By Sreenath B.

Strategy
• Strategy :- the specific pattern of decisions and actions that mangers take to sue core competences to achieve a competitive advantage and outperform competitors. An organization develops a strategy to increase the value it can create for stakeholders. Through strategy, organization try to develop core competences to gain competitive advantage • Core Competences :- the skills and abilities in value creation activities that allow a company to achieve superior efficiency, quality, innovation, or customer responsiveness. Eg: McDonald’s : CC of fast food for new line of breakfast food, GILLETTE : CC to sell razor blades in selling men products.

VALUE CREATION CYCLE
1. Ability to obtain scarce resources

allows an organization to create
Ample resources, a well-thoughtout strategy, and distinctive competences give an organization a competitive advantage, which facilitates the acquisition of still more resources.

2. An organizational strategy

which increases its

and invest resources to develop

4. A competitive advantage

which enable the organization to create

3.Core competence

Sources of Core Competences
• Specialized Resources :– Functional resources :- the skills possessed by an organization’s functional personnel – Organizational Resources :- the attributes that give an organization a competitive advantage such as the skills of the top-management team or possession of valuable and scare resources. • Coordination Ability :- an organization’s ability to coordinate its functional and organizational resources to create maximal value.

Global expansion & core competences
Expanding globally into overseas markets can be an important facilitator of the development of an organization’s core competences.

1. Transfer of core competences abroad

2. Establishment of a global network

4. Use of global learning to enhance core competences

3. Gaining access to global skills and resources

Global expansion and core competences
• Transferring Core Competences Abroad- value creation at the global level begins when an orgz transfers a CC in one or more of its functions to an overseas market to produce cheaper or improved products that will give the orgz a low-cost or differentiation advantage over its competitors in that market. Eg:- Microsoft took its CC of advance software production tech to produce tailored software for customers abroad.

Global expansion & core competences
• Establishing a Global Network- while going global, the firm locates its value-creation activities in countries where economic, political and cultural conditions are likes to enhance its low-cost or differentiation advantage. – It establishes a global network- sets of task and reporting relationships among managers, functions, and divisions that link an organization’s value-creation activities globally. – Low factor costs- to lower costs, value-creation functions are located in countries having low factor costs; cost of raw materials, unskilled or skilled labor, land & tax. Eg:-Nintendo – HQ in one country, assembly operations in another country, design operation in yet another country, buying inputs and raw materials from another country.

Global expansion and core competences
• Gaining Access to Global Resources and Skills:- an organization with a global network has access to resources and skills throughout the world. Because each country has unique eco, political and cultural conditions, different countries have different resources and skills that give them a competitive advantages. Eg:- Japan has skills in ‘lean’ production and T.Q.Manufacturing, Kodak, IBM, Ford has established divisions in Japan to learn these skills. Eg:- Toys “R”U’s, has network of stores throughout Europe using its CC distribution & retailing . They took German and Swiss new & high-quality toys and sold to US thus enhancing its differentiation advantage, creating more value.

Global expansion and core competences
• Using Global Learning to Enhance Core Competences:organizations set up their global activities to gain access to knowledge that will allow them to improve their CC. The global exposure gives new ways to improve and its brought back to the domestic base to enhance the CC and then transfer its enhanced competencies back to its overseas operations to increase its competitive advantage. Eg:- After WWII, Toyota, Panasonic and other Japanese co, studied US based production and marketing methods and took it back to base. They improved on it, compared it with top co’s like GM and adapted it for home country. By this Japan obtained competitive advantage over US co’s who made no attempt to improve present techniques.

Dangers associated with outsourcing competencies to abroad
• Company risks losing control of its technology, partner may improve it and end up as a competitor. • If outsourced, that functional activity will no longer be having resource invested to improve it, so it is giving away a potential source of competitive advantage in future. • So, co’s must be careful in which skill and competencies they should nurture and protect and which they should allow other companies to perform to reduce their costs.

Functional Level Strategy

Functional level strategy
• A plan of action to strengthen an organization’s functional & organizational resources, as well as its coordination abilities, in order to create core competencies.

Cont’d
• The strategic goal of each function is to create a core competence that gives the organization a competitive advantage. • An organization creates its value by applying its functional skills and knowledge to inputs and transforming them to outputs of finished goods and services.

To gain competitive advantage, an organization should :1. Perform functional activities at a cost lower than that of its rivals, or 2. Perform funl activities in a way that clearly differentiates its goods and services from those of its rivals-by giving its pdts unique qualities that customers greatly desire.

Strategies that Lower Costs Or Differentiate Products
• Any fun that can lower the cost at which a pdt is prdced or that can differentiate a pdt adds value to the pdt and the orgzn.
Value Creating Function Manufacturing Source of low cost advantage Development of skills in flexible manufacturing technology Reduction of turnover & absenteeism Source of differentiation advantage Increase in product quality & reliability •Hiring of highly skilled personnel •Development of innovative training programs

HR mgmt

Value Creating Function Materials management

Source of low cost advantage • Use of JIT inventory system/ computerized warehousing • Development of long term relationships with suppliers & customers

Source of differentiation advantage •Use of company reputation & long term relationships with suppliers & customers to provide high quality inputs & efficient distribution & disposal of ops

Sales & marketing

•Increased demand & lower •Targeting of customer groups production costs •Tailoring products to customers •Promoting brand names Improved efficiency of manufacturing technology •Creation of new products •Improvement of existing products

Research & development

Functional Level Strategy And Structure
• The strength of a function’s core competence depends not only on the function’s resources but also its ability to coordinate the use of resources. • In effective orgzns, the pdtn, sales and the R&D deptmts develop an orientation specific to its functional tasks and develops its own ways of responding to its particular funl envimt.

CONTINGENCY THEORY
• According to contingency theory, an organization’s design should permit each fun to develop a structure that suits its human and technical resources.

Structural characteristics associated with the development of core competences in Production, Sales & R&D Manufacturing Sales
Mechanistic Structure` Tall organization

R&D
Organic Structure

Manufacturing

Sales R&D

Manufacturing
Centralized decision making

Flat organizatio n

Sales

R&D

Decentralized decision making Mutual adjustment

Manufacturing
Standardization

Sales

R&D

• Successful research and development reflects the ability of R&D experts to apply their skills & knowledge in innovative ways and to combine their activities with technical resources to produce new pdts. • The structure most conductive to the development of funl abilities in R&D is a flat, decentralized structure in which mutual adjustments among teams is the main means of coordinating human & technical resources.

• The manufacturing function has used a tall hierarchy in which decision making is centralized & the speed of the production line controls the pace of work. • Standardization is achieved through the use of extensive rules and procedures, & the result of these design choices is a mechanistic structure. • Japanese companies has always had a more organic structure than US. It is flatter, more decentralized and relies more on mutual adjustments.

• The sales fun uses a flat, decentralized structure to coordinate its activities because incentive pay systems rather than direct supervision by mgrs are primary control mechanism in sales settings. • Sales people are paid on the basis of how much they sell, and the information about customer needs the changing customer requirements is relayed to the sales people’s superiors through a standardized reporting system. • Because sales people work alone, mutual adjustments are unimportant

Cont’d

• Thus the structure of sales function is likely to be mechanistic compared to that used by the R&D function, but not as mechanistic as that used by manufacturing.

Functional Level Strategy &culture
• Organization culture is a set of shared values that organizational members use when they interact with one another and with other stakeholders. • It is very difficult to imitate orgn culture by a competitor, so it is a competitive advantage. • Orgn culture can be used to reinforce orgn norms and values. • Coordination abilities of manufacturing function are also affected by the culture. In US a mechanistic approach is used while in Japan more organic structure is followed

Importance of organizational culture
• A competitor can easily imitate another organization’s structure, but it is very difficult for a competitor to imitate the culture, for culture is embedded in the day to day interactions of functional personnel. • Organization’s culture emerge gradually and are a product of many factors: an organization’s property right system, its structure, its ethics, and the characteristics of its top management team.

Functional Level Strategy
1. As members or mgrs of a fun, identify the functional resources or coordination abilities that give your fun a core competence. Having identified the sources of your fun’s core competence, establish a plan to improve or strengthen them and create a set of goals to measure your progress.

Cont’d
2. Study your competitors and the methods and the practices they use to control their funl activities. Pick your most effective competitor, study its methods and use them as a benchmark for what you wish t achieve in your fun. 3. Analyze the way your functional structure and culture affect functional resources and abilities. Experiment to see whether changing a component of structure or culture can enhance your fun’s core competence.

Business Level Strategy

Business Level Strategy
• It’s a plan to combine functional core competencies in order to position the organization so that it has a competitive advantage in the domain. • It is the responsibility of top management team and decide how to position the organization to compete for resources in its environment. • Eg:1. 2. Coca-Cola’s marketing skills to defend against Pepsi. Mercedes-Benz skills in R&D and positions itself in luxury segment of car market.

Business Level Strategy
3. Core competencies in marketing, manufacturing, materials management gives McDonalds competitive advantage over Burger King.

Success of Business Level Strategy depends on the following:1. Select the domain organization will compete. 2. Position organization to use resources and abilities to manage its specific and general environment in order to protect and enlarge the domain.

Strategies to Lower costs or Differentiate products
• Value creation can be done through reducing cost of value creation and by giving products a differentiated appeal. • Low cost business level strategy:– It’s a plan where by an organization produces a low priced goods and services for all customer groups. – Eg :- Wal-Mart & Target specializes in selling low price clothing.

• Differentiated business level strategy:– It’s a plan where by an organization produces a high priced quality products aimed at particular market segments.

Cont’d
– Eg :- Neiman-Marcus specializes in selling high priced clothing made by exclusive designers.

• Focus Strategy:- it specializes in one segment of market and focusing all of the organization’s resources on that segment.
– Eg :- KFC, Rolls Royce.

Business Level Strategy & Structure
Types of business level strategy
No of market segments served No of market segments served

STRATEGY
Low cost Focused Low cost Differentiation Focused Differentiation

MANY
YES

FEW

YES YES YES

Characteristics of Organizational structure associated with business level differentiation and low cost strategies

Differentiation Strategy Complex structure Decentralized decision making High Differentiation High Integration Organic Structure

Low Cost Strategy Simple Structure Centralized decision making Low Differentiation Low Integration Mechanic Structure

Choice of organizational structure from strategy perspective
• As an organization produces a wider range of products, it will need greater control over the development, marketing production of these products. • As an organization seeks to find new customer groups for its products, it will need a structure that allows it to serve needs of its customers. • As the pace of new product development in an industry increases, an organization will need a structure that increases coordination among its functions.

Business Level Strategy & Culture
• Organizational Culture plays determinant role in use of functional and organizational resources effectively. • Challenge is to develop values, norms, rules which allow organization to use functional resources at the best advantage. • Low-cost organizations
– – Develop functions that reflect organization’s value for economy. Eg:- Nucor, a leading low-cost steel manufacturer. The ceo Ken Iverson operated the company in a frugal way. Top managers followed the same path and spend less on luxury.

Cont’d • Differentiator Organizations:– – – Product development or marketing is at the centre stage. Innovation, quality, excellence and uniqueness are the cultural values that are given importance. Eg:- Jet and Sahara encountered cultural clashes when they where about to merger.

• Organizational culture is another factor as important as organizational structure in shaping organizational strategy for improving its value creation.

Corporate - Level Strategy

Vertical Integration
A strategy in which an organization takes over and owns its suppliers or its distributors

Input Domain
Backward vertical Integration Related diversification

Related Domain

Core Domain
Forward Vertical integration

Unrelated diversification

Output Domains

Unrelated Domains

Input Domains (eg:- sugar plantations, bottle makers)

Related Domains (eg:- Snack foods, Candy maker )

Core Domain Soft Drinks Output domains (eg:- bottling and trucking companies that distributes soft drinks; fast food restaurants) Unrelated domains (eg:- Department stores, financial networks, cable companies)

Related Diversification

The entry into a new domain that is related in some way to an organization’s domain

The entry into a new domain that is not related in any way to an organization's core domain.

The appropriate organizational structure must be chosen at the corporate level in order to realize the value associated with vertical integration and related and unrelated diversification.

Corporate-level Strategy & Structure
• Conglomerate structure:- a structure in which each business is placed in a self-contained division and there is no contact between divisions. CEO
Corporate Headquarters Staff

A B C D E F G H I DivisionDivisionDivisionDivisionDivisionDivisionDivisionDivisionDivision

Corporate-level Strategy and Structure
• Structures for Related Diversification:An organization pursuing a strategy of related diversification tries to obtain value by sharing resources or by transferring functional skills from one division to another—processes that require a great amount of coordination and integration.

• Cultural values and the common norms, rules and goals that reflect those values can greatly facilitate the management of a corporate strategy. • An organization has to create a culture that reinforces and builds on the strategy it purses and the structure it adopts. • Inter organizational strategies increase value by allowing the organization to avoid the bureaucratic costs often associated with managing a new organization.

Corporate-level Strategy and Culture

Managerial implications of Corporate-Level Strategy
• To protect the organization’s existing domains and to exploit the organization’s core competences to create value for stakeholders. • To distinguish between a value-creation opportunity and a value-losing opportunity, cost benefit analysis. • No matter which corporate strategy managers pursue, as the organization grows, a mangers must be careful to match organizations’ structure and climate to the strategy.

Implementing Strategy Across Countries

Imlementing strategy across countries
Global strategy play a crucial role in strengthening a company’s control over its environment. Four principal strategies that companies can use as they begin to market their products and establish production facilities abroad.     a multi domestic strategy an international strategy a global strategy a transnational strategy

The choice of structure & control systems for managing a global business is a function of 3 factors:
• The decision how to distribute and allocate responsibility and authority b/w managers at home and abroad so that effective control over a company’s global operations is maintained. • The selection of the organizational structure that groups divisions both at home and in a way that allows the best use of resources and serves the needs of foreign customers most effectively. • The selection of the right kinds of integration and control mechanisms and organizational culture to make the overall global structure function effectively.

Implementing a multi domestic strategy
 A company decentralizes control to subsidiaries and divisions in each country in which it operates to produce and customize products to local markets.  Generally operates with a global geographic structure ,where the company duplicates all value –creation activities and establishes an overseas division in every country or world area in which it operates. eg. Car companies such as DaimlerChrysler , GM and Ford used global area structures to manage their overseas operations.  A company that makes and sells the same products in many different countries often groups its overseas divisions into world regions to simplify the coordination of products across countries.

Strategy-Structure Relationships in the International Environment
Vertical Differentiation Choices` Levels in the hierarchy Centralization of authority Low Need for Coordination High Relatively flat Simultaneously centralized and decentralized Global matrix or “matrix in the mind”

Relatively flat Decentralized

Relatively tall Core competences centralize, others decentralized Global product group structure

Relatively tall Centralized

Horizontal Differentiation

Global geographic structure

Global product group structure

Integration Need for integrating mechanisms such as task forces and integrating roles Low Medium Medium High

Need for electronic integration and management networks Need for integration by international organizational culture

Medium`

High

High

Very High

Low

Medium`

High

Very High

Low

Bureaucratic Costs

High

GLOBAL GEOGRAPHIC STRUCTURE
Corporate Headquarters (Located in Sweden)

Canadian Division

United States Division

British Division

French Division

Japanese Division

South American Division

Functional Activities

Implementing international strategy
• International strategy, based on R&D and marketing being centralized at home and all the other value-creation functions to be decentralized to national unit. • For coordinating the flow of different products across different countries, many companies use a global product group structure and create product group headquarters.

Implementing international strategy
Corporate Headquarters (located in the U.S)

Worldwide Chemicals Product Group Headquarters

Worldwide Consumer Goods Product Headquarters

Worldwide Automotive Product Group Headquarters

Canadian Division

British Division

US Division

French Division

Japanese Division

Product Groups Domestic & Foreign Division

Implementing global strategy
• Global strategy, oriented toward cost reduction, with all the principle value-creation functions centralized at the lowest cost global location. • The companies locates its manufacturing and other value- chain activities at the global location for increasing efficiency and quality. Eg: philips

Implementing transnational strategy
• A transnational strategy, focused so that it can achieve both local responsiveness and cost reduction.

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