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07/07/2014
1
What is Strategic
Management? Introduction
By Prof. Balázs Hámori
&
Prof. Katalin Szabó [email protected]
http://www.youtube.com/watch?v=dhk1IPExjnk
http://www.youtube.com/watch?v=xz3x4006l1k
Outline
What is strategy?
Strategy and tactics
What is strategic management and how it is to develop?
The main building blocks: strategic analysis, strategy
development & strategic decisions and strategy
implementation
Two basic models of strategic approach: the I/O model and the
Resource Based Model
Problems of strategy implementation and monitoring
Q
There Isn‘t a Generally Accepted
Definition
• The different authors
provided different
definitions of strategy
• They give selective
attention to certain
issues relevant to
strategy definition
Alfred Chandler
1918-2007
Michael Porter,1947
http://www.youtube.com/watch?v=dhk1IPExjnk
Definitions of Business Strategy
• Chandler (1962):"Strategy is the determination of the basic long-term goals of an enterprise, and the adoption of courses of actions and the allocation of resources necessary to carry out these goals.‖ ( p.13)
• Porter (1966):"Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value" (p. 64).
• Henry Mintzberg (McGill University) defined strategy as "a pattern in a stream of decisions" to contrast with a view of strategy as planning.
The common elements of numerous
definitons
• The time horizons for strategy: is long term (calculated in more years)
• Determining direction of the firm or organization, choosen among consciously-evaluated alternatives ( E.g.Disney: from cartoons to diversified entertainments)
• Organization: strategy is crucially concerned with the boundaries of organization, solving problems differently within and outside the organization
• Porter (1968):Most of definitions treat strategy as (a) explicit, (b) developed consciously and purposefully, and (c) made in advance of the specific decisions to which it applies. In common terminology, a strategy is a "plan".
Q The Origin of Strategy
o Strategy derives from the ancient Greek word strategos which was used to describe the leadership created by the council of generals in planning how to deploy their army (stratos) to achieve their objectives
o The military association continued in the very different society of ancient China where Sun Tzu wrote his Art of War
Sun Tzu
544 BC- 496 BC
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2
Strategies in the Past and in 21th
Century
Be extremely subtle, even to the point of formlessness. Be extremely mysterious, even to the point of soundlessness. Thereby you can be the director of the opponent's fate.
Sun Tzu
Example: Conglomerates in the 70s
The biggest risk is not taking any risk... In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks.
Mark Zuckerberg
Mark Zuckerberg
Example: microfinancing
Yunus
Strategy as an Emergent Process
o Strategy making in an unpredictable world
creates the necessity for flexible strategic approaches
o Serendipity and strategy
Accidental discoveries and happenstances can have dramatic effects on strategic direction (Shale gas)
o Strategy making by lower-level managers too
Strategy evolves through autonomous action
o Intended and emergent strategies
Realized strategies are combinations of intended and emergent strategies
The Purpose of the Strategy
The strategy
• is likely to be concerned with scope of an organization‘s
activities,
• is to do with the matching of activities of an organization
to the environment in which it operates
• is also to do with the maching of the organization‘s
activities to its resource capability,
• has major resource implications for the organization,
• is likely to affect operational decisions,
• will be affected by values and expectations of those
who have power in and around the organizaton,
• is likely to affect the long term direction of an
organization.
What is not strategy?
• Operational
effectiveness
• Tactics
• Pursuing short term
success (Blitzkrieg or
Napoleon)
Operational Effectiveness Isn‘t Strategy
• The Japanese firms are very good at operational effectiveness, but rarely develop distinct strategic position (Except of the largest companies, just like Sony, Canon and Sega and a few others)
The Strategy and Tactics by Clausewitz
The tactics: using the
army to win the battle.
The strategy: using the
battles to win the war.
Carl von Clausewitz
1780-1831
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Difference between Strategy and Tactic
• Strategy is the overall plan for deploying resources to establish a favorable position
• Tactic is a scheme for a specific maneuver
„Casual use of the term [strategy] to describe nothing more than ―what we would like to do next‖ is inappropriate and belies the complexity of true strategy and strategic thinking.‖
Strategy Tactic
Planning Doing
Large
scale
Smaller
scale
Long time Short time
Why How
Difficult to
copy
Easy to
copy
Q What Makes a Difference between Strategy and
Tactics? Examples
• Strategy: Improve
retention of top 10% of
company performers
• Strategy: Connect with
customers while in our
store in order to increase
sales
• Tactics: Offer best in market
compensation plan with
benefits as well as
sabbaticals to tenured top
performers, source ideas
from top talent.
• Tactics: Offer location based
mobile apps on top three
platforms, and provide top 5
needed use cases based on
customer desire and usage
patterns.
Strategy is Not a Quick Victory
• Initial success is hardly ever decisive… If you win power, you still have all the problems of trying to govern; if you have a run of success with some great products or an innovative business model, it does not mean you will stay on top for ever. Strategy, it turns out, is really about trying to work out in a sensible way how to get from one stage to the next
Nokia‘s founders
Source:www.economist.com nov 2, 2013
B
Q Strategic Management –Defined
Art & science of
formulating,
implementing, and
evaluating, cross-
functional decisions
that enable an
organization to
achieve its long term
objectives
Different Types of Managerial Problems
Categories Urgent problems Not urgent problems
Important problems
Crisis management
(I have to do..)
Strategic management
(I really must get around to doing)
Not important problems
Tactical management
(I always seems to get trapped doing..)
Operational management
(I’ll probably end up just
doing..)
The Difference between the Strategic and
Operational Management
Strategic management Operational management
Ambiguity, complexity, non-rutine decisions
Simple models, and routinised decisions
Organization-wide Operationally specific
Fundamental, and significant change
Small-scale change
Environment or expectation driven
Resource driven
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Strategic Management as Practice and
as Theory
•Set of decisions and actions that result to the formulation and implementation of plans designed to achieve a company‘s objectives
•Study of why and how some firms outperform others
Advantages of Strategic Management
o Strategy formulation activities enhance the firm‘s ability to
prevent problems
o Group-based strategic decisions are likely to be drawn
from the best available alternatives
o The involvement of employees in strategy formulation
improves their understanding and, thus, heightens their
motivation
o Gaps and overlaps in activities among individuals and
groups are reduced by participation in strategy formulation
in different roles.
o Resistance to change is reduced.
Strategic Vision, Intent & Mission
Strategic Vision
A written declaration of an organization's core purpose
and focus that normally remains unchanged over time.
Strategic Intent
Winning competitive battles by leveraging the firm‘s
resources, capabilities, and core competencies
Strategic Mission
An application of strategic intent in terms of
products to be offered and markets to be served
Examples for vision
Amazon: • Our vision is to be earth's
most customer centric
company; to build a place
where people can come
to find and discover
anything they might want
to buy online."
• To have our
product in every
home in the United
States
Mission statements (Examples)
Microsoft "to create a family of devices and
services for individuals and
businesses that empower people
around the globe at home, at
work and on the go, for the
activities they value most
Starbucks
Our mission: to inspire and
nurture the human spirit – one
person, one cup and one
neighbourhood at a time.
W Writing assignments ( 5
minutes)
Please formulate a vision
and a mission statement
For your own company or a company known
for you
___________
Pease indicate the company profile(main
activity ) and
Size (number of employees)
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Strategy formulation: from Vision to Implementation
• Define the organization vision
• Formulate the mission statement
• Map the element of outer environment around (threats and
opportunities)
• Taking into account the inner conditions (Strengths and
Weaknesses)
• Determine strategic alternatives
• Formulate strategy (long term)
• Implement strategy through tactics (short term)
Strategic
Position
(analysis)
Strategy
implementation
Strategic
choices
Basic Model of the Strategic Management
Process
The Strategic Analysis
The strategic analysis is concerned with understanding the strategic position of an organization.
The main factors of the strategic analysis related to organization.
• The environment: provide on one hand threats upon the firm, and the same environment provides opportunities
• The resources: provide tools to answer the environmental challenges, and determine strengths and weaknesses of the organizations
• Culture and expectations: determine values and expectations of those who have power in and around the organization,
The Strategic Choice and Decision
The strategic choice is concerned with the strategic
options, and a series of strategic decisions.
The main factors of the strategic choice:
• Identifying and generating strategic options,
• Evaluate of the strategic options in the context of the
strategic analysis to assess their relative merits
• Selection of new strategy, selecting those option which
the organization (and the main stakeholders) will pursue
The Strategic Implementation
The strategic implementation is concerned with the
translation of strategy into action, projects, and
programs.
The main factors of the implementation process:
• Planning and allocating resources, and set up the control
systems
• Re-form the organizational structure, design a new
culture if it needed.
• Managing strategic change
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Intended
strategy
Unrealised
strategy
Realised
strategy
Imposed
strategy
Strategy
as outcome
(of cultural and
political
processes)
Strategy Development Routes
Continuity Incremental Flux Transformational
Patterns of Strategy Development
Strategic decisions
Product launch
Acquisition
Divestment
Overseas expansion
Strategies evolve and inform
strategic decisions, which in
turn consolidate strategic
direction
Evolving
strategic
direction
Strategic Evolution and Consolidation
K
Q
Two Approaches to the Strategy
The Theoretical Foundation
o The first one is rooted in Industrial Organization (I/O) theory, and focuses on the external environment of competitors within an industry. The I/O approach is embedded in Economics, and it was through I/O that Strategy was born. I/O examines with the structure of an industry, such as size, growth, and profitability. From this perspective, competitive advantage derives from an organization‘s relative position within an industry (Porter, 1981)
o The second approach, called Resource Based Approach focuses on the internal environment. Competitive advantage depends on an organization‘s unique resources and/or capabilities add value, are rare, difficult to duplicate and can be exploited by the firm
Strategy dictated by the
external environment
of the firm (what
opportunities exist in
these environments?)
Firm develops internal
skills required by
external environment
(what can the firm do
about the
opportunities?)
General
Environment
Global
Technological
External Environments
Industry
Environment
Competitor
Environment
1. A Conventional Approach of Strategic
Management : The I/O Model Assumptions of the I/O Model
o Pressures and constraints from the external environment determine the strategies that would result in above-average returns
o Most firms competing within a certain segment of a particular industry and having similar relevant resources and pursue similar strategies adequate to the resources
o Resources are highly mobile across firms
o Decision makers are assumed to be rational and acting in the firm‘s best interests, directed by profit-maximizing behaviors
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I/O Model of Strategy
Superior returns: earning
of above-average returns
The External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
Superior Returns
External environment in I/O model
• The organization
• Competiors
• Industry(sector)
• Macro environment
Study the external environment, especially the industry
environment, economies of scale, barriers to market
entry, diversification, product differentiation, degree of
concentration of firms in the industry
Choosing an attractive industry
o Locate an attractive
industry with a high
potential for above-
average returns
o Attractive industry: one
whose structural
characteristics suggest
above-average returns
The 10 Best Industries for 2013 (U.S.)
• Social networking sites (a projected 51 percent
increase in jobs. Social networking sites account for about 20 percent of the time people spend online and are just beginning to attract major ad revenue)
• Social network game development (36 percent increase).
• Video game publishing (35 percent)
• Voice over IP (28 percent)
• Sustainable building materials (26 percent)
• Online payment processing software (22 percent)
• Green building construction(22 percent)
• Home builders(14 percent).
• Remodeling (12 percent)
• Wire and cable manufacturing(11 percent)
I/O Model:Skills and Assets
o Develop or acquire assets
and skills needed to
implement the strategy
Assets and skills: those
assets and skills required to
implement a chosen
strategy
2.Resource-based Model of Strategy
Rooted in the Resource Based Theory of
Firm
• The resource-based view (RBV) argues that firms possess resources, a subset of which enable them to achieve competitive advantage, and a subset of those that lead to superior long-term performance
• Resources that are valuable and rare, can lead to the creation of competitive advantage. That advantage can be sustained over longer time periods to the extent that the firm is able to protect against resource imitation, transfer, or substitution
• Facts and empirical researches have strongly supported the resource-based view
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Penrose, the Forerunner of the Resource-
Based Approach
• It is widely
acknowledged that
Penrose (1959) is
one of the more
influential books of
the second half of
the twentieth
century.
• Other big name in
the RB Theory:
Barney, 1991.
Edith Penrose
1914 – 1996
Select a strategy, that
best allows the firm to
utilize its resources
and capabilities-
relative to
opportunities in the
external environment
Strategy formulation
and implementation:
strategic actions taken
to earn above average
returns
Resource-based Model of Strategy
1.Resources
2.Capability
3. Competitive Advantage
4. Attractive Industry
5.Strategy for/Implementation
6. Evaluation and Control
1.Identify the firm‘s resource-
strengths and weaknesses
compared with competitors
2.Determine the firm‘s
capabilities--what it can do
better than its competitors
Capability: capacity of an
integrated set of resources to
integratively perform a task
or activity
Resource-based Model: Resource and
Capability
The nature of
competition is changing
Competitive Landscape
Dynamics of strategic
maneuvering among
global and innovative
combatants
Price-quality
positioning, new
know-how, first
mover
Protect or invade
established product
or geographic
markets
Hypercompetitive environments
Challenges of global economy
Locate an attractive industry
An attractive industry:
industries with high
profitability, high growth, or
other attractive characteristics
An industry with opportunities
that can be exploited by the
firm‘s resources and
capabilities
Resource-based Model of Strategy:
Looking for an Attractive Industry
Resource-based Model
Strategy Formulation &Implementation
Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment
Implementation of selected strategy through strategic actions leads to earning above average returns
During the implementation process the management may encounter unanticipated obstacles
Consequently the managers may need to modify the original strategic plan to effectively move past the obstacle or to decide the best route to take
B
07/07/2014
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What is strategy implementation?
The process of putting strategies and policies into action through the development of:
• Programs - statements of activities or steps needed to accomplish a single-use plan
• Budgets - statements of a corporation‘s programs in financial terms
• Procedures - systems of sequential steps or techniques that describe in detail how to perform particular tasks or jobs.
Strategic Flexibility is needed
Organizational
slack
Strategic
reorientation
Learning capacity
Strategic
flexibility
Organizational Slack Q
• Organizational slack can be defined as the excess capacity or resources of the organization
• They represent under utilised and hidden spare energies within a company that may be recaptured and employed for a variety of tasks
• It is the failure of an organization to work with the full efficiency. High efficiency would be impossible with a considerable excess of resources above what is strictly necessary
Consciously generated slack for
innovation and flexibility
• 3M provide it‘s scientists with time to work on their own
projects of interest, and Googlers have also found out
how valuable and profitable slacking can be with their
Innovation Time Off program.
• Google encourages its engineers to spend 20 percent of
their time on projects that interest them, and the 50
percent of new product launches originated from the
above 20 percent time
• Several services provided by Google such
as Gmail, Google News, Orkut and AdSense were
originally created by employees in their work time, which
they could use freely.
What Leads to Formulating a New
Strategy?
Triggering
events
New CEO
External intervention
Threat of change in
ownership
Performance gap
Strategic inflection
point
Stimulus
for change
in
strategy
Q
Strategic re-orientation:The Nokia story (1)
• The predecessors of the modern Nokia were the Nokia Company (Nokia Aktiebolag), Finnish Rubber Work Ltd) manufacturer of galoshes and other rubber products
• The first big strategic re-orientation: In 1967 Nokia form a new industrial conglomerate, that was involved in many industries, producing paper products, car and bicycle tires, footwear, communications cables, televisions and other consumer electronics, personal computers, electricity generation machinery, robotics, plastics, aluminum and chemicals. This paved the way for Nokia's future as a global corporation
The Nokia-founder,
Eduard Polón
(1861-1930)
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Strategic reorientation :The Nokia story
(2) • The second big strategic re-
orientation: In 1987, Nokia introduced one of the world's first handheld phones. Nokia launched its handset in 2003, with over 200 million units shipped, was the best-selling mobile phone of all time and the world's top-selling consumer electronics product
• Nokia was one of the key developers of GSM, the second generation mobile technology which could carry data as well as voice traffic.
From the galoshes to GSM
Monitoring and Control
• The core of
monitoring process
corporate activities
and performance is
that actual
performance can be
compared with
desired performance
Strategic Decision-Making Process: Summarizing
model
Review and Revise as Necessary:
Mission Objectives
Generate and Evaluate Strategic Alterna- tives
Select and Recommend Best Alternative
Implement Strategies:
Programs
Budgets Procedures
Evaluate and Control
Strategy
Implementation
Step 7
5(b) 6(a) 6(b) 7 8
Analyze External Factors:
Opportun- ities
Threats
Scan and Assess Internal Environment:
Structure
Culture Resources
Analyze Internal Factors:
Strengths Weak- nesses
Select Strategic Factors (SWOT) in Light of Current Situation
Scan and Assess External Environment:
Societal Task
Evaluate Current Performance Results
Examine and Evaluate the Current:
Mission Objectives Strategies
Policies
Review Corporate Governance:
Board of Directors Top Man- agement
Strategy
Formulation:
Steps 1 – 6
3(a)
1(a) 1(b) 2 5(a)
4(a)
3(b)
4(b)
Evaluation
and
Control:
Step 8
Problems in Strategic Management
• The energies that managers devote to the strategic management may have a negative impact on fullfilling their operational task
• If the creators of strategy are not involved in its implementation, they may shirk their individual responsibility for the decision
• Strategic managers may handle in a problematic manner the disappointment of participating subordinates over unattained expectations.
Issues to Discuss in the Course
• What is Strategy? What is Strategic Management? Introduction
• The Five Competitive Forces that Shape Strategy
• The Core Competence of the Corporation
• Corporate Governace
• Strategic Decisions Making in Companies, Using Balanced Sorecard
• Internal and External Methods of Firms Development
• General Principles of Organization Design
• Innovation models
• Strategies of global expansion
• Corporate culture and the stakeholders
• Implementation of strategy
Environmental
Analysis
Porter‘s Model of Competitive
Forces
by Prof. Balázs Hámori
&
Katalin Szabó
07/07/2014
11
“An industry‘s profit potential
is largely determined by the
intensity of competitive rivalry
within that industry.‖
Michael Porter
Motto Outline
• PESTEL analysis
• Definition of Competitiveness
• The Five Competitive Forces
• Threat of Entry and Entry Barriers
• Typology of Entry Barriers
• Innocent or structural versus strategic
• Tangible or psychological
• Powerful Suppliers and Buyers
• The Threat of Substitute Products or Services, and
• The Jockeying among current contestants.
Trend extrapolation Decentralisation
Delphy analysis
Experience
and learning
Scenario
planning
ENVIRONMENTAL
CONDITIONS
Static
Dynamic
ENVIRONMENTAL
CONDITIONS
Simple Complex
Approaches to Making Sense of the Environment
Strategic analysis
This type of strategic analysis examines the external environment
and the global factors that may affect a business. It can provide a
quick and visual representation of the external pressures facing a
business, and their possible constraints on strategy. It is usually
divided into four external influences on a business
P – Political
E – Economic
S – Social
T – Technological
E – Environmental
L – Legal
PESTEL Analysis
Q
PESTEL analysis: POLITICAL
This is concerned with how political developments, regionally, nationally and internationally might affect a business‘s strategy.
Govenment stability
Taxation policy: Example: Flat rate
Foreign trade and capital investment regulation
Social welfare policy
Example:Tobacco shops in Hungary
PESTEL analysis: ECONOMIC
This involves the analysis of a wide variety of economic
factors and their effects on a business. They include:
Economic growth and rising living standards
Low/high levels of inflation
Low/high levels of unemployment
Balance of payments
(value of imports vs exports)
These factors can further be broken down into
macro-economical and micro-economical
factors.
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PESTEL Analysis: SOCIAL
What competitive advantage might a business gain by social changes taking place outside of the business?
Aging population, reduced birth rates, longer life
expectancy Changing role of women in the workplace Improved education--better skilled workers Early retirement, more leisure time Rising divorce rates, more “single” households Job security Immigration creating a wider range of consumer tastes Example:
16% of all care workers are migrant workers in the U.K. Without them, the range of care provision would be less
Aging in the U.S. The share of
population over 65
Why not addapt the companies to
aging?
In Germany only
4.5% of the
characters in 656
ads were 60 years
or older.
In May 2011, MSNBC reported on a
US study showing the disconnect
between fashion magazines and their
aging readers.
―An analysis of editorial and
advertising images reveals that
despite proportions of older readers
ranging as high as 23%, fashion
magazines portray women over 40
sparingly, if at all.‖
PESTEL analysis: TECHNOLOGICAL
The impact of technological advancement on business strategy
Business Software applications (word processing,
spreadsheets, database, accounting systems, inventory systems)
Computer-aided design
Computer-aided manufacturing
Internet/Intranet
Rates of technological obsolescence
New discoveries
Govt and Industry focus on tech
Govt spending on research
PESTEL Analysis: ENVIRONMENTAL
People‘s perception and reaction to environmental
issues can affect a business
Environmental protection law
Waste Disposal
Energy consumption
PESTEL Analysis: LEGAL
Competition protection unfair trade practices, monopoly, mergers & takeovers
Employment Law
Health and Safety
Product safety
Strength of the rule of law
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Example: PEST- analysis
Heineken
Political
Government has a
negative view on alcohol
due to the negative social
and health
consequences
All governments levy
higher taxes on beer
while foster to export
alcohol
Economic
Unemployment around the
world is rising. Money for
leisure spending will decrease
for everyone globally
PEST- analysis Heineken
Sociocultural
Beer isn‘t just for men anymore. More and more women are enjoying beer for the taste
The new lifestyle of the newest generation is face paced.
This leads to less time to drink beer; at home or at a bar.
The growing population in China leads to more leisure time for people to drink.
The more health conscious America becomes leads to less drinking.
Apps appers in the beer industry
One, called Batch. It, is a cloud-based solution built with the brewer in mind and keeps track of all of the logistics involved with managing a brewhouse like batches in fermentation, inventory stores, completed beers, etc. That product will be out in the first quarter of 2014.
Technological
The Five Competitive Forces
• The threat of new
entrants
• The bargaining power
of customers
• The bargaining power
of suppliers
• The threat of substitute
products or services,
and
• The jockeying among
current contestants.
Michael Eugene
Porter (1947)
is the Bishop William
Lawrence University
Professor at the
Institute for Strategy and
Competitiveness, based
at the Harvard Business
School.
He is a leading authority
on competitive strategy
and the competitiveness
and economic
development of nations,
states, and regions.
Five-plus forces of competition
The First Competitive Force: Threat of Entry,
Entry Barriers and entry Deterrence
If firms in an industry are
profitable, there are likely
to be potential entrants
Successful entry will
lower profits for
existing/incumbent
firms
Therefore existing firms
will want to impede
(deter) entry
• Question: what kinds of
entry barrier exist? Hint:
some are ‗tangible or
semi tangible‘ and some
are based on beliefs
(psychological)
Q
Basic Asymmetry between Incumbents and Entrants
Sunk costs represents
investments put at risk by an
entrant uncertain of its ability to
successfully establish its in the
market
Established relationships with
customers and suppliers are not
easy to replicate
Learning curve effects
Switching costs for the customers
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Two important concepts
Incumbent: referred to as a company that is powerful
and has a large market share, as in, "the dominant
incumbent software company." In business, the
incumbent is typically the largest player in a given
industry
Sunk costs: is a retrospective cost that has already
been incurred and cannot be recovered. Sunk costs are
sometimes contrasted with prospective costs, which are
future costs that may be incurred or changed if an
action is taken
Tipology of entry barriers
Innocent or structural barriers
Exogenous. Due to changes in technology, consumer preferences or government intervention
These types of entry is unintentionally erected as a side effect of normal profit maximization
Strategic or
behavioral barriers
Endogenous.Du
e to purposeful
action by
incumbents
A strategic entry
barrier is
conciously erected
to reduce the
possibility of entry.
There are eigth major sources of barriers to entry
•Economies of scale
•Product differentiation
•Capital requirements
•Cost disadvantages
independent of size
•Ownership a key scarce* resource
•Access to distribution channels
•Network effects*
•Switching costs*
•Government policy
* These barriers
weren‘t
mentioned in the
original book of
Porter
Structural or Natural Barriers to
Entry: Economies of Scale
Economies of scale These economies deter entry by forcing the aspirant either to come in on a large scale or to accept a cost disadvantage.
Examples:These can occur in manufacturing (eg Siemens, ABB, GE), marketing (eg. Vodafone, ABInBev), purchasing, financial (larger companies tend to benefit from a lower cost of capital) and managerial (larger companies can hire more specialised workers).
Q
Structural or Natural Barriers to
Entry: Product differentiation
• Brand identification creates a barrier by forcing entrants to spend heavily on marketing
• This can be seen most clearly in the branded consumer goods industry (eg. Coca-Cola, LVMH).But it also occurs in any industry where the end product is both essential and relatively technologically unique (eg. pharmaceuticals, defence hardware)
In these cases consumers
may be willing to pay a
premium price for a
relatively cheap physical
good due to either loyalty or
the intangible connotations
attached to being seen with
such a product.
With unique essential
technology, a company can
become a legal monopolist,
but only so long as the
product is not superseded
Structural or Natural Barriers to
Entry: Capital requirements
This type of entry barrier is arguably a consequence of economies of scale rather than a separate barrier in its own right.
Where economies of scale exist, new competitors need to enter a market ―in size‖, committing large amounts of capital to purchase fixed assets, to finance inventory and receivables and to finance initial operating losses.
Higher capital requirements mean the pool of potential entrants is much reduced, limiting the threat of entry
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Structural Barriers: Cost
disadvantages
Cost disadvantages independent of size -- Entrenched companies may have cost advantages not available to potential rivals
High set-up costs deter initial market entry. Many of these costs are sunk costs
High R&D costs. When firms spend money on R & D, it is often a signal to potential entrants that they have large financial reserves
In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future. It is widely found in oligopolistic markets such as pharmaceuticals and the chemical industry.
Such advantages include experience (eg. many medium-sized companies in the German & Japanese manufacturing industries) access to unique assets: eg. proprietary technology (Nippon Electric Glass)
Structural or Natural Barriers to Entry:
Network effects
• A network effect is that multiple users have on the value of a good or service to other users.
• The greater the number of
people using the specific good or service the greater the individuals benefit
• If a strong network already exists it may limit new entrants who fail to gain sufficient numbers of users to create a positive network effect.
Examples
Telephone in 20th century
Social media in 21st century
Structural or Natural Barriers to Entry:
Ownership scarce resource and switching costs
Ownwership and control
Owning scarce resources, which other firms could use, creates a considerable barrier to entry, such as an airline controlling access to an airport.
.
Such advantages include access to unique assets (eg. particular raw material deposits in the mining industry), proprietary technology
Access to distribution channels
• For many consumer goods, the supply-chain is controlled by a small number of participants in each segment, which often includes the retailers and existing product manufacturers. This can prevent new entrants from getting their products to market
• The newcomer must, of course, secure distribution of its product or service
Structural or Natural Barriers to Entry:
Government Policy • In certain industries, governments award either monopoly or preferential rights to particular operators.
• Governments can limit or even foreclose entry to industries with such controls as license requirements and limits on access to raw materials etc.
• Utilities in most countries would fall into this category. Sometimes this happens by accident rather than on purpose, as heavy government regulation
Examples can be found in the financial sector and the healthcare sector acts to create a high cost of entry for potential new competitors
Blockaded Entry
• Entry is considered
to be blockaded
when the incumbent
does not need to
take any action to
deter entry
• Existing structural
barriers are effective
in deterring entry
90
arkets
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16
Strategic Barriers to Entry
• Strategic entry barriers are barriers created and maintained by the incumbents
• Incumbents can erect strategic barriers by expanding capacity and/or resorting to limit pricing, predatory pricing and other means in order to keep off the rivals.
91
Deterred Entry by predatory pricing
• Entry deterring strategies
are effective in discouraging
potential rivals and are cost
effective
• Deterred entry is the only
condition under which the
incumbents should engage
in predatory acts applying
predatory pricing
92
Predatory pricing is an act
of setting prices below the
average cost of production
attempting to eliminate the
competition. This sort of
pricing is illegal as it makes
markets vulnerable to a
monopoly
Limit pricing
A limit price is a price, or pricing strategy, where products are
sold by a supplier at a price of which is somewhere around the
average cost of production. Incumbent discourages entry
before the entry itsef occurs
If a monopolist set its profit maximizing price (where MR=MC)
the level of supernormal profit would attract new firms into the
market
Therefore, the monopolist may decide to set a price below this
profit maximizing level, but still enable it to make higher
profits than in a competitive market
For limit pricing to be effective, the monopolist needs to
increase output up to the level where a new firm will not be
able to make any profit on entering the market
What is the difference between limit pricing and predatory pricing
Predatory pricing is when incumbent charges a
price deeply below average cost in order to
make a loss in the short run and force rival firms
out of the industry
Limit pricing is when you reduce your prices to
just above average costs and make sure that
any new entrant would make a loss. Monopoly
does this as they enjoy economies of scale and
so they can keep their monopoly status in the
industry
When Deterrence failed:
Accommodated Entry
• Accommodated Entry: Exists if structural entry barriers are low and:
• entry-deterring strategies will be ineffective; or
• the cost to the incumbent of trying to deter entry exceeds the benefits it could gain from keeping the entrant out.
• When the condition accommodated entry, the incumbents should not bother to deter entry
• This condition is typical of markets with growing demand or rapid technological change
• Structural barriers may be low and strategic barriers may be ineffective in deterring entry or simply not cost effective
95
Typology of Entry Barriers
Intention/Materiali
zation
Tangible or
Semi-tangible
Psychological
Innocent/natur
al
• Economies of scale
• Cost disadvantages
• Product differentiation
• Network effect
• Control of resources
• Access to distribution
channels
• Legal factors(certification
and patents)
• Government policy
• Switching costs
• Customer loyalty
Strategic/Purp
oseful
Product development, product
bundling, loss leaders, limit
pricing, predatory pricing,
lock-in due to compatibility
Goodwill and reputation
brands
Aggressive response to
entry – fighting is a
credible threat even if
costly for the incumbent
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The Second Competitive Force:
Powerful Buyers
Buyer power should be defined as the ability of a
buyer to depress the price it pays a supplier or
obtain more favorable nonprice terms
Unlike the textbook definition of monopsony
power, this definition recognizes that powerful
buyers may seek not only price reductions from
their suppliers but nonprice concessions as well
Buyer Power: Supermarket Chains
Although large buyers like Wal-Mart, Aldi or Tesco occupy important positions in the economy, most of the analysises focus on the conduct of sellers
The power of important supplier or buyer group depends on the market situation and on the relative importance of its sales or purchases to the industry compared with its overall business.
A company's choice of
suppliers to buy from
or buyer groups to sell
to, should be viewed
as a crucial strategic
decision.
• It is concentrated or purchases in large volumes.
• The products it purchases from the industry are standard or
undifferentiated.
• The products it purchases from the industry form a
component of its product and represent a significant fraction
of its cost
• It earns low profit margins, which create great incentive to
lower purchasing costs.
• The industry‘s product is unimportant to the quality of the
buyers‘ products or services.
• The industry‘s product does not save the buyers money.
• The buyers pose a credible threat of integrating backward to
make the industry‘s product.
Buyer power is likely to be high when:
The Source’ of Buyers’ Power Examples for the given
source
It is concentrated or purchases in large
volumes
Example: automotive manufacturing
industry, which purchases many
relatively undifferentiated components
from suppliers who have few – if any –
other customers
The products it purchases from the
industry are standard or
undifferentiated.
Example: Paper and packaging
industry, as most market participants
manufacture identical or relatively
standardized products
The products it purchases from the
industry form a component of its
product and represent a significant
fraction of its cost. .
Example: Supermarkets. Cost of
goods sold represents the bulk of a
supermarket‘s cost and are sold-on to
the customer at relatively low margins
The Source’ of Buyers’ Power Examples for the given
source
It earns low profit margins, which
create great incentive to lower
purchasing costs.
The industry‘s product is unimportant
to the quality of the buyers‘ products
or services.
Example: Business support services
such as the provision of office-cleaning
and waste removal both fall into this
category.
The industry is not an important
customer of the supplier group
The industry‘s product does not save
the buyer money.
Example:This statement applies to the
entire cost of goods sold for a retailer.
Reducing the costs of such inputs
allows the buyer to pass the savings
on to customers
The Third Competitive Force:
Powerful Suppliers
• Some industries are dominated
by a few companies and is more
concentrated than the industry it
sells to.
• The power of each important
supplier group depends on the
market situation and on the
relative importance of its sales
or purchases to the industry
compared with its overall
business.
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Supplier Power is Likekly to be High
• It is dominated by a few companies and is more
concentrated than the industry it sells to.
• Its product is unique or at least differentiated.
• Switching costs exist.
• It poses a credible threat of integrating forward
into the industry‘s business.
• The industry is not an important customer of the
supplier group.
The Source Suppliers’
Power
Examples for the given
source
Their industry is
concentrated than the
industry it sells to
Example: iron ore industry
BHP Billiton, Rio Tinto etc.
Their product is unique
or at least differentiated
Example :ARM Holdings,
which designs the chip-set
used in the Apple iPod,
iPhone and iPad
The Source Suppliers‘ Power(1)
The Source Suppliers‘ Power(2)
The Source Suppliers’ Power
Example for the given source
Switching costs exist Examples: changing software
provider (eg. SAP and Oracle benefit
in this way)
It poses a credible threat of
integrating forward into the
industry‘s business
An example here is the bulk
chemicals industry, as participants in
the downstream oil industry could
easily integrate forward if they so
chose
The industry is not an important
customer of the supplier group
The Fourth Competitive Force:
The Threat of Substitute Products
Substitutes often come rapidly
into play if some development
increases competition in the
industries and causes price
reduction or performance
improvement.
Examples of substitute include
e-mails, instant messages,
faxes, and digital delivery for
document delivery companies
or
video teleconferences instead
of airline travel to meetings or
conventions.
• The companies need to identify products and services which can perform essentially the same functions as the given industry‘s products and services. ―Blinder mentalities‖ about their own industries prevent the timely identification of disruptive substitutes that are offering somewhat similar products at much lower price.
Pressure from Substitute Products
• Firms in an industry are also affected by competition from
related markets. The availability of substitutes influences
the ability of a firm to raise prices, or to change the
attributes of its products
• Identify possible substitute products by asking: ―What set
of products constrains the ability of firms in this industry to
substantially increase prices ?
• Substitute products become particularly important in times
of rapidly increasing demand, and in industries with few
competitors (making it difficult to increase supply quickly)
Forms of Substitutes
Forms of substitutes Examples for the given type
Product substitution
A new product may render a product
superfluous.
Substitutes may also be thought of as
those competing for discretionary
expenditure.
Pepsi & Coke are a similar kind of
product, both fizzy and sweet and
one can be drunk instead of the
other. Hence substitutable.
Refrigerator manufactures
competes for other household
expenditure with
Substitution of need
People redirect themselves towards
opportunity.
Better toothpaste reduces the need
for dentists.
Quicker trains substitute the flights
Generic substitution
The dispensing of a chemically
equivalent but less expensive drug in
place of a brand-name product that
has an expired patent
Crestor or Lipitor, both very potent
cholesterol lowering drugs. The
difference here is only the brand.
Doing without Tobacco
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The Fifth Competitive Force: Jockeying for
Position. Competitors‘ Threat
The product or service
lacks differentiation or
switching costs, which
lock in buyers and protect
one combatant from raids
on its customers, by
another.
Intense rivalry is related to the presence of a number of factors:
• Fixed costs are high or the
product is perishable,
creating strong temptation to
cut prices
• Capacity is normally
augmented in large
increments.
• Competitors are numerous or
are roughly equal in size and
power
• Industry growth is slow,
precipitating fights for market
share that involve expansion-
minded members
Jockeying for Position(1)
Condition for Jockeying Examples
Competitors are numerous or are
roughly equal in size and power.
The packaging industry suffers from
this characteristic.
Industry growth is slow, precipitating
fights for market share that involve
expansion-minded members.
Although incomes are growing in the
developed world, the marginal
pound of income is generally spent
on services (healthcare etc),
meaning the market for packaging
grows only in the low single digits (it
is not economical to transport
packaging)
The product or service lacks
differentiation or switching costs
which lock in buyers.
In the paper industry the product is
homogenous and switching costs
are zero (indeed, most large printers
will source their paper from a
number of suppliers)
Jockeying for Position(2)
Fixed costs are high or the product is
perishable, creating strong temptation
to cut prices
Capacity is normally augmented in
large increments. Such additions, as
in the chlorine and vinyl chloride
businesses, disrupt the industry‘s
supply – demand balance and often
lean to periods of overcapacity and
price-cutting.
Exit barriers are high. Exit barriers,
like very specialized assets or
management‘s loyalty to a particular
business, keep companies competing
even though they may be earning low.
Example: the airline industry.
As any empty seats perish as
soon as the plane takes-off,
while the marginal cost of
carrying an additional
passenger is almost zero.
Consequently, small declines in
customer demand can lead to
large declines in industry pricing
Establishing a strategic agenda
• To establish a strategic agenda for dealing with these forces and to grow despite them, a company must understand how they work in it‘s own industry and particular situation.
• What makes them vary?
• The essence of strategy formulation is coping with the specific kinds of competition experienced.
The Core Competences
of the Corporation and the Value
Network
Prof. Balázs Hámori
&
Prof. Katalin Szabó [email protected]
Outline
Definition of core competency and basic terms
related to it: resources, competences,
capabilities
Core capability and core rigidity
Value chain and value network. Porter‘s value
chain analysis
Customer value
SWOT analysis
114
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Corporation Similar to a Large Tree
Leaves= End Products
Trunk and Major Limbs = Core Products
Roots = Core Competency
115
Basic Terms 1: Resources
Resources – what a firm possesses. Resources
have three main characteristics: Utility, limited
availability and potential for economic
exploitation.
Tangible assets (machines & equipments) E. g. Glaxo
Smith Kline‘s research laboratory or Google‘s power
station feeds its servers
Intangible assets (people, brand name, that in most
cases inaccessible in the market) Examples: Intel‘s
excellent management or Coca-Cola‘s brand name
See: Hitt, Ireland and Hoskisson (2007) 116
Debt/ Equity Debt/ Equity
Classification And Indicators of Resources
117
Some Less Known Concepts
Brand equity: The value premium that a company realizes from a
product with a recognizable name as compared to its generic
equivalent
Turnover:
1. In accounting, the number of times an asset is replaced during
a financial period.
2. The number of shares traded for a period as a percentage of
the total shares in a portfolio or of an exchange.
Royalty: A payment to an owner for the use of property, especially
patents, copyrighted works, franchises or natural resources. In
most cases, royalties are designed to compensate the owner for
the asset's use, and are legally binding. 118
What Makes a Resource
Valuable?
Scarcity Appropriability
Demand
119
Audit Resources--Core Resources
Necessary
Resources
Unique
Resources Resources
Easy to
imitate
Difficult to
imitate
Same as
competitors
Better than
competitors
Define core resources
Core
resources
120
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Easy to Imitate: Cash Commodities
Can be Imitated (but may not be): Capacity Pre-emption Economies of Scale
Difficult to Imitate: Brand Loyalty Favorable cost position Employee Satisfaction Reputation for Fairness
Cannot be imitated: Patents Unique location Unique assets (e.g. Mineral rights)
Source: Collis and Montgomery, Corporate Strategy: Resources and the Scope of the Firm (1996).
Resource Imitability
121
Basic Terms 2: Capabilities
Capabilities describe the firm‘s ability to create, deploy, modify, reconfigure, and leverage resources. Valuable capabilities permit resources to be combined in unique ways
Core capabilities embodied in the staff‘s knowledge, in technological systems, managerial systems, and the institutionalized values. The above factors and systems form evident practice of the organization.
Unique combinations of the resources and capabilities evolves core competencies
122
FUNCTION CAPABILITY EXEMPLARS
Corporate
management
Financial management, Strategic
control
Coordinating business units
Managing acquisitions
Exxon Mobile, GE,
IBM, Samsung, BP,
P&G, Citigroup,
Cisco
MIS Speed and responsiveness through
rapid information transfer
Wal-Mart, Dell,
Capital One
R&D Research capability
Development of innovative new
products
Merck, IBM, Apple,
M3
Manufacturing Efficient volume manufacturing,
Continuous improvement
Flexibility
Briggs & Stratton,
Nucor, Harley-D,
Zara, Four Seasons
Identifying Organizational Capabilities:
A Functional Classification (1)
123
FUNCTION CAPABILITY EXEMPLARS
Design Design capability Apple, Nokia
Marketing Brand management,
Quality reputation,
Responsiveness to
market trends
P&G, LVMH,
Johnson & Johnson
MTV, L‘Oreal
Sales,
Distribution and
Service
Sales Responsiveness,
Efficiency and Speed of
Distribution,
Customer Service
PepsiCo, Pfizer,
LL Bean, Dell,
Singapore Airlines,
Caterpillar
Identifying Organizational Capabilities:
A Functional Classification
124
Strategic Capability – Key Points
Benchmarking establishes relative performance and challenges assumptions
Management of strategic capabilities involves stretching capabilities and building dynamic capabilities 125
Stretching and Adding Capabilities
Extending best practices
Adding and changing activities
Stretching competences
Building on apparent
―weaknesses‖
Ceasing activities
Trade-offs
External capability development
Trade-offs: A technique of reducing
or forgoing one or more desirable
outcomes in exchange for increasing
or obtaining other desirable
outcomes in order to maximize the
total return or effectiveness under
given
Building on weaknesses. But the
best leaders realize that in order for
real achievements to become a
reality they must focus not only on
the pre-eminent attributes of
employees, but also on their
weaknesses, initiating efforts to both
buoy and leverage those
shortcomings to achieve greater
success. 126
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Building Dynamic Capabilities
Promote a learning
organisation
Recognise intuition of people
Accept conflicting ideas
Experimentation as the norm
Add activities to support
learning, e.g. ―venturing‖
business units
Manage organisational
knowledge
Need right culture and
structure
Develop spiral of interaction
between tacit and explicit
knowledge
127
Benchmarking Strategic Capability
Historical – performance compared to previous
years
Industry/sector – comparative performance of other
organisations (strategic groups)
Best in class – wider search for best practice
Increased expectations due to improved
performance in another sector
Breaking the frame about performance standards
to be achieved
Spot opportunities to outperform incumbents in
other markets – stretch core competences 128
Competences
How an organisation employs and
deploys its resources due to its
capabilities
Efficiency and effectiveness of
physical, financial, human and
intellectual resources
How they are managed
Cooperation between people
Adaptability
Innovation
Customer and supplier relationships
Learning 129
The Differences Between Resources
and Competences
Resources Competences
Partly Tangible Intangible
Measureble Mostly difficult to measure
Easy to identify the „owners”
Difficult to identify the „owners”
You can buy and sell You can acquire by „learning by doing”
130
Definition of Core Competence
The central idea is that over
time companies may develop
key areas of expertise which
are distinctive to that company
and critical to the company's
long term growth
The main ideas about core
competences were developed
by C. K. Prahalad and G Hamel
through a series of articles in
the Harvard Business Review
followed by book - Competing
for the Futures.
C. K. Prahalad (1941-2010)
G. Hamel (left) Born: 1954 131
Characteristics of Core Competencies
Combine multiple kinds of
abilities
One business unit may
have several core
competencies
Provide potential access to
a wide variety of markets
Makes a significant
contribution to the
consumers‘ utility
Difficult for competitors to
imitate
Example:
Apple‘s unique competence
seems to be its product design
process. With the iPod, Apple
combined the elements of
jukebox software, which could
organize a large amount of
songs, and MP3 players, which
held lots of songs. Apple
combined these elements in a
way that was simple to use.
Simplicity turned out to be the
core attribute that made the iPod
a revolutionary product, one that
changed consumer expectations.
132
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Hard to Imitate
Miniaturization Fastest and most extended
search
133
Identifying Core Competencies
(3 Tests)
Provides potential access to a wide variety of markets
Makes a significant contribution to the perceived customer benefits of the end product
Difficult for competitors to imitate
Competence Adhesives 134
Unique Resources and
Core Competences
Unique resources
Critically underpin
competitive advantage
and cannot be imitatedc
or obtained by others
For example, two core
competencies of FedEx® is
that FedEx® can deliver
packages faster and more
reliably than anyone else.
135
Competitors Are Also Challenging
FedEx: UPS
UPS has been very aggressive.: "UPS used to be a trucking company
with technology. Now it's a technology company with trucks." Largely
responsible for this transformation of UPS is the $11 billion the firm
poured into technology in the last decade. These funds were used to
buy a host of products-mainframe computers, a vast array of
networked PCs, handheld computers, wireless modems, and cellular
networks, among others-and to hire and support 4,000 programmers
and technicians. Founded in 1907, UPS relies on several core
competencies, including those of operational efficiency and
uniformity, to deliver over 3 billion parcels and documents annually.
UPS has formed a core competency in operational efficiency through
the development and consistent application of 340
precise methods that truck drivers are taught to use
when delivering customers' products 136
Benefits of Core Competency
Provides opportunity for market leadership
Creates competitive advantage
Gives chances for quick and flexible adjustment to emerging markets
Helps to explore new markets and creating customer value
137
Factors, Influencing Decisions about
Capabilities, and Core Competencies
Uncertainty regarding current/future characteristics of
the general and industry environments
Complexity - the interrelationship among factors that
shape a firm‘s environment(s), and top management
perceptions of these environments
Intraorganizational conflicts among people making
and affected by resource allocation decisions 138
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24
How Core Competences Change Over
Time: The World Wutomobile Industry Market acess
o Global network
o Overseas plants
Quality/Reliability
o Production process
o Supplier management
Product features
(at low volume)
o Life-style niche marketing
o ‚Agile‘ production
??? 139
Core Capability and
The Danger of Rigidity
Core capability may
become rigidity (Gilbert,
2005). Too much slack
resources reduce re-
investment and are bad
for innovation (Nohria &
Gulati, 1996).
Existing routines for
providing satisficing
solutions prevent
organizations from
outsourcing or initiating
changes. The Rise and Fall of Eastman Kodak, an
Emblem of American Business Excellence
140
Core Rigidity
Introduced by Leonard-
Barton, 1992.
Flip side of core competen
ces, and caused by
overreliance on any
advantage(s) for too long.
While a successful firm's
management relaxes its
improvement efforts, others
keep on getting better and
obsolete its competitive
adventage.
Example: General Motors
General Motors Founded in
1908, began selling their
vehicles in several countries
and grew rapidly.
Throughout most of the 20th
century GM has been at the
forefront of innovation and
technology.
GM today however, is no
longer the market leader
141
Causes, Led to the GM‘s Fiasco
External and internal factors came into place for GM’s reputation to go down:
1. Increase in costs -supplies, fuel, healthcare, and pension payouts
2. Over-dependence on the US market
3. Organizational structure
4. Their inability to keep up with the alternative energy movement.
During the late 90's early 2000's the automotive industry began to shifting to the
smaller more compact fuel efficient vehicles, and/or vehicles powered by
alternative energy, i.e. hybrids. This was the result of both the continuing rise in
gas prices, as well as the environmental issues that we now know of. GM
however did not develop a hybrid vehicle until 2004, five years after the release
of Honda's Insight Hatchback.
By inevitably having difficulties of avoiding core rigidity, General Motors have
fallen from top to bottom line.
Source:http://www.123helpme.com/core-rigidity-view.asp?id=164353 142
Rigidity types
Creativity-lagging environment
―Unsharing‖ knowledge
Engineering/sales cultural
discrepancy
Reinventing the wheel
Exploding knowledge maze
Path dependency in innovative ideas
143
Hacklin, Inganäs ,
Plüss and Marxt
(2005 144
Creativity-lagging: Lack of team, methodology and transparency of idea
assessment; challenge, resource allocation and idea selection with filtering
―Unsharing‖ knowledge: not effective sharing of existing knowledge; challenge,
structure
Engineering/sales cultural discrepancy: EX Two different cultures; challenge,
collaboration internal and external
Reinventing the wheel: reinventing instead of innovating; challenge, structure
of project closing
Exploding knowledge maze: anonymous and difficult to find knowledge;
challenge, management of meta-knowledge
Path dependency in innovative ideas: conservative thinking; challenge,
sources for radical ideas
Source: Hacklin, Inganäs,Plüss and Marxt. (2005) Core rigidities in the
innovation process: a structured benchmark on knowledge management
challenges
Definitions of Some Concept
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25
Value Chain and Value Network
The main roles of the value chain analysis:
To diagnose strategic capability
To understand how value is created or lost in
terms of the activities undertaken
The value chain describes the activities within
and around an organisation which together
create a product or service
145
Value Chain Elements
Customer value added
Margin orientation
Primary activities
Inbound logistics
Operations
Outbound logistics
Sales and marketing
Service and support
Support Activities
Human resources
(general and admin.)
Tech. development
Procurement 146
Main Areas of Primary Activities
Inbound logistics: concerned with receiving, storing, and
distributing inputs,
Operations: transformation the inputs into final products
and services,
Outbound logistics: moving the product ti buyer
(including warehousing and distributinon) ,
Marketing and sales: bringing the product to buyers and
inducing them to buy and use it,
Services: activities to enhence or maintain the value of
product and service (installing, repairing, maintenace,
training, and other services)
147
Main Areas of Supporting Activities
Procurement: process for acquiring resources and input
Technology development: covering product, process and raw material development and „know how‖
Human resource management: recruitment, training, motivating, development, and rewards
Management infrastructure: strategic, and operational decision-making problem-solving, financial planning, leading
148
Using the Value Chain
Helps you to stay out of the ―No Profit Zone‖
Presents opportunities for integration
Aligns spending with value processes
Identifies areas for cost improvement
Provides for reconfiguration of the value chain
outsourcing
off-shoring
co-location with customers or suppliers
redesign for efficiency
Involves chain partners: customers & suppliers 149
The Porter‘s Value Chain model
Source: Porter, M. (1985). Competitive Advantage
150
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Value Chain and the QCT
Triangle VC allows alignment of
processes with
customers. This
generates a quality
advantage.
VC focuses cost
management efforts.
VC provides for efficient
processes which
improves the timeliness
of operations. 151
Value Chain and the TBC
Triangle
Technical:
Increases knowledge of no profit zones
Increases knowledge of forward and/or backward integration
opportunities
Identifies value processes
Identifies win-win alliance opportunities
Behavioral:
Focus shifts to ―the customer‖
Focus shifts from conflict to partnering with customers & suppliers
Cultural
Creates externally focused mindset
Generates information sharing environment with respect for
confidentiality 152
153
Steps of Value Chain Analysis (1)
Document the activities
Understand the cost and margins at each step.
Use Activity Based Costing
Map the value chain to the industry value chain
Look for core competencies
Map the cost structure
Note that external values drive cost advantages
154
Steps nof Value Chain Analysis (2)
Identifies clusters of activities providing
particular benefit to customers
Highlights activities which are less efficient and
which might be de-emphasised or outsourced
Requires managers to think about the role of
such activities
Can be used to identify the cost and value of
activities 155
0
5
0
10
15
20
25
%
100% Share of industry revenue
Auto
loans
Warranty
Gasoline
Auto
insurance
Aftermarket
parts Auto
rental
Auto
manufacturing
New car
dealers Used car dealers
Service & repair
Vertical Segmentation & Industry Profit Pools
—The US Auto Industry
156
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27
Channel
value chains
Organisation's
value chain
Supplier
value chains Customer
value chains
The Value System of An Industry
157
Customer Value Analysis
Rich and meaningful customer feedback is critical to understanding
the needs of the market, and to assess your company‘s and
competitor‘s performance on those needs.
Customer value is created by:
1) Pinpointing the most crucial value drivers
2) Developing a value proposition based on those factors that
matter most AND that you
are capable of providing
3) Setting product/service pricing at a level commensurate with the
level of perceived
value provided
Customer Value Questions
What are the most crucial buying factors? 158
The Most Important Questions in
Customer Value Analysis
What are customer value, satisfaction,
and loyalty, and how can companies
deliver them?
What is the lifetime value of customers?
How can companies cultivate strong
customer relationships?
How can companies both attract and
retain customers?
What is database marketing?
159
Determinants of Customer Perceived
Value
Image benefit Psychological cost
Personal benefit Energy cost
Services benefit Time cost
Product benefit Monetary cost
Total customer benefit Total customer cost
160
Loyality and Measurement of
Customer Satisfaction
Loyalty is a deeply held
commitment to re-buy
or re-patronize a
preferred product or
service in the future
despite situational
influences and
marketing efforts having
the potential to cause
switching behavior.
Periodic surveys
Customer loss rate
Mystery shoppers
Monitor competitive
performance
161
Maximizing Customer Loyality: CRM
CRM is the process of carefully
managing detailed information
about individual customers and all
customer touchpoints to maximize
customer loyalty.
Goal of the CRM
Identify prospects and customers
Differentiate customers by needs
and value to company
Interact to improve knowledge
Customize for each customer
Reduce the rate of
defection
Increase longevity
Enhance share of wallet
Terminate low-profit
customers
Focus more effort on
high-profit customers
162
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Who Provides CRM?
Traditional giants such as IBM, Oracle and PeopleSoft
Siebel Systems, which now has a 21% share of the CRM market
E.piphany
e-mail specialist Kana Communications, NetGenesis
instant chat provider LivePerson.com, Broadbase, Quintus and Firepond
plus many others.
163
Customer Retention
Acquisition of customers
can cost 5 times more than
retaining current customers
The average customer loses
10% of its customers each
year
A 5% reduction to the
customer defection rate can
increase profits by 25% to
85%
The customer profit rate
increases over the life of a
retained customer.
164
The Value Network – Key Questions (1)
Where are cost and value created?
Which activities are vital to an organisation?
Retain direct control of core capabilities
Outsource less important activities
Where are the profit pools?
Potential profits at different parts of the value network
Availability of competences to compete in these areas
165
Value Network Map of
A Technology Provider
166
SWOT Analysis (1)
Summarise of the strategic position of the organizations
Made by providing analysis of
Business environment
Opportunities and threats
Strategic capabilities
Strengths and weaknesses
Used for comparison with competitors
Focuses on future choices and capability of organisation to support them
167
SWOT Analysis (2)
Strengths: internal resources in which you have
advantage to competitors,
Weaknesses: internal resources in which you
have disadvantages to comeptitors,
Opportunities: environmental factors which
favorable for your organization,
Threats: environmental factors which
unfavorable for your organization
168
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169
Simple
SWOT
Matrix (3)
Extended SWOT Matrix (4)
Strenghts 1,
2,
3,
Weaknesses 1,
2,
3,
Opportunities 1,
2,
3,
SO strategic
projects:
1,
2,
WO strategic
projects:
1,
2,
Threats 1,
2,
3,
ST strategic
projects:
1,
2,
170
171
When to Use SWOT Analysis?
172
SWOT is used during strategic planning for the
following purpose:
o Exploring avenues for new initiatives
o Making decisions about execution strategies for a
new policy
o Identifying possible areas for change in a program
o Refining and redirecting efforts mid-plan
o The SWOT analysis is an excellent tool in organizing
information and presenting solutions, identifying
roadblocks and emphasizing opportunities.
Benefits and Limitations of
SWOT Analysis
173
BENEFITS
Understand your
business better,
address weaknesses,
deter threats,
capitalise on opportunities,
take advantage of your
strengths,
develop business goals and
strategies for achieving
them.
LIMITATIONS
A SWOT analysis may be
limited because it:
doesn't prioritise issues,
doesn't provide solutions or
offer alternative decisions,
can generate too many ideas
but not help you choose which
one is best,
can produce a lot of
information, but not all of it is
useful.
SWOT Analysis (5)
Problems of SWOT
analysis
Can generate long
lists: need to focus on
key issues
Danger of over-
generalisation: not a
substitute for rigorous
strategic analysis
It create illusion: we
have a strategy
174
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Internal Analysis based on corecompetencies
Identifying Core
Competencies
Resources • Tangible • Intangible
Capabilities
Core
Competencies
Identify
sustainable
competitive
advantages
Strategic
Competitiveness
Four Criteria
of Sustainable
Advantage
• Valuable
• Rare
• Imitation/Substitutes = costly
• Organized properly
Value
Chain
Analysis
• Flexsource decisions
175
Corporate governance
Prof. Balázs Hámori
&
Prof. Katalin Szabó
Outline
What is corporate governance and how it has developed to
its contemporary form?
The ownership and the modern corporation
Structure of corporate governance
Bodies in the corporate governance
The Board and the commitees
Control over the corporate business activity and the
management
Part 1
Corporate Governance and Ownership
Corporate governance
• Primarily concerned with
public listed companies,
but corporate
governance applies to
all types of
organisations, not just
companies in the private
sector
• Examples are NGOs,
schools, hospitals,
pension funds, state-
owned enterprises
As a subject, corporate
governance is the set of
processes, customs, policies,
laws, and institutions affecting
the way a corporation is
directed, administered or
controlled.
Corporate governance also
includes the relationships
among the many stakeholders
involved and the goals for
which the corporation is
governed.
Corporate Governance Framework
The corporate governance is a
framework, that determines the
following characteristics of the
corporation
Whom the organisation
serves?
How the purposes and
priorities should be
decided?
How the organisation
should function?
How the power is distributed
among stakeholders?
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Characteristics and crucial elements of
corporate governance
o Authority – the right to
make decisions and carry
out tasks
o Span of control – the
number of people a
superior is responsible for
o Chain of Command – the
relationship between
different levels of
authority in the business
o Hierarchy – shows the line
management
in the business and who
has specific responsibilities
o Delegation – authority to
carry out actions
passed from superior to
subordinate
o Empowerment – giving
responsibilities to people
at lower levels of the
business to make decisions
Business Ethics Corporate Governance
Organisational purposes
Stakeholders Cultural context
Who should the organisation
serve?
How should purposes be
determined?
Which purposes should
be prioritised?
Why?
Mission
Objectives
Which purposes are
prioritised?
Why?
Whom does the
organisation
serve?
Influences on organisational purposes
A corporate stakeholder can affect or be affected by the actions of a business
as a whole. The stakeholder concept was first used in a 1963 at the Stanford
Research Institute. It defined stakeholders as "those groups without whose
support the organization would cease to exist. Any action taken by any
organization or any group might affect those people who are linked with them in
the private sector. For examples these are parents, children, customers,
owners, employees, associates, partners, contractors, and suppliers, people
that are related or located nearby.
Primary Stakeholders - usually internal stakeholders, are those that engage in
economic transactions with the business. (For example stockholders,
customers, suppliers, creditors, and employees)
Secondary Stakeholders - usually external stakeholders, are those who –
although they do not engage in direct economic exchange with the business –
are affected by or can affect its actions. (For example the general public,
communities, activist groups, business support groups, and the media)
Company stakeholder mapping
Stakeholders Early Concepts of the Corporation
o Municipalities, universities
o First joint stock companies,17th century, Britain, Holland
o Private sector
o The corporate form became the governments‘ ally. The level of independence of corporate form made more acceptable the authority of governments‘.
The shipyard of the
Dutch East India
Company in Amsterdam,
circa 1750.
Evolution of the Modern Corporation
The business
environment
Organizational
consequences
Strategic
changes
Late
19th
century
Early
19th
century
Early
20th
century
Local markets Firms specialized & Small firms.
Transport slow focused on local Simple manage-
Limited mechanization markets ment structures
Introduction of Geographical and Functional structu-
railroads, telegraph vertical expansion res. Line/staff
industrialization separation. Accoun-
ting systems
Excess capacity in Product & Development of
distribution. Growth multinational multidivisional
of financial institut- diversification corporation
ions & world trade
What Is Ownership?
Definition: Ownership is a combination of rights and responsibilities with respect to a specific property.
„Ownership‖ of a „Property‖ includes 4 elements:
o has the right to use P
o has the right to regulate use of P
o has the right to transfer rights to P
o is responsible for non-damaging with P
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Main forms of ownership
• State owned
• Privately owned
• Employee owned (ESOP,
MRP in Hungary)
• Foreign ownership
• Professional investors
• Institutional investors
Basic Types of Investors
o Types of Investors
– Individual Investors
– Invest for personal financial
goals (retirement, house)
o Institutional Investors
– Paid to manager other people‘s
money
– Typically manage large
amounts of money
– Include: banks, life insurance
companies, mutual funds and
pension funds
Institutional investors
Institutional investors
include
o Pension funds (also known
as superannuation funds)
o Mutual Funds
o Hedge funds
o Exchange-traded funds
o Financial institutions
Insurance
companies
Banks trusts
o Universities and foundations
o The significance of institutional
investors varies substantially
across countries. In developed
Anglo-American countries
(Australia, Canada, New Zealand,
U.K., U.S.), institutional investors
dominate the market for stocks in
larger corporations.
o While the majority of the shares in
the Japanese market are held by
financial companies and industrial
corporations, these are not
institutional investors if their
holdings are largely with-on group.
A mutual fund is a type of
professionally managed
collective investment scheme
that
pools money from many
investors to purchase
securities. It gives small
investors access
to professionally managed,
diversified portfolios of equities,
bonds and other securities,
which would be quite difficult (if
not impossible) to create with a
small amount of capital
Hedge funds are generally
distinct from mutual funds as
their use of leverage is not
capped by regulators and from
private equity funds as the
majority of hedge funds invest
in relatively liquid assets.
Hedge funds are managed
much more aggressively than
their mutual fund counterparts.
They are able to take
speculative positions in
derivative securities such as
options and have the ability to
short sell stocks.
Mutual Fund and Hedge Fund
Shortcomings of institutional investors
o Institutional investors play a key role in the capital allocation process (size/power)
o Theory suggests ‗rational‘ investors can exploit inefficiencies created by ‗irrational‘ investors and market inefficiencies
o BUT growing evidence of behavioural biases suggests theory does not adequately explain investor behaviour
o Institutions fall short of achieving their stated goals/objectives
Classical rights of shareholders
• The right to sell the
stock
• The right to vote
the proxy
• The right to bring
suit for damages if
the managers or
directors fail to
meet their
obligations
• The right to have
certain information
from the company
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33
Separation ownership and control (I)
Owner
Intangible interest
in
Intangible entity
HIGH TRANSFERABILITY OF SHARES!
Rights of contemporary shareholders
• Control and economic rights
no longer attach to the same
individual or group.
• The shareholder
surrendered control over his
wealth.
• The shareholder is a
supplier of capital and a risk
taker.
• Ultimate responsibility and
authority of ownership is
attached to stock ownership
Separation of Ownership and Control
in modern corporations
• Exclusive control of stocks by shareholder
• Shareholders‘ communities interest limited to the
price of the stock
• Control rights of corporation‘s properties
delegated to management
• Certificate of proportional share of corporation.
The corporation itself is the owner of its own
property!!!
Fractionated ownership
Other differences between notions of traditional and modern share ownership:
- numerical
- legal
- functional
- personal
Types of Shareholders
• Active: interested in the
operation of corporation
too, not only in the profit
(professional investors,
majority owners)
• Passive: interested in
simply the income (divident
or bonus on shares,
e.g.profit)
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Part 2
Structure of corporate governance and
decision making
Level of governance: Corporate strategy, Corporate reponsibility, Mission of the corporation
Level of the management: Organizing activities Implemetation of strategy Controling day-to day activities
Board
Management team
Supervisory Board Independent external auditor
CEO
Chairman
General Assembly
Employees
Structure of corporate governance and decision making
Four Pillars of Corporate Governance
o Accountability:
1. Ensure that management is accountable to the Board and
2. the Board is accountable to shareholders
o Fairness:
1.Protect Shareholders rights.
2.Treat all shareholders including minorities, equitably.
3.Provide effective redress for violations
o Transparency:
1.Ensure timely, accurate disclosure on all material matters,
including the financial situation, performance, ownership and corporate
governance
o Independence:
1. Independent Directors and Advisers i.e. free from the influence of
others
Key Forms of Corporate Governance :
The Bodies
What is „a‖ body?
Body is a team, members created by delegation, nomination or election (voting)
Body has a leader (heading), named chairperson
Bodies have legal background
Body has a bylaw
Bodies have responsibilities by law or by the status of the body
Bodies in the corporate governance
o General Assembly, the body
of owners (shareholders)
o Board; members are elected
by the General Assembly. (In
Germany board members are
elected by the Supervisory
Board)
o Supervisory Board;
members are elected by the
General Assembly. (In US/UK
no Supervisory Board)
o Management team (not
defined by law)
Key Actors of Bodies
• Chairwoman/chairman of the General Assembly, elected by the owners
• Chairperson of the Board/Supervisory Board, elected by body members
• Board Committee leaders, nominated by the Board
• Top management (executives), nominated by the Board
• Independent external auditor, contracted by the management or the Board, accepted by the General Assembly
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Governance – management by
bodies
The corporate governance is
• Collective
• Democratic
• Responsible
• Legally framed
• Well structured
management
Collective Responsibilities of Owners
(General Assembly)
o Creation and change of the Incorporation
Charter, Deed of Foundation (strictly regulated
by Corporate Act)
o Voting for Board (Supervisory Board) members
o Creating discussion issues of General Assembly
o Accepting (or not) Board‘s reports
o Electing the chairperson of the General
Assembly
Duty and Responsibility
o Duty is a legal
(official) obligation, a
job what must to do
o Responsibility is a
moral category with a
lot of legal
consequences
Evolution of the corporate-governance structure
1800 1900 1950 2000
Owner- manager
Investors General Assembly Owners’s representatives Executive management
Investors General assembly Board (Directors) Executive commity
Beneficiaries Trustees of funds Investment funds General assembly Board Executive managers Managers
Market for Corporate Control
• Definition: Shares of
public firms are traded,
and in large enough
blocks. This means
control over corporations
is traded.
• That puts some pressure
on managers to perform,
otherwise their
corporation can be taken
over, and they will be
fired.
The takeover era I
Limited liability + trading with shares =
loosening connection between ownership
+control
Issuing millions of shares
Result: ‖THE WALL STREET RULE‖
Wall Street Rule. On investments: Sell a stock rather than
try to change the company's policies.
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The Contemporary Takeover
Era II Waves of takeovers. Instead of previous checks and balances, no system of checks and Corporate Government got out of balance. Reason: institutional investors stepped in.
The Chain of Corporate Governance
Primary functions of the Board
• Select (CEO, management compensation)
• Review and approve (financial objectives,
strategic plan, adequacy of the system to law)
• Advice and counsel (to the top management)
• Evaluate (board processes, performance)
• Others („umbrella definition)
Board level decisions
The Board – as the highest
level decision making
body of the corporation –
sets direction, vision,
strategy.
Makes decisions in major
investment, financial,
organizational, market
questions and appoints
the very leading persons
of management.
Responsibility of the Board of Directors
• The Board is the operational and strategic management body of the Corporation (firm)
• Election of Board‘s Chairperson
• Nomination of management (President, CEO, etc.)
• Creation reports to General Assembly, presenting the Annual Report
• Sharing all duties with the management – bylaw regulation
• Representing officially the Corporation
Typical board of today
• The structure and composition of boardrooms have changed little in 100 years.
• Average board size has remained at about 15 members.
• Board committees have great importance:
- Social committee
- Assessment committee
- Nomination committee
- Compensation committee
- Financial committee, etc.
• Written guidelines
• Board meeting
• Scope of decision making
activity (duties)
• Relationship with
management
• Separation of CEO and
chairman (conflict of
interest in performance
assessment!)
• Board is „served‖ by
management
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Committees of the Board
• Executive C.
• Financial C.
• Audit C.
• Nominations C.
• Remunerations C.
• Strategic C.
• Assessment C.
• Social C.
• Ad Hoc C. (e.g. for
project, Megers &
Acqusitions)
Responsibility of Board‘s Committees
• Committee is not a decision making body
• Consulting, foundation of business
decisions, controlling function
• Committee members are Board members
and experts
• Analysis for the Board and General
Assembly
Recommendations for The Future
Proposals to improve the performance of the Board:
o improving directors‘ compensation (stock options)
o increasing authority of independent director
o separation of CEO and Chairman positions
o Sarbanes – Oxley (Public Company Accounting
Reform and Investor Protection Act)
o more executive session meeting
o more independence and transparency in decisions
o closer connection with the performance of company
Who is An Independent Director
An Independent Director
(also sometimes known as
a outside director) is a
director (member) of a
Board of Directors who does
not have a material or
pecuniary relationship with
company or related persons,
except sitting fees.
Independent Directors do
not own shares in the
company
Responsibility of the Supervisory Board
• Control over the Board
and Management team
in order to save and
preserve the owner‘s
interests
• Control the legal
conformity of the firm
and they activity with
laws, rules and
prescriptions
• Not a decision making
body
New Corporate Governance Rules between 1994-
2006 The different rules 1994 1998 2002 2006
Renumeration pay by performance May May MUST MUST
Renumeration disclosure May May May MUST
Audit committee creation May MUST MUST MUST
Audit committee independence May MUST MUST MUST
Board independence May MUST MUST MUST
Removal of cross-shareholding May May MUST MUST
Liability of the Board May May May MUST
Comply or explain May May May MUST
Separation of Chairman and CEO May May May May
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Two sides of the governance: business
judgement rule and checks/balances
• Rule granting directors of publicly listed companies‘ immunity from liability if their actions were executed in good faith, using sound business judgment and exercised with reasoned care
• It also refers to the defense of corporate sovereignty, which means that courts do not intervene into company‘s affaires until the decisions of the company are in accordance with good faith and reasoned care
• On the other hand there are rules and processes for governance and control of private sector companies, which balance the autonomy
The Balancing Institutions
• The most important
balances are the corporate
governance rules, and
bodies, and structures
• The other types of
important balances are
rules determining fair
behavior in business
relations:
– The code of ethics, and
– The business culture
The stories of corporate disasters
Ineffective board
Dominant CEO („one man” show)
Disaster
Greed, hubris, irresponsibility
Poor strategy
Ill-judged acquisitions, over-expansions
Inadequate
contr
ol environm
ent
Accidental external trigger
Inadequate
contr
ol environm
ent
Conformist culture
Security System over Corporate
Governance - Internal Securities
o Supervisory board
o Internal audit, audit
committee
o Management
control
o Bylaws, rules
o Corporate code of
governance
o Corporate code of
ethics
226
Security System Over Corporate
Governance – External securities o Ability to publicity (higher
requirement for public corporations)
o Stock exchange norms, rules and Codes of Responsible Corporate Management
o Investment and Creditor Defense Act
o Competition law
o State supervisory and controlling system over accounting, securities operations
o State financial and tax supervision
227
oCourt of registration
oObligatory legal advisory service
over critical documents (e.g.
statutes, written agreements,
articles of incorporation must meet
some criteria)
oPre-forming corporation – special
Hungarian form of business, living
corporation before registration
oExternal audit, conformity with tax
and accounting rules, GAAP
oCivil responsibility of directors (by
civil law)
oOfficial obligatory forms of
documents
Governance checklist
1. Beware dominant chairman or
CEO
2. Majority of truly independent
directors
3. Effective Board and
committee structure
4. Responsibilities, authorities &
accountabilities defined
5. Ethical standards prescribed
6. Effective Board and
committee process
7. Agenda focussed on right
priorities
8. Quality of Board papers and
executive input
9. Conflict of interest provisions
clear and effective
10. Securities trading by directors
strictly controlled
11. Rigorous annual evaluation of
Board performance
12. Individual directors of high
calibre (acumen & integrity)
13. Effective mix of expertise,
experience and perspective
14. Diligent attention to Board
renewal
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The Board‘s Relationship to the
Management Responsibility of Management
• Shared responsibility with the Board
• Management of day-to-day operation
• Functional and structural organization of business
• Management of key processes and functions (e.g.
production, marketing, controlling, logistic, human
resources, sales, finances, organizational development)
• Expertise for the Board and General Assembly
Decision making tree (sample)
Owners
Board of Directors
Management (ExCo)
Directors
Head of Departments
Group leaders
etc.
Decison Making in
Companies
The Balanced Scorecard
By Prof. Balázs Hámori [email protected]
&
Prof. Katalin Szabó [email protected]
Main types of decisions at the
corporations
Short term – medium term – long
term
Strategic – operational
Business (economic) – „political‖
National – international ( regional,
cluster, etc.) – Global
Related to business and support
processes
The basic documents of the corporation
regulate exactly the decision making
processes and mechanisms.
232
Hierarchy of decisions Decision of the Board is the
manifestation of common
will and power.
The board-level decision is
a „product‖ of collective
action.
Resolution
Case of resolution
Standpoint
Individual opinion
Proposal
Recommendation
Remark
Understanding
Veto
Review
233
What are the goals and objectives?
Objectives: desired outcomes for individuals, groups, and entire organizations.
Why organizations set up objectives?
Enviroment orientation
Guide actions
Hierarchy linkage
Coordinate decisions
Basis for control
Why peoples set up objectives:
Personal challenges,
Integration of personal objectives
Fostering of motivation
234
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Objectives need to meet five specifications
An objective should be clear, single, specific topics (It sould not
be stated in vague form)
An objective should relate to a result, not to an activity to be
performes (The objective is a result of an activity, not to
performing the activity)
An objective should be measurable (An objective should be
stated in quantitive terms whenever feasible)
An objective should contain a time deadline and a responsible
person of its achievement
An objective should be challenging but achievable. 235
The hierarchy of
objectives and their
place in the strategy
process
The starting point is a
comprehensive,
complex picture about
the corporate strategy
236
The Nature of Responsibility
Responsibility is a need to
answer (responder)
Some sort of responsibilities:
Moral responsibility
(conscience)
Status responsibility
(consequence of the position)
Professional responsibility (the
art of profession)
Legal responsibility (by
regulation)
Situational responsibility (acting
in the event)
237
Moral responsibility - An Example:
Affymetrix (California) o A person or an agent or a party is morally responsible for a
negatív event, fact or development, if 1) they caused it, 2)
they knew what they were doing, and 3) they could have
prevented it.
o The Affymetrix technology, for example, can put 6.5 million
discrete pieces of genetic information on a single chip. It
can be used for a lot of great things, and it can probably be
used for a few bad things.
o The company has taken a proactive approach to these
concerns, setting up an Ethics Advisory Committee to
address moral and ethical issues.
o The committee consists of seven external participants who
have varied backgrounds, including law, anthropology,
genetics, bioethics, and sociology. 238
What kind of responsibility?
Personal, individual
responsibility
Collective and joint
responsibility
Shared responsibility
Special opinion
Nonconformity with a decision
239
Some other aspects
Decisions and responsibility
Decisions + pressure + lobby
activity
Decisions and follow up
Decision-power tree
Decisions and committees
(anglo-saxon practice)
Corporate decision table
240
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Strategy formation toolkit: Suitability –
Strategic position which helps the decisions
Concept To understand Strategy must address
PESTEL Growth/decline
Changes in industry structure
Industry convergence
Scenarios Uncertainty/risk Contingency plans
5-forces Competitive forces Barriers to new entrants
Strategic Groups
Attractiveness of groups, Mobility barriers, strategic spaces
Repositioning
Core
Competence
Industry threshold standards
Basis of competitive advantage
Eliminate weaknesses
Exploit strengths
Value chain Opportunities for vertical integration/outsourcing
How to integrate (e.g. merger/alliance)
Stakeholders Acceptability to stakeholders
Power and interest
Effect on stakeholders
Manage power/interest 241
Important term
A Strategic Group is
defined as a group of
corporations that
employ the same or
similar strategies in a
particular industry.
Example: „Luxury Car
Strategic Group‖
„Economy Car
strategic Group‖
242
Criteria for Acceptability
Criteria To Understand Examples Limitations
Return
Profitability Financial return on investments
ROCE
Payback period
DCF
Apply to discrete projects
Only tangible costs/benefits
Cost-benefit Wider costs/benefits (incl. intangibles)
Major infrastructure projects
Difficulties of quantification
Real options Sequence of decisions
Real options analysis
Quantification
Shareholder value analysis
Impact on shareholder value
Mergers and acquisitions
Technical detail often difficult 243
Some important terms
ROCE: A financial ratio that measures a company's profitability and the
efficiency with which its capital is employed. Return on Capital Employed
(ROCE) is calculated.
DCF: A valuation method used to estimate the attractiveness of an investment
opportunity. Discounted cash flow (DCF) analysis uses future free cash flow
projections discounts them (most often using the weighted average cost of
capital) to arrive at a present value, which is used to evaluate the potential for
investment. If the value arrived at through DCF analysis is higher than the
current cost of the investment, the opportunity may be a good one.
Real Option: An alternative or choice that becomes available with a business
investment opportunity. Real options can include opportunities to expand and
cease projects if certain conditions arise, amongst other options. They are
referred to as "real" because they usually pertain to tangible assets such as
capital equipment, rather than financial instruments. Taking into account real
options can greatly affect the valuation of potential investments. 244
Criteria for Acceptability
Criteria To Understand Examples Limitations
Risk
Financial ratio projections
Robustness of strategy
Break-even analysis
Impact on gearing/liquidity
Sensitivity analysis
Test assumptions/
robustness
What if? analysis Tests factors separately
Stakeholder reactions
Political dimension Stakeholder mapping
Game theory
Largely qualitative
245
What is GAP-Analysis
The evaluation of the difference
between a desired outcome and
an actual outcome. This difference
is called a gap. Strategic gap
analysis attempts to determine
what a company should do
differently to achieve a particular
goal by looking at the time frame,
management, budget and other
factors to determine where
shortcomings lie. After conducting
this analysis, the company should
develop an implementation plan to
eliminate the gaps
246
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1. Step of the GAP planning
Assumption of the unchanging environmemt
Present
Perf
orm
ance
Time
247
2. Step of the GAP planning
Present
Perf
orm
ance
Time
Unfavorable conditions
Favorable conditions
Unchanged conditions
Assumption of the different – favorable, or unfavorable - environmental conditions.
248
3. Step of the GAP planning
Strategic goals based on mission
Present
Perf
orm
ance
Time
Favorable condition
Goals based on mission
Unchanged conditions
249
4. Step of the GAP planning
Strategic goals based on mission, and actions fitted
to enhanced goals
Present
Perf
orm
ance
Time
Favorable condition
Goals based on mission
Unchanged conditions
Gap what you have to fill with actions
250
What Is a Balanced Scorecard?
A
Measurement
System?
A
Management
System?
A
Management
Philosophy?
A toolkit of management for
Translating strategic goal to
organization‘s practicein order to
reach better performance
It is an useful answer to the question: How to
Measure, Maximize and Maintain Alignment and
Get the Bus Moving in the Right Direction (Michael Taylor) 251
Definition of Balanced Scorecard
The balanced scorecard is a method that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance.
Source: Balanced Scorecard Institute 252
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Balanced Scorecard: four basic
perspective of a company
Based on „Balenced Scorecard‖ (BC) four perspectives are
seen to affect the long term economic value of a company:
o Financial perspective: This includes consideration of
factors such as the return on capital employed, cash flow
o Customer perspective: This requires the company to set
specific goals besides price, that are important to the
customers, qualitiy, performance, and service
o Internal perspective: This includes consideration of factors
such as capacity, and cost connected with effectiveness
o Innovation, and learning perspective: This includes the
generation of new business from innovation, and staff
attitudes and morale
253
The Balanced Scorecard
(Based on Kaplan & Norton) 254
Perspectives Apply to Organizations
by Balanced Scorecard
What must we do to satisfy
our financial contributors?
What are our fiscal
obligations?
Who is our customer? How
can the circle of the customers
be widened?
What internal processes must
we excel at to satisfy our fiscal
obligations, our customers
and the requirements of our
mission?
How must our people learn
and develop skills to respond
to these and future
challenges?
Profit Driven Mission Driven
What must we do to satisfy
our shareholders?
What do our customers
expect from us?
What internal processes
must we excel at to satisfy
our shareholder and
customer?
How must our people learn
and develop themselves in
order to increase the
efficiency their work
Financial
Perspective
Customer
Perspective
Internal
Perspective
Learning &
Growth
Perspective 255
Balanced Score Card
256
The Balanced Scorecard
Key Performance Indicators (KPIs)
Financial perspective e.g. Operational view
Cost reduction
Sales growth
e.g. Shareholder view
ROCE
EVA
Customer perspective e.g. Customer satisfaction
Customer retention
Customer loyalty
Acquisition of new customers
Financial perspective
e.g. Operational view
Cost reduction %
Sales growth %
e.g. Shareholder view
ROCE %
Customer perspective
e.g. Customer satisfaction
Customer retention %
Customer loyalty %
Acquisition of new customers %
Internal Perspective
e.g. Assess quality
of people & processes
Training & development
Job turnover %
Product quality
Stock turnover /
Innovation & learning
e.g. Continuous
improvement
Quality circles
e.g. Research&Development
Speed to market / months 257
.
The Balanced Scorecard Focuses on
Long-Term Value
o Traditional financial reports
look backward
o Reflect only the past:
spending incurred and
revenues earned
o Do not measure creation
or destruction of future
economic value
o The Balanced Scorecard
identifies the factors that
create long-term economic
value in an organization
Processes
Customers
People
258
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1. Leadership From the Top
Create the Climate for Change
Create a Common Focus for Change Activities
Rationalize and Align the Organization
Reengineer Work Processes
– Create Knowledge Sharing Networks
2. Make Strategy Everyone’s Job
– Comprehensive Communication to Create Awareness
– Align Goals and Incentives
– Integrate Budgeting with Strategic Planning
– Align Resources and Initiatives
4. Make Strategy a Continuous Process
– Strategic Feedback That Encourages Learning
– Executive Teams Manage Strategic Themes
– Testing Hypotheses, Adapting, and Learning
The Ingredients of Highly Successful
Balanced Scorecard Programs
STRATEGY
Formulate
Navigate Communicate
Execute
3. Unlock and Focus Hidden Assets
Source: Kaplan et al 259
Why Use Companies a Balanced
Scorecard?
o Change
Formulate and communicate a
new strategy for a more
competitive environment
o Growth
Increase revenues, not just cut
costs and enhance productivity
o Implement
Every employee implements
the new growth strategy in
their day-to-day operations 260
Four Barriers to Strategic
Implementation
Only 5% of the work
force understands the
strategy
60% of organizations
don’t link budgets to
strategy
Only 25% of
managers have
incentives linked to
strategy
85% of executive
teams spend less
than one hour per
month discussing
strategy
9 of 10
companies
fail to execute
strategy
The People Barrier
The Vision Barrier
The Management
Barrier
The Resource
Barrier
Source: Kaplan et al, 1999 261
Success stories
o In 2005, Karen Ponce, CEO and the management team began to focus on
process improvement and attended some training at a local university in
which they first learned about the concept of a Key Performance Indicators
(KPI) - balanced scorecard and decided to try the approach.
o ―We went through the basic steps and it was a bit crude, but a good
foundation,‖ Karen said. ―Over the next 3-4 years, we were successful
because for the first time we were measuring things that were really
important across the entire company. But it was way too much – we had
over 20 objectives.‖
o Karen decided to start over and build a strategic balanced scorecard. In
June 2010, the new balanced scorecard effort was launched and by the end
of 2010, they had netted more income than in the history of the company.
So, what‘s in store for 2011? Karen and her team are currently revising their
strategic balanced scorecard to support their goal of doubling the company‘s
sales over the next 5 years.
The Shat-R-Shield Case
262
Criticism
o The balanced scorecard
does not provide a bottom
line score or a unified
view with clear
recommendations
o It is simply a list of
metrics
o The model fails to fully
reflect the needs of
stakeholders - putting
bias on financial
stakeholders over others
o There are few empirical
studies linking the use
of balanced scorecards
to better decision
making or improved
financial performance
of companies
263
Refinements of the
Balanced Scorecard o More recent iterations to the original BSC have yielded
2nd and 3rd generation BSC‘s.
o The second generation BSC modified the original model to
include a graphical representation of the strategic linkages
and objective across the KPI‘s
o Third generation BSC‘s made a further refinement to include
‗Destination Statements‘ at the end of the design process.
Destination statements are defined to check the objectives,
measures, and selected targets. Culture has also been
suggested and successfully incorporated as a fifth KPI .The
adaptability of the BSC across sectors and industries gives
it greater utility. ‗ 264
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Measures of success in
Balanced Scorecard
Market share
Revenue growth
Profit ratio
Return on investment
Economic value added
Return on capital employed
Operating cost management
Operating ratios and loss
ratios
Corporate goals
Survival
Profitability
Growth
Process cost savings
Increased return on assets
Profit growth
Measures
Cash flow
Net profitability ratio
Sales revenue
Growth in sales revenue
Cost reduction
ROCE
Share price
Return on shareholder funds
265
Why Balanced Scorecard?
o Traditional financial accounting
measures such as ROA, ROE,
EPS gives misleading signals to
executives with regards to
quality and innovation
o Executive performance needs to
be judged on success at meeting
a mix of both financial and non-
financial measures to effectively
operate a business
o Some non-financial measures
are drivers of financial outcome
measures which give managers
more control to take corrective
actions quickly. (Example:
controls in jet cockpit for pilot)
266
Success criteria for
Strategic options
Suitability
Feasibility
Acceptability
267
Success Criteria for Strategic Options (1)
Suitability
Whether strategy
addresses circumstances
in which organisation is
operating
Linked to strategic
position
Rationale of strategy 268
Success Criteria for Strategic Options (2)
o Feasibility
o Whether strategy
can be made to
work in practice
o Linked to strategic
capability
269
Success Criteria for Strategic Options (3)
o Acceptability
o The expected
performance
outcomes (e.g.
risk/return)
o Meeting expectations
of stakeholders
270
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Does it fit the stage
we will be in?
Life cycle analyses Positioning
Business profile Value chain analysis
Portfolio analyses
Suitability Is this a good
strategy?
Does it improve
value for money?
Does it exploit core competences?
Will it lead to
good financial
performance?
Does it strengthen the
balance of activities?
Is the positioning
viable?
Testing suitability
271 272
Internal and External
Development, Alliances
and Acquisitions Strategic Answers to the
Challenges
Prof. Balázs Hámori [email protected]
&
Prof. Katalin Szabó [email protected]
274
Outline
o Get a comprehensive picture about the challenges firms faced and the possible answer to the problems
o The internal options: cost leadership, differentiation and focus strategy
o Related/unrelated diversification
o The rationales of external options: risks and rewards of mergers/acquisitions, and alliances
The Most Important Strategic Problems
Which Force the Management to Change (1)
o Decreasing profitability
and low return on
investment
o Decreasing market share
o Decreasing stockholder
wealth
o Deteriorating financial
position
o Rising overall costs
o Growing debt and week
balance sheet
The most important strategic problems
which force the management to
change(2)
o Deteriorating of competitive
advantages
o Decreasing quality, and the
loyalty of main customers
o The growth rate lower than
the industry average
o Obsolete facilities and
technical infrastructure
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The Most Important Strategic Problems
Which Force the Management to Change(3)
o Decreasing innovativity, slow product innovation
o Weakening the brand image
o Lots of underutilized plant capacity
o Entry of a new strong competitor, or increasing competition within the industry
o Costly new regulatory requirements
o Long-term shift in buyer‘s needs
Most important strategic answers:
Internal options
o Crisis management and consolidation
o Implementation of e-business or/and related management methods
o Diversification and re-positioning the company
o Focus and back to basic
o Re-engineering the structure and processes
o Create a new more competitive corporate governance structure
o Rebuild the organizational culture
Motives for Internal Development
Environment Capabilities Expectations
Lack of choice – breaking new ground/only one in field
Develop highly technical products in-house to create core competence
Avoid culture clash
Inability to find suitable acquisition target
Develop new markets – direct involvement to use or create core competence
Avoid potential incompatibility
Spread cost over time – easier for companies with limited resources
Most important strategic answers:
External options
Merger and acquisitions
Create strategic alliances
Globalization
Overview of strategic options
281
Bases of competitiv
Strategy
o Cost leadership
o Differentiation
o Focus strategies
Alternative Directions
o Protect and build
o Market penetration
o Product
development
o Market development
o Diversification o Related
o Unrelated
Alternative Methods
o Internal
development
o Acquisition
o Jont development
/Alliences
Development strategies
What bases? Which direction? How?
282
Porter's generic strategies describe how
a company pursues competitive
adventage across its chosen market scope.
There are three generic strategies, either
lower cost, differentiated or focus.
A company chooses to pursue one of two
types of competitive advantage, either via
lower costs than its competition or by
differentiating itself along dimensions
valued by customers to command a higher
price. A company also chooses one of two
types of scope, either focus (offering its
products to selected segments of the
market) or industry-wide, offering its
product across many market segments.
Porter's generic strategies
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Differentiation
focus
Low cost leadership
focus
Scope of activities: narrow
Differentiation
Unique products
Small volume
High production cost
Low cost leadership
Standard products
Great volume
Low production
costs
Scope of
activities: broad
Competitive advantages:
Differentiation.
Competitive
advantages: Low cost
Porter’s generic strategies
Best cost provider
Low cost leadership
Drivers of Cost Advantage
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
• Organizational slack; Motivation &
culture; Managerial efficiency
• Ratio of fixed to variable costs
• Speed of capacity adjustment
• Location advantages
• Ownership of low-cost inputs
• Non-union labor
• Bargaining power
• Standardizing designs & components
• Design for manufacture
• Process innovation
• Reengineering business processes
• Increased dexterity
• Improved organizational routines
• Indivisibli\ties
• Specialization and division of labor
The Nature of Differentiation
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customer‘s image, status,
identity, and desire for exclusivity
TANGIBLE DIFFERENTATION
Observable product characteristics:
o size, color, materials, etc.
o performance
o packaging
o complementary services
DEFINITION: ―Providing something unique that is valuable to the
buyer beyond simply offering a low price.‖ (M. Porter)
THE KEY IS TO CREATE VALUE FOR THE CUSTOMER
Differentiation and Segmentation
DOES DIFFERENTIATION IMPLY SEGMENTATION?
—Not necessarily, depends upon the differentiation strategy:
BROAD SCOPE DIFFERENTIATION
Appealing to what is common between different customers
(McDonalds, Honda, Gillette)
FOCUSED DIFFERENTIATION
Appealing to what distinguishes different groups customer
(Harley-Davidson, Ralph Lauren)
DIFFERENTIATION: is concerned with how a firm distinguishes
its offerings from those of its competitors (i.e. How the firm competes)
SEGMENTATION: is concerned with which customers, needs,
localities a firm targets (i.e. Where the firm competes)
Broad differentiation
Production emphasis: ‗nobody could make it better‘
Marketing/production emphasis: ‗Simply the best there
is‘
Operating culture: many frills – the widest range of
options and features, something for every taste.
Creating something different from competitors
product/services
Product innovation to bring new products with new
options to the market.
Premium pricing to cover cost of differentiation
Low volume but high profit margin
Intensive adertising and sales efforts
Features of Cost Leadership
and Differentiation Strategies
Generic strategy Key strategy elements Resource & organizational
requirements
COST Scale-efficient plants. Access to capital. Process
LEADERSHIP Design for manufacture. engineering skills. Frequent
Control of overheads & reports. Tight cost control.
R&D. Avoidance of Specialization of jobs and
marginal customer functions. Incentives for
accounts. quantitative targets.
DIFFERENTIATION Emphasis on branding Marketing. Product
and brand advertising, engineering. Creativity.
design, service, and Product R&D
quality. Qualitative measurement and incentives. Strong cross-functional co-ordination
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Focus strategies
Production emphasis: ‗we taylor our products to meet
your particular needs‘
Production emphasis: ‗Just for you‘
Specialization: buyer segments, geographic areas,
final-use applications.
Marketing emphasis: We‘ar not a ‗Jack of all trade‘, we
are master of one.
Competitive advantage in target segment depends on
either:
1. Low cost leadership (spaecialised experience or
knowledge advantage)
2. Succesfull differentiation (offering somethig unique)
Internal development:
Porter‘ generic strategies
Porter‘s experience
Differentiation Cost leadership
Market share
Sources of Competitive Advantage
COST
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
COMPETITIVE
ADVANTAGE
Ansoff Matrix:
Strategy Development Directions
Exhibit 7.1
Source: Adapted from H. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6.
Protect and Build
o Downsizing or withdrawal from activities
o Maintenance of market share
Consolidation - Protect and strengthen position in
current markets with current products
o Leverage competences
o Desirability of dominant market share
Market penetration - Organisation gains market share
Market Penetration
o Low risk growth strategy
o Focus on selling existing goods in existing
markets
o Business focuses on products and markets it
is familiar with
o Market research is therefore minimized
o Reaction time of competitors is quick
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Product Development
o Medium risk strategy
o Selling new products in existing market
o Apple iPhone and McDonalds are two companies
(products) that use this method
o Product extension strategies and new product
development
o Products may have reached the end of their
useful life
o Reasons to acquire other companies
Product Development
Associated dilemmas
o Expense, risk and potential unprofitability
o Unacceptable consequences of not developing new products
296
Market Development
New market segments with similar CSFs
New uses for existing products
New geographic markets
Using new distribution channels; changing the price;
appealing packaging
The success of a product in one country does not necessarily
guarantee success in another one
Issues
Normally requires some product development
and capability development
Credibility and expectations
Offer existing products in new markets
Diversification
Related diversification
A process that takes place when
a business expands its activities
into product lines that are similar
to those it currently offers.
Example: A computer
maqnufactorer might begin
making calculators
Unrelated diversification
It is a form of diversification when
the business adds new or
unrelated product lines and
penetrates new markets.
Example: if the shoe producer
enters the business of clothing
manufacturing. In this case there
is no direct connection with the
company´s existing business
298
A strategy that takes the organisation away from both
its current markets and products
Repairs and
servicing
BACKWARD INTEGRATION
HORIZONTAL
INTEGRATION
FORWARD
INTEGRATION
Raw materials
manufacture
Components
manufacture
Machinery
manufacture Product/process
research/design
Raw materials
supply Components
supply
Machinery
supply Financing
Transport
Competitive
products
Complementary
products
By-products Manufacturer
Distribution
outlets Transport Marketing
information
Related diversification options for a manufacturer
Reduce
risk
Maintain
growth
Balance
cash
flows
Share
Infrastruc
-ture
Increase
market
power
Extend
competences
Reasons to diversify
Least power to create value Most power to create value
Not recommended as a reason
to diversify
Recommended as a reason to diversify
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Diversification can be risky
High risk growth strategy that involves marketing new products in new markets
Risk is spread over several products Virgin Group
Development of larger controlling companies (parent company) Time Warner
Business is usually not familiar with the product‘s success in different markets
Advantages and disadvantages of
internal development
Avantages Disadvantages
Can be relatively cheap Can be relatively slow
You can manage on your
own
You lack of expertise
Lower investment than buy a
company
Its risky to enter a new field
You can learn how to do To learn a new technology is
slow
You can use existing
organization, and culture
There are big difference
between two culture
Recent Approaches to Internal
Development Dramatic changes in strategy and structure
to adjust to the business conditions of the 1990‘s
Key elements:
Plant closures
Outsourcing
Delayering and cuts in administrative staff
The fundamental rethinking and radical
redesign of business processes to achieve
dynamic improvements in performance. e.g.:-
Several jobs combined into one
Steps of a process combined in natural order
Minimizing steps, controls, and reconciliation
Use case managers as single points of contact
Hybrid centralization/ decentralization
CORPORATE
RESTRUCTURING
BUSINESS
PROCESS
REENGINEERING
304
External development
Mergers and Acquisitions (Definitions)
Merger: a strategy through which two firms agree to
integrate their operations on a relatively co-equal
basis
Acquisition: a strategy through which one firm buys
a controlling interest in another firm with the intent of
making the acquired firm a subsidiary business within
its own portfolio
Takeover: a special type of an acquisition strategy
wherein the target firm did not solicit the acquiring
firm‘s bid
Motives for Mergers and Acquisitions
Environment Capabilities Expectations
Speed in fast-moving
product/market
Exploit core
competences in new
arena
Institutional shareholders
want continuing growth
Competitive situation – static
market, avoid competitor
reaction
Address lack of
resources or
competences
Ambitions of senior
managers
Deregulation – created
suboptimal units ripe for
acquisition
Cost efficiency Speculative to boost
short-term share value
Financial – opportunistic
acquisition of firm with low
share value
Learning
Examples and Motivations for
Acquisitions & Mergers
o Industry
Lifecycle
o (e.g., Maytag
Whirlpool)
o Technological
Trajectories
o (e.g., Google,
YouTube)
By 2005, Maytag's market share had declined to all-time lows, sales were flat, and customer satisfaction surveys ranked Maytag near the bottom of the appliance field. In 2006 Whirpool completed its acquisition of Maytag Corporation
Google bought YouTube ($1.65B in 2006) Why?
o Google bought a rival.
o YouTube had four times as many hits as Google Video
o YouTube streamed nine times as many clips as Google Video.
o Google‘s choice to buy rather than build marked a big strategic change.(Economist, 10/14/06, p82).
306
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Merger and Acquisition Types
o Horizontal
The two firms are competitors, like YouTube
and Google
o Vertical
The two firms are in buyer and seller
relationship
o Congeneric
A type of merger where two companies are
in the same or related industries but do not
offer the same products. The companies
may share similar distribution channels,
providing synergies for the merger.
o Conglomerate
Merger of two business firms engaged in
unrelated business activities. The two
companies are neither competitors, nor a
buyer and seller merging as in vertical
mergers. They have no actual connection
o An example of a congeneric merger is
Citigroup's acquisition of Travelers
Insurance. While both were in the
financial services industry, they had
different product lines.
o An example for conglomerate is General
Electric began as a lighting business
and has since transformed into a
conglomerate that is more synonymous
with "general" than "electric." Shortly
after the company was formed, it
engaged n producing radios,
refrigerators and wind turbines. GE
eventually became the largest
manufacturer of jet engines through GE
Aviation.
Types of Vertical Aquisitions
o There are basically tree types of
Vertical Aquisition/Integration
namely:
o Backward integration – The firm tries
to own an input product company.
For example a car company want to
buy up a company which makes tires
or a bookseller who sells books
acquires book publisher company
o Forward integration – Where the
business tries to control the post
production areas, namely the
distribution network. Like a mobile
company opening its own mobile
retail chain.
o Balanced integration – a
mix of the above two. A
balanced strategy to take
advantages of both the
worlds.
308
Advantages and Disadvantages of Aquisition
Advantages Disadvantages
Can be relatively fast Premium paid: expensive
Cost savings from economies of scale
Not always easy to dispose of unwanted parts
Extend to new geographic areas
Human relations problems that can arise after
Buy market size and share Problem of clash of national, and organizational culture
May reduce competition from a rival
High risk if wrong company targeted
Alliances Versus Joint Ventures
o Not all strategic
alliances are joint
ventures.
o A joint venture (JV) is a
new organization—a
―corporate child‖
created by two or more
parent firms which hold
partial equity ownership
in the new venture.
o Sony Ericsson
o A non-JV alliance is two
(or more) firms working
together—―getting
married‖ but not having
―children.‖
o Renault is a strategic
investor in alliance
with Nissan. Both
operate
independently and
they have not
created a new firm.
Advantages and disadvantages
of joint venture
Advantages Disadvantages
Builds scale quickly Control lost to some extent
Obtain special expertise quickly
Works best where both parties contribute something different
Cheaper than acquisition Can be difficult to manage
Can be use when outright acquisition not feasible
Profit share with partner
Can be used where similar product available
Motives for Strategic Alliances
Need for critical mass
o Cost reduction
o Improved customer offering
Co-specialisation
o Each partner concentrates
on using own capabilities,
e.g. geographical market
entry, value chain activities,
Public Finance Initiative
Learning
o Helps to develop future
competences
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Loose (market)
relationships
Contractual
relationships
Formalised
ownership/
relationships
Formal
integration
FORMS OF
ALLIANCE Networks
Opportunistic
alliances
Subcontracted
Licences and
franchises
Consortia
Joint ventures
Acquisitions and
mergers
INFLUENCES
Asset
management
Assets do not
need joint
management
Asset
management
can be isolated
Assets need to be jointly
managed
Asset
separability Assets cannot
be separated Assets/skills can be separated
Assets cannot
be separated
Asset
appropriability High risk of assets
being appropriated
Low risk of assets being
appropriated
High risk of
asset
appropriation
Types of and motives for strategic alliances Options for Co-operation in Alliances
314
Example: Starbucks
Starbucks partnered with Barnes and
Nobles bookstores in 1993
to provide in-house coffee shops,
benefiting both retailers.
In 1996, Starbucks partnered with
Pepsico to bottle, distribute and sell
the popular coffee-based drink,
Frappacino.
A Starbucks-United Airlines alliance
has resulted in their coffee being offered
on flights with the Starbucks logo on the
cups and a partnership with Kraft foods
has resulted in Starbucks coffee being
marketed in grocery stores. In 2006,
Starbucks formed an alliance with the
NAACP, the sole purpose of which was to
advance the company's and the NAACP's
goals of social and economic justice.
Advantages and disadvantages
of alliance
Advantages
Disadvantages
Can be build close contacts with partner
Slow and plodding approach
Use joint expertise and commitments
Needs constant work to keep relationship sound
Allows potential partners to learn about each other
Partners may only have limited commitments
Locks out other competitors Unlikely to build economies of scale
Structuring the alliance to reduce
opportunism WHAT FORM SHOULD THE ALLIANCE TAKE?
Contracts ----------------------------------------------------------------------Equity
Marketing Consortium Wholly Owned R&D
Joint Venture
Turnkey
License
Franchise
Short-term -----------------------------------------------------------------------Long-
term
---------------------difficult to control
difficult to monitor
difficult to enforce
difficult to negotiate
Opportunism, the main phenomenon that
endangers the alliances and other types
of co-operation
o There exists no agreed general,
scientific definition or theory of
economic opportunism; the
literature usually considers only
specific cases and contexts
o In the most general approach,
opportunism is a practice of
exploiting circumstances in self-
interest, specially without regard
to moral principles or others'
interests. In the case of alliances
it means that one of the partner
disregards the other partners‘
interest pursuing its own selfish
interest.
317
General Principles of
Organization Design
Strategies for Organizational Developments
Prof. Balázs Hámori [email protected]
&
Prof. Katalin Szabó [email protected]
318
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Outline
319
o Basic definitons: organizational design and organization
structure
o Classical types of business organizations by ownership
o Sole proprietorship and partnership
o The nature of corporation
o Structure of business organizations: functional, divisional,
matrix and team structure
o Organizational development and resistance to changes
o The latest development in organizational structure:
decomposition of firms
Basic Definitions
Organizational design is
the process of choosing and
implementing a formal
structural configuration for
an organization
Organizational Structure is
the typically hierarchical
arrangement of lines of
authority, communications,
rights and duties of an
organization
Organizational charts (often
called organigramme or
organogram) are diagrams of a
hierarchy of nodes, commonly
used to portray superior/
subordinate relationships in an
organization
320
321
Business
organization
322
Factors, Detemining Organizational Forms
323
o Technological development and social
environments
o Owner’s objectives: liability, profit
distribution, taxation and capital structure
o Dealings with the actors of outside world:
other owners, heirs, employees,
customers and future owners of business
o Legislative goals: special-purpose entities
to encourage investments, for example,
small businesses or affordable housing
Classical Types of Business Organizations by
Ownership I: Unincorporated Business Forms
1. Sole proprietorship: one person owns the business. Many
businesses are still conducted this way. If someone works for
the sole proprietor, that person is typically an agent and a
servant
2. Partnerships: the operation of business by co-owners
3. Limited Liability Partnerships: the operation of a business with
co-owners, among them some being liable for partnership
debts, while others are not. General Partner (Manager with
Unlimited Liability) and Limited Partner (Investors with Limited
Liability
324
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4. General Corporations: a corporation is
a fictitious legal entity separate from
the owners and shareholders which is
created by filing with the secretary of
the state and the payment of a filing
fee. Corporations can be publicly held,
or closely held.
5. Limited Liability Companies: is a
company that is drawn from a mixture
of forms of business organizations; that
is, they look like corporations but have
different rules for tax and liability
purposes. Hybrid with Corporate
Liability Protections and Partnership
Tax Treatment 325
Classical Types of Business
Organizations II: Corporations Formation of Different Business
Organizations
Sole Proprietorship General
Partnership Corporation
No formalities or legal
documentation; may be
implied from conduct or
actions
Written or oral
agreement or may
be implied from
conduct or actions
Filing of articles of
incorporation with
secretary of state
and payment of fees
326
Governing Documents
Sole Proprietorship General
Partnership Corporation
No formalities or legal
documentation; may be
implied from conduct or
actions
Written or oral
agreement or may
be implied from
conduct or actions
Filing of articles of
incorporation with
secretary of state
and payment of fees
327
Nature of Ownership
Sole
Proprietorship General Partnership Corporation
Wholly owned by
single individual
Contribution, partner
receives proportionate
share of profits/losses
and partnership
property
Residual claim on
corporate equity and
right to vote for
directors and essential
governance
328
Withdraval of Owner
Sole Proprietorship General
Partnership Corporation
Sole proprietorship
not transferable;
property and products
are transferable
Limited right of
transfer subject to
consent by all
partners
Freely transferable
through formal (nyse)
and informal (private
equity) capital markets
329
Liability
Sole
Proprietorship General Partnership Corporation
Sole proprietor
personally liable
for all debts and
obligations
Partners are jointly and
severally liable for all
partnership obligations,
in contract and in tort
Shareholder’s liability
limited to extent of
capital contribution
[limited liability]
330
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Management
Sole Proprietor General Partnership Corporation
Sole proprietor has
complete
management
control
All partners have equal
rights in partnership’s
management and
conduct
Managed by board of
directors elected by
shareholders; board
may delegate authority
to appointed officers
331
Taxation
Sole
Proprietorship General Partnership Corporation
In some developed
countries it is not a
taxable entity (but in
Hungary taxable);
income (loss) passes
through to sole
proprietor
In some developed
countries partnership not a
taxable entity; allocations
of income and loss allowed
within partnership before
pass-through
Corporation taxed as
separate entity and
dividends/capital gains
also taxed [double
taxation]
332
Sole Proprietorship
Advantages
o Easy start-up
o Flexibility (can make decisions quickly)
o The owner is the management in one person
o Owner is his/her own boss
o All income for the owner
o Easy exit: pay the bills and stop working
Disadvantages
o Unlimited liability
o Proprietor is responsible for
everything
o It‘s hard to borrow money
o Size and efficiency
o Owner have to do everything
He/she may be good at some
things (making the product) but
not at others (keeping the
financial records etc.)
o Limited management experience
o Hard to find qualified
employees
o Limited life – business dies when you
die
333
Advantages of Partnerships
o Specialization – specific duties assigned to different partners.
o Sharing of losses. Can borrow more and can sustain heavier losses.
o Easy to establish.Small amount of money to start & operate.
o Shared decision making more informed decisions.
o Personal satisfaction – sense of accomplishment.
Business partners are liable for the
actions of the other partners.•
Profits must be shared with each
others.
Partners can put time and efforts
into the business differently
Disagreements can in decision
making
Expectations and situations can
change in the course of time, which
can lead conflicts
The partnership may end upon the
withdrawal or death of a partner.
Limitations of partnership keep it
from becoming a large business.
Consulting with the partner needs a
lot of time and flexibility
334
Limited Liability Company (LLC)
Advantages
Protection of personal assets
from business debt
Profits/losses pass through to
personal income tax returns of
the owners
Great flexibility in management
and organization of the
business
LLCs do not have the
ownership restrictions of S
Corporations making them
ideal business structures for
foreign investors
Disadvantages
LLCs often have a limited life
(not to exceed 30 years in
many states) Some states
require at least 2 members to
form an LLC, and LLCs are not
corporations and
therefore do not have stock --
and the benefits of stock
ownership and sales.
As with the S Corporation
listing, these lists are not
inclusive. For more detailed
information, please be sure to
speak with a qualified legal
and/or financial advisor.
335
General Corporation
Advantages
Owners' personal assets are
protected from business debt and
liability
Corporations have unlimited life
extending beyond the illness or
death of the owners
Tax free benefits such as
insurance, travel, and retirement
plan deductions
Transfer of ownership facilitated
by sale of stock
Change of ownership need not
affect management
Easier to raise capital through
sale of stocks and bonds
Disadvantages
More expensive to form
than proprietorship or
partnerships
More legal formality
More state and federal rules
and regulations
336
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Definition and Types of
Organizational Structure
Simple
Functional
Divisional
Matrix
Team
structure
337
o Organizational structure refers to
formalized patterns of linking interactions
o Structure provides a means of
balancing two conflicting forces
o Need for the division of tasks into
meaningful groupings
o Need to integrate the groupings for
efficiency and effectiveness
Functional Organizational Structure
338
Defintion: people, and
technologies necessary to do
the work of the business are
divided into separate
―functional‖ groups (such as
marketing, operations, and
finance). Functional structure
increasingly needs formal
procedures for coordinating
and integrating the business
activities to provide the
business‘s products and
services
Functional Organizational Structures
339
Divisional Organizational Structure
o A divisional organizational
structure usually consists of
several parallel teams
focusing on a single product
or service line.
o These divisions called
strategic business units
(SBUs) stand alone, operating
as if they were independent
businesses in and of
themselves.
o Companies create division
devoted to product lines,
geographical location or a
customer type such as
government or women
o Examples of a product
line are the various car
brands under General
Motors or Microsoft's
software platforms
o One example of a service
line is Bank of America's
retail, commercial,
investing and asset
management arms
340
Organogram of Divisional
Organizational Structure
341
Advantages and Disadvantages
of Divisional Structure Advantages
o Improved coordination
o Clear points of
responsibility
o Flexibility
o Expertise focused on
specific customers,
products and regions
o Greater ease in
restructuring
o In a globalized economy, a
divisional structure can
respond to cultural
diversity.
Disadvantages
o Reduce economies of scale
o Conflicts between Divisional
Heads
o Duplication of Functions
o Increase costs through
duplication of resources
across divisions
o Better performance
sometimes even at the cost
of other divisions unhealthy
rivalries
342
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Matrix Structure
o In the matrix structure,
individuals are grouped
by both function and
product
o Because the matrix
structure is a combination
of functional and
divisional structures,
matrix structures can
range from a structure
closer to the functional to
one closer to the project
structure.
This type of structure
used in
o manufacturing
o service industries
o professional fields
o nonprofit sector
343
Chart of the Matrix Structure
344
Evaluation of Matrix Structure
Advantages
o Increased flexibility in
restructuring
o Better inter-functional
cooperation
o Better customer services
o Better performance
accountability
o Improved decision making
o Improved strategic
management
Disadvantages
o The two-boss system
is susceptible to power
struggles
o Workers may suffer
task confusion
o focused team loyalties
to detriment of
organization
345 346
Team structure
o There is a robust trend towards the use of teams to perform tasks
o Team structure is a modern type of the organizations
o Extensively use permanent and temporary teams to solve problems, complete special projects, and accomplish day-to-day tasks
o Often use cross-functional teams.
Chart of Team Structure
347
Team Structures
Advantages
o Eliminates barriers between
operating departments
o Improved morale due to
cross-functional interactions
o Team members support
each others
o Improved quality and speed
of decision making
o Strengthenintg motivations
for work.
Disadvantages
o Increased need for
effective leadership
o Less contact with other
functions
o More change and
instability
o Less organizational
consistency
348
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Inventor
Develops and
understands
technical aspects
of ideas
Does not know
how to win
support for
the idea
or make a
business of it
Champion
Believes in idea
Visualizes benefits
Confronts
organization
realities of cost,
benefits
Obtains financial &
political support
Overcomes
obstacles
Supporter
High-level
manager
who removes
organizational
barriers
Approves and
protects idea
within
organization
Main Actors in Organizational Change
349
Group Tasks
o 5 minutes to think
about what the
emerging trends are
in organizational
developments and
why?
o Break into groups
and discuss your
thoughts
350
Macroforces Driving the Organizational
Developments
o Changes in technology, with special regard on ICT
o Permanent and rapid changes in macro environments due to
globalization
o Need and opportunity of networking
o Increasing diversity of the outer environments
o Shifting age demographics
351
Changes in Technology
Largest Effecting Macro
Force Cause Other Macro
Forces
Consequences
o Speed of Change
o New Strategies
emerging
o New Distribution
Channels
o New Relationships
o Sharpening Competition
352
A Derivative of Other Macro
Forces
o 2nd Biggest Impact
o Ramifications
o Dealing with
Uncertainty
o Need More Flexible
Process
353
Networking and Alliances
o 3rd Biggest Impact
o ―Companies Can‘t Do It
By Themselves Anymore‖
o Key is to Actively Manage
the Relationships
o Challenges in Making
P&A Work
o Dealing with Ambiguity
o Culture Differences
o Boundary Issues
o Finding ―Right‖ Partner
354
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Demographic Shift
Caused by
Declining birth rates
Baby boomers + X
generation aging
Value conflicts
between generations
Rise of ethnic
minorities into
leadership
Examples
Finance Industry
Healthcare Industry
Grocery Industry
355
Organizational Change
Managers must be prepared to handle both
Planned Change
change resulting from a
deliberate decision to
alter the organization
Unplanned Change
change that is imposed
on the organization and
is often unforeseen
356
Resistance to Organizational
Change
o Fear of the unknown
o Fear of loss
o Fear of failure
o Disruption of interpersonal
relationships
o Personality conflicts
o Politics
o Cultural assumptions and
values
357
Decomposition of Organization:
Outsourcing
o Outsourcing: One company contracts another company to do the formers work. Usually, the former (hereafter referred to as the Outsourcer, or client) pays money to the latter (the Outsourcee) in lieu of the work.
o Outsourcing is a kind of vertical disintegration, i.e. the reversal of vertical integration processes, that created th big companies in th 20th century.
o Companies participating in the outsourcing wave dismantle parts production and secondary services, producing a much ―flatter‖ company structure by cutting off some of the many levels dependent on each other. 358
Outsourcing: as a Robust Trend
o Phenomena similar to outsourcing could be experienced even earlier. But the novelty is the intensity of the outsourcing process
o Not merely peripheral functions are contracted out but also such tasks, constituting the core of enterprise management.
o The big firms – becoming freed from ever more functions –turn into particular intellectual holdings.
o This holding retaining the management, regulation and marketing in its framework, and outsource almost their entire production process and supplementary activities (like cleaning, maintaining etc. 359
Strategic Consideration for Outsourcing
o Extended Business Focus
o Lets company focus on broader
business issues by having outside
experts handle various operational
details
o Access to World-Class Capabilities
o The specialized resources of
outsourcing providers makes world-
class capabilities available to firms in
a wide range of applications
360
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Strategic Consideration for Outsourcing
o Accelerate Business Re-Engineering Benefits
o Achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process
o Share Risks
o reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities
361
Several factors can stimulate a company to replace an inner service
or production by outsourcing
Companies can concentrate on their strengths and core
competence. They should‘not divide their attention between
various partial functions and background activities
Returns of Scale. If the outsourcer gives over some activities to
outsourcee, this latter can solve the tasks much cheaper. Because
the outsourcee lends its services many clients, the costs of an
individual unit are lower than its clients‘ original costs
In addition, the outsourcee, concentrating on the given activities,
will find it profitable to install expensive new technologies that
further decrease their costs
IT, printing or legal outsourcing is also less expensive if the
capacities of the outsourcee are all utilised .
Strategic Considerations for Outsourcing
o The immeasurable benefit of
outsourcing is that it adjust the
employment to changing or
fluctuating tasks continuously.
o The learning processes
demanded by new
technologies and facilities are
tiresome and expensive for
companies. Due to the
outsourcing, they can spare
these efftorts. This is a
principal motivation for
outsourcing in the world of fast-
changing technology.
o Free Resources for Other Purposes permits firm to redirect efforts from non-core activities toward those that make these tasks more effectively
363
Strategic Considerations for Outsourcing Time Sharing
o More efficient work by time sharing
o At the considerable part of outsourcees a time share system is working, i.e. their clients share a capacity that they use one at a time. For example:
o Legal consulting and representation are also essentially time-share forms of outsourcing. Since cases at a given company never appear continuously but with periods of too much or too little
o Work, a legal firm can equalise oscillations because none of its client will be having over- or under- lasted periods at the same time
o Most companies are simply unable to keep pace with technologies that change from day to day. 364
Consequences of Outsourcing
o The significance of material capital has greatly diminished and virtual capital, which manifests itself in network connections, establishing and managing networks, and regulating global economic processes, is becoming predominant.
o Leader of TA Associates an American company put it as follows: „We don‘t want to invest in hard assets. They are short lived and risky. … We want to invest in people who have a clear viable concept...who can concentrate their internal energies on that small core of activities,which creates the real uniqueness and value- added for the company‖ (Quinn [1992] p. 49).
365
Outsourcing of Core Functions
There is an emerging
tendency to outsource
sub-elements of research
and development like the
conducting of surveys
and dealing with
mechanical or dangerous
tasks. Strategically
crucial processes
nonetheless remain
internal 366
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Innovation models:
Disruptíve innovation
Prof. Balázs Hámori
&
Prof. Katalin Szabó
368
Roleplay home assignment on innovation
management
Create groups (of five people) with your classmates! (You have them already.)
Find out what sort of company you have/manage as a management body/team
responsible for R&D in the company, so for innovations and their management!
Find out/introduce something new into your company! It can either be a product or
service, or marketing tool/action. So you have an idea/invention for an innovation
Decide what sort of steps had to be made to implement your idea/invention, to make
it a real innovation?
Take into consideration all the possible needs for getting a working and useful
innovation at the and of the process! So how would you manage different:
engineering/technological issues
financial issues,
human resource management issues,
marketing issues,
etc.?
How would you build teams and make them responsible for different steps in that
innovation process?
What sort of motivation tools can be applied during that process?
How would you evaluate your own work, so how would you measure the
effectiveness and efficiency of your managerial function?
Present your results
Outline
o Concepts and types of innovation
o Innovation, learning and knowledge
o Revolutionary changes in innovation model as
reflection or consequence of the „Great
transformation‖ from industrial to information
(knowledge based) economy
369
Concepts of innovation
Secondly, he pointed out that
innovation needs to be
distinguished from invention.
He saw innovation as a
specific social activity
(function) carried out within the
economic sphere and with a
commercial purpose,
While inventions in principle
can be carried out everywhere
and without any intent of
commercialisation.
―Innovation is the outstanding
fact in the economic history of
capitalist society or in what is
purely economic in that history,
and also it is largely responsible
for what we would at first sight
attribute to other factors‖
Scumpeter, 1939, p.
Schumpeter defined
―development‖ as he initially
phrased it) as ―new
combinations‖ of new or
existing knowledge,
resources, equipment and so
on (Schumpeter 1934, pp. 65). 370
Schumpeter‘s innovation definition
―This concept covers the following five
cases:
(1) The introduction of a new good – that
is one with which consumers are not yet
familiar – or a new quality of a good.
(2) The introduction of a new method of
production, that is one not yet tested by
experience in the branch of manufacture
concerned, which need by no means be
founded upon a discovery scientifically
new, and can also exist in a new way of
handling a commodity commercially.
3) The opening of a new market, that is a
market into which the particular branch of
manufacture of the country in question
has not previously entered, whether or not
this market has existed before
(4) The conquest of a new source
of supply or raw materials or
half-manufactured goods, again
irrespective of whether this source
already exists or whether it has
first to be created.
(5) The carrying out of the new
organization of any industry, like
the creation of a monopoly
position (for example through
trustification) or the breaking up of
a monopoly position.‖
(Scumpeter, 1911, p 66.)
1883-1950
371
The Wright-brothers story: The difference betwen
invention and innovation
On a cold, clear morning in December
1903, at Kitty Hawk, North Carolina, the
fragile aircraft of Wilbur and Orville Wright
proved that powered flight was possible.
Thus was the airplane invented; but it would
take more than thirty yeaut it would take
more than thirty years before commercial
aviation could serve the general public.
Engineers say that a new idea has been
"invented" when it is proven to work in the
laboratory. The idea becomes an
"innovation" only when it can be replicated
reliably on a meaningful scale at practical
costs. If the idea is sufficiently important,
such as the telephone, the digital computer,
or commercial aircraft, it is called a "basic
innovation," and it creates a new industry or
transforms an existing industry.
In engineering, when an idea
moves from an invention to an
innovation, diverse "component
technologies" come together.
Emerging from isolated
developments in separate fields of
research, these components
gradually form an "ensemble
rs before
Jossey-Bass Reader (2007).
372
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Types of innovation (OECD: Oslo Manual)
o Product innovation
o Process innovations
o Marketing innovation
o Organizational innovation
373
The development and market
introduction of a new, redesigned
or substantially improved good or
service, which give the consumer
additional benefit
o Efforts to create product designs
o Applications of technology to
develop new products for end
users
o More common during early
stages of an industry‘s life cycle
o Associated with differentiation
strategies
Bergmönch bike folding into a
backpack
o Examples for product
innovation
Velcro:
374
Product innovation
Possible Targets of Product Innovation
Augmented features
Core benefits
Tangible specification
After sale sevices,
perceive benefits
Size, shape, appearance
Functions, attributes
375
Process innovations
A new or significantly improved
production or delivery method.
This includes significant changes
in techniques, equipment and/or
software.
o Improving efficiency of an
organizational process
o Manufacturing systems and
operations
o More likely to occur in later
stages of an industry‘s life
cycle
o Associated with cost leader
strategies
Examples:
o The introduction of automation
in the manufacturing process.
The same good is produced,
it's merely done so in an
improved, more efficient
manner.
o Another example is increasing
the processing speed and
memory capacity of a personal
computer. It's still a personal
computer, just better and
faster.
376
Marketing innovation
o A new marketing method involving
significant changes in product
design or packaging, product
placement, product promotion or
pricing.
Examples:
o TetraPak aseptic packaging
o Dynamic pricing: revenue
management
o Dynamic pricing means for
example, that a hotel will change
its room rates daily or even
within a day if up-to-the-minute
market information reveals the
need for adjustments. It is based
on the recognition that the right
rate to charge for a room night is
what the customer is able and
willing to pay. Arlines also use
revenue management in order to
increase their profit.
377
Organizational innovation
o Definition: A new
organizational method in
business practices, workplace
organization or external
relations.(OECD)
o The existing literature on
organizational innovation is
diverse and scattered. There is
no consensus on a definition of
the term „organizational
innovation‖, which remains
ambiguous (Lam, 2011).
378
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Organizational innovation was undeservingly pushed to the background
Product innovation hits:
3. 900 000 (Google)
1 914 (Ebsco)
Organizational innovation hits:
338 000 (Google)
667 (Ebsco)
„By 1500 the shipyard/armory was the
largest industrial complex in the
world…..produced nearly one ship
every day and, at its height,
employed 16,000 people.‖
The Arsenal of Venice, founded in 1104
379
Organizational power
„It employed production methods of unparalleled efficiency that long predated Henry Ford, including
o assembly lines and
o the use of standardized parts;
o vertical integration;
o just-in-time delivery;
o time management;
o rigorous accounting;
o strict quality control;
o and a specialized workforce‖
(Arsenal of Venice, 2011
March, p. 64.)
380
Typology of organizational innovations. Are there
any similarities in them?
Source: A. Armbruster, A. Bikfalvi, S. Kinkel, G. Lay; Technovation 28, 2008, p. 647 381
Another classifiction: Contrasting types
of innovation
o Radical versus
incremental
innovation
o Disruptive versus
sustaining innovation
o Capital intensive
versus barefooted
innovation
o Steam engine -
Word 8.0
software
o Candle-light
bulb; Aircraft-
helicopter
o New cancer
medicine
versus narrow
tread round
bale wrapper
for hay and
straw 382
Radical innovations
o Often result in quick profits
o In many cases represent
technological breakthroughs
o Usually apply to products and
processes simultaneously
o Usually cannot be patented
383
Radical versus incremental innovation
Radical innovation
Fundamental changes and
breakthroughs
Evoke major departures from
existing practices
Can be highly disruptive
Can transform or revolutionize a
whole industry
Incremental innovation
Incremental innovation is not
about huge sweeping
changes. On the contrary,
firms that innovate
incrementally tend to do so
just a little bit at a time. Think
of incremental innovation as
cost cutting or feature
improvements in existing
products or services (Leifer,
2000).
384
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Continuum of radical and incremental
inovations
385
Sustaining and disruptive innovations
Sustaining innovations
Extend sales in an
existing market, usually
by enabling new
products or services to
be sold at higher
margins.
Disruptive innovations
Overturn markets by
providing an
altogether new
approach to meeting
customer needs.
386
Learning and innovation
o In the decades before and after the millenium the usage of the twin terms „learning & innovation‖ has grown exponentially in the management sciences
o Despite this anormous big popularity, innovation theory is still an immature ―science‖, and the same is true for the studying of learning
387
Unclear relations between learning and
innovaton
o The two phenomena
are diametrically
opposed
o The innovation is a kind
of learning
o The learning is a
necessary precondition
for innovation
„In spite of the number of specific publications on innovation and organizational learning, there is still a gap in combining the issues together.‖
Perin, 2010
388
There are tree basic approaches to the relation between
learning and innovation
Learning Innovation
Fixation of existing patterns
Disruption of existing pattern
Dissemination of existing
knowledge
Crowding out of existing knowlege
Partly institutionalized outside the
economy
Mostly institutionalized inside the
economy
Covers the whole population,
everybody learns
Covers just a small segment of
population, not everybody is
innovator
Basically predictable and partly
organized
Basically unexpected and chaotic
Mostly well controllable The most important parts of the
process are autonomous
Source: Hamori, 2012
389
Learning and innovation: Blurring of the
twin phenomena
„I argued that learning and innovation share the same key feature: they arise unplanned, unexpected, and emergent, and can‘t be commanded to occur‖
Amy Edmondson
Harvard Busieness Scool
According to Argyris
"learning is a process in which people discover a problem, invent a solution to the problem, produce the solution and evaluate the outcome, leading to the
discovery of new problems.‖
Amy Edmondson
Harvard Business Scool
Argyris‘ definition fits
Practically for the innovation
too
390
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Innovation=borrowing knowledge
borrowing knowledge=learning
Innovation is a kind of
borowing knowledge
(March and Simon,
1958)
Herbert Simon (1916-2001)
James G. March
(1928- )
391
Learning is the precondition for
innovation (1)
o Learning is producing
knowledge, without
knowledge there is no
innovation
o Cohen and Levinthal (1990)
probably were the first to
show that absorptive
capacity of firm is critical to
its innovative activities,
since knowledge is only
absorbed if the firms meet
the capabilities to
internalize it.
392
Learning is a necessary precondition
for innovation
o „Outside sources of knowledge (which is accessible by learning H. B.) are often critical to the innovation process, whatever the organizational level at which the innovating unit is defined. While the example of Japan illustrates the point saliently at the national level (it is also true of entire industries, as pointed out by Brock (1975) in the case of computers and by Eck (1962) in the case of aluminum.‖
(Cohen-Levinthal)
o According to Schumpeter‘s definition
(1936) innovation refers to
new combinations of existent
knowledge and organizational
learning 393
Learning is a preconditon and a positive
influencing factor for innovation
o „A theory of innovation.. presumes that new technologies emerge from a firm's accumulated stock of skills. Among these we distinguish technological and networking skills.‖
[Pennings – Harianto (1992)]
o Learning is an influencing factor for innovation
[Slater and Narver, 1995; Dickson, 1996; Hurley and Hult, 1998; Baker and
Sinkula, 1999)].
394
Our wiew about the relationship
between learning and innovation
o Learning is to be differentiated from innovation, in spite of some common features, in many sense they can be opposed to each other
o Learning is the necessary, but not sufficient precondition for innovation, because through it is accumulating knowledge
o There is a definit interplay between this two. Learning gives inputs to innovative combination of the existing knowledge, innovation make learning, relearning and unlearning unavoidable, and the new knowledge gives new opportunities for innovative combinations
395
Innovation interconnections model
„The empirical results presented by Chen et al. 2009 showed ‗that relationship learning and absorptive capacity had positive effects on innovation performance, and innovation performance had a positive effect on competitive advantage‘‖
Performance
Innovation
Learning
Knowledge
Competitiveness
Source: Hámori, 2012 396
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Challenges of Innovation
Mustard Seeds versus Weed Seeds
Experience versus Initiative
Internal versus External staffing
Building capabilities versus Collaborating
Incremental versus Preemptive launch 397
Weeds and seeds: meaning of the
analogy
398
399
o In hypercompetitive
markets can be sustained
only by a series of
preemptive moves
designed to stay ahead
o Firms such as Intel, Hewlett
Packard, and Motorola have
maintained their lead over
several product generations
by ―eating their own lunch‖.
They are launching products
which cannibalize their
current leading products.
Intel‘s introduction of the
486, Pentium, and P6
microprocessors are classic
examples whereby each
successive launch solidified
its position as market leader
while cannibalizing its
previous generation.
o The strategy is cannibalism:
getting an existing product line,
even when it is selling well,
by introducing better versions
for competitive prices -- then
slashing prices on the old line. 400
Preemptive launch
The dilemma of innovation strategy
o The farther that any
company seeks to
innovate, as measured by
the degrees of change
from its base markets and
technologies, the greater
the likelyhood that its
innovation efforts will fail.
o And yet, the less that a
firm seeks to innovate,
across the board, the
greater the likelyhood that
the corporation itself will
fail.
401
Product and Process R&D in Innovative
Life Cycle
Time
Cash
Flow
Innovation Cycle Time
Profit Opportunity Occurs
Project
Activity
Begins
Opportunity
Is Perceived
Breakeven
Time
First
Customers
Are Satisfied
Project
Becomes
Extinct
Product
Definition and Plans
Freeze
Product Is Released to
Production
(Mostly Product
R&D)
(Mostly Process
R&D)
Positive
Cash Flow
Negative
Cash Flow
Net
Period
402
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Major types of technological path
403
Five major technological strategies
Supplier
dominated
Scale
intensive
Science-
based
Information
intensive
Specialized
suppliers
Positions Based on non-
technological
advances
Cost-effective
and safe
complex
products and
processes
Develop
technically
related
products
New products
and services
Monitor and
respond to user
needs
Paths Use of IT in
finance and
distribution
Incremental
integration of
new
knowledge
Exploit basic
science
Design and
operation of
complex
information
processing
systems
Matching
changing
technologies to
user needs
Processes Flexible
response to
user
Diffusion of
best-practice in
design,
production and
distribution
Obtain
complementary
assets, redefine
divisional
boundaries
To matcj IT-
based
opportunities
with user needs
Strong links
with lead users
404
The time to innovate o Nothing grows forever. The
best products, markets, and
business models go through a
predictable cycle of growth
and maturity, often depicted
as an S-curve
o The time to innovate—the
innovation window—is when
the first growth curve hits an
inflection point.
o How do you know when you‘re
hitting the inflection point? You
never know. So the best
companies are forever
paranoid and make innovation
a continuous process. 405
Culture of innovation o The best growth companies
create a culture of innovation:
o Howard Schultz decided
Starbucks had lost its way. He
flew in every store manager
from around the world to help
redesign its café experience.
o Google encourages
employees to spend a day per
week on new ideas.
o P&G tracks the percentage of
revenues from new products
and services.
o Gray Advertising gives a
Heroic Failure Award to the
riskiest ideas ... that fail!
406
Characteristics of Innovative,
Entrepreneurial Culture
o Positive attitude toward change
o Decentralized decision making
o Complexity
o Informal structure
o Interconnectedness
o Organizational slack
o System openness
407
Crowdsourcing as a kind of open
innovation
o ― The act of a company or institution taking a [creative] function once performed by employees [or contractual partners] and outsourcing it to an undefined (and generally large) network of people in the form of an open call‖ (Jeff Howe, 2006)
o It makes for companies and other organizations possible to expand their talent pool for the entire globe, and in parallel with that to get better and more detailed picture of what customers want
o Other field of application (Science, social field, politics) 408
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Epochal changes in innovation
o Earlier unknown types of innovation have emerged.
o The innovation process itself takes place in an unusual manner
o New-- till now peripheral or unknown -- players enter the scene in innovation
o The role of innovation in the global economy is re-
evaluated.
409
How does it work?
Crowdsourcing
platforms
Help in formulating tasks
Collect answers Formulate &
submit task
Search for
solution
Provide answers
to the problems
Select, combine
and refine
solutions
Face a problem
Requesters
Companies/individuals
Individuals/ teams
Test,cheating
detection
Solution providers
410
Mutations of crowdsourcing
o Problem solving (Mechanical Turks, NineSigma)
o Information/Knowledge sharing „Citizen science‖ (Noisetube, Cornell University birdwatch program, Wikipedia)
o Voting (objective evaluation, opinion, ranking)
o Crowdsourcing workers select the preferred variation from a number of choices. The version that the majority selected is considered to be correct or can be chosen. The law of large numbers
o Crowdfunding (Funding startups, Obama first campaign)
o There are 548 crowdfunding platforms in development.
(crowdsourcing org.) 411 412
Crowdsourcing cases: Threadless
t-shirt company
o Threadless.com has a community of 700,000 (!)
users who contribute to t-shirt designs
o The concept of Threadless is simple: Anyone can
submit a design idea that gets ranked by members
of the crowd. If the design gets enough votes, it
makes it into the store and the designer gets a big
payout – $2000 in fact.
413
InnoCentive o Problem-solving marketplace spun off from Eli Lilly,
o 250,000 registered ―solvers‖ from 200 countries (!) competing for more than $35 million in prizes
o Currently in its third round of venture capital funding, InnoCentive has a ―Challenge Driven Innovation‖ platform that uses a network of millions of problem solvers
o Cloud-based technology, to transform the economics of innovation and R&D.
o Prize competitions to solve major enterprise problems from the outside. ( Source: Aron, 2012)
o Further examples: NineSigma, TexScout, Yet2.com, Hypios, One Billion Minds, Amazon, Mechanical Turks (internet marketplace for computer programmers)
o Battle of Concepts, Brainrack
414
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Reverse innovation
o „…any innovation that is adopted first in the developing world Surprisingly often, these innovations defy gravity and flow uphill to the rich world. ‖ (Govidarajan, 2012)
o Innovation is not born out of an engineering idea, or from the autonomic development of R&D, but from the answers provided to the problems of the potential buyers
o Low-cost, easy to use types of simple solutions come to the fore
415
Handheld ultrasound scanner
(China)
o 1980s, GE had been trying to sell ultrasound scanners in China, but 90 percent of hospitals couldn‘t afford them.
o The company decided to create an independent local team in China to develop a scanner just for the Chinese market. The team came up with a handheld scanner - 15 percent of the cost of the company‘s previous low-end ultrasound device.
o Lower performance was outweighed by the portability, ease of use, and low price for rural hospitals.
o Today GE sells the portable scanners in the U.S. and other developed countries for use in ambulances and operating rooms ( Source: McLure, 2012)
416
Low-cost pacemaker (India)
o Medtronic designed a low-cost, pill-sized pacemaker
inside a stent that can be put into the heart
instead of the invasive intercardiac leads used
in the U.S. to electrically synchronize the heart
o Remote sensors in the pill-sized pacemaker transmit signals via any smartphone to a cloudcomputing infrastructure. Although this new technology was developed for India, which has 1 billion citizens but only 100 electrophysiologists, Medtronic intends to market this low-cost pacemaker in the United States and Europe. (Bottles, 2011)
o Other examples: Tata: the World‘s cheapest water purifier. The product does not require running water, power or boiling and uses paddy husk ash as a filter. It also uses silver nanotechnology.
417
Reverse innovation: M-pesa/Kenya
o In 2007, as a result of a student software development project, telecom giant, Safaricom developed a mobile phone based payment and money transfer service, the so called M-Pesa
o The service allows users to deposit money into an account stored on their cell phones, to transfer money by SMS to other users
o Until now this type of payments were to the online environment in the developed world. And they require either a credit card, bank or PayPal account.
o Mid-2012, there were 19.5 million m-money users in Kenya (83% of the adult population), transferring nearly US$8 billion per year (24% of the Kenyan GDP)
o TheGuardian: Kenya sets world first with money transfers by mobile. In the U. K. Pigin system 5 years later
418
Common features of crowdsourcing
an reverse innovation
o Determining role of world wide web, geographic place has no real importance
o Drawing in marginal actors, „democratizing the process‖
o Active role of consumers/users
o Channeling of ideas from remote areas,
combining achievments from different fields
o Decreasing the cost of innovation
o Lower risk of originally „high-risk‖ innovation process 419
The new type of innovations comparing to the
traditional innovation model of industrial capitalism The characteristics of innovation
Traditional model
Crowdsourcing/reverse innovation
The main agents
Vertically integrated corporations
Innovation networks: Increasing importance of marginal agents
The typical place of birth of inventions
―Closed‖ research labs
Internet (open innovation)
The geographic structure
Highly concentrated in the world‘s economic centers
Decentralized, spreads to the less developed countries
The main driving forces of innovation
Profit
Social goals and human motivations of innovators also gain larger weight (glory, self-realization,etc.)
420
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Conclusions o Crowdsourcing and reverse innovation did not pop up by chance
at about the same time
o The ongoing ―Great Transformation‖ of the economic system – from industrial capitalism to information economy stands behind both new forms
o The fundamental features of the Great Transformation
o the dematerialization/virtualization of goods
o transformation of vertically integrated corporations into global networks
o fundamental changes in the relationship between the buyers and sellers are reflected in the new types of innovation
o Every phenomenon can be understood only as a part of a system, and its changes can only be interpreted in the frames of systems‘ transformation.
421
Introduction to International
Strategy: Global Expansion
Prof. Balázs Hámori
&
Prof. Katalin Szabó
422
423
In-class assignment: Cons and pros about FDI (Aspects of Vietnamese macro- micro- and regional economic development)
Create two groups from among you!
Group 1. collects all the possible arguments supporting FDI in Vietnam.
Group 2. collects all the possible arguments against FDI in Vietnam
Please take into consideration
o Technological and engineering
issues,
o Financial issues,
o Marketing issues,
o Organizational and management
issues,
o Administrative and institutional
(laws and regulation) issues
o Environmental issues,
o Cultural issues,
o Behavioral issues
o Educational and training issues,
o Political issues,
o Etc.
o After 10 minutes of thinking,
please start to discuss and
debate those issues with each
other.
o Every group‘s member has
his voice, but please name a
group leader who directs and
perhaps intermediate the
activity of his/her group.
Outline
Motivations for International Expansion
Factors Influencing Business Strategy towards Globalization
Types of International Strategies and Modes of Entry
International Corporate-Level Strategy for Expansion: Global,
Transnational and Multidomestic Strategy
The Theoretical Foundation of International Expansion:
The transaction Cost Explanation
The OLI-Paradigm
424
Motivations for International
Expansion (1)
Increase market share. Domestic market may lack the size to support efficient scale of manufacturing facilities, and economies of scale
Economies of scope
Return on Investment. Large investment projects may require global markets to justify the capital outlays
Cost reduction pressures: Reduction of factor costs (e.g., labor, capital)
425
Motivations for International Expansion (2)
Better access to raw materials & energy
Better access to key customers
Escape from recession
Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators
426
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Examples for Economies of Scale
Telecommunication
Aircraft
Chemicals
Supermarkets
Car
Economies of scale is related to and can easily be confused with the theoretical economic notion of returns to scale. Where economies of scale refer to a firm's costs, returns to scale describe the relationship between inputs and outputs in a long-run (all inputs variable) production function.
427
Examples for Economies of Scope.
Economies of scope
is different to economies of
scale though there is same
principle of larger firms
benefiting from lower
average costs. This occurs
when a large firm uses it
existing resources to
diversify into related markets.
For example, once a firm is
producing soft drinks, it can
use its marketing and
distribution network to start
producing alcoholic drinks
Examples for economies of
scope
Cable TV and internet
service
Production of timber and
particle board
Core and ethanol production
Power generation and
distribution 428
Source: Avesh Bhornya, 2010. www.slideshare.net/
aweshbhornya1986/economies-of-scale-scope
Procter&Gamble: A company, utilizing the
opportunities provided by economies of scope
429
An example for the ecape from
recession
Eric Zuziak the owner of architectural firm, JZMK Partners (Irvine, California) reckons that the Chinese middle class saved him from ruin. Before the real estate bust of the past four years, a company in Nanjing, the capital of Jiangsu province in China, noticed on Zuziak's website all the design awards his architectural firm, JZMK Partners, had won. It then hired Zuziak to design a residential community in Nanjing.
Business from Costa Rica to Qatar soon followed. No worries about the real estate crash, says Zuziak, who now generates 85% of his $4 million in sales overseas.
His secret? He and his Irvine, Calif.-based company work with market researchers to target countries such as China, of course, that have lots of consumers with money to burn. Here's what I think you should be doing to ramp up your own global business.
Nowdays the firm is involved in several undertaking worldwwide (China, Turkey, UAE etc.)
430
Stimulating Factors for Expansion
Narrowing of demand characteristics
Government industrial policies
Rise of new distribution channels
Reduction of transportation, communication, & storage
Reduction of tariffs worldwide
For goods and services alike, international
trade grew dramatically in the second half
of the 20th century. By the year 2000, total
world trade was 22 times greater than it
had been in 1950.This increase in
multilateral international trade occurred at
the same time that trade barriers,
especially tariffs, were reduced or in some
cases eliminated across the globe. 431
Example of Growing Homogenity of
Demand (Example 1) Levi Strauss & Co. is a well-
established global business. It operates in 110 countries, and approximately half of its net revenues come from outside the United Staates.
Between the 1950s and 1980s, Levi's jeans became popular among a wide range of youth subcultures throughout the world. Levi Strauss experienced significant growth in its business as the more casual look of the 1960s and 1970s ushered in the "blue jeans craze"
432
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Example (2): Televison and Movies
Television. Television
disseminates largely Western
―fashions, images, ideas.‖,
uniformizing the cultural taste
throughout the world. At one
point, the most popular
television show around the
world was Baywatch. In
Baywatch ―the primary image is
of slimness, youth, beauty, free
time, enjoyment, and a healthy
dash of sex. These TV images
are enormously seductive.‖
Lawrence M. Friedman thinks
that Americans are good at
identifying ―what sorts of cultural
junk-food people enjoy.‖
Movies. Like television,
American movies are another
method of homogenizing of
cultural demand. Research
indicates that in the early 1990s
the United States commanded
"a staggering 85% of the world's
film market, and 90% of the
European film market." Why
would people outside the U.S.
be intersted in American movies
(coming mostly from
Hollywood?)
(Source:
lg.portalxm.com/library/keytext.c
fm?keytext_id=13 433
Global Factors Influencing Business
Strategy Towards Globalization
• Key factors influencing global business strategy can be summarised under the PEST heading:
• Political
• Economic
• Socio-cultural
• Technological
434
Technological factors
Availability and developments in technology can
have a powerful influence on global business
strategy:
e.g.
Access to bandwidth
PC ownership
Technology and sales – processing payments
and sales
Compatibility of technologies in Business
Management – accounting systems, language
differences, etc. 435
Economic factors Tax Systems
Investment Considerations and
Allowances
Sophistication of Financial Markets
– ease with which capital can be
moved and raised
Commodity Prices – oil, energy,
metals, services that are needed
by the company or its employees
Monetary and Fiscal Policies –
interest rates, government aid etc.
Internal Regulation and
Bureaucracy – How easy is doing
business
Exchange Rates
436
Economy Ease of Doing Business
Rank
Starting a
Business
Singapore 1 3
Hong Kong SAR, China 2 5
New Zealand 3 1
United States 4 20
Denmark 5 40
Malaysia 6 16
Korea, Rep. 7 34
Georgia 8 8
Norway 9 53
United Kingdom 10 28
Australia 11 4
Finland 12 55
Iceland 13 52
Sweden 14 61
Ireland 15 12 Source: http://doingbusiness.org/rankings
437
Taiwan, China 16 17
Lithuania 17 11
Thailand 18 91
Canada 19 2
Mauritius 20 19
Germany 21 111
Estonia 22 61
United Arab Emirates 23 37
Latvia 24 57
Macedonia, FYR 25 7
Saudi Arabia 26 84
Japan 27 120
Netherlands 28 14
Switzerland 29 104
Austria 30 138
Economy Ease of Doing Business
Rank
Starting a
Business
Source: http://doingbusiness.org/rankings
438
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439
Indicator Vietnam
East Asia &
Pacific OECD
Procedures
(number) 10 7 5
Time (days) 34.0 37.8 11.1
Cost (% of income
per capita) 7.7 29.8 3.6
Paid-in Min.
Capital (% of
income per capita)
0.0 293.3 10.4
DB 2014 RANK 10
9 DB 2013 RANK***
10
7 CHANGE IN RANK -2
Starting Business--Some Comparision
109 107
440
Doing Business in Vietnam
TOPICS DB 2014 Rank DB 2013 Rank Change in Rank
Starting a Business 109 107 -2
Dealing with Construction
Permits 29 29 No change
Getting Electricity 156 155 -1
Registering Property 51 48 -3
Getting Credit 42 40 -2
Protecting Investors 157 169 12
Paying Taxes 149 145 -4
Trading Across Borders 65 66 1
Enforcing Contracts 46 46 No change
Resolving Insolvency 149 150 1
Sociocultural factors
Religious Considerations – appropriateness of some business ventures – e.g. selling condoms in staunchly Catholic countries
Impact on local communities of business development – availability of jobs, training, environmental impact for these communities
Impact on the environment – can impact on the businesses image
Ethical considerations
Cultural issues 441
Political factors
Political Change – regime change through coup, violence, etc.
Change in government through democratic election can
influence future business strategy.
e.g. the opportunities that are now available in Russia and
Eastern Europe following the collapse of communism
Political Uncertainty – in countries like Zimbabwe, Sudan,
Venezuela. Political uncertainty can lead to a fall in investment
by businesses and influence decisions on expansion and
business ventures
War/Terrorism – create uncertainty
Political Doctrine – can affect the ease with which business is
conducted 442
Exporting
Licensing
Strategic alliances
Outsourcing
Joint venture
Acquisitions
Establishing of a
new subsidiary
Types of International Strategies and
Modes of Entry
Increased market
size
Return on
investment
Economies of
scale and learning
Location
advantages
Identify International
Opportunities Modes of Entry
Strategic
choice amog
the entry
modes
443
Licensing
Definition: The granting of permission to use intellectual
property rights, such as trademarks, patetnts, or technology,
under defined conditions.
Two main actors: Licensor and the licensee
Advantages:
Appealing to small companies that lack resources
Faster access to the market
Rapid penetration of the global markets
Disadvantages:
Other entry mode choices may be affected
Licensee may not be committed
Lack of enthusiasm on the part of a licensee
Biggest danger is the risk of opportunism
Licensee may become a future competitor 444
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Franchising: Some well known
examples
445
The Definition of Outsourcing
In the narrowest sense, the term is
applied to cases where existing tasks
and functions previously located within
the company or institution are entrusted
to outside entrepreneurs and suppliers
along with the related instruments,
appliances and capacities
Outsourcing is vertical disintegration,
i.e. the reversal of vertical integration
processes. Companies participating in
the outsourcing wave dismantle parts
production and secondary services,
producing a much ―flatter‖ company
structure by cutting off some of the
many levels dependent on each other.
446
Outsourcing
Advantages:
Labor cost
advantages
Savings via taxation,
lower energy costs,
raw materials, and
overheads
Lower political and
economic risk
Quicker access to
markets
Disadvantages or dangers:
Contract manufacturer
may become a future
competitor
Lower productivity
standards
Backlash from the
company‘s home-market
employees regarding HR
and labor issues
Issues of quality and
production standards
447
International Alliances Benefits:
Combining resources and capabilities of different companies
Learning from one another
Reducing time-to-market for innovations
Risk sharing
Problems:
Management differences between the two partners. Conflict
most likely where the partners are also competitors.
Benefits are seldom shared equally. Distribution of benefits
determined by:
Strategic intent of the partners--which partner has the clearer
vision of the purpose of the alliance?
Appropriability of the contribution--which partner‘s resources
and capabilities can more easily be captured by the other?
Absorptive capacity of the company--which partner is the more
receptive learner? 448
International Strategic Alliances
Advantages
Combining resources and
capabilities of different
companies
Learning from one another
Reducing time-to-market for
innovations
Risk sharing
Disadvantages Management differences between
the two partners. Conflict most
likely where the partners are also
competitors.
Benefits are seldom shared equally.
Distribution of benefits determined
by:
Strategic intent of the partners
Appropriability of the
contribution. Which partner‘s
resources and capabilities can
more easily be captured by the
other?
Absorptive capacity of the
company-- which partner is the
more receptive learner?
449
Expanding Globally through Joint
Ventures
Advantages
• Higher rate of return and more control over the operations
• Creation of synergy
• Sharing of resources
• Access to distribution network
• Contact with local suppliers and government officials
• Disadvantages
• More than one partner, and tey can diagree on anything and everything
• Difference of corporate background (level of hierarchy; buerocracy etc)
• Decisions became long and complex
• Communication problems arise
450
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Resource commitment
TRANSACTIONS (FDI) DIRECT INVESTMENT
Spot
sales
Exporting
Foreign
agent /
distributor
Licensing
Franchising
Joint venture
Marketing &
Distribution
only
Long-
term
contract
Licensing
patents &
other IP
Fully
integrated
Wholly owned
subsidiary
Marketing&
Distribution
only
Fully
integrated
Low High
Alternative Modes of Overseas Market Entry
451
Better
performance
Innovation
Opportunities and Outcomes of
International Strategy (2)
Exporting
Licensing
Strategic
alliances
Acquisitions
Establishment of
a new subsidiary
Entry Modes
Problems and
risks
Problems and
risks
Strategic
Competitiveness
Outcomes
452
International Corporate-Level
Strategy
Type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies
Some corporate strategies provide individual country units with flexibility to choose their own strategies
Others dictate business-level strategies from the home office and coordinate resource sharing across units
453
Conflicting Forces of a Global Strategy
Forces for localization /
national differentiation
MARKET DRIVERS
Different languages
Different customer
preferences
Cultural differences
COST DRIVERS
Transportation costs
Transaction costs
Economic & political risk
Speed of response
GOVERNMENT DRIVERS
Trade barriers & inward inv
Regulations
Forces for globalization
MARKET DRIVERS
Common customer needs
Global customers
Cross-border network
effects
COST DRIVERS
Global scale economies
Differences in national
resource availability
Learning
COMPETITIVE DRIVERS
Potential for strategic
competition (e.g. cross-
subsidization) 454
International Corporate-Level Strategy
Need for Local Responsiveness
Nee
d f
or
Glo
bal
In
tegra
tio
n
Low
High
Low High
Global
strategy
Transnational
strategy
Multidomestic
strategy
455 Benefits of national differentiation
Benefits
of global
integration
Cement
Telecom
equipment
Jet engines
Consumer
electronics
Cars
Funeral
services
Retail
banking
Investment
banking
Auto
repair
Positioning industries in terms of benefits of
globalization and national differentiation
456
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International Corporate-Level
Strategy: Global Strategy
Global
strategy
Products are standardized across national markets
Decisions regarding business-level strategies are centralized in the home office
Strategic business units (SBU) are assumed to be interdependent
Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination
across borders (which also makes it difficult to manage)
457
Model of Global Strategy
458
Transnational strategy
Transnational companies also sell
their products in multiple countries
across the globe. This strategy
differs, however, in the way the
product is marketed in each
country. A transnational product
keeps its same characteristics,
regardless of the country in which
it is sold, But the company commit
a minor adptation for example in
packaging
The product itself does not
change according to local
customs or preferences, so that
the product sold in Asia or Mexico
is exactly the same as the version
sold in the United States or
Europe.
A transnational model represents
a compromise between local
autonomy and centralized
decision making. It achieves this
balance by pursuing a distributed
strategy which is a hybrid of the
centralized and decentralized
strategies. Under the
transnational model, a
multinational corporation's
assets and capabilities are
dispersed according to the most
beneficial location for a specific
activity. Simultaneously,
overseas operations are
interdependent, and knowledge
is developed jointly and shared
worldwide.
459
Red is a symbol of good lack
Gold is a symbol of wealth and hapiness
Red is a symbol of courage
Silver is a symbol of maturity
Blue is a symbol of peace
Original appearance
Repackaging
Examples of Corporations Implementing transnational
Strategy by Adaptation(1): Redbull in Vietnam
460
Positioning: An example
FRANCE GERMANY
Small car
market 59% 40% 18%
Positioning Family car Urban car Small car
Target market Middle class
car Youngsters‘ car
between 20-30 Wife car
PORTUGAL
461
Multidomestic
strategy
Multidomestic Strategy
Strategy and operating decisions are decentralized to strategic business units (SBU) in each country
Products and services are tailored to local markets
Business units in one country are independent of each other
Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms
due to broad variety of cultures and markets in Europe
462
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Multidomestic strategy: An Example
Effective when large differences
exist between countries
Advantages:
product differentiation
local responsiveness
minimized political risk
minimized exchange rate risk
Philips is a good example This
strategy resulted in:
Innovation from local R&D
Entrepreneurial spirit
Products tailored to individual
countries
High quality due to backward
integration
Challenges for Philiips:
High costs due to tailored
products and duplication across
countries
The innovation from the local
R&D groups resulted in products
that were R&D driven instead of
market driven.
Decentralized control meant that
national buy-in was required
before introducing a product -
time to market was slow
463
Nokia: Malfunctioning Economic Adaptation
to Emerging Markets/Markets‘ Development
Europe and North
America: Advanced
and expansive
Africa:
Basic and affordable
Nokia and all Western brands are struggling
to get traction in what is shaping up to be an
epic battle against Asian Android vendors 464
Example for multidomestic strategy
One well-known park has
successfully expanded its
operations into France.
The theme park caters to
local customs and tailors the
rides and attractions to the
tastes of the European
public.
When the park initially
opened, business suffered
because the culture was too
unfamiliar. The company did
more research, tailored the
park to local preferences,
and saw business increase. 465
Comparison of Countries as Potential
Subjects of Expansion
466
Theory of Transaction Costs and the
Multinationals
Transaction costs Management costs
Ma
rke
t co
-ord
ina
tion
Inve
stm
en
t b
ase
d
Org
an
iza
tion
al
co
-ord
ina
tion
0% 100 %
Level of internalization for foreign activity 467
Mode of Entry Choice: A Transaction
Cost Explanation
Regarding entry modes,
companies normally face a
tradeoff between the benefits
of increased control and the
costs of resource commitment
and risk.
Transaction Cost Analysis
(TCA) perspective
Transaction-Specific Assets
(assets valuable for a very
narrow range of applications)
468
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The Origin of OLI-paradigm
The ―OLI‖ or ―eclectic‖ approach to the study of foreign direct investment (FDI) was developed by John Dunning (1977).)
It has proved an extremely fruitful way of thinking about multinational enterprises (MNEs)
John H. Dunning
(1927-2009) 469
The Core of OLI
OLI‖ stands for Ownership, Location, and Internalization, three potential sources of advantage that may underline a firm‘s decision to become a multinational.
Ownership advantages address the question of why some firms but not others go abroad, and suggest that a successful MNE has some firm-specific advantages which allow it to overcome the costs of operating in a foreign country
Location advantages focus on the question of where an MNE chooses to locate.
internalization advantages influence how a firm chooses to operate in a foreign country, trading off the savings in transactions, hold-up and monitoring costs of a wholly-owned subsidiary, against the advantages of other entry modes such as exports, licensing, or joint venture.
470
Ownership
A key idea is that firms are collections of assets, and MNEs possess higher levels of assets, that actually internal public goods. These can be applied to production at different locations without reducing their effectiveness
Examples include product development, managerial structures, patents, and marketing skills, all of which are encompassed by the catch-all term of Helpman (1984) ―headquarter services‖
471
Location
In contrast the ownership question, that seems to be self-explanatory, much more attention has been devoted to alternative motives for MNEs to locate abroad. A key issue is the distinction between ―horizontal‖ and ―vertical‖ FDI.
Horizontal FDI occurs when a firm locates a plant abroad in order to improve its market access to foreign consumers. In its purest form, this simply replicates its domestic production facilities at a foreign location.
The horizontal motive for FDI reflects what Brainard (1997) has called a ―proximity-concentration trade-off‖: a local plant saves on trade costs and so has the advantage of proximity; but it loses the benefits of concentrating production home
Vertical FDI, by contrast, is not primarily or even necessarily aimed at production for sale in the foreign market, but rather seeks to avail of lower production costs there.
Now the decision to engage in vertical FDI depends on the trade-off between the benefits of concentration on the one hand and the cost savings from offshoring on the other.
472
Competitive or country-specific advantages
Fir
m-s
pe
cif
ic a
dv
an
tag
es
c
ou
ntr
y–s
pe
cif
ic a
dv
an
tag
es
Foreign
trade
FDI
Multies
Ownership –
ownership
advantage
Location – Locaton
advantage
Internalization –
Intrnalization
advantage
In
tern
ati
aliza
tio
n o
f fi
rms
an
d t
he
ir in
tern
ati
on
al
ac
tiv
itie
s
Competititveness
Diamond model- Clusters
MNV theories
Cross-border innovation
and knowledge management Transaction
costs theory
Resource –based
theory of firm
Entrapreneurial
activity
Internalization theory
Cooperati-
ons
OLI - paradigm
Theories of business
networks
Contingency theory
Behaviroral theory
of firm
473
Prof. Balázs Hámori
&
Prof. Katalin Szabó [email protected]
Business Ethics, Social Responsibility
and Corporate Culture
07/07/2014
80
Outline
o Ethical issues
o Identification stakeholders of organization
o Stakeholders mapping
o Corporate Social Responsibility: internal
and external aspects
o Organizational Culture
Expectations and Purposes
Ethical model
Social Ethics:
Legal rules, customs
Professional Ethics:
Values in workplace Individual Ethics:
Family influence
Organization‘s
Code of Ethics
The most important ethical concepts
o Moral: Relating to, dealing with, or capable of making the distinction between right and wrong in conduct or character
o Ethics: The system or code of morals of a particular person, religion, group or profession.
o Ethical: Conforming to moral standards, conforming to the standards of conduct of a given profession or group.
o Ethical behaviour is what is accepted as „good‖ and „right‖, and as opposed to „bad‖ and „wrong‖ in the context of governing moral code.
What are institutions?
o ―Institutions are the rules of the game in a
society; are the humanly devised constraints
that shape human interaction‖ (North 1990, p. 3)
o Economic, political and social interactions
o Informal institutions: informal constraints:
sanctions, taboos, customs, tradition and code
of conduct
o Formal institutions: formal rules: constitutions,
laws, property rights
Types of Institutions (Ellickson 1991)
Rules Enforcement mechanism Example
1. Convention Self enforcement Language
2. Ethics Imperative self binding Being a vegetarian
3. Norms Social enforcement Social codes of conduct
4. Formal private rules Organized private enforcement
Self imposed rules inside organisations
5. Law Organized state enforcement
Business Law
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Definition of convention
By a convention, we mean
a pattern of behavior that is
customary, expected and
self-enforcing. Everyone
conforms, everyone
expects others to conform,
and everyone has good
reason to conform because
conforming is in each
person's best interest when
everyone else plans to
conform (Lewis, 1969)
Choosing sides A typical case for a coordination game is choosing the sides of
the road upon which to drive, a social standard which can save
lives if it is widely adhered to.
In a simplified example, assume that two drivers meet on a
narrow dirt road. Both have to swerve in order to avoid a head-on
collision. If both execute the same swerving maneuver they will
manage to pass each other, but if they choose differing
maneuvers they will collide.
In the payoff matrix in Fig. successful passing is represented by a
payoff of 10, and a collision by a payoff of 0.
Left Right
Left 10, 10 0, 0
Right 0, 0 10, 10
Norms
o Definition: Group norms are the informal rules that groups adopt to regulate group members‘ behavior. o Sanctions exist to punish those who do not comply. o We can identify norms when they are violated:
o Wait for your turn. o Remain quiet on the bus. o Maintain interpersonal distance. o Assume a somber demeanor during a funeral.
o How do norms form and what happens when these norms are broken?
Norms ensure the survival of the group.
o Do you agree with this statement? o Are all norms useful? o Can you think of norms that persist despite
the fact that they are dysfunctional? o Tautological reasoning: The norms exist because they work and we know they work or else they wouldn’t exist!
Why do norms exist?
Business Rules
• Business Rule is a rule of
a business, company, or
corporation. It is a rule
that defines or constrains
some aspect
of business and always
resolves to either true or
false.
• Business rules are
intended to assert
business structure or to
control or influence the
behavior of the business.
• Clearly, rule carries the
sense of guide for
conduct or action, both
in everyday life and in
business. One way or
another, this sense
of rule can be found in
most, if not all,
authoritative dictionaries.
Model of Business Rules
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A code of conduct is a set
of rules outlining:
1. the responsibilities of; or
2. the proper practices for
an individual, party or
organization
Code of conduct Why Behave Ethically?
Managers should behave ethically to avoid harming others.
Managers are responsible for protecting and nurturing resources in their charge.
Unethical managers run the risk for loss of reputation.
This is a valuable asset to any manager! Reputation is critical to long term management success. All stakeholders are judged by reputation.
Moses with the Tablets
of the Law
In the 1970‘s more and more company developed small, simple, and cheap cars, for young persons. The Ford Co. delayed, and try the catch up. The management speed up the developments, and enters the market with the Ford Pinto. There were more than 500 thousend car on the market when a serious accident happened: After driving away from the filling station two cars collided, the Ford Pinto blow up, and three girl burned in the car. A magazin investigated the case and realised, that there were more than 10 similar accidects, and there were 5 death
The company investigated the case and the analysis discovered:
o Back bumpers were weak, and too near to the fuel tank.
o The engineeers know about the problems, however they were in delay
o The management found that the car in this form met the existing safety regulations.
o Ford had access to a new design which would decrease the possibility of the Ford Pinto from exploding, having cost $11 per car. Ford had done an analysis showing that the new design would result in 180 less deaths. The company had stated that they used the accepted risk/benefit analysis to determine if the monetary costs of making the change and it were greater than the societal benefit. Based on the numbers Ford used, the cost would have been $137 million versus the $49.5 million price tag put on the deaths, injuries, and car damages.
The Ford Pinto story
If your group were the responsible management
body of the corporation
What sort of economic, engineering and other
objective factors of a possible decision to be made
had to be analysed?
What sort of Human resource management issues
can be taken into consideration?
What sort of cultural, social responsibility and ethical
considerations had to be calculated?
Please analyse those issues carefully and
present your results!
In-class exercise
The company had chosen not to implement the
new design, because - by their analysis -, the
production cost of the change would had been
much higher than the possible social gain they
had calculated.
Analysis of the story
There are several reasons why such a strictly economic theory should
not be used
o First, it seems unethical to determine that people should be allowed
to die or be seriously injured because it would cost too much to
prevent it
o Second, the analysis does not take into consideration all the
consequences, such as the negative publicity that Ford received and
the judgments and settlements resulting from the lawsuits
o Also, some things just can't be measured in terms of dollars, and that
includes human life
However, there are arguments in favor of the risk/benefit analysis.
o First, it is well developed through existing case law.
o Second, it encourages companies to take precautions against
creating risks that result in large accident costs.
o Next, it can be argued that all things must have some common
measure. Finally, it provides a bright line which companies can follow.
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83
Four Possible Ethical Stances
100
years
ago
60
years
ago
40
years
ago
20
years
ago
Business ethics –
The Societal Expectations of Organizations
o Macro level
o Range from laissez faire to shapers of society
o Ethical stance of organization in society
o Extent an organization exceeds its minimum obligations to stakeholders and society
o Corporate social responsibility
o Specific ways to exceed minimum obligations imposed by legislation/corporate governance
o Reconcile conflicting demands of stakeholders
o Individual level
o Behavior and actions of individuals within organizations
Obey the Law! A basic tenet of social responsibility and mamagerial ethics is
obedience to the law, preferably both the letter and the spirit of the law.
Tell the truth! Telling the truth is important in building trust with relevant
stakeholders. Show respect for people! Stick to the „golden rule”!. "Do unto others as you would have them do unto you". Above all, do not harm! This principle - the first rule of medical ethics - is considered
by some writers to the bottom-line ethical consideration. Practice participation, not paternalism. This principle is aimed at learning about the needs of relevant
stakeholders, rather than deciding what is the best for them. Always act when you have responsibility. Managers have the responsibility of taking action whenever
they have the capacity or resources.
Ethical Guidelines for Managers
Four Ways of Rationalize Ethical
Misconduct o Convincing yourself that
the behavior is not really illegal
o Convincing yourself that the behavor is really everyone’s best interests
o Convincing yourself that nobody will ever find out what you’ev done.
o Convincing yourself that the organization will protect you.
Stakeholders, who are affected by behavior
and ethical standards of the company
o In general stakeholder is
an entity (firm, individual
group, etc.) that can be
affected by the results of
that in which they are said
to be stakeholders.
o In the business world
typical stakeholders are
customers, employees,
suppliers, communities,
and shareholders or other
financiers.
o For some purposes, some
companies also consider a
broader group that includes
governments, media,
competitors, non-
governmental organizations
(NGOs) and others.
Business is about managing
key stakeholder
relationships.ch they have a
stake.
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Stakeholder Management and
Stakeholder Analysis
o Stakeholder Management is an
important discipline that
successful people use to win
support from others. It helps
them ensure that their projects
succeed where others fail
o Stakeholder Analysis is the
technique used to identify the
key people who have to be won
over. You then use Stakeholder
Planning to build the support
that helps you succeed.
Stakeholders Their main interest
Suppliers Long term connections
Buyers Quality, quick reaction, low price
Other business partners Long term connection, liquidity
Potencial entrans Stable and business-like market
Substitute product producers Clear roles, and conditions
Workers, and their unions Good working conditions, wages
Employer’s association Rule-following behavior
Government’s regulators Rule-following behavior
Enterprises in the industry Acceptance some mutual rules
Types of stakeholders of a business (1)
Types of stakeholders of a business (2)
Stakeholders Their main interest
Local authorities Tax, subsidy
Local communities Help
Trade unions Acceptance
Customer groups Consumer-friendly behavior
Employment association Acceptance
Government Pay tax, follow the laws
Press, media Provide infromation, and advertise
Pressure groups Specific interest
Foreign countries Follow the local custom
Stakeholder Mapping: the Power/Interest Matrix
What to be known about Power/Interest Matrix
High power, interested people: these are the people you must
fully engage and make the greatest efforts to satisfy
High power, less interested people: put enough work in with
these people to keep them satisfied, but not so much that they
become bored with your message
Low power, interested people: keep these people adequately
informed, and talk to them to ensure that no major issues are
arising. These people can often be very helpful with the detail of
your project.
Low power, less interested people: again, monitor these people,
but do not bore them with excessive communication.
Corporate social responsibility
Corporate social responsibility (CSR, also called
corporate conscience, corporate citizenship,
social performance, or sustainable responsible
business/ Responsible Business) is a form of
corporate self-regulation integrated into a business
model
CSR policy functions as a built-in, self-regulating
mechanism whereby a business monitors and
ensures its active compliance with the spirit of the
law, ethical standards, and international norms
The goal of CSR is to embrace responsibility for the
company's actions and encourage a positive impact
through its activities on the environment, consumers,
employees, communities, stakeholders and all other
members of the public sphere who may also be
considered as stakeholders.
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Corporate Social Responsibility
Internal Aspects External Aspects
Employee welfare Environmental issues
Working conditions Products
Job design Markets and marketing
Intellectual property Suppliers
Employment
Community activity
Human rights
Ecology and Environmental Quality
Pollution cleanup and prevention
Dispersion of industry
Land use and beautification
Consumerism
Truth in lending, advertising, and
business
Product warranty and service
Control of harmful products
Community needs
Use of expertise for local problems
Aid with health-care facilities and
education
Service on voluntary groups
Governmental relations
Restrictions on lobbying
Control of business political action
The most important areas of the
corporate social responsibility (1)
Minorities and Disadvantages persons
Training of unemployed
Equal employment opportunity
Locating plants and offices in minority areas
Purchasing from minority businesses
Labor relations
Improved occupational health and safety
Provision of day-care centers
Options of flexible work hours
Stockholder relations
Public seats on the board of directors
Improved financial disclosure
Corporate philanthrophy
Financial support for arts and culture
Special scholarships and gifts to education
Financial support for assorted charities
The Most Important Areas of the
Corporate Social Responsibility (2) Attitudes to Social Responsibility
Obstructionist Stance (Unconcerned)
Do as little as possible to solve social or
environmental problems
Defensive Stance (Damage Control)
Do only what is legally required and nothing more
Accommodative Stance (Compliance)
Meet legal and ethical obligations and go beyond
that in selected cases
Proactive Stance (Ethical Culture)
Organization views itself as a citizen and
proactively seeks opportunities to contribute to
society
Social obligation - corporate behavior at this level conforms
only to legal requirements and competitive market pressures
Social responsibility - Corporate behavior at this level is
congruent with prevailing norms, values, and expectations of
society.
Social responsiveness - Corporate behavior at this level
takes preventive action to avoid adverse social impacts from
company activities and even anticipates or takes the lead in
future movement beyond current expectations.
Continuum of social responsibility Questions of corporate social
responsibility
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Questions of corporate social responsibility
Major arguments againts
social responsibility
Major arguments for social
responsibility
Loss of business profits Long-run profit for business
Increased business costs Public image of business will
improve
Dilution of business purpose Better environment for
everyone
Too mach social power for
business
Public expectations support
business social responsibility
Lack of business
accountability to public
Business may avoid more
regulation
Arguments for and againts of corporate
social responsibilities
UN Global Impact Initiative (1)
o Human Rights
• Principle 1: Businesses should support and respect the
protection of internationally proclaimed human rights; and
• Principle 2: make sure that they are not complicit in human
rights abuses.
o Labor
• Principle 3: Businesses should uphold the freedom of
association and the effective recognition of the right to
collective bargaining;
• Principle 4: the elimination of all forms of forced and
compulsory labor;
• Principle 5: the effective abolition of child labor; and
• Principle 6: the elimination of discrimination in respect of
employment and occupation.
UN Global Impact Initiative (2)
o Environment
o Principle 7: Businesses should support a precautionary
approach to environmental challenges;
o Principle 8: undertake initiatives to promote greater
environmental responsibility; and
o Principle 9: encourage the development and diffusion of
environmentally friendly technologies.
o Anti-Corruption
o Principle 10: Businesses should work against corruption in
all its forms, including extortion and bribery.
o For further information, guidance material, please visit the
Global Compact website: www.unglobalcompact.org
Organizational Culture
Definition
o Organizational culture is a
communicatively constructed,
historically based system of
assumptions, values, beliefs,
behaviors, customs, and
attitudes that help the
members of the organization
understand what it stands for,
how it does things, and what it
considers important
o It is taught to new members
as the correct way to think,
feel, and behave
Organizational culture exists
at two levels
o Observable symbols
o Underlying values
The Importance of Organization Culture
• Culture determines the
overall ―feel‖ of the
organization, although
it may vary across
different segments of
the organization
• Culture is a powerful
force that can shape
the firm‘s overall
effectiveness and
long-term success
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Societal Culture
―Who we are,‖ customs
Organizational Culture
―The way we do things here‖
Team Norms
What‘s (un)acceptable;
―This is what we do‖
Individual Personality
Values, beliefs,
temperament, habits;
―Who I am‖
Levels of Culture Organizational Culture Characteristics
Three common characteristics Culture is SHARED
Frameworks of understanding and interpreting organizational phenomena
Culture is INTANGIBLE
Consists of values, assumptions, norms, and frameworks Culture AFFECTS HUMAN BEHAVIOR
Construction of human interaction that affects and is affected by the behavior of all members of the organization
Other characteristics Communicative creations
Cultures are created, sustained and and influenced by and through human interaction
Historical Cultures emerge and develop over time
Deal and Kennedy created a model of culture that is based on 4 different
types of organizations. They each focus on how quickly the organization
receives feedback, the way members are rewarded, and the level of risks
taken:
Definiton of organizational culture (Deal & Kennedy, 1982)
Work-hard, play-hard culture: This has rapid feedback/reward and low
risk resulting in: Stress coming from quantity of work rather than uncertainty.
High-speed action leading to high-speed recreation.
Examples: Restaurants, software companies.
Tough-guy macho culture: This has rapid feedback/reward and high risk,
resulting in the following: Stress coming from high risk and potential
loss/gain of reward. Focus on the present rather than the longer-term future.
Examples: police, surgeons, sports.
Process culture: This has slow feedback/reward and low risk, resulting in
the following: Low stress, plodding work, comfort and security. Stress that
comes from internal politics and stupidity of the system. Development of
bureaucracies and other ways of maintaining the status quo. Focus on
security of the past and of the future.
Examples: banks, insurance companies
Bet-the-company culture: This has slow feedback/reward and high risk,
resulting in the following: Stress coming from high risk and delay before
knowing if actions have paid off. The long view is taken, but then much work
is put into making sure things happen as planned.
Examples: aircraft manufacturers, oil companies.
Culture Strength and Subcultures
Culture strength is the degree of
agreement among members of an
organization about specific values
Subcultures reflect the common problems,
goals, and experiences of a team or
department
Different departments may have their own
norms
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Determinants of Organizational Culture
• Organization‘s founder
(personal values and
beliefs)
• Symbols, stories, heroes,
slogans, and ceremonies
that embody and personify
the spirit of the organization
• Corporate success that
strengthens the culture.
• Shared experiences that
bond organizational
members together
Managing Organizational Culture
o Understand the current culture
to decide whether to maintain or
change it
o Articulate the culture through
slogans, ceremonies, and
shared experiences
o Reward and promote people
whose behaviors are consistent
with desired cultural values
Corporate Rewards Culture
o Corporate Rewards
Culture manifests in
innovative incentive,
recognition and reward
systems.for some of the
world's most successful
companies.
o Market leaders inspire,
engage and mobilise their
people who matter most to
them - their staff, dealer
networks, sales force and
customers.
Changing Organizational Culture
o Companies must develop
a clear idea of what kind of
culture they want to
develop
o They can bring in
outsiders to important
managerial positions
o Adopt new slogans,
stories, ceremonies, and
purposely break with
tradition
o Culture is important to
learning and innovation
during challenging times
o Strong adaptive cultures
often incorporate the
following values:
o The whole is more
important than the
parts
o Equality and trust are
primary values
o The culture
encourages risk
taking, change, and
improvement
Critical approach to organizational culture
o Organization as a Site of Domination
o Power, Hegemony, and Concertive Control
o Power - the possibility of imposing one‘s will upon the behavior of other persons
o Hegemony - the predominant influence over others
o Concertive Control - based on adherence to socially constructed norms and values developed by organizational members as they attempt to structure the environment
o Communication and Critical Theory
o Habermas - goal to develop a theory of society that aims at the self-emancipation of people from domination (the ideal speech situation)
o The utterances are truthful
o There is a legitimate relationship established between the participants
o The utterances are sincere
o The utterances are comprehensible
Prof. Balázs Hámori [email protected]
&
Prof. Katalin Szabó [email protected]
Implementation of Strategy
07/07/2014
89
529
Outline
o What is strategic implementation?
o A framework for implementation
o Implementation of change
o Controll porcesses
530
Assignment—A Investment Story
2 Billion Investment in Paks In 2 Years
A HUF 2 billion development project, including 800 million EU funding,
will be implemented in Paks Industrial Park in a 2-year period. This
year, three brand new investment projects have been launched, while
the fourth one, construction of a Business Incubator building, will start
late this summer, managing director of Paksi Ipari Park (PIP) Kft.,
Sándor Sztruhár said on Friday.
―At present, 21 companies are based in Paks Industrial Park, the total area
of which has increased from 22 ha to 36 ha since its foundation. Park
residents aresmall to medium enterprises, including firms with 8 to 10 and
also with 200 employees. A total of 500 persons are employed by the
companies that have established themselves in the Park,‖ Sándor Sztruhár
said.
―Park-based enterprises include construction companies, electronics
manufacturers, industrial production companies and assembly plants, with
the last of them to arrive being a robotics technology company,‖ he added.
Paks Industrial Park represents a total of HUF 13.5 billion operating capital
investment – companies operating in the Park had a nearly 11 billion total
sales revenue last year, 60% of which comes from export deliveries.
531
As Sándor Sztruhár said, it was this year that 22-es Építő, Tervező és
Szolgáltató Kft. has occupied its new premises and two local companies, Pakett
Kft. and Robolution Kft., and Italy-based lamp factory A&A kicked off site
development projects.
According to managing director‘s summary, EU grants in the amount of HUF
800 million will be invested in the Park in a 2-year period. Calculating with 40
to 45% aid intensity, these funds amount to an overall investment of HUF 2
billion. In his opinion, this development tendency is backed by the ideal location
of Paks Industrial Park at the heart of Hungary, between the Danube River and
Motorway M6, by the ease of access and a park area fully improved with utilities.
Sztruhár also emphasized that Paksi Ipari Park Kft. was highly committed to be
of help for the local companies in the management of their own business ―to an
extent and degree‖ as and when they need.
He explained that one of the main lines they followed was background tender
management and advisory work with fruits ―right about to ripen‖. He pointed out
that company managers must recognize and identify potentialities in their
undertakings and the availability of tender resources. He also stressed that an
investor-friendly municipality and representative body, firmly committed to
promoting development steps, helped them in their work in Paks. Paksi Ipari
Park Kft., fully owned by the local Municipality, employs highly qualified
professionals in an effort to advance the development of companies intending
to move into, or have already established themselves in, the Park. 532
He added that the Kft. was a self-sustainable organization and its sound
financial management had resulted in a profit last year.
Sándor Sztruhár also reported that construction of a Business Incubator
building would be the next major investment project in the Park, with EU
funding of HUF 200 million awarded to Paksi Ipari Park Kft. Total costs
would run to 495 million, and construction work was scheduled to start in
August. At the same time, Kft‘s staff was working on the development of
new plots within the boundaries of the existing Park area, the installation
of necessary infrastructure, and on designating additional areas suitable
for hosting advanced industrial activitiesin Paks. Sándor Sztruhár pointed
out that it was all the more necessary as the city would like to meet, up to
a high standard, any demand that may arise, and it was also imperative
to prepare for the impending extension of the Nuclear Power Plant.
Paks Warming Up For Power Plant Expansion
―A team of experts and local institutional leaders will be set up and a work
organization created in Paks to prepare the city for future development of
Paks
Nuclear Power Plant,‖ Paks Industrial Park Ltd. managing director
Sztruhár
Sándor said to Hungarian News Agency (MTI) on Tuesday.
533
A Home For Firms
Paks Industrial Park Ltd. offers sites with a fully developed utility system to
industrial enterprises. According to managing director Dr. Sándor Sztruhár, the
Park itself and the development-oriented partnership with immigrant businesses
make this kind of cooperation a success story
In-Class Assignment
Group1
Please collect all the steps, which had to be
made by the investors during investment process. Pay
attention to the logic of those steps made after each other
Group 2
Please collect all the possible difficulties, problems which
could come up, wrong steps which can be made by the
investors over the investment process 534
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Strategic Implementation
oPeople think of execution as the
tactical side of business,
something leaders delegate while
they focus on the perceived
‗bigger issues‘. This idea is
completely wrong. Execution has
to be built into a company‘s
strategy, its goals, and its culture.
And the leader of the organization
must be deeply engaged in it.‖
(Larry Bossidy,
The Discipline of Getting Things Done.)
―
535
Strategic Implementation
o One make-or-break
determinant is how well top
management leads the
process.
o Middle and lower
management need to push
actions to the front lines and
see the strategy is well
executed.
o The real implementation skill
is being good at determining
what it will take to execute the
strategy proficiently.
536
Strategic Implementation
o Among other things, implementation has to do with;
oRigorously discussing ‗hows‘ and ‗whats‘, questioning, tenaciously following through.
oEnsuring accountability
oMaking assumptions about the business environment
oAssessing the organization‘s capabilities
o Linking strategy to operations and the people who are going to implement
o Linking rewards to outcomes
oChanging assumptions as the environment changes
oUpgrading the company‘s capabilities to meet the challenges of an ambitious strategy. 537
A Framework for Executing Strategy
o Entails converting the organization‘s strategic plan into action and results.
oJob for the whole management team
oAffects every part of the firm
o Each manager must answer, ‗what has to be done in my area to implement our part of the strategic plan, and what must I do to get these things accomplished?‘
oAll managers become strategic implementers in their areas and all employees are participants. 538
A Framework for Strategy Implementation
o Implementation should be
addressed initially when the
pros and cons of strategic
alternatives are analyzed.
o Some strategies cannot be
executed by some companies!
o Form follows function – can
vary even by department. 539
Strategic Implementation
―The best game plan is the
world never blocked or
tackled anybody.‖
V. Lombardi
―We would be in some form of
denial if we didn‘t see that
execution is the true
measure of success.‖
C. Michael Armstrong
540
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91
Implementation is Different
o Operation-driven
rather than market-
driven.
o Action-oriented,
make-things-happen
tasks.
o Strategy requires
few; execution
requires everyone.
541
Implementation is Tougher
o Why is it tougher?
oMore time consuming challenge
oWide array of managerial challenges
oMany options to proceed
oDemanding people-management
skills
oPerseverance to get initiatives
o moving
oNumber of unexpected issues
oResistance to change,
misunderstandings.
oDifficulties of integrating
o efforts across groups. 542
Strategic Implementation
o ―AT&T, Campbell Soup,
Gillette, Eastman Kodak,
Xerox. All these companies
should be succeeding but
aren‘t. Why? Because they
don‘t know how to execute.‖
Larry Bossidy,
Chairman and former CEO of
Honeywell.
543
Strategic Implementation
o Most know what it is: few know
how to get things done.
o Three keys to keep in mind:
oExecution is a discipline,
and integral to strategy.
oExecution is the major job
of the business leader.
oExecution must be a core
element of an
organization‘s culture.
544
A Framework for Executing Strategy
o Least charted and most
open-ended area
o Based on individual
company situations
o Know basics that must be
covered – some more
than others, depending on
changes
545
Leading Strategic Implementation
o Depends on nature and
degree of strategic
change
o Probing assessment of
what the organization
must do now – and
what it must do
differently and better to
carry out the new
strategy.
546
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92
The ‗Big 8‘ Components of Implementation
The Strategy
Implementer’s Action
Agenda • what to do now vs. later?
• What requires much
time and personal attention?
• What can be delegated to
others.
Build an organization
with the competencies,
capabilities, and resource strengths needed for
successful strategy
execution.
Allocating ample
resources to
strategy-critical activities.
Establish
strategy-supportive
policies.
Instituting best practices
and pushing for
continuous improvement.
Installing information, operating
and operating systems that enable
company personnel to better carry
out their strategic roles proficiently.
Tying rewards and
incentives to the
achievement of key strategic targets.
Shaping the work
environment and
corporate culture to fit the strategy
Exercise the strategic
leadership needed to
drive implementation forward.
547
Implementation of Change
o Over half of 93 Fortune 500 companies surveyed had execution problems:
oTook more time than planned.
oUnanticipated major problems.
o Ineffective coordination.
oLoss of focus on implementation.
oEmployees incapable, inadequately trained.
oEnvironmental factors
o Inadequate leadership
oTasks poorly defined
o Information systems inadequate to monitor properly.
548
oCommunicate the case for change
oBuild consensus for how to proceed
o Install strong allies in key positions
oUrging and empowering to get process moving
oEstablish measures and deadlines
oReward those who achieve milestones
oReallocate resources
oPersonally preside over the strategic change process
549
Senior management communicate,
communicate and then communicate some more Strategic Implementation
o Among other things, implementation has to do with;
oRigorously discussing ‗hows‘ and ‗whats‘, questioning, tenaciously following through.
oEnsuring accountability
oMaking assumptions about the business environment
oAssessing the organization‘s capabilities
oLinking strategy to operations and the people who are going to implement
oLinking rewards to outcomes
oChanging assumptions as the environment changes
oUpgrading the company‘s capabilities to meet the challenges of an ambitious strategy.
550
Types of Control Processes
Exhibit 8.7 551
Control Processes (1)
o Direct supervision
oDirect control of strategic decisions
oOften small/family businesses
oNeed thorough understanding of business
oCan be effective in crisis
o Planning processes
oAdministrative control
oPlanning and control of resource allocation and monitoring resource utilisation 552
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93
‗Bottom-up‘ Business Planning
Exhibit 8.8 553
Control Processes (2)
o Planning processes
o Budgeting
o Support strategy via
oStandardisation of work processes (e.g. ISO 9000)
oEnterprise resource planning (ERP) systems
oFormulae (e.g. public service budgets per capita)
554
Control Processes: Self-control (3)
o Integration of knowledge and
coordination of activities by
direct interaction of
individuals without
supervision
oManagers shape the context
oProvide the channels of
interaction (e.g. IT)
oSupport with resources 555
Control Processes: Personal Motivation (4)
o Influenced by leadership
style
o Importance of credibility
oProfessional role model
(Grinding)
oSupporting individuals
(Minding)
oSecuring resources (Finding) 556
Control Processes:Cultural processes (5)
o Organisational culture and standardisation of norms o Foster innovation in complex/dynamic environment o Collaborative culture – communities of practice o Danger of core rigidities o Training and development
o Performance targeting processes
o Focus on outputs of an organisation, e.g. quality, revenues or profit
o Public service move to measuring outcomes 557
Control Processes: Performance targeting
processes (6) oBalanced scorecards
oCombine qualitative
and quantitative measures
oAcknowledge expectations of different stakeholders
oRelate assessment of performance to choice of strategy
558
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94
The Balanced Scorecard--Key Performance
Indicators (KPIs)
Financial perspective
e.g. Operational view
Cost reduction %
Sales growth %
e.g. Shareholder view
ROCE %
EVA €
Customer perspective
e.g. Customer satisfaction
Customer retention %
Customer loyalty %
Acquisition of new customers %
Internal Perspective
e.g. Assess quality
of people & processes
Training & development
Job turnover %
Product quality
Stock turnover /
Innovation & learning
e.g. Continuous improvement
Quality circles
e.g. Research &
Development
Speed to market / months
Based on Kaplan & Norton 559
oUse of internal markets
for control
o Formalised system of
contracting for
resources/inputs within
the organisation
o Internal market
oCompetitive bidding
oTransfer pricing
oService-level
agreements
560
Control Processes: Market processes(7)
o Disadvantages
oTime spent on
bargaining
oCreation of
bureaucracy
oDysfunctional
competition,
destroying
collaborative culture 561
Control Processes: Market processes (8) Relating Internally and Externally
562
