Professional Documents
Culture Documents
To acquire familiarity with the principal concepts, frameworks and techniques of strategic management. To gain expertise in applying these concepts, frameworks and techniques in order to understand the reasons for good or bad performance by an enterprise, generate strategy options for an enterprise, assess available options under conditions of imperfect knowledge, select the most appropriate strategy, recommend the best means of implementing the chosen strategy.
2
To integrate the knowledge gained in previous courses. To develop your capacity as a general manager in terms of an appreciation of the work of the general manager, the ability to view business problems from a general management perspective, the ability to develop original and innovative approaches to strategic problems, developing business judgment.
3
Domain of Strategy
strategic competitiveness and above normal returns concerns managerial decisions and actions which materially affect the success and survival of business enterprises involves the judgment necessary to strategically position a business and its resources so as to maximize long-term profits in the face of irreducible uncertainty and aggressive competition strategy is the linkage between a business and its current and future environment
Definition
The determination of the long run goals and objectives of an enterprise, the adoption of courses of action and the allocation of resources necessary for carrying out these goals
Alfred Chandler, Strategy and Structure
Levels of Strategy
CORPORATE STRATEGY CORPORATE HEAD OFFICE
BUSINESS STRATEGY
Division A
Division B
R&D
FUNCTIONAL STRATEGIES
Levels of Strategy
Corporate strategy... defines the scope of the business in terms of the industries and markets in which it competes. includes decisions about diversification, vertical integration, acquisitions, new ventures, divestments, allocation of scarce resources between business units Business strategy... is concerned with how the firm competes within a particular industry or market... to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals. Functional strategy... the detailed deployment of resources at the operational level
Successful Strategy
EFFECTIVE IMPLEMENTATION
Profound understanding of the competitive environment
Ct (1 + r)t
The Worlds Most Valuable Companies: Performance Under Different Profitability Measures
COMPANY MARKET CAP. ($BN.) NET INCOME ($BN) RETURN ON SALES (%) 19.9 10.7 40.3 22.0 9.9 27.0 14.7 5.5 10.7 28.1 23.0 17.3 RETURN ON EQUITY (%) 34.9 22.2 30.0 21.9 27.9 14.1 26.7 21.4 13.0 9.8 16.3 13.7 RETURN ON ASSETS (%) 17.8 14.7 18.8 1.5 10.7 1.2 11.6 8.1 4.8 7.1 1.0 6.4 RETURN TO SHAREHOLDERS (%) 11.7 (1.5) (0.9) 4.6 10.2 2.4 11.8 (10.3) (22.1) n.a. (11.8) 7.2
Exxon Mobil General Electric Microsoft Citigroup BP Bank of America Royal Dutch Shell Wal-Mart Toyota Motor Gazprom HSBC Procter & Gamble
372 363 281 239 233 212 211 197 197 196 190 190
36.1 16.4 12.3 24.6 22.3 16.5 25.3 11.2 12.1 7.3 15.9 8.7
Problems:
Estimating cash flows beyond 2-3 years is difficult Value of firm depends on option value as well as DCF value
Shareholder Value
Measures: Market value of the firm Market value added (MVA) Return to shareholders
Intrinsic Value
Measures: Discounted cash flows Real option values
Financial Indicators
Measures: Return on Capital Growth (of revenues & operating profits Economic profit (EVA)
Value Drivers
Sources: Market share Scale economies Innovation Brands
Avoid Competitors
Attractive Industry
Attractive Strategic Group
Mobility Barriers
Attractive Niche
Entry Barriers
Isolating Mechanisms
1992 1994
Cost per unit of output (in real $)
The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles.
Cumulative Output
UK refrigerators, 1957-71
75%
70% slope
100K
ECONOMIES OF LEARNING
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
Minimum Efficient Plant Size: the point where most scale economies are exhausted
Sprite
Coke
1,000
10
20
50
100
200
500
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture
PURCHASING
PARTS INVENTORIES
GOODS INVENTORIES
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)
STAGE 3. IDENTIFY COST DRIVERS
--Plant scale for each component -- Process technology -- Plant location -- Run length -- Capacity utilization -- Level of quality targets -- Frequency of defects -- No. of dealers -- Sales / dealer -- Level of dealer support -- Frequency of defects under warranty
PURCHASING
PARTS INVENTORIES
GOODS INVENTORIES
Prices paid --Size of commitment depend on: --Productivity of -- Order size R&D/design --Purchases per --No. & frequency of new supplier models -- Bargaining power -- Supplier location
-- Plant scale -- Flexibility of production -- No. of models per plant -- Degree of automation -- Sales / model -- Wage levels -- Capacity utilization
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)
STAGE 4. IDENTIFY LINKAGES
Designing different models around common components and platforms reduces manufacturing costs
PRCHSNG
PARTS INVNTRS
R&D DESIGN
COMPONENT MFR
ASSEMBLY
Higher quality parts and materials reduces costs of defects at later stages
TANGIBLE DIFFERENTATION
Observable product characteristics: size, color, materials, etc. performance packaging complementary services
INTANGIBLE DIFFERENTATION
Unobservable and subjective characteristics that appeal to customers image, status, identity, and desire for exclusivity
FORMULATE DIFFERENTIATION STRATEGY Select product positioning in relation to product attributes Select target customer group Ensure customer / product compatibility Evaluate costs and benefits of differentiation
Using the Value Chain to Identify Differentiation Potential on the Supply Side
MIS that supports fast response capabilities Training to support customer service excellence Unique product features. Fast new product development
FIRM INFRASTRUCTURE
INBOUND
OPERATIONS
OUTBOUND
MARKETING
SERVICE
LOGISTICS
LOGISTICS
& SALES
Customer technical support. Consumer credit. Availability of spares
Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture
1 2 Supplies of steel & aluminum Inventory holding Inventory holding Manufacturing 3 Service & technical support 4
Inventory holding
Purchasing
Distribution
Processing
Design Engineering
Marketing
2. High manufacturing tolerances can avoid breakdowns in customers canning lines. 3. Frequent, reliable delivery can permit canner to adopt JIT can supply. 4. Efficient order processing system can reduce customers ordering costs.
Purchasing
Distribution
Canning
Sales
CAN MAKER
CANNER
10
15
20
Technology
Social structure
The Industry Environment lies at the core of the Macro Environment. The Macro Environment impacts the firm through its effect on the Industry Environment.
We may need to analyze industry at different levels of aggregation for different types of decision
A few firms
Two firms
One firm
Entry and Exit No/Low barriers Barriers Product Differentiation Homogeneous Product Perfect Information flow
Significant barriers
High barriers
Information
SUPPLIERS
Bargaining power of suppliers INDUSTRY COMPETITORS POTENTIAL Threat of ENTRANTS new entrants Threat of Rivalry among existing firms SUBSTITUTES substitutes
BUYERS
THREAT OF ENTRY
Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to distribution channels Legal/ regulatory barriers Retaliation
Concentration Diversity of competitors Product differentiation Excess capacity & exit barriers Cost conditions
INDUSTRY RIVALRY
SUBSTITUTE COMPETITION
Buyers propensity to substitute Relative prices & performance of substitutes
BUYER POWER
Buyers price sensitivity Relative bargaining power
THREAT OF SUBSTITUTES
LOW No substitutes. (Changing as managed care encourages generics.)
Past profitability a poor indicator of future profitability. If we can forecast changes in industry structure we can predict likely impact on competition and profitability.
Strategies to Improve Industry Profitability What structural variables are depressing profitability Which of these variables can be changed by individual or collective strategies?
Improve attractiveness compared to substitutes: better service, more features, etc.. Reduce buyer uniqueness: forward
integrate, differentiate product, new customers, etc..
Fermentation
Shakeout
Maturity
Decline
Sales volume
Time
1900 50 90 07 MOTORCYCLES
1930
50 70 TVs
90
07
Life cycle model can help us to anticipate industry evolutionbut dangerous to assume any common, predetermined pattern of industry development
DEMAND
Wide variety, Standardization rapid design change Short-runs, skill intensive Capacity shortage, mass-production
-----Production shifts from advanced to developing countries----TechnologyProduct innovation Entry & exit Process technology. Design for Shakeout & consolidation Cost efficiency Price wars, exit Overhead reduction, rationalization, low cost sourcing
INDUSTRY STRUCTURE
COMPETITION
Customers become more price conscious Quest for new sources of differentiation
Products become more standardized Diffusion of technology Production becomes less R&D & skill-intensive Production shifts to low-wage countries
Excess capacity increases Demand growth slows as market saturation approaches Bargaining power of distributors increases
Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961
250 200 150 100 50 0
No. of firms
1895
1905
1915
1925
1935
1945
1955
Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change
Stages in undertaking multiple Scenario Analysis: Identify major forces driving industry change Predict possible impacts of each force on the industry environment Identify interactions between different external forces Among range of outcomes, identify 2-4 most likely/ most interesting scenarios: configurations of changes and outcomes Consider implications of each scenario for the company Identify key signposts pointing toward the emergence of each scenario Prepare contingency plan
1880s
1920s
1960s
2000
NEW BRICK
Everyone is responsible for setting strategy Rule-busting innovation is the way to win Unconventional business concepts create competitive advantage More of the same is high risk Theres no correlation between size and competitiveness Innovation equals entirely new business concepts Strategy is the easy only if youre content to be an imitator Change starts with activists Our real problem is innovation Big companies can become gray-haired revolutionaries
Emergence
Convergence
Coexistence
Dominance
Sales volume
Established Industry
Discontinuity
Takeoff
Ferment
Time
Discontinuity
Takeoff
Ferment
Time
Shifting the Focus of Strategy Analysis: From the External to the Internal Environment
THE FIRM
Goals and Values Resources and Capabilities Structure and Systems
STRATEGY
STRATEGY
When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus.
Resources and capabilities are the primary sources of profitability.
Canon: Products and Core Technical Capabilities Precision Mechanics Fine Optics
35mm SLR camera Plain-paper copier Compact fashion camera Color copier EOS autofocus camera Color laser copier Digital camera Basic fax Laser copier Video still camera Laser fax Mask aligners Inkjet printer Excimer laser aligners Laser printer Color video printer Stepper aligners Calculator Notebook computer
MicroElectronics
Businesses
Film Cameras Fine Chemicals Pharmaceuticals Diagnostics
Optomechtronics
Thin-film coatings
DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics Need to build digital imaging capability Digital Imaging Products (e.g. Photo CD System; Advantix cameras & film
HUMAN
Appraising Resources
RESOURCE
Financial Tangible Resources
CHARACTERISTICS
Borrowing capacity Internal funds generation Plant and equipment: size, location, technology flexibility. Land and buildings. Raw materials. Patents, copyrights, know how R&D facilities. Technical and scientific employees Brands. Customer loyalty. Company reputation (with suppliers, customers, government) Training, experience, adaptability, commitment and loyalty of employees
INDICATORS
Debt/ Equity ratio Credit rating Net cash flow Market value of fixed assets. Scale of plants Alternative uses for fixed assets No. of patents owned Royalty income R&D expenditure R&D staff Brand equity Customer retention Supplier loyalty Employee qualifications, pay rates, turnover.
Physical
Human Resources
1 2 3 4 5 6 7 8 9 10
67.5 59.9 53.4 47.0 35.6 26.5 26.4 26.0 24.8 21.2
11 12 13 14 15 16 17 18 19 20
Mercedes Benz 20.0 Citi 20.0 Hewlett-Packard 18.9 American Express 18.6 Gillette 17.5 BMW 17.1 Cisco 16.6 Louis Vuitton 16.1 Honda 15.8 Samsung 15.0 Source: Interbrand
http://www.interbrand.com/best_brands_2007.asp
Organizational Capabilities = firms capacity for undertaking a particular activity. (Grant) Distinctive Competence = things that an organization does particularly well relative to competitors. (Selznick) Core Competence = capabilities that are fundamental to a firms strategy and performance. (Hamel and Prahalad)
Design Marketing
TECHNOLOGY
PRODUCT DESIGN
MANUFACTURING
MARKETING
DISTRIBUTION
SERVICE
INBOUND LOGISTICS
OPERATIONS
OUTBOUND LOGISTICS
SERVICE
PRIMARY ACTIVITIES
CAPABILITIES
C1. Product development C2. Purchasing C3. Engineering C4. Manufacturing
Importance
9 7 7 8 6 6 9
7 8
4
C5. Financial management
5
C6. R&D C7. Marketing & sales C8. Government relations
10
Superfluous Strengths
Key Strengths
C3
Relative Strength
C8 C2 R2 R1 C6 R4
R3 C4 R5 C1 C7
C5
Key Weaknesses
1 1
Zone of Irrelevance 5
10
Strategic Importance
3) Greenfield development of capabilities in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)
4) Build team-based capabilities through training and team development (i.e. develop organizational routines) 5) Align structure & systems with required capabilities 6) Change management to transform values and behaviors (GE,
BP)
7) Product sequencing (Intel , Sony, Hyundai) 8) Knowledge Management (systematic approaches to acquiring,
storing, replicating, and accessing knowledge)
Business Strategy is concerned with how a firm computes within a particular market Corporate Strategy is concerned with where a firm competes, i.e. the scope of its activities The dimensions of scope are product scope vertical scope geographical scope
P1
P2
P3
C1
C2
C3
P1
P2
P3
C1
C2
C3
In situation [A] the business units are integrated within a single firm. In situation [B] the business units are independent firms linked by markets. Are the administrative costs of the integrated firm less than the transaction costs of markets?
Diversification decisions involve these same two issues: How attractive is the sector to be entered? Can the firm achieve a competitive advantage?
1949
1954
1959
1964
1969
1974
Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business)
Note:
During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses
70 60 50 40 30 20 10 0 1950 1960 1970 1983 1993 Single business Dominant business Related business Unrelated business
RISK SPREADING
--Diversification reduces variance of profit flows --But, doesnt create value for shareholdersthey can hold diversified portfolios of securities. --Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk.
PROFIT
--For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability.
2. The Cost of Entry Test: the cost of entry must not capitalize all future profits.
3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of synergy must be present)
Additional source of value from diversification: Option value
ECONOMIES OF SCOPE
Sharing tangible resources (research labs, distribution systems) across multiple businesses Sharing intangible resources (brands, technology) across multiple businesses Transferring functional capabilities (marketing, product development) across businesses Applying general management capabilities to multiple businesses
Economies of scope not a sufficient basis for ECONOMIES diversification ----must be supported by transaction costs FROM Diversification firm can avoid transaction costs by INTERNALIZING operating internal capital and labor markets TRANSACTIONS Key advantage of diversified firm over external markets--superior access to information
Relatedness in Diversification
Economies of scope in diversification derive from two types of relatedness: Operational Relatedness-- synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D) Strategic Relatedness-- synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses. Problem of operational relatedness:- the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation.
Compounding of risk
Steel production
Can making
VERTICAL INTEGRATION
MARKET CONTRACTS
MARKET CONTRACTS
What factors explain why some stages are vertically integrated, while others are linked by market transactions?
Intermediate between spot transactions and vertical integration are several types of vertical relationships ---such relationships may combine benefits of both market transactions and internalization Key issues in designing vertical relationships -- How is risk allocated between the parties? -- Are the incentives appropriate?
Patterns of Internationalization
HIGH
Trading Industries
--aerospace --military hardware --diamond mining --agriculture
Global Industries
--automobiles --oil --semiconductors --consumer electronics
International Trade
Domestic Industries
--railroads --laundries/dry cleaning --hairdressing --milk
Multidomestic Industries
--retail banking --hotels --consulting
LO W
LOW
HIGH
PROFITABILITY
Other things remaining equal, internationalization tends to reduce an industrys margins & rate of return on capital
COMPETITIVE ADVANTAGE
When exchange rates are well-behaved, comparative advantage becomes competitive advantage.
Chemicals
Machinery and transportation equipment Other manufacturers
.42
.12
-.16
-.19
.20
.34
-.06
.22
-.58
.80
-.68
-.07
.01
.29
.40
Note:
Revealed comparative advantage for each product group is measured as: (Exports less Imports)/ Domestic production
Sustained competitive advantage depends upon dynamic factors-- innovation and the upgrading of resources and capabilities
The critical role of the national environment is its impact upon the dynamics of innovation and upgrading.
FACTOR CONDITIONS
DEMAND CONDITIONS
1. 2. 3. 4.
FACTOR CONDITIONSHome grown resources/capabilities more important than natural endowments. RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters DEMAND CONDITIONSDiscerning domestic customers drive quality & innovation STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.
National resource conditions: What are the major resources which the product requires? Where are these available at low cost? Firm-specific advantages: to what extent is the companys competitive advantage based upon firmspecific resources and capabilities, and are these transferable? Tradability issues: Can the product be transported at economic cost? If not, or if trade restrictions exist, then production must be close to the market.
Country
Stage of Processing
Country
Hong Kong
1 2 3 4 1 2 3 4
Japan
1 2 3 4 1 2 3 4
Italy
U.S.A.
What internal resources and capabilities does the firm possess in particular locations?
What is the firms business strategy (e.g. cost vs. differentiation advantage)?
The importance of links between activity X and other activities of the firm
Licensing
Longterm contract
Fully integrated
Low
Resource commitment
High
FIAT
SUZUKI
GM
ISUZU
40% investment
60% owned
FUJI
50% owned
SAIC
TOYOTA
50% owned
DAEWOO
Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment
Investment banking Online C2C auctions Beer Restaurant chains Retail banking Funeral services
Dry cleaning
Investment banking
Retail banking
Funeral services Benefits of national differentiation
The Evolution of Multinational Strategies and Structures: (1) 1900-1939Era of the Europeans
The European MNC as Decentralized Federation : National subsidiaries self-sufficient and autonomous Parent control through appointment of subsidiaries senior management Organization and management systems reflect conditions of transport and communications at the time e.g. Unilever, Phillips, Courtaulds, Royal Dutch/Shell.
The Evolution of Multinational Strategies and Structures: (3) 1970s and 1980sThe Japanese Challenge
Marketing Global Strategies and Situations to Industry Conditions: Firm Success in Different Industries
Consumer Electronics
global integration
Telecommunications Equipment
global integration NEC Erickson
- Global industry
- Matsushita the most successful - Philips the survivor - GE sold out
- Substantial national differentiation, few global scale economies - Kao has limited success outside Japan - Unilever and P&G most successful
- Requires both global integration and national differentiation. - NEC only partially successful - ITT sold out - Ericsson most successful
2.
3.
4.
5.