Strategic Management MBA (GTU)

8/2/2019 Strategic Management MBA (GTU)

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Chapter Title

16/e PPT

What Is Strategyand Why Is

It Important?

Screen graphics created by: Jana F. Kuzmicki, Ph.D.

Troy University-Florida Region

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.



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“Without a strategy

the organization is

like a ship without a

rudder.”

Joel Ross and Michael

Kami



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Chapter Roadmap

What Do We Mean By Strategy?

Strategy and the Quest for Competitive Advantage

Identifying a Company’s Strategy

Why a Company’s Strategy Evolves Over Time A Company’s Strategy Is Partly Proactive and Partly Reactive

Strategy and Ethics: Passing the Test of Moral Scrutiny

The Relationship Between a Company’s Strategy and ItsBusiness Model

What Makes a Strategy a Winner?

Why Are Crafting and Executing Strategy Important?



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Thinking Strategically:The Three Big Strategic Questions

1. What’s the company’s present situation?

2. Where does the company need to go from here?

Business(es) to be in and market positions to stake outBuyer needs and groups to serve

Direction to head

3. How should it get there?

A company’s answer to “how

will we get there?” is its strategy






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Choosing the “Hows” of Strategy

Strategic choices about “how” are based on Trial-and-error organizational learning about what has worked and

what has not worked

Management’s appetite for taking risks

Managerial analysis and strategic thinking about how best toproceed, given market conditions and the company’s circumstances

In choosing a strategy, management is in effect saying,

“Among all the many different business approaches and

ways of competing we could have chosen, we have

decided to employ this particular combination of competitive and operating approaches in moving the

company in the intended direction, strengthening its

market position, and competitiveness, and boosting

performance.”



Key Elements of a Successful Strategy

Developing a successful strategy hinges on makingcompetitive moves aimed at

Appealing to buyers in ways to set the enterprise apart from

rivals and

Carving out its own market position Involves developing a distinctive “aha”

element to

Attract customers and

Produce a competitive edge

Copying competitive moves of other

successful companies rarely works!





For Discussion: Your Opinion

From your perspective as a cable or satellite serviceconsumer, does Comcast’s strategy (as described in

Illustration Capsule 1.1) seem to be well-matched to

industry and competitive conditions?

Does the strategy seem to be keyed to a cost

advantage, differentiating features, serving the unique

needs of a niche, or developing resource strengths and

competitive capabilities rivals can’t imitate or trump (or a

mixture of these)?

What is there about Comcast’s strategy that can lead to

sustainable competitive advantage?



Strategy and the Quest for Competitive Advantage

The heart and soul of any strategy are the actionsand moves in the marketplace that a company

makes to strengthen its competitive position and

gain a competitive advantage over rivals A creative distinctive strategy that sets a company

apart from rivals and yields a competitive

advantage is a company’s most reliable ticket to

above average profitability Competing with a competitive advantage is more

profitable than competing with no advantage Competing with a competitive disadvantage nearly

always results in below-average profitability



A Powerful Strategy Leads toSustainable Competitive Advantage

A company achieves sustainable competitive advantage when an attractive number or buyers prefer its

products/services over those of rivals and when the basis

for this preference can be maintained over time

Its nice when a strategy produces a temporarycompetitive edge but a durable edge over rivals greatly

enhances a company’s prospects for winning in the

marketplace and realizing above-average profits

What separates a powerful strategy from an ordinary

strategy is management’s ability to forge a series of

moves, both in the marketplace and internally, that

produces sustainable competitive advantage!











Test Your Knowledge

A company’s strategy and its quest for competitive advantageare tightly related because

A. a company’s strategy determines whether it will have lower or

higher costs than rivals and thus be at a competitive advantage

or disadvantage.

B. competitive advantage is essential to having a profitable

business model.

C. choosing a competitive advantage to pursue also helps a

company choose which business model is most appropriate.

D. competitive advantage enables a company to achieve itsstrategic objectives.

E. a strategy that leads to sustainable competitive advantage is a

company’s most reliable means of achieving above-average

profitability and financial performance.



Why Do Strategies Evolve?

A company’s strategy is a work in progress

Changes may be necessary to react to

Shifting market conditions

Technological breakthroughs

Fresh moves of competitors

Evolving customer preferences

Emerging market opportunities

New ideas to improve strategy

Crisis situations



Fig. 1.2: A Company’s Strategy IsPartly Proactive and Partly Reactive





Linking Strategy With Ethics

Ethical and moral standards go beyond Prohibitions of law and the language of “thou shalt not”

to issues of Duty and “right” vs. “wrong”

Ethical and moral standards address

“What is the right thing to do?”Two criteria of an ethical strategy:

Does not entail actions and behaviors that cross the linefrom “should do” to “should not do” and “unsavory” or

“shady” and Allows management to fulfill its ethical duties to all

stakeholders





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Role of Senior Executives:Linking Strategy with Ethics

Forbid pursuit of ethically questionable businessopportunities

Insist all aspects of company strategyreflect high ethical standards

Make it clear all employees areexpected to act with integrity

Install organizational checks and balances to Monitor behavior Enforce ethical codes of conduct Provide guidance to employees in gray areas

Display genuine commitment to conduct businessactivities ethically



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Test Your Knowledge

A company's strategy can be considered “ethical”A. if all of its different actions and elements are legal and in

compliance with governmental rules and regulations.

B. so long as its actions and behaviors can pass the test of

“moral scrutiny” and are aboveboard in the sense of not beingshady or unconscionable, injurious to others, or unnecessarily

harmful to the environment.

C. only if all elements of the strategy are in accord with what is

generally considered as being in the overall best interests of

society at large.

D. so long as religious authorities and noted ethics experts find

nothing “wrong” in the company’s actions.

E. if it is in compliance with the company’s code of ethics and has

been approved by the company’s chief ethics officer.



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What Is a Business Model?

A business model addresses “How do we makemoney in this business?” Is the strategy capable of delivering

good bottom-line results?

Do the revenue-cost-profit economicsof the strategy make good business sense? Look at revenue streams the strategy is expected to

produce

Look at associated cost structure and potential profit margins

Do resulting earnings streams and ROI indicate the

strategy makes sense and the company has a viable

business model for making money?



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Relationship BetweenStrategy and Business Model

Strategy . . .Deals with a company’s

competitive initiatives and

business approaches

Business Model . . . Concerns whether revenues

and costs flowing from the

strategy demonstrate a

business can be amplyprofitable and viable

S t r a t e g y

B u s i n

e s s

M o d e l



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Microsoft’s Business Model

Employ a cadre of highly skilled programmers to develop proprietarycode; keep source code hidden from users

Sell resulting OS and software packages to PC makers and users atrelatively attractive prices to achieve a 90% or more market share

Most costs in developing software are fixed; variable costs are small;once break-even volume is reached, revenues from additional salesare almost pure profit

Provide modest level of technical support to users at no cost

Rejuvenate revenues by periodically introducing next-generationsoftware with features inducing PC users to upgrade their operating

systems



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Red Hat’s Business Model

Rely on collaborative efforts of volunteer programmers to create thesoftware

Collect and test enhancements and new applications submitted byvolunteer programmers for evaluation and inclusion in new releases

of Linux

Market upgraded and tested family of Red Hat products to largecompanies, charging a subscription fee that includes 24/7 supportwithin 1 hour in 7 languages

Make source code open and available to all users

Capitalize on specialized expertise required to use Linux byproviding fee-based training, consulting, software customization,

and client-directed engineering to Linus users





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Who has the best business model –

Microsoft or Red Hat?





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Other Criteria for Judgingthe Merits of a Strategy

Internal consistency and unity among all pieces of the strategy

Degree of risk the strategy poses as compared to

alternative strategies

Degree to which the strategy is flexible and

adaptable to changing circumstances

While these criteria are relevant, they seldom override

the importance of the three tests of a winning strategy!



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Why Is Strategy Important?

A compelling need exists for managers

to proactively shape how a firm’s

business will be conducted

A strategy-focused firm is more likely to be a strong bottom-line performer

than one that views strategy as secondary



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Good Strategy + Good Strategy Execution= Good Management

Crafting and executing strategy are core managementfunctions

Among all things managers do, nothing affects a

company’s ultimate success or failure more

fundamentally than how well its management team Charts a company’s direction,

Develops competitively effective strategic moves and business

approaches, and

Pursues what needs to be done internally to produce goodday-in/day-out strategy execution

Excellent execution of an excellent strategy is thebest test of managerial excellence – and the

most reliable recipe for winning in the marketplace!



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Chapter Title

16/e PPT

Evaluating a

Company’sExternal

EnvironmentScreen graphics created by:

Jana F. Kuzmicki, Ph.D.Troy University-Florida Region




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“Analysis is the critical

starting point of

strategic thinking.”

Kenichi Ohmae



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“Things are always

different--the art is

figuring out which

differences matter.”

Laszlo Birinyi





Fi 3 1 F Thi ki St t i ll b t th



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Fig. 3.1: From Thinking Strategically about the

Company’s Situation to Choosing a Strategy





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Thinking Strategically about aCompany’s Macro-environment

A company’s macro-environment includes all relevant factors and influences outside its boundaries Diagnosing a company’s external situation involves

assessing strategically important factors that have abearing on the decisions a company’s makes about its

Direction Objectives Strategy Business model

Requires that company managers scanthe external environment to Identify potentially important external developments Assess their impact and influence Adapt a company’s direction and strategy as needed



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Key Questions Regarding theIndustry and Competitive Environment

What are the

industry’s

dominant

economic traits?

How strong are

competitive

forces?

What forces

are driving

change in the

industry?

What market

positions do

rivals occupy?

What moves will

they make next?

What are the

key factors for

competitive

success?

How attractive

is the industry

from a profit

perspective?



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Market size and growth rate Number of rivals

Scope of competitive rivalry

Buyer needs and requirements

Degree of product differentiation

Product innovation

Supply/demand conditions

Pace of technological change Vertical integration

Economies of scale

Learning and experience curve effects

Question 1: What are the Industry’sDominant Economic Traits?



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Learning/Experience Effects

Learning/experience effects exist when acompany’s unit costs decline as its cumulative

production volume increases because of

Accumulating production know-how

Growing mastery of the technology

The bigger the learning or experience curveeffect, the bigger the cost advantage of the firm

with the largest cumulative production volume

Q i 2 Wh Ki d f C i i



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Question 2: What Kinds of CompetitiveForces Are Industry Members Facing?

Objectives are to identify

Main sources of competitive forces

Strength of these forces

Key analytical tool

Five Forces Model

of Competition



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Fig. 3.3: The Five Forces Model of Competition

A l i th Fi C titi F



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Analyzing the Five Competitive Forces:How to Do It

Step 1: Identify the specific competitive pressures associated with each of

the five forces

Step 2 : Evaluate the strength of each

competitive force -- fierce, strong,

moderate to normal, or weak?

Step 3: Determine whether the collective

strength of the five competitive forces

is conducive to earning attractive profits



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Usually the strongest of the five forces

Key factor in determining strength of rivalry

How aggressively are rivals using various weapons of competition to improve their market positions and

performance?

Competitive rivalry is a combative

contest involving

Offensive actions

Defensive countermoves

Competitive Pressures Among Rival Sellers

Fig. 3.4: Weapons for Competing and FactorsAff i S h f Ri l



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Affecting Strength of Rivalry

Wh t A th T i l



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Lower prices

More or different

performance features

Better product performance

Higher quality

Stronger brand image and

appeal Wider selection of models

and styles

Bigger/better dealer network

Low interest rate financing

Higher levels of advertising

Stronger product

innovation capabilities

Better customer service Stronger capabilities to

provide buyers with

custom-made products

What Are the Typical Weapons for Competing?



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Test Your Knowledge

The rivalry among competing sellers in an industryintensifies

A. when buyer demand for the product is growing rapidly.

B. when customers are brand loyal and their costs to

switch to competing brands or substitute products are

relatively high.

C. when buyer demand is strong and sellers have little or

no excess capacity and only minimal inventories.

D. as the number of rivals increases and as they become

more equal in size and competitive capability.

E. when the products of rival sellers are highly

differentiated products and the industry consists of so

many rivals that any one company’s actions have little

direct impact on rivals’ business.



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Competitors are active in making fresh moves to improvemarket standing and business performance

Slow market growth

Number of rivals increases and rivals are of

equal size and competitive capability

Buyer costs to switch brands are low

Industry conditions tempt rivals to use price cuts or other

competitive weapons to boost volume

A successful strategic move carries a big payoff

Diversity of rivals increases in terms of visions, objectives,strategies, resources, and countries of origin

Outsiders acquire weak firms in the industry and use their

resources to transform new firms into major market

contenders

What Causes Rivalry to be Stronger?



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Industry rivals move only infrequently or in a non-aggressive manner to draw sales from rivals

Rapid market growth

Products of rivals are strongly

differentiated and customer loyalty is high

Buyer costs to switch brands are high

There are fewer than 5 rivals or there are numerous

rivals so any one firm’s actions has minimal impact

on rivals’ business

What Causes Rivalry to be Weaker?

Competiti e Press res



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Seriousness of threat depends on Size of pool of entry candidates

and available resources

Barriers to entry

Reaction of existing firms

Evaluating threat of entry involves assessing

How formidable entry barriers are for each type of

potential entrant and

Attractiveness of growth and profit prospects

Competitive PressuresAssociated With Potential Entry

Fig 3 5: Factors Affecting Threat of Entry



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Fig. 3.5: Factors Affecting Threat of Entry





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There’s a sizable pool of entry candidates

Entry barriers are low

Industry growth is rapid and profit

potential is high

Incumbents are unwilling or unable to contest a

newcomer’s entry efforts

When existing industry members have a strong

incentive to expand into new geographic areas or new

product segments where they currently do not have a

market presence

When Is the Threat of Entry Stronger?



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There’s only a small pool of entry candidates

Entry barriers are high

Existing competitors are struggling to earn good profits

Industry’s outlook is risky

Industry growth is slow or stagnant

Industry members will strongly contest

efforts of new entrants to gain a market foothold

When Is the Threat of Entry Weaker?

Competitive Pressures from Substitute



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Competitive Pressures from SubstituteProducts

Substitutes matter when customers are attracted to

the products of firms in other industries

Concept

Sugar vs. artificial sweeteners

Eyeglasses and contact lensvs. laser surgery

Newspapers vs. TV vs. Internet

Examples

How to Tell Whether Substitute



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How to Tell Whether SubstituteProducts Are a Strong Force

Whether substitutes are readily

available and attractively priced

Whether buyers view substitutes

as being comparable or better

How much it costs end users

to switch to substitutes

Fig 3 6: Factors Affecting Competition From Substitute Products



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Fig. 3.6: Factors Affecting Competition From Substitute Products







When Is the Bargaining



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Industry members incur high costs in switching their purchases to alternative suppliers

Needed inputs are in short supply

Supplier provides a differentiated inputthat enhances the quality of performance

of sellers’ products or is a valuable part

of sellers’ production process

There are only a few suppliers of a specific input

Some suppliers threaten to integrate forward

When Is the BargainingPower of Suppliers Stronger?




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Item being supplied is a commodity Seller switching costs to alternative suppliers are low

Good substitutes exist or new ones emerge

Surge in availability of supplies occurs

Industry members account for a big

fraction of suppliers’ total sales

Industry members threaten to integrate backward

Seller collaboration with selected suppliers provides

attractive win-win opportunities

When Is the BargainingPower of Suppliers Weaker?



Competitive Pressures From Buyers



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

Whether buyers have sufficient bargainingleverage to influence terms of sale in their favor

Extent and competitive importance of

seller-buyer strategic partnerships

in the industry

Competitive Pressures From Buyersand Seller-Buyer Collaboration

Fig. 3.8: Factors Affecting Bargaining Power of Buyers



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Buyer switching costs to competing brands or substitutesare low

Buyers are large and can demand concessions

Large-volume purchases by buyers are important to sellers

Buyer demand is weak or declining Only a few buyers exists

Identity of buyer adds prestige

to seller’s list of customers

Quantity and quality of informationavailable to buyers improves

Buyers have ability to postpone purchases until later

Buyers threaten to integrate backward

When Is the BargainingPower of Buyers Stronger?




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Buyers purchase item infrequently or in small quantities

Buyer switching costs to competing brands are high

Surge in buyer demand creates a “sellers’ market”

Seller’s brand reputation is important to buyer

A specific seller’s product delivers quality

or performance that is very important to buyer

Buyer collaboration with selected sellers provides

attractive win-win opportunities

When Is the BargainingPower of Buyers Weaker?





Strategic Implications of



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Competitive environment is unattractive fromthe standpoint of earning good profits when

Rivalry is vigorous

Entry barriers are low

and entry is likely

Competition from

substitutes is strong

Suppliers and customers have

considerable bargaining power

Strategic Implications of the Five Competitive Forces

Strategic Implications of



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Competitive environment is ideal froma profit-making standpoint when

Rivalry is moderate

Entry barriers are high

and no firm is likely to enter

Good substitutes

do not exist

Suppliers and customers are

in a weak bargaining position

Strategic Implications of the Five Competitive Forces

Coping With the



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Objective is to craft a strategy to

Insulate firm from

competitive pressures

Initiate actions to produce

sustainable competitive advantage

Allow firm to be the industry’s “mover and shaker” with

the “most powerful” strategy that defines the

business model for the industry

Coping With theFive Competitive Forces

Question 3: What Factors Are Driving Industry



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Question 3: What Factors Are Driving IndustryChange and What Impacts Will They Have?

Industries change because forcesare driving industry participants

to alter their actions

Driving forces are themajor underlying causes

of changing industry and

competitive conditions

Where do driving forces originate?

Outer ring of macroenvironment

Inner ring of macroenvironment

Analyzing Driving Forces:



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STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 years Usually no more than 3 - 4 factors

qualify as real drivers of change

STEP 2: Assess impact Are the driving forces acting to cause market

demand for product to increase or decrease?

Are the driving forces acting to make competition more or less intense?

Will the driving forces lead to higher or lower industry profitability?

STEP 3: Determine what strategy changes areneeded to prepare for impacts of driving forces

Analyzing Driving Forces:Three Key Steps

Common T pes of Dri ing Forces



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Emerging new Internet capabilities and applications Increasing globalization of industry

Changes in long-term industry growth rate

Changes in who buys the product and how they

use it

Product innovationTechnological change/process innovation

Marketing innovation

Common Types of Driving Forces





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Question 4: What Market Positions



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Do Rivals Occupy?

One technique to reveal

different competitive positions

of industry rivals is

strategic group mapping

A strategic group is a

cluster of firms in an industry

with similar competitive

approaches and market positions

Strategic Group Mapping



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Firms in same strategic group have two or morecompetitive characteristics in common

Have comparable product line breadth

Sell in same price/quality range

Emphasize same distribution channels

Use same product attributes to appeal

to similar types of buyers

Use identical technological approaches

Offer buyers similar services

Cover same geographic areas

Strategic Group Mapping

Procedure for Constructing



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STEP 1: Identify competitive characteristics thatdifferentiate firms in an industry from one

another

STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics

STEP 3: Assign firms that fall in about the same strategy

space to same strategic group

STEP 4: Draw circles around each group, making circles

proportional to size of group’s respective share

of total industry sales

ga Strategic Group Map

Example: Strategic Group Map of Selected Retail Chains



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Guidelines: Strategic Group Maps



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Variables selected as axes should not be highlycorrelated

Variables chosen as axes should expose big

differences in how rivals compete

Variables do not have to be either quantitative or

continuous

Drawing sizes of circles proportional to combined

sales of firms in each strategic group allows map toreflect relative sizes of each strategic group

If more than two good competitive variables can be

used, several maps can be drawn

Guidelines: Strategic Group Maps

Interpreting Strategic Group Maps



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Interpreting Strategic Group Maps

The closer strategic groups areon the map, the stronger the cross-group

competitive rivalry tends to be

Not all positions on the map are equally attractive Driving forces and competitive pressures often

favor some strategic groups and hurt others

Profit potential of different strategic

groups varies due to strengths and

weaknesses in each group’s market

position

Test Your Knowledge



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Test Your Knowledge

A strategic group map is a helpful analytical tool for

A. assessing why competitive pressures and driving forces usually

impact the biggest strategic groups more so than the smaller groups.

B. determining which companies have how big a competitive advantage

and how good their prospects are for increasing their market shares.

C. determining which company is the most profitable in the industry andwhy it is doing so well.

D. determining who competes most closely with whom; evaluating

whether industry driving forces and competitive pressures favor

some strategic groups and hurt others; and ascertaining whether the

profit potential of different strategic groups varies due to thestrengths and weaknesses in each group’s respective market

positions.

E. pinpointing which of the five competitive forces is the strongest and

which is the weakest.

Question 5: What Strategic Moves Are



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A firm’s best strategic moves are affected by Current strategies of competitors

Future actions of competitors

Profiling key rivals involves gatheringcompetitive intelligence about

Current strategies

Most recent actions and public announcements

Resource strengths and weaknesses

Efforts being made to improve their situation

Thinking and leadership styles of top executives

Rivals Likely to Make Next?

Competitor Analysis



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Sizing up strategies and competitive strengths and weaknesses of rivals involves assessing

Which rival has the best strategy? Which

rivals appear to have weak strategies?

Which firms are poised to gain

market share, and which ones

seen destined to lose ground?

Which rivals are likely to rank among the industry

leaders five years from now? Do any up-and-coming

rivals have strategies and the resources to overtake the

current industry leader?

Competitor Analysis

Things to Consider in



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Which rivals need to increase their unit sales andmarket share? What strategies are rivals most likely to

pursue?

Which rivals have a strong incentive, along with

resources, to make major strategic changes?Which rivals are good candidates to be acquired?

Which rivals have the resources to acquire others?

Which rivals are likely to enter new geographicmarkets?

Which rivals are likely to expand their product offerings

and enter new product segments?

Predicting Moves of Rivals




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Why does a company need to bother with studyingcompetitors and trying to predict what moves rivals

will make next? Why can’t it just choose whatever

strategy it wants or make whatever moves in themarketplace it wishes without first worrying about

what rivals are going to do?

Question 6: What Are the Key



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KSFs are those competitive factors most affectingevery industry member’s ability to prosper

KSFs concern Specific strategy elements

Product attributes Resources

Competencies

Competitive capabilities

that a company needs to be competitively successful KSFs are attributes that spell the difference between

Profit and loss

Competitive success or failure

Factors for Competitive Success?

Identifying Industry Key Success Factors



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Pinpointing KSFs involves determining On what basis do customers choose

between competing brands of sellers?

What resources and competitive capabilities does a

seller need to have to be competitively successful?

What does it take for sellers to achieve a sustainable

competitive advantage?

KSFs consist of the major determinants for success Rarely are there more than 5 - 6 factors that are truly

key to the future financial and competitive success of

industry members

Identifying Industry Key Success Factors



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Example: KSFs for Beer Industry



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Full utilization of brewing capacity –to keep manufacturing costs low

Strong network of wholesale distributors –

to gain access to retail outlets

Clever advertising –

to induce beer drinkers to

buy a particular brand

Example: KSFs for Beer Industry

Example: KSFs for ApparelM f t i I d t



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Manufacturing Industry

Appealing designs and

color combinations –

to create buyer appeal

Low-cost manufacturing efficiency – to keep selling

prices competitive

Example: KSFs for Tin andAl i C I d t



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Aluminum Can Industry

Locating plants close to end-use customers –

to keep costs of shipping empty cans low

Ability to market plant output within

economical shipping distances

Question 7: Does the Outlook for the IndustryP t Att ti O t it ?



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Involves assessing whether the industryand competitive environment is attractive

or unattractive for earning good profits

Under certain circumstances, a firm uniquely

well-situated in an otherwise unattractive

industry can still earn unusually good profits

Attractiveness is relative, not absolute

Conclusions about attractiveness have

to be drawn from the perspective of a

particular company

Present an Attractive Opportunity?

Factors to Consider inA i I d t Att ti



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Industry’s market size and growth potentialWhether competitive forces are conducive to

rising/falling industry profitabilityWhether industry profitability will be favorably or

unfavorably impacted by driving forces Degree of risk and uncertainty in industry’s future Severity of problems facing industry Firm’s competitive position in industry vis-à-vis rivals

Firm’s potential to capitalize onvulnerabilities of weaker rivals

Whether firm has sufficient resources to

defend against unattractive industry factors

Assessing Industry Attractiveness

Core Concept: AssessingI d t Att ti



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Industry Attractiveness

The degree to which an industry is

attractive or unattractive is not the

same for all industry participantsor potential entrants.

The opportunities an industry

presents depend partly on a

company’s ability to capture them.

Test Your Knowledge



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Test Your Knowledge

Which of the following is not an important factor for company

managers to consider in drawing conclusions about whether

the industry presents an attractive opportunity?

A. Whether powerful competitive forces are squeezing industry

profitability to subpar levels and whether competition appears

destined to grow stronger or weaker

B. The industry’s growth potential and the degree of uncertainty and risk

in the industry’s future

C. Whether industry profitability will be affected favorably or unfavorably

by the prevailing driving forces

D. How many of the industry’s key success factors do companies in the

industry typically incorporate into their strategies

E. The company’s ability to capitalize on the vulnerabilities of weakly

positioned rivals and whether the company has sufficient competitive

strength to defend against or counteract the factors that make the

industry unattractive

4



4

Chapter Title

16/e PPT

Evaluating a

Company’sResources and

Competitive

PositionScreen graphics created by:





4-2

“Before executives can

chart a new strategy,

they must reach

common understanding

of the company’s

current position.”W. Chan Kim and Renee

Mauborgne

Chapter Roadmap



4-3

p p

Question 1: How Well Is the Company’s PresentStrategy Working?

Question 2: What Are the Company’s Resource

Strengths and Weaknesses and Its External

Opportunities and Threats?Question 3: Are the Company’s Prices and Costs

Competitive?

Question 4: Is the Company CompetitivelyStronger or Weaker than Key Rivals?

Question 5: What Strategic Issues and Problems

Merit Front-Burner Managerial Attention?

Company Situation Analysis:The Key Questions



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1. How well is the company’spresent strategy working?

2. What are the company’s resource

strengths and weaknesses and its

external opportunities and threats?3. Are the company’s prices and

costs competitive?

4. Is the company competitively stronger or weaker than key rivals?

5. What strategic issues merit

front-burner managerial attention?

The Key Questions

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



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Question 1: How Well Is the Company’sPresent Strategy Working?



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ese t St ategy o g

Must begin by understanding what the strategy is Identify competitive approach

Low-cost leadership

Differentiation Focus on a particular market niche

Determine competitive scope

Broad or narrow geographic market coverage?

In how many stages of industry’s production/distributionchain does the company operate?

Examine recent strategic moves

Identify functional strategies

Key ConsiderationsKey Considerations

Approaches to Assess How Wellthe Present Strategy Is Working



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Qualitative assessment –Is the strategy well-

conceived?

Covers all the bases?

Internally consistent? Makes sense?

Timely and in step with

marketplace?

Quantitative assessment – What are the results?

Is company achieving its

financial and strategic

objectives?

Is company an above-

average industry

performer?

the Present Strategy Is Working

Key Indicators of How Wellthe Strategy Is Working



4-8

Trend in sales and market share Acquiring and/or retaining customers

Trend in profit margins

Trend in net profits, ROI, and EVAOverall financial strength and credit ranking

Efforts at continuous improvement activities

Trend in stock price and stockholder value Image and reputation with customers

Leadership role(s) – Technology, quality,

innovation, e-commerce, etc.

the Strategy Is Working



4-9



4-10

Question 2: What Are the Company’s Strengths,Weaknesses Opportunities and Threats ?



4-11

S W O TS W O T represents the first letter in S S trengths

W W eaknesses

O O pportunities

T T hreats

For a company’s strategy to be well-conceived, it

must be

Matched to its resource strengths and weaknesses

Aimed at capturing its best market opportunities and

erecting defenses against external threats to its well-

being

S W

O T

Weaknesses, Opportunities and Threats ?

Identifying Resource Strengthsand Competitive Capabilities



4-12

A strength is something a firm does well or an attribute

that enhances its competitiveness Valuable skills, competencies, or capabilities Valuable physical assets Valuable human assets

Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute placing a company in a position of market

advantage Alliances or cooperative ventures with partners

Resource strengths and competitivecapabilities are competitive assets!

and Competitive Capabilities

Competencies vs. Core Competencies vs.Distinctive Competencies



4-13

Distinctive Competencies

A competence is the product of organizational learning and experience and represents real

proficiency in performing an internal activity

A core competence is a well-performedinternal activity central (not peripheral or incidental)

to a company’s competitiveness

and profitability

A distinctive competence is a competitively

valuable activity a company performs better than

its rivals



Core Competencies –A Valuable Company Resource



4-15

A Valuable Company Resource

A competence becomes a core competence when the well-performed activity is central to a

company’s competitiveness and profitability

Often, a core competence is

knowledge-based, residing in people,not in assets on a balance sheet

A core competence is typically the result of cross-

department collaboration A core competence gives a company a

potentially valuable competitive capability

and represents a definite competitive asset



Distinctive Competence –A Competitively Superior Resource



4-17

A distinctive competence is a competitivelyvaluable activity that a company performs better

than its competitors

A distinctive competence is a competitively

potent resource source because it

Gives a company a competitively valuable

capability unmatched by rivals

Can underpin and add real punch

to a company’s strategy

Is a basis for sustainable competitive advantage

# 1

A Competitively Superior Resource

Examples: Distinctive Competencies



4-18

ToyotaLow-cost, high-quality

manufacturing of motor

vehicles

StarbucksInnovative coffee drinks

and store ambience

Determining the CompetitivePower of a Company Resource



4-19

Power of a Company Resource

To qualify as competitively valuable or to be the

basis for sustainable competitive advantage, a

“resource” must pass 4 tests:

1. Is the resource hard to copy?

2. Is the resource durable – does it have staying power ?

3. Is the resource really competitively superior?

4. Can the resource be trumped by

the different capabilities of rivals?

Test Your Knowledge



4-20

A distinctive competence

A. is a more important competitive asset than a core

competence.

B. represents uniquely strong capability relative to rival

companies—it qualifies as a competitively superior resource strength with competitive advantage potential.

C. is a competitively important value chain activity that a

company performs better than its rivals.

D. can underpin and add real punch to a company's

strategy.

E. All of the above.





4-22



Identifying a Company’sMarket Opportunities



4-24

Market Opportunities

Opportunities most relevant to a

company are those offering

Good match with its financial and

organizational resource capabilities

Best prospects for profitable

long-term growth

Potential for competitive advantage

Identifying External Threats



4-25

Emergence of cheaper/better technologies

Introduction of better products by rivals

Entry of lower-cost foreign competitors

Onerous regulationsRise in interest rates

Potential of a hostile takeover

Unfavorable demographic shifts

Adverse shifts in foreign exchange rates

Political upheaval in a country

Role of SWOT Analysis inCrafting a Better Strategy



4-26

S W O TS W O T analysis involves more than just developing the

4 lists of strengths, weaknesses, opportunities, and threats

The most important part of S W O TS W O T analysis is

Using the 4 lists to draw conclusions

about a company’s overall situation

Acting on the conclusions to

Better match a company’s strategy to its

resource strengths and market opportunities

Correct the important weaknesses

Defend against external threats

Crafting a Better Strategy

Fig. 4.2: The Three Steps of SWOT Analysis



4-27



Question 3: Are the Company’sPrices and Costs Competitive?



4-29

Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company

situation analysis

Key analytical tools

Value chain analysis

Benchmarking

p



Fig. 4.3: A Representative Company Value Chain



4-31



Example: Value Chain Activitiesfor a Department Store Retailer



4-33

p

Primary Activities

Merchandise selection and

purchasing

Store layout and product

display Advertising

Customer service

Support Activities

Site selection

Hiring and training

Store maintenance

Administrative activities

Example: Value ChainActivities for a Hotel Chain



4-34

Primary Activities

Site selection and

construction

Reservations

Operation of hotel

properties

Managing lineup

of hotel locations

Support Activities

Accounting

Hiring and training

Advertising

Building a brand and

reputation

Generaladministration

Characteristics of Value Chain Analysis



4-35

Combined costs of all activities in a company’s

value chain define the company’s internal cost

structure

Compares a firm’s costs activityby activity against costs of key rivals

From raw materials purchase to

Price paid by ultimate customer

Pinpoints which internal activities are a

source of cost advantage or disadvantage

Why Do Value Chains of Rivals Differ?



4-36

Several factors give rise to differences

in value chains of rival companies

Different strategies

Different operating practices

Different technologies

Different degrees of vertical integration

Some companies may perform particular activities internally

while others outsource them

Differences among the value chains of competing companies complicate task of assessing rivals’ relative cost positions

The Value Chain Systemfor an Entire Industry



4-37

Assessing a company’s cost competitiveness

involves comparing costs all along the industry’s

value chain

Suppliers’ value chains are relevant because

Costs, performance features, and quality of inputsprovided by suppliers influence a firm’s own costs

and product performance

Value chains of distributors and retailers are

relevant because Their costs and profit margins represent “value added”

and are part of the price paid by ultimate end-user

The activities they perform affect end-user satisfaction

Fig. 4.4: Representative Value Chain for an Entire Industry



4-38

Example: Value Chain Activities



4-39

Pulp & Paper Industry

Timber farming

Logging

Pulp mills

Papermaking

Distribution




4-40

Parts and components manufacture

Assembly

Wholesale distribution

Retail sales

Home Appliance Industry




4-41

Processing of basic ingredients

Syrup manufactureBottling and can filling

Wholesale distribution

Advertising

Retailing

Albertson’s

Soft Drink Industry




4-42

Computer Software Industry

Programming

Disk loading

Marketing

Distribution



Activity-Based Costing: A KeyTool in Analyzing Costs



4-44

Determining whether a company’s costs are in line

with those of rivals requires

Measuring how a company’s costs compare with those

of rivals activity-by-activity

Requires having accounting data to measure costof each value chain activity

Activity-based costing entails

Defining expense categories accordingto specific activities performed and

Assigning costs to the activity

responsible for creating the cost



4-45



Objectives of Benchmarking



4-47

Identify best and most efficient means of

performing various value chain activities

Learn what is the “best” way to perform a particular

activity from those companies who have

demonstrated that they are “best-in-industry” or “best-in-world” at performing the activity

Learn what other firms do to perform

an activity at lower costFigure out what actions to take to improve a

company’s own cost competitiveness

Ethical Principles in Benchmarking



4-48

Avoid actions implying an interest

in Restraint of trade Market and/or customer

allocation schemes Price fixing Bribery

Refrain from acquiring trade

secrets by any means viewed as

improper Be willing to provide same type of

information to a benchmarking

partner Communicate early to clarify

expectations and avoid

misunderstandingsBe honest and complete

Treat benchmarking interchange

as confidentialUse information obtained only for

stated purposesRespect corporate culture of

partner companies

Use benchmarking contactsdesignated by partner company

Be fully prepared for each

exchangeProvide partners with agenda and

questionnaire prior to exchangeFollow through with commitments

to partner in a timely manner Understand how partner wants

information provided used



Options to CorrectInternal Cost Disadvantages



4-50

Implement use of best practices throughout company

Eliminate some cost-producing activities altogether by

revamping value chain system

Relocate high-cost activities to lower-cost geographic areas

See if high-cost activities can be performedcheaper by outside vendors/suppliers

Invest in cost-saving technology

Innovate around troublesome cost components

Simplify product design

Make up difference by achieving savings in backward or

forward portions of value chain system

Options to Correct aSupplier-Related Cost Disadvantage



4-51

Pressure suppliers for lower prices

Switch to lower-priced substitutes

Collaborate closely with suppliers to identify mutual

cost-saving opportunities

Arrange for just-in-time deliveries from suppliers to

lower inventory and internal logistics costs

Integrate backward into business

of high-cost suppliers

Options to Correct a Cost Disadvantage Associated

With Activities of Forward Channel Allies



4-52

Pressure dealer-distributors and other forward

channel allies to reduce their costs to make

the final price to buyers more competitive

with prices of rivals

Work closely with forward channel allies to

identify win-win opportunities to reduce costs

Change to a more economical distribution strategy

Switch to cheaper distribution channels

Integrate forward into company-owned retail outlets

Test Your Knowledge



4-53

For a company to translate performance of value chain

activities into competitive advantage, itA. must (1) develop core competencies and maybe a

distinctive competence that rivals don’t have or can’t

quite match and that are instrumental in helping it deliver

attractive value to customers or (2) be more cost efficientin how it performs value chain activities such that it has a

low-cost advantage.

B. has to develop more core competencies than rivals.

C. must be more adept than rivals in using benchmarking

and activity-based costing.

D. has to position itself in the strategic group where profit

margins are highest.

E. Must adopt more best practices than rival firms.

Translating Performance of Value ChainActivities into Competitive Advantage



4-54

A company can create competitive advantage by

out-managing rivals in performing value chain

activities in either/both of two ways

Option 1: Develop competencies and capabilities

that rivals don’t have or can’t match

Option 2 : Do an overall better job than rivals of lowering combined costs of performing

all the value chain activities

Fig. 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage



4-55



Assessing a Company’sCompetitive Strength vs. Key Rivals



4-57

1. List industry key success factors and other relevant

measures of competitive strength2. Rate firm and key rivals on each factor using rating

scale of 1 to 10 (1 = very weak; 5 = average; 10 = verystrong)

3. Decide whether to use a weighted or unweightedrating system (a weighted system is superior because chosen strength measures are unlikely tobe equally important)

4. Sum individual ratings to get an overall measure of competitive strength for each rival

5. Based on overall strength ratings, determine overallcompetitive position of firm



4-58



4-59

Why Do a CompetitiveStrength Assessment ?



4-60

Reveals strength of firm’s competitive position

vis-à-vis key rivals

Shows how firm stacks up against rivals, measure-

by-measure – pinpoints firm’s competitive strengths

and competitive weaknesses Indicates whether firm is at a competitive

advantage / disadvantage against each rival

Identifies possible offensive attacks (pit company

strengths against rivals’ weaknesses)

Identifies possible defensive actions (a need to

correct competitive weaknesses)

Test Your Knowledge



4-61

Which of the following statements is false?

A. The higher a company’s costs are above those of close rivals, themore competitively vulnerable it becomes.

B. Because the value chains of rival companies tend to be quite

similar, costs outside a company’s own value chain do not affect

whether it is at a cost advantage or disadvantage vis-à-vis key

rivals.C. A company’s cost competitiveness depends not only on the costs

of internally performed value chain activities but also on the costs

of activities performed by its suppliers and forward channel allies.

D. The stronger a company’s financial performance and market

position, the more likely it has a well-conceived, well-executedstrategy.

E. A competence is something a company is good at doing whereas a

core competence is a proficiently performed internal activity that is

central to a company’s strategy and competitiveness.

Question 5: What Strategic IssuesMerit Managerial Attention?



4-62

Based on results of both industry and competitive

analysis and an evaluation of a company’s

competitiveness, what items should be

on a company’s “worry list”?

Requires thinking strategically about Pluses and minuses in the industry

and competitive situation

Company’s resource strengths and weaknesses and

attractiveness of its competitive position

A “good” strategy must address “what to do”

about each and every strategic issue!

Stating the Issues Clearly and Precisely



4-63

A well-stated issue involves such phrases as

“How to . . . ?”

“Whether to . . . ?”

“What should be done about . . . ?”

Issues need to be precise, specific,

and “cut straight to the chase”

Issues on the “the worry list”

raise questions about

What actions need to be considered

What to think about doing






4-65

Why is it important for company managers to developa “worry list” of strategic issues and problems that

they need to address and to resolve? Why can’t

managers just skip this step and go directly to thetask of choosing what strategy to employ?





5-2

“Competitive strategy is

about being different. It

means deliberately choosing

to perform activities

differently or to perform

different activities than rivalsto deliver a unique mix of

value.”Michael E. Porter



Strategy and Competitive Advantage



5-4

Competitive advantage exists when a firm’s

strategy gives it an edge in

Attracting customers and

Defending against competitive forces

Convince customers firm’s product / service offers

superior value

A good product at a low price

A superior product worth paying more for

A best-value product

Key to Gaining a Competitive Advantage

What Is Competitive Strategy?



5-5

Deals exclusively with a company’s business

plans to compete successfully

Specific efforts to please customers

Offensive and defensive movesto counter maneuvers of rivals

Responses to prevailing market conditions

Initiatives to strengthen its market position

Narrower in scope than business strategy

Fig. 5.1: The Five Generic Competitive Strategies



5-6

Low-Cost Provider Strategies

Keys to SuccessKeys to Success



5-7

Make achievement of meaningful lower coststhan rivals the theme of firm’s strategy

Include features and services in product

offering that buyers consider essential

Find approaches to achieve a cost advantage

in ways difficult for rivals to copy or match

yy

Low-cost leadership means low overall costs, not

just low manufacturing or production costs!

Translating a Low-Cost Advantage intoHigher Profits: Two Options



5-8

Option 1: Use lower-cost edge tounder-price competitors and attract

price-sensitive buyers in enough

numbers to increase total profits

Option 2: Maintain present price, be

content with present market share,

and use lower-cost edge to earn a

higher profit margin on each unit sold,

thereby increasing total profits

Nucor Corporation’sLow-Cost Provider Strategy



5-9

Eliminate some production processes from value chain used by traditional

integrated steel mills; cut investment in facilities and equipment

Strive hard for continuous improvement in the efficiency of its plants and

frequently invest in state-of-the art equipment to reduce unit costs

Carefully select plan sites to minimize inbound and outbound shippingcosts and to take advantage of low rates for electricity

Hire a nonunion workforce that uses team-based incentive compensation

systems

Heavily emphasize consistent product quality and maintain rigorous qualitysystems

Minimize general and administrative expenses by maintaining a lean staff at

corporate headquarters and allowing only 4 levels of management

Approaches to Securinga Cost Advantage



5-10

Do a better job than rivals of

performing value chain activities

efficiently and cost effectively

Revamp value chain to bypass

cost-producing activities that add littlevalue from the buyer’s perspective

Approach 1

Approach 2Controlcosts!

By-passcosts!

Approach 1: Controlling the Cost Drivers

C t l i id l di i



5-11

Capture scale economies; avoid scale diseconomies

Capture learning and experience curve effects

Control percentage of capacity utilization

Pursue efforts to boost sales and spread costs such as R&D

and advertising over more units

Improve supply chain efficiency

Substitute use of low-cost for high-cost raw materials

Use online systems and sophisticated software to achieve

operating efficiencies

Adopt labor-saving operating methods

Use bargaining power to gain concessions from suppliers

Compare vertical integration vs. outsourcing

U di t t d l / k ti th d

Approach 2: Revamping the Value Chain



5-12

Use direct-to-end-user sales/marketing methods

Make greater use of online technology applications

Streamline operations by eliminating low-value-

added or unnecessary work stepsRelocate facilities closer to suppliers or customers

Offer basic, no-frills product/service

Offer a limited product/service as opposed to a full

product/service line

Wal-Mart’s Approach toManaging Its Value Chain

I i i i f i h i i h d i li



5-13

Institute extensive information sharing with vendors via online

systems

Pursue global procurement of some items and centralize mostpurchasing activities

Invest in state-of-the-art automation at its distribution centers

Strive to optimize the product mix and achieve greater salesturnover

Install security systems and store operating procedures that lower shrinkage rates

Negotiate preferred real estate rental and leasing rates with realestate developers and owners of its store sites

Manage and compensate its workforce in a manner to yield lower labor costs

Keys to Success in AchievingLow-Cost Leadership

Scrutinize each cost creating activity identifying cost drivers



5-14

Scrutinize each cost-creating activity, identifying cost drivers

Use knowledge about cost drivers to manage

costs of each activity down year after year

Find ways to restructure value chain to eliminate

nonessential work steps and low-value activities Work diligently to create cost-conscious corporate cultures

Feature broad employee participation in continuous cost-

improvement efforts and limited perks for executives

Strive to operate with exceptionally small corporate staffs

Aggressively pursue investments in resources and

capabilities that promise to drive costs out of the business

C t i t lt

Characteristics of a Low-Cost Provider



5-15

Cost conscious corporate culture

Employee participation in cost-control efforts

Ongoing efforts to benchmark costs

Intensive scrutiny of budget requests

Programs promoting continuous cost improvement

Successful low-cost producers championfrugality but wisely and aggressively

invest in cost-saving improvements !

Price competition is vigorous

When Does a Low-CostStrategy Work Best?



5-16

Price competition is vigorous

Product is standardized or readily availablefrom many suppliers

There are few ways to achieve

differentiation that have value to buyersMost buyers use product in same ways

Buyers incur low switching costs

Buyers are large and have

significant bargaining power Industry newcomers use introductory low prices to

attract buyers and build customer base

Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price



5-17

Being overly aggressive in cutting price

Low cost methods are easily imitated by rivals

Becoming too fixated on reducing costs

and ignoring Buyer interest in additional features

Declining buyer sensitivity to price

Changes in how the product is used

Technological breakthroughs open up cost

reductions for rivals



ObjectiveObjective

Differentiation Strategies



5-19

Incorporate differentiating features that cause

buyers to prefer firm’s product or service over

brands of rivals

Find ways to differentiate that create value for

buyers and are not easily matched or cheaply

copied by rivals

Not spending more to achieve differentiation

than the price premium that can be charged

ObjectiveObjective

Keys to SuccessKeys to Success

Benefits of Successful Differentiation



5-20

A product / service with unique,appealing attributes allows a firm to

Command a premium price and/or

Increase unit sales and/or

Build brand loyalty

= Competitive Advantage

Whichhat is

unique?

Unique taste – Dr Pepper

Types of Differentiation Themes



5-21

Unique taste – Dr. Pepper

Multiple features – Microsoft Windows and Office Wide selection and one-stop shopping – Home Depot,

Amazon.com

Superior service -- FedEx, Ritz-Carlton

Spare parts availability – Caterpillar

Engineering design and performance – Mercedes, BMW

Prestige – Rolex

Product reliability – Johnson & Johnson Quality manufacture – Karastan, Michelin, Toyota

Technological leadership – 3M Corporation

Top-of-line image – Ralph Lauren, Starbucks, Chanel

http://www.amazon.com/




Where to Find DifferentiationOpportunities in the Value Chain

Purchasing and procurement activities



5-23

Purchasing and procurement activities

Product R&D and product design activities

Production process / technology-related activities

Manufacturing / production activities

Distribution-related activities

Marketing, sales, and customer service activities

Internally

Performed

Activities,

Costs, &

Margins

Activities,

Costs, &

Margins of

Suppliers

Buyer/User

Value

Chains

Activities, Costs,

& Margins of

Forward Channel

Allies &

Strategic Partners

How to Achieve aDifferentiation-Based Advantage

A h 1



5-24

Approach 1

Incorporate features/attributes that raise the performance a buyer gets out of the product

Approach 2

Incorporate features/attributes that enhance buyer

satisfaction in non-economic or intangible ways

Approach 3

Compete on the basis of superior capabilities

Approach 4

Incorporate product features/attributes thatlower buyer’s overall costs of using product

Test Your Knowledge

Which of the following is not one of the four basic routes to



5-25

Which of the following is not one of the four basic routes to

achieving a differentiation-based competitive advantage?A. Appealing to high-income buyers who are willing and able to

pay a premium price for a high-performing, multi-featured

product

B. Incorporating features that raise product performanceC. Incorporating product attributes and user features that lower

the buyer’s overall costs of using the company’s product

D. Delivering value to customers via competencies and

competitive capabilities that rivals don’t have or can’t afford

to match

E. Incorporating features that enhance buyer satisfaction in

intangible or non-economic ways

Importance of Perceived Value

Buyers seldom pay for value that is not perceived



5-26

Buyers seldom pay for value that is not perceived

Price premium of a differentiation strategy reflects

Value actually delivered to the buyer

and

Value perceived by the buyer

Actual and perceived value can differ when buyers

are unable to assess their experience with a

product

Signaling Value as Wellas Delivering Value

Incomplete knowledge of buyers causes them to



5-27

p g y

judge value based on such signals as Price Attractive packaging Extensive ad campaigns Ad content and image

Seller facilities or professionalism andpersonality of employees Having a list of prestigious customers

Signals of value may be as important asactual value when

Nature of differentiation is hard to quantify Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated



Pitfalls of Differentiation Strategies

Appealing product features are easily copied by rivals



5-29

Appealing product features are easily copied by rivals

Buyers see little value in unique attributes of product

Overspending on efforts to differentiate the product

offering, thus eroding profitability

Over-differentiating such that productfeatures exceed buyers’ needs

Charging a price premium

buyers perceive is too high

Not striving to open up meaningful gaps in quality,

service, or performance features vis-à-vis rivals’

products


A low cost provider strategy can defeat a



5-30

A low-cost provider strategy can defeat a

differentiation strategy when buyers are satisfied with

a basic product and don’t think “extra” attributes are

worth a higher price. True or false? Explain.

Best-Cost Provider Strategies

Combine a strategic emphasis on low-cost with



5-31

Combine a strategic emphasis on low cost with

a strategic emphasis on differentiation Make an upscale product at a lower cost

Give customers more value for the money

Deliver superior value by meeting or exceeding

buyer expectations on product attributes and

beating their price expectations

Be the low-cost provider of a product with good-to-

excellent product attributes, then use cost

advantage to underprice comparable brands

Objectives

A best cost provider’s competitive advantage is

Competitive Strength of aBest-Cost Provider Strategy



5-32

A best-cost provider s competitive advantage is

based on its capability to include upscale attributes

at a lower cost than rivals’ comparable products

To achieve competitive advantage,

a company must be able to Incorporate attractive features at a lower cost than rivals

Manufacture a good-to-excellent quality product at a

lower cost than rivals

Develop a product that delivers good-to-excellentperformance at a lower cost than rivals

Provide attractive customer

service at a lower cost than rivals

When Does a Best-CostProvider Strategy Work Best?



5-33

Where buyer diversity makes

product differentiation the norm and

Where many buyers are also

sensitive to price and value

Risk of a Best-Cost Provider Strategy



5-34

A best-cost provider may get squeezed betweenstrategies of firms using low-cost and

differentiation strategies

Low-cost leaders may be able to siphon

customers away with a lower price

High-end differentiators may be able to

steal customers away with better product attributes

Test Your Knowledge

Which of the following are distinguishing features of a best-



5-35

g g g

cost provider strategy (based on the comparisons of the fivegeneric competitive strategies shown in Figure 5.1)?

A. The strategic target is price-conscious buyers

B. A marketing emphasis on charging a slightly higher price than

rival brands having comparable features and attributes

C. A product line that stresses wide selection, many product

variations, and emphasis on differentiating features

D. A competitive advantage based on more value for the money

E. Using constant product innovation, excellent R&D skills, and

periodic technological breakthroughs to sustain the strategy

Focus / Niche Strategies

Involve concentrated attention on a narrow piece of



5-36

Involve concentrated attention on a narrow piece of

the total market

Serve niche buyers better than rivals

Choose a market niche where buyers

have distinctive preferences, special

requirements, or unique needs

Develop unique capabilities to serve

needs of target buyer segment

Objective

Keys to Success

Approaches to Defining a Market Niche



5-37

Geographic uniqueness

Specialized requirements inusing product/service

Special product attributes

appealing only to niche buyers

Examples of Focus Strategies

Animal Planet and History Channel



5-38

y

Cable TVGoogle Internet search engines

Porsche Sports cars

Cannondale Top-of-the line mountain bikes

Enterprise Rent-a-Car Provides rental cars to repair garage customers

Bandag Specialist in truck tire recapping

Focus / Niche Strategiesand Competitive Advantage



5-39

Achieve lower costs than rivals in

serving a well-defined buyer segment –

Focused low-cost strategy

Offer a product appealing to unique

preferences of a well-defined buyer segment –

Focused differentiation strategy

Approach 1

Approach 2Which

hat is

unique?

What Makes a NicheAttractive for Focusing?

Big enough to be profitable and offers good growth



5-40

g g p g g

potential

Not crucial to success of industry leaders

Costly or difficult for multi-segment competitors

to meet specialized needs of niche members

Focuser has resources and capabilities

to effectively serve an attractive niche

Few other rivals are specializing in same nicheFocuser can defend against challengers via

superior ability to serve niche members

Risks of a Focus Strategy



5-41

Competitors find effective ways to matcha focuser’s capabilities in serving niche

Niche buyers’ preferences shift towards product

attributes desired by majority of buyers – niche

becomes part of overall market

Segment becomes so attractive it becomescrowded with rivals, causing segment profits to be

splintered



Deciding Which GenericCompetitive Strategy to Use

Each positions a company differently in its market and



5-43

competitive environment Each establishes a central theme for how a company will

endeavor to outcompete rivals Each creates some boundaries for maneuvering as market

circumstances unfold Each points to different ways of experimenting with the

basics of the strategy Each entails differences in product line, production

emphasis, marketing emphasis, and means to sustain the

strategyThe big risk – Selecting a “stuck in the middle” strategy!

This rarely produces a sustainable competitiveadvantage or a distinctive competitive position!



5-44

6



Chapter Title

16/e PPT

Supplementing

the ChosenCompetitiveStrategy






6-2

“Successful business

strategy is about

actively shaping the

game you play, not just

playing the game youfind.”

Adam M. Brandenburger and Barry J.Nalebuff



6-3

“The sure path to

oblivion is to stay

where you are.”

Bernard Fauber

Chapter Roadmap

Collaborative Strategies: Alliances and Partnerships



6-4

Merger and Acquisition Strategies Vertical Integration Strategies: Operating Across More

Stages of the Industry Value Chain

Outsourcing Strategies: Narrowing the Boundaries of the

Business Offensive Strategies: Improving Market Position and

Building Competitive Advantage

Defensive Strategies: Protecting Market Position and

Competitive Advantage Web Site Strategies

Choosing Appropriate Functional-Area Strategies

First-Mover Advantages and Disadvantages

Fig. 6.1: A Company’s Menu of Strategy Options



6-5

Companies sometimes use

Collaborative Strategies:Alliances and Partnerships



6-6

Companies sometimes use

strategic alliances or

collaborative partnerships to

complement their own strategic

initiatives and strengthen their competitiveness. Such

cooperative strategies go beyond

normal company-to-companydealings but fall short of merger

or full joint venture partnership.

Alliances Can Enhance aFirm’s Competitiveness

Alliances and partnerships can help companies



6-7

cope with two demanding competitive challenges

Racing against rivals to build a

market presence in many

different national markets

Racing against rivals to seize

opportunities on the frontiers

of advancing technology

Collaborative arrangements can help a companylower its costs and/or gain access to needed

expertise and capabilities

Characteristics of a Strategic Alliance

Strategic alliance – A formal agreement between two or



6-8

more separate companies where there is Strategically relevant collaboration of some sort Joint contribution of resources Shared risk Shared control Mutual dependence

Alliances often involve Joint marketing Joint sales or distribution

Joint production Design collaboration Joint research Projects to jointly develop new technologies or products

What Factors Make an Alliance Strategic?

It is critical to a company’s achievement of an



6-9

important objective

It helps build, sustain, or enhance a core

competence or competitive advantage

It helps block a competitive threat

It helps open up important

market opportunities

It mitigates a significant risk

to a company’s business

To collaborate on technology development or new

Why Are Strategic Alliances Formed?



6-10

product development

To fill gaps in technical or manufacturing expertise

To create new skill sets and capabilities

To improve supply chain efficiency

To gain economies of scale in

production and/or marketingTo acquire or improve market access

via joint marketing agreements

Get into critical country markets quickly to accelerate

Potential Benefits of Alliances toAchieve Global and Industry Leadership



6-11

process of building a global presence Gain inside knowledge about unfamiliar markets and

cultures

Access valuable skills and competencies concentratedin particular geographic locations

Establish a beachhead to participate in target industry

Master new technologies and build new expertise faster

than would be possible internally

Open up expanded opportunities in target industry by

combining firm’s capabilities with resources of partners

Capturing the Benefitsof Strategic Alliances

Benefits from forming partnerships are a function of



6-12

Picking a good partner

Being sensitive to cultural differences

Recognizing an alliance

must benefit both parties Ensuring both parties live

up to their commitments

Structuring the decision-making process

so actions can be taken swiftly when needed

Managing the learning process and then adjusting the

alliance agreement over time to fit new circumstances

Why Alliances Fail

Ability of an alliance to endure depends on



6-13

How well partners work together Success of partners in responding

and adapting to changing conditions

Willingness of partners to

renegotiate the bargain Reasons for alliance failure

Diverging objectives and priorities of partners

Inability of partners to work well together

Changing conditions rendering purpose of alliance obsolete

Emergence of more attractive technological paths

Marketplace rivalry between one or more allies

Test Your Knowledge

Which one of the following is not a factor that makes an alliance



6-14

“strategic” as opposed to just a convenient businessarrangement?

A. The alliance involves joint contribution of resources, shared

risk, and is mutually beneficial.

B. The alliance helps block a competitive threat or open up new

market opportunities.

C. The alliance helps mitigate a significant risk to a company’s

business.

D. The alliance helps build, enhance, or sustain a core

competence or competitive advantage.

E. The alliance is critical to the company’s achievement of an

important objective.

Merger – Combination and pooling of equals, with

Merger and Acquisition Strategies



6-15

newly created firm often taking on a new name Acquisition – One firm, the acquirer, purchases

and absorbs operations of another, the acquired

Merger-acquisition strategy Much-used strategic option

Especially suited for situations where

alliances do not provide a firm with needed

capabilities or cost-reducing opportunities

Ownership allows for tightly integrated operations,

creating more control and autonomy than alliances

To create a more cost-efficient operation

Objectives of Mergers and Acquisitions



6-16

To expand a firm’s geographic coverage

To extend a firm’s business into new

product categories or international markets

To gain quick access to new technologies

or competitive capabilities

To invent a new industry and lead the

convergence of industries whose boundaries

are blurred by changing technologies and

new market opportunities

Combining operations may result in

Pitfalls of Mergers and Acquisitions



6-17

Resistance from rank-and-file employees

Hard-to-resolve conflicts in management styles and

corporate cultures

Tough problems of integration

Greater-than-anticipated difficulties in

Achieving expected cost-savings Sharing of expertise

Achieving enhanced competitive capabilities

Vertical Integration Strategies

Extend a firm’s competitive scope within



6-18

same industry Backward into sources of supply

Forward toward end-users of final product

Can aim at either full or partial integration

InternallyPerformed

Activities,

Costs, &

Margins

Activities,

Costs, &

Margins of

Suppliers

Buyer/User

Value

Chains

Activities, Costs,& Margins of

Forward Channel

Allies &

Strategic Partners

Strategic Advantagesof Backward Integration

Generates cost savings only if volume needed is



6-19

big enough to capture efficiencies of suppliersPotential to reduce costs exists when

Suppliers have sizable profit margins

Item supplied is a major cost component

Resource requirements are easily met

Can produce a differentiation-based competitive

advantage when it results in a better quality partReduces risk of depending on suppliers of crucial

raw materials / parts / components

Strategic Advantagesof Forward Integration

To gain better access to end users



6-20

and better market visibilityTo compensate for undependable distribution

channels which undermine steady operations

To offset the lack of a broad product line, a firmmay sell directly to end users

To bypass regular distribution channels in favor of

direct sales and Internet retailing which may

Lower distribution costs

Produce a relative cost advantage over rivals

Enable lower selling prices to end users

Strategic Disadvantagesof Vertical Integration

Boosts resource requirements



6-21

Locks firm deeper into same industry

Results in fixed sources of supply andless flexibility in accommodating buyer

demands for product varietyPoses all types of capacity-matching problems

May require radically different skills / capabilities

Reduces flexibility to make changes in componentparts which may lengthen design time and ability tointroduce new products

Whether vertical integration is a viable

Pros and Cons of Integration vs. De-Integration



6-22

strategic option depends on its Ability to lower cost, build expertise,

increase differentiation, or enhance

performance of strategy-critical activities

Impact on investment cost, flexibility,

and administrative overhead

Contribution to enhancing a firm’s competitiveness

Many companies are finding thatde-integrating value chain activities is a

more flexible, economic strategic option!

Outsourcing Strategies

Concept



6-23

Outsourcing involves withdrawing fromcertain value chain activities and relying on outsiders to supply needed products,support services, or functional activities

Internally

Performed

ActivitiesSuppliers

Support

Services

Functional

Activities

Distributors

or Retailers

Activity can be performed better or

When Does OutsourcingMake Strategic Sense?



6-24

more cheaply by outside specialists Activity is not crucial to achieve asustainable competitive advantage

Risk exposure to changing technology and/or changing buyer preferences is reduced

It improves firm’s ability to innovate Operations are streamlined to

Improve flexibility Cut time to get new products into the market

It increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently

Firm can concentrate on “core” value chain activities thatbest suit its resource strengths

Farming out too many or the wrong activities,

Risk of an Outsourcing Strategy



6-25

thus

Hollowing out capabilities

Losing touch with activities and expertise that

determine overall long-term success

Offensive and Defensive Strategies

Offensive Strategies Defensive Strategies



6-26

Used to build new

or stronger market

position and/or create

competitive advantage

Used to protect


(rarely lead to creating

advantage)

Principles of Offensive Strategies

Focus relentlessly on



6-27

Building competitive advantage and

Striving to convert it into decisive advantage

Employ the element of surprise as

opposed to doing what rivals expect Apply resources where rivals are least able to

defend themselves

Be impatient with the status quo and display astrong bias for swift, decisive actions to boost a

firm’s competitive position vis-à-vis rivals

Types of Offensive Strategy Options

1. Offer an equally good or better product at a lower



6-28

price

2. Leapfrog competitors by being

First adopter of next-generation technologies or

First to market with next-generation products

3. Pursue continuous product innovation

to draw sales and market share away

from less innovative rivals4. Adopt and improve on the

good ideas of other companies

Types of Offensive Strategy Options (con’t)

5. Deliberately attack market segments where a key



6-29

rival makes big profits6. Attack competitive weaknesses of rivals

7. Maneuver around competitors and

concentrate on capturing unoccupiedor less contested market territory

8. Use hit-and-run or guerrilla warfare tactics to grab

sales and market share from complacent rivals

9. Launch a preemptive strike to secure an

advantageous position that rivals are prevented

from duplicating

What Is a Blue Ocean Strategy?



6-30

Seeks to gain a dramatic, durablecompetitive advantage by

Abandoning efforts to beat out

competitors in existing markets and

Inventing a new industry or distinctive

market segment to render existing

competitors largely irrelevant and

Allowing a company to create and

capture altogether new demand

Type of Markets: Blue Ocean Strategy

Typical Market Space

I d b d i

Blue Ocean Market Space

I d d i



6-31

Industry boundaries aredefined and accepted

Competitive rules are well

understood by all rivals

Companies try to outperform

rivals by capturing a bigger

share of existing demand

Industry does not exist yet

Industry is untainted by

competition

Industry offers wide-openopportunities if a firm has a

product and strategy allowing

it to

Create new demand and Avoid fighting over existing

demand


Which of the following is the best example of a blue



6-32

ocean strategy — Apple’s entry into MP3 players with

its iPod models or Dell’s entry into LCD TVs or Audi’s

recent move to bring out a luxury SUV? Explain.

Choosing Rivals to Attack

Four types of firms can be the target of a fresh

ff i



6-33

offensive

Vulnerable market leaders

Runner-up firms with weaknesseswhere challenger is strong

Struggling rivals on

verge of going under

Small local or regional

firms with limited capabilities



Test Your Knowledge

Which one of the following is not a good type of rival for

ff i i d d t t t?



6-35

an offensive-minded company to target?

A. Market leaders that are vulnerable

B. Runner-up firms with weaknesses in areas where the

challenger is strong.

C. Small local and regional companies with limited

capabilities

D. Companies with lower costs and lower prices

E. Struggling enterprises that are on the verge of going

under

Defensive Strategy

Objectives



6-36

Lessen risk of being attacked

Blunt impact of any attack that occurs

Influence challengers to aim attacks at other rivals

Block avenues open to challengers

Signal challengers vigorous

retaliation is likely

Approaches

Block Avenues Open to Challengers

Participate in alternative technologies

I t d f t dd d l b d



6-37

Introduce new features, add new models, or broadenproduct line to close gaps rivals may pursue

Maintain economy-priced models

Increase warranty coverage

Offer free training and support services

Reduce delivery times for spare parts

Make early announcements about new

products or price changes

Challenge quality or safety of rivals’ products

using legal tactics

Sign exclusive agreements with distributors

Publicly announce management’s strong

it t t i t i t k t h

Signal Challengers Retaliation Is Likely



6-38

commitment to maintain present market share

Publicly commit firm to policy of

matching rivals’ terms or prices

Maintain war chest of cash reserves

Make occasional counter-response

to moves of weaker rivals



Using the Internet toDisseminate Product Information

Approach – Website used to provide product

i f ti f f t h l l



6-40

information of manufacturers or wholesalers Relies on click-throughs to websites of

dealers for sales transactions Informs end-users of location of retail stores

Issues – Pursuing online sales may Signal weak strategic commitment to dealers Signal willingness to cannibalize dealers’ sales Prompt dealers to aggressively market rivals’ brands

Avoids channel conflict with dealers – Importantwhere strong support of dealer networks is

essential

Approach – Use online sales to

Using the Internet as aMinor Distribution Channel



6-41

Achieve incremental sales

Gain online sales experience

Conduct marketing research

Learn more about buyer tastes and preferences

Test reactions to new products

Create added market buzz about products

Unlikely to provoke much outcry from dealers

Manufacturer’s profit margin from

online sales is bigger than that from

Reasons to Use the Internetas a Minor Distribution Channel



6-42

online sales is bigger than that fromsales through traditional channels

Encouraging buyers to visit a firm’s

website educates them to the easeand convenience of purchasing online

Selling directly to end users allows a

manufacturer to make greater use of

build-to-order manufacturing and assembly

Approach

Sell directly to consumers and

Brick-and-Click Strategies:An Appealing Middle Ground Approach



6-43

Sell directly to consumers and Use traditional wholesale/retail channels

Strategic appeal for wholesalers and retailers

Economic means of expanding a company’s economicreach

Provide both existing and potential customers another

choice of how to

Communicate with a company Shop for product information

Make purchases

Resolve customer service problems

Approach – Use Internet as the exclusive channel for

all buyer seller contact and transactions

Strategies for Online Enterprises



6-44

all buyer-seller contact and transactions Strategic issues for an online company

How to deliver unique value to buyers

Whether it will pursue competitive advantage based on lower costs, differentiation, or better value for the money

Whether it will have a broad or narrow product offering

Whether to perform order fulfillment activities internally or to

outsource them

How it will draw traffic to its Web site and then convert page

views into revenues

Test Your Knowledge

One very important advantage of a product-information-

only Web site strategy is



6-45

only Web site strategy is A. lower advertising costs.

B. avoiding the extra costs associated with operating Web

site e-stores.

C. avoiding channel conflict—trying to sell online in direct

competition with retail dealers signals both a weak

strategic commitment to dealers and a willingness to

cannibalize dealers’ sales and growth potential.

D. added ability to create a positive image of the company.

E. lower sales force costs.


Suppose that you are a retailer of athletic footwear

and one of the major brands you stock in your store is



6-46

and one of the major brands you stock in your store is

New Balance. What would be your reaction if you

learned that New Balance announced that it would

soon begin selling its footwear online at the

company’s Web site? What actions would you

consider taking?

Involves strategic choices about how functional

areas are managed to support competitive

Choosing AppropriateFunctional-Area Strategies



6-47

areas are managed to support competitivestrategy and other strategic moves

Functional strategies include Research and development

Production

Human resources

Sales and marketing

Finance

Tailoring functional-area strategies to

support key business-level strategies is critical!

When to make a strategic move is often as crucial

as what move to make

First-Mover Advantages



6-48

as what move to make

First-mover advantages arise when

Pioneering helps build firm’s image and reputation

Early commitments to new technologies,

new-style components, and distribution

channels can produce cost advantage

Loyalty of first time buyers is high

Moving first can be a preemptive strike

First-Mover Disadvantages

Moving early can be a disadvantage (or fail to

produce an advantage) when



6-49

produce an advantage) when When costs of pioneering are more than being an

imitative follower and only negligible learning/experience

curve benefits accrue to the leader

Innovator’s products are primitive, not living up to buyer

expectations

Demand side of the market is skeptical about the

benefits of new technology/product of a first-mover

Rapid technological change allows followers to leapfrog

pioneers



7



Chapter Title

16/e PPT

Competing in

Foreign

Markets






7-2

“You have no choice but

to operate in a world

shaped by globalization

and the information

revolution. There are twooptions: Adapt or die.”

Andrew S. Grove

Chapter Roadmap

Why Companies Expand into Foreign Markets

Cross-Country Differences in Cultural Demographic and



7-3

Cross-Country Differences in Cultural, Demographic, andMarket Conditions

The Concepts of Multi-country Competition and Global

Competition

Strategy Options for Entering and Competing in ForeignMarkets

The Quest for Competitive Advantage in Foreign Markets

Profit Sanctuaries, Cross-Market Subsidization, and Global

Strategic Offensives Strategic Alliances and Joint Ventures with Foreign Partners

Strategies That Fit the Markets of Emerging Countries

The Four Big Strategic Issuesin Competing Multinationally

Whether to customize a company’s offerings in each

different country market to match preferences of localbuyers or offer a mostly standardized product worldwide



7-4

different country market to match preferences of localbuyers or offer a mostly standardized product worldwide

Whether to employ essentially the same

basic competitive strategy in all countries

or modify the strategy country by country Where to locate a company’s production facilities,

distribution centers, and customer service operations

to realize the greatest locational advantages

How to efficiently transfer a company’s resource strengths

and capabilities from one country to another to secure


Why Do Companies Expandinto Foreign Markets?

Gain access to Obtain access to



7-5

Gain access tonew customers

Capitalizeon corecompetencies

Achieve lower

costs and enhance

competitiveness

Spread

business risk acrosswider

market base

Obtain access tovaluable natural

resources

International vs. Global Competition

Company operates in aselect few foreign



7-6

International

Competitor

Global

Competitor

select few foreigncountries, with modest

ambitions to expand

further

Company markets productsin 50 to 100 countries and

is expanding operationsinto additional country

markets annually

Cultures and lifestyles differ among countries

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



7-7

Differences in market demographics

and income levels

Variations in manufacturingand distribution costs

Fluctuating exchange rates

Differences in host government

economic and political demands

Consumer tastes and preferences

Consumer buying habits

How Markets Differ fromCountry to Country



7-8

Consumer buying habits

Market size and growth potential

Distribution channels

Driving forces

Competitive pressures

One of the biggest concerns of companies competing in foreign

markets is whether to customize their product offerings in each

different country market to match the tastes and preferences of local

buyers or whether to offer a mostly standardized product worldwide.

Manufacturing costs vary from country to country based on

Wage rates

Different Countries HaveDifferent Locational Appeal



7-9

Wage rates Worker productivity

Inflation rates

Energy costs

Tax rates

Government regulations

Quality of business environment varies from country to

country

Suppliers, trade associations, and makers of

complementary products often find it advantageous to

cluster their operations in the same general location

Fluctuating Exchange Rates Affecta Company’s Competitiveness

Currency exchange rates are unpredictable

Competitiveness of a company’s operations



7-10

Competitiveness of a company s operationspartly depends on whether exchange rate

changes affect costs favorably or unfavorably

Lessons of fluctuating exchange rates Exporters always gain in competitiveness

when the currency of the country where

goods are manufactured grows weaker

Exporters are disadvantaged whenthe currency of the country where

goods are manufactured grows stronger

Test Your Knowledge

Which one of the following statements concerning the effects of fluctuating exchange rates on companies competing in foreign

markets is true?



7-11

A. Japan-based manufacturers exporting goods to the U.S. would bedisadvantaged if the Japanese yen grows weaker in relation to the U.S.dollar.

B. Fluctuating foreign exchange rates greatly reduce the risks of competing in foreign markets—the big problem occurs when exchangerates are fixed at unreasonably low levels.

C. Domestic companies under pressure from lower-cost imports arebenefited when their government’s currency grows weaker in relationto the currencies of the countries where the imported goods are beingmade.

D. Chinese exports to Europe would likely be grow in volume if theChinese currency because much stronger relative to the euro.

E. If the exchange rate of U.S. dollars for euros changes from $1.25 per euro to $1.30 per euro, then it is correct to say that the U.S. dollar hasgrown stronger.

Differences in HostGovernment Trade Policies

Local content requirements

Restrictions on exports



7-12

Restrictions on exportsRegulations on prices of imports

Import tariffs or quotas

Other regulations

Technical standards

Product certification

Prior approval of capital spending projects Withdrawal of funds from country

Ownership (minority or majority) by local citizens

Multi-country

Two Primary Patternsof International Competition



7-13

Multi-country

Competition

Global

Competition

Characteristics of Multi-Country Competition

Market contest among rivals in one country not

closely connected to market contests in othert i



7-14

closely connected to market contests in other countries

Buyers in different countries are

attracted to different product attributes

Sellers vary from country to country

Industry conditions and competitive forces in

each national market differ in important respects

Rival firms battle for national championships –

winning in one country does not necessarily signal the

ability to fare well in other countries!

Competitive conditions across

country markets are strongly linked

Characteristics of Global Competition



7-15

country markets are strongly linked Many of same rivals compete in

many of the same country markets

A true international market exists

A firm’s competitive position in one country isaffected by its position in other countries

Competitive advantage is based on a firm’s world-

wide operations and overall global standingRival firms in globally competitive

industries vie for worldwide leadership!

Strategy Options for Competing in Foreign Markets

Exporting



7-16

Licensing

Franchising strategy

Multi-country strategy

Global strategy

Strategic alliances or joint ventures

Involve using domestic plants as a production

base for exporting to foreign marketsE ll t i iti l t t t i t ti l

Export Strategies



7-17

base for exporting to foreign marketsExcellent initial strategy to pursue international

sales Advantages

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

An export strategy is vulnerable when

Manufacturing costs in home country are higher than in foreign countries where rivals have plants High shipping costs are involved Adverse fluctuations in currency exchange rates

Licensing Strategies

Licensing makes sense when a firm

Has valuable technical know-how or a patented productb d h i i l bili i



7-18

p pbut does not have international capabilities to enter

foreign markets

Desires to avoid risks of committing resources to

markets which are Unfamiliar

Politically volatile

Economically unstable

Disadvantage Risk of providing valuable technical know-how to foreign

firms and losing some control over its use

Franchising Strategies

Often is better suited to global expansion efforts

of service and retailing enterprises



7-19

of service and retailing enterprises

Advantages

Franchisee bears most of costs and

risks of establishing foreign locations

Franchisor has to expend only the

resources to recruit, train, and support franchisees

Disadvantage

Maintaining cross-country quality control

Localized Multicountry Strategiesor a Global Strategy?

Strategic Issue



7-20

Whether to vary a company’s competitive

approach to fit specific market conditions andbuyer preferences in each host county

OR

Whether to employ essentially the same strategy

in all countries

Strategic Issue



What Is a “Think-Local, Act-Local”Approach to Strategy Making?

A company varies its product



7-22

A company varies its product

offerings and basic competitive

strategy from country to country in an effort to be responsive to

differing buyer preferences andmarket conditions.

Characteristics of a “Think-Local,Act-Local” Approach to Strategy Making

Business approaches are deliberately crafted to

Accommodate differing tastes and expectations of b i h t



7-23

gbuyers in each country

Stake out the most attractive market positions vis-à-vis

local competitors

Local managers are given considerablestrategy-making latitude

Plants produce different products

for different local marketsMarketing and distribution are adapted

to fit local customs and cultures

When Is a “Think-Local, Act-Local”Approach to Strategy Making Necessary?

Significant country-to-country differences in

customer preferences and buying habits exist



7-24

p y g

Host governments enact regulations requiring

products sold locally meet strict manufacturingspecifications or performance standards

Trade restrictions of host governments areso diverse and complicated they preclude a

uniform, coordinated worldwide market approach

Drawbacks of a “Think-Local,Act-Local” Approach to Strategy Making

Poses problems of transferring



7-25

Poses problems of transferring

competencies across borders

Works against building a

unified competitive advantage

What Is a “Think-Global, Act-Global”Approach to Strategy Making?



7-26

A company employs the same

basic competitive approach in all

countries where it operates.

Characteristics of a “Think-Global,Act-Global” Approach to Strategy Making

Same products under the same brand names are sold

everywhere

Same distribution channels are used in all countries



7-27

Same distribution channels are used in all countries

Competition is based on the same capabilities

and marketing approaches worldwide

Strategic moves are integrated and coordinated worldwide

Expansion occurs in most nations where significant buyer

demand exists

Strategic emphasis is placed on building

a global brand name

Opportunities to transfer ideas, new

products, and capabilities from one

country to another are aggressively pursued

Fig. 7.2: How a Localized or Multicountry Strategy Differs from a Global Strategy



7-28

What Is a “Think-Global, Act-Local”Approach to Strategy Making?

A company uses the same basic

competitive theme in each country but



7-29

competitive theme in each country but

allows local managers latitude to . . .

2. Incorporate whatever country-specific

variations in product attributes are needed to

best satisfy local buyers and

3. Make whatever adjustments in production,

distribution, and marketing are needed to

compete under local market conditions

Test Your Knowledge

The stand-out characteristic of multicountry competitionis

A. The varying driving forces from country to country.



7-30

A. The varying driving forces from country to country.

B. varying competitive pressures from country to country.

C. varying buyer requirements and expectations from country tocountry.

D. that there is so much cross-country variation in marketconditions and in the companies contending for leadership thatthe market contest among rivals in one country is not closelyconnected to the market contests in other countries—as a

consequence, there is no global or world market, just acollection of self-contained country markets.

E. varying degrees of product differentiation from country tocountry.



The Quest for CompetitiveAdvantage in Foreign Markets

Three ways to gain competitive advantage



7-32

1. Locating activities among nations in ways that lower

costs or achieve greater product differentiation

2. Efficient/effective transfer of competitivelyvaluable competencies and capabilities from

company operations in one country to

company operations in another country

3. Coordinating dispersed activities in

ways a domestic-only competitor cannot

Locating Activities to Build aGlobal Competitive Advantage

Two issues

Wh th t



7-33

Whether to

Concentrate each activity in a

few countries or

Disperse activities to many

different nations

Where to locate activities

Which country is best

location for which activity?

Activities should be concentrated when

Costs of manufacturing or other value chain activities aremeaningfully lower in certain locations than in others

Concentrating Activities to Builda Global Competitive Advantage



7-34

meaningfully lower in certain locations than in others

There are sizable scale economies

in performing the activity

There is a steep learning curve associated

with performing an activity in a single location

Certain locations have

Superior resources

Allow better coordination of related activities or

Offer other valuable advantages

Dispersing Activities to Build aGlobal Competitive Advantage

Activities should be dispersed when



7-35

They need to be performed close to buyers

Transportation costs, scale diseconomies, or

trade barriers make centralization expensive

Buffers for fluctuating exchange rates, supply

interruptions, and adverse politics are needed

Transferring Valuable Competencies toBuild a Global Competitive Advantage

Transferring competencies, capabilities, and

resource strengths across borders contributes to D l t f b d t i d biliti



7-36

Development of broader competencies and capabilities

Achievement of dominating depth in some competitively

valuable area

Dominating depth in a competitively valuable

capability is a strong basis for sustainable

competitive advantage over

Other multinational or global competitors and

Small domestic competitors in host countries

Coordinating Cross-Border Activities toBuild a Global Competitive Advantage

Aligning activities located in different countries

contributes to competitive advantage in severalways



7-37

ways Choose where and how to challenge rivals Shift production from one location to

another to take advantage of most favorablecost or trade conditions or exchange rates Use online systems to collect ideas for new

or improved products and to determine which

products should be standardized or customized Enhance brand reputation by incorporating

same differentiating attributes in its

products in all markets where it competes

What Are Profit Sanctuaries?

Profit sanctuaries are country

markets where a firm H t t t d k t



7-38

Has a strong, protected market

position and

Derives substantial profits

Generally, a firm’s most strategically

crucial profit sanctuary is its home market

Profit sanctuaries are a valuablecompetitive asset in global industries!

Fig. 7.3: Profit Sanctuary Potential of Domestic-Only,

International, and Global Competitors



7-39

Test Your Knowledge

Profit sanctuaries are valuable competitive assets because

A. they enable a company pursuing a “think global, act local” type

of strategy to be more successful.

B d ti tit ith lti l fit t i



7-40

B. a domestic competitor with multiple profit sanctuaries canwage and generally win a competitive offensive against a globalcompetitor whose profits are scattered across many differentcountries.

C. they provide the financial strength to support strategicoffensives in selected country markets and can help fuel acompany’s race for global market leadership.

D. without having at least two profit sanctuaries a company is

virtually precluded from competing globally.E. they enable a company pursuing a global strategy to compete

on an equal footing with companies employing a multicountrystrategy.

Involves supporting competitive offensives in one

market with resources/profits diverted from operations

in other markets

What Is Cross-Market Subsidization?



7-41

Competitive power of cross-market subsidization

results from a global firm’s ability to

Draw upon its resources and profits in other countrymarkets to mount an attack on single-market or one-

country rivals and

Try to lure away their customers with Lower prices

Discount promotions

Heavy advertising

Other offensive tactics


Assume that you are a multinational soft-drink company with a

large, well-protected profit sanctuary in your home country(and perhaps some smaller profit sanctuaries in other



7-42

countries as well). Further assume that you are interested in

entering an important new foreign market in which the leading

soft drink competitors are all domestic companies. Do youthink that a cross-market subsidization strategy based on

under-pricing local competitors might be an appealing way to

gain a market foothold? Why or why not? If you were one of

the local competitors being attacked, what strategic movesmight you make to defend your market position?

Global Strategic Offensives

Attack a foreign rival’s profit sanctuaries

Approach places a rival on the defensive, forcing it to

Spend more on marketing/advertising

Three Options



7-43

Trim its prices

Boost product innovation efforts

Take actions raising its costs and eroding its profits

Employ cross-market subsidization Attractive offensive strategy for companies competing in multiple

country markets with multiple products

Dump goods at cut-rate prices

Approach involves a company selling goods in foreign markets atprices

Well below prices at which it sells in its home market or

Well below its full costs per unit

Achieving GlobalCompetitiveness via Cooperation

Cooperative agreements with foreign companies

are a means to Enter a foreign market or



7-44

Enter a foreign market or

Strengthen a firm’s competitiveness

in world markets

Purpose of alliances

Joint research efforts

Technology-sharing

Joint use of production or distribution facilities

Marketing / promoting one another’s products



Pitfalls of Strategic Alliances

Overcoming language and cultural barriers

Dealing with diverse or conflicting operating practices

Time consuming for managers in terms of communication



7-46

Time consuming for managers in terms of communication,

trust-building, and coordination costs

Mistrust when collaborating in

competitively sensitive areas

Clash of egos and company cultures

Dealing with conflicting objectives, strategies, corporate

values, and ethical standards Becoming too dependent on another firm for essential

expertise over the long-term

Tailoring products for big, emerging markets often

involves Making more than minor product changes and

Characteristics of Competingin Emerging Foreign Markets



7-47

g p g

Becoming more familiar with local cultures

Companies have to attract buyers with

bargain prices as well as better productsSpecially designed and/or specially

packaged products may be needed to

accommodate local market circumstancesManagement team must usually consist

of a mix of expatriate and local managers

Strategic Options: How to Competein Emerging Country Markets

Prepare to compete on the basis of low price

Be prepared to modify aspects of th ’ b i d l t



7-48

the company’s business model to

accommodate local circumstances

Try to change the local market to better match theway the company does business elsewhere

Stay away from those emerging markets where it is

impractical or uneconomic to modify the company’sbusiness model to accommodate local

circumstances



Strategic Options for Local Companies:Use Home-Field Advantages

Concentrate on advantages enjoyed in the home

marketCater to customers who prefer a local touch



7-50

Cater to customers who prefer a local touch

Accept loss of customers attracted to global brands

Astutely exploit its local orientation based on Familiarity with local preferences

Expertise in traditional products

Long-standing customer relationships

Cater to the local market in ways that

pose difficulties for global rivals

Strategic Options for Local Companies:Transfer Expertise to Cross-Border Markets

When a local company trying to defend against a global

challenger has resource strengths and capabilities suitable

for competing in other country markets, then it shouldconsider



7-51

consider

Launching initiatives to transfer its expertise to

cross-border markets

Becoming more of an international competitor

Such a move to enter foreign markets can help

Build a bigger customer base (to offset

any losses in its home market)

Grow sales and profits

Put in a stronger position to contend with

global challengers in its home market

Strategic Options for Local Companies: Dodging Rivalsby Shifting to a New Business Model or Market Niche

When industry pressures to globalize are high, viable

strategic options for a local company trying to defendagainst global challengers in its home market include



7-52

g g g

Shifting the business to a piece of the industry

value chain where the firm’s expertise/resources

provide a defendable position or maybe evena competitive advantage

Entering a joint venture with a globally

competitive partner

Selling out to a global entrant into its

home market

If a local company has resources and capabilities

that it can transfer to operations in other countries,it can launch a strategy aimed at

Strategic Options for Local Companies:Contend on a Global Level



7-53

Entering markets of other countries as rapidly as

possible

Shifting to a more globalized strategy

Building brand recognition and a brand

image that extends to more and more

countries

Gradually establishing the resources and

capabilities to go head-to-head against

large global rivals

8

Tailoring



Chapter Title

16/e PPT

Strategy to Fit

Specific

Industry andCompany

Situations




“In a turbulent age, the



8-2

only dependable

advantage is reinventingyour business model

before circumstances

force you to.Gary Hamel and Liisa

Valikangas

Chapter Roadmap

Strategies for Competing in Emerging Industries Strategies for Competing in Rapidly Growing Markets Strategies for Competing in Maturing Industries Strategies for Competing in Stagnant or Declining Industries



8-3

Strategies for Competing in Stagnant or Declining Industries Strategies for Competing in Turbulent, High-Velocity

Markets

Strategies for Competing in Fragmented Industries Strategies for Sustaining Rapid Company Growth Strategies for Industry Leaders Strategies for Runner-up Firms

Strategies for Weak and Crisis-Ridden Businesses Ten Commandments for Crafting Successful Business

Strategies

Matching Strategy toa Company’s Situation

Nature of industryand competitive



8-4

Most important

drivers shaping a

firm’s strategic

options fall into

two categories

Firm’s competitive

capabilities,

market position,

best opportunities

and competitive

conditions

New and unproven market Proprietary technology

Lack of consensus regarding which of several competing technologies will win out

Features of an Emerging Industry



8-5

Low entry barriers Experience curve effects may permit

cost reductions as volume builds Buyers are first-time users and marketing involves inducing

initial purchase and overcoming customer concerns First-generation products are expected to be rapidly

improved so buyers delay purchase until technology

matures Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build resource

capabilities for rapid growth

Strategy Options for Competingin Emerging Industries

Win early race for industry leadership by employing a bold,

creative strategy

Push hard to perfect technology, improve product quality,

and develop attractive performance features



8-6

and develop attractive performance features

Consider merging with or acquiring another firm to Gain added expertise

Pool resource strengths

When technological uncertainty clears and a dominant

technology emerges, try to capture any first-mover

advantages by moving quickly

Form strategic alliances with Companies having related technological expertise or

Key suppliers

Strategy Options for Competingin Emerging Industries (continued)

Pursue new customers and user applications

Enter new geographical areas



8-7

Make it easy and cheap for first-time buyers to try

product

Focus advertising emphasis on

Increasing frequency of use

Creating brand loyalty

Use price cuts to attract price-sensitive buyers

Strategic Hurdles for Companiesin Emerging Industries

Raising capital to finance initial operations until

Sales and revenues take off

Profits appear



8-8

Cash flows turn positive

Developing a strategy to ride the wave of industry

growth What market segments to pursue

What competitive advantages to go after

Managing the rapid expansion of facilities and sales to

position a company to contend for industry leadership Defending against competitors trying to horn in on the

company’s success

What Is the Key to Success for Competing in Rapidly Growing Markets?

A company needs a strategy predicated on



8-9

growing faster than the market average so it

Can boost its market share and

Improve its competitive standing vis-à-vis rivals

Strategy Options for Competingin Rapidly Growing Markets

Drive down costs per unit to enable price reductions

that attract droves of new customersPursue rapid product innovation to



8-10

Set a company’s product offering apart from rivals

Incorporate attributes to appeal to growing numbers of

customersGain access to additional distribution

channels and sales outlets

Expand a company’s geographic coverageExpand product line to add models/styles to appeal

to a wider range of buyers

Test Your Knowledge

Which one of the following is not likely to be a suitable strategy

option for companies competing in rapid-growth industries?

A. Driving down costs per unit so as to enable price reductions that

attract droves of new customers



8-11

B. Pursuing rapid product innovation, both to set a company’s product

offering apart from rivals and to incorporate attributes that appeal to

growing numbers of customersC. Gaining access to additional distributional channels and sales

outlets

D. Expanding the product line to add models/styles that appeal to a

wider range of buyers

E. Putting top priority on heavy advertising and other marketing-

related actions calculated to strongly differentiate its product

offering from rivals

Slowing demand breeds stiffer competition

More sophisticated buyers demand bargains

Greater emphasis on cost and service

Industry Maturity: The Standout Features



8-12

Greater emphasis on cost and service

“Topping out” problem in adding

production capacityProduct innovation and new

end uses harder to come by

International competition increases

Industry profitability falls

Mergers and acquisitions reduce number of rivals

Strategy Options for Competingin a Mature Industry

Prune marginal products and models

Emphasize innovation in the value chain



8-13

Strong focus on cost reduction

Increase sales to present customers

Purchase rivals at bargain prices

Expand internationally

Build new, more flexible competitive capabilities

Strategic Pitfalls in a Maturing Industry

Employing a ho-hum strategy with no distinctive

features thus leaving firm “stuck in the middle” Being slow to mount a defense against stiffening



8-14

competitive pressures

Concentrating on short-term profits rather than

strengthening long-term competitiveness

Being slow to respond to price-cutting

Having too much excess capacity

Overspending on marketing

Failing to aggressively pursue cost reductions

Stagnant or Declining Industries:The Standout Features

Demand grows more slowly than economy as

whole (or even declines) Advancing technology gives rise to better-



8-15

g gy g

performing substitute products

Customer group shrinksChanging lifestyles and buyer tastes

Rising costs of complementary products

Competitive battle ensues among industry

members for the available business

Pursue focus strategy aimed at

fastest growing market segmentsStress differentiation based on quality

i t d t i ti

Strategy Options for Competingin a Stagnant or Declining Industry



8-16

improvement or product innovationWork diligently to drive costs down

Cut marginal activities from value chain Use outsourcing Redesign internal processes to exploit e-commerce Consolidate under-utilized production facilities

Add more distribution channels Close low-volume, high-cost distribution outlets Prune marginal products

End-Game Strategiesfor Declining Industries

An end-game strategy can take either of two paths

Slow-exit strategy involving

G d l h i d f ti



8-17

Gradual phasing down of operations

Getting the most cash flow from the business

Fast-exit strategy involving

Disengaging from an industry during early stages of decline

Quick recovery of as much of a company’s investment aspossible

Features of High-Velocity Markets

Rapid-fire technological change

Short product life-cycles



8-18

Entry of important new rivals

Frequent launches of

new competitive moves

Rapidly evolving

customer expectations

Fig. 8.1: Meeting the Challenge of High-Velocity Change



8-19

Invest aggressively in R&D

Initiate fresh actions every few monthsDevelop quick response capabilities

Strategy Options for Competingin High-Velocity Markets



8-20

p q p p

Shift resources

Adapt competencies Create new competitive capabilities

Speed new products to market

Use strategic partnerships to develop

specialized expertise and capabilities

Keep products/services fresh and exciting

Cutting-edge expertise

Speed in responding to new developments

C

Keys to Success in Competingin High Velocity Markets



8-21

Collaboration with others

Agility Innovativeness

Opportunism

Resource flexibility

First-to-market capabilities

Competitive Featuresof a Fragmented Industry

Absence of market leaders with large market shares or widespread

buyer recognition

Product/service is delivered to neighborhoodlocations to be convenient to local residents

Buyer demand is so diverse that many firms



8-22

Buyer demand is so diverse that many firms

are required to satisfy buyer needs

Low entry barriers

Absence of scale economies

Market for industry’s product/service may be globalizing, thus

putting many companies across the world in same market arena

Exploding technologies force firms to specialize just to keep up in

their area of expertise Industry is young and crowded with aspiring contenders, with no

firm having yet developed recognition to command a large market

share

Examples of Fragmented Industries

Book publishing

Landscaping and plant nurseries Auto repair



8-23

Restaurant industry

Public accountingWomen’s dresses

Meat packing

Paperboard boxes

Hotels and motels

Furniture

Competing in a Fragmented Industry:The Strategy Options

Construct and operate “formula” facilities

Become a low cost operator



8-24

Become a low-cost operator

Specialize by product type

Specialize by customer type

Focus on limited geographic area

Test Your Knowledge

Which of the following is unlikely to be a promising option for

competing in a fragmented industry?

A. Employing deep price discounting, extensive advertising, and

other muscle flexing maneuvers to gain market dominance in



8-25

other muscle-flexing maneuvers to gain market dominance in

a select few country markets

B. Specializing by product type or becoming a low-cost operator

C. Specializing by customer type

D. Focusing on a limited geographic area

E. Constructing and operating "formula" facilities at many

different locations


What classification would you assign to each of the

following industries—emerging, rapid-growth,

mature/slow-growth, stagnant/declining, high-

velocity/turbulent or fragmented?



8-26

velocity/turbulent, or fragmented?

A. Dry cleaning industry

B. Cigarette industry

C. Cell phone industry

D. MP3 player industry

E. Satellite radio industry


Assume you are charged with crafting a strategy for

XM Satellite Radio. What strategy alternatives wouldyou be inclined to give strong consideration? What



8-27

y g g

strategy alternatives would you be inclined to reject

as unsuitable? Justify your answer.

Fig. 8.2: Three Strategy Horizons for Sustaining Rapid Growth



8-28

Risks of PursuingMultiple Strategy Horizons

Firm should not pursue all options

to avoid stretching itself too thin

Pursuit of medium- and long-jump



8-29

Pursuit of medium and long jump

initiatives may cause firm to stray

too far from its core competenciesCompetitive advantage may be difficult to achieve

in medium- and long-jump businesses that do not

mesh well with firm’s present resource strengths

Payoffs of long-jump initiatives may prove elusive

Strategies Based on aCompany’s Market Position

Industry leaders



8-30

Runner-up firms

Weak or crisis-ridden firms

Industry Leaders:The Defining Characteristics

Strong to powerful market position



8-31

Well-known reputation

Proven strategy

Key strategic concern – How to sustain

dominant leadership position

Strategy Options: Industry Leaders

Stay-on-the-offensive strategy



8-32

Fortify-and-defend strategy

Muscle-flexing strategy

Stay-on-the-Offensive Strategies

Be a first-mover, leading industry change

Best defense is a good offenseConcentrate on achieving a competitive advantage



8-33

and then widening the advantage over time

Relentlessly pursue continuous improvementand innovation, being first to market with

Technological improvements

New or better products

More attractive performance features

Customer service improvements

Stay-on-the-Offensive Strategies (continued)

Aggressively seek out ways to Cut operating costs

Establish competitive capabilities rivals cannot match Make it easier for potential customers to switch their purchases from

other firms to the leader’s own products



8-34

p

Aggressively attack profit sanctuaries of important rivals Launch fresh initiatives to expand overall industry

demand Spur creation of new families of products Make product more suitable for consumers

in emerging-country markets Discover new uses for product Attract new users of product Promote more frequent use

Grow faster than industry, taking market share from rivals

Fortify-and-Defend Strategy

Make it harder for new firms to enter and for

challengers to gain ground

Objectives



8-35

challengers to gain ground

Hold onto present market share

Strengthen current market position

Protect competitive advantage

Fortify-and-Defend Strategy:Strategic Options

Increase advertising and R&D

Provide higher levels of customer service Introduce more brands to match attributes of rivals



8-36

Add personalized services to boost buyer loyalty

Keep prices reasonable and quality attractiveBuild new capacity ahead of market demand

Invest enough to remain cost competitive

Patent feasible alternative technologiesSign exclusive contracts with best suppliers and

distributors

Play competitive hardball with smaller

rivals that threaten leader’s position

Muscle-Flexing Strategy

Objectives



8-37

rivals that threaten leader s position

Signal smaller rivals that moves to cutinto leader’s business will be hard fought

Convince rivals they are better off playing“follow-the-leader” or else attacking each

other rather the industry leader

Be quick to meet price cuts of rivals

Counter with large-scale promotional campaigns if rivals boost advertising

Muscle-Flexing Strategy:Strategic Options



8-38

Offer better deals to rivals’ major customers

Dissuade distributors from carrying rivals’ productsProvide salespersons with documentation about

weaknesses of competing products

Make attractive offers to key executives of rivals

Use arm-twisting tactics to pressure present

customers not to use rivals’ products

Running afoul of antitrust laws

Muscle-Flexing Strategy

Risks



8-39

Running afoul of antitrust laws

Alienating customers with bullying tactics

Arousing adverse public opinion

Types of Runner-up Firms

Market challengers

Use offensive strategies to gain market share



8-40

Focusers

Concentrate on serving alimited portion of market

Perennial runners-up

Lack competitive strength to do

more than continue in trailing position

I’m

trying!

Obstacles Runner-UpFirms Must Overcome

When big size is a competitive asset, firms

with small market share face obstaclesin trying to strengthen their positions



8-41

Less access to economies of scale

Difficulty in gaining customer recognition

Inability to afford mass media advertising

Difficulty in funding capital requirements

Strategic Optionsfor Runner-Up Firms

When big size provides larger rivals with a cost

advantage, runner-up firms have two options



8-42

Build market share

Lower costs and prices to grow sales or

Out-differentiate rivals in ways to grow sales

Withdraw from market

Acquire smaller rivals to expand company’s market reach

and presence

Find innovative ways to drive down costs

to win customers from higher-priced rivals

Offensive Strategies for Runner-Up Firms:Building Market Share



8-43

Craft an attractive differentiation strategy

Pioneer a leapfrog technological breakthrough Be first-to-market with new or better products and build

reputation for product leadership

Outmaneuver slow-to-change market leaders in adapting

to evolving market conditions and customer needs Forge strategic alliances with key distributors, dealers, or

marketers of complementary products

Rule of Offensive Strategy

Runner-up firms should avoid

attacking a leader head on with an



8-44

attacking a leader head-on with an

imitative strategy, regardless of

the resources and staying power

an underdog may have!

Strategic Approaches for Runner-Up Firms

1. Vacant niche strategy

2 Specialist strategy



8-45

2. Specialist strategy

3. Superior product strategy

4. Distinctive image strategy

5. Content follower strategy

Focus strategy concentrated on end-use

applications market leaders have neglected

Characteristics of an ideal vacant niche

Vacant Niche Strategyfor Runner-Up Firms



8-46

Sufficient size to be profitable

Growth potential

Well-suited to a firm’s capabilities

Hard for leaders to serve

Strategy concentrated on

being a leader based on

Specific technology

Specialist Strategy for Runner-Up Firms



8-47

Product uniqueness

Expertise in

Special-purpose products

Specialized know-how

Delivering distinctive customer services

Differentiation-based focused strategy based on

Superior product quality or Unique product attributes

Superior Product Strategyfor Runner-Up Firms



8-48

Approaches

Fine craftsmanship

Prestige quality

Frequent product innovations

Close contact with customers to

gain input for better quality product



Strategy involves avoiding

Trend-setting moves and Aggressive moves to steal

customers from leaders

Content Follower Strategyfor Runner-Up Firms



8-50

customers from leaders

Approaches

Do not provoke competitive retaliation

React and respond

Defense rather than offense

Keep same price as leaders

Attempt to maintain market position

Weak Businesses: Strategic Options

Launch an offensive turnaround strategy

(if resources permit)



8-51

Employ a fortify-and-defend strategy

(to the extent resources permit)

Pursue a fast-exit strategy

Adopt a harvest strategy (a slow-exit type of end-game strategy)

Achieving a Turnaround:The Strategic Options

Sell off assets to generate cash and/or reduce debt

Revise existing strategy



8-52

Launch efforts to boost revenues

Cut costs

Combination of efforts

What Is a Harvest Strategy?

Steers middle course between status quo and

exiting quickly

Involves gradually sacrificing market position



8-53

Involves gradually sacrificing market position

in return for bigger near-term cash flow/profit

Objectives

Short-term - Generate largest

feasible cash flow

Long-term - Exit market

Types of Harvest Options

Reduce operating expenses to rock-bottom

Hold reinvestment to minimum

Place little priority on new capital investments



8-54

Place little priority on new capital investments

Emphasize stringent internal cost controls

Trim advertising and promotion expenses

Do not replace employees who leave

Shave equipment maintenance

Industry’s long-term prospects are unattractive

Building up business would be too costlyMarket share is increasingly costly to maintain

When Should a HarvestStrategy Be Considered?



8-55

Reduced levels of competitive effort will not trigger

immediate fall-off in sales

Firm can re-deploy freed-up resources

in higher opportunity areas

Business is not a major component of

diversified firm’s portfolio of businesses

Wisest strategic option in certain situations

Lack of resources

Dim profit prospects

Liquidation Strategy



8-56

May serve stockholder interests

better than bankruptcy

Unpleasant strategic option

Hardship of job eliminations Effects of closing on local community

10 Commandments for CraftingSuccessful Business Strategies

1. Always put top priority on crafting and executing

strategic moves that enhance a firm’s competitive

position for the long-term and that serve to

establish it as an industry leader.



8-57

2. Be prompt in adapting and responding to changing

market conditions, unmet customer needs and

buyer wishes for something better, emerging

technological alternatives, and new initiatives of

rivals. Responding late or with too little often putsa firm in the precarious position of playing catch-

up.


3. Invest in creating a sustainable competitiveadvantage, for it is a most dependable contributor

to above-average profitability.

4. Avoid strategies capable of succeeding only in theb t f i t



8-58

best of circumstances.

5. Don’t underestimate the reactions and thecommitment of rival firms.

6. Consider that attacking competitive weakness isusually more profitable than attacking competitive

strength.7. Be judicious in cutting prices without an

established cost advantage.


8. Employ bold strategic moves in pursuingdifferentiation strategies so as to open up very

meaningful gaps in quality or service or advertising or other product attributes.

9 E d t t t “ t k b k i th k” ith



8-59

9. Endeavor not to get “stuck back in the pack” withno coherent long-term strategy or distinctivecompetitive position, and little prospect of climbing into the ranks of the industry leaders.

10. Be aware that aggressive strategic moves to

wrest crucial market share away from rivals oftenprovoke aggressive retaliation in the form of amarketing “arms race” and/or price wars.

Test Your Knowledge

Which of the following does not qualify as a "commandment"

for crafting successful business strategies?

A. Place top priority on crafting and executing strategic moves that will

enhance a company's competitive position for the long-term.

B Avoid stuck in the middle strategies that represent compromises



8-60

B. Avoid stuck-in-the-middle strategies that represent compromises

between lower costs and greater differentiation and between broad

and narrow market appeal.C. Strive to open up very meaningful gaps in quality or service or

performance features when pursuing a differentiation strategy.

D. Be judicious in cutting prices without an established cost

advantage.

E. Sell or close a crisis-ridden business immediately—turnaround

strategies are doomed to fail.



“To acquire or not to



9-2

To acquire or not to

acquire: that is the

question.”

Robert J. Terry

“Make winners out



9-3

of every business inyour company.

Don’t carry losers.” Jack WelchFormer CEO, General Electric

Chapter Roadmap

When to Diversify Building Shareholder Value: The Ultimate Justification

for Diversifying Strategies for Entering New Businesses Choosing the Diversification Path: Related versus



9-4

Choosing the Diversification Path: Related versus

Unrelated Businesses

The Case for Diversifying into Related Businesses The Case for Diversifying into Unrelated Businesses Combination Related-Unrelated Diversification

Strategies

Evaluating the Strategy of a Diversified Company After a Company Diversifies: The Four Main Strategy

Alternatives

Diversification andCorporate Strategy

A company is diversified when it is in two or

more lines of business that operate in diverse

market environments

Strategy-making in a diversified company is a



9-5

Strategy making in a diversified company is a

bigger picture exercise than crafting a strategy for

a single line-of-business

A diversified company needs a multi-industry,

multi-business strategy

A strategic action plan must be developedfor several different businesses competing

in diverse industry environments

Four Main Tasks inCrafting Corporate Strategy

Pick new industries to enter

and decide on means of entry

Initiate actions to boost combined

performance of businesses



9-6

performance of businesses

Pursue opportunities to leverage cross-businessvalue chain relationships and strategic fits into


Establish investment priorities, steeringresources into most attractive business units

Less ambiguity about

“Who we are” “What we do”

“Where e are headed”

Competitive Strengths of aSingle-Business Strategy



9-7

“Where we are headed”

Resources can be focused on Improving competitiveness

Expanding into new geographic markets

Responding to changing market conditions

Responding to evolving customer preferences

Putting all the “eggs” in one industry basket

If market becomes unattractive, afirm’s prospects can quickly dim

U f h d i

Risks of a Single Business Strategy



9-8

Unforeseen changes can undermine

a single business firm’s prospects Technological innovation

New products

Changing customer needs

New substitutes

It is faced with diminishing growth prospects in present business

It has opportunities to expand into industries whosetechnologies and products complement its presentbusiness

When Should a Firm Diversify?



9-9

It can leverage existing competencies and

capabilities by expanding into businesses where theseresource strengths are key success factors

It can reduce costs by diversifyinginto closely related businesses

It has a powerful brand name it cantransfer to products of other businesses toincrease sales and profits of these businesses

Why Diversify?

To build shareholder value!

Diversification is capable of building shareholder value

if it th t t

1 + 1 = 31 + 1 = 3



9-10

if it passes three tests

Industry Attractiveness Test — the industry presents goodlong-term profit opportunities

Cost of Entry Test — the cost of entering is not so high as to

spoil the profit opportunities

Better-Off Test — the company’s different businesses

should perform better together than as stand-alone

enterprises, such that company A’s diversification into

business B produces a 1 + 1 = 3 effect for shareholders

Strategies for EnteringNew Businesses

Acquire existing company



9-11

Internal start-up

Joint ventures/strategic partnerships

Acquisition of an Existing Company

Most popular approach to diversification

Advantages Quicker entry into target market

Easier to hurdle certain entry barriers



9-12

Easier to hurdle certain entry barriers

Acquiring technological know-how

Establishing supplier relationships

Becoming big enough to match rivals’

efficiency and costs

Having to spend large sums onintroductory advertising and promotion

Securing adequate distribution access

Internal Startup

More attractive when

Parent firm already has most of needed resources to

build a new business

Ample time exists to launch a new business



9-13

Internal entry has lower costs

than entry via acquisition New start-up does not have to go

head-to-head against powerful rivals

Additional capacity will not adversely impact

supply-demand balance in industry

Incumbents are slow in responding to new entry

Good way to diversify when Uneconomical or risky to go it alone

Pooling competencies of two partners provides more

competitive strength

Only way to gain entry into a desirable foreign market

Joint Ventures and Strategic Partnerships



9-14

Only way to gain entry into a desirable foreign market

Foreign partners are needed to Surmount tariff barriers and import quotas

Offer local knowledge about Market conditions

Customs and cultural factors

Customer buying habits

Access to distribution outlets

Raises questions

Which partner will do what

Who has effective control

Drawbacks of Joint Ventures



9-15

Potential conflicts

Conflicting objectives

Disagreements over how to best operate the venture

Culture clashes

Related Diversification

Involves diversifying into

businesses whose value

chains possess

competitively valuable

Unrelated Diversification

Involves diversifying into

businesses with no


value chain match ups or

Related vs. Unrelated Diversification



9-16


“strategic fits” with value

chain(s) of firm’s present

business(es)

value chain match-ups or

strategic fits with firm’s

present business(es)

Fig. 9.1: Strategy Alternatives for a Company Looking to Diversify



9-17

Involves diversifying into businesses whose value

chains possess competitively valuable “strategic

fits” with the value chain(s) of the presentbusiness(es)

What Is Related Diversification?



9-18

Capturing the “strategic fits” makes related

diversification a 1 + 1 = 3 phenomenon

Exists whenever one or more activities in the

value chains of different businesses are

sufficiently similar to present opportunities for

Transferring competitively valuable

e pertise or technological kno ho

Core Concept: Strategic Fit



9-19

expertise or technological know-how

from one business to another

Combining performance of common

value chain activities to achieve lower costs

Exploiting use of a well-known brand name

Cross-business collaboration to create competitively

valuable resource strengths and capabilities

Fig. 9.2: Related Businesses Possess Related Value

Chain Activities and Competitively Valuable Strategic Fits



9-20

Strategic Appeal of Related Diversification

Reap competitive advantage benefits of

Skills transfer

Lower costs

Common brand name usage



9-21

Stronger competitive capabilities

Spread investor risks over a broader base

Preserve strategic unity across businesses

Achieve consolidated performance greater than

the sum of what individual businesses can earn

operating independently (1 + 1 = 3 outcomes)

Cross-business strategic fits can exist anywhere

along the value chain

R&D and technology activities

Supply chain activities

Types of Strategic Fits



9-22

Supply chain activities

Manufacturing activities

Sales and marketing activities

Distribution activities

Managerial and administrative support activities

R&D and Technology Fits

Offer potential for sharing common technology

or transferring technological know-how

Potential benefits



9-23

Cost-savings in technology

development and new product R&D

Shorter times in getting

new products to market

Interdependence between resulting

products leads to increased sales

Supply Chain Fits

Offer potential opportunities for skills transfer

and/or lower costs

Procuring materials



9-24

Greater bargaining power in

negotiating with common suppliers

Benefits of added collaboration with

common supply chain partners

Added leverage with shippers in securing

volume discounts on incoming parts



Offer potential cost-saving opportunities

Distribution Fits



9-26

Share same distribution facilities

Use many of same wholesale

distributors and retail dealersto access customers

Reduction in sales costs Single sales force for related products

Advertising related products together Combined after-sale service and repair work Joint delivery, shipping, order processing

Sales and Marketing Fits:Types of Potential Benefits



9-27

and billing

Joint promotion tie-insSimilar sales and marketing approaches provide

opportunities to transfer selling, merchandising,

and advertising/promotional skillsTransfer of a strong company’s

brand name and reputation

Managerial andAdministrative Support Fits

Emerge when different business units

require comparable types of

Entrepreneurial know-how

Administrative know-how



9-28

Operating know-how

Different businesses often entail same typesof administrative support facilities

Customer data network

Billing and customer accounting systems Customer service infrastructure

Core Concept: Economies of Scope

Stem from cross-business opportunities to reduce

costs

Arise when costs can be cut

by operating two or more businesses



9-29

by operating two or more businesses

under same corporate umbrella

Cost saving opportunities can stem

from interrelationships anywhere

along the value chains of differentbusinesses

Related Diversificationand Competitive Advantage

Competitive advantage can result from related

diversification when a company captures cross-

business opportunities to Transfer expertise/capabilities/technology

from one business to another



9-30

Reduce costs by combining related

activities of different businesses intoa single operation

Transfer use of firm’s brand name reputation from one business to another

Create valuable competitive capabilities via cross-business collaboration in performing related value chain

activities

From Competitive Advantage toAdded Gains in Shareholder Value

Capturing cross-business strategic fits

Is possible only via a strategy of related diversification

Builds shareholder value in ways shareholders cannot

achieve by owning a portfolio of stocks of companies in



9-31

ac e e by o g a po o o o s oc s o co pa es

unrelated industries

Is not something that happens “automatically” when a

company diversifies into related businesses

Strategic fit benefits materialize only after

management has successfully pursued internal

actions to capture them

Test Your Knowledge

Which of the following is the best example of related

diversification?

A. A manufacturer of golf shoes diversifying into the production of fishing rods and fishing lures

B. A homebuilder acquiring a building materials retailer



9-32

C. A steel producer acquiring a manufacturer of farm equipment

D. A producer of snow skis and ski boots acquiring a maker of ski

apparel and accessories (outerwear, goggles, gloves and

mittens, helmets and toboggans)

E. A publisher of college textbooks acquiring a publisher of magazines

Involves diversifying into businesses with

No strategic fit

No meaningful value chain

relationships

What Is Unrelated Diversification?



9-33

No unifying strategic theme

Basic approach – Diversify into

any industry where potential exists

to realize good financial results

While industry attractiveness and cost-of-entry tests

are important, better-off test is secondary

Fig. 9.3: Unrelated Businesses Have Unrelated Value Chains and NoStrategic Fits

Fig. 9.3: Unrelated Businesses Have UnrelatedValue Chains and No Strategic Fits



9-34

Acquisition Criteria For UnrelatedDiversification Strategies

Can business meet corporate targets

for profitability and ROI?

Is business in an industry with growth potential?

Is business big enough to contribute

to parent firm’s bottom line?



9-35

to parent firm s bottom line?

Will business require substantialinfusions of capital?

Is there potential for union difficulties

or adverse government regulations?

Is industry vulnerable to recession, inflation, high

interest rates, or shifts in government policy?

Attractive Acquisition Targets

Companies with undervalued assets

Capital gains may be realized

Companies in financial distress



9-36

May be purchased at bargain prices and turned

around

Companies with bright growth prospects butshort on investment capital

Cash-poor, opportunity-rich companies are covetedacquisition candidates

Business risk scattered over different industries

Financial resources can be directed to

those industries offering best profit prospects

Appeal of Unrelated Diversification



9-37

If bargain-priced firms with big profit potential are

bought, shareholder wealth can be enhanced

Stability of profits – Hard times in one industrymay be offset by good times in another industry

Building Shareholder Valuevia Unrelated Diversification

Corporate managers must Do a superior job of diversifying into new businesses

capable of producing good earnings and returns oninvestments

Do an excellent job of negotiating favorable

acquisition prices



9-38

acquisition prices

Do a good job overseeing businesses so they perform at a higher level than otherwise possible

Shift corporate financial resources from poorly-

performing businesses to those with potential for

above-average earnings growth Discern when it is the “right” time to sell a business at

the “right” price

Key Drawbacks of Unrelated Diversification

DemandingDemandingManagerialManagerial

RequirementsRequirements



9-39

LimitedLimited

CompetitiveCompetitive

AdvantageAdvantagePotentialPotential

The greater the number and diversity of

businesses, the harder it is for managers to

Discern good acquisitions from bad ones

Select capable managers to manage

the diverse requirements of each business

Unrelated Diversification HasDemanding Managerial Requirements



9-40

the diverse requirements of each business

Judge soundness of strategic proposalsof business-unit managers

Know what to do if a business subsidiary stumbles

Likely effect is 1 + 1 = 2, rather than 1 + 1 = 3!

Lack of cross-business strategic fits means

unrelated diversification offers no competitive

advantage potential beyond what each businesscan generate on its own

Unrelated Diversification OffersLimited Competitive Advantage Potential



9-41

Consolidated performance of unrelated businesses

tends to be no better than sum of individual

businesses on their own (and it may be worse)

Promise of greater sales-profit

stability over business cyclesis seldom realized

Test Your Knowledge

Which of the following is the best example of unrelated

diversification?

A. PepsiCo acquiring Tropicana and Procter & Gamble

acquiring Gillette

B Honda diversifying into the production of lawnmowers



9-42

B. Honda diversifying into the production of lawnmowers

C. Smuckers acquiring Jif peanut butter and Crisco (fromProcter & Gamble)

D. Verizon Wireless acquiring Amazon.com

E. Harley Davidson acquiring the motorcycle business of Honda

Diversification and Shareholder Value

Related Diversification

A strategy-driven approach

to creating shareholder value





9-43

to creating shareholder value

Unrelated Diversification

A finance-driven approachto creating shareholder value

Dominant-business firms

One major core business accounting for 50 - 80 percent

of revenues, with several small related or unrelatedbusinesses accounting for remainder

Narrowly diversified firms

Diversification includes a few (2 - 5) related or unrelated

Combination Related-UnrelatedDiversification Strategies



9-44

Diversification includes a few (2 5) related or unrelated

businesses

Broadly diversified firms

Diversification includes a wide collection of either related

or unrelated businesses or a mixture

Multibusiness firms Diversification portfolio includes several unrelated

groups of related businesses


Newell Rubbermaid is in the following businesses: Cleaning and Organizations Businesses: Rubbermaid storage,

organization and cleaning products, Blue Ice ice substitute, Roughneck

storage items, Stain Shield and TakeAlongs food storage containers,and Brute commercial-grade storage and cleaning products—25% of annual revenues.

Home and Family Businesses: Calphalon cookware and bakeware,Cookware Europe, Graco strollers, Little Tikes children's toys andf it d G d h i i 20% f l l



9-45

furniture, and Goody hair accessories—20% of annual sales.

Home Fashions: Levolor and Kirsch window blinds, shades, andhardware in the U.S.; Swish, Gardinia and Harrison Drape homefurnishings in Europe—15% of annual revenues.

Office Products Businesses: Sharpie markers, Sanford highlighters,Eberhard Faber and Berol ballpoint pens, Paper Mate pens and pencils,Waterman and Parker fine writing instruments, and Liquid Paper—25%

of annual revenues.Would you say that Newell Rubbermaid’s strategy is one of relateddiversification, unrelated diversification or a mixture of both?Explain.


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

the following businesses: Textbook publishing (for grades K-12 and higher education) Financial and information services (it owns Standard & Poors —

a well-known financial ratings agency and provider of financial

data, Platts — a provider of energy information, and McGraw-Hill

Construction — a provider of construction related information)



9-46

Magazine publishing — its flagship publication is Business

Week and it is also the publisher of Aviation Week TV broadcasting — it owns four ABC affiliate stations (in

Indianapolis, Denver, San Diego, and Bakersfield) J.D. Power & Associates — which provides a host of services

relating to product quality and consumer satisfaction

Would you say that McGraw-Hill’s strategy is one of relateddiversification, unrelated diversification or a mixture of both?

Explain.

Fig. 9.4: Identifying a Diversified Company’s Strategy



9-47

How to Evaluate aDiversified Company’s Strategy

Step 1: Assess long-term attractiveness of each industry

firm is in

Step 2: Assess competitive strength of firm’s businessunits

Step 3: Check competitive advantage potential of cross-

b i t t i fit b i it



9-48

business strategic fits among business units

Step 4: Check whether firm’s resources fit requirements

of present businesses

Step 5: Rank performance prospects of businesses and

determine priority for resource allocation

Step 6: Craft new strategic moves to improve overall

company performance

Step 1: Evaluate Industry Attractiveness

Attractiveness of each

industry in portfolio

E h i d t ’ tt ti



9-49

Each industry’s attractiveness

relative to the others

Attractiveness of all

industries as a group

Industry Attractiveness Factors

Market size and projected growth

Intensity of competition

Emerging opportunities and threats

Presence of cross-industry strategic fits

R i t



9-50

Resource requirements

Seasonal and cyclical factors

Social, political, regulatory, and

environmental factors

Industry profitability

Degree of uncertainty and business risk

Procedure: Calculating AttractivenessScores for Each Industry

Step 1: Select industry attractiveness factors

Step 2: Assign weights to each factor

(sum of weights = 1.0)



9-51

Step 3: Rate each industry on eachfactor, using a scale of 1 to 10

Step 4: Calculate weighted ratings; sum to get an

overall industry attractiveness rating for

each industry



9-52

Industries with a score much below 5.0 do not passthe attractiveness test

If a company’s industry attractiveness scores are allabove 5.0, the group of industries the firm operatesin is attractive as a whole

Interpreting Industry Attractiveness Scores



9-53

in is attractive as a whole

To be a strong performer, a diversified firm’sprincipal businesses should be in attractiveindustries—that is, industries with

A good outlook for growth and Above-average profitability

Difficulties in Calculating

Industry Attractiveness Scores

Deciding on appropriate weights for industry

attractiveness factors

Different analysts may have different views about whichweights are appropriate for the industry attractiveness factors

Different weights may be appropriate for different companies



9-54

Gaining sufficient command of an industry to assign

accurate and objective ratings

Gathering statistical data to assign objective ratings is

straightforward for some factors – market size, growth rate,

industry profitability

Assessing the intensity of competition factor is more difficult

due to the different types of competitive influences

Objectives

Appraise how well each

business is positioned in

Step 2: Evaluate Each Business-

Unit’s Competitive Strength



9-55

business is positioned in

its industry relative to rivals

Evaluate whether it is or can be

competitively strong enough to

contend for market leadership

Relative market share

Costs relative to competitors

Ability to match/beat rivals on key product attributes

Ability to benefit from strategic fits with sister

businesses

Factors to Use in

Evaluating Competitive Strength



9-56

Ability to exercise bargaining leverage with keysuppliers or customers

Caliber of alliances and collaborative partnerships

Brand image and reputation

Competitively valuable capabilities Profitability relative to competitors





9-58

Interpreting Competitive Strength Scores

Business units with ratings above 6.7 are strong

market contenders

Businesses with ratings in the 3.3 to 6.7 range

have moderate competitive strength vis-à-vis rivals



9-59

Business units with ratings below 3.3 are incompetitively weak market positions

If a diversified firm’s businesses all have scores

above 5.0, its business units are all fairly strongmarket contenders

Use industry attractiveness (see Table 9.1) and

competitive strength scores (see Table 9.2) to

plot location of each business in matrix

Industry attractiveness plotted on vertical axis

Plotting Industry Attractiveness and

Competitive Strength in a Nine-Cell Matrix



9-60

Competitive strength plotted on horizontal axis

Each business unit appears as a “bubble”

Size of each bubble is scaled to percentage of

revenues the business generates relative to total

corporate revenues

Fig. 9.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix



9-61

Businesses in upper left corner

Accorded top investment priority

Strategic prescription – grow and build

Businesses in three diagonal cells

Given medium investment priority

Strategy Implications of

Attractiveness/Strength Matrix



9-62

Given medium investment priority

Invest to maintain position

Businesses in lower right corner

Candidates for harvesting or divestiture

May, based on potential for good earnings and ROI, be

candidates for an overhaul and reposition strategy

Appeal of Attractiveness/Strength Matrix

Incorporates a wide variety of

strategically relevant variables

Strategy implications

Concentrate corporate resources

in businesses that enjoy high degree of industry



9-63

in businesses that enjoy high degree of industry

attractiveness and high degree of competitive strength Make selective investments in businesses with

intermediate positions on grid

Withdraw resources from businesses low inattractiveness and strength unless they offer exceptional

potential

Test Your Knowledge

The 9-cell industry attractiveness-competitive strength matrix

A. is a valuable tool for ranking a company’s different businesses from

most profitable to least profitable.B. shows which of a diversified company’s businesses have good/poor

strategic fit.

C. indicates which businesses have the highest/lowest economies of



9-64

g

scope.D. is a helpful tool for allocating a diversified company’s resources—the

basic idea is to give top investment priority to those businesses in

the upper left portion of the matrix and to give low priority or perhaps

even divest businesses in the lower right portion of the matrix.

E. pinpoints which of a diversified company’s businesses are resource-

rich and which are resource-poor.

Objective

Determine competitive advantage potential of cross-business strategic fits among portfolio businesses

Examine strategic fit based on

Step 3: Check Competitive Advantage

Potential of Cross-Business Strategic Fits



9-65

Whether one or more businesses

have valuable strategic fits with

other businesses in portfolio

Whether each business meshes wellwith firm’s long-term strategic direction

Identify businesses which have value

chain match-ups offering opportunities to

Reduce costs

Purchasing

Manufacturing

Evaluate Portfolio for Competitively

Valuable Cross-Business Strategic Fits



9-66

Distribution Transfer skills / technology / intellectual capital from one

business to another

Share use of a well-known, competitively powerful brand

name

Create valuable new competitive capabilities

Fig. 9.6: Identifying Competitive AdvantagePotential of Cross-Business Strategic Fits



9-67

Objective

Determine how well firm’s resourcesmatch business unit requirements

Good resource fit exists when

Step 4: Check Resource Fit



9-68

Good resource fit exists when

A business adds to a firm’s resource strengths,

either financially or strategically

Firm has resources to adequately support requirements

of its businesses as a group

Determine cash flow and investment

requirements of business units

Which are cash hogs and which arecash cows?

Assess cash flow of each business Highlights opportunities to shift financial resources

Check for Financial Resource Fits



9-69

Highlights opportunities to shift financial resources

between businesses

Explains why priorities for resource allocation

can differ from business to business

Provides rationalization for both

invest-and-expand and divestiture

strategies

Internal cash flows are inadequate to fully fund

needs for working capital and new capital

investment

Parent company has to continually pump in capital

to “feed the hog”

Characteristics of Cash Hog Businesses



9-70

Strategic options

Aggressively invest in

attractive cash hogs

Divest cash hogs lacking

long-term potential

Generate cash surpluses over what is needed to

sustain present market position

Such businesses are valuable because surplus

cash can be used to

Pay corporate dividends

Characteristics of Cash Cow Businesses



9-71

Finance new acquisitions Invest in promising cash hogs

Strategic objectives

Fortify and defend present market position Keep the business healthy



Good financial fit exists when a business

Contributes to achievement of corporate objectives

Enhances shareholder value

Poor financial fit exists when a business

Soaks up disproportionate share of financial resources

Good vs. Poor Financial Resource Fit



9-73

Soaks up disproportionate share of financial resources

Is an inconsistent bottom-line contributor

Experiences a profit downturn

that could jeopardize entire company

Is too small to make a sizablecontribution to total corporate earnings

Trying to replicate a firm’s success in one

business and hitting a second home run in a new

business is easier said than done

Transferring resource capabilities to new

A Note of Caution: Why

Diversification Efforts Can Fail



9-74

businesses can be far more arduous andexpensive than expected

Management can misjudge difficulty

of overcoming resource strengths of rivals it will face in a new business

Step 5: Rank Business Units Based on

Performance and Priority for Resource Allocation

Factors to consider in judging

business-unit performance

Sales growth

Profit growth

Contribution to company earnings



9-75

Contribution to company earnings

Return on capital employed in business

Economic value added

Cash flow generation

Industry attractiveness and business strength ratings

Objective

“Get the biggest bang for the buck”

in allocating corporate resources

Approach23 5

6 4

Determine Priorities

for Resource Allocation



9-76

Rank each business from highest to lowest priority for corporate resource support and new capital investment

Steer resources from low- to high-opportunity areas

When funds are lacking, strategic uses of resourcesshould take precedence

Fig. 9.7: The Chief Strategic and Financial Options for Allocating a Diversified Company’s Financial Resources



9-77

Stick closely with existing business lineup

and pursue opportunities it presents

Broaden company’s business scope by

making new acquisitions in new industries

Divest certain businesses and retrench

Step 6: Craft New Strategic

Moves – Strategic Options



9-78

to a narrower base of business operations

Restructure company’s business lineup, putting a

whole new face on business makeup

Pursue multinational diversification, striving toglobalize operations of several business units



Conditions making this approach attractive

Slow grow in current businesses

Vulnerability to seasonal or recessionary influences or to

threats from emerging new technologies

Strategies to Broaden a

Diversified Company’s Business Base



9-80

Potential to transfer resources and capabilities to other related businesses

Rapidly-changing conditions in one or more core industries

alter buyer requirements

Complement and strengthen market position of one or

more current businesses

Strategic options

Retrench to a smaller but moreappealing group of businesses

Divest unattractive businesses

Retrench ?Divest ?

Sell ?

Close ?

Divestiture Strategies Aimed at Retrenching

to a Narrower Diversification Base



9-81

Sell it

Spin it off as

independent company

Liquidate it (close it down

because no buyers can be found)

Retrenchment Strategies

Objective

Reduce scope of diversification to smaller number of

“core “ businesses

Strategic options involve

divesting businesses that



9-82

Are losing money

Have little growth potential

Have little strategic fit

with core businesses

Are too small to contribute

meaningfully to earnings

Diversification efforts have become too broad, resulting

in difficulties in profitably managing all the businesses

Deteriorating market conditions in a once-attractiveindustry

Lack of strategic or resource fit of a business

A business is a cash hog with questionable long-term

Conditions That Make

Retrenchment Attractive



9-83

A business is a cash hog with questionable long term

potential

A business is weakly positioned in its industry

Businesses that turn out to be “misfits”

One or more businesses lack compatibility of valuesessential to cultural fit

Options for Accomplishing Divestiture Sell it

Involves finding a company which views the business as a

good deal and good fit

Spin it off as independent company

Involves deciding whether or not to retain partial ownership



9-84

Liquidation

Involves closing down operations and

selling remaining assets

A last resort because no buyer can be found

Strategies to Restructure a

Company’s Business Lineup

Objective

Make radical changes in mixof businesses in portfolio via both

Divestitures and



9-85

New acquisitions

to put a whole new

face on the company’sbusiness makeup



Multinational Diversification Strategies

Distinguishing characteristics

Diversity of businesses and

Diversity of national markets

Presents a big strategy-making challenge



9-87

Strategies must be conceived and executed

for each business, with as many

multinational variations as appropriate

Cross-business and cross-country collaborationopportunities must be pursued and managed

Appeal of Multinational

Diversification Strategies

Offer two avenues for long-term

growth in revenues and profits

Enter additional businesses



9-88

Enter additional businesses

Extend operations of

existing businesses intoadditional country markets

Opportunities to Build Competitive

Advantage via Multinational Diversification

Full capture of economies of scale and experience

curve effects

Capitalize on cross-business economies of scope

Transfer competitively valuable resources from one

business to another and from one country to another



9-89

Leverage use of a competitively powerful brand name

Coordinate strategic activities and

initiatives across businesses and countries

Use cross-business or cross-countrysubsidization to out-compete rivals

Competitive advantage potential is based on

Using a related diversification strategy based on

Resource-sharing and resource-transfer

opportunities among businesses

Economies of scope and brand name

Competitive Strength of

a DMNC in Global Markets



9-90

benefits

Managing related businesses to capture important cross-

business strategic fits

Using cross-market or cross-business subsidizationsparingly to secure footholds in attractive country

markets



10

Chapter TitleStrategy,

Ethics, and



16/e PPT

SocialResponsibility










What Is Business Ethics?

Business ethics involves applying general ethical

principles and standards to business behavior

Ethical principles in business are not different

from ethical principles in general



10-5

Business actions are judged

By general ethical standards of society

Not by a set of rules businesspeopleapply to their own conduct

Are Ethical Standards Universal or

Dependent on Local Norms?

Three schools of thought regarding extent

to which ethical standards can be applied . . .

Ethical Universalism



10-6

Ethical Relativism

Integrative Social Contracts Theory

Concept of Ethical Universalism According to the school of ethical universalism . . .

Same standards of what is ethical and what is unethical

resonate with peoples of most societies regardless of

Local traditions and

Cultural norms



10-7

Thus, common ethical standards can be used to judge

conduct of personnel at companies operating

in a variety of

Country markets and Cultural circumstances

Examples of Universal

Ethical Principles or Norms

Honesty

Trustworthiness

Treating people with dignity and respect

Respecting rights of others



10-8

Practicing the Golden Rule Avoiding unnecessary harm to

Workers

Users of a company’s product or service

Respecting the environment

What Is the Appeal

of Ethical Universalism?Draws on collective views of multiple societies

and cultures to place clear boundaries on what

constitutes Ethical business behavior and

Unethical business behavior

Regardless of what country a company is operating in



10-9

Whenever basic moral standards do not vary

significantly according to local cultural beliefs,

traditions, or religious convictions, a multinational

company can Apply a code of ethics more or less evenly across its

worldwide operations

Concept of Ethical Relativism According to the school of ethical relativism . . .

Different societies/cultures/countries

Put more/less emphasis on some values than others

Have different standards of right and wrong

Have different social mores and behavioral norms



10-10

What is ethical or unethical

Must be judged in light of local

customs and social mores and

Can vary from one country to another

A thorny ethical problem is facedby multinational companies

Degree of cross-country variability in payingbribes as part of business transactions

Companies forbidding payment of bribes in their codes of ethics face a formidable challenge in

Payment of Bribes and Kickbacks



10-11

gcountries where payments are entrenched as alocal custom

Foreign Corrupt Practices Act prohibits U.S.

companies from paying bribes in all countrieswhere they do business

Test Your KnowledgePaying bribes and kickbacks to grease business transactions

A. violates ethical principles of right and wrong in all countries.

B. is ethically acceptable according to the principle of ethicaluniversalism.

C. is acceptable to immoral managers but not to amoral

managers.



10-12

D. should be considered ethically appropriate by a company so

long as such payments are normal and customary in the

countries where such payments are made.

E. may be ethically acceptable according to the principle of

ethical relativism if paying bribes and kickbacks is normal andcustomary practice in a country.

Ethical Relativism =

Multiple Sets of Ethical StandardsProponents of the ethical relativism school maintain

there are

Few ethical absolutes to judge a company’sconduct in various countries

Plenty of situations where ethical

norms are contoured to fit



10-13

Local customs and traditions Local beliefs about what is fair

Local standards of “right” and “wrong”

Ethical problems in business cannot be fully

resolved without appealing to the sharedconvictions of the parties in question

Drawbacks of Ethical Relativism The ethical relativism rule of “when in Rome, do

as the Romans do” presents problems

When the envelope is pushed, it istantamount to rudderless ethical standards

It is ethically dangerous for company personnel

to assume that local ethical standards are an



10-14

adequate guide to ethical behavior What if local standards condone kickbacks and bribery?

What if local standards blink at environmental degradation?

From a global markets perspective, ethical relativism

results in a maze of conflicting ethical standards for

multinational companies wanting to address the issue of

what ethical standards to enforce companywide

Concept of Integrative

Social Contracts Theory According to the integrative social contracts

theory, the ethical standards a company should try

to uphold are governed by both A limited number of universal ethical principles that

are widely recognized as putting legitimate ethical

boundaries on actions and behavior in all situations



10-15

and

The circumstances of local cultures, traditions, and

shared values that further prescribe what constitutes

Ethically permissible behavior and What does not

Appeal of Integrative

Social Contracts Theory Universal ethical principles establish “moral free space”

based on the collective view of multiple societies and

cultures

Commonly held views about morality and ethical principles

combine to form a “social contract” with society

It is appropriate for societies or companies to go beyond

universal ethical principles and specify local or second-order



10-16

ethical norms

Where firms have developed ethical codes, the standards

they call for provide appropriate ethical guidance

Social contracts theory maintains adherence touniversal or first-order ethical norms should alwaystake precedence over local or second-order norms!

Moral manager

Immoral

Three Categories of Management Morality

Managerial

ethical and



10-17

Amoral manager

manager moral

principles

Dedicated to high standards of ethical behavior in

Own actions

How the company’s business is to be conducted

Considers it important to

Be a steward of ethical behavior

Characteristics of a Moral Manager



10-18

Demonstrate ethical leadership

Pursues business success

Within confines of both letter and spirit of laws

With a habit of operating well above what laws require

Characteristics of an Immoral Manager Actively opposes ethical behavior in business

Willfully ignores ethical principles in making

decisionsViews legal standards as barriers to overcome

Pursues own self-interests

I l f it li ti d



10-19

Is an example of capitalistic greed Ignores interests of others

Focuses only on bottom line –

making one’s numbersWill trample on others to avoid being trampled upon

Believes business and ethics should not

be mixed since different rules apply to

Business activities Other realms of life

Does not factor ethical considerations into

own actions since business activity lies

t id h f l j d t

Characteristics of an

Intentionally Amoral Manager



10-20

outside sphere of moral judgment

Views ethics as inappropriate for tough, competitive

business world

Concept of right and wrong is lawyer-driven (whatcan we get by with without running afoul of the law)

Is blind to or casual about ethics of

decision-making and business actions

Displays lack of concern regarding

whether ethics applies to company actions

Sees self as well-intentioned or personally ethical

Characteristics of an

Unintentionally Amoral Manager



10-21

Typical beliefs

Do what is necessary to comply with laws and

regulations

Government provides legal framework stating what

society will put up with—if it is not illegal, it is allowed





10-23



10-24



10-25

Do Company Strategies

Need to Be Ethical? Approaches of most company managers

Ensure a company’s strategy is legal May or may not ensure all elements of strategies are

ethical

Approach of senior executives with strong

ethical convictions Insist all aspects of strategy fall within ethical boundaries



10-26

Approach of immoral or amoral senior executives Use shady strategies if they think they can

get by with it Use unethical or borderline business practices Hide ethically questionable actions

Large numbers of immoral

and amoral business people

Overzealous pursuit of personal gain,

wealth, and other selfish interests

What Are the Drivers of Unethical

Strategies and Business Behavior?



10-27

Heavy pressures on company managers

to meet or beat earnings targets

Company cultures that place profits andgood performance ahead of ethical behavior

People obsessed with wealth accumulation, greed,

power, and status often

Push ethical principles aside in their quest for self gain

Exhibit few qualms in doing whatever

is necessary to achieve their goals

Overzealous Pursuit of Personal Gain,

Wealth, and Selfish Interests



10-28

Look out for their own best interests

Have few scruples and ignore welfare of others

Engage in all kinds of unethicalstrategic maneuvers and behaviors

Managers often feel enormous pressure to do whatever

it takes to deliver good financial performance

Actions often taken by managers Cut costs wherever savings show up immediately

Squeeze extra sales out of early deliveries

Engage in short-term maneuvers to make the numbers

Stretch rules to extreme, until limits of ethical conduct are

overlooked

Heavy Pressures on Company Managers

to Meet or Beat Earnings Targets



10-29

overlooked Executives feel pressure to hit performance targets since

their compensation depends heavily on company

performance

Fundamental problem with a “make the numbers” syndrome Company does not serve its customers or shareholders well by

placing top priority on the bottom line

Company Culture Places Profits and Good

Performance Ahead of Ethical Behavior

In an ethically corrupt or amoral work climate,

people have a company-approved license to

Ignore “what’s right” and stretch rules Engage in most any behavior or employ most

any strategy they think they can get away with

Play down relevance of ethical strategic

actions and business conduct



10-30

actions and business conductPressures to conform to cultural norms

can prompt otherwise honorable people to Make ethical mistakes

Succumb to the many opportunities to engage

in unethical practices and shady behavior

Approaches to Managing a

Company’s Ethical Conduct

Unconcerned or non-issue approach

Damage control approach



10-31

Compliance approach

Ethical culture approach



10-32

Characteristics of Unconcerned Approach

Prevalent at companies whose executives are

immoral and unintentionally amoral

Notions of right and wrong in business matters aredefined by government via prevailing laws and

regulations — after that, anything goes

If the law permits “unethical behavior,”

hy stand on ethical principles



10-33

why stand on ethical principles

Companies are usually out to make

greatest possible profit at most any cost

Strategies used, while legal, may embraceelements that are ethically shady

Characteristics of

Damage Control ApproachFavored at companies whose managers are

intentionally amoral but who fear scandal

May adopt a code of ethics as window-dressing Adept at using “spin” to “explain away” the use of

unethical strategy elements or discount the impactof shady actions

Executives look the other way when shady



10-34

Executives look the other way when shadybehavior occurs

Executives may condone questionableactions that help a company reach

earnings targets or bolster its marketstanding

Characteristics of

Compliance Approach From light to forceful compliance is favored

at companies whose managers Lean toward being somewhat amoral but are highly

concerned about having ethically upstanding reputations or Are moral and see strong compliance methods as best

way to impose and enforce high ethical standards

Emphasis is on securing broad

compliance and measuring degree



10-35

compliance and measuring degreeto which ethical standards are upheld Commitment to eradicate unethical

behavior stems from a desire to

Avoid cost and damage associated with unethical conduct or Gain favor from stakeholders from having a highly regardedreputation for ethical behavior

Pursuing a Compliance Approach:

Typical ActionsMake code of ethics a visible and regular

part of communications with employees

Implement ethics training programs Appoint a chief ethics officer

Have ethics committees to give guidance on ethics matters

Institute formal procedures for investigating alleged ethics

i l ti



10-36

violations

Conduct ethics audits to measure and document compliance

Give ethics awards to employees for outstanding efforts to

create an ethical climate Install ethics hotlines to help detect and deter violations

Potential Weakness

of Compliance Approach

Moral control resides in a company’s

code of ethics and in the ethicscompliance system rather than in

Strong peer pressures for ethical

behavior that come from ingraining



10-37

behavior that come from ingraininga highly ethical corporate culture and

An individual’s own moral

responsibility for ethical behavior

Characteristics of

Ethical Culture Approach Top executives believe high ethical principles must

Be deeply ingrained in the corporate culture Function as guides for “how we do things around here”

Company seeks to gain employee buy-in to Company’s ethical standards Business principles Corporate values

Ethical principles in company’s code of ethics are



10-38

Ethical principles in company s code of ethics are Integral to day-to-day operations Promoted as “business as usual”

Strategy must be ethical

Employees must display ethicalbehaviors in executing the strategy

Why Should Company Strategies Be Ethical?

An unethical strategy

Is morally wrong

Reflects badly on the character of company personnel

An ethical strategy is



10-39

An ethical strategy is

Good business

In the best interest of shareholders

Test Your Knowledge

Which one of the following is false when it comes to making a

case for why a company’s strategy should be ethical?

A. An unethical strategy can put a company’s reputation at riskand do lasting damage, especially when the misdeeds get into

the public spotlight and make media headlines.

B. An ethical strategy is in the best interest of shareholders.

C An unethical strategy reflects badly on the character of the



10-40

C. An unethical strategy reflects badly on the character of thecompany personnel involved.

D. Shareholders profits are not greatly reduced by using ethical

strategies.

E. A strategy that is unethical in whole or in part is morallywrong.

Characteristics of Managers Committed

to Ethical Approaches to Strategy-Making Possess strong moral and ethical characteristics Strongly advocate a corporate code

of ethics and strict ethics compliance Display genuine commitment to certain corporate

values and business practicesWalk the talk in

Displaying a company’s stated values Living up to ethical business principles and standards



10-41

Living up to ethical business principles and standards Adopt values statements/ethics codes

that truly paint the white lines for acompany’s business practices

Consciously opt for strategic actions passing moral scrutiny

Fig. 10.1: The Business Costs of Ethical Failures



10-42

Linking Strategy to Ethics and Values

If ethical standards are to have more than a cosmetic

role, boards of directors and top executives must work

diligently to see they are scrupulously observed in

Crafting a company’s strategy and

Conducting every facet of a company’s business

Two sets of questions must be considered by senior

executives when reviewing a new strategic initiative



10-43

executives when reviewing a new strategic initiative Is what we are proposing to do fully compliant with our

code of ethical conduct? Is there anything here that

could be considered ethically objectionable?

Is it apparent this proposed action is in harmony with our core values? Are any conflicts or concerns evident?


Is it unethical for a high school or college coach to accept

a “talent fee” or similar type of payment from a maker of

sports apparel or sports equipment when the coach hasauthority to determine which brand of apparel or

equipment to use for his/her team and subsequently

chooses the brand of the company making the payment?



10-44

chooses the brand of the company making the payment?Is it unethical for the maker of the sports apparel or

equipment to make such payments in expectation that the

coach will reciprocate by selecting the company’s brand?

(Would you answer be different if “everybody” is doing it?)


Is it unethical for a credit card company to

aggressively try to sign up new accounts when, after

an introductory period of interest-free or low-interest

charges on unpaid monthly balances, the interest rate

on unpaid balances jumps to 1.5 percent or more

monthly (even though such high rates of 18 percent



10-45

monthly (even though such high rates of 18 percent

or more annually are disclosed in fine print)?

What Is Corporate Social Responsibility?

The notion that corporate executives should

balance interests of all stakeholders began to

blossom in the 1960sSocial responsibility as it applies to businesses

concerns a company’s duty to

Operate in an honorable manner

Provide good working conditions for employees



10-46

Provide good working conditions for employees

Be a good steward of the environment

Actively work to better quality of life in

Local communities where it operates and Society at large

What Is Socially Responsible

Business Behavior? A company should strive to balance strategic

actions To benefit shareholders against any possible adverse

impacts on other stakeholders To be a good corporate citizen

Socially responsible behaviors include Corporate philanthropy

Actions to earn trust and respect of stakeholders for



10-47

Actions to earn trust and respect of stakeholders for a firm’s efforts to improve the general well-being of Customers Employees Local communities Society Environment

Fig. 10.2: Categories of Socially Responsible Business Behavior



10-48

Linking Strategy and Social Responsibility

The combination of socially responsible endeavors acompany elects to pursue defines its social responsibility strategy

Management should match a company’ssocial responsibility strategy to its Core values Business mission

Overall strategy



10-49

gy

Some companies are integrating social responsibility objectives into their Missions

Performance targets Strategies

Businesses should promote the betterment of

society, acting in ways to benefit all their

stakeholders because It’s the right thing to do!

Based on an implied social contract, society Grants a business the right to conduct its business affairs

Agrees not to unreasonably restrain a business’ pursuit of a

The Moral Case for

Corporate Social Responsibility



10-50

g y pfair profit

In return for a “license to operate,”

a business should Act as a responsible citizen

Do its fair share to promote the general welfare

Reasons to Behave in a

Socially Responsible Manner Generates internal benefits

Enhances recruitment of quality employees

Increases retention of employees Improves employee productivity

Lowers costs of recruitment and trainings

Reduces risk of reputation-damaging

incidents, leading to increased buyer patronage



10-51

incidents, leading to increased buyer patronageWorks in best interest of shareholders

Minimizes costly legal and regulatory actions

Provides for increased investments by socially conscious

mutual funds and pension benefit managers Focusing on environment issues may enhance earnings

Test Your Knowledge

Which one of the following is false as concerns the merits of why acting in a socially responsible manner is “goodbusiness”?

A. To the extent that a company’s socially responsible behavior winsapplause from consumers and fortifies its reputation, a companymay win additional patronage.

B. Acting in a socially responsible manner reduces the risk of reputation-damaging incidents.

C. Acting in a socially responsible manner is in the overall best interest



10-52

g y pof shareholders.

D. Acting in a socially responsible manner is unlikely to have any effect(positive or negative) on a company’s profitability.

E. Acting in a socially responsible manner can generate internal

benefits (as concerns employee recruiting, workforce retention,training, and improved worker productivity).

Four different views exist regarding use of company

resources by “do-good” executives in pursuit of a better

world

1. Any money authorized for social responsibilityinitiatives is theft from a company’s shareholders

2. Caution should be exercised in pursuing

various societal obligations since this Diverts valuable resources

Weakens a company’s competitiveness3 Social responsibilities are best satisfied through conventional

But Do We Really Want “Do-Good”

Executives — Is There a Downside?



10-53

3. Social responsibilities are best satisfied through conventional

business activities (doing what businesses are supposed to do,

which does not include social engineering)

4. Spending money for social causes

Muddies decision making by diluting focus on a firm’s businessmission Thrusts executives into role of social engineers

How Much Attention to

Social Responsibility Is Enough? What is the appropriate balance between

Creating value for shareholders?

Obligation to contribute to the larger social good?

What fraction of a firm’s resources ought to be aimed at

Addressing social concerns?

Bettering the well-being of society and the environment?

Approaches to fund a social responsibility strategy can



10-54

pp p y gy Allocate a specified percentage of profits

Avoid committing a specified percentage of profits

No widely accepted standard for judging if a companyhas fulfilled its citizenship responsibilities exists!

Linking Social Performance Targets

to Executive Compensation A surefire way to enlist a genuine commitment to

corporate social responsibility initiatives is to

Link achievement of social performance targets toexecutive compensation

Key role of board of directors Incorporate measures of a company’s

social and environmental performancei t it l ti f t ti



10-55

pinto its evaluation of top executives

Key role of top executives Use compensation incentives to enlist support of down-

the-line company personnel to craft and execute a socialresponsibility strategy

1111

Chapter TitleChapter Title

Building an

Organization

Capable of Good

Strategy Execution



16/e PPT16/e PPT

Strategy Execution

Screen graphics created by:



³The best game plan in

the world never blocked

t kl d b d ´



11-2

or tackled anybody.´

Vince Lombardi

³A second-rate strategy

perfectly executed will beat

a first-rate strategy poorly



11-3

a first rate strategy poorly

executed every time.´

Richard M. Kovacevich



Crafting the Strategy

Primarily a market-drivenactivity

Successful strategy makingdepends on

Business vision

Perceptive analysis of market conditions and

company capabilities Att ti d l i

Ex ecuting the Strategy

Primarily an operati ons- driven activity

Successful strategyexecution depends on

Doing a good job of working through others

Good organization-

building B ildi titi

Crafting vs. Executing Strategy



11-5

Attracting and pleasingcustomers

Outcompeting rivals

Using company

capabilities to forge acompetitive advantage

Building competitivecapabilities

Creating a strategy-supportive culture

Getting things done anddelivering good results

An acti on- oriented, make-things ha ppen task

involving management¶s ability to

Direct organizational change

Achieve continuous improvement in

operations and business processes

Move toward operating excellence

Create and nurture a

Implementationinvolves . . .

Executing the Strategy



11-6

strategy-supportive culture

Consistently meet or beat performance targets

Tougher and more time-consuming than crafting

strategy

Implementing a New StrategyRequires Adept Leadership

I m pl ementing a new strategy

takes ade pt l eadershi p to

Convincingly communicate

reasons for the new strategy

Overcome pockets of doubt

S it t f d ti



11-7

Secure commitment of concerned parties

Build consensus and enthusiasm

Get all implementation pieces in place and coordinated

Why Executing Strategy

Isa Tough Management Job

Overcoming resistance to change

Wide array of demanding managerial

activities to be performed

Numerous ways to tackle each activity

Number of bedeviling issues to be worked out

Demands good people management skills



11-8

g g

Requires launching and managing

a variety of initiatives simultaneously

Hard to integrate efforts of many different work

groups into a smoothly-functioning whole

Who Are the Strategy Implementers?

Implementing and executing strategy involves acompany¶s whol e management team and all

em ployees Just as every part of a watch plays a role in making the

watch function properly, it takes all pieces of anorganization working cohesively for a strategyto be well-executed

T op- l evel managers must l ead the



11-9

process and orchestrate major initiatives

But they must rely on cooperation of

Middle and lower -level managers to see things go well in

various parts of an organization and Employees to perform their roles competently

Goals of the StrategyImplementing-Executing Process

U nite total organizati on behind strategy

See that activities are d one in a manner that is

conducive to first-rate strategy e x ecuti on

enerate c ommit ment so an enthusiasticd t t t t



11-10

crusade emerges to carry out strategy

F it how organization conducts its

operati ons to strategy requirements

Every manager has an active role

No proven ³formula´ for implementingparticular types of strategies

There are guidelines, but no

absolute rules and ³must do it

this way´ rules

Characteristics of the StrategyImplementation Process



11-11

Many ways to proceed that are

capable of working

Cuts across many aspects of ³how to manage´

Each implementation situation occurs in a different

context, affected by differing

Business practices and competitive situations

Work environments and cultures

Policies

Compensation incentives Mix of personalities and firm histories

Characteristics of the StrategyImplementation Process (continued)



11-12

Mix of personalities and firm histories

A ppr oach t o i m pl ementati on/e x ecuti on

has be cust omized t o fit the situati on

People implement strategies - Not companies!

Fig. 11.1: The Eight Components of the Strategy Execution Process



11-13

C ommunicate the case for change

Build c onsensus on how to proceed

Arouse enthusiasm for the strategy to turnimplementation process into a companywide crusade

Em power subordinates to keep process moving

E stabl ish measures of progress and deadlines

R eward those who achieve

What Top Executives Have to Do inLeading the Implementation Process



11-14

implementation milestones

Direct resources to the right places

Personally l ead strategic change processand the drive for operating excellence

Test Your Knowledge

Management's handling of the strategy implementation/execution

process can be considered successful

A. so long as a company is profitable.

B. if and when the company meets or beats its performance targets and

shows good progress in achieving its strategic vision for the

company.

C. once the company's management team convinces a majority of

company personnel that the company is headed in the right direction.

D if management is able to put the strategy in place within 6 months



11-15

D. if management is able to put the strategy in place within 6 months.

E. once a capable top management team has been hired, employees

have been appropriately empowered, and effective training programs

for company personnel have been put in place.

BUILDING A CAPABLEBUILDING A CAPABLE

ORGANIZATIONORGANIZATION ²² WHATWHAT

IS INVOLVED?IS INVOLVED?



11-16

Fig. 11.2: The Three Components of Building an

Organization Capable of Proficient Strategy Execution



11-17

Assembling a capable management team is a

cornerstone of the organization-building task

Find the right people to fill each slot

Existing management team

may be suitable

Core executive group

Putting Together aStrong Management Team



11-18

may need strengthening

Promote from within

Bring in skilled outsiders

Selecting the Management Team:Key Considerations

Determine mix of

Backgrounds

Experiences and know-how

Beliefs and values

Styles of managing and personalities

Personal chemistry must be right



11-19

Talent base needs to be appropriate

Picking a solid management team needs to be

acted on early in implementation process

The quality of a company¶s people is an essential

ingredient of successful strategy execution

Biggest challenge facing companies

How to recruit and retain the best

and brightest talent with strong

skill sets and management potential

Intellectual capital, not tangible assets, is

Recruiting and Retaining TalentedEmployees: Implementation Issues



11-20

increasingly being viewed as the most important

investment

Talented people are a prime source of competitiveadvantage

Key Human Resource Practices toAttract and Retain Talented Employees

Spend considerable effort in screening job

applicants, selecting only those with

Suitable skill sets

Energy and initiative

Judgment and aptitudes for learning

Ability to adapt to firm¶s work

environment and culture

P t l th h t i i



11-21

Put employees through training

programs throughout their careers

Give promising employees challenging, interesting,

and skills-stretching assignments

Rotate employees through jobs with great content,

spanning functional and geographic boundaries

Encourage employees to Be creative and innovative

Challenge existing ways of

doing things and offer better ways

Submit ideas for new products or businesses

Foster a stimulating work environment

Key Human Resource Practices to

Attract and Retain Talented Employees (continued)



11-22

Foster a stimulating work environment

Exert efforts to retain high-potential employees with

excellent salary and benefits

Coach average employees to improve their skills

Building Core Competenciesand Competitive Capabilities

Crafting the strategy involves

I dentifying the desired c om petencies and

ca pabi l ities to build into the strategy to help

achieve a competitive advantage

Good strategy e x ecuti on requires

P utting desired c om petencies and ca pabi l ities inplace,



11-23

pl ace,

U pgrading them as needed, and

M odifying them as market

conditions evolve

Example: Intel¶s Core Competence

Design and mass productionof complex chips

for personal computers



11-24

Example: Procter & Gamble¶sCore Competencies

Superb marketing-distribution skills and R&D

capabilities in five core technologies - fats,oils, skin chemistry, surfactants, emulsifiers



11-25

Example: General Electric¶sCore Competencies

Developing professional managers with

broad problem-solving skills andproven ability to grow

global businesses



11-26

Example: Disney¶s Core Competencies

Theme park operation and

family entertainment



11-27

Example: Dell¶s Core Competencies

Capabilities to deliver state-of-the-art

products to customers within days of next-generation components coming available and

at attractively low costs



11-28

Example: Toyota¶s Core Competence

Legendary ³production system´ giving it

the capability to produce high-quality

vehicles at relatively low costs



11-29

1. Develop abi l ity to do something

2. As experience builds,

abi l ity can transl ate into a

c om petence or ca pabi l ity

3 If ability continues to be polished and

Three-Stage Process of DevelopingCompetencies and Capabilities



11-30

3. If abi l ity continues to be pol ished and

refined, it can become a distinctive

c om petence, providing a path to

c om petitive advantage!

Develop abi l ity to do something

Select people with relevant skills/experience

Broaden or expand individual abilities as needed

Step 1 in Developing Competencies



11-31

Mold efforts and work products of

individuals into a cooperative effort

to create organizati onal abi l ity

As experience builds and company learns how to

perform the activity consistently well and at

acceptable cost, the abi l ity ev ol ves into ac om petence or ca pabi l ity

Typically, a capability or competence emerges from

establishing and nurturing c oll aborative

rel ati onshi ps between Individuals and groups in different departments and/or




11-32

g p p

A company and its external allies

If company masters the activity, perf or ming it

better than rival s, the ³ca pabi l ity´ or

³c om petence´ becomes a

Distinctive c om petence and

Holds potential for

c om petitive advantage




11-33

This is the opti mal outc ome of the process

of building ca pabi l ities-c om petencies!

1. Competencies are bund l es of ski ll s and know-how

growing from c ombined eff orts of cross-functional

departments2. Normally, competencies emerge incrementall y from

various company efforts to respond to market

conditions

3. Leveraging competencies into competitive advantagerequires c oncentrating more eff ort and tal ent than

Managing the Process of BuildingCompetences: Four Key Traits



11-34

rivals on strengthening c om petencies to create

valuable capabilities

4. Sustaining competitive advantage requires adjusting

c om petencies t o new c onditi ons

I nternal development involves either

Strengthening the company¶s base of skills,

knowledge, and intellect or Coordinating and networking the efforts

of various work groups and departments

Partnering with key suppliers,

forming strategic alliances, or maybeeven outsourcing certain activities toi li

Approaches to Developing Competencies



11-35

specialists

Buying a c om pany that has the required

capabilities and integrating these competences intothe firm¶s value chain

Competencies and capabilities must

c ontinu ousl y be modified and perhaps

even re pl aced with new ones due to New strategic requirements

Evolving market conditions

Changing customer expectations

O ng oing eff orts to keep core competencies u p-t o-

Updating Competencies andCapabilities as Conditions Change



11-36

date can provide a basis for sustaining both

Effective strategy execution and

Competitive advantage

Training plays a critical role in implementation

when a firm shifts to a strategy requiring different

Skills or core competences Competitive capabilities

Managerial approaches

Operating methods

Types of training approaches

I t l ³ i iti ´

Strategic Role of Employee Training



11-37

Internal ³universities´

Orientation sessions for new employees

Tuition reimbursement programs

Online training courses

Competitive Advantage Potentialof Competencies and Capabilities

When it is difficu l t to outstrategize rivals

with a superior strategy . . .

. . . Best avenue to industry

l eadershi p is to out-c om pete

rivals withsu peri or strategy e x ecuti on!



11-38

Building c om petencies and ca pabi l ities

rivals can¶t match is one of thebest ways to out-compete them!

Test Your Knowledge

When it is difficult or impossible to out-strategize rivals (beat

them with a superior strategy), the other main avenue to

competitive advantage is to

A. institute a lower cost organization structure.

B. outcompete them with smarter managers.

C. do a better job of selecting and training employees.

D outexecute them (beat them by performing certain value chain



11-39

D. outexecute them (beat them by performing certain value chain

activities in superior fashion).

E. do a better job of empowering and motivating employees.

Execution-Related Aspectsof Organizing Work Efforts

Few hard and fast rules for organizing

O ne Big R u l e: R ol e and pur pose of organizati on

structure is t o su pport and faci l itate g ood strategy e x ecuti on!

Each firm¶s structure is idiosyncratic, reflecting

Prior arrangements and internal politics

Executive judgments and preferences about how toarrange reporting relationships



11-40

How best to integrate and coordinate work effort of

different work groups and departments

Vice President Vice President Vice President

CEO

Fig. 11.3: Structuring the Work Effort

to Promote Successful Strategy Execution



11-41

Ste p 1: Decide Which Value Chain Activities toPerform Internally and Which to Outsource

Involves deciding which activities are

essential to strategic success

Most strategies entail certain crucial business processesor activities that must be performed exceedingly well or

in closely coordinated fashion if the strategy is

to be executed with real proficiency

These processes/activities usuallyneed to be performed internally Critical

activities



11-42

Other activities, such as routine

administrative housekeeping and

some support functions, may be

candidates for outsourcing

Determining Strategy-Critical Activities:Issues to Consider

1. What functions or business processeshave to be performed extra well or in

timely fashion to achieve competitive advantage?

2. In what value-chain activities would



11-43

poor execution seriously impair

strategic success?

A company improves its chances for outclassing rivals

in

Performing strategy

-critical activities and

Turning a core competence into a distinctive competence

Streamlining of internal operations that flows from

outsourcing acts to

Decrease internal bureaucracies

Flatten organization structure

Speed decision making

Potential Advantages of Outsourcing Non-Critical Activities



11-44

Speed decision-making

Increase competitive responsiveness

Partnerships can add to a company¶s arsenal of

capabilities and contribute to better strategy execution

Appeal of Outsourcing

Outsourcing non-critical activities allows a firm to

c oncentrate its energies and resources on those

value-chain activities where it

Can create unique value

Can be best in the industry

Needs direct control to



11-45

Build core competencies

Achieve competitive advantage

Manage key customer -supplier -distributor relationships

Potential Advantages of Partnering

By building, improving, and then leveraging

partnerships, a firm enhances its overall capabilities

and builds resource strengths that Deliver value to customers

Rivals can¶t quite match

Consequently pave the wayfor competitive success



11-46

Partnering makes strategic sense when theresult is to enhance a company¶s

competencies and competitive capabilities.




While many people have criticized companies that

have outsourced functions once performed in-house

to foreign suppliers (who can perform the functions

more cheaply) because outsourcing results in

involuntary layoffs or job cuts, it is really fairer and

more accurate to view outsourcing as a meanswhereby a company can enhance its competitiveness



11-48

whereby a company can enhance its competitiveness

and thereby better protect the jobs of the remaining

employees. True or false? Explain.

Assign managers of strategy-critical activities a

visible, influential position

Av oid fragmenting responsibility for strategy-critical

activities across many departments

P r ovide coordinating linkagesbetween related work groups

Assign

managers

key roles

Primary Support

Step 2: Make Strategy-CriticalActivities the Main Building Blocks



11-49

Meld into a valuable

competitive capability

Primary

activities

Strategic

relation-ships

Coordi-

nation

Valuable

capability

Support

functions

What Types of OrganizationalStructures Fit Which Strategies?

A company operating in one business

Functional department structure

A company with operati ons in vari ous parts of

the w or l d

Geographic organizational units

A verticall y integrated company Divisional organizational structure



11-50

g

A diversified company

I

ndividual businesses, with each business unit operatingas independent profit center

In a central ized structure

Top managers retain authority

for most decisions

In a decentral ized structure

Managers and employees are

empowered to make decisions

Trend in most companies

Step 3: Determine How MuchAuthority to Delegate to Whom



11-51

T rend in most companies

Shift from authoritarian to decentralized

structures stressing empowerment



11-52

Characteristics of Centralized Decision Making

Top executives retain authority

For most strategic and operating decisions and

Keep a tight rein on lower -level managers

Minimal discretionary authority is granted to

Frontline supervisors

Rank-and-file employees

Key advantage ± Tight control by top

managers fixes accountability Disadvantages

Lengthens response time to changing conditions



11-53

Lengthens response time to changing conditions

Does not encourage responsibility among lower -level managers and

employees

D

iscourages lower -level managers and employees from exercisinginitiative

Advantages of a Decentralized Structure

Creates a more horizontal structure with fewer management layers

Managers and employees develop their own answers and action

plans

Make decisions in their areas of responsibility

Held accountable for results

Shortens organizational response times and spurs

New ideas

Creative thinking and innovation

Greater involvement of managers and employees

Jobs can be defined more broadly



11-54

Fewer managers are needed

Electronic communication systems provide quick, direct access to

data

Genuine gains in morale and productivity

Place limits on authority empowered employees

can exercise

Hold people accountable for their decisions

Institute compensation incentives that reward

employees for doing their jobs in a manner

contributing to good company performance

Maintaining Control ina Decentralized Structure



11-55

Create a corporate culture where

there¶s strong peer pressure on

employees to act responsibly


A decentralized organization structure is more likely

to further the cause of good strategy execution than isa centralized organization structure. True or false?

Explain.



11-56

C l assic method of c oordinating activities ± Have

rel ated units re port to sing l e manager

Upper -level managers have clout tocoordinate efforts of their units

Su pport activities should be

w oven int o structure to

Maximize performance of primary activities

Step 4: Provide for InternalCross-Unit Coordination



11-57

Contain costs of support activities

F or mal re porting rel ati onshi ps often need to be

su ppl emented to faci l itate c oordinati on

Guard Against FunctionalDesigns That Fragment Activities

Scattering pieces of critical business processes

across several specialized departments results in

Many hand- offs which Lengthens completion time

Drives up administrative costs

Increases risk of details falling through the cracks

O bsessi on with activity rather than resu l t

Solution ¨ Business process reengineering



11-58

S ol uti on ¨ Business pr ocess reengineering

Involves pu ll ing strategy-critical pr ocesses from

functional departments to create pr ocess de part ments

or cr oss-functi onal w ork gr ou ps

Examples of FragmentedStrategy-Critical Activities

Filling customer orders

Speeding new products to market

Improving product quality

Supply chain management

Building capability to conduct business via the

Internet



11-59

Internet

Obtaining feedback from customers, making

product modifications to meet their needs

Cross-functional task forces

Dual reporting relationships

Informal networking

Voluntary cooperation

Incentive compensation tied

to group performance

Coordinating Mechanisms to Supplementthe Basic Organization Structure



11-60

to group performance

Teamwork and cross-

departmental cooperation

Step 5: Provide for Collaboration With Outsiders

Need mu l ti pl e ties at mu l ti pl e l evel s to ensure

Communication

Coordination and control

Find ways to pr oduce c oll aborative

eff orts to enhance firm¶s ca pabi l ities

and resource strengths

While collaborative relationships present



11-61

While collaborative relationships present

opportunities, nothing val uabl e is real ized unti l

the rel ati onshi p develops int o an engine f or

better organizati onal perf or mance

Get right people together

Promote good rapport

See plans for specific activities

are developed and implemented

Help adjust internal proceduresand communication systems to

Roles of Relationship ManagersWith Strategic Partners



11-62

Iron out operating dissimilarities

Nurture interpersonal ties

Test Your Knowledge

Which one of the following tends to be most important in building an

organization capable of good strategy execution?

A. Selecting a capable management team and selecting and training

employees

B. Building and strengthening competencies and competitive

capabilities

C. Empowering employees and utilizing the advantages of

decentralized decision-making

D. Making strategy-critical activities the main building blocks in the

organizational scheme



11-63

E. None of the above is necessarily more or less important²what

factors prove to be particularly important in building an organization

that is capable of good strategy execution can vary from company to

company and situation to situation.

Current Organizational Trends

Numerous companies have completed the task of

remodeling traditional, hierarchical structures built

on Functional specialization and

Centralized authority

Corporate downsizing movement in thelate 1980s and early 1990s was aimed at



11-64

Recasting authoritarian, pyramidal

organizational structures

Into flatter, decentralized structures

Central ized or authoritarian structures have

often turned out to be a l iabi l ity where

Customer preferences shift fromstandardized to customized products

Product life-cycles grow shorter

Flexible manufacturing replaces

mass production

Customers want to be treated as individuals

Drawbacks of CentralizedAuthoritarian Structures



11-65

Customers want to be treated as individuals

Pace of technological change accelerates

Market conditions are fluid

Organizational Structures of

the Future: Overall Themes

Revolutionary changes in how w ork is organized

have been triggered by

New strategic priorities Rapidly shifting competitive conditions

T ool s of organizati onal design include

Empowered managers and workers

Reengineered work processes

Self -directed work teams

The future

structurewill be . . .



11-66

Rapid incorporation of Internet

technology

Networking with outsiders

Characteristics of

Organizations of the Future

Extensive use of I nternet technology

and e-c ommerce business practices

F ewer barriers between Different vertical ranks

Functions and disciplines

Units in different geographic locations

Company and its suppliers, distributors,strategic allies, and customers

Change & Learning



11-67

Ca pacity for change and ra pid l earning

C oll aborative eff orts among people in different

functions and geographic locations

12

Chapter Title

Managing

Internal

Operations



16/e PPT

Screen graphics created by:



“Winning companies

know how to do theirwork better.”



12-2

work better.

Michael Hammer and JamesChampy

“If you want peoplemotivated to do a

good job, give them

a



12-3

good job to do.”Frederick Herzberg

Chapter Roadmap

Marshaling Resources Behind the Drive for GoodStrategy Execution

Instituting Policies and Procedures that FacilitateStrategy Execution

Adopting Best Practices and Striving for Continuous

Improvement

Installing Information and Operating Systems



12-4

Installing Information and Operating Systems

Tying Rewards and Incentives to StrategyExecution

MARSHALING RESOURCESMARSHALING RESOURCES

BEHIND THE DRIVE FORBEHIND THE DRIVE FOR

GOOD STRATEGY GOOD STRATEGY

EXECUTIONEXECUTION



12-5

Allocating Resources to

Support Strategy Execution Allocating resources in ways to support

effective strategy execution involves

Funding strategic initiatives that can makea contribution to strategy implementation

Funding efforts to strengthen competenciesand capabilities or to create new ones



12-6

Shifting resources — downsizing some areas,upsizing others, killing activities no longer justified,and funding new activities with a critical strategy role

ESTABLISH POLICIES ANDESTABLISH POLICIES AND

PROCEDURES TOPROCEDURES TO

FACILITATE STRATEGY FACILITATE STRATEGY

EXECUTIONEXECUTION



12-7



Role of new policies

Channel behaviors and decisionsto promote strategy execution

Counteract tendencies of people to resist chosen strategy

Too much policy can be as stifling as

Wrong policy or as Chaotic as no policy

Creating Strategy-SupportivePolicies and Procedures



12-9

Often, the best policy is empowering employees,

letting them operate between the “white lines” anyway they think best

ADOPTING BEST PRACTICESADOPTING BEST PRACTICESAND STRIVING FORAND STRIVING FOR

CONTINUOUSCONTINUOUS

IMPROVEMENTIMPROVEMENT



12-10

Instituting Best Practicesand Continuous Improvement

Searching out and adopting best practices

is integral to effective implementation

Benchmarking is the backbone of theprocess of identifying, studying, andimplementing best practices

Key tools to promote continuous improvement Six Sigma quality control



12-11

g y

Business process reengineering

TQM

What Is a Best Practice?

An activity that at leastone company has provedworks particularly well

B e s t P r ac t ic e s



12-12

A path to operating excellence

The best practice must

have a proven record in

Significantly lowering

costs

Improving quality or

performance

Shortening time

requirements

Enhancing safety or

To be valuable and

transferable, a best

practice must

Demonstrate success

over time

Deliver quantifiable

and highly positive

results

and

Characteristics of Best Practices



12-13

g y

Delivering some other

highly positiveoperating outcome

Be repeatable

Involves determining how well a firm performs particular activities and processes whencompared against

“Best in industry” or “Best in world” performers Goal – Promote achievement of operating

excellence in performing strategy-critical activities Caution – Exact duplication of best practices

of other firms is not feasible due to differencesin implementation situations

Characteristics of Benchmarking



12-14

Best approach – Best practices of other

firms need to be modified or adapted to fit a firm’s own specific situation

Fig. 12.2: From Benchmarking and Best-PracticeImplementation to Operating Excellence



12-15

Business Process Reengineering:A Contributor to Operating Excellence

Often the performance of strategically relevant activities is scattered acrossseveral functional departments

Creates inefficiencies and often impedes performance Results in lack of accountability since no one

functional manager is responsible for optimumperformance of an entire activity

Solution Business process reengineering

Involves pulling strategy-critical processes from functionalsilos to create process departments or cross-functional work groups



12-16

work groups

Unifies performance of the activity improves howwell the activity is performed and often lowers costs

Promotes operating excellence

What Is T otal Q uality M anagement?

A philosophy of managing a set of business

practices that emphasizes

Continuous improvement in all phases of operations 100 percent accuracy in performing activities

Involvement and empowerment

of employees at all levels

Team-based work design



12-17

Benchmarking and

Total customer satisfaction

Popular TQM Approaches

Deming’s

14 Points

The Juran

Trilogy

Crosby’s 14

Quality Steps



12-18

Baldridge

Award

Criteria

Implementing a Philosophyof Continuous Improvement

Reform the corporate culture

Instill enthusiasm to do things

right throughout company

Strive to achieve little steps forwardeach day (what the Japanese call kaizen)

Ignite creativity in employees to improve



12-19

performance of value-chain activities

Preach there is no such thing as good enough

Six Sigma is a disciplined, statistics-based

system aimed at having not more than 3.4 defectsper million iterations for any business practice –

from manufacturing to customer transactionsTwo approaches to Six Sigma DMAIC process (Design, Measure, Analyze, Improve, Control)

An improvement system for existing processes fallingbelow specification and needing incremental improvement

A great tool for improving performance when there are wide

variations in how well an activity is performed

Six Sigma Quality Control — A Tool for Promoting Operating Excellence



12-20

variations in how well an activity is performed

DMADV process (Define, Measure, Analyze, Design, Verify)

An improvement system used to develop new processes or products at Six Sigma quality levels

Characteristics of Six Sigma Quality Programs

Six Sigma is based on three principles1. All work is a process

2. All processes have variability

3. All processes create data to explain variability A company systematically applying Six Sigma to its

value chain activities can significantly improve theproficiency of strategy implementation

Three challenges in implementing Six Sigma qualityprograms



12-21

p g1. Obtain managerial commitment

2. Establish a quality culture3. Full involvement of employees

Approach of the DMAIC Process

Define What constitutes a defect?

Measure

Collect data to find out why, how,and how often the defect occurs

Analyze – Involves Statistical analysis of the metrics

Identification of a “best practice” Improve Implementation of the documented “best practice”



12-22

Control

Employees are trained on the “best practice” Over time, significant improvement in quality occurs

Reengineering

Aims at quantum gains of 30 to 50% or more

Total quality programs

Stress incremental progress

Techniques are not mutually exclusive Reengineering – Used to produce a good basic design

i ldi d ti i t

Business Process Reengineeringvs. Total Quality Programs



12-23

yielding dramatic improvements

Total quality programs – Used to perfect process,gradually improving efficiency and effectiveness

Select indicators of successful strategy execution

Benchmark against best practice companies

Build a TQ culture

Requires top management commitment

Install TQ-supportive employee practices

Empower employees to do the right things

Provide employees with quick access to required

How to Capture Benefits of Best-Practiceand Continuous Improvement Programs



12-24

Provide employees with quick access to requiredinformation using on-line systems

Preach that performance can/must be improved

The Benefits of EmployingContinuous Improvement Programs

Can greatly enhance a company’s

Competitive capabilities

Ability to achieve a competitive advantage

Have hard-to-imitate aspects

Require substantial investmentof management time and effort

Expensive in terms of training and meetings

Seldom produce short-term results



12-25

Seldom produce short-term results

Long-term payoff — instilling a culture that strivesfor operating excellence

Test Your Knowledge

Which of the following is not a tool that managers can use topromote operating excellence and further the cause of goodstrategy execution?

A. Benchmarking and adoption of best practices

B. Business process reengineering

C. A team-based work structure and operating excellence

analysis

D. Six Sigma quality control techniques



12-26

E. TQM

INSTALL INFORMATIONINSTALL INFORMATIONAND OPERATINGAND OPERATING

SYSTEMSSYSTEMS



12-27

Installing Strategy-SupportiveInformation and Operating Systems

Good information and operating systems areessential for first-rate strategy execution

Support systems can relate to

On-line data capabilities

Speedy delivery or repair

Inventory management

E-commerce capabilities

Mobilizing information and creating systems



12-28

Mobilizing information and creating systemsto use knowledge effectively can yield

Competitive advantage

On-line reservation system

Accurate and expeditious baggage handling system

St i t i ft i t

Airlines Airlines

Examples of Support Systems



12-29

Strict aircraft maintenance program

Federal ExpressFederal Ex

press


Internal communication systems allowing itto coordinate 70,000 vehicles handling anaverage of 5.5 million packages per day

Leading-edge flight operations systemsallow a single controller to direct as manyas 200 of 650-plus aircraft simultaneously



12-30

E-business tools for customers

Sophisticated maintenance support system

Otis Elevator Otis Elevator


Systems have been developed for

eBay eBa

y



12-31

Systems have been developed for

real-time monitoring of new listings, bidding

activity, Web site traffic, and page views

What Areas ShouldInformation Systems Address?

Customer data

Operations data

Employee data

Supplier/partner/collaborative ally data



12-32

Financial performance data

Trends for Information Systems

On-line technology

Daily statistical updates

Up-to-the minute performance monitoring Retail companies have up-to-the minute inventory and

sales records for each item

Electronic scorecards for senior managers Gather daily or weekly statistics from different databases

about inventory, sales, costs, and sales trends



12-33

about inventory, sales, costs, and sales trends

Enables managers to make better decisions on a real-time basis

Challenge

How to ensure actions of employees

stay within acceptable bounds

Control approaches

Managerial control

Establish boundaries on what not todo, allowing freedom to act with limits

Exercising Adequate ControlOver Empowered Employees



12-34

Track and review daily operating performance

Peer-based control


What sort of information and operating systems would

a company like Amazon.com likely need in order to

facilitate good strategy execution?




12-35

TYING REWARDS ANDTYING REWARDS ANDINCENTIVES TO STRATEGY INCENTIVES TO STRATEGY

EXECUTIONEXECUTION



12-36

Monetary IncentivesMonetar

y Incentives

Base pay increases

Performance bonusesProfit sharing plans

Stock options

Retirement packages

Piecework incentives

Non-monetary IncentivesNon-monetar

y Incentives

Praise

Constructive criticism

Special recognition

More, or less, job security

Stimulating assignments

More, or less, autonomy

Rapid promotion

Gaining Commitment: Componentsof an Effective Reward System



12-37

Provide attractive perks and fringe benefits

Rely on promotion from within when possible

Make sure ideas and suggestions of

employees are valued and respected

Create a work atmosphere where there is genuine sincerity

and mutual respect among all employees

State strategic vision in inspirational terms to make

employees feel they are part of something worthwhile

Share financial and strategic information with employees

Approaches: Motivating Peopleto Execute the Strategy Well



12-38

Have knockout facilities

Be flexible in how company approaches peoplemanagement in multicultural environments

Lincoln Electric Lincoln Electric Rewards productivity by paying for each piece

produced (defects can be traced to worker causing them)

GoogleGoo

gle

Employees are provided with free food,

unlimited ice cream, pool and Ping-Pong tables, andcomplimentary massages. Employees are allowed tospend 20% of their work time on any outside activity.

Examples: Motivational Practices



12-39

produced (defects can be traced to worker causing them).Highest rated workers receive bonuses of as much

110% of their piecework compensation.

Xilinx Xilinx New hires receive stock option grants.

CEO responds promptly to employee e-mails

JM Family EnterprisesJM Fam

ily Enterprises

Benefits for employees include: a great lease on new Toyotas,

cruises in the Bahamas on the 172-foot company yacht, officefacility has a heated lap pool, a fitness center, and a free nail

salon, and professionally made take-home dinners.




12-40

CEO responds promptly to employee e-mails.During hard times management takes a 20%

pay cut instead of laying off employees.


NordstromNordstrom

Pay salespeople higher than prevailing rates

Amazon.com Amazon.com

Hands out Just Do It awards to employees who

do something they think will help Amazon withoutgetting their boss’s permission; the action has to bewell thought through but doesn’t have to succeed.



12-41

Pay salespeople higher than prevailing rates,plus commission. “Rule #1: Use good judgment in

all situations. There will be no additional rules.”


W. L. GoreW. L. Gore

Employees get to choose what project/team they work on;each team member’s compensation is based on other teammembers’ ranking of his/her contribution to the enterprise.

Amgen Am

gen

Employees get 16 paid holidays, generousi i i i i b $10 000



12-42

vacation time, tuition reimbursements up to $10,000,

on-site massages, a discounted car wash, and theconvenience of shopping at on-site farmers’ markets.

Elements of both are necessary

Challenge and competition arenecessary for self-satisfaction

Prevailing view

Positive approaches work better than negative ones in terms of

Enthusiasm

Dedication

Balancing Positive vs. Negative Rewards



12-43

Creativity

Initiative

Tying rewards to the achievement of strategic and financial performance targets ismanagement’s single most powerful tool to win

the commitment of company personnel toeffective strategy execution

Objectives in designing the reward system Generously reward those

achieving objectives Deny rewards to those who don’t Make the desired strategic and financial

Linking the Reward Systemto Performance Outcomes



12-44

goutcomes the dominant basis for designing

incentives, evaluating efforts, andhanding out rewards

Test Your Knowledge

Management’s most powerful tool for mobilizing employeecommitment to competent strategy execution and operatingexcellence is

A. the use of either total quality management or Six Sigma qualitycontrol techniques.

B. business process reengineering.

C. a properly designed reward structure.D. making the company a great place to work in terms of pay

scales, fringe benefits, and employee perks.



12-45

E. effective screening of job applicants such that only the most

motivated and energetic people are hired.

Create a results-oriented systemReward people for results, not for activity

Define jobs in terms of what to achieve Incorporate several performance measures

Tie incentive compensation to relevant

outcomes

Top executives – Incentives tied tooverall firm performance

Department heads, teams, and

Key Considerations inDesigning Reward Systems



12-46

individuals – Incentives tied to

achieving performance targetsin their areas of responsibility



Guidelines for Designing anEffective Compensation System

1. Payoff must be a major, notminor, piece of totalcompensation package

2. Incentive plan shouldextend to all employees

3. Administer system withscrupulous fairness

4. Link incentives to achieving

5. Targets a person isexpected to achieve mustinvolve outcomes that can

be personally affected

6. Keep time betweenperformance reviewand payment short

7. Make liberal use of non-monetary rewards



12-48

only the performance

targets in strategic plan8. Avoid ways of rewarding

non-performers

Test Your Knowledge

Strategic Management MBA (GTU)

Documents