Session 01

Introductory concepts

Sasanka Sekhar Chanda

2016
Strategic Management - II

Re-cap SM-I: Business Strategy

Started with core values and core purpose
Learned to analyze the environment
Look into the future, set goals as a function of core values
and purpose, walk back to present to determine the strategy
to attain those goals, given what a firm has & what it can do

Moved on to Competitive strategy

Analytic recourses to obtain an edge over rivals
From the perspective of analysis of Five forces & value
chain
Either be the Cost Leader, or obtain premium by
differentiation

From the perspective of ownership of unique, valuable,

rare, inimitable, non-substitutable (VRIN) resources

Some questions arise after SM-I

If every company acted as per 5 forces and
value chain analyses, profitability should be
same across firms?
Only stupid firms make less profits, and they die

If everyone went after VRIN resources, their

prices would be bid up, nullifying advantage
of possession?
Management would concern bribing officials to corner
VRIN resources at below market prices (Coal,
spectrum)

Functions of the Corporate Office

BOARD OF GOVERNORS
HEADQUARTERS
Functional Heads: FINANCE AND ACCOUNTS , IT, HR, OPERATIONS , R&D
Division Heads: SBU Leaders, COUNTRY Heads
Horizontal functions: Legal, Public Relations, Corporate Social Responsibility

SBU1

SBU2
SBU3
COUNTRY 1

SBU1A

SBU3B

COUNTRY 2

Strategic Business Unit (SBU) Functions

Analyze Product Market conditions, Respond to competitor moves and
technology changes by management of product life cycle, seek to deliver
higher value
Corporate Functions
Strategic Decision Making, Strategy Formulation, Guiding Strategy Implementation,
Diversification, Mergers and Acquisitions, Strategic Alliances, Internationalization,
Corporate Venturing, Knowledge Management
Control Function (TMT & Board of Directors) Leadership, Corporate Governance

Hambrick DC, Fredrickson JW (2005)

Are you sure you have a strategy?

Academy of Management Executive, 15(4): 48-59

Clarifying Elements of Business Strategy:

ARENA
What business are we in? (Drucker p. 53)
Product category, Market segment, Geographic
areas, core technologies, value creation segments
[Design, Mfg, service , distribution]

E.g. Womens high end fashion accessories;

countries with per-capita GDP > $5000; Inexpensive
contemporary furniture for young, white collar
(IKEA); Leading-edge Braking systems for high-end
passenger automobiles and off road vehicles (Brake
Products I)

How does this help?

Clarifying Elements of Business

Strategy: VEHICLES
The means for attaining presence in a particular
product category, market segment, geographic
area or value creation stage
Internal development; Joint venture; Licensing of
Franchising, Acquisitions (p. 54)
E.g. Organic expansion with wholly owned stores
(IKEA) Internal development of new, leading edge
technology + Strategic alliances with suspensioncomponent manufacturers + Joint ventures with
brake companies in Asia (BPI)

How does this help?

Clarifying Elements of Business Strategy:

DIFFERENTIATORS
Concerns what will make customers buy the
products/services of the firm (p. 55)
Image, customization, price, styling, product
reliability (p. 54)
E.g., there is no better value- quality for the price
than a Honda (car); Lowest possible fares and ontime reliability (Southwest Airlines); Instant
fulfilment + reliable quality + low price + shopping
experience (IKEA); ABS & Electronic traction
control technology + system integrations capability
(BPI)

What are pros and cons to making

differentiators explicit?

Clarifying Elements of Business

Strategy: STAGING
Concerns speed or sequence of moves (p. 55)

No universally superior sequence (p. 55). Judgment

required as to what sequence is more useful, given a
firms resources and environmental constraints.

E.g.: Regional Insurance Co. expanded in its neighboring

regions first, acquiring resources to enable larger
advertising expense on branding, paving the way for
more acquisitions at lower premium; International
expansion by region + expansion from one store in a
country(IKEA); Asian JVs and alliances with suspensioncomponent companies, followed by aggressive design and
marketing of system-integration offering (BPI)

Should a firm broaden its suite of offering before

going international, or do the reverse?

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Clarifying Elements of Business

Strategy: ECONOMIC LOGIC
Logic as to how profits will be generated, by
returns above a firms cost of capital (p. 56)
Premium prices by offering customers a difficult-tomatch product (that they are willing to shell-out money for),
e.g. NYT digital charges readers a fee for reading news
articles on their website (others Huffington Post, Rediff,
ToI do not).
Lowest costs through scale/ scope advantages e.g. Walmart
All the good stuff regarding Focus, CL and Diff (Porter)

Dont all differentiated products eventually become

commodities (e.g. cellphone features)?

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Porter ME (1987)
From competitive advantage to
corporate strategy.
Harvard Business Review, 65(3): 43-59

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Implicit Assumptions in Porter 1987

Shareholders can diversify more cheaply than a
corporation because they can buy and sell shares at the
market price (p. 3)

Mitigating risk toward firm survival should not be a prime

motivator for diversification by firms. (p. 7)

Diversification creates shareholder value only when

industry has favorable structure (i.e. enables monopoly
like rents) that support returns exceeding the cost of
capital (p. 6-7).

If acquisitions premiums reflect the future prospects of the

to-be-acquired companies (p. 7), it is not a good buy. It
follows that a firm should be bought only if the corporate
buyer has special information or uncanny ability (expertise
and analytic resources, p. 10) regarding undervaluation of
acquisition premium of the target.

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Porters Advocacy regarding unrelated

diversification by Corporates
Unrelated Diversification (no connection among
business units p. 10)
Portfolio management

Based on diversification through acquisition (p. 10)

Parent does little for the new unit (p. 10).
Suitable only for (developing) countries with undeveloped
capital markets (p. 11). Else let shareholders diversify, firms
should not!

Restructuring

Seek out undeveloped, sick or threatened organizations or

industries on the threshold of significant change (p. 11)
Parent (often) fires the management, infuses new technology,
makes more acquisitions to build critical mass and sells off the
end-product (p. 11)
Benefits stem from the parents uncanny ability to spot
undervalued companies or positions in industries ripe for
transformation

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Porters Advocacy regarding related

diversification by Corporates
Related Diversification
Transferring skills (TS)
The objective is to transfer knowledge about how to
perform value chain activities (better) among its units
(between acquired one and units already existing) (p. 14)
Opportunities arise when business units have similar buyers
or channels, similar value activities like government
relations or procurement etc. (p. 15)
Business units need to be provided incentives to participate
in transfer of skills. (p. 15)
Porter suggests selling of a unit after skills transfer (p. 15)

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Porters Advocacy regarding related

diversification by Corporates contd.
Sharing activities (SA)
Can lower costs if economies of scales are achieved (p.
18)
layoffs of personnel with overlapping duties (HP-Case)
plant closure
Spreading of efforts over more activities (p. 18)

Reconfiguration of existing activity may turn out to be

beneficial (p.18)
Reconfigured mechanism may be sub-optimal for
individual groups that are sharing (p. 18)

Requires greater coordination (p. 18) :: needs $$

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Class question
Can someone point out
what arguments of
Porter do not appear to
hang well together, and
why?