Chapter 1.

The concept of strategy

Strategy is focused on achieving goals, it involves allocation resources, implies
consistency and integration of decision and action. Clear sense of direction.
Strategic choice: where to compete and how to compete.
Characteristic of a strategy that are conductive to success:
1. Goals are simple, consistent and long term
2. Profound understanding of competitive environment
3. Effective in exploiting internal strengths, while protecting area of weaknesses
4. Effective implementation
Basic framework for strategy analysis:
Firm:
The industry
- Goals and values
environment:
Strategy
- Resources and
- Competitors
capabilities
- Customers
- Structure and system
- Suppliers
The task of strategy: how firm will deploy its resources within its environment and
satisfy its long-term goals, and how to organize itself to implement the strategy.
Strategic fit: all these elements should be consistent.
Strategic decisions are important, they involve a significant commitment of
resources and are not easily reversible.
Strategy:
- Corporate strategy: it defines the industry and market in which firm
competes. Corporate strategy decisions include choice over in diversification,
vertical integration, acquisitions and new ventures; and the allocation of
resources between different businesses of the firm.
- Business strategy: it is concerned with how the firm competes within
particular industry or market. It must establish a competitive advantages
over its rivals (competitive strategy)
The scope of a firms business has implication for the sources of competitive
advantage, and the nature of a firms competitive advantage determines the range
of business it can be successful in.
Two dimensions of strategy:
Static (competing for the present)
- Where are we competing?
Product market scope
Geographical scope
Vertical scope
- How are we competing?
What is the basis of
competitive advantage?

our

Dynamic (preparing for the future)

- What do we want to become?
Vision statement (what it seeks to
become)
- What do we want to achieve?
Mission statement (overall purpose of
the firm)
Performance goals
- How we will be there
Guidelines for development
Priority for capital expenditure, R&D
Growth modes: organic growth, M&A,
alliances

Strategy:
- Intended strategy: product of rational deliberation and compromise among
the many groups and individuals involved in the process

Realized strategy: strategy that is implemented, only partly related to what

was intended
- Emergent strategy: permit adaptation and learning through continuous
interaction between strategy formulation and implementation in which
strategy is adjusted and revised. The best approach.
The decentralized, bottom-up strategy emergence often precedes more formalized
strategy formulation. Balance between formal planning and emergency depends on
upon stability and predictability of company business environment. St. planning can
be restricted to a few principles and guidelines.
Example. Southwest Airlines strategy is Meet customers short-haul travel needs at
fares competitive with the cost of automobile travel
Roles of strategy:
1. Decision support:
a. strategy constrains the range of decision alternatives
b. a strategy-making process permits to integrate knowledge of different
individuals
c. a strategy-making process facilitates the use of analytical tools
2. Coordinating device
a. Statement of strategy communicates the identity, goals and
positioning of the company to all organizational members.
b. St. planning process provides a forum in which consensus is developed
c. The control of strategy implementation provides mechanism to ensure
the movement in a consistent direction
3. Target
a. Set aspiration that can motivate and inspire
b. St. is about stretch and resource leverage

Chapter 3. Industry analysis

The business environment consists of all the external influences that affect firms
decision and performance. Analysis of all factors leads to high cost and information
overload, so we should focus on vital: understanding customer (to make profit firm
has to create value for customer), suppliers (firm acquires goods and services),
competition (ability to generate profit depends on the intensity of competition). This
is an industry environment. Macro level factors (e.g. economic trends) affect
industry environment.
Key question: what determines the level of profit in an industry?
- The value of the product to the customers
- The intensity of competition
- The bargaining power of producers relative to their suppliers and buyers
Level of industry profitability is not random, it is determined by the systematic
influence of industry structure.
Concentration
Entry
and
barriers
Product
differentiation
Information
availability

exit

Perfect
competition
Many firms
No barriers

Oligopoly

Duopoly

Homogeneous
product
(commodity)
No
impediments
to information flow

Potential for product differentiation

A few firms
Two firms
Significant barriers

Monopoly
One firm
High barriers

Imperfect availability of information

Another approach to analyze industry environment: Porters Five Forces of

Competition Framework
1. Threat of substitute.
1.1.Buyers propensity to substitute. The absence of close substitute means that
consumers are insensitive to price.
1.2.Relative price and performance of substitute. The more complex the product
and the more difficult it is to discern performance differences, the lower the
extent of substitution on the basis of price differences.
2. Threat of entry. If the entry of new firms is unrestricted, the rate of profit will fall.
Factors that protect industry against new entrants (however barriers that are
effective against new companies may be ineffective against established firms
that are diversifying from other industry):
2.1.Capital requirements
2.2.Economies of scale (usually in industries that are capital, research or
advertising intensive)
2.3.Absolute cost advantages (access to low cost source of raw materials)
2.4.Product differentiation (brand recognition and customer loyalty)
2.5.Access to distribution channels (limited capacity within distribution channel,
risk aversion by retailers)
2.6.Government and legal barriers
2.7.Relation by established producers (aggressive price cutting, increased
advertising, sales promotion)
3. Buyer power
3.1.Price sensitivity

3.1.1. Cost of product relative to total cost. The greater the importance the
more sensitive buyers will be about price they pay.
3.1.2. Product differentiation. The less differentiation, the more willing the
buyer to switch suppliers on the basis of price.
3.1.3. Competition between buyers. The more intense the competition
among buyers, the greater their eagerness for price reduction from their
seller.
3.1.4. The more critical industry product to the quality of buyers product,
the less sensitive buyer to the price.
3.2.Bargaining power
3.2.1. Size and concentration of buyers relative to producers. The smaller
the buyers, the bigger price he pays.
3.2.2. Buyers switching costs.
3.2.3. Buyers information. The better informed buyers are about suppliers,
their price and costs, the better buyers are able to bargain.
3.2.4. Buyers ability to integrate vertically. Buyers can displace supplier, risk
for industry.
4. Industry rivalry. Usually it is the major determinant of profitability.
4.1.Concentration. Concentration ratio: the combined market share of leading
producers. Where market is dominated by a small group, price competition
may be restrained, either by collusion or through parallelism of pricing
decisions; competition focuses on advertising, promotion and product
development. BUT the relation between seller concentration and
profitability is weak statistically, and estimated effect is usually small
4.2.Diversity of competitors. If companies have the same origins, objectives,
cost and strategies they tend to avoid price competition in favor of collusive
pricing practice.
4.3.Product differentiation. The more similar the offerings, the easier customers
switch between them, the greater is the inducement for firm to cut price to
boost sales.
4.4.Excess capacity and exit barriers. Unused capacity encourages firms to cut
price to increase sales. Excess capacity can be cyclical or structural problem
resulting from overinvestment or declining demand. Barriers to exit: durable
and specialized resources, job protection. On average, companies in growing
industries earn higher profits than companies in slow growing or declining
industry.
4.5.Cost conditions (ratio of fixed costs to variable). If fixed costs are high
relative to variable costs, firms will take on marginal business at any price
that covers variable cost. It is disaster for profitability.
5. Supplier power: Same as those determining power of producer relative to buyers.
Applying industry analysis:
1. Describing industry structure:
Industry definition: which activities within value chain we include in industry?
What are the boundaries of industry in term of both product and
geographical scope? It is a matter of judgment and depends on purpose and
context of the analysis.
Determine key industry players (suppliers, buyers, producers, producers of
substitute)
Examine key characteristic of each group
Sort out relationship between them

2. Forecasting industry profitability

Examine how the industry current and recent level of competition and
profitability are a consequence of its present structure

Identify the trends that are changing industry structure. Is the industry
consolidating? Are new player seeking to enter? And so on.

Identify how these structural changes will affect the five forces of
competition and resulting profitability of the industry.
3. Positioning the company where competitive forces are weakest.
4. Develop strategy to alter industry structure.
Identify the key structural features of the industry that are responsible for
depressing profitability
Consider which of these features are amenable through appropriate strategic
initiatives
To identify key success factor we may model the profitability to find profitability
drivers or start with two questions:
- What do our customers want?
- What does the firm need to do to survive competition?
o What drives the competition
o What are the main dimensions of competition
o How intense is competition
o How we can obtain a superior competitive position

Chapter 4.
Further
Competitive Analysis

Topics

In

Industry

And

Porters 5 forces weaknesses

1. Complements: A missing force in the Porters 5 Forces anlysis
- Complements increase the value of my product
- Bargaining power and its deployment are the key ( ex: Nintendo and
software companies)
2. The notion of Porters 5 forces that industry structure is relatively stable
and determines competitive behavior in a predictable way ignores the
dynamic forces of innovation and entrepreneurship.
Game theory
1. It permits the framing of strategic decisions.
2. It can predict the outcome of competitive situations and identify optimal
strategic choices.
Frame Work of Competitor Analysis
1. Competitors Current Strategy
2. Competitors Objectives
3. Competitors Assumptions about the industry
4. Competitors Resources and Capabilities
Stages in Segmentation Analysis
1. Identify Key Segmentation Variables
2. Construct a Segmentation Matrix
3. Analyze Segment Attractiveness
4. Identify the Segments Key Success Factors
5. Select Segment Scope

Chapter 5. Analyzing Resources And Capabilities

Anayzing the Resources of the Firm
1. Tangible Resources: financial, physical assets. The goal is to identify
what opportunities exist for economizing on their use and what the
possibilities are for employing existing assets more profitably.
2. Intangible Resources: brand equity, reputation quotients, trademarks and
so on.
3. Human Resources
Organizational Capabilities
1. Classifying Capabilities
- A functional Analysis: corporate functions, management information R&D.
- A value chain analysis: primary activities and support activities
Appraising Resources and Capabilities
1. 2 conditions for establishing Competitive Advantage
- Scarcity
- Relevance( to KSF )
2. Sustaining Competitive Advantage
- Durability: For example, technology is not as durable to time as brand
value.
- Transferability and Replicability: Can I buy certain resources from another of
do I have to develop it?
3. Approaches to Capability Development
- Acquiring Capabilities; M&A (fast but risky.culture shock, personality
clashes)
- Accessing Capabilities: strategic Alliances (targeted and cost-effective but
the goals should be same and have to manage relationship)
- Creating Capabilities: (time, money)

Chapter
7.
Organization
Management Systems

Structure

and

I) Relevant Vocabulary
Corporation--a corporation is an organization that has a legal identityit can
own property, enter into contracts, sue and be sued.
Holding Company--a company that develops as a result of a series of
acquisitions in which the parent company appoints the board of directors and
receives dividends but maintains little management control over the acquired
companies.
II) The Organizational Problem: Reconciling Specialization with Coordination and
Cooperation
--The fundamental source of efficiency in production is specialization through
division of labor. However, the more unstable the environment is, the more the
decisions the company has to make (and the faster), and thus the coordination cost
of division of labor becomes higher.
--The Cooperation Problemaligning the interests of individuals who have
divergent goals under the umbrella of an organization or company is extremely
difficult.
--Companies employ the following mechanisms to align goals:
Control mechanisms: reporting structures (bosses & subordinates), and
positive and negative incentive systemspromotions, bonuses, firing, etc.
Performance incentives: link rewards to output (bonuses) but are more
difficult to implement (or measure) when employees are working in teams.
Shared Values: Corporate culture.
--The Coordination Problemunless individuals can find ways to coordinate their
efforts, production doesnt happen.
--Coordination mechanisms are as follows:
Rules & Directives: Employment contracts, general company rules
Routines: Where activities are performed recurrently, coordination becomes
institutionalized within the company or organization.
Mutual Adjustment: (soccer example), individuals coordinate without explicit
discussion. This often occurs when there are leaderless teams or when

routinization/mechanization is impossible and works best when team

members are informed of the actions of their teammates.
III) Hierarchy in Organizational Design
Hierarchy: Hierarchy is the fundamental feature of organizational structure. It is the
primary means by which companies achieve specialization. The critical issue is not
whether or not companies should organize by hierarchy, but how it should be
structured and how the various parts should be linked.
--the term hierarchy is sometimes used interchangeably with bureaucracy, to mean
management from the top down. Bureaucracies do not adapt easily to changing
external environments, while well managed hierarchies can.
Benefits of Hierarchy:
--Hierarchy economizes on coordination/ makes coordination simpler and less
onerous/heavy.
--Hierarchical systems are able to adapt more easily than non-hierarchical systems.
--Turbulence in the business/economic environment often makes it difficult for
hierarchies to adapt. As a result many large corporations such as BP and General
Electric have decentralized decision making, reduced the number of hierarchical
layers, shrunk headquarters staff, , and shifted the emphasis of control from
supervision to accountability.
--the essence of hierarchy is specialized units coordinated and controlled by a
superior unitmany companies struggle with what basis on which they should
group employees. The following are examples of bases on which companies group
employees:
--tasks (sales, finance, etc.)
--products
--geography
--process (product development, manufacturing, )
IV) Organizing on the basis of coordination intensity
--a company can be organized based on geographythat is based on local units.
--a company can be organized around functional specializations (Ex. British airways
is organized around flight operations, engineering, marketing, sales, customer
service, human resources)
--a company can be organized around products
Other Factors Influencing the Definition of Organizational Units
--economies of scale: there may be advantages in grouping together activities
where scale economies are present
--economies of utilization: it may be possible to exploit efficiencies from grouping
together similar activities that result from fuller utilization of employees
--learning: if establishing competitive advantage requires building distinctive
capabilities, firms must be structured to maximize learning
--Standardization of control systems: task may be grouped together to achieve
economies of scale in standardized control mechanisms.
V) Alternative Structural Forms
The Functional Structure:

--grouping together functionally similar tasks is conducive to exploiting scale

economies, promoting learning and capability building, and deploying standardized
control systems
--different functional departments develop their own goals, values, vocabularies and
behavioral norms that make cross-functional integration difficult
Multidivisional Structure:
--a loose-coupled, modular organization where business-level strategies and
operating decisions can be made at the divisional level
--creates the potential for decentralized decision making
Matrix Structure:
--organizational structures that formalize coordination and control across multiple
dimensions are called matrix structures.
--companies such as Philips, Nestle, and Unilever adopted matrix structures during
the 1960s and 70s (in the 80s most companies dismantled these structures)
--are sometimes thought to lead to conflict and confusion.
VI) Management Systems for Coordination & Control
Information Systems
--information is fundamental to the operation of all management systems
--administrative hierarchies are based on vertical information flow (from boss to
subordinate, etc.)
--the trend towards decentralization rests on 1) information feedback to the
individual 2) information networking, which has allowed individuals to coordinate
their activities voluntarily
Strategic Planning Systems
--company knowledge becomes more complicated to manage as firms become
larger
--as firms mature, their strategic planning processes become more systematized.
--Most strategic plans consist of the following elements: 1) statement of goals; 2) a
set of assumptions or forecasts about key developments in the external
environment; 3) a qualitative statement on how the shape of the business will be
changing; 4) specific action steps with regard to decisions and projects, supported
by a set of milestones..; 5) specific action steps with regard to decisions and
projects; a set of financial projections including a capital expenditure budget
Financial Planning & Control Systems
--Capital Expenditure Budget
--Operating Budget
Human Resource Management Systems
--has the task of establishing an incentive system that supports the implementation
of strategic plans and performance targets through aligning employee and company
goals and ensuring that each employee has the skills necessary to perform his or
her job

Chapter 8.
Advantage

The Nature & Sources of Competitive

--The more turbulent an industrys environment, the greater the number of sources
of change and the greater the differences in firms resources and capabilities, the
greater the dispersion of profitability within the industry.
I) Competitive Advantage from Responsiveness to Change
--Ability to anticipate changes in the external environment
--Speed
-The first requirement for quick response is information
-The second requirement is short cycle times that allow information on
emerging market developments to be acted upon speedily
Competitive Advantage from Innovation
--innovation not only creates competitive advantage; it provides a basis for
overturning the competitive advantage of other firms
--innovation typically involves creating value for customers from novel products
--innovation may also involve redesigned processes and novel organizational
designs
Blue Ocean Strategy
--the creation of uncontested market space

--the most successful blue ocean strategies do not launch whole new industries but
introduce novel approaches to creating customer value
II) Sustaining Competitive Advantage
--Identification: the firm must be able to identify that a rival possesses a competitive
advantage
--Incentive: Having identified that a rival possesses a competitive advantage, the
firm must believe that by investing in imitation, it too can earn superior returns
--Diagnosis: The firm must be able to diagnose the features of its rivals strategy
that give rise to competitive advantage
--Resource Acquisition: The firm must be able to acquire through transfer or
replication the resources and capabilities necessary for imitation.
Deterrence & Preemption
--If a firm can persuade rivals that imitation will unprofitable, it may be able to avoid
competitive challenges
-A firm can deter imitation by preemptionoccupying existing and potential
strategic niches to reduce the range of investment opportunities open to the
challenger by
--proliferation of product varieties
--large investments in production capacities
--patent proliferation
Diagnosing Competitive Advantage
--the difficult task is to identify which differences are the critical determinants of
superior profitability
--the more multi-dimensional a firms competitive advantage and the more it is
based on complex bundles of organizational capabilities, the more difficult it is for
the competitor to diagnose the determinants of success.
Acquiring Resources and Capabilities
--a firm can acquire resources and capabilities in two ways: it can buy them or it can
build them. The period over which a competitive advantage can be sustained
depends critically on the time it takes to acquire and mobilize the resources and
capabilities needed to mount a competitive challenge.
III) Competitive Advantage in Different Market Settings
--for competitive advantage to exist, there must be imperfection in the market
(imperfect competition)
In trading markets, several types of imperfection to the competitive process create
opportunities for competitive advantage:
Imperfect Availability of Information: This provides opportunities
competitive advantage through superior access to information.

for

Transaction Costs: Competitive advantage may accrue to the traders with the
lowest transaction costs

Systematic Behavioral Trends: Competitive advantage might accrue to firms

that are better placed to follow systematic patterns that result from market
psychology.
Overshooting: Competitive advantage can sometimes be gained (in the short
term) by following the behavior of the herd.
--Competitive advantage in production markets can be influenced by the
heterogeneity of the firms endowments of resources and capabilities. The greater
the heterogeneity, the greater the potential for competitive advantage
--Where firms possess very similar bundles of resources and capabilities, imitation of
the competitive advantage of the incumbent firm is most likely
IV) Types of Competitive Advantage: Cost & Differentiation
A firm can achieve higher profits than a competitor by
Supplying an identical product or service at a lower cost or,
it can supply a product or service that is differentiated in such a way that the
customer is willing to pay a price premium that is greater than the cost of the
differentiation.
See Figure 8.4 (Page 223)
See Table 8.1 (Page 223)
--Porter defines cost leadership and differentiation as mutually exclusivea
firm that is stuck in the middle is almost guaranteed low profitability.
--In practice all firms must differentiate, exampleeven firms such as Ikea
and Southwest Airlines that are known for cost leadership, do have
branded/differentiated products.
--in many industries the cost leader is not the market leader but a smaller
competitor with minimal overheads, nonunion labor, and cheaply acquired
assets.

Chapter 9. Cost Advantage

Strategy and Cost Advantage
Price as the principal medium of competition price competitiveness requires cost efficiency.
Experience curve the relationship between unit cost and cumulative output identified by
the Boston Consulting Group. Cost analysis requires taking account of multiple factors, the
importance of each depending on industry context. Our approach to analyzing cost
advantage will be to identify the basic determinants of a firms cost position within its
particular industry.
The Sources of Cost Advantage
There are seven principal determinants of a firms unit costs (cost per unit of output) relative
to its competitors; we refer these as cost drivers. The relative importance varies across
industries, across firms within an industry and across the different activities within a firm.
The drivers of cost advantage
ECONOMIES OF SCALE

*Technical input-output relationships

*Indivisibilities
*Specialization

ECONOMIES OF LEARNING

*Increased individual skills

*Improved organizational routines

PRODUCTION TECHNIQUES

*Process innovation
*Re-engineering of business processes

PRODUCT DESIGN

*Standardization of designs and components

*Design of manufacture

INPUT COSTS

*Location advantages
*Ownership of low-cost inputs
*Nonunion labor
*Bargaining power

CAPACITY UTILIZATION

*Ratio of fixed to variable costs

*Fast and flexible capacity adjustment

RESIDUAL EFFICIENCY

*Organizational slack/X-inefficiency
*Motivation and organizational culture
*Managerial effectiveness

Economies of Scale
Economies of scale exist wherever proportionate increases in the amounts of inputs
employed in a production process result in lower unit costs. The point at which most scale
economies are exploited is the Minimum Efficient Plant Size (MEPS). Scale economies are
also important in nonmanufacturing operations such as purchasing, R&D, distribution and
advertising.
Scale economies sources:
Technical input-output relationships. In many activities, increases in output do not
require proportionate increases in input.
Indivisibilities. Many resources and activities are lumpy they are unavailable in small
sizes. Hence, they offer economies of scale as firms are able to spread the costs of these
items over larger volumes of output.
Specialization. Increases scale permits grater task specialization that is manifest in
greater division of labor. Breaking down the production process into separate tasks
performed by specialized workers using specialized equipment. Similar economies are
important in knowledge-intensive industries.
Scale Economies and Industry Concentration. Scale economies are a key determinant of an
industrys level of concentration (the proportion of industry output accounted for by the
largest firms).
Limits to Scale Economies. Despite the prevalence of scale economies, small and medium
sized companies continue to survive and prosper in competition with much bigger rivals.
How do small and medium sized firms offset the disadvantages of small scale? First, by
exploiting the flexibility advantages of smaller size; second, by avoiding the difficulties of
motivation and coordination that accompanies large scale.
Economies of Learning
The experience curve is based primarily on learning-doing on the part of individuals and
organizations. Repetition develops both individual skills and organizational routines.
Process Technology and Process Design
For most goods and services, alternative process technologies exist. A process is technically
superior to another when, for each unit of output, it uses less or one input without using

more of any other input. New process technology may radically reduce costs. When process
innovation is embodied in new capital equipment, diffusion is likely to be rapid. However, the
full benefits of new processes typically require system-wide changes in job design, employee
incentives, product design, organizational structure and management controls. In the
absence of fundamental changes in organization and management, the productivity gains
were meager. Cost leadership established is the result of matching their structures, decision
processes and human resource management to the requirements of their process
technologies. Indeed, the greatest productivity gains from process innovation are typically
the result of organizational improvements rather than technological innovation and new
hardware.
Business Process Re-engineering (BPR)
Re-engineering gurus Michael Hammer and James Champy defined BPR as: the
fundamental rethinking and radical redesign of business processes to achieve dramatic
improvements in critical contemporary measures of performance, such as cost, quality,
service, and speed. With information technology, the temptation is to automate existing
processes. The key is to detach from the way in which a process is currently organized and
to begin with the question: If we were starting afresh, how would we design this process?
Hammer and Champy point to the existence of a set of commonalities, recurring themes, or
characteristics that can guide BPR. These include:
Combining several jobs into one.
Allowing workers to make decisions.
Performing the steps of a process in a natural order.
Recognizing that processes have multiple versions and designing processes to take
account of different situations.
Reducing checks and controls to the point where they make economic sense.
Minimizing reconciliation.
Appointing a case manager to provide a single point of contact at the interface between
processes.
Reconciling centralization with decentralization in process design.
To redesign a process one must first understand it. To this extent, Hammer and Champys
recommendation to obliterate existing processes and start with a clean sheet of paper
runs the risk of destroying organizational capabilities that have been nurtured over a long
period of time. While BPR may be a faded fad, design and development is critical to cost
efficiency. Over the past decade, BPR has evolved into business process management,
where the emphasis has shifted form workflow management to the broader application of
information technology to the redesign and enhacement of organizational processes.
Product Design
Design-for-manufacture designing products for ease of production rather than simply for
functionality and esthetics- can offer substantial cost savings.
Service offerings too can be designed for ease and efficiency of production. However,
efficiency in service design is compromised by the tendency for costumers to interfere in
service delivery. This requires a clear strategy to manage variability either through
accommodation or restriction.
Capacity Utilization
The firms in an industry do not necessarily pay the same price for identical inputs.
Locational differences in input prices. The prices of inputs may vary between locations,
the most important being differences in wage rates from one country to another.
Ownership of low-cost sources of supply. In raw material-intensive industries, ownership
or access to low-cost sources can offer crucial cost advantage.

Nonunion labor. Labor unions result in higher levels of pay and benefits and work
restrictions that lower productivity.
Bargaining power. Where bought-in products are a major cost item, differences in buying
power among the firms in an industry can be an important source of cost advantage.

Residual Efficiency
In many industries, the basic cost drivers -scale, technology, product and process design,
input costs, and capacity utilization- fail to provide a complete explanation for why one firm
in an industry has lower unit costs than a competitor. These residual efficiencies relate to the
extent to which the firm approaches its efficiency frontier of optimal operation. Residual
efficiency depends on the firms ability to eliminate organizational slack surplus costs that
keep the firm from maximum-efficiency operation. These costs are often referred to as
organizational fat and built up unconsciously.
Using the Value Chain to Analyze Costs
To analyze costs and make recommendations for building cost advantage, the company or
even the business unit is too big a level for us to work at; every business may be viewed as
a chain of activities. In most value chains each activity has a distinct cost structure
determined by different cost drivers. Firms value chain to identify:
the relative importance of each activity with respect to total cost;
the cost drivers for each activity and the comparative efficiency with which the firm
performs every activity;
how costs in one activity influence costs in another;
which activities should be undertaken within the firm and which activities should be
outsourced.
The Principal Stages of Value Chain Analysis
A value chain analysis of a firms cost position comprises the following stages:
1. Disaggregate the firm into separate activities. It requires understanding the chain of
processes involved in the transformation of inputs into output and its delivery to the
costumer. Key considerations are:
the separateness of one activity from another;
the importance of an activity;
the dissimilarity of activities in terms of cost drivers;
the extent to which there are differences in the way competitors perform the
particular activity.
2. Establish the relative importance of different activities in the total cost of the product.
Our analysis needs to focus on the activities that are major sources of cost.
3. Identify cost drivers. Can be deduced simply from the nature of the activity and the
types of cost incurred. Capital-intensive activities. Labor-intensive assembly activities.
4. Identify linkages. The costs of one activity may be determined, in part, by the way in
which other activities are performed.
5. Identify opportunities for reducing costs. By identifying areas of comparative inefficiency
and the cost drivers for each, opportunities for cost reduction become evident.

Chapter 10. Differentiation Advantage

The Nature of Differentiation and Differentiation Advantage
Differentiation Variables

The potential for differentiating a product or service is partly determined by its

physical characteristics. For products that are technically simple (a pair of socks),
that satisfy uncomplicated needs (a nail) or must meet rigorous technical standards
(a thermometer), differentiation opportunities are constrained by technical and
market factors. Products that are technically complex (an airplane), that satisfy
complex needs (a vacation) or that do not need conform to particular technical
standards (toys) offer much greater scope for differentiation. Differentiation is
limited only by the boundaries of the human imagination. Differentiation extends
beyond the physical characteristics of the product or service to encompass
everything about the product or service that influences the value that costumers
derive from it. This means that differentiation includes every aspect of the way in
which a company relates to its customers. Differentiation is not an activity specific
to particular functions; it infuses all activities through which an organization relates
to its customers and is built into identity and culture of a company. In analyzing
differentiation opportunities, we can distinguish tangible and intangible dimensions
of differentiation. Tangible differentiation is concerned with the observable
characteristics of a product or service that are relevant to customers preferences
and choice processes. Tangible differentiation also includes the performance.
Tangible differentiation extends to products and services that complement the
product in question.
Intangible differentiation arises because the value that customers perceive in a
product or service does not depend exclusively on the tangible aspects of the
offering. There are few products where customer choice is determined solely by
observable product features or objective performance criteria. Where a product or
service is meeting complex customer needs, differentiation choices involve the
overall image of the firm and its offering.
Differentiation and Segmentation
Differentiation is different from segmentation. Differentiation is concerned with how
a firm competes-the ways in which it can offer uniqueness to customers.
Uniqueness might relate to consistency, reliability, quality, and innovation.
Segmentation is concerned with where a firm competes in terms of customer
groups, localities and product types. Whereas segmentation is a feature of market
structure, differentiation is a strategic choice by a firm. A segmented market is one
that can be partitioned according to the characteristics of customers and their
demand. By locating within a segment, a firm does not necessarily differentiate
itself from its competitors within the same segment. Differentiation decisions tend
to be closely linked to choices over the segments in which a firm competes.
The Sustainability of Differentiation Advantage
Differentiation offers a more secure basis for competitive advantage than low cost.
International competition has revealed the fragility of seemingly well-established
positions of domestic cost leadership. Cost advantage is highly vulnerable to
unpredictable external forces, vulnerable to new technology and strategic
innovation. Sustained high profitability is associated more with differentiation than
cost leadership.

Analyzing Differentiation: The Demand Side

Analyzing demand begins with understanding why customers buy a product or
service. Market research systematically explores customer preferences and
customer perceptions of existing products. However, the key to successful
differentiation is to understand customers.
Product Attributes and Positioning
Understanding customer needs requires the analysis of multiple attributes;
concerning the positioning of new products, repositioning of existing products, and
pricing.
Multidimensional Scaling (MDS). Permits customers perceptions of competing
products similarities and dissimilarities to be represented graphically and for the
dimensions to be interpreted in terms of key product attributes.
Conjoint Analysis. Measures the strength of customer preferences for different
product attributes. The technique requires, first, an identification of the underlying
attributes of a product and, second, market research to rank hypothetical products
that contain alternative bundles attributes.
Hedonic Price Analysis. The price at which a product can sell in the market is the
aggregate of the values derived from each of these individual attributes. Hedonic
price analysis uses regression to relate price differences for competing products to
the levels of different attributes offered by each, thereby allowing the implicit
market price for each attribute to be calculated.
Value Curve Analysis. Selecting the optimal combination of attributes depends not
only on which attributes are valued by customers but also on where competitors
offerings are positioned in relation to different attributes. By mapping the
performance characteristics of competing products on to a value curve.
The Role of Social and Psychological Factors
The problem with analyzing product differentiation in terms of measurable
performance attributes is that it does not delve very far into customers underlying
motivations. Must buying is motivated by social and psychological needs. To
understand customer demand and identify profitable differentiation opportunities
requires that we analyze the product and its characteristics, but also customers,
their lifestyles and aspirations, and the relationship of the product to these lifestyles
and aspirations.
Analyzing Differentiation: The Supply Side
Differentiation is concerned with the provision of uniqueness. Michael Porter
identifies a number of drivers of uniqueness that are decision variables for the firm:
product features and product performance;
complementary services (such as credit, delivery, repair);
intensity of marketing activities (such as rate of advertising spending);
technology embodied in design and manufacture;
the quality of purchased inputs;
procedures influencing the conduct of each of the activities;
the skill and experience of employees;
location ;
the degree of vertical integration (which influences a firms ability to control
inputs and intermediate processes).

In analyzing the potential for differentiation, we can distinguish between the

differentiation of the product (hardware) and ancillary services (software). On
this basis, four transaction categories can be identified. As markets mature, so
systems comprising both hardware ans software tend to unbundle. Products
become commoditized while complementary services become provided by
specialized suppliers.
Differentiation of merchandise (hardware) and support (software)
SUPPORT (SOFTWARE)

MERCHANDISE
(HARDWARE)

SYSTEM

PRODUCT

SEVICE

COMMODITY

Differentiated
Undifferentiated
Differentiated
Undifferentiated

Electronic commerce allows customers to assemble their own bundles of goods and
services at low cost with little inconvenience.
Product Integrity
Refers to the consistency of a firms differentiation. It has both internal and external
dimensions. Internal integrity refers to consistency between the function and
structure of the product. External integrity is a measure of how well a product fit the
customers objectives, lifestyle.
Signaling and Reputation
Differentiation is only effective if it is communicated to customers. But information
is not always available to potential customers. The economics literature
distinguishes between search goods, whose qualities and characteristics can be
ascertained by inspection, and experience goods, whose qualities and
characteristics are only recognized after consumption. The market for experience
goods corresponds to a classic prisoners dilemma. Equilibrium is established,
with the customer offering a low price and the supplier offering a low-quality
product. The resolution of this dilemma is for producers to find some credible
means of signaling quality to the customer. The most effective signals are those
that change the payoffs in the prisoners dilemma. Extended warranty, brand
names, sponsorship are all signals of quality. The more difficult it is to ascertain
performance prior purchase, the more important signaling is. Strategies for
reputation building have been subjected to extensive theoretical analysis. Some of
the propositions arise from this research include the following:
Quality signaling is primarily important for products whose quality can only
be ascertained after purchase (experience goods).
Expenditure on advertising is an effective means of signaling superior quality.

A combination of premium pricing and advertising is likely to be superior in

signaling quality than either price or advertising alone.
The higher the sunk costs requires for entry into a market and the greater the
total investment of the firm, the greater the incentives for the firm not to
cheat customers through providing low quality at high prices.

Brands
Brand names and the advertising that supports them are especially important as
signals of quality and consistency because a brand is a valuable asset. Brands
fulfill multiple roles. Most importantly, a brand provides a guarantee by the
producer to the customer of the quality of the product. The brand represents a
guarantee to the customer that reduces uncertainty and search costs. Advertising
has been the primary means of influencing and reinforcing customer perceptions;
increasingly, however, consumer goods companies are seeking new approaches to
brand development that focus less on product characteristics and more on bran
experience.
The Cost Differentiation
Differentiation adds cost. The indirect costs of differentiation arise through the
interaction of differentiation variables with cost variables. If differentiation narrows a
firms segment scope, it also limits the potential for exploiting scale economies.
One means of reconciling differentiation with cost efficiency is to postpone
differentiation to latter stages of the firms value chain.
Bringing It All Together: The Value Chain in Differentiation Analysis
The key to successful differentiation is matching the firms capacity for creating
differentiation to the attributes that customers value most. For this purpose, the
value chain provides a particularly useful framework.
Value Chain Analysis of Producer Goods
Using the value chain to identify opportunities for differentiation advantage involves
four principal stages:
1. Construct a value chain for the firm and the customer. Consider not just the
immediate customer but also further downstream in the value chain.
2. Identify the drivers of uniqueness in each activity. Achieve uniqueness in relation
to competitors offerings.
3. Select the most promising differentiation variables for the firm.
First, we must establish where the firm has greater potential for differentiating
from, or can differentiate at lower cost than, rivals. Firms internal strengths in
terms of resources and capabilities.
Second, identify linkages among activities.
Third, the ease with which different types or uniqueness can be sustained must
be considered. More differentiation is based on resources specific to the firm.
The more it will be for a competitor to imitate the particular source of
differentiation.
1. Locate linkages between the value chain of the firm and that of the buyer. The
objective of differentiation is to yield a price premium for the firm. Creating value
for customers requires either that the firm lowers customers costs, or that
customers own product differentiation is facilitated. The value differentiation

created for the customer represents the maximum price premium the customer
will pay.
Value Chain Analysis of Consumer Goods
Few consumer goods are consumed directly. When the customer is a consumer, it is
still feasible to draw a value chain showing the activities that the consumer engages
in when purchasing and consuming a product.

Chapter 11.
Change

Industry Evolution and Strategic

The Industry Life Cycle

Similarly to Product Life Cycle (demand side) theres an Industry Life Cycle (supply
side); it has the following phases: Introduction, Growth, Maturity, and Decline
Demand Growth:
Introduction
Growth
Small sales
Technical
Low
market
improvements
Efficiency raises
penetration
Novel
of Market
technology
penetration
Lack of scales
increases
Low experience
Customers:
affluent,
innovationoriented,
risktolerant

Maturity
Decline
Market
New challenging
saturation
industries
with
Demand
is
superior
wholly
for
technology
replacement

Product innovation: is responsible for new industrys birth. Rivalry around new
designs and technologies make the industry tend to converge towards a dominant
design (e.g. 35 mm camera, fast-food setup), which is strictly related to a technical
standard (specifications or technology for compatibility). Technical standards arise
when theres a network effect (need to connect users). Except for some early
movers (patents), theres no profit advantage from setting a dominant design.
Process innovation: dominant designs exist also in processes and business
models. Once the industry accepts dominant design, theres only an incremental

further product innovation. Hence firms try to increase productivity and reduce
costs by improving processes.
Life-Cycle Pattern: duration of LCP varies greatly from industry to industry (from
120 years for railroad industry to 10 years for MP3 players). Over time, Life Cycles
have tended to be compressed, especially in Internet environment. Some industries
may never enter decline phase because satisfy everlasting needs (clothes, food
processing. Etc.), while other industries may observe rejuvenation (e.g. motorcycles
in USA and Europe in 60s) due to new markets or breakthrough product
innovations.
Same industry can be in different stage for different countries.

Structure, Competition and Success Factors over the Life Cycle

Duct differentiation:
Introduction
Demand
Early adopters
(high income,
avant-garde)

Technology

Competing
technologies,
rapid product
innovation

Products

Poor
quality,
wide variety of
features
and
technologies,
frequent
design
changes
Short
production
runs,
highskilled
labor
content,
specialized
distribution
channels

Manufacturin
g
and
distribution

Growth
Rapidly
increasing
market
penetration

Standardizatio
n
around
dominant
technology,
rapid process
innovation
Design
and
quality
improve,
emergence of
dominant
design
Capacity
shortages,
mass
production,
competition
for distribution

Maturity
Mass
market,
replacement/re
peat
buying.
Customers
knowledgeable
and
price
sensitive
Well-diffused
technical
knowhow: quest
for
technological
improvement
Trend
to
commoditizatio
n. Attempts to
differentiate by
branding,
quality,
bundling
Emergence
of
overcapacity,
deskilling
of
production, long
production
runs,
distributors
carry
fewer
lines

Decline
Obsolescence

Little
product/proces
s innovation

Commodities
the
norm:
differentiation
difficult
and
unprofitable

Chronic
overcapacity,
re-emergence
of
specialty
channels

Introduction
Producers and
consumers in
advanced
countries

Growth
Exports from
advanced
countries
to
rest of world

Competition

Few
companies

Entry, mergers
and exits

KSF

Product
innovation,
establishing
credible image
of firm and
product

Design
for
manufacture,
access
to
distribution,
brand building,
fast
product
development,
process
innovation

Trade

Maturity
Production
shifts to newly
industrializing
then developing
countries
Shakeout, price
competition
increases
Cost efficiency
through capital
intensity, scale
efficiency
and
low input costs

Decline
Exports
from
countries with
lowest
labor
costs
Price
exits

wars,

Low
overheads,
buyer
selection,
signalling
commitment,
rationalizing
capacity

Organizational Adaptation Change

Organizational inertia: barriers to change:
Organizational routines. The more highly developed are the routines, the
more difficult is the introduction of new ones.
Social and political structures. Organizations create stable systems of political
power and social patterns; changes threaten established power.
Conformity. Institutional isomorphism locks organizations into common
structures and strategies. Pressure for conformism comes from government,
investment analysts, banks and other sources of resources and legitimacy
and through voluntary imitation and risk aversion.
Limited search. Organizations prefer exploitation of existing knowledge rather
than exploration of new opportunities.
Complementarities between strategy, structure and systems. Fit among these
components is hard to reach, but once accomplished becomes a barrier to
change.
Evolutionary Theory and Organizational Change: organizations adapt to
external changes through variation, selection and retention. Two theories are based
upon evolutionary theory:
Organizational ecology: changes happen at industry level (population of
firms), with new entries imitating successful models; the competitive process
is a selection mechanism in which organizations that dont match
requirements imposed by the environment cannot attract resources and are
eliminated.
Evolutionary economics: focuses on individual organizations, which introduce
variation, selection and retention at organizational routines level.

Adapting to changes through the Life Cycle: since KSFs are different through
the Life Cycle, different resources and capabilities are required across all stages. In
fact, innovator firms are not usually the same that scale to the mass-market
(consolidators) with the same product/service.
Adapting to Technological Change: Architectural Innovation: when a new
technology is limited to the component level of a product or process it can
enhance companys existing capabilities; when, on the other hand, its impact is at
architectural level (involving changes in the whole process/product configuration)
it can destroy companys capabilities.
Disruptive Technology: new technologies can be sustaining (it augments existing
performance attributes than the existing one) or disruptive (brings different
performance attributes).
Established Firms in New Industries: some established firms that cannot adapt
easily to changes appear to be less likely to enter successfully into new industries, if
compared to more flexible start-ups. But the latter have obviously less resources
and capabilities. Who is advantaged? It depends upon the extent to which the
resources and capabilities required in the new industry are similar to those present
in an existing industry. When linkage is close, established firms are likely to have an
advantage over start-ups.
Managing Organizational Change: in recent years, management of
organizational change has been viewed as a continuous activity that forms a central
component of a managers responsibilities, rather than a distinct area of
management.
Dual strategies and separate organizational units. Its often easier to pursue
changes by creating new organizational units rather than changing existing
ones and assigning development of new products (that embody new
technologies) into separate units. The biggest issue relates to the dual
strategy: how reconcile the launch of new businesses with existing ones?
Managers must shift their attention from exploiting current businesses
towards building opportunities and new capabilities for the future.
Bottom-up processes of decentralized organizational change. Decentralized
decision making is not enough for speed-up changes. It must be accompanied
by conditions that foster the change process, like:
o Raising performance expectations
o Issuing corporate-wide initiatives
o Alerting managers to the emergence of strategic dissonance created
by divergent strategic directions within the company.
o Periodical changes in organizational structure to stimulate
decentralized searches and, then, to exploit results.
Imposing top-down organizational change. Changes must be orchestrated
from the top, in order to avoid low performances following a complex
restructuration.
Using scenarios to prepare for the future. Anticipating changes is
fundamental to the ability of a company to adapt to them. Scenario analysis
is a systematic way of thinking about how the future might unfold. Its key

value is in combining the interrelated impacts of a wide range of economic,

technological, demographic and political factors into a few distinct stories. It
can be quantitative, qualitative or both.

Chapter 12. Technology-based Industries and the

Management of Innovation
Competitive Advantage in Technology-intensive industries

The principal link between technology and competitive advantage is innovation: this
is responsible for new industries coning into being and for some firms dominate
their industries.
The innovation process: while invention is the creation of new products or
processes through the development of new knowledge or a combination of existing
ones, innovation refers to the commercialization of a single or of many inventions.
Not all inventions lead to innovations, because sometimes they are not
commercially viable. Sometimes innovation is introduced in absence of new
technologies, rather simply with changes in design.

The profitability of Innovation: the profitability of innovation to the innovator

depends on the value created by the innovation and the share of that value that the
innovator is able to appropriate. The value is typically shared by innovators with
customers, suppliers, imitators/followers.
The regime of appropriability describes the conditions that influence the distribution
of returns to innovation. In a strong regime, the innovator captures substantial
shares of the value; in a weak regime, the value is kept mostly by the others.
Property Rights in Innovation: appropriating value depends greatly on the
ability to establish property rights; they include Patents, Copyrights, Trademarks,
Trade secrets
The disadvantage of establishing property rights is that they make information
public, hence companies may prefer secrecy to patents.
Tacitness and Complexity of the Technology: the extent to which innovation
can be imitated depends by the ease with which the technology can be
comprehended and replicated. This depends by:
The level of codifiable knowledge (that can be written down); the highest
information is codified, the easiest is copying it;
Complexity of the technology: the simplest the technology, the easiest is to
copy it.
Lead Time: after introducing an innovation, the innovator has a temporary
competitive advantage over the others; the time it will take followers to catch up is
called innovators Lead Time.
Complementary Resources: to make of an invention an innovation, several
resources are needed: Competitive manufacturing, Distribution, Service, Finance,
Marketing, Complementary Technologies, etc. These are called Complementary
Resources; when these resources are supplied by different firms, the division of the
value among them depends by their relative power. A key determinant of this is
whether the complementary resources are specialized or unspecialized: when
complementary resources are generalized, the innovator is in a much stronger
position to capture value.
Which mechanisms are effective at protecting innovation? Patent protection
is of limited effectiveness as compared with lead-time, secrecy and complementary
resources; although patents are effective in increasing the lead time before
competitors are able to imitate, these gains are likely to be small.
Anyways, some patents are pursued to block potential innovation coming from
competitors or to gain a bargaining power with other companies to access their
proprietary technologies.

Strategies to Exploit Innovation: How and When to Enter

Alternative Strategies to Exploit Innovation
Licensing

Outsourcin
g

Strategic
alliance

Joint
venture

Internal
commercia

Risk and
return

Resource
requireme
nts

Examples

Little
investment
risk
and
returns. Risk
that
licensee
lacks
motivation
or steals the
innovation
Few

Ericssons
Bluetooth
wireless
technology

functions
Limits
capital
investment
but
may
create
dependence
on
suppliers/pa
rtners

Benefits of
flexibility.
Risks
of
informal
structure

Shares
investment
and
risks.
Risk
of
partner
disagreeme
nt
and
culture
clash

Permits
external
resources
and
capabilities
to
be
accessed

Permits pooling of the

resources and capabilities
of more than one firm

Microsofts
Xbox
(designed
and
manufactur
ed
by
others)

Ballards
strategic
alliance with
DaimlerChry
sler
to
develop fuel
cells

Symbian
(created by
Psion, joint
venture with
Ericsson,
Nokia
and
Motorola)

lization
Biggest
investment
requirement
and
correspondi
ng
risks.
Benefits of
control

Substantial
requirement
s in terms of
finance,
production
capability,
distribution,
etc.
Google
(developed
and
marketed
internally)

Timing Innovation: To Lead or to Follow? Sometimes followers have been more

successful than first-movers; the advantage of being early mover depends on the
following factors:
The extent to which innovation can be protected by property rights and or
lead-time
The importance of complementary resources
The potential to establish a standard
Optimal timing depends also by the resources and the capabilities that of the
company: different companies have different strategic windows (periods in time
when their resources/capabilities are aligned with the opportunities of the market).
Small technology-based companies have to move first, while large established firms
have longer and later strategic windows.
Pioneering represents also a higher risk for established companies, since they might
have issues on brand and reputation protection.
Managing Risks: risks in emerging industries are mainly due to two factors:
Technological uncertainty: its given by unpredictability of technological
evolution and by the complex dynamics through which technical standards
and dominant designs are selected;

Market uncertainty: this is related to the difficulty of predicting size and

growth rates. Usually forecasts are based on extrapolation or modelling of
past data by using analogies or relying on insights and experience of experts.
Useful strategies for risks mitigation include:
Cooperating with lead users: monitoring market trends and responding to
customers requirements in the early phases of industry development helps
avoiding major errors in technology and design.
Limiting risk exposure: financial risks of emerging industries can be mitigated
by avoiding debt and keeping fixed costs low. Outsourcing and strategic
alliance can also help in doing this.
Flexibility: keeping options open and delaying commitment to a specific
technology until its potential becomes clear. Well-resourced companies have
usually the possibility of pursuing multiple strategic options.

Competing for Standards

Types of Standards: a standard is a format, an interface or a system that allows
interoperability. They can be public or private:
Public (or open): available to all either for free or for a nominal charge.
Theres no privately owned intellectual property on them or the IP owner
makes access free.
Private (or proprietary): technology and design are owned by companies or
individuals. These can be embodied into products to be sold or licensed to
others that want to use them.
Mandatory: set by governments, have force of law behind them.
De facto: emerge by a voluntary adoption by producers and users; they
make take a long time to emerge.
Network externalities: standards emerge in markets if this is subject to positive
network externalities. This exists whenever the value of a product to an individual
customer depends on the number of the other users of that product (e.g.
telephone)1. Theres no need everyone to use exactly the same product to have a
positive network externality: its enough that compatibility is guaranteed. Network
externalities arise from many sources:
Products where users are linked to a network
Availability of complementary products and services
Economizing on switching costs
NE creates positive feedback by a process called tipping: once a certain threshold is
reached, cumulative forces become unbearable, with a final winner-takes-all
result. Once established, standards are highly resilient; even if theres a superior
standard available, switch may not occur due to collective lock-in.
Winning Standards Wars: tips for winning a standards war:
Before you go, assemble allies: they might be customers, suppliers, even
competitors.
1 Similarly, negative externalities are arising when the value of the product
decreases as the number of buyers/users increases (e.g. luxury goods).

pre-empt the market: enter early, achieve fast-cycle product development,

make early deals with key customers and adopt penetration pricing
Manage expectations: convince everybody that you will emerge as the
victor.
Achieving compatibility with existing products is a critical issue: advantage typically
goes to the competitors that adopt an evolutionary strategy (e.g. backwards
compatibility) rather than a revolutionary strategy.

Implementing Technology Strategies: Creating the Conditions

for Innovation
While innovation requires certain resources, theres no predetermined relationship
between R&D input and innovation output. The crucial challenge facing firms is to
create the conditions conducive to innovation.

Manage creativity:
Conditions for creativity: creativity is fostered both by individual attitudes and
by organizational environments;
Organizing for creativity: management systems must be different and based
on different incentives (recognition, praise, personal development rather than
managerial responsibilities)
From invention to innovation: the challenge of Integration
Balancing creativity and commercial direction: the critical linkage between
these two is market need
Organizational approaches to the management of innovation: the key
organizational challenge is reconciling differentiation and integration;
organizational initiatives aimed at stimulating both new product development
and its commercial exploitation are:
o Cross-functional product development teams
o Product champions
o Buying innovation
o Open innovation (from outside)
o Corporate incubators

Chapter 13.
industries

Competitive advantages in mature

Strategies for Mature Industries:

1. Principal strategic characteristics of mature industries
o Limited number of opportunities for establishing competitive advantage
o Shift from differentiation based competitive advantage to cost-based factors
2. Key success factors within mature industries
o Key success factor Cost advantage can be achieved by:
- Economies of scale
- Low-cost inputs (new entrants tend to have less bureaucracy, etc.)
- Low overheads
3. Opportunities for strategic innovation to establish competitive advantage
o Customer segmentation and customer selection (know your customer, know your
profitable customer segments, know your customer purchasing/spending habits
and behaviors through customer relationship management (CRM) systems
o Differentiation, most likely achievable by offering complementary services (after
sales service, financing, etc.); however, very difficult to be successful in mature
industries as commoditization reduces customer willingness to pay a premium for
differentiation
o Innovation, by embracing new customer groups (Nintendo Wii, etc.), or
augmenting products and services (Barnes & Noble bookstores feature Starbucks
coffee shops)
4. Organizational structures / management systems to effectively implement
strategies
o Primary basis for competitive advantage is operational efficiency (to reduce
costs); this can be achieved by (good example: McDonalds):
- Standardization of routines
- Division of labor
- Close management control
- Clear quantitative and short term performance targets
- Incentives for individuals
- Hierarchical organizational structures with high levels of specialization and
centralized decision making
Strategies for declining industries:
1. Reasons for decline
o Technological substitution (typewriters, photographic film, etc.)
o Changes in consumer preferences (canned food, etc.)
o Demographic shifts (childrens toys in Europe, etc.)

Foreign competition (textiles in advanced industrialized countries, etc.)

2. Key features
o Excess capacities
o Lack of technical change (and with that lack of new product introduction)
o Declining number of competitors
o Aggressive price competition
3. Adjusting capacity to declining demand
o Adjusting of industry capacity to declining demand is key to stability and
profitability depends on the following factors:
- Predictability of decline
- Barriers to exit (specialized expensive assets discourage exit)
- Managerial commitment (legacy, pride, commitment to employees)
- Strategy of surviving firms (stronger firms can facilitate the exit of weaker
firms by offering to buy their assets, etc.)
o Otherwise, declining demand can lead to destructive competition
4. Strategies for declining industries
o Niche, identify a niche that is likely to maintain a stable demand
o Harvest, maximize cash flow with existing assets (avoid further investment)
o Divest

Chapter
14.
Global
multinational corporation

strategies

and

the

Internationalization can occur in 2 ways:

- Trade - Sale and shipment of goods and services to another country
- Direct Investment - Building or acquiring productive assets in another country
Types of industries:
- Sheltered industries - Sheltered from international competition by regulation,
public ownership, or barriers to trade.
- Trading industries Internationalization occurs primarily through imports and
exports.
- Multi-domestic industries Internationalize through direct investment.
- Global industries Trade and direct investment are present and high.
Porter:
- Potential entrants Low barriers to entry; internationalization is a reality
- Rivalry among existing firms Internationalization increases internal rivalry in
3 ways:
o Lowering seller concentration more firms competing in the same
market
o Increasing diversity of competitors cooperation is difficult when goals,
strategies, and cost structures are different.
o Increasing excess capacity an increase in capacity doesnt
necessarily mean an increase in market size.
- Bargaining power of buyers Large customers can excercise their buying
power more effectively.
Competitive advantage:
Firms are able to transfer their competitive advantage internationally when they can
match the conditions of the national environments (resource availability particularly,
input prices, and exchange rates among others).
Organizational structure:
Once an international strategy has been established, a suitable organizational
structure needs to be designed.
Global integration vs. National differentiation:

Industries where scale economies are huge and

homogeneous call for a global strategy (jet engines).

customer

preferences

Industries where national preferences are pronounced and where customization is

not prohibitively expensive favor a multi-domestic strategy (investment banking).
If there are no significant benefits from global integration its advisable to remain
local (funerary services) however, if there is a lack of scale economies in certain
industries (cement, car repair) there could be benefits in global presence.
Major benefits of global strategy:
1. Cost benefits: Scale and replication
2. Exploiting national resources efficiencies
3. Serving global customers
4. Learning benefits
5. Competing strategically
Foreign entry strategy framework:
1. Is the firms competitive advantage based on firm-specific or country-specific
resources?
2. Is the product tradable and what are the barriers to trade?
3. Does the firm possess the full range of resources and capabilities for
establishing a competitive advantage in the overseas market?
4. Can the firm directly appropriate the returns to its resources?
5. What transaction costs are involved?

Chapter 15. Diversification Strategy

1. Diversification may be justifies either by the superior profit potential of the
industry to be entered, or by the ability of the firm to create competitive advantage
in the new industry.
2. Motives for Diversification
- Growth: Revenue vs. Profit. Not a good idea to diversify only if you have money.
- Risk Reduction: The simple act of bringing different business under common
ownership does not create shareholder value through risk reduction.
- Profitability: 3 essential test; the attractiveness test, the cost of entry test and the
better off test
3. Competitive Advantage from Diversification
- Economies of Scope
- Economies from Internalizing Transactions

Chapter 16. Diversification Strategy

Additional Reading: General Electric: Jack Welch's second wave (A) case No. 9-391248 HBS 1991
Multi-business Structure
Usually Multi-divisional, where business decisions and controlled at business level
and corporate centers exercise overall Coordination and control
Four key efficiency advantages of the divisionalized firm called the M form
1 Adaptation to bounded rationality: dispersing decision making
2 Allocation of decision making; Allocation decisions to those that will be best
informed
3 Minimizing coordination costs; Particular product or business decisions made
at divisional level
4 Avoiding Goal Conflict; Divisional heads more likely to pursue profit goals
aligned with the overall company goals
Problems of Divisionalized firms
Constraints on decentralization: Although operational authority is to divisions, this
power only continues if HO is happy with performance
Standardization of Divisional Management: Although in theory, divisional
management allows division to be entrepreneurial, the standardized control from
HO restrains this process.
The Role of Corporate Management
1 Manage corporate investment
2 Exercise guidance and control over divisions
3 Sharing transferrable resources and information
Manage corporate investment: Include portfolio planning models with the best
known models developed by McKinsey, BCG. Which guides through 4 areas:
1 Allocating resources: via the profitability of the industry and the competitive
advantage to the firm.
2 Formulating Business Strategy: Identify current positioning, in relation to
industry attractiveness, developing competitive advantage
3 Analyzing portfolio balance: Cash flows, growth
4 Setting performance targets.

The GM/McKinsey Portfolio Planning matrix has two functions; Industry

Attractiveness and Business unit competitive advantage: If high in both
invest and grow, low in both harvest fro cash but do not invest, and in between, just
hold
BCGs Growth share Matrix is similar.
Value creation through restructuring
Refer Chart 16.4 for 5 stage approach.
1 Analyse current market value
2 Is it possible to manage value via managing external perception
3 Internal improvements: Global expansion, repositioning a business or
strategic outsourcing. Cost cutting or price increases
4 External opportunities: Sell a division if it is worth more to someone else than
to you.
5 Optimum restructured value of the company: This is the end result
PIMS (Profit Impact and Market Strategy)
Used by Multi-business companies to assist in 3 areas of corporate management:
1 Setting performance targets for business units: Par ROI (Return on
Investment)
2 Formulating business unit strategy; by using the ROI variables, the strategy
can be formulated
3 Allocating investment funds between businesses: PIMS indicates investment
attractiveness based on A) estimated real growth rate of market B) Par ROI
Managing internal linkages
Creating value in multi-business companies is done via sharing resources and
capabilities. This includes:
Functions such as, strategic planning, finance, cash risk management,
internal audit, HR, audit, taxation, government relations, R&D, legal. Thought
these benefits always tend to be less than management hopes.
These can be split into 2 corporate groups; Corporate management unit, supporting
corporate management and shared services organization which is responsible for
shared services.
The greater the share of skills, the more need there is for a corporate
headquarters!!