Basic Information of Mgt Strategy[1]

8/6/2019 Basic Information of Mgt Strategy[1]

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Strategic Management

ACHMAD SOBIRINACHMAD SOBIRIN

Fakultas Ekonomi-UIIFakultas Ekonomi-UII


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Military influences in strategy

Strategos referred to a general incommand of an army

The art of the general By 450 B.C. it came to mean managerial skill By 330 B.C. it referred to the skill of employing

forces to overcome positions to create a system ofglobal governance

Carl von Clausewitz tactics(involve)

the use of armed forces in theengagement, strategy (is) the use ofengagements for the object of war1838 On War


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Academic influences in strategy

HBS requires a class in Business Policy in 1912

Adam Smiths invisible hand (the market) givesway to Alfred Sloan (GM CEO from 1923-1946)

concept of the visible handmiddle managerChester Bernard influential book the executiveargues that managers should pay attention tostrategic factors

Ronald Coases 1937 article why firms exist (Nobel

Prize in economics) and Joseph Schumpters conceptof disruptive technologies written in 1942 bring inorganizational economics


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Recent influences in strategy

1960s (Strategy and structure;Corporate Strategy)

1963 Harvard business conference leads to SWOTanalysis

BCG founded in 1963 strategy boutique Created the portfolio analysis

Stars, dogs, cash cows, question marks

1980s (Porters 5 forces)

1990s (Resource Based view of the firm)


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Why is strategic management

important?

Gives everyone a role

Makes a difference in performancelevels

Provides systematic approach to

uncertaintiesCoordinates and focusesemployees


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Basics of Strategic Management

Four aspects that set strategicmanagement apart Interdisciplinary

Capstone of the Business degree

External focus

Competition Internal focus

Future direction


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Why do strategy?

Gain competitive advantageSets an organization apart

Having something other competitors don't

Doing something better than other organizations

Doing something that others can't

Necessary for long-term success and

survival


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Who does strategy?

The Role of the Board of Directors Elected representatives of the companys stockholders Legally obligated to represent and protect stockholders

The Role of Top Management Responsible for decisions and action of every employee Providing effective leadership

Other Organizational Employees Implement put the strategies into action and monitor

performance Evaluatedo the actual evaluations and take necessary

actions


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The Role of the Board of

Directors Approve an organizational philosophy Review and approve strategic goals and plans Review and approve organization's financial

standards and policies Monitor organizational performance and

regularly review performance results Select, evaluate, and compensate top-level

managers Develop management succession plans Monitor relations with shareholders and other

key stakeholders


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Who is on the board of

directors?Chairman of the board Chief Executive officer (CEO)

President Chief Operating officer (COO)

Other Cs Chief Financial officer

Chief information officerInside board members

Outside board members


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The Role of Top Management

EffectiveStrategic

Leadership

Exploiting andMaintaining

Core Competencies

DevelopingHuman Capital

Creating andSustaining Strong

Organizational Culture

EmphasizingEthical Decisions

and Practices

EstablishingAppropriately

Balanced Controls

DeterminingOrganizational

Purpose or Vision


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What is strategy?

Definitionproposed by

Definition of Strategy Key dimensionidentified in the

definition

Chandler

(1962)

Strategy is the determination of

the basic, long-term goals of anenterprise and the adoption courseof actions and the allocation ofresources necessary to carry outthe goals

Strategy is a means of

establishing theorganizational purpose (interm of its long-termobjectives, action programs,and resource allocationpriorities)

Schendel and

Hatten (1972)

Strategy is the basic goals and

objectives of the organization, themajor programs of action chosento reach these goals andobjectives, and the major patternof resource allocation used torelate the organization to itsenvironment


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What is strategy?Argyris (1985) Strategy formulation and implementation

include identifying opportunities and threats inthe organizations environment, evaluating thestrengths and weaknesses of the organization,designing structures, defining roles, hiringappropriate people, and developing appropriatereward to keep the people motivated and makecontribution

Strategy is a response(continuous andadaptive) to externalopportunities andthreats and internalstrengths andweaknesses that affectorganization

Mintzberg(1979)

Strategy is a mediating force between theorganization and its environment; there areconsistent pattern of streams of organizationaldecisions to deal with the environment

Steiner and

Miner (1977)

Strategy is forging of company missions, setting

objectives for the organization in light orexternal and internal force, formulating specificpolicies and strategies to achieve objectives,and ensuring their proper implementation sothat the basic purpose and objectives of theorganization will be achieved


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What is strategy?Andrews (1980) Corporate Strategy is the pattern of

decision in a company that determines

and reveals its objectives, purposes, orgoals, produces the principal policiesand plans for achieving those goals, anddefines the range of businesses thecompany is to pursue, the kind ofeconomic and human organization it isor intends to be, and the nature of the

economic and non-economiccontribution it intends to make to itsshareholders, employees, customersand communities

Strategy is motivating forcefor stakeholders who directly

or indirectly receive thebenefits or costs derivedfrom the action of the firm

Chaffee (1985) Strategy is defines as orientingmetaphor or frames of reference thatallow the organization and environmentto be understood by organizationalstakeholders. On this basis, stakeholdersare motivated to believe and to act inways that are expected to producefavorable result for the organization


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HANG ON, LADIES AND GENTLEMEN, YOU

HAVE YET TO MEET THE WHOLE BEAST

This is

This is an organizational chart that shows the

different parts of a cow, In a real cow, the parts

are not aware that theyre parts. They do not

have trouble sharing information: They smoothly

and naturally work together as one unit. As a

cow. And you have only one question to answer.

Do you want your company to work like a chart?

Or a cow?

Not a Cow


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Environment, Mission, Vision, and

StakeholdersOrganization Mission

Organization VisionBHAG

Organizational Stakeholders

Important Environmental drivers


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Strategic Management

Principle

Effective strategy-makingbegins with a vision of

where the organization

needs to head!


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Elements of a Strategic Vision

Use the mission statementas aas astarting pointstarting point

Develop a strategic visionthatspells out a course to pursue

CommunicateCommunicate the vision in a

clearclearandexcitingexcitingmanner


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Characteristics of a Mission

Statement

Defines currentbusinessactivities

Highlights boundaries of currentbusiness

Conveys Who we are, Whatwe do, and Where we are now


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Characteristics of a Mission

StatementCompany specific, notgeneric so as to give a

company its own identityA companys mission is notto make a profit !

The real mission is alwaysWhat will we do to makea profit?


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Characteristics of a Strategic

VisionCharts a companys futurestrategic course

Defines the business makeupfor 5 years (or more)

Specifies future technology-product-customer focus


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Communicating the Vision

An exciting, inspirational visionChallenges and motivates workforceArouses strong sense of organizational

purpose Induces employee buy-inGalvanizes people to live the business


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Value of a Well-ConceivedStrategic Vision and Mission

Crystallizes long-term direction

Reduces riskof rudderless

decision-makingConveysorganizationalpurpose and identity

Keeps direction-related actions of lower-

level managers on common pathHelps organization prepare for the future


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Concept of Strategic Intent

A company exhibits strategic

intentwhen it relentlessly

pursues an ambitious strategicobjective and concentrates its

competitive actions and energies

on achieving that objective!


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Lessons about change: Built to last

Tried to understand why superiorcompanies are better than peer

companies which are better thanmost companies$1 invested in stock market in 1926

yields$415 in all other companies$955 in peer companies$6356 in superior (visionary) companies


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Who are these companiesVisionary 3M Boeing GE IBM Motorola Nordstrom P&G Sony Wal-mart

Peer companies Norton McDonnell Douglass

Westinghouse Burroughs Zenith Melville

Colgate Kenwood Ames


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So what did they find?Great companies had BHAGBig Hairy Audacious Goals

What ever your values are stickwith it

Deal with the AND, not the OR

Seek Alignment (internally)


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Characteristics of Strategic

Intent

Indicates firms intent to stake out

a particular position over the long-term

Involves establishing a BHAG -

big, hairy, audacious goal

Signals relentless commitmenttowinning


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Example of BHAG

General ElectricAll businesses are held to a standard of

being #1 or #2 in their industries as wellas achieving good business results

John F. KennedyPut a man on the moon and return safely

by the end of the decade


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Crafting a Strategy

An organizations strategy dealswith How to make the strategic vision a

reality and achieve target objectives The game plan for

Pleasing customers

Conducting operations

Building a sustainable competitiveadvantage


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Organizational Stakeholders

Organization

Governments

Customers

Social ActionGroups

EmployeesCommunities

Suppliers

TradeAssociations

PoliticalAction Groups

Shareholders


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Ethics

Corporate Social Responsibility Decision makers have an obligation to

recognize the interrelatedness of businessand society


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External Analysis

Differentiate between externalenvironmental opportunities and threats

Understand the components of anorganizations general environment

Understand the forces in Porters fiveforces model


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SWOT Analysis

Organization

StrengthWeakness

Opportunity

Threat


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What is an external analysis?

External analysis builds upon the notionthat organizations are open systems. Often success is determined by the environment

around the organization and not the intelligenceinside the organization

Organizations need to pay attention toOpportunities and Threats

Opportunities arepositive external environmentaltrends that improve the organizations performance Threats arenegative external environmental trends

that hinder the organization's performance


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External Analysis

Organization

Specific EnvironmentIndustry-Competitors

Substitute

ProductsBargaini

ngPower ofSupplier

s

Bargaining

Power ofBuyers

Potenti

alEntrants

CurrentRivalry

GeneralEnvironment

Technologi

cal

Political-Legal

Sociocultural

Demographic

Economi

c


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Economic Environment

Interest rates

Monetary exchange rates

Inflation ratesGNP or GDP

Consumer income, spending, and debt

levelsUnemployment levels

Workforce productivity


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Demographic Environment

Gender

Age

Income levelsEthnic makeup

Education

Family compositionGeographic location

Birth rates


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Socio-Cultural Environment

Countrys culture

Social Values Traditions Values

Attitudes

Beliefs

Tastes Patterns of behavior


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Political Legal Environment

Federal, state, and local Laws

Regulations

Judicial decisions

Political forces

Examples of legal changes Occupational Safety and Health Act of 1970

Americans with Disabilities Act of 1990

Family and Medical Leave Act of 1993

North American Free Trade Agreement of 1993


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Technical Environment

Communications

Computing

TransportationRobotics

Biotechnology

Medicine and medicalTelecommunications

Consumer electronics


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Industrys environment

INDUSTRY

COMPETITORS

Rivalry Among

Existing Firms

SUPPLIERS

BargainingPower

of Suppliers

POTENTIAL ENTRANTS

Threat of New Entrants

BUYERS

BargainingPower

of Buyers

SUBSTITUTES

Threat of Substitute Products

or Services


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Industry Competitors

Opportunity Few competitors

Industry sales growing

Low fixed or inventorystorage costs

Significantdifferentiation

Minimal exit barriers

Threat Numerous

competitors

Industry salesslowing

High fixed orinventory storagecosts

No differentiation High exit barriers


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Potential Entrants

Opportunity Significant

economies of scale

Strong productdifferentiation

Significant switchingcosts

Controlled access todistribution channels

Threat No or low economies

of scale

Weak productdifferentiation

Minimal switchingcost

Open access todistribution channels


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Bargaining power of buyers

Opportunity Buyer purchases

small volumes

Purchases highlydifferentiated andunique

Buyers profits arestrong

Buyer cantmanufacture products

Buyers have limitedinformation

Threats Buyer purchases large

volumes

Purchases standard orundifferentiated

Buyers profits areweak

Buyer canmanufacture product

Buyer has fullinformation


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Bargaining Power of Supplier

Opportunity Supplying industry is

fragmented

Suppliers productshave substitutes

Suppliers productsarent differentiated

Minimal switching

costs in suppliersproducts

Threats Supplying industry

has a few companies

Supplier products donot have substitutes

Suppliers productsare differentiated

Significant switching

costs


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Substitute Products

OpportunitiesThere are no good

substitutes

ThreatThere are few

good substitutes

There are severalnot-so-goodsubstitutes


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Examples of substitutes

Eyeglasses vs. Contact Lenses

Sugar vs. Artificial Sweeteners

Newspapers vs. TV vs. InternetE-mail vs. Overnight Delivery


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How do you do an external

analysis?Find data Informal

Customer comments Reading trade journals and general news mediaTalking with suppliers' sales representatives

Formal External Information System (EIS)

Market and customer surveys

Evaluate whether data is good orbad


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Why do an external analysis?

Anticipate changes and plan accordingly

Provide information for Planning, Decisionmaking & Strategy formulation

Acquire and control needed resources

Make a difference with higher performance

Cautions Rapid environmental changes are difficult to keep up

with

Amount of time that analysis can consume

Forecasts and trend analyses are not actual fact


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Internal Analysis

Understand organizational strengths andweaknesses

Understand the relationship betweenorganizational resources, organizationalcapabilities, core competencies, anddistinctive organizational capabilities

Understand the Value Chain Outsourcing

Take Aways


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SWOT Analysis

Organization

StrengthWeakness

Opportunity

Threat


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What is an Internal Analysis

Identifies and evaluates resources,capabilities, and core competencies

As such organizations need tounderstand their Strengths are resources that an organization

possesses and capabilities that an organization hasdeveloped that can be exploited and developed intoa sustainable competitive advantage

Weaknesses are resources and capabilities that arelacking or deficient and prevents an organizationfrom developing a sustainable competitiveadvantage


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The road to Competitive Advantage

Organizational

Resources

Financial assetsPhysical assetsHuman resourcesIntangible assets

Structural-culturalassets

Organizational

Capabilities

Organizationalprocesses androutines

Accumulated

knowledge

Core

Competencies

DistinctiveOrganizationalCapabilities

Competitive Advantage

Performance Results


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The road to distinctive

organizational capabilities

OrganizationalCapabilities

Organizational Capabilities

Fundamental building block fordeveloping core competencies

Organizational processesand

routines to get the work done

CoreCompetencies

Distinctive OrganizationalCapabilities

ResourcesTangible

Intangible


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Organizational

Capabilities

Organizational CapabilitiesFundamental building block for

developing core competencies

Organizational processes androutines to get the work done

CoreCompetencies

Core CompetenciesFundamental skills and capabilities

Exploitable by organizationMajor value-creating capabilitiesNot a source of competitive advantage



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Types of Core Competencies

After-sale service capability

Skills in manufacturing a high

quality productSystem to fill customer ordersaccurately and swiftly

Expertise in integrating multipletechnologies to create families ofnew products


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CoreCompetencie

Core CompetenciesNot a source of competitive advantageFundamental skills and capabilitiesExploitable by organizationMajor value-creating capabilities


Distinctive Organizational

Capabilities

Special and unique capabilitiesDistinguish from competitorsSustainable competitiveadvantage

Outperform competition


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From Distinctive capabilities to

competitive advantage

Distinctive

Organizational

Capabilities

Contributes toSuperior Customer

Value

Can Be Usedin a Variety

of Ways

Is Difficult

for Competitorsto Imitate


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The road to Competitive Advantage

OrganizationalResources

Financial assetsPhysical assetsHuman resourcesIntangible assets

Structural-culturalassets


Organizationalprocesses androutines

Accumulated

knowledge

CoreCompetencies

DistinctiveOrganizationalCapabilities

Competitive Advantage

Performance Results


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Capabilities vs. Core Competenciesvs. Distinctive Capabilities

A company capabilityis the product oforganizational learning and experience andrepresents real proficiency in performing

an internal activityA core competence is a well-performedinternal activity that is central (notperipheral or incidental) to a companyscompetitiveness and profitability

A distinctive Capabilityis a competitivelyvaluable activity that a company performsbetter than its rivals


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Value Chain Analysis

MARGIN

MAR

GIN

Support

Activities{Procurement

Technological Development

Human Resource Management

Firm Infrastructure

Primary Activities{

Inbo

un

d

Logistics

Opera

tions

Outb

ound

Logistics

Mark

eting

and

Sa

les

Servic

e


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From Value Chain Analysisto Competitive Advantage

Sustainable competitive advantage

can be created by

1.Managing value chain activitiesbetter than rivals and/or

2.Developing distinctive value chain

capabilities to serve customers!


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Appeal of Outsourcing

Outsourcing non-critical activitiesallows a firm to concentrate its energiesand resources on those value-chainactivities where it Can create unique value

Can be best in the industry

Advantages to outsourcing Decrease internal bureaucracies

Flatten organization structure

Provide firm with heightened strategic focus


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Potential Advantages of OutsourcingNon-Critical Activities

Outsourcing makes strategic sensewhen outsiders can perform certain

activities at a lower cost and/or with

higher value-added.


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How do you do an internalanalysis?

Step 1

Step 2

Step 3

Step 4

Step 5

Prepare current product-market profile.

Identify sources of competitiveadvantage and disadvantage inthe main product-market segments.

Describe all the organizationalcapabilities and competencies.

Sort the core capabilities andcompetencies according tostrategic importance.

Identify and agree onthe key capabilitiesand competencies.


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Difficulty in developingcompetencies

Because these competencies are inpeopleHard to developHard to identifyHard to change / improveAlso hard to steal

Social ComplexityHistoricalCasually ambiguous


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Competitive Strategies

Competitive Strategy

Definitions of competitors

Competitive StrategiesMiles and Snow

Porter

First Mover strategies


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Strategy and CompetitiveAdvantage

Competitive advantageexists when afirms strategy gives it an edge in Defending against competitive forces and

Securing customers

Convince customers firms product / serviceoffers superior value Offer buyers a good product at a lower price Use differentiation to provide a better product

buyers think is worth a premium price

Key to Gaining a Competitive Advantage


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Competition

When organizations battle forsome desired object / outcome

Who are our competitors Industry perspective

Market perspective

Strategic group perspective


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Industry and Market approaches to

defining competitors

Industry

SameProduct-Service

Market

CustomerNeeds


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Strategic Group approach todefining competitors

Possible strategic dimensions foridentifying strategic groups

PriceQualityGeographic scopeProduct line breadth-depthR&D expendituresProduct characteristics


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Different types of competitivestrategies

Miles and Snow typologyProspector

Seeks innovationSurvey dynamic environment and

develops new products

Competitors are uncertain about

prospectors future decisions and actions


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Miles and Snow typology Defender

Searches for market stability Limited product line

Seeks to defend position

Prevents others from entering its turf

Can create and maintain niches


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Miles and Snow typologyAnalyzer

Strategy of analysis and imitationCopies promising new activities

ReactorLacks a strategic plan

Reacts to environmental changesMakes adjustments when forced toUnable to respond quickly to changes


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Porters generic strategies

Market ScopeBroad or Narrow

Competitive advantageLow cost or differentiated

Integrated differentiated / low cost


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Low-Cost Leadership

Make achievement oflow-cost relativeto rivals the theme of firms businessstrategy

Find ways to drive costs outofbusiness year-after-year

Low-cost leadership means lowOVERALL costs, not just low

manufacturing or production costs!

Low-cost leadership means lowoverallcosts, not just low

manufacturing or production costs!


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When Does it work?

It works when Price competition is vigorous Product is standardized Buyers incur low switching costs Industry newcomers use introductory low prices

to attract buyers and build customer base

Pitfalls with this strategyBeing overly aggressive in cutting price

Low cost methods are easily imitated byrivals

Differentiation matters


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Differentiation Strategies

Incorporate differentiating features thatcause buyers to prefer firms product orservice over brands of rivals

Keys to success Find ways to differentiate that create value

for buyers and that are not easilymatchedorcheaply copiedby rivals

Not spending more to achieve differentiationthan the price premium that can be charged


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Types of Differentiation

Unique taste -- Dr. PepperWide selection and one-stop shopping --Home Depot and Amazon.comSuperior service -- FedEx, Ritz-Carlton

Spare parts availability-- CaterpillarMore for your money-- McDonalds, Wal-MartPrestige -- Rolex

Quality manufacture -- Honda, ToyotaTop-of-the-line image -- Ralph Lauren,Chanel


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Signaling Value as Well asDelivering Value

Buyers seldom pay for value that isnot perceived

Signals of value may be asimportant as actual value whenNature of differentiation is hard to

quantifyBuyers are making first-time

purchasesRepurchase is infrequentBuyers are unsophisticated


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When does it work?

It works when There are many ways to differentiate a product that

have value and please customers Buyer needs and uses are diverse Technological change and product innovation are

fast-paced

Pitfalls Charging to high a price or over differentiating

Failing to signal value Not understanding what buyers want or prefer and

differentiating on the wrong things


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Competitive Strategy Principle

A low-costproducer strategy can defeat

a differentiation strategy when buyersare satisfied with a standard product

and do not see extra attributes as

worth paying additional money to

obtain!

A low-cost provider strategy can

defeata differentiation strategy

when buyers are satisfied with

a standard product and do not

see extra differentiating attributes

worth paying for!


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Integrated low-cost / differentiated

Combine a strategic emphasis on low-costwith a strategic emphasis on

differentiationMake an upscale product at a lower costGive customers more value for the moneyDeliver superior value by meeting or

exceedingbuyer expectations onproduct attributes and beating theirprice expectations


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Integrated Low Cost/Differentiation Strategy

DifferentiationLow Cost

Use a single aircraft model

(Boeing 737)

Use secondary airports

15 minute turnaround time

No meals

No reserved seats

Focus on customersatisfaction

High level of employee

dedication

Southwest Airlines


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Risk of an integrated ProviderStrategy

Risk An integratedprovidermay getsqueezedbetween strategies of firmsusing low-costand differentiation

strategies

Low-cost leaders may be able to siphoncustomers away with a lower price

High-end differentiators may be able tosteal customers away with better productattributes


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Focus/Niche Strategies

Involve concentratedattention on anarrow piece of the total market

Objective Serve niche buyers betterthan rivals

Keys to success Choose a market niche where buyers have

distinctive preferences, specialrequirements, or unique needs

Develop unique capabilities to serve needsof target buyer segment


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What Makes a NicheAttractive for Focusing?

Big enough to be profitable and offers goodgrowth potential

Not crucial to success of industry leaders

Costly or difficult for multi-segment competitorsto meet specialized needs of niche members

Focuser has resources and capabilities toeffectively serve an attractive niche

Few other rivals are specializing in same niche

Focuser can defend against challengers viasuperior ability to serve niche members


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Risks of a Focus Strategy

Competitors find effective ways to matcha focusers capabilities in serving niche

Niche buyers preferences shift towardsproduct attributes desired by majority ofbuyers - niche becomes part of overallmarket

Segment becomes so attractive itbecomes crowded with rivals, causingsegment profits to be splintered


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First-Mover Advantages

When to make a strategic move is oftenas crucial as whatmove to make

First-mover advantages arise when

Pioneering helps build firms image and reputation Early commitments to new technologies, new-style

components, and distribution channels can producecost advantage

Loyalty of first time buyers is high

Moving first can be a preemptive strike


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First-Mover Disadvantages

Moving earlycan be adisadvantage (or fail to producean advantage) when

Costs of pioneering are sizable andloyalty of first time buyers is weak

Innovators products are primitive, not

living up to buyer expectations Rapid technological change allows

followers to leapfrog pioneers

Timing and Competitive Advantage


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g p g

Being a first-mover holds potential for competitive advantage in some cases but not inothers

Principle 1

Being a fast follower can sometimes yield as good aresult as being a first mover

Principle 2

Being a late-mover may or may not be fatal -- it varieswith the situation

Principle 3


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Corporate (and international) Strategy

Three directions for corporatestrategyGrowth

M&A, JV/SA International

Stability

RenewalRetrenchmentTurnaround


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Brief Overview of Corporate Strategy

Those strategies concerned withthe broad and long-term questions

of what business(es) theorganization is in and what itwants to do with those businesses


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When to Diversify

Some companies do EXCELLENTLY andare not diversified McDonalds, SWA, Coca-Cola, Dominos

Pizza, Wal-Mart, FedEx, Timex, Gerber Why stay single business

Clear understanding of who we are / what we do No Dilution of managements attention

Risks of a single business strategy Putting all the eggs in one industry basket Unforeseen changes can undermine a single

business firms prospects


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Diversification and Corporate Strategy

A company is diversified when it is in twoor more lines of business

Strategy-making in a diversified companyis a bigger picture exercise than craftinga strategy for a single line-of-business

A diversified company needs a multi-industry, multi-business strategy

A strategic action plan must be developedfor several different businesses competingin diverse industry environments


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Organizational Growth

Growth StrategyOne that involves the attainment of

specific growth objectives byincreasing the level of anorganizations operations

Typical growth strategies include

Increases in sales revenuesProfitsOther performance measures


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Types of Growth Strategies

Organizational

Growth

Concentration

VerticalIntegration

Backward

Forward

HorizontalIntegration

DiversificationRelated

Unrelated

International


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Concentration

Organization concentrates on its primary line

of business and looks for ways to meet its

growth objectives through increasing its levelof operation in this primary business


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Concentration

Customers

Current

New

Current New

Product-MarketExploitation

ProductDevelopment

MarketDevelopment

Product/MarketDiversification

Product(s)


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Diversification

Related

Diversification

OperationalSkills-Capabilities

DistributionChannels

CustomerUse

SimilarTechnology

ProductSimilarities


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Diversification

LevelHorizontal

Anti-trust laws prohibit a lot of these GE & Honeywell

VerticalSuppliers buying buyers (or vice versa)

TypeRelatedUnrelated

Related Diversification


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Related Diversificationand Competitive Advantage

Competitive advantage can result fromrelated diversification if opportunities

exist to Transfer expertise/capabilities/technology

Combine related activities into a single operation andreduce costs

Leverage use of firms brand name reputation Conduct related value chain activities in a

collaborative fashion to create valuable competitivecapabilities


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Involves diversifying into businesses with

No strategic fit

No meaningful value chain relationships

No unifying strategic theme

Approach is to venture into any businessin which we think we can make a profit

Firms pursuing unrelated diversification areoften referred to as conglomerates

What is Unrelated Diversification?


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Attractive Acquisition Targets

Companies with undervalued assets

Capital gains may be realized

Companies in financial distress

May be purchased at bargain prices and turnedaround

Appeal of Unrelated Diversification Strategy

Business risk scattered over different industries

Financial resources can be directed to thoseindustries offering best profit prospects

If bargain-priced firms with big profit potential arebought, shareholder wealth can be enhanced

Drawbacks of Unrelated


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Drawbacks of UnrelatedDiversification

Difficulties of competently managing manydiverse businesses

Lack of strategic fits which can be leveraged

into competitive advantage Consolidated performance of unrelatedbusinesses tends to be no better than sum ofindividual businesses on their own (and it maybe worse) Likely effect is 1 + 1 = 1.5, not 1 + 1 =3

Promise of greater sales-profit stability overbusiness cycles seldom realized

Combination Related Unrelated


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Combination Related-UnrelatedDiversification Strategies

Dominant-business firms One major core business accounting for 50 - 80

percent of revenues, with several small related orunrelated businesses accounting for remainder

Narrowly diversified firms Diversification includes a few (2 - 5) related or

unrelated businesses

Broadly diversified firms Diversification includes a wide ranging collection of

either related or unrelated businesses or a mixtureMulti-business firms Diversification portfolio includes several unrelated

groups ofrelated businesses


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Merger and Acquisition

Most popular approach todiversification

Advantages Quicker entry into target market

Easier to hurdle certain entry barriers Technological inexperience

Gaining access to reliable suppliers Being of a size to match rivals in terms of

efficiency and costs

Getting adequate distribution access

Joint Ventures and Strategic


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Joint Ventures and StrategicAlliances

Good way to diversify when

Uneconomical or risky to go it alone

Pooling competencies of two partnersprovides more competitive strength

Foreign partners are needed to surmount Import quotas and Tariffs

Nationalistic political interests

Cultural roadblocks

Lack of knowledge about markets ofparticular countries


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Drawbacks of JV & SA

Raises questions Which partner will do what

Who has effective control

Potential conflicts Control over strategy and long-term direction

How operations will be conducted

Control over cash flows and profits

Personalities and cultures of partners


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Benefits of SA & JV

Gain scale economies in production and/ormarketing

Fill gaps in technical expertise or knowledge

of local marketsShare distribution facilities and dealernetworks

Direct combined competitive energies

toward defeating mutual rivalsUseful way to gain agreement on importanttechnical standards

Why is the World Economy


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Why is the World EconomyGlobalizing?

Previously closed national economiesare opening up their markets toforeign companies

Importance of geographic distance isshrinking due to the Internet

Growth-minded companies are racing

to stake out positions in the marketsof more and more countries

How Markets Differ from


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How Markets Differ fromCountry to Country

Consumer tastes and preferences

Consumer buying habits

Market size and growth potentialDistribution channels

Driving forces

Competitive pressures

International


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International

Global Integrationof Operations

High

Low

Local MarketResponsiveness

LowHigh

MultidomesticApproach

GlobalApproach

TransnationalApproach

Characteristics of Multi Domestic and


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Multi-Domestic Each country marketis self-contained Competition in one country market is independentof

competition in other country markets No international market, just a collection of

country markets

Global Market Many of same rivals compete in many of the same

country markets

A firms competitive position in one country isaffectedby its position in other countries Competitive advantage (or disadvantage) is based

on a firms world-wide operations and overall globalstanding

Characteristics of Multi-Domestic andGlobal Competition

M lti D ti St t


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Multi-Domestic Strategy

Strategy is matched to local market needsUse Different country strategies when Significant country-to-country differences in

customers needs exist Buyers in one country want a product different

from buyers in another country Host government regulations preclude

uniform global approach

Two drawbacks Poses problems of transferring competencies

across borders Works against building a unified competitive

advantage

Global Strategy


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Global Strategy

Strategyfor competing is similarinall country marketsInvolves Coordinating strategic moves globally Selling in many, if not all, nations

where a significant market exists

Works best when products and buyerrequirements are similar fromcountry to country

St t O ti f I t ti l


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Strategy Options for InternationalMarkets

Exporting

Licensing

Franchising strategy

Diversification

Characteristics of Export


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Characteristics of ExportStrategies

Involves using domestic plants as aproduction base for exporting to foreignmarkets

Excellent initial strategy to pursueinternational salesAdvantages Minimizes both risk and capital requirements Conservative way to test international waters

Minimizes direct investments in foreign countriesAn export strategy is vulnerable when Manufacturing costs in home country are higher than in

foreign countries where rivals have plants High shipping costs are involved

Characteristics of Licensing


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Advantages Has valuable technical know-how or a patented

product but does not have international capabilities orresources to enter foreign markets

Desires to avoid risks of committing resources tomarkets which Are unfamiliar, Present economic uncertainty or Are politically volatile

Disadvantage Risk of providing valuable technical know-how to

foreign firms and losing some control over its use

Characteristics of LicensingStrategies

Characteristics of Franchising


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Often is better suited to globalexpansion efforts of service andretailing enterprises

Advantages Franchisee bears most of costs and risks of

establishing foreign locations

Franchiser has to expend only the resources to

recruit, train, and support franchisees

Disadvantage Maintaining cross-country quality control

Characteristics of FranchisingStrategies

O i ti l R l


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Organizational Renewal

Poor

Management

UncontrollableCosts or Too

High Costs

New

Competitors

UnpredictedShifts in Consumer

Demand

Slow or No Responseto Significant External

or Internal Changes

Overexpansionor Too Rapid

Growth

InadequateFinancialControls

R h


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Retrenchment

Diversification efforts have become too broadLack of resources or skill to support operatingand investment needs of all businesses

Misfits (or poorly performing businesses) cannot

be completely avoidedUnfavorable changes in industry attractiveness

Diversification may lack compatibility of valuesessential to cultural fit

Options for Accomplishing


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Options for AccomplishingRetrenchment

Spin it off as independent company Involves deciding whether to retain partial

ownership or forego any ownership interest

Sell it Involves finding a company which views the

business as a good deal and good fit

Leveraged buy out

Involves selling business to the managers whohave been running it for a minimal equitydown payment and loaning balance ofpurchase price to new owners

Corporate Turnaround


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Corporate TurnaroundStrategies (downsizing)

Objectives Restore money-losing businesses to profitability

rather than divest them

Get whole firm back in the back by curingproblems of ailing businesses in portfolio

Most appropriate where Reasons for poor performance are short-term

Ailing businesses are in attractive industries Divesting money-losers doesnt make long-term

strategic sense

Portfolio Analysis


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y

Industry Growth Rate(in constant sales dollars)

High(faster thanthe economy

as a whole)

Low(slower thanthe economyas a whole)

Relative MarketShare Position

High (above 1.0) Low (below 1.0)1.0

Stars Question Marks

Cash Cows Dogs

Ch t i ti f C h H


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Characteristics of Cash Hogs

Internal cash flows are inadequate tofully fund needs for working capital andnew capital investment

Parent company has to continually pump incapital to feed the hog

Strategic options Aggressively investin

attractive cash hogs Divestcash hogs lacking

long-term potential

Characteristics of Cash Cows


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Characteristics of Cash Cows

Generate cash surpluses over and abovewhat is needed to sustain present marketposition

Such businesses are valuable because

surplus cash can be used to Pay corporate dividends Finance new acquisitions Invest in promising cash hogs

Strategic objectives Fortify and defend present market position Keep the business healthy

Notes of Caution: WhyDiversification Efforts Can Fail


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Diversification Efforts Can Fail

Transferring resource capabilities tonew businesses can be far more arduousand expensive than expected

Trying to replicate a firms success inone business and hitting a second homerun in a new business is easier said thandone

Management can misjudgedifficultyofovercoming resource strengths ofrivals it will face in a new business

What Makes Up a Companys


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p p yCulture?

Values and principles of management

Work climate and atmosphere

Patterns of how we do things around here

Oft-told stories illustrating companys valuesTaboos and political donts

Traditions

Ethical standards

Culture and Strategy Execution:


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Cu u e a d S a egy ecu oAlly or Obstacle?

Culture can contribute to,or hinder,successful strategy execution

Requirements for successful strategyexecution may, or may not, becompatible with culture

Aclose match between culture and

strategy promotes effective strategyexecution

Benefits of a Good Culture-Strategy Fit


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Benefits of a Good Culture Strategy Fit

Strategy-supportive cultures

Shape mood and temperament of the work force,positively affecting organizational energy,

work habits, and operating practices Provide standards, values, informal rules and

peer pressures that nurture and motivatepeople to do their jobs in ways that promotegood strategy execution

Strengthen employeeidentification with thecompany, its performance targets, and strategy

Strategic Management Principle


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Strategic Management Principle

Strong cultures promote good

strategy execution where

theres strategy-culture fit

and hurt execution where

h li l fi !

Documents

Basic Information of Mgt Strategy[1]