Contemporary Strategic Management (Robert Grant, 6e)

Contemporary

Strategic

Management (6 ed.)

Robert M. Grant

1

Quotes

Strategy is the great work of the organization. In situations of life or death, it is

the Tao of survival or extinction. Its study cannot be neglected- Sun Tzu, The Art of War

The strategic aim of business is to earn a return on capital, and if in any

particular case the return in the long run is not satisfactory, then the deficiency

should be corrected or the activity abandoned for a more favorable one- Alfred P Sloan, My Years with General Motors

Diversification is like sex; its attractions are obvious, often irresistible. Yet, the

experience is often disappointing.

- Robert Grant

2

Definitions

The term strategy derives from the Greek word strategia, meaning

‘generalship’

Strategy is not detailed plan or program of instructions; it is underlying theme

that gives coherence and direction to the actions and decisions of an

individual or an organization

3

Index

The Concept of Strategy

Goals, Values and Performance

Industry Analysis: The

Fundamentals

Further Topics in Industry and

Competitive Analysis

Analyzing Resources and

Capabilities

Organizational Structure and

Management Systems

The Nature and Sources of

Competitive Advantage

Cost Advantage

Differentiation Advantage

4

Industry Evolution and Strategic

Change

Technology-based Industries and

Management of Innovation

Competitive Advantage in Mature

Industries

Vertical Integration and the Scope

of the Firm

Global Strategies and

Multinational Corporation

Diversification Strategy

Managing Multi-business

Corporation

Current Trends in Strategic

Management

The Concept of Strategy (1/…)

Characteristics of a strategy Simple, consistent and long term

goals

Profound understanding of

competitive environment

Objective appraisal of resources

Effective implementation

Internal environment Goals and values

Resources and capabilities

Structure and systems

External environment Customer, competitors and

suppliers

5

Strategic fit Link between firm and external

environment

Problem with SWOT analysis (too

simplistic a classification)

Commonality between strategy in

military and business Are important

Involve a significant commitment

of resources

Not easily revisable


1950s- 60s (Financial Budgeting) DCF- based capital budgeting

Financial control through operating

budget

1960s- 70s (Corporate Planning) Medium term economic forecasting

Formal corporate planning

Diversification and quest for

synergy

Creation of corporate planning

departments

1970s- 80s (Strategy as

Positioning) Industry analysis

Market segmentation

The experience curve

PIMS Analysis

Planning through portfolios

6

1970s= 80s (Quest for Competitive

Advantage) Analysis of resources and

capabilities

Shareholder value maximization

Restructuring and re-engineering

Alliances

1990s- 2000s (Strategy for the

New Economy) Strategic innovation

New business models

Disruptive technologies

2000s (Strategy in the New

Millennium) CSR and business ethics

Competing for standards

Winner-take-all markets

Global strategy


Two questions of strategic choices Where to compete?

How to compete?

Levels Corporate strategy (domain selection)- industry attractiveness

Business strategy (domain navigation)- competitive advantage

Strategy: Design vs Emergent Intended, Realized & Emergent (Mintzberg, 1979)

Planned emergence

Roles of strategy: As decision support (constraining range of decisions; acting as heuristics; pooling

of knowledge; and use of analytical tools)

Coordination device (communication device; consensus development)

Target (strategic intent)

7

Tools for Strategy Analysis (1/…)

Primary sources of value Production

Commerce

Distribution of firm’s value among various stakeholder Employees (wages and salaries)

Lenders (interest)

Landlords (rent)

Government (taxes)

Owners (profits)

Economic Profit (economic rent) Economic Value Add (EVA)= Net Operating Profit After Tax (NOPAT)- Cost of Capital

Selecting strategy with highest Net Present Value (NPV)

Strategy and Real Options Modeling uncertainty

Real options valuation

Forward looking performance measure (stock market value)

Backward looking performance measure (accounting ratios)

Values and Social Responsibility

8

Industry Analysis (1/…)

Determinants of firm’s profit Value of product to customers

Intensity of competition

Bargaining power of produced relative to their suppliers

Industrial Organization (IO) Economics: How industry structure drives competitive behavior and determines industry

performance

Industry structure drives competition, which, in turn, determines industry

profitability

Porter’s Five Force Model

Horizontal competition

Rivalry among existing firms

Threat of new entrants

Threat of substitutes

Vertical competition

Bargaining power of suppliers

Bargaining power of buyers

9

Industry Analysis (2/…)

Threat of entry (entry barriers) Capital requirement

Economies of scale

Absolute cost advantage

Product differentiation

Access to channels of distribution

Government and legal barriers

Retaliation

Rivalry between established

competitors (determining factors) Concentration

Diversity of competitors

Product differentiation

Excess capacity and exit barriers

Cost conditions: Scale economies and

ratio of fixed to variable costs

Bargaining power of buyers/

suppliers Buyer’s price sensitivity

Relative bargaining power 10

Industry boundary defined by

group of companies that compete

to serve the same market

A market’s boundary is defined by

substitutability Demand side

Supply side

Key success factors of a firm What do customer want?

What does the firm need to do to

survive competition?

Critique of Porter’s Model Complementary relationships?

Impact of technology on rate of

change

Competition as dynamic,

personalized process

Levels of competition

Competitive Analysis (1/…)

Industry factors account for a minority of inter-firm difference in profitability

(less in 20%)

Complementary goods/ services (The 6th Force) Profits builds for suppliers that have strong market positions

Reduces the value contributed by others

Dynamic competition; Creative destruction and Hypercompetition

Contribution of Game Theory Framing of strategic decisions

Predict the outcome and identify optimal strategies

Game Theory applications Cooperation?

Deterrence? (imposing cost of a unfavorable move)

Commitment (hard or soft)

Changing structure of the game (agreements with competition; self-created competition)

Signaling (deter or mislead competitors )

Limitation of Game Theory: Good for historical analysis, not future; and good

for limited number of firms in concentrate industries

11

Competitive Analysis (2/…)

Competitive intelligence (from publically available info) Forecast competitors’ future strategies and decision

Predict competitors’ likely creation to firm’s strategic initiatives

Determine how competitors’ behavior can be influenced to make it more favorable

Porter’s Model of Predicting competitors’ behavior Competitors'’ current strategy

Competitors’ objectives

Competitors’ assumptions about the industry

Competitors’ resources and capabilities

Segmentation analysis (stages) Identify key segment variables (partition the markets most distinctly)

Construct a segment matrix

Analyze segment attractiveness (apply Five Forces Model)

Identify segment’s key success factors

Select segment groups (specialist vs generalist)

Strategic groups (similar broad strategies, but may not compete)

12

Analyzing Resources & Capabilities (1/…)

Focus of strategy shifted from external environment to internal environment Internal resources and capabilities are more secure source of advantage

Competitive advantage, rather than industry attractiveness is primary source of superior

profitability

Resource based view Firm specific capabilities are more stable source of profitability

Going being serving market needs or leveraging competencies to explore new markets?

Exploiting differences

Profit types Superior marketing power (Monopoly rents)

Superior resources (Ricardian rents)

Resource vs Capabilities Resources: Productive assets owned by the firm

Capabilities: What the firm can do

Resources need to work together to create organizational capability

Intangible vs Tangible Resources

Human Resources

13


Organizational capabilities Distinctive competencies: What organization does particularly well relative to the

competitors

Core competencies: Capabilities fundamental to firm’s strategy and performance

Classification approaches: Functional analysis

Value chain analysis (Porter’s Value Chain- Primary & Support activities)

Architecture of capabilities Capabilities are routine

Routinization is essential step in translating direction and operating practices into capabilities

Learning by doing, hence difficult to copy

Trade-off between efficiency and flexibility

Difficult to respond the novel situations

Hierarchy of capabilities

Cross- functional capabilities

Broad functional capabilities

Activity based capabilities

Specialized capabilities

Single- task capabilities

14


Appraising resources and capabilities (sources of profit)

Establishing competitive advantage Scarcity

Relevance (to key success factors)

Sustaining competitive advantage Durability

Transferability (extent of mobility between companies)

Replicability (asset mass efficiencies & time compression diseconomies)

Appropriating the return on competitive advantage Owners or employees

Relative bargaining power

Advent of ‘team-based capabilities’

15


Ways of leveraging resources Converging resources to a few, clearly defined goals. Focus and target.

Accumulating resources through mining experience or borrowing from other firms

Complementing resources through blending and balancing

Conserving resources through recycling and co-opting

Replicating capabilities Replicating them internally

Systematization of knowledge that underlies capabilities

Creating Standard Operating Procedures (SOPs)

Developing new capabilities

Capabilities as a result of early experiences Path dependence

Organizational capabilities: Rigid or Dynamic? Core capabilities become core rigidities with changing environment

Dynamic capabilities: Firm’s ability to integrate, build, and reconfigure internal and

external competencies to address rapidly changing environments

Routines

16


Approaches to capability development Acquiring capabilities: Mergers & Acquisitions

Integrating issues

Cultural and personality clashes

Accessing capabilities; Strategic alliances

Sharing of resources in pursuit of common goals

Creating capabilities

Acquiring necessary resources

Integrating these resources

Housed within dedicated organizational units

Search, experimentation and problem solving

Creation of organizational routines

Management of motivation and incentives

Role of ‘Knowledge Management’

Incubating capabilities into separate organizational unit

17


Framework for analyzing resources and capabilities

Identify the team’s resources and capabilities

Explore the linkages between resources and capabilities

Appraise the firm’s resources and capabilities on Strategic importance

Relative strength

Develop strategic implications In relations to strengths

How can these be exploited more effectively and fully

In relation to weaknesses

Identify opportunities to outsource activates that can be better performed by other organizations

How can weakness be corrected through acquiring and developing resources and capabilities

18

Org. Structure & Management System (1/…)

Ways of organizing production in capitalistic economy Markets (by price mechanism)

Firms (by managerial direction)

If Administrative Cost is lesser than Transaction Cost, transaction will be

organized within the firm than across markets

Emergence of modern corporation (critical transformations) Line- and –staff structures Complex functional structures (19th century) and Holding

Companies

Multi-divisional corporation (1920s): DuPont (increasing size and widening product

range), General Motors (weak financial control and confused product line)

Centralization Coordination and Decentralized Operation

Matrix organization

Shared service organization

19


Specialization vs. Coordination and Cooperation Stable environment eases division of labor (specialization)

Coordination mechanism

Price mechanism (transfer price between divisions; arms-length coordinator)

Rules and directives ()

Mutual adjustments

Routines (regular and predictable sequence of coordinated actions)

The cooperation Problem Incentives and control

Agency problems (owners and managers)

Managerial supervision (positive and negative incentives)

Financial incentives (pay-for-performance)

Shared values (clan control)

20


Hierarchy in organizational design

Essence of hierarchy is creating specialized units coordinated and controlled

by superior units

Hierarchy as coordination: Modularity (exists in all complex systems) Economizing on coordination (communication)

Adaptability (loosely-coupled systems)

Hierarchy as a control; Bureaucracy (Max Weber) Specialization (systematic division of labor)

Hierarchical structure (one supervisor, one subordinate)

Coordination and control (rules and SOPs)

Standardized employee rules and norms

Separation of management and ownership

Separation on job and people

Rational-legal authority

Formalization (written rules)

21


Mechanistic and organic form (Burns and Stalker)

22

Feature Mechanistic Organic

Task definition Rigid and highly specialized Flexible and less narrowly

defined

Coordination and

control

Rules and directives vertically

imposed

Mutual adjustment, common

culture

Communication Vertical Vertical and horizontal

Knowledge Centralized Dispersed

Commitment and

loyalty

To immediate supervisor To organization and its goals

Environmental

context

Stable with low technological

uncertainty

Unstable with significant

technological uncertainty and

ambiguity


Basis of defining organizational units Tasks

Products

Geography

Process

Based upon required and possible coordination intensity

Levels of interdependence (Thompson) Pooled interdependence (least)

Sequential interdependence

Reciprocal interdependence (most intense)

Factors impacting efficiency of organizational arrangements Economies of scale

Economies of utilization

Learning

Standardization of control systems

23


Alternative structural forms

Functional structure Exploring economies of scale, promoting learning and capability building, and

deploying standardized control systems

Problems of coordination and cooperation

Problem arises when firms grow in product range

Multi-divisional structure Response to diversification

Loosely coupled modular organization

Business level strategy and operating decisions made locally and planning,

budgeting and common services are central

Three levels: corporate center; the division; and individual business units

Matrix structure Often complex, slow and conflict pro structure

Companies move away from matrix structure

Alternative forms: Adhocracies; Team-based and project-based

organizations; and Networks. Characterized by focus on coordination rather

than control; by mutual adjustment; and individual playing multiple roles. 24


Management system for coordination and control

Information system Collect, organize and communicate information

Information feedback and information networking

Strategic planning system For achieving coordination within the company

Ensures consistency and commits managers

Three to Five years; combining top-down initiatives and bottom-up business plans

Assess the goals set assumptions and forecasts qualitative statement

specific action steps set of financial predictions

Financial planning and control systems Capital expenditure budget

Operating budget

Human resources management system Implementation of employee contracts

Corporate culture as control mechanism

25

Nature and Source of Competitive

Advantage (1/…)

Emergence of competitive advantage

External sources of change Changing customer demand

Changing price

Technology change

Magnitude of change and Resource heterogeneity leading to different impact

Competitive advantage from responsiveness to change Information + Flexibility

Time based competition

Competitive advantage from innovation Competitive process as a gale of creative destruction

Strategic innovation (not products and services)

Sustaining competitive advantage Imitation is more direct form of competition

Competitive advantage depends upon ‘isolating mechanisms’

Competitive imitation (Identification Incentive Diagnose Resource acquisition)

26


Advantage (2/…)

Emergence of competitive advantage

Diagnosing competitive advantage Causal ambiguity (arising from multiple attributes of competition)

Uncertain imitability (for an imitator)

Acquiring resources and capabilities Build vs buy (depends upon transferability of resources; transaction cost)

Based upon organizational routines, accumulated learning and coordination

First mover’s advantage

Competitive advantage in different market settings

Trade markets Imperfect availability of information (information asymmetry)

Transaction costs (economizing on research and market analysis)

Systematic behavioral trends (e.g. January effect; week-end effect, etc)

Overshooting (bandwagon effect)

Production markets Difference in resource endowments

27


Advantage (3/…)

Industry conditions conducive to competitive advantage Information complexity

Opportunities for deterrence and preemption

Difficulties of resource acquisition

Types of competitive advantage

28

Generic

strategy

Key strategy elements Resources and organizational requirements

Cost

leadership

Scale-efficient plants

Design for manufacture

Control of overheads and R&D

Process innovation

Outsourcing (especially overseas)

Avoidance of marginal customer accounts

Access to capital

Process engineering skills

Frequent reports

Tight cost control

Specialization of jobs and functions

Incentives linked to quantitative targets

Differentiation Emphasis on branding advertising,

design, service, quality, and new product

development

Marketing abilities

Product engineering skills

Cross-functional coordination

Creativity

Research capability

Incentives linked to qualitative performance

targets

Cost Advantage (1/…)

Cost Leadership: Must find and exploit all sources of cost advantage

and sell a standard, no-frills product

Historical focus of strategy management was on cost advantage

Experience Curve (relation between cost and accumulated experience) The unit cost of value added to a standard product declines by constant percentage

(typically 20 and 30%) each time cumulative output doubles

Firm’s primary objective to be expand market share

Pricing based upon anticipated cost (not current cost)

Sources of cost advantage Economies of scale (technical input-output relation; indivisibilities; specialization)

Economies of learning (increased individual skills; improved org. routines)

Production techniques (process innovation; BPR)

Product design (standardization of design and components; design for mfg)

Input costs (location advantage; ownership of low-cost inputs; non-union labors;

bargaining power)

Capacity utilization (ratio of fixed to variable cost; fast and flexible capacity

adjustments)

Residual efficiency (organizational slack; motivation and organizational culture;

managerial effectiveness) 29

Cost Advantage (2/…)

Stages of Value chain analysis

Disaggregate firm into separate activities

Establish the relative importance of different activities in the total cost of the

product

Compare cost by activity

Identify cost drivers

Identify linkages

Identify opportunities for reducing costs

Cost advantage is a prerequisite for success, though may not guarantee long term

profitability.

30

Differentiation Advantage (1/…)

Differentiation: Providing something unique that is valuable to buyers

beyond a low price

Depends upon the industry type

Not just about ‘what’ you offer, but also ‘how’ you offer it Supply side: Understanding of key resources and capabilities

Demand side: Customer insight

Differentiation variables Tangible and intangible dimensions (differentiation opportunities)

Differentiation (how) vs. segmentation (where) Differentiation is firm imperative while segmentation is market characteristic

Differentiation decisions are closely linked to segmentation

Low cost advantage is less secure than differentiation

Cost advantage are vulnerable to new technologies and strategic innovation

31


Analyzing differentiation: The demand side

Product attributes and positioning Customer perception mapping

Multi-dimensional scaling

Conjoint analysis (strength of preference for different attributes)

Hedonic price analysis (combination of attributes)

Value curve analysis (competitive benchmarking of values offered)

Role of social and psychological factors Relations of customers’ lifestyle and aspiration with product

Observation, more than listening

Formulating differentiation strategy Select product positioning in relation to product attributes

Select target customer groups

Ensure customer/ product compatibility

Evaluate costs and benefits of differentiation

32


Analyzing differentiation: The supply side

Drivers of uniqueness (Porter) Product feature and product performance

Complementary services

Intensity of marketing activities

Technology embodied in design and manufacturing

The quality of purchase inputs

Procedures influencing the conduct of each of the activities

The skills and experience of employees

Location

Degree of vertical integration

With increasing competition, offerings become ‘un-bundled’.

Product integrity Internal and external

Value embedded in the images with which its products are associated

Signaling and reputation Search goods vs experience goods

Depends upon ease of performance assessment 33


Brands Serves as guarantee

Incentive to maintain quality and customer satisfaction

Embodiment of identity and lifestyle

Cost of differentiation Limits potential of economies of scale

Hampers exploitation of learning economies

High investment in brand, quality, employees, and services

Successful differentiation requires a combination of astute analysis and

creative imagination

34


Value chain analysis of differentiation Construct a value chain for the firm and the customer

Identify the drivers of uniqueness in each activity

Select the most promising differentiation variable for the firm

Locate linkage between value chain of the firm and the buyer

35

Industry Evolution & Strategic Change (1/…)

Competition is a Dynamic Process Firm lifecycles are much more shorter than that of industries

Lifecycle get compressed over time (1800s 1900s 2000s)

36

Industry Lifecycle

Key driving forces:

Demand Growth (4 stages)

1. Novel technology/ lack of

experience

2. Standardization and price

fall

3. Replacement demand

4. Substitution products

Production and Diffusion of

Knowledge (for customers)

Emergence of “Dominant Design”. May or may not embody a technical standard.

“Network Effects” determine technical standards.

Shift in focus during the lifecycle:

Radical Product Innovation Incremental Product Innovation Process Innovation


Organizational demographics and industry structure: Organizational

Ecology: Evolution of industries as Darwinian process

Rapid increase of number of firms during initial early stage (de novo or de

alio)

Onset of maturity leads to declining number of firms (shakeout phase)

With concentration, new firms look for peripheral markets (resource

partitioning)

Location and international trade

Demand of new products first emerge in advanced industrialized countries

With maturity, products require fewer inputs of technology and sophisticated

skills

Nature and intensity of competition

Shift from non-price to price competition

With growing intensity, margins shrink

37

Stage Key Success Factor

Introduction Product innovation, manufacturing

capabilities, vertical integration

Growth Scaling-up, distribution,

Maturity Cost efficiency,

Decline Destructive price competition


Organizational adaption and change

Strategy and structure must keep pace with the change in external

environment

Evolutionary theory: Variation, Selection (competitive process) and Retention

Importance of ‘Organizational Routine’ (creation and abandonment)

Changes upset patterns of social interaction and requires coordinated action

among multiple individuals

Barriers to change Organizational capabilities and routines (competency traps)

Social and political structures

Conformity (institutional isomorphism)

Complementarities between strategy, structure and system (idiosyncratic combinations)

Limited search and blinkered perceptions (bounded rationality)

‘Innovators’ that pioneer the creation of new industry are typically different

companies from the ‘consolidators’ that develop it

Adapting to Technology Competency enhancing/ Competency destroying (component or architecture level

change)38


Managing organizational change

Dual strategies and separate organizational units Firm’s capability to simultaneously pursue multiple strategies

Bottom-up process of decentralized organizational change Senior management establishing ‘stretched targets’

Issuing specific company-wide directives

Promotion of ‘strategic dissonance’ by adopting divergent strategic directions

Change in organizational structure (centralized to de-centralized)

Imposing top-down organizational change CEO manufactures a perception of impending crisis within the company

Scenario planning (Rand Corp/ Shell) Value of scenario is not in the result, but in the process

Address ‘what-if?’ question

Shaping the future Revolution must be met by revolution

Competitive advantage depends on the deployment of superior

organizational capabilities and these capabilities develop slowly!

39

Management of Innovation (1/…)

Competitive advantage in Technology- intensive industries

Innovation Process Basic Knowledge Invention Innovation Diffusion (Imitation/ Adoption)

Profitability of innovation Across companies, R&D intensity and frequency of new product introduction tend to be

negatively associated with profitability

Regime of appropriability: Condition that influence the distribution of returns

to innovation. Appropriation to innovator depends upon Who owns property rights

Tacitness and complexity of the technology

Lead-time, and

Complementary resources.

Patent protection is of limited effectiveness as compared with lead-time,

secrecy, and complementary manufacturing and sales/ services resources

Great majority of patented product and processes are duplicated within three

years.

40


Strategies to exploit innovation

Alternative strategies Licensing

Outsourcing certain functions

Strategic alliances

Joint ventures

Internal commercialization

Choices depends upon Characteristics of innovation (advantages of licensing)

Resources and capabilities of the firm (Open Innovation)

Timing innovation: to lead or to follow? Depends upon Extent of protection for the innovation by IP or lead time advantage

Importance of complementary resources

Potential to establish a resource

The risk of pioneering are greater for an established firm with a reputation

and brand to protect, while to exploit its complementary resources effectively

typically requires a more developed market

41


Managing Risk

Sources of uncertainty in emerging industries Technology uncertainty

Market uncertainty

Risk limiting strategies Cooperating the lead users

Limiting risk exposure (strategic alliances and joint ventures)

Flexibility (keeping options open and delaying commitment)

Competing for standards

Types of standards (allows interoperability) Public (open) or Private (proprietary)

Mandatory (regulations) or De facto (can take long time)

Network Externalities: Need for standards (creates positive feedback) Products where usage linked to a network

Availability of complementary products and services

Economizing on switching cost

Creates winner-takes-it-all markets and creates lock-in for the customers42


Creating conditions for innovation

Conditions for creativity Personality traits

Environmental traits (human interactions, experimentation, creative abrasion, whole-

brain teams)

Balancing creativity and commercial direction Direction, discipline and integration

Link between creative process and market needs

Creation Nets- network of collaboration

From invention to innovation (Innovation upsets established routines and threatens

status quo)

Cross-functional product development (heavyweight product managers)

Product champions (an idea finds a champion or dies)

Buying innovation (acquiring small pioneers of innovation)

Incubators (corporate funds/ incubators)

Key to success innovation is not resource application decision, but creating

the structure, integration mechanism, and organizational climate conducive

to innovation. 43

Mature Industries (1/…)

Competitive advantage of mature industries

Impact of maturity Reduce the number of opportunities for establishing competitive advantage

Product standardization

Increased buyer knowledge

International competition

Shift these opportunities from differentiation-based factors to cost-based factors

Diffusion of process technology

Difficult to attack established firms with strong distribution presence

Over-investment in capacity

Slow place of technology change

Sources of low cost: Economies of scale (strong association b/w market share and ROI)

Low-cost inputs (low cost of capital, late entry w/o legacy lock-ins)

Low overheads

Corporate restructuring Asset and cost surgery

Selective product and market pruning

Piecemeal productivity moves 44


Competitive advantage of mature industries

Segment and customer selection Creating niche in unattractive/ stagnant markets

Disaggregation of markets- down to individual customer level (through IT)

Target more attractive customers

Quest of differentiation Trend towards commoditization narrows the scope for differentiation and reduces

customer willingness to pay a premium for differentiation

Product standardization and increasing differentiation in complementary services

Brand promotion (e.g. cola and cigarettes)

Innovation Strategic innovation (when product and process innovations fade out)

Redefining markets and market segments

Embracing new customer groups

Adding products and services that perform new but related functions

45


Strategy implementation

Efficiency through bureaucracy (traditionally popular) Machine bureaucracy (centralize, well-defined roles, vertical communication)

Highly routinized operations and application of highly detailed rules and procedures

Beyond bureaucracy Increased role of business level managers in decision making (autonomy)

Shrinking corporate staff

Less emphasis on economies of large scale production

Increased emphasis on teamwork

Profit incentives to motivate employees

46

Declining Industries (1/…)

Strategies for declining industries

Causes of movement from maturity to decline: Technological substitution

Change in customer preference

Demographic shifts

Foreign competition

Adjusting capacity to declining demand depends upon Predictability of decline

Barriers to exit (durable and specialized assets; cost incurred in plant closure; and

managerial commitment)

Strategies of surviving firms (roll-ups through acquisition)

In segmented markets, general pattern of decline can obscure the existence of

pockets of demand that are not only competitively resilient, but also price inelastic.

Strategies for declining industries Divest or harvest (in industry is unprofitable), otherwise

Gaining leadership (showing commitment, acquisition, raising stakes)

Identify niche (inelastic demand)

47

Vertical Integration & Firm’s Scope (1/…)

Transaction cost and scope of the firm

Components of capitalistic economy Market mechanism (decisions guided by market prices) – invisible hand

Administrative mechanism (decisions made by firm)- visible hand

Internalization of activities if Transaction Cost is higher than Administrative

cost. Administrative costs fell because of: Technology

Management techniques

From an ear of integration, last 20 years have seen firms refocusing on core

strengths (flexibility and specialization)

Types of vertical integration: Backward/ Forward; and Full/ Partial

Concerns driving vertical integration Opportunism and strategic misinterpretation (due to bargaining power)

Hold-up

Factors determining vertical integration decision: Allocation of risk and Incentive

structure

48

Vertical Integration & Firm’s Scope (2/…)

Admin cost of internalization depends upon

Differences in optimal scale between different stages of production

Developing distinctive capabilities (and partner for rest)

Managing strategically different businesses (vertical de-integration)

Incentive problem (not market driven as buyer- seller incentives)

Competitive effects of vertical integration (monopoly effect discouraging customers

and suppliers to do business)

Flexibility (vertical integration for system-wide flexibility)

Compounding risk (domino effect)

Designing Vertical relationships

Long-terms contracts (inflexible)

Vendor partnership (relational contracts, w/o written contracts)

Franchising (flexibility and high power incentives)

Spot sales/ purchase; Agency agreements; Informal supplier/ customer relationship;

Joint Ventures, (in increasing level of commitment)

49

Multi-national Corporation (1/…)

Patterns of internationalization

Trade or Direct Investment

Industry types: Sheltered industry (served exclusively by indigenous firms)

Trading industries (trade, i.e. exports and imports)

Multi-domestic industries (direct investment)

Global industries (both trade and direct investment)

Impact on competition Intense competition and lower industry profitability

Lower entry barriers

Increased rivalry amongst existing firms

Lowering seller concentration

Increasing diversity of competitors

Increasing access capacity

Increasing bargaining power of buyers

Global sourcing

Internet-based markets

50

Success factors of Joint

Ventures and Alliances

Strategic intent of partners

(Competition for

competence)

Appropriability of

contribution (need for

gatekeepers)

Receptivity of company

(clarity of synergies)

How do national cultures

differ? (Hofstede, 1984)

Power distance

Uncertainty avoidance

Individualism

Masculinity/ femininity

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Analyzing competitive advantage

Theory of Comparative Advantage Relative efficiency of nations in producing different

products

Porter’s National Diamond Factor condition (home-grown resources, highly

specialized resources, constraints)

Related and supporting industries (industry clusters)

Demand conditions (domestic tastes)

Strategy, structure and rivalry (intense domestic

competition)

Strategy and national conditions Sync b/w firms’ organizational capabilities and the

national culture and social structure

Determinants of geographical locations National resources availability (cost arbitrage)

Firm-specific competitive advantages (location)

Tradability (mobility)

51

Benefits from fragmenting the

value chain must be traded off

against the added cost of

coordinating globally dispersed

activities. Transportation costs are

one consideration .


Options of overseas market entry

Transactions Exporting (spot sales; long-terms contracts; foreign agent/ distributors)

Licensing (licensing patents and other IPs, franchising)

Direct investment Joint venture (marketing and distribution only; fully integrated)

Wholly owned subsidiary (marketing and distribution only; fully integrated)

Issues relevant in decision of overseas options Is the firm’s competitive advantage based on firm-specific or country- specific resources.

Is the product tradable and what are the barriers to trade

Does the firm possess the full range of resources and capabilities for establishing a

competitive advantage in the overseas market

Can the firm directly appropriate the returns to its resources (licensing/ legal protection)

What transaction costs are involved (negotiating, monitoring and enforcing terms)

Brand and technology are important

Exporting is subjected to transactions cost

Customer preferences are reasonably similar across countries

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Multinational strategies

Assumptions of global strategy Globalization of customer preference (technology homogenization)

Sales economics (development, manufacturing and marketing)

Benefits of global strategy Cost benefits: scales and replication (esp. product development)

Exploiting national resources efficiencies (quest for knowledge, beyond raw material)

Serving global customers (esp. in services)

Learning benefits (deepening and widening of capabilities)

Competing strategically (cross-subsidization, predatory pricing, tidal power)

Need for national differentiation Country specific unique customer requirements

Laws and government regulations

Distribution channels

Presence of lead countries (level of innovation adoption among counties)

National cultures

Trade-off between global integration and national adaptation

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Strategy and organization within multinational corporations

Evolution Early 20th century: Era of European multinationals (Multinational federation, autonomous

national subsidiary; e.g. Unilever, Shell, ICI and Philips)

Post WWII: Era of American multinational (dominant position of US parents; e.g. GM, Ford,

Coca Cola, P&G)

The 1970s and 1980s: The Japanese challenge (globally standard products; e.g. Honda,

Toyota, NEC)

Reconfiguring the MNCs: The Transnational Corporation Changing organizational structure (creation of worldwide product divisions)

New approaches to reconciling localization and global integration (integrated network of

distributed and interdependent resources and capabilities)

Organizing and new product development (local innovations and global integration)

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Diversification Strategy (1/…)

Trends in diversification over time

Ear of diversification: 1950- 1980 Expansion of companies across different product markets

Rise of conglomerates in 1970s (multiple, unrelated acquisitions)

Refocusing: 1980- 2006 Divestment of unprofitable non-core business

Leverage buyouts

Trend towards specialization Emphasis on shareholders value (shift from growth to profitability; threat of leverage

buyouts; conglomerate discount)

Turbulence and transaction cost (agility of specialized companies; efficient external

factory markets)

Trends in management thinking (core competencies)

Motives for diversification Growth (going beyond industry’s growth limits)

Risk reduction (imperfectly correlated cash flows of businesses; CAPM)

Profitability (Essential Tests: attractiveness test; cost-of-entry test; better-off test)

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Diversification Strategy (2/…)

Competitive advantage from diversification

Economies of scope in common resources across multiple products Tangible resources (avoiding duplication; shared services)

Intangible resources (brand extension)

Organizational capabilities (general management capabilities)

Economies from internalizing transactions Relative efficiencies of transaction cost or administrative cost

Diversified firms as internal markets Internal capital markets (diversification and information access)

Internal labor markets (esp. managers and technical specialists; rewarding exposure)

Diversification and Performance (research evidence)

Beyond a point, high level of diversification results in poor performance

Related diversification is more profitable than unrelated diversification

Ambiguity in definition of (perceived) relatedness (similarity between industries in

technologies and markets; possibility of operational or strategic synergies)

Role of ‘dominant logic’ in defining synergies

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Multi-business Corporation (1/…)

Structure of multi-business company

The theory of M-form (efficiency advantages) Adaptation to bounded rationality (M-form permits dispersed decision making)

Allocation of decision making (strategic vs operational)

Minimizing coordination cost (local decision making)

Avoiding goal conflict

Multi-divisional firms solve two problems large firms have Allocation of resources (operating internal capital markets)

Resolution of agency problem (corporate focused shareholder goals; divisions focus on

profit maximization)

Though divisionalized corporations reconcile the benefits of decentralization

with those of coordination, chief executives operating their companies as

personal fiefdoms are found among diversified, divisionalized corporations

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Structure of multi-business company

Problems of divisionalized firms Constraints on decentralization (partial freedom for the divisions)

Standardization of divisional management (strangles addressing unique needs)

Role of corporate management (corporate parenting) Managing corporate portfolio (acquisition, divestment and resource allocation)

Contribution of GE (portfolio planning model; strategic business unit; and PIMS database)

Exercising guidance and control over individual businesses

Managing linkages among businesses

58McKinsey Restructuring Pentagon


Managing individual business

Ways of control a division Control decisions (input control)

Control performance targets (output control)

Strategic planning system (trade off between business initiatives and corporate

control) Strategic planning systems (rational) don’t make strategy (rather it’s continuous decision-

oriented planning)

Weak strategy execution (advice adoption of: milestones, balanced scorecards, strategy

maps)

Performance control and budgetary process Strategy planning (long term) + financial planning (short term)

Performance targets: financial, strategic and operational

Balancing strategy planning and financial control

Adoption of PIMS (Profit Impact of Market Strategies) Setting performance targets for business units

Formulating business unit strategy

Allocating investment funds between businesses

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Managing internal linkages

Common corporate services Corporate management unit

Shared services organization

Business linkages and Porter’s corporate strategy types (corporate strategy

types, in increasing order of central involvement) Portfolio management (holding company, limited interference)

Restructuring (acquire companies to restructure)

Transferring skills (personal exchange and best practice transfer)

Sharing activities (economies of scope)

Corporate role in managing linkages Cross-divisional task forces (transfer resources and capabilities)

Movement from formal to informal control

Simultaneous pursuit of differentiation and integration

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Trends in Strategic Management (1/…)

Trends in external environment of business The Third Industrial Revolution (knowledge revolution; casino of technology)

Societal pressures (CSR; sustainable business)

Decline of public corporation

New direction in strategy thinking Complexity Theory (unpredictability and self- organization)

Real Options

Capability based structure of organization

Team based

Project based

Process based

Organizing for adaptability

Identity

Modularity

Networks

Emotional Intelligence in leaders

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