76198137 Hoskisson and HITT Strategic Management All Chapters PPT

Chapter 1

Strategic Management and Strategic Competitiveness Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2003 Southwestern Publishing Company

1

s t u p n I c i g e t a r t S

The Strategic Management Process

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

Strategy Implementation

Strategy Formulation s n o i t c A c i g e t a r t S s e m o c t u O c i g e t a r t

Chapter 4 Business-Level Strategy

Chapter 5 Competitive Rivalry and Competitive Dynamics

Chapter 6 CorporateLevel Strategy

Chapter 10 Corporate Governance

Chapter 11 Organizational Structure and Controls

Chapter 7 Acquisition and Restructuring Strategies

Chapter 8 International Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Chapter 13 Strategic Entrepreneurship

Strategic Competitiveness Above-Average Returns

Feedback

2

Important Definitions Strategic Management Process The full set of commitments commitments,, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns

3

Important Definitions Strategic Competitiven Competitiveness ess Achieved when a firm successfully formulates and implements a value-creating strategy

Above-Average Returns Occurs when a firm develops a strategy that t hat competitors are not simultaneously implementing Provides benefits which current and potential competitors are unable to duplicate 4

Important Definitions Risk An investor’s uncertainty about the economic gains or losses that will w ill result from a particular investment

Average Returns Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk

5

Competitive Landscape Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new knowhow, first mover Hypercompetitive environments Fundamental nature of competition is changing

Protect or invade established product or geographic markets 6

Competitive Landscape Emergence of global economy

Goods, services, people, skills, and ideas move freely across geographic borders. Spread of economic innovations around the world.

Hypercompetitive environments Fundamental nature of competition is changing

Political and cultural adjustments are required. 7

Competitive Landscape Emergence of global economy Rapid technological change

Increasing rate of technological change and diffusion The information age Increasing knowledge intensity

Hypercompetitive environments Fundamental nature of competition is changing

8

Strategic Flexibility A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment It involves coping with uncertainty and the accompanying risks

9

Strategic Flexibility Organizational slack

Strategic reorientation

Strategic Flexibility flexibility

Capacity to learn 10

I/O Model of Above-Average Returns 1. External Environments General Global

Industry Environment

Competitor Environment Technological

1. Strategy dictated by the external environments of the firm (what opportunities exist in these environments?) 2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?) 11

Four Assumptions of the I/O Model 1. The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns 2. Most firms competing within a particular or within a certain segment of it are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources 12

Four Assumptions of the I/O Model 3. Resources used to implement strategies are highly mobile across firms 4. Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors

13

I/O Model of Above-Average Returns Industrial Organization Model The External Environment

1. Study the external environment, especially the industry environment • economies of scale • barriers to market entry • diversification • product differentiation • degree of concentration of firms in the industry

14


An Attractive Industry

2. Locate an attractive industry with a high potential for above-average returns Attractive industry: one whose structural characteristics suggest above-average returns

15


3. Identify the strategy called for by the attractive industry to earn above-average returns

An Attractive Industry Strategy Formulation

Strategy formulation: selection of a strategy linked with above-average returns in a particular industry

16


4. Develop or acquire assets and skills needed to implement the strategy

An Attractive Industry Strategy Formulation Assets and Skills

Assets and skills: those assets and skills required to implement a chosen strategy 17


5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy



Strategy implementation: select strategic actions linked with effective implementation of the 18 chosen strategy




Superior returns: earning of above-average returns

Superior Returns 19

Resource-based Model of Above Average Returns 1. Firm’s Resources

1. Strategy dictated by unique resources and capabilities of the firm (what can the firm do best?) 2. Find an environment in which to exploit these assets (where are the best opportunities?) 20

Resource-based Model of Above Average Returns Resource-based Model Resources

1. Identify the firm’s resources-strengths and weaknesses compared with competitors Resources: inputs into a firm’s production process

21


Capability

2. Determine the firm’s capabilities--what it can do better than its competitors Capability: capacity of an integrated set of resources to integratively perform a task or activity

22

Four Attributes of Resources and Capabilities (Competitive Advantage) Valuable

Rare Costly to imitate Nonsubstitutable

allow the firm to exploit opportunities or s neutralize threats in its external e environment i t

i l i b possessed by few, if any, current and a p a potential competitors C d n when other firms cannot obtain them or a s must obtain them at a much higher cost e c r u the firm is organized appropriately to o s obtain the full benefits of the resources in e Rorder to realize a competitive advantage 23

Resources and capabilities that meet these four criteria become a source of: Valuable

Rare Costly to imitate Nonsubstitutable

s e i t i l i b a p a C d n a s e c r u o s e R

Core Competencies

24

Core Competencies are the basis for a firm’s Competitive advantage Strategic competitiveness

Core Competencies

Ability to earn above-average returns 25


3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage

Capability Competitive Advantage

Competitive advantage: ability of a firm to outperform its rivals

26

Resource-based Model of Above Average Returns Resource-based Model

4. Locate an attractive industry

Resources

Capability Competitive Advantage An Attractive Industry

An attractive industry: an industry with opportunities that can be exploited by the firm’s resources and capabilities 27


Capability

5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment

Competitive Advantage An Attractive Industry

Strategy Form/Impl

Strategy formulation and implementation: strategic actions taken to earn above average returns

28


Capability Competitive Advantage An Attractive Industry

Strategy Form/Impl

Superior returns: earning of above-average returns

Superior Returns 29

Strategic Intent & Mission 

Strategic Intent 



Winning competitive battles through deciding how to leverage internal resources, capabilities, and core competencies

Strategic Mission 

An application of strategic intent in terms of products to be offered and markets to be served

30

The Firm and Its Stakeholders Stakeholders Groups The firmwho must aremaintain affected by a performance firm’s performance at an adequate and who have level claims in orderontoits retain wealth the participation of key stakeholders

31

The Firm and Its Stakeholders Stakeholders Capital Market Stakeholders

Shareholders Major suppliers of capital •Banks •Private lenders •Venture capitalists

32


Product Market Stakeholders

Primary customers Suppliers Host communities Unions

33


Product Market Stakeholders

Organizational Stakeholders

Employees Managers Nonmanagers 34

Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firm Organizational

Capital Market

1 How do you divide the returns to keep stakeholders involved?

Product Market

35

Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firm Organizational

Capital Market

2 How do you increase the returns so everyone has more to share?

Product Market

36

Chapter 2

The External Environment: Opportunities, Threats, and Industry Competition, and Competitor Analysis Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2003 Southwestern Publishing Company

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Feedback

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The External Environment Environment Sociocultural Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Environment

Technological

General

39

External Environmental Analysis A continuous process which includes 







Scanning: Identifying early signals of environmental changes and trends Monitoring: Detecting meaning through ongoing observations of environmental changes and trends Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies and their management

40

External Environmental Analysis Analysis of general environment Analysis of industry environment Analysis of competitor environment

The External Environment Strategic Intent Strategic Mission

41

General Environment 

Sociocultural segment      

Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences

42


Economic segment       

Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product

43


Political/Legal Segment     

Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

44

General Environment    

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Technological Segment Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies

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Global Segment Important political events

   

Critical global markets Newly industrialize countries Different cultural and institutional attributes

46


Demographic Segment   

 

Population size Age structure Geographic distribution Ethnic mix Income distribution

47

Industry Environment 

A set of factors that directly influences a company and its competitive actions and responses.



Interaction among these factors determine an industry’s profit potential.     

Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry 48

Five Forces Model of Competition 

Identify current and potential competitors and determine which firms serve them.



Conduct competitive analysis.



Recognize that suppliers and buyers can become competitors.



Recognize that producers of potential substitutes may become competitors.

49

Five Forces Model of Competition

Five Forces of Competition

Bargaining Power of Buyers

50

Threat of New Entrants 

Barriers to entry 

Economies of scale



Product differentiation



Capital requirements



Switching costs



Access to distribution channels



Cost disadvantages independent of scale



Government policy



Expected retaliation 51

Bargaining Power of Suppliers 

A itsupplier group is powerful when: is dominated by a few large companies

 

satisfactory substitute products are not available to industry firms



industry firms are not a significant customer for the supplier group



suppliers’ goods are critical to buyers’ marketplace success



effectiveness of suppliers’ products has created high switching costs



suppliers are a credible threat to integrate forward into the buyers’ industry

52

Bargaining Power of Buyers 

Buyers (customers) are powerful when: they purchase a large portion of an industry’s



total output 

the sales of the product being purchased account for a significant portion of the seller’s annual revenues



they could easily switch to another product



the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry 53

Threat of Substitute Products 

Product substitutes are strong threat when: customers face few switching costs

 

substitute product’s price is lower



substitute product’s quality and performance capabilities are equal to or greater than those of the competing product

54

Intensity of Rivalry 

Intensity of rivalry is stronger when competitors: are numerous or equally balanced

 

experience slow industry growth



have high fixed costs or high storage costs



lack differentiation or low switching costs



experience high strategic stakes



have high exit barriers

55

High Exit Barriers 

Common barriers include: specializedexit assets (assets with values linked to



a particular business or location) 

fixed costs of exit such as labor agreements



strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets)



emotional barriers (career concerns, loyalty to employees, etc.)



government and social restrictions 56

Strategic Groups Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions. The strategy followed by a strategic group differs from strategies being implemented implemente d by other companies in the industry. 57

Competitor Environment

Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, objectives, strategies, assumptions, and capabilitie capabilities s 

what drives the competitor as shown by its f u t u r e objectives



what the competitor is doing and can do as eg y revealed by its c u r r e n t s t r a t eg



What the competitor believes about itself and the industry, as shown by its a s s u m p t i o n s



What the the competitor may be able to do, as shown by its capabilities

58

Competitor Analysis Future objectives

Future How doObjectives: our goals compare



with our competitors’ goals? 

Where will the emphasis be placed in the future?



What is the attitude toward risk?

59


Current Strategy: How are we currently



competing? Current strategy



Does this strategy support changes in the competitive structure?

60


Assumptions: Do we assume the future



will be volatile? Current strategy

Assumptions



Are we operating under a status quo?



What assumptions do our competitors hold about the industry and themselves?

61


Capabilities: What are our strengths



and weaknesses? Current strategy



How do we rate compared to our competitors?

Assumptions

Capabilities 62


Current strategy

Assumptions

Capabilities

Response

Response: 

What will our competitors do in the future?



Where do we hold an advantage over our competitors?



How will this change our relationship with our competitors? 63

Chapter 3

The Internal Environment: Resources, Capabilities and Core Competence Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2003 Southwestern Publishing Company

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Feedback

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Sustainability of a Competitive Advantage 

Sustainability of a competitive advantage is a function of: – the rate of core-competence obsolescence due to environmental changes – the availability of substitutes for the core competence – the imitability of the core competence

66

External and Internal Analyses Environment

Sociocultural Industry Environment

By studying the external environment, firms identify what they might choose to do

Opportunities and threats Competitor Environment

Technological General 67

External and Internal Analyses By studying the internal environment, firms identify what they can do

Unique resources, capabilities, and core competencies (sustainable competitive advantage) 68

Challenge of Internal Analysis 

How do we effectively manage current core competencies while simultaneously developing new ones?



How do we assemble bundles of resources, capabilities and core competencies to create value for customers?



How do we learn to change rapidly?

69

Three Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies 

Uncertainty regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences



Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments



Intraorganizational Conflicts among people making managerial decisions and those affected by them 70

Components of Internal Analysis Core Competencies

Discovering Core Competencies

Strategic Competitiveness Competitive Advantage

Capabilities Resources • Tangible • Intangible

Four Criteria of Sustainable Advantages

Value Chain Analysis

• Valuable • Rare • Costly to Imitate • Nonsubstitutable

• Outsource

71


Resources • Tangible • Intangible

Resources are what a firm has to work with--its assets-including its people and the value of its brand name

Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers 72


Resources • Tangible • Intangible

Tangible Resources • Financial • Physical • Human resources • Organizational

Intangible Resources • Technological • Innovation • Reputation

73


Capabilities

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage

74


Capabilities

Capabilities are what a firm does, and represent the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective

75


Core Competencies

Core competencies are resources and capabilities that serve as a source of competitive advantage over rivals Core competencies distinguish a company competitively and make it distinctive

McKinsey and Co. recommends using three to four competencies when framing strategic actions

76

Discovering Core Competencies Four Criteria of Sustainable Advantages


Valuable: Capabilities that help a firm neutralize threats or exploit opportunities

77



Rare: Capabilities that are not possessed by many others

78



Costly to imitate: capabilities that other firms cannot develop easily, usually due to • Unique historical conditions • Causal ambiguity • Social complexity 79



Nonsubstitutable: capabilities that do not have strategic equivalents • Invisible to competitors • Firm specific knowledge • Trust-based working relationships between managers and nonmanagerial personnel

80

Core Competence as a Strategic Capability Resources • Inputs to a firm’s production process

The source of

Capability • An integration of a team of resources

Core Competence • A strategic capability Does it satisfy the criteria of sustainable competitive advantage?

Yes

No

Capability • A nonstrategic team or resource81

Performance Implications Competitive Consequences No

Yes

Yes

Yes

No

No

Yes

Yes

Performance Implications

Competitive Disadvantage

Below Average Returns

Average Returns

No

No

No

Yes/ No

Competitive Parity

No

Yes/ No

Temporary Com Above Average to petitive Advantage Average Returns

Yes

Sustainable Com- Above Average petitive Advantage Returns

Yes

82

The Basic Value Chain

s e i t i v i t c A t r o p p u S

. t m g M e r e u c t r c u u o r t s s e a r R f n n I a m m r u i F H

t n e m p o l e v e D l a t n c i e g m o l e o r n u c h c o r e T P

Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Primary Activities

83

Outsourcing Outsourcing is the purchase of some or all of a valuecreating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently


. t m g M e r e c u t r c u u o r t s s e a r R f n n I a m m r u i F H

t n e m p o l e v e D l a t n c i g e o m l o e r n u h c c o e r T P

Service

Marketing & Sales Outbound Logistics Operations Inbound Logistics 84 Primary Activities

Strategic Rationales for Outsourcing 

Improve Business Focus – lets company focus on broader business issues by having outside experts handle various operational details



Provide Access to World-Class Capabilities – the specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications 85


Accelerate Business Re-Engineering Benefits – achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process



Share Risks – reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities 86


Free Resources for Other Purposes – permits firm to redirect efforts from non-core activities toward those that serve customers more effectively

87

Outsourcing Issues 

Greatest Value – outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced



Evaluating Resources and Capabilities – don’t outsource activities in which the firm itself can create and capture value



Environmental Threats and Ongoing Tasks – do not outsource primary and support activities that are used to neutralize environmental threats or complete necessary ongoing 88 organizational tasks

Outsourcing Issues 

Nonstrategic Team of Resources – do not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantage



Firm’s Knowledge Base – do not outsource activities that stimulate the development of new capabilities and competencies

89

Core Competencies: Cautions and Reminders 

Never take for granted that core competencies will continue to provide a source of competitive advantage



All core competencies have the potential to become c o r e r i g i d i t i es



Core rigidities are former core competencies that now generate inertia and stifle innovation

90

Chapter 4

Business-Level Strategy

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2003 Southwestern Publishing Company

91





The Strategic Management Process Strategy Implementation Chapter 10 Corporate Governance





Feedback

92

Business-Level Strategy Business-level strategy: an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

93

Core Competencies and Strategy Core competencies

Strategy

The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage

Actions taken to provide value to customers Business-level and gain a competitive advantage by exploiting core competencies in specific, strategy individual product markets 94

Key Issues of Business-Level Strategy 

What good or service to offer customers



How to manufacture or create the good or service



How to distribute the good or service in the marketplace

95

The Central Role of Customers In selecting a business-level strategy, the firm determines 1. w h o it will serve 2. w h a t needs those target customers have that it will satisfy 3. h o w those needs will be satisfied

96

Managing Relationships With Customers 

Customer relationships are strengthened by offering them superior value – help customers to develop a new competitive advantage – enhance the value of existing competitive advantages

97

Managing Relationships With Customers 

Establish a competitive advantage along these dimensions:

Reach – the firm’s access and connection to customers

Richness – the depth and detail of the two-way flow of information between the firm and customers

Affiliation – facilitating useful interactions with customers 98

Market Segmentation

Consumer Markets

Customers

Industrial Markets

99

Market Segmentation: Consumer Markets Demographic factors Per.

Dem.

Consumer Con. Soc. Markets Psy.

Socioeconomic factors Geographic factors Psychological factors

Geo.

Consumption patterns Perceptual factors 100

Market Segmentation: Industrial Markets End-use segments Product segments Geographic segments Common buying factor segments

End

Size

Industrial Buy.Markets Pro. Geo.

Customer size segments 101

Types of Business-Level Strategies 

Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals



To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

102

Five Generic Strategies Competitive Advantage Cost

Uniqueness

Cost Leadership e d t e

Differentiation

p a g o o r r a c B t S Integrated Cost e v i Leadership/ t i t Differentiation e p w t e m o r g r o r a a C N t Focused Cost Focused Leadership Differentiation

103

Cost Leadership Strategy An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers – relatively standardized products – features acceptable to many customers – lowest competitive price

104

Cost Leadership Strategy Cost saving actions required by this strategy: – building efficient scale facilities – tightly controlling production costs and overhead – minimizing costs of sales, R&D and service – building efficient manufacturing facilities – monitoring costs of activities provided by outsiders – simplifying production processes 105

How to Obtain a Cost Advantage Determine and control

Cost Drivers

• Alter production process • Change in automation • New distribution channel • New advertising media • Direct sales in place of indirect sales

Reconfigure, if needed

Value Chain

• New raw material • Forward integration • Backward integration • Change location relative to suppliers or buyers 106

Factors That Drive Costs   

 



Economies of scale Asset utilization Capacity utilization pattern • Seasonal, cyclical Interrelationships Order processing and distribution Value chain linkages • Advertising & sales • Logistics & operations

  

     

Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation 107

Questions Leading to Lower Costs 1. How can an activity be performed differently or even eliminated? 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs?

108

Cost Leadership Strategy and the Five Forces of Competition Rivalry Among Competing Firms Five Forces of Competition Bargaining Power of Suppliers

Can use cost leadership strategy to advantage since: competitors avoid price wars with cost leaders, creating higher profits for the entire industry 

109

Cost Leadership Strategy and the Five Forces of Competition Bargaining Power of Buyers Five Forces of Competition Bargaining Power of Suppliers

Can mitigate buyers’ power by: driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm 

110

Cost Leadership Strategy and the Five Forces of Competition Bargaining Power of Suppliers Five Forces of Competition Bargaining Power of Suppliers

Can mitigate suppliers’ power by: being able to absorb cost increases due to low cost position being able to make very large purchases, reducing chance of supplier using power 



111

Cost Leadership Strategy and the Five Forces of Competition Threat of New Entrants

Five Forces of Competition Bargaining Power of Suppliers

Can frighten off new entrants due to: their need to enter on a large scale in order to be cost competitive the time it takes to move down the learning curve 



112

Cost Leadership Strategy and the Five Forces of Competition Threat of Substitute Products Five Forces of Competition Bargaining Power of Suppliers

Cost leader is well positioned to: make investments to be first to create substitutes buy patents developed by potential substitutes lower prices in order to maintain value position 





113

Major Risks of Cost Leadership Strategy 

Dramatic technological change could take away your cost advantage



Competitors may learn how to imitate value chain



Focus on efficiency could cause cost leader to overlook changes in customer preferences

114

Differentiation Strategy An 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 – price for product can exceed what the firm’s target customers are willing to pay – nonstandardized products – customers value differentiated features more than they value low cost 115

Differentiation Strategy 

Value provided by unique features and value characteristics



Command premium price



High customer service



Superior quality



Prestige or exclusivity



Rapid innovation

116

Differentiation Strategy Differentiation actions required by this strategy: – developing new systems and processes – shaping perceptions through advertising – quality focus – capability in R&D – maximize human resource contributions through low turnover and high motivation 117

How to Obtain a Differentiation Advantage Control if needed

Reconfigure to maximize

Cost Drivers

Value Chain

• Lower buyers’ costs • Raise performance of product or service • Create sustainability through: customer perceptions of uniqueness customer reluctance to switch to non-unique product 118

Factors That Drive Differentiation 

Unique product features



Unique product performance



Exceptional services



New technologies



Quality of inputs



Exceptional skill or experience



Detailed information

119

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Five Forces of Competition Bargaining Power of Suppliers

Can defend against competition because: brand loyalty to differentiated product offsets price competition 

120

Differentiation Strategy and the Five Forces of Competition Bargaining Power of Buyers


Can mitigate buyer power because: well differentiated products reduce customer sensitivity to price increases 

Bargaining Power of Suppliers

121

Differentiation Strategy and the Five Forces of Competition Bargaining Power of Suppliers Five Forces of Competition Bargaining Power of Suppliers

Can mitigate suppliers’ power by: absorbing price increases due to higher margins passing along higher supplier prices because buyers are loyal to differentiated brand 



122

Differentiation Strategy and the Five Forces of Competition Threat of New Entrants


Can defend against new entrants because: new products must surpass proven products or, new products must be at least equal to performance of proven products, but offered at lower prices 



Bargaining Power of Suppliers

123

Differentiation Strategy and the Five Forces of Competition Threat of Substitute Products Five Forces of Competition Bargaining Power of Suppliers

Well positioned relative to substitutes because: brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands 

124

Major Risks of Differentiation Strategy 

Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large



Means of differentiation may cease to provide value for which customers are willing to pay

125

Major Risks of Differentiation Strategy 

Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s products



Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s products

126

Focused Business-Level Strategies A focus strategy must exploit a narrow target’s differences from the balance of the industry by: – isolating a particular buyer group – isolating a unique segment of a product line – concentrating on a particular geographic market – finding their “niche” 127

Factors That May Drive Focused Strategies 

Large firms may overlook small niches



Firm may lack resources to compete in the broader market



May be able to serve a narrow market segment more effectively than can larger industry-wide competitors



Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage 128

Major Risks of Focused Strategies 

Firm may be “outfocused” by competitors



Large competitor may set its sights on your niche market



Preferences of niche market may change to match those of broad market

129

Advantages of Integrated Strategy A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: – adapt quickly to environmental changes – learn new skills and technologies more quickly – effectively leverage its core competencies while competing against its rivals 130

Benefits of Integrated Strategy 

Successful firms using this strategy have above-average returns



Firm offers two types of values to customers – some differentiated features (but less than a true differentiated firm) – relatively low cost (but now as low as the cost leader’s price) 131

Major Risks of Integrated Strategy 

An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm)



The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy 132

Chapter 5

Competitive Rivalry and Competitive Dynamics Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2003 Southwestern Publishing Company

133






The Strategic Management Process Strategy Implementation Chapter 10 Corporate Governance





Feedback

134

Definitions 

Competitors – firms operating in the same market, offering similar products and targeting similar customers



Competitive rivalry – the ongoing set of competitive actions and responses occurring between competitors – competitive rivalry influences an individual firm’s ability to gain and sustain competitive advantages 135

Definitions 

Competitive behavior – the set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position



Competitive dynamics – the total set of actions and responses taken by all firms competing within a market

136

From Competitors to Competitive Dynamics Competitors Engage in

Why? Competitive rivalry What results?

How?

• To gain an advantageous market position • Through competitive behavior • Competitive actions • Competitive responses What results?

Competitive Dynamics • Competitive actions and responses taken by all firms competing in a market

137

Effect of Competitive Rivalry on a Firm’s Strategies 

Success of a strategy is determined by: – the firm’s initial competitive actions – how well it anticipates competitors’ responses to them – how well the firm anticipates and responds to its competitors’ initial actions



Competitive rivalry – affects all types of strategies – most dominant influence is on the firm’s business-level strategy or strategies. 138

A Model of Competitive Rivalry Competitive Analysis • Market commonality • Resource similarity

Drivers of Competitive Behavior • Awareness • Motivation • Ability

feedback

Outcomes • Market position • Financial performance

Interim Rivalry • Likelihood of Attack • First mover incentives • Organizational size • Quality • Likelihood of Response • Type of competitive action • Reputation • Market dependence 139

Competitive Rivalry 

Firms are mutually interdependent – one firm’s competitive actions have noticeable effects on competitors – one firm’s competitive actions elicit competitive responses from competitors – competitors feel each other’s actions and responses



Marketplace success is a function of both individual strategies and the consequences of their use 140

Competitor Analysis 

Competitor analysis – a technique firms use to understand their competitive environment. Along with the general and industry environments, the competitive environment comprises the firm’s external environment – a technique used to help the firm u n d e r s t a n d its competitors – the first step to being able to p r e d i c t competitors’ behavior in the form of its competitive actions and responses 141

Market Commonality 

Market Commonality is concerned with – the number of markets with which a firm and a competitor are jointly involved – the degree of importance of the individual markets to each competitor



Most industries’ markets are somewhat related in terms of – technologies – core competencies



Multimarket competition – Firms competing in several markets

142

Resource Similarity 

Resource similarity – the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount



Firms with similar types and amounts of resources are likely to – have similar strengths and weaknesses – use similar strategies



Assessing resource similarity can be difficult if critical resources are intangible 143 rather than tangible

A Framework of Competitor Analysis High II I

Market Commonality

III IV

Low KEY The shaded area represents degree of market commonality between two firms

Low

Resource Similarity

High

Resource endowment A Resource endowment B

144

Drivers of Competitive Actions and Responses: Awareness Drivers of competitive behavior 

Awareness

Awareness is the extent to which competitors recognize the degree of their mutual interdependence – mutual interdependence results from • market commonality • resource similarity

145

Drivers of Competitive Actions and Responses: Motivation Drivers of competitive behavior 

Awareness

Motivation concerns the firm’s incentive – to take action

Motivation

– or to respond to a competitor’s attack – and relates to perceived gains and losses

146

Drivers of Competitive Actions and Responses: Ability Drivers of competitive behavior 

Ability relates

Awareness

– to each firm’s resources

Motivation

– the flexibility these resources provide 

Ability

Without available resources the firm lacks the ability – to attack a competitor – to respond to the competitor’s actions 147

Drivers of Competitive Actions and Responses: Market Commonality Drivers of competitive behavior influenced by Market commonality



A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets



Because of the high stakes of competition under the condition of market commonality, there is a high probability that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets 148

Drivers of Competitive Actions and Responses: Resource Similarity Drivers of competitive behavior influenced by Market commonality



The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage



When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response

Resource similarity

149

Competitive Rivalry 

Competitive action – a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position



Competitive response – a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action

150

Strategic and Tactical Actions 

Strategic action or a strategic response – a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse



Tactical action or a tactical response – market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse

151

Factors Affecting Likelihood of Attack: First Mover Incentives First mover incentives





First movers allocate funds for – product innovation and development – aggressive advertising – advanced research and development First movers can gain – the loyalty of customers who may become committed to the firm’s goods or services – market share that can be difficult for competitors to take during 152 future competitive rivalry

Factors Affecting Likelihood of Attack: Size First mover incentives Size







Small firms are more likely – to launch competitive actions – to be quicker in doing so Small firms are perceived as – nimble and flexible competitors – relying on speed and surprise to defend their competitive advantages or develop new ones while engaged in competitive rivalry Small firms have the flexibility needed to launch a greater variety of 153 competitive actions

Factors Affecting Likelihood of Attack: Size First mover incentives



Size 

Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period Large organizations commonly have the slack resources required to launch a larger number of total competitive actions

“Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.” - Herb Kelleher, Former CEO, Southwest Airlines 154

Factors Affecting Likelihood of Attack: Quality First mover incentives Size Quality





Quality exists when the firm’s goods or services meet or exceed customers’ expectations Product quality dimensions include – – – – – – – –

Performance Features Flexibility Durability Conformance Serviceability Aesthetics Perceived quality

155

Factors Affecting Likelihood of Attack: Quality First mover incentives Size





Quality exists when the firm’s goods or services meet or exceed customers’ expectations Service quality dimensions include – Timeliness – Courtesy

Quality

– Consistency – Convenience – Completeness – Accuracy

156

Factors Affecting Likelihood of Response 

Firms study three factors to predict how a competitor is likely to respond to competitive actions – type of competitive action – reputation – market dependence

157

Factors Affecting Likelihood of Response: Type of Competitive Action Type of competitive action











Strategic actions receive strategic responses Tactical responses are taken to counter the effects of tactical actions Strategic actions elicit fewer total competitive responses A competitor likely will respond quickly to a tactical action The time needed to implement and assess a strategic action delays competitors’ responses 158

Factors Affecting Likelihood of Response: Reputation Type of competitive action



An actor is the firm taking an action or response



Reputation is the positive or negative attribute ascribed by one rival to another based on past competitive behavior



The firm studies responses that a competitor has taken previously when attacked to predict likely responses

Reputation

159

Factors Affecting Likelihood of Response: Market Dependence Type of competitive action Reputation Market dependence



Market dependence is – the extent to which a firm’s revenues or profits are derived from a particular market



In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position

160

Competition 

Competitive Dynamics – competitive dynamics concerns the ongoing actions and responses taking place among all firms competing within a market for advantageous positions



Competitive Rivalry – building and sustaining competitive advantages are at the core of competitive rivalry – competitive advantages are the link to an advantageous market position 161

Strategic Conduct is Dynamic • A firm’s strategic conduct is dynamic in nature • Actions and responses shape the competitive positions of each firm’s business level strategy

Firm A

Firm B

162

Strategic Conduct is Dynamic • Actions taken by one firm elicits responses from competitors • Competitive responses lead to additional actions from the firm that acted originally

Firm A

Actions New Actions New Response Response

Firm B

163

Competitive Dynamics: Slow-Cycle Markets Slow-cycle markets







Slow-cycle markets – the firm’s competitive advantages are shielded from imitation for long periods of time – imitation is costly Competitive advantages are sustainable in slow-cycle markets A proprietary, one-of-a-kind competitive advantage leads to competitive success in a slow-cycle market 164

Gradual Erosion of a Sustainable Competitive Advantage e l b a e n g i a a t t s n u a S v a d A Launch m e o v i r t f i s t e n r p u m t e o R C

0

Exploitation

Counterattack

5 Time (Years)

10 165

Competitive Dynamics: Fast-Cycle Markets Slow-cycle markets



Fast-cycle markets 





Fast-cycle markets – the firm’s competitive advantages aren’t shielded from imitation – imitation happens quickly and somewhat inexpensively Competitive advantages aren’t sustainable Competitors use reverse engineering to quickly imitate or improve on the firm’s products Non-proprietary technology is diffused rapidly 166

Obtaining Temporary Advantages to Create Sustained Advantage s s e n Firm has already moved i o r i e t to next advantage S c Exploitation a A e m l b Launch Counterattack o r a f c s i l n r p e u t R e f R o

0

5

10

15

Time (Years) 167

Competitive Dynamics: Standard-Cycle Markets Slow-cycle markets

Fast-cycle markets





Standard-cycle markets 

Standard-cycle markets – the firm’s competitive advantages may be shielded from imitation – imitation is moderately costly Competitive advantages are partially sustainable if the firm is able to continuously upgrade the quality of its competitive advantages Firms – seek large market shares – gain customer loyalty through brand names 168 – carefully control operations

Chapter 6

Corporate-Level Strategy


169














Feedback

170

Two Levels of Strategy A diversified company has two levels of strategy 1. Business-Level Strategy (Competitive Strategy) How to create competitive advantage in each business in which the company competes - low cost - differentiation - focused low cost - focused differentiation - integrated low cost/ differentiation

2. Corporate-Level Strategy (Company-wide Strategy) How to create value for the corporation as a whole 171

Key Questions in Corporate Strategy 1. What businesses should the corporation be in? 2. How should the corporate office manage the array of business units? C o r p o r a t e S t r at e g y is

what makes the corporate whole add up to more than the sum of its business unit parts 172

Levels and Types of Diversification Low Levels of Diversification Single Business > 95% of business from a single business unit

Dominant Business Between 70 and 95% of business from a single business unit

173

Levels and Types of Diversification Moderate to High Levels of Diversification Related Constrained <70% of revenues from dominant business; all businesses share product, technological and distribution linkages

174

Levels and Types of Diversification Moderate to High Levels of Diversification Related Linked (Mixed) < 70% of revenues from dominant business, and only limited links exist

175

Levels and Types of Diversification Very High Levels of Diversification Unrelated < 70% of revenue comes from the dominant business, and there are no common links between businesses

176

Reasons for Diversification Incentives

Reasons to Enhance Strategic Competitiveness • Economies of scope

Resources

• Market power • Financial economics

Managerial Motives 177


Incentives with Neutral Effects on Strategic Competitiveness • Anti-trust regulation

Resources

• Tax laws • Low performance

Managerial Motives

• Uncertain future cash flows • Firm risk reduction

178


Resources with varying effects on value creation and strategic competitiveness • Tangible resources

Resources

Managerial Motives

 financial resources  physical assets • Intangible resources

 tacit knowledge  customer relations  image and reputation

179


Managerial Motives (Value Reduction) • Diversifying managerial employment risk

Resources

• Increasing managerial compensation

Managerial Motives 180

Value-creating Strategies of Diversification: Operational and Corporate Readiness s e s s e l i n a s n uHigh o i t B a n r e e e p w O t e : B g n s i s r e a n h dLow e S t a l e R

Related Constrained Diversification Vertical Integration (Market Power)

Unrelated Diversification (Financial Economies)

Both Operational and Corporate Relatedness (Rare Capability and can Create Diseconomies of Scope)

Related Linked Diversification (Economies of Scope)

Low High Corporate Readiness: Transferring Skills into 181 Businesses Through Corporate Headquarters

Adding Value by Diversification Diversification most effectively adds value by either of two mechanisms: – Economies of scope: cost savings attributed to transferring the capabilities and competencies developed in one business to a new business

– Market power: when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both

182

Alternative Diversification Strategies Related Diversification Strategies – sharing activities – transferring core competencies

Unrelated Diversification Strategies – efficient internal capital market allocation – restructuring 183

Alternative Diversification Strategies Related Diversification Strategies – sharing activities

184

Sharing Activities:

Key Characteristics



Sharing activities often lowers costs or raises differentiation



Sharing activities can lower costs if it: – achieves economies of scale – boosts efficiency of utilization – helps move more rapidly down the Learning Curve



Sharing activities can enhance potential for or reduce the cost of differentiation



Must involve activities that are crucial to competitive advantage

185

Sharing Activities:

Assumptions



Strong sense of corporate identity



Clear corporate mission that emphasizes the importance of integrating business units



Incentive system that rewards more than just business unit performance

186


187

Transferring Core Competencies: Key Characteristics 

Exploits interrelationships among divisions



Start with value chain analysis – identify ability to transfer skills or expertise among similar value chains – exploit ability to transfer activities

188

Transferring Core Competencies: Assumptions 

Transferring core competencies leads to competitive advantage only if the similarities among business units meet the following conditions: – activities involved in the businesses are similar enough that sharing expertise is meaningful – transfer of skills involves activities which are important to competitive advantage – the skills transferred represent significant sources of competitive advantage for the receiving unit 189


Unrelated Diversification Strategies – efficient internal capital market allocation

190

Efficient Internal Capital Market Allocation: Key Characteristics 

Firms pursuing this strategy frequently diversify by acquisition: – – – –

acquire sound, attractive companies acquired units are autonomous acquiring corporation supplies needed capital portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs – add professional management & control to sub-units – sub-unit managers compensation based on unit results

191

Efficient Internal Capital Market Allocation: Assumptions 

Managers have more detailed knowledge of firm relative to outside investors



Firm need not risk competitive edge by disclosing sensitive competitive information to investors



Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own 192


Unrelated Diversification Strategies – efficient internal capital market allocation – restructuring 193

Restructuring: Key Characteristics 



Seek out undeveloped, sick or threatened organizations or industries Parent company (acquirer) intervenes and frequently: – – – –

changes sub-unit management team shifts strategy infuses firm with new technology enhances discipline by changing control systems – divests part of firm – makes additional acquisitions to achieve critical mass

194

Restructuring: Key Characteristics 

Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations

195

Restructuring: Assumptions 

Requires keen management insight in selecting firms with depressed values or unforeseen potential



Must do more than restructure companies



Need to initiate restructuring of industries to create a more attractive environment

196

Incentives to Diversify External Incentives: 





Relaxation of anti-trust regulation allows more related acquisitions than in the past Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments

197

Incentives to Diversify Internal Incentives: 





Poor performance may lead some firms to diversify to attempt to achieve better returns Firms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to reduce risk

198

Resources and Diversification 

Besides strong incentives, firms are more likely to diversify if they have the resources to do so



Value creation is determined more by appropriate use of resources than incentives to diversify

199

Managerial Motives to Diversify Managers have motives to diversify – diversification increases size; size is associated with executive compensation – diversification reduces employment risk – effective governance mechanisms may restrict such motives

200

Relationship Between Diversification and Performance e c n a m r o f r e P Dominant Business

Related Constrained

Level of Diversification

Unrelated Business 201

Relationship Between Firm Performance and Diversification

Incentives

Resources

Managerial Motives

Capital Market Intervention and the Market for Managerial Talent

Diversification Strategy

Internal Governance

Firm Performance

Strategy Implementation 202

Chapter 7

Acquisition and Restructuring Strategies Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2003 Southwestern Publishing Company

203















Feedback

204

Mergers and Acquisitions 

Merger: a strategy through which two firms agree to integrate their operations on a relatively co-equal basis



Acquisition: a strategy through which one firm buys a controlling interest in another firm with the intent of making the acquired firm a subsidiary business within its own portfolio



Takeover: a special type of an acquisition strategy wherein the target firm did not solicit the acquiring firm’s bid 205

Reasons for Making Acquisitions Learn and develop new capabilities Increase market power

Overcome entry barriers

Cost of new product development

Reshape firm’s competitive scope

Acquisitions

Increase speed to market

Increase diversification

Lower risk compared to developing new products 206

Reasons for Making Acquisitions: Increased Market Power 

Factors increasing market power – when a firm is able to sell its goods or services above competitive levels or – when the costs of its primary or support activities are below those of its competitors – usually is derived from the size of the firm and its resources and capabilities to compete



Market power is increased by – horizontal acquisitions – vertical acquisitions – related acquisitions

207

Reasons for Making Acquisitions: Overcome Barriers to Entry 

Barriers to entry include – economies of scale in established competitors – differentiated products by competitors – enduring relationships with customers that create product loyalties with competitors



acquisition of an established company – may be more effective than entering the market as a competitor offering an unfamiliar good or service that is unfamiliar to current buyers – provides a new entrant with immediate market 208 access

Reasons for Making Acquisitions: Cost of New Product Development and Speed to Market 

Significant investments of a firm’s resources are required to – Develop new products internally – introduce new products into the marketplace



Acquisition of a competitor may result in – more predictable returns – faster market entry – rapid access to new capabilities

209

Reasons for Making Acquisitions: Lower Risk Compared to Developing New Products 

An acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an internal product development process



Therefore managers may view acquisitions as lowering risk

210

Reasons for Making Acquisitions: Increased Diversification 

It may be easier to develop and introduce new products in markets currently served by the firm



It may be difficult to develop new products for markets in which a firm lacks experience – it is uncommon for a firm to develop new products internally to diversify its product lines – acquisitions are the quickest and easiest way to diversify a firm and change its portfolio of business 211

Reasons for Making Acquisitions: Reshaping the Firms’ Competitive Scope 

Firms may use acquisitions to reduce their dependence on one or more products or markets



Reducing a company’s dependence on specific markets alters the firm’s competitive scope

212

Reasons for Making Acquisitions: Learning and Developing New Capabilities 

Acquisitions may gain capabilities that the firm does not possess



Acquisitions may be used to – acquire a special technological capability – broaden a firm’s knowledge base – reduce inertia

213

Problems With Acquisitions Integration difficulties

Inadequate evaluation of target

Resulting firm is too large

Acquisitions

Large or extraordinary debt

Managers overly focused on acquisitions

Too much diversification Inability to achieve synergy 214

Problems With Acquisitions Integration Difficulties 

Integration challenges include – melding two disparate corporate cultures – linking different financial and control systems – building effective working relationships (particularly when management styles differ) – resolving problems regarding the status of the newly acquired firm’s executives – loss of key personnel weakens the acquired firm’s capabilities and reduces its value

215

Problems With Acquisitions Inadequate Evaluation of Target 

Evaluation requires that hundreds of issues be closely examined, including – financing for the intended transaction – differences in cultures between the acquiring and target firm – tax consequences of the transaction – actions that would be necessary to successfully meld the two workforces



Ineffective due-diligence process may – result in paying excessive premium for the target company

216

Problems With Acquisitions Large or Extraordinary Debt 

Firm may take on significant debt to acquire a company



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

217

Problems With Acquisitions Inability to Achieve Synergy 

Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately



Firms experience transaction costs when they use acquisition strategies to create synergy



Firms tend to underestimate indirect costs when evaluating a potential acquisition

218

Problems With Acquisitions Too Much Diversification 

Diversified firms must process more information of greater diversity



Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances



Acquisitions may become substitutes for innovation

219

Problems With Acquisitions Managers Overly Focused on Acquisitions 

Managers in target firms may operate in a state of virtual suspended animation during an acquisition



Executives may become hesitant to make decisions with long-term consequences until negotiations have been completed



Acquisition process can create a shortterm perspective and a greater aversion to risk among top-level executives in a target firm 220

Problems With Acquisitions 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 221

Attributes of Effective Acquisitions Attributes

Results

Complementary Assets or Resources

Buying firms with assets that meet current needs to build competitiveness

Friendly Acquisitions

Friendly deals make integration go more smoothly

Careful Selection Process

Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies

Maintain Financial Slack

Provide enough additional financial resources so that profitable projects would not be foregone 222

Attributes of Effective Acquisitions Attributes

Results

Low-to-Moderate Debt

Merged firm maintains financial flexibility

Sustain Emphasis on Innovation

Continue to invest in R&D as part of the firm’s overall strategy

Flexibility

Has experience at managing change and is flexible and adaptable

223

Restructuring Activities 

Downsizing – Wholesale reduction of employees



Downscoping – Selectively divesting or closing non-core businesses – Reducing scope of operations – Leads to greater focus



Leveraged Buyout (LBO) – A party buys a firm’s entire assets in order to take the firm private. 224

Restructuring and Outcomes

Downsizing

Downscoping

Leveraged buyout

Reduced labor costs

Loss of human capital

Reduced debt costs

Lower performance

Emphasis on strategic controls

Higher performance

High debt costs

Higher risk 225

Chapter 8

International Strategy


226
















Feedback

227

Opportunities and Outcomes of International Strategy Identify International Opportunities

Increased market size Return on investment Economies of scale and learning Advantage in location

Explore Resources and Capabilities International Strategies

Use Core Competence Modes of Entry

International business-level strategy

Exporting

Multidomestic strategy

Strategic alliances

Global strategy

Acquisitions

Transnational strategy

Establishment of a new subsidiary

Licensing

228

Opportunities and Outcomes of International Strategy: Continued Use Core Competence Modes of Entry

Exporting

Management problems and risk

Strategic Competitiveness Outcomes

Better performance

Licensing Strategic alliances Innovation

Acquisitions Establishment of a new subsidiary

Management problems and risk

229

International Strategy Life Cycle Product Demand Develops and Firm Exports Products

Firm Introduces Innovation in Domestic Market

Foreign Competition Begins Production

Selling Products or Services Outside a Firm’s Domestic Market Production Becomes Standardized and is Relocated to Low Cost Countries

Firm Begins Production Abroad

230

Motivations for International Expansion 

Increase Market Share – domestic market may lack the size to support efficient scale manufacturing facilities



Return on Investment – 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

231

Motivations for International Expansion 

Economies of Scale or Learning – expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution – can spread costs over a larger sales’ base – increase profit per unit



Location Advantages – low cost markets may aid in developing competitive advantage – may achieve better access to: • Raw materials • Key customers • Lower cost labor • Energy

232

International Business-Level Strategy: Determinants of National Advantage Factors of production

Firm strategy, structure, and rivalry

Demand conditions

Related and supporting industries 233

International Business-Level Strategy: Determinants of National Advantage 

Factors of production: the inputs necessary to compete in any industry – labor – land – natural resources – capital – infrastructure – basic factors include natural and labor resources – advanced factors include digital communication systems and educated workforce 234


Demand conditions: characterized by the nature and size of buyers’ needs in the home market for the industry’s goods or services – size of market segment can lead to scaleefficient facilities – efficiency can lead to domination of the industry in other countries – specialized demand may create opportunities beyond national boundaries 235


Related and supporting industries: supporting services, facilities, suppliers and so on – support in design – support in distribution – related industries as suppliers and buyers

236


Firm strategy, structure, and rivalry: the pattern of strategy, structure, and rivalry among firms – common technical training – methodological product and process improvement – cooperative and competitive systems

237

International Corporate-Level Strategy n o High i t a r g e t n I l a b o l G r o f d e e N Low

Global strategy

Transnational strategy

Multidomestic strategy

Low

High

Need for Local Responsiveness

238

International Corporate-Level Strategy 





Type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies Some corporate strategies provide individual country units with flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units 239

International Corporate-Level Strategy: Multidomestic Strategy • Strategy and operating decisions are decentralized to strategic business units (SBU) Multidomestic in each country strategy • Products and services are tailored to local markets • Business units in one country are independent of each other • Assumes markets differ by country or regions • Focus on competition in each market • Prominent strategy among European firms due to broad variety of cultures and markets in Europe 240

International Corporate-Level Strategy: Global Strategy Global strategy

• Products are standardized across national markets • Decisions regarding business-level strategies are centralized in the home office • Strategic business units (SBU) are assumed to be interdependent • Emphasizes economies of scale • Often lacks responsiveness to local markets • Requires resource sharing and coordination across borders (which also makes it difficult to manage)

241

International Corporate-Level Strategy: Transnational Strategy • Seeks to achieve both global efficiency and local responsiveness Transnational • Difficult to achieve because of simultaneous strategy requirements  strong central control and coordination to achieve efficiency  decentralization to achieve local market responsiveness • Must pursue organizational learning to achieve competitive advantage

242

Global Market Entry: Choice of Entry Mode Type of Entry

Characteristics

Exporting

High cost, low control

Licensing

Low cost, low risk, little control, low returns

Strategic alliances

Shared costs, shared resources, shared risks, problems of integration

Acquisition

Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations

New wholly owned subsidiary

Complex, often costly, time consuming, high risk, maximum control, potential 243 above-average returns

Strategic Competitiveness Outcomes: Returns 

International diversification and returns : firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets – may increase a firm’s returns – such firms usually achieve the most positive stock returns – firm may achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns 244

Strategic Competitiveness Outcomes: Innovation 

International diversification and innovation : firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets – potentially greater returns on innovations (larger markets) – generate additional resources for investment in innovation – exposed to new products and processes in international markets, generates additional knowledge leading to innovations 245

Risks in an International Environment Political Risks

Economic Risks

Political risks include • instability in national governments • war, both civil and international • potential nationalization of a firm’s resources

246

Risks in an International Environment Political Risks

Economic Risks

Economic risks are interdependent with political risks and include • differences and fluctuations in the value of different currencies • differences in prevailing wage rates • difficulties in enforcing property rights • unemployment

247

Limits to International Expansion: Management Problems 

Cost of coordination across diverse geographical business units



Institutional and cultural barriers



Understanding strategic intent of competitors



The overall complexity of competition

248

Chapter 9

Cooperative Strategy


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Feedback

250

Cooperative Strategy 

Cooperative strategy is a strategy in which firms – work together – to achieve a shared objective



Cooperating with other firms is a strategy that – creates value for a customer – exceeds the cost of constructing customer value in other ways – establishes a favorable position relative to competition

251

Strategic Alliance 

A strategic alliance is a cooperative strategy in which – firms combine some of their resources and capabilities – to create a competitive advantage



A strategic alliance involves – exchange and sharing of resources and capabilities – co-development or distribution of goods or services 252

Strategic Alliance Firm A Resources Capabilities Core Competencies

Firm B

Combined

Resources Capabilities Core Competencies

Resources Capabilities Core Competencies

Mutual interests in designing, manufacturing, or distributing goods or services 253

Types of Cooperative Strategies 

Joint venture: two or more firms create an independent company by combining parts of their assets



Equity strategic alliance: partners who own different percentages of equity in a new venture



Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing 254

Reasons for Strategic Alliances by Market Type Market Slow Cycle

Reason • Gain access to a restricted market • Establish a franchise in a new market • Maintain market stability (e.g., establishing standards)

255

Reasons for Strategic Alliances by Market Type Market Fast Cycle

Reason • Speed up development of new goods or service • Speed up new market entry • Maintain market leadership • Form an industry technology standard • Share risky R&D expenses • Overcome uncertainty

256

Reasons for Strategic Alliances by Market Type Market Standard Cycle

Reason • Gain market power (reduce industry overcapacity) • Gain access to complementary resources • Establish economies of scale • Overcome trade barriers • Meet competitive challenges from other competitors • Pool resources for very large capital projects • Learn new business techniques 257

Business-Level Cooperative Strategies: Complementary Strategic Alliances Complementary Alliances

• complementary strategic alliances are designed to take advantage of market opportunities by combining partner firms’ assets in complementary ways to create new value – these include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage 258

Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer

e c n a i l l A l a c i t r e V


e r u t c u r t s a r f n I m r i F

. t m g M e c r u o s e R n a m u H

t n e m p o l e v e D l a c i g o l o n h c e T

Service t n e m e r u c o r P

Marketing & Sales Outbound Logistics Operations Inbound Logistics

Primary Activities

Supplier





• vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms • outsourcing is one example of this type of alliance



Primary Activities

259

Business-Level Cooperative Strategies: Complementary Strategic Alliances Buyer

Buyer Horizontal Alliance Potential Competitors s e i t i v i t c A t r o p p u S






Primary Activities







Primary Activities

• horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain • focus on long-term product development and distribution opportunities • the partners may become competitors • requires a great deal of trust between the partners

260

Business-Level Cooperative Strategies: Competition Response Alliances Complementary Alliances Competition Response Alliances

• competition response strategic alliances occur when firms join forces to respond to a strategic action of another competitor • because they can be difficult to reverse and expensive to operate, competition response strategic alliances are primarily formed to respond to strategic rather than tactical actions

261

Business-Level Cooperative Strategies: Uncertainty Reducing Alliances Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances

• uncertainty reducing strategic alliances are used to hedge against risk and uncertainty • these alliances are most noticed in fast-cycle markets • alliance may be formed to reduce the uncertainty associated with developing new product or technology standards

262

Business-Level Cooperative Strategies: Competition Reducing Alliances Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances

• competition reducing strategic alliances may be created to avoid destructive or excessive competition • explicit collusion exists when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal) • tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each other’s competitive actions and 263 responses

Business-Level Cooperative Strategies: Competition Reducing Alliances Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances

• mutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple markets • competition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust laws

Competition Reducing Alliances 264

Corporate-Level Cooperative Strategies • Corporate-level cooperative strategies are designed to facilitate product and/or market diversification - diversifying strategic alliance - synergistic strategic alliance - franchising

• Diversifying alliances and synergistic alliances allow firms - to grow and diversify their operations - through a means other than a merger or acquisition 265

Corporate-Level Cooperative Strategies: Diversifying Alliances Diversifying Alliances

• diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisition • provides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility • permits a “test” of whether a future merger between the partners would benefit both parties 266

Corporate-Level Cooperative Strategies: Synergistic Alliances Diversifying Alliances Synergistic Alliances

• synergistic strategic alliances create joint economies of scope between two or more firms • create synergy across multiple functions or multiple businesses between partner firms

267

Corporate-Level Cooperative Strategies: Franchising Diversifying Alliances Synergistic Alliances Franchising

• franchising spreads risks and uses resources, capabilities, and competencies without merging or acquiring another company • contractual relationship concerning the franchise that is developed between two parties, the franchisee and the franchisor • an alternative to pursuing growth through mergers and acquisitions

268

International Cooperative Strategies 

Cross-border strategic alliance – an international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage – a firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets

269

International Cooperative Strategies 

Allows risk sharing by reducing financial investment



Host partner knows local market and customs



International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints



Must gauge partner’s strategic intent so they do not gain access to important technology and become a competitor

270

Network Cooperative Strategies 

A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives – stable alliance network – dynamic alliance network



Effective social relationships and interactions among partners are keys to a successful network cooperative strategy 271

Network Cooperative Strategies: Stable Alliance Network Stable Alliance Network

• long term relationships that often appear in mature industries where demand is relatively constant and predictable • stable networks are built for exploitation of the economies available between firms

272

Network Cooperative Cooperative Strategies: Strategies: Dynamic Alliance Network Stable Alliance Network Dynamic Alliance Network

• arrangements that evolve in industries with rapid technologica technologicall change leading to short product life cycles • primarily used to stimulate rapid, value-creating product innovations and subsequent successful market entries • purpose is often exploration of new ideas

273

Competitive Risks with Cooperative Strategies Competitive Risks

• Partner may act opportunistically • Misrepresentation of competencies brought to the partnership • Partner fails to make committed committed resources and capabilities available to its partners • Firm may make investments that are specific to the alliance while its partner does not

274


Risk and Asset Management Approaches

• Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages from excessive learning by partners • Assign manage managerial rial responsibi responsibility lity for a firm’ firm’ss cooperative cooperative strategies to a high-level executive or team • Specify resources and capabilities that will be shared and those that will not be shared (detailed contracts and monitoring) • Develop trusting relationships

275

Approaches for Managing Cooperative Strategies 

cost minimization – formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled



opportunity maximization – maximize partnership’s value-creation value-creation opportunities – partners take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities – fewer formal, limiting, contracts

276


Risk and Asset Management Approaches

Desired Outcome

• Creating value • Above-average returns

277

Chapter 10

Corporate Governance


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Feedback

279

Corporate Governance 

Corporate governance is – a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations – concerned with identifying ways to ensure that strategic decisions are made effectively – used in corporations to establish order between the firm’s owners and its top-level managers

280

Corporate Governance Mechanisms Internal Governance Mechanisms Ownership concentration – relative amounts of stock owned by individual shareholders and institutional investors Board of Directors – individuals responsible for representing the firm’s owners by monitoring top-level managers’ strategic decisions 281

Corporate Governance Mechanisms Internal Governance Mechanisms Executive Compensation – use of salary, bonuses, and longterm incentives to align managers’ interests with shareholders’ interests 

Monitoring by top-level managers – they may obtain Board seats (not in financial institutions) – they may elect Board representatives 282

Corporate Governance Mechanisms External Governance Mechanisms Market for Corporate Control – the purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitiveness

283

Separation of Ownership and Managerial Control 

Basis of the modern corporation – shareholders purchase stock, becoming r e s i d u a l c l ai m a n t s

– shareholders reduce risk by holding diversified portfolios – professional managers are contracted to provide decision-making 

Modern public corporation form leads to efficient specialization of tasks – risk bearing by shareholders – strategy development and decision-making by managers 284

Agency Relationship: Owners and Managers Shareholders (Principals) • Firm owners

285

Agency Relationship: Owners and Managers Shareholders (Principals) • Firm owners • Decision makers

Managers (Agents)

286

Agency Relationship: Owners and Managers Shareholders (Principals) • Firm owners • Decision makers

Managers (Agents)

• Risk bearing specialist (principal) pays compensation to • A managerial decision-making specialist (agent)

An Agency Relationships 287

Agency Theory Problem 

The agency problem occurs when: – the desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately



Solution: – principals engage in incentive-based performance contracts – monitoring mechanisms such as the board of directors – enforcement mechanisms such as the managerial labor market to mitigate the agency 288 problem

Manager and Shareholder Risk and Diversification

k s i R

Shareholder (business) S risk profile

Managerial (employment) risk profile M

A Dominant Related Business Constrained

Related Linked

Diversification

B

Unrelated Businesses 289

Agency Theory Conflicts 

Principals may engage in monitoring behavior to assess the activities and decisions of managers However, dispersed shareholding makes it difficult and inefficient to monitor management’s behavior



Boards of Directors have a fiduciary duty to shareholders to monitor management However, Boards of Directors are often accused of being lax in performing this function

290

Governance Mechanisms Ownership Concentration

• Large block shareholders have a strong incentive to monitor management closely • Their large stakes make it worth their while to spend time, effort and expense to monitor closely • They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats) 291

Governance Mechanisms Ownership Concentration Boards of Directors

Insiders • The firm’s CEO and other top-level managers

Related Outsiders • Individuals not involved with dayto-day operations, but who have a relationship with the company

Outsiders • Individuals who are independent of the firm’s day-to-day operations and other relationships 292

Governance Mechanisms Ownership Concentration Boards of Directors

Recommendations for more effective Board Governance: • Increase diversity of board members’ backgrounds • Strengthen internal management and accounting control systems • Establish formal processes for evaluation of the board’s performance

293

Governance Mechanisms Ownership Concentration Boards of Directors Executive Compensation

• Salary, bonuses, long term incentive compensation • Executive decisions are complex and non-routine • Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes

294

Governance Mechanisms Ownership Concentration Boards of Directors Executive Compensation

• Stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their control • Incentive systems do not guarantee that managers make the “right” decisions, but do increase the likelihood that managers will do the things for which they are rewarded

295

Governance Mechanisms Ownership Concentration Boards of Directors Executive Compensation Market for Corporate Control

• Firms face the risk of takeover when they are operated inefficiently • Many firms begin to operate more efficiently as a result of the “threat” of takeover, even though the actual incidence of hostile takeovers is relatively small • Changes in regulations have made hostile takeovers difficult • Acts as an important source of discipline over managerial incompetence and waste 296

International Corporate Governance: Germany 





Owner and manager are often the same in private firms Public firms often have a dominant shareholder, frequently a bank Frequently there is less emphasis on shareholder value than in U.S. firms, although this may be changing

297

International Corporate Governance: Germany 

Medium to large firms have a two-tiered board – vorstand monitors and controls managerial decisions – aufsichtsrat selects the Vorstand – employees, union members and shareholders appoint members to the Aufsichtsrat

298

International Corporate Governance: Japan 





Obligation, “family” and consensus are important factors Banks (especially “main bank”) are highly influential with firm’s managers Keiretsus are strongly interrelated groups of firms tied together by crossshareholdings

299

International Corporate Governance: Japan 

Other characteristics: – powerful government intervention – close relationships between firms and government sectors – passive and stable shareholders who exert little control – virtual absence of external market for corporate control

300

Corporate Governance and Ethical Behavior It is important to serve the interests of the firm’s multiple stakeholder groups! Capital Market Stakeholders

• In the U.S., shareholders (in the capital market stakeholder group) are viewed as the most important stakeholder group • which are served by the board of directors • Hence, the focus of governance mechanisms is on the control of managerial decisions to ensure that shareholders’ interests will be served 301

Corporate Governance and Ethical Behavior It is important to serve the interests of the firm’s multiple stakeholder groups! Capital Market Stakeholders Product Market Stakeholders

• Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups

302

Corporate Governance and Ethical Behavior It is important to serve the interests of the firm’s multiple stakeholder groups! Capital Market Stakeholders Product Market Stakeholders Organizational Stakeholders

• 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 is seen in the example of Enron and Arthur Andersen 303

Chapter 11

Organizational Structure and Controls Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2003 Southwestern Publishing Company

304















Feedback

305

Organizational Structure 

Organizational structure specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes



It is critical to match organizational structure to the firm’s strategy

306

Stability and Flexibility in Structure 

Structural stability provides the capacity – required to consistently and predictably manage the firm’s daily work routines



Structural flexibility provides the opportunity to – explore competitive possibilities – allocate resources to activities that shape competitive advantages needed by the firm

307

Organizational Controls 

Organizational controls – guide the use of strategy – indicate how to compare actual results with expected results – suggest corrective actions to take when the difference between actual and expected results is unacceptable



Two types of organizational controls – strategic controls – financial controls 308

Organizational Controls: Strategic Controls Strategic Controls



Concerned with examining the fit between – what the firm m i g h t d o (as suggested by opportunities in its external environment) – what it c an d o (as indicated by its competitive advantages)



Used to evaluate the degree to which the firm focuses on the requirements to implement its strategies 309

Organizational Controls: Financial Controls Strategic Controls



Objective criteria



Accounting-based measures include

Financial Controls

– return on investment – return on assets 

Market-based measures include – economic value added

310

Matching Control to Strategy 

Relative use of controls varies by type of strategy – large diversified firms using the cost leadership strategy emphasize financial controls – companies and business units using the differentiation strategy emphasize strategic controls

311

Evolutionary Patterns of Strategy and Organizational Structure 

Firms grow in predictable patterns – by volume – by geography – integration (vertical, horizontal) – through product/business diversification



A firm’s growth patterns determine its structural form

312

Evolutionary Patterns of Strategy and Organizational Structure 

All organizations require some form of organizational structure to implement and manage their strategies



Firms frequently alter their structure as they grow in size and complexity



Three basic structure types: – simple structure – functional structure – multi-divisional structure (M-form) 313

Strategy and Structure Growth Pattern: Simple Structure Simple Structure

314

Strategy and Structure Growth Pattern: Simple Structure 

Organizational form in which the ownermanager – makes all major decisions directly – monitors all activities



Staff – serves as an extension of the manager’s supervisory authority



Matched with focus strategies and business-level strategies – commonly compete by offering a single product line in a single geographic market

315

Strategy and Structure Growth Pattern: Simple Structure 

Growth creates – complexity – managerial and structural challenges



Owner-managers – commonly lack organizational skills and experience – become ineffective in managing the specialized and complex tasks involved with multiple organizational functions

316

Strategy and Structure Growth Pattern: Functional Structure Simple Structure Efficient implementation of formulated strategy Sales GrowthCoordination and Control Problems

Functional Structure 317

Strategy and Structure Growth Pattern: Functional Structure 

Chief Executive Officer (CEO) – limited corporate staff



Functional line managers in dominant organizational areas – production – marketing – engineering



– accounting – R&D – human resources

Supports use of business-level strategies and some corporate-level strategies – single or dominant business with low levels of 318 diversification

Strategy and Structure Growth Pattern: Functional Structure 

Differences in orientation among organizational functions can – impede communication and coordination – increase the need for CEO to integrate decisions and actions of business functions – facilitate career paths and professional development in specialized functional areas – cause functional-area managers to focus on local versus overall company strategic issues

319

Strategy and Structure Growth Pattern: Multidivisional Structure 

Strategic control – operating divisions – each division is separate business or profit center



Top corporate officer delegates responsibilities to division managers – for day-to-day operations – for business-unit strategy



Appropriate when the firm grows through diversification 320

Strategy and Structure Growth Pattern: Multidivisional Structure 

Three major benefits – corporate officers able to more accurately monitor the performance of each business, which simplifies the problem of control – facilitates comparisons between divisions, which improves the resource allocation process – stimulates managers of poorly performing divisions to look for ways of improving performance

321

Strategy and Structure Growth Pattern: Multidivisional Structure Simple Structure Efficient implementation of formulated strategy Multidivisional Structure

Sales GrowthCoordination and Control Problems

Functional Structure

Efficient implementation of formulated strategy

Sales GrowthCoordination and Control Problems

322

Matching Structure and Strategy 

Different forms of the functional organizational structure are matched to – cost leadership strategy – differentiation strategy – integrated cost leadership/differentiation strategy



differences in these forms seen in three important structural characteristics – specialization – centralization – formalization

323

Structure for Cost Leadership Strategy • Operations is main function • Process engineering is

Office of the President

emphasized over R&D

• Large centralized staff • Formalized procedures • Structure is mechanical, job

Centralized Staff

roles highly structured

Engineering

Accounting

Operations

Marketing

Personnel 324

Structure for Differentiation Strategy President and Limited Staff R&D New Product R&D

Marketing Marketing

Operations

Finance

Human Resources

• Marketing is the main function for tracking new product ideas • New product R&D is emphasized • Most functions are decentralized • Formalization is limited to foster change and promote new ideas • Overall structure is organic; job roles are less structured

325

Multidivisional Structure 

Each division is operated as a separate business



Appropriate for related-diversified businesses Key task of corporate managers is exploiting synergies among divisions Managers use a combination of strategic controls and financial controls





326


Managers try to strike a balance between: – competing among divisions for scarce capital resources – creating opportunities for cooperation to develop synergies





The goal is to maximize overall firm performance The decision-making of managers in a multi-divisional structure may be: – centralized or decentralized – bureaucratic or non-bureaucratic

327


Balance on these dimensions may change over time



Structure will evolve over time with: – changes in strategy – degree of diversification – geographic scope – nature of competition

328

Three Variations of the Multidivisional Structure Multidivisional Structure (M-form)

Cooperative Form

Competitive Form

Strategic Business-Unit (SBU) Form 329

Cooperative Form of Multidivisional Structure: Related-Constrained Strategy Headquarters Office

President

Government Affairs

Legal Affairs

Corporate R&D Lab

Strategic Planning

Corporate Human Resources

Product Division

Product Division

Product Division

Corporate Marketing

Corporate Finance

Product Division

Product Division 330

Cooperative Form of Multidivisional Structure: Related-Constrained Strategy 

Structural integration devices create tight links among all divisions



Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions



R&D is likely to be centralized



Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance



Culture emphasizes cooperative sharing 331

SBU Form of Multidivisional Structure: Related-Linked Strategy Headquarters Office

Corporate R&D Lab

President

Strategic Planning

Corporate HRM

SBU

Division

Corporate Marketing

Corporate Finance

SBU

Division

Division

Division

SBU

Division

Division

Division

Division

Division 332

SBU Form of Multidivisional Structure: Related-Linked Strategy 

Structural integration devices create tight links among all divisions



Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions



R&D is likely to be centralized



Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance



Culture emphasizes cooperative sharing 333

Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy Headquarters Office

President

Legal Affairs

Finance

Division

Division

Division

Division

Auditing

Division

Division

334

Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy 

Corporate headquarters has a small staff



Finance and auditing are the most prominent functions in the headquarters to manage cash flow and ensure the accuracy of performance data coming from divisions



The legal affairs function becomes important when the firm acquires or divests assets



Divisions are independent and separate for financial evaluation purposes



Divisions retain strategic control, but cash is managed by the corporate office



Divisions compete for corporate resources

335

Multidivisional Structure: Other Points 

Complex multi-divisional structure firms may be simultaneously – centralized and decentralized – depending upon the various business-level strategies employed throughout the firm’s individual businesses



Multi-divisional structure firms use a combination of: – strategic controls – financial controls 336

Characteristics of Various Structural Forms Structural Characteristics

Cooperative M-Form

SBU M-Form

Competitive M-Form

Type of Strategy

RelatedConstrained

RelatedLinked

Unrelated Diversification

Degree of Centralization

Centralized at Corporate Office

Partially Centralized in SBUs

Decentralized to Divisions

Extensive

Moderate

Nonexistent

Use of Integrating Mechanisms

337

Characteristics of Various Structural Forms Structural Characteristics

Cooperative M-Form

SBU M-Form

Competitive M-Form

Divisional Performance Appraisal

Subjective Strategic Criteria

Strategic & Financial Criteria

Objective Financial Criteria

Divisional Incentive Compensation

Linked to Corporate Performance

Linked to Linked to Corporate Divisional SBU & Division Performance Performance 338

Worldwide Geographic Area Structure: Multidomestic Strategy Asia

Latin America

United States

Multinational Headquarters

Australia

Middle East/ Africa

Europe

• product characteristics tailored to local preferences • isolation from global competitiion – establish protected market positions – compete in industry segments most affected by differences among local countries 339

Worldwide Product Divisional Structure: Global Strategy • standardized products across countries • economies of scope and scale • outsource some Global Worldwide Worldwide primary or support Products Products Corporate activities to the Division Division Headquarters world’s best providers • decision-making authority centralized Worldwide Worldwide Products Products in worldwide division Division Division headquarters Worldwide Products Division

Worldwide Products Division

340

Using the Combination Structure: Transnational Strategy 

The combination structure has characteristics and mechanisms that result in an emphasis on both geographic and product structures – local responsiveness (multidomestic strategy) – global efficiency (global strategy)

341

Strategic Network 

A strategic network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as alliances and joint ventures



The strategic network seeks to develop a competitive advantage in primary or support activities



A strategic center firm often manages the network 342


strategic center firm engages in four primary tasks – strategic outsourcing (outsources and partners with more firms than do other network members) – competencies (supports each member’s efforts to develop core competencies that can benefit the network)

343


strategic center firm engages in four primary tasks – technology (manages the development and sharing of technology-based ideas among network members) – race to learn (guides participants in efforts to form network-specific competitive advantages)

344

Strategic Network

Strategic Center Firm

345

Distributed Strategic Network 





International cooperative strategies often require more complex networks Many large multinational firms form distributed strategic networks with multiple regional strategic centers to manage their array of cooperative arrangements with partner firms Breaking large networks into multiple manageably-sized networks helps to manage the complexity of maintaining many relationships 346

Distributed Strategic Network

Main Strategic Strategic Center Center Firm Firm

= Distributed Strategic Center Firms

347

Chapter 12

Strategic Leadership


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Feedback

349

Strategic Leadership 

Strategic leadership involves: – the ability to anticipate, envision, maintain flexibility and empower others to create strategic change – multi-functional work that involves working through others – consideration of the entire enterprise rather than just a sub-unit – a managerial frame of reference

350

Strategic Leadership and the Strategic Management Process Effective Strategic Leadership shapes the formulation of

Strategic Intent

Strategic Mission and influence

Successful Strategic Actions 351

Strategic Leadership and the Strategic Management Process Successful Strategic Actions

Formulation of Strategies

Implementation of Strategies

yields


352

Factors Affecting Managerial Discretion External Environment

External Environment • Industry structure • Rate of market growth • Number and type of of competitors • Nature and degree of political/legal constraints • Degree to which products can be differentiated 353


Characteristics of the Organization

Characteristics of the Organization • Size • Age • Culture • Availability of resources • Patterns of interaction among employees

354


Characteristics of the Organization Characteristics of the Manager

Managerial Discretion

Characteristics of the Manager • Tolerance for ambiguity • Commitment to the firm and its desired strategic outcomes • Interpersonal skills • Aspiration level • Degree of self-confidence 355

Top Management Teams 

The top management team is composed of key managers who are responsible for – formulating and – implementing – the organization’s strategies



A heterogeneous top management team with varied expertise and knowledge can draw on multiple perspectives when evaluating alternative strategies and building consensus 356

Top Management Teams 

A top management team must also be able to function effectively as a team in order to implement strategies – a heterogeneous team makes this more difficult – a heterogeneous team, however, is associated positively with innovation and strategic change

357

Strategic Leadership 







Chief executive officers can gain so much power that they are virtually independent of oversight by the board of directors This is especially true when the CEO is also chairman of the board of directors CEOs of long tenure can also wield substantial power The most effective forms of governance share power and influence among the CEO and board of directors 358

Managerial Labor Markets 



The internal labor market is comprised of the career path alternatives available to a firm’s managers Selecting internal candidates for management positions helps to build on valuable firm-specific knowledge

359

Managerial Labor Markets 



The external labor market includes the collection of career opportunities for managers outside their firm Selecting an outsider often brings fresh insights and may energize the firm with innovative new ideas

360

Managerial Labor Markets Managerial Labor Market: CEO Succession

Homogeneous

Internal CEO succession

External CEO succession

Stable strategy

Ambiguous: possible change in top management team and strategy

Stable strategy with innovation

Strategic change

Top Management Team Composition

Heterogeneous

361

Exercise of Effective Strategic Leadership Establishing balanced organizational controls

Determining strategic direction

Exploiting and maintaining core competencies

Effective Strategic Leadership Emphasizing ethical practice

Sustaining an effective organizational culture

Developing human capital 362

Determining Strategic Direction 







Strategic direction means the development of a long-term vision of a firm’s strategic intent A charismatic leader can help achieve strategic intent It is important not to lose sight of the strengths of the organization when making changes required by a new strategic direction Executives must structure the firm effectively to help achieve the vision 363

Exploiting and Maintaining Core Competencies 



Core competencies are resources and capabilities that serve as a source of competitive advantage for a firm over its rivals Strategic leaders must verify that the firm’s competencies are emphasized in strategy implementation efforts

364

Exploiting and Maintaining Core Competencies 



In many large firms, and certainly in related-diversified ones, core competencies are exploited effectively when they are developed and applied across different organizational units Core competencies cannot be developed or exploited effectively without developing the capabilities of human capital

365

Developing Human Capital 







Human capital refers to the knowledge and skills of the firm’s entire workforce Employees are viewed as a capital resource that requires investment No strategy can be effective unless the firm is able to develop and retain good people to carry it out The effective development and management of the firm’s human capital may be the primary determinant of a firm’s ability to formulate and implement 366 strategies successfully

Sustaining an Effective Organizational Culture 



An organizational culture consists of a complex set of ideologies, symbols, and core values that is shared throughout the firm and influences the way it conducts business Shaping the firm’s culture is a central task of effective strategic leadership

367

Sustaining an Effective Organizational Culture 

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An appropriate organizational culture encourages the development of an entrepreneurial orientation among employees and an ability to change the culture as necessary Reengineering can facilitate this process

368

Sustaining an Effective Organizational Culture Changing Culture and Business Reengineering 

The benefits of business reengineering are maximized when employees believe that: – every job in the company is essential and important – all employees must create value through their work

369

Sustaining an Effective Organizational Culture Changing Culture and Business Reengineering 

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Constant learning is a vital part of every person’s job Teamwork is essential to successful implementation Problems are solved only when teams accept the responsibility for the solution

370

Emphasizing Ethical Practices 

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Ethical practices increase the effectiveness of strategy implementation processes Ethical companies encourage and enable people at all organizational levels to exercise ethical judgment

371

Emphasizing Ethical Practices 

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To properly influence employee judgment and behavior, ethical practices must shape the firm’s decision-making process and be an integral part of an organization’s culture Leaders set the tone for creating an environment of mutual respect, honesty and ethical practices among employees

372

Establishing Balanced Organizational Controls 

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Organizational controls provide the parameters within which strategies are to be implemented and corrective actions taken Financial controls are often emphasized in large corporations and focus on shortterm financial outcomes Strategic control focuses on the content of strategic actions, rather than their outcomes 373

Establishing Balanced Organizational Controls 

Successful strategic leaders balance strategic control and financial control (they do not eliminate financial control) with the intent of achieving more positive long-term returns

374

Strategic and Financial Controls in a Balanced Scorecard Framework Perspectives

Criteria

Financial

• Cash flow • Return on equity • Return on assets

Customer

• Assessment of ability to anticipate customers needs • Effectiveness of customer service practices • Percentage of repeat business • Quality of communications with customers 375

76198137 Hoskisson and HITT Strategic Management All Chapters PPT

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