Module Six

Module- Six

Formulating Long-Term Objectives and Grand Strategies

Grand Strategies Grand strategies are also called strategic thrusts.  They provide basic direction for specific strategic actions and functional tactics.  Some grand strategies are used together and reinforce each other and some are usually employed singly. 

Grand Strategy 



General plan of major action to achieve longterm goals Falls into three general categories 1. Growth 2. Stability A separate grand strategy can be 3. Retrenchment defined for global operations

The Grand Strategy Matrix Rapid Market Growth

1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation Weak Competitive Position

1. Retrenchment 2. Concentric diversification 3. Horizontal diversification 4. Conglomerate diversification 5. Divestiture 6. Liquidation

I II IV III

1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification

Strong Competitive Position

1. Concentric diversification 2. Horizontal diversification `3. Conglomerate diversification 4. Joint ventures

Slow Market Growth

Grand Strategy Selection Matrix Overcome weaknesses

Internal (redirected resources within the firm)

Vertical integration Conglomerate diversification

Turnaround or retrenchment Divestiture Liquidation

II I III IV Concentrated growth Mkt. Development Prod. Development Innovation

Horizontal integration Concentric diversification Joint venture

Maximize strengths

External (acquisition or merger for resource capability)

Diversification and Corporate Strategy 

A company is diversified when it is in two or more lines of business that operate in diverse market environments



Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-ofbusiness 

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

Four Main Tasks in Crafting Corporate Strategy 

Pick new industries to enter and decide on means of entry



Initiate actions to boost combined performance of businesses



Pursue opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage



Establish investment priorities, steering resources into most attractive business units

Types of Long-Term Objectives

      

Profitability Productivity Competitive position Employee development Employee relations Technological leadership Public responsibility

Qualities of Long-Term Objectives

Achievable Understandable

Acceptable Criteria used in preparing objectives

Flexible Measurable

Suitable Motivating

Types of Strategies Forward Integration

Vertical Integration Strategies

Backward Integration

Horizontal Integration

Types of Strategies Market Penetration

Intensive Strategies

Market Development

Product Development

Types of Strategies Concentric Diversification

Diversification Strategies

Conglomerate Diversification

Horizontal Diversification

Types of Strategies Retrenchment

Defensive Strategies

Divestiture

Liquidation

Types of Grand Strategies   

 

Concentrated growth Market development Product development Innovation Horizontal integration





  

Vertical integration Concentric diversification Conglomerate diversification Turnaround Divestiture Liquidation

Characteristics of a Concentrated Growth Strategy 





Involves focusing resources on the profitable growth of a single product, in a single market, with a single dominant technology Rationale – Firm develops and exploits its expertise in a delimited competitive arena Determinants of competitive market success • Ability to assess market needs • Knowledge of buyer behavior • Customer price sensitivity • Effectiveness of promotion

Specific Options for Selected Grand Strategies Concentration (Increasing use of present products in present markets) Increasing present customers’ rate of use

1. a. b. c. d.

Increasing size of purchase Increasing the rate of product obsolescence Advertising other uses Giving price incentives for increased use

Attracting competitors’ customers

2. a. b. c.

Establishing sharper brand recognition Increasing promotional effort Initiating price cuts

Attracting nonusers to buy the product

3. a. b. c.

Introducing trial use thru’ sampling, price incentives, etc. Pricing up or down Advertising new uses

Strategies of Market and Product Development 

Market development • Consists of marketing present products, often with only cosmetic modifications to customers in related market areas by  



Adding channels of distribution or Changing content of advertising or promotion

Product development • Involves substantial modification of existing products or creation of new but related products • Based on penetrating existing market by  

Incorporating product modifications into existing items or Developing new products connected to existing products

Market Development (Selling present products in new markets.) 1. Opening additional geographic markets a. Regional expansion b. National expansion c. International expansion 2. Attracting other market segments a. Developing product versions to appeal to other segments b. Entering other channels of distribution c. Advertising in other media

Product Development (Developing new products for present markets) Developing new product features

1. a. b. c. d. e. f. g. h.

2. 3.

Adapt (to other ideas, developments) Modify (change color, motion, sound, odor, form, shape) Magnify (stronger, longer, thicker, extra value) Minify (smaller, shorter, lighter) Substitute (other ingredients, process, power) Rearrange (other patterns, layout, sequence, components) Reverse (inside out) Combine (blend, alloy, assortment, ensemble, combine units, etc.)

Developing quality variations Developing additional models and sizes (product proliferation)

Innovation Strategy

Involves creating a new product life cycle, thereby making similar existing products obsolete

Horizontal and Vertical Integration Strategies





Horizontal Integration Based on growth via acquisition of one or more similar firms operating at the same stage of the productionmarketing chain Vertical Integration Involves acquiring firms •

•

That supply acquiring firm with inputs (backward integration) or Are customers for firm’s outputs (forward integration)



The term horizontal integration describes a type of ownership and control.

Horizontal integration 



Horizontal integration in marketing is much more common than vertical integration is in production. Horizontal integration occurs when a firm is being

taken over by, or merged with, another firm which is in the same industry and in the same stage of production as the merged firm, e.g. a car manufacturer merging with another car manufacturer. In this case both the companies are in the same stage of production and also in the same industry.

Vertical integration 



Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. However to horizontal integration, which is a consolidation of many firms that handle the same part of the production process, vertical integration is typified by one firm engaged in different parts of production (e.g. growing raw materials, manufacturing, transporting, marketing, and/or retailing).



There are three varieties: backward (upstream) vertical integration, forward (downstream) vertical integration, and balanced (horizontal) vertical integration.

vertical integration 





A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by centralizing the production of cars and car parts.





A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold. Balanced vertical integration means a firm controls all of these components, from raw materials to final delivery.

Vertical and Horizontal Integrations

Textile producer

Textile producer

Shirt manufacturer

Shirt manufacturer

Clothing store

Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integration Acquisitions or mergers of competing businesses are horizontal integrations

Motivations for Diversification   

     

Increase firm’s stock value Increase growth rate of firm Investment is better use of funds than using them for internal growth Improves stability of earnings and sales Balance or fill out product line Diversify product line Acquire a needed resource quickly Achieve tax savings Increase efficiency and profitability

Diversification Strategies 





Concentric Diversification Involves acquisition of businesses related to acquiring firm in terms of technology, markets, or products Conglomerate Diversification Involves acquisition of a business because it represents a promising investment opportunity • Primary motivation is profit pattern of venture Difference between the approaches • Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes profits for each individual unit

What Is Unrelated  Involves diversifying into businesses with Diversification? 

No strategic fit



No meaningful value chain relationships



No unifying strategic theme



Basic approach – Diversify into any industry where potential exists to realize good financial results



While industry attractiveness and cost-of-entry tests are important, better-off test is secondary

Turnaround Strategy

Involves a concerted effort over a period of time to fortify a firm’s distinctive competencies, returning it to profitability

Terms Used in Turnaround Strategy 





A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions The immediacy of the resulting threat to company survival posed by the turnaround situation is known as situation severity Turnaround responses typically include two stages of strategic activities  Retrenchment  Recovery response

Divestiture and Liquidation Strategies Divestiture Strategy • Involves selling a firm or a major component of a firm • Reasons for divestiture  Partial mismatches between acquired firm and parent firm  Corporate financial needs  Government antitrust action Liquidation Strategy • Involves selling parts of a firm, usually for its tangible asset value and not as a going concern

The Strategy of Bankruptcy 



Two approaches • Liquidation – Involves complete distribution of a firm’s assets to creditors, most of whom receive a small fraction of amount owed • Reorganization – Involves creditors temporarily freezing their claims while a firm reorganizes and rebuilds its operations more profitably Advantage of a reorganization bankruptcy • Proactive option offering maximum repayment of a firm’s debt in the future if a recovery strategy is successful

Corporate Combination Strategies





Joint Ventures Involves establishing a third company (child), operated for the benefit of the co-owners (parents) Strategic Alliance Involves creating a partnership between two or more companies that contribute skills and expertise to a cooperative project • Exists for a defined period • Does not involve the exchange of equity

Corporate Combination Strategies (contd.) 





Consortia are defined as large interlocking relationships between businesses of an industry. In Japan such consortia are known as keiretsus, in South Korea as chaebols A Japanese keiretsu is an undertaking involving up to 50 different firms that are joined around a large trading company or bank and are coordinated through interlocking directories and stock exchanges Chaebols are typically financed through government banking groups and largely are run by professional managers trained by participating firms expressly for the job

The Top Five Strategic Reasons for Outsourcing 1. 2. 3. 4. 5.

Improve business focus Access to world-class capabilities Accelerated reengineering benefits Shared risks Free resources for other purposes

Basic Issues: Strategic Analysis and Choice

1. What strategies are most effective at building sustainable competitive advantages for single business units? 2. Should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate?

Prominent Sources of Competitive Advantage Cost leadership

Speed

Market focus

Differentiation

Characteristics of Global Industries



 



Differences in prices and costs among countries due to  Currency exchange fluctuations  Differences in wage and inflation rates  Other economic factors Differences in buyer needs across countries Differences in competitors and ways of competing among countries Differences in trade rules and governmental regulations across countries

Strategic Options: Choosing a Generic Competitive Strategy

1. 2. 3. 4.

Broad-line global competition Global focus strategy National focus strategy Protected niche strategy

Grand Strategy Selection Matrix Overcome weaknesses

Internal (redirected resources within the firm)

Vertical integration Conglomerate diversification

Turnaround or retrenchment Divestiture Liquidation

Concentrated growth Mkt. Development Prod. Development Innovation

II

I

III

IV Horizontal integration Concentric diversification Joint venture

Maximize strengths

External (acquisition or merger for resource capability)

Model of Grand Strategy Clusters Rapid market growth 1. 2. 3.

Strong competitive position 1. 2. 3.

Concentrated growth Vertical Integration Concentric diversification

Concentric diversification Conglomerate diversification Joint venture

1. 2. 3. 4.

I

II

IV

III

Reformulation of concentrated growth Horizontal integration Divestiture Liquidation

Weak competitive position 1. 2. 3. 4. 5.

Slow market growth

Turnaround or retrenchment Concentric diversification Conglomerate diversification Divestiture Liquidation

The Portfolio Approach

BCG GrowthShare Matrix Industry AttractivenessBusiness Strength Matrix

Life CycleCompetitive Strength Matrix

BCG’s Strategic Environments Matrix

The BCG Growth-Share Matrix Cash Generation (Market Share)

Cash Use (Growth Rate)

High High

Low

Star

Cash Cow

Low

Problem Child Dog

Description of Dimensions Market share: sales relative to those of other competitors in the market (dividing point is usually selected to have only the two-three largest competitors in any market fall into the high market share region)

Description of Dimensions Growth Rate: Industry growth rate in constant dollars (diving point is usually the GNP’s growth rate)

Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (Industry Attractiveness)

Nature of Competitive Bargaining Power of Rivalry Suppliers/Customers Number

Relative size of of competitors typical players Size of competitors Numbers of each Strength of Importance of competitors’ corporate purchases from or parents sales to Price wars Ability to vertically integrate Competition on multiple dimensions

Threat of Substitutes/New Entrants Technological

maturity/stability Diversity of the market Barriers to entry Flexibility of distribution system

(contd.)

Economic Factors Sales

volatility Cyclicality of demand Market growth Capital intensity

Financial Norms Average

profitability Typical leverage Credit practices

Sociopolitical Considerations Government

regulation Community support Ethical standards

(contd.) (Business Strength)

Cost Position Economies

Level of Differentiation

Promotion of scale effectiveness Manufacturing costs Product quality Overhead Company image Scrap/waste/rework Patented products Experience effects Brand awareness Labor rates Proprietary processes

Response Time Manufacturing

flexibility Time needed to introduce new products Delivery times Organizational flexibility

(contd.)

Financial Strength

Human Assets

Public Approval

Solvency

Turnover

Goodwill

Liquidity

Skill

Reputation

Break-even Cash

point

flows Profitability Growth in revenues

level Relative wage/salary Morale Managerial commitment Unionization

Image

GE Nine 9 cell Matrix (Grid)



In a group Co, the GE chart is used to find the position of each SBU to decide whether any strategic decisions are to be taken. Similarly the GE Matrix can be used for different production/business line to see the worthiness of the portfolio and take correcting actions.

The Industry Attractiveness-Business Strength Matrix Industry Attractiveness

Business Strength

High

Medium

Low

High

Medium

Low

Invest

Selective Growth

Grow or Let Go

Selective Growth

Grow or Let Go

Harvest

Grow or Let Go

Harvest

Divest

Description of Dimensions Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond the strict control of management Business Strength: Subjective assessment of how strong a competitive advantage is created by a broad range of the firm’s internal strengths and weaknesses





The chart divides 3 categories like strong, average and weak on Business Strength And 3 on strategic market growth rate. There are 9 cells. Each industry weight age and rating product is taken and plotted on the matrix. One can visualize the place of the SBU in order to take appropriate strategy like restructuring, turnaround, divestment etc based on data collected.

 



Description of Dimensions Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond the strict control of management Business Strength: Subjective assessment of how strong a competitive advantage is created by a broad range of the firm’s internal strengths and weaknesses



The factors of attractiveness are generally, Market share, Market share growth, Brand image, After sales service, Distribution capacity, Capacity utilization, Product quality, Technology.

Advantages of the Industry Attractiveness-Business Strength Matrix Over the BCG Matrix 





Terminology is less offensive and more understandable Multiple measures associated with each dimension tap many factors relevant to business strength and market attractiveness Allows for broader assessment during both strategy formulation and implementation for a multi business company

The Market Life Cycle-Competitive Strength Matrix

Competitive Strength

Stage of Market Life Cycle

High In

y : ivel h s s Pu gre Ag t s ve n: vely o i ut ecti a C el S st e Inv

Low

Introduction

Growth

Maturity

er: g n st Da arve H

Decline

Description of Dimensions Stage of Market Life Cycle: See p. 146 Competitive Strength: Overall subjective rating, based on a wide range of factors regarding the likelihood of gaining and maintaining a competitive advantage

Sources of Advantage

Ex. 8-6: BCG’s Strategic Environments Matrix

Many

Fragmented

Specialization

apparel, house building, jewelry retailing, sawmills

pharmaceuticals, luxury cars, chocolate confectionery

Volume

Stalemate Few

basic chemicals, volume-grade paper, ship owning, wholesale banking

Small

jet engines, supermarkets, motorcycles, standard microprocessors

Size of Advantage

Big

Contributions of Portfolio Approaches 



 

Convey large amounts of information about diverse businesses and corporate plans in a simplified format Illuminate similarities and differences among businesses, conveying the logic behind corporate strategies for each business Simplify priorities for sharing corporate resources across diverse businesses Provide a simple prescription of what should be accomplished – a balanced portfolio of businesses

Limitations of Portfolio Approaches  



  

Does not address how value is created across business units Accurate measurement for matrix classification not as easy as matrices implied Underlying assumption about relationship between market share and profits varies across different industries and market segments Limited strategic options viewed as basic strategic missions Portrays notion that firms need to be self-sufficient in capital Fails to compare competitive advantage a business receives from being owned by a particular company with costs of owning it

Balancing Financial Resources: Portfolio Techniques BCG Growth-Share Matrix

Industry AttractivenessBusiness Strength Matrix

Life CycleCompetitive Strength Matrix

BCG Growth-Share Matrix

Cash Use (Growth Rate)

Cash Generation (Market Share) Description of Market Share: High Low Dimensions Sales relative to

High

Star

Question mark

Low

Cash Cow

Dog

those of other competitors in market (dividing point is usually selected to have only 2-3 largest competitors in any market fall into high market share region)

Growth Rate: Industry growth rate in constant dollars (dividing point is typically GNP’s growth rate)

Strategies •

Question Marks - Build Market Share

•

Star - Hold Market Share

•

Cash Cows - Harvest

•

Dogs – Divest

Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix Industry Attractiveness Factors

Nature of Competitive Rivalry •Number of competitors

Bargaining Power of Suppliers/Custo mers •Relative size of typical players

•Size of

•Numbers of

competitors

•Strength of competitors’ corporate parents

•Price wars •Competition on multiple

each

•Importance of purchases from or dales to

•Ability to vertically integrate

Threat of Substitutes/ New Entrants •Technological maturity/stabili ty

•Diversity of the market

•Barriers to entry

•Flexibility of distribution system

Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Industry Attractiveness Factors

Economic Factors

•Sales volatility

•Cyclicality of demand

•Market growth

•Capital intensity

Financial Norms

Sociopolitical Considerations

•Average

•Government

profitability

•Typical leverage

•Credit practices

regulation

•Community support

•Ethical standards

Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Business Strength Factors

Cost Position

•Economies of scale

•Manufacturing costs

•Overhead

Level of Differentiation

Response Time

•Promotion

•Manufacturing

effectiveness

•Product quality •Company image

•Scrap/waste/rew •Patented ork

•Experience effects

•Labor rates

products

•Brand awareness

flexibility

•Time needed to introduce new products

•Delivery times •Organizational flexibility

Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (concluded) Business Strength Factors

Financial Strength

Human Assets

Public Approval

•Solvency

•Turnover

•Goodwill

•Liquidity

•Skill level

•Reputation

•Break-even

•Relative

•Image

point

•Cash flows •Profitability •Growth in revenues

wage/salary

•Morale •Managerial commitment

•Unionization

Industry Attractiveness-Business Strength Matrix Industry Attractiveness

Business Strength

High

High

Invest

Medium Selectiv

e Growth

Low

Medium

Low

Selecti Grow or ve Let Growth Go Grow or Harvest Let Go

Grow or Harvest Divest Let Go

Description of Industry Attractiveness: Dimensions

Subjective assessment based on broadest possible range of external opportunities and threats beyond control of management

Business Strength: Subject assessment of how strong a competitive advantage is created by a broad range of a firm’s internal strengths and weaknesses

Advantages of the Industry Attractiveness-Business Strength Matrix over the BCG Matrix 

Terminology is less offensive and more understandable



Multiple measures associated with each dimension tap many factors relevant to business strength and market attractiveness



Allows for broader assessment during both strategy formulation and implementation for a multibusiness company

Market Life Cycle-Competitive Strength Matrix Stage of Market Life Cycle

Competitive Strength

Introduction Growth

High

Moderate

Low

Maturity

Decline

ly e iv : s sh es u P gr Ag t ly : s e e n iv v o t i t c In u le a C Se t s e r: v e g st In n e a D arv H

Description of Stage of Market Dimensions Life Cycle: See page 184

Competitive Strength: Overall subjective rating, based on wide range of factors regarding likelihood of gaining and maintaining a competitive advantage

Contributions of Portfolio Approaches

Convey Convey large large amounts amounts of of information information about about diverse diverse businesses businesses and and corporate corporate plans plans in in a a simplified simplified format format Illuminate Illuminate similarities similarities and and differences differences among among businesses, conveying the logic behind businesses, conveying the logic behind corporate corporate strategies strategies for for each each business business Simplify Simplify priorities priorities for for sharing sharing resources resources across across diverse diverse businesses businesses

corporate corporate

Provide Provide a a simple simple prescription prescription of of what what should should be be accomplished accomplished -- a a balanced balanced portfolio portfolio of of businesses businesses

Limitations of Portfolio Approaches

Does Does not not address address how how value value is is created created across across business business units units Accurate Accurate measurement measurement for for matrix matrix classification classification not not as as easy easy as as matrices matrices implied implied Underlying Underlying assumption assumption about about relationship relationship between between market market share share and and profits profits varies varies across across different different industries industries and and market market segments segments Limited Limited strategic strategic options options viewed viewed as as basic basic strategic strategic missions missions Portrays Portrays notion notion that that firms firms need need to to be be self-sufficient self-sufficient in in capital capital Fails Fails to to compare compare competitive competitive advantage advantage a a business business receives receives from from being being owned owned by by a a particular particular company company with with costs costs of of owning owning it it

Behavioral Considerations Affecting Strategic Choice Role of current strategy Degree of firm’s external dependenc e Managerial priorities different from stockholder s

Attitudes toward risk Internal political consideratio ns

Competitiv e reaction

Behavioral Considerations Affecting Strategic Choice 



Role of current strategy 

What is the amount of time and resources invested in previous strategies?



How close are new strategies to the old?



How successful were previous strategies?

Degree of firm’s external dependence 

How powerful are firm’s owners, customers, competitors, unions, and its government?



How flexible is firm with its environment?

Behavioral Considerations Strategic Choice  Affecting Attitudes toward risk 







Industry volatility and industry evolution affect managerial attitudes Risk-oriented managers prefer offensive, opportunistic strategies Risk-averse managers prefer defensive, conservative strategies

Managerial priorities different from stockholder interests 

Agency theory suggests managers frequently place their own interests above those of their shareholders

Behavioral Considerations Affecting Strategic Choice 

Internal political considerations 







Major sources of company power are CEO, key subunits, and key departments Power can affect corporate decisions over analytical considerations See Fig. 9-6

Competitive reaction 



Probable impact of competitor response must be considered during strategy design process Competitor response can alter strategy success

GE: Strategic Circles 

In 1981, John E. Welch Jr., Chairman and CEO of General Electric designed the company’s operations on the basis of three `strategic circles’:



Core manufacturing units such as lighting and locomotives



Technology -intensive businesses services



To achieve the first or second position in the global market for each of its businesses: By 1986, this strategic orientation had taken shape with 14 distinct businesses, including aircraft engines, medical systems, engineering plastics, major appliances, television and financial services.

IBM’s Partners Sears Toshiba Siemens Mitsubish i Borland

1988 1989 1990 1991 1991

Jointly own Prodigy, an interactive computer service for consumers Jointly built a US $200 million plant in Japan to manufacture highresolution colour flat screens for laptops Jointly developing future chips and jointly built 16-Mb DRAM memory chips in France Mitsubishi Electric sells IBM mainframes in Japan under its own name

IBM’s Partners

Wang

1991 1991

Novell

1991 1991 Apple 1991 Motorola 1991 Intel

Developing tools to make it easier to create software for the OS/2 system Sells IBM’s PCs and RS/6000 workstations under its own name IBM sells Novell networking software Two joint ventures: Taligent and Kaleida Jointly developing the RISC microprocessor Jointly developing a new generation of integrated microprocessor chips

Reebok’s Outsourcing           

Its main function is marketing with a current staff strength of 35 in India. The other activities are outsourced as given below: Apparel design National Institute of Fashion Technology Warehouse management Bakshi Associates Logistics Nexus Logistics Retailing Phoenix Advertising Hindustan Thompson Store design and execution Aakar Sports management 21st Century Gymnasium A private firm Manufacturing Shoes: Phoenix, Aero, Lakhani Apparel Viniyoga and six others Selection Prospects

Ex. 8-7: Value Building in Multibusiness Companies (Market-Related Opportunities)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Shared sales force activities or Lower selling costs shared sales office, or both Better market coverage Stronger technical advice to buyers Enhanced convenience for buyers Improved access to buyers

Impediments to Achieving Enhanced Value Buyers

have different purchasing habits toward the products Different salespersons are more effective in representing the product Some products get more attention than others Buyers prefer to multiplesource rather than singlesource their purchases

Ex. 8-7

(contd.)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Shared after-sales service and repair work

Different equipment or different Low servicing costs labor skills, or both, are needed to Better utilization of service handle repairs personnel Faster servicing of customer calls Buyers may do some in-house repairs

Shared brand name

Company reputation is hurt if Stronger brand image and company reputation quality of one product is lower Increased buyer confidence in the brand

Shared advertising and promotional activities

Lower costs Greater clout in purchasing ads

Appropriate

forms of messages

are different Appropriate timing of promotions is different

Ex. 8-7

(contd.)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Common distribution channels

Lower distribution costs Enhanced bargaining power with distributors and retailers to gain shelf space, shelf positioning, stronger push and more dealer attention, and better profit margins

Dealers

resist being dominated by a single supplier and turn to multiple sources and lines Heavy use of the shared channel erodes willingness of other channels to carry or push the firm’s products

Shared order processing

Lower order processing costs One-stop shopping for buyer enhances service and, thus, differentiation

Differences

in ordering cycles disrupt order processing economies

Ex. 8-7

(contd.)

(Operating Opportunities)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Joint procurements of purchased inputs

Lower input costs Improved input quality Improved service from suppliers

Input

needs are different in terms of quality or other specifications Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plant

Shared inbound or outbound shipping and materials handling

Lower freight and handling costs Better delivery reliability More frequent deliveries, such that inventory costs are reduced

Input

sources or plant locations, or both, are in different geographic areas Needs for frequency and reliability of inbound/outbound delivery differ among the business units

Ex. 8-7

(contd.)

Opportunities to Build Value or Sharing Shared manufacturing and assembly facilities

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Higher changeover costs in Lower manufacturing/assembly costs shifting from one product to another Better capacity utilization, High-cost special tooling or because peak demand for one product correlates with equipment is required to valley demand for other accommodate quality differences or design Bigger scale of operation differences improves access to better technology and results in better quality

Ex. 8-7

(contd.)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Shared product and process technologies or technology development or both

Lower product or process design costs, or both, because of shorter design times and transfers of knowledge from area to area. More innovative ability, owing to scale of effort and attraction of better R&D personnel

Technologies

are the same, but the applications in different business units are different enough to prevent much sharing of value

Shared administrative support activities

Lower administrative and operating overhead costs

Support

activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact)

Ex. 8-7

(contd.)

(Management Opportunities)

Opportunities to Build Value or Sharing Shared management knowhow, operating skills, and proprietary information

Potential Competitive Advantage Efficient transfer of a distinctive competence – can create cost savings or enhance differentiation. More effective management as concerns strategy formulation, strategy implementation, and understanding of key success factors

Impediments to Achieving Enhanced Value Actual

transfer of know-how is costly or stretches the key skill personnel too thinly, or both. Increased risks that proprietary information will leak out

Six Critical Questions for Diversification Success 

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What can our company do better than any of its competitors in its current market(s)? What core competencies do we need in order to succeed in the new market? Can we catch up to or leapfrog competitors at their own game? Will diversification break up our core competencies that need to be kept together? Will we be simply a player in the new market or will we emerge a winner? What can our company learn by diversifying, and are we sufficiently organized to learn it?

Places to Look for Parenting Opportunities   

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Size and age Management Business definition Predictable errors Linkages

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Common capabilities Specialized expertise External relations Major decisions Major changes

The Patching Perspective 

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Patching is the process by which corporate executives routinely remap businesses to match rapidly changing market opportunities. Patching can be    

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Adding Splitting Transferring Exiting, or combining businesses

Patching is more critical in turbulent and rapidly changing markets, than in stable, unchanging markets

Ex. 8-10: Three Approaches to Strategy

Position

Resources

Simple Rules

Strategic logic

Identify an attractive Establish a vision market Build resources Locate a defensible Leverage across position markets Fortify and defend

Jump into the confusion Keep moving Seize opportunities Finish strong

Strategic question

Where should we be?

How should we proceed?

Source of advantage

Unique, valuable Unique, valuable, Key processes and position with tightly inimitable resources unique simple rules integrated activity system

What should we be?

Ex. 8-10

(contd.)

Works best in

Slowly changing, well-structured markets

Moderately changing, wellstructured markets

Rapidly changing, ambiguous markets

Duration of advantage

Sustained

Sustained

Unpredictable

Risk

It will be difficult to alter position as conditions change

Company will be too slow to build new resources as conditions change

Managers will be too tentative in executing on promising opportunities

Long-term dominance

Growth

Performance goal Profitability

Ex. 8-11: Simple Rules, Summarized (Adapted)

Type How-to rules

Purpose They spell out key features of how a process is executed – “What makes our process unique?”

Boundary rules They focus managers on which opportunities can be pursued and which are outside the pale.

Priority rules

They help managers rank the accepted opportunities.

Timing rules

They synchronize managers with the pace of emerging opportunities and other parts of the company.

Exit rules

They help managers decide when to pull out of yesterday’s opportunities.