11-1 MGMT 738 Management of Technology Lecture 8 BUSINESS STRATEGY AND TECHNOLOGY STRATEGY

©2009 Prentice Hall 11-2 Learning Objectives 1.Understand how to analyze the attractiveness of an industry 2.Explain how the five forces model can be used to figure out industry attractiveness 3.Define the value chain 4.Understand how to analyze a value chain and the strategy decisions that can be made on the basis of a value chain analysis 5.Explain why some industries operate through dynamics of creative destruction, while others operate through dynamics of creative accumulation 6.Identify the industry conditions that make small, new and large, established firms more innovative 7.Describe a competitive advantage 8.Define resources, capabilities, dynamic capabilities, and core competencies 9.Explain how core competencies lead to core rigidities 10.Define strategic dissonance

Formulating Technological Innovation Strategy Assessing the firm’s position and defining its strategic direction, Choosing innovation projects in which to invest, including both quantitative and qualitative valuation techniques, Deciding whether and how the firm will collaborate on development activities, choosing a collaboration mode, and choosing and monitoring partners, Crafting a strategy for protecting – or diffusing – a technological innovation through such methods as patents, trademarks, copyrights, and trade secrets.

Overview A coherent technological innovation strategy leverages the firm’s existing competitive position and provides direction for future development of the firm. Formulating this strategy requires:  Appraising the firm’s environment,  Appraising the firm’s strengths, weaknesses, competitive advantages, and core competencies,  Articulating an ambitious strategic intent.

©2009 Prentice Hall 11-5 Industry Analysis An important part of technology strategy is to analyze the attractiveness of an industry Some industries are more attractive than others, making the companies in them consistently more profitable than those in other industries

Assessing the Firm’s Current Position External Analysis  Two common methods are Porter’s Five-Force Model and Stakeholder Analysis.  Porter’s Five-Force Model 1.Degree of existing rivalry. Determined by number of firms, relative size, degree of differentiation between firms, demand conditions, exit barriers. 2.Threat of potential entrants. Determined by attractiveness of industry, height of entry barriers (e.g., start-up costs, brand loyalty, regulation, etc.) 3.Bargaining power of suppliers. Determined by number of suppliers and their degree of differentiation, the portion of a firm’s inputs obtained from a particular supplier, the portion of a supplier’s sales sold to a particular firm, switching costs, and potential for vertical integration.

Assessing the Firm’s Current Position 4.Bargaining power of buyers. Determined by number of buyers, the firm’s degree of differentiation, the portion of a firm’s inputs sold to a particular buyer, the portion of a buyer’s purchases bought from a particular firm, switching costs, and potential for vertical integration. 5.Threat of substitutes. Determined by number of potential substitutes, their closeness in function and relative price. 6.Recently Porter has acknowledged a sixth force: the role of complements. If complements are necessary, industry will be influenced by their availability, quality, and price.

Craft a Strategy to Achieve Objectives Set Objectives Develop a Strategic Vision & Mission Implement & Execute Strategy Evaluate & Make Corrections Improve/ Change Revise as Needed Revise as Needed Improve/ Change Recycle as Needed Task 1Task 2Task 3Task 4Task 5 Thompson and Strickland -The Five Tasks of Strategic Management

David – Strategic Management Process - Three Stages Strategy Formulation Strategy Implementation Strategy Evaluation

Strategy Formulation Vision & Mission Alternative Strategies Long-Term Objectives Strengths & Weaknesses Opportunities & Threats Strategy Selection

Strategy Implementation Motivate Employees Policies Annual Objectives Resource Allocation

Strategy Evaluation Corrective Action Measure Performance Review External & Internal

Factors Shaping the Choice of Company Strategy Company’s Strategic Situation Craft the strategy  External Factors  Internal Factors Social, political, regulatory and community factors Competitive conditions and industry attractiveness Company opportunities and threats to company’s well-being Resource strengths, capabilities, and weaknesses Influences of key executives Shared values and company culture Identify and evaluate alternatives Determine relevance of internal and external factors

Strategic Thinking and Analysis Leads to Good Strategic Choices 1. Industry’s dominant economic traits 2. Nature of competition & strength of competitive forces 3. Drivers of industry change 4. Competitive position of rivals 5. Strategic moves of rivals 6. Key success factors 7. Conclusions about industry attractiveness Assess Industry & Competitive Conditions 1. Assessment of company’s present strategy 2. Resource strengths and weaknesses, market opportunities, and external threats 3. Company’s costs compared to rivals 4. Strength of company’s competitive position 5. Strategic issues that need to be addressed Assess Company Situation Identify Strategic Options for the Company Select the Best Strategy for the Company

©2009 Prentice Hall Profit As a Percentage of Sales for Manufacturing Industries,

©2009 Prentice Hall Five Forces Model The level of industry attractiveness depends on five dimensions: 1.Buyer Power: measures the degree of power that customers have over companies in the industry 2.Supplier Power: measures the degree of power that suppliers have over companies in the industry 3.Threat of New Entrants: measures ease of entry into the industry 4.Threat of Substitutes: measures the likelihood that new products or services will substitute for those supplied by the industry 5.Degree of Rivalry: measures the degree of competition between firms in the industry

©2009 Prentice Hall Five Forces Model

©2009 Prentice Hall Capital Intensity Established firms are better than new firms at innovation in capital-intensive industries because new firms need to finance innovation through external capital markets

©2009 Prentice Hall Advertising Intensity Established firms are better than new firms at innovation in advertising-intensive industries because advertising is subject to economies of scale and takes time to have an effect

©2009 Prentice Hall Effect of Advertising on Sales

©2009 Prentice Hall Concentration New firms are worse than established firms at innovation in concentrated industries because concentrated industries provide firms with market power

©2009 Prentice Hall Average Size of Firms New firms are better than established firms at innovation in industries where the average size of firms is small because the disadvantages of being a small start-up firm are minimal

©2009 Prentice Hall Average Firm Size by Industry over Time

Assessing the Firm’s Current Position  Stakeholder Analysis 1.Who are the stakeholders. 2.What does each stakeholder want. 3.What resources do they contribute to the organization. 4.What claims are they likely to make on the organization.

©2009 Prentice Hall The Value Chain A description of the activities that are used to produce and deliver a product to customers Examining the value chain will help with technology strategy in several ways: 1.Helps to determine where most of the value creation lies in an industry 2.Determine whether it makes sense to focus on a different stage of the value chain if the locus of value creation in an industry changes 3.Offers insight into whether new or established firms will be more effective at innovation 4.Suggests how companies can create competitive advantage at different stages of the value chain 5.Helps with decisions about ownership of different parts of the value chain

©2009 Prentice Hall The Value Chain in Mobile Phones

Assessing the Firm’s Current Position Internal Analysis 1.Identify the firm’s strengths and weaknesses. Helpful to consider each element of value chain.

2. Assess which strengths have potential to be sustainable competitive advantage Rare Valuable Durable Inimitable  Resources are difficult (or impossible) to imitate when they are: –Tacit –Path dependent –Socially complex –Causally ambiguous Assessing the Firm’s Current Position Competitive Advantage Sustainable Competitive Advantage

©2009 Prentice Hall Regimes of Creative Destruction and Creative Accumulation Some industries operate through:  Dynamics of creative destruction: entrepreneurs enter with new firms, challenge established firms on the basis of new ideas, disrupt the old ways of production, organization, and distribution, and replace the old firms  Dynamics of creative accumulation: entrepreneurs enter, challenge established firms on the basis of their new ideas. However, established firms defend their old ways of production, organization and distribution, and the new firms tend to fail

©2009 Prentice Hall A Resource-Based View The creation of sustainable competitive advantage (SCA) depends on resources and capabilities

©2009 Prentice Hall Resources Resources fall into three major categories: 1.Tangible: include plant and equipment, raw materials, and financial reporting systems 2.Intangible: include trade secrets and relationships with customers 3.Human: include employees’ knowledge, skills and abilities Resources are not a complete explanation for competitive advantage Different companies transform resources into products and services in different ways

©2009 Prentice Hall Capabilities The knowledge or skills about how to undertake a particular activity Capabilities can be found in all parts of a company, such as in the skills, knowledge, and ability that employees have accumulated over time in the process of doing their job Other capabilities reside in an organization’s processes, such as those for product development, production, purchasing, supply chain management, and marketing Competitive advantage occurs only when efforts to transform resources into products are valuable, rare, non-substitutable, difficult to imitate, and durable; otherwise, it will not be superior to that of other firms

©2009 Prentice Hall Core Competencies Capabilities are core competencies if they are used to generate value across a wide range of firm activities Core competencies are often created through the coordination of different activities or technologies Core competencies allow firms to expand successfully into new product markets

Identifying Core Competencies and Capabilities Core Competencies: A set of integrated and harmonized abilities that distinguish the firm in the marketplace. Competencies typically combine multiple kinds of abilities. Several core competencies may underlie a business unit. Several business units may draw from same competency. Core competencies should: –Be a significant source of competitive differentiation –Cover a range of businesses –Be hard for competitors to imitate

Identifying Core Competencies and Capabilities

Mobilizing Company Resources to Produce Competitive Advantage Competitive Advantage Core Competencies Distinctive Competencies Competitive Capabilities Company Resources

For a capability to be a Core Competency, it must be: Core Competencies Differential knowledge or skill in the organization Differential knowledge or skill in the organization Difficult for others to imitate Essential to product characteristics critical to customer Applicable to a variety of end products and markets Applicable to a variety of end products and markets

Core Competencies must be: Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships Valuable Rare Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Capabilities that are possessed by few, if any, current or potential competitors Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

CORE PRODUCTS AND END PRODUCTS COMPETENCE CORE PRODUCTS (in business units) END PRODUCTS (to markets)

Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Business Level Strategy Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

Research Brief Identifying the Firm’s Core Competencies  Gallon, Stillman and Coates offer a step-by-step program for identifying core competencies. Module 1 -- Assemble a steering committee, appoint a program manager, and communicate the overall goals of the project to all members of the firm. Module 2 -- Constructing an inventory of capabilities categorized by type. Assess their strength, importance, and criticality. Module 3 – Organize capabilities by both their criticality and the current level of expertise within the firm for each. Module 4 – Distill competencies into possible candidates for the firm to focus on. No options should be thrown out yet. Module 5 -- Testing the candidate core competencies against Prahalad and Hamel's original criteria. Module 6 -- Evaluate the firm’s position in the core competency.

©2009 Prentice Hall Core Rigidities The inability to do new things in areas outside of the firm’s core competencies Often limit the way in which people can work together or solve problems, and what activities they believe are acceptable and unacceptable

Risk of Core Rigidities When firms excel at an activity, they can become over committed to it and rigid.  Incentives and culture may reward current competencies while thwarting development of new competencies.  Dynamic capabilities are competencies that enable the firm to quickly respond to change. E.g., firm may develop a set of abilities that enable it to rapidly deploy new product development teams for a new opportunity; firm may develop competency in working with alliance partners to gain needed resources quickly.

Strategic Intent Strategic Intent: A long-term goal that is ambitious, builds upon and stretches firm’s core competencies, and draws from all levels of the organization. Typically looks years ahead, establishes clear milestones Firm should identify resources and capabilities needed to close gap between strategic intent and current position.

Theory in Action The Balanced Scorecard Kaplan and Norton argue that effective performance measurement should incorporate:  Financial perspective  Customer perspective  Internal perspective  Innovation and learning

PRICE QUALITY LOW HIGH LOW MAYBE ACQUIRE MAYBE AVOID HIGH Example of Decision Matrix

Product new to the world Business Competitiveness New Known No Consider Acquiring Marketing Expertise Consider Acquiring Marketing Expertise Most Promising Most Promising Fit in Existing Division Fit in Existing Division Least Promising Least Promising Yes 3M PRODUCT EVALUATION MATRIX

BCG Growth-Share Matrix StarsQuestion Marks Cash CowsDogs x 4x2x 1.5x 1x 0.5x0.4x0.3x0.2x0.1x Relative Competitive Position Business Growth Rate (Percent) Source: B. Hedley, “Strategy and the Business Portfolio,” Long Range Planning (February 1997), p. 12. Reprinted with permission.

General Electric’s Business Screen Matrix A Winners B C Question Marks D F Average Businesses E Winners Losers G H Profit Producers StrongAverageWeak Low Medium High Business Strength/Competitive Position Industry Attractiveness Source: Adapted from Strategic Management in GE, Corporate Planning and Development, General Electric Corporation. Used by permission of General Electric Company.

Strategic Groups in the Pharmaceutical Industry

Multi-technology, Multi- attribute Matrix Attribute Rank Device 1 Device 2 Device 3 Device 4 Device 5 Attribute 1 Attribute 2 Attribute 3 Attribute 4 TOTAL

SWOT MATRIX STRENGTHSWEAKNESSES OPPORTUNITIES SO STRATEGIES WO STRATEGIES THREATSST STRATEGIES WT STRATEGIES

SWOT Analysis -- What to Consider Potential Resource Strengths Potential Resource Weaknesses Potential Company Opportunities Potential External Threats Powerful strategy Strong financial condition Strong brand name image/reputation Widely recognized market leader Proprietary technology Cost advantages Strong advertising Product innovation skills Good customer service Better product quality Alliances or JVs No clear strategic direction Obsolete facilities Weak balance sheet; excess debt Higher overall costs than rivals Missing some key skills/competencies Subpar profits... Internal operating problems... Falling behind in R&D Too narrow product line Weak marketing skills Serving additional customer groups Expanding to new geographic areas Expanding product line Transferring skills to new products Vertical integration Openings to take MS from rivals Acquisition of rivals Alliances or JVs to expand coverage Openings to exploit new technologies Openings to extend brand name/image Entry of potent new competitors Loss of sales to substitutes Slowing market growth Adverse shifts in exchange rates & trade policies Costly new regulations Vulnerability to business cycle Growing leverage of customers or suppliers Shift in buyer needs for product Demographic changes

PORTER- BUSINESS STRATEGY AND TECHNOLOGY STRATEGY Identify all distinct technologies and sub-technologies in value chain Identify potentially relevant technologies in other industries or under development Determine likely path of change in key technologies Determine which technologies and potential changes are most significant to competitive advantage and industry structure Assess a firm’s relative capabilities in important technologies and cost of making improvements Select a technology strategy, encompassing all- important technologies that reinforce company strategy Reinforce business-unit technology strategies at the corporate level

Strategy and Competitive Advantage The relationship between strategies and resources and capabilities:

Technologies in Products External Technologies Basic Technologies Distinctive Technologies

ITEGRATION DECISIONS Vertical Integration of Technology  Product  Process  Marketing  Disposal Vertical Integration of Supply Chain  Materials production  Suppliers  Manufacturer  Distribution MAKE OR BUY

©2009 Prentice Hall Strategic Dissonance Strategic dissonance occurs when what managers want to accomplish and what companies are doing are misaligned It indicates the need to change strategy Companies are most successful in responding to strategic dissonance by:  Evaluating Information on the Misalignment  Gathering Information from Frontline Employees  Devoting Organizational Resources to the New Direction

Alignment of Technology and Business Strategy

Product-Technology Matrix Technologies CompanyProducts Product A Product B Product... Product N Required Technology 1 Strength Required Technology 2 Strength Required Technology 3 Strength

Mitchell - Six Questions To what extent is technology relevant? Which business strategies require technology? Where will we get it? What are our core technologies? In which technologies should we focus our efforts? What new strategic options could they provide?

Gallon, Stillman and Coates Types of Capabilities  Market-Interface  Infrastructure  Technological Applied Science Design and Development Manufacturing Core competencies  Core Technical Competencies - CTC  Core Marketing Competencies - CMC

CTC PROGRAM 1.Startup 2.Inventory of Capabilities 3.Assessing Capabilities 4.Identifying Candidate Core Competencies 5.Testing Candidate Core Competencies 6.Evaluating Core Competency Positions