1 strategic fit: matching strategy to structure and the situation payne (6)

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STRATEGIC FIT: STRATEGIC FIT: MATCHING STRATEGY TO MATCHING STRATEGY TO

STRUCTURE AND THE SITUATIONSTRUCTURE AND THE SITUATION

Payne

(6)

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Two Primary Types of Fit

1. FIT WITH INDUSTRY OR MARKET CONDITIONS – external fit

1. Strategies for Emerging Industries2. Strategies for High Velocity Markets3. Strategies for Maturing Industries4. Strategies for Declining Industries5. Strategies for Fragmented Industries6. Strategies for International Markets

2. FIT WITH ORGANIZATIONAL STRUCTURE – internal fit

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The Industry Life Cycle The Industry Life Cycle

Introduction Growth Maturity Decline

Ind

us

try

Sa

les

Time

4

0

50

100

150

200

250

1895 1905 1915 1925 1935 1945 1955

No. of firms

Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961

Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961

Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

5

0

2

4

6

8

10

12

RO

I

Val

ue

Ad

ded

/Rev

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e

Tec

hn

ical

Ch

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Pro

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cts

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ales

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ew P

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du

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f P

lan

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.

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stm

ent/

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GrowthMaturityDecline

Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle.

Strategy and Performance at across the Industry Life CycleStrategy and Performance at across the Industry Life Cycle

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Industry Structure over the Life Cycle

INTRODUCTION GROWTH MATURITY DECLINE DEMAND Affluent buyers Increasing Mass market

Knowledgeable, penetration replacement customers,

resi- demand dual

segments

TECHNOLOGYRapid product Product and Incremental Well-diffused innovation process innovation innovation technology

PRODUCTS Wide variety, Standardization Commoditiz- Continued rapid design change ation

commoditization

MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity URING intensive mass-production

TRADE -----Production shifts from advanced to developing countries-----

COMPETITION Technology- Entry & exit Shakeout & Price wars, consolidation exit

KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design for uction, ration-

alization, low cost

sourcing

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1. Features of an Emerging Industry

• New and unproven market• Proprietary technology• Low entry barriers• Experience curve effects may permit

cost reductions as volume builds• Buyers are first-time users• Marketing involves inducing initial purchase

and overcoming customer concerns• Possible difficulties in securing raw materials• Firms struggle to fund R&D, operations and

build resource capabilities for rapid growth

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1. Options in an Emerging Industry

• Win early race for leadership by employing a bold, creative strategy• Push hard to:

• Perfect technology• Improve product quality• Develop attractive performance features

• Move quickly when technological uncertainty clears and a dominant technology emerges

• Form strategic alliances• Capture potential first-mover advantages• Pursue:

• New customers and user applications• Entry into new geographical areas

• Focus advertising emphasis on:• Increasing frequency of use • Creating brand loyalty

• Use price cuts to attract price-sensitive buyers• Prepare for entry of established firms when industry future clears

and risk lessens

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2. Features of High Velocity Markets

• Rapid-fire technological change• Short product life-cycles• Rapidly evolving customer expectations• Frequent launches of new competitive

moves• Entry of important new rivals• Examples:

– Computer PC / Processor Industry– Biotechnology / Pharmaceutical Industry

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2. Options in the High Velocity Markets• Invest aggressively in R&D• Develop quick response capabilities

• Match rivals• Shift resources• Adapt competencies• Create new competitive capabilities• Speed new products to market

• Use strategic partnerships to develop specialized expertise and capabilities

• Keys to success:• Cutting-edge expertise• Speed in responding to new developments• Collaboration with others• Agility• Innovativeness• Opportunism• Resource flexibility• First-to-market capabilities

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3. Characteristics of Industry Maturity

• Slowing demand generates stiff competition• More sophisticated buyers demand bargains• Greater emphasis on cost and service• “Topping out” problem in adding production capacity• Product innovation and new end uses harder to come by• International competition increases• Industry profitability falls• Mergers and acquisitions reduce the number of industry

rivals

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3. Strategy Options for Competingin a Mature Industry

• Prune product line• Emphasize process innovation• Strong focus on cost reduction• Increase sales to present customers• Purchase rivals at bargain prices• Expand internationally• Build new, more flexible competitive

capabilities

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Strategy Implementation in Mature Industries:The Traditional Model

Strategy Implementation in Mature Industries:The Traditional Model

STRATEGY - Pursuit of cost efficiency through mass production

STRUCTURE - Functional departments

- Line and staff distinction

- Job specialization

CONTROLS - Quantitative, short-term performance targets

- Hierarchical monitoring and control

- Standard, formalized operating procedures, reporting, and management by exception.

INCENTIVES - Emphasis on financial incentives linked to individual performance

TOP - Primary functions are control and MANAGEMENT strategic decision making

- Two main styles: politician and autocrat

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4. Characteristics of Stagnant or Declining Industries

• Demand grows more slowly than economy as whole (or even declines)

• Competitive pressures intensify--rivals battle for market share

• To grow and prosper, firm must take market share from rivals

• Industry consolidates to a smaller number of key players via mergers and acquisitions

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4. Options for Competingin a Stagnant or Declining Industry

• Pursue focus strategy aimed at fastest growing market segments

• Stress differentiation based on quality improvement or product innovation

• Work diligently to drive costs down by– Outsourcing– Redesign internal processes– Consolidate under-utilized production facilities– Close low-volume, high-cost distribution outlets– Cut marginal activities from value chain

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5. Characteristics of a Fragmented Industry• No seller has a sizable market share (sometimes because the

industry is so new that no large firms have yet emerged) • Exploding technologies force firms to specialize just to keep

up in their area of expertise • Low entry barriers • Absence of scale economies• Buyers require small quantities of customized products (a

condition that allows small firms to serve the special needs of a few buyers)

• Market is so big or diverse that it requires many firms to satisfy buyer needs

• Examples (non-HC): 1) Book publishing, 2) Landscaping and plant nurseries, 3) Auto repair, 4) Restaurant industry, 5) Public accounting, 6) Women’s dresses, 7) Meat packing, 8) Paperboard boxes, 9) Hotels and motels, 10) Furniture

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5. Options for a Fragmented Industry

• Construct and operate “formula” facilities• Become a low-cost operator• Increase customer value via backward or

forward integration • Specialize by product type• Specialize by customer type• Focus on limited geographic area

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6. Characteristics of International Markets

• Market differences among countries

• Buyer needs and habits• Distribution channels• Long-run growth potential• Driving forces• Competitive pressures

• Cost variations among countries

• Wage rates• Worker productivity• Natural resource availability• Inflation rates• Energy costs• Tax rates

• Fluctuating exchange rates

• Differences in host government trade policies

•Import tariffs or quotas•Local content requirements•Price control policies•Other regulations

»Technical standards»Product certification»Minority ownership by local citizens»Prior approval of capital spending

projects»Withdrawal of funds from country

• Pattern of international competition

•Multicountry patterns•Global patterns

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International Strategy

Need for Local ResponsivenessNeed for Local Responsiveness

Nee

d f

or G

lob

al I

nte

grat

ion

Nee

d f

or G

lob

al I

nte

grat

ion

LowLow

HighHigh

LowLow HighHigh

GlobalGlobalstrategystrategy

TransnationalTransnationalstrategystrategy

MultidomesticMultidomesticstrategystrategy

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International Strategy OptionsInternational International StrategiesStrategies Modes of EntryModes of Entry

International International Business-Level Business-Level StrategyStrategy

Multidomestic Multidomestic StrategyStrategy

Global StrategyGlobal Strategy

Transnational Transnational StrategyStrategy

ExportingExporting

LicensingLicensing

Strategic Strategic AlliancesAlliances

AcquisitionsAcquisitions

Joint VentureJoint Venture

New VentureNew Venture

OutcomeOutcome

Improved Improved Financial Financial Performance Performance

Increased Increased Market ShareMarket Share

Location Location Advantages*Advantages*

InnovationInnovation

*Location Advantages = Access to key customers, cheaper energy, raw materials or lower cost of labor

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Entry Modes for International Expansion

Low

Degree of Ownership and Control

High

Low High

Ext

ent

of I

nve

stm

ent

and

Ris

k

ExportingExporting

LicensingLicensing

FranchisingFranchising

Strategic AllianceStrategic Alliance

Joint VentureJoint Venture

Wholly Owned Subsidiary

Wholly Owned Subsidiary

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Achieving Global Competitivenessvia Strategic Alliances

• Allows firms to compete on a:– More global scale and– Preserve their independence

• Types of alliances:• Joint research efforts• Technology-sharing• Joint use of production facilities• Marketing one another’s products• Joint manufacturing or assembly

• Guidelines:• Pick a compatible partner• Choose ally whose strengths complement products and customers• Learn thoroughly & rapidly about partner’s technology &

management• Do not share competitively sensitive information• View alliance as temporary, not permanent

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Benefits and Pitfalls of Strategic Alliances

• Benefits of Alliances:• Gain scale economies in production and/or marketing• Fill gaps in technical expertise or knowledge of local markets• Share distribution facilities and dealer networks• Direct combined competitive energies toward defeating

mutual rivals• Pitfalls of Alliances:

• Becoming too dependent on another firm for essential expertise over the long-term

• Different motives and conflicting objectives• Time consuming• Language and cultural barriers• Mistrust when collaborating in competitively sensitive areas • Clash of egos and company cultures

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Takeda and Lilly are collaborating to copromote Takeda's novel insulin sensitivity enhancer, Actos, in the United States and more than 70 other countries. Pioneered by Takeda, the thiazolidinedione class of insulin sensitivity enhancers - TZDs - represent a new treatment for patients with type 2 diabetes that treats one of the underlying causes of the disease. Today, worldwide costs for treating diabetes are estimated at more than $200 billion annually, and it is projected that, over the next decade, those costs could double due to the related complications of diabetes, such as kidney damage, limb amputation, and problems with eyesight.

Manufacturing Alliance

Lilly and Ligand are collaborating to discover and develop products based upon Ligand's intracellular receptor technology. The collaboration is focusing on products with broad applications across metabolic diseases, including diabetes, obesity, dislipidemia, insulin resistance and cardiovascular diseases associated with insulin resistance and obesity.

R&D Alliance

Commercial Alliance

Lilly and Lonza are collaborating on the development and manufacturing of Zovant. Lonza Biologics, the leading contract manufacturer of proteins in mammalian cell culture is part of the Lonza Group, the specialty chemical manufacturer headquartered in Switzerland. Zovant is a treatment for severe sepsis.

Eli Lilly: Multiple Alliances

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Strategy & Structure Fit

Concepts:Corporate vs. Business Level Fit

Strategy Precedes StructureStructure CharacteristicsDealing with Size Issues

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Key Questions for Strategy and Structure Fit

• Corporate Strategy and Structure:– Does structure permit the appropriate grouping of activities?– Does structure allow for appropriate centralization or

decentralization of authority?– Does structure promote coordination among its parts?

• Business Level Strategy and Structure:– Does structure allow each business to respond to competitive

forces within its industry?– Does structure fit with basic generic strategy being pursued

by each business?– Does structure allow for development of specific functional

advantages within each business?

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Structure Follows Strategy

New Strategy is Created

New Problems Emerge

Performance Declines

New Structure

Performance Improves

“As the left foot follows the right.”

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Dimensions of Structure• Complexity: Creation of distinct tasks and responsibilities

within the organization– Types of Complexity

• Degree of Specialization• Levels of Hierarchy• Geographic Spread or Dispersion

• Control: Design of hierarchy to supervise various differentiated elements of the organization– Extent to which authority for decision making is held at

higher levels of the organization• Higher levels - Centralization• Lower levels - Decentralization

• Formalization: Extent to which rules and procedure govern the actions of individuals and groups within the organization– Balancing act

• Too Low - Uncertainty about authority and responsibility• Too High - Limit innovation and creativity

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Tall vs. Flat Organizations

Flat Organization Tall Organization

President / CEO

Senior VicePresident

Senior VicePresident

VP

DirectorDirector Director DirectorDirector

VP VP

Director

VP

Director Director

Governing Body

DirectorDirector Director DirectorDirectorDirectorDirector Director

President / CEO

Example: Medical Group Example: Traditional Hospital

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Purposes of Structure

• Coordination– create activities towards a productive goal while

still operating separately– mechanisms for coordination include

• rules and procedures• hierarchical referral• liaison personnel

• Integration– come together and create something new by

combining knowledge and operating as a unit– mechanisms for integration include

• teams and task forces

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Types of Structures

Functional Structure

Matrix Structure

Divisional Structure

Multidivisional Structure

Grouping by function

Grouping by function and purpose

Primary grouping by purpose; secondary grouping by function

Primary grouping by purpose; secondary grouping by purpose; lowest grouping by function

Need to focus on task efficiency

Need to focus on purpose

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Structural Forms

General Manager

Research &Development

ManufacturingHuman

Resources

Engineering MarketingFinance &Accounting

General Manager

Foundry &Castings

ScrewMachining

InspectionCustomer

Service

Milling &Grinding

Finishing &Heat Treating

Loading &Shipping

Billing &Accounting

Process-Oriented Functional Structure

Traditional Functional

Structure

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Structural Forms (2)CEO

CorporateStaff

GMEurope

GMLatin America

GMNorth America

GMAsia Pacific

GMCentral Asia &

Africa

Marketing &Distribution

ProductionEngineering &Prod. Design

DistrictStaff

CEO

CorporateServices

GMBusiness B

Functional/ProcessDepartments

GMBusiness A


GMBusiness C


Decentralized Line-of-Business Structure

GeographicStructure

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CEO

CorporateServices

Group VPSBU II

Strategically RelatedBusiness Units

Group VPSBU I


Group VPSBU III


Structural Forms (3)

HeadManufacture

HeadR&D

VentureManager 1

HeadMarketing

HeadFinance

VentureManager 2

VentureManager 3

VentureManager 4

R&DSpecialists

ProductionSpecialists

MarketingSpecialists

FinanceSpecialists

R&DSpecialists



FinanceSpecialists

R&DSpecialists



FinanceSpecialists

R&DSpecialists



FinanceSpecialists

General Manager

SBU Structure

Matrix Structure

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MatrixStructure CEO

Board of Trustees

Progr

am/P

rojec

t Man

agers

Functional Managers

Design

Manufacturing

Testing

Admin

Project A

Project B

Project C

Project D

Example:Biotech Firm

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Size Obstacles• Where big size is a competitive asset, firms with low

market share face obstacles: – Less access to economies of scale– Difficulty in gaining customer recognition– Inability to afford mass media advertising– Difficulty in funding capital requirements

• Options:– Focus on a few segments where strengths can yield a

competitive edge– Develop technical expertise highly valued by customers– Aggressively pursue development of new products for

customers in target segments– Use innovative entrepreneurial approaches to out-

manage slow-to-change leaders

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Mechanistic and Organic Forms

FEATURE MECHANISTIC ORGANIC .

Task definition Rigid & highly Flexible; less specialized

specialized

Coordination Rules & directives Mutual adjustment,& control imposed from the top Cultural control

Communication Mainly vertical Horizontal & vertical

Commitment To immediate superior To the organization & its

& loyalty goals & values

Environmental Stable with low tech- Dynamic, ambiguous, context nological uncertainty technologically

uncertain

1 strategic fit: matching strategy to structure and the situation payne (6)

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