Strategy Book Summary

8/12/2019 Strategy Book Summary

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Chapter 1. The concept of strategy

Strategy is focused on achieving goals, it involves allocation resources, implies consistency and

integration of decision and action. Clear sense of direction.

Strategic choice: where to compete and how to compete.

Characteristic of a strategy that are conductive to success:

1. Goals are simple, consistent and long term2. Profound understanding of competitive environment3. Effective in exploiting internal strengths, while protecting area of weaknesses4. Effective implementation

Basic framework for strategy analysis:

The task of strategy: how firm will deploy its resources within its environment and satisfy its long-term

goals, and how to organize itself to implement the strategy. Strategic fit: all these elements should be

consistent.

Strategic decisions are important, they involve a significant commitment of resources and are not easily

reversible.

Strategy:

- Corporate strategy: it defines the industry and market in which firm competes. Corporatestrategy decisions include choice over in diversification, vertical integration, acquisitions and

new ventures; and the allocation of resources between different businesses of the firm.

- Business strategy: it is concerned with how the firm competes within particular industry ormarket. It must establish a competitive advantages over its rivals (competitive strategy)

The scope of a firms business has implication for the sources of competitive advantage, and the natureof a firms competitive advantage determines the range of business it can be successful in.

Two dimensions of strategy:

Static (competing for the present)

- Where are we competing? Product market scope Geographical scope Vertical scope

- How are we competing? What is the basis of our competitive

advantage?

Dynamic (preparing for the future)

- What do we want to become? Vision statement (what it seeks to become)

- What do we want to achieve? Mission statement (overall purpose of the

firm)

Performance goals- How we will be there

Guidelines for development Priority for capital expenditure, R&D Growth modes: organic growth, M&A, alliances

Strategy:

- Intended strategy: product of rational deliberation and compromise among the many groupsand individuals involved in the process

- Realized strategy: strategy that is implemented, only partly related to what was intended

Firm:

- Goals and values

- Resources and capabilities

- Structure and system

Strategy

The industry environment:

- Competitors

- Customers

- Suppliers


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- Emergent strategy: permit adaptation and learning through continuous interaction betweenstrategy formulation and implementation in which strategy is adjusted and revised. The best

approach.

The decentralized, bottom-up strategy emergence often precedes more formalized strategy

formulation. Balance between formal planning and emergency depends on upon stability and

predictability of company business environment. St. planning can be restricted to a few principles and

guidelines.

Example. Southwest Airlines strategy is Meet customers short-haul travel needs at fares competitive

with the cost of automobile travel

Roles of strategy:

1. Decision support:a. strategy constrains the range of decision alternativesb. a strategy-making process permits to integrate knowledge of different individualsc. a strategy-making process facilitates the use of analytical tools

2. Coordinating devicea. Statement of strategy communicates the identity, goals and positioning of the company

to all organizational members.

b. St. planning process provides a forum in which consensus is developedc. The control of strategy implementation provides mechanism to ensure the movement in

a consistent direction

3. Targeta. Set aspiration that can motivate and inspireb. St. is about stretch and resource leverage


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Chapter 3. Industry analysis

The business environment consists of all the external influences that affect firms decision and

performance. Analysis of all factors leads to high cost and information overload, so we should focus on

vital: understanding customer (to make profit firm has to create value for customer), suppliers (firm

acquires goods and services), competition (ability to generate profit depends on the intensity ofcompetition). This is an industry environment. Macro level factors (e.g. economic trends) affect industry

environment.

Key question: what determines the level of profit in an industry?

- The value of the product to the customers- The intensity of competition- The bargaining power of producers relative to their suppliers and buyers

Level of industry profitability is not random, it is determined by the systematic influence of industry

structure.

Perfect competition Oligopoly Duopoly Monopoly

Concentration Many firms A few firms Two firms One firm

Entry and exit barriers No barriers Significant barriers High barriers

Product differentiation Homogeneous product

(commodity)

Potential for product differentiation

Information availability No impediments to

information flow

Imperfect availability of information

Another approach to analyze industry environment: Porters Five Forces of Competition Framework

1. Threat of substitute.1.1. Buyers propensity to substitute. The absence of close substitute means that consumers are

insensitive to price.

1.2. Relative price and performance of substitute. The more complex the product and the moredifficult it is to discern performance differences, the lower the extent of substitution on the

basis of price differences.2. Threat of entry. If the entry of new firms is unrestricted, the rate of profit will fall. Factors that

protect industry against new entrants (however barriers that are effective against new companies

may be ineffective against established firms that are diversifying from other industry):

2.1. Capital requirements2.2. Economies of scale (usually in industries that are capital, research or advertising intensive)2.3. Absolute cost advantages (access to low cost source of raw materials)2.4. Product differentiation (brand recognition and customer loyalty)2.5. Access to distribution channels (limited capacity within distribution channel, risk aversion by

retailers)

2.6. Government and legal barriers2.7. Relation by established producers (aggressive price cutting, increased advertising, sales

promotion)

3. Buyer power3.1. Price sensitivity

3.1.1.Cost of product relative to total cost. The greater the importance the more sensitivebuyers will be about price they pay.

3.1.2.Product differentiation. The less differentiation, the more willing the buyer to switchsuppliers on the basis of price.


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3.1.3.Competition between buyers. The more intense the competition among buyers, thegreater their eagerness for price reduction from their seller.

3.1.4.The more critical industry product to the quality of buyers product, the less sensitivebuyer to the price.

3.2. Bargaining power3.2.1.Size and concentration of buyers relative to producers. The smaller the buyers, the bigger

price he pays.

3.2.2.Buyers switching costs.3.2.3.Buyers information. The better informed buyers are about suppliers, their price and costs,

the better buyers are able to bargain.

3.2.4.Buyersability to integrate vertically. Buyers can displace supplier, risk for industry.4. Industry rivalry. Usually it is the major determinant of profitability.

4.1. Concentration. Concentration ratio: the combined market share of leading producers. Wheremarket is dominated by a small group, price competition may be restrained, either by collusion

or through parallelism of pricing decisions; competition focuses on advertising, promotion

and product development. BUT the relation between seller concentration and profitability is

weak statistically, and estimated effect is usually small

4.2. Diversity of competitors. If companies have the same origins, objectives, cost and strategiesthey tend to avoid price competition in favor of collusive pricing practice.

4.3. Product differentiation. The more similar the offerings, the easier customers switch betweenthem, the greater is the inducement for firm to cut price to boost sales.

4.4. Excess capacity and exit barriers. Unused capacity encourages firms to cut price to increasesales. Excess capacity can be cyclical or structural problem resulting from overinvestment or

declining demand. Barriers to exit: durable and specialized resources, job protection. On

average, companies in growing industries earn higher profits than companies in slow growing

or declining industry.

4.5. Cost conditions (ratio of fixed costs to variable). If fixed costs are high relative to variable costs,firms will take on marginal business at any price that covers variable cost. It is disaster for

profitability.5. Supplier power: Same as those determining power of producer relative to buyers.Applying industry analysis:

1. Describing industry structure:- Industry definition: which activities within value chain we include in industry? What are the

boundaries of industry in term of both product and geographical scope? It is a matter of

judgment and depends on purpose and context of the analysis.

- Determine key industry players (suppliers, buyers, producers, producers of substitute)- Examine key characteristic of each group- Sort out relationship between them

2. Forecasting industry profitability- Examine how the industry current and recent level of competition and profitability are a

consequence of its present structure

Identify the trends that are changing industry structure. Is the industry consolidating? Arenew player seeking to enter? And so on.

Identify how these structural changes will affect the five forces of competition andresulting profitability of the industry.

3. Positioning the company where competitive forces are weakest.4. Develop strategy to alter industry structure.


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- Identify the key structural features of the industry that are responsible for depressingprofitability

- Consider which of these features are amenable through appropriate strategic initiativesTo identify key success factor we may model the profitability to find profitability drivers or start with

two questions:

- What do our customers want?- What does the firm need to do to survive competition?

o What drives the competitiono What are the main dimensions of competitiono How intense is competitiono How we can obtain a superior competitive position


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Chapter 4. Further Topics In Industry And Competitive Analysis

Porters 5 forces weaknesses

1. Complements: A missing force in the Porters 5 Forces anlysis

- Complements increase the value of my product

- Bargaining power and its deployment are the key ( ex: Nintendo and software companies)

2. The notion of Porters 5 forces that industry structure is relatively stable and determines

competitive behavior in a predictable way ignores the dynamic forces of innovation and

entrepreneurship.

Game theory

1. It permits the framing of strategic decisions.

2. It can predict the outcome of competitive situations and identify optimal strategic choices.

Frame Work of Competitor Analysis

1. Competitors Current Strategy2. Competitors Objectives

3. Competitors Assumptions about the industry

4. Competitors Resources and Capabilities

Stages in Segmentation Analysis

1. Identify Key Segmentation Variables

2. Construct a Segmentation Matrix

3. Analyze Segment Attractiveness

4. Identify the Segments Key Success Factors

5. Select Segment Scope


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Chapter 5. Analyzing Resources And Capabilities

Anayzing the Resources of the Firm

1. Tangible Resources: financial, physical assets. The goal is to identify what opportunities

exist for economizing on their use and what the possibilities are for employing existing assets

more profitably.

2. Intangible Resources: brand equity, reputation quotients, trademarks and so on.

3. Human Resources

Organizational Capabilities

1. Classifying Capabilities

- A functional Analysis: corporate functions, management information R&D.

- A value chain analysis: primary activities and support activities

Appraising Resources and Capabilities

1. 2 conditions for establishing Competitive Advantage- Scarcity

- Relevance( to KSF )

2. Sustaining Competitive Advantage

- Durability: For example, technology is not as durable to time as brand value.

- Transferability and Replicability: Can I buy certain resources from another of do I have to

develop it?

3. Approaches to Capability Development

- Acquiring Capabilities; M&A (fast but risky.culture shock, personality clashes)

- Accessing Capabilities: strategic Alliances (targeted and cost-effective but the goals should be

same and have to manage relationship)- Creating Capabilities: (time, money)


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Chapter 7. Organization Structure and Management Systems

I) Relevant Vocabulary

Corporation--a corporation is an organization that has a legal identityit can own property,

enter into contracts, sue and be sued.

Holding Company--a company that develops as a result of a series of acquisitions in which theparent company appoints the board of directors and receives dividends but maintains little

management control over the acquired companies.

II) The Organizational Problem: Reconciling Specialization with Coordination and Cooperation

--The fundamental source of efficiency in production is specialization through division of labor.

However, the more unstable the environment is, the more the decisions the company has to make (and

the faster), and thus the coordination cost of division of labor becomes higher.

--The Cooperation Problemaligning the interests of individuals who have divergent goals under the

umbrella of an organization or company is extremely difficult.

--Companies employ the following mechanisms to align goals:

Control mechanisms: reporting structures (bosses & subordinates), and positive and negativeincentive systemspromotions, bonuses, firing, etc.

Performance incentives: link rewards to output (bonuses) but are more difficult to implement

(or measure) when employees are working in teams.

Shared Values: Corporate culture.

--The Coordination Problemunless individuals can find ways to coordinate their efforts, production

doesnt happen.

--Coordination mechanisms are as follows:

Rules & Directives: Employment contracts, general company rules

Routines: Where activities are performed recurrently, coordination becomes institutionalized

within the company or organization.

Mutual Adjustment: (soccer example), individuals coordinate without explicit discussion. This

often occurs when there are leaderless teams or when routinization/mechanization is

impossible and works best when team members are informed of the actions of their

teammates.

III) Hierarchy in Organizational Design

Hierarchy: Hierarchy is the fundamental feature of organizational structure. It is the primary means by

which companies achieve specialization. The critical issue is not whether or not companies should

organize by hierarchy, but how it should be structured and how the various parts should be linked.

--the term hierarchy is sometimes used interchangeably with bureaucracy, to mean management from

the top down. Bureaucracies do not adapt easily to changing external environments, while well

managed hierarchies can.

Benefits of Hierarchy:--Hierarchy economizes on coordination/ makes coordination simpler and less onerous/heavy.

--Hierarchical systems are able to adapt more easily than non-hierarchical systems.

--Turbulence in the business/economic environment often makes it difficult for hierarchies to adapt. As

a result many large corporations such as BP and General Electric have decentralized decision making,

reduced the number of hierarchical layers, shrunk headquarters staff, , and shifted the emphasis of

control from supervision to accountability.


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--the essence of hierarchy is specialized units coordinated and controlled by a superior unitmany

companies struggle with what basis on which they should group employees. The following are examples

of bases on which companies group employees:

--tasks (sales, finance, etc.)

--products

--geography

--process (product development, manufacturing, )

IV) Organizing on the basis of coordination intensity

--a company can be organized based on geographythat is based on local units.

--a company can be organized around functional specializations (Ex. British airways is organized around

flight operations, engineering, marketing, sales, customer service, human resources)

--a company can be organized around products

Other Factors Influencing the Definition of Organizational Units

--economies of scale: there may be advantages in grouping together activities where scale economies

are present

--economies of utilization: it may be possible to exploit efficiencies from grouping together similaractivities that result from fuller utilization of employees

--learning: if establishing competitive advantage requires building distinctive capabilities, firms must be

structured to maximize learning

--Standardization of control systems: task may be grouped together to achieve economies of scale in

standardized control mechanisms.

V) Alternative Structural Forms

The Functional Structure:

--grouping together functionally similar tasks is conducive to exploiting scale economies, promoting

learning and capability building, and deploying standardized control systems--different functional departments develop their own goals, values, vocabularies and behavioral norms

that make cross-functional integration difficult

Multidivisional Structure:

--a loose-coupled, modular organization where business-level strategies and operating decisions can be

made at the divisional level

--creates the potential for decentralized decision making

Matrix Structure:

--organizational structures that formalize coordination and control across multiple dimensions are called

matrix structures.

--companies such as Philips, Nestle, and Unilever adopted matrix structures during the 1960s and 70s (in

the 80s most companies dismantled these structures)

--are sometimes thought to lead to conflict and confusion.

VI) Management Systems for Coordination & Control

Information Systems

--information is fundamental to the operation of all management systems


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--administrative hierarchies are based on vertical information flow (from boss to subordinate, etc.)

--the trend towards decentralization rests on 1) information feedback to the individual 2) information

networking, which has allowed individuals to coordinate their activities voluntarily

Strategic Planning Systems

--company knowledge becomes more complicated to manage as firms become larger

--as firms mature, their strategic planning processes become more systematized.

--Most strategic plans consist of the following elements: 1) statement of goals; 2) a set of assumptions

or forecasts about key developments in the external environment; 3) a qualitative statement on how the

shape of the business will be changing; 4) specific action steps with regard to decisions and projects,

supported by a set of milestones..; 5) specific action steps with regard to decisions and projects; a set of

financial projections including a capital expenditure budget

Financial Planning & Control Systems

--Capital Expenditure Budget

--Operating Budget

Human Resource Management Systems--has the task of establishing an incentive system that supports the implementation of strategic plans

and performance targets through aligning employee and company goals and ensuring that each

employee has the skills necessary to perform his or her job


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Chapter 8. The Nature & Sources of Competitive Advantage

--The more turbulent an industrys environment, the greater the number of sources of change and the

greater the differences in firms resources and capabilities, the greater the dispersion of profitability

within the industry.

I) Competitive Advantage from Responsiveness to Change

--Ability to anticipate changes in the external environment

--Speed

-The first requirement for quick response is information

-The second requirement is short cycle times that allow information on emerging market

developments to be acted upon speedily

Competitive Advantage from Innovation

--innovation not only creates competitive advantage; it provides a basis for overturning the competitive

advantage of other firms

--innovation typically involves creating value for customers from novel products--innovation may also involve redesigned processes and novel organizational designs

Blue Ocean Strategy

--the creation of uncontested market space

--the most successful blue ocean strategies do not launch whole new industries but introduce novel

approaches to creating customer value

II) Sustaining Competitive Advantage

--Identification: the firm must be able to identify that a rival possesses a competitive advantage

--Incentive: Having identified that a rival possesses a competitive advantage, the firm must believe that

by investing in imitation, it too can earn superior returns

--Diagnosis: The firm must be able to diagnose the features of its rivals strategy that give rise to

competitive advantage

--Resource Acquisition: The firm must be able to acquire through transfer or replication the resources

and capabilities necessary for imitation.

Deterrence & Preemption

--If a firm can persuade rivals that imitation will unprofitable, it may be able to avoid competitive

challenges

-A firm can deter imitation by preemptionoccupying existing and potential strategic niches to reduce

the range of investment opportunities open to the challenger by

--proliferation of product varieties

--large investments in production capacities--patent proliferation

Diagnosing Competitive Advantage

--the difficult task is to identify which differences are the critical determinants of superior profitability


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--the more multi-dimensional a firms competitive advantage and the more it is based on complex

bundles of organizational capabilities, the more difficult it is for the competitor to diagnose the

determinants of success.

Acquiring Resources and Capabilities

--a firm can acquire resources and capabilities in two ways: it can buy them or it can build them. The

period over which a competitive advantage can be sustained depends critically on the time it takes to

acquire and mobilize the resources and capabilities needed to mount a competitive challenge.

III) Competitive Advantage in Different Market Settings

--for competitive advantage to exist, there must be imperfection in the market (imperfect competition)

In trading markets, several types of imperfection to the competitive process create opportunities for

competitive advantage:

Imperfect Availability of Information: This provides opportunities for competitive advantage

through superior access to information.

Transaction Costs: Competitive advantage may accrue to the traders with the lowest transaction

costs

Systematic Behavioral Trends: Competitive advantage might accrue to firms that are better

placed to follow systematic patterns that result from market psychology.

Overshooting: Competitive advantage can sometimes be gained (in the short term) by following

the behavior of the herd.

--Competitive advantage in production markets can be influenced by the heterogeneity of the firmsendowments of resources and capabilities. The greater the heterogeneity, the greater the potential for

competitive advantage

--Where firms possess very similar bundles of resources and capabilities, imitation of the competitive

advantage of the incumbent firm is most likely

IV) Types of Competitive Advantage: Cost & Differentiation

A firm can achieve higher profits than a competitor by

Supplying an identical product or service at a lower cost or,

it can supply a product or service that is differentiated in such a way that the customer is willing

to pay a price premium that is greater than the cost of the differentiation.

See Figure 8.4 (Page 223)

See Table 8.1 (Page 223)


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--Porter defines cost leadership and differentiation as mutually exclusivea firm that is stuck in

the middle is almost guaranteed low profitability.

--In practice all firms must differentiate, exampleeven firms such as Ikea and Southwest

Airlines that are known for cost leadership, do have branded/differentiated products.

--in many industries the cost leader is not the market leader but a smaller competitor with

minimal overheads, nonunion labor, and cheaply acquired assets.


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Chapter 9. Cost Advantage

Strategy and Cost Advantage

Price as the principal medium of competition price competitiveness requires cost efficiency. Experience curve

the relationship between unit cost and cumulative output identified by the Boston Consulting Group. Cost analysis

requires taking account of multiple factors, the importance of each depending on industry context. Our approachto analyzing cost advantage will be to identify the basic determinants of a firms cost position within its particular

industry.

The Sources of Cost Advantage

There are seven principal determinants of a firms unit costs (cost per unit of output) relative to its competitors;

we refer these as cost drivers. The relative importance varies across industries, across firms within an industry and

across the different activities within a firm.

The drivers of cost advantage

ECONOMIES OF SCALE *Technical input-output relationships

*Indivisibilities

*Specialization

ECONOMIES OF LEARNING *Increased individual skills

*Improved organizational routines

PRODUCTION TECHNIQUES *Process innovation

*Re-engineering of business processes

PRODUCT DESIGN *Standardization of designs and components

*Design of manufacture

INPUT COSTS *Location advantages

*Ownership of low-cost inputs

*Nonunion labor*Bargaining power

CAPACITY UTILIZATION *Ratio of fixed to variable costs

*Fast and flexible capacity adjustment

RESIDUAL EFFICIENCY *Organizational slack/X-inefficiency

*Motivation and organizational culture

*Managerial effectiveness

Economies of Scale

Economies of scale exist wherever proportionate increases in the amounts of inputs employed in a production

process result in lower unit costs. The point at which most scale economies are exploited is the Minimum Efficient

Plant Size (MEPS). Scale economies are also important in nonmanufacturing operations such as purchasing, R&D,distribution and advertising.

Scale economies sources:

Technical input-output relationships. In many activities, increases in output do not require proportionateincreases in input.

Indivisibilities. Many resources and activities are lumpy they are unavailable in small sizes. Hence, theyoffer economies of scale as firms are able to spread the costs of these items over larger volumes of output.


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Specialization. Increases scale permits grater task specialization that is manifest in greater division of labor.Breaking down the production process into separate tasks performed by specialized workers using specialized

equipment. Similar economies are important in knowledge-intensive industries.

Scale Economies and Industry Concentration. Scale economies are a key determinant of an industrys level of

concentration (the proportion of industry output accounted for by the largest firms).

Limits to Scale Economies. Despite the prevalence of scale economies, small and medium sized companies

continue to survive and prosper in competition with much bigger rivals. How do small and medium sized firms

offset the disadvantages of small scale? First, by exploiting the flexibility advantages of smaller size; second, by

avoiding the difficulties of motivation and coordination that accompanies large scale.

Economies of Learning

The experience curve is based primarily on learning-doing on the part of individuals and organizations. Repetition

develops both individual skills and organizational routines.

Process Technology and Process Design

For most goods and services, alternative process technologies exist. A process is technically superior to another

when, for each unit of output, it uses less or one input without using more of any other input. New process

technology may radically reduce costs. When process innovation is embodied in new capital equipment, diffusion

is likely to be rapid. However, the full benefits of new processes typically require system-wide changes in job

design, employee incentives, product design, organizational structure and management controls. In the absence of

fundamental changes in organization and management, the productivity gains were meager. Cost leadership

established is the result of matching their structures, decision processes and human resource management to the

requirements of their process technologies. Indeed, the greatest productivity gains from process innovation are

typically the result of organizational improvements rather than technological innovation and new hardware.

Business Process Re-engineering (BPR)

Re-engineering gurus Michael Hammer and James Champy defined BPR as: the fundamental rethinking and

radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of

performance, such as cost, quality, service, and speed. With information technology, the temptation is to

automate existing processes. The key is to detach from the way in which a process is currently organized and tobegin with the question: If we were starting afresh, how would we design this process? Hammer and Champy

point to the existence of a set of commonalities, recurring themes, or characteristics that can guide BPR. These

include:

Combining several jobs into one. Allowing workers to make decisions. Performing the steps of a process in a natural order. Recognizing that processes have multiple versions and designing processes to take account of different

situations.

Reducing checks and controls to the point where they make economic sense. Minimizing reconciliation. Appointing a case manager to provide a single point of contact at the interface between processes. Reconciling centralization with decentralization in process design.To redesign a process one must first understand it. To this extent, Hammer and Champys recommendation toobliterate existing processes and start with a clean sheet of paper runs the risk of destroying organizational

capabilities that have been nurtured over a long period of time. While BPR may be a faded fad, design and

development is critical to cost efficiency. Over the past decade, BPR has evolved into business process

management, where the emphasis has shifted form workflow management to the broader application of

information technology to the redesign and enhacement of organizational processes.


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Product Design

Design-for-manufacture designing products for ease of production rather than simply for functionality and

esthetics- can offer substantial cost savings.

Service offerings too can be designed for ease and efficiency of production. However, efficiency in service design is

compromised by the tendency for costumers to interfere in service delivery. This requires a clear strategy to

manage variability either through accommodation or restriction.

Capacity Utilization

The firms in an industry do not necessarily pay the same price for identical inputs.

Locational differences in input prices.The prices of inputs may vary between locations, the most importantbeing differences in wage rates from one country to another.

Ownership of low-cost sources of supply. In raw material-intensive industries, ownership or access to low-costsources can offer crucial cost advantage.

Nonunion labor. Labor unions result in higher levels of pay and benefits and work restrictions that lowerproductivity.

Bargaining power. Where bought-in products are a major cost item, differences in buying power among thefirms in an industry can be an important source of cost advantage.

Residual Efficiency

In many industries, the basic cost drivers -scale, technology, product and process design, input costs, and capacity

utilization- fail to provide a complete explanation for why one firm in an industry has lower unit costs than a

competitor. These residual efficiencies relate to the extent to which the firm approaches its efficiency frontier of

optimal operation. Residual efficiency depends on the firms ability to eliminate organizational slack surplus

costs that keep the firm from maximum-efficiency operation. These costs are often referred to as organizational

fat and built up unconsciously.

Using the Value Chain to Analyze Costs

To analyze costs and make recommendations for building cost advantage, the company or even the business unit is

too big a level for us to work at; every business may be viewed as a chain of activities. In most value chains each

activity has a distinct cost structure determined by different cost drivers. Firms value chain to identify:

the relative importance of each activity with respect to total cost; the cost drivers for each activity and the comparative efficiency with which the firm performs every activity; how costs in one activity influence costs in another; which activities should be undertaken within the firm and which activities should be outsourced.The Principal Stages of Value Chain Analysis

A value chain analysis of a firms cost position comprises the following stages:

1. Disaggregate the firm into separate activities. It requires understanding the chain of processes involved in thetransformation of inputs into output and its delivery to the costumer. Key considerations are:

the separateness of one activity from another; the importance of an activity; the dissimilarity of activities in terms of cost drivers; the extent to which there are differences in the way competitors perform the particular activity.

2. Establish the relative importance of different activities in the total cost of the product. Our analysis needs tofocus on the activities that are major sources of cost.3. Identify cost drivers. Can be deduced simply from the nature of the activity and the types of cost incurred.

Capital-intensive activities. Labor-intensive assembly activities.

4. Identify linkages. The costs of one activity may be determined, in part, by the way in which other activities areperformed.

5. Identify opportunities for reducing costs. By identifying areas of comparative inefficiency and the cost driversfor each, opportunities for cost reduction become evident.


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Chapter 10. Differentiation Advantage

The Nature of Differentiation and Differentiation Advantage

Differentiation Variables

The potential for differentiating a product or service is partly determined by its physical characteristics.For products that are technically simple (a pair of socks), that satisfy uncomplicated needs (a nail) or

must meet rigorous technical standards (a thermometer), differentiation opportunities are constrained

by technical and market factors. Products that are technically complex (an airplane), that satisfy

complex needs (a vacation) or that do not need conform to particular technical standards (toys) offer

much greater scope for differentiation. Differentiation is limited only by the boundaries of the human

imagination. Differentiation extends beyond the physical characteristics of the product or service to

encompass everything about the product or service that influences the value that costumers derive from

it. This means that differentiation includes every aspect of the way in which a company relates to its

customers. Differentiation is not an activity specific to particular functions; it infuses all activities

through which an organization relates to its customers and is built into identity and culture of a

company. In analyzing differentiation opportunities, we can distinguish tangible and intangibledimensions of differentiation. Tangible differentiation is concerned with the observable characteristics

of a product or service that are relevant to customers preferences and choice processes. Tangible

differentiation also includes the performance. Tangible differentiation extends to products and services

that complement the product in question.

Intangible differentiation arises because the value that customers perceive in a product or service does

not depend exclusively on the tangible aspects of the offering. There are few products where customer

choice is determined solely by observable product features or objective performance criteria. Where a

product or service is meeting complex customer needs, differentiation choices involve the overall image

of the firm and its offering.

Differentiation and Segmentation

Differentiation is different from segmentation. Differentiation is concerned with how a firm competes-

the ways in which it can offer uniqueness to customers. Uniqueness might relate to consistency,

reliability, quality, and innovation. Segmentation is concerned with where a firm competes in terms of

customer groups, localities and product types. Whereas segmentation is a feature of market structure,

differentiation is a strategic choice by a firm. A segmented market is one that can be partitioned

according to the characteristics of customers and their demand. By locating within a segment, a firm

does not necessarily differentiate itself from its competitors within the same segment. Differentiation

decisions tend to be closely linked to choices over the segments in which a firm competes.

The Sustainability of Differentiation Advantage

Differentiation offers a more secure basis for competitive advantage than low cost. International

competition has revealed the fragility of seemingly well-established positions of domestic costleadership. Cost advantage is highly vulnerable to unpredictable external forces, vulnerable to new

technology and strategic innovation. Sustained high profitability is associated more with differentiation

than cost leadership.


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Analyzing Differentiation: The Demand Side

Analyzing demand begins with understanding why customers buy a product or service. Market research

systematically explores customer preferences and customer perceptions of existing products. However,

the key to successful differentiation is to understandcustomers.

Product Attributes and Positioning

Understanding customer needs requires the analysis of multiple attributes; concerning the positioning

of new products, repositioning of existing products, and pricing.

Multidimensional Scaling (MDS). Permits customers perceptions of competing products similarities and

dissimilarities to be represented graphically and for the dimensions to be interpreted in terms of key

product attributes.

Conjoint Analysis. Measures the strength of customer preferences for different product attributes. The

technique requires, first, an identification of the underlying attributes of a product and, second, market

research to rank hypothetical products that contain alternative bundles attributes.

Hedonic Price Analysis.The price at which a product can sell in the market is the aggregate of the values

derived from each of these individual attributes. Hedonic price analysis uses regression to relate price

differences for competing products to the levels of different attributes offered by each, thereby allowing

the implicit market price for each attribute to be calculated.Value Curve Analysis. Selecting the optimal combination of attributes depends not only on which

attributes are valued by customers but also on where competitors offerings are positioned in relation

to different attributes. By mapping the performance characteristics of competing products on to a value

curve.

The Role of Social and Psychological Factors

The problem with analyzing product differentiation in terms of measurable performance attributes is

that it does not delve very far into customers underlying motivations. Must buying is motivated by

social and psychological needs. To understand customer demand and identify profitable differentiation

opportunities requires that we analyze the product and its characteristics, but also customers, their

lifestyles and aspirations, and the relationship of the product to these lifestyles and aspirations.

Analyzing Differentiation: The Supply Side

Differentiation is concerned with the provision of uniqueness. Michael Porter identifies a number of

drivers of uniqueness that are decision variables for the firm:

product features and product performance; complementary services (such as credit, delivery, repair); intensity of marketing activities (such as rate of advertising spending); technology embodied in design and manufacture; the quality of purchased inputs; procedures influencing the conduct of each of the activities;

the skill and experience of employees; location ; the degree of vertical integration (which influences a firms ability to control inputs and

intermediate processes).

In analyzing the potential for differentiation, we can distinguish between the differentiation of the

product (hardware) and ancillary services (software). On this basis, four transaction categories can

be identified. As markets mature, so systems comprising both hardware ans software tend to


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unbundle. Products become commoditized while complementary services become provided by

specialized suppliers.

Differentiation of merchandise (hardware) and support (software)

SUPPORT (SOFTWARE)

Differentiated Undifferentiated

MERCHANDISE Differentiated

(HARDWARE)

Undifferentiated

Electronic commerce allows customers to assemble their own bundles of goods and services at low cost

with little inconvenience.

Product Integrity

Refers to the consistency of a firms differentiation. It has both internal and external dimensions.Internal integrity refers to consistency between the function and structure of the product. External

integrity is a measure of how well a product fit the customers objectives, lifestyle.

Signaling and Reputation

Differentiation is only effective if it is communicated to customers. But information is not always

available to potential customers. The economics literature distinguishes between search goods, whose

qualities and characteristics can be ascertained by inspection, and experience goods, whose qualities

and characteristics are only recognized after consumption. The market for experience goods

corresponds to a classic prisoners dilemma. Equilibrium is established, with the customer offering a

low price and the supplier offering a low-quality product. The resolution of this dilemma is for

producers to find some credible means of signaling quality to the customer. The most effective signalsare those that change the payoffs in the prisoners dilemma. Extended warranty, brand names,

sponsorship are all signals of quality. The more difficult it is to ascertain performance prior purchase, the

more important signaling is. Strategies for reputation building have been subjected to extensive

theoretical analysis. Some of the propositions arise from this research include the following:

Quality signaling is primarily important for products whose quality can only be ascertained afterpurchase (experience goods).

Expenditure on advertising is an effective means of signaling superior quality. A combination of premium pricing and advertising is likely to be superior in signaling quality

than either price or advertising alone.

The higher the sunk costs requires for entry into a market and the greater the total investmentof the firm, the greater the incentives for the firm not to cheat customers through providing low

quality at high prices.

Brands

Brand names and the advertising that supports them are especially important as signals of quality and

consistencybecause a brand is a valuable asset. Brands fulfill multiple roles. Most importantly, a brand

provides a guarantee by the producer to the customer of the quality of the product. The brand

represents a guarantee to the customer that reduces uncertainty and search costs. Advertising has

been the primary means of influencing and reinforcing customer perceptions; increasingly, however,

SYSTEM PRODUCT

SEVICE COMMODITY


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consumer goods companies are seeking new approaches to brand development that focus less on

product characteristics and more on bran experience.

The Cost Differentiation

Differentiation adds cost. The indirect costs of differentiation arise through the interaction of

differentiation variables with cost variables. If differentiation narrows a firms segment scope, it also

limits the potential for exploiting scale economies. One means of reconciling differentiation with cost

efficiency is to postpone differentiation to latter stages of the firms value chain.

Bringing It All Together: The Value Chain in Differentiation Analysis

The key to successful differentiation is matching the firms capacity for creating differentiation to the

attributes that customers value most. For this purpose, the value chain provides a particularly useful

framework.

Value Chain Analysis of Producer Goods

Using the value chain to identify opportunities for differentiation advantage involves four principal

stages:

1. Construct a value chain for the firm and the customer.Consider not just the immediate customer butalso further downstream in the value chain.

2. Identify the drivers of uniqueness in each activity. Achieve uniqueness in relation to competitorsofferings.

3. Select the most promising differentiation variables for the firm. First, we must establish where the firm has greater potential for differentiating from, or can

differentiate at lower cost than, rivals. Firms internal strengths in terms of resources and

capabilities.

Second, identify linkages among activities. Third, the ease with which different types or uniqueness can be sustained must be considered. More

differentiation is based on resources specific to the firm. The more it will be for a competitor to

imitate the particular source of differentiation.1. Locate linkages between the value chain of the firm and that of the buyer. The objective of

differentiation is to yield a price premium for the firm. Creating value for customers requires either

that the firm lowers customers costs, or that customers own product differentiation is facilitated.

The value differentiation created for the customer represents the maximum price premium the

customer will pay.

Value Chain Analysis of Consumer Goods

Few consumer goods are consumed directly. When the customer is a consumer, it is still feasible to draw

a value chain showing the activities that the consumer engages in when purchasing and consuming a

product.


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Chapter 11. Industry Evolution and Strategic Change

The Industry Life CycleSimilarly to Product Life Cycle (demand side) theres an Industry Life Cycle (supply side); it has the

following phases: Introduction, Growth, Maturity, and Decline

Demand Growth:

Introduction Growth Maturity Decline

Small sales Low market

penetration

Novel of technology Lack of scales Low experience Customers: affluent,

innovation-oriented,

risk-tolerant

Technicalimprovements

Efficiency raises Market penetration

increases

Market saturation Demand is wholly for

replacement

New challengingindustries with

superior technology

Product innovation: is responsible for new industrys birth. Rivalry around new designs and technologies

make the industry tend to converge towards a dominant design(e.g. 35 mm camera, fast-food setup),

which is strictly related to a technical standard (specifications or technology for compatibility). Technical

standards arise when theres a network effect (need to connect users). Except for some early movers

(patents), theres no profit advantage from setting a dominant design.

Process innovation: dominant designs exist also in processes and business models. Once the industry

accepts dominant design, theres only an incremental further product innovation. Hence firms try to

increase productivity and reduce costs by improving processes.

Life-Cycle Pattern:duration of LCP varies greatly from industry to industry (from 120 years for railroad

industry to 10 years for MP3 players). Over time, Life Cycles have tended to be compressed, especially in

Internet environment. Some industries may never enter decline phase because satisfy everlasting needs

(clothes, food processing. Etc.), while other industries may observe rejuvenation (e.g. motorcycles in

USA and Europe in 60s) due to new markets or breakthrough product innovations.

Same industry can be in different stage for different countries.

Structure, Competition and Success Factors over the Life Cycle

Duct differentiation:

Introduction Growth Maturity DeclineDemand Early adopters

(high income,

avant-garde)

Rapidly increasing

market

penetration

Mass market,

replacement/repeat

buying. Customers

knowledgeable and

price sensitive

Obsolescence


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Introduction Growth Maturity Decline

Technology Competing

technologies,

rapid product

innovation

Standardization

around dominant

technology, rapid

process

innovation

Well-diffused

technical knowhow:

quest for

technological

improvement

Little

product/process

innovation

Products Poor quality, wide

variety of features

and technologies,

frequent design

changes

Design and quality

improve,

emergence of

dominant design

Trend to

commoditization.

Attempts to

differentiate by

branding, quality,

bundling

Commodities the

norm:

differentiation

difficult and

unprofitable

Manufacturing

and distribution

Short production

runs, high-skilled

labor content,

specialized

distribution

channels

Capacity

shortages, mass

production,

competition for

distribution

Emergence of

overcapacity,

deskilling of

production, long

production runs,

distributors carry

fewer lines

Chronic

overcapacity, re-

emergence of

specialty channels

Trade Producers and

consumers in

advanced

countries

Exports from

advanced

countries to rest

of world

Production shifts to

newly

industrializing then

developing

countries

Exports from

countries with

lowest labor costs

Competition Few companies Entry, mergers

and exits

Shakeout, price

competition

increases

Price wars, exits

KSF Product

innovation,establishing

credible image of

firm and product

Design for

manufacture,access to

distribution, brand

building, fast

product

development,

process

innovation

Cost efficiency

through capitalintensity, scale

efficiency and low

input costs

Low overheads,

buyer selection,signalling

commitment,

rationalizing

capacity

Organizational Adaptation Change

Organizational inertia: barriers to change: Organizational routines. The more highly developed are the routines, the more difficult is the

introduction of new ones.

Social and political structures. Organizationscreate stable systems of political power and socialpatterns; changes threaten established power.

Conformity. Institutional isomorphism locks organizations into common structures andstrategies. Pressure for conformism comes from government, investment analysts, banks and

other sources of resources and legitimacy and through voluntary imitation and risk aversion.


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Limited search.Organizations prefer exploitation of existing knowledge rather than explorationof new opportunities.

Complementarities between strategy, structure and systems. Fit among these components ishard to reach, but once accomplished becomes a barrier to change.

Evolutionary Theory and Organizational Change: organizations adapt to external changes through

variation, selectionand retention. Two theories are based upon evolutionary theory:

Organizational ecology: changes happen at industry level (population of firms), with new entriesimitating successful models; the competitive process is a selection mechanism in which

organizations that dont match requirements imposed by the environment cannot attract

resources and are eliminated.

Evolutionary economics: focuses on individual organizations, which introduce variation,selection and retention at organizational routines level.

Adapting to changes through the Life Cycle: since KSFs are different through the Life Cycle, different

resources and capabilities are required across all stages. In fact, innovator firms are not usually the

same that scale to the mass-market (consolidators) with the same product/service.

Adapting to Technological Change: Architectural Innovation:when a new technology is limited to the

component level of a product or process it can enhance companys existing capabilities; when, on the

other hand, its impact is at architectural level (involving changes in the whole process/product

configuration) it can destroy companys capabilities.

Disruptive Technology: new technologies can be sustaining (it augments existing performance

attributes than the existing one) or disruptive(brings different performance attributes).

Established Firms in New Industries: some established firms that cannot adapt easily to changes appear

to be less likely to enter successfully into new industries, if compared to more flexible start-ups. But the

latter have obviously less resources and capabilities. Who is advantaged? It depends upon the extent towhich the resources and capabilities required in the new industry are similar to those present in an

existing industry. When linkage is close, established firms are likely to have an advantage over start-ups.

Managing Organizational Change: in recent years, management of organizational change has been

viewed as a continuous activity that forms a central component of a managers responsibilities, rather

than a distinct area of management.

Dual strategies and separate organizational units. Its often easier to pursue changes by creatingnew organizational units rather than changing existing ones and assigning development of new

products (that embody new technologies) into separate units. The biggest issue relates to the

dual strategy: how reconcile the launch of new businesses with existing ones? Managers must

shift their attention from exploiting current businesses towards building opportunities and new

capabilities for the future.

Bottom-up processes of decentralized organizational change.Decentralized decision making isnot enough for speed-up changes. It must be accompanied by conditions that foster the change

process, like:

o Raising performance expectationso Issuing corporate-wide initiatives


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o Alerting managers to the emergence of strategic dissonance created by divergentstrategic directions within the company.

o Periodical changes in organizational structure to stimulate decentralized searches and,then, to exploit results.

Imposing top-down organizational change. Changes must be orchestrated from the top, in orderto avoid low performances following a complex restructuration.

Using scenarios to prepare for the future. Anticipating changes is fundamental to the ability of acompany to adapt to them. Scenario analysis is a systematic way of thinking about how the

future might unfold. Its key value is in combining the interrelated impacts of a wide range of

economic, technological, demographic and political factors into a few distinct stories. It can be

quantitative, qualitative or both.


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Chapter 12. Technology-based Industries and the Management of

Innovation

Competitive Advantage in Technology-intensive industries

The principal link between technology and competitive advantage is innovation: this is responsible fornew industries coning into being and for some firms dominate their industries.

The innovation process: while invention is the creation of new products or processes through the

development of new knowledge or a combination of existing ones, innovation refers to the

commercialization of a single or of many inventions. Not all inventions lead to innovations, because

sometimes they are not commercially viable. Sometimes innovation is introduced in absence of new

technologies, rather simply with changes in design.

The profitability of Innovation: the profitability of innovation to the innovator depends on the value

created by the innovation and the share of that value that the innovator is able to appropriate. The

value is typically shared by innovators with customers, suppliers, imitators/followers.

The regime of appropriability describes the conditions that influence the distribution of returns to

innovation. In a strongregime, the innovator captures substantial shares of the value; in a weakregime,

the value is kept mostly by the others.

Property Rights in Innovation: appropriatingvalue depends greatly on the ability to establish property

rights; they include Patents, Copyrights, Trademarks, Trade secrets

The disadvantage of establishing property rights is that they make information public, hence companies

may prefer secrecy to patents.

Tacitness and Complexity of the Technology: the extent to which innovation can be imitated depends

by the ease with which the technology can be comprehended and replicated. This depends by:

The level of codifiable knowledge (that can be written down); the highest information iscodified, the easiest is copying it;

Complexityof the technology: the simplest the technology, the easiest is to copy it.Lead Time: after introducing an innovation, the innovator has a temporary competitiveadvantage over

the others; the time it will take followers to catch up is called innovators Lead Time.

Complementary Resources: to make of an invention an innovation, several resources are needed:

Competitive manufacturing, Distribution, Service, Finance, Marketing, Complementary Technologies,

etc. These are called Complementary Resources; when these resources are supplied by different firms,

the division of the value among them depends by their relative power. A key determinant of this is

whether the complementary resources are specializedor unspecialized: when complementary resourcesare generalized, the innovator is in a much stronger position to capture value.

Which mechanisms are effective at protecting innovation?Patent protection is of limited effectiveness

as compared with lead-time, secrecy and complementary resources; although patents are effective in

increasing the lead time before competitors are able to imitate, these gains are likely to be small.

Anyways, some patents are pursued to block potential innovation coming from competitors or to gain a

bargaining power with other companies to access their proprietary technologies.


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Strategies to Exploit Innovation: How and When to Enter

Alternative Strategies to Exploit Innovation

Licensing Outsourcingfunctions

Strategicalliance

Joint venture Internalcommercializat

ion

Risk and

return

Little

investment risk

and returns.

Risk that

licensee lacks

motivation or

steals the

innovation

Limits capital

investment but

may create

dependence on

suppliers/partn

ers

Benefits of

flexibility. Risks

of informal

structure

Shares

investment

and risks. Risk

of partner

disagreement

and culture

clash

Biggest

investment

requirement

and

corresponding

risks. Benefits

of control

Resource

requirements

Few Permits

external

resources and

capabilities to

be accessed

Permits pooling of the resources

and capabilities of more than one

firm

Substantial

requirements

in terms of

finance,

production

capability,

distribution,

etc.

Examples Ericssons

Bluetooth

wireless

technology

Microsofts

Xbox (designed

and

manufactured

by others)

Ballards

strategic

alliance with

DaimlerChrysle

r to developfuel cells

Symbian

(created by

Psion, joint

venture with

Ericsson, Nokiaand Motorola)

Google

(developed

and marketed

internally)

Timing Innovation: To Lead or to Follow? Sometimes followers have been more successful than first-

movers; the advantage of being early mover depends on the following factors:

The extent to which innovation can be protected by property rights and or lead-time The importance of complementary resources The potential to establish a standard

Optimal timing depends also by the resources and the capabilities that of the company: different

companies have different strategic windows (periods in time when their resources/capabilities are

aligned with the opportunities of the market). Small technology-based companies have to move first,

while large established firms have longer and later strategic windows.Pioneering represents also a higher risk for established companies, since they might have issues on

brand and reputation protection.

Managing Risks: risks in emerging industries are mainly due to two factors:

Technological uncertainty: its given by unpredictability of technological evolution and by thecomplex dynamics through which technical standards and dominant designs are selected;


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Achieving compatibility with existing products is a critical issue: advantage typically goes to the

competitors that adopt an evolutionary strategy (e.g. backwards compatibility) rather than a

revolutionary strategy.

Implementing Technology Strategies: Creating the Conditions for Innovation

While innovation requires certain resources, theres no predetermined relationship between R&D inputand innovation output. The crucial challenge facing firms is to create the conditions conducive to

innovation.

Manage creativity:

Conditions for creativity: creativity is fostered both by individual attitudes and by organizationalenvironments;

Organizing for creativity: management systems must be different and based on differentincentives (recognition, praise, personal development rather than managerial responsibilities)

From invention to innovation: the challenge of Integration

Balancing creativity and commercial direction: the critical linkage between these two is marketneed

Organizational approaches to the management of innovation: the key organizational challengeis reconciling differentiation and integration; organizational initiatives aimed at stimulating both

new product development and its commercial exploitation are:

o Cross-functional product development teamso Product championso Buying innovationo Open innovation (from outside)o Corporate incubators


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Chapter 13. Competitive advantages in mature industries

Strategies for Mature Industries:

1. Principal strategic characteristics of mature industrieso

Limited number of opportunities for establishing competitive advantage

o Shift from differentiation based competitive advantage to cost-based factors2. Key success factors within mature industries

o Key success factorCost advantagecan be achieved by:- Economies of scale- Low-cost inputs (new entrants tend to have less bureaucracy, etc.)- Low overheads

3. Opportunities for strategic innovation to establish competitive advantageo Customer segmentation and customer selection (know your customer, know your profitable

customer segments, know your customer purchasing/spending habits and behaviors through

customer relationship management (CRM) systems

o Differentiation, most likely achievable by offering complementary services (after sales service,financing, etc.); however, very difficult to be successful in mature industries as commoditization

reduces customer willingness to pay a premium for differentiation

o Innovation, by embracing new customer groups (Nintendo Wii, etc.), or augmenting products andservices (Barnes & Noble bookstores feature Starbucks coffee shops)

4. Organizational structures / management systems to effectively implement strategieso Primary basis for competitive advantage is operational efficiency (to reduce costs); this can be

achieved by (good example: McDonalds):

- Standardization of routines- Division of labor- Close management control-

Clear quantitative and short term performance targets- Incentives for individuals- Hierarchical organizational structures with high levels of specialization and centralized decision

making

Strategies for declining industries:

1. Reasons for declineo Technological substitution (typewriters, photographic film, etc.)o Changes in consumer preferences (canned food, etc.)o Demographic shifts (childrens toys in Europe, etc.)o Foreign competition (textiles in advanced industrialized countries, etc.)

2. Key featureso Excess capacitieso Lack of technical change (and with that lack of new product introduction)o Declining number of competitorso Aggressive price competition

3. Adjusting capacity to declining demando Adjusting of industry capacity to declining demand is key to stability and profitability depends on the

following factors:


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- Predictability of decline- Barriers to exit (specialized expensive assets discourage exit)- Managerial commitment (legacy, pride, commitment to employees)- Strategy of surviving firms (stronger firms can facilitate the exit of weaker firms by offering to buy

their assets, etc.)

o Otherwise, declining demand can lead to destructive competition4. Strategies for declining industries

o Niche, identify a niche that is likely to maintain a stable demando Harvest, maximize cash flow with existing assets (avoid further investment)o Divest


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Chapter 14. Global strategies and the multinational corporation

Internationalization can occur in 2 ways:

- Trade - Sale and shipment of goods and services to another country- Direct Investment - Building or acquiring productive assets in another country

Types of industries:

- Sheltered industries - Sheltered from international competition by regulation, public ownership,or barriers to trade.

- Trading industriesInternationalization occurs primarily through imports and exports.- Multi-domestic industriesInternationalize through direct investment.- Global industriesTrade and direct investment are present and high.

Porter:

- Potential entrantsLow barriers to entry; internationalization is a reality- Rivalry among existing firmsInternationalization increases internal rivalry in 3 ways:

o Lowering seller concentrationmore firms competing in the same marketo Increasing diversity of competitorscooperation is difficult when goals, strategies, and

cost structures are different.

o Increasing excess capacity an increase in capacity doesnt necessarily mean anincrease in market size.

- Bargaining power of buyers Large customers can excercise their buying power moreeffectively.

Competitive advantage:

Firms are able to transfer their competitive advantage internationally when they can match the

conditions of the national environments (resource availability particularly, input prices, and exchange

rates among others).

Organizational structure:

Once an international strategy has been established, a suitable organizational structure needs to be

designed.

Global integration vs. National differentiation:

Industries where scale economies are huge and customer preferences homogeneous call for a global

strategy (jet engines).

Industries where national preferences are pronounced and where customization is not prohibitively

expensive favor a multi-domestic strategy (investment banking).

If there are no significant benefits from global integration its advisable to remain local (funerary

services)however, if there is a lack of scale economies in certain industries (cement, car repair) there

could be benefits in global presence.

Major benefits of global strategy:

1. Cost benefits: Scale and replication2. Exploiting national resources efficiencies


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3. Serving global customers4. Learning benefits5. Competing strategically

Foreign entry strategy framework:

1. Is the firms competitive advantage based on firm-specific or country-specific resources?2. Is the product tradable and what are the barriers to trade?3. Does the firm possess the full range of resources and capabilities for establishing a competitive

advantage in the overseas market?

4. Can the firm directly appropriate the returns to its resources?5. What transaction costs are involved?


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Chapter 15. Diversification Strategy

1. Diversification may be justifies either by the superior profit potential of the industry to be entered, or

by the ability of the firm to create competitive advantage in the new industry.

2. Motives for Diversification

- Growth: Revenue vs. Profit. Not a good idea to diversify only if you have money.

- Risk Reduction: The simple act of bringing different business under common ownership does not

create shareholder value through risk reduction.

- Profitability: 3 essential test; the attractiveness test, the cost of entry test and the better off test

3. Competitive Advantage from Diversification

- Economies of Scope

- Economies from Internalizing Transactions


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Chapter 16. Diversification Strategy

Additional Reading: General Electric: Jack Welch's second wave (A) case No. 9-391-248 HBS 1991

Multi-business Structure

Usually Multi-divisional, where business decisions and controlled at business level and corporate centersexercise overall Coordination and control

Four key efficiency advantages of the divisionalized firm called the M form

1. Adaptation to bounded rationality:dispersing decision making2. Allocation of decision making; Allocation decisions to those that will be best informed3. Minimizing coordination costs; Particular product or business decisions made at divisional level4. Avoiding Goal Conflict; Divisional heads more likely to pursue profit goals aligned with the

overall company goals

Problems of Divisionalized firms

Constraints on decentralization: Although operational authority is to divisions, this power only continues

if HO is happy with performance

Standardization of Divisional Management: Although in theory, divisional management allows division to

be entrepreneurial, the standardized control from HO restrains this process.

The Role of Corporate Management

1. Manage corporate investment2. Exercise guidance and control over divisions3. Sharing transferrable resources and information

Manage corporate investment: Include portfolio planning models with the best known models

developed by McKinsey, BCG. Which guides through 4 areas:

1. Allocating resources: via the profitability of the industry and the competitive advantage to thefirm.

2. Formulating Business Strategy: Identify current positioning, in relation to industryattractiveness, developing competitive advantage

3. Analyzing portfolio balance: Cash flows, growth4. Setting performance targets.

The GM/McKinsey Portfolio Planning matrix has two functions; Industry Attractiveness and Business

unit competitive advantage: If high in both invest and grow, low in both harvest fro cash but do not

invest, and in between, just hold

BCGs Growth share Matrix is similar.

Value creation through restructuring

Refer Chart 16.4 for 5stage approach.

1. Analyse current market value2. Is it possible to manage value via managing external perception3. Internal improvements: Global expansion, repositioning a business or strategic outsourcing. Cost

cutting or price increases

4. External opportunities: Sell a division if it is worth more to someone else than to you.5. Optimum restructured value of the company: This is the end result

PIMS (Profit Impact and Market Strategy)

Used by Multi-business companies to assist in 3 areas of corporate management:


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1. Setting performance targets for business units: Par ROI (Return on Investment)2. Formulating business unit strategy; by using the ROI variables, the strategy can be formulated3. Allocating investment funds between businesses: PIMS indicates investment attractiveness

based on A) estimated real growth rate of market B) Par ROI

Managing internal linkages

Creating value in multi-business companies is done via sharing resources and capabilities. This includes:

Functions such as, strategic planning, finance, cash risk management, internal audit, HR, audit,taxation, government relations, R&D, legal. Thought these benefits always tend to be less than

management hopes.

These can be split into 2 corporate groups; Corporate management unit, supporting corporate

management and shared services organizationwhich is responsible for shared services.

The greater the share of skills, the more need there is for a corporate headquarters!!

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