Chapters 1 - 9

CHAPTER 1

WHAT IS STRATEGY AND WHY IS IT IMPORTANT?

McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

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1.  Understand why every company needs a sound strategy to compete successfully, manage the conduct of its business, and strengthen its prospects for long-term success.

2.  Develop an awareness of the four most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.

3.  Understand that a company’s strategy tends to evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy.

4.  Learn why it is important for a company to have a viable business model that outlines the company’s customer value proposition and its profit formula.

5.  Learn the three tests of a winning strategy.

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WHAT DO WE MEAN BY STRATEGY ?

♦ What is our present situation? ●  Business environment and industry conditions

●  Firm’s financial and competitive capabilities

♦ Where do we want to go from here? ●  Creating a vision for the firm’s future direction

♦ How are we going to get there? ●  Crafting an action plan that will get us there

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WHAT IS STRATEGY ABOUT?

♦ Strategy is all about How: ● How to outcompete rivals. ● How to respond to economic and market

conditions and growth opportunities. ● How to manage functional pieces of the

business. ● How to improve the firm’s financial and

market performance.

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WHY DO STRATEGY ?

♦ A firm does strategy: ●  To improve its financial performance. ●  To strengthen its competitive position. ●  To gain a sustainable competitive.

advantage over its market rivals.

♦ A creative, distinctive strategy: ●  Can yield above-average profits. ●  Makes competition difficult for rivals.

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STRATEGY AND COMPETITORS

♦ Strategy is about competing differently from rivals— ●  Doing what they don’t do or doing it better! ●  Doing what they can’t do! ●  Doing that which sets the firm apart and

attracts customers. ●  Doing what we should or should not do to

produce a competitive edge.

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1.1 Identifying a Company’s Strategy—What to Look For

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Key initiatives of the Plan-to-Win strategy: •  Improved restaurant operations •  Affordable pricing

•  Wide menu variety and beverage choices

•  Convenience and expansion of dining opportunities

•  Ongoing restaurant reinvestment and international expansion

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•  Which of McDonald’s Plan-to-Win strategy initiatives are associated with meeting customer needs more effectively?

•  Which initiatives are focused on more efficiently delivering products and services?

•  Which initiatives will likely result in the most enduring competitive advantage?

•  Which of the initiatives will competitors likely attempt to overcome first?

Follow-up

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The Quest for Competitive Advantage

♦ Competitive Advantage ●  Meeting customer needs more effectively,

with products or services that customers value more highly, or more efficiently, at lower cost.

♦ Sustainable Competitive Advantage ●  Giving buyers lasting reasons to prefer a

firm’s products or services over those of its competitors.

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STRATEGIC APPROACH CHOICES

Low-cost provider

Differentiation on features

Focus on market niche

Best-cost provider

Building Competitive Advantage

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STRATEGIC APPROACHES

♦ Building a competitive advantage by: 1.  Striving to become the industry’s low-cost

provider (efficiency). 2.  Outcompeting rivals on differentiating

features (effectiveness). 3.  Focusing on better serving a niche market’s

needs (efficiency and\or effectiveness). 4.  Offering the lowest (best) prices for

differentiated goods (best-cost provider).

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GAINING SUSTAINABLE COMPETITIVE ADVANTAGE

♦ How to create a sustainable competitive advantage: ●  Develop valuable expertise and competitive

capabilities over the long-term that rivals cannot readily copy, match or best.

●  Put the constant quest for sustainable competitive advantage at center stage in crafting your strategy.

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Why a Firm’s Strategy Evolves over Time

♦ Managers modify strategy in response to: ●  Changing market conditions ●  Advancing technology ●  Fresh moves of competitors ●  Shifting buyer needs ●  Emerging market opportunities ●  New ideas for improving the strategy

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The Evolving Nature of a Firm’s Strategy

♦ Realized (current) strategy is a blend of: ●  Proactive (deliberate) strategy elements that

include both continued and new initiatives.

●  Reactive (emergent) strategy elements that are required due to unanticipated competitive developments and fresh market conditions.

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1.2 A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments

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THE RELATIONSHIP BETWEEN A FIRM’S STRATEGY AND ITS BUSINESS MODEL

Realized Strategy

Competitive Initiatives

Business Approaches

Business Model

Value Proposition

Profit Formula

$$$?

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A Company’s Business Model

♦ How the business will make money : ●  By providing customers with value.

! The firm’s customer value proposition ●  By generating revenues sufficient to cover

costs and produce attractive profits. ! The firm’s profit formula

It takes a proven business model—one that yields appealing profitability—to demonstrate

viability of a firm’s strategy.

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Business Model Elements

♦  The Customer Value Proposition ●  Satisfying buyer wants and needs at a price

customers will consider a good value. ! The greater the value provided (V) and

the lower the price (P), the more attractive the value proposition is to customers.

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Business Model Elements (cont’d)

♦ The Profit Formula ●  Creating a cost structure that allows for

acceptable profits, given that pricing is tied to the customer value proposition. !  V—the value provided to customers !  P—the price charged to customers !  C—the firm’s costs

●  The lower the costs (C) for a given customer value proposition (V–P), the greater the ability of the business model to be a moneymaker.

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IS OUR STRATEGY A WINNER?

Winning Strategy

The Strategic Fit Test

The Competitive Advantage Test

The Performance Test

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WHAT MAKES A STRATEGY A WINNER?

♦ A winning strategy must pass three tests: ●  The Fit Test

!  Does it exhibit dynamic fit with the external and internal aspects of the firm’s overall situation?

●  The Competitive Advantage Test !  Can it help the firm achieve a significant and

sustainable competitive advantage? ●  The Performance Test

!  Can it produce good performance as measured by the firm’s profitability, financial and competitive strengths, and market standing?

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ILLUSTRATION CAPSULE 1.2

Sirius XM and Over-the-Air Broadcast Radio: Two Contrasting Business Models

Customer value proposition

Profit formula

Digital music, news, national and regional weather, traffic reports in limited areas, and talk radio programming provided for a monthly subscription fee. Programming was interrupted only by brief, occasional ads.

Revenue generation: Monthly subscription fees, sales of satellite radio equipment, and advertising revenues. Cost structure: Fixed costs associated with operating a satellite-based music delivery service. Fixed and variable costs related to programming and content royalties, marketing, and support activities.

Profit margin: Sirius XM's profitability was dependent on attracting a sufficiently large number of subscribers to cover its costs and provide attractive profits.

Free-of-charge music, national and local news, local traffic reports, national and local weather, and talk radio programming. Listeners could expect frequent programming interruption for ads.

Revenue generation: Advertising sales to national and local businesses. Cost structure: Fixed costs associated with terrestrial broadcasting operations. Fixed and variable costs related to local news reporting, advertising sales operations, network affiliate fees, programming and content royalties, commercial production activities, and support activities.

Profit margin: The profitability of over-the-air radio stations was dependent on generating sufficient advertising revenues to cover costs and provide attractive profits.

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Who listens to the radio anymore? •  Given the shifts in how people listen to music, are

the business models of Sirius XM and over-the-air broadcasters viable over the long term?

•  Does Sirus XM’s strategy pass the three tests of a winning strategy? Does the strategy of over-the-air broadcasters pass the same tests?

•  What internal and external factors will create difficulties for either competitor in changing its strategy or business model?

Follow-up

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WHY CRAFTING AND EXECUTING STRATEGY ARE IMPORTANT TASKS

♦ Strategy provides: ●  A prescription for doing business. ●  A road map to competitive advantage. ●  A game plan for pleasing customers. ●  A formula for attaining long-term standout

marketplace performance.

Good Strategy + Good Strategy Execution = Good Management

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THINKING STRATEGICALLY

♦ Google’s web browser-based Chrome operating system and its online applications suite are now challenging Microsoft’s long-term dominance of those marketplace sectors. ●  What should be Microsoft’s first response to this

competitive challenge?

●  How will Microsoft’s response to this competitor’s actions affect its business model?

●  Which competitor’s strategy will likely be the eventual winner in the marketplace?

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THE ROAD AHEAD

♦ Strategy is about asking the right questions: ●  What must managers do, and do well, to make a

firm a winner in the marketplace?

♦ Strategy requires getting the right answers: ●  Good strategic thinking and good management of

the strategy-making, strategy-executing process. ●  First-rate capabilities and skills in crafting and

executing strategy are essential to managing successfully.

Welcome and best wishes for your success!

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CHAPTER 2

CHARTING A COMPANY’S DIRECTION: VISION AND MISSION, OBJECTIVES, AND STRATEGY

McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

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1.  Grasp why it is critical for company managers to have a clear strategic vision of where a company needs to head and why.

2.  Understand the importance of setting both strategic and financial objectives.

3.  Understand why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets.

4.  Become aware of what a company must do to achieve operating excellence and to execute its strategy proficiently.

5.  Become aware of the role and responsibility of a company’s board of directors in overseeing the strategic management process.

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WHAT DOES THE STRATEGY-MAKING, STRATEGY-EXECUTING PROCESS ENTAIL?

1.  Developing a strategic vision, a mission, and a set of values.

2.  Setting objectives for measuring performance and progress.

3.  Crafting a strategy to achieve those objectives. 4.  Executing the chosen strategy efficiently and

effectively. 5.  Monitoring strategic developments, evaluating

execution, and making adjustments in the vision and mission, objectives, strategy, or execution as necessary.

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2.1 The Strategy-Making, Strategy-Executing Process

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STAGE 1: DEVELOPING A STRATEGIC VISION, A MISSION, AND A SET OF CORE VALUES

♦ Developing a Strategic Vision: ●  Delineates management’s future aspirations

for the business to its stakeholders. ●  Provides direction—“where we are going.” ●  Sets out the compelling rationale (strategic

soundness) for the firm’s direction. ●  Uses distinctive and specific language to set

the firm apart from its rivals.

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2.1 Wording a Vision Statement—the Dos and Don’ts

The Dos The Don’ts

Be graphic Don’t be vague or incomplete

Be forward-looking and directional Don’t dwell on the present

Keep it focused Don’t use overly broad language

Have some wiggle room Don’t state the vision in bland or uninspiring terms

Be sure the journey is feasible Don’t be generic

Indicate why the directional path makes good business sense

Don’t rely on superlatives only

Make it memorable Don’t run on and on

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Vision Statement for Coca-Cola Our vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth. • People: Be a great place to work where people are inspired to be the best they

can be. • Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate

and satisfy people’s desires and needs. • Partners: Nurture a winning network of customers and suppliers; together we

create mutual, enduring value. • Planet: Be a responsible citizen that makes a difference by helping build and

support sustainable communities. • Profit: Maximize long-term return to shareowners while being mindful of our overall

responsibilities. • Productivity: Be a highly effective, lean and fast-moving organization. Effective Elements Shortcomings

• Graphic • Focused

• Makes good business sense • Flexible

• Long • Not forward-looking

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Vision Statement for UBS

We are determined to be the best global financial services company. We focus on wealth and asset management, and on investment banking and securities businesses. We continually earn recognition and trust from clients, shareholders, and staff through our ability to anticipate, learn and shape our future. We share a common ambition to succeed by delivering quality in what we do. Our purpose is to help our clients make financial decisions with confidence. We use our resources to develop effective solutions and services for our clients. We foster a distinctive, meritocratic culture of ambition, performance and learning as this attracts, retains and develops the best talent for our company. By growing both our client and our talent franchises, we add sustainable value for our shareholders. Effective Elements Shortcomings

• Focused • Feasible • Desirable

• Not forward-looking • Bland or uninspiring • Hard to communicate

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Vision Statement for Walmart

Saving People Money So They Can Live Better

Effective Elements Shortcomings

• Focused • Memorable • Feasible • Makes good business sense

• Dwells on the present

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Follow-up

♦ For which of these businesses (product, service, or retail) is it the most difficult to create a vision statement?

♦ How does the scope of a business affect the language of its vision statement?

♦ How would you reword the Coca-Cola or UBS vision statements to reduce them to less than 100 words? (Coca-Cola = 127, UBS = 124)

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Communicating the Strategic Vision

♦ Why Communicate the Vision: ●  Fosters employee commitment to the firm’s

chosen strategic direction. ●  Ensures understanding of its importance. ●  Motivates, informs, and inspires internal and

external stakeholders. ●  Demonstrates top management support for

the firm’s future strategic direction and competitive efforts.

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Putting the Strategic Vision in Place

♦ Put the vision in writing and distribute it. ♦ Hold meetings to personally explain the

vision and its rationale. ♦ Create a memorable slogan that captures

the essence of the vision. ♦ Emphasize the positive payoffs for making

the vision happen.

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Crafting a Mission Statement

♦ The Mission Statement: ●  Uses specific language to give the firm its

own unique identity. ●  Describes the firm’s current business and

purpose—“who we are, what we do, and why we are here.”

●  Should focus on describing the company’s business, not on “making a profit”—earning a profit is an objective not a mission.

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The Ideal Mission Statement

♦  Identifies the firm’s product or services.

♦ Specifies the buyer needs it seeks to satisfy.

♦  Identifies the customer groups or markets it is endeavoring to serve.

♦ Specifies its approach to pleasing customers.

♦ Sets the firm apart from its rivals.

♦ Clarifies the firm’s business to stakeholders.

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Linking Vision and Mission with Core Values

♦ Core Values ●  Are the beliefs, traits, and behavioral norms that

employees are expected to display in conducting the firm’s business and in pursuing its strategic vision and mission.

●  Become an integral part of the firm’s culture and what makes it tick when strongly espoused and supported by top management.

●  Matched with the firm’s vision, mission, and strategy contribute to the firm’s business success.

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WOW Philosophy: 10 Core Values ♦  Deliver WOW through Service

♦  Embrace and Drive Change

♦  Create Fun and a Little Weirdness

♦  Be Adventurous, Creative, and Open Minded

♦  Pursue Growth and Learning

♦  Build Open and Honest Relationships With Communication

♦  Build a Positive Team and Family Spirit

♦  Do More with Less

♦  Be Passionate and Determined

♦  Be Humble.

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Core Values for Amazon ♦ Customer

Obsession We start with the customer and work backward.

♦  Innovation If you don’t listen to your customers you will fail. But if you only listen to your customers you will also fail.

♦ Bias for Action

We live in a time of unheralded revolution and instrumental opportunity–provided we make every minute count.

♦ Ownership Ownership matters when you’re building a great company. Owners think long – term, please passionately for their projects and ideas, and are empowered to respectfully challenge decisions.

♦ High-Hiring Bar

When making a hiring decision we ask ourselves: “Will I admire this person? Will I learn from this person? Is this person a superstar?”

♦ Frugality We spend money on the things that really matter and believe that frugality breeds resourcefulness, self-sufficiency and intention.

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♦ How do the core values of Zappos reflect the value it places on its human capital?

♦ What effects do core values have of the hiring practices of firms?

♦ Will Amazon’s acquisition of Zappos create a clash of cultural values?

Follow-up

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STAGE 2: SETTING OBJECTIVES

♦ The Purposes of Setting Objectives: ●  To convert the vision and mission into specific,

measurable, timely performance targets. ●  To focus efforts and align actions throughout

the organization. ●  To serve as yardsticks for tracking a firm’s

performance and progress. ●  To provide motivation and inspire employees

to greater levels of effort.

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THE TWO ESSENTIAL KINDS OF OBJECTIVES TO SET

♦ Financial Objectives ● Communicate top

management’s targets for financial performance.

● Are focused internally on the firm’s operations and activities.

♦ Strategic Objectives ● Are related to a firm’s

marketing standing and competitive vitality.

● Are focused externally on competition vis-à-vis the firm’s rivals.

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SETTING FINANCIAL OBJECTIVES

Examples of Financial Objectives ♦  An x percent increase in annual revenues ♦  Annual increases in after-tax profits of x percent ♦  Annual increases in earnings per share of x percent ♦  Annual dividend increases of x percent ♦  Profit margins of x percent ♦  An x percent return on capital employed (ROCE) or return on

shareholders’ equity investment (ROE) ♦  Increased shareholder value—in the form of an upward-trending stock

price ♦  Bond and credit ratings of x ♦  Internal cash flows of x dollars to fund new capital investment

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SETTING STRATEGIC OBJECTIVES

Examples of Strategic Objectives ♦  Winning an x percent market share ♦  Achieving lower overall costs than rivals ♦  Overtaking key competitors on product performance or quality

or customer service ♦  Deriving x percent of revenues from the sale of new products introduced

within the next five years ♦  Having broader or deeper technological capabilities than rivals ♦  Having a wider product line than rivals ♦  Having a better-known or more powerful brand name than rivals ♦  Having stronger national or global sales and distribution capabilities

than rivals ♦  Consistently getting new or improved products and services to market

ahead of rivals

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Good Strategic Performance Is the Key to Better Financial Performance

♦ Good financial performance is not enough: ●  Current financial results are lagging indicators of

past decisions and actions which does not translate into a stronger competitive capability for delivering better financial results in the future.

●  Setting and achieving stretch strategic objectives signals a firm’s growth in both competitiveness and strength in the marketplace.

●  Good strategic performance is a leading indicator of a firm’s increasing capability to deliver improved future financial performance.

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EMPLOYING A BALANCED SCORECARD

♦ A balanced scorecard measures a firm’s optimal performance by:

!  Placing a balanced emphasis on achieving both financial and strategic objectives.

!  Avoiding tracking only financial performance and overlooking the importance of measuring whether a firm is strengthening its competitiveness and market position.

The surest path to sustained future profitability year after year is to relentlessly pursue strategic outcomes that strengthen a firm’s business position and give it a growing competitive advantage over rivals!

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THE MERITS OF SETTING STRETCH OBJECTIVES

♦ Setting stretch objectives promotes better company performance because stretch targets: ●  Push a firm to be more inventive. ●  Increase the urgency for improving financial

performance and competitive position. ●  Cause the firm to be more intentional and

focused in its actions. ●  Act to prevent complacent coasting and easy

achievement of ho-hum performance outcomes.

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THE NEED FOR SHORT-TERM AND LONG-TERM OBJECTIVES

♦ Short-Term Objectives: ●  Focus attention on quarterly and annual

performance improvements to satisfy near-term shareholder expectations.

♦ Long-Term Objectives: ●  Force consideration of what to do now to

achieve optimal long-term performance. ●  Stand as a barrier to an undue focus on short-

term results.

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THE NEED FOR OBJECTIVES AT ALL ORGANIZATIONAL LEVELS

♦ Breaks down performance targets for each of the organization’s separate units.

♦ Fosters setting performance targets that support achievement of firm-wide strategic and financial objectives.

♦ Extends the top-down objective-setting process to all organizational levels.

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♦ Which company included no strategic objectives in its listing of objectives?

♦ Which company’s listing of objectives appears to best fit the balanced scorecard concept?

♦ Which company has the shortest-term focus based on it objectives? Which has the longest-term focus?

Follow-up

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STAGE 3: CRAFTING A STRATEGY

♦ Strategy Making: ●  Addresses a series of strategic how’s. ●  Requires choosing among strategic alternatives. ●  Promotes actions to do things differently from

competitors rather than running with the herd. ●  Is a collaborative team effort that involves

managers in various positions at all organizational levels.

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Who Is Involved in Strategy Making?

♦  Chief Executive Officer (CEO) ●  Has ultimate responsibility for leading the strategy-making

process as strategic visionary and as chief architect of strategy.

♦  Senior Executives ●  Fashion the major strategy components involving their areas

of responsibility.

♦  Managers of subsidiaries, divisions, geographic regions, plants, and other operating units (and key employees with specialized expertise) ●  Utilize on-the-scene familiarity with their business units to

orchestrate their specific pieces of the strategy.

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Why Is Strategy-Making Often a Collaborative Process?

♦  The many complex strategic issues involved and multiple areas of expertise required can make the strategy-making task too large for one person or a small executive group.

♦  When operations involve different products, industries and geographic areas, strategy-making authority must be delegated to functional and operating unit managers such that all managers have a strategy-making role—ranging from major to minor—for the area they head!

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The Strategy-Making Hierarchy

Corporate Strategy

Multibusiness Strategy—how to gain synergies from managing a portfolio of businesses together rather than as separate businesses

Business Strategy

•  How to strengthen market position and gain competitive advantage •  Actions to build competitive capabilities of single businesses •  Monitoring and aligning lower-level strategies

Functional Area Strategies

• Add relevant detail to the how’s of the business strategy • Provide a game plan for managing a particular activity in ways that

support the business strategy

Operating Strategies

• Add detail and completeness to business and functional strategies • Provide a game plan for managing specific operating activities with

strategic significance

Two-Way Influence

Two-Way Influence

Two-Way Influence

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2.2 A Company’s Strategy-Making Hierarchy

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The Concept of Strategic Intent

An organization exhibits strategic intent when it relentlessly pursues an ambitious strategic

objective, concentrating the full force of its resources and competitive actions on

achieving that objective!

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Characteristics of Strategic Intent

♦  Indicates firm’s intent to making quantum gains in competing against key rivals and to establishing itself as a winner in the marketplace, often against long odds.

♦  Involves establishing a grandiose performance target out of proportion to immediate capabilities and market position but then devoting the firm’s full resources and energies to achieving the target over time.

♦  Entails sustained, aggressive actions to take market share away from rivals and achieve a much stronger market position.

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What Is a Strategic Plan?

Its strategic vision, business mission, and core values

Its strategic and financial objectives

Its chosen strategy

Elements of a Firm’s Strategic Plan

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STAGE 4: EXECUTING THE STRATEGY

♦ Converting strategic plans into actions requires: ●  Directing organizational action. ●  Motivating people. ●  Building and strengthening the firm’s

competencies and competitive capabilities. ●  Creating and nurturing a strategy-supportive

work climate. ●  Meeting or beating performance targets.

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Managing the Strategy Execution Process

♦  Staffing the firm with the needed skills and expertise. ♦  Building and strengthening strategy-supporting

resources and competitive capabilities. ♦  Organizing work effort along the lines of best practice.

♦  Allocating ample resources to the activities critical to strategic success.

♦  Ensuring that policies and procedures facilitate rather than impede effective strategy execution.

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Managing the Strategy Execution Process

♦  Installing information and operating systems that enable effective and efficient performance.

♦  Motivating people and tying rewards and incentives directly to the achievement of performance objectives.

♦  Creating a company culture and work climate conducive to successful strategy execution.

♦  Exerting the internal leadership needed to propel implementation forward and drive continuous improvement of the strategy execution processes.

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STAGE 5: EVALUATING PERFORMANCE AND INITIATING CORRECTIVE ADJUSTMENTS

♦ Evaluating Performance: ●  Deciding whether the enterprise is passing the

three tests of a winning strategy—good fit, competitive advantage, strong performance.

♦ Initiating Corrective Adjustments: ●  Deciding whether to continue or change the

firm’s vision and mission, objectives, strategy, and/or strategy execution methods.

●  Based on organizational learning.

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THE ROLE OF THE BOARD OF DIRECTORS IN CORPORATE GOVERNANCE

♦ Obligations of the Board of Directors: ●  Critically appraise the firm’s direction, strategy, and

business approaches. ●  Evaluate the caliber of senior executives’ strategic

leadership skills. ●  Institute a compensation plan that rewards top

executives for actions and results that serve stakeholder interests—especially shareholders.

●  Oversee the firm’s financial accounting and reporting practices compliance with the Sarbanes-Oxley Act.

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Achieving Effective Corporate Governance

♦ A strong, independent board of directors: ●  Is well informed about the firm’s performance. ●  Guides and judges the CEO and other executives. ●  Can curb management actions the board believes

are inappropriate or unduly risky. ●  Can certify to shareholders that the CEO is doing

what the board expects. ●  Provides insight and advice to top management. ●  Is actively involved in debating the pros and cons

of key strategic decisions and actions.

CHAPTER 3

EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT

McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

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1.  Gain command of the basic concepts and analytical tools widely used to diagnose the competitive conditions in a company’s industry.

2.  Learn how to diagnose the factors shaping industry dynamics and to forecast their effects on future industry profitability.

3.  Become adept at mapping the market positions of key groups of industry rivals.

4.  Understand why in-depth evaluation of a business’s strengths and weaknesses in relation to the specific industry conditions it confronts is an essential prerequisite to crafting a strategy that is well-matched to its external situation.

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3.1 From Thinking Strategically about the Company’s Situation to Choosing a Strategy

Thinking strategically

about a firm’s external

environment

Thinking strategically

about a firm’s internal

environment

Forming a strategic vision of where the firm needs

to head

Identifying promising strategic options

for the firm

Selecting the best strategy and business

model for the firm

Chapter 3

Chapter 4

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The External Environment

♦ The Macro-Environment ●  Is the broad environmental context in which

a firm’s industry is situated. ●  Includes strategically relevant components

over which the firm has no direct control. !  General economic conditions !  Immediate industry and competitive

environment

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3.2 The Components of a Company’s Macro-Environment

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3.1 The Seven Components of the Macro-Environment

Component Description Demographics The size, growth rate, and age distribution of different sectors of the population. It

includes the geographic distribution of the population, the distribution of income across the population, and trends in these factors.

Social forces Societal values, attitudes, cultural factors, and lifestyles that impact businesses. Social forces vary by locale and change over time.

Political, legal, and regulatory factors

Political policies and processes, as well as the regulations and laws with which companies must comply—labor laws, antitrust laws, tax policy, regulatory policies, the political climate, and the strength of institutions such as the court system.

Natural environment

Ecological and environmental forces such as weather, climate, climate change, and associated factors like water shortages.

Technological factors

The pace of technological change and technical developments that have the potential for wide-ranging effects on society, such as genetic engineering, the rise of the Internet, changes in communication technologies, and knowledge and controlling the use of technology,

Global forces Conditions and changes in global markets, including political events and policies toward international trade, sociocultural practices and the institutional environment in which global markets operate.

General economic conditions

Rates of economic growth, unemployment, inflation, interest, trade deficits or surpluses, savings, per capita domestic product, and conditions in the markets for stocks and bonds affecting consumer confidence and discretionary income.

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THINKING STRATEGICALLY ABOUT A COMPANY’S INDUSTRY AND COMPETITIVE ENVIRONMENT

1.  Does the industry offer attractive opportunities for growth? 2.  What kinds of competitive forces are industry members facing,

and how strong is each force? 3.  What factors are driving changes in the industry, and what

impact will these changes have on competitive intensity and industry profitability?

4.  What market positions do industry rivals occupy—who is strongly positioned and who is not?

5.  What strategic moves are rivals likely to make next? 6.  What are the key factors for competitive success in the

industry? 7.  Does the industry offer good prospects for attractive profits?

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QUESTION 1: DOES THE INDUSTRY OFFER ATTRACTIVE OPPORTUNITIES FOR GROWTH?

♦ Defining Growth: ●  What is the current market size in units or sales? ●  What is the past, current and expected rate of

growth for the market\industry? ♦ Considerations:

●  Different sectors\regions of a market grow at different rates.

●  Growth varies with the industry’s life cycle stage—emergence, rapid growth, maturity, and decline.

●  Growth does not guarantee profitability.

3–9

QUESTION 2: WHAT KINDS OF COMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING, AND HOW STRONG ARE THEY?

♦  The Five Competitive Forces: ●  Competition from rival sellers ●  Competition from potential new entrants ●  Competition from substitute products

producers ●  Supplier bargaining power ●  Customer bargaining power

3–10

3.3 The Five-Forces Model of Competition: A Key Analytical Tool

3–11

Using the Five-Forces Model of Competition

Step 1 For each of the five forces, identify the different parties involved, and the specific factors that bring about competitive pressures.

Step 2 Evaluate how strong the pressures stemming from each of the five forces are (strong, moderate to normal, or weak).

Step 3 Determine whether the strength of the five competitive forces, overall, is conducive to earning attractive profits in the industry.

3–12

3.2 Common “Weapons” for Competing with Rivals

Competitive Weapons Primary Effects Price discounting, clearance sales, “blowout” sales

Lowers price (P), acts to boost total sales volume and market share, lowers profit margins per unit sold when price cuts are big and/or increases in sales volume are relatively small

Couponing, advertising items on sale Acts to increase unit sales volume and total revenues, lowers price (P), increases unit costs (C), may lower profit margins per unit sold (P – C)

Advertising product or service characteristics, using ads to enhance a company’s image or reputation

Boosts buyer demand, increases product differentiation and perceived value (V), acts to increase total sales volume and market share, may increase unit costs (C) and/or lower profit margins per unit sold

Innovating to improve product performance and quality

Acts to increase product differentiation and value (V), boosts buyer demand, acts to boost total sales volume, likely to increase unit costs (C)

Introducing new or improved features, increasing the number of styles or models to provide greater product selection

Acts to increase product differentiation and value (V), strengthens buyer demand, acts to boost total sales volume and market share, likely to increase unit costs (C)

Increasing customization of product or service

Acts to increase product differentiation and value (V), increases switching costs, acts to boost total sales volume, often increases unit costs (C)

Building a bigger, better dealer network Broadens access to buyers, acts to boost total sales volume and market share, may increase unit costs (C)

Improving warranties, offering low-interest financing

Acts to increase product differentiation and value (V), increases unit costs (C), increases buyer costs to switch brands, acts to boost total sales volume and market share

3–13

Competitive Pressures That Act to Increase the Rivalry among Competing Sellers

♦  Buyer demand is growing slowly or declining. ♦  It is becoming less costly for buyers to switch brands. ♦  Industry products are becoming more alike. ♦  There is unused production capacity, and\or products

have high fixed costs or high storage costs. ♦  The number of competitors is increasing and\or they are

becoming more equal in size and competitive strength. ♦  The diversity of competitors is increasing. ♦  High exit barriers stop firms from exiting the industry.

3–14

3.4 Factors Affecting the Strength of Rivalry

3–15

Competitive Pressures Associated with the Threat of New Entrants

♦ Entry Threat Considerations: ●  Strength of barriers to entry ●  Expected reaction of incumbent firms ●  Attractiveness of a particular market’s growth in

demand and profit potential ●  Capabilities and resources of potential entrants ●  Entry of existing competitors into market segments

in which they have no current presence

3–16

Market Entry Barriers Facing New Entrants

♦  Economies of scale in production, distribution, advertising, or other areas of operation

♦  Experience and learning curve effects ♦  Unique cost advantages of industry incumbents ♦  Strong brand preferences and customer loyalty ♦  Strong “network effects” in customer demand ♦  High capital requirements ♦  Building a network of distributors or dealers and

securing adequate space on retailers’ shelves ♦  Restrictive government policies

3–17

3.5 Factors Affecting the Threat of Entry

3–18

Competitive Pressures from the Sellers of Substitute Products

♦ Substitute Products Considerations: ●  Ready availability of substitutes ●  Pricing, quality, performance, and other relevant

attributes of substitutes ●  Switching costs that buyers incur

♦  Indicators of Substitutes’ Competitive Strength: ●  Increasing rate of growth in sales of substitutes ●  Substitute producers adding output capacity ●  Increasing profitability of substitute producers

3–19

3.6 Factors Affecting Competition from Substitute Products

3–20

Competitive Pressures Stemming from Supplier Bargaining Power

♦ Supplier Bargaining Power Considerations: ●  Ready availability of supplier products ●  Criticality of supplier products as industry inputs ●  Number of suppliers of standard\commodity items ●  Buyers’ costs for switching among suppliers ●  Availability of substitutes for suppliers’ products ●  Fraction of supplier sales due to industry demand ●  Ratio of suppliers relative to industry buyers ●  Backward integration into suppliers’ industry

3–21

3.7 Factors Affecting the Bargaining Power of Suppliers

3–22

Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity

♦ Buyer Bargaining Power Considerations: ●  Buyer costs for switching to competing sellers ●  Degree to which industry products are commoditized ●  Number and size of buyers relative to sellers ●  Strength of buyer demand for sellers’ products ●  Buyer knowledge of products, costs and pricing ●  Backward integration of buyers into sellers’ industry ●  Buyer discretion in delaying purchases ●  Buyer price sensitivity due to low profits, size of

purchase, and consequences of purchase

3–23

3.8 Factors Affecting the Bargaining Power of Buyers

3–24

Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability?

♦  Is the state of competition in the industry stronger than “normal”?

♦ Can industry firms expect to earn decent profits given prevailing competitive forces?

♦ Are some of the competitive forces sufficiently powerful to undermine industry profitability?

3–25

Matching Strategy to Competitive Conditions

1.  Pursuing avenues that shield the firm from as many competitive pressures as possible.

2.  Initiating actions calculated to shift competitive forces in the firm’s favor by altering underlying factors driving the five forces.

3.  Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker.

3–26

QUESTION 3: WHAT FACTORS ARE DRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE?

♦  Strategic Analysis of Industry Dynamics: 1.  Identifying the drivers of change. 2.  Assessing whether the drivers of change

are, individually or collectively, acting to make the industry more or less attractive.

3.  Determining what strategy changes are needed to prepare for the impacts of the anticipated change.

3–27

3.3 The Most Common Drivers of Industry Change

1.  Changes in the long-term industry growth rate 2.  Increasing globalization 3.  Changes in who buys the product and how they use it 4.  Technological change 5.  Emerging new Internet capabilities and applications 6.  Product and marketing innovation 7.  Entry or exit of major firms 8.  Diffusion of technical know-how across companies and

countries 9.  Improvements in efficiency in adjacent markets 10.  Reductions in uncertainty and business risk 11.  Regulatory influences and government policy changes 12.  Changing societal concerns, attitudes, and lifestyles

3–28

Assessing the Impact of the Factors Driving Industry Change

1.  Overall, are the factors driving change causing demand for the industry’s product to increase or decrease?

2.  Is the collective impact of the drivers of change making competition more or less intense?

3.  Will the combined impacts of the change drivers lead to higher or lower industry profitability?

3–29

Developing a Strategy That Takes the Changes in Industry Conditions into Account

♦ What strategy adjustments will be needed to deal with the impacts of the changes in industry conditions? ●  What adjustments must be made immediately?

●  What actions must we not take or should we cease to do now?

●  What can we do now to prepare for adjustments we anticipate making in the future?

3–30

QUESTION 4: HOW ARE INDUSTRY RIVALS POSITIONED—WHO IS STRONGLY POSITIONED AND WHO IS NOT?

♦  A Strategic Group ●  Is a cluster of industry rivals that have similar

competitive approaches and market positions: !  Have comparable product-line breadth !  Sell in the same price/quality range !  Emphasize the same distribution channels !  Use the same product attributes to buyers !  Depend on identical technological approaches !  Offer similar services and technical assistance

3–31

Using Strategic Group Maps to Assess the Market Positions of Key Competitors

♦ Constructing a strategic group map: ●  Identify the competitive characteristics that

differentiate firms in the industry.

●  Plot the firms on a two-variable map using pairs of differentiating competitive characteristics.

●  Assign firms occupying about the same map location to the same strategic group.

●  Draw circles around each strategic group, making the circles proportional to the size of the group’s share of total industry sales revenues.

3–32

Typical Variables for Differentiating the Market Positions of Key Competitors on Group Maps

♦  Price/quality range (high, medium, low) ♦  Geographic coverage (local, regional, national, global)

♦  Product-line breadth (wide, narrow)

♦  Degree of service offered (no frills, limited, full)

♦  Distribution channels (retail, wholesale, Internet, multiple)

♦  Degree of vertical integration (none, partial, full)

♦  Degree of diversification into other industries (none, some, considerable).

3–33

Choosing Variables for Group Maps

♦ Variables selected as map axes: ●  Must not be highly correlated. ●  Must reflect key approaches to customer

value and expose sizable differences in the marketplace positions of rivals.

●  May be quantitative, continuous, discrete and\or defined in terms of distinct classes and combinations.

3–34

Guidelines for Constructing Group Maps

♦ Draw map circles proportional to the combined sales of firms in each strategic group to reflect the relative sizes of each group to the total size of the industry.

♦ Use different variable sets to show different views of relationships among competitive positions in the industry’s structure—there is no one best map for portraying how competing firms are positioned.

3–35

ILLUSTRATION CAPSULE 3.1 Comparative Market Positions of Selected Retail Chains: A Strategic Group Map Example

>--I'll :I 0 Q; 0 ·.:: a..

High

Low

• Gucci, Chanel, Fen di

Few localities

Geographic Coverage

Wal mart, Kmart

Many localities

3–36

Follow-up

♦ Which strategic group is located in the least favorable market position? Which group is in the most favorable position?

♦ Which strategic group is likely to experience increased intragroup competition?

♦ Which groups are most threatened by the likely strategic moves of members of nearby strategic groups?

3–37

What Can Be Learned from Strategic Group Maps?

♦  Maps are useful in identifying which industry members are close rivals and which are distant rivals.

♦  Not all map positions are equally attractive. 1.  Prevailing competitive pressures in the industry

and drivers of change favor some strategic groups and hurt others.

2.  Profit prospects vary from strategic group to strategic group.

3–38

QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT?

♦ Competitive Intelligence ●  Information about rivals that is useful in anticipating

their next strategic moves. ♦ Signals of the Likelihood of Strategic Moves:

●  Rivals under pressure to improve financial performance

●  Rivals seeking to increase market standing ●  Public statements of rivals’ intentions ●  Profiles developed by competitive intelligence units

3–39

Useful Questions to Help Predict the Likely Actions of Important Rivals

♦  Which competitors’ strategies are achieving good results?

♦  Which competitors are losing in the marketplace or badly need to increase their unit sales and market share?

♦  Which rivals are likely make major moves to enter new geographic markets or to increase sales and market share in a particular geographic region?

♦  Which rivals can expand product offerings to enter new product segments where they do not have a presence?

♦  Which rivals can be acquired? Which rivals are financially able and looking to make an acquisition?

3–40

QUESTION 6: WHAT ARE THE KEY FACTORS FOR FUTURE COMPETITIVE SUCCESS?

♦ Key Success Factors ●  Are the strategy elements, product and

service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry.

●  Vary from industry to industry, and over time within the same industry, as drivers of change and competitive conditions change.

3–41

Identification of Key Success Factors

1.  What product attributes and service features buyers strongly affect buyers when choosing between the competing brands of sellers?

2.  What resources and competitive capabilities are required for a firm to execute a successful strategy in the marketplace?

3.  What shortcomings will put a firm at a significant competitive disadvantage?

3–42

QUESTION 7: DOES THE INDUSTRY OFFER GOOD PROSPECTS FOR ATTRACTIVE PROFITS?

♦  Industry Profitability Considerations: ●  The industry’s overall growth potential ●  Effects of strong competitive forces ●  Effects of prevailing drivers of change in the industry ●  Competitive strength of the firm: its market position

relative to its rivals, its capability to withstand competitive forces, and whether its position will change in the course of competitive interactions

●  The success of the firm’s strategy in delivering on the industry’s key success factors

CHAPTER 4

EVALUATING A COMPANY’S RESOURCES, CAPABILITIES, AND COMPETITIVENESS

McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

4–2

1.  Learn how to take stock of how well a company’s strategy is working.

2.  Understand why a company’s resources and capabilities are central to its strategic approach and how to evaluate their potential for giving the company a competitive edge over rivals.

3.  Discover how to assess the company’s strengths and weaknesses in light of market opportunities and external threats.

4.  Grasp how a company’s value chain activities can affect the company’s cost structure, degree of differentiation, and competitive advantage.

5.  Understand how a comprehensive evaluation of a company’s competitive situation can assist managers in making critical decisions about their next strategic move

4–3

EVALUATING A FIRM’S INTERNAL SITUATION

1.  How well is the firm’s present strategy working?

2.  What are the firm’s competitively important resources and capabilities?

3.  Is the firm able to take advantage of market opportunities and overcome external threats to its external well-being?

4.  Are the firm’s prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition?

5.  Is the firm competitively stronger or weaker than key rivals?

6.  What strategic issues and problems merit front-burner managerial attention?

4–4

QUESTION 1: HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING?

♦ Best indicators of a well-conceived, well-executed strategy: ●  The company is achieving its stated

financial and strategic objectives. ●  The company is an above-average

industry performer.

4–5

Other Indicators of Strategic Success

♦  Growth in firm’s sales and market share ♦  Acquisition and retention of customers

♦  Increasing profit margins, net profits and ROI

♦  Growing financial strength and credit rating

♦  Positively viewed by shareholders and customers

♦  Leadership in factors relevant to market\industry success

♦  Continuing improvement in operating performance

4–6

4.1 Identifying the Components of a Single-Business Company’s Strategy

4–7

4.1 Key Financial Ratios

How Calculated

4–8

4.1 Key Financial Ratios (cont’d)

4–9

4.1 Key Financial Ratios (cont’d)

4–10

QUESTION 2: WHAT ARE THE COMPANY’S COMPETITIVELY IMPORTANT RESOURCES AND CAPABILITIES?

♦ Competitive Assets ●  Are the firm’s resources and capabilities. ●  Are the determinants of its competitiveness

and ability to succeed in the marketplace. ●  Are what a firm’s strategy depends on to

develop sustainable competitive advantage over its rivals.

4–11

Resources and Capabilities

♦ A Resource ●  Is a productive input or competitive asset that is

owned or controlled by a company (e.g., a fleet of oil tankers).

♦ A Capability ●  Is the capacity of a firm to perform some activity

proficiently (e.g., superior skills in marketing).

4–12

4.2 Types of Company Resources

Tangible Resources

Physical resources Financial resources Technological assets

Organizational resources

Intangible Resources

Human assets and intellectual capital Brands External relationships Company culture and incentive system

4–13

Resource and Capability Analysis

♦  Identify the firm’s resources and capabilities. ♦ Test the competitive power of the firm’s

resources and capabilities: ●  Is the resource (or capability) competitively valuable?

●  Is the resource rare—is it something rivals lack?

●  Is the resource hard to copy?

●  Can the resource be overcome by different types of resources and capabilities—are there good substitutes available for the resource?

4–14

Identifying Capabilities

♦ An Organizational Capability ●  Is the intangible but observable capacity of a

firm to perform a critical activity proficiently using a related combination (cross-functional bundle) of its resources.

●  Is knowledge-based, residing in people and in a firm’s intellectual capital or in its organizational processes and functional systems, which embody tacit knowledge.

4–15

Managing Resources and Capabilities Dynamically

♦ Threats to Resources and Capabilities: ●  Rivals providing better substitutes over time ●  Capabilities decaying from benign neglect ●  Disruptive competitive environment change

♦ Managing Capabilities Dynamically ●  Is the process of creating new and\or updating

existing resources\capabilities to obtain durable value in both resource types in syncing their support of a resource-based competitive strategy.

4–16

QUESTION 3: IS THE COMPANY ABLE TO SEIZE MARKET OPPORTUNITIES AND NULLIFY EXTERNAL THREATS?

♦ SWOT Analysis ●  Is a powerful tool for sizing up a firm’s:

!  Internal strengths (the basis for strategy)

!  Internal weaknesses (deficient capabilities)

! Market opportunities (strategic objectives)

! External threats (strategic defenses)

4–17

Identifying a Company’s Internal Strengths

♦ A Competence ●  Is an activity that a firm has learned to perform with

proficiency—a capability.

♦ A Core Competence ●  Is a proficiently performed internal activity that is

central to a firm’s strategy and competitiveness.

♦ A Distinctive Competence ●  Is a competitively valuable activity that a firm

performs better than its rivals.

4–18

Identifying a Company’s Weaknesses and Competitive Deficiencies

♦ A Weakness (Competitive Deficiency) ●  Is something a firm lacks or does poorly (in

comparison to others) or a condition that puts it at a competitive disadvantage in the marketplace.

♦ Types of Weaknesses: ●  Inferior skills, expertise, or intellectual capital ●  Physical, organizational, or intangible assets

deficiencies ●  Missing or inferior capabilities in key areas

4–19

Identifying a Company’s Market Opportunities

♦ Characteristics of Market Opportunities: ●  An absolute “must pursue” market

! Represents much potential but is hidden in “fog of the future.”

●  A marginally interesting market ! Presents high risk and questionable profit

potential. ●  An unsuitable\mismatched market

! The firm’s strengths are not matched to market factors—best avoided.

4–20

Identifying the Threats to a Company’s Future Profitability

♦ Types of Threats: ●  Normal course-of-business threats ●  Sudden-death threats

♦ Considering Threats: ●  Identify the threats to the company’s

future prospects. ●  Evaluate what strategic actions can be

taken to neutralize or lessen their impact.

4–21

What Do the SWOT Listings Reveal?

♦ SWOT Analysis Involves: ●  Drawing conclusions from the SWOT

listings about the firm’s overall situation. ●  Translating these conclusions into

strategic actions by the firm that: ! Match its strategy to its internal

strengths and to market opportunities. ! Correct important weaknesses, and

defend it against external threats.

4–22

4.2 The Steps Involved in SWOT Analysis: Identify the Four Components of SWOT, Draw Conclusions, Translate Implications into Strategic Actions

4–23

QUESTION 4: ARE THE FIRM’S PRICES AND COSTS COMPETITIVE WITH THOSE OF KEY RIVALS, AND DOES IT HAVE AN APPEALING CUSTOMER VALUE PROPOSITION?

♦ Signs of A Firm’s Competitive Strength: ●  Its prices and costs are in line with rivals.

●  Its customer-value proposition is competitive and cost effective.

●  Its bundled capabilities are yielding a sustainable competitive advantage.

4–24

The Concept of a Company Value Chain

♦ The Value Chain ●  Identifies the primary internal activities that create

customer value and the related support activities.

●  Permits a deep look at the firm’s cost structure and ability to offer low prices.

●  Reveals the emphasis that a firm places on activities that enhance differentiation and support higher prices.

4–25

4.3 A Representative Company Value Chain

4–26

Comparing the Value Chains of Rival Firms

♦ Value Chain Analysis ●  Facilitates a comparison, activity-by-activity, of how

effectively and efficiently a company delivers value to its customers, relative to its competitors.

♦ The Value Chain Analysis Process: ●  Segregate the firm’s operations into different types

of primary and secondary activities to identify the major components of its internal cost structure.

●  Use activity-based costing to evaluate the activities. ●  Do the same for significant competitors.

4–27

Value Chain System for an Entire Industry

♦  Industry Value Chain: ●  The firm’s internal value chain ●  The value chains of industry suppliers ●  The value chains of channel intermediaries

♦ Effects of the Industry Value Chain: ●  Costs and margins of suppliers and channel

partners can affect prices to end consumers. ●  Activities of channel partners can affect industry

sales volumes and customer satisfaction.

4–28

4.4 Representative Value Chain System for an Entire Industry

4–29

ILLUSTRATION CAPSULE 4.1 The Value Chain for Just Coffee, a Producer of Fair-Trade Organic Coffee

WHERE YOUR MONEY GOES

MCASURCD IN DOLLARS PCR POUND 1. Average cost of procuring the coffee from coffee-grower cooperatives

2. Import fees, storage costs, and freight charges

3. Labor cost of roasting and bagging

4. Cost of labels and bag

5. Average overhead costs

6. Total company costs

7. Average retail markup over company costs (company operating profit)

8. Average price to consumer at retai l

$2.30

.73

.89

.45

3.03

$7.40

2.59

$9.99

Source: Developed by the authors wi1h help from Jonathan D. Keith from information on Just Coffee's Web site, www.justcoffee.coop/the_coffee dollar_breakdown (accessed June 16, 2010).

4–30

♦ Which activities in the value chain are primary activities? Which are secondary activities?

♦ Which activities are linked to the value chain for the entire industry?

♦ How could activity cost(s) could be reduced without harming the fair-trade intent of the Just Coffee coop?

4–31

Benchmarking and Value Chain Activities

♦ Benchmarking: ●  Involves improving a firm’s internal activities based

on learning other companies’ “best practices.” ●  Assesses whether the cost competitiveness and

effectiveness of a firm’s value chain activities are in line with its competitors’ activities.

♦ Sources of Benchmarking Information ●  Reports, trade groups, analysts and customers ●  Visits to benchmark companies ●  Data from consulting firms

4–32

Strategic Options for Remedying a Disadvantage in Costs or Effectiveness

♦ There are three places in the total value chain system for a company to look for ways to improve its efficiency and effectiveness: ●  The firm’s own activity segments ●  The suppliers’ part of the overall value chain ●  The distribution channel portion of the chain.

4–33

Options for Improving the Efficiency and Effectiveness of Internal Value Chain Activities

♦  Implement best practices throughout the company, particularly for high-cost activities.

♦  Redesign products to eliminate high-cost components or facilitate speedier and more economical assembly or manufacture.

♦  Relocate high-cost activities to areas where they can be performed more cheaply.

♦  Outsource activities that can be performed by contractors more cheaply than in-house.

♦  Shift to lower-cost technologies and/or invest in productivity-enhancing, cost-saving technological improvements.

♦  Stop performing activities that add little or no customer value.

4–34

Ways to Improve the Effectiveness of the Customer Value Proposition and Enhance Differentiation

♦  Implement best practices throughout the company, particularly for high-cost activities.

♦  Adopt best practices and technologies that spur innovation, improve design, and enhance creativity.

♦  Implement the best practices in providing customer service. ♦  Reallocate resources to devote more to activities that will have

the biggest impact on the value delivered to the customer and that address buyers’ most important purchase criteria.

♦  For intermediate buyers, gain an understanding of how the activities the firm performs impact the buyer’s value chain.

♦  Adopt best practices for signaling the value of the product and for enhancing customer perceptions.

4–35

Ways to Improve the Efficiency and Effectiveness of Supplier-Related Value Chain Activities

♦  Pressure suppliers for lower prices.

♦  Switch to lower-priced substitute inputs.

♦  Collaborate closely with suppliers to identify mutual cost-saving opportunities.

♦  Work with suppliers to enhance the firm’s differentiation.

♦  Select and retain suppliers who meet higher-quality standards.

♦  Coordinate with suppliers to enhance design or other features desired by customers.

♦  Provide incentives to suppliers to meet higher-quality standards, and assist suppliers in their efforts to improve.

4–36

Ways to Improve the Efficiency and Effectiveness of Distribution-Related Value Chain Activities

♦ Achieving Cost-Based Competitiveness: ●  Pressure forward channel allies to reduce their

costs and markups so as to make the final price to buyers more competitive.

●  Collaborate with forward channel allies to identify win-win opportunities to reduce costs.

●  Change to a more economical distribution strategy, including switching to cheaper distribution channels.

4–37

Ways to Improve the Efficiency and Effectiveness of Distribution-Related Value Chain Activities

♦ Enhancing Differentiation: ●  Engage in cooperative advertising and promotions

with forward channel allies

●  Use exclusive arrangements with downstream sellers or other mechanisms that increase their incentives to enhance delivered customer value

●  Create and enforce standards for downstream activities and assist in training channel partners in business practices.

4–38

4.5 Translating Company Performance of Value Chain Activities into Competitive Advantage

4–39

4.5 Translating Company Performance of Value Chain Activities into Competitive Advantage (cont’d)

4–40

QUESTION 5: IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY RIVALS?

♦ Competitive Advantage Indicators: ●  Ability to effectively and efficiently bundle

resources and capabilities. ●  Achieving a high rank on each key success

factor. ●  Having a net competitive advantage over its

rivals.

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The Competitive Strength Assessment Process

Step 1 Make a list of the industry’s key success factors and measures of competitive strength or weakness (6 to 10 measures usually suffice).

Step 2 Assign a weight to each competitive strength measure based on its perceived importance.

Step 3 Rate the firm and its rivals on each competitive strength measure and multiply by each measure by its corresponding weight.

4–42

4.4 A Representative Weighted Competitive Strength Assessment

4–43

Strategic Implications of Competitive Strength Assessment

♦  The higher a firm’s overall weighted strength rating, the stronger its overall competitiveness versus rivals.

♦  The rating score indicates the total net competitive advantage for a firm relative to other firms.

♦  Firms with high competitive strength scores are targets for benchmarking.

♦  The ratings show how a company compares against rivals, factor by factor (or capability by capability).

♦  Strength scores can be useful in deciding what strategic moves to make.

4–44

QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL ATTENTION?

♦  Identifying Strategic Issues: ● How to stave off market challenges from new foreign

competitors. ● How to combat the price discounting of rivals. ● How to reduce high costs and pave the way for price

reductions. ● How to sustain growth in light of slowing buyer demand. ● Whether to expand the firm’s product line. ● Whether to correct the firm’s competitive deficiencies

by acquiring a rival company with the missing strengths.

4–45

QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL ATTENTION?

♦  Identifying Strategic Issues (cont’d): ● Whether to expand into foreign markets rapidly

or cautiously.

● Whether to reposition the company and move to a different strategic group.

● What to do about growing buyer interest in substitute products.

● What to do to combat the aging demographics of the firm’s customer base.

CHAPTER 5

THE FIVE GENERIC COMPETITIVE STRATEGIES - Which One to Employ?

McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

5–2

1.  Understand what distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of industry and competitive conditions than in others.

2.  Gain command of the major avenues for achieving a competitive advantage based on lower costs.

3.  Learn the major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.

4.  Recognize the attributes of a best-cost provider strategy and the way in which some firms use a hybrid strategy to go about building a competitive advantage and delivering superior value to customers.

5–3

Why Do Strategies Differ?

Is the competitive advantage pursued linked to low costs or product differentiation?

Is the firm’s market target broad or narrow?

Key factors that distinguish one strategy

from another

5–4

THE FIVE GENERIC COMPETITIVE STRATEGIES

Low-Cost Provider

Striving to achieve lower overall costs than rivals on products that attract a broad spectrum of buyers.

Broad Differentiation

Differentiating the firm’s product offering from rivals’ with attributes that appeal to a broad spectrum of buyers.

Focused Low-Cost

Concentrating on a narrow price-sensitive buyer segment and on costs to offer a lower-priced product.

Focused Differentiation

Concentrating on a narrow buyer segment by meeting specific tastes and requirements of niche members

Best-Cost Provider

Giving customers more value for the money by offering upscale product attributes at a lower cost than rivals

5–5

5.1 The Five Generic Competitive Strategies: Each Stakes Out a Different Market Position

5–6

LOW-COST PROVIDER STRATEGIES

♦ Effective Low-Cost Approaches: ● Pursue cost-savings that are difficult imitate. ● Avoid reducing product quality to unacceptable levels.

♦  Competitive Advantages and Risks: ● Greater total profits and increased market share

gained from underpricing competitors. ● Larger profit margins when selling products at prices

comparable to and competitive with rivals. ● Low pricing does not attract enough new buyers. ● Rival’s retaliatory price cutting set off a price war.

5–7

Major Avenues for Achieving a Cost Advantage

♦ Low-Cost Advantage ●  A firm’s cumulative costs for its overall value chain

must be lower than its rival’s cumulative costs. ♦ How to Gain a Low-cost Advantage:

●  Do a better job than rivals of performing value chain activities more cost-effectively.

●  Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities.

5–8

Cost-Efficient Management of Value Chain Activities

♦ Cost Driver ●  Is a factor with a strong influence on a firm’s costs. ●  Can be asset- or activity-based.

♦ Ways to Secure a Cost Advantage: ●  Use lower-cost inputs and hold minimal assets ●  Offer only “essential” product features or services ●  Offer only limited product lines ●  Use low-cost distribution channels ●  Use the most economical delivery methods

5–9

5.2 Cost Drivers: The Keys to Driving Down Company Costs

5–10

Revamping the Value Chain System to Lower Costs

♦ Bypass the activities and costs of distributors and dealers by selling directly to consumers.

♦ Coordinate with suppliers to bypass activities, speed up their performance, or otherwise increase overall efficiency.

♦ Reduce handling and shipping costs by locating suppliers close to the firm’s own facilities.

5–11

When a Low-Cost Provider Strategy Works Best

♦  Price competition among rival sellers is vigorous. ♦  Products are readily available from many sellers.

♦  Industry products are not easily differentiated.

♦  Most buyers use the product in the same ways.

♦  Buyers incur low costs in switching among sellers.

♦  Large buyers have the power to bargain down prices.

♦  New entrants can use introductory low prices to attract buyers and build a customer base.

5–12

Pitfalls of a Low-Cost Provider Strategy

♦ Lowering selling prices results in gains that are smaller than the increases in total costs, reducing profits rather than raising them.

♦ Relying on a cost advantage that is not sustainable because rivals can copy or otherwise overcome it.

♦ Becoming too fixated on cost reduction such that the firm’s offering is too features-poor to generate sufficient buyer appeal.

5–13

BROAD DIFFERENTIATION STRATEGIES

♦ Effective Differentiation Approaches: ● Carefully study buyer needs and behaviors, values

and willingness to pay a unique product or service. ●  Incorporate features that both appeal to buyers and

create a sustainably distinctive product offering. ● Use higher prices to recoup differentiation costs.

♦ Advantages of Differentiation: ● Premium prices for products ●  Increased unit sales ● Brand loyalty

5–14

Cost-Efficient Management of Value Chain Activities

♦ A Uniqueness Driver Can: ●  Have a strong differentiating effect. ●  Be based on physical as well as functional

attributes of a firm’s products. ●  Be the result of superior performance

capabilities of the firm’s human capital. ●  Have an effect on more than one of the firm’s

value chain activities. ●  Create a perception of value (brand loyalty) in

buyers where there is little reason for it to exist.

5–15

5.3 Uniqueness Drivers: The Keys to Creating a Differentiation Advantage

5–16

Revamping the Value Chain System to Increase Differentiation

Coordinating with suppliers to better address customer needs

Coordinating with channel allies to enhance customer perceptions of value

Approaches to enhancing differentiation

5–17

When a Differentiation Strategy Works Best

Diversity of buyer needs and uses for the product

Many ways that differentiation can have value

to buyers

Few rival firms follow a similar differentiation

approach

Rapid change in technology and

product features

Market Circumstances Favoring Differentiation

5–18

Pitfalls of a Differentiation Strategy

♦  Relying on product attributes easily copied by rivals. ♦  Introducing product attributes that do not evoke an

enthusiastic buyer response. ♦  Eroding profitability by overspending on efforts to

differentiate the firm’s product offering.

♦  Not opening up meaningful gaps in quality, service, or performance features vis-à-vis the products of rivals.

♦  Adding frills and features such that the product exceeds the needs and uses of most buyers.

♦  Charging too high a price premium.

5–19

FOCUSED (OR MARKET NICHE) STRATEGIES

Focused Market Niche

Strategy

Focused Low-Cost Strategy

Focused Strategy Approaches

5–20

When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive

♦  The target market niche is big enough to be profitable and offers good growth potential.

♦  Industry leaders do not see that having a presence in the niche is crucial to their own success.

♦  It is costly or difficult for multisegment competitors to meet the needs of target market niche buyers.

♦  The industry has many different niches and segments.

♦  Rivals have little or no interest in the target segment.

♦  The focuser has a reservoir of buyer goodwill and long-term loyalty.

5–21

The Risks of a Focused Low-Cost or Focused Differentiation Strategy

♦ Competitors will find ways to match the focused firm’s capabilities in serving the target niche.

♦ The specialized preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers.

♦ As attractiveness of the segment increases, it draws in more competitors, intensifying rivalry and splintering segment profits.

5–22

Value-Conscious Buyer

BEST-COST PROVIDER STRATEGIES

Best-Cost Provider Hybrid Approach

Differentiation: Providing desired quality/

features/performance/ service attributes

Low Cost Provider: Charging a lower price than rivals with similar

caliber product offerings

5–23

Market Characteristics Favoring a Best-Cost Provider Strategy

♦  Product differentiation is the market norm. ♦  There are a large number of value-conscious buyers

who prefer midrange products. ♦  There is competitive space near the middle of the

market for a competitor with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price.

♦  Economic conditions have caused more buyers to become value-conscious.

5–24

The Big Risk of a Best-Cost Provider Strategy—Getting Squeezed on Both Sides

High-End Differentiators

Low-Cost Providers

Best-Cost Provider Strategy

5–25

Follow-up

♦ How can product quality lower product costs?

♦  In which stages of the industry life cycle are low-cost leadership, differentiation, focused niche, and best-cost provider strategies most appropriate?

♦ Could differences in the sticker prices of the luxury-car market be used as a proxy for measuring the strength of Toyota’s best-cost strategy?

5–26

THE CONTRASTING FEATURES OF THE FIVE GENERIC COMPETITIVE STRATEGIES: A SUMMARY

♦ Each Generic Strategy: ●  Positions the firm differently in its market.

●  Establishes a central theme for how the firm intends to outcompete rivals.

●  Creates boundaries or guidelines for strategic change as market circumstances unfold.

●  Points to different ways of experimenting and tinkering with the basic strategy.

5–27

5.1 Distinguishing Features of the Five Generic Competitive Strategies

5–28

5.1 Distinguishing Features of the Generic Competitive Strategies (cont’d)

5–29

5.1 Distinguishing Features of the Generic Competitive Strategies (cont’d)

5–30

Successful Competitive Strategies Are Resource-Based

♦ A firm’s competitive strategy is unlikely to succeed unless it is predicated on leveraging a competitively valuable collection of resources and capabilities that match the strategy.

♦ Sustaining a firm’s competitive advantage depends on its resources, capabilities, and competences that are difficult for rivals to duplicate and have no good substitutes.

CHAPTER 6

STRENGTHENING A COMPANY’S COMPETITIVE POSITION Strategic Moves, Timing, and Scope of Operations

McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

6–2

1.  Learn whether and when to pursue offensive or defensive strategic moves to improve a company’s market position.

2.  Recognize when being a first mover or a fast follower or a late mover is most advantageous.

3.  Become aware of the strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

4.  Learn the advantages and disadvantages of extending the company’s scope of operations via vertical integration.

5.  Become aware of the conditions that favor farming out certain value chain activities to outside parties.

6.  Understand when and how strategic alliances can substitute for horizontal mergers and acquisitions or vertical integration and how they can facilitate outsourcing.

6–3

Maximizing the Power of a Strategy

Offensive and Defensive

Competitive Actions

Competitive Dynamics and the Timing of Strategic

Moves

Scope of Operations along

the Industry’s Value Chain

Making choices that complement a competitive approach and

maximize the power of strategy

6–4

Considering Strategy-Enhancing Measures

♦  Whether and when to go on the offensive. ♦  Whether and when to employ defensive strategies. ♦  When to undertake strategic moves—first mover, a fast

follower, or a late mover. ♦  Whether to merge with or acquire another firm. ♦  Whether and where to integrate backward or forward

into the industry’s activity chain. ♦  Whether to outsource value chain activities or perform

them in-house. ♦  Whether to enter into strategic alliances or partnership

arrangements.

6–5

GOING ON THE OFFENSIVE—STRATEGIC OPTIONS TO IMPROVE A FIRM’S MARKET POSITION

♦ Strategic Offensive Principles: ●  Relentlessly build competitive advantage and

then convert it into sustainable advantage.

●  Create and deploy resources in ways that cause rivals to struggle to defend themselves.

●  Employ the element of surprise as opposed to doing what rivals expect and are prepared for.

●  Display a strong bias for swift, decisive, and overwhelming actions to overpower rivals.

6–6

Choosing the Basis for Competitive Attack

♦ Avoid directly challenging a targeted competitor where it is strongest.

♦ Use the firm’s strongest strategic assets to attack a competitor’s weaknesses.

♦ The offensive may not yield immediate results if market rivals are strong competitors.

♦ Be prepared for the threatened competitor’s counter-response.

6–7

Principal Offensive Strategy Options

♦  Use a cost-based advantage to attack competitors on the basis of price or value.

♦  Leapfrog rivals as a first adopter of technology or by being first to market with products.

♦  Adopt and improve on the good ideas of other firms (rivals or otherwise).

♦  Use hit-and-run or guerrilla warfare tactics to grab sales and market share.

♦  Launch a preemptive strike to secure an advantageous position that rivals cannot easily duplicate.

6–8

Choosing Which Rivals to Attack

Market leaders that are

vulnerable

Runner-up firms with weaknesses

in areas where the challenger

is strong

Struggling enterprises on

the verge of going under

Small local and regional

firms with limited capabilities

Best Targets for Offensive Attacks

6–9

Blue-Ocean Strategy— A Special Kind of Offensive

♦ The business universe is divided into: ●  An existing market with boundaries and rules

in which rival firms compete for advantage.

●  A yet-to-be “blue ocean” market space with no rivals and a wide-open long-term growth and profit potential for a firm with the right strategy and product.

6–10

DEFENSIVE STRATEGIES—PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE

Lower the firm’s risk of being attacked

Weaken the impact of an attack

that does occur

Influence challengers to aim their efforts

at other rivals

Purposes of Defensive Strategies

6–11

Blocking the Avenues Open to Challengers

♦  Adopt alternative technologies as a hedge against rivals attacking with a new or better technology.

♦  Introduce new features and models to broaden product lines to close gaps and vacant niches.

♦  Maintain economy-pricing to thwart lower price attacks.

♦  Discourage buyers from trying competitors’ brands.

♦  Challenge quality and safety of competitor’s products

♦  Grant discounts or better terms to intermediaries who handle the firm’s product line exclusively.

6–12

Signaling Challengers That Retaliation Is Likely

♦ Signaling is an effective defensive strategy if the firm follows through by: ●  Publicly announcing its commitment to maintaining

the firm’s present market share. ●  Publicly committing to a policy of matching

competitors’ terms or prices. ●  Maintaining a war chest of cash and marketable

securities. ●  Making a strong counter-response to the moves of

weaker rivals to enhance its tough defender image.

6–13

TIMING A FIRM’S OFFENSIVE AND DEFENSIVE STRATEGIC MOVES

♦ Timing’s Importance: ●  Knowing when to make a strategic move is

as crucial as knowing what move to make. ●  Moving first is no guarantee of success or

competitive advantage. ●  The risks of moving first to stake out a

monopoly position must be carefully weighted.

6–14

Conditions That Lead to First-Mover Advantages

♦  When pioneering helps build a firm’s reputation with buyers and creates brand loyalty.

♦  When a first mover’s customers will thereafter face significant switching costs.

♦  When property rights protections thwart rapid imitation of the initial move.

♦  When an early lead enables movement down the learning curve ahead of rivals.

♦  When a first mover can set the technical standard for the industry.

6–15

Conditions Creating First-Mover Disadvantages

♦  When pioneering is more costly than imitating and offers negligible experience or learning-curve benefits.

♦  When the products of an innovator are somewhat primitive and do not live up to buyer expectations.

♦  When rapid market evolution allows fast followers to leapfrog a first mover’s products with more attractive next-version products.

♦  When market uncertainties make it difficult to ascertain what will eventually succeed.

6–16

To Be a First Mover or Not

♦  Does market takeoff depend on complementary products or services that currently are not available?

♦  Is new infrastructure required before buyer demand can surge?

♦  Must buyers learn new skills or adopt new behaviors? ♦  Will buyers encounter high switching costs in moving

to the newly introduced product or service? ♦  Are there influential competitors in a position to delay

or derail the efforts of a first mover?

6–17

♦ Which first-mover advantages did Jeff Bezos have in starting Amazon.com?

♦ What first-mover disadvantages did Bezos have to watch for after starting Amazon.com?

♦ Why was the learning curve so steep for Amazon.com?

6–18

STRENGTHENING A COMPANY’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS

Range of its activities

performed internally

Breadth of its product and

service offerings

Extent of its geographic

market presence and

mix of businesses

Size of its competitive footprint on its market or industry

Defining the Scope of the Firm’s Operations

6–19

The Dimensions Of Firm Scope

♦ Horizontal Scope ●  Is the range of product and service segments that a

firm serves within its focal market. ♦ Vertical Scope

●  Is the extent to which a firm’s internal activities encompass one, some, many, or all of the activities that make up an industry’s entire value chain system, ranging from raw material production to final sales and service activities.

6–20

HORIZONTAL MERGER AND ACQUISITION STRATEGIES

♦ Merger ●  Is the combining of two or more firms

into a single corporate entity that often takes on a new name.

♦ Acquisition ●  Is a combination in which one firm, the

acquirer, purchases and absorbs the operations of another firm, the acquired.

6–21

Benefits of Increasing Horizontal Scope

♦  Increasing a firm’s horizontal scope strengthens its business and increases its profitability by: ●  Improving the efficiency of its operations ●  Heightening its product differentiation ●  Reducing market rivalry ●  Increasing the firm’s bargaining power over

suppliers and buyers ●  Enhancing its flexibility and dynamic capabilities

6–22

Strategic Outcomes for Horizontal Mergers and Acquisitions

♦  Increasing the firm’s scale of operations and market share.

♦  Expanding a firm’s geographic coverage. ♦  Extending the firm’s business into new

product categories. ♦  Gaining quick access to new technologies or

complementary resources and capabilities. ♦  Leading the convergence of industries whose

boundaries are being blurred by changing technologies and new market opportunities.

6–23

♦ Which strategic outcomes did Lowry Mays pursue through his acquisition strategy?

♦ How did increasing the horizontal scope of Clear Channel Communications through acquisitions strengthen its competitive position and profitability?

♦ Why did Clear Channel sell nearly one-third of its radio stations in 2008?

6–24

Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results

♦  Strategic Issues: ●  Cost savings may prove smaller than expected. ●  Gains in competitive capabilities take longer to realize or

never materialize at all.

♦  Organizational Issues ●  Corporate cultures, operating systems and management

styles fail to mesh due to resistance to change from organization members.

●  Loss of key employees at the acquired firm. ●  The managers overseeing the integration make mistakes

in melding the acquired firm into their own.

6–25

VERTICAL INTEGRATION STRATEGIES

♦ Vertically Integrated Firm ●  Is one that participates in multiple segments

or stages of an industry’s overall value chain.

♦ Vertical Integration Strategy ● Can expand the firm’s range of activities

backward into its sources of supply and/or forward toward end users of its products.

6–26

Types of Vertical Integration Strategies

Full Integration

Partial Integration

Tapered Integration

Vertical Integration Choices

6–27

Types of Vertical Integration Strategies

♦ Full Integration ●  A firm participates in all stages

of the vertical activity chain. ♦ Partial Integration

●  A firm builds positions only in selected stages of the vertical chain.

♦ Tapered Integration ●  Involves a mix of in-house and outsourced

activity in any stage of the vertical chain.

6–28

Backwards Integration Towards Suppliers

♦  Integrating Backwards By: ●  Achieving the same scale economies as outside

suppliers—low-cost based competitive advantage. ●  Matching or beating suppliers’ production

efficiency with no drop-off in quality—differentiation-based competitive advantage.

♦ Reasons for Integrating Backwards: ●  Reduction of supplier power ●  Reduction in costs of major inputs ●  Assurance of the supply and flow of critical inputs ●  Protection of proprietary know-how

6–29

Integrating Forward to Enhance Competitiveness

♦ Reasons for Integrating Forward: ●  To lower overall costs by increasing channel

activity efficiencies relative to competitors. ●  To increase bargaining power through control

of channel activities. ●  To gain better access to end users. ●  To strengthen and reinforce brand awareness. ●  To increase product differentiation.

6–30

Disadvantages of a Vertical Integration Strategy

♦  Increased business risk due to large capital investment. ♦  Acceptance of technological advances or more efficient

production methods. ♦  Loss of operating flexibility through dependence on

internally self-produced parts and components. ♦  Less flexibility in meeting buyer preferences if they

require non-internally produced parts and components. ♦  Internal production levels and capacity matching

problems may not allow for economies of scale. ♦  Requirements for new skills and business capabilities.

6–31

Weighing the Pros and Cons of Vertical Integration

♦  Can vertical integration enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation?

♦  What is the impact of vertical integration on investment costs, flexibility and response times, and the administrative costs of coordinating operations across more vertical chain activities?

♦  How difficult it will be for the company to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain.

6–32

♦ What are the most important strategic benefits that American Apparel derives from its vertical Integration strategy?

♦ Over the long term, how could the vertical scope of American Apparel’s operations threaten its competitive position and profitability?

♦ Why is a vertical integration strategy more appropriate in some industries and not in others?

6–33

OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS

♦  Outsourcing ●  Involves farming out value chain activities to outside vendors.

♦  Outsource an Activity When It: ●  Can be performed better or more cheaply by outside specialists. ●  Is not crucial to achieving sustainable competitive advantage and

does not hollow out the firm’s core competencies. ●  Improves organizational flexibility and speed time to market. ●  Reduces risks due to new technology and/or buyer preferences. ●  Assembles diverse kinds of expertise speedily and efficiently. ●  Allows a firm to concentrate on its core business, leverage key

resources, and do even better what it does best.

6–34

The Risks of Outsourcing Value Chain Activities

♦  Hollowing out the resources and capabilities that the firm needs to be a master of its own destiny.

♦  Loss of control when monitoring, controlling, and coordinating activities of outside parties by means of contracts and arm’s-length transactions.

♦  Lack of incentives for outside parties to make investments specific to the needs of the outsourcing firm’s value chain.

6–35

STRATEGIC ALLIANCES AND PARTNERSHIPS

♦ Strategic Alliance ●  Is a formal agreement between two or more

separate firms in which they agree to work cooperatively toward common objectives.

♦ Joint Venture ●  Is a type of strategic alliance in which the

partners set up an independent corporate entity that they own and control jointly, sharing in its revenues and expenses.

6–36

Factors That Make an Alliance “Strategic”

♦  It helps build, sustain, or enhance a core competence or competitive advantage.

♦  It helps block a competitive threat. ♦  It increases the bargaining power of alliance

members over suppliers or buyers. ♦  It helps open up important new market

opportunities. ♦  It mitigates a significant risk to a firm’s

business.

6–37

Benefits of Strategic Alliances and Partnerships

♦  Minimizes the problems associated with vertical integration, outsourcing, and mergers and acquisitions.

♦  Useful in extending to extend the scope of operations via international expansion and diversification strategies.

♦  Reduces the need to be independent and self-sufficient when strengthening the firm’s competitive position.

♦  Offers greater flexibility should a firm’s resource requirements or goals change over time.

♦  Are useful when industries are experiencing high-velocity technological advances simultaneously.

6–38

Why and How Strategic Alliances Are Advantageous

♦  They expedite the development of promising new technologies or products.

♦  They help overcome deficits in technical and manufacturing expertise.

♦  They bring together the personnel and expertise needed to create new skill sets and capabilities.

♦  They improve supply chain efficiency. ♦  They help partners allocate venture risk sharing. ♦  They allow firms to gain economies of scale. ♦  They provide new market access for partners.

6–39

Reasons for Entering into Strategic Alliances

♦  When seeking global market leadership: ●  Enter into critical country markets quickly. ●  Gain inside knowledge about unfamiliar markets and cultures

through alliances with local partners. ●  Provide access to valuable skills and competencies

concentrated in particular geographic locations.

♦  When staking out a strong industry position: ●  Establish a stronger beachhead in target industry. ●  Master new technologies and build expertise and

competencies. ●  Open up broader opportunities in the target industry.

6–40

Capturing the Benefits of Strategic Alliances

Picking a good partner

Being sensitive to cultural differences

Recognizing that the alliance must benefit both sides

Adjusting the agreement over time to fit new circumstances Structuring the

decision-making process for swift

actions

Ensuring both parties keep their

commitments

Strategic Alliance Factors

6–41

The Drawbacks of Strategic Alliances and Partnerships

♦  Culture clash and integration problems due to different management styles and business practices.

♦  Anticipated gains do not materialize due to an overly optimistic view of the synergies or a poor fit of partners’ resources and capabilities.

♦  Risk of becoming dependent on partner firms for essential expertise and capabilities.

♦  Protection of proprietary technologies, knowledge bases, or trade secrets from partners who are rivals.

6–42

Principle Advantages of Strategic Alliances

♦ They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing.

♦ They are more flexible organizational forms and allow for a more adaptive response to changing conditions.

♦ They are more rapidly deployed—a critical factor when speed is of the essence.

6–43

Strategic Alliances Versus Outsourcing

♦ Key Advantages of Strategic Alliances: ●  The increased ability to exercise control

over the partners’ activities.

●  A greater commitment and willingness of the partners to make relationship-specific investments as opposed to arm’s-length outsourcing transactions.

6–44

How to Make Strategic Alliances Work

♦ Create a system for managing the alliance. ♦ Build trusting relationships with partners. ♦ Set up safeguards to protect from the threat

of opportunism by partners. ♦ Make commitments to partners and see that

partners do the same. ♦ Make learning a routine part of the

management process.

CHAPTER 7

STRATEGIES FOR COMPETING IN INTERNATIONAL MARKETS

McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

7–2

1.  Develop an understanding of the primary reasons firms choose to compete in international markets.

2.  Learn how and why differing market conditions across countries and industries make crafting international strategy a complex undertaking.

3.  Learn about the major strategic options for entering and competing in foreign markets.

4.  Gain familiarity with the three main strategic approaches for competing internationally.

5.  Understand how international firms go about building competitive advantage in foreign markets.

7–3

To exploit core competencies

To spread business risk across a wider

market base

To gain access to new customers

To achieve lower costs and economies

of scale

To access resources and capabilities in

foreign markets

WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS

7–4

WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX

1. Industry competitiveness factors that vary from country to country

2. Location-based advantages for certain countries

3. Differences in government policies and economic conditions

4. Currency exchange rate risks

5. Differences in cultural, demographic, and market conditions

7–5

7.1 The Diamond of National Advantage

Demand Conditions Home-market relative size; domestic buyers’ needs

Related\Supporting Industries Proximity of suppliers, end users, and complementary industries

Firm Strategy, Structure, and Rivalry Different management styles and organization; degree of local rivalry

Factor Conditions Availability, quality, and relative prices of inputs (e.g. labor, materials)

7–6

The Diamond Framework

♦ Answers important questions about competing on an international basis by: ●  Predicting where new foreign entrants are

likely to come from and their strengths. ●  Highlighting foreign market opportunities

where rivals are weakest. ●  Identifying the location-based advantages

of conducting certain value chain activities of the firm in a particular country.

7–7

Reasons for Locating Value Chain Activities for Competitive Advantage

♦ Lower wage rates ♦ Higher worker

productivity ♦ Lower energy costs ♦ Fewer environmental

regulations ♦ Lower tax rates ♦ Lower inflation rates

♦ Proximity to suppliers and technologically related industries

♦ Proximity to customers ♦ Lower distribution costs ♦ Available\unique

natural resources

7–8

The Impact of Government Policies and Economic Conditions in Host Countries

♦ Positives ● Tax incentives ● Low tax rates ● Low-cost loans ● Site location and

development ● Worker training

♦ Negatives ● Environmental regulations ● Subsidies and loans to

domestic competitors ●  Import restrictions ● Tariffs and quotas ● Local-content requirements ● Regulatory approvals ● Profit repatriation limits ● Minority ownership limits

7–9

Political and Economic Risks

♦ Political Risks ● Stem from instability or weaknesses in

national governments and hostility to foreign business.

♦ Economic Risks ● Stem from the stability of a country’s

monetary system, economic and regulatory policies, lack of property rights protections, and risks due to exchange rate fluctuation.

7–10

The Risks of Adverse Exchange Rate Shifts

♦ Effects of Exchange Rate Shifts: ●  Exporters experience a rising demand for

their goods whenever their currency grows weaker relative to the importing country’s currency.

●  Exporters experience a falling demand for their goods whenever their currency grows stronger relative to the importing country’s currency.

7–11

Thinking Strategically

♦ What effects has the adoption of the euro had on the ability of European Union (EU) countries (and firms) to respond changes in intra-national economic conditions in other EU countries given that they now share a common currency? ♦ What should a EU firm do to respond to a

adverse currency exchange rate shift in a non-EU country?

7–12

Cross-Country Differences in Demographic, Cultural, and Market Conditions

To pursue a strategy of offering a mostly standardized product worldwide.

To customize offerings in each country market to match the tastes and preferences of local buyers

Key Strategic Considerations

7–13

THE CONCEPTS OF MULTIDOMESTIC COMPETITION AND GLOBAL COMPETITION

♦ Multidomestic Competition ●  Exists when competition in each country

market is localized and not closely connected to competition in other country markets.

♦ Global Competition ●  Exists when competitive conditions and

prices are strongly linked across many different national markets.

7–14

Features of Multidomestic Competition

♦ 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.

7–15

Features of Global Competition

♦ The same group of firms competes in countries where sales volumes are large and having a presence is important to a strong global position.

♦ Competitive advantage is gained from the transfer of expertise, economies of scale, and worldwide brand-name recognition.

♦ Global competition is increasing in multidomestic markets where custom mass production is coinciding with converging consumer tastes.

7–16

STRATEGIC OPTIONS FOR ENTERING AND COMPETING IN INTERNATIONAL MARKETS

♦  Maintain a national (one-country) production base and export goods to foreign markets.

♦  License foreign firms to produce and distribute the firm’s products abroad.

♦  Employ an overseas franchising strategy.

♦  Establish a wholly-owned subsidiary by either acquiring a foreign company or through a “greenfield” venture.

♦  Form strategic alliances or joint ventures with foreign companies.

7–17

Export Strategies

♦ Advantages ●  Low capital

requirements ●  Economies of scale in

utilizing existing production capacity

●  No distribution risk ●  No direct investment

risk

♦ Disadvantages ● Maintaining relative cost

advantage of home-based production

● Transportation and shipping costs

● Exchange rates risks ● Tariffs\import duties ●  Loss of channel control

7–18

Licensing and Franchising Strategies

♦ Advantages ● Low resource

requirements

●  Income from royalties and franchising fees

● Rapid expansion into many markets

♦ Disadvantages ● Maintaining control of

proprietary know-how

● Loss of operational and quality control

● Adapting to local market tastes and expectations

7–19

Acquisition Strategies

♦ Advantages ● High level of control

● Quick large-scale market entry

● Avoids entry barriers

● Access to acquired firm’s skills

♦ Disadvantages ● Costs of acquisition

● Complexity of acquisition process

●  Integration of the firms’ structures, cultures, operations and personnel

7–20

Greenfield Strategies

♦ Advantages ● High level of control

over venture

●  “Learning by doing” in the local market

● Direct transfer of the firm’s technology, skills, business practices, and culture

♦ Disadvantages ● Capital costs of initial

development

● Risks of loss due to political instability or lack of legal protection of ownership

● Slowest form of entry due to extended time required to construct facility

7–21

Alliance and Joint Venture Strategies

♦ Advantages ● Avoid entry barriers

● Allow for resource and risk sharing

● Partner’s knowledge of local market conditions

●  Joint learning and sharing

● Preservation of partner independence

♦ Disadvantages ● Cultural and language

barriers

● Costs of establishing the working arrangement

●  Issues of joint control

● Protection of proprietary technology or competitive advantage

7–22

COMPETING INTERNATIONALLY: THE THREE MAIN STRATEGIC APPROACHES

Multidomestic Strategy

Global Strategy

Transnational Strategy

Competing Internationally

7–23

Approaches to International Strategy

♦ Multidomestic Strategy ●  Varies product offerings and competitive approaches

from country to country.

♦ Global Strategy ●  Employs the same basic competitive approach in all

countries where the firm operates.

♦ Transnational Strategy ●  Is a think-global, act-local approach that incorporates

elements of both multidomestic and global strategies.

7–24

7.2 Three Approaches for Competing Internationally

7–25

7.1 Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches

Multidomestic Approach Advantages Disadvantages • Can meet the specific needs of

each market more precisely • Can respond more swiftly to

localized changes in demand • Can target reactions to the

moves of local rivals • Can respond more quickly to

local opportunities and threats

• Hinders resource and capability sharing or cross-market transfers

• Higher production and distribution costs

• Not conducive to a worldwide competitive advantage

7–26

7.1 Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches (cont’d)

Transnational Approach Advantages Disadvantages • Offers the benefits of both local

responsiveness and global integration

• Enables the transfer and sharing of resources and capabilities across borders

• Provides the benefits of flexible coordination

• More complex and harder to implement

• Conflicting goals may be difficult to reconcile and require trade-offs

•  Implementation more costly and time-consuming

7–27

7.1 Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches (cont’d)

Global Approach Advantages Disadvantages •  Lower costs due to scale and

scope economies • Greater efficiencies due to the

ability to transfer best practices across markets

• More innovation from knowledge sharing and capability transfer

• The benefit of a global brand and reputation

• Unable to address local needs precisely

•  Less responsive to changes in local market conditions

• Higher transportation costs and tariffs

• Higher coordination and integration costs

7–28

THE QUEST FOR COMPETITIVE ADVANTAGE IN THE INTERNATIONAL ARENA

Use international location to lower

cost or differentiate product

Share resources, competencies, and capabilities

Gain cross-border coordination

benefits

Build Competitive Advantage in International Markets

7–29

Using Location to Build Competitive Advantage

To pursue a strategy of offering a mostly standardized product worldwide.

To customize offerings in each country market to match the tastes and preferences of local buyers

Key Location Issues

7–30

When to Concentrate Activities in a Few Locations

♦  The costs of manufacturing or other activities are significantly lower in some geographic locations than in others.

♦  There are significant scale economies in production or distribution.

♦  There are sizable learning and experience benefits 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.

7–31

When to Disperse Activities across Many Locations

♦  Buyer-related activities can be conducted at a distance. ♦  There are high transportation costs.

♦  There are diseconomies of large size.

♦  Trade barriers make a central location too expensive.

♦  Dispersing activities reduces exchange rate risks.

♦  Dispersion helps prevent supply interruptions.

♦  Dispersion helps avoid adverse political developments.

♦  Dispersion allows for location-based technology and production cost competitive advantages.

7–32

Cross-Border Coordination: Sharing and Transferring Resources and Capabilities

♦ Build a Resource-Based Competitive Advantage By: ●  Using powerful brand names to extend

a differentiation-based competitive advantage beyond the home market.

●  Coordinating activities for sharing and transferring resources and production capabilities across different countries’ domains to develop market dominating depth in key competencies.

7–33

PROFIT SANCTUARIES AND CROSS-BORDER STRATEGIC MOVES

♦ Profit Sanctuaries ●  Are country markets (or geographic regions)

in which a firm derives substantial profits because of its protected market position or its competitive advantage.

♦ Cross-Market Subsidization ●  Is the diversion of resources and profits from

one market to support competitive offensives in another different market.

7–34

7.3 Profit Sanctuary Potential of Domestic-only, International, and Global Competitors

7–35

Dumping as a Strategy

♦ Dumping ●  Selling goods in foreign markets at prices

that are either below normal home market prices or below the full costs per unit.

♦ Why A Firm Engages in Dumping: ●  To reduce or avoid the high fixed costs of

idle production capacity. ●  To use below-cost pricing to gain market

share and drive weak firms from the market.

7–36

Using Cross-Border Tactics to Defend against International Rivals

International Firm A

International Firm B

Firm A moves against Firm B in Country B

Profit Sanctuary

Firm B counters with a response in Country C

7–37

STRATEGIES FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIES

♦ Prepare to compete on the basis of low price. ♦ Prepare to modify the firm’s business model or

strategy to accommodate local circumstances.

♦ Avoid developing markets where it is too costly to accommodate local circumstances.

♦ Try to change the local market to better match the way the firm does business elsewhere.

7–38

DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES

♦  Develop a business model that exploits shortcomings in local distribution networks or infrastructure.

♦  Utilize knowledge of local customer needs and preferences to create customized products or services.

♦  Take advantage of aspects of the local workforce with which large multinational firms may be unfamiliar.

♦  Use local acquisition and rapid-growth strategies to defend against expansion-minded internationals.

♦  Transfer the firm’s expertise to cross-border markets.

CHAPTER 8

CORPORATE STRATEGY: Diversification and the Multibusiness Company

McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

8–2

1.  Understand when and how business diversification can enhance shareholder value.

2.  Gain an understanding of how related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage.

3.  Become aware of the merits and risks of corporate strategies keyed to unrelated diversification.

4.  Gain command of the analytical tools for evaluating a firm’s diversification strategy.

5.  Understand a diversified firm’s four main corporate strategy options for solidifying its diversification strategy and improving company performance.

8–3

Crafting a Diversified Firm’s Overall Or Corporate Strategy

Step 1 Picking new industries to enter and deciding on the best mode of entry.

Step 2 Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage.

Step 3 Establishing investment priorities and steering corporate resources into the most attractive business units.

Step 4 Initiating actions to boost the combined performance of the cooperation’s collection of businesses.

8–4

WHEN TO DIVERSIFY

♦ A firm should consider diversifying when: ●  It can expand into businesses whose technologies

and products complement its present business.

●  Its resources and capabilities can be used as valuable competitive assets in other businesses.

●  Costs can be reduced by cross-business sharing or transfer of resources and capabilities.

●  Transferring a strong brand name to the products of other businesses helps drive up sales and profits of those businesses.

8–5

BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING

The industry attractiveness

test

The cost-of-entry test

The better-off test

Testing Whether a Diversification Move Will Add Long-Term Value for Shareholders

8–6

Testing Whether Diversification Will Add Value for Shareholders

♦ The Attractiveness Test: ●  Are the industry’s returns on investment as

good or better than present business(es)? ♦ The Cost of Entry Test:

●  Is the cost of overcoming entry barriers so great that profitability is too long delayed?

♦ The Better-Off Test: ●  How much synergy will be gained by

diversifying into the industry?

8–7

Better Performance through Synergy

Evaluating the Potential for

Synergy through

Diversification

Firm A purchases Firm B in another industry. A and B’s profits are no greater than what each firm could have earned on its own.

Firm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own.

No Synergy (1+1=2)

Synergy (1+1=3)

8–8

STRATEGIES FOR ENTERING NEW BUSINESSES

Acquisition Internal new venture (start-up) Joint venture

Diversifying into New Businesses

8–9

Acquisition of an Existing Business

♦ Advantages: ●  Quick entry into an industry ●  Barriers to entry avoided ●  Access to complementary resources and capabilities

♦ Disadvantages: ●  Cost of acquisition—whether to pay a premium for a

successful firm or seek a bargain in struggling firm ●  Underestimating costs for integrating acquired firm ●  Overestimating the acquisition’s potential to deliver

added shareholder value

8–10

Internal Development: Corporate Venturing

♦ Advantages of New Venture Development: ●  Avoids pitfalls and uncertain costs of acquisition. ●  Allows entry into a new or emerging industry where

there are no available acquisition candidates.

♦ Disadvantages of Intrapreneurship: ●  Must overcome industry entry barriers. ●  Requires extensive investments in developing

production capacities and competitive capabilities. ●  May fail due to internal organizational resistance to

change and innovation.

8–11

When to Engage in Internal Development

Availability of in-house skills and

resources

Ample time to develop and

launch business Cost of acquisition

is higher than internal entry

Added capacity will not affect supply and

demand balance Low resistance of incumbent

firms to market entry

No head-to-head competition in

targeted industry

Factors Favoring Internal Development

8–12

When to Engage in a Joint Venture

Evaluating the

Potential for a Joint

Venture

Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone?

Does the opportunity require a broader range of competencies and know-how than the firm now possesses?

Will the opportunity involve operations in a country that requires foreign firms to have a local minority or majority ownership partner?

8–13

Choosing a Mode of Market Entry

The Question of Critical Resources and Capabilities

Does the firm have the resources and capabilities for internal development?

The Question of Entry Barriers Are there entry barriers to overcome?

The Question of Speed

Is speed an important factor in the firm’s chances for successful entry?

The Question of Comparative Cost

Which is the least costly mode of entry, given the firm’s objectives?

8–14

CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES

Related Businesses

Unrelated Businesses

Both Related and Unrelated Businesses

Which Diversification Path to Pursue?

8–15

CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES

♦ Related Businesses ●  Have competitively valuable cross-business

value chain and resource matchups. ♦ Unrelated Businesses

●  Have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level.

8–16

STRATEGIC FIT AND DIVERSIFICATION INTO RELATED BUSINESSES

♦ Strategic Fit Benefits ●  Occur when the value chains of the different

businesses present opportunities for: ! Transfer of resources among businesses. ! Lowering of costs in combining related value

chain activities or resource sharing. ! Use of a potent brand name across businesses. ! Cross-business collaboration to build stronger

competitive capabilities.

8–17

Pursuing Related Diversification

♦ Specialized Resources and Capabilities ●  Have very specific applications and their use

is limited to a restricted range of industry and business types.

♦ Generalized Resources and Capabilities ●  Can be widely applied and can be deployed

across a broad range of industry and business types.

8–18

8.1 Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic Fit

8–19

Identifying Cross-Business Strategic Fit along the Value Chain

R&D and Technology Activities

Supply Chain Activities

Manufacturing-Related Activities

Distribution-Related Activities

Customer Service Activities

Sales and Marketing Activities

Potential Cross-Business Fits

8–20

Strategic Fit, Economies of Scope, and Competitive Advantage

Transferring specialized and

generalized skills and\or knowledge

Combining related value

chain activities to achieve

lower costs

Leveraging brand names

and other differentiation

resources

Using cross-business

collaboration and knowledge

sharing

Using Economies of Scope to Convert Strategic Fit into Competitive Advantage

8–21

Economies of Scope Differ from Economies of Scale

♦ Economies of Scope ●  Are cost reductions that flow from cross-

business resource sharing in the activities of the multiple businesses of a firm.

♦ Economies of Scale ●  Accrue when unit costs are reduced due

to the increased output of larger-size operations of a firm.

8–22

From Competitive Advantage to Added Profitability and Gains in Shareholder Value

Builds more shareholder value

than owning a stock portfolio

Is only possible via a strategy

of related diversification

Yields value in the application of specialized resources and

capabilities

Requires that management take internal

actions to realize them

Capturing the Cross-Business Benefits of Related Diversification

8–23

DIVERSIFICATION INTO UNRELATED BUSINESSES

Evaluating the acquisition of a new business or the divestiture of

an existing business

Can it meet corporate targets for profitability and return on investment?

Is it is in an industry with attractive profit and growth potentials?

Is it is big enough to contribute significantly to the parent firm’s bottom line?

8–24

Building Shareholder Value via Unrelated Diversification

Astute Corporate Parenting by Management

Cross-Business Allocation of

Financial Resources

Acquiring and Restructuring Undervalued Companies

Using an Unrelated Diversification Strategy to Pursue Value

8–25

Building Shareholder Value via Unrelated Diversification

Astute Corporate Parenting by Management

•  Provide leadership, oversight, expertise, and guidance. •  Provide generalized or parenting resources that lower

operating costs and increase SBU efficiencies.

Cross-Business Allocation of

Financial Resources

• Serve as an internal capital market. • Allocate surplus cash flows from businesses to fund

the capital requirements of other businesses.

Acquiring and Restructuring Undervalued Companies

• Acquire weakly performing firms at bargain prices. • Use turnaround capabilities to restructure them to

increase their performance and profitability.

8–26

The Path to Greater Shareholder Value through Unrelated Diversification

Actions taken by upper management to create value and

gain a parenting advantage

Do a superior job of diversifying into businesses that produce good earnings and returns on investment.

Do an excellent job of negotiating favorable acquisition prices.

Provide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businesses.

8–27

The Drawbacks of Unrelated Diversification

Pursuing an Unrelated

Diversification Strategy

Limited Competitive Advantage Potential

Demanding Managerial

Requirements

Monitoring and maintaining

the parenting advantage

Potential lack of cross-business

strategic-fit benefits

8–28

Inadequate Reasons for Pursuing Unrelated Diversification

Seeking reduction of

business investment risk

Pursuing rapid or continuous growth for its

own sake

Seeking stabilization to avoid cyclical

swings in businesses

Pursuing personal

managerial motives

Poor Rationales for Unrelated Diversification

8–29

COMBINATION RELATED-UNRELATED DIVERSIFICATION STRATEGIES

Dominant-Business

Enterprises

Narrowly Diversified

Firms

Broadly Diversified

Firms

Multibusiness Enterprises

Related-Unrelated Business Portfolio Combinations

8–30

STRUCTURES OF COMBINATION RELATED-UNRELATED DIVERSIFIED FIRMS

♦  Dominant-Business Enterprises ●  Have a major “core” firm that accounts for 50 to 80% of

total revenues and a collection of small related or unrelated firms that accounts for the remainder.

♦  Narrowly Diversified Firms ●  Are comprised of a few related or unrelated businesses.

♦  Broadly Diversified Firms ●  Have a wide-ranging collection of related businesses,

unrelated businesses, or a mixture of both.

♦  Multibusiness Enterprises ●  Have a business portfolio consisting of several unrelated

groups of related businesses.

8–31

EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY

Diversified Strategy

Attractiveness of industries

Strength of Business Units

Cross-business strategic fit

Fit of firm’s resources

Allocation of resources

New Strategic Moves

8–32

EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY

1.  Assessing the attractiveness of the industries the firm has diversified into, both individually and as a group.

2.  Assessing the competitive strength of the firm’s business units within their respective industries.

3.  Checking the competitive advantage potential of cross-business strategic fit among the firm’s various business units.

4.  Checking whether the firm’s resources fit the requirements of its present business lineup.

5.  Ranking performance prospects of the businesses and determining the parent firm’s priority for allocating resources to its businesses.

6.  Crafting strategic moves to improve corporate performance.

8–33

8.2 Strategy Alternatives for a Company Pursuing Diversification

8–34

Step 1: Evaluating Industry Attractiveness

Does each industry represent a good market for the firm to be in?

Which industries are most attractive, and which are least attractive?

How appealing is the whole group of industries?

How attractive are the industries in which the firm has business operations?

8–35

Key Indicators of Industry Attractiveness

♦ Social, political, regulatory, environmental factors ♦ Seasonal and cyclical factors ♦  Industry uncertainty and business risk ♦ Market size and projected growth rate ♦  Industry profitability ♦ The intensity of competition among market rivals ♦ Emerging opportunities and threats

8–36

Gauging Industry Attractiveness from the Multibusiness Perspective

The Question of Cross-Industry Strategic Fit

How well do the industry’s value chain and resource requirements match up with the value chain activities of other industries in which the firm has operations?

The Question of Resource Requirements

Do the resource requirements for an industry match those of the parent firm or are they otherwise within the company’s reach?

8–37

8.1 Calculating Weighted Industry Attractiveness Scores*

* Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.

Remember: The more intensely competitive an industry is, the lower the attractiveness rating for that industry!

8–38

The Difficulties of Calculating Industry Attractiveness Scores

Evaluating Industry

Attractiveness

Deciding on appropriate weights for the industry attractiveness measures.

Gaining sufficient knowledge of the industry to assign accurate and objective ratings.

Whether to use different weights for different business units whenever the importance of strength measures differs significantly from business to business.

8–39

Step 2: Evaluating Business-Unit Competitive Strength

♦  Relative market share ♦  Costs relative to competitors’ costs. ♦  Ability to match or beat rivals on key product attributes. ♦  Brand image and reputation. ♦  Other competitively valuable resources and capabilities. ♦  Strategic fit with the firm’s other businesses. ♦  Bargaining leverage with key suppliers or customers. ♦  Alliances and partnerships with suppliers and/or buyers. ♦  Profitability relative to competitors

8–40

8.2 Calculating Weighted Competitive Strength Scores for a Diversified Company’s Business Units*

* Rating scale: 1 = very weak; 10 = very strong.

Relative market share: the ratio of a business unit’s market share to the market share of its largest industry rival as measured in unit volumes, not dollars.

8–41

8.3 A Nine-Cell Industry Attractiveness–Competitive Strength Matrix

Note: Circle sizes are scaled to reflect the percentage of companywide revenues generated by the business unit.

Star

Cash cow

8–42

8.4 Identifying the Competitive Advantage Potential of Cross-Business Strategic Fit

8–43

Step 4: Checking for Resource Fit

♦ Financial Resource Fit ●  State of the internal capital market ●  Using the portfolio approach:

! Cash hogs need cash to develop. ! Cash cows generate excess cash. ! Star businesses are self-supporting.

♦ Success sequence: ●  Cash hog ! Star ! Cash cow

8–44

Step 4: Checking for Resource Fit

♦ Does the firm have (or can it develop) the specific resources and capabilities needed to be successful in each of its businesses?

♦ Are the firm’s resources being stretched too thinly by the resource requirements of one or more of its businesses?

8–45

Step 5: Ranking Business Unit Performance and Assigning Resource Allocation Priorities

♦ Ranking Factors: ●  Sales growth ●  Profit growth ●  Contribution to company earnings ●  Return on capital invested in the business ●  Cash flow

♦ Steer resources to business units with the brightest profit and growth prospects and solid strategic and resource fit.

8–46

8.5 The Chief Strategic and Financial Options for Allocating a Diversified Company’s Financial Resources

8–47

Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance

Stick with the Existing

Business Lineup

Broaden the Diversification Base with New Acquisitions

Divest and Retrench to a Narrower

Diversification Base

Restructure through

Divestitures and

Acquisitions

Strategy Options for a Firm That Is Already Diversified

8–48

8.6 A Company’s Four Main Strategic Alternatives After It Diversifies

8–49

Broadening a Diversified Firm’s Business Base

♦ Factors Motivating the Adding of Businesses: ●  The transfer of resources and capabilities

to related or complementary businesses.

●  Rapidly changing technology, legislation, or new product innovations in core businesses.

●  Shoring up the market position and competitive capabilities of the firm’s present businesses.

●  Extension of the scope of the firm’s operations into additional country markets.

8–50

Divesting Businesses and Retrenching to a Narrower Diversification Base

♦ Factors Motivating Business Divestitures: ●  Improvement of long-term performance by

concentrating on stronger positions in fewer core businesses and industries.

●  Business is now in a once-attractive industry where market conditions have badly deteriorated.

●  Business has either failed to perform as expected and\or is lacking in cultural, strategic or resource fit.

●  Business has become more valuable if sold to another firm or as an independent spin-off firm.

8–51

♦ What does the growth in both revenues and profits reveal about the success of J&J’s diversification through acquisition strategy?

♦ To what extent is decentralization required when seeking cross-business strategic fit?

♦ What should J&J do to ensure the continued success of its diversification strategy?

8–52

Using Divestitures and Acquisitions to Restructure the Business Lineup

♦ Factors Leading to Corporate Restructuring: ●  Too many businesses in unattractive industries ●  Too many competitively weak businesses ●  Ongoing declines in the market shares of business

units due to more market-savvy competitors ●  Debt and interest costs that sap profitability ●  Acquisitions that haven’t lived up to expectations ●  Reallocation of assets to strengthen the lineup ●  Businesses with poor resource or strategic fit

8–53

♦  Is VF’s corporate restructuring strategy narrowing or broadening its diversification base?

♦ How did restructuring ensure that VF was better prepared to weather the economic downturn than its competitors?

♦ What actions did VF take after making acquisitions to ensure the success of those acquisitions?

CHAPTER 9

ETHICS, CORPORATE SOCIAL RESPONSIBILITY, ENVIRONMENTAL SUSTAINABILITY, AND STRATEGY

McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc.

9–2

1.  Understand how the standards of ethical behavior in business relate to the ethical standards and norms of the larger society and culture in which a firm operates.

2.  Recognize conditions that can give rise to unethical business strategies and behavior.

3.  Gain an understanding of the costs of business ethics failures.

4.  Gain an understanding of the concepts of corporate social responsibility and environmental sustainability and of how firms balance these duties with economic responsibilities to shareholders.

9–3

WHAT DO WE MEAN BY BUSINESS ETHICS?

♦ Business Ethics ●  Is the application of general ethical

principles to the actions and decisions of businesses and the conduct of their personnel.

●  Are not materially different from ethical principles in general because business actions have to be judged in the context of society’s standards of right and wrong.

9–4

WHERE DO ETHICAL STANDARDS COME FROM—ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS?

The School of Ethical

Universalism

The School of Ethical

Relativism

Integrated Social Contracts

Theory

Sources for Ethical Standards

9–5

The School of Ethical Universalism

♦ Ethical Universalism ●  Holds that common understandings across

multiple cultures and countries about what constitutes right and wrong give rise to universal ethical standards that apply to all societies, all firms, and all businesspeople.

♦ Effect on Business Ethics ●  Whether a business-related action is right or

wrong is judged by universal standards.

9–6

The School of Ethical Relativism

♦ Ethical Relativism ●  Holds that differing beliefs, customs, and

behavioral norms across countries and cultures give rise to multiple sets of standards of what is ethically right or wrong.

♦ Effect on Business Ethics ●  Whether business-related actions are right or

wrong depends on local ethical standards.

9–7

Examples of Ethical Relativism Issues

The Use of Underage

Labor

The Payment of Bribes and

Kickbacks

Relativism Equates to

Multiple Sets of Standards

The Use of Local Morality

to Guide Ethical Behavior

Variations in Ethical Standards

9–8

♦ How effective has Apple’s Supplier Code of Conduct been is reducing abuses of workers at its supplier facilities?

♦  Is it fair for Apple to prescribe that its suppliers comply with universal standards that are at wide variance relative to local market labor practices and conditions?

9–9

Integrated Social Contracts Theory

●  Provides a middle-ground balance between universalism and relativism.

●  Posits that the collective views of multiple societies form universal (first order) ethical principles that all persons have a contractual duty to observe in all situations.

●  Within the contract, cultures or groups can specify locally ethical (second-order) actions.

9–10

Application of Integrated Social Contracts Theory to Multinational Business

♦ Effects on Ethical Standards: ●  Adherence to universal ethical norms

takes precedence over local norms. ●  A local custom is not ethical if it violates

universal ethical norms. ●  Application of codes of ethics should first

follow universal standards with allowance for local ethical diversity and influence.

9–11

HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND EXECUTING STRATEGY

♦ The Ethics Code Litmus Test: ●  Is what we are proposing to do fully compliant with

our code of ethics? Are there areas of ambiguity?

●  Is this action in harmony with our core values? Are any conflicts or potential problems evident?

●  Is there anything in the action that is ethically objectionable? Would our stakeholders, our competitors, the SEC, or the media view this action as ethically objectionable?

9–12

Consequences of Ethically Questionable Strategies

Sizable civil fines and stockholder

lawsuits

Devastating image and

public relations hits

Sharp stock price drops as investors lose

confidence

Criminal indictments

and convictions

When Strategies Fail the Ethical Litmus Test

9–13

WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR?

Unethical Strategies

and Business Behaviors

Faulty Oversight and Self Dealing

Pressure for Short-term Performance

A Weak or Corrupt Ethical Environment

9–14

WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR?

♦ Drivers of Unethical Business Behavior: ●  Faulty internal oversight allows self-dealing

in the pursuit of personal gain, wealth, and self-interest.

●  Short-termism pressure to meet or beat short-term performance targets.

●  A culture that puts profitability and business performance ahead of ethical behavior.

9–15

♦ Which drivers of unethical behavior were active in the Madoff investment fraud scheme?

♦ How did the cultures of the Madoff and Stanford investment firms assist in perpetuating the frauds?

♦ What ethical responsibilities were lacking in the fraud’s investors that would have helped prevent the frauds?

9–16

♦ How could the ethical culture at General Electric be adversely influenced by the firm’s heavy reliance on financial performance?

♦  Is GE’s “one strike and you’re out” ethical standard too harsh?

♦ Will GE’s adoption of global ethical standards and adherence to those standards be practical over the long term?

9–17

WHY SHOULD A FIRM’S STRATEGIES BE ETHICAL?

♦ Moral Case: ●  Because a strategy that is unethical is

morally wrong and reflects badly on the character of the firm’s personnel.

♦ Business Case: ●  Because an ethical strategy can be both

good business and serve the self-interest of shareholders.

9–18

9.1 The Costs A Company Incurs When Ethical Wrongdoing Is Found Out

9–19

CORPORATE SOCIAL RESPONSIBILITY, EVIRONMENTAL SUSTAINABILITY, AND STRATEGY

♦ Corporate Social Responsibility (CSR) ●  Is a firm’s duty to operate in an honorable

manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large.

9–20

9.2 The Five Components of a Corporate Social Responsibility Strategy

9–21

♦ How could components of John Deere’s overall corporate social responsibility strategy conflict with those of its separate business units?

♦ Which components of John Deere’s corporate social responsibility strategy correspond to the separate dimensions of the triple bottom line concept?

9–22

9.3 The Triple Bottom Line (TBL): Excelling on Three Measures of Company Performance

Profit People

Planet

9–23

9.1 A Selection of Companies Recognized for Their Triple Bottom Line Performance in 2009 and 2010

9–24

Sustainability and Sustainable Business Practices

♦ Sustainability ●  Is the relationship of a firm to its environment

and its use of natural resources. ♦ Sustainable Business Practices

●  Are those practices of a firm that meet the needs of the present without compromising the ability to meet the needs of the future.

9–25

Sustainability and Sustainable Business Practices

♦ Environmental Sustainability Strategy ●  Consists of the firm’s deliberate actions to:

! Protect the environment. ! Provide for the longevity of natural resources. ! Maintain ecological support systems for future

generations. ! Guard against ultimate endangerment of the

planet.

9–26

Crafting Corporate Social Responsibility and Sustainability Strategies

Pursuing a Sustainable CSR Strategy in the Firm’s Value Chain Activities

Business Case: Competitive Advantage

Moral Case: Stakeholder

Benefits

9–27

The Moral Case for CSR and Environmentally Sustainable Business Practices

Operate ethically and

legally

Provide good work conditions for employees

Be a good environmental

steward

Display good corporate citizenship

The Implied Social Contract: “To Do the Right Thing”

9–28

The Business Case for CSR and Environmentally Sustainable Business Practices

♦  Increased reputation and buyer patronage ♦ Reduced risk of reputation-damaging incidents ♦ Lower turnover costs and enhanced employee

recruiting and workforce retention ♦  Increased opportunities for revenue

enhancement due innovation in support of sustainability and CSR

♦ Support for the long-term interests of shareholders

9–29

Combating the Evasion of CSR and Socially Harmful Business Practices

Harmful and Unethical Business

Actions and Behaviors

Increased public awareness of misdeeds of

bad behavior by firms

Increased legislation and regulation correct and

punish firms

Refusal to do business with irresponsible firms