"...the determination of the basic long term objective of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals" Chandler 1963 Strategy as stretch or leverage of core competencies in an innovative and distinctive manner
Key Definitions
deliberately choosing a different set of activities to deliver unique mixture of value - Porter
strategy process considers how managers enact and interpret the world around them and the organisational context in which this occurs.
Goals Mis sion Vis ion Values Objectives
A strong strategy model is easily understood by managers and transparent to others within the organisation
how managers interpret and deliver these within the organisation
best performance occurs when simple models are introduced and applied avoiding multiple views and approaches - Problem : if all orgs use the same models how does differentiation occur?
Plans, Decisions and Actions
Competitive Advantage at Business Level Linking Organisation and Strategy
Corporate HQ and Parenting Advantage
3 Key Elements of Strategic Advantage
International and Global Advantage
Orientation: aims and formulating ambitions and visions (future direction)
Ext ernal Environment General Market Industr y Political Econom ic Social Tec hnological Environmental Legal
Animation: mobilisation of the organisational system to implement ambitions (continuous) Important to adopt broader systems based view of interactions between context, organisation and individual action All orgs are complex systems interacting with their environments (structural coupling) with changes in environment affecting the form and behaviour of the organism.
Resources Factor s Capabilities Ideas Innovations
competitive process of natural selection and environmental determination Evolutionary view of Strategy organizations and markets are sticky and strategy emerges slowly
Context, Organisation and Managerial Interpretation
Management interpretation of the environment and internal changes is fundamental to the strategy process with poor interpretation endangering the future of the company
The Basics of Strategy
Organisational Process distinctive resources and competencies distinctive to an organization that provide it with an advantage and underpins their market position
recent arguments made suggesting less power will lie with the management hyper competition blurring of industry boundaries knowledge intensity
Resource-based view
strategy now determined by external conditions outside of managerial control particularly advances in Globalization and IT
greater reliance on knowledge as asset discontinuous change
Strategy and Organisation
challenge of the new environment require flexibility, knowledge creation and collaboration between organisations
Strategic Advantage and the Concept of Strategy
how the firm positions itself relative to the external context External Logic levels of the organisation at which strategy has different meanings and what different resources it needs Internal Logic
Threatening environment Regular short term change Readiness to recruit new people Temporary clusters of skilled individuals Weak loyalty Management consultancy
Key Components of Strategy
distinguishing between achievement of long-term objectives and short term stability Performance Over Time
Mercenary Organisation
role of general management and planning of strategy Managerial Requirement
Calm external environment Bureaucratic structures - specialised sub-units Short-termism with no incentive for long term Difficulty to learn Public sector and banks
Managerial Agency and Practice
Fragmented Organisation
principle of planned vs emergent strategy where organisational typologies emerge over time
best understood within context of long term decision making and future orientation
Unstable environment - competition and regulation High firm loyalty and cooperation Perception that required skills exist within the organisation Sense of shared adventure
strategy as the exercise of choice and making of trade offs between alternative courses of action Organic Organisation
Strategy is about the future
Calm environment but managers who think strategically Bureaucratic but fragmentation avoided ad hoc processes Improvisation and informal processes In groups and out groups Universities
Strategic decisions have significant scale and importance
Strategy is abut taking risks
Self-Sufficient Organisation Subtopic
The Nature of Strategy
Strategic decisions
Strategies have implications for change
Strategy requires the organisation and coordination of vast resources
strategy is about a range of decisions that need to be made by senior management
Lesson 1 - Introduction and the Concept of Strategy.mmap - 01/11/2008 -
Strategic decisions are complex
Strategic decisions take time and are irreversible
Macro-Shock: a major event in the broad environment where a business is located and over which the business has little control
Uncertainties will vary with strategic decisions being made in response to predictable uncertainties (demographics) and unpredictable (technological growth). Uncertainty and Variability: principle that there are limitations to the extent and precision of knowledge about events - this creates RISK for strategic decision makers.
Definition: a company moving into new markets must give consideration to the impact of politics on operations and business development Supranational - EU, UN, OECD National Influence - government and opposition parties
Demographics: strategic decision makers need to consider how these known changes will affect core business - larger market for later middle age group Technology: the film industry face the risk of how successful a film will be - a number of techniques have been developed to reduce and mitigate risk.
Three levels of political influence on a company Dynamism: intensity and frequency of change
Sub national influence - local authorities and regional government
Complexity: number relatedness and diversity of factors
Scenario Planning
Unpredictability: cyclical nature of change and clarity of data
current home legislation future/planned legislation - capital gains tax
Risk and Uncertainty
Political
EU/global legislation - eg SOX or liberalisation of EU automotive industries
risk of interpreting them as falsely precise data analysis has to be highly accurate
Detecting or Perceiving Macro-Shocks
regulatory processes and systems government styles, length and structure - Italy vs UK
NPV and Decision Trees
Risk Analysis
limitations of risk analysis
Political factors for consideration
trading policy
difficulty in incorporating soft factors such as cultural and social issues over-reliance on relationships between past variables
home market lobbying and pressure groups measures relationship between key macro influences and business under analysis
international pressure groups Greenpeace etc Impact Matrix
risks - revolutions, wars, sanctions and embargoes Case Study: The 2007 Sub Prime Crisis - increased defaults on US sub-prime mortgages have led to reduced levels of available credit affecting global financial markets
critical measurement of responsiveness to macro-shock
Definition: a company moving into new markets must give consideration to the impact of changing economic factors in the macro and micro economies both globally and nationally
Fit: how well does the firm fit with existing environmental factors? Strategic Fit and Leverage
taxation - general and product specific ie alcohol and cigarettes
Hamel & Prahalad - too many companies focus on current fit rather than consider future requirements - need to consider stretch and leverage
currencies interest rates prices of raw materials and commodities inflation rates
Economic Economic factors for consideration
stock market movements GDP rates and movement market routes and distribution trends Definition: A company moving into new markets must give consideration to the impact of societal and cultural trends affecting that particular market in areas such as employment, education and lifestyle
Case Study: UK Demography: UK population pyramid will see an increase in older people by2044 with pension age rising to 68. Estimations show that this will cost the UK economy ÂŁ2.3bn in employer contributions
PESTLE lifestyle trends demography including changing population structures consumer attitudes and opinions - ethical buying and environmentalism
Analysis of internal and external factors influencing and affecting a specific company and are critical in identifying future org direction.
PESTLE/SWOT Analysis and Managing Uncertainty
Model is part of the design school where firms set strategy by linking internal capabilities with external environment Management & Organisation
Societal factors for consideration
Societal
media influence and perceptions brand and company image/perception
Strengths and Weaknesses
fashion and role models ethnic and religious factors Finance
Operations
Definition: A company moving into new markets must give consideration to the impact of technological factors such as changes in communications networks and processing of data. Strengths and Weaknesses
what is the research and development climate? -govt grants
Management and Organisation: managerial talent, labour relations and personnel policies. Planning and control system, structure and climate.
what are the risks of technic investment that will lead to obsolescence - Betamax? how does the Internet affect our products and services?
Technological factors for consideration
Technological
what will be the forthcoming trends in technology - second life?
Operations: R&D capabilities and productivity of manufacturing facilities. Analysis of product distribution channels, protection of brand names, competitive pricing.
SWOT
What are the IP safeguards in place?
Finance: capital structure, financing, profitability, tax structures, financial planning and accounting system. Short and long-term financial planning should be undertaken according to objectives and strategy.
Definition: A company moving into new markets must give consideration to the impact of legal and regulatory factors both locally and globally and how these will impact on company strategy definitions and nature of competition
Measurement of 6 key environmental factors
Anti-trust laws - UK Competition Act 1998 increased power of consumers = less attractive proposition
Legal/Regulatory factors for consideration
Opportunities and Threats
Legal/Regulatory Factors
EU law - minimum wage and business regulations Definition: what is the impact of environmental factors on the function of the business? Opportunities and Threats
impact of Kyoto Protocol and requirements to reduce carbon emissions consumer preferences
Environmental factors for consideration
Societal Changes
Government Changes
Competitive Changes
Economic Changes
Demography
Deregulation
Anti-trust
Recessions
Immigration
Increased regulation
Market leavers
Tax reductions
Supplier Changes
Market Changes
Environmental
cost of carbon efficiency
Marks and Spencer Stienway and Broadwoods Piano Battle of Crecy 1346
PESTLE.SWOT Analysis and Managing Uncertainty .mmap - 03/05/2008 -
Further Cases for Consideration
Closures of suppliers
Emerging markets
Sourcing new suppliers
Commodity use for other uses
Markets can be divided into Strategic Segments based on product range and price differentials MBV sees positioning as key factor of competitive advantage
Offer Curve: range of options available to customers what groups of customers exist for combination of price and performance
Group A: Low price and low performance
follows Porter’ s description of generic competitive strategies of cost vs differentiation with either a broad or narrow focus
Price
X
Group B: largest segment with higher specifications for price and performance
C
Market Offer Curve
generic strategy is a typology that captures the economic forces at work in a particular environment through cost leadership, differentiation or focus
Group C: premium market X: firms unwilling to offer product at this point
B
shape of curve dependant on customer price sensitivity
New Offer Curve
A
Innovation can transform shape of offer curve
Product Performance
Strategic Market Segments
Impact and factors of opportunity costs
Industrial
cost of capital
Household Distribution Channel
Distinction of fixed and variable costs and impact on firm flexibility
Buyer Characteristics
Geographic Location
Impact of sunk costs Identification of Segmentation Variables
Size
Cost Advantage
Price Features
microeconomic approach to strategy is achieved by understanding the basics of cost behaviour
Product Characteristics
Design
Long term cost behaviour and strategic implications for firms Significance of economies of scale and scope - Minimum Efficient Scale - indivisibility and engineering characteristics of production
Case Example: Du Pont and domination of titanium dioxide market in 1970s
Performance Experience/learning curve Cost advantage of vertical integration groups existing on supply side with similar strategies aimed at the same group of customer segments
Requires investment of resources - time, capital costs and higher variable costs
product line
Commonly undertaken in marketing areas and R&D
geographic coverage
Quality
Market strategies
distribution channels
Can emerge in 3 ways
The Market Based View
production manufacturing R&D
Supply and Cost Characteristics/Economies of Scale
groups create a range of Mobility Barriers preventing other firms entering the market
Strategic Groups
Competitive Strategy: Analysis of Strategic Position
ownership and structure management and control systems
Firm Characteristics
diversification and integration
product may fail to improve competitors may do it better Risk Factors of differentiation
Differentiation Advantage
customers fail to respond to proposition cost of differentiation may exceed commercial gain
performance and reliability
number and size of groups strategic distance between groups
Innovation Customer Interaction
Product differentiation is the act of making products different from one another and may include both tangible and intangible factors
Quality
reputation
Impact on Industry Profitability - Porter 1979
market interdependence
Sources of Differentiation Advantage
functional attributes and usage patterns Innovation
modernity new distribution system
Markets and industry evolve over time with growth often being cumulative and are often influenced by factors such as technology
Customer Responsiveness
new knowledge has moved sideways into new industries changing the relationship with the customers - wider product take-up capturing changes in customer values - alcopops
creation, exploitation and defence of market imperfections
Industry Transformation
Market Redefinition
brand and relationship management
successful strategy creates superior returns due to unfair advantage created
statement of competitive intent
5 Forces Model can be reconfigured in a number of ways
statement of positioning in the market with a number of key elements
Product Reconception
evidence of customer advantage combination of superior cost position, differentiated product and protected niches
convergence and compression of supply chain Redrawing Industry Boundaries
Power Catching up
Competitive Advantage
Keeping ahead Sustainability of Competitive Advantage
linkage between intended strategy, functional and operational elements and expected performance
Virtuous circle
how a company intends to create value in the market place
Blockbusters - few advantages but large in size
Identify market segment
Estimate cost structure and profit potential
Industries will differ significantly in the size and shape of advantages available and will contain degrees of advantage
Chesbrough & Rosenbloom 2002 function of the business model
Describe position within the supply chain Business Model can be articulated in terms of detailed plans to provide management with guidance for operation and has become a method for communicating how cash flows will operate Will need to reflect sustainability and defensibility of strategic positions and commitment required Impediments to Imitation once establishment of advantage has been made economic forces can protect position allows for preemptive movements
Early Mover Advantage
identification of which competitors to track establishing competitor database analysing competitor strategy
Lesson 3 Mindmap 2.mmap - 05/05/2008 -
Analysis of Mechanisms
reinforcing existing advantages
patterns of advantage will shift and erode by movements in competitive environment
Articulate value proposition
Define structure of value chain
Changing Game
Isolating Mechanisms: economic forces that limit extent to which competitive advantage can be duplicated or neutralised
Business Model
Inch by Inch - multiple sources but limited advantage
Market place competition: customers compare rival options and make choices which influence prices set by companies Investment based competition: future allocation of resources to create differentiations in the market - R&D and patents protection
Levels of Firm-Based Competition
industry analysis is the analysis of assets, resources and capabilities that set out the economic conditions in which firms collectively operate Example: Ford and Toyota operate in the same environment and share common knowledge and technology but each conduct R&D differently with Toyota structuring its operations differently creating differentiations for the company.
Definition of Industry Analysis
"The mixture of common economic characteristics coupled with attempts to differentiate comprises the content of industry analysis" Difference between revenue and material costs isadded value created by labour costs/capital costs and profits - the more attractive industry will have greater value added Horizontal line at the centre can be considered as the supply chain representing the build up and flow of goods to the final customer. At each level of the chain is an industry investing in assets that accumulates fixed and variable costs pricing its goods to the next level
many services don't have second hand parts for resale and can be understood as the outcome of an interaction
The revenue stream based on prices that can be charged and volumes attainable Unit production cost and access to economies of scope and learning What is the capital cost element - if this is higher than incumbents then it acts as a barrier to entry
The most reliable way of purchasing services is through recommendation as it cannot be sampled.
Firm Entry Threat: at each stage of supply chain there is an industry that can be analysed - and firms considering investment will make an entry calculation based on capital investment decision with 3 components
Similarity between substitution and new entrants but entry = imitation while substitution = new dimensions of competition and product displacement
Intangibility
Balance of power between suppliers and buyer is critical and often the biggest risk will come from different elements of the supply chain. Locating this power can be key in understanding where profits can be made
Search Goods: services tested by customers prior to purchase - car Experience Goods: requiring experience before determining satisfaction - restaurant Credence Goods: satisfaction cannot be determined even after purchase - lawyer
Product Entry Threat: this is a longer term pressure and are often associated with technological changes - fibre optic cable in 1980s
Porters 5 Forces Model
Analysis of Industries and Competition
services require face-to-face encounter with the customer dozens of times each day - the service encounter or moment of truth determines the outcome of service quality. Heterogeneity
Premium prices are therefore charged as the cost of switching may be too significant. Prices will continue to rise of there are no substitution possibilities. OPEC cannot act too aggressively as it will encourage customers to seek alternatives Buyer power analysis is identical with greater buyer concentration and homogeneity of products will allow for greater substitution
Intangibility is accurate up to a point and a number of services have a large number of tangible elements included - some services have different degrees of tangibility depending on the extent to which consumers can evaluate the service
Training is based around intensive customer care programmes as organisation is driven by those front line staff however junior - main paradox of service industry - control of transaction point critical. in service sector production sequence is usually distribution production/consumption - hairdresser’s salon
Service Characteristics
Simultaneous Production & Consumption
Since customers cannot test drive they rely on recommendations as returning service is impossible in many cases.
difficult to apply concept of stock or inventory to services - capacity utilisation in services is critical optimal capacity must be sold today or it is lost forever
Supplier and Buyer Power: have a natural interest to raise their prices which often occur when there are few suppliers or the product provided is critical in the performance of another
Perishability
Strategic issue is that firms must be aware of how far Perishability applies to their activities and which ones are re-usable as well as having huge implications for operational systems Geographic location Buildings and equipment
Rivalry: considered as the first force for analysis - competition will be stronger with a larger number of competitors and the commodity-like nature of the product
Scale
Supply and Purchasing Logistics and Distribution
firms attempt to advance their interests by building specific and distinct assets to create imperfections in this environment and create advantage
ICT
Economies of Scale and Scope in the Service Sector Perfect Competition: economic state where all companies operate within identical environment
some firms have an interest in colluding with others to create collective market imperfections to artificially limit competitors
Imperfections provide possibilities for supernormal profits and vary in type and can be firm specific (R&D innovation - proprietary knowledge and differentiation) and market specific ie deregulation
ICT and information networks shared knowledge Scope
process innovation shared cost and investment
Strategy as Imperfections
Culture, training and branding
Market based strategy: creation of distinctive defensible positions Resource based strategy: creation of assets which provide advantage
firms often set strategies to address the forces identified in Porter's model and create an area where supernormal profits can be earned Economies of Scale Economies of Scope: average cost of single product reduced by joint production with other products
Cost Advantages
Industry analysis and generic strategies provide frameworks for thinking about the external logic of strategic decisions and the impact of strategy on the external environment
firms can create a competitive position through cost processes or product differentiation
firm offers item of unique value which is better than rivals
provides a map of the interaction between the external and internal worlds of the firm.
Differentiation Advantage
Industry Analysis and Competitive Strategy
Resources Product market choice
Resource base
Markets
Capabilities
Internal financing
Corporate value
External financing
Shareholders Debt holders
Customer value
The Strategy Cycle
measure of approach to attacking the market - broad or narrow
There are 2 economies within the firm, the real economy denoting trade in goods and services and the financial economy - role of management to balance this and its continuous need for adjustment
Unsegmentation: same product over wide range of segments - Coke
Customer Value is only created when there is a balance between the internal capabilities and opportunities from the external environment
Segmentation: broad range of segments but specific offerings for each one - Honda Niche: firm focuses one segment - Ryanair
Generic Strategies
The Internal Logic of Competitive Strategy
describes the activities the organization performs and links them to the organizations competitive position
Strategic Scope
is a subset of the supply chain, the lower part containing primary activities working in sequence within a firm
Mintzberg - 4 Generic Approaches to Scope
Customisation: firm focuses on individual customers - event management
Direct: direct value creation assembly, sales advertising
theoretically undesired position whereby no strategy exists and a firm remains stuck between the generic strategies a firm would be foolish to not consider the attributes of other strategies when pursuing one and many bigger firms are very successful when being deliberately stuck - Sainsburys adopts both a cost and differentiated strategy
3 types of activity that create value
Quality Assurance: quality of other activities - inspecting, testing and checking
Stuck in the Middle The Value Chain is further generic framework allowing a range of analyses - allows analyst to decompose activities of firm into broad categories
strategy options depend on how firm's offering is perceived in the market in terms of price and relative user value
useful as competitive advantage can manifest itself in subtle ways and differentiation can be created by the extent to which each element of the value chain is managed.
model recognises the possibility of high value low price hybrids - Japanese cars
Interrelationships between VC elements provide important outline of competitive advantage in large firms.
The Strategic Clock
Lesson 3 Mindmap.mmap - 04/05/2008 -
Indirect: facilitate performance of direct activities - admin, maintenance, scheduling
When considering services, traditional strategy frameworks have to be reconsidered such as the value chain where sequencing of activities will be different and will need adaptation. Value Chain in the Service Sector
Core Competence = Distinctive Capability = Strategic Asset
RBV focuses on resources and capabilities of the firm asserting distinctiveness of these enables Sustainable Positional Advantages diversified corporation as large tree w ith root system as core competence
Critical distinction betw een Rents: surplus of revenue over costs
Tyranny of SBU - competencies lost through myopia
Prahalad & Hamel 1990
Capabilities and Resources
provide access to w ider markets
Core Com petencies: resources and capabilities that can earn rents
McGee: Strategic task of a firm is to sustain rent streams over time by creating and protecting the competitive advantage and strategic assets that underpin them
Core competencies should have 3 features
contribute to customer benefits difficult to imitate
Theoretical Approach to RBV and Key Definitions
business processes as foundation of strategy competitive success dependant on transforming processes into capabilities
Sim ilar Activities: sharing of common strategic and generic assets creating economies of scale Com plim entary Activities: dissimilar sets of assets requiring coordination to offer advantages i.e. production and marketing
how to coordinate diverse production skills and integrate multiple technology streams
Core competencies can be understood as the collective learning w ithin the organisation
RBV: an inside out approach to competitive advantage through analysis of how companies use resources and capabilities to formulate strategy
4 basic principles of capabilities based competition
Internal economy of a firm can be seen as set of
cross functional nature of capabilities require CEO championing Speed: ability to respond quickly to customer demand
Boston Consulting Group 1992
Consistency: production of products that continue to satisfy needs
fundamental distinction betw een resources and competencies
Acuity: ability to anticipate behaviour of competitors
strategic resources should aim to outperform in 5 dimensions
Resources: process inputs including capital expenditure and equipment
Agility: ability to adapt simultaneously to different business environments
Capability: the ability to apply resources in differentiated w ay 4 - Suggest strategy that best exploits resources and capabilities relative to external environment
Innovation - generating new ideas and combination of existing elements to create new value
Strategy
3 –Appr aise rent generating potential of capabilities by potential of sustainability an d
of primary benefit to company Appropriative
Capabilities
1 –Identify resources appraise strengths and weaknes ses compared with competitors
relational contracts, internal and external w ays of w orking
Definition of Core Competencies
Resources
Architecture 3 forms of distinctive capabilities
Reputation
Kay 1993
constant innovative process undermine possibilities of imitation Innovation market structure limits entry
Distinctive capabilities created through 3 irreproducible factors
Extracting and Borrow ing: identification of dormant resources or tap into those from other companies
company history tacitness in relationships - routines and behaviours
Blending and Balancing: integration of skills and resources and creating a balanced business plan and process
Resource Leverage: process of better applying existing resources to create an advantage
tangible
Strategic Assets are created through application of key resources
Co opting and Shielding: conserving existing resources
intangible information based
Amit & Schoemaker 1993
Expediting Success: reducing cycle time from investment to sale
Management of Core Competencies
"...the set of difficult to trade and imitate, scarce, apropriable and specialised resources and capabilities that underpin the firm's competitive advantage"
physical uniqueness
bundle of constituent skills and technologies
path dependency - cumulative learning Inim itability
an aptitude to manage physical resources
essential characteristics of core competencies
First mover advantage
makes critical contribution to customer value
Hamel 1994
technical life economic life
Sustainability
5 - Identify resources gaps and possible investment for improving resource base
Convergence and Focus: concentrating resources on few er areas reducing dissipation of effort
causal ambiguity - not know ing value of asset
persistence over time
Distinctive Capabilities: characteristics of a firm that others do not have
Grant 1991
Competitive Advantage
2 –Identify capability and resource inputs for each one
capabilities created by investment into support infrastructure
activities
must be competitively unique should provide access or entry to new markets
Durability/Rarity
time compression
Interpreting the external environment
can resource be trumped by another? Substitutability w ho captures value created by the resource? labour and market structures
Appropriability
Com petitive Superiority
Flexible routines and recipes
Barney 1991 - Determining Values of Core Competencies and Resources
Value
Core Comp eten cies
Shared values and beliefs
Tacit knowledge and un derstan ding
Unde rstanding internal dynamics
Unde rstanding competitive dynamics
Core Competencies as the link betw een managerial ability and the economics of the firm
dispersion of know ledge tactility of know ledge
Galunic & Rodan - Properties of Know ledge
context specific
The Resource Based View and Dynamic Capabilities
important to note overlaps betw een MBV and RBV approaches
key factor in driving competitive strategy is ability to manipulate the factors that create imperfections in the market w hich create sustainable competitive advantage
Competence based competition has been used in a number of cases to allow a firm using a resource based approach to make an advantage
Val ues of t he k ey implement ers
Int er action of val ues an d social n orm s
Broad er societal exp ectat ion s
Strategic Intent: encouragement by company to exceed current capabilities Strategic Stretch: gap betw een ambition and resources - companies expand and adapt to create new resources
greater interest in leveraging resources than fitting
Linking Core Competence to Competitive Advantage
Ext er nal com pany f actors Int er nal com pany f actors Competi tive S trat egy
Strategy as the outcome and resolution of different and conflicting forces
Strategic Innovation: firms that rew rite the rules of the game moving the point of competition elsew here then dominating the field
Case: Apple creation of spreadsheet
Firm st rengt hs and weak nesses/d istin ctive competen cies
Ind ustry opp ortun it ie an d t hreat s; key su ccess f actors
Mat ch ing of r esour ces to m arket s
high levels of learning and innovation long term approach to developing capabilities systematic transfer of competencies across the organisation narrow SBU approach can be myopic
Core Com petence: many firms create competencies through investment in organisational infrastructure
existence of valuable market segments
Competitive Strategy in Practice
Product Market Selection - based one existence of long term viable opportunities
Role of Learning critical in acquisition of skills and collective learning of the firm
existence of sustainable positional advantage creation of appropriate strategic assets
is there a market? is there an advantage?
advantage created by firm that cannot be duplicated by competitors Barney 1986: Sustained Com petitive Advantage
Key Success Factors
can the competition be beaten? requires the analysis of customers/demand and analysis of competition resources are limited and opportunities infinite - Trade Offs Opportunity costs perform activities differently to rivals
Issues for consideration w hen formulating competitive strategy
Sustainability of advantage value of individual activities strategic positions should have
The Resource Based View.mmap - 09/05/2008 -
tim e horizon
critique of Boston Model characterising dogs as in economic downturns all businesses are dogs! distinction between operating and strategic turnarounds Operating: increasing efficiency i.e. advanced technology Strategic: changing fortune of company through strategic adjustments - i.e. divestment or acquisition
Hofer 1976 - Corporate Turnarounds
Analysis of 1200 UK companies and identification of Sharpbender - firms with declining performance which may still be healthy Case A - early recovery - aware of decline and anticipates failures Case B - taking intermediate action to break through line of minimum standards current actions insufficient
Key Issues Grinyer etal 1988 - Turnaround Types
Case C - Late reaction and approaching line of failure - classic turnaround case D - doesn't perceive threat of extinction despite breaking own standards Over expansion Poor financial control and high costs new competition
Reasons for Corporate Decline
unforeseen demand shifts Weak management false security self delusion and massaging Management Reaction to Crisis
focus on cost reduction - easy target comparisons drawn with competitor firms
Corporate Failure and Turnaround Strategy
capitalism as evolutionary process where new discoveries break down existing barriers and create new ones Schumpeter - Creative Destruction
external intervention change of ownership new CEO
sources of competitive advantage are created and eroded at ever increasing speed
Key Triggers for Action
management recognition of problems perception of new opportunities major management change stronger financial control diversification
main strategic aim of the firm is to disrupt existing sources of advantage and create new ones
Actions Taken
quality improvement
emphasis on the importance of time and the shorted period of opportunity for building advantages
D'Aveni 1994 - Hypercompetition
acquisitions Stage 1
Porter Positioning Analysis - price, cost and quality choices
Restructure Leadership and Organisational Culture
Positioning - timing of strategic moves Competitive advantages operates at 4 distinct layers
Building of Entry Barriers Deep Pockets
Stage 2
Cost Reduction
Asset Redeployment
D'Aveni sees competitive process as Dynamic Strategic Interactions operating through succeeding levels of competitive intensity
Product/Market Strategy
Level 1 - Price War - all pricing moves are imitated leading to competition Level 2 - Evolution of generic strategies differentiation and segmentation Level 3 - Middle position movement to meet largest target audience Stage 3
Repositioning
Level 4 - product range strategies Level 5 - Niches
Hoffman 1989 - Generic Turnaround Strategies
Level 6 - Return to Perfect Competition
Erosion of Cost and Quality Advantage
Level 7 - escape from perfect competition and restarting the cycle
unique entry point reflecting unmet demand - segmentation competitive position based on asset configuration of dominant strategic group - emulation
Hypercompetition
redefine quality and create a new price-quality trade off
1 Gateway to Entry
competitive position based on new asset configuration - new game
shift from product to service Number of options for restarting the cycle
entry occurs into segments where barriers are lowest - short term risk minimisation for long term profit
micro marketing and mass customisation product line extensions
2 Initial Entry Point
Sequential Entry Strategy - model for market entry to overcome key barriers
Timing advantage created by skills allowing firm to be first mover
New Entry Strategies
know-how reflects practical operational and technical skills
nature of investment undertaken to use gateway gateways are distinguished by differences in entry costs nature of entry determined by risk management of individual firm
Timing and Know-How
3 Mode of Entry
Ladder of escalation is common in this area within Big Pharma - being first mover is risky but allows rapid movement
strategic decisions about the path of growth and dependent on mode of entry and firm specific assets investments in co specialised assets i.e. technology
economies of scale established firms are encouraged to build high barriers to entry
4 Expansion Path
product differentiation capital investment govt policy
barriers allow for the earning of supernormal profits that can fund new developments
single leader often in dynamic environment with clear and distinct vision and purpose
building of barriers to entry
create opportunities and take significant risks
Erosion of Other Advantages
Strongholds and Entry Barriers
base for expansion to move into competitor area
firms are usually small and aggressive and focus on niche markets firms often have resource disadvantages and seek to avoid competition
Definition of Entrepreneur
new entrants develop attack on incumbent
Entrepreneurs - Start-Ups and Sustainability
Ladder of Escalation
long term defence reshaping resources intensification of competition and multi-point competition
strategy is often deliberate rather than emergent - first mover advantage
unstable stand offs
Intrapreneurship - 1980s attempts to encourage internal innovation within larger firms
final strategy when competitive options and barriers have failed reliance on significant resources to fund R&D, pricing campaigns etc smaller competitors attacked competitors use regulation and law to de rail incumbents
Deep Pockets
Competitive Strategy - From Theory to Practice
Ladder of Escalation
incumbents beat anti-trust actions small firms neutralise deep pocket advantage rise of new power
focus on how firms make competition irrelevant Kim & Mauborgne 2005 Porter's 5 Forces seen as static model and can ignore how industries evolve over time
red vs blue oceans - untapped market space representing opportunity and growth
assimilation of value creation and innovation to create unexpected value for customers
Patterns of Knowledge Creation - new knowledge is captured in form of product innovation creating rival forms of propositions for customers
IKEA Body Shop Barnes & Noble
Demand Growth - S shaped patterns outlining changes in demand
key drivers of value perceived by customers Value Innovation
Grant 2002 - Factors Affecting Industry Evolution
Steps of Value Innovation As C20 has progressed product lifecycles have become progressively compressed
how to adjust the drivers in light of insight into utility functions reconfigure value chain to deliver new balance of activities
The Lifecycle Model Blue Ocean Strategy
consider alternative industries for insight into delivery
identification of lifecycle stage growth rates, market potential, products, competitor numbers
look across strategic groups to determine variety Principle 1 - Reconstruction of Market Boundaries
generic industry characteristics
Start Up - embryonic stage
ignore figures and analyse customer behaviour Discovering a Blue Ocean
Gain position gradually
Principle 2 - Focus on Bigger Picture
Analysis of Lifecycle Effects
Growth with industry - seek to maintain market share Gain position aggressively - when growth is high
think beyond existing customers Principle 3 - Reach Beyond Existing Demand
Natural Strategic Thrusts - strategies that apply at different stages of lifecycle Principle 4 - Correct Strategic Sequence
Harvest validity and usefulness variety in time between stages firms can change lifecycle through innovation
Lesson 5 Mindmap.mmap - 07/06/2008 -
encourage finer segmentation turning blue sky idea into serious business model
Position defence
markets can be rejuvenated
look down buyer chain as users may differ from buyers consider complimentary service offerings
Arthur D Little in 1970s was first to collect data on financial flows over lifecycle with sales following bell curve shape
Critique of Lifecycle Model
Competitiv e Strategy - long term dynamics of better serving customers Relatedness
Key Definitions
Corporate Strategy - value gained from the mixture of businesses within a company and how they are optimised
Portfolio Management
Growth
"... the firm expands to make and sell products or a product line having no market interaction with each of the firm's other products" Competition occurs at business unit level
Rumelt 1982 Definition and Context
Porter 1987 - 3 Factors of Diversification
Diversification adds costs and constraints Shareholders can diversify individually
significant complexity in this area not allowing for comparison across industries and where performance is further influenced by a range of other variables
structure split into functional responsibilities
Single Business Dominant Business
affected by expansion diversification Unitary Form Structure - traditional model from 1850s - railroad and telegraph companies
Related Business Unrelated Business
increased administrative load on senior management
increased problems of coordination
Dominant Constrained and Related Constrained always outperform
division of tasks and responsibilities into semi autonomous operating units
Rumelt 1974 Classification of Firms
industry factors
removed executive responsibility from routine operations
causal ambiguity Vertical Integration Related Diversification Linked Diversification
Galbraith's Centre of Gravity - stage in industry chain where performance increases - 4 Diversification strategies
reduced entrepreneurial effectiveness
Chandler 1962 - Inherent Weaknesses of U Form
Differentiation between Constrained and Linked
increased resources for long term planning and appraisal
Div ersification and Performance Chandler 1962 - Success of M Form
Factors impacting this analysis
allows for economies of scale and scope enables economies of specialisation
Changing Organisational Structures
Unrelated Diversification
allows corporate management to measure and compare performance of units allowed first movers to dominate the market for decades
Relationships Between Diversification and Performance
Palich, Cardinal & Miller 2000 - Relationship of Diversification with Performance
Multi-Div isional Structure - 1920s onwards
allowed for continuous improvement in production and distribution key focus was that of growth which led to oligopolies with post 1960s expansion leading to diversification and conglomerates
conflict of interest from financial perspective that sees diversification as extension of management abuse undermining shareholder interests
corporate management can loose touch with key operational factors
Agency hypothesis - diversification driven by personal goals Div ersification Discount - diversified firms should quote at a discount of potential value of trading separately
confusion around accountability for outcomes Challenges of M Form Structure Div ersification and the Finance Perspectiv e
business units will often compete rather than cooperate for resources impediment of Trans-firm competencies
decreases in diversification associated with pressures of corporate control Denis & Sarin 1997
conceptual understanding that M Form would be naturally selected due to its efficiency
if diversification is negative there should be evidence of significant arbitrage which hasn't increased following 1980s boom
Critique of Finance Perspectiv e
diversified firms trade at a discount due to causes prior to diversification process
economic argument suggests that M form has proliferated due to whole being worth more than the sum of its parts
Corporate Strategy: Adding Value in Multi Business Firms
not clear that diversification leads to lower performance or the other way around
In cases where net value of corporate membership of a firm is negative the break up of the firm is attractive option
Villalonga 2000
diversified firms show a significant premium
potential added value of M form
many emerging markets business groups are performing well despite being widely diversified business focus works well in developed markets but in emerging markets conglomerates imitate functions of several institutions
The Inherent Value of a Multi-Business Firm
corporate centre takes role of involved investor
Div ersification in Emerging Markets and Business Groups
Gov ernance Transaction Cost Economies
necessary information and can impose sanctions and replace management where necessary
2 categories of benefit
value enhancing properties allow the creation of economies of scope
company specific strategy related industry features role of the business as part of a wider organisation importance of industry based factors with negligible corporate factors reinforcement of Porterian outside in view
key management question regarding the overall impact of strategy on multi-business organisations
Scope
Schmalensee 1985
analysis of US companies - identified impact of business effects explaining 45% variance in returns low corporate and industry effects
related businesses can shared specialised knowledge and managerial expertise
Characteristics of the Portfolio First Round of Studies
Does Corporate Strategy Matter?
economics of corporate strategy revolve around 3 key issues
Rumelt 1991
critique of earlier work - analysing smaller companies impact of corporate effect increased significantly
builds key knowledge of business performance providing auditing and direction of improved performance
How synergies are captured Relatedness the Grow th ambitions and achievement through investment
key attributes are interconnected and it is important to ensure that portfolio approach doesn't focus too much on eliminating unprofitable areas while ignoring synergies
Second Round of Studies Brush & Bromiley 1997 and Chang & Singh 2000
Strategy-Structure Balance
what is the Definition of business units and boundaries? what is the intended lateral Integration and Coordination between units
Corporate organisation has to be consistent with economics
what is the Vertical Relationship between corporate and operational units
Corporate operational interface determines authority and accountability in the firm adding value through buying and selling businesses with corporate centre acting as funds investor Portfolio Management approach common in 1980s asset stripping Restructuring - acquisition of businesses with intention of achieving value through intervention Porter 1987 3 Concepts of Corporate Strategy
Transferring Skills - management of ongoing relationships between business units
1960s and 1970s saw growth in divisionalisation and growth of diversification 1970s saw major challenges of large conglomerates and senior management looked for new models to manage the company cash flow rational for business linkage acquisition and divestment did create oversimplified assumptions
BCG Growth Share Matrix
Sharing - value activity created through sharing of facilities, services or resources - economies of scope
additional value created to new purchases from parent organisation
Practical Frameworks and Applications
3 key requisites - corporate advantage = competitive advantage/ greater value creation than cost/must add more value than any other parent company
Managing the Multi Business Firm Corporate Strategies
stand-alone influence - value created by influence on individual business strategy and performance
Portfolio Planning Models
Goold etal 1994 Parenting Advantage
General Management – Stand Alone Influence
3 Classes of Value Creation
Linkage Influence
Portfolio Management
Central Specialist Services
functional and serv ice influence - focus on adding value through influence of centrally controlled staff functions linkage influence - horizontal process of value creation between businesses Planning Influence - to what extent does the corporate level engage with operational factors Control Influence - extent to which business units are held to operational and budgetary control Financial Control - centre allows for operational autonomy but strict application of budget
Goold & Campbell 1987 - Relationship Between Parenting Style and Performance Corporate Styles 3 Key Styles identified
Strategic Planning - high planning control of business units Strategic Control - in between the above
Issue of Relatedness - optimal corporate role dependent on extent of relatedness
Lesson 6 mindmap.mmap - 09/07/2008 -
unrelated businesses do not offer economies of scope and benefit from governance factors McGee pp.354 cooperative and competitive strategic orientations
External Relations hips
poor performance of mergers and acquisitions has led companies to seek alternative strategic approach difficulty in assimilating expertise of target company
M&A and Strategic Alliances are a major force in restructuring industries
immediate advantages of M&A have been undermined by 2 key factors
shortage of attractive targets for M&A
Barriers have increased follow ing deregulation and new markets leading to larger number of cross border activities
Strategic Alliances seek to overcome these problems through avoiding culture and organisational shock w hile build rapid presence in required areas
the purchase of one firm by another w ith 100% controlling interest
Collusive Strategy - several firms cooperate to reduce output below competitive level and increase prices
can be illegal in some countries
payments made in shares or cash or both premium often paid to meet difference betw een share price of acquired firm prior to announcement of bid
2 Types of Cooperative Strategies Strategic Alliances - cooperation w ithin industry but output is not reduced - aim to enhance competitive position
Acquisitions
Grow th options for alliance include: International Expansion/Vertical Integration and Diversification
Basic Definitions
Friendly Acquisitions - management of target company is approached and recommends deal to shareholders Hostile Acquisition - target managers ignored w ith direct appeal to shareholders
companies of different national origin seek to sell a product in a market w here one partner has access
new firm is created out of tw o original ones no premium is paid
alliances often see partners w ith different skills - 1st w orld product and know ledge 3rd w orld understanding of local market
Mergers
(1) International Expansion Joint Ventures Strategic Alliances Betw een Non-Com petitors
alliance betw een 2 companies w ithin same production process - Coca Cola and McDonalds (2) Vertical Partnerships
Although M&A present significant strategic opportunities for a company consideration must be given to w hy so many fail (50%) and w hy firms persist in follow ing this approach?
cooperation betw een companies w ithin different industry w ith aim to leverage capabilities Alliances may occur w hen there is technical convergence
focus tow ards bringing together equals w ith emphasis of retention of both sets of practices
M&A is a high stake process and can lead to conflicts both around target acquisition priceand post merger tensions
(3) Cross Industry Agreements acquisitions affect all aspects of corporate life - much attention has been given to analysing drivers for acquisition
paradoxical concept but around 70% of cooperation agreements exist betw een competitors
analysis has moved tow ards post acquisition phase of implementation w hich connects planning and performance
covering one stage of production process and result in common product shared by all companies intra zonal in areas of R&D and manufacturing - automotive and electronics
high customer visibility and elimination of competition - Aerospace and defence
Acquisitions have evolved in w aves - 1960s diversification exposed in 1980s as fallacy but w ith massive resurgence in the 1990s
(1) Shared Supply Alliances
covers entire production process and results in one final product developed (2) Quasi-Concentration Alliance
Background and Overview to Acquisitions
Dussauge & Garrette 1999 - 3 Types of Com petitor Alliance
1985-1995 cross border acquisitions increased tenfold
drive tow ards single European market has spurred and encouraged cross border acquisitions
assets contribution differ betw een partners i.e. manufacturing and distribution to w ork, new products brought in must not directly compete w ith others - telecomms and automotive
post 1990s have seen increase in mega-mergers creating global giants Mobil and Exxon
(3) Complementary Alliance
Managing Strategic Alliances
profitability is highly influenced by multinational partner w ith local firm totally dependent of profit
movement of organisational survival concluding w ith cross border and mega-mergers of late 1990s
Corporate Strategy: Mergers and Acquisitions Horizontal Consolidation Period
joint venture is small element of business for multi-national if profits are reduced the local firm suffers
industry restructure and removing competitors increased market pow er
balance of power issues need to be resolved - partners from both firms must engage on day to day operational management and push for dominant equity stake
access to new markets Classical/Exploitation Motives
(1) International Expansion Joint Ventures
diversification
low er success rate of joint ventures w ith shred management can result from problems in this balance of pow er
unrelated diversification due to decline ine existing markets, spreading risk and first entrant advantage Exploratory Motives
degree of mutual trust betw een partners commitment for long-term investment
buying a bargain
strategic fit betw een partners
(2) Vertical Partnerships
Financial Motives for M&A
advantage can be created through moving people betw een the tw o firms
openness and transparency of incumbent ability of entering partner to internalise new skills
tax advantages financing advantages avoid focusing on small acquisitions less than 5% of parent turnover
diversification may create advantage tot he host company - the speed of entrant into market dependent on 3 factors
Appropriability of incumbent expertise
Characteristics of Targets linking Acquisitions and Perform ance
risks of failure increase w ith reduction in market share pre-acquisition experience
(3) Cross Industry Agreements
dividing up w ork betw een respective functions through informal structures few incentives to prioritise w ork over personal research
issue of relatedness is hotly debated w ith the w ider belief that acquirer should know the business
Managing Alliances
CEO characteristics Managing R&D
issue of trust and suspicion
Pre-Acquisition Planning
(4) Shared Supply Alliances
Other Im pacts on M&A Process
process issues environmental pressure
long lived but w ith barriers to dissolution can lack flexibility w ith firms becoming captive and isolated from marketplace
how w ill acquisition build on core competencies and enhance competitive advantage? analysis of industry to judge long term profitability - Porter 5 forces
Managing Manufacturing
contractual obligation can impede corrective action
examine possible targets for synergies
focus should be on maximising economies of scale and reducing investment aim to reduce duplication but pooling task may be necessary at times
Target Selection
examination to expose possible incompatibilities assessment of target w orth and affordable price
(5) Quasi-Concentration Alliances
consideration of regulatory factors anti-trust and monopolies
Trojan Horse w ith each partner trying to capture the others skills
success or failure can have w idespread impacts on a range of stakeholders
w ish to make the other partner more dependent to leverage favour capabilities of other partner value and attractiveness of capabilities organisation of the alliance
Bidding Tactics number of factors w ill influence extent of success or degeneration
(6) Complimentary Alliances
need to persuade target shareholders that current performance can be improved upon puffing up management abilities and w ining and dining key stakeholders
Doing the Deal
absorptive capacity of the firm
Reevaluation of Assets - forcing bidder to raise offer
impact of environment change
Im proving Profit Forecasts - influenced by regulation Defender Tactics
post acquisition phase sees value or loss created
White Knight - target seeks alternative bidder
association w ith high levels of redundancies psychological impacts of acquisition w ith numerous layers affected by range of factors including nationality, industry and corporate structure
Organisational Fit
w here employees are integral i.e. consultancy this is most critical impact of organisational constraints is function of strategic direction from the centre and the need for resource transfer aviodance of interfering w ith company and attempt to learn from achievements common in new or unfamiliar areas
Issues on Post-Acquisition Integration
Arm s Length
those companies in poor condition and held in isolation to avoid w ider infection employing of turnaround strategy - high risk
Intensive Care Integration Styles
rapid loss of identity and structure and subsumed into parent common w hen similarities occur and allow for economies of scale and scope
Subjugation
independence from parent company w ith future projects show ing joint efforts interchange of capabilities across companies and offer greatest potential
Collaboration
Crow n Jew els- selling of strategic assets to offset acquisition Pac Man - launch of reverse bid
analysis shifts from one of strategic fit to organisational fit
Lesson 7 Mindmap.mmap - 12/07/2008 -
economies of scope and scale acquisition of new skills
Strategic Motives for M&A
"A common project between legally and commercially independent companies, headquartered in different countries, in which the parties jointly bear both the responsibility for management and financial risk" Weder 1991
collaboration and alliances between firms is not a new phenomenon
require partners to hold equity stake paid by cash or other assets
collaboration is now required to cope with increasing pressures of globalisation, dynamic markets and increasing complexity
reciprocity and pooling , exchange/integration of specific resources
Internet facilitation of alliances allows sharing of data faster and effectively
well defined and limitedstrategic objectives must learn to share power with other partners
Background
Characteristics of IJVs
process of creation is time consuming and can lead to significant delays
surveys have shown up to 95% of UK firms operating within partnerships despite increasing importance alliances can be volatile
most are unstable relationships and require shared learning
issues have developed around cultural barriers or risk of losing trade secrets
need for resources, money and skills
approach to management will require sophisticated interpersonal communication and negotiations kills
allows companies to develop global outlook enables international expansion with reduced financial management allows for greater understanding of new markets Political - pressure from governments to reduce subsidiaries owned by foreign companies
Reasons for Entry into IJV
Market Access - gaining access to new markets and understanding of local issues
Yan & Luo 1002 - 5 Reasons for Entering IJVs
Risk sharing - reduction of 'foreignness liability' Access to Resources Pooling to create economies of scale and synergies Strategic Fit - compatibility of long term objectives of both firms Capabilities Fit - equal contributions of resources, assets and competencies Selection of Partners - 4 Types of Fit
Cultural Fit - corporate, industry and national/ethnic Organisation Fit - way in which partners interact - decision making and control mechanisms
non equity positions through application of contracts distribution agreements Contractual Agreements
equity structure marketing issues
technology transfer agreements franchising agreements
technology transfer
outsourcing Issues Arising in IJV Negotiations
staffing dividend policy
Types of Alliance
International Joint Ventures IJVs
equity holding in partner - common in biotech Equity Alliances
Big Pharma take equity participation in start ups in exchange for finding research firms set up new company investing resource and sharing profits
Joint Ventures
VIVO mobile phone company
Components of the Joint Venture Agreement Scope - intended purpose, level of output and intended rate of growth Contributions - level and nature - cash, technology, brand names and distribution networks Valuations - value of assets and technology contributed, distribution of value created in form of dividends Management and Staffing - size of board and number of seats allocated to each partner
providing wider range of products meeting customer need
Strategic Alliances
matching competitors
Protection - how interests are protected outside of IJV - use of technology and brand names
Key drivers influencing companies to build alliances
expanding global reach focusing on core competencies
Conflict Resolution - internal and external arbitration, renewal and extinction
cost reduction help to actualise Economies of Scale
research has shown overall number to be around 70% Operational Improvement
difficult to determine or quantify failure losses can be made but learning curve invaluable
Barney & Hesterly 2006 - Generic Sources of Value Creation Through Alliances
drastic environmental change differences between partner cultures poor leadership
help partners improve performance through joint learning sharing of risk and cost factors - Big Pharma and biotech
Creating Value Through Alliances
setting technological standards within a particular industry - telecomms Favourable Competitive Environment
Troy 1994 Reasons for Failure in Alliances
licensing agreements allow companies to enter new markets through authorisation of foreign firm to use technology or goods
leadership ambiguity overestimated market
Reasons for IJV Failure
Facilitation of Entry into Country or Industry
other identified causes have included: poor strategy development, optimistic expectations, poor commitment, weak communication, undefined roles
joint ventures allow firms to operate in new environments and expand product base - Coca Cola-Nestle products and diversification
government interference insufficient local infrastructure disputes over sharing of costs and benefits
Woodside and Pitts 1996 - Main Causes of Failure Between Industrial and Developed Countries
perception differences in IJV goals joint ventures can diverge from expected purpose key to understanding how bargaining power of partners will evolve imbalances at preliminary stage will result in dominant control requiring minority to protect its position
Bleeke & Ernst 1995
potential for conflict will increase where product and geographic positions overlap management of relational quality is also critical - Coke Nestle collapse due to mistrust existence of efficient procedural solutions to resolve conflict is critical to success of JVs
Strategic AlliancesLesson 8 Mindmap.mmap - 12/07/2008 -
Alliances as Real Options Managing a Joint Venture
alliances as limited commitment of resources delaying commitment to an initiative firm buys to option to make an acquisition later and test the water
study of transactions taking place across national borders International Business
consists of trade and capital transfers or FDI 50% of trade and 80% of FDI is carried out by the worlds 500 largest firms those earning in excess of $1000bn originate from the US, Asia, EU triad triad is basic unit of analysis for international strategy
Multinational Enterprises (MNE)
Corporate strategy of many MNEs dependent on a few key country policies capital invested in other countries by MNEs Foreign Direct Inv estment
most FDI occurs within the triad and has significant implications on trade patterns and industrial activity OECD
Regulation and Management Bodies
WTO GATT why are some companies able to innovate while other cannot? Supply Conditions success of nations and individual firms due to 4 key attributes
Demand Conditions Related and supporting industries market structure
National Competitiv e Adv antage Porter 1980 Porter Diamond
tendency towards complex structures
International Business - The Strategic Context
MNEs tend towards matrix structures multi country single product MNEs will structure towards country divisions but problems arise with multi product multi country operations Global Company - product divisions based on need to standardise Multi-Domestic - organise around countries due to local advantages
MNE faces challenges from home and host countries strategic choices should influence management structure
Matrix approach is used where there is a fine balance with vertical orientation substituted with more direct individual contacts
linkages are manifested by cash flows and influenced by host country policies
Managing International Organisations
Depth of involvement in foreign market s
long decision making times confusing priorities confused lines of responsibilities
Critique of Matrix
encourages conflict due t lack of vertical control Clarity - how well people understand roles Continuity - commitment to same values and processes by the company Consistency - how well all parts of the company work in relation to each other
Internationalisation Process
Bartlett & Ghoshal 1990 - 3 Criteria for Successful Matrix
Time License
Export via Agent
Export through own systems
Local Assembly
FDI
country centric and treats world as portfolio of local markets local discretion - decentralised federations
responsive to competition and government related forces
Multi-Domestic
foreign operations as offshoots of domestic strategy value created through skills transference to local markets
Rugman & Hodgetts 2003 - MNE Characteristics
International Bartlett & Ghoshal 1989 - 4 Basic Strategies for International Competition
treats the world as single integrated unit focus towards profitability through standardisation and capturing cost reductions from local economies
draw on common pool of resources found in the home country link operations through common strategic vision and unified strategy
international strategy developed by value creation through transfer of skills and products to foreign markets
Global
Toyota world of integrated variety - exploit cost economies, transfer competencies AND consider local responsiveness
competition in any one country is independent of competition elsewhere consumer behaviour differs between markets
Transnational Multi domestic Industries
resource based view can compliment factors of coordination and responsiveness
competition in one country is influenced by competition elsewhere product standardisation and international rivalry
Application of Resource Based View Global Industries
principle of comparative advantage knowledge and capability
firm required to develop integrative process for all countries harder to define a global company at the firm level
provision of organisational and strategic context
range of other factors have been considered including R&D, management style and board structure
Unilever have moved from multi domestic to Transnational strategy attempting to maximise cost efficiencies while protecting local responsiveness transnational company is likely to need appropriate structure moving from a centralised hub to an integrated network
Global Strategies and International Advantage
Role of the Corporate Centre
role is required to make trade offs and strategy of the firm is to avid being stuck in the middle
single global market with standard products and corporate focus on efficiency through standardisation
Global Companies Levitt 1983 - Global Standardisation
triad concept - for success firms should compete in each of the three major regions
Balancing of efficiency, responsiveness and innovation is an elaboration of Porter's diamond
Ohmae 1985 - Global Localisation Cultural Homogenisation - evolution of a global village
Chance and Uncertainty - unforeseen events increase over length of time Role of Home Gov ernment - influence over all elements of national advantage
product variety and differentiation firm manages worldwide activities as a portfolio of independent subsidiaries
core competencies and strategic assets can reside in localities and can be developed anywhere in worldwide operations
Conv ergence of Markets - infrastructure and operation of markets - regulation, competition law, tariffs and consumer protection
Two further variables can be added to this analysis Driv ers of Globalisation
basis of data only considered triad countries and only refers to firms with strong bases
Globalisation of Customers - degree of similarity between utility functions of different customers Cost Driv ers - economies of scope and scale/increased fixed costs
government is a crucial player but not all governments pursue a common policy
Globalisation
Changes in Industry Structure - deregulation, privatisation, technology
companies make the final strategic choices which at times may differ from national orthodoxy
key challenge to manage the blend between global standardisation and local differentiation
assumption of national development as linear lifecycle
global choices can be considered in regard to the positioning of value chain activities
credits outbound FDI as source of change and profit - what of inbound? model ignores role of MNE in creating distinctive position for itself - evidence to show that MNEs are influenced by factors outside of home country govt actions create externalities that can create firm specific advantages
Rugman & D'Cruz 1993 - Critique of Porter
upstream activities can be decoupled from downstream
Strategic Choices standardisation occurs w hen
activities constitute large parts of fixed costs scale effects are of importance
Neglect of gov ernment as maj or driv ing force
larger companies take advantages of imperfections, smaller MNEs are compelled to seek advantage elsewhere
Globalisation and the Value Chain
multi domestic occurs w hen
downstream activities are tied to buyer location activities constitute large parts of fixed costs
globalisation will require value chain to be partitioned - three key choices
implications for big v s small MNEs developed to provide realistic basis of analysing international competitiveness of smaller MNEs
how to link similar activities coordination
captures complex interactions between policies of different governments
Achiev ing Efficiency - dominant perspective with objective to maximise ratio between inputs and outputs
MNE sits at diamond centre but focused on more than one home base from each base factor characteristics are gained as well as benefits from demand conditions
configuration
degree of coordination dependant on standardisation need of product - low vs high coordination are driven by conflict cost vs responsiveness pressures
The Double Diamond Country Issues and the Double Diamond
gains are made through taking advantage of the highest common factor - i.e. best infrastructure and cheapest location
Sources of Competitiv e Adv antage
Ghoshal 1987 - Framework for Globalised Competitive Advantage
Risk Management - macroeconomic, political, resource and competitive risks Innov ation, Learning and Adaptation increased geographic scope increases exposure to diversity National Differences
Canadian US companies 3 tools for building global competitive advantage
Firm Specific Adv antages - Core Competencies
Matrix plots these variables to identify key issues for consideration Quadrant 1 - reliance on strong CSA usually in mature markets - focus on low factor costs Quadrant 2 - no advantages inefficient and candidates for restructure or absorption
Competitiv e Adv antage Matrix
Quadrant 3 - benefit from low cost and differentiation with major factor contributions Quadrant 4 - differentiated firms strengths in marketing and customisation - home base is largely irrelevant what is the role of MNEs in constructing their own destiny rather than being subject to market factors? development of partnership working and cooperative supply networks information sharing between supply partners and inventory coordination includes both suppliers and competitors
Economies of Scale Economies of Scope
Country Specific Adv antages - impact and advantage of home bases on MNE
derived from diamond model but parallels commercial and network relationships challenged by emerging set of relationships around partnerships and joint ventures with competitors
Lesson 9 Mindmap.mmap - 20/07/2008 -
The Flagship Model
traditional definitions of industries will become obsolete as will categories of competitor, buyers and suppliers firm strategies will be more focused towards outsourcing certain assets competitive advantage will be increasingly based on knowledge activity
Major Conclusions
scope economies will become available across apparently unrelated industries intermediaries will become flash points in the value chain
Market and RBV argue that the creation of distinct assets and capabilities can be translated into product bundle of value to the customer tacit and implicit value created through product distinctiveness and risk mitigation for customer
vertical integration representing activities of firm as most efficient model
rents are rooted in temporary monopolies of knowledge that are difficult to imitate or replicate for a specific time
limited company structure created financial advantages through taxation structures
tacit knowledge is now becoming explicit, appropriated by others and industrialized
overall establishment of planned economy of the firm influenced developed of strategic management
if knowledge can be substituted by external providers the vertical integration of a firm can become unsustainable
Traditional View of the Firm
knowledge market has grown significantly with patterns of consumption moving towards knowledge based products
planned economy rose due to tacit and implicit knowledge within the firm creating firm specific assets and competencies
as demand has grown, the supply of knowledge has become an industrialized activity
has led to the growth of outsourcing
supported by highly orchestrated vertical linkages with suppliers and buyers
Know ledge: Demand and Supply
tacit knowledge allows two firms in identical product markets to be differentiated organizational capital
Corporate Glue - idiosyncratic and tacit knowledge embodied in highly specific assets
significant changes in the nature of knowledge investment with previous tacit knowledge now available in the open market or substitutable
nature is now changing and affecting relationships between buyers and suppliers and within markets
defined as the process of replacing internal activities with external provision New Economies of Scale- capture of key activities by larger firms leading to demise of smaller ones lacking capital and expertise creates additional barriers to entry for competitors trying to mirror this approach
Netw ork externalities are the effects on a user of a product or service of others using the same or compatible products or services
New Economies of Scope- scale technology allows for the handling of more data without additional costs
requires new management forms and ways of working
Positiv e netw ork externalitiesexist if the benefits are an increasing function of the number of other users
elements of value chain are replaced by outsourcing opportunities for collaboration with suppliers who have developed greater skills undermine process of vertical integration and replace it with partnership and open market working
influenced by processes of deregulation
new agencies, selling bodies and brokers emerge role of the Internet
The New World of Netw ork Industries
Disintermediation- process of proprietary links within firm are replaced by market mechanisms Quinn 1992 - 6 Phases of Change The Role of Disintermediation
a network is a set of links between nodes that can be one or two way i.e. railway and telephone networks
Deconstruction- wide scale replacement of internal provision with external during Disintermediation Netw orks - Basic Definitions
Redispersion and Redecentralisationreassertion of the need for local and personalized contact
knowledge only really exists where it i s protected by law
Negativ e netw ork externalitiesexist if the benefits are a decreasing function of the number of other users notion ofComplimentarity- i.e. value of a railway station is derived from the existence of other railway stations
Networks
network economies of scale - value rise disproportionately higher than increase in network size as long as prices are constant increasing utility derived by a user as the number of other users for that product increases - i.e. phone system
undermines the notion of pure advantage as possession of unique knowledge
traditional forms of corporate glue are eroding rapidly strategist needs to consider process of erosion identify defensive moves and the principle behind new knowledge combinations
Netw ork Externalities - New Economic Force
Impact on the Strategist
focus of network economics has shifted from monopolies to interconnection, coordination and compatibility
BCG - corporate glue is melting with new intermediaries emerging to support connectivity
the demand curve for a good slope s downwards but is distorted in the presence of network externalities
ICT has allowed for knowledge modules to be snapped together and works to explain how value chains are being refocused
Netw ork Externalities and Critical Mass
knowledge supply has now become a specialism knowledge is now a tradable good undermining proprietary knowledge within firms now critical for competitive advantage
knowledge activities are now significant elements within all value chains
The New Economy Strategy as Knowledge
Deconstructing the Value Chain
competitive pressures require more than technical efficiency - outsourcing becomes a key requirement firms need to refocus attention and resources to knowledge intensive activities that help drive competitive advantage As a consequence ofdeconstruction - 3 new business models have emerged Internet businesses that mount attacks on direct business by splitting information and physical flows - Amazon Amazon model seeks to differentiate itself by mitigating high fixed costs through economies of scope following diversification
The New Competitor
multiple points of Disintermediation allows the firm to focus on those activities that drive advantage
Knowledge led Strategy
firm redefines its remaining capabilities that can be bought in and it becomes less vertically integrated
The Deconstruction Model Disintermediation
it maintains control of the value chain by reinforcing retained competencies battle to control the supply chain and competitive advantage integration replaced by orchestration with powerful brands and competencies providing control of supply - Hewlett Packard
control of the supply chain will be dependent on location of knowledge
The Deconstruction Model Orchestration
Construction of New Value Chains
those groups who can focus on specific value added steps create incentives for scale and scope effects can wrestle control from traditional integrated players first stage of the processsees existing core competencies moved into other value chains establishing scale and scope
sees attempt to dominate other related supply chains with existing competencies knowledge based competencies have become controlling element in multiple supply chains
The Reconstruction Model Know ledge Transfer
nature of scope has moved from product market to knowledge second stage of the processsee new set of corporate level capabilities used to manage collaborative partnerships creation of new value chain
replacement of the value chain with corporate glue at its centre which in turn maintains portfolio position across value chains orchestration of strategic linkages to retain control over traditional value chains
The Value Web
movement of strategic thinking away from market and supply chain domination towards assertion of position within intellectual assets and management of knowledge
Lesson 10 Mindmap.mmap - 01/11/2008 -
original assumption was that networks were each owned by an individual firm but technological advances have meant that there is now fragmented ownership
although value is gained from scarcity in the new economy value comes from plenty tipping point refers to the point at which the size of the networks tips towards one player over another