|
BACK TO 100 examples in
Business, Operations and Engineering. |
Apply Worldwide Now |
Do
it once, do it right, and do it now.
|
|
Back
to Lawson Computing Homepage
|
Apply as needed, when
needed. |
MGT
4900,Business Policy, CSU, Stanislaus 
Business
Policy
Some
Basic Definitions
BUSINESS:
1. (archaic):
purposeful activity
2. a. role,
function
b. an immediate
task or objective, mission
c. a particular
field of endeavor
3. a. a usually
commercial or mercantile activity
engaged in as a
means of livelihood: trade, line
b. commercial of
sometimes industrial enterprise
c. usual
economic dealings
POLICY:
1. a. prudence
or wisdom in the management of affairs.
b. management or
procedure based primarily on material interest.
2. a. a definite course or method of action selected from alternatives and in
light of given
conditions to
guide and determine present & future decisions.
b. a high-level
overall plan embracing the general goals and acceptable procedures .
MANAGE:
1. a. to handle
or direct with a degree of skill or address.
b. to treat with
care.
c. to exercise
executive, administrative & supervisory direction of.
2. a. to direct
or carry on business or affairs.
b. to achieve
one’s purpose.
STRATEGY:
1. a.
generalship (Greek root: strategis)
note the
military implication of this word
2. a. a careful
plan or method
b. the art of
devising or employing plans and stratagems toward a goal.
STRATEGIC:
1. a. necessary
to or important in the initiation, conduct or completion of a strategic plan.
b. of great
importance within an integrated whole or to a planned effect.
ORGANIZE:
1. to cause or
develop an organic structure.
2. to arrange or
form into a coherent unity or functioning whole.
3. to set up an
administrative structure for.
4. at arrange
elements into a whole of interdependent parts.
ORGANIZATION:
1. the act or
process of organizing or of being organized
2. a. an
association or society
b. an
administrative or functional structure and the personnel of such structure .
Definitions of Strategy in Business Policy
Chandler (1962):
"…the determination of the basic long-term goals
and objectives of an enterprise, and the adoption of courses of action and the
allocation of resources necessary for carrying out these goals."
Ansoff (1965):
Strategy is
composed of four components:
(1)
Product/market scope
(2) Growth
Vector
(3) Competitive
Advantage
(4) Synergy
Andrews (1965):
"…the
pattern of objectives, purposes or goals and major policies and the plans for
achieving these goals, stated in such a way as to define what business the
company is in or is to be in and the kind of company it is or is to be."
"The
ability to identify the four components of strategy -
(1) Market
Opportunity,
(2) Corporate
Competencies and Resources,
(3) Personal
Values and Aspirations, and
(4) Acknowledged
obligations to segments of society
other than
stockholders,
- is nothing
compared to the art of reconciling their implications in a final choice of
purpose."
LEVELS OF STRATEGY
(1) Enterprise -
usually thought of as the mission
(2) Corporate -
what businesses do we operate in?
(3) Business -
how do we operate in a single business?
(4) Functional -
operational decision making
ENVIRONMENTAL CONSIDERATIONS
When we discuss
the environment we are attempting to grasp at understanding forces external to
the organization.
The environment
considered in corporate strategy must include:
(1) overall
economic circumstances,
(2) sociopolitical
& cultural considerations,
(3) the
competitive environment,
(4) governmental
restraints,
(5) special
interest groups, and
(6) anyone else
who would be considered a stakeholder.
GOAL FORMULATION
In strategy
formulation, the process is influenced by,
(1) the
environment,
(2) the power
and personal goals of stakeholders,
(3) the
condition of the organization, and
(4) the type of
organization involved.
THE THREE STRATEGY MAKING TASKS
Developing
a Mission
The basic
premise of mission statements is thinking through and articulating:
(1) What the
business is,
(2) What the
business will be, and
(3) What the
business should be.
The company’s
mission should be broad enough to encompass the range of activities that
constitutes the business and narrow enough to focus on those activities that
give the firm competitive advantage.
*** The Role of Entrepreneurship***
"Setting a
corporate purpose that members of the organization can identify with and be
proud of is an ennobling act." (Richards, 1986)
Establishing
Objectives
Objectives
accomplish several things:
(1) provide
guidance,
(2) effect
planning,
(3) provide
motivation, and
(4) form the
basis for evaluating activity.
Objectives must
be derived from "what our business is, what it will be and what it should
be." (Drucker, 1973)
Objectives must
be operational. Hopefully, they are quantifiable.
Objectives must
make possible the concentration of resources and effort. They must be selective
rather than encompass everything.
Establishing
Objectives (Cont.)
There needs to
be multiple objectives in the organization. The manage a business is to balance
a variety of needs and goals. This requires multiple objectives.
Objectives in
organizations may be in conflict. This is due to the achievement of one
objective to the detriment of another (selective attention as a coping
mechanism).
Managers attend
to objectives when they are rewarded to do so.
Crafting a
Strategy
Question: Is
strategy formulation a rational process, or does is consist of power and
coalition formation?
Rational-Deductive School:
The German
tradition is most explicit on this point. The Unternehmer, that is the top man
alone knows what the business is all about and alone makes entrepreneurial
decisions. Everybody else is essentially a technician who carries out
prescribed tasks. No one but the Unternehmer needs to understand the mission
and purpose of the business.
(Drucker, 1974)
Power and Coalition School:
The Development
and use of power, authority, influence and politics are natural adjuncts to the
processes needed to formulate, shape and implement major organizations’
strategies…the full strategy is rarely written down in one place. The process
used to arrive at the total strategy are typically fragmented, evolutionary
& largely intuitive.
(James Brian Quinn, 1980: Logical Incrementalism)
HENRY MINTZBURG: CRAFTING STRAGY
The crafting image better captures the process by
which effective strategies came to be.
Strategies need
not be deliberate - they can also emerge.
Emergent strategies are strategies that appear without
clear intentions.
The Paradox: Purely deliberate strategies preclude
learning once the strategy is formulated. However, purely emergent strategies
preclude control.
Strategic
reorientations happen in brief, quantum leaps.
Kierkegaard - "Life is lived forward but
understood backward."
WHAT EFFECTIVE GENERAL MANAGERS REALLY DO
(1) They spend
most of their time working with others.
The average
general manager (GM) spends only 25% of
their time
working alone.
(2) In
allocating their time, GMs often react to initiatives.
Much of the GMs
day is unplanned. Most of their time is
spent in short, disjointed conversations.
(3) GMs spend
considerable time network building.
(4) GMs work
long hours (55-60 hours/week average).
(Kotter, 1982)
"Deals are my art form. Other people paint
beautifully on canvas or write wonderful poetry. I like making deals,
preferably big deals. That’s how I get my kicks."
Donald Trump,
The Art of the Deal, Ch.1.
(1987)
How To Conduct an Industry Analysis
There are
basically two types of data about industries:
(1) Published
Data, corporate, media or analysts
(2) Interviews
with industry participants & observers.
Then there are
two decisions to be made:
(1) Decide what
it is you are looking for, &
(2) How you are
going to sort through the data.
One strategy is
to get a broad overview of the industry and then focus on specific companies.
Another is to study companies one at a time. It is suggested that a broad
overview may be more efficient.
Obtaining the
Overview:
(1) Find out who is in the industry. One way to do
this is through determining the industry’s SIC code (Standard Industry
Classification, U.S. Bureau of the Census).
(2) Industry
Studies. These are found in a variety of sources.
(3) Annual Reports, Proxy Statements, 10-Ks.
(Available on-line, microfiche & hard copy).
(4) Periodical Literature and CD-ROMs (Compact
Disclosure, Infotrac, etc.).
(5) On-Line
sources (Web sites, Lexis/Nexis, Dow Jones).
(6) Field Data
(Interviews, Observations, telephone calls).
(Porter, 1980)
RAW DATA CATEGORIES FOR INDUSTRY ANALYSIS
DATA
CATEGORIES
COMPILATION
Product Lines By
Company (4)
Buyers &
their behavior By Year (5-Years)
Complementary
Products By Functional Area
Substitute
Products By Division
Industry Growth
Rate
Pattern
(Seasonal, Cyclical)
Determinants of
growth
Technology of
Production & Distribution
Cost Structure
Economies of
Scale
Value Added
Logistics
Labor
Marketing &
Selling
Market
Segmentation
Marketing
Practices
Innovation
Type
Sources
Rate
Suppliers
Distribution
Channels
Competitors -
Strength, Strategy, Goals & Weaknesses
Social,
Political & Legal Environment
Macroeconomic
Environment (Porter, 1980)
STRUCTURAL DETERMINANTS OF THE
INTENSITY OF COMPETITION
I. Bargaining
Power of Buyers
A Buyer group
can be powerful if:
(1) The buyer is concentrated or purchases large
volumes relative to seller sales.
(2) The products it purchases from the industry
represent a significant fraction of the buyer’s costs or purchases.
(3) The products the buyer purchases from the industry
are standard or undifferentiated.
(4) The buyer
faces few switching costs.
(5) The seller
earns low profits.
(6) Buyers pose
a threat of backward integration.
(7) The industry’s product is unimportant to the
quality of the buyer’s products or services.
(8) The buyer
has full information (e.g. your costs).
II. Bargaining
Power of Suppliers
A Supplier Group
can be powerful if the following apply:
(1) The supplier is dominated by a few companies and
is more concentrated than the industry it sell to.
(2) The supplier is not obliged to contend with other
substitute products for sale to the industry.
(3) The industry is not an important customer to the
supply group.
(4) The supplier’s product is an important input to
the buyer’s business.
(5) The supplier groups products are differentiated or
it has built up switching costs.
(6) The supplier group poses a credible threat of
forward integration.
(7) Labor is a supplier. Scarce, highly skilled
employees can bargain away industry profitability.
III. Intensity
of Rivalry among Existing Competitors:
Numerous or
Equally Balanced Competitors
Slow Industry Growth
High Fixed or
Storage Costs
Lack of
Differentiation or Switching Costs
Capacity
Augmented in Large Increments
Diverse
Competitors
High Strategic
Stakes
High Exit
Barriers
IV. Threat of New Entrants depends on
Barriers to Entry:
Economies of
Scale
Product
Differentiation
Capital Costs
(e.g. plant & equipment)
Switching Costs
Access to
Distribution channels
Government
Policy
V. Pressure
from Substitute Products
Substitute
Products that Deserve the Most Attention are:
(1) Products that begin to have a good
price-performance tradeoff with your industry’s product, or
(2) are produced by industries earning high profits.
Competition in their industry will send them looking for yours.
VI. SHADOW FORCE: Government as a Force
in Industry Competition. "The Level Playing Field".
(Porter, 1980)
CONDUCTING A COMPANY SITUATION ANALYSIS
1. Strategic
Performance Indicators
Market Share
Sales Growth
Return on Equity
Market
Penetration
2. Competitive
Assessment (SWOT)
Internal
Strengths
Internal
Weaknesses
External
Opportunities
External Threats
3. Competitive
Strength Assessment
Quality/Product
Performance
Reputation/Image
Technological
Skills
Manufacturing
Capability
Marketing/Distribution
Relative Cost
Position
4. Financial
Assessment
Profitability
Liquidity
Leverage
Turnover
5. Conclusions
concerning Competitive Position
6. Major
Strategic Issues/Problems
7.
Recommendations/Strategies for Success
THE COMPETITOR RESPONSE PROFILE
Given an
analysis of a company’s strategic situation, we can begin to ask the critical
question of how a company is likely to respond to external threats:
Offensive
Moves:
The first step
is to assess the strategic changes the competitor might initiate:
(1) Satisfaction with current position. (Is the
company likely to initiate a strategic change?)
(2) Probable
Moves. (Most probable actions, given history).
(3) Strength & Seriousness of Moves. (What does
the company hope to gain?)
An assessment of
probable gain coupled with analysis of the competitor’s goals will give an
indication of how serious the company will be in response to resistance.
Defensive
Capability
The next step is
to construct a list of the feasible moves a company might make given industry
or environmental changes. These possible actions need to be assessed in light
of the following considerations:
(1) Vulnerability. Where is the company most
vulnerable? What moves are competitor powerless to affect?
(2) Provocation. What moves will force the competitor
to retaliate, regardless of consequences? Should these areas be avoided?
(3) Effectiveness of retaliation. Where is the company
hindered from responding effectively, given its goals and strategy?
THE COMPETITOR RESPONSE PROFILE
Current Strategy
How is the
business currently competing?
Future
Goals
What plans and strategies does the company have for
the future?
Assumptions
What assumptions does the company hold about itself
and the industry in which it operates?
Picking
the Battleground
Assuming that competitors will retaliate to moves a
firm initiates, its strategic agenda involves selecting the best battleground
for fighting it out with its competitors.
(1) The ideal is to find a strategy that competitors
are unable to react to given their present circumstances.
(2) Another good way to pick a fight is to create a
situation of mixed motives or conflicting goals for competitors.
(Porter, 1980)
THE CORE COMPETENCE OF THE CORPORATION
Prahalad & Hamel, HBR, 1990
"In the
short run, a company’s competitiveness derives from the price/performance
attributes of current products…In the long run, competitiveness derives from an
ability to consolidate corporatewide technologies and production skills into
competencies that empower individual businesses to adapt quickly to changing
opportunities."
Identifying
the Core Competence of a Company:
(1) It should provide potential access to a wide
variety of markets.
(2) It should make a significant contribution to the
perceived customer benefits of the end product.
(3) It should be
difficult for competitors to imitate.
From core
Competencies to Core Products
(1) The tangible link between identified core
competencies and end products is what we call the core products - the physical
embodiments of one or more core competencies.
(2) Core products are the components or subassemblies
that actually contribute to the value of end products.
(3) To sustain leadership in their chosen core
competence areas, companies seek to maximize their world manufacturing share in
core products.
(4) A dominant position in core products allows a
company to shape the evolution of applications and end markets.
A few companies
have proven themselves adept at inventing new markets, quickly entering new
markets, and dramatically shifting consumer behavior in markets. These are the
ones to emulate.
"Everything which is properly business we
must keep carefully separate from life. Business requires earnestness and
method; life must have a freer handling"
Goethe (1809)
Elective Affinities, 4.
STRATEGY AND COMPETITIVE ADVANTAGE
Winning Business Strategies are grounded in
sustainable Competitive Advantage.
* Core
Competencies
* Competitive
Advantage
Competitive
Advantage:
A company has
competitive advantage whenever it has an edge over rivals in securing customers
and defending against competitive forces.
Sources of
Competitive Advantage:
(1) Highest
Quality Product
(2) Superior
Customer Service
(3) Achieving
Lower Costs than Rivals
(4) More
Convenient Geographic Location
(5) Better
Performing Product
(6) Better Value
Product (Quality, Service, Price)
GENERIC STRATEGY #1:
OVERALL COST LEADERSHIP
The aim of
overall cost leadership is to achieve the lowest cost structure relative to
other firms in the industry. Cost leadership is a viable strategy for earning
above-average returns in an industry.
Cost
Leadership requires:
(1) Aggressive
construction of efficient-scale facilities.
(2) Vigorous
pursuit of cost reductions from experience.
(3) Tight cost
and overhead control.
(4) Avoidance of
marginal customer accounts.
(5) Cost
minimization in areas like R&D, service, ads, etc.
A great deal of
managerial attention must be devoted to cost control, though quality, service
and other factors cannot be ignored.
Commonly
Required Skills & Resources:
(1) Sustained
capital investment & access to capital.
(2) Process
engineering skills.
(3) Intense
supervision of labor.
(4) Products
designed for ease of manufacture.
(5) Low-cost
distribution system.
Common
Organizational Requirements:
(1) Tight cost
control
(2) Frequent,
detailed cost reports
(3) Structured
organizational responsibilities
(4) Incentives
based on strict quantitative targets.
OVERALL COST LEADERSHIP
Porter
5-Forces Analysis:
Competitors: Lower costs mean the company can still earn returns
after its competitors have competed away their profits through rivalry.
Buyers: Firm is defended against powerful buyers because
buyers can exert their power only to drive pries down to the level of the next
most efficient competitor.
Suppliers: Low cost provides more flexibility to deal with
input cost increases.
Entrants: Low cost usually provides substantial barriers to
entry in terms of economies of scale or cost advantages.
Substitutes: Low cost firm is well positioned to defend from
substitutes relative to their competitors due to an advantageous cost position.
Summary: Low cost protects the firm because competitive
pressures will erode marginal profits only to the next most efficient
competitor’s marginal cost, and less efficient competitors will suffer first.
OVERALL COST LEADERSHIP
Risks of a
Low-Cost Strategy:
(1) Technological change can nullify all past
investments, technology and learning.
(2) Low-Cost learning by competitors by imitation or
investment in state-of-the-art facilities.
(3) Failure to react to required product or marketing
changes due to obsession with cost.
(4) Inflation of costs that narrow a firm’s ability to
maintain enough of a price differential to compete with a competitor’s brand
images or other approaches to differentiation.
Summary:
Cost Leadership
imposes severe burdens on the firm to keep up its position, which means
reinvesting in modern equipment, ruthlessly scrapping its obsolete assets,
avoiding product line proliferation and being alert to technological
improvements. Learning curves with production volume do not occur
automatically.
(Porter, 1980)
GENERIC STRATEGY #2:
DIFFERENTIATION
The generic
strategy of differentiation involves creating something that is perceived
industrywide as being unique.
Approaches to
differentiation takes many forms:
(1) design or
brand image
(2) technology
(3) features
(4) customer
service
(5) dealer
network, etc.
A
differentiation strategy does not allow the firm to ignore costs, but cost is
not the primary strategic target. Differentiation is a viable strategy for
earning above-average returns in an industry.
Commonly
Required Skills & Resources:
(1) Strong
marketing abilities
(2) Product
engineering
(3) Creative
flair
(4) Strong
capability in basic research
(5) Corporate
reputation for quality or technology
(6) Long
corporate tradition or unique skills
Common
Organizational Requirements:
(1) Strong coordination among functions in R&D,
product development & marketing
(2) Subjective measurement & incentives instead of
quantitative measures
(3) Amenities to attract highly skilled labor, R&D
or creative people
DIFFERENTIATION
Porter
5-Forces Analysis:
Competitors: Provides insulation against competitive rivalry
through brand loyalty, which lowers consumer price sensitivity. This widens
margins, which avoids the need for a low-cost position.
Buyers: Buyers lack comparable alternatives and are less
price sensitive.
Suppliers: Higher margins give the firm leverage over
suppliers, making the firm less sensitive to supplier demands.
Entrants: Brand loyalty and product uniqueness provide a
barrier to entry.
Substitutes: Substitutes must overcome uniqueness and brand
loyalty as well.
Summary: Achieving differentiation sometimes precludes market
share. It requires a perception of exclusivity, which is incompatible with high
market share. Achieving differentiation sometimes implies a trade-off with cost
position if the activities required to create it are inherently costly. This is
not always the case, however.
DIFFERENTIATION
Risks of
Differentiation:
(1) The cost differential between low-cost competitors
and the differentiated firm may become too great for the differentiated firm to
hold brand loyalty. Buyers will then sacrifice some of the features, services
or image possessed by the differentiated firm for large cost savings.
(2) Buyer’s need for the differentiating factor falls.
This may occur as buyers become more sophisticated.
(3) Imitation narrows perceived differentiation, a
common occurrence as industries mature.
Summary:
A firm may
achieve differentiation, but this differentiation will usually sustain so much
of a price differential. If a differentiated firm gets too far behind in cost,
a low-cost firm may be in a position to make major inroads.
(Porter, 1980)
GENERIC STRATEGY #3:
FOCUS
Focus involves
targeting a particular buyer group, segment of the product line, or geographic
market.
Focus can take
many forms. The entire strategy is built around serving a particular target
very well.
The strategy
rests on the premise that the firm is thus able to serve its narrow strategic
target more efficiently or effectively than competitors who are competing more
broadly.
As a result, the
firm achieves either differentiation from better meeting the needs of the
particular target, lower costs in serving the target, or both.
The firm
achieving focus may also potentially earn above-average returns for its
industry.
The focus
strategy always some limitation on the over-all market share achievable. Focus
necessarily involves a trade-off between profitability and sales volume.
Like the
differentiation strategy, it may or may not involve a trade-off with overall
cost position.
Firms selecting
a focus strategy may want to select targets without substitutes or where
competitors are weakest.
FOCUS
Commonly
Required Skills & Resources:
Differentiation and/or low cost skills directed at a
particular target.
Common
Organizational Requirements:
Differentiation and/or low cost organizational
requirements directed at a particular target.
Porter
5-Forces Analysis:
See low cost & differentiation analyses. Focus may
incorporate elements of both.
Risks of a
Focus Strategy:
(1) The cost differential between broad-range
competitors and the focused firm may widen to eliminate the cost advantages of
serving a narrow target or to offset the differentiation achieved by focus.
(2) The differences in desired products or services between
the strategic target and the market as a whole may narrow.
(3) Competitors may find strategic submarkets within
the strategic target and outfocus the focuser.
(Porter, 1980)
TACTICS
Offensive
Strategies:
(1) Attack
competitor strengths
(2) Attack
competitor weaknesses
(3) Simultaneous
attack on all fronts
(4) End-Run
offensives
(5) Guerrilla
offensives
(6) Pre-Emptive
strikes (first-mover advantage)
Defensive Strategies:
(1) Buttress the
firm’s present position
(2) Presenting a
moving target
(3) Retaliation
(4) Lowering
margins of return (price war)
Vertical
Integration
This can be both offensive and defensive. It involves
extending the firm’s range of activities backwards and forwards in the value
chain.
Timing
The Art of
War
by Sun Tzu
Waiting
(Patience)
Being good in business is the most fascinating kind of
art…Making money is art and working is art and good business is the best art.
Andy Warhol
(1928-1987)
From A to B
& Back Again
TACTICS IN VARIOUS INDUSTRIES
Emerging
and Growing Industries
No Established
rules, Tremendous Uncertainty
Maturing
Industries
Less product
line, more process innovation
Focus on costs,
present customers
Diversification,
Globalization
The problem of
middle-of-the-road
Stagnant
or Declining Industries
Focus on
profitable niche markets
Differentiation
Focus on costs
Harvest
Fragmented
Industries
Focus on
customer, product or geographic niche
"Formula"
facilities
Low-Cost
operator
TACTICS FOR 3 COMPANY SITUATIONS
Industry Leadership
Stay on the
Offensive
Fortify and
Defend
Follow-the-Leader
Runner-Up
Position
Vacant-Niche
Approach
Specialist
Differentiation
from Leader
Growth via
Acquisition
Content Follower
(Don’t rock the boat)
Firms in
Crisis
Offensive
Turnaround
Fortify and
Defend
Harvest
Run!
COMPETING INTERNATIONALY
The pattern of
international competition differs markedly from industry to industry:
At one of the
spectrum, international competition takes a form that can be labeled multidomestic.
Competition in each nation is essentially independent. Competition takes place
on a country-by-country basis. The international industry, then, is essentially
a collection of domestic industries.
* Milk example
At the other end
of the spectrum are global industries, in which a firm’s competitive
position in one nation significantly affects its position in other nations.
Rivals compete against each other on a truly global basis, drawing on
competitive advantages that grow out of their entire network of global activities.
Industries have become increasingly global since the post WW II era.
* Gillette
Sensor example
In global
industries, firms are compelled to compete internationally in order to achieve
or sustain competitive advantage in the most important industry segments. There
may well be segments in such industries that are domestic because of unique
national need, in which a purely domestic firm can prosper. Choosing a domestic
focus in a global industry is perilous, no matter what the firm’s home nation.
(Porter, 1990)
COMPETITIVE ADVANTAGE THROUGH
GLOBAL STRATEGY
A global
approach to strategy provides two distinctive ways in which a firm can gain
competitive advantage. First, it can disperse activities among the nations in
the world market in the way that best serves the world market and the firm.
Second, the global firm can coordinate these activities globally in a manner
that provides competitive advantage. These two concepts can be summarized as
follows:
(1) CONFIGURATION: Where, and in how many
nations, each activity in the value chain is performed. Does the company
produce in one huge plant or establish plants worldwide?
(2) COORDINATION: How dispersed activities are
coordinated. Is the same brand name or sales approach used in each nation, or
does each unit choose a separate brand and sales channel custom tailored to
each local market?
In multidomestic
competition, multinationals have largely autonomous subsidiaries in each nation
and manage them like a portfolio. In global competition, firms seek to
gain much greater competitive advantage from their international presence,
through locating activities with a global perspective and coordinating actively
among them.
(Porter, 1990)
GLOBAL CONFIGURATION
Global companies
faces the choice whether to concentrate activities in one or two nations or to
disperse them.
Concentrating
Activities:
In some
industries, competitive advantage arise from concentrating activities in one
nation and exporting to foreign markets. This occurs when there are significant
scale economies for the activity, or advantages to locating linked activities
in the same place to allow better coordination.
Dispersing
Activities:
In other
industries, competitive advantage arises from dispersing activities in many
nations. It is favored in industries where there are high costs that make it
inefficient to operate from a central location, and by the presence of risks:
exchange rate risk, political risk, supply interruptions and tariff barriers.
Dispersing activities also makes sense where local product needs differ
substantially. (Government Role)
Locating
Activities:
Given choice of
number of sites, the next question is where to locate it. Activities are
usually all located initially in the home nation. In a global strategy,
however, a firm can choose any nation in which to assemble products, conduct
research, etc. The classical reason for locating a particular activity in a
particular nation is favorable costs. Another reason may be favorable inputs,
such as labor or R&D talent. Firms also locate activities if doing so is a
condition for business.
(Porter, 1990)
GLOBAL COORDINATION
The other means
by which firms gain competitive advantage through a global approach is by
coordinating activities among different nations. Coordination involves sharing
information, allocating responsibility and aligning efforts.
Global
coordination leads to a number of benefits:
(1) Accumulated knowledge acquired at dispersed sites
can be pooled.
(2) Firms can receive early warnings of industry
changes before they become broadly apparent.
(3) Dispersed activities may allow a firm to respond
to shifting exchange rates and other costs.
(4) Coordination may enhance the attractiveness of the
firm for international buyers.
(5) Coordination across countries yields flexibility
in responding to competitors.
However, global
coordination also has problems:
(1) Large differences between countries works against
coordination. Learning may not be applicable.
(2) Global coordination requires a great deal of
effort due to firm complexity, linguistic and cultural differences, and the
need for open, high level information exchange.
(3) Subsidiary managers may not care what the home
(perhaps foreign home) office says.
(4) Global
subsidiaries may view each other as competitors.
As a result
coordination is the exception rather than the rule in many global companies.
(Porter, 1990)
Merchants have no country. The mere spot they stand
on does not constitute so strong an attachment
as that from which they draw their gains.
Thomas Jefferson
Letter to
Horatio Spafford
March 17, 1814
CORPORATE DIVERSIFICATION
What is
Diversification?
Ansoff (1965): Diversification represents the entry of
the firm into new markets with new products.
Kamien & Schwartz (1975): Diversification is the
extent to which firms classified in one industry produce goods classified in
another.
Ramanujam & Varadarajan (1989): Diversification is
defined as the entry of a firm or business unit into new lines of activity,
either by processes of internal business development or acquisition, which
entails changes in its administrative structure, systems and other management
processes.
So What?
Why diversify?
It has been
suggested that there may by influences at work which cause a firm to diversify.
These could be for proactive and for defensive reasons:
(1) The decision may be shaped by the general
environment (e.g. legal, political, economic, technological, social)
(2) The industry’s competitive environment may cause
it.
(3) Specific
characteristics of the firm itself may cause it.
(4) Firm
performance objectives may drive it.
(Ramanujam & Varadarajan, 1989)
Given
Diversification, Where do we go?
Once the
decision to diversify has been made, the next issue the firm faces is the
direction in which to diversify. A firm seeking to diversify can be viewed as
basically seeking ways to modify its business definition so as to satisfy some
set of performance objectives. According to Abell (1980), a business can be
defined in terms of:
(1) the customer needs it seeks to satisfy,
(2) the
technologies it uses in satisfying the customer, &
(3) the targeted
customer groups.
Diversification
is a function of Business Re-Definition
The new lines of
activity into which a firm chooses to diversify may therefore involve
modifications along one or more of their key dimensions of business definition.
Typically, firms do not modify all of these definitions together, but instead
focus on the dimension that represents the firm’s greatest strength or offers
the greatest opportunity.
Research into
corporate diversification has found that firms tend to diversify into
industries that are similar to their primary industry in terms of advertising
intensity, R&D intensity, and/or the buyer-seller relationship.
The thrust of
diversification then moves along one or several of the following lines:
(1)
technologies,
(2) products or
services,
(3) geographic
markets,
(4) customer
segments, or
(5) distribution channels.
(Ramanujam & Varadarajan,
1989)
Diversification
Definitions
Diversification
can be aimed at realizing technological or marketing synergies. This can be
thought of as related diversification. An operational definition is all
products within a firms’ 2-digit primary SIC code.
Diversification
can be undertaken in order to realize economies in the securing or allocation
of financial resources. This can be thought of as unrelated diversification.
An operational definition is all product lines outside a firms’ 2-digit primary
SIC code.
Diversification
can also be used to obtain vertical economies, such as reducing costs by
integrating backward or forward. This can be thought of as vertical
integration.
What are
the Risks/Rewards of Diversification?
Rumelt (1982): The highest levels of profitability are
exhibited by those companies having a strategy of diversifying primarily into
areas that draw upon some common core skill or resource. The lowest
profitability were vertically integrated businesses and unrelated diversifiers.
Conclusion: Vertical integration may lock a firm into
inefficient sources of raw materials, while unrelated diversification may
provide management problems that can not be addressed adequately by incumbent
management.
Then How
Do We Diversify?
There are two
main methods of diversifying:
(1) internal
business development, or
(2) mergers
& acquisition.
A mixture of the
two modes is also possible.
In terms of
acquisition, Lubatkin (1988) argues that related mergers are more valuable to
shareholders than unrelated mergers. Unrelated mergers are argued to be more
value-neutral. In a merger, the big winner always seems to be the acquired
firm’s shareholders. Acquiring firms always seem to overpay.
However,
internal business development is often seen as expensive, uncertain and highly
risky. Acquisition often ensures instant access to technologies & markets,
while internal development often involves significant lead times.
Another option
is a gradual entry into businesses via:
(1) licensing,
(2) joint
ventures,
(3) strategic
alliances, or
(4) equity
stakes in independent firms.
These modes of
entry fall somewhere between the two main methods of diversification.
Management
of Diversity
Question: How do we manage the newly-found diversity
of the firm? This introduces the idea corporate structure. An internal
organization must be developed to cope with the complexity.
(Ramanujam & Varadarajan, 1989)
Perpetual devotion to what a man calls his business is
only to be sustained by neglect of many other things.
Robert Louis
Stevenson
An Apology
for Idlers
Virginibus
Puerisque
ANALYZING A DIVERSIFIED CORPORATION
Preliminary
Analysis:
Identify
company’s segments
Identify segment
sales
Identify segment
profits
Contrast segment
sales against segment profits
Then: Analyze present corporate strategy
Analyzing
the Present Corporate Strategy
(1) Identify the
extent to which the firm is diversified
(2) Isolate
whether the firm’s portfolio is based on related or unrelated diversification,
or both. Is the firm vertically integrated? If so, how?
(3) Identify
whether the scope of company operations is domestic, multinational or global.
(4) Chart recent
moves by business units to boost performance and strengthen existing position.
(5) Follow
recent moves to add new businesses to the portfolio and gain entry to new
industries.
(6) Identify
recent moves to divest unattractive business units.
(7) Record
recent moves to seek business synergies with other business units.
(8) Attempt to
track the flow of capital expenditures to each business unit.
BCG GROWTH SHARE MATRIX
Two Axes:
(1) Growth - proxy for the net cash flows
required to operate the business unit.
(2) Relative Market Share - proxy for
competitive position of the business unit in its industry.
The growth/share
chart is usually divided into four quadrants. The key idea is that business
units located in each of these four quadrants will be in fundamentally
different cash flow positions and should be managed differently, which leads to
some implications for how the firm should try to build its overall portfolio.
Cash Cows: Businesses with high relative share in low-growth
markets will produce healthy cash flow, which can be used to fund other,
developing businesses.
Dogs: Businesses with low relative share in low-growth
markets will often be modest cash users. They will be cash traps because of
their weak competitive position.
Stars: Businesses with high relative share in high-growth
markets will usually require large amounts of cash to sustain growth but have a
strong market position that will yield high profits. They may be nearly in cash
balance.
Question Marks: Businesses with low
relative share in rapidly growing markets require large cash inflows to finance
growth and are weak cash generators because of their poor competitive position.
(Porter, 1980)
BCG GROWTH SHARE MATRIX
How It
Works:
Cash Cow can make Question Marks into Stars
Stars eventually become Cash Cows
Question Marks that don’t make Stars become Dogs
Dogs should be Divested or Harvested
(Porter, 1980)
BCG
Procedure:
(1) Identify
each segment of the diversified company and each segments’ sales.
(2) Identify the
industry that each segment operates in.
(3) Identify
each industry’s growth rate.
(4) Find the
industry leader in each industry segment and identify their market share.
(5) Identify the
market share of each company segment in their respective industries.
(6) Calculate
relative market share for each company segment.
(7) Graph BCG
matrix, scaling each segment to their contribution to corporate revenues.
THE BOTTOM LINE
Evaluating
Unit Performance
(1) Sales Growth
(2) Profit
Growth
(3) Contribution
to Company Earnings
(4) Return on
Capital Invested
(5) Cash Flow
Generation
Keep in mind
that each industry has different industry levels of profitability, e.g.
some industries are more profitable than others. Absolute performance measures
can be misleading when comparing across industries.
Strategic
Fit Analysis
(1) Does the
business unit mesh with the distinctive core competence of the corporation?
(2) Does the
business unit complement the corporate portfolio?
Fit can be strategic or it can be financial.
Strategic
Options for Company Segments
(1) Alter the
strategy of a business unit.
(2) Add new
business units.
(3) Divest
business units.
(4) Form
alliances to strengthen a weak unit.
(5) Lower
performance criteria.
(Thompson & Strickland, 1996)
Corporation. An ingenious device for obtaining individual profit without
individual responsibility.
Ambrose Bierce
(1842-1914)
The Devil’s
Dictionary
THE ADMINISTRATIVE COMPONENTS OF
STRATEGY IMPLEMENTATION
Worker
Motivation
Compensation
Corporate
Culture
Internal &
External Politics
Corporate &
Individual Ethics
Organizational
Change
STRATEGY IMPLEMENTATION
AS SUBSTANCE AND SELLING
Implementation
must be considered during strategy formulation, not later, for it may then be
too late.
A great
strategy is only great if it can actually be implemented.
There are patterns of
behavior for effective
strategy implementation:
(1) Obtain broad-based inputs and participation at the
formulation stage. Involve people early.
(2) Carefully and deliberately assess the obstacles to
implementation.
(a)
internal obstacles
(b)
external obstacles
(3) Make early, first-cut moves across the full array
of implementation levers: resources, policies, people, structure, and rewards.
(4) Sell, sell, sell the strategy to everyone who
matters - up, down, across and out. Build and maintain support among key
constituencies for a plan that is freshly emerging.
(5) Steadily fine tune, adjust and respond as events
and trends arise. Then they wait until circumstances unfold to identify other
decisions that need to be made.
(Hambrick & Cannella, 1989)
THE MORAL COMPONENT OF
CORPORATE STRATEGY
There are two
poles of opinion regarding the role of ethics in strategy:
(1) The Economic
Isolationists
To some the
suggestion that an orderly process of strategy determination should include the
discussion of highly controversial ethical issues is repugnant. Some, such as Milton
Friedman, think that ethics has no place. Their argument is that business
should be required to live up its legal obligations and that consideration of
strategic alternatives should be purely economic.
(2) An Emerging
View
An emergent view
in the leadership of our most prominent corporations is that strategists must
take into account - as part of the social environment - steadily rising moral
and ethical standards. Reconciling the conflict in responsibility that occurs
when profit and social needs appear on the same agenda adds to the complexity
of strategy formulation.
Attention is
called to this for many reasons:
(a) declining
public confidence in institutions
(b) distrust of
business
(c)
globalization and differing ethical standards
(d) rising
expectations of U.S. investors
Some of the most
difficult choices confronting a company are those that must be made among
several alternatives that appear equally attractive and also equally desirable.
(Andrews, 1980)
THE CULTURES OF WORK ORGANIZATIONS
Human cultures
emerge from people’s struggles to manage uncertainties and create some degree
of order in social life. Organizational cultures provide members with sets of
ideas that help them to cope with uncertainties.
Some
Characteristics of Cultures:
Collective: They are the repositories for what their
members agree about.
Emotionally charged: People’s allegiance to ideologies
and cultural forms spring more from emotional needs than from rational
consideration.
Historically Based: People cherish and cling to
ideologies because they seem to make the future predictable by making it
conform to the past.
Inherently Symbolic: Cultural communication is infused
with symbols that are considered the basic unit of expression.
Dynamic:
Cultures continually change.
Inherently Fuzzy: Cultures are not unified, but rather
incorporate contradictions, paradoxes and confusion.
Some Consequences
of Cultures:
(a) Management
of Collective Uncertainties
(b) Creation of
Social Order
(c) Creation of
Continuity
(d) Creation of
Collective Identity and Commitment
(e)
Encouragement of Ethnocentrism
(f) Dual
Consequences: Positive and Negative
(Trice & Beyer, 1992)
Humans build their cultures, nervously loquacious,
on the edge of an abyss.
Kenneth Burke
(1942)
Harvard
Theological Review