Contemporary

Strategic
Management (6 ed.)
Robert M. Grant

1
Quotes
Strategy is the great work of the organization. In situations of life or death, it is
the Tao of survival or extinction. Its study cannot be neglected
- Sun Tzu, The Art of War

The strategic aim of business is to earn a return on capital, and if in any

particular case the return in the long run is not satisfactory, then the deficiency
should be corrected or the activity abandoned for a more favorable one
- Alfred P Sloan, My Years with General Motors

Diversification is like sex; its attractions are obvious, often irresistible. Yet, the
experience is often disappointing.
- Robert Grant

2
Definitions
 The term strategy derives from the Greek word strategia, meaning
‘generalship’
 Strategy is not detailed plan or program of instructions; it is underlying theme
that gives coherence and direction to the actions and decisions of an
individual or an organization

3
Index
 The Concept of Strategy
 Goals, Values and Performance
 Industry Analysis: The
Fundamentals
 Further Topics in Industry and
Competitive Analysis
 Analyzing Resources and
Capabilities
 Organizational Structure and
Management Systems
 The Nature and Sources of
Competitive Advantage
 Cost Advantage
 Differentiation Advantage
 Industry Evolution and Strategic
Change
 Technology-based Industries and
Management of Innovation
 Competitive Advantage in Mature
Industries
 Vertical Integration and the Scope
of the Firm
 Global Strategies and
Multinational Corporation
 Diversification Strategy
 Managing Multi-business
Corporation
 Current Trends in Strategic
Management
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The Concept of Strategy (1/…)
 Characteristics of a strategy
 Simple, consistent and long term
goals
 Profound understanding of
competitive environment
 Objective appraisal of resources
 Effective implementation
 Internal environment
 Goals and values
 Resources and capabilities
 Structure and systems
 External environment
 Customer, competitors and
suppliers
 Strategic fit
 Link between firm and external
environment
 Problem with SWOT analysis (too
simplistic a classification)
 Commonality between strategy in
military and business
 Are important
 Involve a significant commitment
of resources
 Not easily revisable
5
 The Concept of Strategy (2/…)
 1950s- 60s (Financial Budgeting)
 DCF- based capital budgeting
 Financial control through operating
budget
 1960s- 70s (Corporate Planning)
 Medium term economic forecasting
 Formal corporate planning
 Diversification and quest for
synergy
 Creation of corporate planning
departments
 1970s- 80s (Strategy as
Positioning)
 Industry analysis
 Market segmentation
 The experience curve
 PIMS Analysis
 Planning through portfolios
 1970s= 80s (Quest for Competitive
Advantage)
 Analysis of resources and
capabilities
 Shareholder value maximization
 Restructuring and re-engineering
 Alliances
 1990s- 2000s (Strategy for the
New Economy)
 Strategic innovation
 New business models
 Disruptive technologies
 2000s (Strategy in the New
Millennium)
 CSR and business ethics
 Competing for standards
 Winner-take-all markets
 Global strategy
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The Concept of Strategy (3/…)
 Two questions of strategic choices
 Where to compete?
 How to compete?
 Levels
 Corporate strategy (domain selection)- industry attractiveness
 Business strategy (domain navigation)- competitive advantage
 Strategy: Design vs Emergent
 Intended, Realized & Emergent (Mintzberg, 1979)
 Planned emergence
 Roles of strategy:
 As decision support (constraining range of decisions; acting as heuristics; pooling
of knowledge; and use of analytical tools)
 Coordination device (communication device; consensus development)
 Target (strategic intent)

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Tools for Strategy Analysis (1/…)
 Primary sources of value
 Production
 Commerce

 Distribution of firm’s value among various stakeholder

 Employees (wages and salaries)
 Lenders (interest)
 Landlords (rent)
 Government (taxes)
 Owners (profits)

 Economic Profit (economic rent)

 Economic Value Add (EVA)= Net Operating Profit After Tax (NOPAT)- Cost of Capital

 Selecting strategy with highest Net Present Value (NPV)

 Strategy and Real Options
 Modeling uncertainty
 Real options valuation

 Forward looking performance measure (stock market value)

 Backward looking performance measure (accounting ratios)
 Values and Social Responsibility

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Industry Analysis (1/…)
 Determinants of firm’s profit
 Value of product to customers
 Intensity of competition
 Bargaining power of produced relative to their suppliers
 Industrial Organization (IO) Economics:
 How industry structure drives competitive behavior and determines industry
performance
 Industry structure drives competition, which, in turn, determines industry
profitability
 Porter’s Five Force Model
 Horizontal competition
 Rivalry among existing firms
 Threat of new entrants
 Threat of substitutes
 Vertical competition
 Bargaining power of suppliers
 Bargaining power of buyers
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Industry Analysis (2/…)
 Threat of entry (entry barriers)
 Capital requirement
 Economies of scale
 Absolute cost advantage
 Product differentiation
 Access to channels of distribution
 Government and legal barriers
 Retaliation
 Rivalry between established
competitors (determining factors)
 Concentration
 Diversity of competitors
 Product differentiation
 Excess capacity and exit barriers
 Cost conditions: Scale economies and
ratio of fixed to variable costs
 Bargaining power of buyers/
suppliers
 Buyer’s price sensitivity
 Relative bargaining power
 Industry boundary defined by
group of companies that compete
to serve the same market
 A market’s boundary is defined by
substitutability
 Demand side
 Supply side
 Key success factors of a firm
 What do customer want?
 What does the firm need to do to
survive competition?
 Critique of Porter’s Model
 Complementary relationships?
 Impact of technology on rate of
change
 Competition as dynamic,
personalized process
 Levels of competition
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Competitive Analysis (1/…)
 Industry factors account for a minority of inter-firm difference in profitability
(less in 20%)
 Complementary goods/ services (The 6th Force)
 Profits builds for suppliers that have strong market positions
 Reduces the value contributed by others
 Dynamic competition; Creative destruction and Hypercompetition
 Contribution of Game Theory
 Framing of strategic decisions
 Predict the outcome and identify optimal strategies

 Game Theory applications

 Cooperation?
 Deterrence? (imposing cost of a unfavorable move)
 Commitment (hard or soft)
 Changing structure of the game (agreements with competition; self-created competition)
 Signaling (deter or mislead competitors )

 Limitation of Game Theory: Good for historical analysis, not future; and good
for limited number of firms in concentrate industries
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Competitive Analysis (2/…)
 Competitive intelligence (from publically available info)
 Forecast competitors’ future strategies and decision
 Predict competitors’ likely creation to firm’s strategic initiatives
 Determine how competitors’ behavior can be influenced to make it more favorable

 Porter’s Model of Predicting competitors’ behavior

 Competitors'’ current strategy
 Competitors’ objectives
 Competitors’ assumptions about the industry
 Competitors’ resources and capabilities

 Segmentation analysis (stages)

 Identify key segment variables (partition the markets most distinctly)
 Construct a segment matrix
 Analyze segment attractiveness (apply Five Forces Model)
 Identify segment’s key success factors
 Select segment groups (specialist vs generalist)

 Strategic groups (similar broad strategies, but may not compete)

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Analyzing Resources & Capabilities (1/…)
 Focus of strategy shifted from external environment to internal environment
 Internal resources and capabilities are more secure source of advantage
 Competitive advantage, rather than industry attractiveness is primary source of superior
profitability

 Resource based view

 Firm specific capabilities are more stable source of profitability
 Going being serving market needs or leveraging competencies to explore new markets?
 Exploiting differences

 Profit types
 Superior marketing power (Monopoly rents)
 Superior resources (Ricardian rents)

 Resource vs Capabilities
 Resources: Productive assets owned by the firm
 Capabilities: What the firm can do

 Resources need to work together to create organizational capability

 Intangible vs Tangible Resources
 Human Resources
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Analyzing Resources & Capabilities (2/…)
 Organizational capabilities
 Distinctive competencies: What organization does particularly well relative to the
competitors
 Core competencies: Capabilities fundamental to firm’s strategy and performance
 Classification approaches:
 Functional analysis
 Value chain analysis (Porter’s Value Chain- Primary & Support activities)
 Architecture of capabilities
 Capabilities are routine
 Routinization is essential step in translating direction and operating practices into capabilities
 Learning by doing, hence difficult to copy
 Trade-off between efficiency and flexibility
 Difficult to respond the novel situations
 Hierarchy of capabilities
 Cross- functional capabilities
 Broad functional capabilities
 Activity based capabilities
 Specialized capabilities
 Single- task capabilities

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Analyzing Resources & Capabilities (2/…)
Appraising resources and capabilities (sources of profit)
 Establishing competitive advantage
 Scarcity
 Relevance (to key success factors)

 Sustaining competitive advantage

 Durability
 Transferability (extent of mobility between companies)
 Replicability (asset mass efficiencies & time compression diseconomies)

 Appropriating the return on competitive advantage

 Owners or employees
 Relative bargaining power
 Advent of ‘team-based capabilities’

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Analyzing Resources & Capabilities (3/…)
 Ways of leveraging resources
 Converging resources to a few, clearly defined goals. Focus and target.
 Accumulating resources through mining experience or borrowing from other firms
 Complementing resources through blending and balancing
 Conserving resources through recycling and co-opting
 Replicating capabilities
 Replicating them internally
 Systematization of knowledge that underlies capabilities
 Creating Standard Operating Procedures (SOPs)

 Developing new capabilities

 Capabilities as a result of early experiences
 Path dependence
 Organizational capabilities: Rigid or Dynamic?
 Core capabilities become core rigidities with changing environment
 Dynamic capabilities: Firm’s ability to integrate, build, and reconfigure internal and
external competencies to address rapidly changing environments
 Routines

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Analyzing Resources & Capabilities (4/…)
 Approaches to capability development
 Acquiring capabilities: Mergers & Acquisitions
 Integrating issues
 Cultural and personality clashes
 Accessing capabilities; Strategic alliances
 Sharing of resources in pursuit of common goals
 Creating capabilities
 Acquiring necessary resources
 Integrating these resources
 Housed within dedicated organizational units
 Search, experimentation and problem solving
 Creation of organizational routines
 Management of motivation and incentives
 Role of ‘Knowledge Management’
 Incubating capabilities into separate organizational unit

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Analyzing Resources & Capabilities (5/…)

Framework for analyzing resources and capabilities

 Identify the team’s resources and capabilities
 Explore the linkages between resources and capabilities
 Appraise the firm’s resources and capabilities on
 Strategic importance
 Relative strength
 Develop strategic implications
 In relations to strengths
 How can these be exploited more effectively and fully
 In relation to weaknesses
 Identify opportunities to outsource activates that can be better performed by other organizations
 How can weakness be corrected through acquiring and developing resources and capabilities

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Org. Structure & Management System (1/…)
 Ways of organizing production in capitalistic economy
 Markets (by price mechanism)
 Firms (by managerial direction)
 If Administrative Cost is lesser than Transaction Cost, transaction will be
organized within the firm than across markets
 Emergence of modern corporation (critical transformations)
 Line- and –staff structures  Complex functional structures (19th century) and Holding
Companies
 Multi-divisional corporation (1920s): DuPont (increasing size and widening product
range), General Motors (weak financial control and confused product line) 
Centralization Coordination and Decentralized Operation
 Matrix organization
 Shared service organization

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Org. Structure & Management System (2/…)
 Specialization vs. Coordination and Cooperation
 Stable environment eases division of labor (specialization)
 Coordination mechanism
 Price mechanism (transfer price between divisions; arms-length coordinator)
 Rules and directives ()
 Mutual adjustments
 Routines (regular and predictable sequence of coordinated actions)

 The cooperation Problem

 Incentives and control
 Agency problems (owners and managers)
 Managerial supervision (positive and negative incentives)
 Financial incentives (pay-for-performance)
 Shared values (clan control)

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Org. Structure & Management System (3/…)

Hierarchy in organizational design

 Essence of hierarchy is creating specialized units coordinated and controlled
by superior units
 Hierarchy as coordination: Modularity (exists in all complex systems)
 Economizing on coordination (communication)
 Adaptability (loosely-coupled systems)
 Hierarchy as a control; Bureaucracy (Max Weber)
 Specialization (systematic division of labor)
 Hierarchical structure (one supervisor, one subordinate)
 Coordination and control (rules and SOPs)
 Standardized employee rules and norms
 Separation of management and ownership
 Separation on job and people
 Rational-legal authority
 Formalization (written rules)

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Org. Structure & Management System (4/…)
Mechanistic and organic form (Burns and Stalker)

Feature Mechanistic Organic

Task definition Rigid and highly specialized Flexible and less narrowly
defined
Coordination and Rules and directives vertically Mutual adjustment, common
control imposed culture
Communication Vertical Vertical and horizontal
Knowledge Centralized Dispersed
Commitment and To immediate supervisor To organization and its goals
loyalty
Environmental Stable with low technological Unstable with significant
context uncertainty technological uncertainty and
ambiguity

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Org. Structure & Management System (5/…)
 Basis of defining organizational units
 Tasks
 Products
 Geography
 Process
 Based upon required and possible coordination intensity
 Levels of interdependence (Thompson)
 Pooled interdependence (least)
 Sequential interdependence
 Reciprocal interdependence (most intense)
 Factors impacting efficiency of organizational arrangements
 Economies of scale
 Economies of utilization
 Learning
 Standardization of control systems

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Org. Structure & Management System (6/…)
Alternative structural forms
 Functional structure
 Exploring economies of scale, promoting learning and capability building, and
deploying standardized control systems
 Problems of coordination and cooperation
 Problem arises when firms grow in product range
 Multi-divisional structure
 Response to diversification
 Loosely coupled modular organization
 Business level strategy and operating decisions made locally and planning,
budgeting and common services are central
 Three levels: corporate center; the division; and individual business units
 Matrix structure
 Often complex, slow and conflict pro structure
 Companies move away from matrix structure
 Alternative forms: Adhocracies; Team-based and project-based
organizations; and Networks. Characterized by focus on coordination rather
than control; by mutual adjustment; and individual playing multiple roles. 24
Org. Structure & Management System (7/…)
Management system for coordination and control
 Information system
 Collect, organize and communicate information
 Information feedback and information networking
 Strategic planning system
 For achieving coordination within the company
 Ensures consistency and commits managers
 Three to Five years; combining top-down initiatives and bottom-up business plans
 Assess the goals  set assumptions and forecasts  qualitative statement 
specific action steps  set of financial predictions
 Financial planning and control systems
 Capital expenditure budget
 Operating budget
 Human resources management system
 Implementation of employee contracts
 Corporate culture as control mechanism

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Nature and Source of Competitive
Advantage (1/…)
Emergence of competitive advantage
 External sources of change
 Changing customer demand
 Changing price
 Technology change
 Magnitude of change and Resource heterogeneity leading to different impact
 Competitive advantage from responsiveness to change
 Information + Flexibility
 Time based competition

 Competitive advantage from innovation

 Competitive process as a gale of creative destruction
 Strategic innovation (not products and services)

 Sustaining competitive advantage

 Imitation is more direct form of competition
 Competitive advantage depends upon ‘isolating mechanisms’
 Competitive imitation (Identification  Incentive  Diagnose  Resource acquisition)

26
Nature and Source of Competitive
Advantage (2/…)

Emergence of competitive advantage

 Diagnosing competitive advantage
 Causal ambiguity (arising from multiple attributes of competition)
 Uncertain imitability (for an imitator)
 Acquiring resources and capabilities
 Build vs buy (depends upon transferability of resources; transaction cost)
 Based upon organizational routines, accumulated learning and coordination
 First mover’s advantage

Competitive advantage in different market settings

 Trade markets
 Imperfect availability of information (information asymmetry)
 Transaction costs (economizing on research and market analysis)
 Systematic behavioral trends (e.g. January effect; week-end effect, etc)
 Overshooting (bandwagon effect)

 Production markets
 Difference in resource endowments

27
 Nature and Source of Competitive
Advantage (3/…)
 Industry conditions conducive to competitive advantage
 Information complexity
 Opportunities for deterrence and preemption
 Difficulties of resource acquisition
 Types of competitive advantage
Generic Key strategy elements Resources and organizational requirements
strategy
Cost Scale-efficient plants Access to capital
leadership Design for manufacture Process engineering skills
Control of overheads and R&D Frequent reports
Process innovation Tight cost control
Outsourcing (especially overseas) Specialization of jobs and functions
Avoidance of marginal customer accounts Incentives linked to quantitative targets
Differentiation Emphasis on branding advertising, Marketing abilities
design, service, quality, and new product Product engineering skills
development Cross-functional coordination
Creativity
Research capability
Incentives linked to qualitative performance
targets

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Cost Advantage (1/…)

Cost Leadership: Must find and exploit all sources of cost advantage
and sell a standard, no-frills product
 Historical focus of strategy management was on cost advantage
 Experience Curve (relation between cost and accumulated experience)
 The unit cost of value added to a standard product declines by constant percentage
(typically 20 and 30%) each time cumulative output doubles
 Firm’s primary objective to be expand market share
 Pricing based upon anticipated cost (not current cost)

 Sources of cost advantage

 Economies of scale (technical input-output relation; indivisibilities; specialization)
 Economies of learning (increased individual skills; improved org. routines)
 Production techniques (process innovation; BPR)
 Product design (standardization of design and components; design for mfg)
 Input costs (location advantage; ownership of low-cost inputs; non-union labors;
bargaining power)
 Capacity utilization (ratio of fixed to variable cost; fast and flexible capacity
adjustments)
 Residual efficiency (organizational slack; motivation and organizational culture;
managerial effectiveness) 29
Cost Advantage (2/…)

Stages of Value chain analysis

 Disaggregate firm into separate activities
 Establish the relative importance of different activities in the total cost of the
product
 Compare cost by activity
 Identify cost drivers
 Identify linkages
 Identify opportunities for reducing costs

Cost advantage is a prerequisite for success, though may not guarantee long term
profitability.

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Differentiation Advantage (1/…)

Differentiation: Providing something unique that is valuable to buyers

beyond a low price
 Depends upon the industry type
 Not just about ‘what’ you offer, but also ‘how’ you offer it
 Supply side: Understanding of key resources and capabilities
 Demand side: Customer insight

 Differentiation variables
 Tangible and intangible dimensions (differentiation opportunities)

 Differentiation (how) vs. segmentation (where)

 Differentiation is firm imperative while segmentation is market characteristic
 Differentiation decisions are closely linked to segmentation

 Low cost advantage is less secure than differentiation

 Cost advantage are vulnerable to new technologies and strategic innovation

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Differentiation Advantage (2/…)

Analyzing differentiation: The demand side

 Product attributes and positioning
 Customer perception mapping
 Multi-dimensional scaling
 Conjoint analysis (strength of preference for different attributes)
 Hedonic price analysis (combination of attributes)
 Value curve analysis (competitive benchmarking of values offered)

 Role of social and psychological factors

 Relations of customers’ lifestyle and aspiration with product
 Observation, more than listening

 Formulating differentiation strategy

 Select product positioning in relation to product attributes
 Select target customer groups
 Ensure customer/ product compatibility
 Evaluate costs and benefits of differentiation

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Differentiation Advantage (3/…)

Analyzing differentiation: The supply side

 Drivers of uniqueness (Porter)
 Product feature and product performance
 Complementary services
 Intensity of marketing activities
 Technology embodied in design and manufacturing
 The quality of purchase inputs
 Procedures influencing the conduct of each of the activities
 The skills and experience of employees
 Location
 Degree of vertical integration

 With increasing competition, offerings become ‘un-bundled’.

 Product integrity
 Internal and external
 Value embedded in the images with which its products are associated

 Signaling and reputation

 Search goods vs experience goods
 Depends upon ease of performance assessment
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Differentiation Advantage (4/…)
 Brands
 Serves as guarantee
 Incentive to maintain quality and customer satisfaction
 Embodiment of identity and lifestyle

 Cost of differentiation
 Limits potential of economies of scale
 Hampers exploitation of learning economies
 High investment in brand, quality, employees, and services
 Successful differentiation requires a combination of astute analysis and
creative imagination

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Differentiation Advantage (5/…)

Value chain analysis of differentiation

 Construct a value chain for the firm and the customer
 Identify the drivers of uniqueness in each activity
 Select the most promising differentiation variable for the firm
 Locate linkage between value chain of the firm and the buyer

35
Industry Evolution & Strategic Change (1/…)

Competition is a Dynamic Process

 Firm lifecycles are much more shorter than that of industries
 Lifecycle get compressed over time (1800s  1900s  2000s)

Key driving forces:

 Demand Growth (4 stages)
1. Novel technology/ lack of
experience
2. Standardization and price
fall
3. Replacement demand
4. Substitution products
 Production and Diffusion of
Knowledge (for customers)
Industry Lifecycle

Emergence of “Dominant Design”. May or may not embody a technical standard.

“Network Effects” determine technical standards.
Shift in focus during the lifecycle:
Radical Product Innovation  Incremental Product Innovation  Process Innovation
36
Industry Evolution & Strategic Change (2/…)

Organizational demographics and industry structure: Organizational

Ecology: Evolution of industries as Darwinian process
 Rapid increase of number of firms during initial early stage (de novo or de
alio)
 Onset of maturity leads to declining number of firms (shakeout phase)
 With concentration, new firms look for peripheral markets (resource
partitioning)
Location and international trade
 Demand of new products first emerge in advanced industrialized countries
 With maturity, products require fewer inputs of technology and sophisticated
skills Stage Key Success Factor
Nature and intensity of competition Introduction Product innovation, manufacturing
 Shift from non-price to price competition capabilities, vertical integration

 With growing intensity, margins shrink Growth Scaling-up, distribution,

Maturity Cost efficiency,

Decline Destructive price competition

37
Industry Evolution & Strategic Change (3/…)

Organizational adaption and change

 Strategy and structure must keep pace with the change in external
environment
 Evolutionary theory: Variation, Selection (competitive process) and Retention
 Importance of ‘Organizational Routine’ (creation and abandonment)
 Changes upset patterns of social interaction and requires coordinated action
among multiple individuals
 Barriers to change
 Organizational capabilities and routines (competency traps)
 Social and political structures
 Conformity (institutional isomorphism)
 Complementarities between strategy, structure and system (idiosyncratic combinations)
 Limited search and blinkered perceptions (bounded rationality)

 ‘Innovators’ that pioneer the creation of new industry are typically different
companies from the ‘consolidators’ that develop it
 Adapting to Technology
 Competency enhancing/ Competency destroying (component or architecture level
change) 38
Industry Evolution & Strategic Change (4/…)

Managing organizational change

 Dual strategies and separate organizational units
 Firm’s capability to simultaneously pursue multiple strategies

 Bottom-up process of decentralized organizational change

 Senior management establishing ‘stretched targets’
 Issuing specific company-wide directives
 Promotion of ‘strategic dissonance’ by adopting divergent strategic directions
 Change in organizational structure (centralized to de-centralized)

 Imposing top-down organizational change

 CEO manufactures a perception of impending crisis within the company

 Scenario planning (Rand Corp/ Shell)

 Value of scenario is not in the result, but in the process
 Address ‘what-if?’ question

 Shaping the future

 Revolution must be met by revolution

 Competitive advantage depends on the deployment of superior

organizational capabilities and these capabilities develop slowly!
39
Management of Innovation (1/…)

Competitive advantage in Technology- intensive industries

 Innovation Process
 Basic Knowledge  Invention  Innovation  Diffusion  (Imitation/ Adoption)

 Profitability of innovation
 Across companies, R&D intensity and frequency of new product introduction tend to be
negatively associated with profitability

 Regime of appropriability: Condition that influence the distribution of returns

to innovation. Appropriation to innovator depends upon
 Who owns property rights
 Tacitness and complexity of the technology
 Lead-time, and
 Complementary resources.

 Patent protection is of limited effectiveness as compared with lead-time,

secrecy, and complementary manufacturing and sales/ services resources
 Great majority of patented product and processes are duplicated within three
years.

40
Management of Innovation (2/…)

Strategies to exploit innovation

 Alternative strategies
 Licensing
 Outsourcing certain functions
 Strategic alliances
 Joint ventures
 Internal commercialization

 Choices depends upon

 Characteristics of innovation (advantages of licensing)
 Resources and capabilities of the firm (Open Innovation)

 Timing innovation: to lead or to follow? Depends upon

 Extent of protection for the innovation by IP or lead time advantage
 Importance of complementary resources
 Potential to establish a resource

 The risk of pioneering are greater for an established firm with a reputation
and brand to protect, while to exploit its complementary resources effectively
typically requires a more developed market
41
Management of Innovation (3/…)

Managing Risk
 Sources of uncertainty in emerging industries
 Technology uncertainty
 Market uncertainty

 Risk limiting strategies

 Cooperating the lead users
 Limiting risk exposure (strategic alliances and joint ventures)
 Flexibility (keeping options open and delaying commitment)

Competing for standards

 Types of standards (allows interoperability)
 Public (open) or Private (proprietary)
 Mandatory (regulations) or De facto (can take long time)

 Network Externalities: Need for standards (creates positive feedback)

 Products where usage linked to a network
 Availability of complementary products and services
 Economizing on switching cost

 Creates winner-takes-it-all markets and creates lock-in for the customers

42
Management of Innovation (4/…)

Creating conditions for innovation

 Conditions for creativity
 Personality traits
 Environmental traits (human interactions, experimentation, creative abrasion, whole-
brain teams)

 Balancing creativity and commercial direction

 Direction, discipline and integration
 Link between creative process and market needs
 Creation Nets- network of collaboration

 From invention to innovation (Innovation upsets established routines and threatens

status quo)
 Cross-functional product development (heavyweight product managers)
 Product champions (an idea finds a champion or dies)
 Buying innovation (acquiring small pioneers of innovation)
 Incubators (corporate funds/ incubators)

 Key to success innovation is not resource application decision, but creating

the structure, integration mechanism, and organizational climate conducive
to innovation.
43
Mature Industries (1/…)

Competitive advantage of mature industries

 Impact of maturity
 Reduce the number of opportunities for establishing competitive advantage
 Product standardization
 Increased buyer knowledge
 International competition
 Shift these opportunities from differentiation-based factors to cost-based factors
 Diffusion of process technology
 Difficult to attack established firms with strong distribution presence
 Over-investment in capacity
 Slow place of technology change

 Sources of low cost:

 Economies of scale (strong association b/w market share and ROI)
 Low-cost inputs (low cost of capital, late entry w/o legacy lock-ins)
 Low overheads

 Corporate restructuring
 Asset and cost surgery
 Selective product and market pruning
 Piecemeal productivity moves
44
Mature Industries (2/…)

Competitive advantage of mature industries

 Segment and customer selection
 Creating niche in unattractive/ stagnant markets
 Disaggregation of markets- down to individual customer level (through IT)
 Target more attractive customers

 Quest of differentiation
 Trend towards commoditization narrows the scope for differentiation and reduces
customer willingness to pay a premium for differentiation
 Product standardization and increasing differentiation in complementary services
 Brand promotion (e.g. cola and cigarettes)

 Innovation
 Strategic innovation (when product and process innovations fade out)
 Redefining markets and market segments
 Embracing new customer groups
 Adding products and services that perform new but related functions

45
Mature Industries (3/…)

Strategy implementation
 Efficiency through bureaucracy (traditionally popular)
 Machine bureaucracy (centralize, well-defined roles, vertical communication)
 Highly routinized operations and application of highly detailed rules and procedures

 Beyond bureaucracy
 Increased role of business level managers in decision making (autonomy)
 Shrinking corporate staff
 Less emphasis on economies of large scale production
 Increased emphasis on teamwork
 Profit incentives to motivate employees

46
Declining Industries (1/…)

Strategies for declining industries

 Causes of movement from maturity to decline:
 Technological substitution
 Change in customer preference
 Demographic shifts
 Foreign competition
 Adjusting capacity to declining demand depends upon
 Predictability of decline
 Barriers to exit (durable and specialized assets; cost incurred in plant closure; and
managerial commitment)
 Strategies of surviving firms (roll-ups through acquisition)
 In segmented markets, general pattern of decline can obscure the existence of
pockets of demand that are not only competitively resilient, but also price inelastic.
 Strategies for declining industries
 Divest or harvest (in industry is unprofitable), otherwise
 Gaining leadership (showing commitment, acquisition, raising stakes)
 Identify niche (inelastic demand)

47
Vertical Integration & Firm’s Scope (1/…)

Transaction cost and scope of the firm

 Components of capitalistic economy
 Market mechanism (decisions guided by market prices) – invisible hand
 Administrative mechanism (decisions made by firm)- visible hand

 Internalization of activities if Transaction Cost is higher than Administrative

cost. Administrative costs fell because of:
 Technology
 Management techniques

 From an ear of integration, last 20 years have seen firms refocusing on core
strengths (flexibility and specialization)
 Types of vertical integration: Backward/ Forward; and Full/ Partial
 Concerns driving vertical integration
 Opportunism and strategic misinterpretation (due to bargaining power)
 Hold-up

Factors determining vertical integration decision: Allocation of risk and Incentive

structure

48
Vertical Integration & Firm’s Scope (2/…)

Admin cost of internalization depends upon

 Differences in optimal scale between different stages of production
 Developing distinctive capabilities (and partner for rest)
 Managing strategically different businesses (vertical de-integration)
 Incentive problem (not market driven as buyer- seller incentives)
 Competitive effects of vertical integration (monopoly effect discouraging customers
and suppliers to do business)
 Flexibility (vertical integration for system-wide flexibility)
 Compounding risk (domino effect)

Designing Vertical relationships

 Long-terms contracts (inflexible)
 Vendor partnership (relational contracts, w/o written contracts)
 Franchising (flexibility and high power incentives)
 Spot sales/ purchase; Agency agreements; Informal supplier/ customer relationship;
Joint Ventures, (in increasing level of commitment)

49
Multi-national Corporation (1/…)

Patterns of internationalization
Success factors of Joint
 Trade or Direct Investment Ventures and Alliances
 Industry types:  Strategic intent of partners
 Sheltered industry (served exclusively by indigenous firms) (Competition for
 Trading industries (trade, i.e. exports and imports) competence)
 Multi-domestic industries (direct investment)  Appropriability of

 Global industries (both trade and direct investment) contribution (need for
gatekeepers)
 Impact on competition  Receptivity of company
 Intense competition and lower industry profitability (clarity of synergies)
 Lower entry barriers
 Increased rivalry amongst existing firms
 Lowering seller concentration
 Increasing diversity of competitors How do national cultures
 Increasing access capacity differ? (Hofstede, 1984)
 Increasing bargaining power of buyers  Power distance
 Global sourcing  Uncertainty avoidance
 Internet-based markets
 Individualism

 Masculinity/ femininity
50
Multi-national Corporation (2/…)

Analyzing competitive advantage

 Theory of Comparative Advantage
 Relative efficiency of nations in producing different
products

 Porter’s National Diamond

 Factor condition (home-grown resources, highly
specialized resources, constraints)
 Related and supporting industries (industry clusters)
 Demand conditions (domestic tastes)
 Strategy, structure and rivalry (intense domestic
competition)

 Strategy and national conditions

 Sync b/w firms’ organizational capabilities and the Benefits from fragmenting the
national culture and social structure value chain must be traded off
against the added cost of
 Determinants of geographical locations coordinating globally dispersed
 National resources availability (cost arbitrage)
activities. Transportation costs are
 Firm-specific competitive advantages (location) one consideration .
 Tradability (mobility)

51
Multi-national Corporation (3/…)

Options of overseas market entry

 Transactions
 Exporting (spot sales; long-terms contracts; foreign agent/ distributors)
 Licensing (licensing patents and other IPs, franchising)

 Direct investment
 Joint venture (marketing and distribution only; fully integrated)
 Wholly owned subsidiary (marketing and distribution only; fully integrated)

 Issues relevant in decision of overseas options

 Is the firm’s competitive advantage based on firm-specific or country- specific resources.
 Is the product tradable and what are the barriers to trade
 Does the firm possess the full range of resources and capabilities for establishing a
competitive advantage in the overseas market
 Can the firm directly appropriate the returns to its resources (licensing/ legal protection)
 What transaction costs are involved (negotiating, monitoring and enforcing terms)
 Brand and technology are important
 Exporting is subjected to transactions cost
 Customer preferences are reasonably similar across countries

52
Multi-national Corporation (4/…)

Multinational strategies
 Assumptions of global strategy
 Globalization of customer preference (technology homogenization)
 Sales economics (development, manufacturing and marketing)

 Benefits of global strategy

 Cost benefits: scales and replication (esp. product development)
 Exploiting national resources efficiencies (quest for knowledge, beyond raw material)
 Serving global customers (esp. in services)
 Learning benefits (deepening and widening of capabilities)
 Competing strategically (cross-subsidization, predatory pricing, tidal power)

 Need for national differentiation

 Country specific unique customer requirements
 Laws and government regulations
 Distribution channels
 Presence of lead countries (level of innovation adoption among counties)
 National cultures

 Trade-off between global integration and national adaptation

53
Multi-national Corporation (5/…)

Strategy and organization within multinational corporations

 Evolution
 Early 20th century: Era of European multinationals (Multinational federation, autonomous
national subsidiary; e.g. Unilever, Shell, ICI and Philips)
 Post WWII: Era of American multinational (dominant position of US parents; e.g. GM, Ford,
Coca Cola, P&G)
 The 1970s and 1980s: The Japanese challenge (globally standard products; e.g. Honda,
Toyota, NEC)

 Reconfiguring the MNCs: The Transnational Corporation

 Changing organizational structure (creation of worldwide product divisions)
 New approaches to reconciling localization and global integration (integrated network of
distributed and interdependent resources and capabilities)
 Organizing and new product development (local innovations and global integration)

54
Diversification Strategy (1/…)

Trends in diversification over time

 Ear of diversification: 1950- 1980
 Expansion of companies across different product markets
 Rise of conglomerates in 1970s (multiple, unrelated acquisitions)

 Refocusing: 1980- 2006

 Divestment of unprofitable non-core business
 Leverage buyouts

 Trend towards specialization

 Emphasis on shareholders value (shift from growth to profitability; threat of leverage
buyouts; conglomerate discount)
 Turbulence and transaction cost (agility of specialized companies; efficient external
factory markets)
 Trends in management thinking (core competencies)

 Motives for diversification

 Growth (going beyond industry’s growth limits)
 Risk reduction (imperfectly correlated cash flows of businesses; CAPM)
 Profitability (Essential Tests: attractiveness test; cost-of-entry test; better-off test)

55
Diversification Strategy (2/…)

Competitive advantage from diversification

 Economies of scope in common resources across multiple products
 Tangible resources (avoiding duplication; shared services)
 Intangible resources (brand extension)
 Organizational capabilities (general management capabilities)

 Economies from internalizing transactions

 Relative efficiencies of transaction cost or administrative cost

 Diversified firms as internal markets

 Internal capital markets (diversification and information access)
 Internal labor markets (esp. managers and technical specialists; rewarding exposure)

Diversification and Performance (research evidence)

 Beyond a point, high level of diversification results in poor performance
 Related diversification is more profitable than unrelated diversification
 Ambiguity in definition of (perceived) relatedness (similarity between industries in
technologies and markets; possibility of operational or strategic synergies)
 Role of ‘dominant logic’ in defining synergies

56
Multi-business Corporation (1/…)

Structure of multi-business company

 The theory of M-form (efficiency advantages)
 Adaptation to bounded rationality (M-form permits dispersed decision making)
 Allocation of decision making (strategic vs operational)
 Minimizing coordination cost (local decision making)
 Avoiding goal conflict

 Multi-divisional firms solve two problems large firms have

 Allocation of resources (operating internal capital markets)
 Resolution of agency problem (corporate focused shareholder goals; divisions focus on
profit maximization)

 Though divisionalized corporations reconcile the benefits of decentralization

with those of coordination, chief executives operating their companies as
personal fiefdoms are found among diversified, divisionalized corporations

57
Multi-business Corporation (2/…)

Structure of multi-business company

 Problems of divisionalized firms
 Constraints on decentralization (partial freedom for the divisions)
 Standardization of divisional management (strangles addressing unique needs)

 Role of corporate management (corporate parenting)

 Managing corporate portfolio (acquisition, divestment and resource allocation)
 Contribution of GE (portfolio planning model; strategic business unit; and PIMS database)
 Exercising guidance and control over individual businesses
 Managing linkages among businesses

McKinsey Restructuring Pentagon 58

Multi-business Corporation (3/…)

Managing individual business

 Ways of control a division
 Control decisions (input control)
 Control performance targets (output control)

 Strategic planning system (trade off between business initiatives and corporate
control)
 Strategic planning systems (rational) don’t make strategy (rather it’s continuous decision-
oriented planning)
 Weak strategy execution (advice adoption of: milestones, balanced scorecards, strategy
maps)

 Performance control and budgetary process

 Strategy planning (long term) + financial planning (short term)
 Performance targets: financial, strategic and operational
 Balancing strategy planning and financial control

 Adoption of PIMS (Profit Impact of Market Strategies)

 Setting performance targets for business units
 Formulating business unit strategy
 Allocating investment funds between businesses
59
Multi-business Corporation (4/…)

Managing internal linkages

 Common corporate services
 Corporate management unit
 Shared services organization

 Business linkages and Porter’s corporate strategy types (corporate strategy

types, in increasing order of central involvement)
 Portfolio management (holding company, limited interference)
 Restructuring (acquire companies to restructure)
 Transferring skills (personal exchange and best practice transfer)
 Sharing activities (economies of scope)

 Corporate role in managing linkages

 Cross-divisional task forces (transfer resources and capabilities)
 Movement from formal to informal control
 Simultaneous pursuit of differentiation and integration

60
Trends in Strategic Management (1/…)
 Trends in external environment of business
 The Third Industrial Revolution (knowledge revolution; casino of technology)
 Societal pressures (CSR; sustainable business)
 Decline of public corporation

 New direction in strategy thinking

 Complexity Theory (unpredictability and self- organization)
 Real Options
 Capability based structure of organization
 Team based
 Project based
 Process based
 Organizing for adaptability
 Identity
 Modularity
 Networks
 Emotional Intelligence in leaders

61