BUS 800: Strategic Management

Week 1: Chapter 1 – The Concept of Strategy

THE ROLE OF STRATEGY IN SUCCESS

 Four common factors when addressing characteristics of strategy that are conducive to
success:
1) Goals that are simple, consistent, and long-term
2) Profound understanding of the competitive environment
3) Objective appraisal of resources
4) Effective implementation

A BRIEF HISTORY OF STRATEGY

Origins
 Strategy:
o Gives direction and purpose
o Deploys resources in the most effective manner
o Coordinates the decisions made by different individuals
 “Strategy”: “strategia” in Greek, meaning “Generalship”
 Military and business strategy share a number of common concepts and principles, the most
basic being the distinction between strategy and tactics
o Strategy
 Overall plan for deploying resources to establish a favourable position
o Tactics
 Scheme for a specific action
 Strategic decisions share three common characteristics:
1) They are important
2) They involve a significant commitment of resources
3) They are not easily reversible
The Evolution of Business Strategy
 The evolution of business strategy has been driven more by the practical needs of business
than by the development of theory
 Corporate planning: long-term planning
 Strategic management was associated with increasing focus on competition as the central
characteristic of the business environment and competitive advantage was the primary goal
of strategy
 Resource-based view: rather that firms pursuing similar strategies, emphasis on internal
resources and capabilities has encouraged the identification of points of difference from
competitors and the design of strategies that will exploit these differences
 In the face of continuous change and relentless competition, strategy becomes less about
building positions of sustained competitive advantage and more about developing the
responsiveness and flexibility to create successive temporary advantages
 STRATEGY TODAY
 Strategy is a complex, highly contested field of study
o Answers at first seem straightforward, can, on deeper inspection raise further
questions and forces us to reflect on some things we might have previously taken for
granted
What is Strategy?
 Evolution of strategic management
o Financial Budgeting
 1950-1960
o Corporate Planning
 1960-1970
o Strategy as Positioning
 1970-1980
o Quest for Competitive Advantage
 1980-1990
o Strategy for the New Economy
 2000
o Strategy in the New Millenium
 2009
o Strategy in Turbulent Times
 2014
 Strategy is the means by which individuals or organizations achieve their objectives
 Strategy is focused on achieving certain goals; that the critical actions that make up a
strategy involve allocation of resources; and that strategy implies some consistency
integration, or cohesiveness
 As the business environment has become more unstable and unpredictable, so strategy has
become less concerned with detailed plans and more concerned with the quest for success
 Distinction made between corporate strategy and business strategy:
o Corporate strategy
 Defines the scope of the firm in terms of the industries and markets in which
it competes
o Business strategy
 Is concerned with how the firm competes within a particular industry or
market
 The scope of a firm’s business has implications for the sources of competitive advantage,
and the nature of a firm’s competitive advantage determines the range of businesses in
which it can be successful
How Do We Describe a Firm’s Strategy?
 Where is the firm competing?
 How is it competing?
How Do We Identify a Firm’s Strategy?
 Strategy is located in three places:
 1) In the heads of the chief executive, senior managers, and other members of the
organization;
2) In the top management team’s articulations of strategy in speeches and written
documents; and
3) In the decisions through which strategy is enacted
 The game plan should comprise of three definitive components of strategy:
1) Objectives;
2) Scope; and
3) Advantage
 Explicit and public statements of strategy need to be checked against decisions and actions:
o Where is the company investing its money?
o What technologies is the company developing?
o What new products have been released, major investment projects initiative and/or
top management hires made?
How is a Strategy Made? Design versus Emergence
 Intended Strategy
o Conceived by top management
o Less a product of rational deliberation and more an outcome of negotiation,
bargaining, and compromise among the many individuals and groups involved in the
process
 Realized Strategy
o The actual strategy that is implemented
o Is only partly related to that which was intended
 Emergent Strategy
o The decisions that emerge from the complex processes in which individual managers
interpret the intended strategy and adapt to changing external circumstances
 Strategy making almost always involves a combination of centrally driven rational design and
decentralized adaptation
 Strategy is being continually enacted through decisions that are made by every member of
the organization
 Planned emergence: there is a planned strategy by this strategy is continually enacted
through decisions that are made by every member of the organization
What Roles Does Strategy Perform?
 Strategies occupy multiple roles within organizations
Strategy as Decision Support
 Strategy improves decision making in several ways:
1) Simplifies decision making by constraining the range of decision alternatives considered
and by acting as a heuristic that reduces the search required
2) The strategy making process permits the knowledge of different individuals to be pooled
and integrated
3) Facilitates the use of analytics tools
Strategy as a Coordinating Device
 Greatest challenge of managing an organization is coordinating the actions of different
organizational members
 Strategy is a communication device
o CEO can communicate identity, goals and positioning to employees
 Communication is not enough
o For coordination to be enough, buy-in is essential from different groups in the
organization is necessary
Strategy as a Target
 Strategy is forward-looking
o Not only to establish direction, but to set aspirations that can motivate and inspire
the members of the organization
 Strategy should be less about fit and resource allocation and more about stretch and
resource leverage
Strategy as Animation & Orientation
 The most important role of strategy is to animate and orientate individuals within
organizations so that they are mobilized, encouraged, and work in concert with each other
to achieve focus and direction even if the plan isn’t correct.
Strategy: In Whose Interest? Shareholders versus Stakeholders
 There are many different groups in an organization all with different agendas, creating
multiple goals which may conflict
o At the broadest level, all groups intend to create value, but the question of what we
mean by value and how it is created remains
 Value is found in the meeting of needs or wants and is reflected in willingness
to pay
 Purpose is not to just create value for customers, but also to extract some of it in the form of
profit for the firm
 Deciding how much value has been created and how it has been distributed in the absence
of monetized values to act as a common denominator is extremely difficult

STRATEGY: WHOSE INTERESTS SHOULD BE PRIORITIZED

 United States, Canada, United Kingdom, Australia:
o company boards are required to act in the interests of shareholders
 Continental European Countries:
o Companies legally required to take account of the interests of employees, the state,
and the enterprise as a whole
 In practice, the extent to which firms take a narrow (shareholder) or broad (stakeholder)
view of their purpose is probably more a matter of pragmatics than arbitrary choice.
Profit & Purpose
 Most successful companies in terms of profits and shareholder value tend to be those that
are motivated by factors other than profit
 Why does the pursuit of profit so often fail to realize its goal?
o Profit will only be an effective guide to management action if managers know what
determines profit
 o Lack of corporate motivation
The Debate over Corporate Social Responsibility
 What are a company’s obligations to society as a whole?
 Free-market economist Milton Friedman declared CSR to be both unethical and undesirable:
o Unethical because it involved management spending owner’s money on projects
that owners had not approve of; and
o Undesirable because it involved corporate executives determining the interests of
society
 Does this justify support for political groups, for religious movements, for
elitist universities?
 Companies are increasingly accepting responsibilities that extend well beyond the
immediate interests of their owners
 The firm as property view (set of assets owned by shareholders) implies that management’s
responsibility is to operate in the interests of shareholders
 The firm as a social entity view ( a community of individuals that is sustained and supported
by its relationship with its social, political, economic, and natural environment) implies a
responsibility to maintaining the firm within its overall network of relationships and
dependencies
 The successful implementation of sustainability strategies that lower costs or differentiate
products or service offerings can contribute to the firm’s competitive advantage
Strategic Management of Non-For-Profit Organizations
 The strategic planning process of not-for-profit needs to be designed so that mission, goals,
resource allocation, and performance targets are closely aligned
 Many tools of strategy implementation are the same for non-profit as they are for-profit
 Performance in enhanced by aligning strategy with internal strengths in resources and
capabilities

THE APPROACH TAKEN IN THIS BOOK

Narrowing the Focus
 This textbook narrows our focus by limiting discussions to private sector firms operating in
market economies and by assuming that such firms operate in the interests of their owners
and by seeking to maximize profits in the long-run
 The foundations of mainstream strategy lie in analysis of competition and firms’ quests to
outperform their rivals
 Key considerations of assumptions made:
1) Competition erodes profitability
 As competition increases, the interests of different stakeholders converge
around the goal of survival
2) The market for corporate control
 Management teams that fail to maximize the profits of their companies will
be replaced by teams that do
3) Convergence of stakeholder interests
  There is likely to be more community of interests than conflict of interests
among different stakeholders
4) Simplicity
 A key problem of the stakeholder approach is that considering multiple goals
and specifying trade-offs between them vastly increases the complexity of
decision-making
The Basic Framework for Strategy Analysis
 For a strategy to be successful, it must be consistent with the firm’s external environment
and with its internal environment: its goals and values, resources and capabilities, and
structure and systems
Week 2 & 3: Chapter 2 – Industry Analysis
LECTURE:
 Successful Strategy:
o Effective Implementation
 Simple, consistent, long-term goals
 Profound understanding of the competitive environment
 Objective appraisal of resources
 Reasons why we need a strategic approach:
o Continuous competition
o Limited resources
 The main purpose of strategy:
o Making the best choices
o Focusing the organization
 Every strategy you take must be complementary to the others
 Strategic Decisions share 3 common characteristics:
1) They are important
2) They involve a significant commitment of resources
3) They are not easily reversible
 Corporate Strategy
o Industry Attractiveness: which industries should we be in?
o Decided by the board of directors/corporate management
 Business Strategy
o Competitive Advantage: How should we compete?
o For example, how you compete in locomotives or lightbulbs
 The Game plan should comprise of three components of strategy:
o Objectives
o Scope
o Advantage
 Being successful means creating value
 Explicit statements of strategy need to be checked against decisions and actions:
o Where is the company investing its money?
o What technologies is the company developing?
o What new products have been released, major investment projects initiated, and/or top
management hires made?
 Strategy is not operational effectiveness
o Operational Effectiveness
 Assimilating, attaining, and extending best practices
 Do the same thing better
o Strategic Positioning
 Creating a unique and sustainable competitive position
 Do things differently to achieve a different purpose
 Strategy is about doing the right things
o What do we want to accomplish? Where do we want to compete? How will we win?
 Planning is about doing things right
o Putting strategy into action
o Creates order and discipline
o Supports execution
 Value is the gap between the cost and the price
 The Industry Environment
o Microeconomic factors
 Customers, suppliers, competitors
 The Remote Environment
o Macroeconomic factors
 Political: licensing, anti-trust, capital requirements, environmental standards
 Economic: growth, employment, disposable income, cyclical factors
 Social: demographics, social media, public awareness, social norms, fashion
fads, corporate social responsibility
 Technological: enabling communication & social media, automation – rapid
change, artificial intelligence, additive mfg. (3D printing)
 Ecological: environmental protection, CO2 footprint, global warming
 Legal: increasingly complex, rules, patents, litigation
 Industry profits depend on:
o The value of the product to customers
o The intensity of competition, and
o The bargaining power of the producers relative to their suppliers
 A profitable industry:
o Value is created when the price the customer is willing to pay for a product exceeds the
costs incurred by the firm
 Strategic Positioning (Achieving Superior Performance):
o Competitive Advantage
 Differentiation (higher price): creating superior value is necessary for winning
the game
 Lower Cost: cost competitiveness is required for staying in the game
 Defining the Relevant Industry:
o Two primary dimensions:
1) Scope of Products & Services
 Motor oil example (car vs. heavy equipment & stationary)
2) Geographic Scope
 Global
 Regional
 National
 Local
 Porter’s 5 Forces Model
 o Industry Competitors: rivalry among existing firms
 Suppliers: bargaining power of suppliers
 Substitutes: threat of substitutes
 Buyers: bargaining power of buyers
 Potential entrants: threat of new entrants
 Five Forces Model Challenges:
1) Defining the industry
 Product & geographical scope
2) Choosing the appropriate level of analysis
3) Dealing with other factors
4) Dealing with uncertainty and rapid structural change
 Prerequisites for success:
1) What do customers want?
2) How do firms survive competition?

TEXTBOOK:
FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS
 Business Environment: all the external influences that affect a firm’s decisions and
performance
 Environmental Factors can be organized by source (PESTEL analysis) or by proximity (micro
and macro environment)
 Key to effective analysis is distinguishing the vital from the merely important
 Core of the business environment:
1) Customers
2) Suppliers
3) Competitors

THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND & PROFIT

 Consumer Surplus: the stronger the competition among producers, the more the consumer
surplus
 Producer Surplus: the stronger the competition among producers, the less the producer
surplus
 Profits are determined by:
1) The value of the product to customers
2) The intensity of competition
3) The bargaining power of the producers relative to their suppliers
 Industry analysis brings these 3 factors into a single analytical framework

ANALYZING INDUSTRY ATTRACTIVENESS

 Industry profitability is determined by the systematic influences of the industry’s structure
o For example, the pharmaceutical industry produces highly differentiated product
protected by patents (forming a monopoly) that are purchased by price-insensitive
 customers. Whereas the personal computer industry comprises many firms,
produces commoditized products, and is squeezed by powerful suppliers
 Small markets are often more profitable since they may be dominated by a single firm
Porter’s Five Forces of Competition Framework
 Horizontal Competition:
o Competition from Substitutes
o Competition from Entrants
o Competition from Established Rivals
 Vertical Competition:
o Power of Suppliers
o Power of Buyers
Competition from Substitutes
 The price consumers are willing to pay for a product depends, in part, on the availability of
substitute products
 Travel agencies, newspapers, and telecommunication providers have all suffered damaging
competition from Internet-based substitutes
The Threat of Entry
 If the entry of new firms is unrestricted, the rate of profit will fall
o Threat of entry may be sufficient to ensure that established firms keep prices
competitive
 An industry where no barriers to entry or exit exist are contestable
Capital Requirements
The capital costs of getting established in the industry can be so large as to discourage all but
the largest companies.
Economies of Scale
In capital-, research-, or advertising-intensive industries, efficiency requires large-scale
operation.
Entrants are then faced with the decision to:
1) Entering on a small scale and accepting high unit costs, or
2) Entering on a large scale and bearing the costs of underutilized capacity
Absolute Cost Advantages
Established firms may have a unit cost advantage. This often results from the acquisition of low-
cost sources of raw materials.
Product Differentiation
When products are differentiated, established firms possess the advantages of brand
recognition and customer loyalty.
Access to Channels of Distribution
Limited capacity within distribution channels, risk aversion by retailers, and the fixed costs of
carrying an additional product may result in retailers being reluctant to carry a new
manufacturer’s product.
Governmental & Legal Barriers
Some industries (cabs, banking, telecommunications, and broadcasting) require a license from a
public authority to enter.
Retaliation
Established firms may retaliate against new entrants and force them out of the industry.
The Effectiveness of Barriers to Entry
Industries protected by high entry barriers tend to earn above average rates of profit. Barriers
may be ineffective against established firms that are diversifying.
Rivalry between Established Competitors
Concentration
The number and size distribution of firms competing within a market contributes to rivalry.
Diversity of Competitors
The extent to which a group of firms can avoid price competition in favour of collusive pricing
practices depends on how similar they are in their origins, objectives, costs, and strategies.
Product Differentiation
The more similar the offerings, the more willing customers are to switch between firms.
Commodity industries are often plagued by price wars and low profits.
Excess Capacity & Exit Barriers
Unused capacity encourages firms to offer price cuts. Barriers to exit are costs associated with
capacity leaving an industry.
Cost Conditions: Scale Economies & the Ratio of Fixed to Variable Costs
Where fixed costs are high relative to variable costs, firms will take on marginal business at any
price that covers variable price. Scale economies may also encourage companies to compete
aggressively on price in order to gain the cost benefits of greater volume.
Bargaining Power of Buyers
 Input Markets:
o Purchase raw materials, components, and financial and labour services
 Output Markets:
o Sell their goods and services to customers
 The strength of buying power the firm faces depends on price sensitivity and relative
bargaining power.
Buyers’ Price Sensitivity
The extent of sensitivity depends on:
1) The greater the importance of an item as a proportion of total cost, the more sensitive
buyers will be
o For example, the proportional importance of the cost of aluminum at a canning
facility is high whereas the cost of an auditor isn’t relative to their other expenses
2) The less differentiated the products of the supplying industry, the more willing the buyer
is to switch
3) The more intense the competition among buyers, the greater their eagerness for price
reductions from their sellers
o As competition in the car industry intensifies, component suppliers face pressure for
lower prices
4) The more critical the product to the buyer’s product, the less price sensitive buyers are
Relative Bargaining Power
The key issue in bargaining power is the relative cost that each party sustains as a result of the
transaction not being consummated. Several factors influence the bargaining power of buyers
relative to sellers:
1) Size and concentration of buyers relative to suppliers
o The smaller the number of buyers and the bigger their purchases, the greater the
cost of losing one
2) Buyers’ information
o The more information buyers have about prices and costs, the better they are able to
bargain
3) Ability to integrate vertically
Bargaining Power of Suppliers
 The bargaining power of suppliers is comparable to the bargaining power of buyers, except
now the producers of inputs are suppliers and firms in the industry are buyers

APPLYING INDUSTRY ANALYSIS

 Once it is understood how industry structure drives competition, which in turn determines
profitability, we ca apply this analysis in one of two ways:
1) To forecast industry profitability in the future
2) To find ways of changing industry structure for the better
Forecasting Industry Profitability
 Ultimately, our interest in industry analysis is not to explain the past, but predict the future
 To predict the future, the analysis proceeds in 3 stages:
1) Examine how the industry’s recent levels of competition and profitability are a
consequence of its present structure
2) Identify the trends that are changing the industry’s structure
3) Identify how these structural changes will affect the five forces of competition and
resulting profitability of the industry
Strategies to Alter Industry Structure
 Opportunities for changing industry structure to alleviate competitive pressures are
identified through:
1) Identifying the key structural features of an industry that are depressing profitability
2) Consider which of these structural features are amenable to change through
appropriate strategic initiatives

KEY ISSUES & CHALLENGES

 Some have challenged Michael Porter’s model in that it is too simplistic or flawed. These
criticisms will be explored:
Defining the Industry
 In some sectors it can be difficult to get a clear picture of the industry
o This is because the identity of the different players is problematic (producers,
customers, suppliers, etc.)
 Technological change is also causing boundaries to blur
 The key to defining market boundaries is substitutability
 Choosing an Appropriate Level of Analysis
 One of the main approaches of “intra-” industry analysis is market segmentation
 The segmentation analysis proceeds in 5 stages:
1) Identify possible segmentation variables
2) Construct a segmentation matrix
3) Analyze segmentation attractiveness
4) Identify key success factors in each segment
5) Analyze the attraction of broad versus narrow scope
o A firm must decide whether it wishes to be a segment specialist or compete across
multiple segments
Adding Forces?
 While the presence of substitutes reduces the value of a product, complements increase
value
o Michael Porter’s model only takes substitutes into account, but not complements
 The government has been suggested as an addition to Michael Porter’s model
Dealing with Dynamic Competition
 If the structural transformation is rapid, the five forces model has limited predictive value
Does Industry Matter?
 The correct choice of firm strategy may be more important than the correct choice of
industry

FROM INDUSTRY ATTRACTIVENESS TO COMPETITIVE ADVANTAGE: IDENTIFYING KEY SUCCESS

FACTORS
 To survive and prosper, a firm must meet two criteria:
1) It must supply what customers want to buy
2) It must survive competition
Positioning the Company
 Recognizing and understanding the competitive forces that a firm faces within its industry
allows managers to position the firm where competitive forces are weakest
Competitive Positioning Plot
 A competitive positioning plot allows for the determination of how firms are positioned
within the industry relative to each other as measured against the identified key success
factors
Competitive Maneuvering of Firms in an Industry
 It is important for a firm to recognize what moves its competition might make in order to
better determine a position relative to the competition
Undertaking a Blue Ocean Strategy
 A “blue ocean” strategy involves the firm breaking out of the traditional constraints of
industry competition by developing new products or services that forms the basis of an
entirely new industry without competition
Week 4, 5, & 6: Chapter 3 – The Concept of Strategy

THE ROLE OF RESOURCES & CAPABILITIES IN STRATEGY FORMULATION

 Competitive advantage rather than industry attractiveness is the primary source of superior
profitability
Basing Strategy on Resources & Capabilities
 The role of resources and capabilities as the principal basis for firm strategy and the primary
source of profitability merged into the resource-based view of the firm.
 The greater the rate of change in a firm’s external environment, the more likely it is that
internal resources and capabilities rather than external market focus will provide a secure
foundation for long-term strategy
 When facing imminent obsolescence of a core product, should strategy focus on continuing
to serve fundamental customer needs or on deploying resources and capabilities in other
markets?
How Resources & Capabilities Affect Competitive Advantage
 Resources: productive assets owned by the firm
 Capabilities: what a firm can do
 Individual resources do not confer competitive advantage alone; they must work together to
create organizational capability

IDENTIFYING THE ORGANIZATION’S RESOURCES

Tangible Resources
 Easily found on balance sheet, but historical values can skew valuation
 Primary goal of resource analysis is not to value assets, but to understand potential for
creating competitive advantage
 Financial analysis should include financial ratios with operating performance data, over a
period of time, while measuring any growth or decline in ratios each year
 Must address 2 questions:
1) What opportunities exist for economizing (using less) resources?
2) What are the possibilities for employing existing assets more profitably?
Intangible Resources
 Does not appear on balance sheet, but often plays major role in valuation
 Intangible resources are often more valuable than tangible resources
Human Resources
 Does not appear on balance sheet, since firm purchases their services under employment
contracts
 Trends in appraisal include:
1) Greater emphasis on assessing results in relation to performance targets
2) Broadening the basis of evaluation
 Competency modelling involves identifying the set of skills, content knowledge, attitudes,
and values associated with superior performers within a particular job category, and then
assessing each employee against that profile
 “hire for attitude, train for skills”

IDENTIFYING THE ORGANIZATION’S CAPABILITIES

 To perform a task, a team of resources must work together
 Organizational Capability: firm’s capacity to deploy resources for a desired end result
 Distinctive Competence: describes what is done well relative to competitors
 Core Competencies:
o Make a disproportionate contribution to ultimate customer value, or to the
efficiency with which value is delivered
o Provide a basis for entering new markets
Classifying Capabilities
 Two approaches are used for classifying capabilities:
1) Functional Analysis
o Identifies capabilities in relation to each of the principal functional areas of the
firm
2) Value Chain Analysis
o Separates the firm’s activities into a sequential chain
o By exploring different activities and the linkages between them, it is possible to
gain a sense of the firm’s main capabilities
The Nature of Capability
 Identifying capabilities poses a problem since many capabilities are elusive, and cannot be
located within a firm
Capability as a Process & Routine
 Organizational capability requires the efforts of various individuals and capital equipment,
technology, and other resources to be integrated
 Organizational Process: sequence of actions through which a specific task if performed
 Routinization: only by becoming routine do processes become efficient and reliable
The Hierarchy of Capabilities
 Broadly defined capabilities may be broken down into more specialist capabilities

APPRAISING RESOURCES & CAPABILITIES

 Profits that a firm obtains from its resources and capabilities depend on three factors:
1) Establishing competitive advantage
2) Sustaining competitive advantage
3) Appropriating the returns to competitive advantage
Establishing Competitive Advantage
 For a resource or capability to establish a competitive advantage, two conditions must be
present:
1) Scarcity
 o If a resource of capability is widely available within the industry, then it may be
essential to compete, but it will not be a sufficient basis for competitive advantage
2) Relevance
o A resource or capability must be relevant to the key success factors in the market
(e.g. tellers in banks no longer as relevant)
Sustaining Competitive Advantage
 Resources and capabilities are imitable if they are transferable or replicable
 Sustainable advantages depend on:
1) Durability
o Are advantages long-lasting?
2) Transferability
o Are advantages mobile (bought and sold) between companies?
3) Replicability
o Are advantages easily copied?
Appropriating the Returns to Competitive Advantage
 Capabilities depend heavily on the skills and efforts of employees, who are not owned by
the firm
 The mobility of key employees represents a constant threat to competitive advantage

PUTTING RESOURCE & CAPABILITY ANALYSIS TO WORK: A PRACTICAL GUIDE

Step 1: Identifying the Key Resources & Capabilities
 Identification may start internally or externally
 From an external focus, we begin with key success factors (e.g. low cost production)
o What resources and capabilities do these success factors imply? (e.g. manufacturing
capabilities)
Step 2: Appraising Resources & Capabilities
 Resources and capabilities need to be appraised against 2 key criteria:
1) Importance
o Which are most important in conferring competitive advantage?
2) Strengths & Weaknesses
o Relative to competitors
Assessing Importance
 Consider our ultimate objective when assessing importance; objective is not to attract
customers, but to make superior profit through establishing a sustainable competitive
advantage.
Assessing Relative Strengths
 Must identify and appraise looking both inside and outside a firm
 In assessing competencies, organizations frequently fall victim to past glories, hopes for the
future, and wishful thinking
 Benchmarking is a powerful method to move from the subjective level to the objective level
 Appraising resources and capabilities is not about data, it’s about insight and understanding
 For poor-performing companies, an absence of distinctive capabilities isn’t the issue, failure
to recognize and deploy them is
Bringing Together Importance & Relative Strength
 Bringing together the two criteria of importance and relative strength in four quadrants
allows us to identify key strengths and weaknesses
Step 3: Developing Strategy Implications
The SWOT Analysis
 Useful tools for determining the strategic implications of a firm’s strengths and weaknesses
Exploiting Key Strengths
 Key task is to formulate strategy to ensure that strongest of resources and capabilities
(strengths) are deployed to the greatest effect
Managing Key Weaknesses
 Converting weakness into strength is often a long-term task
 Often this can be changed into a short/medium-term task by outsourcing
What about Superfluous Strengths?
 A superfluous strength is a strength that is not an important source of competitive
advantage
 Companies may lower the level of investment in superfluous strengths
The Vrin Model
 Concept of sustaining a competitive advantage by owning resources that are:
1) Valuable
o Related to the ability to improve the effectiveness and efficiency of operations,
especially in light of external threats and opportunities
o E.g. being able to control airplane fuel costs during extreme volatility
2) Rare
o Considered rare when existence rests with a relatively small number of industry
players
3) Inimitable
o The resource is developed over time and replicating it would take the same amount
of time
o Causal ambiguity: inability to pinpoint how and where exactly the capability is
created
o Socially complex: easily observable, not easily replicated
4) Non-Substitutable
o Is not replaced by similar resources and capabilities

DEVELOPING RESOURCES & CAPABILITIES

 Resource that is critical to the development of capabilities is managers with the requisite
knowledge for capability building
Path Dependency & the Role of Early Experiences
 Organizational capability is path dependent: a company’s capabilities are the result of its
history
The Linkage between Resources & Capabilities
 Is it possible to develop the new capabilities needed to meet the challenges of tomorrow?
Are Organizational Capabilities Rigid or Dynamic?
 The more highly developed a firm’s organizational capabilities, the narrower its repertoire
and the more difficult it is for the firm to adapt them to new circumstances
 Thus, core capabilities are simultaneously rigidities; they inhibit firms’ ability to access and
develop new capabilities
 This theory has been challenged from two directions:
1) Flexibility in organizational routines
o Studies have shown that even basic operations display variation and the capacity to
adapt
2) Dynamic capability
o The capacity to change may itself be regarded as an organizational capability

APPROACHES TO CAPABILITY DEVELOPMENT

Acquiring Capabilities: Mergers, Acquisitions, & Alliances
 Acquisitions as a means of extending company’s capability base involves major risks:
1) Acquisitions are expensive
2) Culture clashes may result in the degradation of the capabilities the acquiring company
was originally seeking
 Strategic alliances offer cost-effective means to another company’s capabilities
o When both alliance partners are trying to acquire one another’s capabilities, the
result may be a “competition for competence” that ultimately destabilizes the
relationship.
 Relational capability comprises building trust, developing inter-firm knowledge-sharing
routines, and establishing mechanisms for coordination
 The more a company outsources value chain activities to a network of alliance partners, the
more it needs to develop the :systems integration capability” to coordinate and integrate
the dispersed activities
Internal Development: Focus & Sequencing
 Obtaining necessary resources is easy, integrating these resources to do something is
difficult
 Capability management must be systematic
 Key to developing superior capabilities is resource leveraging, made up of 2 components:
1) Concentrating resources
o Focusing the efforts of each group on specific priorities
2) Accumulating resources
o Through mining experience to accelerate learning
 Increasingly sophisticated products allow a firm to develop the “integrative knowledge” that
is the heart of organizational capability
Week 7: Chapter 4 – The Nature & Sources of Competitive Advantage

THE EMERGENCE OF 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
 Competitive advantage may not be revealed in higher profitability
o External and internal changes can create short-term opportunities for creating an
advantage
External Sources of Change
 The change must have differential effects on companies because of their different resources
and capabilities or strategic positioning
Competitive Advantage from Responsiveness to Change
 Competitive advantage arising from external change depends on firm’s ability to respond to
change
 Responsiveness involves one of two key capabilities:
1) Ability to anticipate changes in the external environment
2) Speed
Competitive Advantage from Innovation: “New Game” Strategies
 A key source of competitive advantage is strategic innovation: new approaches to doing
business, including new business models
 Strategic innovation typically involves creating value for customers from novel products,
experiences, or modes of product delivery
 Strategic innovations tend to involve pioneering along one or more dimensions of strategy:
o New industries
 Launch of products that create a whole new market (blue ocean strategy)
o New customer segments
 New customer segments for existing product segments
o New sources of competitive advantage
 Reintroduction of novel approaches to creating customer value
 E.g. Cirque du Soleil reinventing the circus

SUSTAINING COMPETITIVE ADVANTAGE

 Competitive advantage is subject to erosion by competition
 The speed with which competitive advantage is undermined depends on the ability of
competitors to challenge either by:
o Imitation; or
o Innovation
 Isolating mechanisms: the barriers that protect a firm’s profits from being driven down by
the competitive process
 Process of competitive imitation:
o Identification
 Isolating Mechanisms:
 obscure superior performance
o Incentives for Imitation
 Isolating Mechanisms:
 Deterrence: signal aggressive intentions to imitators
 Pre-Emption: exploit all available investment opportunities
o Diagnosis
 Isolating Mechanisms:
 Rely on multiple sources of competitive advantage to create “causal
ambiguity”
o Resource Acquisition
 Isolating Mechanisms:
 Base competitive advantage on resources and capabilities that are
immobile and difficult to replicate
Identification: Obscuring Superior Performance
 Mask high performance so rivals fail to see success until it’s too late
 Avoid disclosure of financial performance
Deterrence & Pre-Emption
 Persuade rivals imitation will be unprofitable
 Pre-emption: occupy existing and potential strategic niches to reduce the range of
investment opportunities open to the challenger
o Ability to sustain competitive advantage through pre-emption depends on the
presence of 2 flaws in the competitive process:
1) Market must be small relative to the minimum efficient scale of production, such
that only a very small number of competitors is viable
2) Must be a first-mover advantage that gives an incumbent preferential access to
information and other resources, putting rivals at a disadvantage
Diagnosing Competitive Advantage: “Causal Ambiguity” & “Uncertain Imitability”
 Identifying differences in strategy that are the critical determinants of superior profitability
is difficult
o Causal Ambiguity: the more complex or multidimensional the organizational
capabilities, the more difficult to pinpoint determinants of success
o Outcome of causal ambiguity is uncertain imitability
 One of the challenges for the would-be imitator is deciding which management practices are
generic best practices and which are contextual (complementary to bundle of practices)
Acquiring Resources & Capabilities
 The competitor can mount a competitive challenge only by assembling the resources and
capabilities necessary for imitation
 Can acquire resources and capabilities by:
1) Buy them
2) Build them
 Key issue for would-be imitators is the extent to which first-mover advantage exists within
the market

TYPES OF COMPETITIVE ADVANTAGE: COST & DIFFERENTIATION

 A firm can achieve a higher rate of profit over a rival in one of two ways:
1) Cost Advantage: supply an identical product or service at a lower cost; or
2) Differentiation Advantage: supply a product or service that is differentiated in such a way
that the customer is willing to pay a price premium that exceeds the additional cost of
the differentiation

STRATEGY & COST ADVANTAGE

 There are seven determinants of cost drivers relative to competitors:
1) Economies of scale
2) Economies of Learning
3) Production techniques
4) Product design
5) Input costs
6) Capacity utilization
 By examining each of these cost drivers in relation to a particular firm, we may:
o Analyze firm’s cost position relative to its competitors and diagnose the sources of
inefficiency
o Make recommendations as to how a firm can improve cost efficiency
 Analyzing costs requires breaking down the firm’s value chain to identify:
o The relative importance of each activity with respect to total cost;
o The cost drivers for each activity and the comparative efficiency with which the firm
performs each activity;
o How costs in one activity influence costs in another; and
o Which activities should be undertaken within the firm and which activities should be
outsourced
The Principal Stages of Value Chain Analysis for Cost Advantage
 A value chain analysis of a firm’s cost position comprises of the following stages:
1) Break down the firm into separate activities
2) Establish the relative importance of different activities in the total cost of the product
3) Compare costs by activity
4) Identify cost drivers
5) Identify linkages
6) Identify opportunities for reducing costs

STRATEGY & DIFFERENTIATION ADVANTAGE

 Differentiation advantage occurs when a firm is able to obtain a price premium in the
market that exceeds the cost of providing the differentiation
 Differentiation is not simply about offering different product features, it is about identifying
and understanding every possible interaction between the firm and its customers, and
asking how these interactions can be enhanced or changed in order to deliver additional
value to the customer
Principal Stages of Value Chain Analysis for Differentiation Advantage
 Four stages in identifying opportunities for differentiation advantage
1) Construct a value chain for the firm and the customer
2) Identify the drivers of uniqueness in each activity
3) Select the most promising differentiation variables for the firm
o Establish where the form has greater potential for differentiation from, or at a
lower cost than rivals
o identify linkages
o ease with which different types of uniqueness can be sustained must be
considered
4) Locate linkages between the value chain of the firm and that of the buyer
o Differentiation must offer firm a price premium and must create value for the
customer
 Generic strategies model:
1) Cost leadership
2) Differentiation
3) Focused cost leadership
4) Focused differentiation
 Superior value advantage: hybrid of competitive advantages
 Market leadership is often held by firms that maximize customer appeal by reconciling
effective differentiation with low cost
Creating Competitive Advantage in a Knowledge Economy
 Leading firms are found in industries characterized by exponential growth in technological
and scientific capabilities that leaves certain products or services obsolete after short
periods
Week 8: Chapter 5 – Industry Evolution & Strategic Change

THE INDUSTRY LIFE CYCLE

 Industry life cycle is the supply-side equivalent of the product life cycle
o Likely to be a longer duration than that of a single product or service
 Factors that drive industry evolution:
o Demand Growth; and
o Production & Diffusion of Knowledge
Demand Growth
 The characteristic growth profile is an S-shaped curve
 Four Phases:
1) Introduction/Emergence
o Sales are small; rate of market penetration is low; low awareness; few customers;
novelty of technology, small scale production, and lack of experience means high
costs and low quality; customers are affluent, innovation-oriented, and risk-tolerant
2) Growth
o Accelerating market penetration as technical improvements and increased efficiency
open to the mass market
3) Maturity
o Increasing market saturation; demand is entirely for replacement
4) Decline
o Industry becomes challenged by new industries
The Production & Diffusion of Knowledge
 New knowledge (innovation) is responsible for an industry’s birth
 Knowledge creation and diffusion exert a major influence on industry evolution
 In the introduction stage, consumers know little about the product or services (innovation),
but over the life cycle, customers become more knowledgeable, thus more price sensitive.
 The transition from introduction to growth is reflected in:
1) The emergence of dominant designs and technical standards; and
2) A increased focus on process innovation opposed to product or service innovation
Dominant Designs & Technical Standards
 Dominant Design: is a product or service architecture that defines the look, functionality,
and production method for the product service and becomes accepted by the industry as a
whole
o Refers to the overall configurations
 Technical Standard: is a technology or specification that is important for compatibility
 o A dominant design may not embody a technical standard
o Emerge where there are network effects
 Network Effects: the need for users to connect in some way with one another
 Cause each customer to choose the same technology as everyone else to avoid
being stranded
From Product to Process Innovation
 Once the industry coalesces around a leading design, there is a shift from radical to
incremental innovation
o This often users in the industry’s growth phase
 Firms begin to focus on process innovation (reduce costs, increase reliability and large-scale
methods)
How General is the Life Cycle Pattern?
 Duration of the life cycle varies greatly between industries
 The tendency over time has been for life cycles to become compressed
o “competing on internet time” requires radical rethink of strategies and management
processes
 Rejuvenation of the product life cycle is typically the result of companies resisting the forces
of maturity through break-through product innovations or developing new markets
 Industry is likely to be at different stages of life cycle in different countries
Implications of the Life Cycle for Competition & Strategy
 Changes in demand growth and technology over the cycle have implications for industry
structure, competition, and the sources of competitive advantage
 Refer to Table 5.1 on pg. 173
The Introduction Phase
 “De Novo” Entrants: start-up companies
 “De Alio” Entrants: established firms diversifying from related industries
 Born Global Companies: firms that, from their inception, derive significant competitive
advantage from the use of resources and the sale of output in multiple countries
The Growth Phase
 Key challenge is scaling up
 Financial resources become increasingly important as investment requirements grow
 Creates need for internal administrative and strategic skills
The Maturity Phase
 Competitive advantage is increasingly a quest for efficiency
 Cost efficiency through scale economies, low wages, and low overhead become key success
factors
 Price competition is stimulated and firm failure increases sharply
The Decline Phase
 Transition can be a result of technological substitution, changes in consumer preferences,
demographic shirts, or foreign competition
 Key features:
o Excess capacity
 o Lack of technological change
o A declining number of competitors
o High average age of physical and human resources
o Aggressive price competition
 Two factors are critical in determining whether or not a declining industry will become a
competitive bloodbath:
1) The balance between capacity and output; and
2) The nature of the demand for the product or service
Key Success Factors & Strategy
 Introduction Phase: Innovation; financial resources; process capabilities
 Growth Phase: Large-scale production; access to distribution
 Maturity Phase: Efficiency; cost efficiency
 Decline Phase: Cost cutting; detection of signs of decline

MANAGING ORGANIZATIONAL ADAPTATION & STRATEGIC CHANGE

 Industries change – but what about the companies within them?
Why is Change so Difficult? The Sources of Organizational Inertia
 Organizational change is difficult
 Barriers to change theories:
o Organizational routines
 Organizations get caught in competency traps where “core capabilities”
become core rigidities
o Social and political structure
 Change represents a threat to the power of those in positions of authority
o Conformity
 Institutional isomorphism locks organizations into common structures and
strategies that make it difficult to adapt to change
o Limited search
 Organizations prefer exploitation of existing knowledge over exploration for
new opportunities
 Satisficing: sitting at a satisfactory level of performance rather than pursue
optimal performance
o Complementaries between strategy, structure, and systems
 Complex configurations are a barrier to change once established
Coping with Technological Change
 Any change in the external environment of an industry offers opportunities for newcomers
to challenge incumbents (start-ups and established firms)
Competence-Enhancing & Competence-Destroying Technological Change
 Some technological changes are:
o Competence Destroying
 Render obsolete the resources and capabilities of established firms
o Competence Enhancing
  They preserve, strengthen, the resources and capabilities of incumbent firms
Architectural & Component Innovation
 Key factor in determining the success of established firms in adapting to technological
change is whether the innovation occurs at the:
o Component Level; or the
o Architectural Level
 Creates difficulty, since architectural innovation requires a major
reconfiguration of strategy and structure
Disruptive Technology
 New technology can be:
o Incremental; or
 Augments existing performance attributes
o Disruptive
 Incorporates different performance attributes than the existing technology

MANAGING STRATEGIC CHANGE

 Because emphasis is on strategic change, the redirection and adaption of whole organization
will take a top-down change approach
Dual Strategies & Organizational Ambidexterity
 Strategy has two major dimensions:
1) Positioning for the present; and
2) Adapting to the future
 Dual strategies require dual planning systems:
o Short-term planning
 Focuses on strategic fit and performance
o Longer-term planning
 Develop vision; reshape the corporate portfolio; redefine and reposition
individual businesses; develop new capabilities; and redesign organizational
structures
Tools of Strategic Change Management
 Most large companies exhibit periodic restructuring involving simultaneous changes in
strategy, structure, management systems, and top management personnel
o Such restructuring typically follows declining performance caused either by:
 Major external shock
 Growing misalignment between firm and external environment
Creating Perceptions of Crisis
 Necessary changes must be implemented well before the real crisis occurs
 “only the paranoid survive”
Establishing Stretch Targets
 Continually pressure the organization by means of ambitious performance targets
Creating Organizational Initiatives
 Organization-wide initiative endorsed and communicated by the chief executive
Reorganization & New Blood
 Opportunity for redistributing power, shuffling top management, and introducing new blood
Dynamic Capabilities
 Dynamic Capabilities: firm’s ability to integrate, build, and reconfigure internal and external
competencies to address rapidly changing environments

Week 9: Chapter 7 – Corporate Strategy

THE SCOPE OF THE FIRM

 Corporate strategic decisions encompass both the breadth of the firm’s product range
(product scope) and the extent of its involvement in the industry value chain (vertical scope)

KEY CONCEPTS FOR ANALYZING FIRM SCOPE

 Firms extend or reduce their scope because they perceive this to be in the organization’s
best interest
 Concepts that are key to analyzing corporate strategic decisions and shifts in the scope of
firms’ activities over time:
o Economies of scope;
o Transactions costs; and
o The costs of corporate complexity
Economies of Scope
 Cost economies from increasing the output of multiple products
 Exist when the use of a resource across multiple activities consumes less of that resource
than when the activities are carried out independently
 The greater the fixed costs of tangible resources, the greater the associated economies of
scope
 Economies of scope also arise from the centralized provision of administrative and support
services to the different businesses of the corporation
 Exploiting a strong brand across additional products is called brand extensions (intangible)
 Economies from organizational capabilities arise from the ability to transfer capabilities
between businesses within the diversified company
 Some of the most important capabilities in influencing the performance of multi-business
corporations are general management capabilities
 Economies of scope can be exploited simply by selling or licensing the use of the resource or
capability to another company
Transaction Costs
 Although the capitalist economy is frequently referred to as a “market economy”, in fact, it
comprises two forms of economic organization
1) Market Mechanism
o Individuals and firms, guided by market prices, make independent decisions to
buy and sell goods and services
o “invisible hand”
 2) Administrative Mechanism
o Decisions concerning production and resource allocation are made by managers
and imposed by hierarchies
o “visible hand”
 What determines which particular activity is undertaken within a firm or through arm’s-
length market contracts?
o Relative cost
o Markets are not costless: making a purchase or sale involves search costs, the costs
of negotiating and drawing up a contract, the costs of monitoring to ensure that the
other party’s side of the contract is being fulfilled, and the enforcement costs of
arbitration or litigation should a dispute arise (these are transaction costs)
 If the transaction costs associated with organizing across markets are greater
than the administrative costs of organizing within firms, we can expect the
coordination of productive activity to be internalized within firms
 A major factor encouraging firms to extend their boundaries was the fall in the
administrative costs of firms relative to the transaction costs of markets – technology was a
major source of the falling costs
 The dominant trends of the past three decades were “downsizing” and “refocusing,” as large
industrial companies reduced both their product scope through focusing on their core
businesses and their vertical scope through outsourcing
 Even though vertical integration reduces or eliminates certain transaction costs, this doesn’t
mean that incorporating different areas of business within the firm boundaries is necessarily
an efficient solution.
The Costs of Corporate Complexity
 Firm may benefit from economies of scope and may avoid transaction costs of using the
market by extending the scope of operations
o Management costs incurred by the extension can outweigh the potential benefits
 Engaging in more arenas of business involves greater organizational complexity as managing
different businesses usually requires different organizational capabilities

DIVERSIFICATION
Defining Diversification
 Diversification is the expansion of an existing firm into another product line or field of
operation
o Unrelated diversification is sometimes referred to as conglomerate diversification
o Related diversification is sometimes referred to as concentric diversification
o Horizontal diversification involves the firm moving into the same stage of production
o Vertical diversification occurs when a firm undertakes successive stages in the
production of a good or service
 Whereas the opportunities for economies of scope derived from exploiting joint inputs may
be relatively easy to identify at an operational level, strategic relatedness is more elusive
The Benefits & Costs of Diversification
 Diversification is perceived as beneficial if it helps a firm to achieve its objectives
 Options for diversification may be restricted either because the scope of the organization’s
activities is limited by statute or because the organization’s mission is very focused
 Most commonly cited motives for diversification:
o Growth; risk reduction; value creation; exploiting economies of scope; internal
capital markets; and internal labour markets
Growth
 In the absence of diversification, firms are prisoners of their industry
Risk Reduction
 The rationale for diversifying to reduce risk is captured by the advice, “dont put all your eggs
in one basket”
Value Creation
 The primary source of value creation from diversification is exploiting linkages between
different businesses
Exploiting Economies of Scope
 If the resource that forms the basis for potential economies of scope can be traded or
licensed out for anything close to its real value, then it is not necessary to enter another
business
 If the resource cannot easily be traded, then it will be necessary to enter another business
in order to capture extra profitability
Internal Capital Markets
 Internal capital market
o The corporate allocating of capital between the different businesses through the
capital expenditure budget
 Diversified companies have 2 key advantages:
1) By maintaining a balanced portfolio of cash-generating and cash-using businesses,
diversified firms can avoid the costs of using the external capital market
2) Diversified companies have better access to information on the financial prospects of
their different businesses than that typically available to external financiers
 Critical disadvantage
o Investment allocation within diversified companies is a politicized process in which
strategic and financial considerations are subordinated by turf battles and ego
building
Internal Labour Markets
 Efficiencies arise from the ability of diversified companies to transfer employees, especially
managers and technical specialists, between their divisions and to rely less on hiring and
hiring
 A diversified corporation has a pool of employees and can respond to the specific needs of
any one business through transfer from elsewhere within the corporation
When does Diversification Create Value?
 What are the implications of a diversification strategy, if a corporate strategy is to be
directed toward the interests of shareholders?
 Michael Porter’s “essential tests” to be applied in deciding whether diversification will
create shareholder value:
 o The attractiveness test
 Industry must be structurally attractive or capable of being made attractive
o The cost-of-entry test
 Cost of entry must not capitalize all future profits
o The better-off test
 The new unit must gain competitive advantage from its link with the
corporation
 Usually the better-off test dominates
 Attractiveness test and cost-of-entry can cancel each other out , sine attractive industries
tend to have high barriers of entry
Diversification & Performance
 Empirical research into diversification has concentrated on 2 major issues:
1) How do diversified firms perform relative to specialized firms?
2) Does related diversification outperform unrelated diversification?
 High levels of diversification appear to be associated with lower profitability, probably
because of the organizational complexity diversification creates
o A key problem is distinguishing association from causation
Related & Unrelated Diversification
 It appears as those closely related diversification is more profitable than unrelated
diversification
o Secondary studies showed that this depended on several factors
 Unrelated diversification shows greater benefit, but requires complex
management
 Distinction between related and unrelated is not always clear
Recent Trends in Diversification
 Trend toward diversification has reversed and diversified companies have been refocusing
their business portfolios through divesting non-core businesses
 Conglomerate firms have almost disappeared in North America
 In contrast, highly diversified business groups dominate the industrial sector of many
emerging countries
 As the rate at which technologies and products become obsolete increases and competitive
advantage in core businesses erodes, so firms are finding it desirable to create (or acquire_
“growth options” in other industries

VERTICAL INTEGRATION
Defining Vertical Integration
 The extent of vertical integration is indicated by the ratio of a firm’s value added to its sales
revenue
o The more a firm makes rather than buys, the lower are its costs of bought-in goods
and services relative to its final sales revenue
 Backward Integration
o Firm acquires ownership and control over the production of its own inputs
 Forward Integration
 o Firm acquires ownership and control over activities previously undertaken by its
customers
The Benefits & Costs of Vertical Integration
 Vertical integration was considered generally beneficial in the past
o Currently firms are concentrating more on outsourcing to focus on their “core
competencies”
 Vertical integration of software devices and content is viewed as a critical advantage in the
face of rapid technological change in a number of high-tech industries
 Positives of vertical integration:
o Produce cost savings
o Facilitate transaction-specific investments
 Negatives of vertical integration:
o May restrict a firm’s ability to benefit from scale economies and may reduce
flexibility and increase risks
Technical Economies from the Physical Integration of Processes
 Cost savings justify why co-location of plants is necessary, but fail to explain why common
ownership is necessary
Transaction Costs in Vertical Exchanges
 Predominance of market contracts are the result of low transaction costs
o There are many buyers and sellers, information is readily available, and the switching
costs for buyers and suppliers are low
 Transaction specific investments result in transaction costs arising from the difficulties of
framing a comprehensive contract and the risks of disputes and opportunism that arise from
contracts that do not cover every possible eventuality
Differences in Optimal Scale between Different Stages of Production
 It would be illogical for certain companies to backwardly integrate if their needs are well
below the scale needed for efficiency in manufacture
o i.e. It would be illogical for FedEx to manufacture their own trucks since they only
need 40,000, whereas an assembly plant needs to manufacture at least 200,000 to
be efficient
The Incentive Problem
 High powered incentives
o Buyer is motivated to secure best possible deal and seller is motivated to pursue
efficiency and service in order to attract and retain customers
 Low powered incentives
o Internal supplier-customer relationships in vertical integration
Flexibility
 Extensive outsourcing has been a key feature of fast-cycle product development throughout
the electronics sector
 Where system-wide flexibility is required, vertical integration may allow for speed and
coordination in achieving simultaneous adjustment throughout the vertical chain
Compounding Risk
 To the extent that vertical integration ties a company to its internal suppliers, vertical
integration represents a compounding of risk insofar as problems at any one stage of
production threaten production and profitability at all other stages
Assessing the Pros & Cons of Vertical Integration
 Vertical integration is neither good nor bad, it all depends various organizational factors
Designing Vertical Relationships
 There are a variety of relationships through which buyer and sellers can interact and
coordinate their interests
 These relationships may be classified in relation to 2 characteristics:
1) The extent to which the buyer and seller commit resources to the relationship
o Arm’s length, spot contracts involve no resource commitment beyond the single
deal; vertical integration typically involves substantial investment
2) The formality of the relationship
o Long-term contracts and franchises are formalized by the complex written
agreements they entail; spot contracts may involve little or no documentation,
but are bound by the formalities of the common law; collaborative agreements
between buyers and sellers are usually informal, while the formality of vertical
integration is at the discretion of firm’s management
Different Types of Vertical Relationships
 Different types of vertical relationships offer different combinations of advantages and
disadvantages
o Long-Term Contracts
o Vendor Partnerships
o Franchising
Recent Trends in Vertical Integration
 Main feature of recent years has been a growing diversity of hybrid vertical relationships
that have attempted to reconcile the flexibility and incentives of market transactions with
the close collaboration provided by vertical integration
 There has been a massive shift from arm’s-length supplier relationships to long-term
collaboration with fewer suppliers
 Enthusiasm for exploiting lower labour costs in emerging countries has intensified
outsourcing among companies in North America, Europe and Japan
 Mutual dependence from close, long-term suppler-buyer relationships creates vulnerability
for both parties
o While trust may alleviate some of the risks of opportunism, companies can also
reinforce their vertical relationships and discourage opportunism through equity
stakes and profit-sharing arrangements.
 The scope if outsourcing has extended from basic components to a wide range of business
services, including payroll, IT, training, and customer service and support
 Increasingly, outsourcing involves not just individual components and services, but whole
chunks of the value chain
 Extreme levels of outsourcing have given rise to the concept of the virtual corporation
 o Firm whose primary function is to coordinate the activities of a network of suppliers
and downstream partners
o The hub company has the role of systems integrator
o Critical issue is whether a company that outsources most functions can retain the
architectural capabilities needed to manage the component capabilities of the
various partners and contractors

STRATEGIC MANEUVERING
 The performance effects of diversification and vertical integration depend on the mode by
which these strategic moves are made
 Choices besides outsourcing and vertical integration include:
1) Mergers & Acquisitions
2) Strategic Alliances
Mergers & Acquisitions
 Merging or acquiring another firm can provide required resources and capabilities
 The principal difference between the two is the way in which the resulting ownership
interests are determined, the manner in which the arrangement is financed, and the
implications it has on the management of each of the firms
 Corporate cultural differences, and shareholder and management cooperation may prevent
mergers and acquisitions from being effective
Strategic Alliances
 Strategic alliances allow firms to combine their resources and capabilities temporarily
 Alliances allow for a sharing of risk and control and are commonly employed when one or
both firms are seeking to either enter into a new product market or to enter a geographic
market with an existing product
 Disadvantages include:
o Selecting the wrong firm to partner with
o Need to establish trust, communication, and cooperation between management and
employees of both firms

MANAGING THE CORPORATE PORTFOLIO

 If opportunities exist to create value through diversification or vertical integration, then
managers must ask themselves how to manage a multi-business firm in ways that generate
as much value as possible
o Portfolio planning models
Portfolio Planning: The GE/McKinsey Matrix
 Basic idea of portfolio planning model is to represent graphically the individual businesses of
a multi-business company in terms of key strategic variables that determine their potential
for profit
Portfolio Planning: BCG’s Growth-Share Matrix
 Matrix uses industry attractiveness and competitive position to compare the strategic
positions of different businesses
Portfolio Planning: The Ashridge Portfolio Display
 Takes account of the fact that the value-creating potential of a business within a company’s
business portfolio depends, not just upon the characteristics of business, but also on the
characteristics of parents

Week 10: Chapter 8 – Realizing Strategy

THE ORGANIZATIONAL CHALLENGE: RECONCILING SPECIALIZATION WITH COORDINATION &

CO-OPERATION
 Firms exist because they are efficient institutions for the organization of economic activities,
particularly the production of goods and services
 Every organized activity has two fundamental and opposing requirements:
1) The division of labour; and
2) The coordination of these tasks to accomplish the activity
 These two requirements are difficult to reconcile simultaneously
Specialization & Division of Labour
 Specialization is the fundamental source of efficiency in production
 The more a production process is divided between different specialists, the more complex is
the challenge of integrating the efforts of individual specialists
 Integrating efforts involves two issues:
1) The co-operational problem
o Aligning the interests of individuals who have divergent goals
2) The coordination problem
o Even in the absence of goal conflict, how do individuals harmonize their different
activities?
The Co-Operation Problem
 Agency relationship: the problem for the principal is ensuring that the agent acts in the
principal’s best interest
 Main issue today is ensuring managers are maximizing shareholder wealth
 Organizational departments frequently have their own sub goals and these can be at odds
with those of other departments
 Managers can use several mechanisms to align the goals of different individuals and groups
within the organization:
o Bureaucratic controls
 Critics claim this reduces the extent to which those lower down in the
organization can exercise their personal judgement
o Performance incentives
 Two benefits:
1. High powered; and
2. The economize on the need for costly monitoring and supervision
o Shared values
 Organizational member act in the best interests of the company because they are driven by
internal commitment and strong identification with company goals
The Coordination Problem
 Unless individuals can find ways of coordinating their efforts, production doesn’t happen
 The following mechanisms for coordination can be found in all firms:
o Rules and instructions
o Routines
o Mutual adjustment
 The relative roles of these different coordination devices depend on the types of activities
being performed and the intensity of collaboration required
 When we look at structures, systems, and culture, it is important to remember that they are
not only shaped by strategy, but can also influence the way strategy is formed

ORGANIZATIONAL DESIGN
 Hierarchy is a fundamental feature of organizations
 Two main issues:
1) The advantages of using hierarchies to achieve coordination; and
2) The different ways in which organizations can be structured along hierarchal lines
Hierarchy & Coordination
 Hierarchal structures can reduce costs of coordination
 Hierarchies are a flexible way of coordinating activities because they allow specialist units to
act independently of each other
Defining Organizational Units
 Some of the principal bases for grouping employees are:
o Common Tasks
o Products
o Geography
o Process
 How do we decide with bases to define units? The fundamental issue is achieving the
coordination necessary to integrate the efforts of different individuals
Alternative Structural Forms
 Three basic organizational forms:
1) The Functional Structure
2) The Multidivisional Structure
3) The Matrix Structure
The Functional Structure
 Grouping together similar tasks is conducive to exploiting scale economies, promoting
learning and capability building, and deploying standardized control systems
 High degree of centralized control by CEO and top management
 Different functional departments have their own culture, making integration difficult
The Multidivisional Structure
 Key advantage is the potential for decentralized decision making
 Business level strategies and operating decision made at divisional level, while corporate
headquarters concentrates on corporate planning, budgeting, and providing common
services
 Typically organized into three levels:
1) Corporate Centre;
2) Divisions; and
3) Individual Business Units
Matrix Structures
 Formalize coordination and control across multiple dimensions
 In fast-moving environments, benefits from formally coordinating across multiple
dimensions have been outweighed by excessive complexity, larger head office staffs, slower
decision-making, and diffused authority
Beyond Hierarchal Structures
 Many have proclaimed the death of hierarchal structures
 New organizations feature flatter hierarchies, decentralized decision making, greater
tolerance for ambiguity, permeable internal and external boundaries, empowerment of
employees, capacity for renewal, self-organizing units, self-integrating coordination
mechanisms
 Several alternative organizational forms exists:
o Adhocracies
 Flexible, spontaneous coordination and collaboration around problem solving
and other non-routine activities
 Tend to exist where expertise is prized
o Team-based and project-based organizations
 Since every project is different, each project must be undertaken by a closely
interacting team
o Networks
 Highly specialized firms that coordinate to design and produce complex
products
 Several common characteristics:
1. A focus on coordination rather than on control
2. Reliance on coordination by mutual adjustment
3. Individuals in multiple organizational roles

MANAGEMENT SYSTEMS
 Management systems influence the ways in which strategies get realized in practice
 Four management systems:
1) The information systems;
2) The strategic planning systems;
3) The financial systems; and
4) The human resource management systems
Information Systems
 Information is fundamental to the operation of all management systems
 Administrative hierarchies are founded on vertical information flows
o Upward flow of information to manager
o Downward flow of instructions
 The trend toward decentralization and informality rests on two key aspects of increased
information availability:
1) Information feedback to the individual on job performance
 has made self-monitoring possible
2) Information networking
 Allowed individuals to coordinate their activities voluntarily without hierarchal
supervision
Strategic Planning Systems
 The strategy formulation process is an important vehicle for achieving coordination within a
company
 A strategic plan typically comprises of the following elements:
o A statement of the goals
o A set of assumptions or forecasts
o A qualitative statement
o Specific action steps
o A set of financial projections
 Most important aspect of strategic planning is strategy process
o The dialogue through which knowledge is shared and ideas are communicated, the
consensus that is established, and the commitment to action and the results that are
built
Financial Planning & Control Systems
 At the centre of financial planning is the budgetary process
 Two types of budget are set:
1) The capital expenditure budget
2) The operating budget
The Capital Expenditure Budget
 Established through both top-down and bottom-up processes
The Operating Budget
 Is a pro forma profit and loss statement for the company as a whole and for individual
decisions and business units in the upcoming year
 Part forecast and part target
Human Resource Management Systems
 Strategic and financial plans come to nothing unless they influence the ways in which people
within the organization behave
 The general issue is:
o How does a company encourage employees to act in line with its goals?

CORPORATE CULTURE
 Organizational Culture:
 o a pattern of shared basic assumptions that was learned by a group as it solved its
problems of external adaptation and internal integration, that has worked well
enough to be considered valid and, therefore, to be taught to new members as the
correct way you perceive, think and feel in relation to those problems
 Corporate Culture:
o The values and ways of thinking that senior managers wish to encourage within their
organization
Describing & Classifying Cultures
 Cultural Web:
o Paradigm (mission and values), control systems, organizational structures, power
structures, rituals and routines, and stories and myths
 Culture can be understood at three levels:
1) Organization attributes that an outsider visiting might see, hear or feel
 These features are referred t artefacts
2) Values and attitudes that organizational members express
3) “Unspoken” rules and tacit beliefs
 Most influential, but most difficult to change
Can Cultures Be Changed?
 Strong corporate cultures play to employees’ “hearts” rather than their “heads” and
encourage loyalty and commitment
Corporate Culture & Organizational Performance
 Corporate culture and firm performance are linked
Week 11: Chapter 10 – Corporate Responsibility

THE NEW EXTERNAL ENVIRONMENT OF BUSINESS

 The increasing levels of economic turbulence associated with the global financial crisis,
often referred to as the “credit crunch” or “great recession”, that hit the world economy in
the 2000’s will be a defining feature of the early twenty-first century
 To shed light on the emergence of corporate responsibility and sustainability in addressing a
new external environment of business, we look first at the causes and consequences of
recent economic, social, and ecological crises that have triggered change
The Global Financial Crisis
 Immediate cause of the crisis was attributed to the collapse in the U.S. housing market as a
house price bubble burst
o Demand went up due to low interest rates, causing prices to rise
o Financial institutions, wishing to keep cash flowing into the market, turned
mortgages into securities
o Collateralized debt obligations were created
 Promises to pay money to investors based on the cash flow of mortgage
repayments
 CDO’s were split into different risk classes:
o Senior;
o Mezzanine; and
o Junior
 The global financial system “had become vulnerable and interconnected in ways that were
not understood by either the captains of finance or the system’s public stewards”
Background to the Crisis
 Although the immediate source of the crisis lay in the U.S. sub-prime mortgage market, the
seeds of the crisis were probably sown a decade earlier
 Stock markets rose rapidly from the formation of internet-based companies
 On March 10, 2000, the NASDAQ stock market index hit its all-time high, but within a
month, the boom was over and the ensuing meltdown provide the first evidence that U.S.
credit expansion would not be enough to sustain the investment bubbles that had been
built up during the 1990’s
The Immediate Aftermath of the Crisis
 Immediate response around the world was to pump money into the global financial system
to kick-start economic activity
 The growth rates of the rich industrialized nations have been very modest
 Emerging countries, like China and India, have proved more resilient and although their
growth rates were slowed, national output and income have continued to rise
Global Social Upheaval & Ecological Concern
 The start of the twenty-first century has not only been characterized by the economic and
financial turbulence but also by social upheaval and ecological concern
 9/11 and the ensuing counter attacks in the Middle East has had a major impact on world
trade, financial flows, political tensions and risk perceptions
 For organizations to survive and prosper requires that they adapt to the values and
expectations of society and retain what organizational sociologists refer to as social
legitimacy
 Today’s firms have added 2 elements to their strategy:
1) Corporate responsibility; and
2) Sustainability

CORPORATE RESPONSIBILITY & SUSTAINABILITY

 Corporate responsibility and sustainability addresses external and internal stakeholders
 Principal areas of concern:
o Equity
o Occupational health and safety
o Ethics
o Social sustainability
o Ecological sustainability
The Role of Stakeholders in Corporate Responsibility & Sustainability Practices
 The influence of all of the firm’s internal and external stakeholders to the firm’s strategy
development is a recent phenomenon
o Prior to this, firms adopted the “classical model” that limited ethical responsibility of
the firm to making profits, paying taxes, and obeying the law
 The Virtue Matrix
o 2 bottom quadrants represent civil foundation
 Laws, norms, and customers firm is subject to
o 2 top quadrants represent the frontier of corporate responsibility
 Activities driven by the firm’s intrinsic need to act responsibly as opposed to
just increasing shareholder value
o If a company can do both – advance the supply of corporate responsibility while
enhancing shareholder value – it occupies the strategic frontier quadrant
o If the firm is able to provide added benefits to society through its corporately
responsible actions yet fails to add benefit to shareholders, then it lies within the
structural frontier
Principal Areas of Corporate Responsibility & Sustainability
Equity
 Increasing public concern about the widening gap in pay between the bottom and top of
organization
 Equity is not just related to compensation but can also include job security, opportunities to
advance, recognition to advance, flexible work schedules, and acceptance of diversity
Occupational Health & Health
 Supply chains now involve multiple jurisdictions with differing levels of regulation related to
workplace health and safety
 It is not only the direct financial impact that arises from poor occupational health and safety
practices in terms of lost productivity, lawsuits, and fines, but also the indirect financial
impact resulting from diminished brand value leading to lower sales and lower employee
satisfaction
Ethics
 The general public’s confidence in business corporations was dented not only by the
financial crisis but also by a series of scandals:
o Enron
o WorldCom
o Madoff
Social & Environmental Sustainability
 Business sustainability: management of a company’s “financial, social, and environmental
risks, obligations and opportunities,” more commonly referred to as the triple bottom line:
profit, people and planet
 Sustainability as a competitive advantage arises from the creation of competencies that are
distinct from those of a firm’s competitors
 Higher sales and market share can be attained by employing sustainability strategies such as
sustainable products or service offerings that can differentiate a firm and lead to improved
brand reputation, premium pricing and higher margins for products, and the ability to
recruit and retain higher quality employees
 Sustainability performance can be measured along 4 principal dimensions:
1) Economic
2) Social
3) Environmental
4) Governance
Sustainability Strategies for Multiple Jurisdictions
 In developed countries where social, economic, and environmental sustainability is well
established, a company is likely to encounter rules and regulations that guide it in terms of
what sustainability practices are required
o As a result, a firm’s sustainability strategies will be more reactive
 In areas where sustainability policies are lacking, such as in many developing countries, the
firm’s sustainability strategies must be more proactive so that it can conduct its operations
in a manner more acceptable to the standards of its global stakeholders
 Established sustainability indices:
o Economic Sustainability
 The World Economic Forum’s Global Competitiveness Index
 o Social Sustainability
 The Environmental Performance Index
 The United Nations Human Development Index

MANAGING IN A CHANGING WORLD

 Although the worst effects of the recent financial crisis and recession seem to have passed,
the changes that occurred in the business environment and in the demands that society is
not placing on businesses mean that many important challenges remain
 Interconnectedness increases the tendency for the system to amplify small initial
movements in unpredictable ways
 We will focus on 3 particular issues for business moving forward:
o The prioritization of long-term over short-term goals;
o The fitness for purpose of current corporate governance arrangements; and
o The adoption of different styles of leadership
Short-Term vs. Long-Term Goals
 Firms are seduced by short-term gains
 Long-term thinking is necessary for long-term success and the critical focus of top
management should be less on profits and more on the factors that drive profits
o Operational efficiency, customer satisfaction, new product development, etc.
Corporate Governance
 Is the set of processes, institutions, regulations, and policies that affect the way companies
are directed, administered, and controlled
New Forms of Leadership
 To unify and inspire the efforts of organizational members, leadership requires providing
meaning to people’s own aspirations