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Chapter 1:
The Strategic Management
Process: An Overview
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What is Strategic Management?
Strategic management is a process of
analyzing the current situation;
developing appropriate strategies;
putting those into action; and
evaluating, modifying, or changing
those strategies as needed.
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Strategy
Analysis
Strategy
Formulation
Strategy
Evaluation
Strategy
Implementation
Figure 1.1: Basic Activities of Strategic Management.
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What is Strategy?
Consists of competitive moves and
business approaches to produce
successful performance.
Management’s “game plan” for:
Running the business.
Strengthening firm’s competitive position.
Satisfying customers.
Achieving performance targets.
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Five Tasks of Strategic
Management
Defining business, stating a mission and
forming a strategic vision.
Setting measurable objectives.
Crafting a strategy to achieve objectives.
Implementing and executing strategy.
Evaluating performance, reviewing new
developments and initiating corrective
adjustments.
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Developing a Vision and Mission
Begins with thinking strategically
About firm’s future makeup.
Forming vision of firm’s future in 5 – 10 years.
Task is to
Inject sense of purpose into firm’s activities.
Provide long term direction.
Give firm strong identity.
Decide WHO we are, WHAT we do, and WHERE
we go.
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An organization mission
Reflects management’s vision of what firm
seeks to do and become.
Provides clear view of what firm is trying to
accomplish for its customers.
Indicates intent to stake out a particular
business position.
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Why Bother to Define “Who”, “What”
and “Where”?
Helps managers avoid trap of
Trying to move in too many directions.
Being so confused about firm’s direction
that effective actions are NOT taken to
move in ANY direction.
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To successfully chart firm’s future,
managers must
Know where firm is now.
Have view of where it ought to be headed.
Recognize time to shift to new direction.
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Specific Questions That Help Form
Strategic Visions
What business are we in now?
What business do we want to be in?
What will our customers want in future?
What are the expectations of our
stakeholders?
Who will be our future competitors?
Suppliers? Partners?
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What should our competitive scope be?
How will technology impact our industry?
What environmental scenarios are
possible?
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Why a Shared Vision Matters?
A strategic vision widely shared among all
employees functions similar to how a
management aligns iron filings.
When all employees are committed to
firm’s long-term direction, optimum choices
on business decisions are more likely
Individuals and teams know intent of firm’s
strategic vision.
Daily execution of strategy is improved.
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Example: Mission / Vision Statement
Eastman Kodak
To be the world’s best in chemicals and
electronics imaging.
McCaw Cellular Communications
To develop a reliable wireless network that
empowers people with the freedom to travel
anywhere – across the hall or across the
continent – and communicate effortlessly.
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Long John Silver’s
To be America’s best quick service
restaurant chain. We will provide each
guest tasting, healthful, reasonably
priced fish, seafood, and chicken in a
fast, friendly manner on every visit.
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Setting Objectives
Purpose of setting objectives is to
Convert mission into performance targets.
Create yardsticks to track performance.
Establish performance goals requiring
stretch.
Push firm to be inventive, intentional and
focused.
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Setting challenging but achievable
objectives guards against
Complacency
Drift
Internal confusion
Status quo performance
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Two Types of Objectives Needed
Financial objectives
Outcomes that relate to improving firm’s
financial performance
Strategic Objectives
Outcomes that will result in greater
competitiveness and stronger long-term
market position.
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Example of Types of Objectives
Financial Objectives
Increase earnings growth from 10% to 15%
per year.
Boost return on equity investment from 15%
to 20%.
Strategic Objectives
Become leader in new product introductions.
Attain lower overall costs than rivals.
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Example: Corporate Objectives
Protect and improve Nike’s position as the
number one athletic brand in America.
Build a strong momentum in growing
fitness market.
Intensify the company’s effort to develop
products that women need and want.
Explore the market for products
specifically designed for the requirements
of maturing Americans.
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Direct and manage the company’s
international business as it continues to
develop.
Continue the drive for increased margins
through proper inventory management
and fewer, better products.
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Crafting Strategy
Strategy-Making concerns HOW to
Achieve desired strategic and financial
objectives.
Out-compete rivals and win a competitive
advantage.
Respond to changing industry and
competitive conditions.
Defend against threats to firm’s well-being.
Grow the business.
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Objectives = targeted results and
outcomes.
Strategy = HOW to achieve outcomes.
A firm’s actual strategy is a blend of
Deliberate and purposeful actions –
intended strategy.
As needed reactions to unanticipated
developments and fresh competitive
pressures – unintended strategy.
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Diversification
Actions to Improve
Short Term Profits
Responses to
Changing Conditions
The Pattern
of Actions
That Define
Strategy
How Key Functions
Are Managed
Defensive Moves
Pursuing New
Opportunities
Fresh Offensive to
Gain Market Edge
Product Line,
Quality, or Service
Geographic Coverage
Forward /
Backward Integration
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What Does a Firm’s Strategy Consist
of?
How to satisfy customers?
How to grow the business?
How to respond to changing industry and
market conditions?
How to best capitalize on new opportunities?
How to manage each functional piece of
business?
How to achieve strategic and financial
objectives?
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Implementing Strategy
Implementing strategy involves:
Creating fits between way things are done
and what it takes for effective strategy
execution.
Executing strategy proficiently and efficiently.
Producing excellent results in timely manner.
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Most important fits are between
strategy and:
Organizational capabilities
Reward structure
Internal support systems
Organizational culture
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Strategy Implementation
Strategy implementation is an internal,
operations-driven activity involving
organizing, budgeting, motivating,
culture-building, supervising, and
leading to “make the strategy work”
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Strategy implementation include:
Building a firm capable of carrying out
strategy successfully.
Allocating ample resources to strategycritical activities.
Establishing strategy-supportive
policies.
Installing support systems.
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Instituting best practices and programs
for continuous improvement.
Trying reward structure to achievement
of results.
Creating a strategy-supportive
corporate culture.
Exerting strategic leadership.
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Evaluating Performance
None of the tasks of strategic
management are a one-time only
exercise.
Times and conditions change.
Events unfold.
Better ways to do things become evident.
New managers with different ideas take
over.
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Corrective adjustments can entail
Altering firm’s long-term direction.
Redefining the business.
Raising or lowering performance objectives.
Modifying the strategy.
Improving strategy execution.
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Managers must
Constantly evaluate performance.
Monitor situation and decide how well
things are going.
Make necessary adjustments.
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Why Strategic Management is
an Ongoing Process?
Changing market conditions
Moves of competitors
New technologies and production
capabilities
Evolving customer needs and
preferences
Political and regulatory changes
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New windows of opportunity
Fresh ideas to improve current strategy
A crisis situation
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Who Performs the Five Tasks
of Strategic Management?
CEO and other Senior Corporate Level
Executives.
Managers of Subsidiary Business Units.
Functional Area Managers within a
Subsidiary Business Unit.
Managers of Major Operating
Departments and Geographic units.
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The Benefits of Strategic Approach
to Managing
Guides entire firm regarding “what it is
we are trying to do and to achieve.”
Lowers management’s threshold to
change.
Provides basis for evaluating competing
budget requests and steering resources
to strategy-supportive, result –producing
areas.
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Unites numerous strategy-related
decisions of managers at all
organizational levels.
Creates a proactive, rather than
reactive, atmosphere.
Enhances long-range performance.
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Chapter 2:
Establishing Company
Direction
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Developing Vision and Mission
Forming a vision involves
Understanding what business firm is in.
Communicating vision and mission in clear,
exciting, and inspiring ways.
Deciding when to alter firm’s strategic
course and change mission.
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Characteristics of a Strategic Vision and
Mission
A strategic vision:
Identifies activities firm intends to
pursue.
Sets forth long-term direction.
Provides big picture perspective of
Who we are, what we do and where we
are headed
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A mission statement should:
Set firm apart from others.
Arouse strong sense of organizational
identity and business purpose.
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Establishing Objectives
Objectives:
Represent managerial commitment to
achieve specific and measurable
performance targets by a certain time.
Spell-out how much of what kind of
performance by when.
Direct attention and energy to what
need to be accomplished.
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Managerial Value of Objectives
Objectives serve two purposes:
Substitute strategic decision-making for
aimlessness over what to accomplish.
Provide benchmarks for judging
organizational performance.
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What Kind of Objectives to Set?
Financial Objectives
Relate to firm’s financial performance.
Acceptable financial performance is critical to
firm’s survival.
Strategic Objectives
Relate to firm’s competitiveness and market
position.
Tend to be competitor focused.
Acceptable strategic performance is essential
for long-term competitive success.
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Strategic vs Financial Objectives
Pressures to opt for better near-term
financial performance are pronounced
when
Firm is struggling financially.
Resource commitments for strategic moves
will detract from bottom-line.
Proposed strategic moves are risky.
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A firm passing up opportunities to
strengthen long-term gains for nearterm financial gain risks
Diluting its competitiveness
Losing momentum in its markets
Impairing its ability to stave off rivals’
challenges.
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Example:
Financial objectives
Achieve revenue growth of 10% per year.
Increase earning by 15% annually.
Strategic Objectives
A bigger market share.
Lower costs relative to key competitors.
Ability to compete in international market.
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Short-run vs Long-run Objectives
Short-run Objectives
Focus on short-term performance – usually
this year or next.
Long-run Objectives
Focus on long-term performance – within 3
– 5 years.
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Short-range and Long-range Objectives
Short-range Objectives
Spell out near-term results to achieve.
Indicate speed of progress and level of
performance being aimed for
Serve as stair steps for reaching longrange performance.
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Long-range Objectives
Prompt actions now that will permit
reaching targeted long-range
performance later.
PUSH managers to weigh impact of
today’s decisions on future performance.
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Rules for Stating Objectives
Spell out in quantifiable or measurable
terms.
Specify deadline for achievement.
Be challenging but achievable.
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Crafting a Strategy
A firm’s strategy consists of combined
actions management has taken and
intends to take in
Achieving strategic and financial objectives.
Pursuing organization’s mission.
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Strategy-Making is all about how to
Reach performance targets.
Out-compete rivals.
Achieve sustainable competitive advantage.
Maneuver through threatening
environments.
Capture market opportunities
Strengthen firm’ s long-term competitive
position.
Make the strategic vision a reality.
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Characteristic of Strategy Making
Action-Oriented
Evolves over time
Never-ending
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Different Management Level and
Strategies
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Corporate Strategy
Formulated for company as a whole
Business Strategies
Formulated for each separate business unit
Functional Strategies
Formulated by functional-area managers within
each business unit
Operating Strategies
Formulated by plant managers, geographic unit
managers and lower-level managers
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Factors Shaping a Company’s
Strategy
External
Internal
Company strengths and
weakness.
Personal ambitions,
business philosophies
and ethical principles of
key executives.
Influence of shared
value and company
culture.
Social, politic,
regulatory, citizenship
considerations.
Industry attractiveness
and competitive
conditions.
Specific company
opportunities and
threats.
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Chapter 3:
Industry and Competitive
Analysis
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Methods of Industry and
Competitive Analysis
Why do a situation analysis?
Identify features in a firm’s external and
internal environment which frame its
window of strategic options and
opportunities.
Focuses on two considerations:
External factors: Macro environment.
Internal factors: Micro environment.
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How Strategic Thinking and Analysis
Lead to Good Choices?
Thinking strategically
about industry and
competitive conditions
Thinking strategically
about a company’s
own situation
Identifying
strategic
options open to
the company
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Choice of
the best
strategy
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Industry’s Dominant Economic
Features
Market size and growth rate.
Scope of competitive rivalry.
Number of competitors and relative sizes.
Prevalence of backward/forward
integration.
Entry/exit barriers.
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Nature and pace of technological change.
Product and customer characteristics.
Scale economies and experience curve
effects.
Capacity utilization and capital
requirement.
Industry profitability.
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Experience Curve Effects
An experience curve exists when unit costs
decline as cumulative production volume
increases due to increased knowledge
about or familiarity with the process.
The bigger the experience curve effect,
the bigger the cost advantage of the firm
with largest cumulative production volume.
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Comparison of Experience Curve
Effects
1
million
units
2
million
units
4
million
units
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What is Competition Like and
How Strong are Each of the
Competitive Forces?
Delving into the industry’s competitive
process is an important component of
industry and competitive analysis.
The analytical step is essential because
managers cannot devise a successful
strategy without in-depth understanding of
the industry’s competitive character.
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Porter’s Five Forces Model
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Competitive Rivalry
Usually the most powerful of the five
competitive forces.
Weapons of competitive rivalry:
Price and quality.
Performance features offers.
Customer services.
Warranties and guarantees.
Advertising and special promotions.
Dealer networks.
Product innovation.
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What Causes Rivalry to be stronger?
The number of competitors.
Demand for product growing slowly.
Industry conditions tempt competitors to use
competitive weapons to boost volume.
Switching cost incurred by customers are low.
A firm initiates moves to bolster its standing
at expense of rivals.
A successful strategic move carries a big
payoff.
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Costs more to get out of business than to
stay in.
Firms have diverse strategies, corporate
priorities, resources and countries of origin.
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Threat of New Entry
New entrants boost competitive pressures by
bringing new production capacity and through
actions to build share.
Seriousness of threat of entry depends on
barriers to entry and expected reaction of
existing firms to entry.
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Common Barriers to Entry
Economies of scale.
Inability to gain access to specialized technology.
Existence of learning / experience curve effects.
Brand preferences and customer loyalty.
Capital requirements.
Cost disadvantages independent of size.
Access to distribution channels.
Regulatory policies.
Tariffs and international trade restrictions.
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Competitive threat of outsiders entering
a market is stronger when:
Entry barriers are low.
Incumbent firms do not vigorously fight
newcomer.
Newcomer can expect to earn attractive
profits.
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Threat of Substitution
Substitutes matter when products of
firms in another industry enter the
market picture.
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Indicators of strength of substitute Products
Growth rate of sales of substitute.
Market inroads of substitutes.
Plan of manufacturers of substitutes to
expand capacity.
Profits of firms producing substitutes.
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Competitive threat of substitute
products is strong when:
Prices of substitutes are viewed attractive
by buyers.
Buyer’s costs of switching to substitute are
low.
Buyers view substitutes as having equal
better performance features.
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Bargaining Power of Suppliers
Suppliers are strong competitive force when:
Item makes up large portion of costs of product.
It is costly for buyers to switch suppliers.
They have good reputations and growing demand
for their product.
They can supply a component cheaper than
industry member can make it themselves.
They do not have to contend with substitutes.
Buying firms are not important customers.
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Whether suppliers are strong or weak,
competitive force depends on if they
have bargaining power to put rivals at a
competitive disadvantage based on:
Prices they can command.
Quality and performance of items supplied.
Reliability of deliveries.
Other terms and conditions of supply.
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Bargaining Power of Buyers
Buyers are strong competitive force when:
They are large and purchase a sizeable
percentage of industry’s product.
They buy in volume quantities.
They incur low costs in switching to substitutes.
They have flexibility to purchase from several
sellers.
Selling industry’s product is standardized.
They can integrate backward.
Product being purchased does not save buyer
money or has value to buyer.
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Buyers become a stronger competitive
force the more they can exercise
bargaining leverage over:
Price
Quality
Service
Other terms and conditions of sale
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Which Companies are at
Strongest / Weakest Position?
Strategically group mapping is
technique for displaying the different
competitive positions that rival firms
occupy in the industry.
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Strategic Group Maps
Firm in same strategic group have one or
more competitive characteristic in common…
Sell in same price/quality range.
Cover same geographic areas.
Be vertically integrated to same degree.
Have comparable product line breadth.
Emphasize same types of distribution channels.
Offer buyers similar services.
Use identical technological approaches.
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Constructing a strategic Group Map
STEP 1:
Identify competitive characteristic that
differentiate firms in an industry from
one another.
STEP 2:
Plot firms on a two-variable map using
pairs of these differentiating
characteristics.
STEP 3:
Assign firms that fall in about the same
strategy space to same strategic group.
STEP 4:
Draw circles around each strategic
group, making circles proportional size
of group’s respective share of total
industry sales.
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Guidelines: Strategic Group Map
Variables selected as axes should not be highly
correlated.
Variables chosen as axes should expose big
differences in how rivals compete.
Variables do not have to be either quantitative or
continuous.
Drawing sizes of circles proportional to combined
sales of firms in each strategic group allows map
to reflect relative sizes of each strategic group.
If more than two good competitive variables can
be used, several maps can be drawn.
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Interpreting Strategic Group Maps
Driving forces and competitive pressures
often favor some strategic groups and hurt
others.
Profit potential of different strategic groups
varies due to strengths and weaknesses in
each group’s market position.
The closer strategic groups are on map, the
stronger the competitive rivalry among
member firms tends to be.
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Chapter 4:
Evaluating Company
Resources and Competitive
Capabilities
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Key Questions in Company Situation
Analysis
1) How well is firm’s present strategy working?
2) What are firm’s strengths, weaknesses,
opportunities and threats?
3) Are firm’s prices and costs competitive?
4) How strong is firm’s competitive position?
5) What strategic issues does firm face?
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What is Company’s Strategy?
Identify competitive approach
Low-cost leadership
Differentiation
focus
Determine competitive scope
Stages of industry’s production/distribution chain
Geographic coverage
Customer base
Identify functional strategies
Examine recent strategic moves
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How Well is Present Strategy
Working?
Key indicators of strategic & financial
performance
Trends in market share
Trends in profit margins
Trends in net profits & return on
investment
Trends in sales growth/decline
Credit ranking
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Image & reputation with customers
Leadership role(s) i.e. technology, quality,
etc
Competitive advantages or disadvantages
Is competitive position getting
stronger/weaker?
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The stronger a company’s recent
strategic and financial performance,
the more likely it has a well-conceive,
well executed strategy and vice versa.
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What are the Company’s
Resources? (SWOT)
SWOT Analysis
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Identifying Internal Strengths &
Weakness
Strength is something firm is good at or
characteristic giving it an important capability
Useful skill
Important know-how
Valuable organizational resource or competitive
capability
Achievement giving firm a market advantage
weakness is something firm lacks, does poorly
or condition placing it at a disadvantage.
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Significance of a Company’s Strengths &
Weaknesses
Strengths are significant to strategy-making
because they can:
Serve as cornerstones of strategy
Help build COMPETITIVE ADVANTAGE
A good strategy aims at correcting firm’s
weaknesses which can:
Make it vulnerable
Prevent it from pursuing attractive opportunities
Put it at a competitive disadvantage
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Core Competencies
Something a company does
especially well in comparison
to its competitors.
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Type of Core Competencies
Superior skills in producing high quality
product
Superior system for delivering customer
orders accurately & swiftly.
Better after-sale service capability
More skill in achieving low operating costs
Unique formula for selecting good retail
location
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Unusual innovativeness in developing
new products
Better merchandising & product display
skills
Superior mastery of an important
technology
Unusually effective sales force
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Significance of a Core Competence
A core competence is important because of
Added capability it gives firm
Competitive edge it can yield
Potential
Competitive advantage is easier to build when
Firm has a core competence
Rival firms do not have offsetting competencies
It’s costly & time consuming for rivals to match
competency
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Identifying External Opportunities
Opportunities most relevant to a firm
are factors in external environment
offering
Some kind of competitive advantage
Important avenues for growth
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Identifying External Threats
Emergence of cheaper technologies
Introduction of new/better products by rivals
Entry of low-cost foreign competitors
New regulations
Vulnerability to rise in interest rates
Potential of hostile takeover
Unfavorable demographic shifts
Adverse shifts in foreign exchange rates
Political upheaval in a country
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What is Strategic Cost Analysis?
Comparing a firm’s cost position relative
to key competitors activity by activity
range from raw materials purchase to
price paid by ultimate customers
Assessing if firm’s costs are competitive
with those of rivals is a crucial part of
company situation analysis
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Cost disparities among rivals can stem from
differences in
Prices paid for inventory (raw material, component
part & etc)
Basic technology & age of plant & equipment
Economics of scale & experience curve effects
Wage rates & productivity levels
Changes in inflation & foreign exchange rates
Marketing & distribution costs
Inbound & outbound shipping costs
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The Value Chain Concept
Identifies the primary activities that
create value for customers and the
related support activities; value chain are
a tool for thinking strategically about the
relationships among activities performed
inside and outside the firm.
Consists two major type of activities
Primary activities that create value for customers.
Related support activities.
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Figure 4.1: Value Chain
Support
Activities
Primary Activity
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What Determines Costs of Value Chain
Activities?
Costs of performing each value chain
activity can be driven up or down by
two types of factors
Structural cost drivers
Executional cost drivers
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Structural Cost Driver
Scale economies
Experience curve effects
Technology requirements
Capitals intensity
Complexity of product line
Executional Cost Driver
Commitment of workforce to
continuous improvement
Attitudes & capabilities
regarding quality
Cycle time in getting new
products to market
Utilization of existing capacity
Whether internal business
processes are efficiently
designed & executed
How efficiently firm works
with supplier & customer to
reduce costs
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Value Chain System
Upstream
Value Chains
Activities,
Costs, and
Margins of
Suppliers
Company
Value Chains
Internally
Performed
Activities,
Costs, and
Margins
Downstream
Value Chains
Activities,
Costs, &
Margins of
Forward
Channel
Allies
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Buyer /
End User
Value
Chain
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Value Chain System
Cost competitiveness depends on
Costs of internally performed activities.
Cost in value chains of suppliers& forward channel
allies.
Assessing firm’s competitiveness requires
knowledge of value chain system
Firm’s own value chain.
Value chains of suppliers.
Value chains of forward channel allies.
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Suppliers’ value chains matter
Suppliers incur costs in creating & delivering
inputs used in firm’s value chain.
Cost & quality of inputs influence firm’s cost
and/or differentiation capabilities.
Forward channel value chains matter
Costs & margins of downstream firms are part of
price paid by ultimate end-user.
Activities channel allies perform affect satisfaction
of end-user.
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Developing Data for Strategic Cost
Analysis
Data requirement are formidable.
Requires breaking department cost
accounting data out into cost of
performing specific activities.
Activity-based costing
New cost accounting methodology aimed at
assigning cost to specific tasks and value
chain activities.
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Benchmarking the Costs of Key Activities
Benchmarking performance of a firm’s activities
against rivals & best practice firms provides
evidence of firm’s cost competitiveness.
Benchmarking is an excellent tool to determine:
If cost are in line with competitors.
Which business processes need to be scrutinized for
improvement.
Which firms perform a given activity best.
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Focuses on cross-company comparisons
of how well activities are performed.
Purchase of materials
Payment of suppliers
Management of inventories
Training of employees
Processing of payrolls
Getting new products to market
Performance of quality control
Filling & shipping of customer orders
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Achieving Cost Competitiveness
A firm’s competitiveness depends on
how well it manages its value chain
relative to competitors.
Examining a firm’s value chain &
comparing it to key rivals indicates
Who has how much of a cost advantage or
disadvantage.
Which cost components are responsible.
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Three areas in firm’s value chain
contributes to cost differences
compared to rivals
Suppliers’ activities
Firm’s internal activities
Forward channel activities
Strategic actions to eliminate a cost
disadvantage need to be linked to where
cost differences originate!
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Value Chain Analysis and Competitive
Advantage
Value chain analysis is a powerful
managerial tool for identifying which
activities have competitive advantage
potential.
A firm’s competitive edge is based on its
ability to perform competitively crucial
activities along value chain better than
rivals.
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Diagnosing competitive capabilities involves
Construct a value chain of firm’s activities
Examine linkages among internally. performed
activities linkages with suppliers’ & customers’
chains.
Identify activities &competencies critical to
customer satisfaction & market success.
Make appropriate internal & external
benchmarking comparisons to determine
• How well firm performs activities.
• How cost structure compares with rivals.
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How Strong is the Company’s
Competitive Position?
Important elements for competitive strength
analysis:
1)
How strongly the firm holds its present
competitive position.
2)
Whether the firm’s position can be expected to
improve or deteriorate if the present strategy
is continued.
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3)
How the firm ranks relative to key rivals on
each important measure of competitive
strength and industry key success factor.
4)
Whether the firm enjoys a competitive
advantage or is currently at a disadvantages.
5)
The firm’s ability to defend its position in light
of industry driving forces, competitive
pressures and the anticipated moves of rivals.
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Procedure: Assessing a Company’s
Competitive Strength
STEP 1: List key success factors & other relevant measures
of competitive strength.
STEP 2: Rate firm & key rivals on each factor using rating
scale of 1 – 10 (1= week; 10 = strong).
STEP 3: Decide whether to use weighted or unweighted
rating system.
STEP 4: Sum individual ratings to get overall measure of
competitive strength for each rival.
STEP 5: Evaluate firm’s overall competitive strength
relative to rivals.
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Competitive Strength Assessment
Signs of Competitive
Strength
Important core
competencies
Strong market share
A pacesetting or
distinctive strategy
Growing customer base &
customer loyalty.
Above-average market
visibility
Signs of Competitive
Weakness
Confronted with
competitive disadvantages
Losing grown to rival
firms
Below-average growth in
revenue
Short on financial
resources
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Signs of Competitive
Strength
In a favorably situated
strategic group
Concentrating on fastestgrowing market segments
Strongly differentiate
products
Cost advantages
Above-average profit
margins
Above-average
technological and
innovational capability
Signs of Competitive
Weakness
A slipping reputation with
customers
Trailing in product
development
In a strategic group
destined to lose ground
Weak in areas where
there is the most market
potential
A higher cost producer
Too small to be a major
factor in the market place
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Signs of Competitive
Strength
A creative,
entrepreneurially alert
management
In position to capitalize on
opportunities
Signs of Competitive
Weakness
Not in good position to
deal with emerging
threats
Weak product quality
Lacking skills and
capabilities in key areas
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Chapter 5:
Strategy and Competitive
Advantage
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Five Generic Competitive
Advantages
TYPE OF COMPETITIVE
ADVANTAGE BEING PURSUED
Lower Cost
Differentiation
A Broad Range
of Buyers
Marketwide
Overall
Low-cost
Leadership
Strategy
A particular
Buyer Segment
Or Market Niche
Focused
Low-cost
Strategy
Broad
Differentiation
Strategy
Best-cost
Provider
Strategy
Focused
Differentiation
Strategy
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Vertical Integration Strategies
Vertical integration extends a firm’s
competitive scope within same industry
Backward into sources of supply.
Forward toward end-users of final product.
Moves to vertically integrate can aim at
becoming
Fully integrated.
Partially integrated.
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Strategic Advantages of Vertical
Integration
Generates cost savings.
Spare a company the uncertainty of being
dependent on suppliers of crucial components
or support activities.
To build a committed group of dealers and
outlets representing its products to end users.
Permit greater product differentiation and
provide an avenue of escape from the priceoriented competition of a commodity business.
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Strategic Disadvantages of Vertical
Integration
Boosts capital requirements.
Results in fixed sources of supply & less flexibility in
accommodating buyer demands for products variety.
Extends firm’s scope of activity, locking it deeper into
industry.
Posses problems of balancing capacity at each stage
of value chain.
Requires radically different skills & capabilities.
Can reduce firm’s manufacturing flexibility,
lengthening design time & ability to introduce new
products.
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Unbundling and Outsourcing
Strategies
Concept
Involves withdrawing from certain stages
in value chain system and relying on
outside vendors to perform needed
activities and services.
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Advantages of Outsourcing Strategies
Activity can be performed better or more
cheaply by outside specialist.
Activity is not crucial to achieving competitive
advantage.
Reduces firm’s risk exposure to changing.
Streamlines firm operations in ways to
Cut cycle time
Speed decision making
Reduce coordination costs
Allows firm to concentrate on its core
business.
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Offensive Strategies
Offensive Strategies
Nearly always result in successful
achievement of competitive advantage.
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Size of Competitive Advantage
Figure 5.2: The Building and Eroding of Competitive Advantage
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Building and Eroding of Competitive
Advantage
Buildup period
Offensive strategic moves successed in producing a
competitive advantage – ideally, buildup period is
short.
Benefit Period
Length is governed by how long it take rivals to respond
effectively enough to close gap.
Erosion Prriod
Characterized by launch of counter offensives of rivals to
attack advantage & whittle it away.
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Six Basic Types of Strategic Offensive
1) Initiative to match or exceed competitor
strengths .
2) Initiative to capitalize on competitor
weakness.
3) Simultaneous initiatives on many fronts.
4) End-run offensives.
5) Guerrilla offensives.
6) Preemptive strikes.
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Initiative to Match or Exceed Competitor
Strengths
Possible Offensive Options
Underprice rivals.
Boost advertising.
Introduce new features to appeal to rivals’
customers.
Best Options
Attack with equally good product & lower price.
Develop low-cost edge, use it to uderprice
rivals.
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Initiative to Capitalize on Competitor
Weaknesses
Basic Approach
Concentrate one’s competitive strengths & resources
directly against rival’s weakness.
Weaknesses to Attack
Concentrate on geographic regions where rival has weak
market share.
Go after buyer segments rivals is neglecting.
Go after more performance-conscious customers of rivals
who lag behind challenger.
Attack rivals with weaker advertising & brand
recognition.
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Simultaneous Initiatives on Many Fronts
Objectives
Launch several major initiatives to
Throw rival off-balance,
Splinter its attention in many directions,
Force it to use substantial resources to defend its
position.
Appeal
A challenger with superior resources can overpower
a weaker rival by outspending it across-the-board
long enough to “buy its way into the market.”
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End-Run Offensives
Objectives
Dodge head-to-head confrontation that escalate
competitive intensity and risk cutthroat
competition – Attempt to maneuver around
competition.
Appeal
Gain first-first mover advantage in a new arena.
Force competitors into playing catch up.
Change rules of competition in aggressor’s favor.
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End-Run Offensive Approaches
Move aggressively into new geographic
market where rivals have no market
presence.
Introduce products with different attributes &
features to better meet buyer needs.
Introduce next-generation technologies &
leapfrog rivals.
Come up with more support services for
customers.
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Guerrilla Offensive
Approach
Use principles of surprise & hit-and-run to
attack in locations& at times where conditions
are most favorable to initiator.
Appeal
Well-suited to small challengers with limited
resources.
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Guerrilla Offences: Options
Focus on narrow target weakly defended by
rivals.
Challenge rivals where they are overextended
& when they are encountering problems.
Make random scattered raids on leaders with
tactics such as:
Occasional low-balling on price.
Intense bursts of promotional activity.
Legal actions charging antitrust violations, patent
infringements & unfair advertising.
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Preemptive Strategies
Approach
Involves moving first to secure an
advantageous position that rivals are
foreclosed or discouraged from duplicating.
Preemptive Strategies: Options
Expand capacity ahead of demand in hopes of
discouraging rivals from following suit.
Tie up best or cheapest sources of essential raw
materials.
Move to secure best geographic locations.
Obtain business from prestigious customers.
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Build an image in buyers’ minds that is unique & hard
to copy.
Secure exclusive or dominant access to best
distributors.
Acquire desirable, but struggling competitors.
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Choosing Who to Attack?
Four types of firms at which to aim an
offensive
Market leaders
Runner-up firms
Struggling rivals on verge of going under
Small local/regional firms not doing the job
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Defensive Strategies
Objectives
Lessen risk of being attacked.
Blunt impact of any attack that occurs.
Influence challengers to aim attacks at
other rivals.
Strengthen firm’s present position.
Help sustain any competitive advantage
held.
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Defensive Strategies: Approaches
Approach 1
Block avenues challengers can take in
mounting offensive attacks.
Approach 2
Make it clear any challenge will be met
with strong counterattack.
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Approach 1
Broaden product line to fill gaps rivals may go after.
Keep prices low on models that much rivals.
Sign exclusive agreements with distributors and best
suppliers.
Offer free training to buyers’ personnel.
Give better credit terms to buyers.
Reduce delivery times for spare parts.
Increase warranty coverage.
Patent alternative technologies.
Protect proprietary know-how.
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Approach 2
Publicity announce management’s strong
commitment to maintain present market share.
Publicly announce plans to construct new
production capacity to meet forecasted demand.
Give out advance information about new
products, technological breakthroughs & other
moves.
Publicly commit firm to policy of matching prices
& terms offered by rivals.
Maintain war chest of cash reserves.
Make occasional counter-responses to rivals’
moves.
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Chapter 6:
Strategies for Competing in
Globalizing Markets
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Why Company Expand into
Foreign Market?
Desire to seek out new markets to
sustain growth in sales and profits.
Desire to achieve lower costs to
strengthen firm’s long-term competitive
position.
Desire to access natural resource
deposits in other countries.
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Cross Country Differences
Market differences among countries.
Cost differences among countries.
Differences in host government trade
policies.
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Market Differences among Countries
Buyer needs and habits.
Distribution channels.
Long-run growth potential.
Driving forces.
Competitive pressures.
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Costs Differences among Countries
Wage rates
Worker productivity.
Natural resource availability.
Inflation rates.
Energy costs.
Tax rates.
Fluctuating currency exchange rates.
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Differences in Host Government Trade
Policies
Import tariffs or quotas.
Local content requirements.
Price control policies.
Other regulations:
Technical standards.
Product certification.
Minority ownership by local citizens.
Prior approval of capital spending projects.
Withdrawal of funds from country.
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Multi-country Competition or
Global Competition? Global
Multi-country
Competition in each
national market is
independent of
competition in other
national market.
No “international” market.
Rivals compete for market
leadership country by
country.
Competitive conditions
across national markets
are linked to form an
international market.
Firm’s competitive
position in one country
affects and is affected by
its position in other
countries.
Leading competitors
compete head-to-head in
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Strategy Options for Entering and
Competing in Foreign Markets
License foreign firms to use the company’s
technology or produce and distribute the
company’s products.
Maintain a national production base and export
goods to foreign markets.
Follow a multi-country strategy.
Follow a global low cost strategy.
Follow a global differentiation strategy.
Follow a global focus strategy.
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Multi-country Strategy
Matches strategy to host country
circumstances.
Work best when:
Market conditions are diverse among countries.
Buyers insist on highly customized products.
Buyer demand for product exist in few markets.
Host government regulations preclude uniform
global approach.
Two drawbacks:
Entails little coordination across countries.
Not tightly based on competitive advantage.
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Global Strategy
Work best when great similarities in products
and buyer requirements exist among
countries.
Involves:
Coordinating firm’s strategic moves worldwide.
Selling buyer demand exists.
Allows firm to concentrate on securing
competitive advantage over both international
and domestic rivals.
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Pursuing Competitive Advantage
by Competing Multi-nationality
Global strategy provides two avenues
to gain competitive advantage:
1)
2)
Locating activities among nations in ways
that lower costs or helps achieve greater
product differentiation.
Coordinating dispersed activities in ways
domestic-only competitor cannot.
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Locating Activities
To build competitive advantage via location,
firm must consider:
1)
2)
Whether to concentrate each activity in one/two
countries or disperse performance of activity to
many nations.
In which countries to locate activities.
Activities tend to be concentrated when
scale economies / experience curve effects
exist and coordination of related activities is
enhanced.
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Dispersing activities works best when:
Buyer related activities must take place
close to buyers.
Transportation cost, scale diseconomies
and trade barriers make centralization
expensive.
It buffers fluctuating exchange rates,
supply interruptions and adverse political
developments.
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Coordinating Activities and Strategic
Moves
Competitive advantage can be build via:
Knowledge and expertise accumulated at one
location can be transferred to other locations.
Production can be shifted from one location to
another to take advantage of most favorable cost or
trade conditions.
Brand reputation can be enhanced by positioning
products with same differentiating attributes on a
worldwide basis.
Global competitor can choose where and how to
challenge rivals.
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Strategic Alliances
It is an agreements between firms to do
business together in ways that go
beyond normal firm-to-firm dealings but
fall short of merger or full partnership.
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An alliance can take form of:
Joint research efforts.
Technology-sharing.
Joint use of production facilities.
Marketing one another’s products.
Jointly manufacturing components or assembling
finished products.
Alliance enable firms in same industry based
in different countries to compete on a more
global scale while preserving their
independence.
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Benefits of Strategic Alliance
Allies may gain economies of scale in
production and/or marketing.
Allies can share and/or transfer technical and
manufacturing expertise.
Alliances may allow access to markets
previously blocked by governmental barriers.
Allies can direct combined competitive
energies into building competitive advantage
and defeating mutual rivals.
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Pitfalls of Strategic Alliance
Effective coordination is challenging and time
consuming.
Language and cultural barriers and problems of
mistrust may exist.
Relationships may cool and benefits never
realized.
Collaboration in competitively sensitive areas
may be difficult.
Clash of egos and company cultures may occur.
One firm may become too dependent on another
firm’s capabilities.
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Guideline for Forming Strategic Alliances
Pick a compatible partner.
Choose an ally whose products and market
strongholds complement firm’s own products
and customers.
Learn thoroughly and rapidly about partner’s
technology and management.
Be careful not to divulge competitively
sensitive information to a partner.
View alliance as temporary.
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Strategic Intent
Global dominance
Long-term strategic intent is pursing a global strategy.
Defending domestic dominance
Primary strategic objective is defending home country
market.
Host country responsiveness
Primary strategic orientation is pursing a multi-country
strategy.
Domestic-only firm
Strategic intent is focused on home country market.
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Profit Sanctuaries and Critical Markets
Profit sanctuaries are country markets where
a firm has strong or protected market
position and derives substantial profits.
A country is a firm’s profit sanctuary when it
derives a substantial fraction of total profits
from sales in that country.
Generally, a firm’s most strategically crucial
sanctuary is its home market.
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Critical Market
Critical markets are in countries that:
Are profit sanctuaries of key competitors.
Have big sales volume.
Include prestigious customers whose
business it is strategically important to
have.
Offer exceptionally good profit margins due
to weak competitive pressures.
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Competitive Power of CrossSubsidization
Involves using profits earned in a country market
to support offensive against key rivals or gain
increased penetration of a critical market.
Most powerful when global firm with multiple
profit sanctuaries is intent on achieving global
market dominance.
A global firm can use lower prices to siphon a
domestic firm’s customers while gaining market
share and covering losses with profits earned in
other critical markets.
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Chapter 7:
Business Models and
Strategies in the Internet
Era
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Strategy-Shaping Characteristics
of the E-commerce Environment
Internet makes it feasible for companies
everywhere to compete in global markets.
Competition in an industry is greatly intensified
by new e-commerce strategic initiatives of
existing rivals and by entry of new, enterprising
e-commerce rivals.
Entry barriers into e-commerce world are
relatively low.
On-line buyers gain bargaining power.
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Internet makes it feasible for firms to reach
beyond their borders to find the best suppliers
and, further, to collaborate closely with them to
achieve efficiency gains and cost-savings.
Internet and PC technologies are advancing
rapidly, often in uncertain and unexpected
directions.
Internet results in much faster diffusion of new
technology and new ideas across the world.
E-commerce environment demands that firms
move swiftly - “at Internet speed.”
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Internet and e-commerce technology open up a
host of opportunities for reconfiguring industry
and company value chains.
Internet can be an economical means of
delivering customer service.
Capital for funding potentially profitable ecommerce businesses is readily available.
Needed e-commerce resource in short supply is
human talent, in the form of both technological
expertise and managerial know-how.
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Business Model: Suppliers of
Communication Equipment
Traditional business model of a
manufacturer is being used by most firms
to make money.
Sell products to customers at prices above
costs.
Produce a good return on investment.
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Strategic issues facing equipment makers
Several competing technologies for various
components of the Internet infrastructure
exist.
Competing technologies may
• Have different performance pluses and
minuses.
• Be incompatible.
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Business Models: Suppliers of
Computer Components and
Hardware
Traditional business model is used - Make
money by selling products at prices above
costs.
Strategic approaches
Stay on cutting edge of technology.
Invest in R&D.
Move quickly to imitate technological advances
and product innovations of rivals.
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Key to success - Stay with
or ahead of rivals in
introducing next-generation
products.
Competitive advantage will
most likely be
based
on strategies keyed to lowcost.
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Business Model: E-commerce
Retailers
Sell products at or below cost and make
money by selling advertising to other
merchandisers.
Use traditional model of
Purchasing goods from manufacturers and
distributors.
Marketing items at a Web store.
Filling orders from inventory at a warehouse.
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Operate Web site to market and sell
product/service and outsource
manufacturing, distribution and delivery
activities to specialists.
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Business Model: Media Companies
and Content Providers
Using intellectual capital to develop music,
games, video, and text, media firms.
Charge subscription fees.
Rely on a pay-per-use model.
Business model of content providers involves
creating content to attract users, then selling
advertising to firms wanting to deliver a
message.
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Key success factors for content providers
Create a sense of community.
Deliver convenience and entertainment value
as well as information.
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Internet Strategies for Traditional
Business
Use Internet technology to communicate
and collaborate closely with suppliers and
distribution channel allies.
Reengineer company and industry value
chains to revamp how certain activities are
performed and to eliminate or bypass
others.
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Make greater use of build-to-order
manufacturing and assembly.
Build systems to pick and pack products
that are shipped individually.
Use the Internet to give both existing and
potential customers another choice of how
to interact with the company.
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Adopt the Internet as an integral
distribution channel for accessing new
buyers and geographic markets.
Gather real-time data on customer tastes
and buying habits, doing real-time market
research, and using the results to respond
more precisely to customer needs and
wants.
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REV 00
Key Success Factors: Competing
in the E-commerce Environment
Employ an innovative business model.
Develop capability to quickly adjust
business model and strategy to respond to
changing conditions.
Focus on a limited number of
competencies and perform a relatively
specialized number of value chain
activities.
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Stay on the cutting edge of technology.
Use innovative marketing techniques that
are efficient in reaching the targeted
audience and effective in stimulating
purchases.
Engineer an electronic value chain that
enables differentiation or lower costs or
better value for the money.
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Chapter 8:
Tailoring Strategy to Fit
Specific Industry and
Company Situations
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Strategies for Competing in
Emerging Industries
Try to win early race for industry leadership
by employing a bold, creative strategy.
Push hard to:
Perfect technology.
Improve product quality.
Develop attractive performance features.
Shape rules of competition.
Try to capture potential first-mover
advantages.
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Pursue new:
Customers & user applications.
Geographical areas to enter.
Shift advertising focus from building product
awareness to increasing frequency of use and
creating brand loyalty.
Move quickly when technological uncertainty clears
& a “dominant” technology emerges.
Use price cuts to attract price-sensitivity buyers.
Expect established firms looking for growth
opportunities to enter market when risk lessens.
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REV 00
Strategy for competing in
Turbulent, High-Velocity Markets
Pursue a focused strategy by
identifying, creating and exploiting the
growth segments within the industry.
Stress differentiation based on quality
improvement and product innovation.
Work diligently and persistently to drive
cost down. How?
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Outsourcing activities.
Redesigning internal business processes.
Consolidating under-utilized production
facilities.
Closing low-volume, high-cost distribution
outlets.
Cutting marginal activities out of value chain.
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Strategy for Competing in
Maturing Industry
Prune product line.
Emphasize process innovation.
Push hard for cost reduction.
Find ways to increase sales to present
customers.
Purchase rival firms at bargain prices.
Expand internationally.
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Strategies for Competing in
Fragmented Industries
Constructing and operating “formula”
facilities.
Becoming a low-cost operator.
Increasing customer value through
integration.
Specializing by product type.
Specialization by customer type.
Focusing on a limited geographic area.
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REV 00
Chapter 9:
Strategy and Competitive
Advantage in Diversified
Companies
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When to Diversify?
When to diversify depends on
Firm’s competitive position.
Remaining opportunities in home-base
industry.
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REV 00
Strong competitive
position, rapid market
growth – NOT a
good time to diversify
Weak competitive
position, rapid market
growth -- NOT a good
time to diversify
Strong competitive
position, slow market
growth –
Diversification is top
priority consideration
Weak competitive
position, slow market
growth –
Diversification merits
consideration
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Building Shareholder Value
To create shareholder value,
a diversifying company must get
into businesses that can perform
better under common management
than they could perform as
stand-alone enterprises.
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Three Tests for Judging a Diversification
Move
1) The attractiveness test
The industry chosen for diversification must be
attractive enough to yield consistently good returns
on investment.
2) The cost of entry test
The cost to enter the target industry must not be
so high as to erode the potential for good
profitability.
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3) The better-off test
The diversifying company must being some
potential for competitive advantage to the new
business it enters, or the new business must offer
added competitive advantage potential to the
company’s present business.
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REV 00
Diversification Strategies
1) Strategies for entering new industries –
acquisition, start-up and joint ventures.
2) Related diversification strategies.
3) Unrelated diversification strategies.
4) Divestiture and liquidation strategies.
5) Corporate turnaround, retrenchment and
restructuring strategies.
6) Multinational diversification strategy.
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REV 00
Strategies for Entering New Industries
Acquiring and Existing Company
Most popular approach to diversification.
Advantages:
Quicker entry into target market.
Hurdling certain entry barriers.
• Technological inexperience.
• Gaining access to reliable suppliers.
• Being of a size to match rivals in terms of
efficiency and costs.
• Getting adequate distribution access.
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Internal Start-up
Ample time exists.
Incumbent firms slow in responding.
It involves lower costs than acquiring existing
firm.
Firm already has most of needed skills.
Additional capacity will not adversely impact
supply-demand balance in industry.
New start-up does not have to go head-tohead against powerful rivals.
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Joint Ventures
Uneconomical or risky to go it alone.
Pooling competencies of two partners
provides more competitive strength.
Foreign partners needed to surmount
Import quotas.
Tariffs.
Nationalistic political interests.
Cultural roadblock.
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Related Diversification Strategies
A related diversification strategy
involves diversifying into businesses
that possess some kind of “strategic fit”.
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Common Approaches to Related
Diversification
Entering businesses where sales force,
advertising and distribution activities can be
shared.
Exploiting closely related technologies.
Sharing manufacturing facilities.
Transferring know-how and expertise from one
business to another.
Transferring firm’s brand name and reputation
with customers to a new product.
Acquiring new businesses to uniquely help firm’s
position in existing businesses.
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REV 00
Appeal of Related Diversification
Allows firm to maintain unity in
business activities and gain benefits of
skills transfer or cost sharing while
spreading risks over broader base.
Exploits what firm does best and allows
transfer of core competencies from one
business to another.
Help achieve economies of scope.
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Strategic fits among related businesses
offer competitive advantage potential of
Lower cost via sharing common resources
and combining related activities.
Efficient transfer of
• Key skills or core competencies.
• Technological expertise.
• Managerial know how.
Common use of same brand name.
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Unrelated Diversification Strategies
A strategy of unrelated diversification
involves diversifying into whatever
industries and businesses hold promise
for attractive financial gain; exploiting
strategic-fit relationships is secondary.
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Attractive Acquisition Targets
Companies with undervalued assets.
Capital gains may be realized.
Companies that are financially
distressed.
May be purchased at bargain prices.
Companies with bright prospectus but
limited capital.
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Appeal of Unrelated Diversification
Business risk scattered over different
industries.
Capital resources invested in those industries
offering best profit prospects.
Stability of profit – hard time in one industry
may be offset by good times in another
industry.
If management is exceptionally astute at
spotting bargain-priced firms with big profit
potential, then shareholder wealth can be
enhanced.
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REV 00
Drawbacks of Unrelated Diversification
Places big demand on corporate
management – more diverse the
business, harder it is to
Oversee each subsidiary and spot
problems.
Judge caliber of strategic plans of
subsidiaries.
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Consolidated performance of unrelated
portfolio tends to be
No better than sum of individual
businesses on their own and it may worse.
Promises greater sales-profit stability
over business cycle, but is seldom
realized.
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Divestiture and Liquidation Strategies
Situations arise when one or more
subsidiaries have to be sold or shut
down.
Misfits cannot be completely avoided.
Industry attractiveness changes over time.
Subpar performance of some subsidiaries is
bound to occur.
Diversification appearing sensible based on
strategic fit essential to cultural fit.
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Divestiture and Liquidation Strategy Options
Two types of divestiture options
Divest business by spinning it off as
independent company.
Divest business by selling it.
Liquidation
Most painful option.
Involves terminating firm’s existence.
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REV 00
Turnaround, Retrenchment and
Portfolio Restructure Strategies
Strategy options for diversified firm with ailing
subsidiaries.
Conditions causing poor performance
Large losses in one or more subsidiaries.
Disproportionate number of businesses in
unattractive industries.
Bad economic conditions.
Excessive debt load.
Acquisitions that perform worse than expected.
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Corporate Turnaround Strategies
Focused on restoring money-losing
businesses to profitability rather than
divest them.
The main objective is to get whole firm
back in the black by curing problems of
those businesses in portfolio responsible
for puling down overall performance.
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REV 00
Corporate Retrenchment Strategies
Focused on reducing scope
diversification to a smaller number of
businesses.
When to consider?
Certain businesses cannot be made
profitable.
Diversification efforts have become too
broad and building strong position s in
fewer businesses is key to improving longterm performance.
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Retrenchment is usually accomplished by
divesting businesses that are too small to
make sizable contribution to earnings or that
have little or no strategic fit with the
company’s core business.
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REV 00
Most appropriate where
Reasons for poor performance are shortterm.
Ailing businesses are in attractive
industries.
Divesting money-losers does not make
long-term strategic sense.
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REV 00
Portfolio Restructuring Strategies
Focused on making radical changes in
mix and percentage makeup of types of
businesses in portfolio via both
divestitures and new acquisitions.
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REV 00
When to use?
Long-term performance prospects are
unattractive.
Core business units fall upon hard times.
“Wave of the future” technologies or products
emerge and major shakeup is needed to build
position in a potentially big new industry.
“Unique opportunity” emerges and some
existing businesses must be sold to finance
new acquisition.
Major business in portfolio become
unattractive.
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REV 00
Multinational Diversification Strategies
The distinguishing characteristics of a
multinational diversification strategy are
a diversity of businesses and a diversity
of national market.
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The Emergence of Multinational Diversification
1960s
Multinational companies (MNCs) operated
autonomous subsidiaries in each host country.
Management tasks at headquarters focused on
finance functions, technology transfer and export
coordination.
MNCs able to transfer certain skills from country
to country efficiently and cheaply.
MNCs’ market position in a country negotiated
with host government, not due to pressures of
international competition.
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REV 00
1970s
Multicountry strategies based on national
responsiveness began to lose effectiveness.
International competition in more industries.
Relevant market arena in many industries
shifted from national to global.
Traditional MNCs driven to integrate
operations across national borders.
Manufacturing a complete product range in
each country became less prevalent. Instead,
plants specialized in making fewer models.
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REV 00
Gains in manufacturing efficiencies from
converting to world-scale plants more than
offset increased international shipping costs.
In many industries, firms moved to locate
plants in low-wage countries to achieve
labour cost savings.
MNCs acted to take advantage of country-tocountry differences:
Interest and exchange rate.
Favorable credit terms.
Government subsidies.
Export guarantees.
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REV 00
1980s
Another source of competitive advantage
emerged: using strategic fit advantages of
related diversification to build a stronger
global position.
Diversified MNC (DMNC) was competitively
superior to an MNC due to economics of
scope.
Related diversification produced extra
competitive advantage for a MNC where,
Expertise in a core technology was applied in
different industries.
Important brand name advantages existed.
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REV 00
Combination Diversification
Strategies
The most common business portfolios
created by corporate diversification
strategies are:
1)
2)
3)
A dominant business enterprise with sales
concentrated in one major core business but
with a modestly diversified portfolio of either
related or unrelated business.
A narrowly diversified enterprise having a few
related core business units.
A broadly diversified enterprise made up of
many mostly related business units.
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4)
5)
6)
A narrowly diversified enterprise composed of a
few core business unit in unrelated industries.
A broadly diversified enterprise having many
business unite in mostly unrelated business.
A multibusiness enterprise that has diversified
into unrelated areas but that has a portfolio
related businesses within each area.
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REV 00
Chapter 10:
Evaluating the Strategies
of Diversified Companies
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REV 00
Identify the Present Corporate
Strategy
Extend to which firm is diversified.
Whether portfolio is keyed to related or
unrelated diversification or both.
Whether scope of operations is mostly
domestic or increasingly global.
Nature of recent moves to boost
performance of key business units.
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Moves to add new businesses & build
positions in new industries.
Moves to divest weak/unattractive
businesses.
Moves to pursue strategic fit benefits &
use diversification to create competitive
advantage.
Capital expenditures for each different
business unit.
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Matrix Techniques for Evaluating
Diversified Portfolios
A business portfolio matrix is a
two-dimensional display comparing
the strategic positions of every business
a diversified company is in.
The Boston Consulting Group (BCG)
portfolio matrix compares a diversified company’s
businesses on the basis of industry growth
rate and relative market share.
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Figure 10.1: BCG Growth-Share Business Portfolio Matrix
Relative Market Share Position
High
Low
Stars
Question Marks
Cash Cows
Dogs
High
Low
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REV 00
Question marks / Problem Children /
Cash Hogs
Operate in a high growth market but have
low relative market share.
Rapid industry market growth makes
businesses attractive, but low relative
share positions raise questions about
future potential.
Cash needs are high & internal cash
generation is low, making them cash hogs.
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Stars
Market leaders situated in high growth
market with high relative market share.
Offer excellent growth opportunities.
Offer excellent profit opportunities.
Vary as to whether they are self-sustaining
or require infusions of investment funds
from corporate parent.
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Cash Cows
Situated in low growth market but have
high relative market share.
Can generate cash surpluses over & above
that needed for reinvestment & growth in
business.
Valuable portfolio holding because they can
be “milked” for cash to:
• Pay corporate dividends &overhead.
• Finance new acquisitions.
• Invest in young stars or problem children.
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Should not be “harvested” but maintained
in healthy position for long-term cash flow.
Weak cash cows may become candidates
for harvesting & eventual divestiture.
The goal is to FORTIFY and DEFEND
a cash cow’s market position while efficiently
generating dollars to reallocate to business
investments elsewhere!
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Dogs
Situated in low growth market & have low
relative market share.
Have weak competitive position & low
profit potential.
Unable to generate attractive cash flows on
a long-term basis.
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Evaluating Industry Attractiveness
The more attractive the industries that a company
has diversified into, the better its performance prospects.
Three perspectives to evaluate industry
attractiveness:
1)
2)
3)
The attractiveness of each industry represented
in the business portfolio.
Each industry’s attractiveness relative to the
others.
The attractiveness of all the industries as a
group.
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Attractiveness Factors
Market size and projected growth rate.
The intensity of competition.
Technological and production skills required.
Capital requirements.
Seasonal and cyclical factors.
Industry profitability.
Social, political, regulatory and environmental
factor.
Strategic fits with other industries the firm
has diversified into.
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Evaluating the Competitive Strength
of SBU’s
The two most revealing techniques for
evaluating a business’s position in its
industry are:
1)
2)
SWOT Analysis.
Competitive strength assessment.
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Evaluate business-unit strength involve
comparing the following specific criteria:
Relative market share.
Ability to compete on price and/or quality.
Technology & innovation capabilities.
How well the business unit’s skills & competences
match industry key success factors.
Profitability relative to competitors.
Other pertinent measures of competitive strength.
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Strategic Fit Analysis
It need to be looked from two angles:
1)
2)
Whether a business unit has valuable
strategic fit with other businesses the firm
has diversified into.
Whether the business unit mashes well
with corporate strategy or adds a beneficial
dimension to the corporate portfolio.
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A business is more valuable strategically when:
It presents cost-sharing or skills transfer
opportunities that translate into stronger
competitive advantage and/or added profitability.
It fits with strategic direction of corporation.
A business is more valuable financially when:
It is capable of contributing heavily to corporate
performance objectives.
It enhances firm’s overall worth.
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Steps in Conducting Fit Analysis
First
Analyze value chains of each business to identify
opportunities for cost sharing, skills transfer, and/or
differentiation enhancement.
Second
Identify important interrelationships between firm’s
present businesses & other industries not in portfolio.
Third
Decide if existing & potential strategic fit relationships
can lead to an attractive competitive advantage.
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Resource Fit Analysis
To achieve ever-higher levels of performance
from a diversified business portfolio depends
on doing an effective job of corporate
resource allocation.
Key to success – steering resources out of
low opportunity areas into high opportunity
areas.
Sufficient resources are important to
guarantee the success of diversification.
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Options for Allocating Funds
1) Investing in ways to strengthen or
expand existing businesses.
2) Making acquisitions to establish
positions in new industries.
3) Finding long-range R&D ventures.
Financial
moves
Strategic
actions
4) Paying off existing long-term debt.
5) Increasing dividends.
6) Repurchasing the company’s stock.
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Chapter 11:
Building Resources
Strengths and
Organizational Capabilities
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A Framework for Implementing
Strategy
Implementing strategy entails
converting the organization’s
strategic plan into action and
then into results.
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REV 00
Implementing strategy is tougher and
more time consuming than strategy
making due to:
Variety of managerial activities.
Many different ways to tackle each activity.
People management skills required.
Perseverance and wave-making it takes to
launch a variety of initiatives.
Number of bedeviling issues to be worked
through.
Resistance to change to overcome.
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Why Implementing Strategy is a Tough Job?
Implementing a new strategy takes
adept managerial leadership to:
Overcome pockets of doubt and
disagreement.
Build consensus for how to proceed.
Secure commitment and cooperation of
concerned parties.
Get all implementation pieces in place.
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Characteristics of Strategy Implementation
Process
Every manager has an active role.
No 10-step checklists and few concrete
guidelines.
It’s the least charted, most open-ended
part of strategy management.
Best evidence of do’s and don’ts comes
from personal experiences, anecdotal
reports and case studies.
But wisdom yielded is inconsistent.
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Each implementation situation occurs in a
different context, affected by differing:
Business practices and competitive situations.
Work environments and cultures.
Policies.
Compensation incentives.
Mixes of personalities and firm histories.
Approach to implementation should be
customized.
People implement strategies –not companies.
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The Principle Strategy –
Implementation Tasks
Building a capable organization.
Allocating ample resources to strategycritical activities.
Establishing strategy supportive policies
and procedures.
Instituting best practices and mechanisms
for continuous improvement.
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Installing support systems enabling
personnel to carry out their strategic
roles successfully.
Tying rewards and incentives tightly to
achievement of key objectives.
Creating a strategy-supportive
corporate culture.
Exerting strategic leadership.
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REV 00
Figure 11.1: Eight Big Managerial Components of
Implementing Strategy
Allocating ample
resources to
strategy-critical activities
Building a
capable organization
Establishing strategysupportive policies
Strategy
Implementer’s
Action
Agenda
Exercising strategic
leadership
Shaping the corporate
culture to fit the strategy
Instituting best practices
and mechanisms for
continuous improvement
Installing support system
Tying rewards to achievement
of key strategic targets
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Leading the Strategy
Implementation Process
Take active, visible role or low-key, behind the
scenes role.
Make decisions on basis of consensus or
authoritatively.
Delegate much or little.
Be personally involved in implementation details
or coach others carrying day-to-day burden.
Proceed swiftly to achieve results or move
deliberately, content with gradual progress over a
long time frame.
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Factors Influencing the Implementation
Process
Leader’s experience and accumulated
knowledge about business.
Whether manager is new to job or seasoned.
Manager’s network of personal relationships.
Manager’s own diagnostic, administrative,
interpersonal and problem solving skills.
Authority which manager has been given.
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Leadership style manager is most comfortable
with.
Manager’s conclusions about role he/she
should play in light of what has to be done.
Context of organization’s situation.
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Building a Capable Organization
Three main tasks:
1)
2)
3)
Selecting able people for key positions.
Developing skills, core competencies and
competitive capabilities.
Creating strategy-supportive organization
structure.
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Selecting People for Key Positions
Implementation Issues
What kind of core management team is
needed to carry out strategy.
Finding the right people to fill each slot.
Existing management team may be suitable.
Core executive group may need strengthening:
• Promoting from within or,
• Bringing in skilled management talent from outside.
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Key Considerations
Determining mix of backgrounds,
experiences, know-how, values, styles of
managing and personalities to contribute
to successful strategy execution.
Putting together strong management team
with right personal “chemistry” and mix of
skills needs to be acted on early in
implementation process.
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Building Core Competencies
When it is difficult to out-strategize rivals
with a superior strategy, the best avenue
to industry leadership is to out-execute
them, and beat them with superior
strategy implementation.
Building core competencies that rivals
cannot match is one of the best ways to
out-execute them.
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Strategically-relevant core competencies:
Greater proficiency in product development.
Better manufacturing know-how.
Superior cost-cutting skills.
Better marketing and merchandising skills.
Capability to provide better after-sale
service.
Ability to respond quickly to changes in
customer needs.
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REV 00
Four Traits Related to Building Core
Competencies
1) Rarely consist of narrow skill or work efforts
of a single department.
2) Typically emerge from combined efforts of
different work group and departments.
3) Gaining competitive advantage entails
concentrating more effort than rivals on
creating or strengthening core
competencies.
4) Bases of competency need to be broad and
flexible to react to changes in customers’
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needs.
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Creating core competencies is an exercise
best orchestrated by senior managers who
understand how firm’s core competence
is created and have the clout to enforce
necessary networking and cooperation
among functional departments.
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REV 00
Employee Training
Training takes on strategic importance in
efforts to build a skills-based competence.
Training is a strategy-critical activity in
businesses where technical know-how is
changing or advancing rapidly.
Strategy implementers ensure training
function is adequately funded and effective
training programme are in place.
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Matching Organization Structure to
Strategy
Principle
Design internal organization structure around
tasks and activities most critical to success of
a firm’s strategy.
Matching structure to strategy requires
making strategy-critical activities and
organization units the main building
blocks in the organizational structure.
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Guidelines
1) Pinpoint primary activities and key tasks
critical to successful strategy execution.
2) Establish ways to achieve necessary
coordination when it doesn’t make sense to
group all facets of an activity under a single
manager.
3) Determine degree of authority each unit
needs to carry out its assignment
effectively.
4) Determine whether non-critical activities
can be outsourced more efficiently than
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performed internally.
STRATEGIC MANAGEMENT
270
REV 00
Pinpointing Strategy-Critical Activities
Vary according to
Particulars of a firm’s strategy. Value chain makeup.
Competitive requirements.
Identifying a firm’s strategy-critical activities.
1.
2.
What functions have to be performed extra- well
and on time to achieve sustainable competitive
advantage?
In what value chain activities would
malperformance endanger success?
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Grouping Strategy-Critical Activities into
Department Units
Guidelines
Make strategy-critical activities main building
blocks in organizational structure.
Assign managers of these activities a visible,
influential position in organizational pecking
order.
Group related value-chain activities under
coordinating authority of single executive.
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Watch Out for Work Process Fragmentation
In traditional functionally-organized
structures, the pieces of strategically-relevant
activities often end up scattered across
many departments.
Example:
Filling customer orders accurately and promptly.
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273
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Guard Against Organization Designs that
Fragment Activities
Many hand-offs lengthen completion time.
Coordinate fragmented pieces to avoid
increasing overhead costs.
However, some fragmentation may be
necessary.
Keys to good organization design:
Maximize how support activities contribute to
performance of primary value-chain activities.
Contain costs of support activities.
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Reporting Relationship and Cross-Functional
Coordination
Classical method of coordinating activities is to
position the related activities to a single person.
Supplemental options of coordinating activities:
Coordinating teams.
Cross-functional task forces.
Dual reporting relationships. Informal organizational
networking.
Incentive compensation tied to group performance.
Executive level insistence on teamwork and
interdepartmental cooperation.
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Determining the Degree of Authority and
Independence to Give Each Unit
Centralized organization – top executives
retain authority for most decisions.
Decentralized organization – employees
empowered to exercise best judgment.
Centralizing strategy-implementing authority
at the corporate level has merit when related
activities of related businesses need to be
tightly coordinated
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Decentralized structures have:
Fewer management layers.
Short response times.
Greater employee involvement
Trend toward leaner structures stressing
employee empowerment based on 2
principles.
1)
2)
Decision-making authority pushed down to
lowest possible level.
Employees empowered to exercise judgment on
job-related matters.
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Reasons to Consider Outsourcing Noncritical Activities
Allow firm to concentrate resources on valuechain activities where it:
Can create unique value.
Can be best in industry or in the world.
Needs strategic control.
Outsourcing value-chain activities makes
strategic sense whenever they can performed
at lower cost and/or wit higher value-added
by outsiders.
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Outsourcing non-critical support
activities helps:
Decrease internal bureaucracies.
Flatten organization structure.
Provide heightened strategic focus.
Decrease competitive response times.
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279
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Why Structure Follows Strategy?
Changes in strategy may require new
structure for successful implementation.
Research results indicate:
Organizational structure affects
performance.
Structure merits reassessment whenever
strategy changes.
New strategy likely entails different kills
and key activities.
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Structure is a tool for:
Facilitating execution of strategy.
Helping to achieve performance targets.
“Harnessing” individual efforts.
Coordinating performance of diverse tasks.
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Strategy-Driven Approaches to
Organization Structure
Functional specialization
Geographic organization
Decentralization business divisions
Strategic business units
Matrix structures
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Functional organizational Structures
(Traditional)
General
Manager (GM)
Research and
development
Manufacturing
Engineering
Marketing
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STRATEGIC MANAGEMENT
Human
resources
Finance and
accounting
283
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Functional Organizational Structures
(Process-Oriented)
General
Manager
Foundry and
Castings
Screw
Machining
Milling and
Grinding
Inspection
Finishing and
Heat Treating
Customer
Service
Loading and
Shipping
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STRATEGIC MANAGEMENT
Billing and
Accounting
284
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Geographic Organizational Structure
CEO
Corporate
Staff
GM Western
District
GM Southern
District
GM Central
District
GM Northern
District
GM Eastern
District
District
Staff
Engineering
Production
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STRATEGIC MANAGEMENT
Marketing
285
REV 00
Decentralized Line-of-Business Organization
Structure
CEO
Corporate
Services
GM Business A
Functional
Departments
GM Business B
GM Business C
Functional
Departments
Functional
Departments
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Matrix Organization Structure
GM
Head of R&D
and Engineering
Head of
Manufacturing
Head of
Marketing
Head of
Finance
Business/Project/
Venture Manager 1
Engineering
R&D Specialists
Production
Specialists
Marketing
Specialists
Finance
Specialists
Business/Project/
Venture Manager 2
Engineering
R&D Specialists
Production
Specialists
Marketing
Specialists
Finance
Specialists
Business/Project/
Venture Manager 3
Engineering
R&D Specialists
Production
Specialists
Marketing
Specialists
Finance
Specialists
Business/Project/
Venture Manager 4
Engineering
R&D Specialists
Production
Specialists
Marketing
Specialists
Finance
Specialists
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REV 00
Chapter 12:
Managing the Internal
Organization to Promote
Better Strategy Execution
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Linking the Budget to Strategy
Strategy implementers need to:
See that strategy-critical units have enough
resources.
Screen requests for new capital projects &
bigger operating budgets.
Be willing to shift resources to support new
strategic priorities.
Make persuasive case to superiors on what
resources are really needed.
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New strategies often call for significant
budget reallocations due to:
Downsizing some areas & upsizing others.
Killing activities no longer justified.
Funding activities that make or break
success.
How well budget allocations are linked to
the needs of strategy can either promote or
impede the implementation process!
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Creating Strategy – Supportive
Policies and Procedures
Role of new policies in implementing
strategy
Channel actions, behaviours, & decisions in
directions to promote strategy execution.
Counteract tendencies of people to resist
chosen strategy.
Too much policy can be as stifling as
wrong policy or as chaotic as no policy.
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Sometimes, best policy is willingness to
“empower” employees.
“Empowerment” is important when
employee initiative is essential to good
strategy execution.
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How Policies & Procedures Aid Strategy
Implementation
Provide top-down guidance regarding
expected behaviours & performance.
Help align actions & behaviours with strategy.
Help enforce consistency in performance of
strategy-critical activities in geographically.
Serve as powerful lever for changing
corporate culture to produce stronger fit with
a new strategy.
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Instituting Best Practices and
Continuous Improvement
Searching out & adopting “best practice” is
integral to effective implementation.
Benchmarking has spawned new approaches
to improving strategy execution. They are:
Reengineering
Continuous improvement programme
Total quality management (TQM)
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Quality improvement programmes are tools
for implementing strategies keyed to:
Defect-free manufacture.
Superior product quality.
Superior customer service.
Total customer satisfaction.
Identifying & implementing best practices is
a journey, not a destination; it’s an exercise
in doing things in a world-class manner!
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Implementing a Continuous Improvement
Philosophy
Instill enthusiasm & commitment to doing things
rights from top to bottom of firm.
Strive to achieve little steps forward each day:
Kaizen.
Ignite employee efforts to be creative in
improving performance of value-chain activities.
Preach there is no such thing as good enough &
everyone must be involved.
Reform the corporate culture.
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Best Practice Programme
Aim at:
Improved efficiency.
Reduced costs.
Better product quality.
Greater customer satisfaction.
Involves benchmarking against
companies regarded as “best in industry”
or “best in the world”.
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Reengineering & TQM
Reengineering vs TQM programmes
Reengineering seeks one-time quantum gains on
order of 30% to 50% or more.
TQM seeks ongoing incremental improvement.
Reengineering & TQM are not mutually
exclusive.
First, reengineering is used to produce a good
basic design yielding dramatic improvements.
Then TQM is used to perfect process, gradually
improving efficiency.
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Using Best Practice Programmes as an
Implementation Tool
Select indicators of successful strategy
execution.
Next, benchmark against best practice
companies.
Reengineer business processes.
Then build a total quality (TQ) culture
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Starts with management commitment.
Install TQ-supportive employee practices.
Empower employees to do the “right
things”.
Provide employees with quick access to
required information.
Preach that performance can be improved.
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