Products Pricing
Promotion Distribution
Systems Technology
Efficiency Quality
Structure Culture
Leadership Motivation
History Reputation
Governance Relationships
But What Makes This Firm Special?
One Solution is to Ask:
What Are You Good At?
What is Your Core
Competence?
Defining Core Competences
A ‘core competence’ is:
A bundle of skills and technologiesOf fundamental customer benefitCompetitively uniqueA gateway to new markets
The notion shifts strategy from a battle of market position, towards a mastery of skills and capabilities.
The key question is:
What are you best at?
Identifying Core Competences
1. Map products and services2. Identify underlying
technologies, skills, processes and resources
3. Synthesise common technologies, skills, processes and resources
4. Check that common technologies, skills, processes and resources are extendable
5. Test their value!
The ‘Resource Based View’ (RBV) of StrategyWhat Are You Best At?
Is it Valued by Customers?Will they pay you more than it costs?
Is it Superior?Do you command a premium over competitors?
Is it Imitable?Something your competitors cannot copy?
Is it Substitutable?So that your competitors cannot trump you?
Is it Durable?Are you managing and investing in it?
Is it Core?Is it at the heart of (nearly) everything you do?
Why Resource Advantages Can LastCAUSAL AMBIGUITYRivals cannot observe the resourceRivals cannot replicate or reverse engineer the resourceThe social complexity of organizational resources
Examples: Organizational culture, systems, motivation, and commitment
UNIQUE HISTORICAL CONDITIONSRivals cannot replicate the historical sequence of events The path-dependency of firm performance
Examples: First-mover advantages such as location and raw materials
TIME COMPRESSION DISECONOMIESThe resource is inherently time-consuming to accumulate
Examples: Reputation, knowledge, skills, relationships, and experience
Resources Are Distributed Across the Value Chain
Business Designs
Competition is no longer about “Magic Bullets”but about competing on “Business Designs”
Business Design:
A mutually reinforcing configuration of business choices on key value adding dimensions, underpinned by fundamental
assumptions about business drivers
Wal-Mart Dell EasyJet Nucor Amazon
Fundamental Assumptions:
What business are you in?What are your customers going to want?What drives profits in the chain?
Competing on Business Design
“Big Steel” Mini-MillsFundamental Quality at a Price Right quality, Assumptions: Volume Key Right Price,
Low VolumesDesign Elements:Customers Broad Regional FocusScope Vertical Integration ScrapOperating System Basic Oxygen Electric ArcCapital Intensity High LowR&D In-House SuppliersOrganization Unionized Lean, Green
Source: Slywotsky, 1996
Complementarity in Nucor’s Business Design
Electric Arc
Low Volume
LowQuality
GreenWorkers
RegionalMarkets
Low R&D
KeyPlant
Suppliers
LowOverheads
HighIncentives
Low Prices
No Unions
Low Capital
ListPrices
LimitedProducts
Porter, Harvard Business Review, 1996
(Key Drivers Shaded)
Which Matters More: External or Internal?
0102030405060708090
100
EmergentHi-Perf
EmergentLo-Perf
SustainedHi-Perf
SustainedLo-Perf
IndustryBusiness
Percent abnormal profit explained by industry or businessspecific effects, 12,000 business units, 1982-1995:
relative, non-additive
% Explained Abnormal Profits
Adapted from: McGahan and Porter, Strategic Organization, 2003
Value Innovation (“Blue Ocean Strategy”)
1. IndustryForget industry analysis; many constraints are imaginary
2. CompetitionForget what competitors are doing, focus on adding value
3. MarketsGo for big blocks of customers; let some customers go
4. CapabilitiesForget current assets; ask “What if we were starting over?”
5. ProductsForget conventional products; figure out what customers need
Kim and Mauborgne, Harvard Business Review (Jan/Feb, 1997)
Value Curve for a “Blue Ocean Strategy”
Din
ing
Aest
heti
cs
Loun
ge
Room
siz
e
Avai
labl
ere
cept
ion
Furn
ishi
ngs
Bed
qual
ity
Hyg
iene
Qui
et r
oom
Pric
e
Low
Hig
h
One-star hotel
Two-star hotel
Blue Ocean
Kim and Mauborgne, Harvard Business Review (Jan/Feb, 1997)
Is Performance Entirely Due to Competitive Advantages?
Is There Any Way to Achieve Sustained Performance Beyond Competitive Position, Resource
Advantages, and Industry Forces?
Consider those X-Factors
An X-factor is an organizational attribute that is:1. Valuable – increases revenues, reduces costs2. Not necessarily scarce3. Not difficult to imitate – low barriers to
imitation
Examples:Attractive product features or packagingCustomer service, product safetyInformation technology, production efficiencyBasic industry experience and expertiseBasic skills in production, distribution, management
X-Factors in Global Business Schools
X-Factors (“Similarities”)Program Administration: MBA, PhD, Executive Systems and Processes: Planning, Budgeting, IT Faculty Coverage: Finance, Management, MarketingSource of Funds: Tuition, Executive TrainingFacilities: Land, Building, Capital Improvements
Competitive Advantages (“Differences”)Historical Conditions: Location, Age, CultureReputation: Programs, faculty, publication, businessAbnormal Funding Advantages: Endowments, grantsRelationships: University, business, government, alumniCulture: Strong institutional commitments
The Dynamics of Competitive Advantage
CompetitiveAdvantagesCompetitiveAdvantages
X-FactorsX-Factors
The Present The Future
CompetitiveAdvantages
Unsuccessful Vs & Es
X-FactorsX-Factors
Visions &Experiments
Visions &Experiments
X-Actions
X-Actions are the actions associated with X- factors, requiring effort, attention, training, mastery, execution.
Industry: InsuranceX-Actions: Developing insurance products, assessing risks, selling policies, issuing policies, servicing customers, processing claims
X-Actions by a Mobile Phone Provider
CustomerService
Mktg. Logistics ProductDevel.
NetworkAccess
X-Actions
Degree of Mastery
Minimal
Billing
EfficientFrontier
X-Actions in Practice
1.Competitive advantage is not enoughThe goal is superior performance, not competitive advantagesSuperior Performance = Competitive Advantage + X-Actions
2. Firms must master fundamental actions Identifying the X-Factors Understanding the industry standard Avoiding the fatal weakness: X-actions are multiplicative
3. Competitive advantage may be unachievableMost firms should focus on X-actions, not competitive advantages X-actions are clear and achievable, not invisible and ambiguous
How to Explain the Success of the Ipod?
‘The iPod family of digital media players keeps growing in sophistication and popularity. It's also growing more profitable for Apple with each passing revision to the product, says market research firm iSuppli.
iSuppli took apart the 4-GB version of the nano and estimated that the materials inside cost $72.24. That's a drop of more than $17 compared with what Apple paid for the guts of a 2-GB version of the first iPod nano device.
Apple saved money by eliminating a chip called flash disk controller, which it used to purchase from Silicon Storage Technologies (SSTI ). That functionality is now built right into Samsung's SOC.
Apple has nipped and tucked even on such low-end components as transistors and diodes. “These used to cost $3.71 in the old nano, but we estimate the cost has come down to $1.85,” Crotty says. “It may not sound like much, but when you think that Apple sells millions of these things, it really adds up.”’ Business Week, 20 September 2006
Firm Performance and Managerial Control
Impact on Performance
Controllability
Low
High
Low
CompetitivePosition
Resource- Based
Advantages
X-Actions
IndustryForces
High
What Causes Superior Performance?
C PShareholder returnsTotal profitProfit rates (ROA, ROE)Market shareGrowth rateMarket capitalizationEmploymentSocietal contributionEtc.
Michael PorterProduct PositionMarket PositionCost Position
Resource-Based ViewResourcesCapabilities Other Intangibles
What Causes Superior Performance?
CX-Actions
Mastery ofFundamentalsAction EmphasisExecution
PorterProduct PositionMarket PositionCost Position
Resource-Based ViewResourcesCapabilitiesOther Intangibles
P X
Key Concepts & Techniques
Competitive Positioning
Resource-Based Advantage
Value Innovation
X-Factors
Industry Analysis
Christopher McKenna
MBAStrategy: Session Three
Michaelmas 2006
Outline for This Session
Industry Structure (Five Forces)
Key Success Factors
Value Chain
Profit Pools
Value Net
US Industry in 2005 Return on Equity Banks 12.2% Cable TV -0.2% Computers 15.6% Grocery Stores 5.2% Hotels 9.2% Household Products 37.5% Natural Gas Production 13.4% Newspapers 10.3% Precious Metals 2.0% Tobacco 29.9%
Industries Vary Enormously in Their Profitability
Some Industries Outperform in the Long-Run
Profit from 1960-1999 Return on Sales Pharmaceuticals 11.3% Mining 9.0% Tobacco 6.8% Chemicals 5.5% Computers 5.3% Electronics 4.4% Aerospace 3.5% Rubber & Plastic 3.3% Textiles 2.9% All Industries 4.9%
Why Do Some Industries Outperform Others?
The Structure of Industries Vary AccordingTo Five Main Variables (“Forces”)
1. Barriers to Entry2. Competitive Rivalry
3. Power relative to Buyers
4. Power relative to Suppliers
5. Threat of Substitutes
“In the first hundred years of the US air travel (1903-2003), the industry made exactly zero cumulative profit.”
The Financial Times, 22 November 2003
Industry Structure May Even Inhibit Profits
“If there had been a capitalist at Kitty Hawk, he should have shot down Wilbur Wright”
Warren Buffet, Berkshire Hathaway
Industry Structure Analysis
The Analysis of Profit Potential in an Industry
Is this a good industry to be in?
Why is it a good industry and will this change?
How can we manage this change?
Remember, as Karl Marx famously said:
“One capitalist kills many”
Market Share Is Extremely Important
Return on Investment By Market Share
0
5
10
15
2025
30
35
40
45
Lessthan10%
10% to20%
20% to30%
30% to40%
40% to50%
Greaterthan50%
Market Share
Aver
age
Ret
urn
on In
vest
men
t
“Market Share and profitability are strongly related. Business units with very large market shares –- over 50% of their served market -- enjoy rates of return more than three times greater than small-share strategic business units (those that serve under 10% of their markets).”
Market Share: The Top Prizes Available
Market Leader Market Share
PC Operating Systems Microsoft 96%
HIV Drugs GSK 45%
Diapers Kimberley-Clark 45% (North America)
Soft Drinks Coca-Cola 44% (North America)
Mobile Phones Nokia 39%
Databases IBM 36%
Servers IBM 30%
CDs Universal 30% (North America)
Porter’s Five Forces Model
Competitors
Buyers
Suppliers
New Entrants Substitutors
Power Relative to Suppliers
Power Relative to Buyers
Threat of Substitutes
Threat of New Entry
Rivalry
Porter Described Competitive Strategy as Primarily a Function of Industry Sector
“The essence of formulating competive strategy is relating a company to its environment. Although the relevant environment is very broad, encompassing social as well as economic forces, the key aspect of the firm’s environment is the industry or industries in which it competes.”
Competitive Strategy, 1980
Rivalry
Customers
Substitutes
Suppliers
New entrants
• Scale Economies• Patents/Brands• Tariffs/Gov’t
• Price/Performance• Switching Costs• Make or Buy?
• Concentration• Sophistication• Switching Costs• Economies from Integration?
• Concentration• Sophistication• Switching Costs• Economies from Integration?
Your Analysis Tells You If the Industry Is Attractive
Rivalry• Competition• Life Cycle• Exit Barriers• Fixed Costs
Barriers to Entry
High capital costs to enterNo opportunity for small entry
Incumbent economies of scale (large MES)Incumbent economies of scopeIncumbent economies of vertical integration
Incumbent experience/learning advantagesRestricted access to distribution channelsCustomer loyalty to incumbents Restricted access to essential inputsThreat of retaliation by incumbentsExcess capacity
Rising Costs in Semiconductor Chip Production
Arthur Rock, Founding Investor in Intel:
“The cost of capital equipment in semiconductors will double every four years”
The Cost of a Semiconductor Chip Factory
1977 $4 million1985 $30 million1997 $1.5 billion2002 $3-5 billion2007 (forecast) $10 billion
Source: Design News, 2002.
Minimum Efficient Scale (MES)How Many Firms Can the Market Sustain?
Unit Cost
VolumeMES
Total MarketDemand
The Boston Consulting Group’s “Experience Curve”
“Either invest in greater market share or get out.”Bruce Henderson, The Boston Consulting Group
“Total costs per unit of producing a good or service decline by 20% to 30% with every doubling of cumulative units produced”
The Experience Curve in Action
Competitive Rivalry
Low industry growthCommodity products & servicesLow brand loyaltyLow switching costsExcess capacityHigh exit barriers
To What Extent Does the Industry Have?
Changing Share of the “Big Three”American Car Manufacturers
0102030405060708090
100
1910
1913
1929
1947
1954
1971
1983
1988
1992
1995
2001
Power Over Buyers
The Product/Service is Unique The Product/Service is Essential to Buyers Buyers have Few Sources of SupplyBuyers have High Switching CostsBuyers have no Substitutes Available Your Firm can Integrate ForwardYour Firm is Larger than its Customers
To What Extent Is It True That?
Power Over Suppliers
The Supplier’s Input is a CommodityThe Supplier’s Input is Not Crucial to your OutputYou Dominate the Supplier’s SalesThe Supplier has Many CompetitorsThe Supplier has Few Alternative CustomersThe Industry has Low Switching CostsThe Industry has Substitute Products AvailableThe Industry Can Integrate BackwardThe Industry is Larger than it Suppliers
To What Extent Is It True That?
Threat of Substitutes
Alternative Products or Services DeliverComparable Benefits at Lower CostSome Benefits at Significantly Lower Cost
New Technology Can Make the Industry ObsoleteCustomers have Low Switching Costs
To What Extent Is It True That?
Star Plot of Industry Structure Dynamics
Low Rivalry
High EntryBarriers
LowSubstitutability
Low Buyer Power
Low SupplierPower
1. Define the Relevant Market
2. Plot Positions on Each Axis
3. Join Positions into a Web: the Larger the Area, The Greater the Power
• Compare with Other Investment Opportunities
• Alter the Market Structure
• Align Investments
Key Success Factors
Competitive ImperativesTechnological ImperativesFinancial ImperativesMarketing ImperativesOrganizational ImperativesOperational Imperatives
What Are the Requirements for Industry Success?
Global Strategy Consulting IndustryWhat Is Necessary for Success?
Competitive: Innovation, Uniqueness, Reputation
Technological: Leading-Edge Knowledge, Expertise
Financial: Capital, Pricing, Remuneration
Marketing: Products, Propositions, Customer Base
Organizational: Recruiting, Culture, Knowledge
Operational: Client Management, Global Systems
The Value Chain
Understanding the Steps in Production
InfrastructureHuman Res.Res. & Dev.Procurement
InboundLogistics
Operations OutboundLogistics
Marketing& Sales
Service
Total Costs
Margin
Profit
Consider the Pharmaceutical Value Chain
R & DR & D Productmgmt.Productmgmt.
Marketing and SalesMarketing and Sales DistributionDistribution Customer
serviceCustomerservice
For each link in the Value Chain:1. How do we add value?2. What are the x-factors?3. How well do we execute?
For the Value Chain as a Whole:1. What are our distinctive competencies?2. What is our center of gravity?
The Shifting Centre of Gravity:Re
venu
es
Time
Development MaturityExpansion
R & D Marketing Operations
Check the Revenue Along the Value Chain
Check the Profit Along the Value Chain
What is the Centre of Gravity?
Choke Points for Profitability
Profit Pool Analysis
US Auto Industry Profit Pool
100%
Operating Margin
Share of Industry Revenue
Auto Manufacture
New CarDealers
Used CarDealers
Auto Loans
Leasing
Insurance
Service/Repair
PartsRental
Adapted from “How to Map your Industry’s Profit Pool,”Harvard Business Review, 1998
The Personal Computer Industry Profit Pool(Or Why IBM Doesn’t Make PCs)
ProfitMargins
10%
Percentage of Industry Revenue
20%
30%
40%Processors
InternalComponents
Personal Computers
Software
Peripherals
Services
Adapted from Gadiesh & Gilbert, 1998
The Value Net
Organization
Buyers
Suppliers
Competitors Complementors
See Adam Brandenburger and Barry Nalebuff, Co-opetition, 1996
When customers have the complementor’s product, they value your product more(products are complements)
When customers have the competitor’s product, they value your product less(products are substitutes)
Placing the Firm at the CentreMicrosoft X-Box
MicrosoftX-Box
Buyers
Suppliers
Competitors Complementors
Component ProducersEmployees
Wal-Mart (Retailers)Gamers
Sony PlaystationGame Cube
Electronic ArtsBuena Vista
The Power of “Complementors”
An Example:
British Airways and Air France
Compete with each other for landing slots and terminal gates.
Complement each other in defraying Airbus and Boeing’s R&D costs.
Movie Cinemas and Video Rentals
Traditional & Internet Booksellers
The “Paperless” Office
ATM Machines & Banks
Both Competitors & “Complementors”
Source: Brandenburger and Nalebuff, Co-opetition, 1997
Cooperative vs. Competitive Strategy
Every organization is a relationship hub
Complementors may be a market opportunity
Competitors may also be complementors
Managing Interdependencies to create value
It Puts Your Company (not the Industry) at the Centre of the Analysis!
What’s So Different About the Value Net?
Develop Competitive AdvantagesDefine unique cost position, differentiation, market segments Cultivate firm-specific resources & capabilities
Change the Industry StructureManage the Five Forces (raise entry barriers, reduce rivalry, etc)Manage the value chain, profit pools, complementarities
Move into Attractive IndustriesManage corporate growth; the corporate portfolioDiversification strategy; merger & acquisition; synergies
How to Improve Firm Performance
Key Concepts
Industry Structure (Five Forces)
Key Success Factors
Value Chain
Profit Pools
Value Net
Strategy & Change
Christopher McKenna
MBAStrategy: Session Four
Michaelmas 2006
Outline for This Session
Industry Life Cycle
Dominant Design
Macro-Environment (PESTLE)
Strategic Uncertainty
The Poetics of Uncertainty
“As we know, there are known knowns; these also are things we know we know.
We also know there are known unknowns; that is to say, there are some things we know we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.”
Donald Rumsfeld, U.S. Defence Secretary, speaking in 2003, & the Winner of the Plain English Campaign’s “Foot in the Mouth Trophy.”
Industry Sales
Time
Competition:
Key Success Factors:
Introduction Growth Maturity Decline
The Idealised Industry Life Cycle
Grant, Contemporary Strategy Analysis, page 311
Few Entries Consolidation Exits
Design Process Efficiency Commitment
Dominant Design: From Product to Process
Time
Innovation:Number &Importance
Abernathy and Utterback, Harvard Business Review, 1974
Product Innovation: Change in basic configurationof product or service elementsDominant Design: The basic accepted configurationof product or service elements Process Innovation: Change in production or delivery process of product or service
Dominant Design & The Evolving Industry Structure of the Auto Industry
0
50
100
150
200
250
300
1894
1898
1903
1910
1915
1920
1930
Total Firms inthe IndustryEntries PerAnnumExits PerAnnum
Concentration Ratios:1910s (Top 2 Firms): 38%1920s (Top 2 Firms): 60%1930s (Top 3 Firms): 80%
Adapted from Susan Klepper, Rand Journal of Economics, 2002
Do You Want to Be Early or Late?The Early Entrants in Typewriters Survived Longer…
Suarez and Utterback Strategic Management Journal, 1995
0 10 20 30 40 50 600%
20%
40%
60%
80%
100%
Post-Dominant Design
Pre-Dominant Design
Percentage Who Survived
Years
Revolutionaries or Survivors?Survival Functions for Different Types of Change
Competence Enhancing Change: Builds upon or reinforces existing competencies,skills, know-how or infrastructure: For example: Radio to TV
Competence Destroying Change:Makes knowledge obsolete and overturns existing competencies,skills, know-how or infrastructure: Coaches to autos
Survival Function(Log)
Time
Early Entrants with Pre-entry related Experience:Penicillin and TVs
Early Entrants with Pre-entry related Experience:Autos and TyresEarly Entrants without Pre-entry related Experience
Late-Entrants
Adapted from Klepper, Rand Journal of Economics, 2002; Gatignon et al, Management Science, 2000
Strategic Responses to Change
Innovation
Commitment
Stay to the End
Buy theThreat
Spread your Bet
Bet the Company
The Uncertain Future (Or Why Chris McKenna Prefers the Past…)
“Heavier-than-air flying machines are impossible” (Lord Kelvin, Professor of Physics, University of Glasgow, 1895)
“Stocks have reached what looks like a permanently high plateau.” (Irving Fisher, Professor of Economics, Yale University, 1929)
“The concept is interesting and well-formed, but in order to earn better than a ‘C,’ the idea must be feasible.” (Yale Professor in response to Fred Smith's paper proposing Federal Express, 1971)
“People will soon get tired of staring at a plywood box every night” (Darryl F. Zanuck, 20th Century Fox on the TV)
When Is Past History the True Future?
Management Today, January 2000
We tend to ignore history and overestimate the short-term. I call it
micro-myopia. Our hopes and expectations about some new
technology lead us to overestimate its short-term impact on our lives
and, when reality fails to live up to our expectations, our
disappointment leads us to underestimate its long-term implications.
When something doesn’t happen in the immediate way that’s
expected, everyone says it’s never going to happen at all. That’s
the point at which it takes off and blows the door off our houses.
Paul Saffo, Director, Institute for the Future, Palo Alto
The McKinsey & Company Typology of Uncertainty
?
1
2
3
1. “A clear-enough future” 2. “Alternative futures”
3. “A range of futures” 4. “True ambiguity”
No need for scenarios;conventional analysis will do fine
A limited number of scenarios, in which conventional analysis will serve fine
Range of scenarios, testing for robustness
Range of scenarios, for exploring possible futures
The History of Scenario Analysis
Millett, Strategy and Leadership, 2003
Scenario Analysis
Huss, International Journal of Forecasting, 1988
Definition: “A scenario is a narrative description of a consistent set of factors which define in a probabilistic sense alternative sets of future business conditions”
(Huss, 1988)Scenarios Help Where:
Discontinuous Change is ImportantQuantitative Factors are ImportantYou Need a Long-Term PerspectiveThere is High UncertaintyThere are Significant Data Gaps
The Outputs Include:
A Check on StrategyA Means to Improve Managerial Learning
The Scenario Building Process
1. Define the Scope of the Question
2. Identify the Key Drivers Using PESTLE(Pestle: Political, Economic, Social, Technological, Legal and Environmental)
3. Produce the Initial (7-9) Mini-Scenarios
4. Identify Underlying Themes
5. Reduce to 2, 3 or 4 Scenarios (No More!)
6. Identify the Key Strategic Repercussions
Schoemaker, Sloan Management Review, 1995
Pharmaceutical Industry ScenariosScope:
How to build and maintain a leadership position in a high-growth and rapidly changing industry over the next five years; with attention to those who prescribe the drugs, the trade, pharmacies; hospitals, wholesalers and chains, managed health care organizations, competitors, and government regulators
Drivers:Known Drivers: The baby boomer and female population projections, active retirement trends, more knowledgeable consumers; and continued growth in the 85 and older age group.
Uncertain Drivers: Industry consolidation, changes in insured populations, impact of DTC advertising, non-traditional health care, and technological breakthroughs.
Pharmaceutical Scenarios
Societal Health Impact
Exte
rnal
C
ontr
ol
Dangerous Waters
•Little new product•More regulation
Brave New World
•Significant breakthroughs•Strong controls
Rose Garden
•Technical advances•Consumer driven
Low
High
Marginal Breakthrough
Source: Warner-Lambert, Pharmaceutical Executive, April 2000
Japan: Towards 2020
Source: www.nier.co.jp
1. The Long Hollowing:A. Banks rescuedB. Keiretsu relationships protected C. Relocation to devalued Asian economies
2. Crash and Rebirth: A. Bank holiday crisisB. Radical government and financial reformC. Social reform to improve fertility, environment and
education
3. Hercules Departs:A. Americans depart from AsiaB. Trade confrontations with ChinaC. Rise of Nationalism and the revocation of Article 9
Post 9/11 Scenarios
Kennedy et al, Strategy and Leadership, 2003
Let’s Be Clear: “Change” is Not Accelerating…
02468
10121416
1978 84 90 96
The Percentage of US Businesses That Fail Each Year.
McNamara et al, Strategic Management Journal, 2003;McKenna, The World’s Newest Profession, 2006.
“Turbulence turns out to be acondition, not of the outsideenvironment, but of our innerselves. It’s an imagined condition: We glorify ourselvesby describing our own times asTurbulent.”
Henry Mintzberg, Planning Review, 1994
“You have to be bullish about consulting. It thrives on change and this is an era where change is accelerating.” A leading consultant, 1969.
Strategic Uncertainty: What To Do?
Daft et al, Strategic Management Journal, 1988;Friend & Hickling, Planning Under Pressure, 1987.
We Need Clearer
Objectives
We Need Deeper
Investigation
WhatShould WeDo About
Uncertainty?
We Need To Team With
Others
Uncertainties in the
Working Environm
ent
Unce
rtai
ntie
s Abo
ut
Our S
trat
egic
Goa
lsUncertainties About
Related Choices
Studies find that in times of uncertainty, executives turn to insiders to help “scan the environment.”
Perhaps a better way to operate is to classify the nature of the uncertainty.
The Big Picture View, Top Down
Macro-Scenario Analysis
Industry Structures, Life-Cycles& Scenarios
Groups,Pools, & Complements
The Business
Industry Life Cycle
Dominant Design
Macro-Environment (PESTLE)
Strategic Uncertainty
Key Concepts
And When You Don’t Anticipate, In Donald Rumsfeld’s Words:
“Stuff happens.”
(Donald Rumsfeld, on theunanticipated scale of the looting and disorder in Baghdad, April 2003)
Understanding Diversification
Christopher McKenna
MBAStrategy: Session Five
Michaelmas 2005
Key Concepts and Techniques
Hierarchy of Growth
Related Diversification
Portfolio Models
Synergy
Core Competence
Corporate versus Competitive Strategy
Level
Group
Businesses
Functions
Strategy
Corporate
Business
Functional
Types of Strategy
Competitive and Corporate Strategy
Competitive (Business) StrategyHow should a business compete in its industry?
Corporate StrategyWhat businesses should be included in the corporate portfolio?How should these businesses relate to one another?How should these businesses relate to the corporate parent?
The First Definition of “Strategy”
“The determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.”
Alfred Chandler, Strategy and Structure, (MIT Press, 1962), Page 13
The Hierarchy of Growth
Revamp Packaging, Pricing, Promotions
Expand into New Domestic Territories
Develop New, Related Products and Services
Export Current Products Abroad
Acquire a Competitor
Expand Internationally
Acquire in a Related, Growing Industry
Integrate Vertically – Acquire a Supplier or Customer
Acquire in an Unrelated, Growing Industry
Early Strategies
Late Strategies
McKinsey & Co.’s Three Horizons of Growth
Horizon 1: The Current Core Business units that generate today’s performance Products and services now identified with the company name
Horizon 2: Businesses on the Rise Fast-moving, promising new venturesThe emerging stars - need investment
Horizon 3: Seeds for Tomorrow’s BusinessEmbryonic options on the futureProjects, pilots, alliances, minority stakes
Baghai, Coley & White, The Alchemy of Growth, 1999
“Structure Follows Strategy”(Alfred Chandler, 1962)
Thus Diversification Led To Divisionalisation
The Multi-Divisional Corporate Structure Permitted:
1. Decentralised Operations (Either Product or Geography)
2. The Separation of Strategy from Operations in the Business Units
Four Companies (DuPont, GM, Standard Oil, & Sears) adopted the Same Organizational Form during the 1920s because they
Chose to Pursue the Corporate Strategy of Diversification.
This Structure Would Revolutionize Business
What Drove DuPont to Diversify after WWI?
The Black Powder Mill Founded by Eleuthère Irénée du Pont in 1802 on the Brandywine in Delaware.
Although a Monopoly by the late 19th Century, DuPont’s Business was Highly Variable because of Wartime Demand.
In 1912, the U.S. Government Broke DuPont into Three Separate Companies because of Public Hatred of Monopolies.
Following the End of World War I, DuPont had Excess Manufacturing Capacity that was not being Utilized.
Industrial Research into Explosives Led to Patents in InnovativeConsumer Products like Artificial Leather and Varnishes.
The du Pont Family were among the Richest in America in 1919.
Sales Treasury Purchasing Production R&D Engineering
PresidentExecutive Committee
Treasury Auxillary Depts
Explosives Dyestuffs Pyrolin Chems & Paints Fabrikoid
PresidentExecutive Committee
Du Pont’s Functional Structure (1919)
Du Pont’s Divisional Structure (1921)
For these Architects of the Corporation: “Form Followed Function”
Thus the Multidivisional Structure “Follows”From Dupont’s Strategy of Diversification
Divisions(Product/Geographic)
Functions
Functional Structure(report by functionse.g marketing, production)
Divisional Structure(report by businesses)
Functions FunctionsFunctions
The Multidivisional (‘M-Form’) Corporation:Trading Efficiency for Span of Operations
Structure: Advantages: Disadvantages:
Functional: For focused businesses InflexibleFor specialisation of skills NarrowFor control (bureaucratic) Bureaucratic
Divisional: For diversified businesses Low synergy For changing portfolios Top-down For accountability Short-termist
Structural Pros and Cons for the M-Form
Directions in Which to Diversify
Technology
Geography Customer
Diversification Strategy Categories
Single Business: at least 95 per centof turnover in a single business (McDonalds)
Dominant Business: one business at least 70 per cent but less than 95per cent of turnover (BP)
Related Diversified: no business as large as 70 per cent of turnover, but market or technological relationshipsbetween different businesses (Unilever)
Unrelated Diversified (conglomerate): no business as large as 70 per cent of turnover,and no - or limited - market or technological relationships between different businesses (GE).
Diversification Methods:
Internal Growth or Acquisition?
Organic Growth:
Median ROI yrs 3-4: -14%Median ROI yrs 5-6: -8%Median ROI yrs 7-8: +7%
(Biggadike, HBR, 1979)
Acquisition:
“At best, half succeed”(Porter, HBR, 1987)
Diversification Methods: The Pros and Cons
Advantages Disadvantages
Organic:
Incremental learning Adds to industry capacity
Competence enhancing Difficult to recoup failure
Culturally compatible Slow
Acquisition:
Fast Large commitment
Lower rivalry Startup Costs
Upgrading resources Duplication of resources
Michael Porter’s Three “Essential Tests”(For Companies Considering Diversification)
1. The Attractiveness Test: Is the Industry Attractive?
2. The Cost-of-Entry Test: Will You Make Profits?
3. The Better-Off-Test: Will Either Firm Gain?
Put More Simply, What are the Synergies?(and are they practical?)
0102030405060708090
1950 1960 1970 1983 1993
**
*
* *
% of Firms Diversified(Related & Unrelated)
The Diversification of Large Industrial Firms, US and Europe
US
France
GermanyUK
(Domestically-Owned Top 100 Industrial Firms)
Whittington, Mayer, and Curto, 1999, “Chandlerism in Post-War Europe”
Management Consultants
At Work in 1957.
The Bulk of Consultants Work in the 1950s and 1960s
was to Install the Multidivisional
Structure.
Consulting Firms like McKinsey Carried the Structure to Europe
But Which Way Does Causation Run? The 100 Largest Industrial Firms in Britain
0
20
40
60
80
100
1950 1960 1970 1983 1993
%
Sources: Channon, 1973, Strategy and Structure of British Enterprise & Whittington, Mayer, and Curto, 1999, “Chandlerism in Post-War Europe”
Diversified Companies
Multidivisional Companies
The Context for Conglomerates The Geology & Geography of Conglomeration
Definition: Derived from Geology, a Conglomerate is a firm whose growth comes through the acquisition of other firms whose products are largely unrelated.
Origins: Pioneered in American by Royal Little at Textron in the 1950s, Conglomerates quickly became the darlings of stockmarkets in the 1960s before being dismantled in the 1980s.
ExamplesAmerica: GE, ITT, Gulf + Western Europe: Hanson, Virgin, VivendiAsia: Hutchison Whampoa, Hyundai
“Conglomerates are so 1970s. It was thought then that commercial power, brand strength, and management expertise could be leveraged by engaging in several different lines of business, creating a company that was greater than its myriad constituents could be on their own. Now the fashion is to concentrate on core operations, one or a few related activities, and shed the rest. Conglomerates are seen as cumbersome, inefficient, Byzantine corporate structures. Disco may have made a comeback, but based on the opinions of several portfolio managers, retro-chic is unlikely to extend to an appreciation of conglomerates. ‘I never wore flared trousers the first or the second time around, and I have the same attitude on conglomerates,’ says Liam Pagliaro, head of European research for Gartmore.”
The Anglo-American View of Conglomerates
“Conglomerates: Once a Rage, Now a Relic ”International Herald Tribune
From Divisionalized Structure to Conglomeration:The Rise of Business Units Led to a “Lego®” Mentality
With Business Units Functionally Independent, Companies coul Easily Acquire Unrelated Subsidiaries in Order to Expand.
Since the Senior Executives cannot have Technological Expertise in All of the Company’s Lines of Business, Executives Must Judge their Subsidiaries on Abstract Measures like Return on Equity (ROE).
Once Executives View Business Units as easily swapped (like a Lego®), Corporations loose any true coherence (Consider ITT’s ownership of Sheraton, Wonderbread, Avis Car Rental, and Scott Fertilizer during the 1970s).
?Market G
rowth
Market Share HighLow
High
The Infamous BCG Box
But where do Managers Fit in the Box?
McKinsey’s Competitive Response: The GE/McKinsey Matrix
MediumLow High
Medium
Low
High
Business Unit Position
Indu
stry
Att
ract
iven
ess
Does Adding More Factors Improve the Box?
The Good, The Bad, and the Ugly of Portfolio Management
The Good:Gives Executives a Way to Evaluate SBUs Across the OrganizationQuick and EasyHigh Data Compression
The Bad:Ignores Competencies & SynergiesOverly SimplisticOverlooks the Role of Management
& The UglyConglomerates without a Purpose
Synergies (or Economies of Scope)
Potential to Employ Your Assets in Other Markets Synergies can be Found in Assets that are Managerial, Industrial, Marketing, or Brand Related.Too Often Used to Justify Mergers and Conglomerates whether or not such synergies exist...
We can all Identify Economies of Scale, But where are there Economies of Scope?
Horizontal Synergistic Strategies
Business Unit 1
Business Unit 2
Common Buyers
Business Unit 2
Business Unit 3
Common Buyers Common Raw Material Common Components
Common Buyers
Business Unit 3
Business Unit 4
Common Raw Material Common Components
NOTHING SHARED
Common Raw Material Common Components
Three Potential Sources of Synergy in Strategic Business Units
Tangible ResourcesSharing Value Chain ActivitiesExamples include the Sales Force, Technological Patents, and Raw Materials
Intangible ResourcesCommon Know-HowExamples Include Management and Experience
CompetitorsEnemy of My Enemy - ‘Multi-Point Competitors’
Potential Tangible Benefits
Market Interrelationships
Shared Brand Name
Shared Advertising
Cross Selling
Shared Channels
Shared Order Processing
Product Synergies
Shared Purchasing
Shared Systems
Shared Facilities
Shared Support Staff
Shared Product Development
Intangible Synergies
Transfer of Skills Among Activities
But Intangible Synergies are often Difficult...
Know-How Transfer Expensive
Individuals Lack Motivation to Help
Hard to Retain within the Organization
Potential Liabilities in Trying to Find Synergies
Lost Specialization in Product Segments
Coordination Costs Rise
Diffused Responsibility
Synergies are so Problematic that Financial Analysts Frequently Discount Them in Acquisitions…
“A study of diversification trends amongst Fortune 500 companies during the 1980s by Costas Markides found only a small decline in the proportion of conglomerates…
The outlook for the conglomerate in Europe is even rosier. Taking the long-view, my own research suggests there is a powerful post-war trend towards the building of more conglomerates among the top 100 domestically-owned French, German and British industrial companies. In Britain and Germany, at least, the restructuring of the 1980s and the early 1990s made no difference to the trend, so that by 1993 about a quarter of large industrial companies were conglomerates.”
In Contrast: A European View of Conglomerates
“In Praise of the Evergreen Conglomerate”The Financial Times (1 November 1999), By Richard Whittington
How Institutional Context Drives Strategy
Institutional Dimension United States Japan India
Capital Market Equity Focused; Monitoring by Disclosure
Bank Focused; Monitoring by Investments
Underdeveloped; Illiquid Markets and Weak Monitoring
Labour Market Business Schools and Consultants Plentiful
Internal Training the Common Route
Few Business Schools and Little Training
Product Market Reliable Liability Laws; Efficient Dissemination of Information
Reliable Liability Laws; Efficient Dissemination of Information
Limited Enforcement of Laws; Little Dissemination of Information
Government Regulation Low; Free of Corruption
Moderate; Free of Corruption
High; Corruption Common
Contract Enforcement Predictable Predictable Unpredictable
Institutional Outcome Diversification Not Advantageous
Diversification Somewhat Advantageous
Diversification Very Advantageous
Source: Khanna and Palepu, 1997, “Why Focused Strategies May Be Wrong for Emerging Markets,” Harvard Business Review, p. 44.
Consider Virgin’s Synergies (and Context)…
“We are involved in planes, trains, finance, soft drinks, music, mobile phones, holidays, cars, wines, publishing, bridal wear - the lot! What tie all these businesses together are the values of our brand and the attitude of our people. We have created over 200 companies worldwide, employing over 25,000 people. Our total revenues around the world exceed £4 billion (US$7.2 billion).”
www.virgin.com.uk
Defining Core Competences
A ‘core competence’ is:
A bundle of skills and technologiesOf fundamental customer benefitCompetitively uniqueA gateway to new markets
The notion shifts strategy from a battle of market position, towards a mastery of skills and capabilities.
The key question is:
What are you best at?
Identifying Core Competences
1. Map products and services2. Identify underlying
technologies, skills, processes and resources
3. Synthesise common technologies, skills, processes and resources
4. Check that common technologies, skills, processes and resources are extendable
5. Test their value!
Core Competence Leads to New Markets
ReputationReputation
TechnologyTechnology
AssetsAssets
Market PowerMarket Power
CapabilitiesCapabilities
RelationshipsRelationships
CultureCulture HistoryHistory
LocationLocation
Competitive AdvantageAcquisitions
Alliances
Diversification
New Markets
Globalization
Vertical Integration
Product Innovation
Virgin’s Core Competence?(And its Relationship to Conglomeration?)
“We look for opportunities where we can offer something better, fresher and more valuable, and we seize them. We often move into areas where the customer has traditionally received a poor deal, and where the competition is complacent. And with our growing e-commerce activities, we also look to deliver 'old' products and services in new ways. We are pro-active and quick to act, often leaving bigger and more cumbersome organisations in our wake.”
www.virgin.com.uk
Key Concepts
Hierarchy of Growth
Related Diversification
Portfolio Models
Synergy
Core Competence
Global Strategy
Christopher McKenna
MBAStrategy: Session Six
Michaelmas 2006
Key Concepts and Techniques
Modes of International Expansion
Global Products
Diamond of National Advantage
Globalization is Popularly Linked with Multinationals(And Particularly the Dominance of American Culture)
The Growth in International TradeIncome Inequality Across the GlobeThe Power of Business over the StateThe Spread of CapitalismPolicies of Free Trade & LiberalisationFlows of International CapitalHomogeneity of Consumer CultureThe Spread of Multinational Business
“Globalization” Used to Described:
In this Lecture, We are Concerned with the Best Strategies for “Going Global.”
Some Historical Context on Globalisation & the Growth of Multinational Companies
Global Trading: The Great Fortunes from the 18th Century on were all made in global trading & finance.
Homogeneous Tastes: Singer Sewing Machines, Ford Model T’s, and Coca-Cola were all global exports by the 1920s.
Labor Markets: From 1900 to 1910, one million people per year emigrated from Europe to the New World.
Capital Flows: Only in the 1990s, did international capital flows, relative to the size of the international economy, reach the levels they had been prior to 1914.
International Competition: By 1900, Standard Oil controlled 90% of refining capacity in the world. Although it shipped its petrol from New Jersey, Standard battled the Russians for control of the major European markets.
Our Central Concerns for Global Strategy
Why do firms expand internationally?
What are the modes of international entry?
What are the stages of international expansion?
Can products be standardized globally?
What kinds of international structures do firms use?
Do nations have competitive advantages?
The Five Myths of Global Strategy
Distance and National Borders No Longer MatterConsider the World after the 9-11 AttackDeveloping Countries are the Best New MarketsDeveloped Countries remain the largest marketsManufacture Where the Labor is CheapestKnowledge, Infrastructure, and Shipping Costs CrucialGlobalization will Last ForeverThe Global Economy has Contracted BeforeGovernments No Longer MatterRegulations and Nationalisation can Trump the Plans of any Corporation…
Source: Rangan, FT: Mastering Strategy, 2000
The Hierarchy of Growth
Revamp Packaging, Pricing, Promotions
Expand into New Domestic Territories
Develop New, Related Products and Services
Export Current Products Abroad
Acquire a Competitor
Expand Internationally
Acquire in a Related, Growing Industry
Integrate Vertically – Acquire a Supplier or Customer
Acquire in an Unrelated, Growing Industry
Early Strategies
Late Strategies
Why Do Firms Expand Internationally?
ACCESS TO OUTPUT MARKETSSatisfies demands for growthDomestic markets saturated; overseas markets largeScale economies; location or distribution platformsA way to expand without diversifying and still based up the firm’s core competence
ACCESS TO INPUT MARKETSAccess to low-cost labor or materialsAccess to the best knowledge, skills, & workersAccess to technology, best practices, & external capital markets
Do You Really Have a Global Strategy?Hamel & Prahalad
Global Competition Driven By:
Aggressive Competitor uses Cash Flow in Home Market to Attack Foreign Domestic Competitors
The Defensive Competitor then Retaliates in the Foreign Markets where the Aggressor is Most Vulnerable
Distinguish Between:
Global Competition – Cross Subsidizing National Battles
Global Business – Scale Necessitates Overseas Sales
Global Companies – Distribution Systems
Hamel & Prahalad, “Do You Really Have a Global Strategy?”, Harvard Business Review, 1989.
Modes of Market Entry: Transactions or Direct Investment?
Transactions:Export with No Overhead:
Spot Market Long Term Contract
Export with Overhead:Foreign DistributorExport Division
License TechnologyFranchise
Direct Investment:Joint Venture:
Marketing & DistributionFully Integrated
Wholly Owned (Purchase or Greenfield)
Marketing & SalesFully Integrated
Alliance (Not a J.V.)
People often forget that Transactions may offer a Superior Means of Entry.
Moving from Domestic to Global Competition
Stage 1: Domestic CompetitorMore than 80% of sales within home country; limited exports, licensing, outsourcing, franchising: Sainsbury’s
Stage 2: International CompetitorMore than 20% of sales outside the home country; mainly alliances or exports to large markets, some direct investment (FDI): Airbus, Apple
Stage 3: Multinational CompetitorMajority of sales outside of home country; exports, outsourcing, alliances, FDI, host country staffing: KPMG, Coca-Cola
Stage 4: Global CompetitorRevenues globally balanced; significant alliances, FDI, large commitments in host countries: Toyota, Unilever
If You Do Decide to Make a Direct Investment,What is the Best Structure for the Company?
Source: Porter, Competition in Global Industries, 1986
Coordination
Location of Assets
High
Low
Dispersed Concentrated
ComplexGlobal
(‘Transnational’)
SimpleExport
Multi-Domestic
(‘Multinational’)
SimpleGlobal
Margins
Firm Infrastructure
Human resource management
Technology development
Procurement
Inbound logistics
Operations Outbound logistics
Marketing and sales
Service
Margins
The Value Chain and International Strategy
Upstream Activities Downstream Activities
Where the Highest Percentage of the Cost Structure is Downstream, Companies become “Multi-domestic” (or “Multinational”)
Examples Include: Advertising, Retailing, and Packaged Goods
Where the Highest Percentage of the Cost Structure is Upstream, Companies become “Global”
Examples Include: Automobiles, Computer Chips, Aircraft
The Need for Global
Co-Ordination& Integration
The Need for NationalDifferentiation and
Responsiveness
High
LowLow High
The Global vs. Local Balance:Balancing Product Knowledge against Local Service
Global:Scale Economies Co-ordinated MarketingCompetitive Threats
National: Local TastesFreight CostsGovernment Barriers
Regional:Medium Scale EconomiesGlobal/Local Lever
Source: Ghoshal and Bartlett, Managing Across Borders, 1989
Multi-domesticDecentralization
GlobalCoordination
Regional
(Neo), What is the Matrix?
In the 1970s, after McKinsey had installed the Multi-Divisional Structure in every large organization, “the phone stopped ringing.”
The answer, the consultants thought, was a new product – the Matrix Organization –which would balance customer service with product knowledge.
The problem was that the Matrix requires stable markets and multiple layers of management, and the 1970s were a terrible time to install a system that requires costly infrastructure and stable markets.
As a result, very few companies adopted the Matrix and even fewer companies were able to make it work over the long run.
And So We Enter the Matrix…(Using Asea Brown Boveri as an Example)
(Managers) Sweden UK America Canada
Generators
Turbines
Power Lines X
Capacitors
Head of Europe Head of Americas
Head of Power
Generation
Head of Power
Transmission
Regional HeadCEO
Post Script: In the late 1990s, the new CEO of ABB dismantled ABB’s Matrix and centralized control…
The Matrix Reloaded(Using the University of Oxford as an Example)
(Head of House or Chair) Criminal Torts Strategy Finance
St. Cross
Templeton
Brasenose X
Pembroke
Chair of Law The Dean of SBS
Head of Graduate Colleges
Head of Undergrad Colleges
Head of Social Science DivisionVice
Chancellor
In Oxford, the Matrix Balances Specialised Academic Knowledge with Student Attention By Valuing Both.
Investor Multidivisional
Managerial Multidivisional
Network Multidivisional
Emergence: 1920s - 1950s 1960s - 1970s 1980s onwards
Key Resource: Capital Scale & Scope Knowledge
Key Technique: Financial Controls
Planning Exchange
Key Thrust: Control Co-ordination Collaboration
Key Function: Finance Corporate Planning
Human Resources
Shape Pyramid Pear Pancake
Example: Dupont General Electric ABB
The Evolving Multidivisional Firm
Source: Whittington & Meyer, in Strategy Systems, 1997
Multi-Domestic(Countries Self-Contained)European Decentralized
International Organizational Structures
National Subsidiaries
HQ
Simple Global(Global Divisions Dominate)Japanese Centalized Hubs
National Subsidiaries
HQ
Source: Ghoshal and Bartlett, Managing Across Borders, 1989
The Four Ways to Cross Borders
Type Characteristics Example
Multi-domestic Decentralized & Responsive Advertising
Simple Export Knowledge Transfer IBM
Simple Global Centralized Efficiency Coca Cola
Transnational Balancing the Three Toyota
Complex Global StrategyPolycentricInterdependent Co-ordinationCommunications IntensiveKnowledge Leadership‘Clannish’
The Transnational Solution?
Global Business Area(eg. Bowling Balls, Twinkies)
Global Business Leadership
National Subsidiaries
HQ
Source: Bartlett & Ghoshal, Managing Across Borders
(HBS Press, 1989)
Comparative Advantage in Classical Economics
A nation’s relative abundance of resources that enable it to produce a good or service more efficiently than rival nations; endowments of labor, natural resources; “national competitive advantage”
France Climate, location and attractive landscape provide advantages in wine production, tourism and the arts
AustraliaClimate, coastlines, mineral resources and abundant land provide advantages in agriculture, fishing and mining.
Comparative Advantage in Michael Porter’s View
Factor Conditions
Resource endowments, cultivation of resources & continuous innovation: Canadian forestry; Japanese motorcycles
Local Demand Conditions
Discerning local customers + critical mass of local demand: Australian surfboards; Japanese compact appliances
Industry Structure
High domestic rivalry fuels innovation & increased efficiency: South Korea in electronics; USA in entertainment
Related and Supporting Industries
Clusters of interacting producers, suppliers, and customers: French wine; Silicon Valley; Italian footwear
Michael Porter’s National Diamond Framework:The External Structure of International Markets
Factor Conditions
Strategy, Structure, and
Rivalry
DemandConditions
Relating &SupportingIndustries
Porter’s Suggestion for Government Policy
1. Promote Industry Rivalry
Active antitrust regulation; competitive markets
2. Encourage “Clusters of Excellence”
Support natural areas of comparative advantage
Specialize in industries with advantages
3. Support Leading-Edge Technology and Innovation
Access to capital; protect intellectual property
4. Support Industry-Specific Education
Build national skills, research, & capabilities
Focus on industries, not functions
Key Concepts
1. Modes of International Expansion
2. Global Products
3. Diamond of National Advantage
MBAStrategy: Session Seven
Michaelmas 2006
Managing the Multibusiness Company
Christopher McKenna
Hewlett-Packard is king in the land of computer printers, but for years it has eyed the nearby office copier as an enticing market to conquer. Today the company is introducing a line of powerful printers that double as copiers, hoping to capture a sizable slice of the $24-billion- a-year copier market.The move by Hewlett-Packard will bring it increasingly into competition with major copier manufacturers like Xerox, Ricoh, Canon and Minolta as it seeks new ways to expand its printer business. That business is Hewlett-Packard’s financial engine, generating less than one-third of the computer maker’s sales but more than three-fourths of its operating profit.“Hewlett-Packard is definitely coming into the Xerox market,” said Christa Carone, a Xerox company spokeswoman. “But this just validates our strategy.”
“Hewlett Now Wants to Be Your Copier Company, Too”
Steve Lohr, The New York Times, 18 November 2003
Comparing Two Similar Companies Over 30 Years
Patented PhotocopyingInvented the Laser Printer, Networking, and the “Windows”Graphical Environment
Developed Ink-Jet PrintingPromoted the Integration of Imaging and Printing throughDesktop Publishing
At the Xerox PARC R&D Laboratory in Palo Alto, California, by 1975 the Xerox researchers had 150 machines connected by an Ethernet (which they had invented) displaying typeset fonts and sharing common files and printers.
In Research, Xerox Clearly Had the Lead
So It Wasn’t For Lack of Technology…
H-P Looked Like a Pale Copy of Xerox in the 1970s
While Xerox Controlled the Crucial Patents on Photocopies(Literally “To Xerox”);
H-P, which also had Offices in Palo Alto, Produced Electrical Testing Instruments, in an Extremely Competitive Market.
Xerox Controlled the Better Market…
1938: Chester Carlson produces first xerographic image.1959: Launches the first automatic, plain-paper office copier:
This becomes the best-selling industrial product of all time.1970: Xerox opens the Palo Alto Research Center (PARC), the
birthplace of the PC, laser printer, and Ethernet1982: Japanese rivals pioneer low-cost copiers.1983: Xerox purchases Crum & Forster insurance group1995: Xerox introduces digital copiers but ignores PC printers.1998: Sells Crum & Forster at a loss; takes $1 billion write-off.1999: U.S. inkjet printer sales hit $5.2 billion, with 50% controlled
by Hewlett-Packard; Xerox logs a 2% share.2001: Xerox issues a denial that the company is bankrupt.
Xerox’s Shifting Strategy Over Time
Xerox kept Searching for the Next Big Hit…
As Business Week would explain Xerox’s spectacular downfall in 2001:
Xerox Had Destroyed a Monopoly.
Eventually, Hewlett-Packard overtook Xerox
In 1973, an investor could have purchased all of H-P for $2.3 billion, less than 20% of Xerox’s value of $11.9 billion. By 2003, H-P was worth $67 billion, or more than eight times Xerox at $8 billion. Indeed, over that thirty- year period, Xerox lost nearly a third of its nominal value.
Market Capitalization over 30 Years
020406080
100120140160
01/1
1/19
73
01/1
1/19
76
01/1
1/19
79
01/1
1/19
82
01/1
1/19
85
01/1
1/19
88
01/1
1/19
91
01/1
1/19
94
01/1
1/19
97
01/1
1/20
00
Bill
ions
of D
olla
r s
HP Xerox
Or, Why None of Us Owns a Xerox
Key Concepts and Techniques
Dominant Logic
Corporate Parenting
Merger and Acquisition Integration
Levels of Strategy
Corporate LevelPortfolio AnalysisDiversificationPrimary Structure
Operating LevelStrategic Business Units (SBUs)Business Unit Strategy
Intra-Unit LevelFunctional or Departmental PlansProduct Market Plans
CorporateStrategy
CompetitiveStrategy
FunctionalStrategy
Porter Defines Corporate Strategy As
Identifying the Businesses in which the Corporation Should Be Engaged
Deciding How These Businesses Should Be Run
Both Questions are Explicitly about the Problems Inherent in Managing the Multibusiness Company
Porter’s Four Keys to Corporate Strategy
Portfolio Management
Restructuring
Transferring Skills among Strategic Business Units
Sharing Activities
Michael Porter,Harvard Business SchoolIf the Centre Cannot Add Value, then
the Business Units Should Remain Independent of the Centre.
Changing Perspectives on Finding Synergy
Traditional Perspectives:1960s-1970s
Recent Perspectives:1990s-2000s
FinancialSynergiesBCG; PortfoliosCash Flows
Resource SynergiesResources & CapabilitiesCore CompetenceDominant LogicM&A Synergies
Business-UnitSynergiesPorter Sharing ActivitiesTransfer of Skills
The Porter Perspective:
1980s
IndustrySynergiesRichard RumeltRelated Products & Markets
Parenting SynergiesCorporate Advantage
Relatedness versus Core Competence
Relatedness: Product Markets should be Similar
Core Competence: Resources and Capabilities should be Similar
Market A Market B Market C
Strategic Bus. Unit Resources& Capabilities
Strategic Bus. Unit Resources& Capabilities
Strategic Bus. Unit Resources& Capabilities
The Limits to Corporate Diversification
Relatedness ViewLimits to Economic Similarity of Markets
Porter’s ViewLimits to Activity-Sharing & Skill Transfer
Core Competence ViewLimits to Portability of Core Competence
Dominant Logic ViewLimits to Cognitive Capacity of Executives
The Concept of “Dominant Logic”
Dominant LogicEach Industry has a Dominant Logic: “How Things are Done”Determined by Industry History, Market Relationships, Technologies, Regulation, & Production Processes
Cognitive SchemaEvery Manager has a World ViewTheir Schema is Highly Influenced by the Dominant Logic of the Manager’s Original Industry Informed by Education, Training, Experience, Values & Beliefs
Law of Requisite VarietyCognitive Diversity must Match the Wider EnvironmentThe More Dominant Logics, The Greater the Cognitive LoadThe Firm’s Dominant Coalition has a Finite Cognitive Diversity
Potential Business Unit Synergies1. Redundancy: Cost Savings Due to Shared Activities
HP’s Printer & Copier Strategic Business Units can share research and development costs
2. Additivity: Strategic Leverage Due to Greater SizeThe combined Printer and Copier Divisions in HP would have economies of scale in purchasing and manufacturing, greater power over corporate customers, and would be a market share leader in toner consumption.
3. Compatibility: Shared Strategy, Skills, and CultureBoth the Printer and Copier Divisions in HP aspire to growth, market leadership and social relevance in technology; their systems, structures, cultures and values are similar
4. Complementarity: Synergies Arising from DifferencesHP’s Printer Division serves primarily retail customers and does almost no manufacturing while the Copier Division will initially target corporate customers with its own manufactured copiers.
Corporate Synergies
Eliminating overheadInstalling systems, controls, processes & reengineeringImproving product or process technologiesReplacing inexperienced managersRestructuring the businessCorrecting strategic errors: Dealing with overcapacity & underinvestmentFacilitating skill and resource linkages across Strategic Business UnitsProviding expertise, e.g. global expansion, acquisitionExploiting parent relationships, e.g. suppliers, government
Another Way to Visualize the Parent:
The Roles of the Centre
Selecting
Promoting
ResourcingControlling
The Four Functions of the Centre
Selecting
Resourcing
Controlling
Promoting
Portfolio ManagementVertical & Horizontal IntegrationMake or Buy DecisionsGlobal Markets
Capital RequirementsMergers and AcquisitionsCooperation/Joint Ventures
Corporate Culture/PhilosophyOrganizational StructureSystems
Advertising/PR/Corporate Identity
Corporate Parenting Requirements
The Corporate Parent is a Strategic EntityThe Parent Stands between Investors and the Strategic Business Units
The Corporate Parent has Strategic AttributesIt Develops Resources and CapabilitiesCreates Corporate Advantages & Key Success Factors
The Role of the Corporate Parent is to Create ValueIf it Cannot, then it should be disbanded
Value-Creation: Exploiting “Parenting Opportunities”Synergy: When the Strategic Business Unit needs to match corporate advantages
“Multibusiness companies create value by influencing – or parenting – the businesses that they own. The best parent companies create more value than any of their rivals would if they owned the same businesses. Those companies have what we call parenting advantage.”
Campbell, Goold, and Alexander, “The Quest for Parenting Advantage,” Harvard Business Review, 1995.
Defining the “Parenting Advantage”
Four Parenting Strategies
1. Stand-Alone: Parent Sets & Monitors Performance Targets; Hires Key Executives
Potential Problems: misallocations; inexperience
2. Development: Deal-making, Restructuring, Buy and Sell
Potential Problems: No Value-Added; Bad Track Records
3. Linkage: Parent Actively Creates Synergies among SBUs
Potential Problems: Corporate Interference; Synergies Hard to Create
4. Central Services: Corporate IT, HR, PR, R&D, Legal, etc.
Potential Problems: Staff not Attuned to the Strategic Business Units
Thinking Inside the Box:Strategy, Structure, and Style
Goold & Campbell Identified Three ‘Styles’ of Business Among Diversified British Companies:
Strategic Planning (Cadbury, BP)
Strategic Control (ICI, Vickers, Plessey)
Financial Control (Hanson, GEC)
Style and Substance
‘Industrial Groups’ adopt the Strategic Planning Style since they share a common set of core competencies
‘Industrial Holding Companies’ exhibit the Strategic Control Style sharing competencies only within their sub-groups
‘Conglomerates’ turn to the Financial Control Style to manage their disparate businesses.
Strategic Planning
Strategic Control
Financial Control
Organizational Structure
Multiple Perspectives
Separate Responsibilities
Separate Responsibilities
Planning Process
Thorough Review
Thorough Review
Entrepreneurial Response
Central Leadership
Strong Leadership
Divisional Autonomy
Business Autonomy
Objectives Strategic and Financial
Strategic and Financial Financial
Nature of Control Flexible Tight Tight
Tensions Among Styles
Michael Porter’s Three “Essential Tests”(For Companies Considering Acquisitions)
1. The Attractiveness Test: Is the Industry Attractive?
2. The Cost-of-Entry Test: Will You Make Profits?
3. The Better-Off-Test: Will Either Firm Gain?
Put More Simply, What are the Synergies?(and are they practical?)
M&A versus Organic Growth
Why Mergers & Acquisitions? Fast expansion of product line, customers, & geographic marketsAcquire new assets, people, relationships, technologies, & skillsEliminate a competitorPrevent a competitor from making the acquisitionGrowth without expanding industry capacityExisting firms have established track record and risks are knownValue-creation: exploit synergies between acquirer and target
Why Organic Growth?Avoid excessive market premiums for M&AExploit parenting opportunities and core competenceGrowth customized to meet firm’s strategic objectivesGrowth without clash of internal cultures
Finding Success in Mergers & Acquisitions
1. Focus on Complementary SynergiesComplementary synergies are easier to ImplementComplementary synergies induce less employee resistanceLook for complementary markets, resources, capabilities, and finances
2. Synergies are Hard Work to Make WorkThe greater the synergies, the more difficult the task of integrating the companies
3. Synergies are Not EnoughPre- and Post-Merger Integration is the most important factor in the success of Mergers & AcquisitionsManagers need to Implement, not just Identify, SynergiesSuccessful acquirers learn how to integrate companies
Key Concepts
Dominant Logic
Corporate Parenting
Merger and Acquisition Integration
Strategy Process(& the Course Review)
Christopher McKenna
MBAStrategy: Session Eight
Michaelmas 2006
Quote for the Day
Washington, D.C.
29 May 2003
“Oftentimes, we live in a processed world — you know, people focus on the process and not results.”
President George W. Bush (MBA, Harvard, 1975)
Key Concepts & Techniques
Strategic Planning
Emergent Strategy
Logical Incrementalism
Formal Strategic Planning (From Week One)
VisionVision GoalsGoals AnalysisAnalysis DecisionDecision ActionAction
ExternalExternal InternalInternal
SynthesisSynthesis
• Values• Purposes
• Mission• Goals• Objectives
Industry analysisKey success factorsCompetitive positionOpportunities & threats
• Resources and capabilities• Functional area analysis• Financial analysis• Strengths & weaknesses
• Risk Analysis• Negotiation• Strategic
Choice
• Structure• Culture• Processes• Systems• Deployments
Competitive AdvantageStrategic Alternatives
DATADATA
Formulation Implementation
Three Perspectives on Strategy
1. Planning Approach: Tools & Techniques for Managers to Make Decisions about Business Direction. Examples: Portfolio Matrix, Five Forces, & Core Competence.
2. Policy Approach: Organizational Payoffs from Different Strategies. Examples: Diversification, Innovation, M&A, and Internationalisation.
3. Process Approach: Understanding How Organizations First Identify the Need for Change and Then Achieve Change.
Whittington, “Strategy As Practice,” 1996
McKinsey’s 7 Steps to Bullet Proof Problem Solving
Why does the client need us?
What are the key elements of the
problem?
Which elements
come first?
How should we spend our
time?
What am I trying to prove or disprove?What should we do?
Who, what, when, how?
What happens
next?
1. Define the problem 2. Structure the problem
3. Prioritise
4. Issueanalysis
and workplan
5. Analyse6. Synthesise &
recommend7. Communicate
the solution
Problem
Think…
The First Process Question: Causality
Is Strategy First Devised and then Implemented or, as much as we hate to admit it, is Strategy as much a Product of Circumstance, Chance, and Luck, as anything else?
How Much of Your Life has been Planned?
Alfred Chandler (1962):
“… the definition of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.”
Objectives Choice Allocation ImplementationOptions
A Planning View of Strategy-Formation
ImplementationChoiceOptions AllocationObjectives
An Emergent View of Strategy-Formation
Henry Mintzberg:
‘Strategy in general, and realized strategy in particular, will be defined as a pattern in a stream of decisions’
‘[By 1960], the Japanese had developed huge production volumes in their domestic market and volume-related cost reductions had followed. This resulted in a highly competitive cost position which the Japanese used for penetration of world markets with small motor cycles in the early 1960s.
Meanwhile, the primary focus of the British industry was on maintaining short-term profitability. The British found it impossible to match low Japanese price levels on small bikes profitably in the short-term. They therefore responded to the Japanese challenge by withdrawing from the smaller bike segments which were being contested.
Japanese versus British Motorcycles in America
The Story, We Are Told, According to BCG…
“This was the fundamental strategic error. Long-term commercial success in fact depended on achieving sales volumes at least equal to those of the Japanese …. The long-term result of the Japanese industry’s historic focus on market share and volume, often at the expense of profitability, has been …. high and secure profitability.”
The Boston Consulting Group’s Analysis
BCG, Strategy Alternatives for the British Motorcycle Industry, 1975
Honda’s Success - Kihachiro Kawashima’s Story
‘In truth, we had no strategy other than the idea of seeing if we could sell something in the United States. It was a nice frontier, a new challenge, and it fitted the “success at all odds” culture that Mr Honda had cultivated …
Throughout our first eight months, we had not attempted to move the 50cc Supercubs …. They seemed wholly unsuitable for the US market where everything was bigger and more luxurious.
We used the 50ccs ourselves to ride around LA on errands. They attracted a lot of attention. One day we had a call from a Sears buyer… But we still hesitated to push the 50cc bikes out of fear they might damage our image in a heavily macho market. But when the larger bikes started breaking, we had no choice. We let the 50cc bikes move. And surprisingly, the retailers who wanted to sell them weren’t motor cycle dealers, they were sporting goods stores’.
The Case For Formal Strategic Planning
1. Generates InformationIndustry structure, competition, customers, governmentInternal resources, functional area strengths & weaknesses
2. Propels ActionProvides a informed basis for decision-making, resource allocations Strategy gives direction, inspiration, motivation
3. Signals StakeholdersReduces uncertainty for shareholders (and potential shareholders)Can be used to signal customers, suppliers, competitors
4. Educates ManagersTrains rising executives in strategic thinkingAn occasion for improving communication, teamwork, cultural integration
The Case Against Formal Strategic Planning1. Forecasts are Always Wrong
External events, competitive moves, and technologies are not predictableThe greater the uncertainty, the more difficult the forecasting
2. Formal plans are Terrible in Generating ActionPeople are motivated by beliefs, challenges, ideologies, ideas –not by plans Organizational behavior is largely programmed and habitual
3. In Practice, Plans are Seldom ImplementedPlans are often unworkable and unrealistic while execution is poor or incompleteMiddle-management resistance and poor cultural fit
4. Planning is ExpensiveTime-consuming; opportunity costs of meetings, retreats, and reports
5. The Value of Formal Planning Remains UnprovenEmpirical findings vary
Planning versus Emergence
Planning:
Rational preparation and prioritisationPrepared, even for the unexpectedRationalisation, internally and externallyBetter prescription than description?
Emergence:
Ready for actionFlexible and opportunisticRecognises ‘bounded rationality’Better description than prescription?
Processes of Strategy Formulation & Implementation
Filters
Resource Allocation Process
New Products,Processes & Acquisitions
Actual StrategyImplemented
Results
Emergent Strategy
Intended Strategy
Better Understanding
(Feedback Loop)
New
Cri
ses
and
Oppo
rtun
itie
s
(Fee
dbac
k Lo
op)
Three Views of the Strategy Process1. Strategic Planning View (Ansoff)
Formal budgeting and planning cycleFormal external analysis: economic forecasts, and competitive intelligence necessaryFormal internal analysis: Resources, functions, & value chain
2. Emergent Strategy View (Mintzberg)Realized strategies are seldom planned Uncertainty precludes forecasting or predicting competitive moves in the long term.Long-term planning only possible in highly stable environments
3. Logical Incrementalist View (Quinn)Strategic commitments adjust with the forecasting horizonPlanning, but keeping all the available options openFocus on adaptability, flexibility, opportunism, and improvisation
The Second Process Question: Who Strategizes?
Implicit in Strategy since Chandler’s research, and explicit in your coursework, has been a view of Strategy as the function of the CEO.
Can Middle Managers Formulate Strategy ?
If Not, What is Strategy ?
And Who Does It ?
Honda’s middle managers in America pursued a haphazard strategy that was not directly supervised by Japan (and hence “emerged” from the Tokyo executive suite), but was reasonably coherent and rational at the business unit level in Los Angeles (and thus planned by the regional managers).
To What Extent Are We All Strategists?
Nonaka & Takeuchi, The Knowledge Creating Company, 1995
Why Do Middle Managers Filter Strategy through a Resource Allocation Process?
Answer: Their Career Depends on It!
Bower, Managing the Resource Allocation Process, 1986;Burgelman and Sayles, Inside Corporate Innovation, 1986.
Joseph L. Bower,Harvard Business School
1. Definition: Articulating the Idea.
2. Impetus: Is the Idea Worth Support?
3. Structural Context: The Organizational Forces that Influence Definition and Impetus
4. Measurement: Return on Investment
The Strategic Planning Job Market
0
1
2
3
4
5
6
1965
1970
1975
1980
1985
1990
1995
2000
2004
UKFrance
Source: Cailluet, Rose, and Whittington, 2005 (SBS)
Strategic Planning Job Advertisements as a Percentage of All Jobs: France and the UK, 1965-2000/2004
Strategic Planning at EMI as of 1975
“Strategic planning, company investigation and the provision of general information to EMI’s top management…
Help in the construction of long-term Group business plans and will be involved in acquisition appraisals and competitoranalyses…
Numerate and have the ability topresent information clearly and precisely…
Considerable scope for individual initiative and creative thought in a non- routine activity…”
Source: Cailluet, Rose and Whittington, 2005 (SBS)
Strategic Planning at EMI as of 1995
‘Responsibility for the preparation of the four year business plan and budget … Carry out customer, consumer and competitor research; initiate and control a wide range of projects for the business units and the Board..
Analytical, innovative, proactive and with an eye to detail, he/she will be an excellent communicator, able to build relationships and present information at senior levels’
Source: Cailluet, Rose and Whittington, 2005 (SBS)
Strategy as Legal Liability for the Board
Historical D&O Premium Index (1974 = 100)(Based on the Tillinghast Index)
0
200
400
600
800
1000
1200
1400
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
When Is the Strategy Process Simply Legal Cover?
The Third Process Question: How Do We Strategize ?
The Structure of Strategy in General Electric
January: Annual Agenda with 500 ExecutivesMarch: Track Progress, Consult Top 30 ExecutivesApril/May: Visit 3000 ManagersJune: Corporate Executive Council (CEC) MeetingJuly/Aug: Meet with Leaders of Each BusinessSeptember: Quarterly CEC meetingOct/Nov: Meet with Leaders of Each BusinessDec: Quarterly CEC Meeting
In GE, Strategy is Highly Ritualised and Structured.
Elsewhere it is Outsourced…
Strategic Planning at GE in 1978 (Reg Jones)
Corp. Policy Board
DEP
T.
D
IVIS
ION
G
RO
UP
SEC
TOR
EXE
C.
BOAR
D
Reporting – Budgeting –Appraisals
Board of Directors
Division GMs
SVP Planning
CORPORATE LINE STAFF FINANCIAL
Group VPs
Reporting – Budgeting –Appraisals
Channel Type
Org
aniz
atio
nal L
evel
Product GMs
Business Coordination
Functional Mgrs
SVP Finance
Monthly Financial Reviews
SBU Planning
Auditing
CEO
Corp. Exec. Office
Planning Staff
Stra
tegi
c Bu
sine
ss U
nit
Session C
Sector SVPs
Corp. Exec. Council
VP Manpower
Sector Planning
Belleair
Reporting – Budgeting –Appraisals
Planning Staff
Reporting – Budgeting –Planning – Appraisals
Session I & II
Ocasio and Joseph, 2005 (Kellogg)
Strategic Planning at GE in 2000 (Jack Welch)
Ocasio and Joseph, 2005 (Kellogg)
Reporting – Budgeting –Appraisals
DEP
T.
DIV
ISIO
N
BUSIN
ESS
EXEC
.
BO
ARD Board of Directors
Division/ Functional GMs
SVP Bus. Development
CORPORATE LINE STAFF FINANCIAL
Reporting – Budgeting –Planning – Appraisals
Business CEOs
Channel Type
Org
aniz
atio
nal L
evel
Business Coordination
Functional Mgrs
SVP Finance
Monthly Financial Reviews
CEO
Corp. Exec. Office
Corp. Exec. CouncilSession
I
SVP HR
Boca
Session C
Session II Crotonville
Making Strategy Core for Management
Clayton Christensen
Identify the Driving Forces
(Brainstorm through Mapping)
Formulate Strategy to Address the Forces
(Create a Strategy Matrix)
Create a Plan to Implement the Strategy
(Draw on Project Planning)
Christensen, Making Strategy: Learning by Doing, 1997.
Key Concepts
1. Strategic Planning
2. Emergent Strategy
3. Logical Incrementalism
FINAL EXAMINATION
STRATEGY
Tuesday, 13 December, 2005 - 9.30 a.m. - 11.30 a.m.
Case Study: Cirque Du Soleil: Can It Burn Brighter?
1 hour reading time.
During the first hour you may read the case, use pens and make notes of the case.
The questions will be distributed for the second hour of the case.
Students must answer ALL questions.
All questions carry equal marks.
Materials: CalculatorsThe Case Study must not be removed from the Examination Room
Please do not turn over until told that you may do so.
Sample Examination Instructions
All questions carry equal weight
Case Study: Cirque du Soleil: Can It Burn Brighter?
1. Does Cirque du Soleil have a sustainable competitive advantage? If so, what is it? If not, can it create one?
2. What are the growth options available to Cirque du Soleil? What is your assessment of the firm’s diversification strategy?
3. What are the most important strategic issues now facing Cirque du Soleil? What are your strategy recommendations?
Sample Examination Questions
Fair Topics for the Exam
1. All lecture notes
2. Anything discussed in class, and all in-class activities – lectures, discussions, films, games, and experiments
3. All required readings (the supplementary readings are not required but may help)
Course Structure
1. Introduction to Strategy
2. Competitive Advantage
3. Industry Strategy
4. Strategy and Change
5. Diversification
6. Global Strategy
7. Managing the Multibusiness Company
8. Strategy Process
Key Concepts and Techniques
Session 1: Introduction to Strategy Defining strategyVision, mission, goalsStrategy content and process Business and corporate strategyStakeholder view
Session 2: Competitive AdvantageCompetitive positioningResource-based advantageValue innovationX-factors
Key Concepts and Techniques
Session 3: Industry AnalysisIndustry structure (five forces)Key success factorsValue chainProfit poolsValue net
Session 4: Strategy and ChangeMacro-environment (PESTLE)Industry life cycleDominant designStrategic uncertainty
Key Concepts and Techniques
Session 5: DiversificationHierarchy of growthPortfolio modelsSynergyRelated diversificationCore competence
Session 6: Global StrategyModes of international expansionGlobal productsDiamond of national advantage
Key Concepts and Techniques
Session 7: Managing the Multibusiness CompanyDominant logic Corporate parentingMerger & acquisition integration
Session 8: Strategy ProcessStrategic planningEmergent strategyLogical incrementalism
Tips for Doing Well on the Exam
1. Answer the question specifically asked
2. Use theories and frameworks in your answers that come from the readings and lectures, and cite the sources if you can
3. Use facts from the case to support your arguments and avoid just writing you opinion
4. Manage your time and write legibly
