Definition of Strategy

Strategy: A firms long-term plan to gain competitive advantages. Strategy: An action managers take to achieve superior performance.

A comprehensive master plan stating/directing how the organization will achieve its vision, mission, goals and objectives.
Strategy:

It maximizes competitive advantage and minimizes competitive disadvantage.

Competitive Advantage
The Ability to Create More Economic Value Than Competitors
there must be something different about a firms offering vis--vis competitors offerings competitive advantage is the result of doing something different and/or better than competitors if all firms strategies were the same, no firm would have a competitive advantage

Competitive Advantage
Two Types of Difference
1) Preference for the firms output people choose the firms output over others people are willing to pay a premium Example: Cotton of Benetton and Marcello 2) Cost advantage vis--vis competitors lower costs of production/distribution Example: Adem and Baroholka

Competitive Advantage
competitive advantage typically results in high profits
profits attract competition

competition limits the duration of competitive advantage in most cases

Therefore,

most competitive advantage is temporary competitors imitate the advantage or offer something better

Competitive Advantage
Temporary & Sustainable
Some competitive advantages are sustainable if: competitors are unable to imitate the source of advantage

no one conceives of a better offering

Of course,

in time, even sustainable competitive advantage may be lost

Competitive Advantage
Competitive Parity
the firms offerings are average

people do not have a preference for the firms offering the firm does not have a cost advantage over others

Competitive Advantage
Competitive Disadvantage
people may have an aversion to the firms offering the firm may have a cost disadvantage

a firm may have outdated technology/equipment

a firm may have a negative reputation Example: Wal-Marts Labor & Location Policies

Discussion on
Competitive Advantage

Vs
Comparative Advantage

Strategic Management

The strategic management is the process that leads an organization through the steps of strategy formulation and strategy implementation, and contains a number of individual elements that help to achieve competitive advantage.

The process by which managers choose a set of strategies that will allow a company to achieve competitive advantages or superior performance.

The Strategic Management Process

External Analysis Strategic Choice Strategy Implementation Competitive Advantage

Mission

Objectives

Internal Analysis

The Strategic Management Process

Vision, Mission, Objectives and Goals
specific, measurable targets the things a firm needs to do to achieve its mission should influence other elements in the strategic management process

The Strategic Management Process

Strategic Choice
External Analysis Strategic Choice Business Level positioning a business/product Corporate Level which businesses? Internal Analysis

The Strategic Management Process

External and Internal Analysis
Systematic Examination of the Environment and Resources
External Analysis (business and competitive environment Internal Analysis (Resources and Capabilities)

interest rates demographics

human resources (knowledge) manufacturing abilities technology

social trends
technology

Competitive Advantage
The Strategic Management Process
External Analysis Internal Analysis

Strategic Choice

Strategy Competitive Implementation Advantage

identify and exploit differences that may lead to competitive advantage

Hierarchy of Strategy

Corporate Strategy What businesses should we be in?

1.

Each strategy within the hierarchy complement and support one another
Corporate Strategy

Business Strategy How should we compete in each business/product line?

Functional Strategies Supportive strategies in marketing, finance, operations & HR)
2.

Three main categories of

Stability Growth Retrenchment

Business Strategy

3.

Functional Strategy
Marketing Financial HRM Technological

Cost leadership Differentiation Focus

17

The Strategic Management Process

Strategy Implementation
how strategies are carried out who will do what
organizational structure and control who reports to whom how does the firm hire, promote, pay, etc.

The Strategic Management Process

Strategy Implementation
every strategic choice has strategy implementation implications strategy implementation is just as important as strategy formulation

A Strategy Is Only As Good As Its Implementation

The Strategic Management Process

Summary
Firms could achieve competitive parity and survive they would face a flat demand curve their cost structure would be the industry average they would need to adapt their strategy over time just to survive they would fail if they didnt adapt their strategy

The Strategic Management Process

Summary
This course is not about mere survival, it is about thrivingachieving competitive advantage the strategic management process helps managers achieve competitive advantage competitive advantage depends on differences strategy is about discovering and exploiting these differences

The Strategic Management Process

Applying Strategy to Your Career
a solid understanding of strategy concepts will help set you apart from other job candidates you can use the process to identify and exploit difference between you and others you can use the process to determine if you want to stay with a company

The Strategic Management Process & Competitive Advantage

Strategy Matters!
Strategy is often the difference between: success and failure, between mediocrity and excellence a great manager and average managers stumbling through life and moving ahead with purpose

Strategy
A strategy of a corporation is a comprehensive master plan that states how the corporation will achieve competitive advantage.

It maximizes competitive advantage and minimizes competitive disadvantage.

Strategic Management Process

The strategic management process leads an organization through the steps of strategy formulation and strategy implementation, and contains a number of individual elements that help to achieve competitive advantage. advantages.

The Strategic Management Process

External Analysis Vision & Mission Strategy Selection: Corporate, Business, & Functional Internal Analysis

Goals & Objectives

Strategy Implementation

Competitive Advantage

Strategy formulation is composed of

Vision Mission Objectives Strategies Policies

Learning objectives
Defining vision, mission, objectives and policies of an organization. Practical exercise on writing vision, mission, objectives and policies.

Vision Statement involves thinking strategically about Future of company Where are we going?

A vision is more dreamt of than it is articulated.

It could be considered as mental perception of an individual or an organization aspires to create within a broad time horizon.
KIMEP: Education to Change Society/Excellence in Education

MISSION An organizations mission is the purpose or reason for the organizations existence.

Defines current business activities, highlighting boundaries of current business Present products and services Types of customers served Conveys What we do, Where we are now, and Why we are here

Example: Mission Statement

To improve the quality of home life by designing, building, marketing, and servicing the best appliances in the world

Empower people through great software anytime, anyplace, and on any device

Mission -KIMEP
The mission of KIMEP is to develop welleducated citizens and to improve the quality of life in Kazakhstan and the Central Asian region through teaching, learning, the advancement of knowledge in the fields of business administration and social sciences, and through community service. KIMEP serves the international community by welcoming foreign students and faculty and by developing international linkages.

Objectives
An objective is a statement of what is to be achieved.
Objectives normally are stated in terms of a desired level of attainment within a specific time frame. Converts strategic vision and mission into specific performance targets Creates yardsticks to track performance Pushes firm to focus on results Helps prevent complacency and coasting For example, one objective might be to increase sales revenues to $8 million by the end of the current fiscal year. Ideally, objectives are quantifiable, simply stated and measurable.

Characteristics of Objectives
Represent commitment to achieve specific performance targets
Well-stated objectives are Quantifiable & Measurable Contain a deadline for achievement Spell-out how much of what kind of performance by when Goals A goal is an open-ended statement of what one wants to accomplish with no quantification of what is to be achieved and no time criteria for completion

Types of objectives Required

Financial Objectives- Outcomes focused on improving financial performance Strategic Objectives- Outcomes focused on improving long-term, competitive business position

Examples: Financial Objectives

X % increase in annual revenues X % increase annually in after-tax profits X % increase annually in earnings per share X % return on assets (ROA) X % return on shareholder investment (ROE) GOALS Larger gross profit margin Larger operating profit margin Larger net profit margin Strong bond and credit ratings Reduced levels of debt Diversified revenue base

Objective-setting process is mostly top-down, not bottom-up!

1. First, establish organization-wide objectives and performance targets 2. Next, set business and product line objectives 3. Then, establish functional and departmental objectives 4. Individual objectives are established last

Definition of Policy A policy is broad guideline for decision making that links the formulation of a strategy with its implementation. Examples: Southwest Airlines: Southwest offers no meals on airplanes. (Part of lower cost strategy) 3M: 3M researchers should spend 15% of their time working on something other than their primary project. (Part of 3Ms product development/innovation strategy)

Program
Statement of the activities or steps needed to accomplish a single-use plan. Examples: Outsource approximately 70% of manufacturing. Broadcast 5 ads everyday in August to promote new product X.

Procedure Procedures are a system of sequential steps or techniques that describe in details how a particular task or job is to be done. Budget A budget is statement of a corporations programs in terms of money.

The Strategic Management Process

External Analysis Vision & Mission Strategy Selection: Corporate, Business, & Functional Internal Analysis

Goals & Objectives

Strategy Implementation

Competitive Advantage

Environmental Scanning, and External Analysis

Two considerations

Companys external or macro-environment Macro economic (wider national and global) (PESTLE) Industry and competitive conditions (Porter Five Forces)

Why External Analysis?

External analysis allows firms to:
Discover future business opportunities and possible barriers (PESTLE Analysis) Asses profitability in an industry (Porters Five Forces Analysis)

Business News Headlines-This Week

Facebook has announced a major addition to its social network - a smart search engine it has called graph search.

Business News Headlines-This Week

A surge in research into the novel material graphene reveals an intensifying global contest to lead a potential industrial revolution

Other Business News Headlines-This Week

US Gun Law will Change. German GDP contacted by 0.5% ANA Grounded All Dreamliners

Business News Headlines- (KZ)

Phones, smart phones, tablets are the most popular gadgets in Kazakhstan; Sale of notebook will exceed those of Laptop

General External Environment

Technological Change Entry Rivalry Focal Firm Buyers Legal/Political Conditions Industry Suppliers Economic Climate Substitutes Cultural Trends

Specific International Events Complementors

Demographic Trends

External Environment Important Variables

Economic GDP trends Interest rates Money supply Inflation rates Unemployment levels Technological Political-Legal Socio-cultural

Wage/price controls
Devaluation/reva luation Energy availability and cost Disposable and discretionary income

Total Antitrust Lifestyle changes government regulations Career spending for R&D Environmental expectations Total industry protection laws Consumer spending for R&D Tax laws activism Focus of Special Rate of family technological incentives formation efforts Foreign trade Growth rate of Patent protection regulations population New products Attitudes toward Age distribution New foreign of population developments in companies Regional shifts in technology Laws on hiring population transfer from lab and promotion to marketplace Life expectancies Stability of Productivity Birth rates government improvements through automation

General Micro-environment: Key Components (PEST)

Economic (forces that regulate exchange of materials, money, energy and information).
GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/revaluation Energy availability and cost Disposable and discretionary income

Technological (forces that generate problemsolving inventions)

Total government spending for R&D Total industry spending for R&D (Google) Focus of technological efforts Patent protection New products (Intel) New developments in technology transfer from lab to marketplace Productivity improvements through automation (copy machine)

Political-Legal (forces that allocate power and provide constraining and protecting laws and regulations)
Antitrust regulations Environmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion Stability of government

Socio-cultural (forces that regulate the values, morale and customs of society)
Lifestyle changes Career expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shifts in population Life expectancies Birth rates

Impact of General Macro-environmental Trends on Various Industries

Segment/Trends Industry Positive Neutral Negative

Demographic Aging population Sociocultural More women in the workforce Political/legal Tort reform Technological Genetic engineering Economic Interest Rate Increases Global Global Trade

Health Care Baby products Clothing Baking Products Legal Services Auto Manufacturing Pharmaceutical Publishing Residential construction Grocery products Shipping

Issues Priority Matrix

Identify likely trends:

Strategic macro-environmental issues

Assess probability of trends occurring

Low to High

Ascertain likely impact of trends on the corporation

Low to High

Issues Priority Matrix

Probable Impact on Corporation
High Medium Low

Probability of Occurrence

High Priority

High Priority

Medium Priority

High Priority

Medium Priority

Low Priority

Medium Priority

Low Priority

Low Priority

Industry Analysis: Defining an Industry

Industry

A group of companies offering products or services that are close substitutes for each other A group of closely related industries Rival companies that serve the same basic customer needs

Sector

Competitors

Market segments

Distinct groups of customers within a market that can be differentiated from each other based on their distinct attributes and demands

Computer Sector: Industries & Segments

Industry Analysis
Industry analysis- an in-depth examination of key factors within a corporations task environment

Objectives are to identify

Main sources of competitive forces Strength of these forces

Key analytical tool

Five Forces Model of Competition (Michael Porter)

Industry Analysis
Porters Five Forces Model
Entry Industry Focal Firm Threat Suppliers Substitutes

Buyers

Rivalry

Higher Threat

Lower Average Profits

Porters Five Forces Model Explores Industry Competitiveness

Forces acting on an industry

Some forces decrease ability of industry companies to raise prices & generate profits

Represent threats to industry

Some forces increase ability of industry to raise prices & generate profits

Represent opportunities

Analyzing the Five Competitive Forces: How to Do It

Step 1: Identify the specific competitive pressures associated with each of the five forces Step 2: Evaluate the strength of each competitive force -- fierce, strong, moderate, or weak? Step 3: Consider the overall pattern of competition and collective impact of all five forces

Rivalry Among Competing Firms

Usually

the strongest of the five forces

Key

factor in determining strength of rivalry

How

aggressively are rivals using various weapons of competition to improve their market positions and performance?

What Causes Rivalry/competition to be Stronger?

Frequent

and aggressive launches of new offensives to gain sales and market share Slow market growth Number of rivals increases and rivals are of equal size and competitive capability Rivals to use price cuts or other competitive weapons to boost volume Diversity of rivals increases in terms of visions, objectives, strategies, resources, and countries of origin

What Causes Rivalry

to be Weaker?

Industry

rivals move only infrequently or in a non-aggressive manner to draw sales from rivals Rapid market growth Buyer costs to switch brands are high There are fewer than 5 rivals or there numerous rivals so that any one firms actions has minimal impact on rivals business

Competitive Force of Potential Entry

Entry barrier- an obstruction that makes it difficult for a company to enter an industry

Evaluating the threat of entry involves assessing

How

formidable entry barriers are for each type of potential entrant and Attractiveness of growth and profit prospects

Common Barriers to Entry

Sizable

economies of scale Brand preferences and customer loyalty High capital requirements and/or other specialized resource requirements Access to distribution channels Regulatory policies Tariffs and international trade restrictions

When Is the Threat of Entry Stronger?

Entry

barriers are low Sizable pool of entry candidates exists Industry growth is rapid and profit potential is high

When Is the Threat of Entry Weaker?

Small

pool of entry candidates exists Entry barriers are high Existing competitors struggling to earn good profits Industrys outlook is risky
Industry

growth is slow or stagnant

Competitive Force of Substitute Products Substitutes matter when customers are attracted to the products of firms in other industries Examples

Eyeglasses and contact lens vs. laser surgery Sugar vs. artificial sweeteners Newspapers vs. TV vs. Internet

When Is the Competition From Substitutes Stronger?

The

lower the price of substitutes The higher the quality and performance of substitutes The lower the users switching costs The more intense the competitive pressures posed by substitutes

When Is the Bargaining Power of suppliers Stronger?

Industry

members incur high costs in switching their purchases to alternative suppliers Needed inputs are in short supply Supplier provides a differentiated input that enhances the quality of performance of sellers products or is a valuable part of sellers production process There are only a few suppliers of a specific input Some suppliers threaten to integrate forward linkage

When Is the Bargaining Power of Suppliers Weaker?

Item

being supplied is a commodity Seller switching costs to alternative suppliers are low Good substitutes exist or new ones emerge Industry members account for a big fraction of suppliers total sales Industry members threaten to integrate backward linkage Seller collaboration with selected suppliers provides attractive win-win opportunities

When Is the Bargaining Power of Buyers Stronger?

Buyer

switching costs to competing brands or substitutes are low Buyers are large and can demand concessions Large-volume purchases by buyers are important to sellers Only a few buyers exists Identify of buyer adds prestige to sellers list of customers Quantity and quality of information available to buyers improves Buyers have ability to postpone purchases Buyers have the power to integrate backward linkage

When Is the Bargaining Power of Buyers Weaker?

Buyers

purchase item infrequently or in small quantities Buyer switching costs to competing brands are high Sellers brand reputation is important to buyer A specific sellers product delivers quality or performance that is very important to buyer Buyer collaboration with selected sellers provides attractive win-win opportunities

Strategic Implications of the Five Competitive Forces

Competitive

environment is unattractive from the standpoint of earning good profits when

Rivalry/competition

is strong/severe Entry barriers are low and entry is likely Competition from substitutes is strong Suppliers and customers have considerable bargaining power

Strategic Implications of the Five Competitive Forces

Competitive environment is ideal from a profitmaking standpoint when

Rivalry is moderate Entry barriers are high and no firm is likely to enter

Good substitutes do not exist

Suppliers and customers are in a weak bargaining position

Strategic Group and Positioning: Competitors with similar/same resources

Strategic group- a set of business units or firms that pursue similar strategies with similar resources.

Strategic Types/groups (Miles & Snow)

Defenders- focus on improving efficiency Prospectors- focus on product innovation and market opportunities Analyzers- focus on at least two different product market areas Reactors- lack a consistent strategy-structure-culture relationship

Industry Life Cycle:

Embryonic Industries- Just beginning to develop Growth Industries- Demand is expanding as new customers enter the market. Mature Industries- Market is saturated, demand is limited to replacement, and growth is low or zero. Declining Industries- growth becomes negative for a variety of reasons.

Summary
External Analysis:
takes time and effort should include consideration of international markets helps firms recognize threats and opportunities provides assessment of likely levels of industry profitability (normal, above, below)

What Are the Key Success Factors (KSFs) of an Industry?

KSFs are key assets or requisite skills that all firms in an industry must possess in order to be a viable competitor. Factors that can significantly affect the overall competitive positions of companies within an industry.

Identifying Industry Key Success Factors (KSFs)

Pinpointing KSFs involves determining

On what basis do customers choose between competing brands of sellers? What resources and competitive capabilities does a seller need to have to be competitively successful? What does it take for sellers to achieve a sustainable competitive advantage?

KSFs consist of the 3 - 5 major determinants of financial and competitive success

Example: KSFs for Beer Industry

Full utilization of brewing capacity -to keep manufacturing costs low Strong network of wholesale distributors -- to gain access to retail outlets Clever advertising -- to induce beer drinkers to buy a particular brand

Example: KSFs for Apparel Manufacturing Industry

Appealing designs and color combinations -- to create buyer appeal Low-cost manufacturing efficiency -to keep selling prices competitive

The Strategic Management Process

External Analysis Vision & Mission Strategy Selection: Corporate, Business, & Functional Internal Analysis

Goals & Objectives

Strategy Implementation

Competitive Advantage

Internal Analysis
Analyzing a Companys Resources and Competitive Position in terms of resources and capabilities

Companys internal or micro-environment Competencies, capabilities, resource strengths and weaknesses, and competitiveness

Assessing a Companys Competitive Strength

(TWO PERSPECTIVES: HOW AND WHY SOME FIRMS PERFORM BETTER THAN OTHERS)

A firms resources and capabilities determine performance: Success

issues from fundamental differences in what firms own and what they can do (SWOT and Resources Analysis - VRIO)

A firms activities determine performance: Success is driven by a firms

value chain activities- How it configures these activities to add more value than competitors (Activities Analysis-Value Chain Analysis)

What Are the Firms Strengths, Weaknesses, Opportunities and Threats ?

S W O T represents the first letter in

S trengths W eaknesses O pportunities T hreats

For a companys strategy to be well-conceived, it must be matched to both

Resource strengths and weaknesses Best market opportunities and external threats to its well-being

The strength is a resource advantage relative to competitors and the needs of the markets a firm serves or expects to serve. A weakness is a limitation or deficiency in one or more resources or competencies relative to competitors that impedes a firms effective performance. An opportunity is a major favorable situation in a firms environment. A threat is a major unfavorable situation in a firms environment. Threats are key impediments to the firms current or desired position.

Potential Internal Strengths

Adequate financial resources. An acknowledged market leader. Access to economies of scale. Proprietary technology. Cost advantages. Better Advertising campaigns. Product innovation skills Proven management. Ahead on experience curve. Better manufacturing capability. Superior technological skills

Potential Internal Weaknesses

No clear strategic direction. Obsolete facilities, Lack of managerial depth and talent. Missing some key skills or competencies. Falling behind in R&D Too narrow product line. Weak market image. Weak distribution network. Below average marketing skills. Unable to finance needed changes in strategy. Higher overall unit costs relative to key competitors.

Potential External Opportunities

Serve additional customer groups. Enter new markets or segments. Expand product line to meet broader range of customer needs. Diversify into related products. Vertical integration (forward or backward) Falling trade barriers in attractive foreign markets. Faster market growth.

Potential External Threats

Entry of lower-cost foreign competitors. Rising sales of substitute products. Slower market growth Adverse shifts in foreign exchange rates and trade policies of foreign governments. Costly regulatory requirements. Growing bargaining power of customers or suppliers. Changing buyer needs and tastes. Adverse demographic change.

1. ABC Metals Corporation recently signed a longterm labor contract with unionized workers and now has an excellent working relationship between labor and management. In a SWOT analysis, would it be a strength, weakness, opportunity, or threat 2. Your firm has gained a first-mover advantage and now faces a large untapped market potential. In a SWOT analysis, would a large untapped market be considered a strength, weakness, opportunity, or threat?

3. Your industry recently experienced a reduction in tariffs, enabling foreign competitors to enter the US market. (Eighty percent of your goods are sold in the US market.) As a result, your firm (and others in the industry) now faces increased foreign competition. In a SWOT analysis, would it be considered a strength, weakness, opportunity, or threat

4. Your firm was an early entrant into the market, and for a time enjoyed first-mover advantages. However, the market is now two decades old and you find that your facilities are at this point obsolete relative to your competitors. How would you classify these obsolete facilities in a SWOT analysis?

RESOURCES AND CAPABILITIES: Resource Based TheoryVRIO Analysis Resources The inputs that firms use to create goods and services (asset, process, skill, or knowledge controlled by the organization). It could be undifferentiated or firms-specific, tangible or intangible Capabilities (competencies)

A firms ability in using its resources to create goods and services. The combination of procedures and expertise that the firm relies on to engage in distinct activities in the process of producing goods and services.
Core competencies things that the corporation can do exceedingly well
Distinctive competencies capabilities / competencies that are superior to those of competitors

The VRIO Framework

If a firm has resources that are:
valuable, rare, and costly to imitate, and the firm is organized to exploit these resources,

then the firm can expect to enjoy a sustained competitive advantage.

Applying the VRIO Framework

The Question of Value
in theory: Does the resource enable the firm to exploit an external opportunity or neutralize an external threat?
the practical: Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? (Levis reputation allows it to charge a premium for its Dockers pants)

Applying the VRIO Framework

The Question of Rarity
if a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits)

a resource must be rare enough that perfect competition has not set in
thus, there may be other firms that possess the resource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-lowering drugs, but the drugs are still scarcelook at prices)

Applying the VRIO Framework

Valuable and Rare
If a firms resources are:
Not Valuable

The firm can expect:

Competitive Disadvantage

Valuable, but Not Rare

Valuable and Rare

Competitive Parity
Competitive Advantage (at least temporarily)

Applying the VRIO Framework

The Question of Imitability
the temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a cost disadvantage in imitating the resource intangible resources are usually more costly to imitate than tangible resources (Harley-Davidsons styles may be easily imitated, but its reputation cannot)

Applying the VRIO Framework

The Question of Imitability
if there are high costs of imitation, then the firm may enjoy a period of sustained competitive advantage a sustained competitive advantage will last only until a duplicate or substitute emerges if a firm has a competitive advantage, others will attempt to imitate it (Razor scooters
were a big hit and others quickly imitated them)

Applying the VRIO Framework

Value, Rarity, & Imitability
If a firms resources are: Valuable, Rare, but not Costly to Imitate
Valuable, Rare, and Costly to Imitate

The firm can expect: Temporary Competitive Advantage

Sustained Competitive Advantage (if Organized appropriately)

Applying the VRIO Framework

The Question of Organization
a firms structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firms resources examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc. these structure and control mechanisms complement other firm resourcestaken together, they can help a firm achieve sustained competitive advantage (3M Company)

The VRIO Framework

Valuable? No Rare? Costly to Imitate? Exploited by Organization? No Competitive Implications Disadvantage Parity Temporary Advantage Yes Sustained Advantage

Yes

No

Yes Yes

Yes Yes

No Yes

The VRIO Framework

Costly to Exploited by Competitive Valuable? Rare? Imitate? Organization? Implications Economic Implications Below Normal Normal

No

No

Disadvantage

Yes

No

Parity

Yes

Yes

No

Temporary Advantage Sustained Advantage

Above Normal Above Normal

Yes

Yes

Yes

Yes

Internal Analysis
Tells us:
what the firm should do, given the relative strengths and weaknesses of resources and capabilities

Managers Job:
bundle resources and capabilities to achieve competitive advantage

VRIO Framework Helps Managers Recognize Sources of Competitive Advantage

In retail business in Almaty, RAM store is considered as the dominant firm for a long time. Recently, GROS and other small stores are trying to capture some market share of grocery market. It seems they are also doing well in this market. Could you please think of following issues in strategic analysis of RAM store? 1. What is the source of competitive advantage of RAM store? 2. How they will be able to sustain this competitive advantage in a competitive marketplace?

Firms Activities and Performance: Are the Costs Competitive?

Assessing whether a firms costs are competitive with those of rivals is a crucial part of company analysis Key analytical tools Value chain analysis & benchmarking

The Concept of a Company Value Chain

A companys value chain analysis consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service. The value chain contains two types of activities
a. Primary activities -- where most of the value (physical

creation) for customers is created b. Support activities -- facilitate performance of the primary activities

Characteristics of Value Chain Analysis

Combined costs of all activities in a companys value chain define the companys internal cost structure Compares a firms costs activity by activity against costs of key rivals From raw materials purchase to price paid by ultimate customer

Pinpoints which internal activities are a source of cost advantage or disadvantage

Corporate Value Chain

Value Chain: Support Activities

Firm Infrastructure Effective planning Excellent relationships with diverse stakeholders Ability to integrate and coordinate value chain activities Effective culture and reputation HRM Effective recruiting, training, and retention Union relationships Effective reward and incentive programs

Value Chain: Support Activities

Technology/ Development Effective R&D Relationships between R&D and other depts Creative and innovation in culture Procurement Win-win relationships with suppliers Processes and procedures optimize quality, price, service, speed lease versus buy decisions

Example: Key Value Chain Activities

Home Appliance Industry

Parts and components manufacture Assembly Wholesale distribution

Retail sales

Soft-Drink Industry
Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing

Benchmarking Costs of Key Value Chain Activities

Focuses

on cross-company comparisons of how certain activities are performed and the costs associated with these activities
Purchase

of materials Payment of suppliers Management of inventories Getting new products to market Performance of quality control Filling and shipping of customer orders Training of employees Processing of payrolls

What Determines Whether a Company Is Cost Competitive?

Cost

competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains.
When

costs are out-of-line, the high-cost activities can exist in any of three areas in the industry value chain

1. Suppliers activities 2. Companys own internal activities 3. Forward channel activities

Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies

Activities, Costs, & Margins of Suppliers

Buyer/User Value Chains

USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE

Identical

Differentiated Find a different way to perform activities Longer-lasting advantage

Find a better way to perform the same activities

Shorter-term advantage (competitors catch up)

Strategy Formulation: Corporate Strategy

Learning Objectives

After reading this chapter you should be able to identify and formulate strategies for a multi-business firm based on: Corporate directional strategies of growth, stability or retrenchment Portfolio analysis techniques to guide decisions to enter and exit businesses

Corporate Strategy
Key Issues: Firms directional strategy Firms portfolio strategy

Corporate Strategy
Directional Strategy:
Three Grand Strategies:
Growth strategies Stability strategies Retrenchment strategies

GROWTH/EXPANSION STRATEGIES
The expansion strategy is followed when an organization aims high growth by substantially broadening scope of one or more of its businesses.

Types of Growth/Expansion strategy

Several different generic strategies for growth or expansion. The most frequently identifiable growth/expansion strategies are:

1. Growth through Concentration 2. Growth through Integration 3. Growth through Diversification 4. Growth through Cooperation 5. Growth through Internationalization

Concentration Strategy
It involves converging resources in one or more of a firms businesses in terms of their respective customer needs, customer functions, or alternative technologies, either singly or jointly, in such a manner that it results in expansion.

A concentration strategy focuses on a single product/ service or on a small number of closely related products/services and involves increasing sales, profits, or market share faster than it has increased in the past.

Approaches to pursuing a concentration strategy

Basically, there are two general approaches to pursuing a concentration strategy: market development and product development.

A. Market Development. The thrust under a market

development approach is to expand the markets of the current business. This can be done by gaining a larger share of the current market, expanding into new geographic areas, or attracting new market segments.

Coca-Cola has continued to follow a market development strategy since its inception. It amassed its impressive market share through large-scale advertising programs and has continued to expand into new geographic areas.

B. Product Development. The thrust under a product

development approach is to alter the basic product or service or to add a closely related product or service that can be sold through the current marketing channels. Successful product development strategies often capitalize on the favorable reputation of the company or related products. The telephone companies' introduction of numerous styles of phones and additional services, such as call forwarding and call holding, is an example of a product development strategy.

Growth through Integration

Integration means combining activities related to the present activity of a firm.
Integration could be classify in two categories:

1. Vertical integration and 2. Horizontal integration

Vertical Integration
Vertical integration is a growth strategy that involves extending an organization's present business that serves its own needs. It can have two possible directions.
Forward integration moves the organization into distributing its own products or services.

Backward integration moves an organization into supplying some or all of the products or services used in producing its present products or services.

Horizontal Integration
Horizontal integration is the process of acquiring or merging with industry competitors in an effort to achieve the competitive advantages that comes with large scale and scope.

When an organization takes up the same type of products at the same level of production or marketing process, it is said to follow a strategy of horizontal integration.
ADVANTAGES AND DISADVANTAGES

Growth through Diversification

Diversification is the process of adding new businesses to the company that are distinct from its established operations. It occurs when an organization moves into areas that are clearly differentiated from its current businesses.
Most diversification strategies can be classified as either

1. Concentric diversification or 2. Conglomerate diversification.

Concentric diversification Concentric diversification involves adding products or services that lie within the organization's know-how and experience in terms of technology employed, product line, distribution system, or customer base.

Conglomerate Diversification
Conglomerate diversification is a growth strategy that involves adding new products or services that are significantly different from the organization's present products or services. Conglomerate diversification can be pursued internally or externally. Most frequently, however, it is achieved through mergers, acquisitions, or joint ventures.
ADVANTAGES AND DISADVANTAGES

Growth through Cooperation

Sometimes competition among the organizations could co-exist with cooperation. Corporate strategies could take into account the possibility of mutual cooperation with competitors while competing with them at the same time, so that the market potential could expand. The central point is of complementarities among the interests of rival firms. Cooperative strategies could be of the following types:

1. 2. 3. 4.

Mergers Takeovers or Acquisitions Joint Venture Strategic Alliances.

Mergers Strategies
A merger is a combination of two or more organizations in which one acquires the assets and liabilities of the other in exchange for share or cash, or both the organizations are dissolved, and the assets and liabilities are combined and new stock is issued. Mergers may often be of different types. 1. 2. 3. 4. Horizontal mergers Vertical mergers Concentric mergers Conglomerate mergers

Joint Venture Strategies

Joint ventures are a special case of consolidation where two or more companies form a temporary partnership for a specific purpose.

Strategic Alliances
Strategic alliances are a co-operation between two or more independent firms involving shared control and continuing contributions by all partners for mutual benefit.

Growth through internationalization

Exporting Licensing Franchising Joint Ventures Acquisitions Green-Field Development Production Sharing Management Contracts

Corporate Strategy
Stability Strategies:
1. Pause/proceed with caution 2. No change 3. Profit strategies

Corporate Strategy
Retrenchment Strategies:
1. 2. 3. 4. 5. Turnaround Captive Company Strategy Selling out Bankruptcy Liquidation

Corporate Strategy
Portfolio Analysis
How much of our time and money should we spend on our best products to ensure that they continue to be successful? How much of our time and money should we spend developing new costly products, most of which will never be successful?

Portfolio Analysis - BCG (Boston Consulting Group) Matrix

Product life cycle and funding decisions
1. 2. 3. 4. Question marks Stars Cash cows Dogs

BCG Matrix

GE Business Screen Analysis

Long-term industry attractiveness Business strength/competitive position Market growth rate Industry profitability

General Electrics Business Screen

High Winners A Winners B C Question Marks D Winners E Medium

Average Businesses F Losers

Losers G Low Profit Producers Strong Average

Losers Weak

Business Strength/Competitive Position

International Portfolio Analysis

2 Factors:
Countrys attractiveness
Market size, rate of growth, regulation

Competitive strength
Market share, product fit, contribution margin, market support

Portfolio Matrix Plotting Products by Country

Competitive Strengths
High Low

Invest/Grow

Dominate/Divest Joint Venture

Selective Strategies

Harvest/Divest Combine/License

Portfolio Analysis
Advantages:
Top management evaluates each of firms businesses individually Use of externally-oriented data to supplement management judgment Raises issue of cash flow availability Facilitates communication

Portfolio Analysis Disadvantages: Difficult to define product/market segments Standard strategies can miss opportunities Illusion of scientific rigor Value-laden terms

Business Level Strategies

Two Generic Business Level Strategies
Cost Leadership: generate economic value by having lower costs than competitors Example: Wal-Mart Product Differentiation: generate economic value by offering a product that customers prefer over competitors product Example: Harley-Davidson

Generic Competitive Strategies

(Cost leadership- a lower-cost competitive strategy that aims at the broad mass market and requires efficient scale facilities, cost reductions, cost and overhead control; avoids marginal customers, cost minimization in R&D, service, sales force and advertising).

Generic Competitive Strategies

Differentiation strategy- the ability of a company or a business unit to provide a unique or superior value to the buyer in terms of product quality, special features, or after sale service

(Differentiation- involves the creation of a product or service that is perceived throughout the industry as unique. Can be associated with design, brand image, technology, features, dealer network, or customer service).

Porters competitive strategies Cost Focus- low-cost competitive strategy that focuses on a

particular buyer group or geographic market and attempts to serve only this niche to the exclusion of others.

Differentiation Focus- concentrates on a particular buyer group,

product line segment, or geographic market to serve the needs of a narrow strategic market more effectively than its competitors.

Cost leadership
When the competitive advantage of a firm lies in a lower cost of products or services relative to what the competitors have to offer, it is termed as cost leadership. The firm outperforms its competitors by offering products or services at a lower cost that they can. The idea behind an overall cost leadership strategy is to be able to produce and deliver the product or service at a lower cost than the competition.

Sources of Cost Advantage

Economies of Scale
average cost per unit falls as quantity increases -until the minimum efficient scale is reached are a cost advantage because competitors may not be able to match the scale because of capital requirements (barrier to entry)

international expansion may allow a firm to have enough sales to justify investing in additional capacity to capture economies of scale

Sources of Cost Advantage

Learning Curve Economies
a firm gets more efficient at a process with experience the more complicated/technical the process, the greater the experience advantage

international expansion may propel a firm down the experience curve because of higher volumes
Example: Fuel Injectors

Sources of Cost Advantage

Differential Low-Cost Access to Productive Inputs
may result from: historybeing in the right place at the right time being first into a marketesp. foreign markets natural endowmentowning a mineral deposit locking up a sourcebuying all of its output

Example: Quantity Carpet Buys

Conditions under which cost-leadership is used

There are certain conditions that make such usage meaningful. Some of such conditions are:
1. The markets for the product/service operate in such a way that price-based competition is vigorous in making costs an important factor (retail store)
2. The product/service is standardized and its consumption takes place in such a manner that differentiation is superfluous (drinking water). 3. There is lesser customer loyalty and the cost of switching from one seller to another is low. This is often seen in the case of commodities or products that are highly standardized. (Petrol, gasoline).

Risks faced under cost-leadership strategy

The risks faced under the cost-leadership business strategy are several.
1. Cost advantage is ephemeral. It does not remain for long as competitors can imitate the cost reduction techniques easily. 2. Cost leadership is obviously not a market-friendly approach. Often severe cost reduction can dilute customer focus & limit experimentation with product attributes. 3. Technological shifts are a great threat to a cost leader as these may change the ground rules on which an industry operates.

Differentiation (differentiation/broad target)

A differentiation strategy requires that an organization create a product or service that is recognized industry wide as being unique, thus permitting the organization to charge higher than average prices.

Bases of Differentiation
Three Categories
1) Product Attributes

exploiting the actual product

2) FirmCustomer Relationships exploiting relationships with customers 3) Firm Linkages exploiting relationships within the firm and/or relationships with other firms

Bases of Differentiation
Product Attributes
Product Features the shape of a golf club head

Product Complexity multiple functions on a watch

Timing of Introduction being the first to market

Bases of Differentiation
Firm-Customer Relationships
Customization creating a unique diamond bracelet for a customer Consumer Marketing creating brand loyalty to a soap

through image advertising- beauty items

Reputation sponsoring the local homeless shelter

to engender positive community response- organic foods; fair business

Bases of Differentiation
Firm Linkages
Linkages among Functions in the Firm using a circuit board designed in one division in other divisions (Property business and Finance) Linkages with other Firms a sporting goods store sponsors a benefit race by donating running shoes and receives free radio advertising in return Banks; Airlines Product Mix a furniture store begins to sell home gym equipment, computers, and lawn mowers (clinics; notary public; travel agents)

Conditions under which differentiation is used

The major conditions under which differentiation business strategies could be employed are given below. 1. The market is too large to be catered to by a few firms offering a standardized product/service. 2. The customer needs & preferences are too diversified to be satisfied by a standardized product/service. 3. It is possible for the firm to charge a premium price for differentiation that is valued by the customer. 4. The nature of the product/service is such that brand loyalty is possible to generate & sustain. 5. There is ample scope for increasing sales for the product/service on the basis of differentiated features & premium pricing.

Risks faced under differentiation strategy

The risks faced under the differentiation business strategy are several.
1. In a growing market, long-term perceived uniqueness of the basis for differentiation is difficult to sustain. 2. In the case of several differentiators adopting similar differentiation strategies the basis for distinctiveness is gradually lessened & ultimately lost. 3. Differentiation fails to work if its basis is something that is not valued by the customer. This often happens in a case where unnecessary features are added for differentiation is done, carrying little tangible benefit for the customer. 4. Price premium too have a limit. Charging too high a price for differentiated features may cause the customers to forgo the additional advantages from a product/service on the basis for their own cost-benefit analysis.

Focus (lower cost or differentiation/narrow target)

A third business unit strategy is to focus on a particular market segment. The segment sought may be defined by a particular buyer group, a geographic market segment, or a certain part of the product line. As opposed 'to low-cost and differentiation strategies, which have industry wide appeal, a focus strategy is based on the premise that the firm is able to serve a well-defined but narrow market better than competitors who serve a broader market. The basic idea of a focus strategy is to achieve a leastcost position or differentiation, or both, within a narrow market.

Conditions under which focus strategies are used

Certain conditions are ripe for the adoption of a focus strategy either in terms of lower cost or differentiation. Some of the major conditions are mentioned below.

1. There are some kinds of uniqueness in the segment, which could either be geographical, demographic or based on lifestyle. Only specialized attributes & features could satisfy the requirements of such a segment. 2. There are specialized requirements for using the products or services that the common customer cant be expected to fulfill. 3. The niche market is big enough to be profitable for the focused firm. 4. The major players in the industry are not interested in the niches as it may not be crucial to their own success.

Risks associated with focus strategies

There are several risks associated with focus strategies. Basically, these arise from the small size of the focused firms & its independence on the niche markets.
1. First of all, serving niche market requires the development of distinctive competencies to serve those markets. The development of such distinctive competencies may be a long-drawn & difficult process. 2. Being focused means commitment to a narrow market segment. Once committed, it may be difficult for the focused firm to move onto other segments of the market. 3. A major risk of the focused firm lies in the cost configuration. Typically, the costs for focused firm are higher as the markets are limited & the volume of production & sales small. 4. Niches may sometimes become attractive enough for the bigger player to shift attention to them. This is a potential threat to the focused firms.

Functional Strategy
The approach each functional area takes to achieve organizational and business unit objectives and strategies by maximizing resource productivity.

Functional strategy-Marketing Strategy

An organizations choices on market, product, pricing, promotion and distribution intended to achieve organizational objectives.

Marketing Strategy
Market

Development Strategy Captures a larger share of existing markets through market saturation and market penetration, or Develops new markets for current products.

Marketing Strategy
Product

Develop new products for existing markets, or Develop new products for new markets
Development strategy

Marketing Strategy
Advertising

or Promotion strategy

Push

marketing strategy

Investing

in trade promotion to gain or hold share (when you have enough market share)
Pull

marketing strategy

Investing

in consumer advertising to build brand awareness (for new market share)

Marketing Strategy

Pricing
Skim

strategy

pricing skim the cream Penetration pricing hasten market development

Penetration Pricing

If your new product is introduced to a highly competitive market where a large number of similar products are competing then your product must penetrate the market to be successful Usually, the product should be launched at a low price (just above cost) to get noticed, deter other new entrants and find a quick place in the market Usually this strategy is for low-priced goods, no elite segment and little opportunity for differentiation It is popular with FMCG products like soap, shampoo, breakfast cereals and light bulbs

Skimming Pricing

Skimming is often used when a business introduces a new product to a market with little competition. Here, the product is priced higher than normal to quickly recover development and promotion costs. Usually costs getting the product to market are high The strategy reinforces the uniqueness, quality or status of the product Skimming is a strategy used to sell luxury or exclusive goods

Financial Strategy Competitive advantage through lower cost of funds and a flexible ability to raise capital to support business strategy. Key issue tradeoff between achieving the desired debt-to-equity ratio and relying on internal LT financing via cash flow is a key issue in financing strategy

Types of Financial Strategy

Leveraged

buy out (LBO) Company acquired financed largely by debt (from a third party). Debt paid by acquired companys operations or sale of assets

Types of Financial Strategy

Reverse

stock splits Tracking stock Highlighting a high-growth business unit in a popular sector of the stock market. Keeping subsidiarys common stock separately identified

R&D Strategy
Key issue product and process innovation and improvement Questions to ask: 1. appropriate mix of R&D (basic, product, process)? 2. how the technology should be accessed (internal development, external acquisition, strategic alliance)?
Technological

leader Technological follower

Operations Strategy

Determines:
How

and where product is manufactured Level of vertical integration in process Deployment of physical resources

Operations Strategy development of manufacturing strategy

1. 2.

3. 4.

5.
6.

Job shop one-of-a-kind production, skilled labor Connected line batch flow standardized components, machines positioned in the same order as the parts are processed Flexible manufacturing systems parts are grouped into manufacturing families Mass production large amount at low cost, standard goods and services Continuous improvement system crossfunctional teams Mass customization reconfiguration to customers specs

Purchasing Strategy Key Issues: obtaining supplies, parts, and raw materials for operation
1.
2. 3.

Multiple sourcing several vendors for a particular part. Sole sourcing one vendor for each part Parallel sourcing two vendors are sole suppliers of two different parts but can be a backup for each others product

Logistics Strategy
Key issue: flow of products into and out of the manufacturing process.
Centralization

in-house specialists with expertise in different transportation modes such as air, rail, trucking, or water transportation Used to differentiate from competition, to add value, and to reduce costs Outsourcing can be a way to reduce costs and to improve delivery time Internet simplifies logistical system

HRM Strategy Key issue: whom to hire?

Lots of low-skilled low paid workers who quit after a short time? Or Self-managing work teams consisting of skilled workers with relatively high pay and cross-train them?

Increased

quality, productivity, enhanced workers satisfaction and commitment

Temps?

Part-timers?

360 degree appraisal Diverse workforce race, age, gender, etc.

Consistent packages of Business Strategies and HRM practices

Innovative strategy and key HRM practices Quality enhancement strategy and key HRM practices
High participation Explicit job analysis Some external sources Narrow career paths Mostly results criteria Mostly short-term criteria Some employment security Some incentives Egalitarian pay Extensive training Cooperative labor management relations

Cost reduction strategy and key HRM practices

High participation Implicit job analysis External sources Broad career paths Process and results criteria Long term criteria Some employment security Many incentives Egalitarian pay Extensive training Cooperative labor management relations

Low participation Explicit job analysis Mostly internal sources Narrow career paths Short-term criteria Short term criteria Little employment security Few incentives Hierarchical pay Little training Traditional labor management relations

Information System Strategy

Key issue: how will IT provide competitive advantage?

- Follow-the-sun management - Instant translation software - use of extranet

Strategies to Avoid
1.

2.

3.

4.

5.

Follow the leader imitation ignores a firms own strengths and weaknesses. What if the leader is wrong? (IBM and Fujitsu- Mainframe) Hit another home run searching for another successful product to replace the first one constant R&D (digital and Polaroid camera) Arms race entering a long battle for increased market share huge marketing and manufacturing costs Do everything too many opportunities costtoo much depleting all companys resources (Thomas Cook) Losing hand unwilling to accept failure after spending too much on a project

Strategy Implementation: Organizing for Action

Heinz

bought by Warren Buffett's Berkshire Hathaway for $28bn

American

Airlines and US Airways confirm $11bn merger

Emirates

acquire JET Airways

The Strategic Management Process

External Analysis Strategic Choice Strategy Implementation Competitive Advantage

Mission

Objectives

Internal Analysis

Strategy implementation
How a company should create, use, and combine organizational structure, culture, and control systems to pursue strategies that lead to a competitive advantage and superior performance.

Implementing Strategy Through Organizational Structure, Control, and Culture

Organizational structure
Structure can be defined as "the sum total of the ways in which the organization divides its employees and resources, and into distinct tasks, and then achieves coordination between them."

Types of Organizational Structure

All organizational structures are a variation of one of the five basic types: (1)Functional (2)Geographic (3)Divisional (4)Strategic business unit, and (5)Matrix.
In order to match structure to strategy, the strategic decision maker must understand each of these basic types of structures as well as their respective advantages and disadvantages.

Functional Structure

Chief Executive Officer or President

Manager Production

Manager Engineering

Manager Marketing

Manager R&D

Manager Personnel

Manager Accounting

Lower-level managers, specialists, and operating personnel

Functional Structure

Advantage: 1. Develops Functional expertise. 2. Centralized control of strategic decision. 3. Enhances efficiency through specialization. 4. Closely links strategy to structure by designating key activities as separate units.
Disadvantage: 1. Lends itself to interventional conflict, rather than to teamwork. 2. Encourages narrow specialization at all levels. 3. Limits its the development of general managers. 4. Increases response time as the organization grows

Geographic Structure

Geographic Organizational Structure

Advantage: 1. Allows tailoring of strategy to the needs of each geographic market. 2. Improves response time to customer. 3. Delegates profit/loss responsibility to lowest strategic level. 4. Improves functional coordination within the target market. 5. Provides excellent training experience for general managers.
Disadvantage: 1.Makes it difficult to maintain consistency of service/ Image from area to area. 2.Can result in duplication of staff services at headquarters and regional levels. 3.Adds another layer of management. 4.Creates the dilemma of deciding how much autonomy to give regional offices.

Divisional Structure
Chief Executive Officer or President

Corporate Staff

Division A General Manager

Division B General Manager

Division C General Manager

Manager Production

Manager Engineering

Manager Marketing

Manager R&D

Manager Personnel

Manager Accounting

Lower-level managers, specialists, and operating personnel

Organized similarly to Division 1 Organized similarly to Division 1

Divisional Organizational Structures

Advantage: 1. Places authority at the approach level for rapid response. 2. Puts strategic development & implementation proximately to each divisions unique environment. 3. Focuses accountability on division managers 4. Frees CEO to deal with corporate strategic issues. 5. Provides a good training with experience for strategic managers.

Disadvantage: 1. Can result in costly duplication of staff functions at corporate & divisional levels. 2. Can foster dysfunctional division rivalry for corporate resources. 3. Creates the problem of deciding how much authority to delegate to division managers. 4. Creates the problem of how to equitably distribute corporate overhead costs. 5. Corporate management becomes heavily dependent to division on division managers.

Strategic Business Units

The SBU is a form of organization to form project teams within the traditional organization. A project is "a combination of human and non-human resources pulled together in a organization to achieve a specified purpose.

Advantage 1. Provides coordination among divisions with similar strategic concerns and product-markets. 2. Directs accountability to distinct business units. 3. Facilitates in-depth business planning at the corporate and business levels. Disadvantage 1. Adds another layer of management. 2. Can increase dysfunctional competition for corporate resources. 3. Strategy coordination within an SBU can be difficult.

Matrix Structure

Building Blocks of Organizational Structure

Grouping

tasks, functions, and divisions Organizational structure follows the range and variety of tasks that an organization pursues Companies group people and tasks into functions and then functions into divisions

Allocating

authority and responsibility Hierarchy of authority (chain of command) Span of control (number of subordinates) Tall and flat organizations

Match Structure to Strategy

The evolution of business and the degree of diversification of a firms core business affect its choice of organizational structure. Five basic conclusions were derived from the research into strategy-structure fit. 1. A single product firm or single dominant business firm should employ a functional structure. This structure allows for strong task focus through an emphasis on specialization and efficiency, while providing opportunity for adequate controls through centralized review and decision making. 2. A firm with several manageable lines of businesses that are unrelated should employ a divisional structure. Closely related divisions should be combined into groups within this structure.

3. A firm in several related lines of businesses should be organized into matrix structure. It allows the different business entities to be grouped according to some common strategic element. 4. An organization with regional, national, or international locations normally use some type of geographic structure. It allows tailoring of strategy to the needs of each market being served. 5. Early achievement of a strategy-structure fit can be a competitive advantage. A competitive advantage is obtained by the first firm among competitors to achieve appropriate strategy-structure fit.

Organizational Culture
Organizational culture is the set of important assumptions (often unstated) that members of an organization share in common. Organizations culture is similar to an individuals personality- an intangible yet ever-present theme that provides meaning, direction, and the basis of action.

Different Type of Corporate Culture

Hierarchy culture
Formalized and structured place to work Effective leaders and good coordinators and organizers The long-term concerns of the organization are stability, predictability, efficiency, formal rules and policies e.g. fast-food restaurants, major conglomerates, government agencies

Market culture
Internal control is maintained by rules, specialized rules and centralized decisions The major focus is to conduct transactions (exchanges, sales and contracts) to create competitive advantage, e.g. Philips Electronics, General Electric

Clan/Group culture
Semiautonomous work teams that receive rewards on the basis of team (not individual) accomplishment The workers are encouraged to improve their work and the performance of the company The major task of management is to empower employees and facilitate their participation, commitment and loyalty, e.g. People Express Airlines, Texas Air

Adhocracy/development culture
The major goal is to foster adaptability, flexibility and creativity where uncertainty, ambiguity and information overload are typical Frequently found in industries such as aerospace, software development, think-tank consulting, e.g. Apollo 13, Department of Mental Hygiene, Manned-Space Flight Centre at NASA

What Makes Up a Companys Culture?

1. 2.

3.
4. 5. 6.

Core values and business principles of executives Ethical standards Patterns of how we do things around here Often-told stories illustrating companys values Approach to people management Traditions

Features of the Corporate Culture at Wal-Mart

Dedication

to customer satisfaction Zealous pursuit of low costs Frugal operating practices Strong work ethic Ritualistic Saturday morning meetings Executive commitment to Visit stores Listen to customers
Solicit

employees suggestions

Forces and Factors Causing Culture to Evolve

New

challenges in marketplace Revolutionary technologies Shifting internal conditions

Internal

crisis Turnover of top executives

Arrival

of a new CEO Diversification into new businesses Expansion into foreign countries Rapid growth involving adding new employees Merger with or acquisition of another company

Strategy Implementation

Four methods of managing different cultures:

1. 2. 3. 4.

Integration Assimilation Separation Deculturation

221

Merging Organizational Cultures

Assimilation
Acquired company embraces acquiring firms cultural values Acquiring firm imposes its culture on unwilling acquired firm

Deculturation

Integration

Cultures combined into a new composite culture Merging companies retain their separate cultures

Separation

Managing the Culture of an Acquired Firm

223

Merging Organizational Cultures

Four methods of managing different cultures:

1. 2. 3.

4.

Integration: Existing culture can be improve Assimilation: Acquired firm has a weak culture Separation: Firms operating different businesses required different cultures Deculturation: Necessary, only when acquired firms culture does not work, but employees dont realize it.

224

Strategy-Culture Compatibility
Consider
Is

the following:

the planned strategy compatible with the firms current culture? Can the culture be easily modified to make it more compatible with new strategy? Is management willing to make major organizational changes? Is management committed to implementing the strategy?

Implementing Strategy Through Organizational Structure, Control, and Culture

226

Evaluation and Control

The evaluation and control process ensures that a company is achieving what it set out to achieve or accomplished.

227

Evaluation and Control

228

Evaluation and Control

Types of Controls:

Behavior Controls (activities that generates performance)

Policies, rules, directives, operating procedures

Output Controls (actual performance, end results)

Objectives, targets, milestones Resources, knowledge, skills, values ;ISO 9000 (quality); 14000(environmental); 26000 (social accountability) standard series
229

Input Controls

Primary measures of performance (output control)

230

231

232

What is a Balanced Scorecard?

Balanced scorecards combine both qualitative and quantitative measures, acknowledge the expectations of different stakeholders and relate an assessment of performance to choice of strategy.

233

Evaluation and Control

Balanced Scorecard:

Financial

How do we appear to shareholders? How do customers view us? What must we excel at? Can we continue to improve and create value?

Customer

Internal Business Perspective

Innovation and Learning

234

An Example of the Balanced Scorecard

235

236

Evaluation and Control

Problems in Measuring Performance:

1. Short-term orientation 2. Goal displacement a. Behavior substitution (emphasis on wrong items or goals) (overbilled customers
for commission.

to

b. Sub-optimization (one unit detrimental others)

237