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Darral G Clarke for BM 4991 BM 499: Origins of Strategy Session 2 Ghemawat, Chapter One Darral G. Clarke Professor of Management.

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Presentation on theme: "Darral G Clarke for BM 4991 BM 499: Origins of Strategy Session 2 Ghemawat, Chapter One Darral G. Clarke Professor of Management."— Presentation transcript:

1 Darral G Clarke for BM 4991 BM 499: Origins of Strategy Session 2 Ghemawat, Chapter One Darral G. Clarke Professor of Management

2 Darral G Clarke for BM 4992 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

3 Darral G Clarke for BM 4993 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

4 Darral G Clarke for BM 4994 Andrews’ Strategy Framework Environmental Conditions and Trends Economic Technical Physical Political Social Community Nation World Environmental Conditions and Trends Economic Technical Physical Political Social Community Nation World Opportunities and Risks Identification Inquiry Assessment of Risk Opportunities and Risks Identification Inquiry Assessment of Risk Consideration of all combinations Evaluation to determine best match of opportunity and resources Choice of Products and Markets Economic Strategy Choice of Products and Markets Economic Strategy Distinctive Competence Capabilities: Financial Managerial Functional Organizational Reputation History Distinctive Competence Capabilities: Financial Managerial Functional Organizational Reputation History Corporate Resources As extending or constraining opportunity Identification of strengths and weaknesses Programs for increasing capability Corporate Resources As extending or constraining opportunity Identification of strengths and weaknesses Programs for increasing capability Source: Kenneth R. Andrews, The Concept of Corporate Strategy, 1971

5 Darral G Clarke for BM 4995 BCG Portfolio Model The first “strategic model” How to think about managing a collection of companies Based on three concepts Product life-cycle Experience--Costs decline with accumulated volume Relative market share Relative Share: High Relative Share Low High Market Growth Rate Low Cash Cow Star Dog Problem Child

6 Darral G Clarke for BM 4996 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

7 Darral G Clarke for BM 4997 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 margin Industry growth rate and relative market share became the key BCG variables

8 Darral G Clarke for BM 4998 Price per bit (Millicent's) Cumulated output (bits x 10 12 ) Source: Integrated Circuit Engineering Corporation 1976 1977 1978 1979 1980 1981 1982 1983 1984 100101.00.1 10 25 75 100 50 Experience Curve for Semiconductor Memories

9 Darral G Clarke for BM 4999 Conceptual Underpinnings: Experience log(Cost/unit) log(Experience) log(Cumulative Volume) B’’ B’ S’ S’’

10 Darral G Clarke for BM 49910 Portfolio Underpinnings: Market Share PIMS project: Buzzell, Gale, Schoeffler Market Share ROI

11 Darral G Clarke for BM 49911 BCG Generic strategy: Price leadership Price Cost $/unit time

12 Darral G Clarke for BM 49912 Portfolio Models: Flow of Funds LowHigh Market Growth Rate Low High Relative Share Cash Cow Star Dog Problem Child (Harvest) (Divest) (????) (Build)

13 Darral G Clarke for BM 49913 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’’

14 Darral G Clarke for BM 49914 Problems in Portfolio Paradise: Market share Market Share ROI Superior Value Delivery Phillips and Antarasian Profitability not directly related to market share!

15 Darral G Clarke for BM 49915 Problems with BCG Approach Experience 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

16 Investment and Growth High Low Medium Selectivity Harvest/ Divest Harvest/ Divest Selectivity Industry Attractiveness Business Strength Selective Growth Selective Growth Harvest/ Divest Harvest/ Divest Harvest/ Divest The Industry Attractiveness- Business Strength Matrix

17 a Environmental Attractiveness Competitive Position Advantage Disadvantage LowHigh Two Determinants of Profitability

18 Darral G Clarke for BM 49918 Volume Cost/unit LRAC ExperienceExperience ExperienceExperience Scale New technology An Expanded Version of Generic Strategies Broader set of cost structures More diverse set of competitive environments Apply economic theory of long run average cost

19 Darral G Clarke for BM 49919 Strategy and long-run average cost Cost advantage from volume Low High Ability to differentiate product High Low Fragmented Profitable & Defensible StalemateVolume

20 Darral G Clarke for BM 49920 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

21 Darral G Clarke for BM 49921 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

22 Darral G Clarke for BM 49922 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


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