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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 week’s 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 firm’s 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: [email protected] [email protected] Teaching Assistant: [email protected] 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 World’s 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 McNamara’s 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 McNamara’s Failures Cost Us All, From Ford’s Problems, to the Vietnam War, to LDC Debt The Lesson from Robert McNamara’s 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 (Peoplesoft’s) 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 World’s Leading Company” “How will you know?” “It’s like pornography. You know it when you see it.” Canon: Blur Studios: Amstrad: Enron: Q: Skilling: Unilever’s 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? X 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 Doesn’t 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 Porter’s 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 can’t be mixed. His message is: Identify your advantage - your “reason for being” Know your competence Don’t get “stuck-in-the-middle” Porter’s 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 Nucor’s 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 P 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) Porter’s 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 firm’s 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/Gov’t 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 Group’s “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 Supplier’s Input is a Commodity The Supplier’s Input is Not Crucial to your Output You Dominate the Supplier’s 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 Industry’s Profit Pool,” Harvard Business Review, 1998 The Personal Computer Industry Profit Pool (Or Why IBM Doesn’t 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 competitor’s product, they value your product less (products are substitutes) Buyers When customers have the complementor’s 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 Boeing’s R&D costs. What’s 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 don’t know we don’t know.” Donald Rumsfeld, U.S. Defence Secretary, speaking in 2003, & the Winner of the Plain English Campaign’s “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% 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 doesn’t happen in the immediate way that’s expected, everyone says it’s never going to happen at all. That’s 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 Let’s 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. It’s 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 World’s 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 Don’t Anticipate, In Donald Rumsfeld’s 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 today’s 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 Tomorrow’s 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, DuPont’s 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 Eleuthère Irénée du Pont in 1802 on the Brandywine in Delaware. For these Architects of the Corporation: “Form Followed Function” Du Pont’s Functional Structure (1919) President Executive Committee Sales Treasury Purchasing Production R&D Engineering Du Pont’s Divisional Structure (1921) President Executive Committee Treasury Explosives Dyestuffs Auxillary Depts Pyrolin Chems & Paints Fabrikoid Thus the Multidivisional Structure “Follows” From Dupont’s 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 Porter’s 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 Company’s 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 ITT’s 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 McKinsey’s 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 Virgin’s 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 Virgin’s 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 T’s, 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 firm’s 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: Sainsbury’s 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 X Post Script: In the late 1990s, the new CEO of ABB dismantled ABB’s 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 X 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 nation’s 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 Porter’s 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 Porter’s National Diamond Framework: The External Structure of International Markets Factor Conditions Demand Conditions Relating & Supporting Industries Strategy, Structure, and Rivalry Porter’s 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-Packard’s financial engine, generating less than one-third of the computer maker’s 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 Wasn’t 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… Xerox’s 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 Xerox’s 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 Xerox’s 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 Porter’s 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 Porter’s 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 Manager’s 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 Firm’s Dominant Coalition has a Finite Cognitive Diversity Potential Business Unit Synergies 1. Redundancy: Cost Savings Due to Shared Activities HP’s 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 HP’s 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 Porter’s 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 firm’s 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 McKinsey’s 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 Group’s 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 industry’s 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 Honda’s Success - Kihachiro Kawashima’s 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 weren’t 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 Chandler’s 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? Honda’s 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 EMI’s 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 firm’s 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