Professional Documents
Culture Documents
MBA 290-Strategic Analysis
MBA 290-Strategic Analysis
ADVANCED
STRATEGIC
MANAGEMENT
Professor Stanley Han
College of Business Administration
hans@csus.edu
THE CONCEPT OF
STRATEGY
The Concept of Strategy and the Pursuit
of Sustainable Above-Normal Profits
Domain of Strategy
strategic competitiveness and above normal returns
concerns managerial decisions and actions which
materially affect the success and survival of business
enterprises
involves the judgment necessary to strategically
position a business and its resources so as to
maximize long-term profits in the face of irreducible
uncertainty and aggressive competition
strategy is the linkage between a business and its
current and future environment
Definition
The determination of the long run goals
and objectives of an enterprise, the
adoption of courses of action and the
allocation of resources necessary for
carrying out these goals
Alfred Chandler, Strategy and Structure
Levels of Strategy
CORPORATE
STRATEGY
BUSINESS
STRATEGY
FUNCTIONAL
STRATEGIES
CORPORATE
HEAD OFFICE
Division A
Division B
R&D
R&D
Personnel
Personnel
Finance
Finance
Production
Production
Marketing/Sales
Marketing/Sales
Levels of Strategy
Corporate strategy... defines the scope of the
business in terms of the industries and markets in
which it competes.
includes decisions about diversification, vertical
integration, acquisitions, new ventures,
divestments, allocation of scarce resources
between business units
Business strategy... is concerned with how the firm
competes within a particular industry or market... to
win a business unit must adopt a strategy that
establishes a competitive advantage over its rivals.
Functional strategy... the detailed deployment of
resources at the operational level
Successful
Strategy
EFFECTIVE IMPLEMENTATION
Long-term, simple
and agreed upon
objectives
Profound
understanding of
the competitive
environment
Objective
appraisal of
resources
V
Ct
r
Ct
(1 + r)t
MARKET
CAP.
($BN.)
NET
INCOME
($BN)
RETURN
ON
SALES
(%)
RETURN
ON
EQUITY
(%)
RETURN
ON
ASSETS
(%)
RETURN
TO
SHAREHOLDERS
(%)
Exxon Mobil
372
36.1
19.9
34.9
17.8
11.7
General Electric
363
16.4
10.7
22.2
14.7
(1.5)
Microsoft
281
12.3
40.3
30.0
18.8
(0.9)
Citigroup
239
24.6
22.0
21.9
1.5
4.6
BP
233
22.3
9.9
27.9
10.7
10.2
Bank of America
212
16.5
27.0
14.1
1.2
2.4
211
25.3
14.7
26.7
11.6
11.8
Wal-Mart
197
11.2
5.5
21.4
8.1
(10.3)
Toyota Motor
197
12.1
10.7
13.0
4.8
(22.1)
Gazprom
196
7.3
28.1
9.8
7.1
n.a.
HSBC
190
15.9
23.0
16.3
1.0
(11.8)
190
8.7
17.3
13.7
6.4
7.2
Problems:
Shareholder
Value
Measures:
Market value of the
firm
Market value added
(MVA)
Return to
shareholders
Intrinsic
Value
Measures:
Discounted cash
flows
Real option values
Financial
Indicators
Measures:
Return on Capital
Growth (of
revenues & operating
profits
Economic profit (EVA)
Value
Drivers
Sources:
Market share
Scale economies
Innovation
Brands
Avoid
Competitors
Attractive
Industry
Attractive
Strategic
Group
Attractive
Niche
Entry
Barriers
Mobility
Barriers
Isolating
Mechanisms
Be Better Than
Competition
Cost
Advantage
Differentiation
Advantage
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
1992
1994
Cost per
unit of
output (in
real $)
1996
1998
2000
Cumulative Output
2002
2004
75%
100K
200K
500K
1,000K
Accumulated unit production
(millions)
UK refrigerators, 1957-71
Price Index
50 100 200 300
1960 Yen
15K
20K 30K
70% slope
10
50
Accumulated units
(millions)
ECONOMIES OF LEARNING
Indivisibli\ties
Specialization and division of labor
Increased dexterity
Improved organizational routines
PRODUCTION TECHNIQUES
Process innovation
Reengineering business processes
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
Location advantages
Ownership of low-cost inputs
Non-union labor
Bargaining power
Ratio of fixed to variable costs
Speed of capacity adjustment
Organizational slack; Motivation &
culture; Managerial efficiency
Minimum
Efficient Plant
Size: the point
where most scale
economies are
exhausted
Units of output
per period
Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main
brands incur lower advertising costs per unit of sales than their smaller rivals.
Schweppes
SF Dr. Pepper
Diet 7-Up
Tab
Diet Pepsi
Diet Rite
Fresca
Seven Up
Dr. Pepper
Sprite
Pepsi
10
20
50
100
200
500
Coke
1,000
PURCHASING
PARTS
INVENTORIES
R&D
TESTING,
COMPONENT
ASSEMBLY
DESIGN
QUALITY
MFR
ENGNRNG
CONTROL
GOODS
INVENTORIES
PURCHASING
PARTS
INVENTORIES
R&D
COMPONENT ASSEMBLY TESTING,
DESIGN
QUALITY
MFR
ENGNRNG
CONTROL
Prices paid
--Size of commitment
depend on:
--Productivity of
-- Order size
R&D/design
--Purchases per
--No. & frequency of new
supplier
models
-- Bargaining power
-- Supplier location
GOODS
INVENTORIES
-- Plant scale
-- Flexibility of production
-- No. of models per plant
-- Degree of automation
-- Sales / model
-- Wage levels
-- Capacity utilization
-- No. of dealers
-- Sales / dealer
-- Level of dealer
support
-- Frequency of defects
under warranty
SALES
&
MKITG
--Cyclicality &
predictability of sales
--Customers
willingness to wait
PRCHSNG
PARTS
INVNTRS
R&D
DESIGN
COMPONENT
MFR
ASSEMBLY
TESTING GOODS
QUALITY
INV
TANGIBLE DIFFERENTATION
Observable product characteristics:
size, color, materials, etc.
performance
packaging
complementary services
INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customers image, status,
identity, and desire for exclusivity
What needs
does it satisfy?
By what
criteria do they
choose?
THE
CUSTOMER
What
motivates
them?
What are
demographic,
sociological,
psychological
correlates of customer
behavior?
FORMULATE
DIFFERENTIATION
STRATEGY
Select product
positioning in relation
to product attributes
Select target
customer group
Ensure customer /
product compatibility
Evaluate costs and
benefits of
differentiation
Training to support
customer service
excellence
FIRM INFRASTRUCTURE
INBOUND
OPERATIONS
LOGISTICS
Quality of
components &
materials
Defect free
products.
Wide variety
OUTBOUND
MARKETING
LOGISTICS
& SALES
Fast delivery.
Efficient order
processing
Building brand
reputation
SERVICE
Customer technical
support. Consumer
credit. Availability of
spares
5
2
4
Distribution
Marketing
Canning
Processing
Inventory holding
Purchasing
Service &
technical support
Sales
Distribution
Inventory holding
Manufacturing
Design
Engineering
Inventory holding
Purchasing
Supplies of steel
& aluminum
CAN MAKER
CANNER
INDUSTRY ANALYSIS
AND POSITIONING
Determining Industry Attractiveness and
Identifying Strategic Opportunities
22.7
22.3
21.6
19.6
18.9
18.3
18.8
17.8
17.3
17.2
15.5
15.0
14.4
13.9
13.5
13.1
13.0
13.0
11.7
6.2
6.5
Telecom services
Transporation
6.9
Energy
7.7
Materials
8.4
OVERALL AVERAGE
Retailing
9.5
Food retailing
9.6
Capital goods
9.9
9.9
10.3
10.3
11
11.3
11.9
Semiconductors
Commercial services
12.8
Media
14.7
15
15.2
Pharmaceuticals
18.4
10
15
20
Technology
Government
& Politics
The natural
environment
THE INDUSTRY
ENVIRONMENT
Suppliers
Competitors
Customers
Demographic
structure
Social structure
Concentration
Perfect
Competition
Oligopoly
Duopoly
Monopoly
Many firms
A few firms
Two firms
One firm
Significant barriers
Product
Differentiation
Homogeneous
Product
Perfect
Information flow
Information
High barriers
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL Threat of
ENTRANTS
new
entrants
Threat of
Rivalry among
existing firms
SUBSTITUTES
substitutes
BUYERS
THREAT OF ENTRY
Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to distribution
channels
Legal/ regulatory barriers
Retaliation
INDUSTRY RIVALRY
Concentration
Diversity of
competitors
Product differentiation
Excess capacity &
exit barriers
Cost conditions
BUYER POWER
Buyers price sensitivity
Relative bargaining
power
SUBSTITUTE
COMPETITION
Buyers propensity
to substitute
Relative prices &
performance of
substitutes
SUPPLIER POWER
LOW
THREAT OF ENTRY
LOW
economies of scale
capital requirements
for R&D and clinical
trials
product differentiation
control of distribution
channels
patent protection
INDUSTRY
COMPETITIVENESS
LOW
high concentration
product differentiation
patent protection
steady demand growth
no cyclical fluctuations
of demand
BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)
DRUG
INDUSTRY
(ROE=22%)
THREAT OF
SUBSTITUTES
LOW
No substitutes.
(Changing as managed care
encourages generics.)
Rivalry
Substitutes
Buyers
Suppliers
Shakeout
Maturity
Sales volume
Fermentation
Time
Decline
Sales
1900 50 90 07
MOTORCYCLES
Color
B&W
1930
50 70
TVs
Portable
90
HDTV
?
07
GROWTH
Increasing
penetration
TECHNOLOGY
Rapid product
innovation
Product and
Incremental
process innovation innovation
PRODUCTS
Wide variety,
Standardization
rapid design change
Commoditization
Continued
commoditization
MANUFACTURING
Short-runs, skill
intensive
Deskilling
Overcapacity
DEMAND
TRADE
Capacity shortage,
mass-production
MATURITY
Mass market
replacement
demand
DECLINE
Knowledgeable,
customers, residual segments
Well-diffused
technology
COMPETITION
Technology-
KSFs
Product innovation
Shakeout &
consolidation
Cost efficiency
Price wars,
exit
Overhead reduction, rationalization, low
cost sourcing
INDUSTRY STRUCTURE
Customers become
more price conscious
Products become
more standardized
Diffusion of
technology
COMPETITION
Production
becomes less R&D
& skill-intensive
Production shifts
to low-wage
countries
Price competition
intensifies
Excess capacity
increases
Demand growth
slows as market
saturation approaches
Distribution channels
consolidate
Bargaining power
of distributors
increases
100
50
0
1895
1905
1915
1925
1935
1945
1955
Mail order,
catalogue
retailing
e.g. Sears
Roebuck
1880s
Chain
Stores
e.g. A&P
1920s
Warehouse
Internet
Clubs
Retailers
e.g. Price Club
e.g. Amazon;
Sams Club
Expedia
Discount
Category
Stores
Killers
e.g. K-Mart
e.g. Toys-R-Us,
Wal-Mart
Home Depot
1960s
2000
NEW BRICK
Everyone is responsible
for setting strategy
Rule-busting innovation
is the way to win
Convergence
Coexistence
Sales volume
Emergence
Dominance
Established
Industry
Emerging Industry
Time
Discontinuity
Takeoff
Ferment
Time
Discontinuity
Takeoff
Ferment
Time
RESOURCES,
CAPABILITIES, AND
CORE COMPETENCES
THE FIRM
Goals and
Values
Resources and
Capabilities
Structure and
Systems
THE
INDUSTRY
ENVIRONMENT
STRATEGY
STRATEGY
The
Firm-Strategy
Interface
Competitors
Customers
Suppliers
The
Environment-Strategy
Interface
Fine
Optics
MicroElectronics
Chemical Imaging
Organic Chemistry
Polymer technology
Optomechtronics
Thin-film coatings
Brands
Global Distribution
1990s
Businesses
Film
Cameras
Fine Chemicals
Pharmaceuticals
Diagnostics
Digital Imaging
Products (e.g. Photo CD
System; Advantix
cameras & film
INDUSTRY KEY
SUCCESS FACTORS
STRATEGY
ORGANIZATIONAL
CAPABILITIES
RESOURCES
TANGIBLE
INTANGIBLE
Financial
Physical
Technology
Reputation
Culture
HUMAN
Skills/know-how
Capacity for
communication
& collaboration
Motivation
Appraising Resources
RESOURCE
Tangible
Resources
CHARACTERISTICS
Financial
Borrowing capacity
Internal funds generation
Physical
Technology
Reputation
Brand equity
Customer retention
Supplier loyalty
Employee qualifications,
pay rates, turnover.
Intangible
Resources
Human
Resources
INDICATORS
Brand
value
($bn.)
1
2
3
4
5
6
7
8
9
10
67.5
59.9
53.4
47.0
35.6
26.5
26.4
26.0
24.8
21.2
Coca-Cola
Microsoft
IBM
GE
Intel
Nokia
Disney
McDonalds
Toyota
Marlboro
Rank
11
12
13
14
15
16
17
18
19
20
Company
Brand
value
($bn.)
Mercedes Benz
20.0
Citi
20.0
Hewlett-Packard 18.9
American Express 18.6
Gillette
17.5
BMW
17.1
Cisco
16.6
Louis Vuitton
16.1
Honda
15.8
Samsung
15.0
http://www.interbrand.com/best_brands_2007.asp
Source: Interbrand
CAPABILITY
Financial management
Strategic control
Coordinating business units
Managing acquisitions
EXEMPLARS
ExxonMobil, GE
IBM, Samsung
BP, P&G
Citigroup, Cisco
MIS
Wal-Mart, Dell
Capital One
R&D
Research capability
Development of innovative new products
Merck, IBM
Apple, 3M
Manufacturing
Design
Design Capability
Apple, Nokia
Marketing
Brand Management
Quality reputation
Responsiveness to market trends
P&G, LVMH
Johnson & Johnson
MTV, LOreal
Sales, Distribution
& Service
Sales Responsiveness
Efficiency and speed of distribution
Customer Service
PepsiCo, Pfizer
LL Bean, Dell
Singapore Airlines
Caterpillar
TECHNOLOGY
PRODUCT DESIGN
MANUFACTURING
MARKETING
DISTRIBUTION
SERVICE
SUPPORT
ACTIVITIES
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
MARKETING
LOGISTICS
& SALES
SERVICE
PRIMARY
ACTIVITIES
THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY
Scarcity
Relevance
Durability
SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE
Transferability
Replicability
Property rights
APPROPRIABILITY
Relative
bargaining power
Embeddedness
VWs
Relative
Strength
R1. Finance
C1. Product
development
R2. Technology
C2. Purchasing
C3. Engineering
C4. Manufacturing
C5. Financial
management
C6. R&D
C8. Government
relations
RESOURCES
R4. Location
R5. Distribution
7
8
CAPABILITIES
Importance
VWs
Relative
Strength
4
5
10
Key Strengths
Superfluous Strengths
Relative Strength
C3
R3
C4
C8
C2
R2
R1
C6
Zone of Irrelevance
1
1
R5
R4
C5
C1
C7
Key Weaknesses
5
Strategic Importance
10
COMPETITIVE
ADVANTAGE AND THE
SCOPE OF THE FIRM
V1
V2
V3
[B] Several
V1
Specialized
V2
Firms linked
by Markets V3
P1
P1
P2
P2
P3
P3
C1
C1
C2
C2
C3
C3
In situation [A] the business units are integrated within a single firm.
In situation [B] the business units are independent firms linked by markets.
Are the administrative costs of the integrated firm less than the transaction
costs of markets?
Admin. costs of
firms rise relative
to transaction
costs of markets
1949
63.5
53.7
36.5
1954
53.9
46.3
1959
39.9
46.1
1964
37.0
60.1
1969
63.0
1974
Note:
70
60
Single business
50
Dominant
business
Related business
40
30
20
Unrelated
business
10
0
1950 1960 1970 1983 1993
RISK
SPREADING
PROFIT
2. The Cost of Entry Test: the cost of entry must not capitalize
all future profits.
3. The Better-Off Test: either the new unit must gain
competitive advantage from its link with the company, or
vice-versa. (i.e. some form of synergy must be present)
Additional source of value from diversification: Option value
ECONOMIES
OF
SCOPE
Relatedness in Diversification
Economies of scope in diversification derive from two
types of relatedness:
Operational Relatedness-- synergies from sharing
resources across businesses (common distribution
facilities, brands, joint R&D)
Strategic Relatedness-- synergies at the corporate level
deriving from the ability to apply common management
capabilities to different businesses.
Problem of operational relatedness:- the benefits in terms
of economies of scope may be dwarfed by the
administrative costs involved in their exploitation.
Compounding of risk
Is transaction-specific investment
needed?
VI increases risk.
Iron ore
mining
Steel
production
Steel strip
production
Can
making
VERTICAL
INTEGRATION,
AND MARKET
CONTRACTS
VERTICAL
INTEGRATION
MARKET
CONTRACTS
Canning of
food, drink,
oil, etc.
MARKET
CONTRACTS
LO W
International Trade
HIGH
Patterns of Internationalization
Trading
Industries
Global
Industries
--aerospace
--military hardware
--diamond mining
--agriculture
--automobiles
--oil
--semiconductors
--consumer electronics
Domestic
Industries
Multidomestic
Industries
--railroads
--laundries/dry cleaning
--hairdressing
--milk
--retail banking
--hotels
--consulting
LOW
HIGH
Implications of Internationalization
for Industry Analysis
INDUSTRY STRUCTURE
Lower entry barriers around national markets
Increased industry rivalry
--- lower seller concentration
--- greater diversity of competitors
Increased buyer power: wider choice for dealers & consumers
COMPETITION
Increased intensity of competition
PROFITABILITY
Other things remaining equal, internationalization tends to
reduce an industrys margins & rate of return on capital
THE INDUSTRY
ENVIRONMENT
Key Success Factors
COMPETITIVE
ADVANTAGE
National Influences on
Competitiveness: The Theory of
Comparative Advantage
A country has a relative efficiency advantage in those products
that make intensive use of resources that are relatively
abundant within the country. E.g.
Philippines relatively more efficient in the production of
footwear, apparel, and assembled electronic products than in
the production of chemicals and automobiles.
U.S. is relatively more efficient in the production of
semiconductors and pharmaceuticals than shoes or shirts.
Canada
W. Germany
Italy
Japan
.31
.28
-.36
-.29
-.85
Raw materials
.43
.51
-.55
-.30
-.88
-.64
.34
-.72
-.74
-.99
Chemicals
.42
-.16
.20
-.06
-.58
.12
-.19
.34
.22
.80
-.68
-.07
.01
.29
.40
portation equipment
Other manufacturers
Note:
FACTOR CONDITIONS
RELATING AND
SUPPORTING
INDUSTRIES
DEMAND
CONDITIONS
STRATEGY, STRUCTURE,
AND RIVALRY
1.
2.
3.
4.
Mexico
8,000
40
1,000
40
9,180
Country
Stage
of
Processing
Index of
Revealed
Comparative
Advantage
Country
Stage
Index of
of
Revealed
Processing Comparative
Advantage
Hong Kong
1
2
3
4
-0.96
-0.81
-0.41
+0.75
Japan
1
2
3
4
-0.36
+0.48
+0.48
-0.48
Italy
1
2
3
4
-0.54
+0.18
+0.14
+0.72
U.S.A.
1
2
3
4
+0.96
+0.64
+0.22
-0.73
Note:
1 = production of fiber (natural & synthetic)
3 = production of textiles
WHERE TO LOCATE
ACTIVITY X?
What internal
resources and capabilities does the firm
possess in particular locations?
What is the firms business strategy
(e.g. cost vs. differentiation advantage)?
TRANSACTIONS
Exporting
Spot
sales
Foreign
agent /
distributor
Longterm
contract
Low
Licensing
Licensing
patents &
other IP
Joint venture
Marketing &
Distribution
only
Fully
integrated
Franchising
Resource commitment
Wholly
owned
subsidiary
Marketing&
Distribution
only
Fully
integrated
High
Benefits:
--Combining resources and capabilities of different companies
--Learning from one another
--Reducing time-to-market for innovations
--Risk sharing
Problems:
--Management differences between the two partners. Conflict
most likely where the partners are also competitors.
Benefits are seldom shared equally. Distribution of benefits
determined by:
Strategic intent of the partners- which partner has the clearer
vision of the purpose of the alliance?
Appropriability of the contribution-- which partners resources
and capabilities can more easily be captured by the other?
Absorptive capacity of the company-- which partner is the
more receptive learner?
FIAT
50%
owned
SUZUKI
GM
60%
owned
ISUZU
40% investment
IBC Vehicles
Ltd. (U.K.)
(Makes vans in UK)
TOYOTA
FUJI
50% owned
50%
owned
SAIC
DAEWOO
Multinational Strategies:
Globalization vs. National Differentiation
The case for a global strategy:
Ted
Levitt
Globaliz-ation of
Markets
Thesis
Hamel &
Prahalad
Thesis
Kenichi
Ohmaes
Triad
Power
Thesis
GLOBALIZATION ?
--Something to do with increasing interdependence
between countries.
GLOBAL STRATEGY
--At simplest level: Treating the world as a single market
E.g. Japanese companies during the 1970s & 1980s,
(YKK, Honda) standard products, developed &
manfactured within Japan; distributed & marketed
worldwide
--At more sophisticated level: Strategy that recognizes
and exploits linkages between countries (e.g. exploits
global scale, national resource differences, strategic
competition)
World as
single mkt.
World as
separate
national mkts.
multidomestic strategy
COMPETITIVE DRIVERS
--Potential for strategic
competition (e.g. crosssubsidization)
Jet engines
Autos
Benefits
of
global
integration
Consumer
electronics
Telecom
equipment
Investment
banking
Steel
Cement
Dry
cleaning
Auto
repair
Restaurant
chains
Retail
banking
Funeral
services
Consumer
electronics
Telecom
equipment
Investment
banking
Retail
banking
Cement
Auto
repair
Funeral
services
Benefits of national differentiation
Philips
General Electric
local responsiveness
- Global industry
- Matsushita the most
successful
- Philips the survivor
- GE sold out
Ka
o
P&G
Unilever
local responsiveness
- Substantial national
differentiation, few global
scale economies
- Kao has limited success
outside Japan
- Unilever and P&G most
successful
Telecommunications
Equipment
global integration
Matsushit
a
Branded, Packaged
Consumer Goods
global integration
global integration
Consumer Electronics
NEC
Erickson
ITT
local responsiveness
Heavy flows of
technology,
finances, people,
and materials
between
interdependent
units.
2.
3.
4.
5.