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ADVANCED
STRATEGIC
MANAGEMENT
Professor Stanley Han
College of Business Administration
hans@csus.edu
1
Course Overview: Objectives
To acquire familiarity with the principal concepts,
frameworks and techniques of strategic management.
To gain expertise in applying these concepts,
frameworks and techniques in order to
- understand the reasons for good or bad
performance by an enterprise,
- generate strategy options for an enterprise,
- assess available options under conditions of
imperfect knowledge,
- select the most appropriate strategy,
- recommend the best means of implementing the
chosen strategy.
2
Course Overview: Objectives (cont’d)
CORPORATE CORPORATE
STRATEGY HEAD OFFICE
BUSINESS
STRATEGY Division A Division B
R&D R&D
FUNCTIONAL Personnel Personnel
STRATEGIES
Finance Finance
Production Production
Marketing/Sales Marketing/Sales
Levels
Levels of
of Strategy
Strategy
• Corporate strategy... defines the scope of the
business in terms of the industries and markets in
which it competes.
• includes decisions about diversification, vertical
integration, acquisitions, new ventures,
divestments, allocation of scarce resources
between business units
• Business strategy... is concerned with how the firm
competes within a particular industry or market... to
win a business unit must adopt a strategy that
establishes a competitive advantage over its rivals.
• Functional strategy... the detailed deployment of
resources at the operational level
Common
Common Elements
Elements in
in Successful
Successful Strategy
Strategy
Successful
Strategy
EFFECTIVE IMPLEMENTATION
Profound Objective
Long-term, simple
understanding of appraisal of
and agreed upon
the competitive resources
objectives
environment
$
Strategy
Strategy as
as aa Quest
Quest for
for Profit
Profit
• The stakeholder approach : The firm is a coalition of interest groups—
it seeks to balance their different objectives
For the purposes of strategy analysis we assume that the primary goal
of the firm is profit maximization.
Rationale:
1) Boards of directors legally obliged to pursue shareholder interest
2) To replace assets firm must earn return on capital > cost of capital
(difficult when competition strong).
3) Firms that do not max. stock-market value will be acquired
Problems:
• Estimating cash flows beyond 2-3 years is difficult
• Value of firm depends on option value as well as DCF value
Above Normal
Profits
(in Excess of the Competitive Level)
COST
COST
u ct ADVANTAGE
pro d ADVANTAGE
ila r
c ost
Sim r
l o we
COMPETITIVE at
COMPETITIVE
ADVANTAGE
ADVANTAGE Pri
fro ce
m pre
un mi
iqu um
ep
rod DIFFERENTIATION
DIFFERENTIATION
uc
t ADVANTAGE
ADVANTAGE
The
The Experience
Experience Curve
Curve
Cumulative Output
Examples
Examples of
of Experience
Experience Curves
Curves
Price Index
15K
75%
70% slope
• Process innovation
PRODUCTION TECHNIQUES • Reengineering business processes
• Location advantages
INPUT COSTS • Ownership of low-cost inputs
• Non-union labor
• Bargaining power
Cost per
unit of
output
Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main
brands incur lower advertising costs per unit of sales than their smaller rivals.
0.20
Advertising Expenditure ($ per case)
Schweppes
SF Dr. Pepper
0.15
Tab
Diet 7-Up Diet Pepsi
Diet Rite
0.10
Fresca
Seven Up
0.05
PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR
INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
1
5
2 3 4
Inventory holding
Supplies of steel
Inventory holding
Inventory holding
technical support
Manufacturing
& aluminum
Purchasing
Distribution
Processing
Engineering
Marketing
Distribution
Purchasing
Canning
Service &
Design
Sales
Household & Personal Products 22.7 Gas & Electric Utilities 10.4
Pharmaceuticals 22.3 Food and Drug Stores 10.0
Tobacco 21.6 Motor Vehicles & Parts 9.8
Food Consumer Products 19.6 Hotels, Casinos, Resorts 9.7
Securities 18.9 Railroads 9.0
Diversified financials 18.3 Insurance: Life and Health 8.6
Beverages 18.8 Packaging & Containers 8.6
Mining & crude oil 17.8 Insurance: Property & Casualty 8.3
Petroleum Refining 17.3 Building Materials, Glass 8.3
Medical Products & Equipment 17.2 Metals 8.0
Commercial Banks 15.5 Food Production 7.2
Scientific & Photographic Equipt. 15.0 Forest and Paper Products 6.6
Apparel 14.4 Semiconductors &
Computer Software 13.9 Electronic Components 5.9
Publishing, Printing 13.5 Telecommunications 4.6
Health Care 13.1 Communications Equipment 1.2
Electronics, Electrical Equipment 13.0 Entertainment 0.2
Specialty Retailers 13.0 Airlines (22.0)
Computers, Office Equipment 11.7
The Profitability of Global Industries: Return on Invested Capital, 1963-2003
From
From Environmental
EnvironmentalAnalysis
Analysis
to
to Industry
IndustryAnalysis
Analysis
Perfect
Oligopoly Duopoly Monopoly
Competition
Product Homogeneous
Differentiation Potential for product differentiation
Product
Perfect
Information Imperfect availability of information
Information flow
Porter’s
Porter’s Five
Five Forces
Forces of
of Competition
Competition Framework
Framework
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
SUPPLIER POWER
LOW
DRUG
INDUSTRY
(ROE=22%)
THREAT OF ENTRY
LOW INDUSTRY
COMPETITIVENESS
•economies of scale LOW THREAT OF
•capital requirements SUBSTITUTES
for R&D and clinical •high concentration LOW
trials •product differentiation
•product differentiation •patent protection No substitutes.
•control of distribution •steady demand growth (Changing as managed care
channels •no cyclical fluctuations encourages generics.)
•patent protection of demand
BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)
Applying
Applying Five-Forces
Five-ForcesAnalysis
Analysis
Time
How
How Typical
Typical is
is the
the Life
Life Cycle
Cycle Pattern?
Pattern?
Color
Sales Sales B&W Portable
HDTV ?
1900 50 90 07 1930 50 70 90 07
MOTORCYCLES TV’s
Customers become
more knowledgeable Customers become
& experienced more price conscious
Quest for new
sources of
differentiation
Products become
more standardized
Diffusion of
Price competition
technology Production intensifies
Production shifts
becomes less
to low-wage
R&D
countries
& skill-intensive
Excess capacity
increases
Demand growth Bargaining power
slows as market of distributors
saturation approaches Distribution channels increases
consolidate
Changes
Changesininthe
thePopulation
Population of
of Firms
Firmsover
overthe
the
Industry
IndustryLife
LifeCycle:
Cycle:US
USAuto
AutoIndustry
Industry1885-1961
1885-1961
Established
Industry
Emerging Industry
Time
The Industry Life Cycle as an S curve
Performance
Maturity
Discontinuity
Takeoff
Ferment
Time
The S-curve Maps Major Transitions
Maturity
Performance
Discontinuity
Takeoff
Ferment
Time
RESOURCES,
RESOURCES,
CAPABILITIES,
CAPABILITIES, AND
AND
CORE
CORE COMPETENCES
COMPETENCES
Shifting
Shifting the
the Focus
Focus ofof Strategy
StrategyAnalysis:
Analysis:
From
From the
the External
External to
to the
the Internal
Internal Environment
Environment
The The
Firm-Strategy Environment-Strategy
Interface Interface
Rationale
Rationale for
for the
the Resource-based
Resource-based
Approach
Approach to to Strategy
Strategy
Precision Fine
Mechanics Optics
Micro-
Electronics
Eastman Kodak’s Dilemma
INDUSTRY KEY
COMPETITIVE SUCCESS FACTORS
STRATEGY
ADVANTAGE
ORGANIZATIONAL
CAPABILITIES
RESOURCES
TANGIBLE INTANGIBLE HUMAN
•Financial •Skills/know-how
•Technology •Capacity for
•Physical •Reputation
communication
•Culture
& collaboration
•Motivation
Appraising
Appraising Resources
Resources
RESOURCE CHARACTERISTICS INDICATORS
FIRM INFRASTRUCTURE
SUPPORT
HUMAN RESOURCE MANAGEMENT ACTIVITIES
TECHNOLOGY DEVELOPMENT
PROCUREMENT
PRIMARY
ACTIVITIES
The
The Rent-Earning
Rent-Earning Potential
Potential
of
of Resources
Resources and
and Capabilities
Capabilities
Durability
THE PROFIT
EARNING POTENTIAL SUSTAINABILITY OF THE Transferability
OF A RESOURCE OR COMPETITIVE
CAPABILITY ADVANTAGE Replicability
Property rights
Relative
APPROPRIABILITY bargaining power
Embeddedness
Assessing
AssessingaaCompanies
CompaniesResources
Resources
and
andCapabilities:
Capabilities:The
TheCase
Case of
ofVW
VW
Importan VW’s VW’s
RESOURCES ce Relative
CAPABILITIES Importance
Relative
Strength Strength
C1. Product
R1. Finance 6 4 9 4
development
C3. Engineering 7 9
R3. Plant and 8 8
equipment
C4. Manufacturing 8 7
R4. Location 7 4
C5. Financial
6 3
management
R5. Distribution 8 5
C6. R&D 6 4
C8. Government
4 8
relations
Appraising
AppraisingVW’s
VW’sResources
Resourcesand
andCapabilities
Capabilities
(Hypothetical only)
10 Key Strengths
Superfluous Strengths
C3
R3
Relative Strength
C8
C4
C2
5 R2 R5
R1 R4 C1
C6 C7
C5
VerticalProduct Geographical
Scope Scope Scope
[A] Single V1
Integrated V2
P1 P2 P3 C1 C2 C3
Firm V3
[B] Several V1
Specialized P1 P2 P3 C1 C2 C3
V2
Firms linked
by Markets V3
In situation [A] the business units are integrated within a single firm.
In situation [B] the business units are independent firms linked by markets.
Are the administrative costs of the integrated firm less than the transaction
costs of markets?
Determinants
Determinants of
of Changes
Changes in
in Corporate
Corporate Scope
Scope
INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT
> COST OF CAPITAL
COMPETITIVE
ADVANTAGE
Note: During the 1980s and 1990s the trend reversed as large
companies refocused upon their core businesses
Diversification
Diversificationamong
amongLarge
LargeUK
UK
Corporations,
Corporations,1950-93
1950-93
70
60
Single business
50
40 Dominant
business
30 Related business
20
Unrelated
10 business
0
1950 1960 1970 1983 1993
Motives
Motives for
for Diversification
Diversification
2. The Cost of Entry Test: the cost of entry must not capitalize
all future profits.
Canning of
Iron ore Steel Steel strip Can food, drink,
mining production production making oil, etc.
VERTICAL
VERTICAL
INTEGRATION,
INTEGRATION
AND MARKET
CONTRACTS
MARKET
MARKET
CONTRACTS
CONTRACTS
Trading Global
Industries Industries
--aerospace --automobiles
--military hardware --oil
International Trade
Domestic Multidomestic
Industries Industries
--railroads
--laundries/dry cleaning --retail banking
--hairdressing --hotels
LO W
--milk --consulting
COMPETITION
• Increased intensity of competition
PROFITABILITY
• Other things remaining equal, internationalization tends to
reduce an industry’s margins & rate of return on capital
Competitive
CompetitiveAdvantage
Advantagewithin
withinan
anInternational
International
Context:
Context:The
The Basic
Basic Framework
Framework
FIRM RESOURCES
THE INDUSTRY
& CAPABILITIES
ENVIRONMENT
-- Financial resources
-- Physical resources Key Success Factors
-- Technology
-- Reputation
-- Functional capabilities COMPETITIVE
-- General management
ADVANTAGE
capabilities
FACTOR CONDITIONS
RELATING AND
DEMAND SUPPORTING
CONDITIONS INDUSTRIES
STRATEGY, STRUCTURE,
AND RIVALRY
Note:
1 = production of fiber (natural & synthetic) 2 = production of spun yarn
3 = production of textiles 4 = production of clothing
Determining
DeterminingthetheOptimal
Optimal Location
Location
of
of Value
ValueChain
ChainActivities
Activities
Where is the optimal location
of X in terms of the cost and
The optimal location availability of inputs?
of activity X considered
independently What government incentives/ penalties
affect the location decision?
What internal
WHERE TO LOCATE resources and capabilities does the firm
ACTIVITY X? possess in particular locations?
50 pro
40% investment IBC Vehicles ina
. 9 du
Ltd. (U.K.)
% cti
50% SAIC
ow on
owned
ne co
(Makes vans in UK)
d; lla
t e bo
New United Motor
ch ra
ni t i o
Manufacturing
ca n
TOYOTA
l&
50% owned Inc. (NUMMI)
(Makes cars in US) DAEWOO
Multinational
Multinational Strategies:
Strategies:
Globalization
Globalization vs.
vs. National
National Differentiation
Differentiation
The case for a global strategy:
•• GLOBALIZATION
GLOBALIZATION??
--Something
--Somethingto
todo
dowith
withincreasing
increasinginterdependence
interdependence
between
betweencountries.
countries.
•• GLOBAL
GLOBALSTRATEGY
STRATEGY
--At
--Atsimplest
simplestlevel:
level: Treating
Treatingthe
theworld
worldasasaasingle
singlemarket
market
E.g.
E.g.Japanese
Japanesecompanies
companiesduring
duringthethe1970s
1970s&&1980s,
1980s,
(YKK,
(YKK,Honda)
Honda) standard
standardproducts,
products,developed
developed&&
manfactured
manfacturedwithin
withinJapan;
Japan;distributed
distributed&&marketed
marketed
worldwide
worldwide
--At
--Atmore
moresophisticated
sophisticatedlevel:
level: Strategy
Strategythat
thatrecognizes
recognizes
and
andexploits
exploitslinkages
linkagesbetween
betweencountries
countries(e.g.
(e.g.exploits
exploits
global
globalscale,
scale,national
nationalresource
resourcedifferences,
differences,strategic
strategic
competition)
competition)
World as World as inter- World as
single mkt. related mkts. separate
national mkts.
Forces
Forcesfor
for globalization
globalization Forces
Forcesfor
forlocalization
localization/ /national
national
differentiation
differentiation
MARKET
MARKETDRIVERS
DRIVERS
--Common
--Commoncustomer
customerneeds
needs MARKET
MARKETDRIVERS
DRIVERS
--Global
--Globalcustomers
customers --Different
--Differentlanguages
languages
--Cross-border
--Cross-bordernetwork
networkeffects --Different
effects --Differentcustomer
customerpreferences
preferences
--Cultural
--Culturaldifferences
differences
COST
COST DRIVERS
DRIVERS
--Global COST
COSTDRIVERS
DRIVERS
--Globalscale
scaleeconomies
economies --Transportation
--Differences --Transportationcosts
costs
--Differencesin
innational
national --Transaction costs
resource --Transaction costs
resourceavailability
availability --Economic
--Learning --Economic&&political
politicalrisk
risk
--Learning --Speed
--Speedof
ofresponse
response
GOVERNMENT
GOVERNMENTDRIVERSDRIVERS
COMPETITIVE
COMPETITIVEDRIVERS
DRIVERS --Barriers
--Barriersto
totrade
trade&&inward
inwardinv.
inv.
--Potential
--Potentialfor
forstrategic
strategic --Regulations
--Regulations
competition
competition (e.g.
(e.g.cross-
cross-
subsidization)
subsidization)
Jet engines
Autos
Benefits
Consumer
of
electronics Telecom
global
integration equipment
Steel Investment
banking
Cement Online C2C auctions Restaurant
Retail chains
Beer banking
Dry Auto Funeral
cleaning repair services
Jet engines
Autos
Benefits
Consumer
of
electronics Telecom
global
integration equipment
Investment
banking
Retail
Cement banking
Auto Funeral
repair services
a Ka
o
integration
integration
Erickson
global
global
Philips P&G
General Electric Unilever
ITT