1. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 1 Chapter 6 Prepared by Deborah Baker Texas Christian University Management 4th Edition Chuck Williams Organizational Strategy

2. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 2 What Would You Do? TiVo Headquarters, Alviso, CA  TiVo, the first digital video recorder service, has become a popular concept  However, five years after its startup, TiVo still is not profitable and is facing heavy competition from other DVR services  TiVo must find a niche that allows it to survive, differentiate its products and services, and must consider a counterattack against its competitors If you were TiVo’s new CEO, what would you do?

3. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 3 Basics of Organizational Strategy After reading these sections, you should be able to: 1. indicate the components of sustainable competitive advantage and explain why it is important. 2. describe the steps involved in the strategy-making process.

4. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 4 Sustainable Competitive Advantage Resources The assets, capabilities, processes, information, and knowledge that the organization controls The assets, capabilities, processes, information, and knowledge that the organization controls Competitive Advantage Providing greater value for customers than competitors can Sustainable Competitive Advantage Sustainable Competitive Advantage A competitive advantage that other companies have tried unsuccessfully to duplicate 1 1

5. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 5 Requirements for Sustainable Competitive Advantage Sustainable Competitive Advantage Sustainable Competitive Advantage Valuable Resources Non- Substitutable Resources Imperfectly Imitable Resources Rare Resources Adapted from Exhibit 6.1 1 1

6. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 6 Strategy-Making Process Assess need for strategic change Conduct a Situational Analysis Choose Strategic Alternatives 2 2

7. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 7 Assessing the Need for Strategic Change  Avoid Competitive Inertia  a reluctance to change strategies or competitive practices that have been successful in the past  Look for Strategic Dissonance  a discrepancy between a company’s intended strategy and the strategic actions managers take when implementing that strategy 2.1 Step 1 Assess need for strategic change

8. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 8 Doing the Right Thing 2.1 Is Ethics an Overlooked Source of Competitive Advantage?  Volvo’s reputation for safe cars has been a source of competitive advantage  Johnson & Johnson is admired for its response to the Tylenol cyanide contamination incidence Should ethics be the first source of competitive advantage? Probably not…  Start with low costs, good service, or unique product capabilities. Use ethics as a way to differentiate your company from the competition. Is Ethics an Overlooked Source of Competitive Advantage?  Volvo’s reputation for safe cars has been a source of competitive advantage  Johnson & Johnson is admired for its response to the Tylenol cyanide contamination incidence Should ethics be the first source of competitive advantage? Probably not…  Start with low costs, good service, or unique product capabilities. Use ethics as a way to differentiate your company from the competition.

9. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 9 What Really Works Strategic Planning & Profits for Big Companies 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% probability of success72% Strategy Making for Big Firms 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% probability of success75% Strategic Planning & Growth for Big Companies 2.1

10. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 10 What Really Works Strategic Planning & Profits for Small Companies 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% probability of success61% Strategy Making for Small Firms 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Strategic Planning & Growth for Big Companies probability of success62% 2.1

11. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 11 Strategic Planning & External Growth Through Acquisitions 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% probability of success 45% External Growth Through Acquisitions 2.1 What Really Works

12. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 12 Situational Analysis S S W W O O T T Strengths Weaknesses Opportunities Threats Internal External 2.2

13. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 13 Situational Analysis Strengths Weaknesses Distinctive Competence Core Capability INTERNALINTERNAL Opportunities Threats Environmental Scanning Strategic Groups Shadow-Strategy Task Force EXTERNALEXTERNAL Adapted from Exhibit 6.4 2.2

14. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 14 Strategic Groups  Core Firms  central companies in a strategic group  Secondary Firms  firms that follow related, but somewhat different, strategies than do core firms  Transient Firms  companies whose strategies change from one strategic position to another  Shadow-strategy task force  seeks out its own company’s weaknesses and determine how other companies could exploit them 2.2

15. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 15 Strategic Groups Exhibit 6.5 2.2

16. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 16 Choosing Strategic Alternatives  Risk-Avoiding Strategy  protect an existing competitive advantage  Risk-Seeking Strategy  extend or create a sustainable competitive advantage  Strategic Reference Points  targets used by managers to determine if the firm has developed the core competencies it needs to achieve a sustainable competitive advantage 2.3

17. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 17 Menard’s : Risk Seeking

18. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 18 Strategic Reference Points Adapted from Exhibit 6.6 2.3

19. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 19 Corporate, Industry, and Firm-Level Strategies After reading these sections, you should be able to: 3. explain the different kinds of corporate-level strategies. 4. describe the different kinds of industry-level strategies. 5. explain the components and kinds of firm-level strategies.

20. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 20 Corporate-Level Strategies Corporate-Level Strategy Corporate-Level Strategy The overall organizational strategy that addresses the question “What business(es) are we in or should we be in?” The overall organizational strategy that addresses the question “What business(es) are we in or should we be in?” 3 3

21. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 21 Corporate-Level Strategies 3 3  Acquisitions, unrelated diversification, related diversification, single businesses  BCG Matrix  Stars  Question marks  Cash cows  Dogs  Acquisitions, unrelated diversification, related diversification, single businesses  BCG Matrix  Stars  Question marks  Cash cows  Dogs PORTFOLIO STRATEGY  Growth  Stability  Retrenchment/ recovery  Growth  Stability  Retrenchment/ recovery GRAND STRATEGIES Adapted from Exhibit 6.7

22. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 22 BCG Matrix Relative Market Share Market Growth SmallLarge Low High Question Marks Stars Dogs Cash Cows 3.1

23. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 23 BCG Matrix companies with a small share of a fast-growing market Question Marks companies with a large share of a fast-growing market StarsStars companies with a small share of a slow-growing market DogsDogs companies with a large share of a slow-growing market CashCowsCashCows 3.1

24. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 24 BCG Matrix Relative Market Share Market Growth SmallLarge Low High Question Marks Company A Company B Stars Company C Company D Dogs Company H Company G Cash Cows Company F Company E    Adapted from Exhibit 6.8 3.1

25. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 25 Diversification and Risk Risk Low High Single Business Related Diversification Unrelated Diversification Adapted from Exhibit 6.9 3.1 Relationship Between Diversification and Risk

26. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 26 Problems with Portfolio Strategy  Unrelated diversification does not reduce risk.  Present performance is used to predict future performance.  Cash cows fail to aggressively pursue opportunities and defense themselves from threats.  Being labeled a “cash cow” can hurt employee morale.  Companies often overpay to acquire stars.  Acquiring firms often treat stars as “conquered foes.”

27. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 27 Grand Strategies Growth Strategy focuses on increasing profits, revenues, market share, or number of places to do business Stability Strategy Stability Strategy focuses on improving the way in which the company sells the same products or services to the same customers focuses on improving the way in which the company sells the same products or services to the same customers Retrenchment Strategy focuses on turning around very poor company performance by shrinking the size or scope of the business focuses on turning around very poor company performance by shrinking the size or scope of the business 3.2

28. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 28 Industry-Level Strategies Five Industry Forces Positioning Strategies Positioning Strategies Adaptive Strategies 4 4

29. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 29 Porter’s Five Industry Forces Adapted from Exhibit 6.12 Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitutes Threat of Substitutes Threats of New Entrants Character of Rivalry Character of Rivalry 4.1

30. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 30 Positioning Strategies Cost Leadership Differentiation Focus Strategy 4.2

31. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 31 Differentiation

32. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 32 Adaptive Strategies Defenders  seek moderate growth  retain customers Defenders  seek moderate growth  retain customers Prospectors  seek fast growth  emphasize risk taking innovation Prospectors  seek fast growth  emphasize risk taking innovation Analyzers  blend of defender & prospector strategies  imitate other’s successes Analyzers  blend of defender & prospector strategies  imitate other’s successes Reactors  use an inconsistent strategy  respond to changes Reactors  use an inconsistent strategy  respond to changes 4.3

33. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 33 Firm-Level Strategies Basics of Direct Competition Strategic Moves in Direct Competition Strategic Moves in Direct Competition Entrepreneurship and Intrapreneurship 5 5

34. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 34 Firm-Level Strategies DIRECT COMPETITION Market commonality Resource similarity STRATEGIC MOVES OF DIRECT COMP. ENTREPRENEURIAL INTRAPRENEURIAL ORIENTATION Attack Autonomy Response Innovativeness Risk taking Proactiveness Competitive Aggressiveness 5 5

35. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 35 Firm-Level Strategies Adapted from Exhibit 6.13 5 5 Market Commonality Resource Similarity Entering market is most forceful attack. Exiting market is clear defensive signal of retreat. Entrepreneurship is strategy of entering established markets or developing new market. Firm A Firm B Attack Response

36. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 36 Direct Competition Adapted from Exhibit 6.14 5.1 Resource Similarity LowHigh Low Market Commonality III IIIIV McDonald’s Burger King Wendy’s Luby’s Cafeteria Subway

37. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 37 Strategic Moves of Direct Competition 5.2 Attack A competitive move designed to reduce a rival’s market share or profits. Response A competitive countermove, prompted by a rival’s attack, to defend or improve a company’s market share or profit.

38. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 38 Strategic Moves of Direct Competition 5.2 Types of Responses 1. Match or mirror your competitor’s move. 2. Respond along a different dimension from your competitor’s move or attack.

39. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 39 Strategic Moves of Direct Competition Adapted from Exhibit 6.15 5.2 Competitor Analysis Interfirm Rivalry: Action & Response Strong Market Commonality Less Likelihood of an Attack Weak Market Commonality Greater Likelihood of an Attack Strong Resource Commonality Less Likelihood of a Response Low Resource Commonality Greater Likelihood of a Response

40. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 40 Entrepreneurship and Intrapreneurship  Entrepreneurship  the process of entering new or established markets with new goods or services  Intrapreneurship  entrepreneurship within an existing organization  Entrepreneurial orientation  the set of processes, practices, and decision- making activities that lead to new entry 5.3

41. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 41 Key Dimensions of Entrepreneurial Orientation Risk Taking Autonomy Innovativeness Proactiveness Competitive Aggressiveness 5.3

42. Chapter 6 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 42 Entrepreneurship