Professional Documents
Culture Documents
What is Strategy?
“What business strategy is all about is, in a word, competitive advantage”- Kenichi
Ohmae
And that management makes adjustments to that theory to improve its ability to
generate competitive advantage
Strategy as an action
Strategy as an aspiration
Strategy as a vision
The elements of strategy in an organization are:
It’s a company’s goal to earn a return on capital above the cost of capital. There are
two routes to achieve that return:
1. The company can decide to enter an industry where favorable conditions are
shown and where it is possible to earn a rate of return above the competition’s
level- Corporate Strategy (Which industry should we be in?)
2. They can achieve a position of advantage in comparison to their competitor
within an industry- Competitive Strategy (How should we compete?
Corporate Startegy:
This strategy defines: What type of company we want to be; What business we
want to be engaged in; What is the weight we want to give each of our business
units’?
Contains:
o A vision: area of activity, quantitative objectives and unique features
o the configuration of the company: what business activities to operate in,
what business to get into or out of, and the level of vertical or horizontal
integration
o the distribution of corporate resources: how we intend to support the
company’s position in each business
Types of decisions: enter in a new sector and how (internal growth, alliances,
acquisitions?), divestments.
Competitive Strategy:
Defines: How the company will compete in each business (hence the name).
o Each business should have its own competitive strategy, since the
industry structure, competitive behavior and business dynamics are
different in each case.
o it is crucial to identify distinctive competencies and building competitive
advantages.
Includes: an analysis of the opportunities and threats of the environment, along
with a study of the company’s strengths and weaknesses in relation to its rivals.
The Goal: to give each business unit a positioning that will allow it to
strengthen, develop and exploit competitive advantages that benefit the
corporation as a whole.
Functional Strategy: is the approach that the different business areas (Marketing,
Human resources, etc) take to achieve corporate and business unit’s objectives and
strategies.
Portfolios
Objectives:
- analyze the behavior of costs, the determinants of relative cost positioning, and
the way firms can gain a sustainable cost advantage (or minimize their cost
disadvantage)
- identify the cost of differentiation, and the way differentiated competitors can
lower costs in the areas that do not undermine their differentiation
- analyze supplier and buyer cost behavior, for cost position and differentiation
Differentiation:
Key Stages in Applying the value chain to the Cost analysis:
b. Strategic Alliances:
o Refer to cooperative agreements between potential or actual competitors (but
not only!)
o From formal joint ventures (in which two or more firms have equity stakes), to
short term contractual agreements (particular task, such as develop a new
product)
o BUT companies must beware of HOW to use collaboration to avoid and prevent
transferring their skills and knowledge to ambitious partners, and not give away
more than they gain.
• The size and market power of both partners is modest compared with industry
leaders
• Each partner believes that it can learn from the other and at the same time
limit access to proprietary skills
• Merger: transaction that forms one economic unit out of two or more previous
ones.
• Acquisition: transaction where one company buys a part of another company
(part has to be big enough for the acquirer to gain control over the purchased
company).
• They can be means to enter new lines of activities: M&As are considered to be
the fastest way for building a sizeable presence in a new market.
Causes of M&A’s:
a. Rational motives:
To create synergies: Operational synergies, Financial synergies, Managerial
synergies
“To build an empire”: Increase size for compensation of managers;
Conglomerate to decrease risk
For monopoly motives: Increase market share; Deter entry
For tax related motives
b. Restructuring
Portfolio Organization:
Most in use
The acquired units are autonomous, and the teams that run them are
compensated according to unit results
Cost-of-entry test: The cost of entry must not erase all future profits.
Better-off test: Either the new unit must gain competitive advantage from its
relationship with the corporation, or vice versa
a. Parenting Advantage:
• A corporation must bring an advantage to the unit (e.g. shelter, access to more
resources like capital, greater network etc.)
• Or the unit must bring an advantage to the corporation (e.g. access to new
market, new customers, patents, entrepreneurial spirit etc.)
• If you don’t have benefits, don’t buy it, or sell it if you own it!
b. Restructuring:
• The new businesses are not necessarily related to existing units. All that is
necessary is unrealized potential.
• The restructuring strategy seeks out undeveloped, sick, or threatened
organizations or industries on the threshold of significant change. The parent
intervenes, frequently changing the unit management team, shifting strategy,
or infusing the company with new technology.
• Risk: Companies find it very hard to dispose of business units once they are
restructured and performing well.
The value chain defines the two types of interrelationships that may create
synergy:
• The activities involved in the businesses are similar enough that sharing
expertise is meaningful.
Portfolio Sharing
Mngm Activities
Action Plan:
• Selecting the core businesses that will be the foundation of corporate strategy.
Formulation of a strategy:
The First step towards Corporate Strategy:
Positioning the company so that its capabilities provide the best defense
against the balance of the forces through strategic moves, thereby improving
the company's position;
o See the industry as given and match the company's strengths and
weaknesses to it.
o A company can devise a strategy that takes the offensive. This posture is
designed to do more than merely cope with the forces themselves: it is
meant to alter their causes.
o For example, innovations in marketing can raise brand identification or
otherwise differentiate the product.
Anticipating shifts in the factors underlying the forces and responding to them,
with the hope of exploiting change by choosing a strategy appropriate for the
new competitive balance before opponents recognize it.
The fundamental unit of competitive strategic analysis is the industry: Defining the
relevant industry a company competes in is essential to strategy
Company economic performance results from two distinct causes, and strategy must
encompass both:
The implementation of firm’s strategy will have one of three implications for the
competitive position of the firm:
Strategy Audit:
An examination and verification of a company's strategy.
Strategic positioning:
It arises when there are groups of customers with differing needs, and when a
tailored set of activities can serve those needs best.
A variant of needs-based positioning arises when the same customer has
different needs on different occasions or for different types of transactions.
3. Segmenting customers: Customers are accessible in different ways.
But a strategic position is not sustainable unless there are trade-offs with other
positions.
Which activities a company will perform and how it will configure individual
activities
How activities relate to one another.
First-order fit is simple consistency between each activity (function) and the
overall strategy.
The worst error in strategy is to compete with rivals on the same dimensions.
A company should compete to be Unique!
Rivalry among existing competitors fights for a position—using tactics like price
competition, product introduction, and advertising.
The extent to which industry profitability is affected by aggressive price competition
(Intense Rivalry)depends on the factors:
e. Threat of Substitutes:
Price:
o By placing a limit on prices that can be charged, substitute products or
services limit the potential of an industry.
o The more attractive the price performance trade-off offered by substitute
products, the firmer the lid placed on the industry's profit potential.
o Substitute products also reduce the benefits an industry can reap in
boom times.
Differentiation:
3. Toolkit3: VRI:
Valuable, Rare, difficult to Imitate or substitute
Valuable:
does the resource give you more money than it cost you?
• It won’t be a source of competitive advantage unless it gives you more money than
it cost you
Can the firm capture the value from the resource, or does the resource appropriate the
full value for itself?
COMPETITIVE ADVANTAGE:
The objective of a company is to achieve:
Ex: Disney and Wal-Mart have all been successful in implementing strategies about
how to compete that have lead to important competitive advantages for these
firms. But this doesn’t mean they will be successful in the future.
Competitive Parity: A firm experiences competitive parity when its action create
economic value but when several other firms are engaging in similar actions
Ex: When Honda entered the U.S. motorcycle market by trying to sell large
motorcycles, its strategy to compete successfully in the U.S. motorcycle market
was the same as the sued by the other major manufacturers, it could only give
them competitive parity.
Competitive Disadvantage: A firm experiences competitive parity when its action fail
to create economic value, these actions can also be seen as destroying economic
value
Ex: Yugo attempted to implement a strategy in the U.S. automobile industry market
that was inconsistent with the actual economic processes in operating in this market.
Its performance and safety were perceived unacceptable.
A closer look at
“resources” and how they create corporate and competitive advantage:
b. Core Competencies:
• The collective learning in the organization, especially about how to coordinate
diverse production skills and integrate multiple streams of technologies.
• Do not diminish with use
• Unlike physical assets, which deteriorate over time, they are enhanced as they
are applied and shared
• Fade quickly if they are not used: so they need to be nourished and protected
• Bind together different businesses
• The engine for new business development
o Have an intelligent alliance or sourcing strategy but don’t make a choice about
where you will build competence leadership
Bounded innovation: When CCs are not recognized and business-units only
pursue those innovation opportunities that are close at hand, such as marginal
product-line extensions or geographic extensions
A strategic architecture is a roadmap of the future that identifies which CC to build and
their constituent technologies.
Can CC be Core Rigidities?
Environmental
Analysis
An integrated
understanding of the
external and internal
environments is essential for firms to understand the present and predict the future.
o For instance, most firms have little individual effect on the EU or the US
economy…. Although those economies have a major effect on their ability
to operate and even survive.
2.Industry Environment: It is the set of factors that directly influences a firm and its
competitive actions and competitive responses:
o Are the well known 5 forces of Porter and the interactions among those
five factors determine an industry’s profit potential.
Performance improves when the firms integrate the insights provided by analysis of
the general environment, the industry environment, and the competitor
environment.
SWOT Analysis:
Strengths: attributes of the organization that are helpful to achieving the
objective.
SWOt Analysis:
It shows how the opportunities can be performed in a time manner.
Situational Analysis:
The aim of any SWOT analysis is to identify the key internal and external factors
that are important to achieving the objective
Generic Strategies for Competitive Analysis:
Effective cost leaders can remain profitable even when they five forces appear
unattractive: Threat of entry: can frighten off new entrants, Threat of buyers: can
mitigate buyer power, Threat of suppliers: can mitigate supplier power, Threat of
substitutes: firms with a cost strategy are well positioned relative substitutes, Threat of
rivalry: competitors avoid price wars with cost leaders
2.Diferentiation Strategy
Requirements:
Focused business level strategies involve the same basic approach as Broad
market strategies
o To serve only a part of the market with certain characteristics (segment) trying
to be leader in cost or differentiation.
Focus can allow you to direct resources to certain value chain activities
to build competitive advantage
Risks:
The firms stuck in the middle will most likely have low profitability because it loses the
high volume customers who demand low prices and Loses high-margin business.
Mental Models: we all have mental models that are developed over time and are
shaped by our background and experience, reinforced by success. They process
information for us and determine what we see and hear
Characteristics of transaction:
o Uncertainty
o Frequency
Price discrimination
Finance
Agency Theory:
Assumptions:
o Bounded rationality
o Opportunism
o Information asymmetry
Agency relationships occur when one partner in a transaction (the principal) delegates
authority to another (the agent) and the welfare of the principal is affected by the
choices of the agent
o Moral hazard
More of the agent’s actions are hidden from the principal or are costly to observe
o Adverse selection
The agent posseses information that is unobservable or costly to obtain for the
principal
o Risk aversion
As organisations grow managers become risk averse (they would like to protect their
position, managers would like to max. chance of success by projects that have already
brought success, managers build structures to increase their chances of control)
The delegation of decision-making authority from principal to agent is problematic in
that;
2. The principal cannot perfectly and costlessly monitor the actions of the agent
3. The principal cannot perfectly and costlessly monitor and acquire the
information available to or possesed by the agent
Game Theory:
Lessons:
CAGE:
GLOBALONEY = Friedman “The world is flat”, e.g. “old” Coke
Distance represents an important complement to the managerial tools used in country market
portfolio.
The CAGE distance model is intended to help managers meet the international challenge.
Distance
~ Costs
Threats
CAGE
Differences
For a long time, firms’ international activities were apparently motivated entirely by
considerations of arbitrage
Arbitrage and replication are distinct functions, and their cross-border potential varies
from context to context.
Differences between the two functions mainly: what to target? Where to locate? How
to organize?
Ventures are inherently risky: The probability of failure simply comes with the territory
But many failures could be prevented or their cost contained if managers approached
ventures with the right planning and control tool
Key Question from the Business Plan: What do you need from your business?
Institutions created over the past half century include: the General Agreement
on Tariffs and Trade (GATT), the World Trade Organization (WTO), the International
Monetary Fund (IMF), the World Bank, the United Nations (UN)
o interaction
o direction
o renewal
Mgmt teams need to go forward simultaneously on all three fronts to make real
progress.
The role of the board is largely advisory and not of a decision making nature.
Management manages the company, and board members serve as a source of
advice and counsel to the management.
The board should ask discerning questions about strategies, and major policies.
Another critical role for the board is helping management to identify and
resolve strategy and performance issues.
In Conclusion: The board of directors (BOD) role is to formulate, ratify, evaluate, and
change corporate strategy.
Ex: Nestle:
Board of Directors - Board Regulations
The board doesn´t even come in the company’s organigram, it comes separated
from the rest of the company.
Committees: