What is strategy?

● “Strategy is a set of goal-directed actions a firm takes to gain and sustain superior
performance relative to competitors.” (Rothaermel, 2015:4)
●
● “A strategy is an integrated and coordinated set of commitments and actions
designed to exploit core competencies and gain a competitive advantage.” (Hitt,
Ireland & Hoskisson, 2011:4)
●
● “Competitive strategy is about being different. It means deliberately choosing a
different set of activities to deliver a unique mix of value”.(Porter, 1996)

What is strategy?

“a good strategy is, in the end, an hypothesis about what will work. Not a wild theory, but an
educated judgment.” (Rumelt, 2012:243)

According to Richard Rumelt, the kernel of a good strategy is represented by:

1. A diagnosis: it defines/explains the nature of the challenge

● This is not the same thing as mentioning performance goals
●
1. Guiding policy: it deals with the challenge. It is intended to overcome the obstacles
identified earlier
1. Set of coherent actions: designed to carry out the guiding policy. Coordination is
essential

Decisions: strategic, tactical, operational

Magnitude:

● Important
● Involve a significant commitment of resources
● Affect the entire organization
●
Time-scale:

● Medium and long term (depending on the industry)

●

Reversibility:

● Not easily reversible

Decisions: strategic, tactical, operational

Magnitude:

● Relatively important
● Involve a smaller amount of resources
● Affect parts of the organization

Time-scale:

● Short and medium term

Reversibility:

Reversible

Decisions: strategic, tactical, operational

Decisions: strategic, tactical, operational

Magnitude:

● Routine
● Few resources committed
● Only affect parts of the organization

Time-scale:

● Short term

Reversibility:

● Easily reversible

Deliberate strategy vs. Emergent strategy

● Deliberate:
● a strategic plan conceived by top management team (seniors managers) as a
response to challenges confronting an organization
● adapted to stable and predictable environments

Deliberate strategy vs. Emergent strategy

● Emergent:
● opportunistic behaviors and decisions in response to changes in the market
place.
● adapted to moving environments

Strategy & Mission statement, vision, values, goals

Mission:

● The mission describes what it is that the company does

● Mission is often customer-oriented (customer need that the company is trying to
satisfy) rather than product-oriented mission (the products that the company
produces). Can it be different?
● Questions to ask: “What is our business? What will it be? What should it be?”
Strategy & Mission statement, vision, values, goals

Mission:

Vision:

● what the company would like to achieve in the future

Values

● state how managers and employees should conduct themselves, how they should do
business, and what kind of organization they should build

Goals:

● A goal is a precise and measurable desired future state that a company attempts to
realize.
● precise and measurable
● address crucial issues
● challenging but realistic
● specify a time period in which they should be achieved

Understanding the external environment

The importance of understanding the external environment of the firm:

● Align the organization with its environment

● Build strategies more responsive to the environment
● Detect early warning of environmental changes
● Identify useful resources in the environment

External environmental analysis

A continuous process involving various steps:
 ● Scanning: Identification of early signals of environmental changes and trends
● Monitoring: Detection of meaning through ongoing observations of environmental
changes and trends
● Forecasting: Development of projections of anticipated outcomes based on
monitored changes and trends
● Assessing: Determination of the timing and importance of environmental changes
and trends for firms’ strategies and their management

Different types of analysis:

● Macro-environment: PESTEL (PESTLE)

● Industry and competitors: Porter’s Five Forces analysis / Industry life cycle
● Market(s) and customers: Red vs. Blue Ocean Strategy / Strategic groups

PESTLE / PESTEL analysis

PESTEL elements:

● Political/Governmental
● Economic (global, national, regional)
● Social/sociocultural
● Technological
● Ecological
● Legal

Political factors:

● These factors highlight the role of the state and other political forces:
● Political ideological mood of country or region
● Opportunities for lobbying
● Political/business leaders positions on industry-related issues
● Government policies on industry-related issues
● Governmental regulatory vigor
● Government role in meeting societal needs
● Media reports

Economic factors

● refer to macro-economic factors such as:

 ● exchange rates,
● business cycles
● differential economic growth rates around the world

Sociocultural factors

● Social influences include changing cultures and demographics.

● The ageing populations in many Western societies create opportunities and threats
for both private and public sectors.

Technological factors

● innovations in technology that may affect the operations of the industry and the
market favorably or unfavorably.
● examples:
● new ways of producing goods and services
● new ways of distributing goods and services
● new ways of communicating with target markets

Ecological/environmental factors

● “green” environmental issues, such as pollution, waste and climate change

● environmental regulations can impose additional costs: pollution controls
● they can also be a source of opportunity: the new businesses that emerged around
organic food or mobile phone recycling.

Legal factors

● existing laws (long established, how are they interpreted and enforced)
● new laws (recently enacted, how will they be interpreted and enforced)
● proposed legislation (working their way through the legislature, likely impact on
industry and organization)

How to perform the analysis

● PESTEL analysis is not creating lists / enumerations of various factors:

● It is important to identify:
● Key drivers for change: factors that are likely to have a high impact on
industries/sectors & on firm’s success/failure
● PESTEL analysis helps in identifying directions of change:
● Megatrends: large-scale social, economic, political, ecological or technological
changes that are typically slow to form, but which influence many other activities and
views, possibly over decades.
● Example: Ageing population in Western societies; economic development of Asia
● PESTEL analysis helps in identifying directions of change:
● Inflexion points: moments when trends shift in direction, for instance turning sharply
upwards or downwards.
● Example: town-centre retailing vs. internet shopping
 ● PESTEL analysis helps in identifying directions of change:
● Weak signals: advanced signs of future trends and are particularly helpful in
identifying inflexion points.
● Example: early 2000: HKUST enters the Financial Times’ ranking of the top 50
international business schools – sign of success of Asian business schools

Building scenarios:

● scenarios offer plausible alternative views of how the business environment might
develop in the future. They offer managers flexibility

Steps:

● Defining scenario scope: it refers to the subject of the scenario analysis. Whole
industry globally, particular geographical regions and markets?
● Identifying the key drivers for change; example: in the fashion industry, key drivers
range from demographics to technology
● Identifying impacts of alternative scenarios.
● Establishing early warning systems

Industry analysis

● The purpose of industry analysis is to analyze the economic and market forces that
will ultimately influence an industry's profit potential.
●
● Identifying the profit potential or 'attractiveness' of an industry provides the foundation
for bridging the gap between your firm's external environment and its internal
resources.
●
● Michael Porter’s “Five Forces of Competition” framework is designed to give you an
understanding of an industry and its participants.

Definition of industry and market

Industry:

● a group of firms producing products and services that are essentially the same.
● Example:
● the automobile industry (Renault, PSA Peugeot-Citroen, GM, Toyota, etc.)
● The banking industry: BNP Paribas, Société Générale, LCL, HSBC, etc.
● In public services, industries are called “sectors”, (e.g. the health sector or the
education sector).
● Industries and sectors are often made up of several specific markets.

Market:
 ● are essentially the same ( e.g. a particular geographical market).
● a group of customers sharing specific characteristics
● Example:
● the automobile industry has markets in North America, Europe and Asia, for
example.

Porter’s Five Forces Model:

Objectives:

● identify the profit potential of an industry

● identify the forces that would harm your company's profitability in that industry
● protect and extend your competitive advantage
● anticipate changes in industry structure.

Porter classifies the five forces or 'rules of industry competition' as follows:

- Threat of new entrants.

- Bargaining power of suppliers.

- Bargaining power of buyers (customers).

- Threat of substitute products or services.

- Degree of rivalry among existing competitors.

Porter’s Five Forces Model: Threat of new entrants

Profits attract new entrants which erodes profits

New entrants:

● capture incumbents’ market share

● increase internal industry rivalry
● increase the demand and prices for inputs, resulting in lower industry profitability.
Factors

Entry-deterring price

● The cost of entry exceeds forecasted revenue. Often, existing players will lower their
prices to thwart a competitive entry.

Incumbent retaliation

● Existing companies often have substantial resources and the willpower to fight new
entrants.
● Agressive incumbent reaction = weak threat of new entrants
● Non-agressive reaction = strong threat of new entrants

High entry costs

● Often, substantial portions of the start-up costs are unrecoverable.

Product differentiation

● New brands need higher cost of marketing. They are not faced by existing
companies that have well-known brands & loyal customers

Distribution access

● This also includes the need to pay incentives to distributors to persuade them to
carry new products.

Porter’s Five Forces Model: Bargaining power of suppliers

Suppliers:

● have the ability to influence the cost, availability and quality of input resources to
companies in the industry.
● must be thought of more broadly than just those providing raw material inputs
● can also include those groups governing or providing labor (trade unions or
professional bodies, for example), locations (landing slots at airports) or channels
(the broadcasting spectrum), among other things.

Factors of influence:

Concentration

● Supplier bargaining power will be high where an industry is dominated by

fewer players than the industry it sells to unless substitute inputs are
available.
● example:
 ● highly concentrated market (few suppliers: cocoa industry or diamonds
industry) = high bargaining power of suppliers
● not-concentrated market (many suppliers) = low bargaining power of
suppliers

Diversification

● The proportion of total sales that a supplier has with a particular industry will
vary inversely with supplier power.

Organization

● Supplier organizations industry associations/groups or trade unions or the

presence of patents or copyright will increase supplier power, and thus their
collective bargaining power.

Switching costs

● Supplier bargaining power will be weaker if companies in an industry can

switch suppliers easily or inexpensively.

Porter’s Five Forces Model: Bargaining power of buyers (customers)

Customers can influence industry structure and force prices down by such actions as
comparison shopping or by raising quality expectations.

Factors of influence:

Differentiation

● Products with unique attributes will decrease buyers’ power.

● Commodity products that are difficult to distinguish will increase their power.

Concentration

● If there are few buyers and they represent a high proportion of a company’s
sales, then their power is high

Differentiation

● Products with unique attributes will decrease buyers’ power.

● Commodity products that are difficult to distinguish will increase their power.

Concentration

● If there are few buyers and they represent a high proportion of a company’s
sales, then their power is high

Porter’s Five Forces Model: Threat of substitutes

Companies from outside an existing industry which seek to provide alternatives not provided
by companies in the existing industry.

Factors:

Relative price / performance trade-offs

● The risk of substitutes is high where existing products or services offer favorable
attributes at low cost.

Switching costs

● The threat of substitution is low where switching costs - from one product or service
that customers are currently using – are high.

Profitability

● A reliable substitute product that is profitable may displace or disrupt existing

products.

Porter’s Five Forces Model: Degree of rivalry among existing competitors

● no rivalry = a monopoly situation

● the intensity of competition within an industry is determined by:

● Marketgrowth
● When strong, market growth in the existing industry reduces rivalry and
thereby the probability of retaliation

● Cost structure
● When fixed costs are high, over-capacity occurs during demand depression =
fight for market share by existing rivals.

● Barriers to exit
● For low-profit companies, barriers to exit include asset specialization, fixed
costs of exit, emotional attachment or the product’s market importance in a
company’s overall strategic intentions

Strengths

it is a good technique for understanding industry evolution, as it will allow you to identify
windows of opportunity to capitalize on changes in any of the five forces
 ● it helps to identify the main sources of competition and their respective strengths and
to build a strong market position based on competitive advantage
● change in one force will affect the other forces, which may result in the alteration of
an industry’s structure and its boundaries

Weaknesses

● the Five Forces model is primarily concerned with what makes some industries more
attractive — but it does not directly address:
● why or how some companies are able to get into advantageous positions in the first
place and
● why some are able to sustain these positions over time while others are not.
● it underestimates the core competencies or capabilities that may serve as a
company’s competitive advantage in the long term.

Red Ocean / Blue Ocean Strategy

● Developed by Chan KIM et Renee MAUBORGNE

Red oceans:

● known market space

● industry boundaries defined and accepted
● competitive rules of game known
● companies try to outperform rivals; cutthroat competition
● as market space gets crowded, prospects for profit and growth reduced
● products become commodities
● red ocean strategy is a market-competing strategy

Blue oceans:

● unknown market space

● undefined market space, demand creation, opportunity for highly profitable growth
● most are created from within red oceans by expanding existing industry boundaries
● rules of game waiting to be set
● competition irrelevant
● blue ocean strategy is a market-creating strategy
● Creators of blue oceans follow value innovation
● Value Innovation:
○ Equal emphasis on value and innovation
○ Drives down costs while driving up buyers’ value
○ Uses a whole-system approach
○ Follows reconstructionist view
● create uncontested market space
● make the competition irrelevant
● create and capture new demand
● break the value-cost trade-off
● align the whole system of a firm’s activities in pursuit of differentiation and low cost
 ● “the only way to beat the competition is to stop trying to beat the competition!”

Red oceans strategy

● Compete in existing market space

● Beat the competition
● Exploit existing demand
● Make the value-cost trade-off
● Align the whole system of a firm’s activities with its strategic choice of differentiation
or low cost

Internal analysis 1
Introduction:

● External strategic analysis informs us about the environment in which firms compete.
This analysis informs us about what firms might do.
● But, no strategy can be defined without considering the organization. Looking inside
the organization helps us understand what a firm can do.
● Internal analysis is the systematic evaluation of the key internal features of an
organization.
● Internal analysis provides a comparative look at a firm’s capabilities:
● what are the firm’s strengths?
● what are the firm’s weaknesses?
● how do these strengths & weaknesses compare to competitors?
● Why does internal analysis matter?
● to determine if its resources and capabilities are likely sources of competitive
advantage
● to establish strategies that will exploit any sources of competitive advantage

Creating value

● By exploiting their core competencies or competitive advantages, firms create value:

● Value is measured by
● A product’s performance characteristics
● The product’s attributes for which customers are willing to pay
● Firms create value by innovatively bundling and leveraging their resources and
capabilities

Resources

● Resources are assets employed in the activities and processes of the organization
● Cover a spectrum of individual, social and organizational phenomena
● They can be obtained externally or can be internally generated.
●
● Resources can be tangible or intangible.

Resources

● Tangible resources
 ● can be readily seen, and quantified

Financial resources The firm’s borrowing capacity

The firm’s ability to generate internal funds
Organizational Resources The firm’s formal reporting structure and its formal
planning, controlling, and coordinating systems
Physical Resources Sophistication and location of a firm’s plant and equipment
Access to raw materials

Technological Resources Patents, trade-marks, copyrights, and trade secrets

● Intangible resources
● that are difficult to see, or quantify

Human resources Knowledge, Trust, Managerial capabilities, Organizational

routines
Innovation Resources Ideas, Scientific capabilities, Capacity to innovate

Reputational Resources Reputation with customers

Brand name
Perceptions of product quality, durability, and reliability
Reputation with suppliers

Capabilities

● are what the organization can do based on the resources it possesses

● resources refer to what an organization owns, capabilities refer to what the
organization can do
● firm’s ability to bundle, manage, exploit resources in a manner that provides value
added
● Emerge over time through complex interactions among tangible and intangible
resources
● Often are based on developing, carrying and exchanging information and knowledge
through the firm’s human capital
● The foundation of many capabilities lies in:
● The unique skills and knowledge of a firm’s employees
● The functional expertise of those employees
● Capabilities are often developed in specific functional areas or as part of a functional
area

Functional areas Capabilities Examples

 Distribution Effective use of logistics management Carrefour
techniques
Human resources Motivating, empowering, and retaining Microsoft
employees

Marketing Effective promotion of brand-name products Procter & Gamble

Effective customer service
Innovative merchandising

Manufacturing Miniaturization of components and products Sony

- 4 criteria (VRIN)

Valuable Help a firm neutralize threats or exploit opportunities

Rare Are not possessed by many others

Inimitable Historical: A unique and a valuable organizational culture or brand

name
Ambiguous cause: The causes and uses of a competence are
unclear
Social complexity: Interpersonal relationships, trust, and friendship
among managers, suppliers, and customers

Nonsubstitutable No strategic equivalent

Core competencies

● Resources and capabilities that serve as a source of a firm’s competitive advantage:

● Distinguish a company competitively and reflect its personality
● Emerge over time through an organizational process of accumulating and learning
how to deploy different resources and capabilities
● Activities that a firm performs especially well compared to competitors
● Activities through which the firm adds unique value to its goods or services over a
long period of time

Value chain analysis

 ● Developed by Michael Porter in 1985
● Allows the firm to understand the parts of its operations that create value and those
that do not
● Value can be added in two ways:
● By producing products at a lower cost than competitors
● By producing products of greater perceived value than those of competitors.
● The value chain is the chain of activities which results in the final value of a
business’s products.
● Value added, or margin is indicated by sales revenue minus production costs.
● Primary activities:
● They contribute directly to production of good or services and organization’s
provision to customers
● Support activities
○ Provide the support necessary for the primary activities to take place

The value-creating potential of primary activities

Inbound logistics

● Activities used to receive, store, and disseminate inputs to a product (materials

handling, warehousing, inventory control, etc.)

Operations

● Activities necessary to convert the inputs provided by inbound logistics into final
product form (machining, packaging, assembly, etc.)

Outbound logistics

● Activities involved with collecting, storing, and physically distributing the product to
customers (finished goods warehousing, order processing, etc.)

The value-creating potential of primary activities

Marketing and sales

 ● Activities completed to provide means through which customers can purchase
products and to induce them to do so (advertising, promotion, distribution channels,
etc.)

Service

● Activities designed to enhance or maintain a product’s value (repair, training,

adjustment, etc.)

Each activity should be examined relative to competitors’ abilities and rated as superior,
equivalent or inferior
The value-creating potential of support activities

Procurement

● Activities completed to purchase the inputs needed to produce a firm’s products (raw
materials and supplies, machines, laboratory equipment, etc.)

Technological development

● Activities completed to improve a firm’s product and the processes used to

manufacture it (process equipment, basic research, product design, etc)

Human resource management

● Activities involved with recruiting, hiring, training, developing, and compensating all
personnel

The value-creating potential of support activities

Firm infrastructure

● Activities that support the work of the entire value chain (general management,
planning, finance, accounting, legal, government relations, etc.)
● Effectively and consistently identify external opportunities and threats
● Identify resources and capabilities
● Support core competencies

Each activity should be examined relative to competitors’ abilities and rated as superior,
equivalent or inferior
Internal analysis 2
SWOT Analysis

● Strengths, Weakness, Opportunities & Threats

●
● It captures the concept of strategic fit between a company’s internal environment (its
resources and capabilities) and its external environment.
●
● Since external analysis precede internal analysis, the aim is to identify the extent to
which strengths and weaknesses are relevant to, or capable of dealing with, the
changes taking place in the business environment.

Strengths:

● What are a firm’s advantages?

● What does a firm do well?
● What relevant resources does a firm have?
● What do other people see as firm’s strengths?

Examples:

● A strategy supported by good skills and expertise in key areas.

● A strong financial position; ample financial resources to grow the business.
● Strong brand name, image of company, reputation.
● A widely recognized market leader and an attractive customer base.
● Ability to take advantage of economies of scale/scope or learning and experience
curve effects.
● Proprietary technology/skills advantage, important patents.

Weaknesses:

● What could a firm improve?

● What does a firm do badly?
● What should a firm avoid?

Examples:

● No clear strategic direction.

● Obsolete facilities/equipment/processes.
● A weak balance sheet(poor financial capabilities), debt burdened.
● Higher overall unit costs.
● Missing some key skills or competencies/lack of management depth.
● Poor sales/profits/growth.
● Plagued with internal operating/manufacturing problems.

Opportunities:

● Where are the good opportunities a firm is facing?

●
● What are the interesting trends a firm is aware of?
Examples:

● Serving additional customer groups or expanding into new geographic markets or

product segments.
● Expanding the company’s product line to meet a broader range of customer needs.
● Integrating forward or backward.
● Falling trade barriers in attractive foreign markets.

Threats:

● What obstacles do you face?

● What is/are your competitor(s) doing?
● Are the required specifications for your job, products or services changing?
● Is changing technology threatening your position?
● Do you have bad debt/cash-flow problems?
● Could your weaknesses seriously threaten your business?

Examples:

● Likely entry of potential new competitors.

● Loss of sales/profits to substitute offerings.
● Slowdowns in market growth.
● Costly new regulatory requirements.
● Growing bargaining power of customers or suppliers.
● A shift in customer needs and tastes away from the main industry offerings.
● Vulnerability to changes in the country’s macro economic environment.

SWOT Analysis : steps

1. Gather as much information as you can

2. List factors in each of the 4 categories (S, W, O , T)
3. Match internal factors to external ones

4.The SWOT matrix

Dangers in a SWOT analysis:

● Listing: SWOT analysis is not about generating very long lists of apparent strengths,
weaknesses, opportunities and threats; what matters is to be clear about what is
really important and what is less important.
● Lack of prioritization of various factors

Business level strategy

Introduction:

● Why do some firms outperform others and enjoy such advantages over time?
● How they attain and sustain competitive advantages?
● This is related to their business level strategy
● Business-level strategy addresses the question of how a firm will compete in a
particular industry

Defining a business: Derek Abell’s framework

Introduction
 ● A generic strategy is a general way of positioning a firm within an industry
● Focusing on generic strategies allows executives to concentrate on the core
elements of firms’ business-level strategies.

Types of generic strategies:

● two competitive dimensions are the keys to business-level strategy

● firm’s source of competitive advantage (how the firm tries to gain an edge on
rivals)
● keeping costs down
● offering something unique in the market
● firm’s scope of operations
● the firm tries to target customers in general
● it seeks to attract just a segment of customers

● Firms that are not able to offer low prices or appealing unique features are referred to
as “stuck in the middle”
● A generic strategy has a very strong impact on firm’s organization:
● marketing and sales for a differentiation strategy often requires extensive effort
 ● firms that follow cost leadership can be successful with limited marketing efforts

Cost leadership:

● A firm following a cost leadership strategy offers products or services with acceptable
quality and features to a broad set of customers at a low price

● What make this strategy possible?

● economies of scale: costs of offering goods and services decrease as a firm
is able to sell more items
● demand price concessions from suppliers
● spend little on advertising, market research, or research and development
● reorganize firm’s activities for efficiency gains, etc.

Advantages:

● The firm is well positioned to withstand price competition from rivals

● It helps create barriers to entry that protect the firm—and its existing
rivals—from new competition
● It help firms to get bigger market share because a large portion of potential
customers is interested in low prices & acceptable quality
● Provides more flexibility to cope with demands from powerful suppliers who
want to increase input costs
● Puts the firm in a favorable position with respect to substitute products
● It protects the firm against powerful buyers

Disadvantages:

● need for high sales volume

● significant upfront investments in production and/or distribution capacity
● increase in the cost of the inputs on which the advantage is based
● the strategy can be imitated too easily

Differentiation:

● a firm competes based on uniqueness rather than price and is seeking to attract a
broad market
● convince customers to pay a premium price for its good or services by providing
unique and desirable features
 ● differentiation strategy depends on not only offering unique features but also
communicating the value of these features to potential customers.
● => advertising in general and brand building in particular are important to this
strategy
● Forms:
● Prestige or brand image
● Technology
● Innovation
● Features
● Customer service
● Dealer network

dvantages:

● Creates higher entry barriers due to customer loyalty

● Getting premium prices from customers = strong profit margins
● Provides higher margins that enable the firm to deal with supplier power
● Reduces buyer power because buyers lack suitable alternatives
● Establishes customer loyalty and hence less threat from substitutes

Disadvantages:

● Uniqueness that is not valuable

● Too much differentiation
● Too high a price premium
● Differentiation that is easily imitated
● Dilution of brand identification through product line extensions
● Perceptions of differentiation may vary between buyers and sellers

Focused cost leadership:

● competing based on price to target a narrow market

● not necessarily charge the lowest prices in the industry, but low prices relative to
other firms that compete within the target market

● Definition of target market:

● demographics (e.g. Jennyfer & young women)
● sales channel used to reach customers (e.g. Papa Murphy’s)

Focused differentiation:

● requires offering unique features that fulfill the demands of a narrow market
 ● Definition of target market:
● demographics (e.g. Mercedes-Benz & wealthy people)
● sales channel used to reach customers (e.g. Oneplus)

Focus strategies:

Advantages:

● Creates higher entry barriers due to cost leadership or differentiation or both

● Can provide higher margins that enable the firm to deal with supplier power
● Reduces buyer power because the firm provides specialized products or services
● Focused niches are less vulnerable to substitutes

Disadvantages:

● limited demand available within a niche

● when the target market is being well served, expansion to other markets might be the
only way to expand (but this requires developing a new set of skills)
● the niche could disappear or be taken over by larger competitors

Corporate level strategy

Introduction:

Definition:

● Specific actions a firm takes to gain an advantage by selecting and managing a

group of different businesses

2 main concerns with corporate-level strategy:

● What businesses the firm should be in

● How the firm should manage different business units

Diversification:
 ● Diversification involves using expertise and knowledge gained in one business to
diversify into a business where it can be used in a related way

Levels of diversification:

Low level of diversification

● Single-business strategy
● Dominant-business strategy

Moderate-to-high levels of diversification

● Related constrained diversification strategy

● Related linked diversification strategy

Very high levels of diversification

● Unrelated diversification

Single-business strategy

● Firm generates 95% or more of its sales revenue from its core business area
● Example (pre-2008): Wm. Wrigley Jr. Company - the world’s largest producer of
chewing and bubble gums
● Post-2008 - Acquired by Mars Inc.

Dominant-business strategy

● Firm generates 70-95% of total sales revenue within a single business area
● Example: UPS generated 74% of revenue from U.S. package delivery business;
17% from international package business; 9% from non-package business

Moderate-to-high levels of diversification

Related constrained diversification strategy

● < 70% of revenue comes from the dominant business

● There are direct links between the firm's businesses (e.g., share products,
technology; marketing; and distribution linkages)
● Example: Procter & Gamble

Moderate-to-high levels of diversification

Related linked diversification strategy

● < 70% of revenue comes from the dominant business

● Mix between related and unrelated diversification
● Linked firms share fewer resources and assets among their businesses
● Interested in constantly adjusting the mix in their portfolio of businesses and how to
manage the businesses
● Example: Mars

Very high levels of diversification

Unrelated diversification

● Less than 70% of revenue comes from dominant business

● No relationships between businesses
● Often called conglomerates
● Example:

Reasons for diversification: Value-creating reasons

● develop resources that will enhance strategic competitiveness

● Two main ways diversification strategies can create value
● Operational relatedness: sharing activities between businesses
● Ex: P&G’s paper towel business and baby diaper business both use paper products
as inputs; the firm’s paper production plant produces inputs for both businesses
● Corporate relatedness: transferring core competencies into business
● Ex: Honda’s competence in engine design and manufacturing to motorcycles,
lawnmowers, cars and trucks
● Often achieved via transferring or hiring personnel with competencies

Economies of scope
 ● cost savings created by sharing its resources/capabilities or transferring core
competencies of one businesses to another of its businesses

Market power

● when a firm sells its products above competitive levels and/or reduces the cost of its
Value Chain activities below competitive levels
● influenced by a firm’s level of vertical integration (exists when a company produces
its own inputs (backward integration) or owns its own source of output distribution
(forward integration)

Financial economies

● cost savings realized via improved allocations of financial resources based on

investments inside or outside the firm—2 main types
● efficient internal capital allocations can reduce risk of the firm’s portfolio
● restructuring of acquired assets

Reasons for diversification: Value-reducing reasons

Diversifying managerial employment risk

● If one business fails, the whole firm will stay intact

Increasing managerial compensation

● Larger firms are more complex

● Generally mean larger compensation packages

Reasons for diversification: Value-neutral reasons

External value-neutral reasons

● antitrust regulation and tax laws

Internal value-neutral reasons

● low performance
● uncertain future cash flows
● firm risk reduction
● resources and diversification
● excess tangible resources like plant and equipment, sales force, etc.
Benefits of diversification:

● reduce earnings volatility

● minimize risk
● move firm into attractive industries
● prolong “life” of firm
● improve long-term performance
● capture synergies and strategic “fit” between businesses
● steer corporate resources

Portfolio analysis

● a Strategic Business Unit (SBU) is a part of an organization for which there is a

distinct external market for goods or services that is different from another SBU
● the SBUs are the natural ‘grouping’ of part of a corporation
● the SBU has a range of related products/services which has similar technologies and
production processes
● the products/services are sold in similar or related market segments
● the production/services are sold against a well-defined set of competitors
● a Strategic Business Unit (SBU) is a part of an organization for which there is a
distinct external market for goods or services that is different from another SBU
● an SBU is managed by an SBU manager, largely as an independent unit
● the SBU has its own set of goals and strategies
● each SBU in a particular organization should be able to operate independently of any
other SBU
● the sum of SBU’s represents a firm’s portfolio.

● The management views its product lines and business units as a series of
investments from which it expects a profitable return. The process by which
management evaluates the products and business units that make up the company.
This involves:

● assessing the attractiveness of the industries the firm competes in

● assessing the competitive strength of a firm's business units
● checking the competitive advantage potential of sharing activities and/or transferring
competencies across business units
● checking the potential for capturing financial economies

Best case scenario:

● All of a firm's business units compete in attractive industries and have strong
competitive positions

and

● There are ample opportunities to capture economies of scope and/or financial

economies
● Useful tools for portfolio analysis include:
● BCG matrix, Ansoff matrix

BCG Matrix

● invented in the early 1970’s by the Boston Consulting Group

● the BCG model can be used to determine what priorities should be given in the
product portfolio of a business unit.

Stars

● business units with a high market share in a fast-growing industry

● generate lots of cash but require high funding to maintain their growth rate
● they can become cash cows or dogs when growth rate decelerates
Cash cows

● business units with high market share in a slow-growing industry

● because of the low growth, promotion and placement investments are low
● need little investment to maintain the business, they are excellent cash generators
● resemble products in mature stage of life cycle.
● part of profit they make often used to finance new products.

Question marks

● business units with a low market share in a high-growth market. Often new products
where buyers have yet to discover them
● most of businesses start at this point
● need high investment to gain market share
● have a potential to gain market share and become stars, they can also become cash
cows, but can also evolve in dogs. The best way to handle Question Marks is to
either invest heavily in them to gain market

Dogs

● business units with a low market share in a mature, slow-growing industry

● form a pure financial point of view, they don’t bring much to the company. Why
maintaining them?
● contribute to other business units &
● they can provide jobs for employees
 ● firms don’t want lots of dogs
● firms need to avoid lots of stars, as they drain resources
● firms need to balance with cash cows

BCG Matrix: limitations

● too simplistic (highs and lows to make just four categories)

● the link between market share and profitability isn’t necessarily strong. Low-share
businesses can be profitable, too (and vice versa)
● market share is only one aspect of overall competitive position
● growth rate only one aspect of industry attractiveness. High-growth market may not
always be the best for every business unit or product line
● it considers the product line or business unit only relation to one competitor: the
market leader. It misses small competitors with fast-growing market share

Ansoff’s Matrix

● created by Igor Ansoff, Russian-American professor of strategy

● detailed in an article intitled “Strategies for diversification”, published in 1957 in the
Harvard Business Review

How to do a portfolio analysis?

● construct a summary of the industry and competitive environment of each business

units.
● appraising the strength and competitive position of each business unit.
Understanding how each business unit ranks against its rivals on the key factors for
competitive success.
● identifying the external opportunities, threats and strategic issues specific to each
business units.
● determining how much corporate financial support is needed to fund each unit’s
business strategy and what corporate skills and resources could be deployed to
boots the competitive strength of various business units.
● comparing the relative attractiveness of the businesses in the corporate portfolio.
Compare the businesses on various historical and projected performance measures -
sale growth, profit margin, return on investment, etc.
● checking the corporate portfolio to ascertain whether the mix of businesses is
adequately “balanced”
Advantages of portfolio analysis:

● it encourages top management to evaluate each of the businesses individually and

set objectives and allocate resources for each
● it stimulates the use of externally oriented data to supplement management’s
judgment
● it raises the issue of cash flow availability for use in expansion and growth
● its graphic depiction facilitates communication

Limitations of portfolio analysis:

● it is not easy to define product/market segments

● it suggests the use of standard strategies that can miss opportunities or be
impractical
● it provides an illusion of scientific rigor when in reality positions are based on
subjective judgments
● it is not always clear what makes an industry attractive or where a product is in its life
cycle

Organizational structures
Organizational structure specifies:

● The firm’s formal reporting relationships, procedures, controls, and authority and
decision-making processes
● The work to be done and how to do it, given the firm’s strategy or strategies

It is critical to match organizational structure to the firm’s strategy.

Effective structures provide stability & flexibility

Structural stability provides:

● The capacity required to consistently and predictably manage daily work routines

Structural flexibility provides for:

● The opportunity to explore competitive possibilities

● The allocation of resources to activities that shape needed competitive advantages

Relationships between strategy and structure

Strategy and structure have a reciprocal relationship:

● Structure flows from or follows the selection of the firm’s strategy but …
● Once in place, structure can influence current strategic actions as well as choices
about future strategies.

Evolutionary patterns of structure and organizational structure

Firms grow in predictable patterns:

 ● First by volume
● Then by geography
● Then integration (vertical, horizontal)
● And finally through product/business diversification

A firm’s growth patterns determine its structural form.

● All organizations require some form of organizational structure to implement and

manage their strategies
● Firms frequently alter their structure as they grow in size and complexity
● Three basic structure types:
● Simple structure
● Functional structure
● Multidivisional structure (M-form)

Strategy and structure: simple structure

● Owner is also manager

● makes all major decisions directly.
● monitors all activities.
● Staff
● serves as an extension of the manager’s supervisor authority.
● Matched with focus strategies and business-level strategies
● commonly complete by offering a single product line in a single geographic market.
● Growth creates
● complexity
● managerial and structural challenges
● Owner-managers
● commonly lack organizational skills and experience.
● become ineffective in managing the specialized and complex tasks involved with
multiple organizational functions.

Strategy and structure: functional structure

● Chief Executive Officer (CEO)

 ● limited corporate staff
● Functional line managers in dominant organizational areas of:
● production, marketing, engineering, accounting, R&D, human resource management
● Supports use of business-level strategies and some corporate-level strategies
● single or dominant business with low levels of diversification

● Differences in orientation among organizational functions can:

● impede communication and coordination.
● increase the need for CEO to integrate decisions and actions of business functions.
● facilitate career paths and professional development in specialized functional areas.
● cause functional-area managers to focus on local versus overall company strategic
issues.

Strategy and structure: multidivisional structure

● Strategic Control
● Operating divisions function as separate businesses or profit centers
● Top corporate officer delegates responsibilities to division managers
● For day-to-day operations
● For business-unit strategy
● Appropriate as firm grows through diversification

● Three major benefits

● corporate officers are able to more accurately monitor the performance of each
business, which simplifies the problem of control.
 ● facilitates comparisons between divisions, which improves the resource allocation
process.
● stimulates managers of poorly performing divisions to look for ways of improving
performance.

Organizational structure characteristics

● Three important structural characteristics:

● Specialization (number and types of jobs)
● Centralization (decision-making authority)
● Formalization (formal rules and work procedures)

Specialization

● identify the specific jobs required and designate who will do what
● small companies have fewer employees so less specialization
● as organizations grow, they can hire more employees and become more efficient
through specialization

Centralization:

● Distribution of authority
● Centralization
● top managers reserve most of the decision making rights for themselves
● Decentralization
● lower- and middle-level managers have some discretion in making decisions on their
own
● Tall organizational structure
● many layers of management
● too many = rigidity and bureaucracy
● Flat organizational structure
● few layers of management
● too few = chaos and inefficiency

Centralization: span of control

● The number of subordinates that a manager is responsible for supervising

● Wide span = many subordinates. Increase organizational efficiency as employee
autonomy is encouraged
● Narrow span = very few subordinates. Expense of additional layers of management.
Increased complexity of vertical communication. Employee autonomy is discouraged
● Complicated tasks require more supervision and a narrow span of control
Formalization

● the extent to which an organization’s policies, procedures, job descriptions, and rules
are written and explicitly articulated.

Business ethics & CSR

Business ethics

“Business ethics are the accepted principles of right or wrong governing the conduct of
businesspeople” (Hill & Hult, 2016:129)

Ethical dilemma:

● situation which involves conflicts between moral requirements. There is no immediate

ethically acceptable situation.
● e.g. bribing practice vs. performance evaluation

illegal labor vs. economic subsistence for family

Determinants of unethical behavior

Corporate social responsibility (CSR)

● “Consideration of, and response to, issues beyond the narrow economic, technical,
and legal requirements of the firm to accomplish social benefits along with the
traditional economic gains which the firm seeks.” (Peng, 2016:554)
● “A concept whereby companies integrate social and environmental concerns in their
business operations and in their interaction with their stakeholders on a voluntary
basis.” (European Commission)

Archie B. Carroll’s four part definition

 ● CSR encompasses the economic, legal, ethical and discretionary (philanthropic)
expectations that society has of organizations at a given point in time

Responsibility Societal Expectation Examples

Economic Required Be profitable. Maximize sales, minimize

costs, etc.
Legal Required Obey laws and regulations.

Ethical Expected Do what is right, fair and just.

Discretionary Desired/ Be a good corporate citizen.

(Philanthropic) Expected

Stockholder, shareholder, stakeholder

● Stockholder = shareholder
● individual / group who owns at least one share of stock in a company and have
certain rights and privileges
● Stakeholder
● individuals / groups who benefit from or are harmed by, and whose rights are violated
or respected by corporate actions

Firm’s stakeholders
Primary and secondary stakeholder groups

● Primary stakeholder groups are those on whom the firm relies for survival and
prosperity
● Secondary stakeholder groups are defined as “those who influence or affect, or are
influenced or affected by, the corporation, but they are not engaged in transactions
with the corporation and are not essential for its survival”

Key questions in stakeholder management

● Who are our stakeholders?

● What are our stakeholders’ stakes?
● What opportunities and challenges do the stakes and stakeholders present?
● What economic, legal, ethical, and philanthropic responsibilities does our firm have?
● What strategies or actions should our firm take to best manage stakeholder
challenges and opportunities?

CSR: responsibility? responsiveness? performance?

Corporate social… Emphasizes…

Responsibility obligation, accountability

Responsiveness action, activity

Performance outcomes, results

Corporate social responsiveness

● the result of a critique of responsibility perspective

● responsibility: imply more of a state or condition of having assumed an obligation
● responsiveness connotes a dynamic, action-oriented condition
● responsiveness orientation enables organizations to justify and apply their social
responsibilities without spending time with determining what their true responsibilities
are before they take any action.

Responsiveness positions
Reaction:
 ● the corporation denies any responsibility for social
issues.
● founded by Martin Shkreli in 2015
● Acquired the patent for pyrimethamine and
increased price from $13.50/pill to $750/pill
● “If there was a company that was selling an Aston
Martin at the price of a bicycle, and we buy that
company and we ask to charge Toyota prices, I
don't think that that should be a crime."
Defense:

● the corporation defends itself against the criticism, doing the very least that
seems to be required
● The firm was accused of tolerating sweatshops owned by subcontractors
● “[Nike’s] initial attitude was, 'Hey, we don't own the factories. We don't control
what goes on there.' Quite frankly, that was a sort of irresponsible way to
approach this. (Todd McKean, 2001)

Accomodation:

● the corporation accepts responsibility/criticism and does what is demanded of

it by relevant groups
● late 1990s, protests at over 40 universities that held contracts with Nike
● 1999, Nike adopted a code of conduct to govern its suppliers
● Nike conducted more than 600 factory audits to assure that its standards
were being met.

Proaction:

● the corporation seeks to go beyond what is expected

Corporate social performance

● what matters is what companies are able to accomplish

● performance involves:
● acceptance of social responsibility
● adoption of a responsiveness philosophy
● articulation of specific stakeholders
Carroll’s corporate social

performance (CSP) model

The business case for CSR

● why should firms pay attention to CSR & dedicate valuable resources to it?
● the upside benefits:
● sustainability requires innovation and entrepreneurship that can help a firm to
move ahead of competitors through new ideas, lower costs, and stronger
intangibles such as trust and credibility. Companies that manage the
environment carefully can even carry less risk, resulting in lower lending
rates.
● the downside risks:
● companies that do not care for CSR run the risk of incurring society’s wrath
once they step over the line
● even the largest of firms cannot withstand negative public reactions
indefinitely
● the right thing to do:
● things that on the surface appear to be costly are necessary
● sustainability is not a luxury, nor is there really a choice

Arguments against CSR: “Ownership Theory of the Firm”

● Firm is the property of its owners

● Firms’ purpose is to maximize returns to shareholders
● Shareholders’ interests are paramount and take precedence over all others
● Social issues are not the concern of businesses
● Managers do not have the expertise to make social decisions – they are oriented
towards finance and operations
● Business already has enough power – if given decision making power in the social
domain, businesses will be given too much power
● The ability to compete in a global marketplace could be limited

Arguments supporting CSR: “Stakeholder Theory of the Firm”

● The corporation serves a broader purpose, to create value for society, not just for
itself
● Corporations have multiple obligations, all “stakeholder” groups must be taken into
account
● The rise of large corporations has created social problems and they should be
responsible for solving these problems: allows business to be part of the solution
● Prevents unethical conduct which can have serious reputation and financial costs
● Addresses issues by being proactive and using business resources and expertise
● The public strongly supports it