strategic management

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Master IIManagement Financier(Financial Management)(Financial Management)

Mr Xavier LEPERS

References

Johnson G., Scholes K., Whittington R. (2006), Exploring Corporate Strategy, Prentice Hall, 7th edition.Barney J & Hansen W (2006) StrategicBarney J. & Hansen W. (2006), Strategic Management & Competitive Advantage, Pearson Education.Garrette B, Dussauge P & Durand R (Coord), Strategor, 5ème édition, Dunod, 2009.

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Chapter 1: Introducing Strategy

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Chapter 1: Introducing Strategy

From competition to hypercompetition (R.D’Aveni, 1994): a new environment for firmsGlobalization and strategy Differents organizational behaviors (diversifications, alliances, innovations,…)Focus : Dell (from B to B informatic industry to B to C electronic industry)How are strategies built ? How are they implemented in organizations ?

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1 What is Strategy ?

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1.1. The characteristics of strategicdecisions:

Long term decisions (strategic vision)Are concerned with the scope of organisations’ activities (activities frontiers,

hi l f ti i ti l f ti )geographical frontiers, organisational frontiers)The acquisition of a competitive advantageThe search for strategic fit with business environmentCreating opportunities by building on organisation’s resources and competences

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The characteristics of strategic decisions

Complexity and dynamic vision (anticipate competitive game)Strategic decisions are likely to influence operational leveloperational level Strategic decisions are affected by values and expectations of stakeholders They reflect an integrated approach of the organisation.

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A definition of strategy

Strategy : is the direction and scope of anorganisation over the long term, wich achievesadvantage in a changing environment through itsconfiguration of resources and competences withthe aim of fulfilling stakeholders expectations.

Value as a key concept in strategic management (nalebuff & Brandenburger)→to determine firm position compared to competitors.

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1.2. Three levels of strategy in organisations

1) Corporate level strategy : is concerned with the overall purpose and scope of an organisation and how value will be added to th diff t t (b i l l )the differents parts (business levels)2) Business level strategy : is a part of an organisation for wich there is distinct external market for goods or services.

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How to determine SBU?

To a specific SBU is associated specific CSP (critical success factors).

Key questions to set up SBU :Customer group : who’s buying ?Customer need : for doing what ?Technology : how to produce? Distribution channel : how to reach customers ?Determine SBU = set up a strategic segmentation

Focus on Bic Group. 10

And the last one…

3) Operational strategiesAre concerned with how the components of an organisation deliver effectively the corporate and business level strategies in terms of resources,

d hprocesses and human resources. The integration of operational decisions and strategy is therefore of a great importance.

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2 Strategic Management

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Key Elements of Strategic Planning Process

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2.1 Three anchors of strategic management (synthesis scheme)The strategic positionGlobality et complexity…

The EnvironmentThe Environment The strategic capability : understanding strengths and weakenesses Core competences = competitive advantageStakeholders Influence Mass merchandising exemple

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Strategic choices

At business level : based on generic strategies (low price, differentiation, focused differentiation)At corporate level : directions and methods of development (specialisation, diversification, organic development, alliances) Internationalisation

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Strategy into action

Innovation and EntrepreneurshipManaging changeOrganisation and structureG d fi ’ ltGovernance and firm’s culture

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2.2. Strategic management in different contexts

1) the small business concernAre operating in a small numbers of marketsValues and expectatives of senior executivesValues and expectatives of senior executives are likely to be very important, as they may be in an ownership position too. Intensive competitionDifficulties to raise capital Limited choices about feasible strategies.

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Other organisations

2) the multinational corporationMonitoring the whole firm (organisational system) coordination of operations (information, p ( ,finance, logistic)3) manufacturing and service organisationsThe importance of intangible features ( ambience, advises, swiftness,…)

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4) Strategy in the public sector:The importance of ideologyPrivatisation in many industries (telecommunications, rail services, health services, financial services ;

5) The not-for-profit sectors Based on the ‘raison d’être’ rooted in the values of organisationorganisation. Necessity to increase managerial competences in the organisation Influence of stakeholders on the strategy → political influenceProblems of coordination due to the lack of professionalism.

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3. Challenges of strategicmanagement

3.1. Strategic drift: Strategies progressively fail to adress the strategic position of the organisation and performance deteriorates

3 2 Contemporary challenges3.2. Contemporary challenges1. Globalisation, information systems and services2. Knowledge management and long term

development

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Strategic Position / Diagnosis

External AnalysisPESTELPorter’s five (+1) forcesStrat. groups/segmentation

Internal AnalysisValue chainValue networkActivities mappingActivities mappingOrg. Structures

SWOTCore competencesSources of competitive advantage (VRIN test)Strategic Issues / Gap Analysis 21

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Chapter 2: The Environment

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Chapitre 2: The environment

How to cope with complexity? [interconnections, speed of change, lifestyles and globalization,…)How to make sense of this complexity? Diff l l f l iDifferent levels of analysisMacro-environment: PESTEL frameworkThe industry: the 5+1 forces frameworkStrategic groups→ threatens and opportunities→ critical success factors (CSF)

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Exhibit Layers of the business environment

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1. The macro-environment

1.1. PESTEL frameworkCategorises environmental influences into six main types : political, economical, sociological technological ecological andsociological, technological, ecological and legal. The aim: distinguish structural tendances

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Environmental factors Items to analyse

Political -Administration stability-Taxation policy-Foreign trade regulation-Social walfare policies

Economical -Business cycles-GNP trends-Inflation, unemployment-Disposable income

Sociocultural - Population demographicsMobility-Mobility

-Lifestyles changes, attitudes to work and leisures,-Levels of education

Technological -Governement spending on research-New discoveries, spending,-Rates of obsolescence

Ecological -Environmental protection laws-Waste disposal-Energy consumption

Legal -Competition law-Health and safety.

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The macro-environment

Distinguish structural tendencies i.e key drivers of changes likely to influence the industry. Analysis but synthesis too: understanding the combined effects of just some of these separate j pfactors is very important. Illustration: Drivers of globalization

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Exhibit Drivers of internationalisationSource: Adapted from G. Yip, Total Global Strategy II, FT/Prentice Hall, 2003, Chapter 2


1.2. Porter’s DiamondA kind of ‘entrepreneurial darwinism’.It suggests that there are inherent reasons why some nations are more competitive thanwhy some nations are more competitive than others and why some industries whithin nations are more competitive than others. Examples

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1.3. building scenariosIt can be perceived as a way to limit incertitude. Scenarios are detailed and plausible views of how the business environment of an organisation might develop in the future: they are based on key environmental influences and drivers of change about which there is a high level ofand drivers of change about which there is a high level of uncertainty. This instrument make it possible to have different views of potential futures (at less 5 years)It’s crucial to encompass few key drivers or to combine environmental factors through few assumptions. It’s possible to develop strategies for each scenario. Example: firms dependant on oil prices.

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2. The industry

An industry is a group of firms producing the same principal product/service.

2.1. Sources of competition: the five forces frameworkframework

The five forces are likely to decrease the profit or the value captured by firm while exchanges occur. The analyse of the 5 forces must be used at the level of SBUIt’s an illustration of a competitive system (connections, interdependence, disruptions,…)

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Exhibit The five forces frameworkSource: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved

a) The threat of clients, buyers and suppliers.

The profit appears as correlated to actor’s level of power. Some characteristics seem to be important: Concentration of buyersConcentration of buyersThe costs of switchingExamples : L’Oréal / Sony / Agricultural suppliers

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b) The threat of substitutes

Product-for-product substitution (mail/Post) Complementors (Intel / Air France)That implies an extended vision of competition. Substitution of need (new generation of product)Generic substitution (relied on disposable income)

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c) The threat of entry

Depends on the extent to which there are barriers to entry. Barriers to entry are factors that need to be avoided by new entrants looking for competing successfully. Consequently, barriers to entry imply higher costs for new entrants.

Different types of barriers can be distinguished : Financial barriers : Economies of scaleThe capital requirement for entryThe costs of switching (for customers)

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c) The threat of entry

Commercial barriersAccess to supply or distribution channelsReputation, differentiation

B i l t d t d tBarriers related to resources and competencestechnology : patents, trade secrets (SEB, Bic, 3M, Michelin,…)Rarity of the resource : commercial location, air slots, Experiences : tangible and intangible (relational networks build with the other actors of industry)

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d) Competitive rivalryDepends on differents factors :The extent to which competitors are in balance (substitutabilities or complementarities of firms)Lifecycle and growth rate (ex: the automotive sector)High fixed costs (steel industry)High exit barriers (linked to the specificity of assets)

& the State position: appears as being an acting actor

Questions about the 5 forces framework :Is the industry attractive? To classify key forces through a hierarchy (graphical techniques)What are the expectations of the underlying forces?

Determination of CSF (competitive strategic factors) 37

3. Competitors and markets

Strategic groups are organisations within an industry having similar strategic characteristics, following similar strategies or competing on similar bases. Scopes of activities:

Extent of product (or services) diversityExtent of product (or services) diversityExtent of geographical coverageNumber of market segments servedDistribution channels used

Resources Commitment: Extent of brandingMarketing effortProduct or service qualityTechnological leadershipSize of organisation 38

Exhibit Some characteristics for identifying strategic groupsSources: Based on M.E. Porter, Competitive Strategy, Free Press, 1980; and J. McGee and H. Thomas, ‘Strategic groups: theory, research and taxonomy’, Strategic Management Journal, vol. 7, no. 2 (1986), pp. 141–160

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Competitive forces How to counterbalance it?

Power of buyers Creation of a mark valorised by customersSetting up switching costsMultiplication of distribution channelsIntegration forward

Power of suppliers Diversity of sourcing (mass merchandisers marks)Integrate generic componentsIntegration backward

Threat of substitutes Increase the ratio quality/priceIncrease customers loyalty (reputation, services, quality,…)Setting up switching costs (specific technologies)Creation of a breaking technologyLaunching a disruptive communication campaign against substituteLaunching a disruptive communication campaign against substituteSelling itself the substitute

Threat of entry Fixing a price too low for new entrantsFidelity of customers (réputation, services, quality, …)Setting up switching costsProtection of technologies

Competitive rivalry Capacity of innovationFidelity of customers (reputation, services, quality)Etablissement de coûts de transfertProtection of technologiesmonitoring of rare resources and/or core competencesReduction of sunk costs

Power of states Capacity of lobbying 40

Chapter 3: Resources,Resources, competecences & strategic capability

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Chapitre 3 : Resources, competences and strategic capability

Strategic capability is based on the adequacy and suitability (with CSF) between the resources and competences essential for an organisation to survive and prosper.

The advantage of a firm compared to its competitors rests on two keys’ elements:

The chosen position on the markets ;The fitness between this position and the useful R&C

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1. Foundation of strategic capability

The strategic capability is based on resources and competences of the organisation.

1.1. Threshold resources and unique resources4 categories of resources :

Physical resources E i t & t h l i d i d t i l ttl t &Equipements & technologies used, industrial settlements &

commercial stores...Financial resources

firm capital, relationships with bankers, investors, …Human resources

individual expertise, technical and managerial qualification, individual networks (internal & external…)...Intangible resources

marks, culture…

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Exhibit Strategic capabilities and competitive advantage

1.2. Threshold and core competences

Threshold capabilities are essential for the organisation to be able to compete in a given market. Threshold capabilities rest on threshold resources and on threshold competences. Core competences are activities and processes through which resources are deployed in such a way as to achieve competitive advantage difficult to imitate or obtain by competitors.

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Competences (…)Threshold levels of capability will change and usually rise over time as critical success factors changeTrade-offs between threshold capabilities are required for each SBUA competence is a know-how about resources’ combination to achieve goalsThe importance of intangible resources and immaterialThe importance of intangible resources and immaterial competences: Competences examples :

Organisational knowledge and collective know-how (collective experience facing specific situations)Quality management Coordination systems Processes of products development

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Evaluation of core competences : 5 questions

According to Collis and Montgomery, it makes sense to analyse the strenght of resources and competences thanks to 5 key words:The question of imitability : Are competitors able to imitate the resource, the competence? The question of substituability : Are competitors able to develop an alternative resourceAre competitors able to develop an alternative resource, competence ?The question of durability : how fast competences are going to depreciate ?The question of value : who’s going to capture the most important part of value generated by the competence of firm? The question of superiority (exclusivity) : is the firm owning a real advantage compared to its competitors ?

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According to Porter, the identification of competitive advantage is based on :

The value chain: an appropriate pattern to determine where are localised competences in organisation. In order to obtain a competitive advantageIn order to obtain a competitive advantage, core competences have to be applied to the critical success factors identified in SBU.

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Exhibit Strategic capability: the terminology

2. The strategic capability diagnosis

This diagnosis is associated to the value chain.It’s based on the understanding of strengths and weaknesses of firmand weaknesses of firm. It also encompasses the idea of dynamic capabilities: how to readjust continually required competences to cope with the environment evolution and rise the competitive advantage.

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2.1. The value chain and the network

The value chain illustrates the idea that organisations achieve competitive advantage by delivering value to customers. The consultancy needs to understand how the value is created or loosed through the process. M PORTER describes two forms of activities : primary and support activities. Not only activities but also links between them can be responsible of value generated by firm. How useful is the value chain? what are its limits?

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The value chain (Porter, 1985, 1988)

Firm infrastructure

Human resource management

Technologic developmentuppo

rt

tiviti

es

g p

Procurement

Inbound Logistics

Operations Outbound logistics

Marketing & Sales

Service

Primary activities

Su ac

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The value network

The value network is the set of inter-organisational links and relationships necessary to create a product or a service

Nowadays we can observe an interest for valueNowadays, we can observe an interest for value creation beyond the organisation (project groups, supply chain management,…). It illustrates the importance of value throughout vertical network. Taking into account those elements, it will be important to determine whether or not strengths and weaknesses make possible for the organisation to reach the CSF.

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Suppliers Value chain

Channel value chain

Customer value chain

The value network

Organisation’s value chain

Source M. Porter54

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2.2. Cost efficiency

Efficiency is the ratio between reached objectives and the resources used. Efficacy is the ratio between reached objectives and assigned objectivesobjectives and assigned objectives. In many organisations, the control of costs constitute a way for competitive advantage.

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Efficiency rests on mainly four sources

Economies of scaleProcurement costsExperience

V l ff t→Volume effect (mass merchandising industry for example)→An immaterial effect, apprenticeshipProduct and process innovations

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3. Strategic capability and competitive adavantage

3.1. Value : some more ideas

Value creation has to reach customers firstValue creation has to reach customers firstThe notion of goodwill may be applied.

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3.2. the rarity of strategic capabilities

Based on resources and competences What is important: the difficulty to imitate and the robustness of core competences of the organisation.

Core competences are complex to identify They areCore competences are complex to identify. They are embedded in organisation and encompass resources, processes, culture,…The paradox of robust competences How to make explicit and collective knowledge's which are individual and tacit (Nonaka and Takeuchi, 1995)?

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Exhibit 3.5 Criteria for inimitability of strategic capabilities

Synthesis of strategic analyse

Environment analyse

Strategic capabilityanalyse

Strenghts

Weaknesses

Opportunities

Threatens

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Chapter 4: Strategic ChoicesStrategic Choices

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Chapter 4: strategic choices of firm

Up to now, we did the analyse of environment and estimated the strategic capacity of firm →Strategic choices at business level (SBU)Strategic choices at business level (SBU) Strategic choices at corporate level (portfolio matrixes) Directions of development Methods of development

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What are Strategic Choices?

Strategic choicesinvolve understanding the underlying bases for future strategy at both the business unit and

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corporate levels and the options for developing strategy in terms of both the directions and methods of development

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Strategic ChoicesCorporate level choices, e.g.

diversificationinternationalization

Business unit level choices, e.g.:product / market choicespricing choices

Functional level choices, e.g: . marketing, production, finance, human resources, IT, logistics, R&D, etc.

Strategic choices at different levels are connected.

Together, they should be coherent and mutually-reinforcing64

Corporate Strategy

Specialisation - DiversificationIntegration – Internationalisation

Internal growth-External growth - Alliance

The different levels of strategy

Business Strategies

Operating Strategy

Strategic Business Units)

Financial Strategy -Commercial StrategyProduction Strategy -Human resources strategy...

Price – based Strategy Differentiation StrategyFocused differentiation

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1 Business level Strategies

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1. Business level strategies / Competitive strategies Definition: competitive strategies is concerned

with the basis on which a business unit might achieve competitive adavantage in its market.

Porter suggested three ‘generic’ strategies: overall cost leadership, differentiation and ‘focus’ in order to set up a competitive advantage in a business unit

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Business Level Strategies

SBU strategies focus on how companies compete and generate

Exploring Corporate StrategyExhibit5.1© Pearson Educational Ltd. 2005

competitive advantage in different products and markets

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Perceived added value to a particular segment, warranting

price premium

1.1 three ‘generic’ strategies at business level

Focus

Seeks to achieve a lower price than competitors while

trying to maintain similar perceived product or service benefits to those offered by

competitors.

Seeks to provide products or services benefits that are different from those of competitors and that

are widely valued by buyersDevelopment of distinctive

competences

Low price strategy Differentiation

or

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1.2. STRATEGY CLOCK : A global perspective about differentiation

Hybrid Differentiation

Focused differentiation

high

Competitive offer

Low Price

No frills’Strategies destined to

ultimate failure

Price

Perceived

value

lowHigh

Note: The strategy clock is adapted from the work of Cliff Bowman (see D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995.) However, Bowman uses the dimenstion ‘Perceived Use Value’.

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Product-Price Strategies: Needs and Risks

Exploring Corporate StrategyExhibit5 2b

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1.2.1. Price strategy I (no frills’)

Combines a low price, low perceived product /service benefits and a focus on a price-sensitivemarket segment.

Many reasons can explain the development of thatMany reasons can explain the development of thatstrategy:Life cycle products (enrichment of the industry offer)Facing a lower purchasing power It appears as the right way to enter a new market (see Japanese car makers in Europe)Limits : easy to imitate

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Price strategies II (low price)

The aim : to maintain price always lower than competitors thanks to an inimitable efficiency

how ?

By conquering market’ share higher than competitors, in order to use economies of scale, bargaining power and experience effect.

Success maintaing high market share

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1.2.2. Hybrid strategy

An hybrid strategy seeks simultaneously to achievedefferenciation and a price lower than of competitors.

Means: technological break, culture product, greater volumes.

Ex : IKEA / offers triple plays,…

Success depends on both the capacity to generate value for customers but also on costs structure in order to be able to invest and renew differentiation factors.

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1.2.3. Differentiation strategy

Increased perceived value compared to competitors

⇒ Based on the increasing value and managing with costs, it’spossible to maintain the same price.

⇒ In some cases, organisations can increase margins by putting upprices higher

Building on material and immaterial characteristics, theoffer is perceived higher by customers.

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1.2.4. Focused differentiation

This strategy seeks to provide high perceivedproducts / service benefits justifying asubstantial higher price.

It’s a way to cope with or avoid direct confrontation withleaders in an industry.

to limit oneself to a specific market segment

to concentrate on specific customer needs ( ex : clothes forpregnant women, vehicles for airports, products for blind people,…)

Ex : Haute couture focusing on rich customers.76

Strategies for Achieving Competitive Advantage

Staying competitive over time: sustainability of advantage

Volatile Markets: advantages through hypercompetitiong g y

Interdependent competitors: advantages through collaboration

Interdependent competitors: advantages through game theory

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Sustaining Competitive Advantage over Time

Exploring Corporate StrategyExhibit5.3© Pearson Educational Ltd. 2005

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Propose and Evaluate Strategic Choices

RelevanceCoherence with the diagnosis

AcceptabilityExpected gainsExpected gains Risk levelExpected reaction of competitors and stakeholders

FeasibilityEvaluation the capability of the organisation to obtain the resources and competences necessary to the choosen strategy.

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2 Corporate Strategies

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2. Corporate Strategy

Strategy DirectionsSpecialisation

Methods for pursuing strategiesInternal growth

Directions and Methods of development :

Diversification

Refocusing

g

External growth

Alliance

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Strategy DirectionsStrategic analysis approach

portfolio of activities

Development of a robust portfolio on long term development of existing activitiesdevelopment of existing activities to enrich the portfolio to give up from certain activities

→Directions/options of development SpecialisationDiversification / refocusing Vertical integration / externalisation

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2.1 Specialisation

The way of specialisationConcentrate its competences on a single activity (SBU)Development of reputation, expertiseReinforcement of resources, of competences, of competitivep padvantage on one SBU

The aim : acquire a strong position (leadership)in an activity

Ex : firms specialised in audit or advisory services (dealing with strategy orsupply chain management )

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Concentrate all strengths (resources and competences on a unique Strategic Business Unit)Advantages:

° Increasing quality of the product or service,

Specialisation: advantages and inconvenients

Increasing quality of the product or service,• cost control through apprenticeship, economies of scale;° an easier control of the organisation

disadvantages: Risky because of global performance resting on a unique market (technology split, new competitors emerging, saturation of market);dependence on technological and socio-economical environment

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Strategic Directions - Ansoff’s Matrix:(Initial Set of Alternative Development Options)

Each option has its own needs and risks

Exploring Corporate StrategyExhibit 7.1© Pearson Educational Ltd. 2005

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2.2. Diversification

Definition: it’s a strategy that takes the organisation into both new markets and products or services.

It can be related or not to the actual activitiesIt can be related or not to the actual activities

Synergies refer to the benefits that might be gained whereactivities or processes complement each other: such as theircombined effect is greater than the sum of the parts

Objectives :

Re-equilibrate a mature portfolio of activitiesTo renew that portfolioCreate different synergies between activities

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Reasons for Pursuing Diversification

Efficiency gains

Stretching corporate parenting capabilities

Increasing market power

Responding to market decline

Spreading risk

Expectations of powerful stakeholders

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a) Related diversification

Related diversification is a strategy development related tocurrent products and markets, and/or based on thecapabilities or value network of the organisation.

The synergy can be :y gy° Commercial (distribution channel as Unilever toward mass

merchandisers);° Technological (Zodiac )° Any other activity of the value chain

Johnson, Scholes et Fréry88

b) Unrelated diversification

Firm is going to produce goods in differentSBU without any links between them.There is consequently no synergy betweenvalue chainsvalue chains.It can be associated to :

° Developing new markets (information systems, new technologies, …)

° Development of new competences in order to exploit market opportunities.

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Related diversification options for a manufacturerNote: Some companies will manufacture components or semi-finished items. In those cases there will be additional integration opportunities into assembly or finished product manufacture

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c) Advantages and inconvenients of diversification

Advantages :Decrease the risk by developing new activities. Flexibility gain ;development of new competences ‘Financial investment’ in profitable industries

Inconvenients :Inconvenients :Inability to develop “know-how” associated to each SBU. Reputation and mark can be attacked whenever a problem appears on a specific SBU (solution: external growth, owning a portfolio of marks)Bureaucratic costs (coordination, complexity, information and financial flows …) ;Risk associated to identity, homogeneity of culture

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Definitionre-specialisationto give up SBU and to reinforce expertise in some SBU

Advantages and disadvantages of refocusing = similar to specialisation

Advantages

2.3. from diversification to refocusing

g

Reaching a critical size on fundamental SBU putting up core competencesReputation of a specialist Making strategic decision easier

Inconvenients vulnerability of organisation focused on similar activities

!!! Refocusing is not going back but « a centered development » based on core competences

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Backward Integration

Raw material ComponentsMachines and industrial processesResearch and studiesLogisticsServices

o it

your

self

2.4 Integration Strategy

Organisation Horizontal Integration

Do Competitive product or substitute

Complementary products Derivatives

Make or buy

ConsomptionDistributionLogisticsServices

Backward Integration

Do it

your

self

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Vertical integration Vertical integration is a backward or forward integrationinto adjacent activities in the value network

Backward integrationIs the development into activities concerned with the inputs of thecompany’s current business

Ex : Michelin and the production of latex in south America. Massmerchandisers and the fishing boats.

Forward integrationIs the development into activities concerned with a company’soutput.

Ex : Sephora and LVMH, Sony and the creation of specialised stores

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Vertical integration : advantagesSupplies control (quantity, quality, price)

Markets control

Access to Information

Reduction of costs

Development of new competences

Risk allocation

Use of resources

Increase of power negotiation

Setting up barriers of entry95

Vertical integration: disadvantages

Increase of coordination costs

Increase of bureaucratic costs

Increase of complexity

Rigidity and lack of reactivity

Conflict with competitors

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3 Methods for pursuingstrategies

Choosing a corporate strategy, it’s :

1- 2-

« Corporate » Strategy Formulation

- SPECIALISATION - DIVERSIFICATION - REFOCUSING- INTEGRATION- INTERNATIONALISATION

- INTERNAL GROWTH- EXTERNAL GROWTH- ALLIANCES

A strategy direction One or several methods for pursuing strategies

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METHODS OF DEVELOPMENT Engagement form

deve

Self ConcertedCoordination

of existingelopmentform

of existingcapacities External Growth

Growth basedon

cooperationCreation of new capacities

Internal Growth

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Methods of Development

Internal(organic growth) External Collaboration

Methods of Development: Do everything yourself or together with others?

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Acquisitions

Mergers Alliances

Degree of Control+ -DO IT ALONE TOGETHERTOGETHER

Partnerships

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Internal growth or external growth ?

Strong competitive position Long term growth

Large company Diversified firm Rapid growth objectiveLong term growth

objectiveHigh growth rate industry

Internal(organic growth)

Rapid growth objective Economies of scalemature industry

External growth 101

3.1 Internal growth

Growth based on the development of new capacities

Motivations :Accumulation of Experience Controlled and Progressive development Developing apprenticeship and collaborationImpossible external growth Maintain autonomy and org’ identity

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Limits :Growth slownessRisk not shared with a partner (assumed alone) Risk to create an existing product

Internal growth

Risk to create an existing product NIH (« not invented here »)

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3.2 External GrowthGrowth based on the acquisition of existing assets

Strategic motivations :To Grow without creating additional capacities To Eliminate competitors T T k iti idlTo Take a position rapidly

Other motivationsFinancial (acquiring profitable assets)Technological (acquiring a new ‘know-how’)Organisational (new people to fight inertia)Leader’s desire (spreading power)

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External growth

Limits :Prohibitive costs

Dilution of organisation identity

Ri k f l ti f th tit ( f i iti )Risk of over-evaluation of the entity (case of acquisition)

Risk of overestimation of synergies

Problems of management post-acquisitiontechnical systems and organisation

management styles’ potential conflicts

organisational cultures

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1 Growth thanks to COOPERATION

If neither Internal growth nor External growth is appropriate……the cooperation choice

1 Growth thanks to COOPERATION

2 Non competitive COOPERATION : Outsourcing and Partnership

3 Competitive COOPERATION : Strategic Alliance

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3.3 Cooperation strategies

Origin of actorsNATURE of RELATION

Competitive COOPERATION

Same network Organisation supplier Outsourcingvalue relationship Outsourcing

Same industry Competitive Alliance

Differentsindustries or

networks Partnership

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- Develop a collaborative relationship with its suppliers or clients : vertical partnership;

- An alternative solution to integration : maintaining its core competences, flexibility

Outsourcing Strategies

ADVANTAGES-OBJECTIVES EXAMPLES

DEVELOPPEMENT OF NEW PRODUCTS :client-supplier coordination, sharing R&D costs, cross investissements

RENAULT-VALEO : Twingo

REDUCTION OF COSTS : coordination of production flows, stocks reduction, commercial or marketing common actions

Toyota and its suppliers : Just in time (Dyer, 1998)

DIFFERENTIATION : collaborationfor innovation development, increase reputation

Mail-order selling firms : Delivery in "24h"

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- To develop a collaborative relationship with firms outside the competitive industry

- An alternative SOLUTION compared to DIVERSIFICATION : a spot cooperation, easier to leave the industry, flexibility

Partnership strategies

AVANTAGES-OBJECTIVES EXAMPLES

SHARING COMPLEMENTARY RESOURCEScompetences, experience, reputation

IBM-BOUYGUES : sophisticated buildings (information systems inside)

ECONOMIES OF SCOPE :R&D, logistics, commercial

ACCOR-ELF :"hôtels+ fuel stations"

INCREASE MARKET POWER AVIS-OPEL-SNCF : "train-car"

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Developing a collaborative relation -

with its COMPETITORS

Objectives associated to Alliances :

STRATEGIC ALLIANCES

- AVOID A COMPETITIVE RELATION « LOOSER – LOOSER » : mature industry, structural fragility of competitors

- SHARING RESOURCES TO DEVELOP A BUSINESS THAT APPEARS IMPOSSIBLE to deal with ALONE :technology, know-how, production machines, reputation, commercial network

- Setting up strategic « entry barriers " : cartel

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Firms bring assets of...

Same nature Different nature

In order to sell

Typology of strategic alliances

a same product

Specific productsto each partner

ADDITIVE ALLIANCE

JOINT INTEGRATION

COMPLEMENTARYALLIANCE

(source B.GARRETTE)111

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ALLIANCE

A B

ADDITIVE ALLIANCE

Pooling resources on all activities of the value chain Absence of competitors on the industry

Market

Example :

AIRBUS(source B.GARRETTE)

yRisks :

Increase coordination costs duplication of tasksLoosing of skills, competences from allied firms

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ALLIANCE

JOINT INTEGRATION

Pooling resources at the backward level of the value chain : size effect The output issued from alliance is integrated by each partner

A B

Examples :

PSA-FIAT(car makers) (source B.GARRETTE)

The partners might still competitors on the industry Risks :

Rigidity of alliance compared to the evolution of its needs : inertia of allianceDifferences associated to objectives

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A

B

COMPLEMENTARY ALLIANCE

Sharing tasks on the different activities of the value chain2 types of complementarities : symbiotic alliance or « learning » allianceA

Examples :Renault-Matra, Skyteam,

(source B.GARRETTE)

alliance No competition or competition avoidedRisks :

Dependence of one of the alliesPotential divergences

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LIMITS DUE to the CONSTITUTION OF THE ALLIANCE :

Risks and limits associated to strategicalliances - 1

SPY ALLIANCE : Alliance-absorption

ALLIANCE "LEARN AND RUN" : learning from the partner to better compete on the industry

UNBALANCED ALLIANCE : In terms of size, competences, competitive position, …

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LIMITS DUE TO THE MANAGEMENT OF THE ALLIANCE :

Risks and limits of strategic alliance - 2

Complexity of coordination : problems of coordination costs

“Strategic Schizophrenia” : co-existence of a cooperative and a competitive relationship

Reversibility of alliance : to foresee a way to escape

firm’s cultures incompatibility, management styles conflict

Rivalry between allies : appropriation of alliances outputs, ideas, opacity…

the “end” of alliance

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Evaluation of Strategic Choices

RelevanceCoherence with the diagnostic

AcceptabilityExpected gains Risk levelExpected reaction of competitors and stakeholders

FeasibilityEvaluation the capability of the organisation to obtain the resources and competences necessary to display strategy.

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Suitability of Strategic Options

Strategic Option Why this option is suitable in terms of…

Environnement Capacity Stakeholder and cultural influences

Directions

Consolidation Withdraw from declining marketsMaintain market share

Build on strenths through continued investment and innovation Stick to what the organization and its

stakeholders know bestMarket Penetration Gain market share for advantage Exploit superior resources and

competences

Product Development Exploit knowledge of customer needs Exploit R&DMinimize the risk of alienating stakeholders with interests in Current markets saturated preserving the status quo or making counter-cultural decisions

Market DevelopmentCurrent markets saturatedNew opportunities for : geographic spread, entering new segments or new uses

Exploit current products and capabilities

Diversification Current market saturated or declining Exploit core competences in new areas

Meet the needs of stakeholders with expectations for more rapid growthBut potential for culture clash

MethodsOrganic

(Internal) Growth

First entrantPartners or acquisitions not available or not suitable

Building on new capabilitiesLearning and competence development

Cultural / political ease

Mergers & Acquisitions

SpeedSupply / demandP/E ratios

Acquire competencesEconomies of scale

Returns: growth or share valueBut potential for culture clash

Joint Development SpeedStandard / industry norm setting

Complimentary competences Learning from partners

Dilutes riskFashionable

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4 Managing Corporate tf liportfolio

119

4. Managing the corporateportfolio

to have an overview of firms activities & to optimise resources allocation.

diversified firms :

idea of lifecycle : some activities are going to finance others

how to organise that ?

h h b i i i ?how to choose between activities ?

Method

Matrix with 2 dimensions

market attractiveness

SBU strength compared to competition

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4.1 Principle of portfolio matrixhigh

attractiveness

low

low highCompetitive

position

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4.2 The BCG matrix

activity growthRate

Question marks Low rentabilityHigh needs reinforceAnalyse conditions To give up

starsHigh rentability

High needs

To sustainr

Dogs Low rentability

Cash cowHigh rentability

Financial Needs

Rentability Financial resources

Relative market share

yLow needs To maintain Without investmentsTo give up

g yLow needs

To rentabilise

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Funding Strategies in Different Circumstances:

The Growth Share (or BCG) Matrix

Source: Adapted from K. Ward, Corporate Financial Strategy, Butterworth/Heinemann,1993, Chapter 2.

Exploring Corporate StrategyExhibit 9.8© Pearson Educational Ltd. 2005 123

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4.3 McKinsey portfolio matrix2 critics adressed to BCG’s matrix

Competitive position

Possibility or necessity to take into account other criterions than market share. Differentiation allows to conciliate rentability and lower marketshare.

appropriate indicators : Innovation capacity pp p p yreputation marketshare…

Attractiveness of activity

Attractiveness can’t only be associated to growth rate. synergies, sharing experience, barriers to entry…

Examples of indicators : competitve rivalryexperience sharinggrowth, ...

124

McKinsey’s matrix Method :


distinguish indicators of competitive positionassociate a number (weight)notation compared to competitors (from 1 to 3) competitive positioncompetitive position

Attractiveness of activity

distinguish indicators of attractivenessweightassociate a number (from 1 to 3) attractiveness of activity

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McKinsey’s matrix

high

medium

Selectivity Selective Growth

Investment And growth

Divest Selectivity Selective growth

Low

Low High

IndustryAttractiveness


Medium

g

Divest Harvest / divest

SelectivityRentabilise

126