76198137 hoskisson and hitt strategic management all chapters ppt

©2003 Southwestern Publishing Company 1

Strategic Management and Strategic Management and Strategic CompetitivenessStrategic Competitiveness

Michael A. HittR. Duane Ireland

Robert E. Hoskisson

Chapter 1Chapter 1

2

Strategy ImplementationStrategy Implementation

Chapter 13Chapter 13StrategicStrategic

EntrepreneurshipEntrepreneurship

Chapter 11Chapter 11OrganizationalOrganizationalStructure and Structure and

ControlsControls

Chapter 10Chapter 10CorporateCorporate

GovernanceGovernance


LeadershipLeadership

Strategy FormulationStrategy Formulation

StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average

ReturnsReturns

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment

Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment

The Strategic The Strategic Management Management ProcessProcess

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Chapter 6Chapter 6Corporate-Corporate-

Level StrategyLevel Strategy

Chapter 9Chapter 9CooperativeCooperative

StrategyStrategy

Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry

and Competitiveand CompetitiveDynamics Dynamics

Chapter 8Chapter 8InternationalInternational

StrategyStrategy

Chapter 4Chapter 4Business-LevelBusiness-Level

StrategyStrategy

Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring

StrategiesStrategies

3

Important DefinitionsImportant Definitions

Strategic Management ProcessStrategic Management ProcessThe full set of commitments, decisions, The full set of commitments, decisions, and actions required for a firm to achieve and actions required for a firm to achieve strategic competitiveness and earn strategic competitiveness and earn above-average returnsabove-average returns

4


Strategic CompetitivenessStrategic CompetitivenessAchieved when a firm successfully formulates Achieved when a firm successfully formulates and implements a value-creating strategyand implements a value-creating strategy

Occurs when a firm develops a strategy that Occurs when a firm develops a strategy that competitors are not simultaneously competitors are not simultaneously implementingimplementingProvides benefits which current and potential Provides benefits which current and potential competitors are unable to duplicatecompetitors are unable to duplicate

Above-Average ReturnsAbove-Average Returns

5


RiskRiskAn investor’s uncertainty about the An investor’s uncertainty about the economic gains or losses that will result economic gains or losses that will result from a particular investmentfrom a particular investment

Returns that are equal to those an investor Returns that are equal to those an investor expects to earn from other investments with expects to earn from other investments with a similar amount of riska similar amount of risk

Average ReturnsAverage Returns

6

Fundamental nature of competition is changing

Competitive LandscapeCompetitive Landscape

Hypercompetitive Hypercompetitive environmentsenvironments

Dynamics of strategic maneuvering among global and innovative combatants

Price-quality positioning, new know-how, first mover

Protect or invade established product or geographic markets

7




Emergence of global economy

Goods, services, people, skills, and ideas move freely across geographic borders.

Spread of economic innovations around the world.

Political and cultural adjustments are required.

8




Emergence of global economy

Rapid technological change

Increasing rate of technological change and diffusion

The information age

Increasing knowledge intensity

9

Strategic FlexibilityStrategic Flexibility

A set of capabilities used to respond to A set of capabilities used to respond to various demands and opportunities various demands and opportunities existing in a dynamic and uncertain existing in a dynamic and uncertain competitive environmentcompetitive environment

It involves coping with uncertainty and the It involves coping with uncertainty and the accompanying risksaccompanying risks

10

StrategicFlexibilityStrategic

Flexibility

Strategic FlexibilityStrategic Flexibility

StrategicStrategicflexibilityflexibility

StrategicStrategicreorientationreorientation

Capacity toCapacity tolearnlearn

OrganizationalOrganizationalslackslack

11

1.1. Strategy dictated by the Strategy dictated by the external environments of external environments of the firm (what the firm (what opportunities exist in opportunities exist in these environments?)these environments?)

2.2. Firm develops internal Firm develops internal skills required by skills required by external environment external environment (what can the firm do (what can the firm do about the opportunities?)about the opportunities?)

GeneralGeneral

EnvironmentEnvironment

GlobalGlobal

TechnologicalTechnological

Econ

omic

Econ

omic

Sociocultural

Sociocultural

Polit

ical/L

egal

Polit

ical/L

egal Dem

ographic

Demographic

1. External Environments

Industry Environment

Competitor Environment

I/O Model of Above-Average ReturnsI/O Model of Above-Average Returns

12

Four Assumptions of the I/O ModelFour Assumptions of the I/O Model

1.1. The external environment is assumed to The external environment is assumed to possess pressures and constraints that possess pressures and constraints that determine the strategies that would result determine the strategies that would result in above-average returnsin above-average returns

2.2. Most firms competing within a particular Most firms competing within a particular or within a certain segment of it are or within a certain segment of it are assumed to control similar strategically assumed to control similar strategically relevant resources and to pursue similar relevant resources and to pursue similar strategies in light of those resourcesstrategies in light of those resources

13

Four Assumptions of the I/O ModelFour Assumptions of the I/O Model

3.3. Resources used to implement strategies Resources used to implement strategies are highly mobile across firmsare highly mobile across firms

4.4. Organizational decision makers are Organizational decision makers are assumed to be rational and committed to assumed to be rational and committed to acting in the firm’s best interests, as acting in the firm’s best interests, as shown by their profit-maximizing shown by their profit-maximizing behaviorsbehaviors

14

Industrial Organization Industrial Organization ModelModel


1.1. Study the external Study the external environment, especially the environment, especially the industry environmentindustry environment• economies of scaleeconomies of scale• barriers to market entrybarriers to market entry• diversificationdiversification• product differentiationproduct differentiation• degree of concentration of degree of concentration of

firms in the industryfirms in the industry

The External EnvironmentThe External Environment

15


2.2. Locate an attractive industry Locate an attractive industry with a high potential for with a high potential for above-average returnsabove-average returns

Attractive industry: one whose Attractive industry: one whose structural characteristics structural characteristics suggest above-average returnssuggest above-average returns



An Attractive IndustryAn Attractive Industry

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3.3. Identify the strategy called Identify the strategy called for by the attractive industry for by the attractive industry to earn above-average returnsto earn above-average returns

Strategy formulation: selection Strategy formulation: selection of a strategy linked with of a strategy linked with above-average returns in a above-average returns in a particular industryparticular industry





17


4.4. Develop or acquire assets and Develop or acquire assets and skills needed to implement skills needed to implement the strategythe strategy

Assets and skills: those assets Assets and skills: those assets and skills required to and skills required to implement a chosen strategyimplement a chosen strategy





Assets and SkillsAssets and Skills

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5. Use the firm’s strengths (its 5. Use the firm’s strengths (its developed or acquired assets developed or acquired assets and skills) to implement the and skills) to implement the strategystrategy

Strategy implementation: Strategy implementation: select strategic actions linked select strategic actions linked with effective implementation with effective implementation of the chosen strategyof the chosen strategy







19


Industrial Organization Model






Superior ReturnsSuperior Returns

Superior returns: earning of above-average returns

20

1.1. Strategy dictated by Strategy dictated by unique resources and unique resources and capabilities of the firm capabilities of the firm (what can the firm do (what can the firm do best?)best?)

2.2. Find an environment in Find an environment in which to exploit these which to exploit these assets (where are the best assets (where are the best opportunities?)opportunities?)

Resource-based Model of Above Resource-based Model of Above Average ReturnsAverage Returns

1. Firm’s Resources1. Firm’s Resources

21

1.1. Identify the firm’s Identify the firm’s resources-- strengths and resources-- strengths and weaknesses compared with weaknesses compared with competitorscompetitorsResources: inputs into a firm’s Resources: inputs into a firm’s production processproduction process


Resource-based Resource-based ModelModel

ResourcesResources

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2.2. Determine the firm’s Determine the firm’s capabilities--what it can do capabilities--what it can do better than its competitorsbetter than its competitors

Capability: capacity of an Capability: capacity of an integrated set of resources to integrated set of resources to integratively perform a task or integratively perform a task or activityactivity



ResourcesResources

CapabilityCapability

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Four Attributes of Resources and Four Attributes of Resources and Capabilities (Competitive Advantage)Capabilities (Competitive Advantage)

the firm is organized appropriately to the firm is organized appropriately to obtain the full benefits of the resources in obtain the full benefits of the resources in order to realize a competitive advantage order to realize a competitive advantage

ValuableValuable allow the firm to exploit opportunities or allow the firm to exploit opportunities or neutralize threats in its external neutralize threats in its external environmentenvironment

RareRare possessed by few, if any, current and possessed by few, if any, current and potential competitorspotential competitors

Costly to imitateCostly to imitate when other firms cannot obtain them or when other firms cannot obtain them or must obtain them at a much higher costmust obtain them at a much higher cost

NonsubstitutableNonsubstitutable

Res

ourc

es a

nd C

apab

ilitie

sR

esou

rces

and

Cap

abili

ties

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Core CompetenciesCore Competencies

Resources and capabilities that meet these four criteria become a source of:

ValuableValuable

RareRare

Costly to imitateCostly to imitate

NonsubstitutableNonsubstitutable

Core CompetenciesCore CompetenciesR

esou

rces

and

Cap

abili

ties

Res

ourc

es a

nd C

apab

ilitie

s

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Core Competencies are the basis for a firm’s

Competitive Competitive advantageadvantage

Strategic Strategic competitivenesscompetitiveness

Ability to earn Ability to earn above-average above-average

returnsreturns


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3.3. Determine the potential of the Determine the potential of the firm’s resources and firm’s resources and capabilities in terms of a capabilities in terms of a competitive advantagecompetitive advantage

Competitive advantage: ability Competitive advantage: ability of a firm to outperform its of a firm to outperform its rivalsrivals



ResourcesResources


Competitive AdvantageCompetitive Advantage

27

4.4. Locate an attractive industryLocate an attractive industry

An attractive industry: an An attractive industry: an industry with opportunities that industry with opportunities that can be exploited by the firm’s can be exploited by the firm’s resources and capabilitiesresources and capabilities



ResourcesResources




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5.5. Select a strategy that best Select a strategy that best allows the firm to utilize its allows the firm to utilize its resources and capabilities resources and capabilities relative to opportunities in relative to opportunities in the external environmentthe external environment

Strategy formulation and Strategy formulation and implementation: strategic implementation: strategic actions taken to earn above actions taken to earn above average returnsaverage returns



ResourcesResources




Strategy Form/ImplStrategy Form/Impl

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ResourcesResources




Strategy Form/ImplStrategy Form/Impl

Superior ReturnsSuperior Returns

Superior returns: earning Superior returns: earning of above-average returnsof above-average returns

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Strategic Intent & MissionStrategic Intent & MissionStrategic IntentStrategic Intent

Winning competitive battles through deciding Winning competitive battles through deciding how to leverage internal resources, how to leverage internal resources, capabilities, and core competenciescapabilities, and core competencies

Strategic MissionStrategic Mission An application of strategic intent in terms of An application of strategic intent in terms of

products to be offered and markets to be products to be offered and markets to be servedserved

31

Groups who are affected by a Groups who are affected by a firm’s performance and who firm’s performance and who have claims on its wealthhave claims on its wealth

The firm must maintain The firm must maintain performance at an adequate performance at an adequate level in order to retain the level in order to retain the participation of key participation of key stakeholdersstakeholders

The Firm and Its StakeholdersThe Firm and Its Stakeholders

StakeholdersStakeholders

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Capital Market StakeholdersCapital Market Stakeholders


ShareholdersShareholdersMajor suppliers of capitalMajor suppliers of capital

•BanksBanks•Private lendersPrivate lenders•Venture capitalistsVenture capitalists


33


Product Market StakeholdersProduct Market Stakeholders


Primary customersPrimary customersSuppliersSuppliersHost communitiesHost communitiesUnionsUnions


34


Product Market StakeholdersProduct Market Stakeholders

Organizational StakeholdersOrganizational Stakeholders


EmployeesEmployeesManagersManagersNonmanagersNonmanagers


35

Stakeholder InvolvementStakeholder Involvement

Two issues affect the Two issues affect the extent of stakeholder extent of stakeholder involvement in the firminvolvement in the firm

How do you divide the How do you divide the returns to keep returns to keep stakeholders involved?stakeholders involved?

11

Capital Capital MarketMarket

Product Product MarketMarket

OrganizationalOrganizational

36

Stakeholder InvolvementStakeholder Involvement

Two issues affect the Two issues affect the extent of stakeholder extent of stakeholder involvement in the firminvolvement in the firm

How do you increase the How do you increase the returns so everyone has returns so everyone has more to share?more to share?

22

Capital Capital MarketMarket

Product Product MarketMarket

OrganizationalOrganizational


The External Environment: Opportunities, The External Environment: Opportunities, Threats, and Industry Competition, and Threats, and Industry Competition, and

Competitor AnalysisCompetitor Analysis


Robert E. Hoskisson

Chapter 2Chapter 2

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ControlsControls









StrategyStrategy




StrategyStrategy


StrategyStrategy




ReturnsReturns





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General

Envi

ronm

ent

General

Environment

Gen

eral

Environment

SocioculturalSociocultural

Global

Global

TechnologicalTechnologicalPo

litica

l/Leg

al

Polit

ical/L

egal

Dem

ogra

phic

Dem

ogra

phic Econom

ic

Economic


IndustryIndustryEnvironmentEnvironment

Threat of new entrantsThreat of new entrantsPower of suppliersPower of suppliersPower of buyersPower of buyers

Product substitutesProduct substitutesIntensity of rivalryIntensity of rivalry

CompetitorCompetitorEnvironmentEnvironment

40

External Environmental AnalysisExternal Environmental AnalysisA continuous process which includesA continuous process which includes

Scanning: Identifying early signals of environmental changes and trends

Monitoring: Detecting meaning through ongoing observations of environmental changes and trends

Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends

Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies and their management

41

External Environmental AnalysisExternal Environmental Analysis


The ExternalThe ExternalEnvironmentEnvironment

Analysis of general environmentAnalysis of general environment

Analysis of industry environmentAnalysis of industry environment

Analysis of competitor environmentAnalysis of competitor environment

The ExternalThe ExternalEnvironmentEnvironment

42

General EnvironmentGeneral EnvironmentSociocultural segmentSociocultural segment

Women in the workplaceWomen in the workplace Workforce diversityWorkforce diversity Attitudes about quality of worklifeAttitudes about quality of worklife Concerns about environmentConcerns about environment Shifts in work and career preferencesShifts in work and career preferences Shifts in product and service preferencesShifts in product and service preferences

43

Economic segmentEconomic segmentGeneral EnvironmentGeneral Environment

Inflation ratesInflation rates Interest ratesInterest rates Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses Personal savings ratePersonal savings rate Business savings ratesBusiness savings rates Gross domestic productGross domestic product

44

General EnvironmentGeneral EnvironmentPolitical/Legal SegmentPolitical/Legal Segment

Antitrust lawsAntitrust laws Taxation lawsTaxation laws Deregulation philosophiesDeregulation philosophies Labor training lawsLabor training laws Educational philosophies and policiesEducational philosophies and policies

45

General EnvironmentGeneral EnvironmentTechnological SegmentTechnological Segment Product innovationsProduct innovations Applications of knowledgeApplications of knowledge Focus of private and government-supported Focus of private and government-supported

R&D expendituresR&D expenditures New communication technologiesNew communication technologies

46

General EnvironmentGeneral EnvironmentGlobal SegmentGlobal Segment Important political eventsImportant political events

Critical global marketsCritical global markets Newly industrialize countriesNewly industrialize countries Different cultural and institutional attributesDifferent cultural and institutional attributes

47

General EnvironmentGeneral EnvironmentDemographic SegmentDemographic Segment

Population sizePopulation size Age structureAge structure Geographic Geographic

distributiondistribution Ethnic mixEthnic mix Income distributionIncome distribution

48

Industry EnvironmentIndustry EnvironmentA set of factors that directly influences a A set of factors that directly influences a

company and its competitive actions and company and its competitive actions and responses.responses.

Interaction among these factors determine Interaction among these factors determine an industry’s profit potential.an industry’s profit potential. Threat of new entrantsThreat of new entrants Power of suppliersPower of suppliers Power of buyersPower of buyers Product substitutesProduct substitutes Intensity of rivalryIntensity of rivalry

49

Five Forces Model of CompetitionFive Forces Model of Competition

Identify current and potential competitors Identify current and potential competitors and determine which firms serve them.and determine which firms serve them.

Conduct competitive analysis.Conduct competitive analysis. Recognize that suppliers and buyers can Recognize that suppliers and buyers can

become competitors.become competitors. Recognize that producers of potential Recognize that producers of potential

substitutes may become competitors.substitutes may become competitors.

50

Threat of New Entrants

Threat of New Entrants

Barg

aini

ng P

ower

of

Barg

aini

ng P

ower

of

Supp

liers

Supp

liers

Bargaining Power of Bargaining Power of BuyersBuyers

Threat of Substitute

Threat of Substitute

ProductsProducts

Rivalry Among

Rivalry Among

Competing Firm

s

Competing Firm

s

Five Forces Model of CompetitionFive Forces Model of Competition

Five Forces ofFive Forces ofCompetitionCompetition

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Threat of New EntrantsThreat of New EntrantsBarriers to entryBarriers to entry

Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Switching costsSwitching costs Access to distribution channelsAccess to distribution channels Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy Expected retaliationExpected retaliation

52

Bargaining Power of SuppliersBargaining Power of SuppliersA supplier group is powerful when:A supplier group is powerful when: it is dominated by a few large companiesit is dominated by a few large companies

satisfactory substitute products are not available satisfactory substitute products are not available to industry firmsto industry firms

industry firms are not a significant customer for industry firms are not a significant customer for the supplier groupthe supplier group

suppliers’ goods are critical to buyers’ suppliers’ goods are critical to buyers’ marketplace successmarketplace success

effectiveness of suppliers’ products has created effectiveness of suppliers’ products has created high switching costshigh switching costs

suppliers are a credible threat to integrate suppliers are a credible threat to integrate forward into the buyers’ industryforward into the buyers’ industry

53

Bargaining Power of BuyersBargaining Power of BuyersBuyers (customers) are powerful when:Buyers (customers) are powerful when:

they purchase a large portion of an industry’s they purchase a large portion of an industry’s total outputtotal output

the sales of the product being purchased the sales of the product being purchased account for a significant portion of the seller’s account for a significant portion of the seller’s annual revenuesannual revenues

they could easily switch to another productthey could easily switch to another product the industry’s products are undifferentiated or the industry’s products are undifferentiated or

standardized, and buyers pose a credible threat standardized, and buyers pose a credible threat if they were to integrate backward into the if they were to integrate backward into the seller’s industryseller’s industry

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Threat of Substitute ProductsThreat of Substitute ProductsProduct substitutes are strong threat when:Product substitutes are strong threat when:

customers face few switching costscustomers face few switching costs substitute product’s price is lowersubstitute product’s price is lower substitute product’s quality and performance substitute product’s quality and performance

capabilities are equal to or greater than those of capabilities are equal to or greater than those of the competing productthe competing product

55

Intensity of RivalryIntensity of Rivalry Intensity of rivalry is stronger when competitors:Intensity of rivalry is stronger when competitors:

are numerous or equally balancedare numerous or equally balanced experience slow industry growthexperience slow industry growth have high fixed costs or high storage costshave high fixed costs or high storage costs lack differentiation or low switching costslack differentiation or low switching costs experience high strategic stakesexperience high strategic stakes have high exit barriershave high exit barriers

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High Exit BarriersHigh Exit BarriersCommon exit barriers include:Common exit barriers include: specialized assets (assets with values linked to specialized assets (assets with values linked to

a particular business or location)a particular business or location) fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements strategic interrelationships (relationships of strategic interrelationships (relationships of

mutual dependence between one business and mutual dependence between one business and other parts of a company’s operation, such as other parts of a company’s operation, such as shared facilities and access to financial markets)shared facilities and access to financial markets)

emotional barriers (career concerns, loyalty to emotional barriers (career concerns, loyalty to employees, etc.)employees, etc.)

government and social restrictionsgovernment and social restrictions

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Strategic GroupsStrategic GroupsStrategic group: a group of firms in an Strategic group: a group of firms in an industry following the same or similar industry following the same or similar strategy along the same strategic strategy along the same strategic dimensions.dimensions.The strategy followed by a strategic The strategy followed by a strategic group differs from strategies being group differs from strategies being implemented by other companies in implemented by other companies in the industry.the industry.

58

Competitor EnvironmentCompetitor EnvironmentCompetitor intelligenceCompetitor intelligence is the ethical is the ethical gathering of needed information and data gathering of needed information and data about competitors’ objectives, strategies, about competitors’ objectives, strategies, assumptions, and capabilitiesassumptions, and capabilities what drives the competitor as shown by its what drives the competitor as shown by its future future

objectivesobjectives what the competitor is doing and can do as what the competitor is doing and can do as

revealed by its revealed by its current strategycurrent strategy What the competitor believes about itself and the What the competitor believes about itself and the

industry, as shown by its industry, as shown by its assumptionsassumptions What the the competitor may be able to do, as What the the competitor may be able to do, as

shown by its shown by its capabilitiescapabilities

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Competitor AnalysisCompetitor AnalysisFuture Objectives:Future objectivesFuture objectives How do our goals compare

with our competitors’ goals?

Where will the emphasis be placed in the future?

What is the attitude toward risk?

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Current strategyCurrent strategy

Current Strategy:Future objectivesFuture objectives How are we currently

competing? Does this strategy support

changes in the competitive structure?

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AssumptionsAssumptions


Future objectivesFuture objectives Assumptions: Do we assume the future will be volatile?

Are we operating under a status quo?

What assumptions do our competitors hold about the industry and themselves?

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CapabilitiesCapabilities



Future objectivesFuture objectives Capabilities: What are our strengths and weaknesses?

How do we rate compared to our competitors?

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Future objectivesFuture objectives ResponseResponse

Response: What will our competitors

do in the future? Where do we hold an

advantage over our competitors?

How will this change our relationship with our competitors?


The Internal Environment: The Internal Environment: Resources, Capabilities andResources, Capabilities and

Core CompetenceCore Competence


Robert E. Hoskisson

Chapter 3Chapter 3

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Strategy ImplementationStrategy ImplementationChapter 11Chapter 11

OrganizationalOrganizationalStructure and Structure and

ControlsControls







ReturnsReturns





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StrategyStrategy




StrategyStrategy


StrategyStrategy



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Sustainability of a Competitive Sustainability of a Competitive AdvantageAdvantage Sustainability of a competitive advantage Sustainability of a competitive advantage

is a function of:is a function of:– the rate of core-competence obsolescence due the rate of core-competence obsolescence due

to environmental changesto environmental changes– the availability of substitutes for the core the availability of substitutes for the core

competencecompetence– the imitability of the core competencethe imitability of the core competence

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ExternalExternal and Internal Analyses and Internal Analyses

General

General

Envi

ronm

ent

Envi

ronm

ent

GeneralGeneral

EnvironmentEnvironment

Gen

eral

Gen

eral

Environment

Environment

SocioculturalSociocultural

GlobalGlobal

TechnologicalTechnological

Polit

ical/L

egal

Polit

ical/L

egal

Dem

ogra

phic

Dem

ogra

phic Econom

ic

Economic

IndustryIndustryEnvironmentEnvironment

CompetitorCompetitorEnvironmentEnvironment

By studying the external By studying the external environment, firms identify environment, firms identify what they what they might choose to domight choose to do

Opportunities and threatsOpportunities and threats

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ExternalExternal and Internal Analysesand Internal AnalysesBy studying the internal By studying the internal environment, firms identify environment, firms identify what they what they can docan do

Unique resources, Unique resources, capabilities, and core capabilities, and core competenciescompetencies

(sustainable competitive (sustainable competitive advantage)advantage)

External and External and InternalInternal Analyses Analyses

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Challenge of Internal AnalysisChallenge of Internal Analysis How do we effectively manage current core How do we effectively manage current core

competencies while simultaneously competencies while simultaneously developing new ones?developing new ones?

How do we assemble bundles of resources, How do we assemble bundles of resources, capabilities and core competencies to capabilities and core competencies to create value for customers?create value for customers?

How do we learn to change rapidly?How do we learn to change rapidly?

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Three Conditions Affecting Managerial Three Conditions Affecting Managerial Decisions About Resources, Capabilities, Decisions About Resources, Capabilities, and Core Competenciesand Core CompetenciesUncertaintyUncertainty regarding characteristics of the regarding characteristics of the

general and the industry environments, general and the industry environments, competitors’ actions, and customers’ preferencescompetitors’ actions, and customers’ preferences

ComplexityComplexity regarding the interrelated causes regarding the interrelated causes shaping a firm’s environments and perceptions of shaping a firm’s environments and perceptions of the environmentsthe environments

Intraorganizational ConflictsIntraorganizational Conflicts among among people making managerial decisions and those people making managerial decisions and those affected by themaffected by them

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Components ofComponents ofInternal AnalysisInternal Analysis

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources• TangibleTangible• IntangibleIntangible


CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

StrategicStrategicCompetitivenessCompetitiveness

Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages

• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable

ValueValueChainChain

AnalysisAnalysis

• OutsourceOutsource

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Resources are what a firm has Resources are what a firm has to work with--its assets--to work with--its assets--including its people and the including its people and the value of its brand namevalue of its brand name

Resources represent inputs into Resources represent inputs into a firm’s production process... a firm’s production process... such as capital equipment, skills such as capital equipment, skills of employees, brand names, of employees, brand names, finances and talented managersfinances and talented managers

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Tangible ResourcesTangible Resources• FinancialFinancial• PhysicalPhysical• Human resourcesHuman resources• OrganizationalOrganizational

Intangible ResourcesIntangible Resources• TechnologicalTechnological• InnovationInnovation• ReputationReputation

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Capabilities become important when they are combined Capabilities become important when they are combined in unique combinations which create core competencies in unique combinations which create core competencies which have strategic value and can lead to competitive which have strategic value and can lead to competitive advantageadvantage

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Capabilities are what a firm does, and represent the firm’s Capabilities are what a firm does, and represent the firm’s capacity or ability to integrate individual firm resources to capacity or ability to integrate individual firm resources to achieve a desired objectiveachieve a desired objective

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CoreCoreCompetenciesCompetencies

Core competencies are resources and capabilities that serve Core competencies are resources and capabilities that serve as a source of competitive advantage over rivalsas a source of competitive advantage over rivals

Core competencies distinguish a company competitively Core competencies distinguish a company competitively and make it distinctiveand make it distinctive

McKinsey and Co. recommends using three to four McKinsey and Co. recommends using three to four competencies when framing strategic actionscompetencies when framing strategic actions

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Valuable: Capabilities that help a firm neutralize threats or Valuable: Capabilities that help a firm neutralize threats or exploit opportunitiesexploit opportunities

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Rare: Capabilities that are not possessed by many othersRare: Capabilities that are not possessed by many others

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Costly to imitate: capabilities that other firms cannot Costly to imitate: capabilities that other firms cannot develop easily, usually due todevelop easily, usually due to

• Unique historical conditionsUnique historical conditions• Causal ambiguityCausal ambiguity• Social complexitySocial complexity

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Nonsubstitutable: capabilities that do not have strategic Nonsubstitutable: capabilities that do not have strategic equivalentsequivalents

• Invisible to competitorsInvisible to competitors• Firm specific knowledgeFirm specific knowledge• Trust-based working relationships between managers Trust-based working relationships between managers

and nonmanagerial personneland nonmanagerial personnel

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Core Competence as a Strategic Core Competence as a Strategic CapabilityCapability

ResourcesResources• Inputs to a firm’s Inputs to a firm’s

production processproduction process

CapabilityCapability• A nonstrategicA nonstrategic

team or resourceteam or resource

Core CompetenceCore Competence• A strategicA strategic

capabilitycapability

The source ofThe source of

Does it satisfy the Does it satisfy the criteria of sustainable criteria of sustainable competitive competitive advantage?advantage?

YesYes

NoNo

CapabilityCapability• An integration of aAn integration of a

team of resourcesteam of resources

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Performance ImplicationsPerformance Implications

Valuab

le?

Valuab

le?

Rare?

Rare?

Costly

to Im

itate?

Costly

to Im

itate?

Nonsub

stitut

able

Nonsub

stitut

able

CompetitiveCompetitiveConsequencesConsequences

PerformancePerformanceImplicationsImplications

NoNo NoNo NoNo NoNoCompetitiveCompetitiveDisadvantageDisadvantage

Below AverageBelow AverageReturnsReturns

YesYes NoNo NoNoYes/Yes/NoNo

CompetitiveCompetitiveParityParity Average ReturnsAverage Returns

YesYes YesYes NoNoYes/Yes/NoNo

Temporary Com-Temporary Com-petitive Advantagepetitive Advantage

Above Average to Above Average to Average ReturnsAverage Returns

YesYes YesYes YesYes YesYesSustainable Com-Sustainable Com-petitive Advantagepetitive Advantage

Above Average Above Average ReturnsReturns

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ServiceService

Marketing & SalesMarketing & Sales

Outbound LogisticsOutbound Logistics

OperationsOperations

Inbound LogisticsInbound LogisticsFirm

Infra

stru

ctur

eFi

rm In

frast

ruct

ure

Hum

an R

esou

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Primary ActivitiesPrimary Activities

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The BasicThe BasicValue ChainValue Chain

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MarginMargin Margin

Margin

Primary ActivitiesPrimary Activities

Sup

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Act

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OutsourcingOutsourcing

Outsourcing is the Outsourcing is the purchase of some or purchase of some or all of a value-all of a value-creating activity creating activity from an external from an external suppliersupplier

Usually this is Usually this is because the specialty because the specialty supplier can provide supplier can provide these functions more these functions more efficientlyefficiently

ServiceService

Marketing & SalesMarketing & Sales

Outbound LogisticsOutbound Logistics

OperationsOperations

Inbound LogisticsInbound LogisticsFirm

Infra

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Hum

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Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Improve Business FocusImprove Business Focus

– lets company focus on broader business lets company focus on broader business issues by having outside experts handle issues by having outside experts handle various operational detailsvarious operational details

Provide Access to World-Class Provide Access to World-Class CapabilitiesCapabilities– the specialized resources of outsourcing the specialized resources of outsourcing

providers makes world-class capabilities providers makes world-class capabilities available to firms in a wide range of available to firms in a wide range of applicationsapplications

86

Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Accelerate Business Re-Engineering Accelerate Business Re-Engineering

BenefitsBenefits– achieves re-engineering benefits more quickly achieves re-engineering benefits more quickly

by having outsiders--who have already by having outsiders--who have already achieved world-class standards--take over achieved world-class standards--take over processprocess

Share RisksShare Risks– reduces investment requirements and makes reduces investment requirements and makes

firm more flexible, dynamic and better able to firm more flexible, dynamic and better able to adapt to changing opportunitiesadapt to changing opportunities

87

Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Free Resources for Other PurposesFree Resources for Other Purposes

– permits firm to redirect efforts from non-core permits firm to redirect efforts from non-core activities toward those that serve customers activities toward those that serve customers more effectivelymore effectively

88

Outsourcing IssuesOutsourcing Issues Greatest ValueGreatest Value

– outsource only to firms possessing a core outsource only to firms possessing a core competence in terms of performing the primary or competence in terms of performing the primary or support activity being outsourcedsupport activity being outsourced

Evaluating Resources and CapabilitiesEvaluating Resources and Capabilities– don’t outsource activities in which the firm itself can don’t outsource activities in which the firm itself can

create and capture valuecreate and capture value Environmental Threats and Ongoing TasksEnvironmental Threats and Ongoing Tasks

– do not outsource primary and support activities that do not outsource primary and support activities that are used to neutralize environmental threats or are used to neutralize environmental threats or complete necessary ongoing organizational taskscomplete necessary ongoing organizational tasks

89

Outsourcing IssuesOutsourcing Issues Nonstrategic Team of ResourcesNonstrategic Team of Resources

– do not outsource capabilities that are critical to do not outsource capabilities that are critical to their success, even though the capabilities are their success, even though the capabilities are not actual sources of competitive advantagenot actual sources of competitive advantage

Firm’s Knowledge BaseFirm’s Knowledge Base– do not outsource activities that stimulate the do not outsource activities that stimulate the

development of new capabilities and development of new capabilities and competenciescompetencies

90

Core Competencies: Cautions Core Competencies: Cautions and Remindersand Reminders Never take for granted that core Never take for granted that core

competencies will continue to provide a competencies will continue to provide a source of competitive advantagesource of competitive advantage

All core competencies have the potential All core competencies have the potential to become to become core rigiditiescore rigidities

Core rigidities are former core Core rigidities are former core competencies that now generate inertia competencies that now generate inertia and stifle innovationand stifle innovation


Business-Level StrategyBusiness-Level Strategy


Robert E. Hoskisson

Chapter 4Chapter 4

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Business-Level StrategyBusiness-Level StrategyBusiness-level strategyBusiness-level strategy: an integrated and : an integrated and coordinated set of commitments and actions coordinated set of commitments and actions the firm uses to gain a competitive the firm uses to gain a competitive advantage by exploiting core competencies advantage by exploiting core competencies in specific product marketsin specific product markets

94

Core Competencies and StrategyCore Competencies and StrategyThe resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals

An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage

Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets

Business-levelBusiness-levelstrategystrategy

StrategyStrategy

CoreCorecompetenciescompetencies

95

Key Issues of Business-Level Key Issues of Business-Level StrategyStrategy What good or service to offer customersWhat good or service to offer customers How to manufacture or create the good or How to manufacture or create the good or

serviceservice How to distribute the good or service in How to distribute the good or service in

the marketplacethe marketplace

96

The Central Role of CustomersThe Central Role of CustomersIn selecting a business-level In selecting a business-level strategy, the firm determinesstrategy, the firm determines1. 1. whowho it will serve it will serve2.2. whatwhat needs those target customers needs those target customers

have that it will satisfyhave that it will satisfy3.3. howhow those needs will be satisfied those needs will be satisfied

97

Managing Relationships With Managing Relationships With CustomersCustomers Customer relationships are strengthened Customer relationships are strengthened

by offering them superior valueby offering them superior value– help customers to develop a new competitive help customers to develop a new competitive

advantageadvantage– enhance the value of existing competitive enhance the value of existing competitive

advantagesadvantages

98

Managing Relationships With Managing Relationships With CustomersCustomers Establish a competitive advantage along Establish a competitive advantage along

these dimensions:these dimensions:ReachReach

– the firm’s access and connection to customersthe firm’s access and connection to customersRichnessRichness

– the depth and detail of the two-way flow of the depth and detail of the two-way flow of information between the firm and customersinformation between the firm and customers

AffiliationAffiliation– facilitating useful interactions with customersfacilitating useful interactions with customers

99

CustomersCustomers

Market SegmentationMarket Segmentation

ConsumerConsumerMarketsMarkets

IndustrialIndustrialMarketsMarkets

100

Market Segmentation: Market Segmentation: Consumer MarketsConsumer Markets

Demographic factorsDemographic factors

ConsumerConsumerMarketsMarkets

Socioeconomic factorsSocioeconomic factors

Geographic Geographic factorsfactorsPsychological factorsPsychological factors

Consumption patternsConsumption patterns

Perceptual factorsPerceptual factors

Dem.

Soc.

Geo.Psy.

Con.

Per.

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Market Segmentation: Market Segmentation: Industrial MarketsIndustrial Markets

IndustrialIndustrialMarketsMarkets

End-use segmentsEnd-use segments

Product segmentsProduct segments

Geographic segmentsGeographic segments

Common buying factor Common buying factor segmentssegmentsCustomer size segmentsCustomer size segments

End

Pro.

Geo.

Buy.

Size

102

Types of Business-Level StrategiesTypes of Business-Level Strategies Business-level strategies are intended to Business-level strategies are intended to

create differences between the firm’s create differences between the firm’s position relative to those of its rivalsposition relative to those of its rivals

To position itself, the firm must decide To position itself, the firm must decide whether it intends to perform activities whether it intends to perform activities differently or to perform different activities differently or to perform different activities as compared to its rivalsas compared to its rivals

103

Five Generic StrategiesFive Generic StrategiesCompetitive AdvantageCompetitive Advantage

Com

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Scop

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CostCost UniquenessUniqueness

Bro

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Bro

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Nar

row

N

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targ

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Cost Cost LeadershipLeadership

DifferentiationDifferentiation

Focused Cost Focused Cost LeadershipLeadership

Focused Focused DifferentiationDifferentiation

Integrated CostIntegrated CostLeadership/Leadership/

DifferentiationDifferentiation

104

Cost Leadership StrategyCost Leadership StrategyAn integrated set of actions designed to An integrated set of actions designed to produce or deliver goods or services at the produce or deliver goods or services at the lowest costlowest cost, , relative to competitorsrelative to competitors with with features that are acceptable to customersfeatures that are acceptable to customers

– relatively standardized productsrelatively standardized products– features acceptable to many customersfeatures acceptable to many customers– lowest competitive pricelowest competitive price

105

Cost Leadership StrategyCost Leadership StrategyCost saving actions required by this strategy:Cost saving actions required by this strategy:

– building efficient scale facilities– tightly controlling production costs and

overhead– minimizing costs of sales, R&D and service– building efficient manufacturing facilities– monitoring costs of activities provided by

outsiders– simplifying production processes

106

How to Obtain a Cost AdvantageHow to Obtain a Cost Advantage

Cost DriversCost Drivers Value ChainValue Chain

Determine and Determine and controlcontrol

Reconfigure, if Reconfigure, if neededneeded

• Alter production process• Change in automation• New distribution channel

• Direct sales in place of indirect sales

• New advertising media

• New raw material

• Backward integration• Forward integration

• Change location relative to suppliers or buyers

107

Product features Performance Mix & variety of

products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training,

motivation

Factors That Drive CostsFactors That Drive Costs Economies of scale Asset utilization Capacity utilization

pattern• Seasonal, cyclical

Interrelationships Order processing

and distribution Value chain linkages

• Advertising & sales• Logistics &

operations

108

Questions Leading to Lower CostsQuestions Leading to Lower Costs1.1. How can an activity be performed How can an activity be performed

differently or even eliminated?differently or even eliminated?2.2. How can a group of linked value activities How can a group of linked value activities

be regrouped or reordered?be regrouped or reordered?3.3. How might coalitions with other firms How might coalitions with other firms

lower or eliminate costs?lower or eliminate costs?

109

Cost Leadership Strategy and the Cost Leadership Strategy and the Five Forces of CompetitionFive Forces of Competition

Rivalry Among Competing Rivalry Among Competing FirmsFirmsCan use cost leadership Can use cost leadership strategy to advantage since:strategy to advantage since:

competitors avoid price competitors avoid price wars with cost leaders, wars with cost leaders, creating higher profits for creating higher profits for the entire industrythe entire industry

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

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ower

Barg

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of

Buy

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Bargaining Power Bargaining Power of Suppliersof Suppliers

Threat of New

Threat of New

EntrantsEntrants

Threat of

Threat of

Substitute P

roducts

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Bargaining Power of Bargaining Power of BuyersBuyersCan mitigate buyers’ power by:Can mitigate buyers’ power by:

driving prices far below driving prices far below competitors, causing them competitors, causing them to exit and shifting power to exit and shifting power with buyers back to the with buyers back to the firmfirm

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

aini

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ower

Barg

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ower

of

Buy

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Threat of New

Threat of New

EntrantsEntrants

Threat of

Threat of

Substitute P

roducts

Substitute P

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111


Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ power Can mitigate suppliers’ power by:by:

being able to absorb cost being able to absorb cost increases due to low cost increases due to low cost positionposition

being able to make very large being able to make very large purchases, reducing chance purchases, reducing chance of supplier using powerof supplier using power

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

aini

ng P

ower

Barg

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ower

of

Buy

ers

of B

uyer

s


Threat of New

Threat of New

EntrantsEntrants

Threat of

Threat of

Substitute P

roducts

Substitute P

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112


Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

aini

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ower

Barg

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of

Buy

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of B

uyer

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Threat of New

Threat of New

EntrantsEntrants

Threat of

Threat of

Substitute P

roducts

Substitute P

roducts


Threat of New EntrantsThreat of New EntrantsCan frighten off new entrants Can frighten off new entrants due to:due to: their need to enter on a large their need to enter on a large

scale in order to be cost scale in order to be cost competitivecompetitive

the time it takes to move the time it takes to move down the learning curvedown the learning curve

113


Threat of Substitute Threat of Substitute ProductsProductsCost leader is well positioned Cost leader is well positioned to:to:

make investments to be make investments to be first to create substitutesfirst to create substitutes

buy patents developed by buy patents developed by potential substitutespotential substitutes

lower prices in order to lower prices in order to maintain value positionmaintain value position

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

aini

ng P

ower

Barg

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ower

of

Buy

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of B

uyer

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Threat of New

Threat of New

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Threat of

Substitute P

roducts

Substitute P

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114

Major Risks of Cost Leadership Major Risks of Cost Leadership StrategyStrategy Dramatic technological change could take Dramatic technological change could take

away your cost advantageaway your cost advantage Competitors may learn how to imitate Competitors may learn how to imitate

value chainvalue chain Focus on efficiency could cause cost Focus on efficiency could cause cost

leader to overlook changes in customer leader to overlook changes in customer preferencespreferences

115

Differentiation StrategyDifferentiation StrategyAn integrated set of actions designed by a An integrated set of actions designed by a firm to produce or deliver goods or services firm to produce or deliver goods or services (at an acceptable cost) that customers (at an acceptable cost) that customers perceive as being different in ways that are perceive as being different in ways that are important to themimportant to them

– price for product can exceed what the firm’s price for product can exceed what the firm’s target customers are willing to paytarget customers are willing to pay

– nonstandardized productsnonstandardized products– customers value differentiated features more customers value differentiated features more

than they value low costthan they value low cost

116

Differentiation StrategyDifferentiation Strategy Value provided by Value provided by unique features and unique features and

value characteristicsvalue characteristics Command premium priceCommand premium price High customer serviceHigh customer service Superior qualitySuperior quality Prestige or exclusivityPrestige or exclusivity Rapid innovationRapid innovation

117

Differentiation StrategyDifferentiation StrategyDifferentiation actions required by this Differentiation actions required by this strategy:strategy:– developing new systems and processesdeveloping new systems and processes– shaping perceptions through advertisingshaping perceptions through advertising– quality focusquality focus– capability in R&Dcapability in R&D– maximize human resource contributions maximize human resource contributions

through low turnover and high motivationthrough low turnover and high motivation

118

How to Obtain a Differentiation How to Obtain a Differentiation AdvantageAdvantage

Cost DriversCost Drivers Value ChainValue Chain

Control if Control if neededneeded

Reconfigure to Reconfigure to maximizemaximize

customer perceptions of uniquenesscustomer perceptions of uniquenesscustomer reluctance to switch to non-unique productcustomer reluctance to switch to non-unique product

• Raise performance of product or serviceRaise performance of product or service• Lower buyers’ costsLower buyers’ costs

• Create sustainability through:Create sustainability through:

119

Factors That Drive DifferentiationFactors That Drive Differentiation Unique product featuresUnique product features Unique product performanceUnique product performance Exceptional services Exceptional services New technologiesNew technologies Quality of inputsQuality of inputs Exceptional skill or experienceExceptional skill or experience Detailed informationDetailed information

120

Differentiation Strategy and the Differentiation Strategy and the Five Forces of CompetitionFive Forces of Competition

Rivalry Among Competing Rivalry Among Competing FirmsFirmsCan defend against Can defend against competition because:competition because:

brand loyalty to brand loyalty to differentiated product differentiated product offsets price competitionoffsets price competition

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

aini

ng P

ower

Barg

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ower

of

Buy

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uyer

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Threat of New

Threat of New

EntrantsEntrants

Threat of

Threat of

Substitute P

roducts

Substitute P

roducts


121


Bargaining Power of BuyersBargaining Power of BuyersCan mitigate buyer power Can mitigate buyer power because:because:

well differentiated products well differentiated products reduce customer sensitivity reduce customer sensitivity to price increasesto price increases

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

aini

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ower

Barg

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of

Buy

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Threat of New

Threat of New

EntrantsEntrants

Threat of

Threat of

Substitute P

roducts

Substitute P

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122


Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ power Can mitigate suppliers’ power by:by:

absorbing price increases absorbing price increases due to higher marginsdue to higher margins

passing along higher passing along higher supplier prices because supplier prices because buyers are loyal to buyers are loyal to differentiated branddifferentiated brand

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

aini

ng P

ower

Barg

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ower

of

Buy

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of B

uyer

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Threat of New

Threat of New

EntrantsEntrants

Threat of

Threat of

Substitute P

roducts

Substitute P

roducts


123


Threat of New EntrantsThreat of New EntrantsCan defend against new Can defend against new entrants because:entrants because:

new products must surpass new products must surpass proven products or, proven products or,

new products must be at new products must be at least equal to performance least equal to performance of proven products, but of proven products, but offered at lower pricesoffered at lower prices

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

aini

ng P

ower

Barg

aini

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ower

of

Buy

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of B

uyer

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Threat of New

Threat of New

EntrantsEntrants

Threat of

Threat of

Substitute P

roducts

Substitute P

roducts


124


Threat of Substitute Threat of Substitute ProductsProductsWell positioned relative to Well positioned relative to substitutes because:substitutes because:

brand loyalty to a brand loyalty to a differentiated product tends differentiated product tends to reduce customers’ testing to reduce customers’ testing of new products or of new products or switching brandsswitching brands

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Barg

aini

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ower

Barg

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ower

of

Buy

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uyer

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Threat of New

Threat of New

EntrantsEntrants

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Threat of

Substitute P

roducts

Substitute P

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125

Major Risks of Differentiation Major Risks of Differentiation StrategyStrategy Customers may decide that the price Customers may decide that the price

differential between the differentiated differential between the differentiated product and the cost leader’s product is product and the cost leader’s product is too largetoo large

Means of differentiation may cease to Means of differentiation may cease to provide value for which customers are provide value for which customers are willing to paywilling to pay

126

Major Risks of Differentiation Major Risks of Differentiation StrategyStrategy Experience may narrow customer’s Experience may narrow customer’s

perceptions of the value of differentiated perceptions of the value of differentiated features of the firm’s productsfeatures of the firm’s products

Makers of counterfeit goods may attempt Makers of counterfeit goods may attempt to replicate differentiated features of the to replicate differentiated features of the firm’s productsfirm’s products

127

Focused Business-Level Focused Business-Level StrategiesStrategies

A focus strategy must exploit a narrow A focus strategy must exploit a narrow target’s differences from the balance of target’s differences from the balance of the industry by:the industry by:– isolating a particular buyer groupisolating a particular buyer group– isolating a unique segment of a product isolating a unique segment of a product

lineline– concentrating on a particular concentrating on a particular

geographic marketgeographic market– finding their “niche”finding their “niche”

128

Factors That May Drive Focused Factors That May Drive Focused StrategiesStrategies Large firms may overlook small nichesLarge firms may overlook small niches Firm may lack resources to compete in the Firm may lack resources to compete in the

broader marketbroader market May be able to serve a narrow market May be able to serve a narrow market

segment more effectively than can larger segment more effectively than can larger industry-wide competitorsindustry-wide competitors

Focus may allow the firm to direct Focus may allow the firm to direct resources to certain value chain activities resources to certain value chain activities to build competitive advantageto build competitive advantage

129

Major Risks of Focused StrategiesMajor Risks of Focused Strategies Firm may be “outfocused” by competitorsFirm may be “outfocused” by competitors Large competitor may set its sights on Large competitor may set its sights on

your niche marketyour niche market Preferences of niche market may change Preferences of niche market may change

to match those of broad marketto match those of broad market

130

Advantages of Integrated StrategyAdvantages of Integrated StrategyA firm that successfully uses an A firm that successfully uses an integrated cost leadership/differentiation integrated cost leadership/differentiation strategy should be in a better position to:strategy should be in a better position to:– adapt quickly to environmental changesadapt quickly to environmental changes– learn new skills and technologies more learn new skills and technologies more

quicklyquickly– effectively leverage its core effectively leverage its core

competencies while competing against competencies while competing against its rivalsits rivals

131

Benefits of Integrated StrategyBenefits of Integrated Strategy Successful firms using this strategy have Successful firms using this strategy have

above-average returnsabove-average returns Firm offers two types of values to Firm offers two types of values to

customerscustomers– some differentiated features (but less some differentiated features (but less

than a true differentiated firm)than a true differentiated firm)– relatively low cost (but now as low as relatively low cost (but now as low as

the cost leader’s price)the cost leader’s price)

132

Major Risks of Integrated StrategyMajor Risks of Integrated Strategy An integrated cost/differentiation business An integrated cost/differentiation business

level strategy often involves compromises level strategy often involves compromises (neither the lowest cost nor the most (neither the lowest cost nor the most differentiated firm)differentiated firm)

The firm may become “stuck in the The firm may become “stuck in the middle” lacking the strong commitment middle” lacking the strong commitment and expertise that accompanies firms and expertise that accompanies firms following either a cost leadership or a following either a cost leadership or a differentiated strategydifferentiated strategy


Competitive Rivalry and Competitive Rivalry and Competitive DynamicsCompetitive Dynamics


Robert E. Hoskisson

Chapter 5Chapter 5

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StrategyStrategy

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DefinitionsDefinitions CompetitorsCompetitors

– firms operating in the same market, offering firms operating in the same market, offering similar products and targeting similar similar products and targeting similar customerscustomers

Competitive rivalryCompetitive rivalry– the ongoing set of competitive actions and the ongoing set of competitive actions and

responses occurring between competitors responses occurring between competitors – competitive rivalry influences an individual competitive rivalry influences an individual

firm’s ability to gain and sustain competitive firm’s ability to gain and sustain competitive advantagesadvantages

136

DefinitionsDefinitions Competitive behaviorCompetitive behavior

– the set of competitive actions and competitive the set of competitive actions and competitive responses the firm takes to build or defend its responses the firm takes to build or defend its competitive advantages and to improve its competitive advantages and to improve its market positionmarket position

Competitive dynamicsCompetitive dynamics– the total set of actions and responses taken by the total set of actions and responses taken by

all firms competing within a marketall firms competing within a market

137

From Competitors to From Competitors to Competitive DynamicsCompetitive Dynamics

CompetitorsCompetitors

• Through competitiveThrough competitivebehaviorbehavior• Competitive actionsCompetitive actions• Competitive responsesCompetitive responses

• To gain an advantageousTo gain an advantageousmarket positionmarket position

Competitive DynamicsCompetitive Dynamics• Competitive actions and responses taken by allCompetitive actions and responses taken by all

firms competing in a marketfirms competing in a market

CompetitiveCompetitiverivalryrivalry

Engage inEngage in

What results?What results?

What results?What results?

Why?Why?

How?How?

138

Effect of Competitive Rivalry on Effect of Competitive Rivalry on a Firm’s Strategies a Firm’s Strategies Success of a strategy is determined by:Success of a strategy is determined by:

– the firm’s initial competitive actions the firm’s initial competitive actions – how well it anticipates competitors’ responses how well it anticipates competitors’ responses

to them to them – how well the firm anticipates and responds to its how well the firm anticipates and responds to its

competitors’ initial actions competitors’ initial actions Competitive rivalryCompetitive rivalry

– affects all types of strategies affects all types of strategies – most dominant influence is on the firm’s most dominant influence is on the firm’s

business-level strategy or strategies.business-level strategy or strategies.

139

A Model of Competitive A Model of Competitive RivalryRivalry

Competitive AnalysisCompetitive Analysis• Market commonalityMarket commonality• Resource similarityResource similarity

Drivers of CompetitiveDrivers of CompetitiveBehaviorBehavior

• AwarenessAwareness• MotivationMotivation• AbilityAbility

Interim RivalryInterim Rivalry• Likelihood of AttackLikelihood of Attack

• First mover incentivesFirst mover incentives• Organizational sizeOrganizational size• QualityQuality

• Likelihood of ResponseLikelihood of Response• Type of competitive actionType of competitive action• ReputationReputation• Market dependenceMarket dependence

OutcomesOutcomes• Market positionMarket position• Financial performanceFinancial performance

feedbackfeedback

140

Competitive RivalryCompetitive Rivalry Firms are mutually interdependent Firms are mutually interdependent

– one firm’s competitive actions have noticeable one firm’s competitive actions have noticeable effects on competitorseffects on competitors

– one firm’s competitive actions elicit one firm’s competitive actions elicit competitive responses from competitorscompetitive responses from competitors

– competitors feel each other’s actions and competitors feel each other’s actions and responsesresponses

Marketplace success is a function of both Marketplace success is a function of both individual strategies and the individual strategies and the consequences of their useconsequences of their use

141

Competitor AnalysisCompetitor Analysis Competitor analysisCompetitor analysis

– a technique firms use to understand their a technique firms use to understand their competitive environment. Along with the general competitive environment. Along with the general and industry environments, the competitive and industry environments, the competitive environment comprises the firm’s external environment comprises the firm’s external environmentenvironment

– a technique used to help the firm a technique used to help the firm understandunderstand its its competitorscompetitors

– the first step to being able to the first step to being able to predictpredict competitors’ behavior in the form of its competitors’ behavior in the form of its competitive actions and responsescompetitive actions and responses

142

Market CommonalityMarket Commonality Market Commonality is concerned withMarket Commonality is concerned with

– the number of markets with which a firm and a the number of markets with which a firm and a competitor are jointly involvedcompetitor are jointly involved

– the degree of importance of the individual markets to the degree of importance of the individual markets to each competitoreach competitor

Most industries’ markets are somewhat related in Most industries’ markets are somewhat related in terms ofterms of– technologiestechnologies– core competenciescore competencies

Multimarket competitionMultimarket competition– Firms competing in several marketsFirms competing in several markets

143

Resource SimilarityResource Similarity Resource similarityResource similarity

– the extent to which the firm’s tangible and intangible the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of resources are comparable to a competitor’s in terms of both type and amount both type and amount

Firms with similar types and amounts of Firms with similar types and amounts of resources are likely toresources are likely to– have similar strengths and weaknesseshave similar strengths and weaknesses– use similar strategiesuse similar strategies

Assessing resource similarity can be difficult if Assessing resource similarity can be difficult if critical resources are intangible rather than critical resources are intangible rather than tangibletangible

144

A Framework of Competitor A Framework of Competitor AnalysisAnalysis

MarketMarketCommonalityCommonality

HighHigh

LowLow

LowLow HighHighResourceResourceSimilaritySimilarity

The shaded area represents The shaded area represents degree of market commonality degree of market commonality between two firmsbetween two firms

Resource endowment BResource endowment B

Resource endowment AResource endowment A

KEYKEY

IIIIIIIIIIII IVIV

145

Drivers of Competitive Actions Drivers of Competitive Actions and Responses:and Responses:

Awareness is the extent to which Awareness is the extent to which competitors recognize the degree of competitors recognize the degree of their mutual interdependencetheir mutual interdependence– mutual interdependence results mutual interdependence results

fromfrom• market commonalitymarket commonality• resource similarityresource similarity

AwarenessAwareness

AwarenessAwarenessDrivers of competitive behaviorDrivers of competitive behavior

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MotivationMotivation


Motivation concerns the firm’s Motivation concerns the firm’s incentiveincentive– to take actionto take action– or to respond to a competitor’s or to respond to a competitor’s

attackattack– and relates to perceived gains and and relates to perceived gains and

losseslosses

AwarenessAwareness

Drivers of competitive behaviorDrivers of competitive behaviorMotivationMotivation

147

AbilityAbility


Ability relatesAbility relates– to each firm’s resourcesto each firm’s resources– the flexibility these resources the flexibility these resources

provideprovide Without available resources the firm Without available resources the firm

lacks the abilitylacks the ability– to attack a competitor to attack a competitor – to respond to the competitor’s to respond to the competitor’s

actionsactions

AwarenessAwareness

Drivers of competitive behaviorDrivers of competitive behavior

MotivationMotivation

AbilityAbility

148


A firm is more likely to attack the A firm is more likely to attack the rival with whom it has low market rival with whom it has low market commonality than the one with whom commonality than the one with whom it competes in multiple marketsit competes in multiple markets

Because of the high stakes of Because of the high stakes of competition under the condition of competition under the condition of market commonality, there is a high market commonality, there is a high probability that the attacked firm will probability that the attacked firm will respond to its competitor’s action in respond to its competitor’s action in an effort to protect its position in one an effort to protect its position in one or more marketsor more markets

MarketMarketcommonalitycommonality

Drivers of competitive behavior influenced byDrivers of competitive behavior influenced byMarket CommonalityMarket Commonality

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ResourceResourcesimilaritysimilarity


The greater the resource imbalance The greater the resource imbalance between the acting firm and between the acting firm and competitors or potential responders, competitors or potential responders, the greater will be the delay in the greater will be the delay in response by the firm with a resource response by the firm with a resource disadvantagedisadvantage

When facing competitors with greater When facing competitors with greater resources or more attractive market resources or more attractive market positions, firms should eventually positions, firms should eventually respond, no matter how challenging respond, no matter how challenging the responsethe response

Drivers of competitive behavior influenced byDrivers of competitive behavior influenced byMarketMarket

commonalitycommonality

Resource SimilarityResource Similarity

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Competitive RivalryCompetitive Rivalry Competitive actionCompetitive action

– a strategic or tactical action the firm takes to a strategic or tactical action the firm takes to build or defend its competitive advantages or build or defend its competitive advantages or improve its market positionimprove its market position

Competitive responseCompetitive response– a strategic or tactical action the firm takes to a strategic or tactical action the firm takes to

counter the effects of a competitor’s counter the effects of a competitor’s competitive actioncompetitive action

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Strategic and Tactical ActionsStrategic and Tactical Actions Strategic action or a strategic responseStrategic action or a strategic response

– a market-based move that involves a a market-based move that involves a significant commitment of organizational significant commitment of organizational resources and is difficult to implement and resources and is difficult to implement and reversereverse

Tactical action or a tactical responseTactical action or a tactical response– market-based move that is taken to fine-tune a market-based move that is taken to fine-tune a

strategy; it involves fewer resources and is strategy; it involves fewer resources and is relatively easy to implement and reverserelatively easy to implement and reverse

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Factors Affecting Likelihood of Factors Affecting Likelihood of Attack:Attack:

First movers allocate funds forFirst movers allocate funds for– product innovation and developmentproduct innovation and development– aggressive advertisingaggressive advertising– advanced research and developmentadvanced research and development

First movers can gain First movers can gain – the loyalty of customers who may the loyalty of customers who may

become committed to the firm’s become committed to the firm’s goods or servicesgoods or services

– market share that can be difficult for market share that can be difficult for competitors to take during future competitors to take during future competitive rivalrycompetitive rivalry

First moverFirst moverincentivesincentives

First Mover IncentivesFirst Mover Incentives

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SizeSize


Small firms are more likelySmall firms are more likely– to launch competitive actions to launch competitive actions – to be quicker in doing soto be quicker in doing so

Small firms are perceived asSmall firms are perceived as– nimble and flexible competitors nimble and flexible competitors – relying on speed and surprise to relying on speed and surprise to

defend their competitive advantages defend their competitive advantages or develop new ones while engaged or develop new ones while engaged in competitive rivalryin competitive rivalry

Small firms have the flexibility needed to Small firms have the flexibility needed to launch a greater variety of competitive launch a greater variety of competitive actionsactions


SizeSize

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Large firms are likely to initiate more Large firms are likely to initiate more competitive actions as well as competitive actions as well as strategic actions during a given time strategic actions during a given time periodperiod

Large organizations commonly have Large organizations commonly have the slack resources required to the slack resources required to launch a larger number of total launch a larger number of total competitive actionscompetitive actions


SizeSize

SizeSize

““Think and act big and we’ll get smaller. Think and Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.”act small and we’ll get bigger.”

- Herb Kelleher, Former CEO, Southwest Airlines

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QualityQuality


Quality exists when the firm’s goods Quality exists when the firm’s goods or services meet or exceed or services meet or exceed customers’ expectationscustomers’ expectations


SizeSize

QualityQuality

Product quality dimensions includeProduct quality dimensions include– PerformancePerformance– FeaturesFeatures– FlexibilityFlexibility– DurabilityDurability– ConformanceConformance– ServiceabilityServiceability– AestheticsAesthetics– Perceived qualityPerceived quality

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QualityQuality


Quality exists when the firm’s goods Quality exists when the firm’s goods or services meet or exceed or services meet or exceed customers’ expectationscustomers’ expectations


SizeSize

QualityQuality

Service quality dimensions includeService quality dimensions include– TimelinessTimeliness– CourtesyCourtesy– ConsistencyConsistency– ConvenienceConvenience– CompletenessCompleteness– AccuracyAccuracy

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Factors Affecting Likelihood of Factors Affecting Likelihood of ResponseResponse

Firms study three factors to predict how a Firms study three factors to predict how a competitor is likely to respond to competitor is likely to respond to competitive actionscompetitive actions– type of competitive actiontype of competitive action– reputationreputation– market dependencemarket dependence

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Factors Affecting Likelihood of Factors Affecting Likelihood of Response:Response:

Strategic actions receive strategic Strategic actions receive strategic responsesresponses

Tactical responses are taken to Tactical responses are taken to counter the effects of tactical actionscounter the effects of tactical actions

Strategic actions elicit fewer total Strategic actions elicit fewer total competitive responsescompetitive responses

A competitor likely will respond A competitor likely will respond quickly to a tactical actionquickly to a tactical action

The time needed to implement and The time needed to implement and assess a strategic action delays assess a strategic action delays competitors’ responsescompetitors’ responses

Type ofType ofcompetitivecompetitive

actionaction

Type of Competitive ActionType of Competitive Action

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ReputationReputation


An actor is the firm taking an action An actor is the firm taking an action or responseor response

Reputation is the positive or negative Reputation is the positive or negative attribute ascribed by one rival to attribute ascribed by one rival to another based on past competitive another based on past competitive behaviorbehavior

The firm studies responses that a The firm studies responses that a competitor has taken previously when competitor has taken previously when attacked to predict likely responsesattacked to predict likely responses


actionaction


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MarketMarketdependencedependence


Market dependence isMarket dependence is– the extent to which a firm’s the extent to which a firm’s

revenues or profits are derived revenues or profits are derived from a particular marketfrom a particular market

In general, firms can predict that In general, firms can predict that competitors with high market competitors with high market dependence are likely to respond dependence are likely to respond strongly to attacks threatening their strongly to attacks threatening their market positionmarket position


actionaction


Market DependenceMarket Dependence

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CompetitionCompetition Competitive DynamicsCompetitive Dynamics

– competitive dynamics concerns the ongoing competitive dynamics concerns the ongoing actions and responses taking place among actions and responses taking place among allall firms competing within a market for firms competing within a market for advantageous positionsadvantageous positions

Competitive RivalryCompetitive Rivalry– building and sustaining competitive advantages building and sustaining competitive advantages

are at the core of competitive rivalryare at the core of competitive rivalry– competitive advantages are the link to an competitive advantages are the link to an

advantageous market positionadvantageous market position

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Strategic Conduct is DynamicStrategic Conduct is Dynamic

• A firm’s strategic conduct is dynamic in A firm’s strategic conduct is dynamic in naturenature

• Actions and responses shape the Actions and responses shape the competitive positions of each firm’s competitive positions of each firm’s business level strategybusiness level strategy

Firm BFirm BFirm Firm AA

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Firm BFirm BFirm Firm AA

Strategic Conduct is DynamicStrategic Conduct is Dynamic

• Actions taken by one firm elicits Actions taken by one firm elicits responses from competitorsresponses from competitors

• Competitive responses lead to additional Competitive responses lead to additional actions from the firm that acted actions from the firm that acted originallyoriginally

ActionsActions

ResponseResponseNew ActionsNew Actions

New ResponseNew Response

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Competitive Dynamics:Competitive Dynamics:

Slow-cycle marketsSlow-cycle markets– the firm’s competitive advantages the firm’s competitive advantages

are shielded from imitation for long are shielded from imitation for long periods of timeperiods of time

– imitation is costlyimitation is costly Competitive advantages are Competitive advantages are

sustainable in slow-cycle marketssustainable in slow-cycle markets A proprietary, one-of-a-kind A proprietary, one-of-a-kind

competitive advantage leads to competitive advantage leads to competitive success in a slow-cycle competitive success in a slow-cycle marketmarket

Slow-cycleSlow-cyclemarketsmarkets

Slow-Cycle MarketsSlow-Cycle Markets

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Gradual Erosion of a Sustainable Gradual Erosion of a Sustainable Competitive AdvantageCompetitive Advantage

Ret

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Time (Years)Time (Years)00 55 1010

LaunchLaunch

ExploitationExploitation

CounterattackCounterattack

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Fast-cycleFast-cyclemarketsmarkets


Fast-cycle marketsFast-cycle markets– the firm’s competitive advantages the firm’s competitive advantages

aren’t shielded from imitation aren’t shielded from imitation – imitation happens quickly and imitation happens quickly and

somewhat inexpensivelysomewhat inexpensively Competitive advantages aren’t Competitive advantages aren’t

sustainablesustainable Competitors use reverse engineering Competitors use reverse engineering

to quickly imitate or improve on the to quickly imitate or improve on the firm’s productsfirm’s products

Non-proprietary technology is Non-proprietary technology is diffused rapidlydiffused rapidly


Fast-Cycle MarketsFast-Cycle Markets

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Obtaining Temporary Advantages to Obtaining Temporary Advantages to Create Sustained AdvantageCreate Sustained Advantage

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Time (Years)Time (Years)00 55 1010 1515

LaunchLaunchExploitationExploitation

CounterattackCounterattack

Firm has already moved Firm has already moved to next advantageto next advantage

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Standard-cycle markets Standard-cycle markets – the firm’s competitive advantages may the firm’s competitive advantages may

be shielded from imitationbe shielded from imitation– imitation is moderately costlyimitation is moderately costly

Competitive advantages are partially Competitive advantages are partially sustainable if the firm is able to sustainable if the firm is able to continuously upgrade the quality of its continuously upgrade the quality of its competitive advantagescompetitive advantages

FirmsFirms– seek large market sharesseek large market shares– gain customer loyalty through brand gain customer loyalty through brand

namesnames– carefully control operationscarefully control operations


Fast-cycleFast-cyclemarketsmarkets

Standard-cycleStandard-cyclemarketsmarkets

Standard-Cycle MarketsStandard-Cycle Markets


Corporate-Level StrategyCorporate-Level Strategy


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StrategyStrategy

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Two Levels of StrategyTwo Levels of StrategyA diversified company has two levels of strategyA diversified company has two levels of strategy1. Business-Level Strategy1. Business-Level Strategy (Competitive Strategy)(Competitive Strategy)

How to create competitive advantage in each How to create competitive advantage in each business in which the company competesbusiness in which the company competes

- low cost- low cost - differentiation - differentiation- focused low cost- focused low cost - focused differentiation - focused differentiation

- integrated low cost/- integrated low cost/ differentiationdifferentiation

2. Corporate-Level Strategy2. Corporate-Level Strategy (Company-wide Strategy)(Company-wide Strategy)How to create value for the corporation as a wholeHow to create value for the corporation as a whole

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Key Questions in Key Questions in Corporate StrategyCorporate Strategy1. What businesses should the corporation 1. What businesses should the corporation

be in?be in?2. How should the corporate office manage 2. How should the corporate office manage

the array of business units?the array of business units?Corporate StrategyCorporate Strategy is is what makes the what makes the corporate whole add up corporate whole add up to more than the sum of to more than the sum of its business unit partsits business unit parts

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Levels and Types of DiversificationLevels and Types of DiversificationLow Levels of DiversificationLow Levels of Diversification

Single BusinessSingle Business> 95% of business from a single > 95% of business from a single business unitbusiness unit

Dominant BusinessDominant BusinessBetween 70 and 95% of business Between 70 and 95% of business from a single business unitfrom a single business unit

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Related ConstrainedRelated Constrained<70% of revenues from dominant <70% of revenues from dominant business; all businesses share business; all businesses share product, technological and product, technological and distribution linkagesdistribution linkages

Levels and Types of DiversificationLevels and Types of DiversificationModerate to High Levels of DiversificationModerate to High Levels of Diversification

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Related Linked (Mixed)Related Linked (Mixed)< 70% of revenues from dominant < 70% of revenues from dominant business, and only limited links business, and only limited links existexist

Levels and Types of DiversificationLevels and Types of DiversificationModerate to High Levels of DiversificationModerate to High Levels of Diversification

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Levels and Types of Levels and Types of DiversificationDiversification

UnrelatedUnrelated< 70% of revenue comes from the < 70% of revenue comes from the dominant business, and there are dominant business, and there are no common links between no common links between businessesbusinesses

Very High Levels of DiversificationVery High Levels of Diversification

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Reasons for DiversificationReasons for Diversification

Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness

• Economies of scope• Market power• Financial economics

IncentivesIncentives

ResourcesResources

ManagerialManagerialMotivesMotives

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Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness

• Anti-trust regulation• Tax laws• Low performance• Uncertain future cash flows• Firm risk reduction


ResourcesResources



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Resources with varying Resources with varying effects on value creation and effects on value creation and strategic competitivenessstrategic competitiveness

• Tangible resources financial resources physical assets

• Intangible resources tacit knowledge customer relations image and reputation


ResourcesResources



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Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)

• Diversifying managerial employment risk

• Increasing managerial compensation


ResourcesResources



181

Value-creating Strategies of Diversification:Value-creating Strategies of Diversification: Operational and Corporate ReadinessOperational and Corporate Readiness

Related ConstrainedRelated ConstrainedDiversificationDiversification

Vertical IntegrationVertical Integration(Market Power)(Market Power)

UnrelatedUnrelatedDiversificationDiversification

(Financial Economies)(Financial Economies)

Both Operational andBoth Operational andCorporate RelatednessCorporate Relatedness

(Rare Capability(Rare Capabilityand can Createand can CreateDiseconomies ofDiseconomies of

Scope)Scope)

Related LinkedRelated LinkedDiversificationDiversification(Economies of(Economies of

Scope)Scope)

Corporate Readiness: Transferring Skills into Corporate Readiness: Transferring Skills into Businesses Through Corporate HeadquartersBusinesses Through Corporate Headquarters

LowLow HighHigh

Shar

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Ope

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Adding Value by DiversificationAdding Value by DiversificationDiversification most effectively adds value Diversification most effectively adds value by either of two mechanisms:by either of two mechanisms:– Economies of scope:Economies of scope: cost savings attributed cost savings attributed

to transferring the capabilities and competencies to transferring the capabilities and competencies developed in one business to a new businessdeveloped in one business to a new business

– Market power:Market power: when a firm is able to sell its when a firm is able to sell its products above the existing competitive level or products above the existing competitive level or reduce the costs of its primary and support reduce the costs of its primary and support activities below the competitive level, or bothactivities below the competitive level, or both

183

Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies

– sharing activitiessharing activities

– transferring core competenciestransferring core competencies

Unrelated Diversification StrategiesUnrelated Diversification Strategies

– efficient internal capital market allocationefficient internal capital market allocation

– restructuringrestructuring

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Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies


185

Sharing Activities:Sharing Activities: Sharing activities often lowers costs or raises Sharing activities often lowers costs or raises

differentiationdifferentiation Sharing activities can lower costs if it:Sharing activities can lower costs if it:

– achieves economies of scaleachieves economies of scale– boosts efficiency of utilizationboosts efficiency of utilization– helps move more rapidly down the Learning Curvehelps move more rapidly down the Learning Curve

Sharing activities can enhance potential for or Sharing activities can enhance potential for or reduce the cost of differentiationreduce the cost of differentiation

Must involve activities that are crucial to Must involve activities that are crucial to competitive advantagecompetitive advantage

Key CharacteristicsKey Characteristics

186

Sharing Activities:Sharing Activities: Strong sense of corporate identityStrong sense of corporate identity Clear corporate mission that emphasizes Clear corporate mission that emphasizes

the importance of integrating business the importance of integrating business unitsunits

Incentive system that rewards more than Incentive system that rewards more than just business unit performancejust business unit performance


187

Related Diversification StrategiesRelated Diversification Strategies



Alternative Diversification Alternative Diversification StrategiesStrategies

188

Transferring Core Competencies:Transferring Core Competencies:

Exploits interrelationships among Exploits interrelationships among divisionsdivisions

Start with value chain analysisStart with value chain analysis– identify ability to transfer skills or expertise identify ability to transfer skills or expertise

among similar value chainsamong similar value chains– exploit ability to transfer activitiesexploit ability to transfer activities


189

Transferring Core Competencies: Transferring Core Competencies:

Transferring core competencies leads to Transferring core competencies leads to competitive advantage only if the competitive advantage only if the similarities among business units meet the similarities among business units meet the following conditions:following conditions:– activities involved in the businesses are similar activities involved in the businesses are similar

enough that sharing expertise is meaningfulenough that sharing expertise is meaningful– transfer of skills involves activities which are transfer of skills involves activities which are

important to competitive advantageimportant to competitive advantage– the skills transferred represent significant the skills transferred represent significant

sources of competitive advantage for the sources of competitive advantage for the receiving unitreceiving unit


190







191

Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Firms pursuing this strategy frequently Firms pursuing this strategy frequently

diversify by acquisition:diversify by acquisition:– acquire sound, attractive companiesacquire sound, attractive companies– acquired units are autonomousacquired units are autonomous– acquiring corporation supplies needed capitalacquiring corporation supplies needed capital– portfolio managers transfer resources from units portfolio managers transfer resources from units

that generate cash to those with high growth that generate cash to those with high growth potential and substantial cash needspotential and substantial cash needs

– add professional management & control to sub-add professional management & control to sub-unitsunits

– sub-unit managers compensation based on unit sub-unit managers compensation based on unit resultsresults


192

Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Managers have more detailed knowledge Managers have more detailed knowledge

of firm relative to outside investorsof firm relative to outside investors Firm need not risk competitive edge by Firm need not risk competitive edge by

disclosing sensitive competitive disclosing sensitive competitive information to investorsinformation to investors

Firm can reduce risk by allocating Firm can reduce risk by allocating resources among diversified businesses, resources among diversified businesses, although shareholders can generally although shareholders can generally diversify more economically on their owndiversify more economically on their own


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– restructuringrestructuring

194

Restructuring:Restructuring: Seek out undeveloped, sick or threatened Seek out undeveloped, sick or threatened

organizations or industriesorganizations or industries Parent company (acquirer) intervenes and Parent company (acquirer) intervenes and

frequently:frequently:– changes sub-unit management teamchanges sub-unit management team– shifts strategyshifts strategy– infuses firm with new technologyinfuses firm with new technology– enhances discipline by changing control enhances discipline by changing control

systemssystems– divests part of firmdivests part of firm– makes additional acquisitions to achieve makes additional acquisitions to achieve

critical masscritical mass


195

Restructuring:Restructuring: Frequently sell unit after making one-time Frequently sell unit after making one-time

changes since parent no longer adds changes since parent no longer adds value to ongoing operationsvalue to ongoing operations


196

Restructuring:Restructuring: Requires keen management insight in Requires keen management insight in

selecting firms with depressed values or selecting firms with depressed values or unforeseen potentialunforeseen potential

Must do more than restructure companiesMust do more than restructure companies Need to initiate restructuring of industries Need to initiate restructuring of industries

to create a more attractive environmentto create a more attractive environment


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Incentives to DiversifyIncentives to DiversifyExternal Incentives:External Incentives: Relaxation of anti-trust regulation allows more Relaxation of anti-trust regulation allows more

related acquisitions than in the pastrelated acquisitions than in the past Before 1986, higher taxes on dividends favored Before 1986, higher taxes on dividends favored

spending retained earnings on acquisitionsspending retained earnings on acquisitions After 1986, firms made fewer acquisitions with After 1986, firms made fewer acquisitions with

retained earnings, shifting to the use of debt to retained earnings, shifting to the use of debt to take advantage of tax deductible interest take advantage of tax deductible interest paymentspayments

198

Incentives to DiversifyIncentives to DiversifyInternal Incentives:Internal Incentives: Poor performance may lead some firms to Poor performance may lead some firms to

diversify to attempt to achieve better returnsdiversify to attempt to achieve better returns Firms may diversify to balance uncertain future Firms may diversify to balance uncertain future

cash flowscash flows Firms may diversify into different businesses in Firms may diversify into different businesses in

order to reduce riskorder to reduce risk

199

Resources and DiversificationResources and Diversification Besides strong incentives, firms are more Besides strong incentives, firms are more

likely to diversify if they have the likely to diversify if they have the resources to do soresources to do so

Value creation is determined more by Value creation is determined more by appropriate use of resources than appropriate use of resources than incentives to diversifyincentives to diversify

200

Managerial Motives to DiversifyManagerial Motives to DiversifyManagers have motives to diversifyManagers have motives to diversify

– diversification increases size; size is diversification increases size; size is associated with executive compensationassociated with executive compensation

– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict effective governance mechanisms may restrict

such motivessuch motives

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Relationship Between Relationship Between Diversification and PerformanceDiversification and Performance

Perf

orm

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Perf

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Level of DiversificationLevel of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

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Relationship Between Firm Relationship Between Firm Performance and DiversificationPerformance and Diversification



ResourcesResources DiversificationDiversificationStrategyStrategy

FirmFirmPerformancePerformance

InternalInternalGovernanceGovernance

StrategyStrategyImplementationImplementation

Capital MarketCapital MarketIntervention and theIntervention and theMarket forMarket forManagerial TalentManagerial Talent


Acquisition and Restructuring Acquisition and Restructuring StrategiesStrategies


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StrategyStrategy



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Mergers and AcquisitionsMergers and Acquisitions Merger:Merger: a strategy through which two firms a strategy through which two firms

agree to integrate theiragree to integrate their operations on a operations on a relatively co-equal basisrelatively co-equal basis

Acquisition:Acquisition: a strategy through which one firm a strategy through which one firm buys a controlling interest in another firm with buys a controlling interest in another firm with the intent of making the acquired firm a the intent of making the acquired firm a subsidiary business within its own portfoliosubsidiary business within its own portfolio

Takeover:Takeover: a special type of an acquisition a special type of an acquisition strategy wherein the target firm did not solicit the strategy wherein the target firm did not solicit the acquiring firm’s bidacquiring firm’s bid

206

AcquisitionsAcquisitions

Reasons for Making AcquisitionsReasons for Making Acquisitions

IncreaseIncreasemarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed

to marketto market

IncreaseIncreasediversificationdiversification

Reshape firm’sReshape firm’scompetitive scopecompetitive scope

Lower risk comparedLower risk comparedto developing newto developing new

productsproducts

Learn and developLearn and developnew capabilitiesnew capabilities

207

Reasons for Making Acquisitions:Reasons for Making Acquisitions:

Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services above when a firm is able to sell its goods or services above

competitive levels orcompetitive levels or– when the costs of its primary or support activities are when the costs of its primary or support activities are

below those of its competitorsbelow those of its competitors– usually is derived from the size of the firm and its usually is derived from the size of the firm and its

resources and capabilities to compete resources and capabilities to compete Market power is increased byMarket power is increased by

– horizontal acquisitionshorizontal acquisitions– vertical acquisitionsvertical acquisitions– related acquisitionsrelated acquisitions

Increased Market PowerIncreased Market Power

208


Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors– differentiated products by competitorsdifferentiated products by competitors– enduring relationships with customers that create enduring relationships with customers that create

product loyalties with competitorsproduct loyalties with competitors acquisition of an established company acquisition of an established company

– may be more effective than entering the market as a may be more effective than entering the market as a competitor offering an unfamiliar good or service that competitor offering an unfamiliar good or service that is unfamiliar to current buyersis unfamiliar to current buyers

– provides a new entrant with immediate market accessprovides a new entrant with immediate market access

Overcome Barriers to EntryOvercome Barriers to Entry

209


Significant investments of a firm’s Significant investments of a firm’s resources are required toresources are required to– Develop new products internallyDevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace

Acquisition of a competitor may result inAcquisition of a competitor may result in– more predictable returns more predictable returns – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities

Cost of New Product Development and Cost of New Product Development and Speed to MarketSpeed to Market

210


An acquisition’s outcomes can be An acquisition’s outcomes can be estimated more easily and accurately estimated more easily and accurately compared to the outcomes of an internal compared to the outcomes of an internal product development processproduct development process

Therefore managers may view acquisitions Therefore managers may view acquisitions as lowering riskas lowering risk

Lower Risk Compared to Developing Lower Risk Compared to Developing New ProductsNew Products

211


It may be easier to develop and introduce It may be easier to develop and introduce new products in markets currently served new products in markets currently served by the firmby the firm

It may be difficult to develop new products It may be difficult to develop new products for markets in which a firm lacks experiencefor markets in which a firm lacks experience– it is uncommon for a firm to develop new it is uncommon for a firm to develop new

products internally to diversify its product linesproducts internally to diversify its product lines– acquisitions are the quickest and easiest way to acquisitions are the quickest and easiest way to

diversify a firm and change its portfolio of diversify a firm and change its portfolio of businessbusiness

Increased DiversificationIncreased Diversification

212


Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or dependence on one or more products or marketsmarkets

Reducing a company’s dependence on Reducing a company’s dependence on specific markets alters the firm’s specific markets alters the firm’s competitive scopecompetitive scope

Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope

213


Acquisitions may gain capabilities that the Acquisitions may gain capabilities that the firm does not possessfirm does not possess

Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base– reduce inertiareduce inertia

Learning and Developing New CapabilitiesLearning and Developing New Capabilities

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Problems With AcquisitionsProblems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Too muchToo muchdiversificationdiversification

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Resulting firmResulting firmis too largeis too large

215

Problems With AcquisitionsProblems With Acquisitions

Integration challenges includeIntegration challenges include– melding two disparate corporate culturesmelding two disparate corporate cultures– linking different financial and control systemslinking different financial and control systems– building effective working relationships building effective working relationships

(particularly when management styles differ)(particularly when management styles differ)– resolving problems regarding the status of the resolving problems regarding the status of the

newly acquired firm’s executivesnewly acquired firm’s executives– loss of key personnel weakens the acquired loss of key personnel weakens the acquired

firm’s capabilities and reduces its valuefirm’s capabilities and reduces its value

Integration DifficultiesIntegration Difficulties

216


Evaluation requires that hundreds of issues be Evaluation requires that hundreds of issues be closely examined, includingclosely examined, including– financing for the intended transactionfinancing for the intended transaction– differences in cultures between the acquiring and differences in cultures between the acquiring and

target firmtarget firm– tax consequences of the transactiontax consequences of the transaction– actions that would be necessary to successfully meld actions that would be necessary to successfully meld

the two workforcesthe two workforces Ineffective due-diligence process mayIneffective due-diligence process may

– result in paying excessive premium for the target result in paying excessive premium for the target companycompany

Inadequate Evaluation of TargetInadequate Evaluation of Target

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Firm may take on significant debt to Firm may take on significant debt to acquire a companyacquire a company

High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that preclude needed investment in activities that

contribute to the firm’s long-term successcontribute to the firm’s long-term success

Large or Extraordinary DebtLarge or Extraordinary Debt

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Synergy exists when assets are worth Synergy exists when assets are worth more when used in conjunction with each more when used in conjunction with each other than when they are used separatelyother than when they are used separately

Firms experience transaction costs when Firms experience transaction costs when they use acquisition strategies to create they use acquisition strategies to create synergysynergy

Firms tend to underestimate indirect costs Firms tend to underestimate indirect costs when evaluating a potential acquisitionwhen evaluating a potential acquisition

Inability to Achieve SynergyInability to Achieve Synergy

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Diversified firms must process more Diversified firms must process more information of greater diversity information of greater diversity

Scope created by diversification may Scope created by diversification may cause managers to rely too much on cause managers to rely too much on financial rather than strategic controls to financial rather than strategic controls to evaluate business units’ performancesevaluate business units’ performances

Acquisitions may become substitutes for Acquisitions may become substitutes for innovationinnovation

Too Much DiversificationToo Much Diversification

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Managers in target firms may operate in a Managers in target firms may operate in a state of virtual suspended animation during state of virtual suspended animation during an acquisitionan acquisition

Executives may become hesitant to make Executives may become hesitant to make decisions with long-term consequences decisions with long-term consequences until negotiations have been completeduntil negotiations have been completed

Acquisition process can create a short-term Acquisition process can create a short-term perspective and a greater aversion to risk perspective and a greater aversion to risk among top-level executives in a target firmamong top-level executives in a target firm

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions

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Additional costs may exceed the benefits Additional costs may exceed the benefits of the economies of scale and additional of the economies of scale and additional market powermarket power

Larger size may lead to more bureaucratic Larger size may lead to more bureaucratic controls controls

Formalized controls often lead to relatively Formalized controls often lead to relatively rigid and standardized managerial rigid and standardized managerial behaviorbehavior

Firm may produce less innovationFirm may produce less innovation

Too LargeToo Large

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Attributes of Effective Attributes of Effective AcquisitionsAcquisitions

AttributesAttributes ResultsResultsComplementary Complementary Assets or ResourcesAssets or Resources

Buying firms with assets that meet current Buying firms with assets that meet current needs to build competitivenessneeds to build competitiveness

Friendly Friendly AcquisitionsAcquisitions

Friendly deals make integration go more Friendly deals make integration go more smoothlysmoothly

Careful Selection Careful Selection ProcessProcess

Deliberate evaluation and negotiations are Deliberate evaluation and negotiations are more likely to lead to easy integration and more likely to lead to easy integration and building synergiesbuilding synergies

Maintain Financial Maintain Financial SlackSlack

Provide enough additional financial Provide enough additional financial resources so that profitable projects would resources so that profitable projects would not be foregonenot be foregone

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Attributes of Effective Attributes of Effective AcquisitionsAcquisitions

AttributesAttributes ResultsResultsLow-to-Moderate Low-to-Moderate DebtDebt

Merged firm maintains financial flexibilityMerged firm maintains financial flexibility

FlexibilityFlexibility Has experience at managing change and is Has experience at managing change and is flexible and adaptableflexible and adaptable

Sustain Emphasis Sustain Emphasis on Innovation on Innovation

Continue to invest in R&D as part of the Continue to invest in R&D as part of the firm’s overall strategyfirm’s overall strategy

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Restructuring ActivitiesRestructuring Activities DownsizingDownsizing

– Wholesale reduction of employeesWholesale reduction of employees DownscopingDownscoping

– Selectively divesting or closing non-core Selectively divesting or closing non-core businessesbusinesses

– Reducing scope of operationsReducing scope of operations– Leads to greater focusLeads to greater focus

Leveraged Buyout (LBO)Leveraged Buyout (LBO)– A party buys a firm’s entire assets in order to A party buys a firm’s entire assets in order to

take the firm private.take the firm private.

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LowerLowerperformanceperformance

HigherHigherperformanceperformance

Higher riskHigher risk

Loss ofLoss ofhuman capitalhuman capital

Restructuring and OutcomesRestructuring and Outcomes

Emphasis onEmphasis onstrategic controlsstrategic controls

High debt costsHigh debt costs

Reduced debtReduced debtcostscosts

Reduced laborReduced laborcostscosts

DownsizingDownsizing

DownscopingDownscoping

LeveragedLeveragedbuyoutbuyout


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ExportingExporting

LicensingLicensing

Strategic Strategic alliancesalliances


Establishment of Establishment of a new subsidiarya new subsidiary

International International business-level business-level strategystrategy

Multidomestic Multidomestic strategystrategy

Global strategyGlobal strategy

Transnational Transnational strategystrategy

Opportunities and Outcomes of Opportunities and Outcomes of International StrategyInternational Strategy

Increased market Increased market sizesize

Return on Return on investmentinvestment

Economies of Economies of scale and learningscale and learning

Advantage in Advantage in locationlocation

Identify International Identify International OpportunitiesOpportunities

Explore Resources Explore Resources and Capabilitiesand Capabilities

Use Core Use Core CompetenceCompetence

International International StrategiesStrategies Modes of EntryModes of Entry

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Better Better performanceperformance

InnovationInnovation

Opportunities and Outcomes of Opportunities and Outcomes of International Strategy: International Strategy: ContinuedContinued

ExportingExporting

LicensingLicensing

Strategic Strategic alliancesalliances


Establishment of Establishment of a new subsidiarya new subsidiary

Use Core Use Core CompetenceCompetence

Modes of EntryModes of Entry Managementproblems andrisk

Managementproblems andrisk

Strategic Strategic Competitiveness Competitiveness OutcomesOutcomes

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International Strategy Life CycleInternational Strategy Life Cycle

Production BecomesProduction BecomesStandardized and isStandardized and isRelocated to LowRelocated to LowCost CountriesCost Countries

Product DemandProduct DemandDevelops and FirmDevelops and FirmExports ProductsExports Products

Firm IntroducesFirm IntroducesInnovation inInnovation inDomestic MarketDomestic Market

ForeignForeignCompetitionCompetitionBegins ProductionBegins Production

Firm BeginsFirm BeginsProduction AbroadProduction Abroad

Selling Products Selling Products or Services or Services Outside a Firm’s Outside a Firm’s Domestic MarketDomestic Market

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Motivations for International Motivations for International ExpansionExpansion Increase Market ShareIncrease Market Share

– domestic market may lack the size to support domestic market may lack the size to support efficient scale manufacturing facilitiesefficient scale manufacturing facilities

Return on InvestmentReturn on Investment– large investment projects may require global large investment projects may require global

markets to justify the capital outlaysmarkets to justify the capital outlays– weak patent protection in some countries weak patent protection in some countries

implies that firms should expand overseas implies that firms should expand overseas rapidly in order to preempt imitatorsrapidly in order to preempt imitators

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Motivations for International Motivations for International ExpansionExpansion Economies of Scale or LearningEconomies of Scale or Learning

– expanding size or scope of markets helps to expanding size or scope of markets helps to achieve economies of scale in manufacturing achieve economies of scale in manufacturing as well as marketing, R & D or distributionas well as marketing, R & D or distribution

– can spread costs over a larger sales’ basecan spread costs over a larger sales’ base– increase profit per unitincrease profit per unit

Location AdvantagesLocation Advantages– low cost markets may aid in developing low cost markets may aid in developing

competitive advantagecompetitive advantage– may achieve better access to:may achieve better access to:

• Raw materialsRaw materials• Lower cost laborLower cost labor

• Key customersKey customers• EnergyEnergy

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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage

Factors ofFactors ofproductionproduction

Related andRelated andsupportingsupportingindustriesindustries

DemandDemandconditionsconditions

Firm strategy,Firm strategy,structure, andstructure, and

rivalryrivalry

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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage Factors of production:Factors of production: the inputs necessary the inputs necessary

to compete in any industryto compete in any industry– laborlabor– landland– natural resourcesnatural resources– capitalcapital– infrastructureinfrastructure– basic factors include natural and labor basic factors include natural and labor

resourcesresources– advanced factors include digital communication advanced factors include digital communication

systems and educated workforcesystems and educated workforce

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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage Demand conditions:Demand conditions: characterized by the characterized by the

nature and size of buyers’ needs in the nature and size of buyers’ needs in the home market for the industry’s goods or home market for the industry’s goods or servicesservices– size of market segment can lead to scale-size of market segment can lead to scale-

efficient facilitiesefficient facilities– efficiency can lead to domination of the efficiency can lead to domination of the

industry in other countriesindustry in other countries– specialized demand may create opportunities specialized demand may create opportunities

beyond national boundariesbeyond national boundaries

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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage Related and supporting industries:Related and supporting industries:

supporting services, facilities, suppliers supporting services, facilities, suppliers and so onand so on– support in designsupport in design– support in distributionsupport in distribution– related industries as suppliers and buyersrelated industries as suppliers and buyers

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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage Firm strategy, structure, and rivalry:Firm strategy, structure, and rivalry: the the

pattern of strategy, structure, and rivalry pattern of strategy, structure, and rivalry among firmsamong firms– common technical trainingcommon technical training– methodological product and process methodological product and process

improvementimprovement– cooperative and competitive systemscooperative and competitive systems

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International Corporate-Level International Corporate-Level StrategyStrategy

Need for Local ResponsivenessNeed for Local Responsiveness

Nee

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LowLow

HighHigh

LowLow HighHigh

GlobalGlobalstrategystrategy

TransnationalTransnationalstrategystrategy

MultidomesticMultidomesticstrategystrategy

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International Corporate-Level International Corporate-Level StrategyStrategy Type of corporate strategy selected will Type of corporate strategy selected will

have an impact on the selection and have an impact on the selection and implementation of the business-level implementation of the business-level strategiesstrategies

Some corporate strategies provide Some corporate strategies provide individual country units with flexibility to individual country units with flexibility to choose their own strategieschoose their own strategies

Others dictate business-level strategies Others dictate business-level strategies from the home office and coordinate from the home office and coordinate resource sharing across unitsresource sharing across units

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MultidomesticMultidomesticstrategystrategy

International Corporate-Level International Corporate-Level Strategy: Strategy: Multidomestic StrategyMultidomestic Strategy

• Strategy and operating decisions are Strategy and operating decisions are decentralized to strategic business units (SBU) decentralized to strategic business units (SBU) in each countryin each country

• Products and services are tailored to local Products and services are tailored to local marketsmarkets

• Business units in one country are independent Business units in one country are independent of each other of each other

• Assumes markets differ by country or regionsAssumes markets differ by country or regions• Focus on competition in each marketFocus on competition in each market• Prominent strategy among European firms Prominent strategy among European firms

due to broad variety of cultures and markets due to broad variety of cultures and markets in Europein Europe

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International Corporate-Level International Corporate-Level Strategy: Strategy: Global StrategyGlobal Strategy

GlobalGlobalstrategystrategy

• Products are standardized across national Products are standardized across national marketsmarkets

• Decisions regarding business-level strategies Decisions regarding business-level strategies are centralized in the home officeare centralized in the home office

• Strategic business units (SBU) are assumed to Strategic business units (SBU) are assumed to be interdependentbe interdependent

• Emphasizes economies of scaleEmphasizes economies of scale• Often lacks responsiveness to local marketsOften lacks responsiveness to local markets• Requires resource sharing and coordination Requires resource sharing and coordination

across borders (which also makes it difficult across borders (which also makes it difficult to manage)to manage)

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TransnationalTransnationalstrategystrategy

International Corporate-Level International Corporate-Level Strategy: Strategy: Transnational StrategyTransnational Strategy

• Seeks to achieve both global efficiency and Seeks to achieve both global efficiency and local responsivenesslocal responsiveness

• Difficult to achieve because of simultaneous Difficult to achieve because of simultaneous requirementsrequirements strong central control and coordination to strong central control and coordination to

achieve efficiency achieve efficiency decentralization to achieve local market decentralization to achieve local market

responsivenessresponsiveness• Must pursue organizational learning to Must pursue organizational learning to

achieve competitive advantageachieve competitive advantage

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Type of EntryType of Entry CharacteristicsCharacteristicsExportingExporting High cost, low controlHigh cost, low controlLicensingLicensing Low cost, low risk, little control, low Low cost, low risk, little control, low

returnsreturnsStrategic alliancesStrategic alliances Shared costs, shared resources, shared Shared costs, shared resources, shared

risks, problems of integrationrisks, problems of integrationAcquisitionAcquisition Quick access to new market, high cost, Quick access to new market, high cost,

complex negotiations, problems of complex negotiations, problems of merging with domestic operationsmerging with domestic operations

New wholly owned New wholly owned subsidiarysubsidiary

Complex, often costly, time consuming, Complex, often costly, time consuming, high risk, maximum control, potential high risk, maximum control, potential above-average returnsabove-average returns

Global Market Entry: Choice of Global Market Entry: Choice of Entry ModeEntry Mode

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Strategic Competitiveness Strategic Competitiveness Outcomes: Outcomes: ReturnsReturns International diversification and returnsInternational diversification and returns::

firm expands the sales of its goods or services firm expands the sales of its goods or services across the borders of global regions and countries across the borders of global regions and countries into different geographic locations or marketsinto different geographic locations or markets– may increase a firm’s returnsmay increase a firm’s returns– such firms usually achieve the most positive such firms usually achieve the most positive

stock returnsstock returns– firm may achieve economies of scale and firm may achieve economies of scale and

experience, location advantages, increased experience, location advantages, increased market size and opportunity to stabilize returnsmarket size and opportunity to stabilize returns

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Strategic Competitiveness Strategic Competitiveness Outcomes: Outcomes: InnovationInnovation International diversification and innovationInternational diversification and innovation::

firm expands the sales of its goods or services firm expands the sales of its goods or services across the borders of global regions and countries across the borders of global regions and countries into different geographic locations or marketsinto different geographic locations or markets– potentially greater returns on innovations (larger potentially greater returns on innovations (larger

markets)markets)– generate additional resources for investment in generate additional resources for investment in

innovationinnovation– exposed to new products and processes in exposed to new products and processes in

international markets, generates additional international markets, generates additional knowledge leading to innovationsknowledge leading to innovations

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Risks in an International Risks in an International EnvironmentEnvironment

Political RisksPolitical Risks Economic RisksEconomic Risks

Political risks includePolitical risks include• instability in national governmentsinstability in national governments• war, both civil and internationalwar, both civil and international• potential nationalization of a firm’s resourcespotential nationalization of a firm’s resources

Political RisksPolitical Risks

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Risks in an International Risks in an International EnvironmentEnvironment

Economic RisksEconomic Risks

Economic risks are interdependent with political Economic risks are interdependent with political risks and includerisks and include

• differences and fluctuations in the value of different differences and fluctuations in the value of different currenciescurrencies

• differences in prevailing wage ratesdifferences in prevailing wage rates• difficulties in enforcing property rightsdifficulties in enforcing property rights• unemploymentunemployment

Political RisksPolitical Risks

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Limits to International Expansion: Limits to International Expansion: Management ProblemsManagement Problems Cost of coordination across diverse Cost of coordination across diverse

geographical business unitsgeographical business units Institutional and cultural barriersInstitutional and cultural barriers Understanding strategic intent of Understanding strategic intent of

competitorscompetitors The overall complexity of competitionThe overall complexity of competition


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Cooperative StrategyCooperative Strategy Cooperative strategy is a strategy in which Cooperative strategy is a strategy in which

firmsfirms– work togetherwork together– to achieve a shared objectiveto achieve a shared objective

Cooperating with other firms is a strategy Cooperating with other firms is a strategy thatthat– creates value for a customercreates value for a customer– exceeds the cost of constructing customer exceeds the cost of constructing customer

value in other waysvalue in other ways– establishes a favorable position relative to establishes a favorable position relative to

competitioncompetition

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Strategic AllianceStrategic Alliance A strategic alliance is a cooperative A strategic alliance is a cooperative

strategy in whichstrategy in which– firms combine some of their resources and firms combine some of their resources and

capabilitiescapabilities– to create a competitive advantageto create a competitive advantage

A strategic alliance involvesA strategic alliance involves– exchange and sharing of resources and exchange and sharing of resources and

capabilitiescapabilities– co-development or distribution of goods or co-development or distribution of goods or

servicesservices

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CombinedCombinedResourcesResources

CapabilitiesCapabilitiesCore CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities


ResourcesResourcesCapabilitiesCapabilities


Strategic AllianceStrategic Alliance

Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services

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Types of Cooperative StrategiesTypes of Cooperative Strategies Joint venture: two or more firms create an Joint venture: two or more firms create an

independent company by combining parts of independent company by combining parts of their assetstheir assets

Equity strategic alliance: partners who own Equity strategic alliance: partners who own different percentages of equity in a new different percentages of equity in a new ventureventure

Nonequity strategic alliances: contractual Nonequity strategic alliances: contractual agreements given to a company to supply, agreements given to a company to supply, produce, or distribute a firm’s goods or produce, or distribute a firm’s goods or services without equity sharingservices without equity sharing

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MarketMarket ReasonReason

Slow CycleSlow Cycle • Gain access to a restricted marketGain access to a restricted market• Establish a franchise in a new marketEstablish a franchise in a new market• Maintain market stability (e.g., Maintain market stability (e.g.,

establishing standards)establishing standards)

Reasons for Strategic Alliances Reasons for Strategic Alliances by Market Typeby Market Type

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MarketMarket ReasonReason

Fast CycleFast Cycle • Speed up development of new goods or Speed up development of new goods or serviceservice

• Speed up new market entrySpeed up new market entry• Maintain market leadershipMaintain market leadership• Form an industry technology standardForm an industry technology standard• Share risky R&D expensesShare risky R&D expenses• Overcome uncertaintyOvercome uncertainty


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MarketMarket ReasonReasonStandard CycleStandard Cycle • Gain market power (reduce industry Gain market power (reduce industry

overcapacity)overcapacity)• Gain access to complementary resourcesGain access to complementary resources• Establish economies of scaleEstablish economies of scale• Overcome trade barriersOvercome trade barriers• Meet competitive challenges from other Meet competitive challenges from other

competitorscompetitors• Pool resources for very large capital Pool resources for very large capital

projectsprojects• Learn new business techniquesLearn new business techniques


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Business-Level Cooperative Business-Level Cooperative Strategies:Strategies:ComplementaryComplementary

AlliancesAlliances• complementary strategic alliances complementary strategic alliances

are designed to take advantage of are designed to take advantage of market opportunities by combining market opportunities by combining partner firms’ assets in partner firms’ assets in complementary ways to create new complementary ways to create new valuevalue– these include distribution, supplier these include distribution, supplier

or outsourcing alliances where or outsourcing alliances where firms rely on upstream or firms rely on upstream or downstream partners to build downstream partners to build competitive advantagecompetitive advantage

Complementary Strategic AlliancesComplementary Strategic Alliances

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Business-Level Cooperative Business-Level Cooperative Strategies:Strategies:

Margin Margin

Primary Activities

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Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

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Primary Activities

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Marketing & Sales

Outbound Logistics

Operations


Infra

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SupplierSupplier

• vertical complementary vertical complementary strategic alliance is formed strategic alliance is formed between firms that agree to between firms that agree to use their skills and use their skills and capabilities in different stages capabilities in different stages of the value chain to create of the value chain to create value for both firmsvalue for both firms

• outsourcing is one example outsourcing is one example of this type of allianceof this type of alliance

BuyerBuyerComplementary Strategic AlliancesComplementary Strategic Alliances

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Marketing & Sales

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Primary Activities

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Horizontal AllianceHorizontal AllianceBuyerBuyerPotential CompetitorsPotential Competitors

• horizontal complementary strategic alliance is formed horizontal complementary strategic alliance is formed between partners who agree to combine their resources and between partners who agree to combine their resources and skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain

• focus on long-term product development and distribution opportunities

• the partners may become competitorsthe partners may become competitors• requires a great deal of trust between the partnersrequires a great deal of trust between the partners

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• competition response strategic competition response strategic alliances occur when firms join alliances occur when firms join forces to respond to a strategic forces to respond to a strategic action of another competitoraction of another competitor

• because they can be difficult to because they can be difficult to reverse and expensive to operate, reverse and expensive to operate, competition response strategic competition response strategic alliances are primarily formed to alliances are primarily formed to respond to strategic rather than respond to strategic rather than tactical actionstactical actions

Competition Response AlliancesCompetition Response Alliances

CompetitionCompetitionResponse AlliancesResponse Alliances

ComplementaryComplementaryAlliancesAlliances

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• uncertainty reducing strategic uncertainty reducing strategic alliances are used to hedge against alliances are used to hedge against risk and uncertaintyrisk and uncertainty

• these alliances are most noticed in these alliances are most noticed in fast-cycle marketsfast-cycle markets

• alliance may be formed to reduce alliance may be formed to reduce the uncertainty associated with the uncertainty associated with developing new product or developing new product or technology standardstechnology standards

Uncertainty Reducing AlliancesUncertainty Reducing Alliances


UncertaintyUncertaintyReducing AlliancesReducing Alliances


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• competition reducing strategic competition reducing strategic alliances may be created to avoid alliances may be created to avoid destructive or excessive competitiondestructive or excessive competition

• explicit collusion exists when firms explicit collusion exists when firms directly negotiate production output directly negotiate production output and pricing agreements in order to and pricing agreements in order to reduce competition (illegal)reduce competition (illegal)

• tacit collusion exists when several tacit collusion exists when several firms in an industry indirectly firms in an industry indirectly coordinate their production and coordinate their production and pricing decisions by observing each pricing decisions by observing each other’s competitive actions and other’s competitive actions and responsesresponses

Competition Reducing AlliancesCompetition Reducing Alliances

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• mutual forbearance is a form of mutual forbearance is a form of tacit collusion in which firms avoid tacit collusion in which firms avoid competitive attacks against those competitive attacks against those rivals they meet in multiple marketsrivals they meet in multiple markets

• competition reducing strategic competition reducing strategic alliances may require governments alliances may require governments to find ways to permit collaboration to find ways to permit collaboration among rivals without violating among rivals without violating antitrust lawsantitrust laws

Competition Reducing AlliancesCompetition Reducing Alliances

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Corporate-Level Cooperative Corporate-Level Cooperative StrategiesStrategies• Corporate-level cooperative strategies are Corporate-level cooperative strategies are

designed to facilitate product and/or designed to facilitate product and/or market diversificationmarket diversification

- diversifying strategic alliancediversifying strategic alliancesynergistic strategic alliancesynergistic strategic alliance- franchisingfranchising

• Diversifying alliances and synergistic Diversifying alliances and synergistic alliances allow firms alliances allow firms

- to grow and diversify their operationsto grow and diversify their operations- through a means other than a merger or through a means other than a merger or

acquisitionacquisition

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Corporate-Level Cooperative Corporate-Level Cooperative Strategies:Strategies:

DiversifyingDiversifyingAlliancesAlliances

• diversifying strategic alliance diversifying strategic alliance allows a firm to expand into new allows a firm to expand into new product or market areas without product or market areas without completing a merger or an completing a merger or an acquisitionacquisition

• provides some of the potential provides some of the potential synergistic benefits of a merger or synergistic benefits of a merger or acquisition, but with less risk and acquisition, but with less risk and greater levels of flexibilitygreater levels of flexibility

• permits a “test” of whether a future permits a “test” of whether a future merger between the partners would merger between the partners would benefit both partiesbenefit both parties

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• synergistic strategic alliances create synergistic strategic alliances create joint economies of scope between joint economies of scope between two or more firmstwo or more firms

• create synergy across multiple create synergy across multiple functions or multiple businesses functions or multiple businesses between partner firmsbetween partner firms

SynergisticSynergisticAlliancesAlliances

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• franchising spreads risks and uses franchising spreads risks and uses resources, capabilities, and resources, capabilities, and competencies without merging or competencies without merging or acquiring another companyacquiring another company

• contractual relationship concerning contractual relationship concerning the franchise that is developed the franchise that is developed between two parties, the franchisee between two parties, the franchisee and the franchisorand the franchisor

• an alternative to pursuing growth an alternative to pursuing growth through mergers and acquisitionsthrough mergers and acquisitions

FranchisingFranchising

FranchisingFranchising


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International Cooperative International Cooperative StrategiesStrategies Cross-border strategic allianceCross-border strategic alliance

– an international cooperative strategy in which an international cooperative strategy in which firms with headquarters in different nations firms with headquarters in different nations combine some of their resources and combine some of their resources and capabilities to create a competitive advantagecapabilities to create a competitive advantage

– a firm may form cross-border strategic a firm may form cross-border strategic alliances to leverage core competencies that alliances to leverage core competencies that are the foundation of its domestic success to are the foundation of its domestic success to expand into international marketsexpand into international markets

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International Cooperative International Cooperative StrategiesStrategies Allows risk sharing by reducing financial Allows risk sharing by reducing financial

investmentinvestment Host partner knows local market and Host partner knows local market and

customscustoms International alliances can be difficult to International alliances can be difficult to

manage due to differences in management manage due to differences in management styles, cultures or regulatory constraintsstyles, cultures or regulatory constraints

Must gauge partner’s strategic intent so Must gauge partner’s strategic intent so they do not gain access to important they do not gain access to important technology and become a competitortechnology and become a competitor

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Network Cooperative StrategiesNetwork Cooperative Strategies A network strategy is a cooperative A network strategy is a cooperative

strategy wherein several firms agree to strategy wherein several firms agree to form multiple partnerships to achieve form multiple partnerships to achieve shared objectivesshared objectives– stable alliance networkstable alliance network– dynamic alliance networkdynamic alliance network

Effective social relationships and Effective social relationships and interactions among partners are keys to a interactions among partners are keys to a successful network cooperative strategysuccessful network cooperative strategy

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Network Cooperative Strategies:Network Cooperative Strategies:

Stable AllianceStable AllianceNetworkNetwork

• long term relationships that often long term relationships that often appear in mature industries where appear in mature industries where demand is relatively constant and demand is relatively constant and predictablepredictable

• stable networks are built for stable networks are built for exploitationexploitation of the economies of the economies available between firmsavailable between firms

Stable Alliance NetworkStable Alliance Network

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Network Cooperative Strategies:Network Cooperative Strategies:

Dynamic AllianceDynamic AllianceNetworkNetwork

• arrangements that evolve in arrangements that evolve in industries with rapid technological industries with rapid technological change leading to short product life change leading to short product life cyclescycles

• primarily used to stimulate rapid, primarily used to stimulate rapid, value-creating product innovations value-creating product innovations and subsequent successful market and subsequent successful market entriesentries

• purpose is often purpose is often explorationexploration of new of new ideasideas

Dynamic Alliance NetworkDynamic Alliance Network

Stable AllianceStable AllianceNetworkNetwork

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Competitive Risks with Competitive Risks with Cooperative StrategiesCooperative Strategies

CompetitiveCompetitiveRisksRisks

• Partner may act opportunistically Partner may act opportunistically • Misrepresentation of competencies brought to the Misrepresentation of competencies brought to the

partnershippartnership• Partner fails to make committed resources and Partner fails to make committed resources and

capabilities available to its partnerscapabilities available to its partners• Firm may make investments that are specific to the Firm may make investments that are specific to the

alliance while its partner does notalliance while its partner does not

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Risk and Asset Risk and Asset ManagementManagementApproachesApproaches


• Manage the balance between learning from partners while Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages protecting knowledge and sources of competitive advantages from from excessiveexcessive learning by partners learning by partners

• Assign managerial responsibility for a firm’s cooperative Assign managerial responsibility for a firm’s cooperative strategies to a high-level executive or teamstrategies to a high-level executive or team

• Specify resources and capabilities that will be shared and those Specify resources and capabilities that will be shared and those that will not be sharedthat will not be shared (detailed contracts and monitoring) (detailed contracts and monitoring)

• Develop trusting relationshipsDevelop trusting relationships

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Approaches for Managing Approaches for Managing Cooperative StrategiesCooperative Strategies cost minimizationcost minimization

– formal contracts specify how the cooperative formal contracts specify how the cooperative strategy is to be monitored and how partner strategy is to be monitored and how partner behavior is to be controlledbehavior is to be controlled

opportunity maximizationopportunity maximization– maximize partnership’s value-creation maximize partnership’s value-creation

opportunitiesopportunities– partners take advantage of unexpected partners take advantage of unexpected

opportunities to learn from each other and to opportunities to learn from each other and to explore additional marketplace possibilitiesexplore additional marketplace possibilities

– fewer formal, limiting, contractsfewer formal, limiting, contracts

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Risk and Asset Risk and Asset ManagementManagementApproachesApproaches


DesiredDesiredOutcomeOutcome

• Creating valueCreating value• Above-average Above-average

returnsreturns


Corporate GovernanceCorporate Governance


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Corporate GovernanceCorporate Governance Corporate governance is

– a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations

– concerned with identifying ways to ensure that strategic decisions are made effectively

– used in corporations to establish order between the firm’s owners and its top-level managers

281

Corporate Governance Corporate Governance MechanismsMechanisms

Ownership concentrationOwnership concentration– relative amounts of stock owned relative amounts of stock owned

by individual shareholders and by individual shareholders and institutional investorsinstitutional investors

Board of DirectorsBoard of Directors– individuals responsible for individuals responsible for

representing the firm’s owners by representing the firm’s owners by monitoring top-level managers’ monitoring top-level managers’ strategic decisionsstrategic decisions

Internal Governance MechanismsInternal Governance Mechanisms

282


Executive CompensationExecutive Compensation– use of salary, bonuses, and long-use of salary, bonuses, and long-

term incentives to align managers’ term incentives to align managers’ interests with shareholders’ interests with shareholders’ interestsinterests

Monitoring by top-level managersMonitoring by top-level managers– they may obtain Board seats (not they may obtain Board seats (not

in financial institutions)in financial institutions)– they may elect Board they may elect Board

representativesrepresentatives

Internal Governance MechanismsInternal Governance Mechanisms

283


Market for Corporate ControlMarket for Corporate Control– the purchase of a firm that is the purchase of a firm that is

underperforming relative to underperforming relative to industry rivals in order to industry rivals in order to improve its strategic improve its strategic competitivenesscompetitiveness

External Governance MechanismsExternal Governance Mechanisms

284

Separation of Ownership and Separation of Ownership and Managerial ControlManagerial Control Basis of the modern corporationBasis of the modern corporation

– shareholders purchase stock, becoming shareholders purchase stock, becoming residual claimantsresidual claimants

– shareholders reduce risk by holding shareholders reduce risk by holding diversified portfoliosdiversified portfolios

– professional managers are contracted to professional managers are contracted to provide decision-makingprovide decision-making

Modern public corporation form leads to Modern public corporation form leads to efficient specialization of tasksefficient specialization of tasks– risk bearing by shareholdersrisk bearing by shareholders– strategy development and decision-making by strategy development and decision-making by

managersmanagers

285

• Firm ownersFirm owners

Agency Relationship: Agency Relationship: Owners and Owners and ManagersManagers

ShareholdersShareholders(Principals)(Principals)

286

• Decision makersDecision makers


ManagersManagers(Agents)(Agents)



287

• Risk bearing specialist (principal) Risk bearing specialist (principal) pays compensation topays compensation to

• A managerial decision-making A managerial decision-making specialist (agent)specialist (agent)


An AgencyAn AgencyRelationshipsRelationships

ManagersManagers(Agents)(Agents)


• Decision makersDecision makers


288

Agency Theory ProblemAgency Theory Problem The agency problem occurs when:The agency problem occurs when:

– the desires or goals of the principal and agent the desires or goals of the principal and agent conflict and it is difficult or expensive for the conflict and it is difficult or expensive for the principal to verify that the agent has behaved principal to verify that the agent has behaved appropriatelyappropriately

Solution:Solution:– principals engage in incentive-based principals engage in incentive-based

performance contractsperformance contracts– monitoring mechanisms such as the board of monitoring mechanisms such as the board of

directorsdirectors– enforcement mechanisms such as the managerial enforcement mechanisms such as the managerial

labor market to mitigate the agency problemlabor market to mitigate the agency problem

289

Manager and Shareholder Risk Manager and Shareholder Risk and Diversificationand Diversification

Ris

kR

isk

DiversificationDiversification

DominantDominantBusinessBusiness

UnrelatedUnrelatedBusinessesBusinesses

RelatedRelatedConstrainedConstrained

RelatedRelatedLinkedLinked

ManagerialManagerial(employment) (employment)

risk profilerisk profile

BB

Shareholder Shareholder (business) (business) risk profilerisk profileSS

AA

MM

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Agency Theory ConflictsAgency Theory Conflicts Principals may engage in monitoring behavior to Principals may engage in monitoring behavior to

assess the activities and decisions of managersassess the activities and decisions of managersHowever, dispersed shareholding makes it However, dispersed shareholding makes it difficult and inefficient to monitor management’s difficult and inefficient to monitor management’s behaviorbehavior

Boards of Directors have a fiduciary duty to Boards of Directors have a fiduciary duty to shareholders to monitor managementshareholders to monitor managementHowever, Boards of Directors are often accused However, Boards of Directors are often accused of being lax in performing this functionof being lax in performing this function

291

Governance MechanismsGovernance MechanismsOwnershipOwnership

ConcentrationConcentration• Large block shareholders have a Large block shareholders have a

strong incentive to monitor strong incentive to monitor management closelymanagement closely

• Their large stakes make it worth Their large stakes make it worth their while to spend time, effort and their while to spend time, effort and expense to monitor closelyexpense to monitor closely

• They may also obtain Board seats They may also obtain Board seats which enhances their ability to which enhances their ability to monitor effectively (although monitor effectively (although financial institutions are legally financial institutions are legally forbidden from directly holding forbidden from directly holding board seats)board seats)

292


ConcentrationConcentration

Boards ofBoards ofDirectorsDirectors

InsidersInsiders• The firm’s CEO and other top-level The firm’s CEO and other top-level

managersmanagersRelated OutsidersRelated Outsiders• Individuals not involved with day-Individuals not involved with day-

to-day operations, but who have a to-day operations, but who have a relationship with the companyrelationship with the company

OutsidersOutsiders• Individuals who are independent of Individuals who are independent of

the firm’s day-to-day operations the firm’s day-to-day operations and other relationshipsand other relationships

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Recommendations for more effective Recommendations for more effective Board Governance:Board Governance:

• Increase diversity of board Increase diversity of board members’ backgroundsmembers’ backgrounds

• Strengthen internal management Strengthen internal management and accounting control systemsand accounting control systems

• Establish formal processes for Establish formal processes for evaluation of the board’s evaluation of the board’s performanceperformance

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ExecutiveExecutiveCompensationCompensation

• Salary, bonuses, long term incentive Salary, bonuses, long term incentive compensationcompensation

• Executive decisions are complex and Executive decisions are complex and non-routinenon-routine

• Many factors intervene making it Many factors intervene making it difficult to establish how managerial difficult to establish how managerial decisions are directly responsible for decisions are directly responsible for outcomesoutcomes

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• Stock ownership (long-term Stock ownership (long-term incentive compensation) makes incentive compensation) makes managers more susceptible to managers more susceptible to market changes which are partially market changes which are partially beyond their controlbeyond their control

• Incentive systems do not guarantee Incentive systems do not guarantee that managers make the “right” that managers make the “right” decisions, but do increase the decisions, but do increase the likelihood that managers will do the likelihood that managers will do the things for which they are rewardedthings for which they are rewarded

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Market forMarket forCorporate ControlCorporate Control

• Firms face the risk of takeover Firms face the risk of takeover when they are operated inefficientlywhen they are operated inefficiently

• Many firms begin to operate more Many firms begin to operate more efficiently as a result of the “threat” efficiently as a result of the “threat” of takeover, even though the actual of takeover, even though the actual incidence of hostile takeovers is incidence of hostile takeovers is relatively smallrelatively small

• Changes in regulations have made Changes in regulations have made hostile takeovers difficulthostile takeovers difficult

• Acts as an important source of Acts as an important source of discipline over managerial discipline over managerial incompetence and wasteincompetence and waste

297

International Corporate International Corporate Governance:Governance: Owner and manager are often the same in Owner and manager are often the same in

private firmsprivate firms Public firms often have a dominant Public firms often have a dominant

shareholder, frequently a bankshareholder, frequently a bank Frequently there is less emphasis on Frequently there is less emphasis on

shareholder value than in U.S. firms, shareholder value than in U.S. firms, although this may be changingalthough this may be changing

GermanyGermany

298

International Corporate International Corporate Governance:Governance: Medium to large firms have a two-tiered Medium to large firms have a two-tiered

boardboard– vorstand monitors and controls managerial vorstand monitors and controls managerial

decisionsdecisions– aufsichtsrat selects the Vorstandaufsichtsrat selects the Vorstand– employees, union members and shareholders employees, union members and shareholders

appoint members to the Aufsichtsratappoint members to the Aufsichtsrat

GermanyGermany

299

International Corporate International Corporate Governance:Governance: Obligation, “family” and consensus are Obligation, “family” and consensus are

important factorsimportant factors Banks (especially “main bank”) are highly Banks (especially “main bank”) are highly

influential with firm’s managersinfluential with firm’s managers Keiretsus are strongly interrelated groups Keiretsus are strongly interrelated groups

of firms tied together by cross-of firms tied together by cross-shareholdingsshareholdings

JapanJapan

300

International Corporate International Corporate Governance:Governance: Other characteristics:Other characteristics:

– powerful government interventionpowerful government intervention– close relationships between firms and close relationships between firms and

government sectorsgovernment sectors– passive and stable shareholders who exert passive and stable shareholders who exert

little controllittle control– virtual absence of external market for virtual absence of external market for

corporate controlcorporate control

JapanJapan

301

Corporate Governance and Corporate Governance and Ethical BehaviorEthical Behavior

• In the U.S., shareholders (in the capital In the U.S., shareholders (in the capital market stakeholder group) are viewed as market stakeholder group) are viewed as the most important stakeholder groupthe most important stakeholder group

• which are served by the board of which are served by the board of directorsdirectors

• Hence, the focus of governance Hence, the focus of governance mechanisms is on the control of mechanisms is on the control of managerial decisions to ensure that managerial decisions to ensure that shareholders’ interests will be servedshareholders’ interests will be served

It is important to serve the interests It is important to serve the interests of the firm’s multiple stakeholder of the firm’s multiple stakeholder groups!groups!

Capital MarketCapital MarketStakeholdersStakeholders

302



• Product market stakeholders (customers, Product market stakeholders (customers, suppliers and host communities) and suppliers and host communities) and organizational stakeholders (managerial organizational stakeholders (managerial and non-managerial employees) are also and non-managerial employees) are also important stakeholder groupsimportant stakeholder groupsProduct MarketProduct Market



303



• Although the idea is subject to debate, Although the idea is subject to debate, some believe that ethically responsible some believe that ethically responsible companies design and use governance companies design and use governance mechanisms that serve all stakeholders’ mechanisms that serve all stakeholders’ interestsinterests

• Importance of maintaining ethical Importance of maintaining ethical behavior through governance behavior through governance mechanisms is seen in the example of mechanisms is seen in the example of Enron and Arthur AndersenEnron and Arthur Andersen

Product MarketProduct MarketStakeholdersStakeholders

OrganizationalOrganizationalStakeholdersStakeholders



Organizational Structure and Organizational Structure and ControlsControls


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ControlsControls





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Organizational StructureOrganizational Structure Organizational structure specifies the Organizational structure specifies the

firm’s formal reporting relationships, firm’s formal reporting relationships, procedures, controls, and authority and procedures, controls, and authority and decision-making processesdecision-making processes

It is critical to match organizational It is critical to match organizational structure to the firm’s strategystructure to the firm’s strategy

307

Stability and Flexibility in Stability and Flexibility in StructureStructure Structural stability provides the capacityStructural stability provides the capacity

– required to consistently and predictably required to consistently and predictably manage the firm’s daily work routinesmanage the firm’s daily work routines

Structural flexibility provides the Structural flexibility provides the opportunity toopportunity to– explore competitive possibilitiesexplore competitive possibilities– allocate resources to activities that shape allocate resources to activities that shape

competitive advantages needed by the firmcompetitive advantages needed by the firm

308

Organizational ControlsOrganizational Controls

Organizational controlsOrganizational controls– guide the use of strategyguide the use of strategy– indicate how to compare actual results with indicate how to compare actual results with

expected resultsexpected results– suggest corrective actions to take when the suggest corrective actions to take when the

difference between actual and expected results difference between actual and expected results is unacceptableis unacceptable

Two types of organizational controlsTwo types of organizational controls– strategic controlsstrategic controls– financial controlsfinancial controls

309

Organizational Controls: Organizational Controls:

Concerned with examining the Concerned with examining the fit betweenfit between– what the firm what the firm might domight do (as (as

suggested by opportunities in its suggested by opportunities in its external environment)external environment)

– what it what it can docan do (as indicated by (as indicated by its competitive advantages)its competitive advantages)

Used to evaluate the degree to Used to evaluate the degree to which the firm focuses on the which the firm focuses on the requirements to implement its requirements to implement its strategiesstrategies

Strategic ControlsStrategic Controls


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Financial ControlsFinancial Controls

Organizational Controls: Organizational Controls:

Objective criteriaObjective criteria Accounting-based measures Accounting-based measures

includeinclude– return on investment return on investment – return on assetsreturn on assets

Market-based measures Market-based measures includeinclude– economic value addedeconomic value added


Financial ControlsFinancial Controls

311

Matching Control to StrategyMatching Control to Strategy Relative use of controls varies by type of Relative use of controls varies by type of

strategystrategy– large diversified firms using the cost large diversified firms using the cost

leadership strategy emphasize financial leadership strategy emphasize financial controls controls

– companies and business units using the companies and business units using the differentiation strategy emphasize strategic differentiation strategy emphasize strategic controlscontrols

312

Evolutionary Patterns of Strategy Evolutionary Patterns of Strategy and Organizational Structureand Organizational Structure Firms grow in predictable patternsFirms grow in predictable patterns

– by volumeby volume– by geographyby geography– integration (vertical, horizontal)integration (vertical, horizontal)– through product/business diversificationthrough product/business diversification

A firm’s growth patterns determine its A firm’s growth patterns determine its structural formstructural form

313

Evolutionary Patterns of Strategy Evolutionary Patterns of Strategy and Organizational Structureand Organizational Structure All organizations require some form of All organizations require some form of

organizational structure to implement and organizational structure to implement and manage their strategiesmanage their strategies

Firms frequently alter their structure as Firms frequently alter their structure as they grow in size and complexitythey grow in size and complexity

Three basic structure types:Three basic structure types:– simple structuresimple structure– functional structurefunctional structure– multi-divisional structure (M-form)multi-divisional structure (M-form)

314

Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern:

SimpleSimpleStructureStructure

Simple StructureSimple Structure

315

Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Organizational form in which the owner-Organizational form in which the owner-

managermanager– makes all major decisions directlymakes all major decisions directly– monitors all activitiesmonitors all activities

StaffStaff– serves as an extension of the manager’s supervisory serves as an extension of the manager’s supervisory

authorityauthority Matched with focus strategies and business-Matched with focus strategies and business-

level strategieslevel strategies– commonly compete by offering a single product line commonly compete by offering a single product line

in a single geographic marketin a single geographic market


316

Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Growth createsGrowth creates

– complexitycomplexity– managerial and structural challengesmanagerial and structural challenges

Owner-managersOwner-managers– commonly lack organizational skills and commonly lack organizational skills and

experienceexperience– become ineffective in managing the become ineffective in managing the

specialized and complex tasks involved with specialized and complex tasks involved with multiple organizational functionsmultiple organizational functions


317



FunctionalFunctionalStructureStructure

Sales Growth-Sales Growth-Coordination andCoordination andControl ProblemsControl Problems

Efficient implementation Efficient implementation of formulated strategyof formulated strategy

Functional StructureFunctional Structure

318

Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Chief Executive Officer (CEO)Chief Executive Officer (CEO)

– limited corporate stafflimited corporate staff Functional line managers in dominant Functional line managers in dominant

organizational areasorganizational areas– productionproduction – accounting– accounting– marketingmarketing – R&D– R&D– engineeringengineering – human resources– human resources

Supports use of business-level strategies and Supports use of business-level strategies and some corporate-level strategiessome corporate-level strategies– single or dominant business with low levels of single or dominant business with low levels of

diversificationdiversification


319

Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Differences in orientation among Differences in orientation among

organizational functions canorganizational functions can– impede communication and coordinationimpede communication and coordination– increase the need for CEO to integrate increase the need for CEO to integrate

decisions and actions of business functionsdecisions and actions of business functions– facilitate career paths and professional facilitate career paths and professional

development in specialized functional areasdevelopment in specialized functional areas– cause functional-area managers to focus on cause functional-area managers to focus on

local versus overall company strategic issueslocal versus overall company strategic issues


320

Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Strategic controlStrategic control

– operating divisionsoperating divisions– each division is separate business or profit each division is separate business or profit

centercenter Top corporate officer delegates Top corporate officer delegates

responsibilities to division managersresponsibilities to division managers– for day-to-day operationsfor day-to-day operations– for business-unit strategyfor business-unit strategy

Appropriate when the firm grows through Appropriate when the firm grows through diversificationdiversification

Multidivisional StructureMultidivisional Structure

321

Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Three major benefitsThree major benefits

– corporate officers able to more accurately corporate officers able to more accurately monitor the performance of each business, monitor the performance of each business, which simplifies the problem of controlwhich simplifies the problem of control

– facilitates comparisons between divisions, facilitates comparisons between divisions, which improves the resource allocation processwhich improves the resource allocation process

– stimulates managers of poorly performing stimulates managers of poorly performing divisions to look for ways of improving divisions to look for ways of improving performanceperformance


322



FunctionalFunctionalStructureStructure

MultidivisionalMultidivisionalStructureStructure



Efficient implementation Efficient implementation of formulated strategyof formulated strategy

Efficient Efficient implementation implementation of formulated of formulated strategystrategy


323

Matching Structure and StrategyMatching Structure and Strategy Different forms of the functional Different forms of the functional

organizational structure are matched toorganizational structure are matched to– cost leadership strategycost leadership strategy– differentiation strategydifferentiation strategy– integrated cost leadership/differentiation integrated cost leadership/differentiation

strategystrategy differences in these forms seen in three differences in these forms seen in three

important structural characteristicsimportant structural characteristics– specializationspecialization– centralizationcentralization– formalizationformalization

324

Structure for Cost Leadership Structure for Cost Leadership StrategyStrategy

Office of the PresidentOffice of the President

Centralized StaffCentralized Staff

MarketingMarketing PersonnelPersonnel

EngineeringEngineering OperationsOperations AccountingAccounting

• Operations is main functionOperations is main function• Process engineering is Process engineering is

emphasized over R&Demphasized over R&D• Large centralized staffLarge centralized staff• Formalized proceduresFormalized procedures• Structure is mechanical, job Structure is mechanical, job

roles highly structuredroles highly structured

325

OperationsOperations HumanHumanResourcesResources

Structure for Differentiation Structure for Differentiation StrategyStrategy

President andPresident andLimited StaffLimited Staff

MarketingMarketing

New ProductNew ProductR&DR&D

• Marketing is the main function for tracking new product ideasMarketing is the main function for tracking new product ideas• New product R&D is emphasizedNew product R&D is emphasized• Most functions are decentralizedMost functions are decentralized• Formalization is limited to foster change and promote new ideasFormalization is limited to foster change and promote new ideas• Overall structure is organic; job roles are less structuredOverall structure is organic; job roles are less structured

R&DR&D

FinanceFinanceMarketingMarketing

326

Multidivisional StructureMultidivisional Structure Each division is operated as a separate Each division is operated as a separate

businessbusiness Appropriate for related-diversified Appropriate for related-diversified

businessesbusinesses Key task of corporate managers is Key task of corporate managers is

exploiting synergies among divisionsexploiting synergies among divisions Managers use a combination of strategic Managers use a combination of strategic

controls and financial controlscontrols and financial controls

327

Multidivisional StructureMultidivisional Structure Managers try to strike a balance between:Managers try to strike a balance between:

– competing among divisions for scarce capital competing among divisions for scarce capital resourcesresources

– creating opportunities for cooperation to creating opportunities for cooperation to develop synergiesdevelop synergies

The goal is to maximize overall firm The goal is to maximize overall firm performanceperformance

The decision-making of managers in a The decision-making of managers in a multi-divisional structure may be:multi-divisional structure may be:– centralized or decentralizedcentralized or decentralized– bureaucratic or non-bureaucraticbureaucratic or non-bureaucratic

328

Multidivisional StructureMultidivisional Structure Balance on these dimensions may change Balance on these dimensions may change

over timeover time Structure will evolve over time with:Structure will evolve over time with:

– changes in strategychanges in strategy– degree of diversificationdegree of diversification– geographic scopegeographic scope– nature of competitionnature of competition

329

Three Variations of the Three Variations of the Multidivisional StructureMultidivisional Structure

MultidivisionalMultidivisionalStructureStructure(M-form)(M-form)

Strategic Business-UnitStrategic Business-Unit(SBU) Form(SBU) Form

CooperativeCooperativeFormForm

CompetitiveCompetitiveFormForm

330

Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Related-Constrained StrategyRelated-Constrained Strategy

GovernmentGovernmentAffairsAffairs

LegalLegalAffairsAffairs

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHumanHuman

ResourcesResources

CorporateCorporateMarketingMarketing

CorporateCorporateFinanceFinance

ProductProductDivisionDivision





PresidentPresidentHeadquarters OfficeHeadquarters Office

331

Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links

among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic

planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions

R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize

overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance

Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing

Related-Constrained StrategyRelated-Constrained Strategy

332

SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Related-Linked StrategyRelated-Linked Strategy

PresidentPresident

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHRMHRM

CorporateCorporateMarketingMarketing

CorporateCorporateFinanceFinance

Headquarters OfficeHeadquarters Office

DivisionDivision

DivisionDivisionDivisionDivision

SBUSBU SBUSBU SBUSBU

DivisionDivision


DivisionDivision


333

SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links

among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic

planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions

R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize

overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance

Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing

Related-Linked StrategyRelated-Linked Strategy

334

Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Unrelated Diversification StrategyUnrelated Diversification Strategy

PresidentPresident

LegalLegalAffairsAffairs FinanceFinance AuditingAuditing

Headquarters OfficeHeadquarters Office

DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision

335

Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Corporate headquarters has a small staffCorporate headquarters has a small staff Finance and auditing are the most prominent functions Finance and auditing are the most prominent functions

in the headquarters to manage cash flow and ensure the in the headquarters to manage cash flow and ensure the accuracy of performance data coming from divisionsaccuracy of performance data coming from divisions

The legal affairs function becomes important when the The legal affairs function becomes important when the firm acquires or divests assetsfirm acquires or divests assets

Divisions are independent and separate for financial Divisions are independent and separate for financial evaluation purposesevaluation purposes

Divisions retain strategic control, but cash is managed Divisions retain strategic control, but cash is managed by the corporate officeby the corporate office

Divisions compete for corporate resourcesDivisions compete for corporate resources

Unrelated Diversification StrategyUnrelated Diversification Strategy

336

Multidivisional Structure: Other Multidivisional Structure: Other PointsPoints Complex multi-divisional structure firms Complex multi-divisional structure firms

may be simultaneouslymay be simultaneously– centralized and decentralizedcentralized and decentralized– depending upon the various business-level depending upon the various business-level

strategies employed throughout the firm’s strategies employed throughout the firm’s individual businessesindividual businesses

Multi-divisional structure firms use a Multi-divisional structure firms use a combination of:combination of:– strategic controlsstrategic controls– financial controlsfinancial controls

337

Characteristics of Various Characteristics of Various Structural FormsStructural Forms

Structural Structural CharacteristicsCharacteristics

Cooperative Cooperative M-FormM-Form

SBUSBU M-FormM-Form

Competitive Competitive M-FormM-Form

Degree ofDegree ofCentralizationCentralization

Centralized atCentralized atCorporate Corporate

OfficeOffice

Partially Partially CentralizedCentralized

in SBUsin SBUs

DecentralizedDecentralizedto Divisionsto Divisions

Use ofUse ofIntegratingIntegrating

MechanismsMechanismsExtensiveExtensive ModerateModerate NonexistentNonexistent

Type ofType ofStrategyStrategy

Related-Related-ConstrainedConstrained

Related-Related-LinkedLinked

UnrelatedUnrelatedDiversificationDiversification

338

Characteristics of Various Characteristics of Various Structural FormsStructural Forms

DivisionalDivisionalIncentiveIncentive

CompensationCompensation

Linked toLinked toCorporateCorporate

PerformancePerformance

Linked toLinked toCorporateCorporate

SBU & Division SBU & Division PerformancePerformance

Linked toLinked toDivisionalDivisional

PerformancePerformance

DivisionalDivisionalPerformancePerformance

AppraisalAppraisal

SubjectiveSubjectiveStrategicStrategicCriteriaCriteria

Strategic &Strategic &FinancialFinancialCriteriaCriteria

Objective Objective FinancialFinancialCriteriaCriteria

Structural Structural CharacteristicsCharacteristics

Cooperative Cooperative M-FormM-Form

SBUSBU M-FormM-Form

Competitive Competitive M-FormM-Form

339

• product characteristics product characteristics tailored to local tailored to local preferencespreferences

• isolation from global isolation from global competitiioncompetitiion

– establish protected establish protected market positionsmarket positions–compete in industry compete in industry segments most segments most affected by affected by differences among differences among local countrieslocal countries

Worldwide Geographic Area Worldwide Geographic Area Structure:Structure:

MultinationalMultinationalHeadquartersHeadquarters EuropeEurope

UnitedUnitedStatesStates

MiddleMiddleEast/East/

AfricaAfrica

AsiaAsia

AustraliaAustralia

LatinLatinAmericaAmerica

Multidomestic StrategyMultidomestic Strategy

340

• standardized products standardized products across countriesacross countries

• economies of scope economies of scope and scaleand scale

• outsource some outsource some primary or support primary or support activities to the activities to the world’s best providersworld’s best providers

• decision-making decision-making authority centralized authority centralized in worldwide division in worldwide division headquartersheadquarters

Worldwide Product Divisional Worldwide Product Divisional Structure:Structure:

GlobalGlobalCorporateCorporate

HeadquartersHeadquarters

WorldwideWorldwideProductsProductsDivisionDivision






Global StrategyGlobal Strategy

341

Using the Combination Structure:Using the Combination Structure:

The combination structure has The combination structure has characteristics and mechanisms that characteristics and mechanisms that result in an emphasis on both geographic result in an emphasis on both geographic and product structuresand product structures– local responsiveness (multidomestic strategy) local responsiveness (multidomestic strategy) – global efficiency (global strategy)global efficiency (global strategy)

Transnational StrategyTransnational Strategy

342

Strategic NetworkStrategic Network A strategic network is a grouping of A strategic network is a grouping of

organizations that has been formed to organizations that has been formed to create value through participation in an create value through participation in an array of cooperative arrangements, such array of cooperative arrangements, such as alliances and joint venturesas alliances and joint ventures

The strategic network seeks to develop a The strategic network seeks to develop a competitive advantage in primary or competitive advantage in primary or support activities support activities

A strategic center firm often manages the A strategic center firm often manages the networknetwork

343

Strategic NetworkStrategic Network strategic center firm engages in four strategic center firm engages in four

primary tasksprimary tasks– strategic outsourcing (outsources and strategic outsourcing (outsources and

partners with more firms than do other partners with more firms than do other network members)network members)

– competencies (supports each member’s competencies (supports each member’s efforts to develop core competencies that can efforts to develop core competencies that can benefit the network)benefit the network)

344

Strategic NetworkStrategic Network strategic center firm engages in four strategic center firm engages in four

primary tasksprimary tasks– technology (manages the development and technology (manages the development and

sharing of technology-based ideas among sharing of technology-based ideas among network members)network members)

– race to learn (guides participants in efforts to race to learn (guides participants in efforts to form network-specific competitive advantages)form network-specific competitive advantages)

345

Strategic NetworkStrategic Network

StrategicStrategicCenterCenterFirmFirm

346

Distributed Strategic NetworkDistributed Strategic Network International cooperative strategies often International cooperative strategies often

require more complex networksrequire more complex networks Many large multinational firms form Many large multinational firms form

distributed strategic networks with distributed strategic networks with multiple regional strategic centers to multiple regional strategic centers to manage their array of cooperative manage their array of cooperative arrangements with partner firmsarrangements with partner firms

Breaking large networks into multiple Breaking large networks into multiple manageably-sized networks helps to manageably-sized networks helps to manage the complexity of maintaining manage the complexity of maintaining many relationshipsmany relationships

347

StrategicStrategicCenterCenterFirmFirm

Distributed Strategic NetworkDistributed Strategic Network

= Distributed Strategic Center Firms= Distributed Strategic Center Firms

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Strategic LeadershipStrategic Leadership


Robert E. Hoskisson


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StrategyStrategy




StrategyStrategy


StrategyStrategy



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Strategic LeadershipStrategic Leadership Strategic leadership involves:Strategic leadership involves:

– the ability to anticipate, envision, maintain the ability to anticipate, envision, maintain flexibility and empower others to create flexibility and empower others to create strategic changestrategic change

– multi-functional work that involves working multi-functional work that involves working through othersthrough others

– consideration of the entire enterprise rather consideration of the entire enterprise rather than just a sub-unitthan just a sub-unit

– a managerial frame of referencea managerial frame of reference

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SuccessfulSuccessfulStrategic ActionsStrategic Actions

Strategic Leadership and the Strategic Leadership and the Strategic Management ProcessStrategic Management Process

Effective StrategicEffective StrategicLeadershipLeadership

Strategic IntentStrategic Intent Strategic MissionStrategic Mission

shapes the formulation ofshapes the formulation of

andandinfluenceinfluence

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Strategic Leadership and the Strategic Leadership and the Strategic Management ProcessStrategic Management Process

StrategicStrategicCompetitivenessCompetitiveness

Above-Average ReturnsAbove-Average Returns

FormulationFormulationof Strategiesof Strategies

ImplementationImplementationof Strategiesof Strategies

SuccessfulSuccessfulStrategic ActionsStrategic Actions

yieldsyields

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Factors Affecting Managerial Factors Affecting Managerial DiscretionDiscretion

External EnvironmentExternal Environment• Industry structureIndustry structure• Rate of market growthRate of market growth• Number and type of Number and type of

competitorscompetitors• Nature and degree of Nature and degree of

political/legal constraintspolitical/legal constraints• Degree to which products Degree to which products

can be differentiatedcan be differentiated

External EnvironmentExternal Environment

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Characteristics of theCharacteristics of theOrganizationOrganization

Characteristics of the Characteristics of the OrganizationOrganization• SizeSize• AgeAge• CultureCulture• Availability of resourcesAvailability of resources• Patterns of interaction Patterns of interaction

among employeesamong employees


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Characteristics of theCharacteristics of theOrganizationOrganization

Characteristics of theCharacteristics of theManagerManager

ManagerialManagerialDiscretionDiscretion

Characteristics of the Characteristics of the ManagerManager• Tolerance for ambiguityTolerance for ambiguity• Commitment to the firm Commitment to the firm

and its desired strategic and its desired strategic outcomesoutcomes

• Interpersonal skillsInterpersonal skills• Aspiration levelAspiration level• Degree of self-confidenceDegree of self-confidence

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Top Management TeamsTop Management Teams The top management team is composed of The top management team is composed of

key managers who are responsible forkey managers who are responsible for– formulating andformulating and– implementingimplementing– the organization’s strategiesthe organization’s strategies

A heterogeneous top management team A heterogeneous top management team with varied expertise and knowledge can with varied expertise and knowledge can draw on multiple perspectives when draw on multiple perspectives when evaluating alternative strategies and evaluating alternative strategies and building consensusbuilding consensus

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Top Management TeamsTop Management Teams A top management team must also be able A top management team must also be able

to function effectively as a team in order to to function effectively as a team in order to implement strategiesimplement strategies– a heterogeneous team makes this more difficulta heterogeneous team makes this more difficult– a heterogeneous team, however, is associated a heterogeneous team, however, is associated

positively with innovation and strategic changepositively with innovation and strategic change

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Strategic LeadershipStrategic Leadership Chief executive officers can gain so much Chief executive officers can gain so much

power that they are virtually independent power that they are virtually independent of oversight by the board of directorsof oversight by the board of directors

This is especially true when the CEO is This is especially true when the CEO is also chairman of the board of directorsalso chairman of the board of directors

CEOs of long tenure can also wield CEOs of long tenure can also wield substantial powersubstantial power

The most effective forms of governance The most effective forms of governance share power and influence among the CEO share power and influence among the CEO and board of directorsand board of directors

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Managerial Labor MarketsManagerial Labor Markets The internal labor market is comprised of The internal labor market is comprised of

the career path alternatives available to a the career path alternatives available to a firm’s managersfirm’s managers

Selecting internal candidates for Selecting internal candidates for management positions helps to build on management positions helps to build on valuable firm-specific knowledgevaluable firm-specific knowledge

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Managerial Labor MarketsManagerial Labor Markets The external labor market includes the The external labor market includes the

collection of career opportunities for collection of career opportunities for managers outside their firmmanagers outside their firm

Selecting an outsider often brings fresh Selecting an outsider often brings fresh insights and may energize the firm with insights and may energize the firm with innovative new ideasinnovative new ideas

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Managerial Labor MarketsManagerial Labor Markets

StrategicStrategicchangechange

StableStablestrategystrategy

Stable strategyStable strategywith innovationwith innovation

Managerial Labor Market:Managerial Labor Market:CEO SuccessionCEO Succession

Internal CEOInternal CEOsuccessionsuccession

External CEOExternal CEOsuccessionsuccession

Top ManagementTop ManagementTeam CompositionTeam Composition

HeterogeneousHeterogeneous

HomogeneousHomogeneous

Ambiguous:Ambiguous:possible change inpossible change intop managementtop managementteam and strategyteam and strategy

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Exercise of Effective Strategic Exercise of Effective Strategic LeadershipLeadership

EstablishingEstablishingbalancedbalancedorganizationalorganizationalcontrolscontrols

EmphasizingEmphasizingethicalethicalpracticepractice

DevelopingDevelopinghumanhumancapitalcapital

Exploiting andExploiting andmaintainingmaintainingcorecorecompetenciescompetencies

SustainingSustainingan effectivean effectiveorganizationalorganizationalcultureculture

DeterminingDeterminingstrategicstrategicdirectiondirection

Effective StrategicEffective StrategicLeadershipLeadership

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Determining Strategic DirectionDetermining Strategic Direction Strategic direction means the development Strategic direction means the development

of a long-term vision of a firm’s strategic of a long-term vision of a firm’s strategic intentintent

A charismatic leader can help achieve A charismatic leader can help achieve strategic intentstrategic intent

It is important not to lose sight of the It is important not to lose sight of the strengths of the organization when making strengths of the organization when making changes required by a new strategic changes required by a new strategic directiondirection

Executives must structure the firm Executives must structure the firm effectively to help achieve the visioneffectively to help achieve the vision

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Exploiting and Maintaining Core Exploiting and Maintaining Core CompetenciesCompetencies Core competencies are resources and Core competencies are resources and

capabilities that serve as a source of capabilities that serve as a source of competitive advantage for a firm over its competitive advantage for a firm over its rivalsrivals

Strategic leaders must verify that the Strategic leaders must verify that the firm’s competencies are emphasized in firm’s competencies are emphasized in strategy implementation effortsstrategy implementation efforts

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Exploiting and Maintaining Core Exploiting and Maintaining Core CompetenciesCompetencies In many large firms, and certainly in In many large firms, and certainly in

related-diversified ones, core related-diversified ones, core competencies are exploited effectively competencies are exploited effectively when they are developed and applied when they are developed and applied across different organizational unitsacross different organizational units

Core competencies cannot be developed Core competencies cannot be developed or exploited effectively without developing or exploited effectively without developing the capabilities of human capitalthe capabilities of human capital

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Developing Human CapitalDeveloping Human Capital Human capital refers to the knowledge and Human capital refers to the knowledge and

skills of the firm’s entire workforceskills of the firm’s entire workforce Employees are viewed as a capital resource Employees are viewed as a capital resource

that requires investmentthat requires investment No strategy can be effective unless the firm is No strategy can be effective unless the firm is

able to develop and retain good people to able to develop and retain good people to carry it outcarry it out

The effective development and management of The effective development and management of the firm’s human capital may be the primary the firm’s human capital may be the primary determinant of a firm’s ability to formulate and determinant of a firm’s ability to formulate and implement strategies successfullyimplement strategies successfully

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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational Culture An organizational culture consists of a An organizational culture consists of a

complex set of ideologies, symbols, and complex set of ideologies, symbols, and core values that is shared throughout the core values that is shared throughout the firm and influences the way it conducts firm and influences the way it conducts businessbusiness

Shaping the firm’s culture is a central task Shaping the firm’s culture is a central task of effective strategic leadershipof effective strategic leadership

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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational Culture An appropriate organizational culture An appropriate organizational culture

encourages the development of an encourages the development of an entrepreneurial orientation among entrepreneurial orientation among employees and an ability to change the employees and an ability to change the culture as necessaryculture as necessary

Reengineering can facilitate this processReengineering can facilitate this process

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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational CultureChanging Culture and Business Changing Culture and Business

ReengineeringReengineering The benefits of business reengineering The benefits of business reengineering

are maximized when employees believe are maximized when employees believe that:that:– every job in the company is essential and every job in the company is essential and

importantimportant– all employees must create value through their all employees must create value through their

workwork

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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational CultureChanging Culture and Business Changing Culture and Business ReengineeringReengineering Constant learning is a vital part of every Constant learning is a vital part of every

person’s jobperson’s job Teamwork is essential to successful Teamwork is essential to successful

implementationimplementation Problems are solved only when teams Problems are solved only when teams

accept the responsibility for the solutionaccept the responsibility for the solution

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Emphasizing Ethical PracticesEmphasizing Ethical Practices Ethical practices increase the Ethical practices increase the

effectiveness of strategy implementation effectiveness of strategy implementation processesprocesses

Ethical companies encourage and enable Ethical companies encourage and enable people at all organizational levels to people at all organizational levels to exercise ethical judgmentexercise ethical judgment

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Emphasizing Ethical PracticesEmphasizing Ethical Practices To properly influence employee judgment To properly influence employee judgment

and behavior, ethical practices must and behavior, ethical practices must shape the firm’s decision-making process shape the firm’s decision-making process and be an integral part of an and be an integral part of an organization’s cultureorganization’s culture

Leaders set the tone for creating an Leaders set the tone for creating an environment of mutual respect, honesty environment of mutual respect, honesty and ethical practices among employeesand ethical practices among employees

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Establishing Balanced Establishing Balanced Organizational ControlsOrganizational Controls Organizational controls provide the Organizational controls provide the

parameters within which strategies are to parameters within which strategies are to be implemented and corrective actions be implemented and corrective actions takentaken

Financial controls are often emphasized in Financial controls are often emphasized in large corporations and focus on short-large corporations and focus on short-term financial outcomesterm financial outcomes

Strategic control focuses on the content Strategic control focuses on the content of strategic actions, rather than their of strategic actions, rather than their outcomesoutcomes

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Establishing Balanced Establishing Balanced Organizational ControlsOrganizational Controls Successful strategic leaders balance Successful strategic leaders balance

strategic control and financial control strategic control and financial control (they do not eliminate financial control) (they do not eliminate financial control) with the intent of achieving more positive with the intent of achieving more positive long-term returnslong-term returns

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Strategic and Financial Controls in a Strategic and Financial Controls in a Balanced Scorecard FrameworkBalanced Scorecard FrameworkPerspectivesPerspectives CriteriaCriteria

FinancialFinancial • Cash flowCash flow• Return on equityReturn on equity• Return on assetsReturn on assets

CustomerCustomer • Assessment of ability to anticipate Assessment of ability to anticipate customers needscustomers needs

• Effectiveness of customer service Effectiveness of customer service practicespractices

• Percentage of repeat businessPercentage of repeat business• Quality of communications with Quality of communications with

customerscustomers

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Strategic and Financial Controls in a Strategic and Financial Controls in a Balanced Scorecard FrameworkBalanced Scorecard FrameworkPerspectivesPerspectives CriteriaCriteria

Internal Business Internal Business ProcessProcess

• Asset utilization improvementsAsset utilization improvements• Improvements in employee moraleImprovements in employee morale• Changes in turnover ratesChanges in turnover rates

Learning and Learning and GrowthGrowth

• Improvements in innovation abilityImprovements in innovation ability• Number of new products compared Number of new products compared

to competitorsto competitors• Increases in employees’ skillsIncreases in employees’ skills

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