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Chapter One: strategy

Set of related actions that managers take to increase their company’s performance.

Strategic leadership - Creating competitive advantage through effective management of the strategy-making process.

Strategy formulation - Selecting strategies based on analysis of an organization’s external and internal environment.

Strategy implementation - Putting strategies into action.

Superior performance

Risk capital - Equity capital for which there is no guarantee that stockholders will:

recoup their investment.

earn a decent return.

Shareholder value - The returns that shareholders earn from purchasing shares in a company.

Sources

Capital appreciation in the value of a company’s shares

Dividend payments

Superior performance

Profitability - The return a company makes on the capital invested in the enterprise.

Return on invested capital (ROIC) - Net profit over the capital invested in a firm.

Result of how efficiently the capital is used to satisfy customer needs.

Superior performance

Profit growth - The increase in net profit over time, achieved by:

selling products in rapidly growing markets.

gaining market share from rivals.

selling more to existing customers.

expanding overseas or diversifying into new businesses.

To boost profitability and profit growth, managers must:

use strategies to give their company a competitive advantage over rivals.

deliver high profitability and sustainable profit growth.

Competitive advantage

Occurs when a company’s profitability is greater than the average profitability of firms in its industry.

Sustained competitive advantage – A company’s strategies that enable it to maintain above-average profitability for a number of years.

BUSINESS MODEL

Conception of how strategies should work together as a whole to enable the company to achieve competitive advantage.

Deals with how a company:

selects, acquires, and keeps its customers.

defines and differentiates its product offerings.

creates value for its customers.

produces goods or services and delivers to the market.

lowers costs and organizes its resources and activities.

achieves and sustains high profitability and growth.

Corporate-level managers

Oversee the development of strategies for the entire organization.

Provide a link between people concerned with the firm’s strategic development and the shareholders.

Ensure that business strategies pursued by the company are consistent with maximizing profitability and profit growth.

Business-level managers

Heads of business units

Business unit is a self-contained division that provides a product or service for a particular market.

Translate statements of intents into concrete strategies for individual businesses.

Are concerned with strategies specific to a particular business.

Functional- level managers

Responsible for specific business functions.

Develop functional strategies to fulfill the strategic objectives set by business- and corporate-level general managers.

Provide information that helps formulate realistic and attainable strategies.

Steps in a formal strategic planning process

Select the corporate mission and goals.

Analyze the organization’s external competitive environment and internal operating environment.

Select strategies that:

build on the organization’s strengths and correct it’s weaknesses.

are consistent with the organization’s mission and goals.

are congruent and constitute a viable business model.

Implement the strategies

Components of a Mission statement

Purpose of the company, or a statement of what the company strives to do.

Mission

Articulation of a company’s desired achievements or future state.

Vision

Statement of how employees should conduct themselves and their business to help achieve the company mission.

Values

Goal - Precise and measurable desired future state that a company attempts to realize.

Establishing major goals

External and internal analysis

External analysis identifies strategic opportunities and threats that will affect how an organization pursues its mission.

Involves examination of the:

industry environment in which the company operates.

country or national environment.

macroenvironment.

Internal analysis focuses on reviewing the resources, capabilities, and competencies of a company.

Goals identify the company’s strengths and weaknesses.

SWOT analysis

Comparison of strengths, weaknesses, opportunities, and threats.

Purpose - Identify the strategies to:

exploit external opportunities.

build on and protect company strengths.

eradicate weaknesses and counter threats.

Goals - Affirm a company-specific business model.

To align, fit, or match a company’s resources and capabilities to the demands of its environment.

SWOT strategies

Functional-level strategies - Directed at improving the effectiveness of operations within a company.

Business-level strategies - Encompass the business’s overall competitive theme.

How it positions itself in the marketplace to gain a competitive advantage.

Different position strategies that can be used in different industry settings.

SWOT strategies

Global strategies - address how to expand operations outside the home country.

Since competitive advantage is determined at a global level.

Corporate-level strategies determine:

the businesses a company should be in to maximize profitability and profit growth.

how to gain a competitive edge.

Strategy implementation and feedback loop

Strategy implementation

Taking action at the functional, business, and corporate levels to execute a strategic plan.

Designing the best organization structure, culture, and control systems to put a chosen strategy into action.

Feedback loop - Provides information to the corporate level on the:

strategic goals that are being achieved.

degree of competitive advantage being created and sustained.

Criticisms of Formal Planning Models

Unforeseen circumstances can adversely affect strategic plans.

Excessive importance is attached to the role of top management.

While ignoring lower-level managers.

Many successful strategies are a result of serendipity rather than strategic planning.

Scenario planning

Formulating plans that are based on “what-if” scenarios about the future.

Encourages managers to:

think outside the box and be more flexible.

anticipate probable scenarios.

Ivory tower planning - Recognizes that successful strategic planning encompasses managers at all levels of the corporation.

Techniques for Improving Decision Making

A member of a decision-making team identifies all the considerations that might make a proposal unacceptable.

Possible perils of recommended courses of action are brought into light.

Devil’s advocacy

Generation of a plan and a counter-plan that reflect plausible but conflicting courses of action.

Promotes strategic thinking.

Dialectic inquiry

Identification of past successful or failed strategic initiatives to determine if they will work for the current project.

Outside view

Characteristics of Good Strategic Leaders

Vision, eloquence, and consistency

Articulation of a business model

Commitment

Being well informed

Willingness to delegate and empower

Astute use of power

Emotional intelligence

Self-awareness, self-regulation, and motivation

Empathy and social skills

Chapter 2

External Analysis: The Identification of Opportunities and Threats

Learning Objectives

Review the primary technique used to analyze competition in an industry environment: the Five Forces model.

Explore the concept of strategic groups and illustrate the implications for industry analysis.

Discuss how industries evolve over time, with reference to the industry life-cycle model.

Show how trends in the macroenvironment can shape the nature of competition in an industry.

Opportunities and threats

Elements in a company’s environment that allow it to formulate and implement strategies to become more profitable.

Opportunities

Elements in the external environment that could endanger a firm’s integrity and profitability.

Threats

Defining an industry

Industry: Group of companies offering products or services that are close substitutes for each other.

Sector: Group of closely related industries.

Market segments - Distinct groups of customers within a market that can be differentiated on the basis of their:

individual attributes.

specific demands.

Risk of Entry by Potential Competitors

Companies that are currently not competing in the industry but have the potential to do so.

Potential competitors

Reductions in unit costs attributed to a larger output.

Economies of scale

Preference of consumers for the products of established companies.

Brand loyalty

Risk of Entry by Potential Competitors

Enjoyed by incumbents in an industry and that new entrants cannot expect to match.

Absolute cost advantage

Costs that consumers must bear to switch from the products offered by one established company to the products offered by a new entrant.

Switching costs

Falling entry barriers due to government regulation results in significant new entry, increase in the intensity of industry competition, and lower industry profit rates.

Government regulations

Rivalry Among Established Companies

Competitive struggle between companies within an industry to gain market share from each other.

Intense rivalry among established companies constitutes a strong threat to profitability.

Factors that impact the intensity of rivalry among established companies within an industry.

Industry competitive structure - number and size distribution of companies in it.

Rivalry Among Established Companies

Demand conditions - Increasing demand moderates competition by providing greater scope for companies to compete for customers.

Cost conditions - When fixed costs are high, profitability is highly leveraged to sales volume.

Exit barriers - Economic, strategic, and emotional factors that prevent companies from leaving an industry.

High exit barriers - Companies become locked into an unprofitable industry where overall demand is static or declining.

bargaining power of buyers

Bargain down prices or raise costs by demanding better product quality and service.

Choose sellers and purchase in large quantities.

Supplier industry is dependent on them for a major portion of sales.

With low switching costs and ability to purchase an input from several companies at once, buyers can pit companies against each other.

Threat of entering the industry and producing the product.

bargaining power of suppliers

Suppliers’ ability to raise input prices or industry costs through various means.

Product has no substitutes and is vital to the buyer.

Not dependent on one particular industry for their sales.

Companies would incur high switching costs if they moved to a different supplier.

Threat of entering customers’ industry.

Knowledge that companies cannot enter the suppliers’ industry.

substitute products and Complementors

Substitute products - Those of different businesses that satisfy similar customer needs.

Limit the price that companies in an industry can charge for their product.

Complementors - Companies that sell products that add value to the other products.

Strong complementors - Provide a increased opportunity for creating value.

Weak complementors - Slow industry growth and limit profitability.

STRATEGIC GROUPS WITHIN INDUSTRIES

Companies in an industry differ in the way they strategically position products in the market.

Product positioning is determined by the:

product quality, distribution channels and market segments served.

technological leadership and customer service.

pricing and advertising policy.

promotions offered.

Implications of Strategic Groups

Since all companies in a strategic group pursue a similar strategy:

customers view them as direct substitutes for each other.

immediate threat to a company are rivals within its own strategic group.

Different strategic groups have different relationships to each of the competitive forces.

Mobility Barriers

Within-industry factors that inhibit the movement of companies between strategic groups.

Managers must:

determine if it is cost-effective to overcome mobility barriers.

realize that companies in other strategic groups become their competitors if they overcome mobility barriers.

Macroeconomic Forces

Growth rate of the economy

Interest rates

Currency exchange rates

Inflation or deflation rates

Global and Technological Forces

Global forces - Falling barriers to international trade have enabled:

domestic markets enter to foreign markets.

foreign enterprises to enter the domestic markets.

Technological forces - Technological change can:

make products obsolete.

create a host of new product possibilities.

impact the height of the barrier to entry and reshape industry structure.

Demographic, social, and political Forces

Demographic forces - Outcomes of changes in the characteristics of a population.

Social forces - Way in which changing social morals and values affect an industry.

Political and legal forces - Outcomes of changes in laws and regulations.

chapter FOUR: Functional-level strategies

Aimed at improving the effectiveness of a company’s operations and its ability to attain superior:

efficiency.

quality.

innovation.

customer responsiveness.

Efficiency and Economies of scale

Efficiency - Measured by the quantity of inputs that it takes to produce a given output.

Economies of scale - Reductions in unit costs attributed to a larger output.

Ability to spread fixed costs over a large production volume and produce in large volumes.

To achieve greater division of labor and specialization.

Diseconomies of scale - Unit cost increases associated with a large scale of output.

EFFICIENCY AND ECONOMIES OF SCALE

Managers should avoid being complacent about efficiency-based cost advantages derived from experience effects as:

neither learning effects nor economics of scale are sustained forever.

cost advantages gained from experience effects can be made obsolete by new technologies.

Flexible production technology

Reduces setup times for complex equipment.

Increases the use of individual machines through better scheduling.

Improves quality control at all stages of the manufacturing process.

Increases efficiency and lower unit costs.

Enables better customization of product offerings.

MATERIALS MANAGEMENT, JUST-IN-TIME systems, AND EFFICIENCY

Just-in-time (JIT) inventory system

Economizes on inventory holding costs by scheduling components to arrive:

just in time to enter the production process.

as stock is depleted.

Cost savings come from increasing inventory turnover and reducing the need for working and fixed capital.

Drawback of leaving a company without a buffer stock of inventory.

MATERIALS MANAGEMENT, JUST-IN-TIME systems, AND EFFICIENCY

Supply chain management - Managing the flow of inputs and components from suppliers into the company’s production processes to:

minimize inventory holding.

maximize inventory turnover.

total quality management

Increasing product reliability to perform consistently as designed and rarely break down.

Five-step chain reaction

Improved quality means that costs decrease

As a result, productivity improves

Better quality leads to higher market share, allowing the company to raise prices

Higher prices increase profitability, allowing the company to stay in business

Enables the company to create more jobs

total quality management

Steps that should be part of a quality improvement program

Management should strive to eliminate mistakes, defects, and poor-quality

Improve quality of supervision

Work standard to stress on quality of work

Train employees in new skills to remain informed in workplace changes

Commitment from every individual in the company to achieve better quality

Improving Quality as Excellence

To achieve a perception of high quality of attributes the company should:

collect marketing information indicating which attributes are most important to customers.

design products in such a way that those attributes are embodied in the product.

decide significant attributes to promote and how best to position them in the minds of consumers.

recognize that competition is not stationary.

Achieving Superior Innovation

Most important source of competitive advantage.

Innovative products or processes gives a company competitive advantage that allows it to:

differentiate its products and charge a premium price.

lower its cost structure below that of its rivals.

Successful new-product launches are catalysts of superior profitability.

Reasons for High Failure Rate of Innovation

Demand for innovations is essentially uncertain.

Technology is poorly commercialized.

Poor positioning strategy

Positioning strategy - Specific set of options adopts for a product based on price, distribution, promotion and advertising, and product features.

Marketing a technology for which there is inadequate demand.

Slow marketing of products.

Reducing innovation failures

Tight cross-functional integration can help a company ensure that:

product development projects are driven by customer needs.

new products are designed for ease of manufacture.

development costs are reduced.

the time it takes to develop a product and bring it to market is minimized.

close integration between r&d and marketing is achieved.

Chapter five: Business-level strategy

Overall competitive theme of a business.

Way a company positions itself in the marketplace to gain a competitive advantage.

Different positioning strategies that can be used in different industry settings.

Lowering costs

Enables a company to:

gain a competitive advantage in commodity markets.

undercut rivals on price.

gain market share.

maintain or increase profitability.

differentiation

Distinguishing oneself from rivals by offering something that they find hard to match .

Product differentiation is achieved through:

superior reliability, functions, and features.

better design, branding, point-of-sale service, after sales service, and support.

Advantages

Allows a company to charge a premium price.

Helps a company to grow overall demand and capture market share from its rivals.

the differentiation-low cost tradeoff

Efficiency frontier

Shows all the positions a company can adopt with regard to differentiation and low cost.

Has a convex shape because of diminishing returns.

Multiple positions on the differentiation-low cost continuum are viable.

Have enough demand to support an offering.

Value innovation

Occurs when innovations push out the efficiency frontier in an industry, enabling greater value to be offered through superior differentiation.

At a lower cost than was thought possible.

Enable a company to outperform its rivals for a long period of time.

Comparison of Market segmentation approaches

Standardization strategy

Associated with lower costs than a segmented strategy

Segmentation

strategy

Involves customization of product offerings, which drive up costs as:

Focus

strategy

Attempts to attain economies of scale through high sales volume

achieving economies of scale is difficult.

production and delivery costs tend to be high.

Have a higher cost structure as:

new product features and functions need to be added.

attaining economies of scale is difficult.

business-level strategies

Give a company specific form of competitive position and advantage in relation to its rivals

Results in above-average profitability

Generic business-level strategy

Lowering costs in order to lower prices and still make a profit

Broad low-cost strategy

When a company differentiates its product in some way

Broad differentiation strategy

Targeting a certain segment or niche and trying to be the low-cost player in that niche

Focus low-cost strategy

Business-level strategy, industry, and competitive advantage

Low-cost companies

Charge low prices and still make profits

Absorb cost increases from suppliers

Offer deep discount prices for buyers

Differentiated companies

Withstand pricing pressure from powerful buyers and increase prices without buyer resistance

Absorb price increases from suppliers and pass them to customers without losing market share

Withstand substitute goods, as a result of brand loyalty

Lowering costs through functional strategy and organization

Achieve economies of scale and learning effects

Adopt lean production and flexible manufacturing technologies

Implement quality improvement methodologies to produce reliable goods.

Streamline processes

Use information systems to automate business process

Lowering costs through functional strategy and organization

Implement just-in-time inventory control systems.

Design products with a focus on reducing costs.

Increase customer retention.

Ensure that the organization’s structure, systems, and culture reward actions that lead:

higher productivity.

greater efficiency.

Differentiation through functional-level strategy and organization

Customize product offering and marketing mix to different market segments.

Design product offerings that have a high perceived quality regarding their:

functions.

features.

performance.

reliability.

Handle and respond to customer queries and problems promptly.

Differentiation through functional-level strategy and organization

Focus marketing efforts on:

brand building.

perceived differentiation from rivals.

Ensure employees act in a manner consistent with the company’s image.

Create the right organizational structure, controls, incentives, and culture.

Ensure that the control systems, incentive systems, and culture align with the strategic thrust.

Blue ocean strategy

Successful companies build their competitive advantage by redefining their product offering through value innovation.

Creating a new market space.

Blue Ocean - Wide open market space where a company can chart its own course.

Blue ocean strategy

To redefine its market and create a new business-level strategy, a company must:

eliminate factors that rivals take for granted, and reduce costs.

reduce certain factors below industry standards, and lower costs.

raise certain factors above industry standards, and increase value.

create factors that rivals do not offer, and increase value.

Chapter Six : fragmented industry

Composed of a large number of small- and medium-sized companies.

Reasons for fragmentation

Lack of scale economies

Brand loyalty in the industry is primarily local

Low entry barriers due to lack of scale economies and national brand loyalty

Focus strategy works best for a fragmented industry.

Consolidating a fragmented industry through value innovation

Value innovator - Defines value differently than established companies.

Offers the value at lowered cost through the creation of scale economies.

Chaining: Obtaining the advantages of cost leadership by establishing a network of linked merchandising outlets.

Interconnected by information technology that functions as one large company.

Aids in building a national brand.

Consolidating a fragmented industry through value innovation

Franchising: Strategy in which franchisor grants the franchisee the right to use the franchisor’s name, reputation, and business model.

In return for a fee and a percentage of the profits.

Advantages

Finances the growth of the system, resulting in rapid expansion.

Franchisees have a strong incentive to ensure that the operations are run efficiently.

New offerings developed by a franchisee can be used to improve the performance of the entire system.

Consolidating a fragmented industry through value innovation

Disadvantages

Tight control of operations is not possible.

Major portion of the profit go to the franchisee.

When franchisees face a higher cost of capital, it raises system costs and lowers profitability.

Horizontal mergers - Merging with or acquiring competitors and combining them into a single large enterprise.

STRATEGIES IN EMBRYONIC AND GROWTH INDUSTRIES

Limited customer demand for products of an embryonic industry is due to:

limited performance and poor quality of the first products.

customer unfamiliarity with the product.

poorly developed distribution channels.

lack of complementary products.

high production costs because of small volumes of production.

STRATEGIES IN EMBRYONIC AND GROWTH INDUSTRIES

Industry enters the growth stage when a mass market starts to develop for its products.

Mass market: One in which large numbers of customers enter the market.

Occurs when:

Product value increases, due to ongoing technological progress and development of complementary products.

Production cost decreases, resulting in low prices and high demand.

market development and customer groups

First to purchase and experiment with a product based on new technology.

Innovators

Understand that the technology may have important future applications.

Early adopters

Practical and understand the value of new technology.

Early majority

Purchase a new technology only when it is obvious that it has great utility and is here to stay.

Late majority

Unappreciative of the uses of new technology.

Laggards

Strategic implications: crossing the chasm

New strategies are required to strengthen a company’s business model as a market develops.

Customers in each segment have very different needs.

Competitive chasm - Transition between the embryonic market and mass market.

Failure to do so results in the company going out of business.

Strategic implications: crossing the chasm

Innovators and early adopters

Technologically sophisticated and willing to tolerate the limitations of the product.

Reached through specialized distribution channels.

Companies produce small quantities of product that are priced high.

Early majority

Value ease of use and reliability.

Require mass-market distribution and mass-media advertising campaigns.

Require large-scale mass production to produce high-quality product at a low price.

Factors that accelerate customer demand

Degree to which a new product is perceived as better at satisfying customer needs than the product it supersedes.

Relative advantage

Products perceived as complex and difficult to use will diffuse more slowly than those that are easy to use.

Complexity

Degree to which a new product is perceived as being consistent with the current needs or existing values of potential adopters.

Compatibility

Factors that accelerate customer demand

Degree to which potential customers can experiment with a new product during a hands-on trial basis.

Trialability

Degree to which the results of using and enjoying a new product can be seen and appreciated by other people.

Observability

Lead adopters in a market who become infected with a product.

Infect other people, making them adopt and use the product.

Viral model of infection

Strategies to Deter Entry In mature industries

Catering to the needs of all market segments to deter entry by competitors.

Product proliferation strategy

Charging a price that is lower than that required to maximize profits in the short run.

Is above the cost structure of potential entrants.

Limit price strategy

Investments that signal an incumbent’s long-term commitment to a market or a segment of the market.

Strategic commitments

Strategies to Manage Rivalry

Companies increase or decrease product prices to:

convey their intentions to other companies.

influence the price of an industry’s products.

Price signaling

When one company assumes the responsibility for determining the pricing strategy that maximizes industry profitability.

Price leadership

Use of product differentiation strategies to deter potential entrants and manage rivalry within an industry.

Non-price competition

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Capacity Control

Companies devise strategies to control or benefit from capacity expansion programs.

Factors causing excess capacity.

New technologies that produce more than the old ones.

New entrants in an industry.

Economic recession that causes global overcapacity.

High growth of and demand in an industry that triggers rapid expansion.

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Capacity Control

Choosing a strategy

Each company individually must try to preempt its rivals.

Companies must collectively coordinate with each to be aware of the mutual effects of their actions.

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Choosing a Strategy

Leadership strategy: When a company develops strategies to become the dominant player in a declining industry.

Niche strategy: When a company focuses on pockets of demand that are declining more slowly than the industry as a whole to maintain profitability.

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Choosing a Strategy

Harvest strategy: When a company reduces to a minimum the assets it employs in a business to reduce its cost structure and extract maximum profits from its investment.

Divestment strategy: When a company decides to exit an industry by selling off its business assets to another company.

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Chapter seven: Benefits of Standards

Guarantees compatibility between products and their complements.

Reduces confusion in the minds of consumers.

Reduces production costs and risks associated with supplying complementary products.

Leads to low-cost and differentiation advantages for individual companies.

Helps raise the level of industry profitability.

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Establishment of Standards

Standards emerge in an industry when the benefits of establishing are recognized.

Technical standards are set by cooperation among businesses, through the medium of an industry association.

When the government sets standards they fall into the public domain.

Public domain: Any company can freely incorporate the knowledge and technology upon which the standard is based into its products.

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Strategies for Winning a Format War

Make network effects work in one’s favor and against competitors.

Build the installed base for the standard as rapidly as possible.

Ensure a supply of complements.

Leverage killer applications.

Killer applications: Applications or uses of a new technology or product so compelling that customers adopt them in droves, killing competing formats.

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Strategies for Winning a Format War

Pursue aggressive pricing and marketing.

Razor and blade strategy: Pricing the product low to stimulate demand, and pricing complements high.

Cooperate with competitors.

License the format.

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Costs in High-Technology Industries

Similar cost economics.

Very high fixed costs and very low marginal costs.

Law of diminishing returns - Marginal costs rise as a company tries to expand output.

Profitability increases when a company shifts from a cost structure with increasing marginal costs to higher fixed costs with lower marginal costs.

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first mover

Firm that pioneers a particular product category or feature by being first to offer it to the market.

Creation of a revolutionary product results in a monopoly position.

First-mover advantage - Pioneering new technologies and products that lead to slowing the rate of imitation.

First-mover disadvantages: Competitive disadvantages associated with being first.

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Strategic implications: crossing the chasm

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Advantages

Opportunity to exploit network effects and positive feedback loops.

Ability to establish brand loyalty and increase sales volume ahead of rivals.

Ability to create switching costs for customers and accumulate knowledge.

Disadvantages

Bear significant pioneering costs.

More prone to making mistakes.

Risk of building the wrong resources and capabilities.

Risk of investing in inferior or obsolete technology

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Strategies for Exploiting First-Mover Advantages

Develop and market the innovation.

Develop and market the innovation jointly with other companies.

Through a strategic alliance or joint venture.

License the innovation to others and allow them to develop the market.

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Factors to consider when selecting a Strategy

Complementary assets

Required to exploit a new innovation and gain a competitive advantage.

Help build brand loyalty and achieve rapid market penetration.

Height of barriers to imitation

Higher the barriers, longer it takes for rivals to imitate.

Give the innovator more time to build an enduring competitive advantage.

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Factors to consider when selecting a Strategy

Capable competitors

Companies that can move quickly to imitate the pioneering company.

Competitors’ capability depends on their research and development skills and access to complementary assets.

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Technological paradigm shift

Shifts in new technologies that:

revolutionize the structure of the industry.

dramatically alter the nature of competition.

require companies to adopt new strategies for survival.

Occur in an industry when:

established technology is approaching or is at its natural limit.

new disruptive technology has entered the marketplace and is invading the main market.

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STRATEGIC Implications FOR ESTABLISHED COMPANIES

Being aware of how disruptive technologies can revolutionize markets is a valuable strategic asset.

Investing in new technologies that may become disruptive technologies.

Creating an autonomous operating division solely for the disruptive technology.

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Strategic Implications for New Entrants

Do not face pressures to continue the existing out-of-date business model.

Do not have to worry about established:

customer base.

relationships with suppliers and distributors.

Can focus their energies on the opportunities offered by the new disruptive technology.

Must decide whether to partner with an established company or go solo.

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Globalization of Production and Markets

Globalization of production and markets

Increased as companies took advantage of lower barriers to international trade and investment

National markets started merging into one global marketplace

Implications

Companies finding home markets inundated by foreign competitors

Critical to maximize efficiency, quality, customer responsiveness, and innovative ability

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Expanding the Market: Leveraging Products

A company can sell goods, developed at home, internationally to increase its growth rate.

Multinational company is one that does business in two or more national markets.

Success depends on the distinctive competencies that underlie its production and marketing process.

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Realizing Cost Economies from Global Volume

A company can realize cost savings from economies of scale by:

spreading the fixed costs and setting up production facilities over its global sales volume.

serving a global market, a company utilizes its production facilities more intensively.

bargaining down the cost of key inputs with suppliers.

increasing its sales volume more rapidly.

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location economies

Economic benefits that arise from performing a value creation activity in an optimal location.

Help a company:

achieve a low-cost position.

to differentiate its product offering.

to gain competitive advantage over rivals who base all their value creation activities at a single location.

Transportation costs and trade barriers complicate the process of realizing location economies.

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Leveraging the Skills of Global Subsidiaries

Managers must:

realize that valuable skills can arise anywhere within a firm’s global network.

establish an incentive system that encourages local employees to acquire new competencies.

have a process for identifying valuable new skills created in a subsidiary.

help transfer valuable skills within the firm.

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Pressures for cost reductions

To respond to them, a firm must try to lower the costs of value creation.

Pressures are intense:

in industries producing commodity-type products.

for products that serve universal needs.

when major competitors are based in low-cost locations, there is excess capacity, and consumers face low switching costs.

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Pressures for Local Responsiveness

To respond to them, a firm must differentiate its products and marketing strategy from country to country.

Raises a company’s cost structure

Occurs as a result of:

differences in customer tastes and preferences.

differences in distribution channels.

host government demands.

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global standardization strategy

Business model based on pursuing a low-cost strategy on a global scale.

Companies market a standardized product worldwide to reap maximum benefit from economies of scale.

Most appropriate when:

pressures for cost reductions are strong.

demand for local responsiveness is minimal.

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localization strategy

Focuses on increasing profitability by customizing a company’s goods.

Most appropriate when:

consumer tastes and preferences differ across nations.

cost pressures are not very strong.

Benefit - Product value raises in the local market

Limitation - Cost reduction by mass-producing a standardized product is not possible

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transnational strategy

Simultaneously:

achieves low costs.

differentiates the product offering across geographic markets.

fosters a flow of skills between global subsidiaries.

Difficult to pursue because it places conflicting demands on a company

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International Strategy

Occurs when:

companies establish manufacturing and marketing functions in each major country they do business in.

local customization of product offering and marketing strategy is limited in scope.

Most appropriate when:

product serves universal needs.

companies are not confronted with cost pressures.

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Distinctive Competencies and Entry Mode

If a company’s distinctive competency is its technological expertise:

licensing and joint-ventures should be avoided.

wholly owned subsidiary should be given preference.

Combination of franchising and subsidiaries for service companies whose distinctive competency is management proficiency.

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Pressures for Cost Reduction and Entry Mode

Companies pursuing global or transnational strategies prefer establishing a wholly owned subsidiary because:

it gives them tight control over marketing to coordinate a globally dispersed value chain.

it gives them tight control over a local operation.

enables use of profits generated in one market to improve competitive position in another.

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global strategic alliances

Cooperative agreements between companies from different countries that are actual or potential competitors

Advantages

Facilitate entry into a foreign market

Allow firms to share the costs of developing new products or processes

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global strategic alliances

Bring together skills and assets that cannot be developed alone

Help establish technological standards for the industry that will benefit the firm

Disadvantage - Give competitors a low-cost route to new technology and markets.

Success of an alliance depends on:

partner selection.

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Chapter Nine: Corporate-Level Strategy and the Multibusiness Model

Corporate-level strategies should be chosen to promote the success of its business-level strategies.

This allows a firm to achieve a sustainable competitive advantage, leading to higher profitability.

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Corporate-Level Strategy and the Multibusiness Model

Levels of business model:

Business model and strategies for each business unit or division in every industry in which it competes

Higher-level multibusiness model that justifies its entry into different businesses and industries

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Horizontal Integration

Acquiring or merging with industry competitors to achieve the competitive advantages that arise from a large size and scope of operations

Acquisition: Company uses its capital resources to purchase another company.

Merger: Agreement between two companies to pool their resources and operations and join together to better compete in a business or industry.

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Benefits of Horizontal Integration

Lowers the cost structure

Increases product differentiation

Leverages a competitive advantage

Reduces rivalry within the industry

Increases bargaining power over suppliers and buyers

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Vertical Integration

When a company expands its operations either backward or forward into an industry

Backward vertical integration - Produces inputs for the company’s products

Forward vertical integration - Uses, distributes, or sells the company’s products

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Stages in the Value-Added Chain

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PC Industry Value-Added Chain

Increasing Profitability Through Vertical Integration

Vertical integration increases product differentiation, lowers costs, and reduces industry competition when it:

facilitates investments in efficiency-enhancing specialized assets.

protects product quality.

results in improved scheduling.

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Problems with Vertical Integration

Increasing cost structure

Disadvantages that arise when technology is changing fast

Disadvantages that arise when demand is unpredictable

Vertical disintegration: When a company decides to exit industries either forward or backward in the industry value chain to its core industry to increase profitability

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Cooperative Relationships

Quasi integration: Use of long-term relationships, or investment into some of the activities normally performed by suppliers or buyers

In place of full ownership of operations that are backward or forward in the supply chain

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Competitive Bidding and Short-Term Contracts

Competitive bidding strategy - Independent component suppliers compete to be chosen to supply a particular component.

Short-term contracts - Last for a year or less

Does not result in specialized investments

Signals a company’s lack of long-term commitment to its suppliers

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Strategic Alliances and Long-Term Contracting

Strategic alliances: Long-term agreements between two or more companies to jointly develop new products or processes

Substitute for vertical integration

Avoids bureaucratic costs

Component suppliers benefit because their business and profitability grow as the companies they supply grow.

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Strategies to Build Long-Term Cooperative Relationships

Hostage taking: Means of exchanging valuable resources to guarantee that each partner to an agreement will keep its side of the bargain

Credible commitment: Believable promise or pledge to support the development of a long-term relationship between companies

Each company should possess a kind of power to discipline its partner, if the need arises.

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Strategic Outsourcing

Decision to allow one or more of a company’s value-chain activities to be performed by independent, specialist companies

Virtual corporation: Companies that pursue extensive strategic outsourcing to the extent that they only perform the central value creation functions that leads to competitive advantage

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Benefits of Outsourcing

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Lower cost structure

Enhanced differentiation

Focus on the core business

Risks of Outsourcing

Holdup

Risk that a company will become too dependent upon the specialist provider of an outsourced activity

Increased competition

Building of an industry-wide resource that lowers the barriers to entry in that industry

Loss of information and forfeited learning opportunities

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Chapter 10: Diversification

Ways in which profitability can be increased

Transfer competencies between business units in different industries

Leverage competencies to create business units in new industries

Share resources between business units to realize synergies or economies of scope

Use product bundling

Utilize general organizational competencies that increase the performance

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Leveraging Competencies

Taking a distinctive competency developed by a business unit in one industry and using it to create a new business unit in a different industry

Basis of the model

Company’s competitive advantage in one industry being applied to create a differentiation

Cost-based competitive advantage for a new business unit in a different industry

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Sharing Resources and Capabilities

Economies of scope: Synergies that arise when one or more of a diversified company’s business units are able to lower costs or increase differentiation

More effectively pool, share, and utilize expensive resources or capabilities

Sources of cost reductions:

Sharing lowers the cost structure

Marketing function creates the differentiation of products leading to a higher ROIC

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Product Bundling

Providing products that are connected to each other

Allows companies to expand their range providing customers a complete package

Goal - Bundle products to offer customers:

lower prices.

superior set of services.

Does not always require joint ownership

Can be achieved through market contracts

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General Organizational Competencies

Help business units within a company perform at a higher level than it could if it operated as a separate or independent company

Results from the skills of a company’s top managers

Types:

Entrepreneurial capabilities

Organizational design capabilities

Strategic capabilities

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Entrepreneurial Capabilities

Required to take advantage of the free cash flow

To promote entrepreneurship, a company must:

encourage managers to take risks.

give managers the time and resources to pursue novel ideas.

not punish managers when a new idea fails.

make sure that the company’s free cash flow is not wasted in risky ventures that would generate a low return on investment.

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Capabilities in Organizational Design

Organizational design skills: Ability of the managers to create a structure, culture, and control systems that motivate and coordinate employees to perform at a high level

Major factor that:

Influences a company’s entrepreneurial capabilities

Determines a company’s ability to create functional competencies

Determines a diversified company’s ability to profit from its multibusiness model

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Superior Strategic Management Capabilities

Ways to improve the performance of the acquired company:

Top managers of the acquired company are replaced with a more aggressive team.

New top-management team sells off expensive assets.

New management team works to devise new strategies to improve the performance.

Introducing company-wide pay-for-performance bonus system.

Establishing stretch goals for employees at all levels.

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Related Diversification

Corporate-level strategy based on the goal of establishing a business unit in a new industry related to a company’s existing business units

By some form of commonality or linkage between their value-chain functions

Basis of multibusiness model

Taking advantage of strong commonalities that can be modified to increase the competitive advantage

Allowing a company to use any general organizational competency it possesses

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Disadvantages of Diversification

Changes in the industry or company

Management

Technology

Diversification for the wrong reasons

Pooling risks

Entry into a wrong business or at the wrong time or for the wrong reasons

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Disadvantages of Diversification

Bureaucratic costs: Costs associated with solving the transaction difficulties between business units and corporate headquarters

Factors responsible:

Number of business units in a company’s portfolio

Degree to which coordination is required to realize the advantages of diversification

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Related versus unrelated diversification

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Related diversification

Company’s competencies can be applied across a greater number of industries.

Company has superior strategic capabilities that allow it to keep bureaucratic costs under close control.

Unrelated diversification

Company’s top managers are skilled at raising the profitability of poorly run businesses.

Company’s managers use their strategic management competencies to:

improve the competitive advantage of their business units.

keep bureaucratic costs under control.

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Internal New Venturing

Transferring resources and creating a new business unit in a new industry to innovate new kinds of products

Used by companies that are:

Technology-based and pursue related diversification

Venturing to enter a newly emerging industry

Pitfalls:

Market entry on too small a scale

Poor commercialization of the new-venture product

Poor corporate management of new-venture division

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Acquisition

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Integrating the acquired company

Overestimating economic benefits

Expense of acquisitions

Inadequate pre-acquisition screening

Pitfalls

Target identification and pre-acquisition screening

Bidding strategy

Integration

Learning from experience

Guidelines for success

Joint Ventures

Two or more companies agree to pool their resources to create new business

Allows a company to share the risks and costs associated with establishing a business unit

Resulting problems:

Partner with superior skills will have to give away profits

Different business models or time horizons leading to a conflict about how to run the joint venture

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Restructuring

Reasons:

Investors feel these companies no longer have multibusiness models

Complexity of the financial statements of highly diversified enterprises disguises the performance of individual business units

Response to declining financial performance brought about by over-diversification

Diminished advantages of vertical integration or diversification from innovations in strategic management

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