Strategic Management MBA (GTU)

Keyur D Vasava Pharmacy+MBA Dist.
Narmada
"ACCEPT EVERYTHING ABOUT YOURSELF -- I MEAN EVERYTHING, YOU ARE YOU AND THAT IS THE BEGINNING AND THE END -- NO APOLOGIES, NO REGRETS." ( 14/03/12)
1
What Is Strategy Chapter Title and Why Is It Important?
16/e PPT
McGraw-Hill/Irwin
Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University-Florida Region
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Without a strategy the organization is like a ship without a rudder.

Joel Ross and Michael Kami
1-2
Chapter Roadmap
What Do We Mean By Strategy?

Strategy and the Quest for Competitive Advantage Identifying a Companys Strategy Why a Companys Strategy Evolves Over Time A Companys Strategy Is Partly Proactive and Partly Reactive
Strategy and Ethics: Passing the Test of Moral Scrutiny The Relationship Between a Companys Strategy and Its Business Model What Makes a Strategy a Winner? Why Are Crafting and Executing Strategy Important?
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Thinking Strategically: The Three Big Strategic Questions

1. Whats the companys present situation? 2. Where does the company need to go from here?
Business(es) Buyer
to be in and market positions to stake out
needs and groups to serve to head
Direction
3. How should it get there?

A
companys answer to how will we get there? is its strategy

1-4
What Do We Mean By Strategy?

Consists
of competitive moves and business approaches used by managers to run the company action plan to
Managements

Grow the business Attract and please customers Compete successfully Conduct operations Achieve target levels of organizational performance
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The Hows That Define a Firm's Strategy

How How How How
to grow the business to please customers to outcompete rivals

Strategy is HOW to . . .
to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on) to respond to changing market conditions to achieve targeted levels of performance
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How How
Choosing the Hows of Strategy
Strategic choices about how are based on

Trial-and-error organizational learning about what has worked and
what has not worked Managements appetite for taking risks Managerial analysis and strategic thinking about how best to proceed, given market conditions and the companys circumstances
In choosing a strategy, management is in effect saying,

Among all the many different business approaches and ways of competing we could have chosen, we have decided to employ this particular combination of competitive and operating approaches in moving the company in the intended direction, strengthening its market position, and competitiveness, and boosting performance.
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Key Elements of a Successful Strategy
Developing a successful strategy hinges on making competitive moves aimed at

Appealing to buyers in ways to set the enterprise apart from rivals and Carving out its own market position
Involves developing a distinctive aha element to

Attract customers and Produce a competitive edge
Copying competitive moves of other successful companies rarely works!

1-8
Key Elements: Comcasts Strategy

Roll out high-speed Internet or broadband service to customers via cable modems Promote a new video-on-demand service to allow digital subscribers to watch TV programs whenever they want Promote a video-on-demand service so digital customers can order and watch pay-per-view movies Partner with Sony, MGM, and others to expand movie offerings Use VoIP technology to offer subscribers Internet-based phone service at a fraction of the cost charged by others Use video-on-demand and CDV offerings to combat mounting competition from satellite TV providers Employ a sales force to sell advertising to businesses that were shifting advertising dollars from sponsoring network programs to sponsoring cable programs Significantly improve customer service
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For Discussion: Your Opinion

From your perspective as a cable or satellite service consumer, does Comcasts strategy (as described in Illustration Capsule 1.1) seem to be well-matched to industry and competitive conditions?
Does the strategy seem to be keyed to a cost advantage, differentiating features, serving the unique needs of a niche, or developing resource strengths and competitive capabilities rivals cant imitate or trump (or a mixture of these)? What is there about Comcasts strategy that can lead to sustainable competitive advantage?
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Strategy and the Quest for Competitive Advantage

The
heart and soul of any strategy are the actions and moves in the marketplace that a company makes to strengthen its competitive position and gain a competitive advantage over rivals A creative distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a companys most reliable ticket to above average profitability

Competing with a competitive advantage is more profitable than competing with no advantage Competing with a competitive disadvantage nearly always results in below-average profitability
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A Powerful Strategy Leads to Sustainable Competitive Advantage
A company achieves sustainable competitive advantage when an attractive number or buyers prefer its products/services over those of rivals and when the basis for this preference can be maintained over time
Its nice when a strategy produces a temporary competitive edge but a durable edge over rivals greatly enhances a companys prospects for winning in the marketplace and realizing above-average profits
What separates a powerful strategy from an ordinary strategy is managements ability to forge a series of moves, both in the marketplace and internally, that produces sustainable competitive advantage!
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Four Best Strategic Approaches to Building Sustainable Competitive Advantage

Being
the industrys low-cost provider (a cost-based competitive advantage) Incorporate differentiating features (a superior product type of competitive advantage keyed to higher quality, better performance, wider selection, value-added services, or some other attribute) Focusing on a narrow market niche (winning a competitive edge by doing a better job than rivals of serving the needs and preferences of buyers comprising the niche) Developing expertise and resource strengths not easily imitated or matched by rivals (a capabilities-based competitive advantage)
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Competitive Advantage Examples

Strive

to be the industrys low-cost provider
Wal-Mart Southwest Airlines
Outcompete

rivals on a key differentiating feature
Johnson & Johnson Reliability in baby products Harley-Davidson King-of-the-road styling Rolex Top-of-the-line prestige Mercedes-Benz Engineering design and performance L.L. Bean Good value Amazon.com Wide selection and convenience
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Competitive Advantage Examples (cont)
Focus on a narrow market niche

eBay Online auctions Jiffy Lube International Quick oil changes McAfee Virus protection auctions Starbucks Premium coffees and coffee drinks The Weather Channel Cable TV
Develop expertise, resource strengths, and capabilities not easily imitated by rivals

FedEx Next-day delivery of small packages Walt Disney Theme park management and family entertainment Toyota Sophisticated production system Ritz-Carlton Personalized customer service
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Fig. 1.1: Identifying a Companys Strategy
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Test Your Knowledge

A companys strategy and its quest for competitive advantage are tightly related because
A. a companys strategy determines whether it will have lower or higher costs than rivals and thus be at a competitive advantage or disadvantage. B. competitive advantage is essential to having a profitable business model. C. choosing a competitive advantage to pursue also helps a company choose which business model is most appropriate. D. competitive advantage enables a company to achieve its strategic objectives. E. a strategy that leads to sustainable competitive advantage is a companys most reliable means of achieving above-average profitability and financial performance.
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Why Do Strategies Evolve?

A
companys strategy is a work in progress may be necessary to react to

Changes
Shifting market conditions Technological breakthroughs Fresh moves of competitors Evolving customer preferences Emerging market opportunities New ideas to improve strategy Crisis situations
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Fig. 1.2: A Companys Strategy Is Partly Proactive and Partly Reactive
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Crafting Strategy Is an Exercise in Entrepreneurship

Strategy-making

is a market-driven activity involving
Studying market trends and competitors actions Keen observation of customer needs Scrutinizing business possibilities based on new technologies Building firms market position via acquisitions or new product introductions Pursuing ways to strengthen firms competitive capabilities Proactively searching out opportunities to

Do new things or Do existing things in new or better ways

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Linking Strategy With Ethics

Ethical
and moral standards go beyond
Prohibitions of law and the language of thou shalt not
to issues of
Duty and right vs. wrong
Ethical
and moral standards address What is the right thing to do? Two criteria of an ethical strategy:
Does not entail actions and behaviors that cross the line from should do to should not do and unsavory or shady and Allows management to fulfill its ethical duties to all stakeholders
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A Firms Ethical Responsibilities to Its Stakeholders

Owners/shareholders Rightfully expect some form of return on their investment Employees - Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise Customers - Rightfully expect a seller to provide them with a reliable, safe product or service Suppliers - Rightfully expect to have an equitable relationship with firms they supply and be treated fairly Community - Rightfully expect businesses to be good citizens in their community
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Role of Senior Executives: Linking Strategy with Ethics

Forbid
pursuit of ethically questionable business opportunities Insist all aspects of company strategy reflect high ethical standards Make it clear all employees are expected to act with integrity Install organizational checks and balances to

Monitor behavior Enforce ethical codes of conduct Provide guidance to employees in gray areas
Display
genuine commitment to conduct business activities ethically

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Test Your Knowledge

A company's strategy can be considered ethical
A. if all of its different actions and elements are legal and in compliance with governmental rules and regulations. B. so long as its actions and behaviors can pass the test of moral scrutiny and are aboveboard in the sense of not being shady or unconscionable, injurious to others, or unnecessarily harmful to the environment. C. only if all elements of the strategy are in accord with what is generally considered as being in the overall best interests of society at large. D. so long as religious authorities and noted ethics experts find nothing wrong in the companys actions. E. if it is in compliance with the companys code of ethics and has been approved by the companys chief ethics officer.
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What Is a Business Model?

A
business model addresses How do we make money in this business?
Is the strategy capable of delivering good bottom-line results?
Do

the revenue-cost-profit economics of the strategy make good business sense?

Look at revenue streams the strategy is expected to produce Look at associated cost structure and potential profit margins Do resulting earnings streams and ROI indicate the strategy makes sense and the company has a viable business model for making money?
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Relationship Between Strategy and Business Model

Strategy . . .
Deals with a companys competitive initiatives and business approaches
Business Model . . .
Concerns whether revenues and costs flowing from the strategy demonstrate a business can be amply profitable and viable
te tra
gy
ss ne l si e Bu od M
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Microsofts Business Model

Employ a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from users Sell resulting OS and software packages to PC makers and users at relatively attractive prices to achieve a 90% or more market share Most costs in developing software are fixed; variable costs are small; once break-even volume is reached, revenues from additional sales are almost pure profit Provide modest level of technical support to users at no cost Rejuvenate revenues by periodically introducing next-generation software with features inducing PC users to upgrade their operating systems
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Red Hats Business Model

Rely on collaborative efforts of volunteer programmers to create the software Collect and test enhancements and new applications submitted by volunteer programmers for evaluation and inclusion in new releases of Linux Market upgraded and tested family of Red Hat products to large companies, charging a subscription fee that includes 24/7 support within 1 hour in 7 languages Make source code open and available to all users Capitalize on specialized expertise required to use Linux by providing fee-based training, consulting, software customization, and client-directed engineering to Linus users
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Test Your Knowledge

The nitty-gritty issue surrounding a companys business model is whether
A. the strategy is capable of producing sustainable competitive advantage. B. it matches the companys external and internal situation. C. the chosen strategy makes good business sense from a money-making perspective. D. the companys strategy and strategic moves are mostly proactive. E. the companys strategy stands a really good chance of hitting a home-run in the marketplace.
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Who has the best business model Microsoft or Red Hat?
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Tests of a Winning Strategy

GOODNESS
OF FIT TEST
How well does strategy fit the firms situation?
COMPETITIVE
ADVANTAGE TEST
Does strategy lead to sustainable competitive advantage?
PERFORMANCE
TEST
Does strategy boost firm performance?

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Other Criteria for Judging the Merits of a Strategy

Internal
consistency and unity among all pieces of the strategy of risk the strategy poses as compared to alternative strategies to which the strategy is flexible and adaptable to changing circumstances
Degree
Degree
While these criteria are relevant, they seldom override the importance of the three tests of a winning strategy!
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Why Is Strategy Important?

A
compelling need exists for managers to proactively shape how a firms business will be conducted
strategy-focused firm is more likely to be a strong bottom-line performer than one that views strategy as secondary
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Good Strategy + Good Strategy Execution = Good Management

Crafting
and executing strategy are core management functions Among all things managers do, nothing affects a companys ultimate success or failure more fundamentally than how well its management team
Charts a companys direction, Develops competitively effective strategic moves and business approaches, and Pursues what needs to be done internally to produce good day-in/day-out strategy execution
Excellent execution of an excellent strategy is the best test of managerial excellence and the most reliable recipe for winning in the marketplace!
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3
Evaluating a Chapter Title Companys External Environment
16/e PPT
McGraw-Hill/Irwin
Analysis is the critical starting point of strategic thinking.

Kenichi Ohmae
3-2
Things are always different--the art is figuring out which differences matter.
Laszlo Birinyi
3-3
Chapter Roadmap

The Strategically Relevant Components of a Companys External Environment Thinking Strategically About a Companys Industry and Competitive Environment

Question 1: What Are the Industrys Dominant Economic Features? Question 2: What Kinds of Competitive Forces Are Industry Members Facing, and How Strong Is Each Force? Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have? Question 4: What Market Positions Do Rivals OccupyWho Is Strongly Positioned and Who Is Not? Question 5: What Strategic Moves Are Rivals Likely to Make Next? Question 6: What Are the Key Factors for Future Competitive Success? Question 7: Does the Outlook for the Industry Present an Attractive Opportunity?
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Understanding the Factors that Determine a Companys Situation

Diagnosing
facets
a companys situation has two
Assessing the companys external or macro-environment

Industry and competitive conditions Forces acting to reshape this environment
Assessing the companys internal or micro-environment
Market position and competitiveness
Competencies, capabilities, resource strengths and weaknesses, and competitiveness

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Fig. 3.1: From Thinking Strategically about the Companys Situation to Choosing a Strategy
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Fig. 3.2: The Components of a Companys Macro-environment
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Thinking Strategically about a Companys Macro-environment

A companys macro-environment includes all relevant factors and influences outside its boundaries Diagnosing a companys external situation involves assessing strategically important factors that have a bearing on the decisions a companys makes about its
Direction Objectives Strategy Business model
Requires that company managers scan the external environment to

Identify potentially important external developments Assess their impact and influence Adapt a companys direction and strategy as needed
3-8
Key Questions Regarding the Industry and Competitive Environment

What are the industrys dominant economic traits?
How strong are competitive forces?

What market positions do rivals occupy? What moves will they make next?
What forces are driving change in the industry? What are the key factors for competitive success? How attractive is the industry from a profit perspective?
3-9
Question 1: What are the Industrys Dominant Economic Traits?

Market
size and growth rate Number of rivals Scope of competitive rivalry Buyer needs and requirements Degree of product differentiation Product innovation Supply/demand conditions Pace of technological change Vertical integration Economies of scale Learning and experience curve effects
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Learning/Experience Effects
Learning/experience
effects exist when a companys unit costs decline as its cumulative production volume increases because of

Accumulating production know-how Growing mastery of the technology
The
bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume
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Question 2: What Kinds of Competitive Forces Are Industry Members Facing?

Objectives

are to identify
Main sources of competitive forces Strength of these forces
Key
analytical tool
Five Forces Model of Competition

3-13
Fig. 3.3: The Five Forces Model of Competition
3-14
Analyzing the Five Competitive Forces: How to Do It

Step 1: Identify the specific competitive pressures associated with each of the five forces Step 2: Evaluate the strength of each competitive force -- fierce, strong, moderate to normal, or weak? Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits
3-15
Competitive Pressures Among Rival Sellers

Usually Key
the strongest of the five forces
factor in determining strength of rivalry
How aggressively are rivals using various weapons of competition to improve their market positions and performance?
Competitive
rivalry is a combative contest involving

Offensive actions Defensive countermoves

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Fig. 3.4: Weapons for Competing and Factors Affecting Strength of Rivalry
3-17
What Are the Typical Weapons for Competing?

Lower prices More or different performance features Better product performance Higher quality Stronger brand image and appeal Wider selection of models and styles
Bigger/better dealer network Low interest rate financing Higher levels of advertising Stronger product innovation capabilities Better customer service Stronger capabilities to provide buyers with custom-made products
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Test Your Knowledge

The rivalry among competing sellers in an industry intensifies
A. when buyer demand for the product is growing rapidly. B. when customers are brand loyal and their costs to switch to competing brands or substitute products are relatively high. C. when buyer demand is strong and sellers have little or no excess capacity and only minimal inventories. D. as the number of rivals increases and as they become more equal in size and competitive capability. E. when the products of rival sellers are highly differentiated products and the industry consists of so many rivals that any one companys actions have little direct impact on rivals business.
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What Causes Rivalry to be Stronger?

Competitors are active in making fresh moves to improve market standing and business performance Slow market growth Number of rivals increases and rivals are of equal size and competitive capability Buyer costs to switch brands are low Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume A successful strategic move carries a big payoff Diversity of rivals increases in terms of visions, objectives, strategies, resources, and countries of origin Outsiders acquire weak firms in the industry and use their resources to transform new firms into major market contenders
3-20
What Causes Rivalry to be Weaker?

Industry
rivals move only infrequently or in a nonaggressive manner to draw sales from rivals market growth
Rapid
Products
of rivals are strongly differentiated and customer loyalty is high costs to switch brands are high
Buyer There
are fewer than 5 rivals or there are numerous rivals so any one firms actions has minimal impact on rivals business
3-21
Competitive Pressures Associated With Potential Entry

Seriousness
of threat depends on
Size of pool of entry candidates and available resources Barriers to entry Reaction of existing firms
Evaluating
threat of entry involves assessing
How formidable entry barriers are for each type of potential entrant and Attractiveness of growth and profit prospects
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Fig. 3.5: Factors Affecting Threat of Entry
3-23
Common Barriers to Entry

Sizable Cost
economies of scale
and resource disadvantages independent of size preferences and customer loyalty
Brand
Capital
requirements and/or other specialized resource requirements to distribution channels policies
Access
Regulatory Tariffs Ability
and international trade restrictions
of industry incumbents to launch vigorous initiatives to block a newcomers entry

3-24
When Is the Threat of Entry Stronger?

Theres Entry
a sizable pool of entry candidates
barriers are low
Industry
growth is rapid and profit potential is high are unwilling or unable to contest a newcomers entry efforts existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence
3-25
Incumbents
When
When Is the Threat of Entry Weaker?

Theres Entry
only a small pool of entry candidates
barriers are high competitors are struggling to earn good profits outlook is risky
Existing
Industrys Industry Industry
growth is slow or stagnant
members will strongly contest efforts of new entrants to gain a market foothold
3-26
Competitive Pressures from Substitute Products Concept

Substitutes matter when customers are attracted to the products of firms in other industries
Examples
Sugar
vs. artificial sweeteners
Eyeglasses
and contact lens vs. laser surgery vs. TV vs. Internet

3-27
Newspapers
How to Tell Whether Substitute Products Are a Strong Force
Whether substitutes are readily available and attractively priced Whether buyers view substitutes as being comparable or better How much it costs end users to switch to substitutes
3-28
Fig. 3.6: Factors Affecting Competition From Substitute Products
3-29
When Is the Competition From Substitutes Stronger?

There
are many good substitutes readily available are attractively priced
Substitutes The
higher the quality and performance of substitutes lower the end users switching costs
The End
users grow more comfortable with using substitutes

3-30
Competitive Pressures From Suppliers and Supplier-Seller Collaboration

Whether
supplier-seller relationships represent a weak or strong competitive force depends on
Whether suppliers can exercise sufficient bargaining leverage to influence terms of supply in their favor
Nature and extent of supplier-seller collaboration in the industry
3-31
Fig. 3.7: Factors Affecting Bargaining Power of Suppliers
3-32
When Is the Bargaining Power of Suppliers Stronger?

Industry
members incur high costs in switching their purchases to alternative suppliers inputs are in short supply
Needed Supplier
provides a differentiated input that enhances the quality of performance of sellers products or is a valuable part of sellers production process are only a few suppliers of a specific input suppliers threaten to integrate forward
3-33
There Some
When Is the Bargaining Power of Suppliers Weaker?

Item
being supplied is a commodity switching costs to alternative suppliers are low substitutes exist or new ones emerge in availability of supplies occurs
Seller Good Surge
Industry
members account for a big fraction of suppliers total sales members threaten to integrate backward
Industry Seller
collaboration with selected suppliers provides attractive win-win opportunities

3-34
Competitive Pressures: Collaboration Between Sellers and Suppliers

Sellers
are forging strategic partnerships with select suppliers to

Reduce inventory and logistics costs Speed availability of next-generation components Enhance quality of parts being supplied Squeeze out cost savings for both parties
Competitive
advantage potential may accrue to sellers doing the best job of managing supply-chain relationships
3-35
Competitive Pressures From Buyers and Seller-Buyer Collaboration

Whether
seller-buyer relationships represent a weak or strong competitive force depends on

Whether
buyers have sufficient bargaining leverage to influence terms of sale in their favor and competitive importance of seller-buyer strategic partnerships in the industry
Extent
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Fig. 3.8: Factors Affecting Bargaining Power of Buyers
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When Is the Bargaining Power of Buyers Stronger?

Buyer switching costs to competing brands or substitutes are low Buyers are large and can demand concessions Large-volume purchases by buyers are important to sellers Buyer demand is weak or declining Only a few buyers exists Identity of buyer adds prestige to sellers list of customers Quantity and quality of information available to buyers improves Buyers have ability to postpone purchases until later Buyers threaten to integrate backward
3-38
When Is the Bargaining Power of Buyers Weaker?

Buyers Buyer Surge
purchase item infrequently or in small quantities
switching costs to competing brands are high in buyer demand creates a sellers market brand reputation is important to buyer
Sellers A
specific sellers product delivers quality or performance that is very important to buyer collaboration with selected sellers provides attractive win-win opportunities
3-39
Buyer
Competitive Pressures: Collaboration Between Sellers and Buyers

Partnerships
are an increasingly important competitive element in business-to-business relationships Collaboration may result in mutual benefits regarding

Just-in-time deliveries Order processing Electronic invoice payments Data sharing
Competitive
advantage potential may accrue to sellers doing the best job of managing seller-buyer partnerships
3-40

Explain why low switching costs and weakly differentiated products tend to give buyers a high degree of bargaining power.
3-41
Strategic Implications of the Five Competitive Forces

Competitive
environment is unattractive from the standpoint of earning good profits when

Rivalry is vigorous Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power
3-42
Strategic Implications of the Five Competitive Forces

Competitive
environment is ideal from a profit-making standpoint when

Rivalry is moderate Entry barriers are high and no firm is likely to enter Good substitutes do not exist Suppliers and customers are in a weak bargaining position
3-43
Coping With the Five Competitive Forces

Objective
is to craft a strategy to
Insulate firm from competitive pressures Initiate actions to produce sustainable competitive advantage Allow firm to be the industrys mover and shaker with the most powerful strategy that defines the business model for the industry
3-44
Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have?
Industries
change because forces are driving industry participants to alter their actions forces are the major underlying causes of changing industry and competitive conditions do driving forces originate?
ring of macroenvironment ring of macroenvironment
3-45
Driving
Where
Inner
Outer
Analyzing Driving Forces: Three Key Steps

STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years
Usually no more than 3 - 4 factors qualify as real drivers of change Are the driving forces acting to cause market demand for product to increase or decrease? Are the driving forces acting to make competition more or less intense? Will the driving forces lead to higher or lower industry profitability?
STEP 2: Assess impact

STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces
3-46
Common Types of Driving Forces

Emerging
new Internet capabilities and applications globalization of industry
Increasing Changes Changes
in long-term industry growth rate in who buys the product and how they
use it
Product
innovation change/process innovation
Technological Marketing
innovation
3-47
Common Types of Driving Forces (cont)

Entry
or exit of major firms of technical knowledge in cost and efficiency
Diffusion Changes
Consumer Changes
preferences shift from standardized to differentiated products (or vice versa) in degree of uncertainty and risk policies / government legislation societal concerns, attitudes, and lifestyles
3-48
Regulatory Changing
3-49
Question 4: What Market Positions Do Rivals Occupy?

One
technique to reveal different competitive positions of industry rivals is strategic group mapping
strategic group is a cluster of firms in an industry with similar competitive approaches and market positions
3-50
Strategic Group Mapping

Firms

in same strategic group have two or more competitive characteristics in common

Have comparable product line breadth Sell in same price/quality range Emphasize same distribution channels Use same product attributes to appeal to similar types of buyers Use identical technological approaches Offer buyers similar services Cover same geographic areas
3-51
Procedure for Constructing a Strategic Group Map

STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics STEP 3: Assign firms that fall in about the same strategy space to same strategic group STEP 4: Draw circles around each group, making circles proportional to size of groups respective share of total industry sales
3-52
Example: Strategic Group Map of Selected Retail Chains
3-53
Guidelines: Strategic Group Maps

Variables
selected as axes should not be highly correlated Variables chosen as axes should expose big differences in how rivals compete Variables do not have to be either quantitative or continuous Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group If more than two good competitive variables can be used, several maps can be drawn
3-54
Interpreting Strategic Group Maps

The
closer strategic groups are on the map, the stronger the cross-group competitive rivalry tends to be all positions on the map are equally attractive
Not
Driving forces and competitive pressures often favor some strategic groups and hurt others Profit potential of different strategic groups varies due to strengths and weaknesses in each groups market position
3-55
Test Your Knowledge

A strategic group map is a helpful analytical tool for
A. assessing why competitive pressures and driving forces usually impact the biggest strategic groups more so than the smaller groups. B. determining which companies have how big a competitive advantage and how good their prospects are for increasing their market shares. C. determining which company is the most profitable in the industry and why it is doing so well. D. determining who competes most closely with whom; evaluating whether industry driving forces and competitive pressures favor some strategic groups and hurt others; and ascertaining whether the profit potential of different strategic groups varies due to the strengths and weaknesses in each groups respective market positions. E. pinpointing which of the five competitive forces is the strongest and which is the weakest.
3-56
Question 5: What Strategic Moves Are Rivals Likely to Make Next?

A
firms best strategic moves are affected by

Current strategies of competitors Future actions of competitors
Profiling

key rivals involves gathering competitive intelligence about

Current strategies Most recent actions and public announcements Resource strengths and weaknesses Efforts being made to improve their situation Thinking and leadership styles of top executives
3-57
Competitor Analysis
Sizing
up strategies and competitive strengths and weaknesses of rivals involves assessing
Which rival has the best strategy? Which rivals appear to have weak strategies? Which firms are poised to gain market share, and which ones seen destined to lose ground? Which rivals are likely to rank among the industry leaders five years from now? Do any up-and-coming rivals have strategies and the resources to overtake the current industry leader?
3-58
Things to Consider in Predicting Moves of Rivals

Which
rivals need to increase their unit sales and market share? What strategies are rivals most likely to pursue? rivals have a strong incentive, along with resources, to make major strategic changes? rivals are good candidates to be acquired? Which rivals have the resources to acquire others? rivals are likely to enter new geographic markets? rivals are likely to expand their product offerings and enter new product segments?
3-59
Which Which Which Which

Why does a company need to bother with studying competitors and trying to predict what moves rivals will make next? Why cant it just choose whatever strategy it wants or make whatever moves in the marketplace it wishes without first worrying about what rivals are going to do?
3-60
Question 6: What Are the Key Factors for Competitive Success?

KSFs
are those competitive factors most affecting every industry members ability to prosper KSFs concern

Specific strategy elements Product attributes Resources Competencies Competitive capabilities
that a company needs to be competitively successful KSFs are attributes that spell the difference between
Profit and loss Competitive success or failure
3-61
Identifying Industry Key Success Factors

Pinpointing
KSFs involves determining
On what basis do customers choose between competing brands of sellers? What resources and competitive capabilities does a seller need to have to be competitively successful? What does it take for sellers to achieve a sustainable competitive advantage?
KSFs
consist of the major determinants for success
Rarely are there more than 5 - 6 factors that are truly key to the future financial and competitive success of industry members
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3-63
Example: KSFs for Beer Industry

Full
utilization of brewing capacity to keep manufacturing costs low
Strong
network of wholesale distributors to gain access to retail outlets
Clever
advertising to induce beer drinkers to buy a particular brand

3-64
Example: KSFs for Apparel Manufacturing Industry
Appealing designs and color combinations to create buyer appeal
Low-cost manufacturing efficiency to keep selling prices competitive

3-65
Example: KSFs for Tin and Aluminum Can Industry

Locating
plants close to end-use customers to keep costs of shipping empty cans low
Ability
to market plant output within economical shipping distances

3-66
Question 7: Does the Outlook for the Industry Present an Attractive Opportunity?
Involves
assessing whether the industry and competitive environment is attractive or unattractive for earning good profits certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn unusually good profits

Under
Attractiveness is relative, not absolute Conclusions about attractiveness have to be drawn from the perspective of a particular company
3-67
Factors to Consider in Assessing Industry Attractiveness

Industrys
market size and growth potential Whether competitive forces are conducive to rising/falling industry profitability Whether industry profitability will be favorably or unfavorably impacted by driving forces Degree of risk and uncertainty in industrys future Severity of problems facing industry Firms competitive position in industry vis--vis rivals Firms potential to capitalize on vulnerabilities of weaker rivals Whether firm has sufficient resources to defend against unattractive industry factors
3-68
Core Concept: Assessing Industry Attractiveness
The degree to which an industry is attractive or unattractive is not the same for all industry participants or potential entrants. The opportunities an industry presents depend partly on a companys ability to capture them.
3-69
Test Your Knowledge

Which of the following is not an important factor for company managers to consider in drawing conclusions about whether the industry presents an attractive opportunity?
A. Whether powerful competitive forces are squeezing industry
profitability to subpar levels and whether competition appears destined to grow stronger or weaker B. The industrys growth potential and the degree of uncertainty and risk in the industrys future C. Whether industry profitability will be affected favorably or unfavorably by the prevailing driving forces D. How many of the industrys key success factors do companies in the industry typically incorporate into their strategies E. The companys ability to capitalize on the vulnerabilities of weakly positioned rivals and whether the company has sufficient competitive strength to defend against or counteract the factors that make the industry unattractive
3-70
4
Evaluating a Companys Chapter Title Resources and Competitive Position
16/e PPT
McGraw-Hill/Irwin
Before executives can chart a new strategy, they must reach common understanding of the companys
W. Chan Kim and Renee Mauborgne
current position.
4-2
Chapter Roadmap
Question
1: How Well Is the Companys Present Strategy Working? Question 2: What Are the Companys Resource Strengths and Weaknesses and Its External Opportunities and Threats? Question 3: Are the Companys Prices and Costs Competitive? Question 4: Is the Company Competitively Stronger or Weaker than Key Rivals? Question 5: What Strategic Issues and Problems Merit Front-Burner Managerial Attention?
4-3
Company Situation Analysis: The Key Questions

1. How well is the companys present strategy working? 2. What are the companys resource strengths and weaknesses and its external opportunities and threats? 3. Are the companys prices and costs competitive? 4. Is the company competitively stronger or weaker than key rivals? 5. What strategic issues merit front-burner managerial attention?
4-4
Fig. 4.1: Identifying the Components of a Single-Business Companys Strategy
4-5
Question 1: How Well Is the Companys Present Strategy Working? Key Considerations Must begin by understanding what the strategy is
Identify competitive approach

Low-cost leadership Differentiation Focus on a particular market niche Broad or narrow geographic market coverage? In how many stages of industrys production/distribution chain does the company operate?
Determine competitive scope

Examine recent strategic moves Identify functional strategies

4-6
Approaches to Assess How Well the Present Strategy Is Working

Qualitative
assessment Is the strategy wellconceived?

Quantitative assessment What are the results?
Covers all the bases? Internally consistent? Makes sense? Timely and in step with marketplace?
Is company achieving its financial and strategic objectives? Is company an aboveaverage industry performer?
4-7
Key Indicators of How Well the Strategy Is Working

Trend Trend Trend
in sales and market share and/or retaining customers in profit margins in net profits, ROI, and EVA financial strength and credit ranking at continuous improvement activities and reputation with customers
Acquiring
Overall Efforts Trend Image
in stock price and stockholder value
Leadership
role(s) Technology, quality, innovation, e-commerce, etc.

4-8
4-9
4-10
Question 2: What Are the Companys Strengths, Weaknesses, Opportunities and Threats ?
S W O T represents

the first letter in
S trengths W eaknesses O pportunities T hreats
S O
W T
For

a companys strategy to be well-conceived, it must be

Matched to its resource strengths and weaknesses Aimed at capturing its best market opportunities and erecting defenses against external threats to its wellbeing
4-11
Identifying Resource Strengths and Competitive Capabilities

A
strength is something a firm does well or an attribute that enhances its competitiveness

Valuable skills, competencies, or capabilities Valuable physical assets Valuable human assets Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute placing a company in a position of market advantage Alliances or cooperative ventures with partners
Resource strengths and competitive capabilities are competitive assets!

4-12
Competencies vs. Core Competencies vs. Distinctive Competencies

A
competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity core competence is a well-performed internal activity central (not peripheral or incidental) to a companys competitiveness and profitability distinctive competence is a competitively valuable activity a company performs better than its rivals
4-13
Company Competencies and Capabilities

Stem

from skills, expertise, and experience usually representing an

Accumulation of learning over time and Gradual buildup of real proficiency in performing an activity
Involve

deliberate efforts to develop the ability to do something, often entailing

Selecting people with requisite knowledge and skills Upgrading or expanding individual abilities Molding work products of individuals into a cooperative effort to create organizational ability A conscious effort to create intellectual capital
4-14
Core Competencies A Valuable Company Resource

A
competence becomes a core competence when the well-performed activity is central to a companys competitiveness and profitability a core competence is knowledge-based, residing in people, not in assets on a balance sheet core competence is typically the result of crossdepartment collaboration core competence gives a company a potentially valuable competitive capability and represents a definite competitive asset
4-15
Often,
A A
Examples: Core Competencies

Expertise
in integrating multiple technologies to create families of new products in creating operating systems for cost efficient supply chain management new/next-generation products to market
Know-how Speeding Better Skills
after-sale service capability
in manufacturing a high quality product to fill customer orders accurately and

4-16
Capability
swiftly
Distinctive Competence A Competitively Superior Resource

A
distinctive competence is a competitively valuable activity that a company performs better than its competitors distinctive competence is a competitively potent resource source because it
Gives a company a competitively valuable capability unmatched by rivals Can underpin and add real punch to a companys strategy
#1
4-17
Is a basis for sustainable competitive advantage
Examples: Distinctive Competencies Toyota

Low-cost, high-quality manufacturing of motor vehicles
Starbucks
Innovative coffee drinks and store ambience
4-18
Determining the Competitive Power of a Company Resource

To
qualify as competitively valuable or to be the basis for sustainable competitive advantage, a resource must pass 4 tests:
1. Is the resource hard to copy? 2. Is the resource durable does it have staying power? 3. Is the resource really competitively superior? 4. Can the resource be trumped by the different capabilities of rivals?
4-19
Test Your Knowledge

A distinctive competence
A. is a more important competitive asset than a core competence. B. represents uniquely strong capability relative to rival companiesit qualifies as a competitively superior resource strength with competitive advantage potential. C. is a competitively important value chain activity that a company performs better than its rivals. D. can underpin and add real punch to a company's strategy. E. All of the above.
4-20
Identifying Resource Weaknesses and Competitive Deficiencies

A
weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage weaknesses relate to
Resource
Inferior or unproven skills, expertise, or intellectual capital Lack of important physical, organizational, or intangible assets Missing capabilities in key areas
Resource weaknesses and deficiencies are competitive liabilities!

4-21
4-22
4-23
Identifying a Companys Market Opportunities

Opportunities
most relevant to a company are those offering
Good match with its financial and organizational resource capabilities Best prospects for profitable long-term growth Potential for competitive advantage
4-24
Identifying External Threats

Emergence Introduction Entry
of cheaper/better technologies of better products by rivals
of lower-cost foreign competitors regulations of a hostile takeover demographic shifts shifts in foreign exchange rates upheaval in a country
4-25
Onerous Rise
in interest rates
Potential
Unfavorable Adverse Political
Role of SWOT Analysis in Crafting a Better Strategy
S W O T analysis involves more than just developing the 4 lists of strengths, weaknesses, opportunities, and threats The most important part of S W O T analysis is
Using the 4 lists to draw conclusions about a companys overall situation Acting on the conclusions to
Better match a companys strategy to its resource strengths and market opportunities Correct the important weaknesses Defend against external threats
4-26
Fig. 4.2: The Three Steps of SWOT Analysis
4-27

In doing SWOT analysis, why is it not sufficient just to compile 4 lists (one each for resource strengths, resource weaknesses, market opportunities, and external threats) and then move on?
4-28
Question 3: Are the Companys Prices and Costs Competitive?

Assessing
whether a firms costs are competitive with those of rivals is a crucial part of company situation analysis analytical tools
Key
Value chain analysis Benchmarking

4-29
Concept: Company Value Chain
A companys business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service All these activities that a company performs internally combine to form a value chainso-called because the underlying intent of a companys activities is to do things that ultimately create value for buyers The value chain contains two types of activities
Primary activities (where most of the value for customers is created) Support activities that facilitate performance of the primary activities
4-30
Fig. 4.3: A Representative Company Value Chain
4-31
Example: Value Chain Activities for a Bakery Goods Maker

Primary Activities

Support Activities

Supply chain management Recipe development and testing Mixing and baking Packaging Sales and marketing Distribution
Quality control Human resource management Administration
4-32
Example: Value Chain Activities for a Department Store Retailer

Primary Activities

Support Activities

Merchandise selection and purchasing Store layout and product display Advertising Customer service
Site selection Hiring and training Store maintenance Administrative activities
4-33
Example: Value Chain Activities for a Hotel Chain

Primary Activities
Support Activities

Site selection and construction Reservations Operation of hotel properties Managing lineup of hotel locations
Accounting Hiring and training Advertising Building a brand and reputation General administration
4-34
Characteristics of Value Chain Analysis

Combined
costs of all activities in a companys value chain define the companys internal cost structure a firms costs activity by activity against costs of key rivals

Compares
From raw materials purchase to Price paid by ultimate customer
Pinpoints
which internal activities are a source of cost advantage or disadvantage

4-35
Why Do Value Chains of Rivals Differ?
Several factors give rise to differences in value chains of rival companies

Different strategies Different operating practices Different technologies Different degrees of vertical integration Some companies may perform particular activities internally while others outsource them
Differences among the value chains of competing companies complicate task of assessing rivals relative cost positions
4-36
The Value Chain System for an Entire Industry

Assessing
a companys cost competitiveness involves comparing costs all along the industrys value chain Suppliers value chains are relevant because
Costs, performance features, and quality of inputs provided by suppliers influence a firms own costs and product performance
Value

chains of distributors and retailers are relevant because

Their costs and profit margins represent value added and are part of the price paid by ultimate end-user The activities they perform affect end-user satisfaction
4-37
Fig. 4.4: Representative Value Chain for an Entire Industry
4-38
Example: Value Chain Activities

Pulp & Paper Industry
Timber farming Logging Pulp mills Papermaking Distribution

4-39

Home Appliance Industry
Parts and components manufacture Assembly Wholesale distribution Retail sales

4-40

Soft Drink Industry
Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing
4-41
Albertsons

Computer Software Industry
Programming Disk loading Marketing Distribution

4-42
Developing Data to Measure a Companys Cost Competitiveness

After
identifying key value chain activities, the next step involves determining costs of performing specific value chain activities using activity-based costing degree of disaggregation depends on

Appropriate
Economics of activities Value of comparing narrowly defined versus broadly defined activities
Guideline

Develop separate cost estimates for activities

Having different economics Representing a significant or growing proportion of costs
4-43
Activity-Based Costing: A Key Tool in Analyzing Costs

Determining
whether a companys costs are in line with those of rivals requires

Measuring how a companys costs compare with those of rivals activity-by-activity
Requires
having accounting data to measure cost of each value chain activity costing entails

Activity-based
Defining expense categories according to specific activities performed and Assigning costs to the activity responsible for creating the cost
4-44
4-45
Benchmarking Costs of Key Value Chain Activities

Focuses
on cross-company comparisons of how certain activities are performed and costs associated with these activities

Purchase of materials Payment of suppliers Management of inventories Getting new products to market Performance of quality control Filling and shipping of customer orders Training of employees Processing of payrolls
4-46
Objectives of Benchmarking
Identify Learn
best and most efficient means of performing various value chain activities what is the best way to perform a particular activity from those companies who have demonstrated that they are best-in-industry or best-in-world at performing the activity what other firms do to perform an activity at lower cost out what actions to take to improve a companys own cost competitiveness
4-47
Learn
Figure
Ethical Principles in Benchmarking

Avoid
actions implying an interest
Treat
in
Restraint of trade Market and/or customer allocation schemes Price fixing Bribery
Refrain
from acquiring trade secrets by any means viewed as improper Be willing to provide same type of information to a benchmarking partner Communicate early to clarify expectations and avoid misunderstandings Be honest and complete
benchmarking interchange as confidential Use information obtained only for stated purposes Respect corporate culture of partner companies Use benchmarking contacts designated by partner company Be fully prepared for each exchange Provide partners with agenda and questionnaire prior to exchange Follow through with commitments to partner in a timely manner Understand how partner wants information provided used
4-48
What Determines If a Company Is Cost Competitive?

Cost
competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains When a companys costs are out-of-line, the activities responsible for the higher costs may be due to any of three parts of industry value chain
1. Activities performed by suppliers 2. A companys own internal activities 3. Activities performed by forward channel allies
Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies Buyer/User Value Chains
4-49
Options to Correct Internal Cost Disadvantages

Implement use of best practices throughout company Eliminate some cost-producing activities altogether by revamping value chain system Relocate high-cost activities to lower-cost geographic areas See if high-cost activities can be performed cheaper by outside vendors/suppliers Invest in cost-saving technology Innovate around troublesome cost components Simplify product design Make up difference by achieving savings in backward or forward portions of value chain system
4-50
Options to Correct a Supplier-Related Cost Disadvantage

Pressure Switch
suppliers for lower prices
to lower-priced substitutes
Collaborate
closely with suppliers to identify mutual cost-saving opportunities for just-in-time deliveries from suppliers to lower inventory and internal logistics costs backward into business of high-cost suppliers
4-51
Arrange
Integrate
Options to Correct a Cost Disadvantage Associated With Activities of Forward Channel Allies
Pressure
dealer-distributors and other forward channel allies to reduce their costs to make the final price to buyers more competitive with prices of rivals closely with forward channel allies to identify win-win opportunities to reduce costs to a more economical distribution strategy
Work
Change

Switch to cheaper distribution channels Integrate forward into company-owned retail outlets
4-52
Test Your Knowledge

For a company to translate performance of value chain activities into competitive advantage, it
A. must (1) develop core competencies and maybe a distinctive competence that rivals dont have or cant quite match and that are instrumental in helping it deliver attractive value to customers or (2) be more cost efficient in how it performs value chain activities such that it has a low-cost advantage. B. has to develop more core competencies than rivals. C. must be more adept than rivals in using benchmarking and activity-based costing. D. has to position itself in the strategic group where profit margins are highest. E. Must adopt more best practices than rival firms.
4-53
Translating Performance of Value Chain Activities into Competitive Advantage

A
company can create competitive advantage by out-managing rivals in performing value chain activities in either/both of two ways
Option 1: Develop competencies and capabilities that rivals dont have or cant match Option 2: Do an overall better job than rivals of lowering combined costs of performing all the value chain activities
4-54
Fig. 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage
4-55
Question 4: Is the Company Stronger or Weaker than Key Rivals?

Overall
competitive position involves answering two questions
How does a company rank relative to competitors on each important factor that determines market success? Does a company have a net competitive advantage or disadvantage vis--vis major competitors?
4-56
Assessing a Companys Competitive Strength vs. Key Rivals

1. List industry key success factors and other relevant measures of competitive strength 2. Rate firm and key rivals on each factor using rating scale of 1 to 10 (1 = very weak; 5 = average; 10 = very strong) 3. Decide whether to use a weighted or unweighted rating system (a weighted system is superior because chosen strength measures are unlikely to be equally important) 4. Sum individual ratings to get an overall measure of competitive strength for each rival 5. Based on overall strength ratings, determine overall competitive position of firm
4-57
4-58
4-59
Why Do a Competitive Strength Assessment ?

Reveals
strength of firms competitive position vis--vis key rivals Shows how firm stacks up against rivals, measureby-measure pinpoints firms competitive strengths and competitive weaknesses Indicates whether firm is at a competitive advantage / disadvantage against each rival Identifies possible offensive attacks (pit company strengths against rivals weaknesses) Identifies possible defensive actions (a need to correct competitive weaknesses)
4-60
Test Your Knowledge

Which of the following statements is false?
A. The higher a companys costs are above those of close rivals, the more competitively vulnerable it becomes. B. Because the value chains of rival companies tend to be quite similar, costs outside a companys own value chain do not affect whether it is at a cost advantage or disadvantage vis--vis key rivals. C. A companys cost competitiveness depends not only on the costs of internally performed value chain activities but also on the costs of activities performed by its suppliers and forward channel allies. D. The stronger a companys financial performance and market position, the more likely it has a well-conceived, well-executed strategy. E. A competence is something a company is good at doing whereas a core competence is a proficiently performed internal activity that is central to a companys strategy and competitiveness.
4-61
Question 5: What Strategic Issues Merit Managerial Attention?

Based
on results of both industry and competitive analysis and an evaluation of a companys competitiveness, what items should be on a companys worry list? thinking strategically about

Requires
Pluses and minuses in the industry and competitive situation Companys resource strengths and weaknesses and attractiveness of its competitive position
A good strategy must address what to do about each and every strategic issue!
4-62
Stating the Issues Clearly and Precisely

A
well-stated issue involves such phrases as

How to . . . ? Whether to . . . ? What should be done about . . . ?
Issues Issues

need to be precise, specific, and cut straight to the chase on the the worry list raise questions about
What actions need to be considered What to think about doing
4-63
Identifying the Strategic Issues: Some Possibilities

How to stave off market challenges from new foreign competitors? How to combat price discounting of rivals? How to reduce a companys high costs? How to sustain a companys present growth in light of slowing buyer demand? Whether to expand a companys product line? Whether to acquire a rival firm? Whether to expand into foreign markets rapidly or cautiously? What to do about aging demographics of a companys customer base?
4-64

Why is it important for company managers to develop a worry list of strategic issues and problems that they need to address and to resolve? Why cant managers just skip this step and go directly to the task of choosing what strategy to employ?
4-65
5
The Five Chapter Title Generic Competitive Strategies
16/e PPT
McGraw-Hill/Irwin
Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of
Michael E. Porter value.
5-2
Chapter Roadmap
The
Five Competitive Strategies Provider Strategies
Low-Cost Broad
Differentiation Strategies Provider Strategies
Best-Cost Focused The
(or Market Niche) Strategies
Contrasting Features of the Five Generic Competitive Strategies: A Summary

5-3
Strategy and Competitive Advantage

Competitive

advantage exists when a firms strategy gives it an edge in

Attracting customers and Defending against competitive forces
Key to Gaining a Competitive Advantage

Convince

customers firms product / service offers superior value

A good product at a low price A superior product worth paying more for A best-value product
5-4
What Is Competitive Strategy?

Deals
exclusively with a companys business plans to compete successfully

Specific efforts to please customers Offensive and defensive moves to counter maneuvers of rivals Responses to prevailing market conditions Initiatives to strengthen its market position
Narrower
in scope than business strategy

5-5
Fig. 5.1: The Five Generic Competitive Strategies
5-6
Low-Cost Provider Strategies

Keys to Success
Make
achievement of meaningful lower costs than rivals the theme of firms strategy features and services in product offering that buyers consider essential approaches to achieve a cost advantage in ways difficult for rivals to copy or match
Low-cost leadership means low overall costs, not just low manufacturing or production costs!
5-7
Include
Find
Translating a Low-Cost Advantage into Higher Profits: Two Options

Option 1: Use lower-cost edge to under-price competitors and attract price-sensitive buyers in enough numbers to increase total profits Option 2: Maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold, thereby increasing total profits
5-8
Nucor Corporations Low-Cost Provider Strategy

Eliminate some production processes from value chain used by traditional integrated steel mills; cut investment in facilities and equipment Strive hard for continuous improvement in the efficiency of its plants and frequently invest in state-of-the art equipment to reduce unit costs Carefully select plan sites to minimize inbound and outbound shipping costs and to take advantage of low rates for electricity Hire a nonunion workforce that uses team-based incentive compensation systems Heavily emphasize consistent product quality and maintain rigorous quality systems Minimize general and administrative expenses by maintaining a lean staff at corporate headquarters and allowing only 4 levels of management
5-9
Approaches to Securing a Cost Advantage Approach 1

Do a better job than rivals of performing value chain activities efficiently and cost effectively
Approach 2
Revamp value chain to bypass cost-producing activities that add little value from the buyers perspective
Control costs! By-pass costs!
5-10
Approach 1: Controlling the Cost Drivers

Capture scale economies; avoid scale diseconomies Capture learning and experience curve effects Control percentage of capacity utilization Pursue efforts to boost sales and spread costs such as R&D and advertising over more units Improve supply chain efficiency Substitute use of low-cost for high-cost raw materials Use online systems and sophisticated software to achieve operating efficiencies Adopt labor-saving operating methods Use bargaining power to gain concessions from suppliers Compare vertical integration vs. outsourcing
5-11
Approach 2: Revamping the Value Chain

Use
direct-to-end-user sales/marketing methods greater use of online technology applications
Make
Streamline
operations by eliminating low-valueadded or unnecessary work steps facilities closer to suppliers or customers
Relocate Offer Offer
basic, no-frills product/service
a limited product/service as opposed to a full product/service line

5-12
Wal-Marts Approach to Managing Its Value Chain

Institute extensive information sharing with vendors via online systems Pursue global procurement of some items and centralize most purchasing activities Invest in state-of-the-art automation at its distribution centers Strive to optimize the product mix and achieve greater sales turnover Install security systems and store operating procedures that lower shrinkage rates Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites Manage and compensate its workforce in a manner to yield lower labor costs
5-13
Keys to Success in Achieving Low-Cost Leadership

Scrutinize each cost-creating activity, identifying cost drivers Use knowledge about cost drivers to manage costs of each activity down year after year Find ways to restructure value chain to eliminate nonessential work steps and low-value activities Work diligently to create cost-conscious corporate cultures
Feature broad employee participation in continuous costimprovement efforts and limited perks for executives Strive to operate with exceptionally small corporate staffs
Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business
5-14
Characteristics of a Low-Cost Provider

Cost
conscious corporate culture participation in cost-control efforts
Employee Ongoing Intensive
efforts to benchmark costs scrutiny of budget requests promoting continuous cost improvement
Programs
Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements !
5-15
When Does a Low-Cost Strategy Work Best?

Price
competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value to buyers Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power Industry newcomers use introductory low prices to attract buyers and build customer base
5-16
Pitfalls of Low-Cost Strategies

Being Low
overly aggressive in cutting price
cost methods are easily imitated by rivals
Becoming
too fixated on reducing costs and ignoring

Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used
Technological
breakthroughs open up cost reductions for rivals

5-17
Test Your Knowledge

Striving to be the industrys low-cost provider and achieving lower costs than rivals entails
A. doing a better job than rivals of performing value chain activities more cost-effectively. B. having a smaller labor force than rivals, paying lower wages than rivals, locating all facilities in countries where labor costs are low, and outsourcing many value chain activities to suppliers with world-class technological capabilities. C. revamping the firms overall value chain to eliminate or bypass cost-producing activities that produce little value added insofar as customers are concerned. D. adopting activity-based costing, utilizing more best practices than rivals, and having a narrower product line than rivals. E. Both A and C.
5-18
Differentiation Strategies
Objective
Incorporate
differentiating features that cause buyers to prefer firms product or service over brands of rivals Keys to Success
Find
ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals spending more to achieve differentiation than the price premium that can be charged
5-19
Not
Benefits of Successful Differentiation A product / service with unique, appealing attributes allows a firm to

Command a premium price and/or Increase unit sales and/or Build brand loyalty = Competitive Advantage
5-20
Which hat is unique?
Types of Differentiation Themes

Unique taste Dr. Pepper Multiple features Microsoft Windows and Office Wide selection and one-stop shopping Home Depot, Amazon.com Superior service -- FedEx, Ritz-Carlton Spare parts availability Caterpillar Engineering design and performance Mercedes, BMW Prestige Rolex Product reliability Johnson & Johnson Quality manufacture Karastan, Michelin, Toyota Technological leadership 3M Corporation Top-of-line image Ralph Lauren, Starbucks, Chanel
5-21
Sustaining Differentiation: Keys to Competitive Advantage

Most
appealing approaches to differentiation

hardest for rivals to match or imitate buyers will find most appealing
Those Those
Best
choices to gain a longer-lasting, more profitable competitive edge

New
product innovation superiority customer service

5-22
Technical Product
quality and reliability competitive capabilities
Comprehensive Unique
Where to Find Differentiation Opportunities in the Value Chain

Purchasing Product
and procurement activities process / technology-related activities / production activities activities
R&D and product design activities
Production
Manufacturing
Distribution-related Marketing,
Activities, Costs, & Margins of Suppliers
sales, and customer service activities

Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Buyer/User Value Chains
5-23
How to Achieve a Differentiation-Based Advantage

Approach 1 Incorporate product features/attributes that lower buyers overall costs of using product Approach 2 Incorporate features/attributes that raise the performance a buyer gets out of the product Approach 3 Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways Approach 4 Compete on the basis of superior capabilities
5-24
Test Your Knowledge

Which of the following is not one of the four basic routes to achieving a differentiation-based competitive advantage?
A. Appealing to high-income buyers who are willing and able to pay a premium price for a high-performing, multi-featured product B. Incorporating features that raise product performance C. Incorporating product attributes and user features that lower the buyers overall costs of using the companys product D. Delivering value to customers via competencies and competitive capabilities that rivals dont have or cant afford to match E. Incorporating features that enhance buyer satisfaction in intangible or non-economic ways
5-25
Importance of Perceived Value

Buyers Price
seldom pay for value that is not perceived
premium of a differentiation strategy reflects
Value actually delivered to the buyer and
Value perceived by the buyer
Actual
and perceived value can differ when buyers are unable to assess their experience with a product
5-26
Signaling Value as Well as Delivering Value
Incomplete knowledge of buyers causes them to judge value based on such signals as

Price Attractive packaging Extensive ad campaigns Ad content and image Seller facilities or professionalism and personality of employees Having a list of prestigious customers
Signals of value may be as important as actual value when

Nature of differentiation is hard to quantify Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated
5-27
When Does a Differentiation Strategy Work Best?

There
are many ways to differentiate a product that have value and please customers needs and uses are diverse
Buyer Few
rivals are following a similar differentiation approach change and product innovation are fast-paced
5-28
Technological
Pitfalls of Differentiation Strategies

Appealing Buyers
product features are easily copied by rivals
see little value in unique attributes of product
Overspending
on efforts to differentiate the product offering, thus eroding profitability such that product features exceed buyers needs a price premium buyers perceive is too high striving to open up meaningful gaps in quality, service, or performance features vis--vis rivals products
5-29
Over-differentiating Charging Not

A low-cost provider strategy can defeat a differentiation strategy when buyers are satisfied with a basic product and dont think extra attributes are worth a higher price. True or false? Explain.
5-30
Best-Cost Provider Strategies

Combine

a strategic emphasis on low-cost with a strategic emphasis on differentiation

Make an upscale product at a lower cost Give customers more value for the money
Objectives Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations
Be
the low-cost provider of a product with good-toexcellent product attributes, then use cost advantage to underprice comparable brands
5-31
Competitive Strength of a Best-Cost Provider Strategy

A
best-cost providers competitive advantage is based on its capability to include upscale attributes at a lower cost than rivals comparable products To achieve competitive advantage, a company must be able to

Incorporate attractive features at a lower cost than rivals Manufacture a good-to-excellent quality product at a lower cost than rivals Develop a product that delivers good-to-excellent performance at a lower cost than rivals Provide attractive customer service at a lower cost than rivals
5-32
When Does a Best-Cost Provider Strategy Work Best?
Where
buyer diversity makes product differentiation the norm and
Where
many buyers are also sensitive to price and value
5-33
Risk of a Best-Cost Provider Strategy

A
best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies
Low-cost leaders may be able to siphon customers away with a lower price
High-end differentiators may be able to steal customers away with better product attributes
5-34
Test Your Knowledge

Which of the following are distinguishing features of a bestcost provider strategy (based on the comparisons of the five generic competitive strategies shown in Figure 5.1)?
A. The strategic target is price-conscious buyers B. A marketing emphasis on charging a slightly higher price than rival brands having comparable features and attributes C. A product line that stresses wide selection, many product variations, and emphasis on differentiating features D. A competitive advantage based on more value for the money E. Using constant product innovation, excellent R&D skills, and periodic technological breakthroughs to sustain the strategy
5-35
Focus / Niche Strategies

Involve
concentrated attention on a narrow piece of the total market Objective Serve niche buyers better than rivals Keys to Success
Choose
a market niche where buyers have distinctive preferences, special requirements, or unique needs unique capabilities to serve needs of target buyer segment
5-36
Develop
Approaches to Defining a Market Niche
Geographic
uniqueness
Specialized
requirements in using product/service
Special
product attributes appealing only to niche buyers

5-37
Examples of Focus Strategies

Animal
Planet and History Channel
Cable TV Internet search engines Sports cars Top-of-the line mountain bikes
Google
Porsche
Cannondale
Enterprise
Rent-a-Car
Provides rental cars to repair garage customers Specialist in truck tire recapping
5-38
Bandag
Focus / Niche Strategies and Competitive Advantage

Approach 1
Achieve
lower costs than rivals in serving a well-defined buyer segment Focused low-cost strategy
Approach 2
Offer
Which hat is unique?
a product appealing to unique preferences of a well-defined buyer segment Focused differentiation strategy
5-39
What Makes a Niche Attractive for Focusing?

Big
enough to be profitable and offers good growth potential crucial to success of industry leaders or difficult for multi-segment competitors to meet specialized needs of niche members has resources and capabilities to effectively serve an attractive niche other rivals are specializing in same niche can defend against challengers via superior ability to serve niche members
5-40
Not
Costly
Focuser Few
Focuser
Risks of a Focus Strategy

Competitors
find effective ways to match a focusers capabilities in serving niche buyers preferences shift towards product attributes desired by majority of buyers niche becomes part of overall market becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered
5-41
Niche
Segment

Which of the five generic competitive strategies do you think the following companies are employing:
The Saturn division of General Motors Abercrombie & Fitch Amazon.com Avon Products
5-42
Deciding Which Generic Competitive Strategy to Use

Each positions a company differently in its market and competitive environment Each establishes a central theme for how a company will endeavor to outcompete rivals Each creates some boundaries for maneuvering as market circumstances unfold Each points to different ways of experimenting with the basics of the strategy Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy
The big risk Selecting a stuck in the middle strategy! This rarely produces a sustainable competitive advantage or a distinctive competitive position!
5-43
5-44
6
Supplementing Chapter Title the Chosen Competitive Strategy
16/e PPT
McGraw-Hill/Irwin
Successful business strategy is about actively shaping the game you play, not just playing the game you find. and Barry J. Adam M. Brandenburger
Nalebuff
6-2
The sure path to oblivion is to stay where you are.

Bernard Fauber
6-3
Chapter Roadmap

Collaborative Strategies: Alliances and Partnerships Merger and Acquisition Strategies Vertical Integration Strategies: Operating Across More Stages of the Industry Value Chain Outsourcing Strategies: Narrowing the Boundaries of the Business Offensive Strategies: Improving Market Position and Building Competitive Advantage Defensive Strategies: Protecting Market Position and Competitive Advantage Web Site Strategies Choosing Appropriate Functional-Area Strategies First-Mover Advantages and Disadvantages
6-4
Fig. 6.1: A Companys Menu of Strategy Options
6-5
Collaborative Strategies: Alliances and Partnerships

Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-to-company dealings but fall short of merger or full joint venture partnership.
6-6
Alliances Can Enhance a Firms Competitiveness

Alliances
and partnerships can help companies cope with two demanding competitive challenges
Racing against rivals to build a market presence in many different national markets Racing against rivals to seize opportunities on the frontiers of advancing technology
Collaborative
arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities
6-7
Characteristics of a Strategic Alliance
Strategic alliance A formal agreement between two or more separate companies where there is

Strategically relevant collaboration of some sort Joint contribution of resources Shared risk Shared control Mutual dependence Joint marketing Joint sales or distribution Joint production Design collaboration Joint research Projects to jointly develop new technologies or products
6-8
Alliances often involve

What Factors Make an Alliance Strategic?

It
is critical to a companys achievement of an important objective helps build, sustain, or enhance a core competence or competitive advantage helps block a competitive threat
It
It It
helps open up important market opportunities mitigates a significant risk to a companys business
6-9
It
Why Are Strategic Alliances Formed?

To To To To To To
collaborate on technology development or new product development fill gaps in technical or manufacturing expertise create new skill sets and capabilities improve supply chain efficiency
gain economies of scale in production and/or marketing acquire or improve market access via joint marketing agreements
6-10
Potential Benefits of Alliances to Achieve Global and Industry Leadership

Get
into critical country markets quickly to accelerate process of building a global presence inside knowledge about unfamiliar markets and cultures valuable skills and competencies concentrated in particular geographic locations a beachhead to participate in target industry new technologies and build new expertise faster than would be possible internally up expanded opportunities in target industry by combining firms capabilities with resources of partners
6-11
Gain
Access
Establish Master Open
Capturing the Benefits of Strategic Alliances

Benefits

from forming partnerships are a function of
Picking a good partner Being sensitive to cultural differences Recognizing an alliance must benefit both parties Ensuring both parties live up to their commitments Structuring the decision-making process so actions can be taken swiftly when needed Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances
6-12
Why Alliances Fail
Ability of an alliance to endure depends on

How well partners work together Success of partners in responding and adapting to changing conditions Willingness of partners to renegotiate the bargain Diverging objectives and priorities of partners Inability of partners to work well together Changing conditions rendering purpose of alliance obsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies
6-13
Reasons for alliance failure

Test Your Knowledge

Which one of the following is not a factor that makes an alliance strategic as opposed to just a convenient business arrangement?
A. The alliance involves joint contribution of resources, shared risk, and is mutually beneficial. B. The alliance helps block a competitive threat or open up new market opportunities. C. The alliance helps mitigate a significant risk to a companys business. D. The alliance helps build, enhance, or sustain a core competence or competitive advantage. E. The alliance is critical to the companys achievement of an important objective.
6-14
Merger and Acquisition Strategies

Merger
Combination and pooling of equals, with newly created firm often taking on a new name One firm, the acquirer, purchases and absorbs operations of another, the acquired strategy

Acquisition
Merger-acquisition
Much-used strategic option Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities Ownership allows for tightly integrated operations, creating more control and autonomy than alliances
6-15
Objectives of Mergers and Acquisitions

To To To To To
create a more cost-efficient operation expand a firms geographic coverage
extend a firms business into new product categories or international markets gain quick access to new technologies or competitive capabilities invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities
6-16
Pitfalls of Mergers and Acquisitions

Combining

operations may result in
Resistance from rank-and-file employees Hard-to-resolve conflicts in management styles and corporate cultures Tough problems of integration Greater-than-anticipated difficulties in

Achieving expected cost-savings Sharing of expertise Achieving enhanced competitive capabilities

6-17
Vertical Integration Strategies

Extend

a firms competitive scope within same industry

Backward into sources of supply Forward toward end-users of final product
Can
aim at either full or partial integration
Activities, Costs, & Margins of Suppliers
Internally Performed Activities, Costs, & Margins
Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners
Buyer/User Value Chains
6-18
Strategic Advantages of Backward Integration

Generates Potential

cost savings only if volume needed is big enough to capture efficiencies of suppliers to reduce costs exists when
Suppliers have sizable profit margins Item supplied is a major cost component Resource requirements are easily met
Can
produce a differentiation-based competitive advantage when it results in a better quality part risk of depending on suppliers of crucial raw materials / parts / components
6-19
Reduces
Strategic Advantages of Forward Integration

To To To To

gain better access to end users and better market visibility compensate for undependable distribution channels which undermine steady operations offset the lack of a broad product line, a firm may sell directly to end users bypass regular distribution channels in favor of direct sales and Internet retailing which may
Lower distribution costs Produce a relative cost advantage over rivals Enable lower selling prices to end users
6-20
Strategic Disadvantages of Vertical Integration

Boosts Locks
resource requirements
firm deeper into same industry
Results
in fixed sources of supply and less flexibility in accommodating buyer demands for product variety all types of capacity-matching problems require radically different skills / capabilities
Poses May
Reduces
flexibility to make changes in component parts which may lengthen design time and ability to introduce new products
6-21
Pros and Cons of Integration vs. De-Integration

Whether
vertical integration is a viable strategic option depends on its

Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities Impact on investment cost, flexibility, and administrative overhead Contribution to enhancing a firms competitiveness
Many companies are finding that de-integrating value chain activities is a more flexible, economic strategic option!
6-22
Outsourcing Strategies
Concept Outsourcing involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities
Internally Performed Activities Functional Activities
Suppliers
Support Services
Distributors or Retailers
6-23
When Does Outsourcing Make Strategic Sense?

Activity can be performed better or more cheaply by outside specialists Activity is not crucial to achieve a sustainable competitive advantage Risk exposure to changing technology and/or changing buyer preferences is reduced It improves firms ability to innovate Operations are streamlined to
Improve flexibility Cut time to get new products into the market
It increases firms ability to assemble diverse kinds of expertise speedily and efficiently Firm can concentrate on core value chain activities that best suit its resource strengths
6-24
Risk of an Outsourcing Strategy

Farming
out too many or the wrong activities,
thus

Hollowing out capabilities Losing touch with activities and expertise that determine overall long-term success
6-25
Offensive and Defensive Strategies

Offensive Strategies Used to build new or stronger market position and/or create competitive advantage Defensive Strategies Used to protect competitive advantage (rarely lead to creating advantage)
6-26
Principles of Offensive Strategies

Focus

relentlessly on
Building competitive advantage and Striving to convert it into decisive advantage
Employ Apply Be
the element of surprise as opposed to doing what rivals expect resources where rivals are least able to defend themselves impatient with the status quo and display a strong bias for swift, decisive actions to boost a firms competitive position vis--vis rivals
6-27
Types of Offensive Strategy Options

1. Offer an equally good or better product at a lower price 2. Leapfrog competitors by being

First adopter of next-generation technologies or First to market with next-generation products
3. Pursue continuous product innovation to draw sales and market share away from less innovative rivals 4. Adopt and improve on the good ideas of other companies
6-28
Types of Offensive Strategy Options (cont)

5. Deliberately attack market segments where a key rival makes big profits 6. Attack competitive weaknesses of rivals 7. Maneuver around competitors and concentrate on capturing unoccupied or less contested market territory 8. Use hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent rivals 9. Launch a preemptive strike to secure an advantageous position that rivals are prevented from duplicating
6-29
What Is a Blue Ocean Strategy?

Seeks
to gain a dramatic, durable competitive advantage by
Abandoning efforts to beat out competitors in existing markets and Inventing a new industry or distinctive market segment to render existing competitors largely irrelevant and Allowing a company to create and capture altogether new demand
6-30
Type of Markets: Blue Ocean Strategy

Typical Market Space
Industry
Blue Ocean Market Space

Industry Industry
boundaries are defined and accepted rules are well understood by all rivals try to outperform rivals by capturing a bigger share of existing demand
does not exist yet
Competitive
is untainted by competition offers wide-open opportunities if a firm has a product and strategy allowing it to

Industry
Companies
Create new demand and Avoid fighting over existing demand

6-31

Which of the following is the best example of a blue ocean strategy Apples entry into MP3 players with its iPod models or Dells entry into LCD TVs or Audis recent move to bring out a luxury SUV? Explain.
6-32
Choosing Rivals to Attack

Four
types of firms can be the target of a fresh offensive

Vulnerable market leaders Runner-up firms with weaknesses where challenger is strong Struggling rivals on verge of going under Small local or regional firms with limited capabilities
6-33
Using Offensive Strategy to Achieve Competitive Advantage

Strategic
offensives offering strongest basis for competitive advantage entail

An important core competence A unique competitive capability A better-known brand name A cost advantage in manufacturing or distribution Technological superiority A superior product
6-34
Test Your Knowledge

Which one of the following is not a good type of rival for an offensive-minded company to target?
A. Market leaders that are vulnerable B. Runner-up firms with weaknesses in areas where the challenger is strong. C. Small local and regional companies with limited capabilities D. Companies with lower costs and lower prices E. Struggling enterprises that are on the verge of going under
6-35
Defensive Strategy
Objectives
Lessen Blunt
risk of being attacked
impact of any attack that occurs challengers to aim attacks at other rivals Approaches
Influence
Block
avenues open to challengers
Signal
challengers vigorous retaliation is likely

6-36
Block Avenues Open to Challengers

Participate in alternative technologies Introduce new features, add new models, or broaden product line to close gaps rivals may pursue Maintain economy-priced models Increase warranty coverage Offer free training and support services Reduce delivery times for spare parts Make early announcements about new products or price changes Challenge quality or safety of rivals products using legal tactics Sign exclusive agreements with distributors
6-37
Signal Challengers Retaliation Is Likely

Publicly
announce managements strong commitment to maintain present market share commit firm to policy of matching rivals terms or prices war chest of cash reserves
Publicly
Maintain Make
occasional counter-response to moves of weaker rivals

6-38
Web Site Strategies

Strategic
Challenge What use of the Internet should a company make in staking out its position in the marketplace? Five Web site approaches

Use to disseminate only product information Use as minor distribution channel to sell direct to customers Use as one of several important distribution channels to access customers Use as primary distribution channel to access buyers Use as exclusive channel to transact sales with customers
6-39
Using the Internet to Disseminate Product Information

Approach

Website used to provide product information of manufacturers or wholesalers

Relies on click-throughs to websites of dealers for sales transactions Informs end-users of location of retail stores
Issues

Pursuing online sales may
Signal weak strategic commitment to dealers Signal willingness to cannibalize dealers sales Prompt dealers to aggressively market rivals brands
Avoids
channel conflict with dealers Important where strong support of dealer networks is essential
6-40
Using the Internet as a Minor Distribution Channel

Approach

Use online sales to
Achieve incremental sales Gain online sales experience Conduct marketing research

Learn more about buyer tastes and preferences Test reactions to new products Create added market buzz about products
Unlikely
to provoke much outcry from dealers

6-41
Reasons to Use the Internet as a Minor Distribution Channel

Manufacturers
profit margin from online sales is bigger than that from sales through traditional channels buyers to visit a firms website educates them to the ease and convenience of purchasing online directly to end users allows a manufacturer to make greater use of build-to-order manufacturing and assembly
6-42
Encouraging
Selling
Brick-and-Click Strategies: An Appealing Middle Ground Approach

Approach

Sell directly to consumers and Use traditional wholesale/retail channels
Strategic

appeal for wholesalers and retailers
Economic means of expanding a companys economic reach Provide both existing and potential customers another choice of how to

Communicate with a company Shop for product information Make purchases Resolve customer service problems
6-43
Strategies for Online Enterprises

Approach Strategic

Use Internet as the exclusive channel for all buyer-seller contact and transactions issues for an online company
How to deliver unique value to buyers Whether it will pursue competitive advantage based on lower costs, differentiation, or better value for the money Whether it will have a broad or narrow product offering Whether to perform order fulfillment activities internally or to outsource them How it will draw traffic to its Web site and then convert page views into revenues
6-44
Test Your Knowledge

One very important advantage of a product-informationonly Web site strategy is
A. lower advertising costs. B. avoiding the extra costs associated with operating Web site e-stores. C. avoiding channel conflicttrying to sell online in direct competition with retail dealers signals both a weak strategic commitment to dealers and a willingness to cannibalize dealers sales and growth potential. D. added ability to create a positive image of the company. E. lower sales force costs.
6-45

Suppose that you are a retailer of athletic footwear and one of the major brands you stock in your store is New Balance. What would be your reaction if you learned that New Balance announced that it would soon begin selling its footwear online at the companys Web site? What actions would you consider taking?
6-46
Choosing Appropriate Functional-Area Strategies

Involves
strategic choices about how functional areas are managed to support competitive strategy and other strategic moves Functional strategies include

Research and development Production Human resources Sales and marketing Finance
Tailoring functional-area strategies to support key business-level strategies is critical!

6-47
First-Mover Advantages
When
to make a strategic move is often as crucial as what move to make advantages arise when
First-mover

Pioneering helps build firms image and reputation Early commitments to new technologies, new-style components, and distribution channels can produce cost advantage Loyalty of first time buyers is high Moving first can be a preemptive strike
6-48
First-Mover Disadvantages
Moving
early can be a disadvantage (or fail to produce an advantage) when
When costs of pioneering are more than being an imitative follower and only negligible learning/experience curve benefits accrue to the leader Innovators products are primitive, not living up to buyer expectations Demand side of the market is skeptical about the benefits of new technology/product of a first-mover Rapid technological change allows followers to leapfrog pioneers
6-49
Strategic Issues: To Be a First-Mover or Not

Key
issue Is the race to market leadership in an industry a marathon or a sprint? a competitive advantage by being a firstmover involves addressing several questions
Seeking
Does market takeoff depend on development of complementary products or services not currently available? Is new infrastructure required before buyer demand can surge? Will buyers need to learn new skills or adopt new behaviors? Will buyers encounter high switching costs? Are there influential competitors in a position to delay or derail the efforts of a first-mover?
6-50
7
Chapter Title Competing in
Foreign Markets
16/e PPT
McGraw-Hill/Irwin
You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or die.
Andrew S. Grove
7-2
Chapter Roadmap

Why Companies Expand into Foreign Markets Cross-Country Differences in Cultural, Demographic, and Market Conditions The Concepts of Multi-country Competition and Global Competition Strategy Options for Entering and Competing in Foreign Markets The Quest for Competitive Advantage in Foreign Markets Profit Sanctuaries, Cross-Market Subsidization, and Global Strategic Offensives Strategic Alliances and Joint Ventures with Foreign Partners Strategies That Fit the Markets of Emerging Countries
7-3
The Four Big Strategic Issues in Competing Multinationally
Whether to customize a companys offerings in each different country market to match preferences of local buyers or offer a mostly standardized product worldwide Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country Where to locate a companys production facilities, distribution centers, and customer service operations to realize the greatest locational advantages How to efficiently transfer a companys resource strengths and capabilities from one country to another to secure competitive advantage
7-4
Why Do Companies Expand into Foreign Markets? Obtain access to valuable natural resources Achieve lower costs and enhance competitiveness Spread Capitalize business risk across on core wider competencies market base
7-5
Gain access to new customers
International vs. Global Competition

Company operates in a select few foreign countries, with modest ambitions to expand further Company markets products in 50 to 100 countries and is expanding operations into additional country markets annually
7-6
International Competitor
Global Competitor
Cross-Country Differences in Cultural, Demographic, and Market Conditions

Cultures
and lifestyles differ among countries
Differences
in market demographics and income levels in manufacturing and distribution costs exchange rates
Variations
Fluctuating Differences
in host government economic and political demands

7-7
How Markets Differ from Country to Country

Consumer Consumer Market
tastes and preferences buying habits channels pressures
size and growth potential forces
Distribution Driving
Competitive
One of the biggest concerns of companies competing in foreign markets is whether to customize their product offerings in each different country market to match the tastes and preferences of local buyers or whether to offer a mostly standardized product worldwide.
7-8
Different Countries Have Different Locational Appeal
Manufacturing costs vary from country to country based on

Wage rates Worker productivity Inflation rates Energy costs Tax rates Government regulations
Quality of business environment varies from country to country Suppliers, trade associations, and makers of complementary products often find it advantageous to cluster their operations in the same general location
7-9
Fluctuating Exchange Rates Affect a Companys Competitiveness

Currency
exchange rates are unpredictable
Competitiveness of a companys operations partly depends on whether exchange rate changes affect costs favorably or unfavorably
Lessons
of fluctuating exchange rates
Exporters always gain in competitiveness when the currency of the country where goods are manufactured grows weaker Exporters are disadvantaged when the currency of the country where goods are manufactured grows stronger
7-10
Test Your Knowledge

Which one of the following statements concerning the effects of fluctuating exchange rates on companies competing in foreign markets is true?
A. Japan-based manufacturers exporting goods to the U.S. would be disadvantaged if the Japanese yen grows weaker in relation to the U.S. dollar. B. Fluctuating foreign exchange rates greatly reduce the risks of competing in foreign marketsthe big problem occurs when exchange rates are fixed at unreasonably low levels. C. Domestic companies under pressure from lower-cost imports are benefited when their governments currency grows weaker in relation to the currencies of the countries where the imported goods are being made. D. Chinese exports to Europe would likely be grow in volume if the Chinese currency because much stronger relative to the euro. E. If the exchange rate of U.S. dollars for euros changes from $1.25 per euro to $1.30 per euro, then it is correct to say that the U.S. dollar has grown stronger.
7-11
Differences in Host Government Trade Policies

Local
content requirements on exports on prices of imports
Restrictions Regulations Import Other

tariffs or quotas
regulations
Technical standards Product certification Prior approval of capital spending projects Withdrawal of funds from country Ownership (minority or majority) by local citizens
7-12
Two Primary Patterns of International Competition
Multi-country Competition Global Competition

7-13
Characteristics of Multi-Country Competition

Market
contest among rivals in one country not closely connected to market contests in other countries Buyers in different countries are attracted to different product attributes Sellers vary from country to country Industry conditions and competitive forces in each national market differ in important respects
Rival firms battle for national championships winning in one country does not necessarily signal the ability to fare well in other countries!
7-14
Characteristics of Global Competition

Competitive

conditions across country markets are strongly linked

Many of same rivals compete in many of the same country markets A true international market exists
firms competitive position in one country is affected by its position in other countries Competitive advantage is based on a firms worldwide operations and overall global standing Rival firms in globally competitive industries vie for worldwide leadership!
7-15
Strategy Options for Competing in Foreign Markets

Exporting Licensing Franchising
strategy strategy
Multi-country Global
strategy alliances or joint ventures

7-16
Strategic
Export Strategies
Involve
using domestic plants as a production base for exporting to foreign markets Excellent initial strategy to pursue international sales Advantages

Conservative way to test international waters Minimizes both risk and capital requirements Minimizes direct investments in foreign countries
An

export strategy is vulnerable when

Manufacturing costs in home country are higher than in foreign countries where rivals have plants High shipping costs are involved Adverse fluctuations in currency exchange rates
7-17
Licensing Strategies
Licensing
makes sense when a firm
Has valuable technical know-how or a patented product but does not have international capabilities to enter foreign markets Desires to avoid risks of committing resources to markets which are

Unfamiliar Politically volatile Economically unstable
Disadvantage
Risk of providing valuable technical know-how to foreign firms and losing some control over its use
7-18
Franchising Strategies
Often
is better suited to global expansion efforts of service and retailing enterprises
Advantages
Franchisee bears most of costs and risks of establishing foreign locations Franchisor has to expend only the resources to recruit, train, and support franchisees
Disadvantage
Maintaining cross-country quality control

7-19
Localized Multicountry Strategies or a Global Strategy?

Strategic Issue
Whether
to vary a companys competitive approach to fit specific market conditions and buyer preferences in each host county OR to employ essentially the same strategy in all countries
7-20
Whether
Fig. 7.1: A Companys Strategic Options for Dealing with Cross-Country Variations in Buyer Preferences and Market Conditions
7-21
What Is a Think-Local, Act-Local Approach to Strategy Making?
A company varies its product offerings and basic competitive strategy from country to country in an effort to be responsive to differing buyer preferences and market conditions.
7-22
Characteristics of a Think-Local, Act-Local Approach to Strategy Making

Business

approaches are deliberately crafted to
Accommodate differing tastes and expectations of buyers in each country Stake out the most attractive market positions vis--vis local competitors
Local
managers are given considerable strategy-making latitude produce different products for different local markets and distribution are adapted to fit local customs and cultures
7-23
Plants
Marketing
When Is a Think-Local, Act-Local Approach to Strategy Making Necessary?

Significant
country-to-country differences in customer preferences and buying habits exist governments enact regulations requiring products sold locally meet strict manufacturing specifications or performance standards restrictions of host governments are so diverse and complicated they preclude a uniform, coordinated worldwide market approach
7-24
Host
Trade
Drawbacks of a Think-Local, Act-Local Approach to Strategy Making
Poses problems of transferring competencies across borders
Works against building a unified competitive advantage

7-25
What Is a Think-Global, Act-Global Approach to Strategy Making?
A company employs the same basic competitive approach in all countries where it operates.
7-26
Characteristics of a Think-Global, Act-Global Approach to Strategy Making

Same products under the same brand names are sold everywhere Same distribution channels are used in all countries Competition is based on the same capabilities and marketing approaches worldwide Strategic moves are integrated and coordinated worldwide Expansion occurs in most nations where significant buyer demand exists Strategic emphasis is placed on building a global brand name Opportunities to transfer ideas, new products, and capabilities from one country to another are aggressively pursued
7-27
Fig. 7.2: How a Localized or Multicountry Strategy Differs from a Global Strategy
7-28
What Is a Think-Global, Act-Local Approach to Strategy Making?

A company uses the same basic competitive theme in each country but allows local managers latitude to . . . 2. Incorporate whatever country-specific variations in product attributes are needed to best satisfy local buyers and 3. Make whatever adjustments in production, distribution, and marketing are needed to compete under local market conditions
7-29
Test Your Knowledge

The stand-out characteristic of multicountry competition is
A. The varying driving forces from country to country. B. varying competitive pressures from country to country. C. varying buyer requirements and expectations from country to country. D. that there is so much cross-country variation in market conditions and in the companies contending for leadership that the market contest among rivals in one country is not closely connected to the market contests in other countriesas a consequence, there is no global or world market, just a collection of self-contained country markets. E. varying degrees of product differentiation from country to country.
7-30

Assume you are in charge of developing the strategy for a multinational company selling products in several different countries around the world.
A. If your companys product is personal computers, do you think it would make better strategic sense to employ a multicountry strategy or a global strategy? Why? B. If your companys product is dry soup mixes and canned soups, would a multicountry strategy seem to be more advisable than a global strategy? Why? C. If your companys product is washing machines, would it seem to make more sense to pursue a multicountry strategy or a global strategy? Why? D. If your companys product is basic work tools (hammers, screwdrivers, pliers, wrenches, saws), would a multicountry strategy or a global strategy seem to have more appeal? Why?
7-31
The Quest for Competitive Advantage in Foreign Markets

Three
ways to gain competitive advantage
1. Locating activities among nations in ways that lower costs or achieve greater product differentiation 2. Efficient/effective transfer of competitively valuable competencies and capabilities from company operations in one country to company operations in another country 3. Coordinating dispersed activities in ways a domestic-only competitor cannot
7-32
Locating Activities to Build a Global Competitive Advantage

Two
issues
Whether to
Concentrate each activity in a few countries or Disperse activities to many different nations
Where to locate activities
Which country is best location for which activity?

7-33
Concentrating Activities to Build a Global Competitive Advantage

Activities
should be concentrated when
Costs of manufacturing or other value chain activities are meaningfully lower in certain locations than in others There are sizable scale economies in performing the activity There is a steep learning curve associated with performing an activity in a single location Certain locations have

Superior resources Allow better coordination of related activities or Offer other valuable advantages
7-34
Dispersing Activities to Build a Global Competitive Advantage

Activities
should be dispersed when
They need to be performed close to buyers Transportation costs, scale diseconomies, or trade barriers make centralization expensive Buffers for fluctuating exchange rates, supply interruptions, and adverse politics are needed
7-35
Transferring Valuable Competencies to Build a Global Competitive Advantage

Transferring

competencies, capabilities, and resource strengths across borders contributes to

Development of broader competencies and capabilities Achievement of dominating depth in some competitively valuable area
Dominating
depth in a competitively valuable capability is a strong basis for sustainable competitive advantage over

Other multinational or global competitors and Small domestic competitors in host countries
7-36
Coordinating Cross-Border Activities to Build a Global Competitive Advantage

Aligning
activities located in different countries contributes to competitive advantage in several ways

Choose where and how to challenge rivals Shift production from one location to another to take advantage of most favorable cost or trade conditions or exchange rates Use online systems to collect ideas for new or improved products and to determine which products should be standardized or customized Enhance brand reputation by incorporating same differentiating attributes in its products in all markets where it competes
7-37
What Are Profit Sanctuaries?

Profit
sanctuaries are country markets where a firm
Has a strong, protected market position and Derives substantial profits
Generally,
a firms most strategically crucial profit sanctuary is its home market
Profit sanctuaries are a valuable competitive asset in global industries!

7-38
Fig. 7.3: Profit Sanctuary Potential of Domestic-Only, International, and Global Competitors
7-39
Test Your Knowledge

Profit sanctuaries are valuable competitive assets because
A. they enable a company pursuing a think global, act local type of strategy to be more successful. B. a domestic competitor with multiple profit sanctuaries can wage and generally win a competitive offensive against a global competitor whose profits are scattered across many different countries. C. they provide the financial strength to support strategic offensives in selected country markets and can help fuel a companys race for global market leadership. D. without having at least two profit sanctuaries a company is virtually precluded from competing globally. E. they enable a company pursuing a global strategy to compete on an equal footing with companies employing a multicountry strategy.
7-40
What Is Cross-Market Subsidization?

Involves
supporting competitive offensives in one market with resources/profits diverted from operations in other markets Competitive power of cross-market subsidization results from a global firms ability to
Draw upon its resources and profits in other country markets to mount an attack on single-market or onecountry rivals and Try to lure away their customers with
Lower prices Discount promotions Heavy advertising Other offensive tactics
7-41

Assume that you are a multinational soft-drink company with a large, well-protected profit sanctuary in your home country (and perhaps some smaller profit sanctuaries in other countries as well). Further assume that you are interested in entering an important new foreign market in which the leading soft drink competitors are all domestic companies. Do you think that a cross-market subsidization strategy based on under-pricing local competitors might be an appealing way to gain a market foothold? Why or why not? If you were one of the local competitors being attacked, what strategic moves might you make to defend your market position?
7-42
Global Strategic Offensives

Three Options
Attack a foreign rivals profit sanctuaries
Approach places a rival on the defensive, forcing it to

Spend more on marketing/advertising Trim its prices Boost product innovation efforts Take actions raising its costs and eroding its profits
Employ cross-market subsidization
Attractive offensive strategy for companies competing in multiple country markets with multiple products Approach involves a company selling goods in foreign markets at prices

Dump goods at cut-rate prices
Well below prices at which it sells in its home market or Well below its full costs per unit
7-43
Achieving Global Competitiveness via Cooperation

Cooperative

agreements with foreign companies are a means to

Enter a foreign market or Strengthen a firms competitiveness in world markets
Purpose

of alliances
Joint research efforts Technology-sharing Joint use of production or distribution facilities Marketing / promoting one anothers products
7-44
Strategic Appeal of Strategic Alliances

Gain better access to attractive country markets from host countrys government to import and market products locally Capture economies of scale in production and/or marketing Fill gaps in technical expertise or knowledge of local markets Share distribution facilities and dealer networks Direct combined competitive energies toward defeating mutual rivals Take advantage of partners local market knowledge and working relationships with key government officials in host country Useful way to gain agreement on important technical standards
7-45
Pitfalls of Strategic Alliances

Overcoming language and cultural barriers Dealing with diverse or conflicting operating practices Time consuming for managers in terms of communication, trust-building, and coordination costs Mistrust when collaborating in competitively sensitive areas Clash of egos and company cultures Dealing with conflicting objectives, strategies, corporate values, and ethical standards Becoming too dependent on another firm for essential expertise over the long-term
7-46
Characteristics of Competing in Emerging Foreign Markets

Tailoring
products for big, emerging markets often
involves

Making more than minor product changes and Becoming more familiar with local cultures
Companies
have to attract buyers with bargain prices as well as better products Specially designed and/or specially packaged products may be needed to accommodate local market circumstances Management team must usually consist of a mix of expatriate and local managers
7-47
Strategic Options: How to Compete in Emerging Country Markets

Prepare Be
to compete on the basis of low price
prepared to modify aspects of the companys business model to accommodate local circumstances to change the local market to better match the way the company does business elsewhere away from those emerging markets where it is impractical or uneconomic to modify the companys business model to accommodate local circumstances
7-48
Try
Stay
Fig. 7.4: Strategy Options for Local Companies in Competing Against Global Challengers
7-49
Strategic Options for Local Companies: Use Home-Field Advantages

Concentrate
on advantages enjoyed in the home
market
Cater
to customers who prefer a local touch loss of customers attracted to global brands exploit its local orientation based on
Accept
Astutely

Familiarity with local preferences Expertise in traditional products Long-standing customer relationships
Cater
to the local market in ways that pose difficulties for global rivals
7-50
Strategic Options for Local Companies: Transfer Expertise to Cross-Border Markets
When a local company trying to defend against a global challenger has resource strengths and capabilities suitable for competing in other country markets, then it should consider
Launching initiatives to transfer its expertise to cross-border markets Becoming more of an international competitor
Such a move to enter foreign markets can help
Build a bigger customer base (to offset any losses in its home market) Grow sales and profits Put in a stronger position to contend with global challengers in its home market
7-51
Strategic Options for Local Companies: Dodging Rivals by Shifting to a New Business Model or Market Niche
When industry pressures to globalize are high, viable strategic options for a local company trying to defend against global challengers in its home market include
Shifting the business to a piece of the industry value chain where the firms expertise/resources provide a defendable position or maybe even a competitive advantage Entering a joint venture with a globally competitive partner Selling out to a global entrant into its home market
7-52
Strategic Options for Local Companies: Contend on a Global Level

If
a local company has resources and capabilities that it can transfer to operations in other countries, it can launch a strategy aimed at
Entering markets of other countries as rapidly as possible Shifting to a more globalized strategy Building brand recognition and a brand image that extends to more and more countries Gradually establishing the resources and capabilities to go head-to-head against large global rivals
7-53
8
Tailoring Strategy to Fit Chapter Title Specific Industry and Company Situations
16/e PPT
McGraw-Hill/Irwin
In a turbulent age, the only dependable advantage is reinventing your business model before circumstances
Gary Hamel and Liisa Valikangas
force you to.
8-2
Chapter Roadmap

Strategies for Competing in Emerging Industries Strategies for Competing in Rapidly Growing Markets Strategies for Competing in Maturing Industries Strategies for Competing in Stagnant or Declining Industries Strategies for Competing in Turbulent, High-Velocity Markets Strategies for Competing in Fragmented Industries Strategies for Sustaining Rapid Company Growth Strategies for Industry Leaders Strategies for Runner-up Firms Strategies for Weak and Crisis-Ridden Businesses Ten Commandments for Crafting Successful Business Strategies
8-3
Matching Strategy to a Companys Situation

Nature of industry and competitive conditions
Most important drivers shaping a firms strategic options fall into two categories
Firms competitive capabilities, market position, best opportunities

8-4
Features of an Emerging Industry

New and unproven market Proprietary technology Lack of consensus regarding which of several competing technologies will win out Low entry barriers Experience curve effects may permit cost reductions as volume builds Buyers are first-time users and marketing involves inducing initial purchase and overcoming customer concerns First-generation products are expected to be rapidly improved so buyers delay purchase until technology matures Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build resource capabilities for rapid growth
8-5
Strategy Options for Competing in Emerging Industries

Win early race for industry leadership by employing a bold, creative strategy Push hard to perfect technology, improve product quality, and develop attractive performance features Consider merging with or acquiring another firm to
Gain added expertise Pool resource strengths
When technological uncertainty clears and a dominant technology emerges, try to capture any first-mover advantages by moving quickly Form strategic alliances with
Companies having related technological expertise or Key suppliers
8-6
Strategy Options for Competing in Emerging Industries (continued)

Pursue Enter Make
new customers and user applications
new geographical areas
it easy and cheap for first-time buyers to try product advertising emphasis on
Increasing frequency of use Creating brand loyalty
Focus

Use
price cuts to attract price-sensitive buyers

8-7
Strategic Hurdles for Companies in Emerging Industries
Raising capital to finance initial operations until

Sales and revenues take off Profits appear Cash flows turn positive
Developing a strategy to ride the wave of industry growth

What market segments to pursue What competitive advantages to go after
Managing the rapid expansion of facilities and sales to position a company to contend for industry leadership Defending against competitors trying to horn in on the companys success
8-8
What Is the Key to Success for Competing in Rapidly Growing Markets?
A company needs a strategy predicated on growing faster than the market average so it
Can
boost its market share and its competitive standing vis--vis rivals
Improve
8-9
Strategy Options for Competing in Rapidly Growing Markets

Drive
down costs per unit to enable price reductions that attract droves of new customers Pursue rapid product innovation to

Set a companys product offering apart from rivals Incorporate attributes to appeal to growing numbers of customers
Gain
access to additional distribution channels and sales outlets Expand a companys geographic coverage Expand product line to add models/styles to appeal to a wider range of buyers
8-10
Test Your Knowledge

Which one of the following is not likely to be a suitable strategy option for companies competing in rapid-growth industries?
A. Driving down costs per unit so as to enable price reductions that attract droves of new customers B. Pursuing rapid product innovation, both to set a companys product offering apart from rivals and to incorporate attributes that appeal to growing numbers of customers C. Gaining access to additional distributional channels and sales outlets D. Expanding the product line to add models/styles that appeal to a wider range of buyers E. Putting top priority on heavy advertising and other marketingrelated actions calculated to strongly differentiate its product offering from rivals
8-11
Industry Maturity: The Standout Features

Slowing More Greater
demand breeds stiffer competition emphasis on cost and service
sophisticated buyers demand bargains
Topping Product
out problem in adding production capacity innovation and new end uses harder to come by competition increases profitability falls and acquisitions reduce number of rivals
8-12
International Industry Mergers
Strategy Options for Competing in a Mature Industry

Prune
marginal products and models innovation in the value chain
Emphasize Strong
focus on cost reduction sales to present customers rivals at bargain prices
Increase
Purchase Expand Build
internationally
new, more flexible competitive capabilities

8-13
Strategic Pitfalls in a Maturing Industry

Employing Being
a ho-hum strategy with no distinctive features thus leaving firm stuck in the middle slow to mount a defense against stiffening competitive pressures on short-term profits rather than strengthening long-term competitiveness slow to respond to price-cutting too much excess capacity on marketing
8-14
Concentrating Being
Having
Overspending Failing
to aggressively pursue cost reductions
Stagnant or Declining Industries: The Standout Features

Demand
grows more slowly than economy as whole (or even declines) technology gives rise to betterperforming substitute products group shrinks lifestyles and buyer tastes
Advancing Customer Changing Rising
costs of complementary products
Competitive
battle ensues among industry members for the available business

8-15
Strategy Options for Competing in a Stagnant or Declining Industry

Pursue
focus strategy aimed at fastest growing market segments Stress differentiation based on quality improvement or product innovation Work diligently to drive costs down

Cut marginal activities from value chain Use outsourcing Redesign internal processes to exploit e-commerce Consolidate under-utilized production facilities Add more distribution channels Close low-volume, high-cost distribution outlets Prune marginal products
8-16
End-Game Strategies for Declining Industries
An end-game strategy can take either of two paths
Slow-exit strategy involving

Gradual phasing down of operations Getting the most cash flow from the business
Fast-exit strategy involving
Disengaging from an industry during early stages of decline Quick recovery of as much of a companys investment as possible
8-17
Features of High-Velocity Markets

Rapid-fire Short Entry
technological change
product life-cycles of important new rivals
Frequent
launches of new competitive moves evolving customer expectations

8-18
Rapidly
Fig. 8.1: Meeting the Challenge of High-Velocity Change
8-19
Strategy Options for Competing in High-Velocity Markets

Invest Initiate
aggressively in R&D fresh actions every few months quick response capabilities
Develop

Shift resources Adapt competencies Create new competitive capabilities Speed new products to market
Use
strategic partnerships to develop specialized expertise and capabilities products/services fresh and exciting
8-20
Keep
Keys to Success in Competing in High Velocity Markets

Cutting-edge Speed
expertise
in responding to new developments with others
Collaboration Agility
Innovativeness Opportunism Resource
flexibility capabilities
8-21
First-to-market
Competitive Features of a Fragmented Industry

Absence of market leaders with large market shares or widespread buyer recognition Product/service is delivered to neighborhood locations to be convenient to local residents Buyer demand is so diverse that many firms are required to satisfy buyer needs Low entry barriers Absence of scale economies Market for industrys product/service may be globalizing, thus putting many companies across the world in same market arena Exploding technologies force firms to specialize just to keep up in their area of expertise Industry is young and crowded with aspiring contenders, with no firm having yet developed recognition to command a large market share
8-22
Examples of Fragmented Industries

Book publishing Landscaping and plant nurseries Auto repair Restaurant industry Public accounting Womens dresses Meat packing Paperboard boxes Hotels and motels Furniture
8-23
Competing in a Fragmented Industry: The Strategy Options

Construct Become
and operate formula facilities
a low-cost operator by product type by customer type
Specialize Specialize Focus
on limited geographic area

8-24
Test Your Knowledge

Which of the following is unlikely to be a promising option for competing in a fragmented industry?
A. Employing deep price discounting, extensive advertising, and other muscle-flexing maneuvers to gain market dominance in a select few country markets B. Specializing by product type or becoming a low-cost operator C. Specializing by customer type D. Focusing on a limited geographic area E. Constructing and operating "formula" facilities at many different locations
8-25

What classification would you assign to each of the following industriesemerging, rapid-growth, mature/slow-growth, stagnant/declining, highvelocity/turbulent, or fragmented?
A. Dry cleaning industry B. Cigarette industry C. Cell phone industry D. MP3 player industry E. Satellite radio industry
8-26

Assume you are charged with crafting a strategy for XM Satellite Radio. What strategy alternatives would you be inclined to give strong consideration? What strategy alternatives would you be inclined to reject as unsuitable? Justify your answer.
8-27
Fig. 8.2: Three Strategy Horizons for Sustaining Rapid Growth
8-28
Risks of Pursuing Multiple Strategy Horizons

Firm
should not pursue all options to avoid stretching itself too thin of medium- and long-jump initiatives may cause firm to stray too far from its core competencies advantage may be difficult to achieve in medium- and long-jump businesses that do not mesh well with firms present resource strengths of long-jump initiatives may prove elusive
8-29
Pursuit
Competitive
Payoffs
Strategies Based on a Companys Market Position

Industry
leaders
Runner-up
firms
Weak
or crisis-ridden firms
8-30
Industry Leaders: The Defining Characteristics

Strong
to powerful market position
Well-known
reputation
Proven
strategy
Key
strategic concern How to sustain dominant leadership position

8-31
Strategy Options: Industry Leaders
Stay-on-the-offensive strategy Fortify-and-defend strategy
Muscle-flexing strategy
8-32
Stay-on-the-Offensive Strategies
Be
a first-mover, leading industry change defense is a good offense
Best
Concentrate Relentlessly

on achieving a competitive advantage and then widening the advantage over time pursue continuous improvement and innovation, being first to market with
Technological improvements New or better products More attractive performance features Customer service improvements
8-33
Stay-on-the-Offensive Strategies (continued)
Aggressively seek out ways to

Cut operating costs Establish competitive capabilities rivals cannot match Make it easier for potential customers to switch their purchases from other firms to the leaders own products
Aggressively attack profit sanctuaries of important rivals Launch fresh initiatives to expand overall industry demand
Spur creation of new families of products Make product more suitable for consumers in emerging-country markets Discover new uses for product Attract new users of product Promote more frequent use
8-34
Grow faster than industry, taking market share from rivals
Fortify-and-Defend Strategy
Objectives
Make
it harder for new firms to enter and for challengers to gain ground onto present market share current market position
Hold
Strengthen Protect
competitive advantage
8-35
Fortify-and-Defend Strategy: Strategic Options

Increase Provide Add
advertising and R&D more brands to match attributes of rivals
higher levels of customer service
Introduce Keep Build
personalized services to boost buyer loyalty prices reasonable and quality attractive new capacity ahead of market demand enough to remain cost competitive feasible alternative technologies
Invest Patent Sign
exclusive contracts with best suppliers and distributors

8-36
Muscle-Flexing Strategy
Objectives
Play
competitive hardball with smaller rivals that threaten leaders position smaller rivals that moves to cut into leaders business will be hard fought rivals they are better off playing follow-the-leader or else attacking each other rather the industry leader
8-37
Signal
Convince
Muscle-Flexing Strategy: Strategic Options

Be
quick to meet price cuts of rivals
Counter Offer
with large-scale promotional campaigns if rivals boost advertising better deals to rivals major customers distributors from carrying rivals products
Dissuade Provide Make Use
salespersons with documentation about weaknesses of competing products attractive offers to key executives of rivals arm-twisting tactics to pressure present customers not to use rivals products
8-38
Muscle-Flexing Strategy
Risks
Running
afoul of antitrust laws
Alienating
customers with bullying tactics
Arousing
adverse public opinion
8-39
Types of Runner-up Firms

Market
challengers
Use offensive strategies to gain market share
Focusers
Concentrate on serving a limited portion of market
Im trying!
Perennial
runners-up
Lack competitive strength to do more than continue in trailing position

8-40
Obstacles Runner-Up Firms Must Overcome

When
big size is a competitive asset, firms with small market share face obstacles in trying to strengthen their positions
Less access to economies of scale Difficulty in gaining customer recognition Inability to afford mass media advertising Difficulty in funding capital requirements
8-41
Strategic Options for Runner-Up Firms

When
big size provides larger rivals with a cost advantage, runner-up firms have two options
Build market share
Lower costs and prices to grow sales or Out-differentiate rivals in ways to grow sales
Withdraw from market

8-42
Offensive Strategies for Runner-Up Firms: Building Market Share

Acquire smaller rivals to expand companys market reach and presence Find innovative ways to drive down costs to win customers from higher-priced rivals Craft an attractive differentiation strategy Pioneer a leapfrog technological breakthrough Be first-to-market with new or better products and build reputation for product leadership Outmaneuver slow-to-change market leaders in adapting to evolving market conditions and customer needs Forge strategic alliances with key distributors, dealers, or marketers of complementary products
8-43
Rule of Offensive Strategy
Runner-up firms should avoid attacking a leader head-on with an imitative strategy, regardless of the resources and staying power an underdog may have!
8-44
Strategic Approaches for Runner-Up Firms

1. Vacant niche strategy 2. Specialist strategy 3. Superior product strategy 4. Distinctive image strategy 5. Content follower strategy
8-45
Vacant Niche Strategy for Runner-Up Firms

Focus
strategy concentrated on end-use applications market leaders have neglected of an ideal vacant niche
Characteristics

Sufficient size to be profitable Growth potential Well-suited to a firms capabilities Hard for leaders to serve
8-46
Specialist Strategy for Runner-Up Firms

Strategy
concentrated on being a leader based on

Specific technology Product uniqueness Expertise in

Special-purpose products Specialized know-how Delivering distinctive customer services

8-47
Superior Product Strategy for Runner-Up Firms

Differentiation-based

focused strategy based on
Superior product quality or Unique product attributes
Approaches

Fine craftsmanship Prestige quality Frequent product innovations Close contact with customers to gain input for better quality product
8-48
Distinctive Image Strategy for Runner-Up Firms

Strategy
concentrated on ways to stand out from rivals Approaches

Reputation for charging lowest price Prestige quality at a good price Superior customer service Unique product attributes New product introductions Unusually creative advertising
8-49
Content Follower Strategy for Runner-Up Firms

Strategy

involves avoiding
Trend-setting moves and Aggressive moves to steal customers from leaders
Approaches

Do not provoke competitive retaliation React and respond Defense rather than offense Keep same price as leaders Attempt to maintain market position
8-50
Weak Businesses: Strategic Options

Launch
an offensive turnaround strategy (if resources permit) a fortify-and-defend strategy (to the extent resources permit) a fast-exit strategy
Employ
Pursue Adopt
a harvest strategy (a slow-exit type of end-game strategy)

8-51
Achieving a Turnaround: The Strategic Options

Sell
off assets to generate cash and/or reduce debt existing strategy efforts to boost revenues
Revise Launch Cut
costs of efforts
8-52
Combination
What Is a Harvest Strategy?

Steers
middle course between status quo and exiting quickly gradually sacrificing market position in return for bigger near-term cash flow/profit
Involves
Objectives
Short-term - Generate largest feasible cash flow Long-term - Exit market

8-53
Types of Harvest Options

Reduce Hold
operating expenses to rock-bottom
reinvestment to minimum little priority on new capital investments stringent internal cost controls
Place
Emphasize Trim Do
advertising and promotion expenses
not replace employees who leave equipment maintenance

8-54
Shave
When Should a Harvest Strategy Be Considered?

Industrys Building Market
long-term prospects are unattractive
up business would be too costly
share is increasingly costly to maintain
Reduced Firm
levels of competitive effort will not trigger immediate fall-off in sales can re-deploy freed-up resources in higher opportunity areas is not a major component of diversified firms portfolio of businesses
8-55
Business
Liquidation Strategy
Wisest

strategic option in certain situations
Lack of resources Dim profit prospects May serve stockholder interests better than bankruptcy
Unpleasant

strategic option
Hardship of job eliminations Effects of closing on local community

8-56
10 Commandments for Crafting Successful Business Strategies

1. Always put top priority on crafting and executing strategic moves that enhance a firms competitive position for the long-term and that serve to establish it as an industry leader. 2. Be prompt in adapting and responding to changing market conditions, unmet customer needs and buyer wishes for something better, emerging technological alternatives, and new initiatives of rivals. Responding late or with too little often puts a firm in the precarious position of playing catchup.
8-57

3. Invest in creating a sustainable competitive advantage, for it is a most dependable contributor to above-average profitability. 4. Avoid strategies capable of succeeding only in the best of circumstances. 5. Dont underestimate the reactions and the commitment of rival firms. 6. Consider that attacking competitive weakness is usually more profitable than attacking competitive strength. 7. Be judicious in cutting prices without an established cost advantage.
8-58

8. Employ bold strategic moves in pursuing differentiation strategies so as to open up very meaningful gaps in quality or service or advertising or other product attributes. 9. Endeavor not to get stuck back in the pack with no coherent long-term strategy or distinctive competitive position, and little prospect of climbing into the ranks of the industry leaders. 10. Be aware that aggressive strategic moves to wrest crucial market share away from rivals often provoke aggressive retaliation in the form of a marketing arms race and/or price wars.
8-59
Test Your Knowledge

Which of the following does not qualify as a "commandment" for crafting successful business strategies?
A. Place top priority on crafting and executing strategic moves that will enhance a company's competitive position for the long-term. B. Avoid stuck-in-the-middle strategies that represent compromises between lower costs and greater differentiation and between broad and narrow market appeal. C. Strive to open up very meaningful gaps in quality or service or performance features when pursuing a differentiation strategy. D. Be judicious in cutting prices without an established cost advantage. E. Sell or close a crisis-ridden business immediatelyturnaround strategies are doomed to fail.
8-60
9
Diversification:
Chapter Title Strategies for Managing a Group of Businesses
16/e PPT
McGraw-Hill/Irwin
To acquire or not to acquire: that is the question.

Robert J. Terry
9-2
Make winners out of every business in your company. Dont carry losers.
Jack Welch Former CEO, General Electric
9-3
Chapter Roadmap

When to Diversify Building Shareholder Value: The Ultimate Justification for Diversifying Strategies for Entering New Businesses Choosing the Diversification Path: Related versus Unrelated Businesses The Case for Diversifying into Related Businesses The Case for Diversifying into Unrelated Businesses Combination Related-Unrelated Diversification Strategies Evaluating the Strategy of a Diversified Company After a Company Diversifies: The Four Main Strategy Alternatives
9-4
Diversification and Corporate Strategy

A
company is diversified when it is in two or more lines of business that operate in diverse market environments in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business
Strategy-making
A diversified company needs a multi-industry, multi-business strategy A strategic action plan must be developed for several different businesses competing in diverse industry environments
9-5
Four Main Tasks in Crafting Corporate Strategy

Pick
new industries to enter and decide on means of entry actions to boost combined performance of businesses opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage investment priorities, steering resources into most attractive business units
9-6
Initiate
Pursue
Establish
Competitive Strengths of a Single-Business Strategy

Less

ambiguity about
Who we are What we do Where we are headed
Resources

can be focused on
Improving competitiveness Expanding into new geographic markets Responding to changing market conditions Responding to evolving customer preferences
9-7
Risks of a Single Business Strategy

Putting If
all the eggs in one industry basket
market becomes unattractive, a firms prospects can quickly dim changes can undermine a single business firms prospects

Unforeseen
Technological innovation New products Changing customer needs New substitutes

9-8
When Should a Firm Diversify?

It
is faced with diminishing growth prospects in present business It has opportunities to expand into industries whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors It can reduce costs by diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses
9-9
Why Diversify?
To build shareholder value!
1+1=3
Diversification is capable of building shareholder value if it passes three tests

Industry Attractiveness Test the industry presents good long-term profit opportunities Cost of Entry Test the cost of entering is not so high as to spoil the profit opportunities Better-Off Test the companys different businesses should perform better together than as stand-alone enterprises, such that company As diversification into business B produces a 1 + 1 = 3 effect for shareholders
9-10
Strategies for Entering New Businesses
Acquire existing company Internal start-up
Joint ventures/strategic partnerships

9-11
Acquisition of an Existing Company

Most
popular approach to diversification
Advantages

Quicker entry into target market Easier to hurdle certain entry barriers

Acquiring technological know-how Establishing supplier relationships Becoming big enough to match rivals efficiency and costs Having to spend large sums on introductory advertising and promotion Securing adequate distribution access
9-12
Internal Startup
More
attractive when
Parent firm already has most of needed resources to build a new business Ample time exists to launch a new business Internal entry has lower costs than entry via acquisition New start-up does not have to go head-to-head against powerful rivals Additional capacity will not adversely impact supply-demand balance in industry Incumbents are slow in responding to new entry
9-13
Joint Ventures and Strategic Partnerships

Good

way to diversify when
Uneconomical or risky to go it alone Pooling competencies of two partners provides more competitive strength Only way to gain entry into a desirable foreign market
Foreign

partners are needed to
Surmount tariff barriers and import quotas Offer local knowledge about
Market conditions Customs and cultural factors Customer buying habits Access to distribution outlets
9-14
Drawbacks of Joint Ventures

Raises

questions
Which partner will do what Who has effective control
Potential

conflicts
Conflicting objectives Disagreements over how to best operate the venture Culture clashes
9-15
Related vs. Unrelated Diversification

Related Diversification
Involves diversifying into businesses whose value chains possess competitively valuable strategic fits with value chain(s) of firms present business(es)
Unrelated Diversification
Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firms present business(es)
9-16
Fig. 9.1: Strategy Alternatives for a Company Looking to Diversify
9-17
What Is Related Diversification?

Involves
diversifying into businesses whose value chains possess competitively valuable strategic fits with the value chain(s) of the present business(es) the strategic fits makes related diversification a 1 + 1 = 3 phenomenon
Capturing
9-18
Core Concept: Strategic Fit

Exists
whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for
Transferring competitively valuable expertise or technological know-how from one business to another Combining performance of common value chain activities to achieve lower costs Exploiting use of a well-known brand name Cross-business collaboration to create competitively valuable resource strengths and capabilities
9-19
Fig. 9.2: Related Businesses Possess Related Value Chain Activities and Competitively Valuable Strategic Fits
9-20
Strategic Appeal of Related Diversification

Reap

competitive advantage benefits of
Skills transfer Lower costs Common brand name usage Stronger competitive capabilities
Spread
investor risks over a broader base strategic unity across businesses
Preserve Achieve
consolidated performance greater than the sum of what individual businesses can earn operating independently (1 + 1 = 3 outcomes)
9-21
Types of Strategic Fits

Cross-business
strategic fits can exist anywhere along the value chain

R&D
and technology activities chain activities activities
Supply
Manufacturing Sales
and marketing activities activities and administrative support activities

9-22
Distribution Managerial
R&D and Technology Fits

Offer
potential for sharing common technology or transferring technological know-how benefits
Potential
Cost-savings in technology development and new product R&D Shorter times in getting new products to market Interdependence between resulting products leads to increased sales
9-23
Supply Chain Fits

Offer
potential opportunities for skills transfer and/or lower costs

Procuring materials Greater bargaining power in negotiating with common suppliers Benefits of added collaboration with common supply chain partners Added leverage with shippers in securing volume discounts on incoming parts
9-24
Manufacturing Fits
Potential
source of competitive advantage when a diversifiers expertise can be beneficially transferred to another business

Quality manufacture Cost-efficient production methods
Cost-saving
opportunities arise from ability to perform manufacturing/assembly activities jointly in same facility, making it feasible to

Consolidate production into fewer plants Significantly reduce overall manufacturing costs
9-25
Distribution Fits
Offer
potential cost-saving opportunities
Share same distribution facilities
Use many of same wholesale distributors and retail dealers to access customers
9-26
Sales and Marketing Fits: Types of Potential Benefits

Reduction

in sales costs
Single sales force for related products Advertising related products together Combined after-sale service and repair work Joint delivery, shipping, order processing and billing Joint promotion tie-ins
Similar
sales and marketing approaches provide opportunities to transfer selling, merchandising, and advertising/promotional skills Transfer of a strong companys brand name and reputation
9-27
Managerial and Administrative Support Fits

Emerge

when different business units require comparable types of

Entrepreneurial know-how Administrative know-how Operating know-how
Different

businesses often entail same types of administrative support facilities

Customer data network Billing and customer accounting systems Customer service infrastructure
9-28
Core Concept: Economies of Scope

Stem
from cross-business opportunities to reduce
costs
Arise when costs can be cut by operating two or more businesses under same corporate umbrella Cost saving opportunities can stem from interrelationships anywhere along the value chains of different businesses
9-29
Related Diversification and Competitive Advantage

Competitive
advantage can result from related diversification when a company captures crossbusiness opportunities to

Transfer expertise/capabilities/technology from one business to another Reduce costs by combining related activities of different businesses into a single operation Transfer use of firms brand name reputation from one business to another Create valuable competitive capabilities via crossbusiness collaboration in performing related value chain activities
9-30
From Competitive Advantage to Added Gains in Shareholder Value

Capturing

cross-business strategic fits
Is possible only via a strategy of related diversification Builds shareholder value in ways shareholders cannot achieve by owning a portfolio of stocks of companies in unrelated industries Is not something that happens automatically when a company diversifies into related businesses
Strategic fit benefits materialize only after management has successfully pursued internal actions to capture them
9-31
Test Your Knowledge

Which of the following is the best example of related diversification?
A. A manufacturer of golf shoes diversifying into the production of fishing rods and fishing lures B. A homebuilder acquiring a building materials retailer C. A steel producer acquiring a manufacturer of farm equipment D. A producer of snow skis and ski boots acquiring a maker of ski apparel and accessories (outerwear, goggles, gloves and mittens, helmets and toboggans) E. A publisher of college textbooks acquiring a publisher of magazines
9-32
What Is Unrelated Diversification?

Involves

diversifying into businesses with
No strategic fit No meaningful value chain relationships No unifying strategic theme
Basic
approach Diversify into any industry where potential exists to realize good financial results industry attractiveness and cost-of-entry tests are important, better-off test is secondary
9-33
While
Fig. 9.3: Unrelated Unrelated Businesses Have Unrelated and No Fig. 9.3: Businesses Have Unrelated Value Chains Strategic Fits Value Chains and No Strategic Fits
9-34
Acquisition Criteria For Unrelated Diversification Strategies

Can
business meet corporate targets for profitability and ROI? Is business in an industry with growth potential? Is business big enough to contribute to parent firms bottom line? Will business require substantial infusions of capital? Is there potential for union difficulties or adverse government regulations? Is industry vulnerable to recession, inflation, high interest rates, or shifts in government policy?
9-35
Attractive Acquisition Targets

Companies
with undervalued assets
Capital gains may be realized
Companies
in financial distress
May be purchased at bargain prices and turned around
Companies
with bright growth prospects but short on investment capital
Cash-poor, opportunity-rich companies are coveted acquisition candidates

9-36
Appeal of Unrelated Diversification

Business Financial
risk scattered over different industries
resources can be directed to those industries offering best profit prospects bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced of profits Hard times in one industry may be offset by good times in another industry
9-37
If
Stability
Building Shareholder Value via Unrelated Diversification

Corporate
managers must
Do a superior job of diversifying into new businesses capable of producing good earnings and returns on investments Do an excellent job of negotiating favorable acquisition prices Do a good job overseeing businesses so they perform at a higher level than otherwise possible Shift corporate financial resources from poorlyperforming businesses to those with potential for above-average earnings growth Discern when it is the right time to sell a business at the right price
9-38
Key Drawbacks of Unrelated Diversification
Demanding Managerial Requirements Limited Competitive Advantage Potential

9-39
Unrelated Diversification Has Demanding Managerial Requirements

The

greater the number and diversity of businesses, the harder it is for managers to
Discern good acquisitions from bad ones Select capable managers to manage the diverse requirements of each business Judge soundness of strategic proposals of business-unit managers Know what to do if a business subsidiary stumbles
Likely effect is 1 + 1 = 2, rather than 1 + 1 = 3!

9-40
Unrelated Diversification Offers Limited Competitive Advantage Potential

Lack
of cross-business strategic fits means unrelated diversification offers no competitive advantage potential beyond what each business can generate on its own
Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse) Promise of greater sales-profit stability over business cycles is seldom realized
9-41
Test Your Knowledge

Which of the following is the best example of unrelated diversification?
A. PepsiCo acquiring Tropicana and Procter & Gamble acquiring Gillette B. Honda diversifying into the production of lawnmowers C. Smuckers acquiring Jif peanut butter and Crisco (from Procter & Gamble) D. Verizon Wireless acquiring Amazon.com E. Harley Davidson acquiring the motorcycle business of Honda
9-42
Diversification and Shareholder Value

Related
Diversification
A strategy-driven approach to creating shareholder value
Unrelated
Diversification
A finance-driven approach to creating shareholder value

9-43
Combination Related-Unrelated Diversification Strategies
Dominant-business firms
One major core business accounting for 50 - 80 percent of revenues, with several small related or unrelated businesses accounting for remainder Diversification includes a few (2 - 5) related or unrelated businesses Diversification includes a wide collection of either related or unrelated businesses or a mixture Diversification portfolio includes several unrelated groups of related businesses
9-44
Narrowly diversified firms
Broadly diversified firms
Multibusiness firms

Newell Rubbermaid is in the following businesses:
Cleaning and Organizations Businesses: Rubbermaid storage, organization and cleaning products, Blue Ice ice substitute, Roughneck storage items, Stain Shield and TakeAlongs food storage containers, and Brute commercial-grade storage and cleaning products25% of annual revenues. Home and Family Businesses: Calphalon cookware and bakeware, Cookware Europe, Graco strollers, Little Tikes children's toys and furniture, and Goody hair accessories20% of annual sales. Home Fashions: Levolor and Kirsch window blinds, shades, and hardware in the U.S.; Swish, Gardinia and Harrison Drape home furnishings in Europe15% of annual revenues. Office Products Businesses: Sharpie markers, Sanford highlighters, Eberhard Faber and Berol ballpoint pens, Paper Mate pens and pencils, Waterman and Parker fine writing instruments, and Liquid Paper25% of annual revenues.
Would you say that Newell Rubbermaids strategy is one of related diversification, unrelated diversification or a mixture of both? Explain.
9-45

McGraw-Hill, the publisher of the textbook for this course, is in the following businesses:

Textbook publishing (for grades K-12 and higher education) Financial and information services (it owns Standard & Poors a well-known financial ratings agency and provider of financial data, Platts a provider of energy information, and McGraw-Hill Construction a provider of construction related information) Magazine publishing its flagship publication is Business Week and it is also the publisher of Aviation Week TV broadcasting it owns four ABC affiliate stations (in Indianapolis, Denver, San Diego, and Bakersfield) J.D. Power & Associates which provides a host of services relating to product quality and consumer satisfaction
Would you say that McGraw-Hills strategy is one of related diversification, unrelated diversification or a mixture of both? Explain.
9-46
Fig. 9.4: Identifying a Diversified Companys Strategy
9-47
How to Evaluate a Diversified Companys Strategy

Step 1: Assess long-term attractiveness of each industry firm is in Step 2: Assess competitive strength of firms business units Step 3: Check competitive advantage potential of crossbusiness strategic fits among business units Step 4: Check whether firms resources fit requirements of present businesses Step 5: Rank performance prospects of businesses and determine priority for resource allocation Step 6: Craft new strategic moves to improve overall company performance
9-48
Step 1: Evaluate Industry Attractiveness Attractiveness of each industry in portfolio Each industrys attractiveness relative to the others Attractiveness of all industries as a group
9-49
Industry Attractiveness Factors

Market
size and projected growth of competition opportunities and threats of cross-industry strategic fits requirements and cyclical factors
Intensity
Emerging Presence Resource Seasonal Social,
political, regulatory, and environmental factors profitability

9-50
Industry Degree
of uncertainty and business risk
Procedure: Calculating Attractiveness Scores for Each Industry

Step 1: Select industry attractiveness factors Step 2: Assign weights to each factor (sum of weights = 1.0) Step 3: Rate each industry on each factor, using a scale of 1 to 10 Step 4: Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry
9-51
9-52
Interpreting Industry Attractiveness Scores

Industries If
with a score much below 5.0 do not pass the attractiveness test a companys industry attractiveness scores are all above 5.0, the group of industries the firm operates in is attractive as a whole be a strong performer, a diversified firms principal businesses should be in attractive industriesthat is, industries with

To
A good outlook for growth and Above-average profitability

9-53
Difficulties in Calculating Industry Attractiveness Scores

Deciding
on appropriate weights for industry attractiveness factors

Different analysts may have different views about which weights are appropriate for the industry attractiveness factors Different weights may be appropriate for different companies
Gaining
sufficient command of an industry to assign accurate and objective ratings

Gathering statistical data to assign objective ratings is straightforward for some factors market size, growth rate, industry profitability Assessing the intensity of competition factor is more difficult due to the different types of competitive influences
9-54
Step 2: Evaluate Each BusinessUnits Competitive Strength

Objectives
Appraise how well each business is positioned in its industry relative to rivals Evaluate whether it is or can be competitively strong enough to contend for market leadership
9-55
Factors to Use in Evaluating Competitive Strength

Relative
market share Costs relative to competitors Ability to match/beat rivals on key product attributes Ability to benefit from strategic fits with sister businesses Ability to exercise bargaining leverage with key suppliers or customers Caliber of alliances and collaborative partnerships Brand image and reputation Competitively valuable capabilities Profitability relative to competitors
9-56
Procedure: Calculating Competitive Strength Scores for Each Business

Step 1: Select competitive strength factors Step 2: Assign weights to each factor (sum of weights = 1.0) Step 3: Rate each business on each factor, using a scale of 1 to 10 Step 4: Calculate weighted ratings; sum to get an overall strength rating for each business
9-57
9-58
Interpreting Competitive Strength Scores

Business
units with ratings above 6.7 are strong market contenders with ratings in the 3.3 to 6.7 range have moderate competitive strength vis--vis rivals units with ratings below 3.3 are in competitively weak market positions a diversified firms businesses all have scores above 5.0, its business units are all fairly strong market contenders
9-59
Businesses
Business
If
Plotting Industry Attractiveness and Competitive Strength in a Nine-Cell Matrix

Use
industry attractiveness (see Table 9.1) and competitive strength scores (see Table 9.2) to plot location of each business in matrix

Industry attractiveness plotted on vertical axis Competitive strength plotted on horizontal axis
Each
business unit appears as a bubble
Size of each bubble is scaled to percentage of revenues the business generates relative to total corporate revenues
9-60
Fig. 9.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix
9-61
Strategy Implications of Attractiveness/Strength Matrix

Businesses

in upper left corner
Accorded top investment priority Strategic prescription grow and build
Businesses

in three diagonal cells
Given medium investment priority Invest to maintain position
Businesses

in lower right corner
Candidates for harvesting or divestiture May, based on potential for good earnings and ROI, be candidates for an overhaul and reposition strategy
9-62
Appeal of Attractiveness/Strength Matrix

Incorporates Strategy
a wide variety of strategically relevant variables implications

Concentrate corporate resources in businesses that enjoy high degree of industry attractiveness and high degree of competitive strength Make selective investments in businesses with intermediate positions on grid Withdraw resources from businesses low in attractiveness and strength unless they offer exceptional potential
9-63
Test Your Knowledge

The 9-cell industry attractiveness-competitive strength matrix
A. is a valuable tool for ranking a companys different businesses from most profitable to least profitable. B. shows which of a diversified companys businesses have good/poor strategic fit. C. indicates which businesses have the highest/lowest economies of scope. D. is a helpful tool for allocating a diversified companys resourcesthe basic idea is to give top investment priority to those businesses in the upper left portion of the matrix and to give low priority or perhaps even divest businesses in the lower right portion of the matrix. E. pinpoints which of a diversified companys businesses are resourcerich and which are resource-poor.
9-64
Step 3: Check Competitive Advantage Potential of Cross-Business Strategic Fits

Objective
Determine competitive advantage potential of crossbusiness strategic fits among portfolio businesses
Examine
strategic fit based on
Whether one or more businesses have valuable strategic fits with other businesses in portfolio Whether each business meshes well with firms long-term strategic direction
9-65
Evaluate Portfolio for Competitively Valuable Cross-Business Strategic Fits

Identify
businesses which have value chain match-ups offering opportunities to

Reduce costs

Purchasing Manufacturing Distribution
Transfer skills / technology / intellectual capital from one business to another Share use of a well-known, competitively powerful brand name Create valuable new competitive capabilities
9-66
Fig. 9.6: Identifying Competitive Advantage
Potential of Cross-Business Strategic Fits
9-67
Step 4: Check Resource Fit

Objective
Determine how well firms resources match business unit requirements
Good
resource fit exists when
A business adds to a firms resource strengths, either financially or strategically Firm has resources to adequately support requirements of its businesses as a group
9-68
Check for Financial Resource Fits

Determine
cash flow and investment requirements of business units

Which are cash hogs and which are cash cows?
Assess

cash flow of each business
Highlights opportunities to shift financial resources between businesses Explains why priorities for resource allocation can differ from business to business Provides rationalization for both invest-and-expand and divestiture strategies
9-69
Characteristics of Cash Hog Businesses

Internal
cash flows are inadequate to fully fund needs for working capital and new capital investment
Parent company has to continually pump in capital to feed the hog
Strategic
options
Aggressively invest in attractive cash hogs Divest cash hogs lacking long-term potential
9-70
Characteristics of Cash Cow Businesses

Generate Such

cash surpluses over what is needed to sustain present market position businesses are valuable because surplus cash can be used to
Pay corporate dividends Finance new acquisitions Invest in promising cash hogs
Strategic

objectives
Fortify and defend present market position Keep the business healthy
9-71
Other Tests of Resource Fits
Does the business adequately contribute to achieving companywide performance targets? Does the company have adequate financial strength to fund its different businesses and maintain a healthy credit rating? Does the company have or can it develop the specific resource strengths and competitive capabilities needed to be successful in each of its businesses? Are recently acquired businesses acting to strengthen a companys resource base and competitive capabilities or are they causing its competitive and managerial resources to be stretched too thin?
9-72
Good vs. Poor Financial Resource Fit

Good

financial fit exists when a business
Contributes to achievement of corporate objectives Enhances shareholder value
Poor

financial fit exists when a business
Soaks up disproportionate share of financial resources Is an inconsistent bottom-line contributor Experiences a profit downturn that could jeopardize entire company Is too small to make a sizable contribution to total corporate earnings
9-73
A Note of Caution: Why Diversification Efforts Can Fail

Trying
to replicate a firms success in one business and hitting a second home run in a new business is easier said than done resource capabilities to new businesses can be far more arduous and expensive than expected can misjudge difficulty of overcoming resource strengths of rivals it will face in a new business
9-74
Transferring
Management
Step 5: Rank Business Units Based on Performance and Priority for Resource Allocation
Factors
to consider in judging business-unit performance

Sales growth Profit growth Contribution to company earnings Return on capital employed in business Economic value added Cash flow generation Industry attractiveness and business strength ratings
9-75
Determine Priorities for Resource Allocation

Objective
Get the biggest bang for the buck in allocating corporate resources
Approach
2 3 6 4 5
Rank each business from highest to lowest priority for corporate resource support and new capital investment Steer resources from low- to high-opportunity areas When funds are lacking, strategic uses of resources should take precedence
9-76
Fig. 9.7: The Chief Strategic and Financial Options for Allocating a Diversified Companys Financial Resources
9-77
Step 6: Craft New Strategic Moves Strategic Options

Stick
closely with existing business lineup and pursue opportunities it presents companys business scope by making new acquisitions in new industries certain businesses and retrench to a narrower base of business operations companys business lineup, putting a whole new face on business makeup multinational diversification, striving to globalize operations of several business units
9-78
Broaden
Divest
Restructure
Pursue
Fig. 9.8: A Companys Four Main Strategic Alternatives After It Diversifies
9-79
Strategies to Broaden a Diversified Companys Business Base

Conditions

making this approach attractive
Slow grow in current businesses Vulnerability to seasonal or recessionary influences or to threats from emerging new technologies Potential to transfer resources and capabilities to other related businesses Rapidly-changing conditions in one or more core industries alter buyer requirements Complement and strengthen market position of one or more current businesses
9-80
Divestiture Strategies Aimed at Retrenching to a Narrower Diversification Base

Strategic
options Retrench ? Divest ? Close ? Sell ?
Retrench to a smaller but more appealing group of businesses Divest unattractive businesses

Sell it Spin it off as independent company Liquidate it (close it down because no buyers can be found)
9-81
Retrenchment Strategies
Objective
Reduce scope of diversification to smaller number of core businesses
Strategic

options involve divesting businesses that

Are losing money Have little growth potential Have little strategic fit with core businesses Are too small to contribute meaningfully to earnings
9-82
Conditions That Make Retrenchment Attractive

Diversification Deteriorating
efforts have become too broad, resulting in difficulties in profitably managing all the businesses market conditions in a once-attractive industry
Lack A A
of strategic or resource fit of a business
business is a cash hog with questionable long-term potential business is weakly positioned in its industry that turn out to be misfits
Businesses One
or more businesses lack compatibility of values essential to cultural fit

9-83
Options for Accomplishing Divestiture
Sell it
Involves finding a company which views the business as a good deal and good fit
Spin it off as independent company
Involves deciding whether or not to retain partial ownership
Liquidation
Involves closing down operations and selling remaining assets A last resort because no buyer can be found
9-84
Strategies to Restructure a Companys Business Lineup

Objective
Make radical changes in mix of businesses in portfolio via both

Divestitures and New acquisitions
to put a whole new face on the companys business makeup

9-85
Conditions That Make Portfolio Restructuring Attractive

Too many businesses in unattractive industries Too many competitively weak businesses Ongoing declines in market shares of one or more major business units Excessive debt load Ill-chosen acquisitions performing worse than expected New technologies threaten survival of one or more core businesses Appointment of new CEO who decides to redirect company Unique opportunity emerges and existing businesses must be sold to finance new acquisition
9-86
Multinational Diversification Strategies

Distinguishing

characteristics
Diversity of businesses and Diversity of national markets
Presents
a big strategy-making challenge
Strategies must be conceived and executed for each business, with as many multinational variations as appropriate Cross-business and cross-country collaboration opportunities must be pursued and managed
9-87
Appeal of Multinational Diversification Strategies

Offer
two avenues for long-term growth in revenues and profits
Enter additional businesses
Extend operations of existing businesses into additional country markets

9-88
Opportunities to Build Competitive Advantage via Multinational Diversification

Full
capture of economies of scale and experience curve effects on cross-business economies of scope
Capitalize Transfer
competitively valuable resources from one business to another and from one country to another use of a competitively powerful brand name
Leverage
Coordinate Use
strategic activities and initiatives across businesses and countries cross-business or cross-country subsidization to out-compete rivals
9-89
Competitive Strength of a DMNC in Global Markets

Competitive
advantage potential is based on
Using a related diversification strategy based on
Resource-sharing and resource-transfer opportunities among businesses Economies of scope and brand name benefits
Managing related businesses to capture important crossbusiness strategic fits Using cross-market or cross-business subsidization sparingly to secure footholds in attractive country markets
9-90
Competitive Power of a DMNC in Global Markets

A
DMNC has a strategic arsenal capable of defeating both a domestic-only rival or a singlebusiness rival by competing in

Multiple businesses and Multiple country markets
Can
use its multiple profit sanctuaries and can employ cross-subsidization tactics if need be
9-91
10
Strategy, Chapter Title Ethics, and Social Responsibility
16/e PPT
McGraw-Hill/Irwin
There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say engages in free and open competition, without deception or
Milton Friedman, Nobel Prize-winning economist
fraud.
10-2
Chapter Roadmap

What Do We Mean by Business Ethics? Where Do Ethical Standards Come From Are They Universal or Dependent on Local Norms and Situational Circumstances? The Three Categories of Management Morality Do Company Strategies Need to be Ethical? Why Should Company Strategies Be Ethical? Linking a Companys Strategy to its Ethical Principles and Core Values Strategy and Social Responsibility
10-3
Linking Strategy to Ethics and Social Responsibility Key Issues

Should
there be a link between a companys efforts to craft and execute a winning strategy and its duties to

Conduct activities in an ethical manner? Demonstrate socially responsible behavior by

Being a committed corporate citizen? Attending to needs of non-owner stakeholders?

10-4
What Is Business Ethics?

Business
ethics involves applying general ethical principles and standards to business behavior principles in business are not different from ethical principles in general actions are judged
Ethical
Business

By general ethical standards of society Not by a set of rules businesspeople apply to their own conduct
10-5
Are Ethical Standards Universal or Dependent on Local Norms?

Three schools of thought regarding extent to which ethical standards can be applied . . . Ethical Universalism
Ethical Relativism
Integrative Social Contracts Theory

10-6
Concept of Ethical Universalism

According
to the school of ethical universalism . . .
Same standards of what is ethical and what is unethical resonate with peoples of most societies regardless of

Local traditions and Cultural norms
Thus, common ethical standards can be used to judge conduct of personnel at companies operating in a variety of

Country markets and Cultural circumstances

10-7
Examples of Universal Ethical Principles or Norms

Honesty Trustworthiness Treating
people with dignity and respect rights of others the Golden Rule
Respecting Practicing Avoiding

unnecessary harm to
Workers Users of a companys product or service
Respecting
the environment
10-8
What Is the Appeal of Ethical Universalism?

Draws
on collective views of multiple societies and cultures to place clear boundaries on what constitutes
Ethical business behavior and Unethical business behavior Regardless of what country a company is operating in
Whenever basic moral standards do not vary significantly according to local cultural beliefs, traditions, or religious convictions, a multinational company can
Apply a code of ethics more or less evenly across its worldwide operations
10-9
Concept of Ethical Relativism

According
to the school of ethical relativism . . .
Different societies/cultures/countries

Put more/less emphasis on some values than others Have different standards of right and wrong Have different social mores and behavioral norms
What is ethical or unethical
Must be judged in light of local customs and social mores and Can vary from one country to another
10-10
Payment of Bribes and Kickbacks

A
thorny ethical problem is faced by multinational companies

Degree
of cross-country variability in paying bribes as part of business transactions
Companies
forbidding payment of bribes in their codes of ethics face a formidable challenge in countries where payments are entrenched as a local custom Corrupt Practices Act prohibits U.S. companies from paying bribes in all countries where they do business
10-11
Foreign
Test Your Knowledge

Paying bribes and kickbacks to grease business transactions
A. violates ethical principles of right and wrong in all countries. B. is ethically acceptable according to the principle of ethical universalism. C. is acceptable to immoral managers but not to amoral managers. D. should be considered ethically appropriate by a company so long as such payments are normal and customary in the countries where such payments are made. E. may be ethically acceptable according to the principle of ethical relativism if paying bribes and kickbacks is normal and customary practice in a country.
10-12
Ethical Relativism = Multiple Sets of Ethical Standards

Proponents
of the ethical relativism school maintain
there are

Few ethical absolutes to judge a companys conduct in various countries Plenty of situations where ethical norms are contoured to fit

Local customs and traditions Local beliefs about what is fair Local standards of right and wrong
Ethical
problems in business cannot be fully resolved without appealing to the shared convictions of the parties in question
10-13
Drawbacks of Ethical Relativism

The

ethical relativism rule of when in Rome, do as the Romans do presents problems

When the envelope is pushed, it is tantamount to rudderless ethical standards It is ethically dangerous for company personnel to assume that local ethical standards are an adequate guide to ethical behavior

What if local standards condone kickbacks and bribery? What if local standards blink at environmental degradation?
From a global markets perspective, ethical relativism results in a maze of conflicting ethical standards for multinational companies wanting to address the issue of what ethical standards to enforce companywide
10-14
Concept of Integrative Social Contracts Theory

According
to the integrative social contracts theory, the ethical standards a company should try to uphold are governed by both
A limited number of universal ethical principles that are widely recognized as putting legitimate ethical boundaries on actions and behavior in all situations and The circumstances of local cultures, traditions, and shared values that further prescribe what constitutes

Ethically permissible behavior and What does not

10-15
Appeal of Integrative Social Contracts Theory
Universal ethical principles establish moral free space based on the collective view of multiple societies and cultures Commonly held views about morality and ethical principles combine to form a social contract with society It is appropriate for societies or companies to go beyond universal ethical principles and specify local or second-order ethical norms
Where firms have developed ethical codes, the standards they call for provide appropriate ethical guidance Social contracts theory maintains adherence to universal or first-order ethical norms should always take precedence over local or second-order norms!
10-16
Three Categories of Management Morality
Moral manager Managerial ethical and moral principles Immoral manager Amoral manager
10-17
Characteristics of a Moral Manager

Dedicated

to high standards of ethical behavior in
Own actions How the companys business is to be conducted
Considers

it important to
Be a steward of ethical behavior Demonstrate ethical leadership
Pursues

business success
Within confines of both letter and spirit of laws With a habit of operating well above what laws require
10-18
Characteristics of an Immoral Manager

Actively Willfully Views Is
opposes ethical behavior in business
ignores ethical principles in making decisions legal standards as barriers to overcome own self-interests
Pursues Ignores
an example of capitalistic greed interests of others
Focuses Will
only on bottom line making ones numbers trample on others to avoid being trampled upon
10-19
Characteristics of an Intentionally Amoral Manager

Believes

business and ethics should not be mixed since different rules apply to
Business activities Other realms of life
Does
not factor ethical considerations into own actions since business activity lies outside sphere of moral judgment Views ethics as inappropriate for tough, competitive business world Concept of right and wrong is lawyer-driven (what can we get by with without running afoul of the law)
10-20
Characteristics of an Unintentionally Amoral Manager

Is
blind to or casual about ethics of decision-making and business actions lack of concern regarding whether ethics applies to company actions self as well-intentioned or personally ethical beliefs
Displays Sees
Typical
Do what is necessary to comply with laws and regulations Government provides legal framework stating what society will put up withif it is not illegal, it is allowed
10-21
Evidence of Managerial Immorality in the Global Business Community

Evidence
exists a sizable majority of managers are
either

Amoral or Immoral
Results
of the 2005 Global Corruption Report indicate corruption is widespread across the world extends beyond bribes and kickbacks
10-22
Corruption
10-23
10-24
10-25
Do Company Strategies Need to Be Ethical?

Approaches

of most company managers
Ensure a companys strategy is legal May or may not ensure all elements of strategies are ethical
Approach
of senior executives with strong ethical convictions

Insist all aspects of strategy fall within ethical boundaries
Approach

of immoral or amoral senior executives

Use shady strategies if they think they can get by with it Use unethical or borderline business practices Hide ethically questionable actions
10-26
What Are the Drivers of Unethical Strategies and Business Behavior?

Large numbers of immoral and amoral business people Overzealous pursuit of personal gain, wealth, and other selfish interests Heavy pressures on company managers to meet or beat earnings targets Company cultures that place profits and good performance ahead of ethical behavior
10-27
Overzealous Pursuit of Personal Gain, Wealth, and Selfish Interests

People
obsessed with wealth accumulation, greed, power, and status often

Push ethical principles aside in their quest for self gain Exhibit few qualms in doing whatever is necessary to achieve their goals Look out for their own best interests Have few scruples and ignore welfare of others Engage in all kinds of unethical strategic maneuvers and behaviors
10-28
Heavy Pressures on Company Managers to Meet or Beat Earnings Targets

Managers often feel enormous pressure to do whatever it takes to deliver good financial performance Actions often taken by managers

Cut costs wherever savings show up immediately Squeeze extra sales out of early deliveries Engage in short-term maneuvers to make the numbers Stretch rules to extreme, until limits of ethical conduct are overlooked
Executives feel pressure to hit performance targets since their compensation depends heavily on company performance Fundamental problem with a make the numbers syndrome
Company does not serve its customers or shareholders well by placing top priority on the bottom line
10-29
Company Culture Places Profits and Good Performance Ahead of Ethical Behavior
In
an ethically corrupt or amoral work climate, people have a company-approved license to

Ignore whats right and stretch rules Engage in most any behavior or employ most any strategy they think they can get away with Play down relevance of ethical strategic actions and business conduct
Pressures

to conform to cultural norms can prompt otherwise honorable people to

Make ethical mistakes Succumb to the many opportunities to engage in unethical practices and shady behavior
10-30
Approaches to Managing a Companys Ethical Conduct Unconcerned or non-issue approach Damage control approach Compliance approach Ethical culture approach
10-31
10-32
Characteristics of Unconcerned Approach

Prevalent
at companies whose executives are immoral and unintentionally amoral Notions of right and wrong in business matters are defined by government via prevailing laws and regulations after that, anything goes If the law permits unethical behavior, why stand on ethical principles Companies are usually out to make greatest possible profit at most any cost Strategies used, while legal, may embrace elements that are ethically shady
10-33
Characteristics of Damage Control Approach

Favored
at companies whose managers are intentionally amoral but who fear scandal May adopt a code of ethics as window-dressing Adept at using spin to explain away the use of unethical strategy elements or discount the impact of shady actions Executives look the other way when shady behavior occurs Executives may condone questionable actions that help a company reach earnings targets or bolster its market standing
10-34
Characteristics of Compliance Approach

From
light to forceful compliance is favored at companies whose managers

Lean toward being somewhat amoral but are highly concerned about having ethically upstanding reputations or Are moral and see strong compliance methods as best way to impose and enforce high ethical standards
Emphasis
is on securing broad compliance and measuring degree to which ethical standards are upheld Commitment to eradicate unethical behavior stems from a desire to
Avoid cost and damage associated with unethical conduct or Gain favor from stakeholders from having a highly regarded reputation for ethical behavior
10-35
Pursuing a Compliance Approach: Typical Actions

Make
code of ethics a visible and regular part of communications with employees ethics training programs a chief ethics officer
Implement Appoint Have
ethics committees to give guidance on ethics matters
Institute
formal procedures for investigating alleged ethics violations ethics audits to measure and document compliance ethics awards to employees for outstanding efforts to create an ethical climate ethics hotlines to help detect and deter violations
10-36
Conduct Give
Install
Potential Weakness of Compliance Approach

Moral
control resides in a companys code of ethics and in the ethics compliance system rather than in
Strong peer pressures for ethical behavior that come from ingraining a highly ethical corporate culture and An individuals own moral responsibility for ethical behavior
10-37
Characteristics of Ethical Culture Approach

Top
executives believe high ethical principles must seeks to gain employee buy-in to
Be deeply ingrained in the corporate culture Function as guides for how we do things around here
Company
Companys ethical standards Business principles Corporate values

Ethical
principles in companys code of ethics are
Integral to day-to-day operations Promoted as business as usual

Strategy
must be ethical Employees must display ethical behaviors in executing the strategy
10-38
Why Should Company Strategies Be Ethical?

An
unethical strategy
Is morally wrong Reflects badly on the character of company personnel
An
ethical strategy is
Good business In the best interest of shareholders
10-39
Test Your Knowledge

Which one of the following is false when it comes to making a case for why a companys strategy should be ethical?
A. An unethical strategy can put a companys reputation at risk and do lasting damage, especially when the misdeeds get into the public spotlight and make media headlines. B. An ethical strategy is in the best interest of shareholders. C. An unethical strategy reflects badly on the character of the company personnel involved. D. Shareholders profits are not greatly reduced by using ethical strategies. E. A strategy that is unethical in whole or in part is morally wrong.
10-40
Characteristics of Managers Committed to Ethical Approaches to Strategy-Making

Possess
strong moral and ethical characteristics Strongly advocate a corporate code of ethics and strict ethics compliance Display genuine commitment to certain corporate values and business practices Walk the talk in

Displaying a companys stated values Living up to ethical business principles and standards
Adopt
values statements/ethics codes that truly paint the white lines for a companys business practices Consciously opt for strategic actions passing moral scrutiny
10-41
Fig. 10.1: The Business Costs of Ethical Failures
10-42
Linking Strategy to Ethics and Values

If
ethical standards are to have more than a cosmetic role, boards of directors and top executives must work diligently to see they are scrupulously observed in

Crafting a companys strategy and Conducting every facet of a companys business
Two
sets of questions must be considered by senior executives when reviewing a new strategic initiative
Is what we are proposing to do fully compliant with our code of ethical conduct? Is there anything here that could be considered ethically objectionable? Is it apparent this proposed action is in harmony with our core values? Are any conflicts or concerns evident?
10-43

Is it unethical for a high school or college coach to accept a talent fee or similar type of payment from a maker of sports apparel or sports equipment when the coach has authority to determine which brand of apparel or equipment to use for his/her team and subsequently chooses the brand of the company making the payment? Is it unethical for the maker of the sports apparel or equipment to make such payments in expectation that the coach will reciprocate by selecting the companys brand? (Would you answer be different if everybody is doing it?)
10-44

Is it unethical for a credit card company to aggressively try to sign up new accounts when, after an introductory period of interest-free or low-interest charges on unpaid monthly balances, the interest rate on unpaid balances jumps to 1.5 percent or more monthly (even though such high rates of 18 percent or more annually are disclosed in fine print)?
10-45
What Is Corporate Social Responsibility?

The
notion that corporate executives should balance interests of all stakeholders began to blossom in the 1960s responsibility as it applies to businesses concerns a companys duty to

Social
Operate in an honorable manner Provide good working conditions for employees Be a good steward of the environment Actively work to better quality of life in

Local communities where it operates and Society at large

10-46
What Is Socially Responsible Business Behavior?

A
company should strive to balance strategic actions

To benefit shareholders against any possible adverse impacts on other stakeholders To be a good corporate citizen
Socially
responsible behaviors include
Corporate philanthropy Actions to earn trust and respect of stakeholders for a firms efforts to improve the general well-being of

Customers Employees Local communities Society Environment

10-47
Fig. 10.2: Categories of Socially Responsible Business Behavior
10-48
Linking Strategy and Social Responsibility

The
combination of socially responsible endeavors a company elects to pursue defines its social responsibility strategy Management should match a companys social responsibility strategy to its
Core values Business mission Overall strategy
Some
companies are integrating social responsibility objectives into their

Missions Performance targets Strategies
10-49
The Moral Case for Corporate Social Responsibility

Businesses
should promote the betterment of society, acting in ways to benefit all their stakeholders because
Its the right thing to do!
Based
on an implied social contract, society
Grants a business the right to conduct its business affairs Agrees not to unreasonably restrain a business pursuit of a fair profit
In
return for a license to operate, a business should

Act as a responsible citizen Do its fair share to promote the general welfare
10-50
Reasons to Behave in a Socially Responsible Manner

Generates

internal benefits
Enhances recruitment of quality employees Increases retention of employees Improves employee productivity Lowers costs of recruitment and trainings
Reduces
risk of reputation-damaging incidents, leading to increased buyer patronage Works in best interest of shareholders

Minimizes costly legal and regulatory actions Provides for increased investments by socially conscious mutual funds and pension benefit managers Focusing on environment issues may enhance earnings
10-51
Test Your Knowledge

Which one of the following is false as concerns the merits of why acting in a socially responsible manner is good business?
A. To the extent that a companys socially responsible behavior wins applause from consumers and fortifies its reputation, a company may win additional patronage. B. Acting in a socially responsible manner reduces the risk of reputation-damaging incidents. C. Acting in a socially responsible manner is in the overall best interest of shareholders. D. Acting in a socially responsible manner is unlikely to have any effect (positive or negative) on a companys profitability. E. Acting in a socially responsible manner can generate internal benefits (as concerns employee recruiting, workforce retention, training, and improved worker productivity).
10-52
But Do We Really Want Do-Good Executives Is There a Downside?

Four
different views exist regarding use of company resources by do-good executives in pursuit of a better world
1. 2.
Any money authorized for social responsibility initiatives is theft from a companys shareholders Caution should be exercised in pursuing various societal obligations since this
Diverts valuable resources Weakens a companys competitiveness
3.
4.
Social responsibilities are best satisfied through conventional business activities (doing what businesses are supposed to do, which does not include social engineering) Spending money for social causes
Muddies decision making by diluting focus on a firms business mission Thrusts executives into role of social engineers
10-53
How Much Attention to Social Responsibility Is Enough?
What is the appropriate balance between

Creating value for shareholders? Obligation to contribute to the larger social good? Addressing social concerns? Bettering the well-being of society and the environment? Allocate a specified percentage of profits Avoid committing a specified percentage of profits
What fraction of a firms resources ought to be aimed at

Approaches to fund a social responsibility strategy can

No widely accepted standard for judging if a company has fulfilled its citizenship responsibilities exists!
10-54
Linking Social Performance Targets to Executive Compensation

A
surefire way to enlist a genuine commitment to corporate social responsibility initiatives is to
Link achievement of social performance targets to executive compensation
Key
role of board of directors
Incorporate measures of a companys social and environmental performance into its evaluation of top executives
Key
role of top executives
Use compensation incentives to enlist support of downthe-line company personnel to craft and execute a social responsibility strategy
10-55
11
Building an Chapter Title Organization Capable of Good Strategy Execution
16/e PPT
McGraw-Hill/Irwin
The best game plan in the world never blocked or tackled anybody.
Vince Lombardi
11-2
A second-rate strategy perfectly executed will beat a first-rate strategy poorly executed every time.
Richard M. Kovacevich
11-3
Chapter Roadmap

A Framework for Executing Strategy
The Principal Managerial Components of the Strategy Execution Process Building an Organization Capable of Good Strategy Execution Staffing the Organization Building Core Competencies and Competitive Capabilities

Execution-Related Aspects of Organizing the Work Effort Current Organizational Trends

11-4
Crafting vs. Executing Strategy

Crafting the Strategy
Primarily a market-driven activity Successful strategy making depends on Business vision Perceptive analysis of market conditions and company capabilities Attracting and pleasing customers Outcompeting rivals Using company capabilities to forge a competitive advantage

Executing the Strategy

Primarily an operationsdriven activity Successful strategy execution depends on Doing a good job of working through others Good organizationbuilding Building competitive capabilities Creating a strategysupportive culture Getting things done and delivering good results
11-5
Executing the Strategy

An
action-oriented, make-things happen task involving managements ability to

Direct organizational change Achieve continuous improvement in operations and business processes

Implementation involves . . .
Move toward operating excellence
Create and nurture a strategy-supportive culture Consistently meet or beat performance targets
Tougher
and more time-consuming than crafting

11-6
strategy
Implementing a New Strategy Requires Adept Leadership

Implementing
a new strategy takes adept leadership to

Convincingly communicate reasons for the new strategy Overcome pockets of doubt Secure commitment of concerned parties Build consensus and enthusiasm Get all implementation pieces in place and coordinated
11-7
Why Executing Strategy Is a Tough Management Job

Overcoming Wide
resistance to change
array of demanding managerial activities to be performed ways to tackle each activity of bedeviling issues to be worked out good people management skills
Numerous Number
Demands Requires Hard
launching and managing a variety of initiatives simultaneously to integrate efforts of many different work groups into a smoothly-functioning whole
11-8
Who Are the Strategy Implementers?

Implementing
and executing strategy involves a companys whole management team and all employees
Just as every part of a watch plays a role in making the watch function properly, it takes all pieces of an organization working cohesively for a strategy to be well-executed
Top-level
managers must lead the process and orchestrate major initiatives

But they must rely on cooperation of
Middle and lower-level managers to see things go well in various parts of an organization and Employees to perform their roles competently

11-9
Goals of the Strategy Implementing-Executing Process

Unite See
total organization behind strategy
that activities are done in a manner that is conducive to first-rate strategy execution
enerate commitment so an enthusiastic crusade emerges to carry out strategy how organization conducts its operations to strategy requirements
11-10
Fit
Characteristics of the Strategy Implementation Process

Every No
manager has an active role
proven formula for implementing particular types of strategies are guidelines, but no absolute rules and must do it this way rules ways to proceed that are capable of working across many aspects of how to manage
11-11
There
Many
Cuts
Characteristics of the Strategy Implementation Process (continued)

Each
implementation situation occurs in a different context, affected by differing

Business practices and competitive situations Work environments and cultures Policies Compensation incentives Mix of personalities and firm histories
Approach
to implementation/execution has be customized to fit the situation implement strategies - Not companies!
11-12
People
Fig. 11.1: The Eight Components of the Strategy Execution Process
11-13
What Top Executives Have to Do in Leading the Implementation Process

Communicate the case for change
Build consensus on how to proceed Arouse enthusiasm for the strategy to turn implementation process into a companywide crusade Empower subordinates to keep process moving Establish measures of progress and deadlines

Reward those who achieve implementation milestones Direct resources to the right places Personally lead strategic change process and the drive for operating excellence
11-14

Test Your Knowledge

Management's handling of the strategy implementation/execution process can be considered successful
A. so long as a company is profitable. B. if and when the company meets or beats its performance targets and shows good progress in achieving its strategic vision for the company. C. once the company's management team convinces a majority of company personnel that the company is headed in the right direction. D. if management is able to put the strategy in place within 6 months. E. once a capable top management team has been hired, employees have been appropriately empowered, and effective training programs for company personnel have been put in place.
11-15
BUILDING A CAPABLE ORGANIZATION WHAT IS INVOLVED?
11-16
Fig. 11.2: The Three Components of Building an Organization Capable of Proficient Strategy Execution
11-17
Putting Together a Strong Management Team

Assembling
a capable management team is a cornerstone of the organization-building task the right people to fill each slot
Find
Existing management team may be suitable Core executive group may need strengthening

Promote from within Bring in skilled outsiders

11-18
Selecting the Management Team: Key Considerations

Determine
mix of
Backgrounds Experiences and know-how Beliefs and values Styles of managing and personalities
Personal Talent
chemistry must be right
base needs to be appropriate
Picking
a solid management team needs to be acted on early in implementation process

11-19
Recruiting and Retaining Talented Employees: Implementation Issues

The
quality of a companys people is an essential ingredient of successful strategy execution challenge facing companies
How to recruit and retain the best and brightest talent with strong skill sets and management potential
Biggest
Intellectual
capital, not tangible assets, is increasingly being viewed as the most important investment
Talented people are a prime source of competitive advantage
11-20
Key Human Resource Practices to Attract and Retain Talented Employees

Spend
considerable effort in screening job applicants, selecting only those with

Suitable skill sets Energy and initiative Judgment and aptitudes for learning Ability to adapt to firms work environment and culture
Put
employees through training programs throughout their careers Give promising employees challenging, interesting, and skills-stretching assignments
11-21
Key Human Resource Practices to Attract and Retain Talented Employees (continued)
employees through jobs with great content, spanning functional and geographic boundaries Encourage employees to
Rotate
Be creative and innovative Challenge existing ways of doing things and offer better ways Submit ideas for new products or businesses
Foster
a stimulating work environment Exert efforts to retain high-potential employees with excellent salary and benefits Coach average employees to improve their skills
11-22
Building Core Competencies and Competitive Capabilities

Crafting
the strategy involves
Identifying the desired competencies and capabilities to build into the strategy to help achieve a competitive advantage
Good
strategy execution requires
Putting desired competencies and capabilities in place, Upgrading them as needed, and Modifying them as market conditions evolve
11-23
Example: Intels Core Competence
Design and mass production of complex chips for personal computers
11-24
Example: Procter & Gambles Core Competencies

Superb marketing-distribution skills and R&D capabilities in five core technologies - fats, oils, skin chemistry, surfactants, emulsifiers
11-25
Example: General Electrics Core Competencies

Developing professional managers with broad problem-solving skills and proven ability to grow global businesses
11-26
Example: Disneys Core Competencies
Theme park operation and family entertainment
11-27
Example: Dells Core Competencies

Capabilities to deliver state-of-the-art products to customers within days of nextgeneration components coming available and at attractively low costs
11-28
Example: Toyotas Core Competence

Legendary production system giving it the capability to produce high-quality vehicles at relatively low costs
11-29
Three-Stage Process of Developing Competencies and Capabilities

1. Develop ability to do something 2. As experience builds, ability can translate into a competence or capability 3. If ability continues to be polished and refined, it can become a distinctive competence, providing a path to competitive advantage!
11-30
Step 1 in Developing Competencies

Develop
ability to do something
Select people with relevant skills/experience Broaden or expand individual abilities as needed Mold efforts and work products of individuals into a cooperative effort to create organizational ability
11-31

As
experience builds and company learns how to perform the activity consistently well and at acceptable cost, the ability evolves into a competence or capability Typically, a capability or competence emerges from establishing and nurturing collaborative relationships between
Individuals and groups in different departments and/or A company and its external allies
11-32

If
company masters the activity, performing it better than rivals, the capability or competence becomes a
Distinctive competence and Holds potential for competitive advantage
This is the optimal outcome of the process of building capabilities-competencies!

11-33
Managing the Process of Building Competences: Four Key Traits

1. Competencies are bundles of skills and know-how growing from combined efforts of cross-functional departments 2. Normally, competencies emerge incrementally from various company efforts to respond to market conditions 3. Leveraging competencies into competitive advantage requires concentrating more effort and talent than rivals on strengthening competencies to create valuable capabilities 4. Sustaining competitive advantage requires adjusting competencies to new conditions
11-34
Approaches to Developing Competencies

Internal
development involves either
Strengthening the companys base of skills, knowledge, and intellect or Coordinating and networking the efforts of various work groups and departments
Partnering
with key suppliers, forming strategic alliances, or maybe even outsourcing certain activities to specialists a company that has the required capabilities and integrating these competences into the firms value chain
11-35
Buying
Updating Competencies and Capabilities as Conditions Change

Competencies
and capabilities must continuously be modified and perhaps even replaced with new ones due to
New strategic requirements Evolving market conditions Changing customer expectations
Ongoing
efforts to keep core competencies up-todate can provide a basis for sustaining both
Effective strategy execution and Competitive advantage
11-36
Strategic Role of Employee Training

Training
plays a critical role in implementation when a firm shifts to a strategy requiring different
Skills or core competences Competitive capabilities Managerial approaches Operating methods
Types
of training approaches
Internal universities Orientation sessions for new employees Tuition reimbursement programs Online training courses
11-37
Competitive Advantage Potential of Competencies and Capabilities

When it is difficult to outstrategize rivals with a superior strategy . . . . . . Best avenue to industry leadership is to out-compete rivals with superior strategy execution! Building competencies and capabilities rivals cant match is one of the best ways to out-compete them!
11-38
Test Your Knowledge

When it is difficult or impossible to out-strategize rivals (beat them with a superior strategy), the other main avenue to competitive advantage is to
A. institute a lower cost organization structure. B. outcompete them with smarter managers. C. do a better job of selecting and training employees. D. outexecute them (beat them by performing certain value chain activities in superior fashion). E. do a better job of empowering and motivating employees.
11-39
Execution-Related Aspects of Organizing Work Efforts

Few
hard and fast rules for organizing
One Big Rule: Role and purpose of organization structure is to support and facilitate good strategy execution!
Each
firms structure is idiosyncratic, reflecting
Prior arrangements and internal politics Executive judgments and preferences about how to arrange reporting relationships How best to integrate and coordinate work effort of different work groups and departments
CEO Vice President Vice President Vice President
11-40
Fig. 11.3: Structuring the Work Effort to Promote Successful Strategy Execution
11-41
Step 1: Decide Which Value Chain Activities to Perform Internally and Which to Outsource
Involves
deciding which activities are essential to strategic success

Most strategies entail certain crucial business processes or activities that must be performed exceedingly well or in closely coordinated fashion if the strategy is to be executed with real proficiency

These processes/activities usually need to be performed internally
Critical activities
Other activities, such as routine administrative housekeeping and some support functions, may be candidates for outsourcing
11-42
Determining Strategy-Critical Activities: Issues to Consider
1. What functions or business processes have to be performed extra well or in timely fashion to achieve competitive advantage?
2. In what value-chain activities would poor execution seriously impair strategic success?
11-43
Potential Advantages of Outsourcing Non-Critical Activities

A company improves its chances for outclassing rivals in

Performing strategy-critical activities and Turning a core competence into a distinctive competence
Streamlining of internal operations that flows from outsourcing acts to

Decrease internal bureaucracies Flatten organization structure Speed decision-making Increase competitive responsiveness
Partnerships can add to a companys arsenal of capabilities and contribute to better strategy execution
11-44
Appeal of Outsourcing
Outsourcing
non-critical activities allows a firm to concentrate its energies and resources on those value-chain activities where it
Can create unique value Can be best in the industry Needs direct control to

Build core competencies Achieve competitive advantage Manage key customer-supplier-distributor relationships
11-45
Potential Advantages of Partnering

By
building, improving, and then leveraging partnerships, a firm enhances its overall capabilities and builds resource strengths that
Deliver value to customers Rivals cant quite match Consequently pave the way for competitive success
Partnering makes strategic sense when the result is to enhance a companys competencies and competitive capabilities.
11-46
Dangers of Outsourcing
A
company must guard against hollowing out its knowledge base and capabilities to guard against pitfalls of outsourcing
Way
Avoid sourcing key components from a single supplier Use two or three suppliers to minimize dependence on any one supplier Regularly evaluate suppliers Work closely with key suppliers
11-47

While many people have criticized companies that have outsourced functions once performed in-house to foreign suppliers (who can perform the functions more cheaply) because outsourcing results in involuntary layoffs or job cuts, it is really fairer and more accurate to view outsourcing as a means whereby a company can enhance its competitiveness and thereby better protect the jobs of the remaining employees. True or false? Explain.
11-48
Step 2: Make Strategy-Critical Activities the Main Building Blocks

Assign
managers of strategy-critical activities a visible, influential position
Avoid
fragmenting responsibility for strategy-critical activities across many departments coordinating linkages between related work groups
Meld into a valuable competitive capability
Strategic relationships Assign managers key roles Primary activities Support functions
Provide
Coordination
Valuable capability
11-49
What Types of Organizational Structures Fit Which Strategies?

A
company operating in one business

Functional department structure
A
company with operations in various parts of the world

Geographic organizational units
A
vertically integrated company

Divisional organizational structure
A
diversified company
Individual businesses, with each business unit operating as independent profit center
11-50
Step 3: Determine How Much Authority to Delegate to Whom

In
a centralized structure
Top managers retain authority for most decisions
In
a decentralized structure
Managers and employees are empowered to make decisions
Trend
in most companies
Shift from authoritarian to decentralized structures stressing empowerment

11-51
11-52
Characteristics of Centralized Decision Making

Top executives retain authority

For most strategic and operating decisions and Keep a tight rein on lower-level managers
Minimal discretionary authority is granted to

Frontline supervisors Rank-and-file employees

Key advantage Tight control by top managers fixes accountability Disadvantages

Lengthens response time to changing conditions Does not encourage responsibility among lower-level managers and employees Discourages lower-level managers and employees from exercising initiative
11-53
Advantages of a Decentralized Structure

Creates a more horizontal structure with fewer management layers Managers and employees develop their own answers and action plans
Make decisions in their areas of responsibility Held accountable for results
Shortens organizational response times and spurs

New ideas Creative thinking and innovation Greater involvement of managers and employees

Jobs can be defined more broadly Fewer managers are needed Electronic communication systems provide quick, direct access to data Genuine gains in morale and productivity
11-54
Maintaining Control in a Decentralized Structure

Place
limits on authority empowered employees can exercise people accountable for their decisions
Hold
Institute compensation
incentives that reward employees for doing their jobs in a manner contributing to good company performance a corporate culture where theres strong peer pressure on employees to act responsibly
11-55
Create

A decentralized organization structure is more likely to further the cause of good strategy execution than is a centralized organization structure. True or false? Explain.
11-56
Step 4: Provide for Internal Cross-Unit Coordination

Classic
method of coordinating activities Have related units report to single manager

Upper-level managers have clout to coordinate efforts of their units
Support
activities should be woven into structure to

Maximize performance of primary activities Contain costs of support activities
Formal
reporting relationships often need to be supplemented to facilitate coordination

11-57
Guard Against Functional Designs That Fragment Activities

Scattering
pieces of critical business processes across several specialized departments results in

Many hand-offs which

Lengthens completion time Drives up administrative costs Increases risk of details falling through the cracks
Obsession with activity rather than result

Solution
Business process reengineering
Involves pulling strategy-critical processes from functional departments to create process departments or cross-functional work groups
11-58
Examples of Fragmented Strategy-Critical Activities

Filling
customer orders new products to market product quality
Speeding Improving Supply
chain management capability to conduct business via the
Building
Internet
Obtaining
feedback from customers, making product modifications to meet their needs

11-59
Coordinating Mechanisms to Supplement the Basic Organization Structure

Cross-functional Dual
task forces
reporting relationships networking cooperation
Informal
Voluntary Incentive
compensation tied to group performance and crossdepartmental cooperation

11-60
Teamwork
Step 5: Provide for Collaboration With Outsiders

Need
multiple ties at multiple levels to ensure
Communication Coordination and control

Find
ways to produce collaborative efforts to enhance firms capabilities and resource strengths
While
collaborative relationships present opportunities, nothing valuable is realized until the relationship develops into an engine for better organizational performance
11-61
Roles of Relationship Managers With Strategic Partners

Get
right people together good rapport
Promote See
plans for specific activities are developed and implemented adjust internal procedures and communication systems to
Iron out operating dissimilarities Nurture interpersonal ties
11-62
Help
Test Your Knowledge

Which one of the following tends to be most important in building an organization capable of good strategy execution?
A. Selecting a capable management team and selecting and training employees B. Building and strengthening competencies and competitive capabilities C. Empowering employees and utilizing the advantages of decentralized decision-making D. Making strategy-critical activities the main building blocks in the organizational scheme E. None of the above is necessarily more or less importantwhat factors prove to be particularly important in building an organization that is capable of good strategy execution can vary from company to company and situation to situation.
11-63
Current Organizational Trends

Numerous
companies have completed the task of remodeling traditional, hierarchical structures built on
Functional specialization and Centralized authority
Corporate
downsizing movement in the late 1980s and early 1990s was aimed at
Recasting authoritarian, pyramidal organizational structures Into flatter, decentralized structures
11-64
Drawbacks of Centralized Authoritarian Structures

Centralized
or authoritarian structures have often turned out to be a liability where

Customer preferences shift from standardized to customized products Product life-cycles grow shorter Flexible manufacturing replaces mass production Customers want to be treated as individuals Pace of technological change accelerates Market conditions are fluid
11-65
Organizational Structures of the Future: Overall Themes

Revolutionary
changes in how work is organized have been triggered by

New strategic priorities Rapidly shifting competitive conditions
Tools
of organizational design include

The future structure will be . . .
Empowered managers and workers Reengineered work processes Self-directed work teams Rapid incorporation of Internet technology Networking with outsiders
11-66
Characteristics of Organizations of the Future

Extensive
use of Internet technology and e-commerce business practices Fewer barriers between
Different vertical ranks Functions and disciplines Units in different geographic locations Company and its suppliers, distributors, strategic allies, and customers
Capacity
Change & Learning
for change and rapid learning Collaborative efforts among people in different functions and geographic locations
11-67
12
Managing Chapter Title Internal Operations
16/e PPT
McGraw-Hill/Irwin
Winning companies know how to do their work better.

Michael Hammer and James Champy
12-2
If you want people motivated to do a good job, give them a good job to do.
Frederick Herzberg
12-3
Chapter Roadmap
Marshaling
Resources Behind the Drive for Good Strategy Execution Policies and Procedures that Facilitate Strategy Execution Best Practices and Striving for Continuous Improvement Information and Operating Systems
Instituting
Adopting
Installing Tying
Rewards and Incentives to Strategy Execution

12-4
MARSHALING RESOURCES BEHIND THE DRIVE FOR GOOD STRATEGY EXECUTION
12-5
Allocating Resources to Support Strategy Execution

Allocating
resources in ways to support effective strategy execution involves
Funding strategic initiatives that can make a contribution to strategy implementation Funding efforts to strengthen competencies and capabilities or to create new ones Shifting resources downsizing some areas, upsizing others, killing activities no longer justified, and funding new activities with a critical strategy role
12-6
ESTABLISH POLICIES AND PROCEDURES TO FACILITATE STRATEGY EXECUTION
12-7
Fig. 12.1: How Prescribed Policies and Procedures Facilitate Strategy Execution
12-8
Creating Strategy-Supportive Policies and Procedures

Role

of new policies
Channel behaviors and decisions to promote strategy execution Counteract tendencies of people to resist chosen strategy
Too

much policy can be as stifling as
Wrong policy or as Chaotic as no policy
Often,
the best policy is empowering employees, letting them operate between the white lines anyway they think best
12-9
ADOPTING BEST PRACTICES AND STRIVING FOR CONTINUOUS IMPROVEMENT
12-10
Instituting Best Practices and Continuous Improvement

Searching
out and adopting best practices is integral to effective implementation is the backbone of the process of identifying, studying, and implementing best practices tools to promote continuous improvement
Benchmarking
Key

Six Sigma quality control Business process reengineering TQM

12-11
What Is a Best Practice?
An
activity that at least one company has proved works particularly well
ractices Best P
path to operating excellence
12-12
Characteristics of Best Practices
The best practice must have a proven record in
Significantly lowering costs Improving quality or performance Shortening time requirements Enhancing safety or Delivering some other highly positive operating outcome
To be valuable and transferable, a best practice must
Demonstrate success over time Deliver quantifiable and highly positive results and Be repeatable
12-13
Characteristics of Benchmarking
Involves determining how well a firm performs particular activities and processes when compared against
Best in industry or Best in world performers
Goal Promote achievement of operating excellence in performing strategy-critical activities Caution Exact duplication of best practices of other firms is not feasible due to differences in implementation situations Best approach Best practices of other firms need to be modified or adapted to fit a firms own specific situation
12-14
Fig. 12.2: From Benchmarking and Best-Practice
Implementation to Operating Excellence
12-15
Business Process Reengineering: A Contributor to Operating Excellence
Often the performance of strategically relevant activities is scattered across several functional departments
Creates inefficiencies and often impedes performance Results in lack of accountability since no one functional manager is responsible for optimum performance of an entire activity
Solution Business process reengineering

Involves pulling strategy-critical processes from functional silos to create process departments or cross-functional work groups Unifies performance of the activity improves how well the activity is performed and often lowers costs Promotes operating excellence
12-16
What Is Total Quality Management?

A
philosophy of managing a set of business practices that emphasizes

Continuous improvement in all phases of operations 100 percent accuracy in performing activities Involvement and empowerment of employees at all levels Team-based work design Benchmarking and Total customer satisfaction
12-17
Popular TQM Approaches

Demings 14 Points
The Juran Trilogy
Crosbys 14 Quality Steps
Baldridge Award Criteria

12-18
Implementing a Philosophy of Continuous Improvement

Reform Instill
the corporate culture
enthusiasm to do things right throughout company to achieve little steps forward each day (what the Japanese call kaizen) creativity in employees to improve performance of value-chain activities there is no such thing as good enough
12-19
Strive
Ignite
Preach
Six Sigma Quality Control A Tool for Promoting Operating Excellence

Six
Sigma is a disciplined, statistics-based system aimed at having not more than 3.4 defects per million iterations for any business practice from manufacturing to customer transactions Two approaches to Six Sigma
DMAIC process (Design, Measure, Analyze, Improve, Control)

An improvement system for existing processes falling below specification and needing incremental improvement A great tool for improving performance when there are wide variations in how well an activity is performed An improvement system used to develop new processes or products at Six Sigma quality levels
12-20
DMADV process (Define, Measure, Analyze, Design, Verify)
Characteristics of Six Sigma Quality Programs

Six
Sigma is based on three principles
1. All work is a process 2. All processes have variability 3. All processes create data to explain variability
A
company systematically applying Six Sigma to its value chain activities can significantly improve the proficiency of strategy implementation Three challenges in implementing Six Sigma quality programs
1. Obtain managerial commitment 2. Establish a quality culture 3. Full involvement of employees
12-21
Approach of the DMAIC Process

Define

What constitutes a defect?
Measure
Collect data to find out why, how, and how often the defect occurs Analyze Involves Statistical analysis of the metrics Identification of a best practice
Improve

Implementation of the documented best practice Employees are trained on the best practice Over time, significant improvement in quality occurs
12-22
Control
Business Process Reengineering vs. Total Quality Programs

Reengineering
Aims at quantum gains of 30 to 50% or more
Total
quality programs are not mutually exclusive
Stress incremental progress
Techniques
Reengineering Used to produce a good basic design yielding dramatic improvements Total quality programs Used to perfect process, gradually improving efficiency and effectiveness
12-23
How to Capture Benefits of Best-Practice and Continuous Improvement Programs

Select
indicators of successful strategy execution against best practice companies
Benchmark Build

a TQ culture
Requires top management commitment Install TQ-supportive employee practices Empower employees to do the right things Provide employees with quick access to required information using on-line systems Preach that performance can/must be improved
12-24
The Benefits of Employing Continuous Improvement Programs

Can

greatly enhance a companys
Competitive capabilities Ability to achieve a competitive advantage
Have
hard-to-imitate aspects
Require
substantial investment of management time and effort in terms of training and meetings produce short-term results
Expensive Seldom
Long-term
payoff instilling a culture that strives for operating excellence

12-25
Test Your Knowledge

Which of the following is not a tool that managers can use to promote operating excellence and further the cause of good strategy execution?
A. Benchmarking and adoption of best practices B. Business process reengineering C. A team-based work structure and operating excellence analysis D. Six Sigma quality control techniques E. TQM
12-26
INSTALL INFORMATION AND OPERATING SYSTEMS
12-27
Installing Strategy-Supportive Information and Operating Systems

Good
information and operating systems are essential for first-rate strategy execution systems can relate to

Support
On-line data capabilities Speedy delivery or repair Inventory management E-commerce capabilities
Mobilizing
information and creating systems to use knowledge effectively can yield

Competitive advantage
12-28
Examples of Support Systems
Airlines
On-line Accurate
reservation system
and expeditious baggage handling system aircraft maintenance program
Strict
12-29
Federal Express
Internal
communication systems allowing it to coordinate 70,000 vehicles handling an average of 5.5 million packages per day flight operations systems allow a single controller to direct as many as 200 of 650-plus aircraft simultaneously
E-business
Leading-edge
tools for customers

12-30
Otis Elevator
Sophisticated
maintenance support system
eBay
Systems have been developed for
real-time monitoring of new listings, bidding activity, Web site traffic, and page views
12-31
What Areas Should Information Systems Address?

Customer
data data
Operations Employee
data ally data
Supplier/partner/collaborative Financial
performance data
12-32
Trends for Information Systems

On-line

technology
Daily statistical updates Up-to-the minute performance monitoring Retail companies have up-to-the minute inventory and sales records for each item
Electronic
scorecards for senior managers
Gather daily or weekly statistics from different databases about inventory, sales, costs, and sales trends Enables managers to make better decisions on a real-time basis
12-33
Exercising Adequate Control Over Empowered Employees

Challenge
How to ensure actions of employees stay within acceptable bounds
Control
approaches
Managerial control
Establish boundaries on what not to do, allowing freedom to act with limits Track and review daily operating performance
Peer-based control
12-34

What sort of information and operating systems would a company like Amazon.com likely need in order to facilitate good strategy execution?
12-35
TYING REWARDS AND INCENTIVES TO STRATEGY EXECUTION
12-36
Gaining Commitment: Components of an Effective Reward System

Monetary Incentives
Base
Non-monetary Incentives
Praise Constructive Special More,
pay increases bonuses
Performance Profit Stock
criticism
sharing plans options packages
recognition assignments
or less, job security or less, autonomy promotion
Retirement Piecework
Stimulating More, Rapid
incentives
12-37
Approaches: Motivating People to Execute the Strategy Well

Provide attractive perks and fringe benefits Rely on promotion from within when possible Make sure ideas and suggestions of employees are valued and respected Create a work atmosphere where there is genuine sincerity and mutual respect among all employees State strategic vision in inspirational terms to make employees feel they are part of something worthwhile Share financial and strategic information with employees Have knockout facilities Be flexible in how company approaches people management in multicultural environments
12-38
Examples: Motivational Practices Google

Employees are provided with free food, unlimited ice cream, pool and Ping-Pong tables, and complimentary massages. Employees are allowed to spend 20% of their work time on any outside activity.
Lincoln Electric
Rewards productivity by paying for each piece produced (defects can be traced to worker causing them). Highest rated workers receive bonuses of as much 110% of their piecework compensation.
12-39
Examples: Motivational Practices JM Family Enterprises

Benefits for employees include: a great lease on new Toyotas, cruises in the Bahamas on the 172-foot company yacht, office facility has a heated lap pool, a fitness center, and a free nail salon, and professionally made take-home dinners.
Xilinx
New hires receive stock option grants. CEO responds promptly to employee e-mails. During hard times management takes a 20% pay cut instead of laying off employees.
12-40
Examples: Motivational Practices Amazon.com

Hands out Just Do It awards to employees who do something they think will help Amazon without getting their bosss permission; the action has to be well thought through but doesnt have to succeed.
Nordstrom
Pay salespeople higher than prevailing rates, plus commission. Rule #1: Use good judgment in all situations. There will be no additional rules.
12-41
Examples: Motivational Practices W. L. Gore

Employees get to choose what project/team they work on; each team members compensation is based on other team members ranking of his/her contribution to the enterprise.
Amgen
Employees get 16 paid holidays, generous vacation time, tuition reimbursements up to $10,000, on-site massages, a discounted car wash, and the convenience of shopping at on-site farmers markets.
12-42
Balancing Positive vs. Negative Rewards

Elements
of both are necessary
Challenge and competition are necessary for self-satisfaction
Prevailing
view
Positive approaches work better than negative ones in terms of

Enthusiasm Dedication Creativity Initiative

12-43
Linking the Reward System to Performance Outcomes

Tying
rewards to the achievement of strategic and financial performance targets is managements single most powerful tool to win the commitment of company personnel to effective strategy execution Objectives in designing the reward system

Generously reward those achieving objectives Deny rewards to those who dont Make the desired strategic and financial outcomes the dominant basis for designing incentives, evaluating efforts, and handing out rewards
12-44
Test Your Knowledge

Managements most powerful tool for mobilizing employee commitment to competent strategy execution and operating excellence is
A. the use of either total quality management or Six Sigma quality control techniques. B. business process reengineering. C. a properly designed reward structure. D. making the company a great place to work in terms of pay scales, fringe benefits, and employee perks. E. effective screening of job applicants such that only the most motivated and energetic people are hired.
12-45
Key Considerations in Designing Reward Systems

Create
a results-oriented system Reward people for results, not for activity Define jobs in terms of what to achieve Incorporate several performance measures Tie incentive compensation to relevant outcomes

Top executives Incentives tied to overall firm performance Department heads, teams, and individuals Incentives tied to achieving performance targets in their areas of responsibility
12-46

What is the logic for tying incentive compensation awards to the achievement of results as opposed to rewarding people for diligent performance of their assigned duties?
12-47
Guidelines for Designing an Effective Compensation System

1. Payoff must be a major, not minor, piece of total compensation package 2. Incentive plan should extend to all employees 3. Administer system with scrupulous fairness 4. Link incentives to achieving only the performance targets in strategic plan 5. Targets a person is expected to achieve must involve outcomes that can be personally affected 6. Keep time between performance review and payment short 7. Make liberal use of non-monetary rewards 8. Avoid ways of rewarding non-performers
12-48
Test Your Knowledge

A well-designed reward system
A. makes strategically relevant measures of performance the dominant basis for incentive compensation. B. should strive for a 75%-25% mix between positive and negative rewards. C. should strive for a 67%-33% mix between monetary and nonmonetary rewards. D. must emphasize weeding out employees who are consistently rank in the bottom 10% to 15% of the workforce in terms of overall performance and productivity. E. guarantees job security to all employees, so as to reduce stress and anxiety and to allow employees to focus all their energies on performing their assigned duties.
12-49

Strategic Management MBA (GTU)

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Keyur D Vasava Pharmacy+MBA Dist.

Without a strategy the organization is like a ship without a rudder.

What Do We Mean By Strategy?

Thinking Strategically: The Three Big Strategic Questions

to be in and market positions to stake out

needs and groups to serve to head

3. How should it get there?

companys answer to how will we get there? is its strategy

What Do We Mean By Strategy?

The Hows That Define a Firm's Strategy

to grow the business to please customers to outcompete rivals

Choosing the Hows of Strategy

Strategic choices about how are based on

Trial-and-error organizational learning about what has worked and

In choosing a strategy, management is in effect saying,

Key Elements of a Successful Strategy

Developing a successful strategy hinges on making competitive moves aimed at

Involves developing a distinctive aha element to

Attract customers and Produce a competitive edge

Copying competitive moves of other successful companies rarely works!

Key Elements: Comcasts Strategy

For Discussion: Your Opinion

Strategy and the Quest for Competitive Advantage

A Powerful Strategy Leads to Sustainable Competitive Advantage

Four Best Strategic Approaches to Building Sustainable Competitive Advantage

Competitive Advantage Examples

to be the industrys low-cost provider

Wal-Mart Southwest Airlines

rivals on a key differentiating feature

Competitive Advantage Examples (cont)

Focus on a narrow market niche

Fig. 1.1: Identifying a Companys Strategy

Test Your Knowledge

Why Do Strategies Evolve?

companys strategy is a work in progress may be necessary to react to

Fig. 1.2: A Companys Strategy Is Partly Proactive and Partly Reactive

Crafting Strategy Is an Exercise in Entrepreneurship

is a market-driven activity involving

Do new things or Do existing things in new or better ways

Linking Strategy With Ethics

and moral standards go beyond

Prohibitions of law and the language of thou shalt not

A Firms Ethical Responsibilities to Its Stakeholders

Role of Senior Executives: Linking Strategy with Ethics

genuine commitment to conduct business activities ethically

Test Your Knowledge

What Is a Business Model?

business model addresses How do we make money in this business?

Is the strategy capable of delivering good bottom-line results?

the revenue-cost-profit economics of the strategy make good business sense?

Relationship Between Strategy and Business Model

Microsofts Business Model

Red Hats Business Model

Test Your Knowledge

For Discussion: Your Opinion

Who has the best business model Microsoft or Red Hat?

Tests of a Winning Strategy

How well does strategy fit the firms situation?

Does strategy lead to sustainable competitive advantage?

Does strategy boost firm performance?

Other Criteria for Judging the Merits of a Strategy

Why Is Strategy Important?

Good Strategy + Good Strategy Execution = Good Management