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Chapter Title
16/e PPT
What Is Strategyand Why Is
It Important?
Screen graphics created by: Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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“Without a strategy
the organization is
like a ship without a
rudder.”
Joel Ross and Michael
Kami
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Chapter Roadmap
What Do We Mean By Strategy?
Strategy and the Quest for Competitive Advantage
Identifying a Company’s Strategy
Why a Company’s Strategy Evolves Over Time A Company’s Strategy Is Partly Proactive and Partly Reactive
Strategy and Ethics: Passing the Test of Moral Scrutiny
The Relationship Between a Company’s Strategy and ItsBusiness Model
What Makes a Strategy a Winner?
Why Are Crafting and Executing Strategy Important?
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Thinking Strategically:The Three Big Strategic Questions
1. What’s the company’s present situation?
2. Where does the company need to go from here?
Business(es) to be in and market positions to stake outBuyer needs and groups to serve
Direction to head
3. How should it get there?
A company’s answer to “how
will we get there?” is its strategy
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Choosing the “Hows” of Strategy
Strategic choices about “how” are based on Trial-and-error organizational learning about what has worked and
what has not worked
Management’s appetite for taking risks
Managerial analysis and strategic thinking about how best toproceed, given market conditions and the company’s circumstances
In choosing a strategy, management is in effect saying,
“Among all the many different business approaches and
ways of competing we could have chosen, we have
decided to employ this particular combination of competitive and operating approaches in moving the
company in the intended direction, strengthening its
market position, and competitiveness, and boosting
performance.”
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Key Elements of a Successful Strategy
Developing a successful strategy hinges on makingcompetitive moves aimed at
Appealing to buyers in ways to set the enterprise apart from
rivals and
Carving out its own market position Involves developing a distinctive “aha”
element to
Attract customers and
Produce a competitive edge
Copying competitive moves of other
successful companies rarely works!
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For Discussion: Your Opinion
From your perspective as a cable or satellite serviceconsumer, does Comcast’s strategy (as described in
Illustration Capsule 1.1) seem to be well-matched to
industry and competitive conditions?
Does the strategy seem to be keyed to a cost
advantage, differentiating features, serving the unique
needs of a niche, or developing resource strengths and
competitive capabilities rivals can’t imitate or trump (or a
mixture of these)?
What is there about Comcast’s strategy that can lead to
sustainable competitive advantage?
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Strategy and the Quest for Competitive Advantage
The heart and soul of any strategy are the actionsand moves in the marketplace that a company
makes to strengthen its competitive position and
gain a competitive advantage over rivals A creative distinctive strategy that sets a company
apart from rivals and yields a competitive
advantage is a company’s most reliable ticket to
above average profitability Competing with a competitive advantage is more
profitable than competing with no advantage Competing with a competitive disadvantage nearly
always results in below-average profitability
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A Powerful Strategy Leads toSustainable Competitive Advantage
A company achieves sustainable competitive advantage when an attractive number or buyers prefer its
products/services over those of rivals and when the basis
for this preference can be maintained over time
Its nice when a strategy produces a temporarycompetitive edge but a durable edge over rivals greatly
enhances a company’s prospects for winning in the
marketplace and realizing above-average profits
What separates a powerful strategy from an ordinary
strategy is management’s ability to forge a series of
moves, both in the marketplace and internally, that
produces sustainable competitive advantage!
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Test Your Knowledge
A company’s strategy and its quest for competitive advantageare tightly related because
A. a company’s strategy determines whether it will have lower or
higher costs than rivals and thus be at a competitive advantage
or disadvantage.
B. competitive advantage is essential to having a profitable
business model.
C. choosing a competitive advantage to pursue also helps a
company choose which business model is most appropriate.
D. competitive advantage enables a company to achieve itsstrategic objectives.
E. a strategy that leads to sustainable competitive advantage is a
company’s most reliable means of achieving above-average
profitability and financial performance.
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Why Do Strategies Evolve?
A company’s strategy is a work in progress
Changes may be necessary to react to
Shifting market conditions
Technological breakthroughs
Fresh moves of competitors
Evolving customer preferences
Emerging market opportunities
New ideas to improve strategy
Crisis situations
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Fig. 1.2: A Company’s Strategy IsPartly Proactive and Partly Reactive
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Linking Strategy With Ethics
Ethical and moral standards go beyond Prohibitions of law and the language of “thou shalt not”
to issues of Duty and “right” vs. “wrong”
Ethical and moral standards address
“What is the right thing to do?”Two criteria of an ethical strategy:
Does not entail actions and behaviors that cross the linefrom “should do” to “should not do” and “unsavory” or
“shady” and Allows management to fulfill its ethical duties to all
stakeholders
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Role of Senior Executives:Linking Strategy with Ethics
Forbid pursuit of ethically questionable businessopportunities
Insist all aspects of company strategyreflect high ethical standards
Make it clear all employees areexpected to act with integrity
Install organizational checks and balances to Monitor behavior Enforce ethical codes of conduct Provide guidance to employees in gray areas
Display genuine commitment to conduct businessactivities ethically
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Test Your Knowledge
A company's strategy can be considered “ethical”A. if all of its different actions and elements are legal and in
compliance with governmental rules and regulations.
B. so long as its actions and behaviors can pass the test of
“moral scrutiny” and are aboveboard in the sense of not beingshady or unconscionable, injurious to others, or unnecessarily
harmful to the environment.
C. only if all elements of the strategy are in accord with what is
generally considered as being in the overall best interests of
society at large.
D. so long as religious authorities and noted ethics experts find
nothing “wrong” in the company’s actions.
E. if it is in compliance with the company’s code of ethics and has
been approved by the company’s chief ethics officer.
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What Is a Business Model?
A business model addresses “How do we makemoney in this business?” Is the strategy capable of delivering
good bottom-line results?
Do the revenue-cost-profit economicsof the strategy make good business sense? Look at revenue streams the strategy is expected to
produce
Look at associated cost structure and potential profit margins
Do resulting earnings streams and ROI indicate the
strategy makes sense and the company has a viable
business model for making money?
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Relationship BetweenStrategy and Business Model
Strategy . . .Deals with a company’s
competitive initiatives and
business approaches
Business Model . . . Concerns whether revenues
and costs flowing from the
strategy demonstrate a
business can be amplyprofitable and viable
S t r a t e g y
B u s i n
e s s
M o d e l
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Microsoft’s Business Model
Employ a cadre of highly skilled programmers to develop proprietarycode; keep source code hidden from users
Sell resulting OS and software packages to PC makers and users atrelatively attractive prices to achieve a 90% or more market share
Most costs in developing software are fixed; variable costs are small;once break-even volume is reached, revenues from additional salesare almost pure profit
Provide modest level of technical support to users at no cost
Rejuvenate revenues by periodically introducing next-generationsoftware with features inducing PC users to upgrade their operating
systems
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Red Hat’s Business Model
Rely on collaborative efforts of volunteer programmers to create thesoftware
Collect and test enhancements and new applications submitted byvolunteer programmers for evaluation and inclusion in new releases
of Linux
Market upgraded and tested family of Red Hat products to largecompanies, charging a subscription fee that includes 24/7 supportwithin 1 hour in 7 languages
Make source code open and available to all users
Capitalize on specialized expertise required to use Linux byproviding fee-based training, consulting, software customization,
and client-directed engineering to Linus users
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For Discussion: Your Opinion
Who has the best business model –
Microsoft or Red Hat?
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Other Criteria for Judgingthe Merits of a Strategy
Internal consistency and unity among all pieces of the strategy
Degree of risk the strategy poses as compared to
alternative strategies
Degree to which the strategy is flexible and
adaptable to changing circumstances
While these criteria are relevant, they seldom override
the importance of the three tests of a winning strategy!
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Why Is Strategy Important?
A compelling need exists for managers
to proactively shape how a firm’s
business will be conducted
A strategy-focused firm is more likely to be a strong bottom-line performer
than one that views strategy as secondary
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Good Strategy + Good Strategy Execution= Good Management
Crafting and executing strategy are core managementfunctions
Among all things managers do, nothing affects a
company’s ultimate success or failure more
fundamentally than how well its management team Charts a company’s direction,
Develops competitively effective strategic moves and business
approaches, and
Pursues what needs to be done internally to produce goodday-in/day-out strategy execution
Excellent execution of an excellent strategy is thebest test of managerial excellence – and the
most reliable recipe for winning in the marketplace!
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Chapter Title
16/e PPT
Evaluating a
Company’sExternal
EnvironmentScreen graphics created by:
Jana F. Kuzmicki, Ph.D.Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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“Analysis is the critical
starting point of
strategic thinking.”
Kenichi Ohmae
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“Things are always
different--the art is
figuring out which
differences matter.”
Laszlo Birinyi
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Fi 3 1 F Thi ki St t i ll b t th
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Fig. 3.1: From Thinking Strategically about the
Company’s Situation to Choosing a Strategy
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Thinking Strategically about aCompany’s Macro-environment
A company’s macro-environment includes all relevant factors and influences outside its boundaries Diagnosing a company’s external situation involves
assessing strategically important factors that have abearing on the decisions a company’s makes about its
Direction Objectives Strategy Business model
Requires that company managers scanthe external environment to Identify potentially important external developments Assess their impact and influence Adapt a company’s direction and strategy as needed
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Key Questions Regarding theIndustry and Competitive Environment
What are the
industry’s
dominant
economic traits?
How strong are
competitive
forces?
What forces
are driving
change in the
industry?
What market
positions do
rivals occupy?
What moves will
they make next?
What are the
key factors for
competitive
success?
How attractive
is the industry
from a profit
perspective?
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Market size and growth rate Number of rivals
Scope of competitive rivalry
Buyer needs and requirements
Degree of product differentiation
Product innovation
Supply/demand conditions
Pace of technological change Vertical integration
Economies of scale
Learning and experience curve effects
Question 1: What are the Industry’sDominant Economic Traits?
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Learning/Experience Effects
Learning/experience effects exist when acompany’s unit costs decline as its cumulative
production volume increases because of
Accumulating production know-how
Growing mastery of the technology
The bigger the learning or experience curveeffect, the bigger the cost advantage of the firm
with the largest cumulative production volume
Q i 2 Wh Ki d f C i i
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Question 2: What Kinds of CompetitiveForces Are Industry Members Facing?
Objectives are to identify
Main sources of competitive forces
Strength of these forces
Key analytical tool
Five Forces Model
of Competition
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Fig. 3.3: The Five Forces Model of Competition
A l i th Fi C titi F
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Analyzing the Five Competitive Forces:How to Do It
Step 1: Identify the specific competitive pressures associated with each of
the five forces
Step 2 : Evaluate the strength of each
competitive force -- fierce, strong,
moderate to normal, or weak?
Step 3: Determine whether the collective
strength of the five competitive forces
is conducive to earning attractive profits
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Usually the strongest of the five forces
Key factor in determining strength of rivalry
How aggressively are rivals using various weapons of competition to improve their market positions and
performance?
Competitive rivalry is a combative
contest involving
Offensive actions
Defensive countermoves
Competitive Pressures Among Rival Sellers
Fig. 3.4: Weapons for Competing and FactorsAff i S h f Ri l
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Affecting Strength of Rivalry
Wh t A th T i l
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Lower prices
More or different
performance features
Better product performance
Higher quality
Stronger brand image and
appeal Wider selection of models
and styles
Bigger/better dealer network
Low interest rate financing
Higher levels of advertising
Stronger product
innovation capabilities
Better customer service Stronger capabilities to
provide buyers with
custom-made products
What Are the Typical Weapons for Competing?
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Test Your Knowledge
The rivalry among competing sellers in an industryintensifies
A. when buyer demand for the product is growing rapidly.
B. when customers are brand loyal and their costs to
switch to competing brands or substitute products are
relatively high.
C. when buyer demand is strong and sellers have little or
no excess capacity and only minimal inventories.
D. as the number of rivals increases and as they become
more equal in size and competitive capability.
E. when the products of rival sellers are highly
differentiated products and the industry consists of so
many rivals that any one company’s actions have little
direct impact on rivals’ business.
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Competitors are active in making fresh moves to improvemarket standing and business performance
Slow market growth
Number of rivals increases and rivals are of
equal size and competitive capability
Buyer costs to switch brands are low
Industry conditions tempt rivals to use price cuts or other
competitive weapons to boost volume
A successful strategic move carries a big payoff
Diversity of rivals increases in terms of visions, objectives,strategies, resources, and countries of origin
Outsiders acquire weak firms in the industry and use their
resources to transform new firms into major market
contenders
What Causes Rivalry to be Stronger?
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Industry rivals move only infrequently or in a non-aggressive manner to draw sales from rivals
Rapid market growth
Products of rivals are strongly
differentiated and customer loyalty is high
Buyer costs to switch brands are high
There are fewer than 5 rivals or there are numerous
rivals so any one firm’s actions has minimal impact
on rivals’ business
What Causes Rivalry to be Weaker?
Competiti e Press res
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Seriousness of threat depends on Size of pool of entry candidates
and available resources
Barriers to entry
Reaction of existing firms
Evaluating threat of entry involves assessing
How formidable entry barriers are for each type of
potential entrant and
Attractiveness of growth and profit prospects
Competitive PressuresAssociated With Potential Entry
Fig 3 5: Factors Affecting Threat of Entry
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Fig. 3.5: Factors Affecting Threat of Entry
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There’s a sizable pool of entry candidates
Entry barriers are low
Industry growth is rapid and profit
potential is high
Incumbents are unwilling or unable to contest a
newcomer’s entry efforts
When existing industry members have a strong
incentive to expand into new geographic areas or new
product segments where they currently do not have a
market presence
When Is the Threat of Entry Stronger?
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There’s only a small pool of entry candidates
Entry barriers are high
Existing competitors are struggling to earn good profits
Industry’s outlook is risky
Industry growth is slow or stagnant
Industry members will strongly contest
efforts of new entrants to gain a market foothold
When Is the Threat of Entry Weaker?
Competitive Pressures from Substitute
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Competitive Pressures from SubstituteProducts
Substitutes matter when customers are attracted to
the products of firms in other industries
Concept
Sugar vs. artificial sweeteners
Eyeglasses and contact lensvs. laser surgery
Newspapers vs. TV vs. Internet
Examples
How to Tell Whether Substitute
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How to Tell Whether SubstituteProducts Are a Strong Force
Whether substitutes are readily
available and attractively priced
Whether buyers view substitutes
as being comparable or better
How much it costs end users
to switch to substitutes
Fig 3 6: Factors Affecting Competition From Substitute Products
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Fig. 3.6: Factors Affecting Competition From Substitute Products
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When Is the Bargaining
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Industry members incur high costs in switching their purchases to alternative suppliers
Needed inputs are in short supply
Supplier provides a differentiated inputthat enhances the quality of performance
of sellers’ products or is a valuable part
of sellers’ production process
There are only a few suppliers of a specific input
Some suppliers threaten to integrate forward
When Is the BargainingPower of Suppliers Stronger?
When Is the Bargaining
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Item being supplied is a commodity Seller switching costs to alternative suppliers are low
Good substitutes exist or new ones emerge
Surge in availability of supplies occurs
Industry members account for a big
fraction of suppliers’ total sales
Industry members threaten to integrate backward
Seller collaboration with selected suppliers provides
attractive win-win opportunities
When Is the BargainingPower of Suppliers Weaker?
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Competitive Pressures From Buyers
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Whether seller-buyer relationships represent aweak or strong competitive force depends on
Whether buyers have sufficient bargainingleverage to influence terms of sale in their favor
Extent and competitive importance of
seller-buyer strategic partnerships
in the industry
Competitive Pressures From Buyersand Seller-Buyer Collaboration
Fig. 3.8: Factors Affecting Bargaining Power of Buyers
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When Is the Bargaining
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Buyer switching costs to competing brands or substitutesare low
Buyers are large and can demand concessions
Large-volume purchases by buyers are important to sellers
Buyer demand is weak or declining Only a few buyers exists
Identity of buyer adds prestige
to seller’s list of customers
Quantity and quality of informationavailable to buyers improves
Buyers have ability to postpone purchases until later
Buyers threaten to integrate backward
When Is the BargainingPower of Buyers Stronger?
When Is the Bargaining
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Buyers purchase item infrequently or in small quantities
Buyer switching costs to competing brands are high
Surge in buyer demand creates a “sellers’ market”
Seller’s brand reputation is important to buyer
A specific seller’s product delivers quality
or performance that is very important to buyer
Buyer collaboration with selected sellers provides
attractive win-win opportunities
When Is the BargainingPower of Buyers Weaker?
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Strategic Implications of
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Competitive environment is unattractive fromthe standpoint of earning good profits when
Rivalry is vigorous
Entry barriers are low
and entry is likely
Competition from
substitutes is strong
Suppliers and customers have
considerable bargaining power
Strategic Implications of the Five Competitive Forces
Strategic Implications of
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Competitive environment is ideal froma profit-making standpoint when
Rivalry is moderate
Entry barriers are high
and no firm is likely to enter
Good substitutes
do not exist
Suppliers and customers are
in a weak bargaining position
Strategic Implications of the Five Competitive Forces
Coping With the
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Objective is to craft a strategy to
Insulate firm from
competitive pressures
Initiate actions to produce
sustainable competitive advantage
Allow firm to be the industry’s “mover and shaker” with
the “most powerful” strategy that defines the
business model for the industry
Coping With theFive Competitive Forces
Question 3: What Factors Are Driving Industry
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Question 3: What Factors Are Driving IndustryChange and What Impacts Will They Have?
Industries change because forcesare driving industry participants
to alter their actions
Driving forces are themajor underlying causes
of changing industry and
competitive conditions
Where do driving forces originate?
Outer ring of macroenvironment
Inner ring of macroenvironment
Analyzing Driving Forces:
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STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years Usually no more than 3 - 4 factors
qualify as real drivers of change
STEP 2: Assess impact Are the driving forces acting to cause market
demand for product to increase or decrease?
Are the driving forces acting to make competition more or less intense?
Will the driving forces lead to higher or lower industry profitability?
STEP 3: Determine what strategy changes areneeded to prepare for impacts of driving forces
Analyzing Driving Forces:Three Key Steps
Common T pes of Dri ing Forces
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Emerging new Internet capabilities and applications Increasing globalization of industry
Changes in long-term industry growth rate
Changes in who buys the product and how they
use it
Product innovationTechnological change/process innovation
Marketing innovation
Common Types of Driving Forces
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Question 4: What Market Positions
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Do Rivals Occupy?
One technique to reveal
different competitive positions
of industry rivals is
strategic group mapping
A strategic group is a
cluster of firms in an industry
with similar competitive
approaches and market positions
Strategic Group Mapping
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Firms in same strategic group have two or morecompetitive characteristics in common
Have comparable product line breadth
Sell in same price/quality range
Emphasize same distribution channels
Use same product attributes to appeal
to similar types of buyers
Use identical technological approaches
Offer buyers similar services
Cover same geographic areas
Strategic Group Mapping
Procedure for Constructing
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STEP 1: Identify competitive characteristics thatdifferentiate firms in an industry from one
another
STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics
STEP 3: Assign firms that fall in about the same strategy
space to same strategic group
STEP 4: Draw circles around each group, making circles
proportional to size of group’s respective share
of total industry sales
ga Strategic Group Map
Example: Strategic Group Map of Selected Retail Chains
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Guidelines: Strategic Group Maps
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Variables selected as axes should not be highlycorrelated
Variables chosen as axes should expose big
differences in how rivals compete
Variables do not have to be either quantitative or
continuous
Drawing sizes of circles proportional to combined
sales of firms in each strategic group allows map toreflect relative sizes of each strategic group
If more than two good competitive variables can be
used, several maps can be drawn
Guidelines: Strategic Group Maps
Interpreting Strategic Group Maps
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Interpreting Strategic Group Maps
The closer strategic groups areon the map, the stronger the cross-group
competitive rivalry tends to be
Not all positions on the map are equally attractive Driving forces and competitive pressures often
favor some strategic groups and hurt others
Profit potential of different strategic
groups varies due to strengths and
weaknesses in each group’s market
position
Test Your Knowledge
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Test Your Knowledge
A strategic group map is a helpful analytical tool for
A. assessing why competitive pressures and driving forces usually
impact the biggest strategic groups more so than the smaller groups.
B. determining which companies have how big a competitive advantage
and how good their prospects are for increasing their market shares.
C. determining which company is the most profitable in the industry andwhy it is doing so well.
D. determining who competes most closely with whom; evaluating
whether industry driving forces and competitive pressures favor
some strategic groups and hurt others; and ascertaining whether the
profit potential of different strategic groups varies due to thestrengths and weaknesses in each group’s respective market
positions.
E. pinpointing which of the five competitive forces is the strongest and
which is the weakest.
Question 5: What Strategic Moves Are
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A firm’s best strategic moves are affected by Current strategies of competitors
Future actions of competitors
Profiling key rivals involves gatheringcompetitive intelligence about
Current strategies
Most recent actions and public announcements
Resource strengths and weaknesses
Efforts being made to improve their situation
Thinking and leadership styles of top executives
Rivals Likely to Make Next?
Competitor Analysis
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Sizing up strategies and competitive strengths and weaknesses of rivals involves assessing
Which rival has the best strategy? Which
rivals appear to have weak strategies?
Which firms are poised to gain
market share, and which ones
seen destined to lose ground?
Which rivals are likely to rank among the industry
leaders five years from now? Do any up-and-coming
rivals have strategies and the resources to overtake the
current industry leader?
Competitor Analysis
Things to Consider in
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Which rivals need to increase their unit sales andmarket share? What strategies are rivals most likely to
pursue?
Which rivals have a strong incentive, along with
resources, to make major strategic changes?Which rivals are good candidates to be acquired?
Which rivals have the resources to acquire others?
Which rivals are likely to enter new geographicmarkets?
Which rivals are likely to expand their product offerings
and enter new product segments?
Predicting Moves of Rivals
For Discussion: Your Opinion
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For Discussion: Your Opinion
Why does a company need to bother with studyingcompetitors and trying to predict what moves rivals
will make next? Why can’t it just choose whatever
strategy it wants or make whatever moves in themarketplace it wishes without first worrying about
what rivals are going to do?
Question 6: What Are the Key
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KSFs are those competitive factors most affectingevery industry member’s ability to prosper
KSFs concern Specific strategy elements
Product attributes Resources
Competencies
Competitive capabilities
that a company needs to be competitively successful KSFs are attributes that spell the difference between
Profit and loss
Competitive success or failure
Factors for Competitive Success?
Identifying Industry Key Success Factors
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Pinpointing KSFs involves determining On what basis do customers choose
between competing brands of sellers?
What resources and competitive capabilities does a
seller need to have to be competitively successful?
What does it take for sellers to achieve a sustainable
competitive advantage?
KSFs consist of the major determinants for success Rarely are there more than 5 - 6 factors that are truly
key to the future financial and competitive success of
industry members
Identifying Industry Key Success Factors
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Example: KSFs for Beer Industry
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Full utilization of brewing capacity –to keep manufacturing costs low
Strong network of wholesale distributors –
to gain access to retail outlets
Clever advertising –
to induce beer drinkers to
buy a particular brand
Example: KSFs for Beer Industry
Example: KSFs for ApparelM f t i I d t
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Manufacturing Industry
Appealing designs and
color combinations –
to create buyer appeal
Low-cost manufacturing efficiency – to keep selling
prices competitive
Example: KSFs for Tin andAl i C I d t
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Aluminum Can Industry
Locating plants close to end-use customers –
to keep costs of shipping empty cans low
Ability to market plant output within
economical shipping distances
Question 7: Does the Outlook for the IndustryP t Att ti O t it ?
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Involves assessing whether the industryand competitive environment is attractive
or unattractive for earning good profits
Under certain circumstances, a firm uniquely
well-situated in an otherwise unattractive
industry can still earn unusually good profits
Attractiveness is relative, not absolute
Conclusions about attractiveness have
to be drawn from the perspective of a
particular company
Present an Attractive Opportunity?
Factors to Consider inA i I d t Att ti
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Industry’s market size and growth potentialWhether competitive forces are conducive to
rising/falling industry profitabilityWhether industry profitability will be favorably or
unfavorably impacted by driving forces Degree of risk and uncertainty in industry’s future Severity of problems facing industry Firm’s competitive position in industry vis-à-vis rivals
Firm’s potential to capitalize onvulnerabilities of weaker rivals
Whether firm has sufficient resources to
defend against unattractive industry factors
Assessing Industry Attractiveness
Core Concept: AssessingI d t Att ti
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Industry Attractiveness
The degree to which an industry is
attractive or unattractive is not the
same for all industry participantsor potential entrants.
The opportunities an industry
presents depend partly on a
company’s ability to capture them.
Test Your Knowledge
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Test Your Knowledge
Which of the following is not an important factor for company
managers to consider in drawing conclusions about whether
the industry presents an attractive opportunity?
A. Whether powerful competitive forces are squeezing industry
profitability to subpar levels and whether competition appears
destined to grow stronger or weaker
B. The industry’s growth potential and the degree of uncertainty and risk
in the industry’s future
C. Whether industry profitability will be affected favorably or unfavorably
by the prevailing driving forces
D. How many of the industry’s key success factors do companies in the
industry typically incorporate into their strategies
E. The company’s ability to capitalize on the vulnerabilities of weakly
positioned rivals and whether the company has sufficient competitive
strength to defend against or counteract the factors that make the
industry unattractive
4
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4
Chapter Title
16/e PPT
Evaluating a
Company’sResources and
Competitive
PositionScreen graphics created by:
Jana F. Kuzmicki, Ph.D.Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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“Before executives can
chart a new strategy,
they must reach
common understanding
of the company’s
current position.”W. Chan Kim and Renee
Mauborgne
Chapter Roadmap
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p p
Question 1: How Well Is the Company’s PresentStrategy Working?
Question 2: What Are the Company’s Resource
Strengths and Weaknesses and Its External
Opportunities and Threats?Question 3: Are the Company’s Prices and Costs
Competitive?
Question 4: Is the Company CompetitivelyStronger or Weaker than Key Rivals?
Question 5: What Strategic Issues and Problems
Merit Front-Burner Managerial Attention?
Company Situation Analysis:The Key Questions
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1. How well is the company’spresent strategy working?
2. What are the company’s resource
strengths and weaknesses and its
external opportunities and threats?3. Are the company’s prices and
costs competitive?
4. Is the company competitively stronger or weaker than key rivals?
5. What strategic issues merit
front-burner managerial attention?
The Key Questions
Fig. 4.1: Identifying the Components of a Single-Business Company’s Strategy
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Question 1: How Well Is the Company’sPresent Strategy Working?
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ese t St ategy o g
Must begin by understanding what the strategy is Identify competitive approach
Low-cost leadership
Differentiation Focus on a particular market niche
Determine competitive scope
Broad or narrow geographic market coverage?
In how many stages of industry’s production/distributionchain does the company operate?
Examine recent strategic moves
Identify functional strategies
Key ConsiderationsKey Considerations
Approaches to Assess How Wellthe Present Strategy Is Working
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Qualitative assessment –Is the strategy well-
conceived?
Covers all the bases?
Internally consistent? Makes sense?
Timely and in step with
marketplace?
Quantitative assessment – What are the results?
Is company achieving its
financial and strategic
objectives?
Is company an above-
average industry
performer?
the Present Strategy Is Working
Key Indicators of How Wellthe Strategy Is Working
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Trend in sales and market share Acquiring and/or retaining customers
Trend in profit margins
Trend in net profits, ROI, and EVAOverall financial strength and credit ranking
Efforts at continuous improvement activities
Trend in stock price and stockholder value Image and reputation with customers
Leadership role(s) – Technology, quality,
innovation, e-commerce, etc.
the Strategy Is Working
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Question 2: What Are the Company’s Strengths,Weaknesses Opportunities and Threats ?
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S W O TS W O T represents the first letter in S S trengths
W W eaknesses
O O pportunities
T T hreats
For a company’s strategy to be well-conceived, it
must be
Matched to its resource strengths and weaknesses
Aimed at capturing its best market opportunities and
erecting defenses against external threats to its well-
being
S W
O T
Weaknesses, Opportunities and Threats ?
Identifying Resource Strengthsand Competitive Capabilities
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A strength is something a firm does well or an attribute
that enhances its competitiveness Valuable skills, competencies, or capabilities Valuable physical assets Valuable human assets
Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute placing a company in a position of market
advantage Alliances or cooperative ventures with partners
Resource strengths and competitivecapabilities are competitive assets!
and Competitive Capabilities
Competencies vs. Core Competencies vs.Distinctive Competencies
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Distinctive Competencies
A competence is the product of organizational learning and experience and represents real
proficiency in performing an internal activity
A core competence is a well-performedinternal activity central (not peripheral or incidental)
to a company’s competitiveness
and profitability
A distinctive competence is a competitively
valuable activity a company performs better than
its rivals
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Core Competencies –A Valuable Company Resource
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A Valuable Company Resource
A competence becomes a core competence when the well-performed activity is central to a
company’s competitiveness and profitability
Often, a core competence is
knowledge-based, residing in people,not in assets on a balance sheet
A core competence is typically the result of cross-
department collaboration A core competence gives a company a
potentially valuable competitive capability
and represents a definite competitive asset
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Distinctive Competence –A Competitively Superior Resource
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A distinctive competence is a competitivelyvaluable activity that a company performs better
than its competitors
A distinctive competence is a competitively
potent resource source because it
Gives a company a competitively valuable
capability unmatched by rivals
Can underpin and add real punch
to a company’s strategy
Is a basis for sustainable competitive advantage
# 1
A Competitively Superior Resource
Examples: Distinctive Competencies
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ToyotaLow-cost, high-quality
manufacturing of motor
vehicles
StarbucksInnovative coffee drinks
and store ambience
Determining the CompetitivePower of a Company Resource
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Power of a Company Resource
To qualify as competitively valuable or to be the
basis for sustainable competitive advantage, a
“resource” must pass 4 tests:
1. Is the resource hard to copy?
2. Is the resource durable – does it have staying power ?
3. Is the resource really competitively superior?
4. Can the resource be trumped by
the different capabilities of rivals?
Test Your Knowledge
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A distinctive competence
A. is a more important competitive asset than a core
competence.
B. represents uniquely strong capability relative to rival
companies—it qualifies as a competitively superior resource strength with competitive advantage potential.
C. is a competitively important value chain activity that a
company performs better than its rivals.
D. can underpin and add real punch to a company's
strategy.
E. All of the above.
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Identifying a Company’sMarket Opportunities
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Market Opportunities
Opportunities most relevant to a
company are those offering
Good match with its financial and
organizational resource capabilities
Best prospects for profitable
long-term growth
Potential for competitive advantage
Identifying External Threats
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Emergence of cheaper/better technologies
Introduction of better products by rivals
Entry of lower-cost foreign competitors
Onerous regulationsRise in interest rates
Potential of a hostile takeover
Unfavorable demographic shifts
Adverse shifts in foreign exchange rates
Political upheaval in a country
Role of SWOT Analysis inCrafting a Better Strategy
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S W O TS W O T analysis involves more than just developing the
4 lists of strengths, weaknesses, opportunities, and threats
The most important part of S W O TS W O T analysis is
Using the 4 lists to draw conclusions
about a company’s overall situation
Acting on the conclusions to
Better match a company’s strategy to its
resource strengths and market opportunities
Correct the important weaknesses
Defend against external threats
Crafting a Better Strategy
Fig. 4.2: The Three Steps of SWOT Analysis
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Question 3: Are the Company’sPrices and Costs Competitive?
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Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company
situation analysis
Key analytical tools
Value chain analysis
Benchmarking
p
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Fig. 4.3: A Representative Company Value Chain
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Example: Value Chain Activitiesfor a Department Store Retailer
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p
Primary Activities
Merchandise selection and
purchasing
Store layout and product
display Advertising
Customer service
Support Activities
Site selection
Hiring and training
Store maintenance
Administrative activities
Example: Value ChainActivities for a Hotel Chain
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Primary Activities
Site selection and
construction
Reservations
Operation of hotel
properties
Managing lineup
of hotel locations
Support Activities
Accounting
Hiring and training
Advertising
Building a brand and
reputation
Generaladministration
Characteristics of Value Chain Analysis
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Combined costs of all activities in a company’s
value chain define the company’s internal cost
structure
Compares a firm’s costs activityby activity against costs of key rivals
From raw materials purchase to
Price paid by ultimate customer
Pinpoints which internal activities are a
source of cost advantage or disadvantage
Why Do Value Chains of Rivals Differ?
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Several factors give rise to differences
in value chains of rival companies
Different strategies
Different operating practices
Different technologies
Different degrees of vertical integration
Some companies may perform particular activities internally
while others outsource them
Differences among the value chains of competing companies complicate task of assessing rivals’ relative cost positions
The Value Chain Systemfor an Entire Industry
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Assessing a company’s cost competitiveness
involves comparing costs all along the industry’s
value chain
Suppliers’ value chains are relevant because
Costs, performance features, and quality of inputsprovided by suppliers influence a firm’s own costs
and product performance
Value chains of distributors and retailers are
relevant because Their costs and profit margins represent “value added”
and are part of the price paid by ultimate end-user
The activities they perform affect end-user satisfaction
Fig. 4.4: Representative Value Chain for an Entire Industry
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Example: Value Chain Activities
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Pulp & Paper Industry
Timber farming
Logging
Pulp mills
Papermaking
Distribution
Example: Value Chain Activities
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Parts and components manufacture
Assembly
Wholesale distribution
Retail sales
Home Appliance Industry
Example: Value Chain Activities
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Processing of basic ingredients
Syrup manufactureBottling and can filling
Wholesale distribution
Advertising
Retailing
Albertson’s
Soft Drink Industry
Example: Value Chain Activities
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Computer Software Industry
Programming
Disk loading
Marketing
Distribution
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Activity-Based Costing: A KeyTool in Analyzing Costs
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Determining whether a company’s costs are in line
with those of rivals requires
Measuring how a company’s costs compare with those
of rivals activity-by-activity
Requires having accounting data to measure costof each value chain activity
Activity-based costing entails
Defining expense categories accordingto specific activities performed and
Assigning costs to the activity
responsible for creating the cost
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Objectives of Benchmarking
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Identify best and most efficient means of
performing various value chain activities
Learn what is the “best” way to perform a particular
activity from those companies who have
demonstrated that they are “best-in-industry” or “best-in-world” at performing the activity
Learn what other firms do to perform
an activity at lower costFigure out what actions to take to improve a
company’s own cost competitiveness
Ethical Principles in Benchmarking
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Avoid actions implying an interest
in Restraint of trade Market and/or customer
allocation schemes Price fixing Bribery
Refrain from acquiring trade
secrets by any means viewed as
improper Be willing to provide same type of
information to a benchmarking
partner Communicate early to clarify
expectations and avoid
misunderstandingsBe honest and complete
Treat benchmarking interchange
as confidentialUse information obtained only for
stated purposesRespect corporate culture of
partner companies
Use benchmarking contactsdesignated by partner company
Be fully prepared for each
exchangeProvide partners with agenda and
questionnaire prior to exchangeFollow through with commitments
to partner in a timely manner Understand how partner wants
information provided used
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Options to CorrectInternal Cost Disadvantages
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Implement use of best practices throughout company
Eliminate some cost-producing activities altogether by
revamping value chain system
Relocate high-cost activities to lower-cost geographic areas
See if high-cost activities can be performedcheaper by outside vendors/suppliers
Invest in cost-saving technology
Innovate around troublesome cost components
Simplify product design
Make up difference by achieving savings in backward or
forward portions of value chain system
Options to Correct aSupplier-Related Cost Disadvantage
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Pressure suppliers for lower prices
Switch to lower-priced substitutes
Collaborate closely with suppliers to identify mutual
cost-saving opportunities
Arrange for just-in-time deliveries from suppliers to
lower inventory and internal logistics costs
Integrate backward into business
of high-cost suppliers
Options to Correct a Cost Disadvantage Associated
With Activities of Forward Channel Allies
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Pressure dealer-distributors and other forward
channel allies to reduce their costs to make
the final price to buyers more competitive
with prices of rivals
Work closely with forward channel allies to
identify win-win opportunities to reduce costs
Change to a more economical distribution strategy
Switch to cheaper distribution channels
Integrate forward into company-owned retail outlets
Test Your Knowledge
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For a company to translate performance of value chain
activities into competitive advantage, itA. must (1) develop core competencies and maybe a
distinctive competence that rivals don’t have or can’t
quite match and that are instrumental in helping it deliver
attractive value to customers or (2) be more cost efficientin how it performs value chain activities such that it has a
low-cost advantage.
B. has to develop more core competencies than rivals.
C. must be more adept than rivals in using benchmarking
and activity-based costing.
D. has to position itself in the strategic group where profit
margins are highest.
E. Must adopt more best practices than rival firms.
Translating Performance of Value ChainActivities into Competitive Advantage
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A company can create competitive advantage by
out-managing rivals in performing value chain
activities in either/both of two ways
Option 1: Develop competencies and capabilities
that rivals don’t have or can’t match
Option 2 : Do an overall better job than rivals of lowering combined costs of performing
all the value chain activities
Fig. 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage
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Assessing a Company’sCompetitive Strength vs. Key Rivals
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1. List industry key success factors and other relevant
measures of competitive strength2. Rate firm and key rivals on each factor using rating
scale of 1 to 10 (1 = very weak; 5 = average; 10 = verystrong)
3. Decide whether to use a weighted or unweightedrating system (a weighted system is superior because chosen strength measures are unlikely tobe equally important)
4. Sum individual ratings to get an overall measure of competitive strength for each rival
5. Based on overall strength ratings, determine overallcompetitive position of firm
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Why Do a CompetitiveStrength Assessment ?
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Reveals strength of firm’s competitive position
vis-à-vis key rivals
Shows how firm stacks up against rivals, measure-
by-measure – pinpoints firm’s competitive strengths
and competitive weaknesses Indicates whether firm is at a competitive
advantage / disadvantage against each rival
Identifies possible offensive attacks (pit company
strengths against rivals’ weaknesses)
Identifies possible defensive actions (a need to
correct competitive weaknesses)
Test Your Knowledge
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Which of the following statements is false?
A. The higher a company’s costs are above those of close rivals, themore competitively vulnerable it becomes.
B. Because the value chains of rival companies tend to be quite
similar, costs outside a company’s own value chain do not affect
whether it is at a cost advantage or disadvantage vis-à-vis key
rivals.C. A company’s cost competitiveness depends not only on the costs
of internally performed value chain activities but also on the costs
of activities performed by its suppliers and forward channel allies.
D. The stronger a company’s financial performance and market
position, the more likely it has a well-conceived, well-executedstrategy.
E. A competence is something a company is good at doing whereas a
core competence is a proficiently performed internal activity that is
central to a company’s strategy and competitiveness.
Question 5: What Strategic IssuesMerit Managerial Attention?
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Based on results of both industry and competitive
analysis and an evaluation of a company’s
competitiveness, what items should be
on a company’s “worry list”?
Requires thinking strategically about Pluses and minuses in the industry
and competitive situation
Company’s resource strengths and weaknesses and
attractiveness of its competitive position
A “good” strategy must address “what to do”
about each and every strategic issue!
Stating the Issues Clearly and Precisely
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A well-stated issue involves such phrases as
“How to . . . ?”
“Whether to . . . ?”
“What should be done about . . . ?”
Issues need to be precise, specific,
and “cut straight to the chase”
Issues on the “the worry list”
raise questions about
What actions need to be considered
What to think about doing
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For Discussion: Your Opinion
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Why is it important for company managers to developa “worry list” of strategic issues and problems that
they need to address and to resolve? Why can’t
managers just skip this step and go directly to thetask of choosing what strategy to employ?
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“Competitive strategy is
about being different. It
means deliberately choosing
to perform activities
differently or to perform
different activities than rivalsto deliver a unique mix of
value.”Michael E. Porter
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Strategy and Competitive Advantage
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Competitive advantage exists when a firm’s
strategy gives it an edge in
Attracting customers and
Defending against competitive forces
Convince customers firm’s product / service offers
superior value
A good product at a low price
A superior product worth paying more for
A best-value product
Key to Gaining a Competitive Advantage
What Is Competitive Strategy?
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Deals exclusively with a company’s business
plans to compete successfully
Specific efforts to please customers
Offensive and defensive movesto counter maneuvers of rivals
Responses to prevailing market conditions
Initiatives to strengthen its market position
Narrower in scope than business strategy
Fig. 5.1: The Five Generic Competitive Strategies
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Low-Cost Provider Strategies
Keys to SuccessKeys to Success
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Make achievement of meaningful lower coststhan rivals the theme of firm’s strategy
Include features and services in product
offering that buyers consider essential
Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match
yy
Low-cost leadership means low overall costs, not
just low manufacturing or production costs!
Translating a Low-Cost Advantage intoHigher Profits: Two Options
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Option 1: Use lower-cost edge tounder-price competitors and attract
price-sensitive buyers in enough
numbers to increase total profits
Option 2: Maintain present price, be
content with present market share,
and use lower-cost edge to earn a
higher profit margin on each unit sold,
thereby increasing total profits
Nucor Corporation’sLow-Cost Provider Strategy
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Eliminate some production processes from value chain used by traditional
integrated steel mills; cut investment in facilities and equipment
Strive hard for continuous improvement in the efficiency of its plants and
frequently invest in state-of-the art equipment to reduce unit costs
Carefully select plan sites to minimize inbound and outbound shippingcosts and to take advantage of low rates for electricity
Hire a nonunion workforce that uses team-based incentive compensation
systems
Heavily emphasize consistent product quality and maintain rigorous qualitysystems
Minimize general and administrative expenses by maintaining a lean staff at
corporate headquarters and allowing only 4 levels of management
Approaches to Securinga Cost Advantage
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Do a better job than rivals of
performing value chain activities
efficiently and cost effectively
Revamp value chain to bypass
cost-producing activities that add littlevalue from the buyer’s perspective
Approach 1
Approach 2Controlcosts!
By-passcosts!
Approach 1: Controlling the Cost Drivers
C t l i id l di i
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Capture scale economies; avoid scale diseconomies
Capture learning and experience curve effects
Control percentage of capacity utilization
Pursue efforts to boost sales and spread costs such as R&D
and advertising over more units
Improve supply chain efficiency
Substitute use of low-cost for high-cost raw materials
Use online systems and sophisticated software to achieve
operating efficiencies
Adopt labor-saving operating methods
Use bargaining power to gain concessions from suppliers
Compare vertical integration vs. outsourcing
U di t t d l / k ti th d
Approach 2: Revamping the Value Chain
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Use direct-to-end-user sales/marketing methods
Make greater use of online technology applications
Streamline operations by eliminating low-value-
added or unnecessary work stepsRelocate facilities closer to suppliers or customers
Offer basic, no-frills product/service
Offer a limited product/service as opposed to a full
product/service line
Wal-Mart’s Approach toManaging Its Value Chain
I i i i f i h i i h d i li
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Institute extensive information sharing with vendors via online
systems
Pursue global procurement of some items and centralize mostpurchasing activities
Invest in state-of-the-art automation at its distribution centers
Strive to optimize the product mix and achieve greater salesturnover
Install security systems and store operating procedures that lower shrinkage rates
Negotiate preferred real estate rental and leasing rates with realestate developers and owners of its store sites
Manage and compensate its workforce in a manner to yield lower labor costs
Keys to Success in AchievingLow-Cost Leadership
Scrutinize each cost creating activity identifying cost drivers
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Scrutinize each cost-creating activity, identifying cost drivers
Use knowledge about cost drivers to manage
costs of each activity down year after year
Find ways to restructure value chain to eliminate
nonessential work steps and low-value activities Work diligently to create cost-conscious corporate cultures
Feature broad employee participation in continuous cost-
improvement efforts and limited perks for executives
Strive to operate with exceptionally small corporate staffs
Aggressively pursue investments in resources and
capabilities that promise to drive costs out of the business
C t i t lt
Characteristics of a Low-Cost Provider
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Cost conscious corporate culture
Employee participation in cost-control efforts
Ongoing efforts to benchmark costs
Intensive scrutiny of budget requests
Programs promoting continuous cost improvement
Successful low-cost producers championfrugality but wisely and aggressively
invest in cost-saving improvements !
Price competition is vigorous
When Does a Low-CostStrategy Work Best?
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Price competition is vigorous
Product is standardized or readily availablefrom many suppliers
There are few ways to achieve
differentiation that have value to buyersMost buyers use product in same ways
Buyers incur low switching costs
Buyers are large and have
significant bargaining power Industry newcomers use introductory low prices to
attract buyers and build customer base
Pitfalls of Low-Cost Strategies
Being overly aggressive in cutting price
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Being overly aggressive in cutting price
Low cost methods are easily imitated by rivals
Becoming too fixated on reducing costs
and ignoring Buyer interest in additional features
Declining buyer sensitivity to price
Changes in how the product is used
Technological breakthroughs open up cost
reductions for rivals
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ObjectiveObjective
Differentiation Strategies
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Incorporate differentiating features that cause
buyers to prefer firm’s product or service over
brands of rivals
Find ways to differentiate that create value for
buyers and are not easily matched or cheaply
copied by rivals
Not spending more to achieve differentiation
than the price premium that can be charged
ObjectiveObjective
Keys to SuccessKeys to Success
Benefits of Successful Differentiation
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A product / service with unique,appealing attributes allows a firm to
Command a premium price and/or
Increase unit sales and/or
Build brand loyalty
= Competitive Advantage
Whichhat is
unique?
Unique taste – Dr Pepper
Types of Differentiation Themes
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Unique taste – Dr. Pepper
Multiple features – Microsoft Windows and Office Wide selection and one-stop shopping – Home Depot,
Amazon.com
Superior service -- FedEx, Ritz-Carlton
Spare parts availability – Caterpillar
Engineering design and performance – Mercedes, BMW
Prestige – Rolex
Product reliability – Johnson & Johnson Quality manufacture – Karastan, Michelin, Toyota
Technological leadership – 3M Corporation
Top-of-line image – Ralph Lauren, Starbucks, Chanel
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Where to Find DifferentiationOpportunities in the Value Chain
Purchasing and procurement activities
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Purchasing and procurement activities
Product R&D and product design activities
Production process / technology-related activities
Manufacturing / production activities
Distribution-related activities
Marketing, sales, and customer service activities
Internally
Performed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Suppliers
Buyer/User
Value
Chains
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners
How to Achieve aDifferentiation-Based Advantage
A h 1
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Approach 1
Incorporate features/attributes that raise the performance a buyer gets out of the product
Approach 2
Incorporate features/attributes that enhance buyer
satisfaction in non-economic or intangible ways
Approach 3
Compete on the basis of superior capabilities
Approach 4
Incorporate product features/attributes thatlower buyer’s overall costs of using product
Test Your Knowledge
Which of the following is not one of the four basic routes to
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Which of the following is not one of the four basic routes to
achieving a differentiation-based competitive advantage?A. Appealing to high-income buyers who are willing and able to
pay a premium price for a high-performing, multi-featured
product
B. Incorporating features that raise product performanceC. Incorporating product attributes and user features that lower
the buyer’s overall costs of using the company’s product
D. Delivering value to customers via competencies and
competitive capabilities that rivals don’t have or can’t afford
to match
E. Incorporating features that enhance buyer satisfaction in
intangible or non-economic ways
Importance of Perceived Value
Buyers seldom pay for value that is not perceived
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Buyers seldom pay for value that is not perceived
Price premium of a differentiation strategy reflects
Value actually delivered to the buyer
and
Value perceived by the buyer
Actual and perceived value can differ when buyers
are unable to assess their experience with a
product
Signaling Value as Wellas Delivering Value
Incomplete knowledge of buyers causes them to
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p g y
judge value based on such signals as Price Attractive packaging Extensive ad campaigns Ad content and image
Seller facilities or professionalism andpersonality of employees Having a list of prestigious customers
Signals of value may be as important asactual value when
Nature of differentiation is hard to quantify Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated
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Pitfalls of Differentiation Strategies
Appealing product features are easily copied by rivals
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Appealing product features are easily copied by rivals
Buyers see little value in unique attributes of product
Overspending on efforts to differentiate the product
offering, thus eroding profitability
Over-differentiating such that productfeatures exceed buyers’ needs
Charging a price premium
buyers perceive is too high
Not striving to open up meaningful gaps in quality,
service, or performance features vis-à-vis rivals’
products
For Discussion: Your Opinion
A low cost provider strategy can defeat a
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A low-cost provider strategy can defeat a
differentiation strategy when buyers are satisfied with
a basic product and don’t think “extra” attributes are
worth a higher price. True or false? Explain.
Best-Cost Provider Strategies
Combine a strategic emphasis on low-cost with
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Combine a strategic emphasis on low cost with
a strategic emphasis on differentiation Make an upscale product at a lower cost
Give customers more value for the money
Deliver superior value by meeting or exceeding
buyer expectations on product attributes and
beating their price expectations
Be the low-cost provider of a product with good-to-
excellent product attributes, then use cost
advantage to underprice comparable brands
Objectives
A best cost provider’s competitive advantage is
Competitive Strength of aBest-Cost Provider Strategy
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A best-cost provider s competitive advantage is
based on its capability to include upscale attributes
at a lower cost than rivals’ comparable products
To achieve competitive advantage,
a company must be able to Incorporate attractive features at a lower cost than rivals
Manufacture a good-to-excellent quality product at a
lower cost than rivals
Develop a product that delivers good-to-excellentperformance at a lower cost than rivals
Provide attractive customer
service at a lower cost than rivals
When Does a Best-CostProvider Strategy Work Best?
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Where buyer diversity makes
product differentiation the norm and
Where many buyers are also
sensitive to price and value
Risk of a Best-Cost Provider Strategy
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A best-cost provider may get squeezed betweenstrategies of firms using low-cost and
differentiation strategies
Low-cost leaders may be able to siphon
customers away with a lower price
High-end differentiators may be able to
steal customers away with better product attributes
Test Your Knowledge
Which of the following are distinguishing features of a best-
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g g g
cost provider strategy (based on the comparisons of the fivegeneric competitive strategies shown in Figure 5.1)?
A. The strategic target is price-conscious buyers
B. A marketing emphasis on charging a slightly higher price than
rival brands having comparable features and attributes
C. A product line that stresses wide selection, many product
variations, and emphasis on differentiating features
D. A competitive advantage based on more value for the money
E. Using constant product innovation, excellent R&D skills, and
periodic technological breakthroughs to sustain the strategy
Focus / Niche Strategies
Involve concentrated attention on a narrow piece of
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Involve concentrated attention on a narrow piece of
the total market
Serve niche buyers better than rivals
Choose a market niche where buyers
have distinctive preferences, special
requirements, or unique needs
Develop unique capabilities to serve
needs of target buyer segment
Objective
Keys to Success
Approaches to Defining a Market Niche
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Geographic uniqueness
Specialized requirements inusing product/service
Special product attributes
appealing only to niche buyers
Examples of Focus Strategies
Animal Planet and History Channel
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y
Cable TVGoogle Internet search engines
Porsche Sports cars
Cannondale Top-of-the line mountain bikes
Enterprise Rent-a-Car Provides rental cars to repair garage customers
Bandag Specialist in truck tire recapping
Focus / Niche Strategiesand Competitive Advantage
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Achieve lower costs than rivals in
serving a well-defined buyer segment –
Focused low-cost strategy
Offer a product appealing to unique
preferences of a well-defined buyer segment –
Focused differentiation strategy
Approach 1
Approach 2Which
hat is
unique?
What Makes a NicheAttractive for Focusing?
Big enough to be profitable and offers good growth
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g g p g g
potential
Not crucial to success of industry leaders
Costly or difficult for multi-segment competitors
to meet specialized needs of niche members
Focuser has resources and capabilities
to effectively serve an attractive niche
Few other rivals are specializing in same nicheFocuser can defend against challengers via
superior ability to serve niche members
Risks of a Focus Strategy
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Competitors find effective ways to matcha focuser’s capabilities in serving niche
Niche buyers’ preferences shift towards product
attributes desired by majority of buyers – niche
becomes part of overall market
Segment becomes so attractive it becomescrowded with rivals, causing segment profits to be
splintered
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Deciding Which GenericCompetitive Strategy to Use
Each positions a company differently in its market and
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competitive environment Each establishes a central theme for how a company will
endeavor to outcompete rivals Each creates some boundaries for maneuvering as market
circumstances unfold Each points to different ways of experimenting with the
basics of the strategy Each entails differences in product line, production
emphasis, marketing emphasis, and means to sustain the
strategyThe big risk – Selecting a “stuck in the middle” strategy!
This rarely produces a sustainable competitiveadvantage or a distinctive competitive position!
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6
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Chapter Title
16/e PPT
Supplementing
the ChosenCompetitiveStrategy
Screen graphics created by: Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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“Successful business
strategy is about
actively shaping the
game you play, not just
playing the game youfind.”
Adam M. Brandenburger and Barry J.Nalebuff
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“The sure path to
oblivion is to stay
where you are.”
Bernard Fauber
Chapter Roadmap
Collaborative Strategies: Alliances and Partnerships
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Merger and Acquisition Strategies Vertical Integration Strategies: Operating Across More
Stages of the Industry Value Chain
Outsourcing Strategies: Narrowing the Boundaries of the
Business Offensive Strategies: Improving Market Position and
Building Competitive Advantage
Defensive Strategies: Protecting Market Position and
Competitive Advantage Web Site Strategies
Choosing Appropriate Functional-Area Strategies
First-Mover Advantages and Disadvantages
Fig. 6.1: A Company’s Menu of Strategy Options
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Companies sometimes use
Collaborative Strategies:Alliances and Partnerships
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Companies sometimes use
strategic alliances or
collaborative partnerships to
complement their own strategic
initiatives and strengthen their competitiveness. Such
cooperative strategies go beyond
normal company-to-companydealings but fall short of merger
or full joint venture partnership.
Alliances Can Enhance aFirm’s Competitiveness
Alliances and partnerships can help companies
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cope with two demanding competitive challenges
Racing against rivals to build a
market presence in many
different national markets
Racing against rivals to seize
opportunities on the frontiers
of advancing technology
Collaborative arrangements can help a companylower its costs and/or gain access to needed
expertise and capabilities
Characteristics of a Strategic Alliance
Strategic alliance – A formal agreement between two or
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more separate companies where there is Strategically relevant collaboration of some sort Joint contribution of resources Shared risk Shared control Mutual dependence
Alliances often involve Joint marketing Joint sales or distribution
Joint production Design collaboration Joint research Projects to jointly develop new technologies or products
What Factors Make an Alliance Strategic?
It is critical to a company’s achievement of an
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important objective
It helps build, sustain, or enhance a core
competence or competitive advantage
It helps block a competitive threat
It helps open up important
market opportunities
It mitigates a significant risk
to a company’s business
To collaborate on technology development or new
Why Are Strategic Alliances Formed?
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product development
To fill gaps in technical or manufacturing expertise
To create new skill sets and capabilities
To improve supply chain efficiency
To gain economies of scale in
production and/or marketingTo acquire or improve market access
via joint marketing agreements
Get into critical country markets quickly to accelerate
Potential Benefits of Alliances toAchieve Global and Industry Leadership
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process of building a global presence Gain inside knowledge about unfamiliar markets and
cultures
Access valuable skills and competencies concentratedin particular geographic locations
Establish a beachhead to participate in target industry
Master new technologies and build new expertise faster
than would be possible internally
Open up expanded opportunities in target industry by
combining firm’s capabilities with resources of partners
Capturing the Benefitsof Strategic Alliances
Benefits from forming partnerships are a function of
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Picking a good partner
Being sensitive to cultural differences
Recognizing an alliance
must benefit both parties Ensuring both parties live
up to their commitments
Structuring the decision-making process
so actions can be taken swiftly when needed
Managing the learning process and then adjusting the
alliance agreement over time to fit new circumstances
Why Alliances Fail
Ability of an alliance to endure depends on
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How well partners work together Success of partners in responding
and adapting to changing conditions
Willingness of partners to
renegotiate the bargain Reasons for alliance failure
Diverging objectives and priorities of partners
Inability of partners to work well together
Changing conditions rendering purpose of alliance obsolete
Emergence of more attractive technological paths
Marketplace rivalry between one or more allies
Test Your Knowledge
Which one of the following is not a factor that makes an alliance
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“strategic” as opposed to just a convenient businessarrangement?
A. The alliance involves joint contribution of resources, shared
risk, and is mutually beneficial.
B. The alliance helps block a competitive threat or open up new
market opportunities.
C. The alliance helps mitigate a significant risk to a company’s
business.
D. The alliance helps build, enhance, or sustain a core
competence or competitive advantage.
E. The alliance is critical to the company’s achievement of an
important objective.
Merger – Combination and pooling of equals, with
Merger and Acquisition Strategies
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newly created firm often taking on a new name Acquisition – One firm, the acquirer, purchases
and absorbs operations of another, the acquired
Merger-acquisition strategy Much-used strategic option
Especially suited for situations where
alliances do not provide a firm with needed
capabilities or cost-reducing opportunities
Ownership allows for tightly integrated operations,
creating more control and autonomy than alliances
To create a more cost-efficient operation
Objectives of Mergers and Acquisitions
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To expand a firm’s geographic coverage
To extend a firm’s business into new
product categories or international markets
To gain quick access to new technologies
or competitive capabilities
To invent a new industry and lead the
convergence of industries whose boundaries
are blurred by changing technologies and
new market opportunities
Combining operations may result in
Pitfalls of Mergers and Acquisitions
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Resistance from rank-and-file employees
Hard-to-resolve conflicts in management styles and
corporate cultures
Tough problems of integration
Greater-than-anticipated difficulties in
Achieving expected cost-savings Sharing of expertise
Achieving enhanced competitive capabilities
Vertical Integration Strategies
Extend a firm’s competitive scope within
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same industry Backward into sources of supply
Forward toward end-users of final product
Can aim at either full or partial integration
InternallyPerformed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Suppliers
Buyer/User
Value
Chains
Activities, Costs,& Margins of
Forward Channel
Allies &
Strategic Partners
Strategic Advantagesof Backward Integration
Generates cost savings only if volume needed is
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big enough to capture efficiencies of suppliersPotential to reduce costs exists when
Suppliers have sizable profit margins
Item supplied is a major cost component
Resource requirements are easily met
Can produce a differentiation-based competitive
advantage when it results in a better quality partReduces risk of depending on suppliers of crucial
raw materials / parts / components
Strategic Advantagesof Forward Integration
To gain better access to end users
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and better market visibilityTo compensate for undependable distribution
channels which undermine steady operations
To offset the lack of a broad product line, a firmmay sell directly to end users
To bypass regular distribution channels in favor of
direct sales and Internet retailing which may
Lower distribution costs
Produce a relative cost advantage over rivals
Enable lower selling prices to end users
Strategic Disadvantagesof Vertical Integration
Boosts resource requirements
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Locks firm deeper into same industry
Results in fixed sources of supply andless flexibility in accommodating buyer
demands for product varietyPoses all types of capacity-matching problems
May require radically different skills / capabilities
Reduces flexibility to make changes in componentparts which may lengthen design time and ability tointroduce new products
Whether vertical integration is a viable
Pros and Cons of Integration vs. De-Integration
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strategic option depends on its Ability to lower cost, build expertise,
increase differentiation, or enhance
performance of strategy-critical activities
Impact on investment cost, flexibility,
and administrative overhead
Contribution to enhancing a firm’s competitiveness
Many companies are finding thatde-integrating value chain activities is a
more flexible, economic strategic option!
Outsourcing Strategies
Concept
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Outsourcing involves withdrawing fromcertain value chain activities and relying on outsiders to supply needed products,support services, or functional activities
Internally
Performed
ActivitiesSuppliers
Support
Services
Functional
Activities
Distributors
or Retailers
Activity can be performed better or
When Does OutsourcingMake Strategic Sense?
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more cheaply by outside specialists Activity is not crucial to achieve asustainable competitive advantage
Risk exposure to changing technology and/or changing buyer preferences is reduced
It improves firm’s ability to innovate Operations are streamlined to
Improve flexibility Cut time to get new products into the market
It increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently
Firm can concentrate on “core” value chain activities thatbest suit its resource strengths
Farming out too many or the wrong activities,
Risk of an Outsourcing Strategy
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thus
Hollowing out capabilities
Losing touch with activities and expertise that
determine overall long-term success
Offensive and Defensive Strategies
Offensive Strategies Defensive Strategies
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Used to build new
or stronger market
position and/or create
competitive advantage
Used to protect
competitive advantage
(rarely lead to creating
advantage)
Principles of Offensive Strategies
Focus relentlessly on
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Building competitive advantage and
Striving to convert it into decisive advantage
Employ the element of surprise as
opposed to doing what rivals expect Apply resources where rivals are least able to
defend themselves
Be impatient with the status quo and display astrong bias for swift, decisive actions to boost a
firm’s competitive position vis-à-vis rivals
Types of Offensive Strategy Options
1. Offer an equally good or better product at a lower
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price
2. Leapfrog competitors by being
First adopter of next-generation technologies or
First to market with next-generation products
3. Pursue continuous product innovation
to draw sales and market share away
from less innovative rivals4. Adopt and improve on the
good ideas of other companies
Types of Offensive Strategy Options (con’t)
5. Deliberately attack market segments where a key
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rival makes big profits6. Attack competitive weaknesses of rivals
7. Maneuver around competitors and
concentrate on capturing unoccupiedor less contested market territory
8. Use hit-and-run or guerrilla warfare tactics to grab
sales and market share from complacent rivals
9. Launch a preemptive strike to secure an
advantageous position that rivals are prevented
from duplicating
What Is a Blue Ocean Strategy?
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Seeks to gain a dramatic, durablecompetitive advantage by
Abandoning efforts to beat out
competitors in existing markets and
Inventing a new industry or distinctive
market segment to render existing
competitors largely irrelevant and
Allowing a company to create and
capture altogether new demand
Type of Markets: Blue Ocean Strategy
Typical Market Space
I d b d i
Blue Ocean Market Space
I d d i
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Industry boundaries aredefined and accepted
Competitive rules are well
understood by all rivals
Companies try to outperform
rivals by capturing a bigger
share of existing demand
Industry does not exist yet
Industry is untainted by
competition
Industry offers wide-openopportunities if a firm has a
product and strategy allowing
it to
Create new demand and Avoid fighting over existing
demand
For Discussion: Your Opinion
Which of the following is the best example of a blue
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ocean strategy — Apple’s entry into MP3 players with
its iPod models or Dell’s entry into LCD TVs or Audi’s
recent move to bring out a luxury SUV? Explain.
Choosing Rivals to Attack
Four types of firms can be the target of a fresh
ff i
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offensive
Vulnerable market leaders
Runner-up firms with weaknesseswhere challenger is strong
Struggling rivals on
verge of going under
Small local or regional
firms with limited capabilities
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Test Your Knowledge
Which one of the following is not a good type of rival for
ff i i d d t t t?
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an offensive-minded company to target?
A. Market leaders that are vulnerable
B. Runner-up firms with weaknesses in areas where the
challenger is strong.
C. Small local and regional companies with limited
capabilities
D. Companies with lower costs and lower prices
E. Struggling enterprises that are on the verge of going
under
Defensive Strategy
Objectives
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Lessen risk of being attacked
Blunt impact of any attack that occurs
Influence challengers to aim attacks at other rivals
Block avenues open to challengers
Signal challengers vigorous
retaliation is likely
Approaches
Block Avenues Open to Challengers
Participate in alternative technologies
I t d f t dd d l b d
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Introduce new features, add new models, or broadenproduct line to close gaps rivals may pursue
Maintain economy-priced models
Increase warranty coverage
Offer free training and support services
Reduce delivery times for spare parts
Make early announcements about new
products or price changes
Challenge quality or safety of rivals’ products
using legal tactics
Sign exclusive agreements with distributors
Publicly announce management’s strong
it t t i t i t k t h
Signal Challengers Retaliation Is Likely
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commitment to maintain present market share
Publicly commit firm to policy of
matching rivals’ terms or prices
Maintain war chest of cash reserves
Make occasional counter-response
to moves of weaker rivals
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Using the Internet toDisseminate Product Information
Approach – Website used to provide product
i f ti f f t h l l
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information of manufacturers or wholesalers Relies on click-throughs to websites of
dealers for sales transactions Informs end-users of location of retail stores
Issues – Pursuing online sales may Signal weak strategic commitment to dealers Signal willingness to cannibalize dealers’ sales Prompt dealers to aggressively market rivals’ brands
Avoids channel conflict with dealers – Importantwhere strong support of dealer networks is
essential
Approach – Use online sales to
Using the Internet as aMinor Distribution Channel
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Achieve incremental sales
Gain online sales experience
Conduct marketing research
Learn more about buyer tastes and preferences
Test reactions to new products
Create added market buzz about products
Unlikely to provoke much outcry from dealers
Manufacturer’s profit margin from
online sales is bigger than that from
Reasons to Use the Internetas a Minor Distribution Channel
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online sales is bigger than that fromsales through traditional channels
Encouraging buyers to visit a firm’s
website educates them to the easeand convenience of purchasing online
Selling directly to end users allows a
manufacturer to make greater use of
build-to-order manufacturing and assembly
Approach
Sell directly to consumers and
Brick-and-Click Strategies:An Appealing Middle Ground Approach
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Sell directly to consumers and Use traditional wholesale/retail channels
Strategic appeal for wholesalers and retailers
Economic means of expanding a company’s economicreach
Provide both existing and potential customers another
choice of how to
Communicate with a company Shop for product information
Make purchases
Resolve customer service problems
Approach – Use Internet as the exclusive channel for
all buyer seller contact and transactions
Strategies for Online Enterprises
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all buyer-seller contact and transactions Strategic issues for an online company
How to deliver unique value to buyers
Whether it will pursue competitive advantage based on lower costs, differentiation, or better value for the money
Whether it will have a broad or narrow product offering
Whether to perform order fulfillment activities internally or to
outsource them
How it will draw traffic to its Web site and then convert page
views into revenues
Test Your Knowledge
One very important advantage of a product-information-
only Web site strategy is
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only Web site strategy is A. lower advertising costs.
B. avoiding the extra costs associated with operating Web
site e-stores.
C. avoiding channel conflict—trying to sell online in direct
competition with retail dealers signals both a weak
strategic commitment to dealers and a willingness to
cannibalize dealers’ sales and growth potential.
D. added ability to create a positive image of the company.
E. lower sales force costs.
For Discussion: Your Opinion
Suppose that you are a retailer of athletic footwear
and one of the major brands you stock in your store is
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and one of the major brands you stock in your store is
New Balance. What would be your reaction if you
learned that New Balance announced that it would
soon begin selling its footwear online at the
company’s Web site? What actions would you
consider taking?
Involves strategic choices about how functional
areas are managed to support competitive
Choosing AppropriateFunctional-Area Strategies
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areas are managed to support competitivestrategy and other strategic moves
Functional strategies include Research and development
Production
Human resources
Sales and marketing
Finance
Tailoring functional-area strategies to
support key business-level strategies is critical!
When to make a strategic move is often as crucial
as what move to make
First-Mover Advantages
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as what move to make
First-mover advantages arise when
Pioneering helps build firm’s image and reputation
Early commitments to new technologies,
new-style components, and distribution
channels can produce cost advantage
Loyalty of first time buyers is high
Moving first can be a preemptive strike
First-Mover Disadvantages
Moving early can be a disadvantage (or fail to
produce an advantage) when
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produce an advantage) when When costs of pioneering are more than being an
imitative follower and only negligible learning/experience
curve benefits accrue to the leader
Innovator’s products are primitive, not living up to buyer
expectations
Demand side of the market is skeptical about the
benefits of new technology/product of a first-mover
Rapid technological change allows followers to leapfrog
pioneers
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7
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Chapter Title
16/e PPT
Competing in
Foreign
Markets
Screen graphics created by: Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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“You have no choice but
to operate in a world
shaped by globalization
and the information
revolution. There are twooptions: Adapt or die.”
Andrew S. Grove
Chapter Roadmap
Why Companies Expand into Foreign Markets
Cross-Country Differences in Cultural Demographic and
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Cross-Country Differences in Cultural, Demographic, andMarket Conditions
The Concepts of Multi-country Competition and Global
Competition
Strategy Options for Entering and Competing in ForeignMarkets
The Quest for Competitive Advantage in Foreign Markets
Profit Sanctuaries, Cross-Market Subsidization, and Global
Strategic Offensives Strategic Alliances and Joint Ventures with Foreign Partners
Strategies That Fit the Markets of Emerging Countries
The Four Big Strategic Issuesin Competing Multinationally
Whether to customize a company’s offerings in each
different country market to match preferences of localbuyers or offer a mostly standardized product worldwide
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different country market to match preferences of localbuyers or offer a mostly standardized product worldwide
Whether to employ essentially the same
basic competitive strategy in all countries
or modify the strategy country by country Where to locate a company’s production facilities,
distribution centers, and customer service operations
to realize the greatest locational advantages
How to efficiently transfer a company’s resource strengths
and capabilities from one country to another to secure
competitive advantage
Why Do Companies Expandinto Foreign Markets?
Gain access to Obtain access to
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Gain access tonew customers
Capitalizeon corecompetencies
Achieve lower
costs and enhance
competitiveness
Spread
business risk acrosswider
market base
Obtain access tovaluable natural
resources
International vs. Global Competition
Company operates in aselect few foreign
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International
Competitor
Global
Competitor
select few foreigncountries, with modest
ambitions to expand
further
Company markets productsin 50 to 100 countries and
is expanding operationsinto additional country
markets annually
Cultures and lifestyles differ among countries
Cross-Country Differences in Cultural,Demographic, and Market Conditions
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Differences in market demographics
and income levels
Variations in manufacturingand distribution costs
Fluctuating exchange rates
Differences in host government
economic and political demands
Consumer tastes and preferences
Consumer buying habits
How Markets Differ fromCountry to Country
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Consumer buying habits
Market size and growth potential
Distribution channels
Driving forces
Competitive pressures
One of the biggest concerns of companies competing in foreign
markets is whether to customize their product offerings in each
different country market to match the tastes and preferences of local
buyers or whether to offer a mostly standardized product worldwide.
Manufacturing costs vary from country to country based on
Wage rates
Different Countries HaveDifferent Locational Appeal
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Wage rates Worker productivity
Inflation rates
Energy costs
Tax rates
Government regulations
Quality of business environment varies from country to
country
Suppliers, trade associations, and makers of
complementary products often find it advantageous to
cluster their operations in the same general location
Fluctuating Exchange Rates Affecta Company’s Competitiveness
Currency exchange rates are unpredictable
Competitiveness of a company’s operations
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Competitiveness of a company s operationspartly depends on whether exchange rate
changes affect costs favorably or unfavorably
Lessons of fluctuating exchange rates Exporters always gain in competitiveness
when the currency of the country where
goods are manufactured grows weaker
Exporters are disadvantaged whenthe currency of the country where
goods are manufactured grows stronger
Test Your Knowledge
Which one of the following statements concerning the effects of fluctuating exchange rates on companies competing in foreign
markets is true?
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A. Japan-based manufacturers exporting goods to the U.S. would bedisadvantaged if the Japanese yen grows weaker in relation to the U.S.dollar.
B. Fluctuating foreign exchange rates greatly reduce the risks of competing in foreign markets—the big problem occurs when exchangerates are fixed at unreasonably low levels.
C. Domestic companies under pressure from lower-cost imports arebenefited when their government’s currency grows weaker in relationto the currencies of the countries where the imported goods are beingmade.
D. Chinese exports to Europe would likely be grow in volume if theChinese currency because much stronger relative to the euro.
E. If the exchange rate of U.S. dollars for euros changes from $1.25 per euro to $1.30 per euro, then it is correct to say that the U.S. dollar hasgrown stronger.
Differences in HostGovernment Trade Policies
Local content requirements
Restrictions on exports
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Restrictions on exportsRegulations on prices of imports
Import tariffs or quotas
Other regulations
Technical standards
Product certification
Prior approval of capital spending projects Withdrawal of funds from country
Ownership (minority or majority) by local citizens
Multi-country
Two Primary Patternsof International Competition
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Multi-country
Competition
Global
Competition
Characteristics of Multi-Country Competition
Market contest among rivals in one country not
closely connected to market contests in othert i
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closely connected to market contests in other countries
Buyers in different countries are
attracted to different product attributes
Sellers vary from country to country
Industry conditions and competitive forces in
each national market differ in important respects
Rival firms battle for national championships –
winning in one country does not necessarily signal the
ability to fare well in other countries!
Competitive conditions across
country markets are strongly linked
Characteristics of Global Competition
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country markets are strongly linked Many of same rivals compete in
many of the same country markets
A true international market exists
A firm’s competitive position in one country isaffected by its position in other countries
Competitive advantage is based on a firm’s world-
wide operations and overall global standingRival firms in globally competitive
industries vie for worldwide leadership!
Strategy Options for Competing in Foreign Markets
Exporting
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Licensing
Franchising strategy
Multi-country strategy
Global strategy
Strategic alliances or joint ventures
Involve using domestic plants as a production
base for exporting to foreign marketsE ll t i iti l t t t i t ti l
Export Strategies
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base for exporting to foreign marketsExcellent initial strategy to pursue international
sales Advantages
Conservative way to test international waters Minimizes both risk and capital requirements Minimizes direct investments in foreign countries
An export strategy is vulnerable when
Manufacturing costs in home country are higher than in foreign countries where rivals have plants High shipping costs are involved Adverse fluctuations in currency exchange rates
Licensing Strategies
Licensing makes sense when a firm
Has valuable technical know-how or a patented productb d h i i l bili i
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p pbut does not have international capabilities to enter
foreign markets
Desires to avoid risks of committing resources to
markets which are Unfamiliar
Politically volatile
Economically unstable
Disadvantage Risk of providing valuable technical know-how to foreign
firms and losing some control over its use
Franchising Strategies
Often is better suited to global expansion efforts
of service and retailing enterprises
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of service and retailing enterprises
Advantages
Franchisee bears most of costs and
risks of establishing foreign locations
Franchisor has to expend only the
resources to recruit, train, and support franchisees
Disadvantage
Maintaining cross-country quality control
Localized Multicountry Strategiesor a Global Strategy?
Strategic Issue
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Whether to vary a company’s competitive
approach to fit specific market conditions andbuyer preferences in each host county
OR
Whether to employ essentially the same strategy
in all countries
Strategic Issue
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What Is a “Think-Local, Act-Local”Approach to Strategy Making?
A company varies its product
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A company varies its product
offerings and basic competitive
strategy from country to country in an effort to be responsive to
differing buyer preferences andmarket conditions.
Characteristics of a “Think-Local,Act-Local” Approach to Strategy Making
Business approaches are deliberately crafted to
Accommodate differing tastes and expectations of b i h t
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gbuyers in each country
Stake out the most attractive market positions vis-à-vis
local competitors
Local managers are given considerablestrategy-making latitude
Plants produce different products
for different local marketsMarketing and distribution are adapted
to fit local customs and cultures
When Is a “Think-Local, Act-Local”Approach to Strategy Making Necessary?
Significant country-to-country differences in
customer preferences and buying habits exist
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p y g
Host governments enact regulations requiring
products sold locally meet strict manufacturingspecifications or performance standards
Trade restrictions of host governments areso diverse and complicated they preclude a
uniform, coordinated worldwide market approach
Drawbacks of a “Think-Local,Act-Local” Approach to Strategy Making
Poses problems of transferring
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Poses problems of transferring
competencies across borders
Works against building a
unified competitive advantage
What Is a “Think-Global, Act-Global”Approach to Strategy Making?
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A company employs the same
basic competitive approach in all
countries where it operates.
Characteristics of a “Think-Global,Act-Global” Approach to Strategy Making
Same products under the same brand names are sold
everywhere
Same distribution channels are used in all countries
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Same distribution channels are used in all countries
Competition is based on the same capabilities
and marketing approaches worldwide
Strategic moves are integrated and coordinated worldwide
Expansion occurs in most nations where significant buyer
demand exists
Strategic emphasis is placed on building
a global brand name
Opportunities to transfer ideas, new
products, and capabilities from one
country to another are aggressively pursued
Fig. 7.2: How a Localized or Multicountry Strategy Differs from a Global Strategy
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What Is a “Think-Global, Act-Local”Approach to Strategy Making?
A company uses the same basic
competitive theme in each country but
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competitive theme in each country but
allows local managers latitude to . . .
2. Incorporate whatever country-specific
variations in product attributes are needed to
best satisfy local buyers and
3. Make whatever adjustments in production,
distribution, and marketing are needed to
compete under local market conditions
Test Your Knowledge
The stand-out characteristic of multicountry competitionis
A. The varying driving forces from country to country.
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A. The varying driving forces from country to country.
B. varying competitive pressures from country to country.
C. varying buyer requirements and expectations from country tocountry.
D. that there is so much cross-country variation in marketconditions and in the companies contending for leadership thatthe market contest among rivals in one country is not closelyconnected to the market contests in other countries—as a
consequence, there is no global or world market, just acollection of self-contained country markets.
E. varying degrees of product differentiation from country tocountry.
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The Quest for CompetitiveAdvantage in Foreign Markets
Three ways to gain competitive advantage
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1. Locating activities among nations in ways that lower
costs or achieve greater product differentiation
2. Efficient/effective transfer of competitivelyvaluable competencies and capabilities from
company operations in one country to
company operations in another country
3. Coordinating dispersed activities in
ways a domestic-only competitor cannot
Locating Activities to Build aGlobal Competitive Advantage
Two issues
Wh th t
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Whether to
Concentrate each activity in a
few countries or
Disperse activities to many
different nations
Where to locate activities
Which country is best
location for which activity?
Activities should be concentrated when
Costs of manufacturing or other value chain activities aremeaningfully lower in certain locations than in others
Concentrating Activities to Builda Global Competitive Advantage
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meaningfully lower in certain locations than in others
There are sizable scale economies
in performing the activity
There is a steep learning curve associated
with performing an activity in a single location
Certain locations have
Superior resources
Allow better coordination of related activities or
Offer other valuable advantages
Dispersing Activities to Build aGlobal Competitive Advantage
Activities should be dispersed when
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They need to be performed close to buyers
Transportation costs, scale diseconomies, or
trade barriers make centralization expensive
Buffers for fluctuating exchange rates, supply
interruptions, and adverse politics are needed
Transferring Valuable Competencies toBuild a Global Competitive Advantage
Transferring competencies, capabilities, and
resource strengths across borders contributes to D l t f b d t i d biliti
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Development of broader competencies and capabilities
Achievement of dominating depth in some competitively
valuable area
Dominating depth in a competitively valuable
capability is a strong basis for sustainable
competitive advantage over
Other multinational or global competitors and
Small domestic competitors in host countries
Coordinating Cross-Border Activities toBuild a Global Competitive Advantage
Aligning activities located in different countries
contributes to competitive advantage in severalways
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ways Choose where and how to challenge rivals Shift production from one location to
another to take advantage of most favorablecost or trade conditions or exchange rates Use online systems to collect ideas for new
or improved products and to determine which
products should be standardized or customized Enhance brand reputation by incorporating
same differentiating attributes in its
products in all markets where it competes
What Are Profit Sanctuaries?
Profit sanctuaries are country
markets where a firm H t t t d k t
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Has a strong, protected market
position and
Derives substantial profits
Generally, a firm’s most strategically
crucial profit sanctuary is its home market
Profit sanctuaries are a valuablecompetitive asset in global industries!
Fig. 7.3: Profit Sanctuary Potential of Domestic-Only,
International, and Global Competitors
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Test Your Knowledge
Profit sanctuaries are valuable competitive assets because
A. they enable a company pursuing a “think global, act local” type
of strategy to be more successful.
B d ti tit ith lti l fit t i
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B. a domestic competitor with multiple profit sanctuaries canwage and generally win a competitive offensive against a globalcompetitor whose profits are scattered across many differentcountries.
C. they provide the financial strength to support strategicoffensives in selected country markets and can help fuel acompany’s race for global market leadership.
D. without having at least two profit sanctuaries a company is
virtually precluded from competing globally.E. they enable a company pursuing a global strategy to compete
on an equal footing with companies employing a multicountrystrategy.
Involves supporting competitive offensives in one
market with resources/profits diverted from operations
in other markets
What Is Cross-Market Subsidization?
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Competitive power of cross-market subsidization
results from a global firm’s ability to
Draw upon its resources and profits in other countrymarkets to mount an attack on single-market or one-
country rivals and
Try to lure away their customers with Lower prices
Discount promotions
Heavy advertising
Other offensive tactics
For Discussion: Your Opinion
Assume that you are a multinational soft-drink company with a
large, well-protected profit sanctuary in your home country(and perhaps some smaller profit sanctuaries in other
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countries as well). Further assume that you are interested in
entering an important new foreign market in which the leading
soft drink competitors are all domestic companies. Do youthink that a cross-market subsidization strategy based on
under-pricing local competitors might be an appealing way to
gain a market foothold? Why or why not? If you were one of
the local competitors being attacked, what strategic movesmight you make to defend your market position?
Global Strategic Offensives
Attack a foreign rival’s profit sanctuaries
Approach places a rival on the defensive, forcing it to
Spend more on marketing/advertising
Three Options
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Trim its prices
Boost product innovation efforts
Take actions raising its costs and eroding its profits
Employ cross-market subsidization Attractive offensive strategy for companies competing in multiple
country markets with multiple products
Dump goods at cut-rate prices
Approach involves a company selling goods in foreign markets atprices
Well below prices at which it sells in its home market or
Well below its full costs per unit
Achieving GlobalCompetitiveness via Cooperation
Cooperative agreements with foreign companies
are a means to Enter a foreign market or
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Enter a foreign market or
Strengthen a firm’s competitiveness
in world markets
Purpose of alliances
Joint research efforts
Technology-sharing
Joint use of production or distribution facilities
Marketing / promoting one another’s products
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Pitfalls of Strategic Alliances
Overcoming language and cultural barriers
Dealing with diverse or conflicting operating practices
Time consuming for managers in terms of communication
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Time consuming for managers in terms of communication,
trust-building, and coordination costs
Mistrust when collaborating in
competitively sensitive areas
Clash of egos and company cultures
Dealing with conflicting objectives, strategies, corporate
values, and ethical standards Becoming too dependent on another firm for essential
expertise over the long-term
Tailoring products for big, emerging markets often
involves Making more than minor product changes and
Characteristics of Competingin Emerging Foreign Markets
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g p g
Becoming more familiar with local cultures
Companies have to attract buyers with
bargain prices as well as better productsSpecially designed and/or specially
packaged products may be needed to
accommodate local market circumstancesManagement team must usually consist
of a mix of expatriate and local managers
Strategic Options: How to Competein Emerging Country Markets
Prepare to compete on the basis of low price
Be prepared to modify aspects of th ’ b i d l t
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the company’s business model to
accommodate local circumstances
Try to change the local market to better match theway the company does business elsewhere
Stay away from those emerging markets where it is
impractical or uneconomic to modify the company’sbusiness model to accommodate local
circumstances
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Strategic Options for Local Companies:Use Home-Field Advantages
Concentrate on advantages enjoyed in the home
marketCater to customers who prefer a local touch
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Cater to customers who prefer a local touch
Accept loss of customers attracted to global brands
Astutely exploit its local orientation based on Familiarity with local preferences
Expertise in traditional products
Long-standing customer relationships
Cater to the local market in ways that
pose difficulties for global rivals
Strategic Options for Local Companies:Transfer Expertise to Cross-Border Markets
When a local company trying to defend against a global
challenger has resource strengths and capabilities suitable
for competing in other country markets, then it shouldconsider
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consider
Launching initiatives to transfer its expertise to
cross-border markets
Becoming more of an international competitor
Such a move to enter foreign markets can help
Build a bigger customer base (to offset
any losses in its home market)
Grow sales and profits
Put in a stronger position to contend with
global challengers in its home market
Strategic Options for Local Companies: Dodging Rivalsby Shifting to a New Business Model or Market Niche
When industry pressures to globalize are high, viable
strategic options for a local company trying to defendagainst global challengers in its home market include
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g g g
Shifting the business to a piece of the industry
value chain where the firm’s expertise/resources
provide a defendable position or maybe evena competitive advantage
Entering a joint venture with a globally
competitive partner
Selling out to a global entrant into its
home market
If a local company has resources and capabilities
that it can transfer to operations in other countries,it can launch a strategy aimed at
Strategic Options for Local Companies:Contend on a Global Level
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Entering markets of other countries as rapidly as
possible
Shifting to a more globalized strategy
Building brand recognition and a brand
image that extends to more and more
countries
Gradually establishing the resources and
capabilities to go head-to-head against
large global rivals
8
Tailoring
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Chapter Title
16/e PPT
Strategy to Fit
Specific
Industry andCompany
Situations
Screen graphics created by: Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
“In a turbulent age, the
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only dependable
advantage is reinventingyour business model
before circumstances
force you to.Gary Hamel and Liisa
Valikangas
Chapter Roadmap
Strategies for Competing in Emerging Industries Strategies for Competing in Rapidly Growing Markets Strategies for Competing in Maturing Industries Strategies for Competing in Stagnant or Declining Industries
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Strategies for Competing in Stagnant or Declining Industries Strategies for Competing in Turbulent, High-Velocity
Markets
Strategies for Competing in Fragmented Industries Strategies for Sustaining Rapid Company Growth Strategies for Industry Leaders Strategies for Runner-up Firms
Strategies for Weak and Crisis-Ridden Businesses Ten Commandments for Crafting Successful Business
Strategies
Matching Strategy toa Company’s Situation
Nature of industryand competitive
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Most important
drivers shaping a
firm’s strategic
options fall into
two categories
Firm’s competitive
capabilities,
market position,
best opportunities
and competitive
conditions
New and unproven market Proprietary technology
Lack of consensus regarding which of several competing technologies will win out
Features of an Emerging Industry
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Low entry barriers Experience curve effects may permit
cost reductions as volume builds Buyers are first-time users and marketing involves inducing
initial purchase and overcoming customer concerns First-generation products are expected to be rapidly
improved so buyers delay purchase until technology
matures Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build resource
capabilities for rapid growth
Strategy Options for Competingin Emerging Industries
Win early race for industry leadership by employing a bold,
creative strategy
Push hard to perfect technology, improve product quality,
and develop attractive performance features
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and develop attractive performance features
Consider merging with or acquiring another firm to Gain added expertise
Pool resource strengths
When technological uncertainty clears and a dominant
technology emerges, try to capture any first-mover
advantages by moving quickly
Form strategic alliances with Companies having related technological expertise or
Key suppliers
Strategy Options for Competingin Emerging Industries (continued)
Pursue new customers and user applications
Enter new geographical areas
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Make it easy and cheap for first-time buyers to try
product
Focus advertising emphasis on
Increasing frequency of use
Creating brand loyalty
Use price cuts to attract price-sensitive buyers
Strategic Hurdles for Companiesin Emerging Industries
Raising capital to finance initial operations until
Sales and revenues take off
Profits appear
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Cash flows turn positive
Developing a strategy to ride the wave of industry
growth What market segments to pursue
What competitive advantages to go after
Managing the rapid expansion of facilities and sales to
position a company to contend for industry leadership Defending against competitors trying to horn in on the
company’s success
What Is the Key to Success for Competing in Rapidly Growing Markets?
A company needs a strategy predicated on
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growing faster than the market average so it
Can boost its market share and
Improve its competitive standing vis-à-vis rivals
Strategy Options for Competingin Rapidly Growing Markets
Drive down costs per unit to enable price reductions
that attract droves of new customersPursue rapid product innovation to
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Set a company’s product offering apart from rivals
Incorporate attributes to appeal to growing numbers of
customersGain access to additional distribution
channels and sales outlets
Expand a company’s geographic coverageExpand product line to add models/styles to appeal
to a wider range of buyers
Test Your Knowledge
Which one of the following is not likely to be a suitable strategy
option for companies competing in rapid-growth industries?
A. Driving down costs per unit so as to enable price reductions that
attract droves of new customers
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B. Pursuing rapid product innovation, both to set a company’s product
offering apart from rivals and to incorporate attributes that appeal to
growing numbers of customersC. Gaining access to additional distributional channels and sales
outlets
D. Expanding the product line to add models/styles that appeal to a
wider range of buyers
E. Putting top priority on heavy advertising and other marketing-
related actions calculated to strongly differentiate its product
offering from rivals
Slowing demand breeds stiffer competition
More sophisticated buyers demand bargains
Greater emphasis on cost and service
Industry Maturity: The Standout Features
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Greater emphasis on cost and service
“Topping out” problem in adding
production capacityProduct innovation and new
end uses harder to come by
International competition increases
Industry profitability falls
Mergers and acquisitions reduce number of rivals
Strategy Options for Competingin a Mature Industry
Prune marginal products and models
Emphasize innovation in the value chain
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Strong focus on cost reduction
Increase sales to present customers
Purchase rivals at bargain prices
Expand internationally
Build new, more flexible competitive capabilities
Strategic Pitfalls in a Maturing Industry
Employing a ho-hum strategy with no distinctive
features thus leaving firm “stuck in the middle” Being slow to mount a defense against stiffening
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competitive pressures
Concentrating on short-term profits rather than
strengthening long-term competitiveness
Being slow to respond to price-cutting
Having too much excess capacity
Overspending on marketing
Failing to aggressively pursue cost reductions
Stagnant or Declining Industries:The Standout Features
Demand grows more slowly than economy as
whole (or even declines) Advancing technology gives rise to better-
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g gy g
performing substitute products
Customer group shrinksChanging lifestyles and buyer tastes
Rising costs of complementary products
Competitive battle ensues among industry
members for the available business
Pursue focus strategy aimed at
fastest growing market segmentsStress differentiation based on quality
i t d t i ti
Strategy Options for Competingin a Stagnant or Declining Industry
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improvement or product innovationWork diligently to drive costs down
Cut marginal activities from value chain Use outsourcing Redesign internal processes to exploit e-commerce Consolidate under-utilized production facilities
Add more distribution channels Close low-volume, high-cost distribution outlets Prune marginal products
End-Game Strategiesfor Declining Industries
An end-game strategy can take either of two paths
Slow-exit strategy involving
G d l h i d f ti
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Gradual phasing down of operations
Getting the most cash flow from the business
Fast-exit strategy involving
Disengaging from an industry during early stages of decline
Quick recovery of as much of a company’s investment aspossible
Features of High-Velocity Markets
Rapid-fire technological change
Short product life-cycles
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Entry of important new rivals
Frequent launches of
new competitive moves
Rapidly evolving
customer expectations
Fig. 8.1: Meeting the Challenge of High-Velocity Change
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Invest aggressively in R&D
Initiate fresh actions every few monthsDevelop quick response capabilities
Strategy Options for Competingin High-Velocity Markets
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p q p p
Shift resources
Adapt competencies Create new competitive capabilities
Speed new products to market
Use strategic partnerships to develop
specialized expertise and capabilities
Keep products/services fresh and exciting
Cutting-edge expertise
Speed in responding to new developments
C
Keys to Success in Competingin High Velocity Markets
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Collaboration with others
Agility Innovativeness
Opportunism
Resource flexibility
First-to-market capabilities
Competitive Featuresof a Fragmented Industry
Absence of market leaders with large market shares or widespread
buyer recognition
Product/service is delivered to neighborhoodlocations to be convenient to local residents
Buyer demand is so diverse that many firms
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Buyer demand is so diverse that many firms
are required to satisfy buyer needs
Low entry barriers
Absence of scale economies
Market for industry’s product/service may be globalizing, thus
putting many companies across the world in same market arena
Exploding technologies force firms to specialize just to keep up in
their area of expertise Industry is young and crowded with aspiring contenders, with no
firm having yet developed recognition to command a large market
share
Examples of Fragmented Industries
Book publishing
Landscaping and plant nurseries Auto repair
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Restaurant industry
Public accountingWomen’s dresses
Meat packing
Paperboard boxes
Hotels and motels
Furniture
Competing in a Fragmented Industry:The Strategy Options
Construct and operate “formula” facilities
Become a low cost operator
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Become a low-cost operator
Specialize by product type
Specialize by customer type
Focus on limited geographic area
Test Your Knowledge
Which of the following is unlikely to be a promising option for
competing in a fragmented industry?
A. Employing deep price discounting, extensive advertising, and
other muscle flexing maneuvers to gain market dominance in
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other muscle-flexing maneuvers to gain market dominance in
a select few country markets
B. Specializing by product type or becoming a low-cost operator
C. Specializing by customer type
D. Focusing on a limited geographic area
E. Constructing and operating "formula" facilities at many
different locations
For Discussion: Your Opinion
What classification would you assign to each of the
following industries—emerging, rapid-growth,
mature/slow-growth, stagnant/declining, high-
velocity/turbulent or fragmented?
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velocity/turbulent, or fragmented?
A. Dry cleaning industry
B. Cigarette industry
C. Cell phone industry
D. MP3 player industry
E. Satellite radio industry
For Discussion: Your Opinion
Assume you are charged with crafting a strategy for
XM Satellite Radio. What strategy alternatives wouldyou be inclined to give strong consideration? What
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strategy alternatives would you be inclined to reject
as unsuitable? Justify your answer.
Fig. 8.2: Three Strategy Horizons for Sustaining Rapid Growth
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Risks of PursuingMultiple Strategy Horizons
Firm should not pursue all options
to avoid stretching itself too thin
Pursuit of medium- and long-jump
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Pursuit of medium and long jump
initiatives may cause firm to stray
too far from its core competenciesCompetitive advantage may be difficult to achieve
in medium- and long-jump businesses that do not
mesh well with firm’s present resource strengths
Payoffs of long-jump initiatives may prove elusive
Strategies Based on aCompany’s Market Position
Industry leaders
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Runner-up firms
Weak or crisis-ridden firms
Industry Leaders:The Defining Characteristics
Strong to powerful market position
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Well-known reputation
Proven strategy
Key strategic concern – How to sustain
dominant leadership position
Strategy Options: Industry Leaders
Stay-on-the-offensive strategy
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Fortify-and-defend strategy
Muscle-flexing strategy
Stay-on-the-Offensive Strategies
Be a first-mover, leading industry change
Best defense is a good offenseConcentrate on achieving a competitive advantage
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and then widening the advantage over time
Relentlessly pursue continuous improvementand innovation, being first to market with
Technological improvements
New or better products
More attractive performance features
Customer service improvements
Stay-on-the-Offensive Strategies (continued)
Aggressively seek out ways to Cut operating costs
Establish competitive capabilities rivals cannot match Make it easier for potential customers to switch their purchases from
other firms to the leader’s own products
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p
Aggressively attack profit sanctuaries of important rivals Launch fresh initiatives to expand overall industry
demand Spur creation of new families of products Make product more suitable for consumers
in emerging-country markets Discover new uses for product Attract new users of product Promote more frequent use
Grow faster than industry, taking market share from rivals
Fortify-and-Defend Strategy
Make it harder for new firms to enter and for
challengers to gain ground
Objectives
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challengers to gain ground
Hold onto present market share
Strengthen current market position
Protect competitive advantage
Fortify-and-Defend Strategy:Strategic Options
Increase advertising and R&D
Provide higher levels of customer service Introduce more brands to match attributes of rivals
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Add personalized services to boost buyer loyalty
Keep prices reasonable and quality attractiveBuild new capacity ahead of market demand
Invest enough to remain cost competitive
Patent feasible alternative technologiesSign exclusive contracts with best suppliers and
distributors
Play competitive hardball with smaller
rivals that threaten leader’s position
Muscle-Flexing Strategy
Objectives
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rivals that threaten leader s position
Signal smaller rivals that moves to cutinto leader’s business will be hard fought
Convince rivals they are better off playing“follow-the-leader” or else attacking each
other rather the industry leader
Be quick to meet price cuts of rivals
Counter with large-scale promotional campaigns if rivals boost advertising
Muscle-Flexing Strategy:Strategic Options
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Offer better deals to rivals’ major customers
Dissuade distributors from carrying rivals’ productsProvide salespersons with documentation about
weaknesses of competing products
Make attractive offers to key executives of rivals
Use arm-twisting tactics to pressure present
customers not to use rivals’ products
Running afoul of antitrust laws
Muscle-Flexing Strategy
Risks
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Running afoul of antitrust laws
Alienating customers with bullying tactics
Arousing adverse public opinion
Types of Runner-up Firms
Market challengers
Use offensive strategies to gain market share
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Focusers
Concentrate on serving alimited portion of market
Perennial runners-up
Lack competitive strength to do
more than continue in trailing position
I’m
trying!
Obstacles Runner-UpFirms Must Overcome
When big size is a competitive asset, firms
with small market share face obstaclesin trying to strengthen their positions
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Less access to economies of scale
Difficulty in gaining customer recognition
Inability to afford mass media advertising
Difficulty in funding capital requirements
Strategic Optionsfor Runner-Up Firms
When big size provides larger rivals with a cost
advantage, runner-up firms have two options
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Build market share
Lower costs and prices to grow sales or
Out-differentiate rivals in ways to grow sales
Withdraw from market
Acquire smaller rivals to expand company’s market reach
and presence
Find innovative ways to drive down costs
to win customers from higher-priced rivals
Offensive Strategies for Runner-Up Firms:Building Market Share
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Craft an attractive differentiation strategy
Pioneer a leapfrog technological breakthrough Be first-to-market with new or better products and build
reputation for product leadership
Outmaneuver slow-to-change market leaders in adapting
to evolving market conditions and customer needs Forge strategic alliances with key distributors, dealers, or
marketers of complementary products
Rule of Offensive Strategy
Runner-up firms should avoid
attacking a leader head on with an
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attacking a leader head-on with an
imitative strategy, regardless of
the resources and staying power
an underdog may have!
Strategic Approaches for Runner-Up Firms
1. Vacant niche strategy
2 Specialist strategy
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2. Specialist strategy
3. Superior product strategy
4. Distinctive image strategy
5. Content follower strategy
Focus strategy concentrated on end-use
applications market leaders have neglected
Characteristics of an ideal vacant niche
Vacant Niche Strategyfor Runner-Up Firms
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Sufficient size to be profitable
Growth potential
Well-suited to a firm’s capabilities
Hard for leaders to serve
Strategy concentrated on
being a leader based on
Specific technology
Specialist Strategy for Runner-Up Firms
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Product uniqueness
Expertise in
Special-purpose products
Specialized know-how
Delivering distinctive customer services
Differentiation-based focused strategy based on
Superior product quality or Unique product attributes
Superior Product Strategyfor Runner-Up Firms
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Approaches
Fine craftsmanship
Prestige quality
Frequent product innovations
Close contact with customers to
gain input for better quality product
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Strategy involves avoiding
Trend-setting moves and Aggressive moves to steal
customers from leaders
Content Follower Strategyfor Runner-Up Firms
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customers from leaders
Approaches
Do not provoke competitive retaliation
React and respond
Defense rather than offense
Keep same price as leaders
Attempt to maintain market position
Weak Businesses: Strategic Options
Launch an offensive turnaround strategy
(if resources permit)
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Employ a fortify-and-defend strategy
(to the extent resources permit)
Pursue a fast-exit strategy
Adopt a harvest strategy (a slow-exit type of end-game strategy)
Achieving a Turnaround:The Strategic Options
Sell off assets to generate cash and/or reduce debt
Revise existing strategy
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Launch efforts to boost revenues
Cut costs
Combination of efforts
What Is a Harvest Strategy?
Steers middle course between status quo and
exiting quickly
Involves gradually sacrificing market position
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Involves gradually sacrificing market position
in return for bigger near-term cash flow/profit
Objectives
Short-term - Generate largest
feasible cash flow
Long-term - Exit market
Types of Harvest Options
Reduce operating expenses to rock-bottom
Hold reinvestment to minimum
Place little priority on new capital investments
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Place little priority on new capital investments
Emphasize stringent internal cost controls
Trim advertising and promotion expenses
Do not replace employees who leave
Shave equipment maintenance
Industry’s long-term prospects are unattractive
Building up business would be too costlyMarket share is increasingly costly to maintain
When Should a HarvestStrategy Be Considered?
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Reduced levels of competitive effort will not trigger
immediate fall-off in sales
Firm can re-deploy freed-up resources
in higher opportunity areas
Business is not a major component of
diversified firm’s portfolio of businesses
Wisest strategic option in certain situations
Lack of resources
Dim profit prospects
Liquidation Strategy
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May serve stockholder interests
better than bankruptcy
Unpleasant strategic option
Hardship of job eliminations Effects of closing on local community
10 Commandments for CraftingSuccessful Business Strategies
1. Always put top priority on crafting and executing
strategic moves that enhance a firm’s competitive
position for the long-term and that serve to
establish it as an industry leader.
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2. Be prompt in adapting and responding to changing
market conditions, unmet customer needs and
buyer wishes for something better, emerging
technological alternatives, and new initiatives of
rivals. Responding late or with too little often putsa firm in the precarious position of playing catch-
up.
10 Commandments for CraftingSuccessful Business Strategies
3. Invest in creating a sustainable competitiveadvantage, for it is a most dependable contributor
to above-average profitability.
4. Avoid strategies capable of succeeding only in theb t f i t
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best of circumstances.
5. Don’t underestimate the reactions and thecommitment of rival firms.
6. Consider that attacking competitive weakness isusually more profitable than attacking competitive
strength.7. Be judicious in cutting prices without an
established cost advantage.
10 Commandments for CraftingSuccessful Business Strategies
8. Employ bold strategic moves in pursuingdifferentiation strategies so as to open up very
meaningful gaps in quality or service or advertising or other product attributes.
9 E d t t t “ t k b k i th k” ith
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9. Endeavor not to get “stuck back in the pack” withno coherent long-term strategy or distinctivecompetitive position, and little prospect of climbing into the ranks of the industry leaders.
10. Be aware that aggressive strategic moves to
wrest crucial market share away from rivals oftenprovoke aggressive retaliation in the form of amarketing “arms race” and/or price wars.
Test Your Knowledge
Which of the following does not qualify as a "commandment"
for crafting successful business strategies?
A. Place top priority on crafting and executing strategic moves that will
enhance a company's competitive position for the long-term.
B Avoid stuck in the middle strategies that represent compromises
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B. Avoid stuck-in-the-middle strategies that represent compromises
between lower costs and greater differentiation and between broad
and narrow market appeal.C. Strive to open up very meaningful gaps in quality or service or
performance features when pursuing a differentiation strategy.
D. Be judicious in cutting prices without an established cost
advantage.
E. Sell or close a crisis-ridden business immediately—turnaround
strategies are doomed to fail.
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“To acquire or not to
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To acquire or not to
acquire: that is the
question.”
Robert J. Terry
“Make winners out
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of every business inyour company.
Don’t carry losers.” Jack WelchFormer CEO, General Electric
Chapter Roadmap
When to Diversify Building Shareholder Value: The Ultimate Justification
for Diversifying Strategies for Entering New Businesses Choosing the Diversification Path: Related versus
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Choosing the Diversification Path: Related versus
Unrelated Businesses
The Case for Diversifying into Related Businesses The Case for Diversifying into Unrelated Businesses Combination Related-Unrelated Diversification
Strategies
Evaluating the Strategy of a Diversified Company After a Company Diversifies: The Four Main Strategy
Alternatives
Diversification andCorporate Strategy
A company is diversified when it is in two or
more lines of business that operate in diverse
market environments
Strategy-making in a diversified company is a
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Strategy making in a diversified company is a
bigger picture exercise than crafting a strategy for
a single line-of-business
A diversified company needs a multi-industry,
multi-business strategy
A strategic action plan must be developedfor several different businesses competing
in diverse industry environments
Four Main Tasks inCrafting Corporate Strategy
Pick new industries to enter
and decide on means of entry
Initiate actions to boost combined
performance of businesses
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performance of businesses
Pursue opportunities to leverage cross-businessvalue chain relationships and strategic fits into
competitive advantage
Establish investment priorities, steeringresources into most attractive business units
Less ambiguity about
“Who we are” “What we do”
“Where e are headed”
Competitive Strengths of aSingle-Business Strategy
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“Where we are headed”
Resources can be focused on Improving competitiveness
Expanding into new geographic markets
Responding to changing market conditions
Responding to evolving customer preferences
Putting all the “eggs” in one industry basket
If market becomes unattractive, afirm’s prospects can quickly dim
U f h d i
Risks of a Single Business Strategy
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Unforeseen changes can undermine
a single business firm’s prospects Technological innovation
New products
Changing customer needs
New substitutes
It is faced with diminishing growth prospects in present business
It has opportunities to expand into industries whosetechnologies and products complement its presentbusiness
When Should a Firm Diversify?
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It can leverage existing competencies and
capabilities by expanding into businesses where theseresource strengths are key success factors
It can reduce costs by diversifyinginto closely related businesses
It has a powerful brand name it cantransfer to products of other businesses toincrease sales and profits of these businesses
Why Diversify?
To build shareholder value!
Diversification is capable of building shareholder value
if it th t t
1 + 1 = 31 + 1 = 3
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if it passes three tests
Industry Attractiveness Test — the industry presents goodlong-term profit opportunities
Cost of Entry Test — the cost of entering is not so high as to
spoil the profit opportunities
Better-Off Test — the company’s different businesses
should perform better together than as stand-alone
enterprises, such that company A’s diversification into
business B produces a 1 + 1 = 3 effect for shareholders
Strategies for EnteringNew Businesses
Acquire existing company
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Internal start-up
Joint ventures/strategic partnerships
Acquisition of an Existing Company
Most popular approach to diversification
Advantages Quicker entry into target market
Easier to hurdle certain entry barriers
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Easier to hurdle certain entry barriers
Acquiring technological know-how
Establishing supplier relationships
Becoming big enough to match rivals’
efficiency and costs
Having to spend large sums onintroductory advertising and promotion
Securing adequate distribution access
Internal Startup
More attractive when
Parent firm already has most of needed resources to
build a new business
Ample time exists to launch a new business
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Internal entry has lower costs
than entry via acquisition New start-up does not have to go
head-to-head against powerful rivals
Additional capacity will not adversely impact
supply-demand balance in industry
Incumbents are slow in responding to new entry
Good way to diversify when Uneconomical or risky to go it alone
Pooling competencies of two partners provides more
competitive strength
Only way to gain entry into a desirable foreign market
Joint Ventures and Strategic Partnerships
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Only way to gain entry into a desirable foreign market
Foreign partners are needed to Surmount tariff barriers and import quotas
Offer local knowledge about Market conditions
Customs and cultural factors
Customer buying habits
Access to distribution outlets
Raises questions
Which partner will do what
Who has effective control
Drawbacks of Joint Ventures
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Potential conflicts
Conflicting objectives
Disagreements over how to best operate the venture
Culture clashes
Related Diversification
Involves diversifying into
businesses whose value
chains possess
competitively valuable
Unrelated Diversification
Involves diversifying into
businesses with no
competitively valuable
value chain match ups or
Related vs. Unrelated Diversification
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competitively valuable
“strategic fits” with value
chain(s) of firm’s present
business(es)
value chain match-ups or
strategic fits with firm’s
present business(es)
Fig. 9.1: Strategy Alternatives for a Company Looking to Diversify
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Involves diversifying into businesses whose value
chains possess competitively valuable “strategic
fits” with the value chain(s) of the presentbusiness(es)
What Is Related Diversification?
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Capturing the “strategic fits” makes related
diversification a 1 + 1 = 3 phenomenon
Exists whenever one or more activities in the
value chains of different businesses are
sufficiently similar to present opportunities for
Transferring competitively valuable
e pertise or technological kno ho
Core Concept: Strategic Fit
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expertise or technological know-how
from one business to another
Combining performance of common
value chain activities to achieve lower costs
Exploiting use of a well-known brand name
Cross-business collaboration to create competitively
valuable resource strengths and capabilities
Fig. 9.2: Related Businesses Possess Related Value
Chain Activities and Competitively Valuable Strategic Fits
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Strategic Appeal of Related Diversification
Reap competitive advantage benefits of
Skills transfer
Lower costs
Common brand name usage
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Stronger competitive capabilities
Spread investor risks over a broader base
Preserve strategic unity across businesses
Achieve consolidated performance greater than
the sum of what individual businesses can earn
operating independently (1 + 1 = 3 outcomes)
Cross-business strategic fits can exist anywhere
along the value chain
R&D and technology activities
Supply chain activities
Types of Strategic Fits
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Supply chain activities
Manufacturing activities
Sales and marketing activities
Distribution activities
Managerial and administrative support activities
R&D and Technology Fits
Offer potential for sharing common technology
or transferring technological know-how
Potential benefits
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Cost-savings in technology
development and new product R&D
Shorter times in getting
new products to market
Interdependence between resulting
products leads to increased sales
Supply Chain Fits
Offer potential opportunities for skills transfer
and/or lower costs
Procuring materials
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Greater bargaining power in
negotiating with common suppliers
Benefits of added collaboration with
common supply chain partners
Added leverage with shippers in securing
volume discounts on incoming parts
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Offer potential cost-saving opportunities
Distribution Fits
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Share same distribution facilities
Use many of same wholesale
distributors and retail dealersto access customers
Reduction in sales costs Single sales force for related products
Advertising related products together Combined after-sale service and repair work Joint delivery, shipping, order processing
Sales and Marketing Fits:Types of Potential Benefits
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and billing
Joint promotion tie-insSimilar sales and marketing approaches provide
opportunities to transfer selling, merchandising,
and advertising/promotional skillsTransfer of a strong company’s
brand name and reputation
Managerial andAdministrative Support Fits
Emerge when different business units
require comparable types of
Entrepreneurial know-how
Administrative know-how
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Operating know-how
Different businesses often entail same typesof administrative support facilities
Customer data network
Billing and customer accounting systems Customer service infrastructure
Core Concept: Economies of Scope
Stem from cross-business opportunities to reduce
costs
Arise when costs can be cut
by operating two or more businesses
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by operating two or more businesses
under same corporate umbrella
Cost saving opportunities can stem
from interrelationships anywhere
along the value chains of differentbusinesses
Related Diversificationand Competitive Advantage
Competitive advantage can result from related
diversification when a company captures cross-
business opportunities to Transfer expertise/capabilities/technology
from one business to another
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Reduce costs by combining related
activities of different businesses intoa single operation
Transfer use of firm’s brand name reputation from one business to another
Create valuable competitive capabilities via cross-business collaboration in performing related value chain
activities
From Competitive Advantage toAdded Gains in Shareholder Value
Capturing cross-business strategic fits
Is possible only via a strategy of related diversification
Builds shareholder value in ways shareholders cannot
achieve by owning a portfolio of stocks of companies in
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ac e e by o g a po o o o s oc s o co pa es
unrelated industries
Is not something that happens “automatically” when a
company diversifies into related businesses
Strategic fit benefits materialize only after
management has successfully pursued internal
actions to capture them
Test Your Knowledge
Which of the following is the best example of related
diversification?
A. A manufacturer of golf shoes diversifying into the production of fishing rods and fishing lures
B. A homebuilder acquiring a building materials retailer
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C. A steel producer acquiring a manufacturer of farm equipment
D. A producer of snow skis and ski boots acquiring a maker of ski
apparel and accessories (outerwear, goggles, gloves and
mittens, helmets and toboggans)
E. A publisher of college textbooks acquiring a publisher of magazines
Involves diversifying into businesses with
No strategic fit
No meaningful value chain
relationships
What Is Unrelated Diversification?
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No unifying strategic theme
Basic approach – Diversify into
any industry where potential exists
to realize good financial results
While industry attractiveness and cost-of-entry tests
are important, better-off test is secondary
Fig. 9.3: Unrelated Businesses Have Unrelated Value Chains and NoStrategic Fits
Fig. 9.3: Unrelated Businesses Have UnrelatedValue Chains and No Strategic Fits
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Acquisition Criteria For UnrelatedDiversification Strategies
Can business meet corporate targets
for profitability and ROI?
Is business in an industry with growth potential?
Is business big enough to contribute
to parent firm’s bottom line?
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to parent firm s bottom line?
Will business require substantialinfusions of capital?
Is there potential for union difficulties
or adverse government regulations?
Is industry vulnerable to recession, inflation, high
interest rates, or shifts in government policy?
Attractive Acquisition Targets
Companies with undervalued assets
Capital gains may be realized
Companies in financial distress
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May be purchased at bargain prices and turned
around
Companies with bright growth prospects butshort on investment capital
Cash-poor, opportunity-rich companies are covetedacquisition candidates
Business risk scattered over different industries
Financial resources can be directed to
those industries offering best profit prospects
Appeal of Unrelated Diversification
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If bargain-priced firms with big profit potential are
bought, shareholder wealth can be enhanced
Stability of profits – Hard times in one industrymay be offset by good times in another industry
Building Shareholder Valuevia Unrelated Diversification
Corporate managers must Do a superior job of diversifying into new businesses
capable of producing good earnings and returns oninvestments
Do an excellent job of negotiating favorable
acquisition prices
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acquisition prices
Do a good job overseeing businesses so they perform at a higher level than otherwise possible
Shift corporate financial resources from poorly-
performing businesses to those with potential for
above-average earnings growth Discern when it is the “right” time to sell a business at
the “right” price
Key Drawbacks of Unrelated Diversification
DemandingDemandingManagerialManagerial
RequirementsRequirements
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LimitedLimited
CompetitiveCompetitive
AdvantageAdvantagePotentialPotential
The greater the number and diversity of
businesses, the harder it is for managers to
Discern good acquisitions from bad ones
Select capable managers to manage
the diverse requirements of each business
Unrelated Diversification HasDemanding Managerial Requirements
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the diverse requirements of each business
Judge soundness of strategic proposalsof business-unit managers
Know what to do if a business subsidiary stumbles
Likely effect is 1 + 1 = 2, rather than 1 + 1 = 3!
Lack of cross-business strategic fits means
unrelated diversification offers no competitive
advantage potential beyond what each businesscan generate on its own
Unrelated Diversification OffersLimited Competitive Advantage Potential
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Consolidated performance of unrelated businesses
tends to be no better than sum of individual
businesses on their own (and it may be worse)
Promise of greater sales-profit
stability over business cyclesis seldom realized
Test Your Knowledge
Which of the following is the best example of unrelated
diversification?
A. PepsiCo acquiring Tropicana and Procter & Gamble
acquiring Gillette
B Honda diversifying into the production of lawnmowers
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B. Honda diversifying into the production of lawnmowers
C. Smuckers acquiring Jif peanut butter and Crisco (fromProcter & Gamble)
D. Verizon Wireless acquiring Amazon.com
E. Harley Davidson acquiring the motorcycle business of Honda
Diversification and Shareholder Value
Related Diversification
A strategy-driven approach
to creating shareholder value
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to creating shareholder value
Unrelated Diversification
A finance-driven approachto creating shareholder value
Dominant-business firms
One major core business accounting for 50 - 80 percent
of revenues, with several small related or unrelatedbusinesses accounting for remainder
Narrowly diversified firms
Diversification includes a few (2 - 5) related or unrelated
Combination Related-UnrelatedDiversification Strategies
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Diversification includes a few (2 5) related or unrelated
businesses
Broadly diversified firms
Diversification includes a wide collection of either related
or unrelated businesses or a mixture
Multibusiness firms Diversification portfolio includes several unrelated
groups of related businesses
For Discussion: Your Opinion
Newell Rubbermaid is in the following businesses: Cleaning and Organizations Businesses: Rubbermaid storage,
organization and cleaning products, Blue Ice ice substitute, Roughneck
storage items, Stain Shield and TakeAlongs food storage containers,and Brute commercial-grade storage and cleaning products—25% of annual revenues.
Home and Family Businesses: Calphalon cookware and bakeware,Cookware Europe, Graco strollers, Little Tikes children's toys andf it d G d h i i 20% f l l
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furniture, and Goody hair accessories—20% of annual sales.
Home Fashions: Levolor and Kirsch window blinds, shades, andhardware in the U.S.; Swish, Gardinia and Harrison Drape homefurnishings in Europe—15% of annual revenues.
Office Products Businesses: Sharpie markers, Sanford highlighters,Eberhard Faber and Berol ballpoint pens, Paper Mate pens and pencils,Waterman and Parker fine writing instruments, and Liquid Paper—25%
of annual revenues.Would you say that Newell Rubbermaid’s strategy is one of relateddiversification, unrelated diversification or a mixture of both?Explain.
For Discussion: Your Opinion
McGraw-Hill, the publisher of the textbook for this course, is in
the following businesses: Textbook publishing (for grades K-12 and higher education) Financial and information services (it owns Standard & Poors —
a well-known financial ratings agency and provider of financial
data, Platts — a provider of energy information, and McGraw-Hill
Construction — a provider of construction related information)
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Magazine publishing — its flagship publication is Business
Week and it is also the publisher of Aviation Week TV broadcasting — it owns four ABC affiliate stations (in
Indianapolis, Denver, San Diego, and Bakersfield) J.D. Power & Associates — which provides a host of services
relating to product quality and consumer satisfaction
Would you say that McGraw-Hill’s strategy is one of relateddiversification, unrelated diversification or a mixture of both?
Explain.
Fig. 9.4: Identifying a Diversified Company’s Strategy
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How to Evaluate aDiversified Company’s Strategy
Step 1: Assess long-term attractiveness of each industry
firm is in
Step 2: Assess competitive strength of firm’s businessunits
Step 3: Check competitive advantage potential of cross-
b i t t i fit b i it
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business strategic fits among business units
Step 4: Check whether firm’s resources fit requirements
of present businesses
Step 5: Rank performance prospects of businesses and
determine priority for resource allocation
Step 6: Craft new strategic moves to improve overall
company performance
Step 1: Evaluate Industry Attractiveness
Attractiveness of each
industry in portfolio
E h i d t ’ tt ti
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Each industry’s attractiveness
relative to the others
Attractiveness of all
industries as a group
Industry Attractiveness Factors
Market size and projected growth
Intensity of competition
Emerging opportunities and threats
Presence of cross-industry strategic fits
R i t
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Resource requirements
Seasonal and cyclical factors
Social, political, regulatory, and
environmental factors
Industry profitability
Degree of uncertainty and business risk
Procedure: Calculating AttractivenessScores for Each Industry
Step 1: Select industry attractiveness factors
Step 2: Assign weights to each factor
(sum of weights = 1.0)
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Step 3: Rate each industry on eachfactor, using a scale of 1 to 10
Step 4: Calculate weighted ratings; sum to get an
overall industry attractiveness rating for
each industry
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Industries with a score much below 5.0 do not passthe attractiveness test
If a company’s industry attractiveness scores are allabove 5.0, the group of industries the firm operatesin is attractive as a whole
Interpreting Industry Attractiveness Scores
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in is attractive as a whole
To be a strong performer, a diversified firm’sprincipal businesses should be in attractiveindustries—that is, industries with
A good outlook for growth and Above-average profitability
Difficulties in Calculating
Industry Attractiveness Scores
Deciding on appropriate weights for industry
attractiveness factors
Different analysts may have different views about whichweights are appropriate for the industry attractiveness factors
Different weights may be appropriate for different companies
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Gaining sufficient command of an industry to assign
accurate and objective ratings
Gathering statistical data to assign objective ratings is
straightforward for some factors – market size, growth rate,
industry profitability
Assessing the intensity of competition factor is more difficult
due to the different types of competitive influences
Objectives
Appraise how well each
business is positioned in
Step 2: Evaluate Each Business-
Unit’s Competitive Strength
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business is positioned in
its industry relative to rivals
Evaluate whether it is or can be
competitively strong enough to
contend for market leadership
Relative market share
Costs relative to competitors
Ability to match/beat rivals on key product attributes
Ability to benefit from strategic fits with sister
businesses
Factors to Use in
Evaluating Competitive Strength
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Ability to exercise bargaining leverage with keysuppliers or customers
Caliber of alliances and collaborative partnerships
Brand image and reputation
Competitively valuable capabilities Profitability relative to competitors
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Interpreting Competitive Strength Scores
Business units with ratings above 6.7 are strong
market contenders
Businesses with ratings in the 3.3 to 6.7 range
have moderate competitive strength vis-à-vis rivals
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Business units with ratings below 3.3 are incompetitively weak market positions
If a diversified firm’s businesses all have scores
above 5.0, its business units are all fairly strongmarket contenders
Use industry attractiveness (see Table 9.1) and
competitive strength scores (see Table 9.2) to
plot location of each business in matrix
Industry attractiveness plotted on vertical axis
Plotting Industry Attractiveness and
Competitive Strength in a Nine-Cell Matrix
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Competitive strength plotted on horizontal axis
Each business unit appears as a “bubble”
Size of each bubble is scaled to percentage of
revenues the business generates relative to total
corporate revenues
Fig. 9.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix
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Businesses in upper left corner
Accorded top investment priority
Strategic prescription – grow and build
Businesses in three diagonal cells
Given medium investment priority
Strategy Implications of
Attractiveness/Strength Matrix
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Given medium investment priority
Invest to maintain position
Businesses in lower right corner
Candidates for harvesting or divestiture
May, based on potential for good earnings and ROI, be
candidates for an overhaul and reposition strategy
Appeal of Attractiveness/Strength Matrix
Incorporates a wide variety of
strategically relevant variables
Strategy implications
Concentrate corporate resources
in businesses that enjoy high degree of industry
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in businesses that enjoy high degree of industry
attractiveness and high degree of competitive strength Make selective investments in businesses with
intermediate positions on grid
Withdraw resources from businesses low inattractiveness and strength unless they offer exceptional
potential
Test Your Knowledge
The 9-cell industry attractiveness-competitive strength matrix
A. is a valuable tool for ranking a company’s different businesses from
most profitable to least profitable.B. shows which of a diversified company’s businesses have good/poor
strategic fit.
C. indicates which businesses have the highest/lowest economies of
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g
scope.D. is a helpful tool for allocating a diversified company’s resources—the
basic idea is to give top investment priority to those businesses in
the upper left portion of the matrix and to give low priority or perhaps
even divest businesses in the lower right portion of the matrix.
E. pinpoints which of a diversified company’s businesses are resource-
rich and which are resource-poor.
Objective
Determine competitive advantage potential of cross-business strategic fits among portfolio businesses
Examine strategic fit based on
Step 3: Check Competitive Advantage
Potential of Cross-Business Strategic Fits
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Whether one or more businesses
have valuable strategic fits with
other businesses in portfolio
Whether each business meshes wellwith firm’s long-term strategic direction
Identify businesses which have value
chain match-ups offering opportunities to
Reduce costs
Purchasing
Manufacturing
Evaluate Portfolio for Competitively
Valuable Cross-Business Strategic Fits
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Distribution Transfer skills / technology / intellectual capital from one
business to another
Share use of a well-known, competitively powerful brand
name
Create valuable new competitive capabilities
Fig. 9.6: Identifying Competitive AdvantagePotential of Cross-Business Strategic Fits
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Objective
Determine how well firm’s resourcesmatch business unit requirements
Good resource fit exists when
Step 4: Check Resource Fit
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Good resource fit exists when
A business adds to a firm’s resource strengths,
either financially or strategically
Firm has resources to adequately support requirements
of its businesses as a group
Determine cash flow and investment
requirements of business units
Which are cash hogs and which arecash cows?
Assess cash flow of each business Highlights opportunities to shift financial resources
Check for Financial Resource Fits
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Highlights opportunities to shift financial resources
between businesses
Explains why priorities for resource allocation
can differ from business to business
Provides rationalization for both
invest-and-expand and divestiture
strategies
Internal cash flows are inadequate to fully fund
needs for working capital and new capital
investment
Parent company has to continually pump in capital
to “feed the hog”
Characteristics of Cash Hog Businesses
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Strategic options
Aggressively invest in
attractive cash hogs
Divest cash hogs lacking
long-term potential
Generate cash surpluses over what is needed to
sustain present market position
Such businesses are valuable because surplus
cash can be used to
Pay corporate dividends
Characteristics of Cash Cow Businesses
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Finance new acquisitions Invest in promising cash hogs
Strategic objectives
Fortify and defend present market position Keep the business healthy
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Good financial fit exists when a business
Contributes to achievement of corporate objectives
Enhances shareholder value
Poor financial fit exists when a business
Soaks up disproportionate share of financial resources
Good vs. Poor Financial Resource Fit
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Soaks up disproportionate share of financial resources
Is an inconsistent bottom-line contributor
Experiences a profit downturn
that could jeopardize entire company
Is too small to make a sizablecontribution to total corporate earnings
Trying to replicate a firm’s success in one
business and hitting a second home run in a new
business is easier said than done
Transferring resource capabilities to new
A Note of Caution: Why
Diversification Efforts Can Fail
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businesses can be far more arduous andexpensive than expected
Management can misjudge difficulty
of overcoming resource strengths of rivals it will face in a new business
Step 5: Rank Business Units Based on
Performance and Priority for Resource Allocation
Factors to consider in judging
business-unit performance
Sales growth
Profit growth
Contribution to company earnings
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Contribution to company earnings
Return on capital employed in business
Economic value added
Cash flow generation
Industry attractiveness and business strength ratings
Objective
“Get the biggest bang for the buck”
in allocating corporate resources
Approach23 5
6 4
Determine Priorities
for Resource Allocation
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Rank each business from highest to lowest priority for corporate resource support and new capital investment
Steer resources from low- to high-opportunity areas
When funds are lacking, strategic uses of resourcesshould take precedence
Fig. 9.7: The Chief Strategic and Financial Options for Allocating a Diversified Company’s Financial Resources
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Stick closely with existing business lineup
and pursue opportunities it presents
Broaden company’s business scope by
making new acquisitions in new industries
Divest certain businesses and retrench
Step 6: Craft New Strategic
Moves – Strategic Options
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to a narrower base of business operations
Restructure company’s business lineup, putting a
whole new face on business makeup
Pursue multinational diversification, striving toglobalize operations of several business units
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Conditions making this approach attractive
Slow grow in current businesses
Vulnerability to seasonal or recessionary influences or to
threats from emerging new technologies
Strategies to Broaden a
Diversified Company’s Business Base
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Potential to transfer resources and capabilities to other related businesses
Rapidly-changing conditions in one or more core industries
alter buyer requirements
Complement and strengthen market position of one or
more current businesses
Strategic options
Retrench to a smaller but moreappealing group of businesses
Divest unattractive businesses
Retrench ?Divest ?
Sell ?
Close ?
Divestiture Strategies Aimed at Retrenching
to a Narrower Diversification Base
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Sell it
Spin it off as
independent company
Liquidate it (close it down
because no buyers can be found)
Retrenchment Strategies
Objective
Reduce scope of diversification to smaller number of
“core “ businesses
Strategic options involve
divesting businesses that
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Are losing money
Have little growth potential
Have little strategic fit
with core businesses
Are too small to contribute
meaningfully to earnings
Diversification efforts have become too broad, resulting
in difficulties in profitably managing all the businesses
Deteriorating market conditions in a once-attractiveindustry
Lack of strategic or resource fit of a business
A business is a cash hog with questionable long-term
Conditions That Make
Retrenchment Attractive
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A business is a cash hog with questionable long term
potential
A business is weakly positioned in its industry
Businesses that turn out to be “misfits”
One or more businesses lack compatibility of valuesessential to cultural fit
Options for Accomplishing Divestiture Sell it
Involves finding a company which views the business as a
good deal and good fit
Spin it off as independent company
Involves deciding whether or not to retain partial ownership
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Liquidation
Involves closing down operations and
selling remaining assets
A last resort because no buyer can be found
Strategies to Restructure a
Company’s Business Lineup
Objective
Make radical changes in mixof businesses in portfolio via both
Divestitures and
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New acquisitions
to put a whole new
face on the company’sbusiness makeup
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Multinational Diversification Strategies
Distinguishing characteristics
Diversity of businesses and
Diversity of national markets
Presents a big strategy-making challenge
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Strategies must be conceived and executed
for each business, with as many
multinational variations as appropriate
Cross-business and cross-country collaborationopportunities must be pursued and managed
Appeal of Multinational
Diversification Strategies
Offer two avenues for long-term
growth in revenues and profits
Enter additional businesses
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Enter additional businesses
Extend operations of
existing businesses intoadditional country markets
Opportunities to Build Competitive
Advantage via Multinational Diversification
Full capture of economies of scale and experience
curve effects
Capitalize on cross-business economies of scope
Transfer competitively valuable resources from one
business to another and from one country to another
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Leverage use of a competitively powerful brand name
Coordinate strategic activities and
initiatives across businesses and countries
Use cross-business or cross-countrysubsidization to out-compete rivals
Competitive advantage potential is based on
Using a related diversification strategy based on
Resource-sharing and resource-transfer
opportunities among businesses
Economies of scope and brand name
Competitive Strength of
a DMNC in Global Markets
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benefits
Managing related businesses to capture important cross-
business strategic fits
Using cross-market or cross-business subsidizationsparingly to secure footholds in attractive country
markets
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10
Chapter TitleStrategy,
Ethics, and
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16/e PPT
SocialResponsibility
Screen graphics created by: Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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What Is Business Ethics?
Business ethics involves applying general ethical
principles and standards to business behavior
Ethical principles in business are not different
from ethical principles in general
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Business actions are judged
By general ethical standards of society
Not by a set of rules businesspeopleapply to their own conduct
Are Ethical Standards Universal or
Dependent on Local Norms?
Three schools of thought regarding extent
to which ethical standards can be applied . . .
Ethical Universalism
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Ethical Relativism
Integrative Social Contracts Theory
Concept of Ethical Universalism According to the school of ethical universalism . . .
Same standards of what is ethical and what is unethical
resonate with peoples of most societies regardless of
Local traditions and
Cultural norms
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Thus, common ethical standards can be used to judge
conduct of personnel at companies operating
in a variety of
Country markets and Cultural circumstances
Examples of Universal
Ethical Principles or Norms
Honesty
Trustworthiness
Treating people with dignity and respect
Respecting rights of others
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Practicing the Golden Rule Avoiding unnecessary harm to
Workers
Users of a company’s product or service
Respecting the environment
What Is the Appeal
of Ethical Universalism?Draws on collective views of multiple societies
and cultures to place clear boundaries on what
constitutes Ethical business behavior and
Unethical business behavior
Regardless of what country a company is operating in
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Whenever basic moral standards do not vary
significantly according to local cultural beliefs,
traditions, or religious convictions, a multinational
company can Apply a code of ethics more or less evenly across its
worldwide operations
Concept of Ethical Relativism According to the school of ethical relativism . . .
Different societies/cultures/countries
Put more/less emphasis on some values than others
Have different standards of right and wrong
Have different social mores and behavioral norms
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What is ethical or unethical
Must be judged in light of local
customs and social mores and
Can vary from one country to another
A thorny ethical problem is facedby multinational companies
Degree of cross-country variability in payingbribes as part of business transactions
Companies forbidding payment of bribes in their codes of ethics face a formidable challenge in
Payment of Bribes and Kickbacks
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gcountries where payments are entrenched as alocal custom
Foreign Corrupt Practices Act prohibits U.S.
companies from paying bribes in all countrieswhere they do business
Test Your KnowledgePaying bribes and kickbacks to grease business transactions
A. violates ethical principles of right and wrong in all countries.
B. is ethically acceptable according to the principle of ethicaluniversalism.
C. is acceptable to immoral managers but not to amoral
managers.
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D. should be considered ethically appropriate by a company so
long as such payments are normal and customary in the
countries where such payments are made.
E. may be ethically acceptable according to the principle of
ethical relativism if paying bribes and kickbacks is normal andcustomary practice in a country.
Ethical Relativism =
Multiple Sets of Ethical StandardsProponents of the ethical relativism school maintain
there are
Few ethical absolutes to judge a company’sconduct in various countries
Plenty of situations where ethical
norms are contoured to fit
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Local customs and traditions Local beliefs about what is fair
Local standards of “right” and “wrong”
Ethical problems in business cannot be fully
resolved without appealing to the sharedconvictions of the parties in question
Drawbacks of Ethical Relativism The ethical relativism rule of “when in Rome, do
as the Romans do” presents problems
When the envelope is pushed, it istantamount to rudderless ethical standards
It is ethically dangerous for company personnel
to assume that local ethical standards are an
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adequate guide to ethical behavior What if local standards condone kickbacks and bribery?
What if local standards blink at environmental degradation?
From a global markets perspective, ethical relativism
results in a maze of conflicting ethical standards for
multinational companies wanting to address the issue of
what ethical standards to enforce companywide
Concept of Integrative
Social Contracts Theory According to the integrative social contracts
theory, the ethical standards a company should try
to uphold are governed by both A limited number of universal ethical principles that
are widely recognized as putting legitimate ethical
boundaries on actions and behavior in all situations
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and
The circumstances of local cultures, traditions, and
shared values that further prescribe what constitutes
Ethically permissible behavior and What does not
Appeal of Integrative
Social Contracts Theory Universal ethical principles establish “moral free space”
based on the collective view of multiple societies and
cultures
Commonly held views about morality and ethical principles
combine to form a “social contract” with society
It is appropriate for societies or companies to go beyond
universal ethical principles and specify local or second-order
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ethical norms
Where firms have developed ethical codes, the standards
they call for provide appropriate ethical guidance
Social contracts theory maintains adherence touniversal or first-order ethical norms should alwaystake precedence over local or second-order norms!
Moral manager
Immoral
Three Categories of Management Morality
Managerial
ethical and
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Amoral manager
manager moral
principles
Dedicated to high standards of ethical behavior in
Own actions
How the company’s business is to be conducted
Considers it important to
Be a steward of ethical behavior
Characteristics of a Moral Manager
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Demonstrate ethical leadership
Pursues business success
Within confines of both letter and spirit of laws
With a habit of operating well above what laws require
Characteristics of an Immoral Manager Actively opposes ethical behavior in business
Willfully ignores ethical principles in making
decisionsViews legal standards as barriers to overcome
Pursues own self-interests
I l f it li ti d
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Is an example of capitalistic greed Ignores interests of others
Focuses only on bottom line –
making one’s numbersWill trample on others to avoid being trampled upon
Believes business and ethics should not
be mixed since different rules apply to
Business activities Other realms of life
Does not factor ethical considerations into
own actions since business activity lies
t id h f l j d t
Characteristics of an
Intentionally Amoral Manager
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outside sphere of moral judgment
Views ethics as inappropriate for tough, competitive
business world
Concept of right and wrong is lawyer-driven (whatcan we get by with without running afoul of the law)
Is blind to or casual about ethics of
decision-making and business actions
Displays lack of concern regarding
whether ethics applies to company actions
Sees self as well-intentioned or personally ethical
Characteristics of an
Unintentionally Amoral Manager
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Typical beliefs
Do what is necessary to comply with laws and
regulations
Government provides legal framework stating what
society will put up with—if it is not illegal, it is allowed
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Do Company Strategies
Need to Be Ethical? Approaches of most company managers
Ensure a company’s strategy is legal May or may not ensure all elements of strategies are
ethical
Approach of senior executives with strong
ethical convictions Insist all aspects of strategy fall within ethical boundaries
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Approach of immoral or amoral senior executives Use shady strategies if they think they can
get by with it Use unethical or borderline business practices Hide ethically questionable actions
Large numbers of immoral
and amoral business people
Overzealous pursuit of personal gain,
wealth, and other selfish interests
What Are the Drivers of Unethical
Strategies and Business Behavior?
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Heavy pressures on company managers
to meet or beat earnings targets
Company cultures that place profits andgood performance ahead of ethical behavior
People obsessed with wealth accumulation, greed,
power, and status often
Push ethical principles aside in their quest for self gain
Exhibit few qualms in doing whatever
is necessary to achieve their goals
Overzealous Pursuit of Personal Gain,
Wealth, and Selfish Interests
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Look out for their own best interests
Have few scruples and ignore welfare of others
Engage in all kinds of unethicalstrategic maneuvers and behaviors
Managers often feel enormous pressure to do whatever
it takes to deliver good financial performance
Actions often taken by managers Cut costs wherever savings show up immediately
Squeeze extra sales out of early deliveries
Engage in short-term maneuvers to make the numbers
Stretch rules to extreme, until limits of ethical conduct are
overlooked
Heavy Pressures on Company Managers
to Meet or Beat Earnings Targets
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overlooked Executives feel pressure to hit performance targets since
their compensation depends heavily on company
performance
Fundamental problem with a “make the numbers” syndrome Company does not serve its customers or shareholders well by
placing top priority on the bottom line
Company Culture Places Profits and Good
Performance Ahead of Ethical Behavior
In an ethically corrupt or amoral work climate,
people have a company-approved license to
Ignore “what’s right” and stretch rules Engage in most any behavior or employ most
any strategy they think they can get away with
Play down relevance of ethical strategic
actions and business conduct
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actions and business conductPressures to conform to cultural norms
can prompt otherwise honorable people to Make ethical mistakes
Succumb to the many opportunities to engage
in unethical practices and shady behavior
Approaches to Managing a
Company’s Ethical Conduct
Unconcerned or non-issue approach
Damage control approach
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Compliance approach
Ethical culture approach
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Characteristics of Unconcerned Approach
Prevalent at companies whose executives are
immoral and unintentionally amoral
Notions of right and wrong in business matters aredefined by government via prevailing laws and
regulations — after that, anything goes
If the law permits “unethical behavior,”
hy stand on ethical principles
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why stand on ethical principles
Companies are usually out to make
greatest possible profit at most any cost
Strategies used, while legal, may embraceelements that are ethically shady
Characteristics of
Damage Control ApproachFavored at companies whose managers are
intentionally amoral but who fear scandal
May adopt a code of ethics as window-dressing Adept at using “spin” to “explain away” the use of
unethical strategy elements or discount the impactof shady actions
Executives look the other way when shady
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Executives look the other way when shadybehavior occurs
Executives may condone questionableactions that help a company reach
earnings targets or bolster its marketstanding
Characteristics of
Compliance Approach From light to forceful compliance is favored
at companies whose managers Lean toward being somewhat amoral but are highly
concerned about having ethically upstanding reputations or Are moral and see strong compliance methods as best
way to impose and enforce high ethical standards
Emphasis is on securing broad
compliance and measuring degree
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compliance and measuring degreeto which ethical standards are upheld Commitment to eradicate unethical
behavior stems from a desire to
Avoid cost and damage associated with unethical conduct or Gain favor from stakeholders from having a highly regardedreputation for ethical behavior
Pursuing a Compliance Approach:
Typical ActionsMake code of ethics a visible and regular
part of communications with employees
Implement ethics training programs Appoint a chief ethics officer
Have ethics committees to give guidance on ethics matters
Institute formal procedures for investigating alleged ethics
i l ti
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violations
Conduct ethics audits to measure and document compliance
Give ethics awards to employees for outstanding efforts to
create an ethical climate Install ethics hotlines to help detect and deter violations
Potential Weakness
of Compliance Approach
Moral control resides in a company’s
code of ethics and in the ethicscompliance system rather than in
Strong peer pressures for ethical
behavior that come from ingraining
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behavior that come from ingraininga highly ethical corporate culture and
An individual’s own moral
responsibility for ethical behavior
Characteristics of
Ethical Culture Approach Top executives believe high ethical principles must
Be deeply ingrained in the corporate culture Function as guides for “how we do things around here”
Company seeks to gain employee buy-in to Company’s ethical standards Business principles Corporate values
Ethical principles in company’s code of ethics are
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Ethical principles in company s code of ethics are Integral to day-to-day operations Promoted as “business as usual”
Strategy must be ethical
Employees must display ethicalbehaviors in executing the strategy
Why Should Company Strategies Be Ethical?
An unethical strategy
Is morally wrong
Reflects badly on the character of company personnel
An ethical strategy is
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An ethical strategy is
Good business
In the best interest of shareholders
Test Your Knowledge
Which one of the following is false when it comes to making a
case for why a company’s strategy should be ethical?
A. An unethical strategy can put a company’s reputation at riskand do lasting damage, especially when the misdeeds get into
the public spotlight and make media headlines.
B. An ethical strategy is in the best interest of shareholders.
C An unethical strategy reflects badly on the character of the
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C. An unethical strategy reflects badly on the character of thecompany personnel involved.
D. Shareholders profits are not greatly reduced by using ethical
strategies.
E. A strategy that is unethical in whole or in part is morallywrong.
Characteristics of Managers Committed
to Ethical Approaches to Strategy-Making Possess strong moral and ethical characteristics Strongly advocate a corporate code
of ethics and strict ethics compliance Display genuine commitment to certain corporate
values and business practicesWalk the talk in
Displaying a company’s stated values Living up to ethical business principles and standards
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Living up to ethical business principles and standards Adopt values statements/ethics codes
that truly paint the white lines for acompany’s business practices
Consciously opt for strategic actions passing moral scrutiny
Fig. 10.1: The Business Costs of Ethical Failures
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Linking Strategy to Ethics and Values
If ethical standards are to have more than a cosmetic
role, boards of directors and top executives must work
diligently to see they are scrupulously observed in
Crafting a company’s strategy and
Conducting every facet of a company’s business
Two sets of questions must be considered by senior
executives when reviewing a new strategic initiative
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executives when reviewing a new strategic initiative Is what we are proposing to do fully compliant with our
code of ethical conduct? Is there anything here that
could be considered ethically objectionable?
Is it apparent this proposed action is in harmony with our core values? Are any conflicts or concerns evident?
For Discussion: Your Opinion
Is it unethical for a high school or college coach to accept
a “talent fee” or similar type of payment from a maker of
sports apparel or sports equipment when the coach hasauthority to determine which brand of apparel or
equipment to use for his/her team and subsequently
chooses the brand of the company making the payment?
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chooses the brand of the company making the payment?Is it unethical for the maker of the sports apparel or
equipment to make such payments in expectation that the
coach will reciprocate by selecting the company’s brand?
(Would you answer be different if “everybody” is doing it?)
For Discussion: Your Opinion
Is it unethical for a credit card company to
aggressively try to sign up new accounts when, after
an introductory period of interest-free or low-interest
charges on unpaid monthly balances, the interest rate
on unpaid balances jumps to 1.5 percent or more
monthly (even though such high rates of 18 percent
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monthly (even though such high rates of 18 percent
or more annually are disclosed in fine print)?
What Is Corporate Social Responsibility?
The notion that corporate executives should
balance interests of all stakeholders began to
blossom in the 1960sSocial responsibility as it applies to businesses
concerns a company’s duty to
Operate in an honorable manner
Provide good working conditions for employees
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Provide good working conditions for employees
Be a good steward of the environment
Actively work to better quality of life in
Local communities where it operates and Society at large
What Is Socially Responsible
Business Behavior? A company should strive to balance strategic
actions To benefit shareholders against any possible adverse
impacts on other stakeholders To be a good corporate citizen
Socially responsible behaviors include Corporate philanthropy
Actions to earn trust and respect of stakeholders for
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Actions to earn trust and respect of stakeholders for a firm’s efforts to improve the general well-being of Customers Employees Local communities Society Environment
Fig. 10.2: Categories of Socially Responsible Business Behavior
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Linking Strategy and Social Responsibility
The combination of socially responsible endeavors acompany elects to pursue defines its social responsibility strategy
Management should match a company’ssocial responsibility strategy to its Core values Business mission
Overall strategy
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gy
Some companies are integrating social responsibility objectives into their Missions
Performance targets Strategies
Businesses should promote the betterment of
society, acting in ways to benefit all their
stakeholders because It’s the right thing to do!
Based on an implied social contract, society Grants a business the right to conduct its business affairs
Agrees not to unreasonably restrain a business’ pursuit of a
The Moral Case for
Corporate Social Responsibility
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g y pfair profit
In return for a “license to operate,”
a business should Act as a responsible citizen
Do its fair share to promote the general welfare
Reasons to Behave in a
Socially Responsible Manner Generates internal benefits
Enhances recruitment of quality employees
Increases retention of employees Improves employee productivity
Lowers costs of recruitment and trainings
Reduces risk of reputation-damaging
incidents, leading to increased buyer patronage
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incidents, leading to increased buyer patronageWorks in best interest of shareholders
Minimizes costly legal and regulatory actions
Provides for increased investments by socially conscious
mutual funds and pension benefit managers Focusing on environment issues may enhance earnings
Test Your Knowledge
Which one of the following is false as concerns the merits of why acting in a socially responsible manner is “goodbusiness”?
A. To the extent that a company’s socially responsible behavior winsapplause from consumers and fortifies its reputation, a companymay win additional patronage.
B. Acting in a socially responsible manner reduces the risk of reputation-damaging incidents.
C. Acting in a socially responsible manner is in the overall best interest
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g y pof shareholders.
D. Acting in a socially responsible manner is unlikely to have any effect(positive or negative) on a company’s profitability.
E. Acting in a socially responsible manner can generate internal
benefits (as concerns employee recruiting, workforce retention,training, and improved worker productivity).
Four different views exist regarding use of company
resources by “do-good” executives in pursuit of a better
world
1. Any money authorized for social responsibilityinitiatives is theft from a company’s shareholders
2. Caution should be exercised in pursuing
various societal obligations since this Diverts valuable resources
Weakens a company’s competitiveness3 Social responsibilities are best satisfied through conventional
But Do We Really Want “Do-Good”
Executives — Is There a Downside?
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3. Social responsibilities are best satisfied through conventional
business activities (doing what businesses are supposed to do,
which does not include social engineering)
4. Spending money for social causes
Muddies decision making by diluting focus on a firm’s businessmission Thrusts executives into role of social engineers
How Much Attention to
Social Responsibility Is Enough? What is the appropriate balance between
Creating value for shareholders?
Obligation to contribute to the larger social good?
What fraction of a firm’s resources ought to be aimed at
Addressing social concerns?
Bettering the well-being of society and the environment?
Approaches to fund a social responsibility strategy can
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pp p y gy Allocate a specified percentage of profits
Avoid committing a specified percentage of profits
No widely accepted standard for judging if a companyhas fulfilled its citizenship responsibilities exists!
Linking Social Performance Targets
to Executive Compensation A surefire way to enlist a genuine commitment to
corporate social responsibility initiatives is to
Link achievement of social performance targets toexecutive compensation
Key role of board of directors Incorporate measures of a company’s
social and environmental performancei t it l ti f t ti
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pinto its evaluation of top executives
Key role of top executives Use compensation incentives to enlist support of down-
the-line company personnel to craft and execute a socialresponsibility strategy
1111
Chapter TitleChapter Title
Building an
Organization
Capable of Good
Strategy Execution
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16/e PPT16/e PPT
Strategy Execution
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
³The best game plan in
the world never blocked
t kl d b d ´
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or tackled anybody.´
Vince Lombardi
³A second-rate strategy
perfectly executed will beat
a first-rate strategy poorly
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a first rate strategy poorly
executed every time.´
Richard M. Kovacevich
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Crafting the Strategy
Primarily a market-drivenactivity
Successful strategy makingdepends on
Business vision
Perceptive analysis of market conditions and
company capabilities Att ti d l i
Ex ecuting the Strategy
Primarily an operati ons- driven activity
Successful strategyexecution depends on
Doing a good job of working through others
Good organization-
building B ildi titi
Crafting vs. Executing Strategy
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Attracting and pleasingcustomers
Outcompeting rivals
Using company
capabilities to forge acompetitive advantage
Building competitivecapabilities
Creating a strategy-supportive culture
Getting things done anddelivering good results
An acti on- oriented, make-things ha ppen task
involving management¶s ability to
Direct organizational change
Achieve continuous improvement in
operations and business processes
Move toward operating excellence
Create and nurture a
Implementationinvolves . . .
Executing the Strategy
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strategy-supportive culture
Consistently meet or beat performance targets
Tougher and more time-consuming than crafting
strategy
Implementing a New StrategyRequires Adept Leadership
I m pl ementing a new strategy
takes ade pt l eadershi p to
Convincingly communicate
reasons for the new strategy
Overcome pockets of doubt
S it t f d ti
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Secure commitment of concerned parties
Build consensus and enthusiasm
Get all implementation pieces in place and coordinated
Why Executing Strategy
Isa Tough Management Job
Overcoming resistance to change
Wide array of demanding managerial
activities to be performed
Numerous ways to tackle each activity
Number of bedeviling issues to be worked out
Demands good people management skills
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g g
Requires launching and managing
a variety of initiatives simultaneously
Hard to integrate efforts of many different work
groups into a smoothly-functioning whole
Who Are the Strategy Implementers?
Implementing and executing strategy involves acompany¶s whol e management team and all
em ployees Just as every part of a watch plays a role in making the
watch function properly, it takes all pieces of anorganization working cohesively for a strategyto be well-executed
T op- l evel managers must l ead the
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process and orchestrate major initiatives
But they must rely on cooperation of
Middle and lower -level managers to see things go well in
various parts of an organization and Employees to perform their roles competently
Goals of the StrategyImplementing-Executing Process
U nite total organizati on behind strategy
See that activities are d one in a manner that is
conducive to first-rate strategy e x ecuti on
enerate c ommit ment so an enthusiasticd t t t t
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crusade emerges to carry out strategy
F it how organization conducts its
operati ons to strategy requirements
Every manager has an active role
No proven ³formula´ for implementingparticular types of strategies
There are guidelines, but no
absolute rules and ³must do it
this way´ rules
Characteristics of the StrategyImplementation Process
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Many ways to proceed that are
capable of working
Cuts across many aspects of ³how to manage´
Each implementation situation occurs in a different
context, affected by differing
Business practices and competitive situations
Work environments and cultures
Policies
Compensation incentives Mix of personalities and firm histories
Characteristics of the StrategyImplementation Process (continued)
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Mix of personalities and firm histories
A ppr oach t o i m pl ementati on/e x ecuti on
has be cust omized t o fit the situati on
People implement strategies - Not companies!
Fig. 11.1: The Eight Components of the Strategy Execution Process
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C ommunicate the case for change
Build c onsensus on how to proceed
Arouse enthusiasm for the strategy to turnimplementation process into a companywide crusade
Em power subordinates to keep process moving
E stabl ish measures of progress and deadlines
R eward those who achieve
What Top Executives Have to Do inLeading the Implementation Process
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implementation milestones
Direct resources to the right places
Personally l ead strategic change processand the drive for operating excellence
Test Your Knowledge
Management's handling of the strategy implementation/execution
process can be considered successful
A. so long as a company is profitable.
B. if and when the company meets or beats its performance targets and
shows good progress in achieving its strategic vision for the
company.
C. once the company's management team convinces a majority of
company personnel that the company is headed in the right direction.
D if management is able to put the strategy in place within 6 months
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D. if management is able to put the strategy in place within 6 months.
E. once a capable top management team has been hired, employees
have been appropriately empowered, and effective training programs
for company personnel have been put in place.
BUILDING A CAPABLEBUILDING A CAPABLE
ORGANIZATIONORGANIZATION ²² WHATWHAT
IS INVOLVED?IS INVOLVED?
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Fig. 11.2: The Three Components of Building an
Organization Capable of Proficient Strategy Execution
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Assembling a capable management team is a
cornerstone of the organization-building task
Find the right people to fill each slot
Existing management team
may be suitable
Core executive group
Putting Together aStrong Management Team
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may need strengthening
Promote from within
Bring in skilled outsiders
Selecting the Management Team:Key Considerations
Determine mix of
Backgrounds
Experiences and know-how
Beliefs and values
Styles of managing and personalities
Personal chemistry must be right
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Talent base needs to be appropriate
Picking a solid management team needs to be
acted on early in implementation process
The quality of a company¶s people is an essential
ingredient of successful strategy execution
Biggest challenge facing companies
How to recruit and retain the best
and brightest talent with strong
skill sets and management potential
Intellectual capital, not tangible assets, is
Recruiting and Retaining TalentedEmployees: Implementation Issues
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increasingly being viewed as the most important
investment
Talented people are a prime source of competitiveadvantage
Key Human Resource Practices toAttract and Retain Talented Employees
Spend considerable effort in screening job
applicants, selecting only those with
Suitable skill sets
Energy and initiative
Judgment and aptitudes for learning
Ability to adapt to firm¶s work
environment and culture
P t l th h t i i
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Put employees through training
programs throughout their careers
Give promising employees challenging, interesting,
and skills-stretching assignments
Rotate employees through jobs with great content,
spanning functional and geographic boundaries
Encourage employees to Be creative and innovative
Challenge existing ways of
doing things and offer better ways
Submit ideas for new products or businesses
Foster a stimulating work environment
Key Human Resource Practices to
Attract and Retain Talented Employees (continued)
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Foster a stimulating work environment
Exert efforts to retain high-potential employees with
excellent salary and benefits
Coach average employees to improve their skills
Building Core Competenciesand Competitive Capabilities
Crafting the strategy involves
I dentifying the desired c om petencies and
ca pabi l ities to build into the strategy to help
achieve a competitive advantage
Good strategy e x ecuti on requires
P utting desired c om petencies and ca pabi l ities inplace,
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pl ace,
U pgrading them as needed, and
M odifying them as market
conditions evolve
Example: Intel¶s Core Competence
Design and mass productionof complex chips
for personal computers
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Example: Procter & Gamble¶sCore Competencies
Superb marketing-distribution skills and R&D
capabilities in five core technologies - fats,oils, skin chemistry, surfactants, emulsifiers
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Example: General Electric¶sCore Competencies
Developing professional managers with
broad problem-solving skills andproven ability to grow
global businesses
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Example: Disney¶s Core Competencies
Theme park operation and
family entertainment
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Example: Dell¶s Core Competencies
Capabilities to deliver state-of-the-art
products to customers within days of next-generation components coming available and
at attractively low costs
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Example: Toyota¶s Core Competence
Legendary ³production system´ giving it
the capability to produce high-quality
vehicles at relatively low costs
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1. Develop abi l ity to do something
2. As experience builds,
abi l ity can transl ate into a
c om petence or ca pabi l ity
3 If ability continues to be polished and
Three-Stage Process of DevelopingCompetencies and Capabilities
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3. If abi l ity continues to be pol ished and
refined, it can become a distinctive
c om petence, providing a path to
c om petitive advantage!
Develop abi l ity to do something
Select people with relevant skills/experience
Broaden or expand individual abilities as needed
Step 1 in Developing Competencies
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Mold efforts and work products of
individuals into a cooperative effort
to create organizati onal abi l ity
As experience builds and company learns how to
perform the activity consistently well and at
acceptable cost, the abi l ity ev ol ves into ac om petence or ca pabi l ity
Typically, a capability or competence emerges from
establishing and nurturing c oll aborative
rel ati onshi ps between Individuals and groups in different departments and/or
Step 2 in Developing Competencies
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g p p
A company and its external allies
If company masters the activity, perf or ming it
better than rival s, the ³ca pabi l ity´ or
³c om petence´ becomes a
Distinctive c om petence and
Holds potential for
c om petitive advantage
Step 3 in Developing Competencies
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This is the opti mal outc ome of the process
of building ca pabi l ities-c om petencies!
1. Competencies are bund l es of ski ll s and know-how
growing from c ombined eff orts of cross-functional
departments2. Normally, competencies emerge incrementall y from
various company efforts to respond to market
conditions
3. Leveraging competencies into competitive advantagerequires c oncentrating more eff ort and tal ent than
Managing the Process of BuildingCompetences: Four Key Traits
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rivals on strengthening c om petencies to create
valuable capabilities
4. Sustaining competitive advantage requires adjusting
c om petencies t o new c onditi ons
I nternal development involves either
Strengthening the company¶s base of skills,
knowledge, and intellect or Coordinating and networking the efforts
of various work groups and departments
Partnering with key suppliers,
forming strategic alliances, or maybeeven outsourcing certain activities toi li
Approaches to Developing Competencies
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specialists
Buying a c om pany that has the required
capabilities and integrating these competences intothe firm¶s value chain
Competencies and capabilities must
c ontinu ousl y be modified and perhaps
even re pl aced with new ones due to New strategic requirements
Evolving market conditions
Changing customer expectations
O ng oing eff orts to keep core competencies u p-t o-
Updating Competencies andCapabilities as Conditions Change
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date can provide a basis for sustaining both
Effective strategy execution and
Competitive advantage
Training plays a critical role in implementation
when a firm shifts to a strategy requiring different
Skills or core competences Competitive capabilities
Managerial approaches
Operating methods
Types of training approaches
I t l ³ i iti ´
Strategic Role of Employee Training
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Internal ³universities´
Orientation sessions for new employees
Tuition reimbursement programs
Online training courses
Competitive Advantage Potentialof Competencies and Capabilities
When it is difficu l t to outstrategize rivals
with a superior strategy . . .
. . . Best avenue to industry
l eadershi p is to out-c om pete
rivals withsu peri or strategy e x ecuti on!
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Building c om petencies and ca pabi l ities
rivals can¶t match is one of thebest ways to out-compete them!
Test Your Knowledge
When it is difficult or impossible to out-strategize rivals (beat
them with a superior strategy), the other main avenue to
competitive advantage is to
A. institute a lower cost organization structure.
B. outcompete them with smarter managers.
C. do a better job of selecting and training employees.
D outexecute them (beat them by performing certain value chain
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D. outexecute them (beat them by performing certain value chain
activities in superior fashion).
E. do a better job of empowering and motivating employees.
Execution-Related Aspectsof Organizing Work Efforts
Few hard and fast rules for organizing
O ne Big R u l e: R ol e and pur pose of organizati on
structure is t o su pport and faci l itate g ood strategy e x ecuti on!
Each firm¶s structure is idiosyncratic, reflecting
Prior arrangements and internal politics
Executive judgments and preferences about how toarrange reporting relationships
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How best to integrate and coordinate work effort of
different work groups and departments
Vice President Vice President Vice President
CEO
Fig. 11.3: Structuring the Work Effort
to Promote Successful Strategy Execution
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Ste p 1: Decide Which Value Chain Activities toPerform Internally and Which to Outsource
Involves deciding which activities are
essential to strategic success
Most strategies entail certain crucial business processesor activities that must be performed exceedingly well or
in closely coordinated fashion if the strategy is
to be executed with real proficiency
These processes/activities usuallyneed to be performed internally Critical
activities
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Other activities, such as routine
administrative housekeeping and
some support functions, may be
candidates for outsourcing
Determining Strategy-Critical Activities:Issues to Consider
1. What functions or business processeshave to be performed extra well or in
timely fashion to achieve competitive advantage?
2. In what value-chain activities would
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poor execution seriously impair
strategic success?
A company improves its chances for outclassing rivals
in
Performing strategy
-critical activities and
Turning a core competence into a distinctive competence
Streamlining of internal operations that flows from
outsourcing acts to
Decrease internal bureaucracies
Flatten organization structure
Speed decision making
Potential Advantages of Outsourcing Non-Critical Activities
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Speed decision-making
Increase competitive responsiveness
Partnerships can add to a company¶s arsenal of
capabilities and contribute to better strategy execution
Appeal of Outsourcing
Outsourcing non-critical activities allows a firm to
c oncentrate its energies and resources on those
value-chain activities where it
Can create unique value
Can be best in the industry
Needs direct control to
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Build core competencies
Achieve competitive advantage
Manage key customer -supplier -distributor relationships
Potential Advantages of Partnering
By building, improving, and then leveraging
partnerships, a firm enhances its overall capabilities
and builds resource strengths that Deliver value to customers
Rivals can¶t quite match
Consequently pave the wayfor competitive success
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Partnering makes strategic sense when theresult is to enhance a company¶s
competencies and competitive capabilities.
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For Discussion: Your Opinion
While many people have criticized companies that
have outsourced functions once performed in-house
to foreign suppliers (who can perform the functions
more cheaply) because outsourcing results in
involuntary layoffs or job cuts, it is really fairer and
more accurate to view outsourcing as a meanswhereby a company can enhance its competitiveness
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whereby a company can enhance its competitiveness
and thereby better protect the jobs of the remaining
employees. True or false? Explain.
Assign managers of strategy-critical activities a
visible, influential position
Av oid fragmenting responsibility for strategy-critical
activities across many departments
P r ovide coordinating linkagesbetween related work groups
Assign
managers
key roles
Primary Support
Step 2: Make Strategy-CriticalActivities the Main Building Blocks
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Meld into a valuable
competitive capability
Primary
activities
Strategic
relation-ships
Coordi-
nation
Valuable
capability
Support
functions
What Types of OrganizationalStructures Fit Which Strategies?
A company operating in one business
Functional department structure
A company with operati ons in vari ous parts of
the w or l d
Geographic organizational units
A verticall y integrated company Divisional organizational structure
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g
A diversified company
I
ndividual businesses, with each business unit operatingas independent profit center
In a central ized structure
Top managers retain authority
for most decisions
In a decentral ized structure
Managers and employees are
empowered to make decisions
Trend in most companies
Step 3: Determine How MuchAuthority to Delegate to Whom
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T rend in most companies
Shift from authoritarian to decentralized
structures stressing empowerment
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Characteristics of Centralized Decision Making
Top executives retain authority
For most strategic and operating decisions and
Keep a tight rein on lower -level managers
Minimal discretionary authority is granted to
Frontline supervisors
Rank-and-file employees
Key advantage ± Tight control by top
managers fixes accountability Disadvantages
Lengthens response time to changing conditions
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Lengthens response time to changing conditions
Does not encourage responsibility among lower -level managers and
employees
D
iscourages lower -level managers and employees from exercisinginitiative
Advantages of a Decentralized Structure
Creates a more horizontal structure with fewer management layers
Managers and employees develop their own answers and action
plans
Make decisions in their areas of responsibility
Held accountable for results
Shortens organizational response times and spurs
New ideas
Creative thinking and innovation
Greater involvement of managers and employees
Jobs can be defined more broadly
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Fewer managers are needed
Electronic communication systems provide quick, direct access to
data
Genuine gains in morale and productivity
Place limits on authority empowered employees
can exercise
Hold people accountable for their decisions
Institute compensation incentives that reward
employees for doing their jobs in a manner
contributing to good company performance
Maintaining Control ina Decentralized Structure
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Create a corporate culture where
there¶s strong peer pressure on
employees to act responsibly
For Discussion: Your Opinion
A decentralized organization structure is more likely
to further the cause of good strategy execution than isa centralized organization structure. True or false?
Explain.
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C l assic method of c oordinating activities ± Have
rel ated units re port to sing l e manager
Upper -level managers have clout tocoordinate efforts of their units
Su pport activities should be
w oven int o structure to
Maximize performance of primary activities
Step 4: Provide for InternalCross-Unit Coordination
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Contain costs of support activities
F or mal re porting rel ati onshi ps often need to be
su ppl emented to faci l itate c oordinati on
Guard Against FunctionalDesigns That Fragment Activities
Scattering pieces of critical business processes
across several specialized departments results in
Many hand- offs which Lengthens completion time
Drives up administrative costs
Increases risk of details falling through the cracks
O bsessi on with activity rather than resu l t
Solution ¨ Business process reengineering
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S ol uti on ¨ Business pr ocess reengineering
Involves pu ll ing strategy-critical pr ocesses from
functional departments to create pr ocess de part ments
or cr oss-functi onal w ork gr ou ps
Examples of FragmentedStrategy-Critical Activities
Filling customer orders
Speeding new products to market
Improving product quality
Supply chain management
Building capability to conduct business via the
Internet
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Internet
Obtaining feedback from customers, making
product modifications to meet their needs
Cross-functional task forces
Dual reporting relationships
Informal networking
Voluntary cooperation
Incentive compensation tied
to group performance
Coordinating Mechanisms to Supplementthe Basic Organization Structure
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to group performance
Teamwork and cross-
departmental cooperation
Step 5: Provide for Collaboration With Outsiders
Need mu l ti pl e ties at mu l ti pl e l evel s to ensure
Communication
Coordination and control
Find ways to pr oduce c oll aborative
eff orts to enhance firm¶s ca pabi l ities
and resource strengths
While collaborative relationships present
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While collaborative relationships present
opportunities, nothing val uabl e is real ized unti l
the rel ati onshi p develops int o an engine f or
better organizati onal perf or mance
Get right people together
Promote good rapport
See plans for specific activities
are developed and implemented
Help adjust internal proceduresand communication systems to
Roles of Relationship ManagersWith Strategic Partners
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Iron out operating dissimilarities
Nurture interpersonal ties
Test Your Knowledge
Which one of the following tends to be most important in building an
organization capable of good strategy execution?
A. Selecting a capable management team and selecting and training
employees
B. Building and strengthening competencies and competitive
capabilities
C. Empowering employees and utilizing the advantages of
decentralized decision-making
D. Making strategy-critical activities the main building blocks in the
organizational scheme
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E. None of the above is necessarily more or less important²what
factors prove to be particularly important in building an organization
that is capable of good strategy execution can vary from company to
company and situation to situation.
Current Organizational Trends
Numerous companies have completed the task of
remodeling traditional, hierarchical structures built
on Functional specialization and
Centralized authority
Corporate downsizing movement in thelate 1980s and early 1990s was aimed at
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Recasting authoritarian, pyramidal
organizational structures
Into flatter, decentralized structures
Central ized or authoritarian structures have
often turned out to be a l iabi l ity where
Customer preferences shift fromstandardized to customized products
Product life-cycles grow shorter
Flexible manufacturing replaces
mass production
Customers want to be treated as individuals
Drawbacks of CentralizedAuthoritarian Structures
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Customers want to be treated as individuals
Pace of technological change accelerates
Market conditions are fluid
Organizational Structures of
the Future: Overall Themes
Revolutionary changes in how w ork is organized
have been triggered by
New strategic priorities Rapidly shifting competitive conditions
T ool s of organizati onal design include
Empowered managers and workers
Reengineered work processes
Self -directed work teams
The future
structurewill be . . .
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Rapid incorporation of Internet
technology
Networking with outsiders
Characteristics of
Organizations of the Future
Extensive use of I nternet technology
and e-c ommerce business practices
F ewer barriers between Different vertical ranks
Functions and disciplines
Units in different geographic locations
Company and its suppliers, distributors,strategic allies, and customers
Change & Learning
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Ca pacity for change and ra pid l earning
C oll aborative eff orts among people in different
functions and geographic locations
12
Chapter Title
Managing
Internal
Operations
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16/e PPT
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
“Winning companies
know how to do theirwork better.”
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work better.
Michael Hammer and JamesChampy
“If you want peoplemotivated to do a
good job, give them
a
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good job to do.”Frederick Herzberg
Chapter Roadmap
Marshaling Resources Behind the Drive for GoodStrategy Execution
Instituting Policies and Procedures that FacilitateStrategy Execution
Adopting Best Practices and Striving for Continuous
Improvement
Installing Information and Operating Systems
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Installing Information and Operating Systems
Tying Rewards and Incentives to StrategyExecution
MARSHALING RESOURCESMARSHALING RESOURCES
BEHIND THE DRIVE FORBEHIND THE DRIVE FOR
GOOD STRATEGY GOOD STRATEGY
EXECUTIONEXECUTION
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Allocating Resources to
Support Strategy Execution Allocating resources in ways to support
effective strategy execution involves
Funding strategic initiatives that can makea contribution to strategy implementation
Funding efforts to strengthen competenciesand capabilities or to create new ones
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Shifting resources — downsizing some areas,upsizing others, killing activities no longer justified,and funding new activities with a critical strategy role
ESTABLISH POLICIES ANDESTABLISH POLICIES AND
PROCEDURES TOPROCEDURES TO
FACILITATE STRATEGY FACILITATE STRATEGY
EXECUTIONEXECUTION
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Role of new policies
Channel behaviors and decisionsto promote strategy execution
Counteract tendencies of people to resist chosen strategy
Too much policy can be as stifling as
Wrong policy or as Chaotic as no policy
Creating Strategy-SupportivePolicies and Procedures
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Often, the best policy is empowering employees,
letting them operate between the “white lines” anyway they think best
ADOPTING BEST PRACTICESADOPTING BEST PRACTICESAND STRIVING FORAND STRIVING FOR
CONTINUOUSCONTINUOUS
IMPROVEMENTIMPROVEMENT
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Instituting Best Practicesand Continuous Improvement
Searching out and adopting best practices
is integral to effective implementation
Benchmarking is the backbone of theprocess of identifying, studying, andimplementing best practices
Key tools to promote continuous improvement Six Sigma quality control
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g y
Business process reengineering
TQM
What Is a Best Practice?
An activity that at leastone company has provedworks particularly well
B e s t P r ac t ic e s
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A path to operating excellence
The best practice must
have a proven record in
Significantly lowering
costs
Improving quality or
performance
Shortening time
requirements
Enhancing safety or
To be valuable and
transferable, a best
practice must
Demonstrate success
over time
Deliver quantifiable
and highly positive
results
and
Characteristics of Best Practices
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g y
Delivering some other
highly positiveoperating outcome
Be repeatable
Involves determining how well a firm performs particular activities and processes whencompared against
“Best in industry” or “Best in world” performers Goal – Promote achievement of operating
excellence in performing strategy-critical activities Caution – Exact duplication of best practices
of other firms is not feasible due to differencesin implementation situations
Characteristics of Benchmarking
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Best approach – Best practices of other
firms need to be modified or adapted to fit a firm’s own specific situation
Fig. 12.2: From Benchmarking and Best-PracticeImplementation to Operating Excellence
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Business Process Reengineering:A Contributor to Operating Excellence
Often the performance of strategically relevant activities is scattered acrossseveral functional departments
Creates inefficiencies and often impedes performance Results in lack of accountability since no one
functional manager is responsible for optimumperformance of an entire activity
Solution Business process reengineering
Involves pulling strategy-critical processes from functionalsilos to create process departments or cross-functional work groups
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work groups
Unifies performance of the activity improves howwell the activity is performed and often lowers costs
Promotes operating excellence
What Is T otal Q uality M anagement?
A philosophy of managing a set of business
practices that emphasizes
Continuous improvement in all phases of operations 100 percent accuracy in performing activities
Involvement and empowerment
of employees at all levels
Team-based work design
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Benchmarking and
Total customer satisfaction
Popular TQM Approaches
Deming’s
14 Points
The Juran
Trilogy
Crosby’s 14
Quality Steps
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Baldridge
Award
Criteria
Implementing a Philosophyof Continuous Improvement
Reform the corporate culture
Instill enthusiasm to do things
right throughout company
Strive to achieve little steps forwardeach day (what the Japanese call kaizen)
Ignite creativity in employees to improve
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performance of value-chain activities
Preach there is no such thing as good enough
Six Sigma is a disciplined, statistics-based
system aimed at having not more than 3.4 defectsper million iterations for any business practice –
from manufacturing to customer transactionsTwo approaches to Six Sigma DMAIC process (Design, Measure, Analyze, Improve, Control)
An improvement system for existing processes fallingbelow specification and needing incremental improvement
A great tool for improving performance when there are wide
variations in how well an activity is performed
Six Sigma Quality Control — A Tool for Promoting Operating Excellence
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variations in how well an activity is performed
DMADV process (Define, Measure, Analyze, Design, Verify)
An improvement system used to develop new processes or products at Six Sigma quality levels
Characteristics of Six Sigma Quality Programs
Six Sigma is based on three principles1. All work is a process
2. All processes have variability
3. All processes create data to explain variability A company systematically applying Six Sigma to its
value chain activities can significantly improve theproficiency of strategy implementation
Three challenges in implementing Six Sigma qualityprograms
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p g1. Obtain managerial commitment
2. Establish a quality culture3. Full involvement of employees
Approach of the DMAIC Process
Define What constitutes a defect?
Measure
Collect data to find out why, how,and how often the defect occurs
Analyze – Involves Statistical analysis of the metrics
Identification of a “best practice” Improve Implementation of the documented “best practice”
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Control
Employees are trained on the “best practice” Over time, significant improvement in quality occurs
Reengineering
Aims at quantum gains of 30 to 50% or more
Total quality programs
Stress incremental progress
Techniques are not mutually exclusive Reengineering – Used to produce a good basic design
i ldi d ti i t
Business Process Reengineeringvs. Total Quality Programs
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yielding dramatic improvements
Total quality programs – Used to perfect process,gradually improving efficiency and effectiveness
Select indicators of successful strategy execution
Benchmark against best practice companies
Build a TQ culture
Requires top management commitment
Install TQ-supportive employee practices
Empower employees to do the right things
Provide employees with quick access to required
How to Capture Benefits of Best-Practiceand Continuous Improvement Programs
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Provide employees with quick access to requiredinformation using on-line systems
Preach that performance can/must be improved
The Benefits of EmployingContinuous Improvement Programs
Can greatly enhance a company’s
Competitive capabilities
Ability to achieve a competitive advantage
Have hard-to-imitate aspects
Require substantial investmentof management time and effort
Expensive in terms of training and meetings
Seldom produce short-term results
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Seldom produce short-term results
Long-term payoff — instilling a culture that strivesfor operating excellence
Test Your Knowledge
Which of the following is not a tool that managers can use topromote operating excellence and further the cause of goodstrategy execution?
A. Benchmarking and adoption of best practices
B. Business process reengineering
C. A team-based work structure and operating excellence
analysis
D. Six Sigma quality control techniques
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E. TQM
INSTALL INFORMATIONINSTALL INFORMATIONAND OPERATINGAND OPERATING
SYSTEMSSYSTEMS
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Installing Strategy-SupportiveInformation and Operating Systems
Good information and operating systems areessential for first-rate strategy execution
Support systems can relate to
On-line data capabilities
Speedy delivery or repair
Inventory management
E-commerce capabilities
Mobilizing information and creating systems
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Mobilizing information and creating systemsto use knowledge effectively can yield
Competitive advantage
On-line reservation system
Accurate and expeditious baggage handling system
St i t i ft i t
Airlines Airlines
Examples of Support Systems
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Strict aircraft maintenance program
Federal ExpressFederal Ex
press
Examples of Support Systems
Internal communication systems allowing itto coordinate 70,000 vehicles handling anaverage of 5.5 million packages per day
Leading-edge flight operations systemsallow a single controller to direct as manyas 200 of 650-plus aircraft simultaneously
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E-business tools for customers
Sophisticated maintenance support system
Otis Elevator Otis Elevator
Examples of Support Systems
Systems have been developed for
eBay eBa
y
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Systems have been developed for
real-time monitoring of new listings, bidding
activity, Web site traffic, and page views
What Areas ShouldInformation Systems Address?
Customer data
Operations data
Employee data
Supplier/partner/collaborative ally data
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Financial performance data
Trends for Information Systems
On-line technology
Daily statistical updates
Up-to-the minute performance monitoring Retail companies have up-to-the minute inventory and
sales records for each item
Electronic scorecards for senior managers Gather daily or weekly statistics from different databases
about inventory, sales, costs, and sales trends
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about inventory, sales, costs, and sales trends
Enables managers to make better decisions on a real-time basis
Challenge
How to ensure actions of employees
stay within acceptable bounds
Control approaches
Managerial control
Establish boundaries on what not todo, allowing freedom to act with limits
Exercising Adequate ControlOver Empowered Employees
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Track and review daily operating performance
Peer-based control
For Discussion: Your Opinion
What sort of information and operating systems would
a company like Amazon.com likely need in order to
facilitate good strategy execution?
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TYING REWARDS ANDTYING REWARDS ANDINCENTIVES TO STRATEGY INCENTIVES TO STRATEGY
EXECUTIONEXECUTION
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Monetary IncentivesMonetar
y Incentives
Base pay increases
Performance bonusesProfit sharing plans
Stock options
Retirement packages
Piecework incentives
Non-monetary IncentivesNon-monetar
y Incentives
Praise
Constructive criticism
Special recognition
More, or less, job security
Stimulating assignments
More, or less, autonomy
Rapid promotion
Gaining Commitment: Componentsof an Effective Reward System
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Provide attractive perks and fringe benefits
Rely on promotion from within when possible
Make sure ideas and suggestions of
employees are valued and respected
Create a work atmosphere where there is genuine sincerity
and mutual respect among all employees
State strategic vision in inspirational terms to make
employees feel they are part of something worthwhile
Share financial and strategic information with employees
Approaches: Motivating Peopleto Execute the Strategy Well
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Have knockout facilities
Be flexible in how company approaches peoplemanagement in multicultural environments
Lincoln Electric Lincoln Electric Rewards productivity by paying for each piece
produced (defects can be traced to worker causing them)
GoogleGoo
gle
Employees are provided with free food,
unlimited ice cream, pool and Ping-Pong tables, andcomplimentary massages. Employees are allowed tospend 20% of their work time on any outside activity.
Examples: Motivational Practices
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produced (defects can be traced to worker causing them).Highest rated workers receive bonuses of as much
110% of their piecework compensation.
Xilinx Xilinx New hires receive stock option grants.
CEO responds promptly to employee e-mails
JM Family EnterprisesJM Fam
ily Enterprises
Benefits for employees include: a great lease on new Toyotas,
cruises in the Bahamas on the 172-foot company yacht, officefacility has a heated lap pool, a fitness center, and a free nail
salon, and professionally made take-home dinners.
Examples: Motivational Practices
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CEO responds promptly to employee e-mails.During hard times management takes a 20%
pay cut instead of laying off employees.
Examples: Motivational Practices
NordstromNordstrom
Pay salespeople higher than prevailing rates
Amazon.com Amazon.com
Hands out Just Do It awards to employees who
do something they think will help Amazon withoutgetting their boss’s permission; the action has to bewell thought through but doesn’t have to succeed.
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Pay salespeople higher than prevailing rates,plus commission. “Rule #1: Use good judgment in
all situations. There will be no additional rules.”
Examples: Motivational Practices
W. L. GoreW. L. Gore
Employees get to choose what project/team they work on;each team member’s compensation is based on other teammembers’ ranking of his/her contribution to the enterprise.
Amgen Am
gen
Employees get 16 paid holidays, generousi i i i i b $10 000
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vacation time, tuition reimbursements up to $10,000,
on-site massages, a discounted car wash, and theconvenience of shopping at on-site farmers’ markets.
Elements of both are necessary
Challenge and competition arenecessary for self-satisfaction
Prevailing view
Positive approaches work better than negative ones in terms of
Enthusiasm
Dedication
Balancing Positive vs. Negative Rewards
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Creativity
Initiative
Tying rewards to the achievement of strategic and financial performance targets ismanagement’s single most powerful tool to win
the commitment of company personnel toeffective strategy execution
Objectives in designing the reward system Generously reward those
achieving objectives Deny rewards to those who don’t Make the desired strategic and financial
Linking the Reward Systemto Performance Outcomes
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goutcomes the dominant basis for designing
incentives, evaluating efforts, andhanding out rewards
Test Your Knowledge
Management’s most powerful tool for mobilizing employeecommitment to competent strategy execution and operatingexcellence is
A. the use of either total quality management or Six Sigma qualitycontrol techniques.
B. business process reengineering.
C. a properly designed reward structure.D. making the company a great place to work in terms of pay
scales, fringe benefits, and employee perks.
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E. effective screening of job applicants such that only the most
motivated and energetic people are hired.
Create a results-oriented systemReward people for results, not for activity
Define jobs in terms of what to achieve Incorporate several performance measures
Tie incentive compensation to relevant
outcomes
Top executives – Incentives tied tooverall firm performance
Department heads, teams, and
Key Considerations inDesigning Reward Systems
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12-46
individuals – Incentives tied to
achieving performance targetsin their areas of responsibility
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Guidelines for Designing anEffective Compensation System
1. Payoff must be a major, notminor, piece of totalcompensation package
2. Incentive plan shouldextend to all employees
3. Administer system withscrupulous fairness
4. Link incentives to achieving
5. Targets a person isexpected to achieve mustinvolve outcomes that can
be personally affected
6. Keep time betweenperformance reviewand payment short
7. Make liberal use of non-monetary rewards