Chapter 1.

The concept of strategy

Strategy is focused on achieving goals, it involves allocation resources, implies consistency and integration of decision and action. Clear sense of direction. Strategic choice: where to compete and how to compete. Characteristic of a strategy that are conductive to success: 1. Goals are simple, consistent and long term 2. Profound understanding of competitive environment 3. Effective in exploiting internal strengths, while protecting area of weaknesses 4. Effective implementation Basic framework for strategy analysis: Firm: - Goals and values - Resources and capabilities - Structure and system Strategy The industry environment: - Competitors - Customers - Suppliers

The task of strategy: how firm will deploy its resources within its environment and satisfy its long-term goals, and how to organize itself to implement the strategy. Strategic fit: all these elements should be consistent. Strategic decisions are important, they involve a significant commitment of resources and are not easily reversible. Strategy: - Corporate strategy: it defines the industry and market in which firm competes. Corporate strategy decisions include choice over in diversification, vertical integration, acquisitions and new ventures; and the allocation of resources between different businesses of the firm. - Business strategy: it is concerned with how the firm competes within particular industry or market. It must establish a competitive advantages over its rivals (competitive strategy) The scope of a firms business has implication for the sources of competitive advantage, and the nature of a firms competitive advantage determines the range of business it can be successful in. Two dimensions of strategy:
Static (competing for the present) Where are we competing? Product market scope Geographical scope Vertical scope How are we competing? What is the basis of our competitive advantage? Dynamic (preparing for the future) What do we want to become? Vision statement (what it seeks to become) What do we want to achieve? Mission statement (overall purpose of the firm) Performance goals How we will be there Guidelines for development Priority for capital expenditure, R&D Growth modes: organic growth, M&A, alliances

Strategy: - Intended strategy: product of rational deliberation and compromise among the many groups and individuals involved in the process - Realized strategy: strategy that is implemented, only partly related to what was intended

Emergent strategy: permit adaptation and learning through continuous interaction between strategy formulation and implementation in which strategy is adjusted and revised. The best approach. The decentralized, bottom-up strategy emergence often precedes more formalized strategy formulation. Balance between formal planning and emergency depends on upon stability and predictability of company business environment. St. planning can be restricted to a few principles and guidelines. Example. Southwest Airlines strategy is Meet customers short-haul travel needs at fares competitive with the cost of automobile travel Roles of strategy: 1. Decision support: a. strategy constrains the range of decision alternatives b. a strategy-making process permits to integrate knowledge of different individuals c. a strategy-making process facilitates the use of analytical tools 2. Coordinating device a. Statement of strategy communicates the identity, goals and positioning of the company to all organizational members. b. St. planning process provides a forum in which consensus is developed c. The control of strategy implementation provides mechanism to ensure the movement in a consistent direction 3. Target a. Set aspiration that can motivate and inspire b. St. is about stretch and resource leverage

Chapter 3. Industry analysis

The business environment consists of all the external influences that affect firms decision and performance. Analysis of all factors leads to high cost and information overload, so we should focus on vital: understanding customer (to make profit firm has to create value for customer), suppliers (firm acquires goods and services), competition (ability to generate profit depends on the intensity of competition). This is an industry environment. Macro level factors (e.g. economic trends) affect industry environment. Key question: what determines the level of profit in an industry? - The value of the product to the customers - The intensity of competition - The bargaining power of producers relative to their suppliers and buyers Level of industry profitability is not random, it is determined by the systematic influence of industry structure.
Concentration Entry and exit barriers Product differentiation Information availability Perfect competition Many firms No barriers Homogeneous product (commodity) No impediments to information flow Oligopoly Duopoly A few firms Two firms Significant barriers Potential for product differentiation Imperfect availability of information Monopoly One firm High barriers

Another approach to analyze industry environment: Porters Five Forces of Competition Framework 1. Threat of substitute. 1.1. Buyers propensity to substitute. The absence of close substitute means that consumers are insensitive to price. 1.2. Relative price and performance of substitute. The more complex the product and the more difficult it is to discern performance differences, the lower the extent of substitution on the basis of price differences. 2. Threat of entry. If the entry of new firms is unrestricted, the rate of profit will fall. Factors that protect industry against new entrants (however barriers that are effective against new companies may be ineffective against established firms that are diversifying from other industry): 2.1. Capital requirements 2.2. Economies of scale (usually in industries that are capital, research or advertising intensive) 2.3. Absolute cost advantages (access to low cost source of raw materials) 2.4. Product differentiation (brand recognition and customer loyalty) 2.5. Access to distribution channels (limited capacity within distribution channel, risk aversion by retailers) 2.6. Government and legal barriers 2.7. Relation by established producers (aggressive price cutting, increased advertising, sales promotion) 3. Buyer power 3.1. Price sensitivity 3.1.1. Cost of product relative to total cost. The greater the importance the more sensitive buyers will be about price they pay. 3.1.2. Product differentiation. The less differentiation, the more willing the buyer to switch suppliers on the basis of price.

3.1.3. Competition between buyers. The more intense the competition among buyers, the greater their eagerness for price reduction from their seller. 3.1.4. The more critical industry product to the quality of buyers product, the less sensitive buyer to the price. 3.2. Bargaining power 3.2.1. Size and concentration of buyers relative to producers. The smaller the buyers, the bigger price he pays. 3.2.2. Buyers switching costs. 3.2.3. Buyers information. The better informed buyers are about suppliers, their price and costs, the better buyers are able to bargain. 3.2.4. Buyers ability to integrate vertically. Buyers can displace supplier, risk for industry. 4. Industry rivalry. Usually it is the major determinant of profitability. 4.1. Concentration. Concentration ratio: the combined market share of leading producers. Where market is dominated by a small group, price competition may be restrained, either by collusion or through parallelism of pricing decisions; competition focuses on advertising, promotion and product development. BUT the relation between seller concentration and profitability is weak statistically, and estimated effect is usually small 4.2. Diversity of competitors. If companies have the same origins, objectives, cost and strategies they tend to avoid price competition in favor of collusive pricing practice. 4.3. Product differentiation. The more similar the offerings, the easier customers switch between them, the greater is the inducement for firm to cut price to boost sales. 4.4. Excess capacity and exit barriers. Unused capacity encourages firms to cut price to increase sales. Excess capacity can be cyclical or structural problem resulting from overinvestment or declining demand. Barriers to exit: durable and specialized resources, job protection. On average, companies in growing industries earn higher profits than companies in slow growing or declining industry. 4.5. Cost conditions (ratio of fixed costs to variable). If fixed costs are high relative to variable costs, firms will take on marginal business at any price that covers variable cost. It is disaster for profitability. 5. Supplier power: Same as those determining power of producer relative to buyers. Applying industry analysis: 1. Describing industry structure: Industry definition: which activities within value chain we include in industry? What are the boundaries of industry in term of both product and geographical scope? It is a matter of judgment and depends on purpose and context of the analysis. Determine key industry players (suppliers, buyers, producers, producers of substitute) Examine key characteristic of each group Sort out relationship between them 2. Forecasting industry profitability Examine how the industry current and recent level of competition and profitability are a consequence of its present structure Identify the trends that are changing industry structure. Is the industry consolidating? Are new player seeking to enter? And so on. Identify how these structural changes will affect the five forces of competition and resulting profitability of the industry. 3. Positioning the company where competitive forces are weakest. 4. Develop strategy to alter industry structure.

Identify the key structural features of the industry that are responsible for depressing profitability Consider which of these features are amenable through appropriate strategic initiatives To identify key success factor we may model the profitability to find profitability drivers or start with two questions: - What do our customers want? - What does the firm need to do to survive competition? o What drives the competition o What are the main dimensions of competition o How intense is competition o How we can obtain a superior competitive position

Chapter 4. Further Topics In Industry And Competitive Analysis

Porters 5 forces weaknesses 1. Complements: A missing force in the Porters 5 Forces anlysis - Complements increase the value of my product - Bargaining power and its deployment are the key ( ex: Nintendo and software companies) 2. The notion of Porters 5 forces that industry structure is relatively stable and determines competitive behavior in a predictable way ignores the dynamic forces of innovation and entrepreneurship. Game theory 1. It permits the framing of strategic decisions. 2. It can predict the outcome of competitive situations and identify optimal strategic choices. Frame Work of Competitor Analysis 1. Competitors Current Strategy 2. Competitors Objectives 3. Competitors Assumptions about the industry 4. Competitors Resources and Capabilities Stages in Segmentation Analysis 1. Identify Key Segmentation Variables 2. Construct a Segmentation Matrix 3. Analyze Segment Attractiveness 4. Identify the Segments Key Success Factors 5. Select Segment Scope

Chapter 5. Analyzing Resources And Capabilities

Anayzing the Resources of the Firm 1. Tangible Resources: financial, physical assets. The goal is to identify what opportunities exist for economizing on their use and what the possibilities are for employing existing assets more profitably. 2. Intangible Resources: brand equity, reputation quotients, trademarks and so on. 3. Human Resources Organizational Capabilities 1. Classifying Capabilities - A functional Analysis: corporate functions, management information R&D. - A value chain analysis: primary activities and support activities Appraising Resources and Capabilities 1. 2 conditions for establishing Competitive Advantage - Scarcity - Relevance( to KSF ) 2. Sustaining Competitive Advantage - Durability: For example, technology is not as durable to time as brand value. - Transferability and Replicability: Can I buy certain resources from another of do I have to develop it? 3. Approaches to Capability Development - Acquiring Capabilities; M&A (fast but risky.culture shock, personality clashes) - Accessing Capabilities: strategic Alliances (targeted and cost-effective but the goals should be same and have to manage relationship) - Creating Capabilities: (time, money)

Chapter 7. Organization Structure and Management Systems

I) Relevant Vocabulary Corporation--a corporation is an organization that has a legal identityit can own property, enter into contracts, sue and be sued. Holding Company--a company that develops as a result of a series of acquisitions in which the parent company appoints the board of directors and receives dividends but maintains little management control over the acquired companies. II) The Organizational Problem: Reconciling Specialization with Coordination and Cooperation --The fundamental source of efficiency in production is specialization through division of labor. However, the more unstable the environment is, the more the decisions the company has to make (and the faster), and thus the coordination cost of division of labor becomes higher. --The Cooperation Problemaligning the interests of individuals who have divergent goals under the umbrella of an organization or company is extremely difficult. --Companies employ the following mechanisms to align goals: Control mechanisms: reporting structures (bosses & subordinates), and positive and negative incentive systemspromotions, bonuses, firing, etc. Performance incentives: link rewards to output (bonuses) but are more difficult to implement (or measure) when employees are working in teams. Shared Values: Corporate culture. --The Coordination Problemunless individuals can find ways to coordinate their efforts, production doesnt happen. --Coordination mechanisms are as follows: Rules & Directives: Employment contracts, general company rules Routines: Where activities are performed recurrently, coordination becomes institutionalized within the company or organization. Mutual Adjustment: (soccer example), individuals coordinate without explicit discussion. This often occurs when there are leaderless teams or when routinization/mechanization is impossible and works best when team members are informed of the actions of their teammates. III) Hierarchy in Organizational Design Hierarchy: Hierarchy is the fundamental feature of organizational structure. It is the primary means by which companies achieve specialization. The critical issue is not whether or not companies should organize by hierarchy, but how it should be structured and how the various parts should be linked. --the term hierarchy is sometimes used interchangeably with bureaucracy, to mean management from the top down. Bureaucracies do not adapt easily to changing external environments, while well managed hierarchies can. Benefits of Hierarchy: --Hierarchy economizes on coordination/ makes coordination simpler and less onerous/heavy. --Hierarchical systems are able to adapt more easily than non-hierarchical systems. --Turbulence in the business/economic environment often makes it difficult for hierarchies to adapt. As a result many large corporations such as BP and General Electric have decentralized decision making, reduced the number of hierarchical layers, shrunk headquarters staff, , and shifted the emphasis of control from supervision to accountability.

--the essence of hierarchy is specialized units coordinated and controlled by a superior unitmany companies struggle with what basis on which they should group employees. The following are examples of bases on which companies group employees: --tasks (sales, finance, etc.) --products --geography --process (product development, manufacturing, ) IV) Organizing on the basis of coordination intensity --a company can be organized based on geographythat is based on local units. --a company can be organized around functional specializations (Ex. British airways is organized around flight operations, engineering, marketing, sales, customer service, human resources) --a company can be organized around products Other Factors Influencing the Definition of Organizational Units --economies of scale: there may be advantages in grouping together activities where scale economies are present --economies of utilization: it may be possible to exploit efficiencies from grouping together similar activities that result from fuller utilization of employees --learning: if establishing competitive advantage requires building distinctive capabilities, firms must be structured to maximize learning --Standardization of control systems: task may be grouped together to achieve economies of scale in standardized control mechanisms. V) Alternative Structural Forms The Functional Structure: --grouping together functionally similar tasks is conducive to exploiting scale economies, promoting learning and capability building, and deploying standardized control systems --different functional departments develop their own goals, values, vocabularies and behavioral norms that make cross-functional integration difficult Multidivisional Structure: --a loose-coupled, modular organization where business-level strategies and operating decisions can be made at the divisional level --creates the potential for decentralized decision making Matrix Structure: --organizational structures that formalize coordination and control across multiple dimensions are called matrix structures. --companies such as Philips, Nestle, and Unilever adopted matrix structures during the 1960s and 70s (in the 80s most companies dismantled these structures) --are sometimes thought to lead to conflict and confusion. VI) Management Systems for Coordination & Control Information Systems --information is fundamental to the operation of all management systems

--administrative hierarchies are based on vertical information flow (from boss to subordinate, etc.) --the trend towards decentralization rests on 1) information feedback to the individual 2) information networking, which has allowed individuals to coordinate their activities voluntarily Strategic Planning Systems --company knowledge becomes more complicated to manage as firms become larger --as firms mature, their strategic planning processes become more systematized. --Most strategic plans consist of the following elements: 1) statement of goals; 2) a set of assumptions or forecasts about key developments in the external environment; 3) a qualitative statement on how the shape of the business will be changing; 4) specific action steps with regard to decisions and projects, supported by a set of milestones..; 5) specific action steps with regard to decisions and projects; a set of financial projections including a capital expenditure budget Financial Planning & Control Systems --Capital Expenditure Budget --Operating Budget Human Resource Management Systems --has the task of establishing an incentive system that supports the implementation of strategic plans and performance targets through aligning employee and company goals and ensuring that each employee has the skills necessary to perform his or her job

Chapter 8. The Nature & Sources of Competitive Advantage

--The more turbulent an industrys environment, the greater the number of sources of change and the greater the differences in firms resources and capabilities, the greater the dispersion of profitability within the industry. I) Competitive Advantage from Responsiveness to Change --Ability to anticipate changes in the external environment --Speed -The first requirement for quick response is information -The second requirement is short cycle times that allow information on emerging market developments to be acted upon speedily Competitive Advantage from Innovation --innovation not only creates competitive advantage; it provides a basis for overturning the competitive advantage of other firms --innovation typically involves creating value for customers from novel products --innovation may also involve redesigned processes and novel organizational designs Blue Ocean Strategy --the creation of uncontested market space --the most successful blue ocean strategies do not launch whole new industries but introduce novel approaches to creating customer value II) Sustaining Competitive Advantage --Identification: the firm must be able to identify that a rival possesses a competitive advantage --Incentive: Having identified that a rival possesses a competitive advantage, the firm must believe that by investing in imitation, it too can earn superior returns --Diagnosis: The firm must be able to diagnose the features of its rivals strategy that give rise to competitive advantage --Resource Acquisition: The firm must be able to acquire through transfer or replication the resources and capabilities necessary for imitation. Deterrence & Preemption --If a firm can persuade rivals that imitation will unprofitable, it may be able to avoid competitive challenges -A firm can deter imitation by preemptionoccupying existing and potential strategic niches to reduce the range of investment opportunities open to the challenger by --proliferation of product varieties --large investments in production capacities --patent proliferation Diagnosing Competitive Advantage --the difficult task is to identify which differences are the critical determinants of superior profitability

--the more multi-dimensional a firms competitive advantage and the more it is based on complex bundles of organizational capabilities, the more difficult it is for the competitor to diagnose the determinants of success. Acquiring Resources and Capabilities --a firm can acquire resources and capabilities in two ways: it can buy them or it can build them. The period over which a competitive advantage can be sustained depends critically on the time it takes to acquire and mobilize the resources and capabilities needed to mount a competitive challenge. III) Competitive Advantage in Different Market Settings --for competitive advantage to exist, there must be imperfection in the market (imperfect competition) In trading markets, several types of imperfection to the competitive process create opportunities for competitive advantage: Imperfect Availability of Information: This provides opportunities for competitive advantage through superior access to information. Transaction Costs: Competitive advantage may accrue to the traders with the lowest transaction costs Systematic Behavioral Trends: Competitive advantage might accrue to firms that are better placed to follow systematic patterns that result from market psychology. Overshooting: Competitive advantage can sometimes be gained (in the short term) by following the behavior of the herd. --Competitive advantage in production markets can be influenced by the heterogeneity of the firms endowments of resources and capabilities. The greater the heterogeneity, the greater the potential for competitive advantage --Where firms possess very similar bundles of resources and capabilities, imitation of the competitive advantage of the incumbent firm is most likely IV) Types of Competitive Advantage: Cost & Differentiation A firm can achieve higher profits than a competitor by Supplying an identical product or service at a lower cost or, it can supply a product or service that is differentiated in such a way that the customer is willing to pay a price premium that is greater than the cost of the differentiation.

See Figure 8.4 (Page 223) See Table 8.1 (Page 223)

--Porter defines cost leadership and differentiation as mutually exclusivea firm that is stuck in the middle is almost guaranteed low profitability. --In practice all firms must differentiate, exampleeven firms such as Ikea and Southwest Airlines that are known for cost leadership, do have branded/differentiated products. --in many industries the cost leader is not the market leader but a smaller competitor with minimal overheads, nonunion labor, and cheaply acquired assets.

Chapter 9. Cost Advantage

Strategy and Cost Advantage Price as the principal medium of competition price competitiveness requires cost efficiency. Experience curve the relationship between unit cost and cumulative output identified by the Boston Consulting Group. Cost analysis requires taking account of multiple factors, the importance of each depending on industry context. Our approach to analyzing cost advantage will be to identify the basic determinan ts of a firms cost position within its particular industry. The Sources of Cost Advantage There are seven principal determinants of a firms unit costs (cost per unit of output) relative to its competitors; we refer these as cost drivers. The relative importance varies across industries, across firms within an industry and across the different activities within a firm. The drivers of cost advantage ECONOMIES OF SCALE

*Technical input-output relationships *Indivisibilities *Specialization *Increased individual skills *Improved organizational routines *Process innovation *Re-engineering of business processes *Standardization of designs and components *Design of manufacture *Location advantages *Ownership of low-cost inputs *Nonunion labor *Bargaining power *Ratio of fixed to variable costs *Fast and flexible capacity adjustment *Organizational slack/X-inefficiency *Motivation and organizational culture *Managerial effectiveness

ECONOMIES OF LEARNING

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

RESIDUAL EFFICIENCY

Economies of Scale Economies of scale exist wherever proportionate increases in the amounts of inputs employed in a production process result in lower unit costs. The point at which most scale economies are exploited is the Minimum Efficient Plant Size (MEPS). Scale economies are also important in nonmanufacturing operations such as purchasing, R&D, distribution and advertising. Scale economies sources: Technical input-output relationships. In many activities, increases in output do not require proportionate increases in input. Indivisibilities. Many resources and activities are lumpy they are unavailable in small sizes. Hence, they offer economies of scale as firms are able to spread the costs of these items over larger volumes of output.

Specialization. Increases scale permits grater task specialization that is manifest in greater division of labor. Breaking down the production process into separate tasks performed by specialized workers using specialized equipment. Similar economies are important in knowledge-intensive industries.

Scale Economies and Industry Concentration. Scale economies are a key determinant of an industrys level of concentration (the proportion of industry output accounted for by the largest firms). Limits to Scale Economies. Despite the prevalence of scale economies, small and medium sized companies continue to survive and prosper in competition with much bigger rivals. How do small and medium sized firms offset the disadvantages of small scale? First, by exploiting the flexibility advantages of smaller size; second, by avoiding the difficulties of motivation and coordination that accompanies large scale. Economies of Learning The experience curve is based primarily on learning-doing on the part of individuals and organizations. Repetition develops both individual skills and organizational routines. Process Technology and Process Design For most goods and services, alternative process technologies exist. A process is technically superior to another when, for each unit of output, it uses less or one input without using more of any other input. New process technology may radically reduce costs. When process innovation is embodied in new capital equipment, diffusion is likely to be rapid. However, the full benefits of new processes typically require system-wide changes in job design, employee incentives, product design, organizational structure and management controls. In the absence of fundamental changes in organization and management, the productivity gains were meager. Cost leadership established is the result of matching their structures, decision processes and human resource management to the requirements of their process technologies. Indeed, the greatest productivity gains from process innovation are typically the result of organizational improvements rather than technological innovation and new hardware. Business Process Re-engineering (BPR) Re-engineering gurus Michael Hammer and James Champy defined BPR as: the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance, such as cost, quality, service, and speed. With information technology, the temptation is to automate existing processes. The key is to detach from the way in which a process is currently organized and to begin with the question: If we were starting afresh, how would we design this process? Hammer and Champy point to the existence of a set of commonalities, recurring themes, or characteristics that can guide BPR. These include: Combining several jobs into one. Allowing workers to make decisions. Performing the steps of a process in a natural order. Recognizing that processes have multiple versions and designing processes to take account of different situations. Reducing checks and controls to the point where they make economic sense. Minimizing reconciliation. Appointing a case manager to provide a single point of contact at the interface between processes. Reconciling centralization with decentralization in process design. To redesign a process one must first understand it. To this extent, Hammer and Champys recommendation to obliterate existing processes and start with a clean sheet of paper runs the risk of destroying organizational capabilities that have been nurtured over a long period of time. While BPR may be a faded fad, design and development is critical to cost efficiency. Over the past decade, BPR has evolved into business process management, where the emphasis has shifted form workflow management to the broader application of information technology to the redesign and enhacement of organizational processes.

Product Design Design-for-manufacture designing products for ease of production rather than simply for functionality and esthetics- can offer substantial cost savings. Service offerings too can be designed for ease and efficiency of production. However, efficiency in service design is compromised by the tendency for costumers to interfere in service delivery. This requires a clear strategy to manage variability either through accommodation or restriction. Capacity Utilization The firms in an industry do not necessarily pay the same price for identical inputs. Locational differences in input prices. The prices of inputs may vary between locations, the most important being differences in wage rates from one country to another. Ownership of low-cost sources of supply. In raw material-intensive industries, ownership or access to low-cost sources can offer crucial cost advantage. Nonunion labor. Labor unions result in higher levels of pay and benefits and work restrictions that lower productivity. Bargaining power. Where bought-in products are a major cost item, differences in buying power among the firms in an industry can be an important source of cost advantage. Residual Efficiency In many industries, the basic cost drivers -scale, technology, product and process design, input costs, and capacity utilization- fail to provide a complete explanation for why one firm in an industry has lower unit costs than a competitor. These residual efficiencies relate to the extent to which the firm approaches its efficiency frontier of optimal operation. Residual efficiency depends on the firms ability to eliminate organizational slack surplus costs that keep the firm from maximum-efficiency operation. These costs are often referred to as organizational fat and built up unconsciously. Using the Value Chain to Analyze Costs To analyze costs and make recommendations for building cost advantage, the company or even the business unit is too big a level for us to work at; every business may be viewed as a chain of activities. In most value chains each activity has a distinct cost structure determined by different cost drivers. Firms value chain to identify: the relative importance of each activity with respect to total cost; the cost drivers for each activity and the comparative efficiency with which the firm performs every activity; how costs in one activity influence costs in another; which activities should be undertaken within the firm and which activities should be outsourced. The Principal Stages of Value Chain Analysis A value chain analysis of a firms cost position comprises the following stages: 1. Disaggregate the firm into separate activities. It requires understanding the chain of processes involved in the transformation of inputs into output and its delivery to the costumer. Key considerations are: the separateness of one activity from another; the importance of an activity; the dissimilarity of activities in terms of cost drivers; the extent to which there are differences in the way competitors perform the particular activity. 2. Establish the relative importance of different activities in the total cost of the product. Our analysis needs to focus on the activities that are major sources of cost. 3. Identify cost drivers. Can be deduced simply from the nature of the activity and the types of cost incurred. Capital-intensive activities. Labor-intensive assembly activities. 4. Identify linkages. The costs of one activity may be determined, in part, by the way in which other activities are performed. 5. Identify opportunities for reducing costs. By identifying areas of comparative inefficiency and the cost drivers for each, opportunities for cost reduction become evident.

Chapter 10. Differentiation Advantage

The Nature of Differentiation and Differentiation Advantage Differentiation Variables The potential for differentiating a product or service is partly determined by its physical characteristics. For products that are technically simple (a pair of socks), that satisfy uncomplicated needs (a nail) or must meet rigorous technical standards (a thermometer), differentiation opportunities are constrained by technical and market factors. Products that are technically complex (an airplane), that satisfy complex needs (a vacation) or that do not need conform to particular technical standards (toys) offer much greater scope for differentiation. Differentiation is limited only by the boundaries of the human imagination. Differentiation extends beyond the physical characteristics of the product or service to encompass everything about the product or service that influences the value that costumers derive from it. This means that differentiation includes every aspect of the way in which a company relates to its customers. Differentiation is not an activity specific to particular functions; it infuses all activities through which an organization relates to its customers and is built into identity and culture of a company. In analyzing differentiation opportunities, we can distinguish tangible and intangible dimensions of differentiation. Tangible differentiation is concerned with the observable characteristics of a product or service that are relevant to customers preferences and choice processes. Tangible differentiation also includes the performance. Tangible differentiation extends to products and services that complement the product in question. Intangible differentiation arises because the value that customers perceive in a product or service does not depend exclusively on the tangible aspects of the offering. There are few products where customer choice is determined solely by observable product features or objective performance criteria. Where a product or service is meeting complex customer needs, differentiation choices involve the overall image of the firm and its offering. Differentiation and Segmentation Differentiation is different from segmentation. Differentiation is concerned with how a firm competesthe ways in which it can offer uniqueness to customers. Uniqueness might relate to consistency, reliability, quality, and innovation. Segmentation is concerned with where a firm competes in terms of customer groups, localities and product types. Whereas segmentation is a feature of market structure, differentiation is a strategic choice by a firm. A segmented market is one that can be partitioned according to the characteristics of customers and their demand. By locating within a segment, a firm does not necessarily differentiate itself from its competitors within the same segment. Differentiation decisions tend to be closely linked to choices over the segments in which a firm competes. The Sustainability of Differentiation Advantage Differentiation offers a more secure basis for competitive advantage than low cost. International competition has revealed the fragility of seemingly well-established positions of domestic cost leadership. Cost advantage is highly vulnerable to unpredictable external forces, vulnerable to new technology and strategic innovation. Sustained high profitability is associated more with differentiation than cost leadership.

Analyzing Differentiation: The Demand Side Analyzing demand begins with understanding why customers buy a product or service. Market research systematically explores customer preferences and customer perceptions of existing products. However, the key to successful differentiation is to understand customers. Product Attributes and Positioning Understanding customer needs requires the analysis of multiple attributes; concerning the positioning of new products, repositioning of existing products, and pricing. Multidimensional Scaling (MDS). Permits customers perceptions of competing products similarities and dissimilarities to be represented graphically and for the dimensions to be interpreted in terms of key product attributes. Conjoint Analysis. Measures the strength of customer preferences for different product attributes. The technique requires, first, an identification of the underlying attributes of a product and, second, market research to rank hypothetical products that contain alternative bundles attributes. Hedonic Price Analysis. The price at which a product can sell in the market is the aggregate of the values derived from each of these individual attributes. Hedonic price analysis uses regression to relate price differences for competing products to the levels of different attributes offered by each, thereby allowing the implicit market price for each attribute to be calculated. Value Curve Analysis. Selecting the optimal combination of attributes depends not only on which attributes are valued by customers but also on where competitors offerings are positioned in relation to different attributes. By mapping the performance characteristics of competing products on to a value curve. The Role of Social and Psychological Factors The problem with analyzing product differentiation in terms of measurable performance attributes is that it does not delve very far into customers underlying motivations. Must buying is motivated by social and psychological needs. To understand customer demand and identify profitable differentiation opportunities requires that we analyze the product and its characteristics, but also customers, their lifestyles and aspirations, and the relationship of the product to these lifestyles and aspirations. Analyzing Differentiation: The Supply Side Differentiation is concerned with the provision of uniqueness. Michael Porter identifies a number of drivers of uniqueness that are decision variables for the firm: product features and product performance; complementary services (such as credit, delivery, repair); intensity of marketing activities (such as rate of advertising spending); technology embodied in design and manufacture; the quality of purchased inputs; procedures influencing the conduct of each of the activities; the skill and experience of employees; location ; the degree of vertical integration (which influences a firms ability to control inputs and intermediate processes). In analyzing the potential for differentiation, we can distinguish between the differentiation of the product (hardware) and ancillary services (software). On this basis, four transaction categories can be identified. As markets mature, so systems comprising both hardware ans software tend to

unbundle. Products become commoditized while complementary services become provided by specialized suppliers. Differentiation of merchandise (hardware) and support (software) SUPPORT (SOFTWARE) Differentiated MERCHANDISE (HARDWARE) Differentiated Undifferentiated SYSTEM SEVICE Undifferentiated PRODUCT COMMODITY

Electronic commerce allows customers to assemble their own bundles of goods and services at low cost with little inconvenience. Product Integrity Refers to the consistency of a firms differentiation. It has both internal and external dimensions. Internal integrity refers to consistency between the function and structure of the product. External integrity is a measure of how well a product fit the customers objectives, lifestyle. Signaling and Reputation Differentiation is only effective if it is communicated to customers. But information is not always available to potential customers. The economics literature distinguishes between search goods, whose qualities and characteristics can be ascertained by inspection, and experience goods, whose qualities and characteristics are only recognized after consumption. The market for experience goods corresponds to a classic prisoners dilemma. Equilibrium is established, with the customer offering a low price and the supplier offering a low-quality product. The resolution of this dilemma is for producers to find some credible means of signaling quality to the customer. The most effective signals are those that change the payoffs in the prisoners dilemma. Extended warranty, brand names, sponsorship are all signals of quality. The more difficult it is to ascertain performance prior purchase, the more important signaling is. Strategies for reputation building have been subjected to extensive theoretical analysis. Some of the propositions arise from this research include the following: Quality signaling is primarily important for products whose quality can only be ascertained after purchase (experience goods). Expenditure on advertising is an effective means of signaling superior quality. A combination of premium pricing and advertising is likely to be superior in signaling quality than either price or advertising alone. The higher the sunk costs requires for entry into a market and the greater the total investment of the firm, the greater the incentives for the firm not to cheat customers through providing low quality at high prices. Brands Brand names and the advertising that supports them are especially important as signals of quality and consistency because a brand is a valuable asset. Brands fulfill multiple roles. Most importantly, a brand provides a guarantee by the producer to the customer of the quality of the product. The brand represents a guarantee to the customer that reduces uncertainty and search costs. Advertising has been the primary means of influencing and reinforcing customer perceptions; increasingly, however,

consumer goods companies are seeking new approaches to brand development that focus less on product characteristics and more on bran experience. The Cost Differentiation Differentiation adds cost. The indirect costs of differentiation arise through the interaction of differentiation variables with cost variables. If differentiation narrows a firms segment scope, it also limits the potential for exploiting scale economies. One means of reconciling differentiation with cost efficiency is to postpone differentiation to latter stages of the firms value chain. Bringing It All Together: The Value Chain in Differentiation Analysis The key to successful differentiation is matching the firms capacity for creating differentiation to the attributes that customers value most. For this purpose, the value chain provides a particularly useful framework. Value Chain Analysis of Producer Goods Using the value chain to identify opportunities for differentiation advantage involves four principal stages: 1. Construct a value chain for the firm and the customer. Consider not just the immediate customer but also further downstream in the value chain. 2. Identify the drivers of uniqueness in each activity. Achieve uniqueness in relation to competitors offerings. 3. Select the most promising differentiation variables for the firm. First, we must establish where the firm has greater potential for differentiating from, or can differentiate at lower cost than, rivals. Firms internal strengths in terms of resources and capabilities. Second, identify linkages among activities. Third, the ease with which different types or uniqueness can be sustained must be considered. More differentiation is based on resources specific to the firm. The more it will be for a competitor to imitate the particular source of differentiation. 1. Locate linkages between the value chain of the firm and that of the buyer. The objective of differentiation is to yield a price premium for the firm. Creating value for customers requires either that the firm lowers customers costs, or that customers own product differentiation is facilitated. The value differentiation created for the customer represents the maximum price premium the customer will pay. Value Chain Analysis of Consumer Goods Few consumer goods are consumed directly. When the customer is a consumer, it is still feasible to draw a value chain showing the activities that the consumer engages in when purchasing and consuming a product.

Chapter 11. Industry Evolution and Strategic Change

The Industry Life Cycle
Similarly to Product Life Cycle (demand side) theres an Industry Life Cycle (supply side); it has the following phases: Introduction, Growth, Maturity, and Decline Demand Growth: Introduction Growth Maturity Decline Small sales Technical Market saturation New challenging improvements industries with Low market Demand is wholly for superior technology penetration Efficiency raises replacement Novel of technology Market penetration increases Lack of scales Low experience Customers: affluent, innovation-oriented, risk-tolerant Product innovation: is responsible for new industrys birth. Rivalry around new designs and technologies make the industry tend to converge towards a dominant design (e.g. 35 mm camera, fast-food setup), which is strictly related to a technical standard (specifications or technology for compatibility). Technical standards arise when theres a network effect (need to connect users). Except for some early movers (patents), theres no profit advantage from setting a dominant design. Process innovation: dominant designs exist also in processes and business models. Once the industry accepts dominant design, theres only an incremental further product innovation. Hence firms try to increase productivity and reduce costs by improving processes. Life-Cycle Pattern: duration of LCP varies greatly from industry to industry (from 120 years for railroad industry to 10 years for MP3 players). Over time, Life Cycles have tended to be compressed, especially in Internet environment. Some industries may never enter decline phase because satisfy everlasting needs (clothes, food processing. Etc.), while other industries may observe rejuvenation (e.g. motorcycles in USA and Europe in 60s) due to new markets or breakthrough product innovations. Same industry can be in different stage for different countries.

Structure, Competition and Success Factors over the Life Cycle

Duct differentiation: Demand Introduction Early adopters (high income, avant-garde) Growth Rapidly increasing market penetration Maturity Decline Mass market, Obsolescence replacement/repeat buying. Customers knowledgeable and price sensitive

Technology

Introduction Competing technologies, rapid product innovation Poor quality, wide variety of features and technologies, frequent design changes Short production runs, high-skilled labor content, specialized distribution channels Producers consumers advanced countries

Products

Growth Standardization around dominant technology, rapid process innovation Design and quality improve, emergence of dominant design

Manufacturing and distribution

Capacity shortages, mass production, competition for distribution

Trade

and Exports from in advanced countries to rest of world Entry, mergers and exits Design for manufacture, access to distribution, brand building, fast product development, process innovation

Competition

Few companies

KSF

Product innovation, establishing credible image of firm and product

Maturity Well-diffused technical knowhow: quest for technological improvement Trend to commoditization. Attempts to differentiate by branding, quality, bundling Emergence of overcapacity, deskilling of production, long production runs, distributors carry fewer lines Production shifts to newly industrializing then developing countries Shakeout, price competition increases Cost efficiency through capital intensity, scale efficiency and low input costs

Decline Little product/process innovation

Commodities the norm: differentiation difficult and unprofitable Chronic overcapacity, reemergence of specialty channels

Exports from countries with lowest labor costs

Price wars, exits

Low overheads, buyer selection, signalling commitment, rationalizing capacity

Organizational Adaptation Change

Organizational inertia: barriers to change: Organizational routines. The more highly developed are the routines, the more difficult is the introduction of new ones. Social and political structures. Organizations create stable systems of political power and social patterns; changes threaten established power. Conformity. Institutional isomorphism locks organizations into common structures and strategies. Pressure for conformism comes from government, investment analysts, banks and other sources of resources and legitimacy and through voluntary imitation and risk aversion.

Limited search. Organizations prefer exploitation of existing knowledge rather than exploration of new opportunities. Complementarities between strategy, structure and systems. Fit among these components is hard to reach, but once accomplished becomes a barrier to change.

Evolutionary Theory and Organizational Change: organizations adapt to external changes through variation, selection and retention. Two theories are based upon evolutionary theory: Organizational ecology: changes happen at industry level (population of firms), with new entries imitating successful models; the competitive process is a selection mechanism in which organizations that dont match requirements imposed by the environment cannot attract resources and are eliminated. Evolutionary economics: focuses on individual organizations, which introduce variation, selection and retention at organizational routines level. Adapting to changes through the Life Cycle: since KSFs are different through the Life Cycle, different resources and capabilities are required across all stages. In fact, innovator firms are not usually the same that scale to the mass-market (consolidators) with the same product/service. Adapting to Technological Change: Architectural Innovation: when a new technology is limited to the component level of a product or process it can enhance companys existing capabilities; when, on the other hand, its impact is at architectural level (involving changes in the whole process/product configuration) it can destroy companys capabilities. Disruptive Technology: new technologies can be sustaining (it augments existing performance attributes than the existing one) or disruptive (brings different performance attributes). Established Firms in New Industries: some established firms that cannot adapt easily to changes appear to be less likely to enter successfully into new industries, if compared to more flexible start-ups. But the latter have obviously less resources and capabilities. Who is advantaged? It depends upon the extent to which the resources and capabilities required in the new industry are similar to those present in an existing industry. When linkage is close, established firms are likely to have an advantage over start-ups. Managing Organizational Change: in recent years, management of organizational change has been viewed as a continuous activity that forms a central component of a managers responsibilities, rather than a distinct area of management. Dual strategies and separate organizational units. Its often easier to pursue changes by creating new organizational units rather than changing existing ones and assigning development of new products (that embody new technologies) into separate units. The biggest issue relates to the dual strategy: how reconcile the launch of new businesses with existing ones? Managers must shift their attention from exploiting current businesses towards building opportunities and new capabilities for the future. Bottom-up processes of decentralized organizational change. Decentralized decision making is not enough for speed-up changes. It must be accompanied by conditions that foster the change process, like: o Raising performance expectations o Issuing corporate-wide initiatives

Alerting managers to the emergence of strategic dissonance created by divergent strategic directions within the company. o Periodical changes in organizational structure to stimulate decentralized searches and, then, to exploit results. Imposing top-down organizational change. Changes must be orchestrated from the top, in order to avoid low performances following a complex restructuration. Using scenarios to prepare for the future. Anticipating changes is fundamental to the ability of a company to adapt to them. Scenario analysis is a systematic way of thinking about how the future might unfold. Its key value is in combining the interrelated impacts of a wide range of economic, technological, demographic and political factors into a few distinct stories. It can be quantitative, qualitative or both.

Chapter 12. Technology-based Industries and the Management of Innovation

Competitive Advantage in Technology-intensive industries
The principal link between technology and competitive advantage is innovation: this is responsible for new industries coning into being and for some firms dominate their industries. The innovation process: while invention is the creation of new products or processes through the development of new knowledge or a combination of existing ones, innovation refers to the commercialization of a single or of many inventions. Not all inventions lead to innovations, because sometimes they are not commercially viable. Sometimes innovation is introduced in absence of new technologies, rather simply with changes in design. The profitability of Innovation: the profitability of innovation to the innovator depends on the value created by the innovation and the share of that value that the innovator is able to appropriate. The value is typically shared by innovators with customers, suppliers, imitators/followers. The regime of appropriability describes the conditions that influence the distribution of returns to innovation. In a strong regime, the innovator captures substantial shares of the value; in a weak regime, the value is kept mostly by the others. Property Rights in Innovation: appropriating value depends greatly on the ability to establish property rights; they include Patents, Copyrights, Trademarks, Trade secrets The disadvantage of establishing property rights is that they make information public, hence companies may prefer secrecy to patents. Tacitness and Complexity of the Technology: the extent to which innovation can be imitated depends by the ease with which the technology can be comprehended and replicated. This depends by: The level of codifiable knowledge (that can be written down); the highest information is codified, the easiest is copying it; Complexity of the technology: the simplest the technology, the easiest is to copy it. Lead Time: after introducing an innovation, the innovator has a temporary competitive advantage over the others; the time it will take followers to catch up is called innovators Lead Time. Complementary Resources: to make of an invention an innovation, several resources are needed: Competitive manufacturing, Distribution, Service, Finance, Marketing, Complementary Technologies, etc. These are called Complementary Resources; when these resources are supplied by different firms, the division of the value among them depends by their relative power. A key determinant of this is whether the complementary resources are specialized or unspecialized: when complementary resources are generalized, the innovator is in a much stronger position to capture value. Which mechanisms are effective at protecting innovation? Patent protection is of limited effectiveness as compared with lead-time, secrecy and complementary resources; although patents are effective in increasing the lead time before competitors are able to imitate, these gains are likely to be small. Anyways, some patents are pursued to block potential innovation coming from competitors or to gain a bargaining power with other companies to access their proprietary technologies.

Strategies to Exploit Innovation: How and When to Enter

Alternative Strategies to Exploit Innovation Licensing Outsourcing functions Limits capital investment but may create dependence on suppliers/partn ers Strategic alliance Internal commercializat ion Benefits of Shares Biggest flexibility. Risks investment investment of informal and risks. Risk requirement structure of partner and disagreement corresponding and culture risks. Benefits clash of control Joint venture

Risk return

and Little investment risk and returns. Risk that licensee lacks motivation or steals the innovation Resource Few requirements

Permits Permits pooling of the resources external and capabilities of more than one resources and firm capabilities to be accessed

Examples

Ericssons Bluetooth wireless technology

Substantial requirements in terms of finance, production capability, distribution, etc. Microsofts Ballards Symbian Google Xbox (designed strategic (created by (developed and alliance with Psion, joint and marketed manufactured DaimlerChrysle venture with internally) by others) r to develop Ericsson, Nokia fuel cells and Motorola)

Timing Innovation: To Lead or to Follow? Sometimes followers have been more successful than firstmovers; the advantage of being early mover depends on the following factors: The extent to which innovation can be protected by property rights and or lead-time The importance of complementary resources The potential to establish a standard Optimal timing depends also by the resources and the capabilities that of the company: different companies have different strategic windows (periods in time when their resources/capabilities are aligned with the opportunities of the market). Small technology-based companies have to move first, while large established firms have longer and later strategic windows. Pioneering represents also a higher risk for established companies, since they might have issues on brand and reputation protection. Managing Risks: risks in emerging industries are mainly due to two factors: Technological uncertainty: its given by unpredictability of technological evolution and by the complex dynamics through which technical standards and dominant designs are selected;

Market uncertainty: this is related to the difficulty of predicting size and growth rates. Usually forecasts are based on extrapolation or modelling of past data by using analogies or relying on insights and experience of experts. Useful strategies for risks mitigation include: Cooperating with lead users: monitoring market trends and responding to customers requirements in the early phases of industry development helps avoiding major errors in technology and design. Limiting risk exposure: financial risks of emerging industries can be mitigated by avoiding debt and keeping fixed costs low. Outsourcing and strategic alliance can also help in doing this. Flexibility: keeping options open and delaying commitment to a specific technology until its potential becomes clear. Well-resourced companies have usually the possibility of pursuing multiple strategic options.

Competing for Standards

Types of Standards: a standard is a format, an interface or a system that allows interoperability. They can be public or private: Public (or open): available to all either for free or for a nominal charge. Theres no privately owned intellectual property on them or the IP owner makes access free. Private (or proprietary): technology and design are owned by companies or individuals. These can be embodied into products to be sold or licensed to others that want to use them. Mandatory: set by governments, have force of law behind them. De facto: emerge by a voluntary adoption by producers and users; they make take a long time to emerge. Network externalities: standards emerge in markets if this is subject to positive network externalities. This exists whenever the value of a product to an individual customer depends on the number of the other users of that product (e.g. telephone)1. Theres no need everyone to use exactly the same product to have a positive network externality: its enough that compatibility is guaranteed. Network externalities arise from many sources: Products where users are linked to a network Availability of complementary products and services Economizing on switching costs NE creates positive feedback by a process called tipping: once a certain threshold is reached, cumulative forces become unbearable, with a final winner-takes-all result. Once established, standards are highly resilient; even if theres a superior standard available, switch may not occur due to collective lock-in. Winning Standards Wars: tips for winning a standards war: Before you go, assemble allies: they might be customers, suppliers, even competitors. pre-empt the market: enter early, achieve fast-cycle product development, make early deals with key customers and adopt penetration pricing Manage expectations: convince everybody that you will emerge as the victor.

Similarly, negative externalities are arising when the value of the product decreases as the number of buyers/users increases (e.g. luxury goods).

Achieving compatibility with existing products is a critical issue: advantage typically goes to the competitors that adopt an evolutionary strategy (e.g. backwards compatibility) rather than a revolutionary strategy.

Implementing Technology Strategies: Creating the Conditions for Innovation

While innovation requires certain resources, theres no predetermined relationship between R&D input and innovation output. The crucial challenge facing firms is to create the conditions conducive to innovation. Manage creativity: Conditions for creativity: creativity is fostered both by individual attitudes and by organizational environments; Organizing for creativity: management systems must be different and based on different incentives (recognition, praise, personal development rather than managerial responsibilities) From invention to innovation: the challenge of Integration Balancing creativity and commercial direction: the critical linkage between these two is market need Organizational approaches to the management of innovation: the key organizational challenge is reconciling differentiation and integration; organizational initiatives aimed at stimulating both new product development and its commercial exploitation are: o Cross-functional product development teams o Product champions o Buying innovation o Open innovation (from outside) o Corporate incubators

Chapter 13. Competitive advantages in mature industries

Strategies for Mature Industries: 1. Principal strategic characteristics of mature industries o Limited number of opportunities for establishing competitive advantage o Shift from differentiation based competitive advantage to cost-based factors Key success factors within mature industries o Key success factor Cost advantage can be achieved by: - Economies of scale - Low-cost inputs (new entrants tend to have less bureaucracy, etc.) - Low overheads Opportunities for strategic innovation to establish competitive advantage o Customer segmentation and customer selection (know your customer, know your profitable customer segments, know your customer purchasing/spending habits and behaviors through customer relationship management (CRM) systems o Differentiation, most likely achievable by offering complementary services (after sales s ervice, financing, etc.); however, very difficult to be successful in mature industries as commoditization reduces customer willingness to pay a premium for differentiation o Innovation, by embracing new customer groups (Nintendo Wii, etc.), or augmenting products and services (Barnes & Noble bookstores feature Starbucks coffee shops) Organizational structures / management systems to effectively implement strategies o Primary basis for competitive advantage is operational efficiency (to reduce costs); this can be achieved by (good example: McDonalds): - Standardization of routines - Division of labor - Close management control - Clear quantitative and short term performance targets - Incentives for individuals - Hierarchical organizational structures with high levels of specialization and centralized decision making

2.

3.

4.

Strategies for declining industries: 1. Reasons for decline o Technological substitution (typewriters, photographic film, etc.) o Changes in consumer preferences (canned food, etc.) o Demographic shifts (childrens toys in Europe, etc.) o Foreign competition (textiles in advanced industrialized countries, etc.) Key features o Excess capacities o Lack of technical change (and with that lack of new product introduction) o Declining number of competitors o Aggressive price competition Adjusting capacity to declining demand o Adjusting of industry capacity to declining demand is key to stability and profitability depends on the following factors:

2.

3.

o 4.

Predictability of decline Barriers to exit (specialized expensive assets discourage exit) Managerial commitment (legacy, pride, commitment to employees) Strategy of surviving firms (stronger firms can facilitate the exit of weaker firms by offering to buy their assets, etc.) Otherwise, declining demand can lead to destructive competition

Strategies for declining industries o Niche, identify a niche that is likely to maintain a stable demand o Harvest, maximize cash flow with existing assets (avoid further investment) o Divest

Chapter 14. Global strategies and the multinational corporation

Internationalization can occur in 2 ways: - Trade - Sale and shipment of goods and services to another country - Direct Investment - Building or acquiring productive assets in another country Types of industries: - Sheltered industries - Sheltered from international competition by regulation, public ownership, or barriers to trade. - Trading industries Internationalization occurs primarily through imports and exports. - Multi-domestic industries Internationalize through direct investment. - Global industries Trade and direct investment are present and high. Porter: - Potential entrants Low barriers to entry; internationalization is a reality - Rivalry among existing firms Internationalization increases internal rivalry in 3 ways: o Lowering seller concentration more firms competing in the same market o Increasing diversity of competitors cooperation is difficult when goals, strategies, and cost structures are different. o Increasing excess capacity an increase in capacity doesnt necessarily mean an increase in market size. - Bargaining power of buyers Large customers can excercise their buying power more effectively. Competitive advantage: Firms are able to transfer their competitive advantage internationally when they can match the conditions of the national environments (resource availability particularly, input prices, and exchange rates among others). Organizational structure: Once an international strategy has been established, a suitable organizational structure needs to be designed. Global integration vs. National differentiation: Industries where scale economies are huge and customer preferences homogeneous call for a global strategy (jet engines). Industries where national preferences are pronounced and where customization is not prohibitively expensive favor a multi-domestic strategy (investment banking). If there are no significant benefits from global integration its advisable to remain local (funerary services) however, if there is a lack of scale economies in certain industries (cement, car repair) there could be benefits in global presence. Major benefits of global strategy: 1. Cost benefits: Scale and replication 2. Exploiting national resources efficiencies

3. Serving global customers 4. Learning benefits 5. Competing strategically Foreign entry strategy framework: 1. Is the firms competitive advantage based on firm-specific or country-specific resources? 2. Is the product tradable and what are the barriers to trade? 3. Does the firm possess the full range of resources and capabilities for establishing a competitive advantage in the overseas market? 4. Can the firm directly appropriate the returns to its resources? 5. What transaction costs are involved?

Chapter 15. Diversification Strategy

1. Diversification may be justifies either by the superior profit potential of the industry to be entered, or by the ability of the firm to create competitive advantage in the new industry. 2. Motives for Diversification - Growth: Revenue vs. Profit. Not a good idea to diversify only if you have money. - Risk Reduction: The simple act of bringing different business under common ownership does not create shareholder value through risk reduction. - Profitability: 3 essential test; the attractiveness test, the cost of entry test and the better off test 3. Competitive Advantage from Diversification - Economies of Scope - Economies from Internalizing Transactions

Chapter 16. Diversification Strategy

Additional Reading: General Electric: Jack Welch's second wave (A) case No. 9-391-248 HBS 1991 Multi-business Structure Usually Multi-divisional, where business decisions and controlled at business level and corporate centers exercise overall Coordination and control Four key efficiency advantages of the divisionalized firm called the M form 1. Adaptation to bounded rationality: dispersing decision making 2. Allocation of decision making; Allocation decisions to those that will be best informed 3. Minimizing coordination costs; Particular product or business decisions made at divisional level 4. Avoiding Goal Conflict; Divisional heads more likely to pursue profit goals aligned with the overall company goals Problems of Divisionalized firms Constraints on decentralization: Although operational authority is to divisions, this power only continues if HO is happy with performance Standardization of Divisional Management: Although in theory, divisional management allows division to be entrepreneurial, the standardized control from HO restrains this process. The Role of Corporate Management 1. Manage corporate investment 2. Exercise guidance and control over divisions 3. Sharing transferrable resources and information Manage corporate investment: Include portfolio planning models with the best known models developed by McKinsey, BCG. Which guides through 4 areas: 1. Allocating resources: via the profitability of the industry and the competitive advantage to the firm. 2. Formulating Business Strategy: Identify current positioning, in relation to industry attractiveness, developing competitive advantage 3. Analyzing portfolio balance: Cash flows, growth 4. Setting performance targets. The GM/McKinsey Portfolio Planning matrix has two functions; Industry Attractiveness and Business unit competitive advantage: If high in both invest and grow, low in both harvest fro cash but do not invest, and in between, just hold BCGs Growth share Matrix is similar. Value creation through restructuring Refer Chart 16.4 for 5 stage approach. 1. Analyse current market value 2. Is it possible to manage value via managing external perception 3. Internal improvements: Global expansion, repositioning a business or strategic outsourcing. Cost cutting or price increases 4. External opportunities: Sell a division if it is worth more to someone else than to you. 5. Optimum restructured value of the company: This is the end result PIMS (Profit Impact and Market Strategy) Used by Multi-business companies to assist in 3 areas of corporate management:

1. Setting performance targets for business units: Par ROI (Return on Investment) 2. Formulating business unit strategy; by using the ROI variables, the strategy can be formulated 3. Allocating investment funds between businesses: PIMS indicates investment attractiveness based on A) estimated real growth rate of market B) Par ROI Managing internal linkages Creating value in multi-business companies is done via sharing resources and capabilities. This includes: Functions such as, strategic planning, finance, cash risk management, internal audit, HR, audit, taxation, government relations, R&D, legal. Thought these benefits always tend to be less than management hopes. These can be split into 2 corporate groups; Corporate management unit, supporting corporate management and shared services organization which is responsible for shared services. The greater the share of skills, the more need there is for a corporate headquarters!!