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Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
Strategic Management: Concepts and Cases 9e
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Strategic Management: Concepts and Cases 9e

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  • 1. Strategic Management:Concepts and Cases 9e Part I: Strategic Management InputsChapter 1: Strategic Management and Strategic Competitiveness ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 2. Chapter 1: Strategic Management andStrategic Competitiveness• Overview: Eight content areas – Nature of Competition – The Strategic Management Process – The Competitive Landscape – I/O Model of Above-Average Returns (AAR) – Resource-Based Model of AAR – Vision and Mission – Stakeholders – Strategic Leaders ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 3. Nature of Competition: Basic concepts• Strategic Competitiveness – Achieved when a firm formulate & implements a value- creating strategy• Strategy – Integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage• Competitive Advantage (CA) – Implemented strategy that competitors are unable to duplicate or find too costly to imitate• Above Average Returns – Returns in excess of what investor expects in comparison to other investments with similar risk ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 4. Nature of Competition: Basic concepts(Cont’d)• Risk – Investor’s uncertainty about economic gains/losses resulting from a particular investment• Average Returns – Returns equal to what investor expects in comparison to other investments with similar risk• Strategic Management Process (SMP) – Full set of commitments, decisions and actions required for a firm to achieve strategic competitiveness and earn above average returns ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 5. The Strategic Management Process©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 6. The Competitive Landscape• Introduction: The Competitive Landscape (CL) – Pace of change is rapid – Industry boundaries are blurring – Financial capital is more scarce and markets are increasingly volatile – Other CL characteristics: Economies of scale, advertising budgets not as effective as before, change in managerial mind-set from “traditional” to more flexible and innovative ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 7. The Competitive Landscape (Cont’d)• Introduction: The Competitive Landscape (CL) – Hypercompetition – extremely intense rivalry among competing firms, characterized by • Escalating & increasingly aggressive competitive moves • Assumptions of market stability replaced with notion of INstability and change – Two primary drivers of the competitive landscape: • The global economy • Technology ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 8. The Competitive Landscape (Cont’d)• The Global Economy – Goods, services, people, skills and ideas move freely across geographic borders – Europe, through the European Union (EU) is the world’s largest single market • EU vs U.S. GDP: 35% higher – Emerging major competitive forces: China & India – In summary: globalization increased economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 9. The Competitive Landscape (Cont’d)• Technology and Technological Changes – 3 categories: • 1. Technology diffusion & disruptive technologies • 2. The information age • 3. Increasing knowledge intensity ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 10. The Competitive Landscape (Cont’d)• Technology and Technology Changes (Cont’d) – Technology diffusion • Perpetual innovation: describes how new information-intensive technologies are replacing older forms • Speed to market may be primary competitive advantage • 12 – 18 month timeframe to gather info re: competitor R&D – Disruptive technologies • Technologies that – Destroy value of existing technology – Create new markets ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 11. The Competitive Landscape (Cont’d)• Technology and Technology Changes (Cont’d) – The information age • Dramatic changes over last several years • Major technological developments effect how information is used and disseminated • Internet provides infrastructure for information anytime, anywhere – Increasing knowledge intensity • Defined as information, intelligence & expertise and is the basis of technology and its application • Gained through experience, observations and inferences • Strategic Flexibility – set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 12. Industrial Organizational (I/O) Model ofAbove-Average Returns (AAR)• Basic Premise – to explain the dominant influence of the external environment on a firms strategic actions and performance ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 13. Industrial Organizational (I/O) Model ofAbove-Average Returns (AAR)• Underlying Assumptions – External environment imposes pressures and constraints that determine the strategies resulting in AAR – Most firms compete within a particular industry/segment • Control similar strategically relevant resources • Pursue similar strategies in light of those resources – Resources for implementing strategies are highly mobile across firms • Therefore any resource differences between firms will be short-lived – Organizational decision makers are rational and committed to acting in the firms best interests, as shown by their profit-maximizing behaviors ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 14. Industrial Organizational (I/O) Model ofAbove-Average Returns (AAR)• Five-Forces Model (Michael Porter) – The 5 Forces includes • Suppliers, buyers, competitive rivalry, product substitutes and potential entrants – Reinforces the importance of economic theory – Analytical tool previously lacking in the field of strategy – Determines the nature/level of competition and profit potential in an industry • Suggests an industry’s profitability is an interaction between these 5 forces ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 15. The Resource-Based Model of AAR©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 16. The Resource-Based Model of AAR (Cont’d)• Basic Premise - a firms unique [internal] resources & capabilities, in combination, are the basis for firm strategy and AAR – Each firm’s performance difference across time emerges (vs industry’s structural characteristics) – Combined uniqueness should define the firms’ strategic actions – Resources are tangible and intangible ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 17. The Resource-Based Model of AAR (Cont’d)• Resources – Inputs into a firms production process • Includes capital equipment, employee skills, patents, high- quality managers, financial condition, etc. – Basis for competitive advantage: When resources are valuable, rare, costly to imitate and nonsubstitutable – Internal/firm-specific resources can be classified into three categories: • Physical – Things you can touch/feel = tangible • Human – People / employees • Organizational capital – Relative to the firm itself ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 18. The Resource-Based Model of AAR (Cont’d)• Capability – Capacity for a set of resources to perform a task or activity in an integrative manner• Core Competency – A firm’s resources and capabilities that serve as sources of competitive advantage over its rival• Summary – A firm has superior performance because of • Unique resources and capabilities, and the combination makes them different, and better, than their competition – driving the competitive advantage ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 19. Vision and Mission• Vision – Picture of what the firm wants to be and, in broad terms, what it ultimately wants to achieve – An effective vision statement is the responsibility of the leader who should work with others to form it – Foundation for the mission• Mission – Specifics business(es) in which firm intends to compete and customers it intends to serve – More concrete than the vision ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 20. Stakeholders• Basic Premise – a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors• Stakeholders are both individuals and groups – They can affect, and are affected by, the strategic outcomes/performance a firm achieves• Firms are not equally dependent on all stakeholders ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 21. The Three Stakeholder Groups©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 22. Stakeholders (Cont’d)• Classifications of Stakeholders – Capital Market • Expect returns commiserate with risk accepted by investments • Higher the dependency relationship, the more direct and significant firm’s response – Product Market • Customers, suppliers, host communities, unions – Organizational • The employees ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 23. Strategic Leaders• People located in different parts of the firm using the strategic management process to help the firm reach its vision and mission – Decisive and committed to nurturing those around them – Organizational culture emerges from & sustained by leaders • Complex set of ideologies, symbols and core values shared throughout the firm • Affects leaders/their work which in-turn shapes culture • Influences how the firm conducts business ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 24. Strategic Leaders (Cont’d)• The Work of Effective Strategic Leaders – Hard work, thorough analysis, desire for accomplishment, tenacity – Must be able to “think seriously and deeply…about the purposes of the organizations they head or functions they perform, about strategies, tactics,…..and people…and about the important questions … they need to ask.”• Predicting Outcomes: Profit Pools (PP) – Anticipates their decisions relative to the PP – PP entails the total profits earned in an industry at all points along the value chain ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 25. Strategic Management: Concepts and Cases 9e Part I: Strategic Management InputsChapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 26. Chapter 2: The External Environment:Opportunities, Threats, Industry Competitionand Competitor Analysis• Overview: – General and industry environment – External environment analysis process activities – General environment segments – Porter’s 5 Competitive Forces – Strategic groups: Definition and influence – Competitor Analysis: Intelligence and ethics ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 27. External Environment:General, Industry and Competitor• Three External Environments include: – General – Industry – Competitor ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 28. External Environment:General, Industry and Competitor (Cont’d)• The General Environment – The broader society dimensions that influence an industry and the firms within it – Grouped into 7 dimensions OR ‘environmental segments’• Industry Environment – Set of factors directly influencing • A firm’s competitive actions/responses • Relates to Porter’s 5 Forces • Competitor analysis: gather and interpret competitor information• Competitor Environment – Gives details about • A firm’s direct and indirect competitors • The competitive dynamics expected to impact a firms efforts to generate above-average returns ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 29. External Environment Analysis• Opportunity – General environment condition that, if exploited, helps a company achieve strategic competitiveness• Threat – General environment condition that may hinder a companys efforts to achieve strategic competitiveness• 4 components of External Environment Analysis – Scanning – Monitoring – Forecasting – Assessing ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 30. Industry Environment Analysis• Industry – Definition: Group of firms producing products that are close substitutes – Industry environment, in comparison to the general environment, has more direct effect of firm’s • Strategic competitiveness and • Above-average returns – Intensity of industry competition and industry’s profit potential are a function of 5 forces ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 31. Industry Environment Analysis (Cont’d)• Porter’s 5 Forces – 1/5: New entrants • Can threaten market share of existing competitors • May bring additional production capacity • Function of two factors – 1: Barriers to entry » Economies of scale » Product differentiation » Capital requirements » Switching costs » Access to distribution channels » Cost disadvantages independent of scale » Gov’t policy – 2: Expected retaliation – 2/5: Threat of substitute products • Goods or services outside of given industry perform same or similar functions at a competitive price (i.e., plastic has replaced steel in many applications) ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 32. Industry Environment Analysis (Cont’d)• Porter’s 5 Forces – 3/5: Bargaining power of suppliers • They are powerful when … – 1. Few large companies and more concentrated – 2. No substitutes – 3. Industry firms not significant customer to supplier – 4. Supplier’s goods are critical to buyer’s success – 5. High switching costs due to effectiveness of supplier’s products – 6. Threat of forward integration – 4/5: Bargaining power of buyers • They are powerful when … – 1. Purchase large portion of industry’s total output – 2. Product sales accounts for significant seller annual revenue – 3. Low switching costs (to other industry product) – 4. Industry products are undifferentiated or standardized and threat of backward integration ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 33. Industry Environment Analysis (Cont’d)• Porter’s 5 Forces – 5/5: Intensity of Rivalry Among Competitors • Numerous or equally balanced competitors • Slow industry growth • High fixed costs or high storage costs • Lack of differentiation or low switching costs • High strategic stakes • High exit barriers ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 34. Strategic Groups• Strategic Groups – Set of firms emphasizing similar strategic dimensions to use a similar strategy – Implications • Because firms within a group compete (offer similar products) rivalry can be intense – the greater the rivalry the greater the threat to each firm’s profitability • Strengths of the 5 forces differs across strategic groups • The closer the strategic groups, in terms of strategy, the greater the likelihood of rivalry ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 35. Competitor Analysis• Competitor analysis and organization response: – What drives competitors • Shown by organizations future objectives – What the competitor is doing and can do • Revealed in organizations current strategy – What the competitor believes about the industry • Shown in organizations assumptions – What the competitor’s capabilities are • Shown by organizations strengths and weaknesses ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 36. Competitor Analysis Components©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 37. Competitor Analysis (Cont’d)• Competitor intelligence – Set of data and information the firm gathers to better understand and anticipate competitors objectives, strategies, assumptions, and capabilities• Follow ethical practices when gathering competitor intelligence – Obtain public information – Attend trade fairs and shows and collect brochures, view exhibits, listen to their discussions• Some practices may be legal, but unethical• Unethical tactics can include – Blackmail – Trespassing – Eavesdropping – Stealing drawings, samples or documents ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 38. Strategic Management: Concepts and Cases 9e Part I: Strategic Management Inputs Chapter 3: The Internal Organization:Resources, Capabilities, Core Competencies and Competitive Advantages ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 39. Chapter 3: The Internal Organization:Resources, Capabilities, Core Competenciesand Competitive Advantages• Overview: – Importance of understanding internal organization – Value: Definition and importance – Tangible vs intangible resources – Capabilities: Definition and development – Core competencies: Criteria – Value Chain Analysis – Outsourcing: Definition and “why?” – Internal organization assessment and strategic decisions ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 40. Analyzing the Internal Organization (IO) (Cont’d)• Context of Internal Analysis – ‘Global mind-set’ • Ability to study an internal environment in ways that do not depend on the assumptions of a single country, culture, or context – Analyze firm’s portfolio of resources and bundle heterogeneous resources and capabilities • Understand how to leverage these bundles – An organizations core competencies creates and sustains its competitive advantage• Creating Value – Develop core competencies that lead to competitive advantage – Value: measured by a products performance characteristics and by its attributes for which customers are willing to pay ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 41. Analyzing the Internal Organization (IO) (Cont’d)• The Challenge of Analyzing the IO – Strategic decisions are non-routine, have ethical implications and influence the organization’s above- average returns • Involves identifying, developing, deploying and protecting firms’ resources, capabilities and core competencies – Managers face uncertainty on many fronts -- • Proprietary technologies • Changes in economic and political trends, societal values and shifts in customer demands • Environment – increases complexity – Intraorganizational conflict • Due to decisions about core competencies and how to nurture them ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 42. Components of Internal Analysis Leading toCompetitive Advantage and StrategicCompetitiveness©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 43. Conditions Affecting Managerial DecisionsAbout Resources, Capabilities, and CoreCompetencies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 44. Resources, Capabilities and CoreCompetencies• Competitive Advantage (CA) foundation includes – Resources • Bundled to create organizational capabilities • Tangible and intangible (As seen in Figure 3.1) – Capabilities • Source of a firm’s core competencies and basis for CA • Purposely integrated to achieve a specific task/set of tasks – Core Competencies • Capabilities that serve as a source of CA for a firm over its rivals • Distinguish a company from its competitors – the personality ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 45. Resources, Capabilities and Core Competencies• Tangible Resources – Assets that can be seen, touched and quantified – Examples include equipment, facilities, distribution centers, formal reporting structures – Four specific types• Intangible Resources – Assets rooted deeply in the firm’s history, accumulated over time – In comparison to ‘tangible’ resources, usually can’t be seen or touched – Examples include knowledge, trusts, organizational routines, capabilities, innovation, brand name, reputation – Three specific types ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 46. Building Core Competencies:Criteria and Value Chain Analysis• Two tools firms use to identify and build on their core competencies – Four specific criteria of Sustainable CA – Value Chain Analysis ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 47. Building Core Competencies:Criteria and Value Chain Analysis• Four specific criteria of sustainable competitive advantage – capabilities that are: – Valuable – Rare – Costly-to-imitate – Nonsubstitutable capabilities• Competitive consequences: – Focus on capabilities that yield competitive parity and either temporary or sustainable competitive advantage• Performance implications include: – Parity = average returns – Temporary advantage = avg. to above avg. returns – Sustainable advantage = above average returns ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 48. Building Core Competencies:Criteria and Value Chain Analysis• Value Chain Analysis – Primary activities • Involved with product’s physical creation, sales and distribution to buyers, and service after the sale – Support activities • Provide assistance necessary for the primary activities to take place ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 49. Outsourcing• Definition: Purchase of a value-creating activity from an external supplier – Effective execution includes an increase in flexibility, risk mitigation and capital investment reduction – Trend continues at a rapid pace – Firms must outsource activities where they cannot create value or are at a substantial disadvantage compared to competitors• Can cause concerns – Usually revolves around innovative ability and loss of jobs ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 50. Internal Organization Assessment andStrategic Decisions• Firms must identify their strengths and weaknesses• Appropriate resources and capabilities needed to develop desired strategy and create value for customers/other stakeholders• Tools (i.e., outsourcing) can help a firm focus on core competencies as the source for CA• Core competencies have potential to become core rigidities – Competencies emphasized when no longer competitively relevant can become a weakness• External environmental conditions and events impact a firm’s core competencies ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 51. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 4: Business-Level Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 52. Chapter 4: Business-Level Strategy• Overview: – Defining business-level strategy – Relationship between customers and strategy – Differences in business-level strategies – 5-Forces – Risks of business-level strategies ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 53. Introduction• Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives. Choices dictated by – External environment – Internal resources, capabilities and core competencies• Business level-strategy: Integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets – Purpose: To create differences between position of a firm and its competitors – Firm must make a deliberate choice to • Perform activities differently • Perform different activities ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 54. Customers: Their Relationship with Business-Level Strategies (Cont’d)• Satisfying customers is the foundation of successful business strategies – 1. Effectively managing relationships w/ customers – 2. Reach, richness and affiliation – 3. Who: Determining the customers to serve – 4. What: Determining which customer needs to satisfy – 5. How: Determining core competencies necessary to satisfy customer needs ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 55. Purpose of Business-Level (BL) Strategies (con’t)• Two types of competitive advantage firms must choose between – Cost (Are we LOWER than others?) – Uniqueness (Are we DIFFERENT? How?)• Two types of ‘competitive scope’ firms must choose between – Broad target – Narrow target• These combine to yield 5 different BL strategies ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 56. Types of Business-Level Strategies1. Cost Leadership (CL) – Competitive advantage: THE low-cost leader and operates with margins greater than competitors – Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors – No-frill, standardized goods – Continuously reduce costs of value chain activities – Low-cost position is a valuable defense against rivals ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 57. Types of Business-Level Strategies (Cont’d)1. Cost Leadership (CL) (Cont’d) – Cost leaders are in a position to • Absorb supplier price increases and relationship demands • Force suppliers to hold down their prices – Continuously improving levels of efficiency and cost reduction • Can be difficult to replicate and • serve as significant entry barriers to potential competitors – Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers – Examples: Greyhound Bus, Big Lots Inc., Wal-Mart• Competitive Risks of the cost leadership strategy – Source of cost advantage becomes obsolete – Focus on cost may cause the firm to overlook important customer preferences – Imitation ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 58. Types of Business-Level Strategies (Cont’d)2. Differentiation – Competitive advantage: Differentiation – Competitive scope: Broad – Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them – Target customers perceive product value – Customized products – differentiating on as many features as possible – Examples: Apple’s iPod ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 59. Types of Business-Level Strategies (Cont’d)2. Differentiation (Cont’d) – In relationship to the 5 Forces: • Rivalry against existing competitors: Customers are loyal • Bargaining Power of Buyers (Customers): Inverse relationship between loyalty/product price sensitivity • Bargaining Power of Suppliers: Provide high quality components, driving up firm’s costs; Cost may be passed on to customer • Potential Entrants: Substantial barriers; require significant resource investment • Product Substitutes: Customer loyalty effectively positions firm against product substitutes• Competitive Risks of the differentiation strategy – Customers determine that the cost of differentiation is too great – The means of differentiation may cease to provide value for which customers are willing to pay – Experience can narrow customers’ perceptions of the value of a product’s differentiated features – Counterfeiting ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 60. Types of Business-Level Strategies (Cont’d)• There are two “Focus” strategies – In general, the firms’ core competencies used to serve the need of a particular industry segment or niche to the exclusion of others. • May lack resources to compete in the broader market • May be able to more effectively serve a narrow market segment than larger industry-wide competitors • Firms may direct resources to certain value chain activities to build competitive advantage – Large firms may overlook small niches • Risk of using “Focus” strategies – A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser – A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit – Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 61. Types of Business-Level Strategies (Cont’d)5. Integrated CL/Differentiation – Efficiently produce products with differentiated attributes • Efficiency: Sources of low cost • Differentiation: Source of unique value – Can adapt to new technology and rapid changes in external environment – Simultaneously concentrate on TWO sources of competitive advantage: cost and differentiation – consequently… – …must be competent in many of the primary and support activities – Three sources of flexibility useful for this strategy: • Flexible manufacturing systems (FMS) • Information networks • Total Quality Management (TQM) systems ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 62. Types of Business-Level Strategies (Cont’d)• Competitive Risks of Integrated Strategies – Although becoming more popular the RISK is getting ‘stuck in the middle’ • Cost structure is not low enough for attractive pricing of products and products not sufficiently differentiated to create value for target customer – therefore, fail to successfully implement either low cost or differentiation strategy • Result: Don’t earn above-average returns ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 63. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy FormulationChapter 5: Competitive Rivalry and Competitive Dynamics ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 64. Chapter 5: Competitive Rivalry andCompetitive Dynamics• Overview: – Competitors, competitive rivalry, competitive behavior and competitive dynamics – Market commonality and resource similarity: Building blocks of competitor analysis – Competitive actions: Awareness, motivation and ability – Factors driving competitor’s competitive actions – Competitor’s response to actions taken against it – Competitive dynamics in slow, fast and standard-cycle markets ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 65. Introduction and Definitions• Competitors – Firms operating in the same market, offering similar products and targeting similar customers• Competitive Rivalry – Ongoing set of competitive actions and competitive responses occurring between competitors as they contend with each other for an advantageous market position• Competitive Behavior – Set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position• Multimarket Competition – Firms competing against one another in several product or geographic markets• Competitive Dynamics – Total set of actions and responses of all firms competing within a market ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 66. From Competitors to Competitive Dynamics©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 67. Model of Competitive Rivalry• Model of Competitive Rivalry – Over time firms take competitive actions/reactions – Pattern shows firms are mutually interdependent – Firm level rivalry is usually dynamic and complex – Foundation for successfully building and using capabilities and core competencies to gain an advantageous market position ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 68. Competitor Analysis• Market Commonality: Each industry composed of various markets which can be subdivided into (segments)• Resource Similarity: Extent to which firm’s tangible/intangible resources are comparable to competitor’s in type and amount• Market commonality & resource similarity influence three drivers of competitive behavior – Awareness – Motivation – Ability• Other influences include resource dissimilarity – The greater the resource imbalance between acting firm and competitors or potential responders, the greater will be the delay in response ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 69. Competitive Rivalry• Important to understand competitor’s awareness, motivation and ability in order to predict the likelihood of an attack – study ‘likelihood of attack’ factors• What are the strategic and tactical actions? – Strategic actions/responses: market-based moves that signify a significant commitment of organizational resources to pursue a specific strategy • Difficult to implement and reverse – Tactical actions/responses: market-based moves that involve fewer resources to fine-tune a strategy that is already in place • Easy to implement and reverse ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 70. Interfirm Rivalry: Likelihood of Attack• Three possible ‘likelihood of response’ actions – 1. First Mover Incentives – 2. Organizational Size – 3. Quality• Additional factors affect the likelihood a firm will competitively respond to a competitor’s actions: – 1. Types and effectiveness of the competitive action – 2. Actor’s Reputation – 3. Dependence on the Market• Finally, if the action significantly strengthens or weakens the firms competitive position ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 71. Competitive Dynamics: 3 Market Cycles1. Slow-Cycle Markets – Markets in which the firms competitive advantages are shielded from imitation for long periods of time, and in which imitation is costly – Build a one-of-a-kind competitive advantage which creates sustainability – Once a proprietary advantage is developed, competitive behavior should be oriented to protecting, maintaining, and extending that advantage – Organizational structure should be used to effectively support strategic efforts ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 72. Gradual Erosion of a Sustained CompetitiveAdvantage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 73. Competitive Dynamics: 3 Market Cycles(Cont’d)2. Fast-Cycle Markets – Markets in which the firms capabilities that contribute to competitive advantages are not shielded from imitation and where imitation is often rapid and inexpensive – Focus: learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace (creating innovation) – Avoid loyalty to any one product, possibly cannibalizing their own current products to launch new ones before competitors learn how to do so through successful imitation – Continually try to move on to another temporary competitive advantage before competitors can respond to the first one ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 74. Developing Temporary Advantages to CreateSustained Advantage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 75. Competitive Dynamics: 3 Market Cycles(Cont’d)3. Standard-Cycle Markets – Markets where firm’s competitive advantages are moderately shielded from imitation and where imitation is moderately costly – Competitive advantages partially sustained as quality is continuously upgraded – Seek to serve many customers and gain a large market share – Gain brand loyalty through brand names – Careful operational control / manage a consistent experience for the customer ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 76. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy FormulationChapter 6: Corporate-Level Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 77. Chapter 6: Corporate-Level Strategy• Overview: Seven content areas – Define and discuss corporate-level strategy – Different levels of diversification – Three primary reasons firms diversify – Value creation: related diversification strategy – Value creation: unrelated diversification strategy – Incentives and resources encouraging value-neutral diversification – Management motives encouraging firm overdiversification©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 78. Introduction• Corporate-level strategy: Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets – Expected to help firm earn above-average returns – Value ultimately determined by degree to which “the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership • Product diversification (PD): primary form of corporate- level strategy©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 79. Introduction GE Rolls-Royce PLC• 1st in aircraft-engine industry • 2nd in aircraft-engine industry• Involved in hundreds of businesses: • No longer makes luxury cars; operation manufacturing light bulb, medical devices; was parceled off to BMW and operating self-storage facilities; broadcasting (it Volkswagen in 1998. owns NBC) • 72% of its revenue coming from aircraft• Less than 10% of its revenue coming from engine aircraft engine Business-level: Within industry Both face the same competitive pressures: how to compete against Pratt & Whitney (3rd largest) Corporate-level GE faces strategic issues that are less relevant to Roll-Royce, in terms of managing the portfolio of business ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 80. Levels of Diversification• 1. Low Levels – Single Business Strategy: firm generates 95% or more of its sales revenue from its core business area – Dominant Business Diversification Strategy: firm generates 70-95% of total sales revenue within a single business area• 2. Moderate to High Levels – Related Constrained Diversification Strategy • Less than 70% of revenue comes from the dominant business • Direct links between the firms businesses – Related Linked Diversification Strategy (Mixed related and unrelated) • Less than 70% of revenue comes from the dominant business • Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related constrained, above), concentrating on the transfer of knowledge and competencies among the businesses• 3. Very High Levels: Unrelated • Less than 70% of revenue comes from dominant business • No relationships between businesses©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 81. Levels and Types of Diversification©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 82. Reasons for Diversification• A number of reasons exist for diversification: – Value-creating – Value-neutral – Value-reducing©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 83. Value-Creating Diversification Strategies:Operational and Corporate Relatedness©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 84. Value-Creating Diversification (VCD): RelatedStrategies• Purpose: Gain market power relative to competitors• Related diversification wants to develop and exploit economies of scope between its businesses – Economies of scope: Cost savings firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses• VCD: Composed of ‘related’ diversification strategies including Operational and Corporate relatedness©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 85. Value-Creating Diversification (VCD): RelatedStrategies (Cont’d)• 1. Operational Relatedness: Sharing activities – Can gain economies of scope – Share primary or support activities (in value chain) – Related constrained share activities in order to create value – Not easy, often synergies not realized as planned• 2. Corporate Relatedness: Core competency transfer – Complex sets of resources and capabilities linking different businesses through managerial and technological knowledge, experience and expertise – Two sources of value creation • Expense incurred in first business and knowledge transfer reduces resource allocation for second business • Intangible resources difficult for competitors to understand and imitate – Use related-linked diversification strategy©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 86. Value-Creating Diversification (VCD): RelatedStrategies (Cont’d)• Market Power – Exists when a firm is able to sell its products above the existing competitive level, to reduce costs of primary and support activities below the competitive level, or both. – Multimarket (or Multipoint) Competition • Exists when 2 or more diversified firms simultaneously compete in the same product or geographic markets. – Related diversification strategy may include • Vertical Integration • Virtual integration©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 87. Value-Creating Diversification (VCD):Unrelated Strategies• Creates value through two types of financial economies – Cost savings realized through improved allocations of financial resources based on investments inside or outside firm • Efficient internal capital market allocation – Restructuring of acquired assets • Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 88. Value-Neutral Diversification:Incentives and Resources• Incentives to Diversify – Antitrust Regulation and Tax Laws – Low Performance – Uncertain Future Cash Flows – Synergy and Firm Risk Reduction – Resources and Diversification©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 89. Value-Reducing Diversification:Managerial Motives to Diversify• Top-level executives may diversify in order to diversity their own employment risk, as long as profitability does not suffer excessively – Diversification adds benefits to top-level managers but not shareholders – This strategy may be held in check by governance mechanisms or concerns for one’s reputation©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 90. Summary Model of the Relationship BetweenDiversification and Firm Performance©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 91. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 7: Merger and Acquisition Strategies ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 92. Chapter 7: Acquisition and RestructuringStrategies• Overview: Six content areas – Popularity of acquisition strategies for firms competing in the global economy – Why firms use acquisition strategies – Seven problems working against developing a competitive advantage using an acquisition strategy – Attributes of effective acquisitions – Restructuring strategy vs. common forms – Short & long-term outcomes of different restructuring strategies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 93. Introduction: Popularity of M&A Strategies• Popular strategy among U.S. firms for many years• Can be used because of uncertainty in the competitive landscape – Increase market power because of competitive threat – Spread risk due to uncertain environment – Shift core business into different markets • Due to industry or regularity changes• Intent: increase firm’s strategic competitiveness and value• The reality, however, is returns are close to zero©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 94. Introduction: Merger, Acquisition, and Takeover• Merger – Two firms agree to integrate their operations on a relatively co-equal basis• Acquisition – One firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.• Takeover – Special type of acquisition strategy wherein the target firm did not solicit the acquiring firms bid • Hostile Takeover: Unfriendly takeover that is unexpected and undesired by the target firm©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 95. Reasons for Acquisitions• Increased market power• Overcoming entry barriers• Cost of new product development and increased speed to market• Lower risk compared to developing new products• Increased diversification• Reshaping firm’s competitive advantage• Learning and developing new capabilities ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 96. Reasons for Acquisitions and Problems inAchieving Success©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 97. Problems in Achieving Acquisition Success• 1. Integration difficulties• 2. Inadequate evaluation of target• 3. Large or extraordinary debt• 4. Inability to achieve synergy – Synergy: Value created by units exceeds value of units working independently – Private synergy: Occurs when the combination and integration of acquiring and acquired firms assets yields capabilities and core competencies that could not be developed by combining and integrating the assets with any other company©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 98. Problems in Achieving Acquisition Success• 5. Too much diversification• 6. Managers overly focused on acquisitions• 7. Too large –Additional costs may exceed the benefits of the economies of scale and additional market power –Larger size may lead to more bureaucratic controls –Formalized controls often lead to relatively rigid and standardized managerial behavior –Firm may produce less innovation Biggest Failed Mergers©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 99. Effective Acquisitions• Complementary assets or resources• Friendly acquisitions facilitate integration of firms• Effective due-diligence process (assessment of target firm by acquirer, such as books, culture, etc.)• Financial slack• Low debt position – High debt can… • Increase the likelihood of bankruptcy • Lead to a downgrade in the firm’s credit rating • Preclude needed investment in activities that contribute to the firm’s long-term success• Innovation• Flexibility and adaptability©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 100. Restructuring• Restructuring: Firm changes set of businesses or financial structure – 1. Downsizing: Reduction in number of firms’ employees (and possibly number of operating units) that may or may not change the composition of businesses in the companys portfolio – 2. Downscoping: Eliminating businesses unrelated to firms’ core businesses through divesture, spin-off, or some other means – 3. Leveraged buyouts (LBOs) – • One party buys all of a firms assets in order to take the firm private (or no longer trade the firms shares publicly) • Private equity firm: Firm that facilitates or engages in taking a public firm private • Why LBOs? – Protection against a capricious financial market – Allows owners to focus on developing innovations/bring them to market – A form of firm rebirth to facilitate entrepreneurial efforts©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 101. Restructuring and Outcomes©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 102. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 8: International Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 103. Chapter 8: International Strategy (IS)• Overview: Eight content areas – Traditional vs. emerging motives – Four major benefits of International Strategies (IS) – Four factors as basis for international business strategy – Three international corporate-level strategies – Environmental trends affecting IS – Five alternative modes for entering international markets – Effects of international diversification on returns & innovation – Two major risks of international diversification©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 104. Introduction• Many firms choose direct investment in assets over indirect investment – Provides better protection for assets©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 105. Identifying International Opportunities:Incentives to Use an International Strategy (IS)• International Strategy (IS): firm sells its goods or services outside the domestic market• Reasons for an IS – International markets yield potential new opportunities – International diversification: innovation occurs in home- country market, especially in an advanced economy, and demand for product develops in other countries, so exports provided by domestic organization – Multinational strategy: Secure need resources – Other motives exist (i.e., pressure for global integration, borderless demand for globally branded products)©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 106. Identifying International Opportunities:Incentives to Use an International Strategy (IS)(Cont’d)• Four primary reasons – 1. Increased market size • Domestic market may lack the size to support efficient scale manufacturing facilities – 2. Return on Investment (ROI) • Large investment projects may require global markets to justify the capital outlays • Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 107. Identifying International Opportunities:Incentives to Use an International Strategy (IS)(Cont’d)• Four primary reasons (Cont’d) – 3. Economies of Scale and Learning • Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D, or distribution • Costs are spread over a larger sales base • Profit per unit is increased – 4. Location advantages: Low cost markets may… • … aid in developing competitive advantage • … achieve better access to critical resources: – i.e., raw materials, lower cost labor, key customers, energy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 108. International Strategies (IS)• Firms choose one or both of two basic type of IS: Business level and/or corporate level• International business-level strategy – Follows generic strategies of cost-leadership, differentiation, focused or broad• International corporate-level strategy – Home country usually most important source of competitive advantage • Resources and capabilities frequently allow firm to pursue markets in other countries • The determinants of national advantage includes 4 factors©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 109. Determinants of National Advantage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 110. International Corporate-Level Strategies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 111. International Strategies (IS) (Cont’d)• International corporate-level strategies (Cont’d)• 1. Multidomestic – Decentralized strategic & operating decisions by strategic business-unit (SBU) in each country allows units to tailor products to local markets – Focuses on variations of competition within each country – Customized products to meet local customers’ specific needs and preferences – Takes steps to isolate the firm from global competitive forces • Establish protected market positions • Compete in industry segments most affected by differences among local countries – Deals with uncertainty from differences across markets©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 112. International Strategies (IS) (Cont’d)• 2. Global – Offers standardized products across country markets, with the competitive strategy being dictated by the home office – Emphasizes economies of scale – Facilitated by improved global reporting standards (i.e., accounting and financial) – Strategic & operating decisions centralized at home office – Involves interdependent SBUs operating in each country – Home office attempts to achieve integration across SBUs, adding management complexity – Produces lower risk – Is less responsive to local market opportunities – Offers less effective learning processes (pressure to conform and standardize) ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 113. International Strategies (IS) (Cont’d)• 3. Transnational – Seeks to achieve both global efficiency and local responsiveness – these are competing goals! – Requires both global coordination and local flexibility with this strategy/structure combination • Flexible Coordination: Building a shared vision and individual commitment through an integrated network – Challenging, but becoming increasingly necessary to compete in international markets – Growing number of global competitors heightens need to keep costs down while greater information flow and desire for specialized products pressures firms to differentiate and even customize products – nonetheless, – Increasingly used as a strategy©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 114. Environmental Trends• Transnational strategy hard to implement• Two new trends• 1. Liability of foreignness – Increased after terrorists’ attacks and Iraq War – Global strategies not as prevalent today, still difficult to implement even with Internet-based strategies – Regional focus allows firms to marshal resources to compete effectively in regional markets• 2. Regionalization – Focus to a particular region of the world • Increases understanding of market • Achieve some economies • Trade agreements (i.e., EU, OAS, NAFTA) promote flow of trade across country boundaries with their respective regions©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 115. International Entry Modes• Follows the selection of an IS• Five main entry modes• 1. Exporting• 2. Licensing• 3. Strategic Alliances• 4. Acquisitions• 5. New Wholly-Owned Subsidiary©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 116. International Entry Modes (Cont’d)• 1. Exporting – Involves low expense to establish operations in host country – Often involves contractual agreements – Involves high transportation costs – May have some tariffs imposed – Offers low control over marketing and distribution©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 117. International Entry Modes (Cont’d)• 2. Licensing – Involves low cost to expand internationally – Allows licensee to absorb risks – Has low control over manufacturing and marketing – Offers lower potential returns (shared with licensee) – Involves risk of licensee imitating technology and product for own use – May have inflexible ownership arrangement©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 118. International Entry Modes (Cont’d)• 3. Strategic Alliances – Involve shared risks and resources – Facilitate development of core competencies – Involve fewer resources and costs required for entry – May involve possible incompatibility, conflict, or lack of trust with partner – Are difficult to manage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 119. International Entry Modes (Cont’d)• 4. Acquisitions – Allow for quick access to market – Involve possible integration difficulties – Are costly – Have complex negotiations and transaction requirements©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 120. International Entry Modes (Cont’d)• 5. New Wholly-Owned Subsidiary – Is costly – Involves complex processes – Allows for maximum control – Has the highest potential returns – Carries high risk – Greenfield venture: Establish entirely new subsidiary©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 121. International Entry Modes (Cont’d)• Dynamics of Mode of Entry: Use the best suited to the situation at hand; affected by several factors – Export, licensing and strategic alliance: good tactics for early market development – Strategic alliance: used in more uncertain situations – Wholly-owned subsidiary may be preferred if • IP rights in emerging economy not well protected • Number of firms in industry is growing fast • Need for global integration is high – Acquisitions or greenfield ventures: secure a stronger presence in international markets©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 122. Strategic Competitive Outcomes• International diversification: firm expands sales of its goods or services across the borders of global regions and countries into different geographic locations or markets• Implementation follows selection of international strategy and mode of entry• 1. International diversification and returns• 2. International diversification and innovation• 3. Complexity of managing multinational firms©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 123. Strategic Competitive Outcomes (Cont’d)• 1. International diversification and returns – As international diversification increases, firms’ returns initially decrease, but then increase quickly as the firm learns to manage international expansion• 2. International diversification and innovation – Exposure to new products and markets – Opportunity to integrate new knowledge into operations – Generation of resources to sustain innovation efforts• 3. Complexity of managing multinational firms – Geographic dispersion – Costs of coordination – Logistical costs – Trade barriers – Cultural diversity – Host government©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 124. Risk in the International Environment©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 125. Risks in International Environment (Cont’d)• 1. Political risks – Government instability – Conflict or war – Government regulations – Conflicting and diverse legal authorities – Potential nationalization of private assets – Government corruption – Changes in government policies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 126. Risks in International Environment (Cont’d)• 2. Economic risks – Differences and fluctuations in currency values – Investment losses due to political risks• Limits to international expansions: management problems – Geographic dispersion – Trade barriers – Logistical costs – Cultural diversity – Other differences by country – Relationship between organization and host country©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 127. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 9: Cooperative Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 128. Chapter 9: Cooperative Strategy• Overview: Seven content areas – Cooperative strategies and why firms use them – Three types of strategic alliances – Business-level cooperative strategies & their use – Corporate-level strategies in diversified firms – Cross-border strategic alliances’ importance as an international cooperative strategy – Competitive risks with cooperative strategies – Two approaches to manage cooperative strategies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 129. Introduction• Cooperative strategy – Firms work together to achieve a shared objective©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 130. Primary Type of Cooperative Strategy:Strategic Alliances• Introduction: Strategic Alliance – Cooperative strategy in which firms combine resources and capabilities to create a competitive advantage• Three types of strategic alliances – 1. Joint venture – 2. Equity strategic alliance – 3. Nonequity strategic alliances, which include • Licensing agreements • Distribution agreements • Supply contracts • Outsourcing commitments©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 131. Primary Type of Cooperative Strategy:Strategic Alliances (Cont’d)• 1. Joint venture – Two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage• 2. Equity strategic alliance – Two or more firms own a portion of the equity in the venture they have created• 3. Nonequity strategic alliance – Two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 132. Primary Type of Cooperative Strategy:Strategic Alliances (Cont’d)• Why firms might develop strategic alliances – Most firms lack the full set of resources and capabilities needed to reach their objectives – Cooperative behavior allows partners to create value that they couldnt develop by acting independently – Aligning stakeholder interests (both inside and outside of the organization) can reduce environmental uncertainty – Alliances can … • provide a new source of revenue • be a vehicle for firm growth • enhance the speed of responding to market opportunities, technological changes, and global conditions • allow firms to gain new knowledge and experiences to increase competitiveness©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 133. Primary Type of Cooperative Strategy:Strategic Alliances (Cont’d)• In summary, strategic alliances … – …can reduce competition and enhance a firm’s competitive capabilities and – …create avenue for firm to gain access to resources – …allows firm to take advantage of opportunities, build strategic flexibility and innovate©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 134. Reasons for Strategic Alliances by Market Type Market Reason Slow-Cycle • Gain access to restricted market • Establish a franchise in a new market • Maintain market stability (e.g., establishing standard) • Speed up development of new goods or services • Speed up new market entry Fast-Cycle • Maintain market leadership • Form an industry technology standard • Share risky R&D expenses • Overcome uncertainty • Gain market power (reduce industry overcapacity) • Gain access to complementary resources • Establish better economies of scales Standard-Cycle • Overcome trade barriers • Meet competitive challenges from other competitors • Pool resources for very large capital project • Learn new business techniques©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 135. Business-Level Cooperative Strategy• Business level cooperative strategies are used to grow and improve firm performance in individual product markets.• Achieved through Complementary Strategic Alliances (CSA)©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 136. Business-Level Cooperative Strategy (Cont’d)• Complementary Strategic Alliances (CSA) – Firms share some of their resources and capabilities in complementary ways to develop competitive advantages – Partners may have different • Learning rates • Capabilities to leverage complementary resources • Marketplace reputations • types of actions they can legitimately take – Some firms are more effective at managing alliances and deriving benefits from them – Two forms include vertical and horizontal©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 137. Business-Level Cooperative Strategy (Cont’d) –2 Types of CSA: •1. Vertical CSA – partnering firms share resources & capabilities from different stages of the value chain to create a competitive advantage. •2. Horizontal CSA – partnering firms share resources & capabilities from the same stage of the value chain to create a competitive advantage – commonly used for long-term product development and distribution opportunities©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 138. Business-Level Cooperative Strategy (Cont’d)• Competition response strategy – Competitors • initiate competitive actions to attack rivals • launch competitive responses to their competitor’s actions – Strategic alliances (SA) • can be used at the business level to respond to competitor’s attacks • primarily formed to take strategic vs. tactical actions • can be difficult to reverse • expensive to operate©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 139. Business-Level Cooperative Strategy (Cont’d)• Uncertainty-reducing strategy – For example, entering new product markets, emerging economies and establishing a technology standard are unknown areas so by partnering with a firm in the respective industry, a firm’s uncertainty (risk) is reduced – Uncertainty reduced by combining knowledge & capabilities©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 140. Business-Level Cooperative Strategy (Cont’d)• Competition-reducing strategy: Two Collusive Strategies – Collusive strategies (CS) differ from strategic alliances in that CS are usually illegal –1. Explicit collusion – Direct negotiation among firms to establish output levels and pricing agreements that reduce industry competition –2. Tacit collusion – Indirect coordination of production and pricing decisions by several firms, which impacts the degree of competition faced in the industry – Mutual forbearance: firms do not take competitive actions against rivals they meet in multiple markets©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 141. Business-Level Cooperative Strategy (Cont’d)• Business-level cooperative strategy – assessment – Used to develop competitive advantages (CA) for contributing to successful positions & performance in individual product markets – Developing a CA using a strategic alliance, the integrated resources and capabilities must be valuable, rare, imperfectly imitable and nonsubstitutable – Vertical alliances have greatest probability of creating CA; horizontal are sometimes difficult to maintain since they are usually between competitors – SA’s designed to respond to competition and reduce uncertainty are more temporary than complementary (horizontal and vertical) strategic alliances – Competition-reducing has lowest probability of creating a sustainable CA©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 142. Corporate-Level Cooperative Strategies• Corporate-level cooperative strategies (CLCS) help firm to diversify itself in terms of products offered, markets served or both• Common CLCS forms – 1. Diversifying strategic alliance • Firms share some of their resources & capabilities to diversify into new product or market areas – 2. Synergistic strategic alliance • Firms share some of their resources & capabilities to create economies of scope – 3. Franchising • Firm uses a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners – Franchise: contractual agreement between two legally independent companies whereby the franchisor grants the right to the franchisee to sell the franchisors product or do business under its trademarks in a given location for a specified period of time ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 143. Corporate-Level Cooperative Strategies (Cont’d)• Assessment of corporate-level cooperative strategies – Costs incurred regardless of type selected • Important to monitor expenditures! – In comparison w/ business-level strategies • Usually broader in scope • More complex and therefore more costly – Can develop useful knowledge … and, in order to gain maximum value should organize and verify proper distribution with those involved in forming and using alliances©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 144. International Cooperative Strategy• Cross-Border Strategic Alliance – International cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage• Why cross-border strategic alliances? – Multinational corporations outperform firms that operate only domestically – Due to limited domestic growth opportunities, firms look outside their national borders to expand business – Some foreign government policies require investing firms to partner with a local firm to enter their markets©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 145. Competitive Risks in Cooperative Strategies• Risks – Partners may choose to act opportunistically – Partner competencies may be misrepresented – Partner may fail to make available the complementary resources and capabilities that were committed – One partner may make investments specific to the alliance while the other partner may not©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 146. Managing Cooperative Strategy• Two primary approaches – 1. Cost minimization – 2. Opportunity maximization©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 147. Managing Cooperative Strategy (Cont’d)• 1. Cost minimization – Relationship with partner is formalized with contracts – Contracts specify how cooperative strategy is to be monitored and how partner behavior is to be controlled – Goal is to minimize costs and prevent opportunistic behaviors by partners – Costs of monitoring cooperative strategy are greater – Formalities tend to stifle partner efforts to gain maximum value from their participation©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 148. Managing Cooperative Strategy (Cont’d)• 2. Opportunity Maximization – Focus: maximizing partnerships value-creation opportunities – Informal relationships and fewer constraints allow partners to • take advantage of unexpected opportunities • learn from each other • explore additional marketplace possibilities – Partners need a high level of trust that each party will act in the partnerships best interest, which is more difficult in international situations©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 149. Strategic Management:Concepts and Cases 9e Part III: Strategic Actions: Strategy ImplementationChapter 10: Corporate Governance ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 150. Chapter 10: Corporate Governance (CG)• Overview: Seven content areas – Define CG and its monitor/control of managers’ decisions – Separation between ownership and management control – Agency relationship and managerial opportunism – Three internal governance mechanisms used to monitor/control management decisions – External governance mechanism: The market for corporate control – International corporate governance – How CG fosters ethical strategic decisions ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 151. Is CEO Pay Outrageous, Irresponsible, orGreedy?• In 2008: – 10 highest paid CEOs earned $472.2 million and those with their companies since 2007 saw 26% increase – Overall corporate performance was bad – Median CEO salary & bonus down 8.5 percent – CEO direct compensation fell 3.4 percent – Median value of perks up about 7 percent – International survey indicates that most people think business executives are overpaid Today Show (01-09) CEO Executive Excesses (CEO Greed) ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 152. Introduction• Corporate Governance (CG) – Set of mechanisms used to manage the relationships (and conflicting interests) among stakeholders, and to determine and control the strategic direction and performance of organizations (aligning strategic decisions with company values)• Effective CG is of interest to nations as it reflects societal standards – Firms’ shareholders are treated as key stakeholders as they are the company’s legal owners – Effective governance can lead to competitive advantage ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 153. Separation of Ownership andManagerial Control• Introduction – Historically, firms managed by founder-owners & descendants – Separation of ownership and managerial control allow shareholders to purchase stock, entitling them to income (residual returns) – implies ‘risk’ for this group who manage their investment risk – Shareholder value reflected in price of stock ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 154. Separation of Ownership andManagerial Control (Cont’d)• Introduction – Small firms’ managers are high percentage owners, which implies less separation between ownership and management control – Family-owned businesses face two critical issues: • As they grow, they may not have access to all needed skills to manage the growing firm and maximize its returns, so may need outsiders to improve management • They may need to seek outside capital (whereby they give up some ownership control) ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 155. Separation of Ownership andManagerial Control (Cont’d)• Agency relationships – Relationships between business owners (principals) and decision-making specialists (agents) hired to manage principals operations and maximize returns on investment. – Managerial Opportunism: Seeking self-interest with guile (i.e., cunning or deceit) • Opportunism: an attitude and set of behaviors – Principals establish governance and control mechanisms to prevent agents from acting opportunistically ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 156. An Agency Relationship©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 157. Separation of Ownership andManagerial Control (Cont’d)• Agency problems: Product diversification – Can result in two manager benefits shareholders “don’t enjoy” • 1. Increase in firm size • 2. Firm portfolio diversification which can reduce top executives’ employment risk (i.e., job loss, loss of compensation and loss of managerial reputation) – Diversification reduces these risks because a firm and its managers are less vulnerable to the reduction in demand associated with a single or limited number of product lines or businesses ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 158. Separation of Ownership andManagerial Control (Cont’d)• Agency problems: Firm’s free cash flow – Resources remaining after the firm has invested in all projects that have positive net present values within its current businesses – Available cash flows • Managerial inclination to overdiversify can be acted upon • Shareholders may prefer distribution as dividends, so they can control how the cash is invested ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 159. Separation of Ownership andManagerial Control (Cont’d)• Agency costs and governance mechanisms – Sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals, because governance mechanisms cannot guarantee total compliance by the agent • Costs associated with agency relationships, and effective governance mechanisms should be employed to improve managerial decision making and strategic effectiveness • Sarbanes-Oxley Act ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 160. Ownership Concentration• Introduction: Key concepts – Ownership Concentration: Governance mechanism defined by both the number of large-block shareholders and the total percentage of shares they own – Large Block Shareholders: Shareholders owning a concentration of at least 5 percent of a corporation’s issued shares – Institutional Owners: Financial institutions such as stock mutual funds and pension funds that control large-block shareholder positions • The growing influence of institutional owners – Provides size to influence strategy and the incentive to discipline ineffective managers – Increased shareholder activism supported by SEC rulings in support of shareholder involvement and control of managerial decisions ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 161. The Board of Directors (BOD)• Introduction – Group of shareholder-elected individuals (usually called ‘directors’) whose primary responsibility is to act in the owners’ interests by formally monitoring and controlling the corporation’s top-level executives ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 162. The Board of Directors (BOD) (Cont’d)• As stewards of an organizations resources, an effective and well-structured board of directors can influence the performance of a firm – Oversee managers to ensure the company is operated in ways to maximize shareholder wealth – Direct the affairs of the organization – Punish and reward managers – Protect shareholders’ rights and interests – Protect owners from managerial opportunism• Three director classifications: Insider, related outsider and outsider ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 163. The Board of Directors (BOD) (Cont’d)• Historically, BOD dominated by inside managers – Managers suspected of using their power to select and compensate directors – NYSE implemented an audit committee rule requiring outside directors to head audit committee (a response to SEC’s proposal requiring audit committees be made up of outside directors) – Sarbanes-Oxley Act passed leading to BOD changes – Corporate governance becoming more intense through BOD mechanism – BOD scandals led to trend of separating roles of CEO and Board Chairperson ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 164. The Board of Directors (BOD) (Cont’d)• Outside directors – Improve weak managerial monitoring and control that corresponds to inside directors – Tend to emphasize financial controls, to the detriment of risk- related decisions by managers, as they do not have access to daily operations and a high level of information about managers and strategy – Large number of outsiders can create problems – Limited contact with the firm’s day-to-day operations and incomplete information about managers …. • ….results in ineffective assessments of managerial decisions and initiatives • …. Leads to an emphasis on financial, as opposed to strategic, controls to gather performance information to evaluate performance of managers & business units, which could reduce R&D investments, increase diversification, and pursue higher compensation to offset their employment risk ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 165. The Board of Directors (BOD) (Cont’d)• Enhancing BOD effectiveness – Increased diversity in board members’ backgrounds – Establishment and consistent use of formal processes to evaluate the board’s performance – Creation of a “lead director” role that has strong agenda-setting and oversight powers – Modified compensation of directors – Requires that directors own significant stakes in the company in order to keep focused on shareholder interests ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 166. Executive Compensation (EC)• Executive compensation (EC): – Defined: Governance mechanism that seeks to align the interests of top managers and owners through salaries, bonuses, and long-term incentive compensation, such as stock awards and stock options – Thought to be excessive and out of line with performance – Alignment of pay and performance: complicated board responsibility – The effectiveness of pay plans as a governance mechanism is suspect ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 167. Executive Compensation (EC) (Contd’)• The effectiveness of executive compensation – Complicated, especially long-term incentive comp • The quality of complex and nonroutine strategic decisions that top-level managers make is difficult to evaluate • Decisions affect financial outcomes over an extended period, making it difficult to assess the effect of current decisions on corporation performance • External factors affect a firm’s performance in addition to top- level management decisions and behavior ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 168. Executive Compensation (EC) (Contd’)• The effectiveness of executive compensation (Cont’d) – Performance-based compensation used to motivate decisions that best serve shareholder interest are imperfect in their ability to monitor and control managers – Incentive-based compensation plans intended to increase firm value, in line with shareholder expectations, subject to managerial manipulation to maximize managerial interests – Many plans seemingly designed to maximize manager wealth rather than guarantee a high stock price that aligns the interests of managers and shareholders – Stock options are highly popular • Repricing: strike price value of options is commonly lowered from its original position • Backdating: options grant is commonly dated earlier than actually drawn up to ensure an attractive exercise price ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 169. Market for Corporate Control• Market for Corporate Control – Definition: external governance mechanism consisting of a set of potential owners seeking to acquire undervalued firms and earn above-average returns on their investments • Becomes active when a firm’s internal controls fail – Need (for external mechanisms) exists to: • address weak internal corporate governance • correct suboptimal performance relative to competitors, • discipline ineffective or opportunistic managers. – External mechanisms are less precise than internal governance mechanisms• Managerial defense tactics – Hostile takeovers are the major activity • Not always due to poor performance• Consequent to tactics are the defenses ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 170. Governance Mechanisms andEthical Behavior• It is important to serve the interest of the firms’ multiple stakeholder groups• In the U.S., shareholders (in the capital market stakeholder group) are the most important stakeholder group served by the board of directors• Governance mechanisms focus on control of managerial decisions to protect shareholders’ interests ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 171. Governance Mechanisms andEthical Behavior (Cont’d)• Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups• Although the idea is subject to debate, some believe that ethically responsible companies design and use governance mechanisms that serve all stakeholders’ interests• Importance of maintaining ethical behavior through governance mechanisms – just remember Enron and Arthur Andersen! ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 172. Strategic Management:Concepts and Cases 9e Part III: Strategic Actions: Strategy ImplementationChapter 11: Organizational Structure and Controls ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 173. Chapter 11: Organizational Structure (OS) andControls• Overview: Six content areas – Define OS and controls and differences between strategic and financial controls – Describe relationship between strategy & structure – Describe the functional structures used to implement business-level strategies – Three versions of multi-divisional (M-form) structure for different diversification strategies – OS for implementation of three international strategies – Strategic networks and their implementation ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 174. Introduction• All firms use at least one business-level strategy• Once selected, strategies are NOT implemented in a vacuum!• Organizational structure and controls provide framework within which strategies are used ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 175. Organizational Structure (OS) & Controls (OC)• Organizational Structure (OS) – Specifies firm’s formal reporting relationships, procedures, controls, authority & decision-making processes (i.e., work to be done and how to do it!) – Effective use of firm’s strategies facilitated when structure is properly aligned • Structural stability: Capacity firm requires to consistently and predictably manage its daily work routines • Structural flexibility: Opportunity to explore competitive advantages firm will need to be successful in the future – Pioneer Alfred Chandler found organizations change their structures when inefficiencies force them to do so ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 176. Organizational Structure & Controls (Cont’d)• Organizational Controls (OC) – Guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable – Two types include strategic and financial ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 177. Organizational Structure & Controls (Cont’d)• Organizational Controls (OC) – 1. Strategic controls: largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company’s competitive advantages • Concerned with what firm might do vs. what it can do • Used to evaluate degree to which firm focuses on the requirement to implement strategies (i.e., SUB: primary and support activities; corporate level: knowledge, markets & technologies across businesses) • Focus on the content of strategic actions • Encourage decisions that incorporate moderate and acceptable levels of risk ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 178. Organizational Structure & Controls (Cont’d)• Organizational Controls (OC) (Cont’d) – 2. Financial controls • Objective criteria used to measure firm’s performance against previously established quantitative standards (used for unrelated diversification) • Focus on short-term financial outcomes • Produce risk-averse managerial decisions ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 179. Strategy vs. Structure: Relationships• Reciprocal relationship• Implies change to one causes change in the other• “Research shows strategy has a much more important influence on structure than the reverse.” ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 180. Strategy vs. Structure: Evolutionary Patterns• Chandler found firms tend to grow in a predictable pattern, including the areas of volume, geography, integration (horizontal & vertical) & product/ business diversification – Growth pattern implies structural changes!• Several structure forms are used to implement strategies, including: – 1. Simple – 2. Functional – 3. Multidivisional ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 181. Strategy and Structure Growth Pattern©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 182. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Three main structures – 1. Simple • Owner-manager makes all major decisions and monitors all activities, staff acts as extension of managers supervisory authority • Few rules, limited task specialization, unsophisticated technology system • As firm grows more complex, need to add layers and controls ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 183. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Three main structures (Cont’d) – 2. Functional • CEO and a limited corporate staff make all decisions, with functional line managers in dominant organizational areas • Allows functional specialization resulting in active knowledge sharing in each functional area • Can negatively affect communication and coordination among those representing different organizational functions • When changing from a simple to functional structure need to focus on value-destroying bureaucratic procedures ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 184. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Three main structures (Cont’d) – 3. Multidivisional (M-form) structure • Each division represents a separate business or profit center in which corporate officers delegate responsibilities for day-to-day operations and business-unit strategies to division managers • Enables corporate officers to more accurately monitor the performance of each business -->simplifies the problem of control • Facilitates comparisons between divisions --> improves resource allocation process • Stimulates managers of poorly performing divisions to look for ways of improving performance ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 185. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• No one structure (simple, functional or multidivisional) is superior to the others• Structural characteristics drive different forms of organizational structures – 1. Specialization • Type and number of jobs required to do work – 2. Centralization • Degree to which decision-making authority is retained at higher managerial levels – 3. Formalization • Degree to which formal rules and procedures govern work ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 186. Functional Structure for Implementing a CostLeadership Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 187. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between business-level strategies and functional structure to implement them: – 1. Cost leadership and the functional structure • Simple reporting relationships • Few decision-making and authority layers • Centralized corporate staff • Strong operational focus on process improvements • Low-cost culture • Centralized staff decision-making authority • Jobs specialization • Highly formalized rules and procedures ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 188. Functional Structure for Implementing aDifferentiation Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 189. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between business-level strategies and functional structure to implement them : – 2. Differentiation and functional structure • Complex and flexible reporting relationships • Cross-functional product development teams • Strong focus on marketing and product R&D • Development-oriented culture • Decentralized decision making • Broad job descriptions • Informal rules and procedures ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 190. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between business-level strategies and functional structure to implement them : – 3. Integrated cost leadership/differentiation strategy • These firms may sell products that create value because of relatively low price and reasonable sources of differentiation • Difficult to implement, but frequently used in the global economy • Challenge due to primary/support activities • Need to successfully combine specialization, formalization and centralization ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 191. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between corporate-level strategies and multidivisional structure – 3 forms ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 192. Cooperative Form of the MultidivisionalStructure for Implementing a RelatedConstrained Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 193. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between corporate-level strategies & multidivisional structure: Cooperative form/related constrained strategy – Cooperative form: organizational structure using horizontal integration to bring about interdivisional cooperation – Divisions formed around products, markets or both – All of the divisions share one or more corporate strengths – Interdivisional sharing depends on cooperation – Links resulting from effective integration mechanisms support sharing of both tangible and intangible resources – Centralization is one integrating mechanism that can be used to link activities among divisions, allowing firms to exploit common strengths and share competencies ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 194. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between corporate-level strategies & multidivisional structure: Cooperative form/related constrained strategy (cont’d) – Success influenced by how well information is processed among divisions – Success can be influenced by managerial commitment levels and the response to some lost managerial autonomy – Matrix organization may evolve • organizational structure in which a dual structure combines both functional specialization and business product or project specialization ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 195. SBU Form of the Multidivisional Structure forImplementing a Related Linked Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 196. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between corporate-level strategies & multidivisional structure: SBU form/related linked strategy – Related linked: Firms that share fewer resources and assets among their businesses, concentrating on the transfer of knowledge and competencies among the businesses – Strategic Business-Unit (SBU) Form: multidivisional organization structure with three levels to support the implementation diversification strategy • 1. Corporate headquarters • 2. Strategic Business Units (SBUs) • 3. SBU division ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 197. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between corporate-level strategies & multidivisional structure: SBU form/related linked strategy – SBU Form (Cont’d) • Divisions within each SBU are related in terms of shared products and/or markets • Divisions of one SBU have little in common with divisions of other SBUs • Divisions within each SBU share product or market competencies to develop economies of scope • Integrations used in cooperative form are equally effective for the SBU form • Each SBU is a profit center • Financial controls are more vital for evaluating performance ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 198. Competitive Form of the MultidivisionalStructure for Implementing an UnrelatedStrategy©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 199. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between corporate-level strategies & multidivisional structure: Competitive form/unrelated diversification – Competitive form defined: organizational structure in which the firms divisions are completely independent – Divisions do not share common corporate strengths – Integration devices not developed to coordinate activities across divisions – Efficient capital markets in unrelated strategies require organizational arrangements that emphasize divisional competition rather than cooperation – Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 200. Strategy vs. Structure: Evolutionary Patterns(Cont’d)• Matches between corporate-level strategies and multidivisional structure: Competitive form/unrelated diversification (Cont’d) – Headquarters maintains a distant relationship to avoid intervention in divisional affairs – Strategic controls are used to monitor performance relative to targeted returns – Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 201. Worldwide Geographic Area Structure forImplementing a Multidomestic Strategy©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 202. International Strategy and WorldwideStructure (Cont’d)• Three Primary International Strategies:• 1. Worldwide geographic area structure to implement the Multidomestic Strategy – Multidomestic Strategy: international strategy in which strategic and operating decisions are decentralized to the strategic business-unit (SBU) in each country to allow the units to tailor products to local markets – Worldwide Geographic Area Structure: organizational structure emphasizing national interests and facilitates efforts to satisfy local or cultural differences (used to implement the multidomestic strategy) – Focuses on variations of competition within each country ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 203. International Strategy and WorldwideStructure (Cont’d)• Three Primary International Strategies:• 1. Worldwide geographic area structure to implement the Multidomestic Strategy (Cont’d) – Customizes products to meet specific needs and preferences of local customers – Decentralizes the firms strategic and operating decisions to business units in each country – Takes steps to isolate the firm from global competitive forces • Establish protected market positions • Compete in industry segments most affected by differences among local countries – Deals with uncertainty due to differences across markets ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 204. Worldwide Product Divisional Structure forImplementing a Global Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 205. International Strategy and WorldwideStructure (Cont’d)• Three Primary International Strategies:• 2. Worldwide product divisional structure to implement Global Strategy – Global Strategy: International strategy whereby firm offers standardized products across country markets, with the competitive strategy being dictated by the home office – Worldwide Product Divisional Structure: Organizational structure with centralized decision-making authority in the WW division headquarters to coordinate and integrate decisions and actions among divisional business units (used to implement the global strategy) – Facilitated by improved global accounting and financial reporting standards ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 206. International Strategy and WorldwideStructure (Cont’d)• Three Primary International Strategies:• 2. Worldwide product divisional structure to implement Global Strategy (Cont’d) – Emphasizes economies of scale – Centralizes the firms strategic and operating decisions at the home office – Involves SBUs operating in each country that are interdependent – Home office attempts to achieve integration across SBUs, adding management complexity – Produces lower risk – Is less responsive to local market opportunities – Offers less effective learning processes due to the pressure to conform and standardize ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 207. Hybrid Form of the Combination Structure forImplementing a Transnational Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 208. International Strategy and WorldwideStructure (Cont’d)• Three Primary International Strategies:• 3. Combination structure to implement the Transnational Strategy – Transnational Strategy: usually implemented through global matrix structure and hybrid global design – Flexible Coordination: Building a shared vision and individual commitment through an integrated network – Combination Structure: Organizational structure in which characteristics and mechanisms are drawn from both the worldwide geographic area structure and the worldwide product divisional structure (used to implement transnational strategy) ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 209. International Strategy and WorldwideStructure (Cont’d)• Three Primary International Strategies:• 3. Combination structure to implement the Transnational Strategy (Cont’d) – Assets and operations may be centralized/decentralized – Functions may be integrated/nonintegrated – Relationships may be formal/informal – Coordination mechanisms may leverage efficiency/flexibility – Mandates to subsidiaries may be global/specialized- contribution/ localized-implementation – There are competing objectives when a worldwide combination structure is used to implement a transnational strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 210. A Strategic Network©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 211. Strategic Network (Cont’d)• Strategic Center Firm’s primary tasks – 1. Strategic outsourcing – 2. Competencies – 3. Technology – 4. Race to learn ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 212. Implementing Business-levelCooperative Strategies• Business-level complementary alliances – Vertical: partnering firms share their resources and capabilities from different stages of the value chain to create a competitive advantage. – Horizontal: partnering firms share resources and capabilities from the same stage of the value chain to create a competitive advantage - commonly used for long-term product development and distribution opportunities ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 213. Implementing Corporate-levelCooperative Strategies• Used to facilitate product & market diversification – Franchising: contractual relationship to describe and control the sharing of its resources and capabilities with partners • Allows firms to use its competencies to extend or diversity product or market reach, without completing a merger or acquisition – Knowledge embedded in corporate-level cooperative strategies facilitates synergy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 214. A Distributed Strategic Network ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 215. Implementing InternationalCooperative Strategies• Strategic networks formed to implement cooperative strategies resulting in firm competing in several different countries – Distributed strategic networks: Organizational structure used to manage international cooperative strategies • Several regional strategic center firms are included in the distributed network to manage partner firms’ multiple cooperative arrangements ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 216. Strategic Management:Concepts and Cases 9e Part III: Strategic Actions: Strategy Implementation Chapter 12: Strategic Leadership ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 217. Chapter 12: Strategic Leadership (SL)• Overview: Eight content areas – Strategic leadership and top-level managers’ importance – Top management teams and effects on firm performance – Managerial succession process using internal/external labor markets – Value of SL in determining firm’s strategic direction – Importance of strategic leaders in managing firm’s resources – Organizational culture and actions to sustain it – Ethical practices: establishment and emphasis – Importance and use of organizational controls ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 218. Introduction• Regardless on time in position leaders can make a major difference in how a firm performs• Effective strategic leadership is the foundation for successfully using the strategic management process• Strategic leaders facilitate the development of appropriate strategic actions and determine how to implement them – these actions are the path to strategic competitiveness and above-average returns ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 219. Strategic Leadership (SL) and Style• Strategic leadership: the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary• Multifunctional task – Managing through others – Managing an entire enterprise rather than a functional subunit – Coping with change which is increasing in the global economy – Most critical skill: attracting and managing human (includes intellectual) capital ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 220. Strategic Leadership and the StrategicManagement Process ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 221. The Role of Top-Level Managers• Managers use their discretion when making strategic decisions• Primary factors that determines amount of manager’s decision-making discretion – External environmental sources – Organization’s characteristics – Manager’s characteristics ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 222. Factors Affecting Managerial Discretion ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 223. The Role of Top-Level Managers• Top Management Teams – Helps avoid potential problem of CEO making decisions alone: that of managerial hubris • Hubris: excessive pride leading to a feeling of invincibility • Hubris can magnify the effects of decision-making biases – Composed of key individuals who are responsible for selecting and implementing firm’s strategies; usually includes officers of the corporation (VP and above) and BOD©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 224. The Role of Top-Level Managers (Cont’d)• Top Management Teams: Firm performance and strategic change – A heterogeneous team: consists of individuals with varied functional backgrounds, experiences & education – Team members come with a variety of strengths, capabilities & knowledge and provide effective strategic leadership when faced with complex environmental forces and multiple stakeholder relationships to manage • Introduces a variety of perspectives • Has a greater propensity for strong competitive action • Tends to "think outside of the box," leading to more creative decision making, innovation, and strategic change • Offers various areas of expertise to identify environmental opportunities, threats, or the need for change • Promotes debate ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 225. The Role of Top-Level Managers (Cont’d)• Top Management Teams: CEO and top management team power • Top management team characteristics give the CEO’s team the power relative to the board of directors (BOD) and can influence the amount of strategic leadership the board provides • CEO Duality – CEO serves as CEO and BOD – More common in the United States – Occurs most often in the largest firms – Increased shareholder activism recently brought the practice under scrutiny – Criticized for causing poor performance & slow response to change©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 226. Managerial Succession• Defined: Preselect and shape skills of tomorrow’s leaders – Internal Managerial Labor Market – opportunities for managerial positions to be filled from within the firm – External Managerial Labor Market – opportunities for managerial positions to be filled by candidates from outside of the firm• This decision impacts company performance and the ability to embrace change in todays competitive landscape• Succession, top management team composition and strategy are intimately related ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 227. Effects of CEO Succession and TopManagement Team Composition on Strategy©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 228. Managerial Succession• Benefits of Internal Managerial Labor Market – Continuity – Continued commitment – Familiarity – Reduced turnover – Retention of “private knowledge” – Favored when the firm is performing well ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 229. Managerial Succession• Benefits of External Managerial Labor Market – Long tenure with the same firm is thought to reduce innovation – Outsiders bring diverse knowledge bases and social networks, which offer the potential for synergy and new competitive advantage ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 230. Key Strategic Leadership Actions• Certain actions characterize effective strategic leadership – These actions interact with each other – The most effective strategic leaders create options as the foundation for making effective decisions• Determining Strategic Direction – Definition: A firms image and character over time, framed within the context of the conditions in which the company operates ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 231. Exercise of Effective Strategic Leadership ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 232. Key Strategic Leadership Actions (Cont’d)• Effectively managing firm’s resource portfolio – Resources defined as financial, human, social and organizational capital – Exploiting and maintaining core competencies • Related to firm’s functional skills (i.e., manufacturing, finance, marketing and R&D) – Developing Human (HC) and Social Capital (SC) • HC: Knowledge and skills of a firm’s entire workforce • SC: Relationships inside and outside the firm that help it accomplish tasks and create value for customers and shareholders ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 233. Key Strategic Leadership Actions (Cont’d)• Sustaining an effective organizational culture – Organizational culture: complex set of ideologies, symbols, and core values shared throughout the firm – Influences the way business is conducted – Helps to regulate and control employees’ behavior ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 234. Key Strategic Leadership Actions (Cont’d)• Sustaining an effective organizational culture (Cont’d) – Entrepreneurial mind-set • Source of growth and innovation • May be encouraged and promoted by strategic leaders • 5 dimensions of an entrepreneurial mindset – 1. Autonomy (Free of firm constraints) – 2. Innovativeness (Firms’ tendency to support new ideas) – 3. Risk Taking – 4. Proactiveness (Being a market leader vs. follower) – 5. Competitive aggressiveness (Firms’ propensity to take actions in order to outperform rivals) ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 235. Key Strategic Leadership Actions (Cont’d)• Sustaining an effective organizational culture (Cont’d) – Changing the organizational culture and restructuring • More difficult to change culture than maintain it • Sometimes change must occur – Requires effective communication and problem solving – Selecting the right people – Engaging in effective performance appraisals – Measuring individual performance toward goals that fit with new values – Appropriate reward systems ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 236. Key Strategic Leadership Actions (Cont’d)• Emphasizing ethical practices: Actions such as… – Establish and communicate ethics-related goals – Revise, update and disseminate code of conduct – Develop and implement methods & procedures to use in achieving firm’s ethical standards – Create/use specific reward systems that recognize acts of courage – Create a working environment where all are treated with dignity ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 237. Key Strategic Leadership Actions (Cont’d)• Establishing balanced organizational controls – Controls: Formal, information-based procedures used by managers to maintain or alter patterns in organizational activities • Financial Controls – Focus on short-term financial outcomes – Produce risk-averse managerial decisions • Strategic Controls – Focus on the content of strategic actions – Encourage decisions that incorporate moderate and acceptable levels of risk – The Balanced Scorecard • Framework that allows strategic leaders to verify that they have established both financial and strategic controls to assess firm performance ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 238. Strategic Controls and Financial Controls in aBalanced Scorecard Framework ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 239. Strategic Management: Concepts and Cases 9e Part III: Strategic Actions: Strategy ImplementationChapter 13: Strategic Entrepreneurship ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 240. Chapter 13: Strategic Entrepreneurship• Overview: Nine content areas – Strategic and corporate entrepreneurship – Entrepreneurship, opportunities and importance – Invention, innovation and imitation – Entrepreneurs and their mind-set – International entrepreneurship and its importance – Internal development of innovations – Using cooperative strategies to innovate – Using acquisitions as a means of innovation – Creating value through strategic entrepreneurship ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 241. Introduction• Organizational culture: Complex set of ideologies, symbols and core values shared throughout the firm and that influence how the firm conducts business – Social energy that drives - or fails to drive - the organization• Strategic entrepreneurship – Entrepreneurial actions (exploiting found opportunities in the external environment) through a strategic perspective (innovation efforts)• Corporate Entrepreneurship – Use or application of entrepreneurship within an established firm ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 242. Entrepreneurship andEntrepreneurial Opportunities• Entrepreneurship – Process by which individuals or groups identify and pursue entrepreneurial opportunities without the immediate constraint of the resources they currently control – Entrepreneurial opportunities: Opportunities others do not see or for which they do not recognize the commercial potential – As a process, this results in the ‘creative destruction’ of existing products (good or services) or methods of producing them, and replaces them with new products/production methods ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 243. Entrepreneurship andEntrepreneurial Opportunities (Cont’d)• Entrepreneurial Opportunities – Conditions in which new products or services can satisfy a need in the market • Exist due to competitive market imperfections and unevenly distributed information – Studied at the level of the individual firm – May be the economic engine driving many nations’ economies in the global competitive landscape ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 244. Innovation• Innovation – It is the “specific function of entrepreneurship” (Drucker) • And “means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth” (Drucker) – Source of competitive success, especially in turbulent and highly competitive environments ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 245. Innovation (Cont’d)• Innovation activities (Schumpeter): – 1. Invention • Act of creating or developing a new product or process • Brings something new into being—technical criteria determine its success – 2. Innovation • Process of creating a commercial product from an invention • Brings something new into use—commercial criteria determine its success – 3. Imitation • Adoption of an innovation by similar firms • Results of Imitation – Product or process standardization – Products made with fewer features – Products offered at lower prices ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 246. Entrepreneurs• Entrepreneurs – Individuals, acting independently or as part of an organization, who see an entrepreneurial opportunity and then take risks to develop an innovation to exploit it – Characteristics include highly motivated, wiling to take responsibility for their projects and self-confidence; be passionate and emotional about the value and importance of their innovation-based ideas• Entrepreneurial Mind-set – Values uncertainty in the marketplace and seeks to continuously identify opportunities with the potential to lead to important innovations ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 247. International Entrepreneurship• Firms creatively discover and exploit opportunities outside of their domestic markets in order to develop a competitive advantage• Entrepreneurship has become a global phenomenon as general internationalization leads to improved firm performance. Risks include: – Unstable foreign currencies – Inefficient markets – Insufficient infrastructures to support businesses – Limitations on market size and growth ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 248. International Entrepreneurship (Cont’d)• At the top of public policy agendas in many nations throughout the world due to the benefits it offers a nation• Rates of entrepreneurship across countries• Impact of national culture – Entrepreneurship declines as collectivism increases – Exceptionally high levels of individualism can be dysfunctional for entrepreneurship – Balance between individual initiative and cooperative spirit versus group ownership of innovation is required• Level of investment outside of the home country made by new ventures• Top executives with international experience ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 249. Internal Innovation• Firms take deliberate efforts to develop inventions and innovations within the organization, selecting from several types of innovation and the specific processes through which each type is produced• Most innovation due to research & development (R&D) – Investments are uncertain – Often not achieved in the short term – Firms innovate in three ways • 1. Incremental and radical innovation • 2. Autonomous strategic behavior • 3. Induced strategic behavior ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 250. Internal Innovation (Cont’d)• Firm innovation – 1. Incremental and radical innovation • Incremental: Induced strategic behavior, builds on existing knowledge bases and provides small improvements in current product lines • Radical: Autonomous strategic behavior • Radical Innovation: Generating significant technological breakthroughs and creating new knowledge – Strong potential to lead to significant growth in revenues and profits – Rare – due to difficulty and risk involved in development – Results from deliberate efforts • Internal Corporate Venturing refers to the set of activities firms use to develop internal inventions and innovations ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 251. Internal Innovation (Cont’d)• Firm innovation – 2. Autonomous strategic behavior • Bottom-up process in which product champions pursue new ideas, often through a political process, to develop and coordinate the commercialization of a new good or service – Product Champion: individual with an entrepreneurial vision of a new good or service who seeks to create support in the organization for its commercialization • Autonomous strategic behavior focused on firm’s knowledge and resources – Knowledge must be continuously diffused throughout the firm – 3. Induced strategic behavior • Top-down process whereby the firm’s current strategy and structure foster product innovations that are closely associated with that strategy and structure ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 252. Implementing Internal Innovations• Entrepreneurial Mind-set: required for internal corporate ventures – Viewpoint that values uncertainty in the marketplace and seeks to continuously identify opportunities with the potential to lead to important innovations• Value creation through internal innovation processes – 1. Cross-functional product development teams – 2. Facilitating integration and innovation – 3. Creating value from internal innovation ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 253. Creating Value Through Internal InnovationProcesses©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 254. Implementing Internal Innovations (Cont’d)• Value creation through internal innovation processes (Cont’d) – 1. Cross-functional product development teams • Efforts to integrate and coordinate activities, and apply knowledge from different functional activities associated with different functional areas (i.e., design, manufacturing, and marketing), to maximize innovation • Horizontal structures support use of cross-functional teams • Two primary barriers to success: – Independent frames of reference of members with distinct specializations – Organizational politics that create competition for resources and inter-unit conflict ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 255. Implementing Internal Innovations (Cont’d)• Value creation through internal innovation processes (Cont’d) – 2. Facilitating integration and innovation • Shared values, effective leadership and effective communication are important to successfully innovate and facilitate cross-functional integration – 3. Creating value from internal innovation • Entrepreneurial mindset is necessary • Manager support • Cross-functional teams • Effective leadership and shared values ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 256. Innovation ThroughCooperative Strategies• To successfully commercialize inventions, firms may need to cooperate and integrate knowledge and resources – Entrepreneurial new venture firms may need investment capital and distribution capabilities – More established companies may need new technological knowledge possessed by newer entrepreneurial firms• To innovate via cooperative relationships, firms must share their knowledge and skills – strategic alliances and joint ventures allow this to occur ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 257. Innovation Through Acquisitions• Acquisitions – Rapidly extend the product line – Increase the firm’s revenues – Key risk: a firm may substitute ability to buy innovations for ability to produce innovations internally – Firm may … • intensify R&D efforts • lose ability to produce patents ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 258. Creating Value ThroughStrategic Entrepreneurship• Entrepreneurial ventures – Produce more radical innovations – Possess strategic flexibility and willingness to take risks – Do more opportunity seeking• Larger, well-established firms – Produce more incremental innovations – Possess more resources and capabilities to exploit identified opportunities ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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