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1
Master II
Management Financier
(Financial Management) (Financial Management)
Mr Xavier LEPERS
References
Johnson G., Scholes K., Whittington R.
(2006), Exploring Corporate Strategy,
Prentice Hall, 7th edition.
Barney J & Hansen W (2006) Strategic Barney J. & Hansen W. (2006), Strategic
Management & Competitive Advantage,
Pearson Education.
Garrette B, Dussauge P & Durand R (Coord),
Strategor, 5
me
dition, Dunod, 2009.
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Chapter 1:
Introducing Strategy
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Chapter 1: Introducing Strategy
From competition to hypercompetition
(R.DAveni, 1994): a new environment for
firms
Globalization and strategy
Differents organizational behaviors
(diversifications, alliances, innovations,)
Focus : Dell (from B to B informatic industry
to B to C electronic industry)
How are strategies built ?
How are they implemented in organizations ?
4
1 What is Strategy ?
5
1.1. The characteristics of strategic
decisions:
Long term decisions (strategic vision)
Are concerned with the scope of
organisations activities (activities frontiers,
hi l f ti i ti l f ti ) geographical frontiers, organisational frontiers)
The acquisition of a competitive advantage
The search for strategic fit with business
environment
Creating opportunities by building on
organisations resources and competences
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The characteristics of strategic
decisions
Complexity and dynamic vision (anticipate
competitive game)
Strategic decisions are likely to influence
operational level operational level
Strategic decisions are affected by values
and expectations of stakeholders
They reflect an integrated approach of the
organisation.
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A definition of strategy
Strategy : is the direction and scope of an
organisation over the long term, wich achieves
advantage in a changing environment through its
configuration of resources and competences with
the aim of fulfilling stakeholders expectations.
Value as a key concept in strategic management
(nalebuff & Brandenburger)to determine firm position
compared to competitors.
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1.2. Three levels of strategy in
organisations
1) Corporate level strategy : is concerned
with the overall purpose and scope of an
organisation and how value will be added to
th diff t t (b i l l ) the differents parts (business levels)
2) Business level strategy : is a part of an
organisation for wich there is distinct external
market for goods or services.
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How to determine SBU?
To a specific SBU is associated specific CSP
(critical success factors).
Key questions to set up SBU :
O Customer group : whos buying ?
O Customer need : for doing what ?
O Technology : how to produce?
O Distribution channel : how to reach customers ?
O Determine SBU = set up a strategic segmentation
Focus on Bic Group.
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And the last one
3) Operational strategies
Are concerned with how the components of an
organisation deliver effectively the corporate and
business level strategies in terms of resources,
d h processes and human resources.
The integration of operational decisions and
strategy is therefore of a great importance.
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2 Strategic Management
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Key Elements of Strategic Planning Process
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2.1 Three anchors of strategic management
(synthesis scheme)
The strategic position
Globality et complexity
The Environment The Environment
The strategic capability : understanding strengths and
weakenesses
Core competences = competitive advantage
Stakeholders Influence
Mass merchandising exemple
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Strategic choices
At business level : based on generic
strategies (low price, differentiation, focused
differentiation)
At corporate level : directions and methods of
development (specialisation, diversification, organic
development, alliances)
Internationalisation
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Strategy into action
Innovation and Entrepreneurship
Managing change
Organisation and structure
G d fi lt Governance and firms culture
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2.2. Strategic management in
different contexts
1) the small business concern
Are operating in a small numbers of markets
Values and expectatives of senior executives Values and expectatives of senior executives
are likely to be very important, as they may
be in an ownership position too.
Intensive competition
Difficulties to raise capital
Limited choices about feasible strategies.
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Other organisations
2) the multinational corporation
Monitoring the whole firm (organisational
system)
coordination of operations (information, p ( ,
finance, logistic)
3) manufacturing and service
organisations
The importance of intangible features (
ambience, advises, swiftness,)
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4) Strategy in the public sector:
The importance of ideology
Privatisation in many industries (telecommunications, rail
services, health services, financial services ;
5) The not-for-profit sectors
Based on the raison dtre rooted in the values of
organisation organisation.
Necessity to increase managerial competences in the
organisation
Influence of stakeholders on the strategy political
influence
Problems of coordination due to the lack of
professionalism.
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3. Challenges of strategic
management
3.1. Strategic drift:
Strategies progressively fail to adress the strategic
position of the organisation and performance deteriorates
3 2 Contemporary challenges 3.2. Contemporary challenges
1. Globalisation, information systems and services
2. Knowledge management and long term
development
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Strategic Position / Diagnosis
O External Analysis
PESTEL
Porters five (+1) forces
Strat. groups/segmentation
EInternal Analysis
Value chain
Value network
Activities mapping Activities mapping
Org. Structures
SWOT
Core competences
Sources of competitive advantage (VRIN test)
Strategic Issues / Gap Analysis
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Chapter 2: The
Environment
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Chapitre 2: The environment
How to cope with complexity?
[interconnections, speed of change, lifestyles
and globalization,)
How to make sense of this complexity?
Diff l l f l i Different levels of analysis
Macro-environment: PESTEL framework
The industry: the 5+1 forces framework
Strategic groups
threatens and opportunities
critical success factors (CSF)
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Exhibit Layers of the business environment
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1. The macro-environment
1.1. PESTEL framework
Categorises environmental influences into six
main types : political, economical,
sociological technological ecological and sociological, technological, ecological and
legal.
The aim: distinguish structural tendances
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Environmental factors Items to analyse
Political -Administration stability
-Taxation policy
-Foreign trade regulation
-Social walfare policies
Economical -Business cycles
-GNP trends
-Inflation, unemployment
-Disposable income
Sociocultural - Population demographics
Mobility -Mobility
-Lifestyles changes, attitudes to work and leisures,
-Levels of education
Technological -Governement spending on research
-New discoveries, spending,
-Rates of obsolescence
Ecological -Environmental protection laws
-Waste disposal
-Energy consumption
Legal -Competition law
-Health and safety.
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The macro-environment
Distinguish structural tendencies i.e key drivers
of changes likely to influence the industry.
Analysis but synthesis too: understanding the
combined effects of just some of these separate j p
factors is very important.
Illustration: Drivers of globalization
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Exhibit Drivers of internationalisation
Source: Adapted from G. Yip, Total Global Strategy II, FT/Prentice Hall, 2003, Chapter 2
The macro-environment
1.2. Porters Diamond
A kind of entrepreneurial darwinism.
It suggests that there are inherent reasons
why some nations are more competitive than why some nations are more competitive than
others and why some industries whithin
nations are more competitive than others.
Examples
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The macro-environment
1.3. building scenarios
It can be perceived as a way to limit incertitude.
Scenarios are detailed and plausible views of how the
business environment of an organisation might develop in
the future: they are based on key environmental influences
and drivers of change about which there is a high level of and drivers of change about which there is a high level of
uncertainty.
This instrument make it possible to have different views of
potential futures (at less 5 years)
Its crucial to encompass few key drivers or to combine
environmental factors through few assumptions.
Its possible to develop strategies for each scenario.
Example: firms dependant on oil prices.
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2. The industry
An industry is a group of firms producing the same principal
product/service.
2.1. Sources of competition: the five forces
framework framework
The five forces are likely to decrease the profit or the value
captured by firm while exchanges occur.
The analyse of the 5 forces must be used at the level of SBU
Its an illustration of a competitive system (connections,
interdependence, disruptions,)
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Exhibit The five forces framework
Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and
Competitors by Michael E. Porter. Copyright 1980, 1998 by The Free Press. All rights reserved
a) The threat of clients, buyers and
suppliers.
The profit appears as correlated to actors level of
power.
Some characteristics seem to be important:
Concentration of buyers Concentration of buyers
The costs of switching
Examples : LOral / Sony / Agricultural suppliers
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b) The threat of substitutes
Product-for-product substitution (mail/Post)
Complementors (Intel / Air France)
That implies an extended vision of competition.
Substitution of need (new generation of product)
Generic substitution (relied on disposable income)
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c) The threat of entry
Depends on the extent to which there are barriers to entry.
Barriers to entry are factors that need to be avoided by new entrants
looking for competing successfully. Consequently, barriers to entry
imply higher costs for new entrants.
Different types of barriers can be distinguished :
Financial barriers :
Economies of scale
The capital requirement for entry
The costs of switching (for customers)
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c) The threat of entry
Commercial barriers
Access to supply or distribution channels
Reputation, differentiation
B i l t d t d t Barriers related to resources and competences
technology : patents, trade secrets (SEB, Bic, 3M,
Michelin,)
Rarity of the resource : commercial location, air slots,
Experiences : tangible and intangible (relational
networks build with the other actors of industry)
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d) Competitive rivalry
Depends on differents factors :
The extent to which competitors are in balance (substitutabilities or
complementarities of firms)
Lifecycle and growth rate (ex: the automotive sector)
High fixed costs (steel industry)
High exit barriers (linked to the specificity of assets)
& the State position: appears as being an acting actor
Questions about the 5 forces framework :
O Is the industry attractive?
O To classify key forces through a hierarchy (graphical
techniques)
O What are the expectations of the underlying forces?
Determination of CSF (competitive strategic factors)
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3. Competitors and markets
Strategic groups are organisations within an
industry having similar strategic characteristics,
following similar strategies or competing on similar
bases.
Scopes of activities:
O Extent of product (or services) diversity O Extent of product (or services) diversity
O Extent of geographical coverage
O Number of market segments served
O Distribution channels used
Resources Commitment:
O Extent of branding
O Marketing effort
O Product or service quality
O Technological leadership
O Size of organisation
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Exhibit Some characteristics for identifying strategic groups
Sources: Based on M.E. Porter, Competitive Strategy, Free Press, 1980; and J. McGee and H. Thomas, Strategic groups: theory, research and taxonomy, Strategic Management
Journal, vol. 7, no. 2 (1986), pp. 141160
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Competitive forces How to counterbalance it?
Power of buyers Creation of a mark valorised by customers
Setting up switching costs
Multiplication of distribution channels
Integration forward
Power of suppliers Diversity of sourcing (mass merchandisers marks)
Integrate generic components
Integration backward
Threat of substitutes Increase the ratio quality/price
Increase customers loyalty (reputation, services, quality,)
Setting up switching costs (specific technologies)
Creation of a breaking technology
Launching a disruptive communication campaign against substitute Launching a disruptive communication campaign against substitute
Selling itself the substitute
Threat of entry Fixing a price too low for new entrants
Fidelity of customers (rputation, services, quality, )
Setting up switching costs
Protection of technologies
Competitive rivalry Capacity of innovation
Fidelity of customers (reputation, services, quality)
Etablissement de cots de transfert
Protection of technologies
monitoring of rare resources and/or core competences
Reduction of sunk costs
Power of states Capacity of lobbying
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Chapter 3:
Resources, Resources,
competecences &
strategic capability
41
Chapitre 3 : Resources, competences
and strategic capability
Strategic capability is based on the adequacy
and suitability (with CSF) between the
resources and competences essential for an
organisation to survive and prosper.
The advantage of a firm compared to its
competitors rests on two keys elements:
O The chosen position on the markets ;
O The fitness between this position and the useful
R&C
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1. Foundation of strategic capability
The strategic capability is based on resources
and competences of the organisation.
1.1. Threshold resources and unique resources
4 categories of resources :
O Physical resources
= E i t & t h l i d i d t i l ttl t & = Equipements & technologies used, industrial settlements &
commercial stores...
O Financial resources
= firm capital, relationships with bankers, investors,
O Human resources
= individual expertise, technical and managerial qualification,
individual networks (internal & external)...
O Intangible resources
= marks, culture
43
Exhibit Strategic capabilities and competitive advantage
1.2. Threshold and core competences
Threshold capabilities are essential for the
organisation to be able to compete in a given
market. Threshold capabilities rest on
threshold resources and on threshold
competences.
Core competences are activities and
processes through which resources are
deployed in such a way as to achieve
competitive advantage difficult to imitate or
obtain by competitors.
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Competences ()
Threshold levels of capability will change and usually rise over
time as critical success factors change
Trade-offs between threshold capabilities are required for
each SBU
A competence is a know-how about resources combination to
achieve goals
The importance of intangible resources and immaterial The importance of intangible resources and immaterial
competences:
Competences examples :
O Organisational knowledge and collective know-how
(collective experience facing specific situations)
O Quality management
O Coordination systems
O Processes of products development
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Evaluation of core competences :
5 questions
According to Collis and Montgomery, it makes sense to analyse
the strenght of resources and competences thanks to 5 key
words:
The question of imitability :
Are competitors able to imitate the resource, the competence?
The question of substituability :
Are competitors able to develop an alternative resource Are competitors able to develop an alternative resource,
competence ?
The question of durability :
how fast competences are going to depreciate ?
The question of value :
whos going to capture the most important part of value
generated by the competence of firm?
The question of superiority (exclusivity) :
is the firm owning a real advantage compared to its competitors ?
47
According to Porter, the identification of
competitive advantage is based on :
The value chain: an appropriate pattern to
determine where are localised competences
in organisation.
In order to obtain a competitive advantage In order to obtain a competitive advantage,
core competences have to be applied to the
critical success factors identified in SBU.
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Exhibit Strategic capability: the terminology
2. The strategic capability diagnosis
This diagnosis is associated to the value
chain.
Its based on the understanding of strengths
and weaknesses of firm and weaknesses of firm.
It also encompasses the idea of dynamic
capabilities: how to readjust continually
required competences to cope with the
environment evolution and rise the competitive
advantage.
50
2.1. The value chain and the network
The value chain illustrates the idea that organisations
achieve competitive advantage by delivering value to
customers. The consultancy needs to understand
how the value is created or loosed through the
process.
M PORTER describes two forms of activities : primary
and support activities.
Not only activities but also links between them can be
responsible of value generated by firm.
How useful is the value chain? what are its limits?
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The value chain (Porter, 1985, 1988)
Firm infrastructure
Human resource management
Technologic development
u
p
p
o
r
t

t
i
v
i
t
i
e
s
g p
Procurement
Inbound
Logistics
Operations Outbound
logistics
Marketing &
Sales
Service
Primary activities
S
u
a
c
52
The value network
The value network is the set of inter-organisational
links and relationships necessary to create a product
or a service
Nowadays we can observe an interest for value Nowadays, we can observe an interest for value
creation beyond the organisation (project groups,
supply chain management,). It illustrates the
importance of value throughout vertical network.
Taking into account those elements, it will be
important to determine whether or not strengths and
weaknesses make possible for the organisation to
reach the CSF.
53
Suppliers
Value chain
Channel value
chain
Customer value
chain
The value network
Organisations
value chain
Source M. Porter
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2.2. Cost efficiency
Efficiency is the ratio between reached
objectives and the resources used.
Efficacy is the ratio between reached
objectives and assigned objectives objectives and assigned objectives.
In many organisations, the control of costs
constitute a way for competitive advantage.
55
Efficiency rests on mainly four sources
Economies of scale
Procurement costs
Experience
V l ff t Volume effect (mass merchandising industry for
example)
An immaterial effect, apprenticeship
Product and process innovations
56
3. Strategic capability and competitive
adavantage
3.1. Value : some more ideas
Value creation has to reach customers first Value creation has to reach customers first
The notion of goodwill may be applied.
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3.2. the rarity of strategic capabilities
Based on resources and competences
What is important: the difficulty to imitate and the
robustness of core competences of the organisation.
Core competences are complex to identify They are Core competences are complex to identify. They are
embedded in organisation and encompass
resources, processes, culture,
The paradox of robust competences
How to make explicit and collective knowledge's
which are individual and tacit (Nonaka and
Takeuchi, 1995)?
58
Exhibit 3.5 Criteria for inimitability of strategic capabilities
Synthesis of strategic analyse
Environment
analyse
Strategic capability
analyse
Strenghts
Weaknesses
Opportunities
Threatens
60
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Chapter 4:
Strategic Choices Strategic Choices
61
Chapter 4: strategic choices of firm
- Up to now, we did the analyse of environment
and estimated the strategic capacity of firm

- Strategic choices at business level (SBU) - Strategic choices at business level (SBU)
- Strategic choices at corporate level (portfolio
matrixes)
- Directions of development
- Methods of development
62
What are Strategic Choices?
Strategic choices
involve understanding
the underlying bases for
future strategy at both
the business unit and
1-63
corporate levels and the
options for developing
strategy in terms of
both the directions and
methods of development
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Strategic Choices
Corporate level choices, e.g.
O diversification
O internationalization
Business unit level choices, e.g.:
O product / market choices
O pricing choices
Functional level choices, e.g: .
O marketing, production, finance, human resources, IT,
logistics, R&D, etc.
Strategic choices at different levels are connected.
Together, they should be coherent and mutually-reinforcing
64
Corporate Strategy
Specialisation - Diversification
Integration Internationalisation
Internal growth-
External growth - Alliance
The different levels of strategy
Business Strategies
Operating Strategy
Strategic Business Units)
Financial Strategy -
Commercial Strategy
Production Strategy -
Human resources strategy...
Price based Strategy
Differentiation Strategy
Focused differentiation
65
1 Business level Strategies
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1. Business level strategies / Competitive
strategies
Definition: competitive strategies is concerned
with the basis on which a business unit might
achieve competitive adavantage in its market.
Porter suggested three generic strategies:
overall cost leadership, differentiation and
focus in order to set up a competitive
advantage in a business unit
67
Business Level Strategies
SBU strategies
focus on how
companies compete
and generate
Exploring Corporate Strategy
Exhibit5.1
Pearson Educational Ltd. 2005
competitive
advantage in
different
products and
markets
68
Perceived added value to a
particular segment, warranting
price premium
1.1 three generic strategies at
business level
Focus
Seeks to achieve a lower
price than competitors while
trying to maintain similar
perceived product or service
benefits to those offered by
competitors.
Seeks to provide products or
services benefits that are different
from those of competitors and that
are widely valued by buyers
Development of distinctive
competences
Low price
strategy
Differentiation
or
69
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1.2. STRATEGY CLOCK :
A global perspective about differentiation
Hybrid
Differentiation
Focused differentiation
high
Competitive
offer
Low
Price
No frills
Strategies destined to
ultimate failure
Price
Perceived
value
low
High
Note: The strategy clock is adapted from the work of Cliff Bowman (see D. Faulkner and C. Bowman, The Essence of Competitive
Strategy, Prentice Hall, 1995.) However, Bowman uses the dimenstion Perceived Use Value.
70
Product-Price Strategies:
Needs and Risks
Exploring Corporate Strategy
Exhibit5 2b
71
1.2.1. Price strategy I (no frills)
C Combines a low price, low perceived product /
service benefits and a focus on a price-sensitive
market segment.
Many reasons can explain the development of that Many reasons can explain the development of that
strategy:
Life cycle products (enrichment of the industry offer)
Facing a lower purchasing power
It appears as the right way to enter a new market (see Japanese
car makers in Europe)
Limits : easy to imitate
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Price strategies II (low price)
The aim : to maintain price always lower than
competitors thanks to an inimitable efficiency
how ?
By conquering market share higher than
competitors, in order to use economies of scale,
bargaining power and experience effect.
Success maintaing high market
share
73
1.2.2. Hybrid strategy
An hybrid strategy seeks simultaneously to achieve
defferenciation and a price lower than of competitors.
Means: technological break, culture product, greater volumes.
Ex : IKEA / offers triple plays,
Success depends on both the capacity to generate value for
customers but also on costs structure in order to be able to
invest and renew differentiation factors.
74
1.2.3. Differentiation strategy
Increased perceived value compared to competitors
Based on the increasing value and managing with costs, its
possible to maintain the same price.
In some cases, organisations can increase margins by putting up
prices higher
Building on material and immaterial characteristics, the
offer is perceived higher by customers.
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1.2.4. Focused differentiation
This strategy seeks to provide high perceived
products / service benefits justifying a
substantial higher price.
+ Its a way to cope with or avoid direct confrontation with
leaders in an industry.
+ to limit oneself to a specific market segment
+ to concentrate on specific customer needs ( ex : clothes for
pregnant women, vehicles for airports, products for blind people,)
Ex : Haute couture focusing on rich customers.
76
Strategies for Achieving Competitive
Advantage
Staying competitive over time: sustainability of advantage
Volatile Markets: advantages through hypercompetition g g y
Interdependent competitors: advantages through collaboration
Interdependent competitors: advantages through game theory
77
Sustaining Competitive Advantage over
Time
Exploring Corporate Strategy
Exhibit5.3
Pearson Educational Ltd. 2005
78
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Propose and Evaluate
Strategic Choices
Relevance
O Coherence with the diagnosis
Acceptability
O Expected gains O Expected gains
O Risk level
O Expected reaction of competitors and stakeholders
Feasibility
O Evaluation the capability of the organisation to
obtain the resources and competences necessary
to the choosen strategy.
79
2 Corporate Strategies
80
2. Corporate Strategy
Strategy Directions
O Specialisation
Methods for pursuing strategies
O Internal growth
Directions and Methods of development :
O Diversification
O Refocusing
g
O External growth
O Alliance
81
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Strategy Directions
Strategic analysis approach
portfolio of activities
+ Development of a robust portfolio on long term
development of existing activities development of existing activities
to enrich the portfolio
to give up from certain activities
Directions/options of development
Specialisation
Diversification / refocusing
Vertical integration / externalisation
82
2.1 Specialisation
O The way of specialisation
= Concentrate its competences on a single activity (SBU)
= Development of reputation, expertise
= Reinforcement of resources, of competences, of competitive p p
advantage on one SBU
O The aim : acquire a strong position (leadership)
in an activity
Ex : firms specialised in audit or advisory services (dealing with strategy or
supply chain management )
83
Concentrate all strengths (resources and competences
on a unique Strategic Business Unit)
Advantages:
Increasing quality of the product or service,
Specialisation: advantages and
inconvenients
Increasing quality of the product or service,
cost control through apprenticeship, economies of scale;
an easier control of the organisation
disadvantages:
Risky because of global performance resting on a unique market
(technology split, new competitors emerging, saturation of market);
dependence on technological and socio-economical environment
84
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Strategic Directions - Ansoffs Matrix:
(Initial Set of Alternative Development Options)
Each option has its own needs and risks
Exploring Corporate Strategy
Exhibit 7.1
Pearson Educational Ltd. 2005
85
2.2. Diversification
Definition: its a strategy that takes the
organisation into both new markets and products
or services.
It can be related or not to the actual activities It can be related or not to the actual activities
Synergies refer to the benefits that might be gained where
activities or processes complement each other: such as their
combined effect is greater than the sum of the parts
Objectives :
L Re-equilibrate a mature portfolio of activities
L To renew that portfolio
L Create different synergies between activities
86
Reasons for Pursuing
Diversification
Efficiency gains
Stretching corporate parenting capabilities
Increasing market power
Responding to market decline
Spreading risk
Expectations of powerful stakeholders
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a) Related diversification
Related diversification is a strategy development related to
current products and markets, and/or based on the
capabilities or value network of the organisation.
The synergy can be : y gy
Commercial (distribution channel as Unilever toward mass
merchandisers);
Technological (Zodiac )
Any other activity of the value chain
Johnson, Scholes et Frry 88
b) Unrelated diversification
Firm is going to produce goods in different
SBU without any links between them.
There is consequently no synergy between
value chains value chains.
It can be associated to :
Developing new markets (information systems, new
technologies, )
Development of new competences in order to exploit
market opportunities.
89
Related diversification options for a manufacturer
Note: Some companies will manufacture components or semi-finished items. In those cases there will be additional integration opportunities into
assembly or finished product manufacture
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c) Advantages and inconvenients of
diversification
Advantages :
Decrease the risk by developing new activities. Flexibility gain ;
development of new competences
Financial investment in profitable industries
Inconvenients : Inconvenients :
Inability to develop know-how associated to each SBU.
Reputation and mark can be attacked whenever a problem
appears on a specific SBU (solution: external growth, owning a
portfolio of marks)
Bureaucratic costs (coordination, complexity, information and
financial flows ) ;
Risk associated to identity, homogeneity of culture
91
Definition
re-specialisation
to give up SBU and to reinforce expertise in some SBU
Advantages and disadvantages of refocusing = similar to specialisation
Advantages
2.3. from diversification to refocusing
g
Reaching a critical size on fundamental SBU
putting up core competences
Reputation of a specialist
Making strategic decision easier
Inconvenients
vulnerability of organisation focused on similar activities
!!! Refocusing is not going back
but a centered development based on core competences
92
Backward Integration
Raw material
Components
Machines and industrial processes
Research and studies
Logistics
Services
o

i
t

y
o
u
r
s
e
l
f

2.4 Integration Strategy
Organisation
Horizontal Integration
D
o
Competitive product or
substitute
Complementary products
Derivatives
Make or buy
Consomption
Distribution
Logistics
Services
Backward Integration
D
o

i
t

y
o
u
r
s
e
l
f


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Vertical integration
Vertical integration is a backward or forward integration
into adjacent activities in the value network
O Backward integration
= Is the development into activities concerned with the inputs of the
companys current business
Ex : Michelin and the production of latex in south America. Mass
merchandisers and the fishing boats.
O Forward integration
= Is the development into activities concerned with a companys
output.
Ex : Sephora and LVMH, Sony and the creation of specialised stores
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Vertical integration : advantages
O Supplies control (quantity, quality, price)
O Markets control
O Access to Information
O Reduction of costs
O Development of new competences
O Risk allocation
O Use of resources
O Increase of power negotiation
O Setting up barriers of entry
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Vertical integration: disadvantages
O Increase of coordination costs
O Increase of bureaucratic costs
O Increase of complexity
O Rigidity and lack of reactivity
O Conflict with competitors
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3 Methods for pursuing
strategies
Choosing a corporat e st rat egy, it s :
1- 2-
Corporate Strategy Formulation
- SPECI ALI SATI ON
- DI VERSI FI CATI ON
- REFOCUSI NG
- I NTEGRATI ON
- I NTERNATI ONALI SATI ON
- I NTERNAL GROWTH
- EXTERNAL GROWTH
- ALLI ANCES
A st r at egy di r ect i on
One or sever al met hods
f or pur sui ng st r at egi es
98
METHODS OF DEVELOPMENT
Engagement form
d
e
v
e
Self Concerted
Coordination
of existing
e
l
o
p
m
e
n
t
f
o
r
m
of existing
capacities
External Growth
Growth based
on
cooperation
Creation of
new capacities
Internal Growth
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Methods ofDevelopment
Internal
(organic growth)
External Collaboration
Methods of Development:
Do everything yourself or together with others?
100
Acquisitions
Mergers
Alliances
Degree of Control
+ -
DO IT ALONE
TOGETHER TOGETHER
Partnerships
100
Internal growth or external growth ?
Strong competitive
position
Long term growth
Large company
Diversified firm
Rapid growth objective
Long term growth
objective
High growth rate industry
Internal
(organic growth)
Rapid growth objective
Economies of scale
mature industry
External growth
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3.1 Internal growth
Growth based on the development of new
capacities
Motivations :
O Accumulation of Experience
O Controlled and Progressive development
O Developing apprenticeship and collaboration
O Impossible external growth
O Maintain autonomy and org identity
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Limits :
O Growth slowness
O Risk not shared with a partner (assumed alone)
O Risk to create an existing product
Internal growth
O Risk to create an existing product
O NIH ( not invented here )
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3.2 External Growth
Growth based on the acquisition of existing assets
Strategic motivations :
O To Grow without creating additional capacities
O To Eliminate competitors
T T k iti idl O To Take a position rapidly
Other motivations
O Financial (acquiring profitable assets)
O Technological (acquiring a new know-how)
O Organisational (new people to fight inertia)
O Leaders desire (spreading power)
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External growth
Limits :
O Prohibitive costs
O Dilution of organisation identity
Ri k f l ti f th tit ( f i iti ) O Risk of over-evaluation of the entity (case of acquisition)
O Risk of overestimation of synergies
O Problems of management post-acquisition
technical systems and organisation
management styles potential conflicts
organisational cultures
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1 Growth thanks to COOPERATION
If neither Internal growth nor External
growth is appropriate
the cooperation choice
1 Growth thanks to COOPERATION
2 Non competitive COOPERATION :
Outsourcing and Partnership
3 Competitive COOPERATION :
Strategic Alliance
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3.3 Cooperation strategies
Origin of actors
NATURE of RELATION
Competitive COOPERATION
Same network Organisation supplier
Outsourcing
value relationship
Outsourcing
Same industry Competitive Alliance
Differents
industries or
networks
Partnership
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- Devel op a col l abor at i ve r el at i onshi p wi t h i t s suppl i er s or cl i ent s : vert ical
part nership;
- An al t ernat i ve sol ut i on t o i nt egrat i on : maint aining it s core compet ences,
flexibility
Outsourcing Strategies
ADVANTAGES-OBJECTIVES EXAMPLES
DEVELOPPEMENT OF NEW PRODUCTS :
client-supplier coordination, sharing R&D costs, cross
investissements
RENAULT-VALEO :
Twingo
REDUCTION OF COSTS : coordination of production flows,
stocks reduction, commercial or marketing common actions
Toyota and its suppliers :
Just in time (Dyer, 1998)
DIFFERENTIATION : collaboration
for innovation development, increase reputation
Mail-order selling firms :
Delivery in "24h"
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- To devel op a col l abor at i ve r el at i onshi p wi t h f i r ms out si de t he
compet i t i ve i ndust r y
- An al t er nat i ve SOLUTI ON compared t o DI VERSI FI CATI ON : a spot
cooperat ion, easier t o leave t he indust ry, flexibility
Partnership strategies
AVANTAGES-OBJECTIVES EXAMPLES
SHARING COMPLEMENTARY RESOURCES
competences, experience, reputation
IBM-BOUYGUES : sophisticated
buildings (information systems inside)
ECONOMIES OF SCOPE :
R&D, logistics, commercial
ACCOR-ELF :
"htels+ fuel stations"
INCREASE MARKET POWER
AVIS-OPEL-SNCF :
"train-car"
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Developing a collaborative relation -
with its COMPETITORS
Objectives associated to Alliances :
STRATEGIC ALLIANCES
- AVOID A COMPETITIVE RELATION LOOSER LOOSER :
mature industry, structural fragility of competitors
- SHARING RESOURCES TO DEVELOP A BUSINESS THAT APPEARS IMPOSSIBLE
to deal with ALONE :
technology, know-how, production machines, reputation, commercial network
- Setting up strategic entry barriers " : cartel
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Firms bring assets of...
Same nature Different nature
In order to sell
Typology of strategic alliances
a same
product
Specific products
to each partner
ADDITIVE
ALLIANCE
JOINT
INTEGRATION
COMPLEMENTARY
ALLIANCE
(source B.GARRETTE)
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ALLIANCE
A B
ADDITIVE ALLIANCE
Pooling resources on all
activities of the value chain
Absence of competitors on
the industry
Market
Exampl e :
AI RBUS
(source B.GARRETTE)
y
Risks :
O Increase coordination costs
O duplication of tasks
O Loosing of skills, competences
from allied firms
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ALLIANCE
JOINT INTEGRATION
Pooling resources at the backward
level of the value chain : size effect
The output issued from alliance is
integrated by each partner
A B
Exampl es :
PSA-FI AT( car maker s)
(source B.GARRETTE)
The partners might still
competitors on the industry
Risks :
O Rigidity of alliance compared to the
evolution of its needs : inertia of
alliance
O Differences associated to
objectives
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A
B
COMPLEMENTARY ALLIANCE
Sharing tasks on the different
activities of the value chain
2 types of complementarities :
symbiotic alliance or learning
alliance A
Exampl es :
Renaul t - Mat r a, Skyt eam,
(source B.GARRETTE)
alliance
No competition or competition
avoided
Risks :
O Dependence of one of the allies
O Potential divergences
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LI MI TS DUE t o t he CONSTI TUTI ON OF THE ALLI ANCE :
Risks and limits associated to strategic
alliances - 1
SPY ALLIANCE : Alliance-absorption
ALLIANCE "LEARN AND RUN" : learning from the partner to better
compete on the industry
UNBALANCED ALLIANCE : In terms of size, competences, competitive
position,
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LI MI TS DUE TO THE MANAGEMENT OF THE ALLI ANCE :
Risks and limits of strategic alliance - 2
Complexity of coordination : problems of coordination costs
Strategic Schizophrenia : co-existence of a cooperative and a
competitive relationship
Reversibility of alliance : to foresee a way to escape
firms cultures incompatibility, management styles conflict
Rivalry between allies : appropriation of alliances outputs, ideas, opacity
the end of alliance
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Evaluation of Strategic Choices
Relevance
O Coherence with the diagnostic
Acceptability
O Expected gains
O Risk level
O Expected reaction of competitors and stakeholders
Feasibility
O Evaluation the capability of the organisation to
obtain the resources and competences necessary
to display strategy.
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Suitability of Strategic Options
Strategic Option
Why this option is suitable in terms of
Environnement Capacity Stakeholder and cultural
influences
Directions
Consolidation
Withdraw from declining markets
Maintain market share
Build on strenths through
continued investment and
innovation Stick to what the organization and its
stakeholders know best
Market Penetration Gain market share for advantage
Exploit superior resources and
competences
Product Development Exploit knowledge of customer needs Exploit R&D
Minimize the risk of alienating
stakeholders with interests in
Current markets saturated
preserving the status quo or making
counter-cultural decisions
Market Development
Current markets saturated
New opportunities for : geographic
spread, entering new segments or new
uses
Exploit current products and
capabilities
Diversification Current market saturated or declining
Exploit core competences in new
areas
Meet the needs of stakeholders with
expectations for more rapid growth
But potential for culture clash
Methods
Organic
(Internal) Growth
First entrant
Partners or acquisitions not available or
not suitable
Building on new capabilities
Learning and competence
development
Cultural / political ease
Mergers &
Acquisitions
Speed
Supply / demand
P/E ratios
Acquire competences
Economies of scale
Returns: growth or share value
But potential for culture clash
Joint Development
Speed
Standard / industry norm setting
Complimentary competences
Learning from partners
Dilutes risk
Fashionable
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4 Managing Corporate
tf li portfolio
119
4. Managing the corporate
portfolio
to have an overview of firms activities & to optimise resources allocation.
diversified firms :
idea of lifecycle : some activities are going to finance others
+ how to organise that ?
h h b i i i ? + how to choose between activities ?
Method
Matrix with 2 dimensions
market attractiveness
SBU strength compared to competition
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4.1 Principle of portfolio matrix
high
attractiveness
low
low high
Competitive
position
121
4.2 The BCG matrix
activity
growth
Rate
Question marks
Low rentability
High needs
reinforce
Analyse conditions
To give up
stars
High rentability
High needs
To sustainr
Dogs
Low rentability
Cash cow
High rentability
Financial
Needs
Rentability
Financial resources
Relative market share
y
Low needs
To maintain
Without investments
To give up
g y
Low needs
To rentabilise
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Funding Strategies in Different Circumstances:
The Growth Share (or BCG) Matrix
Source: Adapted from K. Ward, Corporate Financial Strategy,
Butterworth/Heinemann,1993, Chapter 2.
Exploring Corporate Strategy
Exhibit 9.8
Pearson Educational Ltd. 2005
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4.3 McKinsey portfolio matrix
2 critics adressed to BCGs matrix
Competitive position
Possibility or necessity to take into account other
criterions than market share. Differentiation allows to conciliate
rentability and lower marketshare.
appropriate indicators : Innovation capacity pp p p y
reputation
marketshare
Attractiveness of activity
Attractiveness cant only be associated to growth rate.
synergies, sharing experience, barriers to entry
Examples of indicators : competitve rivalry
experience sharing
growth, ...
124
McKinseys matrix
Method :
Competitive position
distinguish indicators of competitive position
associate a number (weight)
notation compared to competitors (from 1 to 3)
competitive position competitive position
Attractiveness of activity
distinguish indicators of attractiveness
weight
associate a number (from 1 to 3)
attractiveness of activity
125
McKinseys matrix
high
medium
Selectivity
Selective
Growth
Investment
And growth
Divest
Selectivity
Selective
growth
Low
Low High
Industry
Attractiveness
Competitive
position
Medium
g
Divest
Harvest /
divest
Selectivity
Rentabilise
126