76198137 hoskisson and hitt strategic management all chapters ppt
TRANSCRIPT
©2003 Southwestern Publishing Company 1
Strategic Management and Strategic Management and Strategic CompetitivenessStrategic Competitiveness
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 1Chapter 1
2
Strategy ImplementationStrategy Implementation
Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
Chapter 11Chapter 11OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
FeedbackFeedback
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Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
Chapter 9Chapter 9CooperativeCooperative
StrategyStrategy
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 8Chapter 8InternationalInternational
StrategyStrategy
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring
StrategiesStrategies
3
Important DefinitionsImportant Definitions
Strategic Management ProcessStrategic Management ProcessThe full set of commitments, decisions, The full set of commitments, decisions, and actions required for a firm to achieve and actions required for a firm to achieve strategic competitiveness and earn strategic competitiveness and earn above-average returnsabove-average returns
4
Important DefinitionsImportant Definitions
Strategic CompetitivenessStrategic CompetitivenessAchieved when a firm successfully formulates Achieved when a firm successfully formulates and implements a value-creating strategyand implements a value-creating strategy
Occurs when a firm develops a strategy that Occurs when a firm develops a strategy that competitors are not simultaneously competitors are not simultaneously implementingimplementingProvides benefits which current and potential Provides benefits which current and potential competitors are unable to duplicatecompetitors are unable to duplicate
Above-Average ReturnsAbove-Average Returns
5
Important DefinitionsImportant Definitions
RiskRiskAn investor’s uncertainty about the An investor’s uncertainty about the economic gains or losses that will result economic gains or losses that will result from a particular investmentfrom a particular investment
Returns that are equal to those an investor Returns that are equal to those an investor expects to earn from other investments with expects to earn from other investments with a similar amount of riska similar amount of risk
Average ReturnsAverage Returns
6
Fundamental nature of competition is changing
Competitive LandscapeCompetitive Landscape
Hypercompetitive Hypercompetitive environmentsenvironments
Dynamics of strategic maneuvering among global and innovative combatants
Price-quality positioning, new know-how, first mover
Protect or invade established product or geographic markets
7
Fundamental nature of competition is changing
Hypercompetitive Hypercompetitive environmentsenvironments
Competitive LandscapeCompetitive Landscape
Emergence of global economy
Goods, services, people, skills, and ideas move freely across geographic borders.
Spread of economic innovations around the world.
Political and cultural adjustments are required.
8
Fundamental nature of competition is changing
Hypercompetitive Hypercompetitive environmentsenvironments
Competitive LandscapeCompetitive Landscape
Emergence of global economy
Rapid technological change
Increasing rate of technological change and diffusion
The information age
Increasing knowledge intensity
9
Strategic FlexibilityStrategic Flexibility
A set of capabilities used to respond to A set of capabilities used to respond to various demands and opportunities various demands and opportunities existing in a dynamic and uncertain existing in a dynamic and uncertain competitive environmentcompetitive environment
It involves coping with uncertainty and the It involves coping with uncertainty and the accompanying risksaccompanying risks
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StrategicFlexibilityStrategic
Flexibility
Strategic FlexibilityStrategic Flexibility
StrategicStrategicflexibilityflexibility
StrategicStrategicreorientationreorientation
Capacity toCapacity tolearnlearn
OrganizationalOrganizationalslackslack
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1.1. Strategy dictated by the Strategy dictated by the external environments of external environments of the firm (what the firm (what opportunities exist in opportunities exist in these environments?)these environments?)
2.2. Firm develops internal Firm develops internal skills required by skills required by external environment external environment (what can the firm do (what can the firm do about the opportunities?)about the opportunities?)
GeneralGeneral
EnvironmentEnvironment
GlobalGlobal
TechnologicalTechnological
Econ
omic
Econ
omic
Sociocultural
Sociocultural
Polit
ical/L
egal
Polit
ical/L
egal Dem
ographic
Demographic
1. External Environments
Industry Environment
Competitor Environment
I/O Model of Above-Average ReturnsI/O Model of Above-Average Returns
12
Four Assumptions of the I/O ModelFour Assumptions of the I/O Model
1.1. The external environment is assumed to The external environment is assumed to possess pressures and constraints that possess pressures and constraints that determine the strategies that would result determine the strategies that would result in above-average returnsin above-average returns
2.2. Most firms competing within a particular Most firms competing within a particular or within a certain segment of it are or within a certain segment of it are assumed to control similar strategically assumed to control similar strategically relevant resources and to pursue similar relevant resources and to pursue similar strategies in light of those resourcesstrategies in light of those resources
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Four Assumptions of the I/O ModelFour Assumptions of the I/O Model
3.3. Resources used to implement strategies Resources used to implement strategies are highly mobile across firmsare highly mobile across firms
4.4. Organizational decision makers are Organizational decision makers are assumed to be rational and committed to assumed to be rational and committed to acting in the firm’s best interests, as acting in the firm’s best interests, as shown by their profit-maximizing shown by their profit-maximizing behaviorsbehaviors
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Industrial Organization Industrial Organization ModelModel
I/O Model of Above-Average ReturnsI/O Model of Above-Average Returns
1.1. Study the external Study the external environment, especially the environment, especially the industry environmentindustry environment• economies of scaleeconomies of scale• barriers to market entrybarriers to market entry• diversificationdiversification• product differentiationproduct differentiation• degree of concentration of degree of concentration of
firms in the industryfirms in the industry
The External EnvironmentThe External Environment
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I/O Model of Above-Average ReturnsI/O Model of Above-Average Returns
2.2. Locate an attractive industry Locate an attractive industry with a high potential for with a high potential for above-average returnsabove-average returns
Attractive industry: one whose Attractive industry: one whose structural characteristics structural characteristics suggest above-average returnssuggest above-average returns
Industrial Organization Industrial Organization ModelModel
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
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I/O Model of Above-Average ReturnsI/O Model of Above-Average Returns
3.3. Identify the strategy called Identify the strategy called for by the attractive industry for by the attractive industry to earn above-average returnsto earn above-average returns
Strategy formulation: selection Strategy formulation: selection of a strategy linked with of a strategy linked with above-average returns in a above-average returns in a particular industryparticular industry
Industrial Organization Industrial Organization ModelModel
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
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I/O Model of Above-Average ReturnsI/O Model of Above-Average Returns
4.4. Develop or acquire assets and Develop or acquire assets and skills needed to implement skills needed to implement the strategythe strategy
Assets and skills: those assets Assets and skills: those assets and skills required to and skills required to implement a chosen strategyimplement a chosen strategy
Industrial Organization Industrial Organization ModelModel
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
Assets and SkillsAssets and Skills
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I/O Model of Above-Average ReturnsI/O Model of Above-Average Returns
5. Use the firm’s strengths (its 5. Use the firm’s strengths (its developed or acquired assets developed or acquired assets and skills) to implement the and skills) to implement the strategystrategy
Strategy implementation: Strategy implementation: select strategic actions linked select strategic actions linked with effective implementation with effective implementation of the chosen strategyof the chosen strategy
Industrial Organization Industrial Organization ModelModel
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
Assets and SkillsAssets and Skills
Strategy ImplementationStrategy Implementation
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I/O Model of Above-Average ReturnsI/O Model of Above-Average Returns
Industrial Organization Model
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
Assets and SkillsAssets and Skills
Strategy ImplementationStrategy Implementation
Superior ReturnsSuperior Returns
Superior returns: earning of above-average returns
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1.1. Strategy dictated by Strategy dictated by unique resources and unique resources and capabilities of the firm capabilities of the firm (what can the firm do (what can the firm do best?)best?)
2.2. Find an environment in Find an environment in which to exploit these which to exploit these assets (where are the best assets (where are the best opportunities?)opportunities?)
Resource-based Model of Above Resource-based Model of Above Average ReturnsAverage Returns
1. Firm’s Resources1. Firm’s Resources
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1.1. Identify the firm’s Identify the firm’s resources-- strengths and resources-- strengths and weaknesses compared with weaknesses compared with competitorscompetitorsResources: inputs into a firm’s Resources: inputs into a firm’s production processproduction process
Resource-based Model of Above Resource-based Model of Above Average ReturnsAverage Returns
Resource-based Resource-based ModelModel
ResourcesResources
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2.2. Determine the firm’s Determine the firm’s capabilities--what it can do capabilities--what it can do better than its competitorsbetter than its competitors
Capability: capacity of an Capability: capacity of an integrated set of resources to integrated set of resources to integratively perform a task or integratively perform a task or activityactivity
Resource-based Model of Above Resource-based Model of Above Average ReturnsAverage Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
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Four Attributes of Resources and Four Attributes of Resources and Capabilities (Competitive Advantage)Capabilities (Competitive Advantage)
the firm is organized appropriately to the firm is organized appropriately to obtain the full benefits of the resources in obtain the full benefits of the resources in order to realize a competitive advantage order to realize a competitive advantage
ValuableValuable allow the firm to exploit opportunities or allow the firm to exploit opportunities or neutralize threats in its external neutralize threats in its external environmentenvironment
RareRare possessed by few, if any, current and possessed by few, if any, current and potential competitorspotential competitors
Costly to imitateCostly to imitate when other firms cannot obtain them or when other firms cannot obtain them or must obtain them at a much higher costmust obtain them at a much higher cost
NonsubstitutableNonsubstitutable
Res
ourc
es a
nd C
apab
ilitie
sR
esou
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and
Cap
abili
ties
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Core CompetenciesCore Competencies
Resources and capabilities that meet these four criteria become a source of:
ValuableValuable
RareRare
Costly to imitateCostly to imitate
NonsubstitutableNonsubstitutable
Core CompetenciesCore CompetenciesR
esou
rces
and
Cap
abili
ties
Res
ourc
es a
nd C
apab
ilitie
s
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Core Competencies are the basis for a firm’s
Competitive Competitive advantageadvantage
Strategic Strategic competitivenesscompetitiveness
Ability to earn Ability to earn above-average above-average
returnsreturns
Core CompetenciesCore Competencies
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3.3. Determine the potential of the Determine the potential of the firm’s resources and firm’s resources and capabilities in terms of a capabilities in terms of a competitive advantagecompetitive advantage
Competitive advantage: ability Competitive advantage: ability of a firm to outperform its of a firm to outperform its rivalsrivals
Resource-based Model of Above Resource-based Model of Above Average ReturnsAverage Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
Competitive AdvantageCompetitive Advantage
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4.4. Locate an attractive industryLocate an attractive industry
An attractive industry: an An attractive industry: an industry with opportunities that industry with opportunities that can be exploited by the firm’s can be exploited by the firm’s resources and capabilitiesresources and capabilities
Resource-based Model of Above Resource-based Model of Above Average ReturnsAverage Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
Competitive AdvantageCompetitive Advantage
An Attractive IndustryAn Attractive Industry
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5.5. Select a strategy that best Select a strategy that best allows the firm to utilize its allows the firm to utilize its resources and capabilities resources and capabilities relative to opportunities in relative to opportunities in the external environmentthe external environment
Strategy formulation and Strategy formulation and implementation: strategic implementation: strategic actions taken to earn above actions taken to earn above average returnsaverage returns
Resource-based Model of Above Resource-based Model of Above Average ReturnsAverage Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
Competitive AdvantageCompetitive Advantage
An Attractive IndustryAn Attractive Industry
Strategy Form/ImplStrategy Form/Impl
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Resource-based Model of Above Resource-based Model of Above Average ReturnsAverage Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
Competitive AdvantageCompetitive Advantage
An Attractive IndustryAn Attractive Industry
Strategy Form/ImplStrategy Form/Impl
Superior ReturnsSuperior Returns
Superior returns: earning Superior returns: earning of above-average returnsof above-average returns
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Strategic Intent & MissionStrategic Intent & MissionStrategic IntentStrategic Intent
Winning competitive battles through deciding Winning competitive battles through deciding how to leverage internal resources, how to leverage internal resources, capabilities, and core competenciescapabilities, and core competencies
Strategic MissionStrategic Mission An application of strategic intent in terms of An application of strategic intent in terms of
products to be offered and markets to be products to be offered and markets to be servedserved
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Groups who are affected by a Groups who are affected by a firm’s performance and who firm’s performance and who have claims on its wealthhave claims on its wealth
The firm must maintain The firm must maintain performance at an adequate performance at an adequate level in order to retain the level in order to retain the participation of key participation of key stakeholdersstakeholders
The Firm and Its StakeholdersThe Firm and Its Stakeholders
StakeholdersStakeholders
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Capital Market StakeholdersCapital Market Stakeholders
The Firm and Its StakeholdersThe Firm and Its Stakeholders
ShareholdersShareholdersMajor suppliers of capitalMajor suppliers of capital
•BanksBanks•Private lendersPrivate lenders•Venture capitalistsVenture capitalists
StakeholdersStakeholders
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Capital Market StakeholdersCapital Market Stakeholders
Product Market StakeholdersProduct Market Stakeholders
The Firm and Its StakeholdersThe Firm and Its Stakeholders
Primary customersPrimary customersSuppliersSuppliersHost communitiesHost communitiesUnionsUnions
StakeholdersStakeholders
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Capital Market StakeholdersCapital Market Stakeholders
Product Market StakeholdersProduct Market Stakeholders
Organizational StakeholdersOrganizational Stakeholders
The Firm and Its StakeholdersThe Firm and Its Stakeholders
EmployeesEmployeesManagersManagersNonmanagersNonmanagers
StakeholdersStakeholders
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Stakeholder InvolvementStakeholder Involvement
Two issues affect the Two issues affect the extent of stakeholder extent of stakeholder involvement in the firminvolvement in the firm
How do you divide the How do you divide the returns to keep returns to keep stakeholders involved?stakeholders involved?
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Capital Capital MarketMarket
Product Product MarketMarket
OrganizationalOrganizational
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Stakeholder InvolvementStakeholder Involvement
Two issues affect the Two issues affect the extent of stakeholder extent of stakeholder involvement in the firminvolvement in the firm
How do you increase the How do you increase the returns so everyone has returns so everyone has more to share?more to share?
22
Capital Capital MarketMarket
Product Product MarketMarket
OrganizationalOrganizational
©2003 Southwestern Publishing Company 37
The External Environment: Opportunities, The External Environment: Opportunities, Threats, and Industry Competition, and Threats, and Industry Competition, and
Competitor AnalysisCompetitor Analysis
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 2Chapter 2
38
Strategy ImplementationStrategy Implementation
Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
Chapter 11Chapter 11OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
Chapter 9Chapter 9CooperativeCooperative
StrategyStrategy
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 8Chapter 8InternationalInternational
StrategyStrategy
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring
StrategiesStrategies
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
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General
Envi
ronm
ent
General
Environment
Gen
eral
Environment
SocioculturalSociocultural
Global
Global
TechnologicalTechnologicalPo
litica
l/Leg
al
Polit
ical/L
egal
Dem
ogra
phic
Dem
ogra
phic Econom
ic
Economic
The External EnvironmentThe External Environment
IndustryIndustryEnvironmentEnvironment
Threat of new entrantsThreat of new entrantsPower of suppliersPower of suppliersPower of buyersPower of buyers
Product substitutesProduct substitutesIntensity of rivalryIntensity of rivalry
CompetitorCompetitorEnvironmentEnvironment
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External Environmental AnalysisExternal Environmental AnalysisA continuous process which includesA continuous process which includes
Scanning: Identifying early signals of environmental changes and trends
Monitoring: Detecting meaning through ongoing observations of environmental changes and trends
Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends
Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies and their management
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External Environmental AnalysisExternal Environmental Analysis
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
The ExternalThe ExternalEnvironmentEnvironment
Analysis of general environmentAnalysis of general environment
Analysis of industry environmentAnalysis of industry environment
Analysis of competitor environmentAnalysis of competitor environment
The ExternalThe ExternalEnvironmentEnvironment
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General EnvironmentGeneral EnvironmentSociocultural segmentSociocultural segment
Women in the workplaceWomen in the workplace Workforce diversityWorkforce diversity Attitudes about quality of worklifeAttitudes about quality of worklife Concerns about environmentConcerns about environment Shifts in work and career preferencesShifts in work and career preferences Shifts in product and service preferencesShifts in product and service preferences
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Economic segmentEconomic segmentGeneral EnvironmentGeneral Environment
Inflation ratesInflation rates Interest ratesInterest rates Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses Personal savings ratePersonal savings rate Business savings ratesBusiness savings rates Gross domestic productGross domestic product
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General EnvironmentGeneral EnvironmentPolitical/Legal SegmentPolitical/Legal Segment
Antitrust lawsAntitrust laws Taxation lawsTaxation laws Deregulation philosophiesDeregulation philosophies Labor training lawsLabor training laws Educational philosophies and policiesEducational philosophies and policies
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General EnvironmentGeneral EnvironmentTechnological SegmentTechnological Segment Product innovationsProduct innovations Applications of knowledgeApplications of knowledge Focus of private and government-supported Focus of private and government-supported
R&D expendituresR&D expenditures New communication technologiesNew communication technologies
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General EnvironmentGeneral EnvironmentGlobal SegmentGlobal Segment Important political eventsImportant political events
Critical global marketsCritical global markets Newly industrialize countriesNewly industrialize countries Different cultural and institutional attributesDifferent cultural and institutional attributes
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General EnvironmentGeneral EnvironmentDemographic SegmentDemographic Segment
Population sizePopulation size Age structureAge structure Geographic Geographic
distributiondistribution Ethnic mixEthnic mix Income distributionIncome distribution
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Industry EnvironmentIndustry EnvironmentA set of factors that directly influences a A set of factors that directly influences a
company and its competitive actions and company and its competitive actions and responses.responses.
Interaction among these factors determine Interaction among these factors determine an industry’s profit potential.an industry’s profit potential. Threat of new entrantsThreat of new entrants Power of suppliersPower of suppliers Power of buyersPower of buyers Product substitutesProduct substitutes Intensity of rivalryIntensity of rivalry
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Five Forces Model of CompetitionFive Forces Model of Competition
Identify current and potential competitors Identify current and potential competitors and determine which firms serve them.and determine which firms serve them.
Conduct competitive analysis.Conduct competitive analysis. Recognize that suppliers and buyers can Recognize that suppliers and buyers can
become competitors.become competitors. Recognize that producers of potential Recognize that producers of potential
substitutes may become competitors.substitutes may become competitors.
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Threat of New Entrants
Threat of New Entrants
Barg
aini
ng P
ower
of
Barg
aini
ng P
ower
of
Supp
liers
Supp
liers
Bargaining Power of Bargaining Power of BuyersBuyers
Threat of Substitute
Threat of Substitute
ProductsProducts
Rivalry Among
Rivalry Among
Competing Firm
s
Competing Firm
s
Five Forces Model of CompetitionFive Forces Model of Competition
Five Forces ofFive Forces ofCompetitionCompetition
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Threat of New EntrantsThreat of New EntrantsBarriers to entryBarriers to entry
Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Switching costsSwitching costs Access to distribution channelsAccess to distribution channels Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy Expected retaliationExpected retaliation
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Bargaining Power of SuppliersBargaining Power of SuppliersA supplier group is powerful when:A supplier group is powerful when: it is dominated by a few large companiesit is dominated by a few large companies
satisfactory substitute products are not available satisfactory substitute products are not available to industry firmsto industry firms
industry firms are not a significant customer for industry firms are not a significant customer for the supplier groupthe supplier group
suppliers’ goods are critical to buyers’ suppliers’ goods are critical to buyers’ marketplace successmarketplace success
effectiveness of suppliers’ products has created effectiveness of suppliers’ products has created high switching costshigh switching costs
suppliers are a credible threat to integrate suppliers are a credible threat to integrate forward into the buyers’ industryforward into the buyers’ industry
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Bargaining Power of BuyersBargaining Power of BuyersBuyers (customers) are powerful when:Buyers (customers) are powerful when:
they purchase a large portion of an industry’s they purchase a large portion of an industry’s total outputtotal output
the sales of the product being purchased the sales of the product being purchased account for a significant portion of the seller’s account for a significant portion of the seller’s annual revenuesannual revenues
they could easily switch to another productthey could easily switch to another product the industry’s products are undifferentiated or the industry’s products are undifferentiated or
standardized, and buyers pose a credible threat standardized, and buyers pose a credible threat if they were to integrate backward into the if they were to integrate backward into the seller’s industryseller’s industry
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Threat of Substitute ProductsThreat of Substitute ProductsProduct substitutes are strong threat when:Product substitutes are strong threat when:
customers face few switching costscustomers face few switching costs substitute product’s price is lowersubstitute product’s price is lower substitute product’s quality and performance substitute product’s quality and performance
capabilities are equal to or greater than those of capabilities are equal to or greater than those of the competing productthe competing product
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Intensity of RivalryIntensity of Rivalry Intensity of rivalry is stronger when competitors:Intensity of rivalry is stronger when competitors:
are numerous or equally balancedare numerous or equally balanced experience slow industry growthexperience slow industry growth have high fixed costs or high storage costshave high fixed costs or high storage costs lack differentiation or low switching costslack differentiation or low switching costs experience high strategic stakesexperience high strategic stakes have high exit barriershave high exit barriers
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High Exit BarriersHigh Exit BarriersCommon exit barriers include:Common exit barriers include: specialized assets (assets with values linked to specialized assets (assets with values linked to
a particular business or location)a particular business or location) fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements strategic interrelationships (relationships of strategic interrelationships (relationships of
mutual dependence between one business and mutual dependence between one business and other parts of a company’s operation, such as other parts of a company’s operation, such as shared facilities and access to financial markets)shared facilities and access to financial markets)
emotional barriers (career concerns, loyalty to emotional barriers (career concerns, loyalty to employees, etc.)employees, etc.)
government and social restrictionsgovernment and social restrictions
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Strategic GroupsStrategic GroupsStrategic group: a group of firms in an Strategic group: a group of firms in an industry following the same or similar industry following the same or similar strategy along the same strategic strategy along the same strategic dimensions.dimensions.The strategy followed by a strategic The strategy followed by a strategic group differs from strategies being group differs from strategies being implemented by other companies in implemented by other companies in the industry.the industry.
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Competitor EnvironmentCompetitor EnvironmentCompetitor intelligenceCompetitor intelligence is the ethical is the ethical gathering of needed information and data gathering of needed information and data about competitors’ objectives, strategies, about competitors’ objectives, strategies, assumptions, and capabilitiesassumptions, and capabilities what drives the competitor as shown by its what drives the competitor as shown by its future future
objectivesobjectives what the competitor is doing and can do as what the competitor is doing and can do as
revealed by its revealed by its current strategycurrent strategy What the competitor believes about itself and the What the competitor believes about itself and the
industry, as shown by its industry, as shown by its assumptionsassumptions What the the competitor may be able to do, as What the the competitor may be able to do, as
shown by its shown by its capabilitiescapabilities
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Competitor AnalysisCompetitor AnalysisFuture Objectives:Future objectivesFuture objectives How do our goals compare
with our competitors’ goals?
Where will the emphasis be placed in the future?
What is the attitude toward risk?
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Competitor AnalysisCompetitor Analysis
Current strategyCurrent strategy
Current Strategy:Future objectivesFuture objectives How are we currently
competing? Does this strategy support
changes in the competitive structure?
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Competitor AnalysisCompetitor Analysis
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectives Assumptions: Do we assume the future will be volatile?
Are we operating under a status quo?
What assumptions do our competitors hold about the industry and themselves?
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Competitor AnalysisCompetitor Analysis
CapabilitiesCapabilities
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectives Capabilities: What are our strengths and weaknesses?
How do we rate compared to our competitors?
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Competitor AnalysisCompetitor Analysis
CapabilitiesCapabilities
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectives ResponseResponse
Response: What will our competitors
do in the future? Where do we hold an
advantage over our competitors?
How will this change our relationship with our competitors?
©2003 Southwestern Publishing Company 64
The Internal Environment: The Internal Environment: Resources, Capabilities andResources, Capabilities and
Core CompetenceCore Competence
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 3Chapter 3
65
Strategy ImplementationStrategy ImplementationChapter 11Chapter 11
OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
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Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
Chapter 9Chapter 9CooperativeCooperative
StrategyStrategy
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 8Chapter 8InternationalInternational
StrategyStrategy
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring
StrategiesStrategies
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Sustainability of a Competitive Sustainability of a Competitive AdvantageAdvantage Sustainability of a competitive advantage Sustainability of a competitive advantage
is a function of:is a function of:– the rate of core-competence obsolescence due the rate of core-competence obsolescence due
to environmental changesto environmental changes– the availability of substitutes for the core the availability of substitutes for the core
competencecompetence– the imitability of the core competencethe imitability of the core competence
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ExternalExternal and Internal Analyses and Internal Analyses
General
General
Envi
ronm
ent
Envi
ronm
ent
GeneralGeneral
EnvironmentEnvironment
Gen
eral
Gen
eral
Environment
Environment
SocioculturalSociocultural
GlobalGlobal
TechnologicalTechnological
Polit
ical/L
egal
Polit
ical/L
egal
Dem
ogra
phic
Dem
ogra
phic Econom
ic
Economic
IndustryIndustryEnvironmentEnvironment
CompetitorCompetitorEnvironmentEnvironment
By studying the external By studying the external environment, firms identify environment, firms identify what they what they might choose to domight choose to do
Opportunities and threatsOpportunities and threats
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ExternalExternal and Internal Analysesand Internal AnalysesBy studying the internal By studying the internal environment, firms identify environment, firms identify what they what they can docan do
Unique resources, Unique resources, capabilities, and core capabilities, and core competenciescompetencies
(sustainable competitive (sustainable competitive advantage)advantage)
External and External and InternalInternal Analyses Analyses
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Challenge of Internal AnalysisChallenge of Internal Analysis How do we effectively manage current core How do we effectively manage current core
competencies while simultaneously competencies while simultaneously developing new ones?developing new ones?
How do we assemble bundles of resources, How do we assemble bundles of resources, capabilities and core competencies to capabilities and core competencies to create value for customers?create value for customers?
How do we learn to change rapidly?How do we learn to change rapidly?
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Three Conditions Affecting Managerial Three Conditions Affecting Managerial Decisions About Resources, Capabilities, Decisions About Resources, Capabilities, and Core Competenciesand Core CompetenciesUncertaintyUncertainty regarding characteristics of the regarding characteristics of the
general and the industry environments, general and the industry environments, competitors’ actions, and customers’ preferencescompetitors’ actions, and customers’ preferences
ComplexityComplexity regarding the interrelated causes regarding the interrelated causes shaping a firm’s environments and perceptions of shaping a firm’s environments and perceptions of the environmentsthe environments
Intraorganizational ConflictsIntraorganizational Conflicts among among people making managerial decisions and those people making managerial decisions and those affected by themaffected by them
71
Components ofComponents ofInternal AnalysisInternal Analysis
Discovering CoreDiscovering CoreCompetenciesCompetencies
ResourcesResources• TangibleTangible• IntangibleIntangible
CapabilitiesCapabilities
CoreCoreCompetenciesCompetencies
CompetitiveCompetitiveAdvantageAdvantage
StrategicStrategicCompetitivenessCompetitiveness
Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
ValueValueChainChain
AnalysisAnalysis
• OutsourceOutsource
72
Discovering CoreDiscovering CoreCompetenciesCompetencies
ResourcesResources• TangibleTangible• IntangibleIntangible
Resources are what a firm has Resources are what a firm has to work with--its assets--to work with--its assets--including its people and the including its people and the value of its brand namevalue of its brand name
Resources represent inputs into Resources represent inputs into a firm’s production process... a firm’s production process... such as capital equipment, skills such as capital equipment, skills of employees, brand names, of employees, brand names, finances and talented managersfinances and talented managers
73
Discovering CoreDiscovering CoreCompetenciesCompetencies
ResourcesResources• TangibleTangible• IntangibleIntangible
Tangible ResourcesTangible Resources• FinancialFinancial• PhysicalPhysical• Human resourcesHuman resources• OrganizationalOrganizational
Intangible ResourcesIntangible Resources• TechnologicalTechnological• InnovationInnovation• ReputationReputation
74
Discovering CoreDiscovering CoreCompetenciesCompetencies
CapabilitiesCapabilities
Capabilities become important when they are combined Capabilities become important when they are combined in unique combinations which create core competencies in unique combinations which create core competencies which have strategic value and can lead to competitive which have strategic value and can lead to competitive advantageadvantage
75
Discovering CoreDiscovering CoreCompetenciesCompetencies
CapabilitiesCapabilities
Capabilities are what a firm does, and represent the firm’s Capabilities are what a firm does, and represent the firm’s capacity or ability to integrate individual firm resources to capacity or ability to integrate individual firm resources to achieve a desired objectiveachieve a desired objective
76
Discovering CoreDiscovering CoreCompetenciesCompetencies
CoreCoreCompetenciesCompetencies
Core competencies are resources and capabilities that serve Core competencies are resources and capabilities that serve as a source of competitive advantage over rivalsas a source of competitive advantage over rivals
Core competencies distinguish a company competitively Core competencies distinguish a company competitively and make it distinctiveand make it distinctive
McKinsey and Co. recommends using three to four McKinsey and Co. recommends using three to four competencies when framing strategic actionscompetencies when framing strategic actions
77
Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
Discovering CoreDiscovering CoreCompetenciesCompetencies
Valuable: Capabilities that help a firm neutralize threats or Valuable: Capabilities that help a firm neutralize threats or exploit opportunitiesexploit opportunities
78
Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
Discovering CoreDiscovering CoreCompetenciesCompetencies
Rare: Capabilities that are not possessed by many othersRare: Capabilities that are not possessed by many others
79
Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
Discovering CoreDiscovering CoreCompetenciesCompetencies
Costly to imitate: capabilities that other firms cannot Costly to imitate: capabilities that other firms cannot develop easily, usually due todevelop easily, usually due to
• Unique historical conditionsUnique historical conditions• Causal ambiguityCausal ambiguity• Social complexitySocial complexity
80
Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
Discovering CoreDiscovering CoreCompetenciesCompetencies
Nonsubstitutable: capabilities that do not have strategic Nonsubstitutable: capabilities that do not have strategic equivalentsequivalents
• Invisible to competitorsInvisible to competitors• Firm specific knowledgeFirm specific knowledge• Trust-based working relationships between managers Trust-based working relationships between managers
and nonmanagerial personneland nonmanagerial personnel
81
Core Competence as a Strategic Core Competence as a Strategic CapabilityCapability
ResourcesResources• Inputs to a firm’s Inputs to a firm’s
production processproduction process
CapabilityCapability• A nonstrategicA nonstrategic
team or resourceteam or resource
Core CompetenceCore Competence• A strategicA strategic
capabilitycapability
The source ofThe source of
Does it satisfy the Does it satisfy the criteria of sustainable criteria of sustainable competitive competitive advantage?advantage?
YesYes
NoNo
CapabilityCapability• An integration of aAn integration of a
team of resourcesteam of resources
82
Performance ImplicationsPerformance Implications
Valuab
le?
Valuab
le?
Rare?
Rare?
Costly
to Im
itate?
Costly
to Im
itate?
Nonsub
stitut
able
Nonsub
stitut
able
CompetitiveCompetitiveConsequencesConsequences
PerformancePerformanceImplicationsImplications
NoNo NoNo NoNo NoNoCompetitiveCompetitiveDisadvantageDisadvantage
Below AverageBelow AverageReturnsReturns
YesYes NoNo NoNoYes/Yes/NoNo
CompetitiveCompetitiveParityParity Average ReturnsAverage Returns
YesYes YesYes NoNoYes/Yes/NoNo
Temporary Com-Temporary Com-petitive Advantagepetitive Advantage
Above Average to Above Average to Average ReturnsAverage Returns
YesYes YesYes YesYes YesYesSustainable Com-Sustainable Com-petitive Advantagepetitive Advantage
Above Average Above Average ReturnsReturns
83
ServiceService
Marketing & SalesMarketing & Sales
Outbound LogisticsOutbound Logistics
OperationsOperations
Inbound LogisticsInbound LogisticsFirm
Infra
stru
ctur
eFi
rm In
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ure
Hum
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esou
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Mgm
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Res
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Tech
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tTe
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cal D
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Pro
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Margin Margin
Primary ActivitiesPrimary Activities
Supp
ort A
ctiv
ities
Supp
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ities
The BasicThe BasicValue ChainValue Chain
84
MarginMargin Margin
Margin
Primary ActivitiesPrimary Activities
Sup
port
Act
iviti
esS
uppo
rt A
ctiv
ities
OutsourcingOutsourcing
Outsourcing is the Outsourcing is the purchase of some or purchase of some or all of a value-all of a value-creating activity creating activity from an external from an external suppliersupplier
Usually this is Usually this is because the specialty because the specialty supplier can provide supplier can provide these functions more these functions more efficientlyefficiently
ServiceService
Marketing & SalesMarketing & Sales
Outbound LogisticsOutbound Logistics
OperationsOperations
Inbound LogisticsInbound LogisticsFirm
Infra
stru
ctur
eFi
rm In
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ure
Hum
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esou
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Mgm
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Pro
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85
Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Improve Business FocusImprove Business Focus
– lets company focus on broader business lets company focus on broader business issues by having outside experts handle issues by having outside experts handle various operational detailsvarious operational details
Provide Access to World-Class Provide Access to World-Class CapabilitiesCapabilities– the specialized resources of outsourcing the specialized resources of outsourcing
providers makes world-class capabilities providers makes world-class capabilities available to firms in a wide range of available to firms in a wide range of applicationsapplications
86
Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Accelerate Business Re-Engineering Accelerate Business Re-Engineering
BenefitsBenefits– achieves re-engineering benefits more quickly achieves re-engineering benefits more quickly
by having outsiders--who have already by having outsiders--who have already achieved world-class standards--take over achieved world-class standards--take over processprocess
Share RisksShare Risks– reduces investment requirements and makes reduces investment requirements and makes
firm more flexible, dynamic and better able to firm more flexible, dynamic and better able to adapt to changing opportunitiesadapt to changing opportunities
87
Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Free Resources for Other PurposesFree Resources for Other Purposes
– permits firm to redirect efforts from non-core permits firm to redirect efforts from non-core activities toward those that serve customers activities toward those that serve customers more effectivelymore effectively
88
Outsourcing IssuesOutsourcing Issues Greatest ValueGreatest Value
– outsource only to firms possessing a core outsource only to firms possessing a core competence in terms of performing the primary or competence in terms of performing the primary or support activity being outsourcedsupport activity being outsourced
Evaluating Resources and CapabilitiesEvaluating Resources and Capabilities– don’t outsource activities in which the firm itself can don’t outsource activities in which the firm itself can
create and capture valuecreate and capture value Environmental Threats and Ongoing TasksEnvironmental Threats and Ongoing Tasks
– do not outsource primary and support activities that do not outsource primary and support activities that are used to neutralize environmental threats or are used to neutralize environmental threats or complete necessary ongoing organizational taskscomplete necessary ongoing organizational tasks
89
Outsourcing IssuesOutsourcing Issues Nonstrategic Team of ResourcesNonstrategic Team of Resources
– do not outsource capabilities that are critical to do not outsource capabilities that are critical to their success, even though the capabilities are their success, even though the capabilities are not actual sources of competitive advantagenot actual sources of competitive advantage
Firm’s Knowledge BaseFirm’s Knowledge Base– do not outsource activities that stimulate the do not outsource activities that stimulate the
development of new capabilities and development of new capabilities and competenciescompetencies
90
Core Competencies: Cautions Core Competencies: Cautions and Remindersand Reminders Never take for granted that core Never take for granted that core
competencies will continue to provide a competencies will continue to provide a source of competitive advantagesource of competitive advantage
All core competencies have the potential All core competencies have the potential to become to become core rigiditiescore rigidities
Core rigidities are former core Core rigidities are former core competencies that now generate inertia competencies that now generate inertia and stifle innovationand stifle innovation
©2003 Southwestern Publishing Company 91
Business-Level StrategyBusiness-Level Strategy
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 4Chapter 4
92
Strategy ImplementationStrategy ImplementationChapter 11Chapter 11
OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
FeedbackFeedback
Stra
tegi
c In
puts
Stra
tegi
c In
puts
Stra
tegi
c A
ctio
nsSt
rate
gic
Act
ions
Stra
tegi
c O
utco
mes
Stra
tegi
c O
utco
mes
Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
93
Business-Level StrategyBusiness-Level StrategyBusiness-level strategyBusiness-level strategy: an integrated and : an integrated and coordinated set of commitments and actions coordinated set of commitments and actions the firm uses to gain a competitive the firm uses to gain a competitive advantage by exploiting core competencies advantage by exploiting core competencies in specific product marketsin specific product markets
94
Core Competencies and StrategyCore Competencies and StrategyThe resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals
An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage
Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets
Business-levelBusiness-levelstrategystrategy
StrategyStrategy
CoreCorecompetenciescompetencies
95
Key Issues of Business-Level Key Issues of Business-Level StrategyStrategy What good or service to offer customersWhat good or service to offer customers How to manufacture or create the good or How to manufacture or create the good or
serviceservice How to distribute the good or service in How to distribute the good or service in
the marketplacethe marketplace
96
The Central Role of CustomersThe Central Role of CustomersIn selecting a business-level In selecting a business-level strategy, the firm determinesstrategy, the firm determines1. 1. whowho it will serve it will serve2.2. whatwhat needs those target customers needs those target customers
have that it will satisfyhave that it will satisfy3.3. howhow those needs will be satisfied those needs will be satisfied
97
Managing Relationships With Managing Relationships With CustomersCustomers Customer relationships are strengthened Customer relationships are strengthened
by offering them superior valueby offering them superior value– help customers to develop a new competitive help customers to develop a new competitive
advantageadvantage– enhance the value of existing competitive enhance the value of existing competitive
advantagesadvantages
98
Managing Relationships With Managing Relationships With CustomersCustomers Establish a competitive advantage along Establish a competitive advantage along
these dimensions:these dimensions:ReachReach
– the firm’s access and connection to customersthe firm’s access and connection to customersRichnessRichness
– the depth and detail of the two-way flow of the depth and detail of the two-way flow of information between the firm and customersinformation between the firm and customers
AffiliationAffiliation– facilitating useful interactions with customersfacilitating useful interactions with customers
99
CustomersCustomers
Market SegmentationMarket Segmentation
ConsumerConsumerMarketsMarkets
IndustrialIndustrialMarketsMarkets
100
Market Segmentation: Market Segmentation: Consumer MarketsConsumer Markets
Demographic factorsDemographic factors
ConsumerConsumerMarketsMarkets
Socioeconomic factorsSocioeconomic factors
Geographic Geographic factorsfactorsPsychological factorsPsychological factors
Consumption patternsConsumption patterns
Perceptual factorsPerceptual factors
Dem.
Soc.
Geo.Psy.
Con.
Per.
101
Market Segmentation: Market Segmentation: Industrial MarketsIndustrial Markets
IndustrialIndustrialMarketsMarkets
End-use segmentsEnd-use segments
Product segmentsProduct segments
Geographic segmentsGeographic segments
Common buying factor Common buying factor segmentssegmentsCustomer size segmentsCustomer size segments
End
Pro.
Geo.
Buy.
Size
102
Types of Business-Level StrategiesTypes of Business-Level Strategies Business-level strategies are intended to Business-level strategies are intended to
create differences between the firm’s create differences between the firm’s position relative to those of its rivalsposition relative to those of its rivals
To position itself, the firm must decide To position itself, the firm must decide whether it intends to perform activities whether it intends to perform activities differently or to perform different activities differently or to perform different activities as compared to its rivalsas compared to its rivals
103
Five Generic StrategiesFive Generic StrategiesCompetitive AdvantageCompetitive Advantage
Com
petit
ive
Scop
eC
ompe
titiv
e Sc
ope
CostCost UniquenessUniqueness
Bro
ad
Bro
ad
targ
etta
rget
Nar
row
N
arro
w
targ
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rget
Cost Cost LeadershipLeadership
DifferentiationDifferentiation
Focused Cost Focused Cost LeadershipLeadership
Focused Focused DifferentiationDifferentiation
Integrated CostIntegrated CostLeadership/Leadership/
DifferentiationDifferentiation
104
Cost Leadership StrategyCost Leadership StrategyAn integrated set of actions designed to An integrated set of actions designed to produce or deliver goods or services at the produce or deliver goods or services at the lowest costlowest cost, , relative to competitorsrelative to competitors with with features that are acceptable to customersfeatures that are acceptable to customers
– relatively standardized productsrelatively standardized products– features acceptable to many customersfeatures acceptable to many customers– lowest competitive pricelowest competitive price
105
Cost Leadership StrategyCost Leadership StrategyCost saving actions required by this strategy:Cost saving actions required by this strategy:
– building efficient scale facilities– tightly controlling production costs and
overhead– minimizing costs of sales, R&D and service– building efficient manufacturing facilities– monitoring costs of activities provided by
outsiders– simplifying production processes
106
How to Obtain a Cost AdvantageHow to Obtain a Cost Advantage
Cost DriversCost Drivers Value ChainValue Chain
Determine and Determine and controlcontrol
Reconfigure, if Reconfigure, if neededneeded
• Alter production process• Change in automation• New distribution channel
• Direct sales in place of indirect sales
• New advertising media
• New raw material
• Backward integration• Forward integration
• Change location relative to suppliers or buyers
107
Product features Performance Mix & variety of
products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training,
motivation
Factors That Drive CostsFactors That Drive Costs Economies of scale Asset utilization Capacity utilization
pattern• Seasonal, cyclical
Interrelationships Order processing
and distribution Value chain linkages
• Advertising & sales• Logistics &
operations
108
Questions Leading to Lower CostsQuestions Leading to Lower Costs1.1. How can an activity be performed How can an activity be performed
differently or even eliminated?differently or even eliminated?2.2. How can a group of linked value activities How can a group of linked value activities
be regrouped or reordered?be regrouped or reordered?3.3. How might coalitions with other firms How might coalitions with other firms
lower or eliminate costs?lower or eliminate costs?
109
Cost Leadership Strategy and the Cost Leadership Strategy and the Five Forces of CompetitionFive Forces of Competition
Rivalry Among Competing Rivalry Among Competing FirmsFirmsCan use cost leadership Can use cost leadership strategy to advantage since:strategy to advantage since:
competitors avoid price competitors avoid price wars with cost leaders, wars with cost leaders, creating higher profits for creating higher profits for the entire industrythe entire industry
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
110
Cost Leadership Strategy and the Cost Leadership Strategy and the Five Forces of CompetitionFive Forces of Competition
Bargaining Power of Bargaining Power of BuyersBuyersCan mitigate buyers’ power by:Can mitigate buyers’ power by:
driving prices far below driving prices far below competitors, causing them competitors, causing them to exit and shifting power to exit and shifting power with buyers back to the with buyers back to the firmfirm
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
111
Cost Leadership Strategy and the Cost Leadership Strategy and the Five Forces of CompetitionFive Forces of Competition
Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ power Can mitigate suppliers’ power by:by:
being able to absorb cost being able to absorb cost increases due to low cost increases due to low cost positionposition
being able to make very large being able to make very large purchases, reducing chance purchases, reducing chance of supplier using powerof supplier using power
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
112
Cost Leadership Strategy and the Cost Leadership Strategy and the Five Forces of CompetitionFive Forces of Competition
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
Threat of New EntrantsThreat of New EntrantsCan frighten off new entrants Can frighten off new entrants due to:due to: their need to enter on a large their need to enter on a large
scale in order to be cost scale in order to be cost competitivecompetitive
the time it takes to move the time it takes to move down the learning curvedown the learning curve
113
Cost Leadership Strategy and the Cost Leadership Strategy and the Five Forces of CompetitionFive Forces of Competition
Threat of Substitute Threat of Substitute ProductsProductsCost leader is well positioned Cost leader is well positioned to:to:
make investments to be make investments to be first to create substitutesfirst to create substitutes
buy patents developed by buy patents developed by potential substitutespotential substitutes
lower prices in order to lower prices in order to maintain value positionmaintain value position
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
114
Major Risks of Cost Leadership Major Risks of Cost Leadership StrategyStrategy Dramatic technological change could take Dramatic technological change could take
away your cost advantageaway your cost advantage Competitors may learn how to imitate Competitors may learn how to imitate
value chainvalue chain Focus on efficiency could cause cost Focus on efficiency could cause cost
leader to overlook changes in customer leader to overlook changes in customer preferencespreferences
115
Differentiation StrategyDifferentiation StrategyAn integrated set of actions designed by a An integrated set of actions designed by a firm to produce or deliver goods or services firm to produce or deliver goods or services (at an acceptable cost) that customers (at an acceptable cost) that customers perceive as being different in ways that are perceive as being different in ways that are important to themimportant to them
– price for product can exceed what the firm’s price for product can exceed what the firm’s target customers are willing to paytarget customers are willing to pay
– nonstandardized productsnonstandardized products– customers value differentiated features more customers value differentiated features more
than they value low costthan they value low cost
116
Differentiation StrategyDifferentiation Strategy Value provided by Value provided by unique features and unique features and
value characteristicsvalue characteristics Command premium priceCommand premium price High customer serviceHigh customer service Superior qualitySuperior quality Prestige or exclusivityPrestige or exclusivity Rapid innovationRapid innovation
117
Differentiation StrategyDifferentiation StrategyDifferentiation actions required by this Differentiation actions required by this strategy:strategy:– developing new systems and processesdeveloping new systems and processes– shaping perceptions through advertisingshaping perceptions through advertising– quality focusquality focus– capability in R&Dcapability in R&D– maximize human resource contributions maximize human resource contributions
through low turnover and high motivationthrough low turnover and high motivation
118
How to Obtain a Differentiation How to Obtain a Differentiation AdvantageAdvantage
Cost DriversCost Drivers Value ChainValue Chain
Control if Control if neededneeded
Reconfigure to Reconfigure to maximizemaximize
customer perceptions of uniquenesscustomer perceptions of uniquenesscustomer reluctance to switch to non-unique productcustomer reluctance to switch to non-unique product
• Raise performance of product or serviceRaise performance of product or service• Lower buyers’ costsLower buyers’ costs
• Create sustainability through:Create sustainability through:
119
Factors That Drive DifferentiationFactors That Drive Differentiation Unique product featuresUnique product features Unique product performanceUnique product performance Exceptional services Exceptional services New technologiesNew technologies Quality of inputsQuality of inputs Exceptional skill or experienceExceptional skill or experience Detailed informationDetailed information
120
Differentiation Strategy and the Differentiation Strategy and the Five Forces of CompetitionFive Forces of Competition
Rivalry Among Competing Rivalry Among Competing FirmsFirmsCan defend against Can defend against competition because:competition because:
brand loyalty to brand loyalty to differentiated product differentiated product offsets price competitionoffsets price competition
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
121
Differentiation Strategy and the Differentiation Strategy and the Five Forces of CompetitionFive Forces of Competition
Bargaining Power of BuyersBargaining Power of BuyersCan mitigate buyer power Can mitigate buyer power because:because:
well differentiated products well differentiated products reduce customer sensitivity reduce customer sensitivity to price increasesto price increases
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
122
Differentiation Strategy and the Differentiation Strategy and the Five Forces of CompetitionFive Forces of Competition
Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ power Can mitigate suppliers’ power by:by:
absorbing price increases absorbing price increases due to higher marginsdue to higher margins
passing along higher passing along higher supplier prices because supplier prices because buyers are loyal to buyers are loyal to differentiated branddifferentiated brand
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
123
Differentiation Strategy and the Differentiation Strategy and the Five Forces of CompetitionFive Forces of Competition
Threat of New EntrantsThreat of New EntrantsCan defend against new Can defend against new entrants because:entrants because:
new products must surpass new products must surpass proven products or, proven products or,
new products must be at new products must be at least equal to performance least equal to performance of proven products, but of proven products, but offered at lower pricesoffered at lower prices
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
124
Differentiation Strategy and the Differentiation Strategy and the Five Forces of CompetitionFive Forces of Competition
Threat of Substitute Threat of Substitute ProductsProductsWell positioned relative to Well positioned relative to substitutes because:substitutes because:
brand loyalty to a brand loyalty to a differentiated product tends differentiated product tends to reduce customers’ testing to reduce customers’ testing of new products or of new products or switching brandsswitching brands
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Barg
aini
ng P
ower
Barg
aini
ng P
ower
of
Buy
ers
of B
uyer
s
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of New
Threat of New
EntrantsEntrants
Threat of
Threat of
Substitute P
roducts
Substitute P
roducts
Five Forces ofFive Forces ofCompetitionCompetition
125
Major Risks of Differentiation Major Risks of Differentiation StrategyStrategy Customers may decide that the price Customers may decide that the price
differential between the differentiated differential between the differentiated product and the cost leader’s product is product and the cost leader’s product is too largetoo large
Means of differentiation may cease to Means of differentiation may cease to provide value for which customers are provide value for which customers are willing to paywilling to pay
126
Major Risks of Differentiation Major Risks of Differentiation StrategyStrategy Experience may narrow customer’s Experience may narrow customer’s
perceptions of the value of differentiated perceptions of the value of differentiated features of the firm’s productsfeatures of the firm’s products
Makers of counterfeit goods may attempt Makers of counterfeit goods may attempt to replicate differentiated features of the to replicate differentiated features of the firm’s productsfirm’s products
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Focused Business-Level Focused Business-Level StrategiesStrategies
A focus strategy must exploit a narrow A focus strategy must exploit a narrow target’s differences from the balance of target’s differences from the balance of the industry by:the industry by:– isolating a particular buyer groupisolating a particular buyer group– isolating a unique segment of a product isolating a unique segment of a product
lineline– concentrating on a particular concentrating on a particular
geographic marketgeographic market– finding their “niche”finding their “niche”
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Factors That May Drive Focused Factors That May Drive Focused StrategiesStrategies Large firms may overlook small nichesLarge firms may overlook small niches Firm may lack resources to compete in the Firm may lack resources to compete in the
broader marketbroader market May be able to serve a narrow market May be able to serve a narrow market
segment more effectively than can larger segment more effectively than can larger industry-wide competitorsindustry-wide competitors
Focus may allow the firm to direct Focus may allow the firm to direct resources to certain value chain activities resources to certain value chain activities to build competitive advantageto build competitive advantage
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Major Risks of Focused StrategiesMajor Risks of Focused Strategies Firm may be “outfocused” by competitorsFirm may be “outfocused” by competitors Large competitor may set its sights on Large competitor may set its sights on
your niche marketyour niche market Preferences of niche market may change Preferences of niche market may change
to match those of broad marketto match those of broad market
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Advantages of Integrated StrategyAdvantages of Integrated StrategyA firm that successfully uses an A firm that successfully uses an integrated cost leadership/differentiation integrated cost leadership/differentiation strategy should be in a better position to:strategy should be in a better position to:– adapt quickly to environmental changesadapt quickly to environmental changes– learn new skills and technologies more learn new skills and technologies more
quicklyquickly– effectively leverage its core effectively leverage its core
competencies while competing against competencies while competing against its rivalsits rivals
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Benefits of Integrated StrategyBenefits of Integrated Strategy Successful firms using this strategy have Successful firms using this strategy have
above-average returnsabove-average returns Firm offers two types of values to Firm offers two types of values to
customerscustomers– some differentiated features (but less some differentiated features (but less
than a true differentiated firm)than a true differentiated firm)– relatively low cost (but now as low as relatively low cost (but now as low as
the cost leader’s price)the cost leader’s price)
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Major Risks of Integrated StrategyMajor Risks of Integrated Strategy An integrated cost/differentiation business An integrated cost/differentiation business
level strategy often involves compromises level strategy often involves compromises (neither the lowest cost nor the most (neither the lowest cost nor the most differentiated firm)differentiated firm)
The firm may become “stuck in the The firm may become “stuck in the middle” lacking the strong commitment middle” lacking the strong commitment and expertise that accompanies firms and expertise that accompanies firms following either a cost leadership or a following either a cost leadership or a differentiated strategydifferentiated strategy
©2003 Southwestern Publishing Company 133
Competitive Rivalry and Competitive Rivalry and Competitive DynamicsCompetitive Dynamics
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 5Chapter 5
134
Strategy ImplementationStrategy Implementation
Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
Chapter 11Chapter 11OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
FeedbackFeedback
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Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
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DefinitionsDefinitions CompetitorsCompetitors
– firms operating in the same market, offering firms operating in the same market, offering similar products and targeting similar similar products and targeting similar customerscustomers
Competitive rivalryCompetitive rivalry– the ongoing set of competitive actions and the ongoing set of competitive actions and
responses occurring between competitors responses occurring between competitors – competitive rivalry influences an individual competitive rivalry influences an individual
firm’s ability to gain and sustain competitive firm’s ability to gain and sustain competitive advantagesadvantages
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DefinitionsDefinitions Competitive behaviorCompetitive behavior
– the set of competitive actions and competitive the set of competitive actions and competitive responses the firm takes to build or defend its responses the firm takes to build or defend its competitive advantages and to improve its competitive advantages and to improve its market positionmarket position
Competitive dynamicsCompetitive dynamics– the total set of actions and responses taken by the total set of actions and responses taken by
all firms competing within a marketall firms competing within a market
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From Competitors to From Competitors to Competitive DynamicsCompetitive Dynamics
CompetitorsCompetitors
• Through competitiveThrough competitivebehaviorbehavior• Competitive actionsCompetitive actions• Competitive responsesCompetitive responses
• To gain an advantageousTo gain an advantageousmarket positionmarket position
Competitive DynamicsCompetitive Dynamics• Competitive actions and responses taken by allCompetitive actions and responses taken by all
firms competing in a marketfirms competing in a market
CompetitiveCompetitiverivalryrivalry
Engage inEngage in
What results?What results?
What results?What results?
Why?Why?
How?How?
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Effect of Competitive Rivalry on Effect of Competitive Rivalry on a Firm’s Strategies a Firm’s Strategies Success of a strategy is determined by:Success of a strategy is determined by:
– the firm’s initial competitive actions the firm’s initial competitive actions – how well it anticipates competitors’ responses how well it anticipates competitors’ responses
to them to them – how well the firm anticipates and responds to its how well the firm anticipates and responds to its
competitors’ initial actions competitors’ initial actions Competitive rivalryCompetitive rivalry
– affects all types of strategies affects all types of strategies – most dominant influence is on the firm’s most dominant influence is on the firm’s
business-level strategy or strategies.business-level strategy or strategies.
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A Model of Competitive A Model of Competitive RivalryRivalry
Competitive AnalysisCompetitive Analysis• Market commonalityMarket commonality• Resource similarityResource similarity
Drivers of CompetitiveDrivers of CompetitiveBehaviorBehavior
• AwarenessAwareness• MotivationMotivation• AbilityAbility
Interim RivalryInterim Rivalry• Likelihood of AttackLikelihood of Attack
• First mover incentivesFirst mover incentives• Organizational sizeOrganizational size• QualityQuality
• Likelihood of ResponseLikelihood of Response• Type of competitive actionType of competitive action• ReputationReputation• Market dependenceMarket dependence
OutcomesOutcomes• Market positionMarket position• Financial performanceFinancial performance
feedbackfeedback
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Competitive RivalryCompetitive Rivalry Firms are mutually interdependent Firms are mutually interdependent
– one firm’s competitive actions have noticeable one firm’s competitive actions have noticeable effects on competitorseffects on competitors
– one firm’s competitive actions elicit one firm’s competitive actions elicit competitive responses from competitorscompetitive responses from competitors
– competitors feel each other’s actions and competitors feel each other’s actions and responsesresponses
Marketplace success is a function of both Marketplace success is a function of both individual strategies and the individual strategies and the consequences of their useconsequences of their use
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Competitor AnalysisCompetitor Analysis Competitor analysisCompetitor analysis
– a technique firms use to understand their a technique firms use to understand their competitive environment. Along with the general competitive environment. Along with the general and industry environments, the competitive and industry environments, the competitive environment comprises the firm’s external environment comprises the firm’s external environmentenvironment
– a technique used to help the firm a technique used to help the firm understandunderstand its its competitorscompetitors
– the first step to being able to the first step to being able to predictpredict competitors’ behavior in the form of its competitors’ behavior in the form of its competitive actions and responsescompetitive actions and responses
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Market CommonalityMarket Commonality Market Commonality is concerned withMarket Commonality is concerned with
– the number of markets with which a firm and a the number of markets with which a firm and a competitor are jointly involvedcompetitor are jointly involved
– the degree of importance of the individual markets to the degree of importance of the individual markets to each competitoreach competitor
Most industries’ markets are somewhat related in Most industries’ markets are somewhat related in terms ofterms of– technologiestechnologies– core competenciescore competencies
Multimarket competitionMultimarket competition– Firms competing in several marketsFirms competing in several markets
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Resource SimilarityResource Similarity Resource similarityResource similarity
– the extent to which the firm’s tangible and intangible the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of resources are comparable to a competitor’s in terms of both type and amount both type and amount
Firms with similar types and amounts of Firms with similar types and amounts of resources are likely toresources are likely to– have similar strengths and weaknesseshave similar strengths and weaknesses– use similar strategiesuse similar strategies
Assessing resource similarity can be difficult if Assessing resource similarity can be difficult if critical resources are intangible rather than critical resources are intangible rather than tangibletangible
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A Framework of Competitor A Framework of Competitor AnalysisAnalysis
MarketMarketCommonalityCommonality
HighHigh
LowLow
LowLow HighHighResourceResourceSimilaritySimilarity
The shaded area represents The shaded area represents degree of market commonality degree of market commonality between two firmsbetween two firms
Resource endowment BResource endowment B
Resource endowment AResource endowment A
KEYKEY
IIIIIIIIIIII IVIV
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Drivers of Competitive Actions Drivers of Competitive Actions and Responses:and Responses:
Awareness is the extent to which Awareness is the extent to which competitors recognize the degree of competitors recognize the degree of their mutual interdependencetheir mutual interdependence– mutual interdependence results mutual interdependence results
fromfrom• market commonalitymarket commonality• resource similarityresource similarity
AwarenessAwareness
AwarenessAwarenessDrivers of competitive behaviorDrivers of competitive behavior
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MotivationMotivation
Drivers of Competitive Actions Drivers of Competitive Actions and Responses:and Responses:
Motivation concerns the firm’s Motivation concerns the firm’s incentiveincentive– to take actionto take action– or to respond to a competitor’s or to respond to a competitor’s
attackattack– and relates to perceived gains and and relates to perceived gains and
losseslosses
AwarenessAwareness
Drivers of competitive behaviorDrivers of competitive behaviorMotivationMotivation
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AbilityAbility
Drivers of Competitive Actions Drivers of Competitive Actions and Responses:and Responses:
Ability relatesAbility relates– to each firm’s resourcesto each firm’s resources– the flexibility these resources the flexibility these resources
provideprovide Without available resources the firm Without available resources the firm
lacks the abilitylacks the ability– to attack a competitor to attack a competitor – to respond to the competitor’s to respond to the competitor’s
actionsactions
AwarenessAwareness
Drivers of competitive behaviorDrivers of competitive behavior
MotivationMotivation
AbilityAbility
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Drivers of Competitive Actions Drivers of Competitive Actions and Responses:and Responses:
A firm is more likely to attack the A firm is more likely to attack the rival with whom it has low market rival with whom it has low market commonality than the one with whom commonality than the one with whom it competes in multiple marketsit competes in multiple markets
Because of the high stakes of Because of the high stakes of competition under the condition of competition under the condition of market commonality, there is a high market commonality, there is a high probability that the attacked firm will probability that the attacked firm will respond to its competitor’s action in respond to its competitor’s action in an effort to protect its position in one an effort to protect its position in one or more marketsor more markets
MarketMarketcommonalitycommonality
Drivers of competitive behavior influenced byDrivers of competitive behavior influenced byMarket CommonalityMarket Commonality
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ResourceResourcesimilaritysimilarity
Drivers of Competitive Actions Drivers of Competitive Actions and Responses:and Responses:
The greater the resource imbalance The greater the resource imbalance between the acting firm and between the acting firm and competitors or potential responders, competitors or potential responders, the greater will be the delay in the greater will be the delay in response by the firm with a resource response by the firm with a resource disadvantagedisadvantage
When facing competitors with greater When facing competitors with greater resources or more attractive market resources or more attractive market positions, firms should eventually positions, firms should eventually respond, no matter how challenging respond, no matter how challenging the responsethe response
Drivers of competitive behavior influenced byDrivers of competitive behavior influenced byMarketMarket
commonalitycommonality
Resource SimilarityResource Similarity
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Competitive RivalryCompetitive Rivalry Competitive actionCompetitive action
– a strategic or tactical action the firm takes to a strategic or tactical action the firm takes to build or defend its competitive advantages or build or defend its competitive advantages or improve its market positionimprove its market position
Competitive responseCompetitive response– a strategic or tactical action the firm takes to a strategic or tactical action the firm takes to
counter the effects of a competitor’s counter the effects of a competitor’s competitive actioncompetitive action
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Strategic and Tactical ActionsStrategic and Tactical Actions Strategic action or a strategic responseStrategic action or a strategic response
– a market-based move that involves a a market-based move that involves a significant commitment of organizational significant commitment of organizational resources and is difficult to implement and resources and is difficult to implement and reversereverse
Tactical action or a tactical responseTactical action or a tactical response– market-based move that is taken to fine-tune a market-based move that is taken to fine-tune a
strategy; it involves fewer resources and is strategy; it involves fewer resources and is relatively easy to implement and reverserelatively easy to implement and reverse
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Factors Affecting Likelihood of Factors Affecting Likelihood of Attack:Attack:
First movers allocate funds forFirst movers allocate funds for– product innovation and developmentproduct innovation and development– aggressive advertisingaggressive advertising– advanced research and developmentadvanced research and development
First movers can gain First movers can gain – the loyalty of customers who may the loyalty of customers who may
become committed to the firm’s become committed to the firm’s goods or servicesgoods or services
– market share that can be difficult for market share that can be difficult for competitors to take during future competitors to take during future competitive rivalrycompetitive rivalry
First moverFirst moverincentivesincentives
First Mover IncentivesFirst Mover Incentives
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SizeSize
Factors Affecting Likelihood of Factors Affecting Likelihood of Attack:Attack:
Small firms are more likelySmall firms are more likely– to launch competitive actions to launch competitive actions – to be quicker in doing soto be quicker in doing so
Small firms are perceived asSmall firms are perceived as– nimble and flexible competitors nimble and flexible competitors – relying on speed and surprise to relying on speed and surprise to
defend their competitive advantages defend their competitive advantages or develop new ones while engaged or develop new ones while engaged in competitive rivalryin competitive rivalry
Small firms have the flexibility needed to Small firms have the flexibility needed to launch a greater variety of competitive launch a greater variety of competitive actionsactions
First moverFirst moverincentivesincentives
SizeSize
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Factors Affecting Likelihood of Factors Affecting Likelihood of Attack:Attack:
Large firms are likely to initiate more Large firms are likely to initiate more competitive actions as well as competitive actions as well as strategic actions during a given time strategic actions during a given time periodperiod
Large organizations commonly have Large organizations commonly have the slack resources required to the slack resources required to launch a larger number of total launch a larger number of total competitive actionscompetitive actions
First moverFirst moverincentivesincentives
SizeSize
SizeSize
““Think and act big and we’ll get smaller. Think and Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.”act small and we’ll get bigger.”
- Herb Kelleher, Former CEO, Southwest Airlines
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QualityQuality
Factors Affecting Likelihood of Factors Affecting Likelihood of Attack:Attack:
Quality exists when the firm’s goods Quality exists when the firm’s goods or services meet or exceed or services meet or exceed customers’ expectationscustomers’ expectations
First moverFirst moverincentivesincentives
SizeSize
QualityQuality
Product quality dimensions includeProduct quality dimensions include– PerformancePerformance– FeaturesFeatures– FlexibilityFlexibility– DurabilityDurability– ConformanceConformance– ServiceabilityServiceability– AestheticsAesthetics– Perceived qualityPerceived quality
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QualityQuality
Factors Affecting Likelihood of Factors Affecting Likelihood of Attack:Attack:
Quality exists when the firm’s goods Quality exists when the firm’s goods or services meet or exceed or services meet or exceed customers’ expectationscustomers’ expectations
First moverFirst moverincentivesincentives
SizeSize
QualityQuality
Service quality dimensions includeService quality dimensions include– TimelinessTimeliness– CourtesyCourtesy– ConsistencyConsistency– ConvenienceConvenience– CompletenessCompleteness– AccuracyAccuracy
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Factors Affecting Likelihood of Factors Affecting Likelihood of ResponseResponse
Firms study three factors to predict how a Firms study three factors to predict how a competitor is likely to respond to competitor is likely to respond to competitive actionscompetitive actions– type of competitive actiontype of competitive action– reputationreputation– market dependencemarket dependence
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Factors Affecting Likelihood of Factors Affecting Likelihood of Response:Response:
Strategic actions receive strategic Strategic actions receive strategic responsesresponses
Tactical responses are taken to Tactical responses are taken to counter the effects of tactical actionscounter the effects of tactical actions
Strategic actions elicit fewer total Strategic actions elicit fewer total competitive responsescompetitive responses
A competitor likely will respond A competitor likely will respond quickly to a tactical actionquickly to a tactical action
The time needed to implement and The time needed to implement and assess a strategic action delays assess a strategic action delays competitors’ responsescompetitors’ responses
Type ofType ofcompetitivecompetitive
actionaction
Type of Competitive ActionType of Competitive Action
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ReputationReputation
Factors Affecting Likelihood of Factors Affecting Likelihood of Response:Response:
An actor is the firm taking an action An actor is the firm taking an action or responseor response
Reputation is the positive or negative Reputation is the positive or negative attribute ascribed by one rival to attribute ascribed by one rival to another based on past competitive another based on past competitive behaviorbehavior
The firm studies responses that a The firm studies responses that a competitor has taken previously when competitor has taken previously when attacked to predict likely responsesattacked to predict likely responses
Type ofType ofcompetitivecompetitive
actionaction
ReputationReputation
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MarketMarketdependencedependence
Factors Affecting Likelihood of Factors Affecting Likelihood of Response:Response:
Market dependence isMarket dependence is– the extent to which a firm’s the extent to which a firm’s
revenues or profits are derived revenues or profits are derived from a particular marketfrom a particular market
In general, firms can predict that In general, firms can predict that competitors with high market competitors with high market dependence are likely to respond dependence are likely to respond strongly to attacks threatening their strongly to attacks threatening their market positionmarket position
Type ofType ofcompetitivecompetitive
actionaction
ReputationReputation
Market DependenceMarket Dependence
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CompetitionCompetition Competitive DynamicsCompetitive Dynamics
– competitive dynamics concerns the ongoing competitive dynamics concerns the ongoing actions and responses taking place among actions and responses taking place among allall firms competing within a market for firms competing within a market for advantageous positionsadvantageous positions
Competitive RivalryCompetitive Rivalry– building and sustaining competitive advantages building and sustaining competitive advantages
are at the core of competitive rivalryare at the core of competitive rivalry– competitive advantages are the link to an competitive advantages are the link to an
advantageous market positionadvantageous market position
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Strategic Conduct is DynamicStrategic Conduct is Dynamic
• A firm’s strategic conduct is dynamic in A firm’s strategic conduct is dynamic in naturenature
• Actions and responses shape the Actions and responses shape the competitive positions of each firm’s competitive positions of each firm’s business level strategybusiness level strategy
Firm BFirm BFirm Firm AA
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Firm BFirm BFirm Firm AA
Strategic Conduct is DynamicStrategic Conduct is Dynamic
• Actions taken by one firm elicits Actions taken by one firm elicits responses from competitorsresponses from competitors
• Competitive responses lead to additional Competitive responses lead to additional actions from the firm that acted actions from the firm that acted originallyoriginally
ActionsActions
ResponseResponseNew ActionsNew Actions
New ResponseNew Response
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Competitive Dynamics:Competitive Dynamics:
Slow-cycle marketsSlow-cycle markets– the firm’s competitive advantages the firm’s competitive advantages
are shielded from imitation for long are shielded from imitation for long periods of timeperiods of time
– imitation is costlyimitation is costly Competitive advantages are Competitive advantages are
sustainable in slow-cycle marketssustainable in slow-cycle markets A proprietary, one-of-a-kind A proprietary, one-of-a-kind
competitive advantage leads to competitive advantage leads to competitive success in a slow-cycle competitive success in a slow-cycle marketmarket
Slow-cycleSlow-cyclemarketsmarkets
Slow-Cycle MarketsSlow-Cycle Markets
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Gradual Erosion of a Sustainable Gradual Erosion of a Sustainable Competitive AdvantageCompetitive Advantage
Ret
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Time (Years)Time (Years)00 55 1010
LaunchLaunch
ExploitationExploitation
CounterattackCounterattack
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Fast-cycleFast-cyclemarketsmarkets
Competitive Dynamics:Competitive Dynamics:
Fast-cycle marketsFast-cycle markets– the firm’s competitive advantages the firm’s competitive advantages
aren’t shielded from imitation aren’t shielded from imitation – imitation happens quickly and imitation happens quickly and
somewhat inexpensivelysomewhat inexpensively Competitive advantages aren’t Competitive advantages aren’t
sustainablesustainable Competitors use reverse engineering Competitors use reverse engineering
to quickly imitate or improve on the to quickly imitate or improve on the firm’s productsfirm’s products
Non-proprietary technology is Non-proprietary technology is diffused rapidlydiffused rapidly
Slow-cycleSlow-cyclemarketsmarkets
Fast-Cycle MarketsFast-Cycle Markets
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Obtaining Temporary Advantages to Obtaining Temporary Advantages to Create Sustained AdvantageCreate Sustained Advantage
Ret
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Time (Years)Time (Years)00 55 1010 1515
LaunchLaunchExploitationExploitation
CounterattackCounterattack
Firm has already moved Firm has already moved to next advantageto next advantage
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Competitive Dynamics:Competitive Dynamics:
Standard-cycle markets Standard-cycle markets – the firm’s competitive advantages may the firm’s competitive advantages may
be shielded from imitationbe shielded from imitation– imitation is moderately costlyimitation is moderately costly
Competitive advantages are partially Competitive advantages are partially sustainable if the firm is able to sustainable if the firm is able to continuously upgrade the quality of its continuously upgrade the quality of its competitive advantagescompetitive advantages
FirmsFirms– seek large market sharesseek large market shares– gain customer loyalty through brand gain customer loyalty through brand
namesnames– carefully control operationscarefully control operations
Slow-cycleSlow-cyclemarketsmarkets
Fast-cycleFast-cyclemarketsmarkets
Standard-cycleStandard-cyclemarketsmarkets
Standard-Cycle MarketsStandard-Cycle Markets
©2003 Southwestern Publishing Company 169
Corporate-Level StrategyCorporate-Level Strategy
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 6Chapter 6
170
Strategy ImplementationStrategy ImplementationChapter 11Chapter 11
OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
FeedbackFeedback
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Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
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Two Levels of StrategyTwo Levels of StrategyA diversified company has two levels of strategyA diversified company has two levels of strategy1. Business-Level Strategy1. Business-Level Strategy (Competitive Strategy)(Competitive Strategy)
How to create competitive advantage in each How to create competitive advantage in each business in which the company competesbusiness in which the company competes
- low cost- low cost - differentiation - differentiation- focused low cost- focused low cost - focused differentiation - focused differentiation
- integrated low cost/- integrated low cost/ differentiationdifferentiation
2. Corporate-Level Strategy2. Corporate-Level Strategy (Company-wide Strategy)(Company-wide Strategy)How to create value for the corporation as a wholeHow to create value for the corporation as a whole
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Key Questions in Key Questions in Corporate StrategyCorporate Strategy1. What businesses should the corporation 1. What businesses should the corporation
be in?be in?2. How should the corporate office manage 2. How should the corporate office manage
the array of business units?the array of business units?Corporate StrategyCorporate Strategy is is what makes the what makes the corporate whole add up corporate whole add up to more than the sum of to more than the sum of its business unit partsits business unit parts
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Levels and Types of DiversificationLevels and Types of DiversificationLow Levels of DiversificationLow Levels of Diversification
Single BusinessSingle Business> 95% of business from a single > 95% of business from a single business unitbusiness unit
Dominant BusinessDominant BusinessBetween 70 and 95% of business Between 70 and 95% of business from a single business unitfrom a single business unit
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Related ConstrainedRelated Constrained<70% of revenues from dominant <70% of revenues from dominant business; all businesses share business; all businesses share product, technological and product, technological and distribution linkagesdistribution linkages
Levels and Types of DiversificationLevels and Types of DiversificationModerate to High Levels of DiversificationModerate to High Levels of Diversification
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Related Linked (Mixed)Related Linked (Mixed)< 70% of revenues from dominant < 70% of revenues from dominant business, and only limited links business, and only limited links existexist
Levels and Types of DiversificationLevels and Types of DiversificationModerate to High Levels of DiversificationModerate to High Levels of Diversification
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Levels and Types of Levels and Types of DiversificationDiversification
UnrelatedUnrelated< 70% of revenue comes from the < 70% of revenue comes from the dominant business, and there are dominant business, and there are no common links between no common links between businessesbusinesses
Very High Levels of DiversificationVery High Levels of Diversification
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Reasons for DiversificationReasons for Diversification
Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness
• Economies of scope• Market power• Financial economics
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
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Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness
• Anti-trust regulation• Tax laws• Low performance• Uncertain future cash flows• Firm risk reduction
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for DiversificationReasons for Diversification
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Resources with varying Resources with varying effects on value creation and effects on value creation and strategic competitivenessstrategic competitiveness
• Tangible resources financial resources physical assets
• Intangible resources tacit knowledge customer relations image and reputation
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for DiversificationReasons for Diversification
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Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)
• Diversifying managerial employment risk
• Increasing managerial compensation
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for DiversificationReasons for Diversification
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Value-creating Strategies of Diversification:Value-creating Strategies of Diversification: Operational and Corporate ReadinessOperational and Corporate Readiness
Related ConstrainedRelated ConstrainedDiversificationDiversification
Vertical IntegrationVertical Integration(Market Power)(Market Power)
UnrelatedUnrelatedDiversificationDiversification
(Financial Economies)(Financial Economies)
Both Operational andBoth Operational andCorporate RelatednessCorporate Relatedness
(Rare Capability(Rare Capabilityand can Createand can CreateDiseconomies ofDiseconomies of
Scope)Scope)
Related LinkedRelated LinkedDiversificationDiversification(Economies of(Economies of
Scope)Scope)
Corporate Readiness: Transferring Skills into Corporate Readiness: Transferring Skills into Businesses Through Corporate HeadquartersBusinesses Through Corporate Headquarters
LowLow HighHigh
Shar
ing:
Ope
ratio
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Shar
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Ope
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Rel
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LowLow
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Adding Value by DiversificationAdding Value by DiversificationDiversification most effectively adds value Diversification most effectively adds value by either of two mechanisms:by either of two mechanisms:– Economies of scope:Economies of scope: cost savings attributed cost savings attributed
to transferring the capabilities and competencies to transferring the capabilities and competencies developed in one business to a new businessdeveloped in one business to a new business
– Market power:Market power: when a firm is able to sell its when a firm is able to sell its products above the existing competitive level or products above the existing competitive level or reduce the costs of its primary and support reduce the costs of its primary and support activities below the competitive level, or bothactivities below the competitive level, or both
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Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Unrelated Diversification StrategiesUnrelated Diversification Strategies
– efficient internal capital market allocationefficient internal capital market allocation
– restructuringrestructuring
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Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
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Sharing Activities:Sharing Activities: Sharing activities often lowers costs or raises Sharing activities often lowers costs or raises
differentiationdifferentiation Sharing activities can lower costs if it:Sharing activities can lower costs if it:
– achieves economies of scaleachieves economies of scale– boosts efficiency of utilizationboosts efficiency of utilization– helps move more rapidly down the Learning Curvehelps move more rapidly down the Learning Curve
Sharing activities can enhance potential for or Sharing activities can enhance potential for or reduce the cost of differentiationreduce the cost of differentiation
Must involve activities that are crucial to Must involve activities that are crucial to competitive advantagecompetitive advantage
Key CharacteristicsKey Characteristics
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Sharing Activities:Sharing Activities: Strong sense of corporate identityStrong sense of corporate identity Clear corporate mission that emphasizes Clear corporate mission that emphasizes
the importance of integrating business the importance of integrating business unitsunits
Incentive system that rewards more than Incentive system that rewards more than just business unit performancejust business unit performance
AssumptionsAssumptions
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Related Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Alternative Diversification Alternative Diversification StrategiesStrategies
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Transferring Core Competencies:Transferring Core Competencies:
Exploits interrelationships among Exploits interrelationships among divisionsdivisions
Start with value chain analysisStart with value chain analysis– identify ability to transfer skills or expertise identify ability to transfer skills or expertise
among similar value chainsamong similar value chains– exploit ability to transfer activitiesexploit ability to transfer activities
Key CharacteristicsKey Characteristics
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Transferring Core Competencies: Transferring Core Competencies:
Transferring core competencies leads to Transferring core competencies leads to competitive advantage only if the competitive advantage only if the similarities among business units meet the similarities among business units meet the following conditions:following conditions:– activities involved in the businesses are similar activities involved in the businesses are similar
enough that sharing expertise is meaningfulenough that sharing expertise is meaningful– transfer of skills involves activities which are transfer of skills involves activities which are
important to competitive advantageimportant to competitive advantage– the skills transferred represent significant the skills transferred represent significant
sources of competitive advantage for the sources of competitive advantage for the receiving unitreceiving unit
AssumptionsAssumptions
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Related Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Alternative Diversification Alternative Diversification StrategiesStrategies
Unrelated Diversification StrategiesUnrelated Diversification Strategies
– efficient internal capital market allocationefficient internal capital market allocation
191
Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Firms pursuing this strategy frequently Firms pursuing this strategy frequently
diversify by acquisition:diversify by acquisition:– acquire sound, attractive companiesacquire sound, attractive companies– acquired units are autonomousacquired units are autonomous– acquiring corporation supplies needed capitalacquiring corporation supplies needed capital– portfolio managers transfer resources from units portfolio managers transfer resources from units
that generate cash to those with high growth that generate cash to those with high growth potential and substantial cash needspotential and substantial cash needs
– add professional management & control to sub-add professional management & control to sub-unitsunits
– sub-unit managers compensation based on unit sub-unit managers compensation based on unit resultsresults
Key CharacteristicsKey Characteristics
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Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Managers have more detailed knowledge Managers have more detailed knowledge
of firm relative to outside investorsof firm relative to outside investors Firm need not risk competitive edge by Firm need not risk competitive edge by
disclosing sensitive competitive disclosing sensitive competitive information to investorsinformation to investors
Firm can reduce risk by allocating Firm can reduce risk by allocating resources among diversified businesses, resources among diversified businesses, although shareholders can generally although shareholders can generally diversify more economically on their owndiversify more economically on their own
AssumptionsAssumptions
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Related Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Unrelated Diversification StrategiesUnrelated Diversification Strategies
– efficient internal capital market allocationefficient internal capital market allocation
Alternative Diversification Alternative Diversification StrategiesStrategies
– restructuringrestructuring
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Restructuring:Restructuring: Seek out undeveloped, sick or threatened Seek out undeveloped, sick or threatened
organizations or industriesorganizations or industries Parent company (acquirer) intervenes and Parent company (acquirer) intervenes and
frequently:frequently:– changes sub-unit management teamchanges sub-unit management team– shifts strategyshifts strategy– infuses firm with new technologyinfuses firm with new technology– enhances discipline by changing control enhances discipline by changing control
systemssystems– divests part of firmdivests part of firm– makes additional acquisitions to achieve makes additional acquisitions to achieve
critical masscritical mass
Key CharacteristicsKey Characteristics
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Restructuring:Restructuring: Frequently sell unit after making one-time Frequently sell unit after making one-time
changes since parent no longer adds changes since parent no longer adds value to ongoing operationsvalue to ongoing operations
Key CharacteristicsKey Characteristics
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Restructuring:Restructuring: Requires keen management insight in Requires keen management insight in
selecting firms with depressed values or selecting firms with depressed values or unforeseen potentialunforeseen potential
Must do more than restructure companiesMust do more than restructure companies Need to initiate restructuring of industries Need to initiate restructuring of industries
to create a more attractive environmentto create a more attractive environment
AssumptionsAssumptions
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Incentives to DiversifyIncentives to DiversifyExternal Incentives:External Incentives: Relaxation of anti-trust regulation allows more Relaxation of anti-trust regulation allows more
related acquisitions than in the pastrelated acquisitions than in the past Before 1986, higher taxes on dividends favored Before 1986, higher taxes on dividends favored
spending retained earnings on acquisitionsspending retained earnings on acquisitions After 1986, firms made fewer acquisitions with After 1986, firms made fewer acquisitions with
retained earnings, shifting to the use of debt to retained earnings, shifting to the use of debt to take advantage of tax deductible interest take advantage of tax deductible interest paymentspayments
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Incentives to DiversifyIncentives to DiversifyInternal Incentives:Internal Incentives: Poor performance may lead some firms to Poor performance may lead some firms to
diversify to attempt to achieve better returnsdiversify to attempt to achieve better returns Firms may diversify to balance uncertain future Firms may diversify to balance uncertain future
cash flowscash flows Firms may diversify into different businesses in Firms may diversify into different businesses in
order to reduce riskorder to reduce risk
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Resources and DiversificationResources and Diversification Besides strong incentives, firms are more Besides strong incentives, firms are more
likely to diversify if they have the likely to diversify if they have the resources to do soresources to do so
Value creation is determined more by Value creation is determined more by appropriate use of resources than appropriate use of resources than incentives to diversifyincentives to diversify
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Managerial Motives to DiversifyManagerial Motives to DiversifyManagers have motives to diversifyManagers have motives to diversify
– diversification increases size; size is diversification increases size; size is associated with executive compensationassociated with executive compensation
– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict effective governance mechanisms may restrict
such motivessuch motives
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Relationship Between Relationship Between Diversification and PerformanceDiversification and Performance
Perf
orm
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Perf
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Level of DiversificationLevel of Diversification
DominantBusiness
UnrelatedBusiness
RelatedConstrained
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Relationship Between Firm Relationship Between Firm Performance and DiversificationPerformance and Diversification
IncentivesIncentives
ManagerialManagerialMotivesMotives
ResourcesResources DiversificationDiversificationStrategyStrategy
FirmFirmPerformancePerformance
InternalInternalGovernanceGovernance
StrategyStrategyImplementationImplementation
Capital MarketCapital MarketIntervention and theIntervention and theMarket forMarket forManagerial TalentManagerial Talent
©2003 Southwestern Publishing Company 203
Acquisition and Restructuring Acquisition and Restructuring StrategiesStrategies
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 7Chapter 7
204
Strategy ImplementationStrategy ImplementationChapter 11Chapter 11
OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
FeedbackFeedback
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Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring
StrategiesStrategies
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Mergers and AcquisitionsMergers and Acquisitions Merger:Merger: a strategy through which two firms a strategy through which two firms
agree to integrate theiragree to integrate their operations on a operations on a relatively co-equal basisrelatively co-equal basis
Acquisition:Acquisition: a strategy through which one firm a strategy through which one firm buys a controlling interest in another firm with buys a controlling interest in another firm with the intent of making the acquired firm a the intent of making the acquired firm a subsidiary business within its own portfoliosubsidiary business within its own portfolio
Takeover:Takeover: a special type of an acquisition a special type of an acquisition strategy wherein the target firm did not solicit the strategy wherein the target firm did not solicit the acquiring firm’s bidacquiring firm’s bid
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AcquisitionsAcquisitions
Reasons for Making AcquisitionsReasons for Making Acquisitions
IncreaseIncreasemarket powermarket power
OvercomeOvercomeentry barriersentry barriers
Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed
to marketto market
IncreaseIncreasediversificationdiversification
Reshape firm’sReshape firm’scompetitive scopecompetitive scope
Lower risk comparedLower risk comparedto developing newto developing new
productsproducts
Learn and developLearn and developnew capabilitiesnew capabilities
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services above when a firm is able to sell its goods or services above
competitive levels orcompetitive levels or– when the costs of its primary or support activities are when the costs of its primary or support activities are
below those of its competitorsbelow those of its competitors– usually is derived from the size of the firm and its usually is derived from the size of the firm and its
resources and capabilities to compete resources and capabilities to compete Market power is increased byMarket power is increased by
– horizontal acquisitionshorizontal acquisitions– vertical acquisitionsvertical acquisitions– related acquisitionsrelated acquisitions
Increased Market PowerIncreased Market Power
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors– differentiated products by competitorsdifferentiated products by competitors– enduring relationships with customers that create enduring relationships with customers that create
product loyalties with competitorsproduct loyalties with competitors acquisition of an established company acquisition of an established company
– may be more effective than entering the market as a may be more effective than entering the market as a competitor offering an unfamiliar good or service that competitor offering an unfamiliar good or service that is unfamiliar to current buyersis unfamiliar to current buyers
– provides a new entrant with immediate market accessprovides a new entrant with immediate market access
Overcome Barriers to EntryOvercome Barriers to Entry
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Significant investments of a firm’s Significant investments of a firm’s resources are required toresources are required to– Develop new products internallyDevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace
Acquisition of a competitor may result inAcquisition of a competitor may result in– more predictable returns more predictable returns – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities
Cost of New Product Development and Cost of New Product Development and Speed to MarketSpeed to Market
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
An acquisition’s outcomes can be An acquisition’s outcomes can be estimated more easily and accurately estimated more easily and accurately compared to the outcomes of an internal compared to the outcomes of an internal product development processproduct development process
Therefore managers may view acquisitions Therefore managers may view acquisitions as lowering riskas lowering risk
Lower Risk Compared to Developing Lower Risk Compared to Developing New ProductsNew Products
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
It may be easier to develop and introduce It may be easier to develop and introduce new products in markets currently served new products in markets currently served by the firmby the firm
It may be difficult to develop new products It may be difficult to develop new products for markets in which a firm lacks experiencefor markets in which a firm lacks experience– it is uncommon for a firm to develop new it is uncommon for a firm to develop new
products internally to diversify its product linesproducts internally to diversify its product lines– acquisitions are the quickest and easiest way to acquisitions are the quickest and easiest way to
diversify a firm and change its portfolio of diversify a firm and change its portfolio of businessbusiness
Increased DiversificationIncreased Diversification
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or dependence on one or more products or marketsmarkets
Reducing a company’s dependence on Reducing a company’s dependence on specific markets alters the firm’s specific markets alters the firm’s competitive scopecompetitive scope
Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope
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Reasons for Making Acquisitions:Reasons for Making Acquisitions:
Acquisitions may gain capabilities that the Acquisitions may gain capabilities that the firm does not possessfirm does not possess
Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base– reduce inertiareduce inertia
Learning and Developing New CapabilitiesLearning and Developing New Capabilities
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AcquisitionsAcquisitions
Problems With AcquisitionsProblems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties
InadequateInadequateevaluation of targetevaluation of target
Large orLarge orextraordinary debtextraordinary debt
Inability toInability toachieve synergyachieve synergy
Too muchToo muchdiversificationdiversification
Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions
Resulting firmResulting firmis too largeis too large
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Problems With AcquisitionsProblems With Acquisitions
Integration challenges includeIntegration challenges include– melding two disparate corporate culturesmelding two disparate corporate cultures– linking different financial and control systemslinking different financial and control systems– building effective working relationships building effective working relationships
(particularly when management styles differ)(particularly when management styles differ)– resolving problems regarding the status of the resolving problems regarding the status of the
newly acquired firm’s executivesnewly acquired firm’s executives– loss of key personnel weakens the acquired loss of key personnel weakens the acquired
firm’s capabilities and reduces its valuefirm’s capabilities and reduces its value
Integration DifficultiesIntegration Difficulties
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Problems With AcquisitionsProblems With Acquisitions
Evaluation requires that hundreds of issues be Evaluation requires that hundreds of issues be closely examined, includingclosely examined, including– financing for the intended transactionfinancing for the intended transaction– differences in cultures between the acquiring and differences in cultures between the acquiring and
target firmtarget firm– tax consequences of the transactiontax consequences of the transaction– actions that would be necessary to successfully meld actions that would be necessary to successfully meld
the two workforcesthe two workforces Ineffective due-diligence process mayIneffective due-diligence process may
– result in paying excessive premium for the target result in paying excessive premium for the target companycompany
Inadequate Evaluation of TargetInadequate Evaluation of Target
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Problems With AcquisitionsProblems With Acquisitions
Firm may take on significant debt to Firm may take on significant debt to acquire a companyacquire a company
High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that preclude needed investment in activities that
contribute to the firm’s long-term successcontribute to the firm’s long-term success
Large or Extraordinary DebtLarge or Extraordinary Debt
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Problems With AcquisitionsProblems With Acquisitions
Synergy exists when assets are worth Synergy exists when assets are worth more when used in conjunction with each more when used in conjunction with each other than when they are used separatelyother than when they are used separately
Firms experience transaction costs when Firms experience transaction costs when they use acquisition strategies to create they use acquisition strategies to create synergysynergy
Firms tend to underestimate indirect costs Firms tend to underestimate indirect costs when evaluating a potential acquisitionwhen evaluating a potential acquisition
Inability to Achieve SynergyInability to Achieve Synergy
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Problems With AcquisitionsProblems With Acquisitions
Diversified firms must process more Diversified firms must process more information of greater diversity information of greater diversity
Scope created by diversification may Scope created by diversification may cause managers to rely too much on cause managers to rely too much on financial rather than strategic controls to financial rather than strategic controls to evaluate business units’ performancesevaluate business units’ performances
Acquisitions may become substitutes for Acquisitions may become substitutes for innovationinnovation
Too Much DiversificationToo Much Diversification
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Problems With AcquisitionsProblems With Acquisitions
Managers in target firms may operate in a Managers in target firms may operate in a state of virtual suspended animation during state of virtual suspended animation during an acquisitionan acquisition
Executives may become hesitant to make Executives may become hesitant to make decisions with long-term consequences decisions with long-term consequences until negotiations have been completeduntil negotiations have been completed
Acquisition process can create a short-term Acquisition process can create a short-term perspective and a greater aversion to risk perspective and a greater aversion to risk among top-level executives in a target firmamong top-level executives in a target firm
Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions
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Problems With AcquisitionsProblems With Acquisitions
Additional costs may exceed the benefits Additional costs may exceed the benefits of the economies of scale and additional of the economies of scale and additional market powermarket power
Larger size may lead to more bureaucratic Larger size may lead to more bureaucratic controls controls
Formalized controls often lead to relatively Formalized controls often lead to relatively rigid and standardized managerial rigid and standardized managerial behaviorbehavior
Firm may produce less innovationFirm may produce less innovation
Too LargeToo Large
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Attributes of Effective Attributes of Effective AcquisitionsAcquisitions
AttributesAttributes ResultsResultsComplementary Complementary Assets or ResourcesAssets or Resources
Buying firms with assets that meet current Buying firms with assets that meet current needs to build competitivenessneeds to build competitiveness
Friendly Friendly AcquisitionsAcquisitions
Friendly deals make integration go more Friendly deals make integration go more smoothlysmoothly
Careful Selection Careful Selection ProcessProcess
Deliberate evaluation and negotiations are Deliberate evaluation and negotiations are more likely to lead to easy integration and more likely to lead to easy integration and building synergiesbuilding synergies
Maintain Financial Maintain Financial SlackSlack
Provide enough additional financial Provide enough additional financial resources so that profitable projects would resources so that profitable projects would not be foregonenot be foregone
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Attributes of Effective Attributes of Effective AcquisitionsAcquisitions
AttributesAttributes ResultsResultsLow-to-Moderate Low-to-Moderate DebtDebt
Merged firm maintains financial flexibilityMerged firm maintains financial flexibility
FlexibilityFlexibility Has experience at managing change and is Has experience at managing change and is flexible and adaptableflexible and adaptable
Sustain Emphasis Sustain Emphasis on Innovation on Innovation
Continue to invest in R&D as part of the Continue to invest in R&D as part of the firm’s overall strategyfirm’s overall strategy
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Restructuring ActivitiesRestructuring Activities DownsizingDownsizing
– Wholesale reduction of employeesWholesale reduction of employees DownscopingDownscoping
– Selectively divesting or closing non-core Selectively divesting or closing non-core businessesbusinesses
– Reducing scope of operationsReducing scope of operations– Leads to greater focusLeads to greater focus
Leveraged Buyout (LBO)Leveraged Buyout (LBO)– A party buys a firm’s entire assets in order to A party buys a firm’s entire assets in order to
take the firm private.take the firm private.
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LowerLowerperformanceperformance
HigherHigherperformanceperformance
Higher riskHigher risk
Loss ofLoss ofhuman capitalhuman capital
Restructuring and OutcomesRestructuring and Outcomes
Emphasis onEmphasis onstrategic controlsstrategic controls
High debt costsHigh debt costs
Reduced debtReduced debtcostscosts
Reduced laborReduced laborcostscosts
DownsizingDownsizing
DownscopingDownscoping
LeveragedLeveragedbuyoutbuyout
©2003 Southwestern Publishing Company 226
International StrategyInternational Strategy
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 8Chapter 8
227
Strategy ImplementationStrategy ImplementationChapter 11Chapter 11
OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
FeedbackFeedback
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Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
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Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 8Chapter 8InternationalInternational
StrategyStrategy
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring
StrategiesStrategies
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ExportingExporting
LicensingLicensing
Strategic Strategic alliancesalliances
AcquisitionsAcquisitions
Establishment of Establishment of a new subsidiarya new subsidiary
International International business-level business-level strategystrategy
Multidomestic Multidomestic strategystrategy
Global strategyGlobal strategy
Transnational Transnational strategystrategy
Opportunities and Outcomes of Opportunities and Outcomes of International StrategyInternational Strategy
Increased market Increased market sizesize
Return on Return on investmentinvestment
Economies of Economies of scale and learningscale and learning
Advantage in Advantage in locationlocation
Identify International Identify International OpportunitiesOpportunities
Explore Resources Explore Resources and Capabilitiesand Capabilities
Use Core Use Core CompetenceCompetence
International International StrategiesStrategies Modes of EntryModes of Entry
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Better Better performanceperformance
InnovationInnovation
Opportunities and Outcomes of Opportunities and Outcomes of International Strategy: International Strategy: ContinuedContinued
ExportingExporting
LicensingLicensing
Strategic Strategic alliancesalliances
AcquisitionsAcquisitions
Establishment of Establishment of a new subsidiarya new subsidiary
Use Core Use Core CompetenceCompetence
Modes of EntryModes of Entry Managementproblems andrisk
Managementproblems andrisk
Strategic Strategic Competitiveness Competitiveness OutcomesOutcomes
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International Strategy Life CycleInternational Strategy Life Cycle
Production BecomesProduction BecomesStandardized and isStandardized and isRelocated to LowRelocated to LowCost CountriesCost Countries
Product DemandProduct DemandDevelops and FirmDevelops and FirmExports ProductsExports Products
Firm IntroducesFirm IntroducesInnovation inInnovation inDomestic MarketDomestic Market
ForeignForeignCompetitionCompetitionBegins ProductionBegins Production
Firm BeginsFirm BeginsProduction AbroadProduction Abroad
Selling Products Selling Products or Services or Services Outside a Firm’s Outside a Firm’s Domestic MarketDomestic Market
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Motivations for International Motivations for International ExpansionExpansion Increase Market ShareIncrease Market Share
– domestic market may lack the size to support domestic market may lack the size to support efficient scale manufacturing facilitiesefficient scale manufacturing facilities
Return on InvestmentReturn on Investment– large investment projects may require global large investment projects may require global
markets to justify the capital outlaysmarkets to justify the capital outlays– weak patent protection in some countries weak patent protection in some countries
implies that firms should expand overseas implies that firms should expand overseas rapidly in order to preempt imitatorsrapidly in order to preempt imitators
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Motivations for International Motivations for International ExpansionExpansion Economies of Scale or LearningEconomies of Scale or Learning
– expanding size or scope of markets helps to expanding size or scope of markets helps to achieve economies of scale in manufacturing achieve economies of scale in manufacturing as well as marketing, R & D or distributionas well as marketing, R & D or distribution
– can spread costs over a larger sales’ basecan spread costs over a larger sales’ base– increase profit per unitincrease profit per unit
Location AdvantagesLocation Advantages– low cost markets may aid in developing low cost markets may aid in developing
competitive advantagecompetitive advantage– may achieve better access to:may achieve better access to:
• Raw materialsRaw materials• Lower cost laborLower cost labor
• Key customersKey customers• EnergyEnergy
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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage
Factors ofFactors ofproductionproduction
Related andRelated andsupportingsupportingindustriesindustries
DemandDemandconditionsconditions
Firm strategy,Firm strategy,structure, andstructure, and
rivalryrivalry
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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage Factors of production:Factors of production: the inputs necessary the inputs necessary
to compete in any industryto compete in any industry– laborlabor– landland– natural resourcesnatural resources– capitalcapital– infrastructureinfrastructure– basic factors include natural and labor basic factors include natural and labor
resourcesresources– advanced factors include digital communication advanced factors include digital communication
systems and educated workforcesystems and educated workforce
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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage Demand conditions:Demand conditions: characterized by the characterized by the
nature and size of buyers’ needs in the nature and size of buyers’ needs in the home market for the industry’s goods or home market for the industry’s goods or servicesservices– size of market segment can lead to scale-size of market segment can lead to scale-
efficient facilitiesefficient facilities– efficiency can lead to domination of the efficiency can lead to domination of the
industry in other countriesindustry in other countries– specialized demand may create opportunities specialized demand may create opportunities
beyond national boundariesbeyond national boundaries
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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage Related and supporting industries:Related and supporting industries:
supporting services, facilities, suppliers supporting services, facilities, suppliers and so onand so on– support in designsupport in design– support in distributionsupport in distribution– related industries as suppliers and buyersrelated industries as suppliers and buyers
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International Business-Level Strategy: International Business-Level Strategy: Determinants of National AdvantageDeterminants of National Advantage Firm strategy, structure, and rivalry:Firm strategy, structure, and rivalry: the the
pattern of strategy, structure, and rivalry pattern of strategy, structure, and rivalry among firmsamong firms– common technical trainingcommon technical training– methodological product and process methodological product and process
improvementimprovement– cooperative and competitive systemscooperative and competitive systems
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International Corporate-Level International Corporate-Level StrategyStrategy
Need for Local ResponsivenessNeed for Local Responsiveness
Nee
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loba
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tion
Nee
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loba
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LowLow
HighHigh
LowLow HighHigh
GlobalGlobalstrategystrategy
TransnationalTransnationalstrategystrategy
MultidomesticMultidomesticstrategystrategy
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International Corporate-Level International Corporate-Level StrategyStrategy Type of corporate strategy selected will Type of corporate strategy selected will
have an impact on the selection and have an impact on the selection and implementation of the business-level implementation of the business-level strategiesstrategies
Some corporate strategies provide Some corporate strategies provide individual country units with flexibility to individual country units with flexibility to choose their own strategieschoose their own strategies
Others dictate business-level strategies Others dictate business-level strategies from the home office and coordinate from the home office and coordinate resource sharing across unitsresource sharing across units
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MultidomesticMultidomesticstrategystrategy
International Corporate-Level International Corporate-Level Strategy: Strategy: Multidomestic StrategyMultidomestic Strategy
• Strategy and operating decisions are Strategy and operating decisions are decentralized to strategic business units (SBU) decentralized to strategic business units (SBU) in each countryin each country
• Products and services are tailored to local Products and services are tailored to local marketsmarkets
• Business units in one country are independent Business units in one country are independent of each other of each other
• Assumes markets differ by country or regionsAssumes markets differ by country or regions• Focus on competition in each marketFocus on competition in each market• Prominent strategy among European firms Prominent strategy among European firms
due to broad variety of cultures and markets due to broad variety of cultures and markets in Europein Europe
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International Corporate-Level International Corporate-Level Strategy: Strategy: Global StrategyGlobal Strategy
GlobalGlobalstrategystrategy
• Products are standardized across national Products are standardized across national marketsmarkets
• Decisions regarding business-level strategies Decisions regarding business-level strategies are centralized in the home officeare centralized in the home office
• Strategic business units (SBU) are assumed to Strategic business units (SBU) are assumed to be interdependentbe interdependent
• Emphasizes economies of scaleEmphasizes economies of scale• Often lacks responsiveness to local marketsOften lacks responsiveness to local markets• Requires resource sharing and coordination Requires resource sharing and coordination
across borders (which also makes it difficult across borders (which also makes it difficult to manage)to manage)
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TransnationalTransnationalstrategystrategy
International Corporate-Level International Corporate-Level Strategy: Strategy: Transnational StrategyTransnational Strategy
• Seeks to achieve both global efficiency and Seeks to achieve both global efficiency and local responsivenesslocal responsiveness
• Difficult to achieve because of simultaneous Difficult to achieve because of simultaneous requirementsrequirements strong central control and coordination to strong central control and coordination to
achieve efficiency achieve efficiency decentralization to achieve local market decentralization to achieve local market
responsivenessresponsiveness• Must pursue organizational learning to Must pursue organizational learning to
achieve competitive advantageachieve competitive advantage
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Type of EntryType of Entry CharacteristicsCharacteristicsExportingExporting High cost, low controlHigh cost, low controlLicensingLicensing Low cost, low risk, little control, low Low cost, low risk, little control, low
returnsreturnsStrategic alliancesStrategic alliances Shared costs, shared resources, shared Shared costs, shared resources, shared
risks, problems of integrationrisks, problems of integrationAcquisitionAcquisition Quick access to new market, high cost, Quick access to new market, high cost,
complex negotiations, problems of complex negotiations, problems of merging with domestic operationsmerging with domestic operations
New wholly owned New wholly owned subsidiarysubsidiary
Complex, often costly, time consuming, Complex, often costly, time consuming, high risk, maximum control, potential high risk, maximum control, potential above-average returnsabove-average returns
Global Market Entry: Choice of Global Market Entry: Choice of Entry ModeEntry Mode
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Strategic Competitiveness Strategic Competitiveness Outcomes: Outcomes: ReturnsReturns International diversification and returnsInternational diversification and returns::
firm expands the sales of its goods or services firm expands the sales of its goods or services across the borders of global regions and countries across the borders of global regions and countries into different geographic locations or marketsinto different geographic locations or markets– may increase a firm’s returnsmay increase a firm’s returns– such firms usually achieve the most positive such firms usually achieve the most positive
stock returnsstock returns– firm may achieve economies of scale and firm may achieve economies of scale and
experience, location advantages, increased experience, location advantages, increased market size and opportunity to stabilize returnsmarket size and opportunity to stabilize returns
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Strategic Competitiveness Strategic Competitiveness Outcomes: Outcomes: InnovationInnovation International diversification and innovationInternational diversification and innovation::
firm expands the sales of its goods or services firm expands the sales of its goods or services across the borders of global regions and countries across the borders of global regions and countries into different geographic locations or marketsinto different geographic locations or markets– potentially greater returns on innovations (larger potentially greater returns on innovations (larger
markets)markets)– generate additional resources for investment in generate additional resources for investment in
innovationinnovation– exposed to new products and processes in exposed to new products and processes in
international markets, generates additional international markets, generates additional knowledge leading to innovationsknowledge leading to innovations
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Risks in an International Risks in an International EnvironmentEnvironment
Political RisksPolitical Risks Economic RisksEconomic Risks
Political risks includePolitical risks include• instability in national governmentsinstability in national governments• war, both civil and internationalwar, both civil and international• potential nationalization of a firm’s resourcespotential nationalization of a firm’s resources
Political RisksPolitical Risks
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Risks in an International Risks in an International EnvironmentEnvironment
Economic RisksEconomic Risks
Economic risks are interdependent with political Economic risks are interdependent with political risks and includerisks and include
• differences and fluctuations in the value of different differences and fluctuations in the value of different currenciescurrencies
• differences in prevailing wage ratesdifferences in prevailing wage rates• difficulties in enforcing property rightsdifficulties in enforcing property rights• unemploymentunemployment
Political RisksPolitical Risks
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Limits to International Expansion: Limits to International Expansion: Management ProblemsManagement Problems Cost of coordination across diverse Cost of coordination across diverse
geographical business unitsgeographical business units Institutional and cultural barriersInstitutional and cultural barriers Understanding strategic intent of Understanding strategic intent of
competitorscompetitors The overall complexity of competitionThe overall complexity of competition
©2003 Southwestern Publishing Company 249
Cooperative StrategyCooperative Strategy
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 9Chapter 9
250
Strategy ImplementationStrategy ImplementationChapter 11Chapter 11
OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
FeedbackFeedback
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Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
Chapter 9Chapter 9CooperativeCooperative
StrategyStrategy
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 8Chapter 8InternationalInternational
StrategyStrategy
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring
StrategiesStrategies
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Cooperative StrategyCooperative Strategy Cooperative strategy is a strategy in which Cooperative strategy is a strategy in which
firmsfirms– work togetherwork together– to achieve a shared objectiveto achieve a shared objective
Cooperating with other firms is a strategy Cooperating with other firms is a strategy thatthat– creates value for a customercreates value for a customer– exceeds the cost of constructing customer exceeds the cost of constructing customer
value in other waysvalue in other ways– establishes a favorable position relative to establishes a favorable position relative to
competitioncompetition
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Strategic AllianceStrategic Alliance A strategic alliance is a cooperative A strategic alliance is a cooperative
strategy in whichstrategy in which– firms combine some of their resources and firms combine some of their resources and
capabilitiescapabilities– to create a competitive advantageto create a competitive advantage
A strategic alliance involvesA strategic alliance involves– exchange and sharing of resources and exchange and sharing of resources and
capabilitiescapabilities– co-development or distribution of goods or co-development or distribution of goods or
servicesservices
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CombinedCombinedResourcesResources
CapabilitiesCapabilitiesCore CompetenciesCore Competencies
ResourcesResourcesCapabilitiesCapabilities
Core CompetenciesCore Competencies
ResourcesResourcesCapabilitiesCapabilities
Core CompetenciesCore Competencies
Strategic AllianceStrategic Alliance
Firm AFirm A Firm BFirm B
Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services
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Types of Cooperative StrategiesTypes of Cooperative Strategies Joint venture: two or more firms create an Joint venture: two or more firms create an
independent company by combining parts of independent company by combining parts of their assetstheir assets
Equity strategic alliance: partners who own Equity strategic alliance: partners who own different percentages of equity in a new different percentages of equity in a new ventureventure
Nonequity strategic alliances: contractual Nonequity strategic alliances: contractual agreements given to a company to supply, agreements given to a company to supply, produce, or distribute a firm’s goods or produce, or distribute a firm’s goods or services without equity sharingservices without equity sharing
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MarketMarket ReasonReason
Slow CycleSlow Cycle • Gain access to a restricted marketGain access to a restricted market• Establish a franchise in a new marketEstablish a franchise in a new market• Maintain market stability (e.g., Maintain market stability (e.g.,
establishing standards)establishing standards)
Reasons for Strategic Alliances Reasons for Strategic Alliances by Market Typeby Market Type
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MarketMarket ReasonReason
Fast CycleFast Cycle • Speed up development of new goods or Speed up development of new goods or serviceservice
• Speed up new market entrySpeed up new market entry• Maintain market leadershipMaintain market leadership• Form an industry technology standardForm an industry technology standard• Share risky R&D expensesShare risky R&D expenses• Overcome uncertaintyOvercome uncertainty
Reasons for Strategic Alliances Reasons for Strategic Alliances by Market Typeby Market Type
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MarketMarket ReasonReasonStandard CycleStandard Cycle • Gain market power (reduce industry Gain market power (reduce industry
overcapacity)overcapacity)• Gain access to complementary resourcesGain access to complementary resources• Establish economies of scaleEstablish economies of scale• Overcome trade barriersOvercome trade barriers• Meet competitive challenges from other Meet competitive challenges from other
competitorscompetitors• Pool resources for very large capital Pool resources for very large capital
projectsprojects• Learn new business techniquesLearn new business techniques
Reasons for Strategic Alliances Reasons for Strategic Alliances by Market Typeby Market Type
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Business-Level Cooperative Business-Level Cooperative Strategies:Strategies:ComplementaryComplementary
AlliancesAlliances• complementary strategic alliances complementary strategic alliances
are designed to take advantage of are designed to take advantage of market opportunities by combining market opportunities by combining partner firms’ assets in partner firms’ assets in complementary ways to create new complementary ways to create new valuevalue– these include distribution, supplier these include distribution, supplier
or outsourcing alliances where or outsourcing alliances where firms rely on upstream or firms rely on upstream or downstream partners to build downstream partners to build competitive advantagecompetitive advantage
Complementary Strategic AlliancesComplementary Strategic Alliances
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Business-Level Cooperative Business-Level Cooperative Strategies:Strategies:
Margin Margin
Primary Activities
Sup
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Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
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Margin Margin
Primary Activities
Sup
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Act
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Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
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Alli
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Ver
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Alli
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SupplierSupplier
• vertical complementary vertical complementary strategic alliance is formed strategic alliance is formed between firms that agree to between firms that agree to use their skills and use their skills and capabilities in different stages capabilities in different stages of the value chain to create of the value chain to create value for both firmsvalue for both firms
• outsourcing is one example outsourcing is one example of this type of allianceof this type of alliance
BuyerBuyerComplementary Strategic AlliancesComplementary Strategic Alliances
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Business-Level Cooperative Business-Level Cooperative Strategies:Strategies:
Margin Margin
Primary Activities
Sup
port
Act
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es Service
Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Infra
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Hum
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Mgm
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Tech
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Pro
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Margin Margin
Primary Activities
Sup
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Act
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Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Infra
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Hum
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Horizontal AllianceHorizontal AllianceBuyerBuyerPotential CompetitorsPotential Competitors
• horizontal complementary strategic alliance is formed horizontal complementary strategic alliance is formed between partners who agree to combine their resources and between partners who agree to combine their resources and skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain
• focus on long-term product development and distribution opportunities
• the partners may become competitorsthe partners may become competitors• requires a great deal of trust between the partnersrequires a great deal of trust between the partners
BuyerBuyerComplementary Strategic AlliancesComplementary Strategic Alliances
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Business-Level Cooperative Business-Level Cooperative Strategies:Strategies:
• competition response strategic competition response strategic alliances occur when firms join alliances occur when firms join forces to respond to a strategic forces to respond to a strategic action of another competitoraction of another competitor
• because they can be difficult to because they can be difficult to reverse and expensive to operate, reverse and expensive to operate, competition response strategic competition response strategic alliances are primarily formed to alliances are primarily formed to respond to strategic rather than respond to strategic rather than tactical actionstactical actions
Competition Response AlliancesCompetition Response Alliances
CompetitionCompetitionResponse AlliancesResponse Alliances
ComplementaryComplementaryAlliancesAlliances
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Business-Level Cooperative Business-Level Cooperative Strategies:Strategies:
• uncertainty reducing strategic uncertainty reducing strategic alliances are used to hedge against alliances are used to hedge against risk and uncertaintyrisk and uncertainty
• these alliances are most noticed in these alliances are most noticed in fast-cycle marketsfast-cycle markets
• alliance may be formed to reduce alliance may be formed to reduce the uncertainty associated with the uncertainty associated with developing new product or developing new product or technology standardstechnology standards
Uncertainty Reducing AlliancesUncertainty Reducing Alliances
CompetitionCompetitionResponse AlliancesResponse Alliances
UncertaintyUncertaintyReducing AlliancesReducing Alliances
ComplementaryComplementaryAlliancesAlliances
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Business-Level Cooperative Business-Level Cooperative Strategies:Strategies:
• competition reducing strategic competition reducing strategic alliances may be created to avoid alliances may be created to avoid destructive or excessive competitiondestructive or excessive competition
• explicit collusion exists when firms explicit collusion exists when firms directly negotiate production output directly negotiate production output and pricing agreements in order to and pricing agreements in order to reduce competition (illegal)reduce competition (illegal)
• tacit collusion exists when several tacit collusion exists when several firms in an industry indirectly firms in an industry indirectly coordinate their production and coordinate their production and pricing decisions by observing each pricing decisions by observing each other’s competitive actions and other’s competitive actions and responsesresponses
Competition Reducing AlliancesCompetition Reducing Alliances
Competition ReducingCompetition ReducingAlliancesAlliances
CompetitionCompetitionResponse AlliancesResponse Alliances
UncertaintyUncertaintyReducing AlliancesReducing Alliances
ComplementaryComplementaryAlliancesAlliances
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Business-Level Cooperative Business-Level Cooperative Strategies:Strategies:
• mutual forbearance is a form of mutual forbearance is a form of tacit collusion in which firms avoid tacit collusion in which firms avoid competitive attacks against those competitive attacks against those rivals they meet in multiple marketsrivals they meet in multiple markets
• competition reducing strategic competition reducing strategic alliances may require governments alliances may require governments to find ways to permit collaboration to find ways to permit collaboration among rivals without violating among rivals without violating antitrust lawsantitrust laws
Competition Reducing AlliancesCompetition Reducing Alliances
Competition ReducingCompetition ReducingAlliancesAlliances
CompetitionCompetitionResponse AlliancesResponse Alliances
UncertaintyUncertaintyReducing AlliancesReducing Alliances
ComplementaryComplementaryAlliancesAlliances
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Corporate-Level Cooperative Corporate-Level Cooperative StrategiesStrategies• Corporate-level cooperative strategies are Corporate-level cooperative strategies are
designed to facilitate product and/or designed to facilitate product and/or market diversificationmarket diversification
- diversifying strategic alliancediversifying strategic alliance- synergistic strategic alliancesynergistic strategic alliance- franchisingfranchising
• Diversifying alliances and synergistic Diversifying alliances and synergistic alliances allow firms alliances allow firms
- to grow and diversify their operationsto grow and diversify their operations- through a means other than a merger or through a means other than a merger or
acquisitionacquisition
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Corporate-Level Cooperative Corporate-Level Cooperative Strategies:Strategies:
DiversifyingDiversifyingAlliancesAlliances
• diversifying strategic alliance diversifying strategic alliance allows a firm to expand into new allows a firm to expand into new product or market areas without product or market areas without completing a merger or an completing a merger or an acquisitionacquisition
• provides some of the potential provides some of the potential synergistic benefits of a merger or synergistic benefits of a merger or acquisition, but with less risk and acquisition, but with less risk and greater levels of flexibilitygreater levels of flexibility
• permits a “test” of whether a future permits a “test” of whether a future merger between the partners would merger between the partners would benefit both partiesbenefit both parties
Diversifying AlliancesDiversifying Alliances
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Corporate-Level Cooperative Corporate-Level Cooperative Strategies:Strategies:
• synergistic strategic alliances create synergistic strategic alliances create joint economies of scope between joint economies of scope between two or more firmstwo or more firms
• create synergy across multiple create synergy across multiple functions or multiple businesses functions or multiple businesses between partner firmsbetween partner firms
SynergisticSynergisticAlliancesAlliances
Synergistic AlliancesSynergistic Alliances
DiversifyingDiversifyingAlliancesAlliances
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Corporate-Level Cooperative Corporate-Level Cooperative Strategies:Strategies:
• franchising spreads risks and uses franchising spreads risks and uses resources, capabilities, and resources, capabilities, and competencies without merging or competencies without merging or acquiring another companyacquiring another company
• contractual relationship concerning contractual relationship concerning the franchise that is developed the franchise that is developed between two parties, the franchisee between two parties, the franchisee and the franchisorand the franchisor
• an alternative to pursuing growth an alternative to pursuing growth through mergers and acquisitionsthrough mergers and acquisitions
FranchisingFranchising
FranchisingFranchising
DiversifyingDiversifyingAlliancesAlliances
SynergisticSynergisticAlliancesAlliances
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International Cooperative International Cooperative StrategiesStrategies Cross-border strategic allianceCross-border strategic alliance
– an international cooperative strategy in which an international cooperative strategy in which firms with headquarters in different nations firms with headquarters in different nations combine some of their resources and combine some of their resources and capabilities to create a competitive advantagecapabilities to create a competitive advantage
– a firm may form cross-border strategic a firm may form cross-border strategic alliances to leverage core competencies that alliances to leverage core competencies that are the foundation of its domestic success to are the foundation of its domestic success to expand into international marketsexpand into international markets
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International Cooperative International Cooperative StrategiesStrategies Allows risk sharing by reducing financial Allows risk sharing by reducing financial
investmentinvestment Host partner knows local market and Host partner knows local market and
customscustoms International alliances can be difficult to International alliances can be difficult to
manage due to differences in management manage due to differences in management styles, cultures or regulatory constraintsstyles, cultures or regulatory constraints
Must gauge partner’s strategic intent so Must gauge partner’s strategic intent so they do not gain access to important they do not gain access to important technology and become a competitortechnology and become a competitor
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Network Cooperative StrategiesNetwork Cooperative Strategies A network strategy is a cooperative A network strategy is a cooperative
strategy wherein several firms agree to strategy wherein several firms agree to form multiple partnerships to achieve form multiple partnerships to achieve shared objectivesshared objectives– stable alliance networkstable alliance network– dynamic alliance networkdynamic alliance network
Effective social relationships and Effective social relationships and interactions among partners are keys to a interactions among partners are keys to a successful network cooperative strategysuccessful network cooperative strategy
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Network Cooperative Strategies:Network Cooperative Strategies:
Stable AllianceStable AllianceNetworkNetwork
• long term relationships that often long term relationships that often appear in mature industries where appear in mature industries where demand is relatively constant and demand is relatively constant and predictablepredictable
• stable networks are built for stable networks are built for exploitationexploitation of the economies of the economies available between firmsavailable between firms
Stable Alliance NetworkStable Alliance Network
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Network Cooperative Strategies:Network Cooperative Strategies:
Dynamic AllianceDynamic AllianceNetworkNetwork
• arrangements that evolve in arrangements that evolve in industries with rapid technological industries with rapid technological change leading to short product life change leading to short product life cyclescycles
• primarily used to stimulate rapid, primarily used to stimulate rapid, value-creating product innovations value-creating product innovations and subsequent successful market and subsequent successful market entriesentries
• purpose is often purpose is often explorationexploration of new of new ideasideas
Dynamic Alliance NetworkDynamic Alliance Network
Stable AllianceStable AllianceNetworkNetwork
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Competitive Risks with Competitive Risks with Cooperative StrategiesCooperative Strategies
CompetitiveCompetitiveRisksRisks
• Partner may act opportunistically Partner may act opportunistically • Misrepresentation of competencies brought to the Misrepresentation of competencies brought to the
partnershippartnership• Partner fails to make committed resources and Partner fails to make committed resources and
capabilities available to its partnerscapabilities available to its partners• Firm may make investments that are specific to the Firm may make investments that are specific to the
alliance while its partner does notalliance while its partner does not
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Competitive Risks with Competitive Risks with Cooperative StrategiesCooperative Strategies
Risk and Asset Risk and Asset ManagementManagementApproachesApproaches
CompetitiveCompetitiveRisksRisks
• Manage the balance between learning from partners while Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages protecting knowledge and sources of competitive advantages from from excessiveexcessive learning by partners learning by partners
• Assign managerial responsibility for a firm’s cooperative Assign managerial responsibility for a firm’s cooperative strategies to a high-level executive or teamstrategies to a high-level executive or team
• Specify resources and capabilities that will be shared and those Specify resources and capabilities that will be shared and those that will not be sharedthat will not be shared (detailed contracts and monitoring) (detailed contracts and monitoring)
• Develop trusting relationshipsDevelop trusting relationships
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Approaches for Managing Approaches for Managing Cooperative StrategiesCooperative Strategies cost minimizationcost minimization
– formal contracts specify how the cooperative formal contracts specify how the cooperative strategy is to be monitored and how partner strategy is to be monitored and how partner behavior is to be controlledbehavior is to be controlled
opportunity maximizationopportunity maximization– maximize partnership’s value-creation maximize partnership’s value-creation
opportunitiesopportunities– partners take advantage of unexpected partners take advantage of unexpected
opportunities to learn from each other and to opportunities to learn from each other and to explore additional marketplace possibilitiesexplore additional marketplace possibilities
– fewer formal, limiting, contractsfewer formal, limiting, contracts
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Competitive Risks with Competitive Risks with Cooperative StrategiesCooperative Strategies
Risk and Asset Risk and Asset ManagementManagementApproachesApproaches
CompetitiveCompetitiveRisksRisks
DesiredDesiredOutcomeOutcome
• Creating valueCreating value• Above-average Above-average
returnsreturns
©2003 Southwestern Publishing Company 278
Corporate GovernanceCorporate Governance
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 10Chapter 10
279
Strategy ImplementationStrategy Implementation
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
FeedbackFeedback
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Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
Chapter 9Chapter 9CooperativeCooperative
StrategyStrategy
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 8Chapter 8InternationalInternational
StrategyStrategy
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring
StrategiesStrategies
280
Corporate GovernanceCorporate Governance Corporate governance is
– a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations
– concerned with identifying ways to ensure that strategic decisions are made effectively
– used in corporations to establish order between the firm’s owners and its top-level managers
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Corporate Governance Corporate Governance MechanismsMechanisms
Ownership concentrationOwnership concentration– relative amounts of stock owned relative amounts of stock owned
by individual shareholders and by individual shareholders and institutional investorsinstitutional investors
Board of DirectorsBoard of Directors– individuals responsible for individuals responsible for
representing the firm’s owners by representing the firm’s owners by monitoring top-level managers’ monitoring top-level managers’ strategic decisionsstrategic decisions
Internal Governance MechanismsInternal Governance Mechanisms
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Corporate Governance Corporate Governance MechanismsMechanisms
Executive CompensationExecutive Compensation– use of salary, bonuses, and long-use of salary, bonuses, and long-
term incentives to align managers’ term incentives to align managers’ interests with shareholders’ interests with shareholders’ interestsinterests
Monitoring by top-level managersMonitoring by top-level managers– they may obtain Board seats (not they may obtain Board seats (not
in financial institutions)in financial institutions)– they may elect Board they may elect Board
representativesrepresentatives
Internal Governance MechanismsInternal Governance Mechanisms
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Corporate Governance Corporate Governance MechanismsMechanisms
Market for Corporate ControlMarket for Corporate Control– the purchase of a firm that is the purchase of a firm that is
underperforming relative to underperforming relative to industry rivals in order to industry rivals in order to improve its strategic improve its strategic competitivenesscompetitiveness
External Governance MechanismsExternal Governance Mechanisms
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Separation of Ownership and Separation of Ownership and Managerial ControlManagerial Control Basis of the modern corporationBasis of the modern corporation
– shareholders purchase stock, becoming shareholders purchase stock, becoming residual claimantsresidual claimants
– shareholders reduce risk by holding shareholders reduce risk by holding diversified portfoliosdiversified portfolios
– professional managers are contracted to professional managers are contracted to provide decision-makingprovide decision-making
Modern public corporation form leads to Modern public corporation form leads to efficient specialization of tasksefficient specialization of tasks– risk bearing by shareholdersrisk bearing by shareholders– strategy development and decision-making by strategy development and decision-making by
managersmanagers
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• Firm ownersFirm owners
Agency Relationship: Agency Relationship: Owners and Owners and ManagersManagers
ShareholdersShareholders(Principals)(Principals)
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• Decision makersDecision makers
Agency Relationship: Agency Relationship: Owners and Owners and ManagersManagers
ManagersManagers(Agents)(Agents)
ShareholdersShareholders(Principals)(Principals)
• Firm ownersFirm owners
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• Risk bearing specialist (principal) Risk bearing specialist (principal) pays compensation topays compensation to
• A managerial decision-making A managerial decision-making specialist (agent)specialist (agent)
Agency Relationship: Agency Relationship: Owners and Owners and ManagersManagers
An AgencyAn AgencyRelationshipsRelationships
ManagersManagers(Agents)(Agents)
ShareholdersShareholders(Principals)(Principals)
• Decision makersDecision makers
• Firm ownersFirm owners
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Agency Theory ProblemAgency Theory Problem The agency problem occurs when:The agency problem occurs when:
– the desires or goals of the principal and agent the desires or goals of the principal and agent conflict and it is difficult or expensive for the conflict and it is difficult or expensive for the principal to verify that the agent has behaved principal to verify that the agent has behaved appropriatelyappropriately
Solution:Solution:– principals engage in incentive-based principals engage in incentive-based
performance contractsperformance contracts– monitoring mechanisms such as the board of monitoring mechanisms such as the board of
directorsdirectors– enforcement mechanisms such as the managerial enforcement mechanisms such as the managerial
labor market to mitigate the agency problemlabor market to mitigate the agency problem
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Manager and Shareholder Risk Manager and Shareholder Risk and Diversificationand Diversification
Ris
kR
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DiversificationDiversification
DominantDominantBusinessBusiness
UnrelatedUnrelatedBusinessesBusinesses
RelatedRelatedConstrainedConstrained
RelatedRelatedLinkedLinked
ManagerialManagerial(employment) (employment)
risk profilerisk profile
BB
Shareholder Shareholder (business) (business) risk profilerisk profileSS
AA
MM
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Agency Theory ConflictsAgency Theory Conflicts Principals may engage in monitoring behavior to Principals may engage in monitoring behavior to
assess the activities and decisions of managersassess the activities and decisions of managersHowever, dispersed shareholding makes it However, dispersed shareholding makes it difficult and inefficient to monitor management’s difficult and inefficient to monitor management’s behaviorbehavior
Boards of Directors have a fiduciary duty to Boards of Directors have a fiduciary duty to shareholders to monitor managementshareholders to monitor managementHowever, Boards of Directors are often accused However, Boards of Directors are often accused of being lax in performing this functionof being lax in performing this function
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Governance MechanismsGovernance MechanismsOwnershipOwnership
ConcentrationConcentration• Large block shareholders have a Large block shareholders have a
strong incentive to monitor strong incentive to monitor management closelymanagement closely
• Their large stakes make it worth Their large stakes make it worth their while to spend time, effort and their while to spend time, effort and expense to monitor closelyexpense to monitor closely
• They may also obtain Board seats They may also obtain Board seats which enhances their ability to which enhances their ability to monitor effectively (although monitor effectively (although financial institutions are legally financial institutions are legally forbidden from directly holding forbidden from directly holding board seats)board seats)
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Governance MechanismsGovernance MechanismsOwnershipOwnership
ConcentrationConcentration
Boards ofBoards ofDirectorsDirectors
InsidersInsiders• The firm’s CEO and other top-level The firm’s CEO and other top-level
managersmanagersRelated OutsidersRelated Outsiders• Individuals not involved with day-Individuals not involved with day-
to-day operations, but who have a to-day operations, but who have a relationship with the companyrelationship with the company
OutsidersOutsiders• Individuals who are independent of Individuals who are independent of
the firm’s day-to-day operations the firm’s day-to-day operations and other relationshipsand other relationships
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Governance MechanismsGovernance MechanismsOwnershipOwnership
ConcentrationConcentration
Boards ofBoards ofDirectorsDirectors
Recommendations for more effective Recommendations for more effective Board Governance:Board Governance:
• Increase diversity of board Increase diversity of board members’ backgroundsmembers’ backgrounds
• Strengthen internal management Strengthen internal management and accounting control systemsand accounting control systems
• Establish formal processes for Establish formal processes for evaluation of the board’s evaluation of the board’s performanceperformance
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Governance MechanismsGovernance MechanismsOwnershipOwnership
ConcentrationConcentration
Boards ofBoards ofDirectorsDirectors
ExecutiveExecutiveCompensationCompensation
• Salary, bonuses, long term incentive Salary, bonuses, long term incentive compensationcompensation
• Executive decisions are complex and Executive decisions are complex and non-routinenon-routine
• Many factors intervene making it Many factors intervene making it difficult to establish how managerial difficult to establish how managerial decisions are directly responsible for decisions are directly responsible for outcomesoutcomes
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Governance MechanismsGovernance MechanismsOwnershipOwnership
ConcentrationConcentration
Boards ofBoards ofDirectorsDirectors
ExecutiveExecutiveCompensationCompensation
• Stock ownership (long-term Stock ownership (long-term incentive compensation) makes incentive compensation) makes managers more susceptible to managers more susceptible to market changes which are partially market changes which are partially beyond their controlbeyond their control
• Incentive systems do not guarantee Incentive systems do not guarantee that managers make the “right” that managers make the “right” decisions, but do increase the decisions, but do increase the likelihood that managers will do the likelihood that managers will do the things for which they are rewardedthings for which they are rewarded
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Governance MechanismsGovernance MechanismsOwnershipOwnership
ConcentrationConcentration
Boards ofBoards ofDirectorsDirectors
ExecutiveExecutiveCompensationCompensation
Market forMarket forCorporate ControlCorporate Control
• Firms face the risk of takeover Firms face the risk of takeover when they are operated inefficientlywhen they are operated inefficiently
• Many firms begin to operate more Many firms begin to operate more efficiently as a result of the “threat” efficiently as a result of the “threat” of takeover, even though the actual of takeover, even though the actual incidence of hostile takeovers is incidence of hostile takeovers is relatively smallrelatively small
• Changes in regulations have made Changes in regulations have made hostile takeovers difficulthostile takeovers difficult
• Acts as an important source of Acts as an important source of discipline over managerial discipline over managerial incompetence and wasteincompetence and waste
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International Corporate International Corporate Governance:Governance: Owner and manager are often the same in Owner and manager are often the same in
private firmsprivate firms Public firms often have a dominant Public firms often have a dominant
shareholder, frequently a bankshareholder, frequently a bank Frequently there is less emphasis on Frequently there is less emphasis on
shareholder value than in U.S. firms, shareholder value than in U.S. firms, although this may be changingalthough this may be changing
GermanyGermany
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International Corporate International Corporate Governance:Governance: Medium to large firms have a two-tiered Medium to large firms have a two-tiered
boardboard– vorstand monitors and controls managerial vorstand monitors and controls managerial
decisionsdecisions– aufsichtsrat selects the Vorstandaufsichtsrat selects the Vorstand– employees, union members and shareholders employees, union members and shareholders
appoint members to the Aufsichtsratappoint members to the Aufsichtsrat
GermanyGermany
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International Corporate International Corporate Governance:Governance: Obligation, “family” and consensus are Obligation, “family” and consensus are
important factorsimportant factors Banks (especially “main bank”) are highly Banks (especially “main bank”) are highly
influential with firm’s managersinfluential with firm’s managers Keiretsus are strongly interrelated groups Keiretsus are strongly interrelated groups
of firms tied together by cross-of firms tied together by cross-shareholdingsshareholdings
JapanJapan
300
International Corporate International Corporate Governance:Governance: Other characteristics:Other characteristics:
– powerful government interventionpowerful government intervention– close relationships between firms and close relationships between firms and
government sectorsgovernment sectors– passive and stable shareholders who exert passive and stable shareholders who exert
little controllittle control– virtual absence of external market for virtual absence of external market for
corporate controlcorporate control
JapanJapan
301
Corporate Governance and Corporate Governance and Ethical BehaviorEthical Behavior
• In the U.S., shareholders (in the capital In the U.S., shareholders (in the capital market stakeholder group) are viewed as market stakeholder group) are viewed as the most important stakeholder groupthe most important stakeholder group
• which are served by the board of which are served by the board of directorsdirectors
• Hence, the focus of governance Hence, the focus of governance mechanisms is on the control of mechanisms is on the control of managerial decisions to ensure that managerial decisions to ensure that shareholders’ interests will be servedshareholders’ interests will be served
It is important to serve the interests It is important to serve the interests of the firm’s multiple stakeholder of the firm’s multiple stakeholder groups!groups!
Capital MarketCapital MarketStakeholdersStakeholders
302
It is important to serve the interests It is important to serve the interests of the firm’s multiple stakeholder of the firm’s multiple stakeholder groups!groups!
Corporate Governance and Corporate Governance and Ethical BehaviorEthical Behavior
• Product market stakeholders (customers, Product market stakeholders (customers, suppliers and host communities) and suppliers and host communities) and organizational stakeholders (managerial organizational stakeholders (managerial and non-managerial employees) are also and non-managerial employees) are also important stakeholder groupsimportant stakeholder groupsProduct MarketProduct Market
StakeholdersStakeholders
Capital MarketCapital MarketStakeholdersStakeholders
303
It is important to serve the interests It is important to serve the interests of the firm’s multiple stakeholder of the firm’s multiple stakeholder groups!groups!
Corporate Governance and Corporate Governance and Ethical BehaviorEthical Behavior
• Although the idea is subject to debate, Although the idea is subject to debate, some believe that ethically responsible some believe that ethically responsible companies design and use governance companies design and use governance mechanisms that serve all stakeholders’ mechanisms that serve all stakeholders’ interestsinterests
• Importance of maintaining ethical Importance of maintaining ethical behavior through governance behavior through governance mechanisms is seen in the example of mechanisms is seen in the example of Enron and Arthur AndersenEnron and Arthur Andersen
Product MarketProduct MarketStakeholdersStakeholders
OrganizationalOrganizationalStakeholdersStakeholders
Capital MarketCapital MarketStakeholdersStakeholders
©2003 Southwestern Publishing Company 304
Organizational Structure and Organizational Structure and ControlsControls
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 11Chapter 11
305
Strategy ImplementationStrategy ImplementationChapter 11Chapter 11
OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
FeedbackFeedback
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Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
Chapter 9Chapter 9CooperativeCooperative
StrategyStrategy
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 8Chapter 8InternationalInternational
StrategyStrategy
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring
StrategiesStrategies
306
Organizational StructureOrganizational Structure Organizational structure specifies the Organizational structure specifies the
firm’s formal reporting relationships, firm’s formal reporting relationships, procedures, controls, and authority and procedures, controls, and authority and decision-making processesdecision-making processes
It is critical to match organizational It is critical to match organizational structure to the firm’s strategystructure to the firm’s strategy
307
Stability and Flexibility in Stability and Flexibility in StructureStructure Structural stability provides the capacityStructural stability provides the capacity
– required to consistently and predictably required to consistently and predictably manage the firm’s daily work routinesmanage the firm’s daily work routines
Structural flexibility provides the Structural flexibility provides the opportunity toopportunity to– explore competitive possibilitiesexplore competitive possibilities– allocate resources to activities that shape allocate resources to activities that shape
competitive advantages needed by the firmcompetitive advantages needed by the firm
308
Organizational ControlsOrganizational Controls
Organizational controlsOrganizational controls– guide the use of strategyguide the use of strategy– indicate how to compare actual results with indicate how to compare actual results with
expected resultsexpected results– suggest corrective actions to take when the suggest corrective actions to take when the
difference between actual and expected results difference between actual and expected results is unacceptableis unacceptable
Two types of organizational controlsTwo types of organizational controls– strategic controlsstrategic controls– financial controlsfinancial controls
309
Organizational Controls: Organizational Controls:
Concerned with examining the Concerned with examining the fit betweenfit between– what the firm what the firm might domight do (as (as
suggested by opportunities in its suggested by opportunities in its external environment)external environment)
– what it what it can docan do (as indicated by (as indicated by its competitive advantages)its competitive advantages)
Used to evaluate the degree to Used to evaluate the degree to which the firm focuses on the which the firm focuses on the requirements to implement its requirements to implement its strategiesstrategies
Strategic ControlsStrategic Controls
Strategic ControlsStrategic Controls
310
Financial ControlsFinancial Controls
Organizational Controls: Organizational Controls:
Objective criteriaObjective criteria Accounting-based measures Accounting-based measures
includeinclude– return on investment return on investment – return on assetsreturn on assets
Market-based measures Market-based measures includeinclude– economic value addedeconomic value added
Strategic ControlsStrategic Controls
Financial ControlsFinancial Controls
311
Matching Control to StrategyMatching Control to Strategy Relative use of controls varies by type of Relative use of controls varies by type of
strategystrategy– large diversified firms using the cost large diversified firms using the cost
leadership strategy emphasize financial leadership strategy emphasize financial controls controls
– companies and business units using the companies and business units using the differentiation strategy emphasize strategic differentiation strategy emphasize strategic controlscontrols
312
Evolutionary Patterns of Strategy Evolutionary Patterns of Strategy and Organizational Structureand Organizational Structure Firms grow in predictable patternsFirms grow in predictable patterns
– by volumeby volume– by geographyby geography– integration (vertical, horizontal)integration (vertical, horizontal)– through product/business diversificationthrough product/business diversification
A firm’s growth patterns determine its A firm’s growth patterns determine its structural formstructural form
313
Evolutionary Patterns of Strategy Evolutionary Patterns of Strategy and Organizational Structureand Organizational Structure All organizations require some form of All organizations require some form of
organizational structure to implement and organizational structure to implement and manage their strategiesmanage their strategies
Firms frequently alter their structure as Firms frequently alter their structure as they grow in size and complexitythey grow in size and complexity
Three basic structure types:Three basic structure types:– simple structuresimple structure– functional structurefunctional structure– multi-divisional structure (M-form)multi-divisional structure (M-form)
314
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern:
SimpleSimpleStructureStructure
Simple StructureSimple Structure
315
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Organizational form in which the owner-Organizational form in which the owner-
managermanager– makes all major decisions directlymakes all major decisions directly– monitors all activitiesmonitors all activities
StaffStaff– serves as an extension of the manager’s supervisory serves as an extension of the manager’s supervisory
authorityauthority Matched with focus strategies and business-Matched with focus strategies and business-
level strategieslevel strategies– commonly compete by offering a single product line commonly compete by offering a single product line
in a single geographic marketin a single geographic market
Simple StructureSimple Structure
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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Growth createsGrowth creates
– complexitycomplexity– managerial and structural challengesmanagerial and structural challenges
Owner-managersOwner-managers– commonly lack organizational skills and commonly lack organizational skills and
experienceexperience– become ineffective in managing the become ineffective in managing the
specialized and complex tasks involved with specialized and complex tasks involved with multiple organizational functionsmultiple organizational functions
Simple StructureSimple Structure
317
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern:
SimpleSimpleStructureStructure
FunctionalFunctionalStructureStructure
Sales Growth-Sales Growth-Coordination andCoordination andControl ProblemsControl Problems
Efficient implementation Efficient implementation of formulated strategyof formulated strategy
Functional StructureFunctional Structure
318
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Chief Executive Officer (CEO)Chief Executive Officer (CEO)
– limited corporate stafflimited corporate staff Functional line managers in dominant Functional line managers in dominant
organizational areasorganizational areas– productionproduction – accounting– accounting– marketingmarketing – R&D– R&D– engineeringengineering – human resources– human resources
Supports use of business-level strategies and Supports use of business-level strategies and some corporate-level strategiessome corporate-level strategies– single or dominant business with low levels of single or dominant business with low levels of
diversificationdiversification
Functional StructureFunctional Structure
319
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Differences in orientation among Differences in orientation among
organizational functions canorganizational functions can– impede communication and coordinationimpede communication and coordination– increase the need for CEO to integrate increase the need for CEO to integrate
decisions and actions of business functionsdecisions and actions of business functions– facilitate career paths and professional facilitate career paths and professional
development in specialized functional areasdevelopment in specialized functional areas– cause functional-area managers to focus on cause functional-area managers to focus on
local versus overall company strategic issueslocal versus overall company strategic issues
Functional StructureFunctional Structure
320
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Strategic controlStrategic control
– operating divisionsoperating divisions– each division is separate business or profit each division is separate business or profit
centercenter Top corporate officer delegates Top corporate officer delegates
responsibilities to division managersresponsibilities to division managers– for day-to-day operationsfor day-to-day operations– for business-unit strategyfor business-unit strategy
Appropriate when the firm grows through Appropriate when the firm grows through diversificationdiversification
Multidivisional StructureMultidivisional Structure
321
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Three major benefitsThree major benefits
– corporate officers able to more accurately corporate officers able to more accurately monitor the performance of each business, monitor the performance of each business, which simplifies the problem of controlwhich simplifies the problem of control
– facilitates comparisons between divisions, facilitates comparisons between divisions, which improves the resource allocation processwhich improves the resource allocation process
– stimulates managers of poorly performing stimulates managers of poorly performing divisions to look for ways of improving divisions to look for ways of improving performanceperformance
Multidivisional StructureMultidivisional Structure
322
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern:
SimpleSimpleStructureStructure
FunctionalFunctionalStructureStructure
MultidivisionalMultidivisionalStructureStructure
Sales Growth-Sales Growth-Coordination andCoordination andControl ProblemsControl Problems
Sales Growth-Sales Growth-Coordination andCoordination andControl ProblemsControl Problems
Efficient implementation Efficient implementation of formulated strategyof formulated strategy
Efficient Efficient implementation implementation of formulated of formulated strategystrategy
Multidivisional StructureMultidivisional Structure
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Matching Structure and StrategyMatching Structure and Strategy Different forms of the functional Different forms of the functional
organizational structure are matched toorganizational structure are matched to– cost leadership strategycost leadership strategy– differentiation strategydifferentiation strategy– integrated cost leadership/differentiation integrated cost leadership/differentiation
strategystrategy differences in these forms seen in three differences in these forms seen in three
important structural characteristicsimportant structural characteristics– specializationspecialization– centralizationcentralization– formalizationformalization
324
Structure for Cost Leadership Structure for Cost Leadership StrategyStrategy
Office of the PresidentOffice of the President
Centralized StaffCentralized Staff
MarketingMarketing PersonnelPersonnel
EngineeringEngineering OperationsOperations AccountingAccounting
• Operations is main functionOperations is main function• Process engineering is Process engineering is
emphasized over R&Demphasized over R&D• Large centralized staffLarge centralized staff• Formalized proceduresFormalized procedures• Structure is mechanical, job Structure is mechanical, job
roles highly structuredroles highly structured
325
OperationsOperations HumanHumanResourcesResources
Structure for Differentiation Structure for Differentiation StrategyStrategy
President andPresident andLimited StaffLimited Staff
MarketingMarketing
New ProductNew ProductR&DR&D
• Marketing is the main function for tracking new product ideasMarketing is the main function for tracking new product ideas• New product R&D is emphasizedNew product R&D is emphasized• Most functions are decentralizedMost functions are decentralized• Formalization is limited to foster change and promote new ideasFormalization is limited to foster change and promote new ideas• Overall structure is organic; job roles are less structuredOverall structure is organic; job roles are less structured
R&DR&D
FinanceFinanceMarketingMarketing
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Multidivisional StructureMultidivisional Structure Each division is operated as a separate Each division is operated as a separate
businessbusiness Appropriate for related-diversified Appropriate for related-diversified
businessesbusinesses Key task of corporate managers is Key task of corporate managers is
exploiting synergies among divisionsexploiting synergies among divisions Managers use a combination of strategic Managers use a combination of strategic
controls and financial controlscontrols and financial controls
327
Multidivisional StructureMultidivisional Structure Managers try to strike a balance between:Managers try to strike a balance between:
– competing among divisions for scarce capital competing among divisions for scarce capital resourcesresources
– creating opportunities for cooperation to creating opportunities for cooperation to develop synergiesdevelop synergies
The goal is to maximize overall firm The goal is to maximize overall firm performanceperformance
The decision-making of managers in a The decision-making of managers in a multi-divisional structure may be:multi-divisional structure may be:– centralized or decentralizedcentralized or decentralized– bureaucratic or non-bureaucraticbureaucratic or non-bureaucratic
328
Multidivisional StructureMultidivisional Structure Balance on these dimensions may change Balance on these dimensions may change
over timeover time Structure will evolve over time with:Structure will evolve over time with:
– changes in strategychanges in strategy– degree of diversificationdegree of diversification– geographic scopegeographic scope– nature of competitionnature of competition
329
Three Variations of the Three Variations of the Multidivisional StructureMultidivisional Structure
MultidivisionalMultidivisionalStructureStructure(M-form)(M-form)
Strategic Business-UnitStrategic Business-Unit(SBU) Form(SBU) Form
CooperativeCooperativeFormForm
CompetitiveCompetitiveFormForm
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Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Related-Constrained StrategyRelated-Constrained Strategy
GovernmentGovernmentAffairsAffairs
LegalLegalAffairsAffairs
CorporateCorporateR&D LabR&D Lab
StrategicStrategicPlanningPlanning
CorporateCorporateHumanHuman
ResourcesResources
CorporateCorporateMarketingMarketing
CorporateCorporateFinanceFinance
ProductProductDivisionDivision
ProductProductDivisionDivision
ProductProductDivisionDivision
ProductProductDivisionDivision
ProductProductDivisionDivision
PresidentPresidentHeadquarters OfficeHeadquarters Office
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Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links
among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic
planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions
R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize
overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance
Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing
Related-Constrained StrategyRelated-Constrained Strategy
332
SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Related-Linked StrategyRelated-Linked Strategy
PresidentPresident
CorporateCorporateR&D LabR&D Lab
StrategicStrategicPlanningPlanning
CorporateCorporateHRMHRM
CorporateCorporateMarketingMarketing
CorporateCorporateFinanceFinance
Headquarters OfficeHeadquarters Office
DivisionDivision
DivisionDivisionDivisionDivision
SBUSBU SBUSBU SBUSBU
DivisionDivision
DivisionDivisionDivisionDivision
DivisionDivision
DivisionDivisionDivisionDivision
333
SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links
among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic
planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions
R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize
overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance
Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing
Related-Linked StrategyRelated-Linked Strategy
334
Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Unrelated Diversification StrategyUnrelated Diversification Strategy
PresidentPresident
LegalLegalAffairsAffairs FinanceFinance AuditingAuditing
Headquarters OfficeHeadquarters Office
DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision
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Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Corporate headquarters has a small staffCorporate headquarters has a small staff Finance and auditing are the most prominent functions Finance and auditing are the most prominent functions
in the headquarters to manage cash flow and ensure the in the headquarters to manage cash flow and ensure the accuracy of performance data coming from divisionsaccuracy of performance data coming from divisions
The legal affairs function becomes important when the The legal affairs function becomes important when the firm acquires or divests assetsfirm acquires or divests assets
Divisions are independent and separate for financial Divisions are independent and separate for financial evaluation purposesevaluation purposes
Divisions retain strategic control, but cash is managed Divisions retain strategic control, but cash is managed by the corporate officeby the corporate office
Divisions compete for corporate resourcesDivisions compete for corporate resources
Unrelated Diversification StrategyUnrelated Diversification Strategy
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Multidivisional Structure: Other Multidivisional Structure: Other PointsPoints Complex multi-divisional structure firms Complex multi-divisional structure firms
may be simultaneouslymay be simultaneously– centralized and decentralizedcentralized and decentralized– depending upon the various business-level depending upon the various business-level
strategies employed throughout the firm’s strategies employed throughout the firm’s individual businessesindividual businesses
Multi-divisional structure firms use a Multi-divisional structure firms use a combination of:combination of:– strategic controlsstrategic controls– financial controlsfinancial controls
337
Characteristics of Various Characteristics of Various Structural FormsStructural Forms
Structural Structural CharacteristicsCharacteristics
Cooperative Cooperative M-FormM-Form
SBUSBU M-FormM-Form
Competitive Competitive M-FormM-Form
Degree ofDegree ofCentralizationCentralization
Centralized atCentralized atCorporate Corporate
OfficeOffice
Partially Partially CentralizedCentralized
in SBUsin SBUs
DecentralizedDecentralizedto Divisionsto Divisions
Use ofUse ofIntegratingIntegrating
MechanismsMechanismsExtensiveExtensive ModerateModerate NonexistentNonexistent
Type ofType ofStrategyStrategy
Related-Related-ConstrainedConstrained
Related-Related-LinkedLinked
UnrelatedUnrelatedDiversificationDiversification
338
Characteristics of Various Characteristics of Various Structural FormsStructural Forms
DivisionalDivisionalIncentiveIncentive
CompensationCompensation
Linked toLinked toCorporateCorporate
PerformancePerformance
Linked toLinked toCorporateCorporate
SBU & Division SBU & Division PerformancePerformance
Linked toLinked toDivisionalDivisional
PerformancePerformance
DivisionalDivisionalPerformancePerformance
AppraisalAppraisal
SubjectiveSubjectiveStrategicStrategicCriteriaCriteria
Strategic &Strategic &FinancialFinancialCriteriaCriteria
Objective Objective FinancialFinancialCriteriaCriteria
Structural Structural CharacteristicsCharacteristics
Cooperative Cooperative M-FormM-Form
SBUSBU M-FormM-Form
Competitive Competitive M-FormM-Form
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• product characteristics product characteristics tailored to local tailored to local preferencespreferences
• isolation from global isolation from global competitiioncompetitiion
– establish protected establish protected market positionsmarket positions–compete in industry compete in industry segments most segments most affected by affected by differences among differences among local countrieslocal countries
Worldwide Geographic Area Worldwide Geographic Area Structure:Structure:
MultinationalMultinationalHeadquartersHeadquarters EuropeEurope
UnitedUnitedStatesStates
MiddleMiddleEast/East/
AfricaAfrica
AsiaAsia
AustraliaAustralia
LatinLatinAmericaAmerica
Multidomestic StrategyMultidomestic Strategy
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• standardized products standardized products across countriesacross countries
• economies of scope economies of scope and scaleand scale
• outsource some outsource some primary or support primary or support activities to the activities to the world’s best providersworld’s best providers
• decision-making decision-making authority centralized authority centralized in worldwide division in worldwide division headquartersheadquarters
Worldwide Product Divisional Worldwide Product Divisional Structure:Structure:
GlobalGlobalCorporateCorporate
HeadquartersHeadquarters
WorldwideWorldwideProductsProductsDivisionDivision
WorldwideWorldwideProductsProductsDivisionDivision
WorldwideWorldwideProductsProductsDivisionDivision
WorldwideWorldwideProductsProductsDivisionDivision
WorldwideWorldwideProductsProductsDivisionDivision
WorldwideWorldwideProductsProductsDivisionDivision
Global StrategyGlobal Strategy
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Using the Combination Structure:Using the Combination Structure:
The combination structure has The combination structure has characteristics and mechanisms that characteristics and mechanisms that result in an emphasis on both geographic result in an emphasis on both geographic and product structuresand product structures– local responsiveness (multidomestic strategy) local responsiveness (multidomestic strategy) – global efficiency (global strategy)global efficiency (global strategy)
Transnational StrategyTransnational Strategy
342
Strategic NetworkStrategic Network A strategic network is a grouping of A strategic network is a grouping of
organizations that has been formed to organizations that has been formed to create value through participation in an create value through participation in an array of cooperative arrangements, such array of cooperative arrangements, such as alliances and joint venturesas alliances and joint ventures
The strategic network seeks to develop a The strategic network seeks to develop a competitive advantage in primary or competitive advantage in primary or support activities support activities
A strategic center firm often manages the A strategic center firm often manages the networknetwork
343
Strategic NetworkStrategic Network strategic center firm engages in four strategic center firm engages in four
primary tasksprimary tasks– strategic outsourcing (outsources and strategic outsourcing (outsources and
partners with more firms than do other partners with more firms than do other network members)network members)
– competencies (supports each member’s competencies (supports each member’s efforts to develop core competencies that can efforts to develop core competencies that can benefit the network)benefit the network)
344
Strategic NetworkStrategic Network strategic center firm engages in four strategic center firm engages in four
primary tasksprimary tasks– technology (manages the development and technology (manages the development and
sharing of technology-based ideas among sharing of technology-based ideas among network members)network members)
– race to learn (guides participants in efforts to race to learn (guides participants in efforts to form network-specific competitive advantages)form network-specific competitive advantages)
345
Strategic NetworkStrategic Network
StrategicStrategicCenterCenterFirmFirm
346
Distributed Strategic NetworkDistributed Strategic Network International cooperative strategies often International cooperative strategies often
require more complex networksrequire more complex networks Many large multinational firms form Many large multinational firms form
distributed strategic networks with distributed strategic networks with multiple regional strategic centers to multiple regional strategic centers to manage their array of cooperative manage their array of cooperative arrangements with partner firmsarrangements with partner firms
Breaking large networks into multiple Breaking large networks into multiple manageably-sized networks helps to manageably-sized networks helps to manage the complexity of maintaining manage the complexity of maintaining many relationshipsmany relationships
347
StrategicStrategicCenterCenterFirmFirm
Distributed Strategic NetworkDistributed Strategic Network
= Distributed Strategic Center Firms= Distributed Strategic Center Firms
MainMainStrategicStrategicCenterCenterFirmFirm
©2003 Southwestern Publishing Company 348
Strategic LeadershipStrategic Leadership
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
Chapter 12Chapter 12
349
Strategy ImplementationStrategy ImplementationChapter 11Chapter 11
OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
FeedbackFeedback
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Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
Chapter 9Chapter 9CooperativeCooperative
StrategyStrategy
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 8Chapter 8InternationalInternational
StrategyStrategy
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring
StrategiesStrategies
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Strategic LeadershipStrategic Leadership Strategic leadership involves:Strategic leadership involves:
– the ability to anticipate, envision, maintain the ability to anticipate, envision, maintain flexibility and empower others to create flexibility and empower others to create strategic changestrategic change
– multi-functional work that involves working multi-functional work that involves working through othersthrough others
– consideration of the entire enterprise rather consideration of the entire enterprise rather than just a sub-unitthan just a sub-unit
– a managerial frame of referencea managerial frame of reference
351
SuccessfulSuccessfulStrategic ActionsStrategic Actions
Strategic Leadership and the Strategic Leadership and the Strategic Management ProcessStrategic Management Process
Effective StrategicEffective StrategicLeadershipLeadership
Strategic IntentStrategic Intent Strategic MissionStrategic Mission
shapes the formulation ofshapes the formulation of
andandinfluenceinfluence
352
Strategic Leadership and the Strategic Leadership and the Strategic Management ProcessStrategic Management Process
StrategicStrategicCompetitivenessCompetitiveness
Above-Average ReturnsAbove-Average Returns
FormulationFormulationof Strategiesof Strategies
ImplementationImplementationof Strategiesof Strategies
SuccessfulSuccessfulStrategic ActionsStrategic Actions
yieldsyields
353
Factors Affecting Managerial Factors Affecting Managerial DiscretionDiscretion
External EnvironmentExternal Environment• Industry structureIndustry structure• Rate of market growthRate of market growth• Number and type of Number and type of
competitorscompetitors• Nature and degree of Nature and degree of
political/legal constraintspolitical/legal constraints• Degree to which products Degree to which products
can be differentiatedcan be differentiated
External EnvironmentExternal Environment
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Factors Affecting Managerial Factors Affecting Managerial DiscretionDiscretion
Characteristics of theCharacteristics of theOrganizationOrganization
Characteristics of the Characteristics of the OrganizationOrganization• SizeSize• AgeAge• CultureCulture• Availability of resourcesAvailability of resources• Patterns of interaction Patterns of interaction
among employeesamong employees
External EnvironmentExternal Environment
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Factors Affecting Managerial Factors Affecting Managerial DiscretionDiscretion
External EnvironmentExternal Environment
Characteristics of theCharacteristics of theOrganizationOrganization
Characteristics of theCharacteristics of theManagerManager
ManagerialManagerialDiscretionDiscretion
Characteristics of the Characteristics of the ManagerManager• Tolerance for ambiguityTolerance for ambiguity• Commitment to the firm Commitment to the firm
and its desired strategic and its desired strategic outcomesoutcomes
• Interpersonal skillsInterpersonal skills• Aspiration levelAspiration level• Degree of self-confidenceDegree of self-confidence
356
Top Management TeamsTop Management Teams The top management team is composed of The top management team is composed of
key managers who are responsible forkey managers who are responsible for– formulating andformulating and– implementingimplementing– the organization’s strategiesthe organization’s strategies
A heterogeneous top management team A heterogeneous top management team with varied expertise and knowledge can with varied expertise and knowledge can draw on multiple perspectives when draw on multiple perspectives when evaluating alternative strategies and evaluating alternative strategies and building consensusbuilding consensus
357
Top Management TeamsTop Management Teams A top management team must also be able A top management team must also be able
to function effectively as a team in order to to function effectively as a team in order to implement strategiesimplement strategies– a heterogeneous team makes this more difficulta heterogeneous team makes this more difficult– a heterogeneous team, however, is associated a heterogeneous team, however, is associated
positively with innovation and strategic changepositively with innovation and strategic change
358
Strategic LeadershipStrategic Leadership Chief executive officers can gain so much Chief executive officers can gain so much
power that they are virtually independent power that they are virtually independent of oversight by the board of directorsof oversight by the board of directors
This is especially true when the CEO is This is especially true when the CEO is also chairman of the board of directorsalso chairman of the board of directors
CEOs of long tenure can also wield CEOs of long tenure can also wield substantial powersubstantial power
The most effective forms of governance The most effective forms of governance share power and influence among the CEO share power and influence among the CEO and board of directorsand board of directors
359
Managerial Labor MarketsManagerial Labor Markets The internal labor market is comprised of The internal labor market is comprised of
the career path alternatives available to a the career path alternatives available to a firm’s managersfirm’s managers
Selecting internal candidates for Selecting internal candidates for management positions helps to build on management positions helps to build on valuable firm-specific knowledgevaluable firm-specific knowledge
360
Managerial Labor MarketsManagerial Labor Markets The external labor market includes the The external labor market includes the
collection of career opportunities for collection of career opportunities for managers outside their firmmanagers outside their firm
Selecting an outsider often brings fresh Selecting an outsider often brings fresh insights and may energize the firm with insights and may energize the firm with innovative new ideasinnovative new ideas
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Managerial Labor MarketsManagerial Labor Markets
StrategicStrategicchangechange
StableStablestrategystrategy
Stable strategyStable strategywith innovationwith innovation
Managerial Labor Market:Managerial Labor Market:CEO SuccessionCEO Succession
Internal CEOInternal CEOsuccessionsuccession
External CEOExternal CEOsuccessionsuccession
Top ManagementTop ManagementTeam CompositionTeam Composition
HeterogeneousHeterogeneous
HomogeneousHomogeneous
Ambiguous:Ambiguous:possible change inpossible change intop managementtop managementteam and strategyteam and strategy
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Exercise of Effective Strategic Exercise of Effective Strategic LeadershipLeadership
EstablishingEstablishingbalancedbalancedorganizationalorganizationalcontrolscontrols
EmphasizingEmphasizingethicalethicalpracticepractice
DevelopingDevelopinghumanhumancapitalcapital
Exploiting andExploiting andmaintainingmaintainingcorecorecompetenciescompetencies
SustainingSustainingan effectivean effectiveorganizationalorganizationalcultureculture
DeterminingDeterminingstrategicstrategicdirectiondirection
Effective StrategicEffective StrategicLeadershipLeadership
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Determining Strategic DirectionDetermining Strategic Direction Strategic direction means the development Strategic direction means the development
of a long-term vision of a firm’s strategic of a long-term vision of a firm’s strategic intentintent
A charismatic leader can help achieve A charismatic leader can help achieve strategic intentstrategic intent
It is important not to lose sight of the It is important not to lose sight of the strengths of the organization when making strengths of the organization when making changes required by a new strategic changes required by a new strategic directiondirection
Executives must structure the firm Executives must structure the firm effectively to help achieve the visioneffectively to help achieve the vision
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Exploiting and Maintaining Core Exploiting and Maintaining Core CompetenciesCompetencies Core competencies are resources and Core competencies are resources and
capabilities that serve as a source of capabilities that serve as a source of competitive advantage for a firm over its competitive advantage for a firm over its rivalsrivals
Strategic leaders must verify that the Strategic leaders must verify that the firm’s competencies are emphasized in firm’s competencies are emphasized in strategy implementation effortsstrategy implementation efforts
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Exploiting and Maintaining Core Exploiting and Maintaining Core CompetenciesCompetencies In many large firms, and certainly in In many large firms, and certainly in
related-diversified ones, core related-diversified ones, core competencies are exploited effectively competencies are exploited effectively when they are developed and applied when they are developed and applied across different organizational unitsacross different organizational units
Core competencies cannot be developed Core competencies cannot be developed or exploited effectively without developing or exploited effectively without developing the capabilities of human capitalthe capabilities of human capital
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Developing Human CapitalDeveloping Human Capital Human capital refers to the knowledge and Human capital refers to the knowledge and
skills of the firm’s entire workforceskills of the firm’s entire workforce Employees are viewed as a capital resource Employees are viewed as a capital resource
that requires investmentthat requires investment No strategy can be effective unless the firm is No strategy can be effective unless the firm is
able to develop and retain good people to able to develop and retain good people to carry it outcarry it out
The effective development and management of The effective development and management of the firm’s human capital may be the primary the firm’s human capital may be the primary determinant of a firm’s ability to formulate and determinant of a firm’s ability to formulate and implement strategies successfullyimplement strategies successfully
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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational Culture An organizational culture consists of a An organizational culture consists of a
complex set of ideologies, symbols, and complex set of ideologies, symbols, and core values that is shared throughout the core values that is shared throughout the firm and influences the way it conducts firm and influences the way it conducts businessbusiness
Shaping the firm’s culture is a central task Shaping the firm’s culture is a central task of effective strategic leadershipof effective strategic leadership
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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational Culture An appropriate organizational culture An appropriate organizational culture
encourages the development of an encourages the development of an entrepreneurial orientation among entrepreneurial orientation among employees and an ability to change the employees and an ability to change the culture as necessaryculture as necessary
Reengineering can facilitate this processReengineering can facilitate this process
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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational CultureChanging Culture and Business Changing Culture and Business
ReengineeringReengineering The benefits of business reengineering The benefits of business reengineering
are maximized when employees believe are maximized when employees believe that:that:– every job in the company is essential and every job in the company is essential and
importantimportant– all employees must create value through their all employees must create value through their
workwork
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Sustaining an Effective Sustaining an Effective Organizational CultureOrganizational CultureChanging Culture and Business Changing Culture and Business ReengineeringReengineering Constant learning is a vital part of every Constant learning is a vital part of every
person’s jobperson’s job Teamwork is essential to successful Teamwork is essential to successful
implementationimplementation Problems are solved only when teams Problems are solved only when teams
accept the responsibility for the solutionaccept the responsibility for the solution
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Emphasizing Ethical PracticesEmphasizing Ethical Practices Ethical practices increase the Ethical practices increase the
effectiveness of strategy implementation effectiveness of strategy implementation processesprocesses
Ethical companies encourage and enable Ethical companies encourage and enable people at all organizational levels to people at all organizational levels to exercise ethical judgmentexercise ethical judgment
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Emphasizing Ethical PracticesEmphasizing Ethical Practices To properly influence employee judgment To properly influence employee judgment
and behavior, ethical practices must and behavior, ethical practices must shape the firm’s decision-making process shape the firm’s decision-making process and be an integral part of an and be an integral part of an organization’s cultureorganization’s culture
Leaders set the tone for creating an Leaders set the tone for creating an environment of mutual respect, honesty environment of mutual respect, honesty and ethical practices among employeesand ethical practices among employees
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Establishing Balanced Establishing Balanced Organizational ControlsOrganizational Controls Organizational controls provide the Organizational controls provide the
parameters within which strategies are to parameters within which strategies are to be implemented and corrective actions be implemented and corrective actions takentaken
Financial controls are often emphasized in Financial controls are often emphasized in large corporations and focus on short-large corporations and focus on short-term financial outcomesterm financial outcomes
Strategic control focuses on the content Strategic control focuses on the content of strategic actions, rather than their of strategic actions, rather than their outcomesoutcomes
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Establishing Balanced Establishing Balanced Organizational ControlsOrganizational Controls Successful strategic leaders balance Successful strategic leaders balance
strategic control and financial control strategic control and financial control (they do not eliminate financial control) (they do not eliminate financial control) with the intent of achieving more positive with the intent of achieving more positive long-term returnslong-term returns
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Strategic and Financial Controls in a Strategic and Financial Controls in a Balanced Scorecard FrameworkBalanced Scorecard FrameworkPerspectivesPerspectives CriteriaCriteria
FinancialFinancial • Cash flowCash flow• Return on equityReturn on equity• Return on assetsReturn on assets
CustomerCustomer • Assessment of ability to anticipate Assessment of ability to anticipate customers needscustomers needs
• Effectiveness of customer service Effectiveness of customer service practicespractices
• Percentage of repeat businessPercentage of repeat business• Quality of communications with Quality of communications with
customerscustomers
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Strategic and Financial Controls in a Strategic and Financial Controls in a Balanced Scorecard FrameworkBalanced Scorecard FrameworkPerspectivesPerspectives CriteriaCriteria
Internal Business Internal Business ProcessProcess
• Asset utilization improvementsAsset utilization improvements• Improvements in employee moraleImprovements in employee morale• Changes in turnover ratesChanges in turnover rates
Learning and Learning and GrowthGrowth
• Improvements in innovation abilityImprovements in innovation ability• Number of new products compared Number of new products compared
to competitorsto competitors• Increases in employees’ skillsIncreases in employees’ skills