COS – Chapter 1 – Introduc Introduction tion Strategy
-
Long-term plan of action designed to achieve a goal
-
Intended and emergent initiatives
-
Overall purpose and scope to meet m eet expectations
-
Employing forces
-
Direction, market/scope, advantages, resources, environment, stakeholders
Component of adversity (= something getting in the way on your way to the goal)
-
Strategy is linked to governance (executing power)
-
“social contract” stakeholder management, CSR
-
Often the shareholders are setting the goals and not the managers
-
Key issue for future of organization (e.g. market entry)
-
“a pattern in a stream of decisions” (Mintzberg)
-
Strategy statement : goal (mission, vision, objectives) + scope + advantages
-
More and more strategy consultancies evolve
Need for integration: -
Corporate level overall scope
-
Business level competition in market
-
Operational how to operate components of the organization
Three strategy branches
Horizons
1. Extend and defend core business 2. Build emerging businesses 3. Create viable options
Exploring Strategy Model
WHERE? – WHERE? – Strategic Strategic Position HOW? – HOW? – Strategic Strategic Choices HOW TO? – TO? – Strategy Strategy in Action
All are closely related but strategy has a non-linear nature
Strategy lenses
-
Design = planning, analyzing, designing
-
Experience = influence of pas experience
-
Variety (ideas) = competition of ideas “survival of the fittest”
-
Discourse = phrases, concepts, corporate jargon
Different sectors
-
Small businesses closer to environment (purpose)
-
Multi-nationals likely to be dominated by international strategy (choices) and practice
-
Public sector and non-profit organizations need to have purpose and are evaluated in action
COS – Chapter 2 – Strategic Position The environment
PESTEL
Five Forces
Scenario analyses to show the option and preventing a biased view o n the matter: 1. Identifying the scope: subject and time span 2. Identifying key drivers for change: PESTEL can be used 3. Selecting opposing key drivers: factors with high uncertainty divergent or opposing outcomes but still plausible 4. Developing scenario “stories”: knit together all factors to create possible scenarios 5. Identifying impacts: robustness checks and contingency plans
Industries and sectors
-
Often made up of several specific markets
-
Industry can be analyzed by Porter’s five forces o
threat of entry/potential entrants
o
threat of substitutes
o
power of buyers/bargaining power
o
power of suppliers/bargaining power
o
extent of rivalry between competitors
-
An attractive industry = one that offers good profit potential (five forces must be low)
-
Threat of entry: attractive industry has high barriers to enter o
Scale and experience (mostly related to high entry costs, investment requirements and efficiency)
-
o
Access to supply or distribution channels (might be controlled)
o
Expected retaliations (e.g. price war or marketing blitz)
o
Legislation or government action (e.g. patent protection, regulation of the market)
o
Differentiation (higher perceived value)
Threat of substitutes o
Price/performance ratio (matters more than simple price)
o
Extra-industry effects (core of substitution concept because threat comes from outside the industry)
-
-
Power of buyers: customers, not necessarily the consumer o
Concentrated buyers (e.g. milk in grocery sector)
o
Low switching costs (typically low for weakly differentiated commodities, e.g. steel)
o
Buyer competition threat (threat by DIY, backward vertical integration)
Power of suppliers: raw material, equipment, labor, sources of finance o
-
Concentrated suppliers (many suppliers for one production)
o
High switching costs (e.g. Microsoft Macintosh)
o
Supplier competition threat (cut out middlemen, forward vertical integration)
Competitive rivalry: same customer group o
Competitor balance (search for dominance might be high, e.g. by price cuts)
o
Industry growth rate (low growth or decline likely to be to the expense of a rival, industry life cycle)
o
High fixed costs ( increase volume, cut prices, short-term over-capacity)
o
High exit barriers (high redundancy costs or high investment)
o
Low differentiation (only competition option is by price)
The four main types of industries
-
Monopolistic industry
-
Oligopolistic industry
-
Hypercompetitive industry (constant disequilibrium and change)
-
Perfectly competitive industry (mainly competing by price)
Implication of the five forces analysis
-
What industry to enter?
-
What influence can be exerted?
-
How are competitors differently affected? judgment
Key issues
-
Defining the “right” industry (e.g. geographically)
-
Converging industries
-
Complementary organizations (completing the product, creating a value net)
-
Value net to the right
The dynamics of industry structure
-
The industry life cycle o
Five forces vary accordingly
o
They are not inevitable, don’t necessarily follow each other, but are a reminder of the constant change in basically every industry
o
“maturity mindset” can be dangerous, managers might not act fast enough against new competition
-
-
Comparative industry structure analysis o
Radar plot of the five forces
o
Comparing
o
Larger area in the model below = more profit chances
Competitive cycles o
Rapid and aggressive unstable hypercompetition
o
Various moves and countermoves from incumbents and entrants
Competitors and Markets
-
Strategic groups: o
Organizations in the industry/sector with similar strategic characteristics, following similar strategies or competing on similar bases
o
They differ in scope of activities (geography, product, market, distribution) and resource commitment (marketing, vertical integration, technology)
-
-
o
Top performers are easily identified with help of two-dimensional charts
o
Understanding competition
o
Analysis of strategic opportunities
o
Analysis of mobility barriers (entry barriers to other groups)
Market segments are used to identify: o
Variation in customer needs (taking psycho-demographics etc. into account)
o
Possible specialization (niche marketing)
o
Strategic customer
Blue Ocean Thinking o
They are new market spaces were competition is minimized
o
Looking for strategic gaps in the existing market
o
A strategy canvas compares competitors according to key success factors
CFS (critical success factors) should be identified
Value curves show the customers’ perception of competitors
Value innovation means to excel in competitors’ CFS or creating new CFS for
them re-inventing value for the customer Opportunities and Threats
-
SWOT, PESTEL, key drivers for change, Five Forces, Blue Ocean…
-
Keep in mind that analyses are mostly subjective
-
Managers are often biased
COS – Chapter 3 – Strategic Position Strategic capabilities: a resource-based view Foundations of strategic capabilities
-
-
-
Resources and competences o
What we have and what we do well (physical, financial, human)
o
Efficiency and effectiveness are key success factors
Dynamic capabilities o
Renew and recreate in a changing environment
o
Be flexible and visionary Sensing, seizing, re-configuring
Threshold and distinctive capabilities o
Meet necessary requirements to compete in a given market and achieve parity
o
Threshold levels of capability will change as critical success factors c hange or through
competitors and new entrants o
-
Trade-offs may be necessary in specialized market segments
Distinctive resources or distinctive competences – core competences of a company (skills, activities, resources customer value, differentiation, can be extended and developed)
VRIN – capability assessment
-
-
-
V – value of strategic capabilities o
Taking advantage of opportunities and neutralizing threats
o
Value to customer
o
Providing potential competitive advantage
o
Cost that still provides acceptable levels of return
R – rarity o
Uniqueness of capability
o
Meeting customer need
o
Sustainability
I – inimitability o
Difficult to imitate or obtain for competitors
o
Superior performance
-
-
o
Linked competences
o
Complexity
o
Casual ambiguity (Unklarheit)
o
Culture and history
o
Change
N – non-substitutability o
Product or service substitution
o
Competence substitution
Organizational knowledge o
Collective intelligence and shared experience
o
Also VRIN
Diagnosing strategic capabilities
-
-
-
Benchmarking o
Industry/sector
o
Best-in-class
o
Surface comparison
o
Measurement distortion
Value chain
o
Generic description of activities
o
Analyzing the competitive position with VRIN
o
Analyze cost and value
Value network o
Cost/price structure
o
Profit pools
o
Make or buy?
o
-
Partnering
Activity systems o
o
Mapping activity systems
Identify higher order strategic themes and clusters of activities
Relationship to value chain
Importance of linkage and fit
Relation to VRIN
Disaggregation (Auflockerung)
Superfluous activities
SWOT
Managing strategic capabilities -
Managing activities for capability development o
-
Internally
Leveraging (Einfluss nehmen)
Stretching
o
Externally
o
Ceasing current activities
o
Monitor output and benefits
Managing people for capability development o
Targeted training
o
Staffing policies
o
Organizational learning
o
Develop people’s awareness
COS – Chapter 4 – Strategic Position Strategic Purpose
Stakeholder : individuals or groups that depend on an organization to fulfill their own goals and on
whom, in turn, the organization depends.
Organizational purpose: values, mission, vision and objectives
-
Statements are important for a clear goal-setting for everyone involved
-
Mission statement is the overriding purpose of organization
-
Vision is looking in the future (aspirations)
-
Corporate values communicate underlying and enduring core principles and define its way
-
Objectives are statements of a specific desired outcome (often financially) o
Objectives can be measureable
o
Core objectives should be identified
o
An employee’s contribution might not immediately contribute to t he objective
Corporate governance
-
Structures and systems of control by which managers are held accountable
-
Governance has become very important: o
Separation of ownership and management control (= hierarchy)
o
Corporate failures and scandals
o
Increased accountability to wider stakeholder interest
-
The governance chain varies in every kind of business
-
Principal – agent model (principals pay agents to act on their behalf)
-
Important factors/dangers can be: o
Self-interest (egocentric)
o
Misalignment of incentives and control
o
Passing on responsibility, to whom?
o
Losing sight of the main shareholders
o
The role of institutional investors
o
The role of boards (e.g. the difference executive and non-executive directors)
-
o
Scrutiny (Untersuchung) and control
Who? What? How?
Shareholder model of governance o
UK and US
o
Largely financially involved
o
Proponents: maximizing shareholder value benefits stakeholders too
o
Benefit for investors – higher rate of return, reduced risk, minority shareholding
o
Benefit for the economy – high risk-taking, encouragement
o
Benefit for management – more objective decisions
o
Disadvantages for investors – prevented from monitoring management
-
o
Disadvantages for economy – risk of short-termism
o
Corporate reputation and top management greed
Stakeholder model of governance o
Germany, Italy, Japan
o
Wealth is created, captured and distributed by all stakeholders
o
Majority ownership
o
Long-term horizon – long-term investments, reduced pressure for short-term results
o
Advantages for stakeholders – long-term perspective will be in interest of others
o
Advantages for investors – closer level of monitoring of management, intervention
o
Disadvantages for management – interference, loss of objectivity
o
Disadvantages for investors – dominance of major shareholders, lack of financial pressure
o
Disadvantages for economy – limiting growth and entrepreneurial activity, weak corporate control, high debt financing
-
Family-controlled firms
-
State ownership
-
Public services
-
Changes and reforms can come by international pressure or history
-
Some countries think about switching models, start reforming
-
(Boards of directors) influence strategy o
Delegation
o
Engagement
o
Must operate independently
o
Must be competent to scrutinize activities o f managers
o
Must have time to do their job properly
o
Must act appropriately
Social Responsibility and Ethics
-
CSR – behave ethically, contribute to economy, improving quality of life
-
Laissez-faire view
-
-
-
o
Only goal is to make a profit and provide i nterest to shareholders
o
Government prescribes regulations
o
Meet minimum obligation
o
Nowadays it’s not enough for the conscious society
Enlightened self-interest o
Looking for long-term financial benefits
o
Social actions should make good business sense
o
E.g. sponsorship
o
More interactive with stakeholders than laissez-faire
Forum for stakeholder interaction o
Incorporates multiple interests
o
Performance should be measured more pluralistic
Shapers of society o
Activists
o
E.g. fighting poverty by fair trade
-
CSR is justified in “triple bottom line” o
Socially
o
Environmentally
o
Financially
-
Ethics have to be faced and dealt with
-
Aspects: rights, values, feelings, future, justice, answers
-
Self-awareness
Stakeholder expectations
-
Economic stakeholder
-
Social/political stakeholder
-
Technological stakeholder
-
Community stakeholder
-
Internal stakeholders (e.g. geographically)
-
Stakeholder mapping o
Identify stakeholders’ expectations
o
Identify interests and power they offer/seek
o
Handling depends on governance structure
o
Level of interest/power shouldn’t be underrated
o
Can help identify strategy and purpose (Why? Who? What? How?)
o
Can also raise ethical issues during decision-making
o
Heterogeneity of stakeholder groups – supporters/ actively hostiles/ indifferents, should be balanced, not too generically not too diverse
o
The role of the individual – would it shift if changes occur?
o
Look at stakeholder’s indicators of power: status, claim on resources, representation, symbol of power, resource dependence
COS – Chapter 6 – Strategic Choices Business Strategy -
SBU’s business strategy
-
Supplies goods or services for a distinct domain of activity
-
Often called division or profit center
-
Criteria to identify: o
Market-based same customer, channel, competitor
o
Capability-based similar strategic capabilities (e.g. product-based)
Generic competitive strategies (unspecific)
-
Porter: either produce cheaper or be exceptionally valuable third dimension is definition of the target group
-
-
-
Cost leadership: o
Input costs (labor, raw material,…)
o
Economies of scale (increase sales)
o
Experience
o
Product design
o
Don’t forget quality
o
Parity/equivalence charge same as average, gain more profit
o
Proximity
Differentiation: o
Price premium
o
Perceptual maps
o
Identify strategic customers
o
Identify key competitors
Focus: o
Target narrow segment
o
Distinct segment needs
-
-
o
Distinct segment value chains
o
Variable segment economies
Strategy clock: price perceived benefit o
Differentiation zone
o
Low-price zone
o
Hybrid strategy zone
o
Non-competitive strategies
Strategic lock-in o
“razor and blade” strategy
o
E.g. Microsoft software
Interactive strategies -
Also rely on price quality relationship
-
Threat assessment
-
Differentiation response
-
Cost response
-
Hypercompetition
-
o
Cannibalize bases of success
o
Small moves rather than big moves
o
Be unpredictable
o
Mislead competition
Cooperative strategy (not entirely legal) o
-
-
Focus on Porter’s five forces
Game theory o
Consider competitor’s moves/games
o
Identify strategic signals
o
Interdepend think forward, reason backward
Prisoner’s dilemma o
Two options cooperate!
o
Principles to help make a win-win situation:
Ensure repetition
Signaling
Deterrence (“Abschreckung”)
Commitment
COS – Chapter 7 – Strategic Choices Corporate Strategy and diversification -
Scope: potential diversification of products and markets
-
Concerned with corporate level and overall diversification
Strategy directions
-
Diversification – increase the range
-
Related diversification – diversifying into products or services with relationship to existing business opposite of conglomerate (unrelated) diversification
-
Company can move according to Ansoff’s matrix (market penetration, market development, new products and services, conglomerate diversification)
-
-
-
-
Market penetration may face two constraints o
Retaliation from competitors
o
Legal constraints
Product development may involve high risks o
New strategic capabilities heavy investments and high risk of failure
o
Project management risk delay and increased costs
Market development has two basic forms that need to meet critical success factors o
New users
o
New geographies
Conglomerate diversification are not considered very trustworthy
Diversification drivers
-
Economies of scope = applying ex isting resources and competencies (tangible and intangible) to new markets or services
-
Stretching corporate management competencies (dominant logics) = applying corporatelevel managerial skills/competencies to new business/portfolio of businesses
-
Exploiting superior internal processes = esp. if external capital and labor market don’t work that well yet
-
Increasing market power = diversification for competitive reasons 1. mutual forbearance, balanced moves on the market, not too aggressive; 2. Cross-subsidize one business from the profit of others
Synergy
-
Complementing each other so that effect is greater than the sum of both
-
Often hard to identify and more costly than expected
-
Value-destroying diversification drivers, negative synergies: o
Responding to market decline – sometimes better to let shareholders find new growth investment opportunities than to attack competitors
o
Spreading risk across range of markets – shareholders typically like to stick to one sort of market (the core business)
o
Managerial ambition – going beyond areas of true expertise might cause a disaster
Diversification and performance
-
Diversification-performance relationship follows inverted u-shape
-
However, every strategy needs to be evaluated crucially
Vertical integration
-
Entering activities where the organization is its own supplier or customer
-
Up and down the value network
-
Backward integration o
Development into activities concerned with the inputs into the current business (e.g. acquiring a supplier)
-
Forward integration o
Development into activities concerned with the o utput into the current business (e.g. acquiring a retailer)
-
Horizontal integration would be diversification with integrated aspects of processes
-
Vertical is more profitable for the manufacturer, but two dangers arise
-
o
It involved investments
o
Different strategic capabilities
Outsourcing can replace integration, but keep the following in mind: o
Transaction costs framework
o
Long-term costs of opportunism by external subcontractors, relationships tend to fail if:
-
Few alternatives
Complex and changing product or service
Investments were made in specific assets
Rather vertically integrate than outsource
Two distinct factors balance the decision between outsourcing and integration o
Relative strategic capabilities
o
Risk of opportunism
Value creation and the corporate parent
-
Corporate parent sometimes can’t add value anymore
-
Better to divest relevant businesses from the portfolio
-
Value-adding activities, parenting advantage o
Envisioning – vision, strategy, clear external image, discipline
o
Coaching and facilitating – develop strategic capabilities, improving synergies, crossbusiness relationships
o
Providing central services and resources – investment capital, center of advice, relevant expertise, greater power e.g. for brokering, knowledge management
o
-
Intervening – improve performance, monitor, challenge and develop ambitions
Value-destroying activities o
Adding management costs – businesses have to generate revenues for center
o
Adding bureaucratic – additional layer of management
o
Obscuring financial performance – cross-subsidy of weak businesses by stronger ones, hiding weak performance
-
Three types of parenting:
Portfolio Matrices
-
Keeping balance of the portfolio
-
Attractiveness of the individual business units
-
The fit e.g. for potential synergies
-
BCG growth/share matrix, three potential problems:
-
o
Definition vagueness
o
Capital market assumptions
o
Unkind to cows and dogs
Directional policy (GE-McKinsey) matrix
-
o
Good prospects – less good prospects
o
Attractiveness identified with PESTEL
o
Divest or “harvest” the least attractive and weakest ones
o
Either strength-attractiveness or attractiveness-strength
Parenting matrix o
Feel – critical success factors against parent’s capabilities
o
Benefit – parenting opportunities against parent’s capabilities
o
Heartland – core of future strategy
o
Ballast – should be divested or left alone
o
Value-trap – dangerous, should be divested
o
Alien – misfits, exit
o
Clear focus on how the parent benefits the SBUs
COS - Chapter 8 – Strategic choice International Strategy a. To enter a foreign market, companies should make use of the Yip´s framework, which analyzes the market and sees internationalisation potential through four different drivers:
1. Market drivers 2. Cost drivers 3. Government drivers 4. Competitive drivers b. Geographical advantages
Poter´s Diamond can be used look for advantages that lay in the location of a business
Firm strategy and rivalry
Factor conditions
Demand condition
Related and supporting industries
c.
The four International Strategies
Used to be also the regular order in that companies start to enter a foreign market, however that is not exactly the case anymore. Often companies start already with the global strategy. 1. Simple Export (usually used by companies with strong location advantages; first step when entering a market) 2. Multidomestic (markets are treated independently ; goods and services a re still produced locally) 3. Complex export (building a strong overseas network is important; branding plays an
important role) 4. Global strategy (activities are dispersed around the world; very coordination intense) d. Market selection and Entry
The PESTEL should be used to characterise a market and its potential before entering it. But some important characteristics that can influence the success of a market entry very much need to be taken into consideration; this can be done by using CAGE framework. 1. Cultural distance 2. Administrative and political distance 3. Geographical distance 4. Economical distance e. Entry modes
This modes a traditionally followed step by step, in that way risk is minimized and markets distances, as mentioned above, can be removed, by getting to know markets better. 1. Exporting 2. License or franchise 3. Joint Venture 4. Wholly owned subsidiary
f.
Internationalization has an uncertain relationship to financial performance, with an inverted u-curve warning against over-internationalization
g.
Subsidiaries in an international firm can be managed by portfolio methods just like businesses in a diversified firm
COS – Chapter 10 – Strategic Choices Mergers, Acquisitions, Alliances
Organic development
-
Developing and building on an organization’s own capabilities
-
Advantages:
-
o
knowledge and learning,
o
spreading investments over time (flexibility)
o
no availability constraints
o
strategic independence (uncompromising)
Corporate entrepreneurship = radical change in organization’s business can be limiting if capabilities are limited companies have to look externally
Mergers and acquisitions
-
Combination or takeover
-
Usually cyclical (high peaks, deep troughs) driven by economy cycle over-optimism of a company in an upturn = acquire businesses exaggerated loss of confidence in downturn = sell
-
businesses
Strategic motives: o
extension of reach (geography, products, markets)
o
consolidation of industry possibility to raise prices, increase efficiency, increase production efficiency
o
-
-
capabilities often used where industries are converging
Financial motives: o
Financial efficiency
o
Tax efficiency
o
Asset stripping or unbundling buy, then sell off business units
Managerial motives: o
Self-serving rather than efficiency driven
o
Personal ambition (vanity, fame)
o
Bandwagon effect in economy cycle do what critics, worriers, etc. do
-
Target choice: strategic fit, organizational fit
-
Valuation : evaluate the merger/acquisition, especially the price to pay, carefully
-
Integrate the new unit:
-
Organizational justice (during a merger/acquisition) = perceived fairness o
Distributive justice = rewards and posts
o
Procedural justice = decision-making
o
Informational justice = communication
-
Serial acquirers: multiple acquisitions at a time, need specialist teams to do so
-
Divesture: asset stripping, doesn’t mean the business failed could show dynamics
Strategic alliances
-
Collective success is part of the company’s strategy compete against rival alliances
-
Collaborative advantage is about managing alliances better than competitors
-
Equity alliance = creation of new entry, e.g. joint venture
-
Non-equity alliance = one part is the “looser”, e.g. franchises
-
Motives:
o
Scale alliances, e.g. for output (product, service, etc.) or input (raw material, etc.)
o
Access alliances, e.g. to access others’ capabilities in a fo reign market
o
Complementary alliances, bolster each other’s gaps or weaknesses (strength weakness adjustment)
o
-
Collusive alliances, e.g. cartels
Processes: o
Co-evolution = constant change demands realignment constantly
o
Trust has to be earned
o
1. Courtship needs to be wanted from both sides
o
2. Negotiations equal, harmonic, appropriate
o
3. Start-up material and human resources
o
4. Maintenance active management
o
5. Termination agreement
Conclusion
-
Acquisitions and mergers have high failure rate (50%)
-
Key factors to success: o
Urgency of the action acquisition
o
Uncertainty alliance
o
Type of capabilities:
o
“hard” capabilities acquisition
“soft” capabilities organic development
Modularity of capabilities alliance
COS - Chapter 11 – Strategy in action Evaluating strategies Three success criteria for evaluating strategic options:
Suitability Suitability is concerned with the overall rationale of the strategy:
•
Does it exploit the opportunities in the environment and avoid the threats?
•
Does it capitalise on the organisation’s strengths and strategic capabilities and avoid or remedy the weaknesses?
Acceptability Acceptability is concerned with whether the expected performance outcomes of a proposed strategy
meet the expectations of stakeholders. These are three key aspects of acceptability, the 3Rs: risk, return and stakeholder reaction.
RISK concerns the extent to which the outcomes of a strategy can be predicted. Risk can be assessed using:
Sensitivity analysis (also known as “what if analysis”, as an example see graphs in PP). Financial ratios – e.g. gearing and liquidity. Break-even analysis .
Feasibility is concerned with whether a strategy could work in practice i.e. whether an organisation has the capabilities to deliver a strategy Two key questions: •
Do the resources and competences currently exist to implement the strategy effectively?
•
If not, can they be obtained?
The focus is on three areas :
Finance people (and their skills) importance of resource integration
Summary •
Proposed strategies may be evaluated using the three SAFe criteria: Suitability is concerned with assessing which proposed strategies address the key opportunities and constraints an organisation faces. It is about the rationale of a strategy. The acceptability of a strategy relates to three issues: the level of risk of a strategy, the expected return from a strategy and the likely reaction of stakeholders. Feasibility is concerned with whether an organisation has or can obtain the capabilities to deliver a strategy.
