BA 495 - Petersen 1 Chapter 1 Strategic Management and Strategic Competitiveness Strategic Management and Strategic Competitiveness BA 495 Dr. Candace.

BA 495 - Petersen 1 Chapter 1 Strategic Management and Strategic Competitiveness Strategic Management and Strategic Competitiveness BA 495 Dr. Candace Petersen Winter 2000 BA 495 Dr. Candace Petersen Winter 2000

BA 495 - Petersen 2 Sustained Competitive Advantage Above-Average Returns Returns in excess of what an investor expects to earn from other investments with similar risk Occurs when a firm develops a strategy that competitors are not simultaneously implementing Provides benefits which current and potential competitors are unable to duplicate Strategic Competitiveness Achieved when a firm successfully formulates and implements a value-creating strategy

BA 495 - Petersen 3 which are required for firms to achieve Above-Average Returns Strategic Competitiveness Sustained Competitive Advantage Strategic Management Process Involves the full set of: Actions Commitments Decisions

BA 495 - Petersen 4 Challenge of Strategic Management Changing Competitive Landscape Two Models of Superior Profitability Key Stakeholder Groups Industrial Organization Model Resource-Based Model Chapter One: Key Themes

BA 495 - Petersen 5 Competitive success is transient...unless care is taken to preserve competitive position Challenge of Strategic Management Only 2 of the top 25 U.S. corporations in 1900 are still competitive today! In a recent year, almost 150,000 U.S. businesses failed or filed for bankruptcy

BA 495 - Petersen 6 The pace of change is relentless.... and increasing The pace of change is relentless.... and increasing Traditional industry boundaries are blurring...such as Computers Telecommunications New Competitive Landscape Rapid technological changes Rapid technology diffusions Dramatic changes in information and communication technologies Increasing importance of knowledge Fundamental nature of competition is changing

BA 495 - Petersen 7 The global economy is changing Traditional sources of competitive advantage no longer guarantee success New keys to success include: Flexibility Innovation Integration Speed New Competitive Landscape People, goods, services and ideas move freely across geographic boundaries New opportunities emerge in multiple global markets Markets and industries become more internationalized

BA 495 - Petersen 8 2 2 Alternative Model of Superior Returns Industrial Organization Model 1 1 Resource-Based Model

BA 495 - Petersen 9 I/O Model of Superior Returns The Industrial Organization Model suggests that above-average returns for any firm are largely determined by characteristics outside the firm. The I/O model largely focuses on industry structure or attractiveness of the external environment rather than internal characteristics of the firm.

BA 495 - Petersen 10 Action required: External Environment General Environment Industry Environment Competitive Environment Study the external environment, especially the industry environment. I/O Model of Superior Returns

BA 495 - Petersen 11 External Environment General Environment Industry Environment Competitive Environment An Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Action required: Locate an industry with high potential for above- average returns. I/O Model of Superior Returns

BA 495 - Petersen 12 External Environment General Environment Industry Environment Competitive Environment Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Action required: Identify strategy called for by the industry to earn above-average returns. I/O Model of Superior Returns Selection of a strategy linked with above- average returns in a particular industry Strategy Formulation Strategy Formulation

BA 495 - Petersen 13 External Environment General Environment Industry Environment Competitive Environment Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Strategy Formulation Selection of a strategy linked with above- average returns in a particular industry Action required: Develop or acquire assets and skills needed to implement the strategy. Assets and Skills Assets and skills required to implement a chosen strategy I/O Model of Superior Returns

BA 495 - Petersen 14 External Environment General Environment Industry Environment Competitive Environment Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Strategy Formulation Selection of a strategy linked with above- average returns in a particular industry Assets and Skills Assets and skills required to implement a chosen strategy Action required: Use the firm’s strengths (its assets or skills) to implement the strategy. Strategy Implementation Selection of strategic actions linked with effective implementation of the chosen strategy I/O Model of Superior Returns

BA 495 - Petersen 15 External Environment General Environment Industry Environment Competitive Environment Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Strategy Formulation Selection of a strategy linked with above- average returns in a particular industry Assets and Skills Assets and skills required to implement a chosen strategy Action required: Strategy Implementation Selection of strategic actions linked with effective implementation of the chosen strategy Superior Returns Earning of above- average returns Maintain selected strategy in order to outperform industry rivals. I/O Model of Superior Returns

BA 495 - Petersen 16 The Resource-Based Model suggests that above-average returns for any firm are largely determined by characteristics inside the firm. The Resource-Based view focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate. Resource-Based Model of Superior Returns

BA 495 - Petersen 17 Resources Inputs to a firm’s production process. Action required: Identify firm resources. Study strengths and weaknesses relative to rivals. Resource-Based Model of Superior Returns

BA 495 - Petersen 18 Resources Inputs to a firm’s production process. Action required: Determine what firm capabilities allow it to do better than rivals. Resource-Based Model of Superior Returns Capability Capacity for an integrated set of resources to integratively perform a task or activity.

BA 495 - Petersen 19 Resources Inputs to a firm’s production process. Capability Capacity for an integrated set of resources to integratively perform a task or activity. Competitive Advantage Competitive Advantage Ability of a firm to outperform its rivals Action required: Determine how firm’s resources and capabilities may create competitive advantage. Resource-Based Model of Superior Returns

BA 495 - Petersen 20 Resources Inputs to a firm’s production process. Capability Capacity for an integrated set of resources to integratively perform a task or activity. Competitive Advantage Competitive Advantage Ability of a firm to outperform its rivals An Attractive Industry An Attractive Industry Location of an industry with opportunities that can be exploited by the firm’s resources and capabilities Action required: Locate an attractive industry. Resource-Based Model of Superior Returns

BA 495 - Petersen 21 Resources Inputs to a firm’s production process. Capability Capacity for an integrated set of resources to integratively perform a task or activity. Competitive Advantage Competitive Advantage Ability of a firm to outperform its rivals An Attractive Industry An Attractive Industry Location of an industry with opportunities that can be exploited by the firm’s resources and capabilities Action required: Select strategy that best exploits resources and capabilities relative to opportunities in environs. Strategy Formulation and Implementation Strategic actions taken to earn above-average returns Resource-Based Model of Superior Returns

BA 495 - Petersen 22 Resources Inputs to a firm’s production process. Capability Capacity for an integrated set of resources to integratively perform a task or activity. Competitive Advantage Competitive Advantage Ability of a firm to outperform its rivals An Attractive Industry An Attractive Industry Location of an industry with opportunities that can be exploited by the firm’s resources and capabilities Action required: Maintain selected strategy in order to outperform industry rivals. Strategy Formulation and Implementation Strategic actions taken to earn above-average returns Resource-Based Model of Superior Returns Superior Returns Earning of above- average returns

BA 495 - Petersen 23 Rare - possessed by few, if any, current and potential competitors Costly to Imitate - Costly to Imitate - when other firms either cannot obtain them or must obtain them at a much higher cost Nonsubstitutable- the firm must be organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage Valuable - allow the firm to exploit opportunities or neutralize threats in its external environment Resources and capabilities lead to Competitive Advantage when they are: Resources and capabilities lead to Competitive Advantage when they are:

BA 495 - Petersen 24 Core Competencies When these four criteria are met, Resources and Capabilities become: Core Competencies are Resources and capabilities that can serve as a source of Competitive Advantage The Resource-Based Model argues that Core Competencies are the basis for a firm’s Competitive Advantage, Strategic Competitiveness and ability to earn above-average returns.

BA 495 - Petersen 25 Winning competitive battles through deciding how to leverage internal resources, capabilities, and core competencies. Strategic Intent An application of strategic intent in terms of products to be offered and markets to be served. Strategic Mission

BA 495 - Petersen 26 Stakeholders Firm Groups who are affected by a firm’s performance and who have claims on its performance Product Market OrganizationalOrganizational Capital Market Stock market/Investors Debt suppliers/Banks Employees Managers Non-Managers Employees Managers Non-Managers The firm must maintain performance at an adequate level in order to maintain the participation of key stakeholders Primary Customers Suppliers Primary Customers Suppliers

BA 495 - Petersen 27 Stakeholder Involvement Each of the key stakeholders involved wants a piece of the same pie 1 1 How do you divide the pie in order to keep all of the stakeholders involved? 2 2 How do you increase the size of the pie so that there is more to go around?

BA 495 - Petersen 28 Chapter 2 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Dr. C. Petersen BA 495 Winter ‘00 Term Dr. C. Petersen BA 495 Winter ‘00 Term

BA 495 - Petersen 29 Components of the General Environment Political/ Legal Industry Environment Demographic Economic Technological Global Competitive Environment Competitive Environment Sociocultural

BA 495 - Petersen 30 Threat of Substitute Products Threat of New Entrants Porter’s Five Forces Model of Competition Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Bargaining Power of Suppliers

BA 495 - Petersen 31 Threat of New Entrants Barriers to Entry Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale * * * * * * Government Policy * Expected Retaliation *

BA 495 - Petersen 32 * Supplier industry is dominated by a few firms * Suppliers’ products have few substitutes * Buyer is not an important customer to supplier * Suppliers’ product is an important input to buyers’ product * Suppliers’ products are differentiated Suppliers are likely to be powerful if: * Suppliers’ products have high switching costs * Supplier poses credible threat of forward integration Bargaining Power of Suppliers Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

BA 495 - Petersen 33 Bargaining Power of Buyers Buyer groups are likely to be powerful if: * Buyers are concentrated or purchases are large relative to seller’s sales * Purchase accounts for a significant fraction of supplier’s sales * Products are undifferentiated * Buyers face few switching costs * Buyers’ industry earns low profits * Buyer presents a credible threat of backward integration * Product unimportant to quality * Buyer has full information Buyers compete with the supplying industry by: * Bargaining down prices * Forcing higher quality * Playing firms off of each other

BA 495 - Petersen 34 Threat of Substitute Products * Products with improving price/performance tradeoffs relative to present industry products Products with similar function limit the prices firms can charge For Example: Keys to evaluate substitute products: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery

BA 495 - Petersen 35 Intense rivalry often plays out in the following ways: * Jockeying for strategic position * Using price competition * Staging advertising battles * Making new product introductions * Increasing consumer warranties or service Occurs when a firm is pressured or sees an opportunity * Price competition often leaves the entire industry worse off * Advertising battles may increase total industry demand, but may be costly to smaller competitors Intensity of Rivalry Among Existing Competitors

BA 495 - Petersen 36 Cutthroat competition is more likely to occur when: * Numerous or equally balanced competitors * Slow growth industry * High fixed costs * Lack of differentiation or switching costs * High storage costs * Capacity added in large increments * High strategic stakes * High exit barriers * Diverse competitors Intensity of Rivalry Among Existing Competitors

BA 495 - Petersen 37 High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable. * Specialized assets * Fixed cost of exit (e.g., labor agreements) * Emotional barriers * Government and social restrictions * Strategic interrelationships Intensity of Rivalry Among Existing Competitors

BA 495 - Petersen 38 Effects of Entry Barriers and Exit Barriers on Industry Profits High, Risky Returns Entry Barriers Exit Barriers High Low HighLow Low, Stable Returns High, Stable Returns Low, Risky Returns

BA 495 - Petersen 39 Competitor Analysis Industry Environment Competitive Environment Competitive Environment The follow up to Industry Analysis is effective analysis of a firm’s Competitors

BA 495 - Petersen 40 Future Objectives How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? Competitor Analysis What Drives the competitor?

BA 495 - Petersen 41 Competitor Analysis What is the competitor doing? What can the competitor do? Current Strategy How are we currently competing? Does this strategy support changes in the competitive structure?

BA 495 - Petersen 42 Competitor Analysis What does the competitor believe about itself and the industry? Do we assume the future will be volatile? Are we assuming stable competitive conditions? What assumptions do our competitors hold about the industry and themselves? Assumptions

BA 495 - Petersen 43 Competitor Analysis What are the competitor’s capabilities? What are my competitors’ strengths and weaknesses? How do our capabilities compare to our competitors? Capabilities

BA 495 - Petersen 44 Future Objectives How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? Current Strategy How are we currently competing? Does this strategy support changes in the competition structure? Competitor Analysis Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves? Assumptions Response What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition? Capabilities What are my competitors’ strengths and weaknesses? How do our capabilities compare to our competitors?

BA 495 - Petersen 45 Chapter 3 The Internal Environment: Resources, Capabilities and Core Competencies The Internal Environment: Resources, Capabilities and Core Competencies Dr. C. Petersen BA 495 Dr. C. Petersen BA 495

BA 495 - Petersen 46 What the Firm Might Do What the Firm Can Do Chapter 2 External Environment Five Forces Analysis Chapter 3 Internal Environment Resources, Capabilities and Core Competencies SustainableCompetitiveAdvantage

BA 495 - Petersen 47 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Competitive Advantage Gained through Core Competencies Discovering Core Competencies Criteria of Sustainable Advantages Value Chain Analysis Discovering Core Competencies Valuable Rare Costly to Imitate Nonsubstitutable * * * * Outsource*

BA 495 - Petersen 48 How do we assemble bundles of Resources, Capabilities and Core Competencies to... Create VALUE for Customers Will environmental changes make our core competencies obsolete? And... Are substitutes available for our core competencies? Are our core competencies easily imitated? Key Questions for Managers in Internal Analysis include...

BA 495 - Petersen 49 Key Questions for Managers in Internal Analysis include... Difficult managerial decisions regarding resources, capabilities and core competencies are characterized by three conditions: Uncertainty Complexity Intraorganizational Conflicts

BA 495 - Petersen 50 Resources * * Tangible * * Intangible Discovering Core Competencies

BA 495 - Petersen 51 Tangible Resources Financial * * Physical * * Human Resources * * Organizational * * Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers Resources Intangible Resources Technological * * Innovation * * Reputation * * “Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco

BA 495 - Petersen 52 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Discovering Core Competencies

BA 495 - Petersen 53 Capabilities What a firm Does... Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees. Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.

BA 495 - Petersen 54 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Discovering Core Competencies Discovering Core Competencies

BA 495 - Petersen 55 Core Competencies What a firm Does... that is Strategically Valuable “…are the essence of what makes an organization unique in its ability to provide value to customers.” Leonard-Barton, Bowen, Clark, Holloway & Wheelwright McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.

BA 495 - Petersen 56 Core Competencies For a strategic capability to be a Core Competency, it must be: Valuable Costly to Imitate Nonsubstitutable Rare

BA 495 - Petersen 57 Core Competencies Core Competencies must be: Valuable Rare Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm- specific knowledge or trust-based relationships 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 What a firm Does... that is Strategically Valuable Costly to Imitate

BA 495 - Petersen 58 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage ValuableRare Costly to Imitate Nonsub- stitutable Competitive Consequences Performance Implications Above Average Returns Above Average Returns NONONONO YESNONOYES/NO YESNOYES/NOYES YE S CompetitiveDisadvantage Below Average Returns CompetitiveParityAverageReturns TemporaryCompetitiveAdvantage Aver./Above Average Returns Sustainable Competitive Advantage Sustainable Competitive Advantage

BA 495 - Petersen 59 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Discovering Core Competencies Value Chain Analysis Discovering Core Competencies Outsource* Valuable Rare Costly to Imitate Nonsubstitutable * * * * Criteria of Sustainable Advantages

BA 495 - Petersen 60 Support Activities Primary Activities Value Chain Analysis Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service helps to identify which resources and capabilities can add value MARGIN MARGIN

BA 495 - Petersen 61 Support Activities Primary Activities Outsourcing Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service MARGIN MARGIN - strategic choice to purchase some activities from outside suppliers

BA 495 - Petersen 62 Support Activities Primary Activities Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service MARGIN InboundLogistics Operations OutboundLogistics Service Marketing Technological Development Human Resource Management Procurement MARGIN portion more efficiently Firms often purchase a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficiently Outsourcing - strategic choice to purchase some activities from outside suppliers Outsourcing - strategic choice to purchase some activities from outside suppliers

BA 495 - Petersen 63 What are the Strategic Rationales for Outsourcing?

BA 495 - Petersen 64 Lets company focus on broader business issues by having outside experts handle various operational details What are the Strategic Rationales for Outsourcing? Improve Business Focus Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively Free Resources for Other Purposes Provide Access to World-Class Capabilities Accelerate Business Re-Engineering Benefits Share Risks The specialized resources of outsourcing providers makes world- class capabilities available to firms in a wide range of applications Achieves re-engineering benefits more quickly by having outsiders-- who have already achieved world-class standards--take over process Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

BA 495 - Petersen 65 To capitalize on the usefulness of the Value Chain concept... it is important to recognize that...

BA 495 - Petersen 66 Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value ChainBuyer Value Chain

BA 495 - Petersen 67 Value Chains are part of a Total Value System Firm Value ChainChannel Value ChainBuyer Value Chain Supplier Value Chain Upstream Value Perform valuable activities that complement the firm’s activities

BA 495 - Petersen 68 Value Chains are part of a Total Value System Supplier Value ChainFirm Value ChainBuyer Value Chain Upstream Value Perform valuable activities that complement the firm’s activities Channel Value Chain Each firm must eventually find a way to become a part of some buyer’s value chain

BA 495 - Petersen 69 Value Chains are part of a Total Value System Supplier Value ChainFirm Value ChainChannel Value Chain Upstream Value Perform valuable activities that complement the firm’s activities Buyer Value Chain Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! Each firm must eventually find a way to become a part of some buyer’s value chain

BA 495 - Petersen 70 Value Chains are part of a Total Value System Supplier Value ChainFirm Value ChainChannel Value Chain Upstream Value Perform valuable activities that complement the firm’s activities Buyer Value Chain Each firm must eventually find a way to become a part of some buyer’s value chain Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! Value chains vary for firms in an industry, reflecting each firm’s unique qualities History Strategy Success at Implementation

BA 495 - Petersen 71 Core Competencies--Cautions and Reminders It should never be taken for granted that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become Core Rigidities All core competencies have the potential to become Core Rigidities Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

BA 495 - Petersen 72 Chapter 2 External Environment Chapter 3 Internal Environment The Strategic ManagementProcess ManagementProcess Strategic Mission A statement of the firm’s unique purpose and the scope of its operations in product market terms Strategic Intent Strategic Mission Leveraging of a firm’s resources, capabilities and core competencies to accomplish what may appear to be unattainable goals in the competitive environment

BA 495 - Petersen 73 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Competitive Advantage Gained through Core Competencies Discovering Core Competencies Value Chain Analysis Discovering Core Competencies Valuable Rare Costly to Imitate Nonsubstitutable * * * * Outsource* Criteria of Sustainable Advantages

BA 495 - Petersen 74 Chapter 4 Business-Level Strategy Dr. Candace Petersen BA 495 Dr. Candace Petersen BA 495

BA 495 - Petersen 75 Chapter 4 Business Level Strategy Chapter 2 External Environment Five Forces Analysis Chapter 3 Internal Environment Resources, Capabilities and Core Competencies Sustainable Competitive Advantage Sustainable Competitive Advantage

BA 495 - Petersen 76 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 Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

BA 495 - Petersen 77 Breadth of Competitive Scope Source of Competitive Advantage BroadTargetMarket NarrowTargetMarket Cost Focused Differen- tiation Focused Differen- tiation Cost Leadership Cost Leadership Differen- tiation Differen- tiation Focused Low Cost Generic Business Level Strategies Uniqueness

BA 495 - Petersen 78 Relatively standardized products Features acceptable to many customers Lowest competitive price Requirements Constant effort to reduce costs through: * * Building efficient scale facilities * * * * “State of the Art” manufacturing facilities * * Simplification of processes * * Minimizing costs of sales, R&D and service * * Monitoring costs of activities provided by outsiders Tight control of production costs and overhead Cost Leadership Business Level Strategy

BA 495 - Petersen 79 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy

BA 495 - Petersen 80 Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Inbound Logistics Inbound Logistics Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Located in Close Proximity with Suppliers

BA 495 - Petersen 81 Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Operations Efficient Plant Scale to Minimize Mfg. Costs Timing of Asset Purchases Policy Choice of Plant Technology Organizational Learning

BA 495 - Petersen 82 Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Outbound Logistics Outbound Logistics Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs Efficient Order Sizes Interrelationships with Sister Units

BA 495 - Petersen 83 Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Marketing & Sales National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Marketing & Sales

BA 495 - Petersen 84 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Service Effective Product Installations to Reduce Recalls Effective Product Installations to Reduce Recalls Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy

BA 495 - Petersen 85 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Procurement Systems and Procedures to Find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Procurement Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy

BA 495 - Petersen 86 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Technological Development Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy

BA 495 - Petersen 87 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Human Resource Management Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy

BA 495 - Petersen 88 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Firm Infrastructure Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Value Creating Activities common to a Cost Leadership Business Level Strategy Value Creating Activities common to a Cost Leadership Business Level Strategy

BA 495 - Petersen 89 2 2 How to obtain a Cost Advantage 1 1 Determine and Control Cost Drivers Alter production process Change in automation New distribution channel Direct sales in place of indirect sales New raw material New advertising media Backward integration Forward integration Change location relative to suppliers or buyers Reconfigure the as needed Value Chain

BA 495 - Petersen 90 Ranch Cattle Ship “On the Hoof” to Rail Center (Chicago) Slaughter into sides of beef “Boxed Cuts” at Markets Meat Packing Industry Old Way: Old Way: Example of Reconfiguring the Value Chain

BA 495 - Petersen 91 Example of Reconfiguring the Value Chain Ranch Cattle Ship “on the Hoof” to Rail Center (Chicago) Slaughter into sides of beef “Boxed Cuts” at Markets Old Way: Old Way: Iowa Beef Packers Save on shipping and cattle weight loss Utilize cheaper non-union rural labor New Way: New Way: New Way: Locate large automated plants near ranches Process into “Boxed Cuts” at plants Ship cuts already “Boxed” to Markets

BA 495 - Petersen 92 Choices that Drive Costs Economies of scale Asset utilization Capacity utilization pattern Value chain linkages Product features Interrelationships - Advertising & Sales - Logistics & Operations - Seasonal, cyclical - Order processing and distribution - Order processing and distribution Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Hiring, training, motivation

BA 495 - Petersen 93 Three Key Questions 2 2 How can a group of linked value activities be regrouped or reordered? 3 3 How might coalitions with other firms lower or eliminate costs? Gallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors 1 1 How can an activity be performed differently or even eliminated?

BA 495 - Petersen 94 The Major Risks involved with a Cost Leadership Business Level Strategy The Major Risks involved with a Cost Leadership Business Level Strategy Dramatic technological change could take away your cost advantage Focus on efficiency could cause Cost Leader to overlook changes in customer preferences Competitors may learn how to imitate Value Chain

BA 495 - Petersen 95 Breadth of Competitive Scope Source of Competitive Advantage BroadTargetMarket NarrowTargetMarket Cost Cost Leadership Cost Leadership Differen- tiation Differen- tiation Generic Business Level Strategies Uniqueness

BA 495 - Petersen 96 Value provided by unique features and value characteristics Command premium price Superior quality Key Criteria Differentiation Business Level Strategy Rapid innovation Prestige or exclusivity High customer service

BA 495 - Petersen 97 Differentiation Business Level Strategy Requirements Constant effort to differ- entiate products through: * Developing new systems and processes * Quality focus * * Maximize Human Resource contributions through low turnover and high motivation Capability in R&D * Shaping perceptions through advertising Value provided by unique features and value characteristics Command premium price Superior quality Rapid innovation Prestige or exclusivity High customer service

BA 495 - Petersen 98 Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy

BA 495 - Petersen 99 common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Inbound Logistics Inbound Logistics Superior handling of incoming raw materials to minimize damage and improve the quality of the final product

BA 495 - Petersen 100 common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Operations Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products

BA 495 - Petersen 101 common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Outbound Logistics Outbound Logistics Accurate and responsive order processing procedures Rapid and timely product deliveries to customers

BA 495 - Petersen 102 common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Marketing & Sales Extensive personal relationships with buyers Strong Coordination among functions in R&D, Marketing and Product Development Premium Pricing

BA 495 - Petersen 103 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Service Complete field stocking of replacement parts common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy

BA 495 - Petersen 104 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Procurement Located in Close Proximity with Suppliers Located in Close Proximity with Suppliers Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy

BA 495 - Petersen 105 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Technological Development Strong capability in basic research Investments in technologies to produce highly differentiated products Coordination among R&D, marketing and product development Coordination among R&D, marketing and product development common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy

BA 495 - Petersen 106 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Human Resource Management Compensation programs which encourage worker creativity and productivity Extensive use of subjective performance measures Superior personnel training common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy

BA 495 - Petersen 107 Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Primary Activities Support Activities A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Firm Infrastructure A companywide emphasis on producing high quality products Highly developed Information Systems to better understand customers’ purchasing preferences common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy common to a Value Creating Activities common to a Business Level Strategy Differentiation Business Level Strategy

BA 495 - Petersen 108 Differentiation Business Level Strategy Differentiation Value Chain activities Effectiveness with Differentiation grows out of Value Chain activities Heineken beer Raw materials Caterpillar tractors Service buyers’ needs quickly anywhere in the world Steinway pianos Raw materials & Workmanship Examples: Intel microprocessors Technological superiority Mercedes Benz autos Technology and Workmanship

BA 495 - Petersen 109 Creating barriers by perceptions of uniqueness Creating switching costs through differentiation Raising Buyers’ Performance 1 1 Lowering Buyers’ Costs 3 3 Sustainability is created through: 2 2 Create Value with Differentiation by:

BA 495 - Petersen 110 Drivers of Differentiation Unique product features Unique product performance Exceptional services Quality of inputs New technologies Exceptional skill or experience Detailed information Some Examples:

BA 495 - Petersen 111 The Major Risks involved with a Differentiation Business Level Strategy The Major Risks involved with a Differentiation Business Level Strategy Customers may decide that the cost of “uniqueness” is too great The means of uniqueness may no longer be valued by customers Competitors may learn how to imitate Value Chain

BA 495 - Petersen 112 Breadth of Competitive Scope Source of Competitive Advantage BroadTargetMarket NarrowTargetMarket Cost Cost Leadership Cost Leadership Differen- tiation Differen- tiation Generic Business Level Strategies Focused Differen- tiation Focused Differen- tiation Focused Low Cost Uniqueness

BA 495 - Petersen 113 Focus can allow you to direct resources to certain value chain activities to build competitive advantage May be able to serve a narrow market segment more effectively than industrywide competitors Firm may lack resources to compete industrywide Large firms may overlook small niches However..... Opportunities may exist because: * * * * * * * * Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies

BA 495 - Petersen 114 - Bang & Olufsen Upscale electronic components - Iams Company Premium pet foods - Snap-on tools High quality mechanics’ tools May be able to retrofit old factories to keep costs down Minimize R&D costs by copying innovators * * * * Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies

BA 495 - Petersen 115 Focused Differentiators may thrive by selecting a small market that is underserved by large players Custom manufacturers of parts for Harley-Davidson motorcycles * * Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies

BA 495 - Petersen 116 The Major Risks involved with a Focused Differentiation Business Level Strategy The Major Risks involved with a Focused Differentiation Business Level Strategy Firm may be “outfocused” by competitors Preferences of niche market may change to match those of broad market Large competitor may set its sights on your niche market

BA 495 - Petersen 117 Breadth of Competitive Scope Source of Competitive Advantage BroadTargetMarket NarrowTargetMarket Cost Cost Leadership Cost Leadership Differen- tiation Differen- tiation Generic Business Level Strategies Focused Differen- tiation Focused Differen- tiation Focused Low Cost Integrated Low Cost/ Differentiation Integrated Low Cost/ Differentiation Uniqueness

BA 495 - Petersen 118 May utilize Flexible Manufacturing Systems to create differentiated products at low costs Firms using an Integrated Strategy may: Adapt more quickly Learn new skills and technologies Leverage core competencies through Information Networks across multiple business units Integrated Low Cost/Differentiation Strategy May utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs

BA 495 - Petersen 119 Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise The risk is that the firm may become lacking a strong commitment to or expertise with either type of generic strategy The risk is that the firm may become “Stuck in the Middle” lacking a strong commitment to or expertise with either type of generic strategy Integrated Low Cost/Differentiation Strategy

BA 495 - Petersen 120 Integrated Low Cost/Differentiation Strategy Differentiation Low Cost Use a single aircraft model (Boeing 737) Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes 15 minute turnaround time No meals No reserved seats No travel agent reservations Focus on customer satisfaction New flight services for business travelers (Phones and faxes) New flight services for business travelers (Phones and faxes) High level of employee dedication Southwest Airlines

BA 495 - Petersen 121 Chapter 5 Competitive Dynamics Dr. Candace Petersen BA 495 Dr. Candace Petersen BA 495

BA 495 - Petersen 122 Factors Leading to More Complex Rivalry Declining emphasis on single, domestic markets and increasing emphasis on global markets Advances in communication technology make coordination easier across multiple markets Advances in technology and innovation have increased competitiveness of small and medium sized firms National barriers are falling due to the number and scope of trade agreements (GATT, NAFTA, EEC)

BA 495 - Petersen 123 Competitive Dynamics Results from a series of competitive actions and competitive responses among firms competing within a particular industry Competitive Rivalry Exists when two or more firms jockey with one another in the pursuit of better market position

BA 495 - Petersen 124 Actions and responses shape the competitive positions of each firm’s business level strategy Actions taken by one firm elicit responses from competitors A firm’s strategic conduct is dynamic in nature A firm’s strategic conduct is dynamic in nature Competitive responses lead to additional actions from the firm that acted originally Competitive Dynamics

BA 495 - Petersen 125 Relative Size Speed Innovation Quality Ability for Action and Response Outcomes Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Dependence on the Market Resource Availability Actor’s Reputation Competitive Slow, Standard or Fast Cycle Market Types Competitive Sustained Outcomes Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial or Market-Power Growth-Oriented Actions Feedback Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 126 Drivers of Competitive Behavior Motivation Capability Awareness Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 127 Drivers of Competitive Behavior Motivation Capability Do managers understand the key characteristics of competitors? Awareness Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 128 Does the firm have appropriate incentives to attack or respond? Drivers of Competitive Behavior Motivation Capability Awareness Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 129 Does the firm have the necessary resources to attack or respond? Drivers of Competitive Behavior Motivation Capability Awareness Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 131 Competitor Analysis Resource Similarity Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response Market Commonality

BA 495 - Petersen 132 Competitor Analysis Resource Similarity Do firms compete with each other in multiple markets? Market Commonality Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 133 Competitor Analysis Resource Similarity Market Commonality Multipoint competition tends to reduce competitive interactions, but increases the likelihood of response where interaction occurs For example, airlines price flights similarly, but respond quickly when competitors introduce promotional prices Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 134 Competitor Analysis Resource Similarity Do competitors possess similar types or amounts of resources? Market Commonality Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 135 Competitor Analysis Resource Similarity Market Commonality Firms are less inclined to attack a firm that is likely to retaliate Firms with dissimilar resources are more likely to attack Firms with similar resources are more likely to be aware of each other’s competitive moves Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 137 Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Dependence on the Market Resource Availability Actor’s Reputation Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 138 Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Firm Mover advantage can be substantial Type of Competitive Action Dependence on the Market Resource Availability Actor’s Reputation Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 139 Firms that take an initial competitive action Generally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologies First Mover

BA 495 - Petersen 140 Firms that take an initial competitive action Generally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologies Can earn above average profits until competitors respond Gain customer loyalty, helping to create a barrier to entry by competitors Advantage depends upon difficulty of imitation First Mover

BA 495 - Petersen 141 Second Mover Firms that respond to a First Mover’s actions Second Movers frequently imitate First Movers Should evaluate customers’ response before moving “Fast” Second Movers can capture some of initial customers and develop some brand loyalty Avoid some of the risks associated with First Move Speed of response often dictates success Must possess necessary capabilities to imitate Second Mover

BA 495 - Petersen 142 Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Dependence on the Market Resource Availability Actor’s Reputation Whether a competitor is likely to respond depends on several key factors Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 143 Types of Competitive Actions TacticalActionsTacticalActions Relatively easy to implement Relatively easy to reverse Undertaken to “fine tune” strategy Strategic Actions Significant commitments of specific & distinctive organizational resources Difficult to implement Difficult to reverse Major Acquisition Example

BA 495 - Petersen 144 Market Dependence Firms that are more dependent on a single industry are more likely to respond than are diversified firms Industry dependent firms will likely respond to either strategic or tactical actions Competitor Resources Smaller firms are more likely to respond to tactical actions Limited resources may lead to alternatives such as Strategic Alliances Gauging the Likelihood of Response

BA 495 - Petersen 146 Relative Size Quality Innovation Speed Firm size can have opposing effects on competitive dynamics Ability for Action and Response Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 147 Relative Size Quality Innovation Speed Quick response is crucial to both the first mover and the fast second mover Ability for Action and Response Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 148 Consistent innovation is required for market leadership in many dynamic industries Ability for Action and Response Relative Size Quality Innovation Speed Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 149 Exceeding customer expectations is a necessity to compete in the 1990s Ability for Action and Response Relative Size Quality Innovation Speed Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 151 Sustained Competitive Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Advantage Temporary Advantage Evolutionary Actions Growth-Oriented Actions Market-Power Actions Fast cycle markets are intensely dynamic and a first mover advantage is often unsustainable Evolutionary Outcomes Firms may cannibalize older generation products while introducing new innovative premium products Sustainable competitive advantage is unilkely Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 152 Some Firms Maintain Competitive Advantage in Fast-Cycle Markets by Seizing the Initiative Some Firms Maintain Competitive Advantage in Fast-Cycle Markets by Seizing the Initiative 1 Disrupting the Status Quo Identify new opportuntites to serve the customer by shifting the rules of competition through speed and variety 2 Creating Temporary Advantage Use superior knowledge of the customer, technology and the future to enhance customer orientation and empower workers 3 Seizing the Initiative Move aggressively into new areas of competition to create new advantage and undermine a competitor’s old advantage 4 Sustaining the Momentum Take several actions in a row in order to seize the initiative and create momentum to develop new advantages

BA 495 - Petersen 153 Strategies may be determined by the life cycle of the industry Younger firms and emerging industries are generally characterized by entrepreneurial actions Growth-oriented and Market-power strategies dominate established or mature industries Sustained Competitive Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Advantage Temporary Advantage Evolutionary Actions Growth-Oriented Actions Market-Power Actions Evolutionary Actions Growth-Oriented Actions Market-Power Actions Evolutionary Outcomes Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

BA 495 - Petersen 155 An Action-Based Model of the Industry Life Cycle An Action-Based Model of the Industry Life Cycle Key Task Exploiting Open Niches (Blind Spots) and Competitive Uncertainty Key Task Entrepreneurial Actions Growth-Oriented Actions Growth-Oriented Actions Market-Power Actions Market-Power Actions Exploiting Factors of Production Exploiting Market Position Firm Resource & Market Strength Market Strength Emerging Stage Growth Stage Mature Stage Time

BA 495 - Petersen 156 Chapter 6 Corporate-Level Strategy Dr. C. Petersen BA 495 Dr. C. Petersen BA 495

BA 495 - Petersen 157 - low cost - differentiation - integrated low cost/differentiation - low cost - differentiation - integrated low cost/differentiation - focused low cost - focused differentiation - focused low cost - focused differentiation How to create value for the corporation as a whole A Diversified Company has 2 levels of strategy How to create competitive advantage in each business in which the company competes Corporate-Level Strategy (Companywide Strategy) Business-Level Strategy (Competitive Strategy)

BA 495 - Petersen 158 What businesses should the corporation be in? How should the corporate office manage the array of business units? Corporate Strategy is what makes the corporate whole add up to more than the sum of it business unit parts Corporate Strategy concerns 2 key questions:

BA 495 - Petersen 159 Firms Vary by Degree of Diversification Single-business > 95% of revenues from a single business unit Low Levels of Diversification Dominant-business Between 70% and 95% of revenues from a single business unit Related-Diversified <70% of revenues from a single business unit Moderate to High Levels of Diversification Businesses share product, technological or distribution linkages Unrelated-Diversified Business units not closely related High Levels of Diversification

BA 495 - Petersen 160 Reasons for Diversification Motives to Enhance Strategic Competitiveness Economies of Scope Market Power Financial Economies Resources ManagerialMotives Incentives

BA 495 - Petersen 161 Reasons for Diversification ManagerialMotives Incentives and Resources with Neutral Effects of Strategic Competitiveness Anti-Trust Regulation Resources Incentives Tax Laws Low Performance Uncertain Future Cash Flows Firm Risk Reduction Tangible Resources Intangible Resources

BA 495 - Petersen 162 Reasons for Diversification ManagerialMotives Managerial Motives Causing Value Reduction Diversifying Managerial Employment Risk Increasing Managerial Compensation Resources Incentives

BA 495 - Petersen 163 Summary Model of the Relationship between Firm Performance and Diversification Resources DiversificationStrategy Incentives ManagerialMotives

BA 495 - Petersen 164 Adding Value by Diversification By developing economies of scope between business units in the firms which leads to synergistic benefits By developing market power which lead to greater returns Diversification most effectively adds value by either of two mechanisms

BA 495 - Petersen 165 Transferring Core Competencies Sharing Activities Alternative Diversification Strategies Efficient Internal Capital Market Allocation Restructuring Related Diversification Strategies Unrelated Diversification Strategies 1 2 3 4

BA 495 - Petersen 166 Sharing Activities Related Diversification Strategies 1 Alternative Diversification Strategies

BA 495 - Petersen 167 Sharing Activities Sharing Activities can enhance potential for or reduce the cost of differentiation Must involve activities that are crucial to competitive advantage Example: Shared order processing system may allow new features customers value or make more advanced remote sensing technology available Example: Procter & Gamble’s sharing of sales and physical distribution for disposable diapers and paper towels is effective because these items are so bulky and costly to ship Key Characteristics

BA 495 - Petersen 168 Transferring Core Competencies Related Diversification Strategies 2 Sharing Activities 11 Alternative Diversification Strategies

BA 495 - Petersen 169 Transferring Core Competencies Key Characteristics ** Exploits Interrelationships among divisions ** Start with Value Chain analysis Identify ability to transfer skills or expertise among similar value chains Exploit ability to share activities Two firms can share the same sales force, logistics network or distribution channels

BA 495 - Petersen 170 Transferring Core Competencies Sharing Activities Efficient Internal Capital Market Allocation Related Diversification Strategies Unrelated Diversification Strategies 1 2 3 Alternative Diversification Strategies

BA 495 - Petersen 171 Key Characteristics Firms pursuing this strategy frequently diversify by acquisition: Acquire sound, attractive companies Acquired units are autonomous Acquiring corporation supplies needed capital Portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs Add professional management & control to sub-units Sub-unit managers compensation based on unit results Efficient Internal Capital Market Allocation

BA 495 - Petersen 172 Efficient Internal Capital Market Allocation Assumptions Managers have more detailed knowledge of firm relative to outside investors Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own Firm need not risk competitive edge by disclosing sensitive competitive information to investors

BA 495 - Petersen 173 Transferring Core Competencies Sharing Activities Efficient Internal Capital Market Allocation Restructuring Related Diversification Strategies Unrelated Diversification Strategies 1 2 3 4 Alternative Diversification Strategies

BA 495 - Petersen 174 Key Characteristics Seek out undeveloped, sick or threatened organizations or industries Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations Restructuring Parent company (acquirer) intervenes and frequently: - Changes sub-unit management team - Shifts strategy - Infuses firm with new technology - Divests part of firm - Makes additional acquisitions to achieve critical mass - Enhances discipline by changing control systems

BA 495 - Petersen 175 Assumptions Requires keen management insight in selecting firms with depressed values or unforeseen potential Must do more than restructure companies Need to initiate restructuring of industries to create a more attractive environment Restructuring

BA 495 - Petersen 176 External Incentives Relaxation of Anti-Trust regulation allows more related acquisitions than in the past Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions Incentives to Diversify After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments

BA 495 - Petersen 177 Poor performance may lead some firms to diversify to attempt to achieve better returns Firm may diversify into different businesses in order to reduce risk Incentives to Diversify Internal Incentives Firms may diversify to balance uncertain future cash flows Managers often have incentives to diversify in order to increase their compensation and reduce employment risk, although effective governance mechanisms may restrict such abuses

BA 495 - Petersen 178 What Resources, Capabilities and Core Competencies do we possess that would allow us to outperform competitors? Is it possible to leapfrog competitors? What Core Competencies must we possess to succeed in a new product or geographic market? Will diversification break up capabilities and competencies that should be kept together? Will we only be a player in the new product or geographic market or will we emerge as a winner? What can the firm learn through its diversification? Is it organized properly to acquire such knowledge? Issues to Consider Prior to Diversification

BA 495 - Petersen 179 Chapter 7 Acquisition and Restructuring Strategies Dr. C. Petersen BA 495 Dr. C. Petersen BA 495

BA 495 - Petersen 180 Mergers and Acquisitions TakeoverTakeover An acquisition where the target firm did not solicit the bid of the acquiring firm Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage MergerMerger

BA 495 - Petersen 181 Buying established businesses reduces risk of start-up ventures Reasons for Acquisitions Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive Whirlpool buys Philips’ European appliance business Lower Cost and Risk of New Product Development Ford’s acquisition of Jaguar Increased Market Power Acquisition intended to reduce the competitive balance of the industry Borland’s acquisition of Ashton-Tate

BA 495 - Petersen 182 General Electric’s acquisition of NBC Reasons for Acquisitions Diversification Quick way to move into businesses when firm currently lacks experience and depth in industry Avoiding Excessive Competition Firms may acquire businesses in which competitive pressures are less intense than in their core business Increased Speed to Market Closely related to Barriers to Entry, allows market entry in a more timely fashion BMW’s acquisition of Rover Seagram’s acquisition of Universal Studios

BA 495 - Petersen 183 Problems with Acquisitions Integration Difficulties Differing cultures can make integration of firms difficult Inadequate evaluation of Target “Winners Curse” bid causes acquirer to overpay for firm Bridgestone acquisition of Firestone Pillsbury and Burger King Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows Campeau’s acquisition of Federated Stores

BA 495 - Petersen 184 Conglomerates of 1960s ATT and NCR Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits Overly Diversified Acquirer doesn’t have expertise required to manage unrelated businesses GE--prior to selling businesses and refocusing Managers Overly Focused on Acquisitions Managers lose track of core business by spending so much effort on acquisitions Too Large Large bureaucracy reduced innovation and flexibility Problems with Acquisitions

BA 495 - Petersen 185 Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness Friendly Acquisitions Friendly deals make integration go more smoothly Characteristics of Effective Acquisitions Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone

BA 495 - Petersen 186 FlexibilityFlexibility Has experience at managing change and is flexible and adaptable Characteristics of Effective Acquisitions Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy Low-to-Moderate Debt Merged firm maintains financial flexibility

BA 495 - Petersen 187 Downsizing Wholesale reduction of employees DownscopingDownscoping General Motors cuts 74,000 workers and closes 21 plants Reducing scope of operations Selectively divesting or closing non-core businesses Leads to greater focus Restructuring Activities Break up of ATT into three businesses in 1995

BA 495 - Petersen 188 Purchase involving mostly borrowed funds Generally occurs in mature industries where R&D and innovation are not central to value creation Focuses attention of management on shareholder value Leads to more value-based decision making Greater oversight by “active investor” board members High debt load commits cashflows to repay debt, creating strong discipline for management Leveraged Buyouts Increases concentration of ownership

BA 495 - Petersen 189 Downsizing Downscoping LeveragedBuyoutLeveragedBuyout Reduced Labor Costs Reduced Debt Costs High Debt Costs Loss of Human Capital Lower Performance Higher Performance Higher Risk Alternatives Short-Term Outcomes Long-Term Outcomes Restructuring and Outcomes Emphasis on Strategic Controls

BA 495 - Petersen 190 Chapter 8 International Strategy Dr. C. Petersen BA 495 Dr. C. Petersen BA 495

BA 495 - Petersen 191 International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence StrategicCompetitivenessOutcomes International Strategies Modes of Entry Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage InternationalBusiness-LevelStrategy Multidomestic Strategy GlobalStrategy Transnational Strategy Exporting Establishment of New Subsidiary Exporting StrategicAlliances Acquisition Management Problems and Risk Management Problems and Risk Higher Performance Returns Innovation

BA 495 - Petersen 192 Selling products or services outside of a firm’s domestic market Product Demand Develops and Firm Exports Products Firm Begins Production Abroad Production Becomes Standardized and is Relocated to Low Cost Countries Firm Introduces Innovation in Domestic Market 1 2 Foreign Competition Begins Production 3 4 5 International Strategy Lifecycle

BA 495 - Petersen 193 Large investment projects may require global markets to justify the capital outlays Aircraft manufacturers Boeing or McDonnell Douglas Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators Increase Market Share Domestic market may lack the size to support efficient scale manufacturing facilities Return on Investment Japanese electronics or automobile manufacturers Motivations for International Expansion

BA 495 - Petersen 194 Economies of Scale or Learning Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution - Can spread costs over a larger sales base - Increase profit per unit Location Advantages Low cost markets may aid in developing competitive advantage May achieve better access to: - Raw materials - Lower cost labor - Key suppliers - Key customers - Energy - Natural resources Motivations for International Expansion

BA 495 - Petersen 195 Factor Conditions Basic Factors - Land, labor Advanced Factors - Highly educated workers - Digital communications - Highly educated workers - Digital communications Generalized Factors - Capital, infrastructure Specialized Factors - Skilled personnel Demand Conditions Home country may support scale efficient operations by itself Firm Strategy, Structure & Rivalry Intense rivalry fosters industry competition Related & Supporting Industries - Japanese cameras & copiers - Italian shoes & leather - Japanese cameras & copiers - Italian shoes & leather Porter’s Determinants of National Advantage Home country of origin is crucial to International success

BA 495 - Petersen 197 International Low Cost International Differentiation Countries with advanced or specialized factor conditions most likely to use this strategy Japan, Germany, U.S. Usually located in home country Export to international markets Low value added operations in foreign countries High value added operations in home country Business-Level International Strategies

BA 495 - Petersen 198 International Focus Strategies International Integrated Low Cost/Differentiation Can be most effective in dealing with diverse markets Often relies upon flexible manufacturing, total quality management or rapid communication networks Technologically advanced firms follow focused low cost strategy Focused differentiation firms compete on the basis of image & design Third group competes on low price by imitating Business-Level International Strategies

BA 495 - Petersen 199 Type of Corporate Strategy selected will have an impact on the selection and implementation of the business-level strategies Some Corporate strategies provide individual country units with flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units Three Corporate Strategies Global Strategy Transnational Strategy Multi-Domestic Strategy International Corporate Strategy Corporate-Level International Strategies

BA 495 - Petersen 200 Strategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local markets Business units in each country are independent of each other Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe Multi-Domestic Strategy International Corporate Strategy Corporate-Level International Strategies

BA 495 - Petersen 201 Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage) Global Strategy International Corporate Strategy Corporate-Level International Strategies

BA 495 - Petersen 202 Seeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirements for strong central control and coordination to achieve efficiency and local flexibility and decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage Transnational Strategy International Corporate Strategy Corporate-Level International Strategies

BA 495 - Petersen 203 When is each strategy appropriate? Need for Global Integration Need for Local Market Responsiveness Low High LowHigh International Corporate Strategy

BA 495 - Petersen 205 Common way to enter new international markets No need to establish operations in other countries May have high transportation costs May have less control on marketing and distribution May encounter high import tariffs Difficult to customize products Establish distribution channels through contractual relationships Exporting International Corporate Strategy Choice of International Entry Mode

BA 495 - Petersen 206 Firm authorizes another firm to manufacture and sell its products Licensing firm is paid a royalty on each unit produced and sold Licensee takes risks in manufacturing investments Licensing firm loses control over product quality and distribution Least risky way to enter a foreign market Relatively low profit potential A significant risk is that licensor learns technology and competes when license expires Licensing International Corporate Strategy Choice of International Entry Mode

BA 495 - Petersen 207 Enable firms to shares risks and resources to expand into international ventures Most joint ventures (JVs) involve a foreign company with a new product or technology and a host company with access to distribution or knowledge of local customs, norms or politics May experience difficulties in merging disparate cultures May not understand the strategic intent of partners or experience divergent goals Strategic Alliances International Corporate Strategy Choice of International Entry Mode

BA 495 - Petersen 208 Enable firms to make most rapid international expansion Can be very costly Usually require complex and costly negotiations Potentially disparate corporate cultures Legal and regulatory requirements may present barriers to foreign ownership Acquisitions International Corporate Strategy Choice of International Entry Mode

BA 495 - Petersen 209 Most costly and complex of entry alternatives Achieves greatest degree of control Maintain control over technology, marketing and distribution May need to acquire expertise and knowledge that is relevant to host country Potentially most profitable, if successful Could require hiring host country nationals or consultants at high cost New Wholly-Owned Subsidiary International Corporate Strategy Choice of International Entry Mode

BA 495 - Petersen 211 International diversification facilitates innovation in the firm May generate resources necessary to sustain a large- scale R&D program Generally related to above-average returns, assuming effective implementation and management of international operations Provides larger market to gain more and faster returns form investments in innovation International Corporate Strategy Strategic Competitiveness Outcomes International diversification provides greater economies of scope and learning

BA 495 - Petersen 213 National government instability may create potential problems for internationally diversified firms Legal authority obtained from previous administra- tion may become invalid Potential changes in attitudes or regulations regarding foreign ownership Potential for nationalization of private firms’ assets Political Risk Major Risks of International Diversification

BA 495 - Petersen 214 Economic risks are interdependent with political risks Differences in inflation rates may affect internationally diversified firms’ ability to compete Differences and fluctuations in international currencies may affect value of assets and liabilities and affect prices and ultimately the ability to compete Potential for nationalization of private firms’ assets Economic Risk Major Risks of International Diversification

BA 495 - Petersen 215 Chapter 9 Cooperative Strategy Dr. C. Petersen BA 495 Dr. C. Petersen BA 495

BA 495 - Petersen 216 Partnerships between firms where their are combined to pursue mutual interests to are combined to pursue mutual interests to DevelopDevelop ManufactureManufacture DistributeDistribute GoodsGoods ServicesServices Firm A Firm B Core Competencies Core Competencies Capabilities Resources Strategic Alliances

BA 495 - Petersen 217 Independent firm is created by the joining assets from two other firms where each contributes 50% of the total Dow Corning from Dow Chemical and Corning Inc. Joint Venture Partnership where the two partners do not own equal shares Chrysler and Mitsubishi Automotive Equity Strategic Alliance Contract is given to supply, produce or distribute a firm’s goods or services (without equity sharing) Chrysler’s supplier network Non-Equity Strategic Alliance Types of Strategic Alliances

BA 495 - Petersen 218 Standard Cycle Market * Gain market power * Gain access to complementary resources * Overcome trade barriers * Meet competitive challenge * Pool resources for large projects * Learn new business techniques Slow Cycle Market * Gain access to a restricted market * Establish franchise in a new market * Maintain market stability Fast Cycle Market * Maintain market leadership * Form an industry technology standard * Share risky R&D expenses * Overcome uncertainty * Increase speed of product, service or market entry Reasons for Alliances by Market Type

BA 495 - Petersen 219 Business- Level Complementary Alliances Competition Reduction Alliances Competition Response Alliances Uncertainty Reduction Alliances Corporate- Level Diversification Alliances Synergistic Alliances FranchisingFranchising Types of Strategic Alliances Business- Level Complementary Alliances Competition Reduction Alliances Competition Response Alliances Uncertainty Reduction Alliances

BA 495 - Petersen 220 Partnerships that build on the complementarities among firms that make each more competitive Complementary Strategic Alliances Supplier Value Chain Buyer Value Chain Vertical Alliance Include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage Japanese manufacturers rely on close relationships among suppliers to implement Just-In- Time inventory systems Types of Business-Level Strategic Alliances

BA 495 - Petersen 221 Used to increase the strategic competitiveness of the partners Product development agreements between Microsoft and Dreamworks SKG oror Marketing agreements between Delta and SwissAir Complementary Strategic Alliances Types of Business-Level Strategic Alliances Horizontal Alliance Supplier Value Chain Buyer Value Chain

BA 495 - Petersen 222 Avoiding competition by using tacit collusion such as price fixing Competition Reduction Strategies OPEC petroleum cartel Firms join forces to respond to a strategic action of another competitor Competition Response Strategies DirecTV has agreement with Time Warner for exclusive programming Alliances can be used to hedge against risk and uncertainty Uncertainty Reduction Strategies ATT acquires Teleport, a provider of telecommunications services to business customers Types of Business-Level Strategic Alliances

BA 495 - Petersen 223 Allows a firm to expand into a new product or market area with an acquisition Diversifying Alliances Samsung Group joins with Nissan to build new autos Create economies of scope between two or more firms, creating synergy across multiple businesses between firms Synergistic Strategic Alliances Allows firms to grow and relatively strong centralized control without significant capital investments FranchisingFranchising McDonald’s or Century 21 Sony shares development with many small firms Types of Corporate-Level Strategic Alliances

BA 495 - Petersen 224 Allows risk sharing by reducing financial investment Host partner knows local market and customs International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints However.... Must gauge partner’s strategic intent so they do not gain access to important technology and become a competitor International Cooperative Strategies

BA 495 - Petersen 225 Network strategies involve a group of interrelated firms that work for the common good of all Japanese keiretsus or U.S. R&D consortia The three types of networks are: Stable Networks Dynamic Networks Internal Networks Network Strategies

BA 495 - Petersen 226 Long term relationships that often appear in mature industries with largely predictable market cycles Stable network NIKE’s relationships with suppliers and distributors Management system used to coordinate a global web of suppliers and customers Internal network Asea Brown Boveri’s network Arrangements that evolve in industries with rapid technological change leading to short product life cycles Dynamic network Apple computer and Sharp electronics Network Strategies

BA 495 - Petersen 227 While cooperative systems can offer many advantages, there are also significant risks associated with them Poor contract development Misrepresentation of partners’ competencies Failure of partners to make complementary resources available Being held hostage through specific investments made with partner Misunderstanding a partner’s strategic intent Competitive Risks with Cooperative Strategies

BA 495 - Petersen 228 Competitive Risks Risk and Asset Management Approaches Outcome Detailed contracts and monitoring Value Creation Managing Risks in Cooperative Strategies Inadequate contracts Misrepresentation of competencies Partner fails to use complementary resources Holding alliance partner’s specific investments hostage ** ** ** ** Detailed contracts and monitoring Developing trusting relationships ** **

BA 495 - Petersen 1 Chapter 1 Strategic Management and Strategic Competitiveness Strategic Management and Strategic Competitiveness BA 495 Dr. Candace.

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BA 495 - Petersen 1 Chapter 1 Strategic Management and Strategic Competitiveness Strategic Management and Strategic Competitiveness BA 495 Dr. Candace.

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