Strategic Management: Creating Competitive Advantages

Strategic Management: Creating Competitive Advantages
Chapter One McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO1.1 The definition of strategic management and its four key attributes. LO1.2 The strategic management process and its three interrelated and principal activities. LO1.3 The vital role of corporate governance and stakeholder management as well as how “symbiosis” can be achieved among an organization’s stakeholders.

Learning Objectives (cont.)
LO1.4 The importance of social responsibility, including environmental sustainability, and how it can enhance a corporation’s innovation strategy. LO1.5 The need for greater empowerment throughout the organization. LO1.6 How an awareness of a hierarchy of strategic goals can help an organization achieve coherence in its strategic direction.

Two Perspectives of Leadership
Romantic view Leader is the key force in organization’s success External control perspective Focus is on external factors that may affect an organization’s success Leaders can make a difference Must be aware of opportunities and threats faced in external environment Must have thorough understanding of the firm’s resources and capabilities

QUESTION External control Romantic Internal mechanism Operational
A CEO made a lot of mistakes such as committing errors in assessing the market and competitive conditions and improperly redesigning the organization into numerous business units. Such errors led to significant performance declines. This illustrates the __________ perspective of leadership. External control Romantic Internal mechanism Operational Answer: B - romantic See previous slide

Example: 3M Elements of Buckley’s turnaround
Set clear business goals for the company Wanted 3M to develop lower-cost products to compete in emerging markets Became an outspoken champion for 3M labs

What is Strategic Management?
Strategic management must become both a process and a way of thinking throughout the organization Leaders must be proactive, anticipate change, and continually refine changes to their strategies

Defining Strategic Management
Analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages Strategic management is the study of why some firms outperform others How to compete in order to create competitive advantages in the marketplace How to create competitive advantages in the market place Unique and valuable Difficult for competitors to copy or substitute

Analysis Strategic goals Internal and external environment of the firm Strategic decisions What industries should we compete in? How should we compete in those industries? Analysis Strategic goals (vision, mission, strategic objectives) Internal and external environment of the firm Strategic decisions What industries should we compete in? How should we compete in those industries?

Actions Allocate necessary resources Design the organization to bring intended strategies to reality

Two Fundamental Questions
How should we compete in order to create competitive advantages in the marketplace? How can we create competitive advantages in the marketplace that are unique, valuable, and difficult for rivals to copy or substitute? Operational effectiveness – performing similar activities better than rivals

Strategic Management Concepts
Exhibit 1.1

Key Attributes of Strategic Management
Stakeholders those individuals, groups, and organizations who have a “stake” in the success of the organization, including owners (shareholders in a publicly held corporation), employees, customers, suppliers, the community at large, 1-13

Key Attributes of Strategic Management
Ambidexterity The challenge managers face of both aligning resources to take advantage of existing product markets as well as proactively exploring new opportunities Ambidexterity - The challenge managers face of both aligning resources to take advantage of existing product markets as well as proactively exploring new opportunities

Ambidextrous Behaviors in Individuals
They take time and are alert to opportunities beyond the confines of their own jobs They are brokers, always looking to build internal networks They are cooperative and seek out opportunities to combine their efforts with others They are multitaskers who are comfortable wearing more than one hat They take time and are alert to opportunities beyond the confines of their own jobs They are cooperative and seek out opportunities to combine their efforts with others They are brokers, always looking to build internal networks They are multi-taskers who are comfortable wearing more than one hat How does one become a more ambidextrous leader? Consider the following questions: Do you meet your numbers? Do you help others? What do you do for your peers? When you manage up, do you bring problems – or problems with possible solutions? Are you transparent? Are you developing a group of senior managers who know you and are willing to back your original ideas with resources?

Strategic Management Process
Intended strategy Decisions are determined only by analysis Realized strategy Decisions are determined by both analysis and unforeseen environmental developments, unanticipated resource constraints, and/or changes in managerial preferences

Adapted from Exhibit 1.2 Realized Strategy and Intended Strategy: Usually Not the Same Source: H. Mintzberg and J. A. Waters, “Of Strategies, Deliberate and Emergent,” Strategic Management Journal 6 (1985), pp Exhibit 1.2

The Strategic Management Process Exhibit 1.3 1-18

Strategic Analysis Consists of “advance work” that must be done in order to effectively formulate and implement strategies Starting point Starting point in the strategic management process Analyzing organizational goals and objectives – Ch 1 Analyzing the external environment of the firm – Ch 2 Assessing the internal environment of the firm – Ch 3 Assessing a firm’s intellectual assets – Ch 4

Strategy Formulation A firm’s strategy formulation is developed at several levels: Business-level Corporate level International Entrepreneurial Business level strategy Addresses the issue of how to compete in a given business to attain competitive advantage Corporate-level strategy What businesses should we be in? How can businesses be managed to achieve synergy? International strategy What is the appropriate entry strategy? How do we go about attaining competitive advantage in international markets? Entrepreneurial strategy How do we recognize viable opportunities? How do we formulate an effective strategy? Formulating business level strategy – Ch 5 Formulating corporate level strategy – Ch 6 Formulating international strategy – Ch 7 Entrepreneurial strategy and competitive dynamics – Ch 8

Strategy Implementation
Ensuring proper strategic controls and organizational designs Establishing effective means to coordinate and integrate activities within the firm as well as with suppliers, customers, and alliance partners Strategic control and corporate governance – Ch 9 Creating effective organizational designs – Ch 10 Creating a learning organization and an ethical organization – Ch 11 Fostering corporate entrepreneurship – Ch 12

Corporate Governance and Stakeholder Management
The relationship among various participants in determining the direction and performance of corporations Shareholders, management, board of directors Corporate governance The relationship among various participants in determining the direction and performance of corporations Shareholders Management (led by the CEO) Board of Directors

Corporate Governance and Stakeholder Management (cont.)
Board of Directors Elected representatives of the owners Ensure interests and motives of management are aligned with those of the owners Exhibit 1.4

Corporate Governance Three mechanisms ensure effective corporate governance: An effective and engaged board of directors Shared activism Proper managerial rewards and incentives

Stakeholder Management
Zero sum view Stakeholders compete for attention and resources of the organization Gain of one is a loss to the other Rooted in the traditional conflict between workers and management

Stakeholder Management
Stakeholder symbiosis view Stakeholders are dependent upon each other for their success and well-being Mutual benefits 1-26

QUESTION Outback Steakhouse has developed a sophisticated quantitative model and found that there were positive relationships between employee satisfaction, customer satisfaction, and financial results. This is an example of __________. A. Zero-sum relationship among stakeholders B. Stakeholder symbiosis C. Rewarding stakeholders D. Emphasizing financial returns Answer: B – stakeholder symbiosis. See the previous slide

Crowdsourcing Crowdsourcing
practice wherein the Internet is used to tap a broad range of individuals and groups to generate ideas and solve problems. Linux, Amazon, Wikipedia

Social Responsibility
The expectation that businesses or individuals will strive to improve the overall welfare of society Social responsibility The expectation that businesses or individuals will strive to improve the overall welfare of society Managers must take active steps to make society better

Social Responsibility
Triple bottom line Assessment of a company’s performance in financial, social, and environmental dimensions Triple bottom line Assessment of a company’s performance in financial, social, and environmental dimensions Failure to account for the environmental and social costs of doing business poses risks to the company and its community

Example: Social Responsibility
Starbucks Coffee Company defines CSR as: Conducting business in ways that produce social, environmental and economic benefits for the communities in which we operate and for the company’s stakeholders, including shareholders. Some tangible benefits include attracting and retaining our partners, customer loyalty, reducing operating costs, and creating a sustainable supply chain. Starbucks Coffee Company Managing CSR Starbucks continues to evolve and strengthen the way CSR is managed internally. We have created structures to ensure that emerging issues are identified, prioritized and addressed in a more systematic and integrated manner throughout the company; and that company policies and procedures are upheld and followed. Our Emerging Issues Council, CSR Executive Committee and Policy Governance Council serve these functions respectively. Throughout the company, there is a strong sense of shared accountability for CSR. In fiscal 2007, we took both a centralized and decentralized organizational approach to managing CSR. At the Starbucks Support Center, our global headquarters located in Seattle, there was a dedicated CSR group, reporting to the senior vice president of CSR, for the day-to-day management of specific CSR-related initiatives. This group often serves as the catalyst for new CSR programs, which may end up being managed and implemented at the business unit, division or department level. Once implemented, the CSR team provided broad oversight and served as an ongoing resource. Currently there is not a committee of the board dedicated to CSR. Source:

Strategic Management Perspective
All managers and employees must: Take an integrative, strategic perspective of issues facing the organization Assess how functional areas and activities “fit together” to achieve goals and objectives Managers must make a major effort to effect transformational change Involves extensive communication, incentives, training and development

Three Types of Leaders Local line leaders Executive leaders
Have significant profit-and-loss responsibility Executive leaders Champion and guide ideas, create a learning infrastructure, establish a domain for taking action

Three Types of Leaders (cont.)
Internal networkers Generate power through the conviction and clarity of their ideas

Coherence in Strategic Direction
Hierarchy of goals organizational goals ranging from, at the top, those that are less specific yet able to evoke powerful and compelling mental images, to, at the bottom, those that are more specific and measurable. Vision, mission statement, strategic objectives Hierarchy of goals Goals ranging from, at the top, those that are less specific yet able to evoke powerful and compelling mental images, to, at the bottom, those that are more specific and measurable Vision, mission statement, strategic objectives

A Hierarchy of Goals Exhibit 1.6

Organizational vision Goal that is “massively inspiring, overarching, and long term” Represents a destination that is driven by and evokes passion

Why Do Visions Fail? The walk doesn’t match the talk Irrelevance
Too much focus leads to missed opportunities Not the holy grail An ideal future irreconciled with the present

Mission statement Set of goals that include both the purpose of the organization, its scope of operations, and the basis of its competitive advantage Has the greatest impact when it reflects an organization’s enduring, overarching strategic priorities and competitive positioning Mission statement Set of goals that include both the purpose of the organization, its scope of operations, and the basis of its competitive advantage Incorporates the concept of stakeholder management Has the greatest impact when it reflects an organization’s enduring, overarching strategic priorities and competitive positioning

Strategic objectives A set of organizational goals that are used to operationalize the mission statement and that are specific and cover a well-defined time frame. Help channel employees’ efforts toward common goals Help inspire employees to higher levels of commitment and effort

Analyzing the External Environment of the Firm
Chapter Two McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO2.1 The importance of developing forecasts of the business environment. LO2.2 Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting. LO2.3 Why scenario planning is a useful technique for firms competing in industries characterized by unpredictability and change. LO2.4 The impact of the general environment on a firm’s strategies and performance. 2-42

LO2.5 How forces in the competitive environment can affect profitability and how a firm can improve its competitive position by increasing its power vis-à-vis these forces. LO2.6 How the Internet and digitally based compatibilities are affecting the five competitive forces and industry profitability. LO2.7 The concept of strategic groups and their strategy and performance implications. 2-43

Inputs to Forecasting Exhibit 2.1 2-44

Environmental Scanning & Monitoring
External Scanning surveillance of a firm’s external environment to predict environmental changes and detect changes already under way. Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them 2-45

Environmental Scanning & Monitoring
External Monitoring A firm’s analysis of the external environment that tracks evolution of environmental trends, sequences of events, or streams of activities 2-46

How to Spot Hot Trends Listen Pay attention Follow trends online
Go old school Ask your customers questions about your products and services Read trade publications related to your industry Add websites like trendhunter.com to your regular surfing Ask your customers what they think 2-47 47

How Zara Spots Opportunities
Zara’s designers, marketing managers, and buyers work side by side in an open office plan that fosters frequent discussions and promotes the sharing of real-time data as well as field observations and anecdotes This allows them to break out of their silos and develop a holistic feel for the market, see how their work fits, and sense new opportunities as they arise. 2-48

Competitive Intelligence
A firm’s activities of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitors’ strengths and weaknesses. 2-49

Environmental Forecasting
The development of plausible projections about direction, scope, speed and intensity of environmental change 2-50

Environmental Forecasting
Scenario analysis An in-depth approach to environmental forecasting that involves experts’ detailed assessments of societal trends, economics, politics, technology, or other dimensions of the external environment 2-51

QUESTION Which of the following is a danger of forecasting?
Managers assume that the world is not open to precise predictions. Managers may view uncertainty as black and white and ignore grey areas. Managers assume that the world is uncertain. Managers view the world as completely unpredictable. Answer: B 2-52 52

SWOT Analysis Firm’s strategy must: Build on its strengths
Remedy the weaknesses or work around them Take advantage of the opportunities presented by the environment Protect the firm from threats 2-53

SWOT Analysis SWOT analysis
A framework for analyzing a company’s internal and external environment and that stands for strengths, weaknesses, opportunities, and threats. Strengths – where your firm excels Weaknesses – where the firm is lacking relative to competitors Opportunities and threats – general or competitive environment 2-54 54

Example: Harley-Davidson
Strengths Strong & adaptable brand image Weaknesses Limited ability to develop new non-traditional products Opportunities Growing leisure interest in motorcycles worldwide Threats Differing foreign policies governing motorcycles 2-55

The General Environment
Factors external to an industry, usually beyond a firm’s control Demographic Sociocultural Legal/Political Technological Economic Global General environmental trends and events: Little ability to predict them Even less ability to control them Can vary across industries 2-56 56

Demographic Segment Aging population Rising or declining affluence
Changes in ethnic composition Geographic distribution of population Greater disparities in income levels Demographic segment of the general environment genetic and observable characteristics of a population, including the levels and growth of age, density, sex, race, ethnicity, education, geographic region, and income. 2-57 57

Sociocultural Segment
More women in the workforce Dual-income families Increase in temporary workers Greater concern for healthy diets and physical fitness Greater interest in the environment Postponement of having children Sociocultural forces influence the values, beliefs, and lifestyles of a society 2-58 58

Political/Legal Segment
Tort reform Americans with Disabilities Act (ADA) Repeal of Glass-Steagall Act in 1999 Deregulation of utility and other industries Increases in federally mandated minimum wages Taxation at local, state, federal levels Legislation on corporate governance reforms (Sarbanes-Oxley Act) 2-59

Technological Segment
Genetic engineering Emergence of Internet technology Computer-aided design/computer-aided manufacturing systems (CAD/CAM) Wireless communication Nanotechnology Genetic engineering Emergence of Internet technology Computer-aided design/computer-aided manufacturing systems (CAD/CAM) Research in synthetic and exotic materials Pollution/global warming Miniaturization of computing technologies Wireless communication Nanotechnology 2-60 60

Economic Segment Interest rates Unemployment Consumer Price index
Trends in GDP Changes in stock market valuations 2-61

Global Segment Increasing global trade Currency exchange rates
Emergence of the Indian and Chinese economies Trade agreements (NAFTA, EU, ASEAN) Creation of WTO (decreasing tariffs/free trade in services) 2-62

The Competitive Environment
factors that pertain to an industry and affect a firm’s strategies Competitors, customers, and suppliers 2-63

Porter’s Five Forces Model of Industry Competition
Exhibit 2.7 2-64

The Threat of New Entrants
Profits of established firms in the industry may be eroded by new competitors Sources of entry barriers Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale 2-65

QUESTION If you are considering opening a new pizza restaurant in your community, what would be the threat of new entrants? How would you evaluate Porter’s other forces for this industry? Explain. The threat of new entrants in the food industry is very high, which is why a majority of new food restaurants fail within their first year. The minimum requirements to open a pizza shop are an oven and a small amount of capital. The potential number of competitors is unlimited due to these factors. Based on other forces also, this industry is not very attractive. 2-66 66

The Bargaining Power of Buyers
Buyers threaten an industry by: Forcing down prices Bargaining for higher quality or more services Playing competitors against each other 2-67

The Bargaining Power of Buyers
A buyer group is powerful when It is concentrated or purchases large volumes relative to seller sales The products it purchases from the industry are standard or undifferentiated The buyer faces few switching costs It earns low profits The buyers pose a credible threat of backward integration The industry’s product is unimportant to the quality of the buyer’s products or services 2-68

The Bargaining Power of Suppliers
Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services 2-69

The Bargaining Power of Suppliers
A supplier group will be powerful when The supplier group is dominated by a few companies and is more concentrated than the industry it sells to The supplier group is not obliged to contend with substitute products for sale to the industry The industry is not an important customer of the supplier group 2-70

The Bargaining Power of Suppliers (cont.)
A supplier group will be powerful when The supplier’s product is an important input to the buyer’s business The supplier group’s products are differentiated or it has built up switching costs for the buyer The supplier group poses a credible threat of forward integration 2-71

The Threat of Substitute Products and Services
the threat of limiting the potential returns of an industry by placing a ceiling on the prices that firms in that industry can profitably charge without losing too many customers to substitute products. 2-72

The Intensity of Rivalry among Competitors in an Industry
Price competition Advertising battles Product introductions Increased customer service or warranties 2-73

The Intensity of Rivalry among Competitors in an Industry
Interacting factors lead to intense rivalry Lack of differentiation or switching costs Capacity augmented in large increments High exit barriers Numerous or equally balanced competitors Slow industry growth High fixed or shortage costs 2-74

How the Internet and Digital Technologies Influences Industry
Exhibit 2.9 2-75

Using Industry Analysis: A Few Caveats
Managers must not always avoid low profit industries Can still yield high returns for players with sound strategies Implicitly assumes a zero-sum game, determining how a firm can enhance its position relative to the forces Five Forces analysis is essentially a static analysis 2-76

Using Industry Analysis: A Few Caveats (cont.)
Good industry analysis looks rigorously at the structural underpinnings of profitability. A first step is to understand the time horizon The point of industry analysis is not to declare the industry attractive or unattractive but to understand the underpinnings of competition and the root causes of profitability. 2-77

The Value Net Value net Suppliers and customers (the vertical net) Substitutes and complements (the horizontal net) Exhibit 2.10 2-78 78

Strategic Groups within Industries
Two unassailable assumptions in industry analysis No two firms are totally different No two firms are exactly the same Strategic groups Cluster of firms that share similar strategies Strategic groups Cluster of firms that share similar strategies Breadth of product and geographic scope Price/quality Degree of vertical integration Type of distribution system 2-79 79

Strategic Groups within Industries
Value of strategic groups as an analytical tool Identify barriers to mobility that protect a group from attacks by other groups Identify groups whose competitive position may be marginal or tenuous Chart the future direction of firms’ strategies Thinking through the implications of each industry trend for the strategic group as a whole 2-80

Assessing the Internal Environment of the Firm
Chapter Three McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO3.1 The benefits and limitations of SWOT analysis in conducting an internal analysis of the firm. LO3.2 The primary and support activities of a firm’s value chain. LO3.3 How value-chain analysis can help managers create value by investigating relationships among activities within the firm and between the firm and its customers and suppliers. LO3.4 The resource-based view of the firm and the different types of tangible and intangible resources, as well as organizational capabilities. 3-82 82

LO 3.5 The four criteria that a firm’s resources must possess to maintain a sustainable advantage and how value created can be appropriated by employees. LO 3.6 The usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms. LO 3.7 The value of the “balanced scorecard” in recognizing how the interests of a variety of stakeholders can be interrelated. LO 3.8 How firms are using Internet technologies to add value and achieve unique advantages. (Appendix) 3-83

The Limitations of SWOT Analysis
Strengths may not lead to an advantage SWOT’s focus on the external environment is too narrow SWOT gives a one-shot view of a moving target SWOT overemphasizes a single dimension of strategy 3-84

Value-Chain Analysis Value-chain analysis
a strategic analysis of an organization that uses value creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue Creating value for buyers that exceeds the costs of production is a key concept used in analyzing a firm’s competitive position. 3-85 85

Value-Chain Analysis Primary activities
contribute to the physical creation of the product or service, its sale and transfer to the buyer, and its service after the sale. inbound logistics, operations, outbound logistics, marketing and sales, and service 3-86

QUESTION In assessing its primary activities, an airline would examine: A. Employee training programs B. Baggage handling C. Criteria for lease versus purchase decisions D. The effectiveness of its lobbying activities B – baggage handling 3-87

Value-Chain Analysis Support activities
activities of the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities procurement, technology development, human resource management, and general administration. 3-88

The Value Chain Exhibit 3.1 3-89

Primary Activity: Inbound Logistics
Associated with receiving, storing and distributing inputs to the product Location of distribution facilities Warehouse layout and designs Associated with receiving, storing and distributing inputs to the product Location of distribution facilities Material and inventory control systems Systems to reduce time to send “returns” to suppliers Warehouse layout and designs 3-90 90

Primary Activity: Operations
Associated with transforming inputs into the final product form Efficient plant operations Incorporation of appropriate process technology Efficient plant layout and workflow design Associated with transforming inputs into the final product form Efficient plant operations Incorporation of appropriate process technology Quality production control systems Efficient plant layout and workflow design 3-91 91

Primary Activity: Outbound Logistics
Associated with collecting, storing, and distributing the product or service to buyers Effective shipping processes to provide quick delivery and minimize damages Shipping of goods in large lot sizes to minimize transportation costs. Associated with collecting, storing, and distributing the product or service to buyers Effective shipping processes to provide quick delivery and minimize damages Efficient finished goods warehousing processes Shipping of goods in large lot sizes to minimize transportation costs. Quality material handling equipment 3-92 92

Primary Activity: Marketing and Sales
Associated with purchases of products and services by end users and the inducements used to get them to make purchases Innovative approaches to promotion and advertising Proper identification of customer segments and needs Associated with purchases of products and services by end users and the inducements used to get them to make purchases Highly motivated and competent sales force Innovative approaches to promotion and advertising Selection of most appropriate distribution channels Proper identification of customer segments and needs Effective pricing strategies 3-93 93

Primary Activity: Service
Associated with providing service to enhance or maintain the value of the product Quick response to customer needs and emergencies Quality of service personnel and ongoing training Associated with providing service to enhance or maintain the value of the product Effective use of procedures to solicit customer feedback and to act on information Quick response to customer needs and emergencies Ability to furnish replacement parts Effective management of parts and equipment inventory Quality of service personnel and ongoing training Warranty and guarantee policies 3-94 94

Support Activity: Procurement
Function of purchasing inputs used in the firm’s value chain Procurement of raw material inputs Development of collaborative “win-win” relationships with suppliers Analysis and selection of alternate sources of inputs to minimize dependence on one supplier Function of purchasing inputs used in the firm’s value chain Procurement of raw material inputs Development of collaborative “win-win” relationships with suppliers Effective procedures to purchase advertising and media services Analysis and selection of alternate sources of inputs to minimize dependence on one supplier Ability to make proper lease versus buy decisions 3-95 95

Support Activity: Human Resource Management
Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel Effective recruiting, development, and retention mechanisms for employees Quality relations with trade unions Reward and incentive programs to motivate all employees Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel Effective recruiting, development, and retention mechanisms for employees Quality relations with trade unions Quality work environment to maximize overall employee performance and minimize absenteeism Reward and incentive programs to motivate all employees 3-96 96

Support Activity: Technology Development
Related to a wide range of activities and those embodied in processes and equipment and the product itself Effective R&D activities for process and product initiatives Positive collaborative relationships between R&D and other departments Excellent professional qualifications of personnel Related to a wide range of activities and those embodied in processes and equipment and the product itself Effective R&D activities for process and product initiatives Positive collaborative relationships between R&D and other departments State-of-the art facilities and equipment Culture to enhance creativity and innovation Excellent professional qualifications of personnel Ability to meet critical deadlines 3-97 97

Support Activity: General Administration
Typically supports the entire value chain and not individual activities Effective planning systems Excellent relationships with diverse stakeholder groups Effective information technology to integrate value-creating activities Typically supports the entire value chain and not individual activities Effective planning systems Ability of top management to anticipate and act on key environmental trends and events Ability to obtain low-cost funds for capital expenditures and working capital Excellent relationships with diverse stakeholder groups Ability to coordinate and integrate activities across the value chain Highly visible to inculcate organizational culture, reputation, and values 3-98 98

Interrelationships among Value-Chain Activities within and across Organizations
Two levels Interrelationships among activities within the firm Relationships among activities within the firm and with other organization (e.g., customers and suppliers) 3-99

Value Chains in Service Industries
3-100 Exhibit 3.4

Resource-Based View of the Firm
perspective that firms’ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. 3-101

Resource-Based View of the Firm
Two perspectives The internal analysis of phenomena within a company An external analysis of the industry and its competitive environment 3-102

Types of Resources Tangible resources
organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources. Tangible Resources Financial • Firm’s cash account and cash equivalents. • Firm’s capacity to raise equity. • Firm’s borrowing capacity. Physical • Modern plant and facilities. • Favorable manufacturing locations. • State-of-the-art machinery and equipment. Technological • Trade secrets. • Innovative production processes. • Patents, copyrights, trademarks. Organizational • Effective strategic planning processes. • Excellent evaluation and control systems. 3-103 103

Types of Resources Intangible resources organizational
assets that are difficult to identify and account for and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources. Intangible Resources Human • Experience and capabilities of employees. • Trust. • Managerial skills. • Firm-specific practices and procedures. Innovation and creativity • Technical and scientific skills. • Innovation capacities. Reputation • Brand name. • Reputation with customers for quality and reliability. • Reputation with suppliers for fairness, non–zero-sum relationships. 3-104 104

Types of Resources Organizational capabilities
The competencies and skills that a firm employs to transform inputs into outputs. Organizational Capabilities • Firm competencies or skills the firm employs to transfer inputs to outputs. • Capacity to combine tangible and intangible resources, using organizational processes to attain desired end. EXAMPLES: • Outstanding customer service. • Excellent product development capabilities. • Innovativeness of products and services. • Ability to hire, motivate, and retain human capital. 3-105 105

QUESTION Gillette combines several technologies to attain unparalleled success in the wet shaving industry. This is an example of their A. Tangible resources B. Intangible resources C. Organizational capabilities D. Strong primary activities C – organizational capabilities 3-106

Firm Resources and Sustainable Competitive Advantages
First, the resource must be valuable in the sense that it exploits opportunities and/or neutralizes threats in the firm’s environment. Second, it must be rare among the firm’s current and potential competitors. 3-107

Firm Resources and Sustainable Competitive Advantages
Third, the resource must be difficult for competitors to imitate. Fourth, the resource must have no strategically equivalent substitutes. 3-108

Sources of Inimitability
Physical uniqueness Path dependency Causal ambiguity Social complexity path dependency. This simply means that resources are unique and therefore scarce because of all that has happened along the path followed in their development and/or accumulation. causal ambiguity. This means that would-be competitors may be thwarted because it is impossible to disentangle the causes (or possible explanations) of either what the valuable resource is or how it can be re-created. social complexity a characteristic of a firm’s resources that is costly to imitate because the social engineering required is beyond the capability of competitors, including interpersonal relations among managers, organizational culture, and reputation with suppliers and customers. 3-109 109

The Generation and Distribution of a Firm’s Profits
Four factors help explain the extent to which employees and managers will be able to obtain a proportionately high level of the profits that they generate Employee bargaining power Employee replacement cost Employee exit costs Manager bargaining power • Employee Bargaining Power. If employees are vital to forming a firm’s unique capability, they will earn disproportionately high wages. For example, marketing professionals may have access to valuable information that helps them to understand the intricacies of customer demands and expectations, or engineers may understand unique technical aspects of the products or services. Additionally, in some industries such as consulting, advertising, and tax preparation, clients tend to be very loyal to individual professionals employed by the firm, instead of to the firm itself. This enables them to “take the clients with them” if they leave. This enhances their bargaining power. • Employee Replacement Cost. If employees’ skills are idiosyncratic and rare (a source of resource-based advantages), they should have high bargaining power based on the high cost required by the firm to replace them. For example, Raymond Ozzie, the software designer who was critical in the development of Lotus Notes, was able to dictate the terms under which IBM acquired Lotus. • Employee Exit Costs. This factor may tend to reduce an employee’s bargaining power. An individual may face high personal costs when leaving the organization. Thus, that individual’s threat of leaving may not be credible. In addition, an employee’s expertise may be firm-specific and of limited value to other firms. Causal ambiguity may make it difficult for the employee to explain his or her specific contribution to a given project. Thus, a rival firm might be less likely to pay a high wage premium since it would be unsure of the employee’s unique contribution. • Manager Bargaining Power. Managers’ power is based on how well they create resource-based advantages. They are generally charged with creating value through the process of organizing, coordinating, and leveraging employees as well as other forms of capital such as plant, equipment, and financial capital (addressed further in Chapter 4). Such activities provide managers with sources of information that may not be readily available to others. Thus, although managers may not know as much about the specific nature of customers and technologies, they are in a position to have a more thorough, integrated understanding of the total operation. 3-110 110

Evaluating Firm Performance
Financial ratio analysis Balance sheet Income statement Historical comparison Comparison with industry norms Comparison with key competitors Stakeholder perspective Employees Customers Owners 3-111

Financial Ratio Analysis
Five types of financial ratios Short-term solvency or liquidity Long-term solvency measures Asset management (or turnover) Profitability Market value 3-112

Historical comparisons Comparison with industry norms Comparison with key competitors 3-113

Five Types of Financial Ratios
3-114

The Balance Scorecard Provides a meaningful integration of many issues that come into evaluating a firm’s performance Four key perspectives How do customers see us? What must we excel at? Can we continue to improve and create value? How do we look to shareholders? 3-115

Customer Perspective Time Quality Performance and service Cost 3-116

Internal Business Perspective
Processes Decisions Actions Coordination Resources and capabilities Processes Cycle time Quality Employee Skills Productivity 3-117 117

Innovation and Learning Perspective
Introduction of new products and services Greater value for customers Increased operating efficiencies 3-118

Financial Perspective
Profitability Growth Shareholder value Increased market share Reduced operating expenses Higher asset turnover 3-119

Potential Limitations of the Balanced Scorecard
Lack of a clear strategy Limited or ineffective executive sponsorship Too much emphasis on financial measures rather than non-financial measures Poor data on actual performance Inappropriate links to scorecard measures to compensation Inconsistent or inappropriate terminology 3-120

Recognizing a Firm’s Intellectual Assets: Moving beyond a Firm’s Tangible Resources
Chapter Four McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO4.1 Why the management of knowledge professionals and knowledge itself are so critical in today’s organizations. LO4.2 The importance of recognizing the interdependence of attracting, developing and retaining human capital. LO4.3 The key role of social capital in leveraging human capital within and across the firm. LO4.4 The importance of social networks in knowledge management and in promoting career success. 4-122

LO4.5 The vital role of technology in leveraging knowledge and human capital. LO4.6 Why “electronic” or “virtual” teams are critical in combining and leveraging knowledge in organizations and how they can be made more effective. LO4.7 The challenge of protecting intellectual property and the importance of a firm’s dynamic capabilities. 4-123

The Central Role of Knowledge in Today’s Economy
Knowledge economy wealth is increasingly created by effective management of knowledge workers instead of by the efficient control of physical and financial assets. 4-124

Intellectual capital the difference between a firm’s market value and book value a measure of the value of a firm’s intangible assets 4-125

Intellectual capital also includes assets such as reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees 4-126

Ratio of Market Value to Book Value for Selected Companies
Exhibit 4.1 4-127

Human capital individual capabilities, knowledge, skills, and experience of the company’s employees and managers Social capital the network of relationships that individuals have throughout the organization 4-128

Explicit knowledge Tacit knowledge 4-129

Knowledge Explicit knowledge Tacit knowledge
knowledge that is codified, documented, easily reproduced, and widely distributed. Tacit knowledge knowledge that is in the minds of employees and is based on their experiences and backgrounds. 4-130

QUESTION Recently, a knowledge worker's loyalty to his or her employing firm has __________ compared to his or her loyalty to his profession and colleagues. A. Increased B. Decreased C. Remained the same D. No correlation when B - decreased 4-131 131

Human Capital: Three Interdependent Activities
Exhibit 4.2 4-132

Attracting Human Capital
Hire for attitude, train for skill Emphasis on General knowledge and experience Social skills Values Beliefs Attitudes 4-133

Attracting Human Capital
Sound recruiting approaches Firms must take recruiting seriously Challenge becomes having the right job candidates, not the greatest number of them 4-134

Developing Human Capital
Train and develop at all levels Encouraging widespread involvement Transferring knowledge Monitor progress and track development Evaluate human capital Train and develop at all levels Training is not the sole responsibility of the human resource department Encouraging widespread involvement Transferring knowledge Monitor progress and track development Evaluate human capital Employees must share knowledge and work together, collectively, to reach organizational goals Firms often use 360-degree evaluation and feedback systems Managers’ success cannot compromise the organization’s core values 4-135 135

Best Practices to Recruit and Retain Young Talent
Don’t fudge the sales pitch Let them have a life No time clocks, please Give them responsibility Feedback and more feedback Giving back matters 4-136

How to Get Hired It helps to know someone
Play up volunteer work on your resume Unleash your inner storyteller No lone rangers need apply Be open to learning new things 4-137

An Excerpt from General Electric’s 360-Degree Leadership Assessment Chart
4-138 Exhibit 4.4

Retaining Human Capital
Identifying with organization’s mission and values People who identify with and are more committed to the core mission and values of the organization are less likely to stray or bolt to the competition. 4-139

Challenging work and a stimulating environment opportunities that lower barriers to an employee’s mobility within a company 4-140

Financial and Non-financial Rewards and Incentives Rewards are a vital organizational control mechanism However, money may not be the most important reason why people take or leave jobs Exodus of employees can erode a firm’s competitive advantage 4-141

How Three Companies Are Keeping Their Best During Tough Times
Exhibit 4.5 4-142

How Diversity Benefits the Organization
Cost Resource acquisition Marketing Creativity Problem-solving System flexibility • Cost Argument. As organizations become more diverse, firms effective in managing diversity will have a cost advantage over those that are not. • Resource Acquisition Argument. Firms with excellent reputations as prospective employers for women and ethnic minorities will have an advantage in the competition for top talent. As labor pools shrink and change in composition, such advantages will become even more important. • Marketing Argument. For multinational firms, the insight and cultural sensitivity that members with roots in other countries bring to marketing efforts will be very useful. A similar rationale applies to subpopulations within domestic operations. • Creativity Argument. Less emphasis on conformity to norms of the past and a diversity of perspectives will improve the level of creativity. • Problem-Solving Argument. Heterogeniety in decision-making and problem-solving groups typically produces better decisions because of a wider range of perspectives as well as more thorough analysis. Jim Schiro, CEO of PriceWaterhouseCoopers, explains, “When you make a genuine commitment to diversity, you bring a greater diversity of ideas, approaches, and experiences and abilities that can be applied to client problems. After all, six people with different perspectives have a better shot at solving complex problems than sixty people who all think alike.” 60 • Organizational Flexibility Argument . With effective programs to enhance workplace diversity, systems become less determinant, less standardized, and therefore more fluid. Such fluidity should lead to greater flexibility to react to environmental changes. Reactions should be faster and less costly. 4-143 143

The Vital Role of Social Capital
Attraction, development and retention of talent is a necessary but not sufficient condition for creating competitive advantage Knowledge workers often are more loyal to their colleagues and profession than to their employer 4-144

How Social Capital Helps Attract and Retain Talent
Hiring via personal (social) networks Some job candidates may bring other talent with them Emigration of talent from an organization to form start-up ventures Can provide mechanism for obtaining resources and information from outside the organization 4-145

Social Networks: Implications
Social network analysis depicts the pattern of interactions among individuals and helps to diagnose effective and ineffective patterns helps identify groups or clusters of individuals that comprise the network, individuals who link the clusters, and other network members. helps diagnose communication patterns and communication effectiveness 4-146

A Simplified Social Network
Exhibit 4.6 4-147

Knowledge of Social Networks
Closure the degree to which all members of a social network have relationships with other group members. Bridging relationships relationships in a social network that connect otherwise disconnected people. structural holes structural holes social gaps between groups in a social network where there are few relationships bridging the groups. 4-148 148

Knowledge of Social Networks
Social networks deliver three unique advantages: Private information Access to diverse skill sets Power 4-149

The Potential Downside of Social Capital
Groupthink a tendency not to question shared beliefs Tendency to develop dysfunctional human resource practices. Can be expensive in terms of financial resources and managerial commitment 4-150

Using Technology to Leverage Human Capital and Knowledge
Sharing knowledge and information Conserves resources Develops products and services Creates new opportunities Technology can leverage human capital and knowledge Within the organization With customers With suppliers 4-151 151

Electronic Teams: Using Technology to Enhance Collaboration
team of individuals that completes tasks primarily through communication. Challenges However, there are challenges associated with making e-teams effective. Successful action by both traditional teams and e-teams requires that: • Members identify who among them can provide the most appropriate knowledge and resources, and, • E-team leaders and key members know how to combine individual contributions in the most effective manner for a coordinated and appropriate response. 4-152 152

Advantages of electronic teams have the potential to acquire a broader range of “human capital” can be very effective in generating “social capital” Challenges However, there are challenges associated with making e-teams effective. Successful action by both traditional teams and e-teams requires that: • Members identify who among them can provide the most appropriate knowledge and resources, and, • E-team leaders and key members know how to combine individual contributions in the most effective manner for a coordinated and appropriate response. 4-153 153

Challenges of electronic teams teams suffer processes loss because of low cohesion, low trust among members, a lack of appropriate norms or standard operating procedures, or a lack of shared understanding among team members about their tasks. 4-154

Challenges of electronic teams (cont.) members are more geographically dispersed, and become more susceptible to the risk factors that can create process loss 4-155

Codifying Knowledge for Competitive Advantage
Tacit knowledge Personal experience Shared only with the consent and participation of the individual Explicit (codified) knowledge Can be documented Can be widely distributed Can be easily replicated Can be reused many times at low cost 4-156

QUESTION The use of information technology has increased in recent years in many organizations. This has helped to: Communicate information efficiently Make more effective use of time in every situation Restrict social network growth Create smaller social networks Answer: A - communicate information efficiently 4-157 157

Protecting the Intellectual Assets of the Organization
Intellectual property rights are more difficult to define and protect than property rights for physical assets If intellectual property rights are not reliably protected by the state, there will be no incentive to develop new products and services. 4-158

Dynamic capabilities a firm’s capacity to build and protect a competitive advantage, which rests on knowledge, assets, competencies, complementary assets, and technologies. 4-159

Dynamic capabilities include the ability to sense and seize new opportunities, generate new knowledge, and reconfigure existing assets and capabilities. 4-160

Business-Level Strategy: Creating and Sustaining Competitive Advantages
Chapter Five McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO5.1 The central role of competitive advantage in the study of strategic management and the three generic strategies: overall cost leadership, differentiation, and focus. LO5.2 How the successful attainment of generic strategies can improve a firm’s relative power vis-à-vis the five forces that determine an industry’s average profitability. LO5.3 The pitfalls managers must avoid in striving to attain generic strategies. LO5.4 How firms can effectively combine the generic strategies of overall cost leadership and differentiation. 5-162

LO5.5 What factors determine the sustainability of a firm’s competitive advantage. LO5.6 How Internet-enabled business models are being used to improve strategic positioning. LO5.7 The importance of considering the industry life cycle to determine a firm’s business-level strategy and its relative emphasis on functional area strategies and value-creating activities. LO5.8 The need for turnaround strategies that enable a firm to reposition its competitive position in an industry. 5-163

Three Generic Strategies
Exhibit 5.1 5-164

Overall cost leadership Low-cost-position relative to a firm’s peers Manage relationships throughout the entire value chain Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 5-165

Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership 5-166

Example Companies pursuing an overall cost leadership strategy
McDonalds Wal-Mart Companies pursuing a differentiation strategy Harley Davison Apple Companies pursuing a focus strategy Rolex Lamborghini Encourage students to evaluate these companies as you discuss these strategies further in the following slides. 5-167 167

Competitive Advantage and Business Performance
Exhibit 5.2 5-168

Overall Cost Leadership
Tight set of interrelated tactics that includes: Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in all activities in the firm’s value chain Tight set of interrelated tactics that includes: Aggressive construction of efficient-scale facilities Vigorous pursuit of cost reductions from experience Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in all activities in the firm’s value chain 5-169

Experience curve refers to how business “learns” to lower costs as it gains experience with production processes with experience, unit costs of production decline as output increases in most industries 5-170

Competitive parity a firm’s achievement of similarity, or being “on par,” with competitors with respect to low cost, differentiation, or other strategic product characteristic. A firm must attain competitive parity on the basis of differentiation relative to competitors 5-171

Comparing Experience Curve Effects
Exhibit 5.4 5-172

Improving Competitive Position vis-à-vis the Five Forces
An overall low-cost position Protects a firm against rivalry from competitors Protects a firm against powerful buyers Provides more flexibility to cope with demands from powerful suppliers for input cost increases Provides substantial entry barriers from economies of scale and cost advantages Puts the firm in a favorable position with respect to substitute products 5-173

Pitfalls of Overall Cost Leadership Strategies
Too much focus on one or a few value-chain activities All rivals share a common input or raw material The strategy is imitated too easily A lack of parity on differentiation Erosion of cost advantages when the pricing information available to customers increases 5-174

Differentiation Differentiation strategy
a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industry-wide as unique and valued by customers. Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique 5-175

Differentiation Prestige or brand image Technology Innovation Features
Customer service Dealer network 5-176

Differentiation: Improving Competitive Position
Creates higher entry barriers due to customer loyalty Provides higher margins that enable the firm to deal with supplier power Establishes customer loyalty and hence less threat from substitutes Creates higher entry barriers due to customer loyalty Provides higher margins that enable the firm to deal with supplier power Reduces buyer power because buyers lack suitable alternative Reduces supplier power due to prestige associated with supplying to highly differentiated products Establishes customer loyalty and hence less threat from substitutes 5-177

Potential Pitfalls of Differentiation Strategies
Uniqueness that is not valuable Too much differentiation Too high a price premium Differentiation that is easily imitated Diffusion of brand identification through product-line extensions Perceptions of differentiation may vary between buyers and sellers Dilution of brand identification through product-line extensions Perceptions of differentiation may vary between buyers and sellers 5-178

QUESTION High product differentiation is generally accompanied by
Higher market share Decreased emphasis on competition based on price Higher profit margins and lower costs Significant economies of scale B. Decreased emphasis on competition based on price 5-179 179

Focus Focus is based on the choice of a narrow competitive scope within an industry Firm selects a segment or group of segments (niche) and tailors its strategy to serve them Firm achieves competitive advantages by dedicating itself to these segments exclusively 5-180

Focus Cost focus Differentiation focus
firm strives to create a cost advantage in its target segment Differentiation focus firm seeks to differentiate in its target market 5-181

Focus: Improving Competitive Position
Creates barriers of either cost leadership or differentiation, or both Used to select niches that are least vulnerable to substitutes or where competitors are weakest 5-182

Pitfalls of Focus Strategies
Erosion of cost advantages within the narrow segment Focused products and services still subject to competition from new entrants and from imitation Focusers can become too focused to satisfy buyer needs 5-183

Three Combination Approaches
Automated and flexible manufacturing systems Exploiting the profit pool concept for competitive advantage Coordinating the “extended” value chain by way of information technology Mass customization a firm’s ability to manufacture unique products in small quantities at low cost. Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy Goal of combination strategy is to provide unique value in an efficient manner 5-184 184

U.S. Automobile Industry’s Profit Pool
Exhibit 5.8 5-185

Pitfalls of Combination Strategies
Firms that fail to attain both strategies may end up with neither and become “stuck in the middle” Underestimating the challenges and expenses associated with coordinating value creating activities in the extended value chain Miscalculating sources of revenue and profit pools in the firm’s industry Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain 5-186

Internet-Enabled Low Cost Leader Strategies
Direct access to progress reports and the ability for customers to periodically check work in progress is minimizing rework. Collaborative design efforts using Internet technologies that link designers, materials suppliers, and manufacturers are reducing the costs and speeding the process of new product development. Exhibit 5.9 5-187

Internet-Enabled Differentiation Strategies
Personalized online access provides customers with their own “site within a site” in which their prior orders, status of current orders, and requests for future orders are processed directly on the supplier’s website. Online access to real-time sales and service information is being used to empower the sales force and continually update R&D and technology development efforts. Exhibit 5.10 5-188

Internet-Enabled Focus Strategies
Virtual organizing and online “officing” are being used to minimize firm infrastructure requirements. Procurement technologies that use Internet software to match buyers and sellers are highlighting specialized buyers and drawing attention to smaller suppliers. Exhibit 5.11 5-189

Industry Life-Cycle Stages: Strategic Implications
refers to the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry Emphasis on strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle 5-190 190

Stages of the Industry Life Cycle
Exhibit 5.12 5-191

QUESTION The most likely time to pursue a harvest strategy is in a situation of High growth Strong competitive advantage Mergers and acquisitions Decline in the market life cycle D. Decline in the market life cycle 5-192 192

Strategies in the Introduction Stage
the first stage of the industry life cycle, characterized by (1) new products that are not known to customers, (2) poorly defined market segments, (3) unspecified product features, (4) low sales growth, (5) rapid technological change, (6) operating losses, and (7) a need for financial support. 5-193

Industry Life-Cycle Strategies
For the Introduction Stage: Develop product and get users to try it Generate exposure so product becomes “standard” 5-194

Growth stage The second stage of the product life cycle, characterized by (1) strong increases in sales; (2) growing competition; (3) developing brand recognition; and (4) a need for financing complementary value-chain activities such as marketing, sales, customer service, and research and development. 5-195

For the Growth Stage: Brand recognition Differentiated products Financial resources to support value-chain activities 5-196

Maturity stage The third stage of the product life cycle, characterized by (1) slowing demand growth, (2) saturated markets, (3) direct competition, (4) price competition, and (5) strategic emphasis on efficient operations. Reverse positioning, breakaway positioning 5-197

Decline stage The fourth stage of the product life cycle, characterized by (1) falling sales and profits, (2) increasing price competition, and (3) industry consolidation. 5-198

Strategies in the Decline Stage
For the Decline Stage Maintaining Harvesting Exiting the market Consolidation 5-199

Turnaround Strategies in the Life Cycle
Turnaround strategy a strategy that reverses a firm’s decline in performance and returns it to growth and profitability. Asset and cost surgery Selective product and market pruning Piecemeal productivity improvements • Asset and cost surgery. Very often, mature firms tend to have assets that do not produce any returns. These include real estate, buildings, etc. Outright sales or sale and leaseback free up considerable cash and improve returns. Investment in new plants and equipment can be deferred. Firms in turnaround situations try to aggressively cut administrative expenses and inventories and speed up collection of receivables. Costs also can be reduced by outsourcing production of various inputs for which market prices may be cheaper than in-house production costs. • Selective product and market pruning. Most mature or declining firms have many product lines that are losing money or are only marginally profitable. One strategy is to discontinue such product lines and focus all resources on a few core profitable areas. For example, in the early 1980s, faced with possible bankruptcy, Chrysler Corporation sold off all its nonautomotive businesses as well as all its production facilities abroad. Focus on the North American market and identification of a profitable niche—namely, minivans—were keys to their eventual successful turnaround. • Piecemeal productivity improvements. There are many ways in which a firm can eliminate costs and improve productivity. Although individually these are small gains, they cumulate over a period of time to substantial gains. Improving business processes by reengineering them, benchmarking specific activities against industry leaders, encouraging employee input to identify excess costs, increasing capacity utilization, and improving employee productivity lead to a significant overall gain. 5-200 200

Corporate-Level Strategy: Creating Value through Diversification
Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO6.1 The reasons for the failure of many diversification efforts. LO6.2 How managers can create value through diversification initiatives. LO6.3 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power. 6-202

LO6.4 How corporations can use unrelated diversification to attain synergistic benefits trough corporate restructuring, parenting, and portfolio analysis. LO6.5 The various means of engaging in diversification-mergers and acquisitions, joint ventures/strategic alliances, and internal development. LO6.6 Managerial behaviors that can erode the creation of value. 6-203

Making Diversification Work
the process of firms expanding their operations by entering new businesses. 6-204

What businesses should a corporation compete in? How should these businesses be managed to jointly create more value than if they were freestanding units? 6-205

Diversification initiatives must create value for shareholders Mergers and acquisitions Strategic alliances Joint ventures Internal development Diversification should be synergistic 6-206

Related businesses (horizontal relationships) Sharing tangible resources Sharing intangible resources Unrelated businesses (hierarchical relationships) Value creation derives from corporate office Leveraging support activities 6-207

Related Diversification
a firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. 6-208

Related Diversification
Economies of scope cost savings from leveraging core competencies or sharing related activities among businesses in a corporation. Leverage or reuse key resources Favorable reputation Expert staff Management skills Efficient purchasing operations Existing manufacturing facilities 6-209 209

QUESTION McKesson, a large distribution company, sells many product lines such as pharmaceuticals and liquor through its super warehouses. This is an example of Achieving economies of scope through related diversification Achieving market power through related diversification Attaining the benefits of restructuring through unrelated diversification Attaining the benefits of parenting through unrelated diversification Answer: A. Achieving economies of scope through related diversification 6-210 210

Leveraging Core Competencies
a firm’s strategic resources that reflect the collective learning in the organization. 6-211

Leveraging Core Competencies
Core competencies reflect the collective learning in a firm: How to coordinate diverse production skills How to integrate multiple streams of technologies How to market diverse products and services 6-212

Three Criteria of Core Competencies
Core competencies must enhance competitive advantages by creating superior customer value Different businesses in the firm must be similar in at least one important way related to the core competence Core competencies must be difficult for competitors to imitate or find substitutes for Core competencies must enhance competitive advantages by creating superior customer value Develop strengths relative to competitors Build on skills and innovations Appeal to customers Different businesses in the firm must be similar in at least one important way related to the core competence Not essential that products or services themselves be similar Is essential that one or more elements in the value chain require similar essential skills Brand image is an example Core competencies must be difficult for competitors to imitate or find substitutes for Easily imitated or replicated core competencies are not a sound basis for sustainable advantages Specialized technical skills acquired only in company work experience are an example 6-213 213

QUESTION Philip Morris bought Miller Brewing and used its marketing expertise to improve Miller's market share. This justification for diversification is best described as Utilizing common infrastructures Capitalizing on core competencies Reducing corporate risk Using portfolio analysis Answer: B. Capitalizing on core competencies 6-214 214

Sharing Activities Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units Common manufacturing facilities Distribution channels Sales forces sharing activities having activities of two or more businesses’ value chains done by one of the businesses. 6-215 215

Sharing Activities Sharing activities provide two payoffs Cost savings
Revenue enhancements 6-216

Market Power Market power
firms’ abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment. 6-217

Market Power Pooled negotiating power Vertical integration
The improvement in bargaining position relative to suppliers and customers. Vertical integration an expansion or extension of the firm by integrating preceding or successive production processes. 6-218

Pooled Negotiating Power
Similar businesses working together can have stronger bargaining position relative to Suppliers Customers Competitors Abuse of bargaining power may affect relationships with customers, suppliers and competitors 6-219

Vertical Integration Exhibit 6.3 6-220

Vertical Integration Benefits
A secure source of raw materials or distribution channels. Protection of and control over valuable assets. Access to new business opportunities. Simplified procurement and administrative procedures. Vertical integration occurs when a firm becomes its own supplier or distributor. That is, it represents an expansion or extension of the firm by integrating preceding or successive production processes. 6-221 221

Vertical Integration Risks
Costs and expenses associated with increased overhead and capital expenditures. Loss of flexibility resulting from large investments. Problems associated with unbalanced capacities along the value chain. Additional administrative costs associated with managing a more complex set of activities. 6-222

Making Vertical Integration Decisions
Is the company satisfied with the quality of the value that our present suppliers and distributors are providing? Are there activities in our industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? Is there a high level of stability in the demand for the organization’s products? 6-223

Making Vertical Integration Decisions (cont.)
Do we have the necessary competencies to execute the vertical integration strategies? Will the vertical integration initiative have potential negative impacts on our stakeholders? 6-224

Transaction Cost Perspective
the choice of a transaction’s governance structure, is influenced by transaction costs, such as search, negotiating, contracting, monitoring, and enforcement costs 6-225

Unrelated Diversification
a firm entering a different business that has little horizontal interaction with other businesses of a firm. 6-226

Corporate Parenting and Restructuring
Parenting advantage the positive contributions of the corporate office to a new business as a result of expertise and support provided 6-227

Corporate Parenting and Restructuring
The intervention of the corporate office in a new business that substantially changes the assets, capital structure, and/or management restructuring the intervention of the corporate office in a new business that substantially changes the assets, capital structure, and/or management, including selling off parts of the business, changing the management, reducing payroll and unnecessary sources of expenses, changing strategies, and infusing the new business with new technologies, processes, and reward systems. 6-228 228

Corporate Restructuring
Corporate management must Have insight to detect undervalued companies or businesses with high potential for transformation Have requisite skills and resources to turn the businesses around Can involve changes in Assets Capital Management Asset Restructuring: The sale of unproductive assets, or even whole lines of businesses, that are peripheral. Capital Restructuring: Changing the debt-equity mix, or the mix between different classes of debt or equity. Management Restructuring: Changes in the composition of the top management team, organization structure, and reporting relationships. 6-229 229

Portfolio Management Portfolio management
assessing the competitive position of a portfolio of businesses within a corporation, suggesting strategic alternatives for each business identifying priorities for the allocation of resources across the businesses. 6-230

BCG Portfolio Matrix Key
Each circle represents one of the firm’s business units Size of circle represents the relative size of the business unit in terms of revenue 6-231

Example Church & Dwight has a well balanced portfolio of products, which includes Arm & Hammer Trojan condoms Oxi Clean AIM toothpastes First Response Nair Xtra laundry detergent Brillo Source: 6-232

Limitations of Portfolio Management
SBUs compared on only two dimensions SBUs viewed as stand-alone entities Process becomes largely mechanical Reliance on “strict rules” regarding resource allocation across SBUs can be detrimental they compare SBUs on only two dimensions, making the implicit but erroneous assumption that (1) those are the only factors that really matter and (2) every unit can be accurately compared on that basis. Second, the approach views each SBU as a stand-alone entity, ignoring common core business practices and value-creating activities that may hold promise for synergies across business units. Third, unless care is exercised, the process becomes largely mechanical, substituting an oversimplified graphical model for the important contributions of the CEO’s (and other corporate managers') experience and judgment. Fourth, the reliance on “strict rules” regarding resource allocation across SBUs can be detrimental to a firm’s long-term viability. For example, according to one study, over one-half of all the businesses that should have been cash users (based on the BCG matrix) were instead cash providers. 41 Finally, while colorful and easy to comprehend, the imagery of the BCG matrix can lead to some troublesome and overly simplistic prescriptions 6-233 233

Means to Achieve Diversification
Acquisitions or mergers Pooling resources of other companies with a firm’s own resource base Joint venture Strategic alliance Internal development Corporate entrepreneurship 6-234

Mergers and Acquisitions
Can be a means of obtaining valuable resources that can help an organization expand its product offerings and services Can lead to consolidation within an industry and can force other players to merge Corporations can also enter new market segments by way of acquisitions Can be a means of obtaining valuable resources that can help an organization expand its product offerings and services Can provide the opportunity for firms to attain the three bases of synergy—leveraging core competencies, sharing activities, and building market power Can lead to consolidation within an industry and can force other players to merge Corporations can also enter new market segments by way of acquisitions 6-235

Limitations Competing firms often can imitate any advantages realized or copy synergies that result from the M&A. There can be many cultural issues that may doom the intended benefits from M&A endeavors. The takeover premium that is paid for an acquisition typically is very high Competing firms often can imitate any advantages realized or copy synergies that result from the M&A. Managers’ credibility and ego can sometimes get in the way of sound business decisions. There can be many cultural issues that may doom the intended benefits from M&A endeavors. 6-236

Strategic Alliances and Joint Ventures
Introduce successful product or service into a new market Lacks requisite marketing expertise Join other firms to reduce manufacturing (or other) costs in the value chain Pool capital, value-creating activities, facilities 6-237

Strategic Alliances and Joint Ventures
Develop or diffuse new technologies Use expertise of two or more companies Develop products technologically beyond the capability of the companies acting independently 6-238

Unmet Expectations: Strategic Alliances and Joint Ventures
Improper partner Each partner must bring desired complementary strengths to partnership Strengths contributed by each should be unique Partners must be compatible Partners must trust one another 6-239

Managerial Motives Can Erode Value Creation
Growth for growth’s sake Egotism Antitakeover tactics Greenmail Golden parachute Poison pills greenmail a payment by a firm to a hostile party for the firm’s stock at a premium, made when the firm’s management feels that the hostile party is about to make a tender offer. golden parachute a prearranged contract with managers specifying that, in the event of a hostile takeover, the target firms managers will be paid a significant severance package 6-240 240

International Strategy: Creating Value in Global Markets
Chapter Seven McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO7.1 The importance of international expansion as a viable diversification strategy. LO7.2 The sources of national advantage, that is, why an industry in a given country is more (or less) successful than the same industry in another country. LO7.3 The motivations (or benefits) and the risks associated with international expansion, including the emerging trend for greater offshoring and outsourcing activity. 7-242

LO7.4 The two opposing forces—cost reduction and adaptation to local markets—that firms face when entering international markets. LO7.5 The advantages and disadvantages associated with each of the four basic strategies: international, global, multi-domestic, and transnational. LO7.6 The difference between regional companies and truly global companies. LO7.7 The four basic types of entry strategies and the relative benefits and risks associated with each of them. 7-243

The Global Economy: A Brief Overview
Globalization the increase in international exchange, including trade in goods and services as well as exchange of money, information, ideas, and information. the growing similarity of laws, rules, norms, values, and ideas across countries. 7-244

The Global Economy: A Brief Overview
The economies of East Asia have attained rapid growth Income in Latin America grew by only 6 percent in the past two decades Average incomes in sub- Saharan Africa and the old Eastern European bloc have actually declined 7-245

Factors Affecting a Nation’s Competitiveness
Factor endowments The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry. Demand conditions The nature of home-market demand for the industry’s product or service. 7-246

Factors Affecting a Nation’s Competitiveness (cont.)
Related and supporting industries The presence or absence in the nation of supplier industries and other related industries that are internationally competitive. 7-247

Factors Affecting a Nation’s Competitiveness (cont.)
Firm strategy, structure, and rivalry The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry. 7-248

Factor Endowments To achieve competitive advantage, factors of production must be developed Industry specific Firm specific The pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed 7-249

Demand Conditions Demanding consumers drive firms in a country to
Meet high standards Upgrade existing products and services Create innovative products and services Demands that consumers place on an industry for goods and services Demanding consumers push firms to move ahead of companies from other nations 7-250

Related and Supporting Industries
Enable firms to manage inputs more effectively Allow joint efforts among firms Strong supplier base adds efficiency to downstream activities Competitive supplier base lets a firm obtain inputs using cost-effective, timely methods 7-251

Firm Strategy, Structure and Rivalry
Rivalry is intense in nations with conditions of: Strong consumer demand Strong supplier bases High new entrant potential from related industries 7-252

Firm Strategy, Structure and Rivalry
Competitive rivalry increases the efficiency with which firms Develop within the home country Market within the home country Distribute products and services within the home country 7-253

India’s Diamond in Software
Exhibit 7.1 7-254

QUESTION All of the factors below have made India's software services industry extremely competitive on a global scale except: A. Large pool of skilled workers B. Large network of public and private educational institutions C. Tax and antitrust legislation that protect the dominant players in the industry D. Large, growing market and sophisticated customers Answer: C. Tax and antitrust legislation that protect the dominant players in the industry 7-255

Motivations for International Expansion
Increase the size of potential markets Taking advantage of arbitrage opportunities Extend a product’s life cycle Optimize the location of value chain activities Explore reverse innovation Optimize the physical location for every activity in its value chain Performance enhancement Cost reduction Risk reduction 7-256

International Country Risk Ratings
Exhibit 7.3 7-257

Potential Risks of International Expansion
Political and economic risk Social unrest Military turmoil Demonstrations Violent conflicts and terrorism Laws and their enforcement 7-258

Example: Transparency International Corruption Perceptions Index
The 2010 Transparency International Corruption Perceptions Index (CPI) reveals the most corrupt countries in the world The scores range from ten (squeaky clean) to zero (highly corrupt). The five most corrupt countries are Somalia (CPI Score: 1.1) Myanmar (CPI Score: 1.4) Afghanistan (CPI Score 1.4) Iraq (CPI Score: 1.5) Sudan (CPI Score: 1.6) Uzbekistan (CPI Score: 1.6) The least corrupt countries are Finland, Iceland, and New Zealand. Haiti is perceived to be the most corrupt. Corruption is defined by this index as the use of public office for private gains. 7-259

Currency risks Currency exchange fluctuations Appreciation of the U.S. dollar currency risk potential threat to a firm’s operations in a country due to fluctuations in the local currency’s exchange rate. 7-260

Management risks Culture Customs Language Income levels Customer preferences Distribution system management risk potential threat to a firm’s operations in a country due to the problems that managers have making decisions in the context of foreign markets. 7-261

Outsourcing Outsourcing
occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house. 7-262

Offshoring Offshoring
takes place when a firm decides to shift an activity that they were previously performing in a domestic location to a foreign location. 7-263

Two Opposing Pressures: Reducing Costs and Adapting to Local Markets
Strategies that favor global products and brands Should standardize all of a firm’s products for all of their worldwide markets Should reduce a firm’s overall costs by spreading investments over a larger market 7-264

Three assumptions Customer needs and interests worldwide are becoming more homogeneous People are willing to sacrifice product preferences for lower prices at high quality Economies of scale in production and marketing can be achieved through supplying global markets 7-265

Assumptions may not always be true Product markets vary widely between nations In many product and service markets, there appears to be a growing interest in multiple product features, quality and service 7-266

Technology permits flexible production Cost of production may not be critical to product cost Firm’s strategy should not be product-driven 7-267

Opposing Pressures and Four Strategies
Exhibit 7.4 7-268

International Strategy
An international strategy is based on diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets. The primary goal of the strategy is worldwide exploitation of the parent firm’s knowledge and capabilities. International strategy a strategy based on firms’ diffusion and adaptation of the parent companies’ knowledge and expertise to foreign markets, used in industries where the pressures for both local adaptation and lowering costs are low. 7-269

Strengths and Limitations of International strategies
Exhibit 7.5 7-270

Global Strategy Competitive strategy is centralized and controlled largely by corporate office Emphasizes economies of scale Global strategy a strategy based on firms’ centralization and control by the corporate office, with the primary emphasis on controlling costs, and used in industries where the pressure for local adaptation is low and the pressure for lowering costs is high. 7-271

Strengths and Limitations of Global Strategies
Exhibit 7.6 7-272

Multi-domestic Strategy
Emphasis is differentiating products and services to adapt to local markets Authority is more decentralized Multi-domestic strategy a strategy based on firms’ differentiating their products and services to adapt to local markets, used in industries where the pressure for local adaptation is high and the pressure for lowering costs is low. 7-273

Strengths and Limitations of Multi-domestic Strategies
Exhibit 7.7 7-274

Transnational Strategy
Optimization of tradeoffs associated with efficiency, local adaptation, and learning Firm’s assets and capabilities are dispersed according to the most beneficial location for a specific activity transnational strategy a strategy based on firms’ optimizing the trade-offs associated with efficiency, local adaptation, and learning, used in industries where the pressures for both local adaptation and lowering costs are high. 7-275

Strengths and Limitations of Transnational Strategies
Exhibit 7.8 7-276

Entry Modes of International Expansion
Exhibit 7.10 7-277

Exporting Producing goods in one country to sell to residents of another country. Licensing company receives a fee in exchange for the right to use its intellectual property. 7-278

Wholly owned subsidiary a business in which a multinational company owns 100 percent of the stock. 7-279

QUESTION Fees that a multinational receives from a foreign licensee in return for its use of intellectual property are usually called: Transfer prices Dividends Royalties Intra-corporate inflows Answer: C. Royalties 7-280

Entrepreneurial Strategy and Competitive Dynamics
Chapter Eight McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO8.1 The role of new ventures and small businesses in the U.S. economy. LO8.2 The role of opportunities, resources, and entrepreneurs in successfully pursuing new ventures. LO8.3 Three types of entry strategies—pioneering, initiative, and adaptive—commonly used to launch a new venture. 8-282

LO8.4 How the generic strategies of overall cost leadership, differentiation, and focus are used by new ventures and small businesses. LO8.5 How competitive actions, such as the entry of new competitors into a marketplace, may launch a cycle of actions and reactions among close competitors. LO8.6 The components of competitive dynamics analysis— new competitive action, threat analysis, motivation and capability to respond, types of competitive actions, and likelihood of competitive reaction. 8-283

Recognizing Entrepreneurial Opportunities
Entrepreneurship the creation of new value by an existing organization or new venture that involves the assumption of risk. 8-284

Recognizing Entrepreneurial Opportunities
New value can be created in: Start-up ventures Major corporations Family-owned businesses Non-profit organizations Established institutions 8-285

Entrepreneurial Opportunities
Start-ups Current or past work experiences Hobbies that grow into businesses or lead to inventions Suggestions by friends or family Chance events Change 8-286

Established firms Needs of existing customers Suggestions by suppliers Technological developments that lead to new advances Change 8-287

U.S. Small Companies by Industry
Exhibit 8.1 8-288

Opportunity recognition the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. 8-289

Opportunity Analysis Framework
Exhibit 8.3 8-290

QUESTION The majority of entrepreneurial start-ups are financed with
Bank financing Public financing Venture capital financing Personal savings and the contributions of family and friends Answer: D. Personal savings and the contributions of family and friends 8-291

Discovery phase the process of becoming aware of a new business concept. May be spontaneous and unexpected May occur as the result of deliberate search for new venture projects or creative solutions to business problems 8-292

Opportunity Recognition Process
Opportunity evaluation phase involves analyzing an opportunity to determine whether it is viable and strong enough to be developed into a full-fledged new venture. Talk to potential target customers Discuss it with production or logistics managers Conduct feasibility analysis 8-293

Characteristics of Good Opportunities
Attractive Achievable Durable Value creating • Attractive. The opportunity must be attractive in the marketplace; that is, there must be market demand for the new product or service. • Achievable. The opportunity must be practical and physically possible. • Durable. The opportunity must be attractive long enough for the development and deployment to be successful; that is, the window of opportunity must be open long enough for it to be worthwhile. • Value creating. The opportunity must be potentially profitable; that is, the benefits must surpass the cost of development by a significant margin. 8-294

Sources of Capital for Start-Up Firms
Exhibit 8.5 8-295

Entrepreneurial Resources
Human capital Social capital Government resources Small Business Administration Government contracting State and local governments 8-296

Entrepreneurial Leadership
Launching a new venture requires a special kind of leadership Courage Belief in one’s convictions Energy to work hard 8-297

Three characteristics Vision Dedication and drive Commitment to excellence 8-298

Vision may be entrepreneur’s most important asset Ability to envision realities that do not yet exist Exercise a kind of transformational leadership Able to share with others 8-299

Dedication and drive are reflected in hard work Patience Stamina Willingness to work long hours Internal motivation Intellectual commitment to the enterprise Strong enthusiasm for work and life 8-300

To achieve excellence, entrepreneurs must Know the customer Provide quality products and services Pay attention to details Continuously learn Surround themselves with good people 8-301

Example: 10 Management Lessons
It’s all about perseverance Understand the value of mentorship and teamwork Stick to your niche Stay on top of news that affects your clients Communication is key Capitalization is crucial Communicate unwavering honesty and integrity Stay on top of the curve Take ownership in your clients’ success Never stop marketing Source: Pierce, Sarah. “10 Management Lessons From a Young Entrepreneur,” December 17, 2003. 8-302 302

Entrepreneurial Strategy
Best strategy for the enterprise will be determined to some extent by A viable opportunity, sufficient resources, and skilled and dedicated entrepreneurial team Other conditions in the business environment 8-303

Entry Strategies Pioneering new entry
a firm’s entry into an industry with a radical new product or highly innovative service that changes the way business is conducted. 8-304

Entry Strategies Imitative new entry
a firm’s entry into an industry with products or services that capitalize on proven market successes and that usually has a strong marketing orientation. 8-305

Entry Strategies Adaptive new entry
a firm’s entry into an industry by offering a product or service that is somewhat new and sufficiently different to create value for customers by capitalizing on current market trends. 8-306

Examples of Adaptive New Entrants
Exhibit 8.6 8-307

Elements of a Blue Ocean Strategy
Create uncontested market space Make the competition irrelevant Create and capture new demand Break the value/cost tradeoff Pursue differentiation and low cost simultaneously. 8-308

Generic Strategies Overall cost leadership
Simple organizational structures More quickly upgrade technology and integrate feedback from the marketplace Make timely decisions that affect cost 8-309

Generic Strategies Differentiation Focus Use new technology
Deploy resources in a radical new way Focus Niche strategies fit the small business mold 8-310

Combination Strategies
Entrepreneurial firms are often in a strong position to offer a combination strategy Combine best features of low-cost, differentiation, and focus strategies Flexibility and quick decision-making ability of a small firm not laden with layers of bureaucracy 8-311

Competitive Dynamics Competitive dynamics
Intense rivalry, involving actions and responses, among similar competitors vying for the same customers in a marketplace. 8-312

Model of Competitive Dynamics
Exhibit 8.7 8-313

Why Do Companies Launch New Competitive Actions?
Improve market position Capitalize on growing demand Expand production capacity Provide an innovative new solution Obtain first mover advantages 8-314

Threat Analysis Threat analysis
A firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning. Market commonality Resource similarity market commonality the extent to which competitors are vying for the same customers in the same markets. resource similarity the extent to which rivals draw from the same types of strategic resources. 8-315

Question Aircraft makers Boeing and Airbus have a high degree of __________ because they make very similar products and have many buyers in common. Dynamic capabilities Market commonality First mover advantages Equity funding Answer: B. Market commonality 8-316

Five “Hardball” Strategies
Devastate rivals’ profit sanctuaries Plagiarize with pride Deceive the competition Unleash massive and overwhelming force Raise competitors’ costs 8-317

Types of Competitive Actions
Strategic actions Major commitments of distinctive and specific resources to strategic initiatives. Tactical actions Refinements or extensions of strategies usually involving minor resource commitments. 8-318

Likelihood of Competitive Reaction
How a competitor is likely to respond will depend on three factors Market dependence Competitor’s resources The reputation of the firm that initiates the action (actor’s reputation) 8-319

Choosing Not to React Forbearance Co-opetition
a firm’s choice of not reacting to a rival’s new competitive action. Co-opetition A firm’s strategy of both cooperating and competing with rival firms. 8-320

Strategic Control and Corporate Governance
Chapter Nine McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should have a good understanding of: LO9.1 The value of effective strategic control systems in strategy implementation. LO9.2 The key difference between “traditional” and “contemporary” control systems. LO9.3 The imperative for “contemporary” control systems in today’s complex and rapidly changing competitive and general environments. 9-322

LO9.4 The benefits of having the proper balance among the three levers of behavioral control: culture, rewards and incentives, and boundaries. LO9.5 The three key participants in corporate governance: shareholders, management (led by the CEO), and the board of directors. LO9.6 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. 9-323

Strategic Control Strategic control
the process of monitoring and correcting a firm’s strategy and performance Informational, behavioral two central aspects of strategic control: 2 (1) informational control, which is the ability to respond effectively to environmental change, and (2) behavioral control, which is the appropriate balance and alignment among a firm’s culture, rewards, and boundaries. 9-324

Ensuring Informational Control
Traditional control system strategies are formulated and top management sets goals strategies are implemented performance is measured against the predetermined goal set Process typically involves lengthy time lags, often tied to the annual planning cycle This “single-loop” learning control system simply compares actual performance to a predetermined goal Most appropriate when Environment is stable and relatively simple Goals and objectives can be measured with certainty Little need for complex measures of performance 9-325

Traditional Approach to Strategic Control
Exhibit 9.1 9-326

Traditional Approach to Strategic Control
Most appropriate when Environment is stable and relatively simple Goals and objectives can be measured with certainty Little need for complex measures of performance 9-327

Contemporary Approach to Strategic Control
Exhibit 9.2 9-328

Informational control a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization’s goals and strategies and the strategic environment. 9-329

Question Top managers at USA Today meet every Friday to review daily operational reports and year-to-date data. This is an example of Behavioral control Informational control Strategy formulation Strategy implementation Answer: B. Informational control 9-330

Informational Control
Primarily concerned with whether or not the organization is “doing the right things” Key question “Do the organization’s goals and strategies still ‘fit’ within the context of the current strategic environment?” 9-331

Informational Control
Two key issues Scan and monitor external environment (general and industry) Continuously monitor the internal environment 9-332

Behavioral control a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries. 9-333

Effectiveness of Contemporary Control Systems
Focus on constantly changing information that has potential strategic importance. The information is important enough to demand frequent and regular attention from all levels of the organization. The data and information generated are best interpreted and discussed in face-to-face meetings. The control system is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans. 9-334

Behavioral Control Behavioral control is focused on implementation—doing things right Three key control “levers” Culture Rewards Boundaries 9-335

Reasons for an increased emphasis on culture and rewards
The competitive environment is increasingly complex and unpredictable, demanding both flexibility and quick response to its challenges. The implicit long-term contract between the organization and its key employees has been eroded. 9-336

Building a Strong and Effective Culture
Organizational culture a system of shared values and beliefs that shape a company’s people, organizational structures, and control systems to produce behavioral norms. 9-337

Building a Strong and Effective Culture
Culture sets implicit boundaries (unwritten standards of acceptable behavior) Dress Ethical matters The way an organization conducts its business Culture acts as a means of reducing monitoring costs 9-338

Example: Wal-Mart A lot of Wal-Mart's success was attributed to the strong and pervasive culture at the company, which was developed and nurtured by founder Sam Walton. In over four decades of operation, Wal-Mart managed to retain most of the elements of culture it had when it first started out, as well as the entrepreneurial spirit which often drives startup companies to success. A lot of Wal-Mart's success was attributed to the strong and pervasive culture at the company, which was developed and nurtured by founder Sam Walton. In over four decades of operation, Wal-Mart managed to retain most of the elements of culture it had when it first started out, as well as the entrepreneurial spirit which often drives startup companies to success. The fact that the company's growth rate was often in double digits bears this out. Wal-Mart's culture was characterized by an orientation towards customer service and providing the best value at the lowest prices. 9-339

Sustaining an Effective Culture
Effective culture must be Cultivated Encouraged Fertilized Maintaining an effective culture Storytelling Rallies or pep talks by top executives 9-340

Motivating with Rewards and Incentives
Rewards and incentive systems Powerful means of influencing an organization’s culture Focuses efforts on high-priority tasks Motivates individual and collective task performance Can be an effective motivator and control mechanism 9-341

Motivating with Rewards and Incentives
Potential downside Subcultures may arise in different business units with multiple reward systems May reflect differences among functional areas, products, services and divisions 9-342

Characteristics of Effective Reward and Evaluation Systems
Exhibit 9.4 9-343

Setting Boundaries and Constraints
Focus efforts on strategic priorities Provide short-term objectives and action plans Specific and measurable Specific time horizon for attainment Achievable, but challenging 9-344

Setting Boundaries and Constraints
Improve operational efficiency and effectiveness Minimize improper and unethical conduct Rule-based controls are most appropriate in organizations with the following characteristics: • Environments are stable and predictable. • Employees are largely unskilled and interchangeable. • Consistency in product and service is critical. • The risk of malfeasance is extremely high 9-345

Question Effective boundaries and constraints:
Tend to inhibit efficiency and effectiveness Distract employees who are trying to focus on organizational priorities Minimize improper and unethical conduct Tend to limit organizational growth Answer: C. Minimize improper and unethical conduct 9-346

Organizational Control: Alternative Approaches
Exhibit 9.6 9-347

Evolving from Boundaries to Rewards and Culture
System of rewards and incentives coupled with a strong culture Hire the right people Training plays a key role Managerial role models are vital Reward systems clearly aligned with organizational goals and objectives 9-348

Role of Corporate Governance
the relationship among various participants in determining the direction and performance of corporations. primary participants are the shareholders, the management, and the board of directors.” 9-349

The Modern Corporation
A mechanism created to allow different parties to contribute capital, expertise, and labor for the maximum benefit of each party. Shareholders (investors) Limited liability Participate in the profits of the enterprise Limited involvement in the company’s affairs Management Run the company Does not personally have to provide the funds Board of directors Elected by shareholders Fiduciary obligation to protect shareholder interests 9-350

Agency Theory Deals with the relationship between
Principals – who are owners of the firm (stockholders) Agents – who are the people paid by principals to perform a job on their behalf (management) 9-351

Agency Theory: Two Problems
The conflicting goals of principals and agents, along with the difficulty of principals to monitor the agents, and The different attitudes and preferences towards risk of principals and agents. 9-352

Governance Mechanisms
Board of directors a group that has a fiduciary duty to ensure that the company is run consistently with the long-term interests of the owners, or shareholders, of a corporation and that acts as an intermediary between the shareholders and management. The Business Roundtable, representing the largest U.S. corporations, describes the duties of the board as follows: 1. Select, regularly evaluate, and, if necessary, replace the CEO. Determine management compensation. Review succession planning. 2. Review and, where appropriate, approve the financial objectives, major strategies, and plans of the corporation. 3. Provide advice and counsel to top management. 4. Select and recommend to shareholders for election an appropriate slate of candidates for the board of directors; evaluate board processes and performance. 5. Review the adequacy of the systems to comply with all applicable laws/regulations. 9-353

The New Rules for Directors
Exhibit 9.7 9-354

Governance Mechanisms
Shareholder activism actions by large shareholders, both institutions and individuals, to protect their interests when they feel that managerial actions diverge from shareholder value maximization. 9-355

TIAA-CREF’s Principles on the Role of Stock in Executive Compensation
Exhibit 9.8 9-356

External Governance Control Mechanisms
methods that ensure that managerial actions lead to shareholder value maximization and do not harm other stakeholder groups and that are outside the control of the corporate governance system. 9-357

External Governance Control Mechanisms
Market for corporate control Auditors Banks and analysts Regulatory bodies Media and public activists 9-358

Sarbanes-Oxley Act Auditors
Barred from certain types of non-audit work Not allowed to destroy records for five years Lead partners auditing a firm should be changed at least every five years 9-359

Sarbanes-Oxley Act CEOs and CFOs Executives
Must fully reveal off-balance sheet finances Vouch for the accuracy of information revealed Executives Must promptly reveal the sale of shares in firms they manage Are not allowed to sell shares when other employees cannot 9-360

Learning Objectives After reading this chapter, you should have a good understanding of: LO10.1 The growth patterns of major corporations and the relationship between a firm’s strategy and its structure. LO10.2 Each of the traditional types of organizational structure: simple, functional, divisional, and matrix LO10.3 The implications of a firm’s international operations for organizational structure. 10-362

LO10.4 Why there is no “one best way” to design strategic reward and evaluation systems, and the important contingent roles of business- and corporate-level strategies. LO10.5 The different types of boundaryless organizations—barrier-free modular, and virtual—and their relative advantages and disadvantages. LO10.6 The need for creating ambidextrous organizational designs that enable firms to explore new opportunities and effectively integrate existing operations. 10-363

Traditional Forms of Organizational Structure
refers to formalized patterns of interactions that link a firm’s tasks, technologies, and people 10-364

Traditional Forms of Organizational Structure
Structure provides a means of balancing two conflicting forces Need for the division of tasks into meaningful groupings Need to integrate the groupings for efficiency and effectiveness 10-365

Dominant Growth Patterns of Large Corporations
Exhibit 10.1 10-366

Simple Structure Simple Structure
An organizational form in which the owner-manager makes most of the decisions and controls activities, and the staff serve as an extension of the top executive. Simple structure is the oldest and most common organizational form Staff serve as an extension of the top executive’s personality Highly informal Coordination of tasks by direct supervision Decision making is highly centralized Little specialization of tasks, few rules and regulations, informal evaluation and reward system 10-367

Simple Structure Advantages Disadvantages Highly informal
Centralized decision making Little specialization Disadvantages Employees may not understand their responsibilities May take advantage of lack of regulation 10-368

QUESTION At ACME Corporation, work is divided into units that specialize in production, marketing, research and development, and other management tasks. This is an example of a Simple structure Functional structure Divisional structure Matrix structure Answer: B. Functional structure 10-369

Functional Structure Exhibit 10.2 10-370

Functional Structure Functional Structure
An organizational form in which the major functions of the firm, such as production, marketing, R&D, and accounting, are grouped internally. 10-371

Functional Structure Advantages Enhanced coordination and control
Centralized decision making Enhanced organizational-level perspective More efficient use of managerial and technical talent Facilitated career paths and development in specialized areas 10-372

Functional Structure Disadvantages
Impeded communication and coordination due to differences in values and orientations May lead to short-term thinking (functions vs. organization as a whole) Difficult to establish uniform performance standards 10-373

Divisional Structure Exhibit 10.3 10-374

Divisional Structure Divisional organizational structure
An organizational form in which products, projects, or product markets are grouped internally. Also called multidivisional structure or M-Form Organized around products, projects, or markets Each division includes its own functional specialists typically organized into departments Divisions are relatively autonomous and consist of products and services that are different from those of other divisions Division executives help determine product-market and financial objectives 10-375

Divisional Structure Advantages
Separation of strategic and operating control Quick response to important changes in external environment Minimal problems of sharing resources across functional departments Development of general management talent is enhanced 10-376

Divisional Structure Disadvantages Can be very expensive
Can be dysfunctional competition among divisions Differences in image and quality may occur across divisions Can focus on short-term performance 10-377

SBU Structure Strategic business unit (SBU) structure
An organizational form in which products, projects, or product market divisions are grouped into homogeneous units. Strategic business unit (SBU) structure Divisions with similar products, markets, and/or technologies are grouped into homogenous SBUs Task of planning and control at corporate office is more manageable May become difficult to achieve synergies across SBUs Appropriate when the businesses in a corporation’s portfolio do not have much in common Lower expenses and overhead, fewer levels in the hierarchy Inherent lack of control and dependence of CEO-level executives on divisional executives 10-378

SBU Structure Advantages Disadvantages
task of planning and control by the corporate office more manageable individual businesses can react more quickly to important changes Disadvantages may become difficult to achieve synergies additional level of management increases overhead expenses 10-379

Holding Company Structure
An organizational form in which the divisions have a high degree of autonomy both from other divisions and from corporate headquarters. 10-380

Holding Company Structure
Advantages cost savings associated with lower overhead autonomy increases the motivational level of divisional executives Disadvantages inherent lack of control and dependence limited staff support 10-381

Matrix Structure Exhibit 10.4 10-382

Matrix Structure Matrix organizational structure
an organizational form in which there are multiple lines of authority and some individuals report to at least two managers. 10-383

Matrix Structure Advantages Disadvantages
Facilitates the use of specialized personnel, equipment and facilities Provides professionals with a broader range of responsibility and experience Disadvantages Can cause uncertainty and lead to intense power struggles Working relationships become more complicated Decisions may take longer 10-384

International Operations: Implications for Organizational Structure
Three major contingencies influence structure adopted by firms with international operations Type of strategy driving the firm’s foreign operations Product diversity Extent to which the firm is dependent on foreign sales 10-385

International Operations: Implications for Organizational Structure
Structures used to manage international operations International division Geographic-area division Worldwide functional Worldwide product division Worldwide matrix 10-386

Global Start-Up Global start-up
a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. 10-387

QUESTION Strategic business unit (SBU) and holding company structures result from extensive Diversification Vertical integration International expansion Organizational flattening Answer: A. Diversification 10-388

Business-Level Strategy: Reward and Evaluation Systems
Exhibit 10.6 10-389

Types of Boundaries Vertical boundaries between levels in the organization’s hierarchy Horizontal boundaries between functional areas External boundaries between the firm and its customers, suppliers, and regulators Geographic boundaries between locations, cultures and markets 10-390

Boundaryless Organizational Designs
Organizations in which the boundaries, including vertical, horizontal, external, and geographic boundaries, are permeable. 10-391

The Barrier-Free Organization
An organizational design in which firms bridge real differences in culture, function, and goals to find common ground that facilitates information sharing and other forms of cooperative behavior. 10-392

Pros and Cons of Barrier-Free Structures
Exhibit 10.7 10-393

The Modular Organization
An organization in which non-vital functions are outsourced, which uses the knowledge and expertise of outside suppliers while retaining strategic control. 10-394

Pros and Cons of Modular Structures
Exhibit 10.8 10-395

The Virtual Organization
a continually evolving network of independent companies that are linked together to share skills, costs, and access to one another’s markets. 10-396

Example: Virtual Organization
This textbook and supplemental material was completed by a virtual team The authors are in Texas and New York The editors work in Illinois The compositors are in India The PowerPoint author works in South Carolina Deadlines are coordinated by the MH editor in Burr Ridge, IL to pull the book together 10-397

Pros and Cons of Virtual Structures
Exhibit 10.9 10-398

Boundaryless Organizations: Making Them Work
Factors facilitating effective coordination and integration of key activities Common culture and shared values Horizontal organization structures Horizontal systems and processes Communications and information technologies Human resource practices 10-399

Creating Ambidextrous Organizational Designs
Organization designs that attempt to simultaneously pursue modest, incremental innovations as well as more dramatic, breakthrough innovations. 10-400

Learning Objectives After reading this chapter, you should have a good understanding of: LO12.1 The importance of implementing strategies and practices that foster innovation. LO12.2 The challenges and pitfalls of managing corporate innovation processes. LO12.3 How corporations use new venture teams, business incubators, and product champions to create an internal environment and culture that promote entrepreneurial development. 12-402

LO12.4 How corporate entrepreneurship achieves both financial goals and strategic goals. LO12.5 The benefits and potential drawbacks of real options analysis in making resource deployment decisions in corporate entrepreneurship contexts. LO12.6 How an entrepreneurial orientation can enhance a firm’s efforts to develop promising corporate venture initiatives. 12-403

Managing Innovation Innovation
using new knowledge to transform organizational processes or create commercially viable products and services Latest technology, results of experiments, creative insights, competitive information 12-404

Example: Getting to ‘Aha’
There are “five disciplines” for creating what customers want Identify important customer needs Create solutions that fill those needs Build innovation teams Empower "innovation champions" who keep the effort on track Align the entire enterprise around creating value for customers Source: “Getting to ‘Aha!’,” Business Week. September 4, 2006. 12-405 405

Types of Innovation Product innovation
Efforts to create product designs Applications of technology to develop new products for end users More common during early stages of an industry’s life cycle Associated with differentiation strategies 12-406

Types of Innovation Process innovations
Improving efficiency of an organizational process Manufacturing systems and operations More likely to occur in later stages of an industry’s life cycle Associated with cost leader strategies 12-407

QUESTION Radical innovations Often result in quick profits
Often represent technological breakthroughs Usually apply to products and processes simultaneously Usually cannot be patented Answer: B. Often represent technological breakthroughs 12-408

Types of Innovation Radical innovation
Fundamental changes and breakthroughs Evoke major departures from existing practices Can be highly disruptive Can transform or revolutionize a whole industry 12-409

Types of Innovation Incremental innovation Enhance existing practices
Small improvements in products and processes Evolutionary applications within existing paradigms 12-410

Continuum of Radical and Incremental Innovations
Exhibit 12.1 12-411

Types of Innovation Sustaining innovations Disruptive innovations
extend sales in an existing market, usually by enabling new products or services to be sold at higher margins. Disruptive innovations overturn markets by providing an altogether new approach to meeting customer needs. 12-412

Challenges of Innovation
Seeds versus Weeds Experience versus Initiative Internal versus External staffing Building capabilities versus Collaborating Incremental versus Preemptive launch 12-413

Seeds versus Weeds Deciding the merits of innovative ideas
Seeds – likely to bear fruit Weeds – should be cast aside Dilemma Some innovation projects require considerable level of investment before merit can be determined 12-414

Experience versus Initiative
Deciding who will lead an innovation project Senior managers have experience and credibility and tend to be more risk averse Midlevel employees may be the innovators themselves and have more enthusiasm 12-415

Internal versus External Staffing
People drawn from inside the firm May have greater social capital Know the organization’s culture and routines May not be able to think outside the box People drawn from outside the firm Are costly to recruit, hire, train May have difficulty building relationships 12-416

Building Capabilities versus Collaborating
Firms can seek help Other departments Partner with other companies that bring resources and experience Partnerships Create dependencies and inhibit internal skills development Sharing benefits of innovation may create conflict 12-417

Incremental versus Preemptive Launch
Incremental launch Less risky Requires few resources Can undermine the project’s credibility if too tentative Large-scale launch Requires more resources Can effectively preempt a competitive response 12-418

Defining the Scope of Innovation
Firms must define the “strategic envelope” (scope of the innovation efforts) Firms ensure that their innovation efforts are not wasted on projects that are outside the firm’s domain of interest. 12-419

Defining the Scope of Innovation
In defining the strategic envelope, a firm should answer several questions How much will the innovation cost? How likely is it to actually become commercially viable? How much value will it add; that is, what will it be worth if it works? What will be learned if it does not pan out? 12-420

Managing the Pace of Innovation
Incremental innovation May be six months to two years May use a milestone approach driven by goals and deadlines Radical innovation Typically long term – 10 years or more Often involves open-ended experimentation and time-consuming mistakes 12-421

Staffing to Capture Value from Innovation
Create innovation teams with experienced players Require that employees seeking to advance their career serve in the new venture group 12-422

Staffing to Capture Value from Innovation (cont.)
Once people have experience with the new venture group, transfer them to mainstream management positions Separate the performance of individuals from the performance of the innovation. 12-423

Collaborating with Innovation Partners
To choose partners, firms need to ask what competencies they are looking for and what the innovation partner will contribute. Knowledge of markets Technology expertise Contacts with key players in an industry Innovation often requires collaborating with others who possess complementary knowledge and skills Partners can come from several sources Other personnel within the department Personnel within the firm but from another department Partners outside the firm Non-business sources, including research universities and the federal government 12-424

Corporate Entrepreneurship
the creation of new value for a corporation, through investments that create either new sources of competitive advantage or renewal of the value proposition. 12-425

Factors affecting Entrepreneurial Ventures
The use of teams in strategic decision making Whether the company is product or service oriented Whether its innovation efforts are aimed at product or process improvements The extent to which it is high-tech or low-tech 12-426

Rules for Fostering Innovation
Exhibit 12.3 12-427

Focused Approaches to Corporate Entrepreneurship
New venture group a group of individuals, or a division within a corporation, that identifies, evaluates, and cultivates venture opportunities. 12-428

New Venture Groups Involvement includes Innovation and experimentation
Coordinating with other corporate divisions Identifying potential venture partners Gathering resources Launching the venture 12-429

Focused Approaches to Corporate Entrepreneurship
Business incubator supports and nurtures fledgling entrepreneurial ventures until they can thrive on their own as stand-alone businesses. 12-430

Business Incubators Incubators provide some or all of the following functions Funding Physical space Business services Mentoring Networking 12-431

Dispersed Approaches to Corporate Entrepreneurship
Dedication to principles and practices of entrepreneurship is spread throughout the firm Ability to change is a core capability Stakeholders can bring new ideas or venture opportunities to anyone in the organization Entrepreneurial culture, Product champions Two related aspects of dispersed entrepreneurship Entrepreneurial culture Product champions 12-432

Entrepreneurial Culture
Culture of entrepreneurship Search for venture opportunities permeates every part of the organization Strategic leaders and the culture generate a strong impetus to innovate, take risks and seek out new venture opportunities 12-433

Product Champions Product (or project) champions
Bring entrepreneurial ideas forward Identify what kind of market exists for the product or service Find resources to support the venture Promote the venture concept to upper management New project must pass two critical stages Project definition Project impetus 12-434

Measuring the Success of Corporate Entrepreneurship Activities
Comparing strategic and financial CE goals Are the products or services offered by the venture accepted in the marketplace? Are the contributions of the venture to the corporation’s internal competencies and experience valuable? Is the venture able to sustain its basis of competitive advantage? 12-435

Measuring the Success of Corporate Entrepreneurship Activities
Exit champions individual working within a corporation who is willing to question the viability of a venture project by demanding hard evidence of venture success and challenging the belief system that carries a venture forward. 12-436

Real Options Analysis Real options analysis
for each investment step the investor has the option of (a) investing additional funds to grow or accelerate, (b) delaying, (c) shrinking the scale of, or (d) abandoning the activity. 12-437

Potential Pitfalls of Real Options Analysis
Agency Theory and the Back-Solver Dilemma Managerial Conceit: Overconfidence and the Illusion of Control Managerial Conceit: Irrational Escalation of Commitment If managers know that a certain option value must be met in order for the proposal to get approved, they can back-solve the model to find a variance estimate needed to arrive at the answer that upper management desires. managerial conceit biases, blind spots, and other human frailties that lead to poor managerial decisions. 12-438

QUESTION On average, approximately what percentage of corporate ventures reaches profitability after six years? 80 percent 65 percent 50 percent 35 percent Answer: C. 50 percent 12-439

Dimensions of Entrepreneurial Orientation
Exhibit 12.4 12-440

Learning Objectives After reading this chapter, you should have a good understanding of: LO13.1 How strategic case analysis is used to simulate real-world experiences. LO13.2 How analyzing strategic management cases can help develop the ability to differentiate, speculate, and integrate when evaluating complex business problems. LO13.3 The steps involved in conducting a strategic management case analysis. 13-442

LO13.4 How to get the most out of case analysis. LO13.5 How conflict-inducing discussion techniques can lead to better decisions. LO13.6 How to use the strategic insights and material from each of the 12 previous chapters in the text to analyze issues posed by strategic management cases. 13-443

Questions Raised Why do some firms succeed and others fail?
Why are some companies higher performers than others? What information is needed in the strategic planning process? How do competing values and beliefs affect strategic decision making? What skills and capabilities are needed to implement a strategy effectively? 13-444

Why Analyze Strategic Management Cases?
Case analysis A method of learning complex strategic management concepts places students in the middle of an actual situation and challenges them to figure out what to do. 13-445

Skills Developed from Case Analysis
Differentiate Evaluate many different elements of a situation at once Differentiating between the factors that are influencing the situation Understanding that problems are often complex and multilayered 13-446

Speculate Envision explanation that might not readily be apparent Imagine different scenarios Contemplate the outcome of a decision Deal with uncertainty and incomplete knowledge Deal with uncertainty and incomplete knowledge Missing data Information may be contradictory Speculate about details and consequences that are unknown 13-447

Integrate Have an organization-wide perspective Integrate the impact of various decisions and environmental influences on all parts of the organization 13-448

How to Conduct a Case Analysis
Prepare for a case discussion Investigate Analyze and research potential solutions Gather the advice of others Become immersed in facts, options, and implications 13-449

Put yourself “inside” the case Think like an actual participant Try different perspectives Put yourself “inside” the case Think like an actual participant Strategic decision maker Board of directors Outside consultant Try different perspectives One of the most challenging is as a business founder or owner Hiring an outside consultant may not be an option 13-450

Strategic Decision Maker
Positions to Take Strategic Decision Maker Board of Directors Outside Consultants • Strategic decision maker. This is the position of the senior executive responsible for resolving the situation described in the case. It may be the CEO, the business owner, or a strategic manager in a key executive position. • Board of directors. Since the board of directors represents the owners of a corporation, it has a responsibility to step in when a management crisis threatens the company. As a board member, you may be in a unique position to solve problems. • Outside consultant. Either the board or top management may decide to bring in outsiders. Consultants often have an advantage because they can look at a situation objectively. But they also may be at a disadvantage since they have no power to enforce changes. 13-451 451

Step 1: Become familiar with the material Read quickly through the case one time Use initial read-through to assess possible links to strategic concepts Read the case again, making notes 13-452

Step 1: Become familiar with the material Evaluate how strategic concepts might inform key decisions or suggest alternative solutions. After forming first recommendation, thumb through the case again to assess consequences of actions you propose 13-453

Step 2: Identify problems Some cases have more than one problem Avoid getting hung up on symptoms Articulate the problem Some problems are not apparent until after you do the analysis Writing down a problem statement gives you a reference point when you proceed through case analysis 13-454

Step 3: Conduct strategic analyses Determine which strategic issues are involved Use strategic tools to conduct the analysis Test your own assumptions about the case 13-455

Tools to Conduct Analysis
Five forces analysis Value-chain analysis Contingency frameworks Financial ratio analysis 13-456

Method of evaluating a company’s performance and financial wellbeing through ratios of accounting values, including short-term solvency, long-term solvency, asset utilization, profitability, and market value ratios. 13-457

Step 4: Propose alternative solutions Develop a list of options first without judging them Evaluate alternatives Step 4: Propose alternative solutions Develop a list of options first without judging them “Do nothing” is often a reasonable alternative Evaluate alternatives Can the company afford it? Is the solution likely to evoke a competitive response? Will employees accept the change? How will it affect other stakeholders? How does it fit with the vision, mission, objectives? 13-458

Step 5: Make recommendations Make a set of recommendations that your analysis supports Describe exactly what needs to be done Explain why this course of action will solve the problem Include suggestions for how best to implement the proposed solution 13-459

Preparing an Oral Case Presentation
Organize your thoughts Emphasize strategic analysis Be logical and consistent Defend your position Share presentation responsibilities Organize your thoughts. Begin by becoming familiar with the material. If you are working with a team, compare notes about the key points of the case and share insights that other team members may have gleaned from tables and exhibits. Then make an outline. This is one of the best ways to organize the flow and content of the presentation. Emphasize strategic analysis. The purpose of case analysis is to diagnose problems and find solutions. In the process, you may need to unravel the case material as presented and reconfigure it in a fashion that can be more effectively analyzed. Present the material in a way that lends itself to analysis—don’t simply restate what is in the case. This involves three major categories with the following emphasis: Background/Problem Statement 10– 20% Strategic Analysis/Options 60–75% Recommendations/Action Plan 10–20% As you can see, the emphasis of your presentation should be on analysis. This will probably require you to reorganize the material so that the tools of strategic analysis can be applied. Be logical and consistent. A presentation that is rambling and hard to follow may confuse the listener and fail to evoke a good discussion. Present your arguments and explanations in a logical sequence. Support your claims with facts. Include financial analysis where appropriate. Be sure that the solutions you recommend address the problems you have identified. Defend your position. Usually an oral presentation is followed by a class discussion. Anticipate what others might disagree with and be prepared to defend your views. This means being aware of the choices you made and the implications of your recommendations. Be clear about your assumptions. Be able to expand on your analysis. Share presentation responsibilities. Strategic management case analyses are often conducted by teams. Each member of the team should have a clear role in the oral presentation, preferably a speaking role. It’s also important to coordinate the different parts of the presentation into a logical, smooth-flowing whole. How well a team works together is usually very apparent during an oral presentation. 13-460 460

Example Here are five tips to “wow” your audience like Steve Jobs, co-founder of Apple: Sell the benefit Practice, Practice, and Practice Some More Keep It Visual Exude Passion, Energy, and Enthusiasm At the end of your presentation add more suspense by stating “and one more thing..." Source: Gallo, Carmine. “How to Wow 'Em Like Steve Jobs,” Business Week. April 6, 2006 13-461 461

How to Get the Most from Case Analysis
Keep an open mind Take a stand for what you believe Draw on your own personal experience Participate and persuade Be concise and to the point 13-462

How to Get the Most from Case Analysis (cont.)
Think out of the box Learn from the insights of others Apply insights from other case analyses Critically analyze your own performance Conduct outside research 13-463

Preparing a Written Case Analysis
Exhibit 13.3 13-464

QUESTION What are the symptoms of groupthink identified by Irving Janis? Have you experienced any of these in a group situation? Explain. Symptoms of groupthink: An illusion of invulnerability. A belief in the inherent morality of the group. Stereotyped view of members of opposing groups. The application of pressure to members who express doubts about the group’s shared illusions or question the validity of arguments proposed. The practice of self-censorship. An illusion of unanimity. The appointment of mindguards. 13-465

Using Conflict to Improve Decision Making
Devil’s advocacy a method of introducing conflict into a decision-making process by having specific individuals or groups act as a critic to an analysis or planned solution. 13-466

Using Conflict to Improve Decision Making
Dialectical inquiry a method of introducing conflict into a decision-making process by devising different proposals that are feasible, politically viable, and credible, but rely on different assumptions; and debating the merits of each. Dialectical inquiry involves the following steps: 1. Identify a proposal and the information that was used to derive it. 2. State the underlying assumptions of the proposal. 3. Identify a counterplan (antithesis) that is believed to be feasible, politically viable, and generally credible. However, it rests on assumptions that are opposite to the original proposal. 4. Engage in a debate in which individuals favoring each plan provide their arguments and support. 5. Identify a synthesis which, hopefully, includes the best components of each alternative. 13-467 467

Following the Analysis-Decision-Action Cycle in Case Analysis
Analyzing organizational goals and objectives Has the company developed short-term objectives that are inconsistent with its long-term mission? Has the company considered all of its stakeholders equally in making critical decisions? Has the company developed short-term objectives that are inconsistent with its long-term mission? Has the company considered all of its stakeholders equally in making critical decisions? Is the company faced with an issue that conflicts with one of its longstanding policies? 13-468

Analyzing the external environment Does the company follow trends and events in external environment? Is the company effectively scanning and monitoring the competitive environment? Has the company analyzed the impact of competitive forces in its industry on profitability? 13-469

Analyzing the internal environment Does the company know how the various components of its value chain are adding value to the firm? Is the company’s financial performance as good as or better than that of its close competitors? 13-470

Assessing a firm’s intellectual assets Does the company have underutilized human capital? Is the company missing opportunities to forge strategic alliances? Has the company developed knowledge-management systems that capture what it learns? 13-471

Formulating business-level strategies Has the company chosen the correct competitive strategy, given its industry environment and competitive situation? Does the company use combination strategies effectively? 13-472

Formulating corporate-level strategies Is the company competing in the right businesses, given the opportunities and threats that are present in the environment? Is the corporation managing its portfolio of businesses in a way that creates synergies among the businesses? 13-473

Question Corporate strategies address methods for achieving ______ among businesses within a large firm’s portfolio. Synergies Competitiveness Devil’s advocacy Teamwork Answer: A 13-474

Formulating international-level strategies Is the company’s entry into an international marketplace threatened by the actions of local competitors? Has the company made the appropriate choices between cost reduction and local adaptation to foreign markets? 13-475

Formulating entrepreneurial strategies Is the company engaged in an ongoing process of opportunity recognition? Do the entrepreneurs who are launching new ventures have vision, dedication and drive, and a commitment to excellence? Have strategic principles been used in the process of developing strategies to pursue the entrepreneurial opportunity? If not, how can the venture apply tools such as five-force analysis and value-chain analysis to improve its competitive position and performance? Do the entrepreneurs who are launching new ventures have vision, dedication and drive, and a commitment to excellence? If so, how have these affected the performance and dedication of other employees involved in the venture? 13-476

Achieving effective strategic control Is the company employing the appropriate informational control systems? Does the company have a strong and effective culture? Has the company implemented control systems that match its strategies? 13-477

Creating effective organizational designs Has the company implemented organizational structures that are suited to the type of business it is in? Is the company employing boundaryless organizational designs where appropriate? 13-478

Creating a learning organization and an ethical organization Do company leaders promote excellence as part of the overall culture? Is the company committed to being a learning organization? Have company leaders exhibited an ethical attitude in their own behavior? 13-479

Fostering corporate entrepreneurship Has the company resolved the dilemmas associated with managing innovation? Has the company developed autonomous work units that have the freedom to bring forth new product ideas? Does the company have an entrepreneurial orientation? 13-480

Strategic Management: Creating Competitive Advantages

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