SM-6

CHAPTER 6

Formulating Long-Term Objectives and Grand

Strategies

Chapter Topics

• Long-Term Objectives• Generic Strategies• Grand Strategies• Corporate Combinations• Selection of Long-Term Objectives and Grand

Strategy Sets• Sequence of Objectives and Strategy Selection

Types of Long-Term Objectives

• Profitability• Productivity• Competitive position• Employee development• Employee relations• Technological leadership• Public responsibility

Qualities of Long-Term Objectives

Criteria used in preparing objectives

Acceptable

Flexible

MeasurableMotivating

Suitable

Understandable

Achievable

What is the Balanced Scorecard?

The Balanced Scorecard is a set of measures that are directly linked to the company’s strategy. It directs a company to link its own long-term strategy with tangible goals and actions.

The Four Perspectives in a Balanced Scorecard

Financial performanceCustomer knowledge Internal business processesLearning and growth

Exhibit 6-2: The Balanced Scorecard

Vision and

Strategy

Financial‘To succeed financially, how should we appear to our shareholders?”

Customer“To achieve our vision, how should we appear to our customers?”

Internal Business Process

“To satisfy our shareholders and customers, what business processes must we excel at?”

Learning and Growth‘To achieve our vision, how will we sustain our ability to change and improve?”

Learning and Growth‘To achieve our vision, how will we sustain our ability to change and improve?”

The Value Disciplines

• Strategies must center on delivering superior customer value through one of three value disciplines: Operational excellence Customer intimacy Product leadership

• Companies that specialize in one of these disciplines, while simultaneously meeting industry standards in the other two, gain a sustainable lead in their markets.

Generic Strategies

Low-cost Leadership

Differentiation Focus

Ex. 6-3: Requirements for Generic Competitive Strategies

Generic Strategy

Commonly Required Skills and Resources

Common Organizational Requirements

Overall Cost Leadership

•Sustained capital investment

and access to capital•Process engineering skills•Intense supervision of labor•Products designed for ease in

manufacture•Low-cost distribution system

•Tight cost control•Frequent, detailed

control reports•Structured

organization and

responsibilities•Incentives based on

meeting strict

quantitative targets

Ex. 6-3 (contd.)

Generic Strategy Commonly Required Skills and resources

Common Organizational Requirements

Differentiation •Product engineering•Creative flare•Strong capability in basic research•Corporate reputation for quality or

technological leadership•Unique combination of skills•Strong cooperation from channels•Strong marketing abilities

•Strong coordination

among functions in

R&D, product

development, and

marketing•Subjective measurement and incentives instead of quantitative measures•Amenities to attract highly skilled labor, scientists, or creative people

Focus Combination of above policies directed at the particular strategic target

Combination of above policies directed at the particular strategic target

Ex. 6-4: Risks of the Generic Strategies

Risks of Cost Leadership Risks of Differentiation Risks of Focus

Cost leadership is not sustained•Competitors imitate•Technology changes•Other bases for cost leadership erode

Proximity in differentiation is lost

Cost focusers achieve even lower cost in segments

Differentiation is not sustained•Competitors imitate•Bases for differentiation become less important to buyers

Cost proximity is lost

Differentiation focusers achieve greater differentiation in segments

Focus strategy is imitated

Target segment becomes unattractive•Structure erodes•Demand disappears

Broadly target competitors overwhelm segments•Segment’s differences from others narrow•Advantages of broad line increase

Types of Grand Strategies

• Concentrated growth• Market development• Product development• Innovation• Horizontal integration• Vertical integration• Concentric

diversification

• Conglomerate diversification

• Turnaround• Divestiture• Liquidation• Bankruptcy• Joint ventures• Strategic alliances• Consortia

Characteristics of a Concentrated Growth Strategy

• Involves focusing resources on the profitable growth of a single product, in a single market, with a single dominant technology

• Rationale – Firm develops and exploits its expertise in a delimited competitive arena

• Determinants of competitive market success• Ability to assess market needs• Knowledge of buyer behavior• Customer price sensitivity• Effectiveness of promotion

Conditions Favoring a Concentrated Growth Strategy

Firm’s industry is resistant to major technological advancements Firm’s target markets are not product saturated Firm’s markets are sufficiently distinctive to dissuade

competitors in adjacent markets from entering firm’s segment Firm’s inputs are stable in price and quantity and available in the

amounts and at the times needed Firm’s industry is stable Firm’s competitive advantages are based on efficient production

or distribution channels Success of market generalists

Strategies of Market and Product Development

• Market development• Consists of marketing present products, often with only

cosmetic modifications to customers in related market areas by

• Adding channels of distribution or• Changing content of advertising or promotion

• Product development• Involves substantial modification of existing products or

creation of new but related products • Based on penetrating existing market by

• Incorporating product modifications into existing items or• Developing new products connected to existing products

Exhibit 6-4: Specific Options for Selected Grand Strategies

Concentration (Increasing use of present products in present markets)

1. Increasing present customers’ rate of usea. Increasing size of purchaseb. Increasing the rate of product obsolescencec. Advertising other usesd. Giving price incentives for increased use

2. Attracting competitors’ customersa. Establishing sharper brand recognitionb. Increasing promotional effortc. Initiating price cuts

3. Attracting nonusers to buy the producta. Introducing trial use thru’ sampling, price incentives, etc.b. Pricing up or downc. Advertising new uses

Ex. 6-4 (contd.)

Market Development (Selling present products in new markets.)

1. Opening additional geographic marketsa. Regional expansion

b. National expansion

c. International expansion

2. Attracting other market segmentsa. Developing product versions to appeal to other segments

b. Entering other channels of distribution

c. Advertising in other media

Ex. 6-4 (contd.)

Product Development (Developing new products for present markets)

1. Developing new product featuresa. Adapt (to other ideas, developments)b. Modify (change color, motion, sound, odor, form, shape)c. Magnify (stronger, longer, thicker, extra value)d. Minify (smaller, shorter, lighter)e. Substitute (other ingredients, process, power)f. Rearrange (other patterns, layout, sequence, components)g. Reverse (inside out)h. Combine (blend, alloy, assortment, ensemble, combine units, etc.)

2. Developing quality variations3. Developing additional models and sizes (product proliferation)

Innovation Strategy

Involves creating a new product life cycle, thereby making similar existing products obsolete

Horizontal and Vertical Integration Strategies

Horizontal Integration• Based on growth via acquisition of one or more

similar firms operating at the same stage of the production-marketing chain

Vertical Integration• Involves acquiring firms

• That supply acquiring firm with inputs (backward integration) or

• Are customers for firm’s outputs (forward integration)

Ex. 6-7: Vertical and Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integration

Acquisitions or mergers of competing businesses are horizontal integrations

Motivations for Diversification

Increase firm’s stock value Increase growth rate of firm Investment is better use of funds than using

them for internal growth Improves stability of earnings and salesBalance or fill out product lineDiversify product lineAcquire a needed resource quicklyAchieve tax savings Increase efficiency and profitability

Diversification Strategies

Concentric Diversification• Involves acquisition of businesses related to acquiring

firm in terms of technology, markets, or productsConglomerate Diversification

• Involves acquisition of a business because it represents a promising investment opportunity• Primary motivation is profit pattern of venture

• Difference between the approaches• Concentric diversification emphasizes commonality whereas

conglomerate diversification emphasizes profits for each individual unit

Turnaround Strategy

Involves a concerted effort over a period of time to fortify a firm’s distinctive competencies, returning it to profitability

Turnaround Strategy

A turnaround strategy is done through

Cost reduction Asset reduction

Terms Used in Turnaround Strategy

• A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions

• The immediacy of the resulting threat to company survival posed by the turnaround situation is known as situation severity

• Turnaround responses typically include two stages of strategic activities– Retrenchment– Recovery response

Divestiture and Liquidation Strategies

Divestiture Strategy• Involves selling a firm or a major component of a

firm• Reasons for divestiture

• Partial mismatches between acquired firm and parent firm• Corporate financial needs• Government antitrust action

Liquidation Strategy• Involves selling parts of a firm, usually for its

tangible asset value and not as a going concern

The Strategy of Bankruptcy

• Two approaches• Liquidation – Involves complete distribution of a firm’s

assets to creditors, most of whom receive a small fraction of amount owed

• Reorganization – Involves creditors temporarily freezing their claims while a firm reorganizes and rebuilds its operations more profitably

• Advantage of a reorganization bankruptcy• Proactive option offering maximum repayment of a firm’s

debt in the future if a recovery strategy is successful

Corporate Combination Strategies

Joint Ventures• Involves establishing a third company (child), operated

for the benefit of the co-owners (parents)

Strategic Alliance• Involves creating a partnership between two or more

companies that contribute skills and expertise to a cooperative project• Exists for a defined period• Does not involve the exchange of equity

Corporate Combination Strategies(contd.)

• Consortia are defined as large interlocking relationships between businesses of an industry. In Japan such consortia are known as keiretsus, in South Korea as chaebols

• A Japanese keiretsu is an undertaking involving up to 50 different firms that are joined around a large trading company or bank and are coordinated through interlocking directories and stock exchanges

• Chaebols are typically financed through government banking groups and largely are run by professional managers trained by participating firms expressly for the job

Ex. 6-13: The Top Five Strategic Reasons for Outsourcing

1. Improve business focus

2. Access to world-class capabilities

3. Accelerated reengineering benefits

4. Shared risks

5. Free resources for other purposes

Basic Issues: Strategic Analysis and Choice

1. What strategies are most effective at building sustainable competitive advantages for single business units?

2. Should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate?

Prominent Sources of Competitive Advantage

Cost leadership

Differentiation

Speed Market focus

Ex. 7-2: Evaluating a Business’s Cost Leadership Opportunities

A. Skills and Resources• Sustained capital investment

and access to capital• Process engineering skills• Intense supervision of labor or

core technical operations• Products or services designed

for ease of manufacture or delivery

• Low-cost distribution systems

B. Organizational Requirements

• Tight cost control• Frequent, detailed control

reports• Continuous improvement and

benchmarking orientation• Structured organization and

responsibilities• Incentives based on meeting

strict, usually quantitative targets

Ex. 7-2 (contd.)

Product redesign to reducenumber of components

Technologydevelopment

Safety training for all employees reduces absenteeism,downtime, and accidents

Process innovationLowering production costs HRM

Computerized, integrated info. systemsReduces errors and costs

General administration

Favorable long-term contracts; captive suppliers orkey customer for supplier

Procurement

Global, online suppliers provide automatic restocking of orders based on sales

Inbound logistics

Economy of scale in plant reduces equipment costs and depreciation

Operations

Computerized routing lowers transportation expense

Outbound logistics

Cooperative advtg. creates local cost advantage in buying media space/time

Mkt & sales

Subcontracted service techs. Repair products correctly first time or bear costs

Service

Profit

Margin

Reduced level of managementcuts corporate overhead

Advantages of a Cost Leadership Strategy

Low-cost advantages reduce likelihood of pricing pressure from buyers

Truly sustained low-cost advantages may push rivals into other areas, lessening price competition

New entrants must face an entrenched cost leader without experience to replicate cost advantages

Low-cost advantages should lessen attractiveness of substitutes

Higher margins allow low-cost producers to withstand supplier cost increases

Key Risks of Cost Leadership

• Many cost-saving activities are easily duplicated

• Exclusive cost leadership can become a trap

• Obsessive cost cutting can shrink other competitive advantages involving key product attributes

• Cost differences often decline over time

Ex. 7-3: Evaluating a Business’s Differentiation Opportunities

A. Skills and Resources• Strong marketing abilities• Product engineering• Creative talent and flair• Strong capabilities in basic

research• Corporate reputation for

quality or technological leadership

• Long tradition in an industry or unique combination of skills

• Strong cooperation from channels/suppliers

B. Organizational Requirements• Strong coordination among

functions in R&D, product development, and marketing

• Subjective measurement and incentives instead of quantitative measures

• Amenities to attract highly skilled labor, scientists, and creative people

• Tradition of closeness to key customers

• Some personnel skilled in sales and operations – technical and marketing

Ex. 7-3 (contd.)

Cutting-edge production technology and product features to maintain a distinct image and actual product

Technologydevelopment

Programs to ensure technical competence of sales staff and a marketing orientation of service personnel

HRM

Comprehensive, personalized database to build knowledge of customers to be used in customizing how products are sold, serviced, replaced

General administration

Quality control presence at key supplier facilities; work with suppliers’ new product development activities

Procurement

Purchase superior quality well-known components, raising quality/image of final products

Inbound logistics

Careful inspection of products at each step to improve product performance and lower defect rate

Operations

JIT coordination with buyers; use of own/captive transportation service to ensure timeliness

Outbound logistics

Expensive, informative advertisingandpromotion to build image

Mkt & sales

Servicepersonnel have considerable discretion to creditcustomers for repairs

Service

Profit

Margin

Advantages of a Differentiation Strategy

Rivalry is reduced when a business successfully differentiates itself

Buyers are less sensitive to prices for effectively differentiated products

Brand loyalty is hard for new entrants to overcome

Key Risks of Differentiation

• Imitation narrows perceived differentiation, rendering differentiation meaningless

• Technological changes that nullify past investments or learning

• Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty

Creating a Competitive Advantage Based on Speed

• Has become a major source of competitive advantage for many firms

• Involves the availability of a rapid response to customers by

• Providing current products quicker• Accelerating new product development or

improvement• Quickly adjusting production processes• Making decisions quickly

Ex. 7-4: Evaluating a Business’s Rapid Response Opportunities

A. Skills and resources• Process engineering skills• Excellent inbound and outbound

logistics• Technical people in sales and

customer service• High levels of automation• Corporate reputation for quality or

technical leadership• Flexible manufacturing capabilities• Strong downstream partners• Strong cooperation from suppliers

of major components

B. Organizational Requirements• Strong coordination among

functions in R&D, product development, and marketing

• Major emphasis on customer satisfaction in incentive programs

• Strong delegation to operating personnel

• Tradition of closeness to key customers

• Some personnel skilled in sales and operations – technical and marketing

• Empowered customer service personnel

Ex. 7-4 (contd.)

Use of companywide technology sharing activities and autonomous product dev. teams to speed new product dev.

Technologydevelopment

Develop self-managed work teams and decision-making at the lowest levels to increase responsiveness

HRM

Highly automated and integrated information processing system. Include major buyers in the system on a real-time basis

General administration

Preapproved, online suppliers integrated into production Procurement

Working very closely with suppliers to include their choice of warehouse to minimize delivery timeInbound logistics

Standardize dies, etc. and prod. equipment to allow quick changeover to new or special order

Operations

JIT delivery plus partnering with express mail services to ensure very rapid delivery

Outbound logistics

Use of laptops linked directly to operations to speed order process Mkt & sales

Locate service technicians at customer facilities that are geographically close

Service

Profit

Margin

Activities Conducive to Building Speed-Based Competitive

Advantage

Product or service

improvements

Customer responsiveness

Product development

cycles

Information sharing and technology

Speed in delivery or distribution

Advantages of a Speed-Based Strategy

Creates a way to lessen rivalry because firm has the availability of something a rival may not

Allows firm to charge buyers more, engender loyalty, or enhance its position relative to its buyers

Generates cooperation and concessions from suppliers since they benefit from increased revenues

Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them

Key Risks of a Speed-Based Strategy

Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering

Some industries – stable, mature ones – may not offer much advantage to a firm introducing some forms of rapid response

Creating Competitive Advantage Based on Market Focus

• Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market niche

• Allows a firm to– “Learn” its target customers– Build up organizational knowledge of ways to satisfy its

target market better than larger rivals

• Risks of focus strategies– Can attract major competitors to the segment– Believing a focus, by itself, creates success, rather than a

form of low cost, differentiation, or speed

“Typical” Industry Settings

Emerging IndustriesIndustries Transitioning to

MaturityMature and Decline IndustriesFragmented IndustriesGlobal Industries

Characteristics of Markets in Emerging Industries

• Proprietary technology and technological uncertainty • Competitor uncertainty regarding inadequate information• High initial cost structure• Few entry barriers• First-time buyers require initial inducements • Inability to easily obtain raw materials and components• Need for high-risk capital

Strategic Options for Emerging Industries

1. Ability to shape industry’s structure

2. Ability to rapidly improve product quality

3. Establish favorable relations with key suppliers

4. Ability to establish technology as dominant force

5. Acquire a core group of loyal customers

6. Ability to forecast future competitors

Characteristics of Industries Transitioning to Maturity

Intense competition for market share Increased sales to experienced, repeat buyersGreater emphasis on cost and service Industry capacity “tops” outNew products and new applications harder to

come by Increase in international competitionDeclining profitability

Strategic Options for Maturing Industries

• Prune the product line• Emphasize process innovation• Emphasize cost reductions• Focus on selecting loyal buyers• Pursue horizontal integration• Expand internationally

Pitfalls to Avoid in Competing in Maturing Industries

• A middle-ground approach to selecting a generic competitive strategy

• Sacrificing market share for short-term profits• Waiting too long to respond to price reductions• Retaining unneeded excess capacity• Engaging in sporadic or irrational efforts to boost sales• Placing hopes on “new” products

Characteristics of Mature/Declining Industries

Demand grows more slowly than economy, or even declines

Slowing growth is caused byTechnological substitutionDemographic shiftsShifts in consumer needs

Strategic Options for Mature/Declining Industries

• Focus on key market segments offering growth opportunity

• Emphasize product innovation and quality improvement

• Emphasize production and distribution efficiency• Gradually harvest the business

Characteristics of Fragmented Industries

No firm has a significant market shareNo firm can significantly influence

industry outcomesExamples

Professional servicesRetailingWood and metal fabricationAgricultural productsFuneral industry

Strategic Options for Fragmented Industries

• Tightly managed decentralization – Intense local coordination, high personal service, local autonomy

• “Formula” facilities– Standardized, efficient, low-cost facilities at multiple locations

• Increased value added– Difficult to differentiate products/services

• Specialization– Product type, customer type, type of order, geographic areas

• Bare bones/no frills– Intense low margin competition (low overhead, minimum wage)

Characteristics of Global Industries

Differences in prices and costs among countries due to Currency exchange fluctuations Differences in wage and inflation rates Other economic factors

Differences in buyer needs across countries Differences in competitors and ways of competing

among countries Differences in trade rules and governmental

regulations across countries

Key Components of Competing in Global Industries

Approach to gain global market

coverage

Generic competitive

strategy

Strategic Options: Pursuing Global Market Coverage

• License foreign firms to produce and distribute a firm’s products

• Maintain a domestic production base and export products

• Establish foreign-based plants and distribution in foreign countries

Strategic Options: Choosing a Generic Competitive Strategy

1. Broad-line global competition

2. Global focus strategy

3. National focus strategy

4. Protected niche strategy

Ex. 7-8: Grand Strategy Selection Matrix

III

III IV

Overcome weaknesses

Maximize strengths

Internal (redirected resources within the firm)

External(acquisition or merger for resource capability)

Turnaround or retrenchmentDivestitureLiquidation

Vertical integrationConglomerate diversification

Concentrated growthMkt. DevelopmentProd. DevelopmentInnovation

Horizontal integrationConcentric diversificationJoint venture

Ex. 7-9: Model of Grand Strategy Clusters

I II

IV III

Rapid market growth

Slow market growth

Strong competitive position

Weak competitive position

1. Concentrated growth

2. Vertical Integration

3. Concentric diversification

1. Reformulation of concentrated growth

2. Horizontal integration3. Divestiture4. Liquidation

1. Concentric diversification

2. Conglomerate diversification

3. Joint venture

1. Turnaround or retrenchment2. Concentric diversification3. Conglomerate diversification4. Divestiture5. Liquidation

Opportunities to Build Value

Opportunities to build value via diversification, integration, or joint venture strategies are usually found in market-related, operating-related, and management activities. Such opportunities center around reducing costs, improving margins, or providing access to new revenue sources more cost effectively than traditional internal growth options via concentration, market development, or product development

The Portfolio Approach

BCG Growth-Share Matrix

Industry Attractiveness-

Business Strength Matrix

Life Cycle-Competitive

Strength Matrix

BCG’s Strategic Environments

Matrix

Ex. 8-1: The BCG Growth-Share Matrix

Star Problem Child

Cash Cow Dog

Cash Generation (Market Share)

High Low

High

Low

Cas

h U

se (

Gro

wth

Rat

e)

Description of Dimensions

Market share: sales relative to those of other competitors in the market (dividing point is usually selected to have only the two-three largest competitors in any market fall into the high market share region)

Description of DimensionsGrowth Rate: Industry growth rate in constant dollars (diving point is usually the GNP’s growth rate)

Ex. 8-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix

(Industry Attractiveness)

Nature of Competitive Rivalry

Bargaining Power of Suppliers/Customers

Threat of Substitutes/New

Entrants

•Number of competitors•Size of competitors•Strength of competitors’ corporate parents•Price wars•Competition on multiple dimensions

•Relative size of typical players•Numbers of each•Importance of purchases from or sales to•Ability to vertically integrate

•Technological maturity/stability•Diversity of the market•Barriers to entry•Flexibility of distribution system

Ex. 8-3 (contd.)

Economic Factors Financial Norms Sociopolitical Considerations

•Sales volatility•Cyclicality of demand•Market growth•Capital intensity

•Average profitability•Typical leverage•Credit practices

•Government regulation•Community support•Ethical standards

Ex. 8-3 (contd.)

(Business Strength)

Cost Position Level of Differentiation

Response Time

•Economies of scale•Manufacturing costs•Overhead•Scrap/waste/rework•Experience effects•Labor rates•Proprietary processes

•Promotion effectiveness•Product quality•Company image•Patented products•Brand awareness

•Manufacturing flexibility•Time needed to introduce new products•Delivery times•Organizational flexibility

Ex. 8-3 (contd.)

Financial Strength Human Assets Public Approval•Solvency•Liquidity•Break-even point•Cash flows•Profitability•Growth in revenues

•Turnover•Skill level•Relative wage/salary•Morale•Managerial commitment•Unionization

•Goodwill•Reputation•Image

Ex. 8-4: The Industry Attractiveness-Business Strength

Matrix

High Medium Low

Industry Attractiveness

High

Low

Bus

ines

s S

tren

gth

Medium

InvestSelectiveGrowth

Grow orLet Go

Harvest

Divest

Grow orLet Go

Harvest

SelectiveGrowth

Grow orLet Go

Description of Dimensions

Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond the strict control of managementBusiness Strength: Subjective assessment of how strong a competitive advantage is created by a broad range of the firm’s internal strengths and weaknesses

Advantages of the Industry Attractiveness-Business Strength Matrix Over the BCG Matrix

Terminology is less offensive and more understandable

Multiple measures associated with each dimension tap many factors relevant to business strength and market attractiveness

Allows for broader assessment during both strategy formulation and implementation for a multibusiness company

Ex. 8-5: The Market Life Cycle-Competitive Strength Matrix

Caution:

Invest Sele

ctively

Push:

Invest A

ggresively

Danger:

Harvest

Stage of Market Life Cycle

Introduction Growth Maturity Decline

High

Low

Com

peti

tive

Str

engt

h

Description of DimensionsStage of Market Life Cycle: See p. 146Competitive Strength: Overall subjective rating, based on a wide range of factors regarding the likelihood of gaining and maintaining a competitive advantage

Ex. 8-6: BCG’s Strategic Environments Matrix

Size of Advantage

Fragmentedapparel, house building,

jewelry retailing, sawmills

Specializationpharmaceuticals, luxury cars,

chocolate confectionery

Stalematebasic chemicals, volume-grade paper, ship owning, wholesale

banking

Volumejet engines, supermarkets,

motorcycles, standard microprocessors

Many

Few

Small Big

Sour

ces

of A

dvan

tage

Contributions of Portfolio Approaches

Convey large amounts of information about diverse businesses and corporate plans in a simplified format

Illuminate similarities and differences among businesses, conveying the logic behind corporate strategies for each business

Simplify priorities for sharing corporate resources across diverse businesses

Provide a simple prescription of what should be accomplished – a balanced portfolio of businesses

Limitations of Portfolio Approaches

• Does not address how value is created across business units• Accurate measurement for matrix classification not as easy as

matrices implied• Underlying assumption about relationship between market share

and profits varies across different industries and market segments• Limited strategic options viewed as basic strategic missions• Portrays notion that firms need to be self-sufficient in capital• Fails to compare competitive advantage a business receives from

being owned by a particular company with costs of owning it

Ex. 8-7: Value Building in Multibusiness Companies

(Market-Related Opportunities)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced

Value

Shared sales force activities or shared sales office, or both

Lower selling costs

Better market coverage

Stronger technical advice to buyers

Enhanced convenience for buyers

Improved access to buyers

•Buyers have different purchasing habits toward the products•Different salespersons are more effective in representing the product•Some products get more attention than others•Buyers prefer to multiple-source rather than single-source their purchases

Ex. 8-7 (contd.)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced

Value

Shared after-sales service and repair work

Low servicing costs

Better utilization of service personnel

Faster servicing of customer calls

•Different equipment or different labor skills, or both, are needed to handle repairs•Buyers may do some in-house repairs

Shared brand name Stronger brand image and company reputation

Increased buyer confidence in the brand

•Company reputation is hurt if quality of one product is lower

Shared advertising and promotional activities

Lower costs

Greater clout in purchasing ads

•Appropriate forms of messages are different•Appropriate timing of promotions is different

Ex. 8-7 (contd.)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced

Value

Common distribution channels Lower distribution costs

Enhanced bargaining power with distributors and retailers to gain shelf space, shelf positioning, stronger push and more dealer attention, and better profit margins

•Dealers resist being dominated by a single supplier and turn to multiple sources and lines•Heavy use of the shared channel erodes willingness of other channels to carry or push the firm’s products

Shared order processing Lower order processing costs

One-stop shopping for buyer enhances service and, thus, differentiation

•Differences in ordering cycles disrupt order processing economies

Ex. 8-7 (contd.)

(Operating Opportunities)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced

Value

Joint procurements of purchased inputs

Lower input costs

Improved input quality

Improved service from suppliers

•Input needs are different in terms of quality or other specifications•Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plant

Shared inbound or outbound shipping and materials handling

Lower freight and handling costs

Better delivery reliability

More frequent deliveries, such that inventory costs are reduced

•Input sources or plant locations, or both, are in different geographic areas•Needs for frequency and reliability of inbound/outbound delivery differ among the business units

Ex. 8-7 (contd.)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced

Value

Shared manufacturing and assembly facilities

Lower manufacturing/assembly costs

Better capacity utilization, because peak demand for one product correlates with valley demand for other

Bigger scale of operation improves access to better technology and results in better quality

•Higher changeover costs in shifting from one product to another•High-cost special tooling or equipment is required to accommodate quality differences or design differences

Ex. 8-7 (contd.)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced

ValueShared product and process technologies or technology development or both

Lower product or process design costs, or both, because of shorter design times and transfers of knowledge from area to area.

More innovative ability, owing to scale of effort and attraction of better R&D personnel

•Technologies are the same, but the applications in different business units are different enough to prevent much sharing of value

Shared administrative support activities

Lower administrative and operating overhead costs

•Support activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact)

Ex. 8-7 (contd.)

(Management Opportunities)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced

Value

Shared management know-how, operating skills, and proprietary information

Efficient transfer of a distinctive competence – can create cost savings or enhance differentiation.

More effective management as concerns strategy formulation, strategy implementation, and understanding of key success factors

•Actual transfer of know-how is costly or stretches the key skill personnel too thinly, or both.•Increased risks that proprietary information will leak out

Ex. 8-9: Six Critical Questions for Diversification Success

• What can our company do better than any of its competitors in its current market(s)?

• What core competencies do we need in order to succeed in the new market?

• Can we catch up to or leapfrog competitors at their own game?

• Will diversification break up our core competencies that need to be kept together?

• Will we be simply a player in the new market or will we emerge a winner?

• What can our company learn by diversifying, and are we sufficiently organized to learn it?

Places to Look for Parenting Opportunities

• Size and age• Management• Business

definition• Predictable

errors• Linkages

• Common capabilities

• Specialized expertise

• External relations• Major decisions• Major changes

The Patching Perspective

• Patching is the process by which corporate executives routinely remap businesses to match rapidly changing market opportunities.

• Patching can be– Adding– Splitting– Transferring– Exiting, or combining businesses

• Patching is more critical in turbulent and rapidly changing markets, than in stable, unchanging markets

Ex. 8-10: Three Approaches to Strategy

Position Resources Simple Rules

Strategic logic Identify an attractive market

Locate a defensible position

Fortify and defend

Establish a vision

Build resources

Leverage across markets

Jump into the confusion

Keep moving

Seize opportunities

Finish strong

Strategic question

Where should we be?

What should we be?

How should we proceed?

Source of advantage

Unique, valuable position with tightly integrated activity system

Unique, valuable, inimitable resources

Key processes and unique simple rules

Ex. 8-10 (contd.)

Works best in Slowly changing, well-structured markets

Moderately changing, well-structured markets

Rapidly changing, ambiguous markets

Duration of advantage

Sustained Sustained Unpredictable

Risk It will be difficult to alter position as conditions change

Company will be too slow to build new resources as conditions change

Managers will be too tentative in executing on promising opportunities

Performance goal

Profitability Long-term dominance

Growth

Ex. 8-11: Simple Rules, Summarized(Adapted)

Type PurposeHow-to rules They spell out key features of how a process is executed –

“What makes our process unique?”

Boundary rules They focus managers on which opportunities can be pursued and which are outside the pale.

Priority rules They help managers rank the accepted opportunities.

Timing rules They synchronize managers with the pace of emerging opportunities and other parts of the company.

Exit rules They help managers decide when to pull out of yesterday’s opportunities.