Formulating Strategy

Strategy Ultimately requires the achievement of fit between the external situation and internal capability Seek to leverage the impact of resources by concentrating efforts within a defined zone of dominance while

attempting to anticipate the effects of potentially damaging external forces

Basic premises Clear distinction made between strategy formulation and strategy implementation Belief that strategy should be explicit Structure should follow strategy Strategy emanates from the formal leadership of the organization

Corporate strategy Pattern of decisions in a company that

determines and reveals Objectives Purposes

Goals produces the principal policies and plans for achieving those goals defines

range of business the company is to pursue kind of economic and noneconomic contribution

some unchanging over time but some must change inseparable from structure, behavior and culture processes

formulation implementation

Quality of administrative action and the motivation lending it power cannot be appraised without knowing its relationship to purpose

Summary statements of strategy product line and services offered or planned markets and market segments channels means to finance profit objectives safety of capital versus level of return major policy in central functions intended size, form and climate of the org

Strategy formulation identifying opportunities and threats attaching some estimate or risk to the discernible alternatives strengths and weaknesses of the company resources on hand and available actual or potential capacity to take advantage of perceived market needs or to cope with attendant risks

Economic strategy strategic alternative at an acceptable level of risk

The extent to which they wish to undertake low or high risk presumably depends on their profit objectives

Intellectual processes what a company might do in terms of environmental opportunity what it can do in terms of ability and power what the executives of a company want to do what a company should do (ethics)

Strategy implementation An organizational structure appropriate for the efficient performance of the required tasks must be made

effective by information systems and relationships permitting coordination Organizational processes must be directed toward the kind of behavior required by organizational purpose Role of personal leadership

Strategy follows structure Change in the environment of business necessitates continuous monitoring of a company’s definition of its business

Company’s environment Technology

Technological developments are the fastest unfolding but most far-reaching in extending or contracting opportunity

Ecology Increase in sensitivity to the impact on the physical environment

Economics Consequences of world economic trends need to be monitored in much greater detail for any one industry

or company Industry

Opportunities and risks that reside there are often blurred by familiarity and the uncritical acceptance of the established relative position of competitors

Society Societal development

Politics

Changing values will lead to different expectations of the role business should perform Change threatens all established strategies

Questions that lead to an estimate of opportunity and danger in the present and predicted company setting What are the essential economic, technical and physical characteristics are apparent? What trends suggesting future change in economic and technical characteristics are apparent? What is the nature of competition both within the industry and across industries? What are the requirements for success in competition in the company’s industry? Given the technical, economic, social and political developments that most directly apply, what is the range of

strategy available to any company in this industry?

The first step in validating a tentative choice is to determine whether the organization has the capacity to prosecute it successfully

Key attributes to be appraised should be identified and consistent criteria established for judging

Sources of capabilities Experience Developing strengths and weaknesses of the individuals comprising the organization Degree to which individual capability is effectively applied to the common task Quality of coordination of individual and group effort

Individual and unsupported flashes of strength are not as dependable as the gradually accumulated product and market-related fruits of experience

Identifying strengths Examining the org’s current product line Defining org’s functions it serves in its markets Definition of product must be the market needs it may fill than the engineering specs Identifying the skills that underlie whatever success has been achieved

Matching opportunity and competence To minimize organizational weakness and maximize strength

Opportunism without competence is a path to fairyland The way in which distinctive competence, organizational resources and organizational values are combined is or

should be unique

Strategy evaluation Appraisal of how well a business performs

Misses the whole point of strategy Critical factors determining the quality of current results are often not directly observable or simply

measured By the time strategic opportunities or threats do directly affect operating results, it may well be too late

Attempt to look beyond the obvious facts and appraise instead those more fundamental factors and trends that govern success in the chosen field

Answers the questions Are the objectives of the business appropriate? Are the major policies and plans appropriate? Do the results obtained to date confirm or refuse critical assumptions on which strategy rests

Major issues Each business strategy is unique therefore strategy evaluation must rest on a type of situational logic that

does not focus on one best way but which can be tailored to each problem as it is faced Strategy is centrally concerned with the selection of goals and objectives

Consequence of training in problem structuring Arises out of a tendency to confuse values with objectives

Formal systems of strategic review can create explosive conflict situations

Criteria in business evaluation Consistency

Strategy must not present mutually inconsistent goals and policies Symptoms of inconsistency

Problems in coordination and planning continue despite changes in personnel and tend to be issue rather than people based

Success for one organizational department means failure for another Operating problems continue to be brought to the top for the resolution of policy issues despite

attempts to delegate authority Must also consider: between organizational objectives and the values of the management group

Consonance Strategy must represent an adaptive response to the external environment and to the critical changes

occurring within it 2 different aspects of strategic choice

Basic mission or scope of the business Analysis is done by looking at changing economic and social conditions over time

Generic strategy Special competitive position or edge

Analysis focuses on the differences across firms at a given time Competitive strategy

Focus on generic strategy Major difficulty is that most of the critical threats to a business are those which come from without

Advantage Strategy must provide for the creation and/or maintenance of a competitive advantage in the selected area

of activity Competitive advantage

Superior resources Analytical issue is the question of which skills and resources represent advantages in which

competitive arenas Superior skills

Analytical issue is the question of which skills and resources represent advantages in which competitive arenas

Superior position Certain arrangements of one’s resources can enhance their combined effectiveness Positional advantage

Gained by foresight, superior skill and/or resources Defensible once gained

Returns enough value to warrant its continued maintenance Would be so costly to capture that rivals are deterred from full0scale attacks on the core of the

business Tends to be self-sustaining as long as the basic environmental factors that underlie it remain stable Principal characteristic

Permits the firm to obtain advantage from policies that would not similarly benefit rivals without the position

Types Size or scale Gestalt strategies

Difficult to either analyze or attack in a piecemeal fashion Ownership of special raw material sources or long0term supply contracts Being geographically located near key customers where transport costs are high Being a leader in a service field that permits or requires the building of a unique experience base Being a full-line producer in market with heavy trade-up phenomena Having a wide reputation for providing a needed product or service trait reliable and dependably

Feasibility Strategy must neither overtax available resources nor create unsolvable subproblems Quantify financial resources Individual and organizational capabilities Questions to ask

Has the organization demonstrated that it possesses the problem-solving abilities and/or special competences required by the strategy? Infeasible or incomplete

Has the organization demonstrated the degree of coordinative and integrative skill necessary to carry out the strategy?

Does the strategy challenge and motivate key personnel and is it acceptable to those who must lend their support?

Issues involved are too important and too closely associated with the distribution of power and authority Evaluation is a continuing process Firm’s ability to maintain its competitive position in a world of rivalry and change may be best served by managers

who can maintain a dual view of strategy and strategy evaluation

Willing and be able to perceive the strategy within the welter of daily activity Build and maintain structures and systems that make strategic factors the object of current activity

Competing on ResourcesToday

Markets move faster and faster Strategy has become deeply problematic at the corporate level

New approaches to strategy Total quality management Reengineering Core competence Competing on capabilities Learning organization

Resource-based view of the firm Approach grounded in economics Explains how a company’s resources drive its performance Combines internal analysis within companies and external analysis of the industry and the competitive

environment Sees companies as very different collections of physical and intangible assets and capabilities Forms

Physical Intangible Organizational capability

Competitive advantage Ownership of a valuable resource that enables the company to perform activities better or more cheaply than

competitors

Superior performance Based on developing a competitively distinct set of resources and deploying them in a well-conceived strategy

Resources cannot be evaluated in isolation, because their value is determined in the interplay with market forces

Market tests for resource value

Inimitability Is the resource hard to copy? Characteristics

Physical uniqueness Path dependency

Unique and therefore scarce because of all that has happened along the path taken in their accumulation

Built over time in ways that are difficult to accelerate Causal ambiguity

Impossibility to disentangle either what the valuable resource is or how to re-create it Often are organizational capabilities

Economic deterrence When a company preempts a competitor by making a sizable investment in an asset

Durability How quickly does this resource depreciate? The longer lasting, the more valuable Banking on this is risky because most resources have limited life and will earn only temporary profits

Appropriability Who captures the value that the resource creates? Value is always subject to bargaining among a host of players

Substitutability Can a unique resource be trumped by a different resource?

Competitive superiority Whose resource is really better? Core competence should not be an internal assessment of which activity, of all its activities, the company

performs best It should be a harsh external assessment of what it does better than competitors

Basing a strategy on resources that are not inextricably bound to the company can make profits hard to capture The way to avoid the vacousness of generic statements of core competence is to disaggregate the corporation’s

resources

Disaggregation Important in identifying truly distinctive resources Important in deriving actionable implications

Competitive superiority lies either in the weighted average or in its system-integration capability

Softer aspects of corporate assets Culture Technology Transformational leader

Strategic implications Strategy requires managers to look forward and realize that its distinctive competence’s value is eroded by time

and competition Investment

Strategy requires continual investment in order to maintain and build valuable resources Valuable corporate resources are often supradivisional

Unless someone is managing them on that basis, divisions will underinvest in them or free ride in them Investing in core competencies without examining the competitive dynamics that determine industry

attractiveness is dangerous Upgrade

Continually upgrade the number and quality of their resources Moving beyond what the company is already good at

Adding new resources Upgrading to alternative resources that are threatening the company’s current capabilities Move into a structurally more attractive industry

Leverage Leverage resources into all the markets in which those resources contribute to competitive advantage or to

compete in new markets Specialized resources

Often play a critical role in securing competitive advantage Lose value quickly when they are moved away from their original settings

Highly fungible resources Transfer well across a wide range of markets Rarely constitute the key source of competitive advantage

Strategic errors Managers tend to overestimate the transferability of specific assets and capabilities

Find it difficult to replicate them in new markets Managers overestimate their ability to compete in highly profitable industries Assume that leveraging generic resources will be a major source of competitive advantage in a new market

Institution-Based View as a Third Leg for a Strategy Tripod Institutions directly determine what arrows a firm has in its quiver as it struggles to formulate and implement

strategy

Roots of institution-based view Broader new institutionalism movement throughout the social sciences

Institutions rules of the game regulative, normative and cognitive structures and activities that provide stability and meaning to social

behavior dimensions

formal regulative (coercive)

informal normative cognitive

Institution-based view due to long-standing criticism of the

industry-based ignoring histories and institutions

resource-based little effort to establish appropriate contexts valuable, rare and hard-to-imitate resources and capabilities in one context may become non-valuable,

plentiful and easy to imitate in other contexts focuses on the dynamic interaction between institutions and organizations can add significant insights to the industry-based and resource-based views by specifying in what contexts and

under what circumstances certain capabilities in certain industries add value can benefit from the cross-fertilization with the evolutionary perspective whose leading questions is “how do

firms co-evolve with their environment?” research on multinational enterprises can be further propelled adds to the sociologically oriented institutional theory be demonstrating the benefits of integrating with

efficiency-oriented research holds potential to push the boundaries of the emerging literature on the varieties of capitalism and corporate

social responsibility variables

institution relatedness institution distance legal origins corruption indexes

Developed economies market-supporting institutions are almost invisible corporate effects are more critical in explaining the variation in foreign subsidiary performance market-based strategies

Emerging economies the absence of strong market-supporting institutions is conspicuous country effects are more salient relying on informal connections

Core propositions

Managers and firms rationally pursue their interests and make strategic choices within the formal and informatl constraints in a given institutional framework Rational (boundedly) choices Institutions fundamental role is to reduce uncertainty and provide meaning Compliance or legitimacy occurs through

Expedience Regulative pillar

Social obligation Normative pillar

Taken-for-granted basis Cognitive pillar

While formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty, providing guidance and conferring legitimacy and rewards to managers and firms Formal and informal institutions as compensatory structures Individuals and firms often find ways of altering the terms of their formal and informal contracts to avoid the

adverse effects of weak contracting institutions When a firm cannot be a cost, differentiation or focus leader, it can still beat competition on other grounds –

nonmarket political areana

Four fundamental questions Why do firms differ

Firms within one institutional environment tend to be similar Firms differ across institutional frameworks Interpersonal networks may serve as informal substitutes Interpersonal relationships among managers are translated into an interfirm strategy of relying on networks

and alliances, which, in the aggregate, contributes to the growth of the economy How do firms behave

Industry-based Strategic task is mainly to stake out a position that is less vulnerable relative to the five forces within an

industry Resource-based view

Firm-specific capabilities differentiate successful firms from failing ones Institution-based

Influences of formal and informal rules of the game What determines the scope of the firm

Industry-based Deals primarily with the risks associated with a single-industry strategy and calls for some moderate

diversification for risk reduction Resource-based

Emphasizes synergy in related industries and products Both views fail to explain why conglomerate took place

What determines the success and failure of firms around the globe Focus on performance defines the strategy field Industry-based

Posits that the degree of competitiveness in an industry largely determines firm performance Resource-based

Capabilities drive performance differences Institution-based

Institutional forces also provide an answer to differences Internationally and domestically

Institution-based view complements the existing industry-based and resource-based views

Strategy often suffers from a tyranny of the here and now Field of strategy struggles to develop good theory because it downplays temporal transitivity and generalizability

Enlightened Experimentation: The New Imperative for Innovation Experimentation lies at the heart of every company’s ability to innovate New information-based technologies have driven down the marginal costs of experimentation

Increases the opportunities for innovation Achieving innovation through rapid and frequent experimentation

Rules for enlightened experimentation Organize for rapid experimentation

Can provide rapid feedback necessary to shape those ideas Examine and revamp entrenched routines, org boundaries, and incentives Use small development groups that contain key people Determine what experiments can be performed in parallel

Fail early and often, but avoid mistakes Embrace failures that occur early in the development process Failure can expose important gaps in knowledge Clear objectives and hypotheses

Anticipate and exploit early information Recognize the full value of front-loading

Identifying problems upstream Acknowledge trade-off between cost and fidelity

Experiments of lower fidelity are best suited in early exploratory stages High-fidelity experiments are best suited later to verify product

Help product developers keep up with customer preferences that might evolve Combine new and traditional technologies

New and traditional technologies are best used in concert New technologies emerge and evolve continually

Potential pitfalls of new technologies Without thorough planning, a new technology might fail to deliver on its promise Without thorough planning, a new technology may decrease the overall performance of an R&D org or disrupt

its operations Misaligned objectives

Increased automation of routine experiments will not remove the human element in innovation Increased automation of routine experiments will allow people to focus on areas where their value is greatest

Structural Analysis of Industries Key aspect of the firm’s environment is the industry or industries in which it competes Industry structure has a strong influence in determining the competitive rules as well as the strategies potentially

available to the firm Competition in an industry is rooted in its underlying economic structure Collective strength of the forces determines the ultimate profit potential Not all industries have the same potential Strength of forces in the industry determines the degree to which this inflow of investment occurs and drives the

return to the free market level Industry structure can and does shift gradually over time

Competitive forces Entry

New entrants bring new capacity

desire to gain market share substantial resources

Barriers to entry present Can and do change as the conditions change Although entry barriers sometimes change for reasons largely outside the firm’s control, the firm’s

strategic decisions also can have a major impact Some firms may possess resources or skills which allow them to overcome entry barrier into an industry

more cheaply than other firms Economies of scale

Deter entry by forcing the entrant to come in at large scale and risk strong reaction from existing firms or come in at a small scale and accept a cost disadvantage

Sharing of operations in a multibusiness firms Vertical integration Limits

Large-scale may involve trade-offs with other potentially valuable barriers to entry Technological change may penalize Using existing technology may cloud the perception of new technological possibilities or of other

new ways Product differentiation

Brand identification and customer loyalties Force entrants to spend heavily to overcome existing customer loyalties

Capital requirements Need to invest large financial resources in order to compete Switching costs

One-time costs facing the buyer of switching from one supplier’s product to another If high, new entrants must offer a major improvement in cost or performance

Access to distribution channels Must persuade the channels to accept its product through price breaks, cooperative advertising

allowances, etc, which reduces profits The more limited the wholesale or retail channels for a product are and the more existing

competitors have these tied up, the tougher entry into the industry Cost disadvantages independent of scale

Proprietary product technology Favorable access to raw materials Favorable locations Government subsidies Learning or experience curve

Involves high labor content performing intricate tasks and/or complex assembly operations Nearly always the most significant in the early and growth phase of a product If costs decline with experience in an industry and if the experience can be kept proprietary by

established firm Decline in cost can be augmented if there are diversified firms in the industry who share

operations or functions subject to such a decline with other units in the company or where there are related activities in the company from which incomplete though useful experience can be gained

limits Copying Hiring a competitor’s employees Purchasing the latest machinery from equipment suppliers or purchasing know-how from

consultants or other firms Can be nullified by product or process innovations

Leap-frog Trade-offs with other valuable barriers

If more than one strong company is building its strategy on the experience curve, the consequences for one or more of them can be nearly fatal

May draw attention away from market developments Government policy

Can limit or even foreclose entry Regulated industries

Controls Increase capital needed Impose substantial lead times

Raise the capital cost of entry Give established firms ample notice of impending entry and sometimes full knowledge of

product reaction from existing competitors

conditions that signal retaliation history of vigorous retaliation substantial resources to fight back great commitment to the industry and highly illiquid assets slow industry growth

entry deterring price prevailing structure of prices which just balances the potential rewards from entry with the

expected costs of overcoming structural entry barriers and risking retaliation current price > entry deterring price

entry will occur can be eliminated if they choose or are forced by new entrants to price below this price

Threat of substitution The more attractive the price-performance alternative offered by substitutes, the firmer the lid on industry

profits Searching for other products that can perform the same function Products that need attention

Subject to trends improving their price-performance tradeoff with the industry’s product Produced by industries earning high profits

Bargaining power of buyers Circumstances

It is concentrated or purchases large volumes relative to seller sales The products it purchases from the industry represent a significant fraction of the buyer’s costs or

purchases The product it purchases from the industry are standard or undifferentiated Faces few switching costs Earns low profits Buyers pose a credible threat of backward integration

Tapered integration Producing some of their needs for a given component in-house and purchase the rest from

outside suppliers Industry’s product is unimportant to the quality of the buyers’ products or services Buyer has full information

About demand, actual market prices and supplier costs Consumers tend to be more price sensitive if they are purchasing products that are undifferentiated,

expensive relative to their incomes or where quality is not particularly important Wholesalers and retailers the same _ when they can influence consumers’ purchasing decisions

Company’s choice of buyer groups to sell to should be viewed as a crucial strategic decision Bargaining power of suppliers

Criteria It is dominated by a few companies and is more concentrated than the industry it sells to

It is not obliged to contend with other substitute products for sale to the industry Industry is not an important customer of the supplier group Supplier’s product is an important input to the buyer’s business Supplier group’s products are differentiated or it has built up switching costs Supplier group poses a credible threat of forward integration

Labor Degree of organization Whether the supply of scarce varieties of labor can expand

Rivalry among current competitors Firms are mutually dependent Numerous firms

If they are relatively balanced, creates instability because they may be prone to fight each other and have the resources for sustained and vigorous retaliation

If there is a dominant, can impose discipline and play a coordinative role Foreign competitors

Slow industry growth turns competition into a market share game

High fixed or storage costs Create strong pressures for all firms to fill capacity

Lead to rapidly escalating price cutting when excess capacity is present Lack of differentiation or switching costs

Largely based on price and service Product differentiation

Creates layers of insulation Capacity augmented in large increments

Where economies of scale dictate that capacity must be added in large increments Recurring periods of overcapacity and price cutting

Diverse competitors Strategies Origins Personalities Relationships to their parents

High strategic stakes High exit barriers

Specialized assets Low liquidation values High costs of transfer or conversion

Fixed costs of exit Strategic interrelationships Emotional barriers Government and social restrictions

Shifting rivalry

Structural analysis and competitive strategy Positioning the firm so that its capabilities provide the best defense Influencing the balance of forces Anticipating shifts in the factors underlying the forces and responding to them Diversification

Structural analysis can be used to predict the eventual profitability of an industry

Generic Competitive Strategies

Generic Strategies Overall cost leadership

Requires 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 areas Reinvesting in modern equipment Ruthlessly scrapping obsolete assets Avoiding product line proliferation Eing alert for technological improvemetns

Low-cost position Above-average returns Protects the firm against all five forces Requires

high relative market share heavy up-front capital investment

risks technological change that nullifies past investments or learning low-cost learning by industry newcomers or followers inability to see required product or marketing change inflation costs

Differentiation Design or brand image Technology Features Customer service Dealer network Above-average returns Requires

Gaining high market share Perception of exclusivity

Trade-off with cost position Risks

Cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty

Buyers’ need for the differentiating factor falls Imitation narrows perceived differentiation

Focus Serving a particular target very well Premise that firm is thus able to serve its narrow strategic target more effectively or efficiently than

competitors who are competing more broadly

Above-average returns Limitations on overall market share achievable Trade-off between profitability and sales volume Risks

Cost differential between broad-range competitors and the focused firm widens Differences narrows Competitors find submarkets within the strategic target and outfocus the focuser

Risks Failing to attain or sustain the strategy Value of the strategic advantage provided by the strategy to erode with industry evolution

No single relationship between profitability and market share

A Framework for Competitor Analysis

Diagnostic Components Future goals

Knowledge will allow predictions about whether or not each competitor is satisfied with its present position and financial results

How likely that competitor is to change strategy and the vigor with which it will react to outside events Aid in predicting its reactions to strategic changes Degree of threat will affect the probability of retaliation Helps interpret the seriousness of initiatives Help determine whether a corporate parent will seriously support an initiative taken by one of its business

units Business unit goals

Stated and unstated financial goals How do they make the trade-offs

Long-run and short-run performance Profits and growth in revenue Growth and ability to pay regular dividends

Attitude towards risk Balance of factors

Profitability Market position Rate of growth Desired level of risk

Economic or noneconomic organizational values or beliefs Tradition or history of following a particular strategy Locational preferences Organizational structure

Provides some indication about the relative status of the various functional areas and the coordination and emphasis that are deemed strategically important

Allocation of responsibility and power Where responsibility for decisions is assigned will give clues about the perspective top management

wants to bring to bear on them Control and incentive systems

Clues about what the competitor believes is important and how its managers will respond to events in view of their rewards

Accounting system and convention Policy issues can strongly influence the competitors’ perceptions of its performance, what it costs

are , the way it sets prices, etc Kinds of managers

How much apparent unanimity is there among management about future direction Composition of the board

Clues about the company’s orientation, posture toward risk and even preferred strategic approaches

Contractual commitments that may limit alternatives Regulatory, antitrust or other governmental or social constraints on the behavior of the firm

May sensitize a firm so that I foregoes reacting to strategic events unless some essential element of its business is threatened

Corporate parent and business goals Current results

Indication of the parent’s targets Overall goals of the parent Parent’s probable needs from its business unit Strategic importance the parent attach to the particular business unit

Major influence on the goals it is expected to meet Where does the business fit into the parent’s portfolio Reason of the parent to get into the business

Indication of the way in which the parent views the contribution of the business and the probable pressure it will place

Economic relationship between the business and others in the parent company’s portfolio Corporate-wide values or beliefs of top management

Effect on the business unit Generic strategy that the parent has applied in a number of businesses Sales targets, hurdles for return on investment and constraints on capital that might be placed on the

competitor unit Diversification plan Organizational structure

Clues about actual or probable strategy How is divisional management controlled and compensated Kinds of executives rewarded

Indication of the types of strategic behavior reinforced Time horizons and manner n which they balance risky strategies vs safer ones

Where does the corporate parent recruit from Antitrust, regulatory or social sensitivities Emotional attachment to a unit

Signal that disproportionate attention and support will be given to the unit Indicate exit barriers

Current strategy Assumptions

Competitors’ assumptions about itself Guide the way the firm behaves and the way it reacts to events

Competitors’ assumptions about the industry and the other companies in it Can identify biases or blind spots that may creep into the way managers perceive their environment

Identify moves with a lower probability of immediate retaliation Identify moves where retaliation, once it comes, is not effective

What does the competitor appear to believe about its relative position Strong historical or emotional identification with particular products Cultural, regional or national differences that will affect the way in which competitors perceive and assign

significance Organizational values or canons which have been strongly institutionalized What does the competitor appear to believe about future demand for the product and about the

significance of industry trends What does the competitor appear to believe about the goals and capabilities of its competitors

Belief in industry conventional wisdom or historic rules of thumb Capabilities

Strengths and weaknesses can be assessed by examining a competitor’s position with respect to the 5 forces Core capabilities

Capabilities in each of the functional areas How does it measure up to the tests of the consistency of its strategy Probable changes in those capabilities

Ability to grow Will the capabilities increase or diminish as it grows Capacity for growth in terms of people, skills and plant capacity Sustainable growth

Quick response Capacity to respond quickly

Uncommitted cash reserves Reserve borrowing power Excess plant capacity Unintroduced but on-the-shelf new products

Ability to adapt to change Fixed vs variable costs Ability to adapt and respond to changed conditions in each functional area Respond to exogenous events Exit barriers Share manufacturing facilities, sales force or other facilities or personnel with other units

Provide constraints to adaptation and/or may imped cost control Staying power

Ability of the competitor to sustain a protracted battle

History as indicator of goals and assumptions Current financial performance and market share compared to the past

Almost always be striving to regain the performance of the recent past History in the marketplace

Failure or has been beaten Areas it has starred or succeeded Reaction to particular strategic moves or industry events in the past

Managerial backgrounds as indicator of goals and assumptions Functional background

Key measure of its orientation and perception of the business Types of strategies that have worked or not worked for them personally in their careers Other businesses they have worked in and what rules of the game and strategic approaches have been

characteristic of those businesses Major events they have lived through

Affect the perspective of the manager in a wide range of areas and can influence strategic choices Writing and speaking, technical background or patent history, other firms they come into frequent contact with,

outside activities Management consulting firms, advertising firms, investment banks and other advisors the company uses

Portfolio analysis of the parent will provide clues to what the objectives of the business unit will be how hard it will fight to maintain its position and performance along dimensions and how likely it is to attempt to change its strategic position

Has an idea about competitors’ current strategy and capabilities. Hard to see future goals and assumptions. Framework can help a company understand wht conclusions its competitors are likely to draw about it

Competitors to examine Existing competitors Potential competitors

Firms not in the industry but who could overcome entry barriers particularly cheaply Firms for whom there is obvious synergy from being in the industry Firms for whom competing in the industry is an obvious extension of the corporate strategy Customers of suppliers who may integrate backward or forward

Probable mergers and acquisitions

Competitor response profile Offensive moves

Satisfaction with current position Probable moves Strength and seriousness of moves

Defensive capability Vulnerability Provocation Effectiveness of retaliation

Best battleground Market segment or dimensions of strategy in which competitors are ill-prepared, least enthusiastic or most

uncomfortable about competing

Mixed motives Conflicting goals for competitors Finding moves for which retaliation, though effective, would hurt the competitor’s broader position

Market Signals

Market signal Any action by a competitor that provides a direct or indirect indication of its intentions, motives, goals or

internal situation Functions

Truthful indications of a competitor’s motives, intentions or goals bluffs

Types Prior announcement of moves

Form, character and timing Does not necessarily insure that an action will be taken Preempting other competitors Can be threats of actions to be taken if a competitor follows through with a planned move Tests of competitor sentiments Communicating pleasure or displeasure

Sequence of actions Minimizing the provocation of a forthcoming strategic adjustment Avoid costly simultaneous moves Communication with the financial community Coalescing internal support for a move Preemptive

If there are lasting benefits Conciliation

If there are few benefits If the competitor acting in its narrow self-interest could have done better through a surprise move

Action that is much less damaging Far advanced

Critical implications for the credibility of future commitments and future announcements Trick competitors into expending resources in gearing up to defend against a nonexistent threat

Announcement of results or actions after the fact Insuring that other firms know and take note of the data disclosed

Influence their behavior Public discussions of the industry by competitors

May expose the commenting firm’s assumptions about the industry Conscious or unconscious attempt to get other firms to operate under the same assumptions Seeking to interpret industry conditions in such a way as to improve its own position

Competitor’s discussions and explanations of their own moves Attempt to get other firms to see the logic of a move and hence follow it Communicate that the move is not to be taken as a provocation Preemptive gestures Attempt to communicate commitment

Competitors’ tactics relative to what they could have done A competitor behaving in a way inconsistent with its narrowly defined self-interest may implicitly be

signaling conciliation Manner in which strategic changes are initially implemented Divergence from past goals

Indication of potential major realignment in goals or assumptions Divergence from industry precedent

Aggressive signal Cross-parry

When one firm initiates a move in one area and a competitor responds in a different area with one that affects the initiating firm

Represents a choice by the defending firm not to counter the initial move directly but counter it indirectly

If directed toward one of the bread and butter market Serious warning

If directed toward a minor market Warning Hope of not triggering any unsettling or hasty counterresponse Defender will raise the ante with a more threatening cross-parry later

Fighting brand Firm threatened or potentially threatened by another can introduce a brand that has the effect of

punishing or threatening to punish the source of the threat Can be meant as warnings or deterrents or as shock troops to absorb the brunt of a competitive attack

Private antitrust suits Signal of displeasure Signal of harassment Delaying tactic Sensitizing the stronger firm so that it will not undertake any aggressive actions while the suit is

outstanding Smaller to larger

Inflict penalties Larger to smaller

Studying the historical relationship between a firm’s announcements and its moves Searching for signs a competitor may have inadvertently given before making changes in the past Too much attention to market signals can be counterproductive distraction Prerequisite to interpreting signals accurately is to develop a baseline competitor analysis

Strategic Decisions Having high exit barriers usually leads to disaster

Forced to respond vigorously to moves and will not yield position without a significant investment Unless industry structure is very favorable for the decline phase, harvesting strategies without clear strengths

usually collapse

Preparing for decline Minimize investments that will raise exit barriers Place strategic emphasis on market segments that will be favorable under decline conditions Create switching costs

Competition in Global Industries

Global industry Strategic positions of competitors in major geographic or national markets are fundamentally affected by their

overall global positions Necessary to examine industry economics and competitors in the various geographic or national markets jointly Require a firm

Compete on a worldwide, coordinated basis Subsidiaries are autonomous Competitive balance is country-by-country basis

Industries with multinational competitors are not necessarily global industries

Differences in competing internationally vs nationally Cost differences among countries Differing circumstances in foreign markets Different roles of foreign governments Differences in goals, resources, and ability to monitor foreign competitors

Structural factors and market forces operating in global industries are the same

How to go global Licensing

First foray overseas Export

Present in industries where competition is truly global First foray overseas

Foreign direct investment Present in industries where competition is truly global

Sources of global competitive advantage Conventional comparative advantage Production economies of scale

Cost advantage through centralized production and global competition Vertical integration

Efficient scale of the vertically integrated system is greater than the size of national markets Implies movement of exports among countries

Global experience In technologies subject to significant cost declines due to proprietary experience Global competition can allow faster learning, even if the learning curve flattens at cumulative volumes

Logistical economies of scale

If international logistics involves fixed costs that can be spread by supplying many national markets Ability to use more specialized systems

Marketing economies of scale Common sales force Proprietary marketing techniques Knowledge gained from one market can be used at no cost in other markets Some brand names have carryover among geographic markets Some brand names develop recognition internationally through trade press, technical literature, cultural

prominence Economies of scale in purchasing

Result of bargaining power or lower suppliers’ cost in producing long runs Most probable when the volumes purchased by the industry are moderate compared to the size of the

industry producing the raw materials or components Product differentiation

Edge in reputation and credibility Proprietary product technology

Ability to apply proprietary technology in several national markets Tap into technological developments worldwide

Mobility of production Fixed costs of creating and maintaining an organization and developing proprietary technology can be

readily spread over operations in many national markets Invest in skilled people and mobile equipment

Significance of each source of global advantage depends on How significant to total cost is the aspect of the business subject to global economies How significant to competition is the aspect of the business in which the global competitor has an edge All sources of advantage also imply the presence of mobility barriers for global firms

Impediments to global competition Economic

Transportation and storage costs Offset economies of centralized production Offset efficiency Competition is on a market-by-market basis

Differing product needs When national markets demand different product varieties Depends on the cost of altering products

Established distribution channels When customers are numerous and individual purchase amounts are small Foreign firm to penetrate entrenched distribution channels

Little incentive to substitute a foreign firm’s line for a domestic one Less well-established because the industry is new or in flux

Sales force Product requires a local manufacturer’s direct sales force If national competitor’s sales forces sell a wide line of products

Local repair Offer local manufacturer’s repair

Sensitivity to lead times Short fashion cycles Rapidly moving technology Lead time required to physically transport If local product needs differ

Complex segmentation within geographic markets

Increases the need for product lines with many varieties Increase the need for the ability to produce custom products

Lack of world demand Demand does not exist in a significant number of major countries Only fit the needs of an unusual customer group which is present only in a few national markets

Managerial impediments Differing marketing tasks

Marketing task can vary geographically Nature of distribution channels, marketing media and cost effective means of reaching the buyer Customer bias toward dealing with local firm

Intensive local services Intensive localized marketing, service or other customer interaction is required

Rapidly changing technology Frequent product and process redesign

Institutional impediments Governmental

Tariffs and duties Quotas Preferential procurement Governmental insistence on local R&D or requiring locally produced components in the product Preferential tax treatment, labor policies, etc Bribery laws, tax laws or other policies that are disadvantageous to their firms in international

operations Can either aid locally owned firms or else require production in the country Can force the sale of product varieties peculiar to the country

Perceptual or resource impediments Information and search costs

Environmental triggers to globalization Increased scale economies Decreased transportation or storage costs Rationalized or changed distribution channels Changed factor costs Narrowed national economic and social circumstances Reduced government constraints

Strategic innovations stimulating globalization Product redefinition

National product differences erode naturally as the industry matures Indentification of market segments

Segments of the market that are common to many countries and that are being poorly served Segments of the market less subject to impediments to global competition

Reduced costs of adaptations Create ways of lowering the cost of altering basic products to meet these local needs Any innovation that modularizes a product for easy adaptation or increases its range of compatibility

Design changes Leading to more standardized components

Deintegration of production Government constraints requiring local production can be circumvented by assembling locally while

producing some or all components centrally Elimination of constraints from resources or perception

Entry of new firms can eliminate resource constraints New entrants may be able to start fresh with new strategies unencumbered

Foreign firms have sometimes been better able to perceive possible product redefinitions because they have had experience competing this way in their home markets

Access to the US market Globalization has hinged critically on foreign firms having access to the US market US firms have sometimes felt less pressure to design truly global methods of competition

Issues that must be confronted by global competitors Industrial policy and competitive behavior

Firms and their home government must be regarded together Can shape companies’ goals Provide R&D funds Influence their position in global competition Can help negotiate for the firm Help finance sales through central banks Apply political leverage Barriers to exit may increase

Political and economic relations of the home government vis-à-vis governments in major world markets Relationships with host governments in major markets

Can block global competition Create a number of different strategic groups

Firms competing globally on a coordinated basis Multinational companies that follow a strategy of local responsiveness

Escape many government impediments Local firms

Degree of responsiveness to host government concerns becomes a key strategic variable Systemic competition

Partial overloap in served markets, geographic location, etc Difficulty in competitor analysis

Because of prevalence of foreign firms and need to analyze systemic relationships Data on foreign firms less available Institutional considerations

Strategic alternatives in global industries Broad line global competition

Competing worldwide in the full product line Requires substantial resources and long time horizon

Global focus Targets a particular segment in which the firm competes on a worldwide basis

National focus Takes advantage of national market differences to create a focused approach to a particular national market

Protected niche Seeks out countries where governmental restraints exclude global competitors

In some global industries, strategies of national focus or seeking a protected niche are unavailable because there are no impediments to global competition

Transnational coalitions Cooperative agreements between firms in the industry of different home countries

Trends affecting global competition Reduction in differences among countries

Reduces impediments to world competition More aggressive industrial policy

Stimulate industry in carefully selected sectors Abandonment of sectors deemed less desirable

National recognition and protection of distinctive assets Free flow of technology Gradual emergence of new large-scale markets

If china and Russia control access to their markets, their firms may become major global powers Gaining access to one or both may become a crucial strategic variable in the future

NDC competition Industries vulnerable to NDC

Rapidly changing technology that can be kept proprietary Highly skilled labor Sensitivity to lead times Complex distribution and service High consumer marketing content Complex, technical selling task

Some degree of maturity is necessary for global competition to be present

Strategic Analysis of Vertical Integration

Vertical integration Combination of technologically distinct production, distribution, etc, within the confines of a single firm Utilize internal or administrative transactions Believed to be cheaper, less risky or easier to coordinate Build an inefficiently small facility that meets only its needs Builds and efficient facility and must bear the possible risk of sales or purchases on the open market Benefits

Depend on the volume of products the firm purchases or sells to the adjacent stage relative to the size of the efficient production facility

Economies of integration Economies of combined operations Economies of internal control and coordination

Tapered integration Producing some of its own requirements internally and contracting for the rest

Quasi-integration Use of debt or equity investments and other means to create alliances

Strategic innovation at the Base of the PyramidInnovation in developing markets

has less to do with finding new customers addressing issues of product acceptability, affordability, availability and awareness

companies that develop new strategies to attack competitors and enter new markets often accomplish by introducing architectural or business-model breakthroughs new products new services new customers new ways of promoting, producing or distributing

Innovation in developing markets differences not finding new whos

not about creating new product features but adapting existing products to customers who have fewer resources or a different cultural background

less about creating new business models or differentiating how you compete than establishing basic market ingredients

Framework for strategic innovation affordability

degree to which a company’s goods or services are affordable to consumers at the low end of the market acceptability

extent to which consumers and others in the value chain are willing to consume, distribute or sell a product or service

cultural societal religious political

availability extent to which customers are able to acquire and use a product or service establishing distribution channels when none exist

awareness refers to what customers know about the products or services you sell learning how to generate market demand how to reach potential customers who may not be familiar with their products and who can’t be contacted

with conventional advertising

Sometimes meeting the needs of customers requires broadening the definition of what the product can do

The Four Things a Service Business Must Get Right As the world economies have matured, they have become dominated by service-focused businesses

Elements Offering

Must effectively meet the needs and desires Focus on the experiences customers want to have Service excellence can be defined as what a business chooses what not to do Determine which attributes to target for excellence and which to target for inferior performance Discover the relative importance customers place on attributes Identify customer segments in terms of attributes preferences

Funding mechanism Pricing is not transaction based but involves the bundling of various elements of value or entails some kind

of subscription Forms

Having the customer pay Charge the customer in a palatable way

Form of payment that is less objectionable Create a win-win between operational savings and value-added services

Enhance the customer experience even while spending less Temporary competitive advantage

Cover the cost of excellence with operational savings Spend now to save later

Make operational investments that will pay off eventually by reducing customers’ needs for auxiliary services

Have the customer do the work Self-service

Best thought out as thoroughly as possible prior to the launch Employee management system

People intensive Decisions made in this areas should reflect the service attributes the company aims to be known for What makes our employees reasonably able to achieve excellence What makes our employees reasonably motivated to achieve excellence Employee sacrifice is a rarely sustainable resource Design a system where average employees can thrive

Customer management system Input influences their experiences and other customers’ Customers are not as easy to train as employees Customers have a great deal of discretion in their operational activities

There is no such thing as a good idea in isolation There is only a good idea in the context of a specific service model

It is folly to attempt to be all things to all customers Companies that attempt to be all things to all people begin to struggle when upstart competitors start picking off

profitable niches

Multifocused Various service models under one umbrella Challenge is to use knowledge gained in one service model to strengthen the performance of the others Directive leadership

Accommodates different personalities but always relies on senior managers who are able and willing to exert strong influence on subordinates

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