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Putting Strategy in Its Place
Mission fundamental
purposevalues
Objectives specific targets
Implementation structure rewards process people symbols activities functional policies
and profiles
Strategic Analysisgeneral environment analysis industry analysis competitor analysis resource & capability analysis
StrategyThe central integrated,
externally orientedconcept of howwe will achieve our objectives
Adapted from Hambrick & Fredrickson, AME., 19(4):53.
As stated by Prof. Russel W. Olive 1) (Sloan School of Management, MIT), a vision is a preferred future that the leaders of an organization wish to create.
Successful vision statement will be the one that comes from the heart; is personal, is recognizable as ours, and engenders enthusiasm; is radical and demanding; meets the needs and interests of important constituencies - customers, stockholders,
and employees; is based on the organization’s competencies and stresses excellence; is one part foresight, one part insight, based on creativity and judgement, and is an
expression that embodies courage.
A mission statement is a broadly defined and enduring statement of purpose that distinguishes a business from other firms of its type and identifies the scope of its operations in product/service/market terms.More specifically, it defines the product/service areas to be offered; specifies the primary markets, customer groups, and/or customer needs that will
be served; states the technology to be used in the production or delivery of the products/services; expresses the long-term desire for sustained success through growth of profitability.
1) Russel W. Olive, Creating Manufacturing Strategies for World Class Manufacturers, Workshop Paper. Jakarta: PITO Indonesia, 1995.
A company mission is designed to accomplish seven outcomes:
1. To ensure unanimity of purpose within the organization.
2. To provide a basis for motivating the use of the organization’s resources.
3. To develop a basis, or standard, for allocating organizational resources.
4. To establish a general tone or organizational climate; for example, to suggest a business-like operation.
5. To serve as a focal point for those who can identify with the organization’s purpose and direction and to deter those who cannot do so from participating further in its activities.
6. To facilitate the translation of objectives and goals into a work structure involving the assignment of tasks to responsible elements within the organization.
7. To specify organizational purposes and the translation of these purposes into goals in such a way that cost, time, and performance parameters can be assessed and controlled.
PERFORMANCE INDICATORSPAST YEARS
2011 2012 2013 2014 Short Term Long Term
OBJECTIVETARGETS
CURRENTYEAR
SalesAssetsProfitsMarket valueNumber of employees
SalesAssetsProfitsMarket valueNumber of employees
Profit marginReturn on assets (ROA)Return on equity (ROE)Spread (ROE - Ke )
Dividend yield (Dividend/Price)Total return to investorsPrice/Earning ratio (P/E)Market-to-book value ratio (M/B)Payout (Dividend/Earning)Price per share (P)Book value per share (B)Current ratioQuick ratioDefensive intervalCash positionWorking capital from operationsCash flow from operations
Debt-to-equity ratioShort-term vs. Long-term debtTimes interest earnedCash flow vs. Interest payments
Total assets turnoverAverage collection periodInventory turnover
Bond ratingBetaCost of equity capital (Ke )Cost of debtWeighted average cost of capital
CORPORATE PERFORMANCE OBJECTIVES: Size, Growth,Profitability, Capital Markets, and Other Financial Measures
SIZ
EG
RO
WT
HP
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PIT
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PERFORMANCE INDICATORS
PAST YEARS
2011 2012 2013 2014 Short Term Long Term
OBJECTIVETARGETS
CURRENTYEAR
Job satisfactionJob performanceTurnoverAbsenteeismMotivationJob securityCareer prospectsPsychological stressSafety health conditionsIncome
Rate of technological innovationR & D productivityRate of return in R & D investmentResources allocated to R & DRate of new products introductionTechnology-based diversificationRoyalties or sales of technologyCycle time of product development
CostServiceQualityVendor relationship
CostDelivery QualityFlexibilityNew products introduction
Product strategyDistributionPrice strategyPromotion and advertising
Corporate Performance Objectives For Centralized FunctionsH
UM
AN
RE
SOU
RC
ES
MA
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GE
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PR
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The Five Major Elements of Strategy
Where will we be active?(and with how much emphasis?)
Which product categories?
Which market segments?
Which geographic areas?
Which core technologies?
Which value-creation stages?
What will be our speed and sequenceof moves?
Speed of expansion?
Sequence of initiatives?
How will we obtain our returns?
Lowest costs through scale advantages?
Lowest costs through scope and replication advantages?
Premium prices due to unmatchable service?
Premium prices due to proprietary product features?
How will we get there?
Internal development?
Joint ventures?
Licensing/franchising?
Acquisitions?
How will we win?
Image?
Customization?
Price?
Styling?
Product reliability?
Arenas
Staging EconomicLogic
Vehicles
Differentiators
Source: Hambrick & Fredrickson, AME.,19(4):54.
Resources and Capabilities
Resources are the source of a firm’s capabilities
Capabilities are the main source of a firm’s competitive advantage
1. Financial Resources2. Physical Resources3. Human Resources4. Technological Resources5. Reputation Resources6. Organizational Resources
The collective learning in the organization, especially how tocoordinate diverse production skills and integrate multiplestreams of technology, e.g. NEC’s integration of computer and telecommunications technology Philips’ optical-media expertise Casio’s harmonization of know-how in miniaturization, microprocessor design, material science, and ultrathin precision casting Canon’s integration of optical, microelectronic, and pre- cision-mechanical technologies which forms the basis of its success in cameras, copiers, and facscimile machines Black and Decker’s competence in the design and manu- facture of small electric motors
Grant, CMR., Spring 1991, p. 119
Prahalad & Hamel, HBR., May-June 1990, p. 82.
Resources = Capabilities
The Resource-Based Perspective : Why ?
PatentsBrandsRetaliatory capability
Market share
Firm sizeFinancial resources
Process technologySize of PlantsAccess to Low-cost inputs
BrandsProduct technologyMarketing, distribution,and service capabilities
Barriers to Entry
Monopoly
VerticalBargaining Power
Cost Advantage
Industry Attractiveness
Competitive Advantage
Rate of Profitin Excess of theCompetitive Level
Source: Grant, CMR., Spring 1991, p. 118.
DifferentiationAdvantage
Firm ResourceHeterogeneity
Firm ResourceImmobility
ValueRarenessImperfect Imitability - History Dependent - Causal Ambiguity - Social ComplexitySubstitutability
SustainedCompetitiveAdvantage
Source : Barney, JM., No. 1, 1991, p. 112.
The Relationship Between Resource Heterogeneity and Immobility, Value, Rareness, Imperfect Imitability, and Substitutability,
and Sustained Competitive Advantage
Imperfect MobilityEx Ante Limits to
Competition
Rents(Monopoly or Ricardian)
Rents Sustained
Rents Sustainedwithin the firm
Rents not offsetby costs
The cornerstones of competitive advantage
Source : Petreraf, SMJ., No. 3, 1993, p. 186.
CompetitiveAdvantage
HeterogeneityEx Post Limits to
Competition
Complementarity
Overlap withStrategic IndustryFactors
Durability
Scarcity
Rents due toFirm’s Resources& Capabilities(Strategic Assets)
Appropriability
Low Tradeability
Inimitability
LimitedSubstitutability
Desired characteristics of the firm’s recources and capability
Source: Amit & Schoemaker, SMJ., No. 1, 1993, p. 38.
Resources
externally available & transferable owned or controlled by the firm convertible
Capabilities
information based organizational processes firm specific tangible or intangible intermediate goods
a subset of the firm’s R&C subject to market failure overlap with strategic industry factors uncertain ex-ante form the basis of the firm’s competitive strategy determine organizational rents
Firm Industry
Rivals Customer
Environmental Suppliers Factors(e.g. technology, regulation)
industry speciffic R&C subject to market failure affect industry profitability change & subject to ex-ante uncertainty
Substitutes
Entrants
non-tradable complementary
scarce appropriable firm specific
Strategic Assets
Source: Amit & Schoemaker, SMJ., No. 1, 1993, p. 37.
StrategicIndustryFactors
Performance Outcomes
Strategy
Competitive Advantage
DISTINCTIVE CAPABILITY* Based on superiority in process management x integration of knowledge x diffusion of learning
Business Assets Capabilities of theBusiness
Core Competencies of the Corporation
Sources of Competitive Advantage and Superior Performance
* Scale, scope, and efficiency* Financial condition* Brand equity* Location
* Skills and accumulated knowledge* Enable the activities in a business process to be carried out
* Span and support multiple lines of business
Adapted from: Day, JMkt., No. 4, 1994, p. 40.
Functional capability relates to the ability to do specific things.Cultural capability incorporates the habits, attitudes, beliefs and values, which permeate the individuals and groups which comprise
the organization.Positional capability is a consequence of past or previous actions and decisions.Regulatory capability results from the possession of legal entities. Such legal entities are all defendable, in some fashion, in law.
Source : Hall, SMJ., No. 8, 1993, pp. 610-611.
Know-how of employees,suppliers, distributors,stockbrokers, lawyers,advertising agents,etc.
Perception of quality,ability to learn,ability to react to challenge,ability to change,etc.
Contracts,Licenses, tradesecrets (incl.some data bases), Intellectual prop-erty.rights
Reputation, networks
Data bases
People Dependent
People Independent
Functional Cultural Positional Regulatory
Capabilities
Intangible Resources and Capabilities
Skills
Assets
TYPE OF RESOURCE
ASSETS WITHIN A LEGAL CONTEXTContractsLicensesIntellectual PropertyTrade SecretsOwned Physical Resources
ASSETS WITHOUT A LEGAL CONTEXTReputationNetworksDatabases
COMPETENCIES
KNOW-HOWEmployee Know-HowSupplier Know-HowDistributor Know-Howetc.
ORGANIZATIONAL CULTUREPerception of qualityAbility to Manage ChangePerception of Serviceetc.
TYPE OFCAPABILITYDIFFERENTIAL
REGULATORYDIFFERENTIAL(Protectable in Law)
POSITIONALDIFFERENTIAL(Due to Previous Endeavor)
FUNCTIONALDIFFERENTIAL(Due to Skills & Experience )
CULTURALDIFFERENTIAL(Aptitudes of the Organization)
SUSTAINABLE
COMPETITIVE
ADVANTAGE
ASSETS
Intangible resources, capability differentials and sustainable competitive advantage
Source: Hall, SMJ., No. 2, 1992, p. 144.
Unrelated
TYPE
OF
MARKET
RelatedPhysical Resources
Intangible Assets
Financial Resources: (Internal Funds)
(Low-Risk Debts)
Financial Resources: (Equity Capital)
(Junk Bonds)
Low High
Intangible Assets
FLEXIBILITY OF RESOURCE CLASSES
The relationship between the flexibility of resources and the type of market
Source: Chatterjee & Wernerfelt, SMJ., No. 1, 1991, p. 37.
Last
A skill or important expertise● low-cost manufacturing capabilities● strong e-commerce expertise● technological know-how● skills in improving production processes● a proven track record in defect-free manufacture● expertise in providing consistently good customer service● excellent mass merchandising skills● unique advertising and promotional talents
Valuable physical assets● state-of-the-art plants and equipment● attractive real estate locations● worldwide distribution facilities● ownership of valuable natural resource deposits
Valuable human assets● an experienced and capable workforce● talented employees in key areas● cutting-edge knowledge and intellectual capital● collective learning embedded in the organization and built up over time● proven managerial know-how
Valuable organizational assets● proven quality control systems● proprietary technology● key patents● mineral rights● a cadre of highly trained customer service representatives● sizable amounts of cash and marketable securities● a strong balance sheet and credit rating ● a comprehensive list of customers’ e-mail addresses
Valuable intangible assets● a powerful or well-known brand name● a reputation for technological leadership● strong buyer loyalty and goodwill
Competitive capabilities● product innovation capabilities● short development times in bringing new products to market● a strong dealer network● cutting-edge supply chain management capabilities● quickness in responding to shifting market conditions and emerging opportunities● state-of-the-art systems for doing business via the Internet
An achievement or attribute that puts the company in a position of market advantage● low overall costs relative to competitors● market share leadership● a superior product● a wider product line than rivals● wide geographic coverage ● a well-known brand name● superior e-commerce capabilities● exceptional customer service
Competitively valuable alliances or cooperative ventures● fruitful partnerships with suppliers that reduce costs and/or enhance
product quality and performance● alliances or joint ventures that provide access to valuable technologies,
competencies, or geographic markets
Source: Thomson Jr., Strickland III, and Gamble, 2005:89-90.
ExampleThomson Jr., Strickland III, and Gamble (2005:93) suggest that market share leadership of Toshiba’s laptop computers throughout most of the 1990’s stemmed from a combination of good resource strengths and capabilities, i.e., its strategic partnerships with suppliers of laptop components, efficient assembly capability, design expertise, skills in choosing quality components, a wide selection of models, the attractive mix of built-in performance features found in each model when balanced against price, the better-than-average reliability of its models (based on buyer ratings), and good technical support services (based on buyer ratings).
ECONOMIES OF SCALE
ECONOMIES OF LEARNING
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
Increased individual skills
Specialization
Improved organizational routines
Process innovation
Reengineering of business processes
Standardization of designs and components
Design for manufacture
Location advantages
Ownership of low-cost inputs
Nonunion labor
Bargaining power
Ratio of fixed to variable costs
Fast and flexible capacity adjustment
Organization slack/X-inefficiency
Source : Grant, 2008:227.
The Drivers of Cost Advantage
Technical input-output relationships
Indivisibilities
Motivation and organizational culture
Managerial effectiveness
The Rarity ofSources of CostAdvantage
Likely to Be RareSources of Cost Advantage
Learning-curve economies of scale(especially in emerging industries)
Differential low-cost access to factors of production
Technological “software”
Less Likely to Be RareSources of Cost Advantage
Economies of scale (except when efficient plant size approximately equals total industry demand)
Diseconomies of scale
Technological hardware (unless a firm has proprietary hardware development skills)
Policy choices
Direct Duplication of Cost Leadership
Low-cost duplicationpossible
May be costly to duplicate
Usually costly to duplicate
1. Economies of scale2. Diseconomies of scale
3. Learning-curve economies4. Technological “hardware”5. Policy choices
6. Differential low-cost access to factors of production7. Technological “software”
Source of cost advantage History Uncertainty Social Complexity
Basis for Costly Duplication
--- = not a source of costly imitation * = somewhat likely to be a source of costly imitation ** = likely to be a source of costly imitation *** = very likely to be a source of costly imitation
Source: Barney, 2007:187.
--- --- ------ --- ---
* --- ------ * ** --- ---
*** --- **
*** ** ***
THE CUSTOMERS
FORMULATE DIFFERENTIATION
STRATEGY
* Select product positioning in relation to product attributes
*
*
*
Select target customer group
Ensure customer / product compatibility
Evaluate costs and benefit of differentiation . What motivates them ?
By what criteria do they choose ?
What needs does it satisfy ? What are key attributes ?
Relate patterns of customer preferences to product attributes
What price premiums do product attributes command ?
What are demographic, sociological, psychological correlates of customer behavior ?
Identifying the Potential for Differentiation on the Demand Side
THE PRODUCT
Source : Grant, 2008:248..
Buyers build corporate reputation.MIS that supports innovation and responsiveness to customer needs through close internal coordination.
Unique product features.Fast new product development.Design for reliability/ serviceability
Training that supports goalsof quality and responsiveness.Incentives that are consistentwith differentiation goals.Developing commitment tocustomer service.
Training for customers.Fast, reliable repairs.Availability of spare parts.Training for dealers.Customer credit.
PURCHASING,INVENTORYHOLDING,MATERIALSHANDLING
PRODUCTIONWAREHOUSING
&DISTRIBUTION
SALES&
MARKETING
DEALERSUPPORT
&CUSTOMER
SERVICE
INFRASTRUCTURE ACTIVITIES:
RESEARCH, DEVELOPMENT, DESIGN
HUMAN RESOURCE DEVELOPMENT
Quality and reliabilityof componentsand materials
Fastmanufacturing.Defect-freemanufacturing.Ability toproduce tocustomerspecification.Wide variety.
Fast delivery.Efficient orderprocessing.Sufficientinventoriesto meetunexpected orders.
Advertising thatenhances brandreputation.Effective salesforce.Quality sales literature.Building brandreputation.
MA
RG
IN
PR
IMA
RY
AC
TIV
ITIE
SS
UP
PO
RT
AC
TIV
ITIE
S
Source : Grant, 1995:223; 2002:297;2008:256 (cf. Porter, 1985:122).
Identifying the Potential for Differentiation on the Supply Side:Sources of Differentiation in Porter’s Generic Value Chain
Product Differentiation and Firm Performance: The Analysis of Monopolistic Competition
--- = not likely to be a source of costly duplication * = somewhat likely to be a source of costly duplication ** = likely to be a source of costly duplication*** = very likely to be a source of costly duplication
Source: Barney, 2007:217.
Low-cost duplicationpossible
May be costly to duplicate
Usually costly to duplicate
1. Product features
2. Product mix3. Linkages with other firms4. Product customization5. Product complexity6. Consumer marketing
7 Linkages among functionswithin a firm
8. Timing of product introduction9. Location10. Product reputation11. Distribution channels12. Service and support
Basis of Product Differentiation History Uncertainty Social Complexity
Source of Costly Duplication
Bases of Product Differentiation and the Cost of Duplication
--- --- ---
* * ** --- *** --- *** --- *--- ** ---
* * **
*** * ---*** --- ---*** ** ***** * *** * **
Focuseddifferentiation
Differentiation
Hybrid
Lowprice
‘No frills’ Strategiesdestined forultimate failure
1
2
34
5
6
78
HIGH
LOW
LOW HIGH
PERCEIVED ADDEDVALUE
PRICE
1. ‘No frills’
2. Low price
3. Hybrid
4. Differentiation (a) Without price premium
(b) With price premium
5. Focused differentiation
6. Increased price/standard value
7. Increased price/low value
8. Low value/standard price
Likely to be segment specific
Risk of price war and low margins/need to be cost leader
Low cost base and reinvestment in low price and differentiation
Perceived added value by user, yielding market share benefits
Perceived added value sufficient to bear price premium
Perceived added value to a particular segment, warranting price premium
Higher margins if competitors do not follow/risk of losing market share
Only feasible in monopoly situation
Loss of market share
Needs/risks
The Strategy clock: competitive strategy options
Source: Johnson, Scholes, and Whittington, 2008:.225.
Dif
fere
ntia
tion
Lik
ely
failu
re
Examples of Value-Creating Activities Associated with the Cost Leadership Strategy
Cost-effectivemanagementinformation systems.
Relatively fewmanagerial layers in orderto reduce overhead costs.
Simplifiedplanning practices toreduce planning costs.
Consistent policiesto reduce turnover costs.
Intense and effective trainingprograms to improve workerefficiency and effectiveness
Easy-to-use manufacturingtechnologies.
Investments in technologies in orderto reduce costs associated with a firm’smanufacturing processes.
Systems and procedures to find thelowest cost (with acceptable quality)products to purchase as raw materials.
Frequent evaluationprocesses to monitorsupplier’s performances.
Highlyefficientsystems to linksuppliers’products with the firm’sproductionprocesses.
Use ofeconomies ofscale to reduceproductioncosts
Construction ofefficient-scaleproductionfacilities.
A deliveryschedule thatreduces costs.
Selection of low-costtransportationcarriers.
A small,highly trainedsales force.
Productspriced soas togeneratesignificantsalesvolume.
Efficient andproper productinstallationsin order toreduce the frequencyand severityofrecalls.
MA
RG
INM
AR
GIN
FirmInfrastructure
Human ResourceManagement
TechnologyDevelopment
Procurement
InboundLogistics
Operations OutboundLogistics
Marketingand Sales
Service
Source: Hitt, Hoskisson & Ireland, 2007:111.
Examples of Value-Creating Activities Associated with the Differentiation Strategy
Highly developed informationsystems to better understandcustomers’ purchasing preferences.
A company-wide emphasis onthe importance of producinghigh-quality products.
Compensation programsintended to encourage workercreativity and productivity
Somewhat extensive use ofsubjective rather thanobjective performance measures.
Strong capability inbasic research
Investments in technologies that willallow the firm to produce highlydifferentiated products.
Systems and procedures usedto find the highest qualityraw materials.
Purchase of highest qualityreplacement parts.
Superiorhandling ofincoming rawmaterials so asto minimizedamage andimprove thequality of thefinal product.
Consistentmanufacturingof attractiveproducts.
Rapid responsesto customers’uniquemanufacturingspecifications.
Accurate andresponsiveorder-processingprocedures.
Rapid and timely productdeliveriesto customers.
Extensivegranting ofcredit buyingarrangementsfor customers.
Extensivepersonalrelationshipswith buyersand suppliers.
Extensive buyer trainingto assure high-qualityproduct installations.
MA
RG
INM
AR
GIN
FirmInfrastructure
Human ResourceManagement
TechnologyDevelopment
Procurement
InboundLogistics
Operations OutboundLogistics
Marketingand Sales
Service
Superiorpersonneltraining.
Completefield stock-ing of replace-mentparts.
Source: Hitt, Hoskisson & Ireland, 2007:117.