MGMT 490 Strategic Management

MGMT 490 Strategic Management
Prof. Stephen Standifird Welcome!!!

Syllabus Highlights Basic Content
My contact info. Course objectives Text: Hitt et. al. (6th Edition) Grading Groups (50%) 2 subject pres./memos 1 final pres./memo Individual (50%) 2 exams (no final) Group Participation

Course Philosophy Application, application, application
Strategy - an active topic Participation is a MUST! News you can use Informal but Serious Informative and Enjoyable Questions? Always Encouraged

How to Get an A Individual: Group: Read the Book Attend the Class
Pay Attention!!! Participate Group: Plan Ahead (way ahead!!) Data, Data, Data Be Professional Have Fun

What is Strategy?

In SBA to learn more about:
A. Architectural Design? B. 18th Century European Art? C. Biochemical Engineering? Business!!!

What is Strategy? The study of how a company can make more money!!!

What is Strategy? Strategic Competitiveness: Above-average Returns:
Achieved when a firm successfully formulates and implements a value-creating strategy. Above-average Returns: In excess of what investors expect to earn from other investments with a similar amount of risk. Strategic Management Process: The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and above-average returns.

What is Strategy? How is this done?
The commitments, decisions, and actions that allow the firm to make more money! How is this done? Two competing models 1. Industrial Organizational Model 2. Resource-Based Model

Model One: Industrial Organization (Porter’s Five Forces)
The external environment should drive strategy. Locate and compete in an attractive (profitable) industry.

Model Two: Resource Based (Core Competency)
The resources and capabilities of the firm should drive strategy. Build your strategy around existing resources.

Model Three: Life in the Real World! (the focus of this class)
The external environment and the resources and capabilities of the firm drive strategy. Firms should seek to maximize profitability by locating and competing in an industry where the firm can most effectively leverage existing and potential resources.

Strenghts Weakness Opportunities Threats Internal Environment
Begin Here (the SW of SWOT) External Environment Begin Here (the OT of SWOT)

Complicating Factors Globalization Technological Changes
Tough to find a truly domestic product/market Must be an international strategist Technological Changes Buy-it-here.com Not just for high tech firms any more Multiple Stakeholders Capital Markets, Product Markets, Organizational Government, Competitors, etc. (you get the point)

The External Environment
The General Environment 1. The General Environment Environmental Analysis Segments of the Environment 2. The Industrial Environment Industry Analysis (five forces) Strategic Groups/Competitor Analysis

The External Environment Model of Superior Returns
1. Study the external environment. 2. Locate an industry with high potential for above-average returns. 3. Identify strategy called for by the industry to earn above-average returns.

4. Develop or acquire assets and skills needed to implement the strategy. 5. Use the firm’s strengths (its assets or skills) to implement the strategy. 6. Maintain selected strategy in order to outperform industry rivals.

The External Environment Part I: The General Environment
Demographic Segment Population, Age, Income, Ethnicity Economic Segment Inflation, Exchange rates, Savings rates, Interest Political/legal Segment Antitrust, (De)regulation, Taxation, Labor laws Sociocultural Segment Diversity, Social concerns, quality of life Technological Segment Product and process changes, Communications Global Segment Political events, global and regional crisis, Exchange rates

The General Environment: Important Issues to Remember
The same environmental trend will effect different industries differently (or not at all) Internet: Auto Repair versus Book Store The impact of a particular trend will effect different companies in an industry differently Busier Schedules: Indigo Grill vs McDonald’s So. . . Scan for general trends and identify specific factors that influence your company

Scanning A general look around Monitoring Keeping track of what looks potentially important Forecasting Trying to predict where things will be going Assessing Trying to understand how the changes effect you

The General Environment: Albertson’s Grocery Stores
Scanning - Tech Sector The internet !!! Monitoring Rapidly changing Forecasting Will continue rapid change Assessing Short term? Not an issue Long term impact unclear Continue to monitor Scanning - Demo Sector Dual income families Monitoring Slow but steady change Forecasting Most couples working Assessing Short term? Eating out more, not buying groceries Must respond now “Quick Fix” meals

Group Formation You Pick’um, I referee
Five Persons Per Group (must be this way) Once you have a group, let me know If you need a person (or 2 or 3), let me know Exchange information ( , phone #, etc) Identify potential companies Give me back the group list and company name

Exercise: General Environment and Wal-Mart
Break in groups of 3 or 4 persons Try to identify at least one general trend for each segment of the environment Determine how this trend impacts Wal-Mart a.k.a. the worlds largest retailer (positive, negative or neutral) How would you respond - time permitting

The General Environment and Wal-Mart

External Environment: Part II Industry Analysis
External Environment Model of Superior Returns Locate an industry with high potential for above-average returns. An Industry is a group of firms producing products that are basically the same.

Porter’s Five Forces Model of Competition
Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products

Threat of New Entrants Economies of Scale * Product Differentiation *
Barriers to Entry * Capital Requirements * Switching Costs * Access to Distribution Channels * * Cost Disadvantages Independent of Scale Government Policy *

Threat of Substitute Products
Keys to evaluate substitute products: Products with improving price/performance tradeoffs relative to present industry products * Products with similar function limit the prices firms can charge For Example: Fax machines in place of overnight mail delivery in place of fax machines

Bargaining Power of Suppliers
Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases * Supplier industry is dominated by a few firms Suppliers’ products have few substitutes Suppliers’ products have high switching costs Supplier poses credible threat of forward integration Suppliers’ products are differentiated Suppliers are likely to be powerful if:

Bargaining Power of Buyers
Buyer groups are likely to be powerful if: * Buyers are concentrated or purchases are large relative to industry sales Buyer presents a credible threat of backward integration Products are undifferentiated Buyers face few switching costs Buyers’ industry earns low profits Buyer has full information Buyers compete with the supplying industry by: * Bargaining down prices * Forcing higher quality * Playing firms off of each other

Intensity of Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors * Slow growth industry * High fixed costs * High storage costs * Lack of differentiation or switching costs * Diverse competitors * High strategic stakes * High exit barriers *

Five Forces and the Oil Industry
Threat New Entry Billions of $ to enter No new since mid 1970s VERY LOW Supplier Power Landowners, countries smaller than companies LOW Buyer Power You and I as individuals Very LOW Substitutes Methanol? Not driving? VERY LOW Rivalry Joint drilling operations Mergers and acquisitions “Regional focus” Profits??? Huge, enormous, monstrously large!!!

Five Forces and Restaurants
Threat New Entry Small capital ($50,000) Can be run by a family VERY HIGH Supplier Power Real Estate controls all Buyer Power Do you always go to the exact same restaurant? Substitutes How often does the average family eat out? VERY HIGH Rivalry Why work together? Fierce competition Profits??? Ouch! Not so good, Many don’t survive

Pres./Memo One - Expectations
Provide a Brief company overview (none is fine) Highlight results of the general environment analysis Scanning, monitoring, forecasting, assessing Conduct a detailed Five Force analysis Provide a rough determination of the impact of each force force (support your position) Summarize the overall model results Explain where your company fits in the industry Briefly mention the type of generic business-level strategy pursued by the company The memo should replicate the presentation

THE Project Questions (Your conclusion should address these questions)
What did we learn form the analysis that can be useful to someone within the company? Application, application and more application

Project Expectations Keys to Success
Report the RESULTS of your analysis, not the process of analysis. However, Be thoughtful (what’s really going on) Make sure you SUPPORT YOUR ARGUMENT!!! Data, data and more data - support your position! (not a suggestion, a requirement)

Business-Level Strategy
A Strategy is an integrated and coordinated set of commitments and actions designed to gain a competitive advantage. A Business-level strategy is a (strategy) targeted to specific, individual product markets.

Generic Business Level Strategies Breadth of Competitive Scope
Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market

Cost Leadership Business Level Strategy
Requirements Relatively standardized products Constant effort to reduce costs through: Features acceptable to many customers Lowest competitive price Building efficient scale facilities * * Monitoring costs of activities provided by outsiders Tight control of production costs and overhead * * Minimizing costs of sales, R&D and service * Simplification of processes * “State of the Art” manufacturing facilities

Cost Leadership Competitive Risks
Focus on VOLUME Cost Leadership Competitive Risks Loss of cost advantage due to technology Loss of cost advantage due to imitation Customer interest in a differentiated product

Differentiation Business Level Strategy
Requirements Value provided by unique features and value characteristics Constant effort to differ-entiate products through: Command premium price * Developing new systems and processes High customer service * Shaping perceptions through advertising Superior quality * Quality focus Prestige or exclusivity * Capability in R&D * Maximize Human Resource contributions through low turnover and high motivation Rapid innovation

Differentiation Competitive Risks
Focus on MARGINS Differentiation Competitive Risks Price does not justify the features Unique features no longer valued Loss of differentiation due to imitation

* * * Focused Business Level Strategies
Focused Business Level Strategies involve the same basic approach as Broad Market Strategies However..... Opportunities may exist because: Large firms may overlook small niches * * Firm may lack resources to compete industrywide * May be able to serve a narrow market segment more effectively than industrywide competitors

Focused Competitive Risks
Firm may be “outfocused” by competitors Large competitor may set its sights on your niche market

Integrated Low-Cost/Differentiation
Potential problems? Unachievable! Can easily get stuck in the middle. What is it? The best of both worlds. Both low-cost and differentiated.

Pres./Memo One - Expectations
Provide a Brief company overview (none is fine) Highlight results of the general environment analysis Scanning, monitoring, forecasting, assessing Conduct a detailed Five Force analysis Provide a rough determination of the impact of each force force (support your position) Summarize the overall model results Explain where your company fits in the industry Briefly mention the type of generic business-level strategy pursued by the company The memo should replicate the presentation

THE Project Questions (Your conclusion should address these questions)
What did we learn form the analysis that can be useful to someone within the company? Application, application and more application

Project Expectations Keys to Success
Report the RESULTS of your analysis, not the process of analysis. However, Be thoughtful (what’s really going on) Make sure you SUPPORT YOUR ARGUMENT!!! Data, data and more data - support your position! (not a suggestion, a requirement)

A Diversified Company has 2 levels of strategy
Business-Level Strategy (Competitive Strategy) How to create competitive advantage in each business in which the company competes Corporate-Level Strategy (Companywide Strategy) How to create value for the corporation as a whole 7

Firms Vary by Degree of Diversification
Low Levels of Diversification Single-business More than 95% of revenues from a single business unit Dominant-business Between 70% and 95% of revenues from a single business unit Moderate to High Levels of Diversification Related-Diversified Less than 70% of revenues from a single business unit Businesses share product, techno-logical or distribution linkages High Levels of Diversification Unrelated-Diversified Business units not closely related 15

Alternative Diversification Strategies
Related Diversification Strategies 1 Sharing Activities 2 Transferring Core Competencies Unrelated Diversification Strategies 3 Efficient Internal Capital Market Allocation Restructuring 4 24

Sharing Activities Key Characteristics
Sharing of basic activities often lowering costs or raising differentiation Assumptions 1 Strong sense of corporate identity Clear corporate mission that emphasizes the importance of integrating business units 2 Incentive system that rewards more than just business unit performance 3 36

Transferring Core Competencies
Key Characteristic The sharing of highly specialized skills and expertise Assumptions Activities involved in the businesses are similar enough that sharing expertise is meaningful 1 Transfer of skills involves activities which are important to competitive advantage 2 The skills transferred represent significant sources of competitive advantage for the receiving unit 3 41

Efficient Internal Capital Market Allocation
Key Characteristic Acquire sound, attractive companies, transfer resources from units that generate cash to those with high growth potential and substantial cash needs Major Assumption Managers have more detailed knowledge of the acquired firm relative to outside investors (not likely) 51

Restructuring Key Characteristic
Seek out undeveloped, sick or threatened organizations, make a variety of harsh changes within the firm and (often) sell unit after making one-time changes since parent no longer adds value to ongoing operations Major Assumption Management of the acquiring firm has insight in selecting firms with depressed values or unforeseen potential (yea right!) 58

Firms Vary by Degree of Diversification
Low Levels of Diversification Single-business More than 95% of revenues from a single business unit Dominant-business Between 70% and 95% of revenues from a single business unit Moderate to High Levels of Diversification Related-Diversified Less than 70% of revenues from a single business unit Businesses share product, techno-logical or distribution linkages High Levels of Diversification Unrelated-Diversified Business units not closely related 15

Diversification and Firm Performance Level of Diversification
Dominant Related Unrelated Level of Diversification 67

Why all the Unrelated Diversification?
Managerial Motives to Diversify To diversify employment risk, effective as long as profitability does not suffer excessively. To increase compensation. As firm size goes up, so does executives compensation. It’s the trendy thing to do (more so in the 1980s)

BCG Growth-Share Matrix

Stars Cash Cows Question ? Dogs High Grow High Share Low Grow Low Share Promote and Expand Defend and Maintain Invest or Divest No Future Divest

Major Assumption: If you have a low market share and/or it’s a slow growth market, the long term profitability potential of an investment is low. Problem with Assumption: Does not allow for a sharing of activities or core competencies (skills and abilities) that makes an otherwise poor investment (for some) more attractive for your firm. Assumes that if it’s a high growth market where you can have a large presence, then it’s a good investment.

GE/McKinsey Matrix High Medium Low Grow Hold Harvest
Business Unit Strength High Medium Low Grow Hold Harvest Industry Attractiveness Fatal Assumption: No Interaction Between Business Units

Corporate Governance Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations Concerned with identifying ways to ensure that strategic decisions are made effectively Used in corporations to establish order between the firm’s owners and its top-level managers

Separation of Ownership and Managerial Control
The nature of modern corporations based on capital markets Shareholders purchase stock, becoming Residual Claimants Shareholders reduce risk by holding diversified portfolios Professional managers contract to provide decision-making Modern public corporation form leads to efficient specialization of tasks Risk bearing by shareholders Strategy development & decision-making by managers

Risk Bearing Specialist Managerial Decision-Making Specialist
Agency Theory An agency relationship exists when: Agency Relationship Shareholders (Principals) Risk Bearing Specialist (Principal) Hire Managerial Decision-Making Specialist (Agent) Firm Owners Managers (Agents) which creates Decision Makers 17

Agency Theory The Agency Problem occurs when:
The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately Managerial Opportunism occurs when: The manager acts in her or his self-interests with guile. Problematic because it is impossible to know in advance who will be opportunistic. Example: Overdiversification because increased diversification generally leads to greater compensation. Flat out fraud that benefits individuals at the expense of the firm (Enron)

Agency Theory Principals may engage in monitoring behavior to assess the activities and decisions of managers However, dispersed shareholding makes it difficult and inefficient to monitor management’s behavior What to do? Implement some type of Corporate Governance

Governance Mechanisms
Internal Governance Mechanisms Ownership Concentration Boards of Directors Executive Compensation Multidivisional Organizational Structure External Governance Mechanisms Market for Corporate Control

Auditing is NOT a free service Dangerous if left unchecked
Agency Costs The sum of Corporate Governance Costs incentive, monitoring and enforcement costs Opportunistic Behavior Costs individual financial losses incurred by principles, because of misdeeds by the agent A Balancing Act: Auditing is NOT a free service Dangerous if left unchecked

Ownership Concentration
Large block shareholders have incentive to monitor management closely Their large stakes make it worth their while to spend time, effort and expense to monitor They may also obtain Board seats which enhances their ability to monitor effectively Limitation: Tough to get large enough to be influential is a Fortune 500 firm

Boards of Directors Review and ratify important decisions
Determine CEO compensation/employment Limitation: Lack day to day interaction and/or may be an insider or a related insider Increase diversity of board members backgrounds Internal mgmt/accounting control systems Establish formal processes for evaluation of the board’s performance

Executive Compensation
Salary, Bonuses, Long term incentives Limitations: Executive decisions are complex and non-routine, Many factors making it difficult to establish how decisions are directly responsible for outcomes Stock ownership (long-term incentive) makes managers more susceptible to market changes which are partially beyond their control Incentive systems do not guarantee that managers make the “right” decisions

Multidivisional Organizational Structure (e.g., GM)
Corporate office and Board monitor managers’ strategic decisions Increased managerial interest in wealth maximization at the corporate level Limitation: Does not necessarily limit corporate- level managers’ self-serving actions May lead to greater rather than less diversification Tough to link individual to senior managers

Market for Corporate Control
When firms face the risk of takeover because they operate inefficiently (lower stock price) Firms operate more efficiently as a result of the “threat” of takeover, even though the actual incidence of hostile takeovers was relatively small Limitation: Development of defensive measures Problems with hostile takeovers (TBA)

Exam One: Review Topics Covered Exam Format Focus of the Exam
If it was assigned reading or we talked about it in class, it’s included (does not text include examples). Exam Format 18 multiple choice (1 pt), 11 short answer (2 pts). Should be able to finish in 55 min. Focus of the Exam A combination of knowing basic concepts and applying these concepts to “real” situations.

Exam One: Review Chapter One (not in test) Chapter Two Chapter Four
What is the general environment and how do we include it (SMFA)? NOT the segments. Five Forces in detail. Chapter Four What are the business-level strategies, the advantages & assumptions associated with each? Chapter Six What are the levels of diversification and associated corporate-level strategies? When is a particular corporate-level strategy appropriate? Chapter Ten What is opportunistic behavior and why is it a problem? What are the corporate governance mechanisms and the limitation of each?

That’s all folks!!! (It’s not that tough - if you know your stuff)
Concerns? Questions? Anxieties? Comments?

Internal Model of Superior Returns

Car Shuttle Business Rides from USD to
Old Town Transit Center using my 2005 Honda CRV Leaves every 30 min from campus Monday – Friday from 7:15-9:45 AM and from 3:00-6:30 PM. No other such service in San Diego at this time Car Shuttle Business How many willing to pay $10.00 or more for this service???

Resource-Based Model of Superior Returns
The Resource-Based Model suggests that above-average returns for any firm are largely determined by characteristics inside the firm. The Resource-Based view focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.

Competitive Advantage
Capabilities Results In Combined With Teams of Resources Core Competencies Resources Sources of Sustained Competitive Advantage * Tangible Intangible Components of Internal Analysis Which Leads To Strategic Competitiveness Above-Average Returns

Resource-Based Model of Superior Returns
The Resource-Based Model suggests that above-average returns for any firm are largely determined by characteristics inside the firm. The Resource-Based view focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.

What a firm Has... Resources Resources Tangible Resources
What a firm has to work with: * Financial its assets, including its people and the value of its brand name * Physical * Human Resources * Organizational Resources represent inputs into a firm’s production process... Intangible Resources such as capital equipment, skills of employees, brand names, finances and talented managers * Technological * Innovation * Reputation

Capabilities What a firm Does...
Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources. The combination of specific firm capabilities with specific firm resources results in the core competency of the firm. 26

Core Competency What a firm does with what a firm has...
But is it Strategically Valuable? Question: How do we determine if what a firm does with what a firm has is strategically valuable? Answer: Does it give the firm a Sustained Competitive Advantage?

Sustain Competitive Advantage
Valuable Competency that helps a firm to exploit opportunities to create value for customers Rare Competency that are possessed by few, if any, current or potential competitors Costly to Imitate Competency that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Nonsubstitutable Competency that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships 42

Competitive Consequences Performance Implications
Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Costly to Imitate Nonsub-stitutable Competitive Consequences Performance Implications Valuable Rare Below Average Returns Competitive Disadvantage NO YES/NO YES/NO YES/NO Competitive Parity Average Returns YES NO YES/NO YES/NO Temporary Competitive Advantage Temporary Above Ave Returns YES YES NO YES/NO Sustainable Competitive Advantage Above Average Returns YES YES YES YES 46

Competitive Advantage
Capabilities Results In Combined With Teams of Resources Core Competencies Resources Sources of Sustained Competitive Advantage * Tangible Intangible Components of Internal Analysis Which Leads To Strategic Competitiveness Above-Average Returns

Components of Internal Analysis
Capabilities Combined With Result In Teams of Resources Distinctive Resources Components of Internal Analysis Competencies * Tangible Intangible Which May Be Strategically Sustainable Valuable Competitive Advantage Valuable, Rare, not easily imitated or substituted Above-Average Returns Result In

Warning, Warning, Warning!!!
Products or services that customers like are NOT core competencies. Core competencies are the combination of resources and capabilities that ALLOW the firm to produce the products and services that customers like.

Identifying Core Competencies
Step 1. Prepare a current product/market profile 2. Identify sources of advantage in primary product/markets 3. Determine organizational competencies 4. Determine if competencies give you a sustained competitive advantage Question 1. What are we selling, to whom and how are we doing? 2. Why do our customers choose our products over others? 3. What about our org. gives us advantage with customers? 4. Is the competency rare, valuable, difficult to imitate or substitute?

Canon’s Core Competencies
Question 1. What are we selling, to whom and how are we doing? 2. Why do our customers choose our products over others? 3. What about our org. gives us advantage with customers? 4. Is the competency rare, valuable, difficult to imitate or substitute? Step 1. High end cameras (prior to expansion of the business) 2. Because of the superior optics associated with our lenses 3. The ability to produce superior optical devices 4. Yes, especially as related to cameras BUT also as related to copiers! Canon’s expertise is with optics, not photography. Thus, moving into copies makes sense. Moving into film does not. This is why we focus on resources and capabilities, NOT products.

Warning, Warning, Warning!!!
Products or services that customers like are NOT core competencies. Core competencies are the combination of resources and capabilities that ALLOW the firm to produce the products and services that customers like.

Project Expectations Necessary Items for all presentations/memos
Use the four questions framework to identify the firm’s core competency. Discuss in detail the resources and capabilities that make up the distinctive competency. Determine if the distinctive competency is strategically valuable (valuable, rare, subs, imit). Determine the firm’s competitive position AND the financial implications of this position. Discuss the implications of your analysis.

Project Expectations Must work together as a group
Not appropriate for one person to dominate ALL must participate Any ‘bonus’ depends on equal participation I reserve the right to adjust scores for those who do not contribute to the projects based on feedback received from the rest of the group.

Human Resource Management
Value Chain Analysis helps to identify which resources and capabilities can add value Firm Infrastructure MARGIN Human Resource Management Support Activities Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Primary Activities

Value Chain Analysis (the short version)
Primary Activities - are those involved with the product or service’s creation, its sale and distribution to buyers, and its service after the sale. Support Activities - provide the support necessary for the primary activities to take place. To be a source of competitive advantage, a resource or capability must some how contributed to the overall core competency of the firm.

Outsourcing? What is it? Strategic choice to purchase some activities from outside suppliers Why do it? Improve Business Focus - Lets company focus on broader business issues by having outside experts handle various operational details Provide Access to World-Class Capabilities - The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications Free Resources - Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively

The Short Version: Allows you to focus on doing what you
do best while hiring others to do what they do best. What to Outsource? Potentially anything that does not directly related to your core competency Be careful not to accidentally erode your competitive position For example: If you’re an oil company, why not outsource your payroll functions If you’re a bank, you should probably not outsource your accounting function

Mergers and Acquisitions
A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses

Hostile Takeovers and Leveraged Buyouts
Takeover (Hostile) An acquisition where the target firm did not solicit the bid of the acquiring firm. Often results in the replacing of management Leveraged Buyout A restructuring where the management of the firm and/or outside investors buys all of the assets of the business largely financed with debt and takes the firm private. High debt load commits future cash flows to repay debt, creating increased risk

Reasons for Mergers and Acquisitions
Increase Market Power Acquisition intended to reduce the competitive balance of the industry. (BP Amoco Arco) Overcoming Barriers to Entry Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive (Whirlpool and Phillips Appliance Division) New Product Acquisition (lower cost & risk) Buying established businesses reduces risk of start-up ventures (Ford’s acquiring of Jaguar)

Reasons for Mergers and Acquisitions
Increase Speed to Market Allows entry in a more timely fashion (CBS and iwon) Diversification For all the reasons previously outlined (Philip Morris and Miller Brewing) Avoiding Excessive Competition Trying to move where competitive pressures are less intense (GE and NBC) Bigger is Better/Got to Be There Assumption Based on peer pressure (Exxon & Mobil)

Problems with Acquisitions
Integration Difficulties Differing cultures can make integration of firms difficult Inadequate evaluation of Target “Winners Curse” bid causes acquirer to overpay for firm Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows 23

Problems with Acquisitions
Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits Overly Diversified Acquirer doesn’t have expertise required to manage unrelated businesses Managers Overly Focused on Acquisitions Managers lose track of core business by spending so much effort on acquisitions Too Large Large bureaucracy reduced innovation and flexibility 30

Characteristics of Effective Acquisitions
Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness Friendly Acquisitions Friendly deals make integration go more smoothly Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone 34

Characteristics of Effective Acquisitions
Low-to-Moderate Debt Merged firm maintains financial flexibility Flexibility Has experience at managing change and is flexible and adaptable Do it For the Right Reasons Avoid the bigger is better/Got to be there trap Make sure you have the core competencies to effectively utilize the acquired resources!!!! 37

Alternative Diversification Strategies
Related Diversification Strategies 1 Sharing Activities 2 Transferring Core Competencies 24

Transferring Core Competencies
Key Characteristic The sharing of highly specialized skills and expertise Assumptions Activities involved in the businesses are similar enough that sharing expertise is meaningful 1 Transfer of skills involves activities which are important to competitive advantage 2 The skills transferred represent significant sources of competitive advantage for the receiving unit 3 41

Group Discussion Questions
Image you are the CEO of Ocean Kayaks You have decided it is time to diversify What are your core competencies? What would be an appropriate area of expansion to build on your core competencies? If you were to expand via acquisition, who would be an appropriate acquisition target?

International Strategy
“The selling and/or production of products in markets outside the firm’s domestic market”

Good ‘Strategic’ Reasons for Going Global
Increased Market Share (Sales) Increased sales, increased profits Must adapt to local tastes and preferences Location Specific Advantages (Production) Lower costs OR other reasons Must factor in transportation costs, trade barriers, political risk Increased market share - 1.2 billion Chinese but are they buying watches Adapting to local tastes and preferences - part of culture - very country specific - research, research and research Location Specific Advantages - labor is cheaper in Mexico than in Detroit - Fashion is better in Italy (than Indiana) - Tech revolution is happening in California Factoring in trade and political - from our previous chapters - be aware Do your research ahead of time - Anyone who got burned doing business in Iraq should have seen it coming.

Four Basic Strategies International Strategy Multi-domestic Strategy
Global Strategy Transnational Strategy

Pressures for Local Responsiveness
High Transnational Strategy Global Strategy Cost Pressures (need to keep costs down) Multidomestic Strategy International Strategy Low High Low Pressures for Local Responsiveness (need to locally adapt)

Local Responsiveness Consumer tastes and preferences
Infrastructure and traditional practices Distribution channels Host government demands

International Strategy
Transfer valuable skills and products (and production capabilities) to a foreign market Minimal adaptation for the local environment You have what they want and you are willing to sell it to the (e.g., McDonald’s)

Multidomestic Strategy
Customize both product offerings and marketing strategy Maximum local adaptations Basically setting up a completely new business in the target market (e.g., French Grocery Chain in Poland)

Global Strategy Offer standardize product built using a global network
Global production (to reduce costs) and standardized in marketing Offering a generic product at a low price (e.g., Marlboro Cigarettes)

Transnational Strategy
Low cost and local responsiveness Trying to do both at the same time Hum? I’m not convinced it’s possible

The Four Strategies Compared

What’s the Best Strategy?
It Depends!!! Fast Food in Every Country (Int’l) Soft Drinks World Wide (Global) Grocery Stores in Poland (M-D)

Entering Foreign Markets
The FOUR entry modes 1. Exporting 2. Licensing 3. Strategic Alliance 4. Wholly-Owned subsidiary (including Acquisitions) A trade off of risk and control

Exporting Establish distribution channels through contractual relationships Common way to enter a new int’l market May have high transportation costs May encounter high import tariffs May be impossible to do depending on product characteristics

Exporting Primary Advantage: Primary Disadvantage:
No need to establish operations in target country (low risk) Primary Disadvantage: Less control over marketing and distribution (low control)

Licensing Firm authorizes another firm to manufacture and sell its products Licensing firm is paid a royalty on each unit produced and sold Can also include Franchising where the franchisee is required to follow strict rules of operation May be impossible to do depending on product characteristics

Licensing Primary Advantage: Primary Disadvantage:
Licensee takes the risk associated with manufacturing investment (low risk) Primary Disadvantage: Licensing firm loses control over product quality and distribution (low control) Licensor learns the licensing firm’s technological know how (low control)

Strategic Alliance A business entity/activity that is jointly owned by two or more otherwise independent firms Usually involves a foreign company with a new product or technology and a host company with access to distribution or local knowledge May experience difficulty in merging cultures May incorrectly assess the intent of the partner

Strategic Alliance Primary Advantage: Primary Disadvantage:
Enables a firm to share the risks and resources when expanding into a new environment (moderate risk) Primary Disadvantage: Must share in the decision making with the strategic partner (moderate control)

Wholly-Owned Subsidiary
A 100% owned subsidiary of a company based in another country The parent firm develops an entirely new firm in the target market The parent firm acquires an established firm and uses that firm to promotes its products in the target market

Wholly-Owned Subsidiary
Primary Advantage: The parent firm has complete managerial control over the subsidiary (high control) Primary Disadvantage: The parent firm incurs the entire cost of expansion into the target market (high risk)

What’s the Best Strategy?
It Depends!!! Level of acceptable risk Level of pre-existing knowledge Nature of product or service

A strategy in which firms work together to achieve a shared objective
Cooperative Strategy A strategy in which firms work together to achieve a shared objective Strategic Alliance: Firms combine some of their resources and capabilities to create new competitive advantages. Collusive Strategy: Two or more firms cooperating to raise prices above fully competitive market prices.

Types of Collusion Explicit Conspiracy: Getting together to fix prices
- Illegal in US but practices elsewhere (e.g. Org of the Petroleum Exporting Countries, De Beers) Tacit Coordination: Spontaneous cooperation in concentrated industry - NOT illegal and practiced in US (e.g. with Oil) Facilitating Practices: Announcing of prices/matching guarantees - NOT illegal and practiced in US (e.g. with drugs)

Types of Strategic Alliances
Joint Venture: Independent firm is created by the joining assets from two other firms where each contributes 50% of the total Equity Strategic Alliance: Partnership where the two partners do not own equal shares Non-equity Strategic Alliance: Contract is given to supply, produce or distribute a firm’s goods or services (without equity sharing)

Types of Strategic Alliances
Slow Cycle: (imitation is difficult) Reason: To gain access to restricted markets Fast Cycle: (imitation is ongoing) Reason: Speed/reduce risk of new innovations In either case, focus is on enhancing KEY resources/capabilities (key resource being access to markets or introduction of new innovations)

Business Level Cooperative Strategies
Complementary Alliances Sharing of resources and capabilities in complementary ways to gain advantage Vertical: Up and down the value chain (someone to assist with procurement or sales) Horizontal: Same stage of the value chain (to build a better product) Bottom line: Convince people to buy your product or service over others for whatever reason

Other Cooperative Strategies
Corporate Level Alliance Used to diversify into new products or markets. As previously discussed and based on complimentary resources and capabilities International Cooperative Strategy As a mechanism for entering new markets. Again, as previously discussion with a focus on complimentary resources and capabilities Network Cooperative Strategy Used to advance the interests of a group of firms (e.g., industry). Begins to look like collusion

Cooperative Strategies Risks
Unclear expectations for each party involved Exploitation by one party due to inadequate contractual safeguards Failure to achieve synergies due to misrepresentation of resources and capabilities Failure to achieve synergies due to inability to integrate resources and capabilities due to cultural clashes between the parties involved

Managing Cooperative Strategies
Cost Minimization: Minimize risks by having good contractual safeguards in place. Monitor activities of jointly operated activities. * Easier to do in the short term Opportunity Maximization: Maximize benefits by building trusting relationships and by mutually addressing issues that arise as a result of the relationship. * More cost effective in the long term

Entrepreneurship and Innovation

1973 Crocodile Rock - Elton John Nixon is President (not for long) Microsoft does not exist (neither do you) IBM offers a PC 9 years later First Personal Computer is born (the Alto) Same company invents the mouse, graphical interfacing and word processing What company are we talking about???

Entrepreneurship and Innovation
Invention The act of creating or developing a new product or process Innovation The process of creating a commercial product from an invention Entrepreneur An individual who creates a new venture or develops an innovation and takes risks entering them into the marketplace Corporate Entreprenuership The process whereby an individual or group in an existing organization creates a new venture or develops a process innovation

Internal Corporate Venturing
1 Autonomous strategic behavior is a bottom-up process through which Product Champions pursue new product ideas to commercialization Product Champions are individuals who have an entrepreneurial vision for a new product and seek support for its commercialization 2 Induced strategic behavior is a top-down process in which the current strategy and structure foster product innovations that are closely associated with the current strategy A Decision on which corporate resources to deploy for new technology development and which innovative ideas to bring to market

Implementing Internal Corporate Ventures
Barriers to Integration 1. Independent Frames of Reference (different ways of seeing the world) 2. Organizational Politics Facilitating Integration 1. Shared Values Associated with Innovation 2. Leadership Stressing Innovation 3. “Innovation Friendly” Goals and Budgets 4. An Effective Innovation System

External Sources of Innovation
Strategic Alliances: A partnership between firms whereby resources, capabilities and core competencies are combined to pursue common interests and goals Benefit: Sharing Expertise and Costs (R&D) Main Risk: The Theft of a Firm’s Innovations Acquisitions and Venture Capital: The purchasing of innovation through acquisition or the allocation of resources to entrepreneurs who are involved in a project with high growth potential Benefit: Faster and cheaper than in house innovation Main Risk: Loss of the ability to innovate internally

Entrepreneurship and Innovation: Not Just for the Fortune 500
80% of the world’s R&D from firms of 10,000 or more employees More than half of the world’s “Inventions” come from smaller firms (but not the innovations) Smaller firms (500 or less employees) account for 53% of the workforce, 47% of sales and 51% of private sector GDP.

Tough job to be the companies strategic leader
Strategic Leadership The ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary Involves managing through others, managing an entire enterprise rather than a functional subunit, and coping with change that seems to be increasing exponentially. Tough job to be the companies strategic leader

Why are Strategic Leaders so Important?
Because they . . . determine a firm’s strategic direction by developing the firm’s long-term vision, ensure that the firm’s core competencies are emphasized in strategic implementation efforts, have a large influence on a firm’s ability to attract and retain high quality employees, shaping and reinforcing the firm’s culture, set the ethical tone of a company and, determine the appropriate level of organizational control.

Strategic Leadership and You
You are not going to be the CEO right away (probably). However, you might be making strategic recommendations to the CEO right away. Therefore, you need to understand strategic leadership. The actions of the strategic leadership have a HUGE effect on the firm (will determine what kind of place it is to work)

Heterogeneous Top Management Team
The key managers who are responsible for formulating and implementing the strategy. Heterogeneous Top Management Team A top management team composed of individuals with different functional backgrounds, experiences, and education. More heterogeneous top management teams . . . are better at strategic formulation struggle with strategic implementation

Managerial Labor Market
Internal Labor Market The selection of new management from within the org Familiarity with firm and industry Maintaining firm specific knowledge Often more accepted within the company External Labor Market The selection new management from outside the org Brings in fresh ideas More likely to institute organizational changes

Effects of CEO Succession and Top Management Team Composition
Managerial Labor Market: CEO Succession Internal CEO Succession External CEO Succession Ambiguous: Possible change in Top Management Team and Strategy Stable Strategy Homogeneous Top Management Team Stable Strategy with Innovation Strategic Change Heterogeneous 27

What is best? It Depends! Good, stable industry with a sound core competency Stability sounds good! (Internal CEO and homogeneous top management team) Good Company in a rapidly changing industry Need to keep innovating (Keep the CEO but make sure top team is heterogeneous) Rapidly changing industry without any core competencies Serious change is needed! (Change CEO and develop a heterogeneous top management team) Homogeneous top team with a company going no where? Perhaps an outside CEO can shake things up a bit

The Balanced Scorecard
A framework that firms can use to verify that they have established the appropriate controls to assess their performance (not just financial). A mechanism for monitoring performance on a variety of dimensions including financial, customer, internal business processes, and learning and growth

The Balanced Scorecard
Financial Cash flow, return on equity, return of assets, etc. Customer Anticipating customers needs, customer service practices, % repeat customers, Communication with customers, etc. Internal Business Processes Asset utilization improvements, employee morale, turnover rates, etc. Learning and Growth Innov. abilities, new product intros, employee skills, etc. What’s most important? The key resources and capabilities that lead to you firm’s competitive advantage!

Now, what do we do about it?
Final Project From the smaller presentations: We know what the industry looks like (including external opportunities and threats) We know what our firm looks like (including internal strengths and weaknesses) Now, what do we do about it?

What you’re being paid to do as a consultant.
Final Project Make specific RECOMMENDATIONS! What you’re being paid to do as a consultant. A POTENTIAL framework (not necessary!) Outline the Strengths, Weaknesses, Opportunities and Threats for your company pulling from the previous.

Final Project Most Important: Make specific recommendations
Designed to minimize weakness, deal with threats, capitalize on opportunities while building on strengths. Make sure your recommendations tie specifically to material previously presented in class. For example, can you use your core competency to expand into an area you identified as a threat of substitutes during the Porter’s Five Forces analysis? - a rough example only! Be specific with your recommendations. make assumptions if necessary but clearly state your assumptions during the presentation.

Final Project Support your recommendations.
The support of your recommendations comes from the previous presentations - all of them, not just the last. Do not include any recommendations that are not justified based on your previous strategic analyses Only include recs that are supported by previous analyses. Number of recommendations? One REALLY good (i.e., supported) rec could be enough. Most groups will probably have 3 or 4 (more is too many) Make it Professional with an intro and conclusion. Whatever format communicates your message professionally

The Social Responsibility of Firms
Suggests that a corporation has responsibilities to society that extend beyond making a profit Milton Friedman: There is one and only social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Carroll’s Four Responsibilities
Economic To produce goods and services of value to society so that the firm can repay its creditors and shareholders Legal Defined by governments in laws that management is expected to obey Ethical To follow the generally held beliefs about behavior in a particular society Discretionary Purely voluntary obligations assumed by the firm

Carroll’s Four Responsibilities
Economic (Must) Legal (Have To) Ethical (Should) Discretion (Might) Stuff that has to be done Done by socially responsible firms Listed in order of priority according to Carroll

The Social Responsibility of Firms
Key Question: “Responsible to whom? Multiple Stakeholders: Investors, customers, local community, government regulators, employees, etc. Carroll’s Assumption: Investors come first (an assumption)

Treating Stakeholders Ethically
Ethics: Consensually accepted standards of behavior for a particular environment, occupation or profession. Three basic approaches to ethical behavior Utilitarian Individual Rights Justice

Utilitarian Approach Actions and plans should be judged by their consequences. Behave ways that produce the greatest benefit to society. Individual Rights Approach Fundamental rights should be respected in all decisions. A behavior should be avoided if it interferes with the rights of others. Justice Approach Decision makers should be equitable, fair and impartial in the distribution of costs and benefits to individuals and groups. A behavior should be avoided if it gives preferential treatment to one group or individual at the expense of others.

Utility Does an action/strategy optimize the satisfaction of all stakeholders involved? Rights Does an action/strategy respect the rights of the individuals involved? Justice Is the action/strategy consistent with the concept of justice for all?

Operating Ethically Ethics Committees Codes of Conduct
Internal Monitoring Codes of Conduct Statements of appropriate behavior Corporate Vision The guiding principles of the firm

Exam Two Overview Chapter 3 – Internal Analysis
Know core comp in detail, including 4 questions Chapter 7 – Acquis. & Restructuring Strategies Know different types and difficulties Chapter 8 – International Strategies Two key models, know them both Chapter 9 – Cooperative Strategies Know types and reasons for using each Chapter 12 – Strategic Entrepreneurship Know types and difficulties Ethics of Strategy/Natural Environment Carroll’s responsibilities/stakeholder approaches

What is Strategy? How is this done?
The commitments, decisions, and actions that allow the firm to make more money! How is this done? Two competing models 1. Industrial Organizational Model 2. Resource-Based Model

Components of Internal Analysis
Capabilities Combined With Result In Teams of Resources Core Resources Competencies Components of Internal Analysis * Tangible Intangible Which May Be Strategically Sustainable Valuable Competitive Advantage Valuable, Rare, not easily imitated or substituted Above-Average Returns Result In

Which model was most important?
It Depends! (i.e., neither or both)

Model Three: Life in the Real World! (the focus of this class)
The external environment and the resources and capabilities of the firm drive strategy. Firms should seek to maximize profitability by locate and compete in particularly attractive environments (industries) where the firm can most effectively leverage existing and potential resources (core competencies).

Entry Rivalry Core Comp. that leads to SCA? Where else might this Apply? Industry B Supplier Buyer Subs. Industry A Industry C

Now, what do we do about it?
Final Project From the smaller presentations: We know what the industry looks like (including external opportunities and threats) We know what our firm looks like (including internal strengths and weaknesses) Now, what do we do about it?

Final Project Most Important: Make specific recommendations
Designed to minimize weakness, deal with threats, capitalize on opportunities while building on strengths. Make sure your recommendations tie specifically to material previously presented in class. For example, can you use your core competency to expand into an area you identified as a threat of substitutes during the Porter’s Five Forces analysis? - a rough example only! Be specific with your recommendations. make assumptions if necessary but clearly state your assumptions during the presentation.

Final Project Support your recommendations.
The support of your recommendations comes from the previous presentations - all of them, not just the last. Do not include any recommendations that are not justified based on your previous strategic analyses Only include recs that are supported by previous analyses. Number of recommendations? One REALLY good (i.e., supported) rec could be enough. Most groups will probably have 3 or 4 (more is too many) Make it Professional with an intro and conclusion. Whatever format communicates your message professionally

MGMT 490 Strategic Management

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