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PROF. DR. LÜTFİHAK ALPKANPROF. DR. LÜTFİHAK ALPKAN
Gebze Yüksek Teknoloji Enstitüsü Gebze Yüksek Teknoloji Enstitüsü İşletme Fakültesiİşletme Fakültesi
PROF. DR. LÜTFİHAK ALPKANPROF. DR. LÜTFİHAK ALPKAN
Gebze Yüksek Teknoloji Enstitüsü Gebze Yüksek Teknoloji Enstitüsü İşletme Fakültesiİşletme Fakültesi
Strategic Strategic ManagementManagement
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT
Course OutlineCourse Outline
Part 1Part 1 Introduction to Competitive AnalysisIntroduction to Competitive AnalysisChapter 1 Planning & Measuring for Competitive Chapter 1 Planning & Measuring for Competitive AdvantageAdvantage
Part 2Part 2 SWOT AnalysisSWOT Analysis Chapter 2 External Analysis of Opportunities and Chapter 2 External Analysis of Opportunities and ThreatsThreatsChapter Chapter 33 Internal Analysis of Strenghts and Internal Analysis of Strenghts and WeaknessesWeaknesses
Part 3Part 3 Choice of StrategyChoice of StrategyChapter Chapter 44 Grand Strategies Grand Strategies Chapter Chapter 55 Strategic Business Unit (SBU) Level Strategic Business Unit (SBU) Level StrategiesStrategies
Part Part 44 Global CompetitionGlobal CompetitionChapter Chapter 66 National Sources of National Sources of GlobalGlobal Competitive Competitive PowerPower
1-3Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
WEEK DATE TEACHING PLAN
1 15. 09 INTRODUCTION
2 22. 09 Ch. 1: Planning & Measuring for Competitive Advantage
3 29. 09 Ch. 1: con’t. (Comparison of Competitiveness)
4 06.10 Ch. 2: External Analysis of Opportunities and Threats
5 13. 10 Ch. 2: con’t. (RBV & Value Chain Analysis)
6 20. 10 QUIZ 1
7 27. 10 Ch. 3: Internal Analysis of Strengths and Weaknesses
8 03. 11 MIDTERM EXAM 1
9 10. 12 Ch. 4: Grand Strategies (Growth Strategies)
10 24. 12 Ch. 4: con’t. (Cooperation & Downscoping Strategies)
11 01. 12 Ch. 5: Strategic Business Unit (SBU) Level Strategies
12 08. 12 QUIZ 2
13 15. 12 Ch. 6: National Sources of Global Competitive Power
14 22.12 MIDTERM EXAM 2
15 29.12 OVERVIEW
Planning & Measuring for Competitive
Advantage
Part 1Part 1 Introduction to Introduction to
CompetitiveCompetitive AnalysisAnalysis
Chapter 1Chapter 1
LEARNING OBJECTIVES
• STRATEGIC MANAGEMENT CONCEPTS
• LEVELS OF STRATEGY
• BENEFITS AND RISKS OF STRATEGIC MANAGEMENT
• STRATEGIC INTENTS
• STRATEGIC PERFORMANCE CRITERIA
Strategic Management
• Analysis • Strategic goals (vision, mission, strategic objectives)
• Internal and external environment of the firm
• Strategic decisions• What industries should we compete in?
• How should we compete in those industries?
• Actions• Allocate necessary resources
• Design the organization to bring intended strategies to reality
Strategic Management
• Strategic management is the study of why some firms outperform others
• How to compete in order to create competitive advantages in the marketplace
• How to create competitive advantages in the market place
Unique and valuable Difficult for competitors to copy or substitute
Strategic Management Concepts
Definition: Strategic management consists of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.
Key attributes of strategic management
• Directs the organization toward overall goals and objectives.
• Includes multiple stakeholders in decision making
• Needs to incorporate short-term and long-term perspectives
• Recognizes trade-offs between efficiency and effectiveness
Three levels of Strategy
Corporate Level Strategies
• by CEO and Board of Directors
• Horizon: long term
• Focus on domain selection:
What business sectors to enter/invest ?
How should the resources be allocated across the businesses ?
Functional
Business
Corporate
Business Level Strategies
• by Business Managers
• Horizon: Medium
• Focus on competitive tactics:
How to compete in this business sector?
What markets to concentrate on ?
Three levels of Strategy
Functional
Business
Corporate
Functional Level Strategies
• By functional managers, e.g. marketing manager
• Short Term
• Focus on functional efficiency Annual objectives & decisions within functional
areas Improving efficiency within functional areas
Three levels of Strategy
Functional
Business
Corporate
Benefits of strategic management
• Adaptability: Proactively monitor the environment
• Motivation: Involvement of employees in decision making increases their motivation
• Acceptance: Reduces employees resistance to changes
• Future Orientation: Forces the company to think strategically about its actions
Risks of Strategic Management
• Underestimation of today:
Time spent may have a negative impact on operational responsibilities
• Conflict between planners and doers:
Strategy Formulators may not be involved in the implementation process
Strategic Intents
Vision
Winning competitive battles through deciding how to leverage resources, capabilities, and core
competencies.
Mission
An application of strategic intent in terms of products to be offered and markets to be served.
What an organization should look like once its has successfully implemented its strategies and achieved its full potential.
WHAT IS A VISION ?
Corporate Vision Statements
Medtronic
• Restoring patients to full life
Wells Fargo
• We want to satisfy all of our customers’ financial needs and help them succeed financially.
McDonald’s
• Our vision is to be the world’s best quick service restaurant.
Disney
• To be the happiest place on earth
A declaration of organizational purpose providing the social justification for its existence.
WHAT IS A MISSION?
WHY Stating the Corporate Mission?
A mission statement provides employees of the organization with a shared sense of
purpose, direction, and opportunity.
and guides geographically dispersed employees to work independently and yet
collectively toward realizing the organization’s goals.
9 Components of a Mission Statement
• Customers
• Products or Services
• Markets
• Technology
• Concern for Survival, Growth, & Profitability
• Philosophy
• Self-Concept
• Concern for Public Image
• Concern for Employees
9 Phrases of “Our Mission is...
...to serve consumers, industry and government with high quality...
...our refreshment products include soft drinks, fruit juices,...
...our markets served include restaurants, hotels,...
...we apply electreonics technology in the production of hardware...
...to achieve sufficient profit to finance our growth and survival...
9 Phrases of “Our Mission is...
...we emphasize the meeting of the needs of our stakeholders.
...we have a results-oriented and entrepreneurial corporate culture.
...we are sensitive to our image with our customers and community.
...we create a sense of mutual trust with our members.”
Corporate Mission Statements
Federal Express
• To produce superior financial returns for our shareholders as we serve our customers with the highest quality transportation, logistics, and e-commerce.
Brinker International
To be the very best in the business. Our game plan is status go…we are constantly looking ahead, building on our strengths, and reaching for new goals.
In our quest of these goals, we look at the three stars of the Brinker logo and are reminded of the basic values that are the strength of this company…People, Quality and Profitability. Everything we do at Brinker must support these core values.
We also look at the eight golden flames depicted in our logo, and are reminded of the fire that ignites our mission and makes up the heart and soul of this incredible company.
These flames are: Customers, Food, Team, Concepts, Culture, Partners, Community and Shareholders. As keeper of these flames, we will continue to build on our strengths and work together to be the best in the business.
Corporate Mission Statements
SOME SAMPLE STRATEGIC INTENTS
FORD Motor Company
Our Vision: to become the world's leading company for automotive products and services.
Our Mission: we are a global, diverse family with a proud heritage, passionately committed to providing outstanding products and services.
Our Values: We do the right thing for our people, our environment and our society, but above all for our customers.
SOME SAMPLE STRATEGIC INTENTS
FORD OTOSAN AŞ.
VizyonOtomotiv ürün ve hizmetlerinde Türkiye'nin lider tüketici odaklı şirketi olmak.
MisyonMüşteri ihtiyaç ve beklentilerine en uygun otomotiv ürün ve hizmetlerini sunarak Türkiye otomotiv pazarının lideri olmak. Ford Avrupa'nın ticari araç üretim ve geliştirme merkezi olmak.
SOME SAMPLE STRATEGIC INTENTS
TOYOTA MOTOR Corporation
Slogan: Toyota will continue to innovate relentlessly to ensure further growth.
Mission: Toyota seeks to create a more prosperous society through automotive manufacturing.
Vision: Toyota aims to achieve long-term, stable growth in harmony with the environment, the global economy, the local communities it serves, and its stakeholders.
SOME SAMPLE STRATEGIC INTENTS
HONDA MOTOR Company Let’s go! We have dreams to pursue!
Since our foundation, Honda has been powered by dreams. Our initial and ongoing dream is to provide genuine satisfaction to people everywhere. Providing products of the highest quality at a reasonable price, we are realizing that dream one step at a time.
Our mission: is to offer products, technologies and services that contribute to society and make people’s lives better. That’s why we’re always ahead of the curve, coming up with technologies that make mobility safer and more environmentally sustainable. We see challenges ahead and are facing them squarely, determined to build a brighter future.
8 Dimensions of Strategic Goals
• Profitability
• Productivity
• Physical & Financial Resources
• Managerial Performance & Development
• Worker Performance & Attitude
• Innovation
• Market Standing
• Social Responsibility
Some Strategic Objectives: Financial Goals
Proctor and Gamble
Increase sales growth 6% to 8% and accelerate core net earnings growth to 13% to 15% per share in each of the next five years.
Automation
Generate Internet-related revenue of $1.5 billion
Wells Fargo
Increase the contribution of Banking Group earnings from investments, brokerage, and insurance from 16% to 25%
Some Strategic Objectives: Nonfinancial Goals
Federal ExpressCapitalize on e-commerce
Wells FargoWe want a majority of our customers, when surveyed, to
say they consider Wells Fargo the best financial institution in the community.
Walgreen’sWe want to operate 6,000 stores by 2010-up from 3000 in
the year 2000.
BP AmocoReduce greenhouse gases by 10% (from a 1990 base) by
2010.
1-31Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
5 Characteristics of Strategic Goals
• Specific
• Measurable
• Attainable
• Realistic
• Timely
5 Dimensions of Operational Strategies
• Flexibility
• Innovation
• Speed
• Cost
• Quality
Comparisons of Competitiveness
• Comparison with past performance• Trend analysis – Where are you relative to
the past.
• Stages of Industry Evolution Emergence, Growth, Maturity and Decline Strengths or competencies needed at each stage
are different
• Benchmarking with the competitors Key competitors Best practices irrespective of industry
Competing for Superior Performance
• Business firms as associations of productive assets try to outperform their rivals in the game of trying to make assets available better and before them
• If actual value (AV) < expected value (EV), productive assets shift to more profitable firms.
Actual Value (AV) vs. Expected Value (EV)
Firm A Firm B Firm C Hire “A” level
engineers, pay them “A” wages, generate
“B” performance.
Hire “A” level engineers, pay them “A” wages, generate “A” performance.
Hire “B” level engineers, pay them “B” wages, generate “A” performance.
AV < EV Below Normal
Economic Performance
AV = EV Normal Economic
Performance
AV > EV Above Normal
Economic Performance
(Economic Rent).
Competitive Disadvantage
Competitive Parity Competitive Advantage
Assumptions: (1) Only productive asset is engineers (2) A > B in terms of wages and skills.
Measuring Firm Performance
• Survival as a Measure
• Accounting Measures
• Tobin’s q
Survival as a Performance Measure
• Firm survival over an extended period indicates that it is generating at least normal economic returns.
• Strength: Easy to Use.
• Weaknesses:• When does survival end -- after a takeover,
bankruptcy, or changes in businesses?
• Death can occur slowly
• Death or just a setback?
• Tells nothing about above normal performance
Accounting Measures: Categories
• Profitability Ratios (e.g. ROA, ROE, ROS)
• Profit relative to size
• Liquidity Ratios (e.g. Current Ratio)
• Meeting short-term financial obligations
• Leverage Ratios (e.g. Debts / Assets, Debts / Equity)
• Indebtedness / Capital Structure
• Activity Effectiveness Ratios (e.g. Sales / Assets)
• Level of activity in a business
Limitations of Accounting Measures
• Managerial discretion over accounting methods.
• Incentives to distort: Bonuses, violations
of debt covenants, antitrust issues, etc.
• Many intangibles not recognized.
Tobin’s q
• Firm’s market value = market value of its present assets
• Limitation: it is difficult to determine the replacement cost of a firm’s assets
• q = 1 Normal Performance
• q > 1 Above normal performance
• q < 1 Below normal performance
q = a firm’s market value
a firm’s replacement cost
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT
Chapter Chapter 22 External Analysis of Opportunities
and Threats
Part 2Part 2 SWOT AnalysisSWOT Analysis
LEARNING OBJECTIVES
• INDUSTRIAL ORGANIZATION MODEL
• GENERAL & TASK ENVIRONMENT ANALYSIS
• INDUSTRY STRUCTURE ANALYSIS
• MODEL OF INDUSTRY COMPETITION ANALYSIS
• STRATEGIC GROUPS ANALYSIS
• COMPETITORS’ ANALYSIS
I/O Model of Superior ReturnsI/O Model of Superior Returns
The Industrial Organization Model suggests that above-average returns for any firm are largely determined by characteristics outside the firm.
The I/O model largely focuses on industry structure or attractiveness of the external environment rather than internal characteristics of the firm.
I/O Assumptions
• Environment determines strategy
• Firms possess similar resources and thus pursue similar strategies.
• Resources are mobile
• Decision-makers – rational & act in the best interests of the firm.
Action required:Action required:External External EnvironmentEnvironmentExternal External EnvironmentEnvironment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Study the external environment, especially the industry environment.
I/O Model of Superior ReturnsI/O Model of Superior Returns
External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
An Attractive An Attractive IndustryIndustryAn Attractive An Attractive IndustryIndustry
An industry whose An industry whose structural characteristics structural characteristics suggest above-average suggest above-average returns are possiblereturns are possible
An industry whose An industry whose structural characteristics structural characteristics suggest above-average suggest above-average returns are possiblereturns are possible
Action required:Action required:Locate an industry with high potential for above-average returns.
I/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior Returns
External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Attractive IndustryAttractive Industry
An industry whose structural characteristics suggest above-average returns are possible
An industry whose structural characteristics suggest above-average returns are possible
Action required:Action required:Identify strategy called for by the industry to earn above-average returns.
I/O Model of Superior ReturnsI/O Model of Superior Returns
Selection of a strategy linked with above-average returns in a particular industry
Selection of a strategy linked with above-average returns in a particular industry
StrategyFormulationStrategyFormulation
External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Attractive IndustryAttractive Industry
An industry whose structural characteristics suggest above-average returns are possible
An industry whose structural characteristics suggest above-average returns are possible
Strategy FormulationStrategy Formulation
Selection of a strategy linked with above-average returns in a particular industry
Selection of a strategy linked with above-average returns in a particular industry
Action required:Action required:Develop or acquire assets and skills needed to implement the strategy.
Assets and SkillsAssets and Skills
Assets and skills required to implement a chosen strategy
Assets and skills required to implement a chosen strategy
I/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior Returns
External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Attractive IndustryAttractive Industry
An industry whose structural characteristics suggest above-average returns are possible
An industry whose structural characteristics suggest above-average returns are possible
Strategy FormulationStrategy Formulation
Selection of a strategy linked with above-average returns in a particular industry
Selection of a strategy linked with above-average returns in a particular industry
Assets and SkillsAssets and Skills
Assets and skills required to implement a chosen strategy
Assets and skills required to implement a chosen strategy
Action required:Action required:Use the firm’s strengths (its assets or skills) to implement the strategy.
Strategy ImplementationStrategy Implementation
Selection of strategic actions linked with effective implementation of the chosen strategy
Selection of strategic actions linked with effective implementation of the chosen strategy
I/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior Returns
External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Attractive IndustryAttractive Industry
An industry whose structural characteristics suggest above-average returns are possible
An industry whose structural characteristics suggest above-average returns are possible
Strategy FormulationStrategy Formulation
Selection of a strategy linked with above-average returns in a particular industry
Selection of a strategy linked with above-average returns in a particular industry
Assets and SkillsAssets and Skills
Assets and skills required to implement a chosen strategy
Assets and skills required to implement a chosen strategy
Action required:Action required:
Strategy ImplementationStrategy Implementation
Selection of strategic actions linked with effective implementation of the chosen strategy
Selection of strategic actions linked with effective implementation of the chosen strategy
Superior ReturnsSuperior Returns
Earning of above-average returnsEarning of above-average returns
Maintain selected strategy in order to outperform industry rivals.
I/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior Returns
The General Environment Analysis
• General environmental trends and events
• Little ability to predict them
• Even less ability to control them
• Can vary across industries
General Environment
DemographicSocioculturalPolitical/LegalTechnological
EconomicGlobal
The Competitive Environment Analysis
• Sometimes called the task or industry environment
• Includes• Competitors (existing and
potential)
• Customers
• Suppliers
• Porter’s five-forces model
Competitive Environment
CompetitorsCustomersSuppliers
The Industry Structure Anaysis
Level of Concentration • % of market share held by top 4 firms -
Concentration ratio
Level of Economies of scale• Cost linked to volume
• Determines the intensity of competition
Level of Product Differentiation• Differences in product features
• Brand positioning
The Model of Industry Competition
Threat ofnew entrants
Bargaining power of buyers
Bargaining power of suppliers
Threat ofSubstitute products
and services
Adapted from Exhibit 2.2 Porter’s Five Forces Model of Industry Competition
Porter’s Five Forces Model of Industry Competition
The Threat of New Entrants
• Profits of established firms in the industry may be eroded by new competitors
• High entry barriers lead to low threat of new entries• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of scale
The Bargaining Power of Buyers
• Buyers threaten an industry
• Force down prices
• Bargain for higher quality or more services
• Play competitors against each other
The Bargaining Power of Buyers
• A buyer group is powerful when• It is concentrated or purchases large
volumes relative to seller sales
• The products it purchases from the industry are standard or undifferentiated
• The buyer faces few switching costs
• It earns low profits
• The buyers pose a credible threat of backward integration
• The industry’s product is unimportant to the quality of the buyer’s products or services
The Bargaining Power of Suppliers
• Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services
The Bargaining Power of Suppliers
• A supplier group will be powerful when
• The supplier group is dominated by a few companies and is more concentrated than the industry it sells to
• The supplier group is not obliged to contend with substitute products for sale to the industry
• The industry is not an important customer of the supplier group
The Bargaining Power of Suppliers
• A supplier group will be powerful when
• The supplier’s product is an important input to the buyer’s business
• The supplier group’s products are differentiated or it has built up switching costs for the buyer
• The supplier group poses a credible threat of forward integration
The Threat of Substitute Products and Services
• Substitutes limit the potential returns of an industry
• Ceiling on the prices that firms in that industry can profitably charge
• Price/performance ratio
The Intensity of Rivalry among Competitors in an Industry
• Jockeying for position
• Price competition
• Advertising battles
• Product introductions
• Increased customer service or warranties
The Intensity of Rivalry among Competitors in an Industry
• Interacting factors lead to intense rivalry
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed or storage costs
• Lack of differentiation or switching costs
• Capacity augmented in large increments
• High exit barriers
The Strategic Groups Analysis
• Two unassailable assumptions in industry analysis• No two firms are totally different
• No two firms are exactly the same
• Strategic groups within the same Industry• Cluster of firms that share similar strategies
Breadth of product and geographic scope Price/quality Degree of vertical integration Type of distribution system
Strategic Groups within Industries
Industries not completely homogeneous
Factors differentiate across an industry Scope of operations
Type of customers
Extent of vertical integration
Strategic groups are useful for Identify the closest competitors
Close substitutes
Overall variability in performance
Value of strategic groups as an analytical tool
• Identify barriers to mobility that protect a group from attacks by other groups
• Identify groups whose competitive position may be marginal or tenuous
• Chart the future direction of firms’ strategies
• Thinking through the implications of each industry trend for the strategic group as a whole
The World Automobile Industry: Strategic Groups
Adapted from Exhibit 2.8 The World Automobile Industry: Strategic Groups
The Competitors’ Analysis
Analyzing key competitors allows an entrepreneur to:
• avoid surprises from existing competitors’ new strategies and tactics.
• identify potential new competitors and the threats they pose.
• improve reaction time to competitors’ actions.
• anticipate rivals’ next strategic moves.
Ethical Techniques to Analyze Competitors
• Monitor industry and trade publications.
• Talk to customers and suppliers.
• Listen to employees, especially sales
representatives
• and purchasing agents.
• Attend trade shows and conferences.
1-69Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Ethical Techniques to Analyze Competitors
• Benchmark competitors’ products and services.
• Get competitors’ credit reports.
• Use the internet to learn more about competitors.
• Visit competitors to observe their operations.
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT
Chapter Chapter 33 Internal Analysis of Strenghts and
Weaknesses
Part 2Part 2 SWOT AnalysisSWOT Analysis
LEARNING OBJECTIVES
• THE ASSETS’ ANALYSIS
• THE RESOURCE BASED VIEW
• THE VALUE CHAIN ANALYSIS
Why Do a Competitive Strength Assessment ?
• Reveals firm’s competitive position• Pinpoints the company’s competitive
strengths and weaknesses• Identifies competitive advantage, parity, or
disadvantage• Identifies possible offensive attacks• Identifies possible defensive actions
The Assets’ Analysis
Tangible assets Ford’s Cash Reserves 3 M’s Patents Coca’s cola’s formula
Intangible assets Nike - Brand Name Dell – Reputation GE- Welch’s Leadership
Organizational capabilities Dell’s Customer Service Sony’s Product Development 3 M’s Innovation
Ratio of Market Value to Book Value for Selected Companies
Annual Market Book Ratio of Sales Value Value Market to
Company ($ billions) ($ billions) ($ billions) Book Value
Exhibit 4.1 Ratio of Market Value to Book Value for Selected Companies
eBay 1.2 30.8 3.9 7.9
Microsoft 28.4 254.1 58.3 4.4
Intel 26.8 142.1 35.4 4.0
General Motors Corp. 182.1 20.0 9.4 2.1
Nucor (Steel) 4.8 3.9 2.3 1.7
J. C. Penney 32.3 5.0 6.4 .78
Note: The data on market valuations are as of June 16, 2003. All other financial data is based on the most recently available balance sheets and income statements.
The Central Role of Knowledge in Today’s Economy
Creation of wealth in a knowledge economy• Effective management of knowledge workers
• Intellectual capital
• Assets such as Reputation Employee loyalty and commitment Customer relationships Company values Brand names Experience and skills of employees
The Central Role of Knowledge in Today’s Economy
Intellectual capital = Market value of the firm – Book value of the firm
How do companies create value in the knowledge-intensive economy?
• Human capital (individual capabilities, knowledge, skills, and experience of the company’s employees and managers)
• Social capital (the network of relationships that individuals have throughout the organization)
• Knowledge
• Explicit knowledge
• Tacit knowledge
Human Capital: The Foundation of Intellectual Capital
Exhibit 4.2 Human Capital: Three Interdependent Activities
Microsoft Employees Who Have Left the Company for Other Businesses
Company What It Does Defectors from Microsoft
Exhibit 4.4 Microsoft Employees Who Have Left the Company for Other Businesses
Source: Reprinted by permission of the Wall Street Journal, Copyright ©2000 Dow Jones & Company, Inc. All Rights Reserved Worldwide. License number 397221136576.
Crossgain Builds software around 23 of 60 employeesXMl computer language
ViAir Makes software for Company declines towireless providers specify
CheckSpace Builds online payment Company says “a good service for small businesses chunk” of its 30 employees
digiMine Sells data mining service About 15% of 62 employees inaddition to the 3 founders
Avogadro Builds wireless notification 8 of 25 employeessoftware
Tellme Networks Offers information like stock About 40 of 250 employees;quotes and scores over the another 40 from the formerphone Netscape
The Resource Based View’sTypes of Strategic Resources
• Competencies: Internal capabilities that a company performs better than other capabilities.
• Core competencies: Competencies that are central, not peripheral, to a company’s strategy and operations.
• Distinctive competencies: Competencies that are sources of sustainable competitive advantage.
Firms are unique bundles of relatively immobile resources:
Examples: Distinctive Competencies
• Sharp Corporation• Competencies in flat-panel display technology
• Toyota, Honda, Nissan• Low-cost, high-quality manufacturing
capabilities and short design-to-market cycles
• Intel• Capability to design and manufacture ever
more powerful microprocessors for PCs
Examples: Distinctive Competencies
• Sony• Miniaturization
• Honda• Motor Technology
• Boeing• Large scale system integration, efficient design and
manufacturing, and customer knowledge
Characteristics of Strategic Resources
• In Demand (valuable)
• Scarce (rare)
• Difficult & costly to imitate
• Appropriability
• Nonsubstitutable or durable
Sample Strategic Resources
• Competitively Superior Value Walmart’s Logistics – Allowed better pricing
• Resource Scarcity OPEC’s Oil Reserves – Finite oil reserves
• Appropriability Who profits from a resource?
“Mickey Mouse does not have an agent”
• Inimitability Priceline’s pricing for air tickets Wendy’s Drive Through
Path dependency - Steinway with Pianos Causal ambiguity – South West Airlines Economic Deterrence
• Durability How long will the competitive advantage last?
Patentable products – longer durability
Sample Strategic Resources
Resources’ Characteristics and Implications
valuable? rare?
difficult or costly to imitate?
Non-substitutable? Consequences
Performance Implications
No No No NoCompetitive
DisadvantageBelow AIR*
Yes No No Yes/No Competitive Parity
AIR
Yes Yes No Yes/No Temporary Advantage
AIR to Above AIR
Yes Yes Yes YesSustainable Competitive Advantage
Above AIR
* AIR = Average Industry Returns
Assessing a Company’s Competitive Strength vs. Key Rivals
1. List industry key success factors and other relevant measures of competitive strength
2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong)
3. Decide whether to use a weighted or unweighted rating system
4. Sum individual ratings to get overall measure of competitive strength for each rival
5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage
An Unweighted Competitive Strength Assessment
KSF/Strength Measure
Quality/product performance
Reputation/image
Manufacturing capability
Technological skills
Dealer network/distribution
New product innovation
Financial resources
Relative cost position
Customer service capability
Overall strength rating
ABC Co. Rival 1 Rival 2
8 5 10
8 7 10
2 10 4
10 1 7
9 4 10
9 4 10
5 10 7
5 10 3
5 7 10
61 58 71
Rival 3
1
1
5
3
5
5
3
1
1
25
Rival 4
6
6
1
8
1
1
1
4
4
32
Rating Scale: 1 = Very weak; 10 = Very strong
A Weighted Competitive Strength Assessment
KSF/Strength Measure
Quality/product performance
Reputation/image
Manufacturing capability
Technological skills
Dealer network/distribution
New product innovation
Financial resources
Relative cost position
Customer service capability
Rival 1 Rival 2
5/0.50 10/1.00
7/0.70 10/1.00
10/1.00 4/0.40
1/0.05 7/0.35
4/0.20 10/0.50
4/0.20 10/0.50
10/1.00 7/0.70
10/3.50 3/1.05
7/1.05 10/1.50
ABC Co.
8/0.80
8/0.80
2/0.20
10/0.50
9/0.45
9/0.45
5/0.50
5/1.75
5/0.75
Rival 3
1/0.10
1/0.10
5/0.50
3/0.15
5/0.25
5/0.25
3/0.30
1/0.35
1/0.15
Rival 4
6/0.60
6/0.60
1/0.10
8/0.40
1/0.05
1/0.05
1/0.10
4/1.40
4/1.60
Weight
0.10
0.10
0.10
0.05
0.05
0.05
0.10
0.35
0.15
Sum of weights 1.00
Overall strength rating 6.20 8.20 7.00 2.10 2.90
Rating Scale: 1 = Very weak; 10 = Very strong
Risk of Core Rigidities
• When firms excel at an activity, they can become over committed to it and rigid.– Incentives and culture may reward current
competencies while thwarting development of new competencies.
–Dynamic capabilities are competencies that enable the firm to quickly respond to change, emerging markets and major technological discontinuities
–firm may develop a set of abilities that enable it to rapidly deploy new product development teams for a new opportunity,
–firm may develop competency in working with alliance partners to gain needed resources quickly.
Risk of Core RigiditiesTo develop dynamic competencies, a firm:
–Invests heavily in research areas likely to provide scientific breakthroughs
–Develops pilot plants to experiment with new products and production processes
–Manages its relationships with alliance partners as an integrative and flexible system of capabilities that extend the firms boundaries not as individual relationships focused on particular projects
The Value Chain Analysis
• Disaggregates a business into sets of activities• Primary Activities – Inbound logistics --- Operations ----
Outbound logistics ---- marketing and Sales and service
• Support activities – General Administration, HRM, R&D, Systems Development
• How to do a VCA• Identify key activities
• Allocate costs to each activity
• Identify the activities that differentiate the firm
• Examine the Value Chain Different activities may be important – industry and strategy Importance of activities can vary based on a company position in a
larger scheme of activities
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
oun
d
Log
isti
cs
Op
erat
ion
s
Ou
tbou
nd
Log
isti
cs
Mar
ket
ing
& S
ales
Ser
vice
helps to identify which resources and capabilities can add value
MARG
IN
MARG
IN
MARGIN
MARGIN
The Value Chain System
UpstreamValue Chains
A Company’s Own
Value Chain
DownstreamValue Chains
Activities, Costs, &
Margins ofForwardChannelAllies &
StrategicPartners
InternallyPerformedActivities, Costs, &Margins
Activities, Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT
Grand StrategiesChapter Chapter 44
Part 3Part 3
Choice of StrategyChoice of Strategy
LEARNING OBJECTIVES
• LONG TERM OBJECTIVES
• SINGLE BUSINESS GROWTH STRATEGIES
• MULTI BUSINESS GROWTH STRATEGIES
• COOPERATIVE GROWTH STRATEGIES
• DOWNSCOPING STRATEGIES
Long Term Objectives & Grand Strategies
Companies have to make many fundamental decisions about their path to future success
Single Business vs. Multiple business Growth vs. Downscoping of business Profit vs. Revenue increase Economic viability, Public Responsibility Technological leader vs. Follower
Decisions depend on Industry attractiveness CEO’s disposition Company’s availability of funds and ability to borrow Competitors’ actions
Types of LONG TERM OBJECTIVES
Business Oriented –
• Profitability, return on equity
• competitive position, market share
• technological leadership, innovation rate
Employee Oriented – • Employee Development, inventory of workers’ skill
• Employee Relations, job satisfaction & loyality levels
• Productivity, rate of decrease in customer complaints and defective items
List of GRAND STRATEGIES
GROWTH
Single business growth strategies Concentration Market Diversification / Development Product Differentiation / Development Radical Innovation (Product
Diversification) Horizontal integration Vertical integration
Multi business growth strategies Concentric Diversification Conglomerate Diversification
DOWNSCOPING
Turnaround
Divestiture
Liquidation
Cooperative growth strategies
Joint venturesStrategic alliancesConsortia
Concentration
Focus on a single product in a single market
Policy Options:• increasing present customers’ rate of use• attracting competitors’ customers• attracting non-users
Successful when Products are distinctive Markets are stable Company has a high market share
Market Diversification
Exploiting product knowledge in multiple markets
Attracting other segments within the same market by using
other channels of distribution
other media for advertisement
Opening additional geographic markets (geographic expansion)
Product Development
Developing new products for present markets
Developing related products by adapting present products to the changing needs of the customers
by changing the shape, appearance, size, ingredients, intensity, etc. of the products
Developing quality variations
Developing additional models and sizes (product proliferation)
Radical Innovation
Spend resources on R&D for technological patents
Stay technologically ahead of competition
Take advantage of specialized knowledge by charging a premium on the products
Reinvest profits in R&D
Integration
Growth by acquisitions and mergers
Horizontal IntegrationAcquisition of firms that operate in similar
industries to develop market share
Vertical IntegrationAcquisition of firms that supply raw materials -
Backward integration
Acquisition of firms that provide distribution and marketing facilities - Forward integration
Multi Business Growth Strategies
Concentric Diversification• Businesses are related on the basis of similar product technology,
market knowledge or production technology
• Focus on synergy
• Examples - Honda, Eastman Kodak, Philip Morris
Conglomerate Diversification• Companies use internal capital to expand to businesses that are
attractive and offer great opportunities to grow
• Focus on profits
• Examples- ITT, General Electric, Westinghouse
Cooperation strategies
Why should companies cooperate with othersReduce risk and uncertaintyShare different and scare resourcesLearn know-how and market knowledgeShare the benefits of complementary assets
Types of strategies for cooperationJoint venturesStrategic alliancesConsortia
Joint venture (joint ownership)A child company created and operated for the benefits of
the co-owners (parent companies)
Advantages: easy access to capital, raw materials and foreign markets
Disadvantages: limited discretion, control, & profits
Parents: Samsung Electronics (Korean) & France Telecom (French); Child: Orange Mobile Phone Company (British)
Parents: Chrysler Corp. (US) & Mitsubishi (Japanese); Child: Diamond Star Company (US)
Cooperation strategies
Strategic Alliances
Long term mutually beneficial cooperation beyond supplier-customer relationship, but without any kind of equity sharing
Licensing: transfer of some industrial property rights (patents, trademark, know-how, etc.) in return for a favor (royalty payment, or avoiding tariffs or quotas)
Subcontracting: manufacturing done by contractor having comparative advantages in factors (inputs) of production
Franchising: marketing done by franchisee having comparative advantages in local markets
Outsourcing: supporting activities done by different outer providers having comparative advantages in any one of them
Cooperation strategies
Consortia (network)
A large scale cooperation among numerous local companies operating especially within the same industry (with or without equity sharing)
Keiretsu in Japanese
Up to 50 firms holding each others’ stocks, coordinated by a large company; ex: Mitsubishi
Or by a bank; ex: sank EGS Bank in Turkey
Cooperation strategies
Downscoping Strategies
TurnaroundA kind of crisis management when profits decline
because of:• Economic recessions in the general environment• Innovative breakthroughs in the task environment • Product inneficiencies in the internal environment
If strategists believe that stability and recovery are possible, they may follow either way:
• Cost reduction by getting rid off some employees, promotional activities, and low-margin customers
• Asset reduction by getting rid of unproductive assets, i.e. some land, buildings, cars, equipment
Downscoping Strategies
DivestitureSelling off a business to another business in order to:• to reduce debts of a declining investment in our portfolio• to raise capital by sacrificing a successful investment for the
sake of the total corporation• to improve the image of the corporation on the eyes of the
governmental bodies regulating antitrust actions
Why to buy an unsuccessful investment of another firm?• “we have necessary skills and resources to recover”• or “we can create a synergy between this newly bought
company and our present investments”
Liquidation: Firm sold in parts to raise funds
Grand Strategy Selection Matrix
Overcome Weakness
Maximize Strengths
External FocusInternal Focus
Vertical Integration
Coglomorate Diversification
Horizontal Integration
Concentric Diversification,
Joint Ventures
Turnaround
Divestiture
Liquidation
Concentration
Market/Product Development
Innovation
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT
Chapter Chapter 55 Strategic Business Unit (SBU) Level Strategies
Part 3Part 3
Choice of StraetgyChoice of Straetgy
LEARNING OBJECTIVES
• COST LEADERSHIP STRATEGY
• DIFFERENTIATION STRATEGY
• FOCUS STRATEGY
• COMBINED STRATEGY
• STRATEGY CHOICE CONSIDERING INDUSTRY LIFE CYCLES
Types of Competitive Advantage and Sustainability
• Three generic strategies to overcome the five forces and achieve competitive advantage• Overall cost leadership
Low-cost-position relative to a firm’s peers Manage relationships throughout the entire value chain
• Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a
premium
• Focus strategy Narrow product lines, buyer segments, or targeted
geographic markets Attain advantages either through differentiation or cost
leadership
Three Generic Strategies
Exhibit 5.1 Three Generic Strategies
Source: Reprinted with permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press.
Competitive Advantage
Uniqueness Perceived by the Customer
Low Cost Position
Str
ateg
ic T
arg
et
Particular Segment Only
Industrywide
Performance
Competitive Advantage
Adapted from Exhibit 4.5 Issues to Consider in Creating Value through Human Capital, Social Capital, and Technology
Source: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York: AMACON, 1999), pp. 63-64.
Return oninvestment (%) 35.5 32.9 30.2 17.0 23.7 17.8
Sales Growth (%) 15.1 13.5 13.5 16.4 17.5 12.2
Gain in MarketShare (%) 5.3 5.3 5.5 6.1 6.3 4.4
Sample Size 123 160 100 141 86 105
Differentiation and Cost Differentiation Cost
Differentiation Focus
Cost Focus
Stuck in the Middle
Overall Cost Leadership
• Integrated tactics
• Aggressive construction of efficient-scale facilities
• Vigorous pursuit of cost reductions from experience
• Tight cost and overhead control
• Avoidance of marginal customer accounts
• Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising
Value-Chain Activities
Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership
Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.
Shared purchasing operations with other business units
Effective policy guidelines to ensure low cost raw materials (with acceptable quality levels)
Expertise in process engineering to reduce manufacturing costs
Effective use of automated technology to reduce scrappage rates
Effective orientation and training programs to maxi- mize employee productivity
Minimize costs associated with employee turnover through effective policies
Standardized account- ing practices to minimize personnel required
Few management layers to reduce overhead costs
Effective layout of receiving dock operation
Effective use of quality control inspectors to minimize rework on the final product
Effective utilization of delivery fleets
Purchase of media in large blocks
Sales force utilization is maximized by territory management
Thorough service repair guidelines to minimize repeat maintenance calls
Use of single type of repair vehicle to minimize costs
Firm infrastructure
Human resource management
Technology development
Procurement
Inbound logistics
Operations Outbound logistics
Marketing and sales
Service
Overall Cost Leadership (Cont.)
• A firm following an overall cost leadership position
• Must attain parity on the basis of differentiation relative to competitors
• Parity on the basis of differentiation Permits a cost leader to translate cost
advantages directly into higher profits than competitors
Allows firm to earn above-average profits
Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces
• An overall low-cost position
• Protects a firm against rivalry from competitors
• Protects a firm against powerful buyers
• Provides more flexibility to cope with demands from powerful suppliers for input cost increases
• Provides substantial entry barriers from economies of scale and cost advantages
• Puts the firm in a favorable position with respect to substitute products
Pitfalls of Overall Cost Leadership Strategies
• Too much focus on one or a few value-chain activities
• All rivals share a common input or raw material
• The strategy is initiated too easily
• A lack of parity on differentiation
• Erosion of cost advantages when the pricing information available to customers increases
Differentiation
• Differentiation can take many forms
• Prestige or brand image
• Technology
• Innovation
• Features
• Customer service
• Dealer network
Value-Chain Activities: Examples of Differentiation
Exhibit 5.5 Value-Chain Activities: Examples of Differentiation
Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.
Facilities that promote firm image
Superior MIS—To integrate value-creating activities to improve quality
Widely respected CEO enhances firm reputation
Provide training and incentives to ensure a strong customer service orientation
Programs to attract talented engineers and scientists
Excellent applications engineering support
Superior material handling and sorting technology
Use of most prestigious outletsPurchase of high-quality components to enhance product image
Superior material handling operations to minimize damage
Quick transfer of inputs to manufactur- ing process
Flexibility and speed in responding to changes in manu-facturing specs
Low defect rates to improve quality
Accurate and responsive order processing
Effective product replenish-ment to reduce customer’s inventory
Creative and innovative advertising programs
Fostering of personal relation-ship with key customers
Rapid response to customer service requests
Complete inventory of replacement parts and supplies
Firm infrastructure
Human resource management
Technology development
Procurement
Inbound logistics
Operations Outbound logistics
Marketing and sales
Service
Differentiation
• Firms may differentiate along several dimensions at once
• Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique
• Successful differentiation requires integration with all parts of a firm’s value chain
• An important aspect of differentiation is speed or quick response
Differentiation: Improving Competitive Position vis-à-vis the Five Forces
• Differentiation
• Creates higher entry barriers due to customer loyalty
• Provides higher margins that enable the firm to deal with supplier power
• Reduces buyer power because buyers lack suitable alternative
• Reduces supplier power due to prestige associated with supplying to highly differentiated products
• Establishes customer loyalty and hence less threat from substitutes
Potential Pitfalls of Differentiation Strategies
• Uniqueness that is not valuable
• Too much differentiation
• Too high a price premium
• Differentiation that is easily imitated
• Dilution of brand identification through product-line extensions
• Perceptions of differentiation may vary between buyers and sellers
Focus
• Focus is based on the choice of a narrow competitive scope within an industry
• Firm selects a segment or group of segments (niche) and tailors its strategy to serve them
• Firm achieves competitive advantages by dedicating itself to these segments exclusively
• Two variants
• Cost focus
• Differentiation focus
Focus: Improving Competitive Position vis-à-vis the Five Forces
Advantages of Focus Strategies:
• Creates barriers of either cost leadership or differentiation, or both
• Also focus is used to select niches that are least vulnerable to substitutes or where competitors are weakest
Pitfalls of Focus Strategies:
• Erosion of cost advantages within the narrow segment
• Focused products and services still subject to competition from new entrants and from imitation
• Focusers can become too focused to satisfy buyer needs
Combination Strategies: Integrating Overall Low Cost and Differentiation
• Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy
• Goal of combination strategy is to provide unique value in an efficient manner
Three Combination Approaches
• Automated and flexible manufacturing systems
• Exploiting the profit pool concept for competitive advantage
• Coordinating the “extended” value chain by way of information technology
Combination Strategies: Improving Competitive Position vis-à-vis the Five Forces
• Firms that successfully integrate differentiation and cost strategies obtain advantages of competition from both approaches
• High entry barriers
• Bargaining power over suppliers
• Reduces power of buyers (fewer competitors)
• Value position reduces threat from substitute products
• Reduces the possibility of head-to-head rivalry
Pitfalls of Combination Strategies
• Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”
• Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain
• Miscalculating sources of revenue and profit pools in the firm’s industry
Industry Life-Cycle States: Strategic Implications
• Life cycle of an industry
• Introduction
• Growth
• Maturity
• Decline
• Emphasis on strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle
Stages of the Industry Life Cycle
Adapted from Exhibit 5.8 Stages of the Industry Life Cycle
Stages of the Industry Life Cycle
Generic strategies
Differentiation Differentiation Differentiation Overall costOverall cost leadershipleadership Focus
Market growth rate
Low Very large Low to Negativemoderate
Number of segments
Very few Some Many Few
Intensity of competition
Low Increasing Very intense Changing
Emphasis on product design
Very high High Low to Lowmoderate
StageIntroduction Growth Maturity DeclineFactor
Stages of the Industry Life Cycle
Emphasis on process design
Low Low to High Lowmoderate
Major functional area(s) of concern
Research and Sales and Production GeneralDevelopment marketing management
and finance
Overall objective
Increase Create Defend Consolidate,market share consumer market share maintain, awareness demand and extend harvest, or
product life exitcycles
Stage
Factor Introduction Growth Maturity Decline
Strategies in the Introduction Stage
• Products are unfamiliar to consumers
• Market segments not well defined
• Product features not clearly specified
• Competition tends to be limited
Strategies
• Develop product and get users to try it
• Generate exposure so product becomes “standard
Strategies in the Growth Stage
• Characterized by strong increases in sales
• Attractive to potential competitors
• Primary key to success is to build consumer preferences for specific brands
Strategies
• Brand recognition
• Differentiated products
• Financial resources to support value-chain activities
Strategies in the Maturity Stage
• Aggregate industry demand slows
• Market becomes saturated, few new adopters
• Direct competition becomes predominant
• Marginal competitors begin to exitStrategies
• Efficient manufacturing operations and process engineering
• Low costs (customers become price sensitive)
Strategies in the Decline Stage
• Industry sales and profits begin to fall
• Strategic options become dependent on the actions of rivals
Strategies
• Maintaining
• Exiting the market
• Harvesting
• Consolidation
DIVERSIFICATION
Portfolio Management • Allocate resources among business units
• Expertise of corporate office in finding attractive firms to acquire
• Provide financial resources to business units on favorable terms reflecting the corporation’s overall ability to raise funds
• Provide high quality review and coaching for units
GE Nine Cell Portfolio Matrix
Components of Industry attractiveness
Nature of rivalry
number, size & strength of competitors, price wars
Strength of buyers and sellers
Ease of New Entrants
Economic Factors
market saturation or growth, capital intensity, profitability
Components of Business strength
Cost advantage, quality image, manufacturing flexibility, delivery speed, liquidity, profitability, skillful personnel
GE Nine Cell Matrix
HighHigh MediumMedium LowLow
HighHigh Invest and Grow
Selective Growth
Grow or Let Go
MediumMedium
Selective Growth
Grow or Let Go
Harvest
LowLow
Grow or Let Go
Harvest Divest
Industry Attractiveness
Business
Strength
Based on the subjective assessments on the levels of market attractiveness and business strengths, each SBU falls in one of the NINE different cells of strategic option.
Boston Consulting Group Matrix
Portfolio of Strategic Business Units
High Market Share Low
Industry Growth Rate
High
Low
$$$
1 2
3 4cash cows
stars question marks
dogs
1-145Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
1. Stars. These are products that are in high growth markets with a relatively high share of that market. Stars tend to generate high amounts of income. Keep and build your stars.
2. Question Marks (Problem Children). These are products with a low share of a high growth market. They consume resources and generate little in return. They absorb most money as you attempt to increase market share.
Boston Consulting Group Matrix
1-146Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
3. Cash Cows. These are products with a high share of a low growth market. Cash Cows generate more than is invested in them. So keep them in your portfolio of products for the time being.
4. Dogs. These are products with a low share of a low growth market. They do not generate cash for the company, they tend to absorb it. Get rid of these products.
Boston Consulting Group Matrix
Boston Consulting Group Matrix
Key
Each circle represents one of the firm’s business units
Size of circle represents the relative size of the business unit in terms of revenue
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT
National Sources of International
Competitive Power
Chapter Chapter 66
Part 4Part 4
Global CompetitionGlobal Competition
LEARNING OBJECTIVES
• FACTOR CONDITIONS
• DEMAND CONDITIONS
• RELATED AND SUPPORTING INDUSTRIES
• FIRM STRATEGY, STRUCTURE AND RIVALRY
• GOVERNMENTAL REGULATIONS & CHANCE
The Global Economy: A Brief Overview
• Opportunities and risks when firms diversify abroad
• Trade across nations will exceed trade within nations
• Rise of market capitalism around the world
• Transfer of money from rich to poor countries Equity Bond investments Commercial loans
The Global Economy: A Brief Overview
• Opportunities and risks when firms diversify abroad
• Economies of East Asia have grown rapidly, but little progress in the rest of the world
• Poor education levels in many countries
• Failure to manage broader economic factors in some countries
Interest rates Inflation Unemployment
Factors Affecting a Nation’s Competitiveness
• Factor conditions
• Nation’s position in factors of production
Skilled labor infrastructure
Factor conditions
Demand conditions
• Demand conditions
• Nature of home-market demand
• Industry’s product
• Industry’s service
Factors Affecting a Nation’s Competitiveness
• Related and supporting industries• Presence or absence in the
nation of internationally competitive
Supplier industries Other related industries
Factor conditions
Demand conditions
Related and supporting industries
Factors Affecting a Nation’s Competitiveness
• Firm strategy, structure, and rivalry
• Conditions in the nation governing how companies are
• Created
• Organized
• Managed
• Nature of domestic rivalry
Factor conditions
Demand conditions
Related and supporting industries
Firm strategy, structure, and
rivalry
Factor Conditions
• To achieve competitive advantage, factors of production must be created
• Industry specific
• Firm specific
• Pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed
Demand Conditions
• Demands that consumers place on an industry for goods and services
• Demanding consumers push firms to move ahead of companies from other nations
• Demanding consumers drive firms in a country to
Meet high standards Upgrade existing products and services Create innovative products and services
Related and Supporting Industries
• Related and supporting industries• Enable firms to manage inputs more
effectively Strong supplier base adds efficiency to
downstream activities Competitive supplier base lets a firm obtain inputs
using cost-effective, timely methods
• Allow joint efforts among firms
• Create the probability that new entrants will enter the market
Firm Strategy, Structure and Rivalry
• Rivalry is intense in nations with conditions of• Strong consumer demand
• Strong supplier bases
• High new entrant potential from related industries
• Competitive rivalry increases the efficiency with which firms develop, market, and distribute products and services within the home country
Firm Strategy, Structure and Rivalry
• Competitive rivalry increases the efficiency with which firms
• Develop within the home country
• Market within the home country
• Distribute products and services within the home country
Firm Strategy, Structure and Rivalry
• Domestic rivalry provides a strong impetus for firms to
• Innovate
• Find new sources of competitive advantage
• Domestic rivalry forces firms to look beyond national borders for new markets
Porter’s Diamond of National Advantage: As Applied to India
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