Strategic Management

Strategic Strategic ManagementManagement

BUSINESS the art of making

irrevocable decisions

based on

insufficient knowledge

STRATEGYInsight into

how to

create value

STRATEGIC MANAGEMENT

managerial decisions and actions that determine the long-run performance of a

corporationEmphasizes monitoring and evaluating

environment (external)(external)

Strategy ImplementationStrategy Implementation

Chapter 13Chapter 13StrategicStrategic

EntrepreneurshipEntrepreneurship

Chapter 11Chapter 11OrganizationalOrganizationalStructure and Structure and

ControlsControls

Chapter 10Chapter 10CorporateCorporate

GovernanceGovernance

Chapter 12Chapter 12StrategicStrategic

LeadershipLeadership

Strategy FormulationStrategy Formulation

StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average

ReturnsReturns

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment

Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment

The Strategic The Strategic Management Management ProcessProcess

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Chapter 6Chapter 6Corporate-Corporate-

Level StrategyLevel Strategy

Chapter 9Chapter 9CooperativeCooperative

StrategyStrategy

Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry

and Competitiveand CompetitiveDynamics Dynamics

Chapter 8Chapter 8InternationalInternational

StrategyStrategy

Chapter 4Chapter 4Business-LevelBusiness-Level

StrategyStrategy

Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring

StrategiesStrategies

Sustained Competitive Advantage

Above-Average ReturnsReturns in excess of what an investor expects to earn from other investments with similar risk

Occurs when a firm develops a strategy that competitors are not simultaneously implementing

Provides benefits which current and potential competitors are unable to duplicate

Strategic CompetitivenessAchieved when a firm successfully formulates and implements a value-creating strategy

Important Definitions

ORGANIZATION The Pyramid The Web or Network

FOCUS Internal External

STYLE Structured Flexible

SOURCE OF STRENGHT Stability Change

STRUCTURE Self-sufficiency Interdependencies

RESOUCES Atoms-physical assetsBits-information

OPERATIONS Vertical integration Virtual integration

PRODUCTS Mass production Mass customization

REACH Domestic Global

DATA: BUSINESS WEEK

CHARACTERISTIC 20TH CENTURY 21ST CENTURY

What a Difference a Century Can MakeContrasting views of the corporation:


FININCIALS Quarterly Real time

INVENTORIES Months Hours

STRATEGY Top-down Bottom-up

LEADERSHIP Dogmatic Inspirational

WORKERS Employees Employees/free agents

JOB EXPECTIONS Security Personal growth

MOTIVATION To compete To build

IMPROVEMENTS Incremental Revolutionary

QYALITY Affordable best No compromiseDATA: BUSINESS WEEK

CHARACTERISTIC 20TH CENTURY 21ST CENTURY



The pace of change is relentless....and increasing

The pace of change is relentless....and increasing

Traditional industry boundaries are blurring, such as...

Traditional industry boundaries are blurring, such as...

• Computers• Telecommunications• Computers• Telecommunications

21st Century Competitive 21st Century Competitive LandscapeLandscape

Fundamental nature of competition is changing

•Rapid technological changes

•Rapid technology diffusions

Dramatic changes in information and communication technologies

•Increasing importance of knowledge


Competitive Landscape

Hypercompetitive Hypercompetitive environmentsenvironments

Dynamics of strategic maneuvering among global and innovative combatants

Price-quality positioning, new know-how, first mover

Protect or invade established product or geographic markets




Emergence of global economy

Goods, services, people, skills, and ideas move freely across geographic borders.

Spread of economic innovations around the world.

Political and cultural adjustments are required.




Emergence of global economy

Rapid technological change

Increasing rate of technological change and diffusion

The information age

Increasing knowledge intensity

The Industrial Organization model suggests that above-average returns for any firm are largely determined by characteristics outside the firm.

I/O ModelI/O Model

This model largely focuses on industry structure or attractiveness of the external environment rather than internal characteristics of the firm.

GeneralGeneral

GlobalGlobal

TechnologicalTechnological

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External Environments

Industry Environment

Competitor Environment

I/O Model of Above-Average Returns

1.1. Strategy dictated by the Strategy dictated by the external environments external environments of the firm (what of the firm (what opportunities exist in opportunities exist in these environments?)these environments?)

2.2. Firm develops internal Firm develops internal skills required by skills required by external environment external environment (what can the firm do (what can the firm do about the about the opportunities?)opportunities?)

The Resource-Based model suggests that above-average returns for any firm are largely determined by characteristics inside the firm.

The Resource-Based model suggests that above-average returns for any firm are largely determined by characteristics inside the firm.

This model focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.

This model focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.

Resource-Based ModelResource-Based Model

1.Strategy dictated by 1.Strategy dictated by unique resources and unique resources and capabilities of the firm capabilities of the firm (what can the firm do (what can the firm do best?)best?)

2.Find an environment in 2.Find an environment in which to exploit these which to exploit these assets (where are the assets (where are the best opportunities?)best opportunities?)

Resource-based Model of Above Average Returns

1. Firm’s Resources1. Firm’s Resources

Four Attributes of Resources and Capabilities (Competitive Advantage)

other products can not other products can not accomplish the same functionaccomplish the same function

ValuableValuableallow the firm to exploit allow the firm to exploit opportunities or neutralize threats opportunities or neutralize threats in its external environmentin its external environment

RareRare possessed by few, if any, current possessed by few, if any, current and potential competitorsand potential competitors

Costly to Costly to imitateimitate

when other firms cannot obtain when other firms cannot obtain them or must obtain them at a them or must obtain them at a much higher costmuch higher cost

NonsubstitutableNonsubstitutable Res

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Resources and capabilities that meet these four criteria become a source of:

ValuableValuable

RareRare

Costly to imitateCostly to imitate

NonsubstitutableNonsubstitutable

Core CompetenciesCore Competencies

Res

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Competitive Competitive advantageadvantage

Strategic Strategic competitivenesscompetitiveness

Ability to earn Ability to earn above-average above-average

returnsreturns

Groups who are affected by a Groups who are affected by a firm’s performance and who firm’s performance and who have claims on its wealthhave claims on its wealth

The firm must The firm must maintain performance maintain performance at an adequate level in at an adequate level in order to retain the order to retain the participation of key participation of key stakeholdersstakeholders

The Firm and Its Stakeholders

StakeholdersStakeholders

Capital Market StakeholdersCapital Market Stakeholders


ShareholdersShareholdersMajor suppliers of Major suppliers of capitalcapital

•BanksBanks•Private lendersPrivate lenders•Venture capitalistsVenture capitalists



Product Market StakeholdersProduct Market Stakeholders


Primary customersPrimary customersSuppliersSuppliersHost communitiesHost communitiesUnionsUnions



Product Market StakeholdersProduct Market Stakeholders

Organizational StakeholdersOrganizational Stakeholders


EmployeesEmployeesManagersManagersNonmanagersNonmanagers


Stakeholder InvolvementTwo issues affect the extent of Two issues affect the extent of stakeholder involvement in the firmstakeholder involvement in the firm

How do you divide the How do you divide the returns to keep returns to keep stakeholders involved?stakeholders involved?

11Capital Capital MarketMarket

Product Product MarketMarket

Organ

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Organ

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How do you How do you increase the returns increase the returns so everyone has so everyone has more to share?more to share?

22

Real Issue

Purpose of StrategyPurpose of Strategy

Value CreationOne definitionuse core competence and synergy to provide increased benefits with lower costs paid.

SYNERGY: when organizational parts interact to produce a joint effect that is greater than the sum of its parts acting alone.

CORE COMPETENCE: something the organization does especially well in comparison to its competitors

Purpose of StrategyPurpose of Strategy

STRATEGYSTRATEGYInsight into Insight into

how to how to

create valuecreate value


Environmental AnalysisEnvironmental Analysis

Evaluate Current:•Mission•Goals•Strategies

Scan ExternalEnvironment

Define New:•Mission•Goals

IdentifyStrategicFactors:•Opportunities•Threats

IdentifyStrategicFactors:•Strengths•Weaknesses

Scan InternalEnvironment

FormulateStrategy:•Corporate•Business

ImplementStrategy viaChanges in:•Leadership•Culture•Human Resources•Information and Control Systems


Strategic Management Process

How are they doing?Are they reflective?Are they aspirational?Are they relevant?


•Scan External•Environment

External Environmental Analysis

A continuous process which includesA continuous process which includes Scanning: Identifying early signals of environmental

changes and trends Monitoring: Detecting meaning through ongoing observations

of environmental changes and trends Forecasting: Developing projections of anticipated outcomes

based on monitored changes and trends Assessing: Determining the timing and importance of

environmental changes and trends for firms’ strategies and their management

GlobalGlobal


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The External EnvironmentGeneralGeneral

GlobalGlobal


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The External Environment

The layer of The layer of the external the external environment environment that affects that affects the the organization organization

indirectlyindirectly..

GeneralGeneral

General Environment

Sociocultural segmentSociocultural segment Women in the workplaceWomen in the workplace Workforce diversityWorkforce diversity Attitudes about quality of worklifeAttitudes about quality of worklife Concerns about environmentConcerns about environment Shifts in work and career preferencesShifts in work and career preferences Shifts in product and service preferencesShifts in product and service preferences

Economic segmentEconomic segment

General Environment

Inflation ratesInflation rates Interest ratesInterest rates Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses Personal savings ratePersonal savings rate Business savings ratesBusiness savings rates Gross domestic productGross domestic product

General Environment

Political/Legal SegmentPolitical/Legal Segment

Antitrust lawsAntitrust laws Taxation lawsTaxation laws Deregulation philosophiesDeregulation philosophies Labor training lawsLabor training laws Educational philosophies and policiesEducational philosophies and policies

General Environment Technological SegmentTechnological Segment

Product innovationsProduct innovations Applications of knowledgeApplications of knowledge Focus of private and government-supported Focus of private and government-supported

R&D expendituresR&D expenditures New communication technologiesNew communication technologies

General Environment

Global SegmentGlobal Segment Important political eventsImportant political events Critical global marketsCritical global markets Newly industrialize countriesNewly industrialize countries Different cultural and institutional attributesDifferent cultural and institutional attributes

General Environment Demographic SegmentDemographic Segment

Population sizePopulation size Age structureAge structure Geographic Geographic

distributiondistribution Ethnic mixEthnic mix Income distributionIncome distribution

GlobalGlobal


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GlobalGlobal


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Industry Environment



The layer of The layer of the external the external environment environment that affects that affects the the organization organization

directly.directly.

Industry Environment A set of factors that directly influences a A set of factors that directly influences a

company and its competitive actions and company and its competitive actions and responses.responses.

Interaction among these factors Interaction among these factors determine an industry’s profit potential.determine an industry’s profit potential.

Five Forces Model of CompetitionThreat of New Entrants

Threat of New Entrants

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Bargaining Power of Bargaining Power of BuyersBuyers

Threat of Substitute

Threat of Substitute

Products

Products

Rivalry A

mong

Rivalry A

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Competing Firm

s

Competing Firm

s

Five Forces ofFive Forces ofCompetitionCompetition

Threat of New Entrants

Barriers to entryBarriers to entry Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Switching costsSwitching costs Access to distribution channelsAccess to distribution channels Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy Expected retaliationExpected retaliation

Bargaining Power of Suppliers

A supplier group is powerful when:A supplier group is powerful when: it is dominated by a few large companiesit is dominated by a few large companies satisfactory substitute products are not available to satisfactory substitute products are not available to

industry firmsindustry firms industry firms are not a significant customer for the industry firms are not a significant customer for the

supplier groupsupplier group suppliers’ goods are critical to buyers’ marketplace suppliers’ goods are critical to buyers’ marketplace

successsuccess effectiveness of suppliers’ products has created high effectiveness of suppliers’ products has created high

switching costsswitching costs suppliers are a credible threat to integrate forward into the suppliers are a credible threat to integrate forward into the

buyers’ industrybuyers’ industry

Bargaining Power of Buyers

Buyers (customers) are powerful when:Buyers (customers) are powerful when: they purchase a large portion of an industry’s total outputthey purchase a large portion of an industry’s total output the sales of the product being purchased account for a the sales of the product being purchased account for a

significant portion of the seller’s annual revenuessignificant portion of the seller’s annual revenues they could easily switch to another productthey could easily switch to another product the industry’s products are undifferentiated or the industry’s products are undifferentiated or

standardized, and buyers pose a credible threat if they standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industrywere to integrate backward into the seller’s industry

Threat of Substitute Products

Product substitutes are strong threat when:Product substitutes are strong threat when: customers face few switching costscustomers face few switching costs substitute product’s price is lowersubstitute product’s price is lower substitute product’s quality and performance capabilities substitute product’s quality and performance capabilities

are equal to or greater than those of the competing productare equal to or greater than those of the competing product

Intensity of Rivalry

Intensity of rivalry is stronger when competitors:Intensity of rivalry is stronger when competitors:

are numerous or equally balancedare numerous or equally balanced experience slow industry growthexperience slow industry growth have high fixed costs or high storage costshave high fixed costs or high storage costs lack differentiation or low switching costslack differentiation or low switching costs experience high strategic stakesexperience high strategic stakes have high exit barriershave high exit barriers

High Exit Barriers

Common exit barriers include:Common exit barriers include: specialized assets (assets with values linked to a specialized assets (assets with values linked to a

particular business or location)particular business or location) fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual strategic interrelationships (relationships of mutual

dependence between one business and other parts of a dependence between one business and other parts of a company’s operation, such as shared facilities and access company’s operation, such as shared facilities and access to financial markets)to financial markets)

emotional barriers (career concerns, loyalty to employees, emotional barriers (career concerns, loyalty to employees, etc.)etc.)

government and social restrictionsgovernment and social restrictions

Societal ForcesTask

Elements

Economics123

Technological123

Political-Legal123

Sociocultural123

Communities

Competitors

Cre ditors

Customers

Employees/Unions

Governments

Special-interest groups

Shareholders

Su ppliers

Tra de associations

TREND ANALYSISENVIORNMENTAL ANALYSIS


Competitor intelligenceCompetitor intelligence is the ethical is the ethical gathering of needed information and data gathering of needed information and data about competitors’ objectives, strategies, about competitors’ objectives, strategies, assumptions, and capabilitiesassumptions, and capabilities

what drives the competitor as shown by its what drives the competitor as shown by its future future objectivesobjectives

what the competitor is doing and can do as revealed what the competitor is doing and can do as revealed by its by its current strategycurrent strategy

What the competitor believes about itself and the What the competitor believes about itself and the industry, as shown by its industry, as shown by its assumptionsassumptions

What the the competitor may be able to do, as What the the competitor may be able to do, as shown by its shown by its capabilitiescapabilities

STRATEGYSTRATEGYInsight into Insight into

how to how to

create valuecreate value



IdentifyStrategicFactors:


Internal Analyses

By studying the By studying the internal environment, internal environment, firms identify what firms identify what they they can docan do

Unique resources, Unique resources, capabilities, and capabilities, and core competenciescore competencies

(sustainable (sustainable competitive competitive advantage)advantage)

How do we assemble How do we assemble bundlesbundles of of resources, capabilities and core resources, capabilities and core competencies to competencies to create valuecreate value for for customers?customers?

How do we effectively manage current How do we effectively manage current core competencies while simultaneously core competencies while simultaneously developing new ones?developing new ones?

How do we learn to How do we learn to change rapidlychange rapidly??

Key Questions for Managersin Internal Analysis

Key Questions for Managersin Internal Analysis

Components ofInternal Analysis

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources• TangibleTangible• IntangibleIntangible

CapabilitiesCapabilities

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

StrategicStrategicCompetitivenessCompetitiveness

Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages

• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable

ValueValueChainChain

AnalysisAnalysis

• OutsourceOutsource


ResourcesResources• TangibleTangible• IntangibleIntangible

Resources are what a Resources are what a firm has to work firm has to work with--its assets--with--its assets--including its people including its people and the value of its and the value of its brand namebrand name

Resources represent inputs Resources represent inputs into a firm’s production into a firm’s production process... such as capital process... such as capital equipment, skills of equipment, skills of employees, brand names, employees, brand names, finances and talented finances and talented managersmanagers

Tangible Tangible ResourcesResources

• FinancialFinancial• PhysicalPhysical• Human resourcesHuman resources• OrganizationalOrganizational

Intangible Intangible ResourcesResources

• TechnologicalTechnological• InnovationInnovation• ReputationReputation


CapabilitiesCapabilities

Capabilities become important when they are Capabilities become important when they are combined in unique combinations which create combined in unique combinations which create core competencies which have strategic value core competencies which have strategic value and can lead to competitive advantageand can lead to competitive advantage

Capabilities are what a firm does, and represent Capabilities are what a firm does, and represent the firm’s capacity or ability to integrate the firm’s capacity or ability to integrate individual firm resources to achieve a desired individual firm resources to achieve a desired objectiveobjective


CoreCoreCompetenciesCompetencies

Core competencies are resources and capabilities Core competencies are resources and capabilities that serve as a source of competitive advantage that serve as a source of competitive advantage over rivalsover rivals

Core competencies distinguish a company Core competencies distinguish a company competitively and make it distinctivecompetitively and make it distinctive

McKinsey and Co. recommends using three to four McKinsey and Co. recommends using three to four competencies when framing strategic actionscompetencies when framing strategic actions

Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages

• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable


Valuable: Capabilities Valuable: Capabilities that help a firm that help a firm neutralize threats or neutralize threats or exploit opportunitiesexploit opportunities

Rare: Capabilities that Rare: Capabilities that are not possessed by are not possessed by many othersmany others

Costly to imitate: other Costly to imitate: other firms cannot develop firms cannot develop easily, easily,

• Unique historical Unique historical conditionsconditions

• Causal ambiguityCausal ambiguity• Social complexitySocial complexity

Nonsubstitutable: Nonsubstitutable: • Invisible to competitorsInvisible to competitors• Firm specific knowledgeFirm specific knowledge• Trust-based working Trust-based working

relationshipsrelationships

SupportActivities

Primary Activities

Value Chain AnalysisValue Chain AnalysisIdentifying Resources and Capabilities That Can Add Value

SupportActivities

Primary Activities

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Technological DevelopmentTechnological Development


SupportActivities

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Human Resource ManagementHuman Resource Management


SupportActivities

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Firm InfrastructureFirm Infrastructure


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Inbound Inbound LogisticsLogistics

OperationsOperationsOutboundOutboundLogisticsLogistics

ServiceService

Marketing Marketing & Sales& Sales




MARGIN

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Firms often purchase a portionportion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlymore efficiently

OutsourcingOutsourcingStrategic Choice to Purchase Some Activities From Outside Suppliers

Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders

Never take for granted that core competencies will continue to provide a source of competitive advantageNever take for granted that core competencies will continue to provide a source of competitive advantage

All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats



IdentifyStrategicFactors:•OpportunitiesOpportunities•ThreatsThreats

IdentifyStrategicFactors:•StrengthsStrengths•WeaknessesWeaknesses


SWOT SWOT AnalysisAnalysis

General & TaskEnvironment

InternalEnvironment

SWOT ANALYSISSTRENGTHS

WEAKNESSES

are within the organization itself and not usually within the short run control of management


WEAKNESSES

OPPROTUNITIES

THREATS


are outside the organization, general factors and trends in the societal environmental and specific factors in the task/industry environment


WEAKNESSES

OPPROTUNITIES

THREATS


are outside the organization, general factors and trends in the societal environmental and specific factors in the task/industry environment

4-6 of each4-6 of each

Remember, Opportunities are presented by the External Environment, not company actions


Strategy FormulationStrategy Formulation

CorporateCorporateBusinessBusiness


Scan ExternalEnvironment

Refine New:•Mission•Goals

IdentifyStrategicFactors:•Opportunities•Threats

IdentifyStrategicFactors:•Strengths•Weaknesses


FormulateStrategy:•Corporate•Business

Strategy Formulation

The process of developing long-range plans to deal effectively with environmental opportunities and threats in light of corporate strengths and weaknesses

Composed of Mission Objectives Strategic Plan Policies

Mission

The purpose or reason for the corporation’s existence. It may be narrow or broad in scope.

Narrow Broad

Railroad Transportation

Insurance Financial Services

Objectives

The end results of planned activity. They state WHAT is to be accomplished by WHEN. They should be quantified, if possible.

Two Levels of Strategy

2. Business-Level Strategy2. Business-Level Strategy (Competitive Strategy)(Competitive Strategy)

How to create competitive advantage in each How to create competitive advantage in each business in which the company competesbusiness in which the company competes

Emphasizes improving the competitive position of a corporation’s products or units

1. Corporate-Level Strategy1. Corporate-Level Strategy (Company-wide Strategy)(Company-wide Strategy)

How to create value for the corporation as a wholeHow to create value for the corporation as a wholeCorporation’s overall direction and the management of its businesses

Formulating Corporate Formulating Corporate StrategyStrategy

What Business ShouldWhat Business ShouldWe Be In?We Be In?

GENERIC CORPORATE STRATEGIES

GROWTH

STABILITY

RETRENCHMENT


GROWTH

Vertical Integration

Horizontal Integration

Concentric (Related) Diversification

Conglomerate (Unrelated) Diversification

Up & down the value change

Up & down the value change

Backward - Forward

Backward - Forward

Increasing Increasing Geographic locationsGeographic locations

Range of productsRange of products

Similar industriesSimilar industries

Adding Value by Diversification

Diversification most effectively adds value by either Diversification most effectively adds value by either of two mechanisms:of two mechanisms:

– Economies of scope:Economies of scope: cost savings attributed to cost savings attributed to transferring the capabilities and competencies developed transferring the capabilities and competencies developed in one business to a new businessin one business to a new business

– Market power:Market power: when a firm is able to sell its products when a firm is able to sell its products above the existing competitive level or reduce the costs of above the existing competitive level or reduce the costs of its primary and support activities below the competitive its primary and support activities below the competitive level, or bothlevel, or both


STABILITYPause/ Proceed with CautionNo Change

RETRENCHMENTTurnaroundDivestmentLiquidation

MODELS OF CORPORATE STRATEGIES Business Strengths/Competitive Position

Strong Average Weak

Attractiveness

High

Med

Low

1 Growth

Concentric via Vertical Integration

2 Growth

Concentration via Horizontal Integration

3 Retrenchment

Turnaround

4 Stability

Pause or Proceed with caution

5 GrowthConcentration viaHorizontal Integration-------------------------- Stability No Change or Profit Strategy

6 Retrenchment Captive Company or Selling out

7 Growth

Concentric Diversification

8 Growth

Conglomeration Diversification

9 Retrenchment

Bankruptcy or Liquidation

MODELS OF CORPORATE STRATEGIES Business Strengths/Competitive Position

Strong Average Weak

Attractiveness

High

Med

Low

1 Growth

Concentric via Vertical Integration

2 Growth

Concentration via Horizontal Integration

3 Retrenchment

Turnaround

4 Stability

Pause or Proceed with caution

5 GrowthConcentration viaHorizontal Integration-------------------------- Stability No Change or Profit Strategy

6 Retrenchment Captive Company or Selling out

7 Growth

Concentric Diversification

8 Growth

Conglomeration Diversification

9 Retrenchment

Bankruptcy or LiquidationXX

XX

Formulating Formulating Business StrategyBusiness Strategy

How will weHow will wecompete?compete?

Business-Level Strategy

An integrated and coordinated set of commitments An integrated and coordinated set of commitments and actions the firm uses to gain a competitive and actions the firm uses to gain a competitive advantage by exploiting core competencies in advantage by exploiting core competencies in specific product marketsspecific product markets

External EnvironmentExternal EnvironmentWhat the Firm Might DoWhat the Firm Might Do

Internal EnvironmentInternal EnvironmentWhat the Firm Can DoWhat the Firm Can Do

SustainableSustainableCompetitiveCompetitiveAdvantageAdvantageMatching Opportunitie

s to Strengths

The Central Role of Customers

In selecting a business-level In selecting a business-level strategy, the firm determinesstrategy, the firm determines whowho it will serve it will servewhawhatt needs those target customers needs those target customers

have that it will satisfyhave that it will satisfy

howhow those needs will be satisfied those needs will be satisfied

Types of Business-Level Strategies

Business-level strategies are intended to Business-level strategies are intended to create differences between the firm’s create differences between the firm’s position relative to those of its rivalsposition relative to those of its rivals

To position itself, the firm must decide To position itself, the firm must decide whether it intends to perform activities whether it intends to perform activities differently or to perform different activities differently or to perform different activities as compared to its rivalsas compared to its rivals

Competitive Strategies

Differentiation

Cost Leadership

Focus

Unique/differentComponents of

value chain

Competitive/market segment

Cost Leadership Strategy

An integrated set of actions designed to An integrated set of actions designed to produce or deliver goods or services at the produce or deliver goods or services at the lowest cost, relative to competitorslowest cost, relative to competitors with with features that are acceptable to customersfeatures that are acceptable to customers

– relatively standardized productsrelatively standardized products– features acceptable to many customersfeatures acceptable to many customers– lowest competitive pricelowest competitive price

Product features Performance Mix & variety of

products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training,

motivation

Factors That Drive Costs

Economies of scale Asset utilization Capacity utilization

pattern• Seasonal, cyclical

Interrelationships Order processing

and distribution Value chain linkages

• Advertising & sales• Logistics &

operations

Major Risks of Cost Leadership Strategy Dramatic technological change could Dramatic technological change could

take away your cost advantagetake away your cost advantage Competitors may learn how to imitate Competitors may learn how to imitate

value chainvalue chain Focus on efficiency could cause cost Focus on efficiency could cause cost

leader to overlook changes in customer leader to overlook changes in customer preferencespreferences

Differentiation Strategy

An integrated set of actions designed by a firm to An integrated set of actions designed by a firm to produce or deliver goods or services (at an produce or deliver goods or services (at an acceptable cost) that acceptable cost) that customers perceive as being customers perceive as being different in ways that are important to themdifferent in ways that are important to them

– price for product can exceed what the firm’s target price for product can exceed what the firm’s target customers are willing to paycustomers are willing to pay

– nonstandardized productsnonstandardized products– customers value differentiated features more than customers value differentiated features more than

they value low costthey value low cost

Major Risks of Differentiation Strategy Customers may decide that the price Customers may decide that the price

differential between the differentiated differential between the differentiated product and the cost leader’s product product and the cost leader’s product is too largeis too large

Means of differentiation may cease to Means of differentiation may cease to provide value for which customers provide value for which customers are willing to payare willing to pay

Major Risks of Differentiation Strategy Experience may narrow customer’s Experience may narrow customer’s

perceptions of the value of perceptions of the value of differentiated features of the firm’s differentiated features of the firm’s productsproducts

Makers of counterfeit goods may Makers of counterfeit goods may attempt to replicate differentiated attempt to replicate differentiated features of the firm’s productsfeatures of the firm’s products

Focused Business-Level Strategies

A focus strategy must exploit a narrow A focus strategy must exploit a narrow target’s differences from the balance of the target’s differences from the balance of the industry by:industry by:– isolating a particular buyer groupisolating a particular buyer group– isolating a unique segment of a product lineisolating a unique segment of a product line– concentrating on a particular geographic concentrating on a particular geographic

marketmarket– finding their “niche”finding their “niche”

Factors That May Drive Focused Strategies Large firms may overlook small nichesLarge firms may overlook small niches Firm may lack resources to compete in the broader Firm may lack resources to compete in the broader

marketmarket May be able to serve a narrow market segment more May be able to serve a narrow market segment more

effectively than can larger industry-wide effectively than can larger industry-wide competitorscompetitors

Focus may allow the firm to direct resources to Focus may allow the firm to direct resources to certain value chain activities to build competitive certain value chain activities to build competitive advantageadvantage

Market Segmentation: Consumer Markets

Demographic factorsDemographic factors

ConsumerConsumerMarketsMarkets

Socioeconomic factorsSocioeconomic factors

Geographic factorsGeographic factors

Psychological factorsPsychological factors

Consumption patternsConsumption patterns

Perceptual factorsPerceptual factors

Dem.

Soc.

Geo.Psy.

Con.

Per.

Market Segmentation: Industrial Markets

IndustrialIndustrialMarketsMarkets

End-use segmentsEnd-use segments

Product segmentsProduct segments

Geographic segmentsGeographic segments

Common buying factor Common buying factor segmentssegments

Customer size segmentsCustomer size segments

End

Pro.

Geo.

Buy.

Size

Major Risks of Focused Strategies

Firm may be “outfocused” by Firm may be “outfocused” by competitorscompetitors

Large competitor may set its sights on Large competitor may set its sights on your niche marketyour niche market

Preferences of niche market may Preferences of niche market may change to match those of broad marketchange to match those of broad market

Advantages of Integrated Strategy

A firm that successfully uses an A firm that successfully uses an integrated cost leadership/differentiation integrated cost leadership/differentiation strategy should be in a better position to:strategy should be in a better position to:– adapt quickly to environmental changesadapt quickly to environmental changes– learn new skills and technologies more learn new skills and technologies more

quicklyquickly– effectively leverage its core competencies effectively leverage its core competencies

while competing against its rivalswhile competing against its rivals

Benefits of Integrated Strategy

Successful firms using this strategy Successful firms using this strategy have above-average returnshave above-average returns

Firm offers two types of values to Firm offers two types of values to customerscustomers– some differentiated features (but less some differentiated features (but less

than a true differentiated firm)than a true differentiated firm)– relatively low cost (but now as low relatively low cost (but now as low

as the cost leader’s price)as the cost leader’s price)

Major Risks of Integrated Strategy

An integrated cost/differentiation business An integrated cost/differentiation business level strategy often involves compromises level strategy often involves compromises (neither the lowest cost nor the most (neither the lowest cost nor the most differentiated firm)differentiated firm)

The firm may become “stuck in the middle” The firm may become “stuck in the middle” lacking the strong commitment and expertise lacking the strong commitment and expertise that accompanies firms following either a that accompanies firms following either a cost leadership or a differentiated strategycost leadership or a differentiated strategy

Five Generic StrategiesCompetitive AdvantageCompetitive Advantage

Co

mp

etit

ive

Sco

pe

Co

mp

etit

ive

Sco

pe

CostCost UniquenessUniqueness

Bro

ad

Bro

ad

targ

etta

rget

Nar

row

N

arro

w

targ

etta

rget

Cost Cost LeadershipLeadership

DifferentiationDifferentiation

Focused Focused Cost Cost LeadershipLeadership

Focused Focused DifferentiationDifferentiation

Integrated CostIntegrated CostLeadership/Leadership/

DifferentiationDifferentiation

Think Strategically

how to how to create valuecreate value


Corporate GovernanceCorporate Governance

Separation of Ownership and Managerial Control Basis of the modern corporationBasis of the modern corporation

– shareholders reduce risk by holding diversified shareholders reduce risk by holding diversified portfoliosportfolios

– shareholders purchase stock, becoming shareholders purchase stock, becoming residual residual claimantsclaimants

– professional managers are contracted to provide professional managers are contracted to provide decision-makingdecision-making

Modern public corporation form leads to efficient Modern public corporation form leads to efficient specialization of tasksspecialization of tasks– risk bearing by shareholdersrisk bearing by shareholders– strategy development and decision-making by strategy development and decision-making by

managersmanagers

Corporate Governance

Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.


•Own company

•Elect Board of Directors

•Received residual profits

Shareholders

Technically

Technically

Corporate Governance•Setting corporate strategy, overall direction, mission or vision

•Hiring and firing the CEO and top management

•Controlling, monitoring, or supervising top management

•Reviewing and approving the use of resources

•Caring for shareholder interests

Board of Directors


•Management OrganizationPlanningLeadingOrganizingControlling

CEO

Organization of the Board

Size– Determined by charter and bylaws– Average for publicly-held, large

firm is 11 directors– Average for small/medium private

firms is 7 to 8 directors

Board of Directors

Board of Directors

Nominations & Elections

Traditional Approach:– CEO invites members to serve – Shareholders approve in annual

proxy statement – All nominees are usually elected

(Survey, 1999)

75% of boards have at least 1 female director

25% of boards have two female directors 60% of boards have at least one minority

member

Board of Directors

Members:Inside directors

– “Management directors”– Officers or executives employed by

corporation

Outside directors– “Non-management directors”– May be executives of other firms but not

employed by board’s corporation

Board of Directors

Board of Directors

“Outsider” overly simplistic term --

Some outsiders are not truly objective and could be considered insiders.

Examples: Affiliated Directors Retired Directors Family Directors

• Firm ownersFirm owners

Agency Relationship: Owners and Managers

ShareholdersShareholders(Principals)(Principals)

• Decision makersDecision makers


ManagersManagers(Agents)(Agents)



• Risk bearing specialist (principal) Risk bearing specialist (principal) pays compensation topays compensation to

• A managerial decision-making A managerial decision-making specialist (agent)specialist (agent)


An AgencyAn AgencyRelationshipsRelationships

ManagersManagers(Agents)(Agents)


• Decision makersDecision makers


Agency Theory Problem The agency problem occurs when:The agency problem occurs when:

– the desires or goals of the principal and agent the desires or goals of the principal and agent conflict and it is difficult or expensive for the conflict and it is difficult or expensive for the principal to verify that the agent has behaved principal to verify that the agent has behaved appropriatelyappropriately

Solution:Solution:– principals engage in incentive-based principals engage in incentive-based

performance contractsperformance contracts– monitoring mechanisms such as the board of monitoring mechanisms such as the board of

directorsdirectors– enforcement mechanisms such as the managerial enforcement mechanisms such as the managerial

labor market to mitigate the agency problemlabor market to mitigate the agency problem

Stewardship Theory

Executives tend to be more motivated to act in the best interest of the corporation than their own self-interests.

Theory argues that over time, senior executives tend to view the corporation as an extension of themselves.

Codetermination– The inclusion of a corporation’s

workers on its board of directors.

Board of Directors

Interlocking Directorates

Direct Interlocking Directorate –– When two firms share a director or when

an executive of one firm sits on the board of a second firm.

Indirect Interlocking Directorate –– When two corporations have directors

who also serve on the board of a third firm.

Board of Directors

Board of Directors

No consistent link between board membership, leadership, structure, and financial performance of firm

Investors pay more for a firm’s stock when positive toward good corporate governance—

Belief that• Good governance leads to better performance

over time• Reduces risk of company finding itself in trouble• Governance is a major strategic issue

Governance Mechanisms

OwnershipOwnershipConcentrationConcentration

• Large block shareholders have a strong incentive to monitor management closely

• Their large stakes make it worth their while to spend time, effort and expense to monitor closely

• They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)


Boards ofBoards ofDirectorsDirectors

Recommendations for more effective Board Governance:

• Increase diversity of board members’ backgrounds

• Strengthen internal management and accounting control systems

• Establish formal processes for evaluation of the board’s performance




ExecutiveExecutiveCompensationCompensation

• Salary, bonuses, long term incentive compensation

• Executive decisions are complex and non-routine

• Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes





• Stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their control

• Incentive systems do not guarantee that managers make the “right” decisions, but do increase the likelihood that managers will do the things for which they are rewarded





Market forMarket forCorporate ControlCorporate Control

• Firms face the risk of takeover when they are operated inefficiently

• Many firms begin to operate more efficiently as a result of the “threat” of takeover, even though the actual incidence of hostile takeovers is relatively small

• Changes in regulations have made hostile takeovers difficult

• Acts as an important source of discipline over managerial incompetence and waste


Board of DirectorsTrends in Corporate Governance

Boards more involved in reviewing, evaluating, and shaping strategy

Institutional investors active on boards; pressure on CEO for firm performance

Shareholders demand directors own more than token amounts of the firm’s stock

Non-affiliated outside directors increasing

Board of Directors

Trends in Corporate Governance

Boards becoming smaller Boards taking more control of board functions Corporations becoming more global;

international experience needed Societal expectations that boards balance

profitability and social responsibility Diversity of board members

Board of DirectorsNominations & Elections

Staggered Board Approach:Corporations whose directors serve terms of more than one year, divide the board into classes, and stagger elections so that only a portion of the board stands for election each year.

Corporate GovernanceRole of the Board in strategic management

– MonitorDevelopments inside and outside the

corporation

– Evaluate & InfluenceReview proposals, advise, provide suggestions

and alternatives

– Initiate & DetermineDelineate corporation’s mission and specify

strategic options

Responsibilities of Top Management:

• Provide executive leadership and a strategic vision

• Manage the strategic planning process


International Corporate Governance:

Owner and manager are often the same in private firms

Public firms often have a dominant shareholder, frequently a bank

Frequently there is less emphasis on shareholder value than in U.S. firms, although this may be changing

GermanyGermany

Medium to large firms have a two-tiered board– vorstand monitors and controls managerial

decisions– aufsichtsrat selects the Vorstand– employees, union members and shareholders

appoint members to the Aufsichtsrat


GermanyGermany

Obligation, “family” and consensus are Obligation, “family” and consensus are important factorsimportant factors

Banks (especially “main bank”) are highly Banks (especially “main bank”) are highly influential with firm’s managersinfluential with firm’s managers

Keiretsus are strongly interrelated groups of Keiretsus are strongly interrelated groups of firms tied together by cross-shareholdingsfirms tied together by cross-shareholdings


JapanJapan

Other characteristics:Other characteristics:– powerful government interventionpowerful government intervention– close relationships between firms and close relationships between firms and

government sectorsgovernment sectors– passive and stable shareholders who exert passive and stable shareholders who exert

little controllittle control– virtual absence of external market for virtual absence of external market for

corporate controlcorporate control


JapanJapan

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Strategic Management

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