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: integrated pattern of decisions/actions concerning the devel and allocation of a firms R&C in a dynamic (and compet) environ/ to achieve LT perf goals. Corporate Strategy: where we play?
Competitive/Business Strategy: how we play? (1) Firm: R&C (people, brands, technology, know-how); structure and systems; culture and values. (2) Environment: industry, broad (PESTLE). (1+2+LT
perf objectives)<->Strategy->Realized Performance. Consistency is key (internal and external)![MSFT cloud]Full set of implications, not arbitrary SWOT!
External/Industry Analysis 5 Steps: (1) Defining mkt boundaries [Tesla: luxury sedan]. Product type, customer segments/channels, geography. 2 criteria: demand substitution (cross-price elasticity -
Dq/Dp*P/Q, similar needs), supply subst (similar C&R, P up in one mkt->firms from other mkts enter). [Airbus willing to supply low-cost airlines]. (2) Industry value chain linkages. Supps, manuf,
distrib, retail, cust. (3) Mkt size and LT growth drivers (value creation potential). Supply-demand funda/s: WTP-Costs. Industry life cycle: introduction, growth, maturity, decline. PESTLE. (4) Porter
(capture). Rivalry: difficulty to coordinate or de-escalate (+ # competitors, - mkt concentr HHI, +firm asym, +dem volat, +lumpy capacity, -growth of demand); incentives to price rivalry (+mkt conc, -
firm asym [+price leadership cereals, tobacco], -differentiation, -cust switch costs, +lumpy and infreq orders, +unobservable TOS [vs. -meet the competition, -most-favored-customer clauses, -advance
announce/ of P changes!], +fixed costs, +excess capacity, +storage costs,+price sensitive customers, -dem/cost volatility); unwillingness to exit under duress (strategic commit/s, exit-barriers: industry
specific assets w/ low resale value, contracts w/ penalties to be paid suppliers/buyers, employee compensation packages). High FC+excess cap. -> MC<AC-> P<AC can be optimal Supp/Buyer/Complem
power: relat depend (quality importance, % of total cost, switching costs co-special); barg power (large players, high concentr, well-informed about costs/prices, threat of vert integr) [complements create
value but complem (firms) may also capture value!!]. Threat of substs: availability; price-performance. Threat of new entrs: structural barriers (scale, scope, learning economies, absolute advantages,
brand loyalty, switching costs, network externalities, capital needs, legal barriers, exit barriers!); strategic barriers (pre limit pricing, pos predatory pricing, excess capac (to flood mkt w/ output and
lower P to below compet. ACs), brand or geographic proliferat mkt pre-emption). (5) Re-analyzing trends:snapshot into a movie. Pitfalls: attract. For incumbentr, invert 5F, not firm-specif; mkt bound
ValueCreation=WTP-Cost=(WTP-Price)+(Price-Cost)=CustSurplus+ProdSurplus (representative customer and transaction, specific customer segment which are limitations, as well as observing WTP
and costs). Competitive advantage =longest value stick than comp. WTP Drivers: demogr, geogr, income, features, technology, quality, delivery, breadth of line, service, customization, brand, network
externalities, complements, few substitutes. B2C: increasing WTP or reducing buyers other costs (accessibility, supporting services [IKEA]). B2B: increasing WTP of buyers buyer downstream [Intel
inside; DuPont Teflon kitchenware: advertising boosting brand reputation] or reduce cost of buyer or channel [Metro/Makro quick delivery and advisory]. Costs Drivers: (1) reducing costs of activities
under control [Southwest Airlines lower turnaround times]: scale, scope, learning, specialization, coordination, efficiency, low intermediation and input costs by bargaining, organizational practices and
culture; (2) reducing costs of suppliers activities (passed on to the firm as lower input costs): partnerships/close relationships w/ suppliers coordination benefits [Toyota]; financial/technical assistance to
suppliers [IKEA]; (3) increasing other non-pecuniary benefits for suppliers: personal attachment. learning experience, prestige [Mckinsey]. V-A-RC framework (layers of competitive advantage): Target
custs; Value-creating offerings; Activity System configuration; Stock (accumulate [advertising => brand reputation] and erode [outsourcing => erosion of capabilities?]) of R&Cs (tangible assets
[Walmart stores locations], intangible assets [mng talent, customer base, access to channels, Disney brand], organizational capabilities [ex: managerial know-how, skills, Ryanair turnaround time, Toyota
supply chain management, McDonalds consistent execution, Japan auto companies skills in lean manufact, low-defect product, fast product develop/)]). Porter Firm Value Chain (value creation must be
analyzed in discrete activities): Support acts (firm infrastruc, HR managE/, tech development, procurement); Primary activities (inbound logistics, operations, outbound logistics, mkting&sales, service).
Strategic positioning: how a firm configures its activities (basic units of comp advantage Porter) to compete in the mkt it serves. Positioning entails a tradeoff about which activities should and shouldnt
be performed and how [Dell: Field sales force - online support - direct model - built to order => higher WTP for large corporate buyers; Direct model - built to order - supply chain integration => lower
costs; But tradeoff: Dell wont sell to home users through regular retail channels]. Porters Generic Strategies (cost and benefit leadership in general, how will a firm create value in an industry?;
focus where (in which industry segments) will a firm seek to create value?). (Industry-wide) (1) Differentiation/Benefit Leadership: cost parity (higher WTP, same cost), cost proximity (slightly
higher cost, much higher benefit). (Industry-wide) (2) Cost Leadership: benefit parity (same WTP, lower cost than competitors), benefit proximity (smaller but close WTP, much lower cost). Porters
stuck in the middle: trade-off between high WTP/quality and low costs (productivity frontier) and deeper trade-off in internal fit / consistency (activities, R&C); supporting SITM [Airlines, Kmart stuck
between Walmart and Target]; violating SITM [Target doing well between Walmart and Macys] (quality lowers defects & increases sales => econ. scale => lower costs). (3) Focus: differences
between segments due to differences in customer economics, in supply conditions and segment size; industry-segmentation matrix (1. customer groups vs. 2. product varieties) broad coverage (all 1, all
2) or focus strategy (narrow 1 and/or narrow 2), the last one including customer-specialization focus (one 1, several 2), production-specialization focus (one 2, several 1), customer-and-product-specialization
focus (one 1, one 2), geographic specialization (several 1 and 2 for one specific region). How to exploit a competitive strategy through pricing? Matrix degree of horizontal differentiation (or price
elasticity) vs. type of competitive advantage: weak differentiation & cost advantage => mkt-share strategy underpricing competitors; weak differentiation & benefit advantage => mkt-share strategy
through maintain price parity; strong differentiation & cost advantage => margin strategy by maintain price parity; strong differentiation & benefit advantage => margin strategy charging price premium.
It might be better low-dem seg/ 1 compet) than high-dem seg/ (100 compet) [Kubota tractors Japan]
Sustainability of competitive advantage (strategy is concerned w/ the long-term performance). Competitive advantage is sustainable if persists to 2 threatens: imitate a firms activities and R&C; or
neutralizing the advantage w/ other substitute R&C. 2 dimensions of sustainability: (1) size (scale FC spread,physicial propert. Productivity up, invent manage/, ads -, scope, learning economies [WTP
up and/or C down, BCG experience curve average unit cost (yy) decreases w/ cumulative output of the firm over time (xx)] and bargaining power [size => higher importance + possibility of dominating
own layer of the industry]) and (2) uniqueness (complex and consistent activities; superior, durable, hard-to-copy and to substitute R&C => barriers to imitation + expensive trade-offs) Superior R&C-
>better and/or cheaper; resource-based view-RBV distinct set of R&C in a well-conceived strategy, to achieve unique firm-specific value creation vs. competitors). 5 tests of sustainability: (1)
competitive superiority of R&C (problems: to broad to be compared? KraftHeinz vs Unilever! But it is normally a combination, Honeywell, so we cant divide external assess/); (2) durability: does it
erode/depreciate slowly? Brand (slow) vs. Technological know-how (fast);switch costs, dynamic industry; (3) inimitability (defenses: physical uniqueness [location; Googles tech patents]; causal ambiguity
competitors cannot understand what is the valuable resource [Rubbermaid success in plastic products]; social complexity [Toyota]; path dependency [Coca-Cola; Post-it]; early-mover advantage [Gerber,
but brand loyalty not (time-compression diseconomies); Facebook asset-mass efficiencies/network externalities]); (4) substitutability (Schumpeters gales of creative destruction / bombardment;
disruptive technologies* attack from below instead of bombardment); (5) appropriability: can the firm capture the value that its R&C create? 2 ways: being lucky by acquiring R&C below real value
[Honda?]; or imperfectly mobile R&C that cannot create more value elsewhere [Google innov culture]. Important to invest in R&C, even for firms w/ good R&C [Marks&Spencer continually investing
vs. Xerox loosing leadership to Cannon]. R&C may fail to have same value in other industry/time [IBM in personal pc]. *Disruptive technologies w/ a drastically lower cost: initially w/ lower performance
than traditional tech (low WTP for mainstream customers; appeal only to low-end niche custs); perform increase over time and becomes good enough for mainstream customers and capture them due to
higher value creation (WTP minus Cost). [MP3 vs CDs; news websites vs. newspapers; MOOCs]. Why do dominant firms fail to adapt and invest in disruptive technologies? Innovators Dilemma: focus
on the current needs; know-how specialized in current technology (switching costs); difficult to nourish a competing technology under the same roof; difficult to let a legacy business die.
Red Ocean (struggle to capture value): firms compete head-to-head on the same value drivers (high WTP / low cost trade-off) w/ tough mkt conditions. Get away from red oceans by reconstructing industry
boundaries and compete on substantially different value drivers (redefining the value proposition) => Blue Ocean: make competition irrelevant by creating uncontested mkt space and capturing more value;
reach beyond existing demand by focusing on non-customers (1 tier of customers: satisfied customers; 3 tiers of non-customers: dissatisfied customers, conscious non-customers, unconscious non-
customers); redefine elements of customer value (against industry standards, Eliminate and Reduce to lower costs; Create and Raise to increase value) pursuing simultaneously differentiation and low cost
(Dual Advantage). [Wine industry in the US (red ocean) => the success of yellowtails fun, easy-drinking wine eliminating complexity and creating a blue ocean (entry in 2000; largest selling red wine
in 2003]. [Formule 1: Bed quality, hygiene, silence, self check-in; Cirque du Soleil: theme, multiple productions, artistic music and dance] Good value curve: focus on few factors, diverge from compet
and compelling tagline. Trad vs. BOS (supply differences, existing mkts, beat compet, dual trade-off vs. demand, create new mkt, make it irrel, break wtp/cost tradeoff - both).
The stereotypical old 20th century economy: stable oligopolies (automobiles, steel, chemicals); supply-side economies of scale. VS. The new information economy: temporary (?) monopolies
potentially toppled by upstarts w/ superior technology (hardware, software); network externalities (compatibility and positive feedback). Network: a group or system of interconnected people/things; made
up of nodes (people/things) and linkages between those nodes. Real/physical networks (physical connections; ex: telephone, railroad, airlines, internet; Metcalfes law: the value created by a real/physical
network increases proportionally to the square of the number of nodes n(n-1)X) or Virtual networks (linkages per se not physical [network of Mac or QWERTY users]; the value created by a virtual network
is contingent on the compatibility/interoperability of files/formats/uses by different users installed base). Role of internet: allowing for the creation of real/physical connections between the nodes of
some previously-only virtual networks, increasing the strength of the positive feedback [gamers networks; social relationships - Facebook] but also substituting some networks (ex: telephone, newspapers).
Positive feedback (=network externalities): increase in the value created for a user as the number of nodes in the network increases; customer WTP increases w/ volume (demand side economies of
scale). Virtuous cycle: success-breeds-success (until the network is so large that additional nodes dont increase WTP or congestion in physical networks diminishes WTP); asset-mass-efficiencies. Positive
feedback is not exclusive to the new information technology (ex: old physical networks; experience goods w/ trial costs - cars reputation). Positive feedback: The stronger gets stronger and the weaker
gets weaker; Firms compete for the mkt, not in the mkt; Compete aggressively in early stages to gain mkt share and go out of the battle zone, exploiting mkt power later [Amazon; Uber]. Winner
takes all [Apple and Android (2 winners due to some need for differentiation; eBay; PS4]. When is it likely the mkt to tip for one single product? Strong enough positive feedback and low demand for
variety. Multi-sided networks: economic platforms where 2 or more distinct groups provide each other network externalities direct (inside same group) or indirect (to another group). Critical scale
(supply-side economies of scale; it lowers costs) vs. Critical mass (network externalities I do something because enough [critical mass] others do; it rises WTP). Critical mass: actual cumulative
users/mkt share (yy) vs. expected users/mkt share (xx) => adoption curve; a technology will die if the adoption curve does not intercept the 45 equilibrium line in any point; it will be adopted and survive
if it intercepts. Professors example: 1st and 3rd equilibria are stable; 2nd is unstable => critical mass; the future of the technology depends on achieving the critical mass (it will converge to point 3 w/ big
mkt share) or not (converging to point 1 w/ low mkt share). How to reach critical mass? Jumpstarting [Microsoft] upward movement of the curve (penetration pricing, giving product away, credit
conditions, upgrade conditions, compatibility, influential users, allow some piracy; mandatory: automatic upgrades from users of prior technology) or Bridging movement along the curve (price
commitments, advertising, firm reputation); one may lead to the other. Types of users: unconditional, conditional, haters; pro (adopt anyway) vs. social (target); influential users.
Exercises. Min scale eff: MC=AC. Price elasticity of demand (E) = - dQ/dP * (P/Q). E<1 inelastic demand, E>1 elastic demand. MR(Q)=P*(1-1/E). Perfect competition: Supply=Demand MC=P. When
we have several firms, we calculate the individual supply (MC), but then, we have to put it in order to Q!!!!!! Just after that we can multiply by the #firms to obtain the aggregated supply! Monopoly:
MR=MC equilibrium in an elastic point of the demand -> should we decrease price, since total revenues will increase? No, because we are maximizing profits, not revenues! Oligopoly: P or Q decisions
have a direct effect on our own profits and a strategic effect (indirect) on competitors decisions and consequently on our own profits. a=market size; bi=own price sensitivity; di=cross-price sensitivity
Quantity/Capacity competition (long term) Cournot (homog. Prod., simult. 1-period game, milder, FOC): max i (Qi, Qj)=P(Qi,Qj)*Qi-TC(Qi) choosing Qi => BRi(Qj)=Qi=(a-bQj-ci)/2b (for typical
functions). Solving the equilibrium BRi and BRj. Qi and Qj are strategic substitutes (Q1 decreasing on Q2). Sum of firms competing la Cournot (vs. monopoly): lower T, lower P, higher QT. Cournot
eq. approaches perf. Comp. as #firms tends to infinite ( to 0, Qi down, QT up, P down). MC down / Demand expans. => shift outwards (strat. Eff. To adjust until equil.)
Price competition (ST) Undiff. Bertrand (no capac. Restric. Homog. Prod., simult. 1-period game): max i (Pi, Pj)=Pi*Qi(Pi,Pj)-TC(Qi(Pi,Pj)) choosing Pi. Not continuous function: i=0 if Pi>Pj, i=(P-
MC)*Q if Pi<Pj, i=(P-MC)*Q/2 if Pi=Pj. If ci<cj, Firm(i) will set Pi=cj- and winner takes all. If ci=cj they will split the market with P=MC and zero profits (even with 2 firms!). Pi and Pj are strategic
complements (Pi increasing in Pj). Not always cutthroat: Differentiation; sophisticated pricing schemes (loyalty programs, quant. discounts, two-part tariffs, bundling); contracts (negotiated prices;
meet-the-competition clauses), competitive dynamics and collusion. Differ. Bertrand (horiz. differ., imperf. subst., FOC, simult. 1-period game): max i (Pi,Pj)=(Pi-ci)*(ai-biPi+diPj),
BRi(Pj)=Pi=ai/2bi+ci/2+(di*Pj)/2bi. Strategic complements (P1 increasining in P2); lower intensity of competition (not winner takes all in undiff. With different MCs); differentiation allows positive profits.
MC down / Demand expans. => shift outwards. Dem. Sens. To Pj (di) up => slope up; Dem. Sens. To Pi (bi) up => slope down (lower intercept). Profit/P lower than monopoly.
Pre-committing must be irreversible, visible and understandable, credible (ex: investment in a cost-reducing technology, advertising, fixed output). Direct effect(includes inves): impact of its P/Q decisions
on a firms profits holding the behavior of competitor(s) constant = 3(1,2*) - 1(1*,2*). Strategic effect: impact of its P/Q decisions in the competitors P/Q decisions and in turn on the firms
profits, taking into account competitive side effects = 2(1**,2**) 3(1,2*). Stackelberg (based on Cournot; strat. Subst.; 2-stage sequential game with compl. and perf. info: firm 1 commits
anticipating firm 2 reaction, firm 2 observes and decides): we determine first BR2(Q1) and then we max 1(Q1, BR2(Q1)) choosing Q1. 1 = DE (<0) + SE (>0) = 1(1Stack,2Cournot) 1(1Cournot,2Cournot)
+ 1(1Stack,2Stack)1(1Stack,2Cournot). Not in the BR line. Tough commitments (bad for competitors; ex: capacity expansion) vs. Soft commitments (good for competitors; ex: capacity reduction).
Stack: Q1,QT, 1 HIGHER THAN Cournot; Q2, P, 2 lower. Disadvantage of commit/s: lower mkt demand than expected, unknown local conditions, competitors reactions not visible/foreseeable.
Collusion: PV coll. > PV dev. k + k / + k /2 + > + 0 , with 0<k<1 and =1/(1+r) k /(1-)> >1-k. ()>(); ()>(); ()>().
Better if: up (+ patient), smaller tempt (1), higher reward (2), tougher punish/ (4). 1 in Cournot (in und. Bert. coll. whole mkt), 4 in Und. Bertrand (where when equal MC(4)=0)
Corporate strategy: a bit more than where to play (ROE-Cost of Equity Capital=Economic Returns). Strategy that multi-business firms use to manage a collection of multiple businesses (vs. competitive
strategy for single business). Corporate vs. Competitive differences: (1) Multiple vs. single businesses (a firm may have several competitive strategies for different businesses under one corporate
strategy). Different businesses have different who (customers) or what (product) or how (value chain activities). Different businesses may be in the same industry [sushi / hamburger; full-service
airline / budget carrier] but not the reverse. (2) Competitive vs. corporate advantage (higher value stick => obj. is max. business NPV vs. collection of businesses owned together has higher cumulative
NPV than the sum of values of individual businesses => obj. is max. cumulative NPV and not individual NPVs, no problem of having winners and losers). (3) Who is the competition? Competitive: anyone
who can affect costs or revenues (all 5 Forces) vs. Corporate: anyone who can assemble a similar portfolio (financial investors: rights over returns but typically no decision rights [minority shareholders]
=> main corporate strategy / portfolio assembly / selection approach; or other corporate strategists: rights over returns and decision rights through administrative control [multi-business firms, CEOs,
boards, advisors] => added corporate strategy / business modification / synergy approach; grey zone: minority activist investor).
Selection approach: only available option to create value is lowering the discount rate by reducing the diversifiable risk of a portfolio. Its a low-end benchmark for a corporate strategist. In well-developed
capital mkts (a,b,c,d possible, liquid mkts, appropriate monitoring, widespread information), prices of securities must reflect their underlying value => reduced space for bargain hunting => reduced space
for corporate strategists => advantages of individual shareholders: lower administrative/overhead costs; no acquisition premiums; own risk-return preferences. In underdeveloped capital mkts (c,d, pure
portfolio selection to reduce diversifiable risk may be a goal for corporations (financial investors cannot access an equivalent portfolio), and still w/ the extra option of buying underlying businesses. A) CF
buy undervalued businesses, b) Disc rate reduce diversifiable risk of portfolio, c) CF increase net CF, d) reduce undiversifiable risk of businesses. A) and b) selection; c) and d) synergy.
Synergy approach (administrative control): create value through: increase CF, earlier timing of CF, decrease undiversifiable risk of CF. Synergy: various ways CF (and their risk) w/in a business portfolio
can be improved through joint operation; means to create corporate advantage relative to financial investors (in developed mkts). Sources of synergies (1,2,3 resulting from sharing activities; 1,2,3,4
operational synergies => related businesses; 5 financial synergy => unrelated): (1) economies of scale (lower AC for higher Q; sources: FC of indivisible inputs, physical properties of processing units,
increases in productivity of variable inputs, tradeoffs between different technologies, advertising, inventory, bargaining); (2) scope (cost savings for larger variety; sources: FC indivisible inputs; leveraging
same R&C such as distribution channels) [Walmart expanding non-food; supercenters w/ lower AC (shared infrastructure) than its discount stores; more advanced IT/logistics and lower non-unionized
labor costs than other supermkts]; (3) learning (getting better over time); (4) leveraging same unique superior R&C [Disney brand reputation and animation cap. => expand to theme parks, retailing, TV,
resorts, etc.]; (5) internal capital mkts [BCG matrix: relative mkt share vs. mkt growth]: use proceeds from cash-rich businesses [cash cows] to fund profitable investment opportunities in cash-constrained
businesses [early-stage stars and question marks] w/ difficulties in raising capital outside (due to asymmetric information or reluctance because of low assets/high debt; it reduces financing costs and
bankruptcy risk), divesting dogs. Limits to synergies /firm scope (respectively to each source): (1) labor costs (worker unionization; less attractive jobs => wage compensation); spreading specialized
inputs/resources too thin (managerial attention; specialized equipment); agency and bureaucracy costs; (2) 1; limited applicability of the same R&C to different businesses; limited benefits in applying a
uniform organizational design/structure [Tenneco (gas pipelines, gasoline stations) acquiring Houston Oil and Minerals (exploration company)]; (3) limits to applicability of learning in a specific business
across different businesses; limits to the improvement of processes/products [BIC]; fundamental changes in technology [Tesla electric cars vs. internal-combustion cars]; organizational forgetting (lack of
codification of knowledge + employee turnover), Limits to appropriability of learning outcomes - If employee learning is not firm-specific (or co-specialized with the firm) then employees have a credible
option to sell their services to the highest bidder - Expropriating firm of learning benefits); (4) limited applicability of a firms unique superior R&C to different businesses [brands: Trump hotels + Trump
steaks]; spreading unique superior R&C too thin; difficulties in applying to different businesses the same dominant general manage ment logic [easier to manager General Motors (autos) than General
Electric (aircraft, finance, health care); easyGroup failure: expand EasyJet no frills service to cinema, credit card, etc.]; (5) limited efficiency of internal capital mkts for unrelated businesses: difficult
to monitor performance and compare prospects (worst businesses may be inefficiently cross-subsidized); internal politics/influence activities (managers careers/influence). Problematic reasons for
diversification: (1) portfolio selection approaches w/ well-developed capital mkts: lowering diversifiable risk; bargain hunting; (2) managerial agendas: empire building (prestige); decrease
employment risk; increase compensation. Other problems: (1) time pressure; (2) M&A advice; (3) genuine managerial biases: overestimating ability to leverage R&C [Marks&Spencer failing enter US
1980s: no brand name, supplier relationships], the role of generic R&C [Chrysler failure acquiring Gulfstream to apply designer capabilities to aerospace] and ability to compete [Philip Morris acquiring
7-Up]; misunderstanding relatedness (strategic business units, SBU, based on products/mkts and not on R&C => overlooking linkages in R&C; fallacious relatedness [Blue Circle Industries, producer of
cement, making products related to home building]). Evidence on diversification: Typical failure to find value added from corporate control of different businesses (synergies) ->Conglomerate
(valuation) discount and tentative diversification (valuation) discount: Widely-diversified firms underperforming other firms, conglomerate and diversification discounts (10%-30%) in US; underinvest in
businesses w/ strongest prospects; But: studies sensitive to their specifications; correlation does not imply causality; most studies focus only on measures reflecting profitability ratios (not economic profits
(profitability x volume))!success of widely diversified firms in emerging economies. Success of diversification is more frequent for related businesses (operational synergies).
Growth: (1) directions of expansion: horizontal diversification [Blue Ocean] (Ansoff matrix, new/current product vs. mkts: mkt penetration, product dev., mkt expan./geog. div., prod-mkt div. [Procter
&Gamble]); vertical integration (value chain: backward/upstream; forward/downstream); (2) mode of expansion: organic; licensing; alliances; joint ventures; M&A; (3) cross-business linkages: tradeoff
between integration/coordination (strong operational synergies, one-size fits all) and specialization/localization (autonomy, best in each mkt); plot from high integration to high specialization: dominant
business [Walmart]; related diversification [Disney]; unrelated diversification [Virgin]; conglomerate holding [GE]; plot from global integration to local responsiveness (international context): global
strategy; meta-national strategy [Cemex]; multi-domestic strategy; (4) generic business strategies (Porter); investment posture (build/grow, hold, harvest, divest/exit); (5) grow or not to grow.
Horizontal diversification [Procter and Gamble: soap and candles, laundry detergent, , Gillette; GE]. 3 sequential tests for considering horizontal div.: (1) better-off test: more value together
(synergies)? = corporate advantage. Additionally, diversification can improve attractiveness of the mkt by (a) improving 5 forces: reduce intensity of rivalry and threat of new entrants by making more
difficult to access complements [Microsoft Internet Explorer bundled w/ Windows] and (b) move to more attractive businesses [AOL merging w/ TimeWarner: from fast-deteriorating online services to
more stable industries (TV, magazines, film)]. (2) best-alternative test: is ownership by single firm the best option? [Walmarts supercenters; Disney theme parks] Alternatives: arms length transactions;
contracts; licensing [Disney licensing its characters to McDonalds]; alliances [Yahoo partnering w/ AT&T and BT to provide high-speed internet access]; JV. If contracts work well, these relations have
benefits: sharing activities and leveraging different R&C! It depends on transactions costs: finding a transaction partner, terms of the agreement (opportunistic behavior contracts*), parties satisfaction,
set of transactions, business ownership and governance. There are also costs of transacting inside a firm: internal terms (transfer prices), coordination, opportunity cost, corporate compliance (planning,
time spent explaining top management), employees incentives (direct equity s). (3) good-parent test: company well-placed to realize opportunity? (a) cross business linkages; (b) leveraging (exploit
existing) and stretching (developing new) R&C [Canon surpassing Xerox: from camera to photocopiers, stretching manufacturing capabilities; later to laser prints, stretching electronic controls. Swatch:
from expensive watches to mass mkt. Failures: BP and Exxon diversification into mineral extraction. Coca-Cola wine. A pair of jacks is not enough to go against a royal flush].
*Impediments to contracting efficiency (attenuated by implicit contracts [but not enforceable] and long-term relationships [Toyotas relations w/ suppliers]: cooperative understanding; ongoing close-knit
business relationsh; shadow of the future): (1) Uncertainty, contract complexity and incompleteness (bounded rationality; subtle/complex metrics; asymmetric information [Audi]); (2) High coordination
needs (fit between different stages of the value chain; supervision) [intel making both wiring and wafers]; (3) Unclear property rights (patents are not foolproof); (4) Poor enforcement of contracts and
property rights (developing countries); (5) Relationship-specific investments [Disney theme parks vs. characters to McDonalds]: Site specificity; Physical asset specificity; Dedicated assets; Human asset
specificity. => switching costs (solutions, although increasing transaction costs: ex ante contract; renegotiations ex post; reduced ex-ante specific investment; investments to improve ex-post bargaining).
Evaluation of diversification options: external analysis (Mkt size, growth potential, industry structure, PESTLE, potential to borrow/buy R&C), internal analysis (Existing comp advantage, activities to
share, R&C to leverage, potential to stretch R&C organically), LiabOFor (CAGE), new product/mkt strategy (where/how/when to enter, how much to specialize), realized performance. CAGE framework
[importance of dimensions vary w/ industry] (Cultural [TV, food], Administrative/Political [drugs, telecom], Geographic [glass, fruit, services; favor FDI instead of trade], and Economic distance [cars,
clothing/garment]): liability of foreignness in international strategy (limits to share activities and leveraging R&C). [Walmart failure in German: clients, employees, competition; eBay in China: early-
mover advantage (70%), but Alibabas Taobao offered list for free, communication tool, Alipay (banks and China post) achieving 80%; Yahoo in China: partnering w/ Alibaba provided a huge payoff].
Vertical integration (make-or-buy decisions). 5 common fallacies (why wrong): (1) make an input/asset if its a source of competitive advantage (if easily obtained in the mkt its not unique; if cheaper
to buy than to make it, buy); (2) buy to avoid production costs (paying to suppliers; if cheaper to make, make); (3) make to avoid paying a profit margin (firm may not be able to produce at lower cost than
mkt price; if supplier is so profitable, why dont other firms enter? Barriers; suppliers accounting profit economic profit (opportunity cost)); (4) make to avoid paying high prices in periods of peak
demand or scarce supply (long-term and future contracts [hedging]; line of credit); (5) vertically integrate to tie up channel access and gain mkt share at the expense of competitors = vertical foreclosure:
Downstream monopolist (M) acquiring competitive (C) upstream firm; Up. M acq. C down.; Down. C acq. up. M; Up. C acq. down. M. (foreclosed competitors may open new channels/find new input
sources; monopoly in one layer monopoly in all layers: already capturing value in all value chain due to bottleneck). Reasons not to vertical integrate: deal w/ other firms (1) if they are more efficient
(scale, scope, learning, R&C); (2) to avoid agency/bureaucracy costs (hindering information flows and coordination; difficult to measure/reward performance; internal politics / influence activities; limited
benefits in applying a uniform organizational design/structure [Tenneco]). Reasons to vertical integrate (high transaction costs) = *Impediments to contracting efficiency [GM and Ford likely to make
when it requires more engineering effort: human-asset specificity + scale/learning; Coal-burning plants next to coal mines likely to be backward vertically-integrated: site + physical asset specificity,
Aerospace asset specif + contract complex; electronic components human-asset, scale, learning, contractual complex; regional airlines coordination needs].
Strategy execution: paramount; otherwise, giant w/ feet of clay (most factors impairing realized performance have to do w/ strategy execution). Plans for organizational alignment w/ strategic choices:
plans; performance indicators; management responsibilities; processes/systems (coordination, control, planning, resource allocation/capital budgeting, incentives); values and culture; mechanisms for
learning and adaptation. Instead of using general frameworks (Kotters 8 steps; Balanced score card; McKinseys 7S), focus on 3 aspects:
Principal-Agent relationships: agent is hired by the principal to take actions/decisions that affect the payoff of the principal in the best interest (firm/boss-employee; shareholders-CEO; clients-
professionals; buyers-suppliers). Agency problems when 2 basic conditions are simultaneously met: (1) information/actions (effort) of the agent hard to observe (difficult to write a complete contract to
be verifiable in court); (2) objectives not aligned. Potential solutions (respectively): (1) Monitoring (but: time consuming, costly, imperfect, new agency relationship, monitor influenced by agent); (2) Pay
for performance (sales commissions, bonus and non-monetary rewards contingent on firm performance, stock options, franchising) Besides aligning incentives, may also solve hidden-information problems
(agent uses his private information more efficiently). Marg ben=marg cost effort Issues: (A) random factors (noise); (B) agents are risk averse (risk premium => tradeoff for principal) MCe can be high;(C)
not consider all aspects (distortion => measurable and rewarding,may destroy value: e.g., fights between divisions) => solutions: not using pay for performance and instructing agents to allocate effort
between different activities [professors: teaching and not grades]; careful job design (grouping measurable and non-measurable activities); monitoring and subjective performance evaluations [360 peer
review, management-by-objectives, merit-rating; problems: unpleasant to rate, influence activities, noise]. Objective performance measures: absolute vs. relative (less noise=>lower risk premium; but more
distortion=>sabotage); narrow vs. broad (less distortion; but more noise). Implicit incentive contracts more common than explicit (similarly to subjective performance: more nuanced and fine-grained, but
unpleasant to rate employees and not verifiable/enforceable) [e.g., promotions: distinction and less noise, but: sabotage, best performers at low levels may not be the same at high levels, superstar effect].
Organizational structure: formal arrangements by which critical tasks are divided, information flows and routines are established, decision-making authority by managers and employees is specified.
Different structures define different costs of managing and communicating and different natures of agency problems. 3 approaches to structuring tasks: individually, self-managed teams, hierarchy of
authority. Issues in complex hierarchies: (1) Departmentalization (division of labor) by functions, products, geography or customers; (2) Coordination and control (aggregation of effort): 2 coordination
approaches (autonomy and self-containment of units, fostering adaptability of individual units to the environment [information flows up and down]; lateral relations between units [formal or informal],
important for firm-wide sharing of activities or R&C); 2 control approaches (centralization [decision-making at top levels; related businesses]; decentralization [decision-making at lower levels; diversified
businesses]; issues: central in some dimensions, decentral in others; cognitive and time limits to span of manager control;centralization firm-wide coordination. 4 types of organizational structure: (1)
Unitary functional structure (U-form) (firms w/ few similar businesses, stable conditions, operational efficiency [American Tobacco 19th-cent]): departments responsible for basic functions/tasks
(specialization=>scale/scope/learning, but low coordination, top managers overloaded, slow decision); (2) Multidivisional structure (M-form) (diversified firms [P&G 20th-cent]): autonomous divisions
(most important dimension at higher level: business, product, geography, customer) and subunits inside each division (functions); dealing better w/ complexity (divide strategic and operating decisions),
fostering internal capital mkts, link payment to division performance, but more difficult specialization (w/ scale/scope/learning) of large functional departments, influence activities and lack of cooperation;
(3) Matrix structure (complex global diversified firms): organized at multiple dimensions at once (e.g., geog. and function [Pepsi]); intersections=>report to 2 hierarchies; simultaneous coordination of
different dimensions (equivalent importance; if one is more important, M-form is better), but greater complexity, dual-reporting and conflicts [Pepsi national vs. regional campaigns], larger administrative
overhead costs; (4) Network structure [MorningStar Corp., tomato processor: no titles/bosses; colleague letter of understanding. Valve: free to collaborate on projects]: flexibility (about employees, not
positions) in departmentalization (cross-cutting teams; contribute to multiple tasks reconfigured), coordination and control (changing nature of tasks); individual initiative, innovation, creativity, cooperation,
but costly to manage (who is responsible?) and no specialization. Structure follows strategy! (historical evolution of 4 structures).
Other developments: IT (lower communication costs, allowing to balance better specialization and coordination) and evolution of corporate headquarters since 1980s (larger size; functional centralization).
Shared values and culture: organizational structure not enough (coordination and control problems) => values (principles and vision for a firm) and culture (beliefs and norms of behavior shared by
employees) provide mutual understanding (implicit contract) and guide action under uncertainty. Must be aligned w/ firms strategy [Startups: culture of creativity/risk taking vs. Bertelsmann, media group,
contradiction: culture of cooperation but divisional decentralization]. Values/culture as sustainable sources of competitive advantage (unique resources)=>2 tests: durable and appropriable (not tradable)
(1) superior value creation 1st sentence [McKinseys culture of knowledge building and mutual assistance]; (2) hard to copy: social complexity (interpersonal relationships [Toyota]) and unique historical
events (path dependency [Coca-Cola]). Difficulties: Contingency on social complexity and historical events => difficult to see management intervention results; Difficult to change values/culture when
needed [IBM, Walmart Germany]. Values/culture affect learning and innovation, routines, to promote innovation and improvement [Google: meal areas fostering interaction].