Sustainable Business Strategy (MBA module 5 of 8)

Introduction

The determination of the long-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of resource necessary for carrying out these goals (Alfred D. Chandler)
Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value) Michael Porter
A pattern in a stream of decisions (Henry Mintzberg)
The long-term direction of an organisation (Exploring Strategy)
4 perspective

Top-down

Corporate strategy

Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts

Business strategy

Bottom-up

Emergent sense of what the strategy should be operational experience

Market requirements

Quality
Speed
Dependability
Flexibility
Cost

Operations resources

Capacity
Supply network
Process technology
Development and organisation

The exploring strategy model

Strategic Position

Environment
Capability
Purpose
Culture

Strategic choices

Business
International
Acquisitions & Alliances
Innovation
Corporate

Strategy in action

Evaluating
Organising
Practice
Changing
Processes

The strategy checklist

What are the environmental opportunities and threats?

How should business units compete?
Which strategies are suitable, acceptable and feasible?

What the organisation’s strengths and weaknesses?

Which businesses to include in the portfolio
What kind of strategy-making process is needed?

What is the basic purpose of the organisation?

Where should the organisation compete internationally?
What are the required organisation structures and systems?

How does culture shape strategy?

Is the organisation innovating appropriately?
How should the organisation manage necessary changes?

Dealing with competitors

Should the organisation buy other companies, ally or go it alone?
Negotiate or compete ruthlessly?

4 strategy lenses

Design: strategy development seen as the deliberate positioning of the organisation through a rational, analytic, structured and directive process. Strategist as architect; excludes improvisation.
Experience: strategy development seen as the outcome of individual and collective experience of individuals and their taken-for-granted assumptions. Well embedded and building on past strengths but with low expectation of radical change.
Variety (idea): strategy seen as the emergence of order and innovation from the variety and diversity which exist in and around organisations. Emerging from changes happening within and around the organisation.
Discourse: strategy development seen in terms of language as a ‘resource’ for managers by which strategy is communicated, explained and sustained and through which managers gain influence, power and establish their legitimacy as strategists. Focuses on the importance of how issues are framed because ‘talk matters’

Thinking strategically

What are the limits?
What are the risks?
Considering the environment
What can I change and what can I not change?
God grant me the serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference (Reinhold Niebuhr)
It is one thing to understand strategic models and theories; it is a totally different thing to make the right strategic choices.
Driven by process of information gathering, past experiences and learning. It requires multi-dimensional skills

Holistic = Atomistic
Projective = Current
Creative = Evaluative

Logic and creativity paradox

Logical thinking: the ability of managers to critically reflect on the assumptions they hold and to make their tacit beliefs more explicit
Creative thinking: the ability of managers to abandon the rules, governing sound argumentation and generating new understanding.

Overview of the perspectives

Rational reasoning

Logic over creativity
Analytical
Formal, fixed rules
Deductive and computational
Vertical
Recognising and analysing activities
Formulation and implement activities
Consistency and rigour
Objective, (partially) knowledge
Incomplete information
Calculation
Strategy as science
Analytical approach involving logical thinking
Bounded rationality: Inability to take maximising solution due to cognitive limitations, knowledge constraints, time constraints etc

Generative reasoning

Creativity over logic
Intuitive
Informal, variable rules
Inductive and imaginative
Lateral
Reflecting and sense-making activities
Imaging and doing activities
Unorthodoxy and innovativeness
Subject, (partially) creatable
Adherence to current cognitive map
Judgement
Strategy as art

When you have eliminated the impossible, whatever remains, however improbable, must be the truth (Sherlock Holmes, Arthur Conan Doyle, 1859-1930)
Imagination is more important than knowledge (Albert Einstein, 1879-1955)

Strategic management

It enables management to know from time to time where the organisation stands in relation to predetermined future position
It is possible for an enterprise having good strategies to fail because it has a poor control system
Why control?

Control is necessary to assess effectiveness of each strategy. Control provides feedback that is critical for determining whether strategies are suitable, acceptable & feasible
Control is necessary to check progress towards objectives and to monitor any developments which require a change of plan
Control is necessary to measure standards against actual results. Comparisons against target and the coincident variance analysis will enable corrective action to be taken
The essence of control is the ability to bring about a desired future outcome. In this sense it can be seen that control itself is a process and not an event

Example of failed management

General motors is the largest firm in 1995

2009: GM forced into bankruptcy $19.4 billion in federal help wasn’t enough to keep the nation’s largest automaker out of bankruptcy. The government will pour another $30 billion into GM.
Taxpayers end up with 60% of GM
GM = Government Motors
GM not thinking long term, not thinking strategically

Blockbuster
Toy R Us
Borders
Blackberry

The field of strategic management deals with the major intended (prescriptive) and emergent initiatives taken by general managers on behalf of owners, involving utilisation of resources, to enhance the performance of firms in their external environments (Lynch, 2018)
Strategic management is the pattern of major objectives or goals and essential policies for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be
Prescriptive theories include

Competition based
Resource based
Game-theory based
Co-operation and network theories

Emergent theories include:

Survival-based
Uncertainty-based
Human resource-based
Innovation and learning-based

Importance

It involves the entire organisation
Concerns with the survival of the organisation & the creation of value
Provides clearer sense of vision and direction
Sharper focus on what is strategically important
Improved understanding of rapidly changing environment

Key strategic questions

Where is the organization now?
If no changes are made, where will the organization be in one, two, five or ten years? Are the answers acceptable?
If the answers are not acceptable, what specific actions should management undertake? What are the risks and payoffs involved?
Where are we now?
Where do we want to go?

Business(es) to be in and market positions to stake out
Buyer needs and groups to serve
Outcomes to achieve

How will we get there?

A company’s answer to this question is its strategy

Composition of strategic management

Environmental analysis
Strategy formulation
Strategy implementation
Evaluation & control

Environmental analysis

External environment (PEST factors)
Task environment (industry)
Internal environment

Strategy formulation

Corporate strategy (directional)
Business strategy
Functional strategy

Three elements of the strategic decision

Context: the environment within which the strategy operates and is developed
Content: the main actions of the proposed strategy
Process: how the strategy will be developed and achieved

Strategy

Strategy is the direction and scope of an organisation over the long term: ideally, which matches its resources to its changing environment, and in particular its markets, customers or clients so as to meet stakeholder expectations (Johnson & Scholes)
What business strategy is all about is, in a word, competitive advantage ... The sole purposes of strategic planning is to enable a company to gain, as efficiently as possible, a sustainable edge over its competitors (Kenichi Ohmae)
Strategy is a deliberate search for a plan of action that will develop a business’s competitive advantage and compound it. For any company, the search is an iterative process that begins with a recognition of where you are now and what you have now. Your most dangerous competitors are those that are most like you. The differences between you and your competitors are the basis of your advantage. If you are in business and are self supporting, you already have some kind of advantage, no matter how small or subtle ... The objective is to enlarge the scope of your advantage, which can only happen at someone else’s expense. (Bruce Henderson, Founder of Boston Consulting Group)
Strategy is not a detailed plan or programme of instructions; it is a unifying theme that gives coherence and direction to the actions and decisions of an individual or organisation (Robert Grant)
Hierarchy of strategy

Corporate strategy: is concerned with the overall purpose and scope of an organisation and how to add value to business units
Business (division level) strategy: is concerned with the way a business seeks to compete successfully in its particular market
Operational / functional strategy: is concerned with how different parts of the organisation deliver the strategy in terms of managing resources, processes and people

Crafting strategy

Concentrate on a single business or build a diversified group of businesses
Cater to a broad range of customers or focus on a particular market niche
Develop a wide or narrow product line
Pursue a competitive advantage based on low cost or product superiority or unique organisation capabilities

Pattern of actions that define strategy

Actions to out compete rivals
Responses to changing external circumstances
Actions to alter geographic coverage
Actions to merge or acquire rival companies
Actions to form strategic alliances and collaborative partnerships
Efforts to pursue new opportunities or defend against threats
How functional activities are managed
Actions to strengthen resources & capabilities
Actions to diversify

Fundamental nature of competition is changing

Rapid technological changes
Rapid technological diffusions
Dramatic changes in information and communication technologies
Increasing importance knowledge
The pace of change is relentless and increasing

Traditional industry boundaries are blurring, such as

Online shopping
Smart technology

The global economy is changing

People, goods, services and ideas move freely across geographic boundaries
New opportunities emerged in multiple global markets
Markets and industries become more internationalised
Traditional sources of competitive advantages no longer guarantee success

New keys to success include

Flexibility
Innovation
Integration

Market-based model

The external environment
An attractive industry
Strategy formulation
Assets and skills
Strategy implementation
Superior returns
Outside‐in approach
More risky
Focus: beating competition
The Market-Based Model suggests that above-average returns for any firm are largely determined by characteristics outside the firm
This model largely focuses on industry structure of attractiveness of the external environment rather than internal characteristics of the firm
Strategy dictated by the external environments of the firm (what opportunities exist in these environments?)
Firm develops internal skills required by external environment (what can the firm do about the opportunities?)

Resources-based model

Capability
Competitive advantage
An attractive industry
Strategy implementation
Superior returns
Inside‐out approach
More certainty
Focus: core competence
The Resource-Based model suggests that above-average returns for any firm are largely determined by characteristics inside the firm
This model focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate
Strategy dictated by unique resources, capabilities and core competencies of the firm (what can the firm do best?)
Find an environment in which to exploit these assets (where are the best opportunities?)

Summary

Guides entire firm regarding “what it is we are trying to do and to achieve”
Makes managers more alert to winds of change, new opportunities, and threatening developments
Unifies numerous strategy-related decisions and organisational efforts
Creates a proactive atmosphere
Promotes development of an evolving business model focused on bottom-line success
Provides basis for evaluating competing budget requests

Competition and generic strategy

A strategic business unit (SBU) supplies

goods or services for a distinct domain of activity
A small business has just one SBU
A large diversified corporation is made up of multiple businesses (SBUs)
SBUs can be called ‘divisions’ or ‘profit centres’
SBUs can be identified by:

Market-based criteria (similar customers, channels and competitors)
Capabilities-based criteria (similar strategic capabilities)

To decentralise initiative to smaller units within the corporation so SBUs can pursue their own distinct strategy
To allow large corporations to vary their business strategies according to the different needs of external markets
To encourage accountability – each SBU can be held responsible for the success or failure of its own strategy
SBU business strategy

Generic strategies

Cost leadership

Determine & control Cost Drivers
Reconfigure the value chain as needed
Building efficient scale facilities
State of the art manufacturing facilities
Simplification of processes
Minimising costs of sales, R&D and service
Monitoring costs of activities provided by outsiders
Tight control of production costs and overhead
Risk

Competitors imitate
Technology changes
Other bases for cost leadership erode
Proximity in differentiation is lost
Cost focusers achieve even lower cost in segments

Differentiation

Broad mass market
Unique product or service
Charge premiums
Lower customer sensitivity to price
Developing new systems and processes
Shaping perceptions through advertising
Quality focus
Capability in R&D
Maximise Human Resource contributions through low turnover and high motivation
Lowering buyers’ costs
Raising buyers’ performance
Creating sustainability through creating barriers by perceptions of uniqueness and creating switching costs through differentiation
Examples

Unique product features
Unique product performance
Exceptional services
Quality of inputs
New technologies
Exceptional skill or experience
Detailed information

Risk

Competitors imitate
Bases for differentiation become less important to buyers
Cost proximity is lost
Differentiation focusers achieve even greater differentiation in segments

Focus

Large firms may overlook small niches
Firm may lack resources to compete industry-wide
May be able to serve a narrow market segment more effectively than industrywide competitors
Focus can allow you to direct resources to certain value chain activities to build competitive advantage
Cost focus

Low cost competitive strategy
Focus on particular buyer group or market
Niche focused
Seek cost advantage in target market

Differentiation focus

Focus on particular group or geographic market
Seek differentiation in targeted market segment
Serve special needs of narrow target market

Risk

The target segment becomes structurally unattractive
Structure erodes
Demand disappears
Broadly targeted competitors overwhelm the segment
The segment’s differences from other segments narrow
The advantages of a broad line increase
New focusers subsegment the industry

Hybrid strategies

A Hybrid Strategy seeks to simultaneously achieve differentiation & low price relative to competitors
A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position
Adapt quickly to environmental changes
Learn new skills and technologies more quickly
Effectively leverage its core competencies while competing against its rivals
To enter markets and build position quickly
As an aggressive attempt to win market share
To build volume sales and gain from mass production

Integrated low cost strategy

Low cost

Use a single aircraft model
Fly short routes
No meals on board 40 minutes turnaround time
No reserved seats
Ticketless travel
Toyota has achieved low cost leadership because it has developed considerable skills in efficient supply chain management and low cost assembly capabilities
Transferring these capabilities in making high-quality Toyota models at low cost to making premium quality Lexus model

Differentiation

Focus on customer satisfaction
High level of employee dedication
Unique value creation – first no frill airline in South East Asia
Well trained cabin crew
Designing an array of high performance characteristics & upscale features into the Lexus models, making them comparable in performance & luxury to other high end brands

Michael Porter introduced the term ‘generic strategy’ to mean basic types of competitive strategy that hold across many kinds of business situations
Competitive strategy is concerned with how a strategic business unit achieves competitive advantage in its domain of activity
Competitive advantage is about how an SBU creates value for its users, both greater than the costs of supplying them and superior to that of rival SBUs
It is best to choose which generic strategy to adopt and then stick rigorously to it
Failure to do this leads to a danger of being ‘stuck in the middle’ – doing no strategy well
The argument for pure generic strategies is controversial. Porter acknowledges that the strategies can be combined (e.g. if being unique costs nothing)
A company can create separate strategic business units each pursuing different generic strategies and with different cost structures
Technological or managerial innovations where both cost efficiency and quality are improved
Competitive failures – if rivals are similarly ‘stuck in the middle’ or if there is no significant competition then ‘middle’ strategies may be OK

Interactive strategies

Hyper-competitive strategy
Cooperation
Game theory

Summary of SBU

Competitiveness of today's products
Portfolio of business related in product-market terms
Autonomy is sacrosanct; the SBU 'owns' all resources other than cash
Discrete businesses are the unit of analysis; capital is allocated business by business
Optimising corporate returns through capital allocation trade-offs among businesses

Strategy clock: provides an alternative approach to generic strategy which gives more scope for hybrid strategies

It is focused on the prices to customers rather than the costs to organisations
The circular design allows for incremental adjustments in strategy rather than stark choices

Differentiation strategies
Low-price strategies
Hybrid strategies
Non-competitive strategies

Seeks to simultaneously achieve higher benefits and lower prices relative to those of competitors.
Hybrid strategies can be used:

To enter markets and build position quickly
As an aggressive attempt to win market share
To build volume sales and gain from mass production
A classic example is IKEA

Porter's 4 forces framework

Threat of entry

New market entrants threaten incumbents in two ways

Reduction of incumbent firms’ market share
Decrease in market concentration and consequent increase in internal rivalry

Threat of entry is dependent on extent of entry barriers such as

Significant economies of scale
Legislation or government action
Access to key inputs (resources, technology, etc)
Consumer or supplier loyalty
Experience curve
Expected retaliation (price war, marketing blitz)

Economies of Scale
Product differentiation
Capital requirements
Switching costs
Access to supply & distribution channels
Government policy
Expected retaliation

Threat of substitutes

Substitutes erode profits by reducing incumbents share of demand and increase rivalry
Types include: product-for-product substitution (e.g. air vs. rail travel); substitution of need (e.g. reliable and cheap appliances reduce need for maintenance services); generic substitution (e.g. competition for household income)
Two important points

Price/performance ratio: more expensive substitute may pose effective threat if offering performance advantages valued by customers
Price elasticity of industry demand: where industry-level price elasticity is large rising industry prices drive consumers to purchase substitute products

Buying power

Buyer power refers to ability of firms immediate (or ultimate) customers to negotiate purchase prices that extract profits from sellers
Buyer power is likely to be high with the following prevailing conditions:

Concentration of buyers – where a few large customers account for majority of sales (e.g. milk and the grocery sector)
Buyer competition threat: possibility for backward vertical integration
Low supplier switching costs: switching cost typically low for weakly differentiated commodities e.g. steel

Bargaining down prices
Forcing higher quality
Playing firms off of each other
Buyers are concentrated or purchases are large relative to seller’s sales
Purchase accounts for a significant fraction of supplier’s sales
Products are undifferentiated
Buyers face few switching costs
Buyer presents a credible threat of backward integration
Product unimportant to quality
Buyer has full information

Supplier power

Supplier power is likely to be high where there are

Concentration of suppliers: Few producers dominate supply thus giving more power over buyers
Customers that are fragmented and bargaining power low
High supplier switching costs: where its expensive or disruptive to change suppliers (e.g. Microsoft and operating systems)
Supplier competition threat: possibility for forward vertical integration

Threatening to raise prices or to reduce quality
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Supplier industry is dominated by a few firms
Suppliers’ products have few substitutes
Suppliers’ product is an important input to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high switching costs
Supplier poses credible threat of forward integration

Competitive rivalry

Competitive rivals are organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market (they are distinct from substitutes).
The degree of rivalry is increased when

Competitors are of roughly equal size
Competitors are aggressive in seeking leadership
The market is mature or declining
There are high fixed costs
The exit barriers are high
There is a low level of differentiation

How aggressively are rivals using various weapons of competition to improve their market positions and performance?
Industry growth
Number of competitors & the balance of power
Jockeying for strategic position
Using price competition
Staging advertising battles
New product launch

Key aspects and limitations

Use at level of strategic business units (SBU)
Define the industry/market/sector. Apply at the most appropriate level – not necessarily the whole industry. E.g. the European low cost airline industry rather than airlines globally
Don’t just list the forces: derive implications for industry and assess each force as high, moderate or low
Having the 5 forces in mind identify attractiveness of the industry – important while making a choice (e.g. which industries/markets to enter or leave)
Pays little attention to factors affecting Demand
Considerations of changes in consumer income, tastes, and firm strategies for boosting demand
No explicit account of government role (as regulator)
Qualitative framework: indicative of trends but not means of estimating probabilities of threats
Focuses on whole industry rather than industry sectors and individual firms (e.g. airline industry)
A potentially “new force” identified: Complementors
What is the likelihood that the nature of the relationships identified by the five forces model will change given the trends in the external environment? Are there ways of benefiting from these potential changes?
How can the company improve its current position in the market? Can the company increase its power, relative to suppliers and customers? How?
Given the forces in the industry, what is the relative position of the organisation’s rivals?

Complementors

Demand complementors

An organisation is your complementor if it enhances your business attractiveness to customers. (E.g. app suppliers are complementors to smartphone producers).

Supply complementors

An organisation is a complementor with respect to suppliers if it is more attractive for a supplier to deliver when it also supplies the other organisation. (E.g. a competing airline can be a complementor with respect to a supplier like Boeing – as Boeing may invest more in improvements if they are supplying both airlines).

Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases.

These characteristics are different from those in other strategic groups in the same industry or sector
There are many different characteristics that distinguish between strategic groups
Strategic groups can be mapped on to two-dimensional charts (maps). These can be useful tools of analysis
Identify competitive characteristics that specify strategic groups ('characteristics for identifying different strategic groups')
Identify the leading pairs of independent variables linked to the strategic groups
Plot the pairs as a matrix or as a two-variable map
Assess which competitors should be grouped together using the two variables (some may need to be left as individual companies)
Plot the groups by positioning them on the map
Draw circles centred around the group/competitor with the radius or area representing turnover for the group or competition
Understanding competition: enables focus on direct competitors within a strategic group, rather than the whole industry. (E.g. Tesco will focus on Sainsburys and Asda.) To establish the different bases of competitive rivalry within and between the strategic groups.
Analysis of strategic opportunities: helps identify attractive ‘strategic spaces’ within an industry. Changes in the macro-environment may create attractive strategic spaces (strategic gaps) within an industry.
Analysis of ‘mobility barriers’: i.e. obstacles to movement from one strategic group to another. Use to assess if an organisation could move from one group to another (analysis of mobility barriers). These barriers can be overcome to enter more attractive groups. Barriers can be built to defend an attractive position in a strategic group.
Scope of activities

Extent of product (or service) diversity
Extent of geographical coverage
Number of number segments served
Distribution channels used

Resource commitment

Extent (number) of branding
Marketing effort (e.g. advertising spread, size of salesforce)
Extent of vertical integration
Product or service quality
Technological leadership (a leader or follower)
Size of organisation

Competition is the most intense WITHIN the same strategic group (Brand Competition)
Intensity of competition BETWEEN groups depend on the distance between them (Industry/Form Competition)
Broad product & national scope

Regionally focused broad-line producers e.g. Fiat, PSA, Renault, Rover, Chrysler

Medium product & national scope

Nationally focused, intermediate line producers e.g. Tofas, Vaz, Maruti

Narrow product & national scope

Nationally focused, small, specialist producers e.g. Bristol (UK), Classic Roadsters (USA), Morgan (UK)

Broad range & global scope

Global road-line producers e.g. GM, Ford, Toyota, Nissan, Honda, VW, Hyundai

Medium range & global scope

Global suppliers of narrow model range e.g. Volvo, Subaru, Isuzu, Suzuki, Saab

Narrow range & global scope

Luxury car manufacturers e.g. Jaguar, Rolls Royce, Daimler-Benz, BMW

Strategic gap

Opportunities in business environment not being fully exploited by the competition (Kim & Mauborgne 1999)

Substitute industries
Other strategic groups or strategic spaces
The chain of buyers
Complementary products and services
New market segments
Markets developing over time

Market segment: a group of customers who have similar needs that are different from customer needs in other parts of the market

Where these customer groups are relatively small, such market segments are called ‘niches’.
Customer needs vary. Focusing on customer needs that are highly distinctive is one means of building a secure segment strategy.
Customer needs vary for a variety of reasons – these factors can be used to identify distinct market segments.
Not all segments are attractive or viable market opportunities – evaluation is essential
Two issues are particularly important in market segment analysis

Variation in customer needs: Focusing on customer needs that are highly distinctive from those typical in the market is one means of building a long-term segment strategy.
Specialisation within a market segment can also be an important basis for a successful segmentation strategy. This is sometimes called a ‘niche strategy’

Characteristics of people/organisations

Age, gender, ethnicity
Income
Family size
Life-cycle stage
Location
Lifestyle
Industry
Location
Size
Technology
Profitability
Management

Purchase/use situation

Size of purchase
Brand loyalty
Purpose of use
Purchasing behaviour
Importance of purchase
Choice criteria
Application
Volume
Frequency of purchase
Purchasing procedure
Choice criteria
Distribution channel

Users' needs and preference of product characteristics

Product similarity
Price preference
Brand preferences
Desired features
Quality
Performance requirements
Assistance from suppliers
Quality
Service requirements

Strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased

For a food manufacturer it is the multiple retailers (e.g. Tesco) that are the strategic customers, not the ultimate consumer.
For a pharmaceutical manufacturer it is the health authorities and hospitals, not the final patient

Critical success factors are those factors that are either particularly valued by customers or which provide a significant advantage in terms of cost

Critical success factors are likely to be an important source of competitive advantage if an organisation has them (or a disadvantage if an organisation lacks them)
Different industries and markets will have different critical success factors (e.g. in low-cost airlines the CSFs will be punctuality and value for money whereas in full-service airlines it is all about quality of service)

Blue Ocean thinking

‘Blue Oceans’ are new market spaces where competition is minimised

Create uncontested market space
Make the competition irrelevant
Create and capture new demand
Break the value-cost trade-off
Align the whole system of a firm’s activities in pursuit of differentiation and low cost
Value innovation = innovative value

‘Red Oceans’ are where industries are already well defined and rivalry is intense

Compete in existing market space
Beat the competition
Exploit existing demand
Make the value-cost trade-off (either / or)
Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost
Value creation or addition = added value

Blue Ocean thinking encourages entrepreneurs and managers to be different by finding or creating market spaces that are not currently being served
A ‘strategy canvas’ compares competitors according to their performance in order to establish the extent of differentiation
To win in the future, companies must stop competing with each other. The only way to beat the competition is to stop trying to beat the competition
Value innovation

Value innovation places equal emphasis on value and innovation
Value innovation is a new way of thinking about and executing strategy that results in the creation of a blue ocean
The creation of blue oceans is about driving costs down while simultaneously driving value up for buyers
Cost Savings – eliminate & reduce competing factors
Buyer Value lifted – raise & create new elements

Market boundaries

Across alternate industry

E.g. budget airline transit between economy flights and luxury coach

Across strategic groups

Some industries compete principally on price and function – their appeal is rational
Other industries compete largely on feelings – their appeal is emotional

Across buyer groups
Across complementary scope of products & services
Across functional emotional orientation
Across time

E.g. YouTube generates content overtime and get acquired by Google

Opportunities and threats

The critical issue in undertaking environmental analysis is the implications that are drawn from this understanding in guiding strategic decisions and choices
Identifying opportunities and threats is extremely valuable when thinking about strategic choices
Opportunities and threats form one half of the SWOT analysis that shapes strategy

Innovation

Innovation involves the conversion of new knowledge into a new product, process or service and the putting of this new product, process or service into actual use
Invention → creation of something new → new knowledge

Cash → ideas

Innovation → transformation of an idea or resources into useful applications → new products, services or processes

Ideas → cash

Innovare

Latin word
The process of creating value from ideas
It is all about change

The cure for Apple is not cost-cutting. The cure for Apple is to innovate its way out of its current predicament (Steve Jobs)
Strategy innovation

Strategy Innovation is the capacity to re-conceive the existing industry model in ways that create new value for customers, wrong-foot competitors, and produce new wealth for all stakeholders
Does the company accept or challenge industry conditions?
Does the company focus on segmenting or revolutionising markets?
Does the company focus on improvement or total reconfiguration?

Example

Uber: world’s largest taxi company, owns no vehicles
Facebook: world’s most popular media owner, creates no content
Alibaba: world’s most valuable retailer, has no inventory
Airbnb: world’s largest accommodation provider, owns no real estate

Closed innovation is based on the view that innovations are developed by companies themselves. From the generation of ideas to development and marketing, the innovation process takes place exclusively within the company

It started with a simple idea
Dr. Spencer Silver, a chemist at 3M, invented a unique, low-tack adhesive that would stick on things &can be reused multiple times. He was trying to invent a super strong adhesive, but he came up with a super-weak one instead
A colleague at 3M, was singing in his church choir. He became frustrated when the bookmarks he used to mark his place in his hymnal kept falling out. He remembered Dr Silver’s work
3M launched the product under the name “Press 'n Peel" in four cities. No immediate success
3M relaunched the product & renamed it Post-it®

Open innovation

Open innovation means a situation where an organisation doesn’t just rely on their own internal knowledge, sources and resources (such as their own staff or R&D for example) for innovation but also uses multiple external to drive innovation
Collaboration between startup companies in Silicon Valley aiming for new features or integrations within Samsung’s existing products.
Described as investments into startups to provide access to new technologies that Samsung can learn & benefit from. E.g. Samsung invested in Mobeam, a mobile payment company
Samsung offers the startups an innovative environment and facilities to create new things. Products stemming from the internal startups could become a part of Samsung’s product portfolio over time.
Aims to bring in startups working on innovations that are at the core of Samsung’s strategic areas of the future. E.g. Samsung acquired an IoT company called SmartThings to gain an IoT platform without having to spend the money on R&D

Complex innovation

If technologies are very closely linked, open innovation can carry certain risks: inappropriate elements could be included that harm the innovation process itself or even have a negative impact on the entire product range. A prime example of this is Apple with its highly integrated and coordinated product range. The company is therefore more inclined towards closed innovation

Unique innovation

A closed innovation is usually preferred when an innovation produces fundamental technological improvements that give the company an unassailable advantage over its competitors
Apple tries to keep new products a secret until official launch. Even internal staff do not know about the official specifications until one day before the launch

Hyper-competition

In industries with intensive competition, closed innovation is usually better suited to exploit advantages for the company itself

Mapping innovation (Greg Satell, 2017)

There are many problems that need to be solved. So the key to success is to identify the right strategy for the type of problem we are trying to solve
Innovation is about finding novel solutions to problems!

Resources

The resource-based view (RBV) of strategy asserts that the competitive advantage and superior performance of an organisation are explained by the distinctiveness of its capabilities. It is sometimes also called the ‘capabilities view’
The resources and capabilities of an organisation contribute to its long-term survival and potentially to competitive advantage

Resources are the assets that organisations have or can call upon (e.g. from partners or suppliers), that is ‘what we have’.
Capabilities (sometimes referred to as competences) are the ways those assets are used or deployed, that is ‘what we do well’
Threshold capabilities are those needed for an organisation to meet the necessary requirements to compete in a given market and achieve parity with competitors in that market – ‘qualifiers’
Distinctive capabilities are those that are required to achieve competitive advantage. Distinctive or unique capabilities that are of value to customers and which competitors find difficult to imitate – ‘winners’

Intangible assets

Variety: heterogeneous
Property rights: often fuzzy
Market transactions: infrequent
General awareness of transaction opportunity: low
Recognised on balance sheets: no
Possible strategic value: high

Physical assets

Variety: heterogeneous
Property rights: usually clear
Market transactions: frequent
General awareness of transaction opportunity: high
Recognised on balance sheets: yes
Possible strategic value: low

Balance sheet

The source of finance: capital
Debt – borrowing

Interest depends on rated risk
Security required
Cheaper (but riskier) than equity
Friends or family

Equity – shares

Not applicable to sole traders or partnerships
Cost associated to floating and shareholders
Accounts required
Shares
Capital gain
Dividends

Assets

Resources held and controlled by a business
Assets are used by a business in order to generate a profit in the future
Future benefits must exist
Right to control the assets
Clear benefits from past transactions or events
Measurable in monetary terms
Fixed assets – held for long-term operations

Property, vehicles, machinery, computers, furniture, etc.

Current assets – held for the short term

For sale or consumption during the course of normal operating cycle
Expected to be sold within a year
Held for trading
Cash in hand and at bank, stocks (inventories), trade receivables for goods/services sold on credit (debtors), etc.

Creditors are the people to whom we owe money for goods and services supplied by them to us on credit
Debtors are the people who owe us money for goods or services we have supplied to them

Liability

Amounts that the business has to pay to other people or organisations.
Current liabilities – amounts due for settlement in the short term.

Creditors (goods or services bought on credit).
Corporation tax or a VAT
Loans (or interests) payable within a year

Non-current liabilities – amounts due for settlement after the date of the balance sheet.

Long-term debt (I.e. bank loans)

Assets – Liabilities = Capital

Core competencies and dynamic capabilities

Core competencies: what we do best? (not necessary better than your competitors)
Core competencies are the linked set of skills, activities and resources that, together

Deliver customer value
Differentiate a business from its competitors
Potentially, can be extended and developed as markets change or new opportunities arise
The key to corporate success in the 1990s is 'the ability to identify, cultivate and exploit core competences'
Examples of corporations who have exploited core competences to advantage

NEC - convergence of communications/computing; semiconductors
Honda - small powerful engines, power trains
Canon - optics, imaging and micro-processor controls
(Also mentioned Philips; JVC; 3M; Black and Decker; CitiCorp)

Need to 'invent new markets'; quickly enter emerging markets, dramatically shift patterns of demand in established markets, create products consumers need but have not yet imagined
Core competence involves consolidation of technologies and skills into competences that empower individual businesses to adapt quickly to changing opportunities
Core competence involves cross-fertilisation of ideas and new approaches to "strategic architecture" - getting away from narrow focus SBUs!
Prahalad and Hamel (1990) originated core competence as a source of uniqueness that a company can do uniquely well, offering a competitive advantage as competitors can’t quickly copy
A core competence is “a bundle of skills and technologies that enables a company to provide a particular benefit to its customers” (Hamel and Prahalad, 1994, p.218)

Hamel & Prahalad

Side step Porter on positioning
Identify the differences in three key respects

Positioning is about today’s competition, competency is about creating tomorrow’s industry
Positioning is about SBUs or divisions, competency is about levering advantage across divisions
Porter tool kit (i.e. segmentation analysis, industry structure analysis and value chain analysis) insufficiently radical

Porter methods easy BUT not the basis of single firm advantage

Core competences are the skills and abilities by which resources are deployed through an organisation’s activities and processes such as to achieve competitive advantage in ways that others cannot imitate or obtain
Competences become competitive advantages when

They relate to an activity that underpins the value in the product features
They lead to levels of performance that are significantly better than competitors
They are difficult for competitors to imitate

Source of competitive advantage

Core competences do not come in one day; it is path dependent so it is hard to imitate in a short period of time
Core competences are durable and do not depreciate over time
Core competences are future oriented. Organizations can “control its own destiny only if it understands how to control the destiny of its industry”
The challenge for the organization is to develop insights into the whereabouts of tomorrow’s markets

Core competence → core products → end products
Core competence involves co-ordination and collective learning
Core competence is not just about

Growth in R&D spend (c/fp Cannon & Xerox)
Increase in Vertical integration
Increase in Shared use of resources
Assets in the accounting book
Factory or building
Distribution channel
Patent
Brand

Core competence is an aptitude to manage

Factory (e.g. Toyota’s lean manufacturing)
Channel (e.g. Wal-Mart’s logistics)
Brand (e.g. Coca-Cola’s advertising)
Intellectual property (e.g. Apple’s protecting iPhone by allying with O2)

3 key tests to identify core competencies

Potential access to a wide variety of markets
Make a significant contribution to customer benefits
Difficult for competitors to imitate

Most companies will only be able to develop a few core competences - alliances can help to build the missing pieces.
Mistakes occur

Outsourcing key technologies or products
Abandoning too early 'mature' or 'unattractive' markets and thus abandoning some key competences
Difficult to 'catch up' once left behind
Never take for granted that core competencies will continue to provide a source of competitive advantage
All core competencies have the potential to become Core Rigidities
Core Rigidities are former core competencies that sow the seeds of organisational inertia and prevent the firm from responding appropriately to changes in the external environment
Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

Importance of core products not necessarily end products
Tyranny of the SBU!

Concentration of end products
Focus on success today (not building for the future)
Imprison resources (especially key people who are 'competence carriers')
Bounded innovation - hybrid opportunities missed (SBUs are blinkered)

Strategic architecture for the 1990s

Emphasis on sharing key people
Building for mutual benefit (corporation not SBU)
Train people for transfer between SBUs
Use people as corporate resources
Use of cross-divisional project teams

Johnson et al. four questions:

Who owns the core competences?
How durable are the core competences?
How transferable?
How replicable?

Competitive advantage

They relate to an activity that underpins the value in the product features
They lead to levels of performance that are significantly better than competitors
They are difficult for competitors to imitate
Attracting customers
Defending against competitive forces
A good product at a low price
A superior product worth paying more for
A best-value product

Positioning

Positioning is the process of designing an image and value so that customers within the target segment understand what the company or brand stands for in relation to its competitors
Positioning starts with a product. A piece of merchandise, a service, a company, an institution, or even a person. But positioning is not what you do to a product. Positioning is what you do to the mind of the prospect. That is, you position the product in the mind of the prospect
Positioning strategy

Product class
Product attributes
Benefits offered
Usage occasions
Users
Against a competitor
Away from competitors

The four key criteria by which capabilities can be assessed in terms of providing a basis for achieving sustainable competitive advantage (VIRO / VIRN)

Value: do capabilities exist that are valued by customers and enable the organisation to respond to environmental opportunities or threats?

Take advantage of opportunities and neutralise threats
Provide value to customers
Are provided at a cost that still allows an organisation to make an acceptable return

Rarity: do capabilities exist that no or few competitors possess?

Rare capabilities are those possessed uniquely by one organisation or only by a few others. (e.g. a company may have patented products, have supremely talented people or a powerful brand.)
Rarity could be temporary: (e.g. Patents expire, key individuals can leave or brands can be de-valued by adverse publicity.)

Inimitability: are capabilities difficult and costly for competitors to obtain and imitate?

Inimitable capabilities are those that competitors find difficult and costly to imitate, to obtain or to substitute
Competitive advantage can be built on unique resources (a key individual or IT system) but these may not always be sustainable (key people leave or others acquire the same systems).
Sustainable advantage is more often found in competences (the way resources are managed, developed and deployed) and the way competences are linked together and integrated
Complexity

Internal linkages
External linkages

Casual ambiguity

Characteristic ambiguity
Linkage ambiguity

Culture and history

Taken-for-granted activities
Path dependency

Organisational support: is the organisation appropriately organised to exploit the capabilities?

The organisation must be suitably organised to support the valuable, rare and inimitable capabilities that it has. This includes appropriate processes and systems

Experience curve

Competences in activities develop over time based on experience, resulting in cost efficiencies
Refers to how business “learns” to lower costs as it gains experience with production processes
With experience, unit costs of production decline as output increases in most industries

Core competencies summary

Inter-firm competition to build competencies
Portfolio of competencies, core products, and business
SBU is a potential reservoir of core competencies
Businesses and competencies are the unit of analysis: top management allocates capital and talent
Enunciating strategic architecture and building competencies to secure the future
Competence is no substitute for a strategy; distinctive competences are an important support for competitive positioning

Example (Apple)

Is Apple a computer company? Electronic company? Mobile phone company Or musical company?
It is everything, but it’s also not everything
Apple’s distinctive capability was centred in its consistent innovation in IT (e.g. easy-to-use technology for individuals; human centred designing, etc)
Apple was able to leverage this distinctive capability with other capabilities (e.g. the vision of the iPhone market) to develop innovative products for customers
By reconfiguring and leveraging its capabilities have created various core competences in Apple

Example (Sony)

Ability to miniaturised electronics → Portable music player → Sony Walkman

Example (Google)

Indexing technologies & large‐scale hardware → Internet based productivity tools → Google doc, mail, search engine, etc

Example (Coca Cola)

Strong brand marketing → “Secret” Coke concentrate → Coca Cola

Value chain describes the categories of activities within an organisation which, together, create a product or service.

Value

Customers purchase value (not products)
The business creates value by carrying out its activities either more efficiently than other businesses, or combined in such a way as to provide a unique product or service

Input
Production
Processing & distribution
Marketing
Consumer

Value network

Comprises the set of inter-organisational links and relationships that are necessary to create a product or service
Competitive advantage can be derived from linkages within the value network
Upstream value perform valuable activities that complement the firm’s activities
Each firm must eventually find a way to become a part of some buyer’s value chain
Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain

The value chain consists of five primary activities (which are directly concerned with the creation or delivery of a product or service) and four support activities (which help to improve the effectiveness or efficiency of primary activities).
Competitive advantage can be analysed in any of these activities
Reconfiguring value chain

Alter production process
Change in automation
New distribution channel
Direct sales in place of indirect sales
New advertising media
New raw material
Backward integration
Forward integration
Change location relative to suppliers or buyers

The value system comprises the set of inter-organisational links and relationships that are necessary to create a product or service
Competitive advantage can be derived from linkages within the value system
A generic description of activities – understanding how the discrete activities (or clusters of linked activities) contribute to consumer benefit
Identifying activities where the organisation has particular strengths or weaknesses
Analysing the competitive position of the organisation using the VRIO criteria – thus identifying sources of sustainable advantage
Looking for ways to enhance value or decrease cost in value activities (e.g. outsourcing)
Understanding cost/price structures across the value system – analysing the best area of focus and the best business model
Identifying ‘profit pools’ (i.e. The levels of profit in different parts of the system) – seeking ways to use existing capabilities in order to exploit these
The ‘make or buy’ decision – which activities to do ‘in-house’ and which to outsource
Partnering – deciding who to work with and the nature of these relationships
Primary activities

Inbound logistics: activities associated with receiving, storing, and disseminating inputs
Operations: activities associated with transforming inputs into final products
Outbound logistics: collecting, storing, and physically distributing products/services to buyers
Marketing & sales: providing a means by which buyers can purchase the product
Service: providing service to enhance or maintain the value of products

Support activities

Procurement: purchasing inputs to facilitate all other activities
Technology development: the improvement of technologies throughout the firm
HRM: activities associated with the management of personnel
Firm infrastructure: all general activities that support the entire value chain

VRIO

Valuable

Valuable Capabilities help a firm neutralise threats or exploit opportunities
Coca-Cola exploits worldwide distribution network effectively for entering global markets

Rare

Rare capabilities are not possessed by many others
McDonald’s ability to prepare hot meal quickly

Costly to imitate

A unique & a valuable capability, organisational culture or brand name
Others have tried to imitate Google’s business model, with some success. But hard to imitate the Google’s culture

Organisation

Google is organised to capture value from this capability. The IT department has the skills to collect and maintain the data, while HR and team leaders are trained on how to use the data to hire, promote, manage, and improve performance of employees

Mapping activity systems

Identify ‘higher order strategic themes’, that is, how the organisation meets the critical success factors in the market
Identify the clusters of activities that underpin these themes and how they fit together
Map this in terms of how activity systems are interrelated
Relationship to the value chain. Understanding and identifying strategic capabilities in terms of activities and linkages
The importance of linkages and fit on how the internal and external activities create value for customers by supporting each other
Relationship to VRIO on how these activities and the way they link/fit together can be the source of sustainable competitive advantage

Strategic position: SWOT matrix

SWOT provides a general summary of the Strengths and Weaknesses explored in an analysis of strategic capabilities, and the Opportunities and Threats explored in an analysis of the environment
Major strengths and weaknesses are identified using the analytic tools explained in Chapter 4.
Scoring (e.g. + 5 to −5) can be used to assess the interrelationship between environmental impacts and the strengths and weaknesses
SWOT can be used to examine strengths, weaknesses, in relation to competitors
Focus on strengths and weaknesses that differ in relative terms compared to competitors and leave out areas where the organisation is at par with competitors
Key opportunities and threats are identified using the analytical tools explained in Chapters 2 and 3
Focus on opportunities and threats that are directly relevant for the specific organisation and industry and leave out general and broad factors
Summarise the results and draw concrete conclusions
SWOT can be used to generate strategic options – using a TOWS matrix
Long lists with no attempt at prioritisation
Over generalisation – sweeping statements often based on biased and unsupported opinions.
SWOT is used as a substitute for analysis
SWOT is not used to guide strategy – it is seen as an end in itself

Benchmarking is a means of understanding how an organisation compares with others – typically competitors

Industry/sector benchmarking – comparing performance against other organisations in the same industry/sector against a set of performance indicators
Best-in-class benchmarking – comparing an organisation’s performance or capabilities against ‘best-in-class’ performance – wherever that is found even in a very different industry. (e.g. BA benchmarked its refuelling operations against Formula 1)

Capabilities: what can we do?

Stem from skills, expertise, and experience usually representing an

Accumulation of learning over time
Gradual buildup of real proficiency in performing an activity

Involve deliberate efforts to develop the ability to do something, often entailing

Selecting people with requisite knowledge and skills
Upgrading or expanding individual abilities
Moulding work products of individuals into a cooperative effort to create organizational ability
A conscious effort to create intellectual capital

Dynamic capabilities are the means by which an organisation has the ability to renew and recreate its strategic capabilities to meet the needs of changing environments

Such capabilities are distinct from ordinary capabilities that may be necessary to operate efficiently now but that may not be sufficient to sustain superior performance in the future

Sensing capabilities – constantly scanning and exploring new opportunities across markets and technologies (e.g. R&D and market research)

Seizing capabilities – addressing opportunities through new products, processes and activities

Re-configuring (transforming) capabilities – new products and processes may require renewal and re-configuration of capabilities and investment in new technologies
The term ‘dynamic’ used to refer to situations where there is rapid change in technology and market forces, and ‘feedback’ effects on firms. It refers to the capacity to renew competences so as to achieve congruence with the changing business environment.

Competitive forces approach (Business environment/5 Forces)

Benefits are created largely at the industry level rather than at the firm level.

Strategic conflict approach (Game theory used to discuss the nature of competitive interaction)

To be effective, these strategic moves require irreversible commitments.
This approach: ‘do unto others before they do unto you’.
The worry is that fascination with strategic moves and Machiavellian tricks will distract managers from seeking to build more enduring sources of competitive advantage.

Firm-level efficiency advantage (Resource based view/perspective)

This approach focuses on the benefits accruing to the owners of scarce firm-specific resources/competences rather than the economic profits from product market positioning

How combinations of competences and resources can be developed, deployed and protected
It is about development of management capabilities and difficult to imitate combinations of organisational, functional and technological skills. It integrates and draws upon

Management of R&D
Product/process development
Technology transfer
Intellectual property (IP)
Manufacturing
Human Resources
Organisational learning

Developing strategic capabilities

Building and recombining capabilities: this requires creative entrepreneurial skills (e.g. a culture that promotes capability innovation)
Leveraging capabilities: identifying capabilities in one part of the organisation and transferring them to other parts (sharing best practice)
Stretching capabilities: building new products or services out of existing capabilities
External capability development: adding capabilities through mergers, acquisitions or alliances
Ceasing activities: non-core activities can be stopped, outsourced or reduced in cost
Monitor outputs and benefits: to better understand sources of consumer benefit and enhance anything that contributes to this
Awareness development: recognising what enhances strategy. Training, development and organisation learning are important

Classes of factors determining firms’ distinctive competencies

Processes (Organisational and managerial processes)

Coordination/integration both internal and external (a static concept). Example Japan auto industry (JIT, TQC, Kaizen). Culture is important too (routines, symbols and rewards). Often new entrants embrace technological changes better than incumbents (organisational re-engineering required).
Learning (a dynamic concept) enables tasks to be performed better and quicker. Collaborations and partnerships can be vehicles for new organisational learning.
Reconfiguration (a transformational concept). Constant surveillance of markets and technologies and willingness to adopt the best practice
The way things are done
Routines, Patterns of practice and Learning

Positions (assets e.g. specialised plant and equipment)

Technological (ownership protection and utilisation)
Complementary, Financial (cash resources important short-term)
Reputational, Structural, Institutional (intellectual property regimes and regulatory systems), Market (product market position), Organisational boundaries (integration – vertical, horizontal)
Current specific endowments
Technology, IP, complementary assets, customer base, external relations

Path

Path dependencies (where a firm can go is a function of its current position and the paths ahead). History matters (lock-in).
Technological opportunities (firm specific – depends on org. structures)
Strategic alternatives
Presence or absence of increasing returns and attendant path dependencies

Distinctive competences cannot be:

Replicated: transferred or redeployed from one economic setting to another
Imitated: replicated by the firm itself or its competitors

Task environment

Analysing a firm’s industry involves an understanding of the following

The firm’s customers
The firm’s suppliers
The nature of competition
Industry: A group of companies offering products or services that are close substitutes for each other and that satisfy the same basic customer needs. E.g. Automobile industry; steel industry

Market size
Market growth rate
Capacity surpluses or shortages
Entry/exit barriers
Nature of the product
Industry profitability
Rapid technological change
Capital requirements
Economies of scale
Vertical integration
Rapid product innovation

Sector: A group of closely related industries. E.g. Automobile and steel; computer components, software and hardware

Critical success factors

An industry critical success factors (CSF) are those things that most affect the ability of industry members to prosper in the marketplace. CSF concern what every industry must be competent at doing or concentrate on achieving in order to be competitively and financially successful – they are therefore the prerequisites for industry success
Critical Success Factors vary from industry to industry and even from time to time within the same industry as driving forces and competitive conditions change
Technology-related KSFs

Expertise in a particular technology or in scientific research (important in pharmaceuticals, internet applications, mobile communications, and most high-tech industries)
Proven ability to improve production processes (important in industries where advancing technology opens the way for higher manufacturing efficiency and lower production costs)

Manufacturing-related KSFs

Ability to achieve scale economies and/or capture learning-curve effects (important to achieving low production costs)
Quality control know-how (important in industries where customers insist on product reliability)
High utilisation of fixed assets (important in capital-intensive/high-fixed-cost industries)
Access to attractive supplies of skilled labour
High labour productivity (important for items with high labour content)
Low-cost product design and engineering (reduces manufacturing costs)
Ability to manufacture or assemble products that are customised to buyer specifications

Distribution-related KSFs

A strong network of wholesale distributors/dealers
Strong direct sales capabilities via the Internet and/or having company-owned retail outlets
Ability to secure favourable display space on retailer shelves

Marketing-related KSFs

Breadth of product line and product selection
A well known and well-respected brand name
Fast, accurate technical assistance
Courteous, personalised customer service
Accurate filling of buyer orders (few back orders or mistakes)
Customer guarantees and warranties (important in mail-order and online retailing, big ticket purchases, new product introductions)
Clever advertising

Skills and capability-related KSFs

A talented workforce (superior talent is important in professional services like accounting and investment banking)
National or global distribution capabilities
Product innovation capabilities (important in industries where rivals are racing to be first to market with new product attributes or performance features)
Design expertise (important in fashion and apparel industries)
Short-delivery-time capability
Supply chain management capabilities
Strong e-commerce capabilities – a user-friendly Web site and/or skills in using Internet technology applications to streamline internal operations

Other types of KSFs

Overall low costs (not just in manufacturing) so as to be able to meet low-price expectations of customers
Convenient locations (important in many retailing businesses)
Ability to provide fast, convenient after-the-sale repairs and services
A strong balance sheet and access to financial capital (important in newly emerging industries with high degrees of business risk and in capital-intensive industries)

CSFs in beer industry

Full utilisation of brewing capacity: to keep manufacturing costs low
Strong network of wholesale distributors: to gain access to retail outlets
Clever advertising: to induce beer drinkers to buy a particular brand

KSFs for apparel manufacturing industry

Appealing designs and colour combinations: to create buyer appeal
Low-cost manufacturing efficiency: to keep selling prices competitive

Nature of the product

Consumer product: impulsive buying
Business / industrial product: rational buying
Services: intangibility, pay before use, no ownership

Vertical integration / value chain
Supplier <- manufacturer (company) -> customers (channel members) -> consumer

Backward integration: when manufacturer have bargaining power to compete against supplier
Forward integration: become own distributor and compete against the channel
Example is SIA having SIA Engineering company as supplier and Tradewinds as channel
SUPPLIER = inbound logistics: building relationship with suppliers and dealing with input
CUSTOMER = outbound logistics: making product available and building relationship with the customers
Operations: convert inputs into outputs

Economies of scale: (DECREASE) average cost because (INCREASE) in production
Switching costs: cost incurred in switching between brands, the higher the switching cost the more unwilling consumer want to switch
Fewer competitors results in more intense competition than large competitors base.

Oligopolistic competition

Importance of competitors’ analysis

Times and MPH responded to Borders with café and online means when they are not focusing on Singapore market and Kinokuniya managed to take over

Competitive dynamics

Results from a series of competitive actions and competitive responses among firms competing within a particular industry
Hypercompetition occurs where the frequency, boldness and aggressiveness of dynamic movements by competitors accelerate to create a condition of constant disequilibrium and change
Competitive advantage exists when there is a match between a firm’s distinctive competencies and the factors critical for success within this industry
Few competitive advantages are long lasting. Keeping score of existing advantages is not the same as building new advantages. The essences of strategy lies in creating tomorrow’s competitive advantage faster than competitors mimic the ones you possess today. An organisation’s capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all
Model of interfirm rivalry: attack & response

Likelihood of response

Type of competitive action
Actor’s reputation dependence on the market
Resource availability

First mover are firms that take an initial competitive action. Generally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologies

Can earn above average profits until competitors respond
Gain customer loyalty, helping to create a barrier to entry by competitors
Advantage depends upon difficulty of imitation

Second mover: firm’s that respond to a first mover’s action, frequently imitate first mover or speed of response often dictates success

Should evaluate customers’ response before moving
“Fast” second movers can capture some of initial customers and develop some brand loyalty
Must possess necessary capabilities to imitate

Late Mover:

Responds to market opportunities only after considerable time has elapsed since first and second movers have taken action
Has substantially reduced risks and returns

Competitor analysis

Situation analysis? (Where are we now?)

The strengths and weaknesses of competitors
The positioning of the firm’s competitors

Competitive strategy (Where do we want to be?)

Formulating competitive strategies to gain and sustain competitive advantage
How to respond to competitors’ strategies

Importance

Consequences of failing to monitor competition

An increased likelihood of the company being taken by surprise
Company will likely become a follower rather than a leader
Company will tend to focus more on short term rather than on more fundamental long term issues

Competitor analysis can help in the process of understanding buyer behaviour
We know who our opponents are – their strengths & weaknesses
We can anticipate their likely reactions or responses to our planned actions.
We better understand our “industry dynamics”
We can anticipate what initiatives our competitors are likely to undertake

4 levels of competition

Brand competition: companies offering similar product / services to the same customers at almost similar prices
Industry competition: competitors are all those making the same products or class of products
Form competition: competitors are all those manufacturing products that satisfy the same need
Generic competition: competitors are all those that compete for the same consumer dollar

Environmental scanning

The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation to avoid strategic surprise and ensure the long-term health of the firm.

Special interest groups
Communities
The public
Competitors
Distributors and dealers
Trade associations
Customers
Suppliers

Company’s external or macro-environment

Industry and competitive conditions
The economy
Culture
Political
Technology
Legal
Social
Demography

Company’s internal or micro-environment

Competencies, capabilities, resource strengths and weaknesses, and competitiveness
Company's culture
Company's resources
Company's structure

Analysis of societal environment

Economic, sociocultural, technological, political-legal factors

Interest group analysis
Community analysis
Market analysis
Competitor analysis
Suppliers analysis
Governmental analysis
Selection of strategic factors

Opportunities
Threats

The central role of external analysis is to identify the key factors that are likely to drive change in the environment. Then the aim is to establish how these key factors will affect the industry in general and the organisation in particular
Threat resolution

Environmental turbulence

Rapid product innovation
Changing buyer-seller relationship into partnership
Mergers and acquisitions and partnerships
Changing customer needs & wants
Intense global competition

Strategic tasks

Improving product & service quality
Developing new products
Monitoring competition
Creating a strategic and innovative culture

Skills and competencies of managers in the future

Strategic thinking
Managing change
Communication capability
Sensitivity to market changes

To suggest that firms need to develop new strategies as times change may not go far enough. The problem may not just be that we need to develop new strategies, but that we have to develop wholly new approaches to strategy (Hooley, Saunders & Piercy)
Conclusion

Drivers of change

Political
Economic
Social
Technological
Legal
Environmental

Impact of change

Volatility
Globalisation
Intense competition
Market re-defined

Result of change

Opportunity
Threats
Strategic drift

Competitive advantage

Better than your competitors (the ultimate goal to move towards to)
Example: a building of 15 storey started adding few more floors, immediately no visible damage but down the road it will collapse
Successful company comprises of the configuration of resources, activities and product/service offerings intended to create value for the customers

Product offering: the firm supplies goods or performs services for clients in the market place
Activity system: an integrated set of value creation processes leading to the supply of product and/or service offerings
Resource base: all means at the disposal of the organization for the performance of value-adding activities

A business model is the configuration of resources, activities and product/service offerings intended to create value for customers – the way a firm conducts its business
- Resource base (stock of assets)
- Activity system(value chain)
- Product offering(value proposition)
- Markets
Companies must focus in two ways

Selecting a limited number of businesses: firms need to analyze the structural characteristics of interesting businesses to be able to judge whether they are attractive enough (Porter’s 5-forces analysis)
Focusing within each selected business: firms need to determine what they want to be and what they want to leave aside. To be competitive, firms should choose distinct market segments and target specific product offerings

The risk of an unfocused approach

Low economies of scale: the less specialised the company, the lower the opportunity to leverage the resource base.
Slow organisational learning: being involved in a multitude of products slows down the ability to build up specific knowledge and capabilities
Unclear brand image: in general, companies that stand for everything tend to stand out in nothing
Unclear corporate identity: unfocused companies will have difficulty explaining why its people are together in the same company
High organisational complexity: highly diverse products and customers also create an exponential increase in organisational complexity
Limits to flexibility: less specialised firms are often forced into certain choices due to operational necessity

Product bases

Price: for a firm wanting to compete on price, the most important point is to have a low-cost product offering, activity system and resource base
Features: firms can distinguish their product offering by having different intrinsic functional characteristics more than competing offerings
Bundling: selling a package of products/services ‘wrapped together’
Quality: a firm’s product offering does not necessarily has to be different, it can just be better
Distribution: having the product available at the right place, at the right moment and in the right way, is sometimes the most important aspect for customers
Image: firms can gain advantage in the competition for customers’ preference by having a more appealing image than competitors
Relations: in general, customers prefer to know their suppliers well, as this gives them a more intimate knowledge of their product offering

Resource base

Tangible resources

Land
Building
Materials
Money

Intangible resources

Relational resources

Relationship
Reputation

Competencies

Knowledge
Capabilities
Attitude

Organisational capability

The skills, routines, management and leadership of the organisation – e.g. capable CEOs

Financial resources
Physical resources
Intellectual capital
Human Resources

Resource homogeneity

If all firms posses exactly the same resources none of these firms can enjoy a sustainable CA.
Therefore the assumption that firm resources are heterogeneous.
To have the potential (to generate SCA) a firm resources must satisfy four criteria

Valuable: resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness
Rarity: if a particular valuable firm resource is possessed by large numbers of firms, then each of these firms have the capability of exploiting that resource in the same way and that gives no firm a competitive advantage
Inimitability: valuable and rare resources can only be a source of competitive advantage if the firms that do not possess these resources cannot conceive or implement them
Non-substitutability: for a firm resource to be a source of sustained competitive advantage, it is necessary that there are no strategically equivalent valuable resources which are themselves either not rare or imitable

Firm resources can be imperfectly imitable for one or a combination of the following

Unique historical conditions and imperfectly imitable resources

Firms are intrinsically historical and social entities, but have also the ability to acquire and exploit some resources depending on their place in time and space

Causal ambiguity and imperfectly imitable resources

Causal ambiguity exists when the link between resources controlled by a firm and the sustained competitive advantage is not (or imperfectly) understood

Social complexity and imperfectly imitable resources

Firms resources can be very complex social phenomena, beyond the ability of firms to systematically manage and influence

Resources are of no value unless they are organised into systems, and so a resource audit should go on to consider how well or how badly resources have been utilised, and whether the organisation’s systems are effective and efficient

The paradox of markets and resources

The sustainability of a firm’s competitive advantage is threatened by developments in the market.

Customer needs and wants are in constant flux
Distribution channels can change
Government regulations can be altered
Innovative technologies can be introduced
New entrants can enter the competitive arena

All of these developments can undermine the fit between the firm’s competitive advantage and the environment, weakening the firm’s position
Competitive advantages can be protected when its source is

Difficult for rivals to imitate
Next to impossible to be attacked

In general, a firm’s competitive advantage is more vulnerable when it is based on only a few distinct elements
If a firm’s business model has an entirely different configuration, the barriers to imitation and substitution are higher
Many strategists note that the best defense is not to build walls around a competitive position to ‘keep the barbarians out’, but to have the ability to run faster than rivals – to be able to upgrade one’s resources, value chain and product offering more rapidly than competitors
Juxtaposing

Simultaneously manage perspectives on a permanent basis by accepting the conflict between the two opposites
Company tries to create and maintain a dynamic equilibrium between markets and resources

Parallel processing

Separate perspectives in different internal or external organizational units and integrate them at a higher organizational level
Company separates demands between different organizational units, e.g. sales managers focus on market demands, R&D managers focus on resource leveraging

Perspectives on business level strategy

Outside-in perspective

Firms take their environment as the starting point for their strategy
Strategy begins with an analysis of the environment to identify opportunities.
Insights into markets and industries is essential
Firms that are market-driven are often the first to realise that new resources and/or activities need to be developed and therefore have the ‘first mover advantage’
Markets over resources
Opportunity-driven (external potential)
Market demand and industry structure
Adaptation to environment
Attaining advantageous position
External positioning
Acquiring necessary resources
Bargaining power and mobility barriers
All decisions start with the market and opportunities for advantage
Profits are gained through a superior value proposition and leveraging the brand and customer assets
Customer knowledge is a valuable asset and channels are value-adding partners
We know more than our competitors
No sacred cows — cannibalise yourself
Customers buy the expectation of benefits
Superior quality is defined by customers as "fitness for use"
The best ideas come from living with customers
Customer loyalty is the key to profitability

Inside-out perspective

Firms take their strengths as the starting point for their strategy
Strategy begins with defining which resource base the firm wants to have in order to gain access to market opportunities in the medium and short term
A firm’s competences are more important than its physical assets
Firms that are resource-driven may be locked in past choices and be unable to adapt to the market
Resources over markets
Strength-driven (internal potential)
Resource base and value chain
Adaptation of environment
Attaining distinctive resources
Building resource base
External positioning
Superior resources and imitation barriers
We'll sell to whoever will buy
Profits are gained through cost cutting and efficiency improvements. Six sigma, TQM and replicability of processes take priority
Customer data are a control mechanism and channels are conduits
If competitors do it, it must be good
Protect the cash flow stream
Customers buy performance features
Quality is conformance to internal standards
Customers don't know what they want and they can't tell you if they're asked
Expanding the customer base is what matters

Strategy direction

Growth motives

Personal challenges and satisfaction for managers
New business opportunities
Staying ahead of competitors
Financial benefits to the business (by increasing profitability)
Experience from competing in growing markets
Gaining economies of scale
Maintain or increase share of the market
Generating synergy (2 + 2 = 5)

Growth constraints

Obtaining the additional financial requirements
Additional resources inputs (allocation/ reallocation)
Management limitations - supply / skills / experience
Planning estimates are rarely very accurate (longer to achieve objectives)
Gaining credibility in the market is very difficult (new products)

Scope: how broad to make the portfolio?

Corporate parenting: how should the 'parent' add value?
Portfolio matrices: which SBUs to invest in?

Strategy alternatives

An organisation might choose to 'do nothing' but this is usually a recipe for disaster - environments and markets change
Organisations need to consider a range of growth options - not all will be feasible or acceptable
All these alternatives involve change - organisations must consider the degree of change required/acceptable
Occasionally an organisation can devise a strategy that 'changes the rules of the game' - a true innovation

Development directions: strategic options available to an organisation, in terms of products and market coverage, taking into account the strategic capability of the organisation and the expectations of stakeholders
Directional strategies

Growth Strategies

Makes no change to the company’s current activities

Consolidation Strategies

The organisation focuses defensively on their current markets with current products.

Retrenchment Strategy

Withdrawal from marginal activities in order to concentrate on the most valuable segments and products within their existing business

Consolidation & retrenchment

Consolidation refers to a strategy by which an organisation focuses defensively on their current markets with current products

E.g. consolidation in steel industry (Arcelor/Mittal and Tata/Corus)
Defending market share
Downsizing or divestment

Retrenchment refers to a strategy of withdrawal from marginal activities in order to concentrate on the most valuable segments and products within their existing business

Ansoff product/market matrix

Strategies are executed in sequence

Logical reasons: No point in developing new products/markets when current products/markets still have potential to grow
Economic reasons: as strategies are executed sequentially, the risks and costs will increase significantly

Market penetration refers to a strategy of increasing share of current markets with the current product range

More purchasing and usage from existing customers
Gain customers from competitors
Convert non-users into users (where both are in same market segment)
Strategic capabilities; builds on established resources and competences
Scope is unchanged
Increased power; leads to greater market share and with buyers and suppliers
Economies of scale; and provides greater experience curve benefits
Example: Ryanair implementation of their AGB (e.g. Listening to customers etc)
Constraints of market penetration

Retaliation from competitors
Legal constraints
Economic constraints (recession or funding crisis)

Market development: a strategy by which an organisation offers existing products to new markets

New market segments
New distribution channels
New geographical areas (export markets)
This strategy involves varying degrees of related diversification (in terms of markets) it
May also entail some product development (e.g. new styling or packaging);
Can take the form of attracting new users (e.g. extending the use of aluminium to the automobile industry);
Can take the form of new geographies (e.g. extending the market covered to new areas – international markets being the most important);
Must meet the critical success factors of the new market if it is to succeed
May require new strategic capabilities especially in marketing
New segments
New users
New geographies
Marketing failures: Burger King Russia World Cup (2018). Fast food company Burger King Russia has been forced to apologize after an advertisement offered Russian women the chance to win $47,000 and free Whoppers for life if they have a child with a World Cup player. (CNN)

Product development: a strategy by which an organisation delivers modified or new products to existing markets

Product modification via new features
Different quality levels
‘New’ Product
Involves varying degrees of related diversification (in terms of products);
Can be an expensive and high risk
May require new strategic capabilities
Typically involves project management risks
New strategic capabilities
Project management risk

E.g. Samsung Galaxy 7 recalls due to the battery issues

Diversification: a strategy by which an organisation pursues new product offerings and new markets.

Diversification strategy
Joint ventures

A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity

Mergers
Acquisition / takeover
Diversification involves increasing the range of products or markets served by an organisation
Related diversification involves diversifying into products or services with relationships to the existing business
Conglomerate (unrelated) diversification involves diversifying into products or services with no relationships to the existing businesses
Related diversification is corporate development beyond current products and markets, but within the capabilities or value network of the organisation
Vertical integration is development into activities concerned with the inputs into company’s current business; entering activities where the organisation is its own supplier or customer

Backward integration: activities concerned with the inputs into company’s current business (further back in the value network). Example: a car manufacturer acquires a component supplier

Development into activities concerned with the inputs into the company’s current business

Forward integration: activities concerned with a company’s outputs (further forward into the value system). Example: a car manufacturer handles distribution, repairs and servicing

Development into activities concerned with the outputs of a company’s current business

Horizontal integration is development into activities that are complementary or adjacent to present activities. Example: Google spread into news, maps etc.

It is a type of integration strategies pursued by a company in order to strengthen its position in the industry. A corporate that implements this type of strategy usually mergers or acquires another company that is in the same production stage
Organization competes in a growing industry
Competitors lack of some capabilities, competencies, skills or resources that the company already possesses
HI would lead to a monopoly that is allowed by a government
Economies of scale would have significant effect
The organisation has sufficient resources to manage M&A.

Outsourcing

Outsourcing is the purchase of value-creating activity from an external supplier
Few organisations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities.
A firm can concentrate on those areas in which it can create value
Specialty suppliers can perform outsourced capabilities more efficiently
Outsourcing issues

Activity can be performed better or more cheaply by outside specialists
It improves firm’s ability to innovate
Operations are streamlined to improve flexibility
It increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently
Firm can concentrate on “core” value chain activities that best suit its resource strengths
Firms should never outsource its ‘core’ business activities, and may only outsource ‘non- core’ activities

Unrelated diversification is the development of products and services beyond the current capabilities and value network of the organisation. Often described as conglomerate strategy

Concentric diversification

This occurs when a company seeks to add new products that have technological and/or marketing synergies with the existing products
Nike purchases Hurley($70m) and Cole Haan($80m)
Sony purchased Columbia Pictures($3.4b) and Xperia($1.5b)
Apple purchased Beats($3b) and SIRI($200m)

Conglomerate diversification

This consists of making entirely new products for new classes of customers. These new products have no relationship to the company’s current technology, products or markets
Temasek holdings

DBS
Singtel
Capitaland
Sembcorp
SMRT
Singapore Airlines
Certis Cisco
Singapore Zoological Gardens
Mediacorp
Singapore Technologies
NOL

This is development beyond the present industry into product / markets which, at face value, bear no clear relationship to the present product / market
Because of lack of obvious economies of scope and shared headquarters conglomerates often suffer from lower valuation than the individual businesses would have
Exploiting dominant logics, rather than concrete operational relationship. One person at the top may be able to add value to diverse businesses with the dominant logic (I.e. Warren Buffett – Berkshire Hathaway)
Firms pursuing this strategy frequently diversify by acquisition

Acquire sound, attractive companies
Acquired units are autonomous
Acquiring corporation supplies needed capital
Portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs
Add professional management & control to sub-units
Sub-unit managers compensation based on unit results

Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own
General Electric - operates as an infrastructure and financial services company worldwide.

Power and Water
Oil and Gas
Energy Management
Aviation
Healthcare
Transportation
Appliances and Lighting
GE Capita

Related diversification

Exploits interrelationships among divisions
Start with value chain analysis

Identify ability to transfer skills or expertise among similar value chains
Exploit ability to transfer activities

Transferring core competencies leads to competitive advantage only if the similarities among business units meet the following conditions

Activities involved in the businesses are similar enough that sharing expertise is meaningful
Transfer of skills involves activities which are important to competitive advantage
The skills transferred represent significant sources of competitive advantage for the receiving unit

The Walt Disney Co. [NYSE: DIS]

Theme parks and resorts.
Movies, including all of the Marvel superhero and Star Wars franchises
ABC and the ESPN networks and recently launched a direct-to-consumer video service
Possible acquisition of the film and TV assets of 21st Century Fox (June 2018)

Diversification reasons

Efficiency gains
Stretching corporate parenting capabilities
Increasing market power
Responding to market decline
Spreading risk
Expectations of powerful stakeholders
Economies of scope: cost savings from shared activities within the group
Transfer of core competencies across group
Shared activities such as purchasing or distribution
Vertical integration through ownership of owning its suppliers or the outlets through which its products are sold
Market power through the added strength of belonging to a group
Blocking competitors through market power
Lower cost of capital
Business re-structuring when facing competitive pressures
Efficient capital allocation between parts of the group

Drivers for diversification

Exploiting economies of scope: efficiency gains through applying the organisation’s existing resources or competences to new markets or services
Stretching corporate management competences
Exploiting superior internal processes
Increasing market power
What is the purpose of diversification?
What amount of resources can be devoted to diversification?
What is the required rate of return on the new investment?
Are there any alternative strategies to diversification which would enable the company to achieve its objectives just as well if not better?
What products or markets might provide some useful start-up synergy or operating synergy etc if the company were to diversify into them?

Limitations for diversification

The scope of the industries & markets in which the firm competes
How managers buy, create & sell different businesses to match skills and strengths with opportunities presented to the firm.
Size and costs of headquarters staff: can be a substantial burden on the group
The complexity and management of the diversified firm: argued that difficult for corporate HQ to have the skills to manage, or even understand, truly diverse individual businesses
The lack of a competitive resource-based focus: by definition, a diversified corporation is not focussing on its particular resource strengths
Low-performing areas hide the value of high performing areas inside the overall group valuation: need to divest one or other?

Synergy

Synergy refers to the benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts
Synergy is often referred to as the ‘2 + 2 = 5’ effect

Roles of a corporate parent

The corporate parent refers to the levels of management above that of the business units, and therefore without direct interaction with buyers and competitors
The portfolio manager operates as an active investor in a way that shareholders in the stock market are either too dispersed or too inexpert to be able to do

Corporate office: small
Main emphasis: downward, investing and intervening
Manage a portfolio of BUs
Acquired (whether there are linkages or not) if it adds value to the portfolio
Hands off approach
Possible divestment

Restructurer (similar to Portfolio manager)

More involved with Bus
Companies acquired if under-performing and/or under-priced
Turnaround – short term (if unsuccessful BUs will be divested)

The synergy manager is a corporate parent seeking to enhance value for business units by managing synergies across business units

Corporate office: large
Main emphasis: across, facilitating cooperation
Added value by bringing processes, activities and businesses together (synergy: 2+2=5)
Shared resources
Transferable skills
Corporate reputation (brand)
Often the value is lost

The parental developer seeks to employ its own central capabilities to add value to its businesses

Corporate office: large
Main emphasis: downward, providing parental capabilities
Concentrate on BUs where it can add value (possesses necessary competences and/or parenting skills)
If value can’t be added BUs should be divested (loss of value of the BU due to the costs of corporate centre)
Envisioning Strategic Intent

Focus
Clarity to external stakeholders
Clarity to business units

Central Services and Resources

Investment
Scale advantages
Transferable management capabilities

Intervention at Business Level

Monitor performance
Action to improve performance
Challenge/develop strategic ambitions
Coaching/training
Develop strategic capabilities
Achieve synergies

Expertise

Provide expertise/services
Knowledge creation/sharing
Leverage
Brokering linkages/accessing external networks

Boston Consulting Group (BCG) or growth/share matrix

A star is a business unit which has a high market share in a growing market: build

Market leaders
Fast growth
Substantial profits
Require large investment to finance growth
Protect existing share
Reinvest earnings in the form of price reductions, product improvements, providing better market coverage, production efficiency etc
Obtain a large share of the new users

A question mark (or problem child) is a business unit in a growing market, but it does not yet have a high market share: divest

Rapid growth
Poor profit margins
Enormous demand for cash
Invest heavily to get a disproportionate share of new sales
Buy existing market share by acquiring competitors
Divestment
Harvesting
Focus on a definable niche where dominance can be achieved

A cash cow is a business unit that has a high market share in a mature market: hold

Profitable products
Generate more cash than needed to maintain market share
Invest in progress improvements and technological leadership
Maintain price leadership
Use excess cash to support research and growth elsewhere in the company

A dog is a business unit that has a low market share in a static or declining market: harvest

Greatest number of products that fall in this category
Operate at a cost disadvantage
Few opportunities for growth at a reasonable cost
Markets are not growing
Focus on a specialised segment of the market that can be dominated
Harvesting
Divestment: sale of a growing concern
Abandonment: elimination from the product line

Assumptions of BCG

Profitability is directly determined by relative market share
Sales growth demands cash to finance
Increase in market share generally need cash to support
Growth slows as the product / business reaches life-cycle maturity → surplus of cash → use to support businesses still in the growth stages
The BCG was developed to be an aid in formulating business strategies in complex environments. Its aim was not to prescribe strategies

Problems with the BCG matrix

Definitional vagueness
Capital market assumptions
Motivation problems (in ‘dogs’)
Self-fulfilling prophecies
Ignores commercial linkages
Over simplification
Only have top relative market share products
Problem of classification
May bring about hasty decisions
Question of balancing cash flow
The risk factor
Question of interdependency between products or markets

The directional policy (GE-McKinsey) matrix

SBU strength
Long-term market attractiveness

General Electric business screen / (GE) model

The circle represent the market share and the pie shows the company’s market share
The 9 grids can be classified into one country, one region or one world

High market attractiveness, strong competitive position: invest for growth
High market attractiveness, mid competitive position: invest to build
Mid market attractiveness, strong competitive position: build selectively
High market attractiveness, low competitive position: build selectively
Mid market attractiveness, mid competitive position: develop selectively for income / earnings
Low market attractiveness, strong competitive position: protect and refocus
Mid market attractiveness, low competitive position: limit expansion or harvest
Low market attractiveness, mid competitive position: harvest
Low market attractiveness, low competitive position: divest

Market attractiveness factors

Size (volume/value, both)
Growth rate per year
Sensitivity to price etc
Types of competitor
Degree of concentration
Changes in share
Degrees and types of integration
Contribution margins
Barriers to entry/exit
Capacity utilisation

Business strength

Market share
Company’s annual growth rate
Your influence on market
Lags or leads in sales
Comparison in terms of products markets, capabilities
Relative share change
Company’s level of integration
Company’s margins
Barriers to company’s entry or exit
Company’s capacity utilisation
Company’s ability to cope with change
Degree of patent protection
Depth of company skills

Corporate configuration

The issue of corporate configuration: what should be the profile of the corporation?

Corporate composition: in what lines of business should the corporation be active?

Corporate scope: in how many businesses should the corporation be active?
Corporate distribution: what should be the relative weight of each line of business?

Corporate management: what organisational system is required to run the corporation?

Integration mechanisms: how should synergies between businesses be realised?
Management mechanisms: who should ensure that synergies between businesses are realised?

Management mechanism

Control: to give someone the formal power to enforce centralisation, coordination and standardisation
Cooperation: business units might be willing to cooperate because it is in their interest to do so, or because they recognise the overall corporate interests

Corporate growth dimension

Corporate scope: the more ‘business components’ chosen the broader the scope of the corporation
Corporate distribution: the composition depends on the relative size of the activities in each business area

Integration mechanism

Centralisation: physically bringing resources and activities together into one organisational unit
Coordination: orchestration of resources, activities and/or product offerings split between different business units
Standardisation: creating a common norm for resources, activities and/or product offerings across business units

Responsiveness and synergy paradox

Multi-business synergy: the additional value created by working in two or more business areas, over and above the sum of the business parts
Business responsiveness: the ability to respond to the competitive demands of a specific business area in a timely and adequate manner
Market adaptation

Synergy by leveraging resources

Resource reallocation
Resource replication

Synergy by aligning positions

Improving bargaining position
Improving competitive position

Synergy by integrating value chain activities

Sharing value-adding activities
Linking value-adding activities

Business responsiveness: the ability to respond to the competitive demands of a specific business area in a timely and adequate manner. This is made difficult by

High governance costs: coordinating activities within a firm requires managers. Layers of management, and the bureaucratic processes can lead to escalating costs
Slower decision-making: business units must usually deal with more layers of management, more meetings for coordination purposes, more participants in meetings, more conflicts of interest and more political infighting
Strategy incongruence: some business units might need to compromise, adapting their business strategy to fit with the corporate strategy. Such internal adaptation might lead to a misfit with the business demands
Dysfunctional control: the corporate center might not have the specific business know-how needed to judge business unit strategies, activities and results
Dulled incentives: limited autonomy combined with the aforementioned problems can have a significant negative impact on the motivation to perform optimally

Perspectives on corporate level strategy

Portfolio organization perspective

Responsiveness is emphasized over synergy
The only synergies emphasized are financial synergies
Portfolio approach is well-suited to diversify through acquisition
Business units are responsible for their own competitive strategy
Corporate centres should be modest in ambition and size
Responsiveness over synergy
Collection of business shareholdings
Potentially unrelated (diverse)
Business unit responsiveness
Cash flow optimization and nsk balance
Exerting financial control
Capital allocation and performance control
Highly autonomous (independent)
Low, incidental
Simple to accommodate

Integrated organisation perspective

A corporation should be a tightly knit team of business units grouped around a common core
All business units should tap into and contribute to the corporation’s core competencies, thus the business units’ autonomy is limited
Growth through acquisition is difficult
Synergy over responsiveness Common core with business applications
Tightly related (focused)
Multi-business synergy
Integrating resources, activities and positions
Joint strategy development
Setting direction and managing synergies
Highly integrated (interdependent)
High, structural
Difficult to integrate

Managing the paradox

Navigating

Focus on one perspective at a time: manage different perspectives over time by a series of contrary initiatives
The common means of managing the paradox to focus on one demand at a time.

Balancing

Trading off opposing perspectives: not a search for synthesis, but to create a company specific balance from both perspectives
After having navigated the firm to accumulated multi-business synergies or enhanced business responsiveness, the strategists have to manage the new equilibrium

Resolving

Focus on one perspective at a time: manage different perspectives over time by a series of contrary initiatives
This tension has resulted in arguably the most effective means to combining advantages of synergy and responsiveness: the franchise

Audit

Basically, an audit is the means by which a company can understand how it relates to the environment in which it operates. It is the means by which a company can identify its own strengths and weaknesses as they relate to external opportunities and threats. It is thus a way of helping management to select a position in that environment based on known factors

The organisation’s current and market position
The nature of environmental opportunities & threats
The organisation’s ability to cope with environmental demands

Product lifecycle strategy: Intro, growth, maturity, decline

To input strategy at different stages
Independent: strategies
Dependent: stage
Different type of PLC

Growth-slump maturity (e.g. McDonald’s)
Fad (e.g. Pokemon)
Bust (e.g. Google Glass)
Fashion (Keep going up)

Hierarchy of life cycle (most important to least important)

Need life cycle

Communication

Form life cycle

Landline (decline)
Pager (extinct)
Mobile (late growth-early maturity)
Internet (early growth)

Brand life cycle

Blackberry (decline)
Huawei (growth)
Apple (early maturity)
Samsung (late growth)

Product life cycle

This is not important like Sunpage who died because they just focus on the product
Mate 30 (maturity)
P40 (introduction)
Mate 40 (prelaunch)

Positioning error

Confused positioning (e.g. Phillips sells air-con or not?)
Doubtful positioning (e.g. Roehampton is the best UK university)
Over positioning (e.g. Marina Bay Sands)
Under positioning (e.g. Yakun or Old Chang Kee)

It is about making your competitors irrelevant or making them follow
Problems with conducting audit

Time constraints
Incomplete information
People problem – resistance to the findings brought out in the audit (behavioural aspect)
Disagreements about the scope and terms of the audit
Conducting audits too irregularly – problems might be too serious and insurmountable
Complex environments that change rapidly rendering the findings of the audit outdated

Auditing tools

The value chain
Portfolio analysis

Aid decision making
Effective allocation of resources
Monitor each aspect of the business
Identify future profit potentials
A strategic perspective of management of each major element of the business
How much of our time and money should we spend on our best products / businesses to ensure that they continue to be successful?
How much of our time and money should we spend developing new costly products / businesses, most of which will never be successful?

Product / industry life cycle
Profit impact of marketing & sales (PIMS)
SWOT analysis

For a company’s strategy to be well-conceived, it must be

Matched to its resource strengths and weaknesses
Aimed at capturing its best market opportunities and erecting defenses against external threats to its well-being

SO strategy

This situation suggests growth oriented strategies to exploit the favourable match
Generate strategies here that use strengths to take advantage of opportunities

ST strategy

In this situation, strategies would use current strengths to build long term opportunities in other product markets
Generate strategies here that use strengths to avoid threats

WO strategy

The focus here is to eliminate internal weaknesses so as to more effectively pursue the market opportunity
Generate strategies here that take advantage of opportunities by overcoming weaknesses

WT strategy

This situation calls for strategies that reduce or redirect involvement in the product markets examined by means of SWOT analysis
Generate strategies here that minimise weaknesses and avoid threats

Although SWOT analysis is a particularly well-known management tool, evidence suggests that far too many candidates carry out SWOT analyses which are generally too bland to be of real value. The most common mistake include candidates simply listing strengths, weaknesses, opportunities and threats without paying any or sufficient attention to their real significance

Strategic choice

Market leader, market challenger, market follower

1st mover, 2nd mover, late mover

Rationalisation: pruning (cutting) away non profitable businesses / products
Cannibalisation: the reduction of the sales of a company’s own products as a consequence of its introduction of another similar product
Defending

Flanking product: to defence against main attack (e.g. SIA came out with SCOOT to defence against budget airlines)
Mobile defence: diversification
Contraction defence: withdraw

Attacking

Frontal attack: e.g. price war
Flanking attack: go for their weakness
How to attack a stronger competitor / strength and still win: attack on the seam that brought the strength together
Encirclement attack: share of voice (advertising) > share of mind (customer remember the brand) > share of heart (customer like the brand)
Bypass attack: focus on your own strategy
Guerrilla attack: hit and run

Branding strategies

Corporate umbrella branding (e.g. Philips, Samsung, Sony)
Family range branding (e.g. Armani with Emporior, Giorgio, Exchange; Toyota with Corolla, Altis)
Individual branding (e.g. P&G, Unilever)
Private labelling (e.g. Marks & Spencer on St Michaels; Challenger on Valore)
Co-branding (e.g. Fuji Xerox)

Economies = fall in average cost

Marketing economies
Economies of scale: fall in average cost due to increase of production
Economies of scope (fall in average cost due to increase in synergy)

Related diversification

Horizontal integration: add more value to your customer

E.g. Facebook bought Instagram, Disney bought Pixar, SIA joined Star Alliance
Related diversification: keyword is “transfer”

Product manager (small business) vs. portfolio manager (Temasek Holdings)
Boston Consultant Group (BCG) growth-share matrix

Relative market share (RMS) = our market share ÷ our largest competitor’s market share
Dog stage: e.g. Sony mobile phone business, Brands essence of Chicken
Limitation of classification (e.g. stuck between cash cow and dog)
Negative bottom left is called a war horse
Negative bottom right is called a dinosaur

Harvesting = milking

Commonly first cost to cut is the labour

Management buy-in (MBI): to take over and control the company
Acquisition

Take ownership (asset sales), e.g. Scoot and Tigerair, DBS and POSB
Investment (share sales) - no merger

How best to expand the total market

Finding new users for the product or service
Finding new uses
Increase usage rate

How to protect the organisation’s current share of the market

Position defence
Flanking defence
Preemptive defence
Counteroffensive defence
Mobile defence
Contraction defence

How to increase market share

Heavy advertising
Improved distribution
Price incentives
NPD
Takeovers & mergers
Geographic expansion

Market challenger

Frontal attacks
Flank attacks
Encirclement attacks
Bypass attacks
Guerrilla attacks

Market follower

Counterfeiter
Cloner
Imitator
Adapter

Global strategy

The world is becoming more and more interdependent. The world is ‘shrinking’
It now appears that national boundaries no longer act as ‘watertight’ containers which impede business transactions. The international markets are becoming more and more integrated and thus providing more business opportunities
It is likely that the world will eventually be composed of three dominant trading blocs : one each in Europe, Asia, and the Americas
Motivations

Increase market share

Domestic market may lack the size to support efficient scale manufacturing facilities

Return on investment

Large investment projects may require global markets to justify the capital outlays
Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

Economies of scale or learning

expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution
Can spread costs over a larger sales’ base
Increase profit per unit

Location advantages

Low cost markets may aid in developing competitive advantage
May achieve better access to

Raw materials
Lower cost labor
Key customers
Energy

Why think globally

Global customers: market needs transcend national boundaries and exist in many countries
Globalisation of industries
Global production resources: need for economies of scale
Global competition
Global markets
Global diffusion of information technology

International strategy

Internationalisation drivers: whether to?
Sources of competitive advantage: what to?
Market selection: where to?
Mode of entry: how to?

International company: when it branch out of its home country but still put its home country as priority
International orientation

Ethnocentric: standardise

Home country is superior, sees similarities in foreign countries

Polycentric: adapt

Each host country is unique, sees differences in foreign countries

Regiocentric

Sees similarities and differences in a world region; is ethnocentric or polycentric in its view of the rest of the world

Geocentric

World view, sees similarities and differences in home and host countries

Glocalisation (transnational strategy) = globalisation (perspective / orientation & think global) + standardisation: always a need for mandatory adaptation (action + act local)
Complexity of managing multinational Firms

Highly competitive nature of global markets
Multiple cultural environments
Rapid shifts in the value of different currencies
Instability of some national governments
International diversification must be effectively implemented and managed
Multiple risks are involved when operating in several countries
Legal system

Common law (English law): all Commonwealth countries
Code law: all non Commonwealth countries
Religious law (e.g. Brunei)

Political risk

Instability in national governments
War, both civil and international
Potential nationalisation of a firm’s resources (companies owned by the government)
Expropriation (Confiscation)
Nationalism

Patriotism (Loyalty)
Chauvinism (Biasness)

Economic risk

Differences and fluctuations in the value of different currencies
Differences in prevailing wage rates
Unemployment

Globalisation

The world is semi-globalised, not globalised
Frontiers still matter a lot in international trade
In short, the world economy is considerably more globalised than 50 years ago; but much less so than is theoretically possible. The widespread view that the present degree of globalisation is in some way new and unprecedented is, therefore, false (Glyn and Sutcliffe, 1992)

CAGE framework

The CAGE Distance Framework, developed by Prof Pankaj Ghemawat, identifies differences and closeness along 4 dimensions between countries that companies should address when crafting international strategies
The differences between countries may be an opportunity, but could just as easily be the cause of an organisation’s failure
Cultural: you aren't born with it but learn along the way, it is not easy to unlearn it

This refers to the cultural norms, values and social beliefs, also known as the unwritten rules, that shape the behaviour of individuals and organisations
Culture is least clear to management. After all, culture is far from always visible but has a significant impact on the success of international strategies
Language
Ethnicity
Religion
Work systems
Tradition
Values, social norms, and dispositions

Administrative

This mainly involves the historical and current legal and political differences between two countries. It helps the organisation gauge whether these differences are an aid or an obstacle to the expansion strategy
Legislation and regulations can have serious effects for the trade practices between various countries
Colonial ties
Trade agreements
Shared Currency
Legal systems
Government policies
Political hostility
Visa and work permit requirements
Corruption

Geographical

It involves the physical aspect of the distance between two countries
Globalisation and digitisation have made geographical differences a lot easier to bridge, especially thanks to factors like the internet, social media, and other technology
Physical distance
Common land border
Time zones
Climate
Transportation
Communication
Hostile / not hostile neighbours
Access to trade routes such as the ocean and other topographical features

Economic

It involves the differences between countries with regard to economic aspects. This may be a great obstacle for companies, but it can also provide opportunities. For example, companies gladly make use of the low wages in certain countries
Gross domestic product
Per capita income
Purchasing power
Distribution of wealth
Cost of labour - wages
Availability of human resources
Organisational capabilities
Economic size
Natural resources
Infrastructure

Helps organization carefully analyses CAGE forces, as well as determining how a comparable market would function in a different country. It is more than PEST
Unilever introduced products in small volumes into the Nigerian markets, among others, at a small price. This suddenly turned the poorest segment of the population in these countries into a market segment and an opportunity
Google failed in China

In most industries, the companies that will survive and prosper in this (and next) decade will be global enterprise. Some companies that do not respond to the challenges and opportunities of globalisation will be absorbed by more dynamic enterprise, others will simply disappear (Warren Keegan)

Evaluating Strategy

Uncontrollable variables: market and environment
SWOT provides a general summary of the Strengths and Weaknesses explored in an analysis of strategic capabilities, and the Opportunities and Threats explored in an analysis of the environment

Internal analysis: strengths and weaknesses
External analysis: opportunities and threats
Strengths

Market dominance
Core strengths
Economies of scale
Low-cost position
Leadership and management skills
Financial and cash resource
Manufacturing ability and age
of equipment
Innovation processes and results
Architecture network
Reputation
Differentiated products
Product or service quality

Weaknesses

Share weakness
Few core strengths and low on key skills
Old plant with higher costs than competition
Weak finances and poor cash flow
Management skills and leadership lacking
Poor record on innovation and new ideas
Weak organisation with poor architecture
Low quality and reputation
Products not differentiated and dependent on few products

Opportunities

New markets and segments
New products
Diversification opportunities
Market growth
Strategic space
Demographic and social change
Change in political or economic
environment
New takeover or partnership
opportunities
Economic upturn
International growth

Threats

New market entrants
Increased competition
Increased pressure from customers and suppliers
Substitutes
Low market growth
Economic cycle downturn
Technological threat
Change in political or economic environment
Demographic change
New international barriers to trade

SWOT usage

Major strengths and weaknesses are identified using the analytic tools explained in Chapter 3
Scoring (e.g. + 5 to −5) can be used to assess the interrelationship between environmental impacts and the strengths and weaknesses
SWOT can be used to examine strengths, weaknesses, in relation to competitors
Focus on strengths and weaknesses that differ in relative terms compared to competitors and leave out areas where the organisation is at par with competitors
Key opportunities and threats are identified using the analytical tools
Focus on opportunities and threats that are directly relevant for the specific industry and leave out general and broad factors
Finally, summarise the results and draw concrete conclusions
SWOT can be used to generate strategic options: using a TOWS matrix

Criticism of SWOT (Hill & Westbrook)

SWOT analysis is a very popular form of analysis, however it is rarely carried out rigorously or used properly, either Internally or externally.
Generally they felt that the SWOT was simply used as a way of initiating a discussion or familiarising consultants with the strategic position. They argue that SWOT is too much of a generic tool unsuited for the dynamic, diverse and unstable markets of today
Frequently overlong lists without proper explanations produced with mere generalisations
There was no attempt to prioritise points or give them any kind of weighting
Sometimes conflicts appear with points being raised as both strengths and weaknesses (with no attempt to resolve or rationalise the conflict)
Little data used to verify the points raised (usually they were just opinions)
Little attempt to analyse the issues raised at the general level with precise or specific analysis
Distinction between internal and external factors was often lost
Little attempt to utilise the findings in subsequent strategy development

TOWS matrix

SO strategic options: generate options here that use strengths to take advantage of opportunities

Key area
Offensive strategy

WO strategic options: generate options there that take advantage of opportunities by overcoming weaknesses

Defensive strategy
Needs investment

ST strategic options: generate options here that use strengths to avoid threats

Defensive strategy
Required careful planning

WT strategic options: generate options here that minimise weaknesses and avoid threats

Key area
Exit strategy

Strategy options

Bases of competitive strategy

Price-based strategies

No frills
Low price

Differentiation strategy

Hybrid
Broad differentiation
Focused differentiation

Hyper-competitive strategy
Gaming strategies

Strategy direction

Rationalisation/consolidation
Product/service development
Market development
Diversification

Methods for pursuing strategy

Organic development
Acquisitions and mergers (or disposals)
Alliances

Basic principles

The strategy chosen must be consistent with:

Environment opportunities
Values and objectives
Resources and strengths

Must also be capable of being implemented within the necessary time horizon

Evaluation is a key phase in strategic management and it requires both analysis and Judgement. Risk cannot be avoided
Choice of Strategy depends on many factors: Profitability; Risk; Culture; Leadership; Power. It is a result of both analysis AND political/cultural processes

SAFe criteria

Suitability

Does a proposed strategy address the key opportunities and constraints an organisation faces?
Whether strategy addresses circumstances in which organisation is operating
Linked to strategic position
Rationale of strategy
Suitability is concerned with assessing which proposed strategies address the key opportunities & constraints an organisation faces, through an understanding of the strategic position of an organisation.
It 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 (especially core competences) and avoid or remedy the weaknesses?

Models to be used

PESTEL

Key environmental drivers
Changes in industry structure
Industry cycles
Industry convergence
Major environmental changes

Scenarios

Extent of uncertainty/risk
Extent to which strategic options are mutually exclusive
Need for contingency plans or 'low-cost probes'

Five forces

Industry attractiveness
Competitive forces
Reducing competitive intensity
Development of barriers to new entrants

Strategic groups

Attractiveness of groups
Mobility barriers
Strategic spaces
Need reposition to a more attractive group or to an available strategic space

Strategic capabilities

Industry threshold standards
Bases of competitive advantage
Eliminating weakness
Exploiting strengths

Value chain

Opportunities for vertical integration or outsourcing

Cultural web

The links between organisational culture and the current strategy
The strategic options most aligned with the prevailing culture

Strategies

Retrenchment

Withdraw from declining markets
Maintain market share
Identify and focus on established strengths

Market penetration

Gain market share for advantage
Exploit superior resources and capabilities

Product development

Exploit knowledge of customer needs
Exploit R&D

Market development

Current markets saturated
New opportunities for geographical spread, entering new segments or new uses
Exploit current products and capabilities

Diversification

Current markets saturated or declining
Exploit strategic capabilities in new arenas

Organic development

Where a strategy is pursued by building on and developing an organisation’s own capabilities. This is essentially the ‘do it yourself’ method
Partners or acquisitions not available or not suitable
Building on own capabilities
Learning and competence development
Knowledge and learning can be enhanced
Spreading investment over time – easier to finance
No availability constraints – no need to search for suitable partners or acquisition targets
Strategic independence – less need to make compromises or accept strategic constraints

Restructuring strategies

Restructuring Strategy is a strategy through which a firm changes its set of businesses or financial structure
The failure of an acquisition strategy is often the driver of a restructuring strategy
Restructuring strategy may occur due to changes in the external or internal environments of the firm
Restructuring now aligned with the aim of increasing shareholder value – a “renewed emphasis upon the maximisation of shareholder wealth”
It is not just about cutting costs!
Corporate restructuring

Asset Restructuring: The sale of unproductive assets, or even whole lines of businesses, that are peripheral
Capital Restructuring (Financial Re-engineering): Changing the debt-equity mix, or the mix between different classes of debt or equity
Management Restructuring (MBO / MBI) : Changes in the composition of the top management team, organization structure, and reporting relationships

Downsizing

A reduction in the number of a firm’s employees and, sometimes, in the number of its operating units
Restructuring may or may not change the composition of businesses in the portfolio
Typical reasons for downsizing: expectation of improved profitability from cost reductions or desire or necessity for more efficient operations
A divestiture, spin-off or some other means of eliminating businesses that are unrelated to a firm’s core businesses
A set of actions that causes a firm to strategically refocus on its core and related businesses

Downscoping

Refers to divestiture, spin-off or some other means of eliminating businesses that are unrelated to a firm’s core business
May be accompanied by downsizing, but not eliminating key employees from its primary businesses
Following downscoping, the firm can be more effectively managed by the top management team because it has become less diversified.
E.g. TATA Group restructured and retained only 91 of its 250 businesses

Leverage buyout

A restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private
Significant amounts of debt are usually incurred to finance the buyout
Can correct for managerial mistakes that primarily serve managers’ own interests rather than those of shareholders
Often, the intent is to improve efficiency and performance, eventually making the firm an attractive candidate for purchase
Following LBO, restructuring occurs: downsize and/or downscope
AIG US$182b bailout (2008)
Malaysia Airlines RM6b bailout (2014)

MH has racked up debts approaching US$1.5bn since 2011
2 tragic incidents in 2014 – missing of MH370 (March) & crash of MH17 (July) saw share price crashing
6 Nov 2014, shareholders voted to approve a takeover bid by Khazanah Nasional to take the company private. KN already holds 69.4% of the airline, and will buy the remaining 30.6% of shares in an effective state take-over. This is called leveraged buyout
Restructuring Plan costing RM6 billion was announced to help the company become profitable again by 2017
Governance & financial restructuring
Delist MAS (old company) & migrate the relevant operations, assets & liabilities to a new company by July 2015
Reduce net gearing from 290% to 100% to 125% through debt-to-equity swaps
Operational restructuring
Rationalise network to be principally regionally focused with strong global connectivity through MAS’ Oneworld alliance and other code share partners
A renewed focus on revenue yield management
Consolidate HQ and operations from Subang to KLIA
Strengthening of the assurance, integrity & safety functions
Review and, where appropriate, renegotiate supply contracts
Leadership & Human Capital Restructuring
Appointment of new CEO - Christoph Mueller, the ex CEO of Ireland's Aer Lingus
Right sizing the workforce to an estimated 14,000 employees (30% cut)
Strengthen industrial relations and internal alignment
Reskilling, internal job creation & redeployment
Others
Appropriate Government support on key initiatives
Continuous communications & stakeholder engagement

JAL US$11b bailout (2010)
Singapore Airlines S$16b bailout (2020)

Merger/acquisition

Merger

A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage

Acquisition

A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses
By purchase of assets: the assets of company Y may be sold to company X. Once this is done company Y is then legally terminated and company X survives

Marriott bought Starwood for $13b

By purchase of common shares: the common share of company Y may be purchased by company X. When company X holds all the share of company Y, it is dissolve

Temasek holdings bought 3.6% stake of Bayer for $4.9b

By exchanging of shares for assets: the company X may give their shares to stakeholders of company Y for its net assets. The company Y terminated by its shareholder who now holds share of company X

Grab exchanged 27% shares to Uber

By exchanging of shares for shares: company X gives its shares to the shareholder of company Y and then company X is terminated

UOL exchange 27.3m new shares for 60m UIC shares from Haw par

Speed
Supply/demand
P/E ratios
Acquire capabilities
Scale economies
A merger occurring between companies producing similar products, goods and offerings similar services
This type of merger occurs frequently as a result of larger companies attempting to create more effective economies of scale
Boeing acquired McDonnell Douglas for $13Bn in 1997
Vertical M&A

A merger between two companies producing different goods & services for one specific finished products
The merger of the firm that have actual or potential buyer- seller relationship
Apple Buys Dr Dre Beats Electronics for $3.2Bn in 2014

Conglomerate M&A

An M&A between firms that are involved in totally unrelated business activity
Pure conglomerate M&A: it involves firms with nothing common
Pepsi-Cola acquiring Pizza Hut & KFC in the past
Mixed conglomerate merger: It involves firms that are looking for product extensions or market extensions
Tata Group acquired Jaguar- Land Rover in 2008 from Ford for $2.3Bn

Integration in M&A

Strategic fit: does the target firm strengthen or complement the acquiring firm’s strategy? (N.B. It is easy to over-estimate this potential synergy)
Organisational fit: is there a match between the management practices, cultural practices and staff characteristics of the target and the acquiring firm?
HP Compact and DBS POSB

M&A reasons

Increased market power
Overcome entry barriers
Cost of NPD
Increased speed to market
Lower risk compared to developing new products
Increased diversification
Avoid excessive competition
Extension: scope in terms of geography, products or markets
Consolidation: increasing scale, efficiency and market power
Capabilities: enhancing technological know-how (or other competences)
Financial efficiency: a company with a strong balance sheet (cash rich) may acquire/merge with a company with a weak balance sheet (high debt)
Tax efficiency: reducing the combined tax burden
Asset stripping or unbundling: selling off bits of the acquired company to maximise asset values
Personal ambition: financial incentives tied to short-term growth or share-price targets; boosting personal reputations; giving friends and colleagues greater responsibility or better jobs
Bandwagon effects: managers may be branded as conservative if they don’t follow a M&A trend; shareholder pressure to merge or acquire; the company may itself become a takeover target

M&A problems

Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Too much diversification
Managers overly focused on acquisition
Too large
Inability to achieve synergy

Joint development

Speed
Industry norm
Required for market entry
Complementary capabilities
Learning from partners
Get into critical country markets quickly to accelerate process of building a global presence
Gain inside knowledge about unfamiliar markets and cultures
Access valuable skills and competencies concentrated in particular geographic locations
Establish a beachhead to participate in target industry
Master new technologies and build new expertise faster than would be possible internally
Open up expanded opportunities in target industry by combining firm’s capabilities with resources of partners

Strategic alliance / cooperative strategy

No one organisation can exist in isolation today. All organisations depend on establishing and developing relationships
Many commentators predict that the future of many organisations depend on their ability to successfully enter, and manage, collaborative ventures. The coming decade will be one of strategic collaborations
Partnerships between firms where their resource, capabilities and core competencies are combined to pursue mutual interests to develop, manufacture and distribute goods or services
Companies sometimes use strategic alliances or collaborative partnerships to complement their own strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-to-company dealings but fall short of merger or full joint venture partnership
Cooperating with other firms is a strategy that

Creates value for a customer
Exceeds the cost of constructing customer value in other ways
Establishes a favourable position relative to competition

A strategic alliance involves

Exchange and sharing of resources and capabilities
Co-development or distribution of goods or services

It is critical to a company’s achievement of an important objective
It helps build, sustain, or enhance a core competence or competitive advantage
It helps block a competitive threat
It helps open up important market opportunities
It mitigates a significant risk to a company’s business
Equity alliances: involve the creation of a new entity that is owned separately by the partners involved.
Non-equity alliances: typically looser, without the commitment implied by ownership.

Contract manufacturing

Production of goods by one firm, under the label or brand of another firm
Globally-dispersed production: Boeing 787 Dreamliner

Consortia

Short-term arrangement in which several firms (from the same or different industry sectors or countries) pool their financial and human resources to undertake a large project that benefits all members of the group
6 Singapore firms join hands to team up with international players to vie for high-speed rail contracts

Clifford Capital, Surbana Jurong, DBS, Sembcorp, ST Electronics and SMRT

Acceptability

Does a proposed strategy meet the expectations of stakeholders?
Is the level of risk acceptable?
Is the likely return acceptable?
Will stakeholders accept the strategy?
The expected performance outcomes (e.g. risk/return)
Meeting expectations of stakeholders
Acceptability is concerned with whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders
There are three key aspects of acceptability - the ‘3 R’s’

Risk

Risk concerns the extent to which the outcomes of a strategy can be predicted
Financial ratios: e.g. gearing and liquidity
Break-even analysis
Is profitability acceptable: (ROCE)
Dividend yield
Cost-benefit
Real options
Shareholder value analysis

Return

Returns are the financial benefits which stakeholders are expected to receive from a strategy
Is risk acceptable: financial ratios (Current ratio, Gearing)
Sensitivity analysis
Financial analysis
Shareholder value analysis
Cost–benefit analysis
Real options

Reactions (of stakeholders)

Does the proposed strategy meet their expectations
Stakeholder map

Joint Venture
Licensing and franchising

Licensing: a business arrangement in which one company gives another company permission to manufacture its product for a specified payment
Franchising: a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers

Network

This is a cooperative strategy wherein a group of firms forms multiple partnerships to achieve shared objectives
Star Alliance, One World or Accor Hotels

Feasibility

Would a proposed strategy work in practice?
Can the strategy be financed?
Do people and their skills exist or can they be obtained?
Can the required resources be obtained and integrated?
Whether strategy can be made to work in practice
Linked to strategic capability (financial and human resources)
Feasibility is concerned with whether a strategy could work in practice i.e. whether an organisation has the capabilities to deliver a strategy

Do the resources and competences currently exist to implement the strategy effectively?
If not, can they be obtained?

Financial feasibility

The funding required. Can the strategy be funded from existing resources or can the additional funds be raised?
Cash flow analysis and forecasting
Financial strategies needed for the different ‘phases’ of the life cycle of a business

A typical business life cycle will require heavy funding and zero dividends in its launch and does not require funding with high dividends at the declining stage
People and skills

Has the organisation got or can it get the necessary resources and skills
Do people in the organisation currently have the competences to deliver a proposed strategy?
Are the systems to support those people fit for the strategy?
If not, can the competences be obtained or developed?
Critical issues that need to be considered

Work organisation: will this need to change?
Rewards: are the incentives appropriate?
Relationships: will people interact differently?
Training and development: are current systems appropriate?
Staffing: are the levels and skills of the staff appropriate?

Integrating resources

The success of a strategy depends on the management of many resource areas, for example

People
Finance
Physical resources
Information
Technology
Resources provided by suppliers and partners

It is essential to integrate resources – inside the organisation and in the wider value network.

Measurement

Financial

Funds flow forecasting: timing of new funding
Break-even analysis

Resource deployment

Resources and competences needed

Threshold
Unique resources/core competences

Scale, quality of resource, timetable for change

Business ethics

“The study of business situations, activities and decisions where issues of right and wrong are addressed”(Crane and Matten)
Business ethics is about what business organisations OUGHT to do – and inevitably this brings us into the realm of 'value judgements'
Ultimately it is the behaviour of organisations (their policies and actions) that determine the ethical stance of an organisation
"The ethical stance is the extent to which an organisation will exceed its minimum obligations to stakeholders and society at large" (Johnson & Scholes)
Traditional Ethical theories

Consequentialist theories
Utilitarianism (see Michael Sandel’s: Justice on YouTube)
https://www.youtube.com/watch?v=kBdfcR-8hEY
Egoism

Non-consequential

Ethics of duties
Ethics of rights and justice

Contemporary ethical theories

Virtue ethics
Feminist ethics
Discourse ethics
Postmodern perspectives on business ethics

Why business ethics?

One view is that ethical behaviour cannot be taught - it is personal.
Other views (e.g. Friedman) that businesses should be profitable (leave ethics to the government!)
However ethical issues are becoming increasingly important:

growing concern over scandals (Facebook-Cambridge Analytica data breach, VW emission, The News Corporation – phone hacking)
society expects ever higher standards (e.g. living wages)
consumers are becoming more involved and more powerful (e.g. ethical investors)

Ethical issues are becoming increasingly complex :

Globalisation is exposing different cultures (e.g. bribing for Britain)
Technology development is causing new issues to emerge (e.g. control of the internet)
Environmental problems are becoming more important (e.g. global warming)
Markets are becoming more volatile and competitive (profits harder to achieve)

Corporate social responsibility (CSR)

‘The commitment of organisations to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community or society at large’
Internal aspects

Employee welfare
Working conditions
Job design
Intellectual property

External aspects

Environmental issues
Products
Markets and marketing
Suppliers
Employment
Community activity
Human rights

Concerns central to CSR (Vyarkarnam, 1992)

Environmental protection
Philanthropy
Involvement in social causes
Urban investment
Concern for employment standards

Nature of CSR: Carroll’s Pyramid

Economic responsibility

Be profitable
Do what is required by global capitalism

Legal responsibility

Obey the law
Do what is required by global stakeholders

Ethical responsibility

Be ethical
Do what is expected by global stakeholders

Philanthropic responsibility

Be a good global corporate citizen
Do what is desired by global stakeholders

CSR stances

Laissez-faire
Enlighten self-interest
Forum for stakeholder interaction
Shaper of society

Ethics and corporate behaviour

Opportunistic exploitation: of other players in value chain (e.g. supermarkets exploitation of farmers)
Substandard working conditions: e.g. Primark, Nike and other garment producers use of sweatshop labour in developing countries offering less than a living wage
Environmental degradation: fracking
Corruption: bribing for Britain (BAE Systems and Saudi Arabia)
Anticompetitive behaviour: actions aimed at harming actual or potential competitors (e.g. in 1990s Microsoft’s promotion of IE and British Airways’ dirty tricks against Virgin)
Corporate malpractice: Barclays in interest rate fixing, BHS, RBS...

Texas instruments’ code of conduct

Is the action legal? . . . If no, stop immediately.
Does it comply with our values? . . . If it does not, stop.
If you do it would you feel bad? . . . Ask your own conscience if you can live with it.
How will it look in the news story? . . . Ask if this goes public tomorrow would you do it today?
If you know it’s wrong . . . don’t do it.
If you are not sure . . . ask and keep asking until you get an answer

Stakeholder mapping identifies stakeholder expectations and power and helps in understanding political priorities

Power is the ability of individuals or groups to persuade, induce or coerce others into following certain courses of action

It is worth understanding both the sources of power and the indicators of power in an organisation.
Understanding stakeholder and coalitions and their likely responses to changes and proposed strategies is a useful tool in strategic analysis and evaluation
Identify relevant stakeholders and groups
Establish the expectations and objectives of each group
Understand the relative power of each group
Establish likely conflicts of interest & how these might be resolved
Devise a set of objectives that satisfy the powerful groups and don't alienate other groups
Source of power

Hierarchy (formal power), e.g. autocratic decision-making
Influence (informal power), e.g. charismatic leadership
Control of strategic resources, e.g. strategic products
Possession of knowledge and skills, e.g. computer specialists
Control of the human environment, e.g. negotiating skills
Involvement in strategy implementation, e.g. by exercising discretion
Control of strategic resources, e.g. materials, labour, money
Involvement in strategy implementation, e.g. distribution outlets, agents
Possession of knowledge or skills, e.g. subcontractors, partners
Through internal links, e.g. informal influence

Indicators of power

Status
Claim on resources
Representation
Symbols
Resource dependence
Negotiating arrangements

Stakeholder Mapping might help in better understanding the following issues

In determining purpose and strategy, which stakeholder expectations need to be most considered?
Who are the key blockers and facilitators of strategy?
Is it desirable to reposition certain stakeholders?
Can level of interest or power of key stakeholders be maintained?

Triple bottom line

Economic
Environment
Social

The role of a business

Self-interest: ‘The business of business is business’—Milton Friedman
Higher purpose: Enlightened self-interest: the invisible hand
A force for good in wider society

Paradox of profitability & responsibility

Profitability: to be an attractive investment, a firm must earn a higher return on the shareholders’ equity than could be realised at a bank
Responsibility: acting in the interest of others, even when there is no legal imperative
Economic profitability

Business organisations must be profitable to survive
Once a corporation has a track record of profitability, it is able to raise new capital more easily and can increase its competitiveness

Social responsibility

Societal responsibility: acting in the interest of others, even when there is no legal imperative – lies at the basis of trust
Where there is trust, people are willing to commit themselves to the organization, both emotionally and practically, and are more likely to be loyal
Acting in the interest of all employees is a limited form of societal responsibility. It is important for trust to develop in the broader environment of buyers, suppliers, governments, local communities and activist groups

Shareholder value perspective

Companies belong to their owners and should act in accordance with their interest
The purpose of a corporation is to create economic value for those who invest risk-taking capital
Non-executive members on the board of directors check the executives to see they are running the company in a way that maximises the shareholders’ wealth
It is in the interest of shareholders to treat stakeholders well, but there is no moral obligation to do so (enlightened self-interest)
Higher rates of return
Reduced risk
Increased innovation and entrepreneurship
Better decision making
Diluted monitoring
Vulnerable minority shareholders
Short termism

Stakeholders value perspective

Companies are a joint venture between various stakeholders, with the intention of increasing their common wealth
Shareholders have an interest but profitability must balanced against the demands of the other partners
Managers have a moral obligation to consider the interests of all joint venture partners
Cooperation between stakeholders is more effective than competition
The organization should be responsible to all parties affected by the organization’s activities
Long term horizons
Less reckless risk-taking
Better management
Weaker decision-making
Uneconomic investments
Reduced innovation and entrepreneurship

Perspectives on missioning and visioning

Create a balance between perspectives: arrive at a higher level equilibrium by developing a synthesis or by exploiting the tension
Profits involving a social purpose represent a higher form of capitalism, one that creates a positive cycle of company and community prosperity. The shared value concept moves business and society beyond trade-offs

Friedman’s argument

Business cannot have responsibilities. Only individuals and managers do
The managers of the corporation are the agents of a principal (the shareholder)
The shareholders want maximum profit
Corporate social responsibility, therefore, boils down to taxation without representation

Basic terms

Latent competitors: competitors least expected
Bata: customers accept who you are
Sustainable competitive advantage
Proactive: inductive (to induce or excite)
Reactive: deductive (to deduce or draw own conclusion)
Solution: rather to justify, it is better to set the criteria
GDP = Consumer spending + Investment + Government spending + (Export [gain] - Import [loss])
Strategic drift: falling behind the strategic fit, losing competitive advantages

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Sustainable Business Strategy (MBA module 5 of 8)

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