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SBS-EM

Contemporary Strategy Analysis, 6th edition, R.M. Grant


summary
Jerome Derycke 2009-2010

This document summarizes only the chapters spotted by professor P. Verdin: chapters 1, 2, 3, 5, 7, 8, 9 and 16

Contents
1) a. i. ii. iii. iv. b. i. ii. c. i. ii. d. i. ii. iii. iv. v. e. f. g. 2) a. b. i. ii. iii. iv. v. c. i. ii. d. i. Chapter1: The concept of Strategy (pg3) .....................................................................................................7 The role of Strategy in Success .................................................................................................................7 Goals that are simple, consistent and long term .................................................................................7 Profound understanding of the competitive environment ..................................................................7 Objective appraisal of resources ..........................................................................................................7 Effective implementation .....................................................................................................................7 The basic framework for Strategy Analysis ..............................................................................................7 Whats wrong with SWOT?...................................................................................................................8 Strategic fit ...........................................................................................................................................8 A brief history of business Strategy ..........................................................................................................8 Origins and military antecedents .........................................................................................................8 From corporate planning to strategic management ............................................................................8 Strategic Management today ...................................................................................................................9 What is strategy? ..................................................................................................................................9 Corporate and business strategy ..........................................................................................................9 Describing a firm strategy.....................................................................................................................9 How is strategy made? Design Vs. Emergence .....................................................................................9 Multiple roles of strategy .................................................................................................................. 10 The role of analysis in strategy formulation .......................................................................................... 10 Summary................................................................................................................................................ 11 Self-study questions .............................................................................................................................. 11 Chapter2: Goals, values and performance ................................................................................................ 11 Introduction and Objectives .................................................................................................................. 11 Strategy as a Quest for Value ................................................................................................................ 11 In whose interest? Shareholders vs. Stakeholders ............................................................................ 11 What is profit? ................................................................................................................................... 12 From accounting profit to economic profit: pg 37-38 ....................................................................... 12 Linking profit to enterprise value: pg 39-40 ...................................................................................... 12 Applying DCF Analysis to valuing companies, businesses and strategies ......................................... 12 Strategy and Real Options ..................................................................................................................... 12 Calculating real option value ............................................................................................................. 13 Strategy as Options management ..................................................................................................... 13 Putting Performance Analysis into Practice .......................................................................................... 13 Appraising current and past performance ........................................................................................ 14 2

ii. iii. iv. e. i. ii. iii. f. g. 3) a. b. c. d. i. ii. iii. iv. v. vi. e. i. ii. iii. f. i. ii. g. h. 4) a. b. i. ii. c.

Performance diagnosis ...................................................................................................................... 14 Evaluating alternatives strategies ..................................................................................................... 15 Setting performance targets ............................................................................................................. 15 Beyond profit: Values and Social responsibility .................................................................................... 16 The paradox of profit ......................................................................................................................... 16 Values and principles ......................................................................................................................... 17 The debate over corporate social responsibility ............................................................................... 17 Summary pg 61 ...................................................................................................................................... 17 Self-study questions .............................................................................................................................. 17

Chapter3: Industry Analysis: The fundamentals........................................................................................ 17 Introduction and objectives .................................................................................................................. 17 From environmental analysis to industry analysis ................................................................................ 18 The determinants of industry profit: demand and competition ........................................................... 18 Analyzing industry attractiveness .......................................................................................................... 18 Porters five forces of competition framework ................................................................................. 19 Competition from substitutes ........................................................................................................... 20 Threat of entry................................................................................................................................... 20 Rivalry between established competitors ......................................................................................... 21 Bargaining power of buyers............................................................................................................... 22 Bargaining power of suppliers ........................................................................................................... 23 Applying industry analysis ..................................................................................................................... 23 Describing industry structure ............................................................................................................ 23 Forecasting industry profitability ...................................................................................................... 23 Strategies to alter industry analysis structure................................................................................... 23 Defining industries: where to draw the boundaries ............................................................................. 23 Industries and markets ...................................................................................................................... 23 Defining markets: substitution in demand and supply ..................................................................... 24 From industry attractiveness to competitive advantage: identifying key success factors ................... 24 Summary page 93-94 ............................................................................................................................. 25 Chapter5: Analyzing resources and Capabilities ....................................................................................... 25 Introduction and objectives .................................................................................................................. 25 The role of resources and capabilities in strategy formulation............................................................. 25 Basing strategy on resources and capabilities................................................................................... 26 Resources and capabilities as sources of profit................................................................................. 26 The resources of the firm ...................................................................................................................... 26 3

i. ii. iii. d. i. ii. e. i. ii. iii. f. i. ii. iii. g. i. ii. iii. iv. h. i. i. ii. iii. iv. 5) a. b. i. ii. iii. c. i. ii. iii.

Tangible resources............................................................................................................................. 27 Intangible resources .......................................................................................................................... 27 Human resources............................................................................................................................... 27 Organizational capabilities .................................................................................................................... 28 Classifying capabilities ....................................................................................................................... 28 The architecture of capability ............................................................................................................ 29 Appraising resources and capabilities ................................................................................................... 30 Establishing competitive advantage .................................................................................................. 30 Sustaining competitive advantage .................................................................................................... 30 Appropriating the returns to competitive advantage ....................................................................... 31 Putting resource and capability analysis to work: a practical guide ..................................................... 31 Step1: Identify the key resources and capabilities ............................................................................ 31 Setp2: appraising resources and capabilities .................................................................................... 31 Step3: developing strategy implications ........................................................................................... 32 Developing resources and capabilities .................................................................................................. 33 The relationship between resources and capabilities ....................................................................... 33 Replicating capabilities ...................................................................................................................... 33 Developing new capabilities .............................................................................................................. 33 Approaches to capability development............................................................................................. 34 Summary................................................................................................................................................ 35 Appendix: knowledge management and the knowledge-based view of the firm See Page 159 .......... 35 Types of knowledge ........................................................................................................................... 35 Types of knowledge process.............................................................................................................. 35 Knowledge conversion ...................................................................................................................... 35 Conclusion ......................................................................................................................................... 35

Chapter7: the nature and sources of competitive advantage .................................................................. 35 Introduction and objectives .................................................................................................................. 36 The emergence of competitive advantage ............................................................................................ 36 External sources of change ................................................................................................................ 36 Competitive advantage from responsiveness to change .................................................................. 36 Competitive advantage from innovation: New game strategies ................................................... 37 Sustaining competitive advantage ........................................................................................................ 37 Identification: obscuring superior performance ............................................................................... 38 Deterrence and preemption .............................................................................................................. 38 Diagnosing competitive advantage: causal ambiguity and uncertain imitability ....................... 38 4

iv. v. d. i. ii. iii. e. f. 6) a. b. c. i. ii. iii. iv. v. vi. vii. d. i. e. 7) a. b. i. ii. iii. c. i. ii. d. i. ii. iii.

Acquiring resources and capabilities ................................................................................................. 38 First-mover advantage....................................................................................................................... 38 Competitive advantage in different market settings ............................................................................ 38 Efficient markets: the absence of competitive advantage ................................................................ 39 Competitive advantage in trading market......................................................................................... 39 Competitive advantage in production markets ................................................................................. 40 Types of competitive advantage: cost and differentiation ................................................................... 40 Summary page 220 ................................................................................................................................ 41

Chapter8: Cost advantage ......................................................................................................................... 42 Introduction and objectives .................................................................................................................. 42 Strategy and cost advantages................................................................................................................ 42 The sources of cost advantage .............................................................................................................. 42 Economies of scale ............................................................................................................................ 43 Economics of learning ....................................................................................................................... 44 Process technology and process design ............................................................................................ 44 Product design ................................................................................................................................... 44 Capacity utilization ............................................................................................................................ 45 Input costs ......................................................................................................................................... 45 Residual efficiency ......................................................................................................................... 45

Using the value-chain to analyze costs.................................................................................................. 45 The principal stages of value chain analysis ...................................................................................... 45 Summary................................................................................................................................................ 46 Chapter9: Differentiation advantage ........................................................................................................ 46 Introduction and objectives .................................................................................................................. 46 The nature of Differentiation and Differentiation advantage ............................................................... 46 Differentiation variables .................................................................................................................... 46 Differentiation and segmentation ..................................................................................................... 47 The sustainability of differentiation advantage ................................................................................ 47 Analyzing Differentiation: The demand side ......................................................................................... 47 Product attributes and positioning (see page 246 for details) .......................................................... 47 The role of Social and Psychological factors ...................................................................................... 47 Analyzing Differentiation: The supply side ............................................................................................ 48 The drivers of uniqueness ................................................................................................................. 48 Product integrity ................................................................................................................................ 48 Signaling and Reputation ................................................................................................................... 49 5

iv. v. e. i. ii. f. 8) a. b. i. ii. c. d. i. ii. iii. iv. e. i. ii. iii. iv. f. i. ii. iii. g. h.

Brands ................................................................................................................................................ 49 The costs of Differentiation ............................................................................................................... 49 Bringing it all together: the value Chain in differentiation Analysis...................................................... 49 Value chain analysis of producer goods ............................................................................................ 50 Value chain analysis of consumer goods ........................................................................................... 50 Summary................................................................................................................................................ 51

Chapter 16: Managing the Multibusiness Corporation ............................................................................. 51 Introduction and objectives .................................................................................................................. 51 The structure of the Multibusiness Company ....................................................................................... 51 The theory of the M-form ................................................................................................................. 51 Problems of divisionalized Firms ....................................................................................................... 52 The role of Corporate Management...................................................................................................... 52 Managing the corporate Portfolio ......................................................................................................... 52 GE and the development of strategic planning ................................................................................. 52 Portfolio planning: the GE/McKinsey Matrix ..................................................................................... 53 Portfolio planning: BCGs growth-share matrix................................................................................. 54 Value Creation through corporate restructuring .............................................................................. 54 Managing Individual businesses ............................................................................................................ 55 The strategic planning system ........................................................................................................... 55 Performance control and the budgeting process .............................................................................. 55 Balancing strategic planning and financial control............................................................................ 55 Using PIMS in strategy formulation and performance appraisal ...................................................... 56 Managing Internal Linkages................................................................................................................... 56 Common corporate services.............................................................................................................. 56 Business linkages and Porters corporate strategy types .................................................................. 56 The corporate role in managing linkages .......................................................................................... 57 Leading Change in the Multibusiness Corporation ............................................................................... 57 Summary................................................................................................................................................ 58

Part1-Introduction
1) Chapter1: The concept of Strategy (pg3)
a. The role of Strategy in Success
The book goes through 3 very different cases: Madonna, Vietnam war (North Viet Vs. US), Lance Armstrong and the Tour de France. Here are the common points highlighted: i. Goals that are simple, consistent and long term Madonna: being a superstar ii. Profound understanding of the competitive environment US and South Vietnam were not defeated by superior resources, but by superior Strategy! (US and South Viet have a far larger army!): North Viet won because their enemy gave up! They undermined us will to win by playing on the political field: supporting peace movements in us, and separating the US from their western allies. Besides, the US has no clear aim: supporting South Viet? Fighting Vietcong Terrorists? Combating World Communism? Confusion: who is the enemy? What does the war underlie? in this context it is not possible to keep LT strategy iii. Objective appraisal of resources Exploit internal strength and protect areas of weakness iv. Effective implementation Without implementation, the best strategy is not very useful Successful Strategy

Effective implementation

Simple, consistent, LT goals

Profound understanding of the competitive environment

Objective appraisal of resources

b. The basic framework for Strategy Analysis


We take the 4 previous points and sort them into 2 categories: the firm environment and the industry one. Firm environment -Goals -Resources and capabilities -Structure and systems Strategy Industry environment -competitors -customers -suppliers 7

The task of the business Strategy is to determine how the firm will deploy its resources within the environment and so satisfy its LT goals, and how to organize itself to implement that strategy. i. Whats wrong with SWOT? Is it better to use a 2-way distinction (cf supra) between internal and external influences or a 4-way SWOT1 taxonomy? The categorization into 4 groups is a bit arbitrary and does not always fit to reality since a factor can be sort both as a strength and a weakness for example. So the most important is to identify internal and external factors, and then think deeply about their implications. ii. Strategic fit To make a strategy successful, the latter has to be consistent with-to fit with both external and internal environment.

c. A brief history of business Strategy


i. Origins and military antecedents Strategy = the overall plan for deploying resources to establish a favourable position Tactics = a scheme for a specific action

ii. From corporate planning to strategic management At the beginning, we made forecasts about the total demand, our market shares, and then we estimate our production capacity, the costs encountered, the necessary investments, etc... That was corporate planning. But after 2 oil crisis it turns out that with such moving world it was not possible anymore to forecasts everything. We had then, to move to Strategic management that focuses less on details such as setting the number of machines we will have to buy, etc...Now, we focus on competition and competitive advantage, positioning on the markets... Then, shift from analyzing external environments to analysing company resources: focus on what we are rather than aiming at the most attractive markets. Porter: Competitive Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value The internet technology and other technologies are now the important drivers for opportunities and threats. The uncertainty that resulted from all this technology makes the purpose of the strategy not only being the quest for profit, but also the management of uncertainty: real option and flexibility. Figure 1.3 page 18 summarizes the history

Swot : strengths & weaknesses (internal), opportunities & weaknesses (external)

d. Strategic Management today


i. What is strategy? ii. Corporate and business strategy Industry attractiveness (which industries should we be in?)

Corporate Strategy

Rate of return > cost of capital (how do we make money?)

Competitive advantage (how should we compete?)

Business Strategy

The purpose of the Strategy is to achieve certain goals, for a company the goal is to survive or prosper, which means, having rate of return on capitals > to cost of capital. There are two ways to achieve this; you can move to an attractive market with high rates of return, or you could attain a position in an industry so that you earn superior rate of return than the average of the industry. Corporate Strategy: the scope is the industry; it concerns investment in diversification, vertical integration, acquisitions, allocation of resources among the businesses... Domain selection: where to compete? Business Strategy (= competitive Strategy): how the firm competes within the industry, competitive advantage... Domain Navigation: how to compete?

These 2 notions are closely linked and may depend on each other. iii. Describing a firm strategy Where to find a firm strategy? (Strategy is in top managers minds, but we are not mind readers) Start-up? In the business plan Big enterprise? In its Vision, but it might be too idealized. In its Mission

In its Business Model, it is a statement of the basis on which a business will generate profit. It is a preliminary to a Strategy In its Strategic plans, it documents the strategy in terms of performance goals, approaches to achieve these goals... iv. How is strategy made? Design Vs. Emergence According to Mintzberg, there are 3 ways of making a strategy: Intended strategy: it is decided by the top management, it is a process of bargaining, negotiations and compromises involving many people and groups Realized strategy: thats the actual strategy, only partly related to the intended strategy Emergent strategy: the decision that emerges from the complex process in which individuals managers interpret the intended strategy and adapt it to circumstances 9

The debate is about whether the Strategy is something deliberately planned or something that comes out a complex process of organizational decision making. Mintzberg argues that analytical approaches to design strategy are a poor way of designing it: the strategy is closely linked to the day-to-day management and there is a lot to learn from the continuous interaction between Strategy Formulation and Strategy implementation, where Strategy is constantly being adjusted. Bref, Strategy is made through a combination of design and emergence: strategy is made at boards level, but also at the middle management level where it is interpreted: it is a condition for a maximized responsiveness and adaptability Vs. Rigid imposed Strategy that does not fit every specific circumstances met by middle managers. Strategy planning combines top-down and bottom-up strategy making it leads to planned Emergence. So the idea is to provide guidelines from the top to down, and let the down interpret these in an adaptive and innovative ways. (Decentralized decision making) The balance between design and emergence depends on the stability of the external environment, the more uncertain is the environment, and the more emergent should be the strategy. v. Multiple roles of strategy Strategy making is part of the management process and plays multiple roles within the organizations: 1. Strategy as Decision Support Strategy simplifies decision making by constraining the range of decision alternatives: human rationality is limited! A strategy-making process is a reflexion on-and a process that integrates the knowledge of different individuals A strategy-making process helps the use of analytical tools

2. Strategy as a coordinator device It is a communication device that allows the ceo to communicate goals, company's identity... The strategic planning process enables everyone to participate: views are exchanged and consensus are developed The implementation of the strategy also ensures that the organization moves forward in a consistent direction 3. Strategy as target It is no enough to establish a direction for the development of the firm, the strategy has also to set aspirations that can motivate and inspire the members of the organization Some says Strategy does not necessary have to fit existing resources of the company, there can be a gap between ambitions and resources: then strategy plays the role of resource leverage and for the organization it is a challenge to close the gap by building new competitive advantages.

e. The role of analysis in strategy formulation


The analytic techniques are there to help us identify, classify and understand the principal factors relevant to strategic decisions. It guides us to the questions we need to answer and this analytical approach is no 10

substitute for creativity, intuition, etc...But an important complement, an important input in the strategy formulation.

f. Summary
Structure of the book page 28

g. Self-study questions

Part2-The tools of strategy Analysis


analysis of industry and competition ch3-industry analysis: the fundamentals analysis of the firm ch2-goals, values and performance ch5-analyzing resources and capabilities

2) Chapter2: Goals, values and performance


a. Introduction and Objectives
In the book we assume that the primary goal of the firm is to maximize profit over the long term: Business strategy is then a quest for profit. But the successful businesses are the ones driven by their ambitions other than profit. Profit is the life-blood but it is not what motivates people: important to link business to the missions it pursues.

b. Strategy as a Quest for Value


Businesses are about creating value; for the customer first, and then try to extract some of that value in the form of profit. Value through production: transformation of products that become more valuable to customers Value through commerce: transfer a product to one place to another one where it is more valuable.

i. In whose interest? Shareholders vs. Stakeholders It is a long debate. But Grant assumes that companies operate in the interests of their shareholders, their owners (English speaking countries approach) by maximizing long term profit. Why? Competition: the competition makes the interests of stakeholders converging to a common goal: survival. And survival requires in the long term, rates of returns > cost of capital. If competition is harsh, the only way is profit seeking. The market for corporate control: Management teams that fail to maximize profit are replaced by others: there is a pressure on board directors to improve shareholder returns. Convergence of stakeholder interests: Long-term profitability requires employees loyalty, trusting relationships with suppliers and customers and support from government and communities, etc... Simplicity: stakeholder approach implies high level of complexity and the basic tools are designed for profit maximization.

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But we know that a profit is not the sole motivation driving businesses, changing the world is a very important one among others. But goals other-than-monetary requires financial success to be achieved. ii. What is profit? It is the surplus of revenues over costs available for distribution to the owners of the firm. But... Maximizing total profit or rate of profit? Percentage of sales? (ROS) Total assets? (ROA) or shareholders equity? (ROE) Over what time of period? Quarterly? Annual? How to measure profit? Be aware of the accounting practices, depending on firms, countries... iii. From accounting profit to economic profit: pg 37-38 iv. Linking profit to enterprise value: pg 39-40 We calculate NPV of return to company assets. The value of the firm is the sum of its discounted cash flows. Cash flow is relevant, accounting revenues are not. Maximizing enterprise value and shareholder value means the same thing in the perspective of strategy analysis. v. Applying DCF Analysis to valuing companies, businesses and strategies Same methods used for business and firms valuation can be used for strategy valuation: forecast the cash flows related to each alternative strategy and choose the one with the highest NPV. This approach implies some steps: Identify strategy alternatives Estimate the cash flows associated with each strategy Estimate the implication of each strategy for the cost of capital, taking into account risk and financing implications Select the strategy that generates the highest NPV

(Refer to advanced finance for discussions on NPV). It is simple in theory but in practice it is hard to apply; Cash flow forecast, unpredictability of future business conditions, linking specific cash flows with a strategy is doubtful, ... A strategy is more consistent with product introductions, output levels, prices and investments in new plants. Qualitative approaches may be better for Strategy Strategy as a portfolio of options rather than investments.

c. Strategy and Real Options


Real option analysis as a new field of finance gives important implications for Strategy. You can make an investment that at first does not look like to yield profits for shareholders, but those investments may be an option on further markets or investments. For instance, you invest in renewable energies because it has an option value; you invest to be a leading player in alternatives energy for the time when a conflict or a crisis strikes in the oil market or regulation. 12

Once made, investments are irreversible, and in a world of uncertainty, flexibility is valuable. Thats why you split a project into phases, so at the end of each phase you see if you go onto the next one or not, depending on the new circumstances. i. Calculating real option value The techniques are quiet complex and it might be a problem for the analyst. But the underlying idea is straightforward. This is the 4 stage process of McKinsey to value flexibility in a process (can be applied to business strategy) Apply a standard DCF analysis to the project without taking account of any flexibility options Model uncertainty in the project using event trees. This requires identifying the key uncertainties facing the project at each point of time and identifying the cash flows associated with different outcomes. Model flexibility using a decision tree. Identify the key managerial decisions with regard to flexibility at each stage of the development of the project in order to convert the event tree into a decision tree. Flexibility may relate to abandonment, deferring investment, or changing the scale of the project. Estimate the value of flexibility. For this, the following two approaches can be used o Real option valuation o Decision trees

ii. Strategy as Options management Creating options, by increasing the strategic flexibility of the firm, increases the firms value. It is critical to compare the flexibility costs to the option value that such flexibility creates. Plants that can produce a large variety of products are more valuable than specialized plants for instance. For complete strategies, so not just for a single project, creating option value means positioning the firm in a way it has numerous possible opportunities. Example: Platform investments: it creates a stream of additional options Strategic alliances and joint ventures: limited investments that offer options for the creation of whole new strategies. Organizational capabilities: if a knowledge, an asset can offer multiple business opportunities. For instance, the skills in miniaturization can help in CD screens, solar Cells, PDAs...

d. Putting Performance Analysis into Practice


Profit maximization is convenient and reasonable assumption for the purpose of strategy formulation Profit can be measured in many different ways DCF valuation underestimates values when there are important option values Using value maximization as a basis for selecting an optimal strategy is difficult: hard to forecast cash flows, real option approach is complex and we lack information Given these, how should we use financial analysis in Strategy? 4 points:

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i. Appraising current and past performance The first thing to do in strategy formulation is to assess current situation; identify current strategy and its financial performance. Then diagnose: identify the sources of problems. Forward-looking performance measures: stock market value

We look at the stream of profit (Cash Flow) over the rest of the firms life. For public companies we can use stock market price to evaluate strategy and management team performance. But 1) the information in stock price is imperfect and 2) expectations about a firms future revenues is volatile and depend on external factors (global economy...) Backward-looking performance measures: Accounting ratios

Given the problems linked to stock price as an indicator, we prefer accounting and financial ratios and these are historical. Commonly used performance indicators: ROIC: return on invested capital ROE: measure the profitability for shareholders of the capital that shareholders have brought ROA Gross margin: measure the extent to which a firm adds value to the goods and services it buys in Operating margin: measure the ability to extract profit from its sales Net margin: idem

Be aware of the possible bias and use several indicators to validate their consistency. ii. Performance diagnosis If we face poor performance, we have to identify the sources of this problem: we disaggregate the return on capital employed to spotlight the problems

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cost of goods sold/Sales

return on sales

depreciation/sales

Sales, general and administrative expenses/ sales ROCE (ROIC) fixed asset turnover (Sales/ plant, property and equipment)

inventory turnover (sales/inventories) sales/capital employes creditor turnover (sales/receivables)

turnover of other items of working capital

You combine this information with qualitative information on business strategy, operations, product strategy, organizational issues faced, and the condition of the world market and then you can try to formulate hypothesises on explanations of the problems/successes identified. After that you can identify measures to be taken. Good example of the use of this disaggregation page 48-49 iii. Evaluating alternatives strategies If a firm underperforms, the main priority for strategy is to address these sources of deficient performance. If the firm is in very bad situation, then strategy goal is to adopt short-term orientation. If a firm performs well, we should not say ok, there is nothing to change and strategy has to prepare the business for changing market and competitive conditions. Because forecasting cash flows is difficult, qualitative analysis such as industry trends, product market conditions and sources of competitive advantage can be a good basis for strategy formulation. iv. Setting performance targets If to the overall firm maximizing enterprise value is meaningful, it is totally meaningless for managers down the hierarchy: set targets that are specific to the departments and meaningful for the managers match performance target with the variables managers can control.

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We can use the disaggregate principle here, to identify where the problems lie. Balanced scorecards

The general problem with system of performance management is that goals are long-term while it has to be monitored over the short-term. The scoreboard is a method to make sure that the pursuit of financial goals is not at the expense of long-term strategic position: it helps balance financial and strategic goals and the performance measurement is expanded down the firm (business units...) How do we look to shareholders? How do customers see us? What must we excel at? Can we continue to improve and create value?

Full example page 52.

e. Beyond profit: Values and Social responsibility


i. The paradox of profit The most profitable companies are the one that have other goals than enterprises value maximization: other factors play major roles; a strong vision, an idea, a motivation to change something. Why? A strategic goal (everyone will have a car), leads a company to direct its efforts towards the sources of competitive advantage within its industry Motivation: the goal of maximizing shareholders value is unlikely to motivate employees, to induce a good cooperation, ...

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Profits are to business as breathing is to life, it is essential but it is not what you live for. (But without longterm profitability, you cannot reach any of your goals, thats why in the book they make the assumption of LT profit seeking, even if it goes with sustainable environment) ii. Values and principles The pursuit of the financial goal is likely to be constrained by employees values, ideals and principles for instance. Values and principle is not only image management, it transcends the pursuit of profit and even impact the behaviour of employees, their propensity to collaborate... Values complement the vision: put together core ideology and vision and you get a powerful sense of strategic direction. So strategy is also about creating purpose and unifying the energy and creativity of organizational members in pursuing that purpose. iii. The debate over corporate social responsibility Values and principles may conflict with commercial interests. Plus, personal interests of the CEO may lead to spend owners money to serve general social interest. Two different conceptions The property conception The social entity conception

But one says toward the property conception that today shareholders are not anymore owners that run the company (vs. 19th century), they are just investors. It is important to reward shareholders, but companies live to do something better or different than anyone else. The company is a living organization whose lifespan depends on its ability to adapt itself to the environment. And this can only be achieved through close interactions and supportive relations with the stakeholders. In the long-term, shareholders and stakeholders interests converge.

f. Summary pg 61 g. Self-study questions

3) Chapter3: Industry Analysis: The fundamentals


a. Introduction and objectives
The firms proximate environment is its industry environment; this is why we will study industry analysis. The latter is consistent for both corporate and business level: Corporate strategy: in which industries shall we compete? What should be the allocation of the resources among these? we need to analyse the attractiveness of n industry to answer that question Business strategy: how should we compete? On what competitive advantage? The key is to identify the sources of competitive advantage in an industry: the key success factors 17

b. From environmental analysis to industry analysis


The business environment of the firm consists of all external influences that affect its decisions and performance. Given the large number of possible external influences, managers need to use a framework to organize information (Ex: PEST analysis: political, economic, social and technological factors): Distinguish what is vital from what is not important with regard to profit making Understand the customers to whom you deliver value Understand and manage the suppliers from whom you buy goods and services Understand the competition

So customers, suppliers and competitors form the firms industrial environment Of course more macro-level factors may impact the firm and the latter has to understand the implications of macro-level changes.

the national/international economy

the natural environment

technology

demographic structure

The industry environment


government and politics

-Suppliers -competitors -customers

social structure

c. The determinants of industry profit: demand and competition


The starting point is: what determines the level of profit in an industry? The value of the product for the customer The intensity of competition The bargaining power of the producers relative to their suppliers

Industry analysis brings these 3 factors into a single analytic framework.

d. Analyzing industry attractiveness


The competitive behaviour and so the profitability of an industry is not a random thing; it depends on the industrys structure. The theories underlying this are the theory of monopoly and the theory of perfect competition; monopoly if a single actor with high barriers to entry; perfect competition if several actors provide the same product and low barrier to entry; oligopoly if few actors dominate the industry. In reality firms evolve in a mix of those theories.

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Perfect oligopoly duopoly Monopoly competition Concentration Many firms A few firms Two firms One firm Entry and exit No barriers Significant barriers High barriers barriers Product Homogeneous Potential for product differentiation differentiation product (commodity) Information No obstacles to Imperfect availability of information availability information flow Analyze the principal structural features and their interactions and it will be possible to predict the competitive behaviour and the resulting profitability of an industry. i. Porters five forces of competition framework 5 forces of competition that determine the competition level and the profitability of an industry: 3 horizontal forces: o Competition from substitutes o Competition from entrants o Competition from established rivals 2 vertical forces: o The power of suppliers o The power of buyers

supplier power

threat of entry

industry rivalry

threat of substitutes

buyer power

The strength of each of these forces is determined by key variables: Buyer power o Price sensitivity: Cost of product relative to total cost Product differentiation Competition between buyers o Bargaining power: 19

Size and concentration of buyers relative to producers Buyers switching costs Buyers information Buyers ability to backward integrate Supplier power o See buyer power Threat of entry o Capital requirements o Economies of scale o Absolute cost advantages o Product differentiation o Access to distribution channels o Government and legal barriers o Retaliation by established producers Threat of substitutes o Buyer propensity to substitute o Relative prices and performances of substitute Industry rivalry o Concentration o Diversity of competitors o Product differentiation o Excess capacity and exit barriers o Cost conditions

ii. Competition from substitutes Presence of substitutes means that customer will switch to substitutes if the relative price of the product increases or other things than the price such as the convenience etc...Cf. advanced Marketing. The more complex a product, the more difficult it is to discern its price-performance and the least consumer will make their choice based on price; ex: failure of cheaper perfume because we cannot discern the performance of different flagrances. iii. Threat of entry If an industry earns a return on capital in excess of its cost of capital, and if barriers to entry are low, new firms will enter it until competition reduced the possible profit to zero. The threat of entry is enough to cause a situation where established firms lower their prices. An industry with no sunk costs investments make it vulnerable for hit and run entry. A barrier to entry is any advantage that an established firm has over new entrants. The principal sources of barriers to entry are discussed below. 1. Capital requirements If the necessary capital costs to get into an industry are high it may discourages new entrants 2. Economies of scale The problem for new entrants is whether to deal with small scale and high unit costs or large scale but risk of underutilization costs. The main source of scale economies is new product development costs. 20

3. Absolute cost advantages A cost advantage is an advantage that is not linked with the scale. These absolute cost advantages may be the result of the acquisition and the control of low-cost sources of raw materials or it could result from economies of learning. 4. Product differentiation It relates to brand recognition and customer loyalty. New entrants must spend a lot in advertising and promotion to gain brand awareness similar to established firms. 5. Access to channels of distribution A limited capacity within distribution channels (shelf spaces...) limits the access to the industry: Example: the battle for the shelf space in supermarkets and the phenomenon of slotting fees. Internet allowed new businesses to circumvent barriers to distribution. 6. Governmental and legal barriers Example: licenses given by the public authority, patents, copyrights, regulatory requirements, safety standards... It is a barrier because it raises compliance costs for new entrants. 7. Retaliation Barriers to entry also depend on the possibility of aggressive price-cutting, increased advertising, sales promotion or litigation driven by established firms. To avoid retaliation, new entrants start by entering a less visible market segment. For example Asiatic car manufacturers started in the US small cars segment in order to penetrate US car market. 8. The effectiveness of barriers to entry Industries protected by high barriers to entry tend to earn above average rates of profit. Capital requirements and advertising appear to be particularly effective obstacles to entry. The effectiveness of these barriers depend on the resources of the new entrants: barriers effective against new entrants may be ineffective against firms from other industries that are diversifying. There are different ways to overcome barriers; the power of the Brand, the skills, etc... iv. Rivalry between established competitors 1. Concentration It refers to the number and the size of firms in the industry. It is commonly measured by the concentration ratio: the combined market share of the leading producers. Oligopoly or duopoly? Firms tend to collusion on price and compete on advertisement, promotions and product development. The more actors there are, the less feasible is the collusion and bigger the likelihood that one will start a price-cut. Note that the effect of concentration on profitability is weak (Richard Schmalensee) 2. Diversity of competitors The less similar (cost structure, origins, objectives, strategies...) are the competitors, the smaller is the likelihood of collusion. The hard competition of the car market is due to the different origins, costs management styles and strategies of the manufacturers. 21

3. Product differentiation In industries where products are differentiated, price competition tend to be weak, even though there may be any firms competing. 4. Excess capacity and exit barriers It is linked to the balance of demand and production capacity. The idea of overcapacity is to push price cuts and attract new business so that fixed costs can be spread over greater sales volume. In industries where resources are durable and specialized, and where employees are entitled to job protection, barriers to exit may be important. 5. Cost conditions: scale economies and the ratio of fixed to variable costs When excess capacity causes price competition, how low will prices go? It depends on the cost structure: if fixed costs are important relative to total costs, effect on profitability can be disastrous. For instance, the variable cost of filling empty seats for airlines is very low: they face high fixed costs. There is a critical level of production at which you can benefit from scale economies, but given the fixed demand, firms fight for market shares to be able to reach that critical level. v. Bargaining power of buyers In an industry, firms can operate in 2 types of markets: In Input markets: firms purchase raw materials, components and financial and labor services. In Output markets: firms sell their goods and services to customers (who may be distributors, consumers or other manufacturers

In both markets, value is shared among buyers and sellers. Here we start with the output market: the firm and its customers. The strength of a buyer depends on two things: 1. Buyers price sensitivity The greater the importance of an item in its structure cost, the more buyers will be price sensitive The less differentiated the products of the supplying industry, the more the buyer will switch from one supplier to another based on the price. The more intense the competition among buyers, the greater their need for price reduction form sellers The more critical is an industrys product to the quality of the buyers product or service, the less price sensitive are buyers

2. Relative bargaining power Having bargaining power roughly means having the power to refuse to deal with the other party. The bargaining power of both parties depends on their credibility and on the relative costs each party issue by not making the deal. Size and concentration of buyers relative to suppliers: the smaller the number of buyers and the bigger their purchases, the greater the cost of losing one (? Empirical study page 79) Buyers information: the more information buyers have the more they will be able to bargain. You need information on price and on quality, otherwise you cannot bargain Ability to integrate vertically: ability to find another supplier or to do the job yourself; backward integration. 22

vi. Bargaining power of suppliers Now we cope with the input market: the firm and its suppliers: the analysis is similar to the bargaining power of buyer, the roles are inverted.

e. Applying industry analysis


Now we know what drives competition, we can describe an industry structure, try to forecast its profitability and ultimately, put in place strategies to change its structure. i. Describing industry structure Identify the main players: the producers, the customers, the suppliers, the producers of substitutes... Then identify their characteristics to determine the competition and their bargaining power. It is critical to define the frame of what we call our industry in both products and geographical scope (Frame of reference, Cf. Reading market 3 questions you have to ask). ii. Forecasting industry profitability Changes in industry structure tend to be long term and are the results of fundamental shifts in consumer behaviour, technology and firm strategies. We can use our current observation to identify emerging industry trends. The analysis follows 3 stages: Examine to what extent current level of competition and profitability are a consequence of present industrys structure. Identify the trends that are changing the industrys structure: new entrants? Concentration? Differentiation or commoditization? Demand? Compare to today, does the changes look like tough? Identify the impacts on the 5 forces: weakening or strengthening competition? iii. Strategies to alter industry analysis structure Identify the key features that have a negative impact on profitability See which of these features are ductile through strategic initiatives.

f. Defining industries: where to draw the boundaries


i. Industries and markets Definition from the economists: an industry is a group of firms that supplies a market There is a close correspondence between industries and markets but the difference is that industry if identified with broad sectors while markets refer to specific products: a firm in the food industry compete on many markets! So the starting point is the market: which are the groups of firms that compete to supply a particular service, a particular market? We start at micro-level with customers choosing between rival offerings. Competitive strategy is the positioning of a single offering vis--vis a unique set of potential customers and competitors. (it has no sense to talk about the watch market, because you have the luxurious ones, the sport ones...and these are different offerings). This approach contrasts with global approach of Porter. The choice between both approaches depends on the type of questions we want our strategy to answer: for marketing strategy (product design, pricing...) it is 23

relevant to go onto the micro-level. But for mid-term profitability analysis, the aggregate level approach of Porter fits. ii. Defining markets: substitution in demand and supply So to define industrys boundaries we look at the markets. But now how do we define markets? Markets boundaries are defined by substitutability on the demand side and on the supply side. Demand side: if Jaguars customers are not willing to substitute trucks for cars, Jaguar is in the automobiles market and if customers are likely to substitute the Jaguar for a luxury car then Jaguar is in the luxury car market. Supply side: but if Jaguar can easily switch its production to family cars (using the same plants), then it is competing on a broader automobiles market. Geographic scope: substitutability again: if customers are able to substitute their car with others from different national origins and if manufacturers can divert their output among different countries, then the market is global. Note that substitutability is higher in the long run and so the longer the term of your analysis, the broader will you consider your markets. Sometimes markets area continuum and can be seen as a set of more or less overlapping concentric circles. To use the 5 forces, the market boundaries are not that important as we use also external factors.

g. From industry attractiveness to competitive advantage: identifying key success factors


We have a framework to identify industrys potential for profit. But how will this profit be shared among competing firms? Competition between firms is a battle for competitive advantage. To proposer/survive, a firm has to assess two questions: What do our customers want? (Really? See Marketing reading on market driven and market drivers?): it is the basis for a chain analysis; if customers want low price, then the key issues concern our cost structure. What does the firm need to do to survive competition?

Analysis of disaggregated financial ratios can provide a framework to identify the key factors of profitability.

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Prerequisite for success

What do customers want?

How does the firm survive competition?

Analysis of demand -who are our customers? -what do they want?

Analysis of competition -what drives competition? -what are the main dimensions of competition? -how intense is the competition? -how can we obtain a superior competitive position?

Key success factors

h. Summary page 93-94

4) Chapter5: Analyzing resources and Capabilities


a. Introduction and objectives b. The role of resources and capabilities in strategy formulation
Strategy is about matching the resources and capabilities to external opportunities. Strategy can be about the external opportunities but here we focus on opportunities in the internal environment. The Firm -goals and values -resources and capabilities -structure and systems The industry environment -competitors -Customers -Suppliers

Strategy

The firm-strategy interface

The environmentStrategy interface

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Why the shift from industry environment to internal resources and capabilities? Because it is safer vs. unstable environment and because profitability comes more from competitive advantage than from the attractiveness of an industry. i. Basing strategy on resources and capabilities Resources and capabilities is a much stable basis on which a company can define its identify and a long-term strategy whereas the industry and the external environment is much less stable. Firms are built around specific technological capabilities and where these capabilities are applied is of secondary importance. ii. Resources and capabilities as sources of profit Competitive advantage is more important than industry attractiveness for the simple reason that finding a safe and LT profitable unexploited industry is increasingly hard. Thats why developing resources and capabilities has become the big focus of strategy. But in practice the line is between both is not obvious as industry attractiveness comes from ownership of superior resources (ex: barriers to entry come from the ownership of patents...). When strategy is about choosing the right industry and positioning, firms follow similar strategy When you follow a resource-based approach, firms focus on exploiting their uniqueness and on leveraging points of differences. (reading market: 3 questions)

So a deep understanding of the firms resources and capabilities is important and allow us to: Select a strategy that exploits our key strengths Develop the firms resources and capabilities to fill the gaps (so not just use our current capabilities): it allows us to better fit to changing business conditions

c. The resources of the firm


So we start by assessing the resources and capabilities available to the firm Resources: productive assets owned by the firm Capabilities are what the firm can do

Individual resources are not competitive advantage, they have to work together to build organizational capabilities. Types of resources and relationships in the figure below:

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i. Tangible resources Knowing that a company possesses fixed assets with a book value of X billion is useless with regard to strategy. What we need to know is the composition of these assets, their location, the type of assets, their age, etc... Once we know that, we see how to create more values with those assets, for that we have to ask 2 questions: What opportunities exist for economizing on their use? Use fewer resources to support the same business level? Or reach a higher business activity with the same level of resources? Better inventory control and better cash control? What are the possibilities for employing existing assets more profitably? Redeploy assets for another use? In another location? ii. Intangible resources Brands name and trademarks for instance. These are reputational assets that come from the trust of the customers. The brand has a value if it can charge a premium. The value of a brand can be increased by increasing its product/market scope. Technology, intellectual property, patents...

iii. Human resources It is the expertise and the efforts provided by the employees. Competency modelling: identification of a set of skills, content knowledge, attitudes and values associated with superior performers within a job category and then confronting each employee to this profile. You can use the results to identify the necessary trainings, formations, to make hiring selection, etc...

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The culture of the organization (values, traditions and norms): it plays a role in the interactions of the employees. In general firms with strong financial performance are those with strong managerial values that conduct the business.

d. Organizational capabilities
Resources are not productive on their own: to perform a task, a team of resources must work together and thats the organizational capability of a firm; its capability to deploy resources to achieve a task. Core competences are those that o Make a disproportional contribution to customer value or to the way it is delivered o Provide a basis for entering new markets

i. Classifying capabilities It is necessary to categorize to be able to identify and disaggregate a firms capabilities. 2 possible approaches: A functional analysis identifies the capabilities in relation to each of the principal functional areas of the firm A value chain analysis separates the activities of the firm into a sequential chain

Functional classification Functional Areas Corporate functions

Management information R&D

Operations

Product design Marketing

Sales and distribution

Capability Financial control Strategic management of multiple businesses Strategic innovation Multidivisional coordination Acquisition management International management Comprehensive, integrated MIS network linked to managerial decision making Research Innovative new product development Fast-cycle new product development Efficiency in volume manufacturing Continuous improvements in operations Flexibility and speed of response Design capability Brand management Promoting reputation for quality Responsiveness to market trends Effective sales promotion and execution Efficiency and speed of order processing Speed of distribution Quality and effectiveness of customer service

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And below the Value chain of Porter:

ii. The architecture of capability Lets try to understand organizational capabilities by looking at their structure 1. Capability as routine Organizational routines are regular and predictable patterns of activity made up of a sequence of coordinated actions by individuals. Routinization is an essential step in translating directions and operating practices into capabilities. Ex: sales, ordering, distribution and customer service activities are organized through a number of standardized and complementary routines. 2. The hierarchy of capabilities We can disaggregate the broad capabilities into more specialist capabilities performed by smaller teams of resources: we can draw a hierarchy of capabilities. Ex: A hospitals capability in treating heart disease depends on its integration of capabilities in diagnosis, physical medicine...

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e. Appraising resources and capabilities

scarcity the extent of the competitive advantage established relevance durability the profit-earning potential of a resource or capability sustainability of the competitive advantage transferability replicability property rights Appropriability relative bargaining power embeddedness

The profits that a firm earns from its resources and capabilities depend on 3 factors: their ability to establish a competitive advantage, to sustain that advantage and to appropriate returns on that advantage. i. Establishing competitive advantage Resources and capabilities have to meet 2 conditions to establish a competitive advantage: Scarcity: if all the players have a capacity, it might be needed to play (points of parity?), but it is probably not enough to build a competitive advantage: build competitive advantage on scarce resources and capabilities (points of difference? See marketing course and reading 3questions). Relevance: it has to be relevant with regard to the key success factors in the market

ii. Sustaining competitive advantage Profits earned depend on how long the competitive advantage can be maintained Durability: technology capability is difficult to hold, it has to be constantly renew while brands name seem to be more durable (Coca-Cola, Heinz...) Transferability: if someone is able to buy a capability it means it is transferable. Here are some obstacles to transferability: o Geographical immobility o Imperfect information regarding to the quality and productivity of resources o Complementarities between resources the detachment of one resource will decrease its productivity o Organizational capabilities, because they are less mobile than individual resources

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Replicability: if a firm cannot buy a capability, it must build it, if it possible, then the capability is replicable. Less replicable capabilities are those based on complex organizational routines o asset mass efficiencies: a strong initial position facilitates the accumulation of these resources o time compression diseconomies: replicated resources tend to be less productive than similar expenditures made over a longer period

iii. Appropriating the returns to competitive advantage Capabilities based on knowledge and human skills may yield profits through competitive advantage but since the firm does not really own those, it may not be able to appropriate the profits. The less clearly defined is the ownership of resources and capabilities, the greater the bargaining power of deciding the repartition of the profits between the firm and its individual members. The more an employee skill is integrated into an organizational routine, the less it has bargaining power. If: The individual contribution is clearly identifiable If the employee is mobile And if the skill offers similar productivity in other firms

Then the employee has important bargaining power in appropriating the profits.

f. Putting resource and capability analysis to work: a practical guide


How do we appraise our resources and capabilities and then use the appraisal to guide strategy formulation? i. Step1: Identify the key resources and capabilities From an external focus: we examine the key success factors (Chap3) (design, low-cost, ...) What capabilities and resources do these key success factors imply? Switch to the internal focus: Then we can categorize through the value chain to have a sequence or through the functional divisions. It allows us to underpin which resources underpin each capabilities. ii. Setp2: appraising resources and capabilities 1 criteria: importance 2nd criteria: where are our strengths and weaknesses compared to competitors?
st

1. Assessing importance Needed to play vs. needed to win. Do not concentrate only on customer choice criteria but on establishing competitive advantage. 2. Assessing relative strength Relative and not objective because how to be objective? The risk is to blindly assess your strength based on your previous successes. So conduct the analysis both inside and outside and focus on insight and understanding rather than on just having datas: Inside: try to identify patterns in historical performance Outside : use benchmarking 31

3. Bringing together importance and relative strength See page 146 and 147. Importance Relative Strengths comments Resources R1 6 5 R... Capabilities C1 9 7 C... Both scales range from 1 to 10. The ratings are based on the authors subjective judgement. The Relative strengths are compared to benchmarks, each resource and each capability may have its own benchmark (you take for benchmark the best company in the field) Then you can map the results:

iii. Step3: developing strategy implications 1. Exploiting key strengths Formulate a strategy that ensures that these resources are effectively deployed. Ex: if engineering is a key strength, then focus on differentiation through technical sophistication and safety features 2. Managing key weaknesses Converting weaknesses into strengths is a long-term process. A better solution might be to outsource (and what if it is related to a key success factor? You outsource it?), or you can converse it into a strength (Harley Davidson transformed its poor technological capacities into a strength: old bike components are part of the retro-look and are valuable in that way!)

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3. What about superfluous Strengths? These are strengths that do not seem to be important for sustainable competitive advantage. You can disinvest in those capabilities to reinvest in key strengths or you can make these superfluous strengths key to your business.

g. Developing resources and capabilities


Gap analysis between the current position and the desired one is very limited, since the investments to fill the gaps ay be very expensive or of little productivity (complementary assets for example). i. The relationship between resources and capabilities It is not the size of a firms resource base that leads to success, but its capacity to leverage its resources. That can be done in the following ways: Concentrating resources through the process of converging resources on a limited set of clear and consistent goals and target the activities that have a clear impact on customer value Accumulating resources through mining experience in order to achieve faster learning and borrowing from other firms (alliances, outsourcing...) Complementing resources involves increasing their effectiveness through linking them with complementary resources and capabilities Conserving resources involves utilizing resources and capabilities to the fullest by recycling them through different products, markets...

ii. Replicating capabilities Replicate your capabilities internally, for other products or for other locations for instance. Replication requires systemization of the knowledge that underlies the capabilities- typically through the formulation of standard operating procedures (ex: McDo). iii. Developing new capabilities It is hard 1. Capability as a result of early experiences Organizational capability is path dependent, a companys capabilities today depends on its history and history will set constraints for future development. So a starting point to understand the current capabilities is to go back in time in the foundation and the early development of the firm to identify the key circumstances. 2. Organizational capability: rigid or dynamic? Having highly developed organizational capabilities give little margin for the firm to adapt to environment changes. Core capacities are simultaneously core rigidities. But there are firms able to upgrade and extend continuously their organizational capabilities: dynamic capabilities; those that enable the firm to address rapid changes. No clear agreed definition of what dynamic capabilities are. Strong organizational capabilities may be barriers to entry-a disadvantage for new entrants- but also barriers for new capabilities development-and so an opportunity for new entrants-. So what it is? It depends whether the innovation is competence destroying or competence enhancing. 33

iv. Approaches to capability development Here are 3 common approaches to capability development. 1. Acquiring capabilities: Mergers and Acquisitions If acquiring capabilities it is a long-term process, then acquiring a firm that already developed those is a good shortcut. But it may be risky and it is not enough just to acquire, you still have to find a way to integrate: risk of culture clashes, personality clashes, incompatibility management systems...and these risks can lead to the destruction of the searched capabilities. 2. Accessing capabilities: Strategic alliances M&A is costly, and then alliances may be a cheaper alternative. Strategic alliances: a cooperative relationship between firms involving the sharing of resources for the pursuit of common goals.

Ex: joint-research, joint distribution, technology-sharing arrangements, shared manufacturing, joint marketing... The risk is a competition between the 2 firms to acquire competences of the other. That may destabilize the relationship. 3. Creating capabilities To create the capabilities, you first have to acquire and integrate the necessary resources. Moreover we assume (we do not really know) that organizational routines that capabilities are based on, emerge through the process of learning by doing. Organizational structure and management systems play an important role: Capabilities need to be housed within dedicated organizational units (Ex: product development is easier if undertaken in the product development unit^^) But if there is a department dedicated to each capability, we will face an organizational complexity. Organizations need to be systematic in their approach to capability development. One point is the role of performance aspirations to drive capability development

Sometimes, the organization structure and the management systems do not allow the development of some capabilities, and then it may be a solution to develop it into a new organizational unit that is geographically separated from the firm. Or we can use the push-pull approach: push the development of a product and that will pull the capabilities required for the development of that same product. In every case, the process has to be incremental. A powerful tool for managing the integration of the knowledge of multiple organizational members is knowledge management: see appendix of the chapter, page 159.

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h. Summary
Here is a framework for analyzing resources and capabilities: 4. Develop strategy implications: a. In relation to strengths i. How can these be exploited more effectively and fully? b. In relation to weaknesses: i. Identify opportunities to outsource activities that can be better performed by other organizations ii. How can weaknesses be corrected through acquiring and developing resources and capabilities 3. Appraise the firms resources and capabilities in terms of: a. Strategic importance b. Relative strength

Strategy

Potential for sustainable competitive advantage

2. Explore the linkages between resources and capabilities 1. Identify the firms resources and capabilities

Capabilities

Resources

i. Appendix: knowledge management and the knowledge-based view of the firm See Page 159
i. Types of knowledge ii. Types of knowledge process iii. Knowledge conversion iv. Conclusion

Part3: the analysis of competitive advantage


5) Chapter7: the nature and sources of competitive advantage

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a. Introduction and objectives b. The emergence of competitive advantage


Definition of a competitive advantage: When two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit The point is that competitive advantage may not be revealed in higher profitability, because the firm spends its current profit in investments in market shares, technology, customer loyalty or executive perks i. External sources of change The more turbulent and industrys environment, the greater the number of sources of change, and the greater the differences in firms resources and capabilities, the greater the dispersion in firms profitability. The process of the emergence of competitive advantage:
how does competitive advantage emerge?

*external sources of change -changing customer demand -changing prices -technological change

*internal resources of change

some firms have greater creative and innovative capability

resource heterogeneity among firms means differential impact

some firms are faster and more effective in exploiting change

ii. Competitive advantage from responsiveness to change The ability of quick and good responsiveness to change is crucial in establishing competitive advantage and so taking advantage of the change. This ability is what we call entrepreneurship and is a core management capability. Responsiveness is also about anticipating the changes. Responsiveness to opportunities provided by external changes requires: An important resource: information: provided by relationships with customers, suppliers, competitors... An important capability: flexibility: speed is a source of competitive advantage and the faster you respond to a change, the less you have to forecast the future

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iii. Competitive advantage from innovation: New game strategies Changes can be external or internal. Internal changes come from innovation: the latter creates competitive advantage but also undermine competitors competitive advantages. In business, innovation is not only new knowledge and ideas put together, but also new approaches in doing business: strategic innovation, new business models. Strategic innovation involves creating value for customers from novel experiences, products, delivery How to formulate innovative strategies? Reconfigure the value chain in order to change the rules of the game Deliver high customer satisfaction through combining performance sources that were viewed as conflicting (innovation and low-price for instance) Create new markets or recreate one Management innovation: lean production of Toyota, Brands management in P&G

c. Sustaining competitive advantage


Competition erodes competitive advantage. The speed with which a competitive advantage is undermined depends on competitors ability to imitate or to innovate. Imitation is the most common practice. Then, for a competitive advantage to be sustainable, a firm has to build barriers to imitate, use isolating mechanisms. A successful process of imitation requires 4 conditions: Identification of rivals competitive advantage Incentive to imitate this competitive advantage: earning superior returns Diagnose the features that enable this competitive advantage Acquire the resources and capabilities required

Here is the process of a successful imitation with the relative types of isolating mechanisms:

Requirement for imitation


identification

isolating mechanisms
obscure superior performance

incentives for imitation

-Deterrence: signal aggressive intentions to imitators -Preemption: exploit all available investment opportunities
rely on multiple sources of competitive advantage to create "causal ambiguity"

diagnosis

base competitive resource acquisition advantage on resources and capabilities that are immobile and difficult to replicate

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i. Identification: obscuring superior performance A simple barrier to imitation is to hide that the company has profitable competitive advantage. It is for course, easier for private companies than for public companies. ii. Deterrence and preemption Deterrence: To make the threats credible, it is useful to be able to rely on a reputation (price war for instance). Preemption: Or you could occupy all existing niches to reduce the investments opportunities opened to new entrants: Proliferation of product varieties Large investments in production capacity ahead of the growth of market demand Patent proliferation can protect technology-based advantage by limiting competitors technical opportunities (see Innotech BA3)

Preemption can work if: The market is small relative to the minimum scale of production: very small number of competitors is viable There must be FMA that gives an advantage in terms of information, resources

iii. Diagnosing competitive advantage: causal ambiguity and uncertain imitability If a firm relies on complex organizational capabilities, it is hard to imitate and among the resources and capabilities, it is not easy to identify the key ones that explain performance. iv. Acquiring resources and capabilities The period over which a competitive advantage can be sustained depends a lot on the time competitors need to acquire and mobilize the necessary resources and capabilities. See chapter 5 for the transferability or the acquisition of capabilities and resources. v. First-mover advantage A new entrants ability to challenge an established firm depends on the benefits that the established firm could take from its first mover advantage. There is a FMA if the first mover has an access to resources and capabilities that a follower cannot reach. Ex: Patent, copyright, preferential access to scarce resources, early profit streams to build resources and capabilities faster than followers

d. Competitive advantage in different market settings


There are possible competitive advantages only if there are imperfections in the competition. We have seen 2 types of value-creating businesses: Trading: arbitrage across space and time (speculation) Production: physical transformation of inputs into outputs

These 2 types of business correspond to 2 types of market: 38

Market Type

Source of imperfection of competition None (efficient markets) Imperfect information availability Transaction costs Systematic costs overshooting Barriers to imitation

Opportunity for competitive advantage None Insider trading Cost minimization Superior diagnosis (chart analysis) Contrarianism Identify barriers to imitation and base strategy on them Difficult to influence or exploit

Trading markets

Production markets

Barriers to innovation

i. Efficient markets: the absence of competitive advantage The closest examples of the perfect competition are the financial market and the commodities markets2. An efficient market is one of which price reflect all available information: it is not possible to beat the market, in other words, there is no competitive advantage. Ex: financial markets require only 2 simple types of resources: finance (homogenous) and information (differentiated but easily transferable). If both are equally available to all traders, there is no basis for one to have a competitive advantage. ii. Competitive advantage in trading market We use the example of the financial market to introduce some imperfections; the way the latter relate to the availability of resources and to show how those imperfections can be turned into competitive advantage. 1. Imperfect availability of information See the table above. 2. Transaction costs See the table above. 3. Systematic Behavioral Trends If the price only follows the arrival of new information, then it is a random walk. But if it follows other factors there is a place for a strategy: in the stock market there are/were systematic patterns such as the January effect, etc. Competitive advantage comes from superior skills in understanding those behaviors. 4. Overshooting People overreact to new information and that causes prices overshoot: it is the result of imitative behavior. But the overshoot does not last long and it comes back to equilibrium. So a source of advantage may be to follow a contrarian strategy: do the opposite of the mass-market participants.

P. Verdin : there is no such thing as a commodity, if you sell commodities, it means you run out of ideas.

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iii. Competitive advantage in production markets In contrast to trading markets, production markets rely on complex combinations of highly differentiated resources and capabilities. The greater the uniqueness of each actor (so the higher the differentiation level), the greater the potential for competitive advantage and the less feasible is imitation. If resources are differentiated, the competition will be less direct: a firm will substitute a rivals competitive advantage by using different resources and capabilities. (Ex: substitute a distribution network with an online retail website) Substitute competition is difficult to counter because it may come from everywhere: alternative resources, technological innovation, new business models a solution may be to persuade competitors that substitution will not be profitable (cf. supra: deterrence) 1. Industry conditions conductive to emergence and sustaining of competitive advantage The level of difference between firms plays a role as we have seen, but the characteristics of the industry also. The opportunities for establishing competitive advantage depend on: Whether the industry environment is unpredictable and likely to change or not (regulatory change, technological change, changing customer preferences) The complexity of an industry as it determines the variety of competitive advantage opportunities

The effect of competition on competitive advantage erosion through imitation also depends on industry characteristics: Information complexity: the more difficult is it to diagnose the how of a rivals success, the more difficult it will be to imitate it. Where competitive advantage is based on complex and multilayered capabilities, the advantage tends to be more sustainable Opportunities for deterrence and preemption: the opportunity is high if the market is small (only few places for players), if essential resources are scarce or highly protected, or if economies of learning are important. In one of these conditions, the FM can have a sustainable advantage. Difficulties of resource acquisition: it differs from an industry to another

e. Types of competitive advantage: cost and differentiation


There are 2 ways for a firm to yield higher rate of profit over a rival:

Cost: supply the same product/service but at a lower cost cost advantage Differentiation: supply a differentiated product for which the customer is willing to pay a
premium that exceeds the costs of differentiation differentiation advantage

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Characteristics of those 2 different approaches to business strategy: Generic strategy Key strategy elements Resource and organizational requirements Access to capital Process engineering skills Frequent reports Tight cost control Specialization of jobs and functions Incentives linked to quantitative targets

Cost Leadership

Scale-efficient plants Design for manufacture Control of overheads and R&D Process innovation Outsourcing Avoidance of marginal customer accounts

Differentiation

Emphasis on branding advertising On design On service On quality And on new product development

Marketing abilities Product engineering skills Cross-functional coordination Creativity Research capability

Incentives linked to qualitative performance targets Porter says that those 2 strategies are mutually exclusive because the firm in the middle will underperform on both cost and differentiation, plus, it will suffer from unclear corporate culture and management systems. But it is not as simple, it is not like if you say okay lets differentiate or not. Moreover adopting cost leadership does not mean you cannot differentiate (Ikea, VW beetle) and vice versa: innovations in manufacturing technology and manufacturing management allow both increases in productivity and quality. But focusing on quality is more likely to bring better quality and cost reduction while focusing on cost will, in general, only result in cost decreases (not always long-term decreases).

f. Summary page 220

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6) Chapter8: Cost advantage


a. Introduction and objectives
Cost advantage is at first, the way of competing in commodity markets. But it has become a necessity in a lot of other industries to be able to compete.

b. Strategy and cost advantages


The experience curve theory that links cumulated experience to cost, states that the unit cost of value added to a standard product declines by a constant % each time cumulative output doubles. The implication of this theory is that the firms' priority should be to increase market share. BUT the cost of increasing market shares may be bigger than the related benefits. Moreover, Market share does not necessarily lead to more profitability and sometimes it can be the opposite: a firm uses its profits to increase its market shares. Or it could be that profitability and market shares are the outcome of another factor: innovation, cheap labor... SO, cost advantage is the result of multiple factors and the key in an industry analysis is to find the key cost drivers in this specific industry.

c. The sources of cost advantage


The sources are not to be found only in the experience curve, it is a mix of multiple factors that varies across industries, across firms within an industry and across activities within a firm.

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Economies of scale Economies of learning Production techniques Product design Input costs Capacity utilization Residual efficiency

technical input-outpu indivisibilities specialization

increased individual skills improved organizational routines

process innovation reengineering of business process

standardization of designs and components Design for manufacture

Location advantages Owenership of low-cost inputs Nounion labor Bargaining power Ratio of fixed to variable costs Fast and flexible capacity adjustment

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

i. Economies of scale There are economies of scale when proportionate increases in the amounts of inputs employed in a production process result in lower unit costs. In general there is a minimum efficient size the firm tries to reach. The sources of scale economies are: Technical input-output relationships: in general the increase in outputs requires only a less than proportional increase in inputs Indivisibilities: some resources are not available in small sizes and so the bigger the output, the more you can spread the costs of an indivisible resource. Specialization: it promotes learning, avoids time loss and additional costs from switching activities and assist in mechanization and automation.

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1. Scale economies and Industry Concentration Scale economies explain an industry's level of concentration (the % of industry output accounted by the largest firms). In the auto industry, big firms buy smaller one because they do not produce the sufficient volume to amortize their cars development costs. But the critical scale advantage is rarely in production: it may be in advertising, etc. 2. Limits to scale economies Despite scale economies we see small competitors surviving among big ones because the advantages of scale-economies are offset by 3 factors: the ability of smaller firms to better differentiate the flexibility advantage of being smaller the difficulty of encouraging motivation and coordination in large units

ii. Economics of learning The more complex a process or a product the more important is the potential of learning. Learning occurs both at the individual (problem solving...) and the organizational level (better routines,...) iii. Process technology and process design A process is better than another one when, for each unit of output, it uses less of one output without using more of any other input. If it uses more of other inputs it depends on the relative prices. Benefiting from new processes involve making some changes in: job design, incentives, product design, organizational structure, management control...So it is key to adapt the organization and the human resource management to the requirements of the new process technologies in order to benefit from these. 1. Business process reengineering To reorganize your business to adopt a new process, ask yourself the question "how would I do if I were starting from scratch?". There are few recurrent hints in reengineering: combine several jobs in one allow workers to make decisions perform the steps of a process in a natural order design processes to take account of different situations perform processes where it makes sense: the accountant needs pencils? buy it in the shop around the corner rather than making an order through the purchasing department control only where it makes economic sense minimizing reconciliation appoint a case manager to provide a single point of contact at the interface between processes combine both centralization and decentralization in process design (shared database, decentralized decisions coordinated through shared information)

The risk of thinking like if we start from scratch, is to destroy organizational capabilities that have matured for a long time. iv. Product design Designing for manufacture means designing for ease of production rather than simply for functionality or aesthetics. It may lead to important cost savings. 44

v. Capacity utilization Underutilization raises unit costs as fixed costs are spread over fewer outputs and overutilization raises costs due to overtime payments, costly small plant extensions,... In cyclical industries the ability of adjustment may be an important cost advantage. Make the difference between cyclical overcapacity and structural overcapacity. vi. Input costs Firms in an industry may pay different prices for identical inputs because: Locational differences in input prices: wages... Ownership of low-cost sources of supply: example in oil and gas Nonunion labor: it reduces costs of wages for instance Bargaining power

vii. Residual efficiency Sometimes none of the sources above can explain the cost advantage because it comes from institutional efficiencies that depend on firm's culture and management style. You can have high residual efficiency if you avoid any unnecessary costs Ex: Walmart has high residual efficiencies; low hostel costs, no perks, etc...

d. Using the value-chain to analyze costs


As the cost structure may even differ from an activity to another, it is necessary to disaggregate the firm's value chain to identify: the relative importance of each activity Vs. total cost the cost drivers for each activity and the related comparative efficiencies how cost in one activity influence costs in another which activities to keep/develop in house and which to outsource

i. The principal stages of value chain analysis Here are the stages to proceed a value chain analysis: 1) Disaggregate the firm into separate activities and look at: a. the separateness of one activity from another b. the importance of an activity c. the dissimilarity of activities in terms of cost drivers d. the extent to which there are differences in the way competitors perform the activity 2) establish the relative importance of different activities in the total cost of the product (through Activity Based Costing for ex.): focus on the major sources of cost. 3) compare costs by activity: to see in which activity the firm outperforms or underperforms by using benchmarks (competitors) 4) Identify cost drivers: for each activity what factors determine the level of cost relative to other firms? capital equipment costs? wages? speed of work? Defect rate? 5) Identify linkages: one activity may affect costs of another one, Ex: complex products may increase costs related to client helpdesk, low quality raw materials may increase defect rate...

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6) Identify opportunities for reducing costs: once you have identified the comparative inefficiencies and the cost drivers for each, it is easy to spot opportunities. Example page 237 of the book.

e. Summary
Cost efficiency is no longer a guarantee of profitability but it is almost always a prerequisite for success. The basis of a cost-reduction strategy must be an understanding of the determinants of a company's costs. Go beyond simple accounting data's. Given the multiple factors that influence costs, cost management implies multiple initiatives at different organizational levels.

7) Chapter9: Differentiation advantage


a. Introduction and objectives
A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers beyond simply offering a low price. Differentiation advantage occurs when firms can get a premium from its differentiation that exceeds the cost of differentiation. Everything can be differentiated. (there is no such thing like a commodity, dixit P. Verdin) Differentiation is not only about the product features, but about identifying and understanding all the possible interactions between the firm and its customers, and see how those can be enhanced to deliver additional value to the customers. Differentiation is closely linked to business strategy: who re our customers? how do we create value for them? and how can we do it more efficiently than competitors? TWO requirements for profitable differentiation: on the supply side, the firm must be aware of its resources and capabilities through which it can creates uniqueness on the demand side, the key is to know needs of our customers (Vs. Market-driver?)

b. The nature of Differentiation and Differentiation advantage


i. Differentiation variables Products that are technically complex, that meet complex needs, that not have to meet particular technical standards are the products with the highest differentiation potential. Beyond that,, not only physical features can be differentiated but all about the product/service that influences the value the customer derive from it. (see Marketing course) Tangible dimensions of differentiation: these are the observable characteristics; size, color, design, technology, reliability, speed... All the products and services that are complement to the product in question 46

Intangible dimensions of differentiation: these are for instance: social, emotional, aesthetical choices or also desire for status, exclusivity, security...but also image differentiation (important for experience goods).

ii. Differentiation and segmentation Differentiation is about how a firm competes (on speed, quality, reliability...) and segmentation is about where does the firm compete (customers groups, localities, product types). Differentiation is about the firm's positioning in a market, or a market segment. So you can differentiate while being in a mass market. But in general, by differentiating you inevitably target a niche market. iii. The sustainability of differentiation advantage Low cost offers a less secure advantage then differentiation: differentiation is more sustainable because cost advantage can be affected by new technology, unpredictable external forces (increase in currencies)...

c. Analyzing Differentiation: The demand side


Get customers insight, direct questions are often more valuable than classic market research. i. Product attributes and positioning (see page 246 for details) There are numerous techniques to analyze customer preferences in relation to different product attributes Multidimensional scaling Conjoint Analysis Hedonic price analysis Value curve analysis

The general idea is to find all the valuable attributes for a customer, to see what the competitors do and then find an opportunity for a new set of attributes that would differentiate your product or service. ii. The role of Social and Psychological factors The problem with analyzing product differentiation in terms of measurable performance attributes is that it does not give a deep insight into customers motivations: these are not just basic needs but also more complicated needs such as belonging needs, esteem needs, So analyze the customers lifestyle and the place the service/product takes into this lifestyle.

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d. Analyzing Differentiation: The supply side


Creating differentiation advantage also depends on a firms ability to offer differentiation: we will look at its resources and activities. i. The drivers of uniqueness Some drivers of uniqueness: Product features and product performance Complementary services: delivery, repair Intensity of marketing activities Technology embodied in design and manufacture The quality of purchased inputs Procedures influencing the conduct of each activity: quality control The skill and experience of the employees Location The degree of vertical integration, it influences the ability to control inputs and intermediate processes

We can differentiate the product and/or the surrounding services (the bundle). ii. Product integrity Product integrity refers to the consistency of a firms differentiation. There must be both internal integrity (consistency with the function and the structure-components match together, etc.) and external integrity (products function and structure fits to customers values, objectives, lifestyle). It is a matter of credibility and it depends largely on the companys ability to live the values embodied in the images associated with its products/services.

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iii. Signaling and Reputation Differentiation is effective only if it is communicated to customers. At this point, remember the difference between search goods and experience goods. Examples of signals: brand names, warranties, expensive packaging, money-back guaranties, sponsorships of sports events and cultural events, a good retail environment Here are some propositions with regard to reputation building: Signals are more important for experience goods. Expenditure on advertising is an effective signal of superior quality, since low quality producers do not expect customers retention, and so it would not be profitable for them to advertise Mix advertising and premium pricing for credibility The higher the sunk costs related to a market entry, the higher the incentive for a company not to cheat the customers with low quality at high price.

iv. Brands Brands are valuable assets because it fulfills multiple roles: It identifies the producer of a product A brand is an investment to represents an incentive to deliver quality and maintain customer satisfaction It is a guarantee and it reduces search costs

The more costly a defective product/service is for a customer, the greater the value of a brand. In internet business, brand is particularly important. v. The costs of Differentiation Example: Higher quality inputs Better-trained employees Higher advertising Better after-sale service If differentiation narrows the companys scope, it may reduce scale economies If differentiation requires constant product redesign it may reduce learning economies

Solutions: Apply scale economies at the manufacturing level: the products from your product range should share common components for example

e. Bringing it all together: the value Chain in differentiation Analysis


It is useless to identify valuable product attributes for customers if the firm cannot supply those attributes, and the opposite is also useless. So the key is to match both and the value chain provides a useful framework for this.

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i. Value chain analysis of producer goods Producer goods are intermediate in the value chain: they are supplied to a firm that supplies another one. Using the value chain to identify opportunities for differentiation advantages involve 4 stages: Construct a value chain for the firm and the customer: it may useful to consider not only the intermediate customer but also the downstream firms in the value chain. Identify the drivers of uniqueness in each activity in comparison to competitors offerings

Select the most promising differentiation variables for the firm o On the supply side there 3 main points: Find where the firm has the biggest potential for differentiating from competitors, or at a lower price (analysis of internal strength) Identify linkages among activities since some differentiation variables may involve different activities Consider the ease with which uniqueness can be sustained Locate linkages between the value chain of the firm and that of the buyer: reduce customers costs and/or facilitate customers own product differentiation. Identifying these linkages also allow the firm to evaluate the premium customers will be willing to pay

Example of differentiation opportunities for a can maker page 257 + linkages between firms and customers value chain. ii. Value chain analysis of consumer goods Consumer goods are those delivered to the final customer, the consumer. 50

Example of value chain of a consumer: Search Purchase Financing Acquiring accessories Operation Service and repair Disposal

There are many potential linkages between value chains when consumers one is complex.

f. Summary
Differentiation is less difficult to replicate than cost advantage and is less vulnerable to external changes: it is more sustainable. Differentiation can occur at any level. The key is to increase the perceived value of the offering to the customer more effectively and/or at a lower cost. The value chain is a useful framework for identifying differentiation opportunities. Differentiation requires the combination of analysis skills and creative skills.

Part 5: Corporate Strategy


8) Chapter 16: Managing the Multibusiness Corporation
a. Introduction and objectives
How should a company be structured and managed to benefit from value creation through multibusiness? The main issues are: what business should we be in? How to manage the business portfolio? Quid resources allocation? Quid strategic planning? How to control business unit performance and coordination across businesses?

b. The structure of the Multibusiness Company


In general, multibusinesses are organized in such way that business decisions are taken at business level and the corporate center coordinates and control the whole. We will start by analyzing the role of the corporate center. i. The theory of the M-form 4 key efficiency advantages of the divisionalized firm: Adaptation to bounded rationality: managers cannot think about everything, so divisionalized firms help solve this Allocation of decision making: decisions are not taken at the same frequency: decisions are made infrequently at corporate level Vs. divisional level Minimizing coordination costs 51

Avoiding goal conflict: in functional organizations, departments may follow their own goals while in divisional firms they are more likely to follow the global ones.

So this structure helps solving the allocation of resources problem and reduces the agency problems . See page 417 for details. ii. Problems of divisionalized Firms In principle, divisionalized firms can benefit from both decentralization and coordination, but there are 2 important rigidities that limit decentralization and adaptability: Constraints on decentralization: divisional departments have freedom as long as they are performing, otherwise central headquarter may quickly interfere. Standardization of divisional management: in theory, divisional form allows the businesses to be differentiated by their needs, but in practice there is a pressure for standardization of control systems and management styles. This limits the potential of divisional businesses.

c. The role of Corporate Management


For the multibusiness corporation to be viable, the benefits of gathering different businesses under common ownership and control should be higher than the cost of the corporate center. So we have to look at the role of the corporate managers to see to what extent it can add value. Determine the scope of the firm Allocate resources Administrative and leadership role with regard to corporate strategy implementation Participation in divisional strategy formulation Coordinate the different divisions Secure the overall cohesion, identity and direction within the company

We can identify 3 groups of activities through which corporate center adds value: Managing the corporate portfolio, acquisitions, divestments and resource allocation Exercising guidance and control over individual businesses, including influencing business strategy formulation and managing financial performance Managing linkages among businesses by sharing and transferring resources and capabilities

We will see these aspects in the following chapters.

d. Managing the corporate Portfolio


It means thinking about extensions of the portfolio (M&A, market entries), deletions from the portfolio (divestments) and changes in the balance of the portfolio through the allocation of resources. i. GE and the development of strategic planning 3 points in corporate strategy formulation: Portfolio planning models: use of 2-dimensional matrix-based frameworks The strategic business unit: a unit for which it is meaningful to formulate a specific strategy. A SBU gathers products that share common costs.

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The PIMS database: an internal database of strategic, market and performance data on business units

ii. Portfolio planning: the GE/McKinsey Matrix Use a simple graphical framework to represent businesses and guide strategy analysis through 4 points: Allocating resources: we look at industry attractiveness and the competitive advantage Formulating business unit strategy: formulate the strategic approach based on the previous point Analyzing portfolio balance: o Cash flow: balance cash generating businesses and cash-absorbing ones, this allow to be independent from external capital markets o Growth: balance businesses at different stages of their life to stabilize the overall growth rate Setting performance targets: thanks to matrixes

Harvesting = maximize cash flows with little new investments. The axes are composites of several indicators.

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iii.

Portfolio planning: BCGs growth-share matrix

Here, one variable per axis. Those tools have lost in popularity because of their weaknesses, here are some of these: Oversimplification of the factors that determine industry attractiveness and competitive advantage (Market share and growth rate are very poor indicators) The positioning of businesses on the matrix depends on the definition of some variables: how markets are defined? Moreover, dog businesses may in fact be investment opportunities for developments The tools assume that the businesses are independent but there are linkages that you have to take into account.

iv. Value Creation through corporate restructuring The key issue is to see whether the companys market value is greater with a particular business or without it. 5-stages process (McKinsey restructuring pentagon): The current market value of the company The value of the company as is The potential value of the company with internal improvements: extend, reposition or outsource individual businesses, cost-cutting The potential value of the company with external improvements : see if a business, after internal improvements, can be sold at a higher price than the potential value to the company

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The optimum restructured value of the company: the value attained after considering all the previous points. The difference between the current market value and the optimum restructured value represents the potential gain from restructuring opportunities.

e. Managing Individual businesses


There are two means for the corporate center to exercise control on the businesses: On the inputs, through the control of the decisions On the outputs, through the control of performance

You cannot do both, so you have to find a tradeoff. i. The strategic planning system The challenge is to achiever both business-level initiative and corporate-level guidance. The challenge can be overcome through strategic management. See example page 427. 1. Rethinking the strategic planning system Yet, strategic planning has been criticized: Strategic planning systems dont make strategy: rigorous strategic planning may lead to less flexibility or may not have been effective at all for strategy formulation. It is often a rigid annual cycle that limits the thinking of strategy; a continuous decision-oriented planning is preferable. Weak strategy execution: weak link between strategic planning and operational management

Solution? Establish an office of strategy management that takes care of the strategic planning but also of its implementation. ii. Page 429. iii. It is difficult to do both: Balancing strategic planning and financial control Performance control and the budgeting process

Characteristics of different strategic management styles Strategic planning Financial control Business strategy formulation Business and corporate HQ jointly Strategy formulated at business formulate strategy. HQ unit level. HQ largely reactive, coordinates strategies of offering little coordination businesses Controlling performance Primarily strategic goals with Financial budgets set annual medium-to-long term horizon targets for ROI and other financial variables with monthly and quarterly monitoring Advantages Effective in managing a) linkages Business unit autonomy among businesses b) innovation c) encourages initiative, long-term competitive positioning responsiveness, and the development of business leaders Disadvantages Loss of divisional autonomy and Short-term focus discourages initiative. Conducive to unitary innovation and long-term strategic view. Resistance to development. Limited sharing of abandoning failed strategy resources and skills among businesses 55

Style suited to:

Companies with a small number of closely related businesses. In sectors where technology and competition are important and projects are large and long term

Companies with many businesses across a wide range of industries, and with limited linkages. Approach works best in mature, technologically stable sectors where investment projects are relatively small and short-term

iv. Using PIMS in strategy formulation and performance appraisal PIMS: profit impact of market strategies. It is a database that serves strategy formulation and performance appraisal. Details page 431

f. Managing Internal Linkages


The main opportunities for creating values in the multibusiness company arise from sharing resources and transferring capabilities among the different businesses within the company. This sharing occurs both through the centralization of common services at the corporate level and through direct linkages between businesses. i. Common corporate services Examples: finance, legal, IT, strategic planning The benefits of these shared services are often overvalued because there are little incentives for HQ staff and specialized units to meet the needs of the business-level departments. As a result, companies split their corporate HQ into Corporate management unit: support the corporate management in core activities (finance, legal, strategic planning...) Shared services organization: is responsible for supplying common services (research, engineering, training, IT)

ii. Business linkages and Porters corporate strategy types Exploiting economies of scope is not only achieved through centralizing resources at the corporate level, but also through sharing of resources and capabilities among businesses. Porter identifies 4 corporate strategy styles: Portfolio management: the simplest form of resource sharing is building an internal capital market. Value is created by acquiring companies at favorable prices, closely monitoring their financial performance, and operating an effective internal capital market. Restructuring: acquire poorly managed firms and restructure it to make it profitable Transferring skills: organizational capabilities can be transferred among business units. Creating value this way requires that same capabilities are applicable to the different businesses and also requires a context that eases skills transfers. Sharing activities: Porter says it is the most important source of value: the sharing of resources and capabilities. This requires a high level of coordination so R&D, advertising, distribution systems and service networks are fully exploited. It is helped by o A strong sense of corporate identity o A corporate mission that emphasizes the integration of business-level strategies o An incentive for cooperation among businesses o Interbusiness task forces and other vehicles for cross-business cooperation 56

iii. The corporate role in managing linkages The more interrelated are the businesses, so the closer are the linkages, the more staff will be required at HQ level to coordinate the whole thing. We have also seen that firms with close linkages are more likely to adopt a strategic planning style rather than a financial control one. The sharing of resources and capabilities may require cross-divisional teams. Managing linkages involve costs, and so there is an advantage from sharing activities only if the benefits overcome the costs of coordination, planning, control, etcSo sometimes, simple portfolio management may be more profitable because of those costs. For a diversified business to be successful there must be sufficient strategic similarity among the different businesses so that top management can run the corporation with a single dominant logic.

g. Leading Change in the Multibusiness Corporation


Shift of concern from control to the problem of identifying and implementing means to create value among the businesses. Thats illustrated through the term corporate parenting used instead of corporate control. Moreover the role of the HQ is a lot more than just control. Shift from formal to informal. Shift to decentralized decision making at business levels. Build structure and systems that allow change. The key for the HQ and the CEO is to foster the necessary identity and direction within the multibusiness corporation: create cultural glue between the businesses. We can identify 3 main management processes: The entrepreneurial process: decisions about the opportunities to exploit and the allocation of resources The integration process: how organizational capabilities are built and deployed The renewal process: the shaping of organizational purpose and the initiation of change

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By convention these roles are centralized at the HQ, but they should be spread over different levels: Management processes and levels of management Renewal process Attracting resources and Developing operating managers Providing institutional leadership capabilities and developing the and supporting their activities. through shaping and embedding business Maintaining organizational trust corporate purpose and challenging embedded assumptions Integration process Managing operational Linking skills, knowledge, and Creating a corporate direction. interdependencies and personal resources across units. Reconciling Developing and nurturing networks short-term performance and long- organizational values term ambition Entrepreneurial process Creating and pursuing Reviewing, developing and Establishing performance opportunities. Managing supporting initiatives standards continuous performance improvement Front-Line Management Middle Management Top Management

h. Summary
We can classify firms into different strategic styles, but finally, each firm is unique in the way it has to implement its corporate strategy. Moreover there are no consistent relationships between a firms profitability and the characteristics of its structure, control system or leadership style. 2 sets of issues are critical in determining the structure and the management style of the company: The characteristics of the resources and capabilities that are being exploited within the multibusiness corporation The characteristics of the businesses

Ex: a technology-based business? Make the transfer of knowledge easier, etc Moreover the whole thing has to fit with the firms identity: the latter has to be reflected on all levels of the firm and has to be clear, but revisited continuously as the world changes.

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