asm final draft

8/12/2019 ASM Final Draft

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Masters Programmes

Assignment Cover Sheet

Submitted by:

Date Sent: 21.04.2014

Module Title: Advanced Strategic Management

Module Code: IB98Q0

Date/Year of Module: 2014

Submission Deadline: 21.04.2014

Word Count:

Number of Pages:

This is to certify that the work I am submitting is my own. All external references andsources are clearly ackno wledged and ident i f ied with in the contents. I am aware of the

Universi ty of Warwick regulat ion concerning plagiar ism and col lusion.

No substant ia l par t (s) of the work su bmit ted here has also been submit ted by m e in

other assessments for accredi ted courses of stu dy, and I acknow ledge that i f th is has

been done an appropr iate reduct ion in the mark I migh t otherwise have received w i l l be

made.


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Content:

1. ANSWER 1..4

2. ANSWER 2..7

3. ANSWER 313

References32


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Analyze Googles decision to acquire Nest and discuss whether it enables Google togenerate strategic profits in the smart-home industry.


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Googles acquisition of NEST comes at a critical time when the search

giant is expanding into its energy, robotics and Internet of things

technology. Googlessecond biggest acquisition in history must

not be scrutinized by the hefty $3.2 billion price tag but must beanalyzed by the long-term strategic value NEST creates forGoogle.

Human resources to develop Design capabilities

Google, in its first true attempt to diversify, has made significant efforts to establish

itself in the consumer hardware industry(see diagram below) but thesearch giant has

struggledto design compelling hardware products that resonate with customers .

STRATEGIC VALUE OF THE ACQUISITION

Human

ResourcesBig Data

Design

capabilities

for hardware

Smart home

industry

dream


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Understanding that technology is not sufficient in the consumer device market,

Google has acquired, critical human resources of NEST that will help itcombine

smart algorithims, design, slick hardware and data to achieve competitive

advantage in the hardware industry. With Tony Fadell (Founder of NEST ,godfather of the Ipod and member of the I-Phone development team) and his

group, Google has access to the best product people on Earth who are comfortable

working at the intersection of both hardware and software. The many long-time

former employees of Apple could help Google create strategic valuest by developing

compact devices with sensors, computing power and Internet connectivity to generate

revenues in multiple industries.

BIG DATA

With the mission to "organise the world's information and make it accessible", Googlecan now intrude the physical space of consumers and add information to its giant data

collection. Through NEST, the organization can finally collect informationoffline and provide valuable data to advertisers, who are Googles primary

customers. With Nest developing security camera, lock doors and other

connected home products, the huge data goldmine could provide a fuller

picture of users and add great strategic value .These new sets of

parameters of data could help the King of Dataextract important insights

about consumer domestic activities and further strengthen its successful

advertising model.

The Smart-Home Industry Dream

The acquisition of Nest, a smart smoke alarm and thermostat developer,confirms Googlesvision of a conscious home and its strategy to capture thegrowing (number) connected home market. It is a critical component of

Googles wider strategies to occupy a prominent positionin the much largerInternet of Things market by makingAndroid the leading operating system.The acquisition provides Google the back of a growing brand name to stepdeeper into the smart-home market at a time whenInternet services andconsumer appliances are increasingly merging.The acquisition reflectsGoogles emphasis on developinghardware/software solutions, rather thanrelying on operating systems for other manufacturers to implement inconsumer devices. The $3.2 billion is just a strategic insurance payment for a$55 billion company generating $5 billion per quarter in cash, to ensure itdoes not lose out on one of the biggest opportunities of the decade.


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Conclusion

trategically important because it fills a gap in the company's Internet of things strategyand adds hardware design knowhowAnd Google has begun to sprawl: it makes mobile phones (Motorola) and a smartphoneoperating system (Android), and is aiming at self-driving cars, robots, fibre-optic internetservices and (through Page and Brin) asteroid mining. That's because it has to think big:"All of Google's ideas are about reach,Where Google needs to achieve reach to gather data

If you look at this purchase solely from the perspective of an investor, it seems quite pricey. After

all, this is a relatively new start-up with modest revenue in a niche market of thermostats and

smoke detectors. From the perspective of those deploying capital in the expectation of a return oninvestment, future gains are likely to be paltry relative to the billions invested.

very good track record of acquisitions that enhance its core business.

Create hardware, software solutions, not just an online platform

Firm structure and VRIO for strategic profit analysis


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Too big to innovate? Discuss reasons and examples for why established firms

tend to miss disruptive change.


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Misallocation of resources and Organizational Inertia makes it difficult for

incumbent firms to undergo strategic renewal and deal with disruptive change.

Incumbents Curse

Inefficient

resource allocationprocess

OrganizationalInertia

More investment in incrementalinnovation than radical

innovation

Tendency of an establishedorganization to follow its current

trajectory and resist change

Loss of Disruptive Innovation Capability


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Incumbents fail to allocate resources strategically and make investments in

disruptive innovations because of faulty financial evaluation of innovation

projects, established organization values and tendency to become customer

compelled.

Distorted use of NPV as a analytical tool makes firms fall into the DCF trap, as

cash flows from disruptive innovations are not compared to the potential

decline in future performance in absence of the innovation investment (see

diagram).

Misallocationof Resources

Ineffective

financialevaluation

EstablishedOrganisation

Values

Tendency tobecome

customercompelled


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For instance, USX steel did not invest in the new continuous strip production

technology, as it served the lower-end market and did not provide a large

future cash stream in the near future. In a few years, minimills such as

Chaparral drove USX out of lower-tier products and soon improved production

quality to move upstream and capture market share. The inappropriate

financial analysis jeopardized USXs disruptive innovation capability as it

failed to recognize a new technology as a capability for future competitiveness.

As companies become large, the inexorable evolution of values makes them

progressively less capable to invest in disruptive products that serve small,

emerging market. For instance, Digital Equipment Corporation was the most

successful minicomputer maker in 1980s but failed to capture the PC market.In order to minimize overhead costs, DEC had adopted values that dictated

resource allocation to a high gross margin business. Consequently, the

managers could not invest in the low marginPC business, as it did not fit

with Digitals high profit values, leading to the failure to address disruptive

change. Thus, values establish organizational culture that dictates priorities

and could very often as a barrier to strategic resource allocation.

The resource dependence theory explains how the freedom of investment of

large firms is limited to satisfying the needs of the existing, profitable

customers. Customers exercise extraordinary power in directing a firms

investments, as processes are embedded in organizations to weed out

disruptive products that do no address existing customer needs. For instance,

Seagate, the most successful company in the history of microelectronics

industry, was the main supplier of the 5.25-inch hard-disk supplier to IBM-

compatible PC manufacturers. The company invested in developing the3.5inch drives but its principal customers showed no interest in purchasing the


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product, as they were interested in the data storage attribute rather than size

of the drive. In order to maintain the sales volume, the managers pulled out

investment from the disruptive product and channeled it towards sustaining

innovations to increase data storage.Some years later, this consumer-bound

move backfired as new entrants developed 3.5inch drives with high data

storage and reduced Seagate to a second-tier supplier in the new portable

computer market

Organizational inertia plagues an established firm as a result of a dominant

business design, Hubris and Core competency rigidity.

The dominant design that makes large firms successful, also creates an

Adoption Barrier for the firm as they become path-dependent and over

emphasize on incremental innovations to improve the existing designs and

technologies. The existing successful products, business models and

technologies make the large firms risk-averse and increase their risk of falling

in the familiarity trap. For instance, the large Swiss firms that owned 90% of

the world watch market in 1970, did not embrace disruptive innovations and

change their successful dominant designs and technology even when the

Organizational Inertia

Dominant design

Pathdependency

Successful

businessconce t

Core rigidity

Inability tounlearn

Obsolete

mental model

Hubris

Arrogance

Complacency

Self-pride


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Thus, misallocation of resources and organizational inertia prevent

established firms from becoming ambidextrous organizations and

developing dynamic capabilitiesto deal with disruptive change.

Discuss the design of a strategic decision-making process that addresses theuncertainty inherent in allocating resources to innovation


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Innovation performance is determined the way in which resources are

allocated and not by amount of resources spent on innovation. Competitive

pressure requires resource allocation decisions in commercial uncertainty

where outcomes related to technological standards; customer preferences

and completive landscapes are not understood. The filtering funnel/stage-

gate process applies real options lens to provides flexibility and manage

uncertainty in resource allocation in the dynamic environment.

The rational, disciplined and consistent approach enhances strategic flexibility

by allowing managers to make sequential resource commitment decisions

and benefit from updated information as sequence unfolds. It allows firms to

spread their bets by allocating resources thinly rather than concentrating

significant resources on insufficient number of new innovation projects

Strategic Importance of Filter Funnel Process


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Initial Stage

Broad allocation ofinitial funds to many

projects

Funnel Stage

Subsequentreallocation of reourcesaway from projects asuncertainity resolves

Launch Stage

Commit funds to fixednumber of profitable

projects

Innovation

portfoliomanagementin

uncertainmarkets

Strategic

flexibilitywithout

compromising

stability

Options rationale:

right, but notobligation to pursue

a project at a later

time

Design of the Funnel Decision-making process

Breadth Selectiveness High innovation

portfolio performance


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Initial Stage

The managers must adopt the pro-risk approach for resource allocation by

initiating a broad range of projects with less certain above-average payoff

potential, instead of selecting few projects with a certain average payoff.

Contrary to the conservative approach of selecting projects based on NPV,

the pro-risk approach focuses on pay-off distribution and provides an

opportunity to explore uncertain projects that can provide supernormal profits

if they materialize. These radical long-term projects require small investments

initially, and could be discontinued at a later stage when it is established that

there is no realistic market for the product. Thus, the downside exposure is

capped with the option to filter the project; at the same time the upside

opportunity to capture supernormal profits is enhanced at a minimal cost of

learning.

Such pro-risk attitude will benefit firms, as managers will maximize the valueof flexibility and improve the overall average NPD portfolio pay-off by

improving product-hit rates.

Funnel Stage

The central idea of this stage is to optimize funnel management by ensuring

that projects with the highest commercial prospects get full commitment of

funds. Throughout this stage new information is gained and limited resources

are reassigned to the more promising projects. At each stage-gate managers

practice options rationale as they have the right but not the obligation to

pursue the selected projects. Thus, investments are made incrementally at

subsequent decision gates to avoid over commitment of funds.

A large number of gates in the funnel will promote flexibility but more

discipline will be needed to enhance portfolio performance. Especially, at a


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later stage when uncertainty resolves, decision-makers must prune projects

rigorously and make conservative funding decisions as the investment

increases downstream.

The characteristics of a rigorous and disciplined project pruning process that

ensures standardization and objectivity are:

Transparency in stage-gate decision-making criteria

Emphasis on commercial merits triangulated through multiple sources

and not personal relationships

No punishment to managers who discontinue projects

Rotating the stage-gate decision making committee to remove personal

bias

The funnel design should be optimal for the situation and industry as

unneeded flexibility could incur huge costs. Five significant factors should be

considered to decide the flexibility value of the funnel.

Factor Implication

Market VolatilityHigh market volatility requires wide and selective funnel

that promotes high flexibility

Decision-Makingstrategy

Companies capable of making flexible decisions must havewide funnels and many decision gates to improve portfolio

performance

BudgetConstraints

The number of projects undertaken at each stage and the

number of stage gates must depend on the size anddispersion cycle of the budget

ProductCharacteristics

Technological products require more stages as sequentialallocation and re-allocation of resources is important

Project DivisibilityThe divisibility of projects among different stages of thefunnel must be considered while designing the funnel

stage.


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Finally, the managers must tailor process paths to fit customized needs by

allocating decision weights to projects. This will prevent misbalancing of

portfolio as incremental/radical, external/internal and global/local initiatives

will be reflected equally.

Launch Stage

Only a few promising projects that have met the criteria of all stage-gates and

have a high probability of success will be launched to ensure optimal portfolio

performance.


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Key dimensions of the Flexible Management Process

Two key dimensions characterize the design of the flexible innovation

management process: breath and selectivity. Greater resource allocation

breadth ensures a broader project portfolio that addresses different objectives

and helps hedge bets on individual new projects. The more aspects covered,

the higher the probability of some innovation success. Breadth has a

significant positive direct impact on innovation performance as firms allocate

broadly in the early stage and do not discard projects at a time when

commercial viability is not established.

On the other hand, selectiveness through pruning of project portfolio helps to

maximize the performance effect of resource allocation breadth by offsetting

disadvantages such as managerial complexity, loss of strategic focus and

insufficient resourcing to individual projects. Selectiveness provides a

mechanism to discontinue unprofitable projects at later stages and increases

the probability of offering blockbuster products, and preventing launch of

lackluster products

Breadth coupled with selectiveness is an idea of an efficient failure thatenables probing and learning. The dual dimensions of the funnel decision

making process helps firms address uncertainty inherent in innovation

portfolio management by allowing them to first invest broadly, and then

consequently react to information flows by reallocating resources away from

less promising endeavors. This allows high performers to reduce the risk of

error of omissionby exploring all projects when their commercial viability is

unclear and then discarding unprofitable projects at a later stage when

commercial viability is established.


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Flexible innovation management helps the firm align with the rapidly evolving

market environment and provides strategic flexibility that acts as a competitive

success factor and helps outperform competition in uncertain markets.

f they flexibility has been well managed and projects have been pruned

efficiently, one can expectAnother important determinant of the degree of flexibility

is economies of scale. Too many gates and too much flexibility can be very costly andplaces excessive administrative burdens on innovating firms Therefore if firms are

looking for discounts through economies of scale they need to carefully decide their

level of flexibility as it can serve as a barrier to the firms homogeneity

Capabilities required: Strategic Decision Making to ensure a balance ofconservative and pro-risk projects inthe product portfolio initially at effective use

of real options at each gate of the funnel to enhance portfolio performance

Breadth Selectiveness

Firm with strong Innovative intent

Address

uncertainty in

Innovation

Portfolio

Management


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