CHAPTER 6

Formulating Long-Term
Objectives and Grand
Strategies
 Chapter Topics

• Long-Term Objectives
• Generic Strategies
• Grand Strategies
• Corporate Combinations
• Selection of Long-Term Objectives and Grand
Strategy Sets
• Sequence of Objectives and Strategy Selection
 Types of Long-Term Objectives

• Profitability
• Productivity
• Competitive position
• Employee development
• Employee relations
• Technological leadership
• Public responsibility
 Qualities of Long-Term Objectives

Achievable
Acceptable
Criteria used
Understandable in preparing Flexible
objectives

Suitable Measurable
Motivating
What is the Balanced Scorecard?

The Balanced Scorecard is a set of

measures that are directly linked to the
company’s strategy. It directs a
company to link its own long-term
strategy with tangible goals and
actions.
The Four Perspectives in a
Balanced Scorecard

 Financial performance
 Customer knowledge
 Internal business processes
 Learning and growth
 Exhibit 6-2: The Balanced Scorecard

Financial
‘To succeed financially,
how should we appear to
our shareholders?”
Internal
Customer Business
“To achieve Vision Process
our vision, “To satisfy our
and
how should shareholders
Strategy
we appear to and customers,
our what business
customers?” Learning and Growth processes must
‘To achieve our vision, we excel at?”
how will we sustain our
ability to change and
improve?”
 The Value Disciplines

• Strategies must center on delivering superior customer

value through one of three value disciplines:
 Operational excellence
 Customer intimacy
 Product leadership
• Companies that specialize in one of these disciplines,
while simultaneously meeting industry standards in the
other two, gain a sustainable lead in their markets.
 Generic Strategies

Low-cost Leadership

Differentiation Focus
 Ex. 6-3: Requirements for Generic
Competitive Strategies

Generic Commonly Required Skills and Common

Strategy Resources Organizational
Requirements
Overall Cost •Sustained capital •Tight cost control
Leadership investment •Frequent, detailed
and access to capital control reports
•Process engineering skills •Structured
•Intense supervision of labor organization and
•Products designed for ease responsibilities
in •Incentives based on
manufacture meeting strict
•Low-cost distribution system
quantitative targets
 Ex. 6-3 (contd.)
Generic Strategy Commonly Required Skills and Common Organizational
resources Requirements

Differentiation •Product engineering •Strong coordination

•Creative flare among functions in
•Strong capability in basic research R&D, product
•Corporate reputation for quality or development, and
technological leadership marketing
•Unique combination of skills •Subjective measurement and
•Strong cooperation from channels incentives instead of
•Strong marketing abilities quantitative measures
•Amenities to attract highly
skilled labor, scientists, or
creative people

Focus Combination of above policies directed at Combination of above policies

the particular strategic target directed at the particular
strategic target
 Ex. 6-4: Risks of the Generic
Strategies

Risks of Cost Leadership Risks of Differentiation Risks of Focus

Cost leadership is not
sustained
•Competitors imitate
•Technology changes
•Other bases for cost
leadership erode
Proximity in differentiation
is lost
Cost focusers achieve
even lower cost in
segments
Differentiation is not Focus strategy is imitated
sustained Target segment becomes
•Competitors imitate unattractive
•Bases for differentiation •Structure erodes
become less important to •Demand disappears
buyers Broadly target
Cost proximity is lost competitors overwhelm
Differentiation focusers segments
achieve greater •Segment’s differences
differentiation in from others narrow
segments •Advantages of broad line
increase
 Types of Grand Strategies

• Concentrated growth • Conglomerate

• diversification
Market development
• Turnaround
• Product development
• Divestiture
• Innovation
• Liquidation
• Horizontal integration
• Bankruptcy
• Vertical integration
• Joint ventures
• Concentric
diversification • Strategic alliances
• Consortia
 Characteristics of a Concentrated
Growth Strategy
• Involves focusing resources on the profitable
growth of a single product, in a single market, with a
single dominant technology
• Rationale – Firm develops and exploits its expertise
in a delimited competitive arena
• Determinants of competitive market success
• Ability to assess market needs
• Knowledge of buyer behavior
• Customer price sensitivity
• Effectiveness of promotion
 Conditions Favoring a
Concentrated Growth Strategy
 Firm’s industry is resistant to major technological advancements
 Firm’s target markets are not product saturated
 Firm’s markets are sufficiently distinctive to dissuade
competitors in adjacent markets from entering firm’s segment
 Firm’s inputs are stable in price and quantity and available in the
amounts and at the times needed
 Firm’s industry is stable
 Firm’s competitive advantages are based on efficient production
or distribution channels
 Success of market generalists
 Strategies of Market and Product
Development
• Market development
• Consists of marketing present products, often with only
cosmetic modifications to customers in related market
areas by
• Adding channels of distribution or
• Changing content of advertising or promotion
• Product development
• Involves substantial modification of existing products or
creation of new but related products
• Based on penetrating existing market by
• Incorporating product modifications into existing items or
• Developing new products connected to existing products
 Exhibit 6-4: Specific Options for
Selected Grand Strategies
Concentration (Increasing use of present products in present
markets)
2. Increasing present customers’ rate of use
a. Increasing size of purchase
b. Increasing the rate of product obsolescence
c. Advertising other uses
d. Giving price incentives for increased use
3. Attracting competitors’ customers
a. Establishing sharper brand recognition
b. Increasing promotional effort
c. Initiating price cuts
4. Attracting nonusers to buy the product
a. Introducing trial use thru’ sampling, price incentives, etc.
b. Pricing up or down
c. Advertising new uses
 Ex. 6-4 (contd.)

Market Development (Selling present products in

new markets.)
2. Opening additional geographic markets
a. Regional expansion
b. National expansion
c. International expansion
3. Attracting other market segments
a. Developing product versions to appeal to other segments
b. Entering other channels of distribution
c. Advertising in other media
 Ex. 6-4 (contd.)
Product Development (Developing new products for
present markets)
2. Developing new product features
a. Adapt (to other ideas, developments)
b. Modify (change color, motion, sound, odor, form, shape)
c. Magnify (stronger, longer, thicker, extra value)
d. Minify (smaller, shorter, lighter)
e. Substitute (other ingredients, process, power)
f. Rearrange (other patterns, layout, sequence, components)
g. Reverse (inside out)
h. Combine (blend, alloy, assortment, ensemble, combine units, etc.)
3. Developing quality variations
4. Developing additional models and sizes (product proliferation)
 Innovation Strategy

Involves creating a new

product life cycle, thereby
making similar existing
products obsolete
 Horizontal and Vertical Integration
Strategies
Horizontal Integration
• Based on growth via acquisition of one or more
similar firms operating at the same stage of the
production-marketing chain
Vertical Integration
• Involves acquiring firms
• That supply acquiring firm with inputs (backward
integration) or
• Are customers for firm’s outputs (forward
integration)
 Ex. 6-7: Vertical and Horizontal
Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integration

Acquisitions or mergers of competing businesses are horizontal integrations
 Motivations for Diversification

 Increase firm’s stock value

 Increase growth rate of firm
 Investment is better use of funds than using
them for internal growth
 Improves stability of earnings and sales
 Balance or fill out product line
 Diversify product line
 Acquire a needed resource quickly
 Achieve tax savings
 Increase efficiency and profitability
 Diversification Strategies

Concentric Diversification
• Involves acquisition of businesses related to acquiring
firm in terms of technology, markets, or products
Conglomerate Diversification
• Involves acquisition of a business because it
represents a promising investment opportunity
• Primary motivation is profit pattern of venture
• Difference between the approaches
• Concentric diversification emphasizes commonality whereas
conglomerate diversification emphasizes profits for each
individual unit
 Turnaround Strategy

Involves a concerted effort

over a period of time to
fortify a firm’s distinctive
competencies, returning it to
profitability
 Turnaround Strategy

A turnaround strategy is done

through

Cost reduction Asset reduction

 Terms Used in Turnaround Strategy

• A turnaround situation represents absolute and

relative-to-industry declining performance of a
sufficient magnitude to warrant explicit turnaround
actions
• The immediacy of the resulting threat to company
survival posed by the turnaround situation is known
as situation severity
• Turnaround responses typically include two stages
of strategic activities
– Retrenchment
– Recovery response
 Divestiture and Liquidation Strategies

Divestiture Strategy
• Involves selling a firm or a major component of a
firm
• Reasons for divestiture
• Partial mismatches between acquired firm and parent firm
• Corporate financial needs
• Government antitrust action
Liquidation Strategy
• Involves selling parts of a firm, usually for its
tangible asset value and not as a going concern
 The Strategy of Bankruptcy

• Two approaches
• Liquidation – Involves complete distribution of a firm’s
assets to creditors, most of whom receive a small fraction of
amount owed
• Reorganization – Involves creditors temporarily freezing
their claims while a firm reorganizes and rebuilds its
operations more profitably
• Advantage of a reorganization bankruptcy
• Proactive option offering maximum repayment of a firm’s
debt in the future if a recovery strategy is successful
 Corporate Combination Strategies

Joint Ventures
• Involves establishing a third company (child), operated
for the benefit of the co-owners (parents)
Strategic Alliance
• Involves creating a partnership between two or more
companies that contribute skills and expertise to a
cooperative project
• Exists for a defined period
• Does not involve the exchange of equity
 Corporate Combination Strategies
(contd.)

• Consortia are defined as large interlocking

relationships between businesses of an industry. In
Japan such consortia are known as keiretsus, in
South Korea as chaebols
• A Japanese keiretsu is an undertaking involving up to
50 different firms that are joined around a large trading
company or bank and are coordinated through
interlocking directories and stock exchanges
• Chaebols are typically financed through government
banking groups and largely are run by professional
managers trained by participating firms expressly for
the job
 Ex. 6-13: The Top Five Strategic
Reasons for Outsourcing

1. Improve business focus

2. Access to world-class capabilities
3. Accelerated reengineering benefits
4. Shared risks
5. Free resources for other purposes
 Basic Issues: Strategic Analysis
and Choice

1. What strategies are most effective at building

sustainable competitive advantages for single business
units?

2. Should dominant-product/service businesses

diversify to build value and competitive advantage?
What grand strategies are most appropriate?
 Prominent Sources of Competitive
Advantage

Cost leadership

Speed Market focus

Differentiation
 Ex. 7-2: Evaluating a Business’s
Cost Leadership Opportunities

A. Skills and Resources B. Organizational

• Sustained capital investment
and access to capital
• Process engineering skills
• Intense supervision of labor or
core technical operations
• Products or services designed
for ease of manufacture or
delivery
• Low-cost distribution systems
Requirements
• Tight cost control
• Frequent, detailed control
reports
• Continuous improvement and
benchmarking orientation
• Structured organization and
responsibilities
• Incentives based on meeting
strict, usually quantitative
targets
 Ex. 7-2 (contd.)

Process innovation Product redesign to reduce Technology

Lowering production number of components development
Safety
costs training for all employees reduces HRM
absenteeism,
downtime, andof
Reduced level accidents
management Computerized, integrated info. systems General
administration Pr
cuts corporate overhead Reduces errors and costs of
it
Favorable long-term contracts; captive suppliers or Procurement
key customer for supplier M
Global, online Economy of scale Computerized Cooperative Subcontracted Service ar
advtg. creates service techs.
gi
suppliers provide in plant reduces routing lowers Repair products
n
automatic equipment costs transportation local cost
correctly first
restocking of and depreciation expense advantage in time or bear
orders based on buying media costs
sales space/time

Inbound logistics Operations Outbound logistics Mkt &

sales
 Advantages of a Cost Leadership
Strategy
 Low-cost advantages reduce likelihood of pricing
pressure from buyers
 Truly sustained low-cost advantages may push
rivals into other areas, lessening price competition
 New entrants must face an entrenched cost leader
without experience to replicate cost advantages
 Low-cost advantages should lessen attractiveness
of substitutes
 Higher margins allow low-cost producers to
withstand supplier cost increases
Key Risks of Cost Leadership

• Many cost-saving activities are

easily duplicated
• Exclusive cost leadership can
become a trap
• Obsessive cost cutting can shrink
other competitive advantages
involving key product attributes
• Cost differences often decline
over time
 Ex. 7-3: Evaluating a Business’s
Differentiation Opportunities
A. Skills and Resources B. Organizational Requirements
• Strong marketing abilities • Strong coordination among
functions in R&D, product
• Product engineering development, and marketing
• Creative talent and flair • Subjective measurement and
• Strong capabilities in basic incentives instead of quantitative
research measures
• Corporate reputation for quality • Amenities to attract highly skilled
labor, scientists, and creative
or technological leadership
people
• Long tradition in an industry or • Tradition of closeness to key
unique combination of skills customers
• Strong cooperation from • Some personnel skilled in sales
channels/suppliers and operations – technical and
marketing
 Ex. 7-3 (contd.)

Cutting-edge production technology and product features Technology

to maintain a distinct image and actual product development
Programs to ensure technical competence of sales HRM
staff and a marketing orientation of service personnel
Comprehensive, personalized database to build knowledge of customers General
administration Pr
to be used in customizing how products are sold, serviced, replaced of
it
Quality control presence at key supplier facilities; work with Procurement
suppliers’ new product development activities M
Purchase superior Careful inspection JIT coordination Expensive, Service Service ar
quality well- informative personnel have gi
of products at each with buyers; use considerable
n
known step to improve of own/captive advertising
discretion to
components, product transportation and credit
raising performance and service to ensure promotion to customers
quality/image of lower defect rate timeliness build image for repairs
final products
Inbound logistics Operations Outbound logistics Mkt &
sales
 Advantages of a Differentiation
Strategy
 Rivalry is reduced when a business
successfully differentiates itself
 Buyers are less sensitive to prices for
effectively differentiated products
 Brand loyalty is hard for new entrants to
overcome
 Key Risks of Differentiation

• Imitation narrows perceived differentiation,

rendering differentiation meaningless
• Technological changes that nullify past
investments or learning
• Cost difference between low-cost competitors
and the differentiated business becomes too
great for differentiation to hold brand loyalty
 Creating a Competitive Advantage
Based on Speed

• Has become a major source of competitive

advantage for many firms
• Involves the availability of a rapid response
to customers by
• Providing current products quicker
• Accelerating new product development or
improvement
• Quickly adjusting production processes
• Making decisions quickly
 Ex. 7-4: Evaluating a Business’s
Rapid Response Opportunities
A. Skills and resources
• Process engineering skills B. Organizational Requirements
• Excellent inbound and outbound • Strong coordination among
logistics functions in R&D, product
• Technical people in sales and development, and marketing
customer service • Major emphasis on customer
• High levels of automation satisfaction in incentive programs
• Corporate reputation for quality or • Strong delegation to operating
technical leadership personnel
• Flexible manufacturing capabilities • Tradition of closeness to key
• Strong downstream partners customers
• Strong cooperation from suppliers • Some personnel skilled in sales
of major components and operations – technical and
marketing
• Empowered customer service
personnel
 Ex. 7-4 (contd.)

Use of companywide technology sharing activities and Technology

autonomous product dev. teams to speed new product dev. development
Develop self-managed work teams and decision- HRM
making at the lowest levels to increase
responsiveness
Highly automated and integrated information processing system. Include General
administration Pr
major buyers in the system on a real-time basis of
it
Preapproved, online suppliers integrated into production Procurement

Working very Standardize dies, JIT delivery plus Use of Locate service Service
M
ar
closely with etc. and prod. partnering with laptops technicians at gi
n
suppliers to equipment to allow express mail linked customer
include their facilities that are
quick changeover services to ensure directly to geographically
choice of to new or special very rapid deliveryoperations to close
warehouse to order speed order
minimize process
delivery time
Inbound Operations Outbound logistics Mkt &
logistics sales
 Activities Conducive to Building
Speed-Based Competitive
Advantage

Customer Product
responsiveness development
Product or cycles
service
improvements Speed in
Information
delivery or
sharing and
distribution
technology
 Advantages of a Speed-Based
Strategy
 Creates a way to lessen rivalry because firm has the
availability of something a rival may not
 Allows firm to charge buyers more, engender loyalty, or
enhance its position relative to its buyers
 Generates cooperation and concessions from suppliers
since they benefit from increased revenues
 Substitutes and new entrants are trying to keep up with
the rapid changes rather than introducing them
 Key Risks of a Speed-Based Strategy

Speeding up activities that have not been conducted in a

fashion prioritizing rapid response should only be done after
attention to training, reorganization, and/or reengineering

Some industries – stable, mature ones – may not offer much

advantage to a firm introducing some forms of rapid response
 Creating Competitive Advantage
Based on Market Focus
• Involves building cost, differentiation, and/or speed
competitive advantages targeted to a narrow,
market niche
• Allows a firm to
– “Learn” its target customers
– Build up organizational knowledge of ways to satisfy its
target market better than larger rivals
• Risks of focus strategies
– Can attract major competitors to the segment
– Believing a focus, by itself, creates success, rather than a
form of low cost, differentiation, or speed
 “Typical” Industry Settings

Emerging Industries
Industries Transitioning to
Maturity
Mature and Decline Industries
Fragmented Industries
Global Industries
 Characteristics of Markets in
Emerging Industries
• Proprietary technology and technological uncertainty
• Competitor uncertainty regarding inadequate information
• High initial cost structure
• Few entry barriers
• First-time buyers require initial inducements
• Inability to easily obtain raw materials and components
• Need for high-risk capital
 Strategic Options for Emerging
Industries

1. Ability to shape industry’s structure

2. Ability to rapidly improve product quality
3. Establish favorable relations with key suppliers
4. Ability to establish technology as dominant
force
5. Acquire a core group of loyal customers
6. Ability to forecast future competitors
 Characteristics of Industries
Transitioning to Maturity
 Intense competition for market share
 Increased sales to experienced, repeat buyers
 Greater emphasis on cost and service
 Industry capacity “tops” out
 New products and new applications harder to
come by
 Increase in international competition
 Declining profitability
Strategic Options for Maturing
Industries

• Prune the product line

• Emphasize process innovation
• Emphasize cost reductions
• Focus on selecting loyal buyers
• Pursue horizontal integration
• Expand internationally
 Pitfalls to Avoid in Competing in
Maturing Industries

• A middle-ground approach to selecting a generic

competitive strategy
• Sacrificing market share for short-term profits
• Waiting too long to respond to price reductions
• Retaining unneeded excess capacity
• Engaging in sporadic or irrational efforts to boost sales
• Placing hopes on “new” products
 Characteristics of Mature/Declining
Industries
 Demand grows more slowly than economy, or
even declines
 Slowing growth is caused by
 Technological substitution
 Demographic shifts
 Shifts in consumer needs
 Strategic Options for
Mature/Declining Industries

• Focus on key market segments offering growth

opportunity
• Emphasize product innovation and quality
improvement
• Emphasize production and distribution efficiency
• Gradually harvest the business
 Characteristics of Fragmented
Industries
No firm has a significant market share
No firm can significantly influence
industry outcomes
Examples
Professional services
Retailing
Wood and metal fabrication
Agricultural products
Funeral industry
 Strategic Options for Fragmented
Industries
• Tightly managed decentralization
– Intense local coordination, high personal service, local autonomy
• “Formula” facilities
– Standardized, efficient, low-cost facilities at multiple locations
• Increased value added
– Difficult to differentiate products/services
• Specialization
– Product type, customer type, type of order, geographic areas
• Bare bones/no frills
– Intense low margin competition (low overhead, minimum wage)
 Characteristics of Global Industries

 Differences in prices and costs among countries due

to
 Currency exchange fluctuations
 Differences in wage and inflation rates
 Other economic factors
 Differences in buyer needs across countries
 Differences in competitors and ways of competing
among countries
 Differences in trade rules and governmental
regulations across countries
 Key Components of Competing in
Global Industries

Approach to gain Generic

global market competitive
coverage strategy
 Strategic Options: Pursuing Global
Market Coverage

• License foreign firms to produce and distribute a

firm’s products
• Maintain a domestic production base and export
products
• Establish foreign-based plants and distribution in
foreign countries
Strategic Options: Choosing a
Generic Competitive Strategy

1. Broad-line global competition

2. Global focus strategy
3. National focus strategy
4. Protected niche strategy
 Ex. 7-8: Grand Strategy Selection
Matrix
Overcome weaknesses

Turnaround or Vertical integration

retrenchment Conglomerate diversification
Divestiture
Internal External
Liquidation
(redirected (acquisition or
resources within II I merger for
the firm) resource
III IV capability)
Concentrated growth Horizontal integration
Mkt. Development Concentric diversification
Prod. Development Joint venture
Innovation

Maximize strengths
 Ex. 7-9: Model of Grand Strategy
Clusters
Rapid market growth

1. Concentrated 1. Reformulation of
growth concentrated growth
2. Vertical 2. Horizontal integration
Integration 3. Divestiture
3. Concentric 4. Liquidation
diversification
Strong competitive I II Weak competitive
position position
IV III
1. Concentric 1. Turnaround or retrenchment
diversification 2. Concentric diversification
2. Conglomerate 3. Conglomerate diversification
diversification 4. Divestiture
3. Joint venture 5. Liquidation

Slow market growth

 Opportunities to Build Value

Opportunities to build value via diversification, integration,

or joint venture strategies are usually found in market-
related, operating-related, and management activities. Such
opportunities center around reducing costs, improving
margins, or providing access to new revenue sources more
cost effectively than traditional internal growth options via
concentration, market development, or product development
 The Portfolio Approach

BCG Growth-
Share Matrix

Industry
Attractiveness- BCG’s Strategic
Business Strength Environments
Matrix Matrix
Life Cycle-
Competitive
Strength Matrix
 Ex. 8-1: The BCG Growth-Share
Matrix
Cash Generation (Market Share)
Description of Dimensions
High Low Market share: sales relative
to those of other
Cash Use (Growth Rate)

Star Problem competitors in the market

High (dividing point is usually
Child
selected to have only the
two-three largest
Low Cash Cow Dog competitors in any market
fall into the high market
share region)

Description of Dimensions
Growth Rate: Industry growth rate in constant dollars (diving
point is usually the GNP’s growth rate)
 Ex. 8-3: Factors Considered in Constructing an
Industry Attractiveness-Business Strength Matrix

(Industry Attractiveness)

Nature of Bargaining Power of Threat of

Competitive Rivalry Suppliers/Customers Substitutes/New
Entrants
•Number of •Relative size of •Technological
competitors typical players maturity/stability
•Size of competitors •Numbers of each •Diversity of the
•Strength of •Importance of market
competitors’ purchases from or •Barriers to entry
corporate parents sales to •Flexibility of
•Price wars •Ability to vertically distribution system
•Competition on integrate
multiple dimensions
 Ex. 8-3 (contd.)

Economic Factors Financial Norms Sociopolitical

Considerations
•Sales volatility •Average profitability •Government
•Cyclicality of demand •Typical leverage regulation
•Market growth •Credit practices •Community support
•Capital intensity •Ethical standards
 Ex. 8-3 (contd.)

(Business Strength)

Cost Position Level of Response Time

Differentiation
•Economies of scale •Promotion •Manufacturing
•Manufacturing costs effectiveness flexibility
•Overhead •Product quality •Time needed to
•Scrap/waste/rework •Company image introduce new
•Patented products products
•Experience effects
•Brand awareness •Delivery times
•Labor rates
•Organizational
•Proprietary
flexibility
processes
 Ex. 8-3 (contd.)

Financial Strength Human Assets Public Approval

•Solvency •Turnover •Goodwill
•Liquidity •Skill level •Reputation
•Break-even point •Relative wage/salary •Image
•Cash flows •Morale
•Profitability •Managerial
•Growth in revenues commitment
•Unionization
 Ex. 8-4: The Industry
Attractiveness-Business Strength
Matrix
Industry Attractiveness
High Medium Low
Description of
Selective Grow or Dimensions
High Invest Growth Let Go Industry Attractiveness:
Subjective assessment
based on broadest
Business Strength

possible range of external

opportunities and threats
Selective Grow Harvest beyond the strict control
Medium Growth or of management
Let Go Business Strength:
Subjective assessment of
how strong a competitive
Low Grow Harvest Divest advantage is created by a
or broad range of the firm’s
internal strengths and
Let Go weaknesses
 Advantages of the Industry Attractiveness-
Business Strength Matrix Over the BCG Matrix

 Terminology is less offensive and more

understandable
 Multiple measures associated with each
dimension tap many factors relevant to
business strength and market attractiveness
 Allows for broader assessment during both
strategy formulation and implementation for a
multibusiness company
 Ex. 8-5: The Market Life Cycle-
Competitive Strength Matrix
Stage of Market Life Cycle

Description of
Dimensions
: ely Stage of Market Life
Competitive Strength

High ush esiv Cycle: See p. 146

P gr
t Ag Competitive
s
ve Strength: Overall
In
subjective rating,
i o n: vely
ut ecti based on a wide
a
C el
S range of factors
e st regarding the
Inv
Low g er: likelihood of gaining
n st
Da arve and maintaining a
H competitive
advantage

Introduction Growth Maturity Decline

 Ex. 8-6: BCG’s Strategic
Environments Matrix

Fragmented Specialization
apparel, house building, pharmaceuticals, luxury cars,
Sources of Advantage

Many
jewelry retailing, sawmills chocolate confectionery

Stalemate Volume
basic chemicals, volume-grade jet engines, supermarkets,
Few
paper, ship owning, wholesale motorcycles, standard
banking microprocessors

Small Big
Size of Advantage
 Contributions of Portfolio Approaches

 Convey large amounts of information about

diverse businesses and corporate plans in a
simplified format
 Illuminate similarities and differences among
businesses, conveying the logic behind
corporate strategies for each business
 Simplify priorities for sharing corporate
resources across diverse businesses
 Provide a simple prescription of what should
be accomplished – a balanced portfolio of
businesses
 Limitations of Portfolio Approaches

• Does not address how value is created across business units

• Accurate measurement for matrix classification not as easy as
matrices implied
• Underlying assumption about relationship between market share
and profits varies across different industries and market segments
• Limited strategic options viewed as basic strategic missions
• Portrays notion that firms need to be self-sufficient in capital
• Fails to compare competitive advantage a business receives from
being owned by a particular company with costs of owning it
 Ex. 8-7: Value Building in
Multibusiness Companies
(Market-Related Opportunities)

Opportunities to Build Potential Competitive Impediments to

Value or Sharing Advantage Achieving Enhanced
Value
Shared sales force Lower selling costs •Buyers have different
activities or shared sales Better market coverage purchasing habits toward
office, or both the products
Stronger technical advice
to buyers •Different salespersons
are more effective in
Enhanced convenience for
representing the product
buyers
•Some products get more
Improved access to
attention than others
buyers
•Buyers prefer to multiple-
source rather than single-
source their purchases
 Ex. 8-7 (contd.)
Opportunities to Build Potential Competitive
Value or Sharing Advantage
Shared after-sales service Low servicing costs
and repair work Better utilization of service
personnel
Faster servicing of customer
calls
Shared brand name Stronger brand image and
company reputation
Increased buyer confidence in
the brand
Shared advertising and Lower costs
promotional activities Greater clout in purchasing
ads
Impediments to
Achieving Enhanced
Value
•Different equipment or
different labor skills, or both,
are needed to handle repairs
•Buyers may do some in-
house repairs
•Company reputation is hurt if
quality of one product is lower
•Appropriate forms of
messages are different
•Appropriate timing of
promotions is different

Opportunities to Build
Value or Sharing
Common distribution channels
Shared order processing
Ex. 8-7 (contd.)
Potential Competitive
Advantage
Lower distribution costs
Enhanced bargaining power
with distributors and retailers to
gain shelf space, shelf
positioning, stronger push and
more dealer attention, and
better profit margins
Lower order processing costs
One-stop shopping for buyer
enhances service and, thus,
differentiation
Impediments to
Achieving Enhanced
Value
•Dealers resist being dominated
by a single supplier and turn to
multiple sources and lines
•Heavy use of the shared
channel erodes willingness of
other channels to carry or push
the firm’s products
•Differences in ordering cycles
disrupt order processing
economies

(Operating Opportunities)
Opportunities to Build
Value or Sharing
Joint procurements of
purchased inputs
Shared inbound or outbound
shipping and materials
handling
Ex. 8-7 (contd.)
Potential Competitive
Advantage
Lower input costs
Improved input quality
Improved service from
suppliers
Lower freight and handling
costs
Better delivery reliability
More frequent deliveries, such
that inventory costs are
reduced
Impediments to
Achieving Enhanced
Value
•Input needs are different in
terms of quality or other
specifications
•Inputs are needed at different
plant locations, and
centralized purchasing is not
responsive to separate needs
of each plant
•Input sources or plant
locations, or both, are in
different geographic areas
•Needs for frequency and
reliability of inbound/outbound
delivery differ among the
business units
 Ex. 8-7 (contd.)
Opportunities to Build Potential Competitive
Value or Sharing Advantage
Shared manufacturing and Lower
assembly facilities manufacturing/assembly
costs
Better capacity utilization,
because peak demand for
one product correlates
with valley demand for
other
Bigger scale of operation
improves access to better
technology and results in
better quality
Impediments to
Achieving Enhanced
Value
•Higher changeover costs
in shifting from one
product to another
•High-cost special tooling
or equipment is required
to accommodate quality
differences or design
differences

Opportunities to Build
Value or Sharing
Shared product and process
technologies or technology
development or both
Shared administrative support
activities
Ex. 8-7 (contd.)
Potential Competitive
Advantage
Lower product or process
design costs, or both, because
of shorter design times and
transfers of knowledge from
area to area.
More innovative ability, owing to
scale of effort and attraction of
better R&D personnel
Lower administrative and
operating overhead costs
Impediments to
Achieving Enhanced
Value
•Technologies are the same,
but the applications in different
business units are different
enough to prevent much sharing
of value
•Support activities are not a
large proportion of cost, and
sharing has little cost impact
(and virtually no differentiation
impact)

Opportunities to Build
Value or Sharing
Shared management
know-how, operating skills,
and proprietary information
Ex. 8-7 (contd.)
(Management Opportunities)
Potential Competitive Impediments to
Advantage Achieving Enhanced
Value
Efficient transfer of a •Actual transfer of know-
distinctive competence – how is costly or stretches
can create cost savings or the key skill personnel too
enhance differentiation. thinly, or both.
More effective •Increased risks that
management as concerns proprietary information will
strategy formulation, leak out
strategy implementation,
and understanding of key
success factors
 Ex. 8-9: Six Critical Questions for
Diversification Success
• What can our company do better than any of its
competitors in its current market(s)?
• What core competencies do we need in order to
succeed in the new market?
• Can we catch up to or leapfrog competitors at their
own game?
• Will diversification break up our core competencies
that need to be kept together?
• Will we be simply a player in the new market or will
we emerge a winner?
• What can our company learn by diversifying, and are
we sufficiently organized to learn it?
Places to Look for Parenting Opportunities

• Size and age • Common

• Management capabilities
• Business • Specialized
definition expertise
• Predictable • External relations
errors • Major decisions
• Linkages • Major changes
 The Patching Perspective

• Patching is the process by which corporate

executives routinely remap businesses to
match rapidly changing market opportunities.
• Patching can be
– Adding
– Splitting
– Transferring
– Exiting, or combining businesses
• Patching is more critical in turbulent and
rapidly changing markets, than in stable,
unchanging markets
 Ex. 8-10: Three Approaches to Strategy

Position Resources Simple

Rules
Strategic logic Identify an Establish a vision Jump into the
attractive market Build resources confusion
Locate a Leverage across Keep moving
defensible markets Seize
position opportunities
Fortify and Finish strong
defend
Strategic Where should we What should we How should we
question be? be? proceed?
Source of Unique, valuable Unique, valuable, Key processes
advantage position with inimitable and unique
tightly integrated resources simple rules
activity system
 Ex. 8-10 (contd.)

Works best in Slowly changing, Moderately Rapidly changing,

well-structured changing, well- ambiguous
markets structured markets
markets
Duration of Sustained Sustained Unpredictable
advantage

Risk It will be difficult to Company will be Managers will be

alter position as too slow to build too tentative in
conditions change new resources as executing on
conditions change promising
opportunities
Performance Profitability Long-term Growth
goal dominance
 Ex. 8-11: Simple Rules, Summarized
(Adapted)

Type Purpose
How-to rules They spell out key features of how a process is executed –
“What makes our process unique?”
Boundary rules They focus managers on which opportunities can be
pursued and which are outside the pale.
Priority rules They help managers rank the accepted opportunities.

Timing rules They synchronize managers with the pace of emerging

opportunities and other parts of the company.
Exit rules They help managers decide when to pull out of yesterday’s
opportunities.