strategic management 2010 prashant

PROF. DR. LÜTFİHAK ALPKANPROF. DR. LÜTFİHAK ALPKAN

Gebze Yüksek Teknoloji Enstitüsü Gebze Yüksek Teknoloji Enstitüsü İşletme Fakültesiİşletme Fakültesi

PROF. DR. LÜTFİHAK ALPKANPROF. DR. LÜTFİHAK ALPKAN

Gebze Yüksek Teknoloji Enstitüsü Gebze Yüksek Teknoloji Enstitüsü İşletme Fakültesiİşletme Fakültesi

Strategic Strategic ManagementManagement

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

STRATEGIC MANAGEMENT

Course OutlineCourse Outline

Part 1Part 1 Introduction to Competitive AnalysisIntroduction to Competitive AnalysisChapter 1 Planning & Measuring for Competitive Chapter 1 Planning & Measuring for Competitive AdvantageAdvantage

Part 2Part 2 SWOT AnalysisSWOT Analysis Chapter 2 External Analysis of Opportunities and Chapter 2 External Analysis of Opportunities and ThreatsThreatsChapter Chapter 33 Internal Analysis of Strenghts and Internal Analysis of Strenghts and WeaknessesWeaknesses

Part 3Part 3 Choice of StrategyChoice of StrategyChapter Chapter 44 Grand Strategies Grand Strategies Chapter Chapter 55 Strategic Business Unit (SBU) Level Strategic Business Unit (SBU) Level StrategiesStrategies

Part Part 44 Global CompetitionGlobal CompetitionChapter Chapter 66 National Sources of National Sources of GlobalGlobal Competitive Competitive PowerPower

1-3Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

WEEK DATE TEACHING PLAN

1 15. 09 INTRODUCTION

2 22. 09 Ch. 1: Planning & Measuring for Competitive Advantage

3 29. 09 Ch. 1: con’t. (Comparison of Competitiveness)

4 06.10 Ch. 2: External Analysis of Opportunities and Threats

5 13. 10 Ch. 2: con’t. (RBV & Value Chain Analysis)

6 20. 10 QUIZ 1

7 27. 10 Ch. 3: Internal Analysis of Strengths and Weaknesses

8 03. 11 MIDTERM EXAM 1

9 10. 12 Ch. 4: Grand Strategies (Growth Strategies)

10 24. 12 Ch. 4: con’t. (Cooperation & Downscoping Strategies)

11 01. 12 Ch. 5: Strategic Business Unit (SBU) Level Strategies

12 08. 12 QUIZ 2

13 15. 12 Ch. 6: National Sources of Global Competitive Power

14 22.12 MIDTERM EXAM 2

15 29.12 OVERVIEW

Planning & Measuring for Competitive

Advantage

Part 1Part 1 Introduction to Introduction to

CompetitiveCompetitive AnalysisAnalysis

Chapter 1Chapter 1

LEARNING OBJECTIVES

• STRATEGIC MANAGEMENT CONCEPTS

• LEVELS OF STRATEGY

• BENEFITS AND RISKS OF STRATEGIC MANAGEMENT

• STRATEGIC INTENTS

• STRATEGIC PERFORMANCE CRITERIA

Strategic Management

• Analysis • Strategic goals (vision, mission, strategic objectives)

• Internal and external environment of the firm

• Strategic decisions• What industries should we compete in?

• How should we compete in those industries?

• Actions• Allocate necessary resources

• Design the organization to bring intended strategies to reality

Strategic Management

• Strategic management is the study of why some firms outperform others

• How to compete in order to create competitive advantages in the marketplace

• How to create competitive advantages in the market place

Unique and valuable Difficult for competitors to copy or substitute

Strategic Management Concepts

Definition: Strategic management consists of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.

Key attributes of strategic management

• Directs the organization toward overall goals and objectives.

• Includes multiple stakeholders in decision making

• Needs to incorporate short-term and long-term perspectives

• Recognizes trade-offs between efficiency and effectiveness

Three levels of Strategy

Corporate Level Strategies

• by CEO and Board of Directors

• Horizon: long term

• Focus on domain selection:

What business sectors to enter/invest ?

How should the resources be allocated across the businesses ?

Functional

Business

Corporate

Business Level Strategies

• by Business Managers

• Horizon: Medium

• Focus on competitive tactics:

How to compete in this business sector?

What markets to concentrate on ?


Functional

Business

Corporate

Functional Level Strategies

• By functional managers, e.g. marketing manager

• Short Term

• Focus on functional efficiency Annual objectives & decisions within functional

areas Improving efficiency within functional areas


Functional

Business

Corporate

Benefits of strategic management

• Adaptability: Proactively monitor the environment

• Motivation: Involvement of employees in decision making increases their motivation

• Acceptance: Reduces employees resistance to changes

• Future Orientation: Forces the company to think strategically about its actions

Risks of Strategic Management

• Underestimation of today:

Time spent may have a negative impact on operational responsibilities

• Conflict between planners and doers:

Strategy Formulators may not be involved in the implementation process

Strategic Intents

Vision

Winning competitive battles through deciding how to leverage resources, capabilities, and core

competencies.

Mission

An application of strategic intent in terms of products to be offered and markets to be served.

What an organization should look like once its has successfully implemented its strategies and achieved its full potential.

WHAT IS A VISION ?

Corporate Vision Statements

Medtronic

• Restoring patients to full life

Wells Fargo

• We want to satisfy all of our customers’ financial needs and help them succeed financially.

McDonald’s

• Our vision is to be the world’s best quick service restaurant.

Disney

• To be the happiest place on earth

A declaration of organizational purpose providing the social justification for its existence.

WHAT IS A MISSION?

WHY Stating the Corporate Mission?

A mission statement provides employees of the organization with a shared sense of

purpose, direction, and opportunity.

and guides geographically dispersed employees to work independently and yet

collectively toward realizing the organization’s goals.

9 Components of a Mission Statement

• Customers

• Products or Services

• Markets

• Technology

• Concern for Survival, Growth, & Profitability

• Philosophy

• Self-Concept

• Concern for Public Image

• Concern for Employees

9 Phrases of “Our Mission is...

...to serve consumers, industry and government with high quality...

...our refreshment products include soft drinks, fruit juices,...

...our markets served include restaurants, hotels,...

...we apply electreonics technology in the production of hardware...

...to achieve sufficient profit to finance our growth and survival...

9 Phrases of “Our Mission is...

...we emphasize the meeting of the needs of our stakeholders.

...we have a results-oriented and entrepreneurial corporate culture.

...we are sensitive to our image with our customers and community.

...we create a sense of mutual trust with our members.”

Corporate Mission Statements

Federal Express

• To produce superior financial returns for our shareholders as we serve our customers with the highest quality transportation, logistics, and e-commerce.

Brinker International

To be the very best in the business. Our game plan is status go…we are constantly looking ahead, building on our strengths, and reaching for new goals.

In our quest of these goals, we look at the three stars of the Brinker logo and are reminded of the basic values that are the strength of this company…People, Quality and Profitability. Everything we do at Brinker must support these core values.

We also look at the eight golden flames depicted in our logo, and are reminded of the fire that ignites our mission and makes up the heart and soul of this incredible company.

These flames are: Customers, Food, Team, Concepts, Culture, Partners, Community and Shareholders. As keeper of these flames, we will continue to build on our strengths and work together to be the best in the business.

Corporate Mission Statements

SOME SAMPLE STRATEGIC INTENTS

FORD Motor Company

Our Vision: to become the world's leading company for automotive products and services.

Our Mission: we are a global, diverse family with a proud heritage, passionately committed to providing outstanding products and services.

Our Values: We do the right thing for our people, our environment and our society, but above all for our customers.


FORD OTOSAN AŞ.

VizyonOtomotiv ürün ve hizmetlerinde Türkiye'nin lider tüketici odaklı şirketi olmak.

MisyonMüşteri ihtiyaç ve beklentilerine en uygun otomotiv ürün ve hizmetlerini sunarak Türkiye otomotiv pazarının lideri olmak. Ford Avrupa'nın ticari araç üretim ve geliştirme merkezi olmak.


TOYOTA MOTOR Corporation

Slogan: Toyota will continue to innovate relentlessly to ensure further growth.

Mission: Toyota seeks to create a more prosperous society through automotive manufacturing.

Vision: Toyota aims to achieve long-term, stable growth in harmony with the environment, the global economy, the local communities it serves, and its stakeholders.


HONDA MOTOR Company Let’s go! We have dreams to pursue!

Since our foundation, Honda has been powered by dreams. Our initial and ongoing dream is to provide genuine satisfaction to people everywhere. Providing products of the highest quality at a reasonable price, we are realizing that dream one step at a time.

Our mission: is to offer products, technologies and services that contribute to society and make people’s lives better. That’s why we’re always ahead of the curve, coming up with technologies that make mobility safer and more environmentally sustainable. We see challenges ahead and are facing them squarely, determined to build a brighter future.

8 Dimensions of Strategic Goals

• Profitability

• Productivity

• Physical & Financial Resources

• Managerial Performance & Development

• Worker Performance & Attitude

• Innovation

• Market Standing

• Social Responsibility

Some Strategic Objectives: Financial Goals

Proctor and Gamble

Increase sales growth 6% to 8% and accelerate core net earnings growth to 13% to 15% per share in each of the next five years.

Automation

Generate Internet-related revenue of $1.5 billion

Wells Fargo

Increase the contribution of Banking Group earnings from investments, brokerage, and insurance from 16% to 25%

Some Strategic Objectives: Nonfinancial Goals

Federal ExpressCapitalize on e-commerce

Wells FargoWe want a majority of our customers, when surveyed, to

say they consider Wells Fargo the best financial institution in the community.

Walgreen’sWe want to operate 6,000 stores by 2010-up from 3000 in

the year 2000.

BP AmocoReduce greenhouse gases by 10% (from a 1990 base) by

2010.


5 Characteristics of Strategic Goals

• Specific

• Measurable

• Attainable

• Realistic

• Timely

5 Dimensions of Operational Strategies

• Flexibility

• Innovation

• Speed

• Cost

• Quality

Comparisons of Competitiveness

• Comparison with past performance• Trend analysis – Where are you relative to

the past.

• Stages of Industry Evolution Emergence, Growth, Maturity and Decline Strengths or competencies needed at each stage

are different

• Benchmarking with the competitors Key competitors Best practices irrespective of industry

Competing for Superior Performance

• Business firms as associations of productive assets try to outperform their rivals in the game of trying to make assets available better and before them

• If actual value (AV) < expected value (EV), productive assets shift to more profitable firms.

Actual Value (AV) vs. Expected Value (EV)

Firm A Firm B Firm C Hire “A” level

engineers, pay them “A” wages, generate

“B” performance.

Hire “A” level engineers, pay them “A” wages, generate “A” performance.

Hire “B” level engineers, pay them “B” wages, generate “A” performance.

AV < EV Below Normal

Economic Performance

AV = EV Normal Economic

Performance

AV > EV Above Normal

Economic Performance

(Economic Rent).

Competitive Disadvantage

Competitive Parity Competitive Advantage

Assumptions: (1) Only productive asset is engineers (2) A > B in terms of wages and skills.

Measuring Firm Performance

• Survival as a Measure

• Accounting Measures

• Tobin’s q

Survival as a Performance Measure

• Firm survival over an extended period indicates that it is generating at least normal economic returns.

• Strength: Easy to Use.

• Weaknesses:• When does survival end -- after a takeover,

bankruptcy, or changes in businesses?

• Death can occur slowly

• Death or just a setback?

• Tells nothing about above normal performance

Accounting Measures: Categories

• Profitability Ratios (e.g. ROA, ROE, ROS)

• Profit relative to size

• Liquidity Ratios (e.g. Current Ratio)

• Meeting short-term financial obligations

• Leverage Ratios (e.g. Debts / Assets, Debts / Equity)

• Indebtedness / Capital Structure

• Activity Effectiveness Ratios (e.g. Sales / Assets)

• Level of activity in a business

Limitations of Accounting Measures

• Managerial discretion over accounting methods.

• Incentives to distort: Bonuses, violations

of debt covenants, antitrust issues, etc.

• Many intangibles not recognized.

Tobin’s q

• Firm’s market value = market value of its present assets

• Limitation: it is difficult to determine the replacement cost of a firm’s assets

• q = 1 Normal Performance

• q > 1 Above normal performance

• q < 1 Below normal performance

q = a firm’s market value

a firm’s replacement cost



Chapter Chapter 22 External Analysis of Opportunities

and Threats

Part 2Part 2 SWOT AnalysisSWOT Analysis

LEARNING OBJECTIVES

• INDUSTRIAL ORGANIZATION MODEL

• GENERAL & TASK ENVIRONMENT ANALYSIS

• INDUSTRY STRUCTURE ANALYSIS

• MODEL OF INDUSTRY COMPETITION ANALYSIS

• STRATEGIC GROUPS ANALYSIS

• COMPETITORS’ ANALYSIS

I/O Model of Superior ReturnsI/O Model of Superior Returns

The Industrial Organization Model suggests that above-average returns for any firm are largely determined by characteristics outside the firm.

The I/O model largely focuses on industry structure or attractiveness of the external environment rather than internal characteristics of the firm.

I/O Assumptions

• Environment determines strategy

• Firms possess similar resources and thus pursue similar strategies.

• Resources are mobile

• Decision-makers – rational & act in the best interests of the firm.

Action required:Action required:External External EnvironmentEnvironmentExternal External EnvironmentEnvironment

General EnvironmentGeneral Environment

Industry EnvironmentIndustry Environment

Competitive EnvironmentCompetitive Environment

Study the external environment, especially the industry environment.


External EnvironmentExternal Environment




An Attractive An Attractive IndustryIndustryAn Attractive An Attractive IndustryIndustry

An industry whose An industry whose structural characteristics structural characteristics suggest above-average suggest above-average returns are possiblereturns are possible

An industry whose An industry whose structural characteristics structural characteristics suggest above-average suggest above-average returns are possiblereturns are possible

Action required:Action required:Locate an industry with high potential for above-average returns.

I/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior ReturnsI/O Model of Superior Returns





Attractive IndustryAttractive Industry

An industry whose structural characteristics suggest above-average returns are possible


Action required:Action required:Identify strategy called for by the industry to earn above-average returns.


Selection of a strategy linked with above-average returns in a particular industry


StrategyFormulationStrategyFormulation








Strategy FormulationStrategy Formulation



Action required:Action required:Develop or acquire assets and skills needed to implement the strategy.

Assets and SkillsAssets and Skills

Assets and skills required to implement a chosen strategy
















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

Strategy ImplementationStrategy Implementation

Selection of strategic actions linked with effective implementation of the chosen strategy
















Action required:Action required:

Strategy ImplementationStrategy Implementation



Superior ReturnsSuperior Returns

Earning of above-average returnsEarning of above-average returns

Maintain selected strategy in order to outperform industry rivals.


The General Environment Analysis

• General environmental trends and events

• Little ability to predict them

• Even less ability to control them

• Can vary across industries

General Environment

DemographicSocioculturalPolitical/LegalTechnological

EconomicGlobal

The Competitive Environment Analysis

• Sometimes called the task or industry environment

• Includes• Competitors (existing and

potential)

• Customers

• Suppliers

• Porter’s five-forces model

Competitive Environment

CompetitorsCustomersSuppliers

The Industry Structure Anaysis

Level of Concentration • % of market share held by top 4 firms -

Concentration ratio

Level of Economies of scale• Cost linked to volume

• Determines the intensity of competition

Level of Product Differentiation• Differences in product features

• Brand positioning

The Model of Industry Competition

Threat ofnew entrants

Bargaining power of buyers

Bargaining power of suppliers

Threat ofSubstitute products

and services

Adapted from Exhibit 2.2 Porter’s Five Forces Model of Industry Competition

Porter’s Five Forces Model of Industry Competition

The Threat of New Entrants

• Profits of established firms in the industry may be eroded by new competitors

• High entry barriers lead to low threat of new entries• Economies of scale

• Product differentiation

• Capital requirements

• Switching costs

• Access to distribution channels

• Cost disadvantages independent of scale

The Bargaining Power of Buyers

• Buyers threaten an industry

• Force down prices

• Bargain for higher quality or more services

• Play competitors against each other

The Bargaining Power of Buyers

• A buyer group is powerful when• It is concentrated or purchases large

volumes relative to seller sales

• The products it purchases from the industry are standard or undifferentiated

• The buyer faces few switching costs

• It earns low profits

• The buyers pose a credible threat of backward integration

• The industry’s product is unimportant to the quality of the buyer’s products or services

The Bargaining Power of Suppliers

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


• A supplier group will be powerful when

• The supplier group is dominated by a few companies and is more concentrated than the industry it sells to

• The supplier group is not obliged to contend with substitute products for sale to the industry

• The industry is not an important customer of the supplier group


• A supplier group will be powerful when

• The supplier’s product is an important input to the buyer’s business

• The supplier group’s products are differentiated or it has built up switching costs for the buyer

• The supplier group poses a credible threat of forward integration

The Threat of Substitute Products and Services

• Substitutes limit the potential returns of an industry

• Ceiling on the prices that firms in that industry can profitably charge

• Price/performance ratio

The Intensity of Rivalry among Competitors in an Industry

• Jockeying for position

• Price competition

• Advertising battles

• Product introductions

• Increased customer service or warranties

The Intensity of Rivalry among Competitors in an Industry

• Interacting factors lead to intense rivalry

• Numerous or equally balanced competitors

• Slow industry growth

• High fixed or storage costs

• Lack of differentiation or switching costs

• Capacity augmented in large increments

• High exit barriers

The Strategic Groups Analysis

• Two unassailable assumptions in industry analysis• No two firms are totally different

• No two firms are exactly the same

• Strategic groups within the same Industry• Cluster of firms that share similar strategies

Breadth of product and geographic scope Price/quality Degree of vertical integration Type of distribution system

Strategic Groups within Industries

Industries not completely homogeneous

Factors differentiate across an industry Scope of operations

Type of customers

Extent of vertical integration

Strategic groups are useful for Identify the closest competitors

Close substitutes

Overall variability in performance

Value of strategic groups as an analytical tool

• Identify barriers to mobility that protect a group from attacks by other groups

• Identify groups whose competitive position may be marginal or tenuous

• Chart the future direction of firms’ strategies

• Thinking through the implications of each industry trend for the strategic group as a whole

The World Automobile Industry: Strategic Groups

Adapted from Exhibit 2.8 The World Automobile Industry: Strategic Groups

The Competitors’ Analysis

Analyzing key competitors allows an entrepreneur to:

• avoid surprises from existing competitors’ new strategies and tactics.

• identify potential new competitors and the threats they pose.

• improve reaction time to competitors’ actions.

• anticipate rivals’ next strategic moves.

Ethical Techniques to Analyze Competitors

• Monitor industry and trade publications.

• Talk to customers and suppliers.

• Listen to employees, especially sales

representatives

• and purchasing agents.

• Attend trade shows and conferences.


Ethical Techniques to Analyze Competitors

• Benchmark competitors’ products and services.

• Get competitors’ credit reports.

• Use the internet to learn more about competitors.

• Visit competitors to observe their operations.



Chapter Chapter 33 Internal Analysis of Strenghts and

Weaknesses

Part 2Part 2 SWOT AnalysisSWOT Analysis

LEARNING OBJECTIVES

• THE ASSETS’ ANALYSIS

• THE RESOURCE BASED VIEW

• THE VALUE CHAIN ANALYSIS

Why Do a Competitive Strength Assessment ?

• Reveals firm’s competitive position• Pinpoints the company’s competitive

strengths and weaknesses• Identifies competitive advantage, parity, or

disadvantage• Identifies possible offensive attacks• Identifies possible defensive actions

The Assets’ Analysis

Tangible assets Ford’s Cash Reserves 3 M’s Patents Coca’s cola’s formula

Intangible assets Nike - Brand Name Dell – Reputation GE- Welch’s Leadership

Organizational capabilities Dell’s Customer Service Sony’s Product Development 3 M’s Innovation

Ratio of Market Value to Book Value for Selected Companies

Annual Market Book Ratio of Sales Value Value Market to

Company ($ billions) ($ billions) ($ billions) Book Value

Exhibit 4.1 Ratio of Market Value to Book Value for Selected Companies

eBay 1.2 30.8 3.9 7.9

Microsoft 28.4 254.1 58.3 4.4

Intel 26.8 142.1 35.4 4.0

General Motors Corp. 182.1 20.0 9.4 2.1

Nucor (Steel) 4.8 3.9 2.3 1.7

J. C. Penney 32.3 5.0 6.4 .78

Note: The data on market valuations are as of June 16, 2003. All other financial data is based on the most recently available balance sheets and income statements.

The Central Role of Knowledge in Today’s Economy

Creation of wealth in a knowledge economy• Effective management of knowledge workers

• Intellectual capital

• Assets such as Reputation Employee loyalty and commitment Customer relationships Company values Brand names Experience and skills of employees

The Central Role of Knowledge in Today’s Economy

Intellectual capital = Market value of the firm – Book value of the firm

How do companies create value in the knowledge-intensive economy?

• Human capital (individual capabilities, knowledge, skills, and experience of the company’s employees and managers)

• Social capital (the network of relationships that individuals have throughout the organization)

• Knowledge

• Explicit knowledge

• Tacit knowledge

Human Capital: The Foundation of Intellectual Capital

Exhibit 4.2 Human Capital: Three Interdependent Activities

Microsoft Employees Who Have Left the Company for Other Businesses

Company What It Does Defectors from Microsoft

Exhibit 4.4 Microsoft Employees Who Have Left the Company for Other Businesses

Source: Reprinted by permission of the Wall Street Journal, Copyright ©2000 Dow Jones & Company, Inc. All Rights Reserved Worldwide. License number 397221136576.

Crossgain Builds software around 23 of 60 employeesXMl computer language

ViAir Makes software for Company declines towireless providers specify

CheckSpace Builds online payment Company says “a good service for small businesses chunk” of its 30 employees

digiMine Sells data mining service About 15% of 62 employees inaddition to the 3 founders

Avogadro Builds wireless notification 8 of 25 employeessoftware

Tellme Networks Offers information like stock About 40 of 250 employees;quotes and scores over the another 40 from the formerphone Netscape

The Resource Based View’sTypes of Strategic Resources

• Competencies: Internal capabilities that a company performs better than other capabilities.

• Core competencies: Competencies that are central, not peripheral, to a company’s strategy and operations.

• Distinctive competencies: Competencies that are sources of sustainable competitive advantage.

Firms are unique bundles of relatively immobile resources:

Examples: Distinctive Competencies

• Sharp Corporation• Competencies in flat-panel display technology

• Toyota, Honda, Nissan• Low-cost, high-quality manufacturing

capabilities and short design-to-market cycles

• Intel• Capability to design and manufacture ever

more powerful microprocessors for PCs

Examples: Distinctive Competencies

• Sony• Miniaturization

• Honda• Motor Technology

• Boeing• Large scale system integration, efficient design and

manufacturing, and customer knowledge

Characteristics of Strategic Resources

• In Demand (valuable)

• Scarce (rare)

• Difficult & costly to imitate

• Appropriability

• Nonsubstitutable or durable

Sample Strategic Resources

• Competitively Superior Value Walmart’s Logistics – Allowed better pricing

• Resource Scarcity OPEC’s Oil Reserves – Finite oil reserves

• Appropriability Who profits from a resource?

“Mickey Mouse does not have an agent”

• Inimitability Priceline’s pricing for air tickets Wendy’s Drive Through

Path dependency - Steinway with Pianos Causal ambiguity – South West Airlines Economic Deterrence

• Durability How long will the competitive advantage last?

Patentable products – longer durability

Sample Strategic Resources

Resources’ Characteristics and Implications

valuable? rare?

difficult or costly to imitate?

Non-substitutable? Consequences

Performance Implications

No No No NoCompetitive

DisadvantageBelow AIR*

Yes No No Yes/No Competitive Parity

AIR

Yes Yes No Yes/No Temporary Advantage

AIR to Above AIR

Yes Yes Yes YesSustainable Competitive Advantage

Above AIR

* AIR = Average Industry Returns

Assessing a Company’s Competitive Strength vs. Key Rivals

1. List industry key success factors and other relevant measures of competitive strength

2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong)

3. Decide whether to use a weighted or unweighted rating system

4. Sum individual ratings to get overall measure of competitive strength for each rival

5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage

An Unweighted Competitive Strength Assessment

KSF/Strength Measure

Quality/product performance

Reputation/image

Manufacturing capability

Technological skills

Dealer network/distribution

New product innovation

Financial resources

Relative cost position

Customer service capability

Overall strength rating

ABC Co. Rival 1 Rival 2

8 5 10

8 7 10

2 10 4

10 1 7

9 4 10

9 4 10

5 10 7

5 10 3

5 7 10

61 58 71

Rival 3

1

1

5

3

5

5

3

1

1

25

Rival 4

6

6

1

8

1

1

1

4

4

32

Rating Scale: 1 = Very weak; 10 = Very strong

A Weighted Competitive Strength Assessment

KSF/Strength Measure

Quality/product performance

Reputation/image

Manufacturing capability

Technological skills

Dealer network/distribution

New product innovation

Financial resources

Relative cost position

Customer service capability

Rival 1 Rival 2

5/0.50 10/1.00

7/0.70 10/1.00

10/1.00 4/0.40

1/0.05 7/0.35

4/0.20 10/0.50

4/0.20 10/0.50

10/1.00 7/0.70

10/3.50 3/1.05

7/1.05 10/1.50

ABC Co.

8/0.80

8/0.80

2/0.20

10/0.50

9/0.45

9/0.45

5/0.50

5/1.75

5/0.75

Rival 3

1/0.10

1/0.10

5/0.50

3/0.15

5/0.25

5/0.25

3/0.30

1/0.35

1/0.15

Rival 4

6/0.60

6/0.60

1/0.10

8/0.40

1/0.05

1/0.05

1/0.10

4/1.40

4/1.60

Weight

0.10

0.10

0.10

0.05

0.05

0.05

0.10

0.35

0.15

Sum of weights 1.00

Overall strength rating 6.20 8.20 7.00 2.10 2.90

Rating Scale: 1 = Very weak; 10 = Very strong

Risk of Core Rigidities

• When firms excel at an activity, they can become over committed to it and rigid.– Incentives and culture may reward current

competencies while thwarting development of new competencies.

–Dynamic capabilities are competencies that enable the firm to quickly respond to change, emerging markets and major technological discontinuities

–firm may develop a set of abilities that enable it to rapidly deploy new product development teams for a new opportunity,

–firm may develop competency in working with alliance partners to gain needed resources quickly.

Risk of Core RigiditiesTo develop dynamic competencies, a firm:

–Invests heavily in research areas likely to provide scientific breakthroughs

–Develops pilot plants to experiment with new products and production processes

–Manages its relationships with alliance partners as an integrative and flexible system of capabilities that extend the firms boundaries not as individual relationships focused on particular projects

The Value Chain Analysis

• Disaggregates a business into sets of activities• Primary Activities – Inbound logistics --- Operations ----

Outbound logistics ---- marketing and Sales and service

• Support activities – General Administration, HRM, R&D, Systems Development

• How to do a VCA• Identify key activities

• Allocate costs to each activity

• Identify the activities that differentiate the firm

• Examine the Value Chain Different activities may be important – industry and strategy Importance of activities can vary based on a company position in a

larger scheme of activities

SupportActivities

Primary Activities

Value Chain AnalysisValue Chain Analysis

Technological Development

Human Resource Management

Firm Infrastructure

Procurement

Inb

oun

d

Log

isti

cs

Op

erat

ion

s

Ou

tbou

nd

Log

isti

cs

Mar

ket

ing

& S

ales

Ser

vice

helps to identify which resources and capabilities can add value

MARG

IN

MARG

IN

MARGIN

MARGIN

The Value Chain System

UpstreamValue Chains

A Company’s Own

Value Chain

DownstreamValue Chains

Activities, Costs, &

Margins ofForwardChannelAllies &

StrategicPartners

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains



Grand StrategiesChapter Chapter 44

Part 3Part 3

Choice of StrategyChoice of Strategy

LEARNING OBJECTIVES

• LONG TERM OBJECTIVES

• SINGLE BUSINESS GROWTH STRATEGIES

• MULTI BUSINESS GROWTH STRATEGIES

• COOPERATIVE GROWTH STRATEGIES

• DOWNSCOPING STRATEGIES

Long Term Objectives & Grand Strategies

Companies have to make many fundamental decisions about their path to future success

Single Business vs. Multiple business Growth vs. Downscoping of business Profit vs. Revenue increase Economic viability, Public Responsibility Technological leader vs. Follower

Decisions depend on Industry attractiveness CEO’s disposition Company’s availability of funds and ability to borrow Competitors’ actions

Types of LONG TERM OBJECTIVES

Business Oriented –

• Profitability, return on equity

• competitive position, market share

• technological leadership, innovation rate

Employee Oriented – • Employee Development, inventory of workers’ skill

• Employee Relations, job satisfaction & loyality levels

• Productivity, rate of decrease in customer complaints and defective items

List of GRAND STRATEGIES

GROWTH

Single business growth strategies Concentration Market Diversification / Development Product Differentiation / Development Radical Innovation (Product

Diversification) Horizontal integration Vertical integration

Multi business growth strategies Concentric Diversification Conglomerate Diversification

DOWNSCOPING

Turnaround

Divestiture

Liquidation

Cooperative growth strategies

Joint venturesStrategic alliancesConsortia

Concentration

Focus on a single product in a single market

Policy Options:• increasing present customers’ rate of use• attracting competitors’ customers• attracting non-users

Successful when Products are distinctive Markets are stable Company has a high market share

Market Diversification

Exploiting product knowledge in multiple markets

Attracting other segments within the same market by using

other channels of distribution

other media for advertisement

Opening additional geographic markets (geographic expansion)

Product Development

Developing new products for present markets

Developing related products by adapting present products to the changing needs of the customers

by changing the shape, appearance, size, ingredients, intensity, etc. of the products

Developing quality variations

Developing additional models and sizes (product proliferation)

Radical Innovation

Spend resources on R&D for technological patents

Stay technologically ahead of competition

Take advantage of specialized knowledge by charging a premium on the products

Reinvest profits in R&D

Integration

Growth by acquisitions and mergers

Horizontal IntegrationAcquisition of firms that operate in similar

industries to develop market share

Vertical IntegrationAcquisition of firms that supply raw materials -

Backward integration

Acquisition of firms that provide distribution and marketing facilities - Forward integration

Multi Business Growth Strategies

Concentric Diversification• Businesses are related on the basis of similar product technology,

market knowledge or production technology

• Focus on synergy

• Examples - Honda, Eastman Kodak, Philip Morris

Conglomerate Diversification• Companies use internal capital to expand to businesses that are

attractive and offer great opportunities to grow

• Focus on profits

• Examples- ITT, General Electric, Westinghouse

Cooperation strategies

Why should companies cooperate with othersReduce risk and uncertaintyShare different and scare resourcesLearn know-how and market knowledgeShare the benefits of complementary assets

Types of strategies for cooperationJoint venturesStrategic alliancesConsortia

Joint venture (joint ownership)A child company created and operated for the benefits of

the co-owners (parent companies)

Advantages: easy access to capital, raw materials and foreign markets

Disadvantages: limited discretion, control, & profits

Parents: Samsung Electronics (Korean) & France Telecom (French); Child: Orange Mobile Phone Company (British)

Parents: Chrysler Corp. (US) & Mitsubishi (Japanese); Child: Diamond Star Company (US)


Strategic Alliances

Long term mutually beneficial cooperation beyond supplier-customer relationship, but without any kind of equity sharing

Licensing: transfer of some industrial property rights (patents, trademark, know-how, etc.) in return for a favor (royalty payment, or avoiding tariffs or quotas)

Subcontracting: manufacturing done by contractor having comparative advantages in factors (inputs) of production

Franchising: marketing done by franchisee having comparative advantages in local markets

Outsourcing: supporting activities done by different outer providers having comparative advantages in any one of them


Consortia (network)

A large scale cooperation among numerous local companies operating especially within the same industry (with or without equity sharing)

Keiretsu in Japanese

Up to 50 firms holding each others’ stocks, coordinated by a large company; ex: Mitsubishi

Or by a bank; ex: sank EGS Bank in Turkey


Downscoping Strategies

TurnaroundA kind of crisis management when profits decline

because of:• Economic recessions in the general environment• Innovative breakthroughs in the task environment • Product inneficiencies in the internal environment

If strategists believe that stability and recovery are possible, they may follow either way:

• Cost reduction by getting rid off some employees, promotional activities, and low-margin customers

• Asset reduction by getting rid of unproductive assets, i.e. some land, buildings, cars, equipment

Downscoping Strategies

DivestitureSelling off a business to another business in order to:• to reduce debts of a declining investment in our portfolio• to raise capital by sacrificing a successful investment for the

sake of the total corporation• to improve the image of the corporation on the eyes of the

governmental bodies regulating antitrust actions

Why to buy an unsuccessful investment of another firm?• “we have necessary skills and resources to recover”• or “we can create a synergy between this newly bought

company and our present investments”

Liquidation: Firm sold in parts to raise funds

Grand Strategy Selection Matrix

Overcome Weakness

Maximize Strengths

External FocusInternal Focus

Vertical Integration

Coglomorate Diversification

Horizontal Integration

Concentric Diversification,

Joint Ventures

Turnaround

Divestiture

Liquidation

Concentration

Market/Product Development

Innovation



Chapter Chapter 55 Strategic Business Unit (SBU) Level Strategies

Part 3Part 3

Choice of StraetgyChoice of Straetgy

LEARNING OBJECTIVES

• COST LEADERSHIP STRATEGY

• DIFFERENTIATION STRATEGY

• FOCUS STRATEGY

• COMBINED STRATEGY

• STRATEGY CHOICE CONSIDERING INDUSTRY LIFE CYCLES

Types of Competitive Advantage and Sustainability

• Three generic strategies to overcome the five forces and achieve competitive advantage• Overall cost leadership

Low-cost-position relative to a firm’s peers Manage relationships throughout the entire value chain

• Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a

premium

• Focus strategy Narrow product lines, buyer segments, or targeted

geographic markets Attain advantages either through differentiation or cost

leadership

Three Generic Strategies

Exhibit 5.1 Three Generic Strategies

Source: Reprinted with permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press.

Competitive Advantage

Uniqueness Perceived by the Customer

Low Cost Position

Str

ateg

ic T

arg

et

Particular Segment Only

Industrywide

Performance

Competitive Advantage

Adapted from Exhibit 4.5 Issues to Consider in Creating Value through Human Capital, Social Capital, and Technology

Source: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York: AMACON, 1999), pp. 63-64.

Return oninvestment (%) 35.5 32.9 30.2 17.0 23.7 17.8

Sales Growth (%) 15.1 13.5 13.5 16.4 17.5 12.2

Gain in MarketShare (%) 5.3 5.3 5.5 6.1 6.3 4.4

Sample Size 123 160 100 141 86 105

Differentiation and Cost Differentiation Cost

Differentiation Focus

Cost Focus

Stuck in the Middle

Overall Cost Leadership

• Integrated tactics

• Aggressive construction of efficient-scale facilities

• Vigorous pursuit of cost reductions from experience

• Tight cost and overhead control

• Avoidance of marginal customer accounts

• Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising

Value-Chain Activities

Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership

Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.

Shared purchasing operations with other business units

Effective policy guidelines to ensure low cost raw materials (with acceptable quality levels)

Expertise in process engineering to reduce manufacturing costs

Effective use of automated technology to reduce scrappage rates

Effective orientation and training programs to maximize employee productivity

Minimize costs associated with employee turnover through effective policies

Standardized accounting practices to minimize personnel required

Few management layers to reduce overhead costs

Effective layout of receiving dock operation

Effective use of quality control inspectors to minimize rework on the final product

Effective utilization of delivery fleets

Purchase of media in large blocks

Sales force utilization is maximized by territory management

Thorough service repair guidelines to minimize repeat maintenance calls

Use of single type of repair vehicle to minimize costs

Firm infrastructure

Human resource management

Technology development

Procurement

Inbound logistics

Operations Outbound logistics

Marketing and sales

Service

Overall Cost Leadership (Cont.)

• A firm following an overall cost leadership position

• Must attain parity on the basis of differentiation relative to competitors

• Parity on the basis of differentiation Permits a cost leader to translate cost

advantages directly into higher profits than competitors

Allows firm to earn above-average profits

Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces

• An overall low-cost position

• Protects a firm against rivalry from competitors

• Protects a firm against powerful buyers

• Provides more flexibility to cope with demands from powerful suppliers for input cost increases

• Provides substantial entry barriers from economies of scale and cost advantages

• Puts the firm in a favorable position with respect to substitute products

Pitfalls of Overall Cost Leadership Strategies

• Too much focus on one or a few value-chain activities

• All rivals share a common input or raw material

• The strategy is initiated too easily

• A lack of parity on differentiation

• Erosion of cost advantages when the pricing information available to customers increases

Differentiation

• Differentiation can take many forms

• Prestige or brand image

• Technology

• Innovation

• Features

• Customer service

• Dealer network

Value-Chain Activities: Examples of Differentiation

Exhibit 5.5 Value-Chain Activities: Examples of Differentiation

Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.

Facilities that promote firm image

Superior MIS—To integrate value-creating activities to improve quality

Widely respected CEO enhances firm reputation

Provide training and incentives to ensure a strong customer service orientation

Programs to attract talented engineers and scientists

Excellent applications engineering support

Superior material handling and sorting technology

Use of most prestigious outletsPurchase of high-quality components to enhance product image

Superior material handling operations to minimize damage

Quick transfer of inputs to manufacturing process

Flexibility and speed in responding to changes in manu-facturing specs

Low defect rates to improve quality

Accurate and responsive order processing

Effective product replenish-ment to reduce customer’s inventory

Creative and innovative advertising programs

Fostering of personal relation-ship with key customers

Rapid response to customer service requests

Complete inventory of replacement parts and supplies

Firm infrastructure

Human resource management

Technology development

Procurement

Inbound logistics

Operations Outbound logistics

Marketing and sales

Service

Differentiation

• Firms may differentiate along several dimensions at once

• Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique

• Successful differentiation requires integration with all parts of a firm’s value chain

• An important aspect of differentiation is speed or quick response

Differentiation: Improving Competitive Position vis-à-vis the Five Forces

• Differentiation

• Creates higher entry barriers due to customer loyalty

• Provides higher margins that enable the firm to deal with supplier power

• Reduces buyer power because buyers lack suitable alternative

• Reduces supplier power due to prestige associated with supplying to highly differentiated products

• Establishes customer loyalty and hence less threat from substitutes

Potential Pitfalls of Differentiation Strategies

• Uniqueness that is not valuable

• Too much differentiation

• Too high a price premium

• Differentiation that is easily imitated

• Dilution of brand identification through product-line extensions

• Perceptions of differentiation may vary between buyers and sellers

Focus

• Focus is based on the choice of a narrow competitive scope within an industry

• Firm selects a segment or group of segments (niche) and tailors its strategy to serve them

• Firm achieves competitive advantages by dedicating itself to these segments exclusively

• Two variants

• Cost focus

• Differentiation focus

Focus: Improving Competitive Position vis-à-vis the Five Forces

Advantages of Focus Strategies:

• Creates barriers of either cost leadership or differentiation, or both

• Also focus is used to select niches that are least vulnerable to substitutes or where competitors are weakest

Pitfalls of Focus Strategies:

• Erosion of cost advantages within the narrow segment

• Focused products and services still subject to competition from new entrants and from imitation

• Focusers can become too focused to satisfy buyer needs

Combination Strategies: Integrating Overall Low Cost and Differentiation

• Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy

• Goal of combination strategy is to provide unique value in an efficient manner

Three Combination Approaches

• Automated and flexible manufacturing systems

• Exploiting the profit pool concept for competitive advantage

• Coordinating the “extended” value chain by way of information technology

Combination Strategies: Improving Competitive Position vis-à-vis the Five Forces

• Firms that successfully integrate differentiation and cost strategies obtain advantages of competition from both approaches

• High entry barriers

• Bargaining power over suppliers

• Reduces power of buyers (fewer competitors)

• Value position reduces threat from substitute products

• Reduces the possibility of head-to-head rivalry

Pitfalls of Combination Strategies

• Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”

• Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain

• Miscalculating sources of revenue and profit pools in the firm’s industry

Industry Life-Cycle States: Strategic Implications

• Life cycle of an industry

• Introduction

• Growth

• Maturity

• Decline

• Emphasis on strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle

Stages of the Industry Life Cycle

Adapted from Exhibit 5.8 Stages of the Industry Life Cycle


Generic strategies

Differentiation Differentiation Differentiation Overall costOverall cost leadershipleadership Focus

Market growth rate

Low Very large Low to Negativemoderate

Number of segments

Very few Some Many Few

Intensity of competition

Low Increasing Very intense Changing

Emphasis on product design

Very high High Low to Lowmoderate

StageIntroduction Growth Maturity DeclineFactor


Emphasis on process design

Low Low to High Lowmoderate

Major functional area(s) of concern

Research and Sales and Production GeneralDevelopment marketing management

and finance

Overall objective

Increase Create Defend Consolidate,market share consumer market share maintain, awareness demand and extend harvest, or

product life exitcycles

Stage

Factor Introduction Growth Maturity Decline

Strategies in the Introduction Stage

• Products are unfamiliar to consumers

• Market segments not well defined

• Product features not clearly specified

• Competition tends to be limited

Strategies

• Develop product and get users to try it

• Generate exposure so product becomes “standard

Strategies in the Growth Stage

• Characterized by strong increases in sales

• Attractive to potential competitors

• Primary key to success is to build consumer preferences for specific brands

Strategies

• Brand recognition

• Differentiated products

• Financial resources to support value-chain activities

Strategies in the Maturity Stage

• Aggregate industry demand slows

• Market becomes saturated, few new adopters

• Direct competition becomes predominant

• Marginal competitors begin to exitStrategies

• Efficient manufacturing operations and process engineering

• Low costs (customers become price sensitive)

Strategies in the Decline Stage

• Industry sales and profits begin to fall

• Strategic options become dependent on the actions of rivals

Strategies

• Maintaining

• Exiting the market

• Harvesting

• Consolidation

DIVERSIFICATION

Portfolio Management • Allocate resources among business units

• Expertise of corporate office in finding attractive firms to acquire

• Provide financial resources to business units on favorable terms reflecting the corporation’s overall ability to raise funds

• Provide high quality review and coaching for units

GE Nine Cell Portfolio Matrix

Components of Industry attractiveness

Nature of rivalry

number, size & strength of competitors, price wars

Strength of buyers and sellers

Ease of New Entrants

Economic Factors

market saturation or growth, capital intensity, profitability

Components of Business strength

Cost advantage, quality image, manufacturing flexibility, delivery speed, liquidity, profitability, skillful personnel

GE Nine Cell Matrix

HighHigh MediumMedium LowLow

HighHigh Invest and Grow

Selective Growth

Grow or Let Go

MediumMedium

Selective Growth

Grow or Let Go

Harvest

LowLow

Grow or Let Go

Harvest Divest

Industry Attractiveness

Business

Strength

Based on the subjective assessments on the levels of market attractiveness and business strengths, each SBU falls in one of the NINE different cells of strategic option.

Boston Consulting Group Matrix

Portfolio of Strategic Business Units

High Market Share Low

Industry Growth Rate

High

Low

$$$

1 2

3 4cash cows

stars question marks

dogs


1. Stars. These are products that are in high growth markets with a relatively high share of that market. Stars tend to generate high amounts of income. Keep and build your stars.

2. Question Marks (Problem Children). These are products with a low share of a high growth market. They consume resources and generate little in return. They absorb most money as you attempt to increase market share.



3. Cash Cows. These are products with a high share of a low growth market. Cash Cows generate more than is invested in them. So keep them in your portfolio of products for the time being.

4. Dogs. These are products with a low share of a low growth market. They do not generate cash for the company, they tend to absorb it. Get rid of these products.



Key

Each circle represents one of the firm’s business units

Size of circle represents the relative size of the business unit in terms of revenue



National Sources of International

Competitive Power

Chapter Chapter 66

Part 4Part 4

Global CompetitionGlobal Competition

LEARNING OBJECTIVES

• FACTOR CONDITIONS

• DEMAND CONDITIONS

• RELATED AND SUPPORTING INDUSTRIES

• FIRM STRATEGY, STRUCTURE AND RIVALRY

• GOVERNMENTAL REGULATIONS & CHANCE

The Global Economy: A Brief Overview

• Opportunities and risks when firms diversify abroad

• Trade across nations will exceed trade within nations

• Rise of market capitalism around the world

• Transfer of money from rich to poor countries Equity Bond investments Commercial loans

The Global Economy: A Brief Overview

• Opportunities and risks when firms diversify abroad

• Economies of East Asia have grown rapidly, but little progress in the rest of the world

• Poor education levels in many countries

• Failure to manage broader economic factors in some countries

Interest rates Inflation Unemployment

Factors Affecting a Nation’s Competitiveness

• Factor conditions

• Nation’s position in factors of production

Skilled labor infrastructure

Factor conditions

Demand conditions

• Demand conditions

• Nature of home-market demand

• Industry’s product

• Industry’s service


• Related and supporting industries• Presence or absence in the

nation of internationally competitive

Supplier industries Other related industries

Factor conditions

Demand conditions

Related and supporting industries


• Firm strategy, structure, and rivalry

• Conditions in the nation governing how companies are

• Created

• Organized

• Managed

• Nature of domestic rivalry

Factor conditions

Demand conditions

Related and supporting industries

Firm strategy, structure, and

rivalry

Factor Conditions

• To achieve competitive advantage, factors of production must be created

• Industry specific

• Firm specific

• Pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed

Demand Conditions

• Demands that consumers place on an industry for goods and services

• Demanding consumers push firms to move ahead of companies from other nations

• Demanding consumers drive firms in a country to

Meet high standards Upgrade existing products and services Create innovative products and services

Related and Supporting Industries

• Related and supporting industries• Enable firms to manage inputs more

effectively Strong supplier base adds efficiency to

downstream activities Competitive supplier base lets a firm obtain inputs

using cost-effective, timely methods

• Allow joint efforts among firms

• Create the probability that new entrants will enter the market

Firm Strategy, Structure and Rivalry

• Rivalry is intense in nations with conditions of• Strong consumer demand

• Strong supplier bases

• High new entrant potential from related industries

• Competitive rivalry increases the efficiency with which firms develop, market, and distribute products and services within the home country


• Competitive rivalry increases the efficiency with which firms

• Develop within the home country

• Market within the home country

• Distribute products and services within the home country


• Domestic rivalry provides a strong impetus for firms to

• Innovate

• Find new sources of competitive advantage

• Domestic rivalry forces firms to look beyond national borders for new markets

Porter’s Diamond of National Advantage: As Applied to India

strategic management 2010 prashant

Business

strategic objectives

competitive analysis

firm strategic decisions

strategic intent s vision

competitive advantages

functional levelstrategies

competitive battles

competitive tactics