MBA290: ADVANCED STRATEGIC MANAGEMENT

MBA290: ADVANCED STRATEGIC MANAGEMENT
Professor Stanley Han College of Business Administration

Course Overview: Objectives
To acquire familiarity with the principal concepts, frameworks and techniques of strategic management. To gain expertise in applying these concepts, frameworks and techniques in order to - understand the reasons for good or bad performance by an enterprise, - generate strategy options for an enterprise, - assess available options under conditions of imperfect knowledge, - select the most appropriate strategy, - recommend the best means of implementing the chosen strategy.

Course Overview: Objectives (cont’d)
To integrate the knowledge gained in previous courses. To develop your capacity as a general manager in terms of - an appreciation of the work of the general manager, - the ability to view business problems from a general management perspective, - the ability to develop original and innovative approaches to strategic problems, - developing business judgment.

THE CONCEPT OF STRATEGY
The Concept of Strategy and the Pursuit of Sustainable Above-Normal Profits 1 1 1

Domain of Strategy strategic competitiveness and above normal returns
concerns managerial decisions and actions which materially affect the success and survival of business enterprises involves the judgment necessary to strategically position a business and its resources so as to maximize long-term profits in the face of irreducible uncertainty and aggressive competition strategy is the linkage between a business and its current and future environment routine decisions are not strategic can be replaced by policy or delegated Importance of making a decision Soccer analogy Road analogy Macro environment Stakeholders suppliers customers competitors Government Owners Employees 3 2 2

Definition The determination of the long run goals and objectives of an enterprise, the adoption of courses of action and the allocation of resources necessary for carrying out these goals Alfred Chandler, Strategy and Structure 9 8 8

Levels of Strategy Division A Division B R & D Personnel Finance
CORPORATE STRATEGY CORPORATE HEAD OFFICE BUSINESS STRATEGY Division A Division B R & D Personnel Finance Production Marketing/Sales R & D Personnel Finance Production Marketing/Sales FUNCTIONAL STRATEGIES 20 20

Levels of Strategy Corporate strategy... defines the scope of the business in terms of the industries and markets in which it competes. includes decisions about diversification, vertical integration, acquisitions, new ventures, divestments, allocation of scarce resources between business units Business strategy... is concerned with how the firm competes within a particular industry or market... to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals. Functional strategy... the detailed deployment of resources at the operational level 14 19 19

Common Elements in Successful Strategy
EFFECTIVE IMPLEMENTATION Long-term, simple and agreed upon objectives Profound understanding of the competitive environment Objective appraisal of resources $ 2

Strategy as a Quest for Profit
The stakeholder approach : The firm is a coalition of interest groups—it seeks to balance their different objectives The shareholder approach : The firm exists to maximize the wealth of its owners (= max. present value of profits over the life of the firm) For the purposes of strategy analysis we assume that the primary goal of the firm is profit maximization. Rationale: Boards of directors legally obliged to pursue shareholder interest To replace assets firm must earn return on capital > cost of capital (difficult when competition strong). Firms that do not max. stock-market value will be acquired Hence: Strategy analysis is concerned with identifying and accessing the sources of profit available to the firm 13

From Profit Maximization to Value Maximization
Profit maximization an ambiguous goal Total profit vs. Rate of profit Over what time period? What measure of profit? Accounting profit versus economic profit (e.g. Economic Value Added: Post-tax operating profit less cost of capital Maximizing the value of the firm: Max. net present value of free cash flows: max. V = St Ct (1 + r)t Where: V market value of the firm. Ct free cash flow in time t r weighted average cost of capital

The World’s Most Valuable Companies:
Performance Under Different Profitability Measures COMPANY MARKET CAP. ($BN.) NET INCOME ($BN) RETURN ON SALES (%) RETURN ON EQUITY (%) RETURN ON ASSETS (%) RETURN TO SHARE-HOLDERS (%) Exxon Mobil 372 36.1 19.9 34.9 17.8 11.7 General Electric 363 16.4 10.7 22.2 14.7 (1.5) Microsoft 281 12.3 40.3 30.0 18.8 (0.9) Citigroup 239 24.6 22.0 21.9 1.5 4.6 BP 233 22.3 9.9 27.9 10.2 Bank of America 212 16.5 27.0 14.1 1.2 2.4 Royal Dutch Shell 211 25.3 26.7 11.6 11.8 Wal-Mart 197 11.2 5.5 21.4 8.1 (10.3) Toyota Motor 12.1 13.0 4.8 (22.1) Gazprom 196 7.3 28.1 9.8 7.1 n.a. HSBC 190 15.9 23.0 16.3 1.0 (11.8) Procter & Gamble 8.7 17.3 13.7 6.4 7.2

Shareholder Value Maximization and Strategy Choice
The Value Maximizing Approach to Strategy Formulation: Identify strategy alternatives Estimate cash flows associated with cash strategy Estimate cost of capital for each strategy Select the strategy which generates the highest NPV Problems: Estimating cash flows beyond 2-3 years is difficult Value of firm depends on option value as well as DCF value Implications for strategy analysis: Some simple financial guidelines for value maximization On existing assets—maximize after-tax rate of return On new investment—seek rate of return > cost of capital Utilize qualitative strategy analysis to evaluate future profit potential

A Comprehensive Value Metrics Framework
Shareholder Value Measures: Market value of the firm Market value added (MVA) Return to shareholders Intrinsic Value Measures: Discounted cash flows Real option values Financial Indicators Measures: Return on Capital Growth (of revenues & operating profits Economic profit (EVA) Value Drivers Sources: Market share Scale economies Innovation Brands

Sources of Superior Performance
Above Normal Profits (in Excess of the Competitive Level) Avoid Competitors Be Better Than Competition Attractive Industry Attractive Strategic Group Attractive Niche Cost Advantage Differentiation Advantage Entry Barriers Mobility Barriers Isolating Mechanisms

Sources of Competitive Advantage
COST ADVANTAGE Similar product at lower cost COMPETITIVE ADVANTAGE Price premium from unique product DIFFERENTIATION ADVANTAGE 6

The Experience Curve The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. 1992 1994 Cost per unit of output (in real $) 1996 1998 2000 2002 2004 Cumulative Output 10

Examples of Experience Curves
Japanese clocks & watches, UK refrigerators, 15K K 30K 1960 Yen Price Index 75% 70% slope 100K 200K K ,000K Accumulated unit production Accumulated units (millions) (millions) 11

Drivers of Cost Advantage
Indivisibli\ties Specialization and division of labor ECONOMIES OF SCALE Increased dexterity Improved organizational routines ECONOMIES OF LEARNING Process innovation Reengineering business processes PRODUCTION TECHNIQUES Standardizing designs & components Design for manufacture PRODUCT DESIGN Location advantages Ownership of low-cost inputs Non-union labor Bargaining power INPUT COSTS CAPACITY UTILIZATION Ratio of fixed to variable costs Speed of capacity adjustment Organizational slack; Motivation & culture; Managerial efficiency RESIDUAL EFFICIENCY 13

Economies of Scale: The Long-Run Cost Curve for a Plant
Sources of scale economies: - technical input/output relationships - indivisibilities - specialization Cost per unit of output Units of output per period Minimum Efficient Plant Size: the point where most scale economies are exhausted 14

Scale Economies in Advertising: U.S. Soft Drinks
Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main brands incur lower advertising costs per unit of sales than their smaller rivals. Schweppes SF Dr. Pepper Tab Diet 7-Up Diet Pepsi Advertising Expenditure ($ per case) Diet Rite Fresca Seven Up Dr. Pepper Sprite Pepsi Coke ,000 Annual sales volume (millions of cases) 16

Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES R&D DESIGN ENGNRNG TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DEALER & CUSTOMER SUPPORT PARTS INVEN- TORIES DISTRI- BUTION PURCH- ASING COMPONENT MFR ASSEMBLY STAGE 2. ALLOCATE TOTAL COSTS 18

Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)
--Plant scale for each Level of quality targets No. of dealers component Frequency of defects Sales / dealer -- Process technology Level of dealer Plant location support -- Run length Frequency of defects -- Capacity utilization under warranty STAGE 3. IDENTIFY COST DRIVERS PARTS INVEN- TORIES R&D DESIGN ENGNRNG TESTING, QUALITY CONTROL GOODS INVEN- TORIES PURCH- ASING COMPONENT MFR SALES & MKITG ASSEMBLY DISTRI- BUTION DEALER & CUSTOMER SUPPORT Prices paid --Size of commitment Plant scale Cyclicality & depend on: --Productivity of -- Flexibility of production predictability of sales -- Order size R&D/design -- No. of models per plant --Customers’ --Purchases per --No. & frequency of new -- Degree of automation willingness to wait supplier models -- Sales / model -- Bargaining power -- Wage levels -- Supplier location Capacity utilization 19

STAGE 4. IDENTIFY LINKAGES STAGE 5. RECCOMENDATIONS FOR COST REDUCTION
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) STAGE 4. IDENTIFY LINKAGES PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR Designing different models around common components and platforms reduces manufacturing costs Consolidation of orders to increase discounts, increases inventories Higher quality parts and materials reduces costs of defects at later stages Higher quality in manufacturing reduces warranty costs STAGE 5. RECCOMENDATIONS FOR COST REDUCTION 20

The Nature of Differentiation
DEFINITION: “Providing something unique that is valuable to the buyer beyond simply offering a low price.” (M. Porter) THE KEY IS TO CREATE VALUE FOR THE CUSTOMER TANGIBLE DIFFERENTATION Observable product characteristics: size, color, materials, etc. performance packaging complementary services INTANGIBLE DIFFERENTATION Unobservable and subjective characteristics that appeal to customer’s image, status, identity, and desire for exclusivity TOTAL CUSTOMER RESPONSIVENESS Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer. 24

Identifying Differentiation Potential: The Demand Side
What needs does it satisfy? THE PRODUCT What are key attributes? FORMULATE DIFFERENTIATION STRATEGY Select product positioning in relation to product attributes Select target customer group Ensure customer / product compatibility Evaluate costs and benefits of differentiation Relate patterns of customer preferences to product attributes By what criteria do they choose? THE CUSTOMER What price premiums do product attributes command? What motivates them? What are demographic, sociological, psychological correlates of customer behavior? 29

Using the Value Chain to Identify Differentiation Potential on the Supply Side
MIS that supports fast response capabilities Training to support customer service excellence FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES Unique product features. Fast new product development Customer technical support. Consumer credit. Availability of spares Quality of components & materials Defect free products. Wide variety Fast delivery. Efficient order processing Building brand reputation 35

Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture 1 Inventory holding Service & technical support Manufacturing Purchasing Design Engineering Distribution Sales 5 2 3 4 Inventory holding Purchasing Processing Marketing Distribution Canning Supplies of steel & aluminum CAN MAKER CANNER 1. Distinctive can design can assist canners’ marketing activities. 2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines. 3. Frequent, reliable delivery can permit canner to adopt JIT can supply. 4. Efficient order processing system can reduce customers’ ordering costs. 5. Competent technical support can increase canner’s efficiency of plant utilization. 36

INDUSTRY ANALYSIS AND POSITIONING
Determining Industry Attractiveness and Identifying Strategic Opportunities 1 1 1

Profitability of US Industries (selected industries only)
Median return on equity (%), Household & Personal Products Gas & Electric Utilities Pharmaceuticals Food and Drug Stores Tobacco Motor Vehicles & Parts Food Consumer Products Hotels, Casinos, Resorts Securities Railroads Diversified financials Insurance: Life and Health Beverages Packaging & Containers Mining & crude oil Insurance: Property & Casualty 8.3 Petroleum Refining Building Materials, Glass Medical Products & Equipment Metals Commercial Banks Food Production Scientific & Photographic Equipt Forest and Paper Products Apparel Semiconductors & Computer Software Electronic Components Publishing, Printing Telecommunications Health Care Communications Equipment Electronics, Electrical Equipment Entertainment Specialty Retailers Airlines (22.0) Computers, Office Equipment 11.7 4

The Profitability of Global Industries: Return on Invested Capital, 1963-2003

From Environmental Analysis to Industry Analysis
The natural environment The national/ international economy THE INDUSTRY ENVIRONMENT Suppliers Competitors Customers Demographic structure Technology Government & Politics Social structure Social structure The Industry Environment lies at the core of the Macro Environment. The Macro Environment impacts the firm through its effect on the Industry Environment. 3

Drawing Industry Boundaries : Identifying the Relevant Market
What industry is BMW in: World Auto industry European Auto industry World luxury car industry? Key criterion: SUBSTITUTABILITY On the demand side : are buyers willing to substitute between types of cars and across countries On the supply side : are manufacturers able to switch production between types of cars and across countries We may need to analyze industry at different levels of aggregation for different types of decision 15

The Spectrum of Industry Structures
Perfect Competition Oligopoly Duopoly Monopoly Concentration Many firms A few firms Two firms One firm Entry and Exit Barriers No/Low barriers Significant barriers High barriers Product Differentiation Homogeneous Product Potential for product differentiation Information Perfect Information flow Imperfect availability of information 2 6

Porter’s Five Forces of Competition Framework
SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS Threat of substitutes POTENTIAL ENTRANTS Threat of new entrants SUBSTITUTES Rivalry among existing firms Bargaining power of buyers BUYERS 7

The Structural Determinants of Competition
SUPPLIER POWER Supplier concentration Relative bargaining power THREAT OF ENTRY Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to distribution channels Legal/ regulatory barriers Retaliation INDUSTRY RIVALRY Concentration Diversity of competitors Product differentiation Excess capacity & exit barriers Cost conditions SUBSTITUTE COMPETITION Buyers’ propensity to substitute Relative prices & performance of substitutes BUYER POWER Buyers’ price sensitivity Relative bargaining power 7

(Changing as managed care
DRUG INDUSTRY (ROE=22%) SUPPLIER POWER LOW THREAT OF ENTRY LOW economies of scale capital requirements for R&D and clinical trials product differentiation control of distribution channels patent protection INDUSTRY COMPETITIVENESS LOW high concentration product differentiation patent protection steady demand growth no cyclical fluctuations of demand THREAT OF SUBSTITUTES LOW No substitutes. (Changing as managed care encourages generics.) BUYER POWER LOW Physician as buyer: Not price sensitive No bargaining power. (Changing with managed care.)

Applying Five-Forces Analysis
Forecasting Industry Profitability Past profitability a poor indicator of future profitability. If we can forecast changes in industry structure we can predict likely impact on competition and profitability. Strategies to Improve Industry Profitability What structural variables are depressing profitability Which of these variables can be changed by individual or collective strategies? 14

Neutralizing The Five Competitive Forces
Entry Rivalry Substitutes Buyers Suppliers Method for Neutralizing Force Erecting barriers (isolating mechanisms) create & exploit economies of scale, aggressive deterrence, design in switching costs, etc. Compete on nonprice dimensions: cost leadership, differentiation, cooperation, etc. Improve attractiveness compared to substitutes: better service, more features, etc.. Reduce buyer uniqueness: forward integrate, differentiate product, new customers, etc.. Reduce supplier uniqueness: backward integrate, obtain minority position, second source, etc..

The Traditional Model of Industry Life Cycle
Fermentation Shakeout Maturity Decline Sales volume Examples: fax machines, dial-up Internet service Time

How Typical is the Life Cycle Pattern?
Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries. Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline. Industries may experience life cycle regeneration. Sales Sales MOTORCYCLES TV’s Life cycle model can help us to anticipate industry evolution—but dangerous to assume any common, pre- determined pattern of industry development Color B&W Portable HDTV ? 42

Evolution of Industry Structure over the Life Cycle
INTRODUCTION GROWTH MATURITY DECLINE DEMAND Affluent buyers Increasing Mass market Knowledgeable, penetration replacement customers, resi- demand dual segments TECHNOLOGY Rapid product Product and Incremental Well-diffused innovation process innovation innovation technology PRODUCTS Wide variety, Standardization Commoditiz Continued rapid design change ation commoditization MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity URING intensive mass-production TRADE Production shifts from advanced to developing countries----- COMPETITION Technology- Entry & exit Shakeout & Price wars, consolidation exit KSFs Product innovation Process techno Cost efficiency Overhead red logy. Design for uction, ration alization, low cost sourcing 43

The Driving Forces of Industry Evolution
BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION Customers become more knowledgeable & experienced Customers become more price conscious Quest for new sources of differentiation Products become more standardized Diffusion of technology Price competition intensifies Production becomes less R&D & skill-intensive Production shifts to low-wage countries Excess capacity increases Bargaining power of distributors increases Demand growth slows as market saturation approaches Distribution channels consolidate 44

Changes in the Population of Firms over the
Industry Life Cycle: US Auto Industry Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change
Stages in undertaking multiple Scenario Analysis: Identify major forces driving industry change Predict possible impacts of each force on the industry environment Identify interactions between different external forces Among range of outcomes, identify 2-4 most likely/ most interesting scenarios: configurations of changes and outcomes Consider implications of each scenario for the company Identify key signposts pointing toward the emergence of each scenario Prepare contingency plan

Innovation & Renewal over the Industry Life Cycle: Retailing
Warehouse Clubs e.g. Price Club Sam’s Club Internet Retailers e.g. Amazon; Expedia Discount Stores e.g. K-Mart Wal-Mart “Category Killers” e.g. Toys-R-Us, Home Depot Mail order, catalogue retailing e.g. Sears Roebuck ? Chain Stores e.g. A&P 1880s s s

Gary Hamel: Shaking the Foundations
OLD BRICK NEW BRICK Top management is responsible for setting strategy Everyone is responsible for setting strategy Getting better, getting faster is the way to win Rule-busting innovation is the way to win Unconventional business concepts create competitive advantage IT creates competitive advantage Being revolutionary is high risk More of the same is high risk We can merge our way to competitiveness There’s no correlation between size and competitiveness Innovation equals new products and new technology Innovation equals entirely new business concepts Strategy is the easy only if you’re content to be an imitator Strategy is the easy part, Implementation the hard part Change starts with activists Change starts at the top Our real problem is innovation Our real problem is execution Big companies can become gray-haired revolutionaries Big companies can’t innovate

An Alternate Model of Industry Life Cycle
Emergence Convergence Coexistence Dominance Sales volume Established Industry VHS vs. DVD Cell phones vs. landline phones Dial-up vs. high-speed Internet services Yellow pages vs. Internet-based local service Emerging Industry Time

The Industry Life Cycle as an S curve
Performance Maturity Discontinuity Takeoff Dial-up vs. high-speed Internet services AOL, Nintendo (cartridge vs. DVD-based games) Ferment Time 6 17

The S-curve Maps Major Transitions
Maturity Performance Discontinuity Takeoff Ferment Time 6 17

RESOURCES, CAPABILITIES, AND CORE COMPETENCES
1 1 1

Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment THE FIRM Goals and Values Resources and Capabilities Structure and Systems THE INDUSTRY ENVIRONMENT Competitors Customers Suppliers STRATEGY STRATEGY The Firm-Strategy Interface The Environment-Strategy Interface 5

Rationale for the Resource-based Approach to Strategy
When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus. Resources and capabilities are the primary sources of profitability.

Canon: Products and Core Technical Capabilities
Precision Mechanics Fine Optics Plain-paper copier Color copier Color laser copier Laser copier 35mm SLR camera Compact fashion camera EOS autofocus camera Digital camera Video still camera Basic fax Laser fax Inkjet printer Laser printer Color video printer Mask aligners Excimer laser aligners Stepper aligners Calculator Notebook computer Micro- Electronics 4 4

Eastman Kodak’s Dilemma
Resources & Capabilities Businesses Chemical Imaging Organic Chemistry Polymer technology Optomechtronics Thin-film coatings Brands Global Distribution Film Cameras 1980’s Fine Chemicals Pharmaceuticals Diagnostics 1990’s DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics Need to build digital imaging capability Digital Imaging Products (e.g. Photo CD System; Advantix cameras & film

The Links between Resources, Capabilities and Competitive Advantage
INDUSTRY KEY SUCCESS FACTORS COMPETITIVE ADVANTAGE STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES TANGIBLE INTANGIBLE HUMAN Financial Physical Skills/know-how Capacity for communication & collaboration Motivation Technology Reputation Culture

Appraising Resources RESOURCE CHARACTERISTICS INDICATORS
Financial Borrowing capacity Debt/ Equity ratio Internal funds generation Credit rating Tangible Net cash flow Resources Physical Plant and equipment: Market value of size, location, technology fixed assets. flexibility. Scale of plants Land and buildings. Alternative uses for Raw materials. fixed assets Technology Patents, copyrights, know how No. of patents owned R&D facilities. Royalty income Intangible Technical and scientific R&D expenditure Resources employees R&D staff Reputation Brands. Customer loyalty. Company Brand equity reputation (with suppliers, customers, Customer retention government) Supplier loyalty Human Training, experience, adaptability, Employee qualifications, Resources commitment and loyalty of employees pay rates, turnover.

The World’s Most Valuable Brands, 2006
Rank Company Brand Rank Company Brand value value ($bn.) ($bn.) 1 Coca-Cola Mercedes Benz 2 Microsoft Citi 3 IBM Hewlett-Packard 4 GE American Express 18.6 5 Intel Gillette 6 Nokia BMW 7 Disney Cisco 8 McDonald’s Louis Vuitton 9 Toyota Honda 10 Marlboro Samsung Source: Interbrand

Defining Organizational Capabilities
Organizational Capabilities = firm’s capacity for undertaking a particular activity. (Grant) Distinctive Competence = things that an organization does particularly well relative to competitors. (Selznick) Core Competence = capabilities that are fundamental to a firm’s strategy and performance. (Hamel and Prahalad) 15 16 16

Identifying Organizational Capabilities: A Functional Classification
FUNCTION CAPABILITY EXEMPLARS Corporate Financial management ExxonMobil, GE Management Strategic control IBM, Samsung Coordinating business units BP, P&G Managing acquisitions Citigroup, Cisco MIS Speed and responsiveness through Wal-Mart, Dell rapid information transfer Capital One R&D Research capability Merck, IBM Development of innovative new products Apple, 3M Manufacturing Efficient volume manufacturing Briggs & Stratton Continuous Improvement Nucor, Harley-D Flexibility Zara, Four Seasons Design Design Capability Apple, Nokia Marketing Brand Management P&G, LVMH Quality reputation Johnson & Johnson Responsiveness to market trends MTV, L’Oreal Sales, Distribution Sales Responsiveness PepsiCo, Pfizer & Service Efficiency and speed of distribution LL Bean, Dell Customer Service Singapore Airlines Caterpillar

The Value Chain: The McKinsey Business System
TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE 5 5

The Porter Value Chain FIRM INFRASTRUCTURE SUPPORT
HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES SUPPORT ACTIVITIES PRIMARY ACTIVITIES 6 6

The Rent-Earning Potential of Resources and Capabilities
THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED Scarcity Relevance Durability THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Transferability Replicability Property rights Relative bargaining power APPROPRIABILITY Embeddedness 8 8

Assessing a Companies Resources and Capabilities: The Case of VW
Importance VW’s Relative Strength R1. Finance 6 4 R2. Technology 7 5 R3. Plant and equipment 8 R4. Location R5. Distribution Importance VW’s Relative Strength C1. Product development 9 4 C2. Purchasing 7 5 C3. Engineering C4. Manufacturing 8 C5. Financial management 6 3 C6. R&D C7. Marketing & sales C8. Government relations RESOURCES CAPABILITIES

Appraising VW’s Resources and Capabilities
(Hypothetical only) 10 Key Strengths Superfluous Strengths C3 R3 C8 C4 C2 Relative Strength R2 R5 5 R1 C1 R4 C6 C7 C5 Zone of Irrelevance Key Weaknesses 1 1 5 10 Strategic Importance 9

Approaches to Capability Development
Acquire and develop the underlying resources. Especially human resources --Externally (hiring) --Internally through developing individual skills Acquire/access capabilities externally through acquisition or alliance Greenfield development of capabilities in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn) Build team-based capabilities through training and team development (i.e. develop organizational routines) Align structure & systems with required capabilities Change management to transform values and behaviors (GE, BP) Product sequencing (Intel , Sony, Hyundai) Knowledge Management (systematic approaches to acquiring, storing, replicating, and accessing knowledge)

COMPETITIVE ADVANTAGE AND THE SCOPE OF THE FIRM
1 1 1

From Business Strategy to Corporate Strategy: The Scope of the Firm
Business Strategy is concerned with how a firm computes within a particular market Corporate Strategy is concerned with where a firm competes, i.e. the scope of its activities The dimensions of scope are product scope vertical scope geographical scope 34

Transactions Costs and the Scope of the Firm
Vertical Product Geographical Scope Scope Scope [A] Single Integrated Firm V1 V2 V3 P1 P2 P3 C1 C2 C3 [B] Several Specialized Firms linked by Markets V1 P1 P2 P3 C1 C2 C3 V2 V3 In situation [A] the business units are integrated within a single firm. In situation [B] the business units are independent firms linked by markets. Are the administrative costs of the integrated firm less than the transaction costs of markets? 35

Determinants of Changes in Corporate Scope
1800 – Expanding scale and scope of industrial corporations due to declining administrative costs of firms: Advances in transportation, information and communication technologies Advances in management—accounting systems, decision sciences, financial techniques, organizational innovations, scientific management 1980 – Shrinking size and scope of biggest industrial corporations. Increasingly Increased no. of managerial Admin. costs of turbulent decisions. Need for fast firms rise relative external responses to external to transaction environment change costs of markets . 1995 – Rapid increase in global concentration (steel, aluminium, oil, beer, banking, cement). Key drivers: quest for market power and scale economies. Also, large corporations better at reconciling size with agility 38

The Basic Issues in Diversification Decisions
Superior profit derives from two sources: INDUSTRY ATTRACTIVENESS RATE OF PROFIT > COST OF CAPITAL COMPETITIVE ADVANTAGE Diversification decisions involve these same two issues: How attractive is the sector to be entered? Can the firm achieve a competitive advantage?

Diversification among the US Fortune 500, 1949-74
Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business) Note: During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses 29

Diversification among Large UK Corporations, 1950-93

Motives for Diversification
GROWTH --The desire to escape stagnant or declining industries is a powerful motive for diversification (e.g. tobacco, oil, newspapers). --But, growth satisfies managers not shareholders. --Growth strategies (esp. by acquisition), tend to destroy shareholder value RISK Diversification reduces variance of profit flows SPREADING --But, doesn’t create value for shareholders—they can hold diversified portfolios of securities. --Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk. PROFIT For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability. 31

Diversification and Shareholder Value: Porter’s Three Essential Tests
If diversification is to create shareholder value, it must meet three tests: 1. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive). 2. The Cost of Entry Test: the cost of entry must not capitalize all future profits. 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “synergy” must be present) Additional source of value from diversification: Option value 32

Competitive Advantage from Diversification
Sharing tangible resources (research labs, distribution systems) across multiple businesses Sharing intangible resources (brands, technology) across multiple businesses Transferring functional capabilities (marketing, product development) across businesses Applying general management capabilities to multiple businesses ECONOMIES OF SCOPE Economies of scope not a sufficient basis for diversification ----must be supported by transaction costs Diversification firm can avoid transaction costs by operating internal capital and labor markets Key advantage of diversified firm over external markets--- superior access to information ECONOMIES FROM INTERNALIZING TRANSACTIONS

Relatedness in Diversification
Economies of scope in diversification derive from two types of relatedness: Operational Relatedness-- synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D) Strategic Relatedness-- synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses. Problem of operational relatedness:- the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation. 35

Transactions Costs and The Existence of the Firm
Transaction cost theory explains not just the boundaries of firms, also the existence of firms. In 18th century English woollen industry, no firms – independent spinners and weavers linked by merchants. Residential remodeling industry -- mainly independent self- employed builders, plumbers, electricians, painters. Key issue -- transaction costs of the market vs. administrative costs of firms. Where transaction costs high—firm is more efficient means of organization Note: transaction costs comprise costs of search and contract negotiation and enforcement 36

The Costs and Benefits of Vertical Integration: BENEFITS
Technical economies from integrating processes e.g. iron and steel production —but doesn’t necessarily require common ownership Superior coordination Avoids transactions costs of market contracts in situations where there are: -- small numbers of firms -- transaction-specific investments -- opportunism and strategic misrepresentation -- taxes and regulations on market transactions 39

The Costs and Benefits of Vertical Integration: COSTS
Differences in optimal scale of operation between different stages prevents balanced VI Strategic differences between different vertical stages create management difficulties Inhibits development of and exploitation of core competencies Limits flexibility -- in responding to demand cycles -- in responding to changes in technology, customer preferences, etc. (But, VI may be conducive to system-wide flexibility) Compounding of risk 40

When is Vertical Integration More Attractive than Outsourcing?
How many firms are available The fewer the companies to undertake the activities? the more attractive is VI Is transaction-specific investment If yes, VI more attractive needed? Does limited information permit VI can limit opportunism cheating? Are taxes or regulation imposed VI can avoid them on transactions? Do the different stages have similar Greater the similarity, the optimal scales of operation? more attractive is VI Are the two stages strategically Greater the strategic similar? similarity ---the more attractive is VI How great the need for entrepreneurship Greater the need, the greater & continual upgrading of capabilities the disadvantages of VI How uncertain is market demand? Greater the unpredictability ----the more costly is VI Are risks compounded by VI increases risk. linkages between vertical stages

The value chain for steel cans
Canning of food, drink, oil, etc. Iron ore mining Steel production Steel strip production Can making VERTICAL INTEGRATION, AND MARKET CONTRACTS VERTICAL INTEGRATION MARKET CONTRACTS MARKET CONTRACTS What factors explain why some stages are vertically integrated, while others are linked by market transactions?

Designing Vertical Relationships: Long-Term Contracts and Quasi-Vertical Integration
Intermediate between spot transactions and vertical integration are several types of vertical relationships ---such relationships may combine benefits of both market transactions and internalization Key issues in designing vertical relationships -- How is risk allocated between the parties? -- Are the incentives appropriate? 41

Recent Trends in Vertical Relationships
From competitive contracting to supplier partnerships, e.g. in autos From vertical integration to outsourcing (not just components, also IT, distribution, and administrative services). Diffusion of franchising Technology partnerships (e.g. IBM- Apple; Canon- HP) Inter-firm networks General conclusion: boundaries between firms and markets becoming increasingly blurred. 42

Patterns of Internationalization Foreign Direct Investment
Trading Global Industries Industries --aerospace automobiles --military hardware oil --diamond mining semiconductors --agriculture consumer electronics Domestic Multidomestic --railroads --laundries/dry cleaning --retail banking --hairdressing hotels --milk consulting HIGH International Trade LO W LOW Foreign Direct Investment HIGH 1

Implications of Internationalization for Industry Analysis
INDUSTRY STRUCTURE Lower entry barriers around national markets Increased industry rivalry --- lower seller concentration --- greater diversity of competitors Increased buyer power: wider choice for dealers & consumers COMPETITION Increased intensity of competition PROFITABILITY Other things remaining equal, internationalization tends to reduce an industry’s margins & rate of return on capital 5

THE INDUSTRY ENVIRONMENT
Competitive Advantage within an International Context: The Basic Framework FIRM RESOURCES & CAPABILITIES -- Financial resources -- Physical resources -- Technology -- Reputation -- Functional capabilities -- General management capabilities THE INDUSTRY ENVIRONMENT Key Success Factors COMPETITIVE ADVANTAGE THE NATIONAL ENVIRONMENT -- National resources and capabilities (raw materials; national culture; human resources; transportation, communication, legal infrastructure -- Domestic market conditions -- Government policies -- Exchange rates -- Related and supporting industries 6

National Influences on Competitiveness: The Theory of Comparative Advantage
A country has a relative efficiency advantage in those products that make intensive use of resources that are relatively abundant within the country. E.g. Philippines relatively more efficient in the production of footwear, apparel, and assembled electronic products than in the production of chemicals and automobiles. U.S. is relatively more efficient in the production of semiconductors and pharmaceuticals than shoes or shirts. When exchange rates are well-behaved, comparative advantage becomes competitive advantage. 7

Revealed Comparative Advantage for Certain Broad Product Categories
USA Canada W. Germany Italy Japan Food, drink & tobacco Raw materials Oil & refined products Chemicals Machinery and trans portation equipment Other manufacturers Note: Revealed comparative advantage for each product group is measured as: (Exports less Imports)/ Domestic production 8

Porter’s Competitive Advantage of Nations
Extends and adapts traditional theory of comparative advantage to take account of three factors: International competitive advantage is about companies not countries—the role of the national environment is providing a home base for the company. Sustained competitive advantage depends upon dynamic factors-- innovation and the upgrading of resources and capabilities The critical role of the national environment is its impact upon the dynamics of innovation and upgrading. 9

Porter’s National Diamond Framework
FACTOR CONDITIONS RELATING AND SUPPORTING INDUSTRIES DEMAND CONDITIONS STRATEGY, STRUCTURE, AND RIVALRY FACTOR CONDITIONS—“Home grown” resources/capabilities more important than natural endowments. 2. RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters” 3. DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation 4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading. 10

Consistency Between Strategy and National Conditions
In globally-competitive industries, firm strategy needs to take account of national conditions: U.S. textile manufacturers must compete on the basis of advanced process technologies and focus on high quality, less price-sensitive market segments In the semiconductor industry, CA-based firms concentrate mainly upon design of advanced chips, Malaysian firms concentrate upon fabrication of high volume, less technologically advanced items (e.g. DRAM chips) Dispersion of value chain to exploit different national environments (e.g. Nike conducts R&D in US, components in Korea and Thailand, assembly in Indonesia, China, and India, marketing in Europe and North America) 11

International Location of Production
National resource conditions: What are the major resources which the product requires? Where are these available at low cost? Firm-specific advantages: to what extent is the company’s competitive advantage based upon firm-specific resources and capabilities, and are these transferable? Tradability issues: Can the product be transported at economic cost? If not, or if trade restrictions exist, then production must be close to the market. 12

The Role of Labor Costs Hourly Compensation for Production Workers, 1999 ($) Germany 26.93 Japan U.S France U.K Spain Korea Mexico BUT, wages are only one element of costs: Cost of Producing a Compact Automobile U.S Mexico Parts & components 7,750 8,000 Labor Shipping cost ,000 Inventory TOTAL 8,770 9,180 13

Location and the Value Chain
Comparative advantage in textiles and apparel by stage of processing Country Stage Index of Country Stage Index of of Revealed of Revealed Processing Comparative Processing Comparative Advantage Advantage Hong Kong Italy Japan U.S.A Note: 1 = production of fiber (natural & synthetic) 2 = production of spun yarn 3 = production of textiles 4 = production of clothing 14

Determining the Optimal Location
of Value Chain Activities Where is the optimal location of X in terms of the cost and availability of inputs? The optimal location of activity X considered independently What government incentives/ penalties affect the location decision? What internal resources and capabilities does the firm possess in particular locations? WHERE TO LOCATE ACTIVITY X? What is the firm’s business strategy (e.g. cost vs. differentiation advantage)? The importance of links between activity X and other activities of the firm How great are the coordination benefits from co-locating activities? 15

Alternative Modes of Overseas Market Entry
TRANSACTIONS DIRECT INVESTMENT Exporting Licensing Joint venture Wholly owned subsidiary Marketing & Distribution only Fully integrated Spot sales Foreign agent / distributor Long-term contract Licensing patents & other IP Franchising Marketing& Distribution only Fully integrated Low Resource commitment High 16

Alliances and Joint Ventures: Management Issues
Benefits: --Combining resources and capabilities of different companies --Learning from one another --Reducing time-to-market for innovations --Risk sharing Problems: --Management differences between the two partners. Conflict most likely where the partners are also competitors. Benefits are seldom shared equally. Distribution of benefits determined by: Strategic intent of the partners- which partner has the clearer vision of the purpose of the alliance? Appropriability of the contribution-- which partner’s resources and capabilities can more easily be captured by the other? Absorptive capacity of the company-- which partner is the more receptive learner? 17

General Motors’ Alliances with Competitors
SAAB AVTOVAZ 20% owned (2000-5). Collaboration on technology and components FIAT 50% owned SUZUKI Russian JV to produce cars 10% owned. Co-production GM 20% owned; joint production FUJI 60% owned 49%owned. Co-production ISUZU JV to produce cars in China 40% investment IBC Vehicles Ltd. (U.K.) 50% owned SAIC (Makes vans in UK) 50.9% owned; technical & production collaboration New United Motor Manufacturing Inc. (NUMMI) TOYOTA 50% owned DAEWOO (Makes cars in US) 18

Multinational Strategies: Globalization vs. National Differentiation
The case for a global strategy: National preferences in decline—world becoming a single, if segmented, market Accessing global scale economies—in purchasing, manufacturing, product development, marketing. Strategic strength from global leverage—ability to cross- subsidize a national subsidiary with cash flows from other national subsidiaries Need to access market trends and technological developments in each of the world’s major economic centers- N. America, Europe, East Asia. Ted Levitt “Globaliz- -ation of Markets” Thesis Hamel & Prahalad Thesis Kenichi Ohmae’s “Triad Power” Thesis 20

Globalization & Global Strategy —What are they?
--Something to do with increasing interdependence between countries. GLOBAL STRATEGY --At simplest level: Treating the world as a single market E.g. Japanese companies during the 1970s & 1980s, (YKK, Honda) standard products, developed & manfactured within Japan; distributed & marketed worldwide --At more sophisticated level: Strategy that recognizes and exploits linkages between countries (e.g. exploits global scale, national resource differences, strategic competition) World as separate national mkts. World as single mkt. World as inter- related mkts. global strategy multidomestic strategy

Analyzing benefits/costs of a global strategy
Forces for globalization MARKET DRIVERS --Common customer needs --Global customers --Cross-border network effects COST DRIVERS --Global scale economies --Differences in national resource availability --Learning COMPETITIVE DRIVERS --Potential for strategic competition (e.g. cross- subsidization) Forces for localization / national differentiation MARKET DRIVERS --Different languages --Different customer preferences --Cultural differences COST DRIVERS --Transportation costs --Transaction costs --Economic & political risk --Speed of response GOVERNMENT DRIVERS --Barriers to trade & inward inv. --Regulations

Benefits of national differentiation
Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment Investment banking Steel Restaurant chains Cement Online C2C auctions Retail banking Beer Auto repair Dry cleaning Funeral services Benefits of national differentiation 24

Benefits of national differentiation
Positioning industries in terms of benefits of globalization and national differentiation Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment Investment banking Retail banking Cement Auto repair Funeral services Benefits of national differentiation 24

The Evolution of Multinational Strategies and Structures: (1) 1900-1939—Era of the Europeans
The European MNC as Decentralized Federation : National subsidiaries self-sufficient and autonomous Parent control through appointment of subsidiaries senior management Organization and management systems reflect conditions of transport and communications at the time e.g. Unilever, Phillips, Courtaulds, Royal Dutch/Shell. 21

The Evolution of Multinational Strategies and Structures: (2) 1945-1970—U.S. Dominance
American MNC’s as Coordinated Federations : National subsidiaries fairly autonomous Dominant role as U.S. parent-- especially in developing new technology and products Parent-subsidiary relations involved flows of technology and finance, and appointment of top management. e.g. Ford, GM, Coca Cola, IBM 22

The Evolution of Multinational Strategies and Structures: (3) 1970s and 1980s—The Japanese Challenge
The Japanese MNC as Centralized Hub Pursuit of global strategy from home base Strategy, technology development, and manufacture concentrated at home National subsidiaries primarily sales and distribution companies with limited autonomy. e.g. Toyota, NEC, Matsushita 23

local responsiveness local responsiveness local responsiveness
Marketing Global Strategies and Situations to Industry Conditions: Firm Success in Different Industries Consumer Electronics Branded, Packaged Telecommunications Consumer Goods Equipment - Global industry Substantial national - Requires both global - Matsushita the most differentiation, few global integration and national successful scale economies differentiation. - Philips the survivor Kao has limited success - NEC only partially - GE sold out outside Japan successful Unilever and P&G most - ITT sold out successful - Ericsson most successful Matsushita NEC Kao Erickson global integration Philips global integration P&G global integration Unilever General Electric ITT local responsiveness local responsiveness local responsiveness 25

Reconciling Global Integration with National Differentiation: The Transnational Corporation
Tight complex controls and coordination and a shared strategic decision process. Heavy flows of technology, finances, people, and materials between interdependent units. The Transnational: an integrated network of distributed interdependent resources and capabilities. Each national unit and source of ideas, skills and capabilities that can be harnessed to benefit whole corporation. National units become world sources for particular products, components, and activities. Corporate center involved in orchestrating collaboration through creating the right organizational context. 26

Designing the MNC: Key Learning
On what basis to organize—products, geography, functions? --Where is coordination most important? --How global is the industry? How global is the firm’s strategy? If one dimension is dominant, how to coordination along the other dimensions? --Maintain single line accountability --Other dimensions of coordination can be “dotted line” relations What’s the role of HQ? --Control function --Coordination function --Exploiting scale economies in centralized provision of services The need for internal differentiation --By product/business --By function --By country Formal & informal organization

MBA290: ADVANCED STRATEGIC MANAGEMENT

Similar presentations

Presentation on theme: "MBA290: ADVANCED STRATEGIC MANAGEMENT"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

MBA290: ADVANCED STRATEGIC MANAGEMENT

Similar presentations

Presentation on theme: "MBA290: ADVANCED STRATEGIC MANAGEMENT"— Presentation transcript:

Similar presentations

About project

Feedback