MBA Strategy: Session One Michaelmas 2006

Introduction to Strategy
Christopher McKenna Thomas Powell

Strategic Management
Course Objectives
The ability to apply strategy theory and frameworks to the analysis and diagnosis of strategy problems Understanding how organizations align internal resources and capabilities with external conditions to produce business and corporate strategies The capacity to formulate and defend arguments in support of strategy proposals, using theory and evidence

Course Structure
1. Introduction to Strategy 2. Competitive Advantage 3. Industry Strategy 4. Strategy and Change 5. Diversification 6. Global Strategy 7. Managing the Multibusiness Company 8. Strategy Process

Text Books and Readings

Main: Grant R. (2005), Contemporary Strategy Analysis, Blackwell (5th Edition). Supplements: Johnson G, Scholes K and Whittington (2004), Exploring Corporate Strategy, Prentice Hall (7th Edition). Besanko D, Dranove D, Shanley M. and Schaeffer S. (2004) Economics of Strategy, Wiley (3rd Edition) Also: Selected classic articles

Course Assessment
Practical work (30%) Three group assignments, 10% each. Each assignment should answer the questions for the weeks case. The word limit is 500 to 1000 words (everything included). You must include a word count, including all words in diagrams, footnotes, and appendices. Exceeding the word limit will result in your mark being reduced. Assignments are due by 11pm on Sunday, in weeks 2, 4 and 5. Examination (70%) A two-hour examination paper: three compulsory questions based on a case.

Practical Work Cases

Week 2: Ben & Jerry's Ice Cream - due Sunday, October 15 at 11pm Week 4: Cirque du Soleil - due Sunday, October 29 at 11pm Week 5: The Walt Disney Company - due Sunday, November 5 at 11pm

Practical Work Criteria

Practical work should: Offer a clear view with regard to the set question Draw on relevant concepts and techniques to develop this view Draw on the case to provide evidence and analysis in support of this view A good piece of practical work would justify its final view in the light of any key alternatives, uncertainties, trade-offs or contingencies, as appropriate. We do not believe there is one right view, only wellsupported views. We recognise the constraints imposed by the word limit and the timing of the submission.

Sample Examination Instructions

FINAL EXAMINATION STRATEGY Tuesday, 13 December, 2005 - 9.30 a.m. - 11.30 a.m. Case Study: Cirque Du Soleil: Can It Burn Brighter? 1 hour reading time. During the first hour you may read the case, use pens and make notes of the case. The questions will be distributed for the second hour of the case. Students must answer ALL questions. All questions carry equal marks.
Materials: Calculators The Case Study must not be removed from the Examination Room Please do not turn over until told that you may do so.

Sample Examination Questions

All questions carry equal weight Case Study: Cirque du Soleil: Can It Burn Brighter? 1. Does Cirque du Soleil have a sustainable competitive advantage? If so, what is it? If not, can it create one? 2. What are the growth options available to Cirque du Soleil? What is your assessment of the firms diversification strategy? 3. What are the most important strategic issues now facing Cirque du Soleil? What are your strategy recommendations?

Office Hours
By email appointment with stream teachers: chris.mckenna@sbs.ox.ac.uk thomas.powell@sbs.ox.ac.uk Teaching Assistant: panayotis.dessyllas@sbs.ox.ac.uk All queries regarding group assignments should initially go through Panayotis Dessyllas

Key Concepts and Techniques

Session 1: Introduction to Strategy Defining strategy Vision, mission, goals Strategy content and process Business and corporate strategy Stakeholder view Session 2: Competitive Advantage Competitive positioning Resource-based advantage Value innovation X-factors

Key Concepts and Techniques

Session 3: Industry Analysis Industry structure (five forces) Key success factors Value chain Profit pools Value net Session 4: Strategy and Change Macro-environment (PESTLE) Industry life cycle Dominant design Strategic uncertainty

Key Concepts and Techniques

Session 5: Diversification Hierarchy of growth Portfolio models Synergy Related diversification Core competence Session 6: Global Strategy Modes of international expansion Global products Diamond of national advantage

Key Concepts and Techniques

Session 7: Managing the Multibusiness Company Dominant logic Corporate parenting Merger & acquisition integration Session 8: Strategy Process Strategic planning Emergent strategy Logical incrementalism

STRATEGY, ENTREPRENEURSHIP & INTERNATIONAL BUSINESS (SEIB)

Strategy

SEIB

Entrepreneurship

International Business

Michaelmas term

Hilary term

Trinity term

Entrepreneurship Project Introduction to Strategy (core) Technology & Innovation Strategy IB & Global Governance

Entrepreneurship track

Entrepreneurship electives

Strategy track

Strategy electives

IB track

IB electives

TRINITY TERM ELECTIVES: STRATEGY TRACK

- Strategy Implementation (Ventresca) - Competition, Strategy & Performance (Powell) - Strategy & Complexity (Reed-Tsochas)

TRINITY TERM ELECTIVES: ENTREPRENEURSHIP TRACK TECHNOLOGY ENTREPRENEURSHIP

- Entrepreneurship & Technology Ventures (Seidel) - Risk Management of Technology & Science (Tansey)

SOCIAL ENTREPRENEURSHIP
- Introduction to Social Entrepreneurship (Nicholls) - Institutional Design in Social Entrepreneurship (Nicholls) - Social Entrepreneurship & New Business Models (Leadbetter)

ENTREPRENEURIAL FINANCE
- Entrepreneurial Finance (Chambers)

TRINITY TERM ELECTIVES: INTERNATIONAL BUSINESS TRACK

- Business in China (Thun) - Global Production in Emerging Markets (Brown, Sako, Thun) - Corporate Responsibility (McBarnet) - Managing Business-State Relations and Political Risk (Brown)

Outline for Today

Introduction to the Strategy Module Defining strategy Business and corporate strategy Strategy content and process Stakeholder view Vision, mission, goals

The Cautionary Tale of Robert McNamara: A Man Who Had One of The Greatest CVs in History
1916 Born in San Francisco 1937 Receives his MBA from the Harvard Business School at the Age of 21 1946 Joins Ford Motor Company 1957 Appointed Board Member at Ford; Subsequently Made President of Ford 1961 Appointed US Secretary of Defense under Presidents Kennedy and Johnson 1968 Appointed President of the World Bank 1981 Retires at the Age of 65

Robert McNamara was the Original Whiz Kid:

Leader of Three of the Worlds Largest Organisations

Ford Motor Company

The World Bank

United States Department of Defense

Robert McNamara Knew Every Quantitative Technique But His Strategies Always Failed in Practice

At Ford (with Henry Ford II) in the 1950s

With Dean Rusk and President Kennedy in the White House in 1962

At the World Bank in the late 1970s

For Robert McNamara was the Ultimate Disaster;

He Plunged Ford, the U.S., and the World Bank into Crisis
Robert McNamara Persuades President Kennedy to Start the Vietnam War Under McNamaras Leadership, Ford Introduces the Edsel; GM Dominates the American Automobile Market

At the World Bank, McNamara Masterminds the LDC Debt Crisis

In the End, Robert McNamaras Failures Cost Us All,

From Fords Problems, to the Vietnam War, to LDC Debt

The Lesson from Robert McNamaras Failure is Clear: Good Strategy is Crucial for Any Organisation

A Definition of Strategy
The determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.
Alfred Chandler, Strategy and Structure, (MIT Press, 1962), Page 13.

3/9/03 160

140

120

100

80

60

The share price hasn't moved for a reason: no one knows where they're going. Is there more value in Vivendi than 15 per share? Yes. But the market is not going to buy into that until there is a strategy. Becoming investment grade is not a strategy, it's an outcome. The market is not going to reward you materially for simply becoming investment grade, when you have no strategic direction and remain an amalgam of assets that makes no sense. Edgar Bronfman, FT 1/9/03

40

20

0 1999 2000 2001 VIVENDI UNIVERSAL - OPENING PRICE (~E ) 2002 2003

HIGH 141.00 7/3/00, LOW 11.05 11/3/03, LAST 16.30 2/9/03 Source: DAT AST REAM

Strategy Versus Tactics

Strategic decisions are concerned with the long-term health of the enterprise. Tactical decisions deal more with the day-to-day activities necessary for efficient and smooth operations
Chandler, Strategy and Structure, Page 11

Corporate versus Competitive Strategy

Competitive and Corporate Strategy

Competitive (Business) Strategy How should a business compete in its industry? Corporate Strategy What businesses should be included in the corporate portfolio? How should these businesses relate to one another? How should these businesses relate to the corporate parent?

Strategy as Content
Vision, mission, goals Products and services Customer groups Geographic coverage Price, cost, quality positions Resources Competitors Key issues and how to address them

Strategy as Process
Formulation
Vision Vision Values Purposes Goals Analysis Goals Analysis Mission Goals DATA DATA Objectives

Implementation
Decision Decision Risk Analysis Negotiation Strategic Choice Action Action Structure Culture Processes Systems Deployments

External Internal Internal External Resources and capabilities Industry analysis Functional area analysis Key success factors Financial analysis Competitive position Synthesis Synthesis Strengths & weaknesses Opportunities & threats Competitive Advantage Strategic Alternatives

Defining Strategic Vision

Vision Vision Intention Intention Ideology Ideology

Mission Mission
Vivid Description of Success

Strategic Intent Strategic Intent

Definition of the Business; Inspiring Stretch Goals

Core Values Core Values

Guiding Principles; Only a Few in Number (3 to 5)

Core Purpose Core Purpose

Reason for Being; Outlives Strategies

Oracle Bid for Peoplesoft, July 2003

Craig Conway, CEO Peoplesoft: I can imagine no price or combination of price and other conditions to recommend the offer. The offer is diabolical and atrocious; Larry Ellison is a sociopath.

Larry Ellison, CEO Oracle: In this new era of corporate governance, we would think (Peoplesofts) management and the board of directors would be careful to put shareholder interests before their own

Two Views of the Firm

Community Return on Capital Investors Customers Suppliers

Employees Sales/ Capital Profit/ Sales Stakeholder View of the Firm Responds to Complexity? Managerially Safer? Same in Long-Term?

Shareholder View of the Firm Simpler Criteria? Safer Externally? Same in Long-Term?

Complexity of the Stakeholders

Multiple Audiences Investors Managers Employees Customers Competitors Consultants Multiple Purposes Persuade & Retain Direct & Control Motivate & Guide Attract & Assure Advise & Warn Inform & Steer

Vision and Mission (Strategic Intent)

Vision/Strategic Intent: Inspiring Goals that Stretch the Firm What can we become? Mission: Vivid Description of Achieving that Goal Where will we go?

Vision & Mission at Coca-Cola

Vision A view of a desired future state for the company: The letter C on taps will stand for Coke Not: Giving our customers what they want all the time, every time, on time Mission A statement of what needs to be done in order to achieve the envisioned state, preferably quantified: No urban citizen will ever be more than 100 yards from a Coke Not: To deliver long-term growth in earnings per share and shareholder value. Objectives Measurable targets which relate to the achievement of the mission

Strategic Goals
NASDAQ: To build the world's first truly global securities market. A worldwide market of markets built on a worldwide network of networks, linking pools of liquidity and connecting investors from all over the world, assuring the best possible price for securities at the lowest possible costs. Beat Xerox To work on cool projects, with cool clients and cool employees, not political and corporate bullshit Pan Am takes good care of you. Marks and Spencers loves you. Securicor cares. At Amstrad, we want your money. The Worlds Leading Company How will you know? Its like pornography. You know it when you see it.

Canon: Blur Studios: Amstrad: Enron: Q: Skilling:

Unilevers Purpose
Our purpose in Unilever is to meet the everyday needs of people everywhere to anticipate the aspirations of our consumers and customers and to respond creatively and competitively with branded products and services which raise the quality of life. Our long-term success requires a total commitment to exceptional standards of performance and productivity, to working together effectively and to a willingness to embrace new ideas and learn continuously. Our deep roots in local cultures and markets around the world are our unparalleled inheritance and the foundation for our future growth. We will bring our wealth of knowledge and international expertise to the service of local consumers a truly multi-local, multinational. We believe that to succeed requires the highest standards of corporate behaviour towards our employees, consumers and the societies and world in which we live. This is Unilever's road to sustainable, profitable growth for our business and long-term value creation for our shareholders and employees.

Dilemmas in Strategic Goals

How Much Stretch?
In a stretch environment, the team is asked to come in with plans that reflect their dreams the highest numbers the think the had a shot at: their stretch. The discussion revolves around new directions and growth energising stuff Stretch targets keep them reaching (Jack Welch, General Electric) If you draw the curve of where your growth is headed, and you draw the curve at where 10-15 per cent (growth) is, there's a thing called 'The Gap. And you run around trying to do things to fill that gap, and you lose focus on the core business (James Cantalupo, CEO of McDonalds, after abandoning the double-digit growth targets)

How Much Balance?

Most companies' operational and management control systems are built around financial measures and targets, which bear little relation to the company's progress in achieving longterm strategic objectives. Thus the emphasis most companies place on short-term financial measures leaves a gap between the development of a strategy and its implementation. Robert Kaplan & David Norton, The Balanced Scorecard, 1996

How Much Profit?

The Problem Facing Managers
The Only Real Goal of a Company is to Making a Profit. Or A company, besides making a profit, also has the goal of attaining the well-being of various stakeholders, such as employees, customers, etc. Driven by Profit US 40% UK 33% Germany 24% France 16% Japan 8%

Charles Hampden-Turner & Fons Trompenaars, The Seven Cultures of Capitalism, 1994.

The Anglo-Japanese Divide?

There's a cultural divide. The Japanese investors say don't touch headcount, the western investors say I haven't done enough. Sir Howard concedes that, ideally, he would have gone much further in streamlining Sony's businesses, no fewer than half of which he estimates are losing money. But I have to win hearts and minds. I cannot go in with English jackboots, he says, looking down at his leather shoes. Sir Howard Stringer, CEO, Sony (BA, History, Merton College, Oxford)
The Financial Times, 26 September 2005

The Assumptions of Different Strategies

How Does the World Really Work?
Rationality Rules Adapt to Markets
Outcomes Profit-Maximising

Rationality Fails & Markets Adapt

Planning Processes Deliberate Chameleon

Darwinian

Emergent Crafting

Plural Rationalities Markets & Society

Plural

Plural Irrationalities, Sticky Markets & Orgs.

Source: Richard Whittington, What is Strategy - and Does it Matter?

Key Topics for Today

Defining strategy Business and corporate strategy Strategy content and process Stakeholder view Vision, mission, goals

MBA Strategy: Session Two October 2006

Competitive Advantage
Christopher McKenna

Course Structure
1. Introduction to Strategy 2. Competitive Advantage 3. Industry Strategy 4. Strategy and Change 5. Diversification 6. Global Strategy 7. Managing the Multibusiness Company 8. Strategy Process

How to Explain the Success of the Ipod?

Apple iTunes software Belkin Media Reader photo storage 4 Gigabyte Samsung Flash Memory Apple manufactured touch wheel Phillips power management unit Wolfson Microelectronics for audio codec Silicon Storage Technology 8 Megabytes utility flash memory for system code Samsung S5L8701B05 ARM Core DSP, with Flash Disk Controller Cypress CY8C21424 Mixed-Signal Array with On-Chip Controller for touch wheel

http://www.isuppli.com/news

Key Concepts & Techniques

Competitive Positioning Resource-Based Advantage Value Innovation X-Factors

What Causes Superior Performance?

P
Shareholder returns Total profit Profit rates (ROA, ROE) Market share Growth rate Market capitalization Employment Societal contribution Etc.

Industries Vary Enormously in Their Profitability

US Industry in 2005 Banks Cable TV Computers Grocery Stores Hotels Household Products Natural Gas Production Newspapers Precious Metals Tobacco Return on Equity 12.2% -0.2% 15.6% 5.2% 9.2% 37.5% 13.4% 10.3% 2.0% 29.9%

Is Profitability a Function of Industry or Not?

Total Investors Return, 1988-98% Computers: IBM Compaq Apple Dell General Merchandisers: Wal-Mart Kmart Sears Roebuck Dollar General 27 2 15 40 15 36 1 80

The Central Question:

If Profitability Doesnt Come Automatically From Your Industry, Then How Can You Achieve Extraordinary Profits on a Regular Basis?

Two Views of Competitive Advantage

Competitive Positioning Sustained superior performance requires effective product-market positioning Market share Product features Cost position Brand positioning Geographic scope Vertical integration Resource-Based Sustained superior performance requires unique resources & capabilities Technological skills Teamwork Business processes Leadership Innovation Organization culture

Sources of Competitive Advantage

Resource-Based View Factors of Production
Input Markets People Technology Capital equipment Buildings Land

Competitive Positioning View Products & Services

Output Markets Technology products Industrial products Consumer products Agricultural products Services

Firm

Competitive Strategy: Michael Porters Generic Strategies

At the level of the business unit, there are just two ways of achieving superior performance, the generic strategies of: Cost Leadership Differentiation The scope of cost leadership and differentiation can be broad or narrow. But Porter warns that the two strategies cant be mixed. His message is: Identify your advantage - your reason for being Know your competence Dont get stuck-in-the-middle

Porters Generic Strategy: When Selling Commodities, Cut Costs; Or Sell Specialized Goods

Your Choice Is Either to Take The Market Price Or Charge What You Want

But is it Really that Easy?

On the Face, This Strategy Sounds Good, But Is Anyone Ever Just Low Cost or Differentiated? So How Do You Decide the Right Strategy?

The Generic Strategy Trap?

Market Scope

Niche
Specialized Market Segmentation Geographic Demographic

Broad
Many Market Segments Wide Coverage No Market Specialization

Mixed
Serves few markets Some market Specialization

Generic Competitive Positions

Generic Strategy
Cost Leadership Cost/ Niche Cost/ Broad

Differentiation

Diff/ Niche Niche

Diff/ Broad Broad

Market Scope

Instead of Generic, Be Specific.

In This Industry, What is the Basis of Competition?
Access to Capital Cost Structure Customer Service Distribution Channels Environmental Awareness Geographic Breadth Innovation Market Segments Served Market Share Novelty/Fashion Parent Company Affiliation Price Product Features Product Line Breadth Quality Reputation Social Consciousness Technology Time/Convenience Vertical Integration

How to Discriminate Among Groups:

Identify the High and Low Performers What are the Key Strategic Factors that define these Groups? What are the Strategic Spaces that differentiate these Groups? Which Ones are Available? How are different Strategic Groups affected by Environmental Change? What Mobility Barriers Exist to Moving into Strategic Spaces?

The Resulting Analysis Will Resemble a Venn Diagram

Key Strategic Dimension

Less Competitive Group Highly Competitive Group Specialist or Boutique Firms

Target Customer Segment

An Example: Strategic Groups in Foods in Europe

Geographic Coverage
Low cost production, Local knowledge Brand loyalty, Proprietary skills, R&D capability, Economies of scale Marketing skills

Multinational Major Branders

National OwnLabellers

Minor National Branders

Low costs Retailer switching costs

Major National Branders

Brand loyalty, Proprietary skills, Marketing skills, Local knowledge

0%

Marketing Intensity (% of Sales)

15%

The Strategy Web

Access to Capital Geographic Coverage
+

+
+

Customer Service

Cost Efficiency
+

Brand Recognition Market Share

Product Innovation

Breadth of Product Line

The Firm as a Portfolio of Attributes

Competitive Competitive
Costs Markets Vertical Strategic Integration Group

Financial Financial
Assets Returns to Investors Revenues Financial Structure

Marketing Marketing
Products Promotion Pricing Distribution

Operational Operational
Systems Efficiency Technology Quality

Organizational Organizational
Structure Leadership Culture Motivation

Institutional Institutional
History Reputation

Governance Relationships

But What Makes This Firm Special?

One Solution is to Ask: What Are You Good At? What is Your Core Competence?

Defining Core Competences

A core competence is: A bundle of skills and technologies Of fundamental customer benefit Competitively unique A gateway to new markets The notion shifts strategy from a battle of market position, towards a mastery of skills and capabilities. The key question is: What are you best at?

Identifying Core Competences

1. Map products and services 2. Identify underlying technologies, skills, processes and resources 3. Synthesise common technologies, skills, processes and resources 4. Check that common technologies, skills, processes and resources are extendable 5. Test their value!

The Resource Based View (RBV) of Strategy What Are You Best At?
Is it Valued by Customers? Will they pay you more than it costs? Is it Superior? Do you command a premium over competitors? Is it Imitable? Something your competitors cannot copy? Is it Substitutable? So that your competitors cannot trump you? Is it Durable? Are you managing and investing in it? Is it Core? Is it at the heart of (nearly) everything you do?

Why Resource Advantages Can Last

CAUSAL AMBIGUITY Rivals cannot observe the resource Rivals cannot replicate or reverse engineer the resource The social complexity of organizational resources Examples: Organizational culture, systems, motivation, and commitment UNIQUE HISTORICAL CONDITIONS Rivals cannot replicate the historical sequence of events The path-dependency of firm performance Examples: First-mover advantages such as location and raw materials TIME COMPRESSION DISECONOMIES The resource is inherently time-consuming to accumulate Examples: Reputation, knowledge, skills, relationships, and experience

Resources Are Distributed Across the Value Chain

Business Designs
Competition is no longer about Magic Bullets but about competing on Business Designs Business Design: A mutually reinforcing configuration of business choices on key value adding dimensions, underpinned by fundamental assumptions about business drivers Wal-Mart Dell EasyJet Nucor Amazon

Fundamental Assumptions: What business are you in? What are your customers going to want? What drives profits in the chain?

Competing on Business Design

Big Steel Fundamental Assumptions: Design Elements: Customers Scope Operating System Capital Intensity R&D Organization
Source: Slywotsky, 1996

Mini-Mills Right quality, Right Price, Low Volumes Regional Focus Scrap Electric Arc Low Suppliers Lean, Green

Quality at a Price Volume Key

Broad Vertical Integration Basic Oxygen High In-House Unionized

Complementarity in Nucors Business Design

(Key Drivers Shaded)
Regional Markets Electric Arc Key Plant Suppliers

Low R&D Low Volume Low Capital Limited Products Green Workers No Unions High Incentives Porter, Harvard Business Review, 1996 Low Prices Low Quality List Prices Low Overheads

Which Matters More: External or Internal?

% Explained Abnormal Profits 100 90 80 70 60 50 40 30 20 10 0

Industry Business

Emergent Emergent Sustained Sustained Hi-Perf Lo-Perf Hi-Perf Lo-Perf

Percent abnormal profit explained by industry or business specific effects, 12,000 business units, 1982-1995: relative, non-additive Adapted from: McGahan and Porter, Strategic Organization, 2003

Value Innovation (Blue Ocean Strategy)

1. Industry
Forget industry analysis; many constraints are imaginary

2. Competition 3. Markets

Forget what competitors are doing, focus on adding value Go for big blocks of customers; let some customers go

4. Capabilities
Forget current assets; ask What if we were starting over?

5. Products
Forget conventional products; figure out what customers need
Kim and Mauborgne, Harvard Business Review (Jan/Feb, 1997)

Value Curve for a Blue Ocean Strategy

High Two-star hotel One-star hotel Low Blue Ocean Bed quality Aesthetics Room size Furnishings Hygiene Quiet room Available reception

Lounge

Dining

Kim and Mauborgne, Harvard Business Review (Jan/Feb, 1997)

Price

Is Performance Entirely Due to Competitive Advantages?

Is There Any Way to Achieve Sustained Performance Beyond Competitive Position, Resource Advantages, and Industry Forces?

Consider those X-Factors

An X-factor is an organizational attribute that is: 1. Valuable increases revenues, reduces costs 2. Not necessarily scarce 3. Not difficult to imitate low barriers to imitation Examples: Attractive product features or packaging Customer service, product safety Information technology, production efficiency Basic industry experience and expertise Basic skills in production, distribution, management

X-Factors in Global Business Schools

X-Factors (Similarities)
Program Administration: MBA, PhD, Executive Systems and Processes: Planning, Budgeting, IT Faculty Coverage: Finance, Management, Marketing Source of Funds: Tuition, Executive Training Facilities: Land, Building, Capital Improvements

Competitive Advantages (Differences)

Historical Conditions: Location, Age, Culture Reputation: Programs, faculty, publication, business Abnormal Funding Advantages: Endowments, grants Relationships: University, business, government, alumni Culture: Strong institutional commitments

The Dynamics of Competitive Advantage

The Present X-Factors X-Factors Competitive Competitive Advantages Advantages Visions & Visions & Experiments Experiments The Future

X-Factors X-Factors Competitive Advantages

Unsuc cessfu lV s & Es

X-Actions
X-Actions are the actions associated with Xfactors, requiring effort, attention, training, mastery, execution. Industry: Insurance X-Actions: Developing insurance products, assessing risks, selling policies, issuing policies, servicing customers, processing claims

X-Actions by a Mobile Phone Provider

Efficient Frontier

Degree of Mastery
Minimal Customer Mktg. Logistics Product Network Service Devel. Access Billing

X-Actions

X-Actions in Practice
1.Competitive advantage is not enough The goal is superior performance, not competitive advantages Superior Performance = Competitive Advantage + X-Actions 2. Firms must master fundamental actions Identifying the X-Factors Understanding the industry standard Avoiding the fatal weakness: X-actions are multiplicative 3. Competitive advantage may be unachievable Most firms should focus on X-actions, not competitive advantages X-actions are clear and achievable, not invisible and ambiguous

How to Explain the Success of the Ipod?

The iPod family of digital media players keeps growing in sophistication and popularity. It's also growing more profitable for Apple with each passing revision to the product, says market research firm iSuppli. iSuppli took apart the 4-GB version of the nano and estimated that the materials inside cost $72.24. That's a drop of more than $17 compared with what Apple paid for the guts of a 2-GB version of the first iPod nano device. Apple saved money by eliminating a chip called flash disk controller, which it used to purchase from Silicon Storage Technologies (SSTI ). That functionality is now built right into Samsung's SOC. Apple has nipped and tucked even on such low-end components as transistors and diodes. These used to cost $3.71 in the old nano, but we estimate the cost has come down to $1.85, Crotty says. It may not sound like much, but when you think that Apple sells millions of these things, it really adds up. Business Week, 20 September 2006

Firm Performance and Managerial Control

High Controllability Low
Industry Forces Competitive

Position

X-Actions ResourceBased Advantages

Low

High

Impact on Performance

What Causes Superior Performance?

C
Michael Porter Product Position Market Position Cost Position Resource-Based View Resources Capabilities Other Intangibles

P
Shareholder returns Total profit Profit rates (ROA, ROE) Market share Growth rate Market capitalization Employment Societal contribution Etc.

What Causes Superior Performance?

C
Porter Product Position Market Position Cost Position Resource-Based View Resources Capabilities Other Intangibles

X
X-Actions Mastery of Fundamentals Action Emphasis Execution

Key Concepts & Techniques

Competitive Positioning Resource-Based Advantage Value Innovation X-Factors

MBA Strategy: Session Three Michaelmas 2006

Industry Analysis
Christopher McKenna

Outline for This Session

Industry Structure (Five Forces) Key Success Factors Value Chain Profit Pools Value Net

Industries Vary Enormously in Their Profitability

US Industry in 2005 Banks Cable TV Computers Grocery Stores Hotels Household Products Natural Gas Production Newspapers Precious Metals Tobacco Return on Equity 12.2% -0.2% 15.6% 5.2% 9.2% 37.5% 13.4% 10.3% 2.0% 29.9%

Some Industries Outperform in the Long-Run

Profit from 1960-1999 Pharmaceuticals Mining Tobacco Chemicals Computers Electronics Aerospace Rubber & Plastic Textiles All Industries Return on Sales 11.3% 9.0% 6.8% 5.5% 5.3% 4.4% 3.5% 3.3% 2.9% 4.9%

Why Do Some Industries Outperform Others?

The Structure of Industries Vary According To Five Main Variables (Forces) 1. Barriers to Entry 2. Competitive Rivalry 3. Power relative to Buyers 4. Power relative to Suppliers 5. Threat of Substitutes

Industry Structure May Even Inhibit Profits

In the first hundred years of the US air travel (1903-2003), the industry made exactly zero cumulative profit. The Financial Times, 22 November 2003 If there had been a capitalist at Kitty Hawk, he should have shot down Wilbur Wright Warren Buffet, Berkshire Hathaway

Industry Structure Analysis

The Analysis of Profit Potential in an Industry
Is this a good industry to be in? Why is it a good industry and will this change? How can we manage this change?

Remember, as Karl Marx famously said: One capitalist kills many

Market Share Is Extremely Important

Return on Investment By Market Share
Average Return on Investment 45 40 35 30 25 20 15 10 5 0 Less than 10% Market Share 10% to 20% 20% to 30% 30% to 40% 40% to Greater 50% than 50%

Market Share and profitability are strongly related. Business units with very large market shares - over 50% of their served market -enjoy rates of return more than three times greater than small-share strategic business units (those that serve under 10% of their markets).

Market Share: The Top Prizes Available

Market PC Operating Systems HIV Drugs Diapers Soft Drinks Mobile Phones Databases Servers CDs Leader Microsoft GSK Kimberley-Clark Coca-Cola Nokia IBM IBM Universal Market Share 96% 45% 45% (North America) 44% (North America) 39% 36% 30% 30% (North America)

Porters Five Forces Model

Suppliers
Power Relative to Suppliers Threat of Competitors New Entry

New Entrants

Rivalry

Substitutors
Threat of Substitutes

Power Relative to Buyers

Buyers

Porter Described Competitive Strategy as Primarily a Function of Industry Sector

The essence of formulating competive strategy is relating a company to its environment. Although the relevant environment is very broad, encompassing social as well as economic forces, the key aspect of the firms environment is the industry or industries in which it competes. Competitive Strategy, 1980

Your Analysis Tells You If the Industry Is Attractive

Rivalry
Competition Life Cycle Exit Barriers Fixed Costs

Customers

Concentration Sophistication Switching Costs Economies from Integration?

Rivalry Substitutes
Price/Performance Switching Costs Make or Buy? Concentration Sophistication Switching Costs Economies from Integration?

New entrants
Scale Economies Patents/Brands Tariffs/Govt

Suppliers

Barriers to Entry
High capital costs to enter No opportunity for small entry Incumbent economies of scale (large MES) Incumbent economies of scope Incumbent economies of vertical integration Incumbent experience/learning advantages Restricted access to distribution channels Customer loyalty to incumbents Restricted access to essential inputs Threat of retaliation by incumbents Excess capacity

Rising Costs in Semiconductor Chip Production

Arthur Rock, Founding Investor in Intel: The cost of capital equipment in semiconductors will double every four years The Cost of a Semiconductor Chip Factory 1977 1985 1997 2002 2007 (forecast) Source: Design News, 2002. $4 million $30 million $1.5 billion $3-5 billion $10 billion

Minimum Efficient Scale (MES) How Many Firms Can the Market Sustain?
Unit Cost

Total Market Demand MES Volume

The Boston Consulting Groups Experience Curve

Total costs per unit of producing a good or service decline by 20% to 30% with every doubling of cumulative units produced

Either invest in greater market share or get out. Bruce Henderson, The Boston Consulting Group

The Experience Curve in Action

Competitive Rivalry
To What Extent Does the Industry Have? Low industry growth Commodity products & services Low brand loyalty Low switching costs Excess capacity High exit barriers

Changing Share of the Big Three American Car Manufacturers

100 90 80 70 60 50 40 30 20 10 0
19 10 19 13 19 29 19 47 19 54 19 71 19 83 19 88 19 92 19 95 20 01

Power Over Buyers

To What Extent Is It True That? The Product/Service is Unique The Product/Service is Essential to Buyers Buyers have Few Sources of Supply Buyers have High Switching Costs Buyers have no Substitutes Available Your Firm can Integrate Forward Your Firm is Larger than its Customers

Power Over Suppliers

To What Extent Is It True That? The Suppliers Input is a Commodity The Suppliers Input is Not Crucial to your Output You Dominate the Suppliers Sales The Supplier has Many Competitors The Supplier has Few Alternative Customers The Industry has Low Switching Costs The Industry has Substitute Products Available The Industry Can Integrate Backward The Industry is Larger than it Suppliers

Threat of Substitutes
To What Extent Is It True That? Alternative Products or Services Deliver Comparable Benefits at Lower Cost Some Benefits at Significantly Lower Cost New Technology Can Make the Industry Obsolete Customers have Low Switching Costs

Star Plot of Industry Structure Dynamics

Low Rivalry

1. 2.

High Entry Barriers

Low Substitutability

3.

Low Buyer Power Low Supplier Power

Define the Relevant Market Plot Positions on Each Axis Join Positions into a Web: the Larger the Area, The Greater the Power Compare with Other Investment Opportunities Alter the Market Structure Align Investments

Key Success Factors

What Are the Requirements for Industry Success? Competitive Imperatives Technological Imperatives Financial Imperatives Marketing Imperatives Organizational Imperatives Operational Imperatives

Global Strategy Consulting Industry What Is Necessary for Success?

Competitive: Technological: Financial: Marketing: Organizational: Operational: Innovation, Uniqueness, Reputation Leading-Edge Knowledge, Expertise Capital, Pricing, Remuneration Products, Propositions, Customer Base Recruiting, Culture, Knowledge Client Management, Global Systems

The Value Chain

Understanding the Steps in Production
Total Costs Infrastructure Human Res. Res. & Dev. Procurement Profit

Margin

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Consider the Pharmaceutical Value Chain

R&D R&D Product Product mgmt. mgmt. Marketing Marketing and Sales and Sales Distribution Distribution Customer Customer service service

For each link in the Value Chain: 1. How do we add value? 2. What are the x-factors? 3. How well do we execute? For the Value Chain as a Whole: 1. What are our distinctive competencies? 2. What is our center of gravity?

The Shifting Centre of Gravity:

R&D Marketing Operations

Revenues
Development

Expansion

Maturity

Time

Profit Pool Analysis

Check the Revenue Along the Value Chain Check the Profit Along the Value Chain What is the Centre of Gravity? Choke Points for Profitability

US Auto Industry Profit Pool

Operating Margin Leasing

New Car Dealers Auto Manufacture

Insurance Auto Loans Service/ Rental Repair Parts

Used Car Dealers 100%

Share of Industry Revenue

Adapted from How to Map your Industrys Profit Pool, Harvard Business Review, 1998

The Personal Computer Industry Profit Pool (Or Why IBM Doesnt Make PCs)
40%
Processors

30%

Profit 20% Margins

10%
Internal Components

Software Services

Personal Computers

Peripherals

Percentage of Industry Revenue

Adapted from Gadiesh & Gilbert, 1998

The Value Net

Suppliers

Competitors

Organization

Complementors

When customers have the competitors product, they value your product less (products are substitutes)

Buyers

When customers have the complementors product, they value your product more (products are complements)

See Adam Brandenburger and Barry Nalebuff, Co-opetition, 1996

Placing the Firm at the Centre Microsoft X-Box

Component Producers Employees

Suppliers

Electronic Arts Buena Vista

Competitors

Microsoft X-Box

Complementors

Sony Playstation Game Cube

Buyers

Wal-Mart (Retailers) Gamers

The Power of Complementors

Both Competitors & Complementors Movie Cinemas and Video Rentals Traditional & Internet Booksellers The Paperless Office ATM Machines & Banks
Source: Brandenburger and Nalebuff, Co-opetition, 1997

An Example: British Airways and Air France Compete with each other for landing slots and terminal gates. Complement each other in defraying Airbus and Boeings R&D costs.

Whats So Different About the Value Net?

Cooperative vs. Competitive Strategy Every organization is a relationship hub Complementors may be a market opportunity Competitors may also be complementors Managing Interdependencies to create value It Puts Your Company (not the Industry) at the Centre of the Analysis!

How to Improve Firm Performance

Develop Competitive Advantages
Define unique cost position, differentiation, market segments Cultivate firm-specific resources & capabilities

Change the Industry Structure

Manage the Five Forces (raise entry barriers, reduce rivalry, etc) Manage the value chain, profit pools, complementarities

Move into Attractive Industries

Manage corporate growth; the corporate portfolio Diversification strategy; merger & acquisition; synergies

Key Concepts
Industry Structure (Five Forces) Key Success Factors Value Chain Profit Pools Value Net

MBA Strategy: Session Four Michaelmas 2006

Strategy & Change

Christopher McKenna

Outline for This Session

Industry Life Cycle Dominant Design Macro-Environment (PESTLE) Strategic Uncertainty

The Poetics of Uncertainty

As we know, there are known knowns; these also are things we know we know. We also know there are known unknowns; that is to say, there are some things we know we do not know. But there are also unknown unknowns the ones we dont know we dont know. Donald Rumsfeld, U.S. Defence Secretary, speaking in 2003, & the Winner of the Plain English Campaigns Foot in the Mouth Trophy.

The Idealised Industry Life Cycle

Industry Sales

Time Introduction Competition: Few Key Success Factors: Design Growth Entries Process Maturity Consolidation Efficiency Decline Exits Commitment

Grant, Contemporary Strategy Analysis, page 311

Dominant Design: From Product to Process

Innovation: Number & Importance

Product Innovation: Change in basic configuration of product or service elements Dominant Design: The basic accepted configuration of product or service elements Process Innovation: Change in production or delivery process of product or service
Abernathy and Utterback, Harvard Business Review, 1974

Time

Dominant Design & The Evolving Industry Structure of the Auto Industry
300 250 200 150 100 50 0 Total Firms in the Industry Entries Per Annum Exits Per Annum
Concentration Ratios: 1910s (Top 2 Firms): 38% 1920s (Top 2 Firms): 60% 1930s (Top 3 Firms): 80%

Adapted from Susan Klepper, Rand Journal of Economics, 2002

18 94 18 98 19 03 19 10 19 15 19 20 19 30

Do You Want to Be Early or Late?

The Early Entrants in Typewriters Survived Longer
Percentage Who Survived

100% 80%
Post-Dominant Design

60%
Pre-Dominant Design

40% 20% 0%

10

20

30

40

50

60 Years

Suarez and Utterback Strategic Management Journal, 1995

Revolutionaries or Survivors? Survival Functions for Different Types of Change

Survival Function (Log)
Early Entrants with Pre-entry related Experience: Penicillin and TVs Early Entrants with Pre-entry related Experience: Autos and Tyres Early Entrants without Pre-entry related Experience

Late-Entrants

Time Competence Enhancing Change: Builds upon or reinforces existing competencies, skills, know-how or infrastructure: For example: Radio to TV
Competence Destroying Change: Makes knowledge obsolete and overturns existing competencies, skills, know-how or infrastructure: Coaches to autos
Adapted from Klepper, Rand Journal of Economics, 2002; Gatignon et al, Management Science, 2000

Strategic Responses to Change

Commitment

Stay to the End

Bet the Company

Buy the Threat Spread your Bet

Innovation

The Uncertain Future

(Or Why Chris McKenna Prefers the Past)
Heavier-than-air flying machines are impossible (Lord Kelvin, Professor of Physics, University of Glasgow, 1895) Stocks have reached what looks like a permanently high plateau. (Irving Fisher, Professor of Economics, Yale University, 1929) The concept is interesting and well-formed, but in order to earn better than a C, the idea must be feasible. (Yale Professor in response to Fred Smith's paper proposing Federal Express, 1971) People will soon get tired of staring at a plywood box every night (Darryl F. Zanuck, 20th Century Fox on the TV)

When Is Past History the True Future?

We tend to ignore history and overestimate the short-term. I call it micro-myopia. Our hopes and expectations about some new technology lead us to overestimate its short-term impact on our lives and, when reality fails to live up to our expectations, our disappointment leads us to underestimate its long-term implications. When something doesnt happen in the immediate way thats expected, everyone says its never going to happen at all. Thats the point at which it takes off and blows the door off our houses. Paul Saffo, Director, Institute for the Future, Palo Alto

Management Today, January 2000

The McKinsey & Company Typology of Uncertainty

1 No need for scenarios; conventional analysis will do fine 2 3 A limited number of scenarios, in which conventional analysis will serve fine

1. A clear-enough future

2. Alternative futures

Range of scenarios, testing for robustness

Range of scenarios, for exploring possible futures

3. A range of futures

4. True ambiguity

The History of Scenario Analysis

Millett, Strategy and Leadership, 2003

Scenario Analysis
Definition: A scenario is a narrative description of a consistent set of factors which define in a probabilistic sense alternative sets of future business conditions (Huss, 1988) Scenarios Help Where: Discontinuous Change is Important Quantitative Factors are Important You Need a Long-Term Perspective There is High Uncertainty There are Significant Data Gaps The Outputs Include: A Check on Strategy A Means to Improve Managerial Learning
Huss, International Journal of Forecasting, 1988

The Scenario Building Process

1. Define the Scope of the Question 2. Identify the Key Drivers Using PESTLE
(Pestle: Political, Economic, Social, Technological, Legal and Environmental)

3. Produce the Initial (7-9) Mini-Scenarios 4. Identify Underlying Themes 5. Reduce to 2, 3 or 4 Scenarios (No More!) 6. Identify the Key Strategic Repercussions
Schoemaker, Sloan Management Review, 1995

Pharmaceutical Industry Scenarios

Scope:
How to build and maintain a leadership position in a high-growth and rapidly changing industry over the next five years; with attention to those who prescribe the drugs, the trade, pharmacies; hospitals, wholesalers and chains, managed health care organizations, competitors, and government regulators

Drivers:
Known Drivers: The baby boomer and female population projections, active retirement trends, more knowledgeable consumers; and continued growth in the 85 and older age group. Uncertain Drivers: Industry consolidation, changes in insured populations, impact of DTC advertising, non-traditional health care, and technological breakthroughs.

Pharmaceutical Scenarios
High

Dangerous Waters Control Little new product More regulation Marginal

Brave New World Significant breakthroughs Strong controls Breakthrough

Societal Health Impact External

Low
Source: Warner-Lambert, Pharmaceutical Executive, April 2000

Rose Garden Technical advances Consumer driven

Japan: Towards 2020

1. The Long Hollowing: A. Banks rescued B. Keiretsu relationships protected C. Relocation to devalued Asian economies Crash and Rebirth: A. Bank holiday crisis B. Radical government and financial reform C. Social reform to improve fertility, environment and education Hercules Departs: A. Americans depart from Asia B. Trade confrontations with China C. Rise of Nationalism and the revocation of Article 9

2.

3.

Source: www.nier.co.jp

Post 9/11 Scenarios

Kennedy et al, Strategy and Leadership, 2003

Lets Be Clear: Change is Not Accelerating

You have to be bullish about consulting. It thrives on change and this is an era where change is accelerating. A leading consultant, 1969.
16 14 12 10 8 6 4 2 0 1978

Turbulence turns out to be a condition, not of the outside environment, but of our inner selves. Its an imagined condition: We glorify ourselves by describing our own times as Turbulent. Henry Mintzberg, Planning Review, 1994

84

90

96

The Percentage of US Businesses That Fail Each Year.

McNamara et al, Strategic Management Journal, 2003; McKenna, The Worlds Newest Profession, 2006.

Strategic Uncertainty: What To Do?

Studies find that in times of uncertainty, executives turn to insiders to help scan the environment. Perhaps a better way to operate is to classify the nature of the uncertainty.
Daft et al, Strategic Management Journal, 1988; Friend & Hickling, Planning Under Pressure, 1987.

Un Ou cert r S ain t ra t i e te s A gic bo Go ut als

We Need Clearer Objectives

We Need Deeper Investigation

What Should We Do About Uncertainty?

Uncertainties About Related Choices

We Need To Team With Others

e th in ent ies nm in t ir o r ta n v ce g E Un rkin Wo

The Big Picture View, Top Down

Macro-Scenario Analysis Industry Structures, Life-Cycles & Scenarios Groups, Pools, & Complements The Business

Key Concepts
Industry Life Cycle Dominant Design Macro-Environment (PESTLE) Strategic Uncertainty

And When You Dont Anticipate, In Donald Rumsfelds Words:

Stuff happens.
(Donald Rumsfeld, on the unanticipated scale of the looting and disorder in Baghdad, April 2003)

MBA Strategy: Session Five Michaelmas 2005

Understanding Diversification
Christopher McKenna

Key Concepts and Techniques

Hierarchy of Growth Related Diversification Portfolio Models Synergy Core Competence

Corporate versus Competitive Strategy

Types of Strategy
Level Group Businesses Functions Strategy Corporate Business Functional

Competitive and Corporate Strategy

Competitive (Business) Strategy How should a business compete in its industry? Corporate Strategy What businesses should be included in the corporate portfolio? How should these businesses relate to one another? How should these businesses relate to the corporate parent?

The First Definition of Strategy

The determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.
Alfred Chandler, Strategy and Structure, (MIT Press, 1962), Page 13

The Hierarchy of Growth

Early Strategies Revamp Packaging, Pricing, Promotions Expand into New Domestic Territories Develop New, Related Products and Services Export Current Products Abroad Acquire a Competitor Expand Internationally Acquire in a Related, Growing Industry Late Strategies Integrate Vertically Acquire a Supplier or Customer Acquire in an Unrelated, Growing Industry

McKinsey & Co.s Three Horizons of Growth

Horizon 1: The Current Core Business units that generate todays performance Products and services now identified with the company name Horizon 2: Businesses on the Rise Fast-moving, promising new ventures The emerging stars - need investment Horizon 3: Seeds for Tomorrows Business Embryonic options on the future Projects, pilots, alliances, minority stakes
Baghai, Coley & White, The Alchemy of Growth, 1999

Structure Follows Strategy

(Alfred Chandler, 1962)
Four Companies (DuPont, GM, Standard Oil, & Sears) adopted the Same Organizational Form during the 1920s because they Chose to Pursue the Corporate Strategy of Diversification.

Thus Diversification

Led To Divisionalisation

The Multi-Divisional Corporate Structure Permitted: 1. Decentralised Operations (Either Product or Geography) 2. The Separation of Strategy from Operations in the Business Units
This Structure Would Revolutionize Business

What Drove DuPont to Diversify after WWI?

Although a Monopoly by the late 19th Century, DuPonts Business was Highly Variable because of Wartime Demand. In 1912, the U.S. Government Broke DuPont into Three Separate Companies because of Public Hatred of Monopolies. Following the End of World War I, DuPont had Excess Manufacturing Capacity that was not being Utilized. Industrial Research into Explosives Led to Patents in Innovative Consumer Products like Artificial Leather and Varnishes. The du Pont Family were among the Richest in America in 1919.
The Black Powder Mill Founded by Eleuthre Irne du Pont in 1802 on the Brandywine in Delaware.

For these Architects of the Corporation: Form Followed Function

Du Ponts Functional Structure (1919)
President Executive Committee Sales Treasury Purchasing Production R&D Engineering

Du Ponts Divisional Structure (1921)

President Executive Committee Treasury Explosives Dyestuffs Auxillary Depts Pyrolin Chems & Paints Fabrikoid

Thus the Multidivisional Structure Follows From Duponts Strategy of Diversification

The Multidivisional (M-Form) Corporation: Trading Efficiency for Span of Operations

Functional Structure
(report by functions e.g marketing, production)

Functions

Divisional Structure
(report by businesses)

Divisions (Product/ Geographic) Functions Functions Functions

Structural Pros and Cons for the M-Form

Structure: Functional: Advantages: For focused businesses For specialisation of skills For control (bureaucratic) For diversified businesses For changing portfolios For accountability Disadvantages: Inflexible Narrow Bureaucratic Low synergy Top-down Short-termist

Divisional:

Directions in Which to Diversify

Technology

Geography

Customer

Diversification Strategy Categories

Single Business: at least 95 per cent of turnover in a single business (McDonalds) Dominant Business: one business at least 70 per cent but less than 95 per cent of turnover (BP) Related Diversified: no business as large as 70 per cent of turnover, but market or technological relationships between different businesses (Unilever)

Unrelated Diversified (conglomerate): no business as large as 70 per cent of turnover, and no - or limited - market or technological relationships between different businesses (GE).

Diversification Methods: Internal Growth or Acquisition?

Organic Growth: Median ROI yrs 3-4: -14% Median ROI yrs 5-6: -8% Median ROI yrs 7-8: +7%
(Biggadike, HBR, 1979)

Acquisition: At best, half succeed

(Porter, HBR, 1987)

Diversification Methods: The Pros and Cons

Advantages Organic:
Incremental learning Competence enhancing Culturally compatible Adds to industry capacity Difficult to recoup failure Slow

Disadvantages

Acquisition:
Fast Lower rivalry Upgrading resources Large commitment Startup Costs Duplication of resources

Michael Porters Three Essential Tests (For Companies Considering Diversification)

1. 2. 3.
The Attractiveness Test: Is the Industry Attractive? The Cost-of-Entry Test: Will You Make Profits? The Better-Off-Test: Will Either Firm Gain?

Put More Simply, What are the Synergies? (and are they practical?)

The Diversification of Large Industrial Firms, US and Europe

(Domestically-Owned Top 100 Industrial Firms)
% of Firms Diversified (Related & Unrelated)
90 80 70 60 50 40 30 20 10 0
UK Germany

* * * * *
US

France

1950

1960

1970

1983

1993

Whittington, Mayer, and Curto, 1999, Chandlerism in Post-War Europe

Consulting Firms like McKinsey Carried the Structure to Europe

Management Consultants At Work in 1957. The Bulk of Consultants Work in the 1950s and 1960s was to Install the Multidivisional Structure.

But Which Way Does Causation Run? The 100 Largest Industrial Firms in Britain
100
%

Multidivisional Companies

80 60 40 20 0 1950 1960 1970 1983 1993

Diversified Companies

Sources: Channon, 1973, Strategy and Structure of British Enterprise & Whittington, Mayer, and Curto, 1999, Chandlerism in Post-War Europe

The Context for Conglomerates The Geology & Geography of Conglomeration

Definition: Derived from Geology, a Conglomerate is a firm whose growth comes through the acquisition of other firms whose products are largely unrelated. Origins: Pioneered in American by Royal Little at Textron in the 1950s, Conglomerates quickly became the darlings of stockmarkets in the 1960s before being dismantled in the 1980s. Examples America: GE, ITT, Gulf + Western Europe: Hanson, Virgin, Vivendi Asia: Hutchison Whampoa, Hyundai

The Anglo-American View of Conglomerates

Conglomerates: Once a Rage, Now a Relic International Herald Tribune
Conglomerates are so 1970s. It was thought then that commercial power, brand strength, and management expertise could be leveraged by engaging in several different lines of business, creating a company that was greater than its myriad constituents could be on their own. Now the fashion is to concentrate on core operations, one or a few related activities, and shed the rest. Conglomerates are seen as cumbersome, inefficient, Byzantine corporate structures. Disco may have made a comeback, but based on the opinions of several portfolio managers, retro-chic is unlikely to extend to an appreciation of conglomerates. I never wore flared trousers the first or the second time around, and I have the same attitude on conglomerates, says Liam Pagliaro, head of European research for Gartmore.

From Divisionalized Structure to Conglomeration: The Rise of Business Units Led to a Lego Mentality
With Business Units Functionally Independent, Companies coul Easily Acquire Unrelated Subsidiaries in Order to Expand. Since the Senior Executives cannot have Technological Expertise in All of the Companys Lines of Business, Executives Must Judge their Subsidiaries on Abstract Measures like Return on Equity (ROE). Once Executives View Business Units as easily swapped (like a Lego), Corporations loose any true coherence (Consider ITTs ownership of Sheraton, Wonderbread, Avis Car Rental, and Scott Fertilizer during the 1970s).

The Infamous BCG Box

High

?
Market Share
High

But where do Managers Fit in the Box?

Market Growth
Low

McKinseys Competitive Response: The GE/McKinsey Matrix

Business Unit Position Industry Attractiveness
Low Low Medium High Medium High

Does Adding More Factors Improve the Box?

The Good, The Bad, and the Ugly of Portfolio Management

The Good: Gives Executives a Way to Evaluate SBUs Across the Organization Quick and Easy High Data Compression The Bad: Ignores Competencies & Synergies Overly Simplistic Overlooks the Role of Management & The Ugly Conglomerates without a Purpose

Synergies (or Economies of Scope)

Potential to Employ Your Assets in Other Markets Synergies can be Found in Assets that are Managerial, Industrial, Marketing, or Brand Related. Too Often Used to Justify Mergers and Conglomerates whether or not such synergies exist...
We can all Identify Economies of Scale, But where are there Economies of Scope?

Business Unit 1 Business Unit 2 Business Unit 3 Common Buyers

Horizontal Synergistic Strategies Business

Unit 2

Common Common Buyers Buyers Common Raw Material Common Components Common NOTHING Raw SHARED Material Common Components

Business Unit 3

Business Unit 4

Common Raw Material Common Components

Three Potential Sources of Synergy in Strategic Business Units

Tangible Resources
Sharing Value Chain Activities Examples include the Sales Force, Technological Patents, and Raw Materials

Intangible Resources
Common Know-How Examples Include Management and Experience

Competitors
Enemy of My Enemy - Multi-Point Competitors

Potential Tangible Benefits

Market Interrelationships Shared Brand Name Shared Advertising Cross Selling Shared Channels Shared Order Processing Product Synergies Shared Purchasing Shared Systems Shared Facilities Shared Support Staff Shared Product Development

Intangible Synergies
Transfer of Skills Among Activities But Intangible Synergies are often Difficult... Know-How Transfer Expensive Individuals Lack Motivation to Help Hard to Retain within the Organization

Potential Liabilities in Trying to Find Synergies

Lost Specialization in Product Segments Coordination Costs Rise Diffused Responsibility Synergies are so Problematic that Financial Analysts Frequently Discount Them in Acquisitions

In Contrast: A European View of Conglomerates

In Praise of the Evergreen Conglomerate The Financial Times (1 November 1999), By Richard Whittington

A study of diversification trends amongst Fortune 500 companies during the 1980s by Costas Markides found only a small decline in the proportion of conglomerates The outlook for the conglomerate in Europe is even rosier. Taking the long-view, my own research suggests there is a powerful post-war trend towards the building of more conglomerates among the top 100 domestically-owned French, German and British industrial companies. In Britain and Germany, at least, the restructuring of the 1980s and the early 1990s made no difference to the trend, so that by 1993 about a quarter of large industrial companies were conglomerates.

How Institutional Context Drives Strategy

Institutional Dimension Capital Market United States Equity Focused; Monitoring by Disclosure Business Schools and Consultants Plentiful Reliable Liability Laws; Efficient Dissemination of Information Low; Free of Corruption Predictable Diversification Not Advantageous Japan Bank Focused; Monitoring by Investments Internal Training the Common Route Reliable Liability Laws; Efficient Dissemination of Information Moderate; Free of Corruption Predictable Diversification Somewhat Advantageous India Underdeveloped; Illiquid Markets and Weak Monitoring Few Business Schools and Little Training Limited Enforcement of Laws; Little Dissemination of Information High; Corruption Common Unpredictable Diversification Very Advantageous

Labour Market Product Market

Government Regulation Contract Enforcement Institutional Outcome

Source: Khanna and Palepu, 1997, Why Focused Strategies May Be Wrong for Emerging Markets, Harvard Business Review, p. 44.

Consider Virgins Synergies (and Context)

We are involved in planes, trains, finance, soft drinks, music, mobile phones, holidays, cars, wines, publishing, bridal wear - the lot! What tie all these businesses together are the values of our brand and the attitude of our people. We have created over 200 companies worldwide, employing over 25,000 people. Our total revenues around the world exceed 4 billion (US$7.2 billion).

www.virgin.com.uk

Defining Core Competences

A core competence is: A bundle of skills and technologies Of fundamental customer benefit Competitively unique A gateway to new markets The notion shifts strategy from a battle of market position, towards a mastery of skills and capabilities. The key question is: What are you best at?

Identifying Core Competences

1. Map products and services 2. Identify underlying technologies, skills, processes and resources 3. Synthesise common technologies, skills, processes and resources 4. Check that common technologies, skills, processes and resources are extendable 5. Test their value!

Core Competence Leads to New Markets

Competitive Advantage
Reputation Reputation Assets Assets Location Location

Acquisitions Alliances Diversification New Markets Globalization Vertical Integration Product Innovation

Technology Technology

Market Power Market Power

Relationships Relationships

Culture Culture

Capabilities Capabilities

History History

Virgins Core Competence? (And its Relationship to Conglomeration?)

We look for opportunities where we can offer something better, fresher and more valuable, and we seize them. We often move into areas where the customer has traditionally received a poor deal, and where the competition is complacent. And with our growing e-commerce activities, we also look to deliver 'old' products and services in new ways. We are pro-active and quick to act, often leaving bigger and more cumbersome organisations in our wake.
www.virgin.com.uk

Key Concepts
Hierarchy of Growth Related Diversification Portfolio Models Synergy Core Competence

MBA Strategy: Session Six Michaelmas 2006

Global Strategy
Christopher McKenna

Key Concepts and Techniques

Modes of International Expansion Global Products Diamond of National Advantage

Globalization is Popularly Linked with Multinationals (And Particularly the Dominance of American Culture)
Globalization Used to Described:
The Growth in International Trade Income Inequality Across the Globe The Power of Business over the State The Spread of Capitalism Policies of Free Trade & Liberalisation Flows of International Capital Homogeneity of Consumer Culture The Spread of Multinational Business

In this Lecture, We are Concerned with the Best Strategies for Going Global.

Some Historical Context on Globalisation & the Growth of Multinational Companies

Global Trading: The Great Fortunes from the 18th Century on were all made in global trading & finance. Homogeneous Tastes: Singer Sewing Machines, Ford Model Ts, and Coca-Cola were all global exports by the 1920s. Labor Markets: From 1900 to 1910, one million people per year emigrated from Europe to the New World. Capital Flows: Only in the 1990s, did international capital flows, relative to the size of the international economy, reach the levels they had been prior to 1914. International Competition: By 1900, Standard Oil controlled 90% of refining capacity in the world. Although it shipped its petrol from New Jersey, Standard battled the Russians for control of the major European markets.

Our Central Concerns for Global Strategy

Why do firms expand internationally? What are the modes of international entry? What are the stages of international expansion? Can products be standardized globally? What kinds of international structures do firms use? Do nations have competitive advantages?

The Five Myths of Global Strategy

Distance and National Borders No Longer Matter Consider the World after the 9-11 Attack Developing Countries are the Best New Markets Developed Countries remain the largest markets Manufacture Where the Labor is Cheapest Knowledge, Infrastructure, and Shipping Costs Crucial Globalization will Last Forever The Global Economy has Contracted Before Governments No Longer Matter Regulations and Nationalisation can Trump the Plans of any Corporation
Source: Rangan, FT: Mastering Strategy, 2000

The Hierarchy of Growth

Early Strategies Revamp Packaging, Pricing, Promotions Expand into New Domestic Territories Develop New, Related Products and Services Export Current Products Abroad Acquire a Competitor Expand Internationally Acquire in a Related, Growing Industry Late Strategies Integrate Vertically Acquire a Supplier or Customer Acquire in an Unrelated, Growing Industry

Why Do Firms Expand Internationally?

ACCESS TO OUTPUT MARKETS Satisfies demands for growth Domestic markets saturated; overseas markets large Scale economies; location or distribution platforms A way to expand without diversifying and still based up the firms core competence ACCESS TO INPUT MARKETS Access to low-cost labor or materials Access to the best knowledge, skills, & workers Access to technology, best practices, & external capital markets

Do You Really Have a Global Strategy? Hamel & Prahalad

Global Competition Driven By: Aggressive Competitor uses Cash Flow in Home Market to Attack Foreign Domestic Competitors The Defensive Competitor then Retaliates in the Foreign Markets where the Aggressor is Most Vulnerable Distinguish Between: Global Competition Cross Subsidizing National Battles Global Business Scale Necessitates Overseas Sales Global Companies Distribution Systems
Hamel & Prahalad, Do You Really Have a Global Strategy?, Harvard Business Review, 1989.

Modes of Market Entry: Transactions or Direct Investment?

Transactions: Export with No Overhead:
Spot Market Long Term Contract

Direct Investment: Joint Venture:

Marketing & Distribution Fully Integrated

Export with Overhead:

Foreign Distributor Export Division

Wholly Owned (Purchase or Greenfield)

Marketing & Sales Fully Integrated

License Technology Franchise

Alliance (Not a J.V.)

People often forget that Transactions may offer a Superior Means of Entry.

Moving from Domestic to Global Competition

Stage 1: Domestic Competitor More than 80% of sales within home country; limited exports, licensing, outsourcing, franchising: Sainsburys Stage 2: International Competitor More than 20% of sales outside the home country; mainly alliances or exports to large markets, some direct investment (FDI): Airbus, Apple Stage 3: Multinational Competitor Majority of sales outside of home country; exports, outsourcing, alliances, FDI, host country staffing: KPMG, Coca-Cola Stage 4: Global Competitor Revenues globally balanced; significant alliances, FDI, large commitments in host countries: Toyota, Unilever

If You Do Decide to Make a Direct Investment, What is the Best Structure for the Company?

High

Complex Global (Transnational)

Simple Global

Coordination
Low
MultiDomestic (Multinational) Simple Export

Dispersed

Concentrated

Location of Assets
Source: Porter, Competition in Global Industries, 1986

The Value Chain and International Strategy

Firm Infrastructure
ns r gi Ma

Human resource management Technology development Procurement Inbound logistics Outbound logistics Marketing and sales

Operations

Service

Ma r gi ns

Upstream Activities

Downstream Activities

Where the Highest Percentage of the Cost Structure is Upstream, Companies become Global Examples Include: Automobiles, Computer Chips, Aircraft

Where the Highest Percentage of the Cost Structure is Downstream, Companies become Multi-domestic (or Multinational) Examples Include: Advertising, Retailing, and Packaged Goods

The Global vs. Local Balance: Balancing Product Knowledge against Local Service
High Global Coordination Global: Scale Economies Co-ordinated Marketing Competitive Threats National: Local Tastes Freight Costs Government Barriers Regional: Medium Scale Economies Global/Local Lever

The Need for Global Co-Ordination & Integration

Multi-domestic Decentralization

Regional Low Low The Need for National Differentiation and Responsiveness High

Source: Ghoshal and Bartlett, Managing Across Borders, 1989

(Neo), What is the Matrix?

In the 1970s, after McKinsey had installed the Multi-Divisional Structure in every large organization, the phone stopped ringing. The answer, the consultants thought, was a new product the Matrix Organization which would balance customer service with product knowledge. The problem was that the Matrix requires stable markets and multiple layers of management, and the 1970s were a terrible time to install a system that requires costly infrastructure and stable markets. As a result, very few companies adopted the Matrix and even fewer companies were able to make it work over the long run.

And So We Enter the Matrix

(Using Asea Brown Boveri as an Example)
Regional Head Head of Europe Head of Americas
(Managers) Sweden UK America Canada

CEO

Head of Power Generation Head of Power Transmission

Generators Turbines Power Lines Capacitors

Post Script: In the late 1990s, the new CEO of ABB dismantled ABBs Matrix and centralized control

The Matrix Reloaded

(Using the University of Oxford as an Example)

Vice Chancellor
(Head of House or Chair)

Head of Social Science Division Chair of Law

Criminal Torts

The Dean of SBS

Strategy Finance

Head of Graduate Colleges Head of Undergrad Colleges

St. Cross Templeton Brasenose Pembroke

In Oxford, the Matrix Balances Specialised Academic Knowledge with Student Attention By Valuing Both.

The Evolving Multidivisional Firm

Investor Multidivisional Emergence: Key Resource: Key Technique: Key Thrust: Key Function: Shape Example: 1920s - 1950s Capital Financial Controls Control Finance Pyramid Dupont Managerial Multidivisional 1960s - 1970s Scale & Scope Planning Co-ordination Corporate Planning Pear General Electric Network Multidivisional 1980s onwards Knowledge Exchange Collaboration Human Resources Pancake ABB

Source: Whittington & Meyer, in Strategy Systems, 1997

International Organizational Structures

National Subsidiaries

HQ

HQ

National Subsidiaries

Simple Global
(Global Divisions Dominate) Japanese Centalized Hubs

Multi-Domestic
(Countries Self-Contained) European Decentralized

Source: Ghoshal and Bartlett, Managing Across Borders, 1989

The Four Ways to Cross Borders

Type Multi-domestic Simple Export Simple Global Transnational Characteristics Decentralized & Responsive Knowledge Transfer Centralized Efficiency Balancing the Three Example Advertising IBM Coca Cola Toyota

The Transnational Solution?

Complex Global Strategy Polycentric Interdependent Co-ordination Communications Intensive Knowledge Leadership Clannish

HQ

National Subsidiaries Global Business Area (eg. Bowling Balls, Twinkies)

Source: Bartlett & Ghoshal, Managing Across Borders (HBS Press, 1989)

Global Business Leadership

Comparative Advantage in Classical Economics

A nations relative abundance of resources that enable it to produce a good or service more efficiently than rival nations; endowments of labor, natural resources; national competitive advantage France Climate, location and attractive landscape provide advantages in wine production, tourism and the arts Australia Climate, coastlines, mineral resources and abundant land provide advantages in agriculture, fishing and mining.

Comparative Advantage in Michael Porters View

Factor Conditions Resource endowments, cultivation of resources & continuous innovation: Canadian forestry; Japanese motorcycles Local Demand Conditions Discerning local customers + critical mass of local demand: Australian surfboards; Japanese compact appliances Industry Structure High domestic rivalry fuels innovation & increased efficiency: South Korea in electronics; USA in entertainment Related and Supporting Industries Clusters of interacting producers, suppliers, and customers: French wine; Silicon Valley; Italian footwear

Michael Porters National Diamond Framework: The External Structure of International Markets Factor Conditions

Demand Conditions

Relating & Supporting Industries

Strategy, Structure, and Rivalry

Porters Suggestion for Government Policy

1. Promote Industry Rivalry Active antitrust regulation; competitive markets 2. Encourage Clusters of Excellence Support natural areas of comparative advantage Specialize in industries with advantages 3. Support Leading-Edge Technology and Innovation Access to capital; protect intellectual property 4. Support Industry-Specific Education Build national skills, research, & capabilities Focus on industries, not functions

Key Concepts
1. Modes of International Expansion 2. Global Products 3. Diamond of National Advantage

MBA Strategy: Session Seven Michaelmas 2006

Managing the Multibusiness Company

Christopher McKenna

Hewlett Now Wants to Be Your Copier Company, Too

Steve Lohr, The New York Times, 18 November 2003
Hewlett-Packard is king in the land of computer printers, but for years it has eyed the nearby office copier as an enticing market to conquer. Today the company is introducing a line of powerful printers that double as copiers, hoping to capture a sizable slice of the $24-billiona-year copier market. The move by Hewlett-Packard will bring it increasingly into competition with major copier manufacturers like Xerox, Ricoh, Canon and Minolta as it seeks new ways to expand its printer business. That business is Hewlett-Packards financial engine, generating less than one-third of the computer makers sales but more than three-fourths of its operating profit. Hewlett-Packard is definitely coming into the Xerox market, said Christa Carone, a Xerox company spokeswoman. But this just validates our strategy.

Comparing Two Similar Companies Over 30 Years

Patented Photocopying Invented the Laser Printer, Networking, and the Windows Graphical Environment Developed Ink-Jet Printing Promoted the Integration of Imaging and Printing through Desktop Publishing

In Research, Xerox Clearly Had the Lead

At the Xerox PARC R&D Laboratory in Palo Alto, California, by 1975 the Xerox researchers had 150 machines connected by an Ethernet (which they had invented) displaying typeset fonts and sharing common files and printers.
So It Wasnt For Lack of Technology

H-P Looked Like a Pale Copy of Xerox in the 1970s

While Xerox Controlled the Crucial Patents on Photocopies (Literally To Xerox); H-P, which also had Offices in Palo Alto, Produced Electrical Testing Instruments, in an Extremely Competitive Market.
Xerox Controlled the Better Market

Xeroxs Shifting Strategy Over Time

1938: Chester Carlson produces first xerographic image. 1959: Launches the first automatic, plain-paper office copier: This becomes the best-selling industrial product of all time. 1970: Xerox opens the Palo Alto Research Center (PARC), the birthplace of the PC, laser printer, and Ethernet 1982: Japanese rivals pioneer low-cost copiers. 1983: Xerox purchases Crum & Forster insurance group 1995: Xerox introduces digital copiers but ignores PC printers. 1998: Sells Crum & Forster at a loss; takes $1 billion write-off. 1999: U.S. inkjet printer sales hit $5.2 billion, with 50% controlled by Hewlett-Packard; Xerox logs a 2% share. 2001: Xerox issues a denial that the company is bankrupt.

Xerox kept Searching for the Next Big Hit

As Business Week would explain Xeroxs spectacular downfall in 2001:

Xerox Had Destroyed a Monopoly.

Eventually, Hewlett-Packard overtook Xerox

In 1973, an investor could have purchased all of H-P for $2.3 billion, less than 20% of Xeroxs value of $11.9 billion. By 2003, H-P was worth $67 billion, or more than eight times Xerox at $8 billion. Indeed, over that thirtyyear period, Xerox lost nearly a third of its nominal value.
Market Capitalization over 30 Years
160 Billions of Dollars 140 120 100 80 60 40 20 0 01/11/1973 01/11/1976 01/11/1979 01/11/1982 01/11/1985 01/11/1988 01/11/1991 01/11/1994 01/11/1997 01/11/2000

HP

Xerox

Or, Why None of Us Owns a Xerox

Key Concepts and Techniques

Dominant Logic Corporate Parenting Merger and Acquisition Integration

Levels of Strategy
Corporate Strategy Competitive Strategy Functional Strategy
Corporate Level Portfolio Analysis Diversification Primary Structure Operating Level Strategic Business Units (SBUs) Business Unit Strategy Intra-Unit Level Functional or Departmental Plans Product Market Plans

Porter Defines Corporate Strategy As

Identifying the Businesses in which the Corporation Should Be Engaged Deciding How These Businesses Should Be Run

Both Questions are Explicitly about the Problems Inherent in Managing the Multibusiness Company

Porters Four Keys to Corporate Strategy

Portfolio Management Restructuring Transferring Skills among Strategic Business Units Sharing Activities
If the Centre Cannot Add Value, then the Business Units Should Remain Independent of the Centre.
Michael Porter, Harvard Business School

Changing Perspectives on Finding Synergy

Traditional Perspectives: 1960s-1970s Financial Synergies BCG; Portfolios Cash Flows Industry Synergies Richard Rumelt Related Products & Markets The Porter Perspective: 1980s Business-Unit Synergies Porter Sharing Activities Transfer of Skills Recent Perspectives: 1990s-2000s Resource Synergies Resources & Capabilities Core Competence Dominant Logic M&A Synergies Parenting Synergies Corporate Advantage

Relatedness versus Core Competence

Relatedness: Product Markets should be Similar

Market A

Market B

Market C

Strategic Bus. Unit Resources & Capabilities

Strategic Bus. Unit Resources & Capabilities

Strategic Bus. Unit Resources & Capabilities

Core Competence: Resources and Capabilities should be Similar

The Limits to Corporate Diversification

Relatedness View Limits to Economic Similarity of Markets Porters View Limits to Activity-Sharing & Skill Transfer Core Competence View Limits to Portability of Core Competence Dominant Logic View Limits to Cognitive Capacity of Executives

The Concept of Dominant Logic

Dominant Logic Each Industry has a Dominant Logic: How Things are Done Determined by Industry History, Market Relationships, Technologies, Regulation, & Production Processes Cognitive Schema Every Manager has a World View Their Schema is Highly Influenced by the Dominant Logic of the Managers Original Industry Informed by Education, Training, Experience, Values & Beliefs Law of Requisite Variety Cognitive Diversity must Match the Wider Environment The More Dominant Logics, The Greater the Cognitive Load The Firms Dominant Coalition has a Finite Cognitive Diversity

Potential Business Unit Synergies

1. Redundancy: Cost Savings Due to Shared Activities HPs Printer & Copier Strategic Business Units can share research and development costs Additivity: Strategic Leverage Due to Greater Size The combined Printer and Copier Divisions in HP would have economies of scale in purchasing and manufacturing, greater power over corporate customers, and would be a market share leader in toner consumption. Compatibility: Shared Strategy, Skills, and Culture Both the Printer and Copier Divisions in HP aspire to growth, market leadership and social relevance in technology; their systems, structures, cultures and values are similar Complementarity: Synergies Arising from Differences HPs Printer Division serves primarily retail customers and does almost no manufacturing while the Copier Division will initially target corporate customers with its own manufactured copiers.

2.

3.

4.

Corporate Synergies
Eliminating overhead Installing systems, controls, processes & reengineering Improving product or process technologies Replacing inexperienced managers Restructuring the business Correcting strategic errors: Dealing with overcapacity & underinvestment Facilitating skill and resource linkages across Strategic Business Units Providing expertise, e.g. global expansion, acquisition Exploiting parent relationships, e.g. suppliers, government

Another Way to Visualize the Parent:

The Roles of the Centre

Selecting Promoting

Controlling

Resourcing

The Four Functions of the Centre

Selecting Resourcing Controlling Promoting
Portfolio Management Vertical & Horizontal Integration Make or Buy Decisions Global Markets Capital Requirements Mergers and Acquisitions Cooperation/Joint Ventures Corporate Culture/Philosophy Organizational Structure Systems Advertising/PR/Corporate Identity

Corporate Parenting Requirements

The Corporate Parent is a Strategic Entity The Parent Stands between Investors and the Strategic Business Units The Corporate Parent has Strategic Attributes It Develops Resources and Capabilities Creates Corporate Advantages & Key Success Factors The Role of the Corporate Parent is to Create Value If it Cannot, then it should be disbanded Value-Creation: Exploiting Parenting Opportunities Synergy: When the Strategic Business Unit needs to match corporate advantages

Defining the Parenting Advantage

Multibusiness companies create value by influencing or parenting the businesses that they own. The best parent companies create more value than any of their rivals would if they owned the same businesses. Those companies have what we call parenting advantage.

Campbell, Goold, and Alexander, The Quest for Parenting Advantage, Harvard Business Review, 1995.

Four Parenting Strategies

1. Stand-Alone: Parent Sets & Monitors Performance Targets; Hires Key Executives Potential Problems: misallocations; inexperience 2. Development: Deal-making, Restructuring, Buy and Sell Potential Problems: No Value-Added; Bad Track Records 3. Linkage: Parent Actively Creates Synergies among SBUs Potential Problems: Corporate Interference; Synergies Hard to Create 4. Central Services: Corporate IT, HR, PR, R&D, Legal, etc. Potential Problems: Staff not Attuned to the Strategic Business Units

Thinking Inside the Box: Strategy, Structure, and Style

Goold & Campbell Identified Three Styles of Business Among Diversified British Companies: Strategic Planning (Cadbury, BP) Strategic Control (ICI, Vickers, Plessey) Financial Control (Hanson, GEC)

Style and Substance

Industrial Groups adopt the Strategic Planning Style since they share a common set of core competencies Industrial Holding Companies exhibit the Strategic Control Style sharing competencies only within their sub-groups Conglomerates turn to the Financial Control Style to manage their disparate businesses.

Tensions Among Styles

Strategic Planning Organizational Structure Planning Process Central Leadership Objectives Nature of Control Multiple Perspectives Thorough Review Strong Leadership Strategic Control Financial Control

Separate Separate Responsibilities Responsibilities Thorough Review Divisional Autonomy Entrepreneurial Response Business Autonomy Financial Tight

Strategic and Strategic and Financial Financial Flexible Tight

Michael Porters Three Essential Tests (For Companies Considering Acquisitions)

1. 2. 3.
The Attractiveness Test: Is the Industry Attractive? The Cost-of-Entry Test: Will You Make Profits? The Better-Off-Test: Will Either Firm Gain?

Put More Simply, What are the Synergies? (and are they practical?)

M&A versus Organic Growth

Why Mergers & Acquisitions?
Fast expansion of product line, customers, & geographic markets Acquire new assets, people, relationships, technologies, & skills Eliminate a competitor Prevent a competitor from making the acquisition Growth without expanding industry capacity Existing firms have established track record and risks are known Value-creation: exploit synergies between acquirer and target

Why Organic Growth?

Avoid excessive market premiums for M&A Exploit parenting opportunities and core competence Growth customized to meet firms strategic objectives Growth without clash of internal cultures

Finding Success in Mergers & Acquisitions

1. Focus on Complementary Synergies Complementary synergies are easier to Implement Complementary synergies induce less employee resistance Look for complementary markets, resources, capabilities, and finances 2. Synergies are Hard Work to Make Work The greater the synergies, the more difficult the task of integrating the companies 3. Synergies are Not Enough Pre- and Post-Merger Integration is the most important factor in the success of Mergers & Acquisitions Managers need to Implement, not just Identify, Synergies Successful acquirers learn how to integrate companies

Key Concepts
Dominant Logic Corporate Parenting Merger and Acquisition Integration

MBA Strategy: Session Eight Michaelmas 2006

Strategy Process (& the Course Review)

Christopher McKenna

Quote for the Day

Washington, D.C. 29 May 2003 Oftentimes, we live in a processed world you know, people focus on the process and not results. President George W. Bush (MBA, Harvard, 1975)

Key Concepts & Techniques

Strategic Planning Emergent Strategy Logical Incrementalism

Formal Strategic Planning

(From Week One) Formulation
Vision Vision Values Purposes Goals Analysis Goals Analysis Mission Goals DATA DATA Objectives

Implementation
Decision Decision Risk Analysis Negotiation Strategic Choice Action Action Structure Culture Processes Systems Deployments

External Internal Internal External Resources and capabilities Industry analysis Functional area analysis Key success factors Financial analysis Competitive position Synthesis Synthesis Strengths & weaknesses Opportunities & threats Competitive Advantage Strategic Alternatives

Three Perspectives on Strategy

1. Planning Approach: Tools & Techniques for Managers to Make Decisions about Business Direction. Examples: Portfolio Matrix, Five Forces, & Core Competence. 2. Policy Approach: Organizational Payoffs from Different Strategies. Examples: Diversification, Innovation, M&A, and Internationalisation. 3. Process Approach: Understanding How Organizations First Identify the Need for Change and Then Achieve Change.
Whittington, Strategy As Practice, 1996

McKinseys 7 Steps to Bullet Proof Problem Solving

Why does the client need us? What are the key elements of the problem? Which elements come first?

Problem

1. Define the problem

2. Structure the problem

3. Prioritise

Think

4. Issue analysis and work plan 7. Communicate the solution 6. Synthesise & recommend 5. Analyse

How should we spend our time?

What happens next?

Who, what, when, how?

What should we do?

What am I trying to prove or disprove?

The First Process Question: Causality

Is Strategy First Devised and then Implemented or, as much as we hate to admit it, is Strategy as much a Product of Circumstance, Chance, and Luck, as anything else? How Much of Your Life has been Planned?

A Planning View of Strategy-Formation

Objectives Options Choice Allocation Implementation

Alfred Chandler (1962): the definition of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.

An Emergent View of Strategy-Formation

Objectives Options Choice Allocation Implementation

Henry Mintzberg: Strategy in general, and realized strategy in particular, will be defined as a pattern in a stream of decisions

Japanese versus British Motorcycles in America

[By 1960], the Japanese had developed huge production volumes in their domestic market and volume-related cost reductions had followed. This resulted in a highly competitive cost position which the Japanese used for penetration of world markets with small motor cycles in the early 1960s. Meanwhile, the primary focus of the British industry was on maintaining short-term profitability. The British found it impossible to match low Japanese price levels on small bikes profitably in the short-term. They therefore responded to the Japanese challenge by withdrawing from the smaller bike segments which were being contested.
The Story, We Are Told, According to BCG

The Boston Consulting Groups Analysis

This was the fundamental strategic error. Long-term commercial success in fact depended on achieving sales volumes at least equal to those of the Japanese . The long-term result of the Japanese industrys historic focus on market share and volume, often at the expense of profitability, has been . high and secure profitability.
BCG, Strategy Alternatives for the British Motorcycle Industry, 1975

Hondas Success - Kihachiro Kawashimas Story

In truth, we had no strategy other than the idea of seeing if we could sell something in the United States. It was a nice frontier, a new challenge, and it fitted the success at all odds culture that Mr Honda had cultivated Throughout our first eight months, we had not attempted to move the 50cc Supercubs . They seemed wholly unsuitable for the US market where everything was bigger and more luxurious. We used the 50ccs ourselves to ride around LA on errands. They attracted a lot of attention. One day we had a call from a Sears buyer But we still hesitated to push the 50cc bikes out of fear they might damage our image in a heavily macho market. But when the larger bikes started breaking, we had no choice. We let the 50cc bikes move. And surprisingly, the retailers who wanted to sell them werent motor cycle dealers, they were sporting goods stores.

The Case For Formal Strategic Planning

1. Generates Information Industry structure, competition, customers, government Internal resources, functional area strengths & weaknesses 2. Propels Action Provides a informed basis for decision-making, resource allocations Strategy gives direction, inspiration, motivation 3. Signals Stakeholders Reduces uncertainty for shareholders (and potential shareholders) Can be used to signal customers, suppliers, competitors 4. Educates Managers Trains rising executives in strategic thinking An occasion for improving communication, teamwork, cultural integration

The Case Against Formal Strategic Planning

1. Forecasts are Always Wrong External events, competitive moves, and technologies are not predictable The greater the uncertainty, the more difficult the forecasting 2. Formal plans are Terrible in Generating Action People are motivated by beliefs, challenges, ideologies, ideas not by plans Organizational behavior is largely programmed and habitual 3. In Practice, Plans are Seldom Implemented Plans are often unworkable and unrealistic while execution is poor or incomplete Middle-management resistance and poor cultural fit 4. Planning is Expensive Time-consuming; opportunity costs of meetings, retreats, and reports 5. The Value of Formal Planning Remains Unproven Empirical findings vary

Planning versus Emergence

Planning: Rational preparation and prioritisation Prepared, even for the unexpected Rationalisation, internally and externally Better prescription than description? Emergence: Ready for action Flexible and opportunistic Recognises bounded rationality Better description than prescription?

Processes of Strategy Formulation & Implementation

Filters
Intended Strategy

Resource Allocation Process

New Products, Processes & Acquisitions Actual Strategy Implemented

Emergent Strategy
Cr i se (Fe s and edb O ack ppor Loo tuni t ie p) Ne w s

g din tan ers oop) nd L r U ack b tte Be Feed (

Results

Three Views of the Strategy Process

1. Strategic Planning View (Ansoff) Formal budgeting and planning cycle Formal external analysis: economic forecasts, and competitive intelligence necessary Formal internal analysis: Resources, functions, & value chain 2. Emergent Strategy View (Mintzberg) Realized strategies are seldom planned Uncertainty precludes forecasting or predicting competitive moves in the long term. Long-term planning only possible in highly stable environments 3. Logical Incrementalist View (Quinn) Strategic commitments adjust with the forecasting horizon Planning, but keeping all the available options open Focus on adaptability, flexibility, opportunism, and improvisation

The Second Process Question: Who Strategizes?

Implicit in Strategy since Chandlers research, and explicit in your coursework, has been a view of Strategy as the function of the CEO. Can Middle Managers Formulate Strategy ? If Not, What is Strategy ? And Who Does It ?

To What Extent Are We All Strategists?

Hondas middle managers in America pursued a haphazard strategy that was not directly supervised by Japan (and hence emerged from the Tokyo executive suite), but was reasonably coherent and rational at the business unit level in Los Angeles (and thus planned by the regional managers).
Nonaka & Takeuchi, The Knowledge Creating Company, 1995

Why Do Middle Managers Filter Strategy through a Resource Allocation Process? Answer: Their Career Depends on It!
1. Definition: Articulating the Idea. 2. Impetus: Is the Idea Worth Support? 3. Structural Context:
The Organizational Forces that Influence Definition and Impetus

4. Measurement: Return on
Investment
Bower, Managing the Resource Allocation Process, 1986; Burgelman and Sayles, Inside Corporate Innovation, 1986.

Joseph L. Bower, Harvard Business School

The Strategic Planning Job Market

Strategic Planning Job Advertisements as a Percentage of All Jobs: France and the UK, 1965-2000/2004 6

5 4 3 2 1 0 UK France

Source: Cailluet, Rose, and Whittington, 2005 (SBS)

19 65 19 70 19 75 19 80 19 85 19 90 19 95 20 00 20 04

Strategic Planning at EMI as of 1975

Strategic planning, company investigation and the provision of general information to EMIs top management Help in the construction of long-term Group business plans and will be involved in acquisition appraisals and competitor analyses Numerate and have the ability to present information clearly and precisely Considerable scope for individual initiative and creative thought in a nonroutine activity
Source: Cailluet, Rose and Whittington, 2005 (SBS)

Strategic Planning at EMI as of 1995

Responsibility for the preparation of the four year business plan and budget Carry out customer, consumer and competitor research; initiate and control a wide range of projects for the business units and the Board.. Analytical, innovative, proactive and with an eye to detail, he/she will be an excellent communicator, able to build relationships and present information at senior levels
Source: Cailluet, Rose and Whittington, 2005 (SBS)

Strategy as Legal Liability for the Board

Historical D&O Premium Index (1974 = 100)
(Based on the Tillinghast Index)

1400 1200 1000 800 600 400 200 0

When Is the Strategy Process Simply Legal Cover?

19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02

The Third Process Question: How Do We Strategize ? The Structure of Strategy in General Electric
January: March: April/May: June: July/Aug: September: Oct/Nov: Dec: Annual Agenda with 500 Executives Track Progress, Consult Top 30 Executives Visit 3000 Managers Corporate Executive Council (CEC) Meeting Meet with Leaders of Each Business Quarterly CEC meeting Meet with Leaders of Each Business Quarterly CEC Meeting In GE, Strategy is Highly Ritualised and Structured. Elsewhere it is Outsourced

Strategic Planning at GE in 1978 (Reg Jones)

BOARD Board of Directors CEO Corp. Exec. Office Corp. Policy Board EXEC. SVP Planning SVP Finance VP Manpower Belleair Corp. Exec. Council Session I & II Reporting Budgeting Appraisals Sector SVPs Reporting Budgeting Appraisals Strategic Business Unit Group VPs Reporting Budgeting Appraisals Division GMs Reporting Budgeting Planning Appraisals Product GMs Business Coordination Auditing Monthly Financial Reviews SBU Planning Planning Staff Sector Planning Session C Planning Staff

Organizational Level

DEPT.

DIVISION

GROUP

SECTOR

Channel Type
CORPORATE

Functional Mgrs LINE STAFF FINANCIAL

Ocasio and Joseph, 2005 (Kellogg)

Strategic Planning at GE in 2000 (Jack Welch)

BO R A D Board of Directors CEO

Boca

Corp. Exec. Office SVP Bus. Development SVP HR SVP Finance

E E . X C

Session I Session II

Corp. Exec. Council

O rganizational Level

Crotonville Reporting Budgeting Planning Appraisals Business CEOs Reporting Budgeting Appraisals Division/ Functional GMs Business Coordination Monthly Financial Reviews

D P E T.

D IS N IV IO

BU ES SIN S

Session C

Functional Mgrs

Channel Type
CORPORATE LINE STAFF FINANCIAL

Ocasio and Joseph, 2005 (Kellogg)

Making Strategy Core for Management

Identify the Driving Forces (Brainstorm through Mapping) Formulate Strategy to Address the Forces (Create a Strategy Matrix) Create a Plan to Implement the Strategy (Draw on Project Planning)
Clayton Christensen

Christensen, Making Strategy: Learning by Doing, 1997.

Key Concepts
1. Strategic Planning 2. Emergent Strategy 3. Logical Incrementalism

Sample Examination Instructions

FINAL EXAMINATION STRATEGY Tuesday, 13 December, 2005 - 9.30 a.m. - 11.30 a.m. Case Study: Cirque Du Soleil: Can It Burn Brighter? 1 hour reading time. During the first hour you may read the case, use pens and make notes of the case. The questions will be distributed for the second hour of the case. Students must answer ALL questions. All questions carry equal marks.
Materials: Calculators The Case Study must not be removed from the Examination Room Please do not turn over until told that you may do so.

Sample Examination Questions

All questions carry equal weight Case Study: Cirque du Soleil: Can It Burn Brighter? 1. Does Cirque du Soleil have a sustainable competitive advantage? If so, what is it? If not, can it create one? 2. What are the growth options available to Cirque du Soleil? What is your assessment of the firms diversification strategy? 3. What are the most important strategic issues now facing Cirque du Soleil? What are your strategy recommendations?

Fair Topics for the Exam

1. All lecture notes 2. Anything discussed in class, and all in-class activities lectures, discussions, films, games, and experiments 3. All required readings (the supplementary readings are not required but may help)

Course Structure
1. Introduction to Strategy 2. Competitive Advantage 3. Industry Strategy 4. Strategy and Change 5. Diversification 6. Global Strategy 7. Managing the Multibusiness Company 8. Strategy Process

Key Concepts and Techniques

Session 1: Introduction to Strategy Defining strategy Vision, mission, goals Strategy content and process Business and corporate strategy Stakeholder view Session 2: Competitive Advantage Competitive positioning Resource-based advantage Value innovation X-factors

Key Concepts and Techniques

Session 3: Industry Analysis Industry structure (five forces) Key success factors Value chain Profit pools Value net Session 4: Strategy and Change Macro-environment (PESTLE) Industry life cycle Dominant design Strategic uncertainty

Key Concepts and Techniques

Session 5: Diversification Hierarchy of growth Portfolio models Synergy Related diversification Core competence Session 6: Global Strategy Modes of international expansion Global products Diamond of national advantage

Key Concepts and Techniques

Session 7: Managing the Multibusiness Company Dominant logic Corporate parenting Merger & acquisition integration Session 8: Strategy Process Strategic planning Emergent strategy Logical incrementalism

Tips for Doing Well on the Exam

1. Answer the question specifically asked 2. Use theories and frameworks in your answers that come from the readings and lectures, and cite the sources if you can 3. Use facts from the case to support your arguments and avoid just writing you opinion 4. Manage your time and write legibly