Strategic Management MLPS09-Perrin

Strategic Management

Alexandre PerrinStrategy Department

Audencia Nantes School of Management

Tel: 02 40 37 45 56Mail: [email protected]

Let me introduce myself…

ACADEMIC

• Master in Management (2001) in Audencia

• Specialized Master in Knowledge Management & Business Intelligence in CERAM Sophia Antipolis (2003)

• Master in Research Methods in University of Nice Sophia Antipolis (2004)

• PhD in Management Science (2008) Topic: Knowledge Management

Alexandre PerrinStrategy Department - Office 272 (ECE)

Tel: 02 40 37 45 56

Mail: [email protected]

BUSINESS

• Junior Consultant in Knowledge Management – Agilience a Boston Consulting Group/Siemens spin-off (Paris)

• Assistant of the Corporate Knowledge Manager – Lafarge (Paris)

• Research projects for Lafarge, Manpower and Amadeus

Lived in Paris (22 years!), Cannes (3 years), Barcelona (1 year), New York City (6 months) and Nantes…

… draw me a company !

Based on your experience…

The « organization chart » view

The « organization chart »

• Hierarchy

• Clear division of labor

• Enable organizations to cope with all expected situations

“Managers develop a science for each element of a man's work, which replaces the old rule-of-thumb method”. (Taylor 1911, p.39)

The « Process » view

The « Process » view

• Company as a “black box”

• Precise rules, procedures and practices

• Relationships with the external environment (competitors, stakeholders, the State…)

“In essence, the job of the strategist is to understand and cope with competition”.

(Porter 2008, p.79)

The « Social » view

The social view

• Collection of rights, privileges, obligations and responsibilities

• Conflict resolution and stress

• Power and knowledge within an organization (communities with different interests)

”The central question is to understand the social processes leading to the construction of the competitive cooperation between a set of actors who are mutually dependent for the solution of a common problem, which they cannot solve by themselves”.

(Friedberg 1997, p.122)

…and the Oscar goes to…

Implications of this exercise

• Companies can be depicted in various ways:

Rational How to control?

Systemic How to organize?

Social How to implement?

• Different « images » of an organization

”Organizations are machines, organisms, brains, cultures, political systems, psychic

prisons, flux and…instruments of domination”. (Morgan 2006, p.10)


Part 1. Diagnosis

Part 2. Choices Part 3. Deployment

The manager needs to define the positioning of a company according to:

Its external environment

Its internal capacities

Its stakeholders

Based on the diagnosis, the manager determines the different options available at:

The Corporate level

The Business Unit level

The Operational level

The manager needs to implement the strategy he has chosen according to:

Levers

Levels in the implementation

Resistance to change


Part 1. Diagnosis

Part 2. Choices

Part 3. Deployment

1. Scanning theenvironment

2. Exploring and exploiting capabilities

1. Diversification or Specialisation

2. Managing the portfolio of activities

1. Implementing and controlling decisions

2. Managing change fordeploying strategy

The syllabus

About the course

• 15 hours

• 50% of the credits Continuous assessment

Questions & Answers

Mini-case in class

• 50% of the credits Quizz

Bibliography

• Exploring Corporate Strategy

(8th Edition 2007)by Gerry Johnson, Kevan Scholes and Richard

Whittington (Prentice Hall/Financial Time Editions)

Available for free at the Mediathèque (POL40.1/02-04)

• Contemporary Strategy Analysis

(6th Edition 2007) by Robert Grant (Blackwell Publishers)

Available for free at the Mediathèque (POL40.1/08-01)

67€

40€

Premium resources

• The Harvard Business Review

The best articles in Strategic Management

Available on Business Source Complete (Check the Mediathèque website)

• DowJones Factiva

An international press database in 22 languages (eg. FT, Reuters, LesEchos…)

Available on the Mediathèque Website

• Euromonitor - Global Market Information Database (GMID)

Country statistics, consumer lifestyle reports, company profiles, industry profiles

Available on the Mediathèque Website

Today : Introduction to Strategic Management


Part 1. Diagnosis

Part 2. Choices

Part 3. Deployment

Introduction

A) What is Strategy ?B) What is Strategic Management ?C) Strategic Management as an object of studyD) New contexts for Strategic Management

Introduction

A) What is Strategy ?B) What is Strategic Management ?C) Strategic Management as an object of studyD) Contexts of Strategic Management

The Madonna Mini-Case

Question 1.

Part 1. Diagnosis

Part 2. Choices Part 3. Deployment

• External environment: popstars, music industry, music tastes

• Internal capacities: strengths (ability to anticipate, dancing) and weaknesses (voice)

• Stakeholders: famous music producers, actors, Majors

• The Corporate level: specialisation into music biz diversification + Maverick Records

• The Business Unit level: multi-facets products

• Ability to use all the media cover to promote its products

• A different image according to the consumer (teens/adults)

• Using sexual references while developping charity biz

Question 2. Why Madonna is so successful ?

• One goal (INTENT)

Become a superstar strategy is about “winning”

• Dynamic capabilities (ANALYSIS)

Capable to anticipate music tastes and to diversify into other range of products strategy is about “knowing your strengths and your weaknesses” compared to others

• Key success factors (DECISION)

To maintain key relationships with stakeholders strategy is about “knowing the industry recipe”

• One best way (ACTION)

To establish and renew its image strategy is about “evolving”

What is Strategy ?

Strategy is a process which translates intent into action.

Intent Action

Strategy

Analysis Decision

DecisionWHAT MIGHT

WE DO?(external opportunities

and threats)

AnalysisWHAT CAN

WE DO?(strengths andweaknesses)

IntentWHAT DO WEWANT TO DO?

(organizational andindividual values)

ActionWHAT DO OTHERSEXPECT US TO DO?

(stakeholder expectancies)

Strategy

Four questions to guide the process

First definitions of strategy

• A strategy is the general direction in which an objective is to be thought.King and Cleland in Strategic Planning and Policy, (1978, p.51)

• Strategy is a major organizational plan for action to reach a major organizational objective. Higgins and Wincze, Strategic Management, Text and Cases (1989, p.166)

Strategy is a race to one ideal

position

1. Strategy is the creation of a unique and valuable position, involving a different set of activities

2. Strategy is making tradeoffs in competing, and choosing what not to do

3. Strategy involves creating fit among a company’s activity

What is Strategy? (according to Michael Porter)

Our definition of Strategy

Strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.

G. Johnson, K. Scholes & R. Whittington in

Exploring Corporate Strategy (p.34)

Introduction


Why studying strategic management ?

• The business environment has become more uncertain, complex and globalized.

• Competencies you will get thanks to the course (see the syllabus):

Identify critical management issues in both internal and external organizational environments.

Assess industry and competitive conditions and identify key factors for competitive success.

Conduct and write a strategic audit of a corporation.

What is Strategic Management ?

• Strategic Management theory deals with how firms create competitive advantage and superior market performance in relation to other firms (Barney and Westerley, 1996).

• Strategic Management includes

Strategic diagnosis

Strategic choices

Strategic deployment

Three levels of analysis in Strategic Management

CORPORATE

Division A

R & D Personnel Finance Production Marketing

1. Corporate Strategy

Choices of activities

Diversification or specialisation

2. Strategic Business Unit

Choices of positiniong of each activity

Price-based or differentiation

3. Operational

Organization of the activity

Functions

Introduction


Who teaches Strategic Management ?

• Practitioners

Strategy as an art

How to think about it ?

• Economists

Strategy as a science

How to plan it ?

• Management theorists

Strategy as a tool box

How to implement it ?

Military view of Strategy

Sun Tzu; Clausewitz

time

Economic and industrial view

Harvard, LCAG, Ansoff, BCG, Porter Hamel & Prahalad

Resources

Evolution of the theory

19th Century

The military view

• The word derives from the Greek strategos, which referred to a “military commander” during the age of Athenian Democracy.

• “Strategy is concerned with drafting the plan of war… shaping the individual campaign and, within these, deciding on the individual engagements” Von Clausewitz

• War can be organized according to:

Resources: men, food, water, weapons and

Use of resources: army, division and tactics

Deployment: according to the battlefield

Decisions: from the command line to the field

The Economic view versus the Resource Based view

Economic View

Superior performance is an outcome of market positioning and first-mover advantages.

Resource-Based View

It is the resources internal to the firm that constitute superior performance in the marketplace.

Constructive StrategyDeductive Strategy

Introduction


Driven forces

1. Globalisation + the (re)emergence of China China = long-term strategy

Impact on the energy costs

2. Public/Private relationships Regulation / Deregulation (eg. La Poste)

Mergers between public and state-owned companies

3. Information Technology The world is flat (Friedman 2007)

Generation 2.0 (intangibles>tangibles)

4. Sustainable development Green Economy

Different organizational contexts, different focuses

1. Small and Medium Businesses

Focus on strategic positioning because of the competition with bigger competitors

2. Multinational Companies (MNC)

Focus on the coordination of complex activities distributed around the globe

3. Public Services

Focus on managing change

4. Non-profit Organizations

Focus on stakeholders needs


Part 1. Diagnosis

Part 2. Choices

Part 3. Deployment







The syllabus

Examples of strategic thinking…

We don’t like their sound. Groups of guitars are on the way out.

Decca Executives turning down The Beatles in 1962

There is no reason for any individual to have a computer in their home.

Ken Olson, CEO of Digital (1977)

With other fifty foreign cars on sale here the Japanese auto industry isn’t likely to carve out a

big share of the market for itself.Business Week (1968)

“I used to think that the biggest challenge in developing strategy was understanding the external

environment, properly gauging how industry structure was changing, understanding the way competitors

were moving, and so on….”

A discussion with Michael Porter (1999),

Organizational Dynamics.

Scanning the environment, a big

challenge…

The environment

MarketIndustry

Macro-environment

Competitor A

Competitor B

Competitor C

Competitor D

Product 1

Product 2

Product 3

Company

A) The macro-environment

B) The industry

C) The market

D) Opportunities and threats

Scanning the environment

What affects a company?

Company

Macro-environment

??

??

?

?

Definition of the macro-environment

• The macro-environment consists of broad environmental factors that impact to a greater or lesser extent on almost all organizations.

• Information about the macro-environment:

GMID Database

Other sources: The World Economic Forum, The United Nations, The WTO, INSEE, CIA’s World Factbook, etc…

Tools to diagnose the macro-environment

Tool 1. / The PESTEL framework

Tool 2. / Scenarios planning

The PESTEL framework

It can be used as a checklist to understand the different environmental influences in the macro environment.

• An analysis of the external macro-environment that affects all firms.

Political (eg. Stability, Lobbying)

Economic (eg. GDP, oil price 60% of airlines costs)

Social (eg. Working hours)

Technological (eg. Internet diffusion)

Ecological (eg. Tax)

Legal (eg. Anti-trust laws)

The PESTEL Analysis

Company

Macro-environment

Technological

Legal

Ecological

Social

Economic

Political

Examples of reports from GMID Database

• World report (Consumer Electronics)

Trends

Competitive landscape

Prospects

• Country factfile (Ireland)

Population

Political structure & risk

Main industries

• Industry report in the country (Consumer Electronics in Ireland)

Consumption (size, growth, etc.)

Segmentation

Key players

Another example: the UN Telecom Index

• This index comprises indicators on diffusion of PCs, Internet connections, phone lines, mobile subscriptions and TV sets, and share of population online.

Source: United Nations, Department of Economic and Social Affairs (2007): World Public Sector Report 2007. New York.

Tools to diagnose the macro-environment

Tool 1. / The PESTEL framework

Tool 2. / Scenarios planning

Definition of scenarios planning

• Scenarios planning consists in representing plausible and detailed situations for a company according to a combination of anticipitave structural trends.

• The scenarios are purposeful stories about how the contextual environment could unfold in time.

• It includes unexpectedly important situations and problems that exist in some small form in the present day.

Example: the impact of oil price in the car industry (eg. General Motors hybrid)

Mapping factors in scenarios

Low impact High impact

High predictability of outcome

Low predictability of outcome

Increase of energy costs

Health concerns

Ecological concerns

Steps in scenarios planning at Shell

Step 2. Identify people who will contribute.

Step 1. Decide on the key question to be answered.

Step 4. Find key uncertainties.

Step 3. Map basic trends and driving forces.

Step 5. Produce 10 scenarios and select 3.

Step 6. Impact assessment

Driven by the activity of the company and PESTEL analysis

Brainstorming sessions

Use matrixes

Assess the weigh of factors

Another example – “Horizon 2017” at UPS

• External Non-Customer Interview Questions What external factors will affect the transportation and logistics

industry over the next decade?

What will deliver success (for transportation and logistics companies) 10-12 years out, and how will that differ from today?

Paint me a picture of how transportation and logistics may look in 2017. Which current competitors will be strong players, and what kinds of new entrants do you see emerging?

• External Customer Interview Questions What will make a company successful in your industry in the next

decade? (What's going to be different?)

If we could answer one question about the future to help your company succeed, what would that question be?

What is going to stop being true in your industry over the next decade?

• Management Internal Interview Questions How would you describe success for UPS over the next 10-12

years? What would it look like for us? What would be the results?

How would you like UPS to be viewed within the industry? Within the financial community? Among customers? Among employees?

If I could answer any question for you, what would you want to know? What would you like to know that would give UPS a jump on the competition?

Example of matrix use (source: Company Document)

Alter Eco & Fair Trade

Mini-Case

Question 1.The growth of fair trade products

• Social, Legal and Political issues explain the growth of faire trade products on a global scale.

• Fair trade is mainly a social phenomena : buyers accept to pay a higher price for a differentiated product.

• Demand for fair trade is growing quite fast: The French market is very far from maturity

This growth takes place at the expense of traditional trade, to which fair trade is obviously a substitute

The growth perspective is therefore extremely attractive

In the future the substitution effect will remain marginal or will become really significant.

Question 2. Scenarios of development for Alter Eco

• SC1. A high growth rate of the demand (+20% per year) As the market develops and the costs decrease, retailers

will launch their own fair trade labels

Cheaper “fair trade”: retailers will benefit from cheaper costs than Alter Eco’s

Solution: form partnerships with retailers and supply them

• SC2. A steady growth of the demand (+2% per year). Alter Eco needs to find another positioning such as organic

food

Solution: find sources of differentiation for their products

• SC3. A declining demand Consumers are not willing to pay a price premium

anymore…

Solution: diversification, internationalization or lobbying


B) The industry

C) The market



What affects a company ?

Company

Industry

Macro-environment

Competitor A

Competitor B

Competitor C

Competitor D

SuppliersPartners

What is an « industry »?

• An industry encompasses a group of companies offering the same products or services (Standard Industrial Classification - SIC Codes) Example: Air Transport

Code 3721 Aircraft

Code 3724 Aircraft Engines & Engine Parts

Code 4512 Air Transportation, Scheduled

Code 4581 Airports

• According to Porter (2008), the boundaries of an industry consist of two primary dimensions

The scope of products or services

The geographical scope

If industry structure for two products/services is the same (same buyers, suppliers, barriers, substitutes, regulation) they belong to the same industry.

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Air Transport

Cable And Other Pay TV Svcs

Crude Petroleum & Natural Gas

Motor Vehicles & Car Bodies

Engineering Services

Hotels and Motels

Dental Equipment & Supplies

Trucking, Except Local

Semiconductors

Electronic Computers

Restaurants

Drug Stores

Software

Building Materials Retail

Women's Clothing Stores

Pharmaceuticals

Operating Income / Total Assets, 1985 - 2001

Profitability of Selected Industries

Source: Compustat

Tools to diagnose an industry

Tool 1. / The Five Forces model: determinants of long-term industry profitability

It helps to define the Key Success Factors within the industry

IndustryIndustryStructureStructureIndustryIndustryStructureStructure

Relative Position Relative Position Within the Within the

IndustryIndustry

Relative Position Relative Position Within the Within the

IndustryIndustry

- Rules of Competition - Sources of Competitive Advantage

Threat of SubstituteProducts or Services

Threat of New Entrants

Rivalry AmongExisting

Competitors

Bargaining Powerof Suppliers

Bargaining Powerof Buyers

The framework is a means of identifying the forces which affect the level of competition in an industry or sector

The 5 Forces model

The threat of substitute

Threat of SubstituteProducts or Services

• A substitute performs the same or a similar function as an industry’s product by a different mean Videoconferencing Vs Business travel

DVD Vs VoD

CD Vs MP3

• When the threat is high, industry profitability suffers: A substitute offers attractive trade-off (ex.

Phone Vs Skype)

A substitute creates a price ceiling if the buyer’s cost of switching to the substitute is low (ex. Branded drugs Vs Generics)

The threat of new entrants


• New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs and the rate of investment necessary to compete. Apple in the music distribution

Microsoft in the video game industry

• When the threat is high, incumbents must hold down their prices or boost investment to deter new competitors. Starbucks in the specialty coffee

The threat of new entrants


• The threat of entry depends on the height of entry barriers that are present and on the reaction entrants can expect from incumbents.

• Entry barriers are advantages that incumbents have relative to new entrants: Financial barriers (economies of scale

supply/demand & capital requirements)

Commercial barriers (customers switching costs & distribution channels)

Knowledge barriers (know-how & specific technology or standards)

The suppliers

Bargaining Powerof Suppliers

• Powerful suppliers capture more of the value for themselves by charging higher prices, limitating quality or services, or shifting costs to industry participants. Microsoft in the PC industry

• The bargaining power is high if: The product/service provided is essential or

unique no substitute (ex. luxury goods)

The reputation is strong (ex. Intel)

The transfer costs are high (ex. SAP)

Suppliers are concentrated

The buyers/consumers (B2B or B2C)

Bargaining Powerof Buyers

• Powerful buyers can capture more value by forcing down prices, demanding better quality or more service and generally playing industry participants off against one another.

• Their bargaining power is high if: There are few buyers in the market

They have many suppliers to choose from

They purchase in large volume

The products/services are undifferentiated

The volume they buy accounts for a large percentage of their suppliers’ sales

Rivalry

Rivalry AmongExisting

Competitors

• Competitive rivals are companies with similar products and services aimed at the same customer group: Price discounting

New product introduction or service improvement

Advertising campaigns

• High rivalry limits the profitability of an industry and the degree depends from: Intensity of the rivalry:

Industry growth rate

Number of players

High exit barriers

The basis on which they compete Price

Quality

0

50

100

150

200

250

1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960

No. of firms

Source: S. Klepper, Industrial & Corporate Change (2002, p. 654)

Rivalry in the US Automotive Industry 1895-1961

Implications of the model

• Non attractive industry when : High rivalry

Low barriers of entry

Strong competition between substitutes

Strong bargaining power of suppliers and buyers

• Attractive industry when : Moderated rivalry

High barriers of entry

No substitutes

Weak bargaining power of suppliers and buyers

Voyages-sncf.com

Mini-Case

The website

Travel agencies before e-commerce

Substitute

New entrants

Strong rivalry based on price competition

and reputation

Suppliers Buyers

« Do it Yourself » -Syndicate (SNAV)

-Travel agencies are important outputs

-But their role is questionned by the emergence of the Internet

- Easy to set up its own activity with suppliers

- Size matters (network)

- Airlines (concentrated)

- Hotels (fragmented)

- Car rentals (concentrated)

- Trains (monopoly)

Travel agencies now

Substitute

New entrants

Strong rivalry based on traffic on the

website and partnerships

Suppliers Buyers

- Airlines (concentrated)

- Hotels (fragmented)

- Car rentals (concentrated)

- Trains (monopoly)

Brick-and-mortar travel agencies

- Advertising agencies

- Customers

- Size still matters (network effects)

How voyages-sncf.com makes a positive margin

• The train ticketing activity has reached a maximum.

• Additional revenues are:

fees they ask to the different suppliers

price they ask to advertising agency to put an add on the platform

• The challenge is to transform this « natural » and captive market into a more profitable one

Confusion between train tickets sellers and travel agency

Aggressive and “creative” communication campaign (Doit-on vraiment en arriver là?)

What are the main opportunities and threats ?

Opportunities

• Turn high level of traffic into regular shoppers

• International reach

• Consumer habits

Threats

• Confusion with train tickets remains (because of the name of the travel agency)

• Connection with GDS remains difficult for trains

Pros & cons for using the 5 Forces model

Pros

- Useful to identify industry stakeholders

- Useful to structure an industry analysis

- Identification of key success factors

Cons

- Not dynamic

- Some forces are interrelated

- State regulation has to be included

- Focus on an industry (and not a company !)

Key success factors can be derived from the 5 forces analysis. It consists of 3-5 really major determinants (or recipes) of competitive success in one industry.


B) The industry

C) The market



Definition of a market segment

• Compared to the industry-level, markets refer to specific products or services.

• A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.

Car: City / Family / Sports / Luxury

Watch: Swatch / Lotus / Rolex

• Market segments:

are defined by customers expectations

are served by strategic business units (SBU)

may change the key success factors (eg. Low-price car VS Luxury car)

• A strategic business unit is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU.

• According to similarity of buyers needs

Geographical Europe / Middle East / Africa / Asia

Product-line Personal & Beauty / House & Home / Health &

Wellness

Definition of a Strategic Business Unit (SBU)

Tools to scan competitors business units

Tool 1. / The strategic groups mapping

Tool 2. / Profits pools: the industry value chain

Competitors and markets

• An industry may be a too-general level to provide for a detailed understanding of competition.

Renault & Ferrari are in the same industry…but they compete on different basis.

• Strategic groups are companies within an industry with similar strategic characteristics, following similar strategies or competing on similar basis.

How to select strategic groups?

Scope of activities

• Geographical coverage

• Number of market segments served

• Distribution channel used

Resource commitment

• Level of service or quality

• Product range

• Marketing effort

• Size of the company

Let’s try to define some strategic groups in the car manufacturing industry

Broad

PRODUCTRANGE

Narrow

National GEOGRAPHICAL SCOPE Global

NATIONALLY- FOCUSED, SMALL, SPECIALIST

PRODUCERS e.g., Bristol (U.K.), Classic Roadsters

(U.S.), Morgan (U.K.)

REGIONALLY-FOCUSED BROAD-LINE PRODUCERS

e.g. Fiat, PSA, Kia

PERFORMANCE CAR PRODUCERS e.g.,

Porsche, Ferrari (owned by Fiat) Maserati, Lotus

GLOBAL, BROAD-LINEPRODUCERS

e.g., GM, Ford, Toyota, RenaultNissan, Honda, VW,

DaimlerChrysler

Example 1. The car manufacturing industry

Braniff

TWA

Eastern

United

American

Delta

WesternRepublicOzark

USAir Piedmont

FrontierAirCal

PSA

South-west

Texas Int’l

United

South-west

AmericaWest

InternationalInternational

National National

Regional Regional

No Frills No FrillsFull Service Full Service

Quality of Service Quality of Service

Geo

gra

ph

ic

Sco

pe

The Late 1970s The Early 1990sRenoAir

Continental

PanAm

Northwest

Laker

WorldAmerican

TWA

Delta

USAir

NorthwestConti-nental

Kiwi

Others

Example 2. Airlines industry in the USA

Tools to scan competitors business units

Tool 1. / The strategic groups mapping

Tool 2. / Profits pools: the industry value chain

Profit pools: the industry value-chain

• A profit pool can be defined as the total profits earned in an industry at all points along the value-chain.

It shows the structure of profitability

• Two main indicators to calculate profit pools

Share of industry revenue of the player

Operating margin of the player

0

5

10

15

20

25

30

35

Auto

man

ufac

turin

g

New car

dea

lers

Used

car d

ealers

Auto

loan

s

Leas

ing

War

rant

y

Gasoline

Auto

insu

ranc

e

Serv

ice re

pair

Afte

rmar

ket p

arts

Auto

rent

al

Operating margin

Share of Industry Revenue

Here’s the profit pool

Example 1. The car industry:

Auto Makers

Car dealers

Car loaners

LeasingWarranty

RepairInsurance

Parts Downstream activities are more profitable than upstream activities

Example 2. The VoD

Description Price charged to the consumer

Rental VoD The consumer rents the video for 24h to 72h

3,99 €

Permanent Download The consumer buys the video permanently

9,99 €

Subscription VoD The consumer pays an access to IPTV channels

4,99 € 9,99 € per month

Ad VoD The consumer enjoys the video with ads on the screen

None

Example 2. The VoD value chain

Production

Aggregation

Publishing

Distribution

Equipment

Authors

Taxes on author rights (4,3%)

Payment costs (7%)

Distribution with IPTV

IPTV Commission (30%)

VOD

Distribution costs (30cts per movie)

Editor Royalties

Here’s the profit pool

Example 2. Calculation of the margin for Arte

0,58 €1,04 €Margin

1,57 €

0,23 €0,30 €

1,57 €

- VoD Payment costs (7%)- VoD Distribution costs (30 cts per movie on its website)- Editor Royalties (50% of free tax price – taxes on author rights)

2,15 €3,13 €Editor Net Price

0,14 €0,98 €

0,14 €- Taxes on author rights (4,3%) - IPTV Commission (30%)

3,27 €3,27 €Free Tax Price

0,65 €0,07 €

0,65 €0,07 €

- Tax on Added Value (19,6%) - Tax on VoD (2%)

3,99 €3,99 €PRICE

VoD Rental through IPTV

VoD Rental

Example 2. Calculation of the margin for Arte

VoD Download

VoD Downlaod with IPTV

PRICE 9,99 € 9,99 €

- Tax on Added Value (19,6%) - Tax on VoD (2%)

1,64 €0,16 €

1,64 €0,16 €

Free Tax Price 8,19 € 8,19 €

- Taxes on author rights (4,3%) - IPTV Commission (30%)

0,35 € 0,35 €2,46 €

Editor Net Price 7,84 € 5,38 €

- Editors costs (7%)- Editors distribution costs on VoD (30 cts per movie distributed on its website)- Editor Royalties (50%)

0,57 €0,30 €3,92 € 3,92 €

Margin 3,05 € 1,46 €


B) The industry

C) The market



Opportunities and threats

Threat

An element in the environment that can affect the performance of a company

Opportunity

An element in the environment that can be exploited by the company.

It derived from the external analysis of the company:1. Auditing macro environmental influences 2. Identifying key competitive forces3. Identifying competitive position

The video game industry

Mini-Case

Interview of the CEO

Is the industry attractive?

• Two overlapping activities:

Video game producers (software): Most console manufacturers make money on

games (10 euros/unit), not on consoles

Console makers (hardware): Console makers are all game publishers

Exclusive partnerships exist between console makers and video game makers

• A brain intensive industry where innovation is a competitive advantage ?

Software

Hardware

Convergence of two activities

0

10

10

1010

10

10

5

5

5 5

5

5

Power of buyersPower of suppliers

Rivalry

Threat of new entrants

Regulation from the State

Threat of substitutes

Diagram of the video game industry (software)

0

10

10

1010

10

10

5

5

5 5

5

5


Rivalry




Diagram of the video game industry (software)

Key Success Factors for videogame makers

1. Threat of new entrants:

• use of sports games that transform customers into subscribers (a stable source of revenues)

• acquisition of small software developers

2. Power of suppliers:

use of licences (ie. Harry Potter or FIFA) that boost sales volumes

3. Power of buyers:

• choice of the dominant hardware (ie. Sony Playstation / Nintendo Wii)

0

10

10

1010

10

10

5

5

5 5

5

5


Rivalry




Diagram of the console industry

0

10

10

1010

10

10

5

5

5 5

5

5


Rivalry




Diagram of the console industry

Key Success Factors for the console makers

• Rivalry: the size of the installed base and the network externalities

Players want to play on the same console as their friends in order to swap games

Technology cycles

• Power of suppliers: exclusive partnerships with video game producers

Players prefer the console with the largest game catalogue

• Power of buyers: the distribution network

Technology cycles

1980 1990 2000

Number of units sold (millions)

50

100

Profit pools for the video game publishers

Consoles Makers Fees

20%

ConsoleGames

Publishers47%

Share of industry revenue

Operating margin

10%

20%

100%

Source: Game IDATE

Retailer33%

Profit per game sold

Why the industry is going to concentrate?

Current generation

Unit price including tax

Unit price without tax

Unit price after 6 monthsAverage unit price (80% at full & 20% at half)

- Retailer margin (33%)

Publisher selling price

- Fee paid to console makers

Gross Profit- Mkt/Dist costs (35%)

Profit per unit

605025

45

153010

2010

10

Next generation

Unit price including tax

Unit price without tax

Unit price after 6 monthsAverage unit price (80% at full & 20% at half)

- Retailer margin

Publisher selling price

- Fee paid to console makers

Gross Profit- Mkt/Dist costs (35%)

Profit per unit

504221

381325

10

159

6

> Calculation of the per unit profit made by game publisher

Break even point

Current generation

10 euros of profit per game

Investment between 5 and 10 millions euros

Result = 500 000 to 1 million of units

Next generation

6 euros of profit per game

Investment between 15 and 20 millions euros

Result= 2,6 to 3,3 millions of units

Only AAA pay off Only blockbusters pay offCONCETRATION

OF THE INDUSTRY

Conclusion : market segmentation in the video game industry

Mass Market Pure Player

Target Regular players Very frequent players

Buying Frequency 1 or 2 games per year 1 to 5 games per month

Marketing & licensing impact

High Weak

Distribution channel Supermarket Specialized retailer


Part 1. Diagnosis

Part 2. Choices

Part 3. Deployment







The syllabus

The environment

MarketIndustry

Macro-environment

Competitor A

Competitor B

Competitor C

Competitor D

Product 1

Product 2

Product 3

CompanyWhat do you need to

create your own company?

Strategic capability

Strategic capability is the adequacy and suitability of the resources and competences of an organisation for it to survive and prosper.

Resources are inputs into the production process.

Tangibles: physical (equipment and raw materials), financial and human resources.

Intangibles: intellectual capital (patents, brand names, databases, information).

But, few resources are productive…

Competences

Activities and processes through which a company deploys its resources effectively.

How to obtain a competitive advantage ?

Core competences

Hard to imitate

Unique resources

Hard to imitate

Capabilities for competitive advantage

Threshold competences

Easy to copy

Threshold resourcesEasy to copy

Minimal capabilities

CompetencesResources

Example: athletics

Core:-Dedication

-Tenacity

-Will

Unique: -Exceptional heart

-Height or weight

Capabilities for becoming a champion

Needed:-Training

-Diet planning

Mandatory: -Health body

-Training equipments

Minimal capabilities for doing sport


Number of experts or reputed managers

Years of experience of a specific team

Individual

CollectiveCore competence

Number of patents/copyrights/licences

R&D expenses/R&D staff as % of total

Brand equity/Name recognition/Surveys

Intellectual

Innovation

Reputation

Intangible Resources

Operating Profit/Cash Flow/Credit Rating

Book value/Vintage of capital equipment

Turnover rate/Training days/Diploma

Financial

Physical

Human

Tangible Resources

How to measure capabilities?

Strengths and Weaknesses

Strengths and Weaknesses are internal factors such as assets, competences or resources a company has at its disposal relatively to its competitors.

Examples of strengths Patents Innovative product Marketing expertise Strong brand or reputation Exclusive access to natural resources

Examples of weaknesses Lack of marketing expertise Undifferentiated products Competitors have superior access to distribution channels Lack of resources (size) Damaged reputation

Tool 1. The company value chain

Tool 2. The activity system mapping

Tool 3. Benchmarking

Tools to map strategic capabilities

Tool 1. The value chain

• The value chain describes the activities within and around an organisation which together create a product or service.

• A value chain encompasses:

Primary activities: directly concerned with the creation or the delivery.

Support activities: help to improve the effectiveness or efficiency of primary activities.

The value chain raises the question of what value creating activities a company should be focusing on and what activities it has which do not create a value.

The value chain

Marketing& Sales

(e.g. Sales Force,

Promotion, Advertising,

Proposal Writing, Web

site)

InboundLogistics

(e.g. Incoming Material

Storage, Data Collection,

Service, Customer Access)

Operations

(e.g. Assembly, Component Fabrication,

Branch Operations)

OutboundLogistics

(e.g. Order Processing,

Warehousing, Report

Preparation)

After-Sales

Service

(e.g. Installation, Customer Support,

Complaint Resolution,

Repair)

M

a

r

g

i

n

Primary Activities

SupportActivities

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Procurement(e.g. Components, Machinery, Advertising, Services)

Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Value

What buyers are willing to pay

Marketing& Sales-Owning outlets

- Use of real estate

brokers- Real estate

division

Sourcing

- Diversified-High quality-Commitment

from suppliers

Roasting

-New roasting

techniques-Proprietary processes

Distribution

-Transportation rates

-Very accurate forecasting

-Strong inventory

turns

Consumer Service

-Atmosphere-Wi-fi

-Healthy product

-Lifestyle brand

-Exclusive products

M

a

r

g

i

n

Firm Infrastructure

Procurement

Technology Development

Human Resource Management

Example 1. Starbuck’s value chain

Why do people buy Starbuck’s coffee ?

People are buying a high quality cup of

coffee

Consistent cup of coffee High quality coffee Different and interesting blends

People are buying an experience

Consistent, upscale retail image A community gathering spot A coffee-related experience

Core competence:

Product-driven Service-driven

Prêt à Manger

Mini-Case

Marketing& Sales

13%64%

InboundLogistics

1%8%

Operations

65%18%

OutboundLogistics

1%2%

After-Sales Service

0%0%

M

a

r

g

i

n

Firm Infrastructure 4% 3%

Procurement 3% 1%

Technology Development 3% 3%

Human Resource Management 3% 1%

7%

Operating Costs

Assets

Example 2. Prêt à Manger value chain

The value chain of Prêt à Manger

• Question 1. Operations costs are high: managing its purchased

inputs is critical

Marketing & Sales assets are important: the retail locations are expensive

Half the floor area of a typical Prêt A Manger outlet is kitchen and half is shop.

Sandwich making could take place in a low-cost factory unit, but selling needs high-value retail locations.

• Question 2. Local market research that enables a site's sandwich

revenue potential to be closely predicted is extremely valuable

Finding high value retail locations is a core competence





Tool 2. The activity mapping

• An activity map tries to show how the different activities of an organisation are linked together.

• It helps to identify:

Core competencies

Trade-offs

Limited Passenger

Service

Short-haul, point-to-point routes

between medium-sized cities and

secondary airports

Very Low Ticket Prices

Lean, Highly Productive

Ground and Gate Crews

Frequent, Reliable

Departures

High Aircraft

Utilization

15-Minute Gate Turns

Automatic Ticketing Machines

Standardized fleet of 737

aircraft

Limited use of travel agents

Flexible union

contracts

High employee

stock ownership

No seat assignments

No mealsNo

baggage transfers

No connections with other

airlines

“Southwest, the low-fare

airline”

Zara

Mini-Case

Very flexible

production system

Ownership of

production sites

Advanced productio

n machiner

y

JIT delivery

Production in Spain and

Portugal, close to markets

Encourage repeat buyers

Very frequent product changes

Cutting- edge fashion at moderate

price and quality

Extensive use of store

sales data

Word-of-mouth

marketing

No media advertising

Widely popular styles

Global team of trend-

spotters

Prime store locations in high traffic

areas

Customers chic but

cost-conscious

Source: Draws on research by Jorge Lopez Ramon (IESE) at the Institute for Strategy and Competitiveness, HBS

Very flexible

production system

Ownership of

production sites

Advanced productio

n machiner

y

JIT delivery

Production in Spain and

Portugal, close to markets

Encourage repeat buyers

Very frequent product changes

Cutting- edge fashion at moderate

price and quality

Extensive use of store

sales data

Word-of-mouth

marketing

No media advertising

Widely popular styles

Global team of trend-

spotters

Prime store locations in high traffic

areas

Customers chic but

cost-conscious






• Benchmarking is the search for best practices that lead to superior performance.

Historical benchmarking (evolution of ratios)

Industry benchmarking (practices in a specific domain)

Best-in-class benchmarking (outside the industry; ie. Call centers)

Thanks to a comparison, one can define and compare the value of the internal capabilities

• Limits:

Myopia: « You get what you measure »

Disclosure of sensitive information

Imitation…not differentiation

“Tech companies that are dominant have trouble from within, not from competitors…”

Eric Schmidt, CEO

The Economist (2007, p.57)

Mini-Case

What is a business model?

• A business model is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.

Question 1. How come a late-mover such as Google dominates its industry?

Question 2. What is Google’s business model?

Question 3. What are Google’s resources and competences?

Google’s success

1. Google has dramatically enhanced the relevancy of web search results (search was a commodity outsourced by AOL, Yahoo! Or MSN).

2. Google has monetized search traffic by copying and improving Overture’s paid listings model (cost-per-click).

A late-mover can become a leader thanks to a high-innovative service outsourced by key players…

0

10

10

1010

10

10

5

5

5 5

5

5

Power of customers

Power of suppliers

Rivalry




Diagram of the search engine industry

Key success factors in the search engine industry

• Power of customers is very high

Transfer cost is null for the user (one click)

Relevance of queries + Privacy issues

Network effects (customer trust and loyalty) are keys

• Rivalry is high

Race for innovation (over quality)

Branding the service

Provide innovative services under the same brand is key

• Threat of substitutes is medium

Exclusive partnerships can protect the competitive position (ie. Libraries for Google Library)

Earn money with contextual and sponsored ads is key

Google’s resources & competences

Core:-Culture (« Don’t be evil »)

-Team management

Unique: -PageRank

-World’s largest supercomputer

-Googleplex

Capabilities for becoming the leader in search engine

Needed:-Relationships with soft

editors & universities

-Talented mathematicians

Mandatory: -Servers & computers

-Engineers

-Algorithm + Ads

Minimal capabilities for launching a search engine


Google’s distinctive skills

• Original organization of human resources

70% of time Core business

20% of time Related projects

10% of time New

• It permits ideas to emerge from the ground

To transfer the culture of innovation to “nooglers”

To increase the innovation rate

Google’s business model and capability

Business Model

•Referencer (‘Search’) Unique algorithm to rank web

pages

•Prescriber (‘Ad’) Focus on paid-listing

Aggregation of information

•Innovator (‘Aps’) Services (Google Earth…)

Organizational Capability

•Recruit and develop superior people (10 000 ‘Nooglers’ in three years)•Self-governance (culture of innovation)•Strong embedded policies and culture (unconventional)

OfferDemand

Prescription

Conclusion on Part 1. Diagnosis

Tools to make a strategic diagnosis

Tool Level of analysis Helps with understanding

PESTEL Macro-environment - Changes that affect an industry

- Opportunities for growth or decline

5 Forces Industry - Structure and profitability

- Threats from stakeholders

Strategic groups

Market - Mobility of competitors

- Repositioning to another group

Value chain Industry/Company - Opportunities for vertical / horizontal integration/ outsource

Core competences

Company - Exploiting strengths

- Eliminating weaknesses

Learned, E., Christiansen, C., Andrews, K., and Guth, W. (1969). Business policy:Text and cases. Homewood, IL: Irwin.

SWOT

External Evaluation

Internal Evaluation

Opportunities and Threats

Strengths and Weakness

Key success factors

Distinctive skills

Strategy Creation

Evaluation and Strategic choice

Strategies implementation

Strategic Diagnosis = SWOT


Part 1. Diagnosis

Part 2. Choices

Part 3. Deployment



1. Diversification or Specialisation (Corporate)

2. Managing the portfolio of activities (SBU)



The syllabus

A critical challenge

• The average US-based Fortune 500 company operates in four distinct industries…

• …and derives 35% of its revenues from overseas operations.

• Every year, the average large American/European corporation undertakes: Three acquisitions

Divests two business

Enters into six alliances

When companies should or should not enter into new industries or new geographies ?

Corporate Choices vs Business Unit’s Choices

• Based on the diagnosis, the manager determines the different options available at:

The Corporate level

The Business Unit level

1. Choices at the Corporate level (where do we compete?) CORPORATE STRATEGY

What business are we in?

How to extend our activities?

2. Choices at the Business Unit level (how do we compete?) COMPETITIVE STRATEGY

How to differentiate our products/services?

How to manage our portfolio of activities nationally and internationally?

Danone

Interview of the CEO

Analysis of the speech

• The Group’s performance is the result of a balanced strategy that builds on: international expansion

a growing commitment to innovation

strengthening health-oriented brands.

• Diagnosis: Macro: health issues, increase of commodity

prices, cool summer!

Industry: non-attractive industry Vs attractive (baby food industry) logic of the industry

• Choices: Corporate: divest of the biscuit line, growth,

acquisition of Numico, price paid

Business unit: difference in positioning, ties between business units (=synergies)

Choices at the Corporate Level

A) What business are we in?

B) How to extend our activities?

C) Tools to support choices

Firm’s business scope

For a company that has taken its main business as far as it can go, diversification may should

certainly be considered…

For the company that has not yet developed its main business to the full potential, however, diversification is probably one of the riskiest

strategic choices that can be made…

Kenichi OhmaeHead of McKinsey Japan

What business are we in?

• Shell’s mission is: “to engage efficiently, responsibly and

profitably in oil, oil products, gas, chemicals, and other selected businesses”

• McDonald’s mission is: “to be the world’s best quick-service

restaurant chain”

• Caterpillar’s mission is: “be leader in providing the best value in

machines, engines, and support services for companies dedicated to building the world’s infrastructure”

Diversification or Specialization

• Specialization consists in being in one single activity (or industry)

Learning curve and division of labor have led to scale economies specialized workforce

Limits: flexibility of smaller companies, risky in a mature/declining industry…

• Diversification consists in extending its resources and competences into new scope of activities

Related activities (ex. Pepsi: drink –> food)

Unrelated activities (ex. Philip Morris: tobacco beer, food)

Forms of diversification

• Related

Vertical integrationVertical integration:: adjacent activities backward (suppliers or manufacturers) and forward (distributors or salers)

Horizontal integrationHorizontal integration: activities which are complementary (ex. byproducts, licencies)

• Unrelated

Development of products or services beyond the current capabilities or value network.

National conglomerates in Asia (ex. KIA / Daewoo / LG / Tata / Sime Darby)

Motives for diversification

Motive 1. Growth Without diversification, firms are prisoners of their

industry attractive industries

Motive 2. Risk reduction The desire to spread risks cash flows in different

activities (a diversified portfolio)

Costs of acquisition Vs costs of transactions control of strategic resources (ex. raw materials)

Motive 3. Size Bargaining power over suppliers or distributors

Motive 4. Synergies Benefits that might be gained where two SBUs

complement each other. Their combined effect is greater than the sum of the parts

Technologies

Markets

The era of diversification…

24%6%0%21%9%5%Unrelated business

62%57%27%42%37%26%Related business

10%32%50%23%32%27%Dominant business

5%6%24%14%22%42%Single business

70’s60’s50’s70’s60’s50’s

EuropeUSA

Source: Rumelt (1982) & Whittington & al. (1999)

…and the era of specialization

• After 80’s “noncore” businesses were increasingly divested

The average index of diversification declined from 1.00 to 0.67 for the Fortune 500

• Three factors for specialization:

1. Emphasis on shareholder value (short-term profitability Vs long-term growth)

2. Transaction costs (turbulent external environment higher costs)

3. Trends in management thinking (focus on core competencies)

The diversification of Virgin Group

Mini-Case

Why such a diversification?

1. Virgin is a “branded venture capital” organization.

2. Richard Branson and the Virgin’s brand are the common resources and capabilities.

3. Branson diversifies its company into activities where an unconventional approach can differentiate its products or services (David VS Goliath).

Companies can extend their activities in very different ways…

Choices at the Corporate Level

A) What business are we in?

B) How to extend our activities?

C) Tools to support choices

How to extend our activities?

ALLYStrategic Alliances

Strategic Choices How to develop

my activities?

BUYMergers & Acquisitions

MAKEOrganic Growth

internal

extern

al

hybridEXTERNALIZENon-strategic

1.Make: Internal development

2.Buy: External development

3.Externalize: Outsourcing

4.Ally: Collaboration

How to extend our activities ?

1. Make: Internal development

• Built on the resources and the competences of the company.

• This choice can be explained by

A specific technology

The difficulties of acquiring another company

The cost of ownership

2. Buy: External development

• Acquisition of a competitor by taking over ownership of another organisation.

• Reasons to merge:

Speed to enter the market

Critical size (growth)

Deregulation

Financial synergies

Acquire competencies

3. Externalize: outsourcing

• When the costs of producing a product or a service is lower than the company is capable to obtain

Outside supplier can provide better value for money than in-house provision

Maintain core competence inside the internal value chain

• Ex. cleaning services, IT services, logistics

4. Strategic alliances

• Strategic alliances are where two or more organisations share resources and activities to pursue a strategy.

• Forms:

Partnership (no competition)

Alliance (competition)

• Motives

Critical mass (cost reduction)

Co-specialisation (ex. R&D)

Learning

Increase loyalty (OneWorld/SkyTeam)

The era of strategic alliances

Year

Number of alliance

The number of corporate alliances increases by some 25% a year

Some good news about alliances...

• The number of corporate alliances has increased by some 25% a year.

• Alliances account for nearly a third of many companies’ revenue and value.

• Firms most active in forging alliances produce returns 50% higher than those of other large companies.

Source: Simple Rules for Making Alliances Work (2007)

…and some bad news

• Yet the failure rate for alliances is between 60% to 70% !

• About half of all alliances terminate within 7 years and 78% of international partnerships ended with the acquisition of the joint-venture by one partner.

• In April 1998, American Airlines announced it was entering into a strategic alliance with US Airways… a year later, US Airways was acquired by United !

• In June 2004, Dong Feng formed a Joint-Venture with Renault to produce 300 000 cars in China… …after having signed a similar agreement with

Nissan…and with Peugeot / Citroen!

Four types of strategic alliances

A. Joint venture

B. Equity strategic alliance

C. Nonequity strategic alliances

D. Strategic cooperative network

1. Joint venture

• Definition: two or more firms create a legally independent company by combining parts of their assets.

Long-term relationship

Helps to transfer knowledge

Some countries, such as China require foreign companies to form joint ventures

Combine both capabilities to create a new one

50%

50%

B. Equity strategic alliance

• Definition: two ore more firms own different percentages of equity by combining some of their resources and capabilities to create a competitive advantage.

buys 5%

- Citibank offers technical support to launch credit cards

- Citibank takes a seat on SPDB board

• Definition: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing.

Licensing agreements

Supply contracts

Franchising The franchisor provides the best practices and bargaining power. He

should strengthen the brand.

The franchisee pays fees and manages locally the inventory. He should provide feedbacks.

C. Nonequity strategic alliance

• Definition: multiple firms agree to form partnerships to achieve shared objectives:

Develop customers loyalty

Exploitation of a pool of customers

Co-branding

D. Strategic cooperative network

Pixar vs Disney

100%0>7%100%02004 Pixar last offer (after Cars)

70%30%10%50%50%2003 Disney counter-offer

100%07%100%02003 Pixar Offer

50%50%12,5%50%50%1997 Agreement

15%85%12,5%0100%1991 Agreement

PixarDisneyDisneyPixarDisney

Revenue distribution

Distribution feesProduction costs

A complementary alliance?

• 1991-2003: Pixar needs Disney…

Pixar has core competences in 3D animation (software RenderMan) and skills in creating characters but no distribution network.

Disney has core competences in exploiting characters (licenses) and a broad distribution network for movies (Buena Vista).

• 2003-2006: …Disney needs Pixar

Pixar provides 1/3 of the revenue of Disney!

• On January 24, 2006, Pixar entered into an agreement with Disney to merge the two companies.

$7.4 billion Steve Jobs Disney Board of Directors

Pixar is now a wholly-owned subsidiary of The Walt Disney Company.

Tool 1. Ansoff’s Growth Matrix

Tool 2. Porter’s tests for diversification

Tools to analyze corporate choices

Product

existing new

Market

existing

new

Protect/BuildProduct

Development

Market Development

Diversification

Ansoff’s growth matrix

- Volume discounts- Customer relationship management

- New geographies- New segments

- Reusing existing channels for accessories, add-ons, or completely new products (eg. Halo effect).

Example with Zodiac

Product

Existing New

Market

Existing

New

Inflatable boat

Lifejackets(acquisition of

Aerazur)

Maintenance services

Emergency evacuation

CommercialTechnologic

Tool 1. Ansoff’s Growth Matrix

Tool 2. Porter’s tests for diversification

Tools to analyze corporate choices

Porter’s tests for diversification

• The attractiveness test

The industry chosen for diversification must be structurally attractive or capable of being attractive.

Use the 5 Forces model

• The cost-of-entry test

Does the entry cost in the new business eat up expected returns ?

Legal form of diversification (franchise, joint-venture, etc.)

• The better-off test

Does the new unit bring an advantage to the corporation?

Calculate economies of scope. Economies exist if the total cost of producing two goods jointly is less than the combined cost of producing each separately.

Calculate cross-selling benefits. Benefits exist if the reputation helps the company to sell more through the same channel (eg. Halo effect)

Conclusion on the Choices at Corporate Level

• Corporate Strategy is concerned with the scope of the firm’s activity:

Product scope how specialized should the firm be in terms of the range of products it supplies?

Coke (soft drinks) Vs Pepsi (soft fast food)

Geographical scope what is the optimal geographical spread of activities for the firm?

McDonalds Vs Quick

Vertical scope what range of vertically linked activities should the firm encompass?

Walt Disney Vs Pixar


Part 1. Diagnosis

Part 2. Choices

Part 3. Deployment







The syllabus

Choices at the Business Unit Level

A) How to differentiate our products/services?B) How to coordinate our portfolio of activities nationally and internationally?C) Tools to manage the portfolio

Market Share

Return on Investment

Differentiation Volume cost leadership

The dilemma

3 Generic Strategies for SBU

1.Cost leadership

2.Differentiation

3.Focus

Strategies at different levels

Nature of the competitive advantage

Cost Differentiation

Level

Industry

Segment

Cost Leadership

Differentiation

Focus

3 generic strategies for SBU

1.Cost leadership

2.Differentiation

3.Focus

Perceived Benefits

high

low

low high

“no frills”

low price

The strategy clock: competitive strategy options

Price

1

2

Price-based strategies (1 & 2)

1.1. « No-frills » strategy« No-frills » strategy

Low price and low perceived benefits focused on a price sensitive market segment:

Commodity-like (mass product)

Price-sensitive customers

Customers can switch easily (difficult to establish loyalty)

2.2. Low price strategyLow price strategy

A low price strategy seeks to achieve a lower price than competitors whilst trying to maintain similar perceived product or service benefits to those offered by competitors.

Risks are: margin reductions and inability to reinvest


1.Cost leadership

2.Differentiation

3.Focus

Perceived Benefits

high

low

low high

“no frills”

low price

differentiation focused differentiation

Differentiation

Price

1

2

45

Differentiation (4)

• It seeks to provide products or services benefits that are different from those of competitors and that are widely valued by buyers.

• The price is equal. The differentiation is built on the perception of the customer and on the level of competition.(ex. Voyage-SNCF.Com)

Focused differentiation (5)

• It seeks to provide high perceived product or services benefits justifying a substantial price premium.

• The aim is to offer better products or services at a slightly higher price

Product innovation

Brand

• Dangers:

If the price is too high, sales will go down

If the level of quality is too low, reputation is lost

Perceived Benefits

high

low

low high

“no frills”

low price

hybrid differentiation focused differentiation

The hybrid strategy

Price

1

2

43 5

Hybrid strategy (3)

• A hybrid strategy seeks simultaneously to achieve differentiation and a price lower than that of competitors.

• IKEA’s success is built on:

« Do it yourself »

« Choose it yourself »

Product innovation (design)

Perceived Benefits

high

low

low high

“no frills”

Strategies destined for ultimate failure

low price



Price

1

2

43 5

6

78


1.Cost leadership

2.Differentiation

3.Focus

Focus strategy is segment specific

• Focus means stretching a strategy on one specific segment (very few customers = « niche »).

Based on quality: focused differentiation Luxury products or services

Based on price: no-frills Hard discounters

How to maintain the advantage ?

1. Price-based strategies1. Price-based strategies

• Accept a reduced margin

• Win a price war

• Reduce costs

• Focus on specific segments

2. Differentiation2. Differentiation

• Create difficulties of imitation

• Achieve imperfect mobility

• Reinvest margin

3. Lock in3. Lock in

• Achieve market dominance

• First-mover advantage

• Reinforcement

• Rigorous enforcement

SustainingAdvantage

Standards

Wal Mart

Branding



Criteria for managing the portfolio of activities

• The balance of the portfolio of business units

• The attractiveness of the business units

• The degree of « fit » that the business units have with each other (synergies)

• The glocal dilemma

The extent to which products and services may be standardized across national boundaries or need to be adapted to meet the requirements of specific national markets.

International growth: key foreign market entry modes

1.1. Make:Make: Exporting

2.2. Buy:Buy: Foreign direct investment

3.3. Ally:Ally: Joint ventures/alliances

4.4. Externalize:Externalize: Contractual arrangements through licensing

Make: Exporting

Advantages

No operational facilities needed in the host country Economies of scale By using Internet = access to a market

Disadvantages

No benefit from the locational advantages Limits opportunities to know the local market Dependence on export intermediaries Exposure to trade barriers Transportation costs Limit the ability to respond quickly to customers demands

Buy: Foreign direct investment

Advantages

Full control of resources

Facilitates integration and coordination

Rapid market entry

Can attract financial support from the State

Disadvantages

Substantial investment in and commitment to host country (high exposure)

Acquisition may lead to problems of collaboraiton

Hard to predict costs

Ally: Joint venture and alliances

Advantages

Investment risk shared with partners

Combining of complementary resources

May be a governemental condition for market entry

Disadvantages

Difficulty of identifying appropriate partner

Managing relationships with the foreign partner

Loss of competitive advantage trhough imitation

Hard to coordinate

Externalize: Licensing

Advantages

Contractually agreed income through sale of production and marketing rights

Limits economics and financial exposure

Disadvantages

Difficulty of identifying appropriate partner and agreeing terms

Imitation

Limits benefits from the locational advantages of host nation

Domino’s Pizza

Global expansion and local dilemmas

Specific demand Locally determined costs Local brands Local competitors

Standardized products Scale economies Global brands Global competitors

Local Global

Rent, importance of location Local promotion Local tastes Local pizza chains

Standard size Global sourcing Standardized preparation Global presence

The global-local dilemma

DISTRIBUTION CENTERS

« COMMISSARIES »

DOMINO’S PIZZA STORES

SUPPLIERS

MASTER FRANCHISEE

INDIVIDUAL STORES

DOMINO’S PIZZA

INTERNATIONAL INC.

Vendors negotiate deliver

FRANCHISEES

Owns & operate

royalty

Brand, tools,

guidelines

deliverdeliver

royaltyOwns & operate

Costs:

- 5 000€ for the access to the franchisee + 3,5% per year of royalty

- 10 000€ for the information system

-150 000€ to establish the store

The franchisee system of Domino’s Pizza

Key success factors

• Appraisal of local environment Select the most appropriate locations for stores.

Advertising must be designed taking into account local culture.

Products (toppings in particular) must be adapted to suit local tastes.

• Respect of Domino’s procedures The price of ingredients and supplies is negotiated on

a worldwide basis, and takes advantage of the bargaining power of Domino's as a whole.

The pizza making process is standardized in order to reduce time, to optimize the use of ingredients while conforming to very strict quality requirements.

Appraisal of local environment

Respectof the « Domino’s system »

High Low

High

Low

Success

Quality : high

Variable costs : lowFix costs : low

Sales : highQuality : high

Variable costs : lowFix costs : high

Sales : low

Failure

Quality : low

Variable costs : highFix costs : low

Sales : low

Failure

Quality : low

Variable costs : highFix costs : high

Sales : very low

Catastrophy

Key Success Factors for international expansion

Lessons from the case

• Pizza delivery is neither a totally global industry nor a purely local one.

• International success is determined by: the company's ability to transfer its standardized

processes and procedures to the target countries…

…while at the same time adapting to local conditions and tastes.

• Analysis of the data shows that: Domino's was successful in those countries

where it managed to combine these two aspects

Domino’s was unsuccessful where it focused too exclusively on either of these two dimensions.



Tool 1. The “Strategy Clock”

Tool 2. The BCG Matrix

Tools to manage the portfolio of activities

Perceived Benefits

high

low

low high

“no frills”

Strategies destined for ultimate failure

low price



Price

1

2

43 5

6

78

Tool 1. The “Strategy Clock”

Tool 2. The BCG Matrix

Tools to manage the portfolio of activities

The BCG Matrix

Stars

Cash cows

Question marks

Dogs

Market Share

Market

Growth

High Low

High

Low

Explanation

• A star is a business unit which has a high market share in a growing market Earnings are stable or growing and cash flow is neutral

• A question mark is a business unit in a growing market, but without a high market share Earnings are unstable or growing but cash flow but cash flow is

negative

• A cash cow is a business unit with a high market share in a mature market Earnings and cash flow are high

• Dogs are business units with a low share in static or declining markets Low or instable earnings and negative cash flow

A good management of the portfolio should be…

The cash cows financially support the question marks which can become stars while divesting the dogs.

• Advantages of the BCG Matrix

Analysis can be prepared easily and quickly

Helps to cut through vast quantities of data

Useful point of departure for a more detailed analysis

• Disadvantages of the BCG Matrix

Oversimplifications of the factors (two variables)

Measurement choice (scale)

Business Units are not independent (synergies)

Example 1. BCG Matrix applied to Virgin Group

Market Share

Market

Growth

High Low

High

Low

1

2

4

5

6

20 10 1

0

+5

+10

3

7

8

910

11

12

13

Conclusion on strategic choices

• Corporate-level strategy is concerned with decisions about the range of activity and the international scope. Key decisions are:

Do we diversify or not?

Do we “ally”, “make”, “externalize” and “buy” ?

• Business-level strategy is about competing better: Good management of portfolio of activities and

good market positioning of each of them.

Sustaining the position is possible if the product/service is

difficult to imitate (brand, innovation)

becoming the industry standard

globally imposed through franchisees


Part 1. Diagnosis

Part 2. Choices

Part 3. Deployment







The syllabus

Implementing and controlling decisions

A) Decisions and structures

B) Informal control of decisions

C) Formal control of decisions

Decisions and structures

• ‘Structure follows strategy’ (Chandler 1962)

Adapt the organisation according to the strategy

• ‘Strategy follows structure’ (Hall & Saias 1980)

Existing organisational structure determines strategic opportunities

• ‘Structure follows strategy as the left foot follows the right’ (Minzberg 1990)

Reciprocal relationship

Organizational structure

• Organizational structure describes:

Who is responsible for what

Patterns of communication and knowledge exchange

Skills required to move up the organisation

Nature of organizational structures

1. Formal structures

Functional

Multidivisional

Matrix

Multinational

2. Temporary structures

Team

Projects

3. Informal structures

Social networks

Communities of practice

Functional structure

Multidivisional structure

A matrix structure

A multinational structure

Comparison of structures

XXXXXXXXGlobalisation

XXXXXXXKnowledge

XXXXXXXXXChange

XXXXXXXXControl

TransnationalMatrixDivisionalFunctional Criteria



Functional

Multidivisional

Matrix

Multinational


Team

Projects


Social networks

Communities of practice

Project-based structure

• Teams created, undertake the work, then dissolved

For large expensive projects or limited time events

Constantly changing organisational structure

Contains mixture of specialists

Disadvantages Possible lack of

coordination Proliferation of projects

Breaking up teams hinders knowledge accumulation (lost

knowledge)

Advantages Flexible Good accountability and control (clear tasks/defined time) Real-time knowledge exchange Attract complementary members due to short project times

Project

MKTFIN

QUA

SAL

COM

Example. Direction de la Recherche

Projets de Recherche

Chef Projet 1

Chef Projet 2

Chef Projet 3

Chef Projet N

Chef Projet 4

CKO

Knowlegde coordinator

Directeur

Adjoint au directeur

Directeur d’objectifs Réseaux Directeur d’objectifs Utilisation Directeur d’objectifs des Générales

ProgrammeGaz naturel liquéfié

ProgrammeClients

Programme Etudes éco. et générales

Programme Transport

Programme Distribution

ProgrammeClients industriels

Programme Nouveaux marchés

Pole Techniques de Transport

Pôle Techniques de Distribution

Pôle Métrologie et Matériels Réseaux

Pôle Qualité et Gaz

Pôle Environnement

Pôle Etudes cryogéniques

Pôle Cogénération – Gaz Naturel pour Véhicules

Pôle Gaz pour l’Habitat et le tertiaire

Pôle Bâtiment

Pôle Génie climatique

Pôle industrie

Pôle Moyens d’Essais pour l’Industrie

Service Certification

Pôle combustion, catalyse et mécanique des fluides

Pôle téléservice Domotique

Pôle procédés atomiques et systèmes

Pôle SI gaziers, optimisation et simulation

Pôle économie, statistiques et sociologie

Laboratoire Prototype

Appuis :

- Cabinet de Direction- Relation institutionnelles France- Relations institutionnelles Europe- Relations institutionnelles Partenariat industriels- Mission valorisation- Propriété intellectuelle- Mission connaissance, information, veille- Département achat contrôle de gestion- Service achat- Mission QHSE – Normalisation- Equipe prévention sécurité- Département informatique- Service infrastructure Informatique- Service Informatique métier- Service Intranet Groupware- Ressources humaines- Développement des RH- Contrat de travail- Recrutement mobilité- Solidarité- Service logistique Site- Service comptable et financier



Functional

Multidivisional

Matrix

Multinational


Team

Projects


Social networks

Organization as knowledge transfer

The Silicon Systems organization chart Silicon Systems at work

These diagrams are taken from: Krackhardt, David. “The Strength of Strong Ties: The Importance of Philos in Organizations.” In Nohria & Eccles (Eds), Networks and Organizations. Boston: Harvard Business School Press. 1992, pp.. 216-239.

• We live and work with static, rational ideas about our organizations…

What would an organization be like if it mirrored reality?

Social networks

• The informal network is not official, however, it has a very important function in a company to understand: Who knows who

Givers and takers of information

Strong ties and weak ties

• 4 key roles in this informal network have been identified: The Central Connector

The Boundary Spanner

The Information Broker

The Peripheral Specialist

The central connector

The person everyone in the group talks the most.

Difficulty:

> finding a way to reward these central connectors

> some central connectors, if ineffective, can create bottlenecks.

The boundary spanner

Group’s eyes and ears in the wider world = connection with people outside the informal network.

Useful when people need to share different kinds of expertise but very rare people…

The information broker

He/She connects the various sub-networks in the company

He/She knows a lot of people but not very well (weak ties)

> A departure of the information broker could be a severe blow

The peripheral specialist

Serves as an expert

He is not well socialized and not tightly integrated in the informal network

Often new hires

What is networking ?

• It means building social structures for people who share common interests:

social networking (making friends)

business networking (selling things and building business relationships)

job networking (finding a job)

ex. Corporate alumnis (McKinsey)

• Knowledge networking is building relationships in order to share knowledge and learn from each other in order to work more effectively.





How to coordinate tasks ?

• Formal control (Top-down)

Coercitive

Standardisation of practices

Organization chart

• Informal control (Bottom-up)

Participative

Multiplicity of practices

Social networks

How to control deployment?

RatiosRulesFormal control

PoliticalRoutinesInformal control

Output

(results)

Input

(use of resources)

Informal - Social control by middle managers

• Social control relies on indirect supervision by: Middle managers

Routines

• Middle managers : interpret and adjust strategy as events

unfold in the organization are responsible for implementing plans

determined at the top

are bridge between senior executives and lower levels in the organization help change occur

advise top management about change.

Informal - Social control by routines

• Organizational routines are the “way we do things around here” Persist over time (accumulation of knowledge)

Guide people’s behaviour

Can become core rigidities

• Organizational culture is the basic assumptions and beliefs that are shared by members of an organization, that operate unconsciously and define an organisation’s view of itself and its environment.

Informal - Political & Power

• Power is the ability of individuals or groups to persuade, induce or coerce others into following certains courses of action.

• Power is related to

Formal aspects Hierarchy

Competences

Control of strategic resources

Decision ability

Informal aspects Possession of information & knowledge

Social capital





Formal – Rules & Processes

• A process is a collection of steps that use people to create a service or a product.

• It is a description of tasks and outcomes associated with a business activity:

Are often expressed with a verb

It explains how people are working in the structure

Formal – Ratios

• Ratios are selected values on financial statements or objectives completion Financial ratios allow for comparisons:

between companies

between industries

between different time periods for one company

between a single company and its industry average

Profitability ratios Gross margin Companies

= (Revenue - Cost of sales) / Revenue

= (Net sales - Cost of goods sold) / Net sales

= Operating earnings / Net sales

Economic Value Added Companies

= (Return on Capital - Cost of Capital) (Capital Invested in Project)

Return on capital employed (ROCE) Industry

= Profit After Tax (Net Profit) / Capital Employed * 100

Example of formal control : the Balanced Scorecard

• A performance management tool: for measuring whether the smaller-scale

operational activities (SBU) are aligned with its larger-scale objectives in terms of vision and strategy.

focusing not only on financial outcomes but also on the operational, marketing and intangibles inputs.

• Four general perspectives have been proposed by the Balanced Scorecard: Financial Perspective

Customer Perspective

Internal process Perspective

Innovation & Learning Perspective

The Balanced Scorecard by Kaplan & Norton

Managing change for deploying strategy

A) Why managing change?

B) Tools for mapping change

Why change management?

1. The environment is changing…

Tendency towards organisational inertia and resistance to change

2. People have difficulty to adapt…

Top and middle managers are responsible for strategic change

3. Companies need to implement changes…

Evolution of resources

Change is successful if it is internalised and owned

by those who will implement it

Types of change

Examples of change management for deploying strategy

• Adaptation is change that can be accommodated with the current culture

Example: Name/logo changing

• Reconstruction is change that may be rapid and involve a deep evolution of the organization

Example: Divestment / cost cutting program

• Evolution is change in the strategy that requires cultural change but in a long term

Example: Ethics / Sustainable Dvlpt / Customer orientation

• Revolution is change that requires rapid and major strategic but also culture change

Example: General Motors in 2008

Managing change for deploying strategy

A) Why managing change?

B) Tools for mapping change

Tool 1. The “cultural web mapping”

Tools to manage change

Mapping the cultural web

• The cultural web:

a representation of the taken-for-granted assumptions, or paradigm, of an organisation and the physical manifestations of organizational culture.

• Can be used to:

map current and required culture

analyse changes needed for strategic success

Compagnie des Services Pétroliers (CSP)

Mapping the cultural web in a medium size company

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1. The cultural web of CSP

Paradigm

- Engineers clan- Pragmatism

- Prospector spirit

Symbols

- « Impossible Missions »

- French vs US

Routines

- Onsite integration- If successful career

is guaranteed

Structure- Procedures not well

formalized-Decentralized

- Direct relations

Power- Dominated by

Engineers-Acquired on

the field

Results of the analysis

• CSP is an engineer clan where power is obtained thanks to a rite of passage in the field.

• But the core business evolves from oil exploration & onsite measurement to data analysis.

What was a peripheral activity becomes core activity Necessity to hire top-level computer analysts

Former prospectors not as competitive as external hires

These specialists have a different paradigm: Lower commitment than prospectors

Lower loyalty

Listed on the the stock exchange Need for high-level competence in finance, tax and law

2. The future cultural web of CSP

Paradigm

- Engineers clan- Pragmatism

Symbols

« Impossible Missions »

Change of the name

Routines

Onsite integrationTraining

Structure

Formalized chart

Power

Dominated by Engineers +

managers

Pros & Cons of consultants & general manager programs

• For the consultants

Too radical the change may be rejected by those who are in charge (executive committee)

Some good ideas for evolution: CFO, Change the name

• For the general manager

Seems to be more applicable

This company needs evolution not revolution…

…even if the real issue is “how the managers of this company can evolve themselves?”

Conclusion on strategy implementation

• Controlling strategic decisions is based on formal and informal aspects Formal structure: organization charts +

processes + rules

Informal structure: social networks + local practices + culture

• Managing informal structure is much more difficult than managing formal one Cultural web

Leadership from managers

Documents

Strategic Management MLPS09-Perrin