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Masters Programmes

Assignment Cover Sheet


Submitted by: <1356301 >

Date Sent: 21.04.2014

Module Title: Advanced Strategic Management

Module Code: IB98Q0

Date/Year of Module: 2014

Submission Deadline: 21.04.2014

Word Count:

Number of Pages:

This is to certify that the work I am submitting is my own. All external references and
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made.

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Content:

1. ANSWER 1..4

2. ANSWER 2..7

3. ANSWER 313


References32





















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Analyze Googles decision to acquire Nest and discuss whether it enables Google to
generate strategic profits in the smart-home industry.


















4
Googles acquisition of NEST comes at a critical time when the search
giant is expanding into its energy, robotics and Internet of things
technology. Googles second biggest acquisition in history must
not be scrutinized by the hefty $3.2 billion price tag but must be
analyzed by the long-term strategic value NEST creates for
Google.









Human resources to develop Design capabilities
Google, in its first true attempt to diversify, has made significant efforts to establish
itself in the consumer hardware industry(see diagram below) but the search giant has
struggled to design compelling hardware products that resonate with customers .



STRATEGIC VALUE OF THE ACQUISITION
Human
Resources
Big Data
Design
capabilities
for hardware
Smart home
industry
dream
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Understanding that technology is not sufficient in the consumer device market,
Google has acquired, critical human resources of NEST that will help it combine
smart algorithims, design, slick hardware and data to achieve competitive
advantage in the hardware industry . With Tony Fadell (Founder of NEST ,
godfather of the Ipod and member of the I-Phone development team) and his
group, Google has access to the best product people on Earth who are comfortable
working at the intersection of both hardware and software. The many long-time
former employees of Apple could help Google create strategic valuest by developing
compact devices with sensors, computing power and Internet connectivity to generate
revenues in multiple industries.
BIG DATA
With the mission to "organise the world's information and make it accessible", Google
can now intrude the physical space of consumers and add information to its giant data
collection. Through NEST, the organization can finally collect information
offline and provide valuable data to advertisers, who are Googles primary
customers. With Nest developing security camera, lock doors and other
connected home products, the huge data goldmine could provide a fuller
picture of users and add great strategic value .These new sets of
parameters of data could help the King of Data extract important insights
about consumer domestic activities and further strengthen its successful
advertising model.


The Smart-Home Industry Dream

The acquisition of Nest, a smart smoke alarm and thermostat developer,
confirms Googles vision of a conscious home and its strategy to capture the
growing (number) connected home market. It is a critical component of
Googles wider strategies to occupy a prominent position in the much larger
Internet of Things market by making Android the leading operating system.
The acquisition provides Google the back of a growing brand name to step
deeper into the smart-home market at a time when Internet services and
consumer appliances are increasingly merging .The acquisition reflects
Googles emphasis on developing hardware/software solutions, rather than
relying on operating systems for other manufacturers to implement in
consumer devices. The $3.2 billion is just a strategic insurance payment for a
$55 billion company generating $5 billion per quarter in cash, to ensure it
does not lose out on one of the biggest opportunities of the decade.




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Conclusion
trategically important because it fills a gap in the company's Internet of things strategy
and adds hardware design knowhow
And Google has begun to sprawl: it makes mobile phones (Motorola) and a smartphone
operating system (Android), and is aiming at self-driving cars, robots, fibre-optic internet
services and (through Page and Brin) asteroid mining. That's because it has to think big:
"All of Google's ideas are about reach,
Where Google needs to achieve reach to gather data




If you look at this purchase solely from the perspective of an investor, it seems quite pricey. After
all, this is a relatively new start-up with modest revenue in a niche market of thermostats and
smoke detectors. From the perspective of those deploying capital in the expectation of a return on
investment, future gains are likely to be paltry relative to the billions invested.


very good track record of acquisitions that enhance its core business.
Create hardware, software solutions, not just an online platform

Firm structure and VRIO for strategic profit analysis











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Too big to innovate? Discuss reasons and examples for why established firms
tend to miss disruptive change.







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Misallocation of resources and Organizational Inertia makes it difficult for
incumbent firms to undergo strategic renewal and deal with disruptive change.


Incumbents Curse






















Inefficient
resource allocation
process
Organizational
Inertia
More investment in incremental
innovation than radical
innovation
Tendency of an established
organization to follow its current
trajectory and resist change
Loss of Disruptive Innovation Capability
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Incumbents fail to allocate resources strategically and make investments in
disruptive innovations because of faulty financial evaluation of innovation
projects, established organization values and tendency to become customer
compelled.




Distorted use of NPV as a analytical tool makes firms fall into the DCF trap, as
cash flows from disruptive innovations are not compared to the potential
decline in future performance in absence of the innovation investment (see
diagram).
Misallocation
of Resources
Ineffective
financial
evaluation
Established
Organisation
Values
Tendency to
become
customer
compelled
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For instance, USX steel did not invest in the new continuous strip production
technology, as it served the lower-end market and did not provide a large
future cash stream in the near future. In a few years, minimills such as
Chaparral drove USX out of lower-tier products and soon improved production
quality to move upstream and capture market share. The inappropriate
financial analysis jeopardized USXs disruptive innovation capability as it
failed to recognize a new technology as a capability for future competitiveness.
As companies become large, the inexorable evolution of values makes them
progressively less capable to invest in disruptive products that serve small,
emerging market. For instance, Digital Equipment Corporation was the most
successful minicomputer maker in 1980s but failed to capture the PC market.
In order to minimize overhead costs, DEC had adopted values that dictated
resource allocation to a high gross margin business. Consequently, the
managers could not invest in the low margin PC business, as it did not fit
with Digitals high profit values, leading to the failure to address disruptive
change. Thus, values establish organizational culture that dictates priorities
and could very often as a barrier to strategic resource allocation.
The resource dependence theory explains how the freedom of investment of
large firms is limited to satisfying the needs of the existing, profitable
customers. Customers exercise extraordinary power in directing a firms
investments, as processes are embedded in organizations to weed out
disruptive products that do no address existing customer needs. For instance,
Seagate, the most successful company in the history of microelectronics
industry, was the main supplier of the 5.25-inch hard-disk supplier to IBM-
compatible PC manufacturers. The company invested in developing the
3.5inch drives but its principal customers showed no interest in purchasing the
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product, as they were interested in the data storage attribute rather than size
of the drive. In order to maintain the sales volume, the managers pulled out
investment from the disruptive product and channeled it towards sustaining
innovations to increase data storage. Some years later, this consumer-bound
move backfired as new entrants developed 3.5inch drives with high data
storage and reduced Seagate to a second-tier supplier in the new portable
computer market
Organizational inertia plagues an established firm as a result of a dominant
business design, Hubris and Core competency rigidity.










The dominant design that makes large firms successful, also creates an
Adoption Barrier for the firm as they become path-dependent and over
emphasize on incremental innovations to improve the existing designs and
technologies. The existing successful products, business models and
technologies make the large firms risk-averse and increase their risk of falling
in the familiarity trap. For instance, the large Swiss firms that owned 90% of
the world watch market in 1970, did not embrace disruptive innovations and
change their successful dominant designs and technology even when the
Organizational Inertia
Dominant design
Path
dependency
Successful
business
concept
Core rigidity
Inability to
unlearn
Obsolete
mental model

Hubris
Arrogance
Complacency
Self-pride
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watch industry changed radically. This invocation of a familiar and dominant
paradigm led to their bankruptcy 10 years later. Thus, dominant designs
reinforce status quo and create generic conservatism in the organization,
which makes prevents the firms from stimulating disruptive innovation by
cannibalizing their successful investments.

Many successful firms are plagued by Hubris, which ultimately leads to
strategic inertia and the subsequent downfall of the firm. Extreme pride and
arrogance makes the firm in a powerful position complacent; as a result of
which they overestimate their capabilities, lose touch with reality and fail to
deal with disruptive change. For instance, Blackberry was so consumed by its
success that it failed to listen to the market and thought they could keep
competing on their successful security and enterprise e-mail angle. The RIM
founder Mike Lazardis conceded, We believed we knew better what
customers needed long term than they did. The attitude of most senior
leaders at BlackBerry was IPhone is a music player and a consumer toy.
Arrogance carried over to the enterprise strategy and blinded the
management as Blackberry failed to evolve with the industry and deal with
disruptive change.
Core competencies become core rigidities for future radical innovation as
they create obsolete mental models within the organization and prevent it
from adapting to the changing environment. Kodak suffered from this Mindset
Barrier as they could not replace their core competence of chemical film
processing with the disruptive innovative digital printing technology. Kodak
failed to realize that it was playing in the consumer photography business and
not in the film and printing market. Their core competence was so deeply
ingrained in the company culture that it only saw itself as a filmmaker and did
not understand the need of creating a new technology ecosystem that went
beyond printing digital photos. The once dominant player was trapped in its
own success as its inability to unlearn prevented it from discarding the old
outdated logic and substituting it with something new.

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Thus, misallocation of resources and organizational inertia prevent
established firms from becoming ambidextrous organizations and
developing dynamic capabilities to deal with disruptive change.














Discuss the design of a strategic decision-making process that addresses the
uncertainty inherent in allocating resources to innovation








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Innovation performance is determined the way in which resources are
allocated and not by amount of resources spent on innovation. Competitive
pressure requires resource allocation decisions in commercial uncertainty
where outcomes related to technological standards; customer preferences
and completive landscapes are not understood. The filtering funnel/stage-
gate process applies real options lens to provides flexibility and manage
uncertainty in resource allocation in the dynamic environment.

The rational, disciplined and consistent approach enhances strategic flexibility
by allowing managers to make sequential resource commitment decisions
and benefit from updated information as sequence unfolds. It allows firms to
spread their bets by allocating resources thinly rather than concentrating
significant resources on insufficient number of new innovation projects



Strategic Importance of Filter Funnel Process
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Initial Stage
Broad allocation of
initial funds to many
projects
Funnel Stage
Subsequent
reallocation of reources
away from projects as
uncertainity resolves
Launch Stage
Commit funds to fixed
number of profitable
projects
Innovation
portfolio
management in
uncertain
markets
Strategic
flexibility
without
compromising
stability
Options rationale:
right, but not
obligation to pursue
a project at a later
time
Design of the Funnel Decision-making process
Breadth Selectiveness
High innovation
portfolio performance
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Initial Stage
The managers must adopt the pro-risk approach for resource allocation by
initiating a broad range of projects with less certain above-average payoff
potential, instead of selecting few projects with a certain average payoff.
Contrary to the conservative approach of selecting projects based on NPV,
the pro-risk approach focuses on pay-off distribution and provides an
opportunity to explore uncertain projects that can provide supernormal profits
if they materialize. These radical long-term projects require small investments
initially, and could be discontinued at a later stage when it is established that
there is no realistic market for the product. Thus, the downside exposure is
capped with the option to filter the project; at the same time the upside
opportunity to capture supernormal profits is enhanced at a minimal cost of
learning.
Such pro-risk attitude will benefit firms, as managers will maximize the value
of flexibility and improve the overall average NPD portfolio pay-off by
improving product-hit rates.

Funnel Stage
The central idea of this stage is to optimize funnel management by ensuring
that projects with the highest commercial prospects get full commitment of
funds. Throughout this stage new information is gained and limited resources
are reassigned to the more promising projects. At each stage-gate managers
practice options rationale as they have the right but not the obligation to
pursue the selected projects. Thus, investments are made incrementally at
subsequent decision gates to avoid over commitment of funds.
A large number of gates in the funnel will promote flexibility but more
discipline will be needed to enhance portfolio performance. Especially, at a
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later stage when uncertainty resolves, decision-makers must prune projects
rigorously and make conservative funding decisions as the investment
increases downstream.
The characteristics of a rigorous and disciplined project pruning process that
ensures standardization and objectivity are:
Transparency in stage-gate decision-making criteria
Emphasis on commercial merits triangulated through multiple sources
and not personal relationships
No punishment to managers who discontinue projects
Rotating the stage-gate decision making committee to remove personal
bias
The funnel design should be optimal for the situation and industry as
unneeded flexibility could incur huge costs. Five significant factors should be
considered to decide the flexibility value of the funnel.


Factor

Implication

Market Volatility
High market volatility requires wide and selective funnel
that promotes high flexibility

Decision-Making
strategy
Companies capable of making flexible decisions must have
wide funnels and many decision gates to improve portfolio
performance

Budget
Constraints
The number of projects undertaken at each stage and the
number of stage gates must depend on the size and
dispersion cycle of the budget

Product
Characteristics
Technological products require more stages as sequential
allocation and re-allocation of resources is important

Project Divisibility
The divisibility of projects among different stages of the
funnel must be considered while designing the funnel
stage.


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Finally, the managers must tailor process paths to fit customized needs by
allocating decision weights to projects. This will prevent misbalancing of
portfolio as incremental/radical, external/internal and global/local initiatives
will be reflected equally.

Launch Stage
Only a few promising projects that have met the criteria of all stage-gates and
have a high probability of success will be launched to ensure optimal portfolio
performance.

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Key dimensions of the Flexible Management Process
Two key dimensions characterize the design of the flexible innovation
management process: breath and selectivity. Greater resource allocation
breadth ensures a broader project portfolio that addresses different objectives
and helps hedge bets on individual new projects. The more aspects covered,
the higher the probability of some innovation success. Breadth has a
significant positive direct impact on innovation performance as firms allocate
broadly in the early stage and do not discard projects at a time when
commercial viability is not established.
On the other hand, selectiveness through pruning of project portfolio helps to
maximize the performance effect of resource allocation breadth by offsetting
disadvantages such as managerial complexity, loss of strategic focus and
insufficient resourcing to individual projects. Selectiveness provides a
mechanism to discontinue unprofitable projects at later stages and increases
the probability of offering blockbuster products, and preventing launch of
lackluster products
Breadth coupled with selectiveness is an idea of an efficient failure that
enables probing and learning. The dual dimensions of the funnel decision
making process helps firms address uncertainty inherent in innovation
portfolio management by allowing them to first invest broadly, and then
consequently react to information flows by reallocating resources away from
less promising endeavors. This allows high performers to reduce the risk of
error of omission by exploring all projects when their commercial viability is
unclear and then discarding unprofitable projects at a later stage when
commercial viability is established.





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Flexible innovation management helps the firm align with the rapidly evolving
market environment and provides strategic flexibility that acts as a competitive
success factor and helps outperform competition in uncertain markets.
f they flexibility has been well managed and projects have been pruned
efficiently, one can expect Another important determinant of the degree of flexibility
is economies of scale. Too many gates and too much flexibility can be very costly and
places excessive administrative burdens on innovating firms Therefore if firms are
looking for discounts through economies of scale they need to carefully decide their
level of flexibility as it can serve as a barrier to the firms homogeneity
Capabilities required: Strategic Decision Making to ensure a balance of
conservative and pro-risk projects in the product portfolio initially at effective use
of real options at each gate of the funnel to enhance portfolio performance






Breadth Selectiveness
Firm with strong Innovative intent
Address
uncertainty in
Innovation
Portfolio
Management
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