business+strategy_final+(2)

Business Strategy

Mohd. [email protected]

Objective

To learn what strategic management is?

To understand why strategic management take place

To understand how it take place in modern business

To learn strategic decision making process

To develop an in-depth knowledge about the principles, processes,

application, strategies and dynamics of strategic management in an

organization with regards to the challenges in the industry so as to

impart an appropriate decision making skills

Strategy

Time

Change

Strategy

Time

Where we are?

Where we want to be?

Global Economy

A global economy is one which goods, services,

people, skills and ideas move freely across

geographic borders.

Europe is now world’s largest market.

GDP 35% more than US.

China extremely competitive market. Source of low

cost goods

GE headquartered in US, will have 60% revenue

from developing countries 2015.

The march of Globalization

Globalization is the increasing economic

interdependence among countries and their

organization as reflected in the flow of goods and

services, financial capital knowledge across country

border.

Wal-Mart- Boundary-less retailing, global pricing,

sourcing and logistics

Globalization- Design, production, distribution and

servicing of goods and services.

Strategy

A strategy is an integrated and coordinated set

commitments and actions designed to exploit core

competencies and gain a competitive advantage.

Integrated

Two or more component merged together into a single

system

Core Competencies

Specific factor that a business sees as being central to the

way it works.

Competitive advantage

A strategy competitors are unable to duplicate or find to

costly to try to imitate

Strategy

“A unified, comprehensive, and integrated plan

designed to ensure that the basic objectives of

the enterprise are achieved.” (Glueck, 1980)

“The pattern or plan that integrates an

organization’s major goals, policies, and action

sequences into a cohesive whole.” (Quinn,

1980)

“A pattern of resource allocation that enables

firms to maintain or improve their performance.

Role of technology Increasing rate of change and diffusion

Perpetual Innovation

Continuous and carry high priority

Shorter life cycle

Rapid diffusion of innovation

Replicated within short period

Speed to market may become a source of competitive advantage

The information age

Companies are wired

Customers

Employees

Vendors

Role of Technology Increasing Knowledge Intensity

Converting accumulated knowledge of employees into

corporate asset

Shareholder value is increasingly influenced by the firm’s

intangible assets such as knowledge

From assessing information to exploiting

information Capturing intelligence

Transforming intelligence into usable knowledge

Embedding it as organizational learning

Diffusing it rapidly throughout the organization

Compaq failing against technology 1996 takeover of tandem computers 1998 took over digital 1999 CEO, Pfeiffer Sacked, Why?

By 1995 Compaq become leading seller of PC Purchase of DEC also made it leading computer service

firm competing with IBM. Compaq lost focus of selling PC, went behind Dell in

Internet selling. Announced a bigger move in web sales Reseller become anxious Announced number of reseller to de downsized to 4

from 20. 1998, in charge of service business resigned. Creating further uncertainty about their future

2002 taken over by HP

Competitive Advantage

Valuable

Allow the firm to exploit opportunities or neutralize

threats in its external environment.

Rare

Possessed by few, if any, current and potential

competitors

Costly to imitate

When other firms cannot obtain them or must obtain

them at much higher cost

Organized to be exploited

The firm is organized appropriately to obtain the full

benefits of the resources in order to realize a

competitive advantage.

Organized

Strategic Management Process

Full Set of commitment , decisions, and actions required for a firm

to create value and earn above average returns

Value creation

What is achieved when a firm successfully formulates and implements a

strategy that others companies are unable to duplicate or find too costly

to imitate

Average return

Returns that are equal to those an investor expects to earn from other

investments with similar amount of risk.

Opportunity cost

Above average return

Return that are in excess of what an investor expects to earn from other

investment with a similar amount of risk

Strategic Environment Competitive landscape

Hyper competitive environment

Dynamics of strategic maneuvering among global and innovative combatants

Price-Quality positioning, new know-how, first mover.

Protect or invade established products or geographic markets

Emergence of global economy

Goods, services, people, skills and ideas move freely across geographic

borders.

Spread of economic innovations around the world

Political and cultural adjustment are required

Rapid Economical Change

Increasing rate of technological change and diffusion

The information age

Increasing knowledge intensity

External Environment The general environment

The general environment is composed of dimensions in the broader society that influences industry and firms within it.

Global Political/Legal Socio-Cultural environment Economic Technological Global

The Industry Environment The set of factors that directly influences a firm and its competitive

responses. Threat of new entrant Power of buyers Power of suppliers Intensity of rivalry Product substitute

Competitors environment Firm’s understanding of its current competitors

Assumption of I/O Model

The External environment possess pressures and

constraints that determines the strategies that would

result in above-average return

Most competing firms control similar strategically

relevant resources and pursue similar strategies in

light of those resources

Resources used to implement strategies are highly

mobile

Decision maker are rational, acts in the best interest of

the firm, Profit maximizing behavior

Industrial Organization Model The external environment

Economies of scale

Barriers of scale

Diversification

Product differentiation

Concentration of firms in the industry

An attractive industry

High potential for above average returns

Strategy Formulation

Identify the strategy to earn above average return

Asset and skills

Develop or acquire the asset and skills require to implement the strategy

Strategy Implementation

Use firm’s strength to implement strategy

225

Superior returns; Above average returns

Industrial Organization Model

Above average return will accrue to firm

That successfully implement strategic actions

Enabling the firm to leverage its strength (skills and

resources)

To meet demand or pressure and constraint of the industry

Research finding

20% of the firm profitability can be explained by industry

characteristics

36% of the firm profitability can be attributed to firm

characteristics and the action taken by it

Strategic intent and strategic Mission Strategic Intent

Internally focused

Concerned with leveraging firm’s internal resources, capabilities and

core competencies.

To accomplish what at first may appear attainable goals in competitive

environment.

Using core competencies in a unique way to achieve sustainable

competitive advantage

Resulting in above average return

Strategic Mission

Externally focused application of it strategic intent.

States firm’s purpose an scope of operation

In product and market term

The strategic mission provides general descriptions of products to be provided and markets to be served using its unique sets of resources and capabilities – its core competencies

Enterprise Strategist

Mission andObjectives

The GeneralEnvironment

The Industry & Intern.

Environment

Internal factors

Generic strategy alternatives

Strategy variations

Strategy Choice

Resource and Structure

Policy, Plans and admin.

Evaluation and Control

To determine mission, goals and values of the firm and key decision

makers

To search the environment and

diagnose the impact of threats and opportunities

To examine and diagnose the

firm’s strengths and weaknesses

To consider various

alternatives and assure that the

appropriate strategy is chosen

To match plans, policies,

resources, structure, and administrative

style with strategy

To ensure strategy and

implementation will meet objectives

Implementation

Choice

Analysis & Diagnosis

Feed forward

feedback

The strategic Management

Process

External Environment Analysis Component of external analysis Scanning

Firms use the scanning process to either detect early warning signals regarding potential changes or to detect changes that are already underway.

Monitoring A process whereby analysts observe environmental changes

(over time) to see if, in fact, an important trend begins to emerge.

Forecasting the process where analysts develop feasible projections of

what might happen – and how quickly – as a result of the changes and trends detected through scanning and monitoring.

Assessing The timing and significance of the effects of changes and

trends in the general environment on the strategic management of a firm.

Industrial Organization Model Industrial Organization(I/O) Model of above average return

Global

Dem

ographi

c

Economic

Technological

Polit

ical

/Le

gal

Sociocultural

Industry environment

Competitor environment

Externalenvironment

Strategy dictated by the external environment

(Opportunities)

Development of internal skills to exploit these

opportunities

Segments of general environment

Population size Age structure

Geographic distribution

Ethnic make up

Income distribution

Global

Dem

ographi

c

Economic

Technological

Polit

ical

/Le

gal

Sociocultural




Economic Segment

Inflation rates and

interest rates

Trade deficits and

surpluses

Budget deficits and

surpluses

Personal savings rates

Business savings rates

Gross domestic product

Global

Dem

ographi

c

Economic

Technological

Polit

ical

/Le

gal

Sociocultural




Technological Segment

The scope and speed of

product innovation

The scope and applicability

of process innovation

Application of knowledge

Advances in

communications and

information-management

technology

Global

Dem

ographi

c

Economic

Technological

Polit

ical

/Le

gal

Sociocultural




Political/Legal Segment

Anti-trust regulations and

enforcement

Tax laws

Industry deregulation

labour training laws

Commitments to

education

Free trade versus

protectionism

Global

Dem

ographi

c

Economic

Technological

Polit

ical

/Le

gal

Sociocultural




Socio-cultural Segment

Workforce composition

Changes in attitudes about

the quality of work life

Environmental concerns

Shifts in work and career

preferences, including an

increase in new business

formation by women

Shifts in product and service

preferences

Global

Dem

ographi

c

Economic

Technological

Polit

ical

/Le

gal

Sociocultural



Dell’s win win model in china Dell is succeeding in China in spite of

State firms ownership Government interference with economy Corrupt alloy of personal and business interactions

Direct to consumer model Bypass dealership channel and sell made to order

computers Largest seller of PCs in USA. Direct sales model Dell chose to focus on corporate buyers in China Dell’s success in China was aided by

Its ability to win the loyalty of firms’ chief information officers

Tailoring its level of technical support services to the specific need of the firm

Five forces model of competition

A set of factors that directly influences a company

and its competitive actions and responses.

Interaction among these factors determine an

industry’s profit potential and location of “profit

pools”.

Need to understand which competitive factors have

power, why they have power, and what you might

be able to do about it to improve your own position.


Michael porter’s five force

model

Threat of new entrants

Threat of substitute products

bargaining power of buyer

Bargaining power of suppliers

Rivalry among competing

firms


Threat of new entrants

Economies of scale

Product differentiation

Capital requirements

Switching costs

Access to distribution channels

Cost disadvantages

independent of scale

Government policy

Expected retaliation


Threat of Substitute products

The threat of substitute products increases when:

Buyers face few switching costs

The substitute product’s price is

lower

Substitute product’s quality and performance are equal to or greater than the existing product

Differentiated industry products that are valued by customers reduce this threat

Five forces model of competition Bargaining power of buyer Buyer power increases when:

Buyers are large and few in number

A buyer’s purchases are a significant

portion of a firm’s annual revenues

The product involved is

undifferentiated

Buyers can switch to another product

without incurring high switching costs

Buyers are price sensitive

Buyers are well informed

Buyers pose threat to integrate backward

into the sellers’ industry


Bargaining power of supplier

Supplier power increases when Suppliers are few and/or large Suitable substitutes are not

available Individual buyers are not large

customers of suppliers and are plentiful

Suppliers’ goods are critical for buyers’ marketplace success

Suppliers’ products create high switching costs

Suppliers pose a threat to integrate forward into buyers’ industry


Rivalry among competing firm

Industry rivalry increases when: There are numerous or equally

balanced or aggressive competitors

Industry growth slows or declines (overcapacity exists)

There are high fixed costs or high storage costs

There is a lack of differentiation opportunities or low switching costs

Price cutting strategies are employed

The strategic stakes are high High “exit barriers” exist

Vision

It is a top management’s prophecy of their dream, mental picture, and foresight

about the future of the organization. It is an image of where we want to go in the

future.

Articulates the ideal description of an organization

Give shape to its future

Reflects firm’s values and aspirations

Intended to capture the heart and mind of each employee and its stakeholders

Decision and actions of those involved in developing vision, must be consistent with

that vision

McDonald’s vision

To be world’s best quick service restaurant

Ford Motor Vision

To make automobile accessible to every American(when established by Henry ford)

Vision or Intent

Mission Strategic Mission is a statement of firm’s unique purpose and the scope of its

operations in product and market terms that distinguishes one organization from other similar enterprises and is a declaration of an organization’s “reason for being”. It answers the pivotal question, “What is our business?”

Components of a Mission Statement Customers – who? Products or Services – what? Markets – where? Technology – which? Concern for Survival, Growth and Prosperity – how much? Philosophy – what beliefs, values, aspirations, and philosophical priorities? Self-concept – what are our distinct competencies? Concern for Public Image – how we want to look like? Concern for Employees – how much?

Two methods Comparative Articulation

Mission

Google's mission is to organize the

world's information and make it

universally accessible and useful

Philosophy and values is a guide to action. Ethical question, how to realize mission.

Philosophy Philosophy consist of the basic beliefs, aspirations, and philosophical priorities

that the strategic decision makers are committed to and that guides their management of the company.

Values Beliefs concerning what is desirable or good. Result from choices between

competing human interests in pursuit of goals. Values of the top management reflect in the corporate values.

Importance How the company intends to do business and reflects the company’s

recognition of social and ethical responsibility. Very basis for establishing the corporate culture. How the organization is going to satisfy the various stakeholders. Establish social reputation for the company. Establish long-term objectives and prioritizing them.

Corporate philosophy and Values

Infosys – Its founder emphasized on integrity, independence, hard work and following ethical practices while creating wealth.

Goal The purpose toward which an endeavor is directed.

The result or achievement toward which effort is directed; aim

Objective They prioritize various segments of a mission and fix definite targets in achieving them.

Long-term Objectives five to ten years and represent the results expected from pursuing the particular strategies

The Nature of the Long-term Objectives Quantitative, measurable, realistic, understandable, challenging hierarchical, obtainable, and congruent

among organizational units.

Stated as growth in assets, sales, profitability, market share, degree and nature of diversification, vertical

integration, earning per share, and social responsibility.

Provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize

conflicts, stimulate exertion, and aid in both allocation of resources and the design of jobs.

Needed at the corporate, divisional and functional levels.

Goals and Objectives

External Environment

Firm identify what it might

choose to do?

Examine Opportunities and

threat

Internal environment

Identify what they can do?

Examine unique resources,

capabilities, and

competencies(sustainable

competitive advantage)

Outcome of environment analysis

External Analysis

• Customers

• Pricing Constraint

• Competitors

• Distribution Issues

• Technology

• Macro economy

Regulation

• workstyle Trends

• Major uncertainties

• Suppliers

• Potential buyers

Threat and opportunities

Internal Analysis

• Current

Performance

• Brand Power

• Cost Structure

• Product Portfolio

• R&D Pipeline

• Technical Mastery

• Employee Skills

• Company Culture

Strengths and Weaknesses

Specific Goal

Strategy Formulation

Effective analysis of a firm’s internal environment (learning

what the firm can do ) requires:

Fostering an organizational setting in which experimentation and

learning are expected and promoted

Using a global mind-set

Thinking of the firm as a bundle of heterogeneous resources and

capabilities that can be used to create an exclusive market position

Global mind-set

Ability to study an internal organization in ways that are not

dependent on the assumptions of a single country, culture or context.

The context of internal analysis

Can a brand be source of competitive advantage?

1990 Coca Cola brand could be used as collateral to borrow

close to $100 Billion.

1999- image tainting quality problem, value has fallen but still

remain well above no.2, Microsoft

Brands are intangible assets and as such are difficult to imitate

by competitors. Cash flow streams can be assigned to brands

so that a net present value of the brand may be calculated.

Michael Jordan’s influence was so widespread that the NBA and

television networks that broadcast NBA games were concerned

about retaining fan interest after his retirement.

Internal Analysis

Component of internal analysis

Capabilities

Core Competencies

Discovering core competencies

Competitive Advantage

Strategic competitivenes

s

Four criteria of sustainable advantage

Value chain analysis

• Valuable• Rare• Costly to imitate• No substitutable

Outsource

Resources• Tangible• Intangible

Resources Source of a firm’s capabilities Broad in scope Cover a spectrum of individual, social and organizational phenomena Alone, do not yield a competitive advantage Firm’s assets, including people and the value of its brand name Represent inputs into a firm’s production process, such as:

Capital equipment Skills of employees Brand names Financial resources Talented managers

Tangible resources Financial resources Physical resources Technological resources Organizational resources

Intangible resources Human resources innovation resources Reputation resources

Resources

Capabilities Core CompetenciesCompetitive Advantage

Strategic competitiveness



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

Stock of technology, such as patents, trade-marks, copyrights, and trade secrets

Resources- Tangible





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

For efficient, effective, supportive, and mutually beneficial interactions and

relationships

Resources- Intangible





Capabilities





Functional Area Capability Example

Distribution Effective use of logistic management technique

Wal- Mart, ITC

Human Resources Motivating, empowering, retaining employees

Google, Microsoft, SAS

Management Information System

Effective and efficient control of inventories through point –of-purchase data collection method

Wal-Mart

Manufacturing Miniaturization component and products

Sony

Research and Development Rapid transformation of technology into new products and processes

Google

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

Core Competencies





Comparing Core Competencies and Resources





Primary Importance Gizmo A B

New product-time to market 5 2 3

Product Quality 4 4 5

Dealer Service 4 2 5

Customer satisfaction 5 2 4

Human Talent 4 2 4

Flexible Manufacturing 4 2 3

Secondary Importance

Project Management Skills 4 ? 3

Cost Control 4 3 5

IT systems 3 ? 4

Critical Assets

Brand Power 3 1 4

Supply Chain Power 5 1 4

Distribution network 4 2 4

Flexible Manufacturing 4 2 3

Evaluating Competencies with trajectory

Valuable Capabilities

Help a firm neutralize threats or exploit opportunities

Rare Capabilities

Are not possessed by many others

Costly-to-Imitate Capabilities

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 Capabilities

No strategic equivalent

Sustainable competitive advantage





Sustainable competitive advantage





Parts of firm’s operations that create value and those that do not A template that firms use to:

Understand their cost position Identify multiple means that might be used to facilitate

implementation of a chosen business-level strategy

Primary activities involved with: A product’s physical creation A product’s sale and distribution to buyers The product’s service after the sale

Support activities Provide the support necessary for the primary activities to take

place

Value chain Shows how a product moves from raw-material stage to the final

customer


To be a source of competitive advantage, a resource or capability must allow the firm: To perform an activity in a manner that is superior

to the way competitors perform it, or

To perform a value-creating activity that competitors cannot complete


Business-Level StrategyAn integrated and coordinated set of commitments

and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets.

Key issues in Business Level Strategy Who will be served? What needs will be satisfied? How will those needs be satisfied?

The Purpose of a Business-Level Strategy Business-Level Strategies

Are intended to create differences between the firm’s position relative to those of its rivals.

To position itself, the firm must decide whether it intends to:

Perform activities differently or

Perform different activities as compared to its rivals.

Types of Potential Competitive Advantage Achieving lower overall costs than rivals

Performing activities differently (reducing process costs)

Possessing the capability to differentiate the firm’s product or service and command a premium price

Performing different (more highly valued) activities.

Types of Business-Level Strategies

CostCost UniquenessUniqueness

BroadBroadTargetTarget

NarrowNarrowTargetTarget

Competitive AdvantageCompetitive Advantage

CompetitiveCompetitiveScopeScope

CostLeadership An integrated set of actions taken to produce goods or services with

features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers.

Relatively standardized products

Features acceptable to many customers

Lowest competitive price

Cost saving actions required by this strategy:

Building efficient scale facilities

Tightly controlling production costs and overhead

Minimizing costs of sales, R&D and service

Building efficient manufacturing facilities

Monitoring costs of activities provided by outsiders

Simplifying production processes

How to Obtain a Cost Advantage Determine and control Cost DriversDetermine and control Cost Drivers Reconfigure Value Chain Value Chain if needed Alter production processAlter production process Change in automationChange in automation New distribution channelNew distribution channel New advertising mediaNew advertising media Direct sales in place of indirect salesDirect sales in place of indirect sales New raw materialNew raw material Forward integrationForward integration Backward integrationBackward integration Change location relative to suppliers or buyersChange location relative to suppliers or buyers

Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

Differentiation Strategy Rivalry with Competitors

Defends against competitors because brand loyalty to differentiated product offsets price competition.

Bargaining Power of Buyers Can mitigate buyers’ power because well differentiated products reduce

customer sensitivity to price increases.

Can mitigate suppliers’ power by:

Absorbing price increases due to higher margins.

Passing along higher supplier prices because buyers are loyal to differentiated brand.

Can defend against new entrants because:

New products must surpass proven products.

New products must be at least equal to performance of proven products, but offered at lower prices.

Well positioned relative to substitutes because: Brand loyalty to a differentiated product tends to reduce customers’ testing

of new products or switching brands.

Examples of Value-Creating Activities Associated with the Differentiation Strategy

Competitive Risks of Differentiation The price differential between the differentiator’s

product and the cost leader’s product becomes too large.

Differentiation ceases to provide value for which customers are willing to pay.

Experience narrows customers’ perceptions of the value of differentiated features.

Counterfeit goods replicate differentiated features of the firm’s products.

Focus Strategies An integrated set of actions taken to produce goods or services

that serve the needs of a particular competitive segment.

Particular buyer group—youths or senior citizens

Different segment of a product line—professional craftsmen versus do-it-yourselfers

Different geographic markets Types of focused strategies

Focused cost leadership strategy Focused differentiation strategy

To implement a focus strategy, firms must be able to: Complete various primary and support activities in a

competitively superior manner, in order to develop and sustain a competitive advantage and earn above-average returns.

Factors That Drive Focused Strategies Large firms may overlook small niches.

A firm may lack the resources needed to compete in the broader market.

A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors.

Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.

Competitive Risks of Focus Strategies

A focusing firm may be “outfocused” by its competitors.

A large competitor may set its sights on a firm’s niche market.

Customer preferences in niche market may change to more closely resemble those of the broader market.

Integrated Cost Leadership/ Differentiation Strategy

A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to:

Adapt quickly to environmental changes.

Learn new skills and technologies more quickly.

Effectively leverage its core competencies while competing against its rivals.

Commitment to strategic flexibility is necessary for implementation of integrated cost leadership/differentiation strategy.

Flexible manufacturing systems (FMS)

Information networks

Total quality management (TQM) systems

Risks of the Integrated Cost Leadership/ Differentiation Strategy Often involves compromises

Becoming neither the lowest cost nor the most differentiated firm.

Becoming “stuck in the middle” Lacking the strong commitment and expertise that

accompanies firms following either a cost leadership or a differentiated strategy.

Portfolio Approach

Always strategic choice and analysis Which businesses to grow and diversify

Examine and choose which business to own and which one

to forgo or divest To enter businesses with greater growth potential

Business with different cyclical considerations

How to capture and exploit competitive advantage in each

business To diversify inherent risk

How to allocate resources among these businesses

Cost Leadership Strategy Competitors Rivalry with Existing Competitors

Due to cost leader’s advantageous position:

Rivals hesitate to compete on basis of price.

Lack of price competition leads to greater profits. Bargaining Power of Buyers Can mitigate buyers’ power by:

Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm.

Bargaining Power of Suppliers

Can mitigate suppliers’ power by:

Being able to absorb cost increases due to low cost position.

Being able to make very large purchases, reducing chance of supplier using power.

Cost Leadership Strategy The Threat of Potential EntrantsThe Threat of Potential Entrants

Can frighten off new entrants due to:

Their need to enter on a large scale in order to be cost competitive.

The time it takes to move down the learning curve.

Product SubstitutesProduct Substitutes

Cost leader is well positioned to:

Make investments to be first to create substitutes.

Buy patents developed by potential substitutes.

Lower prices in order to maintain value position.

Competitive Risks

Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations.

Focus on cost reductions may occur at expense of customers’ perceptions of differentiation

Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy.

An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them.

Focus is on non standardized products

Appropriate when customers value differentiated features more than they value low cost.

Control Cost DriversCost Drivers if needed

Reconfigure Value Chain to maximizeReconfigure Value Chain to maximize

Lower buyers’ costsLower buyers’ costs

Raise performance of product or serviceRaise performance of product or service

Create sustainability through:Create sustainability through: Customer perceptions of uniquenessCustomer perceptions of uniqueness

Customer reluctance to switch to non-unique product or serviceCustomer reluctance to switch to non-unique product or service

Strategic Management: Portfolio Approach

The BCG Growth-Share Matrix

Help Managers to balance the flow of cash reserves among

their various businesses while identifying their basic strategic

purpose within the overall portfolio

Market Growth rate

Projected rate of sales growth for the market being served by a particular

business

Percentage increase in a market sales or unit volume

Serve as an indicator of the relative attractiveness of the market

Industry growth rate in constant dollar term

Relative competitive position

Provide basis for comparing the relative strength of businesses in the firm

portfolio.

2 or 3 large competitor

The BCG Growth-Share Matrix Star

Businesses in rapidly growing market with large market Best long run opportunity- Growth and profitability Require substantial investment to maintain and expand their dominant position in growth

market Investment requirement is often

in excess of the funds that theyCan generate initially

Short term priority for corporateresources

Cash Cows High market share low

growth market Strong position and minimal

re-investment Generate cash in excess of

their need Selectively milked for deployment

elsewhere- Star or ?? Provide cash needed to pay

Corporate overheads Dividends Provide debt capacity

Cash

Usa

ge

Gro

wth

Rate

Cash GenerationMarket Share

The BCG Growth-Share Matrix Dogs

Low market share and low growth Mature market and intensive competition, low profit margin Short term cash flow- through cost cutting Divested or liquidated once this short term harvesting has been

maximized ??

High growth rate Considerable appeal

Low market share Profit potential uncertain

Cash Guzzlers Rapid growth need high cash need Small market share result in low cash

generation

Concern Increase their market share

move into star If unlikely divest then reposition resources

Cash

Usa

ge

Gro

wth

Rate

Cash GenerationMarket Share

The Industry Attractiveness-Business Strength Matrix

Invest SelectiveGrowth

Grow or Let go

SelectiveGrowth

Grow or Let go

Harvest

Grow or Let go

Harvest Divest

High

Med

Low

High

Med Low

Factor considered Industry attractiveness

Nature of competitive rivalry Bargaining power of supplier/customers Thrust of substitute product/new entrant Economic factors Financial Norms Sociopolitical consideration

Business Strength Cost position Level of differentiation Response time Financial Strength Human Assets

Industry Attractiveness

Busi

ness

Str

ength

The life cycle-competitive strength Matrix

Life Cycle- Competitive

strength

Their portrayal of businesses as

they exist at one point in time

rather than how they evolve

over time

Developing winners or

potential losers

Competitive Strength

Overall subjective rating based

on a wide range of factors

regarding the likelihood of

gaining and maintaining a

competitive advantage

Push

Inve

st

Aggre

ssive

ly

Cautio

n

Inve

st S

elec

tively

Dange

r

Harve

st

Introduction Growth Maturity Decline

High

Moderate

Low

Stage of market life cycle

Com

peti

tive S

trength

The Competitive Nature of Strategy Competitor

Firms operating in the same market, offering similar products and targeting similar customers

Competitive Rivalry

The ongoing set of competitive actions and responses occurring between competitors.

Competitive rivalry influences an individual firm’s ability to gain and sustain competitive advantages

Competitive Behavior The set of competitive actions and competitive responses the firm takes to

build or defend its competitive advantages and to improve its market position.

Multimarket Competition Firms competing against each other in several product or geographic

markets.

Competitive Dynamics The total set of actions and responses taken by all firms competing within a

market.

Competitive dynamic

Competitive rivalry:

Affects all types of

strategies.

Has the strongest

influence on the

firm’s business-level

strategy or strategies.

Success of a strategy is determined by:

◦ The firm’s initial competitive actions.

◦ How well it anticipates competitors’ responses to them.

◦ How well the firm anticipates and responds to its competitors’ initial

actions.

A Model of Competitive Rivalry

Firms are mutually interdependent A firm’s competitive

actions have noticeable effects on its competitors.

A firm’s competitive actions elicit competitive responses from its competitors.

Competitors feel each other’s actions and responses.

Driver of competitor behavior• Awareness• Ability• Motivation

Interfirm Rivalry• Likelihood of Attack

• First-mover incentives• Organizational size• Quality

• Likelihood of Response• Type of competitive

action• Reputation• Market dependence

Competitive Analysis• Market commonality• Resource similarity

Outcomes• Market position• Financial

performance

Marketplace success is a function of both individual strategies and the consequences of their use.

Competitors analysis Market commonality

The number of markets with which a firm and a competitor are jointly involved.

The degree of importance of the individual markets to each competitor.

Firms competing against one another in several or many markets engage in multimarket competition.

A firm with greater multimarket contact is less likely to initiate an attack, but more likely to more respond aggressively when attacked

Resource Similarity How comparable the firm’s tangible and intangible resources are

to a competitor’s in terms of both types and amounts. Firms with similar types and amounts of resources are likely to:

Have similar strengths and weaknesses. Use similar strategies.

Assessing resource similarity can be difficult if critical resources are intangible rather than tangible.

Competitors analysis

Drivers of Competitive Behavior Awareness

the extent to which competitors recognize the degree of their mutual interdependence that results from: Market commonality Resource similarity

Motivation concerns Firm’s incentive to take action Response to a competitor’s attack Perceived gains and losses

Ability relates to Firm’s resources Flexibility these resources provide Without available resources the

firm lacks the ability to Attack a competitor Respond to the competitor’s

actions

Market Commonality A firm is more likely to attack the

rival with whom it has low market commonality than the one with whom it competes in multiple markets.

Given the strong competition under market commonality, it is likely that the attacked firm will respond to its competitor’s action

Motivation concerns The greater the resource

imbalance, the greater will be the delay in response by the firm with a resource disadvantage.

When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response.

Competitive Rivalry Competitive Action

A strategic or tactical action the firm takes to build or defend its

competitive advantages or improve its market position. Competitive Response

A strategic or tactical action the firm takes to counter the effects of

a competitor’s competitive action.

Strategic Action (or Response)

A market-based move that involves a significant commitment of

organizational resources and is difficult to implement and reverse.

Tactical Action (or Response) A market-based move that is taken to fine-tune a strategy:

Usually involves fewer resources.

Is relatively easy to implement and reverse.

Factors Affecting Likelihood of Attack First Mover

A firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position. First movers allocate funds for:

Product innovation and development Aggressive advertising Advanced research and development

First movers can gain: The loyalty of customers who may become committed to the firm’s goods or services. Market share that can be difficult for competitors to take during future competitive rivalry.

Second Mover Second mover responds to the first mover’s competitive action, typically through imitation:

Studies customers’ reactions to product innovations.

Tries to find any mistakes the first mover made, and avoid them.

Can avoid both the mistakes and the huge spending of the first-movers.

May develop more efficient processes and technologies

Late Mover Late mover responds to a competitive action only after considerable time has elapsed. Any success achieved will be slow in coming and much less than that achieved by first and

second movers. Late mover’s competitive action allows it to earn only average returns and delays its

understanding of how to create value for customers.

Factors Affecting Likelihood of AttackOrganizational Size-Small

Small firms are more likely:

To launch competitive actions.

To be quicker in doing so.

Small firms are perceived as:

Nimble and flexible competitors

Relying on speed and surprise to defend competitive advantages or develop new ones

while engaged in competitive rivalry.

Having the flexibility needed to launch a greater variety of competitive actions.

Organizational Size-Large

Large firms are likely to initiate more competitive actions as well as strategic actions

during a given time period

Large organizations commonly have the slack resources required to launch a larger

number of total competitive actions

Quality

Quality exists when the firm’s goods or services meet or exceed customers’ expectations

Factors Affecting Strategic Response Type of Competitive Action Strategic actions receive strategic responses

Strategic actions elicit fewer total competitive responses. The time needed to implement and assess a strategic action delays

competitor’s responses. Tactical responses are taken to counter the effects of tactical actions

A competitor likely will respond quickly to a tactical actions

Actors Reputation An actor is the firm taking an action or response Reputation is the positive or negative attribute ascribed by one rival to

another based on past competitive behavior. The firm studies responses that a competitor has taken previously when

attacked to predict likely responses.

Dependence on the Market Market dependence is the extent to which a firm’s revenues or profits are

derived from a particular market. In general, firms can predict that competitors with high market dependence

are likely to respond strongly to attacks threatening their market position.

Competitive Dynamic Slow cycle market

Competitive advantages are shielded from imitation for long periods of time and imitation is costly.

Competitive advantages are sustainable in slow-cycle markets.

All firms concentrate on competitive actions and responses to protect, maintain and extend proprietary competitive advantage.

Fast Cycle Market The firm’s competitive advantages aren’t shielded

from imitation. Imitation happens quickly and somewhat

expensively Competitive advantages aren’t sustainable. Competitors use reverse engineering to quickly

imitate or improve on the firm’s products Non-proprietary technology is diffused rapidly

Standard Cycle Market Moderate cost of imitation may shield competitive

advantages. Competitive advantages are partially sustainable

if their quality is continuously upgraded. Firms Seek large market shares Gain customer loyalty through brand names Carefully control operations

Corporate level Strategy Business-level Strategy (Competitive)

Each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets.

Corporate-level Strategy (Companywide) Specifies actions taken by the firm to gain a

competitive advantage by selecting and managing a group of different businesses competing in several industries and product markets.

Ansoff Matrix Market penetration

(existing markets, existing products): Market penetration occurs when a company enters/penetrates a market with current products. The best way to achieve this is by gaining competitors' customers (part of their market share).

Product DevelopmentProduct development (existing markets, new products): A firm with a market for its current products might embark on a strategy of developing other products catering to the same market

Market DevelopmentMarket development (new markets, existing products): An established product in the marketplace can be tweaked or targeted to a different customer segment, as a strategy to earn more revenue for the firm.

Diversification(New markets, new products),This resulted in the company entering new markets where it had no presence before.

Corporate level strategy Corporate-level Strategy’s Value

The degree to which the businesses in the portfolio are worth more under the management of the company than they would be under other ownership. What businesses should

the firm be in?

How should the corporate office manage the group of businesses?

Level of diversification

Reason for diversificationValue-Creating

Diversification• Economies of scope (related

diversification)• Sharing activities• Transferring core

competencies• Market power (related

diversification)• Blocking competitors

through multipoint competition

• Vertical integration• Financial economies

(unrelated diversification)• Efficient internal capital

allocation• Business restructuring

Value-Neutral Diversification

• Antitrust regulation• Tax laws• Low performance• Uncertain future cash

flows• Risk reduction for firm• Tangible resources• Intangible resourcesValue-Reducing

Diversification• Diversifying managerial

employment risk• Increasing managerial

compensation

Value-Creating Diversification Strategies

High

High

Low

Low

Firm creates value by building upon or extending:

Resources

Capabilities

Core competencies

Economies of Scope

Cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses. Corporate

Relatedness

Opera

tional

Rela

tedn

ess

Related diversification Value is created from economies of scope through:

Operational relatedness in sharing activities Corporate relatedness in transferring skills or corporate

core competencies among units.

The difference between sharing activities and transferring competencies is based on how the resources are jointly used to create economies of scope.

Operational Relatedness Created by sharing either a primary activity such as

inventory delivery systems, or a support activity such as purchasing.

Activity sharing requires sharing strategic control over business units.

Activity sharing may create risk because business-unit ties create links between outcomes.

Corporate relatedness Corporate Relatedness

Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise.

Creates value in two ways: Eliminates resource duplication in the need to

allocate resources for a second unit to develop a competence that already exists in another unit.

Provides intangible resources (resource intangibility) that are difficult for competitors to understand and imitate. A transferred intangible resource gives the unit receiving

it an immediate competitive advantage over its rivals.

Related diversificationMarket Power Market power exists when a firm can:

Sell its products above the existing competitive level and/or Reduce the costs of its primary and support activities below the competitive

level.

Multipoint Competition Two or more diversified firms simultaneously compete in the same product

areas or geographic markets.

Vertical Integration Backward integration—a firm produces its own inputs. Forward integration—a firm operates its own distribution system for

delivering its outputs

Complexities Simultaneous Operational Relatedness and Corporate Relatedness

Involves managing two sources of knowledge simultaneously: Operational forms of economies of scope Corporate forms of economies of scope

Many such efforts often fail because of implementation difficulties.

Unrelated diversification Financial Economies

Are cost savings realized through improved allocations of financial resources. Based on investments inside or outside the firm

Create value through two types of financial economies: Efficient internal capital allocations Purchase of other corporations and the restructuring their assets

Efficient Internal Capital Market Allocation Corporate office distributes capital to business divisions to create value for overall

company. Corporate office gains access to information about those businesses’ actual and

prospective performance. Conglomerates have a fairly short life cycle because financial economies are more

easily duplicated by competitors than are gains from operational and corporate relatedness.

Restructuring Restructuring creates financial economies

A firm creates value by buying and selling other firms’ assets in the external market.

Resource allocation decisions may become complex, so success often requires: Focus on mature, low-technology businesses. Focus on businesses not reliant on a client orientation.

Incentive to diversify External

Anti trust legislation

Tax Laws Internal

Low performance Uncertain future

cash flow Synergy and risk

reduction

Resources and diversification A firm must have both:

Incentives to diversify The resources required to

create value through diversification—cash and tangible resources (e.g., plant and equipment)

Value creation is determined more by appropriate use of resources than by incentives to diversify.

Managerial Motives to Diversify Managerial risk reduction Desire for increased

compensation

Value Creating Influences

Economies of Scope

Value Creating Influences

Economies of Scope

Value neutral influencesResources Incentives

Value neutral influencesResources Incentives

Value reducing influencesManagerial

motives

Value reducing influencesManagerial

motives

Capital Market intervention and

market for managerial talent

Capital Market intervention and

market for managerial talent

Diversification Strategy

Diversification Strategy

Internal Governance

Internal Governance



FirmsPerformance

Merger, Acquisition and Takeover Merger

Two firms agree to integrate their operations on a relatively co-equal basis.

Acquisition One firm buys a controlling, or 100% interest in

another firm with the intent of making the acquired firm a subsidiary business within its portfolio.

Takeover A special type of acquisition when the target firm

did not solicit the acquiring firm’s bid for outright ownership.

Reasons for Acquisitions and Problems in Achieving Success

Acquisition: Increased market power Factors increasing market power when:

There is the ability to sell goods or services above competitive levels.

Costs of primary or support activities are below those of competitors.

A firm’s size, resources and capabilities gives it a superior ability to compete.

Acquisitions intended to increase market power are subject to: Regulatory review Analysis by financial markets

Market power is increased by: Horizontal acquisitions: other firms in the same industry

Vertical acquisitions: suppliers or distributors of the acquiring firm

Related acquisitions: firms in related industries

Market Power Acquisitions Horizontal Acquisition

Acquisition of a company in the same industry in which the acquiring firm competes increases a firm’s market power by exploiting.

Cost-based synergiesCost-based synergies Revenue-based synergiesRevenue-based synergies

Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics

Vertical acquisitionVertical acquisition Acquisition of a supplier or distributor of one or more of the

firm’s goods or services Increases a firm’s market power by controlling additional

parts of the value chain. Related acquisitionRelated acquisition

Acquisition of a company in a highly related industry Because of the difficulty in implementing synergy, related

acquisitions are often difficult to implement.

Acquisitions Overcoming Entry Barriers Entry Barriers

Factors associated with the market or with the firms operating in it that increase the expense and difficulty faced by new ventures trying to enter that market Economies of scale Differentiated products

Cross-Border Acquisitions Acquisitions made between companies with headquarters in different

countries Are often made to overcome entry barriers. Can be difficult to negotiate and operate because of the differences in foreign

cultures.

Cost of New-Product Development and Increased Speed to Market Internal development of new products is often perceived as high-risk

activity. Acquisitions allow a firm to gain access to new and current products that are

new to the firm. Returns are more predictable because of the acquired firms’ experience with

the products.

Acquisitions Lower Risk Compared to Developing New Products.

An acquisition’s outcomes can be estimated more easily and accurately than the outcomes of an internal product development process. Managers may view acquisitions as lowering risk associated

with internal ventures and R&D investments.

Acquisitions may discourage or suppress innovation.

Increased Diversification Using acquisitions to diversify a firm is the quickest and easiest

way to change its portfolio of businesses.

Both related diversification and unrelated diversification strategies can be implemented through acquisitions.

The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful.

Acquisitions Reshaping the Firm’s Competitive Scope

An acquisition can: Reduce the negative effect of an intense rivalry on a firm’s financial

performance.

Reduce a firm’s dependence on one or more products or markets.

Reducing a company’s dependence on specific markets alters the firm’s competitive scope.

Learning and Developing New Capabilities An acquiring firm can gain capabilities that the firm does not

currently possess: Special technological capability

A broader knowledge base

Reduced inertia

Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base.

Problems in Achieving Acquisition Success Integration Difficulties

Integration challenges include: Melding two disparate corporate cultures Linking different financial and control systems Building effective working relationships (particularly when management

styles differ) Resolving problems regarding the status of the newly acquired firm’s

executives Loss of key personnel weakens the acquired firm’s capabilities and reduces

its value Inadequate Evaluation of the Target

Due Diligence The process of evaluating a target firm for acquisition Ineffective due diligence may result in paying an excessive premium for the

target company. Evaluation requires examining:

Financing of the intended transaction Differences in culture between the firms Tax consequences of the transaction Actions necessary to meld the two workforces

Problems in Achieving Acquisition Success Large or Extraordinary Debt

High debt (e.g., junk bonds) can: Increase the likelihood of bankruptcy Lead to a downgrade of the firm’s credit rating Preclude investment in activities that contribute to the firm’s long-term success

such as: Research and development, Human resource training, Marketing

Inability to Achieve Synergy Synergy

When assets are worth more when used in conjunction with each other than when they are used separately.

Firms experience transaction costs when they use acquisition strategies to create synergy.

Firms tend to underestimate indirect costs when evaluating a potential acquisition.

Private synergy When the combination and integration of the acquiring and acquired

firms’ assets yields capabilities and core competencies that could not be developed by combining and integrating either firm’s assets with another company. Advantage: It is difficult for competitors to understand and imitate. Disadvantage: It is also difficult to create.

Problems in Achieving Acquisition Success Too Much Diversification

Diversified firms must process more information of greater diversity. Increased operational scope created by diversification may cause

managers to rely too much on financial rather than strategic controls to evaluate business units’ performances.

Strategic focus shifts to short-term performance. Acquisitions may become substitutes for innovation.

Managers Overly Focused on Acquisitions Managers invest substantial time and energy in acquisition

strategies in: Searching for viable acquisition candidates. Completing effective due-diligence processes. Preparing for negotiations. Managing the integration process after the acquisition is completed.

Managers in target firms operate in a state of virtual suspended animation during an acquisition. Executives may become hesitant to make decisions with long-term

consequences until negotiations have been completed. The acquisition process can create a short-term perspective and a

greater aversion to risk among executives in the target firm.

Successful Acquisitions Attributes

Acquired firm has assets or resources that are complementary to the acquiring firm’s core business

Acquisition is friendly Acquiring firm conducts effective due diligence to select target firms and

evaluate the target firm’s health (financial, cultural, and human resources)

Acquiring firm has financial slack (cash or a favorable debt position) Merged firm maintains low to moderate debt position Acquiring firm has sustained and consistent emphasis on R&D and

innovation Acquiring firm manages change well and is flexible and adaptable

Results High probability of synergy and competitive advantage by maintaining

strengths Faster and more effective integration and possibly lower premiums Firms with strongest complementarities are acquired and overpayment is

avoided Financing (debt or equity) is easier and less costly to obtain Lower financing cost, lower risk (e.g., of bankruptcy), and avoidance of

trade-offs that are associated with high debt Maintain long-term competitive advantage in markets Faster and more effective integration facilitates achievement of synergy

Effective Acquisition Strategies Complementary Assets /Resources

Buying firms with assets that meet current needs to build competitiveness.

Friendly Acquisitions Friendly deals make integration go more smoothly.

Careful Selection Process Deliberate evaluation and negotiations are more likely to lead to

easy integration and building synergies. Maintain Financial Slack

Provide enough additional financial resources so that profitable projects would not be foregone.Attributes of Effective Acquisitions

Low-to-Moderate Debt Merged firm maintains financial flexibility

Sustain Emphasis Innovation Continue to invest in R&D as part of the firm’s overall strategy

Flexibility Has experience at managing change and is flexible and adaptable

Restructuring A strategy through which a firm changes its

set of businesses or financial structure. Failure of an acquisition strategy often precedes a

restructuring strategy. Restructuring may occur because of changes in

the external or internal environments.

Restructuring strategies: Downsizing Downscoping Leveraged buyouts

Types of Restructuring: DownscopingDownsizing A reduction in the number of a firm’s employees and

sometimes in the number of its operating units. May or may not change the composition of businesses in

the company’s portfolio. Typical reasons for downsizing:

Expectation of improved profitability from cost reductions Desire or necessity for more efficient operations

A divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core businesses.

A set of actions that causes a firm to strategically refocus on its core businesses. May be accompanied by downsizing, but not eliminating

key employees from its primary businesses. Smaller firm can be more effectively managed by the top

management team.

Restructuring Leveraged Buyouts (LBO)

A restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private. Significant amounts of debt may be incurred to finance

the buyout. Immediate sale of non-core assets to pare down debt.

Can correct for managerial mistakes Managers making decisions that serve their own

interests rather than those of shareholders.

Can facilitate entrepreneurial efforts and strategic growth.

Restructuring and Outcomes

Strategic Leadership Strategic leadership requires the ability to:

Anticipate and envision. Maintain flexibility. Empower others to create strategic change as necessary.

Strategic leadership is: Multi-functional work that involves working through others. Consideration of the entire enterprise rather than just a sub-unit. A managerial frame of reference.

Effective strategic leaders: Manage the firm’s operations effectively. Sustain a high performance over time. Make better decisions than their competitors. Make candid, courageous, pragmatic decisions. Understand how their decisions affect the internal systems in use by the

firm. Solicit feedback from peers, superiors and employees about their

decisions and visions.

Managers as an Organizational Resource Managers often use their discretion when making

strategic decisions and implementing strategies. Factors affecting the amount of decision-making

discretion include: External environmental sources Characteristics of the organization Characteristics of the manager

Top management team Managers often use their discretion when making

strategic decisions and implementing strategies. Factors affecting the amount of decision-making

discretion include: External environmental sources Characteristics of the organization Characteristics of the manager

Firm Performance and Strategic Change Heterogeneous top management teams:

Have difficulty functioning effectively as a team. Require effective management of the team to

facilitate the process of decision making but … Are associated positively with innovation and

strategic change. May force the team or members to “think outside

of the box” and be more creative. Have greater capacity to provide effective

strategic leadership in formulating strategy.

CEO and Top Management Team Power Higher performance is achieved when board of directors are

more directly involved in shaping strategic direction. A powerful CEO may:

Appoint sympathetic outside board members. Have inside board members who report to the CEO. Have significant control over the board’s actions. May also hold the position of chairman of the board (CEO

duality).

Duality often relates to poor performance and slow response to change. CEOs of long tenure can also wield substantial power. CEOs can gain so much power that they are virtually

independent of oversight by the board of directors.

The most effective forms of governance share power and influence among the CEO and board of directors.

Managerial Succession Organizations select managers and strategic leaders from

two types of managerial labor markets: Internal managerial labor market

Advancement opportunities related to managerial positions within a firm.

External managerial labor market Career opportunities for managers in organizations other

than the one for which they currently work. Advantages of internal managerial labor market include:

Experience with the firm and industry environment. Familiarity with company products, markets, technologies, and

operating procedures. Lower turnover among existing personnel.

Advantages of the external managerial labor market include: Long-tenured insiders may be “stale in the saddle”—outsiders

may bring fresh perspectives.

Key Strategic Leadership Actions Determining Strategic Direction

Determining strategic direction involves developing a long-term vision of the firm’s strategic intent. Five to ten years into the future Philosophy with goals The image and character the firm seeks

Ideal long-term vision has two parts: Core ideology Envisioned future

Exploiting and Maintaining Core Competencies Core competencies

Resources and capabilities of a firm that serve as a source of competitive advantage over its rivals.

Leadership must verify that the firm’s competencies are emphasized in strategy implementation efforts.

Firms must continuously develop or even change their core competencies to stay ahead of competitors

Key Strategic Leadership Actions Developing Human Capital and Social Capital

Human capital The knowledge and skills of the firm’s entire workforce are a

capital resource that requires investment in training and development.

Social capital Relationships inside and outside the firm that help it accomplish

tasks and create value for customers and shareholders. Sustaining an Effective Organizational Culture

Organizational Culture The complex set of ideologies, symbols and core values shared

through the firm, that influences the way business is conducted. Entrepreneurial Orientation

Personal characteristics that encourage or discourage entrepreneurial opportunities. Autonomy Proactiveness Innovativeness Risk taking

Key Strategic Leadership Actions Sustaining an Organizational Culture

Changing a firm’s organizational culture is more difficult than maintaining it. Effective strategic leaders recognize when change in culture is needed.

Shaping and reinforcing culture requires: Effective communication Problem solving skills Selection of the right people Effective performance appraisals Appropriate reward systems

Emphasizing Ethical Practices Effectiveness of processes used to implement the firm’s strategies

increases when based on ethical practices. Ethical practices create social capital and goodwill for the firm.

Actions that develop an ethical organizational culture include: Establishing and communicating specific goals to describe the firm’s

ethical standards. Continuously revising and updating the code of conduct. Disseminating the code of conduct to all stakeholders to inform them of

the firm’s ethical standards and practices.

Key Strategic Leadership Actions Emphasizing Ethical Practices

Actions that develop an ethical organizational culture include: Developing and implementing methods and procedures

to use in achieving the firm’s ethical standards. Creating and using explicit reward systems that

recognize acts of courage. Creating a work environment in which all people are

treated with dignity.

Key Strategic Leadership Actions Establishing Organizational Controls

Controls Formal, information-based procedures used by managers to maintain or alter

patterns in organizational activities. Controls help strategic leaders to:

Build credibility Demonstrate the value of strategies to the firm’s stakeholders Promote and support strategic change

The Balanced Scorecard A framework used to verify that the firm has established both strategic

and financial controls to assess its performance. Prevents overemphasis of financial controls at the expense of strategic

controls Four perspectives of the balanced scorecard

Financial Customer Internal business processes Learning and growth

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