Strategy Formulation HCAD 5390. Strategies Defining Future Direction At what levels is future direction defined? Who is responsible for defining future

Strategy Formulation

HCAD 5390

Strategies

Defining Future Direction

At what levels is future direction defined? Who is responsible for defining future direction? How is future direction expressed? Where can it

be seen?

Strategy-Making Levels in an Organization

Corporate Center↓↑

Individual SBUs↓↑

Functional Areas↓↑

Departments↓↑

Teams and Task Forces↓↑

Individual Employees

Responsibility for Defining Future Direction

Board of Directors CEO Top Executive Team Strategic Planning Unit Middle Level Managers All Employees Suppliers and Customers

Future Direction Documents

Mission Vision Values Objectives

Mission Statement

Current purpose of the organization What it is, what it does, and what it does not do The “business” of the firm, its domain The areas in which it operates and the means by

which it competes in those areas The current activities and operations of the firm

Mission Statement - Spheres of Operation and Competition

Industry Industry value chain Products or services Technologies and competencies Customers and market segments Distribution channels Geographic areas

Reasons for a Mission Statement

Fosters organization-wide unanimity of purpose Point of identification for employees and

stakeholders Steers operations and activities in certain

directions and away from others Basis for allocating resources Projects coherent, positive image to external

stakeholders

Characteristics of a Good Mission Statement (I)

Succinct: one page, 200-300 words Memorable and recitable Broad enough to allow management creativity Narrow enough to limit management

recklessness Distinguishes firm from its competitors Reconciles differences among stakeholders Arouses positive feelings about the organization

Characteristics of a Good Mission Statement (II)

Tells managers where to look and where to avoid in seeking strategic opportunities

Conveys image of a successful, well managed, self-aware organization worthy of investment and support

Understood and embraced by all organization members

More immediate and pragmatic than a vision statement

Vision Statement (I)

Describes an ideal, desirable future state for the organization

A future that the organization will work actively to create for itself

Antithesis of allowing the future to shape the organization, or adapting the organization to the future

Vision Statement (II)

Empowers and motivates employees to higher levels of achievement

Value of creating “shared vision” Can be prepared at all organizational levels Join all stakeholders in a “future search” for a

vision

Characteristics of a Good Vision Statement (I)

A kind of “dream” that inspires and drives Different from what is being done now Improvement over what is being done now A “stretch” for the organization with uncertainty

about the chances of achievement Grounded in reality and possible of achievement

Characteristics of a Good Vision Statement (II)

Reflects understanding of resources and competencies, as well as external opportunities and threats

A challenge for employees to accomplish, requiring new abilities and performance at the highest levels

All stakeholders see an aspect of the vision that serves their interests

Values Statement

Guidelines for employee behavior on the job Address beliefs and attitudes of all

organization members Implicit (organizational culture) vs. … Explicit (code of ethics)

Values

Johnson & Johnson’s credosets its responsibilities to:

1. J&J product users.

2. J&J employees.

3. Communities in which J&Jemployees live and work.

4. J&J stockholders.

Source: Courtesy of Johnson & Johnson.

Texas Health Resources

Mission, Vision and Values Mission

To improve the health of the people in the communities we serve. Vision

Texas Health Resources, a faith-based organization joining with physicians, will be the health care system of choice.

Values Respect

Respecting the dignity of all persons, fostering a corporate culture characterized by teamwork, diversity and empowerment.

IntegrityConduct our corporate and personal lives with integrity; Relationships based on loyalty, fairness, truthfulness and trustworthiness.

CompassionSensitivity to the whole person, reflective of God's compassion and love, with particular concern for the poor.

ExcellenceContinuously improving the quality of our service through education, research, competent and innovative personnel, effective leadership and responsible stewardship of resources

Arlington Memorial Hospital

Arlington Memorial Hospital (AMH) is a full-service acute-care medical center with 417 beds, serving Arlington and its surrounding communities. Since opening its doors in 1958, AMH has contributed to the medical and health education needs of area residents, who pooled their resources to help build the original 75-bed hospital.

Today, with more than 550 physicians on the medical staff, 1,900 employees and 300 volunteers, AMH is larger and more advanced than the founders could have imagined.

But its community-oriented focus, established more than five decades ago, has not changed. AMH remains a not-for-profit, community hospital dedicated to providing quality, compassionate health care.

Parkland

Mandate To furnish medical aid and hospital care to indigent

and needy persons residing in the hospital district. Vision By our actions, we will define the standards of

excellence for public academic health systems. Mission Dedicated to the health and well-being of individuals

and communities entrusted to our care.

Values Issues

Violations of the law Integrity, honesty, and ethics Attitude toward and treatment of coworkers,

customers, and suppliers Acceptance of risk taking and failure Attitude toward innovation and the future Tolerance for change within the organization Balance of profit-making and patient welfare

Complications in Values

How to communicate How to enforce Differences among organizational units Differences among professions and

specialties Effect on implementation of strategies

Strategic Objectives

Long-term strategic thrusts Designed to realize the organizational vision Explicit and workable Provide guidelines for specific strategies Set at both the corporate and SBU levels

Criteria for Strategic Objectives

Based on measurable attributes Specific unit of measurement for each

attribute Specific attribute level to be achieved Time deadline for reaching the level Delegate responsibility to a named person for

reaching the level by the deadline

Typical Corporate Strategic Objectives

Improve market price of common stock Increase economic profit of SBU portfolio Increase total annual revenues of SBU portfolio Increase portfolio cash flow to support rapid-

growth SBUs Diversify portfolio into new industries Divest no longer related SBUs Increasing resource sharing among SBUs

Typical SBU Strategic Objectives

Conduct a “turnaround” of the business Improve the business’s market share Increase the business’s revenues or profits Improve the quality of products and services Acquire or develop specific new technologies Acquire or develop new employee competencies

Tips on Setting Strategic Objectives

“Stretch” the abilities of employees assigned to achieve them

Support them with appropriate resources Tolerate risk-taking and innovation Watch for objectives and incentives that

motivate undesirable behavior Employees assigned to achieve objectives

participate in setting them

Challenges in Documents Defining Future Direction

Confusing mission and vision statements with each other

Defining visions distinguished from the competition

Overly long vision statements and too many strategic objectives

Vision and values that inspire employees Creating documents useful in strategic

management process

Distinguishing Corporations from Strategic Business Units (SBUs)

Multi-SBU Corporations: Sole separate legal entity Authorized to execute contracts Able to borrow money and sell equity Produces no goods or services Quite small staff Primary function is to assemble and manage a

portfolio of SBUs

Distinguishing Corporations from Strategic Business Units (SBUs)

Strategic Business Units:

No separate legal existence No separate ability to contract or raise capital Produce goods and services Compete in one or more markets Relative autonomy to manage operations and

strategy

Value-Adding Functions of the Corporate Center

Manage the Portfolio of SBUs Raise Financial Capital for Allocation to SBUs Allocate Resources and Services to SBUs Facilitate Synergies Among SBUs Choose Parenting Style for SBU Interactions Participate in SBU Strategic Planning Process Oversee and Monitor SBU Performance Manage Corporate Relations With Stakeholders

Corporate Management of an SBU Portfolio (I)

In pursuit of a corporate vision Acquires, merges with, or develops internally

new SBUs Divests existing, unwanted SBUs Set performance goals for SBU management Provide input to SBU strategic decisions Count upon SBUs to perform unique strategic

functions

Corporate Management of an SBU Portfolio (II)

Balance between central corporate direction and individual SBU autonomy

Control vs spontaneity Hire good SBU managers, give them general

guidelines, and let them loose … or … Give detailed directions, watch closely, and

intervene frequently

Model Portfolio Management Process

1. Choose strategic thrust of the corporation– Growth– Stability– Retrenchment

2. Choose geographic areas, markets, and products or services to offer in them

3. Decide how many SBUs in the portfolio and which businesses they will be

Texas Health Resources

Texas Health Resources (THR) is one of the largest faith-based, nonprofit health care delivery systems in the United States and the largest in North Texas in terms of patients served. The system's primary service area consists of 16 counties in north central Texas, home to more than 6.2 million people. THR was formed in 1997 with the assets of Fort Worth-based Harris Methodist Health System and Dallas-based Presbyterian Healthcare Resources. Later that year, Arlington Memorial Hospital joined the THR system. THR has 12 acute-care hospitals and one long-term care hospital that total 3,100 licensed hospital beds, employs more than 18,000 people, and counts more than 3,600 physicians with active staff privileges at its hospitals. THR is also a corporate member or partner in six additional hospitals and surgery centers.

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Adaptive Strategies

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Expansion Adaptive Strategy:– Orientation toward growth

Expand, cut back, status quo? Concentrate within current industry, diversify into

other industries? Growth and expansion through internal development

or acquisitions, mergers, or strategic alliances?

Adaptive Strategies

Corporate-Level Strategic Options:Growth – Expand the Portfolio

Most common corporate-level strategy direction Critical to maintaining share in a growing market In pursuit of economies of scale and scope Increase in experience and learning Top executive egos to be satisfied

Growth By Concentration

All businesses start here Dedicate all resources and competencies to

one or a few products or services Achieved in one of three ways:

– Sell more of current products in current markets– Sell current products in new markets– Sell new products in current markets

To sell new products in new markets is diversification

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Basic Growth Strategies:

Concentration– Current product line in one industry

– Vertical Integration– Market Development– Product Development– Penetration

Diversification– Into other product lines in other industries

Adaptive Strategies

41

Expansion of ScopeBasic Concentration Strategies:

Vertical growthHorizontal growth

Adaptive Strategies

Adaptive Strategies

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Horizontal Growth

– Horizontal integration

Adaptive Strategies

Concentration on a Single Business

Advantages– Operational focus on a

single familiar industry or market.

– Current resources and capabilities add value.

– Growing with the market brings competitive advantage.

Disadvantages– No diversification of market

risks.– Vertical integration may be

required to create value and establish competitive advantage.

– Opportunities to create value and make a profit may be missed.

Concentration No Longer Sufficient to Maintain Growth

Unlikely to capture a greater share of current market

Current market is stagnating, maturing, shrinking, or otherwise lacking growth potential

Excess cash on hand needs to be invested productively

Management has greater ambitions for further strategic achievement

Growth By Related Diversification

Move beyond existing markets and products Employ existing resources and competencies New businesses are closely connected

(“related”) to existing businesses Directions of related diversification

– Vertical forward integration (toward customers)– Vertical backward integration (toward suppliers)– Horizontal expansion

Forms of Relatedness

Products or services Markets Processes, systems, or other operating features Manufacturing facilities, distribution channels,

marketing media, or support services Brand image, corporate reputation, creativity or

innovation skills, or general managerial expertise

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Basic Diversification Strategies:

– Concentric Diversification

– Conglomerate Diversification

Adaptive Strategies

49

Concentric Diversification

– Growth into related industry– Search for synergies

Adaptive Strategies

Adaptive Strategies

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Unrelated (Conglomerate) Diversification– Growth into unrelated industry– Concern with financial considerations

Adaptive Strategies

Adaptive Strategies

Reasons for Diversification

Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness

• Economies of scope/scale

• Market power

• Financial economics

IncentivesIncentives

ResourcesResources

ManagerialManagerialMotivesMotives

Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness

• Anti-trust regulation

• Tax laws

• Low performance

• Uncertain future cash flows

• Firm risk reduction


ResourcesResources



Incentives to Diversify

External Incentives:External Incentives: Relaxation of anti-trust regulation allows more related Relaxation of anti-trust regulation allows more related

acquisitions than in the pastacquisitions than in the past Before 1986, higher taxes on dividends favored spending Before 1986, higher taxes on dividends favored spending

retained earnings on acquisitionsretained earnings on acquisitions After 1986, firms made fewer acquisitions with retained After 1986, firms made fewer acquisitions with retained

earnings, shifting to the use of debt to take advantage of tax earnings, shifting to the use of debt to take advantage of tax deductible interest paymentsdeductible interest payments

Incentives to Diversify

Internal Incentives:Internal Incentives: Poor performance may lead some firms to diversify an Poor performance may lead some firms to diversify an

attempt to achieve better returnsattempt to achieve better returns Firms may diversify to balance uncertain future cash flowsFirms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to Firms may diversify into different businesses in order to

reduce riskreduce risk

Resources and Diversification

Besides strong incentives, firms are more likely to Besides strong incentives, firms are more likely to diversify if they have the resources to do sodiversify if they have the resources to do so

Value creation is determined more by appropriate Value creation is determined more by appropriate use of resources than incentives to diversifyuse of resources than incentives to diversify

Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)

• Diversifying managerial employment risk

• Increasing managerial compensation


ResourcesResources



Managerial Motives to Diversify

Managers have motives to diversifyManagers have motives to diversify – diversification increases size; size is associated with diversification increases size; size is associated with

executive compensationexecutive compensation– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict such effective governance mechanisms may restrict such

motivesmotives

Bureaucratic Costs and the Limits of Diversification

Number of businesses– Information overload can lead to poor resource allocation

decisions and create inefficiencies.Coordination among businesses

– As the scope of diversification widens, control and bureaucratic costs increase.

– Resource sharing and pooling arrangements that create value also cause coordination problems.

Limits of diversification– The extent of diversification must be balanced with its

bureaucratic costs.

Relationship Between Diversification and Performance

Per

form

ance

Per

form

ance

Level of DiversificationLevel of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

Restructuring:Contraction of Scope

Why restructure?– Pull-back from overdiversification.– Attacks by competitors on core

businesses.– Diminished strategic advantages of

vertical integration and diversification.Contraction (Exit) strategies

– Retrenchment– Divestment– spinoffs of profitable SBUs to investors;

management buy outs (MBOs).– Harvest– halting investment, maximizing cash flow.– Liquidation– Cease operations, write off assets.

Why Contraction of Scope?

The causes of corporate decline– Poor management– incompetence, neglect– Overexpansion– empire-building CEO’s– Inadequate financial controls– no profit responsibility– High costs– low labor productivity– New competition– powerful emerging competitors– Unforeseen demand shifts– major market changes– Organizational inertia– slow to respond to new competitive

conditions

The Main Steps of Turnaround

Changing the leadership– Replace entrenched management with new managers.

Redefining strategic focus– Evaluate and reconstitute the organization’s strategy.

Asset sales and closures– Divest unwanted assets for investment resources.

Improving profitability– Reduce costs, tighten finance and performance controls.

Acquisitions– Make acquisitions of skills and competencies to strengthen

core businesses.

Adaptive Strategies

Maintenance of ScopeEnhancement

Status Quo

Market Entry Strategies

Acquisition:Acquisition: a strategy through which one organization buys a a strategy through which one organization buys a controlling interest in another organization with the intent of controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own making the acquired firm a subsidiary business within its own portfolioportfolio

Licensing:Licensing: a strategy where the organization purchases the a strategy where the organization purchases the right to use technology, process, etc. right to use technology, process, etc.

Joint Venture:Joint Venture: a strategy where an organization joins with a strategy where an organization joins with another organization(s) to form a new organizationanother organization(s) to form a new organization

AcquisitionsAcquisitions

Reasons for Making Acquisitions

IncreaseIncreasemarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed

to marketto market

IncreaseIncreasediversificationdiversification

Reshape firm’sReshape firm’scompetitive scopecompetitive scope

Lower risk comparedLower risk comparedto developing newto developing new

productsproducts

Learn and developLearn and developnew capabilitiesnew capabilities

Reasons for Making Acquisitions:

Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services above when a firm is able to sell its goods or services above

competitive levels orcompetitive levels or– when the costs of its primary or support activities are below when the costs of its primary or support activities are below

those of its competitorsthose of its competitors– usually is derived from the size of the firm and its resources usually is derived from the size of the firm and its resources

and capabilities to compete and capabilities to compete Market power is increased byMarket power is increased by

– horizontal acquisitionshorizontal acquisitions– vertical acquisitionsvertical acquisitions– related acquisitionsrelated acquisitions

Increased Market PowerIncreased Market Power


Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors– differentiated products by competitorsdifferentiated products by competitors– enduring relationships with customers that create product enduring relationships with customers that create product

loyalties with competitorsloyalties with competitors

acquisition of an established company acquisition of an established company – may be more effective than entering the market as a may be more effective than entering the market as a

competitor offering an unfamiliar good or service that is competitor offering an unfamiliar good or service that is unfamiliar to current buyersunfamiliar to current buyers

Cross-border acquisitionCross-border acquisition

Overcome Barriers to EntryOvercome Barriers to Entry


Significant investments of a firm’s resources are Significant investments of a firm’s resources are required torequired to– develop new products internallydevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace

Acquisition of a competitor may result inAcquisition of a competitor may result in– lower risk compared to developing new productslower risk compared to developing new products– increased diversificationincreased diversification– reshaping the firm’s competitive scopereshaping the firm’s competitive scope– learning and developing new capabilities learning and developing new capabilities – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities


An acquisition’s outcomes can be estimated more An acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an easily and accurately compared to the outcomes of an internal product development processinternal product development process

Therefore managers may view acquisitions as lowering Therefore managers may view acquisitions as lowering riskrisk

Lower Risk Compared to Developing Lower Risk Compared to Developing New ProductsNew Products


It may be easier to develop and introduce new products It may be easier to develop and introduce new products in markets currently served by the firmin markets currently served by the firm

It may be difficult to develop new products for markets It may be difficult to develop new products for markets in which a firm lacks experiencein which a firm lacks experience– it is uncommon for a firm to develop new products internally to it is uncommon for a firm to develop new products internally to

diversify its product linesdiversify its product lines– acquisitions are the quickest and easiest way to diversify a firm acquisitions are the quickest and easiest way to diversify a firm

and change its portfolio of businessesand change its portfolio of businesses

Increased DiversificationIncreased Diversification


Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or marketsdependence on one or more products or markets

Reducing a company’s dependence on specific Reducing a company’s dependence on specific markets alters the firm’s competitive scopemarkets alters the firm’s competitive scope

Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope


Acquisitions may gain capabilities that the firm does Acquisitions may gain capabilities that the firm does not possessnot possess

Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base

– reduce inertiareduce inertia

Learning and Developing New CapabilitiesLearning and Developing New Capabilities

AcquisitionsAcquisitions

Problems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Too muchToo muchdiversificationdiversification

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Resulting firmResulting firmis too largeis too large

Problems With Acquisitions

Integration challenges includeIntegration challenges include– melding two disparate corporate culturesmelding two disparate corporate cultures– linking different financial and control systemslinking different financial and control systems– building effective working relationships (particularly when building effective working relationships (particularly when

management styles differ)management styles differ)– resolving problems regarding the status of the newly resolving problems regarding the status of the newly

acquired firm’s executivesacquired firm’s executives– loss of key personnel weakens the acquired firm’s loss of key personnel weakens the acquired firm’s

capabilities and reduces its valuecapabilities and reduces its value

Integration DifficultiesIntegration Difficulties


Evaluation requires that hundreds of issues be Evaluation requires that hundreds of issues be closely examined, includingclosely examined, including– financing for the intended transactionfinancing for the intended transaction– differences in cultures between the acquiring and target firmdifferences in cultures between the acquiring and target firm– tax consequences of the transactiontax consequences of the transaction– actions that would be necessary to successfully meld the actions that would be necessary to successfully meld the

two workforcestwo workforces Ineffective due-diligence process mayIneffective due-diligence process may

– result in paying excessive premium for the target companyresult in paying excessive premium for the target company

Inadequate Evaluation of TargetInadequate Evaluation of Target


Firm may take on significant debt to acquire a Firm may take on significant debt to acquire a companycompany

High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that contribute to preclude needed investment in activities that contribute to

the firm’s long-term successthe firm’s long-term success

Large or Extraordinary DebtLarge or Extraordinary Debt


Synergy exists when assets are worth more when Synergy exists when assets are worth more when used in conjunction with each other than when they used in conjunction with each other than when they are used separatelyare used separately

Firms experience transaction costs (e.g., legal fees) Firms experience transaction costs (e.g., legal fees) when they use acquisition strategies to create when they use acquisition strategies to create synergysynergy

Firms tend to underestimate indirect costs of Firms tend to underestimate indirect costs of integration when evaluating a potential acquisitionintegration when evaluating a potential acquisition

Inability to Achieve SynergyInability to Achieve Synergy


Diversified firms must process more information of Diversified firms must process more information of greater diversity greater diversity

Scope created by diversification may cause Scope created by diversification may cause managers to rely too much on financial rather than managers to rely too much on financial rather than strategic controls to evaluate business units’ strategic controls to evaluate business units’ performancesperformances

Acquisitions may become substitutes for innovationAcquisitions may become substitutes for innovation

Too Much DiversificationToo Much Diversification


Managers in target firms may operate in a state of Managers in target firms may operate in a state of virtual suspended animation during an acquisitionvirtual suspended animation during an acquisition

Executives may become hesitant to make decisions Executives may become hesitant to make decisions with long-term consequences until negotiations have with long-term consequences until negotiations have been completedbeen completed

Acquisition process can create a short-term Acquisition process can create a short-term perspective and a greater aversion to risk among perspective and a greater aversion to risk among top-level executives in a target firmtop-level executives in a target firm

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions


Additional costs may exceed the benefits of the Additional costs may exceed the benefits of the economies of scale and additional market powereconomies of scale and additional market power

Larger size may lead to more bureaucratic controls Larger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and Formalized controls often lead to relatively rigid and

standardized managerial behaviorstandardized managerial behavior Firm may produce less innovationFirm may produce less innovation

Too LargeToo Large

Strategic Alliance

A strategic alliance is a cooperative strategy in whichA strategic alliance is a cooperative strategy in which– firms combine some of their resources and capabilitiesfirms combine some of their resources and capabilities– to create a competitive advantageto create a competitive advantage

A strategic alliance involvesA strategic alliance involves– exchange and sharing of resources and capabilitiesexchange and sharing of resources and capabilities– co-development or distribution of goods or servicesco-development or distribution of goods or services

CombinedCombinedResourcesResources

CapabilitiesCapabilitiesCore CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

Strategic Alliance

Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services

Types of Cooperative Strategies

Joint venture: two or more firms create an Joint venture: two or more firms create an independent company by combining parts of their independent company by combining parts of their assetsassets

Equity strategic alliance: partners who own different Equity strategic alliance: partners who own different percentages of equity in a new venturepercentages of equity in a new venture

Nonequity strategic alliances: contractual Nonequity strategic alliances: contractual agreements given to a company to supply, produce, agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity or distribute a firm’s goods or services without equity sharingsharing

Strategic Alliances

Margin Margin

Primary Activities

Sup

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Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

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SupplierSupplier

• vertical complementary strategic vertical complementary strategic alliance is formed between firms alliance is formed between firms that agree to use their skills and that agree to use their skills and capabilities in different stages of capabilities in different stages of the value chain to create value the value chain to create value for both firmsfor both firms

• outsourcing is one example of outsourcing is one example of this type of alliancethis type of alliance

Strategic Alliances

Margin Margin

Primary Activities

Sup

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Marketing & Sales

Outbound Logistics

Operations


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BuyerBuyerPotential CompetitorsPotential Competitors

• horizontal complementary strategic alliance is formed horizontal complementary strategic alliance is formed between partners who agree to combine their resources and between partners who agree to combine their resources and skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain

• focus on long-term product development and distribution opportunities

• the partners may become competitorsthe partners may become competitors• requires a great deal of trust between the partnersrequires a great deal of trust between the partners

BuyerBuyer