Hoskisson and HITT Strategic Management All Chapters

Chapter 1
Strategic Management and Strategic Competitiveness

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2003 Southwestern Publishing Company
1
Strategic Inputs
Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment
The Strategic Management Process

Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship
Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry Business-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy
Chapter 6 CorporateLevel Strategy
Chapter 9 Cooperative Strategy
Chapter 12 Strategic Leadership
Strategic Outcomes
Strategic Competitiveness Above-Average Returns
Feedback
Important Definitions
Strategic Management Process
The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns
Strategic Competitiveness
Achieved when a firm successfully formulates and implements a value-creating strategy
Above-Average Returns
Occurs when a firm develops a strategy that competitors are not simultaneously implementing Provides benefits which current and potential competitors are unable to duplicate
4
Risk
An investors uncertainty about the economic gains or losses that will result from a particular investment
Average Returns
Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk
Competitive Landscape
Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new knowhow, first mover Hypercompetitive environments Fundamental nature of competition is changing Protect or invade established product or geographic markets
6
Emergence of global economy Goods, services, people, skills, and ideas move freely across geographic borders. Spread of economic innovations around the world. Hypercompetitive environments Fundamental nature of competition is changing Political and cultural adjustments are required.
7
Emergence of global economy Rapid technological change Increasing rate of technological change and diffusion The information age Increasing knowledge intensity Hypercompetitive environments Fundamental nature of competition is changing
8
Strategic Flexibility
A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment It involves coping with uncertainty and the accompanying risks
Strategic Flexibility
Organizational slack
Strategic reorientation
Strategic Flexibility flexibility
Capacity to learn
10
I/O Model of Above-Average Returns

1. External Environments General
Global
Industry Environment
1. Strategy dictated by the external environments of the firm (what opportunities exist in these environments?)
2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?)
11
Competitor Environment
Technological
Environment
Four Assumptions of the I/O Model

1. The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns 2. Most firms competing within a particular or within a certain segment of it are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources
12
Four Assumptions of the I/O Model

3. Resources used to implement strategies are highly mobile across firms 4. Organizational decision makers are assumed to be rational and committed to acting in the firms best interests, as shown by their profit-maximizing behaviors
13

Industrial Organization Model
The External Environment 1. Study the external environment, especially the industry environment economies of scale barriers to market entry diversification product differentiation degree of concentration of firms in the industry
14

The External Environment 2. Locate an attractive industry with a high potential for above-average returns Attractive industry: one whose structural characteristics suggest above-average returns
An Attractive Industry
15

The External Environment 3. Identify the strategy called for by the attractive industry to earn above-average returns
Strategy Formulation Strategy formulation: selection of a strategy linked with above-average returns in a particular industry
16

The External Environment 4. Develop or acquire assets and skills needed to implement the strategy
Strategy Formulation Assets and Skills Assets and skills: those assets and skills required to implement a chosen strategy
17

The External Environment 5. Use the firms strengths (its developed or acquired assets and skills) to implement the strategy
Strategy Formulation Assets and Skills Strategy implementation: select strategic actions linked with effective implementation of the 18 chosen strategy

The External Environment
Strategy Formulation Assets and Skills Superior returns: earning of above-average returns
Superior Returns
19
Resource-based Model of Above Average Returns

1. Firms Resources
1. Strategy dictated by unique resources and capabilities of the firm (what can the firm do best?)
2. Find an environment in which to exploit these assets (where are the best opportunities?)
20

Resource-based Model
Resources 1. Identify the firms resources-strengths and weaknesses compared with competitors Resources: inputs into a firms production process
21

Resources 2. Determine the firms capabilities--what it can do better than its competitors Capability: capacity of an integrated set of resources to integratively perform a task or activity
Capability
22
Four Attributes of Resources and Capabilities (Competitive Advantage)

Valuable
Resources and Capabilities
allow the firm to exploit opportunities or neutralize threats in its external environment
possessed by few, if any, current and potential competitors
Rare
Costly to imitate Nonsubstitutable
when other firms cannot obtain them or must obtain them at a much higher cost the firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage
23
Resources and capabilities that meet

these four criteria become a source of:
Valuable
Resources and Capabilities
Rare
Core Competencies
Costly to imitate Nonsubstitutable
24
Core Competencies are the basis for a

firms
Competitive advantage
Strategic competitiveness Ability to earn above-average returns
25
Core Competencies

Resources 3. Determine the potential of the firms resources and capabilities in terms of a competitive advantage
Capability
Competitive Advantage Competitive advantage: ability of a firm to outperform its rivals
26

Resources 4. Locate an attractive industry
Capability
Competitive Advantage An Attractive Industry
An attractive industry: an industry with opportunities that can be exploited by the firms resources and capabilities
27

Resources 5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment
Capability
Competitive Advantage An Attractive Industry
Strategy Form/Impl
Strategy formulation and implementation: strategic actions taken to earn above average returns
28

Resources
Capability
Competitive Advantage An Attractive Industry Superior returns: earning of above-average returns
Strategy Form/Impl
Superior Returns
29
Strategic Intent & Mission
Strategic Intent
Winning competitive battles through deciding how to leverage internal resources, capabilities, and core competencies An application of strategic intent in terms of products to be offered and markets to be served
Strategic Mission
30
The Firm and Its Stakeholders

Stakeholders
Groups who are affected by a The firm must maintain firms performanceadequate performance at an and who have claims on its wealth level in order to retain the participation of key stakeholders
31

Stakeholders
Capital Market Stakeholders
Shareholders Major suppliers of capital Banks Private lenders Venture capitalists
32

Stakeholders
Primary customers Suppliers Host communities Unions
Product Market Stakeholders
33

Stakeholders
Product Market Stakeholders Employees Managers Nonmanagers

34
Organizational Stakeholders
Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm
Organizational
Capital Market
1
How do you divide the returns to keep stakeholders involved? Product Market
35
Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm
Organizational
Capital Market
2
How do you increase the returns so everyone has more to share? Product Market
36
Chapter 2
The External Environment: Opportunities, Threats, and Industry Competition, and Competitor Analysis
37
Strategic Inputs

Chapter 10 Corporate Governance
Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship
Strategic Outcomes
Feedback
38
The External Environment Environment

Sociocultural
Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Environment
Technological
General
39
External Environmental Analysis

A continuous process which includes
Scanning: Identifying early signals of environmental changes and trends Monitoring: Detecting meaning through ongoing observations of environmental changes and trends Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends Assessing: Determining the timing and importance of environmental changes and trends for firms strategies and their management
40
External Environmental Analysis

Analysis of general environment Analysis of industry environment
Analysis of competitor environment
The External Environment Strategic Intent Strategic Mission

41
General Environment
Sociocultural segment

Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences
42
General Environment
Economic segment

Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product
43
General Environment
Political/Legal Segment

Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies
44
General Environment
Technological Segment
Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies
45
General Environment
Global Segmentevents Important political

Critical global markets Newly industrialize countries Different cultural and institutional attributes
46
General Environment
Demographic Segment

Population size Age structure Geographic distribution Ethnic mix Income distribution
47
Industry Environment
A set of factors that directly influences a company and its competitive actions and responses. Interaction among these factors determine an industrys profit potential.
Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry
48
Five Forces Model of Competition
Identify current and potential competitors and determine which firms serve them. Conduct competitive analysis. Recognize that suppliers and buyers can become competitors. Recognize that producers of potential substitutes may become competitors.
49
Five Forces Model of Competition
Five Forces of Competition
Bargaining Power of Buyers
50
Threat of New Entrants
Barriers to entry
Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation
51
Bargaining Power of Suppliers

it is dominated by a few powerful when: A supplier group is large companies
satisfactory substitute products are not available to industry firms industry firms are not a significant customer for the supplier group suppliers goods are critical to buyers marketplace success effectiveness of suppliers products has created high switching costs suppliers are a credible threat to integrate forward into the buyers industry 52
Buyers (customers) are powerful when: they purchase a large portion of an industrys
total output the sales of the product being purchased account for a significant portion of the sellers annual revenues they could easily switch to another product the industrys products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the sellers industry 53
Threat of Substitute Products
Product substitutes are strong threat when: customers face few switching costs

substitute products price is lower substitute products quality and performance capabilities are equal to or greater than those of the competing product
54
Intensity of Rivalry
Intensity of rivalry is stronger when competitors: are numerous or equally balanced

experience slow industry growth have high fixed costs or high storage costs lack differentiation or low switching costs experience high strategic stakes have high exit barriers
55
High Exit Barriers

specialized assets (assets with values linked to Common exit barriers include:

a particular business or location) fixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual dependence between one business and other parts of a companys operation, such as shared facilities and access to financial markets) emotional barriers (career concerns, loyalty to employees, etc.) government and social restrictions
56
Strategic Groups
Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions. The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry.
57
Competitor Environment
Competitor intelligence is the ethical gathering of needed information and data about competitors objectives, strategies, assumptions, and capabilities
what drives the competitor as shown by its future objectives what the competitor is doing and can do as revealed by its current strategy What the competitor believes about itself and the industry, as shown by its assumptions What the the competitor may be able to do, as 58 shown by its capabilities
Competitor Analysis
Future objectives
Future Objectives: How do our goals compare

with our competitors goals? Where will the emphasis be placed in the future? What is the attitude toward risk?
59
Competitor Analysis
Future objectives

Current Strategy: How are we currently

competing? Does this strategy support changes in the competitive structure?
Current strategy
60
Competitor Analysis
Future objectives

Assumptions: future Do we assume the

will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves?
Current strategy
Assumptions
61
Competitor Analysis
Future objectives

Capabilities: What are our strengths

and weaknesses? How do we rate compared to our competitors?
Current strategy
Assumptions
Capabilities
62
Competitor Analysis
Future objectives Response
Current strategy
Response:

Assumptions
Capabilities
What will our competitors do in the future? Where do we hold an advantage over our competitors? How will this change our relationship with our competitors? 63
Chapter 3
The Internal Environment: Resources, Capabilities and Core Competence

64
Strategic Inputs

Strategic Outcomes
Feedback
65
Sustainability of a Competitive Advantage
Sustainability of a competitive advantage is a function of:

the rate of core-competence obsolescence due to environmental changes the availability of substitutes for the core competence the imitability of the core competence
66
External and Internal Analyses

Environment Sociocultural Industry Environment
By studying the external environment, firms identify what they might choose to do
Opportunities and threats

Competitor Environment Technological General
67
External and Internal Analyses

By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage)
68
Challenge of Internal Analysis
How do we effectively manage current core competencies while simultaneously developing new ones? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly?
69
Three Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies
Uncertainty regarding characteristics of the

general and the industry environments, competitors actions, and customers preferences
Complexity regarding the interrelated causes

shaping a firms environments and perceptions of the environments
Intraorganizational Conflicts among

people making managerial decisions and those affected by them
70
Components of Internal Analysis

Core Competencies Capabilities Resources Tangible Intangible Four Criteria of Sustainable Advantages Discovering Core Competencies
Strategic Competitiveness Competitive Advantage
Value Chain Analysis
Valuable Rare Costly to Imitate Nonsubstitutable
Outsource
71
Discovering Core Competencies
Resources Tangible Intangible
Resources are what a firm has to work with--its assets-including its people and the value of its brand name
Resources represent inputs into a firms production process... such as capital equipment, skills of employees, brand names, finances and talented managers
72
Resources Tangible Intangible
Tangible Resources Financial Physical Human resources Organizational
Intangible Resources Technological Innovation Reputation

73
Capabilities
Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage
74
Capabilities
Capabilities are what a firm does, and represent the firms capacity or ability to integrate individual firm resources to achieve a desired objective
75
Core Competencies
Core competencies are resources and capabilities that serve as a source of competitive advantage over rivals Core competencies distinguish a company competitively and make it distinctive
McKinsey and Co. recommends using three to four competencies when framing strategic actions
76
Discovering Core Competencies Four Criteria of Sustainable Advantages
Valuable: Capabilities that help a firm neutralize threats or exploit opportunities
77
Rare: Capabilities that are not possessed by many others
78
Costly to imitate: capabilities that other firms cannot develop easily, usually due to Unique historical conditions Causal ambiguity Social complexity
79
Nonsubstitutable: capabilities that do not have strategic equivalents Invisible to competitors Firm specific knowledge Trust-based working relationships between managers and nonmanagerial personnel
80
Core Competence as a Strategic Capability

Resources Inputs to a firms production process
Core Competence A strategic capability
Does it satisfy the criteria of sustainable competitive advantage?
The source of
Capability An integration of a team of resources
Yes
No
Capability A nonstrategic team or resource 81
Performance Implications
Competitive Consequences
No No No No Competitive Disadvantage
Performance Implications
Below Average Returns
Yes
No
Yes/ No No
Yes/ No
Competitive Parity
Temporary Competitive Advantage Sustainable Competitive Advantage
Average Returns Above Average to Average Returns Above Average Returns
Yes
Yes No
Yes
Yes Yes
Yes
82
The Basic Value Chain

Technological Development Human Resource Mgmt.
Firm Infrastructure
Support Activities
Service Marketing & Sales Procurement Outbound Logistics Operations Inbound Logistics Primary Activities
83
Outsourcing
Technological Development
Human Resource Mgmt.
Support Activities
Firm Infrastructure
Outsourcing is the purchase of some or all of a valuecreating activity from an external supplier
Usually this is because the specialty supplier can provide these functions more efficiently
Service Procurement
Marketing & Sales

Outbound Logistics Operations Inbound Logistics
84 Primary Activities
Strategic Rationales for Outsourcing
Improve Business Focus

lets company focus on broader business issues by having outside experts handle various operational details
Provide Access to World-Class Capabilities

the specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications
85
Accelerate Business Re-Engineering Benefits

achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process
Share Risks
reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities
86
Free Resources for Other Purposes

permits firm to redirect efforts from non-core activities toward those that serve customers more effectively
87
Outsourcing Issues
Greatest Value
outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced
Evaluating Resources and Capabilities

dont outsource activities in which the firm itself can create and capture value
Environmental Threats and Ongoing Tasks

do not outsource primary and support activities that are used to neutralize environmental threats or complete necessary ongoing 88 organizational tasks
Outsourcing Issues
Nonstrategic Team of Resources

do not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantage
Firms Knowledge Base

do not outsource activities that stimulate the development of new capabilities and competencies
89
Core Competencies: Cautions and Reminders
Never take for granted that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become core rigidities Core rigidities are former core competencies that now generate inertia and stifle innovation
90
Chapter 4
Business-Level Strategy

91
Strategic Inputs

Strategic Actions
Chapter 4 Business-Level Strategy
Strategic Outcomes
Feedback
92
Business-Level Strategy
Business-level strategy: an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
93
Core Competencies and Strategy

Core competencies The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage
Strategy
Business-level strategy
Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets 94
Key Issues of Business-Level Strategy
What good or service to offer customers How to manufacture or create the good or service How to distribute the good or service in the marketplace
95
The Central Role of Customers

In selecting a business-level strategy, the firm determines
1. who it will serve 2. what needs those target customers have that it will satisfy 3. how those needs will be satisfied
96
Managing Relationships With Customers
Customer relationships are strengthened by offering them superior value

help customers to develop a new competitive advantage enhance the value of existing competitive advantages
97
Managing Relationships With Customers
Establish a competitive advantage along these dimensions: Reach

the firms access and connection to customers
Richness
the depth and detail of the two-way flow of information between the firm and customers
Affiliation
facilitating useful interactions with customers
98
Market Segmentation
Consumer Markets
Customers
Industrial Markets
99
Market Segmentation: Consumer Markets

Demographic factors
Per.
Dem.
Socioeconomic factors Geographic factors Psychological factors Consumption patterns Perceptual factors
100
Consumer Con. Soc. Markets

Psy. Geo.
Market Segmentation: Industrial Markets

End-use segments Product segments Geographic segments Common buying factor segments Customer size segments
Size End
Industrial Buy.Markets Pro.

Geo.
101
Types of Business-Level Strategies
Business-level strategies are intended to create differences between the firms position relative to those of its rivals To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals
102
Five Generic Strategies

Competitive Advantage
Cost Uniqueness Differentiation Cost Leadership
Competitive Scope
Broad target
Integrated Cost Leadership/ Differentiation Narrow target
Focused Cost Leadership
Focused Differentiation
103
Cost Leadership Strategy

An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers relatively standardized products features acceptable to many customers lowest competitive price
104
Cost Leadership Strategy

Cost saving actions required by this strategy: building efficient scale facilities tightly controlling production costs and overhead minimizing costs of sales, R&D and service building efficient manufacturing facilities monitoring costs of activities provided by outsiders simplifying production processes
105
How to Obtain a Cost Advantage

Determine and control Reconfigure, if needed
Cost Drivers
Value Chain
Alter production process Change in automation New distribution channel New advertising media Direct sales in place of indirect sales
New raw material Forward integration Backward integration Change location relative to suppliers or buyers
106
Factors That Drive Costs

Economies of scale Asset utilization Capacity utilization pattern Seasonal, cyclical Interrelationships Order processing and distribution Value chain linkages Advertising & sales Logistics & operations
Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation
107
Questions Leading to Lower Costs

1. How can an activity be performed differently or even eliminated? 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs?
108
Cost Leadership Strategy and the Five Forces of Competition

Rivalry Among Competing Firms
Can use cost leadership strategy to advantage since: competitors avoid price wars with cost leaders, creating higher profits for the entire industry
109

Can mitigate buyers power by: driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm
110

Can mitigate suppliers power by: being able to absorb cost increases due to low cost position being able to make very large purchases, reducing chance of supplier using power
111

Can frighten off new entrants due to: their need to enter on a large scale in order to be cost competitive the time it takes to move down the learning curve
112

Cost leader is well positioned to: make investments to be first to create substitutes buy patents developed by potential substitutes lower prices in order to maintain value position
113
Major Risks of Cost Leadership Strategy
Dramatic technological change could take away your cost advantage Competitors may learn how to imitate value chain Focus on efficiency could cause cost leader to overlook changes in customer preferences
114
Differentiation Strategy
An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them
price for product can exceed what the firms target customers are willing to pay nonstandardized products customers value differentiated features more than they value low cost
115

Value provided by unique features and value characteristics Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation
116
Differentiation actions required by this strategy: developing new systems and processes shaping perceptions through advertising quality focus capability in R&D maximize human resource contributions through low turnover and high motivation 117
How to Obtain a Differentiation Advantage

Control if needed Reconfigure to maximize
Cost Drivers
Value Chain
Lower buyers costs Raise performance of product or service Create sustainability through: customer perceptions of uniqueness customer reluctance to switch to non-unique product
118
Factors That Drive Differentiation

Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information
119
Differentiation Strategy and the Five Forces of Competition

Rivalry Among Competing Firms
Can defend against competition because: brand loyalty to differentiated product offsets price competition
120

Can mitigate buyer power because: well differentiated products reduce customer sensitivity to price increases
121

Can mitigate suppliers power by: absorbing price increases due to higher margins passing along higher supplier prices because buyers are loyal to differentiated brand
122

Can defend against new entrants because: new products must surpass proven products or, new products must be at least equal to performance of proven products, but offered at lower prices
123

Well positioned relative to substitutes because: brand loyalty to a differentiated product tends to reduce customers testing of new products or switching brands
124
Major Risks of Differentiation Strategy
Customers may decide that the price differential between the differentiated product and the cost leaders product is too large Means of differentiation may cease to provide value for which customers are willing to pay
125
Major Risks of Differentiation Strategy

Experience may narrow customers perceptions of the value of differentiated features of the firms products Makers of counterfeit goods may attempt to replicate differentiated features of the firms products
126
Focused Business-Level Strategies

A focus strategy must exploit a narrow targets differences from the balance of the industry by: isolating a particular buyer group isolating a unique segment of a product line concentrating on a particular geographic market finding their niche
127
Factors That May Drive Focused Strategies
Large firms may overlook small niches Firm may lack resources to compete in the broader market May be able to serve a narrow market segment more effectively than can larger industry-wide competitors Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage
128
Major Risks of Focused Strategies

Firm may be outfocused by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market
129
Advantages of Integrated Strategy

A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: adapt quickly to environmental changes learn new skills and technologies more quickly effectively leverage its core competencies while competing against its rivals
130
Benefits of Integrated Strategy
Successful firms using this strategy have above-average returns Firm offers two types of values to customers some differentiated features (but less than a true differentiated firm) relatively low cost (but now as low as the cost leaders price)
131
Major Risks of Integrated Strategy
An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) The firm may become stuck in the middle lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy
132
Chapter 5
Competitive Rivalry and Competitive Dynamics

133
Strategic Inputs

Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry Business-Level and Competitive Strategy Dynamics
Strategic Outcomes
Feedback
134
Definitions
Competitors
firms operating in the same market, offering similar products and targeting similar customers
Competitive rivalry
the ongoing set of competitive actions and responses occurring between competitors competitive rivalry influences an individual firms ability to gain and sustain competitive advantages
135
Definitions
Competitive behavior
the set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position
Competitive dynamics
the total set of actions and responses taken by all firms competing within a market
136
From Competitors to Competitive Dynamics

Competitors Engage in Competitive rivalry How? What results?
Why?
To gain an advantageous market position Through competitive behavior Competitive actions Competitive responses What results?
Competitive Dynamics Competitive actions and responses taken by all firms competing in a market
137
Effect of Competitive Rivalry on a Firms Strategies
Success of a strategy is determined by:

the firms initial competitive actions how well it anticipates competitors responses to them how well the firm anticipates and responds to its competitors initial actions
Competitive rivalry
affects all types of strategies most dominant influence is on the firms business-level strategy or strategies.
138
A Model of Competitive Rivalry

Competitive Analysis Market commonality Resource similarity feedback
Outcomes Market position Financial performance
Drivers of Competitive Behavior Awareness Motivation Ability
Interim Rivalry Likelihood of Attack First mover incentives Organizational size Quality Likelihood of Response Type of competitive action Reputation Market dependence 139
Competitive Rivalry
Firms are mutually interdependent

one firms competitive actions have noticeable effects on competitors one firms competitive actions elicit competitive responses from competitors competitors feel each others actions and responses
Marketplace success is a function of both individual strategies and the consequences of their use
140
Competitor Analysis
Competitor analysis
a technique firms use to understand their competitive environment. Along with the general and industry environments, the competitive environment comprises the firms external environment a technique used to help the firm understand its competitors the first step to being able to predict competitors behavior in the form of its competitive actions and responses
141
Market Commonality
Market Commonality is concerned with

the number of markets with which a firm and a competitor are jointly involved the degree of importance of the individual markets to each competitor
Most industries markets are somewhat related in terms of

technologies core competencies
Multimarket competition
Firms competing in several markets
142
Resource Similarity
Resource similarity
the extent to which the firms tangible and intangible resources are comparable to a competitors in terms of both type and amount
Firms with similar types and amounts of resources are likely to

have similar strengths and weaknesses use similar strategies
Assessing resource similarity can be difficult if critical resources are intangible 143 rather than tangible
A Framework of Competitor Analysis

High
Market Commonality Low

KEY
The shaded area represents degree of market commonality between two firms
Resource endowment A Resource endowment B
II I III IV
Low
Resource Similarity
High
144
Drivers of Competitive Actions and Responses: Awareness

Drivers of competitive behavior
Awareness
Awareness is the extent to which competitors recognize the degree of their mutual interdependence mutual interdependence results from market commonality resource similarity
145
Drivers of Competitive Actions and Responses: Motivation

Awareness
Motivation
Motivation concerns the firms incentive to take action or to respond to a competitors attack and relates to perceived gains and losses
146
Drivers of Competitive Actions and Responses: Ability

Awareness
Motivation
Ability
Ability relates to each firms resources the flexibility these resources provide Without available resources the firm lacks the ability to attack a competitor to respond to the competitors actions
147
Drivers of Competitive Actions and Responses: Market Commonality

Drivers of competitive behavior influenced by
Market commonality
A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets Because of the high stakes of competition under the condition of market commonality, there is a high probability that the attacked firm will respond to its competitors action in an effort to protect its position in one or more markets
148
Drivers of Competitive Actions and Responses: Resource Similarity

Drivers of competitive behavior influenced by
Market commonality
Resource similarity
The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response
149
Competitive Rivalry
Competitive action
a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position
Competitive response
a strategic or tactical action the firm takes to counter the effects of a competitors competitive action
150
Strategic and Tactical Actions
Strategic action or a strategic response

a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse
Tactical action or a tactical response

market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse
151
Factors Affecting Likelihood of Attack: First Mover Incentives

First mover incentives
First movers allocate funds for product innovation and development aggressive advertising advanced research and development First movers can gain the loyalty of customers who may become committed to the firms goods or services market share that can be difficult for competitors to take during 152 future competitive rivalry
Factors Affecting Likelihood of Attack: Size

First mover incentives Size
Small firms are more likely to launch competitive actions to be quicker in doing so Small firms are perceived as nimble and flexible competitors relying on speed and surprise to defend their competitive advantages or develop new ones while engaged in competitive rivalry Small firms have the flexibility needed to launch a greater variety of 153 competitive actions
Factors Affecting Likelihood of Attack: Size

First mover incentives Size

Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period Large organizations commonly have the slack resources required to launch a larger number of total competitive actions
Think and act big and well get smaller. Think and
act small and well get bigger. - Herb Kelleher,
Former CEO, Southwest Airlines
154
Factors Affecting Likelihood of Attack: Quality

First mover incentives Size Quality

Quality exists when the firms goods or services meet or exceed customers expectations Product quality dimensions include
Performance Features Flexibility Durability Conformance Serviceability Aesthetics Perceived quality
155
Factors Affecting Likelihood of Attack: Quality

First mover incentives Size Quality

Quality exists when the firms goods or services meet or exceed customers expectations Service quality dimensions include
Timeliness Courtesy Consistency Convenience Completeness Accuracy
156
Factors Affecting Likelihood of Response
Firms study three factors to predict how a competitor is likely to respond to competitive actions
type of competitive action reputation market dependence
157
Factors Affecting Likelihood of Response: Type of Competitive Action

Type of competitive action
Strategic actions receive strategic responses Tactical responses are taken to counter the effects of tactical actions Strategic actions elicit fewer total competitive responses A competitor likely will respond quickly to a tactical action The time needed to implement and assess a strategic action delays competitors responses
158
Factors Affecting Likelihood of Response: Reputation

Type of competitive action Reputation
An actor is the firm taking an action or response Reputation is the positive or negative attribute ascribed by one rival to another based on past competitive behavior The firm studies responses that a competitor has taken previously when attacked to predict likely responses
159
Factors Affecting Likelihood of Response: Market Dependence

Type of competitive action Reputation Market dependence
Market dependence is the extent to which a firms revenues or profits are derived from a particular market In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position
160
Competition
Competitive Dynamics
competitive dynamics concerns the ongoing actions and responses taking place among all firms competing within a market for advantageous positions
Competitive Rivalry
building and sustaining competitive advantages are at the core of competitive rivalry competitive advantages are the link to an advantageous market position
161
Strategic Conduct is Dynamic

A firms strategic conduct is dynamic in nature Actions and responses shape the competitive positions of each firms business level strategy
Firm A
Firm B
162
Strategic Conduct is Dynamic

Actions taken by one firm elicits responses from competitors Competitive responses lead to additional actions from the firm that acted originally
Actions New Actions New Response Response
Firm A
Firm B
163
Competitive Dynamics:
Slow-Cycle Markets
Slow-cycle markets
Slow-cycle markets the firms competitive advantages are shielded from imitation for long periods of time imitation is costly Competitive advantages are sustainable in slow-cycle markets A proprietary, one-of-a-kind competitive advantage leads to competitive success in a slow-cycle market
164
Gradual Erosion of a Sustainable Competitive Advantage

Returns from a Sustainable Competitive Advantage Exploitation
Launch
Counterattack
5
Time (Years)
10
165
Fast-Cycle Markets
Slow-cycle markets
Fast-cycle markets
Fast-cycle markets the firms competitive advantages arent shielded from imitation imitation happens quickly and somewhat inexpensively Competitive advantages arent sustainable Competitors use reverse engineering to quickly imitate or improve on the firms products Non-proprietary technology is diffused rapidly
166
Obtaining Temporary Advantages to Create Sustained Advantage

Returns from a Series of Replicable Actions
Exploitation
Firm has already moved to next advantage

Counterattack
Launch
10
Time (Years)
15
167
Standard-Cycle Markets
Slow-cycle markets
Fast-cycle markets
Standard-cycle markets
Standard-cycle markets the firms competitive advantages may be shielded from imitation imitation is moderately costly Competitive advantages are partially sustainable if the firm is able to continuously upgrade the quality of its competitive advantages Firms seek large market shares gain customer loyalty through brand names 168 carefully control operations
Chapter 6
Corporate-Level Strategy

169
Strategic Inputs

Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry Business-Level and Competitive Strategy Dynamics Chapter 6 CorporateLevel Strategy
Strategic Outcomes
Feedback
170
Two Levels of Strategy

A diversified company has two levels of strategy 1. Business-Level Strategy (Competitive Strategy) How to create competitive advantage in each business in which the company competes
- low cost - differentiation - focused low cost - focused differentiation - integrated low cost/ differentiation
2. Corporate-Level Strategy (Company-wide Strategy) How to create value for the corporation as a whole
171
Key Questions in Corporate Strategy

1. What businesses should the corporation be in? 2. How should the corporate office manage the array of business units? Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts
172
Levels and Types of Diversification

Low Levels of Diversification
Single Business
> 95% of business from a single business unit
Dominant Business
Between 70 and 95% of business from a single business unit
173

Moderate to High Levels of Diversification
Related Constrained
<70% of revenues from dominant business; all businesses share product, technological and distribution linkages
174

Moderate to High Levels of Diversification
Related Linked (Mixed)
< 70% of revenues from dominant business, and only limited links exist
175

Very High Levels of Diversification
Unrelated
< 70% of revenue comes from the dominant business, and there are no common links between businesses
176
Reasons for Diversification

Incentives
Reasons to Enhance Strategic Competitiveness

Economies of scope Market power Financial economics
Resources
Managerial Motives
177

Incentives
Incentives with Neutral Effects on Strategic Competitiveness

Anti-trust regulation Tax laws Low performance Uncertain future cash flows Firm risk reduction
178
Resources
Managerial Motives

Incentives
Resources with varying effects on value creation and strategic competitiveness

Tangible resources financial resources physical assets Intangible resources tacit knowledge customer relations image and reputation
Resources
Managerial Motives
179

Incentives
Managerial Motives (Value Reduction)

Diversifying managerial employment risk
Resources
Increasing managerial compensation
Managerial Motives
180
Value-creating Strategies of Diversification:

Operational and Corporate Readiness
Sharing: Operational Relatedness Between Businesses
Related Constrained Diversification Both Operational and Corporate Relatedness (Rare Capability and can Create Diseconomies of Scope)
High
Vertical Integration (Market Power)
Low
Unrelated Diversification (Financial Economies)
Related Linked Diversification (Economies of Scope)
Low High Corporate Readiness: Transferring Skills into 181 Businesses Through Corporate Headquarters
Adding Value by Diversification

Diversification most effectively adds value by either of two mechanisms: Economies of scope: cost savings attributed
to transferring the capabilities and competencies developed in one business to a new business
Market power: when a firm is able to sell its

products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both
182
Alternative Diversification Strategies

Related Diversification Strategies
sharing activities transferring core competencies
Unrelated Diversification Strategies

efficient internal capital market allocation
restructuring
183

sharing activities
184
Sharing Activities: Key Characteristics
Sharing activities often lowers costs or raises differentiation Sharing activities can lower costs if it:
achieves economies of scale boosts efficiency of utilization helps move more rapidly down the Learning Curve
Sharing activities can enhance potential for or reduce the cost of differentiation Must involve activities that are crucial to competitive advantage
185
Sharing Activities: Assumptions
Strong sense of corporate identity Clear corporate mission that emphasizes the importance of integrating business units Incentive system that rewards more than just business unit performance
186

sharing activities
transferring core competencies
187
Transferring Core Competencies:

Key Characteristics
Exploits interrelationships among divisions Start with value chain analysis

identify ability to transfer skills or expertise among similar value chains exploit ability to transfer activities
188
Transferring Core Competencies:

Assumptions
Transferring core competencies leads to competitive advantage only if the similarities among business units meet the following conditions:
activities involved in the businesses are similar enough that sharing expertise is meaningful transfer of skills involves activities which are important to competitive advantage the skills transferred represent significant sources of competitive advantage for the receiving unit 189


efficient internal capital market allocation
190
Efficient Internal Capital Market Allocation: Key Characteristics
Firms pursuing this strategy frequently diversify by acquisition:

acquire sound, attractive companies acquired units are autonomous acquiring corporation supplies needed capital portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs add professional management & control to sub-units sub-unit managers compensation based on unit results
191
Efficient Internal Capital Market Allocation: Assumptions
Managers have more detailed knowledge of firm relative to outside investors Firm need not risk competitive edge by disclosing sensitive competitive information to investors Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own
192


efficient internal capital market allocation restructuring
193
Restructuring: Key Characteristics
Seek out undeveloped, sick or threatened organizations or industries Parent company (acquirer) intervenes and frequently:
changes sub-unit management team shifts strategy infuses firm with new technology enhances discipline by changing control systems divests part of firm makes additional acquisitions to achieve critical mass
194
Restructuring: Key Characteristics
Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations
195
Restructuring: Assumptions
Requires keen management insight in selecting firms with depressed values or unforeseen potential Must do more than restructure companies Need to initiate restructuring of industries to create a more attractive environment
196
Incentives to Diversify
External Incentives:

Relaxation of anti-trust regulation allows more related acquisitions than in the past Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments
197
Incentives to Diversify
Internal Incentives:
Poor performance may lead some firms to diversify to attempt to achieve better returns Firms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to reduce risk
198
Resources and Diversification
Besides strong incentives, firms are more likely to diversify if they have the resources to do so Value creation is determined more by appropriate use of resources than incentives to diversify
199
Managerial Motives to Diversify

Managers have motives to diversify
diversification increases size; size is associated with executive compensation diversification reduces employment risk effective governance mechanisms may restrict such motives
200
Relationship Between Diversification and Performance

Performance
Dominant Business
Related Constrained
Unrelated Business
201
Level of Diversification
Relationship Between Firm Performance and Diversification

Incentives Capital Market Intervention and the Market for Managerial Talent
Resources
Diversification Strategy
Firm Performance
Managerial Motives
Internal Governance
202
Chapter 7
Acquisition and Restructuring Strategies

203
Strategic Inputs

Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry Business-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies
Strategic Outcomes
Feedback
204
Mergers and Acquisitions
Merger: a strategy through which two firms agree to integrate their operations on a relatively co-equal basis Acquisition: a strategy through which one firm
buys a controlling interest in another firm with the intent of making the acquired firm a subsidiary business within its own portfolio
Takeover: a special type of an acquisition

strategy wherein the target firm did not solicit the acquiring firms bid
205
Reasons for Making Acquisitions

Learn and develop new capabilities Increase market power Reshape firms competitive scope
Overcome entry barriers
Acquisitions
Increase diversification
Cost of new product development
Increase speed to market
Lower risk compared to developing new products

206
Reasons for Making Acquisitions:

Increased Market Power
Factors increasing market power

when a firm is able to sell its goods or services above competitive levels or when the costs of its primary or support activities are below those of its competitors usually is derived from the size of the firm and its resources and capabilities to compete
Market power is increased by

horizontal acquisitions vertical acquisitions related acquisitions
207

Overcome Barriers to Entry
Barriers to entry include

economies of scale in established competitors differentiated products by competitors enduring relationships with customers that create product loyalties with competitors
acquisition of an established company

may be more effective than entering the market as a competitor offering an unfamiliar good or service that is unfamiliar to current buyers provides a new entrant with immediate market 208 access

Cost of New Product Development and Speed to Market
Significant investments of a firms resources are required to

Develop new products internally introduce new products into the marketplace
Acquisition of a competitor may result in

more predictable returns faster market entry rapid access to new capabilities
209

Lower Risk Compared to Developing New Products
An acquisitions outcomes can be estimated more easily and accurately compared to the outcomes of an internal product development process Therefore managers may view acquisitions as lowering risk
210

Increased Diversification
It may be easier to develop and introduce new products in markets currently served by the firm It may be difficult to develop new products for markets in which a firm lacks experience
it is uncommon for a firm to develop new products internally to diversify its product lines acquisitions are the quickest and easiest way to diversify a firm and change its portfolio of business
211

Reshaping the Firms Competitive Scope
Firms may use acquisitions to reduce their dependence on one or more products or markets Reducing a companys dependence on specific markets alters the firms competitive scope
212

Learning and Developing New Capabilities
Acquisitions may gain capabilities that the firm does not possess Acquisitions may be used to
acquire a special technological capability broaden a firms knowledge base reduce inertia
213
Problems With Acquisitions

Integration difficulties
Resulting firm is too large
Inadequate evaluation of target
Acquisitions
Managers overly focused on acquisitions
Large or extraordinary debt Inability to achieve synergy
Too much diversification
214

Integration Difficulties
Integration challenges include

melding two disparate corporate cultures linking different financial and control systems building effective working relationships (particularly when management styles differ) resolving problems regarding the status of the newly acquired firms executives loss of key personnel weakens the acquired firms capabilities and reduces its value
215

Inadequate Evaluation of Target
Evaluation requires that hundreds of issues be closely examined, including

financing for the intended transaction differences in cultures between the acquiring and target firm tax consequences of the transaction actions that would be necessary to successfully meld the two workforces
Ineffective due-diligence process may

result in paying excessive premium for the target company
216

Large or Extraordinary Debt
Firm may take on significant debt to acquire a company High debt can
increase the likelihood of bankruptcy lead to a downgrade in the firms credit rating preclude needed investment in activities that contribute to the firms long-term success
217

Inability to Achieve Synergy
Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately Firms experience transaction costs when they use acquisition strategies to create synergy Firms tend to underestimate indirect costs when evaluating a potential acquisition
218

Too Much Diversification
Diversified firms must process more information of greater diversity Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units performances Acquisitions may become substitutes for innovation
219

Managers Overly Focused on Acquisitions
Managers in target firms may operate in a state of virtual suspended animation during an acquisition Executives may become hesitant to make decisions with long-term consequences until negotiations have been completed Acquisition process can create a shortterm perspective and a greater aversion to risk among top-level executives in a target firm
220

Too Large
Additional costs may exceed the benefits of the economies of scale and additional market power Larger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and standardized managerial behavior Firm may produce less innovation
221
Attributes of Effective Acquisitions

Attributes
Complementary Assets or Resources Friendly Acquisitions Careful Selection Process Maintain Financial Slack
Results
Buying firms with assets that meet current needs to build competitiveness Friendly deals make integration go more smoothly Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies Provide enough additional financial resources so that profitable projects would not be foregone 222
Attributes of Effective Acquisitions

Attributes
Low-to-Moderate Debt
Results
Merged firm maintains financial flexibility Continue to invest in R&D as part of the firms overall strategy Has experience at managing change and is flexible and adaptable
Sustain Emphasis on Innovation

Flexibility
223
Restructuring Activities

Downsizing
Wholesale reduction of employees
Downscoping
Selectively divesting or closing non-core businesses Reducing scope of operations Leads to greater focus
Leveraged Buyout (LBO)

A party buys a firms entire assets in order to take the firm private.
224
Restructuring and Outcomes

Downsizing Reduced labor costs Reduced debt costs Emphasis on strategic controls High debt costs
Loss of human capital

Lower performance Higher performance Higher risk
225
Downscoping Leveraged buyout
Chapter 8
International Strategy

226
Strategic Inputs

Strategic Outcomes
Feedback
227
Opportunities and Outcomes of International Strategy

Identify International Opportunities Explore Resources and Capabilities International Strategies Use Core Competence Modes of Entry
Increased market size Return on investment Economies of scale and learning Advantage in location
International business-level strategy Multidomestic strategy Global strategy Transnational strategy
Exporting
Licensing
Strategic alliances
Acquisitions
Establishment of a new subsidiary
228
Opportunities and Outcomes of International Strategy: Continued

Use Core Competence Modes of Entry
Exporting
Management problems and risk
Strategic Competitiveness Outcomes
Better performance
Licensing
Strategic alliances
Acquisitions
Establishment of a new subsidiary Management problems and risk
Innovation
229
International Strategy Life Cycle

Product Demand Develops and Firm Exports Products Foreign Competition Begins Production
Firm Introduces Innovation in Domestic Market
Selling Products or Services Outside a Firms Domestic Market

Production Becomes Standardized and is Relocated to Low Cost Countries
Firm Begins Production Abroad
230
Motivations for International Expansion
Increase Market Share

domestic market may lack the size to support efficient scale manufacturing facilities
Return on Investment
large investment projects may require global markets to justify the capital outlays weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators
231
Motivations for International Expansion
Economies of Scale or Learning

expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution can spread costs over a larger sales base increase profit per unit
Location Advantages
low cost markets may aid in developing competitive advantage may achieve better access to: Raw materials Key customers Lower cost labor Energy
232
International Business-Level Strategy: Determinants of National Advantage

Factors of production
Firm strategy, structure, and rivalry

Related and supporting industries
Demand conditions
233
Factors of production: the inputs necessary to compete in any industry

labor land natural resources capital infrastructure basic factors include natural and labor resources advanced factors include digital communication systems and educated workforce 234
Demand conditions: characterized by the nature and size of buyers needs in the home market for the industrys goods or services
size of market segment can lead to scaleefficient facilities efficiency can lead to domination of the industry in other countries specialized demand may create opportunities beyond national boundaries
235
Related and supporting industries: supporting services, facilities, suppliers and so on

support in design support in distribution related industries as suppliers and buyers
236
Firm strategy, structure, and rivalry: the pattern of strategy, structure, and rivalry among firms
common technical training methodological product and process improvement cooperative and competitive systems
237
International Corporate-Level Strategy

Need for Global Integration
High Global strategy Transnational strategy
Multidomestic strategy Low Low High

238
Need for Local Responsiveness
International Corporate-Level Strategy
Type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies Some corporate strategies provide individual country units with flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units
239
International Corporate-Level Strategy: Multidomestic Strategy

Strategy and operating decisions are decentralized to strategic business units (SBU) Multidomestic in each country strategy Products and services are tailored to local markets Business units in one country are independent of each other Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe
240
International Corporate-Level Strategy: Global Strategy

Global strategy
Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage)
241
International Corporate-Level Strategy: Transnational Strategy

Seeks to achieve both global efficiency and local responsiveness Transnational strategy Difficult to achieve because of simultaneous requirements strong central control and coordination to achieve efficiency decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage
242
Global Market Entry: Choice of Entry Mode

Type of Entry
Exporting Licensing
Strategic alliances Acquisition
Characteristics
High cost, low control Low cost, low risk, little control, low returns Shared costs, shared resources, shared risks, problems of integration Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations Complex, often costly, time consuming, high risk, maximum control, potential 243 above-average returns
New wholly owned subsidiary
Strategic Competitiveness Outcomes: Returns
International diversification and returns:

firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets may increase a firms returns such firms usually achieve the most positive stock returns firm may achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns
244
Strategic Competitiveness Outcomes: Innovation
International diversification and innovation:

firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets potentially greater returns on innovations (larger markets) generate additional resources for investment in innovation exposed to new products and processes in international markets, generates additional knowledge leading to innovations
245
Risks in an International Environment

Political Risks Political risks include
instability in national governments war, both civil and international potential nationalization of a firms resources
Economic Risks
246
Risks in an International Environment

Political Risks Economic Risks
Economic risks are interdependent with political risks and include

differences and fluctuations in the value of different currencies differences in prevailing wage rates difficulties in enforcing property rights unemployment
247
Limits to International Expansion: Management Problems
Cost of coordination across diverse geographical business units Institutional and cultural barriers Understanding strategic intent of competitors The overall complexity of competition
248
Chapter 9
Cooperative Strategy

249
Strategic Inputs

Strategic Outcomes
Feedback
250
Cooperative Strategy
Cooperative strategy is a strategy in which firms

work together to achieve a shared objective
Cooperating with other firms is a strategy that

creates value for a customer exceeds the cost of constructing customer value in other ways establishes a favorable position relative to competition
251
Strategic Alliance
A strategic alliance is a cooperative strategy in which

firms combine some of their resources and capabilities to create a competitive advantage
A strategic alliance involves

exchange and sharing of resources and capabilities co-development or distribution of goods or services
252
Strategic Alliance
Firm A
Firm B
Resources Capabilities Core Competencies
Resources Capabilities Core Competencies
Combined Resources Capabilities Core Competencies
Mutual interests in designing, manufacturing, or distributing goods or services

253
Types of Cooperative Strategies
Joint venture: two or more firms create an independent company by combining parts of their assets Equity strategic alliance: partners who own different percentages of equity in a new venture Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firms goods or services without equity sharing
254
Reasons for Strategic Alliances by Market Type

Market
Slow Cycle
Reason
Gain access to a restricted market Establish a franchise in a new market Maintain market stability (e.g., establishing standards)
255

Market
Fast Cycle
Reason
Speed up development of new goods or service Speed up new market entry Maintain market leadership Form an industry technology standard Share risky R&D expenses Overcome uncertainty
256

Market
Standard Cycle
Reason
Gain market power (reduce industry overcapacity) Gain access to complementary resources Establish economies of scale Overcome trade barriers Meet competitive challenges from other competitors Pool resources for very large capital projects Learn new business techniques
257
Business-Level Cooperative Strategies: Complementary Strategic Alliances

Complementary Alliances complementary strategic alliances are designed to take advantage of market opportunities by combining partner firms assets in complementary ways to create new value these include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage
258

Buyer vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms outsourcing is one example of this type of alliance
Support Activities
Firm Infrastructure
Service
Marketing & Sales

Procurement Procurement Outbound Logistics Operations Inbound Logistics
Vertical Alliance
Primary Activities
Supplier
Support Activities
Firm Infrastructure
Service Marketing & Sales Outbound Logistics Operations
Inbound Logistics
Primary Activities
259

Buyer
Horizontal Alliance
Potential Competitors
Human Resource Mgmt.
Buyer
Technological Development
Support Activities
Firm Infrastructure
Marketing & Sales

Procurement Outbound Logistics Operations Inbound Logistics
Firm Infrastructure
Service
Support Activities
Service
Marketing & Sales

Procurement Outbound Logistics Operations Inbound Logistics
horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain focus on long-term product development and distribution opportunities the partners may become competitors 260 requires a great deal of trust between the partners
Primary Activities
Primary Activities
Business-Level Cooperative Strategies: Competition Response Alliances

Complementary Alliances Competition Response Alliances competition response strategic alliances occur when firms join forces to respond to a strategic action of another competitor because they can be difficult to reverse and expensive to operate, competition response strategic alliances are primarily formed to respond to strategic rather than tactical actions
261
Business-Level Cooperative Strategies: Uncertainty Reducing Alliances

Complementary Alliances Competition Response Alliances uncertainty reducing strategic alliances are used to hedge against risk and uncertainty these alliances are most noticed in fast-cycle markets alliance may be formed to reduce the uncertainty associated with developing new product or technology standards
Uncertainty Reducing Alliances
262
Business-Level Cooperative Strategies: Competition Reducing Alliances

Complementary Alliances Competition Response Alliances competition reducing strategic alliances may be created to avoid destructive or excessive competition explicit collusion exists when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal) tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each others competitive actions and 263 responses

Competition Reducing Alliances
Business-Level Cooperative Strategies: Competition Reducing Alliances

Complementary Alliances Competition Response Alliances mutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple markets competition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust laws

Competition Reducing Alliances
264
Corporate-Level Cooperative Strategies

Corporate-level cooperative strategies are designed to facilitate product and/or market diversification
- diversifying strategic alliance - synergistic strategic alliance - franchising
Diversifying alliances and synergistic alliances allow firms

- to grow and diversify their operations - through a means other than a merger or acquisition
265
Corporate-Level Cooperative Strategies: Diversifying Alliances

Diversifying Alliances diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisition provides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility permits a test of whether a future merger between the partners would benefit both parties
266
Corporate-Level Cooperative Strategies: Synergistic Alliances

Diversifying Alliances Synergistic Alliances synergistic strategic alliances create joint economies of scope between two or more firms create synergy across multiple functions or multiple businesses between partner firms
267
Corporate-Level Cooperative Strategies: Franchising

Diversifying Alliances Synergistic Alliances Franchising franchising spreads risks and uses resources, capabilities, and competencies without merging or acquiring another company contractual relationship concerning the franchise that is developed between two parties, the franchisee and the franchisor an alternative to pursuing growth through mergers and acquisitions
268
International Cooperative Strategies
Cross-border strategic alliance

an international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage a firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets
269
International Cooperative Strategies
Allows risk sharing by reducing financial investment Host partner knows local market and customs International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints Must gauge partners strategic intent so they do not gain access to important technology and become a competitor
270
Network Cooperative Strategies
A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives
stable alliance network dynamic alliance network
Effective social relationships and interactions among partners are keys to a successful network cooperative strategy
271
Network Cooperative Strategies:

Stable Alliance Network
Stable Alliance Network
long term relationships that often appear in mature industries where demand is relatively constant and predictable stable networks are built for exploitation of the economies available between firms
272
Network Cooperative Strategies:

Dynamic Alliance Network
Stable Alliance Network Dynamic Alliance Network arrangements that evolve in industries with rapid technological change leading to short product life cycles primarily used to stimulate rapid, value-creating product innovations and subsequent successful market entries purpose is often exploration of new ideas
273
Competitive Risks with Cooperative Strategies

Competitive Risks Partner may act opportunistically Misrepresentation of competencies brought to the partnership Partner fails to make committed resources and capabilities available to its partners Firm may make investments that are specific to the alliance while its partner does not
274

Competitive Risks Risk and Asset Management Approaches
Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages from excessive learning by partners Assign managerial responsibility for a firms cooperative strategies to a high-level executive or team Specify resources and capabilities that will be shared and those that will not be shared (detailed contracts and monitoring) 275 Develop trusting relationships
Approaches for Managing Cooperative Strategies
cost minimization
formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled
opportunity maximization
maximize partnerships value-creation opportunities partners take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities fewer formal, limiting, contracts 276

Competitive Risks Risk and Asset Management Approaches
Desired Outcome
Creating value Above-average returns
277
Chapter 10
Corporate Governance

278
Strategic Inputs

Chapter 10 Corporate Governance
Strategic Outcomes
Feedback
279
Corporate Governance
Corporate governance is
a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations concerned with identifying ways to ensure that strategic decisions are made effectively used in corporations to establish order between the firms owners and its top-level managers
280
Corporate Governance Mechanisms

Internal Governance Mechanisms
Ownership concentration relative amounts of stock owned by individual shareholders and institutional investors Board of Directors individuals responsible for representing the firms owners by monitoring top-level managers strategic decisions
281

Internal Governance Mechanisms
Executive Compensation use of salary, bonuses, and longterm incentives to align managers interests with shareholders interests Monitoring by top-level managers they may obtain Board seats (not in financial institutions) they may elect Board representatives
282

External Governance Mechanisms
Market for Corporate Control the purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitiveness
283
Separation of Ownership and Managerial Control
Basis of the modern corporation

shareholders purchase stock, becoming residual claimants shareholders reduce risk by holding diversified portfolios professional managers are contracted to provide decision-making
Modern public corporation form leads to efficient specialization of tasks

risk bearing by shareholders strategy development and decision-making by managers 284
Agency Relationship: Owners and

Managers
Shareholders (Principals)
Firm owners
285

Managers
Firm owners
Decision makers
Managers (Agents)
286

Managers
Firm owners
Decision makers
Managers (Agents)
Risk bearing specialist (principal) pays compensation to A managerial decision-making specialist (agent)
An Agency Relationships
287
Agency Theory Problem
The agency problem occurs when:

the desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately
Solution:
principals engage in incentive-based performance contracts monitoring mechanisms such as the board of directors enforcement mechanisms such as the managerial labor market to mitigate the agency 288 problem
Manager and Shareholder Risk and Diversification

Shareholder (business) S risk profile Managerial (employment) risk profile M
Risk
A Dominant Related Business Constrained
Related Linked
Unrelated Businesses
289
Diversification
Agency Theory Conflicts
Principals may engage in monitoring behavior to assess the activities and decisions of managers However, dispersed shareholding makes it difficult and inefficient to monitor managements behavior Boards of Directors have a fiduciary duty to shareholders to monitor management However, Boards of Directors are often accused of being lax in performing this function
290
Governance Mechanisms
Ownership Concentration Large block shareholders have a strong incentive to monitor management closely Their large stakes make it worth their while to spend time, effort and expense to monitor closely They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)
291
Ownership Concentration Boards of Directors
Insiders
The firms CEO and other top-level managers
Related Outsiders
Individuals not involved with dayto-day operations, but who have a relationship with the company
Outsiders
Individuals who are independent of the firms day-to-day operations and other relationships
292
Ownership Concentration Boards of Directors Recommendations for more effective Board Governance: Increase diversity of board members backgrounds Strengthen internal management and accounting control systems Establish formal processes for evaluation of the boards performance
293
Ownership Concentration Boards of Directors Executive Compensation Salary, bonuses, long term incentive compensation Executive decisions are complex and non-routine Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes
294
Ownership Concentration Boards of Directors Executive Compensation Stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their control Incentive systems do not guarantee that managers make the right decisions, but do increase the likelihood that managers will do the things for which they are rewarded
295
Ownership Concentration Boards of Directors Executive Compensation Market for Corporate Control Firms face the risk of takeover when they are operated inefficiently Many firms begin to operate more efficiently as a result of the threat of takeover, even though the actual incidence of hostile takeovers is relatively small Changes in regulations have made hostile takeovers difficult Acts as an important source of discipline over managerial incompetence and waste
296
International Corporate Governance: Germany
Owner and manager are often the same in private firms Public firms often have a dominant shareholder, frequently a bank Frequently there is less emphasis on shareholder value than in U.S. firms, although this may be changing
297
International Corporate Governance: Germany
Medium to large firms have a two-tiered board

vorstand monitors and controls managerial decisions aufsichtsrat selects the Vorstand employees, union members and shareholders appoint members to the Aufsichtsrat
298
International Corporate Governance: Japan

Obligation, family and consensus are important factors Banks (especially main bank) are highly influential with firms managers Keiretsus are strongly interrelated groups of firms tied together by crossshareholdings
299
International Corporate Governance: Japan
Other characteristics:
powerful government intervention close relationships between firms and government sectors passive and stable shareholders who exert little control virtual absence of external market for corporate control
300
Corporate Governance and Ethical Behavior

It is important to serve the interests of the firms multiple stakeholder groups!
Capital Market Stakeholders In the U.S., shareholders (in the capital market stakeholder group) are viewed as the most important stakeholder group which are served by the board of directors Hence, the focus of governance mechanisms is on the control of managerial decisions to ensure that shareholders interests will be served
301

Capital Market Stakeholders Product Market Stakeholders Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups
302

Capital Market Stakeholders Product Market Stakeholders Organizational Stakeholders Although the idea is subject to debate, some believe that ethically responsible companies design and use governance mechanisms that serve all stakeholders interests Importance of maintaining ethical behavior through governance mechanisms is seen in the example of Enron and Arthur Andersen
303
Chapter 11
Organizational Structure and Controls

304
Strategic Inputs

Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls
Strategic Outcomes
Feedback
305
Organizational Structure
Organizational structure specifies the firms formal reporting relationships, procedures, controls, and authority and decision-making processes It is critical to match organizational structure to the firms strategy
306
Stability and Flexibility in Structure
Structural stability provides the capacity

required to consistently and predictably manage the firms daily work routines
Structural flexibility provides the opportunity to

explore competitive possibilities allocate resources to activities that shape competitive advantages needed by the firm
307
Organizational Controls
Organizational controls
guide the use of strategy indicate how to compare actual results with expected results suggest corrective actions to take when the difference between actual and expected results is unacceptable
Two types of organizational controls

strategic controls financial controls
308
Organizational Controls:
Strategic Controls
Strategic Controls Concerned with examining
the fit between

what the firm might do (as suggested by opportunities in its external environment) what it can do (as indicated by its competitive advantages)
Used to evaluate the degree to which the firm focuses on the requirements to implement its strategies 309
Organizational Controls:
Financial Controls
Strategic Controls Objective criteria
Financial Controls
Accounting-based measures include

return on investment return on assets
Market-based measures include

economic value added
310
Matching Control to Strategy
Relative use of controls varies by type of strategy

large diversified firms using the cost leadership strategy emphasize financial controls companies and business units using the differentiation strategy emphasize strategic controls
311
Evolutionary Patterns of Strategy and Organizational Structure
Firms grow in predictable patterns

by volume by geography integration (vertical, horizontal) through product/business diversification
A firms growth patterns determine its structural form
312
Evolutionary Patterns of Strategy and Organizational Structure
All organizations require some form of organizational structure to implement and manage their strategies Firms frequently alter their structure as they grow in size and complexity Three basic structure types:
simple structure functional structure multi-divisional structure (M-form)
313
Strategy and Structure Growth Pattern: Simple Structure

Simple Structure
314
Organizational form in which the ownermanager

makes all major decisions directly monitors all activities
Staff
serves as an extension of the managers supervisory authority
Matched with focus strategies and business-level strategies

commonly compete by offering a single product line in a single geographic market
315
Growth creates
complexity managerial and structural challenges
Owner-managers
commonly lack organizational skills and experience become ineffective in managing the specialized and complex tasks involved with multiple organizational functions
316
Strategy and Structure Growth Pattern: Functional Structure

Simple Structure Efficient implementation of formulated strategy Sales GrowthCoordination and Control Problems
Functional Structure
317

Chief Executive Officer (CEO)

limited corporate staff
Functional line managers in dominant organizational areas

production marketing engineering accounting R&D human resources
Supports use of business-level strategies and some corporate-level strategies

single or dominant business with low levels of 318 diversification
Differences in orientation among organizational functions can

impede communication and coordination increase the need for CEO to integrate decisions and actions of business functions facilitate career paths and professional development in specialized functional areas cause functional-area managers to focus on local versus overall company strategic issues
319
Strategy and Structure Growth Pattern: Multidivisional Structure
Strategic control
operating divisions each division is separate business or profit center
Top corporate officer delegates responsibilities to division managers

for day-to-day operations for business-unit strategy
Appropriate when the firm grows through diversification

320
Three major benefits

corporate officers able to more accurately monitor the performance of each business, which simplifies the problem of control facilitates comparisons between divisions, which improves the resource allocation process stimulates managers of poorly performing divisions to look for ways of improving performance
321

Simple Structure Efficient implementation of formulated strategy Sales GrowthCoordination and Control Problems Multidivisional Structure
Functional Structure
Efficient implementation of formulated strategy
Sales GrowthCoordination and Control Problems
322
Matching Structure and Strategy
Different forms of the functional organizational structure are matched to

cost leadership strategy differentiation strategy integrated cost leadership/differentiation strategy
differences in these forms seen in three important structural characteristics

specialization centralization formalization
323
Structure for Cost Leadership Strategy

Operations is main function Process engineering is
emphasized over R&D Large centralized staff Formalized procedures Structure is mechanical, job roles highly structured
Office of the President
Centralized Staff
Engineering
Operations
Accounting Personnel
Marketing
324
Structure for Differentiation Strategy

President and Limited Staff R&D New Product R&D Operations Marketing
Marketing
Finance
Human Resources
Marketing is the main function for tracking new product ideas New product R&D is emphasized Most functions are decentralized Formalization is limited to foster change and promote new ideas Overall structure is organic; job roles are less structured
325
Multidivisional Structure
Each division is operated as a separate business Appropriate for related-diversified businesses Key task of corporate managers is exploiting synergies among divisions Managers use a combination of strategic controls and financial controls
326
Managers try to strike a balance between:

competing among divisions for scarce capital resources creating opportunities for cooperation to develop synergies
The goal is to maximize overall firm performance The decision-making of managers in a multi-divisional structure may be:
centralized or decentralized bureaucratic or non-bureaucratic
327
Balance on these dimensions may change over time Structure will evolve over time with:
changes in strategy degree of diversification geographic scope nature of competition
328
Three Variations of the Multidivisional Structure

Multidivisional Structure (M-form)
Cooperative Form
Competitive Form
Strategic Business-Unit (SBU) Form

329
Cooperative Form of Multidivisional Structure: Related-Constrained Strategy

Headquarters Office
Government Affairs President Legal Affairs
Corporate R&D Lab
Strategic Planning
Corporate Human Resources
Corporate Marketing
Corporate Finance
Product Division
Product Division
Product Division
Product Division
Product Division 330
Cooperative Form of Multidivisional Structure: Related-Constrained Strategy
Structural integration devices create tight links among all divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions R&D is likely to be centralized Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance Culture emphasizes cooperative sharing
331
SBU Form of Multidivisional Structure: Related-Linked Strategy

Headquarters Office
President
Corporate R&D Lab
Strategic Planning
Corporate HRM
Corporate Marketing
Corporate Finance
SBU
Division Division Division
SBU
Division
SBU
Division
Division
332
Division
Division
Division
SBU Form of Multidivisional Structure: Related-Linked Strategy
Structural integration devices create tight links among all divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions R&D is likely to be centralized Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance Culture emphasizes cooperative sharing
333
Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy

Headquarters Office
President
Legal Affairs
Finance
Auditing
Division
Division
Division
Division
Division
Division
334
Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy
Corporate headquarters has a small staff Finance and auditing are the most prominent functions in the headquarters to manage cash flow and ensure the accuracy of performance data coming from divisions The legal affairs function becomes important when the firm acquires or divests assets Divisions are independent and separate for financial evaluation purposes Divisions retain strategic control, but cash is managed by the corporate office Divisions compete for corporate resources
335
Multidivisional Structure: Other Points
Complex multi-divisional structure firms may be simultaneously

centralized and decentralized depending upon the various business-level strategies employed throughout the firms individual businesses
Multi-divisional structure firms use a combination of:

strategic controls financial controls
336
Characteristics of Various Structural Forms

Structural Characteristics Type of Strategy Degree of Centralization Use of Integrating Mechanisms Cooperative M-Form RelatedConstrained Centralized at Corporate Office Extensive SBU M-Form RelatedLinked Partially Centralized in SBUs Moderate Competitive M-Form Unrelated Diversification Decentralized to Divisions
Nonexistent
337
Characteristics of Various Structural Forms

Structural Characteristics Divisional Performance Appraisal Divisional Incentive Compensation Cooperative M-Form Subjective Strategic Criteria Linked to Corporate Performance SBU M-Form Strategic & Financial Criteria Competitive M-Form Objective Financial Criteria
Linked to Linked to Corporate Divisional SBU & Division Performance Performance

338
Worldwide Geographic Area Structure: Multidomestic Strategy

Asia United States product characteristics tailored to local preferences isolation from global competitiion establish protected market positions compete in industry segments most affected by differences among local countries
339
Latin America
Multinational Headquarters
Europe
Australia
Middle East/ Africa
Worldwide Product Divisional Structure: Global Strategy

standardized products across countries economies of scope and scale outsource some Global Worldwide Worldwide primary or support Products Products Corporate activities to the Division Division Headquarters worlds best providers decision-making authority centralized Worldwide Worldwide Products Products in worldwide division Division Division headquarters
Worldwide Products Division Worldwide Products Division
340
Using the Combination Structure:

Transnational Strategy
The combination structure has characteristics and mechanisms that result in an emphasis on both geographic and product structures
local responsiveness (multidomestic strategy) global efficiency (global strategy)
341
Strategic Network
A strategic network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as alliances and joint ventures The strategic network seeks to develop a competitive advantage in primary or support activities A strategic center firm often manages the network
342
Strategic Network
strategic center firm engages in four primary tasks

strategic outsourcing (outsources and partners with more firms than do other network members)
competencies (supports each members efforts to develop core competencies that can benefit the network)
343
Strategic Network
strategic center firm engages in four primary tasks

technology (manages the development and sharing of technology-based ideas among network members) race to learn (guides participants in efforts to form network-specific competitive advantages)
344
Strategic Network
Strategic Center Firm
345
Distributed Strategic Network
International cooperative strategies often require more complex networks Many large multinational firms form distributed strategic networks with multiple regional strategic centers to manage their array of cooperative arrangements with partner firms Breaking large networks into multiple manageably-sized networks helps to manage the complexity of maintaining many relationships
346
Distributed Strategic Network
Main Strategic Strategic Center Center Firm Firm
= Distributed Strategic Center Firms
347
Chapter 12
Strategic Leadership

348
Strategic Inputs

Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls
Strategic Outcomes
Feedback
349
Strategic leadership involves:

the ability to anticipate, envision, maintain flexibility and empower others to create strategic change multi-functional work that involves working through others consideration of the entire enterprise rather than just a sub-unit a managerial frame of reference
350
Strategic Leadership and the Strategic Management Process

Effective Strategic Leadership shapes the formulation of
Strategic Intent
and influence
Strategic Mission
Successful Strategic Actions
351
Strategic Leadership and the Strategic Management Process

Successful Strategic Actions
Formulation of Strategies
Implementation of Strategies
yields
352
Factors Affecting Managerial Discretion

External Environment
External Environment Industry structure Rate of market growth Number and type of competitors Nature and degree of political/legal constraints Degree to which products can be differentiated
353

Characteristics of the Organization
Characteristics of the Organization Size Age Culture Availability of resources Patterns of interaction among employees
354

Characteristics of the Organization

Characteristics of the Manager
Managerial Discretion
Characteristics of the Manager Tolerance for ambiguity Commitment to the firm and its desired strategic outcomes Interpersonal skills Aspiration level Degree of self-confidence
355
Top Management Teams
The top management team is composed of key managers who are responsible for
formulating and implementing the organizations strategies
A heterogeneous top management team with varied expertise and knowledge can draw on multiple perspectives when evaluating alternative strategies and building consensus
356
Top Management Teams
A top management team must also be able to function effectively as a team in order to implement strategies
a heterogeneous team makes this more difficult a heterogeneous team, however, is associated positively with innovation and strategic change
357
Chief executive officers can gain so much power that they are virtually independent of oversight by the board of directors This is especially true when the CEO is also chairman of the board of directors CEOs of long tenure can also wield substantial power The most effective forms of governance share power and influence among the CEO and board of directors
358
Managerial Labor Markets
The internal labor market is comprised of the career path alternatives available to a firms managers Selecting internal candidates for management positions helps to build on valuable firm-specific knowledge
359
The external labor market includes the collection of career opportunities for managers outside their firm Selecting an outsider often brings fresh insights and may energize the firm with innovative new ideas
360

Managerial Labor Market: CEO Succession Internal CEO External CEO succession succession Ambiguous: possible change in Stable top management strategy team and strategy Stable strategy with innovation Strategic change
361
Homogeneous
Top Management Team Composition
Heterogeneous
Exercise of Effective Strategic Leadership

Establishing balanced organizational controls
Determining strategic direction Exploiting and maintaining core competencies
Effective Strategic Leadership Emphasizing ethical practice

Sustaining an effective organizational culture
Developing human capital

362
Determining Strategic Direction
Strategic direction means the development of a long-term vision of a firms strategic intent A charismatic leader can help achieve strategic intent It is important not to lose sight of the strengths of the organization when making changes required by a new strategic direction Executives must structure the firm effectively to help achieve the vision
363
Exploiting and Maintaining Core Competencies
Core competencies are resources and capabilities that serve as a source of competitive advantage for a firm over its rivals Strategic leaders must verify that the firms competencies are emphasized in strategy implementation efforts
364
Exploiting and Maintaining Core Competencies
In many large firms, and certainly in related-diversified ones, core competencies are exploited effectively when they are developed and applied across different organizational units Core competencies cannot be developed or exploited effectively without developing the capabilities of human capital
365
Developing Human Capital
Human capital refers to the knowledge and skills of the firms entire workforce Employees are viewed as a capital resource that requires investment No strategy can be effective unless the firm is able to develop and retain good people to carry it out The effective development and management of the firms human capital may be the primary determinant of a firms ability to formulate and implement 366 strategies successfully
Sustaining an Effective Organizational Culture
An organizational culture consists of a complex set of ideologies, symbols, and core values that is shared throughout the firm and influences the way it conducts business Shaping the firms culture is a central task of effective strategic leadership
367
An appropriate organizational culture encourages the development of an entrepreneurial orientation among employees and an ability to change the culture as necessary Reengineering can facilitate this process
368

Changing Culture and Business Reengineering
The benefits of business reengineering are maximized when employees believe that:
every job in the company is essential and important all employees must create value through their work
369

Changing Culture and Business Reengineering
Constant learning is a vital part of every persons job Teamwork is essential to successful implementation Problems are solved only when teams accept the responsibility for the solution
370
Emphasizing Ethical Practices
Ethical practices increase the effectiveness of strategy implementation processes Ethical companies encourage and enable people at all organizational levels to exercise ethical judgment
371
Emphasizing Ethical Practices
To properly influence employee judgment and behavior, ethical practices must shape the firms decision-making process and be an integral part of an organizations culture Leaders set the tone for creating an environment of mutual respect, honesty and ethical practices among employees
372
Establishing Balanced Organizational Controls
Organizational controls provide the parameters within which strategies are to be implemented and corrective actions taken Financial controls are often emphasized in large corporations and focus on shortterm financial outcomes Strategic control focuses on the content of strategic actions, rather than their outcomes
373
Establishing Balanced Organizational Controls
Successful strategic leaders balance strategic control and financial control (they do not eliminate financial control) with the intent of achieving more positive long-term returns
374
Strategic and Financial Controls in a Balanced Scorecard Framework

Perspectives
Financial
Criteria
Cash flow Return on equity Return on assets
Assessment of ability to anticipate customers needs Effectiveness of customer service practices Percentage of repeat business Quality of communications with customers
Customer
375
Strategic and Financial Controls in a Balanced Scorecard Framework

Perspectives
Internal Business Process
Criteria
Asset utilization improvements Improvements in employee morale Changes in turnover rates
Improvements in innovation ability Number of new products compared to competitors Increases in employees skills
Learning and Growth
376

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Chapter 1

Strategic Management and Strategic Competitiveness

The Strategic Management Process

Chapter 6 CorporateLevel Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Strategic Competitiveness Above-Average Returns

Strategic Flexibility flexibility

I/O Model of Above-Average Returns

Four Assumptions of the I/O Model

Four Assumptions of the I/O Model

I/O Model of Above-Average Returns

I/O Model of Above-Average Returns

I/O Model of Above-Average Returns

I/O Model of Above-Average Returns

I/O Model of Above-Average Returns

I/O Model of Above-Average Returns

Resource-based Model of Above Average Returns

Resource-based Model of Above Average Returns

Resource-based Model of Above Average Returns

Four Attributes of Resources and Capabilities (Competitive Advantage)

Costly to imitate Nonsubstitutable

Resources and capabilities that meet

Costly to imitate Nonsubstitutable

Core Competencies are the basis for a

Resource-based Model of Above Average Returns

Resource-based Model of Above Average Returns

Resource-based Model of Above Average Returns

Resource-based Model of Above Average Returns

Strategic Intent & Mission

The Firm and Its Stakeholders

The Firm and Its Stakeholders

The Firm and Its Stakeholders

Product Market Stakeholders

The Firm and Its Stakeholders

Product Market Stakeholders Employees Managers Nonmanagers

The Strategic Management Process

Chapter 6 CorporateLevel Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Strategic Competitiveness Above-Average Returns

The External Environment Environment

External Environmental Analysis

External Environmental Analysis

Analysis of competitor environment

The External Environment Strategic Intent Strategic Mission

Global Segmentevents Important political

Five Forces Model of Competition

Five Forces Model of Competition

Five Forces of Competition

Bargaining Power of Buyers

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Intensity of rivalry is stronger when competitors: are numerous or equally balanced

High Exit Barriers

Future Objectives: How do our goals compare

Current Strategy: How are we currently

Assumptions: future Do we assume the

Capabilities: What are our strengths

The Internal Environment: Resources, Capabilities and Core Competence