1. BM 499: Origins of Strategy Session 2 Ghemawat, Chapter One
Darral G. Clarke
Professor of Management
Darral G Clarke for BM 499

2. Historical overview: Theory of the Firm
Dismissed as a strategic planning paradigm:
Too hard to understand
Not linked to realm of top management
But, it is fundamental to understanding strategy P
Profit Q
Darral G Clarke for BM 499

3. Historical overview: HBS and the Concept of Strategy
Andrews, The Concept of Corporate Strategy, (1971)
Strengths and Weaknesses
Opportunities and Threats
Nice managerial idea--but analytically limited
No insight for:
identifying SWOTs
evaluating alternative strategies
what to do
Darral G Clarke for BM 499

4. Andrews’ Strategy Framework
Environmental Conditions and Trends
Economic
Technical
Physical
Political
Social
Community
Nation
World
Opportunities and Risks
Identification
Inquiry
Assessment of Risk
Consideration of all combinations
Evaluation to determine best match of opportunity and resources
Choice of Products and Markets
Economic Strategy
Distinctive Competence
Capabilities:
Financial
Managerial
Functional
Organizational
Reputation
History
Corporate Resources
As extending or constraining opportunity Identification of strengths and weaknesses Programs for increasing capability
Source: Kenneth R. Andrews, The Concept of Corporate Strategy, 1971
Darral G Clarke for BM 499

5. BCG Portfolio Model The first “strategic model”
How to think about managing a collection of companies
Based on three concepts
Product life-cycle
Experience--Costs decline with accumulated volume
Relative market share
Relative
Share:
High
Relative Share
Low
Market Growth Rate
Cash Cow
Star
Dog
Problem Child
Darral G Clarke for BM 499

6. Conceptual underpinnings: the product life cycle
The cash flow generated by a company varies predictably across its life
Revenue
Positive Cash
Negative Cash $
time
Cost
Darral G Clarke for BM 499

7. Product life cycle & Market position
The product life cycle profitability pattern can be approximated by a simple equation:
Profit = Industry size(t0)* Industry growth rate * market position * company profit margin
Industry growth rate and relative market share became the key BCG variables
Darral G Clarke for BM 499

8. Experience Curve for Semiconductor Memories
1976
100
1977 75
1978 50
Price per bit
(Millicent's)
1979 25
1980 10
1981
1982
1983
1984
0.1
1.0 10
100
Cumulated output
(bits x 1012)
Source: Integrated Circuit Engineering Corporation
Darral G Clarke for BM 499

9. Conceptual Underpinnings: Experience
log(Cost/unit) S’
S’’ B’
B’’
log(Experience)
log(Cumulative Volume)
Darral G Clarke for BM 499

10. Portfolio Underpinnings: Market Share
ROI
PIMS project: Buzzell, Gale, Schoeffler
Darral G Clarke for BM 499

11. BCG Generic strategy: Price leadership$ / u n i t
Price C o s t
time
Darral G Clarke for BM 499

12. Portfolio Models: Flow of Funds
High
Market Growth Rate
Relative
Share
Cash Cow
Star
Dog
Problem Child
(Harvest)
(Divest)
(????)
(Build)
Darral G Clarke for BM 499

13. Problems in Portfolio Paradise: Experience
log(Cost/unit)
Cost/unit S’
S’’ B’ S’
S’’
B’’ B’
B’’
log(Experience (Cumulative Volume)
Volume
Experience advantages run out!
What causes it in the first place?
Darral G Clarke for BM 499

14. Problems in Portfolio Paradise: Market share
Profitability not directly related to market share!
Superior Value
Delivery
Market
Share
ROI
Phillips and Antarasian
Darral G Clarke for BM 499

15. Problems with BCG Approach
Experience
Declining costs are not universal—experience declines become minimal
Focus on cost decreases innovation and long-run competitiveness
Experience is not proprietary
Portfolio models
Classification problems—ambiguity and bias
Capital may not be the only, or even a, constrained resource
Balance is achieved by reducing the overall profitability of the combined firm
May lead to analytical detachment at the expense of insight and creativity
Neglect of technological development
Darral G Clarke for BM 499

16. The Industry Attractiveness-Business Strength Matrix
High
Medium
Low
Investment
and
Growth
Selective
Growth
High
Selectivity
Selective
Growth
Harvest/
Divest
Medium
Selectivity
Business Strength
Harvest/
Divest
Harvest/
Divest
Harvest/
Harvest/
Low
Selectivity
Divest
Divest

17. Two Determinants of Profitability
Environmental Attractiveness
Competitive
Position
Advantage
Disadvantage
Low
High a

18. An Expanded Version of Generic Strategies
Broader set of cost structures
More diverse set of competitive environments
Apply economic theory of long run average cost
Volume
Cost/unit
LRAC
Experience
Scale
New technology
Darral G Clarke for BM 499

19. Strategy and long-run average cost
Cost advantage from volume
Low
High
Ability to
differentiate
product
Fragmented
Profitable
&
Defensible
Stalemate
Volume
Darral G Clarke for BM 499

20. Competitive Strategy and Long Run Cost/Differentiation I
Volume Industry
Low cost leadership type markets
There is an advantage in scale or technology
Stalemate Industry
Can’t differentiate
Economies of scale, experience common to competitors
No process innovation
Darral G Clarke for BM 499

21. Competitive Strategy and Long Run Cost/Differentiation II
Fragmented Industry
Differentiation is key competitive factor
Niche strategy
Volume in niches inadequate to achieve volume cost advantages
Profitable and defensible industry
Differentiated product
Customer preference
Low cost producer of differentiated product
Transitory industry
Cost advantage based on labor
Cost advantage based on any other temporary advantage
Darral G Clarke for BM 499

22. Use of Strategic Planning Paradigms
Use for insight and structure
Have I considered the important factors?
Is structure consistent with “orthodox strategy?”
What is inconsistent?
Does it indicate a problem?
Does it indicate an opportunity?
Be creative in determining strategy
Orthodox strategy can still be creatively defined and executed
Unorthodox strategy can surprise competitors
Test detail of strategy against “orthodox”
Does the value chain make sense?
Balance short run and long run considerations
Darral G Clarke for BM 499