Strategic Management

ACHMAD SOBIRIN
Fakultas Ekonomi-UII

1
 Military influences in strategy

“Strategos” referred to a general in

command of an army
The art of the general
 By 450 B.C. it came to mean managerial skill
 By 330 B.C. it referred to the skill of employing
forces to overcome positions to create a system of
global governance
Carl von Clausewitz “tactics…(involve)
the use of armed forces in the
engagement, strategy (is) the use of
engagements for the object of war”
1838 On War
2
 Academic influences in strategy

HBS requires a class in Business Policy in 1912

Adam Smith’s “invisible hand” (the market) gives
way to Alfred Sloan (GM CEO from 1923-1946)
concept of the “visible hand”—middle manager
Chester Bernard influential book “the executive”
argues that managers should pay attention to
“strategic factors”
Ronald Coase’s 1937 article “why firms exist” (Nobel
Prize in economics) and Joseph Schumpter’s concept
of “disruptive technologies” written in 1942 bring in
organizational economics

3
 Recent influences in strategy

1960s (Strategy and structure;

Corporate Strategy)
 1963 Harvard business conference leads to SWOT
analysis
 BCG founded in 1963 “strategy boutique”

 Created the portfolio analysis

• Stars, dogs, cash cows, question marks

1980s (Porter’s 5 forces)

1990s (Resource Based view of the firm)

4
Why is strategic management
important?

Gives everyone a role

Makes a difference in performance
levels
Provides systematic approach to
uncertainties
Coordinates and focuses
employees
5
Basics of Strategic Management

Four aspects that set strategic

management apart
 Interdisciplinary
 Capstone of the Business degree
 External focus
 Competition

 Internalfocus
 Future direction

6
 Why do strategy?

Gain competitive advantage

 Sets an organization apart
 Having something other competitors don't
 Doing something better than other organizations

 Doing something that others can't

 Necessary for long-term success and

survival

7
 Who does strategy?
 The Role of the Board of Directors
 Elected representatives of the company’s stockholders
 Legally obligated to represent and protect stockholder’s
 The Role of Top Management
 Responsible for decisions and action of every employee
 Providing effective leadership
 Other Organizational Employees
 Implement— put the strategies into action and monitor
performance
 Evaluate—do the actual evaluations and take necessary
actions

8
 The Role of the Board of
Directors
 Approve an organizational philosophy
 Review and approve strategic goals and plans
 Review and approve organization's financial
standards and policies
 Monitor organizational performance and
regularly review performance results
 Select, evaluate, and compensate top-level
managers
 Develop management succession plans
 Monitor relations with shareholders and other
key stakeholders

9
 Who is on the board of
directors?
Chairman of the board
 Chief Executive officer (CEO)
President
 Chief Operating officer (COO)
Other C’s
 Chief Financial officer
 Chief information officer

Inside board members

Outside board members
10
 The Role of Top Management
Determining
Organizational
Purpose or Vision

Establishing Exploiting and

Appropriately Maintaining
Balanced Controls Core Competencies

Effective
Strategic
Leadership
Developing
Emphasizing Human Capital
Ethical Decisions
and Practices Creating and
Sustaining Strong
Organizational Culture
11
 What is strategy?
Definition Definition of Strategy Key dimension
proposed by identified in the
definition
Chandler Strategy is the determination of Strategy is a means of
(1962) the basic, long-term goals of an establishing the
enterprise and the adoption courseorganizational purpose (in
term of its long-term
of actions and the allocation of
objectives, action programs,
resources necessary to carry out and resource allocation
the goals priorities)
Schendel and Strategy is the basic goals and
Hatten (1972) objectives of the organization, the
major programs of action chosen
to reach these goals and
objectives, and the major pattern
of resource allocation used to
relate the organization to its
environment
12
 What is strategy?
Argyris (1985) Strategy formulation and implementation Strategy is a response
include identifying opportunities and threats in (continuous and
the organization’s environment, evaluating the adaptive) to external
strengths and weaknesses of the organization, opportunities and
designing structures, defining roles, hiring threats and internal
appropriate people, and developing appropriate strengths and
reward to keep the people motivated and make weaknesses that affect
contribution organization

Mintzberg Strategy is a mediating force between the

(1979) organization and its environment; there are
consistent pattern of streams of organizational
decisions to deal with the environment
Steiner and Strategy is forging of company missions, setting
Miner (1977) objectives for the organization in light or
external and internal force, formulating specific
policies and strategies to achieve objectives,
and ensuring their proper implementation so
that the basic purpose and objectives of the
organization will be achieved

13
 What is strategy?
Andrews (1980) Corporate Strategy is the pattern of Strategy is motivating force
decision in a company that determines for stakeholders who directly
and reveals its objectives, purposes, or or indirectly receive the
goals, produces the principal policies benefits or costs derived
and plans for achieving those goals, and from the action of the firm
defines the range of businesses the
company is to pursue, the kind of
economic and human organization it is
or intends to be, and the nature of the
economic and non-economic
contribution it intends to make to its
shareholders, employees, customers
and communities

Chaffee (1985) Strategy is defines as orienting

metaphor or frames of reference that
allow the organization and environment
to be understood by organizational
stakeholders. On this basis, stakeholders
are motivated to believe and to act in
ways that are expected to produce
favorable result for the organization
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“HANG ON, LADIES AND GENTLEMEN, YOU
HAVE YET TO MEET THE WHOLE BEAST”

This is
Not a Cow

This is an organizational chart that shows the

different parts of a cow, In a real cow, the parts
are not aware that they’re parts. They do not
have trouble sharing information: They smoothly
and naturally work together as one unit. As a
cow. And you have only one question to answer.
Do you want your company to work like a chart?
Or a cow?
15
Environment, Mission, Vision, and
Stakeholders

Organization Mission
Organization Vision
 BHAG

Organizational Stakeholders
Important Environmental drivers

16
 Strategic Management
Principle

Effective strategy-making
begins with a vision of
where the organization
needs to head!

17
Elements of a Strategic Vision

Use the mission statement as a

starting point

Develop a strategic vision that

spells out a course to pursue

Communicate the vision in a

clear and exciting manner
18
Characteristics of a Mission
Statement

Defines current business

activities
Highlights boundaries of current
business
Conveys
 Who we are,
 What we do, and
 Where we are now
19
Characteristics of a Mission
Statement
Company specific, not
generic —so as to give a
company its own identity
A company’s mission is not
to make a profit !
The real mission is always
—“What will we do to make
a profit?”
20
Characteristics of a Strategic
Vision
Charts a company’s future
strategic course
Defines the business makeup
for 5 years (or more)
Specifies future technology-
product-customer focus

21
 Communicating the Vision
An exciting, inspirational vision
 Challenges and motivates workforce
 Arouses strong sense of organizational
purpose
 Induces employee buy-in
 Galvanizes people to live the business

22
 Value of a Well-Conceived
Strategic Vision and Mission

Crystallizes long-term direction

Reduces risk of rudderless
decision-making
Conveys organizational
purpose and identity
Keeps direction-related actions of lower-
level managers on common path
Helps organization prepare for the future

23
 Concept of Strategic Intent
A company exhibits strategic
intent when it relentlessly
pursues an ambitious strategic
objective and concentrates its
competitive actions and energies
on achieving that objective!

24
 Lessons about change: Built to last

Tried to understand why superior

companies are better than peer
companies which are better than
most companies
 $1invested in stock market in 1926
yields
 $415 in all other companies
 $955 in peer companies

 $6356 in superior (visionary) companies

25
 Who are these companies
Visionary Peer companies
 3M  Norton
 Boeing  McDonnell Douglass
 Westinghouse
 GE
 Burroughs
 IBM
 Zenith
 Motorola
 Melville
 Nordstrom
 Colgate
 P&G  Kenwood
 Sony  Ames
 Wal-mart

26
 So what did they find?
Great companies had BHAG
Big Hairy Audacious Goals
What ever your values are “stick
with it”
Deal with the AND, not the OR
Seek Alignment (internally)

27
Characteristics of Strategic
Intent

Indicates firm’s intent to stake out

a particular position over the long-
term

Involves establishing a BHAG -

”big, hairy, audacious goal”

Signals relentless commitment to

winning
28
 Example of BHAG

 General Electric
 All
businesses are held to a standard of
being #1 or #2 in their industries as well
as achieving good business results
 John F. Kennedy
 Puta man on the moon and return safely
by the end of the decade

29
 Crafting a Strategy
An organization’s strategy deals
with
 How to make the strategic vision a
reality and achieve target objectives
 The game plan for
 Pleasing customers
 Conducting operations
 Building a sustainable competitive
advantage

30
Organizational Stakeholders
Shareholders

Political Governments
Action Groups

Trade Customers
Associations Organization

Social Action
Suppliers
Groups

Communities Employees

31
 Ethics

Corporate Social Responsibility

 Decision makers have an obligation to
recognize the interrelatedness of business
and society

32
 External Analysis

Differentiate between external

environmental opportunities and threats
Understand the components of an
organization’s general environment
Understand the forces in Porter’s five
forces model

33
 SWOT Analysis
Threat

Strength
Weakness
Organization

Opportunity 34
What is an external analysis?

External analysis builds upon the notion

that organization’s are open systems.
 Often success is determined by the environment
around the organization and not the intelligence
inside the organization
Organization’s need to pay attention to
Opportunities and Threats
 Opportunities are positive external environmental
trends that improve the organization’s performance
 Threats are negative external environmental trends
that hinder the organization's performance

35
 External Analysis

General
Environment

Technologi Economi
cal Specific Environment c
Industry-Competitors
Substit Current
ute Organization Rivalry
Product
sBargaini Potenti
ng
al
Power of Bargaini
Political- Supplier ng Entrant Demograp
Legal Power of s hic
s
Buyers

Sociocultu
ral
36
 Economic Environment

Interest rates
Monetary exchange rates
Inflation rates
GNP or GDP
Consumer income, spending, and debt
levels
Unemployment levels
Workforce productivity
37
 Demographic Environment

Gender
Age
Income levels
Ethnic makeup
Education
Family composition
Geographic location
Birth rates
38
 Socio-Cultural Environment

Country’s culture
Social Values
 Traditions
 Values
 Attitudes
 Beliefs
 Tastes
 Patterns of behavior

39
 Political Legal Environment

Federal, state, and local

 Laws
 Regulations
 Judicial decisions
 Political forces
Examples of legal changes
 Occupational Safety and Health Act of 1970
 Americans with Disabilities Act of 1990
 Family and Medical Leave Act of 1993
 North American Free Trade Agreement of 1993

40
 Technical Environment

Communications
Computing
Transportation
Robotics
Biotechnology
Medicine and medical
Telecommunications
Consumer electronics
41
 Industry’s environment
POTENTIAL ENTRANTS

Threat of New Entrants

Bargaining INDUSTRY Bargaining

Power COMPETITORS Power
of Suppliers of Buyers
SUPPLIERS BUYERS

Rivalry Among
Existing Firms

Threat of Substitute Products

or Services
SUBSTITUTES 42
 Industry Competitors

Opportunity Threat
 Few competitors  Numerous
 Industry sales growing competitors
 Low fixed or inventory  Industry sales
storage costs slowing
 Significant  High fixed or
differentiation inventory storage
 Minimal exit barriers costs
 No differentiation
 High exit barriers

43
 Potential Entrants

Opportunity Threat
 Significant  No or low economies
economies of scale of scale
 Strong product  Weak product
differentiation differentiation
 Significant switching  Minimal switching
costs cost
 Controlled access to  Open access to
distribution channels distribution channels

44
 Bargaining power of buyers

Opportunity Threats
 Buyer purchases  Buyer purchases large
small volumes volumes
 Purchases highly  Purchases standard or
differentiated and
unique undifferentiated
 Buyer’s profits are  Buyer’s profits are
strong weak
 Buyer can’t  Buyer can
manufacture products manufacture product
 Buyer’s have limited  Buyer has full
information information

45
Bargaining Power of Supplier

Opportunity Threats
 Supplying industry is  Supplying industry
fragmented has a few companies
 Supplier’s products  Supplier products do
have substitutes not have substitutes
 Supplier’s products  Supplier’s products
aren’t differentiated are differentiated
 Minimal switching  Significant switching
costs in supplier’s costs
products

46
 Substitute Products

Opportunities Threat
 There are no good  There are few
substitutes good substitutes
 There are several
not-so-good
substitutes

47
 Examples of substitutes

Eyeglasses vs. Contact Lenses

Sugar vs. Artificial Sweeteners
Newspapers vs. TV vs. Internet
E-mail vs. Overnight Delivery

48
 How do you do an external
analysis?
Find data
 Informal
 Customer comments
 Reading trade journals and general news media

 Talking with suppliers' sales representatives

 Formal
 External Information System (EIS)
 Market and customer surveys

Evaluate whether data is good or

bad
49
Why do an external analysis?

Anticipate changes and plan accordingly

Provide information for Planning, Decision
making & Strategy formulation
Acquire and control needed resources
Make a difference with higher performance
Cautions
 Rapid environmental changes are difficult to keep up
with
 Amount of time that analysis can consume
 Forecasts and trend analyses are not actual fact

50
 Internal Analysis

Understand organizational strengths and

weaknesses
Understand the relationship between
organizational resources, organizational
capabilities, core competencies, and
distinctive organizational capabilities
Understand the Value Chain
 Outsourcing
Take Aways

51
 SWOT Analysis

Threat

Weakness Strength
Organization

Opportunity 52
 What is an Internal Analysis

Identifies and evaluates resources,

capabilities, and core competencies
As such organizations need to
understand their
 Strengths are resources that an organization
possesses and capabilities that an organization has
developed that can be exploited and developed into
a sustainable competitive advantage
 Weaknesses are resources and capabilities that are
lacking or deficient and prevents an organization
from developing a sustainable competitive
advantage

53
The road to Competitive Advantage

Performance Results

Competitive Advantage

Distinctive Organizational
Capabilities

Organizational Organizational Core

Resources Capabilities Competencies

Financial assets Organizational

Physical assets processes and
Human resources routines
Intangible assets Accumulated
Structural-cultural knowledge 54
assets
 The road to distinctive
organizational capabilities
Distinctive Organizational
Capabilities

Organizational Core
Capabilities Competencies

Organizational Capabilities
Resources • Fundamental building block for
Tangible developing core competencies
Intangible • Organizational processes
and
routines to get the work done 55
 The road to distinctive
organizational capabilities
Distinctive Organizational
Capabilities

Organizati Core
onal Competencies
Capabiliti
es
Organizational Capabilities Core Competencies
•Fundamental building block for •Fundamental skills and capabilities
developing core competencies
• Organizational processes and
•Exploitable by organization
routines to get the work done •Major value-creating capabilities
•Not a source of competitive advantage
56
Types of Core Competencies

After-sale service capability

Skills in manufacturing a high
quality product
System to fill customer orders
accurately and swiftly
Expertise in integrating multiple
technologies to create families of
new products
57
 The road to distinctive
organizational capabilities
Distinctive Organizational
Capabilities Distinctive Organizational
Capabilities
•Special and unique capabilities
•Distinguish from competitors
•Sustainable competitive Organizational Core
advantage Capabilities Competencies
•Outperform competition

Core Competencies
• Not a source of competitive advantage
• Fundamental skills and capabilities
• Exploitable by organization
• Major value-creating capabilities
58
 From Distinctive capabilities to
competitive advantage
• Contributes to
Superior Customer
Value

• Is Difficult
Distinctive
for Competitors
• Can Be Used Organizational to Imitate
in a Variety Capabilities
of Ways

59
The road to Competitive Advantage

Performance Results

Competitive Advantage

Distinctive Organizational
Capabilities

Organizational Organizational Core

Resources Capabilities Competencies
Financial assets Organizational
Physical assets processes and
Human resources routines
Intangible assets Accumulated
Structural-cultural knowledge 60
assets
Capabilities vs. Core Competencies
vs. Distinctive Capabilities

A company capability is the product of

organizational learning and experience and
represents real proficiency in performing
an internal activity
A core competence is a well-performed
internal activity that is central (not
peripheral or incidental) to a company’s
competitiveness and profitability
A distinctive Capability is a competitively
valuable activity that a company performs
better than its rivals

61
 Value Chain Analysis

{ Firm Infrastructure

Human Resource Management

M
Support

AR
Activities Technological Development

G
IN
Procurement

Marketing
Outbound

and Sales
Operations

IN
Logistics

Logistics
Inbound

G
R
Service

A
M
{
Primary Activities 62
 From Value Chain Analysis
to Competitive Advantage

Sustainable competitive advantage

can be created by
1.Managing value chain activities
better than rivals and/or
2.Developing distinctive value chain
capabilities to serve customers!
63
 Appeal of Outsourcing

Outsourcing non-critical activities

allows a firm to concentrate its energies
and resources on those value-chain
activities where it
 Can create unique value
 Can be best in the industry

Advantages to outsourcing
 Decrease internal bureaucracies
 Flatten organization structure
 Provide firm with heightened strategic focus
64
 Potential Advantages of Outsourcing
Non-Critical Activities

Outsourcing makes strategic sense

when outsiders can perform certain
activities at a lower cost and/or with
higher value-added.

65
How do you do an internal
analysis?
Step 1 Prepare current product-market profile.

Identify sources of competitive

Step 2 advantage and disadvantage in
the main product-market segments.

Describe all the organizational

Step 3 capabilities and competencies.

Sort the core capabilities and

Step 4 competencies according to
strategic importance.

Identify and agree on

Step 5 the key capabilities
and competencies. 66
 Difficulty in developing
competencies
Because these competencies are in
people
 Hard to develop
 Hard to identify
 Hard to change / improve
 Also hard to “steal”
 Social Complexity
 Historical

 Casually ambiguous

67
 Competitive Strategies

Competitive Strategy
Definitions of competitors
Competitive Strategies
 Miles and Snow
 Porter

First Mover strategies

68
 Strategy and Competitive
Advantage
Competitive advantage exists when a
firm’s strategy gives it an edge in
 Defending against competitive forces and
 Securing customers

Key to Gaining a Competitive Advantage

Convince customers firm’s product / service
offers superior value
 Offer buyers a good product at a lower price
 Use differentiation to provide a better product
buyers think is worth a premium price

69
 Competition

When organizations battle for

some desired object / outcome
Who are our competitors
 Industry perspective
 Market perspective

 Strategic group perspective

70
Industry and Market approaches to
defining competitors

Industry
Market

Same Customer
Product-Service Needs

71
Strategic Group approach to
defining competitors
Possible strategic dimensions for
identifying strategic groups
 Price
 Quality
 Geographic scope
 Product line breadth-depth
 R&D expenditures
 Product characteristics

72
Different types of competitive
strategies
Miles and Snow typology
 Prospector
 Seeks innovation
 Survey dynamic environment and

develops new products

 Competitors are uncertain about

prospector’s future decisions and actions

73
Different types of competitive
strategies
Miles and Snow typology
 Defender
 Searches for market stability
 Limited product line
 Seeks to defend position
 Prevents others from entering its turf
 Can create and maintain niches

74
Different types of competitive
strategies
Miles and Snow typology
 Analyzer
 Strategy of analysis and imitation
 Copies promising new activities

 Reactor
 Lacks a strategic plan
 Reacts to environmental changes

 Makes adjustments when forced to

 Unable to respond quickly to changes

75
 Porter’s generic strategies

Market Scope
 Broad or Narrow
Competitive advantage
 Low cost or differentiated
Integrated differentiated / low cost

76
 Low-Cost Leadership

Make achievement of low-cost relative

to rivals the theme of firm’s business
strategy
Find ways to drive costs out of
business year-after-year

Low-cost leadership
Low-cost means
leadership low low
means
OVERALL costs,
overall not not
costs, just just
low low
manufacturing
manufacturing or or
production
production costs!
costs!
77
 When Does it work?
It works when
 Price competition is vigorous
 Product is standardized
 Buyers incur low switching costs
 Industry newcomers use introductory low prices
to attract buyers and build customer base
Pitfalls with this strategy
 Being overly aggressive in cutting price
 Low cost methods are easily imitated by
rivals
 Differentiation matters

78
 Differentiation Strategies
Incorporate differentiating features that
cause buyers to prefer firm’s product or
service over brands of rivals
Keys to success
 Find ways to differentiate that create value
for buyers and that are not easily
matched or cheaply copied by rivals
 Not spending more to achieve differentiation
than the price premium that can be charged

79
 Types of Differentiation
Unique taste -- Dr. Pepper
Wide selection and one-stop shopping --
Home Depot and Amazon.com
Superior service -- FedEx, Ritz-Carlton
Spare parts availability -- Caterpillar
More for your money -- McDonald’s, Wal-
Mart
Prestige -- Rolex
Quality manufacture -- Honda, Toyota
Top-of-the-line image -- Ralph Lauren,
Chanel
80
Signaling Value as Well as
Delivering Value
Buyers seldom pay for value that is
not perceived
Signals of value may be as
important as actual value when
 Nature of differentiation is hard to
quantify
 Buyers are making first-time
purchases
 Repurchase is infrequent
 Buyers are unsophisticated

81
 When does it work?

It works when
 There are many ways to differentiate a product that
have value and please customers
 Buyer needs and uses are diverse
 Technological change and product innovation are
fast-paced
Pitfalls
 Charging to high a price or over differentiating
 Failing to signal value
 Not understanding what buyers want or prefer and
differentiating on the “wrong” things

82
 Competitive Strategy Principle

A low-cost provider strategy can

A low-cost
defeat producer strategystrategy
a differentiation can defeat
a differentiation strategy when buyers
when buyers are satisfied with
are satisfied with a standard product
a standard
and do not product
see extra and do not
attributes as
see extra
worthdifferentiating attributes
paying additional money to
obtain!
worth paying for!

83
 Integrated low-cost / differentiated

Combine a strategic emphasis on low-

cost with a strategic emphasis on
differentiation
 Make an upscale product at a lower cost
 Give customers more value for the money
Deliver superior value by meeting or
exceeding buyer expectations on
product attributes and beating their
price expectations
84
Integrated Low Cost/Differentiation Strategy

Southwest Airlines
Low Cost
Differentiation
Use a single aircraft model
(Boeing 737) Focus on customer
satisfaction
Use secondary airports
High level of employee
No meals dedication

15 minute turnaround time

No reserved seats
85
Risk of an integrated Provider
Strategy
Risk – An integrated provider may get
squeezed between strategies of firms
using low-cost and differentiation
strategies
 Low-cost
leaders may be able to siphon
customers away with a lower price

 High-end differentiators may be able to

steal customers away with better product
attributes
86
 Focus / Niche Strategies
Involve concentrated attention on a
narrow piece of the total market
Objective
 Serve niche buyers better than rivals
Keys to success
 Choose a market niche where buyers have
distinctive preferences, special
requirements, or unique needs
 Develop unique capabilities to serve needs
of target buyer segment
87
 What Makes a Niche
Attractive for Focusing?

Big enough to be profitable and offers good

growth potential
Not crucial to success of industry leaders
Costly or difficult for multi-segment competitors
to meet specialized needs of niche members
Focuser has resources and capabilities to
effectively serve an attractive niche
Few other rivals are specializing in same niche
Focuser can defend against challengers via
superior ability to serve niche members

88
 Risks of a Focus Strategy
Competitors find effective ways to match
a focuser’s capabilities in serving niche
Niche buyers’ preferences shift towards
product attributes desired by majority of
buyers - niche becomes part of overall
market
Segment becomes so attractive it
becomes crowded with rivals, causing
segment profits to be splintered

89
 First-Mover Advantages
When to make a strategic move is often
as crucial as what move to make
First-mover advantages arise when
 Pioneering helps build firm’s image and reputation
 Early commitments to new technologies, new-style
components, and distribution channels can produce
cost advantage
 Loyalty of first time buyers is high
 Moving first can be a preemptive strike

90
First-Mover Disadvantages

Moving early can be a

disadvantage (or fail to produce
an advantage) when
 Costs of pioneering are sizable and
loyalty of first time buyers is weak
 Innovator’s products are primitive, not
living up to buyer expectations
 Rapid technological change allows
followers to leapfrog pioneers
91
 Timing and Competitive Advantage

Principle 1
Being a first-mover holds potential for competitive advantage in some cases but not in
others

Principle 2
Being a fast follower can sometimes yield as good a
result as being a first mover

Principle 3
Being a late-mover may or may not be fatal -- it varies
with the situation
92
Corporate (and international) Strategy

Three directions for corporate

strategy
 Growth
 M&A, JV/SA
 International
 Stability
 Renewal
 Retrenchment

 Turnaround

93
Brief Overview of Corporate Strategy

Those strategies concerned with

the broad and long-term questions
of what business(es) the
organization is in and what it
wants to do with those businesses

94
 When to Diversify

Some companies do EXCELLENTLY and

are not diversified
 McDonalds, SWA, Coca-Cola, Domino’s
Pizza, Wal-Mart, FedEx, Timex, Gerber
 Why stay single business
 Clear understanding of who we are / what we do
 No Dilution of management’s attention
 Risks of a single business strategy
 Putting all the “eggs” in one industry basket
 Unforeseen changes can undermine a single
business firm’s prospects

95
 Diversification and Corporate Strategy

A company is diversified when it is in two

or more lines of business
Strategy-making in a diversified company
is a bigger picture exercise than crafting
a strategy for a single line-of-business
 A diversified company needs a multi-
industry, multi-business strategy
 A strategic action plan must be developed
for several different businesses competing
in diverse industry environments

96
 Organizational Growth

Growth Strategy
 One that involves the attainment of
specific growth objectives by
increasing the level of an
organization’s operations
 Typical growth strategies include
 Increases in sales revenues
 Profits
 Other performance measures

97
 Types of Growth Strategies
International Concentration

Organizational
Growth

Diversification Vertical
• Related Integration
• Unrelated
•
Horizontal Backward
Integration •
Forward
98
 Concentration

Organization concentrates on its primary line

of business and looks for ways to meet its
growth objectives through increasing its level
of operation in this primary business

99
 Concentration
Product(s)

Current New

Product-Market Product
Current Exploitation Development
Customers
New
Market Product/Market
Development Diversification

100
 Diversification
Operational
Skills-Capabilities

Product Distribution
Similarities Related Channels
Diversification

Similar Customer
Technology Use

101
 Diversification

Level
 Horizontal
 Anti-trust laws prohibit a lot of these
 GE & Honeywell
 Vertical
 Suppliers buying buyers (or vice versa)
Type
 Related
 Unrelated

102
 Related Diversification
and Competitive Advantage

Competitive advantage can result from

related diversification if opportunities
exist to
 Transfer expertise/capabilities/technology
 Combine related activities into a single operation and
reduce costs
 Leverage use of firm’s brand name reputation
 Conduct related value chain activities in a
collaborative fashion to create valuable competitive
capabilities
103
What is Unrelated Diversification?

Involves diversifying into businesses with

 No strategic fit
 No meaningful value chain relationships
 No unifying strategic theme
Approach is to venture into “any business
in which we think we can make a profit”
Firms pursuing unrelated diversification are
often referred to as conglomerates

104
Attractive Acquisition Targets

Companies with undervalued assets

 Capital gains may be realized
Companies in financial distress
 May be purchased at bargain prices and turned
around
Appeal of Unrelated Diversification Strategy
 Business risk scattered over different industries
 Financial resources can be directed to those
industries offering best profit prospects
 If bargain-priced firms with big profit potential are
bought, shareholder wealth can be enhanced

105
 Drawbacks of Unrelated
Diversification
Difficulties of competently managing many
diverse businesses
Lack of strategic fits which can be leveraged
into competitive advantage
 Consolidated performance of unrelated
businesses tends to be no better than sum of
individual businesses on their own (and it may
be worse)
 Likely effect is 1 + 1 = 1.5, not 1 + 1 =3
 Promise of greater sales-profit stability over
business cycles seldom realized

106
Combination Related-Unrelated
Diversification Strategies
Dominant-business firms
 One major core business accounting for 50 - 80
percent of revenues, with several small related or
unrelated businesses accounting for remainder
Narrowly diversified firms
 Diversification includes a few (2 - 5) related or
unrelated businesses
Broadly diversified firms
 Diversification includes a wide ranging collection of
either related or unrelated businesses or a mixture
Multi-business firms
 Diversification portfolio includes several unrelated
groups of related businesses

107
 Merger and Acquisition

Most popular approach to

diversification
Advantages
 Quicker entry into target market
 Easier to hurdle certain entry barriers
 Technological inexperience
 Gaining access to reliable suppliers
 Being of a size to match rivals in terms of
efficiency and costs
 Getting adequate distribution access
108
Joint Ventures and Strategic
Alliances
Good way to diversify when
 Uneconomical or risky to go it alone
 Pooling competencies of two partners
provides more competitive strength
 Foreign partners are needed to surmount
 Import quotas and Tariffs
 Nationalistic political interests
 Cultural roadblocks
 Lack of knowledge about markets of
particular countries

109
 Drawbacks of JV & SA

Raises questions
 Which partner will do what
 Who has effective control
Potential conflicts
 Control over strategy and long-term direction
 How operations will be conducted
 Control over cash flows and profits
 Personalities and cultures of partners

110
 Benefits of SA & JV
Gain scale economies in production and/or
marketing
Fill gaps in technical expertise or knowledge
of local markets
Share distribution facilities and dealer
networks
Direct combined competitive energies
toward defeating mutual rivals
Useful way to gain agreement on important
technical standards

111
 Why is the World Economy
Globalizing?
Previously closed national economies
are opening up their markets to
foreign companies
Importance of geographic distance is
shrinking due to the Internet
Growth-minded companies are racing
to stake out positions in the markets
of more and more countries

112
How Markets Differ from
Country to Country

Consumer tastes and preferences

Consumer buying habits
Market size and growth potential
Distribution channels
Driving forces
Competitive pressures

113
 International

Hig
h
Global Transnational
Approach Approach
Global Integration
of Operations

Multidomestic
Approach

Low Low
HighLocal Market
Responsiveness
114
Characteristics of Multi-Domestic and
Global Competition

Multi-Domestic
 Each country market is self-contained
 Competition in one country market is independent of
competition in other country markets
 No “international” market, just a collection of
country markets
Global Market
 Many of same rivals compete in many of the same
country markets
 A firm’s competitive position in one country is
affected by its position in other countries
 Competitive advantage (or disadvantage) is based
on a firm’s world-wide operations and overall global
standing

115
 Multi-Domestic Strategy
Strategy is matched to local market needs
Use Different country strategies when
 Significant country-to-country differences in
customers’ needs exist
 Buyers in one country want a product different
from buyers in another country
 Host government regulations preclude
uniform global approach
Two drawbacks
 Poses problems of transferring competencies
across borders
 Works against building a unified competitive
advantage

116
 Global Strategy

Strategy for competing is similar in

all country markets
Involves
 Coordinating strategic moves globally
 Selling in many, if not all, nations
where a significant market exists
Works best when products and buyer
requirements are similar from
country to country
117
Strategy Options for International
Markets

Exporting
Licensing
Franchising strategy
Diversification

118
 Characteristics of Export
Strategies
Involves using domestic plants as a
production base for exporting to foreign
markets
Excellent initial strategy to pursue
international sales
Advantages
 Minimizes both risk and capital requirements
 Conservative way to test international waters
 Minimizes direct investments in foreign countries
An export strategy is vulnerable when
 Manufacturing costs in home country are higher than in
foreign countries where rivals have plants
 High shipping costs are involved
119
Characteristics of Licensing
Strategies
Advantages
 Has valuable technical know-how or a patented
product but does not have international capabilities or
resources to enter foreign markets
 Desires to avoid risks of committing resources to
markets which
 Are unfamiliar, Present economic uncertainty or
 Are politically volatile
Disadvantage
 Risk of providing valuable technical know-how to
foreign firms and losing some control over its use

120
 Characteristics of Franchising
Strategies
Often is better suited to global
expansion efforts of service and
retailing enterprises
Advantages
 Franchisee bears most of costs and risks of
establishing foreign locations
 Franchiser has to expend only the resources to
recruit, train, and support franchisees
Disadvantage
 Maintaining cross-country quality control
121
 Organizational Renewal
Inadequate
Financial
Controls

Over expansion Uncontrollable

or Too Rapid Costs or Too
Growth High Costs
Poor
Management
Slow or No Response New
to Significant External Competitors
or Internal Changes

Unpredicted
Shifts in Consumer
Demand
122
 Retrenchment
Diversification efforts have become too broad
Lack of resources or skill to support operating
and investment needs of all businesses
Misfits (or poorly performing businesses) cannot
be completely avoided
Unfavorable changes in industry attractiveness
Diversification may lack compatibility of values
essential to cultural fit

123
Options for Accomplishing
Retrenchment
Spin it off as independent company
 Involves deciding whether to retain partial
ownership or forego any ownership interest
Sell it
 Involves finding a company which views the
business as a good deal and good fit
Leveraged buy out
 Involves selling business to the managers who
have been running it for a minimal equity
down payment and loaning balance of
purchase price to new owners

124
 Corporate Turnaround
Strategies (downsizing)
Objectives
 Restore money-losing businesses to profitability
rather than divest them
 Get whole firm back in the back by curing
problems of ailing businesses in portfolio
Most appropriate where
 Reasons for poor performance are short-term
 Ailing businesses are in attractive industries
 Divesting money-losers doesn’t make long-term
strategic sense

125
 Portfolio Analysis
Relative Market
Share Position
High (above 1.0) Low (below 1.0)
1.0
High
Stars Question Marks
(faster than
the economy
as a whole)

Industry Growth Rate

(in constant sales dollars) Cash Cows Dogs

Low
(slower than
the economy
as a whole)
126
Characteristics of Cash Hogs

Internal cash flows are inadequate to

fully fund needs for working capital and
new capital investment
 Parent company has to continually pump in
capital to “feed the hog”
Strategic options
 Aggressively invest in
attractive cash hogs
 Divest cash hogs lacking
long-term potential

127
Characteristics of Cash Cows
Generate cash surpluses over and above
what is needed to sustain present market
position
Such businesses are valuable because
surplus cash can be used to
 Pay corporate dividends
 Finance new acquisitions
 Invest in promising cash hogs
Strategic objectives
 Fortify and defend present market position
 Keep the business healthy
128
 Notes of Caution: Why
Diversification Efforts Can Fail

Transferring resource capabilities to

new businesses can be far more arduous
and expensive than expected
Trying to replicate a firm’s success in
one business and hitting a second home
run in a new business is easier said than
done
Management can misjudge difficulty of
overcoming resource strengths of
rivals it will face in a new business
129
What Makes Up a Company’s
Culture?
Values and principles of management
Work climate and atmosphere
Patterns of “how we do things around here”
Oft-told stories illustrating company’s values
Taboos and political don’ts
Traditions
Ethical standards

130
 Culture and Strategy Execution:
Ally or Obstacle?

Culture can contribute to,or hinder,

successful strategy execution
Requirements for successful strategy
execution may, or may not, be
compatible with culture
A close match between culture and
strategy promotes effective strategy
execution

131
 Benefits of a Good Culture-Strategy Fit

Strategy-supportive cultures
 Shape mood and temperament of the work force,
positively affecting organizational energy,
work habits, and operating practices
 Provide standards, values, informal rules and
peer pressures that nurture and motivate
people to do their jobs in ways that promote
good strategy execution
 Strengthen employee identification with the
company, its performance targets, and strategy

132
Strategic Management Principle

Strong cultures promote good

strategy execution where

there’s strategy-culture fit

and hurt execution where

there’s little fit!

133