Business Strategy (lecture notes, book and slides), Dispense di Strategia d'impresa

Scarica Business Strategy (lecture notes, book and slides) e più Dispense in PDF di Strategia d'impresa solo su Docsity! LESSON 1 Strategy is about success. Strategy differs from planning because it is not a detailed plan or program of instructions; but it's a unifying theme that gives coherence in directions to the actions and decisions of an individual or an organization. A brief history of strategy Enterprises need business strategies for much the same reasons that armies need military strategies: to give direction and purpose to deploy resources in the most effective manner and to coordinate the decisions made by different individuals. Many of the concepts and theories of business strategy in fact are were born in the military world. The term ‘strategy’, derives from the Greek word strategia, that means ‘generalship’. However, the concept of strategy did not originate with the Greeks. The first treatise on strategy, in fact, was written in about 500 BC and it is called ‘the art of war’, by Sun Tzu. Case 1: The success of Lady Gaga Stefani Joanne Angelina Germanotta, better known as Lady Gaga, is the most successful popular entertainer to emerge in the 21st century. Her three albums, The Fame, released August 2008, Born This Way, released May 2011, and Artpop, released November 2013, sold a total of 26 million copies by the end of 2013. Her Monster Ball completed a 2009 concert world tour that grossed $227.4 million (the highest for any debut artist). She has earned five Grammy music awards and 13 MTV video music awards and places on Forbes’ listings of The World’s 100 Most Powerful Women (though some way behind German Chancellor Angela Merkel). Since dropping out of NYU’s Tisch School of the Arts in 2005, she has shown total commitment to advancing her career as an entertainer and developing her Lady Gaga persona. Gaga’s music is an appealing pastiche of Seventies glam, Eighties disco and Nineties Europop. One music critic, Simon Reynolds, described it as, ‘ruthlessly catchy, noughties pop glazed with Auto- Tune and undergirded with R&B-ish beats’. 1 Her songs embody themes of stardom, love, religion, money, identity, liberation, sexuality and individualism. However, music is only one element in the Lady Gaga phenomenon – her achievement is based less upon her abilities as a singer or songwriter and more upon her establishing a persona which transcends pop music. Like David Bowie and Madonna before her, Lady Gaga is famous for being Lady Gaga. The Gaga persona comprises a multimedia, multifaceted offering built from an integrated array of components that include her music, her stunning visual appearance, newsworthy events, distinctive social attitudes, her personality and a set of clearly communicated values. Key among these is visual impact and theatricality. Lady Gaga’s outfits have set new standards in eccentricity and innovation. Her dresses – including her plastic bubble dress, meat dress and ‘decapitated-corpse dress’ – together with weird hairdos, extravagant hats and extreme footwear (she met President Obama in 16-inch heels) – are as well- known as her hit songs, and her music is promoted through visually stunning videos that combine fantasy, sex, sadism and science fiction. The variety of visual images she projects is such that her every appearance creates a buzz of anticipation as to her latest incarnation. Lady Gaga has established a business model that recognizes the realities of the post- digital world of entertainment. Like Web 2.0 pioneers such as Facebook and Twitter, Gaga has followed the dictum ‘first build market presence then monetize that presence’. She builds market presence through a range of online channels: her website, YouTube, Facebook and Twitter. With 2.8 billion YouTube views, 64 million Facebook fans and 41 million Twitter followers, she is outranked in online presence only by Justin Bieber and Katy Perry. Her emphasis on visual imagery reflects the ways in which her fame is converted into revenue. Music royalties are dwarfed by her concert earnings. Her other revenue sources – merchandizing deals, endorsements and product placements – are also linked to her market presence. Common characteristics of strategy decisions Strategic decisions, share three common characteristics: • they are important • they involve a significant commitment of resources; • they are not easily reversible Definitions of strategy Strategy has been examined from a number of different academic disciplines: • military strategy (e.g. Sun Tzu, Machiavelli) • psychology (e.g. Belbin) • sociology (e.g. Pfeffer and Salancik) • economics (e.g. Porter, Penrose) Strategy is by its very nature interdisciplinary, but economics has (arguably) been the most influential discipline • Economics is about the allocation of resources – both in markets and firms – and deals with performance What is Strategy and how can we identify it? In its broadest sense, strategy is the means by which individuals or organizations achieve their objectives. Common to definitions of business strategy is the notion that strategy is focused on achieving certain goals; that the critical actions which make up a strategy involve allocation of resources; and that strategy implies consistency, integration or cohesiveness. Yet, as we have seen, the conception of firm strategy has changed greatly over the past half century. As the business environment has become more unstable and unpredictable, so strategy has become less concerned with detailed plans and more about the quest for success. This is consistent with our starting point to the chapter. If we think back to Jeff Bezos and Lady Gaga, neither wrote detailed strategic plans but both possessed clear ideas of what they wanted to achieve and how they would achieve it. This shift in emphasis from strategy as plan to strategy as direction does not imply any downgrading of the role of strategy. Certainly, in a turbulent environment, strategy must embrace flexibility and responsiveness. It is precisely in these conditions that strategy becomes more rather than less important. In an environment of uncertainty and change, a clear sense of direction is essential to the pursuit of objectives. When the firm is buffeted by unforeseen threats and when new opportunities are constantly appearing, strategy becomes a vital tool to navigate the firm through stormy seas. Example: the firm is apple, and the industry environment is technology Even if we know how to describe a firm’s strategy, where do we look to find what strategy a firm is pursuing? Strategy is located in three places: in the heads of the chief executive, senior managers and other members of the organization; in the top management team’s articulations of strategy in speeches and written documents; and in the decisions through which strategy is enacted. Only the last two are observable. While the most explicit statements of strategy – in board minutes and strategic planning documents – are almost invariably confidential, most companies, and public companies in particular, see value in communicating their strategy to employees, customers, investors and business partners and, inevitably, to the public at large. Collis and Rukstad identify a hierarchy of strategy statements: • The mission statement is the basic statement of organizational purpose; it addresses ‘Why we exist’. • A statement of principles or values outlines 'What we believe in and how we will behave'. • The vision statement projects ‘What we want to be’. • The strategy statement articulates ‘What our competitive game plan will be’. Collis and Rukstad argue that the game plan should comprise three definitive components of strategy: objectives, scope (where we will compete) and advantage (how we will compete). A version of some or all of these statements is typically found on the corporate pages of companies’ websites. More detailed statements of strategy, including qualitative and quantitative medium-term targets, are often found in top management presentations to analysts which are typically included in the ‘For investors’ pages of company websites. More detailed information on scope (Where?) and advantage (How?) can be found in companies’ annual reports but this kind of information can be difficult to find for privately owned companies. The usefulness of public statements of strategy is, however, limited by their role as public relations vehicles. This is particularly evident in vision and mission statements, which are frequently grandiose and clichéd. Hence, explicit statements of strategy need to be checked against decisions and actions: • Where is the company investing its money? Notes to financial statements often provide detailed breakdowns of capital expenditure by region and business segment. • What technologies is the company developing? Identifying the patents that a company has filed (using the online databases of the US and EU patent offices) indicates the technological trajectory it is pursuing. • What new products have been released, major investment projects initiated and/or top management hires made? A company’s press releases usually announce these strategic decisions. Identifying a firm’s strategy requires drawing upon multiple sources of information in order to build an overall picture of what the company says it is doing and what it is actually doing. Corporate Versus Business Strategy When discussing strategy a distinction is commonly made between corporate strategy and business strategy. Corporate strategy defines the scope of the firm in terms of the industries and markets in which it competes. Corporate strategy decisions include investment in diversification, vertical integration, acquisitions and new ventures; the allocation of resources between the different businesses of the firm; and divestments. Business strategy is concerned with how the firm competes within a particular industry or market. If the firm is to prosper within an industry, it must establish a competitive advantage over its rivals. Hence, this area of strategy is also referred to as competitive strategy. This distinction may be expressed in even simpler terms. The basic question facing the firm is: ‘How do we make money? ’ The answer to this question corresponds to the two basic strategic choices we identified above: ‘Where to compete? ’ and ‘How to compete? ’ The distinction between corporate strategy and business strategy corresponds to the organizational structure of most large companies. Corporate strategy is typically the responsibility of the top management team and the corporate strategy staff. Business strategy is primarily the responsibility of divisional management. How do we describe a firm’s strategy? These same two questions ‘Where is the firm competing? ’ and ‘How is it competing? ’ also provide the basis upon which we can describe the strategy that a firm is pursuing. The where question has multiple dimensions. It relates to the industry or industries in which the firm is located, the products it supplies, the customer groups it targets, the countries and localities in which it operates and the vertical range of the activities it undertakes. However, strategy is not simply about competing for today; it is also concerned with competing for tomorrow. This dynamic concept of strategy involves establishing objectives for the future and determining how they will be achieved. Future objectives relate to the overall purpose of the firm (mission), what it seeks to become (vision) and specific performance targets What is the role of Strategy? The role of strategy is to help us understand success. These observations about the role of strategy in success can be made in relation to most fields of human endeavour. Whether we look at warfare, chess, politics, sport or business, the success of individuals and organizations is seldom the outcome of a The pharmaceutical industry and the personal-computer industry not only supply very different products but also have very different structures, which make one highly profitable and the other a nightmare of price competition and weak margins. The pharmaceutical industry produces highly differentiated products bought by price- insensitive consumers and new products receive monopoly privileges in the form of patents. The personal-computer industry comprises many firms, produces commoditized products and is squeezed by powerful suppliers (e.g. Intel and Microsoft). Small markets can often support much higher profitability than large markets, for the simple reason that small markets can more easily be dominated by a single firm; in fact Tobacco industry is profitable because there are few companies that produce tobacco and barriers to entry in the market are high. Airlines industry was not profitable because customers prefer low-cost airlines. After 9/11 the industry has having difficulties because people we scared to fly. • In 2020 the most profitable industry were banks, broadcasting,etcc… because people in lockdown started streaming. • Trucking went down due to increasing fuel and sustainability; trucks are not sustainable and companies prefer using railroads that are more sustainable. Also trains are faster. Increase of entrance in railroad industry • Green and renewable energy was not profitable The objectives of industry analysis • To understand how industry structure drives competition, which determines the level of industry profitability (what blockbuster should have done) • To assess industry attractiveness • To use evidence on changes in industry structure to forecast future profitability • To identify Key Success Factors • To formulate strategies to change industry structure to improve industry profitability Sources of superior profitability Why is environment so important? The business environment of a firm consists of all the external influences that affect its decisions and performance. Given the vast number and range of external influences, how can managers hope to monitor, let alone analyse, environmental conditions? The starting point is some kind of system or framework for organizing information. For example, environmental influences can be classified by source – e.g. political, economic, social and technological factors (PEST analysis) – or by proximity – the micro-environment or task environment can be distinguished from the wider influences that form themacro- environment. Disney Case Disney is present in a lot of markets: streaming, movies, television, etc. In this case we call it synergy, because all the industries are connected. An illustration of PEST analysis Some illustrative examples of the PEST factors affecting firms in the marijuana industry include: Political • Licensing: the extent to which other states and other countries follow Colorado’s lead in legalizing marijuana is of paramount importance to existing and potential marijuana producers, as are the regulations and processes surrounding the issue of licences. Strict regulatory regimes raise capital requirements, affect the cost structures and profitability of existing producers and influence the nature and extent of entry into this industry. • Taxation: it seems likely that marijuana, like tobacco and alcohol, will be subject to heavy taxation and to relatively frequent changes in tax rates. The extent to which this will affect the industry depends, in large part, on how sensitive consumers are to changes in price. • Trademarks and intellectual property: even though the use of marijuana for recreational use is now permitted in Colorado, it still remains a federal crime to sell ‘pot’. As a consequence it is not currently possible for Colorado marijuana producers to get federal trademark protection for their brands outside the state. While this is a factor that marijuana producers need to take into consideration, the larger concern is the uncertainty created by the lack of alignment between state and federal policy. It is possible to imagine a scenario in which the federal government decides to enforce the federal prohibition on marijuana and shut down cannabis sellers in Colorado. Economic • The costs of labour, capital and energy: the production of marijuana is a labour- , capital- and energy-intensive process hence the profitability of individual producers, and the industry as a whole, is affected by movements in these cost categories. The overall impact of cost changes on the profitability of any given producer will, of course, depend on that firm’s cost structure and the extent to which consumers are prepared to absorb cost increases through price rises. • The level of economic activity: while it seems likely that the demand for marijuana will be affected by macro-factors such as levels of employment/unemployment or national income, the nature and extent of any effect is difficult to judge. On the one hand, it could be expected that as incomes rise consumption of marijuana would, all other things being equal, rise, but this is not necessarily the case. Marijuana may be viewed as a gateway drug and as incomes rise users may switch to other drugs (e.g. cocaine), to alcohol or other recreational activities. The hitherto illicit nature of much of this industry means that very little evidence is available, so it is difficult to judge the impact macro- economic factors have. In addition, there are likely to be important differences between those who consume marijuana for medical reasons and those who use it for recreational purposes. Social Shifting attitudes towards the consumption of marijuana: the consumption of marijuana, particularly for recreational purposes, remains illegal in many states because of ongoing concerns over physical and psychological risks. Although in recent years support for legalization has grown markedly so has opposition and there are strong demographic and geographic differences in public opinion. Overall, the general public’s attitudes towards marijuana consumption are ambivalent but will be shaped by the results of ongoing research into the impact of marijuana use on health and well- being and the evidence that emerges from the experience of states like Colorado that have lifted prohibitions. Technological Changes in technology are having a major impact on the way in which marijuana is grown and resulting in big cost savings. Industry sources suggest that the costs of producing a pound of premium cannabis in Colorado can range from around $385 to $1450 and that technological innovation accounts for much of the difference.3 Key technologies include: • The use of advanced greenhouses: modern cannabis greenhouses employ light diffusion and dehumidification technologies to modify the flowering cycle of the cannabis plants to generate higher yields. For example, by using recently developed LED lighting technology in a greenhouse environment as opposed to using high- pressure sodium lights in an indoor facility, growers can dramatically reduce their energy bills. • Automated fertilization and irrigation: the nutrients and water requirements of plants are carefully controlled through the use of sensors, electronic injectors and sophisticated computer software. Pest analysis to Meat industry Political: give incentives for the production of plant-based meat, campaigns to promote healthier lifestyle Economic: people with lower income cannot afford vegan food so the company should invest in developed countries Social: culture, religion, personal beliefs, health Technological: investing in new technologies to find formulas to make the product tastier Environmental: climate change, less pollution Legal: regulations, product labelling, treating animals, tracing meat The spectrum of industry structures The determinants of industry profitability The starting point for industry analysis is a simple question: ‘What determines the level of profit in an industry?’ The prerequisite for profit is the creation of value for the customer. Value is created when the price the customer is willing to pay for a product exceeds the costs incurred Competitive pressure from producers of substitutes depends upon: • Buyers’ propensity to substitute • The price of substitutes 2. Threat of new entrants Entrants’ threat to industry profitability depends upon the height of barriers to entry. A barrier to entry is any advantage that established firms have over entrants. The height of a barrier to entry is usually measured as the unit cost disadvantage faced by would-be entrants. The principal sources of barriers to entry are discussed below. Sources of barriers to entry are: • Capital requirements (e.g. upfront investments, more barriers) The capital costs of getting established in an industry can be so large as to discourage all but the largest companies • Absolute cost advantage (e.g. learning & experience curve, proprietary technology, favorable location, government subsidies) Established firms may have a unit cost advantage over entrants irrespective of scale. Absolute cost advantages often result from the acquisition of low-cost sources of raw materials • Product differentiation (e.g.product diversity, brand, loyalty) In an industry where products are differentiated, established firms possess the advantages of brand recognition and customer loyalty. • Economies of scale (more EoS more barriers, difficulties to entry) In industries that are capital or research or advertising intensive, efficiency requires large-scale operation. The problem for new entrants is that they are faced with the choice of either entering on a small scale and accepting high unit costs, or entering on a large scale and bearing the costs of under-utilized capacity. One of the main sources of economies of scale is new product development costs. • Access to channels of distribution (difficulty in getting distribution channels) For many new suppliers of consumer goods, the principal barrier to entry is likely to be gaining distribution. Limited capacity within distribution channels (e.g. shelf space), risk aversion by retailers and the fixed costs associated with carrying an additional product result in retailers being reluctant to carry a new manufacturer’s product. • Legal and regulatory barriers (e.g. Government policies increase barriers)Economists from the Chicago School claim that the only effective barriers to entry are those created by government. In taxicabs, banking, telecommunications and broadcasting, entry usually requires a licence from a public authority. The effectiveness of barriers to entry depends on the resources and capabilities that potential entrants possess. Barriers that are effective against new companies may be ineffective against established firms that are diversifying from other industries. Google has used its massive Web presence as a platform for entering a number of other markets, including Microsoft’s seemingly impregnable position in browsers and Apple’s in the smartphone market. More barriers to entry = less entrants' threat = more industry profitability 3. Bargaining power of buyers The output market is the market where firms sell their goods and services to customers, so buyers. The strength of buying power that firms face from their customers depends on two sets of factors: buyers’ price sensitivity and relative bargaining power. Buyer Power increases when... 1. They buy in large quantities 2. The product/service being bought is undifferentiated 3. Quality is less important 4. They earn low profits 5. Low switching costs 6. Possibility of integration The extent to which buyers are sensitive to the prices charged by the firms in an industry depends on four main factors: • The greater the importance of an item as a proportion of total cost, the more sensitive buyers will be about the price they pay. Beverage manufacturers are highly sensitive to the costs of aluminum cans because this is one of their largest single cost items. Conversely, most companies are not sensitive to the fees charged by their auditors, since auditing costs are a tiny fraction of total company expenses. • The less differentiated the products of the supplying industry, the more willing the buyer is to switch suppliers on the basis of price. The manufacturers of T-shirts and light bulbs have much more to fear from Tesco’s buying power than have the suppliers of perfumes. • The more intense the competition among buyers, the greater their eagerness for price reductions from their sellers. As competition in the world car industry has intensified, so component suppliers face greater pressures for lower prices. • The more critical an industry’s product to the quality of the buyer’s product or service, the less sensitive are buyers to the prices they are charged. The buying power of personal computer manufacturers relative to the manufacturers of microprocessors (Intel and AMD) is limited by the vital importance of these components to the functionality of PCs. 4. Bargaining power of Suppliers Supplier Power increases when... 1. Suppliers < Buyers 2. Product is unique (e.g. technical component) 3. Switching costs for the company are high 4. They can forward integrate Analysis of the determinants of relative power between the producers in an industry and their suppliers is comparable to analysis of the relationship between producers and their buyers. The only difference is that it is now the firms in the industry that are the buyers and the producers of inputs that are the suppliers. The key issues are the 2. Construct a segmentation matrix. Typically, segmentation analysis generates far too many segmentation variables so it is necessary to reduce the number of variables to make the analysis more manageable. This is usually done by selecting only those variables that are most important or closely correlated with each other. Reducing the number of variables allows individual segments to be identified in a two- or three- dimensional matrix. 3. Analyse segment attractiveness. Profitability within a segment is determined by the same structural forces that determine profitability within the industry as a whole so the five forces analysis can be applied to individual market segments. 4. Identify key success factors in each segment. By analyzing buyers’ purchase criteria and the basis of competition within individual segments, we can identify what a firm needs to do well in order to be successful in a particular segment. 5. Select segment scope. A firm needs to decide whether it wishes to be a segment specialist or compete across multiple segments. The advantage of a broad over a narrow focus depends on the similarity of key success factors and the presence of shared costs. SEGMENTATION VARIABLES Key success factors How is industry profit shared between the different firms competing in that industry? Let us look explicitly at the sources of competitive advantage within an industry. Our goal here is to identify those factors within the firm’s market environment that determine the firm’s ability to survive and prosper: its key success factors. Our approach to identifying key success factors is straightforward and common sense. To survive and prosper in an industry, a firm must meet two criteria: 1. first, it must supply what customers want to buy; 2. second, it must survive competition. Hence, we may start by asking two questions: • What do our customers want? To answer the first question we need to look more closely at customers of the industry and to view them not as a threat to profitability because of their buying power but as the purpose of the industry and its underlying source of profit. This requires that we ask: Who are our customers? What are their needs? How do they choose between competing offerings? Once we recognize the basis of customers’ preferences, we can identify the factors that confer success upon the individual firm. For example, if consumers choose supermarkets on the basis of price then cost efficiency is the primary basis for competitive advantage and the key success factors are the determinants of inter-firm cost differentials. • What does the firm need to do to survive competition? The second question requires us to examine the nature of competition in the industry. How intense is competition and what are its key dimensions? Thus, in airlines, it is not enough to offer low fares, convenience and safety. Survival requires sufficient financial strength to survive the intense price competition that accompanies cyclical downturns. A basic framework for identifying key success factors is presented Strategic Group Analysis A strategic group is a group of firms in an industry that follow the same or similar strategies Identifying strategic groups: • Identify main strategic variables which distinguish firms • Position each firm in relation to these variables • Identify clusters Eastman Kodak is a classic example. Its dominance of the world market for photographic products was threatened by digital imaging. From 1990 onwards, Kodak invested billions of dollars developing digital technologies and digital imaging products. Yet, in January 2012, continuing losses on digital products and services forced Kodak into bankruptcy. Might Kodak have been better off by sticking with its chemical know-how, allowing its photographic business to decline while developing its interests in specialty chemicals, pharmaceuticals and healthcare? IDENTIFYING THE FIRM'S RESOURCES AND CAPABILITIES The first stage in the analysis of resources and capabilities is to identify the resources and capabilities of the firm – or, indeed, any organization since the analysis of resources and capabilities is as applicable to not-for-profit organizations as it is to business enterprises. It is important to distinguish between the resources and the capabilities of the firm: resources are the productive assets owned by the firm; capabilities are what the firm can do. Individual resources do not confer competitive advantage; they must work together to create organizational capability. Capability is the essence of superior performance. The figure shows the relationships between resources, capabilities and competitive advantage. Identify resources 1. Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identified and valued in the firm’s financial statements. Yet, balance sheets are renowned for their propensity to obscure strategically relevant information and to under- or overvalue assets. Historical cost valuation can provide little indication of an asset’s market value. However, the primary goal of resource analysis is not to value a company’s assets but to understand their potential for creating competitive advantage. Information that British Airways possessed fixed assets valued at £8 billion in 2013 is of little use in assessing the airline’s strategic value. To assess British Airways’ ability to compete effectively in the world airline industry we need to know about the composition of these assets: the location of land and buildings, the types of plane, the landing slots and gate facilities at airports and so on. Once we have fuller information on a company’s tangible resources we explore how we can create additional value from them. This requires that we address two key questions: • What opportunities exist for economizing on their use? It may be possible to use fewer resources to support the same level of business, or to use the existing resources to support a larger volume of business. In the case of British Airways, there may be opportunities for consolidating administrative offices and engineering and service facilities. Improved inventory control may allow economies in inventories of parts and fuel. Better control of cash and receivables permits a business to operate with lower levels of cash and liquid financial resources. • What are the possibilities for employing existing assets more profitably? Could British Airways generate better returns on some of its planes by redeploying them into cargo carrying? Should British Airways seek to redeploy its assets from Europe and the North Atlantic to Asia-Pacific? Might it reduce costs in its European network by reassigning routes to small franchised airlines? 2. For most companies, intangible resources are more valuable than tangible resources. Yet, in company financial statements, intangible resources remain largely invisible. The exclusion or undervaluation of intangible resources is a major reason for the large and growing divergence between companies’ balance sheet valuations (‘book values’) and their stock market valuations . Among the most important of these undervalued or unvalued intangible resources are brand names. The value of a company’s brands can be increased by extending the range of products over which a company markets its brands. Johnson & Johnson, Samsung and General Electric derive considerable economies from applying a single brand to a wide range of products. As a result, companies that succeed in building strong consumer brands have a powerful incentive to diversify, for example Nike’s diversification from athletic shoes into apparel and sports equipment. Like reputation, technology is an intangible asset whose value is not evident from most companies’ balance sheets. Intellectual property – patents, copyrights, trade secrets and trademarks – comprises technological and artistic resources where ownership is defined in law. Over the past 20 years, companies have become more attentive to the value of their intellectual property. For IBM (with the world’s biggest patent portfolio) and Qualcomm (with its patents relating to CDMA digital wireless telephony), intellectual property is the most valuable resource they own. 3. Human resources of the firm comprise the expertise and effort offered by employees. Like intangible resources, human resources do not appear on the firm’s balance sheet – for the simple reason that the firm does not own its employees; it purchases their services under employment contacts. The reason for including human resources as part of the resources of the firm is their stability. Although employees are free to move from one firm to another – most employment contracts require no more than a month’s notice on the part of the employee – in practice most employment contracts are long term. In the US the average length of time an employee stays with an employer is four years; in Europe it is longer: 8.4 years in Britain to 13 and 11.7 in France and Italy respectively. Most firms devote considerable effort to appraising their human resources. This appraisal occurs at the hiring stage when potential employees are evaluated in relation to the requirements of their job and as part of an ongoing appraisal process of which annual employee reviews form the centerpiece. The purposes of appraisal are to assess past performance for the purposes of compensation and promotion, set future performance goals and establish employee development plans. Trends in appraisal include greater emphasis on assessing results in relation to performance targets (e.g. management-by-objectives) and broadening the basis of evaluation (e.g. 360-degree appraisal). Over the past decade, human resource evaluation has become far more systematic and sophisticated. Many organizations have established assessment centers specifically for the purpose of providing comprehensive, quantitative assessments of the skills and attributes of individual employees, and increasingly appraisal criteria are based upon empirical research into the components and correlates of superior job performance. Competencies modelling involves identifying the set of skills, content knowledge, attitudes and values associated with superior performers within a particular job category and then assessing each employee against that profile. An important finding of research into HR competencies is the critical role of psychological and social aptitudes in determining superior performance; typically these factors outweigh technical skills and educational and professional qualifications. 2. Value chain analysis separates the activities of the firm into a sequential chain and explores the linkages between activities in order to gain insight into a firm’s competitive position. Michael Porter’s representation of the value chain distinguishes between primary activities (those involved with the transformation of inputs and interface with the customer) and support activities . Porter’s generic value chain identifies a few broadly defined activities that can be separated to provide a more detailed identification of the firm’s activities (and the capabilities that correspond to each activity). Thus, marketing can include market research, test marketing, advertising, promotion, pricing and dealer relations. By exploring different activities and, most crucially, the linkages between them, it is possible to gain a sense of an organization’s main capabilities. Porter's value chain The nature of capability Drawing up an inventory of a firm’s resources is fairly straightforward. Organizational capabilities are more elusive, partly because they are idiosyncratic – every organization has features of its capabilities that are unique and difficult to capture using simple functional and value chain classifications. Consider Apple’s product design and product development capabilities. Apple has a remarkable ability to combine hardware technology, software engineering, aesthetics, ergonomics and cognitive awareness to create products with a superior user interface and unrivalled market appeal. But identifying the components of this product design/development capability and establishing where and with whom within Apple this capability is located is no simple task. Let us explore more closely the nature and the determinants of organizational capability. Capabilities are based upon routinized behavior. Routinization is an essential step in creating organizational capability – only when the activities of organizational members become routine can tasks be completed efficiently and reliably. These organizational routines – ‘regular and predictable behavioral patterns [comprising] repetitive patterns of activity’– are viewed by evolutionary economists as the fundamental building blocks of what firms do and who they are. It is through the adaptation and replication of routines that firms develop. Like individual skills, organizational routines develop through learning by doing. Just as individual skills become rusty when not used, so it is difficult for organizations to retain coordinated responses to contingencies that arise only rarely. Hence, there tends to be a trade-off between efficiency and flexibility. A limited repertoire of routines can be performed highly efficiently with near-perfect coordination. The same organization may find it extremely difficult to respond to novel situations Creating organizational capability is not simply a matter of allowing routines to emerge. Combining resources to create capability requires conscious and systematic actions by management. These actions include: bringing the relevant resources together within an organizational unit, designing processes, creating motivation and aligning the activity with the overall strategy of the organization. A hierarchy of capabilities Whether we start from a functional or value chain approach, the capabilities that we identify are likely to be broadly defined: operational capability, marketing capability, supply chain management capability. However, having recognized that capabilities are the outcome of processes and routines, it is evident that these broadly defined capabilities can be broken down into more specialist capabilities. For example, marketing capabilities can be separated into market research capability, product launch capability, advertising capability, pricing capability, dealer relations capability – and others too. We can also recognize that even broadly defined functional capabilities integrate to form wider cross- functional capabilities: new product development, business development, the provision of customer solutions. What we observe is a hierarchy of capabilities where more general, broadly defined capabilities are formed from the integration of more specialized capabilities. The figure offers a partial view of the hierarchy of capabilities of a telecom equipment maker. As we ascend the hierarchy, capabilities become progressively more difficult to develop: higher-level capabilities require the broadest integration of know-how, typically across different functional departments. Appraising resources and capabilities Having identified the principal resources and capabilities of an organization, how do we appraise their potential for value creation? There are two fundamental issues: first, what is the strategic importance of different resources and capabilities and, second, Even when resources and capabilities can be copied, imitators are typically at a disadvantage to initiators. 5. APPROPRIATING THE RETURNS TO COMPETITIVE ADVANTAGE Who gains the returns generated by superior resources and capabilities? Typically, the owner of that resource or capability. But ownership may not be clear-cut. Are organizational capabilities owned by the employees who provide skills and effort or by the firm which provides the processes and culture? In human-capital-intensive firms, there is an ongoing struggle between employees and shareholders as to the division of the rents arising from superior capabilities. This struggle is reminiscent of the conflict between labor and capital to capture surplus value described by Karl Marx. The prevalence of partnerships (rather than shareholder-owned companies) in law, accounting and consulting firms is one solution to this conflict over rent appropriation. The less clear are property rights in resources and capabilities, the greater the importance of relative bargaining power in determining the division of returns between the firm and its members. The more deeply embedded are individual skills and knowledge within organizational routines, and the more they depend on corporate systems and reputation, the weaker the employee is relative to the firm. Appraising the relative strength of a firm’s resources and capabilities Having established which resources and capabilities are strategically most important, we need to assess how a firm measures up relative to its competitors. Making an objective appraisal of a company’s resources and capabilities relative to its competitors’ is difficult. Organizations frequently fall victim to past glories, hopes for the future and their own wishful thinking. The tendency toward hubris among companies, and their senior managers, means that business success often sows the seeds of its own destruction. Benchmarking is ‘the process of identifying, understanding, and adapting outstanding practices from organizations anywhere in the world to help your organization improve its performance’. Benchmarking offers a systematic framework and methodology for identifying particular functions and processes and then for comparing their performance with other companies’. By establishing performance metrics for different capabilities, an organization can rate its relative position. The results can be salutary: Xerox Corporation, a pioneer of benchmarking during the 1980s, observed the massive superiority of its Japanese competitors in cost efficiency, quality and new-product development. Subsequent evidence showed wide gaps in most industries between average practices and best practices. Developing Strategy Implications Key strengths How do we exploit our key strengths most effectively? How can we address our key weaknesses in terms of both reducing our vulnerability to them and correcting them? Finally, what about our ‘inconsequential’ strengths: are these really superfluous or are there ways in which we can deploy them to greater effect? • The foremost task is to ensure that the firm’s critical strengths are deployed to the greatest effect: If some of Walt Disney’s key strengths are the Disney brand, the worldwide affection that children and their parents have for Disney characters and the company’s capabilities in the design and operation of theme parks, the implication is that Disney should not limit its theme park activities to six locations (Anaheim, Orlando, Paris, Tokyo, Hong Kong and Shanghai); it should open theme parks in other locations that have adequate market potential for year- round attendance. • If a core competence of quality newspapers such as the New York Times, the Guardian (UK) and Le Monde (France) is their ability to interpret events (especially in their home countries), can this capability be used as a basis for establishing new businesses such as customized business intelligence and other types of consulting in order to supplement their declining revenues from newspaper sales? • • If a company has few key strengths, this may suggest adopting a niche strategy. Harley-Davidson’s key strength is its brand identity built on its 110-year heritage. Its strategy has been built around this single strength: a focus on super-heavyweight, traditionally styled, technologically backward motorcycles. Key weaknesses What does a company do about its key weaknesses? It is tempting to think of how companies can upgrade existing resources and capabilities to correct such weaknesses. However, converting weakness into strength is likely to be a long-term task for most companies. In the short to medium term, a company is likely to be stuck with the resources and capabilities that it has inherited. The most decisive, and often most successful, solution to weaknesses in key functions is to outsource. Thus, in the automobile industry, companies have become increasingly selective in the activities they perform internally. Clever strategy formulation can allow a firm to negate its vulnerability to key weaknesses. Returning to our Opening Case, Harley-Davidson cannot compete with Honda, Yamaha and BMW on technology. The solution? It has made a virtue of its outmoded technology and traditional designs. Harley-Davidson’s old-fashioned, push- rod engines and recycled designs have become central to its retro-look authenticity. Superfluous strengths What about those resources and capabilities where a company has particular strengths that don’t appear to be important sources of sustainable competitive advantage? One response may be to lower the level of investment into these resources and capabilities. If a retail bank has a strong but increasingly underutilized branch network, it may be time to prune its real-estate assets and invest in Web-based customer services. However, in the same way that companies can turn apparent weaknesses into competitive strengths, it is possible to develop innovative strategies that turn apparently inconsequential strengths into key strategy differentiators. Completing the picture: the case of VW TYPES OF COMPETITVE ADVANTAGE: Cost and Differentiation A firm can achieve a higher rate of profit (or potential profit) over a rival in one of two ways: either it can supply an identical product or service at a lower cost or it can supply a product or service that is differentiated in such a way that the customer is willing to pay a price premium that exceeds the additional cost of the differentiation. In the former case, the firm possesses a cost advantage; in the latter, a differentiation advantage. • Cost advantage: same product with lower cost than its competitors (cost is what the company spends, price is what customers pay). • Differentiation advantage: when the company is able to offer to customers unique products with characteristics that customers cannot find anywhere else. The two sources of competitive advantage define two fundamentally different approaches to business strategy. A firm that is competing on low cost is distinguishable from a firm that competes through differentiation in terms of market positioning, resources and capabilities, and organizational characteristics. Porter's Generic Strategies this categories are not fixed and companies in reality do not fall in only one categories. Some companies are not able to have cost advantages or differentiation advantages so they are stuck in the middle By combining the two types of competitive advantage with the firm’s choice of scope – broad market versus narrow segment – Michael Porter has defined three generic strategies: cost leadership, differentiation and focus. Porter views cost leadership and differentiation as mutually exclusive strategies. A firm that attempts to pursue both is ‘stuck in the middle’: The firm stuck in the middle is almost guaranteed low profitability. It either loses the high-volume customers who demand low prices or must bid away its profits to get this business from the low-cost firms. Yet it also loses high-margin business to the firms who are focused on high-margin targets or have achieved differentiation overall. The firm that is stuck in the middle also probably suffers from a conflicting set of organizational arrangements and motivation system. Alitalia is a perfect example of a company 'stuck in the middle'. Alitalia offered both 'low- cost' flights and business/first class flights; the company did not focus on one target and probably this is one of the reasons why it has failed. COST ADVANTAGE The ability to produce similar product with lower cost of its competitors. Cost advantage does not mean necessary low price. If companies lower their costs, their margin will be higher because of the high profitability. DRIVERS OF COST ADVANTAGE There are seven principal determinants of a firm’s unit costs (cost per unit of output) relative to its competitors; we refer to these as cost drivers. By examining each of these different cost drivers, in relation to a particular firm, we can analyze a firm’s cost position relative to its competitors and diagnose the sources of inefficiency and make recommendations as to how a firm can improve its cost efficiency. Economies of scale: technical input-output relationships; indivisibilities, specialization. The more i produce the lower will be the cost of unit. Economy of learning: increased individual skills, improved organizational routines. once u keep producing, the cost of production will go down because you know how to produce and become skilled. Production techniques: process innovation, re-engineering of business processes. methods of production, techniques, change in time, due to innovation and sustainability. Product design: standardization of design and components, design for manufacture. I can exploit the design of a product in order to make that product less expensive and reduce costs and resources Input costs: location advantages, ownership of low-cost inputs, non-union labor, bargaining power. switch to lower inputs and to lower costs Capacity utilization: ratio of fixed to variable costs, fast and flexible capacity adjustment. Sources of economies learning 1. Enhanced skills in carrying out activities 2. More accurate selection of production resources 3. More efficient coordination among people and departments 4. Higher programmability of processes 5. Simplified products and processes 6. Examples of experience curve Economies of scope Economies of network PORTER'S VALUE CHAIN: A TOOL FOR COST ANALYSIS The value chain is a useful framework with which to undertake this analysis. Every business may be viewed as a chain of activities. Analysing costs requires breaking down the firm’s value chain to identify: • the relative importance of each activity with respect to total cost; • the cost drivers for each activity and the comparative efficiency with which the firm performs each activity; • how costs in one activity influence costs in another; • which activities should be undertaken within the firm and which activities should be outsourced. To analyse a firm’s cost position, we need to look at individual activities. Each activity tends to be subject to adifferent set of cost drivers, which give it a distinct cost structure. A value chain analysis of a firm’s cost position comprises the following five stages: Break down the firm into separate activities. Determining the appropriate value chain activities is a matter of judgement. It requires understanding the chain of processes involved in the transformation of inputs into output and its delivery to the customer. Very often, the firm’s own divisional and departmental structure is a useful guide. 1. IDENTIFY FIRM ACTIVITIES: Establish the relative importance of different activities in the total cost of the product. Our analysis needs to focus on the activities that are the major sources of cost. In separating costs, Michael Porter suggests the detailed assignment of operating costs and assets to each value activity. Though the adoption of activity-based costing has made such cost data more available, detailed cost allocation can be a major exercise. Even without such detailed cost data, it is usually possible to identify the critical activities, establish which activities are performed relatively efficiently or inefficiently, identify cost drivers and offer recommendations. 2. ALLOCATE TOTAL COSTS TO SINGLE ACTIVITIES: Compare costs by activity. To establish which activities the firm performs relatively efficiently and which it does not, benchmark unit costs for each activity against those of competitors. 3. IDENTIFY COST DRIVERS FOR EACH ACTIVITY: For each activity, what factors determine the level of cost relative to other firms? For some activities, cost drivers are evident simply from the nature of the activity and the composition of costs. For capital-intensive activities, such as the operation of a body press in a car plant, the principal factors are likely to be capital equipment costs, weekly production volume and downtime between changes of dyes. For labor- intensive assembly activities, critical issues are wage rates, speed of work and defect rates. 4. IDENTIFY INKAGES BETWEEN ACTIVITIES: The costs of one activity may be determined, in part, by the way in which other activities are performed. Xerox discovered that its high service costs relative to competitors’ reflected the complexity of design of its copiers, which required 30 different interrelated adjustments. 5. MAKE RECOMMENDATIONS FOR COST REDUCTION: Identify opportunities for reducing costs. By identifying areas of comparative inefficiency and the cost drivers for each, opportunities for cost reduction become evident. For example: 1. If scale economies are a key cost driver, can volume be increased? One feature of Caterpillar’s cost-reduction strategy was to broaden its model range and begin selling diesel engines to other vehicle manufacturers in order to expand its sales base. Difference between differentiation and segmentation DIFFERENTIATION: concerns choices of how a firm distinguishes its offerings from those of its competitors (i.e. How the firm competes) SEGMENTATION: concerns choices of which customers, needs, localities a firm targets (i.e. Where the firm competes) DOES DIFFERENTIATION IMPLY SEGMENTATION? Not necessarily, depends upon the differentiation strategy: • BROAD SCOPE DIFFERENTIATION Appealing to what is common between different customers (McDonalds, Honda, Gillette • FOCUSED DIFFERENTIATION Appealing to what distinguishes different customer groups (MTV, Harley-Davidson, Armani) Analyzing differentiation Analyzing differentiation requires looking at both the firm (the supply side) and its customers (the demand side). While supply-side analysis identifies the firm’s potential to create uniqueness, the critical issue is whether such differentiation creates value for customers and whether the value created exceeds the cost of the differentiation. We can divide differentiation in demand and supply side. Demand: Insight into customers’ needs and preferences Supply: Firm’s drivers (resources and capabilities) to create uniqueness DEMAND SIDE Supply side The Drivers of uniqueness (decision variables for the firm): • Product features and product performance • Complementary services (e.g. credit, delivery, repair); for instance for apple is the customer care; supermarket delivery • Intensity of marketing activities (e.g. rate of advertising spending) • Technology embodied in design and manufacture • Quality of purchased inputs (quality of raw materials) • Procedures influencing the conduct of each activity (rigor of quality control, services procedures, frequency of sales visits to a customer) • Skill and experience of employees (for example handmade in fashion) • Location (e.g., with retail stores) (tiffany store in fifth avenue NY is iconic because of the movie) • Degree of vertical integration (which influences a firm’s ability to control inputs and intermediate processes) ability of the company to control the raw material; for instance a company that makes wine and grows their own grapes will increase the company's degree of vertical integration Functions and signals The more difficult it is to ascertain performance prior to purchase, the more important signaling is. HOW FIRMS CAN BUILD DIFFERENTIATION? PRINCIPAL STAGES OF VALUE CHAIN ANALYSIS FOR DIFFERENTIATION ADVANTAGE In much the same way as we used the value chain to analyze the potential for a firm to gain a cost advantage relative to its rivals so we can use this framework to analyze opportunities for differentiation advantage. This involves four principal stages: 1. Construct a value chain for the firm and the customer. It may be useful to consider not just the immediate customer but also firms further downstream in the value chain. If the firm supplies different types of customers – for example, a steel company may supply steel strip to car manufacturers and white goods producers – draw separate value chains for each of the main categories of customer. 2. Identify the drivers of uniqueness in each activity. Assess the firm’s potential for differentiating its product by examining each activity in the firm’s value chain and identifying the variables and actions through which the firm can achieve uniqueness in relation to competitors’ offerings. Figure 4.5 identifies some illustrative sources of differentiation within Porter’s generic value chain. 3. Select the most promising differentiation variables for the firm. Among the numerous drivers of uniqueness that we can identify within the firm, which one should be selected as the primary basis for the firm’s differentiation strategy? On the supply side, there are three important considerations: 1. First, we must establish where the firm has greater potential for differentiating from, or can differentiate at lower cost than, rivals. This requires some analysis of the firm’s internal strengths in terms of resources and capabilities. 2. Second, to identify the most promising aspects of differentiation, we also need to identify linkages among activities, since some differentiation variables may involve interaction among several activities. Thus, product reliability is likely to be the outcome of several linked activities: monitoring purchases of inputs from suppliers, the skill and motivation of production workers, and quality control and product testing. 3. Third, the ease with which different types of uniqueness can be sustained must be considered. The more differentiation is based on resources specific to the firm or skills that involve the complex coordination of a large number of individuals, the more difficult it will be for a competitor to imitate the particular source of differentiation. Thus, offering business class passengers wider seats and more legroom is an easily imitated source of differentiation. Achieving high levels of punctuality represents a more sustainable source of differentiation. 4. Locate linkages between the value chain of the firm and that of the buyer. The objective of differentiation is to yield a price premium for the firm. This requires the firm’s differentiation to create value for the customer. Creating value for customers requires either that the firm lowers customers’ costs or Why use a defensive strategy?To Keep market share, reputation of company, strong relationship with other players in the ecosystem PRE AND POST ENTRY: Types of strategies Defensive mechanism 1. Increase structural barriers: by filling all the possible gaps, raise buyers switching costs ( to make difficult for the buyers to change product), block channel of access ( block the raw material, logistics, or distribution), continuous improvement, Increase capital requirements. Encourage government policies that rise barriers: it means lobbying, so giving restrictions favourable to the companies already in the industry, restrictions that discourage new companies Form coalitions: like alliances between airlines for example Confindustria (so federations of companies that are allied) 2. Increase the perceived threat of a counter attack: Signal initial barriers ▪ Establish blocking positions ▪ Encourage good competition and establish coalitions 3. Lowering the benefits of an attack: Reducing the profit targets ▪ Managing competitors' assumptions For a successful deterrence it’s necessary to… ▪ understand existing barriers ▪ foresee which are the most likely challengers ▪ identify which are the most likely passages used for a possible attack If companies are attacked: • The counterattack should be as early as possible • Defenders should concentrate their response on the reasons of the attack • Defenders should not only stop challengers, but also deflect them • Defenders should try to view their response as an opportunity to gain position Types of Defensive Strategies with examples 1. Joint Venture: A joint venture is when two businesses and companies formally decide to cooperate in order to achieve certain common goals. The objectives of a joint venture may vary from business to business and market to market. The purpose of a joint venture in the defensive strategy is to defeat the common competitor that is targeting both similar/dissimilar companies at the same time. For example, Microsoft and General Electric started a joint venture by the name of “Caradigm” in 2011. Both of these companies shared their resources to develop a better technology; GE health technology and Microsoft healthcare intelligence product. 2. Liquidation: If a part of a business is going to lose and declining and there’s no way to pull it back, then you finally decided to sell them off. It’s also a type of retrenchment strategy. Liquidation also helps a business in the defensive strategy, especially when they’re cutting down the prices. For instance, a retail shop is running into losses. The retailer to sell off his entire business, but he couldn’t find any interested buyer. Finally, he decides to get as much value out of it as possible by selling all the equipment, inventory, fixture, and everything. The purpose is to permanently shut down the entire business. 3. Divestiture: Divestiture is a type of retrenchment strategy where you re- examine the asset of your business and company. If the assets aren’t serving anymore, then you sell them off. It helps businesses to reduce their expenses. For example, Thomson Reuters, a Canadian multinational company, decided to sell its science and intellectual property division in 2016. The purpose of divestiture is because the company wanted to decrease its leverage on the balance sheet. Advantages of Defensive Strategies 1. Marketing & Advertisement: The marketing and advertising of products and services increase the market reach of your business. It allows you to target both your old and new customers. The defensive strategy provides you with the real benefits of promoting your business. 2. Less Risky: The good thing about defensive strategy is that it’s not risky. It’s even less risky than the offensive strategy. Here you utilize your competitive advantages to secure your market share. You reduce the threats at the cost of taking minimum risks. 3. Promote Value of your Product: The focus of the defensive strategy is to promote the benefits of your products and services. When you start comparing your product/service with the competitors’ by highlighting your key features, it devalues their service. It can turn into a long term business strategy for your business. It also helps you to be more niches focused. Disadvantages of Defensive Strategies 1. Different Needs of Target Market: One of the biggest disadvantages of the defensive strategy is that the companies and businesses underestimate the needs and wants of the target market. They offer their product/service to all the market without focusing on any particular segment. For instance, the children’s bicycles and children’s storybook would only interest the young children market. If you offer children’s products to the elderly and young demographic of the market, they won’t buy your product. That’s how businesses make mistakes while applying defensive strategy. You have to know your target market and target them accordingly. 2. Innovation: The defensive strategy won’t work when the target market is looking for an innovative and creative product. That’s why smart businesses and companies always look for new ideas and technology by keeping their eyes and ears open. Therefore, businesses should develop a long term strategy by using the defensive strategy along with innovation. Offensive Strategy An offensive strategy is when a business takes certain steps against the market leader to get competitive in order to secure its market position. Businesses and companies gain competitive advantages by differentiating their product, offering it at a lower price, or having a resource advantage. The thing to keep in mind while following the offensive strategy is that the competitors shouldn’t counter it. A company who wants to enter in the business or a company who is already in the business and wants to attack other companies chooses an offensive strategy. • Improving own position by taking away market share of competitors • Involves direct & indirect attacks • Retaliatory in nature • To be more competitive and gaining more competitive advantage to be more profitable • It could be a temporary attack to leapfrog the competitors • To boost the sales What Makes Offensive Strategy Successful A successful offensive strategy must keep in mind the following steps; • A company must achieve the product acceptance of customers in a very short time. It should be new and reasonably innovative. • You should reduce the competition by launching a counter offer. • You must have all the required resources for the production of the counteroffer. • You should have a contingency plan in order to protect your position. • If the benefit period doesn’t last long, it means that the competitors may come up with a counteroffer at any time. They may copy your innovative differentiating product. The offensive strategy would only work if your business has strong resources and competencies. The experienced companies target the weaknesses of their competitors. Like the unhappy customers, outdated technology, customer service and other product line issues help you to gain a competitive edge.The new businesses and ambitious companies follow the offensive strategy to get some advantage in the market and strengthen their position LESSON 8: NDUSTRY EVOLUTION AND STRATEGIC CHANGE For which reasons industries can change? • External factors: Evolution of technology, environmental changes, change of society, preference of customers, economic growth, The industry lifecycle is the supply-side equivalent of the product lifecycle (products are born, their sales grow, they reach maturity, they go into decline and they ultimately die). To the extent that an industry produces multiple generations of a product, the industry lifecycle is likely to be of longer duration than that of a single product.The lifecycle comprises four phases: introduction (or emergence), growth, maturity and decline. Before we examine the features of each of these stages, let us examine the forces that drive industry evolution. The two major forces that drive industry evolution are: 1. DEMAND GROWTH The lifecycle and the stages within it are defined primarily by changes in an industry’s growth rate over time. The characteristic profile is an S-shaped growth curve. • In the introduction stage, sales are small and the rate of market penetration is low because the industry’s products are little known and customers are few. The novelty of the technology, small scale of production and lack of experience means high costs and low quality. Customers for new products tend to be affluent, innovation-oriented and risk-tolerant. • The growth stage is characterized by accelerating market penetration as technical improvements and increased efficiency open up the mass market. • Increasing market saturation causes the onset of the maturity stage. Once saturation is reached, demand is wholly for replacement. • Finally, as the industry becomes challenged by new industries that produce technologically superior substitute products, the industry enters its decline stage. 2. PRODUCTION AND DIFFUSION OF KWOLEDGE The second driver of the industry lifecycle is knowledge. New knowledge in the form of product innovation is responsible for an industry’s birth, and the dual processes of knowledge creation and knowledge diffusion exert a major influence on industry evolution. Knowledge and its role (knowledge that humans acquire in time to evolve is a key factor that influences industry lifecycle) • Introduction: In the introduction stage, product technology advances rapidly. There is no dominant product technology and rival technologies compete for attention. Competition is primarily between alternative technologies and design configurations. Potential consumers often know little about the product and sales are primarily focused on enthusiasts and pioneers. Rapid product technology (no dominant tech) - Little knowledge of customers • Over the course of the lifecycle, customers become increasingly informed about the product and the market expands, but as customers become more knowledgeable about the performance attributes of manufacturers’ products, so they are better able to judge value for money and become more price sensitive. Customers increases in the knowledge of product’s characteristics / performances - Market expands - Better judgements on the value → price sensibility • Transition to growth: The transition of an industry from its introduction to growth phase is reflected typically in the emergence of dominant designs and technical standards and in a change of focus away from product innovation towards process innovation. ✓ Emergence of Dominant Designs and tech standards ✓ Change of focus: product → process innovation HOW TYPICAL IS THE LIFECYCLE PATTERN? Patterns of evolution: To what extent do industries conform to this lifecycle pattern? To begin with, the duration of the lifecycle varies greatly from industry to industry . Over time, industry lifecycles have become increasingly compressed. This is especially evident in e-commerce. Businesses such as online gambling, business-to-business online auctions and online travel services went from initial introduction to maturity within a few years. • Social networking was launched in 1997 by Sixedegrees. By 2005, a number of sites were rapidly building their networks, including Myspace, Orkut (Google), Badoo and LinkedIn. However, it was Facebook that broke away from the pack achieving 12 million users by the end of 2006, 100 million by August 2008 and 600 million by the beginning of 2011. Since then, monthly growth has slowed to a modest 3.5%. • Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries • Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline • Industries may experience life cycle regeneration, e.g. motorcycles, TVs: Analyzing the industry lifecycle is needed to understand the future of an industry, in order for instance to create some defensive strategies to keep up with evolution and to 'fight' competitors. Lifecycle model can help us to anticipate industry evolution —but it’s dangerous to assume any common, pre-determined pattern of industry development So, DURATION of industry life-cycle varies greatly from industry to industry Example: • The introduction phase of the US railroad industry extended from the building of the first railroad, the Baltimore and Ohio in 1827, to the growth phase of the 1870s. By the late 1950s, the industry was entering its decline phase. • The growth phase. During this phase, overseas demand may be serviced initially by exports, but the drive to reduce cost and associated changes in production processes reduces the need for sophisticated labour skills and makes production attractive in newly industrialized countries. Eventually, production and assembly may shift away from the advanced countries and these countries may start to import. • With the maturity stage, competitive advantage is increasingly a quest for efficiency, particularly in industries that tend towards commoditization. Cost efficiency through scale economies, low wages and low overheads become the key success factors. With the onset of maturity, the number of firms begins to fall as product standardization and excess capacity stimulate price competition. Very often, industries go through one or more ‘shakeout’ phases during which the rate of firm failure increases sharply. The intensity of the shakeout depends a great deal on the capacity/demand balance and the extent of international competition. With maturity comes the commoditization and de-skilling of production processes, and production eventually shifts to developing countries where labour costs are lowest. • The decline phase. The transition from maturity to decline can be a result of technological substitution (typewriters, photographic film), changes in consumer preferences (canned food, men’s suits), demographic shifts (children’s toys in Europe) or foreign competition (textiles in the advanced industrialized countries). ORGANIZATIONAL CHANGE Managing organizational adaptation and strategic change We have established that industries change. But what about the companies within them? Let us turn our attention to business enterprises and consider both the impediments to change and the means by which change takes place. A. Given the many barriers to organizational change and the difficulties that companies experience in coping with disruptive technologies and architectural innovation, how can companies adapt to changes in their environment? Organizational development comprises a set of methodologies through which an internal or external consultant acts as a catalyst for systemic change within a team or organizational unit. Organizational development draws upon theories of psychology and sociology and is based upon a set of humanistic values. It emphasizes group processes as vehicles for organizational change. B. When we examined the industry lifecycle earlier in this chapter, we noted how in the introductory phase new start-ups often compete with established firms diversifying from other industries. However, competition between new starts- ups and established firms is not limited to the early phases of industries’ lifecycles; any change in the external environment of an industry offers opportunities for newcomers to challenge incumbents. In vacuum cleaners, Dyson displaced established leaders Hoover and Electrolux in several countries’ markets. In financial information services, Bloomberg took leadership from Reuters and Dow Jones. The major stumbling block for established firms is technological change. What does research tell us about why technological change is such a problem for established firms? ORGANIZATIONAL INERTIA 1. Organizational routines: Evolutionary economists emphasize the fact that capabilities are based on organizational routines – patterns of coordinated interactions among organizational members that develop through continual repetition. The more highly developed are an organization’s routines, the more difficult it is to develop new routines. Hence, organizations get caught in competency traps where ‘core capabilities become core rigidities’. 2. Social and political structures: Organizations are both social systems and political systems. As social systems, organizations develop patterns of interaction that make organizational change stressful and disruptive. As political systems, organizations develop stable distributions of power; change represents a threat to the power of those in positions of authority. Hence, as a result of rigidities in both social systems and political systems, organizations tend to resist change. 3. Conformity: Institutional sociologists emphasize the propensity of firms to imitate one another in order to gain legitimacy. The process of institutional isomorphism locks organizations into common structures and strategies that make it difficult for them to adapt to change. The pressures for conformity can be external: governments, investment analysts, banks and other resource providers encourage the adoption of similar strategies and structures. Isomorphism also results from voluntary imitation: risk aversion encourages companies to adopt similar strategies and structures to their peers. 4. Limited search: The Carnegie School of Organizational Theory (associated with Herbert Simon, Jim March and Richard Cyert) views search as the primary driver of organizational change. Organizations tend to limit search to areas close to their existing activities – they prefer exploitation of existing knowledge over exploration for new opportunities. Limited search is reinforced, first, by bounded rationality – human beings have limited information processing capacity, which constrains the set of choices they can consider – and, second, satisficing – the propensity for individuals (and organizations) to terminate the search for better solutions when they reach a satisfactory level of performance rather than to pursue optimal performance. The implication is that organizational change is triggered by a decline in performance. 5. Complementarities between strategy, structure and systems: Organizational economics, socio- technical systems and complexity theory have all emphasized the importance of fit between an organization’s strategy, structure, management systems, culture, employee skills – indeed, all the characteristics of an organization. Organizations struggle to establish complex, idiosyncratic combinations of multiple characteristics during their early phases of development that match the conditions of their business environment. However, once established, this complex configuration becomes a barrier to change. To respond to a change in its external environment, it is not enough to make incremental changes to a few dimensions of strategy; it is likely that a firm will need to find a new configuration that involves a comprehensive set of changes. The implication is that organizations tend to evolve through a process of punctuated equilibrium involving long periods of stability during which the widening misalignment between the organization and its environment ultimately forces radical and comprehensive change on the company. Systematic changes that involve establishing a new configuration of activities that better matches the requirements of the external environment may require the appointment of a CEO from outside who is not wedded to the previous configuration. MANAGING STRATEGIC CHANGES A. DUAL STRATEGIES Running a successful business requires a clear strategy in terms of defining target markets and lavishing attention on those factors which are critical to success; changing a business in anticipation of the future requires a vision of how the future will look and a strategy for how the organization will have to adapt to meet future challenges. The ability of some firms – IBM, General Electric, 3M, Shell and Toyota – to adapt to new circumstances while others ossify and fail implies differences in the capability base of different companies. David Teece and his colleagues introduced the term dynamic capabilities to refer to a ‘firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments’. The precise definition of a dynamic capability has proved contentious. LESSON 9: RESTRUCTURING Types of restructuring • Portfolio Restructuring – Portfolio restructuring involves significant change in the firm’s configuration of lines of business through acquisition and divesture transactions • Financial Restructuring – MBO and LBO. The assumption is that a large amount of dept will force managers to focus on their core businesses, and not squander cash flows from the core businesses in less rewarding diversification projects • Organizational Restructuring – It means restructuring the organization of the company. Traditionally, organizational restructuring has been shown to be ineffective because it is disruptive and may destroy competencies. Restructuring activities 1. DOWNSIZING: wholesale reduction of employees. Firing. Downsizing is a reduction in the number of a firm’s employees and, sometimes, in the number of its operating units, but it, may or may not change the composition of businesses in the company’s portfolio . Thus, downsizing is an intentional proactive management strategy, whereas “decline is an environmental or organizational phenomenon that occurs involuntarily and results in erosion of an organizational resource base” (McKinley, Zhao, and Rust, 2000). 2. DOWNSCOPING: Selectively divesting or closing non-core businesses. Downscoping refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s core businesses. Commonly, downscoping is described as a set of actions that causes a firm to strategically refocus on its core businesses (Danikoff, Koller, and Schneider, 2002). Philips example: they decided to remove the TV segment from their company and focus on other sectors; so basically they strategically refocused its core business. 3. LEVERAGE BUYOUTS (LBO): Financial restructuring in align managers’ focus and shareholders’ interest. Riskier. • Purchase involving mostly borrowed funds • Generally, occurs in mature industries where R&D and innovation are not central to value creation • High debt load commits cash-flows to repay debt, creating strong discipline for management • Increases concentration of ownership • Focuses attention of management on shareholder value • Greater oversight by “active investor” board members • Leads to more value-based decision making Short-term and Long-term outcomes of restructuring During the pandemic many companies are considring restructuring; nowadays its a very common trend. Zara for instance is reducing its physical stores and focusing more on online business. LESSON 10: BLUE AND RED OCEAN STRATEGIES = CdS highlighted three fascinating factors of circus: The tent, the acrobats, and the clowns The clown's humor has been made less coarse and more sophisticated The tent has been maximized and made attractive (magic, but with a high comfort) Acrobats and thrilling shows have been maintained, but with a reduced role, and rendered more elegant o 000 = New elements have been inserted from the theater o There is atheme anda story, even ifit is vague = Broadway’ style productions: © Multiple productions based on different stories and themes o Original musical column; Lighting; Abstract and spiritual dance o Very sophisticated entertainment Within any given industry, every firm seeks to raise value & cut costs in order to enhance value innovation and outperform the competitors. The effect is more competition, minor profit margins for everyone > dii A successful strategy consists of esito “pulling ourself out” of the tough competition by venturing into È unchartered “water” where no other competitors are present (yet) A Red Ocean Someway it's the same as a military approach of the economy. = They represent all the existing industries today => Inthe RED oceans: o the boundaries of industries are defined and accepted o the competitive rules ofthe game are clear = Companies try to overcome the performance of rivals, to increase their market share = As the number of companies increases: o profits are reduced o The growing competition “makes the water bloody “