mgmt 490 strategic management prof. stephen standifird

MGMT 490Strategic Management

Prof. Stephen Standifird

Welcome!!!Welcome!!!

Syllabus Highlights

Basic Content

• My contact info.• Course objectives• Text: Hitt et. al.

(6th Edition)

Grading

• Groups (50%)– 2 subject pres./memos

– 1 final pres./memo

• Individual (50%)– 2 exams (no final)

– Group Participation

Course Philosophy

• Application, application, application• Strategy - an active topic• Participation is a MUST!• News you can use• Informal but Serious • Informative and Enjoyable• Questions? Always Encouraged

How to Get an A

Individual:– Read the Book

– Attend the Class

– Pay Attention!!!

– Participate

Group:– Plan Ahead (way ahead!!)

– Data, Data, Data

– Be Professional

– Have Fun

Fi na lGrade

A

What is StrategyStrategy?

In SBA to learn more about:

A. Architectural Design?

B. 18th Century European Art?

C. Biochemical Engineering?

Business!!!

What is StrategyStrategy?

The study of how a company can make more moneymake more money!!!

What is Strategy?

• Strategic Competitiveness:– Achieved when a firm successfully formulates and

implements a value-creating strategy.

• Above-average Returns:– In excess of what investors expect to earn from other

investments with a similar amount of risk.

• Strategic Management Process:– The full set of commitments, decisions, and actions

required for a firm to achieve strategic competitiveness and above-average returns.

What is Strategy?

• The commitments, decisions, and actions that allow the firm to make more money!

How is this done?

• Two competing models1. Industrial Organizational Model

2. Resource-Based Model

Model One:Industrial Organization (Porter’s Five Forces)

The external environment should drive strategy. Locate and compete in an attractive (profitable) industry.

Model Two:Resource Based

(Core Competency)

The resources and capabilities of the firm should drive strategy. Build your strategy

around existing resources.

Model Three:Life in the Real World!(the focus of this class)

The external environment and the resources and capabilities of the firm drive strategy. Firms should seek to maximize profitability

by locating and competing in an industry where the firm can most effectively leverage

existing and potential resources.

Strenghts

Weakness

Opportunities

ThreatsExternal EnvironmentBegin Here (the OT of SWOT)

Internal EnvironmentBegin Here (the SW of SWOT)

Complicating Factors

• Globalization– Tough to find a truly domestic product/market– Must be an international strategist

• Technological Changes– Buy-it-here.com– Not just for high tech firms any more

• Multiple Stakeholders– Capital Markets, Product Markets, Organizational– Government, Competitors, etc. (you get the point)

The External Environment

The General Environment1. The General Environment

• Environmental Analysis

• Segments of the Environment

2. The Industrial Environment• Industry Analysis (five forces)

• Strategic Groups/Competitor Analysis

The External EnvironmentModel of Superior Returns

1. Study the external environment.

2. Locate an industry with high potential for above-average returns.

3. Identify strategy called for by the industry to earn above-average returns.


4. Develop or acquire assets and skills needed to implement the strategy.

5. Use the firm’s strengths (its assets or skills) to implement the strategy.

6. Maintain selected strategy in order to outperform industry rivals.

The External Environment Part I: The General Environment

• Demographic Segment– Population, Age,

Income, Ethnicity

• Economic Segment– Inflation, Exchange rates,

Savings rates, Interest

• Political/legal Segment– Antitrust, (De)regulation,

Taxation, Labor laws

• Sociocultural Segment– Diversity, Social concerns,

quality of life

• Technological Segment– Product and process

changes, Communications

• Global Segment– Political events, global and

regional crisis, Exchange rates

The General Environment:Important Issues to Remember

• The same environmental trend will effect different industries differently (or not at all)– Internet: Auto Repair versus Book Store

• The impact of a particular trend will effect different companies in an industry differently– Busier Schedules: Indigo Grill vs McDonald’s

So. . . Scan for general trends and identify specific factorsspecific factors that influence your company



Income, Ethnicity






quality of life






• Scanning– A general look around

• Monitoring– Keeping track of what looks potentially important

• Forecasting– Trying to predict where things will be going

• Assessing– Trying to understand how the changes effect you

The General Environment:Albertson’s Grocery Stores

• Scanning - Tech Sector– The internet !!!

• Monitoring– Rapidly changing

• Forecasting– Will continue rapid change

• Assessing– Short term? Not an issue

– Long term impact unclear

– Continue to monitor

• Scanning - Demo Sector– Dual income families

• Monitoring– Slow but steady change

• Forecasting– Most couples working

• Assessing– Short term? Eating out more, not

buying groceries– Must respond now– “Quick Fix” meals

Group Formation

• You Pick’um, I referee• Five Persons Per Group (must be this way)• Once you have a group, let me know• If you need a person (or 2 or 3), let me know• Exchange information (e-mail, phone #, etc)• Identify potential companies• Give me back the group list and company name



Income, Ethnicity






quality of life





Exercise: General Environment and Wal-Mart

• Break in groups of 3 or 4 persons

• Try to identify at least one general trend for each segment of the environment

• Determine how this trend impacts Wal-Mart a.k.a. the worlds largest retailer (positive, negative or neutral)

• How would you respond - time permitting

The General Environment and Wal-Mart


Income, Ethnicity






quality of life





External Environment: Part IIIndustry Analysis

External Environment Model of Superior Returns– Locate an industry with high potential for

above-average returns.

An Industry is a group of firms producing

products that are basically the same.

Threat of Substitute Products


Threat of New

Entrants

Threat of New

Entrants

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Rivalry Among Competing Firms

in Industry


in Industry

Bargaining Power of Buyers


Bargaining Power of Suppliers


Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

Economies of ScaleEconomies of Scale

Product DifferentiationProduct Differentiation

Capital RequirementsCapital Requirements

Switching CostsSwitching Costs

Access to Distribution ChannelsAccess to Distribution Channels

Cost Disadvantages Independent Cost Disadvantages Independent of Scaleof Scale

**

**

**

**

**

**

Government PolicyGovernment Policy**

Threat of Substitute ProductsThreat of Substitute Products

** Products with improving Products with improving price/performance tradeoffs relative price/performance tradeoffs relative to present industry productsto present industry products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

For Example:For Example:

Keys to evaluate substitute products:Keys to evaluate substitute products:

Fax machines in place of overnight Fax machines in place of overnight mail deliverymail delivery

E-mail in place of fax machinesE-mail in place of fax machines

** Supplier industry is dominated by Supplier industry is dominated by a few firmsa few firms

** Suppliers’ products have few Suppliers’ products have few substitutessubstitutes

** Suppliers’ products have high Suppliers’ products have high switching costsswitching costs

** Supplier poses credible threat of Supplier poses credible threat of forward integrationforward integration

** Suppliers’ products are differentiatedSuppliers’ products are differentiated

Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:

Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:Suppliers exert power in the industry by:

* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Bargaining Power of BuyersBargaining Power of Buyers

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

** Buyers are concentrated or purchases Buyers are concentrated or purchases are large relative to industry salesare large relative to industry sales

** Buyer presents a credible threat of Buyer presents a credible threat of backward integrationbackward integration

** Products are undifferentiatedProducts are undifferentiated

** Buyers face few switching costsBuyers face few switching costs

** Buyers’ industry earns low profitsBuyers’ industry earns low profits

** Buyer has full informationBuyer has full information

Buyers compete with the supplying

industry by:

Buyers compete with the supplying

industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off ofeach othereach other

CutthroatCutthroat competitioncompetition is more likely to occur when: is more likely to occur when:

** Numerous or equally balanced competitorsNumerous or equally balanced competitors

** Slow growth industrySlow growth industry

** High fixed costsHigh fixed costs

** Lack of differentiation or switching costsLack of differentiation or switching costs

** High storage costsHigh storage costs

** Diverse competitorsDiverse competitors

** High exit barriersHigh exit barriers

** High strategic stakesHigh strategic stakes

Intensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing Competitors



Threat of New

Entrants

Threat of New

Entrants



in Industry


in Industry





Five Forces and the Oil Industry

• Threat New Entry – Billions of $ to enter– No new since mid 1970s

VERY LOWVERY LOW

• Supplier Power– Landowners, countries

smaller than companies

LOWLOW

• Buyer Power– You and I as individuals

Very LOWVery LOW

• Substitutes– Methanol? Not driving?

VERY LOWVERY LOW

• Rivalry– Joint drilling operations

– Mergers and acquisitions

– “Regional focus”

VERY LOWVERY LOW

• Profits???Huge, enormous, Huge, enormous,

monstrously large!!!monstrously large!!!

Five Forces and Restaurants

• Threat New Entry – Small capital ($50,000)

– Can be run by a family

VERY HIGHVERY HIGH

• Supplier Power– Real Estate controls all

VERY HIGHVERY HIGH

• Buyer Power– Do you always go to the

exact same restaurant?

VERY HIGHVERY HIGH

• Substitutes– How often does the

average family eat out?

VERY HIGHVERY HIGH

• Rivalry– Why work together?

– Fierce competition

VERY HIGHVERY HIGH

• Profits???Ouch! Not so good,Ouch! Not so good,

Many don’t surviveMany don’t survive

Pres./Memo One - Expectations• Provide a Brief company overview (none is fine)• Highlight results of the general environment analysis

– Scanning, monitoring, forecasting, assessing

• Conduct a detailed Five Force analysis– Provide a rough determination of the impact of each force force (support

your position)– Summarize the overall model results– Explain where your company fits in the industry

• Briefly mention the type of generic business-level strategy pursued by the company

• The memo should replicate the presentation

THETHE Project Questions(Your conclusion should address these questions)

What did we learn form the analysis that can be useful to

someone within the company?

Application, application and more applicationApplication, application and more application

• Keys to Success

– Report the RESULTS of your analysis, not the process of analysis. However,

– Be thoughtful (what’s reallyreally going on)

– Make sure you SUPPORT YOUR ARGUMENT!!!

Project Expectations

Data, data and more data - support your Data, data and more data - support your position!position!

(not a suggestion, a requirement)(not a suggestion, a requirement)



Threat of New

Entrants

Threat of New

Entrants



in Industry


in Industry





Business-Level Strategy

• A Strategy is an integrated and coordinated set of commitments and actions designed to gain a competitive advantage.

• A Business-level strategy is a (strategy) targeted to specific, individual product markets.

Breadth of Breadth of Competitive Competitive

ScopeScope

Source of Competitive AdvantageSource of Competitive Advantage

BroadBroadTargetTargetMarketMarket

NarrowNarrowTargetTargetMarketMarket

CostCost

Focused Differen-

tiation

Focused Differen-

tiation

CostLeadership

CostLeadership

Differen-tiation

Differen-tiation

Focused Low CostFocused

Low Cost

Generic Business Level StrategiesGeneric Business Level Strategies

UniquenessUniqueness

Relatively standardized productsRelatively standardized products

Features acceptable to many customersFeatures acceptable to many customers

Lowest competitive priceLowest competitive price

RequirementsRequirementsConstant effort to reduce costs through:Constant effort to reduce costs through:

** Building efficient scale facilitiesBuilding efficient scale facilities

**

** “State of the Art” manufacturing facilities“State of the Art” manufacturing facilities

** Simplification of processesSimplification of processes

**

Minimizing costs of sales, R&D and serviceMinimizing costs of sales, R&D and service

** Monitoring costs of activities provided by outsiders

Monitoring costs of activities provided by outsiders

Tight control of production costs and overheadTight control of production costs and overhead

Cost Leadership Business Level StrategyCost Leadership Business Level Strategy

Cost LeadershipCompetitive Risks

• Loss of cost advantage due to technology

• Loss of cost advantage due to imitation

• Customer interest in a differentiated product

Focus on Focus on VOLUMEVOLUME

Differentiation Business Level StrategyDifferentiation Business Level Strategy

Value provided by unique features and value characteristics

Value provided by unique features and value characteristics

Command premium priceCommand premium price

Superior qualitySuperior quality

Rapid innovationRapid innovation

Prestige or exclusivityPrestige or exclusivity

High customer serviceHigh customer service

RequirementsRequirementsConstant effort to differ-Constant effort to differ-entiate products through:entiate products through:

** Developing new systems Developing new systems and processesand processes

** Quality focusQuality focus

**** Maximize Human Resource Maximize Human Resource

contributions through low contributions through low turnover and high motivationturnover and high motivation

Capability in R&DCapability in R&D

** Shaping perceptions through Shaping perceptions through advertisingadvertising

DifferentiationCompetitive Risks

• Price does not justify the features

• Unique features no longer valued

• Loss of differentiation due to imitation

Focus on Focus on MARGINSMARGINS

May be able to serve a narrow market segment more effectively than industrywide competitorsMay be able to serve a narrow market segment more effectively than industrywide competitors

Firm may lack resources to compete industrywideFirm may lack resources to compete industrywide

Large firms may overlook small nichesLarge firms may overlook small niches

However.....However.....Opportunities may exist because:Opportunities may exist because:

**

**

**

Focused Business Level StrategiesFocused Business Level Strategies

Focused Business Level Strategies involve the same basic approach as Broad Market Strategies

Focused Business Level Strategies involve the same basic approach as Broad Market Strategies

FocusedCompetitive Risks

• Firm may be “outfocused” by competitors

• Large competitor may set its sights on your niche market

Integrated Low-Cost/Differentiation

What is it?

• The best of both worlds. Both low-cost and differentiated.

Potential problems?

• Unachievable! Can easily get stuck in the middle.

Pres./Memo One - Expectations• Provide a Brief company overview (none is fine)• Highlight results of the general environment analysis

– Scanning, monitoring, forecasting, assessing

• Conduct a detailed Five Force analysis– Provide a rough determination of the impact of each force force (support

your position)– Summarize the overall model results– Explain where your company fits in the industry

• Briefly mention the type of generic business-level strategy pursued by the company

• The memo should replicate the presentation

THETHE Project Questions(Your conclusion should address these questions)

What did we learn form the analysis that can be useful to

someone within the company?

Application, application and more applicationApplication, application and more application

• Keys to Success

– Report the RESULTS of your analysis, not the process of analysis. However,

– Be thoughtful (what’s reallyreally going on)

– Make sure you SUPPORT YOUR ARGUMENT!!!


Data, data and more data - support your Data, data and more data - support your position!position!

(not a suggestion, a requirement)(not a suggestion, a requirement)

How to create value for the corporation as a wholeHow to create value for the corporation as a whole

A Diversified Company has A Diversified Company has 22 levels of strategy levels of strategy

How to create competitive advantage in How to create competitive advantage in each businesseach business in in which the company competeswhich the company competesHow to create competitive advantage in How to create competitive advantage in each businesseach business in in which the company competeswhich the company competes

Corporate-Level Strategy Corporate-Level Strategy (Companywide Strategy)(Companywide Strategy)

Business-Level Strategy Business-Level Strategy (Competitive Strategy)(Competitive Strategy)

Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification

Single-businessSingle-business More than 95% of revenues More than 95% of revenues from a single business unitfrom a single business unit

Low Levels of DiversificationLow Levels of Diversification

Dominant-businessDominant-business Between 70% and 95% of revenues Between 70% and 95% of revenues from a single business unitfrom a single business unit

Related-DiversifiedRelated-Diversified Less than 70% of revenues from Less than 70% of revenues from a single business unita single business unit

Moderate to High Levels of DiversificationModerate to High Levels of Diversification

Businesses share product, techno-Businesses share product, techno-logical or distribution linkageslogical or distribution linkages

Unrelated-DiversifiedUnrelated-Diversified Business units not closely related Business units not closely related

High Levels of DiversificationHigh Levels of Diversification

Transferring Core CompetenciesTransferring Core Competencies

Sharing ActivitiesSharing Activities

Alternative Diversification StrategiesAlternative Diversification Strategies

Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation

RestructuringRestructuring

Related Diversification Strategies

Unrelated Diversification Strategies

11

22

33

44

Sharing ActivitiesSharing Activities

Clear corporate mission that emphasizes the Clear corporate mission that emphasizes the importance of integrating business unitsimportance of integrating business units

Incentive system that rewards more than just Incentive system that rewards more than just business unit performancebusiness unit performance

Strong sense of corporate identityStrong sense of corporate identity

Assumptions

Key Characteristics

11

22

33

Sharing of basic activities often lowering costs or raising Sharing of basic activities often lowering costs or raising differentiationdifferentiation


Key Characteristic

Assumptions

Activities involved in the businesses are similar enough that sharing expertise is meaningful

The skills transferred represent significant sources of competitive advantage for the receiving unit

11

22

33

Transfer of skills involves activities which areimportant to competitive advantage

The sharing of highly specialized skills and expertiseThe sharing of highly specialized skills and expertise

Key Characteristic

Acquire sound, attractive companies, transfer resources Acquire sound, attractive companies, transfer resources from units that generate cash to those with high growth from units that generate cash to those with high growth potential and substantial cash needspotential and substantial cash needs

Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation

Managers have more detailed knowledge of the acquired Managers have more detailed knowledge of the acquired firm relative to outside investors (not likely)firm relative to outside investors (not likely)

Major Assumption

Key Characteristic

Seek out undeveloped, sick or threatened organizations, make a variety of harsh changes within the firm and (often) sell unit after making one-time changes since parent no longer adds value to ongoing operations

RestructuringRestructuring

Major Assumption

Management of the acquiring firm has insight in Management of the acquiring firm has insight in selecting firms with depressed values or unforeseen selecting firms with depressed values or unforeseen potential (yea right!)potential (yea right!)

Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification

Single-businessSingle-business More than 95% of revenues More than 95% of revenues from a single business unitfrom a single business unit

Low Levels of DiversificationLow Levels of Diversification

Dominant-businessDominant-business Between 70% and 95% of revenues Between 70% and 95% of revenues from a single business unitfrom a single business unit

Related-DiversifiedRelated-Diversified Less than 70% of revenues from Less than 70% of revenues from a single business unita single business unit

Moderate to High Levels of DiversificationModerate to High Levels of Diversification

Businesses share product, techno-Businesses share product, techno-logical or distribution linkageslogical or distribution linkages

Unrelated-DiversifiedUnrelated-Diversified Business units not closely related Business units not closely related

High Levels of DiversificationHigh Levels of Diversification

Per

form

ance

Per

form

ance

Level of DiversificationLevel of Diversification

Diversification and Firm PerformanceDiversification and Firm Performance

DominantDominantDominantDominant UnrelatedUnrelatedUnrelatedUnrelatedRelatedRelatedRelatedRelated

Why all the Unrelated Diversification?

Why all the Unrelated Diversification?

• Managerial Motives to Diversify

– To diversify employment risk, effective as long as profitability does not suffer excessively.

– To increase compensation. As firm size goes up, so does executives compensation.

– It’s the trendy thing to do (more so in the 1980s)

BCG Growth-Share MatrixBCG Growth-Share Matrix

Stars Cash Cows Question ? Dogs

High Grow

High Share

Low Grow

High Share

High Grow

Low Share

Low Grow

Low Share

Promote and Expand

Defend and Maintain

Invest or Divest

No Future Divest


• Major Assumption:– If you have a low market share and/or it’s a slow

growth market, the long term profitability potential of an investment is low.

• Problem with Assumption:– Does not allow for a sharing of activities or core

competencies (skills and abilities) that makes an otherwise poor investment (for some) more attractive for your firm.

– Assumes that if it’s a high growth market where you can have a large presence, then it’s a good investment.


GE/McKinsey MatrixGE/McKinsey Matrix

High Medium Low

High Grow Grow Hold

Medium Grow Hold Harvest

Low Hold Harvest Harvest

Business Unit StrengthIn

dust

ry A

ttra

ctiv

enes

s

Fatal Assumption: No Interaction Between Business Units

Corporate GovernanceCorporate GovernanceCorporate GovernanceCorporate Governance

• Corporate Governance is a relationship among Corporate Governance is a relationship among stakeholders that is used to determine and control stakeholders that is used to determine and control the strategic direction and performance of the strategic direction and performance of organizationsorganizations

• Concerned with identifying ways to ensure that Concerned with identifying ways to ensure that strategic decisions are made effectively strategic decisions are made effectively

• Used in corporations to establish order between the Used in corporations to establish order between the firm’s owners and its top-level managersfirm’s owners and its top-level managers

Separation of Ownership and Separation of Ownership and Managerial ControlManagerial Control

Separation of Ownership and Separation of Ownership and Managerial ControlManagerial Control

• The nature of modern corporations based on capital markets The nature of modern corporations based on capital markets • Shareholders purchase stock, becoming Shareholders purchase stock, becoming Residual ClaimantsResidual Claimants• Shareholders reduce risk by holding diversified portfoliosShareholders reduce risk by holding diversified portfolios• Professional managers contract to provide decision-makingProfessional managers contract to provide decision-making• Modern public corporation form leads to efficient Modern public corporation form leads to efficient

specialization of tasksspecialization of tasks

– Risk bearing by shareholders Risk bearing by shareholders – Strategy development & decision-making by managersStrategy development & decision-making by managers

An agency relationship exists when:An agency relationship exists when:

Shareholders Shareholders (Principals)(Principals)

Firm OwnersFirm Owners

Agency RelationshipAgency Relationship

Risk Bearing SpecialistRisk Bearing Specialist(Principal)(Principal)

Managers Managers (Agents)(Agents)

DecisionDecisionMakersMakers

which createswhich creates

Managerial Decision-Managerial Decision-Making SpecialistMaking Specialist

(Agent)(Agent)

HireHire

Agency TheoryAgency TheoryAgency TheoryAgency Theory


The The Agency ProblemAgency Problem occurs when: occurs when: The desires or goals of the principal and agent conflict and it The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the is difficult or expensive for the principal to verify that the agent has behaved appropriatelyagent has behaved appropriately

Managerial OpportunismManagerial Opportunism occurs when: occurs when: The manager acts in her or his self-interests with guile. The manager acts in her or his self-interests with guile. Problematic because it is impossible to know in advance who Problematic because it is impossible to know in advance who will be opportunistic.will be opportunistic.

Example:Example: Overdiversification because increased diversification Overdiversification because increased diversification generally leads to greater compensation. Flat out fraud that generally leads to greater compensation. Flat out fraud that benefits individuals at the expense of the firm (Enron)benefits individuals at the expense of the firm (Enron)


• Principals may engage in monitoring Principals may engage in monitoring behavior to assess the activities and behavior to assess the activities and decisions of managersdecisions of managers

• However, dispersed shareholding makes it However, dispersed shareholding makes it difficult and inefficient to monitor difficult and inefficient to monitor management’s behaviormanagement’s behavior

• What to do? What to do? – Implement some type of Corporate GovernanceImplement some type of Corporate Governance

Governance MechanismsGovernance MechanismsGovernance MechanismsGovernance Mechanisms

Internal Governance MechanismsInternal Governance Mechanisms

• Ownership ConcentrationOwnership Concentration

• Boards of DirectorsBoards of Directors

• Executive CompensationExecutive Compensation

• Multidivisional Organizational StructureMultidivisional Organizational Structure

External Governance MechanismsExternal Governance Mechanisms

• Market for Corporate ControlMarket for Corporate Control

Agency CostsAgency CostsAgency CostsAgency Costs

The sum of The sum of

Corporate Governance CostsCorporate Governance Costs• incentive, monitoring and enforcement costsincentive, monitoring and enforcement costsOpportunistic Behavior CostsOpportunistic Behavior Costs• individual financial losses incurred by principles, individual financial losses incurred by principles,

because of misdeeds by the agentbecause of misdeeds by the agent

A Balancing Act: A Balancing Act: Auditing is NOT a free service Auditing is NOT a free service

Dangerous if left uncheckedDangerous if left unchecked

Ownership ConcentrationOwnership ConcentrationOwnership ConcentrationOwnership Concentration

• Large block shareholders have incentive to Large block shareholders have incentive to monitor management closelymonitor management closely

• Their large stakes make it worth their while to Their large stakes make it worth their while to spend time, effort and expense to monitorspend time, effort and expense to monitor

• They may also obtain Board seats which They may also obtain Board seats which enhances their ability to monitor effectivelyenhances their ability to monitor effectively

• Limitation:Limitation: Tough to get large enough to be Tough to get large enough to be influential is a Fortune 500 firminfluential is a Fortune 500 firm

Boards of DirectorsBoards of DirectorsBoards of DirectorsBoards of Directors

• Review and ratify important decisionsReview and ratify important decisions

• Determine CEO compensation/employmentDetermine CEO compensation/employment

• Limitation:Limitation: Lack day to day interaction and/or Lack day to day interaction and/or may be an insider or a related insidermay be an insider or a related insider– Increase diversity of board members backgroundsIncrease diversity of board members backgrounds– Internal mgmt/accounting control systemsInternal mgmt/accounting control systems– Establish formal processes for evaluation of the Establish formal processes for evaluation of the

board’s performanceboard’s performance

Executive CompensationExecutive CompensationExecutive CompensationExecutive Compensation

• Salary, Bonuses, Long term incentivesSalary, Bonuses, Long term incentives

• Limitations:Limitations: – Executive decisions are complex and non-routine, Executive decisions are complex and non-routine,

Many factors making it difficult to establish how Many factors making it difficult to establish how decisions are directly responsible for outcomesdecisions are directly responsible for outcomes

– Stock ownership (long-term incentive) makes Stock ownership (long-term incentive) makes managers more susceptible to market changes managers more susceptible to market changes which are partially beyond their controlwhich are partially beyond their control

– Incentive systems do not guarantee that managers Incentive systems do not guarantee that managers make the “right” decisionsmake the “right” decisions

Multidivisional Organizational Multidivisional Organizational Structure (e.g., GM)Structure (e.g., GM)

Multidivisional Organizational Multidivisional Organizational Structure (e.g., GM)Structure (e.g., GM)

• Corporate office and Board monitor Corporate office and Board monitor managers’ strategic decisionsmanagers’ strategic decisions

• Increased managerial interest in wealth Increased managerial interest in wealth maximization at the corporate levelmaximization at the corporate level

• Limitation:Limitation: – Does not necessarily limit corporate- level Does not necessarily limit corporate- level

managers’ self-serving actionsmanagers’ self-serving actions– May lead to greater rather than less May lead to greater rather than less

diversificationdiversification– Tough to link individual to senior managersTough to link individual to senior managers

Market for Corporate ControlMarket for Corporate ControlMarket for Corporate ControlMarket for Corporate Control

• When firms face the risk of takeover because When firms face the risk of takeover because they operate inefficiently (lower stock price)they operate inefficiently (lower stock price)

• Firms operate more efficiently as a result of Firms operate more efficiently as a result of the “threat” of takeover, even though the the “threat” of takeover, even though the actual incidence of hostile takeovers was actual incidence of hostile takeovers was relatively smallrelatively small

• Limitation:Limitation: – Development of defensive measuresDevelopment of defensive measures– Problems with hostile takeovers (TBA)Problems with hostile takeovers (TBA)

Exam One: Review

• Topics Covered– If it was assigned reading or we talked about it in class, it’s

included (does not text include examples).

• Exam Format– 18 multiple choice (1 pt), 11 short answer (2 pts).– Should be able to finish in 55 min.

• Focus of the Exam– A combination of knowing basic concepts and applying

these concepts to “real” situations.

Exam One: Review• Chapter One (not in test)• Chapter Two

– What is the general environment and how do we include it (SMFA)?

– NOT the segments.– Five Forces in detail.

• Chapter Four– What are the business-level

strategies, the advantages & assumptions associated with each?

• Chapter Six– What are the levels of

diversification and associated corporate-level strategies?

– When is a particular corporate-level strategy appropriate?

• Chapter Ten– What is opportunistic behavior

and why is it a problem?– What are the corporate

governance mechanisms and the limitation of each?

That’s all folks!!!(It’s not that tough - if you know your stuff)

Questions?

Comments?

Concerns?

Anxieties?

Internal Model of Superior Returns

Car Shuttle Business

Rides from USD to

Old Town Transit Center using my 2005 Honda CRV

Leaves every 30 min from campus Monday – Friday from 7:15-9:45 AM and from 3:00-6:30 PM.

No other such service in San Diego at this time

How many willing to How many willing to

pay $10.00 or more for pay $10.00 or more for

this service???this service???


(Core Competency)



The Resource-Based Model suggests that above-average returns for any firm are largely determined by characteristics inside the firm.


The Resource-Based view focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.


Resource-Based Model of Superior ReturnsResource-Based Model of Superior Returns

Which Leads To

Combined With

Results In

ResourcesResourcesResourcesResources**** TangibleTangibleTangibleTangible

**** IntangibleIntangibleIntangibleIntangible

CapabilitiesCapabilitiesCapabilitiesCapabilities

Teams of Teams of ResourcesResourcesTeams of Teams of ResourcesResources

Sources of Sources of SustainedSustained

Competitive Competitive AdvantageAdvantage



CoreCoreCoreCoreCompetenciesCompetenciesCompetenciesCompetencies

Above-AverageAbove-AverageReturnsReturns


StrategicStrategicStrategicStrategicCompetitivenessCompetitivenessCompetitivenessCompetitiveness

Components of Components of Internal AnalysisInternal AnalysisComponents of Components of

Internal AnalysisInternal Analysis





Resource-Based Model of Superior ReturnsResource-Based Model of Superior Returns

Tangible ResourcesTangible ResourcesFinancialFinancial**

PhysicalPhysical**

Human ResourcesHuman Resources**

OrganizationalOrganizational**

ResourcesResources What a firm Has...

What a firm has to work with:

its assets, including its people and the value of its brand name

Resources represent inputs into a firm’s production process...

such as capital equipment, skills of employees, brand names, finances and talented managers

ResourcesResources

Intangible ResourcesIntangible Resources

TechnologicalTechnological**

InnovationInnovation**

ReputationReputation**

CapabilitiesCapabilities What a firm Does...

Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.

Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources.

The combination of specific firm capabilities with specific firm resources results in the core competency of the firm.

Core Competency

What a firm does with what a firm has...

But is it Strategically Valuable?Strategically Valuable?

Question: How do we determine if what a firm does with what a firm has is strategically valuable?

Answer:Does it give the firm a Sustained Competitive AdvantageSustained Competitive Advantage?

Sustain Competitive AdvantageSustain Competitive Advantage

ValuableValuable

RareRare

NonsubstitutableNonsubstitutableCompetency that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationshipsCompetency that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships

Competency that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexityCompetency that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity

Competency that are possessed by few, if any, current or potential competitorsCompetency that are possessed by few, if any, current or potential competitors

Competency that helps a firm to exploit opportunities to create value for customersCompetency that helps a firm to exploit opportunities to create value for customers

Costly to ImitateCostly to Imitate

Outcomes from Combinations of the Criteria Outcomes from Combinations of the Criteria for Sustainable Competitive Advantagefor Sustainable Competitive Advantage

Outcomes from Combinations of the Criteria Outcomes from Combinations of the Criteria for Sustainable Competitive Advantagefor Sustainable Competitive Advantage

ValuableValuable RareRareCostly to Costly to ImitateImitate

Nonsub-Nonsub-stitutablestitutable

Competitive Competitive ConsequencesConsequences

Performance Performance ImplicationsImplications

AboveAverageReturns

AboveAverageReturns

NONO YES/NOYES/NO YES/NOYES/NO YES/NOYES/NO

YESYES NONO YES/NOYES/NO YES/NOYES/NO

YESYES NONO YES/NOYES/NOYESYES

YESYESYESYES YESYESYESYES

CompetitiveCompetitiveDisadvantageDisadvantage

Below Below AverageAverageReturnsReturns

CompetitiveCompetitiveParityParity

AverageAverageReturnsReturns

TemporaryTemporaryCompetitiveCompetitiveAdvantageAdvantage

Temporary Temporary Above AveAbove Ave

ReturnsReturns

SustainableCompetitiveAdvantage

SustainableCompetitiveAdvantage

Which Leads To

Combined With

Results In












StrategicStrategicStrategicStrategicCompetitivenessCompetitivenessCompetitivenessCompetitiveness







DistinctiveDistinctiveDistinctiveDistinctiveCompetenciesCompetenciesCompetenciesCompetencies



SustainableSustainableSustainableSustainableCompetitiveCompetitiveCompetitiveCompetitive



Strategically Strategically Strategically Strategically ValuableValuableValuableValuable

Valuable, Rare, not easily imitated or substituted

CombinedWith

Result In

Which May Be

Result In

AdvantageAdvantageAdvantageAdvantage

Warning, Warning, Warning!!!

Products or services that customers like

are NOTNOT core competencies.

Core competencies are the combination

of resources and capabilities that ALLOWALLOW the firm to produce the products and

services that customers like.

Identifying Core CompetenciesStep

1. Prepare a current product/market profile

2. Identify sources of advantage in primary product/markets

3. Determine organizational competencies

4. Determine if competencies give you a sustained competitive advantage

Question

1. What are we selling, to whom and how are we doing?

2. Why do our customers choose our products over others?

3. What about our org. gives us advantage with customers?

4. Is the competency rare, valuable, difficult to imitate or substitute?

Canon’s Core Competencies

Step

1. High end cameras (prior to expansion of the business)

2. Because of the superior optics associated with our lenses

3. The ability to produce superior optical devices

4. Yes, especially as related to cameras BUT also as related to copiers!

Question

1. What are we selling, to whom and how are we doing?

2. Why do our customers choose our products over others?

3. What about our org. gives us advantage with customers?

4. Is the competency rare, valuable, difficult to imitate or substitute?

Canon’s expertise is with optics, not photography. Thus, moving Canon’s expertise is with optics, not photography. Thus, moving into copies makes sense. Moving into film does not. This is why into copies makes sense. Moving into film does not. This is why we focus on resources and capabilities, NOT products.we focus on resources and capabilities, NOT products.

Warning, Warning, Warning!!!

Products or services that customers like

are NOTNOT core competencies.

Core competencies are the combination

of resources and capabilities that ALLOWALLOW the firm to produce the products and

services that customers like.


Necessary Items for all presentations/memos• Use the four questions framework to identify

the firm’s core competency. • Discuss in detail the resources and capabilities that make

up the distinctive competency.• Determine if the distinctive competency is

strategically valuable (valuable, rare, subs, imit).• Determine the firm’s competitive position AND the

financial implications of this position.• Discuss the implications of your analysis.


• Must work together as a group

• Not appropriate for one person to dominate

• ALL must participate

• Any ‘bonus’ depends on equal participation

• I reserve the right to adjust scores for those who do not contribute to the projects based on feedback received from the rest of the group.

SupportActivities

Primary Activities

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure

ProcurementProcurement

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Value Chain Analysishelps to identify which resources and capabilities can add value

Value Chain Analysis(the short version)

• Primary Activities - are those involved with the product or service’s creation, its sale and distribution to buyers, and its service after the sale.

• Support Activities - provide the support necessary for the primary activities to take place.

To be a source of competitive advantage, a resource To be a source of competitive advantage, a resource or capability must some how contributed to the overall or capability must some how contributed to the overall core competency of the firm.core competency of the firm.

Outsourcing?What is it?

Strategic choice to purchase some activities from outside suppliers

Why do it?

Improve Business FocusImprove Business Focus - Lets company focus on broader business issues by having outside experts handle various operational details

Provide Access to World-Class CapabilitiesProvide Access to World-Class Capabilities - The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications

Free Resources Free Resources - Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively

What to Outsource?

• Potentially anything that does not directly related to your core competency

• Be careful not to accidentally erode your competitive position

For example: – If you’re an oil company, why not outsource your

payroll functions– If you’re a bank, you should probably not outsource

your accounting function

The Short Version: Allows you to focus on doing what you do best while hiring others to do what they do best.

• Merger– A transaction where two firms agree to integrate their

operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage

• Acquisition– A transaction where one firm buys another firm with

the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses

Mergers and Acquisitions

Hostile Takeovers and Leveraged Buyouts

• Takeover (Hostile)– An acquisition where the target firm did not solicit

the bid of the acquiring firm. Often results in the replacing of management

• Leveraged Buyout– A restructuring where the management of the firm

and/or outside investors buys all of the assets of the business largely financed with debt and takes the firm private. High debt load commits future cash flows to repay debt, creating increased risk

Reasons for Mergers and Acquisitions

• Increase Market Power– Acquisition intended to reduce the competitive balance of the Acquisition intended to reduce the competitive balance of the

industry. (BP Amoco Arco)industry. (BP Amoco Arco)

• Overcoming Barriers to Entry– Acquisitions overcome costly barriers to entry which may make Acquisitions overcome costly barriers to entry which may make

“start-ups” economically unattractive (Whirlpool and Phillips “start-ups” economically unattractive (Whirlpool and Phillips Appliance Division)Appliance Division)

• New Product Acquisition (lower cost & risk)– Buying established businesses reduces risk of start-up ventures Buying established businesses reduces risk of start-up ventures

(Ford’s acquiring of Jaguar)(Ford’s acquiring of Jaguar)

Reasons for Mergers and Acquisitions

• Increase Speed to Market– Allows entry in a more timely fashion (CBS and iwon)Allows entry in a more timely fashion (CBS and iwon)

• Diversification– For all the reasons previously outlined For all the reasons previously outlined

(Philip Morris and Miller Brewing)(Philip Morris and Miller Brewing)

• Avoiding Excessive Competition– Trying to move where competitive pressures are less intense (GE and Trying to move where competitive pressures are less intense (GE and

NBC)NBC)

• Bigger is Better/Got to Be There Assumption– Based on peer pressure (Exxon & Mobil)Based on peer pressure (Exxon & Mobil)

Problems with AcquisitionsProblems with AcquisitionsProblems with AcquisitionsProblems with Acquisitions

Integration DifficultiesIntegration Difficulties

Differing cultures can make integration of firms difficultDiffering cultures can make integration of firms difficult

Inadequate evaluation of TargetInadequate evaluation of Target““Winners Curse” bid causes acquirer to overpay for firmWinners Curse” bid causes acquirer to overpay for firm

Large or Extraordinary DebtLarge or Extraordinary DebtLarge or Extraordinary DebtLarge or Extraordinary Debt

Costly debt can create onerous burden on cash outflowsCostly debt can create onerous burden on cash outflows

Inability to Achieve SynergyInability to Achieve SynergyJustifying acquisitions can increase estimate of expected Justifying acquisitions can increase estimate of expected benefitsbenefits

Overly DiversifiedOverly DiversifiedAcquirer doesn’t have expertise required to manage Acquirer doesn’t have expertise required to manage unrelated businessesunrelated businesses

Managers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers Overly Focused on AcquisitionsManagers lose track of core business by spending so much Managers lose track of core business by spending so much effort on acquisitionseffort on acquisitions

Too LargeToo LargeLarge bureaucracy reduced innovation and flexibilityLarge bureaucracy reduced innovation and flexibility

Problems with AcquisitionsProblems with Acquisitions

Complementary Assets or ResourcesComplementary Assets or ResourcesBuying firms with assets that meet current needs to build Buying firms with assets that meet current needs to build competitivenesscompetitiveness

Friendly AcquisitionsFriendly AcquisitionsFriendly AcquisitionsFriendly AcquisitionsFriendly deals make integration go more smoothlyFriendly deals make integration go more smoothly

Characteristics of Effective AcquisitionsCharacteristics of Effective AcquisitionsCharacteristics of Effective AcquisitionsCharacteristics of Effective Acquisitions

Careful Selection ProcessCareful Selection ProcessCareful Selection ProcessCareful Selection ProcessDeliberate evaluation and negotiations is more likely to Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergieslead to easy integration and building synergies

Maintain Financial SlackMaintain Financial SlackMaintain Financial SlackMaintain Financial SlackProvide enough additional financial resources so that Provide enough additional financial resources so that profitable projects would not be foregoneprofitable projects would not be foregone

FlexibilityFlexibilityFlexibilityFlexibilityHas experience at managing change and is flexible and Has experience at managing change and is flexible and adaptableadaptable

Characteristics of Effective AcquisitionsCharacteristics of Effective AcquisitionsCharacteristics of Effective AcquisitionsCharacteristics of Effective Acquisitions

Low-to-Moderate DebtLow-to-Moderate DebtLow-to-Moderate DebtLow-to-Moderate DebtMerged firm maintains financial flexibilityMerged firm maintains financial flexibility

Do it For the Right Reasons Do it For the Right Reasons Do it For the Right Reasons Do it For the Right Reasons Avoid the bigger is better/Got to be there trapAvoid the bigger is better/Got to be there trap

Make sure you have the core competencies to Make sure you have the core competencies to effectively utilize the acquired resources!!!!effectively utilize the acquired resources!!!!


Sharing Activities

Alternative Diversification StrategiesAlternative Diversification Strategies

Related Diversification Strategies

11

22


Key Characteristic

Assumptions

Activities involved in the businesses are similar enough that sharing expertise is meaningful

The skills transferred represent significant sources of competitive advantage for the receiving unit

11

22

33

Transfer of skills involves activities which areimportant to competitive advantage

The sharing of highly specialized skills and expertiseThe sharing of highly specialized skills and expertise

Group Discussion Questions

• Image you are the CEO of Ocean Kayaks

• You have decided it is time to diversify

• What are your core competencies?

• What would be an appropriate area of expansion to build on your core competencies?

• If you were to expand via acquisition, who would be an appropriate acquisition target?

http://www.oceankayak.com/scrambler.html

International Strategy

““The selling The selling and/orand/or production production of products in markets outside the of products in markets outside the

firm’s domestic market”firm’s domestic market”

Good ‘Strategic’ Reasons forGoing Global

• Increased Market Share (Sales)– Increased sales, increased profits– Must adapt to local tastes and preferences

• Location Specific Advantages (Production)– Lower costs OR other reasons– Must factor in transportation costs, trade

barriers, political risk

Four Basic Strategies

• International Strategy

• Multi-domestic Strategy

• Global Strategy

• Transnational Strategy

TransnationalTransnationalStrategyStrategy

GlobalGlobalStrategyStrategy

InternationalInternational StrategyStrategy

MultidomesticMultidomestic StrategyStrategy

Pressures for Local Responsiveness(need to locally adapt)

CostPressures(need to keep costs down)

Low High

Low

High

Local Responsiveness

• Consumer tastes and preferences

• Infrastructure and traditional practices

• Distribution channels

• Host government demands

International Strategy

• Transfer valuable skills and products (and production capabilities) to a foreign market

• Minimal adaptation for the local environment

You have what they want and you are willing to sell it to the (e.g., McDonald’s)

Multidomestic Strategy

• Customize both product offerings and marketing strategy

• Maximum local adaptations

Basically setting up a completely new business in the target market

(e.g., French Grocery Chain in Poland)

Global Strategy

• Offer standardize product built using a global network

• Global production (to reduce costs) and standardized in marketing

Offering a generic product at a low price

(e.g., Marlboro Cigarettes)

Transnational Strategy

• Low cost and local responsiveness

• Trying to do both at the same time

Hum? I’m not convinced it’s possible

The Four Strategies Compared

Strategy Advantage Disadvantage

InternationalEasy to do and canfocus on yourdistinctive traits

Lacks responsivenessand not necessarilycost effective

GlobalCost savings byexploiting locationspecific advantages

Lacks in the area oflocal responsiveness

MultidomesticMaximizes in thearea of localresponsiveness

Can be very costlyto implement

TransnationalLocally responsiveand cost effective atthe same time

Difficult (impossible)to implement

What’s the Best Strategy?

It Depends!!!Fast Food in Every Country (Int’l)

Soft Drinks World Wide (Global)

Grocery Stores in Poland (M-D)

Entering Foreign Markets

The FOUR entry modes

1. Exporting

2. Licensing

3. Strategic Alliance

4. Wholly-Owned subsidiary (including Acquisitions)

A trade off of risk and controlA trade off of risk and control

Exporting

Establish distribution channels through contractual relationships

– Common way to enter a new int’l market– May have high transportation costs– May encounter high import tariffs– May be impossible to do depending on product

characteristics

Exporting

Primary Advantage: – No need to establish operations in target

country (low risklow risk)

Primary Disadvantage: – Less control over marketing and distribution

(low controllow control)

Licensing

Firm authorizes another firm to manufacture and sell its products

– Licensing firm is paid a royalty on each unit produced and sold

– Can also include Franchising where the franchisee is required to follow strict rules of operation

– May be impossible to do depending on product characteristics

Licensing

Primary Advantage: – Licensee takes the risk associated with

manufacturing investment (low risklow risk)

Primary Disadvantage: – Licensing firm loses control over product quality

and distribution (low controllow control)– Licensor learns the licensing firm’s technological

know how (low controllow control)

Strategic Alliance

A business entity/activity that is jointly owned by two or more otherwise independent firms

– Usually involves a foreign company with a new product or technology and a host company with access to distribution or local knowledge

– May experience difficulty in merging cultures– May incorrectly assess the intent of the partner

Strategic Alliance

Primary Advantage: – Enables a firm to share the risks and resources

when expanding into a new environment (moderate riskmoderate risk)

Primary Disadvantage: – Must share in the decision making with the

strategic partner (moderate controlmoderate control)

Wholly-Owned Subsidiary

A 100% owned subsidiary of a company based in another country

– The parent firm develops an entirely new firm in the target market

– The parent firm acquires an established firm and uses that firm to promotes its products in the target market

Wholly-Owned Subsidiary

Primary Advantage: – The parent firm has complete managerial

control over the subsidiary (high controlhigh control)

Primary Disadvantage: – The parent firm incurs the entire cost of

expansion into the target market (high riskhigh risk)

What’s the Best Strategy?

It Depends!!!Level of acceptable risk

Level of pre-existing knowledge

Nature of product or service

Cooperative Strategy

A strategy in which firms work together to achieve a shared objective

Strategic Alliance: Firms combine some of their resources and capabilities to create new competitive advantages.

Collusive Strategy: Two or more firms cooperating to raise prices above fully competitive market prices.

Types of Collusion

Explicit Conspiracy: Getting together to fix prices - Illegal in US but practices elsewhere (e.g. Org of the Petroleum Exporting Countries, De Beers)

Tacit Coordination:Spontaneous cooperation in concentrated industry- NOT illegal and practiced in US (e.g. with Oil)

Facilitating Practices:Announcing of prices/matching guarantees- NOT illegal and practiced in US (e.g. with drugs)

Types of Strategic Alliances

Joint Venture: Independent firm is created by the joining assets from two other firms where each contributes 50% of the total

Equity Strategic Alliance: Partnership where the two partners do not own equal shares

Non-equity Strategic Alliance: Contract is given to supply, produce or distribute a firm’s goods or services (without equity sharing)

Types of Strategic Alliances

Slow Cycle: (imitation is difficult)Reason: To gain access to restricted markets

Fast Cycle: (imitation is ongoing)Reason: Speed/reduce risk of new innovations

In either case, focus is on enhancing KEY resources/capabilities (key resource being access to markets or introduction of new innovations)

Business Level Cooperative Strategies

Complementary AlliancesSharing of resources and capabilities in complementary ways to gain advantage

Vertical: Up and down the value chain (someone to assist with procurement or sales)

Horizontal: Same stage of the value chain (to build a better product)

Bottom line: Convince people to buy your product or service over others for whatever reason

Other Cooperative Strategies

Corporate Level AllianceUsed to diversify into new products or markets. As previously discussed and based on complimentary resources and capabilities

International Cooperative StrategyAs a mechanism for entering new markets. Again, as previously discussion with a focus on complimentary resources and capabilities

Network Cooperative StrategyUsed to advance the interests of a group of firms (e.g., industry). Begins to look like collusion

Cooperative Strategies Risks

• Unclear expectations for each party involved• Exploitation by one party due to inadequate

contractual safeguards• Failure to achieve synergies due to

misrepresentation of resources and capabilities• Failure to achieve synergies due to inability to

integrate resources and capabilities due to cultural clashes between the parties involved

Managing Cooperative Strategies

Cost Minimization:

Minimize risks by having good contractual safeguards in place. Monitor activities of jointly operated activities.

* Easier to do in the short term

Opportunity Maximization:

Maximize benefits by building trusting relationships and by mutually addressing issues that arise as a result of the relationship.

* More cost effective in the long term

Entrepreneurship Entrepreneurship and Innovationand Innovation

Crocodile Rock - Elton JohnNixon is President (not for long)Microsoft does not exist (neither do you)IBM offers a PC 9 years later

First Personal Computer is born (the Alto)

Same company invents the mouse, graphical interfacing and word processing

What company are we talking about???

Entrepreneurship and Innovation• Invention

– The act of creating or developing a new product or process

• Innovation– The process of creating a commercial product from an invention

• Entrepreneur– An individual who creates a new venture or develops an innovation

and takes risks entering them into the marketplace

• Corporate Entreprenuership– The process whereby an individual or group in an existing organization

creates a new venture or develops a process innovation

Internal Corporate Venturing1 Autonomous strategic behaviorAutonomous strategic behavior is a bottom-up is a bottom-up

process through which Product Champions pursue process through which Product Champions pursue new product ideas to commercializationnew product ideas to commercialization

Product ChampionsProduct Champions are individuals who have an are individuals who have an entrepreneurial vision for a new product and seek entrepreneurial vision for a new product and seek support for its commercializationsupport for its commercialization

2 Induced strategic behaviorInduced strategic behavior is a top-down process is a top-down process in which the current strategy and structure foster in which the current strategy and structure foster product innovations that are closely associated with product innovations that are closely associated with the current strategythe current strategy

A DecisionA Decision on which corporate resources to on which corporate resources to deploy for new technology development and which deploy for new technology development and which innovative ideas to bring to marketinnovative ideas to bring to market

Implementing Internal Corporate Ventures

• Barriers to Integration1. Independent Frames of Reference (different

ways of seeing the world)

2. Organizational Politics

• Facilitating Integration1. Shared Values Associated with Innovation

2. Leadership Stressing Innovation

3. “Innovation Friendly” Goals and Budgets

4. An Effective Innovation System

External Sources of Innovation

• Strategic Alliances: A partnership between firms whereby resources, capabilities and core competencies are combined to pursue common interests and goals– Benefit: Sharing Expertise and Costs (R&D)

– Main Risk: The Theft of a Firm’s Innovations

• Acquisitions and Venture Capital: The purchasing of innovation through acquisition or the allocation of resources to entrepreneurs who are involved in a project with high growth potential– Benefit: Faster and cheaper than in house innovation

– Main Risk: Loss of the ability to innovate internally

Entrepreneurship and Innovation:Not Just for the Fortune 500

• 80% of the world’s R&D from firms of 10,000 or more employees

• More than half of the world’s “Inventions” come from smaller firms (but not the innovations)

• Smaller firms (500 or less employees) account for 53% of the workforce, 47% of sales and 51% of private sector GDP.

Strategic Leadership

• The ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary

• Involves managing through others, managing an entire enterprise rather than a functional subunit, and coping with change that seems to be increasing exponentially.

Tough job to be the companies strategic leader

Why are Strategic Leaders so Important?

• Because they . . . – determine a firm’s strategic direction by developing the

firm’s long-term vision,– ensure that the firm’s core competencies are

emphasized in strategic implementation efforts,– have a large influence on a firm’s ability to attract and

retain high quality employees,– shaping and reinforcing the firm’s culture,– set the ethical tone of a company and,– determine the appropriate level of organizational

control.

Strategic Leadership and You

• You are not going to be the CEO right away (probably). However, you might be making strategic recommendations to the CEO right away. Therefore, you need to understand strategic leadership.

• The actions of the strategic leadership have a HUGE effect on the firm (will determine what kind of place it is to work)

• Top Management Team– The key managers who are responsible for

formulating and implementing the strategy.

• Heterogeneous Top Management Team– A top management team composed of individuals

with different functional backgrounds, experiences, and education.

• More heterogeneous top management teams . . .– are better at strategic formulation– struggle with strategic implementation

Managerial Labor Market

• Internal Labor Market– The selection of new management from within the org

– Familiarity with firm and industry

– Maintaining firm specific knowledge

– Often more accepted within the company

• External Labor Market– The selection new management from outside the org

– Brings in fresh ideas

– More likely to institute organizational changes

Effects of CEO Succession and Top Management Team Composition

Effects of CEO Succession and Top Management Team Composition

StrategicChange

StrategicChange

Top Management

Team

Managerial Labor Market:CEO Succession

Heterogeneous

Homogeneous

InternalCEO Succession

Stable StrategyStable

Strategy

Stable Strategy with

Innovation

Stable Strategy with

Innovation

Ambiguous:Possible change in Top Management

Team and Strategy

Ambiguous:Possible change in Top Management

Team and Strategy

ExternalCEO Succession

What is best? It Depends!

• Good, stable industry with a sound core competency– Stability sounds good! (Internal CEO and homogeneous top

management team)• Good Company in a rapidly changing industry

– Need to keep innovating (Keep the CEO but make sure top team is heterogeneous)

• Rapidly changing industry without any core competencies– Serious change is needed! (Change CEO and develop a

heterogeneous top management team)• Homogeneous top team with a company going no where?

– Perhaps an outside CEO can shake things up a bit

The Balanced Scorecard

A framework that firms can use to verify that they have established the appropriate controls to assess their performance (not just financial).

A mechanism for monitoring performance on a variety of dimensions including financial, customer, internal business processes, and learning and growth

The Balanced ScorecardFinancial

– Cash flow, return on equity, return of assets, etc.

Customer– Anticipating customers needs, customer service practices,

% repeat customers, Communication with customers, etc.

Internal Business Processes– Asset utilization improvements, employee morale,

turnover rates, etc.

Learning and Growth– Innov. abilities, new product intros, employee skills, etc.

What’s most important? The key What’s most important? The key resources and capabilitiesresources and capabilities that lead to you firm’s competitive advantage!that lead to you firm’s competitive advantage!

Final Project

From the smaller presentations:

• We know what the industry looks like (including external opportunities and threats)

• We know what our firm looks like (including internal strengths and weaknesses)

Now, what do we do about it?

Final Project

Make specific RECOMMENDATIONSRECOMMENDATIONS!

What you’re being paid to do as a consultant.

A POTENTIALPOTENTIAL framework (not necessary!)

Outline the Strengths, Weaknesses, Opportunities

and Threats for your company pulling from the previous.

Final Project• Most ImportantMost Important: Make specific recommendations

– Designed to minimize weakness, deal with threats, capitalize on opportunities while building on strengths.

• Make sure your recommendations tie specifically to material previously presented in class. – For example, can you use your core competency to expand into an area you

identified as a threat of substitutes during the Porter’s Five Forces analysis? - a rough example only!

• Be specific with your recommendations. – make assumptions if necessary but clearly state your assumptions during

the presentation.

Final Project

• Support your recommendations.– The support of your recommendations comes from the previous

presentations - all of them, not just the last.

• Do not include any recommendations that are not justified based on your previous strategic analyses– Only include recs that are supported by previous analyses.

• Number of recommendations? – One REALLY good (i.e., supported) rec could be enough.– Most groups will probably have 3 or 4 (more is too many)

• Make it Professional with an intro and conclusion.– Whatever format communicates your message professionally

The Social Responsibility of Firms

Suggests that a corporation has responsibilities to society that extend beyond making a profit

Milton Friedman:There is one and only social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Carroll’s Four Responsibilities

1. EconomicTo produce goods and services of value to society so that the firm can repay its creditors and shareholders

2. LegalDefined by governments in laws that management is expected to obey

3. EthicalTo follow the generally held beliefs about behavior in a particular society

4. DiscretionaryPurely voluntary obligations assumed by the firm

Carroll’s Four Responsibilities

Economic(Must)

Legal(Have To)

Ethical(Should)

Discretion(Might)

Stuff that has to be done

Done by socially responsible firms

Listed in order of priority according to Carroll

The Social Responsibility of Firms

Key Question:

“Responsible to whom?

Multiple Stakeholders:

Investors, customers, local community, government regulators, employees, etc.

Carroll’s Assumption:

Investors come first (an assumption)

Treating Stakeholders Ethically

Ethics:Consensually accepted standards of behavior for a particular environment, occupation or profession.

Three basic approaches to ethical behavior1. Utilitarian

2. Individual Rights

3. Justice


Utilitarian ApproachActions and plans should be judged by their consequences. Behave ways that produce the greatest benefit to society.

Individual Rights ApproachFundamental rights should be respected in all decisions. A behavior should be avoided if it interferes with the rights of others.

Justice ApproachDecision makers should be equitable, fair and impartial in the distribution of costs and benefits to individuals and groups. A behavior should be avoided if it gives preferential treatment to one group or individual at the expense of others.


1. UtilityDoes an action/strategy optimize the satisfaction of all stakeholders involved?

2. RightsDoes an action/strategy respect the rights of the individuals involved?

3. JusticeIs the action/strategy consistent with the concept of justice for all?

Operating Ethically

• Ethics Committees– Internal Monitoring

• Codes of Conduct– Statements of appropriate behavior

• Corporate Vision– The guiding principles of the firm

Exam Two Overview• Chapter 3 – Internal Analysis

– Know core comp in detail, including 4 questions

• Chapter 7 – Acquis. & Restructuring Strategies

– Know different types and difficulties

• Chapter 8 – International Strategies

– Two key models, know them both

• Chapter 9 – Cooperative Strategies

– Know types and reasons for using each

• Chapter 12 – Strategic Entrepreneurship

– Know types and difficulties

• Ethics of Strategy/Natural Environment

– Carroll’s responsibilities/stakeholder approaches

What is Strategy?

• The commitments, decisions, and actions that allow the firm to make more money!

How is this done?

• Two competing models1. Industrial Organizational Model

2. Resource-Based Model



Threat of New

Entrants

Threat of New

Entrants



in Industry


in Industry






(Core Competency)










SustainableSustainableSustainableSustainableCompetitiveCompetitiveCompetitiveCompetitive



Strategically Strategically Strategically Strategically ValuableValuableValuableValuable

Valuable, Rare, not easily imitated or substituted

CombinedWith

Result In

Which May Be

Result In

AdvantageAdvantageAdvantageAdvantage

Which model was most important?

It Depends!

(i.e., neither or both)

Model Three:Life in the Real World!(the focus of this class)

The external environment and the resources and capabilities of the firm drive strategy.

Firms should seek to maximize profitability by locate and compete in particularly attractive environments (industries) where the firm can

most effectively leverage existing and potential resources (core competencies).

Entry

SupplierBuyer

Subs.

RivalryCore Comp. that leads to

SCA? Where else might this

Core Comp. Apply?

Industry A

Industry B

Industry C

Final Project

From the smaller presentations:

• We know what the industry looks like (including external opportunities and threats)

• We know what our firm looks like (including internal strengths and weaknesses)

Now, what do we do about it?

Final Project• Most ImportantMost Important: Make specific recommendations

– Designed to minimize weakness, deal with threats, capitalize on opportunities while building on strengths.

• Make sure your recommendations tie specifically to material previously presented in class. – For example, can you use your core competency to expand into an area you

identified as a threat of substitutes during the Porter’s Five Forces analysis? - a rough example only!

• Be specific with your recommendations. – make assumptions if necessary but clearly state your assumptions during

the presentation.

Final Project

• Support your recommendations.– The support of your recommendations comes from the previous

presentations - all of them, not just the last.

• Do not include any recommendations that are not justified based on your previous strategic analyses– Only include recs that are supported by previous analyses.

• Number of recommendations? – One REALLY good (i.e., supported) rec could be enough.– Most groups will probably have 3 or 4 (more is too many)

• Make it Professional with an intro and conclusion.– Whatever format communicates your message professionally

mgmt 490 strategic management prof. stephen standifird

Documents

application strategy

selected strategy

average returns

industry rivals

exchange rates

attractive profitable

savings rates

resourcebased model