Strategic MGMT Study Guide Final Lecture Notes Lectures 1 10

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Strategic Mgmt Study Guide Final - Lecture notes, lectures 1 -

10
Strategic Management (King's College London)
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Strategy
 Strategies have major impact on a firm’s performance relative to
rivals (Walmart does well in the fiercely competitive retail
industry while Kmart struggles)
 Def.: Set of actions that managers take to increase their
company’s performance relative to rivals
 Competitive advantage: occurs if a strategy does result in
superior performance
Superior performance
 Superior performance is usually thought of in terms of
profitability relative to that of other companies in the industry
 Measured by ROCI  the more efficiently a company uses its
resources, the higher its profitability and ROCI
 It is determined by the strategies adopted by its managers
o e.g. Walmart’s strategy of cost savings from efficient
logistics and information systems, which are passed on to
consumers through lower prices
o allowed the firm to gain market share, reap economies of
scale and further lower the cost structure, boosting
profitability
Competitive advantage
 Profitability is greater than the average profitability in the
industry
 Sustained competitive advantage: ability to maintain above-
average profitability for a number of years like Walmart and Dell
(which pursued firm-specific strategies that result in superior
performance)
Company’s performance
 Determined by strategies as well as industry characteristics e.g.
demand trends, excess capacity and price war occurrence,
technological change, barriers to entry
 Average profitability is higher in some varies between industries
than others due to different competitive conditions
General managers

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 Bear responsibility for the overall company performance or for a

self-contained subunit/division
 Decide how to create a competitive advantage and achieve high
profitability with the resources and capital at their disposal
Company
 Collection of functions and departments that work together
 Multidivisional companies have three main levels of
management:
o Corporate: CEO (decides on strategy), board of directors,
corporate managers
 oversee the development of strategies
 agents of shareholders and ensure that the strategies
are consistent with profit maximisation
o Business: divisional managers and staff
 Business unit is a self-contained division for a
product/service
 Translate the general statements of direction from
the corporate level into concrete strategies for the
individual divisions
o Functional: functional managers
 Responsible for supervising a particular function ie
task/activity/operation like accounting, R/D
 Sphere of responsibility is confined to one
organisational activity
 Develop functional strategies that help fulfil strategic
objectives set by business- and corporate-level
general managers
Strategy-making process
 Although top management plays the most important role,
valuable strategies often emerge from deep within the
organization without prior planning
 Yet, formal strategic planning models are in place and have 5
steps
1. select corporate mission and major corporate goals
2. analyse the external competitive environment to identify
opportunities and threats

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3. analyse the organisation’s internal environment to identify

strengths and weaknesses
4. select strategies that build on strengths, correct weaknesses to
take advantage of external opportunities and to counter external threats
 should be consistent with the mission and major goals to constitute a
viable business model
5. implement strategies
Strategy formulation
 SWOT analysis and selecting appropriate strategies
Strategy implementation
 Putting these plans into action at the functional, the business and
the corporate level
o E.g. quality improvement programs, changing product
designs, segmenting the marketing
 Allocating roles, responsibilities among mangers, resources,
setting ST objectives and designing a control/reward system
 Also entails designing the best organisation structure, culture
and control systems
Strategic management process

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 Mission statement: first component of the str mgmt. process.

o 4 components
 mission, vision, key values and major goals
 External analysis: second component
o Opportunities and threats should be examined at the
industry environment, the national environment and the
wider macro-environment
 Internal analysis
o S&W
o A competitive advantage requires a company to achieve
superior EQIR efficiency, quality, innovation and
responsiveness  company strengths lead to superior
performance in these areas and vice versa for weaknesses
 Strategy formulation based on SWOT analysis
o Generation of a series of strategic alternatives given SWOT
o Purpose is to identify strategies that will create a company-
specific business model that will best align, fit or match the
company’s resources and capabilities to the demands of
the environment in which it operates

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o Compare/contrast alternative possible strategies with

respect to their ability to achieve a competitive advantage
 Strategy making process ends with the design of the
organizational structure culture and control systems necessary to
implement the chosen strategy
 Feedback loop
o Indicates that strategic planning is on-going
o Once implemented, strategy execution must be monitored
to determine the extent to which strategic objectives are
achieved and the degree to which a competitive advantage
is created and sustained
o Info and knowledge is passed back up to the corporate
level through feedback loops, which turn into input for the
next round of strategy formulation and implementation
Strategy as an emergent process

 The basic planning model suggests that strategies are a result of
a plan and that the strategic planning process is rational,
structured and orchestrated by top management
 Criticised for three reasons
o Unpredictability of the real world
o Role that lower level managers can play in the str mgmt.
process
o Many successful strategies are often a result of serendipity
not rational strategizing
Alternative view of strategy making

 Strategy making in an unpredictably world – unplanned strategic
shifts
o Uncertainty, complexity, ambiguity dominate
o Premium on being bale to respond quickly to changing
circumstances
o E.g. 1994/5 Gates shifted the company strategy after the
unanticipated emergence of the WWW  such flexibility
would not be possible within the traditional strategic
planning framework, which has the implicit assumption
that strategies need to be reviewed only during the annual
strategic planning exercise

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 Autonomous action: strategy making by lower level managers

o Too much importance on top mgmt. esp the CEO
o Individual employees can often exert a profound influence
over the firm’s strategic direction e.g. at Intel, lower level
managers formulated new strategies on their own initiative
and persuaded top-level managers to alter the firm’s
strategic priorities
o Lower level managers are less likely to have the same
commitment to the status quo, thus seeing things from a
different perspective. They also have more to gain from
promoting new technologies and strategies within the firm
and may therefore be the ones who recognise new
strategic opportunities
 Serendipity and strategy
o Serendipitous discoveries and events can cause companies
to enter new businesses as was the case with 3M which
entered the fabric protection business in the 1960s
o If serendipitous discoveries are inconsistent with prior
planned strategy conceptions, opportunities may be
missed, as was the case with the telegraph company
Western Union which turned down the opportunity to
purchase the rights to Bell’s invention of the telephone
Intended and emergent strategies

 Henry Mintzberg proposed a strategy model which is more
encompassing of what strategy is
 A realised strategy is the product of whatever planned strategies
are actually put into action AND of any unplanned or emergent
strategies
 Unrealised strategies: not implemented due to unpredicted
environment changes
 Emergent strategies are unplanned responses to unforeseen
circumstances, arising from autonomous action by individual
managers deep within the organisation, from serendipitous
discoveries or events, or from an unplanned strategic shift by
top-level managers in response to changed circumstances
o Not the product of formal top-down planning mechanisms
o Mintzberg: more appropriate than intended strategies

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o He notes that strategies can take root wherever people

have the capacity to learn and the resources to support
that capacity
 Management needs to recognise the process of emergence and

intervene when appropriate, evaluating emergent strategies
 Capability to produce emergent strategies depends on the
corporate culture, structure and control systems
Strategy planning in practice

 Formal planning systems does improve strategic decisions,
despite criticisms
 Managers have to try to achieve a competitive advantage in the
future competitive environment, leading to scenario planning,
which takes into account the unpredictability of the future
o Involves formulating plans for a range of possible futures
o Incorporates the dynamic and complex nature of the
environment  managers must understand this

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 >50% of Fortune 500 companies use some sort of

scenario planning
o forces managers to think outside of the box
Decentralised planning
 Ivory tower (top-down) approach may cause top managers to
formulate strategic plan in a vacuum due to limited
understanding / appreciation of current operating realities
 Ivory tower concept of planning can also lead to tensions
between corporate, business and functional level managers
 Moreover, ivory tower planning ignores the important strategic
role of autonomous action by lower-level managers and
serendipity
 The recognition that successful strategic planning encompasses
managers at all levels of the corporation corrects the ivory tower
approach issues
 Corporate-level planners should act as facilitators who help
business and functional managers to do the planning by setting
the broad strategic goals and providing resources to attain them
Strategic decision making is influenced by

 Cognitive biases
o Systematic errors in human decision making that arise
from the way people process information
 Prior hypothesis bias
o Cognitive bias that occurs when decision-makers have
strong prior beliefs which they base decisions on despite
being presented with contrary evidence that beliefs are
wrong
 Escalating commitment
o Cognitive bias that occurs when decision markers commit
even more resources to a failing project because they have
invested in it already
 Reasoning by analogy
o Cognitive bias that involves the use of simple analogies to
understand complex problems
 Representativeness
o Cognitive bias rooted in the tendency to generalise

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 Illusion of control
o Cognitive bias rooted in the tendency to overestimate one’s
ability to control events
Improving decision making

 2 techniques that enhance strategic thinking and counteract
groupthink
 Devil’s advocacy
o One member brings out all negative considerations of a
proposal
 Dialectic inquiry
o More complex, requiring the generation of a plan and
counterplan that reflect plausible but conflicting sources of
action
o Strategic managers are presented with both plans and then
base their decisions on them
 Kahneman’s “outside view” also promotes better decision making
o Involves the comparison of the current project against
prior strategic initiatives, countering illusion of control and
promoting reasoning by analogy and representativeness
Strategic leadership
 Good strategic leaders can positively impact performance
through
o Vision, eloquence and consistency
Giving a sense of direction and eloquently formulate

a consistent vision e.g. Bill Gates
o Commitment
 Strong leaders demonstrate commitment to their
vision by actions and words, and lead by example
o Being well informed
 Effective leaders develop a network of formal and
informal sources who keep them well informed e.g.
McDonald’s Kroc and Walmart’s Walton often
dropped in unannounced to visit their restaurants
and stores  constant interaction with employees at
all levels improves the network
o Willingness to delegate and empower

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Empowerment is a good motivational tool

Delegation makes sense to avoid responsibility
overload
o Astute use of power
 Edward Wrapp: strategic leaders should act as
democratic leaders of a coalition rather than as
dictators
 Jeffery Pfeffer introduces the notion of using power
intelligently. He suggests that power comes from
control over resources and that sometimes quite
junior functional managers can build an effective
power base and influence organisational outcomes
o EQ
 Goldman introduced this term to describe
psychological attributes that many strong and
effective leaders exhibit, namely
 Self-awareness  elicits the trust&confidence
of subordinates
 Self-regulation  elicits the trust&confidence of
subordinates
 Motivation
 Empathy  earn loyalty of subordinates
 Social skills  earn loyalty of subordinates

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Stakeholders, the mission, governance and business ethics
Stakeholders
 Individuals or groups with an interest/claim/stake in the
company, in what it does and how well it performs its operations
and performance
 All stakeholders are in an exchange relationship with the

company, supplying the company with resources/contributions
and expecting inducements in exchange e.g. customers provide
revenues and demand high-quality products in return
 A company should consider these claims when formulating
strategies, as negative reactions of stakeholders can damage the
enterprise e.g. suppliers looking for more dependable buyers or
stockholders selling shares, bondholders demanding higher
interest
 The goals of different groups may conflict e.g. unions demanding
higher wages and customers demanding low prices  need to
identify stakeholders, their interests and claims and prioritise
them to identify strategic challenging
Corporate governance
 Mechanisms that exist to ensure managers pursue strategies that
are in the interests of an important stakeholder group
Mission
 Describes what the company does  customer vs product-
oriented mission

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o Customer-oriented missions (like Kodak’s) help businesses

anticipate demand shifts and assists companies to
capitalize on environmental changes.
o Product-oriented missions ignore the need to satisfy
customer needs
 Business definition depends on customer groups, needs and how
needs are satisfied (i.e. distinctive competencies)
Vision
 Lays out some desired future state, articulating what the
company would like to achieve
 Good vision statements stretch a company by articulating an
ambitious but attainable future state that helps motivate
employees
Values
 Code of conduct for managers and employees, stating what kind
of organisation they should build to help a company achieve its
mission
 Bedrock of a company’s organisational culture: set of values,
norms and standards that drive and shape behaviour, that
determines how employees work to achieve the mission/goals
 Culture can be an important source of competitive advantage

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o Nucor Steel is one of the most productive and profitable

steel firms worldwide partially due to its extremely high
productivity  emphasis on pay for performance, fair
treatment and job security, leading to high productivity
and a low cost structure
Goal
 a precise and measurable desired future state that a company
attempts to realise
 after stating the mission, vision and key values, the next step in
formulating a mission statement is the establishment of major
goals
 well-structured goals have 4 main characteristics
o precise and measurable – allowing managers to judge
performance
o address critical issues – to maintain focus
o challenging but realistic – to foster employee motivation
o specify a time period in which they should be achieved –
deadlines can act as a motivator
 central goal: max shareholder returns ie high profitability and
profit growth
 However, necessary to not focus on ST too much and cut down
on essential investments in R&D, marketing or new capital
investments
 Pressure to focus on ST profitability may lead to unethical
behaviour e.g. Enron – profits were inflated to misrepresent true
performance
  need to focus on LT performance and competitiveness(e.g.
R&D investment)
Corporate governance and strategy

 The capital stockholders provide is seen as risk capital: equity
capital for which there is no guarantee that stockholders will
recoup their investment/earn a decent return
 Stockholders delegate the job of controlling the company to
managers, who become their agents of stockholders.
 Agency relationship: arises whenever one party delegates
decision-making authority over resources to another

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 Principal: a person delegating authority to an agent, who acts on

the principal’s behalf
 Agent: a person to whom authority is delegated by the principal
 Information asymmetry: situation in which one party has more
information about the exchange than the other
o Is not always bad but can make it difficult to measure how
well an agent is performing
o Performance ambiguity is inherent to the principal-agent
relationship
o Principles must trust the agent, however, they put
governance mechanisms in place to monitor them,
evaluate their performance and take corrective action if
necessary
 This division of ownership and management gives rise to the
agency problem, where managers pursue strategies that are not
in the interests of owners/stockholders
o Agents may be able to do this due to an information
asymmetry – they have more information and use their
superior information it to mislead principals and maximise
their own interests
Agency theory
 Basic principles can be extended to cover the relationship with
other key stakeholders like employees and between different
layers of management
 On the job consumption: CEOs misusing corporate funds to
invest in their status (buying executive jets, organising expense-
paid trips etc) rather than investing the funds to increase
stockholder returns
 CEO incomes increased far more rapidly than that of average
workers, mainly because of very liberal stock option grants that
enables CEOs to earn huge pay bonuses in rising stock markets
even if the company underperforms the market and its
competitors
o 1980: average CEO in business Week’s survey of S&P500
firms earned 42 times as much as the average blue-
collared worker, compared to 350 times as much in 2005

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 Lack of relationship between CEO payments and company

performance raises criticism (as was the case with Pfizer’s CEO
McKinnell in 2005)
 CEO pay has dropped in 2009&2010 due to the aftermath of the
financial crisis
 Engagement in empire building: building many new businesses
to increase company size through diversification and further the
desire for status/security/power/income
 There is a trade-off between LT profitability and revenue growth
rates  growth rates that are too low and too high will lead to
lower profitability
 In the early 2000s a series of accounting scandals were
attributed to self-interested senior excecutives and a failure of
corporate governance mechanisms to hold them in line
o Enron: $27bn in debt was kept off the BS and hidden from
shareholders
o Tyco, Royal Dutch Shell
 Challenge for principals is to
o Shape agent behaviour in accordance with principals’ goals
o Reduce information asymmetry
o Develop mechanisms for removing agents who do not act
in accordance with principal goals
 These challenges are dealt with through governance mechanisms
Corporate governance mechanisms

 Mechanisms and principals put in place to align incentives
between principals and agents and to monitor and control agents
 Purpose: reduce the scope and frequency of the agency problem
 4 main CG mechanisms
 Board of directors
o Centrepiece of CG system in the US and UK
o Directors are directly elected by stockholders and
represent their interests
o Monitors and evaluates senior management on behalf of
stockholders
o Legal authority to hire, fire and compensate corporate
employees including the CEO
o Ensure validity of financial statements

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o Exists to reduce information asymmetry

o Typical board consists of inside and outside directors
o Inside directors: senior employees like the CEO – required
as they have inside information necessary for monitoring
o Outside directors: bring objectivity to monitoring as many
of them are FT professional directors who hold positions on
the boards of several companies
 need to maintain a reputation as competent outside
directors is an incentive to be as objective as
possible
o Critics: inside directors often dominate the outsiders on the
board, using their senior positions to exercise control over
what information the board receives
 Superior knowledge and control over information are
sources of power, putting insiders in a better position
to influence boardroom decision making
 Often the CEO is also the chairman of the board and
inside and outside directors are often the personal
nominees of the CEO
 Board loyalty may be biased toward the CEO not the
stockholders
o Corporate governance became more objective prompted by
new legislation like the 2002 Sarbanes-Oxley Act in the US,
which tightened CG and corporate reporting rules
o Growing trend to hold directors liable for corporate
misstatements
o Powerful institutional investors like pension funds are more
aggressive in exerting power by pushing for outside
representation
o Result: over 50% of big companies had outside directors in
the chairman’s role by the 2005, up from less than half of
that number in 1990
 Stock-based compensation
o Incentive for agents to behave in the best interest of the
principal
o Encouragement to pursue strategies that maximise LT
profitability and profit growth by linking the pay to the
performance of the stock price

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o Most common pay-for-performance system are stock

options: right to buy company shares at a strike price in
the future (usually the current price), to encourage CEOs
to adopt strategies that increase the share price and thus
the value of their own stock options
o Research studies: stock-based pay aligns interests as
managers are more likely to consider the effects of their
acquisition decisions on stockholder returns if they were
significant shareholders themselves
o Critics 1: stock options are often too generous and granted
at such low strike prices that significant returns can be
made even if the company underperforms the stock market
 In 2007, the SEC investigated 130 companies for
possible fraud relating to stock option dating and the
issue of “backdating” options to a time when the
stock price was lower
o Critics 2: stock options increase outstanding shares and
dilute the equity of stockholders, so they should be shown
in company accounts ass an expense against profits  only
required after 2005
o Conc: good idea in theory but have been abused in
practice. To limit abuse, accounting rules require stock
options to be treated as an expense
 Boeing went further even before legal changes by
issuing performance share units that are convertible
into common stock only if the stock appreciates at
least 10% annually for 5 years  limit free ride of
stock option holders while aligning management and
stockholder interest through stock-based
compensation
 Financial statements
o Legal requirement to file financial statement according to
GAAP/IFRS raises transparency
o Purpose is to give consistent, detailed and accurate
information about how efficiently and effectively
management runs the company
o To ensure proper financial representation, external audits
are performed

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o Some companies abused the system, aided by the

compliance of auditors like Arthur Anderson, which had
lucrative consulting contracts with Enron  helped Enron
hide its off-BS debt, meaning that shareholders based
investment decisions on inaccurate information
o Motive to inflate earnings/revenues is to foster investor
enthusiasm and increase the stock price, allowing
managers to cash in stock option grants at the expense of
misled stockholders
o As a response to financial statement misrepresentations,
the Sarbanes-Oxley act was passed in 2002
 Biggest change in accounting rules and CG
procedures since the 1930s
 E.g. barred companies from hiring the same
accounting firm for auditing and consulting services
 Takeover constraint
o Risk of being acquired by another company
o This risk rises if stockholders sell shares in large numbers
so that the share price falls and the company is worth less
than the book value BV of its assets
o If managers ignore stockholder interests and the company
is acquired, senior management typically lose their
independency and jobs, limiting the worst excesses of the
agency problem
 Existence of governance mechanisms and comprehensive
measurement and control systems cannot eliminate information
asymmetry
Ethics and strategy

 Ethics: accepted principles of right or wrong that govern the
conduct of a person, the members of a profession or the actions
of an organization
 Business ethics: accepted principles of right or wrong that
govern the conduct of business people
 Ethical decisions: in accordance with these accepted principles of
right and wrong

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 Ethical dilemmas: situations without agreements over what the

accepted principles of right and wrong are or where no available
alternative seems ethically acceptable
 Many of these principles of right or wrong are universally
recognised and even codified into law through tort laws, contract
laws, intellectual property laws, antitrust laws, securities laws etc
 not only unethical but also illegal to break these laws
 Behaving ethically goes beyond staying within the bounds of law
 1990s Nike engaged in outsourcing but the working conditions of
several producers in the developing world were very poor, so
that Nike was attacked for using “sweatshop labour”  Nike did
not break the laws in place in the developing world yet it was not
ethical  wave of demonstrations and consumer boycotts
Ethical issues in strategy

 Most arise due to a potential conflict between the goals of the
enterprise of the goals of stakeholders
o Stockholders: right to timely and accurate financial
information
o Customers: right to complete product and service
information
o Employees: right to safe working conditions and fair
compensation
o Suppliers:: right to expect contracts to be respected
o General public: right to expect that the firm will not violate
basic social expectations like environmental friendliness
 Stakeholder view of business ethics: it is in the self-interest of
managers to behave ethically because doing so will ensure
stakeholder support and thus benefit the firm
 Necessary to go beyond this instrumental approach to ethics:
acting ethically is simply the right thing to do and businesses
should recognise their noblesse oblige: responsibility of people to
act honourably and benevolently in regards to moral
responsibilities
 Unethical behaviour often arises when managers put their own
goals or enterprise goals above the fundamental rights of one or
more stakeholder groups  ie unethical behaviour may arise
from agency problems. Examples of such behaviours:

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o Self-dealing
 Occurs when managers feather their own nests with
corporate monies e.g. Tyco
 Information manipulation: when managers use their
control over corporate data to distort/hide
information to enhance their own financial
situation/the firm’s competitive position
 Can also occur in regards to nonfinancial data
e.g. tobacco companies hid internal research
linking smoking to health problems, violating
consumer rights for accurate information about
the dangers of smoking
o Anticompetitive behaviour
 Actions aimed at harming actual or potential
competitors, usually by using monopoly power to
enhance LT prospects
 E.g. Microsoft forced PC manufacturers to use its
Web browser Internet Explorer
 Violates consumers by limiting their choices
 Violates the rights of downstream participants
in the industry value chain (in this case PC
manufacturers)
 Violates the rights of competitors to free and
fair competition
o Opportunistic exploitation of other value chain players
 Occurs when managers seek to rewrite contract
terms with suppliers/buyers/complement providers in
a way that it more favourable to the firm
 Use of power to push through contract revisions as
did Boeing with Titanium Metals Corp
o Substandard working conditions
 Managers underinvest in working conditions or pay
wages below market rates to reduce production costs
 Occurs in countries that lack workplace regulations
o Environmental degradation
 Firm’s actions that directly or indirectly result in
pollution or other forms of environmental harm 
violates the public’s rights to clean air and water

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o Corruption in the business context

 Managers pay bribes to gain access to lucrative
business contracts
 Violates the right of competitors to a level playing
field
Roots of unethical behaviour

 Some generalizations can be made – no simple answer
 Business ethics are linked to personal ethics
o generally accepted principles of right and wrong governing
the conduct of individuals
o Personal ethical code guiding our behaviour comes from
sources e.g. parents/school/religion/media  this
influences how we behave as business people
 4 Potential causes
 1. Studies show that sometimes managers do not consider the
ethical dimension to business decision making
o E.g. Nike’s subcontracting decisions were based on
economic logic
 2. Some business cultures de-emphasize business ethics and
focus on the economic soundness of decisions
o HP introduced the HP Way, which is a setoff values which
focuses on ethical components
 3. Linked to the second cause are unrealistic performance goals
that can only be attained by unethical actions
 4. Leadership: leaders establish organisational cultures
Foster ethical behaviour through

 Ethical issues should be routinely inserted into business decisions
 Hiring and promotion
o Build and foster a workforce with strong personal ethics
through hiring and promoting such people
o Difficult to judge personal ethics and bad ethics are usually
hidden  check through psychometric tests and letters of
reference
 Organisational culture and leadership
o Culture that places a high value on ethical behaviour
o Three important things

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 Draft a code of ethics: formal statement of ethical

priorities that sends a clear message about
appropriate ethics to all employees and managers
 Leaders give life and meaning to the code of ethics
by acting on it
 Some companies go further and hire firms to
audit consistency with ethical codes
 Building a culture that places high value on ethical
behaviour requires incentive and promotional
systems that reward people who engage in ethical
behaviour and sanction those who do not
 Decision-making processes
o Judging whether decisions are ethically acceptable by
answering predetermined questions
 Ethics officers
o Ensure that all employees are trained to be ethically aware
when entering the business decision-making process and
that the code of ethics is adhered to
Strong corporate governance

 Required to ensure managers and employees adhere to ethical
norms and do not engage in self-dealing or information
manipulation
Importance of moral courage

 Enables managers to walk away from a decision that is profitable
but unethical  fosters ethical behaviour, integrity and honesty

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External analysis
 Starting point of strategy formulation is the analysis of forces
that shape competition in the industry in which a company is
based
 Gain an understanding oft he opportunities and threats
 Opp: arise when a company can take advantage of
environmental conditions to formulate and implement strategies,
leading to higher profitability
 Threats: conditions in the external environment that endanger
the integrity and profitability of a business
Industry
 Group of companies that satisfy the same basic customer needs
and offer close substitutes
 Closest competitors/rivals serve the same basic customer needs
 Starting point of external analysis is to identify the industry that
a company competes in (e.g. softdrinks: Pepsi, Coke,
Schweppes)
o To do this, managers must look at the basic customer
needs their company is serving, adopting a customer
rather than a product-oriented view
 Secondly, competitive forces must be analysed to identify
opportunities and threats
 Michal Porter’s 5 forces framework helps with this manalysis
 Five forces that shape competition:

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 the stronger each of these forces, the more limited the ability of
established companies to raise prices and earn greater profits
 within Porter’s forces, a strong competitive force can be regarded
as a threat as it depresses profits
 Weak competitive force can be seen as an opp as it allows firms
to earn greater profits
 Strength of the five forces may change over time as industry
conditions change
 Important to observe and respond to these changes by adapting
strategies accordingly
 Possible to alter the strength of one or more forces to the firm’s
advantage through strategic choices
Risk of entry by potential competitors

 Potential competitors: not currently competing in an industry but
have the capability to do so e.g. tech advancements allowed TV
companies to become potential competitors to traditional phone
companies

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 High risk of entry makes it more difficult for incumbents (ie

established firms) to profits market share and generate profits

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 Risk of entry is a function of barriers to entry ie factors that

make entry costly
o e.g. economies of scale: unit costs fall as firms expand
output
o brand loyalty: preference for products of established firms
o absolute cost advantages: low cost structures enjoyed by
incumbents that new entrants cannot expect to match
 come from superior production operation/processes
due to experience or patents, control over production
inputs or access to cheaper funds as existing
companies represent lower risks than new entrants
o customer switching costs: arise when it costs a cusomter
time, energy and money to switch products offered by one
established company to those of new entrants
o government regulation are often major entry barriers to
many industries
 - high barriers are associated with higher entry costs,
weakening this competitive force
 it is in the interest of established firms to pursue strategies that
raise entry barriers to secure profits
 Potential entrants have to find strategies to circumvent barriers
to entry
o Research suggests that it is best to go after customers who
are poorly served by incumbents and use new distribution
channels and business models
Rivalry among established companies

 Refers to the competitive struggle between companies to
increase market share
 Competitive struggle can be fought using price or non-price
variables, decing, advertising, promotion, after-sales service and
support
 More intense rivalry implies lower prices or more spending on
non-price competitive weapons (or both)
 Intense rivalry lowers prices and raises costs, squeezing profits
 Less intense rivalry: potential opportunity to raise prices or
reduce spending on non-price competitive weapons – raise
profits

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 Intensity of rivalry is largely a function of 4 factors

o Industry competitive structure
 Refers to the number and size distribution of
companies in the industry (determined at the
beginning of industry analysis)
 Fragmented
 large number of small to mid-sized companies
 low entry barriers & products are hard to
differentiate
 often results in boom-and-bust cycles as
industry profits rise and fall
 when demand is strong new entrants flood the
market, creating excess capacity and causing
companies to cut prices to use their spare
capacity
 attempts to differentiate can exacerbate this
tendency, resulting in price wars, depressing
industry profits and forcing some firms out of
the industry

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the more commodity-like an industry’s product

is, the more vicious the price war will be
 The bust continues until overall industry
capacity matches demand and then prices may
stabilise again
 Fragmented industry structures constitute a
threat rather than an opp as most booms are
rather short lived
 Difficulty to differentiate leads to a focus on
cost reduction
 Consolidated industry
 domination by a small number of large
companies
 companies are interdependent as one firm’s
competitive actions directly affect the market
share of its rivals and thus their profitability
 Actions “force” reactions and responses
 Rivalry increases as companies try to undercut
prices or offer more value, lowering profits e.g.
airline fare wars
 Threats can be reduced by following the
dominant company in the undstry
 Careful to engage in tacit rather than direct
collusion, which is illegal
o Demand conditions
 Growing demand moderates competition as it
provides greater scope for companies to compete for
customers
 Companies can sell more without taking away market
share from one another, leading to increasing
industry profits
 Declining demand forces companies to fight to
maintain market share and revenues
o Cost conditions

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High fixed costs, that must be borne before the firm

makes sales, means that profitability is highly
leveraged to sales volume, leading to the desire to
grow volume (through lower prices or investment in
non-price competitive measures) which can spark off
intense competition
o Height of exit barriers to the industry
 Economic, strategic and emotional factors that
prevent companies from leaving an industry
 High exit barriers can cause companies to become
locked into an unprofitable industry with
static/declining demand
 Leads to excess productive capacity, leading to more
intense rivalry and price competitions in order to
obtain customer orders required to use idle capacity
and cover FC
 E.g. high capital investments, high FC of exit e.g.
payment of health benefits and pensions, emotional
attachments to the industry
 E.g. the need to maintain a nationwide network is an
exit barrier for the express mail and parcel delivery
industry
Bargaining power of buyers

 Ability of buyers to bargain down prices charged by companies in
the industry or raise the costs by demanding better product
quality/service
 Powerful buyers are a threat as they can therefore squeeze out
profits
 Buyers are powerful when
o the industry is fragmented and there are only a few large
buyers,
o when they purchase in large quantities and can bargain for
price reduction,
o when switching costs are low so that buyers can play off
the supplying companies against each other to force down
prices,

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o when buyers can threaten to enter the industry and

produce the products themselves
o e.g. auto component supply industry, whose buyers are
large automobile manufacturers like GM
 relative power of buyers and suppliers tends to change in
response to changing industry conditions as is the case with
increasing buyer power in the pharmaceutical industry
Bargaining power of suppliers

 Suppliers provide inputs to the industry
 Refers to the ability of suppliers to raise input prices or raise
costs in other ways e.g. by providing poor quality inputs or poor
services
 Powerful suppliers can raise costs and hence lower industry
profits, making them a threat
 Powerful when
o They sell vital products with few substitutes
o Their profitability is not significantly affected by the
industry purchases ie the industry is not an important
customer
o Companies in the industry would face large switching costs
when moving to a different supplier
o Suppliers can threaten to enter the industry and use their
inputs to produce the products themselves
o Companies in the industry cannot threaten to enter their
suppliers’ industry
o E.g. personal computer industry is heavily dependent on
Intel, the world’s largest supplier of microprocessors for
PCs
Threat of substitute products

 Products of different businesses/industries that can satisfy
similar customer needs
 E.g. coffee, tea and soft drink industry all serve customer needs
for non-alcoholic drinks
 Existence of close substitutes is a strong competitive threat as it
limits the price an industry can charge and thus their profitability

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Conc
 Systematic analysis of industry forces using this framework is a
powerful tool that helps managers to thing strategically
 Important to realise that competitive forces often affect one
another and all must be considered
Strategic groups within industries

 Companies differ from each other regarding how they
strategically position their products in the market in terms of
distribution channels, chosen target market segments, product
quality, customer service, pricing policy, advertising policy and
promotions
 Due to these differences, it is possible to observe companies that
pursue similar strategies, referred to as strategic groups
 E.g. pharmaceutical industry consists of the proprietary strategic
group (invests highly on R&D  high risks and returns) and
generic drug strategic group (focuses on the manufacture of
generic drugs, low costs/risks and returns)
Implication of strategic groups

 Affects industry opps and threats
 1. Customers tend to view products offered by firms in the same
strategic group as direct substitutes
o A firm’s closest competitors which pose the most
immediate threat to profitability are thus those in its own
strategic group
 2. Each strategic group may face a different set of opps and
threats due to varying strengths of competitive forces
Role of mobility barriers

 The two issues cause some strategic groups to be more desirable
than others due to favourable/weaker competitive forces that
lead to larger opportunities
 There are mobility barriers: Within-industry factors that inhibit
the movement of a company between strategic groups
o E.g. entry and exit barriers
 Competing in a more favourable strategic group is therefore
difficult

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 Managers must determine if it is cost-effective to overcome

mobility barriers
Industry life cycle analysis

 the strength of competitive forces changes as an industry
evolves, especially the forces of risk of entry and rivalry among
existing firms
 Industry evolution and its effects on competitive forces can be
analysed using the industry life cycle model
 Five sequential stages in industry evolution
 Managers should anticipate how the strength of competitive

forces will change over the life cycle and to formulate strategies
that take advantage of opportunities that arise and that counter
emerging threats
Embryonic industries
 Just beginning to develop e.g. nanotech today

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 Slow growth due to buyers’ unfamiliarity, high prices due to the

lack of scale economies, poorly developed distribution channels
 Barriers to entry tend to be based on access to key tech know-
how, not cost economies or brand loyalty
 Rivalry is based on educating customers, opening up distribution
channels and perfecting product design rather than on price
Growth industry
 First-time demand is expanding rapidly as many new customers
enter the market
 Customers become familiar with the products and prices fall due
to experience and scale economies; distribution channels develop
 E.g. US cellular telephone industry in 1990s
 Low barriers to entry, especially in the early growth stage,
meaning that the threat from potential competitors is highest at
this point
 Paradoxically high growth usually means that new entrants can
be absorbed without marked increase in rivalry intensity due to
rapid demand growth, hence, rivalry tends to be relatively low
 Companies can expand TR and profits without taking away
market share from one another
 Strategically aware firms prepare themselves for the intense
competition in the industry shakeout during this phase
Industry shakeout
 Demand approaches saturation levels, causing rivalry to become
intense
 Companies that have become accustomed to rapid growth
continue to add capacity but demand slows, leading to excess
productive capacity
 To reduce this capacity, firms often cut prices, potentially leading
to price wars and causing inefficient companies to leave the
industry and deter any new entry
 Focus on cost minimisation and the development of brand loyalty
to survive the shakeout
Mature industries

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 Market is totally saturated, demand is limited to replacement

demand and growth is low (coming from population expansion or
an increase in replacement demand) or zero
 Firms that have survived the shakeout have brand loyalty and
efficient low-cost operations
 Barriers to entry increases, threat of entry decreases 
opportunity to raise prices and profits
 Competition for market share develops, driving down prices –
potential price wars as happened in the airline industry
 Due to the shakeout, most mature industries have consolidated
and become oligopolies
 Recognise their interdependence and avoid price wars
 Stable demand allows price leadership agreements, reducing
rivalry intensity and allowing greater profitability
 General economic slumps can depress industry demands and can
cause such agreements to break down, leading to periodic price
wars
Declining industries
 Growth becomes negative due to tech substitution, social and
demographic changes and/or international competition
 Degree of rivalry typically increases
 Depending on the speed of decline and the height of exit
barriers, competitive pressures can become as fierce as in the
shakeout stage
 Falling demand leads to excess capacity, sparking price wars
 The larger exit barriers, the harder it is for companies to reduce
capacity and the greater is the threat of severe price competition
 managers must tailor strategies to changing industry conditions!

 Must learn to recognise industry evolution stages and forecast
when they happen
 This is also true at the level of strategic groups, as stage shifts
may vary in pace among different strategic groups
The macro-environment

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 Broader economic, global, technological, demographic, social and

political context in which companies and industries are
embedded
 Changes in macro forces can directly affect one or all of Porter’s
forces, altering their relative strength and industry attractiveness
Macroeconomic forces
 Most importantly economic growth rates, interest rates, currency
exchange rates and price inflation affect the well-being of an
economy
 Econ growth: higher customer expenditures ease competitive
pressures
 Interest rates: important whenever customers routinely borrow
money to finance product purchases – falling rates represent an
opportunity
 Currency exchange rates: define relative values of national
currencies and affect product competitiveness in the global
marketplace
o Low currency reduces the threat from foreign competitors
and creates opportunities for increased sales overseas
 Price inflation can destabilise the economy, slowing down
economic growth and leading to higher interest rates
o Key characteristic: makes future planning less predictable
o Uncertainty lowers investments, leading to economic
slumps  high inflation is a threat
Global changes
 Barriers to international trade and investment tumbled
 More countries enjoy sustained econ growth
 Emerging economies create large new markets for goods –
opportunity to grow profits by entering these nations
  easier to enter foreign nations and for foreign nations to enter
domestic economies
 Creation of a much larger and more competitive global market
place creates a myriad of threats and opportunities
Tech forces
 Increasing pace of tech change since WWII

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 Unleashed a process called a perennial gale of creative

destruction , referring to the power of tech to make established
products obsolete and to create many new product possibilities
 Tech is both an opportunity and a threat
 It can affect the strength of barriers to entry and thus radically
reshape industry structures
 E.g. the internet reduces customer switching costs, increasing
rivalry intensity and lowering prices and profits
Demographic forces
 Changes in the characteristics of a population like age, gender,
race, social classes
 Presents managers with opportunities and threats
 Most industrialised nations experience aging population due to
falling birth and death rates, raising opportunities for firms that
cater to older people and to home health care and recreation
industries
Social forces
 Refer to the way in which changing social values affect
industries, creating opportunities and threats
 Trend toward greater health consciousness allowed PepsiCo to
gain market share from its rival Coca-Cola by being the first to
introduce diet colas and fruit-based soft drinks
 At the same time: threat for the tobacco industry due to greater
awareness of negative health implications of smoking
Political/legal forces
 Outcomes of changes in laws and regulations
 Political processes shape laws, which constrain business
operations and can create both opportunities and threats
 Deregulation and privatisation led to more intense competition
 Governments may also provide direct financial support to
companies that operate in what they perceive to be important
infant industries
 May impose trade restrictions to reduce competitive forces in the
domestic market

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11.03.2015
Functional level strategy - building a competitive advantage

 Not only industry structures determine company performance
but
 Within industries, some companies are more profitable than
others as they are more efficient, have higher product quality or
are more innovative or responsive to customers e.g. Toyota
consistently outperformed GM for most of the last 20 years
 Directed at improving the effectiveness of operations within a
company e.g. manufacturing, marketing, materials management,
product development, customer service
 4 generic building blocks of competitive advantage
o efficiency
o quality
o innovation
o customer responsiveness
 for one company to outperform another, it must have unique
strengths/distinctive competencies in at least one of these
building blocks
Competitive advantage: value creation, low cost and differentiation

 Def.: above-average profitability (for several years) e.g. Walmart
has had a sustained competitive advantage in the US retail
industry for decades
 Profitability is determined by the value customers place on goods
(as this determines prices) and the company’s costs of
production
 Prices charged are typically less than the value placed on that
good by the average customer, the difference of which is
captured in the consumer surplus  possible due to competition
with other firms and the inability to perfectly segment the
market and charge each customer according to their willingness
to pay
 Profit rate is greater as costs decrease relative to prices
 Difference between value and price is partially determined by the
intensity of competition – the lower the intensity, the higher the
price that can be charged relative to value
 Value created is captured by the difference between value and
costs

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 Value creation stems from lower costs or higher value due to

superior design/functionality/quality, making them willing to pay
higher prices
 Concept of value creation lies at the heart of competitive
advantage
 E.g. Toyota and GM  Toyota has the best reputation for quality
in the industry, leading to higher utility and allowing it to charge
5-10% higher prices than GM for equivalent cars. In addition, it
has a lower cost structure due to superior labour productivity
o Together, this leads to greater profitability per vehicle
Superior value creation

 Requires a greater gap between perceived value and production
costs than the gap attained by competitors
 Michael Porter argued that low cost and differentiation are two
basic strategies for creating value
 Porter argues that firm that create superior value attain a
competitive advantage
Mention ethical dilemmas
4 factors build competitive advantage (low costs and differentiation)

Superiority in
 efficiency
 quality
 innovation
 customer responsiveness
These factors are interrelated e.g. superior quality can lead to

superior efficiency while innovation can positively impact all others
Efficiency
 The quantity of inputs that it takes to produce a certain output 
efficiency=outputs/inputs
 The more efficient, the fewer inputs are required to produce a
given output
 Efficiency lowers cost structures, leading to the attainment of a

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 Two of the most important components of efficiency are

employee productivity (measured by output per employee e.g.
GM 30h/car, Ford 25h/car) and capital productivity (measured by
output per unit of invested capital) all other things equal
 Concept of productivity also extends to R&D spending for
example e.g. how many new drugs are developed from R&D
investments
 High productivity=high efficiency=low costs
Quality as excellence and reliability

 A product features a number of attributes e.g. performance,
durability, style, design, reliability
 Superior quality means that customers perceive that the
attributes of a product provide them with higher value than
attributes of products sold by rivals
o e.g. Rolex watches are perceived to be superior in quality
due to better design/styling/performance/reliability,
meaning that Rolex has differentiated its watches by these
attributes
 Product quality is measured in regards to excellence and
reliability
o Quality as excellence perspective
 Important attributes are its aesthetic appeal,
features and function, as well as the level of service
regarding delivery
 When excellence is built into a product offering,
consumers have to pay more e.g. Nordstrom boots
vs Walmart boots
o Quality as reliability perspective
 The product consistently does the job it was designed
for well
 Increases the value a consumer gets (as with
excellence) and thus the price that can be charged
 e.g. Toyota’s cars have the highest reliability ratings
in the automobile industry
o Quality position of a product can be traced against these
two dimensions

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o Quality is equally relevant to products and services e.g.

banking services
o Twofold impact of high product quality on competitive
advantage
 Increases the value, giving the firm the option to
charge higher prices
 Greater efficiency and lower unit costs are associated
with reliable products
 Less employee time is wasted making defective
products/providing substandard services
  high product quality enables a company to
differentiate its product and if the product is also
reliable, it additionally lowers costs
Innovation
 Def. Act of creating new products or processes
 Two main types: product and process innovation
 Product innovation
o Development of new products or products with superior
attributes than existing ones, allowing the firm to charge
higher prices and creating value
 Process innovation
o Def: Development of a new process for
producing/delivering products, creating value through
lowering production costs e.g. Toyota’s lean production
system consisting of just-in-time inventory systems boosts
productivity  cost-based competitive advantage
 Important building block of comp advantage
 Competition can be viewed as a process driven by innovations,
as they lead to great cost reductions and/or uniqueness which
allows for differentiation
Customer responsiveness
 For superior responsiveness a firm must do a better job than
competitors of identifying and satisfying customer needs
 More value will then be attributed to the products

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 Improving the quality and innovation of a product offering is

consistent with achieving responsiveness, as is innovation and
developing new products with new features
 Another factor: need to customise goods/services to unique
demands of individual customers/groups e.g. customising cars
 Another factor: customer response time: time it takes for a good
to be delivered/ a service to be performed – e.g. waiting time in
checkout lines in supermarkets
o Surveys show strong correlations between dissatisfaction
and slow response times
 Sources of enhanced responsiveness: superior design, service
and after-sales support  all contribute to differentiation, leading
to brand loyalty and the ability to charge higher prices e.g.
willing to pay extra for express mail
Value chain
 Def.: Company is a chain of activities for transforming inputs into
outputs valued by customers’ value
 This process consists of primary and support activity, each of
which adds value
 Different company functions can help drive down costs and
increase the perception of value through differentiation
 Primary activities
o Def.: have to do with the design, creation and delivery of
the products, its marketing, and its support and after-sales
service
o Can be broken down into four functions
o R&D
Concerned with the design of products and
production processes
 Superiority in design of products and production
processes can increase functionality and value as
well as lower costs
o Production
Concerned with the creation of a good or service
Goods – refers to manufacturing, services – refers to
the delivery of the service
o Marketing and sales

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Can create value through brand positioning,

advertising  can increase perceived value and
create a favourable impression
 Can also create value by discovering customer needs
and communicating them back to the R&D function,
which can design products that better match those
needs
o Customer service
 This relates to the provision of aster-sales service
and support
 Can create superior utility by solving customer
problems and supporting them after they made
purchases
 Support activitities
o Def.: provide inputs that allow the primary activities to
take place
o Can be broken down into four functions
o Materials management – logistics
Def.: controls the transmission of physical materials

through the value chain, from procurement
(Beschaffung) through production and into
distribution
 The efficiency can significantly lower costs, thus
increasing value e.g. Walmart has a very efficient
materials management setup, eliminating the need
for large inventories
o Human resources
 Can help to create value by ensuring that skilled
people perform the firm’s value-creation activities
effectively
 Responsible to ensure people are adequately trained,
motivated and compensated
 Well-functioning HR departments can raise employee
productivity and improve customer services, lowering
costs and raising utility
o Information systems

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Electronic systems for managing inventory, tracking


sales, pricing products, selling products, dealing with
customer service inquiries etc.
 They are key to improving the efficiency and
effectiveness with which a company manages its
other value-creation activities e.g. Walmart uses
them to alter the way it does business
o Company infrastructure
 Context within which all other value-creation
activities take place, referring to the organizational
structure, control systems and company culture
 Top management considerably shapes these aspects
and should thus be viewed as part of company
infrastructure
 Strong leadership can positively affect the
performance of all other value-creation activities
Functional strategies and the generic building blocks of competitive

advantage
Functional level strategies are used to improve efficiency, quality,

innovation and customer responsiveness
Focus on a limited number of important functional level strategies

(too much to discuss all)
1. Increasing efficiency

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 R&D and efficiency

o Simplify the design of a product or reduce the umber of
parts it contains
o Decrease the required assembly time, increasing employee
productivity, lowering costs and raising profitability
o It is necessary for production and R&D personnel to work
closely together (in cross-functional teams) to jointly
identify and solve problems
 Production and efficiency
o Increase productivity of capital and labour in the
production function by pursuing economies of scale
o Major source of economies of scale is the ability to spread
FC over a large production volume
 FC = costs that must be incurred whatever the level
of output
 E.g. Microsoft can increase sales rapidly enough that
FC can be spread over large unit volumes and
substantial scale economies can be realised

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o Another source of scale economies is that large companies

can achieve a greater division of labour and specialisation
 Leads to higher skills at performing particular tasks,
raising productivity
 E.g. Ford’s Model T car which was produced using
mass production  car manufacturing costs fell from
$3,000 to $900
o Boost efficiency and reduce costs through maximising
learning effects
 Learning by doing is key
 Moreover, management learns over time how to best
run new operations
 Labour productivity and management efficiency
increase over time
 Also relevant for services e.g. learning effects are at
work in surgery
o Lean production aka flexible manufacturing technology
 A range of manufacturing technologies designed to
reduce setup times for complex equipment, increase
the use of individual machines through better
scheduling and improve quality control at all stages
of the manufacturing process
 Allows the production of a wider variety of products
than the mass production of a standardised output
 Enables the company to customise its product
offering while maintaining high efficiency and low
unit costs
 Mass customisation: Ability to reconcile low costs and
differentiation through customisation, which were
once thought to be incompatible
 Marketing and efficiency
o Marketing strategy: the position a company takes
regarding its pricing, promotion, advertising, product
design and distribution
o Attaining economies of scale and learning effects can be
facilitated by aggressive pricing, promotions and
advertising, all of which build sales volume rapidly

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o Marketing can be used to reduce customer defection rates,

which is the %age of a company’s customers who defect
every year to competitors
o Determined by customer loyalty, which is a function of
customer satisfaction
o Customer acquisition costs entail certain one-time fixed
costs for advertising, promotions etc, and low customer
defection rates allows a company to amortise its customer
acquisition costs (one-time fixed costs for advertising,
promotions) and achieve a lower overall cost structure e.g.
Verizon moved customer toward 2 year contracts and
works to build brand loyalty – it has the lowest customer
defection rate in the industry with 17%
 Materials management (logistics) and efficiency
o Materials and transportation costs usually account for 50-
70% of revenues for manufacturing companies, so small
cost reductions can substantially affect profitability
o Improving efficiency of this function often requires the
adoption of a just-in-time JIT inventory system, lowering
inventory holding time and costs by having components
arrive at a manufacturing plant JIT to enter the production
process
o Higher inventory turnover rates reduce holding costs like
storage costs and the need for working capital e.g.
Walmart can replenish the stock in its stores at least twice
a week
o A Drawback of JIT systems is that they leave firms without
buffer stock of inventory
o Buffer stocks are expensive to store, however, they help
companies to overcome input shortages due to supplier
disruptions and to respond quickly to demand increases
o Nonetheless, there are ways around these limitations e.g.
sourcing inputs from multiple suppliers
 HR strategy and efficiency
o Employee productivity is a key determinant of efficiency,
cost structure and profitability

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o Considerable attention to hiring strategy, which should be

consistent with the firm’s own internal organization, culture
and strategic priorities e.g. self-reliant and goal oriented
employees versus positive team-players
o Organising the workforce into self-managing teams is
popular.
 In such teams, 5-15 members who produce an entire
product or undertake an entire task coordinate their
own activities including hiring, training, work and
reward decisions.
 Team members learn all tasks and rotate jobs,
increasing flexibility and allowing them to fill in for
absent co-workers and take over managerial duties.
 Positive response from greater autonomy boosts
motivation & productivity
 Reportedly causes productivity to rise by 40% or
more and substantially increase product quality
 The consequent flattening of the organisational
hierarchy further lowers the cost structure
o Pay for performance compensation system also boosts
efficiency through raising employee productivity
 Since cooperation is usually necessary to realise
productivity gains, pay is often linked to group or
team –rather than individual- performance
 This creates a strong incentive to cooperate,
facilitating teamwork
 Information systems and efficiency
o With the rapid spread of computers, and the growth of
internet and wireless technology, information systems are
key to achieve operating efficiencies and lower cost
structures
o Information systems affect all other company activities e.g.
web-based information systems reduce coordination costs
by automating customer and supplier interactions e.g.
banks move customer accounts and support functions
online, reducing the need for customer service
representatives etc
 Infrastructure and efficiency

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o Structure, culture, leadership style and control system

determine the context within which all other value creation
activities take place
o An appropriate infrastructure can promote cooperation
among different function to achieve efficiency goals 
cross-functional cooperation is required for superior
efficiencs
o Strategic leadership by functional and general managers is
especially important in building a firm-wide commitment to
efficiency by articulating a vision for all functions to
improve efficiency
2. Raising quality
 Quality consists of 2 dimensions (reliability and excellence) –
high quality products are reliable and perceived to have superior
attributes
 Superior quality has 2 advantages: allows for differentiation and
eliminates defects or errors, thus increasing efficiency and
lowering the cost structure
 Attaining superior reliability
o 1. Important that senior managers engage in quality
improvement programs
 Most managers raise reliability by using the Six
Sigma quality improvement methodology, which
comes from the total quality management TQM
philosophy
 The philosophy states that higher quality lowers
costs due to better use of time and materials,
improving productivity. It also leads to a higher
market share, allowing the firm to raise prices and
increasing profitability
o 2. If programs are successfully, individuals must be
identified to lead the program
 Under the Six Sigma methodology, exceptional
employees are identified and put through a black belt
training course to become internal consultants and
project leaders
 Successful black belts are promoted

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o 3. Quality improvement requires the identifications of any

defects as well as their sources, in order to make
corrections. Need to work closely with production and
materials management
 Tracing defects to sources is facilitated by reductions
in production sizes for manufactured products, which
simultaneously decreases waste by lowering the
number of defective products
 Lean production can be used to reduce lot sizes
without raising costs, and JIT inventory systems also
play a part as they cause defective inputs to be
spotted quickly as inputs are not stored a long time
before use. The problem can be traced to the supply
source and corrected
o 4. Create a metric that can be used to measure quality
o 5. Set a challenging quality goal and create incentives for
reaching it
 under Six Sigma programs the goal is 3.4 defects per
million units and link pay to the goal
o 6. Incorporate ideas of shop floor employees into a quality-
improvement programs
o 7. Work with suppliers to improve input quality
o 8. Design products with fewer parts as this allows for less
mistakes
o implementing quality-improvement methodologies requires
firm-wide commitment and strong cooperation among
functions e.g. R&D must cooperate with production to
design products that are easy to manufacture
 Improving quality as excellence
o In addition to reliability, products have other attributes like
form, features, performance, durability and styling
o quality as excellence can be created by emphasizing
attributes of a service associated with the product,
including prompt delivery, easy installation etc
o high quality on the excellence dimension means that the
offering is seen as superior to that of rivals
o requires key actions by managers

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 they must use marketing intelligence to understand

which attributes are most important to customers
 design its products and associated services in a way
to embody these attributes in the product
 requires close coordination between marketing and
product development, as well as involving HR in the
employee selection and training
 decision which of the attributes to promote and how
to best position them in consumer minds  focus on
one or two central attributes to convey a focused
message e.g. safety and durability for Volvo
 important to realise that competition does not stand
still!!
3. Increasing innovation
 most important source of competitive advantage in many ways
 can result in new products or improve the quality/attributes of
existing products, raising utility, or reducing the production costs
 Innovation allows it to differentiate products – higher price, and/
or lower its cost structure
 Competitors will imitate successful innovations and often
succeed, which is why the maintenance of a competitive
advantage requires a continuing commitment to innovation
 However, at the same time the failure rate of innovative new
products is high and only 10-20% of major &D projects give rise
to commercial products e.g. Apple Computer’s Newton was a
failure
 5 explanations for failure
o demand is inherently uncertain – unsure whether the new
product has tapped an unmet customer need
 good market research can reduce but not eradicate
this uncertainty
o technology is poorly commercialised and the product is not
well adapted to customer needs
o poor positioning strategy, which refers to the set of options
chosen for the four main marketing dimensions price,
distribution, promotion/advertising, and product features
o insufficient demand

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o slow to get products to the market due to slow “cycle

time”, which refers from the time between initial
development and final marketing
 increases the probability that someone else will beat
the company and gain a first-mover advantage
 Reducing innovation failures
o Ensure a tight integration between R&D, production and
marketing
o Cross-functional integration can help to ensure that
Product development projects are driven by customer
needs
 New products are designed for ease of manufacture
 Development costs are kept in check
 Time to market is minimised
 Close integration between R&D and marketing is
achieved to ensure projects are driven by customer
needs
o Customers, particularly their unmet needs, are a primary
source of new product ideas
o The marketing division is the point of contact with clients,
meaning that it can provide valuable information
o Integration R&D is necessary as the product should be
properly commercialised
o Integrating the production division ensures cost
minimisation and high product quality – easy design, little
room for defects
o Best achieve cross-functional integration through cross-
functional product development teams, which have the
objective to take a product from the development stage to
market introduction
o Product development team functions effectively when
 Heavyweight project manager with a high status and
the authority and authority to get financial and
human resources that a project team needs to
succeed should lead the team and be dedicated
entirely/primarily to the project
 Team should be composed of at least one high-
standing member from each key function

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 Team members should be physically co-located to

create a sense of camaraderie and facilitate
communication
 Clear goal and plan
 Develop own processes for communication and
conflict resolution
 Characteristics: 100% dedication to the project and
team players willing to cooperate
Superior customer responsiveness

 Important differentiating attribute that can help build brand
loyalty
 Taking steps to innovate, improve production efficiency and
product quality are consistent with superior customer
responsiveness
 To attain this goal there are two prerequisites, namely a tight
customer focus and an ongoing effort to seek better ways to
satisfy those needs
 Customer focus
o First step: identify needs and make the whole company
focus on the customer through strong leadership and
employee commitment to serve customers e.g. mission
statement that puts the customer first and appropriately
training employees towards satisfying customers and
rewarding them accordingly
 Satisfying customer needs
o Beyond innovation, quality and efficiency, firms can raise
satisfaction if they differentiate their products by
customisation and reducing the time it takes to satisfy
customer needs
o Customisation entails varying the features of a
good/service to tailor it to the unique needs of groups or
individuals
o Flexible manufacturing technologies made this
customisation possible to a much greater extent than was
feasible in the past without experiencing large increases in
costs

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o Quick response to customer demands helps to build brand

loyalty and is achieved through
 a marketing function that quickly communicates
customer requests to products
 production and materials management functions that
quickly adjust production schedules to meet
unanticipated customer demand
 information systems that help production and
marketing in this process
Distinctive competencies and competitive advantage

 If successful in efforts to improve efficiency, quality, innovation
and customer responsiveness, costs may be lowered and/or
product offerings may be differentiated better, providing the
basis for a competitive advantage
 Distinctive competency: unique, firm-specific strength that
enables a company to better differentiate its products and or
achieve substantially lower costs than its rivals, thus gaining a
competitive advantage  can relate to any value chain activity
 Distinctive competencies arise from 2 complementary sources:
resources and capabilities
 Resources
o Financial, physical, social or human, tech and
organisational factors that allow a company to create value
for its customers
o Can be divided into tangible (physical) and intangible
(nonphysical) resources (which are created by managers
and other employees)
o The more firm specific and difficult to imitate is a resource,
the more likely a company is to have a distinctive
competency e.g. Polariod’s tech know-how regarding
instant photography
o The distinctive competency only disappears once a process
can be imitated e.g. patents expire, or a superior
technology is developed e.g. digital photography
o Resources that lead to a distinctive competency are
valuable, thus helping to create strong demand  becomes
less valuable after superior technologies are introduced

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 Capabilities
o Refer to a firm’s skills at coordinating resources and
putting them to productive use
o Skills reside in an organisation’s rules, routines, procedures
and in the way in which decisions are made and internal
processes are managed to achieve organisational
objectives
o Capabilities are the product of a firm’s organisational
structure, processes and control systems, specifying how
and where decisions are made, what behaviour is rewarded
and defining cultural norms and values
o Intangible
 Resources and capabilities are distinct:
o firm-specific and valuable resources may not lead to
distinctive competencies if the firm is unable to use
resources effectively
o Unique capabilities that no rivals have may lead to distinct
competencies without firm-specific and valuable resources
 Distinctive competencies stem from
o Firm-specific and valuable resource in combination with the
capabilities to take advantage of that resource
o Firm-specific capability to manage resources
 Distinctive competencies are strongest when firms possess both
firm-specific and valuable resources and firm-specific capabilities
to manage those resources

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 Reciprocal relationship between strategies, distinctive

competencies and competitive advantage, in which distinctive
competencies shape strategies and strategies help to build and
create distinctive competencies
 Strategies build superior efficiency/quality/innovation/customer
responsiveness
Durability of competitive advantage

 Competitive advantage leads to superior profitability, signalling
to rivals that the firm has some valuable distinctive competency
 Competitors will try to identify and imitate that competency and,
if successful, compete away superior profitability
 Speed at which this process occurs depends on the height of
barriers to imitation
o Factors that make it difficult for a competitor to copy a
company’s distinctive competencies
o The greater the barriers to imitation, the more sustainable
a firm’s competitive advantage
o Differ in regards to imitating resources or capabilities
 Easiest distinctive competencies to imitate are firm-
specific and valuable tangible resources e.g. PPE 
visible and can be purchased on the market e.g. GM
quickly imitated Ford’s assembly line manufacturing
process
 Intangible resources can be more difficult to imitate,
that is particularly true of brand names which
symbolise a firm’s reputation and are associated with
a certain level of quality
 marketing know-how is an important intangible
resources that is easily imitated as marketing is
visible to competitors
 tech know-how is immune to imitation due to the
patent system, providing 20-years of exclusive
production rights to the inventor HOWEVER it is
possible to invent around patents
 produce a functional equivalent that does not
rely on the patented tech

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study: 60% of patented innovations were

successfully invented around in 4 years
 thus, tech-know-how based competencies can
be relatively short-lived
 imitating capabilities is more difficult as they are
based on the way in which decisions are made and
processes managed deep within a company, making
it difficult for outsiders to discern
 competitors could gain insights into company
operations through poaching; however, competencies
are the product of the interaction of numerous
employees not just single individuals
o Competitive advantage is more secure when based upon
intangible resources and especially capabilities, compared
to tangible resources
o Imitating capabilities requires the imitator to change its
own internal management process, which is difficult due to
organisation inertia
o Yet, a company is never totally secure due to the
possibility to invent around the source of competitive
advantage
o Once dominant firms like IBM declined due to rivals which
developed new and better ways of competing, nullifying
the competitive advantage of the initial dominant firms
Grove, former Intel CEO stated: only the paranoid survive  need
to always develop new ways of doing business to keep up with
competitors

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11.03.2015
 Business level strategy and competitive positioning 144-160: 16
 Encompasses the business’ overall competitive theme and the

way it positions itself in the marketplace to gain a competitive
advantage by using business-level strategy
o Def.: the plan of action that strategic managers adopt to
use a firm’s resources and distinctive competencies to gain
a competitive advantage over its rivals in a
market/industry
o Based on customer needs (what), groups (who) and
distinctive competencies (how are they satisfied)
 and the different positioning strategies that can be used in
different industry settings
o Cost leadership, differentiation, focus on a niche/industry
segment, or a combination of these
Customer needs and product differentiation

 Customer needs: desires, wants or cravings that can be satisfied
by the characteristics of a product/service
 Product differentiation: the process of creating a competitive
advantage by designing products/services to satisfy customer
needs
o Some differentiation is necessary to attract customers and
satisfy a minimal level of need
o Some companies differentiate their products to a much
greater degree than others & endow their product with
some unique attribute  competitive edge
 Uniqueness may be related to physical characteristics
e.g. quality or reliability, or it may lie in the appeal to
psychological needs e.g. prestige or status  Toyota
vs Porsche
o Others offer the customer a low-priced product without
engaging in much product differentiation
Customer groups and market segmentation

 Market segmentation is the way a company decides to group
customers based on important differences in their
needs/preferences, in order to gian a competitive advantage

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o GM groups customers according to their willingness to

spend
 3 alternative strategies for market segmentation
o not recognise different customer groups/needs and serve
the average customer
o recognise differences and make a product targeted toward
most or all of the differentiated market segments e.g.
Toyota offers family cars, luxury vehicles, trucks
o recognise the semented market and only focus on servicing
one market segment e.g. luxury-car niche chosen by
Mercedez-Benz
o The decision to provide many products tailored to market
niches improves the satisfaction of customer need, raising
demand and revenue
 However, sometimes the nature of the product or industry does
not allow for much differentiation e.g. cement, causing price to
be the main criterion that customers use to evaluate the product
 superior efficiency thus provides the competitive advantage
Distinctive competencies
 Obtained through superior efficiency, quality, innovation and
responsiveness to customers
 Business-level strategies are pursued to gain a competitive
advantage, enabling them to outperform their rivals and achieve
above-average returns
3 basic generic (relevant for all businesses) competitive approaches

that can be combined in different ways
 cost leadership
 differentiation
 focus
These generic strategies are a result of consistent choices on

product, market and distinctive competencies – these choices reinforce
each other

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Cost-leadership strategy
 Outperform competitors by producing at lower costs
 Two advantages
o Lower cost at similarly low prices increases the profitability
of the cost leader compared to its competitors
o Cost leader is better able to withstand competition when
rivalry and price competition intensified
o Thus, cost leaders tend to earn above-average profits
 Cost leadership is achieved by means of the product-market-
distinctive competency choices
 Product differentiation: low to moderate as it is expensive and
requires resources, raising costs – tries to match the level of
differentiation of rivals and not be profoundly inferior
 Market segments are usually ignored, positioning the product to
appeal to the average customer – tailoring products to the needs
of different market segments is difficult
 Distinctive competency: increase efficiency and lower costs 
develop distinctive competencies in manufacturing and materials
management is key – attempt to ride down the learning curve
o This reduces operating costs
o All functions shape their competencies to meet the cost-
leadership objective e.g. sales focuses on large stable
customer orders, HR on enhancing employee productivity,
R&D on process improvements to lower costs
 All strategic choices are made to minimise costs to sustain
competitive advantage e.g. Heinz Beans is a cost leader
Advantage/disadvantage of each generic strategy are best

discussed in terms of Porter’s 5 forces

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 Cost leader is protected from industry competitors due to lower

cost structure
 Less affected by price increases of powerful suppliers and by
lower prices demanded by powerful buyers than its rivals
 Usually requires a big market share, increasing bargaining power
over suppliers
 Substitute products are less threatening due to the ability to
lower prices
 Cost advantage constitutes a barrier to entry
 cost leaders are relatively safe as long as the cost advantage can
be maintained, however, disadvantages are:
 main danger is the ability of competitors to imitate the cost
leader’s methods or develop new strategies that lower their cost
structure e.g. tech changes, which would also eliminate learning
curve effects
 drawing cost advantage from labour-cost savings and sweat-
shops can be part of unethical behaviour and harm the
reputation
 risk of losing sight of changes in customers’ tastes due to the
focus on reducing costs
Differentiation strategy
 Achieve a competitive advantage by creating a product that is
perceived by customers to be unique in some important way,
allowing the firm to charge a premium price above the industry
average, thereby increasing revenues and gaining above-average
profits
 Premium price is substantially above that of the cost leader and
the qualities are perceived to be worth the difference  product
is priced based on the willingness to pay e.g. Merc, Rolex, Tiffany
 Product differentiation: high --> can be achieved by a focus on
o Quality
o innovation (for high-tech products)
o customer responsiveness  extensive after sales services
and product control
 e.g. BMC excels in customer responsiveness)

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 e.g. law firms charge premium prices and offer

exceptionally high levels of service with high
knowledge, professionalism and reputation
o appeal to psychological desires like prestige and status
o Firms pursuing this strategy try to differentiate themselves
on as many dimensions as possible to be more protected
from competition and widen their market appeal e.g. BMW
offers prestige, tech sophistication, reliability and good
repair services
 Market segmentation
o Generally segmented into many niches
o Broad differentiator: offers a product designed for each
market niche
o Focussed differentiator: only serve niches for which it has a
specific differentiation advantage
 Focus on the function which the competitive advantage is based
on e.g. differentiation based on R&D depends on the R&D
function
 Yet, differentiators simultaneously want to keep costs near those
of the cost leader
 Expenses associated with developing the distinct competency
leads to a higher cost structure than the leader
 Best to control costs but not to minimise them to the point of
losing the source of differentiation
Differentiation advantages/disadvantages
 Safeguards companies against competitors to the degree that
customers develop brand loyalty
 Powerful suppliers are rarely a problem as differentiated
companies are more focused on the prices they can charge than
towards the costs of production
 Since the firm offers a unique product, the problem of powerful
buyers is unlikely to occur
 Differentiation and brand loyalty create a barrier to entry as new
firms need to create their own distinctive competency
 Threat of substitute products depends on the competitors’ ability
to meet the same customer need and break the differentiator’s
customers’ brand loyalty

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 Main problem: maintain the perceived uniqueness as competitors

often move to imitate and copy successful differentiators
o Patents and first-mover advantages only last for a certain
period
 Brand loyalty declines as overall product quality by all companies
increases
Cost leadership and differentiation

 New flexible tech allows firms to pursue a differentiation strategy
at low cost, combining these 2 generic strategies
 Using flexible manufacturing cells reduces the costs of retooling
the production line and the costs of small production runs,
promoting the current trend toward market fragmentation and
niche marketing
 Differentiated producers can realise economies of scale by
standardizing component parts used in end products e.g. in the
auto market
 Package offerings also lower manufacturing costs as they allow
for long production runs of various possible packages
 Focussing advertising and marketing efforts on particular market
segments also decreases costs
 Benefitting from new developments in production and marketing
causes firms to reap gains from simultaneous differentiation and
cost leadership  lower cost and premium price
 E.g. Dell Computer
Focus strategy
 Directing toward serving the needs of a limited customer
group/segment  builds market share only in one or a few
market segments
 Once the market segment is chosen, the company pursues a
focus strategy through a differentiation or low-cost approach
 A focused company is either a specialised differentiator or a cost
leader
 The focuser may have a cost advantage due to the concentration
on small-volume complex custom products, for which there are
few experience-curve advantages and economies of scale

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 Focused companies are likely to successfully differentiate their

products due to their detailed knowledge of a small customer
set/ region
 Concentrating on a small range of products can allow the firm to
develop innovations faster than a large differentiator
 If successful in its market segment/s, it may chip away the
differentiator’s competitive advantage over time
 The focused firm can pursue any distinctive competency because
it can seek any kind of differentiation or low-cost advantage
o Might find cost advantage and develop superior efficiency
in low-cost manufacturing within a region OR
o Might develop superior skills in responsiveness to
customers, based on its ability to serve regional customers
in ways that national differentiators find expensive
 Large companies can start with a focus strategy and take over
other focused companies
Focus strategy dis/advantages

 Competitive advantage stems from the source of its distinctive
competency: efficiency, quality, innovation or customer
responsiveness
 Protected form rivals if it can provide a good service that they
cannot, also giving the focuser power over its buyers
 At a disadvantage regarding powerful suppliers as they buy
inputs in small volume  however, may not be significant as
long as if price increases can be passed on to loyal customers
 Potential entrants must overcome customer loyalty, reducing the
threat of substitute products
 Protection from 5 forces – superior profitability
 Further advantage: permits close customer contact and quick
response to changing needs
Each generic strategy requires consistent product/market/distinctive

competency choices to establish a competitive advantage, otherwise it will
disappear e.g. cannot focus on differentiation through innovation and cut
R&D costs
Stuck in the middle

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 Def.: firms have made product/market choices in such a way

that they have been unable to obtain/sustain a competitive
advantage
 Consequently, they have no consistent business-level strategy
and below-average performance
 E.g. start using one strategy and then make wrong resource
allocations
 Cost leaders and differentiators can fail in the market and end up
stuck in the middle e.g. IBM became stuck in the mainframe
computer market
 No company is safe in a highly-competitive global environment
Conc
 Strat managers must
o ensure that their product/market/distinctive-competency
decisions are oriented toward one specific competitive
strategy
o monitor the environment to keep the sources of the
competitive advantage in tune with changing opportunities
and threats
Competitive positioning in different industry environments

 After developing successful generic business-level strategies,
managers must choose appropriate competitive tactics to
position their company to sustain the comp advantage over time
in different industry environments
Strategies in fragmented and growing industries

 Large number of small and medium-sized companies e.g.
restaurant industry due to few barriers to entry
 Focus strategy is the principal choice for many fragmented
industries, so companies may specialise by customer
groups/needs/regions
 Strategic managers are eager to then pursue low-cost or
differentiation strategies by circumventing fragmented industries
and consolidating them
 Competitive strategies to consolidate fragmented industries 
Dominant companies use four main competitive strategies

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o Chaining e.g. Walmart

Establish networks so that functions act as one large
business entity
 Leads to great buying power and large potential price
reduction with suppliers, promoting competitive
advantage
 Distribution centres overcome high transportation
costs, economise on inventory costs and maximise
responsiveness
 Sharing managerial skills across the chain leads to
economies of scale, as well as nationwide rather than
local advertising
o Franchising e.g. McD
 The franchisor (parent) grants the franchisee the
right to use the parent’s name, reputation and
business skills in a particular location or area
 If the franchisee also acts is the manager, the
motivation to satisfy customer needs is particularly
high, which is very critical if differentiation is pursued
 Franchising allows a firm to control many small
outlets, while simultaneously retaining their
uniqueness, solving the problem of fragmented
industries
 Lessens financial burden of expansion, thereby
permitting rapid growth
 Advantages of large-scale advertising, management
and distribution, purchasing economies
o Horizontal merger e.g. Macy’s
 Merger of many regional store chains to form a
national company
 Obtain economies of scale and secure a national
market, thus being able to pursue a cost-leadership
strategy or a differentiation strategy
o Internet e.g. eBay and the fragmented auction business
 eBay provides sellers with global visibility for their
collectibles, allowing them to receive a higher price

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 Consolidate through using the internet – is even

likely to further consolidate relatively oligopolistic
industries
 Challenge in fragmented/growing industries
o Choose the most appropriate means: franchising, chaining,
horizontal merger or the internet – to consolidate the
market and grow sales
o Most major service activities have been
merged/consolidated by chaining or franchising
o Internet has been introduced into many new industries
Strategy in mature industries

 Dominated by a small number of large companies as a result of
the growth and shakeout stages
 The large companies determine the nature of the industry’s
competition as they can influence the 5 competitive forces
 They are the firms that have developed the most successful
generic business-level strategies
 Companies have learned about their interdependence and will
adjust their strategy in response to actions of rivals
 Main challenge: adopt a competitive strategy that allows each
firm to protect its competitive advantage and preserve industry
profitability
 Large companies try collectively to reduce the strength of the
five forces of industry competition to preserve company and
industry profitability
 They can use tactics to reduce the threat of each competitive
force
 Strategies to deter entry in mature industries
o 3 main methods
o Product proliferation
 Strategy of pursuing a broad product line to deter
entry
 most commonly, companies produce a range of
products aimed at different market segments so that
they feature broad product lines

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 to lower the threat of entry, companies expand the

range of products to fill a wide variety of niches,
making it more difficult to break into an industry
 e.g. the number and kind of breakfast cereals and
snacks successfully proliferate, making it very
difficult for prospective entrants to find an empty
market segment and differentiate themselves
o Price cutting
 Pricing strategies can deter entry and protect profit
margins
 E.g. skimming: initially charge a high price in the
growth stage but then cut aggressively to build
market share and deter entry, signalling that
incumbents will use their competitive advantage to
drive down prices to unsustainable levels for
potential entrants
 Yet, this strategy is unlikely to deter a strong
potential competitor ie an established firm like IBM
that can withstand ST losses  may be in the
incumbent’s interest to give up market share and
prevent price wars if feasible
 Once established in a mature market, nonprice
competition becomes the main basis of industry
competition and prices are likely to rise as
competition stabilises
o Maintaining excess capacity
 Producing more than customers currently demand
 Serves as a warning to potential entrants that
existing firms will retaliate by increasing output and
forcing down prices
 The threat to increase output must be credible ie the
firms must collectively be able to riase the level of
production quickly if entry appears likely
 Strategies to manage rivalry in mature industries
o Strategies to manage their competitive interdependence
and decrease rivalry

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o Unrestrictive industry price competition reduces company

and industry profitability, leading to the emergence of
competitive tactics that prevent price wars and manage
industry relations, including price signalling, price
leadership, non-price competition and capacity control
o Price signalling
 The process by which companies increase or
decrease product prices to convey their competitive
intentions to other companies, influencing how
competitors price their products
 2 ways that firms defend their generic competitive
strategies
 Tit-for-tat strategy signals that firms will respond
vigorously to hostile movements, suggesting that
nobody gains and everybody loses
 Allow companies to indirectly coordinate actions and
avoid costly competitive moves – price signalling
allows companies to give each other information,
allowing them to make coordinated competitive
moves to protect industry profitability
o Price leadership
 One company informally takes responsibility for
setting industry prices
 Formal price leadership is illegal under antitrust laws
 Tacit price leadership is subtle e.g. auto industry:
vehicle prices are set by imitation
 Pricing is done by market segment
 Allows differentiators to charge a premium price and
helps low-cost companies by increasing their margins
 Can stabilise industry relationships by preventing
fierce competition, yet, it has its dangers
 Helps companies with higher costs to survive
without becoming more productive/efficient,
which makes them vulnerable to companies
that continually develop new production
techniques to lower costs

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This happened in the US auto industry after the


Japanese entered the market  Toyota became
the largest global automaker in 2008 without
dropping their prices significantly
o Non-price competition
 Differentiation may be the principal competitive tactic
used to prevent rivals from stealing
customers/reducing market share
 Allows rivals to compete for market share by offering
different or superior features, or by utilising different
marketing techniques
 4 non-price competitive strategies based on product
differentiation
 1. Market penetration
 focus on expanding market share in the
existing product markets
 involves heavy advertising to promote and
build product differentiation, and create a
brand name reputation, allowing for premium
prices e.g. P&G spends more than 20% of
revenues on advertising, constituting a barrier
to entry
 2. Product development
 creation of new or improved products to
replace existing ones to create successive
waves of consumer demand
 e.g. Gillette in the wet-shaving industry
periodically introduced improved razors; each
global car-maker replaces its models 3-5years
to encourage customers to buy the new one
with the latest styling and technology
 important to maintain product differentiation
and build market share
 3. Market development
 involves searching for new market segments
for a company’s products

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 firm wants to capitalise on the brand name

developed in one market segment by
competing in new segments
 e.g. Japanese car manufacturers, which
competed primarily as low-cost producers,
upgraded each car model over time, directing
them at more expensive market segments e.g.
Toyota’s Lexus brand competes in the luxury
segment
 4. Product proliferation
 leading companies all have a product in each
market segment or niche and compete head-
to-head for customers
 if a new niche develops, the leader gets a first-
mover advantage but competition is stabilised
as soon as other firms catch up
 the battle is over a product’s perceived quality
and uniqueness, not over its price
Strategies in declining industries

 size of the total market starts to shrink due to tech change,
social trends and demographic shifts
 e.g. railroad industry – tech changes brought viable substitutes;
tobacco industry shrank due to changing social attitudes toward
smoking as a result of health concerns
 competition intensifies as the total market size shrinks, causing
profits to fall
 intensity of competition depends on four critical factors
o 1. Speed of decline
 competition is more intense when the decline is rapid
rather than gradual, as is the case with the tobacco
industry
o 2. Height of exit barriers
 competition is more intense if there are high exit
barriers, keeping companies locked into an industry
even with falling demand, leading to excess
productive capacity
o 3. Level of fixed costs

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competition is more intense if fixed costs are high as

firms need to cover them, potentially causing firms
to try to use excess capacity to slash prices, which
may trigger price wars
o 4. Commodity nature of product
 competition is more intense if the product is
perceived to be a commodity e.g. steel, as little
differentiation is possible
 not all segments of industries decline at the same rate e.g. bulk
steel products suffered general decline, whereas demand for
specialty steels has risen
 4 main strategies to deal with decline
 Choice of strategy depends on the intensity of competition (and
rate of decline) and a company’s strengths relative to remaining
demand

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 1. Leadership strategy
o strategy through which a company seeks to become the
dominant player in a declining industry
o aims at growing in a declining industry by picking up the
market share of companies that are leaving
o makes sense when
 a firm has distinctive strengths that enable it to
capture market share in a declining industry
 speed of decline and intensity of competition are
moderate
o tactical steps to achieve a leadership position
 aggressive pricing and marketing to build market
share

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 acquiring established competitors to consolidate the

industry
 raising the stakes for other competitors by making
new investments in productive capacity
  these steps signal that the firm is willing and able
to stay and compete in the declining industry,
potentially persuading other firms to exit, further
enhancing the leader’s competitive position
 2. niche strategy
o focuses on pockets of demand that are declining more
slowly than industry demand
o makes sense when
 company has some unique strengths relative to those
niches where demand remains relatively strong
 3. Harvest strategy
o company wants to get out of a declining industry and
optimises CF in the process
o makes sense when
 the firm foresees a steep decline and intense future
competition
 lacks strengths relative to remaining pockets of
demand
 requires the firm to cut all new investments, causing
it to lose market share but since there are no more
investments, its initial CF will increase
 ultimately, CF will start to decline, at which stage the
company will liquidate the business
 4. Divestment strategy
o company sells off the business to others as it can maximise
its net investment recovery by selling it early before a
steep decline
o makes sense when
 company has few strengths relative to whatever
pockets of demand remain in the industry
 competition is likely to be intense
 best option: sell out to a company that is pursuing a
leadership strategy

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11.03.2015
Strategy in the global environment 179-188: 9

 Process of globalisation and the strategic response required from
companies that compete across national borders
Chapter 6: global strategy

 How to expand operations outside the home country, where
competitive advantage is determined at a global level
Recent developments
 Barriers to international trade and investment have tumbled
o Average tariff rate on manufactured goods between
advanced nations fell from around 40% to 4%
o Significant rise in international trade and FDI
o FDI increased by more than 500% between 1992-2007,
world trade grew by 145% and world output by about 40%
o Led to the globalisation of production and markets,
allowing companies to take advantage of national
differences in the cast and quality of fops, leading to lower
cost structures and higher profits
 Huge global markets for goods and services have been created
 Implications of globalised production and markets
o Companies operate globally, increasing the intensity of
competition
o Rivalry extends beyond national boundaries
o Despite a higher threat of entry and more intense rivalry
than within formerly protected national markets,
globalisation bears enormous opportunities
 E.g. Western European, Japanese and US companies
have accelerated investments in Eastern Europe,
Latin America and Southeast Asia as they try to take
advantage of growth opportunities there
o Managers must consider how globalisation impacts the
environment in which the business competes and what
strategies to use to exploit opportunities and counter
threats
Increasing profitability through global expansion

 Increases the size of the market, thereby boosting profit growth

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 Offers opportunities for reducing the cost structure or adding

value through differentiation, thereby boosting profit growth
 Expanding the market: leveraging products and competencies
o Most MNCs started out by developing goods/services at
home and selling them internationally e.g. P&G
o Returns are greater if indigenous competitors in the
nations that are being entered lack comparable products
o Success of MNCs depends on their goods as well as their
distinctive competencies that underlie the production and
marketing of those goods e.g. P&G success was based on
its portfolio of consumer products and on its skills in mass
marketing, which it could apply to foreign markets
o Distinctive competencies are in essence the most valuable
aspects of a company’s business
o The same concept applies to the service sectors of an
economy
 Realising economies of scale
o International expansion allows more rapid profit growth
and an expansion in sales volume, leading to cost savings
from economies of scale
o Sources
 spreading FC over global sales volume, thereby
lowering average unit costs
 utilising production facilities more intensively, leading
to higher productivity, lower costs and greater
profitability
 bargaining power with suppliers increases, allowing
the firm to bargain down the cost of key inputs e.g.
Walmart
 Realising location economies
o Economic benefits that arise from performing a value
creation activity in the optimal location for that activity
o This can have one of two effects
 Lower costs of value creation
 Enable differentiation and allowing for premium
prices or keeping prices low and increasing sales
volume

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o Efforts to realise location economies are consistent with the

business-level strategies of low cost and differentiation
o A company that disperses each value creation activity to
the optimal location realises location economies and allows
it to better differentiate the product offering and achieve a
lower cost structure than its single-location competitors
o May be imperative for survival in highly competitive
industries
 Leveraging the skills of global subsidiaries
o For MNCs that have already established a network of
subsidiary operations in foreign markets, the development
of valuable skills can just as well occur in foreign
subsidiaries
o Leveraging the skills creating within subsidiaries and
applying them to other operations in the global network
may create value e.g. McD uses foreign franchisees as a
source of new ideas e.g. it upgraded its store layout and
changed its menu in France after experiencing slow growth
there and now wants to adopt similar changes in other
markets with sluggish growth
Cost pressures and pressures for local responsiveness

 Companies are faced with 2 types of competitive pressures,
placing conflicting demands on a company and posing a difficult
strategic challenge
 Pressure for cost reduction
o Pressures require a firm to try to lower the cost of value
creation by
 producing at the most favourable low-cost location
and offer a standardised product to benefit from
economies of scale and learning effect
 alternatively, outsourcing certain functions to low
cost foreign suppliers e.g. many computer companies
outsourced their telephone based customer service
functions to India where wages for skilled English
speakers are lower than in the US
o pressures can be particularly intense

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 in industries producing commodity-type products

where meaningful differentiation on non-price factors
is difficult, making price the main competitive
weapon
 this tends to be the case for products that
serve universal needs, which exist when the
taste and preferences of consumers are
similar/identical in different nations e.g. steel,
petroleum, sugar
 also tends to be the case for many industrial
and consumer products e.g. PCs
 if there is persistent excess capacity, consumers are
powerful and face low switching costs
o liberalisation of world trade and investment facilitated
greater international competition, increasing cost pressures
 Pressure to be locally responsive
o Requires differentiation and targeted marketing strategy
for each country to accommodate diverse demands arising
from national differences in consumer tastes and
preferences, business practices, gov policies, distribution
channels etc
o Local responsiveness tends to raise costs
o 1. Differences in consumer tastes and preferences
 strong pressures if tastes and preferences differ
significantly between countries for historic or cultural
reasons
 products and marketing message must be
customised to appeal to the tastes and preferences
e.g. pickup trucks are popular with individuals in
North America, whereas they are mainly purchased
by firms in Europe
o 2. Differences in infrastructure and traditional practices
 e.g. in the UK, people drive on the left-hand side,
creating demand for right-hand-drive cars, as
opposed to the rest of Europe which demands left-
hand-drive cars
o 3. Differences in distribution channels

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 may be necessary to delegate marketing function to

national subsidiaries as the US-style hard sell
strategy is not in line with Europe’s and Japan’s soft
sell strategy
o 4. Differences in Host Government Demands
 threats of protectionism and strict local rules and
requirements in the pharmaceutical industry for
example, that require local responsiveness
Choosing a global strategy

 pressures for local responsiveness imply that full benefits from
economies of scale and location economies may not be realised
 also implies that it may not be possible to leverage skills and
products associated with a firm’s distinctive competencies
wholesale from one nation to another
 it may not be possible to serve the global marketplace from a
single low-cost location, producing a globally standardised
product and marketing it worldwide to achieve economies of
scale
 need to customise the product offering to local conditions and
balance the cost and differentiation sides of a company’s
business
 firms choose among 4 main strategic postures when competing
internationally, depending on the strengths of the cost and
differentiation pressures

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Global standardisation strategy

 focuses on increasing profitability through cost reductions from
economies of scale and location economies
 Pursuing a low-cost strategy on a global scale
 Production, marketing and R&D activities are concentrated in a
few favourable locations
 No customisation as this involves shorter production runs and
the duplication of function, raising costs
 Use cost advantage to support aggressive pricing in world
markets
 Makes sense:

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o Strong pressure for cost reduction

o Little pressure for local responsiveness
o E.g. industrial goods industries like the semiconductor
industry  Intel pursues a global strategy
Localisation strategy
 Focuses on increasing profitability by customising the
goods/services so that they match the tastes and preferences in
different national markets
 Most appropriate when there are
o substantial differences across nations regarding consumer
tastes and preferences
o Low cost pressures
 By customising the product offering to local demands, the
perceived value in the local market increases
 However, it involves some duplication of functions and smaller
production runs, leading to higher cost structures that the mass
production of a standardised good for global consumption
 If the added value supports higher pricing and enables the
company to recoup higher costs, or if it leads to substantially
greater local demand and creates scale economies in the local
market, this strategy results in higher profitability
 E.g. MTV varies its programming to match the viewers’ demands
in different nations, preventing the loss of market share to local
competitors
 Such companies tend to be efficient and will attempt to capture
some scale economies from their global reach
Transnational strategy
 Try to simultaneously achieve low costs, differentiate the product
offering across geographic markets and foster a flow of skills
between different subsidiaries in the firm’s global network of
operations
 Difficult to embrace this strategy due to the conflicting demands

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 In the current global competitive environment, it can be argued

that companies must to respond to both cost reduction and local
responsiveness pressures by realising location economies and
economies of scale from global volume, transferring distinctive
competencies and skills within the company and simultaneously
creating a differentiated and customised product
 Since distinctive competencies and skills can develop in any of
the company’s worldwide operations, the flow of skills and
product offerings is not uni-directional, meaning that
transnational companies must focus on leveraging subsidiary
skills
International strategy
 Some MNCs are confronted with low cost pressures and low
pressures for local responsiveness
 Typically these enterprises sell products that serve universal
needs and do not face significant competitors e.g. because of
patents, meaning that there are little cost pressures – Xerox
patented its technology underlying the photocopier
 Companies pursuing this strategy tend to centralise product
development functions such as R&D at home and establish
manufacturing and marketing functions in each major
country/geographic region in which they do business
 May undertake some local customisation and marketing strategy
but this tends to be limited in scope
 Head office retains tight control over marketing and product
strategy e.g. Microsoft
Changes in strategy over time

 Competitors inevitably emerge if no proactive steps are taken to
reduce cost structures
 As competitors emerge, international strategy and localisation
strategy become less viable
 International strategy
o E.g. Japanese firms like Canon invented around Xerox’s
patents to create their own photocopiers which were
produced very efficiently and could be priced competitively,
allowing Canon to steal global market share from Xerox

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 Same can be said about localisation

o even though it provides a competitive edge, as competition
intensifies, the firms will need to reduce their cost
structures e.g. P&G moved from a localisation strategy to
more of a transnational strategy
5 main choices of entry (entry mode)

 Exporting
o Most firms begin their global expansion as exporters and
only later switch to another mode of serving foreign
markets
o Plus: Initial investment is minimal and economies of scale
and location economies can be exploited
 E.g. Sony came to dominate the global TV market
like this
o Minus:
 exporting from the home base may not be
appropriate if there are lower-cost locations for
manufacturing the product abroad
 particularly in the case of firms pursuing a global
standardisation or transnational strategy, it may pay
to manufacture in the most favourable location and
then export from there
 this is merely an argument against exporting
from the home country
 high transportation costs may make exporting
uneconomical especially in the case of bulk products
 get around this by manufacturing bulk products
on a regional basis, realising some economies
from large-scale production while limiting
transport costs
 tariff barriers can make exporting uneconomical
 companies may delegate marketing activities in each
country to a local agent, but there is no guarantee
that the agent will act in the company’s best interest
as they may also carry the products of competing
companies and thus have divided loyalties

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solve this by setting up a wholly owned

subsidiary and handle local marketing  allows
the firm to reap cost advantages from
manufacturing the product in a single location
and exercise tight control over the marketing
strategy
 International licensing
o Arrangement whereby a foreign licensee buys the rights to
produce a company’s product in the licensee’s country for a
negotiated fee
o The licensee contributes most capital to get the operation
going
o Mostly pursued by manufacturing companies
o Pro
 Company does not have to bear development costs
and risks associated with opening up a foreign
market
 Attractive for firms that lack capital to develop
overseas operations or that are reluctant to invest
lots of financial resources in highly risky markets
o 3 serious drawbacks
 does not give a company tight control over
manufacturing, marketing and strategic functions
which are necessary to realise location and scale
economies (as firms that pursue global
standardisation and transnational strategies try to
achieve) – if these economies are important,
licensing may not be the best way of expansion
 limits a company’s ability to coordinate its strategy
across countries and as licensees will be unwilling to
let the MNC use its profits to support competitive
attacks against another licensee
 risk of licensing tech know-how to foreign companies
 if it forms the basis of the competitive
advantage, MNCs will want to maintain control
over the tech know-how
 by licensing its tech, companies may quickly
lose their control over it

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 Franchising
o Similar to licensing but tends to involve longer-term
commitments
o Specialised form of licensing in which the franchiser sells
the intangible property to the franchisee but in addition
also insists that the franchisee abides by strict rules
regarding business conduct
o Mainly employed by service companies e.g. McD has strict
rules as to how franchisees should operate a restaurant,
providing financial assistance, management training and
also organising the supply chain for its franchisees
o Pros
 Similar to licencing
 No development costs and risks of opening up a
foreign market, since the franchisee typically
assumes those costs and risks
 Strategy allows a company to quickly build up a
global presence at a low cost
o Cons
 Since it is used by service companies, there is little
concern about achieving scale and location
economies
 May inhibit a company’s ability to achieve global
strategic coordination
 More significant concern: lack of quality control and
the maintenance of the reputation
 To reduce the problem, a subsidiary can be set
up in each country/region in which the firm
wants to expand
 Subsidiary might by wholly owned or a joint
venture
 Subsidiary assumes the rights and obligations
to establish franchisees throughout that
country/region
 This eases monitoring processes and lowers the
quality control problem

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In addition, since the subsidiary is at least


partly owned by the company, the company
can place its own managers in the subsidiary to
ensure quality monitoring  very popular and
has been used by Hilton Hotels Corp.
 Joint venture with a host country company
o Separate corporate entity in which two or more companies
have an ownership stake
o Most typical form of joint-venture is a 50-50 venture: each
firm takes a 50% ownership stake and operating control is
shared by a team of managers from both parent
companies
o Pros
 Firm may benefit from a local partner’s knowledge of
a host country’s competitive conditions, culture,
language, business systems
 Share development costs and risks with a local
partners
 Political considerations make joint ventures the only
feasible entry mode in some countries
o 2 main drawbacks
risk of losing control over its technology too its
venture partner as with licencing
 to minimise this risk, the firm can seek a
majority ownership, allowing it to exercise
greater control over its tech but it might be
difficult to find a foreign partner that accepts a
minority ownership position
 does not give a company the tight control over its
subsidiaries that it might need to realise scale
economies or location economies (as standardisation
and transnational firms try to do) or to engage in
coordinated global attacks against rivals
 Wholly owned subsidiaries in the host country
o Parent company owns 100% of the subsidiary’s stock
o Set up a completely new operation in a foreign country or
acquire an established host country company and use it to
promote its products in the host market

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o Pros
 1. Preferred mode of entry when the competitive
advantage is based on the firm’s control of a tech
competency – reduces the risk of losing this control
 popular for high tech firms
 2. Tight control over operations in different countries,
which is necessary if it engages in global strategic
coordination: taking profits from one country to
support competitive attacks in another
 3. Best choice to realise location and scale economies
as it allows a firm to maximise the value added at
each stage of the value chain e.g. national
subsidiaries may specialise in producing only certain
components of the end product
 national operations must be prepared to accept
centrally determined decisions about how and
how much they should be produced
o Con
 Most costly method of serving a foreign market
 Parent company bears all costs and risks of setting
up overseas operations
 the risks of learning to do business in a new culture
diminishes when the firm acquires an established
host country enterprise, however, such acquisition
raise different problems like marrying divergent
corporate cultures

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Choosing an entry strategy

 trade-offs in choosing one entry mode over another
 some generalisations can be made about optimal choice of entry
mode
 distinctive competencies and entry mode
o distinguish whether the distinctive competency is based on
tech know-how or management know-how
o if based on proprietary technology, then entering into a
joint venture or engaging in licensing might mean loss of
control to the joint venture partner, presenting a hazard
o wholly owned subsidiaries may be more ideal
o however, this is a generalisation and not a hard rule, as
licensing or joint venture arrangements can be structured
in such a way as to reduce the risks that a company’s tech
know-how will be expropriated by licensees

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o if the tech advantage is perceived as transitory due to

rapid imitation, the company might want to license its
technology as quickly as possible to foreign companies to
gain global acceptance of its technology before imitation
occurs
 by licensing the tech to its competitors, the firm may
deter them from developing their own, possibly
superior, tech, and can establish its tech as the
dominant design in the industry, ensuring steady
streams of royalty payments
o the competitive advantage of many service companies is
based on management know-how
 risk of losing control of management skills to
franchisees or joint venture partners is minimal
 valuable asset of such firms is their brand name
which is well protected
 many service companies thus favour a combination
of franchising and subsidiaries to control franchisees
within a particular region – the subsidiary may bee
wholly owned or a joint venture
 many service companies have found that entering a
joint venture with a local partner works best as it is
politically more acceptable and brings a degree of
local knowledge to the subsidiary
 pressures for cost reduction and entry mode
o the greater the pressures for cost reductions, the more
likely the firm is to pursue some combination of exporting
and wholly owned subsidiaries
o manufacturing in optimal locations and then exporting to
the rest of the world allows the company to realise
substantial economies of scale and location economies
o the company might want to export finished products to
marketing subsidiaries based in various countries, which
are typically wholly owned and responsible for overseeing
the distribution

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o setting up wholly owned marketing subsidiaries is

preferable to a joint venture arrangement or using a
foreign marketing agent as it gives the company tight
control over marketing that might be required to
coordinate a globally dispersed value chain  allows a firm
to use profits generated in one market to improve its
competitive position in another
o HENCE, companies pursuing global or transnational
strategies prefer to establish wholly owned subsidiaries

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11.03.2015
Corporate level and LR profitability 207-214: 19
Corporate level strategy and LT profitability

 Principle concern is to identify the industries a company should
be in to maximise LT profitability and profit growth, how should
we enter and increase our presence in these businesses to gain a
 Possibilities
o Concentrate on a single industry and focus its activities on
developing business-level strategies to improve its
competitive position in that industry (ch5)
o Enter new industries through vertical integration or
diversification
o Exit businesses and industries or shrink the boundaries of
the organisation by restructuring and downsizing
Important to stress that if a corporate-level strategy increases LR

profitability, it must enable a company to perform one or more value
creation functions at a lower cost or in a way that leads to increased
differentiation
Successful corporate level strategies

 Built distinctive competencies and increase the competitive
advantage over rivals
 Important link between corporate-level strategy and creating
competitive advantage at the business level
Concentration on a single industry

 Focuses resources and capabilities on competing successfully
within the confines of a particular product market e.g. McD
focuses on the fast-food restaurant market
 Several advantages of concentrating on the needs of customers
in just one product market (and the different segments within it)
o Focus all managerial, fin, tech and functional resources and
capabilities on developing strategies to strengthen its
competitive position in just one business

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o Important in fast-growing industries that make strong

demands on resources and capabilities but also offer
prospects of substantial LT profits
o Avoids the risk of spreading resources to thinly and thus
prevents the loss of competitive advantage
o Mature companies often find out later that they have
stretched resources to far, leading to declining
performances e.g. Coca-Cola acquired Columbia Pictures
and expanded into the movie business and later divested it
at significant loss
 Can result in disadvantages emerging over time
o Certain amount of vertical integration may be necessary to
strengthen a firm’s competitive advantage within its core
industry
o Miss out on opportunities to create more value and
increasing profitability by entering other markets/industries
Tactics a company may deploy to improve its competitive position

in an industry:
1. Horizontal integration
 Process of acquiring or merging with industry competitors in an
effort to achieve the competitive advantages that come with
large size or scale
 Acquisitions occur when one company uses its capital resources
to purchase another
o e.g. Google took over hundreds of small Internet
companies to better position itself in segments like
streaming video, music downloading and digital
photography
 Mergers are agreements between two companies to pool their
resources in combined operations
 M&A consolidates fragmented industries e.g. four largest
semiconductor chips firms controlled 85% of the global market in
2007, up from 45% in 1997
 M&A and horizontal integration can improve the competitive
advantage and profitability in the single chosen industry
 Profitability increases when horizontal integration results in

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o Lower operating costs

 If it leads to economies of scale there will be lower
operating costs
 This is particularly important in industries with high
FC as large-scale production allows a company to
spread CF over a large volume, driving down
operating costs
 M&A in the pharmaceutical industry is often driven by
the need to realise scale economies in sales and
marketing
 Allows the closure of head offices, redundancies etc
o Higher product differentiation
 E.g. by combining product lines of merged companies
to offer customers a wider range of products that can
be bundled together
 Product bundling: ability to offer customers the
opportunity to buy a complete range of products at a
single, combined price
 E.g. Microsoft Office is a bundle of different
software programs
 Increases the perceived value as customers
 1. Often obtain price discounts by purchasing
products as a set
 2. Get used to dealing with just one company
o Less rivalry within an industry for 2 reasons
 1. M&A with a competitor helps to eliminate excess
capacity in an industry, lowering the possibility of
price wars and creating a more benign environment
 2. Lowering the number of competitors creates an
oligopoly and facilitates tacit price coordination
between rivals
o And/or higher bargaining power over suppliers and buyers
 Strengthens its competitive position and profitability
 By using horizontal integration to consolidate the
industry, a company becomes a much larger buyer of
its suppliers’ products, which can be used as
leverage to bargain down the input prices, thereby
lowering costs

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 As the company controls a greater percentage of the

industry’s final product/output, buyers become more
dependent on it, meaning that the company has
more power to raise prices and profits
 Higher prices and lower costs improves margins
 Ethical Dilemma: Microsoft is accused of creating a monopoly by
forcing out rivals through horizontal integration
 Problems and limitations
o Gains from anticipated M&A are often not realised due to
different company cultures, high management turnover in
hostile acquisitions, overestimating benefits and
underestimating problems
o Antitrust authorities may prevent horizontal integration if it
is used to become a dominant industry competitor as
competition is believed to be better for consumers
2. Outsourcing functional activities

 outsourcing one or more value creation functions involves a
contract with another company which will perform that activity
on its behalf
 expansion of global outsourcing in recent years – especially
manufacturing and IT activities
 the value chain activities that form the basis of a firm’s
competitive advantage and give it its distinctive competencies
should be protected and performed internally
 the remaining non-core functional activities can then be reviewed
and performed more efficiently by specialist companies at home
or abroad
 the relationship between the company and its subcontractors are
structured by a competitive process
 virtual corporation: describes companies that outsource most
functional activities and focus on one or a few core value chain
functions e.g. Xerox focuses on the design and manufacture of
photocopying systems and outsources IT and marketing to other
companies
 advantages
o outsourcing noncore activities to more efficient specialist
companies lowers operating costs

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o specialists often have distinctive competencies in a

particular functional activity, potentially helping the
company to better differentiate its products
o allows a company to focus its scarce human, financial and
physical resources on further strengthening its core
competencies
 disadvantages
o loss of the ability to learn from the activity that is
outsourced and transform it into a distinctive competency
o a company may go too far and outsource value creation
activities that are central to maintaining its competitive
advantage – may lose control over the future development
of a competency and performance may consequently
decline
o dependence on a particular subcontractor – who may then
demand higher prices
 does not mean that outsourcing should not be used but that
managers must carefully weigh pros and cons
Conc
  outsourcing and horizontal integration may strengthen the
competitive position in the single industry that the firm
concentrates on, allowing it to lower costs or better differentiate
products
Strategies when companies enter new industries – increasing LT

profits
1. Vertical integration
 expands operations backward into industries that produce inputs
(backwards vertical integration) or forward into industries that
use, distribute and sell its products (forward vertical integration)
 the company may acquire existing companies or establish its
own operations
 4 main stages in a typical raw-materials-to-customer value-
added chain are
o raw materials – component parts manufacturing – final
assembly – retails (customer)

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o at each stage in the chain value is added, meaning that the

product is transformed in a way that it is worth more to a
company at the next stage
o important: each stage of the value-added chain is a
separate industry in which many different companies may
be competing
o in each industry, every company has a value chain
composed of the value chain functions R&D,
manufacturing, marketing, customer service etc
 gives a company a choice about which industries in the raw-
materials-to-consumer chain they should compete in to
maximise LT profitability
 4 arguments for vertical integration
o building barriers to entry
 by gaining control over the source of critical inputs
(backward integration)/over distribution channels
(forward integration)
 if effective, this limits competition and enables the
company to charge a higher price
 e.g. 1970s/80s IBM manufactured the main
computer components, designed and assembled
computers, produced the software and sold the final
products
 by producing the proprietary technology in-house
they could limit rivals’ access to it, building barriers
to entry
o facilitating investments in specialised assets
 specialised asset is a value-creation tool e.g.
machine, computer, factory, that is designed to
perform a specific set of activities but whose value-
creation potential is significantly lower in its next
best use
 specialised assets lower the costs of value creation or
better differentiate the products

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 it may be difficult to persuade companies in adjacent

stages in the value-added chain to undertake these
investments, and to realise economic gains
associated with specialised assets, the company may
have to vertically integrate into such adjacent stages
and make the investments itself
 by asking subcontractors to invest in specialised
assets, a mutual dependence would be created,
making the company hesitant to contracting out and
any potential suppliers hesitant to undertaking
investments
 the risk of holdup ie the risk of being taken
advantage of by a trading partner after the
investment in specialised assets has been made,
leads to a lack of trust
 hence, if a competitive advantage can be acquired by
investing in specialised assets in an adjacent value-
added stage, the risk of holdup may serve as a
deterrent to trade with other firms, so vertical
integration takes place
 this consideration made automobile companies
vertically integrate backward into the production of
component parts
o protecting product quality & results in improved scheduling
 vertical integration allows a company to become a
differentiated player in its core business
 e.g. General Foods integrated backward to gain
control over banana supply sources to ensure that
bananas are distributed at the optimal time for
consumption – able to charge premium prices as the
company built consumer confidence
 same considerations can result in forward integration
reasons
 e.g. ownership of distribution outlets may be
necessary if after-sale service standards for
complex products must be maintained
 Disadvantages

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o May increase costs when a company must purchase high

cost inputs from company-owned suppliers despite low-
cost external sources of supply
 E.g. 1990 GM produced 68% of the component parts
of vehicles in-house, more than any other major
automaker, causing it to be the highest-cost global
carmakers
 Due to the acquisition/establishment of an operation,
the new firm must not compete for orders and has
less incentive to be efficient
 This issue is less serious when the firm pursues
taper, rather than full, integration
 Full integration
 A firm produces all of a particular input or
disposes all its output through its own
operations
 Taper integration
 Company buys some components from
independent suppliers and some from
company-owned suppliers, and sells some of
its output through independent retailers and
some through company-owned outlets
 Hence, company-owned suppliers must
compete with independent suppliers, giving
managers a strong incentive to reduce costs
o When tech is changing rapidly, a strategy of vertical
integration often ties a company into old, obsolescent high-
cost technology
 In fact, any significant environmental changes in
each industry can put a company investment at risk
 The more industries in which a company operates,
the more risks it is exposed to
 It may reduce profitability if a lack of cost-cutting incentives on
company-owned suppliers increases operating costs; or if the
inability to change its technology quickly results in lower quality
and reduced differentiation

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 A company should thus only pursue vertical integration if the

extra value created by entering a new industry exceeds the extra
costs of managing new operations
 If operating costs rise faster than the value that is created in a
particular industry, companies will vertically disintegrate and exit
unprofitable industries
Vertical integration and outsourcing

 Advantages of vertical integration can also be obtained by
making agreements with specialised suppliers to perform specific
upstream/downstream activities on his behalf
 Outsourcing promotes a company’s competitive advantage when
the company enters into cooperative outsourcing relationships:
LT relationships or strategic alliances, in which trust and goodwill
build up over time
 However, if a company enters into only ST contracts with
suppliers/distributors, it is often unable to realise the gains
associated with vertical integration through outsourcing, as the
outsourcing partners have no incentive to help the companies
reduce cots or improve product features/quality
Entering new industries through diversification

 Diversification is the process of entering one or more industries
that are distinct from a company’s core industry to find ways to
use its distinctive competencies to increase the value of products
in those industries
 Diversified company: operates in two or more different or distinct
industries (not in adjacent stages of the industry value chain) to
increase LT profitability
 In each industry that the firm enters, it sets up a self-contained
company that performs a complete set of the value chain
functions needed to make and sell products for that particular
market
 Diversification should lead to lower costs or higher differentiation
 Most companies only consider diversification if there are excess
financial resources than those necessary to maintain a
 Creating value through diversification

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o Superior internal governance

 Internal governance refers to the manner in which
top executives manage business units, divisions and
functions
 Diversification creates value when top managers
operate the company’s different business units so
effectively that they perform better than they would
if they were separate and independent companies
 Difficult to do this
 Research suggests that managers who create value
through superior internal governance seem to make
similar kinds of strategies decisions
 Organise different business units into self-
contained divisions that operate separately
 Divisions are managed in a decentralised
fashion and managers only set challenging
financial goals rather than getting involved in
no daily operations
 Link monitoring mechanisms to incentive pay
systems that reward outstanding personnel
 An extension of this approach is an acquisition and
restructuring strategy: acquiring inefficient and
poorly managed enterprises and creating value by
installing their superior internal governance –
diversification if the acquired company operates in a
different industry
 1. Top management team is replaced
 2. Operating costs are reduced
 3. Efficiency/quality/innovativeness/
responsiveness is improved
o Transferring competencies among businesses
 Based on transferring competencies
 Transfer existing distinctive competencies in one or
more value creation functions (e.g. manufacturing,
marketing, materials management, R&D) to other
industries

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 Managers seek out companies in new industries

where they believe they can apply their distinctive
competencies to create value and increase
profitability
 Alternatively, they may acquire a company in a
different industry as they believe it to have superior
skills that can improve the efficiency of their existing
value creation activities
 Competency transfers e.g. marketing skills, can
lower costs or enable activities that lead to
differentiation and premium pricing
 To work, the transferred competencies must allow
the acquired company to establish a competitive
advantage in its industry
 Often however, advantages are assessed incorrectly
and benefits are overestimated e.g. eBay’s acquired
Skype in 2005 and disposed of it in 2009
o Realising economies of scope
 Based on sharing resources!
 When two or more business units can share
resources or capabilities e.g. R&D costs, advertising
campaigns etc, total operating costs fall
 Each business unit that shares a common resources
has to pay less to operate that particular functional
activity
 E.g. products are shipped via the same distribution
system, lowering unit costs of diversified firms
 Diversification should only be pursued when sharing
is likely to generate a significant competitive
advantage
 Costs of managing and coordinating the activities of
the newly linked business units increases as the
number of business units rises – these costs must
not outweigh the value created by such a strategy
 There is a limit to diversification and it only makes
sense if the extra value created exceeds the
increased costs

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 If firms diversify beyond this point, the scope of the

enterprise should be reduced through divestments
 Related vs unrelated diversification
o Related: strategy of operating a business unit in a new
industry that is related to a company’s existing business
units by some linkage between one or more components of
each business unit’s value chain
 Linkages may be based on manufacturing, marketing
or tech connections/similarities
 Can create value by resource sharing and
transferring competencies
 Restructurings can be carried out
 Can create value in more ways than unrelated
diversification – may be preferred as it involves
fewer risks
o Unrelated: diversification into a new business or industry
that has no obvious value chain connection with any
businesses or industries in which a company is currently
operating
 Companies pursuing unrelated diversification are
often called conglomerate ie made of of many
diverse businesses
 Value can only be created by pursuing and
acquisition and restructuring strategy
 UTC has pursued unrelated diversification
successfully and is one of the highest performing
Fortune 500 companies
Restructuring and downsizing

 Reducing company scope by exiting business areas
 Many conglomerates restructured and downsized before 2000 to
focus on key industries
 Why restructure?
o Prime reason why extensively diversified companies
restructured in the last decade is due to diversification
discounts, which refer to stocks of highly diversified
companies to be valued lower relative to earnings than less
diversified companies for 2 reasons

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Investors are put off by the complexity and lack of

transparency of financial statements of highly
diversified companies, causing them to appear more
risky  restructuring can boost shareholder returns
 Managers have a tendency to diversify too much for
the wrong reason, pursuing growth rather than
profitability  restructuring is a response to declining
financial performance
o Response to failed acquisitions
Whether made to support a horizontal/vertical
integration or diversification strategy
 Fail to deliver anticipated gains
o Innovations in management strategy and in advanced IT
diminished the profit-enhancing advantages of vertical
integration and diversification
 Strategic innovations like long-term contracting (LT
cooperative relationships) facilitates investments in
specialisation and avoids bureaucratic costs of
vertical integration
 3 main Exit strategies
o Divestment (favoured exit strategy)
Much of the initial investment can be recovered
Selling a business unit to the highest bidder
buyers include
 independent investors  spinoff
 makes sense when the unit is profitability
and the stock market has an appetite for
new stock issues e.g. market upswings
 other companies
 in the same line of business as the unit
 management of the unit that will be divested)
o Harvest strategy
 Involves halting investment in a unit to maximise
short to medium term CF
 Often difficult to apply in practice

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 Once a harvest strategy is pursued, customer and

supplier confidence shrink as well as employee
morale, causing a rapid decline in revenues and
increase in costs
 Strategy become untenable
o Liquidation strategy
 Involves shutting down the operations of a business
unit
 Least attractive as it requires the company to write
off its investment, often at considerable cost
 May be the only viable alternative
Restructuring
 Process through which managers simplify organisational
structure by eliminating divisions, departments or levels in
hierarchy, and downsize by terminating employees, thus
lowering operating costs

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11.03.2015
Strategic change: implementing strategies to build and develop a

company 232-240: 13
Strategic change
 Movement of a company away from its present state toward
some desired future state to increase its competitive advantage
and profitability
 E.g. strengthen existing core competencies and build new ones
to compete more effectively
 Often a result of unexpected environmental changes e.g. tech
breakthroughs
Strategic change always involves considerable uncertainty and risks

that must be borne if above-average returns are to be achieved!!!
Types of strategic change

 Change a company to operate more effectively by reengineering
o Process in which managers focus on the business
processes underlying the value creation process rather
than functional activities
o Business process: any activity that is vital to delivering
goods and services to customers quickly or that promotes
high quality or low costs e.g. design  cut across functions
o Reengineering and total quality management (ch4) are
highly interrelated and complementary
 After reengineering (and finding the best way to
provide customers with goods/services), TQM takes
over to continue to improve and refine the new
process by finding better ways of managing task and
role relationships
 Restructuring
o Process through which managers simplify organisational
structure by eliminating divisions, departments or levels in
hierarchy, and downsize by terminating employees, thus
lowering operating costs
o May involve outsourcing (def): contract another company
to perform a functional activity like manufacturing,
marketing or customer service

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o Various reasons for downsizing and streamlining 

environmental changes
o Often however, restructuring occurs because managers
have not continuously monitored business processes and
have not made incremental changes to strategies that
adjust to changing condition
A model of the change process

1. Determining the need for change
o May not be obvious due to a gradual performance decline
o Recognise the gap between desired performance and
actual performance using profitability, stock price etc
o To discover the need for change, managers conduct a
SWOT analysis
1. S&W  strategic audit of all functions to assess
their contribution to profitability  identifies
problem source
2. O&T  might explain the problem e.g. more
intense competition, shift in consumer tastes
 Next step is to determine the desired future state and how it
should change the strategy and structure to achieve the new
goals
2. Determining the obstacles to change

 strategic change is often resisted by people and groups inside an
organisation
 e.g. restructuring requires new set of role and authority
relationships among managers in different functions and
divisions, threatening the status and rewards of some
 there may be high level of resistance at all levels in the
organisation
 obstacles are found at 4 levels: corporate, divisional, functional,
individual
o corporate: e.g. centralisation as a cost-cutting means
affects balance of power  small changes have large
impacts on the company’s behaviour
o divisional: change favours some divisions over others

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o functions: different functional goals and orientations make

it hard to formulate and implement a new strategy e.g.
production may focus on cost reduction, sales on demand
rises and R&D on product innovation to boost profitability
o individual: resistance to change as it implies uncertainty
and thus insecurity
 paradoxically companies that experience the greatest uncertainty
may become best able to respond to it – when forced to change
frequently, the firm becomes more skilled at handling change
 the larger and more complex the organisation, the more
pervasive inertia is and the harder it is to implement change
3. Managing change
 raises questions e.g. who should carry out change – internal
managers with experience and knowledge or external consultants
with new perspectives
 internal managers may be politically motivated and have a
personal stake in their recommended changes
 external consultants have an objective perspective but must
spend a lot of time learning about the company and its problems
before proposing a plan of action
 2 approaches to implementing and managing change
o top-down change
strong CEO/top management analyses the necessary
strategies and recommends a course of action,
quickly restructuring and implementing change
 emphasis is on the speed of response and prompt
management of problems as they occur
 BUT problems may emerge later and be difficult to
resolve
o bottom-up change
 more gradual
 top management consults with managers at all levels
and develops a detailed plan for change with a
timetable that outlines all stages
 emphasis is on participation and keeping people
informed

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 removes some obstacles of change by including them

in the strategic plan BUT: slow pace#
4. evaluating change
 evaluate effects of strategic changes on organisational
performance using indexes like stock market price
Analysing a company’s portfolio of core competencies

 A tool that helps to determine a firm’s desired future state and
how to get there is to analyse a company as a portfolio of core
competencies (conceptual tool was developed by Hamel and
Prahalad)
 Core competency: central value creation capability of a company
ie core skill
 Corporate development is oriented toward maintaining existing
competencies and building new competencies, leveraging them
by applying them to new business opportunities
 They suggest that identifying current core competencies is the
first step in deciding which business opportunities to pursue
 An agenda should be established to build and leverage core
competencies to create new business opportunities
 E.g. matrix that distinguishes between existing and new
competencies and existing and new product markets

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 Premier Plus 10: e.g. Canon realised the need to build a new
competency in digital imaging if it wants to maintain its
 Mega-opportunities: may be pursued if they are viewed as
particularly attractive or relevant
 This core competency framework helps companies to identify
business opportunities and ahs clear implications for resource
allocation
 Focuses explicitly on how to create value by building
new/recombine existing competencies
 The framework recognises interdependencies among businesses
Implementing strategy through internal new ventures

 Def.: involves creating the value chain functions necessary to
start a new business from scratch
 Typically executed when a firm can leverage a set of valuable
competencies to enter new business areas
 E.g. 2M successfully shapes new markets from internally
generated ideas

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 Even if the firm lacks competencies to compete in a new

business, it may pursue new venturing if the industry it is
entering is emerging, meaning there are no established
companies with competencies and the firm is at no competitive
disadvantage
 Alternative option: acquire existing companies
 Pitfalls with internal new ventures
o Popular but there’s a high risk of failure
o Research suggests that 33-60% of all new products that
reach the marketplace, most of which resulted from new
ventures, do not generate an adequate return
o 3 Reasons for the high failure rate
 Scale of entry
 This is a critical precondition of success with a
new venture, yet, substantial capital
investments to support large-scale entry raises
risks
 Thus, Many companies make the mistake of
choosing a small-scale entry strategy, causing
them to fail to build market share necessary for
LT success
 Large scale entry allows the realisation of scale
economies, access to distribution channels and
creates brand loyalty, increasing the likelihood
of success

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 Scale effects are particularly significant when

the industry is established and incumbent
companies benefit from scale economies, brand
loyalty etc
 Commercialisation
 To be commercially successful, market
requirements must be considered
 Must analyse market opportunities and demand
properly
 Firms may become blended by the promise of a
new tech/invention that it ignores the market
e.g. Iridium project
 Poor corporate management
 Managing the new-venture process and
controlling the new-venture division creates
many difficult managerial and organisational
issues
 Common mistake of establishing too many
different internal new-venture divisions at the
same time, placing large demands on CF
 Not enough cash and management attention
 Failure to be clear about the strategic
objectives of the venture and how to establish
a competitive advantage

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Failure to anticipate the time and costs of the


new-venture process – it is realistic that it can
take 5-12 years before a new venture
generates substantial profits
 Guidelines for successful internal new venturing
o Adopt a structured approach to managing internal new
venturing
o Begins with R&D
 Should be close links between R&D and marketing
personnel so that research projects address market
needs to boost profitability
 Also close links to the manufacturing personnel to
ensure manufacturing capabilities
 Linkages can be achieved by setting up project
teams with employees from various functional areas
o Choose ventures with likely commercial success
Selection process is necessary to avoid spreading
resources over too many projects
o Monitor the progress of the venture closely
 Consider growth in market share rather than
profitability in the first 4-5 years
 Clearly defined market share goals
o Enter large-scale before demand fully materialised
 Scale economies, build market presence and brand
loyalty
Implementing strategy through acquisitions

 One firm purchases another to strengthen its competitive
position in an existing business by purchasing a competitor
(horizontal integration) or to enter a new business/industry
 Popular
o When firms feel the need to move fast as internal
venturing as a relatively slow process
 Acquisitions are quicker to establish market
presence, create value and increase profitability
o As they are often perceived as less risky than internal new
ventures as they involve less commercial uncertainty

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New venturing: uncertain future profitability,


revenues, CF
 Established firms have a track record
o When incumbent companies enjoy significant protection
from barriers to entry because of brand loyalty, economies
of scale etc.
 Makes new venturing difficult and acquisitions allow a
firm to circumvent entry barriers
 Pitfalls of acquisitions
o Many fail to add value and realise anticipated benefits as
market shares often decline following acquisitions and
acquired businesses are often sold off at a later stage
o Reasons for failed acquisitions
 Post-acquisition integration
 Involves the adoption of common management
and financial control systems and joining
operations to share information and personnel
 Integration is hampered by differences in
corporate cultures and tension between
business units may arise
 If top management of the acquired company
changes, management talent and expertise is
lost
 Overestimating economic benefits
 Even when integration is achieved, synergies
are often overestimated e.g. AOL acquired
Time Warner in 2001 and spun it off into a
separate company in 2009
 Expensive
 During the acquisition process, stock prices
often get bid up, making the acquisition even
more expensive
 Debts taken on to finance acquisitions may
later become a problem especially if interest
rates rise
 Inadequate screening of acquisition targets
 Realisation that the firm bought a troubled
rather than a well-run business

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 Guidelines for successful acquisitions

o Pre-acquisition Screening
 Increasing knowledge about potential takeover
targets and lowering the risk of purchasing a problem
company with a weak business model
 Leads to a more realistic assessment oft he problems
involved e.g. integration
 Screening should begin with a detailed assessment
oft he strategic rationale for acquisitions and the
identification of the ideal acquisition candidate
 Evaluate potential acquisition candidate based on a
set of criteria, focusing on the financial position,
product market position, competitive environment,
management capabilities and corporate culture
 Allows the identification of S&W of each candidate,
the extent of economies of scope, potential
integration problems and the compatibility of
corporate cultures e.g. Microsoft and SAP decided not
to merge after such considerations
o Bidding strategy
 Reduce the price that a company must pay for an
acquisition candidate
 Essential element is timing and using cyclicality t
purchase companies when they are undervalued by
the stock market
o Integration
 Positive steps to integrate the acquired company into
the organisational structure of the acquirer
 Integration should centre on the source of potential
strategic advantages of the acquisitions e.g. sharing
marketing resources
 If a company pursues unrelated diversification,
integration will be a much smaller problem than for
related diversification
Implementing strategy through strategic alliances

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 Def.: Cooperative agreements between two or more companies

to work together and share resources to achieve a common
business objective
o Can range from informal agreements and ST contracts in
which firms agree to share know-how, to formal
contractual agreements such as LT outsourcing agreements
and joint ventures
o Some are temporary, others may prelude a permanent
relationship e.g. LT agreements may lead to joint ventures
 Joint venture: formal type of strategic alliance in which two
companies jointly create a new, separate company to enter a
new business area
 Pursued when a company considers new venturing but the
associated risks and costs are too high to assume on its own
 Valuable strategic tool that helps companies maximise business
opportunities in today’s competitive global environment
 Advantages of strategic alliances
o Might be a way to facilitate entry into a market e.g.
Motorola entered the Japanese market by forming an
alliance with Toshiba
o Sharing FC and associated risks arising from the
development of new products/processes
o Brings together complementary skills and assets that
neither company could easily develop on its own
 Disadvantages
o May provide competitors with access to valuable
knowledge, technology and market access
o Sharing risks also requires sharing profits and control,
which may lead to future conflicts if managers have
different business philosophies, investment preferences or
time horizons
o The more extensive and formal the alliance, the higher the
risks, however, benefits may also result in more
advantages than disadvantages
 Making strategic alliances work
o Failure rate of strategic alliances is quite high
o Success seems to be a function of 3 factors
 1. Partner selection – partners should

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 help a company achieve strategic goals (e.g.

gain market share, share costs/risks of new
product development)  have capabilities that
the company lacks and values
 share the vision fort he purpose oft he alliance
 not exploit the alliance opportunistically for ist
own ends e.g. IBM is involved in so many
strategic alliances that it would not pay the
company to cheat on individual alliance
partners
 need to thoroughly investigate potential
alliance candidates – public and private
information ie face-to-face meetings
 2. Alliance structure
 structure the alliance so that the firm’s risk of
giving too much away tot he partner is reduce
to an acceptable level
 4 safeguards against opportunism of cheating
 “wall off” and protect sensitive
technologies form partners, effectively
cutting off the transfer of key competitive
technology and only permitting access to
final assembly
 contractual safeguards can be written to
guard against exploitation risk e.g. guard
against a firm using another merely to
gain access to the firm’s home market
and compete there
 agreeing to swap valuable skills and
technologies by using gross-licensing
agreements e.g. Motorola and Toshiba
 seeking credible commitments to signal
that the firm does its best to ensure that
the alliance works. Such credible
commitments often come in the form of
capital investments
 3. Manner in which the how the alliance is managed

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 maximise the benefits from the alliance by

being sensitive to cultural differences and
building trust between partners, which is
referred to as relationship capital
 personal relationships also foster an informal
management network, which can solve
problems in more formal contexts
 Hence: have distinct advantages as well as drawbacks compared
to internal new venturing or acquisitions as a means of
establishing a new business operation
 Managers must assess the pros and cons of the alternatives
carefully

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11.03.2015
Implementing strategy through organisational design 267-275: 8
 Refers to the organisational arrangements that enable a firm to
pursue its strategy most effectively
 Organisational design: selecting the combination of
organisational structure and control systems that allows a
company to pursue its strategy most effectively and lets it create
and sustain a competitive advantage
 Good org design raises profits in two ways
o Lowers the costs of value creation activities by coordinating
employees
o Enhances the ability to achieve superior efficiency, quality,
innovativeness and customer responsiveness to obtain a
differentiation advantage by motivating employees
 Org structure and control shape the way people behave and
determine how they act in org settings
Role of organisational structure

 After formulating strategies, designing an org structure is the
next priority as organisational structure is vital for strategy
implementation
 Value creation activities must be linked
o Especially if functions/divisions are specialised, they may
pursue their own goals and linkages may be weak
o E.g. R&D focuses on innovation and manufacturing on
increasing efficiency
 Each function (which all aim to develop distinctive competencies
to increase efficiency, quality, innovation or customer service)
needs a structure that leads to higher productivity
 Structure is a vehicle to coordinate company activities across
functions, divisions and business units to take advantage of their
skills and competencies
 For cost leadership strategies, companies should coordinate
activities of manufacturing and RZD
 To gain economies of scope and resource sharing between
divisions, managers must motivate divisional managers to
communicate and share their skills and knowledge

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 Global/transnational strategy: right org structure for managing

resource and capability flows between domestic and overseas
divisions
Building blocks of org structure are differentiation and integration

 Differentiation consists of the division into parts and integration
consists of the combination of these parts
 Differentiation: way in which a company allocates people and
resources to organisational tasks to create value
 The more functions and divisions, the more specialised and the
higher the level of differentiation e.g. GE 300 different divisions
 When deciding how to create value through differentiation,
strategic managers must choose how to
o distribute decision-making authority  vertical
differentiation choices
 authority of functional managers
o divide people and tasks into functions to increase their
ability to create value  horizontal differentiation choices
 e.g. should sales and marketing be combined?
 Integration: coordinate people and functions to accomplish
organisational tasks
o Integration mechanisms and control systems are used to
promote coordination and cooperation between functions
and divisions
o Establishing organisational norms, shared values and a
common culture e.g. that supports innovation (Apple)
promotes integration
Vertical differentiation
 Aim of vertical differentiation is to specify the reporting
relationships that link people, tasks and functions at all levels
 Involves the decision on the number of hierarchical levels and
span of control
 The organisational hierarchy establishes the authority structure
from the top to the bottom of the organisation
 Span of control: defined as the number of subordinates a
managers directly manages

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 Basic choice: flat structure with few hierarchical levels and thus a
relatively wide span of control or a tall structure with many levels
and thus a relatively narrow span of control
 E.g. average number of hierarchical levels for a company
employing 3,000 people is seven  Google employs 22,000 and
has 5 hierarchical levels  relatively flat structure
 Choose the number of levels based on their strategy and
functional tasks necessary to achieve this strategy e.g. high-tech
firms pursue differentiation strategy based on service and control
– flat structure gives employees wide discretion to meet
customer demands
 Allocation of authority must match the needs of corporate,
business and functional-level strategies
Problems with tall structures

 As organisations grow, managers try to keep the organisation as
flat as possible and follow the so-called principle of the minimum
chain of command, which states that an organisation should
choose a hierarchy with the minimum levels of authority
necessary to achieve its strategy
 When companies become too tall, problems may arise that make
the strategy more difficult to implement
o Coordination and communication problems between
employees and functions  communication between top
and bottom takes much longer, leading to inflexibility and
raising costs
o Information distortion can occur for upwards or downwards
information streams as the hierarchy of authority
lengthens and managers may misinterpret information
o Motivational problems: the authority of managers at each
hierarchical level diminishes as the number of levels
increase, lowering their responsibility and motivation
 Tall structure means that managers are constantly
supervised and may refuse to take risks that are
often necessary to pursue new strategies
o Too many middle managers: who are expensive due to
managerial salaries, benefits offices, secretaries etc

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 Hence, as companies become too tall, managers may lose

control over the hierarchy and the structure may lower
motivation and coordination, raising operating costs
 To address such problems and lower costs, authority can be
decentralised  problems of tall hierarchies can be reduced by
decentralisation depending on the situation, however, as size
increases, decentralisation may become less effective
Centralisation or decentralisation
 centralised authority: managers at the upper levels of the org
hierarchy retain the authority to make the most important
decisions
 decentralised authority: managers delegate authority to
divisions, functions and managers and workers at lower levels in
the organisation, thereby avoiding communication and
coordination problems
o 3 advantages
 when strategic managers delegate responsibility to
middle and first-level managers, they reduce
information overload and allow them to make more
effective decisions
 responsibility of bottom layer managers increases
their motivation and accountability
 fewer managers are needed to oversee the activities
of lower-level employees if they are allowed to make
important decisions, lowering costs
 centralisation has its advantages too
o centralised decision making facilitates the coordination of
organisation activities
o ensures that decisions fit broad organisational objectives
Horizontal differentiation
 Decide how best to group organisational tasks and activities to
meet the strategic objectives of a company’s strategies
Functional structure
 As a company grows, 2 things happen:
o the range of tasks performed expands

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o individuals must focus on only one organisational task to

avoid becoming overloaded
 hence, firms must group activities to most efficiently handle the
needs of growing companies at least costs, through adopting
functional structures for instance
o def.: arranging and grouping people on the basis of
common expertise and experience/ the use of the same
resources
 Advantages
o People who perform similar tasks are grouped together and
can learn from one another and become better – more
specialised and productive
o Monitor each other, leading to higher efficiency and lower
costs, also increasing operational flexibility
o Give managers greater control of organisational activities,
as grouping into functions creates different hierarchies and
prevents companies from becoming too tall
o by adopting a functional structure, a company increases its
level of horizontal differentiation to handle more complex
tasks and control activities as it grows. However, if it
becomes too large or diverse, control and coordination
problems arise
 Disadvantages
o Communication problems
because functions grow more remote from one
another as horizontal differentiation becomes greater
 they develop independent orientations and
communication and coordination worsens
o Measurement problems

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 As the number of products grows, it may be difficult

to measure the contribution of each to overall
profitability
 Hence, a company may produce some unprofitable
products without realising it and make poor resource
allocation decisions
o Location problems
 Centralised control does not support operations that
span various regions
 Functional structure is not complex enough to handle
regional diversity and not flexible enough to respond
to customer needs
o Strategic problems
 Combined effect of these factors is that management
is preoccupied with solving communication and
coordination problems, leading to a failure to take
advantage of new opportunities and optimise
strategies
 A company must change its mix of vertical and horizontal
differentiation if it should perform organisational tasks in a way
to enhance competitive advantage
 Such problems indicate that a company has outgrown its
structure and needs to develop a more complex one that needs
the needs of its competitive strategy  expensive but often
necessary
 Many companies reorganise, adopting a product, geographic or
product-team structure, depending on the source of the
coordination problem
Product structure
 Activities are grouped by product line e.g. Dell adopted a product
structure based on serving the product needs of different
customer groups
 Ie manufacturing is broken down into product lines based on the
similarities and differences among the products
 In each product group, many kinds of similar products are
manufactured

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 The degree of horizontal differentiation is higher than in the

functional one as each function is divided so that personnel
specialises in one of the different product categories
 All groups coordinate their activities to ensure good
communication and transfer of knowledge among product lines
 Reduces problems of control and coordination as was the case
with the functional structure
 It pushes barriers among functions aside, as the focus is on
product line rather than each function, becomes the focus of
attention
 Profit contribution of each product line can be identified and
resources efficiently allocated
 One more level in the hierarchy than the functional structure:
product line manager
o Increase in vertical differentiation allows managers at the
product line level to concentrate on operations and gives
top managers time to develop the competitive advantage
 higher operating costs are offset by extra coordination
and control that the structure provides
  Division among product lines leads to reduced costs and
improved monitoring and control
Product-team structure
 Major structural innovation
 Due to the competitive environment today, many companies are
forced to optimise the coordination of their support functions to
bring their products to the market more rapidly and protect their
 Def.: tasks are divided among product lines to reduce costs and
improve monitoring and control, and specialists from various
support functions are assigned to work on a product/project and
are combined into cross functional teams to serve product needs
 As all functions have direct input from the beginning, design and
subsequent manufacturing costs can be kept low
 Cross-functional teams can speed innovation and customer
responsiveness as authority is decentralised to the team
Geographic structure

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 Geographic regions become the basis for the grouping of

organisational activities, allowing local responsiveness and
reduced transportation costs e.g. by establishing manufacturing
plants in different regions of the country
 Neiman Marcus adopts a geographic structure to adjust to
different regional clothing needs, while the purchasing function
remains centralised
o Economies of scale in buying and distribution
o Reduces coordination and communication problems as
regional buyers feed their information of customer needs to
central buyers
o Most profitable luxury department store chain
 Usefulness oft he product or geographic structure depends on
the size of the company and its range of products and regions
 If a firm diversifies into unrelated products or integrates
vertically into new industries, product structures cannot handle
the increased diversity as it does not allow for effective
coordination of value creation activities
 Not complex enough for large, multi business companies
 At this point, multidivisional structures are adopted
Multidivisional structure
 each product line/business unit is placed in its own self-contained
unit, with all support functions e.g. GE only has self-contained
divisions, performing all value creation functions to give the
division a competitive advantage
 2 main advantages over a functional structure
o innovations that let a company grow and diversify
o overcome problems stemming from loss of control
 higher level of horizontal differentiation
 the office of corporate HQ staff is created to monitor divisional
activities and exercise financial control over each division, adding
a level in the organisational hierarchy  higher level of vertical
differentiation
 operation costs are very high compared to a functional structure
and the large size of corporate staff is a major expense,
however, it makes sense if the costs are offset by a higher level
of value creation

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 each division can adopt the structure that best suits its needs
 Matrix structure: functional managers work with project
managers in temporary teams to develop a new product
o Once completed, functional and project managers move to
new teams to apply their skills
 Divisional management has operating responsibility:
responsibility of their division’s daily operations
 Corporate HQ staff has strategic responsibility: responsibility of
overseeing LT plans and providing guidance for interdivisional
projects
 A combination of self-contained decisions with centralised
corporate management represents higher vertical and horizontal
differentiation
 Provides extra control needed to coordinate growth and
diversification – more than 90% of US corporates use it despite
high costs
Advantages of a multi-divisional structure

 Enhanced corporate financial control
o Clearly visible profitability of different divisions
o Each division is its own profit centre and performance goals
are established by corporate managers for each division
o Performance can be monitored and intervention is possible
when problems arise  allocate resources most effectively,
channelling funds to high-performing divisions that produce
most profits
 Enhanced strategic control
o Frees corporate managers from operating responsibilities
o More time for strategic issues and developing responses to
environmental changes
 Growth
o Possible to overcome an organisational limit to a firm’s
growth with this structure
o Reduces information overload at the centre and
communication problems due to the same set of control
techniques that is used to evaluate all divisions

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o Corporate managers may implement a policy of

management by exception: only intervening when
problems arise
 Stronger pursuit of internal efficiency
o Individual efficiency of each autonomous division can be
directly observed and measured by he profit it generates
o Autonomy makes divisional managers accountable
o Easier to identify inefficiencies
Disadvantages of a multidivisional structure

 Good management can eliminate some, but others are inherent
tot he way the structure operates
 Establishing the divisional-corporate authority relationship
o Introduces a new level in the management hierarchy,
namely the corporate level
o Corporate managers must decide how much authority to
decentralise to operating divisions and how much to
centralise at HQ  depends on business and corporate-
level strategies and the environment
o Retain too much power: little motivation
o Delegate too much authority: managers may pursue
strategies that benefit their own divisional objectives but
add little value to the corporation
 Distortion of information
o Setting very high ROI targets_ divisional managers may
distort information and pursue strategies that increase ST
profitability and reduce LT profitability
o Careful control of the interactions between corporate
managers and divisional managers is necessary
 Competition for resources
o Rivalry between divisions may prevent economies of scope
or synergy gains from emerging
o Competition for resources may reduce interdivisional
coordination
 Transfer pricing

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o Divisional competition may lead to battles over transfer

pricing, which refers to the prices at which products
produced by one business unit are sold to other company-
owned business units
o Each division tries to get the highest price to maximise its
own profitability, potentially undermining the corporate
culture
 Focus on ST R&D
o High profitability targets raise the danger of cutting back
on R&D to improve the financial performance
o Reduces the ability to develop new products and leads to
lower LT profits
o Corporate management must control the interactions with
the divisions to ensure that both ST and LT goals are
achieved
 High operating costs
o Each division possesses its own specialised functions like
R&D, making it expensive to run and manage
o Duplication of specialist services is not a problem if the
gain of separate specialist functions outweigh the costs
o Advisory services and planning functions are often
centralised
 Advantages and disadvantages must be balanced
 Multidivisional structure dominates today
Integration and organisational control

 The appropriate form of differentiation must be chosen to match
strategy  the greater diversification, the higher differentiation
should be
 Second decision for organisational design is the level and type of
integration and control necessary to make an organisational
structure
 Integration is the extent to which a firm seeks to coordinate its
value creation activities and make them interdependent
 The higher the level of differentiation, the higher the level of
integration that is needed for the structure to work effectively
 E.g. FedEx needs strong integration to fulfil next-day delivery
(geographical structure)

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 Higher integration is also expensive  only use more complex

integration to implement strategy effectively
Forms of integrating mechanisms

 Direct contact
o Between managers from different divisions/functions so
that they can work together to solve mutual problems
o As they have different goals but equal authority they may
tend to compete rather than cooperate when conflicts arise
o Sign of problems: number of problems sent up the
hierarchy for upper-level managers to resolve, wasting
time and retarding strategic decision making
 Interdepartmental liaison roles
o Improve inter-functional coordination this way
o As the volume of contacts between two departments or
functions increases, it makes sense to give one manager in
each division the responsibility for coordinating with the
other function
o Managers meet as often as needed
o Through this responsibility for coordination, permanent
relationships are established
o Also present a way of transferring information across the
organisation
 Temporary task forces
o When more than 2 functions/divisions share common
problems, direct contact and liaison roles often fail to
provide enough coordination
o Solution: task force, a more complex integration
mechanism
o One member of each function/division is assigned to a task
force that has been created to solve a specific problem –
they are ad hoc committees and members are responsible
for reporting to their departments on the issues and
recommended solutions
o Temporary as employees take on their normal roles once
issues are resolved
 Permanent teams

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o If issues addressed by a task force recur, permanent

integrating mechanisms must be adopted
o Permanent team e.g. new-product development
committee, which requires integration among functions if
new products are to be successfully introduced
o Importance of teams cannot be overemphasized
o Permanent teams are standing committees
o E.g. product-team structure is based on the use of cross-
functional teams to speed products to market, with the
goal is to increase coordination
 Integrating roles
o Only function of the integrating role is to prompt
integration among divisions/departments
o Full time job that is staffed by an independent exports,
usually a senior manager with lots of experience in joint
needs between departments
o Only occurs in large, diversified corporations that see the
need for integration among divisions
Differentiation and integration

 Many options when firms increase their level of differentiation as
a result of increased growth or diversification
 High differentiation must be matched by integrating mechanism
to meet organisational objectives
 A combination of low differentiation and high integration is also
inefficient as this creates over-controlled, bureaucratized
organisation with little flexibility  unnecessarily high costs
 Companies must operate the simplest structure consistent with
implementing its strategy effectively
Companies try to coordinate activities through integrating

mechanisms, as well as control systems
Organisational control
 Process by which managers monitor the ongoing activities of an
organisation and its members to evaluate whether activities are
performed efficiently and effectively and to take corrective action
to improve performance if not

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 1. Managers choose strategy and structure to use resources

most effectively and create value
 2. Managers create control systems and monitor and evaluate
whether the strategy and structure work as intended and how
they could be improved
 Control is a strategic process, as it is about keeping an
organisation on track, anticipating events and responding swiftly
to new opportunities
 Companies develop strategic control systems
o Def.: formal target-setting, measurement and feedback
systems that allow strategic managers to evaluate whether
a company is achieving superior efficiency, quality,
innovation and customer responsiveness and is
implementing strategy successfully
 Control is therefore not only about monitoring but also about
keeping employees motivated and encouraging them to excel
 Effective control systems should be
o Flexible
 Allow managers to respond as necessary to
unexpected events
o Provide accurate information
 Truly reflecting organisational performance
o Supply information to managers in a timely manner
 Steps in designing an effective control system
o Establish standards and targets
General performance standards often derive from the
goal of achieving superior efficiency, quality,
innovation or customer responsiveness
 Specific performance standards are derived form the
chosen strategy
o Create measuring and monitoring systems
That indicate whether standards and targets are

reached
 Measuring performance can be difficult if the
organisation is engaged in many complex activities
e.g. measure R&D and integration  need to use
various types of control systems
o Compare actual performance to established targets

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Evaluate any deviations

if performance is higher, standards may be raised
if performance Is too low, managers must identify
reasons for poor performance and decide what to do
 may be difficult if they stem from external factors
e.g. recession
o Evaluate results and take corrective action if necessary
 May include changing any aspect of strategy e.g.
invest more resources in improving R&D or diversify,
change the organisational structure
 Aim is to continuously enhance the organisation’s
Types of control systems
Financial controls
 Select financial goals related to growth/profitability and measure
whether or not they are achieved
 Popular as financial performance measures are objective and can
be compared
 e.g. Stock price indicate the market’s expectations for the firm’s
future performance and LT future return, meaning that it can be
regarded as an indicator of the company’s LR potential
 e.g. ROI measures profitability by dividing net income by
invested capital
o at the corporate level, the performance of the whole
industry can be evaluate against other similar companies
to assess relative performance
o at the divisional level, capital allocations are made on the
divisions’ relative performance
 Failure to meet stock price or ROI targets indicates that
corrective action is necessary
Output controls
 Def.: Strategic managers estimate appropriate performance
goals for each division, department and employee and then
measure actual performance relative to these goals

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 Tells managers the effectiveness of their strategies regarding the

creation of a competitive advantage and distinctive competencies
 Reward system is often linked to output controls, thereby
motivating employees at all organisational levels
 Divisional goals
o State expectations for each division’s performance on
dimensions such as efficiency, quality, innovation and
customer responsiveness
o Divisional managers are given considerable autonomy to
formulate a strategy to meet this goal
o Failing divisions are divested
 Functional and individual goals
o Divisional managers set goals for functional managers that
will allow the division to achieve its goals
o Functional goals should encourage the development of
competencies that give a firm a competitive advantage (4
building blocks for this: efficiency, quality, innovation and
customer responsiveness)
o Functional managers establish goals for individual
employees
Behaviour control
 Control through the establishment of a comprehensive system of
rules and procedures to direct the actions or behaviour of
divisions, functions and individuals
 Objective of behaviour controls is to standardise the way of
reaching goals
 Rules standardise behaviour lead to predictability
 3 types of behaviour control
o Operating budgets
Blueprint that states how managers intend to use
organisational resources to achieve organisational
goals most efficiently
 Once managers are given a budget they must
allocate certain amounts for different organisational
activities
o Standardisation

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 Degree to which a company specifies how decisions

are to be made so that employees’ behaviour
becomes predictable
 An organisation can standardise
 inputs
 specify required skills (employees) and
qualities (raw materials)
 JIT inventory systems help standardise
the flow of inputs
 conversion activities
 program work activities to be done the
same way: standardised fast food McD
 outputs
 specify performance characteristics of the
final product or service
 criterion: number of customer complaints
 on production lines, periodic sampling of
products can indicate whether
performance standards are met
o Rules and procedures
 Behaviour controls have potential pitfalls that must
be avoided
 Top management must monitor and evaluate the
usefulness of behaviour controls  rules constrain
people  easier to establish than get rid off,
potentially leading to inflexibility and bureaucracy,
reducing the competitive advantage due to lower
innovation and customer responsiveness
 Reducing the rules and procedures to the essential
minimum is important, as otherwise, integration and
coordination may fall apart as rules hamper inter-
functional communication
o Organisational culture
 Specific collection of values and norms that are
shared by people and groups in an organisation and
that control the way they interact with each other
and with stakeholders

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 Organisational values: beliefs and ideas about what

kinds of goals members should pursue and what
behaviours employees should use to achieve these
goals e.g. Bill Gates created clear values for Microsoft
incl. entrepreneurship
 From values develop organisational norms, the
guidelines or expectations that prescribe appropriate
kinds of behaviour by employees in particular
situations and control the interaction between
employees
 Functions as a form of control in that strategic
managers can influence values and norms e.g. Gates
cultivate values to encourage subordinates to
perform their roles innovatively and creatively as
this is best suited to Microsoft’s strategy
Culture and strategic leadership

 Structure, which designing tasks and reporting relationship, and
culture both shape employee behaviour
 Culture is the product of strategic leadership provided by the
founder and top managers
 Leadership style is transmitted to managers and members
typically share the same values, making the culture more distinct
 Shared values and common culture increases integration and
improves coordination among organisational members
 Rules and procedures become less important when shared norms
and values regulate behaviour and motivate employees
 Subscribing to norms and values increases their commitment

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11.03.2015
Best strategies: help you achieve your mission
2h
3 questions which each cover multiple questions
Sample exam
No examples, only material
Should only take 1h?
Single industry: question: Outsourcing is a tactic, not a strategy

Grow within a single industry
Explain advantages and disadvantages and WHERE you would use a

strategic alliance etc.
“If it’s important enough to ask a question, it’s important enough to

know the answer”
Mission statement and how it is related to other strategies

 3 chapters on strategy
 Corporate, global and business strategy
He does not believe in functional strategy being a “thing”!!!!
2.1
Stakeholders
 strategy might benefit one department over another (internal
stakeholders) especially when there are strategic changes –
maintenance of power comes into play
Mission statement
 Measurable, address crucial issues, challenging but realistic, time
period (which is really important)

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 Basis on which the strategy is developed
Ethics in strategy
 Self dealing
 Information manipulation
 Anti-competitive behaviour
 Opportunistic exploitation
 Environmental degradation
 Corruption
Taking a highly ethical approach may be a way to optimise strategy
E.g. Bodyshop
Tools to use for analysing the external environment

 Looking for: opportunities and threats
 Look at: macro-environment and industry environment (and how
they interact)  macro-environment influences the influences
 PESTLE and Porter’s 5 forces
 Further analysis: strategic groups in the pharmaceutical industry
 Industry life cycle and the appropriate strategies
Internal analysis
 Looking for: S&W (Have/do better-have not/worse than
competitors)
 Look at value chain analysis and generic building blocks of
 Price-cost is better for Toyota for 2 reasons: customer’s
perception (higher price and thus perceived value) and higher
superiority (lower costs)
 Competitive advantage (low costs, differentiation) building blocks
o Superior efficiency (Toyota)
o Superior quality (Toyota)
o Superior customer responsiveness

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o Superior innovation
 The value chain: support activities and primary activities
o Look at each and ask whether you have a
strength/weakness in any of them
2 basic areas where a company develops strategies: corporate and

business strategy  only then you develop a functional strategy
Corporate-level strategy
 principle concern: what industry to compete in
 4 types of growth strategies
o single industry
o horizontal integration
o vertical integration (forward, backward)
o Diversification
 Advantages and disadvantages of each
 Where to use them
 Other strategies
o Restructuring: implement strategies for reducing the scope
of the company by removing existing business areas
 Happens often in diversified industries and re-
evaluate the industries
 Use the funds to build the core
 3 main exit strategies
o divestment
o harvest
o liquidation
Strategy formulation: mission, external, internal, formulate

strategies: corporate, business, functional
Global strategy – expand outside the domestic market or not

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 Managers need to consider

o How globalisation is impacting the environment in which
their company competes
o What strategies they should adopt to exploit opportunities
o How to counter threats
 Success of many MNCs is not only based on goods and services
they sell but upon distinctive competencies that underlie their
production and marketing
 Increasing profitability through globalisation
o Expanding market
o Realise economies of scale
o Realise location economies
o Leveraging the skills of global subsidiaries
 Expanding in international markets  consider cost pressures
and localisation pressures  this will determine which of the 4
basic global strategies to pursue
o Localisation: low cost pressures but large pressures to
conform to local norms/values e.g. standardised breakfast
cereal was introduced in the UK as an afternoon snack
after it failed at first
 Consider how to structure entry
o Exporting
 Most begin like this
o Licencing
 License the product and get a royalty
o Franchising
 Popular in food industry
 Licence multiple parts of your business
o Joint venture
o Wholly owned subsidiary
After considering corporate and global strategy, move to business

level strategy
Business level strategy: competitive advantage

 Profitability is greater than the industry’s average (over a
number of years  sustained)

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 Try to create value through the competitive advantage

 Value creation: increase price or lower costs
o V, P, C
o V-C= value created
o P-C= profit margin
o V-P= consumer surplus
 Building competitive advantage: 4 factors
o Efficiency – logistics, bulk buying
o Quality
o Innovation
o Customer responsiveness
 Types of business level strategies
o Cost leadership
o Differentiation  general or focus
o Focused cost-leadership strategy
o Focused differentiation strategy
 Business level strategies in declining industries
o Leadership or niche
o Niche or harvest
o Divest
o Harvest or diversity
o Depending on: company strengths relative to remaining
demand, intensity of competition in declining industry
Strategic change
 Stages in the change process

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o Determine the need for change (compare current to

potential new strategy)
o Determine the obstacles to change (resistance to change)
o Implementing change
o Evaluating change (ensure the strategy gets you where
you want to go)
If you implement a strategy and inter new industries:

Strategies to generate new industries are implemented through
 Internal new ventures (dealing with how to generate new
industries vs. wholly owned subsidiaries which determine how to
pursue global strategies)
 Acquisitions
 Strategic alliances
o Organisation teams up with others to develop highly
costly/risky industries – protection and access to other
firms’ expertise (e.g. tech)
Organisational design
 Selecting the combination of organisational structure and control
system that let the company create and sustain a competitive
advantage
 Building blocks
 Tall structures vs flat structures
 Horizontal differentiation structures
o Functional structures
o Product structures
o Geographic structures
o 4th
o  consider how they are related to the pursued strategies
 Integrating mechanisms
Organisational control
 Process by which managers monitor activities and members
 3 types

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o financial controls: stock price, ROI

o output controls: items produced, sales made
o behavioural controls: standards and norms, organisation
culture
Strategic management process: mission, external environment,

internal analysis, strategy formulation, strategy implementation, progress
review – feedback loop feeding back into mission, vision, values and goals

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Strategic Mgmt Study Guide Final - Lecture notes, lectures 1 -

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 Bear responsibility for the overall company performance or for a

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3. analyse the organisation’s internal environment to identify

Strategic management process

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 Mission statement: first component of the str mgmt. process.

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o Compare/contrast alternative possible strategies with

Strategy as an emergent process

Alternative view of strategy making

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 Autonomous action: strategy making by lower level managers

Intended and emergent strategies

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o He notes that strategies can take root wherever people

 Management needs to recognise the process of emergence and

Strategy planning in practice

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 >50% of Fortune 500 companies use some sort of

Strategic decision making is influenced by

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Improving decision making

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Empowerment is a good motivational tool

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Stakeholders, the mission, governance and business ethics

 All stakeholders are in an exchange relationship with the

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o Customer-oriented missions (like Kodak’s) help businesses

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o Nucor Steel is one of the most productive and profitable

Corporate governance and strategy

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 Principal: a person delegating authority to an agent, who acts on

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 Lack of relationship between CEO payments and company

Corporate governance mechanisms

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o Exists to reduce information asymmetry

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o Most common pay-for-performance system are stock

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o Some companies abused the system, aided by the

Ethics and strategy

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 Ethical dilemmas: situations without agreements over what the

Ethical issues in strategy

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o Corruption in the business context

Roots of unethical behaviour

Foster ethical behaviour through

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