Slide 1 - California State University, Northridge

Strategic Management: ConceptsA dynamic perspective

Mason A. Carpenter and Wm. Gerard Sanders2009, 2nd. Edition

ISBN 9780132341400

Presentation of key concepts and logicPrepared by Daniel Degravel

July 2008

Ch 01 Introducing Strategic Management002

Introduction

Strategy and strategic management

Components and dimensions of strategy

Competitive advantage

Strategic management process

Ch 01 Introducing Strategic Management

Birth and life of Under Armor: illustration of strategic management

Objective of textbook: 7Objective of textbook: 7““study of concepts that you study of concepts that you will need to answer questions will need to answer questions about gaining and sustaining about gaining and sustaining success in the world of success in the world of business competition”business competition”

Strategic management relies upon three fundamental themes

1-Time (dynamic industries and firms)

2-Link between strategy formulation and implementation

3-Role of strategic leadership

003

Introduction


10 Strategy = coordinated view by which an organization pursues its goals and objectives, including the pattern of actions that have been taken or planned

9 Strategos = “General’s view”; a plan that will lead to victory9 Big-picture perspective on firm and its context

8 Strategic management = process by which a firm manages the formulation and implementation of its strategy

Why should we study strategy?Understanding business situationActing in the situationPersonal career and issues

004Strategy and Strategic Management


Strategy

005Components and dimensions of Strategy

Corporate strategy

Business strategy

A B

Diamond of strategy

Economic logicTime

Arenas

Vehicles

Differentiators

Levels of strategy


Strategy

006Components and dimensions of Strategy

Implementationlevers

C D

Implementation

IntendedDeliberateUnrealizedEmergentRealized

FormulationStrategic Leadership

Structure

Systems and processes

People and rewards

Formulation + Implementation

Ch 01 Introducing Strategic Management007Competitive advantage

Two plus one perspectives on competitive advantage (and on strategy)

1-ExternalI/OFirm’s environment determinant

2-InternalRBVOwnership of capabilities determinant

3-DynamicTime is keyPresent is partially determined by past but future is open

22 Competitive advantage = firm’s ability to create value in a way that its rivals cannot

Ch 01 Introducing Strategic Management008Strategic management process

Vision and Mission

Strategic analysis

Goals and objectives

STRATEGY Implementation4

3

21

Inside

Outside

Ch 02

Vision and Mission (Leading strategically)

009

Ch 02 Vision and Mission (Leading strategically)010

Introduction

Strategic leadership: definitions and characteristics

Strategic leadership: defining Vision and Mission

Strategic Purpose and strategic Coherence

Stakeholders “management”

Strategic decision-making: biases and ethics

Anne Mulcahy CEO of Xerox since 2000 p31-33Background of the firmAnne Mulcahy’s actions as CEOXerox’s turnaround story: to pull a $15bn cow out of a ditch

011 Ch 02 Vision and Mission (Leading strategically)

Introduction

ResponsibilityPowerless to controlAuthority but enemies and resentmentCleat strategy? Reactive and defensive?Symbolic and substantive impact on organizational outcomesNo time for hands-on managementHigh personal price

Congratulations, you are a CEO!


Strategic leadership: definition and characteristics

33 Leadership = task of exerting influence on other people’s pursuit of goals in an organizational context33 Strategic leadership = task of managing an overall enterprise and influencing key organizational outcomes

ROLES

Complex and multifaceted



FORMALAuthority and status

DECISIONALEntrepreneurDisturbance handlerResource allocatorNegotiator

INFORMATIONALMonitorDisseminatorSpokesperson

INTERPERSONALFigureheadLiaisonLeader

SKILLS and ACTIONS



Level 5 Leaders Pyramid

L5 ExecutiveL4 Effective leaderL3 Competent managerL2 Contributing team memberL1 Highly capable individual

Professional WillProfessional Modesty

PERSONALITY

Tolerance for ambiguity or riskLocus of controlNeed for achievementCharisma and emotional intelligence

Personality traits vs. Leadership abilitiesCourage, toughness

BACKGROUND and DEMOGRAPHICS

Work experience and educationGender, nationality, race , religion…

Reasons for more diversity

International skillsQuality of human capitalSubstantive work experienceTalent for strategic thinkingGroups tend to make better decisions (43 social capital, succession planning)

Because top managers influence strategy by judgment and behavior, it is worthwhile to understand what makes them think and act the way they do

44-45 HWYDTMapping social network


Strategic leadership: defining Vision and Mission

46 Vision (long term status)

46 Mission (Values, purposes and relations with stakeholders)

47, 49 Goals and Objectives

49 ROIC49 Superordinate goals49 Balanced scorecard

Strategy


Strategic purpose and strategic coherence

50 Strategic purpose = simplified, widely shared model of the organization and its future, including anticipated changes in environment

Vision and Mission do not guarantee high performance

Tradeoffs and optionsEffective strategic purpose must be tied to a coherent set of activities, near-term goals and objectives anchored in measurable strategic outcomes

52 Strategic coherence = symmetrical alignment of the strategic diamond, functional area policies and overarching fit of businesses under corporate umbrella

Strategic / Tactic / DesignEnvironment / Vision / Mission / StrategyCL-S / BL-SDiamond 5 elements

Fit

Accepted as truthful and useful by stakeholders


Stakeholders “Management”

52 Stakeholders (Interest + Power) Importance of TMT as stakeholder

Benefits of STo Management:-Support and better strategic choice-Win more resources-Full understanding of STo-Anticipate STo’s reaction

Management STo:

Identification of STosDimensions usedThree groups

a) Influence of STo on strategyb) Effects on strategy on SToc) STO’s power on strategy

STos’ Management PlanApproachObjectiveMessage to conveyActions

58-59 HWYDTTritec JV Chrysler-Daimler BenzAnalysis of STo


Strategic decision-making: biases and ethics

Ethics violation:Vulnerability of organizationsAuthority structureIncentive system

61 Corporate governance

Strategic decision biasesTheories about ourselves (escalation of commitment)

Theories about other people Ethnocentrism; stereotyping)

Theories about the world

019

Ch 03

External environment: Resources, capabilities

and activities

020 Ch 03 External environment: Resources, capabilities and activities

Introduction

Internal drivers of competitive advantage

Resources and capabilities

Dynamic capabilities

Value chain

Strategic leadership: linking R&C to strategy


Introduction

Intel and its CEO Paul Otellini 69-72

World largest computer chip maker $35bnInnovation and massive R&D

Evolution of the environment and transition from memory chips to micro-processor, which started from the bottom of the hierarchy and was not planned

Licensing its technology then revoked these licenses and controlled the value chain



Why some firms perform better than others?Chapter focuses on internal characteristics of the firm or the resource-based inputs into the strategy process; these are resources and capabilities.Role of managers in configuring activities and managing R&C is also explored

For Intel:1-engineering expertise for technology creation2-operational efficiency3-marketing skillsTexas Instruments

Grocery industry: Publix, Whole Foods, Weis

Dynamic capabilities or R&C modelAvailable R&C are source of competitive advantage

Value chain modelConfiguration of value chain activities in way that add more value to PS than rivals

Internal source of competitive advantageTwo models

Strategic leadership (an learning)

DIFFERENTIATOR of strategy diamond



Resources

And

Capabilities

Strategic leadership Strategy

Competitive advantage

Performance



76 Resources = inputs that firm uses to create PS76 Tangible76 Intangible

Intangible Resources are more likely to be a source of competitive advantage because more difficult to imitate for rivals

However, distinction Tangible – Intangible not so clear and some Tangible resources may deliver Intangible benefits

76 Wal*Mart and quasi monopoly in rural areas that locks out potential rivals because “no room for two”76 Union Pacific Railroads controls key rail property gives competitive advantage in transportation of certain materials76 McDonalds has high valuable real estate because of location close to high traffic areas



77 Capability = Competency = firm’s skill in using its resources to create a PS; combination of procedures and expertise

77 Outsourcing

77 Distinctive competence = set firm apart from other firms because unique

77 Core competence = central to the main business operations of firm

Capabilities vary in level (degree of complexity of task) and in location (embedded into individuals or owned by firm at global level)Globally the capabilities are activities that constitute the value chainA special class of capabilities is the “dynamic capabilities”R&C are linked and collectively represent the differentiators (strategy diamond)

77 Wal*Mart has excellent capabilities in logistics management (large store, fleet of vehicles, massive distribution centers)77 Table with capabilities and result for Wal*Mart, The Vanguard Group and 3M77-78 GE has general management capabilities because manages a portfolio of businesses based on sound principles78 Intel78 Oil industry: BP, Chevron; Exxon Mobil; Royal Dutch Shell. Only downstream activities in value chain of industry are Valero Energy; Sunoco which do not have any oil exploration activity78 McDonalds



79 VRINE model =Valuable = take advantage of opportunities or protects from threatsRare = scarcity relative to demandnot Imitable = cannot acquire capability quickly or at low costNon substituable = cannot achieve same benefit with different capability (cost; property rights; time, causal ambiguity)Exploitable = must be usable and the value can go out of the capability

80 Union Pacific Railroad

81 McDonalds opens restaurant into Wal*Mart store; Burger King and Wendy81 Monsanto owned patent for aspartame; Pfizer, Levitra, Cialis81 Toyota, Honda

82 Barnes & Noble, Borders; Amazon.com82 Cisco purchased Cerent to acquire fiber-optic-data-transfer capabilities82 media companies and property rights82 Coca cola and time; subsidizing of American government for entry overseas; Pepsi at disadvantage83 Causal ambiguity: Apple, Google, 3M and Toyota

84 Nowell and its core NetWare product were successful. But no innovation and decline. Sun Microsystems84 Xerox84 Pfizer85 Pfizer and VRINE model

84 Coca cola, Toyota, Intel



Vision quite static until now. However, developing capabilities is dynamic processStatic vs. Dynamic

Stock vs. FlowA stock of resources and capabilities is what is possessed at any point in time. This stock was created over time through a combination of initial endowment and accumulated investment

Value of R&C is function of level (stock) of R&C and the net effect of additional investment and depreciationProcess of accumulation through dynamic capabilities is different from static possession of R&C

86 Dynamic capabilities = processes by which a firm integrates, reconfigures, acquires or divests resources in order to achieve new configurations of R&C.The term “Dynamic” refers to the ability to modify and revise its R&C to match a shifting environment, especially critical in fast moving markets and is typically seen in complex areas of the firm (culture, knowledge and ability to learn).



Dynamic capabilities are manifest in several ways:-Creating new P S-Reconfiguring or transferring R&C across divisions-Building alliances and acquisitions

Value of firm’s portfolio of R&C directly affected by dynamic capabilities to reconfigure R&C to the evolving environment

86 Disney and Princess line based on famous female Disney characters86 Mail Boxes Inc. MBE (UPS)86 Intel86 Cisco and its acquisitions87 Intel organizational processes

Activities

Routines

Resources

Capabilities

Dynamic Capabilities


Value chain

87 Value chain = set of activities performed within the firm to produce P S87 Primary activities87 Support activities

Issues of :-Outsourcing-Creation of value by better way to perform same activities or different ways to perform these activities

89 Trade-off protection = modification of activities implies elimination or addition of other activities. This necessity is a protection against imitationProtecting competitive advantage is developing different activities than rivals but in such a configuration that they cannot be imitated without significant trade-offs, locking-out imitators

88 Beverage distribution firm in Kern county, CA using trucks to transport products to LA, use trucks back to Kern89 Caterpillar, Komatsu89-90 Southwest Airlines, and classic US airlines comparison Exhibits 3.8 and 3.9. The trade-offs they must make91 Change of activities and value chain of Ikea, Dell and Southwest


Value chain

DuPont Formula breaks down determinants of profitability based on equation:

Return On Assets = Net profit margin x Asset turnover91 ROA91 Asset turnover91 Profit margin92 Exhibit detail of formula

94-95 Illustration of DuPont formula in retailing industry: Wal*mart, Sears, and Kohl’s

Value chain helps to see which activities must be in-house and those that can be performed outside92 Outsourcing92 Off-shoringNot new but broader choices now for managers92 Ikea92 Boeing and 78793 Nike and Pacific Cycle93 Baker & McKenzie law firm (team in Manilla)

Three criteria for successful offshoring and outsourcing

031

Strategic leadership

Managers are key because at root of actions

96 Decision agent

Issue of “fait accompli” (96 Intel)

Issue of large vs. small firms managements

Portfolio of processes:-96 Entrepreneurial-96 Capability-building-96 Renewal

-Middle managers have important role (entrepreneur; communicator; psychoanalyst; tightrope walker)-Front line managers DuPont Formula breaks down determinants of profitability based on equation:

Ch 03 External environment: Resources, capabilities and activities

032

Ch 04

Macro and industry dynamicsExploring external environment

033

Introduction

External context of strategy

Macro-environment

Industry analysis

Dynamic characteristics of the external context

Ch 04 Macro and industry dynamics

034

Introduction


103 Ford vs. Chevrolet battle for money but also for customers’ hearts and 103 Ford vs. Chevrolet battle for money but also for customers’ hearts and mindsminds

103-106 Pepsi vs. Coke103-106 Pepsi vs. CokePepsi fighting hard to catch up with CokePepsi fighting hard to catch up with CokeRestaurant business (KFC, Taco Bell and Pizza Hut), spun off with Yum Restaurant business (KFC, Taco Bell and Pizza Hut), spun off with Yum Brands and finally sold offBrands and finally sold offChange into core carbonated soft drinks industryChange into core carbonated soft drinks industryStrategic wins are moving targetStrategic wins are moving targetFight between Coke and PepsiFight between Coke and PepsiValue-chain of industry four functions: Production, marketing, packaging, Value-chain of industry four functions: Production, marketing, packaging, and distributionand distributionBottling operationsBottling operations

Finally, the industry… good for Pepsi and CokeFinally, the industry… good for Pepsi and Coke

035

External context of strategyCh 04 Macro and industry dynamics

Necessity to understand environment because source of opportunities and threats

Broad senseNarrow sense

Tools to perform analysis of competitive environment

Some industries are more profitable than others

107 Coke and PepsiCoca-Cola’s entry into wine industry in 1977, purchasing Taylor Wine and Sterling Vineyard. Finally sold them off.Two fundamental characteristics of wine industry: little brand loyalty; sale and distribution heavily regulated

Tools to understand factors related to industry and relevant to firm performance at any point in timeIn fact, an industry “snapshot”

036

External context of strategyCh 04 Macro and industry dynamics

Key questions about industry:-What is industry?-Macro-environmental conditions that would impact your strategy implementation?-Trends?-Characteristics of industry?

ME

SG

IE

F

037

Macro-environment


109 Macro-environment

109 PESTEL analysis = non exhaustive list of potential influences of environment on organization; focuses on future impact of macro-environmental factors (110 Exhibit 4.3 Dimensions)

Make sure strategy is aligned with forces of change

109 Lands End (online clothier) expanded operations from US to GermanyLocal regulations were obstacle

1-Relevance of factors to context2-Identify and categorize information3-Analyze data and draw conclusions

109 Political110 Economic111 Socio-cultural111 Technological111 Environmental111 Legal

111 Coke and Pepsi

111 Pepsi111 Coca-cola

038

Macro-environment


111 Globalization

112 Coke and Pepsi; Boeing and Airbus

112 Pharmaceuticals; Coke and Pepsi; Boeing and Airbus

113 Railroad industry113 Cell-phone industry113 Motorola and Nokia113 Samsung and NEC

1-Markets

2-Costs

3-Governments

4-Competition

Factors favoring industry globalization

039

Industry analysisCh 04 Macro and industry dynamics

If perfect competition, no firm can earn greater-than-normal profits, because of entry of new firms or exit of incumbents if profit level raises above or below “normal”

If imperfect competition, abnormal profit possibleFew competitors; numerous suppliers and buyers; asymmetric information; heterogeneous PS; barriers Firm’s goal is to create a competitive advantage

Industrial Organization Economics (internal conditions held constant)

114 Key Success Factors114 Key Success Factors in soft drink industry

In I/O approach, assets and strategy are dictated by industry characteristicsThen, every firm must possess assets and so not rareKSF does not give competitive advantage but only allows to competeKSF are easily transferable

040


Industry boundaries115 Industry = group firms producing or selling same or similar PS to same markets115 Monopoly115 Duopoly115 Oligopoly

115 Concentration ratioConcentration affects intensity of competition (fragmented markets more competitive than concentrated ones)Boundaries not simple as it seems; industries are composed of many segments with different structural characteristicsClassification of P or markets

115 Beverage industry Lipton, Starbucks, Seagram’s, Heineken, Mondavi, Ocean Spray, Coke and Pepsi116 Carbonated soft drink industry116 Cola war: Coke bought Minute Maid and Odwalla; Pepsi bought Tropicana and South Beach beverages116 Nestle, Pepsi, Coke, Danone116 Food industry116 Apparel industry

041


Model of Industry structure117 Industry Five-force model P5FHorizontal axis is stylized version of value chainFactors that alter negotiating strengths suppliers,

buyers or rivals and threats of NE and PSCountervailing sources of power vying for larger

piece of industry’s profit

117 Rivalry119 Exit barriers

119 Threat of entry119 Barriers to entry

121 Supplier power122 Buyer power123 Threat of substitute124 Complementors

Attractiveness of industryP5F benefits:1) Understanding of industry (Characteristics,

changes, fit)2) Strategy fit with 5 forcesForces are not static but in state of flux

118 Cola wars119 Software industry Microsoft; airline industry; Litton Industries ship building and the Navy

119 Computer-chip manufacturing120 Soft drink industry; Virgin group120 Barriers to entry list for 6 industries

121 Soft drink industry; Jewelry industry and De Beers; Textiles or wood; Furniture; ERP software and SAP, Oracle and PeopleSoft

122 Tire makers; National Football League Green Bay Packers; New car buyers123 Large brewers; Matsushita Electric Industrial; Best Buy and Circuit City

123 Bottled waters and soft drink; Movie rental industry Blockbuster, Hollywood Video, Movie Gallery and Netflix; Southwest airlines 124 Table of substitutes for 6 industries

124 Music and electronics industries; Hot dogs, buns, condiments and beverages; United and delta125 Computer peripherals; commercial real estate development and financing

126-127 P5F and Complementors analysis US airline industry

042


Competitor analysis: understanding and predicting the rivals’ behaviors and strategiesFuture competition; opportunities for growth

Sources of information128 Bicycle industry: Trek, Huffy, Schwinn128-129 Luxury hotels: Marriott, Hyatt, Motel 6, Best Western129 Airline industry

128 Value curve = tool for visualization of landscape, visually plot how rivals compete on several dimensions and reveal underlying assumptions about businessHorizontal axis is KSF s perceived by competitors; Vertical axis is level of delivery of major groups of firms129 Strategic group = clusters of firms following the same strategy, generally assessed by the central tendency

Predicting competitors’ behaviors and responses to your own strategy; reasonable predictionsFor future behavior, most pertinent rivals are those in the strategic group or susceptible to enter itFuture rivals’ behavior can influence your strategy

Four step analysis1) Rivals’ objectives 2) Rivals’ current strategies 3) Rivals assumptions 4) Rivals’ R&C129 Coke and Pepsi130-131 Value curve in the wine industry

CognitionUnderlying assumptions about industry, best business practices, and the worldUnderlying strategic logic

Competitors

043

Dynamic characteristics of the external contextCh 04 Macro and industry dynamics

Overconfidence in one’s strength is often preclude to declineDurability of competitive advantage varies with industry132 Coke and Pepsi132 Utilities132 Consumer products Sears and Wal*Mart132 Airline industry Southwest, Jet Blue, AA, United airlines132-133 Pineapple industry Fresh Del Monte, Chiquita, Dole

Two drivers of industry change

Industry life cycle Discontinuities

044


A storybook where P5F and structure of industry evolve over timeComparable to product life-cycle

133 Industry life-cycle = model describing evolution of industry from inception to present and possible future states

133 Cell phone handsets, laser printer, digital cameras133 Automobile industry emerged in 1885 with invention of gasoline engine

134 Exhibit 4.10 Impact of P5F factors on industry structure dynamics

133-134 Commoditization = process by which sales eventually become to depend less on unique product features and more on prices. Generally, most of incumbents have similar R&C and offer similar products134 Cell phone, airlines, PC

135 Reinvigoration = growth again135 Bicycle industry

Evolution and information: new entrants replace leaders136 IBM, Dell

Evolution and tactics: extra services at beginning136 IBM and Compaq

Industry life-cycle

045


A special and intensive case of technological change in action

136 Process technology136 Product technology

136 Incremental evolutionary change136 Discontinuous change = breakthrough technology137 Disruptive technologies = breakthrough technology that destroy incumbents’ competencies137 Mini computer industry, disk drive industry

137 Innovator’s dilemma = the economic incentive are to continue to develop evolutionary improvements in their existing technology and to avoid sponsoring disruptive technology, even when the latest may eventually supplant the existing technology137 DEC and mini computers

138 Exhibit showing interplay between incumbents and new entrants innovations138 Notebook computers and handheld digital appliances; full-service stock and online brokerage; printed and online greeting cards; education and distance education; offset printing and digital printing; cardiac surgery and angioplasty139 Auto industry Toyota, Honda139 Airlines Southwest139 Wal*Mart, Sears139 US Stell

Technological discontinuities

046


Emergence of new market; large enough to dedicate a distribution channel

139 3Com Corp and its Palm division139 Sony, Compaq, Dell making hardware and Palm and Microsoft software139 Category killers PetSmart; Home Depot and Lowe’s; Amazon.com; BarnesandNoble.com; Travalocity.com and Expedia.com

When industries divide

When industries collide

140 Consolidation = reduction in the number of industries

140 Global media and entertainment industries are agglomerating Fox, Disney, Viacom and Vivendi Universal140 FedEx-Kinko’s140 Computer industry has changed faster than steel industry

047

Ch 05

Creating Business strategies

048

Introduction

Types of strategies

Economic drivers of strategic positioning

Threats to successful competitive positioning

Strategy and fit with industry conditions

Testing the quality of a strategy

Ch 05 Creating Business strategies

049

Introduction


145-147 The US bicycle industry Three companies with different strategic orientations

1- Pacific BicycleHigh volume, large range of products, large range of quality, distribution through mass-market retailers, all market segments, one-stop shop, lots of acquisitions, manufacturing in Asia

2- Trek BicycleUpper-end users, high quality bikes, innovation, different market segments served, one distribution channel: independent bicycle distributors

3- MontagueBoutique-style, full size high performance folding bicycleHighly specialized product targeted at narrow range of customers

Through Business strategy, we will try to find the best configuration of positions

050

Types of strategies


To reduce complexity of strategic choices, a typology “generic strategies” is used

148 Strategic positioning = the way managers situate a firm relative to its rivals along important competitive dimensionsStrategic positioning aims at reducing the effects of rivalry and improve profitability

148 Trek149 Auto industry: Daimler Benz and Porsche; Luxury cars: Buick, Lexus, Mercedes

149 Generic strategies = Four alternative positions resulting from two sets of choices: the economic logic and the scope of arenas

150-151 COST vs. DIFFERENTIATION150 Exhibit 5.1 Generic strategies with examples of firms

151 Cost = strategic position where firm produces PS while maintaining total costs lower than it takes to rivals to produce similar PS. Basic needs; acceptable PSCreation of sustainable gap with rivals

151 Porsche, category killers such as Lowe’s and Staples151 Wal*Mart, Pacific Bicycle, Gallo WInes

051

Types of strategies


COST151 Cost = strategic position where firm produces PS while maintaining total costs lower than it takes to rivals to produce similar PS. Basic needs; acceptable PSCreation of sustainable gap with rivals151 Porsche, category killers such as Lowe’s and Staples151 Wal*Mart, Pacific Bicycle, Gallo Wines152 Wal*Mart and Southwest airlines

DIFFERENTIATION150, 152 Differentiation = condition of perceived PS uniqueness along different possible dimensions that causes customers to pay premium prices (more satisfied needs and WTP)Higher prices than average152 Coca-cola and Pepsi, Mercedes reputation152 Honda, Yamaha and Suzuki153 Stouffers

FOCUSED153 Focused Cost and Differentiation = Serves narrow segment153 JetBlue, Southwest airlines153 Montague, Trek, Cannondale, Mercedes, Porsche, Ferrari, Harley-Davidson, Orange County Choppers

INTEGRATED154 Integrated C-D = position of simultaneous low cost and differentiationTrade-offs required, difficult to achieve154 McDonalds, Toyota155 Ikea, Chevrolet, Hyundai, Ford

052

Types of strategies


Appropriate strategic position depends on:1- Firm’s R&C2- Industry conditions

Innovation capabilities encourage DifferentiationCapabilities in large scale production encourage Cost

156 Intel156 Dell156 Cooper Industries acquiring and consolidating firms in tool, hardware and electrical products

053Economic drivers of strategic positioning


Key Economic drivers of generic strategies

Economies of scale

Diseconomies of scale

Minimum Efficient Scale MES

Learning curve

Product technologyProduct design

Economies of scope

COSTDIFFERENTIATION

Premium brand image

Customization and convenience

Unique Styling

Speed

Unusually high quality

Creating value and promoting Willingness to Pay WTP



Key Economic drivers of Cost strategies

157 Economies of scale = average total cost for unit of production is lower at higher levels of output157 Coca-cola, Audi, Wal*Mart

158 Diseconomies of scale = average total cost increases with higher levels of output158 Institutional fund management, Microsoft, GM

Sources: spreading fixed costs, specializing in a process, superior inventory management, purchasing power, more efficient advertising because of sizeMost important: spreading fixed costs

Sources: Bureaucracy, labor costs, differences in efficiency

159 Minimum Efficient Scale MES = output level that delivers the lowest possible cost; the smallest scale to achieve maximum economies of scale (there is range of scales at which costs will be minimized)Function of technology159 Steel industry: mini-mills using different furnaces. Requirements for technology different



Key Economic drivers of cost strategies

160 Learning curve = incremental production costs decline at a constant rate as production experience is gainedCumulative level of production since production of first unitForecasting future costs160-161 Japanese motorcycle and car manufacturers161 Computer-chip manufacturers161 Bank clerk, electrical contracting firm162 Fast-food trainee, custom boat builder162-163 Illustration of learning curve at bicycle manufacturer Montague

Sources: resource sharing

164 Economies of scope = potential cost savings associated with multi-business164 Multipurpose table and furniture industryMity Lite and folding tables, expansion into complementary products

Sources: learning by doing, intra-organizational transfer of knowledge

165 Production technology 165 Jet Blue, Nucor Steel

165 Product design165 Canon and Xerox, Pacific Cycle and Trek



Drivers of Differentiation advantages

Premium brand image165 Toyota

Customization and convenience166 Curves International166 Swiss Colony

Unique Styling166 Harley Davidson, Honda

Speed167 Intel, Dell, Apple, Microsoft

Unusually high quality167 Apple, Dell, Red Robin and Fuddruckers (hamburgers), McDonalds, Wendy, Burger King

Creating value and promoting Willingness to Pay WTP167 Willingness to Pay

057Threats to successful competitive positioning


CostImitationAcceptable combination quality-pricePublic awareness of questionable practices in off-shoring168 Mini-mills in steel industry, Kmart vs. Wal*Mart

DifferentiationCustomer does not care about added valueMisunderstanding of costs entailed by differentiationOver-fulfillmentImitation168 Audi, BMW, Mercedes, BMW, Jaguar169 Ford, John Deere, Coke and Pepsi

Focus positionsSame than above plus being out-focused by rivals, attempting to satisfy too many segments169 Harley Davidson

Integrated positionSame than above plus (169) straddling169 H&R Block trades-off between 170 Southwest airlines, United and Delta

Several factors play a role

Successful strategic position:1- is based on firm’s R&C2- must be consistent with industry conditions

Exhibit 5.10 Drivers and threats for Cost and Differentiation

058Strategy and fit with industry conditions


Capturing effect of industry on strategyUnder different life-cycle conditions

Embryonic

Growth

Maturity

Decline

171 Exhibit 5.11 Industry life-cycle and strategy diamond

172 Palm, camcorder, color TV, VCR, cell phone172 Biotechnology

172 US Bicycle172 Wal*Mart

172-173 General Dynamics

059

Testing the quality of a strategy


Five key questions

1-Does strategy exploit firm’s R&C?

2-Does strategy fit with industry conditions?

3-Are differentiators sustainable?

4-Is there internal and external alignment of strategy diamond?

5-Can strategy be implemented?

1-

2-

Differentiators sustainability3-

Firm

4a-

4b-

5-

060

Ch 06

Crafting business strategy for dynamic

contexts

061

Introduction

Strategy and dynamic contexts

Revolutionary strategies that lead industry change

First movers, second movers, and fast movers

Defensive strategies for incumbent caught off-guard

Formulating and implementing dynamic strategies

Ch 06 Crafting business strategy for dynamic contexts

062

Introduction


181-183 Roxio and the resurrection of Napster

Chris Gorog was Napster’s CEO-Free client software enabling people to copy music on their PC and play it for free-Central Napster-run server dispensing information about music

The RIAA attacked Napster on legal grounds and Napster went bankrupt in 2002Gorog has created a new software firm Roxio, that acquired Napster after it filed bankruptcy. He re-launched Napster as a legal download music provider siteWhich model to choose?

Roxio sold it software business to Sonic Solutions in 2004

Napster has never shown a profit

063



How can firms develop competitive advantages in dynamic environments?

Change may be rapid and unpredictableChallenge is anything that may threaten the VRINE R&C (value, common, imitation, substitutability, ability to exploit)For apparently fast change, often seeds have developed for a long time

Response to changes and to dynamic competition

Dynamic response requires:-trade-off between economic logic of Cost and Differentiation-permanent improvement-strategy to be “revolutionary” (changing rules of the game)-seamless integration formulation - implementation

064



The challenges

Interactions between incumbents and between incumbents and new entrantsCompetitive interaction theory

Competitive interaction

186 Four phases of competitive interaction

185 Four Competitive action initiations:-aggressiveness-complexity of answer-unpredictability-tactics to delay leader’s reaction

185 Regional title insurance185-186 Nike and Reebok185-186 SABMiller and Anheuser Busch187 Enterprise, Amazon.com, E*trade, Charles Schwab, Nucor, Southwest, JetBlue, Ryanair

Industry evolution

187 Life-cycleCommoditization

Industry evolution

187 Technological discontinuity187 Technological disruption187 Process innovation187 Application innovation187 Business model innovation

Speed of change tends to compound effects of change driversReacting to change vs. Leading change

187 Charles Schwab, Toyota, GM, Amazon.com188 Progressive Direct, Sony, Apple, Napster, Boeing

065



No naïve vision of industry analysis which is not static but always changing-Large incumbents-Imitators-Rule breakers

Revolutionary strategies

Three families:

Five categories

189 High-end disruption189 Low-end disruption190 Hybrid disruption

191 Reconceive PS193 Reconfigure value chain196 Redefine arena197 Rescale industry198 Reconsider competitive mindset

189 McDonald,s, Hertz, Blockbuster189 Burger King, Avis, Hollywood Videos189 Subway, Enterprise, Netflix

189 Cirque du Soleil189 Southwest airlines190 Amazon.com, JetBlue, Charles Schwab, University Phoenix, Merrill Lynch

190 Exhibit 6.2 Revolutionary strategies table with examples

066



191 Reconceive PS

193 Reconfigure value chain

196 Redefine arena

197 Rescale industry

198 Reconsider competitive mindset

191 Cirque du Soleil192 Wine industry Yellow Tail194-195 Capsule Yellow Tail

Creating new value CurveFour-action framework

Separating function and form 193 Credit card

Radically new value chain

Compress value chain

193 Amazon.com, Skype, eBay

193-194 Dell, Ikea

Changing temporal or geographic availability

Imagine total possible market

Spearheading industry convergence

196 Fast food, Wal*Mart, Target, Grocery stores, Airlines, McDonalds, Coinstar

196 Disposable cameras and children, Copeland

196 TiVo197 Mobile music revolution, cell phone, Play station 2, Ericsson and Napster

Increase scale

Decrease scale

Creating complementors(198 Value Net)

Shift in focus of strategic thinking

197 Service Corporation International, Holliday Inn, McDonalds, Waste management services, Adult education

198 Micro breweries, Bed & Breakfast Inn

199 GM, FedEx and UPS and Land’s End; Novel software and PC; Delata and American and Boeing; Micron and Apple and Lexar

067First movers, second movers, and fast movers


Approach to technology discontinuities depends on R&C

200 First mover200 Second mover200 Fast mover201 Takeoff period201 Late mover

Competitive advantage comes from ability to manage change and harness the R&C consistent with F or S Mover strategiesRole of complementary assets

PROS

Absolute cost advantage in terms of scale or scope

Strong reputation

First –time customers locked-in

Scale of first move makes imitation unlikely

CONS

Technological change

PS flawed

Cost outweighs benefits of F Mover position

201 Amazon.com, BarnesandNoble.com, MS, Palm, Boeing, Atari, Apple, deHaviland201 Wal*Mart, Unilever, Procter & Gamble203 Cancer therapy, PC-software applications202 Gallery of first movers and fast followers (Exhibit 6.9 p.202)

First Mover

068Defensive strategies for incumbent caught off-guard


Resource-based competitive advantage is a position in which the exploitation of a resource makes the resource stronger and more resilientSuccess of strategy depends on strengths and weaknesses

Five competitor-response strategies

1-Containment

2-Neutralization

3-Shaping

4-Absorption

5-Annulment

204 American, Southwest, retail

204-205 MS, Napster, Bertelsmann, Roxio

205 AMA and Chiropractic medicine

205 MS, Intuit

205-206 Kodak, IBM, EDS, HP-Compaq, Lenovo

Any firm that invests in R&C that support retaliation to the exclusion of innovation and change may only be prolonging its inevitable demise

206 Ralston Purina, Nestle

069Defensive strategies for incumbent caught off-guard


Real optionWaiting for uncertainty to clear

Real option = opportunity to take action that will either maximize the upside or limit the downsize of a capital investmentA small investment that will allow to have an option on making a bolder move later

1-Waiting-to-invest options2-Growth options3-Flexibility options4-Exit options5-Learning options

207 Intel207 Oil and gas, mining, pharmaceuticals, biotechnology207 Auto, aerospace, consumer goods, industrial products, high tech

070Formulating and implementing dynamic strategies


Implementation of revolutionary strategies

Role of arenaRole of staging

Exhibit 6.11 p.209 Creating options for future competitive advantage-Current businesses-Emerging new businesses-Future growth businesses

Tactical moves can be used as low cost probes for experimentation in new ways of competing tomorrow

Speed and rhythm of changeImplementation levers: systems, procedures, leadership and processes

209 Home pesticide, Dell

210 Charles Schwab, E*Trade, Merrill Lynch, 3M

210 Examples of pacing in the real world

071

Ch 07

Developing corporate strategy

072

Introduction

Corporate Strategy

Economic logic of diversification: synergy

Types of diversification

Strategies for entering attractive new businesses

Competitive advantage and corporate strategy

Corporate strategy in stable and dynamic contexts

Ch 07 Developing corporate strategy

073

Introduction


215-217 General Electric, Minnesota Mining and Manufacturing 3M and MITY Enterprises

GENERAL ELECTRICOnly firm still on the Dow Jones IndustrialRevenue 2007 $163bn: consumer and commercial finance, health care, industrial, infrastructure, news and entertainmentConglomerateAcquisitionsVision of high performing businesses, #1 or #2; growth and higher margin business; exit from slow growth and volatile businesses

3MRevenue $23bn: industrial and transportation; display and graphics, health care; safety, security and protection; electro and communication; consumers and officeHigh R&DMostly innovation and some acquisitions

MITY ENTREPRISESRevenue $55m: tables, fencesInternal growth through innovation

074

Corporate Strategy


Corporate strategy questions:

1-Which arenas?2-How can corporate parent add value to businesses?3-How can diversification help compete in our existing businesses?

218 Synergy = combined benefits of firm’s activities in more than one arena are more than the simple sum of those benefits alone

218 Examples of GE, 3M and MITY show different approaches of corporate strategy which have increasing levels of diversification: MITY, 3M and GE

075

Corporate Strategy


Evolution of diversification in the US

220 Vertical integration

220 Conglomerate

220 Portfolio planning = family of models to achieve a balanced portfolio of businesses; allocation of resources between businesses

220 GM, DuPont, Standard Oil, ITT (History Exhibit 7.2)

Matrixes AA (Business Attractiveness x Firm’s Assets for that business -or competitive position-)Most famous is BCG (Market growth x Relative market share)222 Exhibit 7.4 AA Matrixes for MITY and financial services firm

McKinsey, AD LittleModified versions with integration of industry life-cycle223 Portfolio model with life-cycle for financial services firm

223 Questionable diversifications: telecommunication firm into hotel industry; Sears in credit card Discovery, in stock brokerage Dean Witter, in real estate brokerage Coldwell-Banker and insurance Allstate. Wal*Mart and Kmart

076



224 Synergy = Economies of scope EoSco + Revenue enhancement synergies RES

EOSCO224 EoSco = Average costs (X,Y) < Average costs (X) + Average costs (Y)Leveraging resource or value chain activity across several P, S, geographic areaSource: use of common resource across several businessesWhen resource used across several businesses, firm has potential to generate EoSco225 PesiCo has Sobe225 Coke and PepsiCo enjoy EoSco in soft drinks, noncarbonated beverages and bottled water

RES225 Revenue enhancement synergy RES = Total revenue (X,Y) > Total revenue (X) +Total revenue (Y)Sales greater if more than one PS sold and distributed by one firmSource: bundling products, sharing knowledge, sharing distribution opportunities225-226 Disney and Big Red Boat, cable and network TV channels, radio226 Financial services226 MITY

077



Economic benefits of DiversificationParenting advantage when global cash flow superior to sum of cash flows and global market value exceeds sum of particular market values of independent businesses of the portfolioUsing “market multiples” such as PER of independent rivals into industry to compare total value with combined hypothetical values of the businesses

Resource sharing encompasses knowledge transfer226 Yum! Brands, Black & Decker, Honda

Limits225 Diseconomies of scopeWhen are economies of scope likely to materialize?227 AT&T never able to realize cross-selling and synergistic outcomes projected. Sale of long-distance activities to SBC Communication, which changed its name to AT&T

Two drivers of diversification:1-Number of different businesses2-Degree of relatedness of those businesses

078



Economic benefits of Diversification227 Related diversification227 Unrelated diversification

Unrelated diversification increases complexity, bureaucratic costs and transaction costsRisk of doing too much in-house and underutilizing outside suppliersIf more complexity, more difficult to find skilled managers to handle it

Analysis of performance (ROA and TSR) in regards to degree of diversification shows that optimum is moderate level of diversification (Inverted U shape)Exception: 228 GE

Match of R&C and need of potential subsidiaries / divisionsAre strategies of the different businesses similar? Better if similarCognition and vision of activities

229 Conglomerate

Maximum opportunities to exploit potential EoSco and RES:1-fit parent – subsidiary / division R&C2-fit parent - subsidiary / division strategies

Self-serving motives for diversification:1-risk reduction2-empire building3-compensation

079



Options of Diversification230 Vertical scope

231 Horizontal scope232 Profit pool

Often defensive; familiar with industryBundling complementary PSNeed for R&C; incumbents may have strong advantage; difficulty of different rules in new industry231 Pulte Homes231 Automakers and dealers

In same industry or different oneProximity measured in terms of similarity of customer needs, of value chains or human capital231 Coke and Pepsi into bottled water; Pepsi in snack foodReduction of costs through EoScoIncrease of revenue by synergiesProfit pool is tool to assess size of value chain components relative to total sales and profitability234-235 Six steps to build profit pool in different industriesProfit concentration different than revenue concentration232 Auto industry in Europe, Global music industry, Dell, gateway, U-Haul, Ryder, Hertz-Penske, Budget

080



Options of Diversification233 Geographic scope

233 Internationalization

EoScaEoSco

236 Pharmaceutical firm; high tech products

Adaptation to local environment

236 Dell237 Microsoft237 Honeywell, GE

246-247 Walt Disney diversification: an evaluation with different tools

081Strategies for entering attractive new businesses


How to narrow down the search for multiple possible businesses to enter?

Attractive business generally high profitability and then high BTE

Ways to circumvent BTE

1-Focus on niche

Not the heart of the market, but an underserved niche238 Coca-cola and Pepsi and Red Bull targeting young adult market

2-Revolutionary strategy

Strategy breaking with convention of incumbents who are predisposed to think that that strategy is inferior, unwise or risky, and to ignore itWhen it proves to be successful, often too lateEx. Reconfigure value-chain238 Skype reconfiguration of value chain238 Jobs purchased the computer graphic division of Lucasfilm, Ltd in 1986, transformed it into Pixar and sold it to Walt Disney in 2006

3-Leverage existing resources

Use of resources and maybe with a partner’s ones to leapfrog BTE239 Wal*Mart entry into soft drink in partnership with Cott Corp to develop Sam’s choice239 Under Armour

4-Combination strategies

239 Wal*Mart entry combining existing resources + revolutionary strategy239 Skype niche + reconfiguration

Indirect way that does not assault directly incumbents and threaten their immediate profitability

082Competitive advantage and corporate strategy


When does diversification create value for stakeholders?

CL-S

BL-S

Success in creating more value because of a portfolio of businesses

Relative position of firm compared to rivals in an industry

A R IUltimately, combination of-Arena-Resources-Implementationdetermines competitive advantage

083Competitive advantage and corporate strategy


ARENABusinesses logically connected to arenaRelatedness = similarity in markets, resources, dominant logic, etc.Nature of resources varies along a continuum240 GE has managerial resources in common between its businesses

A R I

RESOURCESUsefulness of resources to create competitive advantage at:BL-S: VRINE modelCL-S: specialized vs. general resources

240 Specialized resources240 Fiber-optic capabilities240 General resources240 Manufacturing and mass marketing

IMPLEMENTATIONStructure, processes and systems, people and rewards1-Knowledge transfer2-Coordination mechanisms3-Compensation and reward systems4-Size and organization of corporate-level management241 3M, GE242 Berkshire Hathaway, SC Johnson

084

Corporate strategy in stable and dynamic contexts


Strategy in different contexts

Stable contextSynergies conceived as functions of static business-unit arenas and the formal structural links among themCL-S focuses on EoSco and EoSca, making sure that firm operates as a tightly interwoven whole242 Kansas City Southern railroad diversifying into financial services with Janus and divesting after243 Masco Corp. plumbing, home building and repair supplies; Home Depot and Lowe’s

Dynamic contextDiversification can be viable strategy in dynamic contexts, unless the disadvantages offset the pros (flexibility, coordination, complexity)243 Co-evolution = web of shifting linkages between evolving businesses (biology: successful changes among two or more ecologically interdependent species)Cross-business synergies are temporary; tension about the optimum number of linkages for maximum efficiencyBusinesses potentially cooperating and in rivalryDivestiture and spinoffs243 Adaptec, Inc. spun off its software as Roxio243 Palm and 3Com244 Exhibit 7.8 Masco

245 Exhibit 7.9 Stable vs. dynamic contexts characteristics

085

Ch 08

Looking at international

strategies

086

Introduction

International Strategy

International Strategy and competitive advantage

Using CAGE model to choose foreign countries

Entry vehicles

International strategy configurations

International strategy in stable and dynamic contexts

Ch 08 Looking at international strategies

087

Introduction


253-255 DELL

In 2007, second largest PC manufacturer and third largest in ChinaEnormous potential market in China for PCSize is attractive but hazards (Mattel, Motorola, Kodak)

Dell’s approach in China is to stay flexible and entrepreneurialLocal and global simultaneouslyArenaVehicles (alliances)StagingEconomic logic

Lenovo and HP are rivals

088

International Strategy


256 International strategy = cross-border activities of the firm

Growing awareness of international landscape (new market, new constraints)

Thinking about all dimensions of internationalization is key

Trends Exhibit 8.2 p.257 Global trends to watch (shifting of activities, growing consumers, knowledge, talent and labor, environmental issues)

258 Wal*Mart, GE258 Oil and gas, auto, banking and insurance firms in the top twenty Fortune 500258 Logitech, Skype, eBay

089



Three questions1- Why?2-Where?Hard and soft criteriaFit3-How?

Internationalization increasingly critical:1-Capital markets and employees favor fast-growing firms (domestic market saturated)2-Efficiencies in all value-chain activities are linked across borders3-Developing countries have opportunities4-Knowledge can come from abroad5-Customers are becoming global6-Competitors are becoming global

Globalization not a panacea and exposes to hazardsParticipating does not equate to having a competitive advantageAlignment with strategy and benefits > costs are necessary

260 Pepsi260 Wal*Mart261 Dell

090



Costs1-Liabilities of newness and foreignness261 Liability of newness

2-Costs of governance and coordinationInformation distortion, transfer, translation, misalignment between managers

3-Costs and benefits evolveRegarding level of internationalization, evolution of elements (Exhibit 8.6 p.262)Best performance at moderate-high levels of internationalization

091



Global EoSca and EoScoEnormous costs development require larger customer base262 Citigroup, McDonalds, Coca-cola leveraging brands

EoSca and purchasing powerEoSco (exploiting brand internationally)263 McDonalds

LocationImplications for cost, demand rivalry, complements264 Soft drink industry Coca-cola and Pepsi264 Arbitrage

Multipoint competition264 Multipoint competition265 Stronghold assaultUse with care because typically not sustainable265 Michelin attacking Goodyear on its US market

Learning and knowledge sharingInternational can be used as innovation, improving or new ideas265 Dell learning about Chinese market266 Lincoln Electric purchasing Messer GresheimTransfer knowledge across countries267 SC JohnsonLearn where competition is strongest267 Toyota, Honda, DuPont, WL Gore &AssociatesSharing knowledge across units267 BP, GlaxoSmithKline

Key Factors in Globalization

092Using CAGE model to choose foreign countries


268 CAGE Framework = model helping to think about globalization (location, opportunities, risks)268 Fast food269-270 Emerging market boom farm equipment, refrigerators, aircraft, telecom

270 Cultural distance271 Lincoln Electric

271 Administrative distance

273 Geographic distance273 Maintenance, repair and overhaul industry MRO WW Grainger

273 Economic distance273 Hindustan Lever276 Processed cheese274-275 CAGE model at Virgin Mobile Country Attractiveness Portfolio CAP276 Virgin276 Lenovo

093

Entry vehicles


276 Vehicles of strategyDifferent levels of ownership control and local presenceStaged process

Exhibit 8.15 Typology of entry vehicles p.277

Different levels of ownership control, local presence and risk

279 Exporting279 Contractual agreement280 Foreign Direct Investment281 Importing281 Business Process Outsourcing BPO281 Off-shoring

277 Lincoln Electric278 South African Breweries and Miller SABMiller279 Kvaerner A?S builds paper mills and deep-sea oil rigs279 Bayer AG280 Millennium Pharmaceuticals280 McDonalds in Japan280 Virgin Mobile and Sprint280 DaimlerChrysler and BMW formed Tritec280 Rayovac purchased Microlite, battery maker to enter Brazilian market281 Nike, Pacific Cycle281 Service and IT intensive industries282 Ford, Daimler-Benz, Cargill

094

International strategy configurations


Trade-off between responsiveness to local needs and global efficiency282 Market fragmentation

Four different strategies on a matrix along with two dimensions: Local responsiveness and Global efficiencies1- Emphasize local responsiveness283 Lincoln Electric2- Emphasize global efficiencies with some local advantages284 Intel, Pfizer3- Emphasize global efficiencies284 Steel and copper BHP Billeton4- Seek to exploit local advantages and global efficiencies284 McDonalds

284 Born-global firm285 LogitechQuestions to succeed as a global start-up

095

International strategy in stable and dynamic contexts


Industries considered as stable will become more dynamic because of globalizationGlobalization adds another level of complexity to strategy

Dynamic nature of industry and globalizationFMAStaging and geographic marketsArenas in international strategiesR&C in strategy287 Lincoln Electric287 Ikea

Global mindsetGlobal perspective of executivesAbility to learn and to transfer knowledge; effective communication networkExpatriates and Inpatriates288 Dell288 SC Johnson

096

Ch 09

Alliances and cooperative strategies

097

Introduction

Strategic alliances

Why alliances?

Form and structure of alliances

Alliances as strategy vehicles

Alliances in stable and dynamic contexts

What makes an alliance successful?

Ch 09 Alliances and cooperative strategies

098Introduction


293-295 PROCTER & GAMBLE

P&G and Magla gloves signed an agreement to market a line of Magla household gloves under the Mr. Clean nameMagla pays royalties to P&G for the use of that brand

Speed is increased in alliances

Alliance with Stanley Works, American Red Cross and Old World Industries

099Strategic alliances


Alliance has start and endNot a strategy in itself but is a strategic “Vehicle”; must be consistent with economic logic of strategy

Often sharing investments and rewards, reducing risk and uncertainty

Alliances outperform firms without alliances on average

296 Strategic alliance = partnership where several firms combine R&C with the goal of creating mutual advantageMay concern one step or several of value-chains; be strategic or tactical for partners

295 BMW and DaimlerChrysler to build a plant together to reach the 400,000 vehicle/year of minimum efficient scale296 Wal*Mart dropped Rubbermaid when it tried to raise its prices Alliances have grown dramatically in the last few decadesAlliances are be high risk and high return vehiclesFirms behave in their own self-interest; success of alliance depends on willingness to subordinate own interest to alliance’s one

100Why alliances?


Four ways of creating competitive advantage

Joint Investment

Capability of firms to make investmentToo strong tie with client firm

298 Wal*Mart

Knowledge sharing

Learning from partnersMutual trust and familiarityConsistent information sharing routines

298 John Deere and Hitachi exchange employees in segments

Complementary resources

Creation of R&C unavailable to other players

299 Coke and Pepsi

Effective management

Comparison of costs between alternativesMake Buy Ally choice MBA

Trust is source of competitive advantage because facilitates controls, investments, commitment and reduces costs

101Why alliances?


Evolution of alliances

Product Performance Focus1970s

299 Corning and Dow

Position Focus1980s

299 Microsoft and Intel299 P&G and Magla

Learning and R&C Focus2000

300 Pacific Cycle

102Form and structure of alliances


Time commitment

Financial commitment

Non equity alliances Equity alliances

-- +

+

300 Coffee supplier and enterprise software supplier

301 Examples

103Form and structure of alliances


JV and Equity alliances

301 Joint Venture

301 Equity alliance

301 Dow and Corning301 Millennium Pharmaceuticals

302 Non Equity alliance

Sole-sourcing, JIT supply, licensing, co-branding, franchising

302 Starbucks, Barnes & Noble, UA, Dreyer’s, Kraft

Non Equity alliances

302 Consortia

302 Sematech consortium of semi conductor manufacturers

Multi party alliances

104Alliances as strategy vehicles


Alliances and Business strategy

P5F model to look at potential partners

Rivals

New entrants

Suppliers

Customers

Substitutes

Complementors

303 One World and Star; Beer Anheuser Busch, Miller, Sam Adams

303 Wal-Mart and Cifra

304 Tritec, SC Johnson, Wal-Mart

304 Copeland, Trane, Rheem; Dell, Apple and Intel

304 Dean Foods and Silk

304 Coke and Pepsi

Value Net modelAnother way to look at potential partners304 Coopetition

304 Intel and Motorola

Vertical alliance1- Create more value (speed to market, quality, innovation, faster response to change)2- Decrease costs in four areas (transaction costs, quality-related costs, product development costs, logistics costs)In a sense, an alternative to vertical integration305 Vertical alliance306 Timken Exhibit 9.7

Horizontal alliance306 Horizontal alliancePresence in multiple segments of an industry1- Reduce risk2- Greater efficiency3- Learning and innovation4-Overcome political obstacles

Higher probability of success:1-Partners’ goals converge2-When partners are chasing industry leaders3-Each partner must protect proprietary skills

306 Oil exploration firms306 Kraft’s, Starbucks, Yuma brands, Gevalia, Maxwell House306 Mondavi306 McDonald’s and Disney

306 Sematech307 Sony and Apple307 Otis Elevator and Tianjin307 Philips and DuPont307 Semi conductor makers in Asia and Intel307 Fuji-photo and Xerox

105Alliances as strategy vehicles


Alliances and Corporate strategy

Alliances and International strategiesDomestic vs. international alliances (more complex)

308 Dell and Asian distributors 308 Saudi Arabia308 Chinese firms308 Indian firms308 semi conductor firms

Alliance networkNetworks of alliancesFirm operating an hub, a node in a complex array of partially owned and not owned businessesCompetition should arise within and across industries308 Star, One World and Sky Team308 HP, IBM, Sun and MIPS309 Beta and VHS formats309-310 P&G: Connect + Develop309 Exhibit 9.8 Different alliance networks310 Exhibit 9.9 Alliance networks of Sun, MIPS, IBM and HP

Diversification optionsCreate value across a portfolio

307 Fuji-photo and Xerox307 P&G and Magla308 VC firm Softbank

Risks:1-Poor contract development2-Misrepresentation of R&C3-Misappropriation of R&C4-Failure to make complementary R&C available5-Being held hostage through specific investments6-Misunderstanding partner’s strategic intent312 Trek Bicycles and Giant312 Rayovac, Mashushita, and Panasonic

106Alliances in stable and dynamic contexts


Stable environment more forgiving of mistake and allows firm to participate in more alliances312 Nestle and Mars

In dynamic environment, serious consequences, particularly if dynamism coupled with technology intensity312 Millennium Pharmaceuticals

Stability of environment affects partners’ objectives and motivationsCo-evolution model of corporate strategy and development of linkages: alliance enables firm to develop its R&C in concert with the best R&C availableAlliance sustains a specific focused strategy

107What makes an alliance successful?


Five families of areas for reasons for alliance success (ten features in these families)1- Trust2-Manage knowledge and learning3-Understanding alliance evolution4-Measuring alliance performance5-Dedicated alliance function

1-TrustCan be competitive advantageMechanisms to protectAdvantages of trust […]315 BMW and DaimlerChrysler Tritec

315 Relational quality-initial conditions-negotiation process-reciprocal experiences-outside behavior316 Wal-Mart dropping Rubbermaid

2-Manage knowledge and learningIncrease collective benefits of allianceWillingness and resources316 Toyota and its suppliers

3-Understanding alliance evolutionMay eventually become acquisitionRelationship between partners may change over time316 P&G and Magla318 Exhibit 9.12 Coevolution in Fuji-Xerox alliance

108What makes an alliance successful?


4-Measuring performance-different information and reporting systems-inputs that alliance receives from members difficult to track and account for-outputs (idem)317 BMW and DaimlerChrysler Tritec

5-Dedicated alliance functionManager or group of people319 Exhibit 9.13 Dedicated alliance function through value-chain

When do partners fit?-strategic fit-Resource and financial fit-Cultural fit-Structure, system and processes fit-additional fit criteria (timing, other alliances, alternatives, environmental context and competitive pressures)Alliances between complementary equals tend to be strongest and longest lasting319 P&G and Magla322 Sematech; Intel; Wal-Mart320-321 Assessing alliance fit at Millennium Pharmaceuticals

109

Ch 10

Mergers and acquisitions

110

Introduction

Motives for mergers and acquisitions

Mergers, acquisitions and strategy

Types of mergers and acquisitions

Pricing and premiums

Acquisition process

Integrating and implementing an acquisition

Acquisition in industry contexts

Ch 10 Mergers and acquisitions

111

Introduction


327-330 eBay + Skype + PayPal

eBay acquired Butterfields but sold it off three years after eBay acquired PayPal in 2002 and paid a premium of $250m (price $1,5bn)eBay acquired Skype in 2005 for $4.1bn

eBay and PayPal made each business stronger on their own and combination opened up new opportunitiesPayPal global payment system

Communication synergy that Skype brings in

eBay buyers and sellers use Skype to communicate and Skype callers use PayPal to pay for their calls; both encouraging cross-border business growth

329 eBay business model329 PayPal business model

112Motives for mergers and acquisitions


Definitions of terms

330 Acquisition = transfer of ownership; one firm buys another one

330 Merger = combination or consolidation of one firm with another Merger generally means “merger of equals”, i.e. merger between firms of relatively equal size and influence that fuse together to form a larger firm

330 Dispute over differences in definitions for Daimler’s acquisition of Chrysler (Kirk Kerkorian)

113Motives for mergers and acquisitions


Managerial self-interest

330 “Managerialism”

Hubris

331 Hubris = excessive pride, overconfidence, arrogance

Synergy

1-Reducing threats2-Increasing market power and access3-Cost savings332 Soft synergies4-Increasing financial strength5-Sharing and leveraging capabilities

331 Cisco systems332 First Union acquired Wachovia332 Daimler acquired Chrysler332 PepsiCo acquired Taco Bell, Pizza Hut, Kentucky Fried Chicken and Carts of Colorado

114Mergers, acquisitions and strategy


Three questions

1-Economic logic?

2-Existence of alternatives to acquisition?

3-Difficulties and hazards



1-Economic logic?

Usage has increased in recent years; it represents a major economic activityHowever, criticism existsSome acquisitions are successful, other fail

Not strategy in itself but one element of strategy (vehicle)Implications for strategy: possibly diversification; realization of synergies; acceleration of strategy realization because fast

335 Divestiture = selling off a businessDivestiture is also key strategic vehicle, the flip side of acquisition, that enables firms to exit businesses

333 eBay, PayPal and Butterfields

335 Acquisitions “mistake”:335 AT&T of NCR335 Quaker of Snapple; sold it to Triarc which resold Snapple to Cadbury Schweppes with profit336 Exhibit 10.6 Ups and downs at Snapple335 AOL of Time Warner335 Daimler of Chrysler



2-Acquisition vs. alternative (internal development)?Advantages:-Speed-Critical mass immediately-Access to complementary R&C; new R&C can be integrated-Less competitive environment by elimination of one rival

3-Drawbacks of acquisition-Cost-Premium may outweigh potential benefit-Inheritance of unnecessary adjunct businesses-AON All-Or-Nothing tool, whereas internal development entails incremental investment overtime; reevaluation is possible-risk of cultural differences and clash-Greater cost in capital and time required for integration, the more synergies managers will have to squeeze out of the operation

117Types of mergers and acquisitions


Different types exist, each one with specific purpose

General objectives:1-Managing competition2-Managing uncertainty3-Managing both

Vertical Acq.

1-Securing supply

2-More value for final customer (leverage R&C)

3-Reduce costs across value chain Horizontal Acq.

Expansion of firm’s offerings

Complem

entary Acq.

Reciprocal increases in

sales

337 Coke and Pepsi and bottling

337 Cadbury Schweppes acquisition of Snapple

338 Best Buy acquisition

of Geek Squad

118 Ch 10 Mergers and acquisitions

Typology J. Bower

Types of mergers and acquisitions

Product and market extension

Geographic roll-up

R&D goal

Overcapacity

Industry convergence

Investor/Holding

International

338 Product-extension338 Market-extension338 Quaker and Snapple; Cadbury Schweppes

338 Geographic roll-up339 First Chicago and Bank One339 Waste Management roll-up firm to buy small trash hauling firms339 United Rentals acquisition of heavy equipment leasing firms

339 R&D Goal or In lieu or addition to internal R&DIndustry where rapid technological change and innovation requires large resources; buying start-ups340 Cisco, Microsoft, Intel and AMD

340 Overcapacity or consolidation340 Daimler and Chrysler; banking industry

340 Industry convergencePut firm in better competitive position when industry boundaries erode340 AOL, Time, Warner340 Viacom and Paramount, CBS, Blockbuster341 Disney and ABC, ESPN

Independent investors or holding acquire existing firmsBring management, operating and financial discipline341 Berkshire Hathaway

Same types but more complexity

119Pricing and premiums


No single correct priceValue of target depends of hunter’s strategy (how does target fit with strategy?)

Different components:341 1- Market value (capitalization, stock x stock price)342 2- Intrinsic value (future cash flows and corrections from market)342 3- Purchase price

If potential buyer perceives synergies, it may pay more than market valueSynergy is function of strategic fit between firm and potential buyer so each bidding firm may value target differently

342 Synergy = economic value creating by ability to decrease costs or increase revenues

342 Daimler and Chrysler342 Vodafone and Bell Atlantic bidding for AirTouch

120Pricing and premiums


342 Premium = market value – price paidOn average premium equals 30 – 45% market valueJustification of paying premium is realization of synergies

342 Synergy trap343 Berkshire Hathaway

343 Required Performance Improvement

343 Walk-away price343 Coke trying to buy Quaker Oats; Pepsi bidding as well. Buffett opposed the deal because overpriced343 Comcast offer for Disney and forced to withdraw offer because drop of its own stock

343 Winner’s curse (escalation of commitment)

344-345 Calculation of premium and required synergies for PayPal’s acquisition by eBay

121Acquisition process


Single largest factor of successProblems: decision-making problems and implementation problems

Four stages:1-Idea generationImpetus for acquisition346 United Rentals’ roll-up strategy; Quaker and Snapple

2-JustificationLogic for acquisition: how does it contribute to strategy and competitive position [list of 8 questions for managers]Trial and error effect if operating-level managers do not understand the logicAfraid of causing decision-makers to shy away from deal-Understand conditions required for creating synergies-Control timing of implementation and integration-Establish walk-away price348 Quaker and Snapple348 Cisco Systems ; Exhibit 10.11 Organizational-fit acquisition screening by Cisco

3-IntegrationInteraction between target and acquiring firm

4-Results

122Integrating and implementing an acquisition


Option of degree of integration: target autonomy vs. target complete integration

349 Berkshire Hathaway often grants complete autonomy to acquired firms

Strategic interdependenceDepends on nature and volume of R sharing and skill transfer

Need for autonomyRetain key individualsAppropriate amount of autonomy depends on whether it is necessary to create value349 To acquire Rowntree York, Nestle allowed executives to stay in the UK to make them accept the deal350 Cisco had to deviate from its policy to achieve an acquisition of a resisting target

+ -

123 Ch 10 Mergers and acquisitions

Integrating and implementing an acquisition

Implementation process

350 Serial acquirer

Continual process and not an event350 Due diligenceGE Capital and Cisco

Integration management is full-time jobIntegration manager350 GE Capital

Key decisions made swiftlySpeed is critical because cost and time value of money and negative organizational effects of delaying

Address technical and cultural issues351 Cisco351 Franklin Quest merged with Covey and deep different philosophies

124Acquisition in industry contexts


Life cycleIntroductionGrowthMaturity

Dynamic contextsTechnological change

Demographic change

Geopolitical change

Deregulation

Acquisition fits with co-evolution model of corporate strategyAbsorption of target’s dynamic capabilities to build specific capabilitiesAcquisition supports a specific focused strategyAdding and paring off businesses

352 Cisco and Microsoft

353 Tribune merged with Times-Mirror and acquired Hoy

353 Wal-Mart acquisition of Cifra

353 Banking industry; telecommunications; AT&T

125

Ch 11

Organizational structure, systems

and processes

126

Introduction

Interdependence strategy formulation and implementation

Implementation levers

Strategic leadership and strategy implementation

Implementation levers in global firms and dynamic contexts

Ch 11 Organizational structure, systems and processes

127

Introduction


359-362 HUI

HUI is small metal fabricator which implemented the Lean ManufacturingToyota and Danaher Corp as wellHUI has reinvented itself from a traditional family business to an open book managed company with defined goals, roles and authority spread over the entire firm

Lean allowed HUI to discover the real factors that keep it going and increased its speed and adulthood

HUI embraced the cellular manufacturing (U-shaped work cell) that brings in many benefits (faster detection or errors, flexibility, reduced lead-time and inventory)Culture of employee management, customer process and ownership by employees, learning and individual growth

Source of competitive advantage

128Interdependence strategy formulation and implementation


Formulation and implementation are interdependent and iterative

362 Exhibit 11.2 Formulation and implementation

If difficulties, questions: what is flawed? Formulation, Implementation or both?

363 HUI shows that all the variables of implementation were impacted:-Levers support strategy of growth- organization- systems- people management and culture

“A strategy is only good as it execution”“The important decisions are strategic but more important and more difficult is to make effective the course of action decided upon”

Intended strategy Realized strategy

Strategic leadership


366 Exhibit 11.5 Key facets of Implementation



Knowing-Doing gap = difference between Knowing and Doing

Causes of Knowing-Doing Gap

Sharing of strategy formulation with STo

Managers

Leadership


Implementation obstacles



Causes of Knowing-Doing gap

Culture364 CultureIf strong culture, higher performance, less variability in performanceThis effect is reinforced in highly competitive marketsValues must be consistent with strategy

MismatchesEasy to see afterwardsPermanent attention must be given to coherence between strategy, processes and systems and people management

364 HP tried to mimic Dell’s business model but encountered resistance from retailers such as Best Buy and CompUSA

364 At IBM, Lou Gerstner revived the firm’s culture364 Exhibit 11.3 Lou Gerstner at IBM

365 HUI Levers support strategy of growth

365 Hardware and software providers that attempted to become IT solution providers through adding a consulting division, e.g. SAP366 Exhibit 11.4 Picking up the pieces at SAP

131



367 Implementers levers = mechanisms that a strategic leader has to help execute a strategy

Three components:1-Structure2-Systems and processes3-People and rewards

132



367 Organizational structure = relatively stable arrangement and division of responsibilities, tasks and people within an organizationThe framework that management has devised to divide tasks, deploy resources, and coordinate departments

Structure encompasses: Authority hierarchy; organizational units and coordination mechanisms

Two functions: control and coordination

Structure must fit strategy (e.g. diversification strategy; concentration strategy)

Relationship strategy – structure: egg-chicken or one dominant direction?How structure influence strategy?368 Discovering new offerings that were profitable then integration into strategy Air Liquide368 Intel’s shift from memory chips to microprocessors not orchestrated by top managers but acted by operational managers to follow one of the rule of activity profitability

STRUCTURE

133



368 Functional structureSmall firms; efficiency and qualityIssue of “functional silos”; difficulty to adapt to environment

369 Multidivisional structureMarket, product, business; Fast reaction, duplication of resources, enhances coordination, undesirable competition between divisions

371 MatrixTwo reporting channels; flexibility, high control and coordination, complexity, difficult to manage, skills needed

371 Network structureSmall, semi-autonomous and potentially temporary groups brought together for a special purpose (e.g. team)Flexible; authority based on control of knowledge, resources and expertise; potential for confusion and ambiguity“Network brokers” and connections in networks

STRUCTURE

Four basic forms:

368 Platypus Technologies small nanotech firm

369 Disney Businesses369 GM Product (brand)370 Emageon Visualization tools for medical organizations370 GM with Buick and Cadillac

370 Asean Brown Boveri

370 Gore Industries

372 Professional partnerships372 Legal offices, accounting and consulting firms, advertising agencies and real estate

372 Franchise

134



Many systems exist for different functions, such budgeting quality control, planning, distribution, resource allocationBalancing need for short term performance and long term performance

373 Balance scorecard = elaborate summary of goals and objectives of strategic management processObjectives:1-Translate strategy in operational terms2-Align organization and strategy3-Make strategy everyone’s job4-Make strategy an on-going process5-Mobilize change through executive leadership

Balanced scorecard relies on range of metrics and not only financial indicators. It measures elements that are relevant to the value being delivered to key stakeholdersFour components:1-Financial perspective2-External relations perspective3-Internal business process perspective4-Learning and growth perspective

Contents:1-Objectives2-Measures3-Targets4-Initiatives

375 GE375 Exhibit 11.10 Balanced scorecard system

SYSTEMS & PROCEDURES

135



375-376 Strategy Map = visual tool explaining strategic objectives, targets and measures

-Objectives-Measures-Targets

Is staging and pacing of strategy on track?

Smoothes process of implementation because articulates causality between objectivesTool for communicationImproves support for strategyHelps to determine resource allocation

377 Microsoft ties compensation of top executives to customer satisfaction378-379 Balanced scorecard for the NUWC Naval Undersea Warfare CenterThemes, measures, target, initiatives

SYSTEMS & PROCEDURES

377 Lean377 Toyota seven wastesElimination of waste, quality improvement, production time, and cost reduction380 Exhibit 11.14 Elimination of waste soul: the 7 wastesKey principles: zero defect, removing non-value-added activities, efficient use of resources, continuous improvement, flexibility, long term relationship suppliers-primary producers

136



People and rewards together; Human capital is key

Success if “right people with right competencies at right time at right place”Importance of right people accentuated in human-intensive industries

Recruitment, Selection and Training RSTPeople’s skills are critical. Link with organizational competenciesDownsizing results in short term improvements but in performance decline afterwards382 SAP; BGI383 Jet Blue, Southwest; GE, Microsoft; oilfields

383 Reward systemsYou get what you measureYou get what is rewardedReinforce culture383 Outcome control383 Behavioral controlReward system in diversified firms: issue of incentive for cooperation and synergies across divisions838 GE384 Commercial and investment banks have different reward systems

Contingency framework for analyzing pay384 Exhibit 11.15 [Matrix 2x2 Employer transactional relationship x Employee transactional relationship ]385 Exhibit 11.16 Pay objectives at Medtronic and AES

Rewarding A while 385 Exhibit 11.17 Common management follies about reward systems

PEOPLE & REWARDS

377 Lean377 Toyota seven wastesElimination of waste, quality improvement, production time, and cost reduction380 Exhibit 11.14 Elimination of waste soul: the 7 wastesKey principles: zero defect, removing non-value-added activities, efficient use of resources, continuous improvement, flexibility, long term relationship suppliers-primary producers

137Strategic leadership and strategy implementation


Main roles for leadership:1-Implementation of levers2-Resource allocation3-Communication strategy to key stakeholders

1-Implementation of leversImplementation implies trade-offsPoor implementation results from alignment of strategy, its levers and the environment

With time, environment changes, firms grows and levers must be questioned386 HUI

2-Resource allocationTo allocate resources, trade-offs unavoidableConsistency with strategyObstacles: political interests, mimicking rivals’ allocation of resources

Competitive advantage emerges when a firm develops unique advantages, usually scarce387 Airline industry Southwest and JetBlue are not mimicking the other airlines387 Wine industry388 Intel shifted focus from memory chips to microprocessors

138Strategic leadership and strategy implementation


3-Communication of strategy to key stakeholdersImportant strategic function for leaders that starts in the strategy formulation itself

Four directions for communication1-Upward388 HUI

2-DownwardOrganization members’ support

3-AcrossInternal stakeholders across units and divisions388 Emageon

4-OutwardExternal stakeholders388 IBMChampion neededSTo analysis

Three C-s of strategy communication:-contacts-cultural understanding-credibility389 3M, BGI

139



Global firms

Need for efficiency and local responsivenessFour structural forms

1-Local responsivenessPortfolio of independent businesses around the world390 US Government, SAP, Nestle

2-Global efficiencies with some local advantagesCoordinated group of federations over which more control is exerted by home-country headquartersOverseas operations seen as appendage of domestic activities390 SAP

3-Global efficienciesCentralization of resources and decisionsOverseas operations seen as pipelines for distributing products to global and homogeneous market301 Ford, Japanese firms

4-Both local advantages and global efficienciesDispersion, specialization, interdependence391 McDonalds

Finding and rewarding managers in global organizationExpatriates vs. localAsymmetry of information

140



Dynamic contexts

To manage high-velocity industries is difficult when implementing strategy

Two responses:1-Ambidextrous organization2-Patching in diversified firms

1-Ambidextrous organizationWhen disruptive technology emerges, difficult to retain market leadershipIncumbent has disadvantage because status quo perceived as best interest of managers and employeesParadoxical problem: to flourish in long run, firm must exploit existing advantages and explore innovations that will probably alter industry significantly in the future. Then firm must learn to integrate incremental change and radical innovation393 Ambidextrous organizationAmbidextrous answer OK for development of radically new businesses freely

Four structural forms1-Functional where innovation integrated into existing structure2-Cross-functional or matrix (innovation outside functional hierarchy)3-Team or units4-Structural independent unit for innovation linked to organizational at upper level only

141



Dynamic contexts

2-Patching393 Patching = process of regularly remapping businesses in accordance with changing market conditions and restitching them into new internal business structures (combining, splitting, transferring, adding units)

ComplexStructure is altered so must be seen as flexible and contingentUsually involves small incremental changesAdjust internal systemsPatching OK for multi-products and geographies where systems are consistent across firms393 BGI, HP

Linking implementation to stagingProcess should anticipate staging objectives of strategy388 HUI

142

Ch 12

New ventures and corporate renewal

143

Introduction

From new-venture creation to corporate renewal

Entrepreneurship and the entrepreneurial process

New venture creation and corporate new venturing

Initial Public Offering and managerial professionalism

Why do organizations fail?

Strategic change and organizational renewal

Ch 12 New ventures and corporate renewal

144Introduction


401-403 SNOCAP

SNOCAP helps artists and copyright owners to sell music directly to customers from the artist’s website or MySpace pageShawn Fanning founded Napster in 1999 and SNOCAP402 Long tail where huge potential for revenue exists when selling to many individuals products that have each low sales volume

iTunes, RhapsodyAmazon.com

493 Social networking403 FaceBook, Friendster, and MySpace

SNOCAP differentiators are rights protection and commercePotential market is 10 times was does exist today, according to SNOCAP

145From new-venture creation to corporate renewal


Birth TransitionIPO

Rescue

Three important stages that can punctuate the life cycle of a firmTrue regardless of firm age or sizeEntrepreneurship is present at each stage

Strategy provides solutions to problemsOpportunities and R&C

404 New venture creation404 Corporate renewal404 Initial Public Offerings IPO

146Entrepreneurship and the entrepreneurial process


Success depends as much on entrepreneurial team as on the lead entrepreneur

405 Entrepreneurship = consequence of actions based on the identification and exploration of opportunities in the absence of obviously available resources405 Entrepreneurial process

405 OrthodoxyOrthodoxy represents status quo therefore creates blind spots to the recognition of new opportunitiesList of several dimensions where may existCustomer, interface, profit definition and value delivery, PS functionality, PS form, way processes are structured and managed, ideal cost and pricing structure

404 Dell, IBM and Apple405 Exhibit 12.2 Firms and orthodoxies that have created blind spots



Entrepreneurial process integrates three elements:1-Opportunity2-Key resources and capabilities3-Entrepreneur and entrepreneurial team

1-OpportunityOpportunity and assessment of R&CEliminate, reduce, create or raise previously assumed dimensionsMarket disruption situation is entrepreneur’s dream because opportunitiesScientific discovery or breakthrough inspire entrepreneursLink with R&C406 SNOCAP407 Google, Universities Stanford and Wisconsin-Madison



2-R&COverlap between people and R&C because opportunity sometimes based on skills and experience408 SNOCAP

3- Entrepreneur and entrepreneurial teamNo litmus test to find right peopleEntrepreneur must balances three key elements of entrepreneurial process

408 Exhibit 12.4 Google’s management team with three people and the repartition of responsibilities

149New venture creation and corporate new venturing


No rule of thumb to move to step after Opportunity identification

Generally:1-Business plan2-Financing3-Launching PS

1-Business planProvides coherent basis for strategy and explores five facets of strategy411 Exhibit 12.6 Table contents of typical business planWell-crafted plan does not ensure success. Strength and coherence of three fundamental elements is critical. Continuous work in progress

2-FinancingOften own resources firstToo much money early can be counterproductive410 Bootstrapping410 SNCAP, Angel Investors LLC, Morgenthaler Ventures, Walden VC, Court Square Ventures

150New venture creation and corporate new venturing


Corporate new-venturing411 Corporate new-venturing412 Merck, 3M, Motorola, Rubbermaid, Johnson & Johnson, Corning, GE, Raychem, HP, Wal-Mart

Two forms

1-New businessA champion (individual or group) for innovationAssembling R&C, meeting goals, solidifying organization, business climate supportive to entrepreneurial activitiesThree obstacles

2-New venture divisionStructural solution: unit working like venture capitalist or incubatorCreating new business that will contribute to corporate entity or high growth new venture that can be sell off at profitNew business is protected from main activity but at the same time isolatedBalance requirements of corporate new ventureConditions of success […]R&C approach required413 Gillette, IBM, Levi Strauss and Xerox, firms that tried to start e-commerce operations to mirror traditional brick-and-mortar activities

151Initial Public Offering and managerial professionalism


414 Initial Public Offerings IPOTransition to a more complex, large and established formAccess to more capital and to put more professional management414 Krispy Kreme

MethodFirm establishes market value in private sectorValue estimated by investment-banking institution (impressive amount of information)Timing the offering to target the optimal timeInstitution sells shares to public414 S-1 statement414 Prospectus414 Tomo Therapy and 415 Exhibit 12.7 S1-statement first page414 Google

Cost is roughly 10% of amount of capitalFinancial tests and audit

417 Road show

417 Bermuda Triangle of Management = region where firms face the need to cross over from entrepreneurial to formal management417 Trucking industry418 SAP417 What does formal professional management entail? […]

152Why do organizations fail?


Understanding causes failure important because helps understand guide firm through strategic change to correct problems before failureAll firms may experience distress at any point of their life cycle

Set of common factors underlies business failure

419-420 Google list of risks listed in S-14 Krispy Kreme

External causesSome changes are rapid whereas others are slow and predictableIn most cases, managers observed, discussed and disregarded relevant change in environment

1-Economic change

2-Competitive change421 Clothing, consumer electronics, steel

3- Social change421 Krispy Kreme

4- Technological changeITTransportation technology

153Why do organizations fail?


Internal causesImpossible to say what percentage of failures result from internal causes but most experts agree that they are the dominant cause

1-Strategy failure

2-Management failureTop managers very smart but dysfunctions hinder their abilities (dictatorial style, lack of managerial depth, unbalanced team, dishonesty and fraud, weak financial function)423 Roger Smith at GM got rid of executives who disagreed with him423 Enron, WorldCom, Tyco

Warning signals of organizational declinePESTEL, industry structure and value-chain, financial indicators424-425 Ford’s numbers fizzy or flat?Three indicators: Z-Score model; Sustainable growth and Operating leverage

154Strategic change and organizational renewal


All business environments are in a state of changeStrategic management deals with the state of change

Two actions:1-Anticipate change2-Respond quickly to changes

426 Strategic changeWhen orthodoxies exist, difficulty of change is compounded

Traditional types of change:-cost reduction-asset reduction or redeployment426 Brewery-restructuring



Eight steps of sound change management:1-Sense of urgency2-Guiding coalition3-Vision4-Communication5-Empowerment of others6-Short-term winsSAP’s signing of Exxon as customer7-Consolidation8-Institutionalization

The nuts and bolts of change through the necessary levers 429 Exhibit 12.12: what happens if one levers are missing-vision-skills-incentives-resources-structure



Turnaround management:When firm faces dire straits, no luxury for time, but emergency430 Ford, GM

Five stages:431 Five stages Exhibit 12.131-Changing management (way top managers approach issues)2-Analyzing situation3-Implementation of emergency plans4-Stabilization5-Return to normal432 Exhibit 12.14 Successful turnaround at ISH

Five caveats:-stages not necessarily distinguishable-number stages varies and depends upon seriousness of crisis-importance of each stage varies-more than one stage at a time; overlap-length of time varies (12 to 36 months)

157

Ch 13

Corporate governance

158

Introduction

What is corporate governance?

Corporate governance and competitive advantage

Ownership and roles of owners

Board of directors

Executive compensation

Market for corporate control

Faces of corporate governance around the world

Ch 13 Corporate governance

159

Introduction


439- 442 Hewlett-Packard

HP founded in 1938, manufacturing audio oscillator

Growth and many products

First outsider as CEO Carly Fiorina 1999

Battle for merger with CompaqPro-merger won and merger took several years to be completed

Questioning Fiorina’s leadershipConflict with Board and information leak to the pressBoard asked Fiorina to step down

Patricia Dunn appointed chairman of BoardMark Hurd appointed as CEO

Investigation about source of leak through unethical meansGeorge Keyworth was the source

Fight back to the investigation and punitive damages for HP to payHP fired DunnSeries of corporate governance reforms

160What is corporate governance?


Definitions

Top management team TMT responsible for vision and formulation/implementation of strategyRisk that TMT engage in practices detrimental to STo’s interests

Separation of ownership and management

Make sure that:-profits and resources not squandered-not self-serving decisions at STo expense-STo receive positive return on investment

442 Agency problem442 Corporate governance = system by which organizations are directed and controlled by owners; it addresses distribution of rights and responsibilities among participants and spells out rules and procedures for decision making

161Corporate governance and competitive advantage


Effect of CG on firm’s survival, performance and competitive advantage?

Good CG is positive for STo satisfaction and firm’s performance

443 German law and limited form of stock-based compensation. Early adopters have stock price increase and impact on strategy by divesting non core operations443 Mercato Italiano di Borsa started new exchange STAR for firms adhering to strict CG rules. They constantly outperform those listed on regular Borsa444 Internet-based firms in risky and uncertain markets. Indicators of CG to evaluate444 Fraud and malfeasance in the US444-445 Krispy Kreme rated by Governance Metrics International. Problems followed for Krispy Kreme. Morningstar is investment advisory firm and grade firms on CG A-F scale

Risk of deviation from firm’s purposes increases when managers are not ownersMost visible roles of CG:-control-incentivesWhat recourse do have STo if TMT deviates from firm’s purposed?



446 Agent446 PrincipalWhen TMT and STo’s interests are identical, agency problem is minimalWhen these interests do not naturally overlap (max executive pay; over-diversification), something must be done

1-Align interests2-Monitor and control TMT’s actions



446 Codes of governance

Cadbury code446 Adrian Cadbury former chairman of Cadbury Schweppes19 recommendations

Sarbanes-Oxley Act2002447 Adelphia, Enron, Arthur Andersen, WorldCom and TycoAccounting oversight, auditor independence, disclosure, analysts’ conflicts of interests, accountability for fraud, and attorney responsibilities

Public Company Accounting Oversight BoardPCAOB oversees audit of public companiesIt sets rules and standards; accounting firms that audit must register with PCAOB which enforces compliance by these registered firms

Codes of governance



Four mechanisms:

1- Ownership concentration and power

2- Board of directors

3- Incentive compensation

4- Market for corporate control

Corporate governance mechanisms

165Ownership and roles of owners


448 Private firm448 Public firm

Dispersion of ownershipSome owners have so much voting power that they can influence strategy and CGDispersion of ownership affects type and magnitude of agency problem faced by investors449 Adelphia and Rigas family’s power of control449 Blockholders449 Coca-cola 13% stocks controlled by 2 individuals; Dell

449 Institutional owners449 FedEx has Vanguard, Barclays and Capital Research and Management Company449 Exhibit 13.3 Ownership structure comparison of Dell, FedEx, Coca, Berkshire Hathaway and PorscheMost institutional owners are passive but some are very activeDifferent types of investors seem to have preference for firms with different strategies450 California Public Employee Retirement System, State of Wisconsin Investment Bank

166Board of directors


Board of directors450 Board of directorsFormal and informal roles

450 Insider450 Outsider451 Independent outsider

CEO and chairman of BoardTwo roles are mostly combined in US but split in EuropeCombining for need of specialized information and lack of qualified candidatesSplitting for need for monitoring

451 Split model: Boeing, Walt Disney and oracle

In US, boards are typically composed of a majority of outside directorsOutside directors may not be independentCEO has control over outside directorsIn technical areas, insider can provide better information

167Board of directors


Board’s activities

Monitoring452 MonitoringExecutive compensationExecutive successionAudit reviewHP 452453 GE and Jack Welch

Several committees with specific responsibilities

Advising managersExpertise and contacts of directorsExistence of social ties: good or bad?453 GE

Stability of environment is a factor influencing repartition insider-outsider directors

Lever of power and influence454 Board interlock454 Home Depot, Pepsi and Coca represented at Bristol-Myers Squibb board

168Executive compensation


Solution to conflict of interest is to reward executives for what is in STo’s best interest455 Incentive alignment“Golden parachute”

Stock-ownership:Requirement that executives own stocks: executives are then more likely to behave like an owner and not a hired hand. But it can backfire455 Exhibit 13.6 Dendrite DRTE software for pharmaceutical industry

1- Traditional stock-ownership (multiple of salary approach)2- Retention program (ownership as percentage of gains resulting of equity-based incentives)456 Mellon Financial Corp

Plans require time so executives have several years

Bonus planYear-end cash reward based on performance. Bias of making decision to maximizing possible bonus; short term bias and inattention to long term strategic needs; easy to revoke or withhold for BoardLong Term Incentive Plan LTIP is based on long term performance457 Food industry Campbell Soup, Kellogg’s, General Mills, Heinz

169Executive compensation


Stock-option458 Stock-option = right to buy stock at later date at predetermined price (vesting period)After period time, executive can redeem option. He can actually buy stock (at a discount if stock price has increased) or sometimes receives difference between option price and actual price as compensation (without actually buying it)Disadvantages: only the upside potential of gain is at stake; executives do not bear financial risk, just a cost of opportunity458 GE, HP

Restricted stockFirm grants actual stock generally with restriction built in to ensure that executive does not sell the stock to convert it in cash, loosing incentive of being stock owner (vesting period 3-5 years, restriction to sale extended period of time)

Well-design incentive planIncentives are powerful tools: long term performance460 General Dynamics

Options used with moderation and balanced with other types of compensationGap CEO and second manager461 Exhibit 13.10 Comparison CEO pay Home Depot and Lowe’s

159

Market for corporate control


460 Market for corporate control = every public firm is theoretically for saleMarket; control460 Stock-market = mechanism that the market for corporate control uses to allow one party to take control away from another460 HP and Compaq

Corporate control is who controls firm462 Corporate raiders, competitors and leveraged-buyout firms are investors who buy underperforming firms, restructure them and sale them for a profitTo save jobs, market for corporate control is mechanism of CG

462 Corporate raiders: T Boone Pickens, Carl Icahn, Saul Steinberg, Ted Turner, Michael Milliken462 Oracle acquiring PeopleSoft

Corporate takeovers generally generate gains; target firm’s STo benefit; bidding firm’s STo do not lose outManagerial teams compete for rights to manage corporate resources (RBV)Most costly, emotion-wrenched remedy; benefit for buyer always of concern

159Faces of corporate governance around the world


Scandals462-463 Ahold Group; Parmalat, Vivendi, Elf, MCI, Tyco

Corporate governance varies by country

463 T Boone Pickens takeover attempt on Koito Manufacturing463 Hostile takeover of Steel Partners on Yushiro Chemicals

Germany

China