Strategic Management

Introduction :
Management : Aims at setting organizational goals and then planning, organizing,
influencing and controlling actions, resources & processes in order to achieve these goals.

Benefits of planning: Know what to do to achieve goals and mitigate foreseeable chaos.

Effectiveness = capacity to achieve goals ≠ Efficiency = optimum use of resources

Organizational performance :
Efficient & ineffective = the business dies slowly
Efficient & effective = the business thrives
Inefficient & ineffective = the business dies quickly
Inefficient & effective = the business survives

Productivity = relationship between the total amount of output and input. => Output / Input
 Value of work / hours worked
Strategy is the mean by which individuals or organizations achieve their objectives.

Strategy ≠ tactics
In each organization there is an internal and an external environment.

Direct competitors : Strategic group

Potential competitor : Industry and substitutable
Managers need to relate strategy to the external and the internal environments of the firm.

Consumer uncertainty and competitive offering make the marketing process difficult.

Chapter 1 : The concept of strategy

To succeed : Long-term objectives, understanding of the competitive environment and
objective appraisal of resources.
Strategy is a link between the firm and the industry environment.
Strategy fit refers to the consistency of a firm’s strategy.

SWOT : The problem is that classifying external factors into opportunities and threats and
internal factors into strengths and weaknesses is often arbitrary.

Porter states : “strategy is the creation of a unique and differentiated position involving a
different set of activities”.

Two possible ways to achieve superior performance :

- Choosing to locate within industries where overall rates of return are attractive
- Earn a return that exceeds the industry average
So industry attractiveness (corporate strategy : where to compete) or competitive
advantage (Business strategy : how to compete).
Very often strategy making combines design and emergence -> planned emergence. As the
business environment becomes more turbulent and less predictable, so strategy making
becomes less about detailed decisions and more about guidelines and general direction.

Chapter 2 : Advanced strategic management: goals, values and

performance
Value can be crated in two ways: by production and by commerce.
Difference btw value of output and cost of input = Value added

Ranking of profit: we use ROE, ROS, ROA

Accounting profit/loss: Profit after various explicit costs and expenses are subtracted from
total revenue.
Economic profit/loss: Surplus available after deducting opportunity cost from accounting
profit.
Implicit cost = any cost associated with not taking a certain action.
Economic profit has two advantages: more demanding performance discipline for managers,
healthy profits disappear once cost of capital is today into account.

EVA = earnings – opportunity cost of capital = NOPAT – (Invested capital * WACC)

Measure of cost efficiencies (smaller is better) : COGS/Sales ; SGA / Sales

Measure of asset turnover (higher is better) : Cash turnover, receivables turnover, inventory
turnover, fixed asset turnover
Measure of capital productivity (Higher is better) : Sales / Total asset
Measure of operating efficiency (Higher is better) : ROS

Profitability is the most useful indicator of firm performance.

Common to every business, the desire & need to create value

Many of the firms that are most successful at creating shareholder value are those that
emphasize Purpose Over profit.

The balanced scorecard : Provides an integrated framework for balancing financial and
strategic goals and cascading performance measures down the organization to individual BU
and departments.  4 questions : How do we look to shareholders ? How do customers see
us ? What must we excel at ? Can we continue to improve and create value ?
Scorecards can also be used to implement stakeholder-focused management.

Deliver sustainable products/services, invest in employees, deal fairly with suppliers,

generate long term value for shareholders, acting on emissions-reduction and other
sustainability targets  Profit.
CSR = corporate social responsibility: strategic management aims at helping organizations
achieve long-term profitability
CSV = corporate shared value
Porter and Kramer: Firms should create economic value in a way which also creates value
for society.

The new thinking suggests businesses can make profit by helping solve social problems by
creating shared value.

Chapter 3 : Industry Analysis & Industrial organization economics

In many activities, increases in output do not require proportionate increases in input.
In R&D, leaders tend to have much lower costs as a percentage of sales than their smaller
rivals.

The experience curve has its basis in learning-by-doing. It has important implications for
strategy. If a firm can expand its output faster than its competitors, it can move down the
experience curve more rapidly and open-up a widening cost differential.

Les prix ne se forment pas en fonction du temps mais en fonction de l’expérience de

l’industrie. Chaque fois que l’expérience double, les prix baissent d’un pourcentage fixe.
Croissance et baisse de prix sont inversement corrélés.

Rule of 70 : If growth rate is n%, the number of years to double cumulative production is
Y = 70/n

Industry value chain :

Raw materials (Supplier’s supplier) -> Intermediary goods (firm’s supplier) -> manufacturing
(firm) -> distribution (firm’s customer) -> Consumers (customer’s customer).

External environment analysis :

Influence of the macro environment : PESTEL
The nat / int economy, The natural environment, technology, legal context,
government & politics, social & demographic structure

Perceptual acuity allows CEO to senses what’s coming. It is the ability to sense what is
coming before the fog clears.
Environmental scanning : Knowing the mega-trends, looking for inflection points, detection
of early signs of change.

Environmental monitoring tracks some trends identified via the scanning activity.

We need to constantly monitor the biggest risks & opportunities.

Industry analysis : Evaluating industry attractiveness by understanding how industry

structure drives competition, which determines the level of industry profitability.
Identifying who are the main players and distinguishing the key structural characteristics.
The determinants of industry profitability : The value of the product to customers, the
intensity of competition, relative bargaining power at different stages of the value chain.

Industry structures :
- Perfect competition : Zero profitability, no barriers, homogeneous products
- Oligopoly : Intermediary profitability, significant barriers, potential for product
differentiation
- Duopoly : Intermediary profitability, significant barriers, potential for product
differentiation
- Monopoly : High profitability, High barriers, potential for product differentiation

HHi = The Herfindahl Hirschman index, is a common measure of market concentration and is
used to determine market competitiveness, often pre and post M&A transaction.

Porter’s five forces of competition framework :

Suppliers, substitutes, potential entrants, buyers, industry competitors.

Principals sources of barriers to entry are : Capital requirements, economies of scale,

absolute cost advantage, product differentiation, legal and regulatory barriers, Access to
suppliers and/or distribution channels, retaliation (aggressive price cutting, increased
advertising, sales promotion or litigation for expl).

The extent to which industry profitability is depressed by aggressive price competition

depends upon : Concentration, diversity of competitors, product differentiation.

If rivalry is intense and based on price, profitability will decrease and if rivalry is based on
features, differentiation, brand and service, then it can support higher profitability.

The extent to which buyers are able to depress profitability in an industry depends upon
buyer’s price sensitivity and relative bargaining power.

Suppliers can exert bargaining power by threatening to raise prices or reduce the quality of
purchased goods and services.

The absence of close substitutes for a product means that consumers are comparatively
insensitive to price.
The existence of close substitutes means that customers will switch to substitutes in
response to price increases for the product.

Three ways a firm can use the 5 forces analysis to design a superior strategy : Position your
company where the forces are weakest, exploit changes in forces, reshape the forces in your
favor.
In a liberal economy, governments are expected to intervene in order to encourage or
discourage corporate behavior: externalities, investment, regulating employment.

Defining industry boundaries : Industries definition depends upon the strategic issues being
considered.

Identifying Key success factors : Pre-requisites for success : What do customers want? How
does the firm survive competition ?  gateway to the analysis of competitive advantage.

Chapter 4 : Further topics in industry and competitive analysis

Competition also changes industry structure :
- Schumpeterian competition : market leaders overthrown by innovation
- Hyper competition : Intense and rapid competitive moves

Industry attractiveness becomes irrelevant in industries where great disparities exist

between firms : The winner-takes all.

Six forces : Introducing complement : The suppliers of complements create value for the
industry and can exercise bargaining power.  expl apple’s domination of its
complementors.

The contribution of Game theory :

- Frames strategic decisions as interactions between competitors.
- Predicts outcomes of competitive situations involving a few, evenly matched players.
- Provides key insights into the nature and determinants of interactions among
competitors.
Cooperation : Formal collusive agreements and tacit collusion.

Competition results in inferior outcomes for participants than cooperation.

Deterrence : The principle behind deterrence is to impose costs on the other players for
actions deemed to be undesirable.
For deterrence to be credible it must be backed by commitment.

Creative strategies can change the structure of the competitive game.

Competitive reactions depend on how the competitor perceives its rival’s initiative. Signaling
describe the selective communication of information to competitors designed to influence
their perception to competitors.
The credibility of threats is critically dependent on reputation.

Game theory provides a set of tools that allows us to structure our view of competitive
interactions and to explore and understand the dynamics of competition by identifying the
players in a game, the decision choices available to each and the implications of each
combination of decisions.
Competitive intelligence involves the systematic collection and analysis of information about
rivals for informing decision making.

Chapter 5 : Analyzing resources and capabilities

Apple drops the project of apple car (this is not a failure).
By 2035, no transaction will be allowed regarded on combustion cars in France, Germany
and others.

As firm’s industry environments gave become unstable since 90s, internal resources and
capabilities rather than external environment focus have been viewed as representing am
ore secure base for formulating strategy.

RBW : resource-based view -> recognizes that each company possess a unique collection of
resources and capabilities.

In fast moving tech-based industries, basing strategy upon capabilities can help firms to
outlive the life cycle of their initial products.
Microsoft's initial success was the result of its MS-DOS operating system for the IBM PC
Name of the cloud company of Microsoft is Azur.

Companies that attempted to maintain their market focus in the face of radical
technological change have often experienced huge difficulties in building the new
technological capabilities needed to serve their customers (Kodak).

The ability of some firms (3M, NVIDIA, …) to repeatedly adapt to new circumstances while
others stagnate and die suggests that the capacity for change is itself an organizational
capability.

Tangible resources :
Primary goal is to understand their potential for generating profit. This requires not just
valuation but information on their composition and characteristics.

Intangible resources :
For many companies, intangible resources are more valuable than tangible resources.
Yet in BS, intangible tend to be either undervalued or omitted altogether. This is a major
reason for the large and growing divergence between companies’ BS valuations and their
stock market valuations.

Human resources :
Comprise the skills and productive effort offered by an organization’s employees. But they
don’t appear in the firm’s BS.
Most companies devote considerable effort to analysing their human resources in hiring
new employees, planning their development, etc.
Classifying capabilities:
Value chain analysis identifies a sequential chain of the main activities that the firm
undertakes -> distinguishes between primary activities and support activities.
Primary activities contribute to the physical creation of the product or service, its sale and
transfer to the buyer and its service after the sale.
Support activities either add value by themselves or add value through important
relationships with both primary activities and other support activities.

A firm’s resources must be evaluated in terms of how valuable and hard they are for
competitors to duplicate.

The extent of the competitive advantage, sustainability of the competitive advantage and
appropriability regime  The profit earning potential.

VRIO framework: Valuable, Rare, Inimitable, Organization

Superflous strengths : high relative strengths and low strategic importance

Key strengths : high relative strengths and high strategic importance
Zone of irrelevance : low relative strengths and low strategic importance
Key weaknesses : low relative strengths and high strategic importance

The framework for analysing resources and capabilities

1. Identify the firm’s resources and capabilities
2. Appraise the firm’s resrouces and capabilities in termes of strategic importance and
relative strength
3. Develop strategy implications.

Chapter 7 : The Nature and sources of competitive advantage

To survive and prosper, the firm need to earn a rate of return on its capital that exceeds its
cost of capital.
As we saw there is a corporate strategy and a business strategy.
Competitive advantage may not be revealed in higher profitability – a firm may forgo
current profit in favor of investing in market share, tech, customer loyalty.

Competitive advantage emerges with external sources of change (faster and more
effective in exploiting change) or internal sources (greater creative and innovative
capability).

The ability to anticipate changes : IBM has a remarkable ability to renew its competitive
advantage.
Speed : quick response capability has become increasingly important as a source of
competitive advantage. Imitation or innovation.
Imitation is the most direct form of competition. Barriers to imitation : Isolating
mechanisms. Once established, competitive advantage is eroded by competition.
Four conditions to imitate a strategy :
Identify the competitive advantage of a rival, have an incentive to imitate, be able to
diagnose the sources of the rival’s competitive advantage, be able to acquire the resources
and capabilities necessary for imitation.

To protect the competitive advantage :

Cost advantage : similar product at lower cost

Differentiation advantage : Price premium from unique product
To achieve a higher rate of profit over a rival : Supplying an identical product or service at a
lower cost ; supplying a product or service that is differentiated in such a way that the
customer is willing to pay a price premium that exceeds the additional cost of the
differentiation.

Differentiation strategy :
- Broad scope differentiation : Appealing to what is common between different
customers
- Focused differentiation : Appealing to what distinguishes different customer groups.

Red Oceans : Represent all the industries in existence today, this is the known market space.
Companies try to outperform their rivals to grab a greater share of existing demand.
Blue oceans : untapped market space, demand creation and opportunity for highly
profitable growth.

Blue ocean strategy : Making competition irrelevant by finding your Key competing Factors
(KCFs).

Porter recommends businesses to either go for a cost leadership or for a differentiation

strategy (do not trying to do the two in the same time).
Ryan air totally outperformed air France in terms of profitability.
If a low-cost player enters your segment :
- If this company do not take away my present or future customers : I just watch
- If they do, increase the differentiation of your products by using a combination of
tactics.

- If there are sufficient numbers of consumers willing to pay more for the benefits I
offer; I intensify differentiation by offering more benefits. Over time, restructure
company to reduce the price of the benefits I offer.
- If no, learn to live with a smaller company. If possible, merge with or take over rivals.

- If I set up a low-cost business, will it generate synergies with my existing business ?

- If yes, attack your low-cost rival by setting in a low-cost business
- If no, switch to selling solution or transform your company into a low-cost player.

Chapter 8 : Industry evolution and strategic change

Major sources of change : Advancements in science and tech, globalization, climate change,
world demographics.
One of the greatest challenges of strategic management is to ensure that the firm keeps
pace with changes occurring within its environment.
For organizations the forces of inertia are even stronger. The life cycles of firms tend to be
much shorter than the life cycles of industries.

En 1912, les plus grande market cap étaient des entreprises industrielles, maintenant c’est
dans le secteur de la tech.

Changes is not only the result of external forces, the competitive strategies of firms are key
drivers of change, industries are being continually re-invented by competition.
‘When the rate of change outside an organization is greater than the change inside, the end
is near’.

Barriers to change : Organizational routines, social & political structures, conformity, limited
search, complementarities between strategy, structure and systems.

Dual strategies : a firm need a strategy for today and a strategy for tomorrow that prepares
the future.
Organizational ambidexterity : a firm need to exploit existing resources and capabilities and
market positions and explore new opportunities for future.
Structural ambidexterity : exploration and exploitation allocated to different organizational
unites.
Contextual ambidexterity : same organizational units and people perform both exploration
and exploitation.
Combatting organizational inertia : Creating perceptions of crisis, establishing stretch
targets, organizational initiatives, reorganizing company structure, new leadership.
CA = Competitive advantage

Technology intensive industries may retain features of emerging industries over time.
Other industries reach maturity but not decline.

Industries may experience life cycle regeneration.

Common mistakes : arrogance, excessive vertical integration, straddling (stuck in the
middle), CEOs’ propensity to pay dividends.

Chapter 9 : Technology-based industries and management innovation

New technology is a source of opportunity especially for new businesses, but it presents
major problems for many established companies.

Innovation is a link between technology and competitive advantage.

Invention is the creation of new products through the development of new knowledge or
new combinations of existing knowledge.
Innovation is the initial commercialization of invention by producing and marketing a new
good or service or by using a new method of production.
Opinion leaders also called adopters. The 68% of majority will start to buy only when you
will reach the critical point between 2 and 3.
This process is called tipping.

Innovation is no guarantor of fame and fortune. Yet the inventors are more likely to be
found at the bankruptcy courts than on luxury yachts in Monaco.
There is no consistent evidence that either R&D intensity or frequency of new-product
introductions is positively associated with profitability.
In the pharma industry, only 10% of projects help generate sales & profits.

The profitability of an innovation depends on the value created and the share of that value
that the innovator is able to capture.

Appropriating value :

Pharma : Followers are

either firms that create
new products within the
same drug or suppliers
of generics.

PC : Innovators : Apple, MITS, Xerox, etc

Followers : IBM, DELL, ACER, Toshiba, etc

Smartphones : Innovator : IBM, Nokia – Followers : Apple, Samsung, etc

Regime of appropriability : conditions that influence the distribution of the value created by
innovation.
Proprietary technology synonymous with lack of competition.
In a weak regime of appropriability, other parties derive most of the value. A lack of
proprietary technology results in fierce price competition and most of the value created
goes to consumers.

Profits from innovation :

- Value of the innovation users
- Innovator’s ability to appropriate the value of the innovation (legal protection,
complementary resources, imitability of the tech, lead time).
Legal protection of intellectual property :
- Patents
- Copyrights
- Trademarks
- Trade secrets
Also employment contracts that may restrict employees’ freedom to transfer technology.

Complementary resources may be accessed through alliances with other firms. When an
innovation and the complementary resources that support it are supplied by different firms,
the division of value between them depends on their relative power.

Alternative strategies for exploiting innovation : Licensing, Outsourcing certain functions,

strategic alliance, joint venture, internal commercialization.

While protection from imitation is the principal motive, patenting activity appears to be
strategic : firms patent to prevent copying and to block others.
Cross licensing arrangements : one company gives access to its patents across a field of
technology in exchange for access to another company’s patents (in semiconductors and
electronics).

A successful follower strategy requires active

waiting : a company needs to monitor market
developments and assemble resources and
capabilities while it prepares for large scale
market entry.

Advantages in leadership if the innovation can be

protected by intellectual property right or if there
is potential to establish an industry standard.

2 sources of uncertainty : Technological uncertainty and market uncertainty.

Strategies to managing risk : cooperate with lead users, limit risk exposure and flexibility.
A standard is a format, an interface or a system that allows interoperability. There are
public standards (available to all either free or for a nominal charge) and private standards
(tech and designs are owned by companies or individuals).

Own technical standard :

Standards emerge in markets that are

subject to network externalities.
Exists whenever the value of a product to
an individual customer depends on the
number of other users of that product.

Sources of network externalities : users linked within a network, availability of

complementary products, economizing on switching costs.
Value appropriation vs market acceptance.

Fighting standards wars :

- Determine potential for standards emergence
- Assemble allies enlist partners to build a bandwagon
- Pre-empt the market
- Manage expectations

Initiative to stimulate innovation :

- Cross functional new product
development teams
- Product champions (provide the direction
and motivation needed to link invention
with commercialization, integration, etc)
- Buying innovation
- Open innovation (sharing of ideas and
technical know-how among firms)
- Corporate incubators

Chapter 10 : Vertical integration and the scope of the firm

Corporate strategy is concerned with the scope of the firm. The dimensions of scope are
vertical, product, geographical.

Specialization versus integration in the packaging industry:

Vertical scope
Transaction costs and the scope of the firm
Vertical integration and the scope of the firm:

The capitalist economy is frequently referred to as a market economy however it actually

comprises two forms of economic organizations:
1. Market mechanism where individuals and firms guided by market prices make
independent decisions to buy and sell goods and services.
2. Administrative mechanism where decisions concerning production and resource
allocation are made by managers and carried out through hierarchies.
Question: What is determining which activities should be undertaken within a firm and
which through market contracts (outsourcing or buying)?
- Transactions using the Markets mechanism are not costless: those Costs include the
costs of: searching for a suitable supplier, monitoring the relationship, negotiation,
drawing up contracts, and monitoring and enforcing the terms of contracts
(including the costs of litigation in case of disputes)
- Conversely, if an activity is internalized within a firm, then the firm incurs
Management & Administrative Costs

If the Transaction Costs of organizing an activity through the market are higher than the
Administrative Costs of organizing it within a firm, we can expect that activity to be
organized within a firm.

Transaction costs are the unobservable costs of using the price mechanism or internal
mechanism for business transactions. Expl: agent's commissions in buying and selling real
estate – expenses incurred when buying or selling a good or service – brokers’ commissions,
which are the differences between the price the dealer paid for a security and the price the
buyer pays.
They are important to investors because they are one of the key determinants of net
returns.

Transaction cost economics provide a solid theoretical ground to analysing the choice of
governance structures and organizational forms such as wholly-owned subsidiaries, joint
ventures, strategic alliances or contracts.

The transaction cost theory :

Choosing the appropriate governance structure

Transaction cost theory analysis helps find the most efficient form of governance: cost is
central. But TCT does not consider the role of trust in a supplier-buyer relationship.

The benefits and costs of vertical integration.

The benefits:
- Technical economies from the physical integration of processes.
- Avoids transactions costs of market contracts
- Superior coordination and control over the value-chain.

The challenges of vertical integration

- Imposes an administrative cost
- Too much vertical integration inhibits development of distinctive capabilities
- Difficulties of managing strategically different businesses
- The profit-incentive problems might comprise a lack of profit incentives that exist in
a supplier customer relationship.
 - Vertical integration limits flexibility
- Compounding of risk
- Investing in an unattractive business

Chapter 11 : Global strategies and the multinational corporation

Globalization : the process of interaction and integration among the people, institutions,
companies, and governments of different nation in an interdependent global economy.

Internationalization : the process of increasing involvement of enterprises in international

markets to create and/or maintain competitive advantage.
Internationalization adds complexity: widens the market available to firms, increasing the
number of potential customers, increases competitive pressure. Usually synonymous with
more competition and lower industry profitability.

Why businesses internationalize ?

Why don’t firms all outsource to Philippines ?

Shipping costs, quality, supply chain interruptions and risks, other transaction costs.

The benefits from fragmenting the value chain must be traded off against the added costs of
coordinating globally dispersed activities.
The theory of comparative advantage :

A country has a comparative advantage in those products that make intensive use of
resources that are abundant within that country.

The world's three leading exporters (after China) are Italy, Vietnam, and Germany
Each country's shoe producers exploit the resource strengths of their home country:
- Italian shoe producers such as Tod's, Fratelli Rosetti, and Santoni emphasize style
and craftsmanship
- Germany's shoe companies such as Adidas, Puma, and Brütting emphasize
technology
- Vietnam's shoe industry uses low-cost labor to produce vast numbers of cheap
casual shoes.

Comparative advantage of countries are revealed in trade performance.

Factor conditions : factors that

shape & influence resource and
capaibilities.
Relating and supporting industries : national competitive strengths tend to be associated
with clusters of industries.

Demand conditions provide the primary drivers of innovation and quality improvement.
Strategy, structure and rivalry : porter proposes that intense competition within the
domestic market drives innovation, quality and efficiency.

Where to locate activities :

Firms move beyond their national borders not only to seek foreign markets but also to
access the resources and capabilities available in other countries.
Increasingly, decisions concerning where to produce are being separated from decisions
over where to sell.
Different locations (countries) might offer advantages to different stages of the value chain
(Porter « Firm level » value chain).
Set of factors:
- National resource conditions
- Firm specific advantage
- Tradability issues.

Internationalization occurs through trade and direct investment.

If the firm’s competitive advantage is country-based, the firm must exploit an overseas
market by exporting.
If the firm’s competitive advantage is firm-based, the firm can exploit overseas either by
exporting or by direct investment.

Transaction costs play a central role in the theory of the multinational corporation.
Multinational companies (MNCs) tend to predominate in industries where:
- Exports are subject to transaction costs
- Firm-specific intangible resources such as brands and technology are important and
licensing the use of these resources incurs transaction costs
- Customer preferences are reasonably similar between countries.

The benefits of global strategy

- Access to scale economies in purchasing, manufacturing, marketing and new product
development.
- They must market globally to amortize the huge costs of product development.
- In service industries, the cost efficiencies from multinational operation derive
primarily from economies of replication.

Arbitrage strategies are conventionally associated with exploiting wage differentials by

offshoring production to low-wage locations.
Increasingly arbitrage is about exploiting the distinctive knowledge available in different
locations.

The Uppsala model prodicts that firms internationalize in a sequential pattern :

- First exporting to countries with the least ‘psychic distance’ from their home
markets.
- Then broadening and deepening their engagement and eventually establishing
manufacturing subsidiaries in foreign markets.

Chapter 12 : Diversification strategy

From the Ansoff perspective, opportunities might arise from diversifying products, markets
or both.
Ansoff matrix
Related diversification happens when a firm develops/sells new but related products
(related to its existing products & industry, …).
Unrelated diversification happens when a firm enters new but unrelated industries.
Diversification is often achieved through acquisition.
In the 20th century, diversification was driven by Growth and risk reduction.

In diversified firms, Senior management no longer needed industry-specific experience.

Corporate managers only needed insights into financial and strategic management.

The dominant trend of the past two decades is refocusing on core businesses.
The shift from diversification to refocusing during this period was an outcome of the
growing commitment of corporate managers to the goal of creating shareholder value.

Why businesses diversify : Diminishing growth opportunities in current market, reducing

risk, excess of resources, resources with multiple uses, financial economies.
The desire to escape stagnant or declining industries is a powerful motive for diversification.
Systematic risk refers to risk affecting the entire market also known as undiversifiable risk.
Unsystematic risk impacts a specific industry or security.

The transaction costs to shareholders diversifying their portfolios are far less than the
transaction costs to firms diversifying through acquisition.
For diversification to create shareholder value, it must meet three tests:
- The attractiveness test: must be directed towards attractive industries
- The cost of entry test: the cost of entry must not capitalize all future profits
- The better-off test: either the new unit must gain competitive advantage from its link
with the company or vice-versa.

Economies of scope exist when using a resource across multiple activities uses less of that
resource than when the activities are carried out independently.
Exist for similar reasons as economies of scale.
However, ‘Economies of scale’ relate to cost economies from increasing output of a single
product & ‘Economies of scop’e are cost economies from increasing the output of multiple
products.

Economies of scope in diversification derive from two types of relatedness:

- Operational relatedness  Problem: the benefits from economies of scope may be
dwarfed by the administrative costs involved in their exploitation.
- Strategic relatedness

We need to ensure that the presence of transaction costs makes the internal integration of
diversification preferable to licensing contracts.

Economies of scop from internalizing transactions:

- Sharing tangible and intangible resources across multiple businesses
- Transferring functional capabilities across businesses
- Applying common general management capabilities to different businesses
- Diversified firm can avoid external transactions by operating internal capital and
internal labor market.

Economies of scope from markets or licensing contracts:

- Economies of scope in resources & capabilities can be exploited through licensing
contracts
- Airlines realize economies of scope not by diversifying into catering by by leasing
space to specialist retailers and restaurants.
- Walt Disney earned 2.4 billion in 2013 from licensing its intellectual property to
producers of clothing, toys, …
- Starbucks diversified into grocery through licensing: Unilever and PepsiCo produced
Tazo tea beverages, Nestlé produced Starbucks' ice cream, and Kraft distributed
Starbucks' packaged coffee

Research generally find that related or limited diversifiers outperform both firms that
remain specialized and those which have unrelated or extensively diversified strategies.
Chapter 13 : Implementing corporate strategy : Managing the
multibusiness firm
Corporate management add value to its individual businesses by:
- Managing the business portfolio
- Managing linkage among businesses
- Managing individual businesses
- Managing change and development
 General Electric initiated a pioneering portfolio planning work.

Using portfolio planning models for strategy formulation:

- Allocation resources
- Formulating business-unit strategy
- Setting performance targets
- Portfolio balance
The GE / McKinsey Matrix uses the two primary drivers of profitability : market
attractiveness and competitive advantage.

Sources of synergy within the multi-business corporation:

- Envisioning
- Facilitating synergies
- Coaching
- Shared corporate services
- Transferring skills between businesses
- Sharing resources and activities
But exploiting synergies is not costless.

In most diversified companies, business strategies are initiated by divisional managers.

Critiques of strategic planning:

- Strategic planning systems don’t make strategy, it’s just a ritualistic process.
- Weak execution : procedures for converting plans into actions are weak.
Performance management and financial control :
Multibusiness companies gave a dual planning process : Strategic planning (medium and
long term), financial planning (short term)
Strategic plan is a basis for : operating budget, capex, annual performance plans, strategic
milestones.

Strategic planning and financial control as alternative modes of corporate control:

Two basic approaches: Input control : monitoring and approving business level decisions
Output control : setting performance targets and monitoring their achievement

The challenge of leading change :

The bigger and more complex the company – the greater the forces of inertia
Facilitating change : adaptative tension, institutionalizing change, new business
development, top down large scale development initiatives.

Chapter 14. External Growth strategies : M&A and alliances

The options to close the strategic gap are : Build, borrow, buy
M&A being the most costly, complex & difficult to reverse strategic options.
They are the principal means by which firms achieve major extensions in the size and scope
of their activities. They have created many of the world’s leading enterprises.
Can also have disastrous consequences.

An acquisition is the purchase of one company by another. This involve the acquiring
company making an offer for the common stock of the other company.
In a hostile takeover, the acquirer must go around the target board and appeal directly to
the target company’s shareholders.

A merger is where two companies amalgamate to form a new company. Mergers typically
involve companies of similar size. Often preferred because of tax advantages, avoids the
dominant partner to pay an acquisition premium, help avoid cultural barriers such as the
fear of foreign domination.

M&A occur in waves :

- Firms in specific industries react to economic chocks
- Firm valuations deviate from fundamentals

Acquisition premium refers to the excess that an acquirer pays over the market trading
value of the shares being acquired.

Benefits of M&A :
Obtain valuable assets/ resources / capabilities.
Attain six bases of synergy : reducing costs, sharing activities, building market power,
optimizing distribution, revenue enhancement
Enter new international markets.
Expl : 2014, Apple purchased Beats Electronics.
Limitations of M&A:
Takeover premiums, competitors imitate and copy synergies, managers’ egos, cultural
issues.

Modeling mergers: Projecting the combined financials and taking into account the effect of
synergies take a lot of skills.
Empirical studies focus upon two main performance measures: Shareholder returns and
accounting profits.

70 to 90% of acquisitions destroyed shareholder value. But investors see value looking to
the characteristics of the deal and the motivation of the acquiring firm.
 greater value when the acquiring and the target firms are in the same or closely related
industries.
If the acquiring firm is highly leveraged investors see more value in the acquisition.

Managerial hubris is a form of self-delusion in which managers convince themselves of their

superior skills in the face of clear evidence to the contrary.

Motives for M&A:

- Managerial motives: Potential value destruction, potential value creation
- Financially motivated mergers
- Strategic: horizontal, geographical extension, vertical, diversifying

Diversification may also involve small acquisitions which provide a foundation for internal
investment.

Challenges of pre-merger planning  clear understanding by the companies involve

Due Diligence dimensions: Financial, legal, strategic
Challenges of pre-merger integration  requires intimate knowledge of the target
company.
Always assess the objectives of the merger vs the acquisition target.

Poor deal preparation is a leading reason why as many as 55% of all M&A deals actually
destroyed shareholder value.
One of the most important roles of acquisitions is to enable a firm to reinvent its business
model.

Alliances : collaborative arrangements between two or more firms to pursue common goals.
They are important means of corporate development.
Types of strategic alliance:
- Equity
- Non-equity
Joint venture is a particular form of equity alliance where the partners form a new company
that they jointly own.
Expl: Pfizer – BioNtech, Nike with apple, Bulgari with marriott.

The most critical factor in the success of an alliance is to choose the right set of partners.
If the goal is to enter new markets or expand scale, partners within the same industry are
often the best fit.
If the goal is to acquire new capabilities and innovate, companies should be willing to look
for partners beyond their own industry.

The more a company outsources its value chain activities to a network of alliance partners,
the more it needs to develop the systems integration capability to coordinate and integrate
the dispersed activities.

Chapter 15: Current trends in strategic management

Forces shaping the business environment

Digital technology, competition, systemic risk, social forces and the crisis of capitalism,
geopolitical risks.

Generative AI has the potential to be as revolutionary as electricity or the printing press. But
also bring risks.
Generative AI could potentially help democratize investing and markets, improve
algorithmic trading, enable more robust data utilization and allow for better analysis and
pricing of insurance risk. Also 24/7 customer service via chatbots.

Digital tech: destruction of industries (Travel agencies, bookstores, …), rise of new industries
(e-commerce, AI, audio & video streaming, …), transformation of industries (financial
services, dating, …)

Digital innovation is also a major source of new competition.

The threat of new competition has been counteracted by the efforts of established
companies to consolidate their positions of market leadership.

Systemic risk:
A feature of the global economy and human society in general is increasing
interconnectedness.
The greatest threat to the stability of the business environment is climate change.
In an interconnected world, initial disturbances are amplified and transmitted.

Social forces:
Organizations need to adapt themselves to the values and expectations of society.

Crisis of capitalism: Increasing inequalities created a loss of legitimacy of market capitalism.

This fueled political extremism apparent in populist movements and let into the
disappearing center in US and European politics.
Liberal societies face challenges include decline in tolerance and pluralism, rising populism,
declining in trust in institutions, …

China reopening:
Over the medium to long term, china is facing new challenges: Aging population, slowing
productivity growth, old financial system, trade, climate, debt.

2 wars in 2024: Ukraine and Israel.

Tensions between US and China led to a series of tit-for-tat trade war actions by the two
countries. The succeeding administration of president biden left measures un place.
Taiwanese independence became a greater political hot button.

New directions in strategic thinking:

Re-orientation of corporate objectives, new approaches to competitive advantage, learning
to compete in digital markets, placing greater emphasis on the management of strategic
options.

Corporate social responsibility is essential for firms to maintaining their licence to operate
and broadening of goals to open up new avenues for value creation – the central theme of
Porter and Kramer’s notion of shared value.
Complex competitive advantages are more sustainable than simple advantages. The quest
for more complex sources of competitive advantage may involve strategies that look beyond
industry boundaries to exploit linkages across firm's broader ecosystems

The circular economy : Industrial system that is restorative or regenerative by intention and
design.

Viewing strategy as the management of a portfolio of options shifts the emphasis of strategy
formulation from making resource commitments to creating opportunities.
Strategic alliances are especially useful corporate instruments in creating growth options
while allowing each partner to focus on a narrow set of capabilities.
Industry attractiveness will depend more on the range of strategic options it offers.

The changing role of Managers

To unify and inspire the efforts of organizational members, leadership requires providing
meaning to people’s own aspirations. Ultimately this requires attention to the emotional
climate of organization.
If strategy is supported by organizational identity, common purpose and organizational
culture, then a key role of top management is to clarify, nurture and communicate the
company’s purpose, heritage, personality, values and norms.