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Strategic Management: ConceptsA dynamic perspective
Mason A. Carpenter and Wm. Gerard Sanders2009, 2nd. Edition
ISBN 9780132341400
Presentation of key concepts and logicPrepared by Daniel Degravel
July 2008
Ch 01 Introducing Strategic Management002
Introduction
Strategy and strategic management
Components and dimensions of strategy
Competitive advantage
Strategic management process
Ch 01 Introducing Strategic Management
Birth and life of Under Armor: illustration of strategic management
Objective of textbook: 7Objective of textbook: 7““study of concepts that you study of concepts that you will need to answer questions will need to answer questions about gaining and sustaining about gaining and sustaining success in the world of success in the world of business competition”business competition”
Strategic management relies upon three fundamental themes
1-Time (dynamic industries and firms)
2-Link between strategy formulation and implementation
3-Role of strategic leadership
003
Introduction
Ch 01 Introducing Strategic Management
10 Strategy = coordinated view by which an organization pursues its goals and objectives, including the pattern of actions that have been taken or planned
9 Strategos = “General’s view”; a plan that will lead to victory9 Big-picture perspective on firm and its context
8 Strategic management = process by which a firm manages the formulation and implementation of its strategy
Why should we study strategy?Understanding business situationActing in the situationPersonal career and issues
004Strategy and Strategic Management
Ch 01 Introducing Strategic Management
Strategy
005Components and dimensions of Strategy
Corporate strategy
Business strategy
A B
Diamond of strategy
Economic logicTime
Arenas
Vehicles
Differentiators
Levels of strategy
Ch 01 Introducing Strategic Management
Strategy
006Components and dimensions of Strategy
Implementationlevers
C D
Implementation
IntendedDeliberateUnrealizedEmergentRealized
FormulationStrategic Leadership
Structure
Systems and processes
People and rewards
Formulation + Implementation
Ch 01 Introducing Strategic Management007Competitive advantage
Two plus one perspectives on competitive advantage (and on strategy)
1-ExternalI/OFirm’s environment determinant
2-InternalRBVOwnership of capabilities determinant
3-DynamicTime is keyPresent is partially determined by past but future is open
22 Competitive advantage = firm’s ability to create value in a way that its rivals cannot
Ch 01 Introducing Strategic Management008Strategic management process
Vision and Mission
Strategic analysis
Goals and objectives
STRATEGY Implementation4
3
21
Inside
Outside
Ch 02
Vision and Mission (Leading strategically)
009
Ch 02 Vision and Mission (Leading strategically)010
Introduction
Strategic leadership: definitions and characteristics
Strategic leadership: defining Vision and Mission
Strategic Purpose and strategic Coherence
Stakeholders “management”
Strategic decision-making: biases and ethics
Anne Mulcahy CEO of Xerox since 2000 p31-33Background of the firmAnne Mulcahy’s actions as CEOXerox’s turnaround story: to pull a $15bn cow out of a ditch
011 Ch 02 Vision and Mission (Leading strategically)
Introduction
ResponsibilityPowerless to controlAuthority but enemies and resentmentCleat strategy? Reactive and defensive?Symbolic and substantive impact on organizational outcomesNo time for hands-on managementHigh personal price
Congratulations, you are a CEO!
012 Ch 02 Vision and Mission (Leading strategically)
Strategic leadership: definition and characteristics
33 Leadership = task of exerting influence on other people’s pursuit of goals in an organizational context33 Strategic leadership = task of managing an overall enterprise and influencing key organizational outcomes
ROLES
Complex and multifaceted
013 Ch 02 Vision and Mission (Leading strategically)
Strategic leadership: definition and characteristics
FORMALAuthority and status
DECISIONALEntrepreneurDisturbance handlerResource allocatorNegotiator
INFORMATIONALMonitorDisseminatorSpokesperson
INTERPERSONALFigureheadLiaisonLeader
SKILLS and ACTIONS
014 Ch 02 Vision and Mission (Leading strategically)
Strategic leadership: definition and characteristics
Level 5 Leaders Pyramid
L5 ExecutiveL4 Effective leaderL3 Competent managerL2 Contributing team memberL1 Highly capable individual
Professional WillProfessional Modesty
PERSONALITY
Tolerance for ambiguity or riskLocus of controlNeed for achievementCharisma and emotional intelligence
Personality traits vs. Leadership abilitiesCourage, toughness
BACKGROUND and DEMOGRAPHICS
Work experience and educationGender, nationality, race , religion…
Reasons for more diversity
International skillsQuality of human capitalSubstantive work experienceTalent for strategic thinkingGroups tend to make better decisions (43 social capital, succession planning)
Because top managers influence strategy by judgment and behavior, it is worthwhile to understand what makes them think and act the way they do
44-45 HWYDTMapping social network
015 Ch 02 Vision and Mission (Leading strategically)
Strategic leadership: defining Vision and Mission
46 Vision (long term status)
46 Mission (Values, purposes and relations with stakeholders)
47, 49 Goals and Objectives
49 ROIC49 Superordinate goals49 Balanced scorecard
Strategy
016 Ch 02 Vision and Mission (Leading strategically)
Strategic purpose and strategic coherence
50 Strategic purpose = simplified, widely shared model of the organization and its future, including anticipated changes in environment
Vision and Mission do not guarantee high performance
Tradeoffs and optionsEffective strategic purpose must be tied to a coherent set of activities, near-term goals and objectives anchored in measurable strategic outcomes
52 Strategic coherence = symmetrical alignment of the strategic diamond, functional area policies and overarching fit of businesses under corporate umbrella
Strategic / Tactic / DesignEnvironment / Vision / Mission / StrategyCL-S / BL-SDiamond 5 elements
Fit
Accepted as truthful and useful by stakeholders
017 Ch 02 Vision and Mission (Leading strategically)
Stakeholders “Management”
52 Stakeholders (Interest + Power) Importance of TMT as stakeholder
Benefits of STo Management:-Support and better strategic choice-Win more resources-Full understanding of STo-Anticipate STo’s reaction
Management STo:
Identification of STosDimensions usedThree groups
a) Influence of STo on strategyb) Effects on strategy on SToc) STO’s power on strategy
STos’ Management PlanApproachObjectiveMessage to conveyActions
58-59 HWYDTTritec JV Chrysler-Daimler BenzAnalysis of STo
018 Ch 02 Vision and Mission (Leading strategically)
Strategic decision-making: biases and ethics
Ethics violation:Vulnerability of organizationsAuthority structureIncentive system
61 Corporate governance
Strategic decision biasesTheories about ourselves (escalation of commitment)
Theories about other people Ethnocentrism; stereotyping)
Theories about the world
019
Ch 03
External environment: Resources, capabilities
and activities
020 Ch 03 External environment: Resources, capabilities and activities
Introduction
Internal drivers of competitive advantage
Resources and capabilities
Dynamic capabilities
Value chain
Strategic leadership: linking R&C to strategy
021 Ch 03 External environment: Resources, capabilities and activities
Introduction
Intel and its CEO Paul Otellini 69-72
World largest computer chip maker $35bnInnovation and massive R&D
Evolution of the environment and transition from memory chips to micro-processor, which started from the bottom of the hierarchy and was not planned
Licensing its technology then revoked these licenses and controlled the value chain
022 Ch 03 External environment: Resources, capabilities and activities
Internal drivers of competitive advantage
Why some firms perform better than others?Chapter focuses on internal characteristics of the firm or the resource-based inputs into the strategy process; these are resources and capabilities.Role of managers in configuring activities and managing R&C is also explored
For Intel:1-engineering expertise for technology creation2-operational efficiency3-marketing skillsTexas Instruments
Grocery industry: Publix, Whole Foods, Weis
Dynamic capabilities or R&C modelAvailable R&C are source of competitive advantage
Value chain modelConfiguration of value chain activities in way that add more value to PS than rivals
Internal source of competitive advantageTwo models
Strategic leadership (an learning)
DIFFERENTIATOR of strategy diamond
023 Ch 03 External environment: Resources, capabilities and activities
Internal drivers of competitive advantage
Resources
And
Capabilities
Strategic leadership Strategy
Competitive advantage
Performance
024 Ch 03 External environment: Resources, capabilities and activities
Resources and capabilities
76 Resources = inputs that firm uses to create PS76 Tangible76 Intangible
Intangible Resources are more likely to be a source of competitive advantage because more difficult to imitate for rivals
However, distinction Tangible – Intangible not so clear and some Tangible resources may deliver Intangible benefits
76 Wal*Mart and quasi monopoly in rural areas that locks out potential rivals because “no room for two”76 Union Pacific Railroads controls key rail property gives competitive advantage in transportation of certain materials76 McDonalds has high valuable real estate because of location close to high traffic areas
025 Ch 03 External environment: Resources, capabilities and activities
Resources and capabilities
77 Capability = Competency = firm’s skill in using its resources to create a PS; combination of procedures and expertise
77 Outsourcing
77 Distinctive competence = set firm apart from other firms because unique
77 Core competence = central to the main business operations of firm
Capabilities vary in level (degree of complexity of task) and in location (embedded into individuals or owned by firm at global level)Globally the capabilities are activities that constitute the value chainA special class of capabilities is the “dynamic capabilities”R&C are linked and collectively represent the differentiators (strategy diamond)
77 Wal*Mart has excellent capabilities in logistics management (large store, fleet of vehicles, massive distribution centers)77 Table with capabilities and result for Wal*Mart, The Vanguard Group and 3M77-78 GE has general management capabilities because manages a portfolio of businesses based on sound principles78 Intel78 Oil industry: BP, Chevron; Exxon Mobil; Royal Dutch Shell. Only downstream activities in value chain of industry are Valero Energy; Sunoco which do not have any oil exploration activity78 McDonalds
026 Ch 03 External environment: Resources, capabilities and activities
Resources and capabilities
79 VRINE model =Valuable = take advantage of opportunities or protects from threatsRare = scarcity relative to demandnot Imitable = cannot acquire capability quickly or at low costNon substituable = cannot achieve same benefit with different capability (cost; property rights; time, causal ambiguity)Exploitable = must be usable and the value can go out of the capability
80 Union Pacific Railroad
81 McDonalds opens restaurant into Wal*Mart store; Burger King and Wendy81 Monsanto owned patent for aspartame; Pfizer, Levitra, Cialis81 Toyota, Honda
82 Barnes & Noble, Borders; Amazon.com82 Cisco purchased Cerent to acquire fiber-optic-data-transfer capabilities82 media companies and property rights82 Coca cola and time; subsidizing of American government for entry overseas; Pepsi at disadvantage83 Causal ambiguity: Apple, Google, 3M and Toyota
84 Nowell and its core NetWare product were successful. But no innovation and decline. Sun Microsystems84 Xerox84 Pfizer85 Pfizer and VRINE model
84 Coca cola, Toyota, Intel
027 Ch 03 External environment: Resources, capabilities and activities
Dynamic capabilities
Vision quite static until now. However, developing capabilities is dynamic processStatic vs. Dynamic
Stock vs. FlowA stock of resources and capabilities is what is possessed at any point in time. This stock was created over time through a combination of initial endowment and accumulated investment
Value of R&C is function of level (stock) of R&C and the net effect of additional investment and depreciationProcess of accumulation through dynamic capabilities is different from static possession of R&C
86 Dynamic capabilities = processes by which a firm integrates, reconfigures, acquires or divests resources in order to achieve new configurations of R&C.The term “Dynamic” refers to the ability to modify and revise its R&C to match a shifting environment, especially critical in fast moving markets and is typically seen in complex areas of the firm (culture, knowledge and ability to learn).
028 Ch 03 External environment: Resources, capabilities and activities
Dynamic capabilities
Dynamic capabilities are manifest in several ways:-Creating new P S-Reconfiguring or transferring R&C across divisions-Building alliances and acquisitions
Value of firm’s portfolio of R&C directly affected by dynamic capabilities to reconfigure R&C to the evolving environment
86 Disney and Princess line based on famous female Disney characters86 Mail Boxes Inc. MBE (UPS)86 Intel86 Cisco and its acquisitions87 Intel organizational processes
Activities
Routines
Resources
Capabilities
Dynamic Capabilities
029 Ch 03 External environment: Resources, capabilities and activities
Value chain
87 Value chain = set of activities performed within the firm to produce P S87 Primary activities87 Support activities
Issues of :-Outsourcing-Creation of value by better way to perform same activities or different ways to perform these activities
89 Trade-off protection = modification of activities implies elimination or addition of other activities. This necessity is a protection against imitationProtecting competitive advantage is developing different activities than rivals but in such a configuration that they cannot be imitated without significant trade-offs, locking-out imitators
88 Beverage distribution firm in Kern county, CA using trucks to transport products to LA, use trucks back to Kern89 Caterpillar, Komatsu89-90 Southwest Airlines, and classic US airlines comparison Exhibits 3.8 and 3.9. The trade-offs they must make91 Change of activities and value chain of Ikea, Dell and Southwest
030 Ch 03 External environment: Resources, capabilities and activities
Value chain
DuPont Formula breaks down determinants of profitability based on equation:
Return On Assets = Net profit margin x Asset turnover91 ROA91 Asset turnover91 Profit margin92 Exhibit detail of formula
94-95 Illustration of DuPont formula in retailing industry: Wal*mart, Sears, and Kohl’s
Value chain helps to see which activities must be in-house and those that can be performed outside92 Outsourcing92 Off-shoringNot new but broader choices now for managers92 Ikea92 Boeing and 78793 Nike and Pacific Cycle93 Baker & McKenzie law firm (team in Manilla)
Three criteria for successful offshoring and outsourcing
031
Strategic leadership
Managers are key because at root of actions
96 Decision agent
Issue of “fait accompli” (96 Intel)
Issue of large vs. small firms managements
Portfolio of processes:-96 Entrepreneurial-96 Capability-building-96 Renewal
-Middle managers have important role (entrepreneur; communicator; psychoanalyst; tightrope walker)-Front line managers DuPont Formula breaks down determinants of profitability based on equation:
Ch 03 External environment: Resources, capabilities and activities
032
Ch 04
Macro and industry dynamicsExploring external environment
033
Introduction
External context of strategy
Macro-environment
Industry analysis
Dynamic characteristics of the external context
Ch 04 Macro and industry dynamics
034
Introduction
Ch 04 Macro and industry dynamics
103 Ford vs. Chevrolet battle for money but also for customers’ hearts and 103 Ford vs. Chevrolet battle for money but also for customers’ hearts and mindsminds
103-106 Pepsi vs. Coke103-106 Pepsi vs. CokePepsi fighting hard to catch up with CokePepsi fighting hard to catch up with CokeRestaurant business (KFC, Taco Bell and Pizza Hut), spun off with Yum Restaurant business (KFC, Taco Bell and Pizza Hut), spun off with Yum Brands and finally sold offBrands and finally sold offChange into core carbonated soft drinks industryChange into core carbonated soft drinks industryStrategic wins are moving targetStrategic wins are moving targetFight between Coke and PepsiFight between Coke and PepsiValue-chain of industry four functions: Production, marketing, packaging, Value-chain of industry four functions: Production, marketing, packaging, and distributionand distributionBottling operationsBottling operations
Finally, the industry… good for Pepsi and CokeFinally, the industry… good for Pepsi and Coke
035
External context of strategyCh 04 Macro and industry dynamics
Necessity to understand environment because source of opportunities and threats
Broad senseNarrow sense
Tools to perform analysis of competitive environment
Some industries are more profitable than others
107 Coke and PepsiCoca-Cola’s entry into wine industry in 1977, purchasing Taylor Wine and Sterling Vineyard. Finally sold them off.Two fundamental characteristics of wine industry: little brand loyalty; sale and distribution heavily regulated
Tools to understand factors related to industry and relevant to firm performance at any point in timeIn fact, an industry “snapshot”
036
External context of strategyCh 04 Macro and industry dynamics
Key questions about industry:-What is industry?-Macro-environmental conditions that would impact your strategy implementation?-Trends?-Characteristics of industry?
ME
SG
IE
F
037
Macro-environment
Ch 04 Macro and industry dynamics
109 Macro-environment
109 PESTEL analysis = non exhaustive list of potential influences of environment on organization; focuses on future impact of macro-environmental factors (110 Exhibit 4.3 Dimensions)
Make sure strategy is aligned with forces of change
109 Lands End (online clothier) expanded operations from US to GermanyLocal regulations were obstacle
1-Relevance of factors to context2-Identify and categorize information3-Analyze data and draw conclusions
109 Political110 Economic111 Socio-cultural111 Technological111 Environmental111 Legal
111 Coke and Pepsi
111 Pepsi111 Coca-cola
038
Macro-environment
Ch 04 Macro and industry dynamics
111 Globalization
112 Coke and Pepsi; Boeing and Airbus
112 Pharmaceuticals; Coke and Pepsi; Boeing and Airbus
113 Railroad industry113 Cell-phone industry113 Motorola and Nokia113 Samsung and NEC
1-Markets
2-Costs
3-Governments
4-Competition
Factors favoring industry globalization
039
Industry analysisCh 04 Macro and industry dynamics
If perfect competition, no firm can earn greater-than-normal profits, because of entry of new firms or exit of incumbents if profit level raises above or below “normal”
If imperfect competition, abnormal profit possibleFew competitors; numerous suppliers and buyers; asymmetric information; heterogeneous PS; barriers Firm’s goal is to create a competitive advantage
Industrial Organization Economics (internal conditions held constant)
114 Key Success Factors114 Key Success Factors in soft drink industry
In I/O approach, assets and strategy are dictated by industry characteristicsThen, every firm must possess assets and so not rareKSF does not give competitive advantage but only allows to competeKSF are easily transferable
040
Industry analysisCh 04 Macro and industry dynamics
Industry boundaries115 Industry = group firms producing or selling same or similar PS to same markets115 Monopoly115 Duopoly115 Oligopoly
115 Concentration ratioConcentration affects intensity of competition (fragmented markets more competitive than concentrated ones)Boundaries not simple as it seems; industries are composed of many segments with different structural characteristicsClassification of P or markets
115 Beverage industry Lipton, Starbucks, Seagram’s, Heineken, Mondavi, Ocean Spray, Coke and Pepsi116 Carbonated soft drink industry116 Cola war: Coke bought Minute Maid and Odwalla; Pepsi bought Tropicana and South Beach beverages116 Nestle, Pepsi, Coke, Danone116 Food industry116 Apparel industry
041
Industry analysisCh 04 Macro and industry dynamics
Model of Industry structure117 Industry Five-force model P5FHorizontal axis is stylized version of value chainFactors that alter negotiating strengths suppliers,
buyers or rivals and threats of NE and PSCountervailing sources of power vying for larger
piece of industry’s profit
117 Rivalry119 Exit barriers
119 Threat of entry119 Barriers to entry
121 Supplier power122 Buyer power123 Threat of substitute124 Complementors
Attractiveness of industryP5F benefits:1) Understanding of industry (Characteristics,
changes, fit)2) Strategy fit with 5 forcesForces are not static but in state of flux
118 Cola wars119 Software industry Microsoft; airline industry; Litton Industries ship building and the Navy
119 Computer-chip manufacturing120 Soft drink industry; Virgin group120 Barriers to entry list for 6 industries
121 Soft drink industry; Jewelry industry and De Beers; Textiles or wood; Furniture; ERP software and SAP, Oracle and PeopleSoft
122 Tire makers; National Football League Green Bay Packers; New car buyers123 Large brewers; Matsushita Electric Industrial; Best Buy and Circuit City
123 Bottled waters and soft drink; Movie rental industry Blockbuster, Hollywood Video, Movie Gallery and Netflix; Southwest airlines 124 Table of substitutes for 6 industries
124 Music and electronics industries; Hot dogs, buns, condiments and beverages; United and delta125 Computer peripherals; commercial real estate development and financing
126-127 P5F and Complementors analysis US airline industry
042
Industry analysisCh 04 Macro and industry dynamics
Competitor analysis: understanding and predicting the rivals’ behaviors and strategiesFuture competition; opportunities for growth
Sources of information128 Bicycle industry: Trek, Huffy, Schwinn128-129 Luxury hotels: Marriott, Hyatt, Motel 6, Best Western129 Airline industry
128 Value curve = tool for visualization of landscape, visually plot how rivals compete on several dimensions and reveal underlying assumptions about businessHorizontal axis is KSF s perceived by competitors; Vertical axis is level of delivery of major groups of firms129 Strategic group = clusters of firms following the same strategy, generally assessed by the central tendency
Predicting competitors’ behaviors and responses to your own strategy; reasonable predictionsFor future behavior, most pertinent rivals are those in the strategic group or susceptible to enter itFuture rivals’ behavior can influence your strategy
Four step analysis1) Rivals’ objectives 2) Rivals’ current strategies 3) Rivals assumptions 4) Rivals’ R&C129 Coke and Pepsi130-131 Value curve in the wine industry
CognitionUnderlying assumptions about industry, best business practices, and the worldUnderlying strategic logic
Competitors
043
Dynamic characteristics of the external contextCh 04 Macro and industry dynamics
Overconfidence in one’s strength is often preclude to declineDurability of competitive advantage varies with industry132 Coke and Pepsi132 Utilities132 Consumer products Sears and Wal*Mart132 Airline industry Southwest, Jet Blue, AA, United airlines132-133 Pineapple industry Fresh Del Monte, Chiquita, Dole
Two drivers of industry change
Industry life cycle Discontinuities
044
Dynamic characteristics of the external contextCh 04 Macro and industry dynamics
A storybook where P5F and structure of industry evolve over timeComparable to product life-cycle
133 Industry life-cycle = model describing evolution of industry from inception to present and possible future states
133 Cell phone handsets, laser printer, digital cameras133 Automobile industry emerged in 1885 with invention of gasoline engine
134 Exhibit 4.10 Impact of P5F factors on industry structure dynamics
133-134 Commoditization = process by which sales eventually become to depend less on unique product features and more on prices. Generally, most of incumbents have similar R&C and offer similar products134 Cell phone, airlines, PC
135 Reinvigoration = growth again135 Bicycle industry
Evolution and information: new entrants replace leaders136 IBM, Dell
Evolution and tactics: extra services at beginning136 IBM and Compaq
Industry life-cycle
045
Dynamic characteristics of the external contextCh 04 Macro and industry dynamics
A special and intensive case of technological change in action
136 Process technology136 Product technology
136 Incremental evolutionary change136 Discontinuous change = breakthrough technology137 Disruptive technologies = breakthrough technology that destroy incumbents’ competencies137 Mini computer industry, disk drive industry
137 Innovator’s dilemma = the economic incentive are to continue to develop evolutionary improvements in their existing technology and to avoid sponsoring disruptive technology, even when the latest may eventually supplant the existing technology137 DEC and mini computers
138 Exhibit showing interplay between incumbents and new entrants innovations138 Notebook computers and handheld digital appliances; full-service stock and online brokerage; printed and online greeting cards; education and distance education; offset printing and digital printing; cardiac surgery and angioplasty139 Auto industry Toyota, Honda139 Airlines Southwest139 Wal*Mart, Sears139 US Stell
Technological discontinuities
046
Dynamic characteristics of the external contextCh 04 Macro and industry dynamics
Emergence of new market; large enough to dedicate a distribution channel
139 3Com Corp and its Palm division139 Sony, Compaq, Dell making hardware and Palm and Microsoft software139 Category killers PetSmart; Home Depot and Lowe’s; Amazon.com; BarnesandNoble.com; Travalocity.com and Expedia.com
When industries divide
When industries collide
140 Consolidation = reduction in the number of industries
140 Global media and entertainment industries are agglomerating Fox, Disney, Viacom and Vivendi Universal140 FedEx-Kinko’s140 Computer industry has changed faster than steel industry
047
Ch 05
Creating Business strategies
048
Introduction
Types of strategies
Economic drivers of strategic positioning
Threats to successful competitive positioning
Strategy and fit with industry conditions
Testing the quality of a strategy
Ch 05 Creating Business strategies
049
Introduction
Ch 05 Creating Business strategies
145-147 The US bicycle industry Three companies with different strategic orientations
1- Pacific BicycleHigh volume, large range of products, large range of quality, distribution through mass-market retailers, all market segments, one-stop shop, lots of acquisitions, manufacturing in Asia
2- Trek BicycleUpper-end users, high quality bikes, innovation, different market segments served, one distribution channel: independent bicycle distributors
3- MontagueBoutique-style, full size high performance folding bicycleHighly specialized product targeted at narrow range of customers
Through Business strategy, we will try to find the best configuration of positions
050
Types of strategies
Ch 05 Creating Business strategies
To reduce complexity of strategic choices, a typology “generic strategies” is used
148 Strategic positioning = the way managers situate a firm relative to its rivals along important competitive dimensionsStrategic positioning aims at reducing the effects of rivalry and improve profitability
148 Trek149 Auto industry: Daimler Benz and Porsche; Luxury cars: Buick, Lexus, Mercedes
149 Generic strategies = Four alternative positions resulting from two sets of choices: the economic logic and the scope of arenas
150-151 COST vs. DIFFERENTIATION150 Exhibit 5.1 Generic strategies with examples of firms
151 Cost = strategic position where firm produces PS while maintaining total costs lower than it takes to rivals to produce similar PS. Basic needs; acceptable PSCreation of sustainable gap with rivals
151 Porsche, category killers such as Lowe’s and Staples151 Wal*Mart, Pacific Bicycle, Gallo WInes
051
Types of strategies
Ch 05 Creating Business strategies
COST151 Cost = strategic position where firm produces PS while maintaining total costs lower than it takes to rivals to produce similar PS. Basic needs; acceptable PSCreation of sustainable gap with rivals151 Porsche, category killers such as Lowe’s and Staples151 Wal*Mart, Pacific Bicycle, Gallo Wines152 Wal*Mart and Southwest airlines
DIFFERENTIATION150, 152 Differentiation = condition of perceived PS uniqueness along different possible dimensions that causes customers to pay premium prices (more satisfied needs and WTP)Higher prices than average152 Coca-cola and Pepsi, Mercedes reputation152 Honda, Yamaha and Suzuki153 Stouffers
FOCUSED153 Focused Cost and Differentiation = Serves narrow segment153 JetBlue, Southwest airlines153 Montague, Trek, Cannondale, Mercedes, Porsche, Ferrari, Harley-Davidson, Orange County Choppers
INTEGRATED154 Integrated C-D = position of simultaneous low cost and differentiationTrade-offs required, difficult to achieve154 McDonalds, Toyota155 Ikea, Chevrolet, Hyundai, Ford
052
Types of strategies
Ch 05 Creating Business strategies
Appropriate strategic position depends on:1- Firm’s R&C2- Industry conditions
Innovation capabilities encourage DifferentiationCapabilities in large scale production encourage Cost
156 Intel156 Dell156 Cooper Industries acquiring and consolidating firms in tool, hardware and electrical products
053Economic drivers of strategic positioning
Ch 05 Creating Business strategies
Key Economic drivers of generic strategies
Economies of scale
Diseconomies of scale
Minimum Efficient Scale MES
Learning curve
Product technologyProduct design
Economies of scope
COSTDIFFERENTIATION
Premium brand image
Customization and convenience
Unique Styling
Speed
Unusually high quality
Creating value and promoting Willingness to Pay WTP
054Economic drivers of strategic positioning
Ch 05 Creating Business strategies
Key Economic drivers of Cost strategies
157 Economies of scale = average total cost for unit of production is lower at higher levels of output157 Coca-cola, Audi, Wal*Mart
158 Diseconomies of scale = average total cost increases with higher levels of output158 Institutional fund management, Microsoft, GM
Sources: spreading fixed costs, specializing in a process, superior inventory management, purchasing power, more efficient advertising because of sizeMost important: spreading fixed costs
Sources: Bureaucracy, labor costs, differences in efficiency
159 Minimum Efficient Scale MES = output level that delivers the lowest possible cost; the smallest scale to achieve maximum economies of scale (there is range of scales at which costs will be minimized)Function of technology159 Steel industry: mini-mills using different furnaces. Requirements for technology different
055Economic drivers of strategic positioning
Ch 05 Creating Business strategies
Key Economic drivers of cost strategies
160 Learning curve = incremental production costs decline at a constant rate as production experience is gainedCumulative level of production since production of first unitForecasting future costs160-161 Japanese motorcycle and car manufacturers161 Computer-chip manufacturers161 Bank clerk, electrical contracting firm162 Fast-food trainee, custom boat builder162-163 Illustration of learning curve at bicycle manufacturer Montague
Sources: resource sharing
164 Economies of scope = potential cost savings associated with multi-business164 Multipurpose table and furniture industryMity Lite and folding tables, expansion into complementary products
Sources: learning by doing, intra-organizational transfer of knowledge
165 Production technology 165 Jet Blue, Nucor Steel
165 Product design165 Canon and Xerox, Pacific Cycle and Trek
056Economic drivers of strategic positioning
Ch 05 Creating Business strategies
Drivers of Differentiation advantages
Premium brand image165 Toyota
Customization and convenience166 Curves International166 Swiss Colony
Unique Styling166 Harley Davidson, Honda
Speed167 Intel, Dell, Apple, Microsoft
Unusually high quality167 Apple, Dell, Red Robin and Fuddruckers (hamburgers), McDonalds, Wendy, Burger King
Creating value and promoting Willingness to Pay WTP167 Willingness to Pay
057Threats to successful competitive positioning
Ch 05 Creating Business strategies
CostImitationAcceptable combination quality-pricePublic awareness of questionable practices in off-shoring168 Mini-mills in steel industry, Kmart vs. Wal*Mart
DifferentiationCustomer does not care about added valueMisunderstanding of costs entailed by differentiationOver-fulfillmentImitation168 Audi, BMW, Mercedes, BMW, Jaguar169 Ford, John Deere, Coke and Pepsi
Focus positionsSame than above plus being out-focused by rivals, attempting to satisfy too many segments169 Harley Davidson
Integrated positionSame than above plus (169) straddling169 H&R Block trades-off between 170 Southwest airlines, United and Delta
Several factors play a role
Successful strategic position:1- is based on firm’s R&C2- must be consistent with industry conditions
Exhibit 5.10 Drivers and threats for Cost and Differentiation
058Strategy and fit with industry conditions
Ch 05 Creating Business strategies
Capturing effect of industry on strategyUnder different life-cycle conditions
Embryonic
Growth
Maturity
Decline
171 Exhibit 5.11 Industry life-cycle and strategy diamond
172 Palm, camcorder, color TV, VCR, cell phone172 Biotechnology
172 US Bicycle172 Wal*Mart
172-173 General Dynamics
059
Testing the quality of a strategy
Ch 05 Creating Business strategies
Five key questions
1-Does strategy exploit firm’s R&C?
2-Does strategy fit with industry conditions?
3-Are differentiators sustainable?
4-Is there internal and external alignment of strategy diamond?
5-Can strategy be implemented?
1-
2-
Differentiators sustainability3-
Firm
4a-
4b-
5-
060
Ch 06
Crafting business strategy for dynamic
contexts
061
Introduction
Strategy and dynamic contexts
Revolutionary strategies that lead industry change
First movers, second movers, and fast movers
Defensive strategies for incumbent caught off-guard
Formulating and implementing dynamic strategies
Ch 06 Crafting business strategy for dynamic contexts
062
Introduction
Ch 06 Crafting business strategy for dynamic contexts
181-183 Roxio and the resurrection of Napster
Chris Gorog was Napster’s CEO-Free client software enabling people to copy music on their PC and play it for free-Central Napster-run server dispensing information about music
The RIAA attacked Napster on legal grounds and Napster went bankrupt in 2002Gorog has created a new software firm Roxio, that acquired Napster after it filed bankruptcy. He re-launched Napster as a legal download music provider siteWhich model to choose?
Roxio sold it software business to Sonic Solutions in 2004
Napster has never shown a profit
063
Strategy and dynamic contexts
Ch 06 Crafting business strategy for dynamic contexts
How can firms develop competitive advantages in dynamic environments?
Change may be rapid and unpredictableChallenge is anything that may threaten the VRINE R&C (value, common, imitation, substitutability, ability to exploit)For apparently fast change, often seeds have developed for a long time
Response to changes and to dynamic competition
Dynamic response requires:-trade-off between economic logic of Cost and Differentiation-permanent improvement-strategy to be “revolutionary” (changing rules of the game)-seamless integration formulation - implementation
064
Strategy and dynamic contexts
Ch 06 Crafting business strategy for dynamic contexts
The challenges
Interactions between incumbents and between incumbents and new entrantsCompetitive interaction theory
Competitive interaction
186 Four phases of competitive interaction
185 Four Competitive action initiations:-aggressiveness-complexity of answer-unpredictability-tactics to delay leader’s reaction
185 Regional title insurance185-186 Nike and Reebok185-186 SABMiller and Anheuser Busch187 Enterprise, Amazon.com, E*trade, Charles Schwab, Nucor, Southwest, JetBlue, Ryanair
Industry evolution
187 Life-cycleCommoditization
Industry evolution
187 Technological discontinuity187 Technological disruption187 Process innovation187 Application innovation187 Business model innovation
Speed of change tends to compound effects of change driversReacting to change vs. Leading change
187 Charles Schwab, Toyota, GM, Amazon.com188 Progressive Direct, Sony, Apple, Napster, Boeing
065
Revolutionary strategies that lead industry change
Ch 06 Crafting business strategy for dynamic contexts
No naïve vision of industry analysis which is not static but always changing-Large incumbents-Imitators-Rule breakers
Revolutionary strategies
Three families:
Five categories
189 High-end disruption189 Low-end disruption190 Hybrid disruption
191 Reconceive PS193 Reconfigure value chain196 Redefine arena197 Rescale industry198 Reconsider competitive mindset
189 McDonald,s, Hertz, Blockbuster189 Burger King, Avis, Hollywood Videos189 Subway, Enterprise, Netflix
189 Cirque du Soleil189 Southwest airlines190 Amazon.com, JetBlue, Charles Schwab, University Phoenix, Merrill Lynch
190 Exhibit 6.2 Revolutionary strategies table with examples
066
Revolutionary strategies that lead industry change
Ch 06 Crafting business strategy for dynamic contexts
191 Reconceive PS
193 Reconfigure value chain
196 Redefine arena
197 Rescale industry
198 Reconsider competitive mindset
191 Cirque du Soleil192 Wine industry Yellow Tail194-195 Capsule Yellow Tail
Creating new value CurveFour-action framework
Separating function and form 193 Credit card
Radically new value chain
Compress value chain
193 Amazon.com, Skype, eBay
193-194 Dell, Ikea
Changing temporal or geographic availability
Imagine total possible market
Spearheading industry convergence
196 Fast food, Wal*Mart, Target, Grocery stores, Airlines, McDonalds, Coinstar
196 Disposable cameras and children, Copeland
196 TiVo197 Mobile music revolution, cell phone, Play station 2, Ericsson and Napster
Increase scale
Decrease scale
Creating complementors(198 Value Net)
Shift in focus of strategic thinking
197 Service Corporation International, Holliday Inn, McDonalds, Waste management services, Adult education
198 Micro breweries, Bed & Breakfast Inn
199 GM, FedEx and UPS and Land’s End; Novel software and PC; Delata and American and Boeing; Micron and Apple and Lexar
067First movers, second movers, and fast movers
Ch 06 Crafting business strategy for dynamic contexts
Approach to technology discontinuities depends on R&C
200 First mover200 Second mover200 Fast mover201 Takeoff period201 Late mover
Competitive advantage comes from ability to manage change and harness the R&C consistent with F or S Mover strategiesRole of complementary assets
PROS
Absolute cost advantage in terms of scale or scope
Strong reputation
First –time customers locked-in
Scale of first move makes imitation unlikely
CONS
Technological change
PS flawed
Cost outweighs benefits of F Mover position
201 Amazon.com, BarnesandNoble.com, MS, Palm, Boeing, Atari, Apple, deHaviland201 Wal*Mart, Unilever, Procter & Gamble203 Cancer therapy, PC-software applications202 Gallery of first movers and fast followers (Exhibit 6.9 p.202)
First Mover
068Defensive strategies for incumbent caught off-guard
Ch 06 Crafting business strategy for dynamic contexts
Resource-based competitive advantage is a position in which the exploitation of a resource makes the resource stronger and more resilientSuccess of strategy depends on strengths and weaknesses
Five competitor-response strategies
1-Containment
2-Neutralization
3-Shaping
4-Absorption
5-Annulment
204 American, Southwest, retail
204-205 MS, Napster, Bertelsmann, Roxio
205 AMA and Chiropractic medicine
205 MS, Intuit
205-206 Kodak, IBM, EDS, HP-Compaq, Lenovo
Any firm that invests in R&C that support retaliation to the exclusion of innovation and change may only be prolonging its inevitable demise
206 Ralston Purina, Nestle
069Defensive strategies for incumbent caught off-guard
Ch 06 Crafting business strategy for dynamic contexts
Real optionWaiting for uncertainty to clear
Real option = opportunity to take action that will either maximize the upside or limit the downsize of a capital investmentA small investment that will allow to have an option on making a bolder move later
1-Waiting-to-invest options2-Growth options3-Flexibility options4-Exit options5-Learning options
207 Intel207 Oil and gas, mining, pharmaceuticals, biotechnology207 Auto, aerospace, consumer goods, industrial products, high tech
070Formulating and implementing dynamic strategies
Ch 06 Crafting business strategy for dynamic contexts
Implementation of revolutionary strategies
Role of arenaRole of staging
Exhibit 6.11 p.209 Creating options for future competitive advantage-Current businesses-Emerging new businesses-Future growth businesses
Tactical moves can be used as low cost probes for experimentation in new ways of competing tomorrow
Speed and rhythm of changeImplementation levers: systems, procedures, leadership and processes
209 Home pesticide, Dell
210 Charles Schwab, E*Trade, Merrill Lynch, 3M
210 Examples of pacing in the real world
071
Ch 07
Developing corporate strategy
072
Introduction
Corporate Strategy
Economic logic of diversification: synergy
Types of diversification
Strategies for entering attractive new businesses
Competitive advantage and corporate strategy
Corporate strategy in stable and dynamic contexts
Ch 07 Developing corporate strategy
073
Introduction
Ch 07 Developing corporate strategy
215-217 General Electric, Minnesota Mining and Manufacturing 3M and MITY Enterprises
GENERAL ELECTRICOnly firm still on the Dow Jones IndustrialRevenue 2007 $163bn: consumer and commercial finance, health care, industrial, infrastructure, news and entertainmentConglomerateAcquisitionsVision of high performing businesses, #1 or #2; growth and higher margin business; exit from slow growth and volatile businesses
3MRevenue $23bn: industrial and transportation; display and graphics, health care; safety, security and protection; electro and communication; consumers and officeHigh R&DMostly innovation and some acquisitions
MITY ENTREPRISESRevenue $55m: tables, fencesInternal growth through innovation
074
Corporate Strategy
Ch 07 Developing corporate strategy
Corporate strategy questions:
1-Which arenas?2-How can corporate parent add value to businesses?3-How can diversification help compete in our existing businesses?
218 Synergy = combined benefits of firm’s activities in more than one arena are more than the simple sum of those benefits alone
218 Examples of GE, 3M and MITY show different approaches of corporate strategy which have increasing levels of diversification: MITY, 3M and GE
075
Corporate Strategy
Ch 07 Developing corporate strategy
Evolution of diversification in the US
220 Vertical integration
220 Conglomerate
220 Portfolio planning = family of models to achieve a balanced portfolio of businesses; allocation of resources between businesses
220 GM, DuPont, Standard Oil, ITT (History Exhibit 7.2)
Matrixes AA (Business Attractiveness x Firm’s Assets for that business -or competitive position-)Most famous is BCG (Market growth x Relative market share)222 Exhibit 7.4 AA Matrixes for MITY and financial services firm
McKinsey, AD LittleModified versions with integration of industry life-cycle223 Portfolio model with life-cycle for financial services firm
223 Questionable diversifications: telecommunication firm into hotel industry; Sears in credit card Discovery, in stock brokerage Dean Witter, in real estate brokerage Coldwell-Banker and insurance Allstate. Wal*Mart and Kmart
076
Economic logic of diversification: synergy
Ch 07 Developing corporate strategy
224 Synergy = Economies of scope EoSco + Revenue enhancement synergies RES
EOSCO224 EoSco = Average costs (X,Y) < Average costs (X) + Average costs (Y)Leveraging resource or value chain activity across several P, S, geographic areaSource: use of common resource across several businessesWhen resource used across several businesses, firm has potential to generate EoSco225 PesiCo has Sobe225 Coke and PepsiCo enjoy EoSco in soft drinks, noncarbonated beverages and bottled water
RES225 Revenue enhancement synergy RES = Total revenue (X,Y) > Total revenue (X) +Total revenue (Y)Sales greater if more than one PS sold and distributed by one firmSource: bundling products, sharing knowledge, sharing distribution opportunities225-226 Disney and Big Red Boat, cable and network TV channels, radio226 Financial services226 MITY
077
Economic logic of diversification: synergy
Ch 07 Developing corporate strategy
Economic benefits of DiversificationParenting advantage when global cash flow superior to sum of cash flows and global market value exceeds sum of particular market values of independent businesses of the portfolioUsing “market multiples” such as PER of independent rivals into industry to compare total value with combined hypothetical values of the businesses
Resource sharing encompasses knowledge transfer226 Yum! Brands, Black & Decker, Honda
Limits225 Diseconomies of scopeWhen are economies of scope likely to materialize?227 AT&T never able to realize cross-selling and synergistic outcomes projected. Sale of long-distance activities to SBC Communication, which changed its name to AT&T
Two drivers of diversification:1-Number of different businesses2-Degree of relatedness of those businesses
078
Economic logic of diversification: synergy
Ch 07 Developing corporate strategy
Economic benefits of Diversification227 Related diversification227 Unrelated diversification
Unrelated diversification increases complexity, bureaucratic costs and transaction costsRisk of doing too much in-house and underutilizing outside suppliersIf more complexity, more difficult to find skilled managers to handle it
Analysis of performance (ROA and TSR) in regards to degree of diversification shows that optimum is moderate level of diversification (Inverted U shape)Exception: 228 GE
Match of R&C and need of potential subsidiaries / divisionsAre strategies of the different businesses similar? Better if similarCognition and vision of activities
229 Conglomerate
Maximum opportunities to exploit potential EoSco and RES:1-fit parent – subsidiary / division R&C2-fit parent - subsidiary / division strategies
Self-serving motives for diversification:1-risk reduction2-empire building3-compensation
079
Types of diversification
Ch 07 Developing corporate strategy
Options of Diversification230 Vertical scope
231 Horizontal scope232 Profit pool
Often defensive; familiar with industryBundling complementary PSNeed for R&C; incumbents may have strong advantage; difficulty of different rules in new industry231 Pulte Homes231 Automakers and dealers
In same industry or different oneProximity measured in terms of similarity of customer needs, of value chains or human capital231 Coke and Pepsi into bottled water; Pepsi in snack foodReduction of costs through EoScoIncrease of revenue by synergiesProfit pool is tool to assess size of value chain components relative to total sales and profitability234-235 Six steps to build profit pool in different industriesProfit concentration different than revenue concentration232 Auto industry in Europe, Global music industry, Dell, gateway, U-Haul, Ryder, Hertz-Penske, Budget
080
Types of diversification
Ch 07 Developing corporate strategy
Options of Diversification233 Geographic scope
233 Internationalization
EoScaEoSco
236 Pharmaceutical firm; high tech products
Adaptation to local environment
236 Dell237 Microsoft237 Honeywell, GE
246-247 Walt Disney diversification: an evaluation with different tools
081Strategies for entering attractive new businesses
Ch 07 Developing corporate strategy
How to narrow down the search for multiple possible businesses to enter?
Attractive business generally high profitability and then high BTE
Ways to circumvent BTE
1-Focus on niche
Not the heart of the market, but an underserved niche238 Coca-cola and Pepsi and Red Bull targeting young adult market
2-Revolutionary strategy
Strategy breaking with convention of incumbents who are predisposed to think that that strategy is inferior, unwise or risky, and to ignore itWhen it proves to be successful, often too lateEx. Reconfigure value-chain238 Skype reconfiguration of value chain238 Jobs purchased the computer graphic division of Lucasfilm, Ltd in 1986, transformed it into Pixar and sold it to Walt Disney in 2006
3-Leverage existing resources
Use of resources and maybe with a partner’s ones to leapfrog BTE239 Wal*Mart entry into soft drink in partnership with Cott Corp to develop Sam’s choice239 Under Armour
4-Combination strategies
239 Wal*Mart entry combining existing resources + revolutionary strategy239 Skype niche + reconfiguration
Indirect way that does not assault directly incumbents and threaten their immediate profitability
082Competitive advantage and corporate strategy
Ch 07 Developing corporate strategy
When does diversification create value for stakeholders?
CL-S
BL-S
Success in creating more value because of a portfolio of businesses
Relative position of firm compared to rivals in an industry
A R IUltimately, combination of-Arena-Resources-Implementationdetermines competitive advantage
083Competitive advantage and corporate strategy
Ch 07 Developing corporate strategy
ARENABusinesses logically connected to arenaRelatedness = similarity in markets, resources, dominant logic, etc.Nature of resources varies along a continuum240 GE has managerial resources in common between its businesses
A R I
RESOURCESUsefulness of resources to create competitive advantage at:BL-S: VRINE modelCL-S: specialized vs. general resources
240 Specialized resources240 Fiber-optic capabilities240 General resources240 Manufacturing and mass marketing
IMPLEMENTATIONStructure, processes and systems, people and rewards1-Knowledge transfer2-Coordination mechanisms3-Compensation and reward systems4-Size and organization of corporate-level management241 3M, GE242 Berkshire Hathaway, SC Johnson
084
Corporate strategy in stable and dynamic contexts
Ch 07 Developing corporate strategy
Strategy in different contexts
Stable contextSynergies conceived as functions of static business-unit arenas and the formal structural links among themCL-S focuses on EoSco and EoSca, making sure that firm operates as a tightly interwoven whole242 Kansas City Southern railroad diversifying into financial services with Janus and divesting after243 Masco Corp. plumbing, home building and repair supplies; Home Depot and Lowe’s
Dynamic contextDiversification can be viable strategy in dynamic contexts, unless the disadvantages offset the pros (flexibility, coordination, complexity)243 Co-evolution = web of shifting linkages between evolving businesses (biology: successful changes among two or more ecologically interdependent species)Cross-business synergies are temporary; tension about the optimum number of linkages for maximum efficiencyBusinesses potentially cooperating and in rivalryDivestiture and spinoffs243 Adaptec, Inc. spun off its software as Roxio243 Palm and 3Com244 Exhibit 7.8 Masco
245 Exhibit 7.9 Stable vs. dynamic contexts characteristics
085
Ch 08
Looking at international
strategies
086
Introduction
International Strategy
International Strategy and competitive advantage
Using CAGE model to choose foreign countries
Entry vehicles
International strategy configurations
International strategy in stable and dynamic contexts
Ch 08 Looking at international strategies
087
Introduction
Ch 08 Looking at international strategies
253-255 DELL
In 2007, second largest PC manufacturer and third largest in ChinaEnormous potential market in China for PCSize is attractive but hazards (Mattel, Motorola, Kodak)
Dell’s approach in China is to stay flexible and entrepreneurialLocal and global simultaneouslyArenaVehicles (alliances)StagingEconomic logic
Lenovo and HP are rivals
088
International Strategy
Ch 08 Looking at international strategies
256 International strategy = cross-border activities of the firm
Growing awareness of international landscape (new market, new constraints)
Thinking about all dimensions of internationalization is key
Trends Exhibit 8.2 p.257 Global trends to watch (shifting of activities, growing consumers, knowledge, talent and labor, environmental issues)
258 Wal*Mart, GE258 Oil and gas, auto, banking and insurance firms in the top twenty Fortune 500258 Logitech, Skype, eBay
089
International Strategy and competitive advantage
Ch 08 Looking at international strategies
Three questions1- Why?2-Where?Hard and soft criteriaFit3-How?
Internationalization increasingly critical:1-Capital markets and employees favor fast-growing firms (domestic market saturated)2-Efficiencies in all value-chain activities are linked across borders3-Developing countries have opportunities4-Knowledge can come from abroad5-Customers are becoming global6-Competitors are becoming global
Globalization not a panacea and exposes to hazardsParticipating does not equate to having a competitive advantageAlignment with strategy and benefits > costs are necessary
260 Pepsi260 Wal*Mart261 Dell
090
International Strategy and competitive advantage
Ch 08 Looking at international strategies
Costs1-Liabilities of newness and foreignness261 Liability of newness
2-Costs of governance and coordinationInformation distortion, transfer, translation, misalignment between managers
3-Costs and benefits evolveRegarding level of internationalization, evolution of elements (Exhibit 8.6 p.262)Best performance at moderate-high levels of internationalization
091
International Strategy and competitive advantage
Ch 08 Looking at international strategies
Global EoSca and EoScoEnormous costs development require larger customer base262 Citigroup, McDonalds, Coca-cola leveraging brands
EoSca and purchasing powerEoSco (exploiting brand internationally)263 McDonalds
LocationImplications for cost, demand rivalry, complements264 Soft drink industry Coca-cola and Pepsi264 Arbitrage
Multipoint competition264 Multipoint competition265 Stronghold assaultUse with care because typically not sustainable265 Michelin attacking Goodyear on its US market
Learning and knowledge sharingInternational can be used as innovation, improving or new ideas265 Dell learning about Chinese market266 Lincoln Electric purchasing Messer GresheimTransfer knowledge across countries267 SC JohnsonLearn where competition is strongest267 Toyota, Honda, DuPont, WL Gore &AssociatesSharing knowledge across units267 BP, GlaxoSmithKline
Key Factors in Globalization
092Using CAGE model to choose foreign countries
Ch 08 Looking at international strategies
268 CAGE Framework = model helping to think about globalization (location, opportunities, risks)268 Fast food269-270 Emerging market boom farm equipment, refrigerators, aircraft, telecom
270 Cultural distance271 Lincoln Electric
271 Administrative distance
273 Geographic distance273 Maintenance, repair and overhaul industry MRO WW Grainger
273 Economic distance273 Hindustan Lever276 Processed cheese274-275 CAGE model at Virgin Mobile Country Attractiveness Portfolio CAP276 Virgin276 Lenovo
093
Entry vehicles
Ch 08 Looking at international strategies
276 Vehicles of strategyDifferent levels of ownership control and local presenceStaged process
Exhibit 8.15 Typology of entry vehicles p.277
Different levels of ownership control, local presence and risk
279 Exporting279 Contractual agreement280 Foreign Direct Investment281 Importing281 Business Process Outsourcing BPO281 Off-shoring
277 Lincoln Electric278 South African Breweries and Miller SABMiller279 Kvaerner A?S builds paper mills and deep-sea oil rigs279 Bayer AG280 Millennium Pharmaceuticals280 McDonalds in Japan280 Virgin Mobile and Sprint280 DaimlerChrysler and BMW formed Tritec280 Rayovac purchased Microlite, battery maker to enter Brazilian market281 Nike, Pacific Cycle281 Service and IT intensive industries282 Ford, Daimler-Benz, Cargill
094
International strategy configurations
Ch 08 Looking at international strategies
Trade-off between responsiveness to local needs and global efficiency282 Market fragmentation
Four different strategies on a matrix along with two dimensions: Local responsiveness and Global efficiencies1- Emphasize local responsiveness283 Lincoln Electric2- Emphasize global efficiencies with some local advantages284 Intel, Pfizer3- Emphasize global efficiencies284 Steel and copper BHP Billeton4- Seek to exploit local advantages and global efficiencies284 McDonalds
284 Born-global firm285 LogitechQuestions to succeed as a global start-up
095
International strategy in stable and dynamic contexts
Ch 08 Looking at international strategies
Industries considered as stable will become more dynamic because of globalizationGlobalization adds another level of complexity to strategy
Dynamic nature of industry and globalizationFMAStaging and geographic marketsArenas in international strategiesR&C in strategy287 Lincoln Electric287 Ikea
Global mindsetGlobal perspective of executivesAbility to learn and to transfer knowledge; effective communication networkExpatriates and Inpatriates288 Dell288 SC Johnson
096
Ch 09
Alliances and cooperative strategies
097
Introduction
Strategic alliances
Why alliances?
Form and structure of alliances
Alliances as strategy vehicles
Alliances in stable and dynamic contexts
What makes an alliance successful?
Ch 09 Alliances and cooperative strategies
098Introduction
Ch 09 Alliances and cooperative strategies
293-295 PROCTER & GAMBLE
P&G and Magla gloves signed an agreement to market a line of Magla household gloves under the Mr. Clean nameMagla pays royalties to P&G for the use of that brand
Speed is increased in alliances
Alliance with Stanley Works, American Red Cross and Old World Industries
099Strategic alliances
Ch 09 Alliances and cooperative strategies
Alliance has start and endNot a strategy in itself but is a strategic “Vehicle”; must be consistent with economic logic of strategy
Often sharing investments and rewards, reducing risk and uncertainty
Alliances outperform firms without alliances on average
296 Strategic alliance = partnership where several firms combine R&C with the goal of creating mutual advantageMay concern one step or several of value-chains; be strategic or tactical for partners
295 BMW and DaimlerChrysler to build a plant together to reach the 400,000 vehicle/year of minimum efficient scale296 Wal*Mart dropped Rubbermaid when it tried to raise its prices Alliances have grown dramatically in the last few decadesAlliances are be high risk and high return vehiclesFirms behave in their own self-interest; success of alliance depends on willingness to subordinate own interest to alliance’s one
100Why alliances?
Ch 09 Alliances and cooperative strategies
Four ways of creating competitive advantage
Joint Investment
Capability of firms to make investmentToo strong tie with client firm
298 Wal*Mart
Knowledge sharing
Learning from partnersMutual trust and familiarityConsistent information sharing routines
298 John Deere and Hitachi exchange employees in segments
Complementary resources
Creation of R&C unavailable to other players
299 Coke and Pepsi
Effective management
Comparison of costs between alternativesMake Buy Ally choice MBA
Trust is source of competitive advantage because facilitates controls, investments, commitment and reduces costs
101Why alliances?
Ch 09 Alliances and cooperative strategies
Evolution of alliances
Product Performance Focus1970s
299 Corning and Dow
Position Focus1980s
299 Microsoft and Intel299 P&G and Magla
Learning and R&C Focus2000
300 Pacific Cycle
102Form and structure of alliances
Ch 09 Alliances and cooperative strategies
Time commitment
Financial commitment
Non equity alliances Equity alliances
-- +
+
300 Coffee supplier and enterprise software supplier
301 Examples
103Form and structure of alliances
Ch 09 Alliances and cooperative strategies
JV and Equity alliances
301 Joint Venture
301 Equity alliance
301 Dow and Corning301 Millennium Pharmaceuticals
302 Non Equity alliance
Sole-sourcing, JIT supply, licensing, co-branding, franchising
302 Starbucks, Barnes & Noble, UA, Dreyer’s, Kraft
Non Equity alliances
302 Consortia
302 Sematech consortium of semi conductor manufacturers
Multi party alliances
104Alliances as strategy vehicles
Ch 09 Alliances and cooperative strategies
Alliances and Business strategy
P5F model to look at potential partners
Rivals
New entrants
Suppliers
Customers
Substitutes
Complementors
303 One World and Star; Beer Anheuser Busch, Miller, Sam Adams
303 Wal-Mart and Cifra
304 Tritec, SC Johnson, Wal-Mart
304 Copeland, Trane, Rheem; Dell, Apple and Intel
304 Dean Foods and Silk
304 Coke and Pepsi
Value Net modelAnother way to look at potential partners304 Coopetition
304 Intel and Motorola
Vertical alliance1- Create more value (speed to market, quality, innovation, faster response to change)2- Decrease costs in four areas (transaction costs, quality-related costs, product development costs, logistics costs)In a sense, an alternative to vertical integration305 Vertical alliance306 Timken Exhibit 9.7
Horizontal alliance306 Horizontal alliancePresence in multiple segments of an industry1- Reduce risk2- Greater efficiency3- Learning and innovation4-Overcome political obstacles
Higher probability of success:1-Partners’ goals converge2-When partners are chasing industry leaders3-Each partner must protect proprietary skills
306 Oil exploration firms306 Kraft’s, Starbucks, Yuma brands, Gevalia, Maxwell House306 Mondavi306 McDonald’s and Disney
306 Sematech307 Sony and Apple307 Otis Elevator and Tianjin307 Philips and DuPont307 Semi conductor makers in Asia and Intel307 Fuji-photo and Xerox
105Alliances as strategy vehicles
Ch 09 Alliances and cooperative strategies
Alliances and Corporate strategy
Alliances and International strategiesDomestic vs. international alliances (more complex)
308 Dell and Asian distributors 308 Saudi Arabia308 Chinese firms308 Indian firms308 semi conductor firms
Alliance networkNetworks of alliancesFirm operating an hub, a node in a complex array of partially owned and not owned businessesCompetition should arise within and across industries308 Star, One World and Sky Team308 HP, IBM, Sun and MIPS309 Beta and VHS formats309-310 P&G: Connect + Develop309 Exhibit 9.8 Different alliance networks310 Exhibit 9.9 Alliance networks of Sun, MIPS, IBM and HP
Diversification optionsCreate value across a portfolio
307 Fuji-photo and Xerox307 P&G and Magla308 VC firm Softbank
Risks:1-Poor contract development2-Misrepresentation of R&C3-Misappropriation of R&C4-Failure to make complementary R&C available5-Being held hostage through specific investments6-Misunderstanding partner’s strategic intent312 Trek Bicycles and Giant312 Rayovac, Mashushita, and Panasonic
106Alliances in stable and dynamic contexts
Ch 09 Alliances and cooperative strategies
Stable environment more forgiving of mistake and allows firm to participate in more alliances312 Nestle and Mars
In dynamic environment, serious consequences, particularly if dynamism coupled with technology intensity312 Millennium Pharmaceuticals
Stability of environment affects partners’ objectives and motivationsCo-evolution model of corporate strategy and development of linkages: alliance enables firm to develop its R&C in concert with the best R&C availableAlliance sustains a specific focused strategy
107What makes an alliance successful?
Ch 09 Alliances and cooperative strategies
Five families of areas for reasons for alliance success (ten features in these families)1- Trust2-Manage knowledge and learning3-Understanding alliance evolution4-Measuring alliance performance5-Dedicated alliance function
1-TrustCan be competitive advantageMechanisms to protectAdvantages of trust […]315 BMW and DaimlerChrysler Tritec
315 Relational quality-initial conditions-negotiation process-reciprocal experiences-outside behavior316 Wal-Mart dropping Rubbermaid
2-Manage knowledge and learningIncrease collective benefits of allianceWillingness and resources316 Toyota and its suppliers
3-Understanding alliance evolutionMay eventually become acquisitionRelationship between partners may change over time316 P&G and Magla318 Exhibit 9.12 Coevolution in Fuji-Xerox alliance
108What makes an alliance successful?
Ch 09 Alliances and cooperative strategies
4-Measuring performance-different information and reporting systems-inputs that alliance receives from members difficult to track and account for-outputs (idem)317 BMW and DaimlerChrysler Tritec
5-Dedicated alliance functionManager or group of people319 Exhibit 9.13 Dedicated alliance function through value-chain
When do partners fit?-strategic fit-Resource and financial fit-Cultural fit-Structure, system and processes fit-additional fit criteria (timing, other alliances, alternatives, environmental context and competitive pressures)Alliances between complementary equals tend to be strongest and longest lasting319 P&G and Magla322 Sematech; Intel; Wal-Mart320-321 Assessing alliance fit at Millennium Pharmaceuticals
109
Ch 10
Mergers and acquisitions
110
Introduction
Motives for mergers and acquisitions
Mergers, acquisitions and strategy
Types of mergers and acquisitions
Pricing and premiums
Acquisition process
Integrating and implementing an acquisition
Acquisition in industry contexts
Ch 10 Mergers and acquisitions
111
Introduction
Ch 10 Mergers and acquisitions
327-330 eBay + Skype + PayPal
eBay acquired Butterfields but sold it off three years after eBay acquired PayPal in 2002 and paid a premium of $250m (price $1,5bn)eBay acquired Skype in 2005 for $4.1bn
eBay and PayPal made each business stronger on their own and combination opened up new opportunitiesPayPal global payment system
Communication synergy that Skype brings in
eBay buyers and sellers use Skype to communicate and Skype callers use PayPal to pay for their calls; both encouraging cross-border business growth
329 eBay business model329 PayPal business model
112Motives for mergers and acquisitions
Ch 10 Mergers and acquisitions
Definitions of terms
330 Acquisition = transfer of ownership; one firm buys another one
330 Merger = combination or consolidation of one firm with another Merger generally means “merger of equals”, i.e. merger between firms of relatively equal size and influence that fuse together to form a larger firm
330 Dispute over differences in definitions for Daimler’s acquisition of Chrysler (Kirk Kerkorian)
113Motives for mergers and acquisitions
Ch 10 Mergers and acquisitions
Managerial self-interest
330 “Managerialism”
Hubris
331 Hubris = excessive pride, overconfidence, arrogance
Synergy
1-Reducing threats2-Increasing market power and access3-Cost savings332 Soft synergies4-Increasing financial strength5-Sharing and leveraging capabilities
331 Cisco systems332 First Union acquired Wachovia332 Daimler acquired Chrysler332 PepsiCo acquired Taco Bell, Pizza Hut, Kentucky Fried Chicken and Carts of Colorado
114Mergers, acquisitions and strategy
Ch 10 Mergers and acquisitions
Three questions
1-Economic logic?
2-Existence of alternatives to acquisition?
3-Difficulties and hazards
115Mergers, acquisitions and strategy
Ch 10 Mergers and acquisitions
1-Economic logic?
Usage has increased in recent years; it represents a major economic activityHowever, criticism existsSome acquisitions are successful, other fail
Not strategy in itself but one element of strategy (vehicle)Implications for strategy: possibly diversification; realization of synergies; acceleration of strategy realization because fast
335 Divestiture = selling off a businessDivestiture is also key strategic vehicle, the flip side of acquisition, that enables firms to exit businesses
333 eBay, PayPal and Butterfields
335 Acquisitions “mistake”:335 AT&T of NCR335 Quaker of Snapple; sold it to Triarc which resold Snapple to Cadbury Schweppes with profit336 Exhibit 10.6 Ups and downs at Snapple335 AOL of Time Warner335 Daimler of Chrysler
116Mergers, acquisitions and strategy
Ch 10 Mergers and acquisitions
2-Acquisition vs. alternative (internal development)?Advantages:-Speed-Critical mass immediately-Access to complementary R&C; new R&C can be integrated-Less competitive environment by elimination of one rival
3-Drawbacks of acquisition-Cost-Premium may outweigh potential benefit-Inheritance of unnecessary adjunct businesses-AON All-Or-Nothing tool, whereas internal development entails incremental investment overtime; reevaluation is possible-risk of cultural differences and clash-Greater cost in capital and time required for integration, the more synergies managers will have to squeeze out of the operation
117Types of mergers and acquisitions
Ch 10 Mergers and acquisitions
Different types exist, each one with specific purpose
General objectives:1-Managing competition2-Managing uncertainty3-Managing both
Vertical Acq.
1-Securing supply
2-More value for final customer (leverage R&C)
3-Reduce costs across value chain Horizontal Acq.
Expansion of firm’s offerings
Complem
entary Acq.
Reciprocal increases in
sales
337 Coke and Pepsi and bottling
337 Cadbury Schweppes acquisition of Snapple
338 Best Buy acquisition
of Geek Squad
118 Ch 10 Mergers and acquisitions
Typology J. Bower
Types of mergers and acquisitions
Product and market extension
Geographic roll-up
R&D goal
Overcapacity
Industry convergence
Investor/Holding
International
338 Product-extension338 Market-extension338 Quaker and Snapple; Cadbury Schweppes
338 Geographic roll-up339 First Chicago and Bank One339 Waste Management roll-up firm to buy small trash hauling firms339 United Rentals acquisition of heavy equipment leasing firms
339 R&D Goal or In lieu or addition to internal R&DIndustry where rapid technological change and innovation requires large resources; buying start-ups340 Cisco, Microsoft, Intel and AMD
340 Overcapacity or consolidation340 Daimler and Chrysler; banking industry
340 Industry convergencePut firm in better competitive position when industry boundaries erode340 AOL, Time, Warner340 Viacom and Paramount, CBS, Blockbuster341 Disney and ABC, ESPN
Independent investors or holding acquire existing firmsBring management, operating and financial discipline341 Berkshire Hathaway
Same types but more complexity
119Pricing and premiums
Ch 10 Mergers and acquisitions
No single correct priceValue of target depends of hunter’s strategy (how does target fit with strategy?)
Different components:341 1- Market value (capitalization, stock x stock price)342 2- Intrinsic value (future cash flows and corrections from market)342 3- Purchase price
If potential buyer perceives synergies, it may pay more than market valueSynergy is function of strategic fit between firm and potential buyer so each bidding firm may value target differently
342 Synergy = economic value creating by ability to decrease costs or increase revenues
342 Daimler and Chrysler342 Vodafone and Bell Atlantic bidding for AirTouch
120Pricing and premiums
Ch 10 Mergers and acquisitions
342 Premium = market value – price paidOn average premium equals 30 – 45% market valueJustification of paying premium is realization of synergies
342 Synergy trap343 Berkshire Hathaway
343 Required Performance Improvement
343 Walk-away price343 Coke trying to buy Quaker Oats; Pepsi bidding as well. Buffett opposed the deal because overpriced343 Comcast offer for Disney and forced to withdraw offer because drop of its own stock
343 Winner’s curse (escalation of commitment)
344-345 Calculation of premium and required synergies for PayPal’s acquisition by eBay
121Acquisition process
Ch 10 Mergers and acquisitions
Single largest factor of successProblems: decision-making problems and implementation problems
Four stages:1-Idea generationImpetus for acquisition346 United Rentals’ roll-up strategy; Quaker and Snapple
2-JustificationLogic for acquisition: how does it contribute to strategy and competitive position [list of 8 questions for managers]Trial and error effect if operating-level managers do not understand the logicAfraid of causing decision-makers to shy away from deal-Understand conditions required for creating synergies-Control timing of implementation and integration-Establish walk-away price348 Quaker and Snapple348 Cisco Systems ; Exhibit 10.11 Organizational-fit acquisition screening by Cisco
3-IntegrationInteraction between target and acquiring firm
4-Results
122Integrating and implementing an acquisition
Ch 10 Mergers and acquisitions
Option of degree of integration: target autonomy vs. target complete integration
349 Berkshire Hathaway often grants complete autonomy to acquired firms
Strategic interdependenceDepends on nature and volume of R sharing and skill transfer
Need for autonomyRetain key individualsAppropriate amount of autonomy depends on whether it is necessary to create value349 To acquire Rowntree York, Nestle allowed executives to stay in the UK to make them accept the deal350 Cisco had to deviate from its policy to achieve an acquisition of a resisting target
+ -
123 Ch 10 Mergers and acquisitions
Integrating and implementing an acquisition
Implementation process
350 Serial acquirer
Continual process and not an event350 Due diligenceGE Capital and Cisco
Integration management is full-time jobIntegration manager350 GE Capital
Key decisions made swiftlySpeed is critical because cost and time value of money and negative organizational effects of delaying
Address technical and cultural issues351 Cisco351 Franklin Quest merged with Covey and deep different philosophies
124Acquisition in industry contexts
Ch 10 Mergers and acquisitions
Life cycleIntroductionGrowthMaturity
Dynamic contextsTechnological change
Demographic change
Geopolitical change
Deregulation
Acquisition fits with co-evolution model of corporate strategyAbsorption of target’s dynamic capabilities to build specific capabilitiesAcquisition supports a specific focused strategyAdding and paring off businesses
352 Cisco and Microsoft
353 Tribune merged with Times-Mirror and acquired Hoy
353 Wal-Mart acquisition of Cifra
353 Banking industry; telecommunications; AT&T
125
Ch 11
Organizational structure, systems
and processes
126
Introduction
Interdependence strategy formulation and implementation
Implementation levers
Strategic leadership and strategy implementation
Implementation levers in global firms and dynamic contexts
Ch 11 Organizational structure, systems and processes
127
Introduction
Ch 11 Organizational structure, systems and processes
359-362 HUI
HUI is small metal fabricator which implemented the Lean ManufacturingToyota and Danaher Corp as wellHUI has reinvented itself from a traditional family business to an open book managed company with defined goals, roles and authority spread over the entire firm
Lean allowed HUI to discover the real factors that keep it going and increased its speed and adulthood
HUI embraced the cellular manufacturing (U-shaped work cell) that brings in many benefits (faster detection or errors, flexibility, reduced lead-time and inventory)Culture of employee management, customer process and ownership by employees, learning and individual growth
Source of competitive advantage
128Interdependence strategy formulation and implementation
Ch 11 Organizational structure, systems and processes
Formulation and implementation are interdependent and iterative
362 Exhibit 11.2 Formulation and implementation
If difficulties, questions: what is flawed? Formulation, Implementation or both?
363 HUI shows that all the variables of implementation were impacted:-Levers support strategy of growth- organization- systems- people management and culture
“A strategy is only good as it execution”“The important decisions are strategic but more important and more difficult is to make effective the course of action decided upon”
Intended strategy Realized strategy
Strategic leadership
Implementation levers
366 Exhibit 11.5 Key facets of Implementation
129Interdependence strategy formulation and implementation
Ch 11 Organizational structure, systems and processes
Knowing-Doing gap = difference between Knowing and Doing
Causes of Knowing-Doing Gap
Sharing of strategy formulation with STo
Managers
Leadership
Implementation levers
Implementation obstacles
130Interdependence strategy formulation and implementation
Ch 11 Organizational structure, systems and processes
Causes of Knowing-Doing gap
Culture364 CultureIf strong culture, higher performance, less variability in performanceThis effect is reinforced in highly competitive marketsValues must be consistent with strategy
MismatchesEasy to see afterwardsPermanent attention must be given to coherence between strategy, processes and systems and people management
364 HP tried to mimic Dell’s business model but encountered resistance from retailers such as Best Buy and CompUSA
364 At IBM, Lou Gerstner revived the firm’s culture364 Exhibit 11.3 Lou Gerstner at IBM
365 HUI Levers support strategy of growth
365 Hardware and software providers that attempted to become IT solution providers through adding a consulting division, e.g. SAP366 Exhibit 11.4 Picking up the pieces at SAP
131
Implementation levers
Ch 11 Organizational structure, systems and processes
367 Implementers levers = mechanisms that a strategic leader has to help execute a strategy
Three components:1-Structure2-Systems and processes3-People and rewards
132
Implementation levers
Ch 11 Organizational structure, systems and processes
367 Organizational structure = relatively stable arrangement and division of responsibilities, tasks and people within an organizationThe framework that management has devised to divide tasks, deploy resources, and coordinate departments
Structure encompasses: Authority hierarchy; organizational units and coordination mechanisms
Two functions: control and coordination
Structure must fit strategy (e.g. diversification strategy; concentration strategy)
Relationship strategy – structure: egg-chicken or one dominant direction?How structure influence strategy?368 Discovering new offerings that were profitable then integration into strategy Air Liquide368 Intel’s shift from memory chips to microprocessors not orchestrated by top managers but acted by operational managers to follow one of the rule of activity profitability
STRUCTURE
133
Implementation levers
Ch 11 Organizational structure, systems and processes
368 Functional structureSmall firms; efficiency and qualityIssue of “functional silos”; difficulty to adapt to environment
369 Multidivisional structureMarket, product, business; Fast reaction, duplication of resources, enhances coordination, undesirable competition between divisions
371 MatrixTwo reporting channels; flexibility, high control and coordination, complexity, difficult to manage, skills needed
371 Network structureSmall, semi-autonomous and potentially temporary groups brought together for a special purpose (e.g. team)Flexible; authority based on control of knowledge, resources and expertise; potential for confusion and ambiguity“Network brokers” and connections in networks
STRUCTURE
Four basic forms:
368 Platypus Technologies small nanotech firm
369 Disney Businesses369 GM Product (brand)370 Emageon Visualization tools for medical organizations370 GM with Buick and Cadillac
370 Asean Brown Boveri
370 Gore Industries
372 Professional partnerships372 Legal offices, accounting and consulting firms, advertising agencies and real estate
372 Franchise
134
Implementation levers
Ch 11 Organizational structure, systems and processes
Many systems exist for different functions, such budgeting quality control, planning, distribution, resource allocationBalancing need for short term performance and long term performance
373 Balance scorecard = elaborate summary of goals and objectives of strategic management processObjectives:1-Translate strategy in operational terms2-Align organization and strategy3-Make strategy everyone’s job4-Make strategy an on-going process5-Mobilize change through executive leadership
Balanced scorecard relies on range of metrics and not only financial indicators. It measures elements that are relevant to the value being delivered to key stakeholdersFour components:1-Financial perspective2-External relations perspective3-Internal business process perspective4-Learning and growth perspective
Contents:1-Objectives2-Measures3-Targets4-Initiatives
375 GE375 Exhibit 11.10 Balanced scorecard system
SYSTEMS & PROCEDURES
135
Implementation levers
Ch 11 Organizational structure, systems and processes
375-376 Strategy Map = visual tool explaining strategic objectives, targets and measures
-Objectives-Measures-Targets
Is staging and pacing of strategy on track?
Smoothes process of implementation because articulates causality between objectivesTool for communicationImproves support for strategyHelps to determine resource allocation
377 Microsoft ties compensation of top executives to customer satisfaction378-379 Balanced scorecard for the NUWC Naval Undersea Warfare CenterThemes, measures, target, initiatives
SYSTEMS & PROCEDURES
377 Lean377 Toyota seven wastesElimination of waste, quality improvement, production time, and cost reduction380 Exhibit 11.14 Elimination of waste soul: the 7 wastesKey principles: zero defect, removing non-value-added activities, efficient use of resources, continuous improvement, flexibility, long term relationship suppliers-primary producers
136
Implementation levers
Ch 11 Organizational structure, systems and processes
People and rewards together; Human capital is key
Success if “right people with right competencies at right time at right place”Importance of right people accentuated in human-intensive industries
Recruitment, Selection and Training RSTPeople’s skills are critical. Link with organizational competenciesDownsizing results in short term improvements but in performance decline afterwards382 SAP; BGI383 Jet Blue, Southwest; GE, Microsoft; oilfields
383 Reward systemsYou get what you measureYou get what is rewardedReinforce culture383 Outcome control383 Behavioral controlReward system in diversified firms: issue of incentive for cooperation and synergies across divisions838 GE384 Commercial and investment banks have different reward systems
Contingency framework for analyzing pay384 Exhibit 11.15 [Matrix 2x2 Employer transactional relationship x Employee transactional relationship ]385 Exhibit 11.16 Pay objectives at Medtronic and AES
Rewarding A while 385 Exhibit 11.17 Common management follies about reward systems
PEOPLE & REWARDS
377 Lean377 Toyota seven wastesElimination of waste, quality improvement, production time, and cost reduction380 Exhibit 11.14 Elimination of waste soul: the 7 wastesKey principles: zero defect, removing non-value-added activities, efficient use of resources, continuous improvement, flexibility, long term relationship suppliers-primary producers
137Strategic leadership and strategy implementation
Ch 11 Organizational structure, systems and processes
Main roles for leadership:1-Implementation of levers2-Resource allocation3-Communication strategy to key stakeholders
1-Implementation of leversImplementation implies trade-offsPoor implementation results from alignment of strategy, its levers and the environment
With time, environment changes, firms grows and levers must be questioned386 HUI
2-Resource allocationTo allocate resources, trade-offs unavoidableConsistency with strategyObstacles: political interests, mimicking rivals’ allocation of resources
Competitive advantage emerges when a firm develops unique advantages, usually scarce387 Airline industry Southwest and JetBlue are not mimicking the other airlines387 Wine industry388 Intel shifted focus from memory chips to microprocessors
138Strategic leadership and strategy implementation
Ch 11 Organizational structure, systems and processes
3-Communication of strategy to key stakeholdersImportant strategic function for leaders that starts in the strategy formulation itself
Four directions for communication1-Upward388 HUI
2-DownwardOrganization members’ support
3-AcrossInternal stakeholders across units and divisions388 Emageon
4-OutwardExternal stakeholders388 IBMChampion neededSTo analysis
Three C-s of strategy communication:-contacts-cultural understanding-credibility389 3M, BGI
139
Implementation levers in global firms and dynamic contexts
Ch 11 Organizational structure, systems and processes
Global firms
Need for efficiency and local responsivenessFour structural forms
1-Local responsivenessPortfolio of independent businesses around the world390 US Government, SAP, Nestle
2-Global efficiencies with some local advantagesCoordinated group of federations over which more control is exerted by home-country headquartersOverseas operations seen as appendage of domestic activities390 SAP
3-Global efficienciesCentralization of resources and decisionsOverseas operations seen as pipelines for distributing products to global and homogeneous market301 Ford, Japanese firms
4-Both local advantages and global efficienciesDispersion, specialization, interdependence391 McDonalds
Finding and rewarding managers in global organizationExpatriates vs. localAsymmetry of information
140
Implementation levers in global firms and dynamic contexts
Ch 11 Organizational structure, systems and processes
Dynamic contexts
To manage high-velocity industries is difficult when implementing strategy
Two responses:1-Ambidextrous organization2-Patching in diversified firms
1-Ambidextrous organizationWhen disruptive technology emerges, difficult to retain market leadershipIncumbent has disadvantage because status quo perceived as best interest of managers and employeesParadoxical problem: to flourish in long run, firm must exploit existing advantages and explore innovations that will probably alter industry significantly in the future. Then firm must learn to integrate incremental change and radical innovation393 Ambidextrous organizationAmbidextrous answer OK for development of radically new businesses freely
Four structural forms1-Functional where innovation integrated into existing structure2-Cross-functional or matrix (innovation outside functional hierarchy)3-Team or units4-Structural independent unit for innovation linked to organizational at upper level only
141
Implementation levers in global firms and dynamic contexts
Ch 11 Organizational structure, systems and processes
Dynamic contexts
2-Patching393 Patching = process of regularly remapping businesses in accordance with changing market conditions and restitching them into new internal business structures (combining, splitting, transferring, adding units)
ComplexStructure is altered so must be seen as flexible and contingentUsually involves small incremental changesAdjust internal systemsPatching OK for multi-products and geographies where systems are consistent across firms393 BGI, HP
Linking implementation to stagingProcess should anticipate staging objectives of strategy388 HUI
142
Ch 12
New ventures and corporate renewal
143
Introduction
From new-venture creation to corporate renewal
Entrepreneurship and the entrepreneurial process
New venture creation and corporate new venturing
Initial Public Offering and managerial professionalism
Why do organizations fail?
Strategic change and organizational renewal
Ch 12 New ventures and corporate renewal
144Introduction
Ch 12 New ventures and corporate renewal
401-403 SNOCAP
SNOCAP helps artists and copyright owners to sell music directly to customers from the artist’s website or MySpace pageShawn Fanning founded Napster in 1999 and SNOCAP402 Long tail where huge potential for revenue exists when selling to many individuals products that have each low sales volume
iTunes, RhapsodyAmazon.com
493 Social networking403 FaceBook, Friendster, and MySpace
SNOCAP differentiators are rights protection and commercePotential market is 10 times was does exist today, according to SNOCAP
145From new-venture creation to corporate renewal
Ch 12 New ventures and corporate renewal
Birth TransitionIPO
Rescue
Three important stages that can punctuate the life cycle of a firmTrue regardless of firm age or sizeEntrepreneurship is present at each stage
Strategy provides solutions to problemsOpportunities and R&C
404 New venture creation404 Corporate renewal404 Initial Public Offerings IPO
146Entrepreneurship and the entrepreneurial process
Ch 12 New ventures and corporate renewal
Success depends as much on entrepreneurial team as on the lead entrepreneur
405 Entrepreneurship = consequence of actions based on the identification and exploration of opportunities in the absence of obviously available resources405 Entrepreneurial process
405 OrthodoxyOrthodoxy represents status quo therefore creates blind spots to the recognition of new opportunitiesList of several dimensions where may existCustomer, interface, profit definition and value delivery, PS functionality, PS form, way processes are structured and managed, ideal cost and pricing structure
404 Dell, IBM and Apple405 Exhibit 12.2 Firms and orthodoxies that have created blind spots
147Entrepreneurship and the entrepreneurial process
Ch 12 New ventures and corporate renewal
Entrepreneurial process integrates three elements:1-Opportunity2-Key resources and capabilities3-Entrepreneur and entrepreneurial team
1-OpportunityOpportunity and assessment of R&CEliminate, reduce, create or raise previously assumed dimensionsMarket disruption situation is entrepreneur’s dream because opportunitiesScientific discovery or breakthrough inspire entrepreneursLink with R&C406 SNOCAP407 Google, Universities Stanford and Wisconsin-Madison
148Entrepreneurship and the entrepreneurial process
Ch 12 New ventures and corporate renewal
2-R&COverlap between people and R&C because opportunity sometimes based on skills and experience408 SNOCAP
3- Entrepreneur and entrepreneurial teamNo litmus test to find right peopleEntrepreneur must balances three key elements of entrepreneurial process
408 Exhibit 12.4 Google’s management team with three people and the repartition of responsibilities
149New venture creation and corporate new venturing
Ch 12 New ventures and corporate renewal
No rule of thumb to move to step after Opportunity identification
Generally:1-Business plan2-Financing3-Launching PS
1-Business planProvides coherent basis for strategy and explores five facets of strategy411 Exhibit 12.6 Table contents of typical business planWell-crafted plan does not ensure success. Strength and coherence of three fundamental elements is critical. Continuous work in progress
2-FinancingOften own resources firstToo much money early can be counterproductive410 Bootstrapping410 SNCAP, Angel Investors LLC, Morgenthaler Ventures, Walden VC, Court Square Ventures
150New venture creation and corporate new venturing
Ch 12 New ventures and corporate renewal
Corporate new-venturing411 Corporate new-venturing412 Merck, 3M, Motorola, Rubbermaid, Johnson & Johnson, Corning, GE, Raychem, HP, Wal-Mart
Two forms
1-New businessA champion (individual or group) for innovationAssembling R&C, meeting goals, solidifying organization, business climate supportive to entrepreneurial activitiesThree obstacles
2-New venture divisionStructural solution: unit working like venture capitalist or incubatorCreating new business that will contribute to corporate entity or high growth new venture that can be sell off at profitNew business is protected from main activity but at the same time isolatedBalance requirements of corporate new ventureConditions of success […]R&C approach required413 Gillette, IBM, Levi Strauss and Xerox, firms that tried to start e-commerce operations to mirror traditional brick-and-mortar activities
151Initial Public Offering and managerial professionalism
Ch 12 New ventures and corporate renewal
414 Initial Public Offerings IPOTransition to a more complex, large and established formAccess to more capital and to put more professional management414 Krispy Kreme
MethodFirm establishes market value in private sectorValue estimated by investment-banking institution (impressive amount of information)Timing the offering to target the optimal timeInstitution sells shares to public414 S-1 statement414 Prospectus414 Tomo Therapy and 415 Exhibit 12.7 S1-statement first page414 Google
Cost is roughly 10% of amount of capitalFinancial tests and audit
417 Road show
417 Bermuda Triangle of Management = region where firms face the need to cross over from entrepreneurial to formal management417 Trucking industry418 SAP417 What does formal professional management entail? […]
152Why do organizations fail?
Ch 12 New ventures and corporate renewal
Understanding causes failure important because helps understand guide firm through strategic change to correct problems before failureAll firms may experience distress at any point of their life cycle
Set of common factors underlies business failure
419-420 Google list of risks listed in S-14 Krispy Kreme
External causesSome changes are rapid whereas others are slow and predictableIn most cases, managers observed, discussed and disregarded relevant change in environment
1-Economic change
2-Competitive change421 Clothing, consumer electronics, steel
3- Social change421 Krispy Kreme
4- Technological changeITTransportation technology
153Why do organizations fail?
Ch 12 New ventures and corporate renewal
Internal causesImpossible to say what percentage of failures result from internal causes but most experts agree that they are the dominant cause
1-Strategy failure
2-Management failureTop managers very smart but dysfunctions hinder their abilities (dictatorial style, lack of managerial depth, unbalanced team, dishonesty and fraud, weak financial function)423 Roger Smith at GM got rid of executives who disagreed with him423 Enron, WorldCom, Tyco
Warning signals of organizational declinePESTEL, industry structure and value-chain, financial indicators424-425 Ford’s numbers fizzy or flat?Three indicators: Z-Score model; Sustainable growth and Operating leverage
154Strategic change and organizational renewal
Ch 12 New ventures and corporate renewal
All business environments are in a state of changeStrategic management deals with the state of change
Two actions:1-Anticipate change2-Respond quickly to changes
426 Strategic changeWhen orthodoxies exist, difficulty of change is compounded
Traditional types of change:-cost reduction-asset reduction or redeployment426 Brewery-restructuring
155Strategic change and organizational renewal
Ch 12 New ventures and corporate renewal
Eight steps of sound change management:1-Sense of urgency2-Guiding coalition3-Vision4-Communication5-Empowerment of others6-Short-term winsSAP’s signing of Exxon as customer7-Consolidation8-Institutionalization
The nuts and bolts of change through the necessary levers 429 Exhibit 12.12: what happens if one levers are missing-vision-skills-incentives-resources-structure
156Strategic change and organizational renewal
Ch 12 New ventures and corporate renewal
Turnaround management:When firm faces dire straits, no luxury for time, but emergency430 Ford, GM
Five stages:431 Five stages Exhibit 12.131-Changing management (way top managers approach issues)2-Analyzing situation3-Implementation of emergency plans4-Stabilization5-Return to normal432 Exhibit 12.14 Successful turnaround at ISH
Five caveats:-stages not necessarily distinguishable-number stages varies and depends upon seriousness of crisis-importance of each stage varies-more than one stage at a time; overlap-length of time varies (12 to 36 months)
157
Ch 13
Corporate governance
158
Introduction
What is corporate governance?
Corporate governance and competitive advantage
Ownership and roles of owners
Board of directors
Executive compensation
Market for corporate control
Faces of corporate governance around the world
Ch 13 Corporate governance
159
Introduction
Ch 13 Corporate governance
439- 442 Hewlett-Packard
HP founded in 1938, manufacturing audio oscillator
Growth and many products
First outsider as CEO Carly Fiorina 1999
Battle for merger with CompaqPro-merger won and merger took several years to be completed
Questioning Fiorina’s leadershipConflict with Board and information leak to the pressBoard asked Fiorina to step down
Patricia Dunn appointed chairman of BoardMark Hurd appointed as CEO
Investigation about source of leak through unethical meansGeorge Keyworth was the source
Fight back to the investigation and punitive damages for HP to payHP fired DunnSeries of corporate governance reforms
160What is corporate governance?
Ch 13 Corporate governance
Definitions
Top management team TMT responsible for vision and formulation/implementation of strategyRisk that TMT engage in practices detrimental to STo’s interests
Separation of ownership and management
Make sure that:-profits and resources not squandered-not self-serving decisions at STo expense-STo receive positive return on investment
442 Agency problem442 Corporate governance = system by which organizations are directed and controlled by owners; it addresses distribution of rights and responsibilities among participants and spells out rules and procedures for decision making
161Corporate governance and competitive advantage
Ch 13 Corporate governance
Effect of CG on firm’s survival, performance and competitive advantage?
Good CG is positive for STo satisfaction and firm’s performance
443 German law and limited form of stock-based compensation. Early adopters have stock price increase and impact on strategy by divesting non core operations443 Mercato Italiano di Borsa started new exchange STAR for firms adhering to strict CG rules. They constantly outperform those listed on regular Borsa444 Internet-based firms in risky and uncertain markets. Indicators of CG to evaluate444 Fraud and malfeasance in the US444-445 Krispy Kreme rated by Governance Metrics International. Problems followed for Krispy Kreme. Morningstar is investment advisory firm and grade firms on CG A-F scale
Risk of deviation from firm’s purposes increases when managers are not ownersMost visible roles of CG:-control-incentivesWhat recourse do have STo if TMT deviates from firm’s purposed?
162Corporate governance and competitive advantage
Ch 13 Corporate governance
446 Agent446 PrincipalWhen TMT and STo’s interests are identical, agency problem is minimalWhen these interests do not naturally overlap (max executive pay; over-diversification), something must be done
1-Align interests2-Monitor and control TMT’s actions
163Corporate governance and competitive advantage
Ch 13 Corporate governance
446 Codes of governance
Cadbury code446 Adrian Cadbury former chairman of Cadbury Schweppes19 recommendations
Sarbanes-Oxley Act2002447 Adelphia, Enron, Arthur Andersen, WorldCom and TycoAccounting oversight, auditor independence, disclosure, analysts’ conflicts of interests, accountability for fraud, and attorney responsibilities
Public Company Accounting Oversight BoardPCAOB oversees audit of public companiesIt sets rules and standards; accounting firms that audit must register with PCAOB which enforces compliance by these registered firms
Codes of governance
164Corporate governance and competitive advantage
Ch 13 Corporate governance
Four mechanisms:
1- Ownership concentration and power
2- Board of directors
3- Incentive compensation
4- Market for corporate control
Corporate governance mechanisms
165Ownership and roles of owners
Ch 13 Corporate governance
448 Private firm448 Public firm
Dispersion of ownershipSome owners have so much voting power that they can influence strategy and CGDispersion of ownership affects type and magnitude of agency problem faced by investors449 Adelphia and Rigas family’s power of control449 Blockholders449 Coca-cola 13% stocks controlled by 2 individuals; Dell
449 Institutional owners449 FedEx has Vanguard, Barclays and Capital Research and Management Company449 Exhibit 13.3 Ownership structure comparison of Dell, FedEx, Coca, Berkshire Hathaway and PorscheMost institutional owners are passive but some are very activeDifferent types of investors seem to have preference for firms with different strategies450 California Public Employee Retirement System, State of Wisconsin Investment Bank
166Board of directors
Ch 13 Corporate governance
Board of directors450 Board of directorsFormal and informal roles
450 Insider450 Outsider451 Independent outsider
CEO and chairman of BoardTwo roles are mostly combined in US but split in EuropeCombining for need of specialized information and lack of qualified candidatesSplitting for need for monitoring
451 Split model: Boeing, Walt Disney and oracle
In US, boards are typically composed of a majority of outside directorsOutside directors may not be independentCEO has control over outside directorsIn technical areas, insider can provide better information
167Board of directors
Ch 13 Corporate governance
Board’s activities
Monitoring452 MonitoringExecutive compensationExecutive successionAudit reviewHP 452453 GE and Jack Welch
Several committees with specific responsibilities
Advising managersExpertise and contacts of directorsExistence of social ties: good or bad?453 GE
Stability of environment is a factor influencing repartition insider-outsider directors
Lever of power and influence454 Board interlock454 Home Depot, Pepsi and Coca represented at Bristol-Myers Squibb board
168Executive compensation
Ch 13 Corporate governance
Solution to conflict of interest is to reward executives for what is in STo’s best interest455 Incentive alignment“Golden parachute”
Stock-ownership:Requirement that executives own stocks: executives are then more likely to behave like an owner and not a hired hand. But it can backfire455 Exhibit 13.6 Dendrite DRTE software for pharmaceutical industry
1- Traditional stock-ownership (multiple of salary approach)2- Retention program (ownership as percentage of gains resulting of equity-based incentives)456 Mellon Financial Corp
Plans require time so executives have several years
Bonus planYear-end cash reward based on performance. Bias of making decision to maximizing possible bonus; short term bias and inattention to long term strategic needs; easy to revoke or withhold for BoardLong Term Incentive Plan LTIP is based on long term performance457 Food industry Campbell Soup, Kellogg’s, General Mills, Heinz
169Executive compensation
Ch 13 Corporate governance
Stock-option458 Stock-option = right to buy stock at later date at predetermined price (vesting period)After period time, executive can redeem option. He can actually buy stock (at a discount if stock price has increased) or sometimes receives difference between option price and actual price as compensation (without actually buying it)Disadvantages: only the upside potential of gain is at stake; executives do not bear financial risk, just a cost of opportunity458 GE, HP
Restricted stockFirm grants actual stock generally with restriction built in to ensure that executive does not sell the stock to convert it in cash, loosing incentive of being stock owner (vesting period 3-5 years, restriction to sale extended period of time)
Well-design incentive planIncentives are powerful tools: long term performance460 General Dynamics
Options used with moderation and balanced with other types of compensationGap CEO and second manager461 Exhibit 13.10 Comparison CEO pay Home Depot and Lowe’s
159
Market for corporate control
Ch 13 Corporate governance
460 Market for corporate control = every public firm is theoretically for saleMarket; control460 Stock-market = mechanism that the market for corporate control uses to allow one party to take control away from another460 HP and Compaq
Corporate control is who controls firm462 Corporate raiders, competitors and leveraged-buyout firms are investors who buy underperforming firms, restructure them and sale them for a profitTo save jobs, market for corporate control is mechanism of CG
462 Corporate raiders: T Boone Pickens, Carl Icahn, Saul Steinberg, Ted Turner, Michael Milliken462 Oracle acquiring PeopleSoft
Corporate takeovers generally generate gains; target firm’s STo benefit; bidding firm’s STo do not lose outManagerial teams compete for rights to manage corporate resources (RBV)Most costly, emotion-wrenched remedy; benefit for buyer always of concern
159Faces of corporate governance around the world
Ch 13 Corporate governance
Scandals462-463 Ahold Group; Parmalat, Vivendi, Elf, MCI, Tyco
Corporate governance varies by country
463 T Boone Pickens takeover attempt on Koito Manufacturing463 Hostile takeover of Steel Partners on Yushiro Chemicals
Germany
China