COS – Chapter 1 – Introduction Strategy - Long-term plan of action designed to achieve a goal - Intended and emergent initiatives - Overall purpose and scope to meet expectations - Employing forces - Direction, market/scope, advantages, resources, environment, stakeholders Component of adversity (= something getting in the way on your way to the goal) - Strategy is linked to governance (executing power) - “social contract” stakeholder management, CSR - Often the shareholders are setting the goals and not the managers - Key issue for future of organization (e.g. market entry) - “a pattern in a stream of decisions” (Mintzberg) - Strategy statement: goal (mission, vision, objectives) + scope + advantages - More and more strategy consultancies evolve Need for integration: - Corporate level overall scope - Business level competition in market - Operational how to operate components of the organization Three strategy branches
Transcript
COS – Chapter 1 – IntroductionStrategy
- Long-term plan of action designed to achieve a goal- Intended and emergent initiatives- Overall purpose and scope to meet expectations- Employing forces- Direction, market/scope, advantages, resources, environment, stakeholders Component of adversity (= something getting in the way on your way to the goal)
- Strategy is linked to governance (executing power)- “social contract” stakeholder management, CSR- Often the shareholders are setting the goals and not the managers- Key issue for future of organization (e.g. market entry)- “a pattern in a stream of decisions” (Mintzberg)- Strategy statement: goal (mission, vision, objectives) + scope + advantages- More and more strategy consultancies evolve
Need for integration:
- Corporate level overall scope- Business level competition in market- Operational how to operate components of the organization
All are closely related but strategy has a non-linear nature
Strategy lenses
- Design = planning, analyzing, designing- Experience = influence of pas experience- Variety (ideas) = competition of ideas “survival of the fittest”- Discourse = phrases, concepts, corporate jargon
Different sectors
- Small businesses closer to environment (purpose)- Multi-nationals likely to be dominated by international strategy (choices) and practice- Public sector and non-profit organizations need to have purpose and are evaluated in
action
COS – Chapter 2 – Strategic Position
The environment
PESTEL
Five Forces
Scenario analyses to show the option and preventing a biased view on the matter:
1. Identifying the scope: subject and time span2. Identifying key drivers for change: PESTEL can be used3. Selecting opposing key drivers: factors with high uncertainty divergent or opposing
outcomes but still plausible 4. Developing scenario “stories”: knit together all factors to create possible scenarios5. Identifying impacts: robustness checks and contingency plans
Industries and sectors
- Often made up of several specific markets- Industry can be analyzed by Porter’s five forces
o threat of entry/potential entrantso threat of substituteso power of buyers/bargaining powero power of suppliers/bargaining powero extent of rivalry between competitors
- An attractive industry = one that offers good profit potential (five forces must be low)- Threat of entry: attractive industry has high barriers to enter
o Scale and experience (mostly related to high entry costs, investment requirements and efficiency)
o Access to supply or distribution channels (might be controlled)o Expected retaliations (e.g. price war or marketing blitz)o Legislation or government action (e.g. patent protection, regulation of the market)o Differentiation (higher perceived value)
- Threat of substituteso Price/performance ratio (matters more than simple price)o Extra-industry effects (core of substitution concept because threat comes from
outside the industry)- Power of buyers: customers, not necessarily the consumer
o Concentrated buyers (e.g. milk in grocery sector)o Low switching costs (typically low for weakly differentiated commodities, e.g. steel)o Buyer competition threat (threat by DIY, backward vertical integration)
- Power of suppliers: raw material, equipment, labor, sources of financeo Concentrated suppliers (many suppliers for one production)o High switching costs (e.g. Microsoft Macintosh)o Supplier competition threat (cut out middlemen, forward vertical integration)
- Competitive rivalry: same customer groupo Competitor balance (search for dominance might be high, e.g. by price cuts)o Industry growth rate (low growth or decline likely to be to the expense of a rival,
industry life cycle)o High fixed costs ( increase volume, cut prices, short-term over-capacity)
o High exit barriers (high redundancy costs or high investment)o Low differentiation (only competition option is by price)
The four main types of industries
- Monopolistic industry- Oligopolistic industry- Hypercompetitive industry (constant disequilibrium and change)- Perfectly competitive industry (mainly competing by price)
Implication of the five forces analysis
- What industry to enter?- What influence can be exerted?- How are competitors differently affected?
judgment
Key issues
- Defining the “right” industry (e.g. geographically)
- The industry life cycleo Five forces vary accordinglyo They are not inevitable, don’t necessarily follow each other, but are a reminder of
the constant change in basically every industryo “maturity mindset” can be dangerous, managers might not act fast enough against
new competition
- Comparative industry structure analysiso Radar plot of the five forceso Comparing o Larger area in the model below = more profit chances
- Competitive cycleso Rapid and aggressive unstable hypercompetitiono Various moves and countermoves from incumbents and entrants
Competitors and Markets
- Strategic groups:o Organizations in the industry/sector with similar strategic characteristics, following
similar strategies or competing on similar baseso They differ in scope of activities (geography, product, market, distribution) and
resource commitment (marketing, vertical integration, technology)o Top performers are easily identified with help of two-dimensional chartso Understanding competitiono Analysis of strategic opportunitieso Analysis of mobility barriers (entry barriers to other groups)
- Market segments are used to identify:o Variation in customer needs (taking psycho-demographics etc. into account)o Possible specialization (niche marketing)o Strategic customer
- Blue Ocean Thinking
o They are new market spaces were competition is minimizedo Looking for strategic gaps in the existing marketo A strategy canvas compares competitors according to key success factors
CFS (critical success factors) should be identified Value curves show the customers’ perception of competitors Value innovation means to excel in competitors’ CFS or creating new CFS for
them re-inventing value for the customer
Opportunities and Threats
- SWOT, PESTEL, key drivers for change, Five Forces, Blue Ocean…- Keep in mind that analyses are mostly subjective- Managers are often biased
COS – Chapter 3 – Strategic Position
Strategic capabilities: a resource-based view
Foundations of strategic capabilities
- Resources and competenceso What we have and what we do well (physical, financial, human)o Efficiency and effectiveness are key success factors
- Dynamic capabilitieso Renew and recreate in a changing environmento Be flexible and visionary Sensing, seizing, re-configuring
- Threshold and distinctive capabilitieso Meet necessary requirements to compete in a given market and achieve parityo Threshold levels of capability will change as critical success factors change or through
competitors and new entrantso Trade-offs may be necessary in specialized market segments
- Distinctive resources or distinctive competences – core competences of a company (skills, activities, resources customer value, differentiation, can be extended and developed)
VRIN – capability assessment
- V – value of strategic capabilitieso Taking advantage of opportunities and neutralizing threatso Value to customero Providing potential competitive advantageo Cost that still provides acceptable levels of return
- R – rarityo Uniqueness of capabilityo Meeting customer needo Sustainability
- I – inimitabilityo Difficult to imitate or obtain
for competitorso Superior performanceo Linked competenceso Complexityo Casual ambiguity (Unklarheit)o Culture and historyo Change
- N – non-substitutabilityo Product or service substitutiono Competence substitution
- Organizational knowledgeo Collective intelligence and shared experienceo Also VRIN
o Analyzing the competitive position with VRINo Analyze cost and value
- Value networko Cost/price structureo Profit pools
o Make or buy?o Partnering
- Activity systems
o Mapping activity systems
Identify higher order strategic themes and clusters of activities Relationship to value chain Importance of linkage and fit Relation to VRIN Disaggregation (Auflockerung) Superfluous activities
o SWOT
Managing strategic capabilities
- Managing activities for capability developmento Internally
Leveraging (Einfluss nehmen) Stretching
o Externallyo Ceasing current activitieso Monitor output and benefits
- Managing people for capability developmento Targeted trainingo Staffing policieso Organizational learningo Develop people’s awareness
COS – Chapter 4 – Strategic Position
Strategic Purpose
Stakeholder: individuals or groups that depend on an organization to fulfill their own goals and on whom, in turn, the organization depends.
Organizational purpose: values, mission, vision and objectives
- Statements are important for a clear goal-setting for everyone involved- Mission statement is the overriding purpose of organization- Vision is looking in the future (aspirations)- Corporate values communicate underlying and enduring core principles and define its way- Objectives are statements of a specific desired outcome (often financially)
o Objectives can be measureableo Core objectives should be identifiedo An employee’s contribution might not immediately contribute to the objective
Corporate governance
- Structures and systems of control by which managers are held accountable- Governance has become very important:
o Separation of ownership and management control (= hierarchy)
o Corporate failures and scandalso Increased accountability to wider
stakeholder interest- The governance chain varies in every kind of
business- Principal – agent model (principals pay agents to act
on their behalf)- Important factors/dangers can be:
o Self-interest (egocentric)o Misalignment of incentives and controlo Passing on responsibility, to whom?o Losing sight of the main shareholderso The role of institutional investorso The role of boards (e.g. the difference
executive and non-executive directors)o Scrutiny (Untersuchung) and control Who? What? How?
- Shareholder model of governanceo UK and USo Largely financially involvedo Proponents: maximizing shareholder value benefits stakeholders tooo Benefit for investors – higher rate of return, reduced risk, minority shareholdingo Benefit for the economy – high risk-taking, encouragemento Benefit for management – more objective decisions
o Disadvantages for investors – prevented from monitoring managemento Disadvantages for economy – risk of short-termismo Corporate reputation and top management greed
- Stakeholder model of governanceo Germany, Italy, Japano Wealth is created, captured and distributed by all stakeholderso Majority ownershipo Long-term horizon – long-term investments, reduced pressure for short-term resultso Advantages for stakeholders – long-term perspective will be in interest of otherso Advantages for investors – closer level of monitoring of management, interventiono Disadvantages for management – interference, loss of objectivityo Disadvantages for investors – dominance of major shareholders, lack of financial
pressureo Disadvantages for economy – limiting growth and entrepreneurial activity, weak
corporate control, high debt financing- Family-controlled firms- State ownership- Public services
- Changes and reforms can come by international pressure or history- Some countries think about switching models, start reforming- (Boards of directors) influence strategy
o Delegationo Engagemento Must operate independentlyo Must be competent to scrutinize activities of managerso Must have time to do their job properlyo Must act appropriately
Social Responsibility and Ethics
- CSR – behave ethically, contribute to economy, improving quality of life- Laissez-faire view
o Only goal is to make a profit and provide interest to shareholderso Government prescribes regulationso Meet minimum obligationo Nowadays it’s not enough for the conscious society
- Enlightened self-interesto Looking for long-term financial benefitso Social actions should make good business senseo E.g. sponsorshipo More interactive with stakeholders than laissez-faire
- Forum for stakeholder interactiono Incorporates multiple interestso Performance should be measured more pluralistic
- Shapers of societyo Activistso E.g. fighting poverty by fair trade
- CSR is justified in “triple bottom line” o Sociallyo Environmentallyo Financially
- Ethics have to be faced and dealt with- Aspects: rights, values, feelings, future, justice, answers- Self-awareness
o Identify stakeholders’ expectationso Identify interests and power they offer/seeko Handling depends on governance structureo Level of interest/power shouldn’t be underratedo Can help identify strategy and purpose (Why? Who? What? How?)o Can also raise ethical issues during decision-making
o Heterogeneity of stakeholder groups – supporters/ actively hostiles/ indifferents, should be balanced, not too generically not too diverse
o The role of the individual – would it shift if changes occur?o Look at stakeholder’s indicators of power: status, claim on resources,
representation, symbol of power, resource dependence
COS – Chapter 6 – Strategic Choices
Business Strategy
- SBU’s business strategy- Supplies goods or services for a distinct domain of activity- Often called division or profit center- Criteria to identify:
o Market-based same customer, channel, competitoro Capability-based similar strategic capabilities (e.g. product-based)
Generic competitive strategies (unspecific)
- Porter: either produce cheaper or be exceptionally valuable third dimension is definition of the target group
- Cost leadership:o Input costs (labor, raw material,…)o Economies of scale (increase sales)o Experienceo Product designo Don’t forget qualityo Parity/equivalence charge same as average, gain more profito Proximity
- Scope: potential diversification of products and markets
- Concerned with corporate level and overall diversification
Strategy directions
- Diversification – increase the range- Related diversification – diversifying into products or services with relationship to existing
business opposite of conglomerate (unrelated) diversification- Company can move according to Ansoff’s matrix (market penetration, market development,
new products and services, conglomerate diversification)- Market penetration may face two constraints
o Retaliation from competitorso Legal constraints
- Product development may involve high riskso New strategic capabilities heavy investments and high risk of failureo Project management risk delay and increased costs
- Market development has two basic forms that need to meet critical success factorso New userso New geographies
- Conglomerate diversification are not considered very trustworthy
Diversification drivers
- Economies of scope = applying existing resources and competencies (tangible and intangible) to new markets or services
- Stretching corporate management competencies (dominant logics) = applying corporate-level managerial skills/competencies to new business/portfolio of businesses
- Exploiting superior internal processes = esp. if external capital and labor market don’t work that well yet
- Increasing market power = diversification for competitive reasons 1. mutual forbearance, balanced moves on the market, not too aggressive; 2. Cross-subsidize one business from the profit of others
Synergy
- Complementing each other so that effect is greater than the sum of both- Often hard to identify and more costly than expected- Value-destroying diversification drivers, negative synergies:
o Responding to market decline – sometimes better to let shareholders find new growth investment opportunities than to attack competitors
o Spreading risk across range of markets – shareholders typically like to stick to one sort of market (the core business)
o Managerial ambition – going beyond areas of true expertise might cause a disaster
- However, every strategy needs to be evaluated crucially
Vertical integration
- Entering activities where the organization is its own supplier or customer
- Up and down the value network- Backward integration
o Development into activities concerned with the inputs into the current business (e.g. acquiring a supplier)
- Forward integrationo Development into activities concerned with the output into the current business (e.g.
acquiring a retailer)- Horizontal integration would be diversification with integrated aspects of processes
- Vertical is more profitable for the manufacturer, but two dangers ariseo It involved investmentso Different strategic capabilities
- Outsourcing can replace integration, but keep the following in mind:o Transaction costs frameworko Long-term costs of opportunism by external subcontractors, relationships tend to fail
if: Few alternatives
Complex and changing product or service Investments were made in specific assets
Rather vertically integrate than outsource- Two distinct factors balance the decision between outsourcing and integration
o Relative strategic capabilitieso Risk of opportunism
Value creation and the corporate parent
- Corporate parent sometimes can’t add value anymore- Better to divest relevant businesses from the portfolio- Value-adding activities, parenting advantage
o Envisioning – vision, strategy, clear external image, disciplineo Coaching and facilitating – develop strategic capabilities, improving synergies, cross-
business relationships o Providing central services and resources – investment capital, center of advice,
relevant expertise, greater power e.g. for brokering, knowledge managemento Intervening – improve performance, monitor, challenge and develop ambitions
- Value-destroying activitieso Adding management costs – businesses have to generate revenues for centero Adding bureaucratic – additional layer of managemento Obscuring financial performance – cross-subsidy of weak businesses by stronger
ones, hiding weak performance- Three types of parenting:
Portfolio Matrices
- Keeping balance of the portfolio- Attractiveness of the individual business units
- The fit e.g. for potential synergies- BCG growth/share matrix, three potential problems:
o Definition vaguenesso Capital market assumptionso Unkind to cows and dogs
- Directional policy (GE-McKinsey) matrix o Good prospects – less good prospectso Attractiveness identified with PESTELo Divest or “harvest” the least attractive
and weakest oneso Either strength-attractiveness or
attractiveness-strength- Parenting matrix
o Feel – critical success factors against parent’s capabilities
o Benefit – parenting opportunities against parent’s capabilities
o Heartland – core of future strategyo Ballast – should be divested or left
aloneo Value-trap – dangerous, should be
divestedo Alien – misfits, exito Clear focus on how the parent benefits
the SBUs
COS - Chapter 8 – Strategic choice
International Strategy
a. To enter a foreign market, companies should make use of the Yip´s framework, which analyzes the market and sees internationalisation potential through four different drivers:
1. Market drivers2. Cost drivers3. Government drivers4. Competitive drivers
b. Geographical advantages
Poter´s Diamond can be used look for advantages that lay in the location of a business
c. The four International StrategiesUsed to be also the regular order in that companies start to enter a foreign market, however that is not exactly the case anymore. Often companies start already with the global strategy. 1. Simple Export (usually used by companies with strong location advantages; first step
when entering a market) 2. Multidomestic (markets are treated independently ; goods and services are still
produced locally)3. Complex export (building a strong overseas network is important; branding plays an
important role)4. Global strategy (activities are dispersed around the world; very coordination intense)
d. Market selection and EntryThe PESTEL should be used to characterise a market and its potential before entering it. But some important characteristics that can influence the success of a market entry very much need to be taken into consideration; this can be done by using CAGE framework.
1. Cultural distance2. Administrative and political distance 3. Geographical distance 4. Economical distance
e. Entry modes This modes a traditionally followed step by step, in that way risk is minimized and markets distances, as mentioned above, can be removed, by getting to know markets better. 1. Exporting 2. License or franchise3. Joint Venture 4. Wholly owned subsidiary
Firm strategy and rivalry
Demand condition
Related and supporting industries
Factor conditions
f. Internationalization has an uncertain relationship to financial performance, with an inverted u-curve warning against over-internationalization
g. Subsidiaries in an international firm can be managed by portfolio methods just like businesses in a diversified firm
COS – Chapter 10 – Strategic Choices
Mergers, Acquisitions, Alliances
Organic development
- Developing and building on an organization’s own capabilities- Advantages:
o knowledge and learning, o spreading investments over time (flexibility)o no availability constraintso strategic independence (uncompromising)
- Corporate entrepreneurship = radical change in organization’s business can be limiting if capabilities are limited companies have to look externally
Mergers and acquisitions
- Combination or takeover
- Usually cyclical (high peaks, deep troughs) driven by economy cycle over-optimism of a company in an upturn = acquire businesses exaggerated loss of confidence in downturn = sell businesses
- Strategic motives:o extension of reach (geography, products, markets)o consolidation of industry possibility to raise prices, increase efficiency, increase
production efficiencyo capabilities often used where industries are converging
- Financial motives:o Financial efficiencyo Tax efficiencyo Asset stripping or unbundling buy, then sell off business units
- Managerial motives:o Self-serving rather than efficiency driveno Personal ambition (vanity, fame)o Bandwagon effect in economy cycle do what critics, worriers, etc. do
- Target choice: strategic fit, organizational fit- Valuation : evaluate the merger/acquisition, especially the price to pay, carefully- Integrate the new unit:
- Organizational justice (during a merger/acquisition) = perceived fairnesso Distributive justice = rewards and postso Procedural justice = decision-makingo Informational justice = communication
- Serial acquirers: multiple acquisitions at a time, need specialist teams to do so- Divesture: asset stripping, doesn’t mean the business failed could show dynamics
Strategic alliances
- Collective success is part of the company’s strategy compete against rival alliances- Collaborative advantage is about managing alliances better than competitors- Equity alliance = creation of new entry, e.g. joint venture- Non-equity alliance = one part is the “looser”, e.g. franchises
- Motives:o Scale alliances, e.g. for output (product, service, etc.) or input (raw material, etc.)o Access alliances, e.g. to access others’ capabilities in a foreign marketo Complementary alliances, bolster each other’s gaps or weaknesses (strength
weakness adjustment)o Collusive alliances, e.g. cartels
- Processes:o Co-evolution = constant change demands realignment constantlyo Trust has to be earnedo 1. Courtship needs to be wanted from both sideso 2. Negotiations equal, harmonic, appropriateo 3. Start-up material and human resourceso 4. Maintenance active managemento 5. Termination agreement
Conclusion
- Acquisitions and mergers have high failure rate (50%)- Key factors to success:
o Urgency of the action acquisitiono Uncertainty allianceo Type of capabilities:
“hard” capabilities acquisition “soft” capabilities organic development
o Modularity of capabilities alliance
COS - Chapter 11 – Strategy in action
Evaluating strategies
Three success criteria for evaluating strategic options:
SuitabilitySuitability is concerned with the overall rationale of the strategy:
•Does it exploit the opportunities in the environment and avoid the threats?
•Does it capitalise on the organisation’s strengths and strategic capabilities and avoid or remedy the weaknesses?
AcceptabilityAcceptability is concerned with whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders. These are three key aspects of acceptability, the 3Rs: risk, return and stakeholder reaction.
RISK concerns the extent to which the outcomes of a strategy can be predicted.
Risk can be assessed using:
Sensitivity analysis (also known as “what if analysis”, as an example see graphs in PP). Financial ratios – e.g. gearing and liquidity. Break-even analysis.
Feasibilityis concerned with whether a strategy could work in practice i.e. whether an organisation has the capabilities to deliver a strategy
Two key questions:
• Do the resources and competences currently exist to implement the strategy effectively?
• If not, can they be obtained?
The focus is on three areas:
Finance people (and their skills) importance of resource integration
Summary
• Proposed strategies may be evaluated using the three SAFe criteria:
Suitability is concerned with assessing which proposed strategies address the key opportunities and constraints an organisation faces. It is about the rationale of a strategy.
The acceptability of a strategy relates to three issues: the level of risk of a strategy, the expected return from a strategy and the likely reaction of stakeholders.
Feasibility is concerned with whether an organisation has or can obtain the capabilities to deliver a strategy.
