Strategic Management

Ali Divandari
The levels of
strategy
The levels of
strategy
 How firms should go about creating a (sustainable)
competitive advantage in each business in which they
operate is the central issue concerning managers engaged in
business level strategy.
 business strategy
The tools of industry
analysis, low cost or
differentiation strategies,
and innovation help
managers devise business
unit strategy, or an
approach for creating
competitive advantage
within a single industry,
market, or line of business.
Corporate strategy
Corporate strategy refers to decisions that are made by senior
corporate executives about where to compete in terms of industries
and markets.
For example, Amazon’s corporate executives made the decision to
enter the electronic reader/tablet business with the Kindle where it
would face new competitors like Apple. Similarly, Amazon’s launch of
Amazon Web Services—a business that provides web hosting, cloud
storage, and marketplace software—was made at corporate
headquarters by the corporate management team.
 CORPORATE VS. BUSINESS UNIT STRATEGY

Business Unit Strategy- The search for competitive advantage within a

single industry, market, or line of business.

Corporate Strategy- The search for value and competitive advantages

through participation in several different industries and markets.
 CREATING VALUE
• Vertical Integration- Movement into adjacent markets by a firm
along its own value chain. Movement in the direction of raw
materials is backward integration. Movement in the direction of
sales, service, or warranty operations is forward integration.

• Horizontal Diversification- The movement into an adjacent, or

unrelated, market that is not along a firm’s own value chain.
 MOVING ALONG THE VALUE CHAIN
• Vertical
– Backward integration
– Forward integration

• Horizontal
– Diversification
– Alliances
Netflix's next strategy on
vertical integration – that is,
on owning its content and
using its distribution system
to deliver that content to its
subscribers. Owning rights
and distributing direct to
viewers allows Netflix to
keep all revenues, rather
than sharing with
distributors.
For Starbucks, vertical
integration is a risk
mitigation strategy. At the
same time, ownership of the
entire value chain means
Starbucks doesn't depend on
external distribution channels,
so quality is guaranteed all
the way through the supply
chain.
It's a hardware company, a
software company, a services
company, and a retail company.
Most technology companies in
the world can manage one or
two of these disciplines, but
only Apple has all four entities
working in harmony.
 MCDONALDS THE KING OF VERTICAL INTEGRATION
They grow their own beef
through contracted producers,
process their own meat, create
their own spices and mixes in
factories that they contract,
grow their own potatoes and
other vegetable through
contracted producers,
transport their goods on their
own.
 2 WAYS TO DIVERSIFY
Go it alone— Buy your way
Greenfield in—acquisition
 ADDING VALUE
The critical question

• Deploying and exploiting current resources

• Developing and expanding new resources

Exploit v. Expand
 MECHANISMS TO CREATE VALUE
lack
Similar Business
Models

Synergy Spreading Capital

Shared Knowledge Stepping stone

 THE 6 S’S
Slack- Unused resource capacity.

• Economy of Scope- Activities where the average cost of producing two different
products is less when delivered together than separately.

• Management Skill- The individual and collective abilities of a firm’s management

team to engage in value-creating activities.

Synergy- Action between different elements of a system that creates more value
together than the elements create separately.

Shared Knowledge- Collective knowledge that can be distributed throughout the

organization to create value.
 THE 6 S’S
Similar Business Model- A business model is a method for enabling value to be
created and exchanged between companies and their customers. General Motors’
business model involves transforming raw materials such as steel, rubber, and plastic
into automobiles, all done at very large scale.

Spreading Capital

• Internal Capital Market- The movement of funds, talent, or knowledge from

unit to unit directed by the leaders of the firm.

Providing Stepping Stones- While the other five Ss all exploit a company’s
current resources and capabilities, the stepping stone mechanism explicitly works to
enhance capabilities.
DESTROYING VALUE THROUGH DIVERSIFICATION

Sunk-Cost
Hubris
Fallacy

Poor
Imitation Governance
and Incentives

Poor
Management
 ENTRY MODE
Greenfield Acquisition
• Existing resources move from • Resources don’t move from
existing to new business existing to new business
– Brand – No brand equity
– Customer knowledge – New customers
– Technology overlap – New technology

• Speed not essential • Speed essential

 ACQUISITION INTEGRATION STRATEGIES
Bury—completely absorb target

Build—a new organization, best of breed

Blend—loose coupling, leverage target

Bolt-on—two companies, one owner

GENERAL INTEGRATION STRATEGIES