CHAPTER 1: Strategic Management & Strategic Competitiveness

CHAPTER 1: Strategic Management & Strategic Competitiveness
PART 1: STRATEGIC MANAGEMENT INPUTS CHAPTER 1: Strategic Management & Strategic Competitiveness

The Strategic Management Process
FIGURE 1.1 The Strategic Management Process

KNOWLEDGE OBJECTIVES ● Define strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process. ● Describe the competitive landscape and explain how globalization and technological changes shape it. ● Use the industrial organization (I/O) model to explain how firms can earn above-average returns. ● Use the resource-based model to explain how firms can earn above-average returns.

KNOWLEDGE OBJECTIVES ● Describe vision and mission and discuss their value. ● Define stakeholders and describe their ability to influence organizations. ● Describe the work of strategic leaders. ● Explain the strategic management process.

IMPORTANT DEFINITIONS
● STRATEGIC COMPETITIVENESS - achieved when a firm successfully formulates and implements a value-creating strategy ● STRATEGY - an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage ● COMPETITIVE ADVANTAGE - when a firm implements a strategy that creates superior value for customers; competitors are unable to duplicate it or find too costly to imitate it

● RISK - an investor’s uncertainty about the economic gains or losses that will result from a particular investment ● ABOVE-AVERAGE RETURNS - returns in excess of what an investor expects to earn from other investments with a similar amount of risk ● AVERAGE RETURNS - returns equal to those an investor expects to earn from other investments with a similar amount of risk

OPENING CASE ONCE A “GIANT,” BORDERS BECAME A “WEAKLING” ON ITS KNEES INABILITY TO EARN AVERAGE RETURNS resulted first in decline and, eventually, failure ●Enjoyed considerable success early on ●Tried to enrich its traditional approach with more marketing and more attractive stores, demonstrating a lack of market understanding ● Declining book sales for large chain store retailers ● Should have been entrepreneurial, innovative, and market-oriented BORDERS - OPENING CASE - FAILURE EXAMPLE

THE STRATEGIC MANAGEMENT PROCESS
■ FIRST: External environment and internal organization are analyzed to determine resources, capabilities, and core competencies—the sources of “strategic inputs.” ■ NEXT: Vision and mission are developed; strategies are formulated. ■ THEN: Strategies are implemented with the goal of achieving strategic competitiveness and above-average returns. ■ DYNAMIC PROCESS: Continuously changing markets and industry conditions must match evolving strategic inputs.

Rational: the approach firms use to achieve strategic competitiveness and earn above-average returns FORMULATION and IMPLEMENTATION: the two types of strategic actions that must be simultaneously integrated to successfully employ the strategic management process

PART I: STRATEGIC INPUTS Chapters , Vision/Mission STRATEGY FORMULATION PART II: STRATEGIC ACTIONS- Chapters , 5, 6, 7, 8 & 9 STRATEGY IMPLEMENTATION PART III: STRATEGIC ACTIONS- Chapters , 11, 12 & 13 The text is divided into three parts.

THE COMPETITIVE LANDSCAPE
■ GLOBALIZATION - emergence of a global economy ■ TECHNOLOGY - rapid technological changes ■ INDUSTRY BOUNDARIES BLURRING ■ EXAMPLES - computer networks and telecommunications have blurred the boundaries of the entertainment industry ■ MSNBC is co-owned by NBC Universal and Microsoft ■ General Electric owns 49 percent of NBC Universal and Comcast owns the remaining 51 percent ■ STRATEGIC MANAGEMENT PROCESS - effective use of the strategic management process reduces the likelihood of failure for firms as they encounter the conditions of today’s competitive landscape

■ HYPERCOMPETITION - characterized by ■ Market instability and change ■ Rapidly escalating competition ■ Aggressive challengers ■ Strategic maneuvering to establish first- mover advantage ■ Technology industries ■ TWO DRIVERS - GLOBALIZATION - TECHNOLOGY ■ Strategic flexibility - important tool

THE GLOBAL ECONOMY ■ Goods, services, people, skills, and ideas move freely across geographic borders ■ New opportunities and challenges emerge ■ Competitive environments are broader and increasingly more complex

THE GLOBAL ECONOMY ■ The European Union has become one of the world’s largest markets, with 700 million potential customers ■ China has become the second largest economy in the world surpassing Japan ■ India, the world’s largest democracy, has an economy that now ranks as the fourth largest in the world

STRATEGIC FOCUS Huawei also needs Guanxi in the United States GUANXI ■ Strong relationships in which each party feels obligated to help the other ■ Key element of doing business in China ■ Building strong relationships is an important dimension of Chinese culture; Guanxi is also important when conducting business in the United States

THE GLOBAL ECONOMY ■ Hypercompetitive business environment challenges firms to reconsider which markets to compete in; this positioning is more critical than ever ■ GE - headquartered in the U.S., yet up to 60% of its revenue growth through 2015 will be generated from rapidly developing economies such as China and India ■ Jeffrey Immelt - suggests that we have entered a new economic era in which the global economy will be more volatile and emerging economies such as Brazil, China, and India will be the major drivers of growth

THE COMPETITIVE LANDSCAPE THE MARCH OF GLOBALIZATION
Globalization is increasing economic interdependence among countries and their organizations as reflected in the flow of goods and services, financial capital, and knowledge across country borders. Globalization is the product of a large number of firms competing against one another in an increasing number of global economies. Highly globalized firms must anticipate ever-increasing complexities in their operations as goods, services, people, etc. move freely across geographic borders.

THE COMPETITIVE LANDSCAPE THE MARCH OF GLOBALIZATION
Globalization has led to higher performance standards in quality, cost, productivity, product introduction time, and operational efficiency. These standards translate and impact domestic-only firms as well. Free flow of resources among global economies, global sourcing for firms, global purchasing for customers, and a global forum for workers all serve as a key source of competitive advantage for firms. Firms must learn that in this twenty-first century competitive landscape, only firms capable of meeting, if not exceeding, global standards, have the capability to earn above-average returns.

THE COMPETITIVE LANDSCAPE THE RISKS OF GLOBALIZATION
Significant time is required for firms to learn how to compete in new markets, and performance may suffer during this time. With globalization, firms may over-diversify internationally, which can have strong negative effects on a firm’s overall performance. It is critical for firms competing globally to remain strategically committed to and competitive in both domestic and international markets.

TECHNOLOGY AND TECHNOLOGICAL CHANGES THREE CATEGORIES for TECHNOLOGY TRENDS Technology is significantly altering the nature of competition and enabling unstable competitive environments ■Technology Diffusion & Disruptive Technologies ■ Information Age ■ Increasing Knowledge Intensity

TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 ■ Technology Diffusion – the speed at which new technologies become available and are used; has increased substantially over the past 15 to 20 year. ■ Examples of technology diffusion: How long it took to get the following into 25 percent of U.S. homes: ● Telephone — 35 years ● TV — 26 years ● Radio — 22 years ● PCs — 16 years ● Internet — 7 years

TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Perpetual Innovation ■ Perpetual Innovation - describes how rapidly and consistently new, information-intensive technologies replace older ones ■ Competitive Premium - the shorter product life cycles resulting from rapid diffusions of new technologies place a competitive premium on being able to quickly introduce new, innovative goods and services ■ Competitive Advantage - speed to market with innovative products is a primary source of competitive advantage

TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Perpetual Innovation ■ Innovations must be derived from an understanding of global standards and global expectations in terms of product functionality ■ Apple - an excellent example of radical innovation by a large established firm ■ Technology Diffusion - to diffuse the technology and enhance the innovation value, firms need to be innovative in incorporating the new technology into their product

TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Perpetual Innovation ■ Rapid Technology Diffusion - now may take only 12 to 18 months for firms to gather information about research and development and product decisions for their competitors ■ Patents - may be an effective protection of proprietary technology in a small number of industries, e.g., pharmaceuticals ■ Proprietary Strategies - many firms often do not apply for patents to prevent competitors from gaining access to the technological knowledge included in the patent application, e.g., the electronics industry

TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Disruptive Technologies ■ Disruptive Technologies - technologies that destroy the value of an existing technology and create new markets, many times representing radical or breakthrough innovation ■ Examples: iPods, iPads, WiFi, and the browser ■ Industry Incumbents Harmed or Destroyed – a disruptive or radical technology creates a new industry, thereby destroying the existing industry; with superior resources, experience, and access to the new technology, some incumbents may be able to adapt

TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Technology and Innovation Strategic Focus: Apple ■ Apple’s “legendary” market power, phenomenal growth rate, and impressive financial performance stem from its new technology development and innovation ■ Imitators - Apple is expected to retain at least 80% of the tablet computer market even with the many imitative products on the market ■ International- Apple’s stores in China handle 40,000 people daily, four times the average flow of U.S. customers

TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Technology and Innovation Strategic Focus: Apple ■ Versatility - Apple provides an example of technological entrepreneurship across multiple industries ■ Disruptive Technologies ● Innovation and industry transformation, e.g., iPod, iPad, and the iPhone ● iPod and the complementary iTunes have revolutionized how music is sold and used by consumers ● iPad, in conjunction with Amazon’s Kindle, is changing the publishing industry; moving to electronic books

TECHNOLOGY AND TECHNOLOGICAL CHANGES The Information Age - Category 2 ■ Dramatic Changes - in information technology have occurred in recent years, e.g., personal computers, cellular phones, artificial intelligence, virtual reality, massive databases, and multiple social networking sites ■ Competitive Advantage - the ability to effectively and efficiently access and use information has become an important source of competitive advantage in virtually all industries ■ Information Technology - enables small firms to be flexible and competitive in the global arena

TECHNOLOGY AND TECHNOLOGICAL CHANGES The Information Age - Category 2 ■ Change - both the pace of change in information technology and its diffusion will continue to increase ■ Cost - the declining costs of information technologies and the increased accessibility to them are evident in the current competitive landscape ■ Internet - contributing factor to hypercompetition ■ Speed and Diffusion - the global proliferation of computers increases the speed and diffusion of information technologies and enables a level playing field

TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity - Category 3 ■ Knowledge - information, intelligence, and expertise are the basis of technology and its application ■ Competitive Advantage - in the 1980s, the basis of competition shifted from hard assets to intangible resources; knowledge is a critical organizational resource and an increasingly valuable source of competitive advantage ■ Intangible Resource – knowledge gained through experience, observation, and inference is an intangible resource; the value of intangible resources is growing as a proportion of total shareholder value .

TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity - Category 3 ■ Strategic Competitiveness - enhanced for the firm that develops the ability to capture intelligence, transform it into usable knowledge, and diffuse it rapidly throughout the firm ■ Competitive Advantage - firms must develop (e.g., through training programs) and acquire (e.g., by hiring educated and experienced employees) knowledge, integrate it into the organization to create capabilities, and then apply it to gain a competitive advantage

TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity - Category 3 ■ Knowledge Spillovers - knowledge falls into competitor’s hands, e.g., hiring of professional staff/managers by competitors ■ Knowledge Diffusion - because of the potential for spillovers, firms must act quickly to use their knowledge in productive ways ■ Strategic Flexibility - facilitates knowledge diffusion to where it has value

TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity - Category 3 STRATEGIC FLEXIBILITY ■ Set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment ■ Enables the capacity to learn ■ Facilitates coping with hypercompetition, uncertainty, and risk ■ Firms should try to develop strategic flexibility in all areas of operations

TWO MODELS OF STRATEGIC DECISION MAKING
Firms use two major models to help develop their vision and mission and then choose one or more strategies in pursuit of strategic competitiveness and above-average returns. EXTERNAL I/O MODEL INTERNAL RESOURCE-BASED MODEL

THE I/O MODEL OF ABOVE-AVERAGE RETURNS Four Underlying Assumptions
Grounded in economics, the I/O model has First, the external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns. Second, most firms competing within an industry or within a segment of that industry are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources. Four Underlying Assumptions

THE I/O MODEL of ABOVE-AVERAGE RETURNS
Third, resources used to implement strategies are assumed to be highly mobile across firms, so any resource differences that might develop between firms will be short-lived. Fourth, organizational decision-makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behavior.

The Five Forces Model of competition is an analytical tool used to help firms find the industry that is the most attractive, as measured by its profitability potential. The Five Forces Model suggests that an industry’s profitability (i.e., its rate of return on invested capital relative to its cost of capital) is a function of interactions among the Five Forces: suppliers, buyers, rivalry, product substitutes, and potential entrants to the industry.

FIRMS CAN EARN ABOVE-AVERAGE RETURNS: ● Cost Leadership Strategy – producing standardized goods or services at costs below those of competitors ● Differentiation Strategy - producing differentiated goods or services for which customers are willing to pay a price premium The I/O model suggests that above-average returns are earned when firms are able to effectively study the external environment as the foundation for identifying an attractive industry and implementing the appropriate strategy.

THE I/O MODEL OF ABOVE-AVERAGE RETURNS
Research findings support the I/O model, in that approximately 20% of a firm’s profitability is explained by the industry in which it chooses to compete. However, this research also shows that 36% of the variance in firm profitability can be attributed to the firm’s characteristics and actions. These findings suggest that the External AND Internal environments influence the company’s ability to achieve strategic competitiveness and earn above-average returns.

THE I/O MODEL OF ABOVE-AVERAGE RETURNS
FIGURE 1.2 The I/O Model of Above Average Returns

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS
The resource-based model assumes that each organization is a collection of unique resources and capabilities. The uniqueness of its resources and capabilities is the basis of a firm’s strategy and its ability to earn above-average returns. The core assumption of the resource-based model is that the firm’s unique resources, capabilities, and core competencies have more influence on selecting and using strategies than does the firm’s external environment.

There are FOUR components to the Resource- Based Model: ● Resources ● Capabilities ● Core Competencies ● Competitive Advantage There are FOUR criteria that if resources and capabilities fulfill, then they become Core Competencies: ● Valuable ● Rare ● Costly to Imitate ● Nonsubstitutable

Resources are inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers. A firm’s resources are either tangible or intangible and are classified into three categories: physical, human, and organizational capital. Resources alone may not yield a competitive advantage. Many resources can either be imitated or substituted over time, therefore, it is difficult to achieve and sustain a competitive advantage based on resources alone.

THE RESOURCE-BASED MODEL of ABOVE-AVERAGE RETURNS
A capability is the capacity for a set of resources to perform a task or an activity in an integrative manner. Capabilities evolve over time and must be managed dynamically in pursuit of above-average returns. Core competencies are resources and capabilities that serve as a source of competitive advantage. KEY WORD: INTEGRATIVE

When these four criteria are met, resources and capabilities become core competencies: VALUABLE They are valuable when they allow a firm to take advantage of opportunities or neutralize threats. RARE They are rare when possessed by few, if any, current and potential competitors. COSTLY TO IMITATE Resources are costly to imitate when other firms cannot obtain them or are at a cost disadvantage. NON-SUBSTITUTABLE They are nonsubstitutable when they have no structural equivalents.

Four Underlying Assumptions First, differences in firms’ performances across time are due primarily to their unique resources and capabilities rather than the industry’s structural characteristics. Second, firms acquire different resources and develop unique capabilities based on how they combine and use the resources.

THE RESOURCE-BASED MODEL of ABOVE-AVERAGE RETURNS
Third, that resources and capabilities are NOT highly mobile across firms. Fourth, that the differences in resources and capabilities are the basis of competitive advantages. Above-average returns are earned when the firm uses its valuable, rare, costly-to-imitate, and nonsubstitutable resources and capabilities to compete against its rivals in one or more industries.

FIGURE 1.3 The Resource-Based Model of Above Average Returns

TWO MODELS OF STRATEGIC DECISION MAKING
Evidence indicates that both models yield insights that are linked to successfully selecting and using strategies. EXTERNAL I/O MODEL INTERNAL RESOURCE-BASED MODEL

VISION Vision is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve. A vision statement is short and concise, making it easy to remember. It articulates the ideal description of the organization and gives shape to its intended future.

VISION A firm’s vision tends to be enduring, whereas its mission can change in light of changing environmental conditions. vision statements reflect a firm’s values and aspirations and are intended to capture the heart and mind of each stakeholder. Executives and top-level managers must formulate and implement strategies consistent with the vision.

VISION Examples: Our vision is to be the world’s best quick service restaurant. (McDonald’s) To make the automobile accessible to every American. (Ford Motor Company’s vision when established by Henry Ford)

MISSION The vision is the foundation for the firm’s mission.
The firm’s mission is more concrete than its vision. A mission specifies the business or businesses in which the firm intends to compete and the customers it intends to serve.

MISSION Examples: Be the best employer for our people in each community around the world and deliver operational excellence to our customers in each of our restaurants. (McDonald’s) Our mission is to be recognized by our customers as the leader in applications engineering. We always focus on the activities customers desire; we are highly motivated and strive to advance our technical knowledge in the areas of material, part design, and fabrication technology. (LNP, a GE Plastics Company)

MISSION Similar to the vision, a mission should establish a firm’s individuality and should be inspirational to all stakeholders. A firm’s vision and mission are critical aspects of the strategic inputs required to engage in strategic actions that help achieve strategic competitiveness and earn above-average returns.

VISION, MISSION AND ETHICS
The probability of forming an effective mission increases when employees have a strong sense of the ethical standards that guide their behaviors. ●VISION Deciding what a firm wants to become ●MISSION Deciding who it intends to serve and how it wants to serve those individuals and groups Business ethics are a vital part of:

Competitive Advantage
hort STAKEHOLDERS Are there individuals, groups, and organizations who have a stake in the organization ● Who can affect the firm’s vision and mission? ● Are affected by the strategic outcomes achieved? ● Have enforceable claims on the firm’s performance? Competitive Advantage Firms effectively managing stakeholder relationships outperform those that do not.

hort STAKEHOLDERS Organizations are not equally dependent on all stakeholders, so not every stakeholder has the same level of influence. The more critical and valued a stakeholder’s participation, the greater a firm’s dependence on it, which gives the stakeholder more potential influence over the firm. Managers must find ways to accommodate or insulate the organization from the demands of stakeholders controlling critical resources.

CLASSIFICATION OF STAKEHOLDERS
Three groups of stakeholders: C ● Shareholders and the major suppliers of a firm’s capital ● A firm’s primary customers, suppliers, host communities, and unions representing the workforce ● Firm’s employees, including both non-managerial and managerial personnel Capital market stakeholders Product market stakeholders Organizational stakeholders

FIGURE 1.4 The Three Stakeholder Groups

Trade-offs must be made in situations where the objectives of various stakeholder groups differ or conflict. ● Shareholders – individuals and groups who have invested capital in a firm in the expectation of earning a positive return on their investments. These stakeholders’ rights are grounded in laws governing private property and private enterprise. ● Consumers – interests are maximized when the quality and reliability of a firm’s products are improved, but without high prices. ● High returns to customers might come at the expense of lower returns for capital market stakeholders and vice-versa. Conflict examples:

MANAGING STAKEHOLDER CONFLICT
First, a firm must thoroughly identify and understand all important stakeholders. Second, it must prioritize them, in case it cannot satisfy all of them. Power is the most critical criterion in prioritizing stakeholders. Other criteria might include the urgency of satisfying each particular stakeholder group and the degree of importance of each to the firm’s above-average returns.

POWER URGENCY IMPORTANCE STAKEHOLDER PRIORITIES

CHALLENGES: When earning above-average returns, a firm can more easily satisfy multiple stakeholders simultaneously. When earning only average returns, a firm is unable to maximize the interests of all stakeholders, thus stakeholders should be at least minimally satisfied. Cultural differences and societal values also influence stakeholder priorities.

CAPITAL MARKET STAKEHOLDERS BALANCING CONFLICTING SHAREHOLDER GOALS
The returns that shareholders expect are commensurate with the degree of risk accepted with those investments. CHALLENGING FOR MANAGERS: ● Some shareholders want short-term increases in returns ● Others desire building long-term competitiveness Often large shareholders prefer that the firm minimize its use of debt because of the risk of debt, its cost, and the possibility that debt holders have first call over shareholders on the firm’s assets in case of default.

PRODUCT MARKET STAKEHOLDERS
Though all product market stakeholders are important, without customers, the other product market stakeholders are of little value. Customers demand reliable products at the lowest possible prices. Host communities want companies willing to be long-term employers and providers of tax revenue without placing excessive demands on public support services.

PRODUCT MARKET STAKEHOLDERS
Suppliers seek loyal customers who are willing to pay the highest sustainable prices for the goods and services they receive. Union officials are interested in secure jobs, under highly desirable working conditions, for the employees they represent. Product market stakeholders are generally satisfied when a firm’s profit margin reflects at least a balance between the returns to capital market stakeholders and goals of product market stakeholders.

ORGANIZATIONAL STAKEHOLDERS
Employees expect the firm to provide a dynamic, stimulating, and rewarding work environment. Employees are usually satisfied working for a company that is: ● Growing ● Actively developing their skills to be effective team members ● Meeting or exceeding global work standards

ORGANIZATIONAL STAKEHOLDERS
International assignments help cultivate employee skills for the global competitive landscape. The process of managing expatriate employees and helping them build knowledge can have significant effects on a firm’s global competence. To be successful, strategic leaders must effectively leverage a firm’s human capital.

STRATEGIC LEADERS Strategic leaders are people located in different areas and levels of the firm using the strategic management process to select strategic actions that help the firm achieve its vision and fulfill its mission. Successful strategic leaders are decisive, committed to nurturing those around them, and are committed to helping the firm create value for all stakeholder groups.

STRATEGIC LEADERS Increasingly, CEOs delegate strategic responsibilities to include decision-makers closest to the action due to the changing competitive landscape: The global economy Globalization Rapid technological change Increasing importance of knowledge People as sources of competitive advantage

STRATEGIC LEADERS AND ORGANIZATIONAL CULTURE
Visionary Strategic Leaders emphasize not only maximizing shareholder wealth, but maximizing the interests of all stakeholders, underscoring a civic and personal commitment to corporate citizenship. Organizational culture affects strategic leaders and their work. In turn, strategic leaders’ decisions and actions shape a firm’s culture. Organizational culture is the social energy that drives—or fails to drive—the organization, the ideologies, symbols, and shared core values.

THE WORK OF EFFECTIVE STRATEGIC LEADERS
SUCCESSFUL STRATEGIC LEADERSHIP CHARACTERISTICS Hard working ● Embraces dynamic competitive landscape Brutally honest Tenacious Penchant for wanting the firm and its people to accomplish more Strong strategic orientation

THE WORK OF EFFECTIVE STRATEGIC LEADERS
SUCCESSFUL STRATEGIC LEADERSHIP CHARACTERISTICS Innovative thinker Exploratory learning of new and unique forms of knowledge Exploitative learning, which adds incremental knowledge to existing knowledge bases Global mindset Dreams that challenges and energizes a company, i.e., vision

PART 1: STRATEGIC MANAGEMENT INPUTS
CHAPTER 2 The External Environment: Opportunities, Threats, Industry Competition, & Competitor Analysis

KNOWLEDGE OBJECTIVES ● Explain the importance of analyzing and understanding the firm’s external environment. ● Define and describe the general environment and the industry environment. ● Discuss the four activities of the external environmental analysis process. ● Name and describe the general environment’s seven segments.

KNOWLEDGE OBJECTIVES ● Identify the five competitive forces and explain how they determine an industry’s profit potential. ● Define strategic groups and describe their influence on the firm. ● Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them.

A firm’s EXTERNAL ENVIRONMENT is broken down into three parts: ● General ● Industry ● Competitor A firm’s strategic actions are influenced by the conditions in all three parts.

MACRO MICRO ● General Environment Dimensions in the broader society that influence an industry and the firms within it ● Industry Environment Set of factors that directly influences a firm and its competitive actions and response ● Competitor Environment Focuses on each company against which a firm directly competes

THE EXTERNAL ENVIRONMENT
FIGURE The External Environment

BRITISH PETROLEUM (BP)
OPENING CASE BRITISH PETROLEUM (BP) External environment affects a firm’s strategic actions ●BP seeks to expand its oil reserves after the Deepwater Horizon oil and gas drilling platform disaster in the Gulf of Mexico by forming joint ventures in Russia with Rosneft Corporation and in India with Reliance Industries. ●BP’s strategic actions are also affected by conditions in other segments of its general environment: e.g., the political/legal, social/cultural, and physical environment segments.

A firm’s external environment creates: ● OPPORTUNITIES e.g., the opportunity for BP to enter other global markets, and ● THREATS e.g., the possibility that additional regulations in its markets will reduce opportunities for BP to extract oil and gas Collectively, opportunities and threats affect a firm’s strategic actions.

EXTERNAL ENVIRONMENT UNDERSTANDING INTERNAL ENVIRONMENT KNOWLEDGE VISION, MISSION, AND STRATEGY MATCHING

GENERAL ●The General Environment is grouped into seven environmental segments: [1] Demographic [2] Economic [3] Political/Legal [4] Sociocultural [5] Technological [6] Global [7] Physical ●To successfully deal with uncertainty in the external environment and achieve strategic competitiveness, firms must be aware of and understand these segments.

GENERAL ● Firms cannot directly CONTROL the general environment’s segments. ● However, these segments influence the actions that firms take. ● Successful firms learn how to gather the information needed to understand all segments and their implications for selecting and implementing the firm’s strategies.

GENERAL SEGMENTS AND ELEMENTS THE DEMOGRAPHIC SEGMENT Demographic segments are commonly analyzed on a global basis because of their potential effects across countries’ borders and because many firms compete in global markets. Demographic Segment Population size Age structure Geographic distribution Ethnic mix Income distribution

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND ELEMENTS
THE ECONOMIC SEGMENT This segment refers to the nature and direction of the economy in which a firm competes or may compete. Firms generally seek to compete in relatively stable economies with strong growth potential. With globalization and the interconnectedness of nations, firms must scan, monitor, forecast, and assess the health of their host nation and the health of the economies outside their host nation. Economic Segment Budget deficits or surpluses Personal savings rate Inflation rates Business savings rates Interest rates Gross domestic product Trade deficits or surpluses

THE POLITICAL/LEGAL SEGMENT This segment represents how organizations and governments mutually try to influence each other, and how firms try to understand these influences (current and projected) on their strategic actions. Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

GENERAL SEGMENTS AND ELEMENTS THE SOCIOCULTURAL SEGMENT The sociocultural segment is concerned with a society’s attitudes and cultural values. Because attitudes and values form the cornerstone of a society, they often drive demographic, economic, political/legal, and technological conditions and changes. Sociocultural Segment Women in the workforce Workforce Diversity attitudes about the quality of work life Shifts in work and career preferences Shifts in product and service preference characteristics

THE TECHNOLOGICAL SEGMENT Technological changes occur through new products, processes, and materials. The technological segment includes the activities involved in creating new knowledge and translating that knowledge into new outputs, products, processes, and materials. Given the rapid pace of technological change and risk of disruption, it is vital for firms to study this segment. Technological Segment Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies

THE GLOBAL SEGMENT Markets and consumers are more global. This segment includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets. Global Segment Important political events Critical global markets Newly industrialized countries Different cultural and institutional attributes

GENERAL SEGMENTS AND ELEMENTS THE PHYSICAL ENVIRONMENT SEGMENT Concerned with trends oriented to sustaining the world’s physical environment, firms recognize that ecological, social, and economic systems interactively influence what happens in this particular segment. This segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes. Physical Environment Segment Energy consumption Practices used to develop energy sources Renewable energy efforts Minimizing a firm’s environmental footprint Availability of water as a resource Producing environmentally friendly products Reacting to natural or man-made disasters

GENERAL SEGMENTS AND ELEMENTS THE PHYSICAL ENVIRONMENT SEGMENT Strategic Focus: Firms’ Efforts to Take Care of the Physical Environment in Which They Compete ● The examples noted in this Strategic Focus: Siemens AG, McDonald’s, Procter & Gamble, and GE signify a growing commitment by firms around the globe in response to emerging trends in the physical environment segment. ● In addition to positively responding to the observed trends in this segment of the general environment, there is some evidence that firms engaging in these types of behaviors outperform those failing to do so. ● This emerging evidence suggests that these behaviors benefit companies, their stakeholders, and the physical environment in which they operate. EXAMPLE

EXTERNAL ENVIRONMENTAL ANALYSIS
External environments are: Turbulent Complex Global Uncertain Ambiguous Incomplete Firms engage in external environmental analysis to better understand and cope with their environments. This analysis has four parts: scanning, monitoring, forecasting, and assessing.

SCANNING Identifying early signals of environmental changes and trends. MONITORING Detecting meaning through ongoing observations of environmental changes and trends. FORECASTING Developing projections of anticipated outcomes based on monitored changes and trends. ASSESSING Determining the timing and importance of environmental changes and trends for firms’ strategies and management. Analyzing the external environment is a difficult, yet significant, activity.

● Identifying opportunities and threats is an important objective of studying the general environment. ● OPPORTUNITY is a condition in the general environment that if exploited effectively, helps a company achieve strategic competitiveness. EXAMPLE: Procter & Gamble (P&G) is reorienting beauty products to better serve both men and women.

● THREAT is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness. EXAMPLE: Microsoft is experiencing a severe external threat as smartphones are expected to surpass personal computer (PC) sales in the near future.

Firms use several sources to analyze the general environment:  trade publications  newspapers  business publications  academic research  public polls  trade shows  suppliers  customers  employees People in boundary-spanning positions can obtain a great deal of this type of information. Examples: salespersons, purchasing managers, public relations directors, and customer service representatives, each of whom interacts with external constituents

EXTERNAL ENVIRONMENTAL ANALYSIS: SCANNING
Scanning: the study of all segments in the general environment; through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already underway Scannin g often reveals ambigu ous, incompl ete, or unconn ected data and informat ion. Environ mental scannin g is challeng ing but critically importa nt for firms, especial ly those competi ng in highly volatile environ ment. Many firms use special software to reduce the trade-off between an important missed event and false alarm rates. Also, the Internet provides significant opportunities for scanning.

EXTERNAL ENVIRONMENTAL ANALYSIS: MONITORING
Monitoring: analysts observe MEANINGFUL environmental changes to see if an important trend is emerging from among those spotted through scanning Effective monitoring requires the firm to identify important stakeholders and understand its reputation among these stakeholders as the foundation for serving their unique needs. Scanning and monitoring are particularly important when a firm competes in an industry with high technological uncertainty.

EXTERNAL ENVIRONMENTAL ANALYSIS: FORECASTING
Forecasting: feasibility projections developed for what might happen, and how quickly, as a result of the changes and trends detected through scanning and monitoring, both of which focus on events at a point in time Technology trends are continually driving product life cycles shorter, which makes forecasting demand for new technological products that much more challenging. During an economic downturn, forecasting becomes more difficult and more important.

EXTERNAL ENVIRONMENTAL ANALYSIS: ASSESSING
Assessing: determining the timing and significance of the effects of environmental trends that have been identified; specifying the implications of the understanding gathered in the previous stages INTERPRETATION IS KEY. Even if formal assessment is inadequate, the appropriate interpretation of that information is important. Gathering and organizing information is important, BUT appropriately interpreting that intelligence to determine if an identified trend in the external environment is an opportunity or threat is PARAMOUNT.

INDUSTRY ENVIRONMENT ANALYSIS
An INDUSTRY is a group of firms that produce similar products or offer similar services that are close substitutes. Compared with the general environment, the industry environment has a more direct effect on the firm’s: ■ Strategic competitiveness ■ Ability to earn above-average returns

An industry’s profit potential is a function of the five forces of competition: ■ The threats posed by new entrants ■ The power of suppliers ■ The power of buyers ■ Product substitutes ■ The intensity of rivalry among competitors Strategies are chosen, in part, because of the influence of an industry’s characteristics.

FIGURE 2.2 The Five Forces of Competition Model

THE FIVE FORCES OF COMPETITION MODEL ● The five forces model of competition expands the arena for competitive analysis. Historically, firms concentrated only on direct competitors. ● Today, firms must study many industries, as competitors are defined more broadly. For example, the communications industry now encompasses media companies, telecoms, entertainment companies, and smartphone producers.

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY ● Can threaten market share of existing competitors ● May stimulate additional production capacity ● New competitors may force existing firms to be more efficient and to learn how to compete on new dimensions ● Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY ● High entry barriers tend to increase the returns for existing firms in the industry and may allow some firms to dominate the industry ● Industry incumbents want to maintain high entry barriers in order to discourage potential competitors from entering the industry

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY FUNCTION OF TWO FACTORS 1 BARRIERS TO ENTRY ● Economies of scale ● Product differentiation ● Capital requirements ● Switching costs ● Access to distribution channels ● Cost disadvantages independent of scale ● Government policy 2 EXPECTED RETALIATION

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY ECONOMIES OF SCALE ● Marginal improvements in efficiency that a firm experiences as it incrementally increases its size ● Economies of scale can be developed in most business functions, such as marketing, manufacturing, research and development, and purchasing

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY ECONOMIES OF SCALE (cont’d) FACTORS (advantages/disadvantages) related to large- and small-scale entry ● Flexibility in pricing and market share ● Costs related to scale economies ● Competitor retaliation ● Flexible manufacturing systems diminishes the effectiveness of economies scale to act as a barrier

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY PRODUCT DIFFERENTIATION ● Unique products ● Customer loyalty ● New entrants frequently offer products at lower prices

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY CAPITAL REQUIREMENTS ● Differ according to industry ● Availability of capital ● Physical facilities/Inventories/Marketing activities ● Knowledge requirements

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY SWITCHING COSTS One-time costs customers incur when they buy from a different supplier ■ New equipment ■ Retraining employees ■ Psychological costs of ending a supplier relationship

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY ACCESS TO DISTRIBUTION CHANNELS ● Stocking or shelf space ● Price breaks/Cooperative advertising allowances ● Less of a barrier for products that can be sold on the Internet

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY COST DISADVANTAGES INDEPENDENT OF SCALE ● Proprietary product technology ● Favorable access to raw materials ● Desirable locations

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY GOVERNMENT POLICY ● Licensing and permit requirements ● Regulation/Deregulation of industries ● Antitrust violations resulting from industry dominance

THE FIVE FORCES OF COMPETITION MODEL 1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY EXPECTED RETALIATION Vigorous retaliation can be expected when the existing firm has a major stake in the industry. ■ It has fixed assets with few, if any, alternative uses ■ It has substantial resources ■ When industry growth is slow or constrained ● Locating market niches not being served by incumbents allows the new entrant to avoid entry barriers ● Small entrepreneurial firms are generally best suited for identifying and serving neglected market segments

THE FIVE FORCES OF COMPETITION MODEL 2/5 BARGAINING POWER OF SUPPLIERS SUPPLIER POWER INCREASES WHEN: ● Suppliers are large and few in number ● Suitable substitute products are not available ● Industry firms are not a significant customer for the suppliers ● Suppliers’ goods are critical to buyers’ marketplace success

THE FIVE FORCES OF COMPETITION MODEL 2/5 BARGAINING POWER OF SUPPLIERS SUPPLIER POWER INCREASES WHEN (cont’d): ● Suppliers’ products create high switching costs ● Suppliers have substantial resources and provide a highly differentiated product ● Suppliers pose a credible threat to integrate forward into the buyers’ industry

THE FIVE FORCES OF COMPETITION MODEL 3/5 BARGAINING POWER OF BUYERS BUYER POWER INCREASES WHEN: ● Buyers purchase a large portion of an industry’s total output ● Buyers’ purchases are a significant portion of a seller’s annual revenues ● Switching costs are low (to other industry product)

THE FIVE FORCES OF COMPETITION MODEL 3/5 BARGAINING POWER OF BUYERS BUYER POWER INCREASES WHEN (cont’d): ● The industry’s products are undifferentiated or standardized ● Buyers pose a credible threat to integrate backward into the sellers’ industry

THE FIVE FORCES OF COMPETITION MODEL 4/5 THREAT OF SUBSTITUTE PRODUCTS THREAT OF SUBSTITUTE PRODUCTS INCREASES WHEN: ● Buyers face few switching costs ● The substitute product’s price is lower ● Substitute product’s quality and performance are equal to or greater than the existing product ● Differentiated industry products that are valued by customers reduce this threat

THE FIVE FORCES OF COMPETITION MODEL 4/5 THREAT OF SUBSTITUTE PRODUCTS FUNCTION OF A SUBSTITUTE ● Places a ceiling on prices firms can charge ● Goods or services outside a given industry perform the same or similar functions at a competitive price (e.g., plastic has replaced steel in many applications)

THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG COMPETITORS INDUSTRY RESTRUCTURED THROUGH COMPETITORS STRATEGIC FOCUS: The Multi-Industry Battle for Mobile and Home Digital Computing and Entertainment ● The process of new technology creation, utilization, and commercialization ultimately leads to changes in organizational patterns, and in particular, strategic alliances and mergers and acquisitions as firms restructure themselves around the opportunities being created.

THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG COMPETITORS INDUSTRY RESTRUCTURED THROUGH COMPETITORS (cont’d) ● Competitor analysis must examine how such technological changes will lead to convergence of competitors or other firms and associated organizational changes and the possible re-creation of a new set of industry competitors, buyers, and suppliers.

THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG COMPETITORS INDUSTRY RIVALRY ● Competitors are rarely homogeneous; they differ in resources and capabilities and seek to differentiate themselves from competitors ● Firms seek to differentiate their products in ways that customers value and in which the firms have a competitive advantage ● Common rivalry dimensions: ■ Price ■ Service after the sale ■ Innovation

THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG COMPETITORS INDUSTRY RIVALRY INTENSIFIES WITH: ● Numerous or equally balanced competitors ● Slow industry growth ● High fixed costs or high storage costs ● Lack of differentiation opportunities or low switching costs ● High strategic stakes ● High exit barriers

THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG COMPETITORS EXIT BARRIERS High exit barriers prevent competitors from leaving the industry EXAMPLES ■ Specialized assets: assets with values linked to a particular business ■ Fixed costs of exit: such as labor agreements

THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG COMPETITORS EXIT BARRIERS (examples cont’d): ■ Strategic interrelationships: relationships of mutual dependence, such as those between one business and other parts of a company’s operations, including shared facilities and access to financial markets

THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG COMPETITORS EXIT BARRIERS (examples cont’d): : ■ Emotional barriers: aversion to economically justified business decisions because of fear for one’s own career, loyalty to employees, etc. ■ Government and social restrictions: often based on government concerns for job losses and regional economic effects; more common outside the United States

THE FIVE FORCES OF COMPETITION MODEL INTERPRETING INDUSTRY ANALYSES Unattractive Industry Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors LOW PROFIT POTENTIAL

THE FIVE FORCES OF COMPETITION MODEL INTERPRETING INDUSTRY ANALYSES Attractive Industry High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors HIGH PROFIT POTENTIAL

INDUSTRY ENVIRONMENT ANALYSIS: STRATEGIC GROUPS
STRATEGIC GROUP DEFINED ● A set of firms emphasizing similar strategic dimensions and using similar strategies ● The competition within a strategic group is greater than the competition between strategic groups ● There is more heterogeneity in the performance of firms within strategic groups ■ Similar market positions ■ Similar products ■ Similar strategic actions INTRASTRATEGIC GROUP COMPETITION MORE INTENSE THAN INTERSTRATEGIC GROUP COMPETITION

STRATEGIC DIMENSIONS ● Extent of technological leadership ● Product quality ● Pricing policies ● Distribution channels ● Customer service

IMPLICATIONS ■ Firms within a strategic group are direct competitors (offer similar products), thus rivalry can be intense; the greater the rivalry the greater the threat to each firm’s profitability ■ The strengths of the five forces differ across strategic groups ■ The closer the strategic groups in terms of strategy, the greater the likelihood of rivalry

COMPETITOR ANALYSIS COMPETITOR INTELLIGENCE ■ Set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities ■ The ethical and legal gathering of needed information and data that provides insight into: ● What drives competitors ■ Shown by organization's future objectives ● What the competitor is doing and can do ■ Revealed in organization's current strategy ● What the competitor believes about the industry ■ Shown in organization's assumptions ● What the competitor’s capabilities are ■ Shown by organization's strengths and weaknesses

Competitor Analysis Components
FIGURE 2.3 Competitor Analysis Components

COMPETITOR ANALYSIS: COMPLEMENTORS
Complementors: The network of companies that sell complementary products or services or are compatible with the focal firm’s own product or service. Complementors expand the set of competitors that firms must evaluate when completing a competitor analysis COMPLEMENTOR If a complementor’s product or service adds value to the sale of the focal firm’s product or service, it is likely to create value for the focal firm COMPETITOR If a complementor’s product or service is in a market into which the focal firm intends to expand, the complementor can represent a formidable competitor.

STEALING DRAWINGS, SAMPLES, OR DOCUMENTS
COMPETITOR ANALYSIS: ETHICAL CONSIDERATIONS BLACKMAIL TRESPASSING EAVESDROPPING STEALING DRAWINGS, SAMPLES, OR DOCUMENTS Unethical tactics can include:

STRATEGIC MANAGEMENT INPUTS
PART 1: STRATEGIC MANAGEMENT INPUTS CHAPTER 3 THE INTERNAL ENVIRONMENT: RESOURCES, CAPABILITIES, & CORE COMPETENCIES

KNOWLEDGE OBJECTIVES ● Explain why firms need to study and understand their internal organization. ● Define value and discuss its importance. ● Describe the differences between tangible and intangible resources. ● Define capabilities and discuss their development. ● Describe four criteria used to determine whether resources and capabilities are core competencies.

KNOWLEDGE OBJECTIVES ● Explain how firms analyze their value chain for the purpose of determining where they are able to create value when using their resources, capabilities, and core competencies. ● Define outsourcing and discuss reasons for its use. ● Discuss the importance of identifying internal strengths and weaknesses. ● Discuss the importance of avoiding core rigidities.

SUBWAY RESTAURANTS: CORE COMPETENCIES AS THE FOUNDATION FOR SUCCESS
OPENING CASE SUBWAY RESTAURANTS: CORE COMPETENCIES AS THE FOUNDATION FOR SUCCESS 1965: Subway opened its first shop Current portfolio of almost 35,000 units located in 98 countries More store locations than McDonald’s Subway’s focus on “Eat Fresh,” high-quality foods, continuous training, customer service, and “non-traditional” store locations illustrate Subway’s core competencies and the foundation for competitive advantage, underscoring key chapter concepts

EXTERNAL ANALYSES’ OUTCOMES
Opportunities and Threats By studying the external environment, firms identify what they MIGHT CHOOSE TO DO

INTERNAL ANALYSES’ OUTCOMES
Unique Resources, Capabilities, and Competencies (required for sustainable competitive advantage) By studying the internal environment, firms identify what they CAN DO

INTERNAL ORGANIZATION
STRATEGIC COMPETITIVENESS AND ABOVE-AVERAGE RETURNS RESULT WHEN: INTERNAL ORGANIZATION What a firm can do: Function of resources, capabilities, and core competencies EXTERNAL ENVIRONMENT What a firm might do: Function of opportunities in the firm’s external environment MATCHES ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITIVE ADVANTAGE
KEY POINTS ■ No competitive advantage lasts forever ■ Over time, rivals use their own unique resources, capabilities, and core competencies to duplicate the focal firm’s ability to create value for customers ■ With globalization, sustainable competitive advantage is especially challenging

KEY POINTS ■ Firms must exploit their current advantages while simultaneously using their resources and capabilities to form new advantages that can lead to future competitive success ■ INNOVATION and PEOPLE are critical resources for organizations in their quest for competitive advantage

Sustainability of a competitive advantage is a function of:
The rate of core competence obsolescence due to environmental changes The availability of substitutes for the core competence The imitability of the core competence

ANALYZING THE INTERNAL ORGANIZATION The Context of Internal Analysis
Global Economy Traditional sources of advantages can be overcome by competitors’ international strategies and by the flow of resources throughout the global economy Global Mindset The ability to study an internal environment in ways that are not dependent on the assumptions of a single country, culture, or context Analysis Outcome Understanding how to leverage the firm’s bundle of heterogeneous resources and capabilities

Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness FIGURE 3.1 Components of an Internal Analysis

Creating Value Value is measured by:
ANALYZING THE INTERNAL ORGANIZATION Creating Value By innovatively bundling and leveraging their resources and capabilities; by exploiting their core competencies or competitive advantages, firms create value. Value is measured by: Product performance characteristics Product attributes for which customers are willing to pay Superior value  Above-average returns

The Challenge of Analyzing the Internal Organization
Strategic decisions ● Are non-routine ● Have ethical implications ● Significantly influence the firm’s ability to earn above-average returns Strategic leaders make effective decisions regarding the firm’s resources, capabilities, and core competencies and decide on their use

Managers face uncertainty on many fronts ● Proprietary technologies ● Changes in economic and political trends, societal values and shifts in customer demands ● Environment – increasing complexity Intraorganizational conflict ● Results from decisions about core competencies and how to develop them

ANALYZING THE INTERNAL ORGANIZATION
FIGURE 3.2 Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competences

Learning ● Generated by making and correcting mistakes; can be important in creating new capabilities and core competencies Judgment is required under these conditions ● Decision makers often take intelligent risks ● With good judgment, successful strategic leaders achieve strategic competitiveness

RESOURCES, CAPABILITIES, AND CORE COMPETENCIES
Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals Capabilities An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage Resources Tangible Intangible Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

Are the source of a firm’s capabilities Are broad in scope Cover a spectrum of individual, social, and organizational phenomena Represent inputs into a firm’s production process Alone, do not yield a competitive advantage, i.e., by themselves do not allow firms to create value that results in above-average returns Capabilities Resources Tangible Intangible

TYPES OF RESOURCES Tangible Resources Assets that can be seen, touched, and quantified Intangible Resources Assets rooted deeply in the firm’s history, accumulated over time In comparison to ‘tangible’ resources, usually can’t be seen or touched Compared to tangible resources, intangible resources are a superior source of core competencies

RESOURCES, CAPABILITIES AND, CORE COMPETENCIES
TYPES OF RESOURCES Tangible Resources FINANCIAL RESOURCES - the firm’s capacity to borrow and generate internal funds ORGANIZATIONAL RESOURCES - formal reporting structures PHYSICAL RESOURCES - sophistication and location of a firm’s plant and equipment; distribution facilities; product inventory TECHNOLOGICAL RESOURCES - stock of technology, such as patents, trademarks, copyrights, and trade secrets

TYPES OF RESOURCES Intangible Resources HUMAN RESOURCES - knowledge; trust; skills; collaborative abilities INNOVATION RESOURCES - scientific capabilities; capacity to innovate REPUTATIONAL RESOURCES - brand name; perceptions of product quality, durability, and reliability; positive reputation with stakeholders, e.g., suppliers/customers

■ Emerge over time through complex interactions among tangible and intangible resources ■ Stem from employees Unique skills and knowledge Functional expertise ■ Are activities that a firm performs exceptionally well relative to rivals ■ Are activities through which the firm adds unique value to its goods or services over an extended period of time Capabilities Resources Tangible Intangible

CAPABILITIES (cont’d) ■ Exist when resources have been purposely integrated to achieve a specific task or set of tasks ■ Are often developed in specific functional areas Distribution Human resources Management information systems Marketing Management Manufacturing Research & Development Capabilities Resources Tangible Intangible

TABLE 3.3 Examples of Firms’ Capabilities

BUILDING CORE COMPETENCIES
TWO TOOLS FIRMS USE TO IDENTIFY AND BUILD CORE COMPETENCIES: Four Specific Criteria of Sustainable Competitive Advantage that can be used to determine which capabilities are core competencies Value Chain Analysis - this tool helps select the value-creating competencies that should be maintained, upgraded, or developed and those that should be outsourced Capabilities Resources Tangible Intangible

The Four Criteria of Sustainable Competitive Advantage
BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage Capabilities must fulfill four specific criteria in order to be CORE COMPETENCIES Valuable Rare Costly-to-imitate Nonsubstitutable capabilities

BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage VALUABLE CAPABILITIES • Help a firm neutralize threats or exploit opportunities RARE CAPABILITIES • Are not possessed by many others TABLE 3.4 The Four Criteria of Sustainable Competitive Advantage

BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage COSTLY-TO-IMITATE CAPABILITIES • Historical: A unique and a valuable organizational culture or brand name • Ambiguous cause: The causes and uses of a competence are unclear • Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers TABLE 3.4 The Four Criteria of Sustainable Competitive Advantage

BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage NONSUBSTITUTABLE CAPABILITIES No strategic equivalent Firm-specific knowledge Organizational culture Superior execution of the chosen business model TABLE 3.4 The Four Criteria of Sustainable Competitive Advantage

BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage SUSTAINABLE COMPETITIVE ADVANTAGE Exists only when competitors cannot duplicate a firm’s strategy or when they lack the resources to attempt imitation Exists until competitors can successfully imitate a good, service, or process Lasts for a relatively long period of time if all four of the criteria discussed are satisfied

BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage COMPETITIVE CONSEQUENCES Focus on capabilities that yield competitive parity and either temporary or sustainable competitive advantage PERFORMANCE IMPLICATIONS Parity = average returns Temporary advantage = average to above average returns Sustainable advantage = above average returns using valuable, rare, costly-to-imitate, and nonsubstitutable capabilities

TABLE 3.5 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

VALUE CHAIN ANALYSIS Allows the firm to understand the parts of its operations that create value and those that do not A template that firms use to: Understand their cost position Facilitate the implementation of a chosen business-level strategy

VALUE CHAIN ANALYSIS Both value chain (primary) and support activities should be analyzed Competitive landscape demands that value chains and supply chains be examined in a global context Each activity should be examined relative to competitor’s abilities and rated as superior, equivalent, or inferior

VALUE CHAIN ANALYSIS To become a core competence and a source of competitive advantage, a capability must allow the firm: 1. to perform an activity in a manner that provides superior value relative to competitors, or 2. to perform a value-creating activity that competitors cannot perform

VALUE CHAIN ANALYSIS VALUE CHAIN ACTIVITIES: activities the firm completes in order to produce products and then sell, distribute, and service those products in ways that create value for customers SUPPORT FUNCTIONS: activities the firm completes in order to support the work being done to produce, sell, distribute, and service the products the firm is producing

FIGURE 3.3 A Model of the Value Chain

VALUE CHAIN ANALYSIS FIGURE 3.4 Creating Value through Value Chain Activities

FIGURE 3.5 Creating Value through Support Functions

VALUE CHAIN ANALYSIS SOCIAL CAPITAL - when firms have strong positive alliances with suppliers and customers TRUST - is required to build social capital whereby resources such as knowledge are transferred across organizations JUDGMENT - pivotal in evaluating a firm’s capability to execute its value chain activities and support functions

OUTSOURCING Definition: purchase of a value-creating activity or support function from an external supplier Effective execution includes an increase in flexibility and risk mitigation, and a reduction in capital investment Global industries trend continues at a rapid pace Firms must outsource activities where they cannot create value or are at a substantial disadvantage compared to competitors

OUTSOURCING STRATEGIC RATIONALES
■ Few organizations are competitively superior in all value chain activities and support functions ■ By outsourcing activities where it lacks competence, the firm can fully concentrate on those areas in which it can create value ■ Freeing resources for other purposes redirects efforts from non-core activities toward those that serve customers more effectively .

OUTSOURCING STRATEGIC RATIONALES
■ Specialty suppliers can perform outsourced capabilities more efficiently. ■ Sharing risks - reduces investment requirements and makes firm more flexible, dynamic, and better able to adapt to changing opportunities ■ Providing access to world-class standards – the specialized resources of outsourcing providers makes world-class capabilities available to firms .

OUTSOURCING ■ Outsource those value chain activities and support functions that are NOT a source of core competence ■ Concerns: innovation, technological uncertainty, and job loss; usually revolves around firm’s innovative ability and loss of jobs to external supplier ■ Offshoring - foreign supply source

COMPETENCIES, STRENGTHS, WEAKNESSES, AND STRATEGIC DECISIONS
Firms must identify their strengths and weaknesses Appropriate resources and capabilities are needed to develop desired strategy and create value for customers and other stakeholders

The “right” resources (as opposed to “many” resources) are those with the potential to be formed into core competencies as the foundation for competitive advantage Tools (e.g., outsourcing) can help a firm focus on core competencies as the source for competitive advantage

Core competencies have potential to become CORE RIGIDITIES Former core competencies that now generate inertia and stifle innovation External environmental conditions and events impact a firm’s core competencies

INTERNAL ORGANIZATION What a firm can do: Function of resources, capabilities, and core competencies EXTERNAL ENVIRONMENT What a firm might do: Function of opportunities in the firm’s external environment STRATEGY ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION
CHAPTER 4: BUSINESS-LEVEL STRATEGY

KNOWLEDGE OBJECTIVES ● Define business-level strategy. ● Discuss the relationship between customers and business-level strategies in terms of who, what, and how. ● Explain the differences among business-level strategies. ● Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy. ● Describe the risks of using each of the business-level strategies.

OPENING CASE MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS ■ With the 2008 global financial crisis and competitors, e.g., McDonald’s gaining market share, consumers were less willing to pay the high prices for premium coffee, leading to a reduction in store sales for the first time in Starbucks’ history. ■ Starbucks appeared to be unable to control the quality of the “experience” and began losing its differentiation advantage.

OPENING CASE MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS (cont’d) ■ CEO Howard Schultz closed 900 poorly performing stores in the United States and refocused on innovation. ■ By 2011, with its 40th anniversary, a new logo, innovation such as VIA and customers paying for their purchases with their iPhones, environmental consciousness, employee health insurance, and a global focus on emerging markets such as China and India, Starbucks was once again differentiating itself.

BUSINESS–LEVEL STRATEGY: HOW TO COMPETE IN A SPECIFIC INDUSTRY
IMPORTANT DEFINITION BUSINESS–LEVEL STRATEGY: HOW TO COMPETE IN A SPECIFIC INDUSTRY ■ An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets ■ It is the core strategy ■ Every firm must form and use a business-level strategy for each one of its businesses ■ Business-level strategy choices matter because long-term performance is linked to a firm’s strategies

BUSINESS-LEVEL STRATEGY
ONE BUSINESS- LEVEL STRATEGY A single-product market/single geographic location firm employs one business-level strategy and one corporate-level strategy identifying what or which industry the firm will compete in SEVERAL BUSINESS-LEVEL STRATEGIES A diversified firm employs a separate business-level strategy for each product market area in which it competes and one or more corporate-level strategies dealing with product and/or geographic diversity

CORE COMPETENCIES AND STRATEGY
Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets Business-level Strategy

CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES
Who will be served? KEY ISSUES in BUSINESS- LEVEL STRATEGY What needs will be satisfied? How will those needs be satisfied?

EFFECTIVE GLOBAL COMPETITORS Adept at identifying customer needs across cultures and geography Quickly and successfully adapt products/services to meet those needs

BUSINESS-LEVEL STRATEGIES
FIVE COMPETITIVE FORCES GENERIC: Applicable to any organization in any industry VALUE CHAIN ACTIVITIES RISKS for each Strategy Effective STRUCTURE for each Strategy

SATISFYING CUSTOMERS IS THE FOUNDATION OF SUCCESSFUL BUSINESS STRATEGIES Managing relationships with customers Reach, richness, affiliation Who will be served What needs will be satisfied How those needs will be satisfied

REACH Access and Connection to Customers EFFECTIVELY MANAGING RELATIONSHIPS WITH CUSTOMERS RICHNESS Depth and Detail of Two-Way Flow of Information Between the Firm and Customer AFFILIATION Facilitating Useful Interactions With Customers

WHO: DETERMINING THE CUSTOMERS TO SERVE
MARKET SEGMENTATION A process used to cluster people with similar needs into individual and identifiable groups Consumer Markets Industrial Markets

MARKET SEGMENTATION: CONSUMER MARKETS
DEMOGRAPHIC FACTORS (age, income, sex, etc.) 2. SOCIOECONOMIC FACTORS (social class, stage in the family life cycle) 3. GEOGRAPHIC FACTORS (cultural, regional, and national differences) 4. PSYCHOLOGICAL FACTORS (lifestyle, personality traits) 5. CONSUMPTION PATTERNS (heavy, moderate, and light users) 6. PERCEPTUAL FACTORS (benefit segmentation, perceptual mapping)

MARKET SEGMENTATION: INDUSTRIAL MARKETS
END-USE SEGMENTS (identified by SIC code) 2. PRODUCT SEGMENTS (based on technological differences or production economics) 3. GEOGRAPHIC SEGMENTS (defined by boundaries between countries or by regional differences within them) 4. COMMON BUYING FACTOR SEGMENTS (cut across product market and geographic segments) 5. CUSTOMER SIZE SEGMENTS

WHAT: DETERMINING WHICH CUSTOMER NEEDS TO SATISFY
■ Customer needs are related to a product’s benefits and features ■ Customer needs are neither right nor wrong, good nor bad ■ Customer needs represent desires in terms of features and performance capabilities ■ Successful firms learn how to deliver to customers what they want, when they want it Customers are the lifeblood of a firm

HOW: DETERMINING CORE COMPETENCIES NECESSARY TO SATISFY CUSTOMER NEEDS
■ Firms use core competencies to implement value creating strategies that satisfy customers’ needs ■ Value means goods or services that provide either low cost with acceptable features or highly differentiated features with acceptable costs ■ Only firms with capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and/or exceed customer expectations across time

Target Group of Customers
HOW ● WHAT ● WHO WHO: Target Group of Customers WHAT: Satisfy Customer Needs

BUSINESS-LEVEL STRATEGY BUSINESS-LEVEL STRATEGIES
PURPOSE BUSINESS-LEVEL STRATEGIES are intended to create differences between the firm’s position relative to those of its rivals To position itself, the firm must decide whether it intends to: ● Perform activities differently, or ● Perform different activities as compared to its rivals

BUSINESS-LEVEL STRATEGY BUSINESS-LEVEL STRATEGY
PURPOSE BUSINESS-LEVEL STRATEGY is a deliberate choice about how the firm will perform the value chain activities to create unique value Southwest’s Competitive Advantages (rivals unable to imitate): ● Tight integration among activities ● Cost leadership strategy ● Unique culture and customer service

BUSINESS-LEVEL STRATEGY
PURPOSE FIGURE 4.1 Southwest Airlines Activity System

SOURCES OF COMPETITIVE ADVANTAGE
■ Achieving LOWER OVERALL COSTS than rivals ■ Performing activities differently (reducing process costs) ■ Providing a low cost product that customers deem as ACCEPTABLE ■ Possessing the capability TO DIFFERENTIATE the firm’s product or service and command a premium price ■ Performing MORE HIGHLY VALUED activities

FIVE GENERIC BUSINESS-LEVEL STRATEGIES
FIGURE 4.2 Five Business Level Strategies

TARGET MARKETS BROAD NARROW
Firms serving a broad market seek to use their capabilities to create value for customers on an industry-wide basis; competing in many customer segments NARROW A narrow market segment means that the firm intends to serve the needs of a narrow customer group; tailoring its strategy to serving them at the exclusion of others

BUSINESS-LEVEL STRATEGY EFFECTIVENESS
■ None of the five business-level strategies is inherently or universally superior to the others ■ The effectiveness of each strategy is contingent upon: ● External opportunities/threats ● Internal strengths/weaknesses ■ KEY: A successful business-level strategy must match external opportunities/threats with internal strengths, i.e., its core competencies

COST LEADERSHIP STRATEGY
An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers ■ Relatively standardized products ■ Features acceptable to many customers ■ Lowest competitive price

COST LEADERSHIP STRATEGY: VALUE CHAIN ACTIVITIES
■ Value chain analysis identifies the parts of a firm’s operations that create value and those that do not ■ A competitive advantage in logistics creates more value for a cost leadership strategy than for a differentiation strategy  Inbound logistics [materials handling, warehousing, and inventory control]  Outbound logistics [collecting, storing, and distribution]

COST LEADERSHIP STRATEGY:
COST SAVING ACTIONS ■ Employing process innovations that facilitate efficient production and distribution methods ■ Building efficient scale facilities ■ Tightly controlling production costs and overhead ■ Minimizing costs of sales, R&D, and service ■ Building efficient manufacturing facilities ■ Monitoring costs of activities provided by outsiders ■ Simplifying production processes

COST LEADERSHIP STRATEGY: VALUE CHAIN ACTIVITIES
FIGURE 4.3 Examples of Value-Creating Activities Associated with the Cost-Leadership Strategy

VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP
RECONFIGURE THE VALUE CHAIN FOR COST ADVANTAGE Cost-effective MIS Few management layers Simplified planning Consistent policies Effecting training Easy-to-use manufacturing technologies Investments in technologies Finding low cost raw materials Monitor suppliers’ performances Link suppliers’ products to production processes Economies of scale Efficient-scale facilities Effective delivery schedules Low-cost transportation Highly trained sales force Proper pricing

VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP
RECONFIGURE THE VALUE CHAIN FOR A COST ADVANTAGE Alter production process New raw material Change in automation Forward integration New distribution channel Backward integration Change location relative to suppliers or buyers New advertising media Direct sales in place of indirect sales

COST LEADERSHIP STRATEGY: STRATEGIC FOCUS
WALMART, DOLLAR STORES, AND AMAZON: WHO IS BUYING WHOSE LUNCH? ■ Walmart deviated from its cost-leadership strategy designed to take market share away from Target by introducing organic foods, remodeling some stores, and reducing the variety of products offered, thereby increasing prices on some goods. ■ Recognizing its mistake, Walmart has re-focused on low costs and prices, increased its product diversity, and is opening 40 new express stores. ■ Will Walmart will be able to recapture its cost leadership position in the market after giving it up to rivals?

COST LEADERSHIP STRATEGY: COMPETITORS
Due to cost leader’s advantageous position: Rivals hesitate to compete on basis of price Lack of price competition leads to greater profits Rivalry may be based on factors such as size, resources, location, market dependence, and prior competitive interactions RIVALRY WITH EXISTING COMPETITORS Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

COST LEADERSHIP STRATEGY: BUYERS (CUSTOMERS)
Can mitigate buyers’ power by: Driving prices far below competitors, causing them to exit, thus shifting power away from buyers back to the firm Powerful customers can force a cost leader to reduce its prices, but not below the level where the next-most-efficient industry competitor can earn average returns BARGAINING POWER OF BUYERS Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

COST LEADERSHIP STRATEGY: SUPPLIERS BARGAINING POWER OF SUPPLIERS
Can mitigate suppliers’ power by: Being able to absorb cost increases due to low cost position Being able to make very large purchases, reducing chance of supplier using power Outsourcing, to reduce costs may also require relationship-building (Guanxi), particularly to a foreign supplier Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

COST LEADERSHIP STRATEGY: THREAT OF POTENTIAL ENTRANTS
NEW ENTRANTS Barriers to potential entrants: Their need to enter on a large scale in order to be cost competitive The time it takes to move up the learning curve Efficiency of cost leaders through continuous efforts to reduce costs enhances profit margins and serves as a significant entry barrier THREAT OF POTENTIAL ENTRANTS Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

COST LEADERSHIP STRATEGY: SUBSTITUTES
Cost leader is well positioned to: Make investments to be first to create substitutes Buy patents developed by potential substitutes Lower prices in order to maintain value position Be more flexible than its differentiated competitors PRODUCT SUBSTITUTES Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

COST LEADERSHIP STRATEGY:
RISKS COMPETITIVE RISKS OBSOLESCENCE: processes used to produce and distribute goods/services may become obsolete due to competitors’ innovations COST REDUCTIONS: too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation IMITATION: competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

DIFFERENTIATION STRATEGY
An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them ■ Focus is on non-standardized products ■ Appropriate when customers value differentiated features more than they value low cost ■ Firms must still be able to produce differentiated products at competitive costs to reduce upward pressure on the price that customers pay

DIFFERENTIATION STRATEGY:
DISTINCTIVE ACTIONS Firms seek to be different from competitors on as many dimensions as possible Differentiation approaches ■ Unusual features ■ Responsive customer service ■ Rapid product innovations ■ Technological leadership ■ Perceived prestige and status ■ Different tastes ■ Engineering design and performance

DIFFERENTIATION STRATEGY: VALUE CHAIN ACTIVITIES
FIGURE 4.4 Examples of Value-Creating Activities Associated with the Differentiation Strategy

VALUE-CREATING ACTIVITIES FOR DIFFERENTIATION
RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS Highly developed MIS Emphasis on quality Worker compensation for creativity/productivity Use of subjective performance measures Basic research capability Technology High quality raw materials Delivery of products High quality replacement parts Superior handling of incoming raw materials Attractive products Rapid response to customer specifications Order-processing procedures Customer credit Personal relationships

VALUE-CREATING ACTIVITIES FOR DIFFERENTIATION
RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS Whereas cost leadership targets a specific industry, differentiation creates value by distinguishing products/services A firm must consistently upgrade differentiated features that customers value and/or create new valuable features (innovate) without significant cost increases Create sustainability through: Customer perceptions of distinctiveness Customer reluctance to switch to non-distinctive products

DIFFERENTIATION STRATEGY: COMPETITORS
RIVALRY WITH EXISTING COMPETITORS The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry Reputation can also sustain the competitive advantage of firms following a differentiation strategy Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

DIFFERENTIATION STRATEGY: BUYERS (CUSTOMERS)
BARGAINING POWER OF BUYERS Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases Customers are willing to accept a price increase when a product satisfies their perceived unique needs, as long as they do not think that an acceptable product alternative exists Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

DIFFERENTIATION STRATEGY: SUPPLIERS BARGAINING POWER OF SUPPLIERS
Can mitigate suppliers’ power by: Absorbing price increases due to higher margins from high-quality components Alternatively, considering buyers’ relative insensitivity to price increases and their brand loyalty, firms may pass along higher supplier prices to the buyer Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

DIFFERENTIATION STRATEGY: NEW ENTRANTS THREAT OF POTENTIAL ENTRANTS
Substantial barriers to potential entrants: Customer loyalty and the need to overcome the uniqueness of a differentiated product New products must surpass proven products New products must be at least equal to the performance of proven products, but offered at lower prices Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

DIFFERENTIATION STRATEGY: SUBSTITUTES
PRODUCT SUBSTITUTES Well-positioned relative to substitutes because: Brand loyalty to a differentiated product tends to reduce: customers’ testing of new products switching brands Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

DIFFERENTIATION STRATEGY:
RISKS COMPETITIVE RISKS PRICE DIFFERENTIAL: between the differentiator’s and the cost leader’s products becomes too large VALUE DIMINISHED: Differentiation ceases to provide value for which customers are willing to pay EXPERIENCE: narrows customers’ perceptions of the value of differentiated features COUNTERFEIT: goods replicate differentiated features of the firm’s products

FOCUSED STRATEGIES An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment Target markets include: ■ a Particular buyer group (e.g., youths or senior citizens) ■ Different segment of a product line (e.g., products for professional painters or the do-it-yourself group) ■ Different geographic market (e.g., northern or southern Italy by using a foreign subsidiary)

FOCUSED STRATEGIES Types of focused strategies:
■ Focused cost leadership strategy ■ Focused differentiation strategy To implement a focus strategy, firms must be able to: Complete various value chain activities in a competitively superior manner in order to develop and sustain a competitive advantage and earn above-average returns

FACTORS THAT DRIVE FOCUSED STRATEGIES
■ Large firms may overlook small niches ■ A firm may lack the resources needed to compete in the broader market ■ A firm is able to serve a narrow market segment more effectively than its larger industry-wide competitors can ■ Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

FOCUSED COST LEADERSHIP STRATEGY
A firm focuses on a niche market, adding value by leveraging value chain activities that allow value-creation through the cost leadership strategy ■ Competitive advantage: low-cost ■ Competitive scope: narrow industry segment

FOCUSED DIFFERENTIATION STRATEGY
The value chain may be analyzed to determine if a firm is able to link the activities required to create value by using the focused differentiation strategy ■ Competitive advantage: differentiation ■ Competitive scope: narrow industry segment

FOCUS STRATEGIES: RISKS
COMPETITIVE RISKS OUTFOCUSED: a focusing firm may be “outfocused” by its competitors COMPETITION: a large competitor may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit CHANGING PREFERENCES: customer preferences in the niche market may change to more closely resemble those of the broader market

INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY
Efficiently produce products with differentiated attributes: EFFICIENCY: SOURCES OF LOW COST DIFFERENTIATION: SOURCE OF UNIQUE VALUE ■ Readily adapts to external environmental changes ■ Concentrates simultaneously on TWO sources of competitive advantage: cost and differentiation ■ Competence and flexibility required in several value chain activities

INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY
Three sources of flexibility useful for this strategy: ■ Flexible manufacturing systems (FMS) ■ Information networks ■ Total quality management (TQM) systems

FLEXIBLE MANUFACTURING SYSTEMS
Computer-controlled processes used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention ■ Goal is to eliminate the “low cost versus wide product variety” tradeoff ■ Allows firms to produce large variety of products at relatively low costs

INFORMATION NETWORKS Links companies electronically with their suppliers, distributors, and customers ■ Facilitates efforts to satisfy customer expectations in terms of product quality and delivery speed ■ Improves flow of work among employees in the firm and their counterpart suppliers and distributors ■ Requires customer relationship management (CRM)

TOTAL QUALITY MANAGEMENT [TQM] SYSTEMS
Emphasize total commitment to the customer through continuous improvement using: ■ Problem-solving approaches based on employee empowerment Benefits ■ Increased customer satisfaction ■ Lower costs ■ Reduced time-to-market for innovative products TQM systems help firms maintain competitive parity, but by itself, rarely will it lead to a competitive advantage

“STUCK in the MIDDLE” INTEGRATED COST LEADERSHIP/
DIFFERENTIATION STRATEGY: RISKS “STUCK in the MIDDLE” Strategy is gaining in popularity… but is RISKY Products do not offer sufficient value in terms of either low cost or differentiation

INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY: RISKS
“STUCK in the MIDDLE” Cost structure is not low enough for attractive pricing of products; products not sufficiently differentiated to create value for target customer RESULT: DO NOT EARN ABOVE-AVERAGE RETURNS

CHAPTER 5 COMPETITIVE RIVALRY AND COMPETITIVE DYNAMICS

KNOWLEDGE OBJECTIVES ● Define competitors, competitive rivalry, competitive behavior, and competitive dynamics. ● Describe market commonality and resource similarity as the building blocks of a competitor analysis. ● Explain awareness, motivation, and ability as drivers of competitive behaviors.

KNOWLEDGE OBJECTIVES ● Discuss factors affecting the likelihood a competitor will take competitive actions. ● Describe factors affecting the likelihood a competitor will respond to actions taken against it. ● Explain the competitive dynamics in each of slow-cycle, fast-cycle, and standard-cycle markets.

DISRUPTIVE INNOVATION: WINNING RIVALRY BATTLES AGAINST COMPETITORS
OPENING CASE DISRUPTIVE INNOVATION: WINNING RIVALRY BATTLES AGAINST COMPETITORS ■ Clayton Christensen, a Harvard professor and author of The Innovator’s Dilemma, defines “disruptive innovation” as: “an innovation that makes it so much simpler and so much more affordable to own and use a product that a whole new population of people can now have one.

OPENING CASE DISRUPTIVE INNOVATION: WINNING RIVALRY BATTLES AGAINST COMPETITORS EXAMPLES OF DISRUPTIVE INNOVATION ■ Xerox was disrupted by Canon ■ Apple’s iPhone has disrupted the cell phone and personal computer markets, creating the smartphone segment ■ As the iPad continues to improve its graphics power, game platform hardware and software producers are threatened

OPENING CASE DISRUPTIVE INNOVATION: WINNING RIVALRY BATTLES AGAINST COMPETITORS EXAMPLES OF DISRUPTIVE INNOVATION ■ In the video-on-demand market, Walmart’s Vudu, a non-subscription video streaming service, may disrupt Apple’s iTune service ■ Clayton Christensen suggests disruptive innovations include “the personal computer, the router, Toyota’s automobiles, Kodak’s original camera, Xerox’s original photocopier, and Canon’s desktop photocopier.”

COMPETITORS COMPETITORS: firms operating in the same market, offering similar products, and targeting similar customers EXAMPLES: ■ Southwest, Delta, United, Continental, and JetBlue ■ PepsiCo and Coca-Cola Company ■ Apple’s family of products (Macs, iPads, iPods, and iPhones) compete in the video game market with standalone and mobile game platforms from Sony, Microsoft, and Nintendo

COMPETITIVE RIVALRY COMPETITIVE BEHAVIOR
IMPORTANT DEFINITIONS COMPETITIVE RIVALRY COMPETITIVE BEHAVIOR ■ COMPETITIVE RIVALRY: the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an advantageous market position ■ COMPETITIVE BEHAVIOR: the set of competitive actions and responses the firm takes to build or defend its competitive advantages and to improve its market position

COMPETITIVE RIVALRY DURING RECESSION
IMPORTANT DEFINITIONS COMPETITIVE RIVALRY DURING RECESSION Competitive rivalry often increases during recession Customers change buying behavior Look for ways to escape daily negative environment Movie ticket sales increase Candy consumption increases Bottled water sales declined two percent in 2008 Bottled water distributors introduced new products Address plastic bottle concerns Competition from tap water filter manufacturers

MULTIMARKET COMPETITION COMPETITIVE DYNAMICS
IMPORTANT DEFINITIONS MULTIMARKET COMPETITION COMPETITIVE DYNAMICS ■ MULTIMARKET COMPETITION: firms competing against each other in several product or geographic markets ■ COMPETITIVE DYNAMICS: all competitive behavior, that is, the total set of actions and responses taken by all firms competing within a market

COMPETITORS TO COMPETITIVE DYNAMICS
FIGURE 5.1 From Competitors to Competitive Dynamics

COMPETITIVE DYNAMICS VERSUS RIVALRY
Ongoing actions and responses taking place among all firms competing within a market for advantageous positions COMPETITIVE RIVALRY Ongoing actions and responses taking place between an individual firm and its competitors for advantageous market position

COMPETITIVE RIVALRY’S EFFECT ON STRATEGY
Success of a strategy is determined by: The firm’s initial competitive actions How well it anticipates competitors’ responses to them How well the firm anticipates and responds to its competitors’ initial actions Competitive rivalry: Affects all types of strategies Has the strongest influence on the firm’s business-level strategy or strategies

A MODEL OF COMPETITIVE RIVALRY
Firms are mutually interdependent A firm’s competitive actions have noticeable effects on competitors A firm’s competitive actions elicit competitive responses from competitors Firms are affected by each other’s actions and responses Over time firms take competitive actions and reactions

A MODEL OF COMPETITIVE RIVALRY (CONT’D)
Firm level rivalry is usually dynamic and complex Foundation for successfully building and using capabilities and core competencies to gain an advantageous market position Sequence of events (next slide) are the components of this chapter Marketplace success is a function of both individual strategies and the consequences of their use

A MODEL OF COMPETITIVE RIVALRY
FIGURE 5.2 A Model of Competitive Rivalry

COMPETITOR ANALYSIS Competitor analysis is used to help a firm understand its competitors. The firm studies competitors’ future objectives, current strategies, assumptions, and capabilities. With the analysis, a firm is better able to predict competitors’ behaviors when forming its competitive actions and responses.

MARKET COMMONALITY AND RESOURCE SIMILARITY
COMPETITOR ANALYSIS MARKET COMMONALITY AND RESOURCE SIMILARITY Two components to assess: MARKET COMMONALITY and RESOURCE SIMILARITY The question: To what extent are firms competitors? ● Competitor: high market commonality & high resource similarity EXAMPLE: Dell and HP are direct competitors ● Combination of market commonality & resource similarity indicate a firm’s direct competitors DIRECT COMPETITION DOES NOT ALWAYS IMPLY INTENSE RIVALRY

COMPETITOR ANALYSIS MARKET COMMONALITY
Market commonality is concerned with: The number of markets with which a firm and a competitor are jointly involved The degree of importance of the individual markets to each competitor Firms competing against one another in several or many markets engage in multimarket competition A firm with greater multimarket contact is less likely to initiate an attack, but more likely to respond aggressively when attacked

COMPETITOR ANALYSIS RESOURCE SIMILARITY Resource Similarity
How comparable the firm’s tangible and intangible resources are to a competitor’s in terms of both types and amounts Firms with similar types and amounts of resources are likely to: Have similar strengths and weaknesses Use similar strategies Assessing resource similarity can be difficult if critical resources are intangible rather than tangible

A FRAMEWORK OF COMPETITOR ANALYSIS
FIGURE 5.3 A Framework of Competitor Analysis

DRIVERS OF COMPETITIVE ACTIONS AND RESPONSES
Awareness Awareness is the extent to which competitors recognize the degree of their mutual interdependence that results from: Market commonality Resource similarity

Awareness Motivation concerns the firm’s incentive to take action or to respond to a competitor’s attack and relates to perceived gains and losses Motivation

Awareness Ability relates to each firm’s resources the flexibility these resources provide Without available resources the firm lacks the ability to attack a competitor respond to the competitor’s actions Motivation Ability

Awareness A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets. Given the strong competition under market commonality, it is likely that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets. Motivation Ability Market Commonality

Awareness The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage. When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response. Motivation Ability Market Commonality Resource Dissimilarity

COMPETITIVE RIVALRY The ongoing competitive action/response sequence between a firm and a competitor affects the performance of both firms. Understanding a competitor’s awareness, motivation, and ability helps the firm predict the likelihood of an attack and response to actions initiated by the firm or other competitors. The predictions drawn from studying competitors in terms of awareness, motivation, and ability are grounded in market commonality and resource similarity.

COMPETITIVE RIVALRY STRATEGIC AND TACTICAL ACTIONS Competitive Action
A strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position Competitive Response A strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action

COMPETITIVE RIVALRY STRATEGIC AND TACTICAL ACTIONS
Strategic Action (or Response) A market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse Tactical Action (or Response) A market-based move that is taken to fine-tune a strategy Usually involves fewer resources Is relatively easy to implement and reverse

LIKELIHOOD OF ATTACK In addition to: ● Market commonality
● Resource similarity ● Awareness ● Motivation ● Ability Other factors also affect the likelihood that a competitor will use strategic and tactical actions to attack its competitors: ● First-mover incentives ● Organizational size ● Quality

First-Mover Incentives
LIKELIHOOD OF ATTACK First-Mover Incentives First movers allocate funds for: Product innovation and development Aggressive advertising Advanced research and development First movers can gain: The loyalty of customers who may become committed to the firm’s goods or services Market share that can be difficult for competitors to take during future competitive rivalry First Mover A firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position

LIKELIHOOD OF ATTACK First-Mover Incentives First movers: Often build on a strategic foundation of superior research and development skills Tend to be aggressive and willing to experiment with innovation Tend to take higher, yet reasonable, risks Need to have liquid resources (slack) that can be quickly allocated to support actions Benefits can be substantial, but beware of the learning curve!

LIKELIHOOD OF ATTACK Second mover responds to first mover, typically through imitation Is more cautious than first movers Tends to study customer reactions to product innovations Tends to learn from the mistakes of first movers, reducing its risks Takes advantage of time to develop processes and technologies that are more efficient than first movers, reducing its costs Can avoid both the mistakes and the huge spending of the first movers Will not benefit from first mover advantages, lowering potential returns First-Mover Incentives Second Mover

LIKELIHOOD OF ATTACK First-Mover Incentives Late mover responds to a competitive action only after considerable time has elapsed since first and second movers have taken action Any success achieved will be slow in coming and much less than that achieved by first and second movers Late mover’s competitive action allows it to earn only average returns and delays its understanding of how to create value for customers Has substantially reduced risks and returns Second Mover Late Mover

LIKELIHOOD OF ATTACK First-Mover Incentives Second Mover Late Mover
Small firms are more likely: To launch competitive actions To be quicker To be nimble and flexible competitors To rely on speed and surprise to defend their competitive advantage To have flexibility needed to launch a greater variety of competitive actions Second Mover Late Mover Organizational Size - Small

LIKELIHOOD OF ATTACK First-Mover Incentives Second Mover Late Mover
Large firms are more likely to initiate competitive as well as strategic actions over time Large organizations often have greater slack resources They tend to rely on a limited variety of competitive actions, which can ultimately reduce their competitive success Think and act big and we’ll get smaller. Think and act small and we’ll get bigger. Herb Kelleher Former CEO, Southwest Airlines Walmart has the flexibility required to take many types of competitive actions that few—if any—of its competitors can undertake, and does it at a reduced cost Second Mover Late Mover Organizational Size - Large

LIKELIHOOD OF ATTACK First-Mover Incentives Quality exists when the firm’s goods or services meet or exceed customers’ expectations Product quality dimensions include: Second Mover Late Mover Performance Features Flexibility Durability Conformance Serviceability Aesthetics Perceived quality Organizational Size Quality (Product)

PRODUCT QUALITY DIMENSIONS
TABLE 5.1 Quality Dimensions of Goods and Services

LIKELIHOOD OF ATTACK First-Mover Incentives Service quality dimensions include: Timeliness Courtesy Consistency Convenience Completeness Accuracy Second Mover Late Mover Organizational Size Quality (Service)

QUALITY ■ Customer perception that the firm's goods or services perform in ways that are important to customers, meeting or exceeding their expectations. ■ From a strategic perspective, quality is the outcome of how a firm completes its primary and support activities. ■ Quality is a universal theme in the global economy and is a necessary but insufficient condition for competitive success. ■ Quality is possible only when top-level managers support it and when its importance is institutionalized throughout the entire organization and its value chain.

LIKELIHOOD OF RESPONSE
In addition to market commonality, resource similarity, awareness, motivation, and ability, firms evaluate the following three factors to predict how a competitor is likely to respond to competitive actions: 1. Type of Competitive Action 2. Actor’s Reputation Dependence on the Market A firm is likely to respond when the action significantly strengthens or inaction weakens the firm's competitive position.

LIKELIHOOD OF RESPONSE (CONT’D)
Strategic actions receive strategic responses Strategic actions elicit fewer total competitive responses due to the significant resources required and their irreversibility The time needed to implement and assess a strategic action delays competitor’s responses Tactical responses are taken to counter the effects of tactical actions A competitor likely will respond quickly to a tactical action Type of Competitive Action The success of a firm’s competitive action is affected by the likelihood that a competitor will respond to it as well as by the type (strategic or tactical) and effectiveness of that response.

Type of Competitive Action An actor is the firm taking an action or response Reputation is the positive or negative attribute ascribed by one rival to another based on past competitive behavior The firm studies responses that a competitor has taken previously when attacked to predict likely responses. Actor’s Reputation

Type of Competitive Action Market dependence is the extent to which a firm’s revenues or profits are derived from a particular market In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position Actor’s Reputation Dependence on the Market

COMPETITIVE DYNAMICS ■ Competitive rivalry concerns the ongoing actions and responses between a firm and its DIRECT COMPETITORS for an advantageous market position. ■ Competitive dynamics concern the ongoing actions and responses AMONG ALL FIRMS competing within a market for advantageous positions. ■ Building and sustaining competitive advantages are at the core of competitive rivalry, in that advantages are the key to creating value for shareholder.

COMPETITIVE DYNAMICS ■ Competitive behaviors differ across market types. ■ Competitive dynamics differ in slow-cycle, fast-cycle, and standard-cycle markets. ■ The sustainability of the firm’s competitive advantages differs across the three market types. ■ The degree of sustainability differs by market type and is affected by how quickly competitive advantages can be imitated and how costly it is to do so.

COMPETITIVE DYNAMICS VERSUS RIVALRY
(All firms) Market speed (slow-cycle, fast-cycle, and standard-cycle Effects of market speed on actions and responses of all competitors in the market COMPETITIVE RIVALRY (Individual firms) Market commonality and resource similarity Awareness, motivation, and ability First mover incentives, size, and quality

COMPETITIVE DYNAMICS Slow-Cycle Markets
Competitive advantages are shielded from imitation for long periods of time and imitation is costly. Competitive advantages are sustainable in slow-cycle markets. Build a unique and proprietary capability that yields competitive advantage, creating sustainability (i.e., proprietary and difficult for competitors to imitate). Once a proprietary advantage is developed, competitive behavior should be oriented to protecting, maintaining, and extending that advantage. Organizational structure should be used to effectively support strategic efforts. Slow-Cycle Markets

Gradual Erosion of a Sustained Competitive Advantage
COMPETITIVE DYNAMICS FIGURE 5.4 Gradual Erosion of a Sustained Competitive Advantage

COMPETITIVE DYNAMICS Slow-Cycle Markets Fast-Cycle Markets
The firm’s competitive advantages are not shielded from imitation. Technology is non-proprietary. Imitation is rapid and inexpensive. Competitive advantages are not sustainable. Reverse engineering. Market volatility. Focus: Learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace (creating innovation). Slow-Cycle Markets Fast-Cycle Markets

COMPETITIVE DYNAMICS Slow-Cycle Markets Fast-Cycle Markets
Avoid loyalty to any one product, possibly cannibalizing on own current products to launch new ones before competitors learn how to do so through successful imitation. Continually try to move on to another temporary competitive advantage before competitors can respond to the previous one. Fast-Cycle Markets

Developing Temporary Advantages to Create Sustained Advantage
COMPETITIVE DYNAMICS FIGURE 5.5 Developing Temporary Advantages to Create Sustained Advantage

Standard-Cycle Markets
COMPETITIVE DYNAMICS Firm’s competitive advantages are moderately shielded from imitation Imitation is moderately costly Competitive advantages partially sustainable if quality is continuously upgraded Firms Seek large market shares; mass markets Develop economies of scale Gain customer loyalty through brand names Carefully control operations Manage a consistent experience for the customer Slow-Cycle Markets Fast-Cycle Markets Standard-Cycle Markets

COMPETITIVE DYNAMICS COMPETITIVE ADVANTAGE IMITATION
Slow-Cycle Markets Slow and Costly Proprietary rights A costly-to-imitate resource/capability usually results from unique historical conditions, causal ambiguity, and/or social complexity Sustained competitive advantage is most achievable in this market Rapid and Inexpensive Not sustainable Reverse engineering Faster and less costly than in slow-cycle markets; and slower and more expensive than in fast-cycle markets Partially sustainable Fast-Cycle Markets Standard-Cycle Markets

CHAPTER 6 CORPORATE-LEVEL STRATEGY

KNOWLEDGE OBJECTIVES ● Define corporate-level strategy and discuss its purpose. ● Describe different levels of diversification with different corporate-level strategies. ● Explain three primary reasons firms diversify. ● Describe how firms can create value by using a related diversification strategy.

KNOWLEDGE OBJECTIVES ● Explain the two ways value can be created with an unrelated diversification strategy. ● Discuss the incentives and resources that encourage diversification. ● Describe motives that can encourage managers to over diversify a firm.

GENERAL ELECTRIC: THE QUINTESSENTIAL DIVERSIFIED FIRM
OPENING CASE GENERAL ELECTRIC: THE QUINTESSENTIAL DIVERSIFIED FIRM ■ GE competes in 16 different industries: appliances, aviation, consumer electronics, electrical distribution, energy, entertainment, finance, gas, health care, lighting, locomotives, oil, software, water, weapons, and wind turbines ■ GE’s businesses are grouped in four divisions: GE Capital, GE Energy, GE Technology Infrastructure, and GE Home & Business Solutions

OPENING CASE GENERAL ELECTRIC: THE QUINTESSENTIAL DIVERSIFIED FIRM ■ With more than 50 percent of its annual revenues stemming from its financial services, GE is the only company that was listed in the initial Dow Jones Industrial Average in 1896 that remains on it today. Criticisms: ● Media control - GE has restricted NBC reporters from reporting on certain content that is critical of GE

OPENING CASE GENERAL ELECTRIC: THE QUINTESSENTIAL DIVERSIFIED FIRM Criticisms (cont’d): ● Poor environmental records of some of its businesses ● GE had reductions in stock value during the first decade of the twenty-first century ■ Today, a major player in the “clean energy” industry, GE is well-positioned to capitalize on emerging economies via a diversification strategy of mergers and acquisitions in Brazil and China

CORPORATE–LEVEL STRATEGY: WHAT BUSINESSES SHOULD A FIRM COMPETE IN?
IMPORTANT DEFINITION CORPORATE–LEVEL STRATEGY: WHAT BUSINESSES SHOULD A FIRM COMPETE IN? TWO KEY ISSUES 1. In what product markets and businesses should the firm compete? 2. How should corporate headquarters manage those businesses?

CORPORATE–LEVEL STRATEGY: WHAT BUSINESSES SHOULD A FIRM COMPETE IN?
IMPORTANT DEFINITION CORPORATE–LEVEL STRATEGY: WHAT BUSINESSES SHOULD A FIRM COMPETE IN? ■ Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets ■ Corporate-level strategies help companies select new strategic positions that are expected to increase the firm’s value ■ Firms can pursue defensive or offensive strategies that realize growth, and may have different strategic intents

CORPORATE–LEVEL STRATEGIES
IMPORTANT DEFINITIONS CORPORATE–LEVEL STRATEGIES ■ MARKET DEVELOPMENT - moving into different geographic markets ■ PRODUCT DEVELOPMENT - developing new products and/or significantly improving on existing products ■ HORIZONTAL INTEGRATION - acquisition of competitors; horizontal movement at the same point in the value chain ■ VERTICAL INTEGRATION - becoming your own supplier or distributor through acquisition; vertical movement up or down the value chain

CORPORATE–LEVEL STRATEGY: ULTIMATE VALUE QUESTION
IMPORTANT DEFINITION CORPORATE–LEVEL STRATEGY: ULTIMATE VALUE QUESTION CORPORATE-LEVEL STRATEGY’S VALUE ■ Corporate-level strategy’s value is ultimately determined by the degree to which “the businesses in the portfolio are worth more under the management of the company than they would be under any other ownership” ■ A corporate-level strategy is expected to help the firm earn above-average returns by creating value

CORPORATE–LEVEL STRATEGY: DIVERSIFICATION
IMPORTANT DEFINITION CORPORATE–LEVEL STRATEGY: DIVERSIFICATION ■ DIVERSIFICATION - growing into new business areas either related (similar to existing business) or unrelated (different from existing business); allows a firm to create value by productively using excess resources ■ The diversified firm operates in several different and unique product markets and likely in several businesses; it forms two types of strategies: corporate-level (or company-wide) and business-level (or competitive) ■ For the diversified corporation, a business-level strategy must be selected for each one of its businesses

CORPORATE-LEVEL STRATEGY
ONE BUSINESS- LEVEL STRATEGY A single-product market/single geographic location firm employs one business-level strategy and one corporate-level strategy identifying what or which industry the firm will compete in SEVERAL BUSINESS-LEVEL STRATEGIES A diversified firm employs a separate business-level strategy for each product market area in which it competes and one or more corporate-level strategies dealing with product and/or geographic diversity

IMPORTANT DEFINITION CORPORATE–LEVEL STRATEGY: DIVERSIFICATION PRODUCT DIVERSIFICATION - a primary form of corporate-level strategies; concerns the scope of the markets and industries in which the firm competes ■ The ideal portfolio of businesses balances diversification’s costs and benefits: ■ Reduction in profitability variability as earnings are generated from different businesses ■ Independence/flexibility to shift investments to those markets with the greatest returns

IMPORTANT DEFINITION CORPORATE–LEVEL STRATEGY: DIVERSIFICATION ■ This chapter focuses on DIVERSIFICATION ■ VALUE CREATION: low – high levels of diversification ● The sharing of resources (the related constrained strategy) ● The transferring of core competencies across the firm’s different businesses (the related linked strategy) ● Managerial motives to diversify can actually destroy some of the firm’s value

LEVELS OF DIVERSIFICATION
FIGURE 6.1 Levels and Types of Diversification

● Figure 6.1 defines five categories of businesses according to increasing levels of diversification ● Diversified firms vary according to their level of diversification and the connections between and among their businesses ● The single- and dominant-business categories denote relatively low levels of diversification; more fully diversified firms are classified into related and unrelated categories

A firm is related through its diversification when its businesses share links across: ■ PRODUCTS (goods or services) ■ TECHNOLOGIES ■ DISTRIBUTION CHANNELS The more links among businesses, the more “constrained” is the relatedness of diversification “Unrelated” refers to the absence of direct links between businesses

1. Low Levels Single Business Strategy Corporate-level strategy in which the firm generates 95% or more of its sales revenue from its core business area EXAMPLE: WRIGLEY Wm. Wrigley Jr. Company, the world’s largest producer of chewing and bubble gums, historically used a single-business strategy while operating in few product markets 2005: Wrigley employed the dominant-business strategy, when it acquired the confectionary assets of Kraft Foods Inc., including Life Savers and Altoids. 2008- Wrigley was acquired by Mars, a privately held global confection company.

1. Low Levels Dominant Business Diversification Strategy Corporate-level strategy whereby firm generates 70-95% of total sales revenue within a single business area EXAMPLE: UPS United Parcel Service (UPS) uses this strategy UPS generates 60 percent of its revenue from its U.S. package delivery business and 22 percent from its international package business, with the remaining 18 percent coming from the firm’s non-package business

2. Moderate to High Levels Related Constrained Diversification Strategy Less than 70% of revenue comes from the dominant business Direct links (i.e., share products, technology, and distribution linkages) between the firm's businesses EXAMPLES: Campbell Soup, Procter & Gamble, Merck & Company, The Publicis Groupe

2. Moderate to High Levels Related Linked Diversification Strategy (mixed related and unrelated) Less than 70% of revenue comes from the dominant business Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related constrained), concentrating on the transfer of knowledge and competencies among the businesses EXAMPLE: GE

3. Very High Levels: Unrelated Less than 70% of revenue comes from dominant business No relationships between businesses EXAMPLES: United Technologies, Textron, Samsung, and Hutchison Whampoa Limited (HWL)

REASONS FOR DIVERSIFICATION
TABLE 6.1 Reasons for Diversification

REASONS FOR DIVERSIFICATION
FIGURE 6.2 Value-Creating Diversification Strategies: Operational and Corporate Relatedness

FIRM CREATES VALUE BY BUILDING UPON OR EXTENDING: Resources
VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION FIRM CREATES VALUE BY BUILDING UPON OR EXTENDING: Resources Capabilities Core competencies

PURPOSE: gain market power relative to competitors
VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION PURPOSE: gain market power relative to competitors ADVANTAGE: ECONOMIES OF SCOPE Cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses

VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION
■ Operational relatedness in sharing activities ■ Corporate relatedness in transferring skills or corporate core competencies among units The difference between sharing activities and transferring competencies is based on how the resources are jointly used to create economies of scope

OPERATIONAL RELATEDNESS: SHARING ACTIVITIES
VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION OPERATIONAL RELATEDNESS: SHARING ACTIVITIES ■ Can gain economies of scope ■ Share primary or support activities (in value chain), e.g., a primary activity such as inventory delivery systems, or a support activity such as purchasing ■ Risky as ties create links between outcomes ■ Related constrained share activities in order to create value ■ Not easy, often synergies not realized as planned

CORPORATE RELATEDNESS: TRANSFERRING OF CORE COMPETENCIES
VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION CORPORATE RELATEDNESS: TRANSFERRING OF CORE COMPETENCIES ■ Complex sets of resources and capabilities linking different businesses through managerial and technological knowledge, experience, and expertise ■ Two sources of value creation ● Expense incurred in first business and knowledge transfer reduces resource allocation for second business ● Intangible resources difficult for competitors to understand and imitate, so immediate competitive advantage over competition

CORPORATE RELATEDNESS: TRANSFERRING OF CORE COMPETENCIES
VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION CORPORATE RELATEDNESS: TRANSFERRING OF CORE COMPETENCIES ■ One way managers facilitate the transfer of corporate-level core competencies is by moving key people into new management positions ■ However, the manager of an older business may be reluctant to transfer key people who have accumulated knowledge and experience critical to the business’s success ■ Too much dependence on outsourcing can lower the usefulness of core competencies and thereby reduce their useful transferability to other business units in the diversified firm

MARKET POWER ■ Relevant for: ●RELATED CONSTRAINED ●RELATED LINKED ■ Exists when a firm is able to sell its products above the existing competitive level, to reduce costs of primary and support activities below the competitive level, or both ■ Related diversification strategy may include: ● Vertical integration Backward integration: a firm produces its own inputs Forward integration: a firm operates its own distribution system for delivering its outputs ● Virtual integration

MARKET POWER ■ Multimarket (or Multipoint) Competition
VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION MARKET POWER ■ Multimarket (or Multipoint) Competition ● Exists when two or more diversified firms simultaneously compete in the same product or geographic markets EXAMPLE: GOOGLE (Strategic Focus) ■ Google is diversifying into new markets that allow it to engage in multipoint competition, e.g., competing with Microsoft and Apple in several markets

MARKET POWER ■ MARKET POWER: while Google appears to be increasing its vertical integration, many manufacturing firms have been reducing vertical integration to gain market power ■ DEINTEGRATION: developing independent supplier networks - the focus of many manufacturing firms, such as Intel and Dell, and Ford and General Motors

SIMULTANEOUS OPERATIONAL RELATEDNESS AND CORPORATE RELATEDNESS
VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION SIMULTANEOUS OPERATIONAL RELATEDNESS AND CORPORATE RELATEDNESS ■ The ability to simultaneously create economies of scope by sharing activities (operational relatedness) and transferring core competencies (corporate relatedness) is difficult for competitors to understand and learn how to imitate

VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION SIMULTANEOUS OPERATIONAL RELATEDNESS AND CORPORATE RELATEDNESS ■ Involves managing two sources of knowledge simultaneously: Operational forms of economies of scope Corporate forms of economies of scope ■ Many such efforts often fail because of implementation difficulties

VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION SIMULTANEOUS OPERATIONAL RELATEDNESS AND CORPORATE RELATEDNESS ■ If the cost of realizing both types of relatedness is not offset by the benefits created, the result is DISECONOMIES because the cost of organization and incentive structure is very expensive

VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION SIMULTANEOUS OPERATIONAL RELATEDNESS AND CORPORATE RELATEDNESS EXAMPLE: Walt Disney Co. ■ Walt Disney Co. has been able to successfully use related diversification as a corporate-level strategy through which it creates economies of scope by sharing some activities and by transferring core competencies ■ Because this value creation can be difficult for investors to see, the value of the assets of a firm using a diversification strategy to create economies of scope often is discounted by investors

UNRELATED DIVERSIFICATION
Creates value through two types of FINANCIAL ECONOMIES ■ Cost savings realized through improved allocations of financial resources based on investments inside or outside firm Efficient internal capital market allocation ■ Restructuring of acquired assets Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market

EFFICIENT INTERNAL CAPITAL MARKET ALLOCATION ● In a market economy, capital markets allocate capital efficiently ● EQUITY - investors take equity positions (ownership) with high expected future cash-flow values. ● DEBT - debt holders try to improve the value of their investments by taking stakes in businesses with high growth and profitability prospects

UNRELATED DIVERSIFICATION EFFICIENT INTERNAL CAPITAL MARKET ALLOCATION
In large diversified firms, capital distributions may generate gains from internal capital market allocations that EXTERNAL CAPITAL MARKET the gains that would accrue to shareholders from capital being allocated by the external capital market EXCEED

EFFICIENT INTERNAL CAPITAL MARKET ALLOCATION CONGLOMERATE DISCOUNT ■ This discount results from analysts not knowing how to value a vast array of large businesses with complex financial reports ■ Stock markets apply a “Conglomerate Discount” of 20% on unrelated diversified firms, which means that investors believe that the value of conglomerates is 20% less than the value of the sum of their parts ■ To overcome this discount, many unrelated diversifiers or conglomerates have sought to establish a brand for the parent company

EFFICIENT INTERNAL CAPITAL MARKET ALLOCATION ACHILLES’ HEEL Financial economies are more easily duplicated by competitors than are gains from operational and corporate relatedness This issue is less of a problem in emerging economies, where the absence of a “soft infrastructure” (including effective financial intermediaries, sound regulations, and contract laws) supports and encourages use of the unrelated diversification strategy In emerging economies such as those in Korea, India, and Chile, research has shown that diversification increases the performance of firms affiliated with large diversified business groups

RESTRUCTURING OF ASSETS Restructuring creates financial economies A firm creates value by buying, restructuring, then selling the restructured firms’ assets in the external market An economic downturn can present opportunities but also some risks Resource allocation decisions may become complex, so success often requires: Focus on mature, low-technology businesses Focus on businesses not reliant on a client orientation

DIVERSIFICATION ADVANTAGES
RELATED DIVERSIFICATION ECONOMIES OF SCOPE UNRELATED DIVERSIFICATION FINANCIAL ECONOMIES

VALUE-NEUTRAL DIVERSIFICATION: INCENTIVES AND RESOURCES
Different incentives to diversify exist, and the quality of the firm’s resources may permit only diversification that is value neutral rather than value creating.

VALUE-NEUTRAL DIVERSIFICATION: INCENTIVES AND RESOURCES
INCENTIVES TO DIVERSIFY External incentives ■ Antitrust regulations ■ Tax laws Internal incentives ■ Low performance ■ Uncertain future cash flows ■ Synergy and Firm Risk Reduction

EXTERNAL INCENTIVES TO DIVERSIFY
Antitrust Regulation Antitrust laws in 1960s and 1970s discouraged mergers that created increased market power (vertical or horizontal integration) Mergers in the 1960s and 1970s thus tended to be unrelated (conglomerate) 1980s: Relaxation of antitrust enforcement results in more and larger horizontal mergers Late 1990s: Industry-specific deregulation spurred increased merger activity in banking, telecommunications, oil and gas, and electric utilities Early 2000s: Antitrust concerns seem to be emerging and mergers are more closely scrutinized

EXTERNAL INCENTIVES TO DIVERSIFY (cont’d)
Antitrust Regulation High tax rates on dividends cause a corporate shift from dividends to buying and building companies in high-performance industries 1986 Tax Reform Act Reduced individual ordinary income tax rate from 50 to 28 percent Treated capital gains as ordinary income Thus created incentive for shareholders to prefer dividends to acquisition investments, as the 1986 Tax Reform Act diminished some of the corporate tax advantages of diversification Tax Laws

INTERNAL INCENTIVES TO DIVERSIFY
Low Performance High performance eliminates the need for greater diversification Low performance acts as incentive for diversification Firms plagued by poor performance often take higher risks (diversification is risky)

DIVERSIFICATION AND PERFORMANCE
FIGURE 6.3 The Curvilinear Relationship Between Diversification and Performance

INTERNAL INCENTIVES TO DIVERSIFY (CONT’D)
Low Performance Diversification may be defensive strategy if the: Product line matures Product line is threatened Firm is small and is in a mature or maturing industry Uncertain Future Cash Flows

INTERNAL INCENTIVES TO DIVERSIFY (CONT’D)
Low Performance Synergy exists when the value created by businesses working together exceeds the value created by them working independently … But synergy creates joint interdependence between business units A firm may reduce the level of technological change by operating in more certain environments—resulting in more related types of diversification A firm may become risk averse, constrain its level of activity sharing, and forgo potential benefits of synergy—resulting in more unrelated types of diversification Uncertain Future Cash Flows Synergy and Risk Reduction

RESOURCES AND DIVERSIFICATION
A FIRM MUST HAVE BOTH: Incentives to diversify The resources required to create value through diversification—cash and tangible resources (e.g., plant and equipment) Value creation is determined more by appropriate use of resources than by incentives to diversify

VALUE-REDUCING DIVERSIFICATION: MANAGERIAL MOTIVES TO DIVERSIFY
Top-level executives may diversify in order to diversity their own employment risk, as long as profitability does not suffer excessively Diversification adds benefits to top-level managers but not shareholders This strategy may be held in check by governance mechanisms or concerns for one’s reputation

VALUE-REDUCING DIVERSIFICATION: MANAGERIAL MOTIVES TO DIVERSIFY
■ Managerial risk reduction ■ Desire for increased compensation

DIVERSIFICATION AND FIRM PERFORMANCE
FIGURE 6.4 Summary Model of the Relationship between Diversification and Firm Performance

CHAPTER 7 ACQUISITION AND RESTRUCTURING STRATEGIES

KNOWLEDGE OBJECTIVES ● Explain the popularity of merger and acquisition strategies in firms competing in the global economy. ● Discuss reasons why firms use an acquisition strategy to achieve strategic competitiveness. ● Describe seven problems that work against achieving success when using an acquisition strategy.

KNOWLEDGE OBJECTIVES ● Name and describe the attributes of effective acquisitions. ● Define the restructuring strategy and distinguish among its common forms. ● Explain the short- and long-term outcomes of the different types of restructuring strategies.

TECHNOLOGY GIANTS’ ACQUISITION STRATEGIES AND THEIR OUTCOMES
OPENING CASE TECHNOLOGY GIANTS’ ACQUISITION STRATEGIES AND THEIR OUTCOMES ■ Online social networks, such as Facebook, have caused Procter & Gamble (P&G) to reallocate their advertising resources away from television to more digital formats. ■ When Microsoft announced that it would acquire Skype Global S.A.R.L., the leading Internet telecommunications company for $8.5 billion, there were both positive and negative attributions about the deal in the media.

OPENING CASE TECHNOLOGY GIANTS’ ACQUISITION STRATEGIES AND THEIR OUTCOMES ■ Because Skype was founded and headquartered outside the U.S. (Luxembourg), Microsoft was able to use cash that was not repatriated into the U.S. to pay for the deal, and in so doing, it avoided paying U.S. income tax. ■ The Skype investment seems to be a bargain; the $8.5 billion represents a cost of $14.70 per customer. Comparatively, when Skype was bought by eBay in 2005, it paid $45.60 per user.

OPENING CASE TECHNOLOGY GIANTS’ ACQUISITION STRATEGIES AND THEIR OUTCOMES CHALLENGES: ● Whether Microsoft will be able to utilize the service and integrate it into its focus on business customers relative to the consumer focus of Skype ● Whether Microsoft will be able to incorporate the Skype service into its various devices and software platforms

OPENING CASE TECHNOLOGY GIANTS’ ACQUISITION STRATEGIES AND THEIR OUTCOMES DEFENSIVE RATIONALE ● If Microsoft did not buy Skype, it may have ended up in the hands of a competitor such as Google, who might be able to use it to strengthen its ecosystem at the expense of Microsoft. OFFENSIVE STRATEGY ● Google’s acquisition strategy is usually to acquire earlier-stage companies than Microsoft’s deal to acquire Skype. Google purchased YouTube for $1.6 billion in 2006.

OPENING CASE TECHNOLOGY GIANTS’ ACQUISITION STRATEGIES AND THEIR OUTCOMES ■ Facebook has a somewhat different approach to acquisitions, having recently purchased Snaptu. Snaptu provides application software for services such as Facebook, Twitter, and LinkedIn, which allows these services to be featured on phones. ■ Facebook has made 11 acquisitions since 2007; however, almost none of the acquired companies’ services has survived as independent businesses.

OPENING CASE TECHNOLOGY GIANTS’ ACQUISITION STRATEGIES AND THEIR OUTCOMES ■ Online commerce is moving into a consumer- oriented retail phase, of which firms such as Facebook and Amazon are seeking to take advantage. ■ Acquisitions are a quick way to move into the space that these tech giants see evolving, such as Microsoft seeking to broaden its communication base, Google expanding beyond search to experiment with new models of advertising, and Facebook’s attempts to learn from the human capital that they are able to acquire.

POPULARITY OF MERGER AND ACQUISITION STRATEGIES
Popular strategy in the U.S. for many years Source of firm growth and above-average returns Some believe that M&A strategies played a central role in the restructuring of U.S. businesses during the 1980s and 1990s and that they continue generating benefits in the twenty-first century

Heavily influenced by external environment Tight credit markets Political changes in foreign countries’ orientation toward M&A During the recent financial crisis, tightened credit markets made it more difficult for firms to complete “megadeals” (> $10 billion) Then U.S. deals picked up in 2011, where “first-quarter deal volume rose 45% to $290.8 billion, compared with $200.6 billion” in 2010

Cross-border acquisitions heighten during currency imbalances, from strong currency countries to weaker currency countries, such as the U.S. Firms use M&A strategies to create value for all stakeholders M&A value creation applies equally to all strategies (business-level, corporate-level, international, and cooperative)

Can be used because of uncertainty in the competitive landscape Increase market power because of competitive threat Spread risk due to uncertain environment Shift core business into different markets Manage industry and regulatory changes Intent: Increase firm’s strategic competitiveness and value; historically returns are close to zero so it rarely works as planned

M&A value creation is challenging GOOD NEWS: Shareholders of ACQUIRED firms often earn above-average returns from acquisitions BAD NEWS: Shareholders of ACQUIRING firms earn returns that are close to zero: In 2/3 of all acquisitions, the acquiring firm’s stock price fell immediately after the intended transaction was announced This negative response reflects investors’ skepticism about projected synergies being captured

MERGERS, ACQUISITIONS, AND TAKEOVERS: WHAT ARE THE DIFFERENCES?
Two firms agree to integrate their operations on a relatively co-equal basis  There are few TRUE mergers because one firm usually dominates in terms of market share, size, or asset value ACQUISITION One firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

MERGERS, ACQUISITIONS, AND TAKEOVERS: WHAT ARE THE DIFFERENCES?
Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid HOSTILE TAKEOVER Unfriendly takeover that is undesired by the target firm RATIONALE FOR STRATEGY Pre-announcement returns of hostile takeovers are largely anticipated and associated with a significant increase in the bidder’s and target’s share price

REASONS FOR ACQUISITIONS AND PROBLEMS IN ACHIEVING SUCCESS
FIGURE 7.1 Reasons for Acquisitions and Problems in Achieving Success

REASONS FOR ACQUISITIONS
Increased Market Power Market Leadership results from Market Power Factors increasing market power: ● The ability to sell goods or services above competitive levels ● Costs of primary or support activities are below those of competitors ● Size of the firm, resources, and capabilities to compete in the market and share of the market ● Purchase of a competitor, a supplier, a distributor, or a business in a highly related industry

Increased Market Power Market power is increased by: ●Horizontal acquisitions: other firms in the same industry McDonald’s acquisition of Boston Market (successful?) ●Vertical acquisitions: suppliers or distributors of the acquiring firm Walt Disney Company’s acquisition of Fox Family Worldwide ●Related acquisitions: firms in related industries

Increased Market Power Acquirer and acquired companies compete in the same industry Firm’s market power is increased by exploiting: Cost-based synergies Revenue-based synergies Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics Horizontal Acquisitions Similar characteristics: Strategy Managerial styles Resource allocation patterns Previous alliance management experience

Increased Market Power Horizontal Acquisitions Acquisition of a supplier or distributor of one or more of the firm’s goods or services Increases a firm’s market power by controlling additional parts of the value chain Vertical Acquisitions

Increased Market Power Acquisition of a company in a highly related industry Value creation takes place through the synergy that is generated by integrating resources and capabilities Because of the difficulty in implementing synergy, related acquisitions are often difficult to implement Horizontal Acquisitions Vertical Acquisitions Related Acquisitions

Increased Market Power Horizontal, Vertical, and Related Acquisitions Acquisitions intended to increase market power are subject to: Regulatory review Analysis by financial markets

Overcoming Entry Barriers Entry Barriers Factors associated with the market or with the firms operating in it that increase the expense and difficulty faced by new ventures trying to enter that market Economies of scale Differentiated products Cross-Border Acquisitions Acquisitions made between companies with headquarters in different countries Are often made to overcome entry barriers Can be difficult to negotiate and operate because of the differences in foreign cultures

Cross-Border Acquisitions In the current global competitive landscape, firms from other nations may use an acquisition strategy more frequently than firms in North America and Europe. The Strategic Focus underscores the different approaches to cross-border acquisitions by Chinese, Indian, and Brazilian corporations.

Cost of New Product Development and Increased Speed to Market Internal development of new products is often perceived as high-risk activity. Acquisitions allow a firm to gain access to new and current products that are new to the firm. Compared with internal product development, acquisitions: Are less costly Have faster market penetration Have more predictable returns due to the acquired firms’ experience with the products

Lower Risk Compared to Developing New Products Outcomes for an acquisition can be more easily and accurately estimated than the outcomes of an internal product development process. Acquisition strategies are a common means of avoiding risky internal ventures and risky R&D investments. Acquisitions may become a substitute for innovation, and thus should always be strategic rather than defensive in nature.

Increased Diversification Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses. Both related diversification and unrelated diversification strategies can be implemented through acquisitions. The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful.

Reshaping the Firm’s Competitive Scope An acquisition can: Reduce the negative effect of an intense rivalry on a firm’s financial performance. Reduce a firm’s dependence on one or more products or markets. Reducing a company’s dependence on specific markets alters the firm’s competitive scope

Learning and Developing New Capabilities An acquiring firm can gain capabilities that the firm does not currently possess: Special technological capability A broader knowledge base Reduced inertia Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base

PROBLEMS IN ACHIEVING ACQUISITION SUCCESS
Integration Difficulties Too Large Inadequate Target Evaluation PROBLEMS WITH ACQUISITIONS Managers Overly Focused on Acquisitions Large or Extraordinary Debt Too Much Diversification Inability to Achieve Synergy

● Acquisition strategies are not problem-free, even when pursued for value-creating reasons. ● Research suggests: 20% of all mergers and acquisitions are successful 60% produce disappointing results 20% are clear failures, with technology acquisitions reporting even higher failure rates

Greater acquisition success accrues to firms able to: 1. select the “right” target 2. avoid paying too high a premium (by doing appropriate due diligence) 3. integrate the operations of the acquiring and target firm effectively 4. retain the target firm’s human capital, as illustrated by Facebook’s approach described in the opening case

Integration Difficulties Integration challenges include: Melding two disparate corporate cultures Linking different financial and control systems Building effective working relationships (particularly when management styles differ) Resolving problems regarding the status of the newly acquired firm’s executives Loss of key personnel weakening the acquired firm’s capabilities and reducing its value

Inadequate Evaluation of Target Due Diligence The process of evaluating a target firm for acquisition Ineffective due diligence may result in paying an excessive premium for the target company Evaluation requires examining: The financing of the intended transaction The differences in culture between the firms The tax consequences of the transaction Actions necessary to meld the two workforces BOTH the accuracy of the financial position and accounting standards used AND the quality of the strategic fit and the ability of the acquiring firm to effectively integrate the target

Large or Extraordinary Debt Junk bonds: Financing option whereby risky acquisitions are financed with money (debt) that provides a large potential return to lenders (bondholders) High debt (e.g., junk bonds) can: Increase the likelihood of bankruptcy Lead to a downgrade of the firm’s credit rating Preclude investment in activities that contribute to the firm’s long-term success such as: Research and development Human resource training Marketing

Inability to Achieve Synergy Synergy: when assets are worth more when used in conjunction with each other than when they are used separately Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources (e.g., human capital and knowledge) across the businesses in the merged firm. Firms experience transaction costs when they use acquisition strategies to create synergy Firms tend to underestimate indirect costs when evaluating a potential acquisition

Inability to Achieve Synergy Private synergy: when the combination and integration of the acquiring and acquired firms’ assets yields capabilities and core competencies that could not be developed by combining and integrating either firm’s assets with another company Advantage: It is difficult for competitors to understand and imitate Disadvantage: It is also difficult to create

Too Much Diversification Diversified firms must process more information of greater diversity. Increased operational scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances Strategic focus shifts to short-term performance Acquisitions may become substitutes for innovation

Too Much Diversification Overdiversification Related diversification requires more information processing than does unrelated diversification Due to the additional information processing, related diversified firms become overdiversified with fewer business units than do unrelated diversifiers Overdiversification leads to a decline in performance, after which business units are often divested Even when a firm is not overdiversified, a high level of diversification can have a negative effect on its long-term performance

Managers Overly Focused on Acquisitions WHY: MORE FUN TO MAKE THE DEALS THAN TO RUN THE COMPANY Managers invest substantial time and energy in acquisition strategies in: Searching for viable acquisition candidates Completing effective due-diligence processes Preparing for negotiations Managing the integration process after the acquisition is completed

Managers Overly Focused on Acquisitions Managers in target firms operate in a state of virtual suspended animation during an acquisition. Executives may become hesitant to make decisions with long-term consequences until negotiations have been completed. The acquisition process can create a short-term perspective and a greater aversion to risk among executives in the target firm.

Too Large Additional costs and complexity of management may exceed the benefits of the economies of scale and additional market power, creating diseconomies of scope More bureaucratic controls result from size: Formal rules and policies ensure consistency of decisions and actions Formalized controls often lead to relatively rigid and standardized managerial behavior The firm may produce less innovation

EFFECTIVE ACQUISITIONS
TABLE 7.1 Attributes of Successful Acquisitions

EFFECTIVE ACQUISITION STRATEGIES
Complementary Assets/Resources Buying firms with assets that meet current needs to build competitiveness Friendly Acquisitions Friendly deals make integration go more smoothly Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies Due Diligence/Careful Selection Process Provide enough additional financial resources so that profitable projects may be capitalized upon rather than forgone Maintain Financial Slack

EFFECTIVE ACQUISITION STRATEGIES
Attributes Results Low-to-Moderate Debt Merged firm maintains financial flexibility Sustained Emphasis on Innovation Continue to invest in R&D as part of the firm’s overall strategy Flexibility Has experience at managing change and is flexible and adaptable

RESTRUCTURING A strategy through which a firm changes its set of businesses or financial structure Failure of an acquisition strategy often precedes a restructuring strategy Restructuring may occur because of changes in the external or internal environments Restructuring strategies: Downsizing Downscoping Leveraged buyouts

RESTRUCTURING DOWNSIZING DOWNSCOPING LEVERAGED BUYOUT
Reduction in the number of a firm’s employees and in the number of its operating units, but it does not change the essence of the business DOWNSCOPING Refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s core businesses LEVERAGED BUYOUT A party buys all of the assets of a business, financed largely with debt, and takes the firm private

RESTRUCTURING DOWNSCOPING DOWNSIZING Tactical Short-term
Cut labor costs Acquisition failed to create anticipated value Paid too much for target DOWNSCOPING Strategic Long-term Focus on core businesses More positive effect on firm performance than downsizing

RESTRUCTURING Downsizing: a reduction in the number of a firm’s employees and sometimes in the number of its operating units May or may not change the composition of businesses in the company’s portfolio Typical reasons for downsizing: Expectation of improved profitability from labor cost reductions Desire or necessity for more efficient operations

RESTRUCTURING Downscoping: a divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core businesses A set of actions that causes a firm to strategically refocus on its core businesses and reduce the diversity of its business portfolio May be accompanied by downsizing, but must avoid eliminating key employees Smaller firm can be more effectively managed by the top management team

RESTRUCTURING DOWNSCOPING AND GLOBALIZATION
U.S. firms use downscoping more frequently than do European companies Conglomerate-building has been the trend in Europe, Latin America, and Asia Some Asian and Latin American conglomerates have begun to adopt Western corporate strategies, i.e., refocusing on their core businesses Downscoping has occurred simultaneously with globalization and market liberalization, which have greatly enhanced competition

RESTRUCTURING Leveraged Buyouts (LBOs): one party buys all of a firm's assets in order to take the firm private (or no longer trade the firm's shares publicly) ● Private equity firm: firm that facilitates or engages in taking a public firm private Significant amounts of debt may be incurred to finance the buyout Immediate sale of non-core assets to pare down debt ● Can correct for managerial mistakes Managers making decisions that serve their own interests rather than those of shareholders

LEVERAGED BUYOUTS (LBOs)
RESTRUCTURING LEVERAGED BUYOUTS (LBOs) ● Three types of LBOs Management buyouts (MBOs) Employee buyouts (EBOs) Whole-firm buyouts ● MBOs, moreso than EBOs and whole-firm buyouts, lead to downscoping, increased strategic focus, and improved performance ● Why LBOs? ■ Protection against a capricious financial market ■ Allows owners to focus on developing innovations and bringing them to market ■ A form of firm rebirth to facilitate entrepreneurial efforts

LEVERAGED BUYOUTS (LBOs)
RESTRUCTURING LEVERAGED BUYOUTS (LBOs) Considered a significant innovation in the financial restructuring of firms, HOWEVER, they can involve negative trade-offs: ■ First, the resulting large debt increases the firm’s financial risk, as is evidenced by the number of companies that filed for bankruptcy in the 1990s after executing a whole-firm LBO ■ A short-term and risk-averse managerial focus results in these firms failing to adequately invest in R&D and other core competency drivers Most LBOs have been completed in mature industries where stable cash flows are possible

RESTRUCTURING OUTCOMES
Short-term Reduced costs: labor and debt Emphasis on strategic controls Long-term Loss of human capital Performance: higher/lower Higher risk

Restructuring and Outcomes
FIGURE 7.2 Restructuring and Outcomes

CHAPTER 8 INTERNATIONAL STRATEGY

KNOWLEDGE OBJECTIVES ● Explain incentives that can influence firms to use an international strategy. ● Identify three basic benefits firms achieve by successfully implementing an international strategy. ● Explore the determinants of national advantage as the basis for international business-level strategies. ● Describe the three international corporate-level strategies. ● Discuss environmental trends affecting the choice of international strategies, particularly international corporate-level strategies.

KNOWLEDGE OBJECTIVES ● Explain the five modes firms use to enter international markets. ● Discuss the two major risks of using international strategies. ● Discuss the strategic competitiveness outcomes associated with international strategies particularly with an international diversification strategy. ● Explain two important issues firms should have knowledge about when using international strategies.

INTERNATIONAL STRATEGY: CRITICAL TO STARBUCKS’ FUTURE SUCCESS
OPENING CASE INTERNATIONAL STRATEGY: CRITICAL TO STARBUCKS’ FUTURE SUCCESS ■ From launching its operations in 1971 to currently being one of the world’s most recognized brands, Starbucks has over 17,000 locations in some 50 countries; global growth is paramount ■ This case highlights the increasing importance of international markets for Starbucks ■ China and India are especially pivotal markets ■ Starbucks uses an international differentiation business-level strategy and a transnational international corporate-level strategy in China

INTERNATIONAL STRATEGY: CRITICAL TO STARBUCKS’ FUTURE SUCCESS
OPENING CASE INTERNATIONAL STRATEGY: CRITICAL TO STARBUCKS’ FUTURE SUCCESS ■ Starbucks’ international differentiation strategy underscores unique products and customer experiences, with a commensurate premium price. ■ Its transnational strategy leverages Starbucks’ core competencies to standardize its operations to gain global efficiencies, while decentralizing decision-making responsibilities in China so that some products can be customized to meet local consumers’ unique needs.

DOMESTIC VERSUS GLOBAL MARKETS
Stable Predictable Less complex Globalization is reducing the number of domestic-only markets GLOBAL MARKETS Unstable Unpredictable Complex and risky Globalization is enabling global markets

INTRODUCTION The purpose of this chapter is to discuss how international strategies can be a source of global strategic competitiveness. It addresses: Factors that influence firms to identify international opportunities Three basic benefits that can accrue to firms that successfully use international strategies International business-level strategies and international corporate-level strategies Five modes of entry firms consider when deciding how to enter international markets Economic and political risks when implementing international strategies Outcomes firms seek when using international strategies International strategy: challenges to be mindful of

OPPORTUNITIES AND OUTCOMES OF INTERNATIONAL STRATEGY
FIGURE 8.1 Opportunities and Outcomes of International Strategy ©Copyrighted 2011 Michael A. Hitt, R. Duane Ireland and Robert E. Hoskisson

IDENTIFYING INTERNATIONAL OPPORTUNITIES
International Strategy: a strategy through which the firm sells its goods or services outside its domestic market Reasons for having an international strategy International markets yield new opportunities Needed resources can be secured Greater potential product demand Borderless demand for globally branded products Pressure for global integration New market expansion extends product life cycle

Many firms choose direct investment in assets over indirect investment because it: ● Provides better protection for assets ● Develops relationships with key resources faster ● May provide reduction in risk due to direct connections

INCENTIVES AND BASIC BENEFITS OF INTERNATIONAL STRATEGY
FIGURE 8.2 Incentives and Basic Benefits of International Strategy

INCENTIVES TO USE INTERNATIONAL STRATEGIES ● Firms derive three basic benefits by successfully using international strategies: 1. increased market size 2. increased economies of scale and learning 3. development of a competitive advantage through location (e.g., access to low-cost labor, critical resources, or customers) ● Raymond Vernon states that the classic rationale for international diversification is to: 4. extend the product’s life cycle

CLASSIC RATIONALE: EXTENDING THE PRODUCT’S LIFE CYCLE Product demand develops and firm exports products Foreign competition begins production Firm introduces innovation in domestic market Firm begins production abroad Production is standardized and relocated to low cost countries

THREE BASIC BENEFITS OF INTERNATIONAL STRATEGY 1. INCREASED MARKET SIZE ● Domestic market may lack the size to support efficient scale manufacturing facilities ● Generally, larger international markets offer higher potential returns and pose less risk for firms ● The strength of international markets may facilitate efforts to more effectively sell and/or produce products that create value for customers

THREE BASIC BENEFITS OF INTERNATIONAL STRATEGY 2. ECONOMIES OF SCALE AND LEARNING ● Expanding size or scope of markets helps achieve economies of scale in manufacturing as well as marketing, R&D, or distribution ● Costs are spread over a larger sales base ● Profit per unit is increased

THREE BASIC BENEFITS OF INTERNATIONAL STRATEGY 2. ECONOMIES OF SCALE AND LEARNING ● Firms may also be able to exploit core competencies in international markets through resource and knowledge sharing between units and network partners across country borders ● By sharing resources and knowledge in this manner, firms can learn how to create synergy, which in turn can help each firm learn how to produce higher-quality products at a lower cost

THREE BASIC BENEFITS OF INTERNATIONAL STRATEGY 2. ECONOMIES OF SCALE AND LEARNING ● Working in multiple international markets also provides firms with new learning opportunities ● Increasing the firm’s R&D ability can contribute to its efforts to enhance innovation, which is critical to both short- and long-term success ● However, to take advantage of international R&D investments, firms need to already have a strong system in place to absorb resulting R&D knowledge

THREE BASIC BENEFITS OF INTERNATIONAL STRATEGY 3. LOCATION ADVANTAGES ● Certain markets may offer superior access to critical resources, e.g., raw materials, lower-cost labor, energy, suppliers, key customers ● Cultural influences may be advantageous—a strong cultural match facilitates international business transactions ● Physical distances influence firms’ location choices, i.e., transportation costs

INTERNATIONAL STRATEGIES
Firms choose one or both of two basic types of international strategies: business level and corporate level International business-level strategies Cost leadership Differentiation Focused cost leadership Focused differentiation Integrated cost leadership/differentiation

International Corporate-level strategies Multidomestic Global Transnational (the combination of the multidomestic and global strategies) Each international strategy the firm uses must be based on one or more core competencies

INTERNATIONAL STRATEGIES INTERNATIONAL BUSINESS-LEVEL STRATEGY
● International firms first develop domestic strategies (at the business level and at the corporate level if the firm has diversified at the product level). ● Firms may be able to leverage some of their domestic capabilities and core competencies as the foundation for their international competitive success, however, this type of domestic-global translation diminishes as geographic diversity increases.

● Home country is usually the most important source of competitive advantage: Domestic resources and capabilities are the building blocks for international capabilities and core competencies. ● This reasoning is grounded in Michael Porter’s analysis of why some nations/industries are more competitive than others within nations or in other nations.

● International business-level strategy is selected based on structural characteristics of an economy, as identified by Porter’s four determinants of national advantage (see Figure 8.3). ● Porter’s core argument is that conditions/ factors in a firm’s domestic market either help or hinder the firm’s international business-level strategy implementation.

INTERNATIONAL STRATEGIES DETERMINANTS OF NATIONAL ADVANTAGE
FIGURE 8.3 Determinants of National Advantage

Factors of production The inputs necessary to compete in any industry  Labor Land Natural resources  Capital Infrastructure Basic factors Natural and labor resources Advanced factors Digital communication systems and an educated workforce

Demand conditions: characterized by the nature and size of buyers’ needs in the home market for the industry’s goods or services Size of the market segment can lead to scale-efficient facilities Efficiency can lead to domination of the industry in other countries Specialized demand may create opportunities beyond national boundaries

Related and supporting industries: supporting services, facilities, suppliers, etc. Support in design Support in distribution Related industries as suppliers and buyers

Firm strategy, structure, and rivalry: the pattern of strategy, structure, and rivalry among firms Common technical training Methodological product and process improvement Cooperative and competitive systems

Firm strategy, structure, and rivalry EXAMPLES Germany - the excellent technical training system fosters a strong emphasis on continuous product and process improvements Japan - unusual cooperative and competitive systems facilitate the cross-functional management of complex assembly operations Italy - the national pride of the country’s designers spawns strong industries in shoes, sports cars, fashion apparel, and furniture U.S. - Competition among computer manufacturers and software producers accelerates development in these industries

INTERNATIONAL STRATEGIES INTERNATIONAL CORPORATE-LEVEL STRATEGY
The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies Some strategies provide individual country units with the flexibility to choose their own strategies Other strategies dictate business-level strategies from the home office and coordinate resource sharing across units

Focuses on the scope of operations: Product diversification Geographic diversification Required when the firm operates in: Multiple industries, and Multiple countries or regions Headquarters unit guides the strategy However, business or country-level managers can have substantial strategic input

FIGURE 8.4 International Corporate-Level Strategies

INTERNATIONAL CORPORATE-LEVEL STRATEGIES MULTIDOMESTIC STRATEGY Multidomestic strategy Strategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local markets Business units in each country are independent Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets

INTERNATIONAL CORPORATE-LEVEL STRATEGIES MULTIDOMESTIC STRATEGY Multidomestic strategy Strategy results in less knowledge sharing for the corporation as a whole Strategy isolates the firm from global competitive forces Establish protected market positions Compete in industry segments most affected by differences among local countries Deals with uncertainty from differences across markets

INTERNATIONAL STRATEGIES INTERNATIONAL CORPORATE-LEVEL STRATEGIES
GLOBAL STRATEGY Global strategy Firm offers standardized products across country markets, with the competitive strategy being dictated by the home office Strategic and operating decisions are centralized at the home office Involves interdependent SBUs operating in each country Home office attempts to achieve integration across SBUs, adding management complexity Produces lower risk

GLOBAL STRATEGY Global strategy Facilitated by improved global reporting standards (i.e., accounting and financial) Emphasizes economies of scale Less responsive to local market opportunities Requires resource sharing and coordination across borders (hard to manage) Offers less effective learning processes (pressure to conform and standardize) Strategy more effective in areas where regional integration is occurring

INTERNATIONAL CORPORATE-LEVEL STRATEGIES TRANSNATIONAL STRATEGY Transnational strategy Seeks to achieve both global efficiency and local responsiveness—competing goals Requires both: Centralization - global coordination and control Decentralization - local flexibility Global competitive landscape fosters intense competition, thus pressures to reduce costs, while at the same time information sharing has intensified the desire for specialized, customized, differentiated products

INTERNATIONAL CORPORATE-LEVEL STRATEGIES TRANSNATIONAL STRATEGY Transnational strategy Firm must pursue organizational learning to achieve competitive advantage Challenging, but becoming increasingly necessary to compete in international markets Increasingly popular as a strategy

MULTIDOMESTIC KEY ASSUMPTION: country/cultural differences → need for local responsiveness ADVANTAGE: local responsiveness GLOBAL KEY ASSUMPTION: universal demand → need for global integration ADVANTAGE: global efficiencies TRANSNATIONAL ADVANTAGE: BOTH local responsiveness and global efficiencies

MULTIDOMESTIC EXAMPLE: Unilever is transitioning from a multidomestic strategy to a transnational strategy GLOBAL EXAMPLE: CEMEX is a global building materials company that centralizes operations in order to gain scale economies, among other benefits TRANSNATIONAL EXAMPLE: Starbucks in China standardizes operations while simultaneously decentralizes some decision-making for local responsiveness

LIABILITY OF FOREIGNESS
ENVIRONMENTAL TRENDS LIABILITY OF FOREIGNESS TWO NEW TRENDS Brazil, Russia, India, and China (BRIC) represent major international market opportunities and threats. 1. Liability of foreignness: costs associated with entering foreign markets Increased after terrorists’ attacks and Iraq War Four types of distances: Cultural differences Administrative (unfamiliar operating environments) Geographic (challenges of distance coordination) Economic

ENVIRONMENTAL TRENDS REGIONALIZATION
TWO NEW TRENDS 2. Regionalization Global strategies not as prevalent today; difficult to implement even with Internet- based strategies Regional focus allows firms to marshal resources to compete effectively in regional markets Increases understanding of market: cultures, legal and social norms

ENVIRONMENTAL TRENDS REGIONALIZATION
TWO NEW TRENDS 2. Regionalization (cont’d) Achieve some economies through coordination and sharing of resources Trade agreements (e.g., EU, OAS, NAFTA) promote trade flows across country boundaries with their respective regions Most firms enter regional markets sequentially, beginning in more familiar markets, introducing their largest and strongest lines of business first

CHOICE OF INTERNATIONAL ENTRY MODE
FIGURE 8.5 Modes of Entry and Their Characteristics

Following the selection of an international strategy, the five main entry modes are: Exporting Licensing Strategic Alliances Acquisitions New Wholly Owned Subsidiary

EXPORTING LICENSING STRATEGIC ALLIANCES ACQUISITIONS NEW WHOLLY OWNED SUBSIDIARY RISK INCREASES CONTROL INCREASES ©Copyrighted 2011 Marta Szabo White, Ph.D.

EXPORTING 1. Exporting: the firm sends products it produces in its domestic market to international markets Involves low expense to establish operations in host country Often involves contractual agreements Involves high transportation costs Tariffs maybe imposed Low control over marketing and distribution

LICENSING 2. Licensing: an agreement is formed that allows a foreign company to purchase the right to manufacture and sell a firm’s products within a host country’s market or a set of markets

LICENSING 2. Licensing (cont’d) Involves low cost to expand internationally Allows licensee to absorb risks Has low control over manufacturing and marketing Offers lower potential returns (shared with licensee) Involves risk of licensee imitating technology and product for own use May have inflexible ownership arrangement

STRATEGIC ALLIANCES 3. Strategic alliance: collaboration with a partner firm for international market entry Involves shared risks and resources Facilitates development of core competencies Involves fewer resources and costs required for entry May involve possible incompatibility, conflict, or lack of trust with partner Is difficult to manage

ACQUISITIONS 4. Acquisitions Cross-border acquisition: a firm from one country acquires a stake in or purchases 100% of a firm located in another country Allows for quick access to market Involves possible integration difficulties Is costly (debt financing) Has complex negotiations and transaction requirements

CHOICE OF INTERNATIONAL ENTRY MODE NEW WHOLLY OWNED SUBSIDIARY
Greenfield venture: a firm invests directly in another country/market by establishing a new wholly owned subsidiary Is costly Involves complex processes Allows for maximum control Has the highest potential returns Carries high risk

CHOICE OF INTERNATIONAL ENTRY MODE DYNAMICS OF MODE OF ENTRY
Use the best suited mode of entry to the situation at hand; affected by several factors: Export, licensing, and strategic alliance: good tactics for early market development Strategic alliance: used in more uncertain situations

CHOICE OF INTERNATIONAL ENTRY MODE DYNAMICS OF MODE OF ENTRY
Wholly owned subsidiary may be preferred if: Intellectual Property (IP) rights in emerging economy are not well protected Number of firms in industry is accelerating Need for global integration is high Acquisitions or Greenfield ventures: secure a stronger presence in international markets

EXPORTING What’s the best solution? Situation Optimal Solution The firm has no foreign manufacturing expertise and requires investment only in distribution. Exporting

LICENSING What’s the best solution? Situation Optimal Solution The firm needs to facilitate the product improvements necessary to enter foreign markets. Licensing

STRATEGIC ALLIANCES What’s the best solution? Situation Optimal Solution The firm needs to connect with an experienced partner already in the targeted market. Strategic Alliance

STRATEGIC ALLIANCES What’s the best solution? Situation Optimal Solution The firm needs to reduce its risk through the sharing of costs. Strategic Alliance

STRATEGIC ALLIANCES What’s the best solution? Situation Optimal Solution The firm is facing uncertain situations such as an emerging economy in its targeted market. Strategic Alliance

ACQUISITIONS What’s the best solution? Situation Optimal Solution The firm must act quickly to gain rapid access to this new market, where corruption is not an issue. Acquisition

WHOLLY OWNED SUBSIDIARY What’s the best solution? Situation Optimal Solution The firm’s intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high. Wholly Owned Subsidiary (Greenfield Venture)

RISKS IN AN INTERNATIONAL ENVIRONMENT
FIGURE 8.6 Risks in the International Environment

RISKS IN AN INTERNATIONAL ENVIRONMENT: POLITICAL RISKS
Political risks: disruption of MNC operations by political forces or events whether they occur in host countries or home country, or result from changes in the international environment Prior to implementing any of the five modes of international entry, political risk analysis should be conducted, where the firm examines potential sources and factors of noncommercial disruptions of their foreign investments and the operations.

RISKS IN AN INTERNATIONAL ENVIRONMENT: POLITICAL RISKS
International strategy implementation may be disrupted by the following examples of political risk: ● Government instability ● Conflict or war ● Government regulations ● Conflicting and diverse legal authorities ● Potential nationalization of private assets ● Government corruption ● Changes in government policies

RISKS IN AN INTERNATIONAL ENVIRONMENT: ECONOMIC RISKS
Economic risks: fundamental weaknesses in a country or region’s economy with the potential to adversely impact the successful implementation of a firm’s international strategies International strategy implementation may be disrupted by the following examples of economic risk: ● Foremost economic risk - currency volatility ● Currency effect on the prices of globally manufactured goods, thus exports/imports

RISKS IN AN INTERNATIONAL ENVIRONMENT: ECONOMIC RISKS
International strategy implementation may be disrupted by the following examples of economic risk (cont’d): ● Government oversight and control of economic/financial capital. ● Weak Intellectual Property (IP) rights protections, impact FDI attractiveness. ● Investment losses due to political risks ● Terrorism ● Security risk of foreign firms acquiring key natural resources or strategic IP.

EXAMPLES OF POLITICAL AND ECONOMIC RISKS
? ? ? ? ?

STRATEGIC COMPETITIVENESS OUTCOMES
INTERNATIONAL DIVERSIFICATION AND RETURNS International diversification: firm expands sales of its goods or services across the borders of global regions and countries into different geographic locations or markets From Figure 8.1, the benefits of implementing international strategies are critical to strategic competitiveness, as measured by improved performance and enhanced innovation.

INTERNATIONAL DIVERSIFICATION AND RETURNS Implementation follows the selection of international strategy and mode of entry: International diversification and returns International diversification and innovation Complexity of managing multinational firms

INTERNATIONAL DIVERSIFICATION AND RETURNS ● As international diversification increases, firms’ returns initially decrease, but then increase quickly as the firm learns to manage international expansion. ● Firms that are broadly diversified into multiple international markets usually achieve the most positive stock returns, especially when they diversify geographically into core business areas.

INTERNATIONAL DIVERSIFICATION AND RETURNS Many factors contribute to the positive effects of international diversification: Private versus government ownership Economies of scale and experience Location advantages Increased market size Opportunity to stabilize returns, which helps reduce a firm’s overall risk

ENHANCED INNOVATION Exposure to new products and markets Opportunity to integrate new knowledge into operations Generation of resources to sustain innovation efforts The relationship among international geographic diversification, innovation, and returns is complex

ENHANCED INNOVATION ● Some level of performance is necessary to provide the resources the firm needs to diversify geographically; in turn, geographic diversification provides incentives and resources to invest in R&D. ● Effective R&D should enhance the firm’s returns, which then provides more resources for continued geographic diversification and investment in R&D.

THE CHALLENGE OF INTERNATIONAL STRATEGIES
THE COMPLEXITY OF MANAGING INTERNATIONAL STRATEGIES Complexity of managing multinational firms–six considerations: Geographic dispersion Costs of coordination Logistical costs Trade barriers Cultural diversity Host government

THE CHALLENGE OF INTERNATIONAL STRATEGIES
LIMITS TO INTERNATIONAL EXPANSION There are several reasons that explain the limits to the positive effects of the diversification associated with international strategies: Geographic dispersion Trade barriers Logistical costs Cultural diversity and barriers Complexity of competition Relationship between firm and host country Other country differences

CHAPTER 9 COOPERATIVE STRATEGY

KNOWLEDGE OBJECTIVES ● Define cooperative strategies and explain why firms use them. ● Define and discuss the three major types of strategic alliances. ● Name the business-level cooperative strategies and describe their use. ● Discuss the use of corporate-level cooperative strategies in diversified firms.

KNOWLEDGE OBJECTIVES ● Understand the importance of cross-border strategic alliances as an international cooperative strategy. ● Explain cooperative strategies’ risks ● Describe two approaches used to manage cooperative strategies.

THE RENAULT-NISSAN ALLIANCE: COLLABORATING TO SUCCEED
OPENING CASE THE RENAULT-NISSAN ALLIANCE: COLLABORATING TO SUCCEED ■ The 1999 French-based Renault and Japanese-based Nissan alliance was launched because each firm lacked the necessary size to develop economies of scale and economies of scope, critical components in the global automobile market. ■ Renault has a 44.3% stake in Nissan while Nissan has a 15% stake in Renault, with Brazilian-born Carlos Ghosn as CEO for both companies.

OPENING CASE THE RENAULT-NISSAN ALLIANCE: COLLABORATING TO SUCCEED ■ Three guiding values for this synergistic alliance: 1. Trust (work fairly, impartially, and professionally) 2. Respect (honor commitments, liabilities, and responsibilities) 3. Transparency (be open, frank, and clear) ■ Renault-Nissan B.V., a key reason for the alliance’s success, is a strategic management firm, responsible for strategies, synergies, and combining resources, capabilities, and core competencies.

OPENING CASE THE RENAULT-NISSAN ALLIANCE: COLLABORATING TO SUCCEED ■ This opening case underscores the complexities of cooperative relationships and highlights the many challenges of this corporate-level alliance, and the business-unit level, horizontal alliances. ■ Under CEO Ghosn’s leadership, each company maintains its separate identify while capitalizing upon their collaboration.

INTRODUCTION COOPERATIVE STRATEGY
Firms collaborate for the purpose of working together to achieve a shared objective. Cooperating with other firms is a strategy that: Creates value for a customer Exceeds the cost of constructing customer value in other ways Establishes a favorable position relative to competitors

INTRODUCTION COOPERATIVE STRATEGY
Examples of cooperative behavior known to contribute to alliance success: Actively solving problems Being trustworthy Consistently pursuing ways to combine partners’ resources and capabilities to create value Collaborative (Relational) Advantage A competitive advantage developed through a cooperative strategy

STRATEGIC ALLIANCES AS A PRIMARY TYPE OF COOPERATIVE STRATEGY
Strategic alliance: cooperative strategy in which firms combine resources and capabilities to create a competitive advantage Three types of strategic alliances Joint venture Equity strategic alliance Nonequity strategic alliances, which include: Licensing agreements Distribution agreements Supply contracts Outsourcing commitments

TYPES OF MAJOR STRATEGIC ALLIANCES
Joint venture: two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage Optimal when firms need to combine their resources and capabilities to create a competitive advantage that is substantially different from individual advantages, and when highly uncertain, hypercompetitive markets are targeted.

2. Equity strategic alliance: two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities for the purpose of creating a competitive advantage Many foreign direct investments, such as those companies from multiple countries are making in China, are completed through an equity strategic alliance

3. Nonequity strategic alliance: two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage Separate independent company NOT established, thus no equity positions: less formal, fewer partner commitments, and intimate relationship among partners is not fostered

1. Joint Venture EXAMPLE: Germany’s Siemens AG and Japan’s Fujitsu Ltd. each owned 50 percent of the joint venture Fujitsu Siemens Computers B.V., later to become Fujitsu Technology Solutions when Fujitsu bought Siemens’ share of the joint venture. 2. Equity Strategic Alliance EXAMPLE: Japanese telecom operator NTT DOCOMO Inc. and Chinese Internet search operator Baidu Inc. established an equity strategic alliance in China to distribute games and other mobile-phone content. 3. Nonequity Strategic Alliance EXAMPLES: Licensing agreements, distribution agreements, and supply contracts. Hewlett-Packard (HP) actively uses this type of cooperative strategy to license some of its intellectual property.

Nonequity Strategic Alliance Outsourcing, a type of nonequity strategic alliance, is the purchase of a value-creating primary or support activity from another firm. Dell Inc. and most other computer firms outsource most or all of their production of laptop computers and often form nonequity strategic alliances. To protect IP, modularity is employed, which prevents the contracting partner from gaining too much knowledge or from sharing certain aspects of the business the outsourcing firm does not want revealed.

REASONS FIRMS DEVELOP STRATEGIC ALLIANCES
FIGURE 9.1 Reasons for Strategic Alliances by Market Type

Most firms lack the full set of resources and capabilities needed to reach their objectives Cooperative behavior allows partners to create value that they could not develop by acting independently Collaborative strategies are particularly valuable for small firms with constrained resources for reaching new customers and broadening their distribution channels Aligning stakeholder interests (both inside and outside the organization) can reduce environmental uncertainty

Alliances can: provide a new source of revenue (can account for 25% or more of a firm’s sales revenue) be a vehicle for firm growth enhance the speed and depth of responding to market opportunities, technological changes, and global conditions allow firms to gain new knowledge and experiences to increase competitiveness

In summary, strategic alliances: Can reduce competition and enhance a firm’s competitive capabilities Create an avenue for the firm to gain access to resources Allow a firm to take advantage of opportunities, build strategic flexibility, and innovate The competitive market conditions: Slow-cycle markets Fast-cycle markets Standard-cycle markets

Slow-cycle markets – firm’s competitive advantages are shielded from imitation for relatively long periods of time and where imitation is costly These markets are close to monopolistic conditions. Railroads and, historically, telecommunications, utilities, financial services, and steel manufacturers are industries characterized as slow-cycle markets.

Slow-cycle markets are becoming rare due to: Privatization of industries and economies Rapid expansion of the Internet's capabilities Quick dissemination of information Speed with which advancing technologies permit imitation of even complex products) Cooperative strategies can help firms transition from sheltered markets to more competitive ones.

Market Reason Slow-cycle Gain access to a restricted market Establish a franchise in a new market Maintain market stability (e.g., establishing standards)

Fast-cycle markets: hypercompetitive, unstable, unpredictable, and complex Firm’s competitive advantages are not shielded from imitation, preventing their long-term sustainability. These conditions virtually preclude establishing long-lasting competitive advantages, forcing firms to constantly seek sources of new competitive advantages while creating value by using current ones.

Fast-cycle markets “Collaboration mindset” is paramount. Alliances between firms with current excess resources and capabilities and those with promising capabilities help companies compete in fast-cycle markets to effectively transition from the present to the future and to gain rapid entry into new markets.

Market Reason Fast-cycle Speed up development of new goods or service Speed up new market entry Maintain market leadership Form an industry technology standard Share risky R&D expenses Overcome uncertainty

Standard-cycle markets Competitive advantages are moderately shielded from imitation in these markets, typically allowing them to be sustained for a longer period of time than in fast-cycle market situations, but for a shorter period of time than in slow-cycle markets.

Standard-cycle markets Alliances are more likely to be made by partners that have complementary resources and capabilities, e.g., airline alliances provide opportunities to reduce costs and have access to additional international routes.

Market Reason Gain market power (reduce industry overcapacity) Gain access to complementary resources Establish economies of scale Overcome trade barriers Meet competitive challenges from other competitors Pool resources for very large capital projects Learn new business techniques Standard-cycle

BUSINESS-LEVEL COOPERATIVE STRATEGY
BUSINESS-LEVEL COOPERATIVE STRATEGY: firms combine some of their resources and capabilities for the purpose of creating a competitive advantage by competing in one or more product markets

FIGURE 9.2 Business-Level Cooperative Strategies

FIGURE 9.1 Business-Level Cooperative Strategies

Complementary Strategic Alliances Firms share some of their resources and capabilities in complementary ways to develop competitive advantages Include distribution, supplier, or outsourcing alliances where firms rely on upstream or downstream partners to create value Partners may have different ▪ Learning rates ▪ Capabilities to leverage ▪ Complementary resources ▪ Marketplace reputations ▪ Types of actions they can legitimately take Two forms include vertical and horizontal

FIGURE 9.3 Vertical and Horizontal ComplementaryStrategic Alliances

COMPLEMENTARY STRATEGIC ALLIANCES
Vertical Complementary Strategic Alliance Partnering firms share resources and capabilities from different stages of the value chain to create a competitive advantage Outsourcing is one example of this type of alliance Horizontal Complementary Strategic Alliance Partnering firms share resources and capabilities from the same stage of the value chain to create a competitive advantage Commonly used for long-term product development and distribution opportunities The partners may become competitors, which requires a great deal of trust between the partners.

Complementary Strategic Alliances Competitors ▪ Initiate competitive actions to attack rivals ▪ Launch competitive responses to their competitor’s actions Strategic alliances ▪ Can be used at the business level to respond to competitor’s attacks ▪ Primarily formed to take strategic vs. tactical actions ▪ Can be difficult to reverse, expensive to operate Competition Response Strategy

Complementary Strategic Alliances Are used to hedge against risk and uncertainty These alliances are most noticed in fast-cycle markets Uncertainty is reduced by combining knowledge and capabilities ▪ For example, when entering new product markets, emerging economies, and establishing technology standards, these are unknown areas, so by partnering with a firm in the respective industry, a firm’s uncertainty (risk) is reduced. Competition Response Strategy Uncertainty Reducing Strategy

Complementary Strategic Alliances Collusive strategies differ from strategic alliances in that they are usually illegal Created to avoid destructive or excessive competition Explicit collusion: Direct negotiation among firms to establish output levels and pricing agreements that reduce industry competition. (illegal) Tacit collusion: Indirect coordination of production and pricing decisions by several firms, which impacts the degree of competition faced in the industry. Mutual forbearance: (tacit collusion) Firms do not take competitive actions against rivals they meet in multiple markets. Competition Response Strategy Uncertainty Reducing Strategy Competition Reducing Strategy

ASSESSING BUSINESS-LEVEL COOPERATIVE STRATEGIES
Used to develop competitive advantages for contributing to successful positions and performance in individual product markets. Developing a competitive advantage using a strategic alliance, the integrated resources and capabilities must be valuable, rare, imperfectly imitable, and nonsubstitutable. Vertical alliances have greatest probability of creating competitive advantage; horizontal are sometimes difficult to maintain since they are usually between competitors.

ASSESSING BUSINESS-LEVEL COOPERATIVE STRATEGIES
Strategic alliances designed to respond to competition and reduce uncertainty are more temporary than complementary (horizontal and vertical) strategic alliances. Of the four business-level cooperative strategies, the competition reducing strategy has the lowest probability of creating a sustainable competitive advantage; it also tends to be temporary.

CORPORATE-LEVEL COOPERATIVE STRATEGIES
CORPORATE-LEVEL COOPERATIVE STRATEGY is a strategy through which a firm collaborates with one or more companies for the purpose of expanding its operations ● Helps a firm diversify itself in terms of products offered, markets served, or both ● Requires fewer resource commitments ● Permits greater flexibility in terms of efforts to diversify partners’ operations

FIGURE 9.4 Corporate-Level Cooperative Strategies

Firms share some of their resources and capabilities to diversify into new product or market areas Allows a firm to expand into new product or market areas without completing a merger or acquisition Provides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility Permits a “test” of whether a future merger between the partners would benefit both parties Diversifying Strategic Alliance

Diversifying Strategic Alliance Firms share some of their resources and capabilities to create economies of scope Creates synergy across multiple functions or multiple businesses between partner firms Synergistic Strategic Alliance

Firm uses a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners Franchise: contractual agreement between two legally independent companies whereby the franchisor grants the right to the franchisee to sell the franchisor's product or do business under its trademarks in a given location for a specified period of time Spreads risks and uses resources, capabilities, and competencies without merging or acquiring another company Diversifying Strategic Alliance Synergistic Strategic Alliance Franchising

ASSESSING CORPORATE-LEVEL COOPERATIVE STRATEGIES
Compared to business-level strategies  Broader in scope  More complex therefore more costly Costs incurred regardless of type selected Important to monitor expenditures! Can lead to competitive advantage and value when: Successful alliance experiences are internalized

ASSESSING CORPORATE-LEVEL COOPERATIVE STRATEGIES
Can lead to competitive advantage and value when (cont’d): The firm uses such strategies to develop useful knowledge about how to succeed in the future The firm gains maximum value from this knowledge by organizing it and verifying that it is always properly distributed to those involved with forming and using alliances

INTERNATIONAL COOPERATIVE STRATEGY
CROSS-BORDER STRATEGIC ALLIANCE: an international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage ● These alliances are sometimes formed instead of mergers and acquisitions, which can be riskier ● Cross-border alliances can be complex and hard to manage

INTERNATIONAL COOPERATIVE STRATEGY
Why form cross-border strategic alliances? A firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets. Multinational corporations outperform firms that operate only domestically. Due to limited domestic growth opportunities, firms look outside their national borders to expand business. Some foreign government policies require investing firms to partner with a local firm to enter their markets.

NETWORK COOPERATIVE STRATEGY
Network cooperative strategy: a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives Stable alliance network Dynamic alliance network Effective social relationships and interactions among partners are keys to a successful network cooperative strategy. Firms involved in networks of alliances use heterogeneous knowledge and are more innovative.

There are disadvantages to participating in networks, as a firm can be locked into its partnerships, precluding the development of alliances with others. In certain network configurations, such as Japanese keiretsus, firms in a network are expected to help other firms in that network whenever support is required. Such expectations can become a burden and negatively affect the focal firm’s performance over time.

Stable Alliance Network Long-term relationships that often appear in mature industries where demand is relatively constant and predictable Stable networks are built for exploitation of the economies (of scale and/or scope) available between the firms

Stable Alliance Network Arrangements that evolve in industries with rapid technological change leading to short product life cycles Primarily used to stimulate rapid, value-creating product innovation and subsequent successful market entries Purpose is often exploration of new ideas Dynamic Alliance Network

COMPETITIVE RISKS WITH COOPERATIVE STRATEGIES
Partners may choose to act opportunistically Partner competencies may be misrepresented Partner may fail to make available the complementary resources and capabilities that were committed One partner may make investments specific to the alliance while the other partner may not

COMPETITIVE RISKS WITH COOPERATIVE STRATEGIES
FIGURE 9.5 Managing Competitive Risks in Cooperative Strategies

MANAGING COOPERATIVE STRATEGIES
Two primary approaches: Cost minimization Opportunity maximization

1. Cost minimization Relationship with partner is formalized with contracts Contracts specify how cooperative strategy is to be monitored and how partner behavior is to be controlled Goal is to minimize costs and prevent opportunistic behaviors by partners Costs of monitoring cooperative strategy are greater Formalities tend to stifle partner efforts to gain maximum value from their participation

2. Opportunity maximization Focus: maximizing partnership's value-creation opportunities Informal relationships and fewer constraints allow partners to: take advantage of unexpected opportunities learn from each other explore additional marketplace possibilities Partners need a high level of trust that each party will act in the partnership's best interest, which is more difficult in international situations

PART 3: STRATEGIC ACTIONS: STRATEGY IMPLEMENTATION
CHAPTER 10 CORPORATE GOVERNANCE

KNOWLEDGE OBJECTIVES ● Define corporate governance and explain why it is used to monitor and control top-level managers’ decisions. ● Explain why ownership is largely separated from managerial control in organizations. ● Define an agency relationship and managerial opportunism and describe their strategic implications. ● Explain the use of three internal governance mechanisms to monitor and control managers’ decisions.

KNOWLEDGE OBJECTIVES ● Discuss the types of compensation top-level managers receive and their effects on managerial decisions. ● Describe how the external corporate governance mechanism—the market for corporate control—restrains top-level managers’ decisions. ● Discuss the nature and use of corporate governance in international settings, especially in Germany, Japan, and China. ● Describe how corporate governance fosters the making of ethical decisions by a firm’s top-level managers.

CORPORATE GOVERANCE: WHAT IS ALL THE FUSS ABOUT?
OPENING CASE CORPORATE GOVERANCE: WHAT IS ALL THE FUSS ABOUT? ■ Corporate governance can destroy or create value for a firm. ■ It is concerned with: 1. strengthening the effectiveness of a company’s board of directors 2. verifying the transparency of a firm’s operations 3. enhancing accountability to shareholders 4. incentivizing executives 5. maximizing value-creation for stakeholders and shareholders

OPENING CASE CORPORATE GOVERANCE: WHAT IS ALL THE FUSS ABOUT? ■ Given recent criticisms, boards’ actions in nations throughout the world are being more carefully scrutinized and regulated. ■ In the U.S., that after being fired by their firm, a number of CEOs still remain as members of other firms’ boards of directors, is drawing close attention. ■ Corporate governance is weak in many Chinese firms and there is concern about the validity and reliability of some auditors’ work and the quality of companies’ financial statements.

OPENING CASE CORPORATE GOVERANCE: WHAT IS ALL THE FUSS ABOUT? ■ The reason there is a “fuss” about corporate governance is that these activities are critical to globally signaling transparency coupled with strategic competitiveness. ■ Corporate governance fundamentals: Corporate Directors should: ● Focus on creating long-term value for shareholders ● Use performance-related pay to attract and retain senior management ● Exercise sound business judgment to evaluate opportunities and manage risk ● Communicate with key shareholders

CORPORATE GOVERNANCE Corporate governance: a set of mechanisms used to manage the relationships (and conflicting interests) among stakeholders, and to determine and control the strategic direction and performance of organizations (aligning strategic decisions with company values) When CEOs are motivated to act in the best interests of the firm—particularly, the shareholders—the company’s value should increase. Successfully dealing with this challenge is important, as evidence suggests that corporate governance is critical to firms’ success.

CORPORATE GOVERNANCE Corporate Governance Emphasis Two reasons:
Apparent failure of corporate governance mechanisms to adequately monitor and control top-level managers’ decisions during recent times Evidence that a well-functioning corporate governance and control system can create a competitive advantage for an individual firm

CORPORATE GOVERNANCE Corporate Governance Concern
Effective corporate governance is of interest to nations as it reflects societal standards: Firms’ shareholders are treated as key stakeholders as they are the company’s legal owners Effective governance can lead to competitive advantage How nations choose to govern their corporations affects firms’ investment decisions; firms seek to invest in nations with national governance standards that are acceptable

SEPARATION OF OWNERSHIP AND MANAGERIAL CONTROL
INTRODUCTION Historically, firms managed by founder-owners and descendants Separation of ownership and managerial control allows each group to focus on what it does best: Shareholders bear risk Managers formulate and implement strategy

INTRODUCTION (cont’d) Small firms’ managers are high percentage owners, which implies less separation between ownership and management control Family-owned businesses face two critical issues: As they grow, they may not have access to all needed skills to manage the growing firm and maximize its returns, so may need outsiders to improve management They may need to seek outside capital (whereby they give up some ownership control)

Basis of the modern corporation: Shareholders purchase stock, becoming residual claimants Shareholders reduce risk by holding diversified portfolios Shareholder value reflected in price of stock Professional managers are contracted to provide decision making Modern public corporation form leads to efficient specialization of tasks: Risk bearing by shareholders Strategy development and decision making by managers

SHA REH OLD ERS Shareholders purchase stock Entitled to income (residual returns) Risk bearing by shareholders—firm’s expenses may exceed revenues Investment risk is managed through a diversified investment portfolio MANAGERS Professional managers contracted to provide decision making Strategy development and decision making by managers

FIGURE 10.1 An Agency Relationship

AGENCY RELATIONSHIPS Managerial opportunism: seeking self-interest with guile (i.e., cunning or deceit) Opportunism: an attitude and set of behaviors Decisions in managers’ best interests, contrary to shareholders’ best interests Decisions such as these prevent maximizing shareholder wealth Principals establish governance and control mechanisms to prevent agents from acting opportunistically.

PRODUCT DIVERSIFICATION AS AN EXAMPLE OF AN AGENCY PROBLEM
Two benefits that accrue to top-level managers and not to shareholders: 1. Increase in firm size: product diversification usually increases the size of a firm; that size is positively related to executive compensation 2. Firm portfolio diversification, which can reduce top executives’ employment risk (i.e., job loss, loss of compensation, and loss of managerial reputation) Diversification reduces these risks because a firm and its managers are less vulnerable to reductions in demand associated with a single/limited number of businesses.

FREE CASH FLOW AS AN EXAMPLE OF AN AGENCY PROBLEM
Free cash flow: resources remaining after the firm has invested in all projects that have positive net present values within its current businesses Use of Free Cash Flows ■ Managers inclination to over-diversify and invest these funds in additional product diversification ■ Shareholders prefer distribution as dividends, so they can control how the cash is invested

MANAGER AND SHAREHOLDER RISK AND DIVERSIFICATION
FIGURE 10.2 Manager and Shareholder Risk and Diversification

MANAGER AND SHAREHOLDER RISK AND DIVERSIFICATION
In general, shareholders prefer riskier strategies than managers DIVERSIFICATION Shareholders prefer more focused diversification Managers prefer greater diversification, a level that maximizes firm size and their compensation while also reducing their employment risk However, their preference is that the firm’s diversification falls short of where it increases their employment risk and reduces their employment opportunities (e.g., acquisition target from poor performance)

AGENCY COSTS AND GOVERNANCE MECHANISMS
AGENCY COSTS: the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals, because governance mechanisms cannot guarantee total compliance by the agent ● Principals may engage in monitoring behavior to assess the activities and decisions of managers ● However, dispersed shareholding makes it difficult and inefficient to monitor management’s behavior.

● Boards of Directors have a fiduciary duty to shareholders to monitor management ● However, Boards of Directors are often accused of being lax in performing this function ● Costs associated with agency relationships, and effective governance mechanisms should be employed to improve managerial decision making and strategic effectiveness ● In response, U.S. Congress enacted: ▪ Sarbanes-Oxley (SOX) Act in 2002 ▪ Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in mid-2010

AGENCY PROBLEMS GOVERNANCE MECHANISMS
AGENCY RELATIONSHIPS

All of the following are consequences of the Sarbanes-Oxley Act: ● Decrease in foreign firms listing on U.S. stock exchanges at the same time as listing on foreign exchanges increased ● Internal auditing scrutiny has improved and there is greater trust in financial reporting ● Section 404 creates excessive costs for firms Determining governance practices that strike a balance between protecting stakeholders’ interests and allowing firms to implement strategies with some degree of risk is difficult

GOVERNANCE MECHANISMS
Three internal governance mechanisms and a single external one are used in the modern corporation. The three internal governance mechanisms are: 1. Ownership Concentration, represented by types of shareholders and their different incentives to monitor managers 2. Board of Directors 3. Executive Compensation The external corporate governance mechanism is: 4. Market for Corporate Control This market is a set of potential owners seeking to acquire undervalued firms and earn above-average returns on their investments by replacing ineffective top-level management teams.

GOVERNANCE MECHANISMS
Internal Governance Mechanisms Ownership Concentration • Relative amounts of stock owned by individual shareholders and institutional investors Board of Directors • Individuals responsible for representing the firm’s owners by monitoring top-level managers’ strategic decisions Executive Compensation • Use of salary, bonuses, and long-term incentives to align managers’ interests with shareholders’ interests External Governance Mechanism Market for Corporate Control • The purchase of a company that is underperforming relative to industry rivals in order to improve the firm’s strategic competitiveness

OWNERSHIP CONCENTRATION
Governance mechanism defined by both the number of large-block shareholders and the total percentage of shares owned Large block shareholders: shareholders owning a concentration of at least 5 percent of a corporation’s issued shares Large block shareholders have a strong incentive to monitor management closely They may also obtain Board seats, which enhances their ability to monitor effectively Ownership Concentration

Institutional owners: financial institutions such as stock mutual funds and pension funds that control large block shareholder positions The growing influence of institutional owners Provides size to influence strategy and the incentive to discipline ineffective managers Increased shareholder activism supported by SEC rulings in support of shareholder involvement and control of managerial decisions Ownership Concentration

Shareholder activism: Shareholders can convene to discuss corporation’s direction If a consensus exists, shareholders can vote as a block to elect their candidates to the board Proxy fights There are limits on shareholder activism available to institutional owners in responding to activists’ tactics

BOARD OF DIRECTORS Ownership Concentration Group of shareholder-elected individuals (usually called ‘directors’) whose primary responsibility is to act in the owners’ interests by formally monitoring and controlling the corporation’s top-level executives Board of Directors

BOARD OF DIRECTORS As stewards of an organization's resources, an effective and well-structured board of directors can influence the performance of a firm: Oversee managers to ensure the company is operated in ways to maximize shareholder wealth Direct the affairs of the organization Punish and reward managers Protect shareholders’ rights and interests Protect owners from managerial opportunism Ownership Concentration Board of Directors

BOARD OF DIRECTORS Three director classifications: Insider, related outsider, and outsider: Insiders: the firm’s CEO and other top-level managers Related outsiders: individuals uninvolved with day-to-day operations, but who have a relationship with the firm Outsiders: individuals who are independent of the firm’s day-to-day operations and other relationships Ownership Concentration Board of Directors

BOARD OF DIRECTORS Criticisms of Boards of Directors include that they: Too readily approve managers’ self-serving initiatives Are exploited by managers with personal ties to board members Are not vigilant enough in hiring and monitoring CEO behavior Lack agreement about the number of and most appropriate role of outside directors Ownership Concentration Board of Directors

BOARD OF DIRECTORS Ownership Concentration Board of Directors
Historically, BOD dominated by inside managers: Managers suspected of using their power to select and compensate directors NYSE implemented an audit committee rule requiring outside directors to head audit committee (a response to SEC’s proposal requiring audit committees be made up of outside directors) Sarbanes-Oxley Act passed leading to BOD changes Corporate governance becoming more intense through BOD mechanism BOD scandals led to trend of separating roles of CEO and Board Chairperson Ownership Concentration Board of Directors

BOARD OF DIRECTORS Outside directors:
Improve weak managerial monitoring and control that corresponds to inside directors Tend to emphasize financial controls, to the detriment of risk-related decisions by managers, as they do not have access to daily operations and a high level of information about managers and strategy Large number of outsiders can create problems Ownership Concentration Board of Directors

BOARD OF DIRECTORS Outside directors (problems)
Limited contact with the firm’s day-to-day operations and incomplete information about managers: Results in ineffective assessments of managerial decisions and initiatives Leads to an emphasis on financial, rather than strategic controls to evaluate performance of managers and business units, which could reduce R&D investments and allow top-level managers to pursue increased diversification for the purpose of higher compensation and minimizing their employment risk Ownership Concentration Board of Directors

BOARD OF DIRECTORS Enhancing the effectiveness of the Board of Directors: Increase the diversity of the backgrounds of board members (e.g., public service, academic, scientific; ethnic minorities and women; different countries) Strengthen internal management and accounting control systems Establish and consistently use formal processes to evaluate the board’s performance Ownership Concentration Board of Directors

BOARD OF DIRECTORS Enhancing the effectiveness of the Board of Directors: 4. Modify the compensation of directors, especially reducing or eliminating stock options as part of their package 5. Create the “lead director” role that has strong powers with regard to the board agenda and oversight of non-management board member activities 6. Require that directors own significant equity stakes in the firm to keep focus on shareholder interests Ownership Concentration Board of Directors

EXECUTIVE COMPENSATION
Ownership Concentration Governance mechanism that seeks to align the interests of top managers and owners through salaries, bonuses, and long-term incentive compensation, such as stock awards and stock options Thought to be excessive and out of line with performance Board of Directors Executive Compensation

Factors complicating executive compensation: Strategic decisions by top-level managers are complex, non- routine and affect the firm over an extended period, making it difficult to assess the current decision effectiveness Other intervening variables affect the firm’s performance over time Alignment of pay and performance: complicated board responsibility The effectiveness of pay plans as a governance mechanism is suspect Ownership Concentration Board of Directors Executive Compensation

The effectiveness of executive compensation: Performance-based compensation used to motivate decisions that best serve shareholder interest are imperfect in their ability to monitor and control managers Incentive-based compensation plans intended to increase firm value, in line with shareholder expectations, subject to managerial manipulation to maximize managerial interests Ownership Concentration Board of Directors Executive Compensation

The effectiveness of executive compensation: Many plans seemingly designed to maximize manager wealth rather than guarantee a high stock price that aligns the interests of managers and shareholders Stock options are popular: Repricing: strike price value of options is commonly lowered from its original position Backdating: options grant is commonly dated earlier than actually drawn up to ensure an attractive exercise price Ownership Concentration Board of Directors Executive Compensation

Ownership Concentration Limits on the effectiveness of executive compensation: Unintended consequences of stock options Firm performance not as important as firm size Balance sheet not showing executive wealth Options not expensed at the time they are awarded Board of Directors Executive Compensation

MARKET FOR CORPORATE CONTROL
Ownership Concentration External governance: a mechanism consisting of a set of potential owners seeking to acquire undervalued firms and earn above-average returns on their investments Becomes active only when internal controls have failed Ineffective managers are usually replaced in such takeovers Board of Directors Executive Compensation Market for Corporate Control

Ownership Concentration Need for external mechanisms exists to: Address weak internal corporate governance Correct suboptimal performance relative to competitors Discipline ineffective or opportunistic managers Threat of takeover may lead firm to operate more efficiently Changes in regulations have made hostile takeovers difficult Board of Directors Executive Compensation Market for Corporate Control

Ownership Concentration Managerial defense tactics increase the costs of mounting a takeover Defense tactics may require: Asset restructuring Changes in the financial structure of the firm Shareholder approval External mechanism is less precise than the internal governance mechanisms Board of Directors Executive Compensation Market for Corporate Control

HOSTILE TAKEOVER DEFENSE STRATEGIES
TABLE 10.2 Hostile Takeover Defense Strategies

HOSTILE TAKEOVER DEFENSE STRATEGIES
TABLE 10.2 Hostile Takeover Defense Strategies (Cont’d)

INTERNATIONAL CORPORATE GOVERNANCE Corporate Governance in Germany
Concentration of ownership is strong In many private German firms, the owner and manager may be the same individual In these instances, agency problems are not present. In publicly traded German corporations, a single shareholder is often dominant, frequently a bank The concentration of ownership is an important means of corporate governance in Germany, as it is in the U.S.

Banks exercise significant power as a source of financing for firms. Two-tiered board structures, required for larger employers (more than 2,000 employees), place responsibility for monitoring and controlling managerial decisions and actions with separate groups. Power sharing includes representation from the community as well as unions.

Germany: Two-tiered Board Vorstand The management board is responsible for all the functions of strategy and management Aufsichtsrat Responsible for appointing members to the Vorstand Employees Union Members Shareholders Responsible for appointing members to the Aufsichtsrat

● Proponents of the German structure suggest that it helps prevent corporate wrongdoing and rash decisions by “dictatorial CEOs” ● Critics maintain that it slows decision making and often ties a CEO’s hands ● The corporate governance practices in Germany make it difficult to restructure companies as quickly as in the U.S. ● Banks are powerful; private shareholders rarely have major ownership positions in German firms

● Large institutional investors, e.g., pension funds and insurance companies, are also relatively insignificant owners of corporate stock ● Less emphasis on shareholder value ● This traditional system produced agency costs because of a lack of external ownership power ● Changes - German firms with listings on U.S. stock exchanges have increasingly adopted executive stock option compensation as a long-term incentive pay policy

INTERNATIONAL CORPORATE GOVERNANCE Corporate Governance in Japan
● Cultural concepts of obligation, family, and consensus affect attitudes toward governance ● Close relationships between stakeholders and a company are manifested in cross-shareholding, and can negatively impact efficiencies ● Keiretsus: strongly interrelated groups of firms tied together by cross-shareholdings ● Banks (especially “main bank”) are highly influential with firm’s managers

● Japan has a bank-based financial and corporate governance structure whereas the United States has a market-based financial and governance structure ● Banks play an important role in financing and monitoring large public firms ● Powerful government intervention ● Despite the counter-cultural nature of corporate takeovers, changes in corporate governance have introduced this practice

Changes: ● Deregulation in the financial sector has reduced the cost of hostile takeovers, facilitating Japan’s previously nonexistent market for corporate control ● Diminishing role of banks monitoring and controlling managerial behavior, due to their development as economic organizations ● CEOs of both public and private companies receive similar levels of compensation, which is closely tied to observable performance goals

INTERNATIONAL CORPORATE GOVERNANCE Corporate Governance in China
Changes: ● Major changes over the past decade ● Privatization of business and the development and integrity of equity market ● The stock markets in China remain young and underdeveloped; in their early years, they were weak because of significant insider trading, but with stronger governance these markets have improved ● The state dominates—directly or indirectly—the strategies that most firms employ

INTERNATIONAL CORPORATE GOVERNANCE Corporate Governance in China
● Firms with higher state ownership have lower market value and more volatility ● The state is imposing social goals on these firms and executives are not trying to maximize shareholder wealth ● Moving toward a Western-style model ● Chinese executives are being compensated based on the firm’s financial performance ● Much work remains if the governance of Chinese companies is to meet international and Western standards

INTERNATIONAL CORPORATE GOVERNANCE Global Corporate Governance
Relatively uniform governance structures are evolving These structures are moving closer to the U.S. corporate governance model Although implementation is slower, merging with U.S. practices is occurring even in transitional economies

GOVERNANCE MECHANISMS AND ETHICAL BEHAVIOR
It is important to serve the interests of the firm’s multiple stakeholder groups! Capital Market Stakeholders In the U.S., shareholders (in the capital market group) are the most important stakeholder group served by the Board of Directors Governance mechanisms focus on control of managerial decisions to protect shareholder interests Product Market Stakeholders Organizational Stakeholders

It is important to serve the interests of the firm’s multiple stakeholder groups! Capital Market Stakeholders Product market stakeholders (customers, suppliers, and host communities) and organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups and may withdraw their support of the firm if their needs are not met, at least minimally Product Market Stakeholders Organizational Stakeholders

It is important to serve the interests of the firm’s multiple stakeholder groups! Capital Market Stakeholders Some observers believe that ethically responsible companies design and use governance mechanisms that serve all stakeholders’ interests Importance of maintaining ethical behavior is seen in the examples of Enron, Arthur Andersen, WorldCom, HealthSouth and Tyco Product Market Stakeholders Organizational Stakeholders

● For 2011, some of World Finance’s “Best Corporate Governance Awards” by country were given to: ◘ Royal Bank of Canada (Canada) ◘ Vestas Wind Systems A/S (Denmark) ◘ BSF AG (Germany) ◘ Empresas ICA (Mexico) ◘ Cisco Systems (United States)

● These awards are determined by analyzing a number of corporate governance issues: ◘ Board accountability/financial disclosure ◘ Executive compensation ◘ Shareholder rights ◘ Ownership base ◘ Takeover provisions ◘ Corporate behavior ◘ Overall responsibility exhibited by firm

CHAPTER 11 ORGANIZATIONAL STRUCTURE AND CONTROLS

KNOWLEDGE OBJECTIVES ● Define organizational structure and controls and discuss the difference between strategic and financial controls. ● Describe the relationship between strategy and structure. ● Discuss the functional structures used to implement business-level strategies.

KNOWLEDGE OBJECTIVES ● Explain the use of three versions of the multidivisional (M-form) structure to implement different diversification strategies. ● Discuss the organizational structures used to implement three international strategies. ● Define strategic networks and discuss how strategic center firms implement such networks at the business, corporate, and international levels.

ANOTHER ONE BITES THE DUST: BORDERS DECLARES BANKRUPTCY
OPENING CASE ANOTHER ONE BITES THE DUST: BORDERS DECLARES BANKRUPTCY ■ Founded in 1971, one of the original superstore book retailing chains, Borders, declared bankruptcy in 2011 with debts of $1.293 billion and assets of $1.275 billion. ■ This case underscores the importance of strategy implementation. While Borders crafted an innovative strategy with knowledgeable employees, a world-class inventory system, and even espresso before Starbucks made it popular, their implementation was their Achilles’ heel.

OPENING CASE ANOTHER ONE BITES THE DUST: BORDERS DECLARES BANKRUPTCY ■ Initial strategy worked well ● Borders sold the relatively small bookstore chain and inventory system to Kmart ● Borders was spun off with an IPO ■ Bankruptcy through a series of blunders ● International diversification reduced Borders’ focus on the most lucrative book retailing market in the U.S. ● When Barnes & Noble developed the capability to sell online, Borders outsourced this to Amazon, which sent customers and business to a major competitor.

OPENING CASE ANOTHER ONE BITES THE DUST: BORDERS DECLARES BANKRUPTCY ■ a Borders store in Madison, Wisconsin, had no Internet! ■ Borders had incredibly bad management, especially at the higher levels of the firm ■ It was unable to correct these problems because of an inadequate structure and a focus on financial engineering (financial controls), both of which crippled its ability to respond effectively to changes in the marketplace and to implement its strategies (e.g., international strategy) effectively

INTRODUCTION Strategy may be implemented via: Structure
Reward mechanisms Organizational culture Leadership This chapter focuses on structure. IMPORTANT: The match or degree of fit between strategy and structure influences the firm’s ability to earn above-average return.

INTRODUCTION ● Organizational structure and controls provide the framework within which strategies (business, corporate, international and cooperative) are used ● No one structure is the best for all organizations ● The choice of structure and controls should support the strategic goals of the firm ● Structure will change as the strategy of the organization changes ● Effective strategic leadership means selecting the appropriate structure.

ORGANIZATIONAL STRUCTURE AND CONTROLS
Structure and Firm Performance Research suggests that performance declines when the firm’s strategy is not matched with the most appropriate structure and controls Example: CEO Jeffrey Immelt recognized the need to match strategy and structure during the recent economic downturn, as evidenced by the restructuring alignments in GE Capital, GE’s financial service group

ORGANIZATIONAL STRUCTURE
Specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes Specifies the work to be done and how to do it, given the firm’s strategy or strategies Is the pivotal component of effective strategy implementation It is critical to match organizational structure to the firm’s strategy

ORGANIZATIONAL STRUCTURE
Strategy pioneer Alfred Chandler found organizations change their structures when inefficiencies force them to. A firm’s strategy is supported when its structure is properly aligned to its strategy Two considerations regarding alignment Structural stability: capacity firm requires to consistently and predictably manage its daily work routines Structural flexibility: opportunity to explore competitive advantages firm will need to be successful in the future Source: A. Chandler, 1962, Strategy and Structure, Cambridge, MA: MIT Press.

ORGANIZATIONAL CONTROLS
Controls guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable. Two types: Strategic Controls Financial Controls

STRATEGIC CONTROLS Largely SUBJECTIVE criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company’s competitive advantages. Are concerned with examining the fit between: What the firm might do (opportunities in its external environment) What the firm can do (competitive advantages) Evaluate the degree to which the firm focuses on the requirements to implement strategy Business-level: primary and support activities Corporate-level (related): sharing of knowledge, markets, and technologies across businesses Focus on the content of strategic actions

FINANCIAL CONTROLS Largely OBJECTIVE criteria used to measure firm’s performance against previously established quantitative standards Focus on short-term financial outcomes Include accounting-based measures ROI (return on investment) ROA (return on assets) Include market-based measures EVA (economic value added) Produce risk-averse managerial decisions Are essential when a firm pursues a strategy with unrelated diversification

ORGANIZATIONAL STRUCTURE AND CONTROLS
STR ATE GIC CON TRO LS Business - differentiation strategy emphasizes strategic controls (such as subjective measures of the effectiveness of product development teams) Corporate - related diversification strategy where sharing among business units is critical; emphasizes strategic controls FINANCIAL CONTROLS Business - cost leadership strategy emphasizes financial controls (such as quantitative cost goals) Corporate - unrelated diversification strategies where capabilities are not shared; emphasizes financial controls Structure’s effectiveness is determined by using both strategic and financial controls.

RELATIONSHIPS BETWEEN STRATEGY AND STRUCTURE
● RECIPROCAL RELATIONSHIP - change in one typically causes a change in the other, underscoring the interconnectedness between strategy formulation and strategy implementation STRATEGY STRUCTURE ● Strategy typically has a much more important influence on structure than structure on strategy

Growth pattern determines structure!
EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL STRUCTURE Chandler found that firms tend to grow in predictable patterns: ● first by volume ● then by geography ● then by integration (vertical, horizontal) ● finally through product/business diversification Growth pattern determines structure! 1 – Chandler, 1962 Source: A. Chandler, 1962, Strategy and Structure, Cambridge, MA: MIT Press.

EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL STRUCTURE
■ Firms typically alter their structure as they grow in size and complexity ■ Three key structural forms used to implement strategies: Simple structure Functional structure Multidivisional structure (M-form)

EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL STRUCTURE
FIGURE 11.1 Strategy Structure Growth Pattern

STRATEGY AND STRUCTURE: SIMPLE STRUCTURE
● Owner-manager makes all major decisions and monitors all activities ● Staff acts as extension of manager's supervisory authority ● Matched focus strategies and business-level strategies: these firms offer single product lines in single geographic markets ● Few rules, limited task specialization, basic technology system ● With size comes complexity and managerial and structural challenges; firms tend to move from a simple to a functional structure

STRATEGY AND STRUCTURE: FUNCTIONAL STRUCTURE
● CEO and a limited corporate staff make all decisions. ● Functional line managers are in dominant organizational areas Production Marketing Engineering R&D Accounting Human resources ● WITHIN – functional specialization results in active knowledge sharing within each area ● BETWEEN – impedes communication and coordination among different functional areas

STRATEGY AND STRUCTURE: FUNCTIONAL STRUCTURE
● Facilitates career paths and professional development in specialized functional areas ● Causes functional-area managers to focus on local versus overall company strategic issues ● Supports implementing business-level strategies and some corporate-level strategies (e.g., single or dominant business) with low levels of diversification ● When changing from a simple to a functional structure, need to focus on and avoid value-destroying bureaucratic procedures

STRATEGY AND STRUCTURE: MULTIDIVISIONAL (M-FORM) STRUCTURE
● Operating divisions each represent a separate business or profit center ● Top corporate officer delegates responsibilities for day-to-day operations and business-unit strategies to division managers ● Ties together all operating divisions ● Each division represents a separate business or profit center with its own functional hierarchy ● Each division is responsible for daily operations ● Business-unit strategy is delegated to the division

STRATEGY AND STRUCTURE: MULTIDIVISIONAL (M-FORM) STRUCTURE
Appropriate structure as firms DIVERSIFY Three Major Benefits ● Simplifies the problem of control through more accurate monitoring of the performance of each business ● Facilitates comparisons between divisions, which improves the resource allocation process ● Stimulates managers of poorly performing divisions to look for ways of improving performance

STRATEGY AND STRUCTURE: THE RIGHT STRUCTURE
IT DEPENDS ● No one organizational structure (simple, functional, or multidivisional) is inherently superior to the others ● The firm must select a structure that is “right” for the chosen strategy ● Managers develop proper matches between strategies and organizational structures rather than searching for an “optimal” structure

MATCHES BETWEEN BUSINESS-LEVEL STRATEGIES AND THE FUNCTIONAL STRUCTURE
Firms use different forms of the functional organizational structure to support their strategy Business-level strategies are: Cost leadership (broad or focused) Differentiation (broad or focused) Integrated cost leadership/differentiation Structural choices are: Simple Functional Multidivisional

MATCHES BETWEEN BUSINESS-LEVEL STRATEGIES AND THE FUNCTIONAL STRUCTURE
The choice of structure is influenced by structural characteristics needed to compete: Specialization: the type and number of jobs required to complete the work of the firm Centralization: the degree to which decision-making authority is retained at higher managerial levels Formalization: the degree to which formal rules and procedures govern work

Functional Structure for Implementing a Cost Leadership Strategy
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE COST LEADERSHIP STRATEGY FIGURE 11.2 Functional Structure for Implementing a Cost Leadership Strategy

The choice of structure is influenced by structural characteristics:
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE COST LEADERSHIP STRATEGY The choice of structure is influenced by structural characteristics: Specialization: departments are designed around areas of expertise—engineering to accounting Centralization: highly centralized; staff are all together Formalization: reporting roles are clearly defined; simple lines of communication

Cost leadership and the functional structure results:
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE COST LEADERSHIP STRATEGY Cost leadership and the functional structure results: Operations is the main function Process engineering is emphasized rather than new product R&D Few decision-making and authority layers Centralized corporate staff Highly formalized rules and procedures Low-cost culture Centralized staff decision-making authority Job specialization Simple reporting relationships Overall structure is mechanistic; structured job roles

Cost Leadership and Five Forces of Competition
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE COST LEADERSHIP STRATEGY Cost Leadership and Five Forces of Competition Low-cost position is a valuable defense against rivals Powerful customers can demand reduced prices Cost leaders are in a position to absorb supplier price increases and relationship demands, and to force suppliers to hold down their prices Continuously improving levels of efficiency and cost reduction can be difficult to replicate and serve as significant entry barriers to potential competitors Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers

Cost leadership strategy risks
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE COST LEADERSHIP STRATEGY Cost leadership strategy risks Processes can become obsolete Focus on cost reductions can come at the expense of understanding customer perceptions and needs Strategy could be imitated, requiring the firm to increase the value offered to retain customers

Functional Structure for Implementing a Differentiation Strategy
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION STRATEGY FIGURE 11.3 Functional Structure for Implementing a Differentiation Strategy

The choice of structure is influenced by structural characteristics
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION STRATEGY The choice of structure is influenced by structural characteristics Specialization: departments are designed around areas of expertise—engineering to accounting Centralization: the key departments are coordinated through a highly centralized office that reflects a focus on product design and marketing; otherwise DECENTRALIZED Formalization: reporting roles are clearly defined; simple lines of communication

Differentiation and the functional structure results:
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION STRATEGY Differentiation and the functional structure results: Marketing is the main function; new product ideas New product R&D is emphasized Most functions are decentralized, but R&D and marketing may have centralized staffs Cross-functional product development teams Complex and flexible reporting relationships Development-oriented culture Decentralized decision making Broad job descriptions Informal rules and procedures Overall structure is organic; less structured job roles

Differentiation strategy should deliver:
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION STRATEGY Differentiation strategy should deliver: An integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them Target customers – perceived product value Customized products – differentiating as many features as possible Unusual features include responsive customer service, rapid product innovations, technological leadership, perceived prestige and status, different tastes, engineering design, performance

Differentiation and Five Forces of Competition
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION STRATEGY Differentiation and Five Forces of Competition Customer loyalty: the most valuable defense against rivals Unique products reduce customer sensitivity to raised prices High margins (for differentiated products) insulate firm from supplier influence Significant entry barriers: customer loyalty and product uniqueness Firms with customers loyal to their products are positioned effectively against product substitutes

Differentiation strategy risks
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION STRATEGY Differentiation strategy risks Price differential for differentiated product may be perceived as too large Firms’ means of differentiation may cease to provide value for which customers are willing to pay a premium price (successful rival imitation) Experience can narrow customers' perceptions of the value of a product's differentiated features Counterfeit goods may appear in the marketplace

These firms create value through both low cost and uniqueness:
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY These firms create value through both low cost and uniqueness: Relatively low product cost through an emphasis on production and process engineering, with infrequent product changes Reasonable sources of differentiation based on new-product R&D Difficult to implement, but frequently used in the global economy

Challenges due to primary/support activities
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY Challenges due to primary/support activities Need to successfully combine specialization, formalization, and centralization Decision-making patterns that are partially centralized and partially decentralized Semi-specialized jobs Rules and procedures that allow both formal and informal job behaviors

A firm’s continuing success that leads to:
MATCHES BETWEEN CORPORATE-LEVEL STRATEGIES AND THE MULTIDIVISIONAL STRUCTURE A firm’s continuing success that leads to:  Product diversification, or  Market diversification, or  Both product and market diversification Increasing diversification creates problems beyond the scope of the functional structure:  Information processing  Coordination  Control

MATCHES BETWEEN CORPORATE-LEVEL STRATEGIES AND THE MULTIDIVISIONAL STRUCTURE
Diversification strategy requires firm to change from a functional structure to a multidivisional structure Different levels of diversification create the need for implementation of a unique form of the multidivisional structure Matrix organization may evolve- organizational structure in which a dual structure combines both functional specialization and business product or project specialization.

THREE VARIATIONS OF THE MULTIDIVISIONAL STRUCTURE
FIGURE 11.4 Three Variations of the Multidivisional Structure

COOPERATIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED CONSTRAINED STRATEGY
FIGURE 11.5 Cooperative Form of the Multidivisional Structure for Implementing a Related Constrained Strategy

COOPERATIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED CONSTRAINED STRATEGY
● Structural integration devices create tight links among all divisions ● Corporate office dictates centralized decision-making ● Rewards are subjective and tend to emphasize overall corporate performance in addition to divisional performance ● Culture emphasizes cooperative sharing ● Economies of scope (cost savings resulting from the sharing of competencies developed in one division with another division) are important for the related constrained strategy ● Interdivisional sharing of competencies depends on cooperation- links result from effective integration mechanisms ● Sharing of both tangible and intangible resources ● The cooperative structure uses different characteristics of structure (centralization, standardization, and formalization) as integrating mechanisms to facilitate interdivisional cooperation

SBU FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED LINKED STRATEGY
FIGURE 11.6 SBU Form of the Multidivisional Structure for Implementing a Related Linked Strategy

Corporate headquarters Strategic business units (SBUs)
SBU FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED LINKED STRATEGY ● Firms that share fewer resources and assets among their businesses, concentrating on the transfer of knowledge and competencies among the businesses (related linked strategy) ● Organization structure with three levels to support the implementation diversification strategy: Corporate headquarters Strategic business units (SBUs) Divisions under each SBU

● SBU divisions related in terms of shared products/markets
SBU FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED LINKED STRATEGY ● SBU divisions related in terms of shared products/markets ● Divisions of one SBU have little in common with divisions of other SBUs ● Divisions within each SBU share product or market competencies to develop economies of scope ● Integrations used in cooperative form are equally effective for the SBU form ● Each SBU is a profit center; has its own budget for staff to foster integration ● Financial controls are more vital for evaluating performance

COMPETITIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING AN UNRELATED STRATEGY
FIGURE 11.7 Competitive Form of the Multidivisional Structure for Implementing an Unrelated Strategy

● Financial economies are pivotal for the unrelated strategy
COMPETITIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING AN UNRELATED STRATEGY ● Financial economies are pivotal for the unrelated strategy Creates value through two types of financial economies ▪ Cost savings realized through improved allocations of financial resources based on investments inside or outside firm ▪ Efficient internal capital market allocation: restructuring of acquired assets ● The efficient internal capital market is the key for this strategy, and requires divisional competition rather than cooperation. ● Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources ● Divisions are independent and separate for financial evaluation purposes; and retain strategic control

● Three benefits from the internal competition:
COMPETITIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING AN UNRELATED STRATEGY ● Three benefits from the internal competition: 1. Creates flexibility and resources can then be allocated to the division with the greatest potential 2. Challenges the status quo and inertia 3. Motivates competition internally to be as intense as the challenge of external competition ●Corporate headquarters has a small staff ● Finance and auditing are the most prominent functions in the headquarters office to manage cash flow and assure the accuracy of performance data coming from divisions ● The legal affairs function is important for acquisitions/divestitures

Table 11.1

KEY POINTS FROM TABLE 11.1 : ● The three major forms of the multidivisional structure should each be paired with a particular corporate-level strategy ● Differences exist in the degree of centralization, the focus of the performance evaluation, the horizontal structures (integrating mechanisms), and the incentive compensation schemes ● Cooperative structure - the most centralized and most costly structural form ● Competitive structure - the least centralized, with the lowest bureaucratic costs ● The SBU structure requires partial centralization, some of the mechanisms necessary to implement the relatedness between divisions, and the divisional incentive compensation awards allocated according to both SBUs and corporate performance

MATCHES BETWEEN INTERNATIONAL STRATEGIES AND WORLDWIDE STRUCTURE
International strategies allow the firm to search for new: Markets Resources Core competencies Technologies Three primary international strategies: Multidomestic Global Transnational

WORLDWIDE GEOGRAPHIC AREA STRUCTURE FOR IMPLEMENTING A MULTIDOMESTIC STRATEGY
FIGURE 11.8 Worldwide Geographic Area Structure for Implementing a Multidomestic Strategy

WORLDWIDE GEOGRAPHIC AREA STRUCTURE FOR IMPLEMENTING A MULTIDOMESTIC STRATEGY
Multidomestic Strategy: International strategy in which strategic and operating decisions are decentralized to each country to allow the units to tailor products to local markets Worldwide Geographic Area Structure: Organizational structure emphasizing national interests; facilitates efforts to satisfy local or cultural differences Focuses on variations of competition within each country Emphasis is on differentiation by local demand to fit an area or country culture Deals with uncertainty due to market differences Corporate headquarters coordinates financial resources among independent subsidiaries

WORLDWIDE PRODUCT DIVISIONAL STRUCTURE FOR IMPLEMENTING A GLOBAL STRATEGY
FIGURE 11.9 Worldwide Product Divisional Structure for Implementing a Global Strategy

WORLDWIDE PRODUCT DIVISIONAL STRUCTURE FOR IMPLEMENTING A GLOBAL STRATEGY
Global Strategy: International strategy with standardized products across country markets, and the competitive strategy dictated by the home office Worldwide Product Divisional Structure: Organizational structure with centralized decision-making authority to coordinate/integrate decisions among divisional units Emphasizes economies of scale and scope Corporate headquarters allocates financial resources in a cooperative way Facilitated by improved global accounting and financial reporting standards Produces lower risk Less effective learning processes due to the pressures to conform and standardize

HYBRID FORM OF THE COMBINATION STRUCTURE FOR IMPLEMENTING A TRANSNATIONAL STRATEGY
FIGURE Hybrid Form of the Combination Structure for Implementing a Transnational Strategy

Transnational strategy: international strategy through which the firm seeks to achieve both global efficiency and local responsiveness; usually implemented through global matrix structure and hybrid global design Flexible coordination: building a shared vision and individual commitment through an integrated network Combination structure: organizational structure in which characteristics and mechanisms are drawn from both the worldwide geographic area structure and the worldwide product divisional structure (used to implement transnational strategy)

Assets and operations may be centralized/decentralized Functions may be integrated/nonintegrated Relationships may be formal/informal Coordination mechanisms may leverage efficiency/flexibility Mandates to subsidiaries may be global/ specialized-contribution/localized-implementation There are competing objectives when a worldwide combination structure is used to implement a transnational strategy

MATCHES BETWEEN COOPERATIVE STRATEGIES AND NETWORK STRUCTURES
Greater levels of environmental complexity and uncertainty in today’s competitive environment are causing more firms to use cooperative strategies such as strategic alliances and joint ventures Strategic network: group of firms that form around a core to create value by participating in multiple cooperative arrangements Used to implement business-level, corporate-level, and international cooperative strategies Strategic Center Firm has four primary tasks: 1. Strategic outsourcing 2. Competencies 3. Technology 4. Race to learn

A STRATEGIC NETWORK FIGURE A Strategic Network

EXAMPLE OF A STRATEGIC NETWORK
Key technology supplier Competitor with alliance agreement Main strategic center of the firm Key raw material supplier Research team at local university Top legal firm in intellectual property

IMPLEMENTING BUSINESS-LEVEL COOPERATIVE STRATEGIES
Business-level complementary alliances Vertical: partnering firms share their resources and capabilities from different stages of the value chain to create a competitive advantage Horizontal: partnering firms share resources and capabilities from the same stage of the value chain to create a competitive advantage; commonly used for long-term product development and distribution opportunities

IMPLEMENTING CORPORATE-LEVEL COOPERATIVE STRATEGIES
Used to facilitate product and market diversification EXAMPLE - Franchising: contractual relationship to describe and control the sharing of its resources and capabilities with partners Allows firms to use its competencies to extend or diversify product or market reach, without completing a merger or acquisition Knowledge embedded in corporate-level cooperative strategies facilitates synergy

IMPLEMENTING INTERNATIONAL COOPERATIVE STRATEGIES
Strategic networks formed to implement cooperative strategies resulting in firms competing in several different countries Distributed strategic networks: organizational structure used to manage international cooperative strategies Several regional strategic center firms are included in the distributed network to manage partner firms’ multiple cooperative arrangements

A DISTRIBUTED STRATEGIC NETWORK
FIGURE A Distributed Strategic Network

EXAMPLE OF A STRATEGIC NETWORK
Key technology supplier Competitor with alliance agreement Main strategic center of the firm Key raw material supplier Research team at local university Top legal firm in intellectual property Distributed strategic center of the firm

CHAPTER 12 STRATEGIC LEADERSHIP

KNOWLEDGE OBJECTIVES ● Define strategic leadership and describe top-level managers’ importance. ● Explain what top management teams are and how they affect firm performance. ● Describe the managerial succession process using internal and external managerial labor markets. ● Discuss the value of strategic leadership in determining the firm’s strategic direction.

KNOWLEDGE OBJECTIVES ● Describe the importance of strategic leaders in managing the firm’s resources. ● Define organizational culture and explain what must be done to sustain an effective culture. ● Explain what strategic leaders can do to establish and emphasize ethical practices. ● Discuss the importance and use of organizational controls.

SUCCESSION AT HP: CAN THE NEW CEO SAVE THE COMPANY’S SOUL?
OPENING CASE SUCCESSION AT HP: CAN THE NEW CEO SAVE THE COMPANY’S SOUL? ■ HP’s culture of innovation suffered under Mark Hurd, the former CEO’s leadership. ■ Hurd was efficiency oriented and had made the company money by tightly controlling costs. ■ Former SAP CEO Leo Apotheker was named as CEO successor and had the opportunity to “reboot” the company and its culture.

SUCCESSION AT HP: CAN THE NEW CEO SAVE THE COMPANY’S SOUL?
OPENING CASE SUCCESSION AT HP: CAN THE NEW CEO SAVE THE COMPANY’S SOUL? ■ Having lost its culture of innovation, HP’s strategic redirection into software and cloud computing needed to be successful. ■ With a merciless market, the expectation of strong performance exists even though major strategic changes take time to produce fruitful results. ■ Apotheker’s strategic leadership is being tested in the midst of layoff rumors and profit target reductions.

INTRODUCTION ● Effective strategic leadership is the foundation for successfully using the strategic management process. ● Strategic leaders guide the firm in ways that result in forming a vision and mission. ● This guidance often finds leaders thinking of ways to create goals that stretch everyone in the organization to improve performance. ● Moreover, strategic leaders facilitate the development of appropriate strategic actions and determine how to implement them. ● Leaders can make a major difference in how a firm performs.

STRATEGIC LEADERSHIP AND STYLE
Strategic leadership: the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary Multifunctional task Managing through others Managing an entire enterprise rather than a functional subunit Coping with change that is increasing in the global economy Most critical skill: attracting and managing human (includes intellectual) capital NOTE: Many examples of well-known CEOs are mentioned throughout the chapter to illustrate their leadership styles.

STRATEGIC LEADERSHIP AND STYLE
FIGURE 12.1 Strategic Leadership and the Strategic Management Process

STRATEGIC LEADERSHIP AND STYLE EFFECTIVE STRATEGIC LEADERS
Build strong ties with external stakeholders to gain access to information and advice Understand how their decisions impact their firm Sustain above-average performance Attract and manage human capital Do not delegate decision-making responsibilities Inspire and enable others to do excellent work and realize their potential Promote and nurture innovation through transformational leadership

THE ROLE OF TOP-LEVEL MANAGERS
● Managers use their discretion when making strategic decisions ● Primary factors that determine the amount of a manager’s decision-making discretion External environmental sources Organization’s characteristics Manager’s characteristics

FACTORS AFFECTING MANAGERIAL DISCRETION
FIGURE 12.2 Factors Affecting Managerial Discretion

External Environment Industry structure Rate of market growth Number and type of competitors Nature and degree of political/legal constraints Degree to which products can be differentiated

External Environment Size Age Culture Availability of resources Patterns of interaction among employees Characteristics of the Organization

External Environment Tolerance for ambiguity Commitment to the firm and its desired strategic outcomes Interpersonal skills Aspiration level Degree of self-confidence Characteristics of the Organization Characteristics of the Manager

External Environment The degree of latitude for action when making strategic decisions, especially those concerned with effective implementation of strategies How managers exercise discretion when determining appropriate strategic actions is critical to the firm’s success Characteristics of the Organization Characteristics of the Manager Managerial Discretion

TOP MANAGEMENT TEAMS Top Management Teams
Help avoid potential problem of CEO making decisions alone: managerial hubris Hubris: excessive pride leading to a feeling of invincibility Hubris can magnify the effects of decision-making biases Composed of key individuals who are responsible for selecting and implementing firm’s strategies; usually includes officers of the corporation (VP and above) and BOD

TOP MANAGEMENT TEAM, FIRM PERFORMANCE, AND STRATEGIC CHANGE
Heterogeneous team: individuals with varied functional backgrounds, experiences, and education Team members: bring a variety of strengths, capabilities, and knowledge and provide effective strategic leadership when faced with complex environments and multiple stakeholder relationships to manage

TOP MANAGEMENT TEAM, FIRM PERFORMANCE, AND STRATEGIC CHANGE
A HETEROGENEOUS TEAM Introduces a variety of perspectives Has a greater propensity for strong competitive action “Outside of the box thinking," leads to more creative decision making, innovation, and strategic change Offers various areas of expertise to identify environmental opportunities, threats, or the need for change Promotes debate, which leads to better strategic decisions, and higher firm performance May take longer to reach consensus

THE CEO AND TOP MANAGEMENT TEAM POWER
Higher performance is achieved when the board of directors (BOD) is more directly involved in shaping strategic direction A powerful CEO may: Appoint sympathetic outside board members Have inside board members who report to the CEO Have long tenure, thus have greater influence on board decisions Be virtually independent of oversight by the BOD May also hold the position of chairman of the board (CEO duality)

THE CEO AND TOP MANAGEMENT TEAM POWER
CEO Duality – CEO serves as CEO and BOD More common in the United States Occurs most often in the largest firms Increased shareholder activism recently brought the practice under scrutiny Criticized for causing poor performance and slow response to change BALANCE OF POWER BETWEEN THE BOD AND TOP MANAGEMENT IMPACTED BY: Resource abundance Environmental volatility and uncertainty

MANAGERIAL SUCCESSION
DEFINITION: preselect and shape the skills of tomorrow’s leaders Internal managerial labor market: opportunities for managerial positions to be filled from within the firm External managerial labor market: opportunities for managerial positions to be filled by candidates from outside of the firm This decision impacts company performance and the ability to embrace change in today's competitive landscape Succession, top management team composition, and strategy are intimately related

EFFECTS OF CEO SUCCESSION AND TOP MANAGEMENT TEAM COMPOSITION ON STRATEGY
FIGURE 12.3 Effects of CEO Succession and Top Management Team Composition on Strategy

MANAGERIAL SUCCESSION Benefits of Internal Managerial Labor Market
Continuity Continued commitment Familiarity Reduced turnover Retention of “private knowledge” Favored when the firm is performing well

MANAGERIAL SUCCESSION Benefits of External Managerial Labor Market
Long tenure with the same firm is thought to reduce innovation Outsiders bring diverse knowledge bases and social networks, which offer the potential for synergy and new competitive advantages Fresh paradigms Note: Opportunity cost for firms: Women as strategic leaders have been somewhat overlooked

KEY STRATEGIC LEADERSHIP ACTIONS
Certain actions characterize effective strategic leadership These actions interact with each other The most effective strategic leaders create options as the foundation for making effective decisions

EXERCISE OF EFFECTIVE STRATEGIC LEADERSHIP
FIGURE 12.4 Exercise of Effective Strategic Leadership

Determining Strategic Direction ● The strategic direction is framed within the context of the conditions (i.e., opportunities and threats) strategic leaders expect their firm to face in the next 3-5 years ● Ideal long-term strategic direction has two parts: ■ Core ideology ■ Envisioned future ● Serves as a guide to a firm’s strategy implementation process, including motivation, leadership, employee empowerment, and organizational design

Effectively Managing the Firm’s Resource Portfolio Most important task - effectively managing the firm’s portfolio of resources Resources defined as financial, human, social, and organizational capital Effective strategic leaders manage their firm’s resource portfolio by: Organizing the resources into capabilities Structuring the firm to facilitate using those capabilities Managing each type of resource as well as the integration of resources, e.g., using financial capital to enhance human capital capabilities (training and development) Choosing strategies through which the capabilities are successfully leveraged to create value for customers

Exploiting and Maintaining Core Competencies Core competencies Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals Relate to an organization’s functional skills, such as manufacturing, finance, marketing, and research and development Leadership must verify that the firm’s competencies are emphasized when implementing strategy Firms must continuously develop/change their core competencies to prevail over competitors

Developing Human Capital and Social Capital Human capital: knowledge and skills of a firm’s entire workforce, requiring investment in training and development Social capital: relationships inside and outside the firm that help it accomplish tasks and create value for customers and shareholders Cooperative strategies, e.g., strategic alliances, may leverage complementary resources to develop social capital

Developing Human Capital and Social Capital Firms with strong social capital can access multiple capabilities, providing them with important flexibility to take advantage of opportunities and respond to challenges Social capital created through alliances is pivotal to: Large multinational firms when entering new foreign markets Entrepreneurial firms for resource access, venture capital, or other types of resources

Sustaining an Effective Organizational Culture Organizational culture: the complex set of ideologies, symbols, and core values shared throughout the firm Influences the way business is conducted Helps regulate and control employees’ behavior Strong organizational culture may be a competitive advantage

Sustaining an Effective Organizational Culture ENTREPRENEURIAL MIND-SET ● Source of growth and innovation ● May be encouraged and promoted by strategic leaders ● An organizational culture can encourage (or discourage) strategic leaders from pursuing (or not pursuing) entrepreneurial opportunities Fostering an Entrepreneurial Mind-Set: Five Dimensions Autonomy Innovativeness Risk taking Proactiveness Competitive aggressiveness

ENTREPRENEURIAL MIND-SET: FIVE DIMENSIONS
AUTONOMY Employees are allowed to take actions that are free of organizational constraints; permits individuals and groups to be self-directed

AUTONOMY Reflects a firm’s tendency to engage in and support new ideas, novelty, experimentation, and creative processes that may result in new products, services, or technological processes Cultures with a tendency toward innovativeness encourage employees to think beyond existing knowledge, technologies, and parameters to find creative ways to add value INNOVATIVENESS

AUTONOMY Reflects a willingness by employees and their firm to accept risks when pursuing entrepreneurial opportunities Examples of RISKS Assuming significant levels of debt Allocating large amounts of resources to projects that may not be completed INNOVATIVENESS RISK TAKING

AUTONOMY Ability to be a market leader rather than a follower Proactive organizational cultures constantly use processes to anticipate future market needs and to satisfy them before competitors learn how to do so INNOVATIVENESS RISK TAKING PROACTIVENESS

AUTONOMY INNOVATIVENESS RISK TAKING Propensity to take actions that allow the firm to consistently and substantially outperform its rivals. PROACTIVENESS COMPETITIVE AGGRESSIVENESS

Sustaining an Effective Organizational Culture CHANGING THE ORGANIZATIONAL CULTURE AND RESTRUCTURING More difficult to change culture than maintain it Sometimes change must occur Effective strategic leaders recognize when change in culture is needed Requires effective communicating and problem solving Selecting the right people Engaging in effective performance appraisals Measuring individual performance toward goals that fit with new values Using appropriate reward systems

Emphasizing Ethical Practices Effectiveness of strategy implementation processes increases when based on ethical practices Ethical practices create social capital and goodwill for the firm

Emphasizing Ethical Practices Actions that foster an ethical organizational culture: Establish and communicate ethics-related goals Revise, update, and disseminate code of conduct Develop and implement methods and procedures to use in achieving firm’s ethical standards Create/use specific reward systems that recognize acts of courage Create a working environment where all are treated with dignity

Establishing Balanced Organizational Controls Controls: formal, information-based procedures used by managers to maintain or alter patterns in organizational activities Controls help strategic leaders: ● Build credibility ● Demonstrate the value of strategies to the firm’s stakeholders ● Promote and support strategic change

Establishing Balanced Organizational Controls ● Financial Controls Focus on short-term financial outcomes Produce risk-averse managerial decisions because financial outcomes may be caused by events beyond managers’ direct control ● Strategic Controls Focus on the content of strategic actions rather than their outcomes Encourage decisions that incorporate moderate and acceptable levels of risk

Establishing Balanced Organizational Controls THE BALANCED SCORECARD Framework to evaluate if firms have achieved the appropriate balance among the strategic and financial controls to attain the desired level of firm performance Most appropriate for evaluating business-level strategies; it can also be used with the other strategies firms implement (e.g., corporate-level, international, and cooperative) Prevents overemphasis of financial controls at the expense of strategic controls

Establishing Balanced Organizational Controls THE BALANCED SCORECARD ● Premise is that firms jeopardize their future performance when financial controls are emphasized at the expense of strategic controls ● This is because financial controls focus on historical outcomes, and do not address future performance drivers ● An overemphasis on financial controls may promote managerial behavior that sacrifices long-term, value-creating potential for short-term performance gains ● An appropriate balance of strategic controls and financial controls, rather than an overemphasis on either, allows firms to achieve higher levels of performance

Establishing Balanced Organizational Controls THE BALANCED SCORECARD Four perspectives of the balanced scorecard  Financial  Customer  Internal Business Processes  Learning and Growth

STRATEGIC CONTROLS AND FINANCIAL CONTROLS IN A BALANCED SCORECARD FRAMEWORK
FIGURE 12.5 Strategic Controls and Financial Controls in a Balanced Scorecard Framework

CHAPTER 13 STRATEGIC ENTREPRENEURSHIP

KNOWLEDGE OBJECTIVES ● Define strategic entrepreneurship and corporate entrepreneurship. ● Define entrepreneurship and entrepreneurial opportunities and explain their importance. ● Define invention, innovation, and imitation, and describe the relationship among them. ● Describe entrepreneurs and the entrepreneurial mind-set. ● Explain international entrepreneurship and its importance.

KNOWLEDGE OBJECTIVES ● Describe how firms internally develop innovations. ● Explain how firms use cooperative strategies to innovate. ● Describe how firms use acquisitions as a means of innovation. ● Explain how strategic entrepreneurship helps firms create value.

■ The world’s 10 most innovative firms in 2011: Apple Google
OPENING CASE OPEN INNOVATION: COMBINING EXTERNAL TECHNOLOGIES AND IDEAS WITH INTERNAL R&D CAPABILITIES ■ The world’s 10 most innovative firms in 2011: Apple Google Twitter Dawning Information Industry Facebook NetFlix Nissan Zynga, Groupon Epocrates Source: Fast Company ■ Continuous innovation, the common denominator, is a potent competitive weapon, especially during tough economic times

OPENING CASE OPEN INNOVATION: COMBINING EXTERNAL TECHNOLOGIES AND IDEAS WITH INTERNAL R&D CAPABILITIES ■ Open innovation occurs when a firm finds that a good idea is not commercially viable, given a firm’s present strategy; rather than shelving the idea, commercialization can take place through licenses, spin-offs, and joint ventures ■ P&G launched the concept of open innovation in 2001, with its Connect & Develop program

■ Open innovation examples:
OPENING CASE OPEN INNOVATION: COMBINING EXTERNAL TECHNOLOGIES AND IDEAS WITH INTERNAL R&D CAPABILITIES ■ Open innovation examples: ● P&G - Tide Total Care was developed through Sweden’s Lund University and two small chemical companies as partners ● P&G - Glad brand plastic bag joint venture with Clorox, a historical rival ● P&G - Food product joint ventures with ConAgra and General Mills

■ Open innovation examples:
OPENING CASE OPEN INNOVATION: COMBINING EXTERNAL TECHNOLOGIES AND IDEAS WITH INTERNAL R&D CAPABILITIES ■ Open innovation examples: ● Nike and Apple developed a sensor that transmits data from inside a shoe to the runner’s iPod or iPhone ● GlaxoSmithKline and Oratech partnered to develop Aquafresh White Trays, a tooth-whitening strip

OPENING CASE OPEN INNOVATION: COMBINING EXTERNAL TECHNOLOGIES AND IDEAS WITH INTERNAL R&D CAPABILITIES ■ Open innovation examples: ● Kimberly-Clark and SunHealth Solutions developed Little Swimmers Sun Care, an adhesive sticker that changes color to alert parents to the risk of sunburn ● Kraft and Hershey developed S’mores, a mixture of hot marshmallows that melt the chocolate between two graham crackers

OPENING CASE OPEN INNOVATION: COMBINING EXTERNAL TECHNOLOGIES AND IDEAS WITH INTERNAL R&D CAPABILITIES ■ Three paths for open innovation solutions: ● Customer-driven: tapping unmet customer needs ● Technology-driven: substantial R&D investments ● Competitor-driven: Fast follower of competitors’ successful strategies ■ Senior-level championing is critical for success

Organizational culture: the complex set of ideologies, symbols, and core values shared throughout the firm and that influence how the firm conducts business The social energy that drives—or fails to drive—the organization Strategic entrepreneurship: entrepreneurial actions (exploiting found opportunities in the external environment) through a strategic perspective (innovation efforts) Entrepreneurship dimension: identifying opportunities to exploit through innovations Strategic dimension: determining the best way to manage the firm’s innovation efforts

Strategic entrepreneurship actions can be taken by: Individuals Corporations Corporate entrepreneurship: the use or application of entrepreneurship within an established firm

ENTREPRENEURSHIP AND ENTREPRENEURIAL OPPORTUNITIES
Entrepreneurship is concerned with: The discovery of profitable opportunities The exploitation of profitable opportunities Entrepreneurship: the process by which individuals or groups identify and pursue entrepreneurial opportunities without the immediate constraint of the resources they currently control

Purpose of entrepreneurship: To create wealth Firms that foster entrepreneurship are: Risk takers Committed to innovation Proactive in creating opportunities rather than waiting to respond to opportunities created by others

Are opportunities others do not see or for which they do not recognize the commercial potential Are conditions in which new products or services can satisfy a need in the market Exist due to competitive market imperfections and unevenly distributed information Are studied at the level of the individual firm May be the economic engine driving many nations’ economies in the global competitive landscape

Creative Destruction (Schumpeter) Entrepreneurship, as a process, results in the ‘creative destruction’ of existing products (good or services) or methods of producing them, and replaces them with new products/production methods Entrepreneurial firms value individual innovations and the ability to continuously innovate across time

KEY CHAPTER POINTS THREE ‘I’s ● Invention THREE WAYS TO INNOVATE
Three types of innovation activities according to Schumpeter ● Invention ● Innovation ● Imitation THREE WAYS TO INNOVATE ● Internal - autonomous vs. induced ● Cooperative strategies (e.g., strategic alliances) ● Acquisitions

INNOVATION Innovation is the “specific function of entrepreneurship” (Drucker) It is “the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth” (Drucker) It is a source of competitive success, especially in turbulent and highly competitive environments For global markets, innovation is key for competitive parity at a minimum, much less for competitive advantage

INNOVATION Invention The act of creating or developing a new product or process Brings something new into being Technical criteria determine the success of an invention

INNOVATION Invention Innovation
Process of creating a commercial product from an invention Brings something new into use Commercial criteria determine the success of an innovation Innovation

INNOVATION Invention Innovation Imitation
Adoption of an innovation by similar firms Usually leads to product or process standardization Products based on imitation often are offered at lower prices and without as many features Results of imitation Product or process standardization Products made with fewer features Products offered at lower prices Innovation Imitation

THE IMPORTANCE OF INNOVATION
Entrepreneurship is the linchpin between invention and innovation Inventions are easier than commercializing those inventions: roughly 80% of R&D occurs in large firms, but these same firms produce fewer than 50% of the patents Note: Google Labs was created to facilitate the transition from invention to innovation Especially in the U.S., innovation is the most critical of the three types of innovative activities

ENTREPRENEURS Entrepreneurs Entrepreneurial Mind-set
Individuals, acting independently or as part of an organization, who see an entrepreneurial opportunity and then take risks to develop an innovation to exploit it Entrepreneurial Mind-set Values uncertainty in the marketplace and seeks to continuously identify opportunities with the potential to lead to important innovations

ENTREPRENEURS Entrepreneurial characteristics: Highly motivated
Willing to take responsibility for their projects Passionate Optimistic Emotional about the value and importance of their innovation-based ideas Entrepreneurial mind-set Able to deal with uncertainty More alert to opportunities than others Good social skills and plan exceptionally well

INTERNATIONAL ENTREPRENEURSHIP
● Firms creatively discover and exploit opportunities outside their domestic markets in order to develop a competitive advantage ● Entrepreneurship has become a global phenomenon as internationalization typically leads to improved firm performance ● EXAMPLE - Large multinational companies (MNCs) generate roughly 54% of their sales outside their domestic market, and more than 50% of their employees work outside of the home country

Risks include: Unstable foreign currencies Inefficient markets Insufficient infrastructures to support businesses Limitations on market size and growth

Rates of entrepreneurship differ across countries due to: ● Impact of national culture Entrepreneurship declines as collectivism increases Exceptionally high levels of individualism can be dysfunctional for entrepreneurship Balance between individual initiative and cooperative spirit versus group ownership of innovation is required ● Level of investment outside of the home country made by new ventures ● Top executives with international experience Internationally diversified firms are generally more innovative

Entrepreneurship can: Fuel economic growth Create employment Generate prosperity for citizens There is a strong positive relationship between the rate of entrepreneurial activity and economic development in a nation.

INTERNAL INNOVATION Firms take deliberate efforts to develop inventions and innovations within the organization, selecting from several types of innovation and the specific processes through which each type is produced. Most innovation is due to research and development (R&D): Investments are uncertain Often not achieved in the short term Firms innovate internally in two ways 1. Autonomous strategic behavior 2. Induced strategic behavior

INTERNAL INNOVATION: INCREMENTAL AND RADICAL INNOVATION
AUTONOMOUS STRATEGIC BEHAVIOR Facilitates incremental and radical innovation Primarily Radical Innovation INDUCED STRATEGIC BEHAVIOR Facilitates incremental and radical innovation Primarily Incremental Innovation

Incremental Innovation Is evolutionary and linear Most innovations are incremental Builds on existing knowledge bases and provides small improvements in current product lines/processes Radical Innovation Is revolutionary and nonlinear Is rare because of difficulty and risk Generates significant technological breakthroughs and creates new knowledge/processes Requires creativity

Incremental Innovation Results from deliberate efforts Primarily - induced strategic behavior Can create value Radical Innovation Results from deliberate efforts Strong potential to lead to significant growth in revenues and profits Primarily - autonomous strategic behavior Can create value

MODEL OF INTERNAL CORPORATE VENTURING
FIGURE 13.1 Model of Internal Corporate Venturing

AUTONOMOUS STRATEGIC BEHAVIOR INDUCED STRATEGIC BEHAVIOR
INTERNAL INNOVATION Internal Corporate Venturing refers to the set of activities firms use to develop internal inventions and innovations: autonomous and induced AUTONOMOUS STRATEGIC BEHAVIOR Bottom-up process INDUCED STRATEGIC BEHAVIOR Top-down process

AUTONOMOUS STRATEGIC BEHAVIOR
INTERNAL INNOVATION AUTONOMOUS STRATEGIC BEHAVIOR Bottom-up process ■ Bottom-up process in which product champions pursue new ideas, often through a political process, to develop and coordinate the commercialization of a new good or service ■ Product champion: individual with an entrepreneurial vision of a new good or service who seeks to create support in the organization for its commercialization ■ Autonomous strategic behavior is focused on firm’s knowledge and resources ■ Knowledge must be continuously diffused throughout the firm

INDUCED STRATEGIC BEHAVIOR
INTERNAL INNOVATION INDUCED STRATEGIC BEHAVIOR Top-down process Induced strategic behavior Top-down process whereby the firm’s current strategy and structure foster product innovations that are closely associated with that strategy and structure

IMPLEMENTING INTERNAL INNOVATIONS
Entrepreneurial mind-set: required for internal corporate ventures Viewpoint that values uncertainty in the marketplace and seeks to continuously identify opportunities with the potential to lead to important innovations Value creation through internal innovation processes: 1. Cross-functional product development teams 2. Facilitating integration and innovation 3. Creating value from internal innovation

CREATING VALUE THROUGH INTERNAL INNOVATION PROCESSES
FIGURE 13.2 Creating Value Through Internal Innovation Processes

Cross-Functional Product Development Teams Efforts to integrate and coordinate activities and apply knowledge from different functional activities associated with different functional areas to maximize innovation: Design Manufacturing Marketing New product development processes can be completed more quickly Products can be more easily commercialized when cross-functional teams work effectively Cross-Functional Product Development Team

Cross-Functional Product Development Teams Horizontal structures support use of cross-functional teams Two primary barriers to success: Independent frames of reference of members with distinct specializations Organizational politics that create competition for resources and inter-unit conflict Cross-Functional Product Development Team

IMPLEMENTING INTERNAL INNOVATIONS Facilitating Integration and Innovation
Shared Values Are framed around the firm’s strategic intent and mission Become the glue that promotes integration between functional units Effective Leadership Sets goals and allocates resources Goals include integrated development and commercialization of new goods and services Effective Communication All are important to successfully innovate and facilitate cross-functional integration.

Creating Value from Internal Innovation Entrepreneurial mind-set is necessary Manager support Cross-functional teams Effective leadership and shared values

INNOVATION THROUGH COOPERATIVE STRATEGIES
To successfully commercialize inventions, firms may need to cooperate and integrate knowledge and resources Entrepreneurial new venture firms may need investment capital and distribution capabilities More established companies may need new technological knowledge possessed by newer entrepreneurial firms To innovate via cooperative relationships, firms must share their knowledge and skills – strategic alliances and joint ventures allow this to occur

INNOVATION THROUGH ACQUISITIONS
Rapidly extend the product line Increase the firm’s revenues KEY RISK: a firm may substitute its ability to buy innovations for its ability to produce innovations internally A firm may: Lose its intensity in R&D efforts Lose its ability to produce patents Research demonstrates that subsequent to acquisitions, firms introduce fewer new products into the market This is because firms focus on the financial controls at the expense of strategic control

CREATING VALUE THROUGH STRATEGIC ENTREPRENEURSHIP
Entrepreneurial ventures: Produce more radical innovations Possess strategic flexibility and willingness to take risks Do more opportunity seeking Must learn how to gain a competitive advantage (advantage-seeking behaviors) Larger, well-established firms: Produce more incremental innovations Possess more resources and capabilities to exploit identified opportunities Must relearn how to identify entrepreneurial opportunities (opportunity-seeking skills)

CREATING VALUE THROUGH STRATEGIC ENTREPRENEURSHIP
Objective is to help firms develop successful incremental and radical innovations Be flexible and willing to take risks. Identify and exploit opportunities with sufficient resources and capabilities to launch strategic actions. Sustain a competitive advantage while identifying and exploiting opportunities. Foster an entrepreneurial mind-set among managers and employees. Emphasize resource management, particularly human capital and social capital. Seek to enter and compete in international markets.

CHAPTER 1: Strategic Management & Strategic Competitiveness

Similar presentations

Presentation on theme: "CHAPTER 1: Strategic Management & Strategic Competitiveness"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

CHAPTER 1: Strategic Management & Strategic Competitiveness

Similar presentations

Presentation on theme: "CHAPTER 1: Strategic Management & Strategic Competitiveness"— Presentation transcript:

Similar presentations

About project

Feedback