Competitive Technology and Business Strategy Corporate, Competitive, Technology Strategy Strategy: growth and development; stability, and decline

Business (Competitive) Corporate, Business and Technology Strategy Hierarchy E X T. M A C R O N V I R. Corporate Strategy E X T. M I C R O N V R. Business (Competitive) Strategy Functional Strategy – Technology Strategy INTERNAL ENVIRONMENT

Five Forces Model The level of industry attractiveness depends on five dimensions: Buyer Power: measures the degree of power that customers have over companies in the industry Supplier Power: measures the degree of power that suppliers have over companies in the industry Threat of New Entrants: measures ease of entry into the industry Threat of Substitutes: measures the likelihood that new products or services will substitute for those supplied by the industry Degree of Rivalry: measures the degree of competition between firms in the industry

Five Forces Model

STRATEGY Action plan by which organisations fulfill their mission and objectives. Strategy Creation is the result of Strategic Analysis: External analysis (micro i macro firm environment); 2. Internal analysis (resources, capabilities, competences)

Competitive strategy (generic) 1. Strategy of low costs; 2. Strategy of differentiation; 3. Strategy responsiveness.

COMBINED STRATEGY Takes into account all the feasible and sustainable options for accomplishing competitiveness: low costs (prices), product/service differentiation (quality, variety) and responsiveness (short times, quick response to customer needs and demands, flexibility)

STRATEGY OF LOW COSTS (PRICES)-Example: American airline Company Sothwest Airlines Standardized fleet; Shorter flights, secondary airports and terminals; Limited custormer service: no ticket reservations, checking and transfer of luggage, automated ticket issuing, no food on the plane; Specialized maintenance; Employees have ownership shares in the Company.

Strategy of differentiation-Example of Gilette Company Creates unique, special and superior value for the customer; Quality, special characteristics, post-sale services; Innovative products – new models of razor blades adaptable to skin type, emitting vitamin E, etc.

Strategy of responsiveness- Example of Global Company Johnson Electric Fast, flexible, reliable response to customer demand; Short response time/speed in product development, manufacturinf and deliverance; Global Company Johnson, central offices in Hong Kong delivers apprx. 13 milliona motors monthly that are assembled in China.

Strategy Options Strategy of growth and development: company operations expansion; Strategy of stability: unchanged existing operations; Strategy of decline: operations reduction/ revival/revitalization

Possible Growth Strategies Concentration strategy, and Diversification strategy: Related and unrelated; Tangible and intangible; Resource based (i.e.technology) and business

1. Growth Strategy: Concentration When an organization focuses on its primary line of business and looks for ways to meet its growth goals by expanding its core business There are three concentration options Product – market exploitation Product development option Market development option

Concentration Strategies Product-Market exploitation Attempt to increase sales of current products/services in current markets, might include incentives or advertizing Product development option Creates new products or new features on current products, which would be sold in current markets Market development option When selling current products in new markets

Concentration Strategy Options

Concentration Strategies - advantages Growing the core business using different combinations of products and markets; Organization becomes good at what it does develops knowledge of the industry and of their competitors functional and competitive strategies can be tuned to know what customers want and how to best provide it Everyone can concentrate on exploiting resources, competencies, and capabilities critical to success

Concentration Strategies – drawbacks The organization is vulnerable to changes in the industry and the external environment Concentration strategy may be effective for small companies, but larger often start off by this approach and may continue using it

Global Perspective – example 1 Kuka Robotics is Europe’s largest manufacturer of automated industrial machines (robots) Initially a supplier for the automotive industry, the company looked for new markets amidst a slump in the industry The firm found lucrative markets for its robotics in a number of industries by making sure it developed robots that did not look like industrial equipment

Global Perspective – example 2 Navteq Corporation formerly provided navigation systems for autos Acquired by Nokia because it is a digital mapmaker and it could be used to expand into handheld devices Revenue growth from handhelds is expected to double over the next few years

2. Growth Strategy: Diversification Enables a company to grow by moving into a different industry. Two types of diversification: I. Related Diversification Means diversifying into a different industry, but related to the company’s current business II Unrelated diversification Means diversifying into a completely different industry, not related to the company’s current business

Related Diversification Related Diversification is an attempt at a “strategic” fit Effort is to transfer resources, distinctive capabilities, and core competencies to the new industry It is an attempt at synergy that seeks to enhance performance of both businesses

Related Diversification Synergy occurs when shared resources, capabilities, and competencies enable greater performance by two entities when combined

Types of Related Diversification

Unrelated Diversification Unrelated diversification is when an organization seeks growth by moving into industries in which there is no strategic fit

Unrelated Diversification Unrelated diversification can occur when a company does not believe its core industry offers growth potential This approach is challenging because of the need to develop an ability to effectively manage different businesses An example is Fortune Brands; which owns separate business that sell liquor, padlocks, cabinets, and golf balls

Related vs. Unrelated Diversification Research shows that related diversification is superior to unrelated diversification because it allows the effective use of current resources, capabilities, and core competencies However, unrelated diversification can be a valuable strategy at times, depending on how effectively the diverse operations are managed

Growth strategy can be accomplished by: VERTICAL growth: overtaking operations of suppliers and/or customers (buyers); HORIZONTAL growth: difusion of operations into new fields and areas (geographical, new industries) and/or the broadening of product scope.

Vertical Integration Strategy that grows by gaining control of its inputs (backward) or its outputs (forward) Backward integration The organization becomes its own supplier Example: eBay bought an online payment business Forward integration The organization becomes its own distributor Example: Apple Computer opened retail outlets

Vertical Integration Vertical integration strategy is a growth strategy because an organization expands its activities and operations by becoming a source of supply or distribution However, expanding into industries connected to its primary business means it is still a single business organization It is taking another path to meeting growth goals by controlling different parts of the value chain

Horizontal Integration This strategy is used to grow the organization by combining operations with its competitors It keeps the organization in the same industry, but provides a way to expand market share and strengthen its competitive position In the US, Federal Trade Commission and Department of Justice regulates such activities through antitrust laws, assessing the impact of such combinations to allow fair competition

Horizontal Integration The European Union regulates efforts toward horizontal integration within member countries As a growth strategy, horizontal integration can be appropriate if: It enables the company to meet growth plans It can be strategically managed to attain competitive advantage It satisfies legal and regulatory guidelines

The Global Perspective Horizontal integration knows no borders Coca-Cola sought to buy one of China’s biggest beverage makers, Huiyuan Juice Group Ltd for $2.3 Billion It would have given Coke a strong market presence The deal was rejected by the Chinese Ministry of Commerce, which indicated it would have hurt competition in the local market

Growth Strategies – Internal vs. External Sources Based on Internal sources (Example: Ford); Based on External sources – collaboration with external actors: - Mergers; - Long-term contracts; - Acquisitions; - Joint venture; - Strategic alliance; - Franchising; - Licencing; - BOT, Leasing, etc.

Growth Strategy: Internal sources Internal development involves creating and developing new business activities within Rather than face risks and challenges of combining new businesses, a company seeks to develop crucial capabilities to meet desired goals

Growth Strategies: Mergers-Acquisitions Involves the purchase of an organization that enables a firm to combine operations with that company it has merged with or acquired The popularity of mergers and acquisitions go in cycles The main feature of either effort is to implement growth strategies

Mergers and Acquisitions Merger is a legal transaction in which two parties combined operations through an exchange of stock to create a new entity Usually they take place between organizations of similar size and it is considered “friendly”, it is acceptable to all parties Acquisition is an outright purchase of one company by another Can be hostile and involve different sized firms

Example: Thinking Small at IBM IBM was reorganized into smaller, integrated global enterprise centers of expertise focused on industries and technical skills; Rather than continuing to use massive divisions, the company create a more nimble global network that helped improve performance This effort also included decentralized decision making that was more conducive to creativity, collaboration, and innovation

Example: Acquisition strategy at GE General Electric (GE) entered the airport security market by purchasing firms These acquisitions enabled GE to leverage its brand, size, and credibility with the acquired firms technology Why do you think GE chose acquisitions as its way to grow?

Mergers-Acquisitions or Internal Development

Strategic Alliances and Partnering This is a grow effort that seeks to minimize the challenges and risks of buying a business or developing its own This is a formal legal arrangement The effort seeks to combined resources, capabilities, and core competencies for a specific business purpose

Strategic Partnering – examples Partnering with suppliers, distributors, or competitors Three main types of strategic partnering Joint ventures Long term contracts Strategic alliances

Joint Venture (JV) Two or more organizations form separate and equal independent organization for strategic purposes It minimizes the financial and political/legal constraints that accompany M&A or internal development Example: Clorox and Proctor & Gamble entered a JV to develop garbage bags and plastic wrap

Long term Contract Covers a specific business purpose Viewed as variation of vertical integration between company and supplier Both partners understand the importance of long term benefits to meet cost or quality expectations Creates assured outlet for products

Strategic Alliance Two or more organizations share different resources, capabilities, or competencies to pursue some business purpose; requires trust Different than joint venture because there is no separate legal entity formed The effort seeks to encourage product innovation, bring stability to cyclical businesses, expand product lines, or cement relationships with suppliers, distributors, or competitors

Why Alliances Make Sense Flexibility and informality of arrangements promote efficiencies Provide access to new markets or technologies Less complexity when creating/disbanding Risks and expenses are shared Brand identification is kept and exploited Synergies created Avoids issues related to antitrust

Not all alliances work out - Amazon.com and Toys R Us created an alliance in 2000 that combined the resources of a “bricks and mortar” business with an internet company It failed, each party claiming to be deceived by the other Amazon violated its promise to be only sell those toys, games, and baby products on its site Toys R Us failed to provide certain items

Organizational Stability Strategy It may seem odd for an organization to want to remain where it is However, it may make sense when resources, capabilities, or competencies are stretched to limits and growth might risk the organization’s competitiveness

Stability Strategy – Example of Dell Company Is effective only in the SHORT RUN; Only as temporary solution or “timeout”; Dell had introduced in 1993. stability strategy after intensive growth. It was understood as a short temporary pause needed for consolidation after the 285% growth in the previous two years

When is Stability an Appropriate Strategic Choice? In period of rapid upheaval with several industry and general external forces drastically changing This demands investment in current businesses or functions When there is slow or no growth opportunities Allows the firm to analyze their strategic options – diversification, vertical or horizontal integration

When is Stability an Appropriate Strategic Choice? If the organization has grown rapidly and now needs “down time” Effort is to better manage the expanded activities and operations Large firms in a mature industry or a small firm with satisfactory results might be risk averse If successful, do not pursue growth

Decline and Renewal Strategy Decline is represented by strategies: Dependence; Sale/divestment; Bankrupcy/liquidation. Renewal, Revitalization – feasible when problems are identified and have not yet become critical.

Decline/Renewal trategy When managers have not been effective and unable to develop or exploit a competitive advantage the organization will need for something to be done in order to survive Renewal strategies are used to put the organization back on the path to successfully achieving its strategic goals

Possible Causes of Corporate Decline

What Leads to Performance Declines? While managers do not make deliberately bad decisions causing a decline in performance, they do create conditions that prevent effective performance The primary cause of corporate decline is poor management, to which all other causes can be traced Performance will suffer if manages are inept, incompetent, or incapable

What Leads to Performance Declines? Poor management judgment is evident when: Decisions to expand too rapidly or over-expand Inadequate financial controls or high costs Managers unaware of trends or changes in the external environment Performance is declining

Signs of Declining Performance

Renewal Strategies Two main renewal strategies Retrenchment Turnaround Short run strategy designed to address weaknesses that are leading to performance declines Not necessary to have negative financial returns, usually occurs if unable to meet strategic goals 57

Renewal Strategies – retrenchment Is a military term refers to going back to the “trenches” to stabilize, revitalize, and prepare for entering battle again The point is to address issues before they lead to severe problems

Renewal Strategies – Turnaround Is designed for situations in which the organization’s performance are more serious Often when the organization is facing severe external and internal pressures and must make strategic changes in order to remain viable There is no guarantee the turnaround will accomplish the desired results, but without it the organization will not survive

Implementing Renewal Strategies Cost cutting Reducing costs to bring performance results back in line with expectations It can be across the board or selective The effort should avoid cutting costs in those areas critical to retain or exploit competitiveness Redundancies, inefficiencies, or waste in activities should be eliminated Restructuring/downsizing are severe approaches

Restructuring This includes refocusing on the primary businesses and involve Selling or divestment Spin off Liquidation Downsizing Divestment might occur when the business is desired by another company and is no longer a strategic fit

Restructuring Spin off Liquidation Involves removing a business unit and setting it up as a separate, independent business by distributing its shares of stock Liquidation When no buyer exists or there is no possible spin off, a business unit will be discontinued This is a strategic action of last resort

Restructuring – downsizing Is a quick way to cut costs by elimination jobs It can be effective when done strategically Table 7.3 lists some recommendations

Making Downsizing Effective

Bankruptcy & Liquidation - Involves restructuring- reorganizes debt and protects the business from creditors until it can emerge from bankruptcy Liquidation All assets are sold to pay off existing debts The company ceases to exist

Restructuring – summary Regarding renewal strategies Typically, they are not used one at a time; rather, they are often combined The coordinated effort by strategic managers may involve selected use of any of these efforts The key is that the organization’s competitiveness is improved or strengthened

Evaluating Corporate Strategies This is an important part of the entire strategic management process There are four main evaluation techniques Corporate goals Efficiency, effectiveness, productivity Benchmarking Portfolio analysis

Corporate Goals Indicate desired end results or targets that are broader, more comprehensive, and longer term than those of functional areas or of business units However, attaining functional goals and competitive goals are how an organization achieves its corporate goals Thus, they are the standard against which performance is measured

Types of Corporate Goals

Efficiency, Effectiveness, and Productivity Measures Efficiency is an organization’s ability to minimize resource use in goal attainment Effectiveness is an organization’s ability to reach its goals Productivity is a specific measure of how many inputs it takes to produce outputs These three measures assess how well an organization works and achieve desired ends

Example: Changing the Menu Kraft is the world’s second largest food company behind Nestle. Beginning in 1903, the company has looked for ways to grow its business. Over time, the company has developed new products (Miracle Whip, Velveeta, Parkay) It has diversified by merging with Dart Industries It was bought by Philip Morris and merged with General Foods, creating the largest food maker

Benchmarking Is the search for the best practices inside or outside an organization The benchmarking process can be used to implement strategy Specific benchmarks or best practices can be a standard against which to measure performance Using benchmarks, strategic managers can evaluate whether an organization is being managed well or if improvements are needed

Changing Corporate Strategies Strategic managers must decide whether to act and, if so, what actions to take Changes to functional and competitive strategies might be necessary, modifications or even drastic action might be needed to achieve desired results The key is to understand the opportunities and threats, strengths and weaknesses facing the organization and the need to design appropriate strategies to exploit resources, capabilities, and core competencies

Summarizing what corporate strategy is Corporate strategy is concerned with choices of what business to be in and what to do with those businesses Single business organization is in one industry Multiple business organization in more than one industry It establishes the overall direction, while functional strategies provide the means to get there

Summarizing what corporate strategy is – cont’d Each type of strategy is important to what the organization does and whether it achieves its goals The three corporate strategic directions include: Moving it forward (growth) Keeping it where it is (stability) Reversing the decline (renewal)

Discuss organizational growth strategies A growth strategy uses current businesses or new business to: Expand the products offered Increase the markets served Expand its activities or operations Employs one of five possible approaches

Discuss organizational growth strategies – cont’d Concentration Focuses on growth in primary line of business Product-market exploitation that involves selling more products to current markets Product development is selling new products to current markets Market development is selling current products to new markets The drawback is vulnerability to external changes

Discuss organizational growth strategies – cont’d Vertical integration Grow by gaining control of inputs (backward), outputs (forward), or both Horizontal integration Combining operations with competitors Diversification Growth by moving into a different industry Related to current business or unrelated

Discuss organizational growth strategies – cont’d International Takes advantage of new global markets or protects core operations from global competitors Growth can be implemented in three ways: Merger/Acquisition Internal development Strategic partnering (joint venture, long term contract, strategic alliance)

Describe the organizational stability strategy Stability strategy maintains current size and activities, it is short term Includes times when industry is in period of rapid change, slow or no growth, rapid growth When organization is large and in maturity stage of industry life cycle or small and satisfied with position

Describe organizational renewal strategies Renewal strategy used when organization needs to reverse the decline to put the organization back on appropriate path to achieving its goals Main cause of decline is management decisions Two main renewal strategies Retrenchment Turnaround

Describe organizational renewal strategies – cont’d Renewal strategies are implemented by: Cutting costs Restructuring Restructuring includes: Divestment = selling a business Spin off = setting up separate business Liquidation = shutting down Downsizing = reducing jobs Bankruptcy = reorganizing or closing

Discuss how corporate strategy is evaluated and changed There are four techniques for evaluation Corporate goals Measuring efficiency (use of resources), effectiveness (ability to reach goals), productivity (how many inputs used to create outputs) Benchmarking (best practices) Portfolio analysis (BCG, McKinsey-GE spotlight, product/market matrices)