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Chapter 1

Strategic Management and Strategic Competitiveness


Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2003 Southwestern Publishing Company
1

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 CorporateCorporateLevel Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

Important Definitions
Strategic Management Process
The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn aboveabove-average returns

Important Definitions
Strategic Competitiveness
Achieved when a firm successfully formulates and implements a value-creating strategy value-

AboveAbove-Average Returns
Occurs when a firm develops a strategy that competitors are not simultaneously implementing Provides benefits which current and potential competitors are unable to duplicate
4

Important Definitions
Risk
An investors uncertainty about the economic gains or losses that will result from a particular investment

Average Returns
Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk

Competitive Landscape
Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new knowhow, first mover Hypercompetitive environments Fundamental nature of competition is changing Protect or invade established product or geographic markets
6

Competitive Landscape
Emergence of global economy Goods, services, people, skills, and ideas move freely across geographic borders. Spread of economic innovations around the world. Hypercompetitive environments Fundamental nature of competition is changing Political and cultural adjustments are required.
7

Competitive Landscape
Emergence of global economy Rapid technological change Increasing rate of technological change and diffusion The information age Increasing knowledge intensity Hypercompetitive environments Fundamental nature of competition is changing

Strategic Flexibility
A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment It involves coping with uncertainty and the accompanying risks

Strategic Flexibility
Organizational slack

Strategic reorientation

Strategic Flexibility flexibility

Capacity to learn
10

I/O Model of Above-Average Returns Above1. External Environments General


Global

Industry Environment

1. Strategy dictated by the external environments of the firm (what opportunities exist in these environments?) 2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?)
11

Competitor Environment
Technological

Environment

Four Assumptions of the I/O Model


1. The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns above2. Most firms competing within a particular or within a certain segment of it are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources
12

Four Assumptions of the I/O Model


3. Resources used to implement strategies are highly mobile across firms 4. Organizational decision makers are assumed to be rational and committed to acting in the firms best interests, as shown by their profit-maximizing profitbehaviors

13

I/O Model of Above-Average Returns AboveIndustrial Organization Model


The External Environment 1. Study the external environment, especially the industry environment economies of scale barriers to market entry diversification product differentiation degree of concentration of firms in the industry

14

I/O Model of Above-Average Returns AboveIndustrial Organization Model


The External Environment An Attractive Industry 2. Locate an attractive industry with a high potential for aboveabove-average returns Attractive industry: one whose structural characteristics suggest above-average returns above-

15

I/O Model of Above-Average Returns AboveIndustrial Organization Model


The External Environment An Attractive Industry Strategy Formulation Strategy formulation: selection of a strategy linked with aboveabove-average returns in a particular industry 3. Identify the strategy called for by the attractive industry to earn above-average returns above-

16

I/O Model of Above-Average Returns AboveIndustrial Organization Model


The External Environment An Attractive Industry Strategy Formulation Assets and Skills Assets and skills: those assets and skills required to implement a chosen strategy
17

4. Develop or acquire assets and skills needed to implement the strategy

I/O Model of Above-Average Returns AboveIndustrial Organization Model


The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Strategy implementation: select strategic actions linked with effective implementation of the 18 chosen strategy 5. Use the firms strengths (its developed or acquired assets and skills) to implement the strategy

I/O Model of Above-Average Returns AboveIndustrial Organization Model


The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior Returns
19

Superior returns: earning of above-average returns

ResourceResource-based Model of Above Average Returns


1. Firms Resources

1. Strategy dictated by unique resources and capabilities of the firm (what can the firm do best?) 2. Find an environment in which to exploit these assets (where are the best opportunities?)
20

ResourceResource-based Model of Above Average Returns


ResourceResource-based Model
Resources 1. Identify the firms resources-resources-strengths and weaknesses compared with competitors Resources: inputs into a firms production process

21

ResourceResource-based Model of Above Average Returns


ResourceResource-based Model
Resources Capability 2. Determine the firms capabilities--what capabilities--what it can do better than its competitors Capability: capacity of an integrated set of resources to integratively perform a task or activity

22

Four Attributes of Resources and Capabilities (Competitive Advantage)


Valuable
Resources and Capabilities allow the firm to exploit opportunities or neutralize threats in its external environment possessed by few, if any, current and potential competitors when other firms cannot obtain them or must obtain them at a much higher cost the firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage
23

Rare Costly to imitate Nonsubstitutable

Resources and capabilities that meet


these four criteria become a source of:
Valuable
Resources and Capabilities

Rare Costly to imitate Nonsubstitutable

Core Competencies

24

Core Competencies are the basis for a


firms
Competitive advantage Strategic competitiveness Ability to earn aboveabove-average returns
25

Core Competencies

ResourceResource-based Model of Above Average Returns


ResourceResource-based Model
Resources Capability Competitive Advantage Competitive advantage: ability of a firm to outperform its rivals 3. Determine the potential of the firms resources and capabilities in terms of a competitive advantage

26

ResourceResource-based Model of Above Average Returns


ResourceResource-based Model
Resources Capability Competitive Advantage An Attractive Industry An attractive industry: an industry with opportunities that can be exploited by the firms resources and capabilities
27

4. Locate an attractive industry

ResourceResource-based Model of Above Average Returns


ResourceResource-based Model
Resources Capability Competitive Advantage An Attractive Industry Strategy Form/Impl Strategy formulation and implementation: strategic actions taken to earn above average returns 5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment

28

ResourceResource-based Model of Above Average Returns


ResourceResource-based Model
Resources Capability Competitive Advantage An Attractive Industry Strategy Form/Impl Superior Returns
29

Superior returns: earning of above-average returns above-

Strategic Intent & Mission




Strategic Intent


Winning competitive battles through deciding how to leverage internal resources, capabilities, and core competencies An application of strategic intent in terms of products to be offered and markets to be served

Strategic Mission


30

The Firm and Its Stakeholders


Stakeholders
Groups who are affected by a The firm must maintain firms performance and who performance at an adequate have claims on its wealth level in order to retain the participation of key stakeholders

31

The Firm and Its Stakeholders


Stakeholders
Capital Market Stakeholders Shareholders Major suppliers of capital Banks Private lenders Venture capitalists

32

The Firm and Its Stakeholders


Stakeholders
Capital Market Stakeholders Primary customers Suppliers Host communities Unions

Product Market Stakeholders

33

The Firm and Its Stakeholders


Stakeholders
Capital Market Stakeholders

Product Market Stakeholders Employees Managers Nonmanagers


34

Organizational Stakeholders

Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm
Organizational

Capital Market

1
How do you divide the returns to keep stakeholders involved? Product Market

35

Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm
Organizational

Capital Market

2
How do you increase the returns so everyone has more to share? Product Market

36

Chapter 2

The External Environment: Opportunities, Threats, and Industry Competition, and Competitor Analysis
Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2003 Southwestern Publishing Company
37

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 CorporateCorporateLevel Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

38

The External Environment Environment


Sociocultural Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Environment

Technological

General

39

External Environmental Analysis


A continuous process which includes


Scanning: Identifying early signals of environmental changes and trends Monitoring: Detecting meaning through ongoing observations of environmental changes and trends Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends Assessing: Determining the timing and importance of environmental changes and trends for firms strategies and their management
40

External Environmental Analysis


Analysis of general environment Analysis of industry environment Analysis of competitor environment

The External Environment Strategic Intent Strategic Mission


41

General Environment


Sociocultural segment
     

Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences

42

General Environment


Economic segment
Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate  Business savings rates  Gross domestic product
    

43

General Environment


Political/Legal Segment
    

Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

44

General Environment

  

Technological Segment

Product innovations Applications of knowledge Focus of private and government-supported governmentR&D expenditures  New communication technologies

45

General Environment
  Important political events Global Segment
Critical global markets  Newly industrialize countries  Different cultural and institutional attributes


46

General Environment


Demographic Segment
Population size Age structure Geographic distribution  Ethnic mix  Income distribution
  

47

Industry Environment
A set of factors that directly influences a company and its competitive actions and responses.  Interaction among these factors determine an industrys profit potential.

    

Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry
48

Five Forces Model of Competition


   

Identify current and potential competitors and determine which firms serve them. Conduct competitive analysis. Recognize that suppliers and buyers can become competitors. Recognize that producers of potential substitutes may become competitors.

49

Five Forces Model of Competition

Five Forces of Competition

Bargaining Power of Buyers

50

Threat of New Entrants




Barriers to entry
       

Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation
51

Bargaining Power of Suppliers


  it is dominated by a few powerful when: A supplier group is large companies
    

satisfactory substitute products are not available to industry firms industry firms are not a significant customer for the supplier group suppliers goods are critical to buyers marketplace success effectiveness of suppliers products has created high switching costs suppliers are a credible threat to integrate forward into the buyers industry 52

Bargaining Power of Buyers




Buyers (customers) are powerful when:  they purchase a large portion of an industrys
total output  the sales of the product being purchased account for a significant portion of the sellers annual revenues  they could easily switch to another product  the industrys products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the sellers industry 53

Threat of Substitute Products




Product substitutes are strong threat when:  customers face few switching costs
substitute products price is lower  substitute products quality and performance capabilities are equal to or greater than those of the competing product


54

Intensity of Rivalry


Intensity of rivalry is stronger when competitors:  are numerous or equally balanced


    

experience slow industry growth have high fixed costs or high storage costs lack differentiation or low switching costs experience high strategic stakes have high exit barriers

55

High Exit Barriers


  specialized assets (assets with values linked to Common exit barriers include:
 

 

a particular business or location) fixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual dependence between one business and other parts of a companys operation, such as shared facilities and access to financial markets) emotional barriers (career concerns, loyalty to employees, etc.) government and social restrictions
56

Strategic Groups
Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions. The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry.
57

Competitor Environment

Competitor intelligence is the ethical gathering of needed information and data about competitors objectives, strategies, assumptions, and capabilities
what drives the competitor as shown by its future objectives  what the competitor is doing and can do as revealed by its current strategy  What the competitor believes about itself and the industry, as shown by its assumptions  What the the competitor may be able to do, as 58 shown by its capabilities


Competitor Analysis
Future objectives


Future Objectives: How do our goals compare

with our competitors goals?  Where will the emphasis be placed in the future?  What is the attitude toward risk?

59

Competitor Analysis
Future objectives


Current Strategy: How are we currently

Current strategy

competing?  Does this strategy support changes in the competitive structure?

60

Competitor Analysis
Future objectives


Assumptions: future Do we assume the

Current strategy

Assumptions

will be volatile?  Are we operating under a status quo?  What assumptions do our competitors hold about the industry and themselves?

61

Competitor Analysis
Future objectives


Capabilities: What are our strengths

Current strategy

and weaknesses?  How do we rate compared to our competitors?

Assumptions

Capabilities
62

Competitor Analysis
Future objectives Response

Current strategy

Response:
What will our competitors do in the future?  Where do we hold an advantage over our competitors?  How will this change our relationship with our competitors? 63


Assumptions

Capabilities

Chapter 3

The Internal Environment: Resources, Capabilities and Core Competence


Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2003 Southwestern Publishing Company
64

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 CorporateCorporateLevel Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

65

Sustainability of a Competitive Advantage




Sustainability of a competitive advantage is a function of:


the rate of core-competence obsolescence due coreto environmental changes the availability of substitutes for the core competence the imitability of the core competence

66

External and Internal Analyses


Environment Sociocultural Industry Environment

By studying the external environment, firms identify what they might choose to do

Opportunities and threats


Competitor Environment Technological General
67

External and Internal Analyses


By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage)
68

Challenge of Internal Analysis




How do we effectively manage current core competencies while simultaneously developing new ones? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly?

69

Three Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies


Uncertainty regarding characteristics of the


general and the industry environments, competitors actions, and customers preferences

Complexity regarding the interrelated causes


shaping a firms environments and perceptions of the environments

Intraorganizational Conflicts among


people making managerial decisions and those affected by them
70

Components of Internal Analysis


Core Competencies Capabilities Resources Tangible Intangible Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable Discovering Core Competencies

Strategic Competitiveness Competitive Advantage

Value Chain Analysis

Outsource

71

Discovering Core Competencies

Resources Tangible Intangible

Resources are what a firm has to work with--its assets-with--its assets-including its people and the value of its brand name

Resources represent inputs into a firms production process... such as capital equipment, skills of employees, brand names, finances and talented managers
72

Discovering Core Competencies

Resources Tangible Intangible

Tangible Resources Financial Physical Human resources Organizational

Intangible Resources Technological Innovation Reputation

73

Discovering Core Competencies

Capabilities

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage

74

Discovering Core Competencies

Capabilities

Capabilities are what a firm does, and represent the firms capacity or ability to integrate individual firm resources to achieve a desired objective

75

Discovering Core Competencies

Core Competencies

Core competencies are resources and capabilities that serve as a source of competitive advantage over rivals Core competencies distinguish a company competitively and make it distinctive McKinsey and Co. recommends using three to four competencies when framing strategic actions
76

Discovering Core Competencies Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable

Valuable: Capabilities that help a firm neutralize threats or exploit opportunities

77

Discovering Core Competencies Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable

Rare: Capabilities that are not possessed by many others

78

Discovering Core Competencies Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable

Costly to imitate: capabilities that other firms cannot develop easily, usually due to Unique historical conditions Causal ambiguity Social complexity
79

Discovering Core Competencies Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable

Nonsubstitutable: capabilities that do not have strategic equivalents Invisible to competitors Firm specific knowledge Trust-based working relationships between managers Trustand nonmanagerial personnel

80

Core Competence as a Strategic Capability


Resources Inputs to a firms production process Core Competence A strategic capability
Does it satisfy the criteria of sustainable competitive advantage?

The source of

Capability An integration of a team of resources

Yes

No

Capability A nonstrategic team or resource 81

Performance Implications
Competitive Consequences
No Yes No No No No Competitive Disadvantage Competitive Parity Temporary ComCompetitive Advantage Sustainable ComCompetitive Advantage

Performance Implications
Below Average Returns Average Returns Above Average to Average Returns Above Average Returns

Yes/ No No Yes/ No

Yes

Yes No

Yes

Yes Yes

Yes

82

The Basic Value Chain


Technological Development Human Resource Mgmt.

Firm Infrastructure

Support Activities

Service Marketing & Sales Procurement Outbound Logistics Operations Inbound Logistics Primary Activities
83

Outsourcing
Technological Development

Human Resource Mgmt.

Support Activities

Firm Infrastructure

Outsourcing is the purchase of some or all of a valuevaluecreating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently

Service Procurement Marketing & Sales Outbound Logistics Operations Inbound Logistics
84 Primary Activities

Strategic Rationales for Outsourcing




Improve Business Focus


lets company focus on broader business issues by having outside experts handle various operational details

Provide Access to World-Class WorldCapabilities


the specialized resources of outsourcing providers makes world-class capabilities worldavailable to firms in a wide range of applications
85

Strategic Rationales for Outsourcing




Accelerate Business Re-Engineering ReBenefits


achieves re-engineering benefits more quickly reby having outsiders--who have already outsiders--who achieved world-class standards--take over worldstandards--take process

Share Risks
reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities
86

Strategic Rationales for Outsourcing




Free Resources for Other Purposes


permits firm to redirect efforts from non-core nonactivities toward those that serve customers more effectively

87

Outsourcing Issues


Greatest Value
outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced

Evaluating Resources and Capabilities


dont outsource activities in which the firm itself can create and capture value

Environmental Threats and Ongoing Tasks


do not outsource primary and support activities that are used to neutralize environmental threats or complete necessary ongoing 88 organizational tasks

Outsourcing Issues


Nonstrategic Team of Resources


do not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantage

Firms Knowledge Base


do not outsource activities that stimulate the development of new capabilities and competencies

89

Core Competencies: Cautions and Reminders




 

Never take for granted that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become core rigidities Core rigidities are former core competencies that now generate inertia and stifle innovation

90

Chapter 4

BusinessBusiness-Level Strategy

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson


2003 Southwestern Publishing Company
91

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 4 BusinessBusiness-Level Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

92

BusinessBusiness-Level Strategy
BusinessBusiness-level strategy: an integrated and strategy: coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

93

Core Competencies and Strategy


Core competencies The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets 94

Strategy

BusinessBusiness-level strategy

Key Issues of Business-Level BusinessStrategy


  

What good or service to offer customers How to manufacture or create the good or service How to distribute the good or service in the marketplace

95

The Central Role of Customers


In selecting a business-level businessstrategy, the firm determines
1. who it will serve 2. what needs those target customers have that it will satisfy 3. how those needs will be satisfied

96

Managing Relationships With Customers




Customer relationships are strengthened by offering them superior value


help customers to develop a new competitive advantage enhance the value of existing competitive advantages

97

Managing Relationships With Customers


Establish a competitive advantage along these dimensions: Reach


the firms access and connection to customers

Richness
the depth and detail of the two-way flow of twoinformation between the firm and customers

Affiliation
facilitating useful interactions with customers
98

Market Segmentation

Consumer Markets

Customers

Industrial Markets

99

Market Segmentation: Consumer Markets


Demographic factors
Per. Dem.

Socioeconomic factors Geographic factors Psychological factors Consumption patterns Perceptual factors
100

Consumer Con. Soc. Markets


Psy. Geo.

Market Segmentation: Industrial Markets


EndEnd-use segments Product segments Geographic segments Common buying factor segments Customer size segments
Size End

Industrial Buy.Markets Pro.


Geo.

101

Types of Business-Level Strategies Business

BusinessBusiness-level strategies are intended to create differences between the firms position relative to those of its rivals To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

102

Five Generic Strategies


Competitive Advantage
Cost Uniqueness Differentiation Cost Leadership

Competitive Scope

Broad target

Integrated Cost Leadership/ Differentiation Narrow target

Focused Cost Leadership

Focused Differentiation

103

Cost Leadership Strategy


An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with cost, features that are acceptable to customers relatively standardized products features acceptable to many customers lowest competitive price

104

Cost Leadership Strategy


Cost saving actions required by this strategy: building efficient scale facilities tightly controlling production costs and overhead minimizing costs of sales, R&D and service building efficient manufacturing facilities monitoring costs of activities provided by outsiders simplifying production processes
105

How to Obtain a Cost Advantage


Determine and control Reconfigure, if needed

Cost Drivers Alter production process Change in automation New distribution channel New advertising media Direct sales in place of indirect sales

Value Chain New raw material Forward integration Backward integration Change location relative to suppliers or buyers
106

Factors That Drive Costs


Economies of scale Asset utilization Capacity utilization pattern Seasonal, cyclical  Interrelationships  Order processing and distribution  Value chain linkages Advertising & sales Logistics & operations
           

Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation
107

Questions Leading to Lower Costs


1. How can an activity be performed differently or even eliminated? 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs?

108

Cost Leadership Strategy and the Five Forces of Competition


Rivalry Among Competing Firms
Five Forces of Competition
Bargaining Power of Suppliers

Can use cost leadership strategy to advantage since:  competitors avoid price wars with cost leaders, creating higher profits for the entire industry

109

Cost Leadership Strategy and the Five Forces of Competition


Bargaining Power of Buyers
Five Forces of Competition
Bargaining Power of Suppliers

Can mitigate buyers power by:  driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm

110

Cost Leadership Strategy and the Five Forces of Competition


Bargaining Power of Suppliers
Five Forces of Competition
Bargaining Power of Suppliers

Can mitigate suppliers power by:  being able to absorb cost increases due to low cost position  being able to make very large purchases, reducing chance of supplier using power
111

Cost Leadership Strategy and the Five Forces of Competition


Threat of New Entrants
Five Forces of Competition
Bargaining Power of Suppliers

Can frighten off new entrants due to:  their need to enter on a large scale in order to be cost competitive  the time it takes to move down the learning curve

112

Cost Leadership Strategy and the Five Forces of Competition


Threat of Substitute Products
Five Forces of Competition
Bargaining Power of Suppliers

Cost leader is well positioned to:  make investments to be first to create substitutes  buy patents developed by potential substitutes  lower prices in order to maintain value position
113

Major Risks of Cost Leadership Strategy


  

Dramatic technological change could take away your cost advantage Competitors may learn how to imitate value chain Focus on efficiency could cause cost leader to overlook changes in customer preferences

114

Differentiation Strategy
An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them
price for product can exceed what the firms target customers are willing to pay nonstandardized products customers value differentiated features more than they value low cost
115

Differentiation Strategy
     

Value provided by unique features and value characteristics Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation

116

Differentiation Strategy
Differentiation actions required by this strategy: developing new systems and processes shaping perceptions through advertising quality focus capability in R&D maximize human resource contributions through low turnover and high motivation 117

How to Obtain a Differentiation Advantage


Control if needed Reconfigure to maximize

Cost Drivers

Value Chain

Lower buyers costs Raise performance of product or service Create sustainability through: customer perceptions of uniqueness customer reluctance to switch to non-unique product non118

Factors That Drive Differentiation


      

Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information

119

Differentiation Strategy and the Five Forces of Competition


Rivalry Among Competing Firms
Five Forces of Competition
Bargaining Power of Suppliers

Can defend against competition because:  brand loyalty to differentiated product offsets price competition

120

Differentiation Strategy and the Five Forces of Competition


Bargaining Power of Buyers
Five Forces of Competition
Bargaining Power of Suppliers

Can mitigate buyer power because:  well differentiated products reduce customer sensitivity to price increases

121

Differentiation Strategy and the Five Forces of Competition


Bargaining Power of Suppliers
Five Forces of Competition
Bargaining Power of Suppliers

Can mitigate suppliers power by:  absorbing price increases due to higher margins  passing along higher supplier prices because buyers are loyal to differentiated brand
122

Differentiation Strategy and the Five Forces of Competition


Threat of New Entrants
Five Forces of Competition
Bargaining Power of Suppliers

Can defend against new entrants because:  new products must surpass proven products or,  new products must be at least equal to performance of proven products, but offered at lower prices
123

Differentiation Strategy and the Five Forces of Competition


Threat of Substitute Products
Five Forces of Competition
Bargaining Power of Suppliers

Well positioned relative to substitutes because:  brand loyalty to a differentiated product tends to reduce customers testing of new products or switching brands
124

Major Risks of Differentiation Strategy




Customers may decide that the price differential between the differentiated product and the cost leaders product is too large Means of differentiation may cease to provide value for which customers are willing to pay

125

Major Risks of Differentiation Strategy




Experience may narrow customers perceptions of the value of differentiated features of the firms products Makers of counterfeit goods may attempt to replicate differentiated features of the firms products

126

Focused Business-Level Strategies BusinessA focus strategy must exploit a narrow targets differences from the balance of the industry by: isolating a particular buyer group isolating a unique segment of a product line concentrating on a particular geographic market finding their niche
127

Factors That May Drive Focused Strategies


  

Large firms may overlook small niches Firm may lack resources to compete in the broader market May be able to serve a narrow market segment more effectively than can larger industryindustry-wide competitors Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage
128

Major Risks of Focused Strategies


  

Firm may be outfocused by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market

129

Advantages of Integrated Strategy


A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: adapt quickly to environmental changes learn new skills and technologies more quickly effectively leverage its core competencies while competing against its rivals
130

Benefits of Integrated Strategy


 

Successful firms using this strategy have aboveabove-average returns Firm offers two types of values to customers some differentiated features (but less than a true differentiated firm) relatively low cost (but now as low as the cost leaders price)
131

Major Risks of Integrated Strategy




An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) The firm may become stuck in the middle lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy
132

Chapter 5

Competitive Rivalry and Competitive Dynamics


Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2003 Southwestern Publishing Company
133

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

134

Definitions


Competitors
firms operating in the same market, offering similar products and targeting similar customers

Competitive rivalry
the ongoing set of competitive actions and responses occurring between competitors competitive rivalry influences an individual firms ability to gain and sustain competitive advantages
135

Definitions


Competitive behavior
the set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position

Competitive dynamics
the total set of actions and responses taken by all firms competing within a market

136

From Competitors to Competitive Dynamics


Competitors Engage in Competitive rivalry What results? Why? To gain an advantageous market position Through competitive behavior Competitive actions Competitive responses What results? Competitive Dynamics Competitive actions and responses taken by all firms competing in a market

How?

137

Effect of Competitive Rivalry on a Firms Strategies




Success of a strategy is determined by:


the firms initial competitive actions how well it anticipates competitors responses to them how well the firm anticipates and responds to its competitors initial actions

Competitive rivalry
affects all types of strategies most dominant influence is on the firms businessbusiness-level strategy or strategies.
138

A Model of Competitive Rivalry


Competitive Analysis Market commonality Resource similarity feedback Outcomes Market position Financial performance

Drivers of Competitive Behavior Awareness Motivation Ability

Interim Rivalry Likelihood of Attack First mover incentives Organizational size Quality Likelihood of Response Type of competitive action Reputation Market dependence 139

Competitive Rivalry


Firms are mutually interdependent


one firms competitive actions have noticeable effects on competitors one firms competitive actions elicit competitive responses from competitors competitors feel each others actions and responses

Marketplace success is a function of both individual strategies and the consequences of their use
140

Competitor Analysis


Competitor analysis
a technique firms use to understand their competitive environment. Along with the general and industry environments, the competitive environment comprises the firms external environment a technique used to help the firm understand its competitors the first step to being able to predict competitors behavior in the form of its competitive actions and responses
141

Market Commonality


Market Commonality is concerned with


the number of markets with which a firm and a competitor are jointly involved the degree of importance of the individual markets to each competitor

Most industries markets are somewhat related in terms of


technologies core competencies

Multimarket competition
Firms competing in several markets
142

Resource Similarity


Resource similarity
the extent to which the firms tangible and intangible resources are comparable to a competitors in terms of both type and amount

Firms with similar types and amounts of resources are likely to


have similar strengths and weaknesses use similar strategies

Assessing resource similarity can be difficult if critical resources are intangible 143 rather than tangible

A Framework of Competitor Analysis


High Market Commonality Low KEY
The shaded area represents degree of market commonality between two firms Resource endowment A Resource endowment B
144

II I III IV

Low

Resource Similarity

High

Drivers of Competitive Actions and Responses: Awareness


Drivers of competitive behavior


Awareness

Awareness is the extent to which competitors recognize the degree of their mutual interdependence mutual interdependence results from market commonality resource similarity

145

Drivers of Competitive Actions and Responses: Motivation


Drivers of competitive behavior


Awareness Motivation

Motivation concerns the firms incentive to take action or to respond to a competitors attack and relates to perceived gains and losses

146

Drivers of Competitive Actions and Responses: Ability


Drivers of competitive behavior
Awareness Motivation Ability Ability relates to each firms resources the flexibility these resources provide  Without available resources the firm lacks the ability to attack a competitor to respond to the competitors actions

147

Drivers of Competitive Actions and Responses: Market Commonality


Drivers of competitive behavior influenced by
Market commonality A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets  Because of the high stakes of competition under the condition of market commonality, there is a high probability that the attacked firm will respond to its competitors action in an effort to protect its position in one or more markets

148

Drivers of Competitive Actions and Responses: Resource Similarity


Drivers of competitive behavior influenced by
Market commonality Resource similarity The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage  When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response

149

Competitive Rivalry


Competitive action
a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position

Competitive response
a strategic or tactical action the firm takes to counter the effects of a competitors competitive action

150

Strategic and Tactical Actions




Strategic action or a strategic response


a market-based move that involves a marketsignificant commitment of organizational resources and is difficult to implement and reverse

Tactical action or a tactical response


market-based move that is taken to fine-tune a marketfinestrategy; it involves fewer resources and is relatively easy to implement and reverse

151

Factors Affecting Likelihood of Attack: First Mover Incentives


First mover incentives First movers allocate funds for product innovation and development aggressive advertising advanced research and development  First movers can gain the loyalty of customers who may become committed to the firms goods or services market share that can be difficult for competitors to take during 152 future competitive rivalry


Factors Affecting Likelihood of Attack: Size


First mover incentives Size Small firms are more likely to launch competitive actions to be quicker in doing so  Small firms are perceived as nimble and flexible competitors relying on speed and surprise to defend their competitive advantages or develop new ones while engaged in competitive rivalry  Small firms have the flexibility needed to launch a greater variety of 153 competitive actions


Factors Affecting Likelihood of Attack: Size


First mover incentives Size Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period  Large organizations commonly have the slack resources required to launch a larger number of total competitive actions


Think and act big and well get smaller. Think and
act small and well get bigger. - Herb Kelleher,
Former CEO, Southwest Airlines
154

Factors Affecting Likelihood of Attack: Quality


First mover incentives Size Quality Quality exists when the firms goods or services meet or exceed customers expectations  Product quality dimensions include


Performance Features Flexibility Durability Conformance Serviceability Aesthetics Perceived quality


155

Factors Affecting Likelihood of Attack: Quality


First mover incentives Size Quality Quality exists when the firms goods or services meet or exceed customers expectations  Service quality dimensions include


Timeliness Courtesy Consistency Convenience Completeness Accuracy

156

Factors Affecting Likelihood of Response




Firms study three factors to predict how a competitor is likely to respond to competitive actions
type of competitive action reputation market dependence

157

Factors Affecting Likelihood of Response: Type of Competitive Action


Type of competitive action
    

Strategic actions receive strategic responses Tactical responses are taken to counter the effects of tactical actions Strategic actions elicit fewer total competitive responses A competitor likely will respond quickly to a tactical action The time needed to implement and assess a strategic action delays competitors responses
158

Factors Affecting Likelihood of Response: Reputation


Type of competitive action Reputation An actor is the firm taking an action or response  Reputation is the positive or negative attribute ascribed by one rival to another based on past competitive behavior  The firm studies responses that a competitor has taken previously when attacked to predict likely responses


159

Factors Affecting Likelihood of Response: Market Dependence


Type of competitive action Reputation Market dependence Market dependence is the extent to which a firms revenues or profits are derived from a particular market  In general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position


160

Competition


Competitive Dynamics
competitive dynamics concerns the ongoing actions and responses taking place among all firms competing within a market for advantageous positions

Competitive Rivalry
building and sustaining competitive advantages are at the core of competitive rivalry competitive advantages are the link to an advantageous market position
161

Strategic Conduct is Dynamic


A firms strategic conduct is dynamic in nature Actions and responses shape the competitive positions of each firms business level strategy

Firm A

Firm B

162

Strategic Conduct is Dynamic


Actions taken by one firm elicits responses from competitors Competitive responses lead to additional actions from the firm that acted originally
Actions New Actions New Response Response

Firm A

Firm B

163

Competitive Dynamics:
SlowSlow-Cycle Markets
SlowSlow-cycle markets SlowSlow-cycle markets the firms competitive advantages are shielded from imitation for long periods of time imitation is costly  Competitive advantages are sustainable in slow-cycle markets slow A proprietary, one-of-a-kind one-ofcompetitive advantage leads to competitive success in a slow-cycle slowmarket

164

Gradual Erosion of a Sustainable Competitive Advantage


Returns from a Sustainable Competitive Advantage Exploitation

Launch

Counterattack

5
Time (Years)

10
165

Competitive Dynamics:
FastFast-Cycle Markets
SlowSlow-cycle markets FastFast-cycle markets FastFast-cycle markets the firms competitive advantages arent shielded from imitation imitation happens quickly and somewhat inexpensively  Competitive advantages arent sustainable  Competitors use reverse engineering to quickly imitate or improve on the firms products  Non-proprietary technology is Nondiffused rapidly

166

Obtaining Temporary Advantages to Create Sustained Advantage


Returns from a Series of Replicable Actions Firm has already moved to next advantage Counterattack

Exploitation Launch

10
Time (Years)

15
167

Competitive Dynamics:
StandardStandard-Cycle Markets
SlowSlow-cycle markets FastFast-cycle markets StandardStandard-cycle markets StandardStandard-cycle markets the firms competitive advantages may be shielded from imitation imitation is moderately costly  Competitive advantages are partially sustainable if the firm is able to continuously upgrade the quality of its competitive advantages  Firms seek large market shares gain customer loyalty through brand names 168 carefully control operations


Chapter 6

CorporateCorporate-Level Strategy

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson


2003 Southwestern Publishing Company
169

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 6 CorporateCorporateLevel Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

170

Two Levels of Strategy


A diversified company has two levels of strategy 1. Business-Level Strategy (Competitive Strategy) BusinessHow to create competitive advantage in each business in which the company competes
- low cost - differentiation - focused low cost - focused differentiation - integrated low cost/ differentiation

2. Corporate-Level Strategy (Company-wide Strategy) Corporate(CompanyHow to create value for the corporation as a whole
171

Key Questions in Corporate Strategy


1. What businesses should the corporation be in? 2. How should the corporate office manage the array of business units? Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts
172

Levels and Types of Diversification


Low Levels of Diversification
Single Business
> 95% of business from a single 95% business unit

Dominant Business
Between 70 and 95% of business from a single business unit

173

Levels and Types of Diversification


Moderate to High Levels of Diversification
Related Constrained
<70% of revenues from dominant business; all businesses share product, technological and distribution linkages

174

Levels and Types of Diversification


Moderate to High Levels of Diversification
Related Linked (Mixed)
< 70% of revenues from dominant 70% business, and only limited links exist

175

Levels and Types of Diversification


Very High Levels of Diversification
Unrelated
< 70% of revenue comes from the dominant business, and there are no common links between businesses

176

Reasons for Diversification


Incentives

Reasons to Enhance Strategic Competitiveness


Economies of scope Market power Financial economics

Resources

Managerial Motives
177

Reasons for Diversification


Incentives

Incentives with Neutral Effects on Strategic Competitiveness


Anti-trust regulation Tax laws Low performance Uncertain future cash flows Firm risk reduction
178

Resources

Managerial Motives

Reasons for Diversification


Incentives

Resources with varying effects on value creation and strategic competitiveness


Tangible resources  financial resources  physical assets Intangible resources  tacit knowledge  customer relations  image and reputation

Resources

Managerial Motives

179

Reasons for Diversification


Incentives

Managerial Motives (Value Reduction)


Diversifying managerial employment risk

Resources

Increasing managerial compensation

Managerial Motives
180

ValueValue-creating Strategies of Diversification:


Operational and Corporate Readiness
Sharing: Operational Relatedness Between Businesses
Related Constrained Diversification Both Operational and Corporate Relatedness (Rare Capability and can Create Diseconomies of Scope)

High
Vertical Integration (Market Power)

Low

Unrelated Diversification (Financial Economies)

Related Linked Diversification (Economies of Scope)

Low High Corporate Readiness: Transferring Skills into 181 Businesses Through Corporate Headquarters

Adding Value by Diversification


Diversification most effectively adds value by either of two mechanisms: Economies of scope: cost savings attributed
to transferring the capabilities and competencies developed in one business to a new business

Market power: when a firm is able to sell its


products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both

182

Alternative Diversification Strategies


Related Diversification Strategies
sharing activities transferring core competencies

Unrelated Diversification Strategies


efficient internal capital market allocation restructuring
183

Alternative Diversification Strategies


Related Diversification Strategies
sharing activities

184

Sharing Activities: Key Characteristics


 

Sharing activities often lowers costs or raises differentiation Sharing activities can lower costs if it:
achieves economies of scale boosts efficiency of utilization helps move more rapidly down the Learning Curve

 

Sharing activities can enhance potential for or reduce the cost of differentiation Must involve activities that are crucial to competitive advantage

185

Sharing Activities: Assumptions


 

Strong sense of corporate identity Clear corporate mission that emphasizes the importance of integrating business units Incentive system that rewards more than just business unit performance

186

Alternative Diversification Strategies


Related Diversification Strategies
sharing activities transferring core competencies

187

Transferring Core Competencies:


Key Characteristics
 

Exploits interrelationships among divisions Start with value chain analysis


identify ability to transfer skills or expertise among similar value chains exploit ability to transfer activities

188

Transferring Core Competencies:


Assumptions


Transferring core competencies leads to competitive advantage only if the similarities among business units meet the following conditions:
activities involved in the businesses are similar enough that sharing expertise is meaningful transfer of skills involves activities which are important to competitive advantage the skills transferred represent significant sources of competitive advantage for the receiving unit 189

Alternative Diversification Strategies


Related Diversification Strategies
sharing activities transferring core competencies

Unrelated Diversification Strategies


efficient internal capital market allocation

190

Efficient Internal Capital Market Allocation: Key Characteristics




Firms pursuing this strategy frequently diversify by acquisition:


acquire sound, attractive companies acquired units are autonomous acquiring corporation supplies needed capital portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs add professional management & control to subsub-units sub-unit managers compensation based on subunit results
191

Efficient Internal Capital Market Allocation: Assumptions


 

Managers have more detailed knowledge of firm relative to outside investors Firm need not risk competitive edge by disclosing sensitive competitive information to investors Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own
192

Alternative Diversification Strategies


Related Diversification Strategies
sharing activities transferring core competencies

Unrelated Diversification Strategies


efficient internal capital market allocation restructuring
193

Restructuring: Key Characteristics


 

Seek out undeveloped, sick or threatened organizations or industries Parent company (acquirer) intervenes and frequently:
changes sub-unit management team subshifts strategy infuses firm with new technology enhances discipline by changing control systems divests part of firm makes additional acquisitions to achieve critical mass

194

Restructuring: Key Characteristics




Frequently sell unit after making one-time onechanges since parent no longer adds value to ongoing operations

195

Restructuring: Assumptions


 

Requires keen management insight in selecting firms with depressed values or unforeseen potential Must do more than restructure companies Need to initiate restructuring of industries to create a more attractive environment

196

Incentives to Diversify
External Incentives:
Relaxation of anti-trust regulation allows more antirelated acquisitions than in the past  Before 1986, higher taxes on dividends favored 1986, spending retained earnings on acquisitions  After 1986, firms made fewer acquisitions with 1986, retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments


197

Incentives to Diversify
Internal Incentives:
Poor performance may lead some firms to diversify to attempt to achieve better returns  Firms may diversify to balance uncertain future cash flows  Firms may diversify into different businesses in order to reduce risk


198

Resources and Diversification




Besides strong incentives, firms are more likely to diversify if they have the resources to do so Value creation is determined more by appropriate use of resources than incentives to diversify

199

Managerial Motives to Diversify


Managers have motives to diversify
diversification increases size; size is associated with executive compensation diversification reduces employment risk effective governance mechanisms may restrict such motives

200

Relationship Between Diversification and Performance


Performance

Dominant Business

Related Constrained

Unrelated Business
201

Level of Diversification

Relationship Between Firm Performance and Diversification


Incentives Capital Market Intervention and the Market for Managerial Talent

Resources

Diversification Strategy

Firm Performance

Managerial Motives

Internal Governance

Strategy Implementation
202

Chapter 7

Acquisition and Restructuring Strategies


Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2003 Southwestern Publishing Company
203

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 6 CorporateCorporateLevel Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

204

Mergers and Acquisitions




Merger: a strategy through which two firms agree to integrate their operations on a relatively co-equal basis coAcquisition: a strategy through which one firm
buys a controlling interest in another firm with the intent of making the acquired firm a subsidiary business within its own portfolio

Takeover: a special type of an acquisition


strategy wherein the target firm did not solicit the acquiring firms bid
205

Reasons for Making Acquisitions


Learn and develop new capabilities Increase market power Reshape firms competitive scope

Overcome entry barriers

Acquisitions

Increase diversification

Cost of new product development

Increase speed to market

Lower risk compared to developing new products


206

Reasons for Making Acquisitions:


Increased Market Power


Factors increasing market power


when a firm is able to sell its goods or services above competitive levels or when the costs of its primary or support activities are below those of its competitors usually is derived from the size of the firm and its resources and capabilities to compete

Market power is increased by


horizontal acquisitions vertical acquisitions related acquisitions

207

Reasons for Making Acquisitions:


Overcome Barriers to Entry


Barriers to entry include


economies of scale in established competitors differentiated products by competitors enduring relationships with customers that create product loyalties with competitors

acquisition of an established company


may be more effective than entering the market as a competitor offering an unfamiliar good or service that is unfamiliar to current buyers provides a new entrant with immediate market 208 access

Reasons for Making Acquisitions:


Cost of New Product Development and Speed to Market


Significant investments of a firms resources are required to


Develop new products internally introduce new products into the marketplace

Acquisition of a competitor may result in


more predictable returns faster market entry rapid access to new capabilities

209

Reasons for Making Acquisitions:


Lower Risk Compared to Developing New Products


An acquisitions outcomes can be estimated more easily and accurately compared to the outcomes of an internal product development process Therefore managers may view acquisitions as lowering risk

210

Reasons for Making Acquisitions:


Increased Diversification


It may be easier to develop and introduce new products in markets currently served by the firm It may be difficult to develop new products for markets in which a firm lacks experience
it is uncommon for a firm to develop new products internally to diversify its product lines acquisitions are the quickest and easiest way to diversify a firm and change its portfolio of business
211

Reasons for Making Acquisitions:


Reshaping the Firms Competitive Scope


Firms may use acquisitions to reduce their dependence on one or more products or markets Reducing a companys dependence on specific markets alters the firms competitive scope

212

Reasons for Making Acquisitions:


Learning and Developing New Capabilities
 

Acquisitions may gain capabilities that the firm does not possess Acquisitions may be used to
acquire a special technological capability broaden a firms knowledge base reduce inertia

213

Problems With Acquisitions


Integration difficulties Resulting firm is too large

Inadequate evaluation of target

Acquisitions

Managers overly focused on acquisitions

Large or extraordinary debt Inability to achieve synergy

Too much diversification

214

Problems With Acquisitions


Integration Difficulties


Integration challenges include


melding two disparate corporate cultures linking different financial and control systems building effective working relationships (particularly when management styles differ) resolving problems regarding the status of the newly acquired firms executives loss of key personnel weakens the acquired firms capabilities and reduces its value

215

Problems With Acquisitions


Inadequate Evaluation of Target


Evaluation requires that hundreds of issues be closely examined, including


financing for the intended transaction differences in cultures between the acquiring and target firm tax consequences of the transaction actions that would be necessary to successfully meld the two workforces

Ineffective due-diligence process may due result in paying excessive premium for the target company
216

Problems With Acquisitions


Large or Extraordinary Debt
 

Firm may take on significant debt to acquire a company High debt can
increase the likelihood of bankruptcy lead to a downgrade in the firms credit rating preclude needed investment in activities that contribute to the firms long-term success long-

217

Problems With Acquisitions


Inability to Achieve Synergy


Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately Firms experience transaction costs when they use acquisition strategies to create synergy Firms tend to underestimate indirect costs when evaluating a potential acquisition

218

Problems With Acquisitions


Too Much Diversification
 

Diversified firms must process more information of greater diversity Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units performances Acquisitions may become substitutes for innovation

219

Problems With Acquisitions


Managers Overly Focused on Acquisitions


Managers in target firms may operate in a state of virtual suspended animation during an acquisition Executives may become hesitant to make decisions with long-term consequences longuntil negotiations have been completed Acquisition process can create a shortshortterm perspective and a greater aversion to risk among top-level executives in a target topfirm
220

Problems With Acquisitions


Too Large


 

Additional costs may exceed the benefits of the economies of scale and additional market power Larger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and standardized managerial behavior Firm may produce less innovation
221

Attributes of Effective Acquisitions


Attributes
Complementary Assets or Resources Friendly Acquisitions Careful Selection Process Maintain Financial Slack

Results
Buying firms with assets that meet current needs to build competitiveness Friendly deals make integration go more smoothly Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies Provide enough additional financial resources so that profitable projects would not be foregone 222

Attributes of Effective Acquisitions


Attributes
Low-toLow-to-Moderate Debt Sustain Emphasis on Innovation Flexibility

Results
Merged firm maintains financial flexibility Continue to invest in R&D as part of the firms overall strategy Has experience at managing change and is flexible and adaptable

223

Restructuring Activities
 

Downsizing
Wholesale reduction of employees

Downscoping
Selectively divesting or closing non-core nonbusinesses Reducing scope of operations Leads to greater focus

Leveraged Buyout (LBO)


A party buys a firms entire assets in order to take the firm private.
224

Restructuring and Outcomes


Downsizing Reduced labor costs Reduced debt costs Emphasis on strategic controls High debt costs Loss of human capital Lower performance Higher performance Higher risk
225

Downscoping Leveraged buyout

Chapter 8

International Strategy

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson


2003 Southwestern Publishing Company
226

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 CorporateCorporateLevel Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

227

Opportunities and Outcomes of International Strategy


Identify International Opportunities Explore Resources and Capabilities International Strategies Use Core Competence Modes of Entry

Increased market size Return on investment Economies of scale and learning Advantage in location

International businessbusiness-level strategy Multidomestic strategy Global strategy Transnational strategy

Exporting Licensing Strategic alliances Acquisitions Establishment of a new subsidiary


228

Opportunities and Outcomes of International Strategy: Continued


Use Core Competence Modes of Entry

Exporting Licensing Strategic alliances Acquisitions Establishment of a new subsidiary

Management problems and risk

Strategic Competitiveness Outcomes

Better performance

Innovation Management problems and risk

229

International Strategy Life Cycle


Product Demand Develops and Firm Exports Products Foreign Competition Begins Production

Firm Introduces Innovation in Domestic Market

Selling Products or Services Outside a Firms Domestic Market


Production Becomes Standardized and is Relocated to Low Cost Countries

Firm Begins Production Abroad

230

Motivations for International Expansion




Increase Market Share


domestic market may lack the size to support efficient scale manufacturing facilities

Return on Investment
large investment projects may require global markets to justify the capital outlays weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

231

Motivations for International Expansion




Economies of Scale or Learning


expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution can spread costs over a larger sales base increase profit per unit

Location Advantages
low cost markets may aid in developing competitive advantage may achieve better access to: Raw materials Key customers Lower cost labor Energy

232

International Business-Level Strategy: BusinessDeterminants of National Advantage


Factors of production

Firm strategy, structure, and rivalry Related and supporting industries

Demand conditions

233

International Business-Level Strategy: BusinessDeterminants of National Advantage




Factors of production: the inputs necessary to compete in any industry


labor land natural resources capital infrastructure basic factors include natural and labor resources advanced factors include digital communication systems and educated workforce 234

International Business-Level Strategy: BusinessDeterminants of National Advantage




Demand conditions: characterized by the nature and size of buyers needs in the home market for the industrys goods or services
size of market segment can lead to scalescaleefficient facilities efficiency can lead to domination of the industry in other countries specialized demand may create opportunities beyond national boundaries
235

International Business-Level Strategy: BusinessDeterminants of National Advantage




Related and supporting industries: supporting services, facilities, suppliers and so on


support in design support in distribution related industries as suppliers and buyers

236

International Business-Level Strategy: BusinessDeterminants of National Advantage




Firm strategy, structure, and rivalry: the pattern of strategy, structure, and rivalry among firms
common technical training methodological product and process improvement cooperative and competitive systems

237

International Corporate-Level CorporateStrategy


Need for Global Integration
High Global strategy Transnational strategy

Multidomestic strategy Low Low High


238

Need for Local Responsiveness

International Corporate-Level CorporateStrategy




Type of corporate strategy selected will have an impact on the selection and implementation of the business-level businessstrategies Some corporate strategies provide individual country units with flexibility to choose their own strategies Others dictate business-level strategies businessfrom the home office and coordinate resource sharing across units
239

International Corporate-Level CorporateStrategy: Multidomestic Strategy


Strategy and operating decisions are decentralized to strategic business units (SBU) Multidomestic in each country strategy Products and services are tailored to local markets Business units in one country are independent of each other Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe
240

International Corporate-Level CorporateStrategy: Global Strategy


Global strategy

Products are standardized across national markets Decisions regarding business-level strategies businessare centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage)

241

International Corporate-Level CorporateStrategy: Transnational Strategy


Seeks to achieve both global efficiency and local responsiveness Transnational strategy Difficult to achieve because of simultaneous requirements  strong central control and coordination to achieve efficiency  decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage

242

Global Market Entry: Choice of Entry Mode


Type of Entry
Exporting Licensing Strategic alliances Acquisition

Characteristics
High cost, low control Low cost, low risk, little control, low returns Shared costs, shared resources, shared risks, problems of integration Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations Complex, often costly, time consuming, high risk, maximum control, potential 243 aboveabove-average returns

New wholly owned subsidiary

Strategic Competitiveness Outcomes: Returns




International diversification and returns:


firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets may increase a firms returns such firms usually achieve the most positive stock returns firm may achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns
244

Strategic Competitiveness Outcomes: Innovation




International diversification and innovation:


firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets potentially greater returns on innovations (larger markets) generate additional resources for investment in innovation exposed to new products and processes in international markets, generates additional knowledge leading to innovations
245

Risks in an International Environment


Political Risks Political risks include
instability in national governments war, both civil and international potential nationalization of a firms resources

Economic Risks

246

Risks in an International Environment


Political Risks Economic Risks

Economic risks are interdependent with political risks and include


differences and fluctuations in the value of different currencies differences in prevailing wage rates difficulties in enforcing property rights unemployment

247

Limits to International Expansion: Management Problems


   

Cost of coordination across diverse geographical business units Institutional and cultural barriers Understanding strategic intent of competitors The overall complexity of competition

248

Chapter 9

Cooperative Strategy

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson


2003 Southwestern Publishing Company
249

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 CorporateCorporateLevel Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

250

Cooperative Strategy


Cooperative strategy is a strategy in which firms


work together to achieve a shared objective

Cooperating with other firms is a strategy that


creates value for a customer exceeds the cost of constructing customer value in other ways establishes a favorable position relative to competition

251

Strategic Alliance


A strategic alliance is a cooperative strategy in which


firms combine some of their resources and capabilities to create a competitive advantage

 A strategic alliance involves


exchange and sharing of resources and capabilities co-development or distribution of goods or coservices
252

Strategic Alliance
Firm A Resources Capabilities Core Competencies Firm B Resources Capabilities Core Competencies

Combined Resources Capabilities Core Competencies

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


253

Types of Cooperative Strategies




Joint venture: two or more firms create an independent company by combining parts of their assets Equity strategic alliance: partners who own different percentages of equity in a new venture Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firms goods or services without equity sharing
254

Reasons for Strategic Alliances by Market Type


Market
Slow Cycle

Reason
Gain access to a restricted market Establish a franchise in a new market Maintain market stability (e.g., establishing standards)

255

Reasons for Strategic Alliances by Market Type


Market
Fast Cycle

Reason
Speed up development of new goods or service Speed up new market entry Maintain market leadership Form an industry technology standard Share risky R&D expenses Overcome uncertainty

256

Reasons for Strategic Alliances by Market Type


Market
Standard Cycle

Reason
Gain market power (reduce industry overcapacity) Gain access to complementary resources Establish economies of scale Overcome trade barriers Meet competitive challenges from other competitors Pool resources for very large capital projects Learn new business techniques
257

BusinessBusiness-Level Cooperative Strategies: Complementary Strategic Alliances


Complementary Alliances complementary strategic alliances are designed to take advantage of market opportunities by combining partner firms assets in complementary ways to create new value these include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage
258

BusinessBusiness-Level Cooperative Strategies: Complementary Strategic Alliances


Buyer vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms outsourcing is one example of this type of alliance
Technological Development

Support Activities

Human Resource Mgmt.

Firm Infrastructure

Service Marketing & Sales Procurement Procurement Outbound Logistics Operations Inbound Logistics

Vertical Alliance

Primary Activities

Supplier
Technological Development Human Resource Mgmt.

Support Activities

Firm Infrastructure

Service Marketing & Sales Outbound Logistics Operations Inbound Logistics

Primary Activities

259

BusinessBusiness-Level Cooperative Strategies: Complementary Strategic Alliances


Buyer
Technological Development

Horizontal Alliance
Potential Competitors
Human Resource Mgmt.

Buyer
Technological Development

Support Activities

Human Resource Mgmt.

Firm Infrastructure

Marketing & Sales Procurement Outbound Logistics Operations Inbound Logistics

Firm Infrastructure

Service

Support Activities

Service Marketing & Sales Procurement Outbound Logistics Operations Inbound Logistics

Primary Activities

Primary Activities

horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain focus on long-term product development and distribution opportunities the partners may become competitors 260 requires a great deal of trust between the partners

BusinessBusiness-Level Cooperative Strategies: Competition Response Alliances


Complementary Alliances Competition Response Alliances competition response strategic alliances occur when firms join forces to respond to a strategic action of another competitor because they can be difficult to reverse and expensive to operate, competition response strategic alliances are primarily formed to respond to strategic rather than tactical actions

261

BusinessBusiness-Level Cooperative Strategies: Uncertainty Reducing Alliances


Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances uncertainty reducing strategic alliances are used to hedge against risk and uncertainty these alliances are most noticed in fastfast-cycle markets alliance may be formed to reduce the uncertainty associated with developing new product or technology standards

262

BusinessBusiness-Level Cooperative Strategies: Competition Reducing Alliances


Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances competition reducing strategic alliances may be created to avoid destructive or excessive competition explicit collusion exists when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal) tacit collusion exists when several firms in an industry indirectly coordinate their production and pricing decisions by observing each others competitive actions and 263 responses

BusinessBusiness-Level Cooperative Strategies: Competition Reducing Alliances


Complementary Alliances Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances
264

mutual forbearance is a form of tacit collusion in which firms avoid competitive attacks against those rivals they meet in multiple markets competition reducing strategic alliances may require governments to find ways to permit collaboration among rivals without violating antitrust laws

CorporateCorporate-Level Cooperative Strategies


Corporate-level cooperative strategies are Corporatedesigned to facilitate product and/or market diversification
- diversifying strategic alliance - synergistic strategic alliance - franchising

Diversifying alliances and synergistic alliances allow firms


- to grow and diversify their operations - through a means other than a merger or acquisition
265

CorporateCorporate-Level Cooperative Strategies: Diversifying Alliances


Diversifying Alliances diversifying strategic alliance allows a firm to expand into new product or market areas without completing a merger or an acquisition provides some of the potential synergistic benefits of a merger or acquisition, but with less risk and greater levels of flexibility permits a test of whether a future merger between the partners would benefit both parties
266

CorporateCorporate-Level Cooperative Strategies: Synergistic Alliances


Diversifying Alliances Synergistic Alliances synergistic strategic alliances create joint economies of scope between two or more firms create synergy across multiple functions or multiple businesses between partner firms

267

CorporateCorporate-Level Cooperative Strategies: Franchising


Diversifying Alliances Synergistic Alliances Franchising franchising spreads risks and uses resources, capabilities, and competencies without merging or acquiring another company contractual relationship concerning the franchise that is developed between two parties, the franchisee and the franchisor an alternative to pursuing growth through mergers and acquisitions

268

International Cooperative Strategies




CrossCross-border strategic alliance


an international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage a firm may form cross-border strategic crossalliances to leverage core competencies that are the foundation of its domestic success to expand into international markets

269

International Cooperative Strategies


  

Allows risk sharing by reducing financial investment Host partner knows local market and customs International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints Must gauge partners strategic intent so they do not gain access to important technology and become a competitor

270

Network Cooperative Strategies




A network strategy is a cooperative strategy wherein several firms agree to form multiple partnerships to achieve shared objectives
stable alliance network dynamic alliance network

Effective social relationships and interactions among partners are keys to a successful network cooperative strategy
271

Network Cooperative Strategies:


Stable Alliance Network
Stable Alliance Network long term relationships that often appear in mature industries where demand is relatively constant and predictable stable networks are built for exploitation of the economies available between firms

272

Network Cooperative Strategies:


Dynamic Alliance Network
Stable Alliance Network Dynamic Alliance Network arrangements that evolve in industries with rapid technological change leading to short product life cycles primarily used to stimulate rapid, valuevalue-creating product innovations and subsequent successful market entries purpose is often exploration of new ideas

273

Competitive Risks with Cooperative Strategies


Competitive Risks Partner may act opportunistically Misrepresentation of competencies brought to the partnership Partner fails to make committed resources and capabilities available to its partners Firm may make investments that are specific to the alliance while its partner does not

274

Competitive Risks with Cooperative Strategies


Competitive Risks Risk and Asset Management Approaches

Manage the balance between learning from partners while protecting knowledge and sources of competitive advantages from excessive learning by partners Assign managerial responsibility for a firms cooperative strategies to a high-level executive or team high Specify resources and capabilities that will be shared and those that will not be shared (detailed contracts and monitoring) 275 Develop trusting relationships

Approaches for Managing Cooperative Strategies




cost minimization
formal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled

opportunity maximization
maximize partnerships value-creation valueopportunities partners take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities fewer formal, limiting, contracts 276

Competitive Risks with Cooperative Strategies


Competitive Risks Risk and Asset Management Approaches Desired Outcome Creating value Above-average Abovereturns

277

Chapter 10

Corporate Governance

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson


2003 Southwestern Publishing Company
278

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 CorporateCorporateLevel Strategy

Chapter 9 Cooperative Strategy

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

279

Corporate Governance


Corporate governance is
a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations concerned with identifying ways to ensure that strategic decisions are made effectively used in corporations to establish order between the firms owners and its top-level managers

280

Corporate Governance Mechanisms


Internal Governance Mechanisms
Ownership concentration relative amounts of stock owned by individual shareholders and institutional investors Board of Directors individuals responsible for representing the firms owners by monitoring top-level managers topstrategic decisions
281

Corporate Governance Mechanisms


Internal Governance Mechanisms
Executive Compensation use of salary, bonuses, and longlongterm incentives to align managers interests with shareholders interests  Monitoring by top-level managers top they may obtain Board seats (not in financial institutions) they may elect Board representatives
282

Corporate Governance Mechanisms


External Governance Mechanisms
Market for Corporate Control the purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitiveness

283

Separation of Ownership and Managerial Control




Basis of the modern corporation


shareholders purchase stock, becoming residual claimants shareholders reduce risk by holding diversified portfolios professional managers are contracted to provide decision-making decision-

Modern public corporation form leads to efficient specialization of tasks


risk bearing by shareholders strategy development and decision-making by decisionmanagers 284

Agency Relationship: Owners and


Managers
Shareholders (Principals) Firm owners

285

Agency Relationship: Owners and


Managers
Shareholders (Principals) Firm owners Decision makers Managers (Agents)

286

Agency Relationship: Owners and


Managers
Shareholders (Principals) Firm owners Decision makers Managers (Agents)

Risk bearing specialist (principal) pays compensation to A managerial decision-making decisionspecialist (agent)

An Agency Relationships
287

Agency Theory Problem




The agency problem occurs when:


the desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately

Solution:
principals engage in incentive-based incentiveperformance contracts monitoring mechanisms such as the board of directors enforcement mechanisms such as the managerial labor market to mitigate the agency 288 problem

Manager and Shareholder Risk and Diversification


Shareholder (business) S risk profile Managerial (employment) risk profile M

Risk

A Dominant Related Business Constrained

Related Linked

Unrelated Businesses
289

Diversification

Agency Theory Conflicts


Principals may engage in monitoring behavior to assess the activities and decisions of managers However, dispersed shareholding makes it difficult and inefficient to monitor managements behavior  Boards of Directors have a fiduciary duty to shareholders to monitor management However, Boards of Directors are often accused of being lax in performing this function


290

Governance Mechanisms
Ownership Concentration Large block shareholders have a strong incentive to monitor management closely Their large stakes make it worth their while to spend time, effort and expense to monitor closely They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)
291

Governance Mechanisms
Ownership Concentration Boards of Directors

Insiders
The firms CEO and other top-level topmanagers

Related Outsiders
Individuals not involved with daydayto-day operations, but who have a torelationship with the company

Outsiders
Individuals who are independent of the firms day-to-day operations day-toand other relationships
292

Governance Mechanisms
Ownership Concentration Boards of Directors Recommendations for more effective Board Governance: Increase diversity of board members backgrounds Strengthen internal management and accounting control systems Establish formal processes for evaluation of the boards performance

293

Governance Mechanisms
Ownership Concentration Boards of Directors Executive Compensation Salary, bonuses, long term incentive compensation Executive decisions are complex and nonnon-routine Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes

294

Governance Mechanisms
Ownership Concentration Boards of Directors Executive Compensation Stock ownership (long-term (longincentive compensation) makes managers more susceptible to market changes which are partially beyond their control Incentive systems do not guarantee that managers make the right decisions, but do increase the likelihood that managers will do the things for which they are rewarded

295

Governance Mechanisms
Ownership Concentration Boards of Directors Executive Compensation Market for Corporate Control Firms face the risk of takeover when they are operated inefficiently Many firms begin to operate more efficiently as a result of the threat of takeover, even though the actual incidence of hostile takeovers is relatively small Changes in regulations have made hostile takeovers difficult Acts as an important source of discipline over managerial incompetence and waste
296

International Corporate Governance: Germany


  

Owner and manager are often the same in private firms Public firms often have a dominant shareholder, frequently a bank Frequently there is less emphasis on shareholder value than in U.S. firms, although this may be changing

297

International Corporate Governance: Germany




Medium to large firms have a two-tiered twoboard


vorstand monitors and controls managerial decisions aufsichtsrat selects the Vorstand employees, union members and shareholders appoint members to the Aufsichtsrat

298

International Corporate Governance: Japan


  

Obligation, family and consensus are important factors Banks (especially main bank) are highly influential with firms managers Keiretsus are strongly interrelated groups of firms tied together by crosscrossshareholdings

299

International Corporate Governance: Japan




Other characteristics:
powerful government intervention close relationships between firms and government sectors passive and stable shareholders who exert little control virtual absence of external market for corporate control

300

Corporate Governance and Ethical Behavior


It is important to serve the interests of the firms multiple stakeholder groups!
Capital Market Stakeholders In the U.S., shareholders (in the capital market stakeholder group) are viewed as the most important stakeholder group which are served by the board of directors Hence, the focus of governance mechanisms is on the control of managerial decisions to ensure that shareholders interests will be served
301

Corporate Governance and Ethical Behavior


It is important to serve the interests of the firms multiple stakeholder groups!
Capital Market Stakeholders Product Market Stakeholders Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders (managerial and non-managerial employees) are also nonimportant stakeholder groups

302

Corporate Governance and Ethical Behavior


It is important to serve the interests of the firms multiple stakeholder groups!
Capital Market Stakeholders Product Market Stakeholders Organizational Stakeholders Although the idea is subject to debate, some believe that ethically responsible companies design and use governance mechanisms that serve all stakeholders interests Importance of maintaining ethical behavior through governance mechanisms is seen in the example of Enron and Arthur Andersen
303

Chapter 11

Organizational Structure and Controls


Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2003 Southwestern Publishing Company
304

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 CorporateCorporateLevel Strategy

Chapter 9 Cooperative Strategy

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

305

Organizational Structure


Organizational structure specifies the firms formal reporting relationships, procedures, controls, and authority and decisiondecision-making processes It is critical to match organizational structure to the firms strategy

306

Stability and Flexibility in Structure




Structural stability provides the capacity


required to consistently and predictably manage the firms daily work routines

Structural flexibility provides the opportunity to


explore competitive possibilities allocate resources to activities that shape competitive advantages needed by the firm

307

Organizational Controls


Organizational controls
guide the use of strategy indicate how to compare actual results with expected results suggest corrective actions to take when the difference between actual and expected results is unacceptable

Two types of organizational controls


strategic controls financial controls
308

Organizational Controls:
Strategic Controls
Strategic Controls  Concerned with examining

the fit between

what the firm might do (as suggested by opportunities in its external environment) what it can do (as indicated by its competitive advantages)


Used to evaluate the degree to which the firm focuses on the requirements to implement its strategies 309

Organizational Controls:
Financial Controls
Strategic Controls  Objective criteria


Financial Controls

AccountingAccounting-based measures include


return on investment return on assets

MarketMarket-based measures include


economic value added

310

Matching Control to Strategy




Relative use of controls varies by type of strategy


large diversified firms using the cost leadership strategy emphasize financial controls companies and business units using the differentiation strategy emphasize strategic controls

311

Evolutionary Patterns of Strategy and Organizational Structure




Firms grow in predictable patterns


by volume by geography integration (vertical, horizontal) through product/business diversification

A firms growth patterns determine its structural form

312

Evolutionary Patterns of Strategy and Organizational Structure




 

All organizations require some form of organizational structure to implement and manage their strategies Firms frequently alter their structure as they grow in size and complexity Three basic structure types:
simple structure functional structure multi-divisional structure (M-form) multi(M313

Strategy and Structure Growth Pattern: Simple Structure


Simple Structure

314

Strategy and Structure Growth Pattern: Simple Structure




Organizational form in which the ownerownermanager


makes all major decisions directly monitors all activities

Staff
serves as an extension of the managers supervisory authority

Matched with focus strategies and businessbusiness-level strategies


commonly compete by offering a single product line in a single geographic market
315

Strategy and Structure Growth Pattern: Simple Structure




Growth creates
complexity managerial and structural challenges

OwnerOwner-managers
commonly lack organizational skills and experience become ineffective in managing the specialized and complex tasks involved with multiple organizational functions

316

Strategy and Structure Growth Pattern: Functional Structure


Simple Structure Efficient implementation of formulated strategy Sales GrowthGrowthCoordination and Control Problems Functional Structure
317

Strategy and Structure Growth Pattern: Functional Structure


 

Chief Executive Officer (CEO)


limited corporate staff

Functional line managers in dominant organizational areas


production marketing engineering accounting R&D human resources

Supports use of business-level strategies businessand some corporate-level strategies corporate single or dominant business with low levels of 318 diversification

Strategy and Structure Growth Pattern: Functional Structure




Differences in orientation among organizational functions can


impede communication and coordination increase the need for CEO to integrate decisions and actions of business functions facilitate career paths and professional development in specialized functional areas cause functional-area managers to focus on functionallocal versus overall company strategic issues

319

Strategy and Structure Growth Pattern: Multidivisional Structure




Strategic control
operating divisions each division is separate business or profit center

Top corporate officer delegates responsibilities to division managers


for day-to-day operations day-to for business-unit strategy business-

Appropriate when the firm grows through diversification


320

Strategy and Structure Growth Pattern: Multidivisional Structure




Three major benefits


corporate officers able to more accurately monitor the performance of each business, which simplifies the problem of control facilitates comparisons between divisions, which improves the resource allocation process stimulates managers of poorly performing divisions to look for ways of improving performance

321

Strategy and Structure Growth Pattern: Multidivisional Structure


Simple Structure Efficient implementation of formulated strategy Sales GrowthGrowthCoordination and Control Problems Functional Structure Efficient implementation of formulated strategy Multidivisional Structure

Sales GrowthGrowthCoordination and Control Problems

322

Matching Structure and Strategy




Different forms of the functional organizational structure are matched to


cost leadership strategy differentiation strategy integrated cost leadership/differentiation strategy

differences in these forms seen in three important structural characteristics


specialization centralization formalization

323

Structure for Cost Leadership Strategy


Operations is main function Process engineering is
emphasized over R&D Large centralized staff Formalized procedures Structure is mechanical, job roles highly structured

Office of the President

Centralized Staff

Engineering Marketing

Operations Personnel

Accounting

324

Structure for Differentiation Strategy


President and Limited Staff R&D New Product R&D Operations Marketing Human Resources Marketing Finance

Marketing is the main function for tracking new product ideas New product R&D is emphasized Most functions are decentralized Formalization is limited to foster change and promote new ideas Overall structure is organic; job roles are less structured

325

Multidivisional Structure
   

Each division is operated as a separate business Appropriate for related-diversified relatedbusinesses Key task of corporate managers is exploiting synergies among divisions Managers use a combination of strategic controls and financial controls

326

Multidivisional Structure


Managers try to strike a balance between:


competing among divisions for scarce capital resources creating opportunities for cooperation to develop synergies

 

The goal is to maximize overall firm performance The decision-making of managers in a decisionmultimulti-divisional structure may be:
centralized or decentralized bureaucratic or non-bureaucratic non327

Multidivisional Structure
 

Balance on these dimensions may change over time Structure will evolve over time with:
changes in strategy degree of diversification geographic scope nature of competition

328

Three Variations of the Multidivisional Structure


Multidivisional Structure (M(M-form)

Cooperative Form Strategic Business-Unit Business(SBU) Form

Competitive Form

329

Cooperative Form of Multidivisional RelatedStructure: Related-Constrained Strategy


Headquarters Office Government Affairs Corporate Human Resources President Legal Affairs

Corporate R&D Lab

Strategic Planning

Corporate Marketing

Corporate Finance

Product Division

Product Division

Product Division

Product Division

Product Division 330

Cooperative Form of Multidivisional RelatedStructure: Related-Constrained Strategy


 

 

Structural integration devices create tight links among all divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions R&D is likely to be centralized Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance Culture emphasizes cooperative sharing
331

SBU Form of Multidivisional RelatedStructure: Related-Linked Strategy


Headquarters Office President

Corporate R&D Lab

Strategic Planning

Corporate HRM

Corporate Marketing

Corporate Finance

SBU
Division Division Division

SBU
Division Division

SBU
Division
332

Division

Division

Division

SBU Form of Multidivisional RelatedStructure: Related-Linked Strategy


 

 

Structural integration devices create tight links among all divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions R&D is likely to be centralized Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance Culture emphasizes cooperative sharing
333

Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy


Headquarters Office President

Legal Affairs

Finance

Auditing

Division

Division

Division

Division

Division

Division

334

Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy


 

   

Corporate headquarters has a small staff Finance and auditing are the most prominent functions in the headquarters to manage cash flow and ensure the accuracy of performance data coming from divisions The legal affairs function becomes important when the firm acquires or divests assets Divisions are independent and separate for financial evaluation purposes Divisions retain strategic control, but cash is managed by the corporate office Divisions compete for corporate resources

335

Multidivisional Structure: Other Points




Complex multi-divisional structure firms multimay be simultaneously


centralized and decentralized depending upon the various business-level businessstrategies employed throughout the firms individual businesses

MultiMulti-divisional structure firms use a combination of:


strategic controls financial controls
336

Characteristics of Various Structural Forms


Structural Characteristics Type of Strategy Degree of Centralization Use of Integrating Mechanisms Cooperative M-Form RelatedRelatedConstrained Centralized at Corporate Office Extensive SBU M-Form RelatedRelatedLinked Partially Centralized in SBUs Moderate Competitive M-Form Unrelated Diversification Decentralized to Divisions

Nonexistent
337

Characteristics of Various Structural Forms


Structural Characteristics Divisional Performance Appraisal Divisional Incentive Compensation Cooperative M-Form Subjective Strategic Criteria Linked to Corporate Performance SBU M-Form Strategic & Financial Criteria Competitive M-Form Objective Financial Criteria

Linked to Linked to Corporate Divisional SBU & Division Performance Performance


338

Worldwide Geographic Area Structure: Multidomestic Strategy


Asia United States product characteristics tailored to local preferences isolation from global competitiion establish protected market positions compete in industry segments most affected by differences among local countries
339

Latin America

Multinational Headquarters

Europe

Australia

Middle East/ Africa

Worldwide Product Divisional Structure: Global Strategy


standardized products across countries economies of scope and scale outsource some Global Worldwide Worldwide primary or support Products Products Corporate activities to the Division Division Headquarters worlds best providers decision-making decisionauthority centralized Worldwide Worldwide Products Products in worldwide division Division Division headquarters
Worldwide Products Division Worldwide Products Division
340

Using the Combination Structure:


Transnational Strategy


The combination structure has characteristics and mechanisms that result in an emphasis on both geographic and product structures
local responsiveness (multidomestic strategy) global efficiency (global strategy)

341

Strategic Network


A strategic network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as alliances and joint ventures The strategic network seeks to develop a competitive advantage in primary or support activities A strategic center firm often manages the network
342

Strategic Network


strategic center firm engages in four primary tasks


strategic outsourcing (outsources and partners with more firms than do other network members) competencies (supports each members efforts to develop core competencies that can benefit the network)

343

Strategic Network


strategic center firm engages in four primary tasks


technology (manages the development and sharing of technology-based ideas among technologynetwork members) race to learn (guides participants in efforts to form network-specific competitive advantages) network-

344

Strategic Network

Strategic Center Firm

345

Distributed Strategic Network


 

International cooperative strategies often require more complex networks Many large multinational firms form distributed strategic networks with multiple regional strategic centers to manage their array of cooperative arrangements with partner firms Breaking large networks into multiple manageablymanageably-sized networks helps to manage the complexity of maintaining many relationships
346

Distributed Strategic Network

Main Strategic Strategic Center Center Firm Firm

= Distributed Strategic Center Firms

347

Chapter 12

Strategic Leadership

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson


2003 Southwestern Publishing Company
348

Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process


Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 CorporateCorporateLevel Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

349

Strategic Leadership


Strategic leadership involves:


the ability to anticipate, envision, maintain flexibility and empower others to create strategic change multi-functional work that involves working multithrough others consideration of the entire enterprise rather than just a sub-unit sub a managerial frame of reference

350

Strategic Leadership and the Strategic Management Process


Effective Strategic Leadership shapes the formulation of

Strategic Intent and influence

Strategic Mission

Successful Strategic Actions


351

Strategic Leadership and the Strategic Management Process


Successful Strategic Actions

Formulation of Strategies yields

Implementation of Strategies

Strategic Competitiveness AboveAbove-Average Returns

352

Factors Affecting Managerial Discretion


External Environment

External Environment Industry structure Rate of market growth Number and type of competitors Nature and degree of political/legal constraints Degree to which products can be differentiated
353

Factors Affecting Managerial Discretion


External Environment Characteristics of the Organization

Characteristics of the Organization Size Age Culture Availability of resources Patterns of interaction among employees

354

Factors Affecting Managerial Discretion


External Environment Characteristics of the Organization Characteristics of the Manager

Managerial Discretion

Characteristics of the Manager Tolerance for ambiguity Commitment to the firm and its desired strategic outcomes Interpersonal skills Aspiration level Degree of self-confidence self355

Top Management Teams




The top management team is composed of key managers who are responsible for
formulating and implementing the organizations strategies

A heterogeneous top management team with varied expertise and knowledge can draw on multiple perspectives when evaluating alternative strategies and building consensus
356

Top Management Teams




A top management team must also be able to function effectively as a team in order to implement strategies
a heterogeneous team makes this more difficult a heterogeneous team, however, is associated positively with innovation and strategic change

357

Strategic Leadership


  

Chief executive officers can gain so much power that they are virtually independent of oversight by the board of directors This is especially true when the CEO is also chairman of the board of directors CEOs of long tenure can also wield substantial power The most effective forms of governance share power and influence among the CEO and board of directors
358

Managerial Labor Markets




The internal labor market is comprised of the career path alternatives available to a firms managers Selecting internal candidates for management positions helps to build on valuable firm-specific knowledge firm-

359

Managerial Labor Markets




The external labor market includes the collection of career opportunities for managers outside their firm Selecting an outsider often brings fresh insights and may energize the firm with innovative new ideas

360

Managerial Labor Markets


Managerial Labor Market: CEO Succession Internal CEO External CEO succession succession Ambiguous: Stable possible change in strategy top management team and strategy Stable strategy with innovation Strategic change
361

Homogeneous Top Management Team Composition Heterogeneous

Exercise of Effective Strategic Leadership


Establishing balanced organizational controls Determining strategic direction Exploiting and maintaining core competencies

Effective Strategic Leadership Emphasizing ethical practice Sustaining an effective organizational culture Developing human capital
362

Determining Strategic Direction




 

Strategic direction means the development of a long-term vision of a firms strategic longintent A charismatic leader can help achieve strategic intent It is important not to lose sight of the strengths of the organization when making changes required by a new strategic direction Executives must structure the firm effectively to help achieve the vision
363

Exploiting and Maintaining Core Competencies




Core competencies are resources and capabilities that serve as a source of competitive advantage for a firm over its rivals Strategic leaders must verify that the firms competencies are emphasized in strategy implementation efforts

364

Exploiting and Maintaining Core Competencies




In many large firms, and certainly in relatedrelated-diversified ones, core competencies are exploited effectively when they are developed and applied across different organizational units Core competencies cannot be developed or exploited effectively without developing the capabilities of human capital

365

Developing Human Capital


  

Human capital refers to the knowledge and skills of the firms entire workforce Employees are viewed as a capital resource that requires investment No strategy can be effective unless the firm is able to develop and retain good people to carry it out The effective development and management of the firms human capital may be the primary determinant of a firms ability to formulate and implement 366 strategies successfully

Sustaining an Effective Organizational Culture




An organizational culture consists of a complex set of ideologies, symbols, and core values that is shared throughout the firm and influences the way it conducts business Shaping the firms culture is a central task of effective strategic leadership

367

Sustaining an Effective Organizational Culture




An appropriate organizational culture encourages the development of an entrepreneurial orientation among employees and an ability to change the culture as necessary Reengineering can facilitate this process

368

Sustaining an Effective Organizational Culture


Changing Culture and Business Reengineering


The benefits of business reengineering are maximized when employees believe that:
every job in the company is essential and important all employees must create value through their work

369

Sustaining an Effective Organizational Culture


Changing Culture and Business Reengineering
  

Constant learning is a vital part of every persons job Teamwork is essential to successful implementation Problems are solved only when teams accept the responsibility for the solution

370

Emphasizing Ethical Practices




Ethical practices increase the effectiveness of strategy implementation processes Ethical companies encourage and enable people at all organizational levels to exercise ethical judgment

371

Emphasizing Ethical Practices




To properly influence employee judgment and behavior, ethical practices must shape the firms decision-making process decisionand be an integral part of an organizations culture Leaders set the tone for creating an environment of mutual respect, honesty and ethical practices among employees

372

Establishing Balanced Organizational Controls




Organizational controls provide the parameters within which strategies are to be implemented and corrective actions taken Financial controls are often emphasized in large corporations and focus on shortshortterm financial outcomes Strategic control focuses on the content of strategic actions, rather than their outcomes
373

Establishing Balanced Organizational Controls




Successful strategic leaders balance strategic control and financial control (they do not eliminate financial control) with the intent of achieving more positive longlong-term returns

374

Strategic and Financial Controls in a Balanced Scorecard Framework


Perspectives
Financial

Criteria
Cash flow Return on equity Return on assets Assessment of ability to anticipate customers needs Effectiveness of customer service practices Percentage of repeat business Quality of communications with customers
375

Customer

Strategic and Financial Controls in a Balanced Scorecard Framework


Perspectives
Internal Business Process

Criteria
Asset utilization improvements Improvements in employee morale Changes in turnover rates Improvements in innovation ability Number of new products compared to competitors Increases in employees skills

Learning and Growth

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