Strategic Audit Report

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Strategic Management Week 5 – Chapter 4

General Strategies: Cost Leadership

The Key Steps in a Strategic Audit of a Company

• Understand its goal and strategy Strategy Analysis • Analyze its external environment Industry/External Analysis • Evaluate its resources Resource/Internal Analysis • Assess its performance? Performance Analysis • Make Strategic Recommendations:

– Use the Issues identified in the 5 parts of the analysis above. – Identify several strategic options that the company can follow – Evaluate these options (pros and cons/how likely to address the issues

raised and risks) – Make your recommendations with any warnings to the management.

Where Are We in the SM Process?

Mission Objectives

External Analysis

Internal Analysis

Strategic Choice

Strategy Implementation

Competitive Advantage

Business Level Strategy

Corporate Level Strategy

How to Position a Business

in the Market?

Which Businesses to Enter?

STRATEGY Choice

Good Understanding of the industry (the

industry forces and key success

factors)

Good Understanding Of the firm (Current

Strategy and Performance, Internal Environment including leadership)

Strategy Design

Group Strategy/Vision

Corporate or Divisional Strategy

Business Unit Strategy

Functional Policies

Product/Market Strategies and Tactics

There are more than many levels of Strategy

Source: Professor José De La Torre

Rate of Profit in Excess of the

Competitive Level

Avoid Competitors

Attractive Industry

Attractive Niche

Cost Advantage

Be Better Than Competition

Differentiation Advantage

Sources of Superior Profitability

Different goals for Strategies for Business and Corporate

To allow a company to create and exploit a unique strategic position within its industry which capitalizes on its resources and capabilities and builds new ones

To enhance the strategic positions of the business units and ensure their renewal

CorporateBusiness

Chs. 4 & 5: Business-Level Strategies

Two Generic Business Level Strategies Cost Leadership:

• generate economic value by having lower costs than competitors

Product Differentiation:

• generate economic value by offering a product that customers prefer over competitors’ product

Example: Wal-Mart

Example: Harley-Davidson

Ethics and Strategy

• “Race to the Bottom” – What is this? – Examples? – Are there any looming forces that could alter its

dynamics?

The Economics of Cost Leadership

Industry avg. (sub1) &

cost leader (sub2) are both price

takers

Sources of Cost Advantage

– Economies of Scale • Average cost per unit falls as quantity increases until the

minimum efficient scale is reached

– Avoiding Diseconomies of Scale • Organizational cost (bureaucracy) increases and surpass reduction

in MC/unit – Physical, managerial, worker de-motivation, distance to

markets/suppliers

– Learning Curve Economies • Increased efficiency at a complicated/technical process

with experience

Sources of Cost Advantage

– Differential Low-Cost Access to Productive Inputs

• History: right place/right time • First to a market • Controlling a rare natural endowment • Locking up a source for a scare input

Sources of Cost Advantage

• Technology Independent of Scale – Similar to Economies of scale but not dependent on

scaling up physical production resources – The cost of developing the technology may be

prohibitive if a firm doesn’t have the capacity to fully exploit it

• Policy Choices – Higher quality can cause cost to increase at an

increasing rate – Flexibility can lead to increased costs (or, in some

cases, the potential to capture minimum cost)

Technology Independent of Scale

• Important to note: The advantage typically accrues to the ‘owner’ of the technology— may or may not be the ones who actually use the technology

Cost Leadership and Competitive Advantage

A source of cost advantage will lead to competitive advantage if that source is: • Valuable • Rare • Costly to Imitate • Organized (Implemented Appropriately)

Cost Leadership & 5 Forces

Rivalry

Entry Buyers

SuppliersSubstitutes

• increases capital requirements for entrants

• competitors rationally avoid price competition

• limits attractiveness of substitutes

• increases importance of the focal firm to the

supplier

• lowers incentives for buyers to

vertically integrate

Influence of Industry Life-Cycle/Structure

Economies of Scale

Diseconomies of Scale

Learning Curve Economies

Technology

Policy Choices

Differential Input Access

Not Rare Rare

Emerging Mature

Rare Rare

Not RareRare

Rare Rare

Not RareRare

Rare Rare

Generally…

Imitability High Cost Conditions

•Balanced Industry Capacity and Demand

•Path Dependence (Historical Uniqueness)

•Protected Technology

•Highly Unobservable Technology (Causal Ambiguity)

•Relational Exchange (Social Complexity)

Low Cost Conditions •Unbalanced Industry Capacity and Demand

•Non-Proprietary Technology

•Highly Observable Technology

•Transactional Exchange

Implementing a Cost Leadership Strategy

A strategy is only as good as its implementation. Strategy is implemented through organizational structure and control: • structure: (1) the division of management responsibilities, and

(2) the establishment of reporting relationships • control: policies intended to influence behavior—align the

interests of the individual with the interests of the organization

Ownership Structure & Controls

• Structure – Division of management responsibilities – Establishment of reporting relationships

• Controls – policies intended to influence behavior—

align the interests of the individual with the interests of the organization

Ownership Structures

• Simple – Aligns Management & Ownership (small firms)

• Functional Structure (U-Form: Unitary) – Specialization of functional knowledge – Facilitates coordination within functional areas – Keep decisions proximate to knowledge source

• Multi-Divisional Structure (M-Form) – More focus on products and customers – Easier to evaluate performance of the product

• Matrix

Organizational Structure

Simple Structure Owner/Manager

• Owner/Manager makes all major decisions directly and monitors all activities.

• Difficult to maintain this structure as the firm grows in size and complexity.

Organizational Structure

Functional Structure (U-Form: Unitary)

• Divides management responsibilities by function

• marketing • procurement • HR • finance • production • logistics • accounting • R&D • and so on

• CEO is the only executive with enterprise-wide perspective.

• CEO is responsible for strategy and coordination of functions.

Organizational Structure

Functional Structure

Organizational Structure

Multidivisional Structure (M-Form) • Functions are replicated in each division as appropriate. • This structure makes sense when the firm is involved in more

than one business or has grown large enough to justify geographic divisions.

• CEO has strategic responsibility with the help of vice presidents, and so on—information is filtered through layers.

• CEO balances coordination and competition among divisions.

Organizational Structure

The Functional Structure and Cost Leadership • Specialization within functions facilitates cost reduction • CEO can use this structure to:

– ensure that best cost reduction practices are shared among divisions

– allow and encourage decision-making by those who are in the best positions to do so—those close to decisions

– ensure that functions are coordinating efforts in pursuit of a common strategy

• Best for changing and complicated business environment

• Allows flexible use of human resources CEO

Defense Commercial North America

Europe

Latin America

Asia Pacific

Matrix Structure

Organizational Controls • Policies intended to influence behavior by aligning the

interests of the individual with the interests of the organization • Management Controls

– Formal • Budgeting, credit, T&E, purchasing

– Informal • culture • attitudes • leadership styles

• Compensation Policies – Monetary – Non-monetary

Organizational Controls

Compensation Policies • stock options • bonuses based on:

– cost reduction – financial performance

• nonmonetary awards – Vacations – parking places – office decor

Compensation Policies Should Reinforce Formal and Informal Management Controls

Organizational Controls

Organizational Controls and Cost Leadership • Management controls and compensation policies can be

focused on cost reduction. • Supply contracts that stipulate cost reductions over time • Tight credit policies • Austere travel policies (e.g., no first class) • Bonuses tied to cost reduction targets

Example: Wal-Mart and Southwest Airlines

Organizational Controls

Organizational Controls and Cost Leadership • Management controls and compensation policies can be

Example: Wal-Mart and Southwest Airlines