STRATEGIC MANAGEMENT Screen graphics created by: AP Mazarura

• “Without a strategy the organization is like a ship without a rudder, going around in circles.” • Joel Ross and Michael Kami

Thinking Strategically: The Three Big Strategic Questions • Where are we now … what is our situation?

• Where do we want to go?

 Business (es) we want to be in and market positions we want to stake out  Buyer needs and groups we want to serve  Outcomes we want to achieve How will we get there?

CHAPTER 1

THE STRATEGIC MANAGEMENT PROCESS Screen graphics created by: A P Mazarura, Midlands State University, Gweru, Zimbabwe

Chapter Outline

• Five tasks of strategic management  Developing a strategic vision and mission  Setting objectives  Crafting performance and initiating corrective adjustments • Why strategic management is a process • Who performs the task of strategy?

• Benefits of “Managing Strategically” • Terms to remember

What is strategy?

Concept • Competitive moves and business approaches management employs in running a company • Management’s “game plan” to  Please customers  Position a company in its chosen market  Compete successfully  Achieve good business performance

Why are strategies needed?

• To proactively shape how a company’s business will be conducted • To mold the independent actions and decisions of managers and employees into a coordinated, companywide game plan

Task 1

The Five Tasks of Strategic Management

Task 2 Task 3 Task 4 Task 5

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Develop a strategic vision and mission Revise as needed

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Set objectives

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Craft & strategy to achieves objectives Revise as needed Improve and change Implement & execute strategy

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Improve and change

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Evaluate & make corrections Recycle as needed

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Missions vs. Strategic Visions

• A mission statement focuses on current business activities  Business(es) company is in now  Customer needs currently being served • A strategic vision concerns a firm’s future business path  The kind of company it is trying to become  Customer needs to be satisfied in the future

Strategic Management Concept

• N/L

Developing a Vision and Mission • The first task of Strategic Management • Begins with thinking strategically about  The firm’s future business makeup  Where to take the firm • The task is to  Create a roadmap of a company’s future  Decide what future business position to stake out  Provide long-term direction  Give the firm a strong identity

Developing a Strategic Vision

• A strategic vision is a roadmap of a company’s future –  Direction it is headed  Business position it intends to stake out  Capabilities it plans to develop  Customer needs it intends to serve

Examples: Mission and Vision Statements • McDonald’s Corporation • McDonald’s vision is to dominate the global foodservice industry. Global dominance means setting the performance standard for customer satisfaction while increasing market share and profitability through our Convenience, Value and Execution Strategies.

Example: Mission and Vision Statements Avis Rent –a-Car • Our business is renting cars. Our mission is total customer satisfaction. American Red Cross • The mission of the American Red Cross is to improve the quality of human life; to enhance self-reliance and concern for others and to help people avoid, prepare for and cope with emergencies.

Examples: Mission and Vision Statements • Ritz-Carlton Hotels • The Ritz-Calton Hotel is a place where the genuine care and comfort of our guests is our highest mission • We pledge to provide the finest personal service and facilities for our guests who always enjoy a warm, relaxed yet refined ambiance.

• The Ritz-Carlton experience enlivens the senses, instils well-being, and fulfils even the unexpressed wishes and needs of our guests.

Examples: Mission and Vision Statements • Otis Elevator • Our mission is to provide any customer a means of moving people and things up, down, and sideways over short distances with higher reliability than any similar enterprise in the world.

• Microsoft Corporation • One vision drives everything we do: A computer on every desk and in every home using great software as an empowering tool.

Examples: Mission and Vision Statements • The Body Shop • We aim to achieve commercial success by meeting our customers’ needs through the provision of high quality, good value products with exceptional service and relevant information which enables customers to make informed and responsible choices.

• Eastman Kodak • We are in the picture business

Examples : Mission and Vision Statements • Intel • Intel supplies the computing industry with chips, boards, systems, and software. Intel’s products are used as “building blocks” to create advanced computing systems for PC users. Intel’s mission is to be the preeminent building block supplier to the new computing industry worldwide • Compaq Computer To be the leading supplier of PCs and PC servers in all customer segments.

Examples :Mission and Vision Statements • Long John Silver’s • To be America’s best quick service restaurant chain. We will provide each guest great tasting, healthful, reasonably priced fish, seafood, and chicken in a fast, friendly manner on every visit.

• Bristol-Myers Squibb • The mission is to extend and enhance human life by providing the highest quality health and personal care products. We intended to be the preeminent global diversified health and personal care company.

Types of Objectives Required

• Financial Objectives • Outcomes focused on improving a firm’s financial performance • Strategic Objectives • Outcomes focused on improving a firm’s competitiveness and its long term business position

Examples : Strategic Objectives • Increase firm’s market share • Overtake key rivals on quality or customer service or product performance.

• Attain lower overall costs than rivals • Boost firm’s reputation with customers • Attain stronger foothold in international markets • Achieve technological superiority • Become leader in new product introductions • Capture attractive growth opportunities

Setting Objectives

• The Second Task of strategic Management • Establishing Objectives  Converts vision into specific performance targets.

 Create yardsticks to track performance  Pushes firm to be inventive and focused  Helps prevent coasting and complacency if targets require stretch

Examples : Financial Objectives

• Grow earnings per share 15% annually • Boost annual return on investment (or EVA) from 15% to 20% • Increase annual dividends per share to stockholders by 5% each year.

• Strive for stock price appreciation equal to or above the S & P 500 average • Maintain a positive cash flow • Achieve and maintain a AA bond rating

Example : Corporate Objectives

• Protect and improve Nike's position as the number one athletic brand in America.

• Build a strong momentum in growing fitness market.

• Intensify the company’s effort to develop products that are women need and want • Explore the market for products specifically designed for the requirements of maturing Americans.

• Direct and manage the company’s international business as it continues to develop.

• Continue the drive for increased margins through proper inventory management and fewer, better products.

Example: McCormick’s Corporate Objectives • Dispose of those parts of our business which cannot generate adequate returns or do not fit with our business strategy • Achieve a 20% return on equity • Achieve net sales growth rate of 10% per year • Maintain an average earning per share growth rate of 15% per year • Maintain a total debt to total capital at 40% or less • Pay out 25% to 35% of net income in dividends

Example: Strategic and Financial Objectives Ford Motor Company • To satisfy our customers by providing  Quality cars and trucks.

 Developing new products  Reducing the time it takes to bring new vehicles to market  Improving the efficiency of all our plants & processes, and  Building on our teamwork with employees unions, dealers, and suppliers.

Example : Strategic and Financial Objectives General Electric • To become the most competitive enterprise in the world by being number one or number two in market share in every business the company is in. To achieve an average of 10 inventory turns and a corporate operating profit margin of 16% by 1998.

Examples: Strategic and Financial Objectives Banc One Corporation • To be one of the top three banking companies in terms of market share in all significant markets we serve.

Domino’s Pizza • To safely deliver a hot, quality pizza in 30 minutes or less at a fair price and a reasonable profit.

Examples: Strategic and Financial Objectives Exxon • To provide shareholders a secure investment with a superior return. Alcan Aluminum • To be the lowest-cost producer of aluminum and to outperform the average return on equity of the Standard and Poor’s industrial stock index.

Examples: Strategic and Financial Objectives • Bristol-Myers Squibb • To focus globally on those businesses in health and personal care where we can be number one or number two through delivering superior value to the customer. Atlas Corporation • To become a low-cost , medium-size gold producer, producing in excess of 125000 ounces of gold a year and building gold reserves of 1 500 000 ounces.

Example : Strategic Financial Objectives • 3M Corp  Annual growth in earnings per share of 10% or better on average  A return on stockholders’ equity of 20 – 25%  A return on capital employer of 27% or better  Have at least 30% of sales come from products introduced in the past four years.

Crafting a strategy

• Involves deciding how to  Respond to changing buyer preferences  Outcome rivals  Respond to new market conditions  Grow the business over the long term  Achieve perfomance targets

The Hows That Define a Firm’s Strategy • How to grow the business • How to please customer • How to out complete rivals • How to respond to changing market conditions • How to manage each functional piece of the business and develop needed organisational capabilities • How to achieve strategic and financial objectives

Crafting a Strategy

• The Third Task of Strategic Management • Strategy involves determining whether to  Concentrate on a single business or several business (diversification)  Cater to a broad range of customers or focus on a particular niche     Develop a wide or narrow product line Pursue a competitive advantage based on Low cost or Product superiority or  Unique organisational capabilities

Strategy Example: McDonald’s • Strategic Priorities  Continued growth  Providing  Remaining an efficient and quality producer  Offering high value and good tasting products.

 Effectively marketing McDonald’s brand on a global scale

Crafting strategy is an Exercise in Entrepreneurship • Strategy – making is a market- driven and customer – driven activity that involves  Risk – taking and venturesomeness  Innovation and business creativity  Keen eye for spotting market opportunities  Keen observation of customer needs  Choosing among alternatives

Why Do Strategies Evolve?

• There is always an ongoing need to react to  Shifting market conditions  Fresh moves of competitions  New technologies  Evolving customer preferences  Political and regulatory changes  New windows of opportunity  Then crisis of the moment

Core Elements of Mc Donald’s Strategy • Add 2500 restaurants annually • Promote frequent customer visits via attractive menu items, low-price specials and extra value meals • Be highly selective in granting franchises • Locate on sites offering convince to customers and profitable growth potential • Focus on limited menu and consistent quality • Careful attention to store efficiency • Extensive advertising and use of Mc prefix • Hire courteous personnel, pay an equitable wage • Provide good training

Characteristics of Entrepreneurial Managers • Boldly pursue new strategic opportunities • Emphasize out-innovating the competition • Lead the way to improve firm performance • Willing to be first-mover and take risks • Respond quickly and opportunistically to new developments • Devise trail blazing strategies

What is a Strategic Plan?

• Where firm is headed • Strategic vision and business mission • Short and long term performance • Strategic and financial objectives • Action approaches to achieve targeted results • A comprehensive strategy

Implementing Strategy

• The fourth task of Strategic Management • Creating fits between way things are done and what it takes for effective strategy execution • Getting the organisation to execute strategy proficiency and efficiently • Producing excellent results in a timely manner

What does strategy implementation include?

• Building a capable organisation • Allocating resources to strategy-critical activities • Establishing strategy-supportive policies • Motivating people to pursue objectives • Tying rewards to achievement of results • Creating a strategy-supportive corporative culture • Installing needed information, communication, and operating systems • Instituting best practices for continuous improvement • Exerting strategic leadership

Evaluating Performance

• Corrective adjustments  Alter long-term direction  Redefine the business  Raise or lower performance objectives  Modify the strategy  Improve strategy execution

Strategy Implementation

• Strategy implementation is an internal, operation-driven activity involving organizing, budgeting, motivating, culture building, supervising and leading to “make the strategy work” as intended!

Evaluating Performance

The Fifth Task of Strategic Management • The tasks of strategy are not a one-time only exercise  Times and conditions change  Events unfold  Better ways to do things emerge  New managers with different ideas take over

Characteristics of the strategic Management Process • Need to perform tasks never goes away • Boundaries among tasks are blurry • Strategizing is not isolated from other managerial activities • Time required comes in lumps and spurts • • The big challenge is to get the best strategy supportive performance from employees, perfect current strategy and improve strategy execution

Who Performs the Five Strategic Management Tasks?

• Senior corporate level executives • Subsidiary unit managers • Functional area managers • Operating managers

Role of Strategic Planners

• Gather necessary information • Provide support in revising strategic plans • Coordinate review and approval process • Crystallize strategic issues to be addressed • Conduct studies of industry and competitive conditions • Establish an annual review cycle • Develop strategy performance assessments

Strategic Management Principle

• Strategy-making is a job for line managers, not a staff of planners – doers should be the strategy-makers!

Strategizing: an Individual or Group Responsibility?

• Teams are increasingly used because  Strategic issues cut across departmental lines  Ideas of people with different backgrounds can be tapped into  More people will have an ownership stake in the strategy

Why Planers should not be strategy makers • Managers may toss tough decisions to planners • Planers know less about company’s situation • Difficult to fix accountability for poor results • Managers have no “buy in” to strategy • Strategic planning may be viewed as an unproductive “bureaucratic” activity

Strategic Role of a Board of Directors • Continuously audit validity of a company’s long-term direction ad strategy • Evaluate strategic leadership skills of the CEO and candidates to succeed the CEO

Strategic Management Principle

• A board of director’s role in the strategic management process is to critically appraise and ultimately approve strategic action plans, but rarely, if ever, to develop the details!

Recap of Important Terms

Strategic Vision • A view of an organisation’s future direction and business course; a guiding concept for what the organisation is trying to do and to become Organisation Mission • Represents management’s customized answer to the question “what is our business and what will it be.” A mission statement broadly outlines the organisation’s future direction ad serves as a guiding concept for what the organisation is to do and to become.

Recap of Important Terms

Long-Range Objectives • Achievement levels to be reached within the next three to five years. • Short-Range Objectives • Near-term performance target: they establish the pace for achieving the long range objectives.

Benefits of Strategic Approach to Managing • Guides entire firm regarding “what is we are trying to do and to achieve” • Lowers management’s threshold to change • Provides basis for evaluating competing budget requests • Unifies numerous strategy-related decisions • Creates a proactive atmosphere • Enhances long range performance

Recap of Important Terms

Performance Objectives

• Organisation’s targets for achievement: both short and long range objectives are needed •

Financial Objectives

• Financial performance targets a company wants to achieve •

Strategic Objectives

• Targets relating to strengthening a company’s overall market position and competitive viability

Recap of Important Terms

Strategy

• Managerial action plan for achieving organizational objectives; strategy is mirrored in the pattern of moves and approaches devised by management to produce the desired performance. Strategy is the how of pursuing an organisation’s mission and reaching target objectives. Strategic Plan • Statement outlining an organisation’s mission and future direction, near-term and long term performance targets and strategy, in light of organisation’s external and internal situations.

Recap of Important Terms

• Strategy Implementation • Includes the full range of managerial activities associated with putting the chosen strategy into place, supervision its pursuit and achieving the targeted results.

CHAPTER 2 • THE THREE STRATEGY – MAKING TASKS

Screen graphics created by: Jana F. Kuzmicki, Indiana University Southeast

Chapter Outline

• Developing a strategic vision/mission • Establishing financial and strategic objectives • Crafting a strategy • Factors shaping a company’s strategy • Linking strategy with ethics • Approaches to performing the strategy making task

Why have a Mission or Strategic Vision?

• Power of a well-conceived strategic vision  Guides managerial decision making  Arouses employee buy-in and commitment  Prepares a company for the future

• “Management’s job is not to see the company as it is … but as it can become.” John W. Teets • “A strategy is a commitment to undertake one set of actions rather than another.” Sharon M. Oster

Developing a Vision or Mission

First direction-setting task • Indicates the long-term course management has charted for the organisation  Business activities to be pursued  Future market position  Future customer focus  Kind of company to become

Characteristics of a Strategic Vision • Charts a company’s future strategic course  Defines the business makeup in 5 to 10 years • Company specific, not genetic  Provides a company with its own special identity and path to follow • The vision is not to make a profit  The real mission/vision is “

what will we do to make a profit?

” • Requires the exercise of management foresight

Elements of a Strategic Vision

• Defines present and future Business make up of company • Charts a long-term path to follow

Example: Strategic Vision

• DELTA AIRLINES

WORLDWIDE

, because we are and intend to remain an innovative, aggressive, ethical and successful competitor that offers access to the world at the highest standards of customer service. We will continue to look for opportunities to extend our reach through new routes and creative global alliances.

Example: Strategic Vision

• DELTA AIRLINES

OF CHOICE

, because we have value the loyalty of our customers, employees and investors. For passengers and shippers, we will continue to provide the best service and value. For our personnel, we will continue to offer an evermore challenging, rewarding and result-oriented workplace that recognizes and appreciates their contributions. For our shareholders, we will earn a consistent, superior financial return.

Example: Strategic Vision DELTA AIRLINES … we want Delta to be the WORLD WIDE AIRLINE OF CHOICE

Example: Strategic Vision

• DELTA AIRLINES

AIRLINE

, because we intend to stay in the business we know best – air transport and related services. We won’t stray from our roots. We believe in the long-term prospects for profitable growth in the airline industry and we will continue for focus time, attention and investment on enhancing our place in that business environment

Defining a Company’s Business

• A good business definition incorporates three factors: • Customer needs –

WHAT

satisfied is being • Customer groups – WHO is being satisfied • Technologies used and functions performed –

HOW

customer needs are satisfied

Business Mission: Russell Corp.

• Russell Corporation is a vertically integrated international designer, manufacturer and mark of athletic uniforms, … and a comprehensive of lightweight, yarn-dyed woven fabrics • The company’s manufacturing operations include the entire process of converting raw fibers into finished apparel and fabrics • Products are marketed to sporting goods dealers, department and specially stores, mass merchandisers and other apparel manufacturers

Broad – Narrow Mission Statements?

• Narrow enough to specify real arena of interest • Serve as  Boundary for what to do and not do  Beacon of where top management intends to take firm • Diversified companies employ broader business definitions

Mission Statement of a Diversified Firm TIMES MIRROR CORPORATION • Times mirror is a media and information company principally engaged in newspaper publishing, book, magazine and other publishing and cable and broadcast television

Business Mission: McDonalds

• Serving a limited menu of hot, tasty food quickly in a clean, friendly restaurant for a good value to a broad base of fast-food customers worldwide • McDonald’s serves approximately 30 million customers daily at 20.000-plus restaurants in over 90 countries

Definitions: Broad – Narrow Scope Broad Definition  Beverages  Children’s products  Furniture  Global mail delivery  Travel & Tourism Narrow Definition  Soft drinks  Toys  Wrought iron lawn furniture  Overnight package delivery  Ship cruises in the Caribbean

Mission Statements for Functional Departments • Spotlights Department’s  Contribution to firm’s mission/vision/objectives  Role and scope of activities  Direction which department needs to pursue

Mission Statements of Functional Departments Human Resources • To contribute to organizational success by developing effective leaders, creating high performance teams and maximizing the potential of individuals Corporate Security • To provide service for the protection of corporate personnel and assets through preventive measures and investigations

Intel’s “Strategic Inflection Points” • Pre-mid 1980s  Business focus was memory chips • Post-mid 1980s  Abandon memory chip business  Adopt new strategic vision  Become preeminent supplier of microprocessors to PC industry  Make PC central appliance in workplace and home  Be undisputed leader in driving PC technology forward

Managerial Value: Strategic Vision and Mission • Crystallizes long-term direction • Reduces risk or rudderless decision making • Conveys organizational purpose and identity • Keeps direction-related actions of lower level managers on common path • Helps organisation prepare for the future

Decision Time: What will the Vision Be?

• Entrepreneurial challenge –  Creatively preparing a company for the future • Astute strategists focus on  Shifting customer needs  New technologies  Attractive foreign markets  Growing or shrinking opportunities

Communicating the Vision

• An exciting, inspirational vision  Inspires, challenges and motivates workforce  Arouses strong sense of organizational purpose and induces employee buy-in  Brings workforce together and galvanizes people to live the business

Establishing Objectives

Second Direction-Setting Task • Represent commitment to achieve specific performance targets by a certain time • Must be stated in quantifiable terms and contain a deadline for achievement • Spell-out how much of what kind of performance by when

Purpose of Objectives

• Substitutes results-oriented decision making for aimlessness over what to accomplish • Provides benchmarks for judging organizational performance

Types of Objectives Required

• Financial Objectives • Outcomes that improve a firm’s financial performance • Strategic Objectives • Outcomes that strengthen a firm’s competitiveness and long-term market position

Examples: Financial Objectives

• Achieve revenue growth of 10% per year • Increase earnings by 15% annually • Increase dividends per share by 5% per year • Increase net profit margins from 2% to 4% • Attractive EVA performance • Stronger bond and credit ratings • A rising stock price (outperform the S&P 500) • Attractive increases in MVA • • Recognition as a “blue chip” company • A more diversified revenue base

Strategic Management Principle

• Companies whose managers set objectives for each key result area and then press forward with actions aimed directly at achieving these performance outcomes typically outperform companies while managers exhibit good intentions, try hard and hope for the best!

Strategic Management Principle • Every company needs both strategic and financial objectives!

Examples: Strategic Objectives

• A bigger market share • Quicker design-to-market times than rivals • Higher product quality than rivals • Lower costs relative to key competitors • Broader product line than rivals • A stronger reputation with customers than rivals • Better customer service than rivals • Recognition as a leader in technology • Wider geographic coverage than rivals • More innovative products than rivals

Corporate Objectives: McDonalds • To achieve 100 percent total customer satisfaction … everyday … in every restaurant … for every customer

Corporate Objectives: Anheuser Busch • To make all our companies leaders in their industries in quality while exceeding customer expectations • To achieve a 50% share of the U.S beer market • To establish and maintain a dominant leadership position in the international beer market • To provide all our employees with challenging and rewarding work,… and opportunities for personal development, advancement and competitive compensation • To provide our shareholders with superior returns by achieving double-digit annual earnings per share growth

Strategic of Financial Objectives – Which Take Precedence?

• Pressure for better short-term financial performance become pronounced when  Firm is struggling financially  Resource commitments for new strategic initiatives may hurt bottom-line for several years  Proposed strategic moves are risky • A firm that consistently passes up opportunities to strengthen its long-term competitive position  Risks diluting its competitiveness  Risks losing momentum in its markets  Can hurt its ability to fend off rivals’ challenges

Corporative Objectives: 3M Corporation • 30 percent of the company’s annual sales must come from products fewer than four years old

Corporate Objectives: McCormick & Co.

• To achieve a 20 percent return on equity • To achieve a net sales growth rate of 10 percent per year • To maintain an average earnings per share growth rate of 15 percent per year • To maintain total debt-to-total capital at 40 percent or less • To pay out 25% to 35% of the net income in dividends

Strategic Management Principle

• Building a stronger long-term competitive position benefits shareholders more lastingly than improving short-term profitability!

The Concept of Strategic Intent

• A company exhibits Strategic Intent when it relentlessly pursues an ambitious strategic objective and concentrates its competitive actions and energies on achieving that objective!

Short-Ranger and Long-Ranger Objectives • Short-Range Objectives  Targets to be achieved soon  Serve as star steps for reaching long-range performance • Long Range Objectives  Targets to be achieved within 3 to 5 years  Prompt actions now that will permit reaching targeted long-range performance later

Strategic Management Principle

• Objectives-setting needs to be more of a top-down than a bottom-up process in order to guide lower-level managers and organizational units toward outcomes that support the achievement of overall business and company objectives.

The Concept of Strategic Intent

• Indicates firm’s intent to stake out a particular position over the long-term • Serves as a rallying cry for employees to do their very best • Signals deep-seated commitment to winning

Objectives are Needed at all Levels • Process is top-down, not bottom-up 1. First, establish organisation-wide objectives 2. Next, set business and product line objectives 3. Then, establish functional and departmental objectives 4. Individual objectives come last

Crafting a Strategy

• Third Direction –Setting Task • An organization's strategy deals with  How to make management's strategic vision a reality  The game plan for  Moving the company into an attractive business position  Building A sustainable competitive advantage

Strategizing is How to…

• Achieve performance targets • Out-compete rivals • Achieve sustainable competitive advantage • Strengthen firm’s long-term competitive position • Make the strategic vision a reality

Fig. 2-1(a): Level of Strategy Making A Diversified Company

• Corporate-Level Managers Business level Managers Functional Managers Operating Managers Corporate Strategy Business Strategy Functional Strategies Operating Strategies KEY Two way influence

Corporate Strategy for a Diversified Company Kind of Diversification Response to changing conditions How much diversification Approach to capital allocation Corporate Strategy Efforts to build competitive advantage via diversification Moves to diverse weak units Moves to Add New Businesses Moves to strengthen positions and profits in present businesses

Characteristics of strategy- Making • Action – oriented • • Evolves over time • A never-ending, ongoing task

• e Level of Strategy-Making A Single-Business Company Executive-level Managers Business Strategy KEY Two-way influence Functional Managers Operating Managers Functional Strategies Operating Strategies

Tasks of Corporate Strategy

• Moves to achieve diversification • Actions to boost of individual businesses • Capturing synergy among business units 2+2=5 effects!

• Establishing investment priorities and steering corporate resources into the most attractive business units

Strategy Components of a Single Business Company Response to changing conditions and collaborative partnerships Basic competitive Approach Manufacturing Strategy Marketing Strategy R & O Strategy Business Strategy Moves to secure competitive advantage Geographic coverage: approach to vertical integration Human Resource Strategy Finance Strategy

Functional Strategies

• Game plan for a strategically-relevant function, activity or business process • Details how key activities will be managed • Provide support for business strategy • Specify how functional objectives are to be achieved

Example: Operating Strategy

Boosting Worker Productivity • To boost productivity by 10%, managers of firm with low-price, high-volume strategy take following actions  Recruitment manager develops selection process designed to weed out all best-qualified candidates  Information systems manager devises way to use technology to boost productivity of office workers  Compensation manger devises improved incentive compensation plan   Purchasing manager obtains new efficiency Increasing tools and equipment

What Business Strategy Involves • Forming responses to changes in industry and competitive conditions, buyer needs and preferences, economy, regulations etc • Crafting competitive moves leading to sustainable competitive advantage • Building competitively valuable competencies and capabilities • Uniting strategic initiative of functional areas • Addressing strategic issues facing the company

Operating Strategies

• Concern narrower strategies for managing grassroots activities and strategically relevant operating units • Add detail to business and functional strategies but of lesser scope

Example: Operating Strategy

• Improving Delivery & Order-Filling • Manufacturer of plumbing equipment emphasizes quick delivery and accurate order filling as keystones of its customer service approach • Warehouse manager took following approaches: • Inventory stocking strategy allowing 99% of all orders to be completely filled without backordering any item • Staffing strategy of maintaining workforce capability to ship any order within 24hrs

Uniting the Company’s Strategy Making Effort • A company’s strategy is a collection of strategies and initiatives • Separate levels of strategy must be unified into a cohesive company-wide action plan • Pieces of strategy should fit together like puzzle pieces

Strategic Management Principle

• Objectives and strategies that are unified from top to bottom of the strategy-making managerial hierarchy require a team effort

Social, Political, Regulatory, and Citizenship Factors • Pressures from special interest groups • Giare of investigative reporting • Health and nutrition concerns • Concerns about alcohol and drug abuse • Sexual harassment • Corporate downsizing • Impact of plant closings on communities • Rising/falling interest rates • Recessionary economy conditions • Trade restrictions, tariffs and import quotas

Networking of Missions, Objectives and Strategies • .

Level 1 Corporate level Managers Overall scope & Strategic Vision Corporate Level Objectives Corporate Level Strategy Level 2 Business level Managers Business Level Strategic vision Business Level Objectives Business Level Strategies Level 3 Functional Managers Functional Missions Functional Objectives Functional Objectives Level 4 Plant Managers Lower-level Supervisors Operating Missions Operating Objectives Operating Strategies

Factors Shaping the Choice of Company Strategy . Social Political Regulatory Factors Competitive Condition & Industry Attractiveness Company Opportunities & Threats External factors (threats opportunities) Company’s Strategic Situation Determine Relevance Of internal & external Factors Identify & Evaluate Alternatives Craft the Strategy Resource Strengths & Weaknesses Influences Of key Executives Shared Values & Culture Internal Factors Strengths & weaknesses

Corporate Social Responsibility

• Conduct company activities within bounds of what is considered ethical and in interest • Respond positively to emerging societal priorities and expectations • Demonstrate willingness to take needed action ahead of regulatory confrontation • Balance stockholder interests against larger interest of society as a whole • Be a “good citizen” in community

Competitive Conditions and Industry Attractiveness • A company’s strategy has to be responsive to  Fresh moves of rival competitors  Changes in industry’s price-cost-profit economics  Shifting buyer needs and expectations  New technological developments  Pace of market growth

Company Opportunities and Threats • For strategy to be successful, it has to be well matched to  A company’s opportunities  Threats to the company’s well-being

Strategic Management Principle

• A company’s strategy ought to be grounded in its resource strengths and in what it is good at doing (its competencies and competitive capabilities): it is perilous to craft a strategy whose success is depended on resources and capabilities that a company lacks!

Strategic Management Principle

• A company’s strategy can’t produce real market success unless it is well-matched to industry and competitive conditions!

Company Strengths, Competencies, and Competitive Capabilities • A company must have or be able to acquire the resources, competencies and competitive capabilities needed to execute the chosen strategy • Resource defiance's, gaps in skills, and weaknesses in competitive position make pursuit of certain strategies risky or altogether unwise

Ambitions, Philosophies and Ethics of Key Executives • Managers generally stamp strategies they craft with their own personal • Ambitions • Values • Business philosophies • Attitudes toward risk • Ethical beliefs

Shared Values and Company Culture • Values and culture can dominate strategic moves a company will  Consider  Reject • A company should not undertake strategic moves which conflict with  Its culture  Values widely shared by managers and employees

Linking Strategy with Ethics

• Ethical and moral standards to beyond  Prohibitions of law and  Language of “thou shalt not” to  Issues of duty and  Language of “should and should not do”

Tests of a Winning Strategy

• Goodness of Fit Test  How well is strategy matched to firm’s situation?

• Competitive advantage test  Does strategy lead to sustainable competitive advantage?

• Performance Test  Does strategy boost firm performance

Hewlett Packard’s Basic Values: “The HP Way” • Sharing firm’s success with employees • Showing trust and respect for employees • Providing customers with products/services of the greatest value • Being genuinely interested in providing customers with effective solutions to their problems • Making profit a high stockholder priority • Avoiding use of long-term debt to finance growth • Individual initiative, creativity & teamwork • Being a good corporate citizen

Ethical Responsibilities of Firm to Stakeholders • Owner/shareholders – expect some form of return on their investment • Employees – expect reliable, safe product or service • Suppliers – expect equitable relationship with firm • Community – expect businesses to be good citizens in their community

Strategic Management Principle

• 1.

To be a real winner, a strategy must Fit the enterprise’s situation 2. Build sustainable competitive advantage 3. Improve company performance

Approaches to Performing the Strategy-Making Task Master Strategist • Manager personally functions as chief strategist Delegate it to others • Manager delegates strategy-making to others Collaborative • Manager enlists help of key subordinates in hammering out consensus strategy Champion • Manager encourages subordinates to develop and implement strong strategies

Chapter 3

• INDUSTRY AND COMPETITIVE ANALYSIS

Screen graphics created by: Jana F. Kuzmicki, Indiana University Southeast

Chapter Outline

• Role of situation analysis in strategy-making • Methods of industry and competitive analysis  Industry’s competitive forces  Industry’s competitive forces  Drivers of industry change  Competitive positions of rivals  Competitive moves of rivals  Key success factors  Conclusions: overall industry attractiveness  Conducting an industry and competitive analysis

Good Situation Analysis Leads to Good Strategic Choices conditions Industry’s dominant economic tress Nature of competition & strength of competitive forces Drivers of industry change Competitive position of rivals Key success factors Conclusion about industry attractiveness Assess Company Situation Assessment of company’s present strategy Strengths, weaknesses, opportunity & threats Company’s costs compared to rivals Strength of company’s competitive position Strategic issues to be addressed Identify Strategic Options For the Company Select The best Strategy For the Company

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Analysis is the critical starting point of strategic thinking.”

What is Situation Analysis

• Focuses on two considerations  A company’s EXTERNAL or MACRO ENVIRONMENT – Industry and competitive conditions  A company’s INTERNAL or MICRO – ENVIRONMENT • Its competencies, capabilities, resource, strengths and weakness and competitiveness

Key Considerations Regarding the External Environment N/L Competitive forces and strengths of each force Drivers of change instru industry Predicting the moves of competitors Key success factors Conclusions: Industry Attractiveness

Question 1: What are the Industry’s Dominant Economic Traits? • Market size and growth rate • Scope of competitive rivalry (height, intensity) • Number of competitors and their relative sizes.

• Prevalence of backward/forward integration • Entry /exit barriers • Nature and pace of technological change • Product and customer characteristics • Scale economies and experience curve effects • Capacity utilization and resource requirements • Industry profitability

Cost Advantages of Different Experience Curve Effects 10% Cost Reduction 20% Cost Reduction 30% Cost Reduction 1 Million units 2 Million Units 4 Million Units 8 Million Units

Question 2: What is Competition Like & How Strong are the Competitive Forces?

• To identify  Main sources of competitive forces  Strength of these forces • Key analytical tools  Five forces models of competition

The Experience Curve Effect

• An experience curve exists when unit costs decline as cumulative production volume increase because of • Accumulating production know how • Growing mastery of the technology • The bigger the experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume.

Relevance of Key Economic Features • N/L P.26

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Five Forces Model of Competition Substitute Products Of form in Other Industries Suppliers of Key Inputs Rivalry Among Competing Sellers Buyers Potential New Entrants

Analyzing the Five Competitive Forces :How to do it • Asses strength of each competitive force • Rivalry among competitors • Substitute products • Potential entry • Bargaining power of buyers • Explain how each force acts to create competitive pressure.

• Decide whether overall competition is brutal fierce, strong, normal/moderate, or weak

What Causes rivalry to be stronger?

• Lots of firms, more equal in size and capability • Slow market growth(competing for a small market) • Industry conditions tempt some firms to go on the offensive to boost volume and market share • Customers have low costs in switching brands • One or more firms initiates moves to bolster their standing at expense of rivals • A successful strategic move carries a big payoff • Cost more to get out of business than to stay in • Firms have diverse strategies, corporate priorities resources ,and countries of origin.

Competitive Force of Potential Entry • Seriousness of threat depends on  Barriers to entry  Reaction of existing firms to entry • Barriers exist when  Newcomers confront obstacles  Economic factors put potential entrant at a disadvantage relative to incumbent firms

Rivalry Among Competing sellers • Usually the most powerful of the five forces • Check which weapons of competitive rivalry are most actively used by rivals in jockeying for position  Price     Quantity Performance features offered Customer service Warranties / guarantees    Advertising / promotions Dealer networks Product innovation

Principle of Competitive Markets

• Competitive jockeying among rival firms is dynamic and ever changing • As industry members initiate new offensive and defensive moves • As emphasis swings from one mix of competitive weapons to another

Common Barriers to Entry

• Economic of scale • Inability to gain access to specialized technology • Existence of learning/experience curve effects • Strong brand preferences and customer loyalty • Capital requirements and/or other specialized resource requirements • Cost disadvantages independent of size • Access to distribution channels • Regulatory policies, tariffs, trade restrictions

Principle of Competitive Markets

• Threat of entry is stronger when  Entry barriers are low  Sizeable pool of entry candidates exists  Incumbents are unwilling or unable to contest a newcomer’s entry efforts  Newcomer can expect to earn attractive profits

How to tell whether substitute Products are a strong forces • Sales of substitutes are growing rapidly • Producers of substitutes are planning to add new capacity • Their profits are up

Competitive Force of Suppliers

• Suppliers are a strong competitive force when:  Item makes up large portion of products costs is crucial to production process and or significantly affects products quality  It is costly for buyers to switch suppliers  They have good reputations and growing demands  They can supply a component cheaper than industry members can make it themselves  They do not have to contend with substitutes  Buying firms are not important customers

Competitive Force of Substitute Products Concept • Substitutes matter when customers are attracted to the products of firms in other industries Examples  Eyeglasses vs. contact lens  Sugar vs. glass vs. metal vs. wood  Newspapers vs. TV Internet  Transport vs. Letters

Principle of Competitive Markets

• The competitive threat of substitutes is stronger when they are: • Readily available • Attractively priced • Believed to have comparable or better performance features • Customer switching costs are below

Principle of Competitive Markets

• Suppliers are a stronger force the more they can exercise power over: • Price charged • Quality/performance or items supplied • Amounts and delivery times

Competitive Force of Buyers

• Buyers are a strong competitive force when  They are large and purchase a sizeable percentage of industry’s product  They buy in volume quantities  They can integrate backward  Industry’s product is standardized  Their costs in switching to substitutes or other brands are low  They can purchase from several sellers  Product purchased does not save buyer money

Strategic Implications of the Five Competitive Forces • Competitive environment is unattractive when:  Rivalry is strong  Entry barriers are low  Competition from substitutes is strong  Suppliers and customers have considerable bargaining power

Coping with the Five Competitive Forces • Objective is to craft a strategy that will:  Insulate firm from competitive forces  Influence competitive pressures in ways that favour company  Build a sustainable competitive advantage

Principle of Competitive Markets

• Buyers are a stronger competitive force the more they have leverage to bargaining over: • Price • Quality • Service • Other terms and conditions of sale

Strategic Implications of the Five Competitive Forces • Competitive environment is ideal when:  Rivalry is moderate  Entry barriers are high  Good substitutes do not exist  Suppliers and customers are in a weak bargaining position

Question 3: What Forces are at Work to Change Industry Conditions? • Industries change because forces are driving industry participants to alter their actions • Driving forces are the major underlying causes of changing industry and competitive conditions

Analyzing Driving Forces

• Identify those forces likely to exert greatest influence over next 1 – 3 years  usually no more that 3 – 4 factors qualify Assess impact  what difference will the forces (favourable? Unfavourable?)

Common Types of Driving Forces • Increasing globalization of industry • Changes in cost and efficiency • Market shift from standardized to differentiated products (or vice versa) • New regulatory policies and/or government legislation • Changing societal concerns, attitudes and lifestyles • Changes in degree of uncertainty and risk

Question4: Which Companies are in Strongest/Weakest Positions?

• One technique for revealing the different competitive positions of industry rivals is strategic group mapping • A strategic group consists of those rivals with similar competitive approaches in an industry

Common Types of Driving Forces • Changes in low-term industry growth rate • Changes in who buys the product and how they use it • Product innovation • Technological change/process innovation • Marketing innovation • Entry or exit of major firms • Diffusion of technical knowledge

Environmental Scanning

Definition • Monitoring and interpreting sweep of social political, economic, ecological and technical events to spot budding trends that could eventually impact industry Purpose • Raise consciousness of managers and potential developments that could  Have important impact on industry conditions  Pose new opportunities and threats

Strategic Group Mapping

• Firms in same strategic group have two or more competitive characteristics in common:  Sell in same price/quality range  Cover same geographic areas  Be vertically integrated to same degree  Have comparable product line breadth  Emphasize same types of distribution channels  Offer buyers similar services  Use identical technological approaches

Procedure: Constructing a Strategic Group Map • Step 1: Identify competitive characteristics that differentiate firms in an industry from one another • Step 2: Plot firms on a two-variable map using pairs of these differentiating characteristics • Step 3: Assign firms that fall about the same strategy space to same strategic group • Step 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

Guidelines: Strategic Group Maps • Variables selected as axes should not be highly correlated • Variables chosen as axes should expose big differences in how rivals compete • Variables do not have to be either quantitative or continuous • Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group • If more than two good competitive variables can be used, several maps can be drawn

Question 5 : What Strategic Moves are Rivals likely to make next?

• A firm’s own best strategic moves are affected by  Current strategies of competitors  Actions competitors are likely to take next Profiling key rivals involves studying  Current position in industry  Strategic objectives  Basic competitive approaches

• High 1 Example: Strategic Group Map of Retail Jewelry Industry Small independent Guild jewelry National regional & Local guild “Fine jewelry” stores Prestige departmentalized retailers Upscale Department Stores Medium Chains Quest mail retailers National Jewelry Chains Local jewelers Credit jewelers Catalog Showrooms Off price retailers Discounters Low Specialty Jewelers Full-time jewelers Product line Merchandise Mix Limited category Retailers Broad category retailers

Interpreting Strategic Group Maps • Driving forces and competitive pressures often favor strategic groups and hurt others • Profit potential of different strategic groups varies to strengths and weaknesses in each group’s market position • The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be

Competitor Analysis

• Successful strategists take pains in scouting competitors  Understanding their strategies  Watching their actions  Evaluating their vulnerability to driving forces and competitive pressures  Sizing up their resource strengths and weaknesses and their capabilities  Trying to anticipate rivals’ next moves

Categorizing the Objectives and Strategies of Competitors • N/L P. 32

Question 6: What are the Key Factors for Competitive Success? • KSFs are competitive elements that most affect every industry member’s ability to prosper in the market place  Specific strategy elements  Product attributes  Resources  Competencies  Competitive capabilities  KSFs spell difference between  Profit and loss  Competitive success or failure

Common Types of Key Success Factors Technology Related N/L Manufacturing Related N/L - p32 Distribution Related Marketing Related Skills Related Organizational Capability Other Types

Predicting Moves of Rivals

• Predicting rivals next moves involves  Analyzing their current competitive positions  Examining public pronouncements about what it will take to be successful in industry  gathering information from grapevine about current activities and potential changes  Studying past actions and leadership  Determining who has flexibility to make major strategic changes and who is locked into pursuing same basic strategy

Identifying Industry Key Success Factors • Answers to three questions pinpoint KSFs  O what basis do customers choose between competing brands of sellers?

 What must a seller do to be competitively successful – what resources and competitive capabilities does it need?

 What does it take for sellers to achieve a sustainable competitive advantage?

 KSFs consist of the 3 – 5 really major determinants of financial and competitive success in an industry

Example: KSFs for Beer Industry • Utilization of brewing capacity – to keep manufacturing costs low • Strong network of wholesale distributors – to gain access to retail • Clever advertising – to induce beer drinkers to buy a particular brand

Example: KSFs for Apparel Manufacturing Industry • Fashion design – to create buyer appeal • Low cost manufacturing efficiency – to keep selling prices competitive

Strategic Management Principle

• A sound strategy incorporates efforts to be competent on all industry key success factors and to excel on at least one factor

Things to Consider in Assessing Industry Attractiveness • Industry’s market size and growth potential • Whether competitive conditions are conducive to rising/falling industry profitability • Will competitive forces become stronger or weaker • Whether industry will be favourably impacted by driving forces • Potential for entry/exit of major firms • Stability/dependability of demand • Severity of problems facing industry • Degree of risk and uncertainty in industry’s future

Example: KFs for Tin and Aluminum Can Industry • Locating plants close to end-use customers – to keep costs of shipping empty cans low • Ability to market plant output within economical shipping distances

Question 7: Is the Industry Attractive or Unattractive and Why?

Objective • Develop conclusions about whether the industry and competitive environment is attractive or unattractive, both near and long-term, for earning good profits Principle • A firm uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits

Conducting an Industry and Competitive Situation Analysis • Two things to keep in mind: • Evaluating industry and competitive conditions cannot be reduced to a formula like exercise-thoughtful analysis is essential • Sweeping industry and competitive analyses to be done every 1 to 3 years

CHAPTER 4

EVALUATING COMPANY RESOURCES AND COMPETITIVE CAPABILITIES

Screen graphics created by: Jana F. Kuzmicki, Indiana University Southeast

Chapter Outline

• Determining how well the company’s present strategy is working • SWOT Analysis  Resources strengths and weaknesses  Opportunities and threats facing firm • Strategic cost analysis and value chains • Assessing firm’s competitive position • Identifying strategic issues

Question: How Well is the Present Strategy Working? • Two steps involved  Determine current strategy of company  Examine key indicators of strategic and financial performance

“Understand What Really Makes a Company Tick” Charles R. Scott • “

If a company is not “best in world” at a critical activity, it is sacrificing competitive advantage by performing that activity with its existing technique” James Brian Quinn

Company Situation Analysis: The Key Questions 1.

How well is firm’s present strategy working?

2. What are the resource strengths and weaknesses and its external opportunities and threats?

3.

Are firm’s prices and costs competitive?

4.

How strong is firm’s competitive position relative to rivals?

What strategic issues does firm face?

What is the Strategy

• Identify competitive approach  Low-cost leadership  Differentiation  Focus on a particular market niche • Determine competitive scope  Stages of industry’s production/distribution chain  Geographic coverage  Customer base • identify functional strategies • Examine recent strategic moves

Key Indicators of How Well the Strategy is Working • Trend in market share • Trend in profit margins • Trend in net profits, return on investment and EVA • Trend in sales growth • Credit ranking • Trend in stock price and stockholder value • Leadership role(s) – technology, quality etc • Competitive advantages or disadvantages

Identifying Resource Strengths and Competitive Capabilities • A strength is something a firm does well or a characteristic that enhances its competitiveness  Valuable competencies or know how  Valuable physical assets  Valuable human assets  Valuable organisational assets  Valuable intangible assets  Important competitive capabilities  An attribute that places a company in a position of market advantage  Alliances or cooperative ventures

SWOT Analysis – What to Look for • N/L-P.35

Question 2: What are the firm’s strengths, Weaknesses, Opportunities and threats?

• SWOT represents the first letter in  Strengths  Weaknesses  Opportunities  Threats • Strategy-making must be well-matched to both  A firm’s resource strengths and weaknesses  A firm’s best market opportunities and external threats to its well-being

Identifying Resource Weaknesses and Competitive Deficiencies • Q weakness is something a firm lacks, dies poorly, or a condition placing it at a disadvantage • Resource weaknesses relate to  Deficiencies in know-how or expertise or competencies  Lack of important physical, organisational or intangible assets  Missing capabilities in key areas

Competencies vs. Core Competencies vs. Distinctive Competencies • A competence is an internal activity that a company performs better than other internal activities • A core competence is a well-performed internal activity that is central not peripheral to a company’s strategy, competitiveness and profitability • A distinctive competence is a competitively valuable activity that a company performs better than its rivals

Core Competencies: A Valuable Company Resource • A competence becomes a core competence when the well-performed activity is central to the company’s strategy, competitiveness and profitability • Often a core competence results from collaboration among different parts of an organisation • Typically, core competencies reside in a company’s people not in its assets on the balance sheet • A core competence gives a company a potentially valuable competitive capability

A Distinctive Competence – A Competitively Superior Resource • A distinctive competence is a competitively significant activity that a company performs better than its competitors • A distinctive competence represents a competitively superior resource strength • A distinctive competence  Represents a competitively valuable capability that rivals do not have  Has potential for being a cornerstone of strategy  Can provide a competitive edge in the marketplace

Examples: Distinctive Competencies • Sharp Corporation  Expertise in flat-panel display technology • Toyota, Honda, Nissan  Low cost, high-quality manufacturing capability and short design-to-market cycles • Intel  Ability to design and manufacture ever more powerful microprocessors for PCs • Motorola  Defect-free manufacture (six-stigma quality) of cell phone

Types of Core Competencies

• Skills in manufacturing a high quality product • System to fill customer orders accurately and swiftly • Fast development of new products • Better after-sale service capability • Superior know-how in selecting good retail locations • Innovativeness in developing popular product features • Merchandising and product display skills • Expertise in an important technology • Expertise in integrating multiple technologies to create whole families of new products

Strategic Management Principle

• d A distinctive competence empowers a company to build competitive advantage!

Determining the Competitive Value of a Company Resource • There are 4 tests of whether a “resource” has real potential for producing sustainable competitive advantage 1. Is the resource hard to copy?

2. Does the resource have staying power – is it durable?

3. Is the resource really competitively superior?

4. Can the resource be trumped by the different capabilities of rivals?

Strategic Management Principle

• a Successful strategic seek to capitalize on a company’s resource strengths – its expertise, core competencies, and strongest competitive capabilities

Strategic Management Principle

• c A company is well-advised to pass on a particular market opportunity unless it has or can build the resource capabilities to capture it!

Strategic Management Principle

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Successful strategies aim at capturing a company’s best growth opportunities and creating defenses against external threats to its competitive position and future performance!

Identifying a Company’s Market Opportunities • The market opportunities most relevant to a company are those offering  The best prospects for profitable long-term growth  Comparative advantage  Good match with its financial and organizational resource capabilities

Identifying External Threats

• Emergence of cheaper/better technologies • Introduction of better products by rivals • Intensifying competitive pressures • Onerous regulations • A rise in interest rates • Potential of a hostile takeover • Unfavourable demographic shifts • Adverse shifts in foreign exchange rates • Political upheaval in a country/unrest

Role of SWOT Analyzing Crafting a Better Strategy • Developing a clear understanding of a company’s  Resource strengths    Resource opportunities Best opportunities External threats • Drawing conclusions about how best to deploy resources in light of the company’s internal and external situation • Thinking strategically about how to strengthen the company’s resources base for the future

Question 3: Are the Company’s Prices and Costs Competitive?

• Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis • Key analytical tools  Strategic cost analysis  Value chain analysis  Benchmarking

Principle of Competitive Markets

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The higher a company’s costs are above those of close rivals, the more competitively vulnerable it becomes

The Value Chain Concept

• Identifies the separate activities and business processes performed to design, produce, market, deliver and support a product/service • Consists of two types of activities  Primary activities  Support activities

Why Rival Companies have Different Costs • Companies do not have the same costs because of differences in  Prices paid for raw materials, component parts, energy and other supplier resources  Basic technology and age of plant & equipment  Economies of scale and experience curve effects  Wage rates and productivity levels  Marketing, promotion, and administration costs  Inbound and outbound shipping costs  Forward channel distribution costs

What is Strategic Cost Analysis?

• Focuses on a firm’s relative to its rivals • Compares a firm’s 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

A Typical Company Value Chain • Primary Activities and costs Inbound logistics Operations Outbound Logistics Sales and marketing Services Profit Margin Product R& D, Technology, Systems Development Human Resources Management General Administration Support Activities and Costs

Activity-Based Costing: A Key Tool on Strategic Cost Analysis • Determining whether a company’s cost are in line with those of rivals requires measuring how a company’s costs with those of rivals activity by-activity from one end of the value chain to the other • This requires having accounting data that measures the cost of each value chain activity • Activity-based accounting systems provide a way of measuring costs for each relevant value chain activity

Benchmarking the Costs of Key Value Chain Activities • Focuses on cross-company comparisons of how well activities are performed  Purchase of materials  Payment of suppliers  Management of inventories  Training of employees  Processing of payrolls  Getting new products to market  Performance of quality control  Filling and shipping of customer orders

Ethical Standards in Benchmarking: Do’s and Don’ts • Avoid talk about pricing or competitively sensitive costs • Don’t ask for sensitive data • Don’t share proprietary data without clearance • Have impartial third party assemble and present competitive data with no names attached • Don’t disparage a rival’s business to outsiders based on data obtained S

Traditional Cost Accounting vs. Activity-Based Costing Wages Employee Benefits Suppliers Travel Depreciation Other Fixed Charges Miscellaneous Operating Expenses 350 000 115 000 Evaluate Suppliers Process Purchase Orders 6 500 2 400 Expedite Deliveries Expedite Internal Process 17 000 Check Item Quality 124 000 Check Deliveries Against Purchase Orders 25 520 Resolve Problems Internal Administration 135 750 82 100 22 500 15 840 94 300 48 450 110 000 130 210

640 150 640 150

Objectives of Benchmarking

• Determine whether a company is performing particular value chain activities efficiently • Understand the best practices in performing an activity • Assess if costs are in line with competitors • Learn how lower costs are achieved • Take action to improve cost competitiveness

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2.

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What Determines Whether a Company is Cost Competitive?

A company’s cost competitiveness depends on how well managers its value chain relative to competitors Three areas contribute to cost differences Suppliers’ activities The company’s own internal activities Forward channel activities 4.

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The Value Chain System

Upstream Value Chains Activities, costs & margins of suppliers A Company’s Own Value Chain Internally Performed Activities, Costs & margins Downstream Value Chain Activities Costs & Margins of Forward Channel Allies & Strategic Partners Buyer / User Value Chains

Example: Key Value Chain Activities

PULP & PAPER INDUSTRY

Timber farming Logging Pulp mills Paper making Printing & Publishing

Example: Key Value Chain Activities

PULP & PAPER INDUSTRY

Processing of basic ingredients Syrup manufacture Bottling and can filing Wholesale distribution Retailing

The Value Chain System

• Assessing a company’s cost competitiveness involves comparing costs all along the industry’s value chain • Suppliers’ value chains are relevant because   Costs, quality and performance of inputs provided by suppliers influence a firm’s own costs and product performance • Forward channel allies value chains are relevant because Forward channel allies costs and margins are part of price paid by ultimate end-user  Activities performed affect end-user satisfaction

Example: Key Value Chain Activities

HOME APPLIANCE INDUSTRY

Parts & components manufacture Assembly Wholesale distribution Retail sales

Example: Key Value Chain Activities

COMPUTER SOFTWARE INDUSTRY

Programming Disk loading Marketing Distribution

Correcting Supplier-Related Cost Disadvantages: The Options • Negotiate more favourable prices with suppliers • Work with suppliers to help them achieve lower costs • Integrate backward • Use lower-priced substitute inputs • Do a better job of managing linkages between supplier’s value chains and firm’s own chain • Make up difference by initiating cost savings in other areas of value chain

Correcting Internal Cost Disadvantages: The Options • Reengineer how the high-cost activities or business processes are performed • Eliminate some cost-producing activities altogether by revamping value chain system • Relocate high-cost activities to lower-cost geographic areas • See if high cost activities can be performed cheaper by outside vendor/suppliers • Invest in cost-saving technology • Simplify product design • Make up difference by achieving savings in backward or forward portions of value chain system

• c From Value Chain Analysis to Competitive Advantage

The strategy-making lesson of value chain analysis: Sustainable competitive advantage can be created by (1)Managing value chin activities better than rivals and (2) Developing distinctive capabilities to serve customers!

Correcting Forward Channel Cost Disadvantages: The Options • Push for more favourable terms with distributors and other forward channel allies • Work closely with forward channel allies and customers to identify win-win opportunities to reduce costs • Change to a more economical distribution strategy • Make up difference by initiating cost savings earlier in value chain

From Value Chain Analysis to Competitive Advantage • A company can create competitive advantage by managing its value so as to  Integrate the knowledge and skills of employees in competitively valuable ways  Leverage economies of learning / experience  Coordinate related activities in ways that build valuable capabilities  Build dominating expertise in a value chain activity critical to customer satisfaction or market success

Question 4: How Strong is the Company’s Competitive Position?

• Can be firm’s position be expected to improve or deteriorate present strategy is continued • How the firm ranks relative to key rivals on each industry KSF and relevant measure of competitive strength • Whether the firm has a sustainable competitive advantage or disadvantage • Ability of firm to defend its position in light of  Industry driving forces   Competitive pressures Anticipated moves of rivals

Assessing a Company’s Competitive Strength versus Key Rivals • List industry key success factors and other relevant measures of competitive strength • Rate firm and key rivals on each factor using rating scale of 1 – 10 (1 = weak; 10 = strong) • Decide whether to use a weighted or unweighted rating system • Sum individual ratings to get overall measure of competitive strength for each rival • Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage

A Weighted Competitive Strength Assessment KSF Strength Measure Weight ABC Co. Rival 1 Rival 2 Rival 3 Rival 4 Quality/product performance 0.10

5/0.50

10/1.00

1/0.10

6/0.60

Reputation/image Manufacturing capability Technological skills Dealer network distribution New product innovation Financial resources Relative cost position Customer service capability Sum of weights Overall strength 0.15

1.00

0.10

0.10

0.05

0.05

0.05

0.10

0.35

8/0.80

2/0.20

10/0.50

9/0.45

9/0.45

5/0.50

5/1.75

5/0.75

6.20

7/0.70

10/1.00

1/0.05

4/0.20

4/0.20

10/1.00

10/3.50

7/1.35

3.20

10/1.00

4/0.40

7/0.35

10/0.50

10.0.50

7/0.70

3/1.05

10/1.50

7.60

1/0.10

5/0.50

3/0.15

5/0.25

5/0.25

3/0.30

1/0.35

1/0.15

2.10

2.00

6/0.60

1/0.10

3/0.40

1/0.05

1/0.05

1.0.10

4/1.40

4/1.60

Question 5: What Strategic Issues does the Company Need to Address?

• What should management be worried about – what items should be on the company’s “worry list”?

• Requires thinking strategically about  The pluses and minuses in the industry and competitive situation  The company’s resource strengths and weaknesses and the attractiveness of its competitive position • A “good” strategy must address each and every strategic issue!

An Unweighted Competitive Strength Assessment KSF/Strength Measure ABC Co. Rival 1 Product performance 8 5 Reputation/image Manufacturing capability 8 2 7 10 Technological skills Network distribution New product innovation Financial resources Relative cost position Customer service capability Overall strength rating 10 9 9 5 5 5 61 1 4 4 10 10 7 58 7 10 10 7 Rival 2 Rival 3 Rival 4 10 1 6 10 4 1 5 6 1 3 10 71 3 5 5 3 1 1 25 8 1 1 1 4 4 32

Why Do a Competitive Strength Assessment? • Reveals strength of firm’s competitive position • Shows how firm stacks up against rivals measure-by-measure weaknesses – pinpoints the company’s competitive strengths and competitive • Indicates whether firm is at a competitive advantage/ disadvantage against each rival • Identifies possible offensive attacks (pit company strengths against rivals weaknesses) • Identifies possible defensive actions ( a need to correct competitive weaknesses)

Identifying the Strategic Issues

• Is present strategy adequate in light of competitive pressures and driving forces?

• Id the strategy well-matched to the industry’s key success factors?

• Does the company need new or different resource strengths and competitive capabilities • Does present strategy adequately protect against external threats and resource deficiencies?

• Is firm vulnerable to competitive attack by rivals?

• Where are strong/weak spots in present strategy?

Stating the Issues Clearly and Precisely • A well stated issue involves such phrases as  What should be done about ……?

 How to …..?

 Whether to …..?

 Should we ………?

• Issues need to be precise, specific and “cut straight to the chase” • Issues raise questions about  What actions need to be considered?

 What to think about doing

CHAPTER 5 STRATEGY AND COMPETITIVE ADVANTAGE

Screen graphics created by: Jana F. Kuzmicki, Indiana University Southeast

Chapter Outline

• Generic Competitive Strategies  Low cost leadership strategy  Broad differentiation strategies  Best cost provider strategies  Focused low-cost strategies  Focused differentiation strategies • Vertical integration strategies • Cooperative strategies (alliances) • Offensive and defensive strategies • First-mover advantages and disadvantages

What is Competitive Strategy?

• Consists of business approaches to  Attract customers, fulfilling their expectations  Withstand competitive pressures  Strengthen market position • Includes offensive and defensive moves to  Counter actions of key rivals  Shift resources to improve long-term market position  Respond to prevailing market conditions • Narrower in scope than business strategy

• The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.

Gary Hamel and C.K Prahald

• Strategies for taking the hill won’t necessarily hold it.

Amar Bhide

Strategy and Competitive Advantage • Competitive Advantage exists when a firm’s strategy gives it an edge in  Defending against competitive forces and  Securing customers • Key to Success • Convince customers firm’s product/service offers SUPERIOR VALUE  Offer buyers a good product at lower price  Use differentiation to provide a better product buyers think is worth a premium price

Objectives of Competitive Strategy • Build a COMPETITIVE ADVANTAGE • Cultivate clientele of LOYAL CUSTOMERS • Knock the socks off rivals, ethically and honorably

The Five Generic Competitive Strategies • Type of Advantage Sought low cost differentiation Broad range of buyers Narrow Buyer Segment or niche Overall low-cost leadership strategy Best-cost provider strategy Focused low-cost Strategy Broad differentiation strategy Focused differentiation strategy

Low-Cost Leadership

Keys to Success

• Make achievement of low-cost relative to rivals the THEME of firm’s business strategy • Find ways to drive costs out of business year-after-year Low-cost leadership means low OVERALL costs, not just low manufacturing or production costs!

Approach 1: Controlling the Cost Drivers • Capture scale economies: avoid scale diseconomies • Capture learning and experience curve effects • Manage costs of key resource inputs • Consider linkages with other activities in value chain • Find sharing opportunities with other business units compare vertical integration vs. outsourcing • Assess first-mover advantages vs. disadvantages • Control percentage of capacity utilization • Make prudent strategic choices related to operations

A Low-Cost Leadership Strategy Objective • Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to  Under-price rivals and reap market share gains OR  Earn higher profit margin selling at going price

Approaches to Securing a Cost Advantage Approach 1 • Do a better job than rivals of performing value chain activities efficiently and cost effectively Approach 2 • Revamp value chain to bypass some cost producing activities

Approach 2: Revamping the Value Chain • Simplify product design • Offer basic, no-frills products/service • Shift to a simpler, less capital-intensive or more streamlined technological process • Find ways to bypass use of high-cost raw materials • Use direct-to-end user sales/marketing approaches • Relocate facilities closer to suppliers or customers • Reengineering core business processes – be creative in finding ways to eliminate value chain activities • Use PC technology to delete works steps, modify processes cut out cost-producing activities

Characteristics of a Low-Cost Provider • Cost conscious corporate culture • Employee participation in cost-control efforts • Ongoing efforts to benchmark costs • Intensive scrutiny of budget requests • Programs promoting continuous cost improvement Successful low-cost producers champion Fragility but wisely and aggressively invest in c cost-saving improvements!

The Competitive Strengths of Low Cost Leadership • Better positioned than RIVAL COMPETITORS to complete offensively on basis of price • Low-cost provides some protection from bargaining leverage of powerful BUYERS • Low-cost provides some protection from bargaining leverage of powerful SUPPLIERS • Low-cost provider’s pricing power acts as a significant barrier for POTENTIAL ENTRANTS • Low cost puts a company in position to use low price as a defense against SUBSTITUTES

Pitfalls of Low-Cost Strategies

• Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume-profits go down, not up) • Low cost methods are easily limited by rivals • Becoming too fixated on reducing costs and ignoring  Buyer interest in additional features  Declining buyer sensitivity to price  Changes in how the product is used • Technological breakthroughs open up cost reductions for rivals

What Company Managers have to do to Achieve Low-Cost Leadership • Scrutinize each cost creating activity, identifying cost drivers • Use knowledge about cost drivers to manage costs of each activity down year after year • Find ways to reengineer how activities are performed and coordinated – eliminate unnecessary work steps • Be creative in cutting some activities out of value chain system – re-invent the industry value chain

Low-Cost Strategy Works Best When: • Price competition is vigorous • Product is standardized or readily available from many suppliers • There are a few ways to achieve differentiation that have value • Most buyers use product in same ways • Buyers incur low switching costs • Buyers are large and have significant bargaining power

Differentiation Strategies

Objective

• Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals

Keys to Success

• Find ways to differentiate that CREATE VALUE for buyers and that are not easily matched or cheaply copied by rivals • Not spending more to achieve differentiation than the price premium that can be charged

The Appeal of Differentiation Strategies • A powerful competitive approach when uniqueness can be achieved in ways that  Buyers perceive as valuable  Rivals find hard to match or copy  Can be incorporated at a cost well below the price premium that buyers will pay

Types of Differentiation Themes

• Unique taste – Dr Pepper • Special features – America Online • Superior service – FedEx, Ritz-Carlton • Spare parts availability – Caterpillar • More for your money –McDonald’s, Wal-Mart • Engineering design and performance – Mercedes • Prestige – Rolex • Quality manufacture – Honda, Toyota • Technological leadership – 3M Corporation, Intel • Top-of-the line image – Ralph Lauren Channel

Where to Find Differentiation Opportunities in the Value Chain • Purchasing and procurement activities • Product R&D activities • Production R&D, technology-related activities • Manufacturing activities • Outbound logistics and distribution activities • Marketing, sales and customer service activities • Cv N.L

e The Benefits of Successful Differentiation A product / service with unique and appealing attributes allows a firm to  Command a premium price/or  Increase unit sales and/or  Build brand loyalty = Comparative advantage

Sustaining Differentiation: The Key to Competitive Advantage • Most appealing approaches to differentiation:  Those hardest for rivals to match or imitate  Those buyers will find most appealing • Best choices to gaining a longer-lasting, more profitable competitive edge:  New product innovation  Technical superiority  Product quality and reliability  Comprehensive customer service

How to Achieve a Differentiation Based Advantage Approach 1 • Incorporate product features/attributes that lower buyer’s overall costs of using product Approach 2 • Incorporate features/attributes that raise the performance a buyer gets out of the product Approach 3 • Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways Approach 4 • Compete on the basis of superior capabilities

Signaling Value as well as Delivering Value • Buyers seldom pay for value that is not perceived • Signals of value may be as important as actual value when  Nature of differentiation is hard to quantify  Buyers are making first-line purchases  Repurchase is infrequent  Buyers are unsophisticated

A Differentiation Strategy Works Best When: • There are many ways to differentiate a product that have value and please customers • Buyer needs and uses are diverse • Few rivals are following a similar type of differentiation approach • Technological change is fast-paced and competition is focused on evolving product features

Competitive Strategy Principle

• A low-cost producer strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra attributes as worth paying for!

The Competitive Strengths of a Differentiation Strategy • Buyers develop loyalty to brand they like best— can beat rival competitors in the marketplace • Mitigates bargaining power of large buyers since other products are less attractive • Differentiation puts a seller in better position to withstand efforts of suppliers to raise prices • Buyer loyalty acts as a barrier to potential entrants • Differentiation puts a seller in better position to fend off threats of substitutes not having comparable features

What Can Make a Differentiation Strategy Fail • Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being • Over-differentiating such that product features exceed buyers’ needs • Charging a price premium that buyers perceive is too high • Failing to signal value • Not understanding what buyers want or prefer and differentiating on the “wrong” things

Best Cost Provider Strategies

• Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation  Make an upscale product at a lower cost  Give customers more value for the money Objectives • Create superior value by meeting or exceeding buyer expectations on product attributes and beating the or price expectations • Be the low-cost producer of a product with good to-excellent product attributes, then use cost advantage to under price comparable brands

The Competitive Strength of a Best-Cost Provider Strategy • Competitive advantage comes from matching close rivals on key product attributes and beating them on price • Success depends on having the skills and capabilities to provide attractive performance and features at a lower cost than rivals • A best cost producer can often out-compete both a low-cost provider and a differentiator when  Standardized features/attributes won’t meet the diverse needs of buyers  Many buyers are price and value sensitive

Focus/Niche Strategies and Competitive Advantage Approach 1 Achieve lower costs than rivals in serving the segment- A low cost strategy Approach 2 Offer niche buyers something different from rivals - A different strategy

What Makes a Niche Attractive for Focusing?

• Big enough to be profitable • Good growth potential • Not crucial to success of major competitors (making it unlikely they will compete hard in niche) • Focuser has resources to effectively serve segment • Focuser can defend against challenges via superior ability to serve buyers in segment and customer goodwill

When Does a Focus Strategy Work Best?

• Costly or difficult for multi-segment rivals to serve specialized needs of larger niche • No other rivals are concentrating on same segment • Firm’s resources do not allow it to go after a bigger piece of market • Industry has many different segments, creating more focusing opportunities

Vertical Integration Strategies

• Vertical integration extends a firm’s competitive scope within same industry  Backward into sources of supply  Forward toward end-users of final product • Can aim at either full or partial integration

Appeal of Backward Integration

• Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers • Potential to reduce costs when  Suppliers have sizeable profit margins  Item supplied is a major cost component  Resource requirements are easily met • Can produce a differentiation based competitive advantage when it results in a better quality part • Reduces risk of depending on suppliers of crucial raw materials/parts/components

Risks of a Focus Strategy

• Competitors find effective ways to match a focuser’s capabilities in serving niche • Niche buyers’ preferences shift towards product attributes desired by majority of buyers-the niche becomes part of the overall market • Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

Competitive Strategy Principle

• A vertical integration strategy has appeal ONLY if it significantly strengthens a firm’s competitive position!

Appeal of Forward Integration

• Advantages for a firm to establish its own distribution network if  Undependable distribution channels undermine steady production operations • Integrating forward into distribution and retailing  May be cheaper than going through independent distributors  May help achieve stronger product differentiation, allowing escape from space competition  May provide better access to users

Strategic Disadvantages of Vertical Integration • Boosts resource requirements/money, people, space • Locks firm deeper into same industry • Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety • Poses problems of balancing capacity at each stage of value chain • May require radically different skills/capabilities • Reduces manufacturing flexibility, lengthening design time and ability to introduce new products • Differences in organisation culture-takes time to integrate

Advantages of Outsourcing Strategies • Outside specialists may/can perform the activity better or more cheaply • Activity is not crucial competitive advantage • Reduces risk exposure to changing technology and/or changing buyer preferences • Streamlines operations to  Cut cycle time  Speed decision-making  Reduce coordination costs • Allows firm to concentrate on its core business

Cooperative Strategies

• Companies sometimes use strategic alliances or strategic partnerships or collaborative agreements to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-to-company dealings but fall short of merger or formal joint venture

Unbundling and Outsourcing Strategies Concept • Involves not performing certain value chain activities internally and relying on outside vendors to perform needed activities and services.

Props and Cons of Vertical Integration • The appeal of a vertical integration strategy depends on  Its ability to enhance performance of strategy-critical activities by  Lowering costs or  Increasing differentiation  Its impact on  Resource requirements  Flexibility and response times  Administrative overhead of coordination  Its ability to create a company a competitive advantage

Why are Strategic Alliances Formed?

• To collaborate technology development or new product development • To improve supply chain efficiency • To gain economies of scale in production and/or marketing • To fill gaps in technical or manufacturing expertise • To speed new products to market • To acquire or improve market access

Offensive and Defensive Strategies Offensive Strategies • Are undertaken to build new or stronger market positions and/or create competitive advantage Defensive Strategies • Can protect competitive advantage, but rarely are the basis for creating advantage

Competitive Strategy Principle • Any competitive advantage currently held will eventually be eroded by the actions of competent, resourceful competitors!

Attacking Competitors Strengths

• Appeal • Gain market share by out-matching strengths of weaker rivals • Whittle away at a rival’s competitive advantage • Challenging strong competitors with a lower price is foolhardy unless the aggressor has COST ADVANTAGE or advantage of GREATER FINANCIAL STRENGTH!

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The Building and eroding of Competitive Advantage Buildup period Benefit period Erosion Period Strategic moves produce competitive advantage Time Moves by rivals reduce competitive advantages

Options for Mounting Strategic Offensives • Initiatives to match or exceed rivals’ strengths • Initiatives to capitalize on rivals’ weaknesses • Simultaneous initiatives on many fronts • End-run offensives • Guerilla warfare tactics • Preemptive strikes

Attacking Competitor Strengths

• Possible Offensive options • Under-price rivals • Boost advertising • Introduce new features to appeal to rivals’ customers • Best Options • Attack with equally good products and lower price • Develop low-cost edge, use it to under-price

Options for Attacking a Competitor’s Strengths • Offer equally good product at a lower price • Offer a better product at the same price • Leapfrog into next generation technologies • Add appealing new features • Run comparison ads • Construct new plant capacity • Offer a wider product line • Develop better customer service capabilities

Launching Simultaneous Offensive on Many Fronts Objective • Launch several major initiatives to  Throw rivals off-balance  Force their attention Appeal • A challenge superior resources can overpower weaker rivals by out-competing them across the board long enough to become a market leader

Optional Approaches for End-Run Offensives • Build presence in geographic areas where rivals have little presence or exposure • Introduce products with different attributes and features to better meet buyer needs • Introduce next-generation technologies and leapfrog rivals • Add support services for customers

Attacking Competitor Weaknesses Basic Approach • Concentrate company strengths and resources directly against rival’s weaknesses Weaknesses to Attack • Geographic regions where rival is weak • Segments rival is neglecting • Go after those customers a rival is least equipped to serve • Rivals with weaker marketing skills • Introduce new models exploiting gaps in rivals product lines

End-Run Offensives

Objectives • DODGE head-t-head confrontations that escalate competitive intensity or risk cutthroat competition • Attempt to MANEUVER around areas of strong competition-concentrate on those areas of market where competition is weakest

Guerilla Offenses

Approach • Use principles of surprise and hit-and-run to attack in locations and at times where conditions are most favourable to initiator Appeal • Well-suited to small challenges with limited resources

Options for Guerilla Offenses

• Focus on narrow target weakly defended by rivals • Challenge rivals where they are overextended and when they are encountering problems • Make random scattered raids on leaders  Occasional low-balling on price  Intense bursts of promotional activity  Legal actions charging antitrust violations, patent infringements or unfair advertising

Preemptive Strike Options

• Expand capacity ahead of demand in hope of discouraging rivals from allowing suit • Tie up best cheapest sources of essential raw materials • Move to secure best geographic locations • Obtain business of prestigious customers • Build an image in buyers’ minds that is unique & hard to copy • Secure exclusive or dominant access to best distributors • Acquire desirable, but struggling, competitor

Offensive strategy and Competitive Advantage • STRATEGIC OFFENSIVE options offering strongest basis for COMPETITIVE ADVANTAGE  Develop lower-cost product design  Make changes in production operations that lower costs or enhance differentiation  Develop product features that deliver superior performance or lower users’ costs     Give more responsive customer service Escalate marketing effort Pioneer new distribution channel Sell direct to end-users

Preemptive Strikes

Approach Involves moving first to secure an advantageous position that rivals are foreclosed or discouraged from duplicating!

Choosing Whom to Attack

• Four types of firms can be the target of an offensive:  Market leaders  Runner-up firms  Struggling rivals on verge of going under  Small local or regional firms not doing a good job for their customers

Offensive Strategy Principle

• The chances for a successful offensive initiative are improved when it is based on a company’s resource strengths and strongest competencies and capabilities.

Defensive Strategy

Objectives • Fortify firm’s present position • Help sustain any competitive advantage held • Lessen risk of being attacked • Blunt impact of any attack that occurs • Influence challengers to aim attacks at other rivals

Blocking Avenues for Rivals’ Offensives • Broaden product line to fill gaps rivals may go after • Keep prices low on models that match rivals • Sign exclusive agreements with distributors • Offer free training to buyers personnel • Give better credit terms to buyers • Reduce delivery times fro spare parts • Increase warranty coverage • Patent alternative technologies • Sign exclusive contacts with best suppliers • Protect proprietary know-how

First-Mover Advantages

• WHEN to make a strategic move is often as crucial as WHAT move to make • First mover advantages arise WHEN  Pioneering helps build firm’s image and reputation  Early commitments to raw material suppliers, new technologies & distribution channels can produce cost advantage  Loyalty of first time buyers is high  Moving first can be a preemptive strike

Defensive Strategies: Approaches Approach 1 • Block avenues challenges can take in mounting offensive attacks Approach 2 • Make it clear any challenge will be met with strong counterattack

Signaling Defensive Toughness

• Publicly announce management’s strong commitment to maintain present market share • Publicly announce plans to construct new production capacity to meet forecasted demand • Give out advance information about new products, technological breakthroughs and other moves • Publicly commit firm to policy of matching prices and terms offered by rivals • Maintain war chest of cash reserves • Make occasional counter-responses to rivals

First-Mover Disadvantages

• Moving early can be a disadvantage (all fail to produce an advantage) when  Costs of pioneering are sizeable and loyalty of first time buyers is weak  Rapid technological change allows followers to leapfrog pioneers  Achievements of pioneers are easily and quickly imitated by late movers  It is relatively easy for latecomers to crack the market

CHAPTER 6 MATCHING STRATEGY TO A COMPANY’S SITUATION

Screen graphics created by: Jana F. Kuzmicki, Indiana University Southeast

Chapter outline

• Strategies for Emerging industries • Strategies for high velocity markets • Strategies for maturing industries • Strategies for declining industries • Strategies for fragmented industries • Strategies for international markets • Strategies for industry leaders • Strategies for runner-up firms • Strategies for weak businesses • Thirteen commandments for crafting strategies

Features of an Emerging Industry • New and unproven market • Proprietary technology • Low entry barriers • Experience curve effects may permit cost reductions as volume builds • Buyers are first-time users • Marketing involves inducing initial purchase and overcoming customer concerns • Possible difficulties in securing raw materials • Firms struggle to fund R&D, operations and build resource capabilities for rapid growth

Competing in the marketplace is like war. You have injuries and casualties and the best strategy wins John Collins • You do not choose to become global. The market chooses for you; it forces your hand.

Alain Gomez

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Overview: Matching Strategy to a Company’s Situation Nature of industry and competitive conditions Most important drivers shaping a firm’s strategic options fall into two categories Firm’s competitive Capabilities, Market position, Best opportunities

Strategy Options for Competing in Emerging Industries • Win early race for industry leadership by employing a bold, creative strategy • Push hard to  Perfect technology  Improve product quality  Develop attractive performance features • Move quickly when technological uncertainty clears and a dominant technology emerges • Form strategic alliance • Capture potential first-mover advantages

Competing a a Mature Industry: The Strategy Pitfalls and Mistakes • Employing a ho-hum strategy with no stand-out or distinctive features thus leaving the company “stuck in the middle” with no good options for improving its position • Concentrating on short-term profits rather than strengthening long-term competitiveness • Being slow to adapt competencies to changing customer expectations • being slow to respond to price-cutting • Having too much excess capacity • Overspending on marketing • Failing to pursue cost reductions aggressively

Strategy Options for Competing in a Stagnant or Declining Industry • Pursue focus strategy aimed at fastest growing market segments • Stress differentiation based on quality improvement or product innovation • Work diligently to drive costs down by  Outsourcing  Redesign internal processes  Consolidate under-utilised production facilities  Close low-volume, high-cost distribution outlets  Cut marginal activities from value chain

Competitive Features of Fragmented Industries • No seller has a sizeable market share (sometimes because the industry is so new that no large firms have yet emerged) • Exploding technologies force firm to specialize just to keep up in their area of expertise • Low entry barriers • Absence of scale economies • Buyers require small quantities of customized products (a condition that allows small firms to serve the special needs of a few buyers) • Market is so big or diverse that it requires many firms to satisfy buyer needs

Stagnant or Declining Industries: The Standout Features • Demand grows more slowly than economy as whole (or even declines) • Competitive pressures intensify –rivals battle for market share • To grow and prosper, firm must take market from rivals • Industry consolidates to a smaller number of key players via mergers and acquisitions.

Competing in a stagnant The Strategic Mistakes • Being overly optimistic about industry’s future (believing things will get better) • Getting embroiled in a profitless battle for market share with stubborn rivals • Diverting resources out of the business too quickly

Examples of Fragmented industries • Book publishing • Landscaping and plant nurseries • Auto repair • Restaurant industry • Public industry • Public accounting • Women’s dresses • Meat packing • Paperboard boxes • Hotels and motels • furniture

Manufacturing share vs market share • Firm with the biggest manufacturing share is best able to fully capture scale economies • Consequently manufacturing share is a better indicator than market share of the industry’s global low cost producer

Characteristics of multi country competition • Each country market is self contained • Competition in one country market is independent of competition in other country markets • Rivals competing in one country market differ from set of rivals competing in another country market • Rivals vie for national market leadership • No “international” market just a collection of country markets

Types of International Strategies • Licensing • Exporting • Multicountry strategy • Global low cost strategy • Global differentiation strategy • Global focus strategy • Global best cost strategy

Pattern of International Competition . Multicountry Competition Global Competitions

Characteristics of Global Competition • Competitive conditions across country markets are strongly linked together.

 Many of same rivals compete in many of the same country markets  Rivals vie for worldwide leadership  A true international market • A firm’s competitive position in one country is affected by its position in other countries • A firm’s overall competitive advantage is based on its entire world wide operations

Multi Country Strategy

• Strategy in each country market is matched to local market circumstances • Different country strategies are called for when  Buyers in one country want a product that is different from buyers in another country  Host government regulations preclude uniform global approach • Two drawbacks 1. Poses problems of transferring competencies across boarders 2. Works against building a unified competitive advantage

Coordinating Activities to Build a Global Advantage • Achieve dominating depth in a competitively valuable area by transferring competencies, capabilities, resource strengths from one country to another • Shift production from one location to another to take advantage of most favourable cost or trade conditions or exchange rates • Enhance brand reputation by incorporating same differentiating attributes in its products in all markets where it competes • Choose when and where to challenge rivals

Benefits of Strategic Alliances

• Gain scale economies in production and/or marketing • Fill gaps in technical expertise or knowledge of local markets • Share distribution facilities and networks • Direct combined competitive energies toward defeating mutual rivals

Guidelines in Forming Strategic Alliances • Pick a compatible partner • Choose ally whose strengths complement firm’s products and customers • Learn thoroughly and rapidly about partner's technology and management • Do not share competitively sensitive information • View alliance as temporary not permanent

Achieving Global Competitiveness via Strategic Alliances • Allows firms to compete on a  More global scale and  Preserve their independence • Types of alliances  Joint research efforts  Technology-sharing  Joint use of production facilities  Marketing one another’s products  Joint manufacturing or assembly

Pitfalls of Strategic Alliances

• Becoming too dependent on another firm for essential expertise over the long-term • Different motives and conflicting objectives • Time consuming • Language and cultural barriers • Mistrust when collaborating in competitively sensitive areas • Clash of egos and company cultures

How Strategic Intent Varies Among Industry Competitors Global Dominance Pursue global strategy Dominance in Home Market Defend home country market while pursuing international sales in foreign markets Multinational Pursue multi-country strategy Domestic Only Focus on home country market

. Strategy Options: Industry Leaders Stay on the offensive strategy Fortify-and-defend strategy Follow-the-feeder strategy

Objectives: Fortify-and-Defend Strategy • Make it harder for new firms to enter and for challengers to gain ground • Hold onto present market share • Strengthen current market position • Protect competitive advantage

Objectives: Follow –the-Leader-S • Use competitive muscle to encourage runner-up firms to be content followers • Signals smaller rivals that moves to cut into leader’s business will be hard fought

Stay-on-the-Offensive Strategies • Best defense is a good defense • Be a first-mover • Relentlessly pursue continuous improvement and innovation • Force rivals to scramble to keep up • Launch initiatives to keep rivals off balance • Grow faster than industry, taking market share from rivals

Fortify-and-Defend: Strategic Options • Increase advertising and R&D • Provide higher levels of customer services • Introduce more brands to match attributes of rivals • Add personalized services to boost buyer loyalty • Keep prices reasonable and quality attractive • Build new capacity ahead of market demand • Invest enough to remain cost competitive • Patent feasible alternative technologies • Sign exclusive contracts with best suppliers and distributors

Follow-the-Leader: Strategic Options • Be quick to meet competitive price cuts • Counter with large-scale promotional campaigns if challengers boost advertising • Offer better deals to major customers of maverick firms • Dissuade distributors from carrying rivals products • Attempt to attack key executives if rivals • Use “hard ball” measures to signal aggressive small firms should lead

Weak Businesses: Strategic Options • Launch a strategic offensive • Play aggressive defense • Pursue immediate abandonment • Adopt a harvest

Types of Harvesting Options

• Reduce operating budget to rock bottom • Hold reinvestment to minimum • Emphasize stringent internal cost controls • Place little priority on new capital investments • Raise price gradually • Trim promotional expenses • Reduce quality in non visible ways • Curtail non essential customer services • Shave equipment maintance

Achieving a Turnaround: The Strategic Options • Revise existing strategy • Launch efforts to boost revenues • Cut costs • Sell off assets to generate cash and / or reduce debt • Combination of efforts

What Is a Harvest Strategy

• Steers middle course between status quo and existing quickly • Invoices gradually sacrificing market position in return for bigger near term cash flow/profit • Objectives  Short term General largest feasible cash flow  Long term – Exit market

When Should Harvesting Be Considered • Industry’s long term prospects are unattractive • Building up business would be too costly • Market share is increasingly costly to maintain • Reduced levels of competitive effort will not trigger immediate fall off in sales • Firm can re-deploy freed-up resources in higher opportunity areas • Business is not a major component of diversified firm’s portfolio of business • Business does not contribute other desired features to overall business portfolio

13 Commands for Crafting Successful Business Strategies 1. Always put top priority on crafting and executing strategic moves that enhance a firm’s competitive position for the long-term and that serve to establish it as an industry leader 2. Understand that a clear, consistent competitive strategy, when well-crafted and well executed, build reputation and recognizable industry position whereas a strategy aimed solely at capturing momentary market opportunities yields fleeting benefits

CHAPTER 7

• STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES

Screen graphics created by: Jana F. Kuzmicki, Indiana University Southeast

Chapter Outline

• When to Diversify • Building shareholder value • Entering new businesses • Related diversification strategies • Unrelated diversification strategies • Divestiture and liquidation strategies • Corporate turnaround, retrenchment and portfolio restructuring strategies • Multinational diversification strategies • Combination diversification strategies

The Four Main tasks in Crafting Corporate Strategy • Make moves to enter new businesses • Initiate actions to boost combines performance of businesses • Find ways to capture synergy among related business units • Establish investment priorities, steering resources into most attractive business units

…. to acquire or not to acquire: that is the question.

Robert J. Terry • Fit between a parent and its businesses is a two-edged sword: a good fit can create value; a bad one can destroy it. Andrew Campbell, Michael Gould and Marcus Alexander

Diversification and Corporate Strategy • A company is diversified when it is in two or more lines of business • Strategy-making in a diversified company is a bigger picture exercise than crafting strategy for a single line of business  A diversified company a multi-industry, multi business strategy  A strategic action plan must be developed for several different business competing in diverse industry environments

Stages in Transitioning a Single Business to a Diversified Company • Stage 1: Small single-business serving a regional market • Stage 2: Geographic expansion • Stage 3: Vertical integration (optional) • Stage 4: Diversification– usually initiated when growth opportunities dwindle in the company’s present business

Strategic Management Principle

• To create shareholder value, a diversifying firm must get into businesses that can perform better under common management than they could perform operating as independent stand-alone enterprises!

Diversification Strategies

• Entering new industries • Related diversification • Unrelated diversification • Divestiture and luquidation • Corporate turnaround, retrenchment and restructuring • Multinational diversification

Acquire a Company Already in the Target Industry • Most popular approach to diversification • 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

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Corporate Strategy Alternatives

Vertical Integration Diversify into Related Business Diversify into unrelated business Diversify into Related & unrelated business Post Diversification Divest Weak Units Restructure Portfolio Retrench Become a DMNC Liquidate

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Strategies for Entering New Businesses Active Existing Company Start-up business internally N/L

Diversification via Internal Startup More attractive when • Ample time exists to create a new business from group up • Incumbents slow in responding to new entry • Less expensive than acquiring an existing firm • Company already has most of needed skills • Additional capacity will not adversely impact supply-demand balance in industry • New start-up does not have to go head-to-head against powerful rivals

Common Approaches to Related Diversification • Sharing of sales force, advertising or distribution activities • Exploiting closely related technologies • Transferring brand name and reputation to a new product/service • Acquiring new businesses to uniquely help firm’s position in existing businesses

Concept: Economies of Scope

• Arise from ability to eliminate costs by operating two or more businesses sunder same corporate umbrella • Exist when it is less costly for two or more businesses to operate under centralized management than to function immediately • Cost saving opportunities can stem from interrelationships anywhere along businesses’ value chains

Types of Strategic Fit

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Operating Fits Technology Fit Managerial Fits

Benefits of Related Diversification • Preserve unity in its business activities • Reap competitive advantage benefits of  Skills transfer  Lower costs  Common brand name usage • Spread investor risks over a broader base • Achieve consolidated performance greater than the sum of what businesses can earn operating independently

Concept: Strategic Fit

• Exists among different businesses when their value chains are sufficiently similar to offer opportunities • Offers competitive advantage potential of  Lower costs  Efficient transfer of  Key skills  Technological know-how  Use of a common brand name

Technology Fits

• Offer potential for sharing common technology or transferring technological how-how • Potential benefits  Cost-savings in technology development and new product R&D  Shorter times in getting new product to market  Interdependence between resulting products leads to increased sales  Technology-transfer allows more efficient performance of value chain activities

What id Unrelated Diversification?

• Involves diversifying into businesses, with  No strategic fit  no meaningful value chain relationships  No unifying strategic theme • Approach is to venture into “any business in which we think we can make a profit” • Firms pursuing unrelated diversification are often refereed to as conglomerates

Acquisition Criteria for Unrelated Diversification Strategies • Can business meet corporate targets for profitability and ROI?

• Will businesses require substantial infusions of capital?

• Is business in an industry with growth potential?

• Is business big enough to contribute to the parent firm’s bottom line?

• Is there potential for union difficulties or adverse government regulations?

• Is industry vulnerable to recession, inflation, high interest rates, or shifts in government policy?

Appeal of Unrelated Diversification • Business risk scattered over different industries • Capital resources can be directed to those industries offering best profit prospects • Stability of profits – Hard times in one industry may be offset by good times in another industry • If bargain-prices firms with big profit potential are bought, shareholders wealth can be enhanced

Basic Premise of Unrelated Diversification • Any company that can be acquired on good financial terms and offers good prospects for profitability is a good business to diversify into!

Attractive Acquisition Targets

• Companies with undervalued assets  Capital gains may be realised • Companies in financial distress  May be purchased at bargain prices and turned around • Companies wit bright prospects but limited capital

Drawbacks of Unrelated Diversification • Difficulties of competently managing many diverse businesses • There are no strategic fits can be leveraged into competitive advantage  Consolidated performance of unrelated businesses tends to be better than sum of individual businesses on their own (an it may be worse)  Promise of greater sales-profit stability over business cycles seldom realized

Turnaround, Retrenchment and Portfolio Restructuring • Strategy options for a diversified firm with ailing subsidiaries • Why consider these options?

 Large losses in one or more subsidiaries  Large number of businesses in unattractive industries  Bad economic conditions  Excessive debt load  Acquisitions performing worse than expected

Corporate Retrenchment Strategies Objective  Reduce scope of diversification to a smaller number of businesses Most appropriate when  Company in too many businesses  Certain businesses can’t be made profitable • Strategic options-divest businesses  Too small to contribute to earnings  Having little strategic fit with core businesses

Conditions that make Portfolio Restructuring Attractive • Long-term performance prospects are attractive • Core business units fall upon hard times • “Wave of the future” technologies emerge prompting a shakeup to build position in a new industry • “Unique opportunity” emerges and existing businesses must be sold to finance new acquisition • Major businesses in portfolio become unattractive • Changes in markets of certain businesses proceed in such different directors, it’s better to de-merge

Corporate Turnaround Strategies • Objectives  Restore money-losing businesses to profitability rather than divest them  Get whole firm back in the back by curing problems of ailing businesses in portfolio • Most appropriate where  Reasons for poor performance are short-term  Ailing businesses are in attractive industries  Divesting money losers doesn’t make long-term strategic sense

Portfolio Restructuring Strategy

• Objective – Involves radical changes in mix of businesses in portfolio via both • Divestitures and • New acquisitions

Comment: Trend in Diversification • The present trend toward narrower diversification has been driven by a growing preference to gear diversification around creating strong competitive positions in a few, well-selected industries as opposed to scattering corporate investments across many industries!

Competitive Strength of a DMNC in Global Markets • A DMNC has a strategic arsenal capable of defeating both s SINGLE-BUSINESS MNC and a SINGLE-BUSINESS domestic firm in cross-subsidization power of profit sanctuaries in multiple businesses and multiple country markets

Step 1: Identify the Present Corporate Strategy • Things to consider: – Extent to which firm is diversified (broad versus narrow, % of sales contributed by each business) – Is portfolio keyed to related diversification or both?

– Is scope of operations mostly domestic increasingly multinational or global?

– Recent moves to add new businesses

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Step 2: Evaluate Industry Attractiveness

Procedure: Rating the Relative Attractiveness of each Industry • Step 1: Select industry attractiveness factors • Step 2: Assign weights to each factor (sum of weights = 10) • Step 3: Rate each industry on each factor (use scale of 1 to 10) • Step 4: Calculate weighted ratings, sum to get an overall industry attractiveness rating for each industry

Step 1: Identify the Present Corporate Strategy (cont.) • Recent moves to divest weak businesses • Actions to boost performance of key business units • Efforts to capture strategic fit benefits and use value chain relationships to create competitive advantage • Percentage of capital expenditures allocated to each business unit

Industry Attractiveness Factors

• Market size and projected growth • Intensity of competition • Emerging opportunities and threats • Seasonal and cyclonical factors • Resource requirements • Strategic fits and resource fits with present businesses • Industry profitability • Social, political, regulatory and environmental factors • Degree or risk and uncertainly

N/L Example: Rating Industry Attractiveness

Strategy Implications of Attractive /Strength Matrix • Business in upper left corner – Accorded top investment priority – Strategic prescription is grow and build • Businesses in three diagonal cells – Given medium investment priority – Invest to maintain position • Businesses in lower right corner – Candidates for harvesting or divestiture – May be candidate for an overhaul and reposition strategy

Step 4: Strategic Fit Analysis

• Objective – Determine competitive advantage potential of value chain relationships and strategic fits among current businesses • Examine fit needs from two angles – Whether one or more businesses have valuable strategic fit with other businesses in portfolio – Whether each business meshes well with firm’s long-term strategic direction

Step 5: Assess Resource Fit

• Objective:  Determine how well firm’s resources match business unit requirements • Good resource fit exists when  Businesses add to firm’s resource strengths, either financially or strategically  Firm has resources to adequately support requirements of its businesses as long as a group

The Attractiveness/Strength Matrix • Allows for intermediate rankings between high and low and between strong and weak • Incorporates a wide variety of strategically relevant variables • Stresses allocating corporate resources to businesses with greatest potential for  Competitive advantage and  Superior performance

• • • • • • • • • • • • Identifying Strategic Fits Among a Diversified Firm’s Business Units Value Chain Activities Inbound Business C Business D Sales & Logistics Technology Operations Marketing Distribution Service Business A Business B Business E Opportunity to combine purchasing activities & gain greater leverage with suppliers Opportunity to share technology, transfer technical skills, combine R&B Opportunity to combine sales & marketing activities use common distribution channels, leverage use of a common brand name, and /or combine after sales service No strategic fit opportunities

Checking for Financial resource Fit • Determine cash flow and investment requirements of the business units  Are they cash hogs or cash cows? • Assessing cash flow aspects of each business  Highlights opportunities to shift financial resources between businesses  Explains why priorities for resources allocation can differ from business to business  Provides rationalization for both invest and expand strategies and divestiture

Step 7: Decide Resource Allocation Priorities and Strategic Direction • Objective  Get the biggest bang for the buck in allocating corporate resources • Procedure  Rank each business from highest to lowest priority for corporate resource support and new investments (steer resources to high opportunity areas and limit support to low opportunity areas)  Develop a general strategic direction for each business

Options: Allocating Financial Resources 1. Invest in ways to strengthen or expand businesses 2. Make acquisitions to establish positions in new industries 3. Fund long-range R&D ventures 4. Pay off existing long-term debt 5. Increase dividends 6.

Repurchase company’s stock

Step 8: Crafting a Corporate Strategy- Key Issues (cont.) • Is there ample resource fit among the businesses?

• Are there enough cash cows to finance cash hogs with potential to be star performers?

• Do core businesses generate dependable profits and / cash flow?

• Does makeup of business portfolio put firm in good future position?

Options: General Strategic Direction • Invest and grow  Aggressive expansion • Fortify-and-defend  Protect current position • Overhaul and reposition  Make major strategy changes • Harvest-divest  Spuf off business as independent company  Sell business

Step: Crafting a Corporate Strategy – Key Issues • Are enough businesses in attractiveness in attractive industries?

• Is the number of mature or declining businesses so great corporate growth will be sluggish?

• Are businesses overy vulnerable to seasonal influences or recession?

• Are there too many average-to-weak businesses in the company’s business make-up?

• Is there ample strategic fit among the businesses?

The Performance Test

• Can the company’s performance targets be reached with the current businesses?

 if yes, no major corporate strategy changes are indicated  If a performance gap is likely actions can be taken to close the gap

Chapter 9

IMPLEMENTING STRATEGY: BUILDING RESOURCE CAPABILITIES AND STRUCTURING THE ORGANIZATION Screen graphics created by: Jana F. Kuzmicki, Indiana University Southeast

Chapter Outline

• Strategy Implementation Framework – Key Tasks – Leading the Implementation Process • Building a Capable Organisation – Selecting people for key positions – Building core competencies and competitive capabilities – Matching organization structure to strategy • Why structure follows strategy • Strategic advantages and disadvantages of different organization structures • Organizational structures of the future

“Unless you have a trained, literate, motivated work force, and give them decision-making authority, you don’t get satisfied customers” Anthony Rucci Chief Administrative Officer Sears Roebuck

The Task of Implementing Strategy • An action-oriented, operations-driven activity revolving around managing people and business processes • Tougher and more time-consuming than crafting strategy • Success depends on doing a good job of – Leading – Motivating – Working with others to create fits between strategy and how organisation does things

Why Implementing Strategy is a Tough Management Job • Implementing a new strategy takes adept leadership to – Overcome pockets of doubt – Build consensus – Secure commitment of concerned parties – Get all implementation pieces in place and coordinated

Factors Influencing Managers in Leading Implementation Process • Experience and knowledge of business • New to job seasoned • Network and personal relationships • Diagnostic, administrative, interpersonal and problem-solving skills • Authority given manager • Leadership style most comfortable with • View of role to get things done • Context of organization's situation

Selecting People for Key Positions: Implementation Issues • Type of core management team needed to carry out strategy • Find the right people to fill each slot – Existing management team may be suitable – Core executive group may need strengthening • Promote from within • Bring in skilled outsiders

Key Organization-Building Objectives • Staff organizational units with the specialized talents, skills and technical expertise needed to develop and build core competencies • Build competitively valuable organizational capabilities

Task #1: Building a Capable Organisation • Selectable people for key positions • Develop skills core competencies managerial talents competitive capabilities

Selecting People for Key Positions: Key Considerations • Determine mix of – Backgrounds – Experiences and know-how – Beliefs and values – Styles of managing and personalities • Personal chemistry must be right • Talent base needs to be appropriate • Picking a solid management team needs to be acted on early in implementation process

Strategic Management Principle

Building core competencies, resource strengths and organizational capabilities that rivals can’t match is a sound foundation for sustainable competitive advantage!

Building Core Competencies: The Necessary Understanding 1. Core competencies are rarely grounded in skills or know-how of a single department i.

Typically emerge from collaborative efforts of different work groups 2. Leveraging competencies into competitive advantage requires concentrating more effort and more talent than rivals on strengthening competencies and creating valuable organizational capabilities 3. Sustaining competitive advantage requires adapting competencies to new conditions

Strategic Management Principle

• Building core competencies, resource strengths and organisational capabilities that rivals can’t match is a sound basis for sustainable competitive advantage.

The Most Valuable Organisational Capabilities • Contribute heavily to better strategy execution • Provide a differentiating fact that customers can see and that customers value • Are hard for rivals to match – Time consuming to build – Hard to replicate or imitate – Difficult to obtain from others

Building Competitively Valuable Competencies and Capabilities • Involves – Managing human skills, knowledge bases and intellect – Coordinating efforts of related work groups – Collaborative networking among internal groups and with external partners – Achieving dominating depth • Senior managers have to guide the process • The ongoing challenge; broaden, deepen or modify competencies and capabilities in response to customer/market changes

Building Competencies and Competencies and Capabilities • Involves – Managing human skills, knowledge bases and intellect – Coordinating efforts of related work groups – Collaborative networking among internal groups and with external partners • Senior managers have to guide the process • The ongoing challenge, broaden, deepen or modify competencies and capabilities in response to customer/market changes

Building Competencies and Capabilities: The Keys to Success: • Superior selection Empowerment • Training Attractive incentives • Cultural influences Organisational flexibility • Cooperative • Networking • Motivation Short deadlines Good databases

The Process of Building Organizational Capabilities: Step 1 • Step one is to – Select people with relevant skills/experience – Broaden or deepen individual abilities as needed – Mold the energies and work products of individuals into a cooperative group effort to create organisational ability

Step 2: Looking for Outsourcing Opportunities • Potential advantages of outsourcing • Decrease internal bureaucracies • Flatten organization structure • Provide firm with heightened strategic focus • Makes strategic sense when outsiders can perform certain activities – At a lower cost and/or – With higher value added

Step 4: Making Strategy-Critical Activities the Main Building Blocks • Assign managers of strategy critical activities a visible, influential position • Avoid fragmenting responsibility for strategy-critical activities across many departments • Provide coordinating linkages between related work groups • Meld into a valuable competitive capability

Guard against Organisation Designs that Fragment Activities • Parceling critical work across specialized departments contributed to Many hand-offs which Lengthens completion time Increase overhead costs Obsession with activity rather than result Solution: Pull critical processes from functional silos and create process-complete departments However some fragmentation is often advantageous for certain support activities

Step 3: Deciding which Activities Require Partners • The advantages partnering may offer: – Speed new technology/products to market – Quicker delivery or lower inventories of parts – Help provide better/faster technical assistance to customers via • Geographically wider distribution • Economical custom manufacture • More extensive after-sale support services

Partnering makes strategies sense when result is to enhance organisational capabilities

Strategic Management Principle

• N/Ll

Examples of Strategy-Critical Activities that are Often Fragmented • Filing customer orders • Customer service • Obtaining feedback from customers • New product development • Improving product quality • Managing relationships with key suppliers • Building capability to conduct business via the internet

Why Structure follows Strategy

• Changes in strategy typically require a new structure for implementation to be successful • Research indicates – Structure affects performance \structure merits reassement whenever strategy changes – New strategy involves different skills and key activities How work is structured is a means to an end not an end in itself.

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A Traditional Functional Organisation Structure General Manager Research & Development Engineering Manufacturing Marketing Human Resources Finance & Accounting

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A Geographic Organisation Structure CEO Corporate Staff GM North America GM Latin America GM Europe Engineering & Prod. Design Production GM Asia Pacific GM Central Asia & Africa District Staff Marketing & Distribution

Strategy-driven Approaches to Organization • N/L

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A Process-Oriented Functional Structure General Manager Foundry & Castings Screw Machining Inspection Customer Service Milling & Grinding Finishing & Heat Treating Loading & Shipping Billing & Accounting

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A Decentralized Line of Business Organisation Structure CEO Corporate services GM Business A Functional / Process Departments GM Business B Functional /Process Departments GM Business C Functional/Process Departments

Organizational Structures of the Future: Success depends On… • Quick response to shifting customer preferences • Short design to market cycles • First time quality • Custom order and multi version production • Expedited delivery and accurate order filing • Personalized customer service • Creativity and innovativeness • Speedy reaction to competitive developments

Characteristics of Organisation of the Future • Fewer boundaries between  Different vertical ranks  Functions and disciplines  Units in different geographic locations  Firm and its suppliers, distributors, strategic allies, and customers • Capacity for change and learning • Collaborative efforts among people in different functions and geographic locations • Extensive use of digital technology

Organisation Structures of the future: Meeting the New Requirements • Decentralized structures with fewer managers • Small scale business units • Reengineering to decrease fragmentation • Development of stronger and newer capabilities • Collaborative partnerships with outsiders • Empowerment and self directed work teams • Lean staffing of corporate support functions • Open communications via e mail • Electronic information systems • Accountability for results

How policies and Procedures Aid Strategy Implementation • Provide top down guidance regarding expected behaviors • Help align internal actions with strategy channeling efforts along the intended path • Enforce consistency in performance of activities in geographically scattered units • Serve as powerful lever for changing corporate culture to produce stronger fit with a new strategy

Instituting Best Practices and Continuous improvement • Searching out and adopting best practices is integral to effective implementation • Benchmarking has spawned new approaches to improve strategy execution • Reengineering • TQM • Continuous improvement programs

Implementing a Philosophy of continuous Improvement • Instill enthusiasm to do things right throughout company • Strive to achieve little steps forward each day i.e Kaizen • Ignite creativity in employees to improve performance of value chain activities • Preach there is no such thing as good enough • Reform the corporate culture

Creating strategy Supportive policies and Procedures • Role of new policies • Channel behaviors and decisions to promote strategy execution counteract tendencies of people to resist chosen strategy • Too much policy can be as stiffing as – Wrong policy or as – Chaotic as no policy • Often, the best policy is a willingness to empower employees

The Objectives of Quality Improvement Programs • Defect-free manufacture • Superior product quality • Superior customer service • Total customer satisfaction

EXCELLENCE

What is Total Quality Management?

• N/L

Characteristics of TQM/Continuous Improvement Programs • Valuable competitive asset in a company’s resource portfolio • Have hard-to-imitate aspects • Require substantial investment of management time and effort • Expensive in terms of training and meetings • Seldom produce short-term results • Long-term pay-off – instilling a TQM culture

Using Best Practice Programs as an Implementation Tool • Select indicators of successful strategy execution benchmark against best practice companies • Reengineer business processes • Build a TQ culture • Starts with management commitment • Install TQ-supportive employee practice • Empower employees to do the right things • Provide employees with quick access to required information • Preach that performance can be improved

Examples: Support Systems

• Airlines • Computerized reservation systems • Federal Express • Computerized parcel tracking system and leading edge flight operations systems

TQM vs Process Reengineering

• Reengineering – Aims at quantum of 30 to 50% or more • TQM - Stresses incremental progress • Techniques are not mutually exclusive • Reengineering- used to produce a good basic design yielding dramatic improvements • TQM – used to perfect process, gradually improving efficiency and effectiveness

Installing Support Systems

• Essential to promote successful execution • Types of support systems • Online data systems • Internet and company intranets • Electronic mail • Web pages • Mobilising information and creating systems to use knowledge effectively can yield competitive advantage

Examples: Support Systems

• Otis Elevator • Sophisticated maintenance support system • Procter & Gamble • System to obtain early warning signs of product problems and changing tastes

Approaches: Motivating People to Execute the Strategy Well • Inspire employees to do their best • Get employees to buy into strategy • Structure individual efforts in teams to facilitate a supportive climate • Allow employees to participate in decision about their jobs • Make jobs interesting in satisfying • Devise strategy – supportive motivational approaches

Examples: Motivational Practices Tupperware and Mary Kay Cosmetics • Hold inspirational get-togethers for sales force organisations Nordstrom • Pays salespeople higher than prevailing rates, plus commission. “Use judgment in all situations. There will be no additional rules.”

Balancing Positive vs. Negative Rewards • Elements of both are necessary • Challenge and competition is necessary for self satisfaction • Prevailing view • Positive approaches work better than negative ones • Enthusiasm • Effort • Initiative

Examples” Motivational Practices • Mars Inc.

• Every employee including the president, gets a weekly 10% bonus by coming to work on time each day that week • Japanese Companies • Employees meet regularly to hear inspirational speeches, sing company songs, and chant the corporate litany

Examples: Motivational Practices • Microsoft • Team members enjoy working 60-80 hours per week for a leading edge company, accompanied by attractive pay and lucrative stock options • Lincoln Electric • Rewards productivity by paying for each good produced (defects can be traced to worker causing them). Bonuses of 50% to 100% are common

Linking the Reward System to Performance Outcomes • Rewards are the single most powerful tool to win commitment to the strategy • Objectives – Generously reward those achieving objectives – Deny rewards to those who don’t – Make strategic performance measures the dominate basis for designing incentives

CHAPTER 11 IMPLEMENTING STRATEGY: CULTURE AND LEADERSHIP

Screen graphics created by: Jana F. Kuzmicki, Indiana University Southeast

Chapter Outline

• Building a strategy supportive corporate culture • Where does corporate culture come from?

• Power of culture • Types of cultures • Creating a fit between Strategy and culture • Establishing ethical Standards and values • Building a spirit of high performance • Exerting strategic leadership MBWA • Fostering a strategy supportive culture • Keeping internal organisation innovative • Dealing with company politics • Enforcing ethical behaviour • Making collective adjustments

Features of the Corporate Culture at Wal-Mart • Dedication to customer satisfaction • Zealous pursuit of low costs • Belief in treating employees as partners • Sam Walton’s legendary frugality • Ritualistic Saturday morning meetings • Executive commitment to – Visit stores – Talk to customers – Solicit employees suggestions

“An organization's capacity to execute its strategy depends on its “hard” infrastructure and systems– and on its “soft” infrastructure—its culture and norms.” Amar Bhide

What Makes up a Company’s Culture • Beliefs about how business ought to be conducted • Values and principles of management • Patterns of how we do things around here • Oft-told stories illustrating company’s values • Taboos and political don’ts • Traditions • Ethical standards

Features of the Corporate Culture at Nordstrom's • Company motto – Respond to unreasonable customer requests • Out –of the ordinary customer requests viewed as opportunities for “heroic” acts • Promotions based on outstanding service • Salaries based entirely on commission • Weed out those not meeting standards and reward those who do

Types of Corporate Cultures

• Strong vs. Weak Cultures • Low-performance cultures

How does a culture come to be strong?

• Leader who establishes values consistent with – Customer needs – Competitive conditions – Strategic requirements • A deep, abiding commitment espoused values and business philosophy • Genuine concern for well-being of – Customers – Employees – Shareholders

Characteristics of Weak Culture Companies • Many subcultures • Few values and norms widely shared • Few strong traditions • Little cohesion among the departments • Weak employee allegiance to company’s vision and strategy • No strong sense of company identity

Characteristics of Strong Culture Companies • Conduct business according to a clear, widely understood philosophy • Management spends considerable time communicating and reinforcing values • Values widely shared and deeply rooted • Often have a values statement • Careful screening /selection of new employees to be sure they will “fit in” • Visible rewards for those following norms; penalties for those who don’t

Strategic Management Principle

• Strong cultures promote good strategy execution where there’s fit and hurt execution where there’s little fit

Characteristics of Low Performance Cultures • Politicized internal environment issues resolved on basis of turf • Hostility to change • Experimentation and efforts to alter status quo discourages • Avoid risks and don’t screw up • Promote managers who are more concerned about process than about results • Aversion to look outside for superior practices • Must be invented here syndrome

Instilling Values of Ethics

• Incorporating values statement and ethics code in employee training programs • Screen out applicants who do not exhibit compatible character traits • Communicate the vales and ethics code to all employees • Management involvement and oversight • Strong endorsement by CEO • Word-of-mouth indoctrination

Approaches to Building a Spirit of High Performance • Treat employees with dignity and respect • Train each employee thoroughly • Encourage employees to use initiative • Set clear performance standards • Use rewards and punishment to enforce high performance standards • Hold managers responsible for employee development • Grant employees autonomy to contribute • Make champions out of people who excel

Role #1: Stay on Top of What’s Happening • Talk with many people at all levels • Be an avid practitioner of MBWA • Observe situation firsthand • Monitor operating results regularly • Get feedback from customers • Watch competitive reactions of rivals

Building a Spirit of High Performance into the Culture • Emphasize achievement and excellence • Promote a results-oriented culture • Pursue practices to inspire people to excel • Desired outcome – Produce extraordinary results with ordinary people

Six Roles of the Strategy Implementer 1.

Stay on top of what’s happening 2. Promote a culture energizing organisation to accomplish strategy 3. Keep firm responsive to changing conditions 4. Build consensus and deal with politics of crafting and implementing strategy 5. Enforce ethics standards 6. Take corrective actions to improve overall strategic performance

Role #2: Foster a Strategy – Supportive Culture • Successful leaders – Spend time convincing organisation members that chosen strategy is right and that competent strategy execution is top priority – Nurturing values – Building and nurturing a culture that promotes good strategy execution

Political Tactics of Successful Executives • Let weakly supported ideas die via inaction • Establish harmless for strongly supported ideas that shouldn't be opposed • Keep low ideas on unacceptable ideas by getting subordinates to say no • Let most negative decision come from group consensus • Lead the strategy but don’t dictate it • Stay alert to symbolic impact of one’s actions • Ensure all major power bases have access to top managers • Inject new views when considering major changes • Minimize political exposure on highly controversial issues

Leader’s Role in Enforcing Ethical Behaviour • Set an excellent ethical example • Provide training to employees about what is ethical and what isn’t • Reiterate unequivocal support of ethics code • Remove people from key positions if found guilty • Reprimand people lax in monitoring ethical compliance

Role #6: Lead the Process of Making Corrective Adjustments • Requires both – Reactive adjustments – Proactive adjustments • Involves – Reshaping long-term direction, objectives and strategy to unfolding events – Promoting initiatives to align internal activities and bahaviour with strategy

Role #5: Enforce Ethical Behaviour • Insist upon strong code of ethics • Install tough consequences for unethical behaviour • Take actions to ensure compliance • Make it a duty for employees to – Report ethical violations – Observe ethical codes

Key Components of an Ethics Program • Oversight committee of board of directors • Committee of senior managers to direct training, implementation and compliance • Annual audit manager’s efforts to uphold ethical standards • Formal reports on managers’ actions to remedy deficient conduct • Require people to sign documents certifying compliance with ethical standards

Supplementing Formal Approaches to Organizing • Special project teams – create a largely self-sufficient work group to oversee the completion of a special activity • Popular means of handling one of a kind situations having a finite life expectancy

Cross Functional Task Forces

• Top level executives/specialists come together to: – Solve problems requiring specialised expertise – Coordinate strategy – related activities spanning departmental boundaries – Explore ways to leverage skills of functional specialists into broader care competencies Typically used to solve real problems, produce some solution efficiently and then disbanded

Venture Team Approach

• Group formed to manage launch of new producer, entry into new geographic area, or creation of a specific new business

Self contained work teams

• People from different disciplines work together on a semi-permanent basis to continuously improve performance in specific strategy related areas

Process Teams

• Functional specialists who perform pieces of a specific business process form a team to reengineer the process • Team is held accountable for results and rewarded on basis of how well process is performed

Contact Managers

• Managers who provide a single point contact for customers, acting as a buffer between internal process and customers • Best results are achieved when contact persons are empowered to act on their own judgment to please customers

Current Trends in Organisation

• Quick response to customer preferences