Chapter One strategySet of related actions that managers take.docx

Chapter One: strategy
Set of related actions that managers take to increase their
company’s performance.
Strategic leadership - Creating competitive advantage through
effective management of the strategy-making process.
Strategy formulation - Selecting strategies based on analysis of
an organization’s external and internal environment.
Strategy implementation - Putting strategies into action.
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Superior performance
Risk capital - Equity capital for which there is no guarantee
that stockholders will:
recoup their investment.
earn a decent return.
Shareholder value - The returns that shareholders earn from
purchasing shares in a company.
Sources
Capital appreciation in the value of a company’s shares
Dividend payments
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Profitability - The return a company makes on the capital
invested in the enterprise.
Return on invested capital (ROIC) - Net profit over the capital
invested in a firm.
Result of how efficiently the capital is used to satisfy customer
needs.
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Profit growth - The increase in net profit over time, achieved
by:
selling products in rapidly growing markets.
gaining market share from rivals.
selling more to existing customers.
expanding overseas or diversifying into new businesses.
To boost profitability and profit growth, managers must:
use strategies to give their company a competitive advantage
over rivals.
deliver high profitability and sustainable profit growth.
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Competitive advantage

Occurs when a company’s profitability is greater than the
average profitability of firms in its industry.
Sustained competitive advantage – A company’s strategies that
enable it to maintain above-average profitability for a number
of years.
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BUSINESS MODEL
Conception of how strategies should work together as a whole
to enable the company to achieve competitive advantage.
Deals with how a company:
selects, acquires, and keeps its customers.
defines and differentiates its product offerings.
creates value for its customers.
produces goods or services and delivers to the market.
lowers costs and organizes its resources and activities.
achieves and sustains high profitability and growth.
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Corporate-level managers
Oversee the development of strategies for the entire
organization.
Provide a link between people concerned with the firm’s
strategic development and the shareholders.
Ensure that business strategies pursued by the company are
consistent with maximizing profitability and profit growth.
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Business-level managers
Heads of business units
Business unit is a self-contained division that provides a
product or service for a particular market.
Translate statements of intents into concrete strategies for
individual businesses.
Are concerned with strategies specific to a particular business.
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Functional- level managers
Responsible for specific business functions.
Develop functional strategies to fulfill the strategic objectives
set by business- and corporate-level general managers.
Provide information that helps formulate realistic and attainable
strategies.
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Steps in a formal strategic planning process
Select the corporate mission and goals.
Analyze the organization’s external competitive environment
and internal operating environment.
Select strategies that:
build on the organization’s strengths and correct it’s
weaknesses.
are consistent with the organization’s mission and goals.
are congruent and constitute a viable business model.
Implement the strategies
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Components of a Mission statement
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Purpose of the company, or a statement of what the company
strives to do.
Mission
Articulation of a company’s desired achievements or future
state.
Vision
Statement of how employees should conduct themselves and
their business to help achieve the company mission.
Values
Goal - Precise and measurable desired future state that a
company attempts to realize.
Establishing major goals
External and internal analysis
External analysis identifies strategic opportunities and threats
that will affect how an organization pursues its mission.
Involves examination of the:
industry environment in which the company operates.
country or national environment.
macroenvironment.
Internal analysis focuses on reviewing the resources,

capabilities, and competencies of a company.
Goals identify the company’s strengths and weaknesses.
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SWOT analysis
Comparison of strengths, weaknesses, opportunities, and
threats.
Purpose - Identify the strategies to:
exploit external opportunities.
build on and protect company strengths.
eradicate weaknesses and counter threats.
Goals - Affirm a company-specific business model.
To align, fit, or match a company’s resources and capabilities to
the demands of its environment.
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SWOT strategies
Functional-level strategies - Directed at improving the
effectiveness of operations within a company.
Business-level strategies - Encompass the business’s overall
competitive theme.
How it positions itself in the marketplace to gain a competitive
advantage.
Different position strategies that can be used in different

industry settings.
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SWOT strategies
Global strategies - address how to expand operations outside the
home country.
Since competitive advantage is determined at a global level.
Corporate-level strategies determine:
the businesses a company should be in to maximize profitability
and profit growth.
how to gain a competitive edge.
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Strategy implementation and feedback loop
Strategy implementation
Taking action at the functional, business, and corporate levels
to execute a strategic plan.
Designing the best organization structure, culture, and control
systems to put a chosen strategy into action.
Feedback loop - Provides information to the corporate level on
the:
strategic goals that are being achieved.
degree of competitive advantage being created and sustained.

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Criticisms of Formal Planning Models
Unforeseen circumstances can adversely affect strategic plans.
Excessive importance is attached to the role of top management.
While ignoring lower-level managers.
Many successful strategies are a result of serendipity rather than
strategic planning.
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Scenario planning
Formulating plans that are based on “what-if” scenarios about
the future.
Encourages managers to:
think outside the box and be more flexible.
anticipate probable scenarios.
Ivory tower planning - Recognizes that successful strategic
planning encompasses managers at all levels of the corporation.
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Techniques for Improving Decision Making
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A member of a decision-making team identifies all the
considerations that might make a proposal unacceptable.
Possible perils of recommended courses of action are brought
into light.
Devil’s advocacy
Generation of a plan and a counter-plan that reflect plausible
but conflicting courses of action.
Promotes strategic thinking.
Dialectic inquiry
Identification of past successful or failed strategic initiatives to
determine if they will work for the current project.

Outside view
Characteristics of Good Strategic Leaders
Vision, eloquence, and consistency
Articulation of a business model
Commitment
Being well informed
Willingness to delegate and empower
Astute use of power
Emotional intelligence
Self-awareness, self-regulation, and motivation
Empathy and social skills
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Chapter 2
External Analysis: The Identification of Opportunities and
Threats

Learning Objectives
Review the primary technique used to analyze competition in an
industry environment: the Five Forces model.
Explore the concept of strategic groups and illustrate the
implications for industry analysis.
Discuss how industries evolve over time, with reference to the
industry life-cycle model.
Show how trends in the macroenvironment can shape the nature
of competition in an industry.
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Opportunities and threats
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Elements in a company’s environment that allow it to formulate
and implement strategies to become more profitable.
Opportunities
Elements in the external environment that could endanger a
firm’s integrity and profitability.
Threats
Defining an industry
Industry: Group of companies offering products or services that
are close substitutes for each other.
Sector: Group of closely related industries.

Market segments - Distinct groups of customers within a market
that can be differentiated on the basis of their:
individual attributes.
specific demands.
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Risk of Entry by Potential Competitors
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Companies that are currently not competing in the industry but
have the potential to do so.
Potential competitors
Reductions in unit costs attributed to a larger output.
Economies of scale
Preference of consumers for the products of established
companies.
Brand loyalty

Risk of Entry by Potential Competitors
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Enjoyed by incumbents in an industry and that new entrants
cannot expect to match.
Absolute cost advantage
Costs that consumers must bear to switch from the products
offered by one established company to the products offered by a
new entrant.
Switching costs
Falling entry barriers due to government regulation results in
significant new entry, increase in the intensity of industry
competition, and lower industry profit rates.
Government regulations
Rivalry Among Established Companies
Competitive struggle between companies within an industry to
gain market share from each other.
Intense rivalry among established companies constitutes a
strong threat to profitability.
Factors that impact the intensity of rivalry among established
companies within an industry.
Industry competitive structure - number and size distribution of
companies in it.
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Rivalry Among Established Companies
Demand conditions - Increasing demand moderates competition
by providing greater scope for companies to compete for
customers.
Cost conditions - When fixed costs are high, profitability is
highly leveraged to sales volume.
Exit barriers - Economic, strategic, and emotional factors that
prevent companies from leaving an industry.
High exit barriers - Companies become locked into an
unprofitable industry where overall demand is static or
declining.
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bargaining power of buyers
Bargain down prices or raise costs by demanding better product
quality and service.
Choose sellers and purchase in large quantities.
Supplier industry is dependent on them for a major portion of
sales.
With low switching costs and ability to purchase an input from
several companies at once, buyers can pit companies against
each other.
Threat of entering the industry and producing the product.
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bargaining power of suppliers
Suppliers’ ability to raise input prices or industry costs through
various means.
Product has no substitutes and is vital to the buyer.
Not dependent on one particular industry for their sales.
Companies would incur high switching costs if they moved to a
different supplier.
Threat of entering customers’ industry.
Knowledge that companies cannot enter the suppliers’ industry.
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substitute products and Complementors
Substitute products - Those of different businesses that satisfy
similar customer needs.
Limit the price that companies in an industry can charge for
their product.
Complementors - Companies that sell products that add value to
the other products.
Strong complementors - Provide a increased opportunity for
creating value.
Weak complementors - Slow industry growth and limit
profitability.
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STRATEGIC GROUPS WITHIN INDUSTRIES
Companies in an industry differ in the way they strategically
position products in the market.
Product positioning is determined by the:
product quality, distribution channels and market segments
served.
technological leadership and customer service.
pricing and advertising policy.
promotions offered.
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Implications of Strategic Groups
Since all companies in a strategic group pursue a similar
strategy:
customers view them as direct substitutes for each other.

immediate threat to a company are rivals within its own
strategic group.
Different strategic groups have different relationships to each of
the competitive forces.
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Mobility Barriers
Within-industry factors that inhibit the movement of companies
between strategic groups.
Managers must:
determine if it is cost-effective to overcome mobility barriers.
realize that companies in other strategic groups become their
competitors if they overcome mobility barriers.
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Macroeconomic Forces
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Growth rate of the economy
Interest rates
Currency exchange rates
Inflation or deflation rates
Global and Technological Forces
Global forces - Falling barriers to international trade have
enabled:
domestic markets enter to foreign markets.
foreign enterprises to enter the domestic markets.
Technological forces - Technological change can:
make products obsolete.
create a host of new product possibilities.
impact the height of the barrier to entry and reshape industry
structure.
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Demographic, social, and political Forces
Demographic forces - Outcomes of changes in the
characteristics of a population.
Social forces - Way in which changing social morals and values
affect an industry.

Political and legal forces - Outcomes of changes in laws and
regulations.
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chapter FOUR: Functional-level strategies
Aimed at improving the effectiveness of a company’s operations
and its ability to attain superior:
efficiency.
quality.
innovation.
customer responsiveness.
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Efficiency and Economies of scale
Efficiency - Measured by the quantity of inputs that it takes to
produce a given output.
Economies of scale - Reductions in unit costs attributed to a
larger output.
Ability to spread fixed costs over a large production volume and
produce in large volumes.
To achieve greater division of labor and specialization.
Diseconomies of scale - Unit cost increases associated with a
large scale of output.
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EFFICIENCY AND ECONOMIES OF SCALE
Managers should avoid being complacent about efficiency-based
cost advantages derived from experience effects as:
neither learning effects nor economics of scale are sustained
forever.
cost advantages gained from experience effects can be made
obsolete by new technologies.
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Flexible production technology
Reduces setup times for complex equipment.
Increases the use of individual machines through better
scheduling.
Improves quality control at all stages of the manufacturing
process.
Increases efficiency and lower unit costs.
Enables better customization of product offerings.
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MATERIALS MANAGEMENT, JUST-IN-TIME systems, AND
EFFICIENCY
Just-in-time (JIT) inventory system
Economizes on inventory holding costs by scheduling
components to arrive:
just in time to enter the production process.
as stock is depleted.
Cost savings come from increasing inventory turnover and
reducing the need for working and fixed capital.
Drawback of leaving a company without a buffer stock of
inventory.

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MATERIALS MANAGEMENT, JUST-IN-TIME systems, AND
EFFICIENCY
Supply chain management - Managing the flow of inputs and
components from suppliers into the company’s production
processes to:
minimize inventory holding.
maximize inventory turnover.
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total quality management
Increasing product reliability to perform consistently as
designed and rarely break down.
Five-step chain reaction
Improved quality means that costs decrease
As a result, productivity improves
Better quality leads to higher market share, allowing the
company to raise prices
Higher prices increase profitability, allowing the company to
stay in business
Enables the company to create more jobs
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total quality management
Steps that should be part of a quality improvement program
Management should strive to eliminate mistakes, defects, and
poor-quality
Improve quality of supervision
Work standard to stress on quality of work
Train employees in new skills to remain informed in workplace
changes
Commitment from every individual in the company to achieve
better quality
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Improving Quality as Excellence
To achieve a perception of high quality of attributes the
company should:
collect marketing information indicating which attributes are
most important to customers.
design products in such a way that those attributes are embodied
in the product.
decide significant attributes to promote and how best to position
them in the minds of consumers.
recognize that competition is not stationary.
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Achieving Superior Innovation
Most important source of competitive advantage.
Innovative products or processes gives a company competitive
advantage that allows it to:
differentiate its products and charge a premium price.

lower its cost structure below that of its rivals.
Successful new-product launches are catalysts of superior
profitability.
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Reasons for High Failure Rate of Innovation
Demand for innovations is essentially uncertain.
Technology is poorly commercialized.
Poor positioning strategy
Positioning strategy - Specific set of options adopts for a
product based on price, distribution, promotion and advertising,
and product features.
Marketing a technology for which there is inadequate demand.
Slow marketing of products.
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Reducing innovation failures
Tight cross-functional integration can help a company ensure
that:
product development projects are driven by customer needs.
new products are designed for ease of manufacture.
development costs are reduced.
the time it takes to develop a product and bring it to market is
minimized.

close integration between r&d and marketing is achieved.
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Chapter five: Business-level strategy
Overall competitive theme of a business.
Way a company positions itself in the marketplace to gain a
competitive advantage.
Different positioning strategies that can be used in different
industry settings.
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Lowering costs
Enables a company to:
gain a competitive advantage in commodity markets.
undercut rivals on price.
gain market share.
maintain or increase profitability.
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differentiation
Distinguishing oneself from rivals by offering something that
they find hard to match .
Product differentiation is achieved through:
superior reliability, functions, and features.
better design, branding, point-of-sale service, after sales
service, and support.
Advantages
Allows a company to charge a premium price.
Helps a company to grow overall demand and capture market
share from its rivals.
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the differentiation-low cost tradeoff
Efficiency frontier
Shows all the positions a company can adopt with regard to
differentiation and low cost.
Has a convex shape because of diminishing returns.
Multiple positions on the differentiation-low cost continuum are
viable.
Have enough demand to support an offering.
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Value innovation
Occurs when innovations push out the efficiency frontier in an
industry, enabling greater value to be offered through superior
differentiation.
At a lower cost than was thought possible.
Enable a company to outperform its rivals for a long period of
time.
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Comparison of Market segmentation approaches
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Standardization strategy
Associated with lower costs than a segmented strategy
Segmentation
strategy
Involves customization of product offerings, which drive up
costs as:
Focus
strategy
Attempts to attain economies of scale through high sales volume

achieving economies of scale is difficult.
production and delivery costs tend to be high.
Have a higher cost structure as:
new product features and functions need to be added.
attaining economies of scale is difficult.
business-level strategies
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Give a company specific form of competitive position and
advantage in relation to its rivals
Results in above-average profitability
Generic business-level strategy
Lowering costs in order to lower prices and still make a profit
Broad low-cost strategy
When a company differentiates its product in some way
Broad differentiation strategy
Targeting a certain segment or niche and trying to be the low-
cost player in that niche

Focus low-cost strategy
Business-level strategy, industry, and competitive advantage
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Low-cost companies
Charge low prices and still make profits
Absorb cost increases from suppliers
Offer deep discount prices for buyers
Differentiated companies
Withstand pricing pressure from powerful buyers and increase
prices without buyer resistance

Absorb price increases from suppliers and pass them to
customers without losing market share
Withstand substitute goods, as a result of brand loyalty
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Lowering costs through functional strategy and organization
Achieve economies of scale and learning effects
Adopt lean production and flexible manufacturing technologies
Implement quality improvement methodologies to produce
reliable goods.
Streamline processes
Use information systems to automate business process
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Lowering costs through functional strategy and organization
Implement just-in-time inventory control systems.
Design products with a focus on reducing costs.
Increase customer retention.
Ensure that the organization’s structure, systems, and culture
reward actions that lead:
higher productivity.
greater efficiency.
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Differentiation through functional-level strategy and
organization
Customize product offering and marketing mix to different
market segments.
Design product offerings that have a high perceived quality
regarding their:
functions.
features.
performance.
reliability.
Handle and respond to customer queries and problems promptly.
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Differentiation through functional-level strategy and
organization
Focus marketing efforts on:
brand building.
perceived differentiation from rivals.
Ensure employees act in a manner consistent with the
company’s image.
Create the right organizational structure, controls, incentives,
and culture.
Ensure that the control systems, incentive systems, and culture
align with the strategic thrust.
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Blue ocean strategy
Successful companies build their competitive advantage by
redefining their product offering through value innovation.
Creating a new market space.
Blue Ocean - Wide open market space where a company can
chart its own course.
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Blue ocean strategy
To redefine its market and create a new business-level strategy,
a company must:

eliminate factors that rivals take for granted, and reduce costs.
reduce certain factors below industry standards, and lower
costs.
raise certain factors above industry standards, and increase
value.
create factors that rivals do not offer, and increase value.
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Chapter Six : fragmented industry
Composed of a large number of small- and medium-sized
companies.
Reasons for fragmentation
Lack of scale economies
Brand loyalty in the industry is primarily local
Low entry barriers due to lack of scale economies and national
brand loyalty
Focus strategy works best for a fragmented industry.
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Consolidating a fragmented industry through value innovation
Value innovator - Defines value differently than established
companies.
Offers the value at lowered cost through the creation of scale
economies.

Chaining: Obtaining the advantages of cost leadership by
establishing a network of linked merchandising outlets.
Interconnected by information technology that functions as one
large company.
Aids in building a national brand.
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Franchising: Strategy in which franchisor grants the franchisee
the right to use the franchisor’s name, reputation, and business
model.
In return for a fee and a percentage of the profits.
Advantages
Finances the growth of the system, resulting in rapid expansion.
Franchisees have a strong incentive to ensure that the operations
are run efficiently.
New offerings developed by a franchisee can be used to improve
the performance of the entire system.
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Disadvantages
Tight control of operations is not possible.
Major portion of the profit go to the franchisee.

When franchisees face a higher cost of capital, it raises system
costs and lowers profitability.
Horizontal mergers - Merging with or acquiring competitors and
combining them into a single large enterprise.
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STRATEGIES IN EMBRYONIC AND GROWTH INDUSTRIES
Limited customer demand for products of an embryonic industry
is due to:
limited performance and poor quality of the first products.
customer unfamiliarity with the product.
poorly developed distribution channels.
lack of complementary products.
high production costs because of small volumes of production.
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STRATEGIES IN EMBRYONIC AND GROWTH INDUSTRIES
Industry enters the growth stage when a mass market starts to
develop for its products.
Mass market: One in which large numbers of customers enter
the market.
Occurs when:
Product value increases, due to ongoing technological progress
and development of complementary products.

Production cost decreases, resulting in low prices and high
demand.
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market development and customer groups
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First to purchase and experiment with a product based on new
technology.
Innovators
Understand that the technology may have important future
applications.
Early adopters
Practical and understand the value of new technology.
Early majority
Purchase a new technology only when it is obvious that it has
great utility and is here to stay.
Late majority
Unappreciative of the uses of new technology.
Laggards

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Strategic implications: crossing the chasm
New strategies are required to strengthen a company’s business
model as a market develops.
Customers in each segment have very different needs.
Competitive chasm - Transition between the embryonic market
and mass market.
Failure to do so results in the company going out of business.
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Innovators and early adopters
Technologically sophisticated and willing to tolerate the
limitations of the product.
Reached through specialized distribution channels.
Companies produce small quantities of product that are priced
high.
Early majority
Value ease of use and reliability.
Require mass-market distribution and mass-media advertising
campaigns.
Require large-scale mass production to produce high-quality
product at a low price.
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Factors that accelerate customer demand
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Degree to which a new product is perceived as better at
satisfying customer needs than the product it supersedes.
Relative advantage
Products perceived as complex and difficult to use will diffuse
more slowly than those that are easy to use.
Complexity
Degree to which a new product is perceived as being consistent
with the current needs or existing values of potential adopters.
Compatibility
Factors that accelerate customer demand
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Degree to which potential customers can experiment with a new
product during a hands-on trial basis.
Trialability
Degree to which the results of using and enjoying a new product
can be seen and appreciated by other people.
Observability
Lead adopters in a market who become infected with a product.
Infect other people, making them adopt and use the product.
Viral model of infection

Strategies to Deter Entry In mature industries
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Catering to the needs of all market segments to deter entry by
competitors.
Product proliferation strategy
Charging a price that is lower than that required to maximize
profits in the short run.
Is above the cost structure of potential entrants.
Limit price strategy
Investments that signal an incumbent’s long-term commitment
to a market or a segment of the market.
Strategic commitments
Strategies to Manage Rivalry
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Companies increase or decrease product prices to:
convey their intentions to other companies.
influence the price of an industry’s products.
Price signaling
When one company assumes the responsibility for determining
the pricing strategy that maximizes industry profitability.
Price leadership
Use of product differentiation strategies to deter potential
entrants and manage rivalry within an industry.
Non-price competition

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Capacity Control
Companies devise strategies to control or benefit from capacity
expansion programs.
Factors causing excess capacity.
New technologies that produce more than the old ones.
New entrants in an industry.
Economic recession that causes global overcapacity.
High growth of and demand in an industry that triggers rapid
expansion.
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Capacity Control
Choosing a strategy
Each company individually must try to preempt its rivals.
Companies must collectively coordinate with each to be aware
of the mutual effects of their actions.

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Choosing a Strategy
Leadership strategy: When a company develops strategies to
become the dominant player in a declining industry.
Niche strategy: When a company focuses on pockets of demand
that are declining more slowly than the industry as a whole to
maintain profitability.
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Choosing a Strategy
Harvest strategy: When a company reduces to a minimum the
assets it employs in a business to reduce its cost structure and
extract maximum profits from its investment.
Divestment strategy: When a company decides to exit an

industry by selling off its business assets to another company.
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Chapter seven:
Benefits of Standards
Guarantees compatibility between products and their
complements.
Reduces confusion in the minds of consumers.
Reduces production costs and risks associated with supplying
complementary products.
Leads to low-cost and differentiation advantages for individual
companies.
Helps raise the level of industry profitability.
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Establishment of Standards
Standards emerge in an industry when the benefits of
establishing are recognized.
Technical standards are set by cooperation among businesses,
through the medium of an industry association.
When the government sets standards they fall into the public
domain.
Public domain: Any company can freely incorporate the
knowledge and technology upon which the standard is based
into its products.
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Strategies for Winning a Format War
Make network effects work in one’s favor and against
competitors.
Build the installed base for the standard as rapidly as possible.
Ensure a supply of complements.
Leverage killer applications.
Killer applications: Applications or uses of a new technology or
product so compelling that customers adopt them in droves,
killing competing formats.
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Strategies for Winning a Format War
Pursue aggressive pricing and marketing.
Razor and blade strategy: Pricing the product low to stimulate
demand, and pricing complements high.
Cooperate with competitors.
License the format.
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Costs in High-Technology
Industries
Similar cost economics.
Very high fixed costs and very low marginal costs.
Law of diminishing returns - Marginal costs rise as a company
tries to expand output.
Profitability increases when a company shifts from a cost
structure with increasing marginal costs to higher fixed costs
with lower marginal costs.
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first mover
Firm that pioneers a particular product category or feature by
being first to offer it to the market.
Creation of a revolutionary product results in a monopoly
position.

First-mover advantage - Pioneering new technologies and
products that lead to slowing the rate of imitation.
First-mover disadvantages: Competitive disadvantages
associated with being first.
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Advantages
Opportunity to exploit network effects and positive feedback
loops.
Ability to establish brand loyalty and increase sales volume
ahead of rivals.
Ability to create switching costs for customers and accumulate
knowledge.
Disadvantages
Bear significant pioneering costs.
More prone to making mistakes.
Risk of building the wrong resources and capabilities.
Risk of investing in inferior or obsolete technology

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Strategies for Exploiting First-Mover Advantages
Develop and market the innovation.
Develop and market the innovation jointly with other
companies.
Through a strategic alliance or joint venture.
License the innovation to others and allow them to develop the
market.
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Factors to consider when selecting a Strategy
Complementary assets
Required to exploit a new innovation and gain a competitive
advantage.
Help build brand loyalty and achieve rapid market penetration.
Height of barriers to imitation
Higher the barriers, longer it takes for rivals to imitate.
Give the innovator more time to build an enduring competitive
advantage.
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Factors to consider when selecting a Strategy
Capable competitors
Companies that can move quickly to imitate the pioneering
company.
Competitors’ capability depends on their research and
development skills and access to complementary assets.
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Technological paradigm shift
Shifts in new technologies that:
revolutionize the structure of the industry.
dramatically alter the nature of competition.
require companies to adopt new strategies for survival.
Occur in an industry when:
established technology is approaching or is at its natural limit.
new disruptive technology has entered the marketplace and is
invading the main market.
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STRATEGIC Implications FOR ESTABLISHED COMPANIES
Being aware of how disruptive technologies can revolutionize
markets is a valuable strategic asset.
Investing in new technologies that may become disruptive
technologies.
Creating an autonomous operating division solely for the
disruptive technology.
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Strategic Implications for New Entrants
Do not face pressures to continue the existing out-of-date
business model.
Do not have to worry about established:
customer base.
relationships with suppliers and distributors.
Can focus their energies on the opportunities offered by the new
disruptive technology.
Must decide whether to partner with an established company or
go solo.
123
Globalization of Production and Markets
Globalization of production and markets
Increased as companies took advantage of lower barriers to
international trade and investment
National markets started merging into one global marketplace
Implications
Companies finding home markets inundated by foreign
competitors
Critical to maximize efficiency, quality, customer
responsiveness, and innovative ability
124

125
Expanding the Market:
Leveraging Products
A company can sell goods, developed at home, internationally
to increase its growth rate.
Multinational company is one that does business in two or more
national markets.
Success depends on the distinctive competencies that underlie
its production and marketing process.
126
Realizing Cost Economies from Global Volume
A company can realize cost savings from economies of scale by:
spreading the fixed costs and setting up production facilities
over its global sales volume.
serving a global market, a company utilizes its production

facilities more intensively.
bargaining down the cost of key inputs with suppliers.
increasing its sales volume more rapidly.
127
location economies
Economic benefits that arise from performing a value creation
activity in an optimal location.
Help a company:
achieve a low-cost position.
to differentiate its product offering.
to gain competitive advantage over rivals who base all their
value creation activities at a single location.
Transportation costs and trade barriers complicate the process
of realizing location economies.
128
Leveraging the Skills of Global Subsidiaries
Managers must:
realize that valuable skills can arise anywhere within a firm’s
global network.
establish an incentive system that encourages local employees
to acquire new competencies.
have a process for identifying valuable new skills created in a

subsidiary.
help transfer valuable skills within the firm.
129
Pressures for cost reductions
To respond to them, a firm must try to lower the costs of value
creation.
Pressures are intense:
in industries producing commodity-type products.
for products that serve universal needs.
when major competitors are based in low-cost locations, there is
excess capacity, and consumers face low switching costs.
130
Pressures for Local Responsiveness
To respond to them, a firm must differentiate its products and
marketing strategy from country to country.
Raises a company’s cost structure
Occurs as a result of:
differences in customer tastes and preferences.
differences in distribution channels.
host government demands.
131

global standardization strategy
Business model based on pursuing a low-cost strategy on a
global scale.
Companies market a standardized product worldwide to reap
maximum benefit from economies of scale.
Most appropriate when:
pressures for cost reductions are strong.
demand for local responsiveness is minimal.
132
localization strategy
Focuses on increasing profitability by customizing a company’s
goods.
consumer tastes and preferences differ across nations.
cost pressures are not very strong.
Benefit - Product value raises in the local market
Limitation - Cost reduction by mass-producing a standardized
product is not possible
133

transnational strategy
Simultaneously:
achieves low costs.
differentiates the product offering across geographic markets.
fosters a flow of skills between global subsidiaries.
Difficult to pursue because it places conflicting demands on a
company
134
International Strategy
Occurs when:
companies establish manufacturing and marketing functions in
each major country they do business in.
local customization of product offering and marketing strategy
is limited in scope.
product serves universal needs.
companies are not confronted with cost pressures.
135
136

137
Distinctive Competencies and Entry Mode
If a company’s distinctive competency is its technological
expertise:
licensing and joint-ventures should be avoided.
wholly owned subsidiary should be given preference.
Combination of franchising and subsidiaries for service
companies whose distinctive competency is management
proficiency.
138
Pressures for Cost Reduction and Entry Mode
Companies pursuing global or transnational strategies prefer
establishing a wholly owned subsidiary because:

it gives them tight control over marketing to coordinate a
globally dispersed value chain.
it gives them tight control over a local operation.
enables use of profits generated in one market to improve
competitive position in another.
139
global strategic alliances
Cooperative agreements between companies from different
countries that are actual or potential competitors
Advantages
Facilitate entry into a foreign market
Allow firms to share the costs of developing new products or
processes
140
global strategic alliances
Bring together skills and assets that cannot be developed alone
Help establish technological standards for the industry that will
benefit the firm
Disadvantage - Give competitors a low-cost route to new
technology and markets.
Success of an alliance depends on:

partner selection.
141
Chapter Nine: Corporate-Level Strategy and the Multibusiness
Model
Corporate-level strategies should be chosen to promote the
success of its business-level strategies.
This allows a firm to achieve a sustainable competitive
advantage, leading to higher profitability.
142
Corporate-Level Strategy
and the Multibusiness Model
Levels of business model:
Business model and strategies for each business unit or division
in every industry in which it competes
Higher-level multibusiness model that justifies its entry into
different businesses and industries
143

Horizontal Integration
Acquiring or merging with industry competitors to achieve the
competitive advantages that arise from a large size and scope of
operations
Acquisition: Company uses its capital resources to purchase
another company.
Merger: Agreement between two companies to pool their
resources and operations and join together to better compete in
a business or industry.
144
Benefits of Horizontal Integration
Lowers the cost structure
Increases product differentiation
Leverages a competitive advantage
Reduces rivalry within the industry
Increases bargaining power over suppliers and buyers
145
Vertical Integration

When a company expands its operations either backward or
forward into an industry
Backward vertical integration - Produces inputs for the
company’s products
Forward vertical integration - Uses, distributes, or sells the
company’s products
146
147
Stages in the Value-Added Chain
148
PC Industry Value-Added Chain
Increasing Profitability Through Vertical Integration
Vertical integration increases product differentiation, lowers

costs, and reduces industry competition when it:
facilitates investments in efficiency-enhancing specialized
assets.
protects product quality.
results in improved scheduling.
149
Problems with Vertical Integration
Increasing cost structure
Disadvantages that arise when technology is changing fast
Disadvantages that arise when demand is unpredictable
Vertical disintegration: When a company decides to exit
industries either forward or backward in the industry value
chain to its core industry to increase profitability
150
Cooperative Relationships
Quasi integration: Use of long-term relationships, or investment
into some of the activities normally performed by suppliers or
buyers
In place of full ownership of operations that are backward or
forward in the supply chain
151

Competitive Bidding and Short-Term Contracts
Competitive bidding strategy - Independent component
suppliers compete to be chosen to supply a particular
component.
Short-term contracts - Last for a year or less
Does not result in specialized investments
Signals a company’s lack of long-term commitment to its
suppliers
152
Strategic Alliances and Long-Term Contracting
Strategic alliances: Long-term agreements between two or more
companies to jointly develop new products or processes
Substitute for vertical integration
Avoids bureaucratic costs
Component suppliers benefit because their business and
profitability grow as the companies they supply grow.
153

Strategies to Build Long-Term Cooperative Relationships
Hostage taking: Means of exchanging valuable resources to
guarantee that each partner to an agreement will keep its side of
the bargain
Credible commitment: Believable promise or pledge to support
the development of a long-term relationship between companies
Each company should possess a kind of power to discipline its
partner, if the need arises.
154
Strategic Outsourcing
Decision to allow one or more of a company’s value-chain
activities to be performed by independent, specialist companies
Virtual corporation: Companies that pursue extensive strategic
outsourcing to the extent that they only perform the central
value creation functions that leads to competitive advantage
155
156

Benefits of Outsourcing
157
Lower cost structure
Enhanced differentiation
Focus on the core business
Risks of Outsourcing
Holdup
Risk that a company will become too dependent upon the
specialist provider of an outsourced activity
Increased competition
Building of an industry-wide resource that lowers the barriers to
entry in that industry
Loss of information and forfeited learning opportunities
158
Chapter 10: Diversification
Ways in which profitability can be increased
Transfer competencies between business units in different
industries

Leverage competencies to create business units in new
industries
Share resources between business units to realize synergies or
economies of scope
Use product bundling
Utilize general organizational competencies that increase the
performance
159
160
Leveraging Competencies
Taking a distinctive competency developed by a business unit in
one industry and using it to create a new business unit in a
different industry
Basis of the model
Company’s competitive advantage in one industry being applied
to create a differentiation
Cost-based competitive advantage for a new business unit in a
different industry
161

Sharing Resources and Capabilities
Economies of scope: Synergies that arise when one or more of a
diversified company’s business units are able to lower costs or
increase differentiation
More effectively pool, share, and utilize expensive resources or
capabilities
Sources of cost reductions:
Sharing lowers the cost structure
Marketing function creates the differentiation of products
leading to a higher ROIC
162
Product Bundling
Providing products that are connected to each other
Allows companies to expand their range providing customers a
complete package
Goal - Bundle products to offer customers:
lower prices.
superior set of services.
Does not always require joint ownership
Can be achieved through market contracts
163

General Organizational Competencies
Help business units within a company perform at a higher level
than it could if it operated as a separate or independent
company
Results from the skills of a company’s top managers
Types:
Entrepreneurial capabilities
Organizational design capabilities
Strategic capabilities
164
Entrepreneurial Capabilities
Required to take advantage of the free cash flow
To promote entrepreneurship, a company must:
encourage managers to take risks.
give managers the time and resources to pursue novel ideas.
not punish managers when a new idea fails.
make sure that the company’s free cash flow is not wasted in
risky ventures that would generate a low return on investment.
165

Capabilities in Organizational Design
Organizational design skills: Ability of the managers to create a
structure, culture, and control systems that motivate and
coordinate employees to perform at a high level
Major factor that:
Influences a company’s entrepreneurial capabilities
Determines a company’s ability to create functional
competencies
Determines a diversified company’s ability to profit from its
multibusiness model
166
Superior Strategic Management Capabilities
Ways to improve the performance of the acquired company:
Top managers of the acquired company are replaced with a more
aggressive team.
New top-management team sells off expensive assets.
New management team works to devise new strategies to
improve the performance.
Introducing company-wide pay-for-performance bonus system.
Establishing stretch goals for employees at all levels.
167

Related Diversification
Corporate-level strategy based on the goal of establishing a
business unit in a new industry related to a company’s existing
business units
By some form of commonality or linkage between their value-
chain functions
Basis of multibusiness model
Taking advantage of strong commonalities that can be modified
to increase the competitive advantage
Allowing a company to use any general organizational
competency it possesses
168
Disadvantages of Diversification
Changes in the industry or company
Management
Technology
Diversification for the wrong reasons
Pooling risks
Entry into a wrong business or at the wrong time or for the
wrong reasons
169
Disadvantages of Diversification

Bureaucratic costs: Costs associated with solving the
transaction difficulties between business units and corporate
headquarters
Factors responsible:
Number of business units in a company’s portfolio
Degree to which coordination is required to realize the
advantages of diversification
170
Related versus unrelated diversification
171
Related diversification
Company’s competencies can be applied across a greater
number of industries.
Company has superior strategic capabilities that allow it to keep
bureaucratic costs under close control.
Unrelated diversification
Company’s top managers are skilled at raising the profitability
of poorly run businesses.
Company’s managers use their strategic management
competencies to:
improve the competitive advantage of their business units.
keep bureaucratic costs under control.

171
172
Internal New Venturing
Transferring resources and creating a new business unit in a
new industry to innovate new kinds of products
Used by companies that are:
Technology-based and pursue related diversification
Venturing to enter a newly emerging industry
Pitfalls:
Market entry on too small a scale
Poor commercialization of the new-venture product
Poor corporate management of new-venture division
173
Acquisition
174
Integrating the acquired company
Overestimating economic benefits
Expense of acquisitions
Inadequate pre-acquisition screening

Pitfalls
Target identification and pre-acquisition screening
Bidding strategy
Integration
Learning from experience
Guidelines for success
Joint Ventures
Two or more companies agree to pool their resources to create
new business
Allows a company to share the risks and costs associated with
establishing a business unit
Resulting problems:
Partner with superior skills will have to give away profits
Different business models or time horizons leading to a conflict
about how to run the joint venture
175
Restructuring
Reasons:
Investors feel these companies no longer have multibusiness
models
Complexity of the financial statements of highly diversified
enterprises disguises the performance of individual business

units
Response to declining financial performance brought about by
over-diversification
Diminished advantages of vertical integration or diversification
from innovations in strategic management
176

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