1. 1 Business Structures and Business Development Strategies Dr. William Y. Jiang Professor and Chair Department of Organization & Management San José State University Tel: 408-924-3551 Email: william.jiang@sjsu.edu Dr. William Y. Jiang Professor and Chair Department of Organization & Management San José State University Tel: 408-924-3551 Email: william.jiang@sjsu.edu

2. 2 Legal Business Structures Sole ProprietorshipSole Proprietorship PartnershipPartnership –general partnerships –limited partnerships CorporationCorporation Sole ProprietorshipSole Proprietorship PartnershipPartnership –general partnerships –limited partnerships CorporationCorporation

3. 3 Legal Business Structures Sole Proprietorship Easy to form with few regulationsEasy to form with few regulations The owner is the business (same legal entity).The owner is the business (same legal entity). No double taxNo double tax Owner has unlimited liabilityOwner has unlimited liability Limited lifeLimited life Difficult to raise moneyDifficult to raise money Sole Proprietorship Easy to form with few regulationsEasy to form with few regulations The owner is the business (same legal entity).The owner is the business (same legal entity). No double taxNo double tax Owner has unlimited liabilityOwner has unlimited liability Limited lifeLimited life Difficult to raise moneyDifficult to raise money

4. 4 Legal Business Structures Partnership Shared System (funding and liability)Shared System (funding and liability) Shared ManagementShared Management Inexpensive and easy to formInexpensive and easy to form No double taxNo double tax Difficult to raise moneyDifficult to raise moneyPartnership Shared System (funding and liability)Shared System (funding and liability) Shared ManagementShared Management Inexpensive and easy to formInexpensive and easy to form No double taxNo double tax Difficult to raise moneyDifficult to raise money

5. 5 Legal Business Structures Corporation Independent legal entity and independent lifeIndependent legal entity and independent life More complicated to form (bylaws, Charters, etc.)More complicated to form (bylaws, Charters, etc.) Three sets of distinct stakeholders: shareholders, directors and managerThree sets of distinct stakeholders: shareholders, directors and manager Ownership can be readily transferableOwnership can be readily transferable Limited liabilityLimited liability Unlimited lifeUnlimited life Possibility of fund raisingPossibility of fund raisingCorporation Independent legal entity and independent lifeIndependent legal entity and independent life More complicated to form (bylaws, Charters, etc.)More complicated to form (bylaws, Charters, etc.) Three sets of distinct stakeholders: shareholders, directors and managerThree sets of distinct stakeholders: shareholders, directors and manager Ownership can be readily transferableOwnership can be readily transferable Limited liabilityLimited liability Unlimited lifeUnlimited life Possibility of fund raisingPossibility of fund raising

6. 6 Organizational Structure and Controls Organizational Structure: –Formal reporting relationships –Authority and decision-making hierarchy –It is critical to match organizational structure to the firm’s strategy. Organizational Structure: –Formal reporting relationships –Authority and decision-making hierarchy –It is critical to match organizational structure to the firm’s strategy.

7. 7 Organizational Structure Effective structures provide: –Stability and Flexibility Structural stability provides: –Capacity to consistently and predictably manage daily work routines Effective structures provide: –Stability and Flexibility Structural stability provides: –Capacity to consistently and predictably manage daily work routines

8. 8 Organizational Structure Structural flexibility provides: –The opportunity to explore competitive possibilities –The allocation of resources to activities that shape needed competitive advantages Structural flexibility provides: –The opportunity to explore competitive possibilities –The allocation of resources to activities that shape needed competitive advantages

9. 9 Relationships between Strategy and Structure Strategy and structure have a reciprocal relationship:Strategy and structure have a reciprocal relationship: –Structure flows from or follows the selection of the firm’s strategy but … –Once in place, structure can influence current strategic actions as well as choices about future strategies. Strategy and structure have a reciprocal relationship:Strategy and structure have a reciprocal relationship: –Structure flows from or follows the selection of the firm’s strategy but … –Once in place, structure can influence current strategic actions as well as choices about future strategies.

10. 10 Simple Structure Owner-managerOwner-manager –Makes all major decisions directly. –Monitors all activities. Matched with focus strategies and business-level strategiesMatched with focus strategies and business-level strategies –Commonly complete by offering a single product line in a single geographic market. Owner-managerOwner-manager –Makes all major decisions directly. –Monitors all activities. Matched with focus strategies and business-level strategiesMatched with focus strategies and business-level strategies –Commonly complete by offering a single product line in a single geographic market.

11. 11 Simple Structure Growth creates complexity and structural challengesGrowth creates complexity and structural challenges Owner-managersOwner-managers –Commonly lack organizational skills and experience. –Become ineffective in managing the specialized and complex tasks in multiple organizational functions. Growth creates complexity and structural challengesGrowth creates complexity and structural challenges Owner-managersOwner-managers –Commonly lack organizational skills and experience. –Become ineffective in managing the specialized and complex tasks in multiple organizational functions.

12. 12 Functional Structure Chief Executive Officer (CEO)Chief Executive Officer (CEO) –Limited corporate staff Functional line managers in dominant functional areas:Functional line managers in dominant functional areas: Production  Marketing  Engineering Accounting  R&D  Human resources Chief Executive Officer (CEO)Chief Executive Officer (CEO) –Limited corporate staff Functional line managers in dominant functional areas:Functional line managers in dominant functional areas: Production  Marketing  Engineering Accounting  R&D  Human resources

13. 13 Multidivisional Structure Strategic ControlStrategic Control –Operating divisions function as separate businesses or profit centers Top corporate officer delegates responsibilities to division managersTop corporate officer delegates responsibilities to division managers –For day-to-day operations –For business-unit strategy Appropriate as firm grows through diversificationAppropriate as firm grows through diversification Strategic ControlStrategic Control –Operating divisions function as separate businesses or profit centers Top corporate officer delegates responsibilities to division managersTop corporate officer delegates responsibilities to division managers –For day-to-day operations –For business-unit strategy Appropriate as firm grows through diversificationAppropriate as firm grows through diversification

14. 14 Multidivisional Structure (cont’d) Three Major BenefitsThree Major Benefits –Corporate officers are able to more accurately monitor the performance of each business, which simplifies the problem of control. –Facilitates comparisons between divisions, which improves the resource allocation process. –Stimulates managers of poorly performing divisions to look for ways of improving performance. Three Major BenefitsThree Major Benefits –Corporate officers are able to more accurately monitor the performance of each business, which simplifies the problem of control. –Facilitates comparisons between divisions, which improves the resource allocation process. –Stimulates managers of poorly performing divisions to look for ways of improving performance.

15. 15 Matching Strategy and Functional Structure Different forms of the functional organizational structure are matched to: –Cost leadership strategy –Differentiation strategy –Integrated cost leadership/differentiation strategy Different forms of the functional organizational structure are matched to: –Cost leadership strategy –Differentiation strategy –Integrated cost leadership/differentiation strategy

16. 16 The External Environment

17. 17 General Environment Dimensions in the broader society that influence an industry and the firms: DemographicDemographic EconomicEconomic Political-legalPolitical-legal Socio-culturalSocio-cultural TechnologicalTechnological GlobalGlobal Dimensions in the broader society that influence an industry and the firms: DemographicDemographic EconomicEconomic Political-legalPolitical-legal Socio-culturalSocio-cultural TechnologicalTechnological GlobalGlobal

18. 18 Industry Environment The set of factors influencing a firm and its competitive actions and competitive responses –Threat of new entrants –Power of suppliers –Power of buyers –Threat of product substitutes –Intensity of rivalry among competitors The set of factors influencing a firm and its competitive actions and competitive responses –Threat of new entrants –Power of suppliers –Power of buyers –Threat of product substitutes –Intensity of rivalry among competitors

19. 19 Five Forces Model

20. 20 Threat of New Entrants: Barriers to Entry Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Switching costsSwitching costs Access to distribution channelsAccess to distribution channels Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy Expected retaliationExpected retaliation Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Switching costsSwitching costs Access to distribution channelsAccess to distribution channels Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy Expected retaliationExpected retaliation

21. 21 Bargaining Power of Suppliers Supplier power increases when: –Suppliers are large and few in number –Suitable substitute products not available –Individual buyers are not large customer –Suppliers’ goods are critical to the buyers –Suppliers’ products has high switching costs –Suppliers pose a threat to integrate forward Supplier power increases when: –Suppliers are large and few in number –Suitable substitute products not available –Individual buyers are not large customer –Suppliers’ goods are critical to the buyers –Suppliers’ products has high switching costs –Suppliers pose a threat to integrate forward

22. 22 Bargaining Power of Buyers Buyer power increases when: –Buyers are large and few in number –Buyers purchase a large portion of an industry’s total output –Buyers’ switching costs are low. –Buyers can pose threat to integrate backward Buyer power increases when: –Buyers are large and few in number –Buyers purchase a large portion of an industry’s total output –Buyers’ switching costs are low. –Buyers can pose threat to integrate backward

23. 23 Threat of Substitute Products The threat of substitute products increases –Buyers face low switching costs –The substitute product price is low. –Substitute product’s quality and performance are equal to or greater –Differentiated industry products that are valued by customers reduce this threat The threat of substitute products increases –Buyers face low switching costs –The substitute product price is low. –Substitute product’s quality and performance are equal to or greater –Differentiated industry products that are valued by customers reduce this threat

24. 24 Intensity of Rivalry Among Competitors Industry rivalry increases when:Industry rivalry increases when: –Numerous competitors with equal balance –Industry growth slows or declines –High fixed costs –Lack of differentiation or low switching costs –High strategic stakes –High exit barriers Industry rivalry increases when:Industry rivalry increases when: –Numerous competitors with equal balance –Industry growth slows or declines –High fixed costs –Lack of differentiation or low switching costs –High strategic stakes –High exit barriers

25. 25 Low entry barriers Interpreting Industry Analyses Unattractive Industry Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors Low profit potential

26. 26 Interpreting Industry Analyses Attractive Industry High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors High profit potential

27. 27 Business-Level Strategy An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets.

28. 28 The Purpose of a Business- Level Strategy Business-Level Strategies –create differences between the firm’s position relative to those of its rivals –Perform activities differently or –Perform different activities as compared to its rivals Business-Level Strategies –create differences between the firm’s position relative to those of its rivals –Perform activities differently or –Perform different activities as compared to its rivals

29. 29 Types of Potential Competitive Advantage Lower overall costs than rivalsLower overall costs than rivals Differentiate the firm’s product or service and command a premium priceDifferentiate the firm’s product or service and command a premium price Lower overall costs than rivalsLower overall costs than rivals Differentiate the firm’s product or service and command a premium priceDifferentiate the firm’s product or service and command a premium price

30. 30 Competitive Scope Broad ScopeBroad Scope –The firm competes in many customer segments. Narrow ScopeNarrow Scope –The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others. Broad ScopeBroad Scope –The firm competes in many customer segments. Narrow ScopeNarrow Scope –The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others.

31. 31 Types of Business-Level Strategies CostUniqueness Differentiation Cost Leadership Focused Differentiation Focused Cost Leadership Integrated Cost Leadership/ Differentiation BroadTarget NarrowTarget Competitive Advantage CompetitiveScope