CHAPTER 1
WHAT IS STRATEGY AND WHY IS IT IMPORTANT?
McGraw-Hill/Irwin
1. Understand why every company needs a sound strategy to compete successfully, manage the conduct of its business, and strengthen its prospects for long-term success. 2. Develop an awareness of the four most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage. 3. Understand that a company’s strategy tends to evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy. 4. Learn why it is important for a company to have a viable business model that outlines the company’s customer value proposition and its profit formula. 5. Learn the three tests of a winning strategy.
1–2
WHAT DO WE MEAN BY STRATEGY ? ♦ What is our present situation? ●
Business environment and industry conditions
●
Firm’s financial and competitive capabilities
♦ Where do we want to go from here? ●
Creating a vision for the firm’s future direction
♦ How are we going to get there? ●
Crafting an action plan that will get us there 1–3
WHAT IS STRATEGY ABOUT? ♦ Strategy is all about How: ●
How to outcompete rivals.
●
How to respond to economic and market conditions and growth opportunities.
●
How to manage functional pieces of the business.
●
How to improve the firm’s financial and market performance.
1–4
WHY DO STRATEGY ? ♦ A firm does strategy: ●
To improve its financial performance.
●
To strengthen its competitive position.
●
To gain a sustainable competitive. advantage over its market rivals.
♦ A creative, distinctive strategy: ●
Can yield above-average profits.
●
Makes competition difficult for rivals. 1–5
STRATEGY AND COMPETITORS ♦ Strategy is about competing differently from rivals— ●
Doing what they don’t do or doing it better!
●
Doing what they can’t do!
●
Doing that which sets the firm apart and attracts customers.
●
Doing what we should or should not do to produce a competitive edge.
1–6
1.1
Identifying a Company’s Strategy—What to Look For
1–7
Key initiatives of the Plan-to-Win strategy: • Improved restaurant operations • Affordable pricing • Wide menu variety and beverage choices • Convenience and expansion of dining opportunities • Ongoing restaurant reinvestment and international expansion
1–8
Follow-up
• Which of McDonald’s Plan-to-Win strategy initiatives are associated with meeting customer needs more effectively? • Which initiatives are focused on more efficiently delivering products and services? • Which initiatives will likely result in the most enduring competitive advantage? • Which of the initiatives will competitors likely attempt to overcome first?
1–9
The Quest for Competitive Advantage ♦ Competitive Advantage ●
Meeting customer needs more effectively, with products or services that customers value more highly, or more efficiently, at lower cost.
♦ Sustainable Competitive Advantage ●
Giving buyers lasting reasons to prefer a firm’s products or services over those of its competitors. 1–10
STRATEGIC APPROACH CHOICES
Building Competitive Advantage
Low-cost provider
Differentiation on features
Focus on market niche
Best-cost provider
1–11
STRATEGIC APPROACHES ♦ Building a competitive advantage by: 1. Striving to become the industry’s low-cost provider (efficiency). 2. Outcompeting rivals on differentiating features (effectiveness). 3. Focusing on better serving a niche market’s needs (efficiency and\or effectiveness). 4. Offering the lowest (best) prices for differentiated goods (best-cost provider). 1–12
GAINING SUSTAINABLE COMPETITIVE ADVANTAGE ♦ How to create a sustainable competitive advantage: ●
Develop valuable expertise and competitive capabilities over the long-term that rivals cannot readily copy, match or best.
●
Put the constant quest for sustainable competitive advantage at center stage in crafting your strategy.
1–13
Why a Firm’s Strategy Evolves over Time ♦ Managers modify strategy in response to: ● ● ● ● ● ●
Changing market conditions Advancing technology Fresh moves of competitors Shifting buyer needs Emerging market opportunities New ideas for improving the strategy
1–14
The Evolving Nature of a Firm’s Strategy ♦ Realized (current) strategy is a blend of: ●
Proactive (deliberate) strategy elements that include both continued and new initiatives.
●
Reactive (emergent) strategy elements that are required due to unanticipated competitive developments and fresh market conditions.
1–15
1.2
A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments
1–16
THE RELATIONSHIP BETWEEN A FIRM’S STRATEGY AND ITS BUSINESS MODEL Realized Strategy
$$$?
Business Model
Competitive Initiatives
Value Proposition
Business Approaches
Profit Formula
1–17
A Company’s Business Model ♦ How the business will make money : ● By
providing customers with value. ! The firm’s customer value proposition ● By generating revenues sufficient to cover costs and produce attractive profits. ! The firm’s profit formula It takes a proven business model—one that yields appealing profitability—to demonstrate viability of a firm’s strategy. 1–18
Business Model Elements ♦ The Customer Value Proposition ●
Satisfying buyer wants and needs at a price customers will consider a good value. ! The greater the value provided (V) and the lower the price (P), the more attractive the value proposition is to customers.
1–19
Business Model Elements (cont’d) ♦ The Profit Formula ●
Creating a cost structure that allows for acceptable profits, given that pricing is tied to the customer value proposition. V—the value provided to customers ! P—the price charged to customers ! C—the firm’s costs The lower the costs (C) for a given customer value proposition (V–P), the greater the ability of the business model to be a moneymaker. !
●
1–20
IS OUR STRATEGY A WINNER?
The Strategic Fit Test
The Competitive Advantage Test
Winning Strategy
The Performance Test
1–21
WHAT MAKES A STRATEGY A WINNER? ♦ A winning strategy must pass three tests: ●
●
●
The Fit Test ! Does it exhibit dynamic fit with the external and internal aspects of the firm’s overall situation? The Competitive Advantage Test ! Can it help the firm achieve a significant and sustainable competitive advantage? The Performance Test ! Can it produce good performance as measured by the firm’s profitability, financial and competitive strengths, and market standing? 1–22
1–23
Follow-up
Who listens to the radio anymore? • Given the shifts in how people listen to music, are the business models of Sirius XM and over-the-air broadcasters viable over the long term? • Does Sirus XM’s strategy pass the three tests of a winning strategy? Does the strategy of over-the-air broadcasters pass the same tests? • What internal and external factors will create difficulties for either competitor in changing its strategy or business model? 1–24
WHY CRAFTING AND EXECUTING STRATEGY ARE IMPORTANT TASKS ♦ Strategy provides: ● ● ● ●
A prescription for doing business. A road map to competitive advantage. A game plan for pleasing customers. A formula for attaining long-term standout marketplace performance.
Good Strategy + Good Strategy Execution = Good Management 1–25
THINKING STRATEGICALLY ♦ Google’s web browser-based Chrome operating system and its online applications suite are now challenging Microsoft’s long-term dominance of those marketplace sectors. ●
What should be Microsoft’s first response to this competitive challenge?
●
How will Microsoft’s response to this competitor’s actions affect its business model?
●
Which competitor’s strategy will likely be the eventual winner in the marketplace? 1–26
THE ROAD AHEAD ♦ Strategy is about asking the right questions: ●
What must managers do, and do well, to make a firm a winner in the marketplace?
♦ Strategy requires getting the right answers: ●
Good strategic thinking and good management of the strategy-making, strategy-executing process.
●
First-rate capabilities and skills in crafting and executing strategy are essential to managing successfully.
Welcome and best wishes for your success! 1–27
CHAPTER 2
CHARTING A COMPANY’S DIRECTION: VISION AND MISSION, OBJECTIVES, AND STRATEGY
McGraw-Hill/Irwin
1. Grasp why it is critical for company managers to have a clear strategic vision of where a company needs to head and why. 2. Understand the importance of setting both strategic and financial objectives. 3. Understand why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets. 4. Become aware of what a company must do to achieve operating excellence and to execute its strategy proficiently. 5. Become aware of the role and responsibility of a company’s board of directors in overseeing the strategic management process.
2–2
WHAT DOES THE STRATEGY-MAKING, STRATEGY-EXECUTING PROCESS ENTAIL?
1. Developing a strategic vision, a mission, and a set of values. 2. Setting objectives for measuring performance and progress. 3. Crafting a strategy to achieve those objectives. 4. Executing the chosen strategy efficiently and effectively. 5. Monitoring strategic developments, evaluating execution, and making adjustments in the vision and mission, objectives, strategy, or execution as necessary. 2–3
2.1
The Strategy-Making, Strategy-Executing Process
2–4
STAGE 1: DEVELOPING A STRATEGIC VISION, A MISSION, AND A SET OF CORE VALUES
♦ Developing a Strategic Vision: ● Delineates
management’s future aspirations for the business to its stakeholders.
● Provides
direction—“where we are going.”
● Sets
out the compelling rationale (strategic soundness) for the firm’s direction.
● Uses
distinctive and specific language to set the firm apart from its rivals. 2–5
2.1
Wording a Vision Statement—the Dos and Don’ts
The Dos
The Don’ts
Be graphic
Don’t be vague or incomplete
Be forward-looking and directional
Don’t dwell on the present
Keep it focused
Don’t use overly broad language
Have some wiggle room
Don’t state the vision in bland or uninspiring terms
Be sure the journey is feasible
Don’t be generic
Indicate why the directional path makes good business sense
Don’t rely on superlatives only
Make it memorable
Don’t run on and on
2–6
Vision Statement for Coca-Cola Our vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth. • People: Be a great place to work where people are inspired to be the best they can be. • Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people’s desires and needs. • Partners: Nurture a winning network of customers and suppliers; together we create mutual, enduring value. • Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities. • Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities. • Productivity: Be a highly effective, lean and fast-moving organization. Effective Elements
Shortcomings
• Graphic • Focused
• Long • Not forward-looking
• Makes good business sense • Flexible
2–7
Vision Statement for UBS
We are determined to be the best global financial services company. We focus on wealth and asset management, and on investment banking and securities businesses. We continually earn recognition and trust from clients, shareholders, and staff through our ability to anticipate, learn and shape our future. We share a common ambition to succeed by delivering quality in what we do. Our purpose is to help our clients make financial decisions with confidence. We use our resources to develop effective solutions and services for our clients. We foster a distinctive, meritocratic culture of ambition, performance and learning as this attracts, retains and develops the best talent for our company. By growing both our client and our talent franchises, we add sustainable value for our shareholders. Effective Elements
Shortcomings
• Focused • Feasible • Desirable
• Not forward-looking • Bland or uninspiring • Hard to communicate 2–8
Vision Statement for Walmart
Saving People Money So They Can Live Better Effective Elements
Shortcomings
• Focused • Memorable • Feasible • Makes good business sense
• Dwells on the present
2–9
Follow-up
♦ For which of these businesses (product, service, or retail) is it the most difficult to create a vision statement? ♦ How does the scope of a business affect the language of its vision statement? ♦ How would you reword the Coca-Cola or UBS vision statements to reduce them to less than 100 words? (Coca-Cola = 127, UBS = 124)
2–10
Communicating the Strategic Vision ♦ Why Communicate the Vision: ● Fosters
employee commitment to the firm’s chosen strategic direction. ● Ensures understanding of its importance. ● Motivates, informs, and inspires internal and external stakeholders. ● Demonstrates top management support for the firm’s future strategic direction and competitive efforts.
2–11
Putting the Strategic Vision in Place ♦ Put the vision in writing and distribute it. ♦ Hold meetings to personally explain the vision and its rationale. ♦ Create a memorable slogan that captures the essence of the vision. ♦ Emphasize the positive payoffs for making the vision happen.
2–12
Crafting a Mission Statement ♦ The Mission Statement: ● Uses
specific language to give the firm its own unique identity.
● Describes
the firm’s current business and purpose—“who we are, what we do, and why we are here.”
● Should
focus on describing the company’s business, not on “making a profit”—earning a profit is an objective not a mission. 2–13
The Ideal Mission Statement ♦ Identifies the firm’s product or services. ♦ Specifies the buyer needs it seeks to satisfy. ♦ Identifies the customer groups or markets it is endeavoring to serve. ♦ Specifies its approach to pleasing customers. ♦ Sets the firm apart from its rivals. ♦ Clarifies the firm’s business to stakeholders.
2–14
Linking Vision and Mission with Core Values ♦ Core Values ●
Are the beliefs, traits, and behavioral norms that employees are expected to display in conducting the firm’s business and in pursuing its strategic vision and mission.
●
Become an integral part of the firm’s culture and what makes it tick when strongly espoused and supported by top management.
●
Matched with the firm’s vision, mission, and strategy contribute to the firm’s business success. 2–15
WOW Philosophy: 10 Core Values ♦ Deliver WOW through Service ♦ Embrace and Drive Change
♦ Build Open and Honest Relationships With Communication
♦ Create Fun and a Little Weirdness
♦ Build a Positive Team and Family Spirit
♦ Be Adventurous, Creative, and Open Minded
♦ Do More with Less
♦ Pursue Growth and Learning
♦ Be Passionate and Determined ♦ Be Humble.
2–16
Core Values for Amazon ♦ Customer Obsession
We start with the customer and work backward.
♦ Innovation
If you don’t listen to your customers you will fail. But if you only listen to your customers you will also fail.
♦ Bias for Action
We live in a time of unheralded revolution and instrumental opportunity–provided we make every minute count.
♦ Ownership
Ownership matters when you’re building a great company. Owners think long – term, please passionately for their projects and ideas, and are empowered to respectfully challenge decisions.
♦ High-Hiring Bar
When making a hiring decision we ask ourselves: “Will I admire this person? Will I learn from this person? Is this person a superstar?”
♦ Frugality
We spend money on the things that really matter and believe that frugality breeds resourcefulness, selfsufficiency and intention. 2–17
Follow-up
♦ How do the core values of Zappos reflect the value it places on its human capital? ♦ What effects do core values have of the hiring practices of firms? ♦ Will Amazon’s acquisition of Zappos create a clash of cultural values?
2–18
STAGE 2: SETTING OBJECTIVES ♦ The Purposes of Setting Objectives: ● To
convert the vision and mission into specific, measurable, timely performance targets.
● To
focus efforts and align actions throughout the organization.
● To
serve as yardsticks for tracking a firm’s performance and progress.
● To
provide motivation and inspire employees to greater levels of effort. 2–19
THE TWO ESSENTIAL KINDS OF OBJECTIVES TO SET ♦ Financial Objectives
♦ Strategic Objectives
● Communicate
● Are
● Are
● Are
top management’s targets for financial performance. focused internally on the firm’s operations and activities.
related to a firm’s marketing standing and competitive vitality. focused externally on competition vis-àvis the firm’s rivals.
2–20
SETTING FINANCIAL OBJECTIVES Examples of Financial Objectives ♦ An x percent increase in annual revenues ♦ Annual increases in after-tax profits of x percent ♦ Annual increases in earnings per share of x percent ♦ Annual dividend increases of x percent ♦ Profit margins of x percent ♦ An x percent return on capital employed (ROCE) or return on shareholders’ equity investment (ROE) ♦ Increased shareholder value—in the form of an upward-trending stock price ♦ Bond and credit ratings of x ♦ Internal cash flows of x dollars to fund new capital investment 2–21
SETTING STRATEGIC OBJECTIVES Examples of Strategic Objectives ♦ Winning an x percent market share ♦ Achieving lower overall costs than rivals ♦ Overtaking key competitors on product performance or quality or customer service ♦ Deriving x percent of revenues from the sale of new products introduced within the next five years ♦ Having broader or deeper technological capabilities than rivals ♦ Having a wider product line than rivals ♦ Having a better-known or more powerful brand name than rivals ♦ Having stronger national or global sales and distribution capabilities than rivals ♦ Consistently getting new or improved products and services to market ahead of rivals 2–22
Good Strategic Performance Is the Key to Better Financial Performance ♦ Good financial performance is not enough: ●
Current financial results are lagging indicators of past decisions and actions which does not translate into a stronger competitive capability for delivering better financial results in the future.
●
Setting and achieving stretch strategic objectives signals a firm’s growth in both competitiveness and strength in the marketplace.
●
Good strategic performance is a leading indicator of a firm’s increasing capability to deliver improved future financial performance.
2–23
EMPLOYING A BALANCED SCORECARD ♦ A balanced scorecard measures a firm’s optimal performance by: !
Placing a balanced emphasis on achieving both financial and strategic objectives.
!
Avoiding tracking only financial performance and overlooking the importance of measuring whether a firm is strengthening its competitiveness and market position.
The surest path to sustained future profitability year after year is to relentlessly pursue strategic outcomes that strengthen a firm’s business position and give it a growing competitive advantage over rivals!
2–24
THE MERITS OF SETTING STRETCH OBJECTIVES ♦ Setting stretch objectives promotes better company performance because stretch targets: ● Push
a firm to be more inventive. ● Increase the urgency for improving financial performance and competitive position. ● Cause
the firm to be more intentional and focused in its actions.
● Act
to prevent complacent coasting and easy achievement of ho-hum performance outcomes. 2–25
THE NEED FOR SHORT-TERM AND LONG-TERM OBJECTIVES ♦ Short-Term Objectives: ● Focus
attention on quarterly and annual performance improvements to satisfy nearterm shareholder expectations.
♦ Long-Term Objectives: ● Force
consideration of what to do now to achieve optimal long-term performance. ● Stand as a barrier to an undue focus on shortterm results. 2–26
THE NEED FOR OBJECTIVES AT ALL ORGANIZATIONAL LEVELS ♦ Breaks down performance targets for each of the organization’s separate units. ♦ Fosters setting performance targets that support achievement of firm-wide strategic and financial objectives. ♦ Extends the top-down objective-setting process to all organizational levels.
2–27
Follow-up
♦ Which company included no strategic objectives in its listing of objectives? ♦ Which company’s listing of objectives appears to best fit the balanced scorecard concept? ♦ Which company has the shortest-term focus based on it objectives? Which has the longest-term focus?
2–28
STAGE 3: CRAFTING A STRATEGY ♦ Strategy Making: ● Addresses ● Requires
a series of strategic how’s.
choosing among strategic alternatives.
● Promotes
actions to do things differently from competitors rather than running with the herd.
● Is
a collaborative team effort that involves managers in various positions at all organizational levels.
2–29
Who Is Involved in Strategy Making? ♦ Chief Executive Officer (CEO) ●
Has ultimate responsibility for leading the strategy-making process as strategic visionary and as chief architect of strategy.
♦ Senior Executives ●
Fashion the major strategy components involving their areas of responsibility.
♦ Managers of subsidiaries, divisions, geographic regions, plants, and other operating units (and key employees with specialized expertise) ●
Utilize on-the-scene familiarity with their business units to orchestrate their specific pieces of the strategy.
2–30
Why Is Strategy-Making Often a Collaborative Process? ♦ The many complex strategic issues involved and multiple areas of expertise required can make the strategy-making task too large for one person or a small executive group. ♦ When operations involve different products, industries and geographic areas, strategy-making authority must be delegated to functional and operating unit managers such that all managers have a strategy-making role— ranging from major to minor—for the area they head!
2–31
The Strategy-Making Hierarchy Corporate Strategy
Multibusiness Strategy—how to gain synergies from managing a portfolio of businesses together rather than as separate businesses Two-Way Influence
Business Strategy
• How to strengthen market position and gain competitive advantage • Actions to build competitive capabilities of single businesses • Monitoring and aligning lower-level strategies Two-Way Influence
Functional Area Strategies
• Add relevant detail to the how’s of the business strategy • Provide a game plan for managing a particular activity in ways that support the business strategy Two-Way Influence
Operating Strategies
• Add detail and completeness to business and functional strategies • Provide a game plan for managing specific operating activities with strategic significance 2–32
2.2 A Company’s StrategyMaking Hierarchy
2–33
The Concept of Strategic Intent An organization exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective!
2–34
Characteristics of Strategic Intent ♦ Indicates firm’s intent to making quantum gains in competing against key rivals and to establishing itself as a winner in the marketplace, often against long odds. ♦ Involves establishing a grandiose performance target out of proportion to immediate capabilities and market position but then devoting the firm’s full resources and energies to achieving the target over time. ♦ Entails sustained, aggressive actions to take market share away from rivals and achieve a much stronger market position.
2–35
What Is a Strategic Plan? Elements of a Firm’s Strategic Plan
Its strategic vision, business mission, and core values Its strategic and financial objectives
Its chosen strategy
2–36
STAGE 4: EXECUTING THE STRATEGY ♦ Converting strategic plans into actions requires: ● Directing
organizational action. ● Motivating people. ● Building and strengthening the firm’s competencies and competitive capabilities. ● Creating
and nurturing a strategy-supportive work climate.
● Meeting
or beating performance targets. 2–37
Managing the Strategy Execution Process ♦ Staffing the firm with the needed skills and expertise. ♦ Building and strengthening strategy-supporting resources and competitive capabilities. ♦ Organizing work effort along the lines of best practice. ♦ Allocating ample resources to the activities critical to strategic success. ♦ Ensuring that policies and procedures facilitate rather than impede effective strategy execution.
2–38
Managing the Strategy Execution Process ♦ Installing information and operating systems that enable effective and efficient performance. ♦ Motivating people and tying rewards and incentives directly to the achievement of performance objectives. ♦ Creating a company culture and work climate conducive to successful strategy execution. ♦ Exerting the internal leadership needed to propel implementation forward and drive continuous improvement of the strategy execution processes.
2–39
STAGE 5: EVALUATING PERFORMANCE AND INITIATING CORRECTIVE ADJUSTMENTS
♦ Evaluating Performance: ● Deciding
whether the enterprise is passing the three tests of a winning strategy—good fit, competitive advantage, strong performance.
♦ Initiating Corrective Adjustments: ● Deciding
whether to continue or change the firm’s vision and mission, objectives, strategy, and/or strategy execution methods. ● Based on organizational learning. 2–40
THE ROLE OF THE BOARD OF DIRECTORS IN CORPORATE GOVERNANCE ♦ Obligations of the Board of Directors: ●
Critically appraise the firm’s direction, strategy, and business approaches.
●
Evaluate the caliber of senior executives’ strategic leadership skills.
●
Institute a compensation plan that rewards top executives for actions and results that serve stakeholder interests—especially shareholders.
●
Oversee the firm’s financial accounting and reporting practices compliance with the Sarbanes-Oxley Act. 2–41
Achieving Effective Corporate Governance ♦ A strong, independent board of directors: ●
Is well informed about the firm’s performance.
●
Guides and judges the CEO and other executives.
●
Can curb management actions the board believes are inappropriate or unduly risky.
●
Can certify to shareholders that the CEO is doing what the board expects.
●
Provides insight and advice to top management.
●
Is actively involved in debating the pros and cons of key strategic decisions and actions. 2–42
CHAPTER 3
EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT
Copyright ®2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
1. Gain command of the basic concepts and analytical tools widely used to diagnose the competitive conditions in a company’s industry. 2. Learn how to diagnose the factors shaping industry dynamics and to forecast their effects on future industry profitability. 3. Become adept at mapping the market positions of key groups of industry rivals. 4. Understand why in-depth evaluation of a business’s strengths and weaknesses in relation to the specific industry conditions it confronts is an essential prerequisite to crafting a strategy that is well-matched to its external situation.
3–2
3.1
From Thinking Strategically about the Company’s Situation to Choosing a Strategy
Chapter 3 Thinking strategically about a firm’s external environment
Thinking strategically about a firm’s internal environment
Forming a strategic vision of where the firm needs to head
Identifying promising strategic options for the firm
Selecting the best strategy and business model for the firm
Chapter 4 3–3
The External Environment ♦ The Macro-Environment ● Is
the broad environmental context in which a firm’s industry is situated. ● Includes strategically relevant components over which the firm has no direct control. ! General economic conditions ! Immediate industry and competitive environment
3–4
3.2
The Components of a Company’s Macro-Environment
3–5
3.1 Component
The Seven Components of the Macro-Environment Description
Demographics The size, growth rate, and age distribution of different sectors of the population. It includes the geographic distribution of the population, the distribution of income across the population, and trends in these factors.
Social forces
Societal values, attitudes, cultural factors, and lifestyles that impact businesses. Social forces vary by locale and change over time.
Political, legal, Political policies and processes, as well as the regulations and laws with which and regulatory companies must comply—labor laws, antitrust laws, tax policy, regulatory policies, the political climate, and the strength of institutions such as the court system. factors Natural environment
Ecological and environmental forces such as weather, climate, climate change, and associated factors like water shortages.
Technological factors
The pace of technological change and technical developments that have the potential for wide-ranging effects on society, such as genetic engineering, the rise of the Internet, changes in communication technologies, and knowledge and controlling the use of technology,
Global forces
Conditions and changes in global markets, including political events and policies toward international trade, sociocultural practices and the institutional environment in which global markets operate.
General economic conditions
Rates of economic growth, unemployment, inflation, interest, trade deficits or surpluses, savings, per capita domestic product, and conditions in the markets for stocks and bonds affecting consumer confidence and discretionary income. 3–6
THINKING STRATEGICALLY ABOUT A COMPANY’S INDUSTRY AND COMPETITIVE ENVIRONMENT 1. Does the industry offer attractive opportunities for growth? 2. What kinds of competitive forces are industry members facing, and how strong is each force? 3. What factors are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability? 4. What market positions do industry rivals occupy—who is strongly positioned and who is not? 5. What strategic moves are rivals likely to make next? 6. What are the key factors for competitive success in the industry? 7. Does the industry offer good prospects for attractive profits? 3–7
QUESTION 1: DOES THE INDUSTRY OFFER ATTRACTIVE OPPORTUNITIES FOR GROWTH?
♦ Defining Growth: ● ●
What is the current market size in units or sales? What is the past, current and expected rate of growth for the market\industry?
♦ Considerations: ● ● ●
Different sectors\regions of a market grow at different rates. Growth varies with the industry’s life cycle stage— emergence, rapid growth, maturity, and decline. Growth does not guarantee profitability. 3–8
QUESTION 2: WHAT KINDS OF COMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING, AND HOW STRONG ARE THEY?
♦ The Five Competitive Forces: ● Competition
from rival sellers
● Competition
from potential new entrants
● Competition
from substitute products
producers ● Supplier
bargaining power
● Customer
bargaining power
3–9
3.3 The Five-Forces Model of Competition: A Key Analytical Tool
3–10
Using the Five-Forces Model of Competition
Step 1
For each of the five forces, identify the different parties involved, and the specific factors that bring about competitive pressures.
Step 2
Evaluate how strong the pressures stemming from each of the five forces are (strong, moderate to normal, or weak).
Step 3
Determine whether the strength of the five competitive forces, overall, is conducive to earning attractive profits in the industry.
3–11
3.2
Common “Weapons” for Competing with Rivals
Competitive Weapons
Primary Effects
Price discounting, clearance sales, “blowout” sales
Lowers price (P), acts to boost total sales volume and market share, lowers profit margins per unit sold when price cuts are big and/or increases in sales volume are relatively small
Couponing, advertising items on sale
Acts to increase unit sales volume and total revenues, lowers price (P), increases unit costs (C), may lower profit margins per unit sold (P – C)
Advertising product or service characteristics, using ads to enhance a company’s image or reputation
Boosts buyer demand, increases product differentiation and perceived value (V), acts to increase total sales volume and market share, may increase unit costs (C) and/or lower profit margins per unit sold
Innovating to improve product performance and quality
Acts to increase product differentiation and value (V), boosts buyer demand, acts to boost total sales volume, likely to increase unit costs (C)
Introducing new or improved features, increasing the number of styles or models to provide greater product selection
Acts to increase product differentiation and value (V), strengthens buyer demand, acts to boost total sales volume and market share, likely to increase unit costs (C)
Increasing customization of product or service
Acts to increase product differentiation and value (V), increases switching costs, acts to boost total sales volume, often increases unit costs (C)
Building a bigger, better dealer network
Broadens access to buyers, acts to boost total sales volume and market share, may increase unit costs (C)
Improving warranties, offering lowinterest financing
Acts to increase product differentiation and value (V), increases unit costs (C), increases buyer costs to switch brands, acts to boost total sales volume and market share 3–12
Competitive Pressures That Act to Increase the Rivalry among Competing Sellers ♦ Buyer demand is growing slowly or declining. ♦ It is becoming less costly for buyers to switch brands. ♦ Industry products are becoming more alike. ♦ There is unused production capacity, and\or products have high fixed costs or high storage costs. ♦ The number of competitors is increasing and\or they are becoming more equal in size and competitive strength. ♦ The diversity of competitors is increasing. ♦ High exit barriers stop firms from exiting the industry.
3–13
3.4 Factors Affecting the Strength of Rivalry
3–14
Competitive Pressures Associated with the Threat of New Entrants ♦ Entry Threat Considerations: ●
Strength of barriers to entry
●
Expected reaction of incumbent firms
●
Attractiveness of a particular market’s growth in demand and profit potential
●
Capabilities and resources of potential entrants
●
Entry of existing competitors into market segments in which they have no current presence
3–15
Market Entry Barriers Facing New Entrants ♦ Economies of scale in production, distribution, advertising, or other areas of operation ♦ Experience and learning curve effects ♦ Unique cost advantages of industry incumbents ♦ Strong brand preferences and customer loyalty ♦ Strong “network effects” in customer demand ♦ High capital requirements ♦ Building a network of distributors or dealers and securing adequate space on retailers’ shelves ♦ Restrictive government policies 3–16
3.5 Factors Affecting the Threat of Entry
3–17
Competitive Pressures from the Sellers of Substitute Products ♦ Substitute Products Considerations: ● ● ●
Ready availability of substitutes Pricing, quality, performance, and other relevant attributes of substitutes Switching costs that buyers incur
♦ Indicators of Substitutes’ Competitive Strength: ● ● ●
Increasing rate of growth in sales of substitutes Substitute producers adding output capacity Increasing profitability of substitute producers
3–18
3.6 Factors Affecting Competition from Substitute Products 3–19
Competitive Pressures Stemming from Supplier Bargaining Power ♦ Supplier Bargaining Power Considerations: ● ● ● ● ● ● ● ●
Ready availability of supplier products Criticality of supplier products as industry inputs Number of suppliers of standard\commodity items Buyers’ costs for switching among suppliers Availability of substitutes for suppliers’ products Fraction of supplier sales due to industry demand Ratio of suppliers relative to industry buyers Backward integration into suppliers’ industry
3–20
3.7 Factors Affecting the Bargaining Power of Suppliers
3–21
Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity ♦ Buyer Bargaining Power Considerations: ●
Buyer costs for switching to competing sellers
●
Degree to which industry products are commoditized
● ●
Number and size of buyers relative to sellers Strength of buyer demand for sellers’ products
●
Buyer knowledge of products, costs and pricing
●
Backward integration of buyers into sellers’ industry Buyer discretion in delaying purchases
● ●
Buyer price sensitivity due to low profits, size of purchase, and consequences of purchase 3–22
3.8 Factors Affecting the Bargaining Power of Buyers
3–23
Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? ♦ Is the state of competition in the industry stronger than “normal”? ♦ Can industry firms expect to earn decent profits given prevailing competitive forces? ♦ Are some of the competitive forces sufficiently powerful to undermine industry profitability?
3–24
Matching Strategy to Competitive Conditions 1. Pursuing avenues that shield the firm from as many competitive pressures as possible. 2. Initiating actions calculated to shift competitive forces in the firm’s favor by altering underlying factors driving the five forces. 3. Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker.
3–25
QUESTION 3: WHAT FACTORS ARE DRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE?
♦ Strategic Analysis of Industry Dynamics: 1. Identifying the drivers of change. 2. Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive. 3. Determining what strategy changes are needed to prepare for the impacts of the anticipated change. 3–26
3.3
The Most Common Drivers of Industry Change
1. Changes in the long-term industry growth rate 2. Increasing globalization 3. Changes in who buys the product and how they use it 4. Technological change 5. Emerging new Internet capabilities and applications 6. Product and marketing innovation 7. Entry or exit of major firms 8. Diffusion of technical know-how across companies and countries 9. Improvements in efficiency in adjacent markets 10. Reductions in uncertainty and business risk 11. Regulatory influences and government policy changes 12. Changing societal concerns, attitudes, and lifestyles 3–27
Assessing the Impact of the Factors Driving Industry Change 1. Overall, are the factors driving change causing demand for the industry’s product to increase or decrease? 2. Is the collective impact of the drivers of change making competition more or less intense? 3. Will the combined impacts of the change drivers lead to higher or lower industry profitability?
3–28
Developing a Strategy That Takes the Changes in Industry Conditions into Account ♦ What strategy adjustments will be needed to deal with the impacts of the changes in industry conditions? ●
What adjustments must be made immediately?
●
What actions must we not take or should we cease to do now?
●
What can we do now to prepare for adjustments we anticipate making in the future?
3–29
QUESTION 4: HOW ARE INDUSTRY RIVALS POSITIONED—WHO IS STRONGLY POSITIONED AND WHO IS NOT?
♦ A Strategic Group ● Is
a cluster of industry rivals that have similar competitive approaches and market positions: !
Have comparable product-line breadth
! !
Sell in the same price/quality range Emphasize the same distribution channels
!
Use the same product attributes to buyers
!
Depend on identical technological approaches Offer similar services and technical assistance
!
3–30
Using Strategic Group Maps to Assess the Market Positions of Key Competitors ♦ Constructing a strategic group map: ●
Identify the competitive characteristics that differentiate firms in the industry.
●
Plot the firms on a two-variable map using pairs of differentiating competitive characteristics.
●
Assign firms occupying about the same map location to the same strategic group.
●
Draw circles around each strategic group, making the circles proportional to the size of the group’s share of total industry sales revenues. 3–31
Typical Variables for Differentiating the Market Positions of Key Competitors on Group Maps ♦ Price/quality range (high, medium, low) ♦ Geographic coverage (local, regional, national, global) ♦ Product-line breadth (wide, narrow) ♦ Degree of service offered (no frills, limited, full) ♦ Distribution channels (retail, wholesale, Internet, multiple) ♦ Degree of vertical integration (none, partial, full) ♦ Degree of diversification into other industries (none, some, considerable).
3–32
Choosing Variables for Group Maps ♦ Variables selected as map axes: ● Must
not be highly correlated. ● Must reflect key approaches to customer value and expose sizable differences in the marketplace positions of rivals. ● May be quantitative, continuous, discrete and\or defined in terms of distinct classes and combinations.
3–33
Guidelines for Constructing Group Maps ♦ Draw map circles proportional to the combined sales of firms in each strategic group to reflect the relative sizes of each group to the total size of the industry. ♦ Use different variable sets to show different views of relationships among competitive positions in the industry’s structure—there is no one best map for portraying how competing firms are positioned.
3–34
3–35
Follow-up
♦ Which strategic group is located in the least favorable market position? Which group is in the most favorable position? ♦ Which strategic group is likely to experience increased intragroup competition? ♦ Which groups are most threatened by the likely strategic moves of members of nearby strategic groups?
3–36
What Can Be Learned from Strategic Group Maps? ♦ Maps are useful in identifying which industry members are close rivals and which are distant rivals. ♦ Not all map positions are equally attractive. 1. Prevailing competitive pressures in the industry and drivers of change favor some strategic groups and hurt others. 2. Profit prospects vary from strategic group to strategic group.
3–37
QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT? ♦ Competitive Intelligence ●
Information about rivals that is useful in anticipating their next strategic moves.
♦ Signals of the Likelihood of Strategic Moves: ● ● ● ●
Rivals under pressure to improve financial performance Rivals seeking to increase market standing Public statements of rivals’ intentions Profiles developed by competitive intelligence units
3–38
Useful Questions to Help Predict the Likely Actions of Important Rivals ♦ Which competitors’ strategies are achieving good results? ♦ Which competitors are losing in the marketplace or badly need to increase their unit sales and market share? ♦ Which rivals are likely make major moves to enter new geographic markets or to increase sales and market share in a particular geographic region? ♦ Which rivals can expand product offerings to enter new product segments where they do not have a presence? ♦ Which rivals can be acquired? Which rivals are financially able and looking to make an acquisition? 3–39
QUESTION 6: WHAT ARE THE KEY FACTORS FOR FUTURE COMPETITIVE SUCCESS?
♦ Key Success Factors ● Are
the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry.
● Vary
from industry to industry, and over time within the same industry, as drivers of change and competitive conditions change. 3–40
Identification of Key Success Factors 1. What product attributes and service features buyers strongly affect buyers when choosing between the competing brands of sellers? 2. What resources and competitive capabilities are required for a firm to execute a successful strategy in the marketplace? 3. What shortcomings will put a firm at a significant competitive disadvantage?
3–41
QUESTION 7: DOES THE INDUSTRY OFFER GOOD PROSPECTS FOR ATTRACTIVE PROFITS? ♦ Industry Profitability Considerations: ●
The industry’s overall growth potential
●
Effects of strong competitive forces
●
Effects of prevailing drivers of change in the industry
●
Competitive strength of the firm: its market position relative to its rivals, its capability to withstand competitive forces, and whether its position will change in the course of competitive interactions
●
The success of the firm’s strategy in delivering on the industry’s key success factors 3–42
CHAPTER 4
EVALUATING A COMPANY’S RESOURCES, CAPABILITIES, AND COMPETITIVENESS
Copyright ®2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
1. Learn how to take stock of how well a company’s strategy is working. 2. Understand why a company’s resources and capabilities are central to its strategic approach and how to evaluate their potential for giving the company a competitive edge over rivals. 3. Discover how to assess the company’s strengths and weaknesses in light of market opportunities and external threats. 4. Grasp how a company’s value chain activities can affect the company’s cost structure, degree of differentiation, and competitive advantage. 5. Understand how a comprehensive evaluation of a company’s competitive situation can assist managers in making critical decisions about their next strategic move 4–2
EVALUATING A FIRM’S INTERNAL SITUATION 1. How well is the firm’s present strategy working? 2. What are the firm’s competitively important resources and capabilities? 3. Is the firm able to take advantage of market opportunities and overcome external threats to its external well-being? 4. Are the firm’s prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition? 5. Is the firm competitively stronger or weaker than key rivals? 6. What strategic issues and problems merit front-burner managerial attention? 4–3
QUESTION 1: HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING? ♦ Best indicators of a well-conceived, well-executed strategy: ● The
company is achieving its stated financial and strategic objectives.
● The
company is an above-average industry performer.
4–4
Other Indicators of Strategic Success ♦ Growth in firm’s sales and market share ♦ Acquisition and retention of customers ♦ Increasing profit margins, net profits and ROI ♦ Growing financial strength and credit rating ♦ Positively viewed by shareholders and customers ♦ Leadership in factors relevant to market\industry success ♦ Continuing improvement in operating performance
4–5
4.1 Identifying the Components of a Single-Business Company’s Strategy
4–6
4.1 Key Financial Ratios
How Calculated
4–7
4.1 Key Financial Ratios (cont’d)
4–8
4.1 Key Financial Ratios (cont’d)
4–9
QUESTION 2: WHAT ARE THE COMPANY’S COMPETITIVELY IMPORTANT RESOURCES AND CAPABILITIES?
♦ Competitive Assets ● Are
the firm’s resources and capabilities.
● Are
the determinants of its competitiveness and ability to succeed in the marketplace.
● Are
what a firm’s strategy depends on to develop sustainable competitive advantage over its rivals. 4–10
Resources and Capabilities ♦ A Resource ●
Is a productive input or competitive asset that is owned or controlled by a company (e.g., a fleet of oil tankers).
♦ A Capability ●
Is the capacity of a firm to perform some activity proficiently (e.g., superior skills in marketing).
4–11
4.2
Types of Company Resources
Tangible Resources Physical resources Financial resources Technological assets Organizational resources Intangible Resources Human assets and intellectual capital Brands External relationships Company culture and incentive system 4–12
Resource and Capability Analysis ♦ Identify the firm’s resources and capabilities. ♦ Test the competitive power of the firm’s resources and capabilities: ●
Is the resource (or capability) competitively valuable?
●
Is the resource rare—is it something rivals lack?
●
Is the resource hard to copy?
●
Can the resource be overcome by different types of resources and capabilities—are there good substitutes available for the resource?
4–13
Identifying Capabilities ♦ An Organizational Capability ●
Is the intangible but observable capacity of a firm to perform a critical activity proficiently using a related combination (cross-functional bundle) of its resources.
●
Is knowledge-based, residing in people and in a firm’s intellectual capital or in its organizational processes and functional systems, which embody tacit knowledge.
4–14
Managing Resources and Capabilities Dynamically ♦ Threats to Resources and Capabilities: ●
Rivals providing better substitutes over time
●
Capabilities decaying from benign neglect
●
Disruptive competitive environment change
♦ Managing Capabilities Dynamically ●
Is the process of creating new and\or updating existing resources\capabilities to obtain durable value in both resource types in syncing their support of a resource-based competitive strategy.
4–15
QUESTION 3: IS THE COMPANY ABLE TO SEIZE MARKET OPPORTUNITIES AND NULLIFY EXTERNAL THREATS?
♦ SWOT Analysis ● Is
a powerful tool for sizing up a firm’s:
! Internal
strengths (the basis for strategy)
! Internal
weaknesses (deficient capabilities)
! Market
opportunities (strategic objectives)
! External
threats (strategic defenses) 4–16
Identifying a Company’s Internal Strengths ♦ A Competence ●
Is an activity that a firm has learned to perform with proficiency—a capability.
♦ A Core Competence ●
Is a proficiently performed internal activity that is central to a firm’s strategy and competitiveness.
♦ A Distinctive Competence ●
Is a competitively valuable activity that a firm performs better than its rivals.
4–17
Identifying a Company’s Weaknesses and Competitive Deficiencies ♦ A Weakness (Competitive Deficiency) ●
Is something a firm lacks or does poorly (in comparison to others) or a condition that puts it at a competitive disadvantage in the marketplace.
♦ Types of Weaknesses: ● ● ●
Inferior skills, expertise, or intellectual capital Physical, organizational, or intangible assets deficiencies Missing or inferior capabilities in key areas
4–18
Identifying a Company’s Market Opportunities ♦ Characteristics of Market Opportunities: ●
●
●
An absolute “must pursue” market ! Represents much potential but is hidden in “fog of the future.” A marginally interesting market ! Presents high risk and questionable profit potential. An unsuitable\mismatched market ! The firm’s strengths are not matched to market factors—best avoided.
4–19
Identifying the Threats to a Company’s Future Profitability ♦ Types of Threats: ●
Normal course-of-business threats
●
Sudden-death threats
♦ Considering Threats: ●
Identify the threats to the company’s future prospects.
●
Evaluate what strategic actions can be taken to neutralize or lessen their impact.
4–20
What Do the SWOT Listings Reveal? ♦ SWOT Analysis Involves: ●
Drawing conclusions from the SWOT listings about the firm’s overall situation.
●
Translating these conclusions into strategic actions by the firm that: ! Match
its strategy to its internal strengths and to market opportunities.
! Correct
important weaknesses, and defend it against external threats.
4–21
4.2 The Steps Involved in SWOT Analysis: Identify the Four
Components of SWOT, Draw Conclusions, Translate Implications into Strategic Actions
4–22
QUESTION 4: ARE THE FIRM’S PRICES AND COSTS COMPETITIVE WITH THOSE OF KEY RIVALS, AND DOES IT HAVE AN APPEALING CUSTOMER VALUE PROPOSITION?
♦ Signs of A Firm’s Competitive Strength: ● Its
prices and costs are in line with rivals.
● Its
customer-value proposition is competitive and cost effective.
● Its
bundled capabilities are yielding a sustainable competitive advantage.
4–23
The Concept of a Company Value Chain ♦ The Value Chain ●
Identifies the primary internal activities that create customer value and the related support activities.
●
Permits a deep look at the firm’s cost structure and ability to offer low prices.
●
Reveals the emphasis that a firm places on activities that enhance differentiation and support higher prices.
4–24
4.3
A Representative Company Value Chain
4–25
Comparing the Value Chains of Rival Firms ♦ Value Chain Analysis ●
Facilitates a comparison, activity-by-activity, of how effectively and efficiently a company delivers value to its customers, relative to its competitors.
♦ The Value Chain Analysis Process: ●
Segregate the firm’s operations into different types of primary and secondary activities to identify the major components of its internal cost structure.
●
Use activity-based costing to evaluate the activities.
●
Do the same for significant competitors. 4–26
Value Chain System for an Entire Industry ♦ Industry Value Chain: ●
The firm’s internal value chain
●
The value chains of industry suppliers
●
The value chains of channel intermediaries
♦ Effects of the Industry Value Chain: ●
Costs and margins of suppliers and channel partners can affect prices to end consumers.
●
Activities of channel partners can affect industry sales volumes and customer satisfaction.
4–27
4.4
Representative Value Chain System for an Entire Industry
4–28
4–29
♦ Which activities in the value chain are primary activities? Which are secondary activities? ♦ Which activities are linked to the value chain for the entire industry? ♦ How could activity cost(s) could be reduced without harming the fair-trade intent of the Just Coffee coop?
4–30
Benchmarking and Value Chain Activities ♦ Benchmarking: ●
Involves improving a firm’s internal activities based on learning other companies’ “best practices.”
●
Assesses whether the cost competitiveness and effectiveness of a firm’s value chain activities are in line with its competitors’ activities.
♦ Sources of Benchmarking Information ●
Reports, trade groups, analysts and customers
●
Visits to benchmark companies
●
Data from consulting firms 4–31
Strategic Options for Remedying a Disadvantage in Costs or Effectiveness
♦ There are three places in the total value chain system for a company to look for ways to improve its efficiency and effectiveness: ● The
firm’s own activity segments
● The
suppliers’ part of the overall value chain
● The
distribution channel portion of the chain.
4–32
Options for Improving the Efficiency and Effectiveness of Internal Value Chain Activities ♦ Implement best practices throughout the company, particularly for high-cost activities. ♦ Redesign products to eliminate high-cost components or facilitate speedier and more economical assembly or manufacture. ♦ Relocate high-cost activities to areas where they can be performed more cheaply. ♦ Outsource activities that can be performed by contractors more cheaply than in-house. ♦ Shift to lower-cost technologies and/or invest in productivityenhancing, cost-saving technological improvements. ♦ Stop performing activities that add little or no customer value.
4–33
Ways to Improve the Effectiveness of the Customer Value Proposition and Enhance Differentiation ♦ Implement best practices throughout the company, particularly for high-cost activities. ♦ Adopt best practices and technologies that spur innovation, improve design, and enhance creativity. ♦ Implement the best practices in providing customer service. ♦ Reallocate resources to devote more to activities that will have the biggest impact on the value delivered to the customer and that address buyers’ most important purchase criteria. ♦ For intermediate buyers, gain an understanding of how the activities the firm performs impact the buyer’s value chain. ♦ Adopt best practices for signaling the value of the product and for enhancing customer perceptions.
4–34
Ways to Improve the Efficiency and Effectiveness of Supplier-Related Value Chain Activities ♦ Pressure suppliers for lower prices. ♦ Switch to lower-priced substitute inputs. ♦ Collaborate closely with suppliers to identify mutual cost-saving opportunities. ♦ Work with suppliers to enhance the firm’s differentiation. ♦ Select and retain suppliers who meet higher-quality standards. ♦ Coordinate with suppliers to enhance design or other features desired by customers. ♦ Provide incentives to suppliers to meet higher-quality standards, and assist suppliers in their efforts to improve.
4–35
Ways to Improve the Efficiency and Effectiveness of Distribution-Related Value Chain Activities ♦ Achieving Cost-Based Competitiveness: ●
Pressure forward channel allies to reduce their costs and markups so as to make the final price to buyers more competitive.
●
Collaborate with forward channel allies to identify win-win opportunities to reduce costs.
●
Change to a more economical distribution strategy, including switching to cheaper distribution channels.
4–36
Ways to Improve the Efficiency and Effectiveness of Distribution-Related Value Chain Activities ♦ Enhancing Differentiation: ●
Engage in cooperative advertising and promotions with forward channel allies
●
Use exclusive arrangements with downstream sellers or other mechanisms that increase their incentives to enhance delivered customer value
●
Create and enforce standards for downstream activities and assist in training channel partners in business practices.
4–37
4.5
Translating Company Performance of Value Chain Activities into Competitive Advantage
4–38
4.5
Translating Company Performance of Value Chain Activities into Competitive Advantage (cont’d)
4–39
QUESTION 5: IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY RIVALS?
♦ Competitive Advantage Indicators: ●
Ability to effectively and efficiently bundle resources and capabilities.
●
Achieving a high rank on each key success factor.
●
Having a net competitive advantage over its rivals. 4–40
The Competitive Strength Assessment Process
Step 1
Make a list of the industry’s key success factors and measures of competitive strength or weakness (6 to 10 measures usually suffice).
Step 2
Assign a weight to each competitive strength measure based on its perceived importance.
Step 3
Rate the firm and its rivals on each competitive strength measure and multiply by each measure by its corresponding weight.
4–41
4.4 A Representative Weighted Competitive Strength Assessment
4–42
Strategic Implications of Competitive Strength Assessment ♦ The higher a firm’s overall weighted strength rating, the stronger its overall competitiveness versus rivals. ♦ The rating score indicates the total net competitive advantage for a firm relative to other firms. ♦ Firms with high competitive strength scores are targets for benchmarking. ♦ The ratings show how a company compares against rivals, factor by factor (or capability by capability). ♦ Strength scores can be useful in deciding what strategic moves to make. 4–43
QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL ATTENTION? ♦ Identifying Strategic Issues: ● How
to stave off market challenges from new foreign competitors.
● How
to combat the price discounting of rivals.
● How
to reduce high costs and pave the way for price reductions.
● How
to sustain growth in light of slowing buyer demand.
● Whether
to expand the firm’s product line. ● Whether to correct the firm’s competitive deficiencies by acquiring a rival company with the missing strengths. 4–44
QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL ATTENTION? ♦ Identifying Strategic Issues (cont’d): ● Whether
to expand into foreign markets rapidly or cautiously.
● Whether
to reposition the company and move to a different strategic group.
● What
to do about growing buyer interest in substitute products.
● What
to do to combat the aging demographics of the firm’s customer base. 4–45
CHAPTER 5
THE FIVE GENERIC COMPETITIVE STRATEGIES Which One to Employ?
Copyright 速2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
1. Understand what distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of industry and competitive conditions than in others. 2. Gain command of the major avenues for achieving a competitive advantage based on lower costs. 3. Learn the major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals. 4. Recognize the attributes of a best-cost provider strategy and the way in which some firms use a hybrid strategy to go about building a competitive advantage and delivering superior value to customers.
5–2
Why Do Strategies Differ?
Is the firm’s market target broad or narrow?
Key factors that distinguish one strategy from another Is the competitive advantage pursued linked to low costs or product differentiation?
5–3
THE FIVE GENERIC COMPETITIVE STRATEGIES Low-Cost Provider
Striving to achieve lower overall costs than rivals on products that attract a broad spectrum of buyers.
Broad Differentiation
Differentiating the firm’s product offering from rivals’ with attributes that appeal to a broad spectrum of buyers.
Focused Low-Cost
Concentrating on a narrow price-sensitive buyer segment and on costs to offer a lower-priced product.
Focused Differentiation
Concentrating on a narrow buyer segment by meeting specific tastes and requirements of niche members
Best-Cost Provider
Giving customers more value for the money by offering upscale product attributes at a lower cost than rivals 5–4
5.1
The Five Generic Competitive Strategies: Each Stakes Out a Different Market Position
5–5
LOW-COST PROVIDER STRATEGIES ♦ Effective Low-Cost Approaches: ● Pursue
cost-savings that are difficult imitate. ● Avoid reducing product quality to unacceptable levels.
♦ Competitive Advantages and Risks: ● Greater
total profits and increased market share gained from underpricing competitors.
● Larger
profit margins when selling products at prices comparable to and competitive with rivals.
● Low
pricing does not attract enough new buyers.
● Rival’s
retaliatory price cutting set off a price war. 5–6
Major Avenues for Achieving a Cost Advantage ♦ Low-Cost Advantage ●
A firm’s cumulative costs for its overall value chain must be lower than its rival’s cumulative costs.
♦ How to Gain a Low-cost Advantage: ● ●
Do a better job than rivals of performing value chain activities more cost-effectively. Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities.
5–7
Cost-Efficient Management of Value Chain Activities ♦ Cost Driver ● ●
Is a factor with a strong influence on a firm’s costs. Can be asset- or activity-based.
♦ Ways to Secure a Cost Advantage: ● ● ● ● ●
Use lower-cost inputs and hold minimal assets Offer only “essential” product features or services Offer only limited product lines Use low-cost distribution channels Use the most economical delivery methods
5–8
5.2
Cost Drivers: The Keys to Driving Down Company Costs
5–9
Revamping the Value Chain System to Lower Costs ♦ Bypass the activities and costs of distributors and dealers by selling directly to consumers. ♦ Coordinate with suppliers to bypass activities, speed up their performance, or otherwise increase overall efficiency. ♦ Reduce handling and shipping costs by locating suppliers close to the firm’s own facilities.
5–10
When a Low-Cost Provider Strategy Works Best ♦ Price competition among rival sellers is vigorous. ♦ Products are readily available from many sellers. ♦ Industry products are not easily differentiated. ♦ Most buyers use the product in the same ways. ♦ Buyers incur low costs in switching among sellers. ♦ Large buyers have the power to bargain down prices. ♦ New entrants can use introductory low prices to attract buyers and build a customer base.
5–11
Pitfalls of a Low-Cost Provider Strategy ♦ Lowering selling prices results in gains that are smaller than the increases in total costs, reducing profits rather than raising them. ♦ Relying on a cost advantage that is not sustainable because rivals can copy or otherwise overcome it. ♦ Becoming too fixated on cost reduction such that the firm’s offering is too features-poor to generate sufficient buyer appeal.
5–12
BROAD DIFFERENTIATION STRATEGIES ♦ Effective Differentiation Approaches: ● Carefully
study buyer needs and behaviors, values and willingness to pay a unique product or service.
● Incorporate
features that both appeal to buyers and create a sustainably distinctive product offering.
● Use
higher prices to recoup differentiation costs.
♦ Advantages of Differentiation: ● Premium
prices for products ● Increased unit sales ● Brand
loyalty 5–13
Cost-Efficient Management of Value Chain Activities ♦ A Uniqueness Driver Can: ●
Have a strong differentiating effect.
●
Be based on physical as well as functional attributes of a firm’s products.
●
Be the result of superior performance capabilities of the firm’s human capital.
●
Have an effect on more than one of the firm’s value chain activities.
●
Create a perception of value (brand loyalty) in buyers where there is little reason for it to exist.
5–14
5.3
Uniqueness Drivers: The Keys to Creating a Differentiation Advantage
5–15
Revamping the Value Chain System to Increase Differentiation
Approaches to enhancing differentiation
Coordinating with channel allies to enhance customer perceptions of value
Coordinating with suppliers to better address customer needs
5–16
When a Differentiation Strategy Works Best
Market Circumstances Favoring Differentiation
Diversity of buyer needs and uses for the product
Many ways that differentiation can have value to buyers
Few rival firms follow a similar differentiation approach
Rapid change in technology and product features
5–17
Pitfalls of a Differentiation Strategy ♦ Relying on product attributes easily copied by rivals. ♦ Introducing product attributes that do not evoke an enthusiastic buyer response. ♦ Eroding profitability by overspending on efforts to differentiate the firm’s product offering. ♦ Not opening up meaningful gaps in quality, service, or performance features vis-à-vis the products of rivals. ♦ Adding frills and features such that the product exceeds the needs and uses of most buyers. ♦ Charging too high a price premium. 5–18
FOCUSED (OR MARKET NICHE) STRATEGIES
Focused Strategy Approaches
Focused Low-Cost Strategy
Focused Market Niche Strategy
5–19
When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive ♦ The target market niche is big enough to be profitable and offers good growth potential. ♦ Industry leaders do not see that having a presence in the niche is crucial to their own success. ♦ It is costly or difficult for multisegment competitors to meet the needs of target market niche buyers. ♦ The industry has many different niches and segments. ♦ Rivals have little or no interest in the target segment. ♦ The focuser has a reservoir of buyer goodwill and long-term loyalty. 5–20
The Risks of a Focused Low-Cost or Focused Differentiation Strategy ♦ Competitors will find ways to match the focused firm’s capabilities in serving the target niche. ♦ The specialized preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. ♦ As attractiveness of the segment increases, it draws in more competitors, intensifying rivalry and splintering segment profits. 5–21
BEST-COST PROVIDER STRATEGIES
Differentiation: Providing desired quality/ features/performance/ service attributes
Low Cost Provider: Charging a lower price than rivals with similar caliber product offerings
Best-Cost Provider Hybrid Approach
Value-Conscious Buyer 5–22
Market Characteristics Favoring a Best-Cost Provider Strategy ♦ Product differentiation is the market norm. ♦ There are a large number of value-conscious buyers who prefer midrange products. ♦ There is competitive space near the middle of the market for a competitor with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price. ♦ Economic conditions have caused more buyers to become value-conscious.
5–23
The Big Risk of a Best-Cost Provider Strategy— Getting Squeezed on Both Sides
Low-Cost Providers
Best-Cost Provider Strategy
High-End Differentiators
5–24
Follow-up
♦ How can product quality lower product costs? ♦ In which stages of the industry life cycle are low-cost leadership, differentiation, focused niche, and best-cost provider strategies most appropriate? ♦ Could differences in the sticker prices of the luxury-car market be used as a proxy for measuring the strength of Toyota’s best-cost strategy? 5–25
THE CONTRASTING FEATURES OF THE FIVE GENERIC COMPETITIVE STRATEGIES: A SUMMARY ♦ Each Generic Strategy: ●
Positions the firm differently in its market.
●
Establishes a central theme for how the firm intends to outcompete rivals.
●
Creates boundaries or guidelines for strategic change as market circumstances unfold.
●
Points to different ways of experimenting and tinkering with the basic strategy. 5–26
5.1 Distinguishing Features of the Five Generic Competitive Strategies
5–27
5.1 Distinguishing Features of the Generic Competitive Strategies (cont’d)
5–28
5.1 Distinguishing Features of the Generic Competitive Strategies (cont’d)
5–29
Successful Competitive Strategies Are Resource-Based ♦ A firm’s competitive strategy is unlikely to succeed unless it is predicated on leveraging a competitively valuable collection of resources and capabilities that match the strategy. ♦ Sustaining a firm’s competitive advantage depends on its resources, capabilities, and competences that are difficult for rivals to duplicate and have no good substitutes.
5–30
CHAPTER 6
STRENGTHENING A COMPANY’S COMPETITIVE POSITION Strategic Moves, Timing, and Scope of Operations
Copyright ®2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
1. Learn whether and when to pursue offensive or defensive strategic moves to improve a company’s market position. 2. Recognize when being a first mover or a fast follower or a late mover is most advantageous. 3. Become aware of the strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions. 4. Learn the advantages and disadvantages of extending the company’s scope of operations via vertical integration. 5. Become aware of the conditions that favor farming out certain value chain activities to outside parties. 6. Understand when and how strategic alliances can substitute for horizontal mergers and acquisitions or vertical integration and how they can facilitate outsourcing. 6–2
Maximizing the Power of a Strategy
Making choices that complement a competitive approach and maximize the power of strategy
Offensive and Defensive Competitive Actions
Competitive Dynamics and the Timing of Strategic Moves
Scope of Operations along the Industry’s Value Chain
6–3
Considering Strategy-Enhancing Measures ♦ Whether and when to go on the offensive. ♦ Whether and when to employ defensive strategies. ♦ When to undertake strategic moves—first mover, a fast follower, or a late mover. ♦ Whether to merge with or acquire another firm. ♦ Whether and where to integrate backward or forward into the industry’s activity chain. ♦ Whether to outsource value chain activities or perform them in-house. ♦ Whether to enter into strategic alliances or partnership arrangements. 6–4
GOING ON THE OFFENSIVE— STRATEGIC OPTIONS TO IMPROVE A FIRM’S MARKET POSITION ♦ Strategic Offensive Principles: ●
Relentlessly build competitive advantage and then convert it into sustainable advantage.
●
Create and deploy resources in ways that cause rivals to struggle to defend themselves.
●
Employ the element of surprise as opposed to doing what rivals expect and are prepared for.
●
Display a strong bias for swift, decisive, and overwhelming actions to overpower rivals. 6–5
Choosing the Basis for Competitive Attack ♦ Avoid directly challenging a targeted competitor where it is strongest. ♦ Use the firm’s strongest strategic assets to attack a competitor’s weaknesses. ♦ The offensive may not yield immediate results if market rivals are strong competitors. ♦ Be prepared for the threatened competitor’s counter-response.
6–6
Principal Offensive Strategy Options ♦ Use a cost-based advantage to attack competitors on the basis of price or value. ♦ Leapfrog rivals as a first adopter of technology or by being first to market with products. ♦ Adopt and improve on the good ideas of other firms (rivals or otherwise). ♦ Use hit-and-run or guerrilla warfare tactics to grab sales and market share. ♦ Launch a preemptive strike to secure an advantageous position that rivals cannot easily duplicate.
6–7
Choosing Which Rivals to Attack Best Targets for Offensive Attacks
Market leaders that are vulnerable
Runner-up firms with weaknesses in areas where the challenger is strong
Struggling enterprises on the verge of going under
Small local and regional firms with limited capabilities
6–8
Blue-Ocean Strategy— A Special Kind of Offensive ♦ The business universe is divided into: ● An
existing market with boundaries and rules in which rival firms compete for advantage.
● A
yet-to-be “blue ocean” market space with no rivals and a wide-open long-term growth and profit potential for a firm with the right strategy and product.
6–9
DEFENSIVE STRATEGIES— PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE
Purposes of Defensive Strategies
Lower the firm’s risk of being attacked
Weaken the impact of an attack that does occur
Influence challengers to aim their efforts at other rivals
6–10
Blocking the Avenues Open to Challengers ♦ Adopt alternative technologies as a hedge against rivals attacking with a new or better technology. ♦ Introduce new features and models to broaden product lines to close gaps and vacant niches. ♦ Maintain economy-pricing to thwart lower price attacks. ♦ Discourage buyers from trying competitors’ brands. ♦ Challenge quality and safety of competitor’s products ♦ Grant discounts or better terms to intermediaries who handle the firm’s product line exclusively.
6–11
Signaling Challengers That Retaliation Is Likely ♦ Signaling is an effective defensive strategy if the firm follows through by: ●
Publicly announcing its commitment to maintaining the firm’s present market share.
●
Publicly committing to a policy of matching competitors’ terms or prices.
●
Maintaining a war chest of cash and marketable securities.
●
Making a strong counter-response to the moves of weaker rivals to enhance its tough defender image.
6–12
TIMING A FIRM’S OFFENSIVE AND DEFENSIVE STRATEGIC MOVES ♦ Timing’s Importance: ● Knowing
when to make a strategic move is as crucial as knowing what move to make.
● Moving
first is no guarantee of success or competitive advantage.
● The
risks of moving first to stake out a monopoly position must be carefully weighted. 6–13
Conditions That Lead to First-Mover Advantages ♦ When pioneering helps build a firm’s reputation with buyers and creates brand loyalty. ♦ When a first mover’s customers will thereafter face significant switching costs. ♦ When property rights protections thwart rapid imitation of the initial move. ♦ When an early lead enables movement down the learning curve ahead of rivals. ♦ When a first mover can set the technical standard for the industry.
6–14
Conditions Creating First-Mover Disadvantages ♦ When pioneering is more costly than imitating and offers negligible experience or learning-curve benefits. ♦ When the products of an innovator are somewhat primitive and do not live up to buyer expectations. ♦ When rapid market evolution allows fast followers to leapfrog a first mover’s products with more attractive next-version products. ♦ When market uncertainties make it difficult to ascertain what will eventually succeed.
6–15
To Be a First Mover or Not ♦ Does market takeoff depend on complementary products or services that currently are not available? ♦ Is new infrastructure required before buyer demand can surge? ♦ Must buyers learn new skills or adopt new behaviors? ♦ Will buyers encounter high switching costs in moving to the newly introduced product or service? ♦ Are there influential competitors in a position to delay or derail the efforts of a first mover?
6–16
♦ Which first-mover advantages did Jeff Bezos have in starting Amazon.com? ♦ What first-mover disadvantages did Bezos have to watch for after starting Amazon.com? ♦ Why was the learning curve so steep for Amazon.com?
6–17
STRENGTHENING A COMPANY’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS Defining the Scope of the Firm’s Operations
Range of its activities performed internally
Breadth of its product and service offerings
Extent of its geographic market presence and mix of businesses
Size of its competitive footprint on its market or industry
6–18
The Dimensions Of Firm Scope ♦ Horizontal Scope ●
Is the range of product and service segments that a firm serves within its focal market.
♦ Vertical Scope ●
Is the extent to which a firm’s internal activities encompass one, some, many, or all of the activities that make up an industry’s entire value chain system, ranging from raw material production to final sales and service activities.
6–19
HORIZONTAL MERGER AND ACQUISITION STRATEGIES ♦ Merger ● Is
the combining of two or more firms into a single corporate entity that often takes on a new name.
♦ Acquisition ● Is
a combination in which one firm, the acquirer, purchases and absorbs the operations of another firm, the acquired.
6–20
Benefits of Increasing Horizontal Scope ♦ Increasing a firm’s horizontal scope strengthens its business and increases its profitability by: ●
Improving the efficiency of its operations
●
Heightening its product differentiation
●
Reducing market rivalry
●
Increasing the firm’s bargaining power over suppliers and buyers
●
Enhancing its flexibility and dynamic capabilities
6–21
Strategic Outcomes for Horizontal Mergers and Acquisitions ♦ Increasing the firm’s scale of operations and market share. ♦ Expanding a firm’s geographic coverage. ♦ Extending the firm’s business into new product categories. ♦ Gaining quick access to new technologies or complementary resources and capabilities. ♦ Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities.
6–22
♦ Which strategic outcomes did Lowry Mays pursue through his acquisition strategy? ♦ How did increasing the horizontal scope of Clear Channel Communications through acquisitions strengthen its competitive position and profitability? ♦ Why did Clear Channel sell nearly one-third of its radio stations in 2008?
6–23
Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results ♦ Strategic Issues: ●
Cost savings may prove smaller than expected.
●
Gains in competitive capabilities take longer to realize or never materialize at all.
♦ Organizational Issues ●
Corporate cultures, operating systems and management styles fail to mesh due to resistance to change from organization members.
●
Loss of key employees at the acquired firm.
●
The managers overseeing the integration make mistakes in melding the acquired firm into their own.
6–24
VERTICAL INTEGRATION STRATEGIES ♦ Vertically Integrated Firm ● Is
one that participates in multiple segments or stages of an industry’s overall value chain.
♦ Vertical Integration Strategy ● Can
expand the firm’s range of activities backward into its sources of supply and/or forward toward end users of its products.
6–25
Types of Vertical Integration Strategies
Vertical Integration Choices
Full Integration
Partial Integration
Tapered Integration
6–26
Types of Vertical Integration Strategies ♦ Full Integration ● A
firm participates in all stages of the vertical activity chain.
♦ Partial Integration ● A
firm builds positions only in selected stages of the vertical chain.
♦ Tapered Integration ● Involves
a mix of in-house and outsourced activity in any stage of the vertical chain. 6–27
Backwards Integration Towards Suppliers ♦ Integrating Backwards By: ●
Achieving the same scale economies as outside suppliers—low-cost based competitive advantage.
●
Matching or beating suppliers’ production efficiency with no drop-off in quality— differentiation-based competitive advantage.
♦ Reasons for Integrating Backwards: ●
Reduction of supplier power
●
Reduction in costs of major inputs
●
Assurance of the supply and flow of critical inputs Protection of proprietary know-how
●
6–28
Integrating Forward to Enhance Competitiveness ♦ Reasons for Integrating Forward: ●
To lower overall costs by increasing channel activity efficiencies relative to competitors.
●
To increase bargaining power through control of channel activities.
●
To gain better access to end users.
●
To strengthen and reinforce brand awareness.
●
To increase product differentiation.
6–29
Disadvantages of a Vertical Integration Strategy ♦ Increased business risk due to large capital investment. ♦ Acceptance of technological advances or more efficient production methods. ♦ Loss of operating flexibility through dependence on internally self-produced parts and components. ♦ Less flexibility in meeting buyer preferences if they require non-internally produced parts and components. ♦ Internal production levels and capacity matching problems may not allow for economies of scale. ♦ Requirements for new skills and business capabilities.
6–30
Weighing the Pros and Cons of Vertical Integration ♦ Can vertical integration enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation? ♦ What is the impact of vertical integration on investment costs, flexibility and response times, and the administrative costs of coordinating operations across more vertical chain activities? ♦ How difficult it will be for the company to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain.
6–31
♦ What are the most important strategic benefits that American Apparel derives from its vertical Integration strategy? ♦ Over the long term, how could the vertical scope of American Apparel’s operations threaten its competitive position and profitability? ♦ Why is a vertical integration strategy more appropriate in some industries and not in others? 6–32
OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS ♦ Outsourcing ●
Involves farming out value chain activities to outside vendors.
♦ Outsource an Activity When It: ●
Can be performed better or more cheaply by outside specialists.
●
Is not crucial to achieving sustainable competitive advantage and does not hollow out the firm’s core competencies.
●
Improves organizational flexibility and speed time to market.
●
Reduces risks due to new technology and/or buyer preferences.
●
Assembles diverse kinds of expertise speedily and efficiently.
●
Allows a firm to concentrate on its core business, leverage key resources, and do even better what it does best. 6–33
The Risks of Outsourcing Value Chain Activities ♦ Hollowing out the resources and capabilities that the firm needs to be a master of its own destiny. ♦ Loss of control when monitoring, controlling, and coordinating activities of outside parties by means of contracts and arm’s-length transactions. ♦ Lack of incentives for outside parties to make investments specific to the needs of the outsourcing firm’s value chain.
6–34
STRATEGIC ALLIANCES AND PARTNERSHIPS ♦ Strategic Alliance ● Is
a formal agreement between two or more separate firms in which they agree to work cooperatively toward common objectives.
♦ Joint Venture ● Is
a type of strategic alliance in which the partners set up an independent corporate entity that they own and control jointly, sharing in its revenues and expenses. 6–35
Factors That Make an Alliance “Strategic” ♦ It helps build, sustain, or enhance a core competence or competitive advantage. ♦ It helps block a competitive threat. ♦ It increases the bargaining power of alliance members over suppliers or buyers. ♦ It helps open up important new market opportunities. ♦ It mitigates a significant risk to a firm’s business. 6–36
Benefits of Strategic Alliances and Partnerships ♦ Minimizes the problems associated with vertical integration, outsourcing, and mergers and acquisitions. ♦ Useful in extending to extend the scope of operations via international expansion and diversification strategies. ♦ Reduces the need to be independent and self-sufficient when strengthening the firm’s competitive position. ♦ Offers greater flexibility should a firm’s resource requirements or goals change over time. ♦ Are useful when industries are experiencing highvelocity technological advances simultaneously.
6–37
Why and How Strategic Alliances Are Advantageous ♦ They expedite the development of promising new technologies or products. ♦ They help overcome deficits in technical and manufacturing expertise. ♦ They bring together the personnel and expertise needed to create new skill sets and capabilities. ♦ They improve supply chain efficiency. ♦ They help partners allocate venture risk sharing. ♦ They allow firms to gain economies of scale. ♦ They provide new market access for partners. 6–38
Reasons for Entering into Strategic Alliances ♦ When seeking global market leadership: ●
Enter into critical country markets quickly.
●
Gain inside knowledge about unfamiliar markets and cultures through alliances with local partners.
●
Provide access to valuable skills and competencies concentrated in particular geographic locations.
♦ When staking out a strong industry position: ●
Establish a stronger beachhead in target industry.
●
Master new technologies and build expertise and competencies.
●
Open up broader opportunities in the target industry.
6–39
Capturing the Benefits of Strategic Alliances Being sensitive to cultural differences Picking a good partner
Recognizing that the alliance must benefit both sides
Strategic Alliance Factors Ensuring both parties keep their commitments Structuring the decision-making process for swift actions
Adjusting the agreement over time to fit new circumstances
6–40
The Drawbacks of Strategic Alliances and Partnerships ♦ Culture clash and integration problems due to different management styles and business practices. ♦ Anticipated gains do not materialize due to an overly optimistic view of the synergies or a poor fit of partners’ resources and capabilities. ♦ Risk of becoming dependent on partner firms for essential expertise and capabilities. ♦ Protection of proprietary technologies, knowledge bases, or trade secrets from partners who are rivals.
6–41
Principle Advantages of Strategic Alliances ♦ They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing. ♦ They are more flexible organizational forms and allow for a more adaptive response to changing conditions. ♦ They are more rapidly deployed—a critical factor when speed is of the essence.
6–42
Strategic Alliances Versus Outsourcing ♦ Key Advantages of Strategic Alliances: ● The
increased ability to exercise control over the partners’ activities.
● A
greater commitment and willingness of the partners to make relationship-specific investments as opposed to arm’s-length outsourcing transactions.
6–43
How to Make Strategic Alliances Work ♦ Create a system for managing the alliance. ♦ Build trusting relationships with partners. ♦ Set up safeguards to protect from the threat of opportunism by partners. ♦ Make commitments to partners and see that partners do the same. ♦ Make learning a routine part of the management process.
6–44
CHAPTER 7
STRATEGIES FOR COMPETING IN INTERNATIONAL MARKETS
Copyright 速2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
1. Develop an understanding of the primary reasons firms choose to compete in international markets. 2. Learn how and why differing market conditions across countries and industries make crafting international strategy a complex undertaking. 3. Learn about the major strategic options for entering and competing in foreign markets. 4. Gain familiarity with the three main strategic approaches for competing internationally. 5. Understand how international firms go about building competitive advantage in foreign markets. 7–2
WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS
To gain access to new customers
To exploit core competencies
To achieve lower costs and economies of scale
To spread business risk across a wider market base To access resources and capabilities in foreign markets
7–3
WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX 1.
Industry competitiveness factors that vary from country to country
2.
Location-based advantages for certain countries
3.
Differences in government policies and economic conditions
4.
Currency exchange rate risks
5.
Differences in cultural, demographic, and market conditions 7–4
7.1 The Diamond of National Advantage Demand Conditions Home-market relative size; domestic buyers’ needs
Related\Supporting Industries
Firm Strategy, Structure, and Rivalry
Proximity of suppliers, end users, and complementary industries
Different management styles and organization; degree of local rivalry
Factor Conditions Availability, quality, and relative prices of inputs (e.g. labor, materials)
7–5
The Diamond Framework ♦ Answers important questions about competing on an international basis by: ● Predicting
where new foreign entrants are likely to come from and their strengths.
● Highlighting
foreign market opportunities where rivals are weakest.
● Identifying
the location-based advantages of conducting certain value chain activities of the firm in a particular country. 7–6
Reasons for Locating Value Chain Activities for Competitive Advantage ♦ Lower wage rates ♦ Higher worker productivity
♦ Proximity to suppliers and technologically related industries
♦ Lower energy costs
♦ Proximity to customers
♦ Fewer environmental ♦ Lower distribution costs regulations ♦ Available\unique natural resources ♦ Lower tax rates ♦ Lower inflation rates
7–7
The Impact of Government Policies and Economic Conditions in Host Countries ♦ Positives
♦ Negatives
● Tax
incentives
● Environmental
● Low
tax rates
● Subsidies
● Low-cost
loans
● Site
location and development
● Worker
training
regulations
and loans to domestic competitors
● Import
restrictions
● Tariffs
and quotas
● Local-content ● Regulatory ● Profit
requirements
approvals
repatriation limits
● Minority
ownership limits 7–8
Political and Economic Risks ♦ Political Risks ● Stem
from instability or weaknesses in national governments and hostility to foreign business.
♦ Economic Risks ● Stem
from the stability of a country’s monetary system, economic and regulatory policies, lack of property rights protections, and risks due to exchange rate fluctuation.
7–9
The Risks of Adverse Exchange Rate Shifts ♦ Effects of Exchange Rate Shifts: ● Exporters
experience a rising demand for their goods whenever their currency grows weaker relative to the importing country’s currency. ● Exporters experience a falling demand for their goods whenever their currency grows stronger relative to the importing country’s currency.
7–10
Thinking Strategically ♦ What effects has the adoption of the euro had on the ability of European Union (EU) countries (and firms) to respond changes in intra-national economic conditions in other EU countries given that they now share a common currency? ♦ What should a EU firm do to respond to a adverse currency exchange rate shift in a non-EU country? 7–11
Cross-Country Differences in Demographic, Cultural, and Market Conditions
To customize offerings in each country market to match the tastes and preferences of local buyers Key Strategic Considerations To pursue a strategy of offering a mostly standardized product worldwide.
7–12
THE CONCEPTS OF MULTIDOMESTIC COMPETITION AND GLOBAL COMPETITION ♦ Multidomestic Competition ● Exists
when competition in each country market is localized and not closely connected to competition in other country markets.
♦ Global Competition ● Exists
when competitive conditions and prices are strongly linked across many different national markets. 7–13
Features of Multidomestic Competition ♦ Buyers in different countries are attracted to different product attributes. ♦ Sellers vary from country to country. ♦ Industry conditions and competitive forces in each national market differ in important respects.
7–14
Features of Global Competition ♦ The same group of firms competes in countries where sales volumes are large and having a presence is important to a strong global position. ♦ Competitive advantage is gained from the transfer of expertise, economies of scale, and worldwide brand-name recognition. ♦ Global competition is increasing in multidomestic markets where custom mass production is coinciding with converging consumer tastes.
7–15
STRATEGIC OPTIONS FOR ENTERING AND COMPETING IN INTERNATIONAL MARKETS ♦ Maintain a national (one-country) production base and export goods to foreign markets. ♦ License foreign firms to produce and distribute the firm’s products abroad. ♦ Employ an overseas franchising strategy. ♦ Establish a wholly-owned subsidiary by either acquiring a foreign company or through a “greenfield” venture. ♦ Form strategic alliances or joint ventures with foreign companies. 7–16
Export Strategies ♦ Advantages
♦ Disadvantages
●
Low capital requirements
● Maintaining
relative cost advantage of home-based production
●
Economies of scale in utilizing existing production capacity
● Transportation
●
No distribution risk
● Exchange
●
No direct investment risk
● Tariffs\import
and
shipping costs
● Loss
rates risks duties
of channel control
7–17
Licensing and Franchising Strategies ♦ Advantages resource requirements
♦ Disadvantages
● Low
● Maintaining
● Income
● Loss
● Rapid
● Adapting
from royalties and franchising fees expansion into many markets
control of proprietary know-how of operational and quality control to local market tastes and expectations
7–18
Acquisition Strategies ♦ Advantages ● High
level of control
● Quick
large-scale market entry
● Avoids ● Access
entry barriers
to acquired firm’s skills
♦ Disadvantages ● Costs
of acquisition
● Complexity
of acquisition
process ● Integration
of the firms’ structures, cultures, operations and personnel
7–19
Greenfield Strategies ♦ Advantages ● High
♦ Disadvantages
level of control over venture
● Capital
by doing” in the local market
● Risks
● “Learning ● Direct
transfer of the firm’s technology, skills, business practices, and culture
costs of initial development of loss due to political instability or lack of legal protection of ownership
● Slowest
form of entry due to extended time required to construct facility
7–20
Alliance and Joint Venture Strategies ♦ Advantages ● Avoid
♦ Disadvantages
entry barriers
● Allow
for resource and risk sharing
● Partner’s
knowledge of local market conditions
● Joint
learning and sharing
● Preservation
of partner independence
● Cultural
and language
barriers ● Costs
of establishing the working arrangement
● Issues
of joint control
● Protection
of proprietary technology or competitive advantage
7–21
COMPETING INTERNATIONALLY: THE THREE MAIN STRATEGIC APPROACHES Competing Internationally
Multidomestic Strategy
Global Strategy
Transnational Strategy
7–22
Approaches to International Strategy ♦ Multidomestic Strategy ●
Varies product offerings and competitive approaches from country to country.
♦ Global Strategy ●
Employs the same basic competitive approach in all countries where the firm operates.
♦ Transnational Strategy ●
Is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies.
7–23
7.2
Three Approaches for Competing Internationally
7–24
7.1
Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches
Multidomestic Approach Advantages
Disadvantages
• Can meet the specific needs of each market more precisely
• Hinders resource and capability sharing or cross-market transfers
• Can respond more swiftly to localized changes in demand
• Higher production and distribution costs
• Can target reactions to the moves of local rivals
• Not conducive to a worldwide competitive advantage
• Can respond more quickly to local opportunities and threats
7–25
7.1
Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches (cont’d)
Transnational Approach Advantages
Disadvantages
• Offers the benefits of both local responsiveness and global integration
• More complex and harder to implement
• Conflicting goals may be difficult to • Enables the transfer and sharing reconcile and require trade-offs of resources and capabilities • Implementation more costly and across borders time-consuming • Provides the benefits of flexible coordination
7–26
7.1
Advantages and Disadvantages of Multidomestic, Global, and Transnational Approaches (cont’d)
Global Approach Advantages
Disadvantages
• Lower costs due to scale and scope economies
• Unable to address local needs precisely
• Greater efficiencies due to the ability to transfer best practices across markets
• Less responsive to changes in local market conditions
• Higher transportation costs and • More innovation from knowledge tariffs sharing and capability transfer • Higher coordination and integration • The benefit of a global brand and reputation
costs
7–27
THE QUEST FOR COMPETITIVE ADVANTAGE IN THE INTERNATIONAL ARENA
Build Competitive Advantage in International Markets
Use international location to lower cost or differentiate product
Share resources, competencies, and capabilities
Gain cross-border coordination benefits
7–28
Using Location to Build Competitive Advantage
To customize offerings in each country market to match the tastes and preferences of local buyers Key Location Issues To pursue a strategy of offering a mostly standardized product worldwide.
7–29
When to Concentrate Activities in a Few Locations ♦ The costs of manufacturing or other activities are significantly lower in some geographic locations than in others. ♦ There are significant scale economies in production or distribution. ♦ There are sizable learning and experience benefits associated with performing an activity in a single location. ♦ Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages.
7–30
When to Disperse Activities across Many Locations ♦ Buyer-related activities can be conducted at a distance. ♦ There are high transportation costs. ♦ There are diseconomies of large size. ♦ Trade barriers make a central location too expensive. ♦ Dispersing activities reduces exchange rate risks. ♦ Dispersion helps prevent supply interruptions. ♦ Dispersion helps avoid adverse political developments. ♦ Dispersion allows for location-based technology and production cost competitive advantages.
7–31
Cross-Border Coordination: Sharing and Transferring Resources and Capabilities ♦ Build a Resource-Based Competitive Advantage By: ●
Using powerful brand names to extend a differentiation-based competitive advantage beyond the home market.
●
Coordinating activities for sharing and transferring resources and production capabilities across different countries’ domains to develop market dominating depth in key competencies.
7–32
PROFIT SANCTUARIES AND CROSSBORDER STRATEGIC MOVES ♦ Profit Sanctuaries ● Are
country markets (or geographic regions) in which a firm derives substantial profits because of its protected market position or its competitive advantage.
♦ Cross-Market Subsidization ● Is
the diversion of resources and profits from one market to support competitive offensives in another different market. 7–33
7.3
Profit Sanctuary Potential of Domestic-only, International, and Global Competitors
7–34
Dumping as a Strategy ♦ Dumping ● Selling
goods in foreign markets at prices that are either below normal home market prices or below the full costs per unit.
♦ Why A Firm Engages in Dumping: ● To
reduce or avoid the high fixed costs of idle production capacity. ● To use below-cost pricing to gain market share and drive weak firms from the market. 7–35
Using Cross-Border Tactics to Defend against International Rivals International Firm A
International Firm B
Profit Sanctuary
Firm A moves against Firm B in Country B Firm B counters with a response in Country C
7–36
STRATEGIES FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIES ♦ Prepare to compete on the basis of low price. ♦ Prepare to modify the firm’s business model or strategy to accommodate local circumstances. ♦ Avoid developing markets where it is too costly to accommodate local circumstances. ♦ Try to change the local market to better match the way the firm does business elsewhere. 7–37
DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES ♦ Develop a business model that exploits shortcomings in local distribution networks or infrastructure. ♦ Utilize knowledge of local customer needs and preferences to create customized products or services. ♦ Take advantage of aspects of the local workforce with which large multinational firms may be unfamiliar. ♦ Use local acquisition and rapid-growth strategies to defend against expansion-minded internationals. ♦ Transfer the firm’s expertise to cross-border markets. 7–38
CHAPTER 8
CORPORATE STRATEGY: Diversification and the Multibusiness Company
Copyright 速2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
1. Understand when and how business diversification can enhance shareholder value. 2. Gain an understanding of how related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage. 3. Become aware of the merits and risks of corporate strategies keyed to unrelated diversification. 4. Gain command of the analytical tools for evaluating a firm’s diversification strategy. 5. Understand a diversified firm’s four main corporate strategy options for solidifying its diversification strategy and improving company performance. 8–2
Crafting a Diversified Firm’s Overall Or Corporate Strategy
Step 1
Picking new industries to enter and deciding on the best mode of entry.
Step 2
Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage.
Step 3
Establishing investment priorities and steering corporate resources into the most attractive business units.
Step 4
Initiating actions to boost the combined performance of the cooperation’s collection of businesses.
8–3
WHEN TO DIVERSIFY ♦ A firm should consider diversifying when: ●
It can expand into businesses whose technologies and products complement its present business.
●
Its resources and capabilities can be used as valuable competitive assets in other businesses.
●
Costs can be reduced by cross-business sharing or transfer of resources and capabilities.
●
Transferring a strong brand name to the products of other businesses helps drive up sales and profits of those businesses.
8–4
BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING
Testing Whether a Diversification Move Will Add Long-Term Value for Shareholders
The industry attractiveness test
The cost-of-entry test
The better-off test
8–5
Testing Whether Diversification Will Add Value for Shareholders ♦ The Attractiveness Test: ● Are
the industry’s returns on investment as good or better than present business(es)?
♦ The Cost of Entry Test: ● Is
the cost of overcoming entry barriers so great that profitability is too long delayed?
♦ The Better-Off Test: ● How
much synergy will be gained by diversifying into the industry? 8–6
Better Performance through Synergy
Evaluating the Potential for Synergy through Diversification
Firm A purchases Firm B in another industry. A and B’s profits are no greater than what each firm could have earned on its own.
No Synergy (1+1=2)
Firm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own.
Synergy (1+1=3)
8–7
STRATEGIES FOR ENTERING NEW BUSINESSES
Diversifying into New Businesses
Acquisition
Internal new venture (start-up)
Joint venture
8–8
Acquisition of an Existing Business ♦ Advantages: ●
Quick entry into an industry
●
Barriers to entry avoided
●
Access to complementary resources and capabilities
♦ Disadvantages: ●
Cost of acquisition—whether to pay a premium for a successful firm or seek a bargain in struggling firm
●
Underestimating costs for integrating acquired firm
●
Overestimating the acquisition’s potential to deliver added shareholder value 8–9
Internal Development: Corporate Venturing ♦ Advantages of New Venture Development: ●
Avoids pitfalls and uncertain costs of acquisition.
●
Allows entry into a new or emerging industry where there are no available acquisition candidates.
♦ Disadvantages of Intrapreneurship: ●
Must overcome industry entry barriers.
●
Requires extensive investments in developing production capacities and competitive capabilities.
●
May fail due to internal organizational resistance to change and innovation. 8–10
When to Engage in Internal Development Ample time to develop and launch business Availability of inhouse skills and resources
Cost of acquisition is higher than internal entry
Factors Favoring Internal Development No head-to-head competition in targeted industry Low resistance of incumbent firms to market entry
Added capacity will not affect supply and demand balance
8–11
When to Engage in a Joint Venture
Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone? Evaluating the Potential for a Joint Venture
Does the opportunity require a broader range of competencies and know-how than the firm now possesses? Will the opportunity involve operations in a country that requires foreign firms to have a local minority or majority ownership partner?
8–12
Choosing a Mode of Market Entry The Question of Critical Resources and Capabilities
Does the firm have the resources and capabilities for internal development?
The Question of Entry Barriers
Are there entry barriers to overcome?
The Question of Speed
Is speed an important factor in the firm’s chances for successful entry?
The Question of Comparative Cost
Which is the least costly mode of entry, given the firm’s objectives?
8–13
CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES
Which Diversification Path to Pursue?
Related Businesses
Unrelated Businesses
Both Related and Unrelated Businesses
8–14
CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES ♦ Related Businesses ● Have
competitively valuable cross-business value chain and resource matchups.
♦ Unrelated Businesses ● Have
dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level. 8–15
STRATEGIC FIT AND DIVERSIFICATION INTO RELATED BUSINESSES ♦ Strategic Fit Benefits ● Occur
when the value chains of the different businesses present opportunities for: ! Transfer
of resources among businesses.
! Lowering
of costs in combining related value chain activities or resource sharing.
! Use
of a potent brand name across businesses.
! Cross-business
collaboration to build stronger competitive capabilities. 8–16
Pursuing Related Diversification ♦ Specialized Resources and Capabilities ● Have
very specific applications and their use is limited to a restricted range of industry and business types.
♦ Generalized Resources and Capabilities ● Can
be widely applied and can be deployed across a broad range of industry and business types.
8–17
8.1
Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic Fit
8–18
Identifying Cross-Business Strategic Fit along the Value Chain Supply Chain Activities R&D and Technology Activities
ManufacturingRelated Activities
Potential Cross-Business Fits Sales and Marketing Activities
DistributionRelated Activities Customer Service Activities
8–19
Strategic Fit, Economies of Scope, and Competitive Advantage Using Economies of Scope to Convert Strategic Fit into Competitive Advantage
Transferring specialized and generalized skills and\or knowledge
Combining related value chain activities to achieve lower costs
Leveraging brand names and other differentiation resources
Using crossbusiness collaboration and knowledge sharing
8–20
Economies of Scope Differ from Economies of Scale ♦ Economies of Scope ● Are
cost reductions that flow from crossbusiness resource sharing in the activities of the multiple businesses of a firm.
♦ Economies of Scale ● Accrue
when unit costs are reduced due to the increased output of larger-size operations of a firm.
8–21
From Competitive Advantage to Added Profitability and Gains in Shareholder Value Capturing the Cross-Business Benefits of Related Diversification
Builds more shareholder value than owning a stock portfolio
Is only possible via a strategy of related diversification
Yields value in the application of specialized resources and capabilities
Requires that management take internal actions to realize them
8–22
DIVERSIFICATION INTO UNRELATED BUSINESSES Can it meet corporate targets for profitability and return on investment? Evaluating the acquisition of a new business or the divestiture of an existing business
Is it is in an industry with attractive profit and growth potentials? Is it is big enough to contribute significantly to the parent firm’s bottom line?
8–23
Building Shareholder Value via Unrelated Diversification
Using an Unrelated Diversification Strategy to Pursue Value
Astute Corporate Parenting by Management
Cross-Business Allocation of Financial Resources
Acquiring and Restructuring Undervalued Companies
8–24
Building Shareholder Value via Unrelated Diversification Astute Corporate Parenting by Management Cross-Business Allocation of Financial Resources Acquiring and Restructuring Undervalued Companies
• Provide leadership, oversight, expertise, and guidance. • Provide generalized or parenting resources that lower operating costs and increase SBU efficiencies.
• Serve as an internal capital market. • Allocate surplus cash flows from businesses to fund the capital requirements of other businesses.
• Acquire weakly performing firms at bargain prices. • Use turnaround capabilities to restructure them to increase their performance and profitability.
8–25
The Path to Greater Shareholder Value through Unrelated Diversification Do a superior job of diversifying into businesses that produce good earnings and returns on investment. Actions taken by upper management to create value and gain a parenting advantage
Do an excellent job of negotiating favorable acquisition prices. Provide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businesses.
8–26
The Drawbacks of Unrelated Diversification
Demanding Managerial Requirements
Monitoring and maintaining the parenting advantage
Pursuing an Unrelated Diversification Strategy
Limited Competitive Advantage Potential
Potential lack of cross-business strategic-fit benefits
8–27
Inadequate Reasons for Pursuing Unrelated Diversification Poor Rationales for Unrelated Diversification
Seeking reduction of business investment risk
Pursuing rapid or continuous growth for its own sake
Seeking stabilization to avoid cyclical swings in businesses
Pursuing personal managerial motives
8–28
COMBINATION RELATED-UNRELATED DIVERSIFICATION STRATEGIES
Related-Unrelated Business Portfolio Combinations
DominantBusiness Enterprises
Narrowly Diversified Firms
Broadly Diversified Firms
Multibusiness Enterprises
8–29
STRUCTURES OF COMBINATION RELATEDUNRELATED DIVERSIFIED FIRMS ♦ Dominant-Business Enterprises ●
Have a major “core” firm that accounts for 50 to 80% of total revenues and a collection of small related or unrelated firms that accounts for the remainder.
♦ Narrowly Diversified Firms ●
Are comprised of a few related or unrelated businesses.
♦ Broadly Diversified Firms ●
Have a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both.
♦ Multibusiness Enterprises ●
Have a business portfolio consisting of several unrelated groups of related businesses. 8–30
EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY Attractiveness of industries
Strength of Business Units
Cross-business strategic fit
Diversified Strategy
Fit of firm’s resources
Allocation of resources
New Strategic Moves
8–31
EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY 1. Assessing the attractiveness of the industries the firm has diversified into, both individually and as a group. 2. Assessing the competitive strength of the firm’s business units within their respective industries. 3. Checking the competitive advantage potential of crossbusiness strategic fit among the firm’s various business units. 4. Checking whether the firm’s resources fit the requirements of its present business lineup. 5. Ranking performance prospects of the businesses and determining the parent firm’s priority for allocating resources to its businesses. 6. Crafting strategic moves to improve corporate performance. 8–32
8.2 Strategy Alternatives for a Company Pursuing Diversification
8–33
Step 1: Evaluating Industry Attractiveness How attractive are the industries in which the firm has business operations?
Does each industry represent a good market for the firm to be in? Which industries are most attractive, and which are least attractive? How appealing is the whole group of industries?
8–34
Key Indicators of Industry Attractiveness ♦ Social, political, regulatory, environmental factors ♦ Seasonal and cyclical factors ♦ Industry uncertainty and business risk ♦ Market size and projected growth rate ♦ Industry profitability ♦ The intensity of competition among market rivals ♦ Emerging opportunities and threats
8–35
Gauging Industry Attractiveness from the Multibusiness Perspective
The Question of CrossIndustry Strategic Fit
How well do the industry’s value chain and resource requirements match up with the value chain activities of other industries in which the firm has operations?
The Question of Resource Requirements
Do the resource requirements for an industry match those of the parent firm or are they otherwise within the company’s reach?
8–36
8.1
Calculating Weighted Industry Attractiveness Scores*
* Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.
Remember: The more intensely competitive an industry is, the lower the attractiveness rating for that industry! 8–37
The Difficulties of Calculating Industry Attractiveness Scores
Deciding on appropriate weights for the industry attractiveness measures. Evaluating Industry Attractiveness
Gaining sufficient knowledge of the industry to assign accurate and objective ratings. Whether to use different weights for different business units whenever the importance of strength measures differs significantly from business to business.
8–38
Step 2: Evaluating Business-Unit Competitive Strength ♦ Relative market share ♦ Costs relative to competitors’ costs. ♦ Ability to match or beat rivals on key product attributes. ♦ Brand image and reputation. ♦ Other competitively valuable resources and capabilities. ♦ Strategic fit with the firm’s other businesses. ♦ Bargaining leverage with key suppliers or customers. ♦ Alliances and partnerships with suppliers and/or buyers. ♦ Profitability relative to competitors
8–39
8.2
Calculating Weighted Competitive Strength Scores for a Diversified Company’s Business Units*
* Rating scale: 1 = very weak; 10 = very strong.
Relative market share: the ratio of a business unit’s market share to the market share of its largest industry rival as measured in unit volumes, not dollars. 8–40
8.3 A Nine-Cell Industry Attractiveness– Competitive Strength Matrix
Star
Cash cow
Note: Circle sizes are scaled to reflect the percentage of companywide revenues generated by the business unit.
8–41
8.4
Identifying the Competitive Advantage Potential of Cross-Business Strategic Fit
8–42
Step 4: Checking for Resource Fit ♦ Financial Resource Fit ● State
of the internal capital market ● Using the portfolio approach: ! Cash hogs need cash to develop. ! Cash cows generate excess cash. ! Star businesses are self-supporting.
♦ Success sequence: ● Cash
hog ! Star ! Cash cow
8–43
Step 4: Checking for Resource Fit ♦ Does the firm have (or can it develop) the specific resources and capabilities needed to be successful in each of its businesses? ♦ Are the firm’s resources being stretched too thinly by the resource requirements of one or more of its businesses?
8–44
Step 5: Ranking Business Unit Performance and Assigning Resource Allocation Priorities ♦ Ranking Factors: ●
Sales growth Profit growth
●
Contribution to company earnings
●
Return on capital invested in the business
●
Cash flow
●
♦ Steer resources to business units with the brightest profit and growth prospects and solid strategic and resource fit.
8–45
8.5
The Chief Strategic and Financial Options for Allocating a Diversified Company’s Financial Resources
8–46
Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance Strategy Options for a Firm That Is Already Diversified
Stick with the Existing Business Lineup
Broaden the Diversification Base with New Acquisitions
Divest and Retrench to a Narrower Diversification Base
Restructure through Divestitures and Acquisitions
8–47
8.6 A Company’s Four Main Strategic Alternatives After It Diversifies
8–48
Broadening a Diversified Firm’s Business Base ♦ Factors Motivating the Adding of Businesses: ●
The transfer of resources and capabilities to related or complementary businesses.
●
Rapidly changing technology, legislation, or new product innovations in core businesses.
●
Shoring up the market position and competitive capabilities of the firm’s present businesses.
●
Extension of the scope of the firm’s operations into additional country markets.
8–49
Divesting Businesses and Retrenching to a Narrower Diversification Base ♦ Factors Motivating Business Divestitures: ●
Improvement of long-term performance by concentrating on stronger positions in fewer core businesses and industries.
●
Business is now in a once-attractive industry where market conditions have badly deteriorated.
●
Business has either failed to perform as expected and\or is lacking in cultural, strategic or resource fit.
●
Business has become more valuable if sold to another firm or as an independent spin-off firm.
8–50
♦ What does the growth in both revenues and profits reveal about the success of J&J’s diversification through acquisition strategy? ♦ To what extent is decentralization required when seeking cross-business strategic fit? ♦ What should J&J do to ensure the continued success of its diversification strategy?
8–51
Using Divestitures and Acquisitions to Restructure the Business Lineup ♦ Factors Leading to Corporate Restructuring: ●
Too many businesses in unattractive industries
●
Too many competitively weak businesses
●
Ongoing declines in the market shares of business units due to more market-savvy competitors
●
Debt and interest costs that sap profitability
●
Acquisitions that haven’t lived up to expectations
●
Reallocation of assets to strengthen the lineup
●
Businesses with poor resource or strategic fit
8–52
♦ Is VF’s corporate restructuring strategy narrowing or broadening its diversification base? ♦ How did restructuring ensure that VF was better prepared to weather the economic downturn than its competitors? ♦ What actions did VF take after making acquisitions to ensure the success of those acquisitions? 8–53
CHAPTER 9
ETHICS, CORPORATE SOCIAL RESPONSIBILITY, ENVIRONMENTAL SUSTAINABILITY, AND STRATEGY
Copyright 速2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
1. Understand how the standards of ethical behavior in business relate to the ethical standards and norms of the larger society and culture in which a firm operates. 2. Recognize conditions that can give rise to unethical business strategies and behavior. 3. Gain an understanding of the costs of business ethics failures. 4. Gain an understanding of the concepts of corporate social responsibility and environmental sustainability and of how firms balance these duties with economic responsibilities to shareholders. 9–2
WHAT DO WE MEAN BY BUSINESS ETHICS?
♦ Business Ethics ● Is
the application of general ethical principles to the actions and decisions of businesses and the conduct of their personnel.
● Are
not materially different from ethical principles in general because business actions have to be judged in the context of society’s standards of right and wrong. 9–3
WHERE DO ETHICAL STANDARDS COME FROM—ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS?
Sources for Ethical Standards
The School of Ethical Universalism
The School of Ethical Relativism
Integrated Social Contracts Theory
9–4
The School of Ethical Universalism ♦ Ethical Universalism ● Holds
that common understandings across multiple cultures and countries about what constitutes right and wrong give rise to universal ethical standards that apply to all societies, all firms, and all businesspeople.
♦ Effect on Business Ethics ● Whether
a business-related action is right or wrong is judged by universal standards. 9–5
The School of Ethical Relativism ♦ Ethical Relativism ● Holds
that differing beliefs, customs, and behavioral norms across countries and cultures give rise to multiple sets of standards of what is ethically right or wrong.
♦ Effect on Business Ethics ● Whether
business-related actions are right or wrong depends on local ethical standards.
9–6
Examples of Ethical Relativism Issues Variations in Ethical Standards
The Use of Underage Labor
The Payment of Bribes and Kickbacks
Relativism Equates to Multiple Sets of Standards
The Use of Local Morality to Guide Ethical Behavior
9–7
♦ How effective has Apple’s Supplier Code of Conduct been is reducing abuses of workers at its supplier facilities? ♦ Is it fair for Apple to prescribe that its suppliers comply with universal standards that are at wide variance relative to local market labor practices and conditions?
9–8
Integrated Social Contracts Theory ● Provides
a middle-ground balance between universalism and relativism.
● Posits
that the collective views of multiple societies form universal (first order) ethical principles that all persons have a contractual duty to observe in all situations.
● Within
the contract, cultures or groups can specify locally ethical (second-order) actions.
9–9
Application of Integrated Social Contracts Theory to Multinational Business ♦ Effects on Ethical Standards: ● Adherence
to universal ethical norms takes precedence over local norms.
● A
local custom is not ethical if it violates universal ethical norms.
● Application
of codes of ethics should first follow universal standards with allowance for local ethical diversity and influence.
9–10
HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND EXECUTING STRATEGY ♦ The Ethics Code Litmus Test: ●
Is what we are proposing to do fully compliant with our code of ethics? Are there areas of ambiguity?
●
Is this action in harmony with our core values? Are any conflicts or potential problems evident?
●
Is there anything in the action that is ethically objectionable? Would our stakeholders, our competitors, the SEC, or the media view this action as ethically objectionable? 9–11
Consequences of Ethically Questionable Strategies When Strategies Fail the Ethical Litmus Test
Sizable civil fines and stockholder lawsuits
Devastating image and public relations hits
Sharp stock price drops as investors lose confidence
Criminal indictments and convictions
9–12
WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR? Faulty Oversight and Self Dealing
Pressure for Shortterm Performance
Unethical Strategies and Business Behaviors
A Weak or Corrupt Ethical Environment
9–13
WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR? ♦ Drivers of Unethical Business Behavior: ● Faulty
internal oversight allows self-dealing in the pursuit of personal gain, wealth, and self-interest.
● Short-termism
pressure to meet or beat short-term performance targets.
● A
culture that puts profitability and business performance ahead of ethical behavior. 9–14
♦ Which drivers of unethical behavior were active in the Madoff investment fraud scheme? ♦ How did the cultures of the Madoff and Stanford investment firms assist in perpetuating the frauds? ♦ What ethical responsibilities were lacking in the fraud’s investors that would have helped prevent the frauds? 9–15
♦ How could the ethical culture at General Electric be adversely influenced by the firm’s heavy reliance on financial performance? ♦ Is GE’s “one strike and you’re out” ethical standard too harsh? ♦ Will GE’s adoption of global ethical standards and adherence to those standards be practical over the long term?
9–16
WHY SHOULD A FIRM’S STRATEGIES BE ETHICAL? ♦ Moral Case: ● Because
a strategy that is unethical is morally wrong and reflects badly on the character of the firm’s personnel.
♦ Business Case: ● Because
an ethical strategy can be both good business and serve the self-interest of shareholders.
9–17
9.1 The Costs A Company Incurs When Ethical Wrongdoing Is Found Out
9–18
CORPORATE SOCIAL RESPONSIBILITY, EVIRONMENTAL SUSTAINABILITY, AND STRATEGY ♦ Corporate Social Responsibility (CSR) ● Is
a firm’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large. 9–19
9.2 The Five Components of a Corporate Social Responsibility Strategy
9–20
♦ How could components of John Deere’s overall corporate social responsibility strategy conflict with those of its separate business units? ♦ Which components of John Deere’s corporate social responsibility strategy correspond to the separate dimensions of the triple bottom line concept?
9–21
9.3
The Triple Bottom Line (TBL): Excelling on Three Measures of Company Performance
People
Profit
Planet 9–22
9.1
A Selection of Companies Recognized for Their Triple Bottom Line Performance in 2009 and 2010
9–23
Sustainability and Sustainable Business Practices ♦ Sustainability ●
Is the relationship of a firm to its environment and its use of natural resources.
♦ Sustainable Business Practices ●
Are those practices of a firm that meet the needs of the present without compromising the ability to meet the needs of the future.
9–24
Sustainability and Sustainable Business Practices ♦ Environmental Sustainability Strategy ●
Consists of the firm’s deliberate actions to: ! Protect ! Provide
the environment. for the longevity of natural resources.
! Maintain
ecological support systems for future generations.
! Guard
against ultimate endangerment of the
planet.
9–25
Crafting Corporate Social Responsibility and Sustainability Strategies
Pursuing a Sustainable CSR Strategy in the Firm’s Value Chain Activities
Moral Case: Stakeholder Benefits
Business Case: Competitive Advantage
9–26
The Moral Case for CSR and Environmentally Sustainable Business Practices
The Implied Social Contract: “To Do the Right Thing”
Operate ethically and legally
Provide good work conditions for employees
Be a good environmental steward
Display good corporate citizenship
9–27
The Business Case for CSR and Environmentally Sustainable Business Practices ♦ Increased reputation and buyer patronage ♦ Reduced risk of reputation-damaging incidents ♦ Lower turnover costs and enhanced employee recruiting and workforce retention ♦ Increased opportunities for revenue enhancement due innovation in support of sustainability and CSR ♦ Support for the long-term interests of shareholders 9–28
Combating the Evasion of CSR and Socially Harmful Business Practices
Increased public awareness of misdeeds of bad behavior by firms Increased legislation and regulation correct and punish firms
Harmful and Unethical Business Actions and Behaviors
Refusal to do business with irresponsible firms
9–29