Strategic management Strategic management

Lecture 6. Lecture 6. Strategic alternatives, strategic Strategic alternatives, strategic

optionsoptions

The most important strategic problems (1)The most important strategic problems (1)

Decreasing profitability and low Decreasing profitability and low return on investmentreturn on investment

Decreasing market shareDecreasing market share Decreasing stockholder wealthDecreasing stockholder wealth Deteriorating financial positionDeteriorating financial position Rising overall costsRising overall costs Growing debt and week balance Growing debt and week balance

sheetsheet

The most important strategic problems (2)The most important strategic problems (2)

Deterriorating of competitive Deterriorating of competitive advantagesadvantages

Decreasing quality, and the loyalty of Decreasing quality, and the loyalty of main customersmain customers

The growth rate lower than the The growth rate lower than the industry avarageindustry avarage

Obsolate facilities and technical Obsolate facilities and technical infrastructureinfrastructure

The most important strategic problems (3)The most important strategic problems (3)

Decreasing innovativity, slow product Decreasing innovativity, slow product innovationinnovation

Weakening the brand imageWeakening the brand image Lots of underutilised plant capacityLots of underutilised plant capacity Entry a new strong competitor, or Entry a new strong competitor, or

increasing competition within the increasing competition within the industryindustry

Costly new regulatory requirementsCostly new regulatory requirements Long-term shift in buyer needsLong-term shift in buyer needs

DEVELOPMENTSTRATEGIES

Which direction?Which direction?

Market development

Product development

Diversification: related unrelated

Bases of competitivstrategy

AlternativeDirections

Alternativemethods

What basis?What basis? How?How?

Cost leadership

Differentiation

Focus strategies

Internal development

Acquisition

Joint Development/alliances

Protect and build

Market penetration

Porter’ generic strategiesPorter’ generic strategies

Porter’s experiencePorter’s experience

Differentiation Cost leadership

Market share

ROI

Sources of Competitive AdvantageSources of Competitive AdvantageSources of Competitive AdvantageSources of Competitive Advantage

COST ADVANTAGE

COST ADVANTAGE

DIFFERENTIATIONADVANTAGE

DIFFERENTIATIONADVANTAGE

COMPETITIVEADVANTAGE

COMPETITIVEADVANTAGE

Similar product

at lower cost

Price premium

from unique product

Differentiation

focus

Low cost leadership focus

Scope of activities:

narrow

DifferentiationUnique products

Small volume

High production cost

Low cost leadershipStandard products

Great volume

Low production costs

Scope of

activities: broad

Competitive advantages: Differentiation.

Competitive advantages: Low cost

PORTER’S generic strategiesPORTER’S generic strategies

Best cost provider

Low cost leadershipLow cost leadership

Production emphasis: ‘nobody could do it Production emphasis: ‘nobody could do it cheaper’cheaper’

Marketing/production emphasis: ‘Low prices and Marketing/production emphasis: ‘Low prices and outstanding value for money’outstanding value for money’

Operating culture: no frills, reputation for being Operating culture: no frills, reputation for being ‘lean and mean’‘lean and mean’

Economies of scale from high volumeEconomies of scale from high volume Process innovation to cut costsProcess innovation to cut costs High productivity per employeeHigh productivity per employee Price cuting as an offensive or defensive weaponPrice cuting as an offensive or defensive weapon Low profit marginsin return for high volumeLow profit marginsin return for high volume

Broad differentiationBroad differentiation

Production emphasis: ‘nobody could make it better’Production emphasis: ‘nobody could make it better’ Marketing/production emphasis: ‘Simply the best there is’Marketing/production emphasis: ‘Simply the best there is’ Operating culture: many frills – the widest range of options Operating culture: many frills – the widest range of options

and features, something for every taste.and features, something for every taste. Creating something different from competitors Creating something different from competitors

product/servicesproduct/services Product innovation to bring new products with new options Product innovation to bring new products with new options

to the market. to the market. Premium pricing to cover cost of differentiation Premium pricing to cover cost of differentiation Low volume but high profit margin Low volume but high profit margin Intensive adertising and sales effortsIntensive adertising and sales efforts

Focus strategiesFocus strategies

Production emphasis: ‘we taylor our products to Production emphasis: ‘we taylor our products to meet your particular needs’meet your particular needs’

Production emphasis: ‘Just for you’Production emphasis: ‘Just for you’ Specialization: buyer segments, geographic Specialization: buyer segments, geographic

areas, final-use applications. areas, final-use applications. Marketing emphasis: We’ar not a ‘Jack of all Marketing emphasis: We’ar not a ‘Jack of all

trade’, we are master of one. trade’, we are master of one. Competitive advantage in target segment Competitive advantage in target segment

depends on either: depends on either: 1.1. Low cost leadership (spaecialised experience or Low cost leadership (spaecialised experience or

knowledge advantage) knowledge advantage)

2.2. Succesfull differentiation (offering somethig unique)Succesfull differentiation (offering somethig unique)

Features of Cost Leadership and Features of Cost Leadership and Differentiation StrategiesDifferentiation Strategies

Features of Cost Leadership and Features of Cost Leadership and Differentiation StrategiesDifferentiation Strategies

Generic strategy Key strategy elements Resource & organizationalGeneric strategy Key strategy elements Resource & organizational requirementsrequirements

COST COST Scale-efficient plants. Scale-efficient plants. Access to capital. Access to capital. ProcessProcess

LEADERSHIP LEADERSHIP Design for manufacture. Design for manufacture. engineering skillsengineering skills. . FrequentFrequent

Control of overheads & Control of overheads & reports. Tight cost reports. Tight cost control.control.

R&D. Avoidance of R&D. Avoidance of Specialization of jobs Specialization of jobs and and

marginal customer marginal customer functions. Incentives functions. Incentives forfor

accounts.accounts. quantitative targets.quantitative targets.

DIFFERENTIATION Emphasis on branding DIFFERENTIATION Emphasis on branding Marketing. ProductMarketing. Product and brand advertising, and brand advertising, engineering. Creativity.engineering. Creativity. design, service, and design, service, and Product R&DProduct R&D quality.quality. Qualitative Qualitative

measurement measurement and and incentives. Strong incentives. Strong

cross-functionalcross-functional coordination.coordination.

Differentiation and SegmentationDifferentiation and SegmentationDifferentiation and SegmentationDifferentiation and Segmentation

DOES DIFFERENTIATION IMPLY SEGMENTATION?DOES DIFFERENTIATION IMPLY SEGMENTATION?

— —Not necessarily, depends upon the differentiation strategy:Not necessarily, depends upon the differentiation strategy:

BROAD SCOPE DIFFERENTIATIONBROAD SCOPE DIFFERENTIATION Appealing to Appealing to what is commonwhat is common between different customers between different customers (McDonalds, Honda, Gillette)(McDonalds, Honda, Gillette)

FOCUSED DIFFERENTIATIONFOCUSED DIFFERENTIATION Appealing to Appealing to what distinguisheswhat distinguishes different customer groups different customer groups

((Harley-Davidson, Ralph Harley-Davidson, Ralph Lauren)Lauren)

DIFFERENTIATION: is concerned with how a firm distinguishesits 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)

Drivers of Cost AdvantageDrivers of Cost AdvantageDrivers of Cost AdvantageDrivers 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 DifferentiationThe Nature of DifferentiationThe Nature of DifferentiationThe Nature of Differentiation

TOTAL CUSTOMER RESPONSIVENESSDifferentiation not just about the product, it embraces the whole relationship between the supplier and the customer.

INTANGIBLE DIFFERENTATION

Unobservable and subjectivecharacteristics that appeal to customer’s image, status, identity, and desire for exclusivity

TANGIBLE DIFFERENTATIONObservable product characteristics:• size, color, materials, etc.• performance• packaging• complementary services

DEFINITION: “Providing something unique that is valuable to thebuyer beyond simply offering a low price.” (M. Porter)

THE KEY IS TO CREATE VALUE FOR THE CUSTOMER

Strategy Development DirectionsStrategy Development Directions

Exhibit 7.1

Source: Adapted from H. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6.

Protect and BuildProtect and Build

Downsizing or withdrawal from activitiesDownsizing or withdrawal from activities Maintenance of market shareMaintenance of market share

Consolidation - Protect and strengthen position in current markets with current products

Consolidation - Protect and strengthen position in current markets with current products

Leverage competencesLeverage competences Desirability of dominant market shareDesirability of dominant market share

Market penetration - Organisation gains market shareMarket penetration - Organisation gains market share

Market DevelopmentMarket Development

New market segments with similar New market segments with similar CSFsCSFs

New uses for existing productsNew uses for existing products New geographic marketsNew geographic markets IssuesIssues

• Normally requires some product Normally requires some product development and capability developmentdevelopment and capability development

• Credibility and expectations Credibility and expectations

Offer existing products in new marketsOffer existing products in new markets

Product DevelopmentProduct Development Associated dilemmasAssociated dilemmas

• Expense, risk and potential unprofitabilityExpense, risk and potential unprofitability• Unacceptable consequences of not Unacceptable consequences of not

developing new productsdeveloping new products

DiversificationDiversification

Related diversificationRelated diversification Unrelated diversificationUnrelated diversification

A strategy that takes the organisation away from both its current markets and products

A strategy that takes the organisation away from both its current markets and products

Reduce risk

Maintaingrowth

Balance cash flows

Shareinfrastructure

Increasemarketpower

Extendcompetences

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

Repairs andservicing

BACKWARD INTEGRATIONBACKWARD INTEGRATION

HORIZONTALHORIZONTALINTEGRATIONINTEGRATION

FORWARDFORWARDINTEGRATIONINTEGRATION

Raw materialsmanufacture

Components manufacture

Machinery manufacture

Product/processresearch/design

Raw materialssupply

Components supply

Machinery supply

Financing

Transport

Competitive products

Complementary products

By-productsManufacturerManufacturer

Distribution outlets

Transport Marketing information

Related diversification options for a manufacturer

Methods of Strategy DevelopmentMethods of Strategy Development

Internal DevelopmentInternal Development• Organic developmentOrganic development• Build on and develop an organisation’s own Build on and develop an organisation’s own

capabilitiescapabilities

Mergers and AcquisitionsMergers and Acquisitions• Take over ownership of another organisationTake over ownership of another organisation

Strategic AlliancesStrategic Alliances• Two or more organisations share resources and Two or more organisations share resources and

activitiesactivities

Advantages and disadvantages of internal Advantages and disadvantages of internal developmentdevelopment

Avantages Avantages Disadvantages Disadvantages

Can be relatively cheapCan be relatively cheap Can be relatively slowCan be relatively slow

You can manage on your You can manage on your ownown

You lack of expertiseYou lack of expertise

Lower investment than Lower investment than buy a companybuy a company

Its risky to enter a new Its risky to enter a new field field

You can learn how to doYou can learn how to do To learn a new To learn a new technology is slowtechnology is slow

You can use existing You can use existing organization, and cultureorganization, and culture

There are big difference There are big difference between two culture between two culture

Advantages and disadvantages of aquisitionAdvantages and disadvantages of aquisition

Avantages Avantages Disadvantages Disadvantages

Can be relatively fastCan be relatively fast Premium paid: expensivePremium paid: expensive

Cost savings from Cost savings from economie of scaleeconomie of scale

Not alwais easy to dispose Not alwais easy to dispose of anwanted partsof anwanted parts

Extend to new Extend to new geogrephic areasgeogrephic areas

Human relations problems Human relations problems that can arise after that can arise after

Buy market size and Buy market size and shareshare

Problem of clash of national, Problem of clash of national, and organizational cultureand organizational culture

May reduce competition May reduce competition from a rivalfrom a rival

High risk if wrong company High risk if wrong company targeted targeted

Advantages and disadvantages of joint Advantages and disadvantages of joint ventureventure

Avantages Avantages Disadvantages Disadvantages

Builds scale quicklyBuilds scale quickly Control lost to some extentControl lost to some extent

Obtain special expertise Obtain special expertise quicklyquickly

Woks best where both parties Woks best where both parties contribute something differentcontribute something different

Cheaper than acquisitionCheaper than acquisition Can be difficult to manageCan be difficult to manage

Can be use when outright Can be use when outright acquisition not feasibleacquisition not feasible

Profit share with partnerProfit share with partner

Can be used where similar Can be used where similar product availableproduct available

Advantages and disadvantages of allianceAdvantages and disadvantages of alliance

AdvantagesAdvantages DisadvantagesDisadvantages

Can be build close Can be build close contacts with parenercontacts with parener

Slow and plodding Slow and plodding approachapproach

Use joint expertise and Use joint expertise and commitmentscommitments

Needs constant work to Needs constant work to keep relationship soundkeep relationship sound

Allows potential partners Allows potential partners to learn about each otherto learn about each other

Partners may only have Partners may only have limited commitmentslimited commitments

Locks out other Locks out other competitorscompetitors

Unlikely to build Unlikely to build economie of scaleeconomie of scale

Motives for Internal DevelopmentMotives for Internal Development

EnvironmentEnvironment CapabilitiesCapabilities ExpectationsExpectationsLack of choice – Lack of choice – breaking new breaking new ground/only one in ground/only one in fieldfield

Develop highly Develop highly technical products in-technical products in-house to create core house to create core competencecompetence

Avoid culture clashAvoid culture clash

Inability to find Inability to find suitable suitable acquisition targetacquisition target

Develop new markets – Develop new markets – direct involvement to direct involvement to increase understandingincrease understanding& create core & create core competencecompetence

Avoid potential Avoid potential incompatibilityincompatibility

Spread cost over time – Spread cost over time – easier for companies easier for companies with limited resourceswith limited resources

Motives for Strategic AlliancesMotives for Strategic Alliances

Need for critical massNeed for critical mass• Cost reductionCost reduction• Improved customer offeringImproved customer offering

Co-specialisationCo-specialisation• Each partner concentrates on using own Each partner concentrates on using own

capabilities, e.g. geographical market capabilities, e.g. geographical market entry, value chain activities, Public entry, value chain activities, Public Finance InitiativeFinance Initiative

LearningLearning• Helps to develop future competencesHelps to develop future competences

Motives for Mergers and AcquisitionsMotives for Mergers and Acquisitions

EnvironmentEnvironment CapabilitiesCapabilities ExpectationsExpectationsSpeed in fast-moving Speed in fast-moving product/marketproduct/market

Exploit core Exploit core competences in competences in new arenanew arena

Institutional Institutional shareholders want shareholders want continuing growthcontinuing growth

Competitive situation Competitive situation – static market, avoid – static market, avoid competitor reactioncompetitor reaction

Address lack of Address lack of resources or resources or competencescompetences

Ambitions of senior Ambitions of senior managersmanagers

Deregulation – created Deregulation – created suboptimal units ripe suboptimal units ripe for acquisitionfor acquisition

Cost efficiencyCost efficiency Speculative to Speculative to boost short-term boost short-term share valueshare value

Financial – Financial – opportunistic opportunistic acquisition of firm with acquisition of firm with low share value low share value

LearningLearning

Most important strategic answers (1)Most important strategic answers (1)

Globalization Globalization Implementation of e-business or/and Implementation of e-business or/and

related management methods related management methods Merger and acquisitionsMerger and acquisitions Create strategic alliancesCreate strategic alliances Divest (harvest) and find new Divest (harvest) and find new

industry or a new nicheindustry or a new niche Crisis management and consolidationCrisis management and consolidation

Most important strategic answers (2)Most important strategic answers (2)

Diversification and re-positioning the Diversification and re-positioning the companycompany

Focus and back to basicFocus and back to basic Benchmaring and outsourcingBenchmaring and outsourcing Vertical and horizontal integrationVertical and horizontal integration Re-engineering the structure and Re-engineering the structure and

processes. processes. Rebuild the organizational cultureRebuild the organizational culture Create a new more competitive corporate Create a new more competitive corporate

governance structure governance structure

Recent Approaches to Cost ReductionRecent Approaches to Cost ReductionRecent Approaches to Cost ReductionRecent Approaches to Cost Reduction

Dramatic changes in strategy and structureDramatic changes in strategy and structureto adjust to the business conditions of the to adjust to the business conditions of the

1990’s1990’sKey elements:Key elements: Plant closuresPlant closures OutsourcingOutsourcing Delayering and cuts in administrative staffDelayering and cuts in administrative staff

The fundamental rethinking and radicalThe fundamental rethinking and radicalredesign of business processes to achieveredesign of business processes to achievedynamic improvements in performance. e.g.:-dynamic improvements in performance. e.g.:- Several jobs combined into one Several jobs combined into one Steps of a process combined in natural Steps of a process combined in natural

orderorder Minimizing steps, controls, and Minimizing steps, controls, and

reconciliationreconciliation Use case managers as single points of Use case managers as single points of

contactcontact Hybrid centralization/ decentralization Hybrid centralization/ decentralization

CORPORATERESTRUCTURING

BUSINESSPROCESS

REENGINEERING

Loose (market)relationships

Contractualrelationships

Formalisedownership/relationships

Formalintegration

FORMS OFALLIANCE Networks

Opportunisticalliances

SubcontractedLicences andfranchises

ConsortiaJoint ventures

Acquisitions andmergers

INFLUENCESAssetmanagement

Assets do notneed jointmanagement

Assetmanagementcan be isolated

Assets need to be jointlymanaged

Assetseparability Assets cannot

be separated Assets/skills can be separatedAssets cannotbe separated

Assetappropriability High risk of assets

being appropriatedLow risk of assets being

appropriatedHigh risk ofassetappropriation

Types of and motives for strategic alliances