darral g clarke for bm 4991 bm 499: origins of strategy session 2 ghemawat, chapter one darral g....
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Darral G Clarke for BM 499 1
BM 499: Origins of StrategySession 2Ghemawat, Chapter One
Darral G. ClarkeProfessor of Management
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Historical overview: Theory of the Firm
Dismissed as a strategic planning paradigm: Too hard to understand Not linked to realm of top management
But, it is fundamental to understanding strategy
P
Profit
Q
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Historical overview: HBS and the Concept of Strategy
Andrews, The Concept of Corporate Strategy, (1971) Strengths and Weaknesses Opportunities and Threats
Nice managerial idea--but analytically limited No insight for:
identifying SWOTs evaluating alternative strategies what to do
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Andrews’ Strategy Framework
Environmental Conditions and Trends
EconomicTechnicalPhysicalPoliticalSocial
CommunityNationWorld
Environmental Conditions and Trends
EconomicTechnicalPhysicalPoliticalSocial
CommunityNationWorld
Opportunities and Risks
IdentificationInquiry
Assessment of Risk
Opportunities and Risks
IdentificationInquiry
Assessment of Risk
Consideration ofall combinations
Consideration ofall combinations
Evaluation to determinebest match of
opportunity and resources
Evaluation to determinebest match of
opportunity and resources
Choice of Productsand Markets
Economic Strategy
Choice of Productsand Markets
Economic Strategy
Distinctive Competence
Capabilities:FinancialManagerialFunctionalOrganizational
ReputationHistory
Distinctive Competence
Capabilities:FinancialManagerialFunctionalOrganizational
ReputationHistory
Corporate Resources
As extending or constrainingopportunity
Identification ofstrengths andweaknesses
Programs forincreasingcapability
Corporate Resources
As extending or constrainingopportunity
Identification ofstrengths andweaknesses
Programs forincreasingcapability
Source: Kenneth R. Andrews, The Concept of Corporate Strategy, 1971
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BCG Portfolio ModelThe first “strategic model”
How to think about managing a collection of companiesBased on three concepts
Product life-cycle Experience--Costs decline with accumulated volume Relative market share
RelativeShare:
HighRelative Share
Low HighMarket Growth Rate
Low
Cash Cow Star
DogProblem Child
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Conceptual underpinnings:the product life cycle
The cash flow generated by a company varies predictably across its life
Revenue
Positive Cash
Negative Cash
$
time
Cost
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Product life cycle &Market position
The product life cycle profitability pattern can be approximated by a simple equation:Profit = Industry size(t0)* Industry growth rate * market position * company profit marginIndustry growth rate and relative market share became the key BCG variables
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Pri
ce p
er b
it(M
illi
cent
's)
Cumulated output(bits x 1012)
Source: Integrated Circuit Engineering Corporation
1976
1977
1978
1979
1980
19811982
19831984
100101.00.1
10
25
75
100
50
Experience Curve for Semiconductor Memories
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Conceptual Underpinnings: Experience
log(Cost/unit)
log(Experience) log(Cumulative Volume)
B’’B’
S’S’’
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Portfolio Underpinnings: Market Share
PIMS project: Buzzell, Gale, Schoeffler
Market Share
ROI
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BCG Generic strategy: Price leadership
Price
Cos t
$/ un i t
time
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Portfolio Models: Flow of Funds
Low HighMarket Growth Rate
Low
High
Relative Share
Cash Cow Star
Dog Problem Child
(Harvest)
(Divest)(????)
(Build)
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Problems in Portfolio Paradise: Experience
Experience advantages run out!What causes it in the first place?
Cost/unit
Volume
B’’B’
S’
S’’
log(Cost/unit)
log(Experience (Cumulative Volume)
B’’
B’
S’S’’
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Problems in Portfolio Paradise:Market share
MarketShare ROI
Superior ValueDelivery
Phillips and Antarasian
Profitability not directly related to market share!
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Problems with BCG ApproachExperience
Declining costs are not universal—experience declines become minimal
Focus on cost decreases innovation and long-run competitiveness
Experience is not proprietary
Portfolio models Classification problems—ambiguity and bias Capital may not be the only, or even a, constrained resource Balance is achieved by reducing the overall profitability of
the combined firm May lead to analytical detachment at the expense of insight
and creativity Neglect of technological development
Darral G Clarke for BM 499
Investmentand
Growth
High
High
Low
Low
Medium
Medium
Selectivity
Harvest/ Divest
Harvest/ DivestSelectivity
Selectivity
Industry Attractiveness B
usi
ness
Str
ength Selective
Growth
SelectiveGrowth
Harvest/Divest
Harvest/Divest
Harvest/Divest
The Industry Attractiveness-Business Strength Matrix
Darral G Clarke for BM 499
Environmental Attractiveness
CompetitivePosition
Advantage
Disadvantage
Low High
Two Determinants of Profitability
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Volume
Cost/unit
LRAC
Experience
Experience
Scale
New technology
An Expanded Version of Generic StrategiesBroader set of cost structuresMore diverse set of competitive environmentsApply economic theory of long run average cost
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Strategy and long-run average cost
Cost advantage from volume
Low High
Ability todifferentiateproduct
High
Low
FragmentedProfitable &Defensible
Stalemate Volume
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Competitive Strategy and Long Run Cost/Differentiation I
Volume Industry Low cost leadership type markets There is an advantage in scale or
technology
Stalemate Industry Can’t differentiate Economies of scale, experience common to
competitors No process innovation
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Competitive Strategy and Long Run Cost/Differentiation II
Fragmented Industry Differentiation is key competitive factor Niche strategy Volume in niches inadequate to achieve volume cost
advantages
Profitable and defensible industry Differentiated product Customer preference Low cost producer of differentiated product
Transitory industry Cost advantage based on labor Cost advantage based on any other temporary
advantage
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Use of Strategic Planning Paradigms
Use for insight and structure Have I considered the important factors? Is structure consistent with “orthodox strategy?” What is inconsistent?
Does it indicate a problem? Does it indicate an opportunity?
Be creative in determining strategy Orthodox strategy can still be creatively defined and
executed Unorthodox strategy can surprise competitors
Test detail of strategy against “orthodox” Does the value chain make sense?
Balance short run and long run considerations