Review For Test

Strategic Management
Vitaly Nishanov
B BUS 470 - Training Materials
2016
Course Outline
Introduction to Strategy
Business-Level Strategy Corporate-Level Strategy

External Internal Diversification
Environment Environment
Competitive Positioning Mergers & Alliances

Acquisitions
Competitive Dynamics International Strategies
Strategy implementation through

Organization & Control
Strategic Leadership
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Levels of Strategic Management
Corporate Level:
Where to Compete?
CEO, Board of Directors,
Head
and corporate staff
Office
Business Level:
How to Compete?
Divisional managers Division Division
and staff A B
Functional Level:
How to Implement
Business Strategy? Marketing R&D Finance
Functional managers
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Q #1: In which situations a company can run

successful business without any business
strategy?
 Monopoly
 Stable market
 Small number of competitors
 High and stable demand for a company’s products and/or services
 Governmental protectionism
 Predictable future
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Evolution of Management Systems
Igor Ansoff
Visibility of 1900 – 1930 1950 1970 1990 -2008

Future Familiar Extrapolable
Recurring • Procedures Manual

Management by control
• Financial control
Predictable by • Management by Objectives
Extrapolation Management by extrapolation
• Long term planning
Predictable Treats • Periodic strategic planning

and Opportunities Management by anticipation of change
• Strategic management
Partially Predictable • Strategic management

Management by flexible/rapid response or
“Weak Signals”
Strategic Management
• Weak signal
Unpredictable management
Surprises
Vitaly Nishanov • Surprise management 5
Q #2: What factors can increase the level of

uncertainty for a company?
 Economic Trends which can increase the level of a

company’s uncertainty
 Social
 Cultural
 Demographic/Environmental
 Political, Legal, Governmental
 Technological
 Competitors and Competition
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Five forces of competition
The Competitive
Government?
Force of Potential New Entry
The Power The Power

of Suppliers of Buyers
Competitors
The Competitive Pressures

from Substitute Products
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Strategic Management is about how to gain and

maintain Competitive Advantage
Competitive Key question:

Advantage: how do Firms create
a Firm’s ability to create sustained above-average
value in a way that its returns?
rivals cannot
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Q: What are the Main Differences between a
Company with Clear Business Strategy and a
Company without any Business Strategy?
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Q: How to measure/estimate the

Profitability of a Company?
 ROIC – the return on invested capital
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Why some companies do not want
to develop its Business Strategy
 Satisfied with success  Overconfidence
 Waste of time  Fear of failure
 Too expensive  Prior bad experience
 Laziness  Self-interest
 Poor reward structures  Fear of the unknown
 Fire-fighting  Suspicion
Strategic Planning Process
Environmental
Analysis
Vision and
Mission Goals SWOT
Statement
Organization’s
Resources
Analysis
Strategy Strategy Strategic

Strategy
Monitoring& Selection/ Alternatives
Implementation
Evaluation Formulation Analyses
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6
How to define a strategy
Determination of the
marketing niche
and target group
Strengths and Weaknesses Opportunity and Threats
Strategy
- Administration - Market (supply and demand)
- Organizational Structure - Competitors
- Human Resources - Economic situation
- Equipment - New technology
- Production and Technology - Social conditions
Goals
-Qualitative
-- Quantitative
Resources
- Personnel
- Finance
- Equipment
Vision&Mission
- Clients
- Needs
- Technology
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What is Business Strategy?
A Strategy is a set of decision making principals for which a company

administration is using in order to achieve the company’s goals.
There are four areas where the strategy can be applied:

1. Yardsticks by which the present and future performance of the company is
measured.
2. Rules for developing the firm's relationship with its external environment:
• what products-technology the firm will develop,
• where and to whom the products are to be sold, and
• how will the firm gain advantage over competitors.
3. Rules for establishing the internal relations and processes within the
organization; this is frequently called the administrative strategy.
4. The rules by which the firm conducts its day-to-day business, called operating
policies.
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Business Model
A business model is managers’ conception of how the various strategies

that the company pursues fit together into a congruent whole
 Putting strategy into actions
 Razor-razor-blade model
 Subscription model
 Google vs. Microsoft
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Competing Business Models: Google vs.

Microsoft
Microsoft
Operating Software Online
Systems Apps Search
Google
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Producers + Consumers = Prosumers
 Threadless (www.threadless.com) business model is to give

consumers an opportunity to work as a member of R&D department.
 Members of Threadless community submit T-shirts designs online

and than select the best design.
 Other partners with Threadless?
 Dell Computer – laptop exteriors
 Thermos – lunch boxes
 Griffin Technology – iPhone covers
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One of the Basic Principles of Strategic

Management
Take advantage of
External Opportunities
Strategy
Formulation
Avoid/minimize impact of
External Threats
Copyright © 2009 Pearson Education, Inc.

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Corporate Level of Strategy and Business
Unit Level of Strategy
Corporate-level strategy should

ask
• In which markets do we compete
today?
• In which markets do we want to
compete tomorrow?
• How does our ownership of a
business ensure its competitiveness
today and in the future?
Business-level strategy should ask
• How do we compete in this
market today?
• How will we compete in this
market in the future?
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Ethics and Biases in Strategic Decisions

Is the decision Have any potential biases
ethical? clouded our decision-
making process?
New strategy – Implementation

A new means to – Executing new
accomplish goals strategy to realize
goals
• Authority structures • Common illusions about ourselves

• Incentive systems (e.g., favorability optimism , control)
• Role of corporate • Escalating commitments

governance • Self-serving fairness bias
• Overconfidence bias
• Ethnocentrism
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• Stereotyping 20
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Vision, Mission Statement and
Objectives
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Vision, Mission and Strategy
Strategy
Vision and Mission Strategic Goals
and objectives
• Fundamental The central, integrated,
purpose • Specific targets externally-oriented
• Values • Measurable concept of how the firm
outcomes will achieve its
• View of future
objectives.
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Vision and Mission Statements
Vision Statement –
What do we want to become?
Agreement on the basic vision for which the firm strives to achieve in the long run is
critically important to the firm’s success
Mission Statement –
What is our business?
 Enduring statement of purpose
 Distinguishes one firm from another
 Declares the firm’s reason for being
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Vision Statement – uses of Ambition and

Ambiguity
Vision statements
Sony’s vision in early 1950’s:
“becoming the company that most • generally express
changes the worldwide image of long-term action
Japanese products as being of poor horizons,
quality.”
• are ambitious and
force the firm to
stretch.
CitiBank’s vision in 1915: • their ambiguity
“the most powerful, the most allows flexibility for
serviceable, the most far reaching changing strategy or
world financial institution the world implementation
has ever seen.” tactics
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Vision Statement Examples
 Tyson Foods’ vision is to be the world’s first choice for protein solutions while
maximizing shareholder value.
 General Motors’ vision is to be the world leader in transportation products

and related services.
 PepsiCo’s responsibility is to continually improve all aspects of the world in

which we operate – environment, social, economic – creating a better
tomorrow than today.
 Dell’s vision is to create a company culture where environmental excellence

is second nature.
 Shoro’s (Kyrgyzstan) vision is to produce beverages which will be more

popular in the World than Coca Cola and Pepsi.
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Vision Statement
Clear Business
Vision
Comprehensive
Mission Statement
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Mission Statements
 The best mission statements:
 Define the business
 Differentiate it from competitors
 Explain relationships with stakeholders
 Focus energy on critical activities and goals
 If social responsibility is central to the company’s mission, that should

be reflected in its wording.
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Mission Statements: Examples
 3M: What Mission Statements

"To solve unsolved problems innovatively" do you like more?
 Mary Kay Cosmetics:
"To give unlimited opportunity to women"
 Merck:
"To preserve and improve human life"
 Wal-Mart:
"To give ordinary folk the chance to buy the same thing as rich people“
 Walt Disney:
"To make people happy"
 Philips:
"Let's make things better"
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How to formulate a Mission Statement
To define mission statement it is necessary

to answer three questions:
 Whose needs are we going to satisfy?

(Who are our clients?)
 What are our clients needs?
 How are we going to satisfy these needs?
Who? What? How?

(Clients) (Needs) (Our products/
services)
Today
Tomorrow
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Characteristics of a Mission Statement
 Inspiring
 Less than 250 words in length
 Indentify the utility (usefulness) of a company’s products/services
 Reveal a company’s social responsibility
 Include NINE components:
1. Customer
2. Products or services
3. Markets
4. Technology
5. Concern for survival, profitability, growth
6. Philosophy -- basic believes, values, ethical principles
7. Self-concept -- company’s distinctive competitive advantages
8. Concern for public image
9. Concern for employees
 Enduring
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Group exercise:
 Evaluate Six Mission Statements using Mission Statement Evaluation

Matrix
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Mission Statement Examples (I)
 Fleetwood Enterprises will lead the recreational vehicle and manufactured housing industries in
providing quality products with a passion for customer-driven innovation. We will emphasize training,
embrace diversity and provide growth opportunities for our associates and our dealers. We will lead
our industry in the application of appropriate technologies. We will operate at the highest levels of
ethics and compliance with a focus on exemplary corporate governance. We will deliver value to our
shareholders, positive operating results and industry-leading earnings.
 We aspire to make PepsiCo the world’s premier consumer products company, focused on
convenient foods and beverages. We seek to produce healthy financial rewards for investors as we
provide opportunities for growth and enrichment to our employees, our business partners and the
communities in which we operate. And in everything we do, we strive to act with honesty, openness,
fairness and integrity.
 Dell’s mission is to be the most successful computer company in the world at delivering the best
customer experience in markets we serve. In doing so, Dell will meet consumer expectations of
highest quality; leading technology; competitive pricing; individual and company accountability; best-
in-class service and support; flexible customization capability; superior corporate citizenship;
financial stability.
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Mission Statement Examples (II)
 At L’Oreal, we believe that lasting business success is built upon ethical standards which guide
growth and on a genuine sense of responsibility to our employees, our consumers, our environment
and to the communities in which we operate
 We are loyal to Royal Caribbean and Celebrity and strive for continuous improvement in
everything we do. We always proved service with a friendly greeting and a smile. We anticipate the
needs of our customers and make all efforts to exceed our customers’ expectations. We take
ownership of any problem that is brought to our attention. We engage in conduct that enhances our
corporate reputation and employee morale. We are committed to act in the highest ethical manner
and respect the rights and dignity of others.
 Procter & Gamble will provide branded products and services of superior quality and value that
improve the lives of the world’s consumers. As a result, consumers will reward us with industry
leadership in sales, profit, and value creation, allowing our people, out shareholders, and the
communities in which we live and work to prosper.
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Mission Statement Evaluation Matrix

Public image (8)
Self-concept (7)
Technology (4)
Philosophy (6)
Employees (9)
or services (2)
Customer (1)
profitability,
Markets (3)
growth (5)
Products
Organization
Survival,
Fleetwood
Enterprises Yes Yes No Yes Yes Yes Yes No Yes
PepsiCo
No Yes Yes No Yes Yes No Yes Yes
Dell
Yes Yes Yes Yes Yes Yes Yes Yes No
L’Oreal
No No No No No Yes No Yes Yes
Royal
Caribbean and
Yes No No No No Yes Yes No Yes
Celebrity
Procter &
Gamble Yes No Yes No Yes No Yes Yes Yes
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Strategy as Scenario Planning
“In preparing for battle, I have

 Scenario planning always found that plans are
useless, but planning is
 Envision different "what-if" plans indispensable”
General and later
 Generates a dominant plan President Eisenhower
• Must implement the most probable option
 Keeps other scenarios in the event of changes…
• "Arab Spring" impact on the oil industry?
 Good example of the AFI framework
Analysis, Formulation, Implementation

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Scenario Planning
 The future cannot be known

 Some examples:
 UPS, FedEx, AirTran, Delta …
• How to compete if the barrel of oil costs $35 or $200?
 Boeing, Harley-Davidson, Caterpillar …
• How to compete if 1 euro = $2 or $1 = 75 yen
 Thinking outside the box

 But tendency is not to think about pessimistic scenarios
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Scenario Planning in the AFI Strategy
Framework
The only constant is change
Portfolio of Future Options
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Mintzberg’s Planning Framework
Emergent Strategy – any

unplanned strategic initiative
undertaken by mid-level
employees of their own
volition
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Alternatives Evaluation Matrix
Horizontal Cost Cutting International
Criteria Importance
Merger Measures Expansion
Financial ST Medium - + -
Financial LT High + + +
Employee Morale High - 0 -
Mkt. Share
High + - +
Potential
Risk High - - -
Customer
High + + +
Experience
Impact to Comp.
High + 0 +
Adv.
Managerial
High + + -
Expertise
TOTAL +5 +3 +1
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Objectives/Goals
An objective is a criterion by which Long-Term Goals:

the firm's success (or failure) is 1. Health and more leisure.
determined 2. Money.
3. Write book (play?)-fame ////??
4. Visit India.
Objectives:
Short-term Goals:
 Economic 1. Pick up pattern at Hilda's.
 Non-economic 2. Change faucets - call plumber (who?)
 Organizational 3. Try yogurt??
 Short-term
 Long term From the Diary of a Lady Quoted
in the New Yorker
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How to Set Effective Goals - SMART
Specific - Define precisely the objective or outcome you want. Useful tool for setting
specific goal is “W” questions: Who, What, Where , When, Which, Why
Measurable - Define objectively how you will know when you've attained the goal.
Attainable - Goals should be realistic, challenging, and attainable. Impossible goals

reduce motivation because people do not like to fail.
Result oriented – Goals should focus on desired end-result. “Useful” verbs are
complete, acquire, produce, increase, decrease. Avoid verbs develop, conduct,
implement, analyze.
Time bound - Set a deadline for reaching your goals.
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Strategy and the External Environment
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Where we are


Acquisitions
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SWOT Analysis
SWOT - Strengths, Weaknesses, Opportunities, Threats
Strengths and
Strategic Opportunities and
Weaknesses
Competitiveness Threats
of the company
Internal Audit External Audit
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The Main Purposes
of External Audit
Identify
• Opportunities – a condition in the general environment that, if

exploited, helps a company to achieve strategic
competitiveness
• Threats – a condition in the general environment that may

hinder a company’s efforts to achieve strategic competitiveness
Copyright © 2009 Pearson Education, 45

Vitaly Nishanov
Inc. Publishing as Prentice Hall
Find the most attractive industry for your

company
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Definitions: Industry,
Industry's Boundary, Sector
Do you like this definition?
 An industry can be defined as a group of companies offering products or services that
are close substitutes for each other – that is, products or services that satisfy the same
basic customer needs.
 A company’s closest competitors, its rivals, are those that serve the same basic
customer needs.
 An industry is the supply side of a market, and companies in the industry are the
suppliers.
 Customers are the demand side of a market and are the buyers of the industry’s
products.
 The basic customer needs that are served by a market define an industry’s boundary.
• Case study: Coca-Cola and bottled water and fruit drinks
 A sector is a group of closely related industries.
• Ex. Computer sector • Computer Component Industry
• Computer Hardware Industry
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The Firm Embedded in Its External

Environment Strategic Group – The set of
companies that pursue a similar
strategy within a specific industry
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PESTEL Framework
 Political  Technological
 Gov’t pressures  Innovation
 Subsidies & incentives  Diffusion
 Differences in countries, states,
 Research & development
Countries & regions
 Environmental
 Economic
 Growth rates  Global warming
 Interest rates  Sustainability

 Employment levels  Pollution
 Currency exchange  Legal
 Sociocultural  Court system
 Norms, culture, values
 Legislation
 Demographics
 Hiring laws, ADA, SBOX
 Lifestyle changes
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The External Environment Segments and

Elements
• Antitrust laws • Labor training laws
Political/Legal Segment • Taxation laws • Educational policies

• Deregulation philosophies
• Inflation & interest rates • Personal savings rate

Economic Segment • Trade deficit or surpluses • Business saving rate
• Budget deficit or surpluses • Gross domestic product
• Population size • Ethnic mix

• Age structure • Income distribution
Demographic Segment
• Geographic distribution
• Women in the workforce • Concerns about the environment
Sociocultural Segment • Workforce diversity • Shifts in work and career

• Quality of work • Preferences in products/services
• Product innovations • R&D expenditures

Technological Segment • Applications of knowledge • New communication technologies
• Important political events • Newly industrialized countries

Global Segment
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Industry Structures along the Continuum
Ex. Pet supply Ex. Computer Ex. Express mail Ex. Utilities for
stores, Free hardware (Apple, (FedEx and UPS), electricity, gas, and
software, Fruit Dell, HP), Organic soft drinks (Coca- water
vendors foods producers Cola vs. Pepsi)
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External Analysis Methods
1. Scanning  Identifying early signals of environmental changes

and trends
2. Monitoring  Detecting meaning through ongoing observations

of environmental changes and trends
3. Forecasting  Developing projections of anticipated outcomes

cased on monitored changes and trends
 Determining the timing and importance of

4. Assessing
environmental changes and trends for firms’
strategies and their management
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Q: What might be the sources of External Audit?
 Internet
 Libraries
 Suppliers
 Distributors
 Salespersons
 Customers
 Competition/Competitors
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Q: What we need to know about our competitors
 Strengths
 Weaknesses
 Capabilities
 Opportunities
 Threats
 Objectives
 Strategies
 How they have coped with previous threats and how they
answered to previous opportunities
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Sources of Corporate Information
 Moody’s Manuals
 Standard Corporation Descriptions
 Value Line Investment Surveys
 Dun’s Business Rankings
 Standard & Poor’s Industry Surveys
 Industry Week
 Forbes, Fortune, BusinessWeek
 Spy Agencies. According to U.S. News,
• Spy Agencies Turn to Newspapers, NPR, and Wikipedia for Information
• The intelligence community is learning to value "open-source" information
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Ethics and External Audit
 Case studies:
 Center of Business and Consulting vs. Professional Manager

Consulting
 Case study: Oracle vs. Microsoft
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Spies for Hire
“Corporate espionage involves the same principles and tactics that private investigators or government
spies use: pretending to be someone you're not, searching for financial clues through old records or
the Internet, and exploiting disgruntled workers. It could also mean going through your competitors'
trash. In fact, that's just what happened to Microsoft last June.
Microsoft's main competitor, Bay Area computer firm Oracle, hired an intelligence company and a
private investigator to search the trash of its rival. Oracle also tried to bribe Microsoft janitors
for $1,200. It's our "civic duty," said brazen Oracle CEO Larry Ellison at the time. According to
Fountain, Oracle's methods of gaining insight into Microsoft are not unique. "Look at Boeing. They
are getting burned by their competitor Airbus right now, because of Airbus' superb intelligence-
gathering," says Fountain.
Hiring a spy company to do your dirty work is not cheap. Fountain revealed that he charges anywhere
from $8,000 to $15,000 just to do a psychological profile of a CEO, for example. "We may be hired to
learn how CEOs behave, to learn how they reacted in past case studies, so we can predict future
behavior," says Fountain. "Or we may try to get them elected to a variety of boards so they'll be
distracted."
Believe it or not, the business of exploiting does have ethical guidelines. According to SCIP's charter,
members are supposed to identify themselves to every source and follow all local relevant laws. Do
they? "Well, we follow the laws, but let's just say there are a ton of companies who will do anything,"
Fountain says. http://www.thestranger.com/seattle/Content?oid=6753
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Five Forces of Competition
The Competitive
Force of Potential New Entry
The Power The Power

Competitors

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Rivalry Among Competing Firms
 The intensity of competition is known as rivalry
 Rivalry is the most powerful of the five forces
 Focus on competitive advantage of strategies
The Key Questions:
• Who are the competitors?
• How do rival firms compete?
• Which firms will be identified as competitors?
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Rivalry Among Competitors
High rivalry limits the profitability of an industry.

• Price discounting
• New product introductions
• Advertising campaigns
• Service improvement
The intensity of rivalry is greatest if:
• Competitors are numerous or are roughly equal in size and power.
• Industry growth is slow => fights for market share among competitors
• Exit barriers are high.
Rivalry is especially destructive to profitability if it gravitates to price competition.
• Products or services of rivals are nearly identical
• Fixes costs are high and marginal costs are low.
• The product is perishable.
Copyright © 2009 Pearson Education, Inc.

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Q: What should a company do in order to win a
price competition without damaging itself?
 To reduce the costs for products
Q: What should a company do in order to reduce

the costs for products?
 To use new technology (for example, manufacturing technology or/and
distributing, like internet)
 To set up a manufacturing branch in a country with low labor forces
 To improve manufacturing process (value chain), to improve operational
effectiveness.
 To find cheaper suppliers
 To increase automation
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Threat of Entry
Threat of Entry – Degree to which new competitors can enter an industry and intensity
rivalry
 Barriers to entry – condition under which it is more difficult to join or compete in an
industry
 Supply-side economies of scale. Firms that are able to produce larger volumes can spread fixed
costs over more units and reduce costs per unit.
 Demand-side benefits of scale also know as network effect. A buyer’s willingness to pay for a
company’s product increases with the number of other buyers who also patronize the company.
o Case Study: Virgin Group – Richard Bransen
 Customer switching costs. Switching costs are fixed costs that buyers face when they change
suppliers.
 Capital requirement. The need to invest large financial resources in order to compete can deter new
entrants
 Unequal access to distribution channels. (Brandon)
 Restrictive government policy.
 Expected retaliation - how potential entrants believe incumbents may react will influence their
decision to enter or stay out of an industry.
• Honda motorbikes (1960)
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Threat of Entry is High If:
 Customer Switching Costs are Low
 Capital Needs are Low
 Retaliation is Not Expected
 Incumbents don’t have:
 Proprietary technology
 Established brands
 Closed distribution channels
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The Threat of Substitutes
A substitute performs the same or a similar function as an industry’s product by a

different means. When the threat of substitutes is high, industry profitability
suffers. Substitute products or services limit an industry’s profit potential by
placing a ceiling on prices.
The threat of a substitute is high if:
 It offers an attractive prices-performance trade-off to the industry’s product.
 The buyer’s cost of switching to the substitute is low.
• Switching from a branded drug to a generic drug involves minimal costs
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The Power of Buyers
Buyer Power – Degree to which firms in the buying industry are able to dictate terms on
purchase agreements that extract some of the profit that would otherwise go to
competitors in the focal industry.
Powerful customers can capture more value by
 Forcing down prices
 Demanding better quality or more services (thereby driving up coasts)
 Playing industry participants off against one another (at the expense of industry
profitability).
The power of buyers can increase if:
 There are few buyers and/or they can buy large volume of product
 The industry’s products are standardized or undifferentiated.
 Buyers face few switching costs
 Backward Integration is credible
 The switching costs are low for buyers.
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Buyer Power
Industry A Industry B
Suppliers Buyers Suppliers Buyers
In industries
characterized
with many
suppliers and
few buyers,
Profits Profits buyers often
capture a
greater share of
profits
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The Power of Suppliers
Supplier power – Degree to which firms in the supply industry are able to dictate terms to
contracts and thereby extract some of the profit that would otherwise be available to
competitors in the focal industry.
Powerful suppliers capture more of the value for themselves by
 Charging higher prices
 Limiting quality or services
 Shifting costs to industry participants.
A supplier group is powerful if:
 Forward Integration is a credible threat
 No substitutes for supplier products
 Suppliers products are differentiated
 Incumbents face high switching costs
 Product is important input to buyer.
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Supplier Power
Diamond supply Diamond

Percent Retailers
Others 50
When firms in the

supply industry can
dictate terms, they
can extract greater
profits
DeBeers 50
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The Sixth Force of Competition
 Complementors is a term used to describe businesses that directly

sell a product (or products) or service (or services) that complement
the product or service of another company by adding value to mutual
customers
• Andrew Stephen Grove – former Chairmen of Intel Corporation
 Examples: ?
 Michelin tires for Ford & GM The hotdog and the hotdog bun
 Strategic alliances Complementors is a “Commercial Symbiosis”
Vitaly Nishanov 69
Determining Industry Attractiveness
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35
Blue Ocean
New Entry
The Power The Power

Competitors

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Strategic Groups
Strategic Group is the set of companies that pursue a similar
strategy within a specific industry.
 Mapping Groups  Mobility Barriers

 Auto industry example  Firms would try to move to the profit
spots BUT…
• GM, Ford, Toyota – gas
• BYD, Tesla – electric  Specific factors that separate groups
 ID best dimensions  Airlines
 Choose two for map • International routes
 Locate firms on map • Regulations: airport slots
• Bubble size = market share
 Rivalry is strongest in SAME group

 Some groups more profitable than others
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36
Strategic Groups and Mobility Barrier – U.S.
Airlines
Virgin
America
Vitaly Nishanov
Q: Two models to analyze and develop

strategy of Above-Average Returns (AAR)
 Industrial organization  Resource-based model

(I/O) model
 External environment is  A firm’s unique resources and

primary determinant of a firm’s capabilities are the critical link
strategic actions to strategic competitiveness.
 Model focuses on the firm’s  Model focuses on the firm’s

external environment internal environment
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37
Q:
1) What model do you recommend to use
for developing a company strategy?
2) Why?
Vitaly Nishanov
Industrial
Organizational
(I/O) Model of
Above-Average
Returns (AAR)
According to the model,

the industry in which a
company chooses to
compete has a stronger
influence on
performance than do the
choices managers make
inside their
organizations.
76
Vitaly Nishanov
38
The Resource-
Based Model of
AAR
Assumes each
organization is a
collection of unique
resources and
capabilities, and
uniqueness of its
resources and
capabilities is the
basis for a firm’s
strategy and ability
to earn above-
average returns.
77
Vitaly Nishanov
Strategy and the Internal Environment
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39
Where we are


Acquisitions
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SWOT Analysis
SWOT - Strengths, Weaknesses, Opportunities, Threats
Strengths and
Strategic Opportunities and
Weaknesses
Competitiveness Threats
of the company
Internal Audit External Audit
Vitaly Nishanov 80
40
Core Competencies
 The essence of what make an organization unique in its ability to

provide value to customers
 Firm’s strengths that cannot be easily matched or imitated by

competitors
 Building competitive advantage involves taking advantage of

distinctive competencies
 Strategies designed to improve on a firm’s weaknesses and turn to

strengths
Vitaly Nishanov 81
What does it mean

Value of Products or Services?
 Value = Benefits / Price
 Value = Quality received / Expectations
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41
Examples of Core Competencies
 Wal-Mart: Logistics – distributing last amounts of goods

quickly and efficiently to remote locations
 3M: Generating new ideas and turning them into
innovative and profitable products.
 Honda:
Engines
 Volvo: Safety system
 Professional Manager Q: ?
Consulting
 Southwest Airlines: Q: ???
Vitaly Nishanov 83
Case Study: "Southwest Airlines" (1)
Southwest Airlines has long been one of the standout performers in the U.S. airline industry. It is famous for its low
fares, which are often about 30% beneath those of its major rivals. These are balanced by an even lower cost structure, which
has enabled it to record superior profitability even in bad years such as 2002, when the industry faced slumping demand in the
wake of the September 11 terrorist attacks. Indeed, during 2001 to 2005, quite possibly the worst four years in the history of
the airline industry, when every other major airline lost money, Southwest made money every year and earned a return on
invested capital of 5.8%.
What is the source of Southwest's competitive advantage? Many people immediately point to the company's business
model and low cost structure. With regard to their business model, while operators like American Airlines and United route
passengers through congested hubs, Southwest Airlines flies point-to-point, often through smaller airports. By competing in a
way that other airlines do not, Southwest has found that it can capture enough demand to keep its planes full. Moreover,
because it avoids many hubs, Southwest has experienced fewer delays. In the first eight months of 2006, Southwest planes
arrived on schedule 80% of the time, compared to 76% at United and 74% at Continental.
As for Southwest's low cost structure, this has a number of sources. Unlike most airlines, Southwest flies only one type
of plane, the Boeing 737. This reduces training costs, maintenance costs, and inventory costs while increasing efficiency in
crew and flight scheduling. The operation is nearly ticketless and there is no seat assignment, which reduces cost and back-
office accounting functions. There are no meals or movies in flight, and the airline will not transfer baggage to other airlines,
reducing the need for baggage handlers.
Vitaly Nishanov 84
42
Case Study: "Southwest Airlines" (2)
The most important source of the company's low cost structure, however, seems to be very high employee productivity.
One way airlines measure employee productivity is by the ratio of employees to passengers carried. According to figures from
company 10-K statements, in 2005, Southwest had an employee-to-passenger ratio of 1 to 2,400, the best in the industry. By
comparison, the ratio at United Airlines during 2005 was 1 to 1,175 and at Continental, it was 1 to 1,125. These figures
suggest that holding size constant, Southwest runs its operation with far fewer people than competitors. How does it do this?
First, Southwest devotes enormous attention to the people it hires. On average, the company hires only 3% of those
interviewed in a year. When hiring, it emphasizes teamwork and a positive attitude. Southwest rationalizes that skills can be
taught but a positive attitude and a willingness to pitch in cannot. Southwest also creates incentives for its employees to work
hard. All employees are covered by a profit-sharing plan, and at least 25% of an employee's share of the profit-sharing plan
has to be invested in Southwest Airlines stock. This gives rise to a simple formula: the harder employees work, the more
profitable Southwest becomes, and the richer the employees get. The results are clear. At other airlines, one would never see
a pilot helping to check passengers onto the plane. At Southwest, pilots and flight attendants have been known to help clean
the aircraft and check in passengers at the gate. They do this to turn around an aircraft as quickly as possible and get it into
the air again because an aircraft doesn't make money when it is sitting on the ground. This flexible and motivated work force
leads to higher productivity and reduces the company's need for more employees.
Second, because Southwest because flies point-to-point: rather than through congested airport hubs, there is no need
for dozens of gates and thousands of employees to handle banks of flights that come in and then disperse within a two-hour
window, leaving the hub empty until the next flights a few hours later. The result: Southwest: can operate with far fewer
employees than airlines that fly through hubs
Vitaly Nishanov 85
Core Competencies of "Southwest

Airlines"
 One of the most essential elements of Core Competencies of
"Southwest Airlines" is its unique Organizational Culture emphasizes
 teamwork and
 a positive attitude
• At Southwest, pilots and flight attendants have been known to help clean
the aircraft and check in passengers at the gate. They do this to turn
around an aircraft as quickly as possible and get it into the air again
because an aircraft doesn't make money when it is sitting on the ground.
This flexible and motivated work force leads to higher productivity and re-
duces the company's need for more employees
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43
Competitive advantage of Southwest
Airlines
 Competitive advantage of Southwest Airlines comes from
efficiency, customer responsiveness, and reliability.
 Southwest’s efficiency is primarily due to high labor productivity, which

translates into lower operating costs.
 Southwest is responsive to customers because it flies point-to-point,

and does not force passengers to fly through congested hubs that
might lengthen their journeys.
 Southwest is more reliable because a greater proportion of its flights

arrive on time.
Vitaly Nishanov 87
Southwest Airlines Competitive Strategies
Low Cost Differentiation

 Standardized aircraft  Focus on customer satisfaction
 Use secondary airports

 High level of employee
 Fly short routes dedication
 No meals
 New flight services for business
 15 minute turnaround time travelers (phones and faxes)
 No reserved seats
 No travel agent reservations
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44
Components of Internal Analysis Leading to
Competitive Advantage
Resources
Core Competitive
• Tangible Capability
competencies Advantage
• Intangible
Four Criteria
Value Chain
of Sustainable
Analysis
Advantages
• Valuable
• Outsources
• Rare
• Costly to Imitate
• Organized to Capture
Vitaly Nishanov Value 89
Tangible Resources
Tangible Resources are assets that can be seen and quantified
Financial Resources • The firm’s borrowing capacity

• The firm’s ability to generate internal funds
Organizational Resources • The firm’s organizational structure, and its

planning, controlling, staffing system
Physical Resources • Sophistication and location of a firm’s plant and

equipment
• Access to raw materials, energy, infrastructure
• Land
Resources Competitive
Vitaly Nishanov Capability Core competencies 90
• Tangible Advantage
45
Intangible Resources
Intangible resources include assets that are rooted deeply in the firm’s history
and have accumulated over time
Human Resources • Knowledge • Managerial capabilities

• Trust • Organizational culture
Innovation Resources • Ideas • Capability to innovate

• Patents, Copyrights • Trade Secrets
• Scientific capability • Knowledge management
Reputational Resources • Reputation with customers
• Brand name
• Perceptions of product quality, durability, and
reliability
• Reputation with suppliers
Resources
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Competitive 91
Capability Core competencies
• Intangible Advantage
Role of Inflows & Outflows

in Building Stocks or Intangible Resources
Circuit City best employees moved to Best Buy
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46
What are Intangible Resources of
 Microsoft ?
 Li-Ning?
Resources
Vitaly Nishanov
Competitive 93
Capability Core competencies
• Intangible Advantage
Capabilities: What a firm Does
 Capabilities – A firm’s skills at using its resources to create goods and

services
• The firm’s capacity or ability to integrate firms resources to achieve a

desired objective
• Become important when they combine resources in unique combinations

that create economic values and can lead to competitive advantage.
 Q: Are capabilities tangible or intangible?
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Competitive 94
Resources Capability Core competencies
Advantage
47
Case Studies:
 Felt Factory v. Asel Tailoring Shop
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Competitive 95
Advantage
Examples of Firms Capabilities
Functional Area Capabilities Examples of Firms
Distribution Effective use of logistics management Wal-Mart

techniques
Human Microsoft, Southwest
Motivating, empowering, and retaining
resources employees Airline , Google, 3M
Management Effective control of inventories through Wal-Mart, Boeing

information system point-to-purchase data collection methods
Marketing Effective promotion of brand-name products Procter & Gamble, Polo

Ralph Lauren
Effective customer service Nordstrom Inc
Manufacturing Miniaturization of components and products Sony
R&D Innovative technology 3M, Caterpillar, Apple,

Google
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Competitive 96
Advantage
48
Core competencies
 Core competencies (or Distinctive competencies) –

are firms-specific strengths that allow a company to differentiate its
products from those offered by rivals, and achieve substantially lower
costs than its rivals.
 Capabilities that serve as a source of competitive advantage for a

firm over its rivals
 Distinguish a company from its competitors – the personality
 Strategic competitiveness and above-average returns can result only

when a firm’s core competencies are matched with opportunities.
Vitaly Nishanov
Competitive 97
Advantage
Four Criteria of Sustainable

Competitive Advantage (VRIO)
Valuable Capabilities • Help a firm neutralize threats or exploit opportunities

 Attractive features
 Lower costs (& price) = Higher profits
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate • Historical: A unique and a valuable organizational

Capabilities culture or brand name
• Ambiguous cause: The causes and uses of a
competence are unclear
• Social complexity: Interpersonal relationships, trust,
and friendship among managers, suppliers, and
customers
Organized to Capture Value • Exploit competitive potential

Effective Organizational Structure and
Coordinating systems
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Competitive 98
Advantage
49
Components of Internal Analysis Leading to
Resources
Core Competitive
• Tangible Capability
competencies Advantage
• Intangible
Four Criteria
Value Chain
of Sustainable
Analysis
Advantages
• Valuable
• Rare • Outsources
• Costly to Imitate
• Organized to Capture
Vitaly Nishanov
Value 99
Four Criteria of Sustainable

Competitive Advantage (VRIO)
Valuable Capabilities • Help a firm neutralize threats or exploit opportunities

 Attractive features
 Lower costs (& price) = Higher profits
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate • Historical: A unique and a valuable organizational

Capabilities culture or brand name
• Ambiguous cause: The causes and uses of a
competence are unclear
• Social complexity: Interpersonal relationships, trust,
and friendship among managers, suppliers, and
customers
Organized to Capture Value • Exploit competitive potential

Effective Organizational Structure and
Coordinating systems
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Competitive 100
Advantage
50
Decision Tree Competitive Implications
Vitaly Nishanov
Competitive
Advantage
Value Chain Analysis (I)
Value chain analysis allows the firm to understand the parts of its operations that create
value and those that do not. Understanding these issues is important because the firm
earns above-average returns only when the value it creates is greater than the costs
incurred to create that value.
The value chain analysis shows how a product moves from the raw-material stage to the
final customer.
How to do it? 1) Macro Analysis

2) Micro Analysis
 Disaggregate the firm into separate activities
 Identify resources and capabilities associated with each activity

X1, X2, …, Xn Y=F(x) Y1, Y2, …
 Identify linkages/relationships across activities
 Determine that changes in firm activities need to be made to support strategy
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Competitive 102
Advantage
51
Value Chain Analysis (II)
Indirectly add value: Provide support to the primary activities.
Information systems, human resources, accounting, etc
Add value directly in transforming inputs into outputs

Raw materials through production to customers
Vitaly Nishanov
Competitive
Advantage
Value Chain Analysis (III)
Primary Activities Support Activities

 Inbound Logistics – the receiving and  The infrastructure of the firm: organizational
warehousing of raw materials, and their structure, control systems, company culture,
distribution to manufacturing as they are
etc
required
 Operations: the processes of transforming  Human resources management: employee

inputs into finished products and services recruiting, hiring, training, development, and
compensation.
 Outbound Logistics: the warehousing and
distribution of finished goods
 Technology development: technologies to
 Marketing & Sales: the identification of support value-creating activities.
customer needs and the generation of sales
 Service: the support of customers after the  Procurement: purchasing inputs such as
products and services are sold to them materials, supplies, and equipment
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Competitive 104
Advantage
52
Value Chain: Primary & Support
Activities
The essence of strategy is to choose what activities to engage in and what
not to do.
Michel Porter
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Value Chain Analysis (IV)
 Identify the firm’s position in the value chain
 Identify the firm’s value creating activities
Supplier Manufacture Distribution Retailer
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Competitive 106
Advantage
53
Outsourcing (I)
 Definition: Purchase of a value-creating activity from an

external supplier
 Effective execution includes an increase in flexibility, risk mitigation and

capital investment reduction
 Trend continues at a rapid pace
 Firms must outsource activities where they cannot create value or are at
a substantial disadvantage compared to competitors
 Can cause concerns
 Usually revolves around innovative ability and loss of jobs
Competitive 107
Vitaly Nishanov
Advantage
Outsourcing (II)
 Improve business focus Q: A firm should NOT outsource the

following:
 Gain access to world-class
capabilities  Activities in which the firm itself can
create and capture value.
 Accelerate re-engineering
benefits  Primary and support activities used
to neutralize environmental threats
 Share risks or to complete necessary ongoing
organizational tasks.
 Free resources for other
purposes  Capabilities critical to the firm’s
success
 Seek greatest value
 Activities that stimulate the
 Evaluate resources and development of new capabilities
capabilities and competencies
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Competitive
Advantage
54
Competitive Advantage and
Value Creation
 Competitive advantage leads to superior profitability.
 Profitability of a company depends on three factors:
1. The value customers place on the company’s products/services
2. The price that a company charges for its products/services
3. The costs of creating those products/services
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Competitive 109
Advantage
Value Creation
The consumer surplus (V – P) is the amount that consumers benefit by being able to purchase
a product for a price that is less than they would be willing to pay
V = Value to consumer
V-P
V-C P = Price
P-C
C = Costs of production
V
P V – P = Consumer surplus
C C P – C = Profit (producer surplus)
V – C = Competitive Advantage
Vitaly Nishanov
Competitive
Ch. Hill, G. Jones. Strategic Management Theory. 110
Advantage
55
Economic Value as Competitive
Advantage
If the economic value created is
1. greater than its rivals  competitive advantage
2. equal to its rivals  competitive parity
3. lower than its rivals  competitive disadvantage
Vitaly Nishanov
Value Creation and Pricing Options
Option 2: Lower prices Initial State Option 1: Raise prices

to generate demand to reflect higher utility
V – P1
V – P2 V-P
P1 – C1
P-C
V* P1 – C2 V V**
C C1
C2
Vitaly Nishanov
Competitive
Advantage
56
Compering Toyota and V-P
General Motors V-P

P-C
P-C
 In 2005 Toyota made $1,200 in profit on every C C

vehicle it manufactured in North America.
 General Motors, in contrast, lost $2,496 on every General Motors Toyota
vehicle it made.
 Toyota creates more
 First, Toyota has the best reputation for quality
utility/value
in the industry, while GM cars are at best in the
middle of the pack. The higher quality of Toyota’s  Toyota can charge
car translates into a higher utility and allows higher prices
Toyota to charge 5 – 10% higher prices than GM
for equivalent cars.  Toyota makes more
 Secondly, Toyota has a lower cost per vehicle profits per unit
than GM because of its superior labor
 Toyota has a lower
productivity. For example, in Toyota’s North
cost structure
America plants, it took an average of 29.4
employee hours to build a car, compared to
33.19 at GM plants.
Vitaly Nishanov Ch. Hill, G. Jones. Strategic Management Theory. 113
Q: What are the main secrets of Kaizen

Hard Work
Japanese car manufactures?
National
Culture
 “If Japan Can, Why Can’t We?”
Vitaly Nishanov 114
57
Value Creation
The consumer surplus (V – P) is the amount that consumers benefit by being able to purchase
a product for a price that is less than they would be willing to pay
Experience + Learning
V = Value to consumer
V-P
P = Price
V-C
P-C
C = Costs of production
V
P V – P = Consumer surplus
C C P – C = Profit (producer surplus)
V – C = Competitive Advantage
Vitaly Nishanov
Competitive
Advantage
Elements of Competitive Advantage
Superior
Quality
Competitive
Superior
Superior Advantage:
Customer
Efficiency • Low Cost Responsiveness
• Differentiation
Superior
Innovation
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Competitive 116
Advantage
58
Superior Efficiency
Efficiency = Output/Input
The more efficient the company is the fewer the inputs required to produce a given
output.
1. Employee productivity refers to the output produced per employee.
• Ex. It takes General Motors 33 hours of employee time to assemble a car. For
Toyota, it takes 29 hours of employee time, and for Ford it takes only 25 hours!
2. Capital productivity refers to the sales produced per dollar of capital

invested in a business.
• Ex. In 2005 Dell Computer generated $12.07 for every dollar of capital it invested in
its business.
• HP generated $2.14 of sales for every dollar of capital it invested in its business.
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Competitive 117
Advantage
Superior Quality
 Superior Quality as Excellence and Reliability
 A product is said to have superior quality when customers perceive

that its attributes provide them with higher utility than attributes of
products of products sold by rivals.
 When customers evaluate the quality of a product, they commonly

measure it against two kinds of attributes:
1. those related to quality as excellence and
2. those related to quality as reliability
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Competitive 118
Advantage
59
A Quality Map for Automobiles
Lexus
High
Quality as Reliability
Toyota
Corolla
Reliability
Ford
Explorer
Proton/
Moskvich/
Low
Inferior Attributes Superior
Vitaly Nishanov Quality as Excellence 119
Superior Customer Responsiveness
 One of the most essential indicator of customer responsiveness is the time

that it takes for a good to be delivered or a service to be performed.
 To achieve superior responsiveness to customers, a company must be able to

do a better job than competitors of identifying and satisfying its customers’
needs.
 Customer response time: the time that it takes for a good to be delivered
or a service to be performed.
 Case studies:
• The Professional Manager Consulting vs. The City Center of Management
• Zara Company
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Competitive 120
Advantage
60
Case study: Zara
The fashion retailer Zara is one of Spain's fastest growing and most successful companies, with sales of about $8.5 billion and a
network of 2,800 stores in sixty-four countries. Zara's competitive advantage centers around one thing -- speed. While it takes most
fashion houses six to nine months to go from design to having merchandise delivered to a store, Zara can pull off the entire process in just
five weeks. This rapid response time enables Zara to quickly respond to changing fashions.
Zara achieves this by breaking many of the rules of operation in the fashion business. While most fashion houses outsource
production, Zara has its own factories and keeps about half of its production in-house. Zara also has its own designers and stores. Its
designers are in constant contact with the stores, not only tracking what is selling on a real-time basis through information systems, but
also talking to store managers once a week to get their subjective impressions of what is hot. This information supplements data gathered
from other sources, such as fashion shows.
Drawing on this information, Zara's designers create approximately 40,000 new designs a year, from which 10,000 are selected for
production. Zara then purchases basic textiles from global suppliers but performs capital intensive production activities in its own factories.
These factories use computer-controlled machinery to cut pieces for garments. Zara does not produce in large volumes to attain
economies of scale; instead it produces in small lots. Labor-intensive activities, such as sewing, are performed by subcontractors located
close to Zara's factories. Zara makes a practice of having more production capacity than necessary so that if it spots an emerging fashion
trend, it can quickly respond by designing garments and ramping up production.
Once a garment has been made, it is delivered to one of Zara's own warehouses and then shipped to its own stores once a week.
Zara deliberately under produces products, supplying small batches of products in hot demand before quickly shifting to the next fashion
trend. Often its merchandise sells out quickly. The empty shelves in Zara stores create a scarcity value, which helps to generate demand.
Customers quickly snap up products they like because they known they may soon be out of stock and not produced again.
As a result of this strategy, which is supported by competencies in design, information systems, and logistics management, Zara
carries fewer inventories than competitors (Zara's inventory amounts to about 10% of sales, compared to 15% at rival stores like The Gap
and Benetton). This means fewer price reductions to move products that haven't sold and higher profit margins.
Vitaly Nishanov 121
Elements of Competitive Advantage
Superior
Quality
Competitive
Superior
Superior Advantage:
Customer
Efficiency • Low Cost Responsiveness
• Differentiation
Superior
Innovation
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Competitive 122
Advantage
61
Innovation
 Product innovation creates value by creating new products
 Examples:
• Intel Microprocessor, early 1970s
• Cisco Router for Internet, mid 1980s
• Palm Palm Pilot – hand held computer, mid 1990s

• Apple iPod, early 2000s
 Process innovation allows a company to create move value by lowering
production costs.
 Example:
• Toyota - Toyota Lean Production or Toyota Production System (TPS):
– Just-in-time inventory system, self-managing team, cost reduction
Lean manufacturing or lean production, which is often known simply as "Lean",
is a production practice that considers the expenditure of resources for any goal other
than the creation of value for the end customer to be wasteful, and thus a target for elimination.
In a more basic term, More value with less work.
Vitaly Nishanov 123
Red Ocean Strategy
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62
Vitaly Nishanov 125
Red Ocean vs Blue Ocean
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63
Why a Company Loses its Competitive
Advantage
 Inertia
 IBM (1992)
 Prior strategic commitments
 The Icarus Paradox
 Examples:
• IBM
• DEC
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Competitive 127
Advantage
Case study: DEC

Digital Equipment Corporation (DEC) was one of the premier computer companies of the 1970s and 1980s. DEC's original
success was founded on the minicomputer, a cheaper, more flexible version of its mainframe cousins that Ken Olson and his
brilliant team of engineers invented in the 1960s. They then improved on their original minicomputers until they could not be beat
for quality and reliability. In the 1970s, their VAX series of minicomputers was widely regarded as the most reliable series of
computers ever produced, and DEC was rewarded by high profit rates and rapid growth. By 1990, it was number 27 on the
Fortune 500 list of the largest corporations in America.
Buoyed by its success, DEC turned into an engineering monoculture: its engineers became idols; its marketing and accounting
staff, however, were barely tolerated. Component specs and design standards were all that senior managers understood.
Technological fine-tuning became such an obsession that the needs of customers for smaller, more economical, user-friendly
computers were ignored. DEC's personal computers, for example, bombed because they were out of touch with the needs of
customers, and the company failed to respond to the threat to its core market presented by the rise of computer workstations and
client-server architecture. Indeed, Ken Olson was known for dismissing such new products. He once said, "We always say that
customers are right, but they are not always right." Perhaps. But DEC, blinded by its early success, failed to remain
responsive to its customers and changing market conditions. In another famous statement, when asked about personal computers
in the early 1980s, Olson said, "I can see of no reason why anybody would ever want a computer on their desk."
By the early 1990s, DEC was in deep trouble. Olson was forced out in July 1992, and the company lost billions of dollars
between 1992 and 1995. It returned to profitability in 1996 primarily because of the success of a turnaround strategy aimed at
reorienting the company to serve precisely those areas that Olson had dismissed. In 1998, the company was acquired by Compaq
Computer Corporation (which was subsequently purchased by Hewlett-Packard) and disappeared from the business landscape as
an independent entity.
Vitaly Nishanov 128
64
Competitive Positioning:
Business Level Strategy
Vitaly Nishanov
Where we are now


Acquisitions
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65
Environmental
Analysis
Vision and
Mission Goals SWOT
Statement
Organization’s
Resources
Analysis

Strategy
Implementation
Vitaly Nishanov 131
Strategic Results of SWOT analysis
Strengths Weaknesses
What might we do in order to receive Why do not we rid us of our weaknesses?

maximum advantages from our strengths?
What should we do to be rid us of them?
Opportunities Threats
Are our competitors situated in better

position to receive advantages on the base What can we undertake in order to minimize
of present (given) opportunities? our threats?
What kind opportunities are correlated Is it possible to transfer our threats

with our strengths?
to opportunities?
Vitaly Nishanov 132
66
Four Types of Strategies: SWOT
1. Strengths-Opportunities (SO)
2. Weaknesses-Opportunities (WO)
3. Strengths-Threats (ST)
4. Weaknesses-Threats (WT)
Vitaly Nishanov Ch 6
-133
SO Strategies
Strengths
Weaknesses Use a firm’s
internal strengths
Opportunities
to take advantage
Threats of external
SO
opportunities
SWOT Strategies
134
Vitaly Nishanov
67
WO Strategies
Strengths
Weaknesses Improving internal
weaknesses by
Opportunities
taking advantage
Threats of external
WO
opportunities
SWOT Strategies
Vitaly Nishanov
ST Strategies
Strengths Use a firm’s

Weaknesses strengths
Opportunities to avoid or
Threats reduce the impact
ST of external
SWOT Strategies threats
Vitaly Nishanov
68
WT Strategies
Defensive tactics
Strengths aimed at reducing
Weaknesses internal
Opportunities weaknesses &
Threats avoiding
WT environmental
SWOT Strategies threats
Vitaly Nishanov 137
Ch
ce6
-138
Hall
SWOT Matrix
Strengths – S Weaknesses – W
List Strengths List Weaknesses
Opportunities – O SO Strategies WO Strategies
Use strengths to take Overcoming weaknesses by

List Opportunities advantage of opportunities taking advantage of
opportunities
Threats – T ST Strategies WT Strategies
Use strengths to avoid Minimize weaknesses and

List Threats threats avoid threats
Vitaly Nishanov
69
Q: Formulate Four Types of SWOT
Strategies for HP
1. Strengths-Opportunities (SO)
2. Weaknesses-Opportunities (WO)
3. Strengths-Threats (ST)
4. Weaknesses-Threats (WT)
Vitaly Nishanov 139
HP: Strengths
1. HP’s unit growth was an impressive 23.8 percent, significantly outpacing the second and third-place
vendors
2. In November 2006, HP completed the acquisition of Mercury Interactive Corp., a provider of software
and services, for $4.5 billion.
3. HP’s net property, plant, and equipment increased from $6.5 billion in 2005 to $6.9 billion in 2006.
4. HP’s worldwide PC shipments market share increased in 2006 to 17 percent from 15.7 percent in
2005.
5. HP experienced a 8.4 percent increase in worldwide volume server market share.
6. HP’s high-end server revenues increased 2.4 percent.
7. HP remained in the number 1 spot in the fourth quarter of 2006, according to IDC, and gained more
than 200 basis points of market share on a year-over-year basis, ending the period at 18.1 percent.
8. In the U.S., HP’s market share rose to 24.0 percent from 20.6 percent.
9. HP’s server revenue growth was 5.1 percent in the fourth quarter of 2006.
10. HP’s non-U.S. net revenue rose from $56.1 billion in 2005 to 59.4 billion in 2006.
Vitaly Nishanov 140
70
HP: Threats
1. IBM maintained its position as the leader in overall server market revenues in 2006.
2. PC unit shipments in the U.S. declined 0.5 percent in the fourth quarter of 2006.
3. During the fourth quarter of 2006, Apple grew its units by 31.8 percent in the U.S.
market.
4. Sun’s server market share was 9.7 percent in the fourth quarter of 2006, up from 8.2
percent a year earlier.
5. Apple’s switch in 2006 to Intel-based chips increased the processing power of Macs.
6. IBM’s server factory revenues increased 0.8 percent.
7. Sun Microsystems’s server factory revenues increased 11.2 percent.
8. Apple’s improvement in the U.S. market share from 3.3 percent in 2004 to 4.0 percent
in 2005, and then to 4.2 percent in 2006.
9. IBM’s high-end sever market share rose to 57.2 percent from 53.6 percent as revenues
improved by 6.6 percent.
10. Sun Microsystems’s low-end server market share expanded 60 basis points to 8.2
percent.
Vitaly Nishanov 141
HP: Opportunities
1. The worldwide personal computer industry posted its fourth consecutive year of double digit expansion
in 2006, recording 10 percent unit growth.
2. PC shipments in the Asia-Pacific region expanded by an estimated 17.6 percent in 2006 on a unit
basis.
3. IDC’s “rest of the world” category, which includes Eastern Europe, Latin America, and the Middle East
rose 22 percent on a preliminary basis.
4. It is estimated that the PC industry will post total unit growth of approximately 11 percent for 2007.
5. Dell’s units sold declined 8.4 percent, so Dell’s market share fell by nearly 300 basis points on a year-
over-year basis.
6. Over the past three years, Gateway’s gross margins narrowed from 14.4 percent in the first quarter of
2004 to 5.2 percent in the fourth quarter of 2006
7. During the fourth quarter of 2006, server market revenue grew by 5.2 percent.
8. Dell achieved server market share of 9.4 percent on server revenue growth of 2.4 percent, down from
9.6 percent
9. Worldwide revenues for servers were up 2.0 percent to $52.3 billion.
10.In the first quarter of 2006, IBM’s server revenue growth of 3.8 percent put its market share at 37.9
percent, down from 38.4 percent the comparable year-earlier quarter.
Vitaly Nishanov 142

71
HP: Weaknesses
1. HP’s worldwide midrange server market share decreased 21.3 percent in 2006.
2. HP ceded 100 basis points of server market share, to 26.8 percent.
3. Local labor conditions and regulations
4. HP’s return on equity is 18.55 percent, while the return in equity of the industry leader in return on
equity is 38.93 percent.
5. Managing a geographically dispersed workforce
6. HP’s long-term debt/equity is 0.233, while the long-term debt/equity of the industry leader in long-
term debt/equity is 1.689.
7. HP’s server vendor market share dropped from 26.9 percent in 2005 to 26.8 percent in 2006.
8. Over 60 percent of overall net revenue in 2006 came from outside of the U.S.
9. Longer accounts receivable cycles
10. HP’s long-term growth rate (5 yrs) is 13.82 percent, while the long-term growth rate of the industry
leader in long-term growth is 22.62 percent.
Vitaly Nishanov 143
HP: SO Strategies
The worldwide personal computer industry posted its fourth consecutive year of
Dell achieved server market share of 9.4 percent on server revenue growth of 2.4
1 2 3 4 5 6 7 8 9 10
double digit expansion in 2006, recording 10 percent unit growth.
1HP’s unit growth was an impressive 23.8 percent, significantly outpacing the second and third-place
vendors
2
3
4
5
percent, down from 9.6 percent
6
7
8
9
10
Vitaly Nishanov 144
72
HP: WO Strategies
1 2 3 4 5 6 7 8 9 10
1
2
3
4
5
6
7
8
9
10
Vitaly Nishanov 145
HP: WT Strategies
1 2 3 4 5 6 7 8 9 10
1
2
3
4
5
6
7
8
9
10
Vitaly Nishanov 146
73
HP: ST Strategies
1 2 3 4 5 6 7 8 9 10
1
2
3
4
5
6
7
8
9
10
Vitaly Nishanov 147
Example: Nestlé
SO
 Increase advertising of Baby food by $200 million in Australia (S3, O8,

O9).
 Develop sugar-free and low-sugar type of Hot chocolate for American

market where 30% people takes care about healthy food (S3, S7, O1)
Vitaly Nishanov 148
74
Q: Formulate Four Types of SWOT
Strategies for HP
 Strengths-Opportunities (SO)
 1) ………………………
 2) ………………………
 Weaknesses-Opportunities (WO)
 1) ………………………
 2) ………………………
 Strengths-Threats (ST)
 1) ………………………
 2) ………………………
 Weaknesses-Threats (WT)
 1) ………………………
 2) ………………………
Vitaly Nishanov 149
Environmental
Analysis
Vision and
Mission Goals SWOT
Statement
Organization’s
Resources
Analysis

Strategy
Implementation
Vitaly Nishanov 150
75
Strategic Alternatives
 Growth
 Limited Growth (or Stability)
 Retrenchment
 Liquidation
 Cutting of unnecessary
 Shortening and reorientation
 Combination See
Textbook
Vitaly Nishanov p. 222-223 151
How to Choose a Strategic Alternative (1)?

See
Textbook
p. 222-223
Growth-Share Matrix of the Boston Consulting Group

Market Share:
High Low
High
Growth Rate:
Question Mark
Low
Vitaly Nishanov 152

76
How to Choose a Strategic
Alternative (2)?
Recommendations of the Boston Consulting Group
 «Stars» - Support and strengthen them
Control production costs and investment, and estimate

 «Cash Cows» -
possibility to invest money to Stars and Cats
 «Wild Cats» - Research possibility of the conversion of the Cats into Stars
in case of special investment to Cats
 «Dogs» - Try to be rid of Dogs if there are no special reasons to keep

(save) them, for example for PR
Possible Strategic Decisions
Growth-Share Matrix of the Boston Consulting Group

Relative Market Share Position:
High Low
• Backward, Forward, or • Market Penetration
Horizontal Integration • Market Development
High
Industry Sale Growth Rate:
• Market Penetration • Product Development

• Market Development • Divestiture
• Product Development
• Product Development • Retrenchment

• Diversification • Divestiture
• Retrenchment • Liquidation
Low
• Divestiture
Vitaly Nishanov 154

77
Three Approaches to Strategy Developing
 Porter’s Five Generic Strategies
 Synergy
 Product Life Circle
Vitaly Nishanov 155
Two ways to achieve advantage over rivals
No advantage over Advantage over rivals

rivals
Produce a differentiated product
Differentiation and charge sufficiently higher
prices to more than off-set the
added costs of differentiation
Produce an essentially
Low-cost equivalent product at a lower
cost
156
Vitaly Nishanov Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
78
Q: Identify and explain strategies
(1), (2), and (3)?
Average Profit
market
price
Profit
Profit
Profit
Costs
Costs
Costs Costs
Competitor 1 2 3
Vitaly Nishanov 157
Porter’s Generic Competitive

Strategies
Cost Uniqueness
Broad Cost leadership Differentiation

Competitive Scope
target
Integrated Cost
Leadership/
Differentiation
Focus Cost Focused

Narrow Leadership Differentiation
target
Vitaly Nishanov 158
79
Generic Business Strategies
Vitaly Nishanov What kind of innovation do we recommend for the Cost Leader?
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 159
Cost
Differentiation
Cost Drivers: Cost-Leadership leadership
Focus Cost
Integrated Cost
Leadership/
Differentiation
Focused
Leadership Differentiation
• Cost Leadership:
 Competitive advantage = economic value created (V-C) > competitors

 GM vs. Hyundai
Vitaly Nishanov
80
Cost Leadership Cost
leadership
Integrated Cost
Leadership/
Differentiation
Differentiation
Focus Cost Focused
 A company pursuing a cost-leadership business model chooses strategies that do

everything possible to lower its cost structure so it can make and sell goods or services
at a lower cost than its competitors.
 Two advantages:
1. If a company’s closest rivals charge similar prices for their products, the cost leader will be
more profitable than its competitors because of its lower costs.
2. The cost leader gains a competitive advantage by being able to charge a lower price than its
competitors because of its lower cost structure.
 Cost leader is relatively safe as long as it can maintain its low-cost advantage.
 Cost leaders’ goods and services must have competitive levels of quality that create
value for customers. At the extreme, concentrating only on reducing costs could result
in the firm efficiently producing products that no customer wants to purchase.
 Case studies:
Profit
 Wal-Mart Profit
Profit
 Dell
Costs
Costs Costs
Vitaly Nishanov 161
Cost
Cost Leadership Strategies leadership
Integrated Cost
Leadership/
Differentiation
Differentiation
Focus Cost Focused

Key Criteria: Requirements:
 Produce relatively standardized  Build efficient scale facilities

products/services
 Tight control of production costs
 Reduce differentiation (the level of and overhead
differentiation must be obtainable
at low cost)  Simplify processes
 Define the possible minimum of  Minimize sales, R&D, and service

costs
features that are acceptable for
large market  Monitor external service providers’
costs
 Lowest competitive price
 Reconfigure Value Chain as
needed
How to produce the smallest number of products that will be desired by
the highest number of customers
81
Risks of Costs Leadership Cost
leadership
Integrated Cost
Leadership/
Differentiation
Differentiation
Focus Cost Focused
 Technological change may eliminate cost advantage
• Goods could become obsolete because of competitors’ innovations.
 Competitors may learn how to imitate value chain
 Focus on efficiency may blind firm to changes in customer

preferences
• Case: Chinese goods in Central Asia
Vitaly Nishanov
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 163
Focus Cost Leadership Cost

leadership
Integrated Cost
Leadership/
Differentiation
Differentiation
Focus Cost Focused
 Focus cost leadership business model bases on combining the cost

leadership and focused business-level strategies to compete for customers in
just one or a few market segments.
 Focused cost leaders concentrate on a narrow market segment, which can be

defined geographically, by type of customer, or by segment of the product
line.
 The focus cost leader concentrates on small-volume products.
 Because a focused firm makes and sells only a relatively small quantity of a
product, its cost structure will often be higher than that of the cost leader.
 Ex.: Asian Food Center

Vitaly Nishanov 164
82
Cost
Focused Strategies leadership
Integrated Cost
Leadership/
Differentiation
Differentiation
Focus Cost Focused
Walmart
Asian Food Center
Russian grocery store
Value Drivers: Differentiation Cost

leadership
Integrated Cost
Leadership/
Differentiation
Differentiation
Focus Cost Focused
Differentiation:
 Product features, customer service, customization, and complements
 Competitive advantage = economic value created (V-C) > competitors

Vitaly Nishanov Marriott line of Hotels
83
V> Cost
Differentiation
Differentiation leadership
Focus Cost
Integrated Cost
Leadership/
Differentiation
Focused
If What
I bought it, the
I might think buyers?
that I own it.
about powerful
But in reality, it owns me!
 The Differentiation Strategy is an integrated set of actions taken to produce goods or
services that customers perceive as being different in ways that are important to them.
 Examples of differentiation:
• Unusual features
• Responsive customer service
• Rapid product innovations and technological leadership
• Perceived prestige and status
• Different tastes,
• Design
 A differentiator has to have the ability to satisfy customers’ needs in a way that its
competitors cannot.
 Customers pay a premium price when they believe the product’s differentiated qualities
are worth the extra money. Consequently, differentiated products are often prices on
the basis of what the market will bear.
 Cases:
• Mercedes-Benz vs. Toyota A Differentiator only targets the market segments in
• BMW vs. Honda
which customers are willing to pay a premium price.
Vitaly Nishanov• Chrysler 167
Cost
Differentiation
leadership
Focused Differentiation Focus Cost
Integrated Cost
Leadership/
Differentiation
Focused
Vitaly Nishanov 168
84
Risk of Focused Strategies
 A competitor may be able to focus on a more narrowly

defined competitive segment and “outfocus” the focuser.
• Confederate Motor Co. is producing a highly differentiated motorcycle. All

of them are produces by hand. Prices are from $62,000
 Large competitors may enter niche market
• Gap Inc. have tried to design and market products that would compete
with Anne Fontaine’s product lines
 Preferences of niche customers may change and become similar to

those of broad market
Vitaly Nishanov 169
Q: _________________________ Strategies
Offers products Offers products

to only one group to many kinds
of customers of customers
Offers Focused
low-priced Cost-Leadership
Cost-Leadership
products Strategy
Strategy
to customers
Offers
unique or Focused
distinctive Differentiation
Differentiation
products Strategy
Strategy
to customers
Vitaly Nishanov 170
85
Cost
Differentiation
Cost Leaders, Broad Differentiators, leadership

Integrated Cost
Leadership/
Differentiation
Focus Cost Focused
and Differentiators Leadership Differentiation
Differentiators
Broad differentiators
Cost leaders
Vitaly Nishanov 171
Avon Pursuing an Integration Strategy Cost

leadership
Integrated Cost
Leadership/
Differentiation
Differentiation
Focus Cost Focused
Integration strategy allows firms two pricing options:

1) The firm can charge a higher price than the cost leader,
2) The firm can lower its price below that of the differentiator
Vitaly Nishanov
6-172
86
Integrated Cost Leadership/ Cost
leadership
Integrated Cost
Differentiation
Leadership/
Differentiation Strategy Focus Cost

Leadership
Differentiation
Focused
Differentiation
The Integrated Cost Leadership/Differentiation Strategy involves engaging in primary and

support activities that allow a firm to simultaneously pursue low cost and differentiation.
Three secrets of this strategy
 Flexible manufacturing systems (FMS). The goal of an FMS is to eliminate the “low
cost versus product variety” trade-off. In fact, FMS is a computer-controlled process
used to produce a variety of products in moderate, flexible quantities with a minimum of
manual intervention.
 Information networks. By linking companies with their suppliers, distributors, and
customers, information networks provide another source of flexibility.
 Total quality management system (TQM) is a managerial innovation that
emphasizes an organization's total commitment to the customer and to continuous
improvement of every process through the use of data-driven, problem-solving
approaches vase on empowerment of employee groups and teams.
Vitaly Nishanov 173
Production and Efficiency: Cost

leadership
Differentiation
Integrated Cost
Leadership/
Flexible Manufacturing Focus Cost

Leadership
Differentiation
Focused
Differentiation
 Flexible manufacturing technology (lean production)

 Reduced setup times
 Increased machine utilization
 Improved quality control
 Lower inventory levels
 Mass customization
 Low cost and product customization
 Flexible machine cells
 Increased variety of operations
• Honda motorcycles vs. Yamaha motorcycles
Vitaly Nishanov 174
87
Risk of Integrated Cost Leadership/ Cost
leadership
Integrated Cost
Differentiation
Leadership/
Differentiation Strategy Focus Cost

Leadership
Differentiation
Focused
Differentiation
 Involves compromises and trade-offs between maximizing low cost

and maximizing differentiation
 May become “stuck in the middle”
• Lack strong commitment to either generic strategy
 Successful integrators are rare
Vitaly Nishanov 175
Cost
Q: What is the Difference between leadership

Integrated Cost
Leadership/
Differentiation
Differentiation
Focus Cost Focused
Integration and Blue Ocean Strategies? Leadership Differentiation
Create uncontested market space

 …
Make the competition irrelevant

 …
Focus on non-customers
 …
 …
Create and capture new demand
Vitaly Nishanov 176
88
Cost
Differentiation
leadership
Q: What is Common in Both Strategies? Focus Cost
Integrated Cost
Leadership/
Differentiation
Focused
 Break
… the value-cost tradeoff
(seek greater value to
customers and low cost
simultaneously)
 Align
… the whole system of a
firm’s activities in pursuit of
differentiation and low cost
Vitaly Nishanov 177
The Dynamics of Competitive Positioning:

Apple, HP, and Dell
Vitaly Nishanov
89
Synergy or 2+2=5
2*2=5
The Synergy concept means “Total should be greater than sum of its parts”.
Synergy exists when the value created by business units working together exceeds the value that those
same units create working independently.
There are at least four types of synergy:
 Market Synergy – when one product or service fortifies and promotes the sales of one or more
other product or service.
 Cost Synergy – when two or more products (or services) might be designed by the same group
of specialists, produced in the same equipment, distributed through the same channels, and sold
the same sale people. (Cost synergy is applicable in all businesses and in all spheres of a
company activity)
 Technological Synergy - presupposes transferring technology from one application to another.
 Management Synergy when one manager can substitute for another one in case of need, or/and
managers from different business units are able to share with each other successful strategic
decisions; it requires Knowledge Management.
Vitaly Nishanov 179
Product Life Cycles (PLCs) Strategies
18
16
14
12
10
8
Sales Profit
6
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-2
Time
-4
Product life cycle stages

Precommercialization Introduction Growth Maturity Decline
Basic Strategies
Innovation Infiltration Advancement Defense Withdrawal
Vitaly Nishanov 180
90
How to realize strategies of PLCs
Strategies of PLC
Innovation Infiltration Advancement Defense Withdrawal
Research and develop Scale up production Research and Cut costs in production Scale down
new product/services and marketing development and marketing to fight production and
operations competitive declining profit marketing
innovations for
present products
Forecast sales and key Provide aggressive Seek economies of Consider extending Trim inventories
trends marketing scale in production product life cycle via
reintroduction or product
update
Plan financing for Plan financing for Study competitors Reassign personnel
negative cash flow negative cash flow
period period
Conduct production Build relationship with Build brand Emphasize customer Cut promotion costs
and marketing tests reliable suppliers preference and service and compete on the
product loyalty basis price
Begin to gather and Anticipate
train personnel competition
Build relationship with Fill in neglected market Plan termination of
reliable suppliers segments product or line
Vitaly Nishanov 181
Cost
Classwork #3 (I) leadership
Integrated Cost
Leadership/
Differentiation
Differentiation
Focus Cost Focused

 Given a list of prominent firms. Place each firm you know (or research online) in one of
the five categories of generic business-level strategies—broad cost-leadership, focused
cost-leadership, broad differentiation, focused differentiation, and integration. No
explanation!
 Ann Taylor  McKinsey & Co.

 BIC  Nike
 Black & Decker  Porsche
 Clif Bar  Rhapsody
 Coca-Cola  Rolls-Royce
 Dollar Stores  Ryanair
 Google  Samuel Adams
 Goya Foods  Singapore Airlines
 Greyhound Lines  Target
 Kia Motors  Toyota
 Lands’ End  Vanguard
 Liberty Mutual  Victoria’s Secret
 Martin Guitars  Zara
Vitaly Nishanov 182
91
Cost
Differentiation
leadership
Integrated Cost
Classwork #3 (II) Focus Cost

Leadership
Leadership/
Differentiation
Focused
Differentiation
Cost Differentiation
Broad
Narrow
Vitaly Nishanov 183
Functional Level Strategy
Vitaly Nishanov
92
Matsushita (I)
When Kunio Nakamura became CEO at the venerable Japanese electronics giant, Matsushita, in 2000, it
was a company in deep trouble. Earnings had been going south for years and the company's market
capitalization had shrunk to less than half of that of long-time rival Sony. Employees were frustrated and morale
was poor. By the time he retired in June 2006, Matsushita was delivering its best financial performance in more
than a decade. After losing $3.7 billion in 2002, in the year ending March 2006 the company registered profits of
$1.37 billion. Moreover, earnings were projected to grow 20%, to $1.7 billion, in the year ending March 2007.
Nakamura achieved this transformation by relentlessly focusing on efficiency improvements. Early in his
tenure, he put an end to the internal rivalries that had led different divisions to develop identical products.
The resulting duplication wasted precious research and development (R&D) money and limited the ability of the
company to realize economies of scale. He reduced the number of layers in the management hierarchy and
slashed the domestic work-force by 19%-a tough thing to do at Matsushita, where life time employment had
been the norm - and closed thirty factories. Then he pushed factory managers to do everything possible to raise
productivity.
Matsushita's factory in Saga, Japan, exemplifies the obsession with productivity improvements. By 2004,
employees at the factory, which makes cordless phones, faxes, and security cameras, had already doubled
productivity since 2000 by introducing robots into the assembly line, but factory managers were not happy. An
analysis of flow in the production system showed that bottlenecks on the assembly line meant that robots sat
idle for longer than they were working. So the plant's managers ripped out the assembly line conveyer belts and
replaced them with clusters of robots grouped into cells. The cells allowed them to double up on slower robots
to make the entire manufacturing process run more smoothly. Then they developed software to synchronize
production so that each robot jumped into action as soon as the previous step was completed. If one robot
broke down, the work flow could be shifted to another to do the same job.
Copyright © 2009 Pearson Education,
Vitaly Nishanov
Matsushita (II)
The results were impressive. The time that it took to build products was drastically reduced. It used to
take two and a half days in a production run before the first finished products came off the assembly line;
now it takes as little as forty minutes.
Phones, for example, can now be assembled in one-third of the time, doubling weekly output from the
same plant with the same number of employees. Shorter cycle times enabled the factory to slash
inventories. Work-in-progress, such as partly finished products, along with components such as chipsets,
keypads, and circuit boards, now spent far less time in the factory.
The Saga factory is known as a mother plant within Matsushita. Once process improvements have
been refined at a mother plant, they have to be transferred to other plants within the group as quickly as
possible. There are six other plants in the Saga group: in China, Malaysia, Mexico, and Britain. Most were
able to quickly copy what was done at Saga and saw similar cuts in inventory and boosts in productivity.
Despite the faster pace of work, the factory employees paid close attention to product quality. The
short cycle times helped employees to identify the source of defective products and quickly fix any errors
that led to quality problems.
Consequently, at less than 1% of output, by 2006, defect rates were at an all-time low in every factory.
The reduction in waste further boosted productivity and helped the company to strengthen its reputation for
producing high-quality merchandise.
Vitaly Nishanov 186
93
Functional - Level Strategy
The main purpose of functional-level strategy is to improve the effectiveness of

a company’s operations and thus its ability to attain superior efficiency,
quality, innovation, and customer responsiveness.
Efficiency = Outputs/Inputs
Four Tasks of Functional-Level Strategies
1. Achieving Superior Efficiency
2. Achieving Superior Quality
3. Achieving Superior Innovation
4. Achieving Superior Customer Responsiveness
Superior Efficiency
Vitaly Nishanov
Superior Quality Superior Innovation Superior Customer Responsiveness 187
Achieving Superior Efficiency
 Production and Efficiency

 Economies of Scale
 Learning Effects
 The Experience Curve
 Flexible Manufacturing
 Marketing Efficiency
 Materials Management, JIT, and Efficiency
 R&D Strategy and Efficiency
 Human Resource Strategy and Efficiency
 Infrastructure and Efficiency
Superior Efficiency
Vitaly Nishanov
94
Production and Efficiency:
Economies of Scale
A typical long-run unit-
cost curve:
FORD Model T car.
As a result of economy of scale,

the cost of manufacturing a car at Ford fell from
$3,000 to less that $900 (in 1958 dollars)
189
Superior Efficiency
Vitaly Nishanov
Superior Quality Superior Innovation Superior Customer Responsiveness
Production and Efficiency:

Economies and Diseconomies of Scale
Superior Efficiency
Vitaly Nishanov
95
Production and Efficiency: Learning Effects
Unit Costs
. A
Average Costs
Output
Superior Efficiency
Vitaly Nishanov
Production and Efficiency: Learning Effects
Unit Costs
. A Economies
of Scale
.
B
Average Costs
.C
Learning
Effects
Average Costs
Output
Superior Efficiency
Vitaly Nishanov
96
Learning Effects in Cardiac Surgery
A study carried out by researchers at the Harvard Business School tried to estimate the importance of learning effects in the
case of a specific new technology for minimally invasive heart surgery that was approved by federal regulators in 1996. The
researchers looked at sixteen hospitals and obtained data on the operations for 660 patients. They examined how the time
required to undertake the procedure varied with cumulative experience. Across the sixteen hospitals, they found that average
time fell from 280 minutes for the first procedure with the new technology to 220 minutes by the time a hospital had performed
fifty procedures (note that not all of the hospitals performed fifty procedures, and the estimates represent an extrapolation based
on the data).
Next they looked at differences across hospitals. Here they found evidence of very large differences in learning effects. One
hospital, in particular, stood out. This hospital, which they called Hospital M, reduced its net procedure time from 500 minutes
on case 1 to 132 minutes by case 50. Hospital M's eighty-eight -minute procedure time advantage over the average hospital at
case 50 translated into a cost saving of approximately $2,250 per case, and allowed surgeons at the hospital to do one more
revenue-generating procedure per day.
The researchers tried to find out why Hospital M was so superior. They noted that all hospitals had similar state-of-the-art
operating rooms and used the same set of FDA-approved devices, that all adopting surgeons went through the same training
courses, and that all surgeons came from highly respected training hospitals. Follow-up interviews suggested, however, that
Hospital M differed in how it implemented the new procedure. The team was handpicked by the adopting surgeon to perform the
surgery. It had significant prior experience working together (indeed, that was apparently a key criterion for team members). The
team trained together to perform the new surgery. Before undertaking a single procedure, they met with the operating room
nurses and anesthesiologists to discuss the procedure. Moreover, the adopting surgeon mandated that the surgical team and
surgical procedure were stable in the early cases. The initial team went through fifteen procedures before new members were
added or substituted and twenty cases before the procedures were modified. The adopting surgeon also insisted that the team
meet prior to each of the first ten cases, and they also meet after the first twenty cases to debrief.
The picture that emerges is one of a core team that was selected and managed to maximize the gains from learning. Unlike
other hospitals where there was less stability of team members and procedures, and where there was not the same attention to
briefing, debriefing, and learning, surgeons at Hospital M both learned much faster and ultimately achieved higher productivity
than their peers in other institutions. Clearly, differences in the implementation of the new procedure were very important.
Vitaly Nishanov 193
Production and Efficiency: The Experience Curve
Unit Costs
. B
. A
Accumulated
Output
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97
Production and Efficiency: Cost
Differentiation
leadership

Integrated Cost
Leadership/
Differentiation
Focused
The Tradeoff Between Costs and Product Variety

Unit Costs
Unit Costs
Traditional Flexible
Manufacturing Manufacturing
Total
Variety
Related Total
Volume
Volume Related
Related Variety
Related
Low High Low High
Production Volume Production Volume
Production Variety Production Variety
Superior Efficiency
Vitaly Nishanov
Cost
Differentiation
leadership
Production and Efficiency: Integrated Cost
Leadership/
Differentiation

Leadership
Focused
Differentiation
 Flexible manufacturing technology (lean production)

 Reduced setup times
 Increased machine utilization
 Improved quality control
 Lower inventory levels
 Mass customization
 Low cost and product customization
 Flexible machine cells
 Increased variety of operations
• Honda motorcycles vs. Yamaha motorcycles
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98
Mass Customization at
Years ago, almost all clothing was made to individual order by a tailor (a job shop production method). Then along came the twentieth
century and techniques for mass production, mass marketing, and mass selling. Production in the industry shifted toward larger volume and less
variety based on standardized sizes. The benefits in terms of production cost reductions were enormous, but the customer did not always win.
Offset against lower prices was the difficulty of finding clothes that fit as well as tailored clothes once did. Look around you and you will see that
people come in a bewildering variety of shapes and sizes; then go into a store to purchase a shirt, and you get to choose between just four sizes:
small, medium, large, and extra large! It is estimated the current sizing categories in clothing fit only about one-third of the population. The rest of
us wear clothes where the fit is less than ideal.
The mass-production system has drawbacks for apparel manufacturers and retailers as well. Year after year, apparel firms find themselves
saddled with billions of dollars in excess inventory that is either thrown away, or put on fire sale, because retailers had too many items of the
wrong size and color. To try and solve this problem, Lands' End has been experimenting with mass-customization techniques.
To purchase customized clothes from Lands' End, the customer provides information on the Lands' End website by answering a series of
fifteen questions (for pants) or twenty five questions (for shirts), covering about everything from waist to inseam. The process takes about twenty
minutes the first time through, but once the information is saved by Lands' End, it can be quickly accessed for repeat purchases. The customer
information is then analyzed by an algorithm that pinpoints a person's body dimensions by taking these data points and running them against a
huge database of typical sizes to create a unique, customized pattern. The analysis is done automatically by a computer, which then transmits the
order to one of five contract manufacturer plants in the United States and elsewhere, which cut and sew the finished garment, and ship the
finished product directly to the customer.
Today, customization is available for most categories of Lands' End clothing. Some 40% of its online shoppers choose a customized garment
over the standard size equivalent when they have the choice. Even though prices for customized clothes are at least $20 higher and they take
about three to four weeks to arrive, customized clothing reportedly accounts for a rapidly growing percentage of the $500 million online business
for Lands' End. Land's End states that its profit margins are roughly the same for customized clothes as regular clothes, but the reductions in
inventories that come from matching demand to supply account for additional cost savings. Moreover, customers who customize appear to be
more loyal, with reordering rates that are 34% higher than for buyers of standard size clothing.
Vitaly Nishanov 197
Marketing and Efficiency
Advertising
Promotion Product
Design
Pricing Distribution
Marketing Strategy
Superior
Vitaly Nishanov Efficiency Superior Quality Superior Innovation Superior Customer Responsiveness
99
The Relationship Between
Average Unit Costs and Customer Defection Rates
High
Average Unit Costs
Customer
Low
Defection Rates
Low High
Superior Efficiency
Vitaly Nishanov

The Relationship Between
Customer Loyalty and Profit Per Customer
5% reduction in customer defection

rates leads to the following increases in
Profit per Customer profits per customer over average
customer life:
(+)
75% in the credit card business,
50% in the insurance industry,
45% in the industrial laundry business,
35% in the computer software industry.
Length of Time
O Customer Has Been
With Company
(-)
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100
Materials Management, JIT,
and Efficiency
 Materials management
 Getting materials into and through

the production process and out
through the distribution system
to the end user.
 Just-In-Time (JIT)
 Reduce inventory holding costs by having materials arrive JIT to enter

the production process.
 JIT risk: There are no buffer stocks for nondelivery or unanticipated

increases in demand.
Superior Efficiency
Vitaly Nishanov
R&D Strategy and Efficiency
 Design easy-to-manufacture products
 Reduce numbers of parts per unit.
 Reduce assembly time.
 Closely coordinate R&D

and production activities.
 Pioneer process innovations
 Innovations create competitive

advantage through gains in process efficiencies.
Superior Efficiency
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101
Human Resource Strategy and
Efficiency
 Hiring strategy
 Employee Training
 Self-Managing Teams
 Pay for Performance
Superior Efficiency
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Infrastructure and Efficiency
 Organization structure
 Organizational Culture
 Leadership style
 Control system
Superior Efficiency
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102
Superior Quality
 Superior Quality as Excellence and Reliability
 A product is said to have superior quality when customers perceive

that its attributes provide them with higher utility than attributes of
products sold by rivals.
 When customers evaluate the quality of a product, they commonly

measure it against two kinds of attributes:
1. those related to quality as excellence and
2. those related to quality as reliability
Superior Efficiency
Vitaly Nishanov
Achieving Superior Innovation
 Causes of the high failure rate of innovation:
 Uncertainty
• Quantum innovation
• Incremental innovation
 Poor commercialization
 Poor positioning strategy
 Technological myopia
 Slowness in marketing
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Achieving Superior Innovation
Building Competencies in Innovation
 Building Skills in Basic and Increase absorptive capacity, or the ability of a

Applied Research company to identify, value, assimilate, and
use new knowledge.
 Project Selection and Overall management of the innovation process,

from generation of the concept through
Management
development and into final production.
 Cross-Functional Integration Integration among R&D, production, and

marketing departments in order to achieve
to ensure that projects are driven by the
needs of customers.
 Product Development Teams
Matrix structure: Team must be composed of
representatives from R&D, Marketing,
Production, and Finance Departments.
 Partly Parallel Development
Process Development stages overlap each other
Superior Efficiency
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The Development Funnel

Gate 1 Gate 2
Market
Phase 2: Phase 3:
Phase 1: Project Project
Idea Generation Refinement Execution
Superior
104
Matrix Structure
Director
Marketing HR
Production Finance R&D
and Sales Department
Project
Manager
Project
Manager
Project
Manager
Vitaly Nishanov
Superior
Sequential Development Process
Opportunity
Identification R&D
Concept
Development
Product Manufacturing
Design
R&D and Marketing Process

Design
Commercial
Production
Superior
105
A Partly Parallel Process
Opportunity
Identification R&D and Manufacturing
Concept
Development
Product
Design
R&D and Marketing Process
Design
Customers
Commercial
Production
Superior
How to motivate employees to be

more creative
 HP encourages its corporate researchers to devote 10% of company
time to explore their own ideas.
 3M encourage its employees to devote 15% for the same purposes
 Google allows employees to spend 20% for their projects
• Among Google products Google News and Google Earth were

developed by individual initiatives
 ROWE
Superior
Vitaly Nishanov Efficiency Superior Quality Superior Innovation Superior Customer Responsiveness 212
106
Functional - Level Strategy
The main purpose of functional-level strategy is to improve the effectiveness of

a company’s operations and thus its ability to attain superior efficiency,
quality, innovation, and customer responsiveness.
Efficiency = Outputs/Inputs
Four Tasks of Functional-Level Strategies
1. Achieving Superior Efficiency
2. Achieving Superior Quality
3. Achieving Superior Innovation
4. Achieving Superior Customer Responsiveness
Superior Efficiency
Vitaly Nishanov
Achieving Superior Customer

Responsiveness
 Customer Focus
 Demonstrating Leadership Customer focus must start at the top of the

organization.
 Employee Attitudes All employees must see the customer as the focus of
their activity and be trained to focus on the customer.
 Bringing Customers into the Knowing the customer not only requires that
Company employees think like customers themselves; it also
demands that they listen to what their customers have
to say.
 Satisfying Customer Needs
 Customization Customization is varying the features of a good or
service to adapt/adjust it to the unique needs or tastes
of groups of customers.
 Response Time Companies that can satisfy customer demands for
rapid response build brand loyalty, differentiate their
products, and can charge higher prices for them.
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107
Achieving Superior Customer
Responsiveness
 Developing a customer focus: *** Caterpillar
 Top leadership commitment to customers.
 Employee attitudes toward customers. **** Capsim
 Bringing customers into the company.
 Satisfying customer needs:
 Customization of the features of products and services to meet the
unique need of groups and individual customers.
 Reducing customer response times:
• Marketing that communicates with production.
• Flexible production and materials management.
• Information systems that support the process.
Superior Efficiency
Vitaly Nishanov
QQQ: Value Chain Analysis
Firm Infrastructure
Activities
Support
Human Resource Management

Technological Development
Procurement
Operations
Marketing
Outbound
Activities
Logistics
Logistics
Primary
Inbound
Service
& Sales
Vitaly Nishanov 216
108
The Role Played by Various Functions
in Achieving Superior Efficiency
Value Creation Function Primary Roles
1. Infrastructure (Leadership) 1. Provide companywide commitment to efficiency

2. Facilitate cooperation among functions.
1. Pursue economies of scale and learning effect.

2. Production
2. Implement flexible manufacturing systems
1. Where appropriate, adopt aggressive marketing to ride down the

3. Marketing experience curve
2. Limit customer defection rates by building brand loyalty.
4. Material Management 1. Implement JIT system
1. Design products for ease of manufacture

5. R&D
2. Seek process innovation
1. Use information systems to automate processes

6. Information systems
2. Use information systems to reduce costs of coordination
1. Training programs to build skills

7. Human resources
2. Implement self managing teams
Vitaly Nishanov 217
3. Implement pay for performance
The Role Played by Various Functions

in Achieving Superior Innovation
1. Infrastructure (Leadership) 1. Overall project management (i.e. managing the development

function)
2. Facilitating cross-functional cooperation
2. Production 1. Cooperate with R&D on designing products that are easy to
manufacture.
2. Work with R&D on developing process innovations.
3. Marketing 1. Provide market information to R&D. Work with R&D on
developing new products.
4. Material Management No Primary Responsibility
1. Develop new products and processes

5. R&D 2. Cooperate with other functions, particularly marketing and
manufacturing, in the development process.
6. Information systems 1. Use information system to coordinate cross-functional and
cross-company product development work
7. Human resources 1. Hire talented scientists and engineers.

218
Superior Efficiency
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109
The Primary Role of Different Functions in
Achieving Superior Customer Responsiveness
1. Through leadership by example, build a wide
1. Infrastructure (Leadership)
commitment responsiveness to customers
1. Achieve customization through implementation
2. Production flexible manufacturing.
2. Achieve rapid response through flexible manufacturing
1. Know the customer
3. Marketing 2. Communicate customer feedback to appropriate
functions.
4. Material Management 1. Develop logistics systems capable of responding
quickly to unanticipated customer demands.
5. R&D 1. Bring customers into the product development process.
1. Use web-based information systems to increase

6. Information systems
responsiveness to customers
1. Develop training programs that get employees to think of

7. Human resources
themselves as customers.
219
Superior Efficiency
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Corporate Level Strategy
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110
Where we are


Acquisitions
Vitaly Nishanov
Corporate Level Strategy
A corporate-level strategy specifies actions a firm takes to gain a competitive

advantage by selecting and managing a group of different businesses
competing in different product markets
Two main questions:
 What businesses the corporation should be in?
 How the corporate office should manage the array of business units?
• how to create synergies between businesses?
Copyright © 2009 Pearson Education, 222

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111
Corporate Strategy
Diversified company has 3 levels of strategy
 Business-level strategy
• How to create competitive advantage in each of company’s businesses
 Functional-level strategy
• How to improve the effectiveness of a company’s operations and thus its

ability to attain superior efficiency, quality, innovation, and customer
responsiveness
 Corporate-level strategy
• How to create value for the corporation as a whole
• What mix of businesses should we be in?
Vitaly Nishanov 223
Corporate-Level Strategy: Key Questions
Corporate-level Strategy’s Value
 The degree to which the businesses in the portfolio are worth more
under the management of the company than they would be under other
ownership.
 What businesses should

the firm be in?
 How should the corporate

office manage the
group of businesses?
Business Units
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112
Three Dimensions of Corporate Strategy
 What stages of industry value

chain and degrees of vertical
integration
 What range of products and

services and degrees of
horizontal integration and
diversification
 Where in the world to

compete and global strategy
Scope of the firm determines boundaries along these 3 dimensions.

Vitaly Nishanov
Diversification
Diversification – degree to which a firm conducts business in more than one area (market).
Single Business Dominant Business
95% or more
Low of revenue
70 - 95% of revenue
comes from
level comes from a single business
a single business
Related Businesses Unrelated Businesses
Less than 70% Less than 70%

High of revenue comes from of revenue comes from
the dominant business, and the dominant business, and
level all businesses share product, there are only limited links
technological, between businesses
and distribution linkages
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113
General Electric (1)
General Electric (GE) was established in 1892 as a merger between two manufacturers of electrical equipment, Thomson-Houston
Electric Co. and Edison General Electric Co. (of which Thomas Edison was one of the directors). GE's early products included such Edison
inventions as light bulbs, elevators, motors, and toasters. In 1896, GE was among the 12 original companies to be included in the newly
created Dow Jones Industrial Average, and it's the only one that's still on the list.
By 1980, GE was earning $25 billion in revenues from such diverse businesses as plastics, consumer electronics, nuclear reactors, and
jet engines. By 2007, its revenues were an astounding $163 billion and its businesses spanned consumer and commercial finance, health
care, industrial, infrastructure, and news and entertainment. GE CEO Jeffrey Immelt described the range of GE:"We're not a monolithic
company," lmmelt said. We have a $17 billion healthcare business that competes in a $4 trillion industry that's growing 8 percent a year. I can
grow that business 8 percent. I’ve got a consumer-finance business in a $40 trillion global market growing 10 percent a year." How did GE
evolve from an electronics company to an enormous conglomeration of many businesses?
Over the years, GE developed some of the businesses through its own research and development (R&D) efforts. However, many of its
current operations are the result of acquisitions. Indeed, GE is one of the most frequent acquirers of other businesses in the world. Between
January 2000 and December 2004, GE acquired more than 250 different companies and spent more than $78 billion to do so. Despite its
diversity of operations, GE stays competitive by following a vision that its CEO John F. (Jack) Welch formulated in 1981. Welch announced
that GE would participate only in high-performing businesses in which it could be the number-one or number-two competitor. This gave GE a
vision for growth as well as disciplined criteria for adding or divesting business lines.
Vitaly Nishanov 227
General Electric (2)
GE divested itself of many of its businesses, including air conditioning, house wares, and semiconductors, but it remains one of
the most diversified companies in the U.S., if not the world. Today, the company's products and services include aircraft engines,
locomotives and other transportation equipment, appliances (kitchen and laundry equipment), lighting, electric distribution and electric
control equipment, generators and turbines, nuclear reactor, medical imaging equipment, commercial insurance, consumer finance,
and network (NBC).
Describing his strategy for the future, Immelt said in 2007,"We continue to execute on our strategy to invest in leadership
businesses. Our focus remains on building faster growth, higher margin businesses. Since the beginning of the year, we have
announced $15 billion of acquisitions in fast growth platforms in oil and gas, healthcare, and aviation. We continue to exit slower growth
and more volatile businesses, and we are currently reviewing the potential disposition of our plastics business." The company’s
success has earned it the respect of the business community.
In 2007, GE was named the top company on Fortune magazine's "America's Most Admired Companies" list, making 2007 the
seventh year of the last ten in which GE was voted number one.
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114
3M
3M Minnesota Mining and Manufacturing (3M) - perhaps best known for its Post-it Notes and Scotch tape products - was originally founded in 1902 to sell
corundum (an extremely hard mineral that is used as an abrasive) to grinding-wheel manufacturers. Within a couple of years, the fledgling company was
specializing in sandpaper, but it wasn't until the 1920s, when it began focusing on technological innovation, that 3M hit its stride. Two products –Scotch-
brand masking tape (introduced in 1925) and Scotch-brand cellophane tape (1930) - became so successful that they virtually guaranteed the company a
long and prosperous future. Today, 3M has six operating units – industrial and transportation; display and graphics; health care; safety, security, and
protection; electro and communications products; and consumer and office products. With nearly $23 billion in annual revenues, the company makes
thousands of products, ranging from asthma inhalers to Scotchgard™ fabric coatings.
Coupled with enormous R&D spending (over $1 billion per year), 3M's policy of allowing scientists to dedicate 10 percent of their working time to
experimentation has yielded a number of highly profitable innovations. Of course, not all divisions and innovations have been equally successful, and the
company has spun off some divisions, including low-profit imaging and data storage ventures. 3M closed its audiotape and videotape businesses and got
out of billboard advertising.
3M has entered most of its businesses through internal innovation, but it recently increased its pace of acquisitions. Between January 2000 and December
2004, 3M completed only 10 acquisitions and spent only a little more than $500 million on these deals in total. But in 2006 alone, the company completed
19 acquisitions and spent $900 million on them. The acquisitions ranged from a German firm that makes personalized passports to a Brazilian company
that provides earplugs, eyewear, and hand cream. Despite the recent acquisitions, CEO George Buckley sees growth through external acquisitions as
secondary to growth through internal invention. "We'll build first where 3M is strong, defend and expand market presence, and build size and scale,"
Buckley said. "We will also grow through continuous invention and reinvention in our core businesses - the marketplace manifestations of 3M imagination
and 3M innovation." Beyond growing the core business, Buckley will look for acquisitions that expand 3M into adjacent markets.
“Acquisitions will help us enter adjacent markets and build business in new spaces more quickly," Buckley said. 3M's healthy mix of businesses cushions
the company from disruptions in any single market. "The unique nature of 3M's business model lends power unseen elsewhere," Buckley said. "At 3M, we
have some real magic."
Vitaly Nishanov 229
MITY Enterprises
In contrast to corporate giants GE and 3M, MITY Enterprises is a small $55 million company founded just 20 years ago.
MITY's first product was a lightweight, durable folding-leg table. Since then, the company has diversified into other
product lines, including chairs and other low-cost furniture. The company looks for acquisitions, but for a company
MITY's size, acquisition targets are not easy to find. Instead, MITY focuses on internal growth through innovation.
"We believe that new product development will continue to propel our growth," said MITY CEO Bradley Nielson. "With
that in mind, we are working on new chair lines, staging, dance floors, new healthcare chairs, and additional fencing
and accessories."
Not all new product introductions work out. As Nielson said in 2006,"When we entered the year, we were just coming off a
failed next-generation table experiment that was diluting our earnings base. However, rather than spending time
licking our wounds, we quickly shifted gears and began executing a new plan. "The new plan included taking the
failed technology from the failed table experiment and applying it to a new area: fences. Like MITY's furniture, the
fence panels are durable. "The panels are impact resistant, won't bow or sag in the sun, need no sanding, painting, or
other kinds of maintenance, [and] are faster and easier to install than concrete or stone," Nielson said. The new
product line is doing well, and MITY will continue developing innovative products."Our growth is not dependent on
making an acquisition," Nielson said. "We can do just fine going without."
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115
Diversifications
Company Diversification process Types of businesses
Many seemingly
Heavy reliance unrelated
on acquisition businesses
Many businesses
Primarily organic clustered in a few
related industries
Product extensions/ Few related

new product lines product lines
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Different Types of Diversification
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116
Reasons to diversify
 Value creating  Value neutral
 Economies of scope  Antitrust regulation
 Tax laws
 Market power
 Uncertain future cash flows
 Financial economies
 Risk reduction for firm
 Value reducing
 Diversifying managerial
employment risk
 Increasing managerial compensation
Vitaly Nishanov
Value creating Value neutral Value reducing
Value Creating Diversification
Diversification most effectively adds value by three mechanisms:

 Developing economies of scope & scale between business units
(Related diversification - SYNERGY)
• firm achieves savings as it increases the variety of activities it performs,
such as the variety of goods it produces
 Developing market power (Related diversification)
• exists when a firm is able to sell its products at a price above the existing
competitive levels
– achieved via multimarket contact
 Financial economies (unrelated diversification)

• improves efficiency of capital allocation through an internal capital market
or by restructuring the portfolio of businesses
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Value creating Value neutral Value reducing 234
117
Related Diversification
 Using a related diversification corporate-level strategy, the firm
 Builds or extends resources and capabilities to create value
 Develops and exploits economies of scope
• Economies of scope: Cost savings that the firm creates when they
successfully share resources and capabilities or transfer corporate-level
core competencies from one business to another.
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Economies of scope
Vitaly Nishanov Value creating Value neutral Value reducing 236
118
Operational and Corporate Relatedness
Operational Relatedness Corporate Relatedness

 Transferring core competencies
 Sharing activities (Intangible Resources) between
business units or between the
 Usually involves sharing tangible corporate office and a business
resources between businesses. unit.
 Often associated with related
linked (or mixed related and
unrelated) diversification.
 One way managers facilitate the
transfer of corporate-level core
competencies is by moving key
people into new management
positions.
Case: P&G Case: P&G
Vitaly Nishanov
Operational and Corporate Relatedness
High Related Constrained Both Operational and

Diversification Corporate Relatedness
Vertical Integration (Rare capability that
Operational (Market Power creates diseconomies of
Relatedness: Economies of Scope) scope)
Sharing Activities
between
Businesses Unrelated Related Linked
Diversification Diversification
(Financial Economies) (Economies of Scope)
Low
Low High
Corporate Relatedness:
Transferring Skills into Businesses through
Corporate Headquarters
238
Operational
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Relatedness Corporate Relatedness Unrelated Diversification Both types of Relatedness
119
Procter & Gamble
Paper Towel Business
Paper Plant
Baby Diaper Business
239
Operational
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Vertical integration
When a company produces its own inputs (backward integration)

or owns its own source of output distribution (forward integration)
 Example: oil companies that own their own exploration and drilling, refineries,
and retail locations.
Vertical integration
 can create value including market power over competitors
 but it also has risks and costs.
Operational
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120
Vertical Integration
Stages in the Raw-Materials-to-Customer Value-Added Chain
Customers
Components
Row Final
parts Retail
materials assembly
manufacturing
Backward vertical integration Forward vertical integration

into upstream industries into downstream industries
241
Operational
Vitaly Nishanov
Raw-Materials-to-Costumer Value-Added Chain in

the Personal Computer Industry
Office Max, CompUSA, and other retailers

also add value to the product (PCs).
Is it correct?
Operational
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121
Problems with Vertical Integration
 Increased Cost Structure

• Company-owned suppliers develop a higher cost structure than those of the
independent suppliers Why would a company-owned supplier develop
Because they have
such a high cost structure?
• Bureaucratic costs of solving transaction difficulties a “captive customer”.
 Fast-changing Technology
• Vertical integration may lock into old or inefficient technology
• Prevent company from changing to a new technology that could strengthen the
business model
 Unpredictable Demand
• When demand is unpredictable, taper integration might be less risky
than full integration.
Vertical integration can weaken a business model when:

• Company-owned suppliers lack incentive to reduce costs
• Changing demand or technology reduces ability to be competitive
Operational
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243
Full and Taper Integration
Full Integration
Customers
In House In House In House

Suppliers Manufacturing Distributors
Taper Integration
In House In House In House

Customers
Suppliers Manufacturing Distributors
Outside Independent
Suppliers Distributors
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122
Alternatives to Vertical Integration:
Cooperative Relationships
 Short-term contracts and competitive bidding

 May signal a company’s lack of commitment to its supplier
 Strategic alliances and long-term contracting

 Enables creation of a stable long-term relationship
 Becomes a substitute for vertical integration
 Avoids the problems of having to manage a company located in an adjacent industry
 Building long-term cooperative relationships

 Hostage taking – creating a mutual dependency
 Credible commitments – a believable promise or pledge
 Maintaining market discipline – power to discipline supplier
• Periodic contract renegotiation
• Parallel sourcing policy
Operational Relatedness
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Corporate Relatedness Unrelated Diversification Both types of Relatedness
245
Market Power
Firms also may implement related diversification strategies
in an attempt to gain market power.
 Market power exists when a firm is able to sell its products at prices above
the existing competitive level or decrease the costs of its primary activities
below the competitive level, or both.
 Market power through diversification may be gained through multipoint
competition, a condition where two or more diversified firms compete in the
same product areas or geographic markets.
 Multimarket (or Multipoint) Competition
• Exists when 2 or more diversified firms simultaneously compete in the
same product or geographic markets.
 Related diversification strategy may include
 Vertical Integration
Ford and General Motors,
 Virtual Integration Intel and Dell develop independent
 Vertical Deintegration supplier network.
246
Operational Relatedness
Vitaly Nishanov
Corporate Relatedness Unrelated Diversification Both types of Relatedness
123
HP: Scanner + Printer + Copier + Ink
 HP transferred it core competence

in ink printers to high-end copiers.
 Ink copiers are cheaper compared

with Laser, but quality of color
copies are better.
 Moreover, this capacity gives HP

the opportunity to sell more ink
products.
247
Operational
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Sharing Resources at Procter & Gamble
Operational
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Relatedness Corporate Relatedness Unrelated Diversification 248
Both types of Relatedness
124
Q: Honda
249
Operational
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Q: Philip Morris in 1969 acquired Miller Brewing

Tobacco Industry
Brewing Industry
Operational
Vitaly Nishanov
250
125
Q: P&G and Gillette Co
P&G Gillette Co
Toothpaste: Health core products under follower brands:
 Crest  Gillette
 Braun,
In 2005, P&G acquired the Gillette company
with the hope to achieve synergetic  Duracell, and
effect.
 Oral-B
What products can be matched/used for
this purpose?
P&G made a decision to combine the Crest Toothpaste brand with

the Oral-B Toothbrush using
Pro-Health label
251
Operational
Vitaly Nishanov
A Bit of Disney History
By using operational relatedness and corporate relatedness, Disney made $3 billion on

the 150 products that were marketed with its movie, The Lion King.
Sony’s Men in Black was a super hit at the box office and earned $600 million, but box-
office and video revenues were practically the entire success story.
Disney was able to accomplish its great success by sharing activities regarding the Lion
King theme within its movie, theme park, music, and retail products divisions, while at the
same time transferring knowledge into these same divisions, creating a music CD, Rhythm of
the Pride Lands, and producing a video, Simba’s Pride. In addition, there were Lion King
themes at Disney resorts and Animal Kingdom parks.
However, it is difficult for analysts from outside the firm to fully assess the value-
creating potential of the firm pursuing both operational relatedness and corporate
relatedness. As such, Disney’s assets as well as other media firms such as AOL Time
Warner have been discounted somewhat because “the biggest lingering questions is
whether multiple revenue streams will outpace multiple-platform overhead.”
252
Operational
Vitaly Nishanov
126
Unrelated Diversification
 Two ways to create value
1. Efficiently allocate resources
2. Restructure a target firm’s assets and place them under rigorous

financial controls
 Focus on creating financial economies to generate value.
Operational
Vitaly Nishanov
Q: Vertical Integration and

Diversification: Sources of Value
Creation and Costs
!
!
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127
Other Reasons to Diversify
Reasons to diversify (other than creating value)
 Incentives from tax and antitrust government policies

(or how to help Steve Sussman to save his future “free cash flows”)
 Performance disappointments
 Uncertainties about future cash flow.
Operational
Vitaly Nishanov
Diversification:
Incentives and Resources
Incentives to Diversify
 Antitrust Regulation and Tax Laws
 Low Performance Synergy creates interdependence between business

Survival strategy for firms when their products reach
units.
Interdependence
maturity stage. can restrain the firm flexibility.
 Uncertain Future Cash Flows
To eliminate this risk, firms may do one of two things:
In 2001 PepsiCo acquired Quaker Oats to fortify its
• operate in more certain environments, or/and
 Synergy and Firm Risk Reduction growth
Not with Gatorade
all tangible and healthy
and intangible snacks,
resources canonbe
the
useful
• constrain or reduce the level of activity-sharing,
to create value.
projection that these products would experience
thus foregoing the potential benefits of synergy.
 Resources and Diversification greater
A growth
firm might haverates than Pepsi’s
incentives soft drinks.
to diversify in order to have
These decisions could lead to further diversification:
a good mix of recourses.
 Other reasons • to diversify into industries where more certainty
P&G + Gillette = Crest Pro-Health
exists
• to additional, but unrelated diversification
256
Operational
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128
The Curvilinear Relationship between
Diversification and Performance
257
Vitaly Nishanov
Antitrust Regulation and Tax Laws
 During the 1960s and 1970s, dividends were taxed more heavily than ordinary personal
income.
• Dividends are taxed twice: once when the firm pays taxes on its operating income and a second
time when net income is paid out to shareholders in the form of dividends as shareholders pay a
tax on dividends received at their personal income tax rate.
 In the 1960s and 1970s, government policies—in the form of antitrust enforcement and
tax laws—provided U.S. firms with incentives to diversify the mix of businesses
controlled by the firm. As a result of these policies, the vast majority of mergers during
the period represented unrelated diversification. They were classified as conglomerate
mergers.
 During the 1980s, enforcement of antitrust laws slackened and firms chose to
implement horizontal merger strategies (or mergers with firms in the same [or a related]
line of business).
 At the same time, investment bankers aggressively promoted merger and acquisition
activity to the extent that many acquisitions were classified as unfriendly or as hostile
takeovers.
Operational
Vitaly Nishanov
129
Value-Reducing Diversification:
Managerial Motives
Risk More efficient for investors to

reduction diversify themselves
Empire Rarely results in higher share-

building holder value or margins
Acquisition motivated by executive

Compensation pay - a bigger company usually implies
a bigger pay check - rarely creates value

Vitaly Nishanov 259
130

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Strategic Management

B BUS 470 - Training Materials

Business-Level Strategy Corporate-Level Strategy

Competitive Positioning Mergers & Alliances

Competitive Dynamics International Strategies

Strategy implementation through

Q #1: In which situations a company can run

 Small number of competitors

 High and stable demand for a company’s products and/or services

Visibility of 1900 – 1930 1950 1970 1990 -2008

Recurring • Procedures Manual

Predictable Treats • Periodic strategic planning

Partially Predictable • Strategic management

Q #2: What factors can increase the level of

 Economic Trends which can increase the level of a

 Political, Legal, Governmental

 Competitors and Competition

The Power The Power

The Competitive Pressures

Strategic Management is about how to gain and

Competitive Key question:

Q: How to measure/estimate the

 Satisfied with success  Overconfidence

 Waste of time  Fear of failure

 Too expensive  Prior bad experience

 Poor reward structures  Fear of the unknown

Strategic Planning Process

Strategy Strategy Strategic

Strengths and Weaknesses Opportunity and Threats

What is Business Strategy?

A Strategy is a set of decision making principals for which a company

There are four areas where the strategy can be applied:

A business model is managers’ conception of how the various strategies

 Putting strategy into actions

 Google vs. Microsoft

Competing Business Models: Google vs.

 Threadless (www.threadless.com) business model is to give

 Members of Threadless community submit T-shirts designs online

 Other partners with Threadless?

 Dell Computer – laptop exteriors

 Thermos – lunch boxes

 Griffin Technology – iPhone covers

One of the Basic Principles of Strategic

Copyright © 2009 Pearson Education, Inc.

Corporate-level strategy should

Ethics and Biases in Strategic Decisions

New strategy – Implementation

• Authority structures • Common illusions about ourselves

• Role of corporate • Escalating commitments

Vision, Mission and Strategy

Vision Statement – uses of Ambition and

 General Motors’ vision is to be the world leader in transportation products

 PepsiCo’s responsibility is to continually improve all aspects of the world in

 Dell’s vision is to create a company culture where environmental excellence

 Shoro’s (Kyrgyzstan) vision is to produce beverages which will be more

 The best mission statements:

 Define the business

 Differentiate it from competitors

 Explain relationships with stakeholders

 Focus energy on critical activities and goals

 If social responsibility is central to the company’s mission, that should

Mission Statements: Examples

 3M: What Mission Statements