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Strategic Management Semester of Notes

by: Shogo Okuda

Strategic Management Semester of Notes MGMT 430

Marketplace > University of Washington > Business Administration > MGMT 430 > Strategic Management Semester of Notes
Shogo Okuda
GPA 3.97
Strategic Management

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Strategic Management
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Date Created: 10/30/14
MGMT43O Notes 115 CH6 Corporate Level Strategy Corporate strategies strategies rms use to diversify their operations form a single business competing in a single market into several product markets and most commonly into serveral busiensses Corporate level strategy speci es actions a rm takes to gain a competitive advantage by selecting an dmanaging a group of different businesses competing in different product markets Corporate strategy concemed with 2 key issues 1 in what product markets and businesses the rm should compete 2 how corporate HQ shold manage those businesses The more constrained is the relatedness of diversi cation Low levels of Diversi cation Low level of diversi cation uses either a single or dominant business corporate level diversi cations strategy Single business diversification strategy corporate level strategy wherein the rm generates 95 or more of its sales revenue from its core business area Dominant business diversifications strategy rm generates between 70 and 95 of its total revenue win a single business area UPS Moderate and High Levels of Diversi cation Related constrained diversification strategy less than 70 of revenue comes from the dominant business and all businesses share product technological and distribution linkages Campbell soup PampG Merck amp Co Related linked mix related and unrelated Less than 7 0 of revenue comes from the dominant business and there are only limited links between businesses GE Unrelated diversification strategy less than 7 0 of revenue comes from the dominant business and there are no common links between businesses United Technologies Textron Samsung Hutchison Whampoa Limited called conglomerates Reasons for Diversi cation ValueCreating Diversi cation 39 Economies of scope related diversi cation 0 Sharing activities 0 Transferring core competencies Market power related diversi cation 0 Blocking competitors through multipoint competition 0 Vertical integration Financial economies unrelated diversi cation 0 Ef cient intemal capital allocation 0 Business restructuring Valueneutral Diversi cation 39 Antitrust regulation Tax laws Low performance Uncertain future cash ows Risk reduction for rm Tangible resources Intangible resources Value reducing diversi cation Diversifying managerial employment risk Increasing managerial compensation Value Creating Diversi cation Related Constrained and Related Linked Diversi cation Economies of scope cost savings that the rm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate level core competencies that were developed in one of its businesses to another of its businesses 1 sharing activities operational relatedness 2 transferring corporate level core competencies corporate relatedness Firms can share operational relatedness by sharing either a primary activity or support activity Corporate level core competencies complex sets of resources and capabilities that link different businesses primarily through managerial and technological knowledge experience and expertise Helps rms to create value in at least 2 ways 1 bc the expense of developing a core competence has already been incurred in one of the rm s businesses transferring this competence to a 2nd businesses eliminates the need for that business to allocate resources to develop it HP 2 Resource intangibility intangible resources are dif cult for competitors to understand and imitate a2 immediate competitive advantage over its rivals Market Power Market power exists when a rm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level or both Multipoint competition exists when 2 or more diversi ed rms simultaneously compete in the same product areas or geographic markets Vertical integration exists when a company produces its own inputs backward integration or owns its own source of output distribution forward integration Market power is gained as the rm develops the ability to save on its operations avoid market costs improve product quality and possibly protect its technology from imitation by rivals It is also created when rms have strong ties between their assets for which no market prices exist Establishing a market price would result in high search and transaction costs a2 rms seek to vertically integrate rather than remain separate businesses Many manufacturing rms have been reducing vertical integration as a means of gaining market power virtual integration gt vertical integration may be a more common source of market power gains for rms today Simultaneous Operational Relatedness and Corporate Relatedness EX Walt Disney Unrelated Diversi cation Financial economies cost savings realized through improved allocations of nancial resources based on investments inside or outside the rm In large diversi ed rms the corporate HQ distributes capital to its businesses to create value for the overall corporation Firms w intemal capital markets may have at least 2 informational advantages 1 information provided to capital markets through annual reports and other sources may not include negative information instead emphasizing positive prospects and outcomes 2 Although a rm must disseminate information that information also becomes simultaneously available to the rm s current and potential competitors Thus an ability to ef ciently allocate capital through an intemal market ay help the rm protect the competitive advantages it develops while using its corporate level strategy as well as its various business unit level strategies Conglomerate discount results from analyst not knowing how to value a vast array of large businesses w complex nancial reports For both hightech rms and service based companies relatively few tangible assets can be restructured to create value and sell pro tably It is dif cult to restructure intangible assets such as human capital and effective relationships that have evolved over time between buyer and sellers Value neutral diversi cation Incentives and Resources Incentives to diversify come from both extemal and intemal environment External include antitrust regulations and tax laws Internal include low performance uncertain future cash ows and pursuit of synergy and reduction of risk for the rm While individual tax rates for capital gains and dividends created a shareholder incentive to increase diversi cation before 1986 they encouraged less diversi cation after 1986 unless it was funded by taxdeductible debt Cuvilinear Relationship between Diversi cation and Performance Some research shows that low retums are related to greater levels of diversi cation ex eBay and Skype As a rrn s product line matures or is threatened diversi cation may be an important defensive strategy Synergy exists when the value created by business units Working together exceeds the value that those same units create Working independently But as rm increases its relatedness between business units it also increases its risk of corporate failure c synergy produces joint interdependence between businesses that constrains the rm s exibility to respond This threat may force 2 basic decisions 1 rm may reduce its level of technological change by operating in environments that are more certain 2 rm may constrain its level of activity sharing and forgo synergy s potential bene ts Resources and Diverisi cation Although both tangible and intangible resources facilitate diversi cation they vary in their ability to create value Intangible resources are more exible than tangible physical assets in facilitating diversi cation Value Reducing Diversi cation Managerial Motive to Diversify Managerial motives to diversify can exist independent of valueneutral reasons and value creating reasons Desire for increased compensation amp reduced managerial risk are 2 motives for top level executive to diversify their rm beyond value creating and value neutral levels It is overly pessimistic to assume that managers usually act in their own selfinterest as opposed to their rm s interest Greater the incentives and the more exible the resources the higher the level of expected diversi cation Financial resources should have a stronger relationship to the extent of diversi cation than either tangible or intangible resources Tangible resources most in exible are useful primarily for related diversi cation MGMT43O Notes 106 Ch3 The Internal Organization Resources Capabilities Core Competencies and Competitive Advantages Apple de es gravity w innovative genius In general the sustainability of a competitive advantage is a function of 3 factors 1 The rate of core competence obsolescence bc of environmental changes 2 The availability of substitutes for the core competence 3 The imitability of the core competence Global mind set the ability to analyze understand and manage an internal organization in ways that are not dependent on the assumptions of a single country culture or context Analysis of the rm s internal organization requires that evaluators examine the rm s portfolio of resources and the bundles of heterogeneous resources and capabilities managers have created Understanding how to leverage the rm s unique bundle of resources and capabilities is a key outcome decision makers seek when analyzing the internal organization Value measured by a product s performance characteristics and by its attributes for which customers are willing to pay Dif cult managerial decisions concerning resources capabilities and core competencies are characterized by 3 conditions uncertainty complexity and intraorganizational con icts Managers face uncertainty in terms of new proprietary technologies rapidly changing economic and political trends transformations in societal values and shifts in customer demands Environmental uncertainty increases the complexity and range of issues to examine when studying the internal environment Intraorganizational con ict surfaces when decisions are made about the core competencies to nurture as well as how to nurture them Judgment capability of making successful decisions when no obviously correct model or rule is available or when relevant data are unreliable or incomplete GE builds management capabilities and shares with others Resources Capabilities and Core Competencies Typically resources alone do not yield a competitive advantage Tangible resources assets that can be observed and quanti ed Ex production equipment manufacturing facilities formal reporting structures Intangible resources assets that are deeply rooted in the rm s history and have accumulated over time bc they are embedded in unique patterns of routines intangible resource are relatively dif cult for competitors to analyze and imitate Ex knowledge trust between managers and employees managerial capabilities organizational routine 4 types of tangible resources Financial resources rm s borrowing capacity rm s ability to generate internal funds Organizational resources rm s formal reporting structure and its formal planning controlling and coordinating systems Physical resources sophistication and location of a rm s plant and equipment access to raw materials Technological resources stock to technology such as patents trademarks copyrights and trade secrets Human Resources knowledge trust managerial capabilities organizational routines Innovation Resources ideas scienti c capabilities capacity to innovate Reputational Resources reputation with customers brand name perceptions of product quality durability and reliability reputation with suppliers for ef cient effective supportive and mutually bene cial interactions and relationships Although production assets are tangible many of the processes necessary to use these assets are intangible The more intangible a resource is the more sustainable will be the competitive advantage that is based on it With intangible resources the larger the network of users the greater the bene t to each party Capabilities are often based on developing carrying and exchanging information and knowledge through the rm s human capital Core competencies distinguish a company competitively and re ect its personality Examples of Firm s Capabilities 0 Distribution effective use of logistics mgmt techniques Wal Mart 0 Human Resources Motivating empowering and retaining employees Microsoft 0 Mgmt IS effective and ef cient control of inventories through POS data collection methods Wal Mart 0 Marketing effective promotion of brand name products effective customer service innovative merchandising PampG 0 Mgmt ability to envision the future of clothing effective organizational structure Hugo Boss 0 Manufacturing design and production skills yielding reliable products product and design quality miniaturization of components and products Komatsu 0 RampD innovative technology Caterpillar 2 tools to help identify and build core competencies 1 Four speci c criteria of sustainable competitive advantage that rms can use to determine those capabilities that are core competencies 2 Value chain analysis Although every core competence is a capability not every capability is a core competence 4 criteria of sustainable competitive advantage Valuable capabilities allow the rm to exploit opportunities or neutralize threats in its external environment Rare capabilities capabilities that few if any competitors possess Costly to imitate capabilities capabilities that other rms cannot easily develop 1 Firm sometimes is able to develop capabilities bc of unique historical conditions A rm w unique and valuable organizational culture that emerged in the early stages of the company s history may have an imperfectly imitable advantage over rms founded in another historical period 2 Link between the rm s capabilities and its competitive advantage is casually ambiguous ambiguous cause 3 Social complexity at least some and frequently many of the rm s reputation w suppliers and customers are examples of socially complex capabilities trust interpersonal relationships etc Nonsubstitutable capabilities capabilities that do not have strategic equivalents 2 valuable rm resources are strategically equivalent when they each can be separately exploited to implement the same strategies Value chain analysis Allows the rm to understand the parts of its operations that create value and those that do not Primary activities involved wa product s physical creation its sale and distribution to buyers and its service after the sale Support activities provide the assistance necessary for the primary activities to take place Most valuable links on the chain are people who have knowledge about customers To be a source of competitive advantage a resource or capability must allow the rm to 1 To perform an activity in a manner that provides value superior to that provide by competitors or 2 To perform a value creating activity that competitors cannot perform When rms have strong positive relationships W suppliers and customers they are said to have social capital Examining the value creating potential of primary activities Inbound logistics activities such as material handling Warehousing and inventory control used to receive store and disseminate inputs to a product Operations activities necessary to convert the inputs provided by inbound logistics into nal product form Machining packaging assembly and equipment maintenance are examples of operations activities Outbound logistics activities involved W collecting storing and physically distributing the nal product to customers Examples of these activities include nished goods Warehousing materials handling and order processing Mktg and Sales activities completed to provide means through Which customers can purchase products and to induce them to do so To effectively market and sell products rms develop advertising and promotional campaigns select appropriate distribution channels and select develop and support their sales force Service activities designed to enhance or maintain a product s value Firms engage in a range of service related activities including installation repair training and adjustment Examining the value creating potential of support activities Procurement activities completed to purchase the inputs needed to produce a rm s products Ex raw materials and supplies machinery Technological development activities completed to improve a rm s product and processes used to manufacture it ex process equipment Human resource mgmt activities involved W recruiting hiring training developing and compensating all personnel Firm infrastructure includes activities such as general mgmt planning nance acctg legal support and governmental relations that are required to support the Work of the entire value chain Outsourcing purchase of a value creating activity from an external supplier Firms engaging in effective outsourcing increase their exibility mitigate risks and reduce their capital investments To verify that appropriate primary and support activities are outsourced managers should have 4 skills strategic thinking deal making partnership governance and change management All core competencies have the potential to become core rigidities However in the nal analysis changes in the external environment do not cause core competencies to become core rigidities rather strategic myopia and in exibility on the part of managers are those causes MGMT43O Notes 929 Chl Strategic Management and Strategic Competitiveness McDonald s Corporation Firing on all cylinders while preparing for the future Business level perspective McDonald decided to focus on product innovations and upgrades of its existing properties instead of continuing to rapidly expand the number of units while relying almost exclusively on the core products it had sold for many years as the source f its sales revenue Corporate level perspective McDonald s decided to become less diversi ed Strategic competitiveness achieved when a rm successfully formulates and implements a value creating strategy Strategy integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage Competitive advantage has this when it implements a strategy competitors are unable to duplicate or nd too costly to try to imitate Above average returns returns in excess of what an investor expects to earn from other investments w a similar amount of risk Risk investor s uncertainty about the economic gains or losses that will result from a particular investment Average returns returns equal to those an investor expects to earn from other investments w a similar amount of risk Strategic management process full set of commitments decisions and actions required for a rm to achieve strategic competitiveness and earn above average returns Hyper competition assumptions of market stability are replaced by notions of inherent instability and change Results from the dynamics of strategic maneuvering among global and innovative combatants It is a condition of rapidly escalating competition based on price quality positioning competition to create know how and establish rst mover advantage and competition to protect or invade established product or geographic markets Firms often aggressively challenge their competitors in the hopes of improving their competitive position and ultimately their performance Several factors create hypercompetitive environments and in uence the nature of the current competitive landscape emergence of a global economy and technology speci cally rapid technological change are the 2 primary drivers of hypercompetitive environments and the nature of today s competitive landscape Global economy is one in which goods services people skills and ideas move freely across geographic borders Globalization increasing economic interdependence among countries and their organizations as re ected in the ow of goods and services nancial capital and knowledge across country borders Technology related trends and conditions can be placed into 3 categories technology diffusion and disruptive technologies the information age and increasing knowledge intensity Perpetual innovation term used to describe how rapidly and consistently new information intensive technologies replace older ones Disruptive technologies technologies that destroy the value of an existing technology and create new markets surface frequently in today s competitive markets Strategic exibility set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment Industrial Organization model of above average returns explains the external environment s dominant in uence on a rm s strategic actions It speci es that the industry or segment of an industry in which a company chooses to compete has a stronger in uence on performance than do the choices managers make inside their organizations The rm s performance is believed to be determined primarily by a range of industry properties including economies of scale barriers to market entry diversi cation product differentiation and the degree of concentration of rms in the industry 4 underlying assumptions 1 External environment is assumed to impose pressures and constraints that determine the strategies that would result in above average returns 2 Most rms competing win an industry or win a segment of that industry are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources 3 Resources used to implement strategies are assumed to be highly mobile across rms so any resource differences that might develop between rms will be short lived 4 Organizational decision makers are assumed to be rational and committed to acting in the rm s best interests as shown by their pro t maximizing behaviors Five forces model of competition an analytical tool used to help rms nd the industry that is the most attractive for them Suggests that industry s pro tability is a function of interactions among ve forces suppliers buyers competitive rivalry among rms currently in the industry product substitutes and potential entrants to the industry The model suggests that returns are determined primarily by external characteristics rather than by the rm s unique internal resources and capabilities IO model of above average returns 1 Study the external environment especially the industry environment General environment industry environment competitor environment Locate an industry w high potential for above average returns Identify the strategy called for by the attractive industry to earn above average returns Develop or acquire assets and skills needed to implement the strategy Use the rm s strengths its developed or acquired assets and skills to implement the strategy w4gts Resource based model assumes that each organization is a collection of unique resources and capabilities Resources inputs into a rm s production process such as capital equipment the skills of individual employees patents nances and talented managers 3 categories physical human and organizational capital Capability the capacity for a set of resources to perform a task or an activity in an integrative manner Core competencies resources and capabilities that serve as a source of competitive advantage for a rm over its rivals Firm s resources and capabilities have potential to be the foundation for a competitive advantage when they are valuable rare costly to imitate and nonsubstitutable Valuable when they allow a rm to take advantage of opportunities or neutralize threats in its external environment Rare when possessed by few if any current and potential competitors Costly to imitate when other rms either cannot obtain them or are at a cost disadvantage in obtaining them compared w the rm that already possess them Nonsubstitutable when they have no structural equivalents Resource based model of above average returns 1 Identify the rm s resources Study its strengths and weaknesses compared w those of competitors 2 Determine the rm s capabilities What do the capabilities allow the rm to do better than its competitors 3 Determine the potential of the rm s resources and capabilities in terms of a competitive advantage 4 Locate an attractive industry an industry w opportunities that can be exploited by the rm s resources and capabilities 5 Select a strategy that best allows the rm to utilize its resources and capabilities relative to opportunities in the external environment Vision picture of what the rm want to be and in broad terms what it wants to ultimately achieve Helps people feel what they are supposed to be doing in the organization Vision is foundation for the rm s mission Mission speci es the business or businesses in which the rm intends to compete and the customers it intends to serve Firm s mission is more concrete than vision Vision and mission are critical aspects of the strategic inputs it requires to engage in strategic actions as the foundation for achieving strategic competitiveness and earning above average returns Stakeholders individuals and groups who can affect the rm s vision and mission are affected by the strategic outcomes achieved Not every stakeholder has the same level of in uence Most obvious stakeholders at least in the US organizations are shareholders individuals and groups who have invested capital in a rm in the expectation of earning a positive return on their investments Capital market stakeholders 0 Shareholders 0 Major suppliers of capital eg banks Product market stakeholders 0 Primary customers 0 Suppliers 0 Host communities 0 Unions Organizational stakeholders 0 Employees 0 Managers 0 Nonmanagers First carefully identify all stakeholders Second prioritize them in case it cannot satisfy all of them Power is the most critical criterion in prioritizing Strategic leaders people located in different parts of the rm using the strategic management process to help the rm reach its vision and mission Organizational culture complex set of ideologies symbols and core values that are shared throughout the rm and that in uence how the rm conducts business The relationship between organizational culture and strategic leaders work is reciprocal Pro t pool entails the total pro ts earned in an industry at all points along the value chain 4 steps to identifying pro t pools 1 De ne the pool s boundaries Estimate the pool s overall size Estimate the size of the value chain activity in the pool Reconcile the calculations 39gtquot MGMT43O Notes 1015 Ch4 Business Level Strategy ACER bare bones cost structure to succeed in global PC markets Strategy is concerned w making choices among 2 or more alternatives Business level strategy an integrated and coordinated set of commitments and actions the rm sues to gain a competitive advantage by exploiting core competencies in speci c product markets Business level strategy 2 core strategy When selecting business level strategy the rm determines 1 Who will be served 2 What needs those target customers have that it will satisfy 3 How those needs will be satis ed Reach dimension of relationships w customers concerned w the rm s access and connection to customers Richness concerned w the depth and detail of the 2way flow of information between the rm and the customer Ajfiliation concerned w facilitating useful interactions w customers Who Determining the customers to serve Market segmentation dividing customers into groups based on their needs Basis for customer segmentation Consumer markets Demographic factors age income sex etc Socioeconomic factors social class stage in the family life cycle Geographic factors cultural regional and national differences Psychological factors lifestyle personality traits Consumption patterns heavy moderate and light users Perceptual factors bene t segmentation perceptual mapping In ustrial Markets End use segments identi ed by SIC code Product segments based on technological differencesproduction economics Geographic segments de ned by boundaries between countries or by regional differences win them Common buying factor segments cut across product market and geographic segments Customer size segments Needs related to a product s bene ts and features How determining core competencies necessary to satisfy customer needs Purpose of business levels strategy to create differences between the rm s position and those of its competitors To position differently rm must decide whether to perform activities differently or to perform different activities Types of business strategies 0 Cost leadership 0 Differentiation 0 Focused cost leadership 0 Focused differentiation 0 Integrated cost leadershipdifferentiation 2 types of competitive scope broad target amp narrow target Cost leadership strategy integrated set of actions taken to produce goods or services w features that are acceptable to customers at the lowest cost relative to that of competitors Commonly sell standardized goodsservices Process innovations important Risks U1I bJgt t OU1I L Jgt t 1 Processes used by the cost leader to produce and distribute its goodservice could become obsolete bc of competitor s innovations 2 Too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers perceptions of competitive levels of differentiation Differentiation strategy integrated set of actions taken to produce goodsservices at an acceptable cost that customers perceive as being different in ways that are important to them Risks 1 Customers might decide that the price differential between the differentiator s product and the cost leader s product is too large 2 Firm s means of differentiation may cease to provide value for which customers are willing to pay 3 Experience can narrow customers perceptions of the value of a product s differentiated features Focus strategy integrated set of actions taken to produce goodsservices that serve the needs of a particular competitive segment Examples of speci c market segment 1 A particular buyer group 2 A different segment of a product line 3 Different geographic market Focused cost leadership strategy IKEA Focused differentiation strategy Kazoo toys Competitive risks of focus strategies 1 Competitor may be able to focus on a more narrowly de ned competitive segment and outfocus the focuser 2 Company competing on an industry wide basis may decide that the market segment served by the rm using a focus strategy is attractive and worthy of competitive pursuit 3 Needs of customers win a narrow competitive segment may become more similar to those of industry wide customers as a whole over time Integrated cost leadershipdifferentiation strategy to ef ciently produce products w some differentiated features Flexible manufacturing system increase the exibilities of human physical and information resources that the rm integrates to create relatively differentiated products at relatively low costs Goal of FMS eliminate the low cost vs product variety trade off that is inherent in traditional manufacturing technologies Total quality management managerial innovation that emphasizes an organiztion s total commitment to the customer and to continuous improvement of every process through the use of data driven problem solving approaches based on empowerment of employee groups and teams Firms develop and use TQM systems in order to 1 Increase customer satisfaction 2 Cut costs 3 Reduce the amount of time required to introduce innovative products to the marketplace Competitive risks of the integrated cost leadershipdifferentiation strategy Firms nd it dif cult to perform primary and support activities in ways that allow them to produce relatively inexpensive products w levels of differentiation that create value for the target customer Firms must be able to simultaneously reduce costs incurred to produce products while increasing products differentiation MGMT43O Notes 1025 Ch5 Competitive Rivalry and Competitive Dynamics Recessions staple goods manufacturers retailers that sell consumer staple goods health care products and pharmaceuticals movie studios and theaters video game developers and distributors candy manufacturers tobacco and alcohol tend to do well during recession Competitors rms operating in the same market offering similar products and targeting similar customers Competitive rivalry the ongoing set of competitive actions and competitive responses that occur among rins as they maneuver for an advantageous market position Competitive behavior the set of competitive actions and competitive responses the rin takes to build or defend its competitive advantages and to improve its market position Multimarket competition occurs when rins compete against each other in several product or geographic markets Competitive dynamics refer to all competitive behaviors the total set of actions and responses taken by all firms competing within a market Competitor Analysis Market Commonality concemed w the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each In general multimarket competition reduce competitive rivalry but some firms will still compete when the potential rewards are high Resource similarity extent to which the rm s tangible and intangible resources are comparable to a competitor s in terms of both type and amount Firm s mapping of its competitive relationship w rivals is uid as firms enter and exit markets and as companies resources change in type and amount 2 companies with which the firm is a direct competitor change across time Awareness prerequisite to any competitive action or response taken by a firm refers to the extent to which competitors recognize the degree of their mutual interdependence that results from market commonality and resource similarity Motivation concems the firm s incentive to take action or respond to a competitor s attack relates to perceived gains and losses Bc of the high stakes of competition under the condition of market commonality the probability is high that the attacked firm will respond to its competitor s action in an effort to protect its position in one or more markets Ability relates to each firm s resources and the exibility they provide Resource dissimilarity also in uences competitive actions and responses between firms in tat the greater is the resource imbalance between the acting rin and competitors or potential responders the greater will be the delay in response by the firm with a resource disadvantage Competitive action strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position Competitive response strategic or tactical action the firm takes to counter the effects of a competitor s competitive action Strategic action or strategic response market based move that involve a signi cant commitment of organizational resources and is difficult to implement and reverse Tactical action or a tactical response market based move that is taken to fine tune a strategy it involves fewer resources and is relatively easy to implement and reverse First mover firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position In addition to eaming aboveaverage retums until its competitors respond to its successful competitive action the first mover can gain 1 the loyalty of customers who may become committed to the goods or services of the firm that first made them available 2 market share that can be difficult for competitors to take during future competitive rivalry Slack buffer or cushion provided by actual or obtainable resources that aren t current in use and are in excess of the minimum resources needed to produce a given level of organizational output Second mover firm that responds to the first mover s competitive action typically through imitation Late mover firm that responds to a competitive action a significant amount of time after the first mover s action and the second mover s response Organizational size affects the likelihood that it will take competitive actions as well as the types and timing of those actions Quality exists when the firm s goods or services meet or exceed customer s expectations Likelihood of response In general a firm is likely to respond to a competitor s action when l the action leads to better use of the competitor s capabilities to gain or produce stronger competitive advantages or an improvement in tis market position 2 the action damages the firm s ability to use it capabilities to create or maintain an advantage 3 the firm s market position becomes less defensible Quality dimensions of goods and services Product quality dimensions 1 performance operating characteristics features important special characteristics exibility meeting operating specifications over some period of time durability amount of use before performance deteriorates conformance match with preestablished standards 39gt 6 serviceability ease and speed of repair 7 aesthetics how a product looks and feels 8 perceived quality subjective assessment of characteristics product image Service quality dimensions 1 timeliness performed in the promised period of time courtesy performed cheerfully consistency giving all customers similar experiences each time convenience accessibility to customers completeness fully serviced as required 6 accuracy performed correctly each time Actor s reputation Actor firm taking an action or a response while reputation is the positive or negative attribute ascribed by one rival to another based on past competitive behavior Market dependence denotes the extent to which a f1rm s revenues or pro ts are derived from a particular market Slow cycle markets those in which the f1rm s competitive advantages are shielded from imitation commonly for long periods of time and where imitation is costly 39gt competitive advantages are sustainable over longer periods of time in slowcycle markets Fast cycle markets markets in which the f1rm s capabilities that contribute to competitive advantages aren t shielded from imitation and where imitation is often rapid and inexpensive Fast cycle more volatile than slow cycle and standard cycle markets Innovation is the key source of competitive advantage Candy products represent a standard cycle market firms in the industry take actions to build customer loyalty seek high market shares and try to build positive brand names Standard cycle markets markets in which the f1rrn s competitive advantages are partially shielded from imitation and imitation is moderately costly Serves many customers in competitive markets Capabilities and core competencies on which their competitive advantages are based are less specialized imitation is faster and less costly for standard cycle f1mrs than for those competing in slow cycle markets However imitation is slower and more expensive in these markets than in fast cycle markets bc of large volumes the size of mass markets and the need to develop scale economies the competition for market share is intense in standard cycle markets innovation has substantial in uence on competitive dynamics as it affects the actions and responses of all companies competing within a slowcycle fastOcycle or standard cycle market MGMT43O Notes 103 Ch 2 Phillip Morris International The Effects of its external environment Politicallegal segment of PMl s general environment affect how PMI conducts its business Global segment of the general environment affect as well Global easier PMI anticipates that changes will occur in the sociocultural segment of the general environment such that fewer people will be willing to risk disease by consuming tobacco products As of physical environment segment of the external environment PMI says that it is strongly committed to the promotion of sustainable tobacco farming the ef cient use of natural resources the reduction of waste in manufacturing process eliminating child labor and giving back to the communities in which it operates Firm s external environment creates both opportunities and threats Firm s strategic actions are in uenced by the conditions in the 3 parts general industry and competitor of its external environment General environment composed of dimensions in the broader society that in uence an industry and the rms within it 7 environmental segments demographic economic politicallegal sociocultural technological global and physical Demographic segment population size age structure geographic distribution ethnic mix income distribution Economic segment in ation rates interest rates trade de cits or surpluses budget de cits or surpluses personal savings rate business savings rates GDP Politicallegal segment antitrust laws taxation laws deregulation philosophies labor training laws educational philosophies and policies Sociocultural segment women in the workforce workforce diversity attitudes about the quality of work life shifts in work and career preferences shifts in preferences regarding product and service characteristics Technological segment product innovations applications of knowledge focus on pvt and govt supported RampD expenditures new communication technologies Global segment important political events critical global markets newly industrialized countries different cultural and institutional attributes Physical Environment Segment energy consumption practices used to develop energy sources renewable energy efforts minimizing a rm s environmental footprint availability of water as a resource producing environmentally friendly products Industry environment set of factors that directly in uences a rm and its competitive actions and responses the threat of new entrants the power of suppliers the power of buyers the threat of product substitutes and the intensity of rivalry among competitors Competitor analysis how companies gather and interpret information about their competitors Analysis of general environment focused on environmental trends Analysis of industry environment focused on factors and conditions in uencing an industry s pro tability potential Analysis of competitors focused on predicting competitors actions responses and intentions The results of these 3 analyses in uence rm s vision mission and strategic actions External environmental analysis has 4 parts scanning monitoring forecasting and assessing Scanning identifying early signals of environmental changes and trends Monitoring detecting meaning through ongoing observations of environmental changes and trends both LT and ST Forecasting developing projections of anticipated outcomes based on monitored changes and trends Assessing determining the timing and importance of environmental changes and trends for rms strategies and their management Opportunity condition in the general environment that if exploited effectively helps a company achieve strategic competitiveness Threat condition in the general environment that may hinder a company s efforts to achieve strategic competitiveness Boundary spanning positions ex salespersons purchasing managers PR directors customer service representatives each of whom interacts w external constituents Recent trend consumers desire to receive additional value when purchasing brand name products Demographic segment concerned w a population s size age structure geographic distribution ethnic mix and income distribution World s population doubled 36b in the roughly 40 year period between 1959 and 1999 US census Bureau estimates pop will be 9b by 2040 India to be most populous Age structure aging population in Japan and other countries Geographic Distribution US population shifting from the north and east to the west and south as well as rural China urbanization continues in Shanghai and Beijing Ethnic Mix Hispanigs are now the largest ethnic minority in the US Income distribution although real income has been declining in general in some nations the household income of dual career couples has increased especially in the US In 2005 55 of world s population could be de ned as middle class Economic environment refers to the nature and direction of the economy in which a rm competes or may compete In general rms seek to compete in relatively stable economies w strong growth potential Vietnam recognized as one in which opportunities might exist Politicallegal segment arena in which organizations and interest groups compete for attention resources and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between rms and various local governmental agencies Sociocultural segment concerned with a society s attitudes and cultural values They often drive demographic economic politicallegal and technological conditions and changes US healthcare ethnic gender cultural diversity contingency workers guanxi personal connections Technological segment includes the institutions and activities involved w creating knowledge and translating that knowledge into new outputs products processes and materials Ex Kindle Global segment includes relevant new global markets existing markets that are changing important international political events and critical cultural and institutional characteristics of global markets Globalfocusing often used by rms w moderate levels of international operations who increase their internationalization by focusing on global niche markets Another way is to focus their operations and sales in one region of the world Wa guanxi Inhwa Physical environmental segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal w those changes Ex global warming energy consumption Industry group of rms producing products that are close substitutes Compared w general environment the industry environment has a more direct effect on the rm s strategic competitiveness and ability to earn above average returns Industry s pro t potential is a function of 5 forces of competition the threats posed by new entrants the power of suppliers the power of buyers product substitutes and the intensity of rivalry among competitors In addition to positively responding to the observed trends in this segment of the general environment there is some evidence that rms engaging in these types of behaviors outperform those failing to do so Threat of new entrants they bring additional production capacity often have keen interest in gaining a large market share force existing rms to be more ef cient and to learn how to compete on new dimensions Likelihood that rms enter an industry is 2 factors barriers to entry and the retaliation expected from current industry participants Barriers to entry Economies of scale derived from incremental ef ciency improvements through experience as a rm grow larger Ex DELL IBM HP markets of one companies manufacturing customized products learn how to respond quickly to customers needs in lieu of developing scale economies Product di ferentiation Ford PampG Col gate Palmolive Customer loyalty Capital Requirements defense industries are dif cult to enter bc of the substantial resource investments required to be competitive Switching costs one time costs customers incur when they buy from a different supplier Usually the more established the relationship between parties the greater switching costs Access to Distribution Channels particularly in consumer nondurable goods industries and in international markets Cost disadvantages independent of scale proprietary product technology favorable access to raw materials desirable locations and govt subsidies etc Govt policy liquor retailing radio and TV broadcasting banking trucking Antitrust Expected Retaliation can be expected when the existing rm has a major stake in the industry has substantial resources industry growth is slow or constrained Bargaining Power of Suppliers A supper group is powerful when 0 It is dominated by a few large companies and is more concentrated than the industry to which it sells 0 Satisfactory substitute products are not available to industry rms 0 Industry rms are not a signi cant customer for the supplier group 0 Suppliers goods are critical to buyers marketplace success 0 The effectiveness of suppliers products has created high switching costs for industry rms 0 It poses a credible threat to integrate forward into the buyers industry Credibility is enhanced when suppliers have substantial resources and provide a highly differentiated product Bargaining Power of Buyers Customers are powerful when They purchase a large portion of an industry s total output The sales of the product being purchased account for a signi cant portion of the seller s annual revenues They could switch to another product at little if any cost The industry s products are undifferentiated or standardized and the buyers pose a credible threat if they were to integrate backward into the seller s industry Threat of Substitute Product present strong threat when customers face few if any switching costs and when the substitute product s price is lower or its quality and performance capabilities are equal to or greater than those of the competing product Differentiating a product along dimensions that customers value such as quality service after the sale and location reduces a substitute s attractiveness Intensity of Rivalry Among Competitors Competitive rivalry intensi es when a rm is challenged or when a company recognizes an opportunity to improve its market position Firms within industries are rarely homogeneous they differ in resources and capabilities and seek to differentiate themselves from competitors Common dimension on which rivalry is based include price service after the sale innovation Most prominent factors that experience shows to affect the intensity of rm s rivalries Numerous or equally balanced competitors Slow industry growth High xed costs or high storage costs Lack of differentiation or low switching costs High strategic stakes ex Samsung Japanese auto etc High exit barriers Common exit barriers 0 Specialized assets assets w values linked to a particular business or location 0 Fixed costs of exit such as labor agreements 0 Strategic interrelationsihps relationships of mutual dependence such as those between one business and other parts of a company s operations including shared facilities and access to nancial markets 0 Emotional barriers aversion to economically justi ed business decisiosn bc of fear for one s own career loyalty to employees and so forth 0 Government and social restrictions often based on govt concerns for job losses and regional economic effects more common outside the US Unattractive industry low entry barriers suppliers and buyers w strong bargaining positions strong competitive threats from product substitutes and intense rivalry among competitors Attractive industry high entry barriers suppliers and buyers w little bargaining power few competitive threats from product substitutes and relatively moderate rivalry Strategic group set of rms emphasizing similar strategic dimensions to use a similar strategy Competition between rms win a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group High mobility barriers high rivalry and low resources among the rms win an industry limit the formation of strategic groups However after strategic groups are formed their membership remain relatively stable over time making analysis easier and more useful Strategic groups have several implications 1 bc rms win a group offer similar products to the same customers the competitive rivalry among them can be intense The more intense the rivalry greater the threat to each rm s pro tability 2 the strengths of the 5 industry forces differ across strategic groups 3 the closer the strategic groups are in terms of their strategies the greater is the likelihood of rivalry between the groups Competitor Analysis focuses on each company against which a rm directly competes Firms seeks to understand the following 0 What drives the competitor as shown by its future objectives gt How do our goals compare w out competitors goals gt Where will emphasis be placed in the future gt What is the attitude toward risk 0 What the competitor is doing and can do as revealed by its current strategy gt How are we currently competing gt Does their strategy support changes in the competitive structure What the competitor believes about the industry as shown by its assumptions gt Do we assume the future will be volatile gt Are we operating under a status quo gt What assumptions do our competitors hold about the industry and themselves What the competitor s capabilities are as shown by its strengths and weaknesses gt What are our strengths and weaknesses gt How do we rate compared to our competitors Response What will our competitors do in the future Where do we hold an advantage over our competitors How will this change our relationship with our competitors Competitor intelligence the set of data and information the rm gathers to better understand and better anticipate competitors objectives strategies assumptions and capabilities In competitor analysis rms not only gather intelligence not only about its competitors but also regarding public policies in countries around the world Complementors companies or networks of companies that sell complementary goods or services that are compatible with the focal rm s good or service EX Intel and Microsoft Practices considered both legal and ethical include 1 Obtaining publicly available information court records competitors helpwanted advertisements annual reports nancial reports of public comp and uniform commercial code lings Attending trade fairs and shows to obtain competitors brochures view their exhibits and listen to discussions about their products Blackmail trespassing eavesdropping stealing drawings samples or documents unethical Especially w electronic transmissions the lien between legal and ethical practices can be dif cult to determine MGMT430 Notes 1110 Ch7 Merger and Acquisition Strategies Global Merger and Acquisition Activity during a global crisis Recent declines in MampA activity both globally and domestically but still a very viable source of rm growth Changing conditions in the external environment in uence the type of MampA activity rms pursue Some research indicates that shareholders of acquired rms often eam aboveaverage retums from acquisitions while shareholders of acquiring rms typically eam retums that are close to 0 In approximately 23 of all acquisitions acquiring rrn s stock falls immediately after the intended transaction is announced Merger strategy through which 2 rms agree to integrate their operations on a relatively coequal basis few true merger actually take place Acquisition strategy through which 1 rms buys a controlling or 100 interest in another rm w the intent of making the acquired rm a subsidiary business within its portfolio most of the mergers that are completed are friendly in nature Takeover special type of acquisition wherein the target rm does not solicit the acquiring rm s bid thus takeovers are unfriendly acquisitions Acquisitions more common than mergers amp takeovers Reasons for Acquisitions Increased market Power Achieving greater market power is a primary reason for acquisitions Horizontal Acquisitions Acquisition of a company competing in the same industry as the acquiring rm Increase rrn s market power by exploiting cost based and revenue based synergies Horizontal acquisitions results in higher performance when the rms have similar characteristics such as strategy managerial styles and resource allocation pattems Vertical Acquisitions Refers to a rm acquiring a supplier or distributor of one or more of its goods or services CVS Caremark Related Acquisitions Acquiring a rm in a highly related industry Firms seek to create value through the synergy that can be generated by integrating some of their resources and capabilities Firms seeking growth and market power through acquisitions must understand the politicallegal segment of the general environment in order to successfully use an acquisition strategy Overcoming Entry Barriers Higher the barrier to market entry the greater the probability that a rm will acquire an existing rm to overcome them Crossborder Acquisitions Acquisitions made between companies w HQ in different countries Some believe that next wave of crossborder MampA may be led out of Asia Cost of New Product Development and Increased Speed to Market Estimated 88 of innovations fail to achieve adequate retums Potentially contributing to these less than desirable rates of retums is the successful imitation of approximately 60 of innovations win 4yrs after the patents are obtained intemal product development is high risk activity Number of pharmaceutical rms use an acquisition strategy bc of the cost of new product development Acquisitions should always be strategic rather than defensive in nature Increased Diversi cation Relatively uncommon for a rm to develop new products intemally to diversify its product lines Acquisitions strategies can be used to support use of both unrelated and related diversi cation strategies In general more related the acquired rm is to the acquiring rm the greater is the probability the acquisition will be successful Reshaping the rm s competitive scope To reduce the negative effect of an intense rivalry on their nancial performance rms may use acquisitions to lessen their dependence on one or more products or markets Leaming and Developing New Capabilities Firms sometimes complete acquisitions to gain access to capabilities they lack Firms should seek to acquire companies w different but related and complementary capabilities in order to build their own knowledge base Problems in Achieving Acquisition Success Research suggest that 20 of all MampA are successful approximately 60 produce disappointing results and 20 are clear failures BUT sophistication of companies going through transactions has increased exponentially Greater acquisitions success accrues to rms able to 1 select the right target 2 avoid paying too high a premium doing appropriate due diligence 3 effectively integrate the operations of the acquiring and target rms Integration Dif culties Post acquisition integration phase is probably the single most important determinant of shareholder value creation in MampA Inadequate Evaluation of Target Due diligence process through which a potential acquirer evaluates a target rm for acquisition Rather than enter a bidding war rms should only extend bids that are consistent w the results of their due diligence process Large or Extraordinary Debt Junk bonds nancing option through which risky acquistions are nanced w money debt that provides a large potential retum to lenders bondholders unsecured obligations that are not tied to speci c assets or collateral ea high interest rates l820 during 1980s High debt increases the likelihood of bankruptcy M lead to downgrade of credit rating may have to divest some assets to relieve its debt burden Thus rm s using an acquisition strategy must be certain that their purchases do not create a debt load that overpowers the company s ability to remain solvent Inability to Achieve Synergy Synergy exists when the value created by units Working together exceeds the value those units could create Working independently Synergy is created by the ef ciencies derived from economies of scale and economies of scope and by sharing resources across the businesses in the merged rm Firm develops a competitive advantage through an acquisition strategy only when a transaction generates private synergy Private synergy created when combining and integrating the acquiring and acquired rms assets yield capabilities and core competencies that could not be developed by combining and integrating either rm s assets w another company Private synergy possible when rm s assets are complementary in unique ways Dif cult for competitors to understand and imitate but it is dif cult to create Too much Diversi cation In general rms using related diversi cation strategies outperform those employing unrelated diversi cation strategies Level at which overdiversi cation occurs varies across companies bc each rm has different capabilities to manage diversi cation BC of additional information processing related diversi ed rms become overdiversi ed w a smaller number of business units than do rms using an unrelated diversi cation strategy Even when a rm is not overdiversi ed a high level of diversi cation can have a negative effect on its LT performance rely on nancial rather than strategic goals amp tendency for acquisitions to become substitutes for innovation Managers overly focused on acquisitions Activities with which managers become involved include 1 2 3 4 searching for viable acquisition candidates completing effective duediligence process preparing for negotiations managing the integration process after completing the acquisition can divert managerial attention from other matters that are necessary for LT competitive success such as identifying and taking advantage of other opportunities and interacting w important extemal stakeholders Too Large Bureaucratic controls formalized supervisory and behavioral rules and policies designed to ensure consistency of decisions and actions across different units of a rm Effective Acquisitions Attributes of Successful Acquisitions 1 Acquired rm has assets or resources that are complementary to the acquiring rm s core business ea high probability of synergy and competitive advantage by maintaining strengths 2 Acquisition is friendly a faster and more effective integration and possibly lower premiums 3 Acquiring rms conducts effective due diligence to select target rms and evaluate the target rm s health nancial cultural and HR ea rms w strongest compelmentarities are acquired and overpayment is avoided 4 Acquiring rm has nancial slack cash or a favorable debt position a2 nancing debt equity is easier and less costly to obtain 5 Merged rm maintains low to moderate debt position E2 lower nancing cost lower risk bankruptcy and avoidance of tradeoffs that are associated w high debt 6 Acquiring rm has sustained and consistent emphasis on RampD and innovation a maintain LT competitive advantage in markets 7 Acquiring rm manages change well and is exible and adaptable E2 faster and more effective integration facilitates achievement of synergy Restructuring Restructuring strategy through which a rm changes its set of businesses or its nancial structure Commonly rms focus on a fewer of product and markets following restructuring Firms sometimes use restructuring strategies bc of changes they have detected in their extemal environment Downsizing reduction in the number of a f1rrn s employees and sometimes in the number of its operating units but it may or may not change the composition of businesses in the company portfolio Downsizing is an intentional proactive mgmt strategy in contrast to decline It is often a part of acquisitions that fail to create the value anticipated when the transaction was completed It is now recognized as a legitimate restructuring strategy Downsizing will be far more effective when they consistently use HR practices that ensure procedural justice and faimess in downsizing decisions Downscoping divestiture spinoff or some other means of eliminating businesses that are unrelated to a f1rm s core businesses Has a more positive effect on firm performance than does downsizing causes firms to refocus on their core business Managerial effectiveness increases bc the firm has become less diversi ed allowing the top mgmt team to better understand and manage the remaining businesses In general US firms us downscoping as a restructuring strategy more frequently than do European companies Europe Latin America and Asia has been to build conglomerates grupos in Latin America Leveraged Buyouts restructuring strategy whereby a party typically a PE firm buys all of a f1rm s assets in order to take the firm private Traditionally used to correct for managerial mistakes or bc the f1rrn s managers were making decisions that primarily served their own interests rather than those of sh but some use to build firm resources and expand rather than restructure distressed assets Significant amount of debt are commonly incurred to nance a buyout MBOs employee buyouts EBOs and whole firm buyouts in which one company or partnership purchases an entire company instead of a part of it are the 3 types of LBOs MBOs have been found to lead downscoping increased strategic focus and improved performance Research shows that MBO can lead to greater entreprenerurial activity and growth Restructuring outcomes Downsizing typically does not lead to higher performance Investors also seem to conclude that downsizing occurs as a consequence of other problems in a company Loss of human capital is another potential problem of downsizing In general research evidence and corporate experience suggest that downsizing may be of more tactical or ST value than strategic LT value Downscoping generally leads to more positive outcomes in both ST amp LT than does downsizing or LBO it is product of reduced debt costs amp emphasis on strategic controls derived from concentrating on the f1rm s core business LBO negative tradeoff resulting large debt increases the firm s nancial risk ST and risk averse managerial focus In rms w an entrepreneurial mindset buyouts can lead to greater innovation especially if debt load is not too great However b c buyouts more often results in signi cant debt most LBOs have been completed in mature industries Where stable CF are possible MGMT43O Notes 1124 Ch 12 Strategic Leadership Smooth transition to new CEO Strategic leadership ability to anticipate envision maintain exibility and empower others to create strategic change as necessary Ability to attract and then manage human capital may be the most critical of the strategic leader s skills especially bc the lack of talented human capital constrains rm growth Primary factors that determine the amount of decision making discretion held by a manager especially a toplevel manager are 1 extemal environment sources such as the industry structure the rate of market growth in the firm s primary industry and the degree to which products can be differentiated 2 characteristics of the organization including its size age resources and culture 3 characteristics of the manager including commitment to the firm and its strategic outcomes tolerance for ambiguity skills in working with different people and aspiration levels to guard against CEO overconfidence and poor strategic decisions firms often use the top management team to consider strategic opportunities and problems and to make strategic decisions Top management team composed of the key individuals who are responsible for selecting and implementing the firin s strategies Job of toplevel executives is complex and requires a broad knowledge of the firm s operations as well as the 3 key parts of the firin s extemal environment general industry and competitor environments Heterogeneous top management team composed of individuals with different functional backgrounds experience and education In general the more heterogeneous and larger the top mgmt team is the more difficult it is for the team to effectively implement strategies To successfully create strategic change the CEO should exercise transformational leadership CEO and top mgmt team power Amount of discretion a CEO has in making strategic decisions is related to the BoD and how it chooses to oversee the actions of the CEO and the top mgmt team CEO duality occurs most commonly in larger firms Increased shareholder activism however has brought CEO duality under scrutiny and attack in both US and European firms Managerial Succession Organizations select managers and strategic leaders from 2 types of managerial labor markets intemal and extemal Internal managerial labor market consists of a rm s opportunities for managerial positions and the quali ed employees within that rm External managerial labor market collection of managerial career opportunities and the quali ed people Acquiring rms should work hard to avoid successions during the integration process and thereafter Key strategic leadership actions Determining Strategic Direction involves specifying the image and character the rm seeks to develop over time Ideal long term strategic direction has 2 parts 1 core ideology 2 envisioned future Effectively managing the rrn s resource portfolio Exploiting and Maintaining Core Competencies Competitive agility an ability to act in a variety of competitively relevant ways Competitive speed an ability to act quickly when facing environmental and competitive pressures Developing human capital and social capital Human capital refers to the knowledge and skills of a rm s entire workforce social capital involves relationships inside and outside the rm that help the rm accomplish tasks and create value for customers and shareholders Sustaining an Effective Organizational Culture Organizational culture complex set of ideologies symbols and core values that are shared throughout the rm and in uence the way business is conducted Because the organizational culture in uences how the r conducts its business and helps regulate and control employees behavior it can be a source of competitive advantage and is a critical factor in promoting innovation Strategic leaders with an entrepreneurial mindset are committed to pursuing pro table growth 1 autonomy allows employees to take actions that are free of organizational constraints and permits individuals and groups to be selfdirected 2 Innovativeness re ects rm s tendency to engage in and support new ideas novelty experimentation and creative processes that may result in new products services or technological processes 3 Risk taking re ects a willingness by employees and their rm to accept risks when pursuing entrepreneurial opportunities 4 Proactiveness describes a f1rm s ability to be a market leader rather than a follower 5 Competitive aggressiveness f1rm s propensity to take actions that allow it to consistently and substantially outperform its rivals Changing a f1rm s organizational culture is more difficult than maintaining it Incremental changes to the f1rm s culture typically are used to implement strategies Emphasizing Ethical Practices Research suggests that a value based culture is the most effective means of ensuring that employees comply with the f1rm s ethical requirements Strategic leaders can take several actions to develop an ethical organizational culture 1 establishing and communicating specific goals to describe the f1rm s ethical standards e g developing and disseminating a code of conduct 2 continuously revising and updating the code of conduct based on inputs from people throughout the firm and from other stakeholders customers and suppliers 3 disseminating the code of conduct to all stakeholders to inform them of the f1r s ethical standards and practices 4 developing and implementing methods and procedures to use in achieving the f1rm s ethical standards using intemal auditing practices that are consistent with the standards 5 creating and using explicit reward systems that recognize acts of courage rewarding those who use proper channels and procedures to report observed wrongdoings 6 creating a work environment in which all people are treated with dignity Establishing Balanced Organizational Controls Most critically controls provide the parameters for implementing strategies as well as the corrective actions to be taken when implementation related adjustments are required Strategic control focuses on the content of strategic actions rather than their outcomes Emphasizing financial controls often produces more short term and risk averse managerial decisions b c financial outcomes may be caused by events beyond managers direct control Altematively strategic control encourages lower level managers to make decisions that incorporate moderate and acceptable levels of risk because outcomes are shared between the business level executives making strategic proposals and the corporate level executives evaluating them Balanced scorecard framework firms can use to verify that they have established both strategic and financial controls to assess their performance 4 perspectives 1 nancial concemed with growth pro tability and risk from the shareholder s perspective 2 customer amount of value customers perceive was created by the rm s products 3 intemal business process focus on the priorities for various business processes that create customer and shareholder satisfaction 4 leaming and growth concerned with the rm s effort to create a climate that supports change innovation and growth generally strategic controls tend to be emphasized when the rm assesses its performance relative to the leaming and growth perspective whereas nancial controls are emphasized when assessing performance in terms of the nancial perspective Mike Duke and Walmart intemational expansion MGMT43O Notes 1117 Ch 11 Organizational Structure and Controls Cisco s evolution of strategy and structure All firms use one or more business level strategies Organizational Structure and Controls Organizational structure specifies the f1rm s formal reporting relationships procedures controls and authority and decision making processes Structural stability provides the capacity the firm requires to consistently and predictably manage its daily work routines Structural exibility provides the opportunity to explore competitive possibilities and then allocate resources to activities that will shape the competitive advantages the rm will need to be successful in the future Effectively exible organizational structure allows the firm to exploit current competitive advantages while developing new ones that can potentially be used in the future Because of the inertial tendencies structural change is often induced instead by actions from stakeholders who are no longer willing to tolerate the firm s performance Effective organizational controls help managers recognize when it is time to adjust the f1rm s structure Organizational controls guide the use of strategy indicate how to compare actual results with expected results and suggest corrective actions to take when the difference is unacceptable Strategic controls largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the extemal enviromnent and the company s competitive advantages Financial controls largely objective criteria used to measure the f1rm s performance against previously established quantitative standards ROI ROA economic value etc Strategy and structure have a reciprocal relationship Firms choose from among 3 major types of organizational structures simple functional and multidivisional to implement strategies Across time successful rms move form the simple to the functional to the multidivisional structure to support changes in their growth strategies Simple structure structure in which the owner manager makes all major decisions and monitors all activities while the staff serves as an extension of the manager s supervisory authority Functional structure consists of a CEO and a limited corporate staff with functional line managers in dominant organizational areas such as production accounting marketing RampD engineering and HR This structure allows for functional specialization thereby facilitating active sharing of knowledge within each functional area When changing from simple to functional structure rms want to avoid introducing valuedestroying bureaucratic procedures such as failing to promote innovation and creativity Multidivisional Mform structure consists of a corporate of ce and operating divisions each operating division representing a separate business or pro t center in which the top corporate of cer delegates responsibilities for daytoday operations and business unit strategy to division managers As initially designed Mform was thought to have 3 major bene ts 1 it enabled corporate of cers to more accurately monitor the performance of each business which simplified the problem of control 2 it facilitated comparisons between divisions which improved the resource allocation process 3 it stimulated managers of poorly performing divisions to look for ways of improving performance No one organizational structure is inherently superior to the others Firms use different forms of functional organizational structure to support implementing cost leadership differentiation and integrated cost leadership differentiation strategies Differences in these forms are accounted for primarily by different uses of 3 important structural characteristics 1 specialization concemed with the type and number of jobs required to complete work 2 centralization the degree to which decision making authority is retained at higher managerial levels 3 formalization the degree to which formal rules and procedures govem work Cost leadership strategy Low cost culture Decision making authority is centralized in a staff function to maintain a costreducing emphasis within each organizational function Guiding individual s work in highly formalized rules and procedures Differentiation Strategy Development oriented culture in which employees try to nd ways to further differentiate current products and to develop new highly differentiated products Decentralized decision making responsibility and authority Not highly specialized few formal rules and procedures Cost LeadershipDifferentiation Strategy Cost low relative to the cost leader s prices while their differentiation is reasonable when compared with the clearly unique features of the differentiator s products Decision making patterns that are partially centralized and partially decentralized Jobs are semispecialized and rules and procedures call for some formal and some informal job behavior Matches between Corporate level strategies and the Multidivisional structure Using the cooperative form of multidivisional structure to implement the related constrained strategy Cooperative form is an Mform structure in which horizontal integration is used to bring about interdivisional cooperation Ultimately a matrix organization may evolve in firms implementing the related constrained strategy Matrix organization is an organizational structure in which there is a dual structure combining both functional specialization and business product or project specialization Using strategic business unit form of the Multidivisional structure to implement the related linked strategy Firms with fewer links or less constrained links among their divisions use the related linked diversi cation strategy Strategic business unit SBU form Mform structure consisting of 3 levels corporate HQ strategic business units SBUs and SBU divisions Used by large firms and cam be complex given associated organization size and product and market diversity Sharing competencies among units within an SBU is an important characteristic of the SBU form of the multidivisional structure Drawback is that multifaceted businesses often have difficulties in communicating this complex business model to stockholders Using the competitive form of the multidivisional structure to implement the unrelated diversification strategy Firms using this want to create value through efficient intemal capital allocations or by restructuring buying and selling businesses Competitive form of multidivisional structure supports implementation of this strategy Competitive form Mform structure characterized by complete independence among the f1rm s divisions which compete for corporate resources Unlike cooperative structure divisions that are part of the competitive structure do not share common corporate strengths integrating devices are not developed for use by the divisions included in the competitive structure 3 benefits from intemal competition 2 1 creates exibility 2 challenges the status quo and inertia 3 motivates effort in that the challenge of competing against intemal peers can be as great as the challenge of competing against external rivals Matches between Intemational Strategies and Worldwide structure Using the worldwide geographic area structure to implement the multidomestic strategy Multidomestic strategy decentralizes the firm s strategic and operating decisions to business units in each country so that product characteristics can be tailored to local preferences Worldwide geographic area structure emphasizes national interests and facilitates the firm s efforts to satisfy local differences Using multidomesetic strategy requires little coordination between different country markets meaning that integrating mechanisms among divisions around the world are not needed Key disadvantage inability to create strong global efficiency Using the worldwide product divisional structure to implement the global strategy Global strategy is one through which the firm offers standardized products across country markets Worldwide product divisional structure supports this strategy Worldwide product divisional structure decision making authority is centralized in the worldwide division HQs to coordinate and integrate decisions and actions among divisional business units Disadvantage difficulty involved with coordinating decisions and actions across country borders ad the inability to quickly respond to local needs and preferences Using the combination structure to implement the transnational strategy Transnational strategy calls for the firm to combine the multidomestic strategy s local responsiveness with global strategy s efficiency Combination structure structure drawing characteristics and mechanisms from both the worldwide geographic area structure and the worldwide product divisional structure Global matrix design promotes exibility in designing product and responding to customer needs but it has severe limitations in that it place employees in a position of being accountable to more than one manager Matches between cooperative strategies and network structures Greater levels of environmental complexity and uncertainty facing companies today in competitive environment are causing more firms to use cooperative strategies such as strategic alliances and JV Strategic network group of firms that has been formed to create value by participating in multiple cooperative arrangements Strategic center firm the one around which the network s cooperative relationships revolve Strategic center rm is engaged in 4 primary tasks as it manages the strategic network and controls its operations 1 Strategic outsourcing 2 Competencies 3 Technology 4 Race to leam emphasizes that the principal dimensions of competition are between value chains and between networks of value chains strategic network is only as strong as its weakest valuechain link Implementing Business Level Cooperative Strategies Toyota and its cooperative arrangements in its strategic network Strategic center is obvious in vertical complementary strategic alliances but not so in horizontal complementary strategic alliances ex Star alliance Horizontal complementary alliances are used less often and less successfully than their vertical counterpart Implementing Corporate Level cooperative strategies Franchising and McDonalds Implementing Intemational Cooperative Strategies Verifying that at a minimum the network s operations comply w all legal requirements Distributed strategic networks organizational structure used to manage intemational cooperative strategies HP and EDS MGMT43O Notes 1115 Ch8 Intemational Strategy Entry into China by Foreign and Chinese rms reaching for Global Markets Intemational strategy strategy through which the rm sells its goods or services outside it domestic market Intemational markets yield potential new opportunities Secure needed resources Universal product demand Economies of scale necessary to reduce costs to the lowest level Currency uctuations When intemational strategies are successful rms can derive 4 basic bene ts 1 increased market size 2 greater retums on major capital investments or on investments in new products and processes 3 greater economies of scale scope or leaming 4 a competitive advantage through location Increased market size Following an intemationals strategy is a particularly attractive option to rms competing in domestic markets that have limited growth opportunities Size of intemational market also affects a rm s willingness to invest in RampD to build competitive advantages in that market Most rms prefer to invest more heavily in those countries w the scienti c knowledge and talent to produce value creating products and processes from their RampD activities Return on Investment Intemational expansion expands the opportunity for the rm to recoup signi cant capital investments and large scale RampD expenditures Economies of Scale and Learning Standardize its products across country borders and use the same or similar production facilities May also be able to exploit core competencies in intemational markets through resource and knowledge sharing between units and network partners across country borders Research nds that to take advantage of intemational RampD investments rms need to already have a strong RampD system in place to absorb the knowledge Location Advantages Once positioned favorably with an attractive location rms must manage their facilities effectively to gain the full benefit of a location advantage Intemational Strategies 2 basic types 1 business level international strategy a cost leadership differentiation focused cost leadership focused differentiation integrated cost leadership differentiation 2 corporate level international strategy a multidomestic b global c transnational combo of multidomestic and global to create competitive advantage each strategy must utilize a core competence based on difficult to imitate resources and capabilities FDP0 Intemational business level strategy Home country of operation is often the most important source of competitive advantage Porter s model Factors of production If a country has both advanced and specialized production factors it is likely to serve an industry well by spawning strong homecountry competitors that also can be successful global competitors Ironically countries often develop advanced and specialized factors bc they lack critical basic resources Demand conditions Characterized by the nature and size of buyers needs in the home market for the industry s goods or services Related and supporting industries Italy has become the leader in the shoe industry because of related and supporting industries well established leather processing industry provides the leather needed to construct shoes and related products Firm strategy structure and rivalry Foster the growth of certain industries Type of strategy structure and rivalry among firms vary greatly from nation to nation Govemment policy also clearly contributes to the success and failure of many firms and industries The actual strategic choices managers make may be the most compelling reasons for success or failure Intemational CorporateLevel Strategy Multidomestic strategy strategic and operating decisions are decentralized to the strategic business unit in each country so as to follow that unit to tailor products to the local market Usually expands the firm s local market share bc the firm can pay attention to the needs of the local clientele ea result sin less knowledge sharing for the corporation as a whole bc of differences across markets decentralization and different strategies employed by local country units E2 firms decentralize their strategic and operating decisions to the business units operating in each country Global strategy offer standardized products across country markets with competitive strategy being dictated by the home office Emphasizes economies of scale and offers greater opportunities to take innovations developed at the corporate level or in one country and utilize them in other markets Transnational strategy intemational strategy through which the firm seeks to achieve both global efficiency and local responsiveness Building a shared vision and individual commitment through an integrated network exible coordination is required to implement it Environmetnal Trends 2 important trends 1 liability of foreignness 2 regionalization Liability of foreignness Ex Disney in France Firms may focus less on truly global markets and more on regional adaptation Regionalization Because a firm s location can affect its strategic competitiveness it must decide whether to compete in all or many global markets or to focus on a particular region or regions However a firm that competes in industry where the intemational markets differ greatly may wish to narrow its focus to a particular region of the world Choice of Intemational Entry mode Exporting Does not require expense of establishing operations in the host countries but must establish some means of marketing an distributing their products May be difficult to market a competitive product through exporting or to provide a product that is customized to each intemational market However evidence suggests that cost leadership strategies enhance the performance of export sin developed countries whereas differentiation strategies with larger scale are more successful in emerging economies Firms export mostly to countries that are closes to their facilities due to lower costs and greater similarity between geographic neighbors Licensing Allows a foreign company to purchase the right to manufacture and sell the r s products within a host country or set of countries Possibly the least costly form of international expansion Gives little control over the manufacture and mktg of its products in other countries Strategic Alliances Allows rms to share risks and resources required to enter international markets Each partner in an alliance brings knowledge or resources to the partnership Trust is important and if affected by at least 4 fundamental issues 1 initial condition of the relationship 2 negotiation process to arrive at an agreement 3 partner interactions 4 extemal events Acquisitions Often provide the fastest and the largest initial intemational expansion of any of the altematives Can be expensive and often require debt nancing which carries an extra cost Has same disadvantage of domestic acquisitions Acquires make fewer acquisitions in countries with signi cant corruption choose to use intemational JV instead Green eld venture establishment of a new wholly owned subsidiary Often complex and costly but affords maximum ctrl to the rm and has most potential to provide above average retums Green eld ventures also help the rms to maintain the proprietary nature of their systems Dynamics of Mode of Entry Export licensing and strategic alliance good tactics for early market development Both acquisitions and green eld ventures are likely to come at later stages in the development of an intemational strategy Strategic Competitive Outcomes International Diversification and Returns International diversification strategy through which a rm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets Positive relationship with rms retums International Diversification and Innovation Provides the potential for rms to achieve greater retums on their innovations through larger or more numerous markets and reduces the often substantial risks of RampD investments Complexity of managing multinational firms Multiple risks are involved when a rm operates in several different countries High competitive nature of global markets multiple cultural environments potentially rapid shifts in the value of different currencies and the instability of some national governments Risks in an international environment Political Risks risks related to instability in national govemment and to war both civil and intemational Economic Risks interdependent with political risks Foremost among the economic risks of intemational diversification differences and uctuations in the value of different currencies Limits to intemational expansion management problems retums often level off and become negative s the diversi cation increases past a certain point 1 Greater geographic dispersion across country borders increases the costs of coordination between units and the distribution of products 2 Trade barriers logistical costs cultural diversity and other differences by country greatly complicate the implementation of an intemational diversification strategy Fake products make up 7 of world s goods


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