1. Business Strategy 050 322 Instructor: Michael Cooke
Address:
Office: IC room 817
Class hours: Tuesday 09:00-12:00
Class Location: IC room 822

2. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

3. Global Strategy Competitive Advantage
Cost leadership
Builds on economies of scale and scope
Learning effects (how to be more efficient)
Long production runs (high cost to change lines)
Spread fixed costs over more units (R&D often fixed)
Shared resources or volume purchasing of inputs
Cost leadership can be a barrier to entry (and a trap!)
Product differentiation
Customers willing to pay premium price for unique products
Can be a barrier to entry (“own a category”)
Niche strategy
Focus on a highly specialized segment
Try to achieve a dominant global position in that segment
Pays to stay ‘under the radar’
A overlooked niche can grow into something much bigger
Global companies combine cost control and product differentiation

4. Global Strategy Cost Forces Driving Globalization
Global economies of scale and scope
Scale economies result from producing in high volume
Scope economies arise from producing a range of products
Shared inputs
Shared resources (such as finance or marketing)
Cross selling
Global sourcing efficiencies
Favorable logistics
Difference in country costs
High product development costs
Need to spread costs onto higher volumes (Boeing’s 787 cost $32BB to develop)
Emerging R&D centers in lower cost countries
Short product life cycles (need to achieve high volume quickly)

5. More on Economies of Scope From The Economist, 20 Oct 2008*
Economies of scale, however, have a dark side, called diseconomies of scale. The larger an organization becomes in order to reap economies of scale, the more complex it has to be to manage and run such scale. This complexity incurs a cost, and eventually this cost may come to outweigh the savings gained from greater scale.
The desire to garner economies of scope was the driving force behind the vast international conglomerates built up in the 1970s and 1980s, including BTR and Hanson in the UK and ITT in the United States. The logic behind these amalgamations lay mostly in the scope for the companies to leverage their financial skills across a diversified range of industries.
A number of conglomerates put together in the 1990s relied on cross-selling, thus reaping economies of scope by using the same people and systems to market many different products. The combination of Travelers Group and Citicorp in 1998, for instance, was based on the logic of selling the financial products of the one by using the sales teams of the other.
On vertical integration: *

6. Booz & Co. R&D Survey 2011 http://www. booz
Study of 1,000 public companies that spent the most on research and development in 2010
Total for the 1,000 $550 bb
Computing and electronics 28% of all R&D expenditure
Health care (pharmaceuticals) 22%
Automotive 15% of all R&D expenditures
China and India HQ companies = 2% of total R & D
Spending doesn’t correlate successful innovation
“There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues.” according to Booz & Co
Most innovative firms were Apple, Google, and 3M
Samsung and Toyota were big spenders and innovative
The key finding: culture is key to innovation success
According to 3M: “Our goal is to get the voice of the customer all the way back to the basic research level and the product development level, to make sure our technical people see how their technologies work in various market conditions.”

7. Booz & Co. R&D Survey 2011 http://www. booz
Need Seekers, Market Readers and Technology Drivers
Need Seekers consistently strive to be first movers and proactively engage customers to shape new innovations, and align innovation and business strategies (3M)
Market Readers adopt a second mover strategy and emphasize incremental change (Samsung)
Technology Drivers stress technology achievement and both incremental and breakthrough change (Google)
If you align innovation strategy and culture to your business model, build the right capabilities, and execute, you can prevail no matter which strategy you follow
There may be no more critical source of business success or failure than a company’s culture. It is more important than strategy and leadership. According to Booz & Co.:
Companies whose strategic goals are clear, and whose cultures strongly support those goals, possess a huge advantage
“Connect with the customer, find out their articulated and unarticulated needs, and then determine the capability at 3M that can be developed across the company that could solve that customer’s problem in a unique, proprietary, and sustainable way. Our businesses are all interdependent and collaborative.”

8. Booz & Co. R&D Survey – 2011*
Most often cited strategic goals of innovation are:
Superior product performance
Superior product quality
Cultural attributes:
Strong identification with the customer
Pride in products
Need seekers: Gaining insights on customers needs is the responsibility of all customer-facing employees.
Silicon Valley companies are almost twice as likely as average companies to have capabilities that provide a superior understanding of the stated and unstated needs of their end customers
Technological advances that lead to products and services that gain traction in the marketplace come through superior insight into customers, as well as the development of practical value propositions that will win those customers business
6/10 of the most innovative were need seekers
2/10 of the biggest spenders were need seekers *

9. Booz & Co. R&D Survey Top 12 R&D in 2010 Excluding Health
Rank list
Rank all
Company
R&D $BB
% sales
Region 1 4
Microsoft
8.7 14 US 2 6
Toyota
8.5
Asia 3 7
Samsung
7.9 8
Nokia
7.8
Europe 5 9
General Motors
7.0 11
Intel
6.6 15 12
Panasonic
6.1 VW
IBM
6.0 10 17
Honda
5.7 19
Cisco
5.3 13 20
Siemens
5.2

10. Booz & Co. R&D Survey 2011 Innovation
As part of this year’s study, Booz & Co. surveyed almost 600 innovation leaders in companies around the world, large and small, in every major industry sector.
As noted, almost half of the companies reported inadequate strategic alignment and poor cultural support for their innovation strategies.
Possibly even more surprising, nearly 20 percent of companies said they didn’t have a well defined innovation strategy at all.

11. Booz & Co. R&D Survey Top 10 Innovative Companies in 2010
Rank
Company
R&D $BB
% sales
Spend rank 1
Apple
$1.8
2.7 70 2
Google
$3.8
12.8 34 3 3M
$1.4
5.4 86 4 GE
$3.9
2.6 32 5
Microsoft
$14.0
14.0 6
IBM
$6.0
6.0 15 7
Samsung
$5.9
5.9 8
P&G
$2.5
2.5 61 9
Toyota
3.9 10
Facebook na

12. Developing New Products for Global Markets The Role of Corporate R&D
Very few companies do early stage research
In the past Bell Labs, Xerox (PARC) and IBM had renowned research
“What used to be spent on an in-house division is now spent on sponsorship of university research and the acquisition of intellectual property from smaller companies. The few exceptions to this rule (Google labs?) seem to be for companies that have trade secret protection as a viable alternative to patenting” (1)
Enormous expense of basic research often shared
IBM, Samsung, Intel, Global Foundries, and TMSC share cost of $4.4BB R&D center and collaborate with SUNY on cost technology
SEMATECH launched with US government assistance in 1987
Common model is to focus R&D effort on identifying available technologies or to reducing costs
License from other companies, or buy smaller companies with promising technology as Kodak did in the late 90s and early 2000s
(1)

13. Samsung’s Software Strategy
Samsung is dominant in the smart-phone business because of efficiency and vertical integration in hardware development and production
Apple and Nokia-Microsoft masters both hardware and software
Samsung’s strategy is to differentiate the Android product with exclusive software add-ons
As part of the strategy, Samsung identifies possible acquisitions
In-house software development produced poor results
Samsung tried to buy an Israeli mapping service
Google beat Samsung with a $1.1BB offer
Samsung has acquired other software companies
mSpot streaming music in 2012 (for a Samsung exclusive service)
Boxee television software in 2013 (brought into in-house development)
Potential acquisitions include a Seattle mapping startup company, a games company, and a video chat service
Samsung hopes to create their own developer community
Participates in developer conferences
Maintains startup incubators in SF and NYC
Service unity across products + less dependence on Google might be goals

14. R&D as % of GDP - selected EU and non-EU countries, 2006*

15. Country Variation in R&D Intensity (1)
Technological specialization explains the variation in R&D intensity better than any other country characteristics.
When industrial specialization is taken into account, only Sweden and the US still outperform other countries. Neither Japan nor Finland has an R&D intensity that is particularly high in relation to what their industrial structures would suggest.
A country specialized in the finance industry (e.g., Luxemburg) would not need a high level of R&D expenditure in order to ensure growth. Similarly, a country specialized in the tourism, fashion, services or food industries would have a lower R&D intensity than a country specialized in the pharmaceutical, engineering or biotech industries.
The four European countries with the highest academic R&D intensities are also the four countries with the highest business R&D intensities. With effective technology transfer systems in place, academic research is probably the most effective source of new ideas, which in turn induce further research in the business sector.

16. Developing New Products for Global Markets The Role of Universities
Corporate collaboration with universities
Research oriented universities have technology transfer offices – and typically license intellectual property
Companies might have a need to fill a hole in product line
Corporate R&D’s role is to find and evaluate the technology
IBM has research centers in nine countries *
Close links to universities in India, for example
Seeks collaboration as well as a role in developing future staff
University faculty or graduate students may form companies
Develop products from early stage university lab ideas
Small companies often sold to large organizations or do licensing
Some go on to become highly successful industry pioneers
Genentech (University of CA) in biotech
Google (Stanford) internet technology
Sun Microsystems (UC and Stanford) computers and software
SAS (NCSU led consortium) statistical analysis software *

17. Standardization versus Customization Five forces favoring a globalized product strategy
Common customer preferences (Exhibit 10-2)
Similar use functions across cultures
Similar use conditions or benefits (example: stylishness)
Global customers (business to business)
Global companies may have centralized sourcing
Global customers often prefer identical products/services
Scale economies
Sourcing efficiencies or R&D efficiencies
Economies of scale have limits in some industries (timeliness factor)
Time to market – need for speed
Short product life cycles
Focus R&D and product development efforts on a few projects
Regional market agreements (such as single European market) facilitate standardization

18. Developing New Products for Global Markets Identifying New Product Ideas
4 C’s:
Company (internal sources)
Transplant ideas from one region to another
R&D, sales, market research, other employees
Customers
The most difficult customers are often the best
In most cases initial marketing is to mid-level analysts
Analysts review product, make recommendations to executives
Difficult customers may become beta sites
Suggest improvements, additional features, new approach
Competition
Collaborators – suppliers, distributors, etc.
Innovation Centers – teams to develop new products
Institutional barriers to innovation among companies with dominant products
Kodak in the 1990s
Microsoft after 2000
Role of bureaucracy
Threat to profits of legacy products

19. Truly Global Product Development
Companies have research centers across the world.
Few have set up a global product development process
Lack access to regional talent
Establish a global innovation process across regions (Nokia uses ideas from UK, USA, Japan, and Italy)
To harvest the benefits of multi-region innovation:
Prospecting- Find valuable new pockets of knowledge around the world.
Assessing- Decide on the right number of sources
Mobilize – Link knowledge clusters

20. Developing New Products for Global Markets New Product Development
Nearly ¾ of the 30 biggest selling products worldwide had origins in marketing or manufacturing *
Use of global reach to move ideas from one part of the world to another
Alpha and beta test feedback may suggest changes
Some companies set up small incubator units or innovation centers
Working with distributors or producers of complementary products
Watching competitors
Screening
Product ideas from marketplace most likely to succeed
Product advantage (superiority to competitors, unique features) a major success factor
Consumer characteristics – some are more likely to buy new products
Concept Testing – detailed description of the product
Focus groups – small groups of prospective customers
“Red Bull” concept rejected all around – concept testing is imperfect
Test marketing
May be skipped to save money
Lead markets can be used as projections (Exhibit 10-4)
Timing of Entry (Exhibit 10-5)
Waterfall—staged rollout beginning with home country favored if:
Long product life cycle
Unfavorable host market conditions
Sprinkler—global rollout simultaneously motivated by:
Competitor concerns
Universal segments
*Czinkota and Ronkainan “International Marketing 8E” US, Thomson, p476

21. Degrees of Global Customization
Modular Approach
Mass produce standard components (engines, gears, etc)
Assemble to local requirements or tastes(Deere example)
Core-Product (Common Platform) Approach
Mass produce core product
Add attachments for local needs or tastes (auto heaters)
Standardization versus adaptation
Too much standardization stifles local initiative
Over-customization = competition with local products
Costs of tailoring to local markets (break-even analysis)
Proctor and Gamble has Beijing R&D operation

22. Finance/Accounting And Management
Are the interests of management aligned with interests of shareholders/owners?
Does the firm have adequate planning and budgeting processes?
Are the firm’s financial managers capable?
Where is the firm financially weak or strong?
Does the firm have access to short term capital or sufficient working capital?
How can the firm raise needed long-term capital (debt or issuance of shares)?
Are dividend payout policies reasonable?
Does the firm have good relations with its investors and stockholders?
Does the firm have adequate cash flow for debt service?

23. Identify strengths and weaknesses in
Internal Audit
Identify strengths and weaknesses in
Management
Marketing
Finance and accounting
Production and operations
Research and development
Management information systems
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24. Internal strengths/weaknesses External opportunities/threats
Nature of an Internal Audit
Basis for Objectives & Strategies
Internal strengths/weaknesses
External opportunities/threats
Clear statement of mission
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25. Key Internal Forces
Distinctive Competencies:
Firm’s strengths that cannot be easily matched or imitated by competitors
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26. Key Internal Forces
Distinctive Competencies:
Building competitive advantage involves taking advantage of distinctive competencies
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27. Information gathered from:
Internal Audit Process
Parallels process of external audit
Information gathered from:
Management
Marketing
Finance/accounting
Production/operations
Research & development
Management information systems
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28. Internal Audit
Involvement in performing an internal strategic-management audit provides a vehicle for understanding the nature and effect of decisions in other functional business areas of the firm
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29. Managers and employees from all areas provide information
Internal Audit
Managers and employees from all areas provide information
A team of managers then selects 10 to 15 key organizational strengths and weaknesses to focus on
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30. Internal Audit
Financial Ratio Analysis
Exemplifies complexity of relationships among functional areas of the business
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31. Internal resources are more important than external factors
Resource Based View (RBV)
Approach to Competitive Advantage
Internal resources are more important than external factors
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32. Resource Based View (RBV)
Three All-Encompassing Categories
Physical resources
Human resources
Organizational resources
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33. Not easily substitutable
Resource Based View (RBV)
Empirical Indicators
Rare
Hard to imitate
Not easily substitutable
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34. Integrating Strategy & Culture
Organizational Culture
Pattern of behavior developed by an organization as it learns to cope with its problem of external adaptation and internal integration is considered valid and taught to new members as the correct way to perceive, think, and feel
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35. Integrating Strategy & Culture
Organizational Culture
Resistant to change
May represent:
Strength
Weakness
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36. Integrating Strategy & Culture
Values
Beliefs
Legends
Heroes
Rites
Cultural
Products
Symbols
Rituals
Myths
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37. Integrating Strategy & Culture
Organizational Culture Can Inhibit Strategic Management
Miss external changes due to strongly held beliefs
Natural tendency to “hold the course” even during times of strategic change
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38. Management Functions of Management Planning Organizing Motivating
Staffing
Controlling
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39. Stage When Most Important
Management
Stage When Most Important
Function
Planning
Strategy Formulation
Organizing
Strategy Implementation
Motivating
Strategy Implementation
Staffing
Strategy Implementation
Controlling
Strategy Evaluation
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40. Management Planning Beginning of management process
Bridge between present & future
Improves likelihood of attaining desired results
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41. Management Developing a mission Forecasting future events and trends
Establishing objectives
Choosing strategies to pursue
Planning
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42. Planning Synergy Can develop through planning
Exists when everyone pulls together as a team that knows what it wants to achieve
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43. Management Organizing Achieves coordinated effort
Defines task & authority relationships
Determines who does what
Determines who reports to whom
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44. Management Organizing Breaking down tasks into jobs
Combining jobs to form departments
Delegating authority
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45. Management Motivating Influencing to accomplish specific objectives
Four components include:
Leadership
Group dynamics
Communication
Organizational change
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46. Human resource management
Staffing
Personnel management
Human resource management
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47. Management Staffing Recruiting Interviewing Testing Selecting
Orienting
Training
Developing
Caring for
Evaluating
Rewarding
Disciplining
Promoting
Transferring
Demoting
Dismissing
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48. Management Controlling Establishing performance standards
Ensure actual operations conform to planned operations
Taking corrective actions
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49. Management Controlling Establish performance standards
Measure individual and organizational performance
Compare actual performance to planned performance standards
Take corrective action
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50. Management Audit Checklist
Does the firm use strategic management concepts?
Are objectives/goals measurable? Well communicated?
Do managers at all levels plan effectively?
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51. Management Audit Checklist
Do managers delegate well?
Is the organization’s structure appropriate?
Are job descriptions clear?
Are job specifications clear?
Is employee morale high?
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52. Management Audit Checklist
Is employee absenteeism low?
Is employee turnover low?
Are the reward mechanisms effective?
Are the organization’s control mechanisms effective?
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53. Marketing Customer Needs or Wants for Products and Services Defining
Anticipating
Creating
Fulfilling
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54. Marketing Marketing Functions Customer analysis
Selling products/services
Product & service planning
Pricing
Distribution
Marketing research
Opportunity analysis
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55. Marketing Customer surveys Consumer information
Market positioning strategies
Customer profiles
Market segmentation strategies
Customer
Analysis
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56. Selling Products/Services
Marketing
Advertising
Sales Promotion
Publicity
Personal Selling
Sales force management
Customer relations
Dealer relations
Selling Products/Services
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57. Product/Service Planning
Marketing
Test marketing
Brand positioning
Devising warranties
Packaging
Product features/options
Product style
Quality
Deleting old products
Providing for customer service
Product/Service Planning
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58. Marketing Consumers Governments Suppliers Distributors Competitors
Pricing
Major Stakeholders
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59. Marketing Warehousing Distribution channels Retail site locations
Sales territories
Inventory levels
Transportation
Wholesaling
Retailing
Distribution
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60. Marketing Gather data Record data Analyze data Marketing Research
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61. Cost/Benefit Analysis
Marketing
Assessing costs
Assessing benefits
Assessing risks
Cost/Benefit Analysis
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62. Marketing Audit Are markets segmented effectively?
Is the organization positioned well among competitors?
Has the firm’s market share been increasing?
Are the distribution channels reliable & cost effective?
Is the sales force effective?
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63. Marketing Audit Does the firm conduct market research?
Are product quality & customer service good?
Are the firm’s products and services priced appropriately?
Does the firm have effective promotion, advertising, and publicity strategies?
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64. Marketing Audit Are the marketing, planning, and budgeting effective?
Do the firm’s marketing managers have adequate experience and training?
Is the firm’s Internet presence excellent as compared to rivals?
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65. Investment decision (Capital budgeting) Financing decision
Finance/Accounting
Investment decision (Capital budgeting)
Financing decision
Dividend decision
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66. Basic Financial Ratios
Firm’s ability to meet its short-term obligations
Ratios
Current ratio
Quick (or acid test) ratio
Liquidity Ratios
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67. Basic Financial Ratios
Extent of debt financing
Ratios
Debt-to-total assets
Debt-to-equity
Long-term debt-to-equity
Times-interest-earned
Leverage Ratios
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68. Basic Financial Ratios
Effective use of firm’s resources
Ratios
Inventory turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period
Activity Ratios
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69. Effectiveness shown by returns on sales and investment
Basic Financial Ratios
Effectiveness shown by returns on sales and investment
Ratios
Gross profit margin
Operating profit margin
Net profit margin
Return on total assets (ROA)
Profitability Ratios
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70. Basic Financial Ratios
Effectiveness shown by returns on sales & investment
Ratios
Return on stockholders’ equity (ROE)
Earnings per share
Price-earnings ratio
Profitability Ratios (cont’d)
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71. Firm’s ability to maintain economic position
Basic Financial Ratios
Firm’s ability to maintain economic position
Ratios
Sales
Net Income
Earnings per share
Dividends per share
Growth Ratios
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72. Growth Ratios Ratio Sales Net Income Earnings per share
Dividends per share
Annual percentage growth in
Total sales
Profits
EPS
Dividends per share
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Figure 4-3 page 109
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Breakeven point = quantity of units that a firm must sell in order for total revenues to equal total costs
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77. Production/Operations
Production/Operations Functions
Process
Capacity
Inventory
Workforce
Quality
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79. Production/Operations Audit
Are suppliers of materials, parts, etc. reliable and reasonable?
Are facilities, equipment, machinery, and offices in good condition?
Are inventory-control policies and procedures effective?
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80. Production/Operations Audit
Are quality-control policies & procedures effective?
Are facilities, resources, and markets strategically located?
Does the firm have technological competencies?
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81. Research & Development
Research & Development Functions
Development of new products before competitors
Improving product quality
Improving manufacturing processes to reduce costs
These functions can be done internally or externally
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82. Research & Development
Financing as many projects as possible
Use percent-of-sales method
Budgeting relative to competitors How many successful new products are needed
R&D Budgets
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83. Research & Development Audit
Are the R&D facilities adequate?
If R&D is outsourced, is it cost-effective?
Are the R&D personnel well qualified?
Are R&D resources allocated effectively?
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84. Research & Development Audit
Are MIS and computer systems adequate?
Is communication between R&D and other organizational units effective?
Are present products technologically competitive?
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85. Management Information Systems
Purpose
Improve performance of an enterprise by improving the quality of managerial decisions
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86. Management Information Systems Audit
Do all managers use the information system to make decisions?
Is there a CIO or Director of Information Systems position in the firm?
Are data updated regularly?
Do managers from all functional areas contribute input to the information system?
Are there effective passwords for entry into the firm’s information system?
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87. Management Information Systems Audit
Are strategists of the firm familiar with the information systems of rival firms?
Is the information system user-friendly?
Do all users understand the competitive advantages that information can provide?
Are computer training workshops provided for users?
Is the firm’s system being improved?
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88. Value Chain Analysis
The process whereby a firm determines the costs associated with:
Purchasing raw materials
Manufacturing products
Marketing products
And compares them to the value chain of rival firms
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89. Value Chain Analysis Core competencies Distinctive competencies
Benchmarking
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90. Transforming Value Chain Activities into Sustained Competitive Advantage
Value Chain Activities Are Identified and Assessed
Core Competencies Arise in Some Activities
Some Core Competencies Evolve into Distinctive Competencies
Some Distinctive Competencies Yield Sustained Competitive Advantages
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91. Internal Factor Evaluation (IFE) Matrix
List key internal factors
Assign a weight ranging from 0.0 to 1.0
Assign a 1 to 4 rating to each factor
Multiply the weight times the rating
Sum the weighted scores
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92. Quiz: Pass/Fail = 50% 1: To make a profit when fixed costs increase
A) Product volume must increase
B) Gross margin must increase
C) Accounts receivable must decrease
D) Either A or B
2: High research and development costs, such as the $32 billion cost of developing a modern jet airliner, are a good reason for
A) Abandoning R&D altogether
B) Patent infringement
C) Seeking global markets
D) Staying within a domestic market
3: ‘Diseconomy of scale’
A) Occurs when a firm makes large products
B) Is an out of date concept
C) Can arise from the complexity of managing and running a large organization
D) Is due to the tendency for machines to break down after a long use
4: The most innovative companies
A) Get innovation ideas from very smart executives, like Steve Jobs
B) Do a lot of basic research
C) Have superior insights into customer needs
D) Any of the above
5: Big company R&D functions
A) Have research centers in many parts of the world
B) Maintain close ties to research at universities
C) Seek to identify promising technology at smaller companies
6: A profitable company with high gross margins and low fixed costs can
A) Normally drop prices more than a company with low margins
B) Is in a weak position relative to companies with low gross margins
C) Should never initiate a price war
D) None of the above