Business Strategy

Mohd. Wassem
mohdwassem@gmail.com
Objective
 To learn what strategic management is?
 To understand why strategic management take place
 To understand how it take place in modern business
 To learn strategic decision making process

To develop an in-depth knowledge about the principles, processes, application,

strategies and dynamics of strategic management in an organization with
regards to the challenges in the industry so as to impart an appropriate decision
making skills
Strategy

Change

Time
Strategy

Time

Where we are? Where we want to be?

Global Economy
 A global economy is one which goods, services, people, skills
and ideas move freely across geographic borders.
 Europe is now world’s largest market.
 GDP 35% more than US.
 China extremely competitive market. Source of low cost goods
 GE headquartered in US, will have 60% revenue from
developing countries 2015.
The march of Globalization
 Globalization is the increasing economic interdependence
among countries and their organization as reflected in the flow
of goods and services, financial capital knowledge across
country border.
 Wal-Mart- Boundary-less retailing, global pricing, sourcing
and logistics
 Globalization- Design, production, distribution and servicing
of goods and services.
Strategy

 A strategy is an integrated and coordinated set commitments and

actions designed to exploit core competencies and gain a competitive
advantage.
 Integrated
 Two or more component merged together into a single system
 Core Competencies
 Specific factor that a business sees as being central to the way it works.
 Competitive advantage
 A strategy competitors are unable to duplicate or find to costly to try to
imitate
Strategy
 “A unified, comprehensive, and integrated plan designed
to ensure that the basic objectives of the enterprise are
achieved.” (Glueck, 1980)
 “The pattern or plan that integrates an organization’s
major goals, policies, and action sequences into a cohesive
whole.” (Quinn, 1980)
 “A pattern of resource allocation that enables firms to
maintain or improve their performance.
Role of technology
 Increasing rate of change and diffusion
 Perpetual Innovation
 Continuous and carry high priority
 Shorter life cycle
 Rapid diffusion of innovation
 Replicated within short period
 Speed to market may become a source of competitive advantage
 The information age
 Companies are wired
 Customers
 Employees
 Vendors
Role of Technology
 Increasing Knowledge Intensity
 Converting accumulated knowledge of employees into corporate
asset
 Shareholder value is increasingly influenced by the firm’s intangible
assets such as knowledge
 From assessing information to exploiting information
 Capturing intelligence
 Transforming intelligence into usable knowledge
 Embedding it as organizational learning
 Diffusing it rapidly throughout the organization
Compaq failing against technology
 1996 takeover of tandem computers
 1998 took over digital
 1999 CEO, Pfeiffer Sacked, Why?
 By 1995 Compaq become leading seller of PC
 Purchase of DEC also made it leading computer service firm
competing with IBM.
 Compaq lost focus of selling PC, went behind Dell in Internet selling.
 Announced a bigger move in web sales
 Reseller become anxious
 Announced number of reseller to de downsized to 4 from 20.
 1998, in charge of service business resigned.
 Creating further uncertainty about their future
 2002 taken over by HP
Competitive Advantage
 Valuable
 Allow the firm to exploit opportunities or neutralize threats in its
external environment.
 Rare
Organized
 Possessed by few, if any, current and potential competitors
 Costly to imitate
 When other firms cannot obtain them or must obtain them at much
higher cost
 Organized to be exploited
 The firm is organized appropriately to obtain the full benefits of the
resources in order to realize a competitive advantage.
Strategic Management Process
 Full Set of commitment , decisions, and actions required for a firm to create value
and earn above average returns
 Value creation
 What is achieved when a firm successfully formulates and implements a strategy that others
companies are unable to duplicate or find too costly to imitate
 Average return
 Returns that are equal to those an investor expects to earn from other investments with
similar amount of risk.
 Opportunity cost
 Above average return
 Return that are in excess of what an investor expects to earn from other investment with a
similar amount of risk
Strategic Environment
 Competitive landscape
 Hyper competitive environment
 Dynamics of strategic maneuvering among global and innovative combatants
 Price-Quality positioning, new know-how, first mover.
 Protect or invade established products or geographic markets
 Emergence of global economy
 Goods, services, people, skills and ideas move freely across geographic borders.
 Spread of economic innovations around the world
 Political and cultural adjustment are required
 Rapid Economical Change
 Increasing rate of technological change and diffusion
 The information age
 Increasing knowledge intensity
External Environment
 The general environment
The general environment is composed of dimensions in the broader society that influences
industry and firms within it.
 Global
 Political/Legal
 Socio-Cultural environment
 Economic
 Technological
 Global
 The Industry Environment
 The set of factors that directly influences a firm and its competitive responses.
 Threat of new entrant
 Power of buyers
 Power of suppliers
 Intensity of rivalry
 Product substitute
 Competitors environment
 Firm’s understanding of its current competitors
Assumption of I/O Model

 The External environment possess pressures and constraints that

determines the strategies that would result in above-average return
 Most competing firms control similar strategically relevant resources
and pursue similar strategies in light of those resources
 Resources used to implement strategies are highly mobile
 Decision maker are rational, acts in the best interest of the firm,
Profit maximizing behavior
Industrial Organization Model
 The external environment
 Economies of scale
 Barriers of scale
 Diversification
 Product differentiation
 Concentration of firms in the industry
Superior returns; Above average
 An attractive industry returns
 High potential for above average returns

 Strategy Formulation
 Identify the strategy to earn above average return

 Asset and skills

 Develop or acquire the asset and skills require to implement the strategy

 Strategy Implementation
 Use firm’s strength to implement strategy

 225
Industrial Organization Model
 Above average return will accrue to firm
 That successfully implement strategic actions
 Enabling the firm to leverage its strength (skills and resources)
 To meet demand or pressure and constraint of the industry
 Research finding
 20% of the firm profitability can be explained by industry
characteristics
 36% of the firm profitability can be attributed to firm characteristics
and the action taken by it
Strategic intent and strategic Mission
 Strategic Intent
 Internally focused
 Concerned with leveraging firm’s internal resources, capabilities and core competencies.
 To accomplish what at first may appear attainable goals in competitive environment.
 Using core competencies in a unique way to achieve sustainable competitive advantage
 Resulting in above average return
 Strategic Mission
 Externally focused application of it strategic intent.
 States firm’s purpose an scope of operation
The strategic mission provides
 In product and market term
general descriptions of products to
be provided and markets to be
served using its unique sets of
resources and capabilities – its
core competencies
To determine mission, goals and
values of the firm and key
Enterprise Mission and
decision makers
Strategist Objectives

The General
Environment
To search the
environment and
diagnose the impact of The Industry & Intern. Analysis &
threats and Environment Diagnosis
opportunities
To examine and diagnose
the firm’s strengths and Internal factors
weaknesses

Generic strategy
alternatives
The strategic
To consider various Management Process
alternatives and assure
Choice
that the appropriate Strategy variations
strategy is chosen

Strategy Choice
To match plans, policies,
resources, structure, and
administrative style with Resource and Structure
strategy
Implementation
Policy, Plans and
admin.
To ensure strategy and
implementation will meet
objectives
Evaluation and Control
feedback Feed forward
External Environment Analysis
 Component of external analysis
 Scanning
 Firms use the scanning process to either detect early warning signals
regarding potential changes or to detect changes that are already
underway.
 Monitoring
 A process whereby analysts observe environmental changes (over time)
to see if, in fact, an important trend begins to emerge.
 Forecasting
 the process where analysts develop feasible projections of what might
happen – and how quickly – as a result of the changes and trends
detected through scanning and monitoring.
 Assessing
 The timing and significance of the effects of changes and trends in the
general environment on the strategic management of a firm.
 Industrial Organization Model
 Industrial Organization(I/O) Model of above average return

Strategy dictated by the external

Global environment
(Opportunities)
l

De
ga
/Le

mo
Industry
l

gra
ica
it

ph
environment
Pol

ic
External
environment
So c

E
Competitor
c o
io c

environment
om
ultu

ic
r

Development of internal skills to

al

Technological
exploit these opportunities
 Segments of general environment
 Population size
Global  Age structure
gal

De
 Geographic distribution
/Le

mo
Industry
l

gra
ica

 Ethnic make up
it

ph
environment
Pol

ic
 Income distribution
So c

Ec

Competitor
on
io c

environment
o
ultu

mic
ral

Technological
 Segments of general environment

 Economic Segment
Global
 Inflation rates and interest
gal

De
rates
/Le

mo
Industry
l

gra
ica

 Trade deficits and surpluses

it

ph
environment
Pol

ic
 Budget deficits and surpluses
 Personal savings rates
So c

Ec

Competitor  Business savings rates

on
io c

environment
o
ultu

Gross domestic product

m


ic
ral

Technological
 Segments of general environment
 Technological Segment

Global  The scope and speed of product

innovation
gal

De
/Le

mo
Industry
l

gra
ica

 The scope and applicability of

it

ph
environment
Pol

ic
process innovation
 Application of knowledge
So c

Ec

Competitor  Advances in communications

on
io c

environment
o
ultu

and information-management
ic
ral

Technological technology
 Segments of general environment
 Political/Legal Segment

Global  Anti-trust regulations and

enforcement
gal

De
/Le

mo
Industry
l

gra
Tax laws
ica


it

ph
environment
Pol

ic
 Industry deregulation
 labour training laws
So c

Ec

Competitor
Commitments to education
on


io c

environment
o
ultu

mic

Free trade versus protectionism

ral

Technological
 Segments of general environment

 Socio-cultural Segment
Global
 Workforce composition
gal

De
Changes in attitudes about the quality
/Le

mo
Industry
l

gra
ica

of work life
it

ph
environment
Pol

ic
 Environmental concerns
 Shifts in work and career preferences,
So c

Ec

Competitor including an increase in new business

on
io c

environment
o
ultu

formation by women
ic
ral

Technological
 Shifts in product and service
preferences
Dell’s win win model in china
 Dell is succeeding in China in spite of
 State firms ownership
 Government interference with economy
 Corrupt alloy of personal and business interactions
 Direct to consumer model
 Bypass dealership channel and sell made to order computers
 Largest seller of PCs in USA.
 Direct sales model
 Dell chose to focus on corporate buyers in China
 Dell’s success in China was aided by
 Its ability to win the loyalty of firms’ chief information officers
 Tailoring its level of technical support services to the specific need of
the firm
 Five forces model of competition

 A set of factors that directly influences a company and its

competitive actions and responses.
 Interaction among these factors determine an industry’s
profit potential and location of “profit pools”.
 Need to understand which competitive factors have power,
why they have power, and what you might be able to do
about it to improve your own position.
 Five forces model of competition

 Michael porter’s five force

model

 Threat of new entrants

 Threat of substitute products
 bargaining power of buyer
 Bargaining power of suppliers
 Rivalry among competing firms
 Five forces model of competition

 Threat of new entrants

 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of
scale
 Government policy
 Expected retaliation
 Five forces model of competition

 Threat of Substitute products

 The threat of substitute products increases
when:
 Buyers face few switching costs
 The substitute product’s price is
lower
 Substitute product’s quality and
performance are equal to or
greater than the existing product
 Differentiated industry products that are
valued by customers reduce this threat
 Five forces model of competition
 Bargaining power of buyer
 Buyer power increases when:

 Buyers are large and few in number

 A buyer’s purchases are a significant

portion of a firm’s annual revenues

 The product involved is

undifferentiated
 Buyers can switch to another product without incurring
high switching costs
 Buyers are price sensitive
 Buyers are well informed
 Buyers pose threat to integrate backward into the
sellers’ industry
 Five forces model of competition

 Bargaining power of supplier

 Supplier power increases when
 Suppliers are few and/or large
 Suitable substitutes are not available
 Individual buyers are not large
customers of suppliers and are
plentiful
 Suppliers’ goods are critical for
buyers’ marketplace success
 Suppliers’ products create high
switching costs
 Suppliers pose a threat to integrate
forward into buyers’ industry
 Five forces model of competition

 Rivalry among competing firm

 Industry rivalry increases when:
 There are numerous or equally
balanced or aggressive competitors
 Industry growth slows or declines
(overcapacity exists)
 There are high fixed costs or high
storage costs
 There is a lack of differentiation
opportunities or low switching costs
 Price cutting strategies are employed
 The strategic stakes are high
 High “exit barriers” exist
Vision or Intent
 Vision
 It is a top management’s prophecy of their dream, mental picture, and foresight about the future of the
organization. It is an image of where we want to go in the future.
 Articulates the ideal description of an organization
 Give shape to its future
 Reflects firm’s values and aspirations
 Intended to capture the heart and mind of each employee and its stakeholders
 Decision and actions of those involved in developing vision, must be consistent with that vision

 McDonald’s vision
 To be world’s best quick service restaurant

 Ford Motor Vision

 To make automobile accessible to every American(when established by Henry ford)
Mission
 Mission
 Strategic Mission is a statement of firm’s unique purpose and the scope of its operations in product and
market terms that distinguishes one organization from other similar enterprises and is a declaration of an
organization’s “reason for being”. It answers the pivotal question, “What is our business?”
 Components of a Mission Statement
 Customers – who?
 Products or Services – what?
 Markets – where?
 Technology – which?
 Concern for Survival, Growth and Prosperity – how much?
 Philosophy – what beliefs, values, aspirations, and philosophical priorities?
 Self-concept – what are our distinct competencies?
 Concern for Public Image – how we want to look like?
 Concern for Employees – how much?
 Two methods
 Comparative
Google's mission is to organize the
 Articulation
world's information and make it
universally accessible and useful
Corporate philosophy and Values
 Philosophy and values is a guide to action. Ethical question, how to realize mission.
 Philosophy
 Philosophy consist of the basic beliefs, aspirations, and philosophical priorities that the strategic
decision makers are committed to and that guides their management of the company.
 Values
 Beliefs concerning what is desirable or good. Result from choices between competing human
interests in pursuit of goals. Values of the top management reflect in the corporate values.
 Importance
 How the company intends to do business and reflects the company’s recognition of social and
ethical responsibility.
 Very basis for establishing the corporate culture.
 How the organization is going to satisfy the various stakeholders.
 Establish social reputation for the company.
 Establish long-term objectives and prioritizing them.

Infosys – Its founder emphasized on integrity,

independence, hard work and following ethical
practices while creating wealth.
Goals and Objectives
 Goal
 The purpose toward which an endeavor is directed.
 The result or achievement toward which effort is directed; aim

 Objective
 They prioritize various segments of a mission and fix definite targets in achieving them.

 Long-term Objectives
 five to ten years and represent the results expected from pursuing the particular strategies

 The Nature of the Long-term Objectives

 Quantitative, measurable, realistic, understandable, challenging hierarchical, obtainable, and congruent among organizational units.  
 Stated as growth in assets, sales, profitability, market share, degree and nature of diversification, vertical integration, earning per
share, and social responsibility. 
 Provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion,
and aid in both allocation of resources and the design of jobs. 
 Needed at the corporate, divisional and functional levels.
 Outcome of environment analysis
Specific Goal

 External Environment External Analysis Internal Analysis

• Customers
 Firm identify what it might choose
• Pricing Constraint • Current Performance
to do? • Competitors • Brand Power
 Examine Opportunities and threat • Distribution Issues • Cost Structure
• Technology • Product Portfolio
 Internal environment • Macro economy • R&D Pipeline
Regulation • Technical Mastery
 Identify what they can do?
• workstyle Trends • Employee Skills
 Examine unique resources, • Major uncertainties • Company Culture
capabilities, and • Suppliers

competencies(sustainable • Potential buyers

competitive advantage) Threat and opportunities Strengths and Weaknesses

Strategy
Formulation
The context of internal analysis

 Effective analysis of a firm’s internal environment (learning what the

firm can do ) requires:
 Fostering an organizational setting in which experimentation and learning are
expected and promoted
 Using a global mind-set
 Thinking of the firm as a bundle of heterogeneous resources and capabilities
that can be used to create an exclusive market position

 Global mind-set
 Ability to study an internal organization in ways that are not dependent on the
assumptions of a single country, culture or context.
Internal Analysis
 Can a brand be source of competitive advantage?
 1990 Coca Cola brand could be used as collateral to borrow close to $100
Billion.
 1999- image tainting quality problem, value has fallen but still remain well
above no.2, Microsoft
 Brands are intangible assets and as such are difficult to imitate by competitors.
Cash flow streams can be assigned to brands so that a net present value of the
brand may be calculated.
 Michael Jordan’s influence was so widespread that the NBA and television
networks that broadcast NBA games were concerned about retaining fan
interest after his retirement.
 Component of internal analysis
Strategic
competitiveness

Competitive
Advantage

Discovering core
competencies

Core Competencies

Capabilities
Four criteria of Value chain analysis
sustainable advantage
Resources
• Tangible
• Intangible

• Valuable
• Rare
Outsource
• Costly to imitate
• No substitutable
Resources
Discovering core Strategic
• Tangible Capabilities Core Competencies Competitive Advantage
competencies competitiveness
• Intangible

Resources
 Resources
 Source of a firm’s capabilities
 Broad in scope
 Cover a spectrum of individual, social and organizational phenomena
 Alone, do not yield a competitive advantage
 Firm’s assets, including people and the value of its brand name
 Represent inputs into a firm’s production process, such as:
 Capital equipment
 Skills of employees
 Brand names
 Financial resources
 Talented managers
 Tangible resources
 Financial resources
 Physical resources
 Technological resources
 Organizational resources
 Intangible resources
 Human resources
 innovation resources
 Reputation resources
Resources
Discovering core Strategic
• Tangible Capabilities Core Competencies Competitive Advantage
competencies competitiveness
• Intangible

Resources- Tangible
 Financial Resources
 The firm’s borrowing capacity

 The firm’s ability to generate internal funds

 Organizational Resources
 The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems

 Physical Resources
 Sophistication and location of a firm’s plant and equipment

 Access to raw materials

 Technological Resources
 Stock of technology, such as patents, trade-marks, copyrights, and trade secrets
Resources
Discovering core Strategic
• Tangible Capabilities Core Competencies Competitive Advantage
competencies competitiveness
• Intangible

Resources-
 Human Resources
Intangible
 Knowledge
 Trust
 Managerial capabilities
 Organizational routines

 Innovation Resources
 Ideas
 Scientific capabilities
 Capacity to innovate

 Reputational Resources
 Reputation with customers
 Brand name
 Perceptions of product quality, durability, and reliability
 Reputation with suppliers
 For efficient, effective, supportive, and mutually beneficial interactions and
relationships
Resources
Discovering core Strategic
• Tangible Capabilities Core Competencies Competitive Advantage
competencies competitiveness
• Intangible

Capabilities
Functional Area Capability Example
Distribution Effective use of logistic Wal- Mart, ITC
management technique

Human Resources Motivating, empowering, retaining Google, Microsoft, SAS

employees

Management Information System Effective and efficient control of Wal-Mart

inventories through point –of-
purchase data collection method

Manufacturing Miniaturization component and Sony

products

Research and Development Rapid transformation of Google

technology into new products and
processes
Resources
Discovering core Strategic
• Tangible Capabilities Core Competencies Competitive Advantage
competencies competitiveness
• Intangible

Core Competencies
 Resources and capabilities that serve as a source of a firm’s
competitive advantage:
 Distinguish a company competitively and reflect its personality
 Emerge over time through an organizational process of accumulating
and learning how to deploy different resources and capabilities

 Activities that a firm performs especially well compared to

competitors
 Activities through which the firm adds unique value to its
goods or services over a long period of time
Resources
Discovering core Strategic
• Tangible Capabilities Core Competencies Competitive Advantage
competencies competitiveness
• Intangible

Comparing Core Competencies and Resources

Primary Importance Gizmo A B
New product-time to market 5 2 3
Product Quality 4 4 5
Dealer Service 4 2 5
Customer satisfaction 5 2 4
Human Talent 4 2 4
Flexible Manufacturing 4 2 3
Secondary Importance
Project Management Skills 4 ? 3
Cost Control 4 3 5
IT systems 3 ? 4
Critical Assets
Brand Power 3 1 4
Supply Chain Power 5 1 4
Distribution network 4 2 4

Evaluating Competencies with trajectory

Flexible Manufacturing 4 2 3
Resources
Discovering core Strategic
• Tangible Capabilities Core Competencies Competitive Advantage
competencies competitiveness
• Intangible

Sustainable competitive advantage

 Valuable Capabilities
 Help a firm neutralize threats or exploit opportunities
 Rare Capabilities
 Are not possessed by many others
 Costly-to-Imitate Capabilities
 Historical: A unique and a valuable organizational culture or brand name
 Ambiguous cause: The causes and uses of a competence are unclear
 Social complexity: Interpersonal relationships, trust, and friendship among
managers, suppliers, and customers
 Nonsubstitutable Capabilities
 No strategic equivalent
Resources
Discovering core Strategic
• Tangible Capabilities Core Competencies Competitive Advantage
competencies competitiveness
• Intangible

Sustainable competitive advantage

Value chain analysis
Parts of firm’s operations that create value and those that do not
 A template that firms use to:
 Understand their cost position
 Identify multiple means that might be used to facilitate implementation of a chosen
business-level strategy
 Primary activities involved with:
 A product’s physical creation
 A product’s sale and distribution to buyers
 The product’s service after the sale
 Support activities
 Provide the support necessary for the primary activities to take place
 Value chain
 Shows how a product moves from raw-material stage to the final customer
Value chain analysis
 To be a source of competitive advantage, a resource or
capability must allow the firm:
 To perform an activity in a manner that is superior to the way
competitors perform it, or
 To perform a value-creating activity that competitors cannot
complete
Business-Level Strategy
An integrated and coordinated set of commitments and actions
the firm uses to gain a competitive advantage by exploiting
core competencies in specific product markets.
 Key issues in Business Level Strategy
 Who will be served?
 What needs will be satisfied?
 How will those needs be satisfied?
The Purpose of a Business-Level Strategy
 Business-Level Strategies
 Are intended to create differences between the firm’s position relative to those of its
rivals.
 To position itself, the firm must decide whether it intends to:
 Perform activities differently or
 Perform different activities as compared to its rivals.

Types of Potential Competitive Advantage

 Achieving lower overall costs than rivals
 Performing activities differently (reducing process costs)
 Possessing the capability to differentiate the firm’s product or service and command a
premium price
 Performing different (more highly valued) activities.
Types of Business-Level Strategies

Competitive Advantage

Cost Uniqueness

Broad
Target

Competitive
Scope
Narrow
Target
CostLeadership
 An integrated set of actions taken to produce goods or services with features that are
acceptable to customers at the lowest cost, relative to that of competitors with features
that are acceptable to customers.
 Relatively standardized products
 Features acceptable to many customers
 Lowest competitive price
 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
How to Obtain a Cost Advantage
 Determine and control Cost Drivers
 Reconfigure Value Chain if needed
 Alter production process
 Change in automation
 New distribution channel
 New advertising media
 Direct sales in place of indirect sales
 New raw material
 Forward integration
 Backward integration
 Change location relative to suppliers or buyers
Examples of Value-Creating Activities Associated with the
Cost Leadership Strategy
Differentiation Strategy
 Rivalry with Competitors
 Defends against competitors because brand loyalty to differentiated product offsets price
competition.
 Bargaining Power of Buyers
 Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to
price increases.
 Can mitigate suppliers’ power by:
 Absorbing price increases due to higher margins.
 Passing along higher supplier prices because buyers are loyal to differentiated brand.
 Can defend against new entrants because:
 New products must surpass proven products.
 New products must be at least equal to performance of proven products, but offered at lower
prices.
 Well positioned relative to substitutes because:
 Brand loyalty to a differentiated product tends to reduce customers’ testing of new products or
switching brands.
Examples of Value-Creating Activities Associated
with the Differentiation Strategy
Competitive Risks of Differentiation
 The price differential between the differentiator’s product and
the cost leader’s product becomes too large.
 Differentiation ceases to provide value for which customers are
willing to pay.
 Experience narrows customers’ perceptions of the value of
differentiated features.
 Counterfeit goods replicate differentiated features of the firm’s
products.
Focus Strategies
 An integrated set of actions taken to produce goods or services that serve the needs
of a particular competitive segment.
 Particular buyer group—youths or senior citizens
 Different segment of a product line—professional craftsmen versus do-it-
yourselfers
 Different geographic markets
 Types of focused strategies
 Focused cost leadership strategy
 Focused differentiation strategy

 To implement a focus strategy, firms must be able to:

 Complete various primary and support activities in a competitively superior
manner, in order to develop and sustain a competitive advantage and earn above-
average returns.
Factors That Drive Focused Strategies
 Large firms may overlook small niches.
 A firm may lack the resources needed to compete in the broader market.
 A firm is able to serve a narrow market segment more effectively than can its larger
industry-wide competitors.
 Focusing allows the firm to direct its resources to certain value chain activities to
build competitive advantage.
 Competitive Risks of Focus Strategies
 A focusing firm may be “outfocused” by its competitors.
 A large competitor may set its sights on a firm’s niche market.
 Customer preferences in niche market may change to more closely resemble
those of the broader market.
Integrated Cost Leadership/ Differentiation
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.
 Commitment to strategic flexibility is necessary for implementation of
integrated cost leadership/differentiation strategy.
 Flexible manufacturing systems (FMS)
 Information networks
 Total quality management (TQM) systems
Risks of the Integrated Cost
Leadership/ Differentiation Strategy
 Often involves compromises
 Becoming neither the lowest cost nor the most differentiated
firm.
 Becoming “stuck in the middle”
 Lacking the strong commitment and expertise that accompanies
firms following either a cost leadership or a differentiated
strategy.
 Portfolio Approach
 Always strategic choice and analysis
 Which businesses to grow and diversify
 Examine and choose which business to own and which one to forgo or
divest
 To enter businesses with greater growth potential
 Business with different cyclical considerations
 How to capture and exploit competitive advantage in each business
 To diversify inherent risk
 How to allocate resources among these businesses
Cost Leadership Strategy
 Competitors
 Rivalry with Existing Competitors
 Due to cost leader’s advantageous position:
 Rivals hesitate to compete on basis of price.
 Lack of price competition leads to greater profits.
 Bargaining Power of Buyers
 Can mitigate buyers’ power by:
 Driving prices far below competitors, causing them to exit, thus shifting power with
buyers back to the firm.
 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.
Cost Leadership Strategy
 The Threat of Potential Entrants
 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.
 Product Substitutes
 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.
 Competitive Risks
 Processes used to produce and distribute good or service may become obsolete due to competitors’
innovations.
 Focus on cost reductions may occur at expense of customers’ perceptions of differentiation
 Competitors, using their own core competencies, may successfully imitate the cost leader’s
strategy.
 An integrated set of actions taken to produce goods or services (at an acceptable
cost) that customers perceive as being different in ways that are important to them.
 Focus is on non standardized products
 Appropriate when customers value differentiated features more than they value
low cost.
 Control Cost Drivers if needed
 Reconfigure Value Chain to maximize
 Lower buyers’ costs
 Raise performance of product or service
 Create sustainability through:
 Customer perceptions of uniqueness
 Customer reluctance to switch to non-unique product or service
Strategic Management: Portfolio Approach

The BCG Growth-Share Matrix

 Help Managers to balance the flow of cash reserves among their various
businesses while identifying their basic strategic purpose within the overall
portfolio
 Market Growth rate
 Projected rate of sales growth for the market being served by a particular business
 Percentage increase in a market sales or unit volume
 Serve as an indicator of the relative attractiveness of the market
 Industry growth rate in constant dollar term
 Relative competitive position
 Provide basis for comparing the relative strength of businesses in the firm portfolio.
 2 or 3 large competitor
The BCG Growth-Share Matrix
 Star
 Businesses in rapidly growing market with large market
 Best long run opportunity- Growth and profitability
 Require substantial investment to maintain and expand their dominant position in growth market
 Investment requirement is often
in excess of the funds that they
Can generate initially
 Short term priority for corporate
resources
 Cash Cows
 High market share low
growth market
Strong position and minimal Cash Usage
Growth Rate

re-investment
 Generate cash in excess of
their need
 Selectively milked for deployment
elsewhere- Star or ??
 Provide cash needed to pay
 Corporate overheads
 Dividends
 Provide debt capacity
Cash Generation
Market Share
The BCG Growth-Share Matrix
 Dogs
 Low market share and low growth
 Mature market and intensive competition, low profit margin
 Short term cash flow- through cost cutting
 Divested or liquidated once this short term harvesting has been maximized
 ??
 High growth rate
 Considerable appeal
 Low market share
 Profit potential uncertain
Cash Guzzlers Cash Usage
Growth Rate

 Rapid growth need high cash need
 Small market share result in low cash
generation

 Concern
 Increase their market share
move into star
 If unlikely divest then reposition
 resources

Cash Generation
Market Share
 The Industry Attractiveness-Business Strength Matrix
Factor considered
 Industry attractiveness

 Nature of competitive rivalry

 Bargaining power of supplier/customers

 Thrust of substitute product/new entrant Industry Attractiveness

 Economic factors

 Financial Norms Invest Selective Grow or Let

Growth go
 Sociopolitical consideration High
 Business Strength

Business Strength
 Cost position Selective Grow or Let Harvest
Med Growth go
 Level of differentiation

 Response time

 Financial Strength Grow or Let Harvest Divest

Low go
 Human Assets

High Med Low

The life cycle-competitive strength Matrix

 Life Cycle- Competitive strength

Introduction Growth Maturity Decline
 Their portrayal of businesses as they
exist at one point in time rather than
how they evolve over time
ely
h siv
 Developing winners or potential losers High s s
Pu gre
Competitive Strength g

Competitive Strength

A
est

y
v

el
le n
Overall subjective rating based
In


iv
Se io
Moderate

ct
st ut
ve Ca
on a wide range of factors regarding
the likelihood of gaining and

ar e r
H ng
st
In
maintaining a competitive advantage Low

ve
a
D
Stage of market life cycle
The Competitive Nature of Strategy
 Competitor
 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 firm’s ability to gain and sustain competitive
advantages
 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.
 Multimarket Competition
 Firms competing against each other in several product or geographic markets.
 Competitive Dynamics
 The total set of actions and responses taken by all firms competing within a market.
 Competitive dynamic

 Success of a strategy is determined by:

◦ The firm’s 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.
 Has the strongest
influence on the firm’s
business-level strategy or
strategies.
 A Model of Competitive Rivalry

 Firms are mutually Competitive Analysis Driver of competitor behavior

interdependent • Market commonality • Awareness
 A firm’s competitive • Resource similarity • Ability
actions have noticeable • Motivation
effects on its competitors.
 A firm’s competitive
actions elicit competitive
responses from its Interfirm Rivalry
competitors. • Likelihood of Attack
 Competitors feel each Outcomes • First-mover incentives
other’s actions and • Market position • Organizational size
responses. • Financial performance • Quality
• Likelihood of Response
• Type of competitive action
• Reputation
• Market dependence
 Marketplace success is a function of both individual
strategies and the consequences of their use.
Competitors analysis
 Market commonality
 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.
 Firms competing against one another in several or many markets engage in
multimarket competition.
 A firm with greater multimarket contact is less likely to initiate an attack, but
more likely to more respond aggressively when attacked
 Resource Similarity
 How comparable the firm’s tangible and intangible resources are to a
competitor’s in terms of both types and amounts.
 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 rather than tangible.
Competitors analysis
 Drivers of Competitive Behavior
 Awareness
 the extent to which competitors recognize
the degree of their mutual interdependence
that results from:
 Market commonality
 Resource similarity
 Motivation concerns
 Firm’s incentive to take action
 Response to a competitor’s attack
 Perceived gains and losses
 Ability relates to
 Firm’s resources
 Flexibility these resources provide
 Without available resources the firm lacks
the ability to
 Attack a competitor
 Respond to the competitor’s actions
 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.
 Given the strong competition under
market commonality, it is likely that the
attacked firm will respond to its
competitor’s action
 Motivation concerns
 The greater the resource imbalance, 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.
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 competitor’s
competitive action.
 Strategic Action (or Response)
 A market-based move that involves a significant commitment of organizational
resources and is difficult to implement and reverse.
 Tactical Action (or Response)
 A market-based move that is taken to fine-tune a strategy:
 Usually involves fewer resources.
 Is relatively easy to implement and reverse.
Factors Affecting Likelihood of Attack
 First Mover
A firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its
market position.
 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 firm’s goods or services.
 Market share that can be difficult for competitors to take during future competitive rivalry.
 Second Mover
 Second mover responds to the first mover’s competitive action, typically through imitation:
 Studies customers’ reactions to product innovations.
 Tries to find any mistakes the first mover made, and avoid them.
 Can avoid both the mistakes and the huge spending of the first-movers.
 May develop more efficient processes and technologies
 Late Mover
 Late mover responds to a competitive action only after considerable time has elapsed.
 Any success achieved will be slow in coming and much less than that achieved by first and second movers.
 Late mover’s competitive action allows it to earn only average returns and delays its understanding of how to create
value for customers.
Factors Affecting Likelihood of Attack
Organizational Size-Small
 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 competitive advantages or develop new ones while engaged in
competitive rivalry.
 Having the flexibility needed to launch a greater variety of competitive actions.
Organizational Size-Large
 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

Quality
 Quality exists when the firm’s goods or services meet or exceed customers’ expectations
Factors Affecting Strategic Response
 Type of Competitive Action
 Strategic actions receive strategic responses
 Strategic actions elicit fewer total competitive responses.
 The time needed to implement and assess a strategic action delays competitor’s responses.
 Tactical responses are taken to counter the effects of tactical actions
 A competitor likely will respond quickly to a tactical actions

 Actors 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.
 Dependence on the Market
 Market dependence is the extent to which a firm’s 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.
 Competitive Dynamic
 Slow cycle market
 Competitive advantages are shielded from imitation for long
periods of time and imitation is costly.
 Competitive advantages are sustainable in slow-cycle markets.
 All firms concentrate on competitive actions and responses to
protect, maintain and extend proprietary competitive
advantage.
 Fast Cycle Market
 The firm’s competitive advantages aren’t shielded from
imitation.
 Imitation happens quickly and somewhat expensively
 Competitive advantages aren’t sustainable.
 Competitors use reverse engineering to quickly imitate or
improve on the firm’s products
 Non-proprietary technology is diffused rapidly
 Standard Cycle Market
 Moderate cost of imitation may shield competitive advantages.
 Competitive advantages are partially sustainable if their quality
is continuously upgraded.
 Firms
 Seek large market shares
 Gain customer loyalty through brand names
 Carefully control operations
Corporate level Strategy
 Business-level Strategy (Competitive)
 Each business unit in a diversified firm chooses a business-
level strategy as its means of competing in individual product
markets.
 Corporate-level Strategy (Companywide)
 Specifies actions taken by the firm to gain a competitive
advantage by selecting and managing a group of different
businesses competing in several industries and product markets.
Ansoff Matrix
 Market penetration
(existing markets, existing products): Market penetration
occurs when a company enters/penetrates a market with
current products. The best way to achieve this is by
gaining competitors' customers (part of their market
share).
 Product Development
Product development (existing markets, new products):
A firm with a market for its current products might
embark on a strategy of developing other products
catering to the same market
 Market Development
Market development (new markets, existing products):
An established product in the marketplace can be
tweaked or targeted to a different customer segment, as a
strategy to earn more revenue for the firm.
 Diversification
(New markets, new products),This resulted in the
company entering new markets where it had no presence
before.
Corporate level strategy
 Corporate-level Strategy’s Value
 The degree to which the businesses in the portfolio are worth
more under the management of the company than they would
be under other ownership.
 What businesses should
the firm be in?
 How should the corporate
office manage the
group of businesses?
Level of diversification
Reason for diversification
Value-Creating Diversification
• Economies of scope (related
diversification)
• Sharing activities
• Transferring core competencies
• Market power (related
diversification)
• Blocking competitors through
multipoint competition
• Vertical integration
• Financial economies (unrelated
diversification)
• Efficient internal capital allocation
• Business restructuring
Value-Neutral Diversification
• Antitrust regulation
• Tax laws
• Low performance
• Uncertain future cash flows
• Risk reduction for firm
• Tangible resources
• Intangible resources
Value-Reducing Diversification
• Diversifying managerial
employment risk
• Increasing managerial
compensation
 Value-Creating Diversification Strategies
 Firm creates value by building
upon or extending:
 Resources High

Operational Relatedness
 Capabilities
 Core competencies
 Economies of Scope
 Cost savings that occur
when a firm transfers Low
capabilities and
competencies developed in
one of its businesses to
another of its businesses. Low High

Corporate Relatedness
Related diversification
 Value is created from economies of scope through:
 Operational relatedness in sharing activities
 Corporate relatedness in transferring skills or corporate core
competencies among units.
 The difference between sharing activities and transferring
competencies is based on how the resources are jointly used to create
economies of scope.
 Operational Relatedness
 Created by sharing either a primary activity such as inventory delivery
systems, or a support activity such as purchasing.
 Activity sharing requires sharing strategic control over business units.
 Activity sharing may create risk because business-unit ties create links
between outcomes.
Corporate relatedness
 Corporate Relatedness
 Using complex sets of resources and capabilities to link
different businesses through managerial and technological
knowledge, experience, and expertise.
 Creates value in two ways:
 Eliminates resource duplication in the need to allocate
resources for a second unit to develop a competence that
already exists in another unit.
 Provides intangible resources (resource intangibility) that are
difficult for competitors to understand and imitate.
 A transferred intangible resource gives the unit receiving it an
immediate competitive advantage over its rivals.
Related diversification
Market Power
 Market power exists when a firm can:
 Sell its products above the existing competitive level and/or
 Reduce the costs of its primary and support activities below the competitive level.
 Multipoint Competition
 Two or more diversified firms simultaneously compete in the same product areas or
geographic markets.
 Vertical Integration
 Backward integration—a firm produces its own inputs.
 Forward integration—a firm operates its own distribution system for delivering its outputs
Complexities
 Simultaneous Operational Relatedness and Corporate Relatedness
 Involves managing two sources of knowledge simultaneously:
 Operational forms of economies of scope
 Corporate forms of economies of scope
 Many such efforts often fail because of implementation difficulties.
Unrelated diversification
 Financial Economies
 Are cost savings realized through improved allocations of financial resources.
 Based on investments inside or outside the firm
 Create value through two types of financial economies:
 Efficient internal capital allocations
 Purchase of other corporations and the restructuring their assets
 Efficient Internal Capital Market Allocation
 Corporate office distributes capital to business divisions to create value for overall company.
 Corporate office gains access to information about those businesses’ actual and prospective performance.
 Conglomerates have a fairly short life cycle because financial economies are more easily duplicated by
competitors than are gains from operational and corporate relatedness.
Restructuring
 Restructuring creates financial economies
 A firm creates value by buying and selling other firms’ assets in the external market.
 Resource allocation decisions may become complex, so success often requires:
 Focus on mature, low-technology businesses.
 Focus on businesses not reliant on a client orientation.
Incentive to diversify
 External
 Anti trust legislation
 Tax Laws
 Internal
 Low performance
 Uncertain future cash
flow
 Synergy and risk
reduction
Resources and diversification
 A firm must have both: Capital Market
intervention and
 Incentives to diversify market for managerial
talent
Value Creating
 The resources required to create Influences
Economies of Scope
value through diversification—
cash and tangible resources (e.g.,
plant and equipment)
 Value creation is determined Value neutral
influences Diversification
Firms
Performance
more by appropriate use of Resources
Incentives
Strategy

resources than by incentives to

diversify.
 Managerial Motives to Value reducing
influences
Diversify Managerial motives

 Managerial risk reduction

 Desire for increased compensation Internal Governance
Strategy
Implementation
Merger, Acquisition and Takeover
 Merger
 Two firms agree to integrate their operations on a relatively co-
equal basis.
 Acquisition
 One firm buys a controlling, or 100% interest in another firm
with the intent of making the acquired firm a subsidiary
business within its portfolio.
 Takeover
 A special type of acquisition when the target firm did not solicit
the acquiring firm’s bid for outright ownership.
Reasons for Acquisitions and Problems in Achieving Success
Acquisition: Increased market power
 Factors increasing market power when:
 There is the ability to sell goods or services above competitive levels.
 Costs of primary or support activities are below those of competitors.
 A firm’s size, resources and capabilities gives it a superior ability to
compete.
 Acquisitions intended to increase market power are subject to:
 Regulatory review
 Analysis by financial markets
 Market power is increased by:
 Horizontal acquisitions: other firms in the same industry
 Vertical acquisitions: suppliers or distributors of the acquiring firm
 Related acquisitions: firms in related industries
Market Power Acquisitions
 Horizontal Acquisition
 Acquisition of a company in the same industry in which the acquiring firm
competes increases a firm’s market power by exploiting.
 Cost-based synergies
 Revenue-based synergies
 Acquisitions with similar characteristics result in higher performance than
those with dissimilar characteristics
 Vertical acquisition
 Acquisition of a supplier or distributor of one or more of the firm’s goods or
services
 Increases a firm’s market power by controlling additional parts of the value
chain.
 Related acquisition
 Acquisition of a company in a highly related industry
 Because of the difficulty in implementing synergy, related acquisitions are often
difficult to implement.
Acquisitions
 Overcoming Entry Barriers
 Entry Barriers
 Factors associated with the market or with the firms operating in it that increase
the expense and difficulty faced by new ventures trying to enter that market
 Economies of scale
 Differentiated products
 Cross-Border Acquisitions
 Acquisitions made between companies with headquarters in different countries
 Are often made to overcome entry barriers.
 Can be difficult to negotiate and operate because of the differences in foreign cultures.
 Cost of New-Product Development and Increased Speed to Market
 Internal development of new products is often perceived as high-risk activity.
 Acquisitions allow a firm to gain access to new and current products that are new to the
firm.
 Returns are more predictable because of the acquired firms’ experience with the
products.
Acquisitions
 Lower Risk Compared to Developing New Products.
 An acquisition’s outcomes can be estimated more easily and
accurately than the outcomes of an internal product development
process.
 Managers may view acquisitions as lowering risk associated with internal
ventures and R&D investments.
 Acquisitions may discourage or suppress innovation.
 Increased Diversification
 Using acquisitions to diversify a firm is the quickest and easiest way to change its
portfolio of businesses.
 Both related diversification and unrelated diversification strategies can be
implemented through acquisitions.
 The more related the acquired firm is to the acquiring firm, the greater is the
probability that the acquisition will be successful.
Acquisitions
 Reshaping the Firm’s Competitive Scope
 An acquisition can:
 Reduce the negative effect of an intense rivalry on a firm’s financial performance.
 Reduce a firm’s dependence on one or more products or markets.
 Reducing a company’s dependence on specific markets alters the firm’s
competitive scope.
 Learning and Developing New Capabilities
 An acquiring firm can gain capabilities that the firm does not currently
possess:
 Special technological capability
 A broader knowledge base
 Reduced inertia
 Firms should acquire other firms with different but related and
complementary capabilities in order to build their own knowledge base.
Problems in Achieving Acquisition Success
 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 firm’s executives
 Loss of key personnel weakens the acquired firm’s capabilities and reduces its value
 Inadequate Evaluation of the Target
 Due Diligence
 The process of evaluating a target firm for acquisition
 Ineffective due diligence may result in paying an excessive premium for the target
company.
 Evaluation requires examining:
 Financing of the intended transaction
 Differences in culture between the firms
 Tax consequences of the transaction
 Actions necessary to meld the two workforces
Problems in Achieving Acquisition Success
 Large or Extraordinary Debt
 High debt (e.g., junk bonds) can:
 Increase the likelihood of bankruptcy
 Lead to a downgrade of the firm’s credit rating
 Preclude investment in activities that contribute to the firm’s long-term success such as:
 Research and development, Human resource training, Marketing
 Inability to Achieve Synergy
 Synergy
 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.
 Private synergy
 When the combination and integration of the acquiring and acquired firms’ assets yields
capabilities and core competencies that could not be developed by combining and
integrating either firm’s assets with another company.
 Advantage: It is difficult for competitors to understand and imitate.
 Disadvantage: It is also difficult to create.
Problems in Achieving Acquisition Success
 Too Much Diversification
 Diversified firms must process more information of greater diversity.
 Increased operational scope created by diversification may cause managers to rely too
much on financial rather than strategic controls to evaluate business units’
performances.
 Strategic focus shifts to short-term performance.
 Acquisitions may become substitutes for innovation.
 Managers Overly Focused on Acquisitions
 Managers invest substantial time and energy in acquisition strategies in:
 Searching for viable acquisition candidates.
 Completing effective due-diligence processes.
 Preparing for negotiations.
 Managing the integration process after the acquisition is completed.
 Managers in target firms operate in a state of virtual suspended animation during
an acquisition.
 Executives may become hesitant to make decisions with long-term consequences until
negotiations have been completed.
 The acquisition process can create a short-term perspective and a greater aversion to risk
among executives in the target firm.
Successful Acquisitions
 Attributes
 Acquired firm has assets or resources that are complementary to the acquiring firm’s core
business
 Acquisition is friendly
 Acquiring firm conducts effective due diligence to select target firms and evaluate the target
firm’s health (financial, cultural, and human resources)
 Acquiring firm has financial slack (cash or a favorable debt position)
 Merged firm maintains low to moderate debt position
 Acquiring firm has sustained and consistent emphasis on R&D and innovation
 Acquiring firm manages change well and is flexible and adaptable
 Results
 High probability of synergy and competitive advantage by maintaining strengths
 Faster and more effective integration and possibly lower premiums
 Firms with strongest complementarities are acquired and overpayment is avoided
 Financing (debt or equity) is easier and less costly to obtain
 Lower financing cost, lower risk (e.g., of bankruptcy), and avoidance of trade-offs that are
associated with high debt
 Maintain long-term competitive advantage in markets
 Faster and more effective integration facilitates achievement of synergy
Effective Acquisition Strategies
 Complementary Assets /Resources
 Buying firms with assets that meet current needs to build competitiveness.
 Friendly Acquisitions
 Friendly deals make integration go more smoothly.
 Careful Selection Process
 Deliberate evaluation and negotiations are more likely to lead to easy integration
and building synergies.
 Maintain Financial Slack
 Provide enough additional financial resources so that profitable projects would
not be foregone.
Attributes of Effective Acquisitions
 Low-to-Moderate Debt
 Merged firm maintains financial flexibility
 Sustain Emphasis Innovation
 Continue to invest in R&D as part of the firm’s overall strategy
 Flexibility
 Has experience at managing change and is flexible and adaptable
Restructuring
 A strategy through which a firm changes its set of
businesses or financial structure.
 Failure of an acquisition strategy often precedes a restructuring
strategy.
 Restructuring may occur because of changes in the external or
internal environments.
 Restructuring strategies:
 Downsizing
 Downscoping
 Leveraged buyouts
Types of Restructuring: Downscoping
Downsizing
 A reduction in the number of a firm’s employees and sometimes in
the number of its operating units.
 May or may not change the composition of businesses in the company’s
portfolio.
 Typical reasons for downsizing:
 Expectation of improved profitability from cost reductions
 Desire or necessity for more efficient operations
 A divestiture, spin-off or other means of eliminating businesses
unrelated to a firm’s core businesses.
 A set of actions that causes a firm to strategically refocus on its core
businesses.
 May be accompanied by downsizing, but not eliminating key employees
from its primary businesses.
 Smaller firm can be more effectively managed by the top management
team.
Restructuring
 Leveraged Buyouts (LBO)
 A restructuring strategy whereby a party buys all of a firm’s
assets in order to take the firm private.
 Significant amounts of debt may be incurred to finance the buyout.
 Immediate sale of non-core assets to pare down debt.
 Can correct for managerial mistakes
 Managers making decisions that serve their own interests rather than
those of shareholders.
 Can facilitate entrepreneurial efforts and strategic growth.
Restructuring and Outcomes
Strategic Leadership
 Strategic leadership requires the ability to:
 Anticipate and envision.
 Maintain flexibility.
 Empower others to create strategic change as necessary.
 Strategic leadership is:
 Multi-functional work that involves working through others.
 Consideration of the entire enterprise rather than just a sub-unit.
 A managerial frame of reference.
 Effective strategic leaders:
 Manage the firm’s operations effectively.
 Sustain a high performance over time.
 Make better decisions than their competitors.
 Make candid, courageous, pragmatic decisions.
 Understand how their decisions affect the internal systems in use by the firm.
 Solicit feedback from peers, superiors and employees about their decisions and visions.
Managers as an Organizational Resource
 Managers often use their discretion when making strategic
decisions and implementing strategies.
 Factors affecting the amount of decision-making discretion
include:
 External environmental sources
 Characteristics of the organization
 Characteristics of the manager
 Top management team
 Managers often use their discretion when making strategic decisions
and implementing strategies.
 Factors affecting the amount of decision-making discretion include:
 External environmental sources
 Characteristics of the organization
 Characteristics of the manager
Firm Performance and Strategic Change
 Heterogeneous top management teams:
 Have difficulty functioning effectively as a team.
 Require effective management of the team to facilitate the
process of decision making but …
 Are associated positively with innovation and strategic change.
 May force the team or members to “think outside of the box”
and be more creative.
 Have greater capacity to provide effective strategic leadership
in formulating strategy.
CEO and Top Management Team Power
 Higher performance is achieved when board of directors are more directly
involved in shaping strategic direction.
 A powerful CEO may:
 Appoint sympathetic outside board members.
 Have inside board members who report to the CEO.
 Have significant control over the board’s actions.
 May also hold the position of chairman of the board (CEO duality).
 Duality often relates to poor performance and slow response to change.
 CEOs of long tenure can also wield substantial power.
 CEOs can gain so much power that they are virtually independent of oversight by
the board of directors.
 The most effective forms of governance share power and influence among
the CEO and board of directors.
Managerial Succession
 Organizations select managers and strategic leaders from two types of
managerial labor markets:
 Internal managerial labor market
 Advancement opportunities related to managerial positions within a firm.
 External managerial labor market
 Career opportunities for managers in organizations other than the one for
which they currently work.
 Advantages of internal managerial labor market include:
 Experience with the firm and industry environment.
 Familiarity with company products, markets, technologies, and operating
procedures.
 Lower turnover among existing personnel.
 Advantages of the external managerial labor market include:
 Long-tenured insiders may be “stale in the saddle”—outsiders may bring fresh
perspectives.
Key Strategic Leadership Actions
 Determining Strategic Direction
 Determining strategic direction involves developing a long-term vision of the
firm’s strategic intent.
 Five to ten years into the future
 Philosophy with goals
 The image and character the firm seeks
 Ideal long-term vision has two parts:
 Core ideology
 Envisioned future
 Exploiting and Maintaining Core Competencies
 Core competencies
 Resources and capabilities of a firm that serve as a source of competitive advantage over
its rivals.
 Leadership must verify that the firm’s competencies are emphasized in strategy
implementation efforts.
 Firms must continuously develop or even change their core competencies to stay ahead
of competitors
Key Strategic Leadership Actions
 Developing Human Capital and Social Capital
 Human capital
 The knowledge and skills of the firm’s entire workforce are a capital resource that
requires investment in training and development.
 Social capital
 Relationships inside and outside the firm that help it accomplish tasks and create
value for customers and shareholders.
 Sustaining an Effective Organizational Culture
 Organizational Culture
 The complex set of ideologies, symbols and core values shared through the firm,
that influences the way business is conducted.
 Entrepreneurial Orientation
 Personal characteristics that encourage or discourage entrepreneurial opportunities.
 Autonomy
 Proactiveness
 Innovativeness
 Risk taking
Key Strategic Leadership Actions
 Sustaining an Organizational Culture
 Changing a firm’s organizational culture is more difficult than maintaining it.
 Effective strategic leaders recognize when change in culture is needed.
 Shaping and reinforcing culture requires:
 Effective communication
 Problem solving skills
 Selection of the right people
 Effective performance appraisals
 Appropriate reward systems
 Emphasizing Ethical Practices
 Effectiveness of processes used to implement the firm’s strategies increases when based on
ethical practices.
 Ethical practices create social capital and goodwill for the firm.
 Actions that develop an ethical organizational culture include:
 Establishing and communicating specific goals to describe the firm’s ethical standards.
 Continuously revising and updating the code of conduct.
 Disseminating the code of conduct to all stakeholders to inform them of the firm’s ethical
standards and practices.
Key Strategic Leadership Actions
 Emphasizing Ethical Practices
 Actions that develop an ethical organizational culture include:
 Developing and implementing methods and procedures to use in
achieving the firm’s ethical standards.
 Creating and using explicit reward systems that recognize acts of
courage.
 Creating a work environment in which all people are treated with
dignity.
Key Strategic Leadership Actions
 Establishing Organizational Controls
 Controls
 Formal, information-based procedures used by managers to maintain or alter patterns in
organizational activities.
 Controls help strategic leaders to:
 Build credibility
 Demonstrate the value of strategies to the firm’s stakeholders
 Promote and support strategic change
 The Balanced Scorecard
 A framework used to verify that the firm has established both strategic and financial
controls to assess its performance.
 Prevents overemphasis of financial controls at the expense of strategic controls
 Four perspectives of the balanced scorecard
 Financial
 Customer
 Internal business processes
 Learning and growth