Summary: Strategic Management

Deze samenvatting is geschreven in collegejaar 2012-2013.

Chapter 1 What is Strategic Management?

1.1 Strategic Management
The analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. The essence of strategic management is the study of why some firms outperform others: strategy is all about being different from everyone else.

The four key attributes of Strategic Management are:
1) It is directed toward overall organizational goals and objectives;
2) It includes multiple stakeholders in decision making;
3) It requires incorporating both short-term and long-term perspectives;
4) It involves the recognition of trade-offs between effectiveness and efficiency.

Individuals, groups, and organizations who have a stake in the success of the organization, including owners (shareholders in a publicly held corporation), employees, customers, suppliers, and the community at large.

Stakeholder Group Nature of claim

Stakeholder Group

Nature of claim








dividends, capital appreciation;

wages, benefits, safe working environment;

payment on time, assurance of continued relationship;

payment of interest, repayment of principal;

value, warranties;

taxes, compliance with regulations;

good citizenship behavior such as charities, employment, not polluting the environment.

Tailoring actions to the need of an organization rather than wasting effort, or “doing the right thing.”

Performing actions at a low cost relative to a benchmark, or “doing things right.”

Operational Effectiveness
Performing similar activities better than rivals.

The challenge mangers face of both aligning resources to take advantage of existing product markets as well as proactively exploring new opportunities.

1.2 The Strategic Management Process
Three ongoing processes that are central to strategic management are analyses, decisions and actions. These three processes, referred to as strategy analysis, formulation and implementation, are highly interdependent.

An alternative model of strategy development:

  • Intended strategy: strategy in which organizational decisions are determined only by analysis.
  • Realized strategy: strategy in which organizational decisions are determined by both analysis and unforeseen environmental developments, unanticipated resource constraints, and/or changes in managerial preferences.

1.3 The Role of Corporate Governance and Stakeholder Management Corporate Governance

The relationship among various participants in determining the direction and performance of corporations. The primary participants are:
1) the shareholders;
2) the management (led by the chief executive officer);
3) the board of directors.Generating long-term returns for the shareholders is the primary goal of a publicly held corporation. 

There are two opposing ways of looking at the role of stakeholder management in the strategic management process:
1) Zero sum: the role of management is to look upon the various stakeholders as competing for the organization’s resources. In essence, the gain of one individual or group is the loss of another individual or group.
2) Stakeholder symbiosis: stakeholders are dependent upon each other for their success and well-being. That is, managers acknowledge the interdependence among employees, suppliers, customers, shareholders and the community at large.

Social responsibility
The expectation that businesses or individuals will strive to improve the overall welfare of society.
Triple Bottom Line
The assessment of a company’s performance in financial, social and environmental dimensions.

1.4 The Strategic Management Perspective: An Imperative throughout the Organization
To develop and mobilize people and other assets, leaders are needed throughout the organization. Everyone must be involved in the stratgic management process. There is a critical need for three types of leaders:
1) Local line leaders who have significant profit-and-loss responsibility;
2) Executive leaders who champion and guide ideas, create a learning infrastructure and establish a domain for taking action;
3) Internal networkers who, although they have little positional power and formal authority, generate their power through the convinction and clarity of their ideas.

Top-level executives are key in setting the tone for the empowerment of employees.

There are two perspectives of leadership:
1) Romantic view of leadership: situations in which the leader is the key force determining the
organization’s success – or lack thereof.
2) External view of leadership: situations in which external forces – where the leader has limited influence - determine the organization’s success.
1.5 Ensuring Coherence in Strategic Direction

Hierarchy of goals
Organizational goals ranging from, at the top, those that are less specific yet able to evoke powerful and compelling mental images, to, at the bottom, those that are more specific and measurable.

Organizational goal(s) that evoke(s) powerful and compelling mental images.

Mission Statement
A set of organizational goals that include both the purpose of the organization, its scope of operations, and the basis of its competitive advantage.

Strategic Objectives
A set of organizational goals that are used to operationalize the mission statement and that are specific and cover a well-defined time frame. They must be measurable, specific, appropriate, realistic and timely.

Chapter 2 External Environment of the Firm

2.1 Three important processes to develop forecasts:
1) Environmental Scanning: surveillance of a firm’s external environment to predict environmental changes and detect changes already under way.
2) Environmental Monitoring: a firm’s analysis of the external environment that tracks the evolution of environmental trends, sequence of events, or streams of activities.
3) Competitive Intelligence: a firm’s activities of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitors’ strengths and weaknesses.

Environmental Forecasting
The development of plausible projections about the direction, scope, speed, and intensity of environmental change. A danger of forecasting is that managers may view uncertainty as black and white and ignore important grey areas.

Scenario Analysis
An in-depth approach to environmental forecasting that involves experts’ detailed assessments of societal trends, economics, politics, technology, or other dimensions of the external environment.

SWOT Analysis
A framework for analyzing a company’s internal and external environment and that stands for  strengths, weaknesses, opportunities and threats.

The strengths and weaknesses portion of SWOT refers to the internal conditions of the firm. opportunities and threats are environmental conditions external to the firm.

Limitations of SWOT Analysis
By listing the firm’s attributes, managers have the raw material needed to perform more in-depth strategic analysis. However, SWOT cannot show them how to achieve a competitive advantage, because of the following limitations:

  • Strengths may not lead to an advantage;
  • SWOT’s focus on the external environment is too narrow;
  • SWOT gives a one-shot view of a moving target, because it is primarily a static assessment;
  • SWOT overemphasizes a single dimension of strategy.

2.2 The General Environment
Factors external to an industry, and usually beyond a firm’s control, that affect a firm’s strategy. The general environment is divided into six segments:
1) Demographic: aging population, rising affluence, changes in ethnic composition, geographic
distribution of population etc;
2) Sociocultural: more women in the workforce, increase in temporary workers, greater concern for fitness, concern for environment etc;
3) Political/Legal: tort reform, Americans with Disabilities Act, taxation of local, state and federal levels, Sarbanes-Oxley Act of 2002 etc;
4) Technological: genetic engineering, emergence of Internet technology, pollution/global warming, wireless communication etc;
5) Economic: interest rates, unemployment rates, consumer price index, trends in GDP, changes in stock market valuations etc;
6) Global: increasing global trade, currency exchange rates, emergence of the Indian and Chinese economies, creation of WTO etc.

2.3 The Competitive Environment
Factors that pertain to an industry and affect a firm’s strategies. The nature of competition in an industry as well as the profitability of a firm is often more directly influenced by developments in the competitive environment.

Porter’s Five-Forces Model
The “five-forces” model has been the most commonly used analytical tool for examining the competitive environment. It describes the competitive environment in terms of five basic competitive forces (see the figure):1) Potential Entrants;2) Buyers;3) Suppliers;4) Substitutes;5) Industry Competitors.

1) Threat of new entrants: possibility that the profits of established firms in the industry may be eroded by new competitors. There are six major sources of entry barriers:

  • Economies of Scale;
  • Product Differentiation;
  • Capital Requirements;
  • Switching Costs;
  • Access to Distribution Channels;
  • Cost Disadvantages Independent of Scale.

2) Bargaining Power of Buyers: buyers threaten an industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other. A buyer group is powerful under the following circumstances:

  • It is concentrated or purchases large volumes relative to seller sales;
  • The products it purchases from the industry are standard or undifferentiated;
  • The buyer faces few switching costs;
  • The buyers pose a credible threat of backward integration;
  • The industry’s product is unimportant to the quality of the buyer’s products or services.

3) Bargaining Power of Suppliers:

  • The supplier group is dominated by a few companies and is more concentrated (few firms dominate the industry)  than the industry it sells to;
  • The supplier group is not obliged to contend with substitute products for sale to the industry;
  • The industry is not an important customer of the supplier group;
  • The supplier group’s products are differentiated or it has built up switching costs for the buyer;
  • The supplier group poses a credible threat of forward integration.

4) Threat of Substitute Products and Services: all firms within an industry compete with industries producing substitute products and services. Substitutes limit the potential returns of an industry by placing a ceiling on prices that firms in that industry can profitably charge. The more attractive the price/performance ratio of substitute products, the tighter the lid on an industry’s profits.

5) Intensity of Rivalry among competitors in an Industry: rivalry among existing competitors takes the form of jockeying for position. Firms use tactics like price competition, advertising battles, product introductions, and increased customer service or warranties. Intense rivalry is the result of several interacting factors, including the following:

  • Numerous or equally balanced competitors
  • Slow industry growth
  • High fixed or storage costs
  • Lack of differentiation or switching costs
  • Capacity augmented in large increments
  • High exit barriers

Caveats of using industry analysis:

  • Managers must not always avoid low profit industries (or low profit segments in profitable industries). Such industries can still yield high returns;
  • the five-forces analysis implicitly assumes a zero-sum game, determining how a firm can enhance its position relative to the forces. Yet, such an approach can often be short-sighted;
  • The five-forces analysis also has been criticized for being essentially a static analysis. External forces as well as strategies of individual firms are continually changing the structure of all industries.

Products or services that have an impact on the value of a firm’s products or services.

Strategic Groups
Clusters of firms that share similar strategies. Competition tends to be more intense among firms within a strategic group than between strategic groups.

One can derive an analytical tool from the strategic groups concept:

  • Strategic groupings help a firm to identify barriers to mobility that protect a group from attacks by other groups;
  • Strategic groupings help a firm identify groups whose competitive position may be marginal or tenuous;
  • Strategic groupings help chart the future directions of firms’ strategies;
  • Strategic groups are helpful in thinking through the implications of each industry trend for the strategic group as a whole.

Chapter 3 Internal Environment of the Firm

While we believe SWOT analysis is very helpful as a starting point, it should not form the primary basis for evaluating a firm’s internal strenghts and weaknesses or the opportunities and threats in the environment. The value-chain analysis provides greater insights into analyzing a firm’s competitive position than SWOT analysis does by itself.

3.1 Value-Chain Analysis
A strategic analysis of an organization that uses value-creating activities

  • Primary activities: inbound logistics, operations, outbound logistics, marketing and sales, service;
  • Support activities: infrastructure, human resources management, technology development, procurement.

Primary activities: sequential activities of the value chain that refer to the physical creation of the
product or service, its sale and transfer to the buyer, and its service after sale, including:

  • Inbound Logistics: is primarily associated with receiving, storing and distributing inputs to the product. It includes material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers;
  • Operations: include all activities associated with transforming inputs into the final product form, such as machining, packaging, assembly, testing printing, and facility operations;
  • Outbound Logistics: is associated with collecting, storing, and distributing the product or service to buyers. These activities include finished goods, warehousing, material handling, delivery vehicle operation, order processing, and scheduling;
  • Marketing and Sales: are associated with purchases of products and services by end users and the inducements used to get them to make purchases. They include advertising, promotion, sales force, channel selection, channel relations and pricing;
  • Service: includes all actions associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment.

Support activities: Activities of the value chain that either add value by themselves or add value
through important relationships with both primary activities and other support activities; including:

  • Procurement: refers to the function of purchasing inputs used in the firm’s value chain, not to the purchased inputs themselves. Purchased inputs include raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings;
  • Technology Development: every value activity embodies technology. Technology development related to the product and its features supports the entire value chain, while other technology development is associated with particular primary or support activities;
  • Human Resource Management: consists of activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel. It supports both individual primary and support activities (e.g. hiring of engineers and scientists) and the entire value chain (e.g. negotiation with labor unions);
  • Infrastructure (General Administration): consists of a number of activities, including general management, planning, finance, accounting, legal and government affairs, quality management, and Information systems. It typically supports the entire value chain and not individual activities.

There are two levels of interrelationships among value-chain activities:
1) Interrelationships among activities within the firm;
2) Interrelationships among activities within the firm and with other organizations (e.g. customers and suppliers) that are part of the firm’s expanded value chain.

3.2 Resource-Based View of the Firm
Perspective that firms’ competitive advantages are due to their endowment of strategic resources which are valuable, rare, costly to imitate, and costly to substitute. It combines two perspectives:
1) The internal analysis of phenomena within a company;
2) An external analysis of the industry and its competitive environment.

Sustainable Competitive Advantages
Resources alone are not a basis for competitive advantages, nor are advantages sustainable over time. In some case, a resource or capability helps a firm to increase its revenues or to lower costs but the firm derives only a temporary advantage because competitors quickly imitate or substitute it. For a resource to provide a firm with the potential for a sustainable competitive advantage, it must have four attributes:
1) It must be valuable: in the sense that it exploits opportunities and/or neutralizes threats in the firm’s environment by formulating and implementing strategies that improve its efficiency or effectiveness;
2) It must be rare: among the firm’s current and potential competitors;
3) It must be difficult to imitate: If a resource is inimitable, then any profits generated are more likely to be sustainable. Since an advantage based on inimitability won’t last forever, managers can forestall them and sustain profits for a while by developing strategies around resources that have at least one of the following four characteristics:

  • Physical uniqueness: is by definition inherently to copy;
  • Path dependency: a characteristic of resources that is developed and/or accumulated through a unique series of events;
  • Casual ambiguity: a characteristic or a firm’s resources that is costly to imitate because a competitor cannot determine what the resource is and/or how it can be re-created;
  • Social complexity: a characteristic of a firm’s resources that is costly to imitate because the social engineering required is beyond the capability of competitors, including interpersonal relations among managers, organizational culture, and reputation with suppliers and customers;

4) No substitutes readily available: the fourth requirement for a firm resource to be a source of sustainable competitive advantage is that there must be no strategically equivalent resources that are themselves not rare or inimitable.
Extending the Resource-Based View of the firm
Although the resource-based view of the firm has been useful in determining when firms will create competitive advantages and enjoy high levels of profitability, it has not been developed to address how a firm’s profits will be distributed to a firm’s management and employees. Four factors help explain the extent to which employees and managers will be able to obtain a proportionately high level of the profits that they generate:
1) Employee Bargaining Power: if employees are vital to forming a firm’s unique capability, they will earn disproportionately high wages;
2) Employee Replacement Cost: if employees’ skills are idiosyncratic and rare, they should have high bargaining power based on the high cost required by the firm to replace them;
3) Employee Exit Costs: this factor may tend to reduce an employee’s bargaining power, because an individual may face high personal costs when leaving the organization;
4) Manager Bargaining Power: managers’ power is usually based on how well they create resource-based advantages. Thus, managers may not know as much about the specific nature of customers and technologies, they are in a position to have a more thorough, integrated understanding of the total operation.
There are three types of firm resources:
1) Tangible Resources: organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources;
2) Intangible Resources: organizational assets that are difficult to identify and account for and that are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources;
3) Organizational Capabilities: the competences and skills that a firm employs to transform inputs into outputs.

3.3 Evaluating Firm Performance: Two approaches
1) Financial Ratio Analysis: Identifies how a firm is performing according to its balance sheet, income statement, and market valuation. The beginning point in analyzing the financial position of a firm is to compute and analyze five different types of financial ratios.

Short-term solvency or liquidity

Long-term solvency measures

Asset management (=turnover)


Market value

current ratio, quick ratio, cash ratio;

total debt ratio, debt-equity ratio, equity multiplier, times interest earned ratio, cash coverage ratio;

inventory turnover, days’ sales in inventory, receivables turnover, total asset turnover;

profit margin, return on asset (ROA), return on equity (ROE);

price-earnings ratio, market-to-book-ratio.

It is important to note that a meaningful ratio analysis must go beyond the calculation and interpretation of financial ratios. It must include an analysis of how ratios change over time as well as how they are interrelated. When evaluating a firm’s financial performance one should also compare it with industry norms. A firm’s profitability may appear impressive at first glance. However, it may pale when compared with industry standards or norms.

2) Balanced Scorecard: a method of evaluating a firm’s performance using performance measures from the customers’, internal, innovation and learning, and financial perspectives.

  • Customer Perspective: how a company is performing from its customers’ perspective is a top priority for management. The balanced scorecard requires that managers translate their general mission statements on customer service into specific measures that reflect the factors that really matter to customers;
  • Internal Perspective: although customer-based measures are important, they must be translated into indicators of what the firm must do internally to meet customers’ expectations;
  • Innovation and Learning Perspective: given the rapid rate of markets, technologies, and global competition, the criteria for success are constantly changing. A firm’s ability to do well from a learning and growth perspective is more dependent on its intangible than tangible assets: Three categories are critically important: Human capital (skills, talent, and knowledge), information capital (information systems), and organization leadership (culture, leadership);
  • Financial Perspective: measures of financial performance indicate whether the company’s strategy, implementation, and execution are indeed contributing to bottom-line improvement. Typical financial goals include shareholder value and growth.

Potential Downsides And Limitations:

  • Lack of a clear strategy;
  • Limited or ineffective executive sponsorship;
  • Poor data on actual performance;
  • Too much emphasis on financial measures rather than nonfinancial measures;
  • Inappropriate links of scorecard measures to compensation;
  • Inconsistent or inappropriate terminology.

Chapter 4 The Central Role of Knowledge in Today’s Economy

Knowledge Economy
An economy where wealth is created through the effective management of knowledge workers instead of by the efficient control of physical and financial assets.

Intellectual Capital
The difference between the market value of the firm and the book value of the firm, including assets such as reputation, employee loyalty, and commitment, customer relationships, company values, brand names, and the experience and skills of employees.
Intellectual Capital = Market value of firm – Book Value of firm.

Human Capital
The individual capabilities, knowledge, skills, and experience of a company’s employees and

Social Capital
The Network of relationships that individuals have both inside and outside the organization.

Explicit knowledge
Knowledge that is codified, documented, easily reproduced, and widely distributed.

Tacit knowledge
Knowledge that is in the minds of employees and is based on their experiences and backgrounds.

Socially complex processes (leadership, culture and trust) play a central role in the creation of knowledge.

4.1 Human Capital: The Foundation of Intellectual Capital
All successful organizations must engage to build and leverage their human capital. Hiring is only the first of three key processes. Firms must also develop employees at all levels and specialties. Finally, the first two processes are for naught if firms can’t provide the working environment and intrinsic and extrinsic rewards to retain their best and brightest. These activities can be viewed as a “three-legged stool”, implying that it is difficult for firms to be successful if they ignore or are unsuccessful in any one of these activities.
Attracting Human Capital
The first step in the process of building superior human capital is input control: Attracting and selecting the right person. A popular phrase in this context is: “Hire for Attitude, Train for Skill”. Organizations are increasingly placing their emphasis on the general knowledge and experience, social skills, values, beliefs, and attitudes of employees. In particular, it is important to attract employees who can collaborate with others, give the importance of collective efforts such as teams and task forces.

Developing Human Capital
It is not enough to hire top-level talent and expect that the skills and capabilities of those employees remain current throughout the duration of their employment. Rather, training and devilment must take place at all levels of the organization. Three related topics are:
1) Encouraging Widespread Involvement;
2) Monitoring Progress and Tracking Development;
3) Evaluating Human Capital.

Retaining Human Capital
An organization can either try to force employees to stay in the firm or try to keep them from wanting to jump out by creating incentives. Some mechanisms for retaining human capital are:

  • Employees’ identification with the organization’s mission and values;
  • Providing challenging work and a stimulating environment;
  • The importance of financial and nonfinancial rewards and incentives;
  • Providing flexibility and amenities.

A key issue here is that a firm should not overemphasize financial rewards. After all, if individuals join an organization for money, they also are likely to leave for money. With money as the primary motivator, there is little chance that employees will develop firm-specific ties to keep them with the organization.

4.2 The Vital Role of Social Capital
Social capital refers to the network or relationships that individuals have throughout the organization as well as with customers and suppliers.

Social network analysis  
Analysis of the pattern of social interactions among individuals.

The degree to which all members of a social network have relationships (or ties) with other groupmembers.

Bridging Relationships
Relationships in a social network that connect otherwise disconnected people.

Structural Holes
Social gaps between groups in a social network where there are few relationships bridging the groups.
Implications for Career Success
Clearly, effective social networks can provide many advantages for an organization. From an individual’s perspective, social networks deliver three unique advantages:
1) Private information: is gathered from personal contacts who can offer something unique that cannot be found in publicly available sources;
2) Access to Diverse Skill Sets: success is tied to the ability to transcend natural skill limitations through others;
3) Power: traditionally, a manager’s power was embedded in a firm’s hierarchy. But, when corporate organizations became flatter, that power was repositioned in the network’s brokers (people who bridged multiple networks), who could adapt to changes in the organization, develop clients, and synthesize opposing points of view.

The potential downside of Social Capital
These include the expenses that firms may bear when promoting social and working relationships among individuals as well as the potential for “groupthink”, wherein individuals are reluctant to express divergent (or opposing) views on an issue because of social pressures to conform.
Individuals may also use the contacts they develop to pursue their own interests and agendas that may be inconsistent with the organization’s goals and objectives.

4.3 Using Technology to Leverage Human Capital and Knowledge
Sharing knowledge and information throughout the organization can be a means of conserving resources, developing products and services, and creating new opportunities. There are relatively simple means of using technology, such as e-mail and networks where individuals can collaborate by way of personal computers.

Electronic Teams
Teams of individuals that complete tasks primarily through e-mail communication. These teams are
less restricted by the geographic constraints that are placed on face-to-face teams. Once formed, e-
teams can be more flexible in responding to unanticipated work challenges and opportunities.
Furthermore, e-teams can be very effective in generating “social capital” – the quality of relationships
and networks that leaders and team members form.
However, the geographical dispersion can also cause low cohesion, low trust among members, a lack of appropriate norms or standard operating procedures, or a lack of shared understanding among team members about their tasks.

Protecting the Intellectual Assets: Intellectual Property and Dynamic Capabilities
Although traditional approaches such as patents, copyrights, and trademarks are important, the development of dynamic capabilities may be the best protection in the long run.

Chapter 5 Business-Level Strategy

Competitive advantage has a central role in the study of strategic management.

5.1 Three generic strategies
1) Overall Cost Leadership: a firm’s generic strategy based on appeal to the industry wide market using a competitive advantage based on low cost (experience curve). An overall low-cost position:

  • Enables a firm to achieve above-average returns despite strong competition;
  • Protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry;
  • Provides more flexibility to cope with demands from powerful suppliers for input cost increase;
  • Puts the firm in a favorable position with respect to substitute products introduced by new and existing competitors.

Potential pitfalls of overall cost leadership strategy include:

  • Too much focus on one or a few value-chain activities;
  • All rivals share a common input or raw material;
  • The strategy is imitated too easily;
  • A lack of parity on differentiation;
  • Erosion of cost advantages when the pricing information available to customers increases.

Competitive Parity
A firm’s achievement of similarity, or being “on par”, with competitors with respect to low cost, differentiation, or other strategic product characteristic.

2) Differentiation Strategy: a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industry wide as unique and valued by customers. A differentiation strategy:

  • Provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs;
  • Avoids the need for a low-cost position, by increasing a firm’s margins;
  • Provides higher margins that enable a firm to deal with supplier power;
  • Reduces buyer power, because buyers lack comparable alternatives and are therefore less price sensitive;
  • Enhances customer loyalty, thus reducing the threat of substitutes.

Potential pitfalls of differentiation strategy include:

  • Uniqueness that is not valuable;
  • Too much differentiation;
  • Too high a price premium;
  • Differentiation that is easily imitated;
  • Dilution of brand identification through product-line extensions;
  • Perceptions of differentiation may vary between buyers and sellers.

3) Focus Strategy: a firm’s generic strategy based on appeal to a narrow market segment within an industry. It requires that a firm either has a low-cost position with its strategic target, high
differentiation, or both. It is used to select niches that are least vulnerable to substitutes or
where competitors are weakest.

Potential pitfalls of focus strategy include:

  • Erosion of cost advantages within the narrow segment;
  • Even product and service offerings that are highly focused are subject to competition from new entrants and from imitation;
  • Focusers can become too focused to satisfy buyer needs.

Combination Strategies: Integrating Overall Low Cost and Differentiation
According to study of nearly 1,800 strategic business units, the highest performers were businesses that attained both cost and differentiation advantages, followed by those that had either one or the other. Perhaps the primary benefit to firms that integrate low-cost and differentiation strategies is that it is generally harder for rivals to duplicate or imitate, because the strategy enables a firm to provide two types of value to customers: differentiated attributes (e.g. high quality, brand identification, reputation) and lower prices (because of the firm’s lower costs in value-creating activities).

Potential Pitfalls of Integrated Overall Cost Leadership and Differentiation Strategies:

  • Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”;
  • Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain;
  • Miscalculating sources of revenue and profit pools in the firm’s industry.

5.2 How the Internet and Digital Technologies are affecting the competitive strategies

a. Internet-Enabled Low-Cost Leader Strategies

  • Online bidding and order processing are eliminating the need for sales calls and are minimizing sales force expenses;
  • Online purchase orders are making many transactions paperless, thus reducing the cost of procurement and paper;
  • Direct access to progress reports and the ability for customers to periodically check work in progress is minimizing rework;
  • Collaborative design efforts using Internet technologies that link designers, materials, suppliers, and manufacturers are reducing the costs and speeding the process of new product development.

Potential Internet-Related Pitfalls for Low-Cost Leaders:

  • One of the biggest threats to low-cost leaders is imitation (most software driven capabilities can be duplicated quickly and without threat of infringement or proprietary information);
  • Companies than become overly enamored with suing the Internet for cost-cutting might suffer if they place too much attention on one business activity and ignore others.

b. Internet Enabled Differentiation Strategies:

  • Personalized online access provides customers with their own “site within a site” in which their prior orders, status of current orders, and requests for future orders are processed directly on the supplier’s website;
  • Online access to real-time sales and service information is being used to empower the sales force and continually update R&D and technology development efforts;
  • Internet-based knowledge management systems that link all parts of the organization are shortening response times and accelerating organization learning;
  • Quick online responses to service requests and rapid feedback to customer surveys and product promotions are enhancing marketing efforts.

Potential Internet-Related Pitfalls for Differentiators:

  • Since Internet-enabled capabilities such as the ability to compare product features side-by-side or bid online for competing services, become part of the mainstream, it will become harder to use the Web to differentiate.

c. Internet-Enable Focus Strategies:

  • Permission marketing techniques are focusing sales efforts on specific customers who opt to receive advertising notices;
  • Niche portals that target specific groups are providing advertisers with access to viewers with specialized interests;
  • Virtual organizing and online “officing” are being used to minimize firm infrastructure requirements;
  • Procurement technologies that use Internet software to match buzzers and sellers are highlighting specialized buyers and drawing attention to smaller suppliers.

Potential Internet-Related Pitfalls for Focusers:

  • A key danger for focusers using the Internet relates to correctly assessing the size of the online marketplace.

5.3 Industry Life Cycle Stages: Strategic Implications

Industry Life Cycle
The stages of introduction, growth, maturity, and decline that typically occur over the life of an
1) Introduction Stage: the first stage of the industry life cycle characterized by (1) new products that are not known to customers, (2) poorly defined market segments, (3) unspecified product features, (4) low sales growth, (5) rapid technological change, (6) operating losses, and (7) a need for financial support;
2) Growth Stage: the second stage of the product life cycle characterized by (1) strong increases in sales; (2) growing competition; (3) developing brand recognition; and (4) a need for financing complementary value-chain activities such as marketing, sales, customer service, and research and development;
3) Maturity Stage: the third stage of the product life cycle characterized by (1) slowing demand growth, (2) saturated markets, (3) direct competition, (4) price competition, and (5) strategic emphasis on efficient operations. Firms are able to rescue products floundering in the maturity phase of their life cycles and return them to the growth phase by:

  • Reverse Positioning: a  break in industry tendency to continuously augment products, characteristic of the product life cycle, by offering products with fewer product attributes and lower prices;
  • Breakaway Positioning: a break in industry tendency to incrementally improve products along specific dimensions, characteristic of the product life cycle, by offering products that are still in the industry but that are perceived by customers as being different;

4) Decline stage: the fourth stage of the product life cycle characterized by (1) falling sales and profits, (2) increasing price competition, and (3) industry consolidation. Four basic strategies are available in the decline phase:

  • Maintaining: refers to keeping a product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will eventually exit the market;
  • Harvesting: involves obtaining as much profit as possible and requires that costs be reduced quickly;
  • Exiting the market: involves dropping the product from a firm’s portfolio. Since a residual core of consumers may still use the product, eliminating it should be considered carefully;
  • Consolidation: involves one firm acquiring at a reasonable price the best of the surviving firms in an industry. This enables firms too enhance market power and acquire valuable assets.

Turnaround Strategies
A strategy that reverses a firm’s decline in performance and returns it to growth and profitability:
1) Asset and cost surgery: firms in turnaround situations try to aggressively cut administrative expenses and inventories and speed up collection of receivables;
2) Selective product and market pruning: one strategy is to discontinue only marginally profitable product lines and focus all resources on a few core profitable areas;
3) Piecemeal productivity improvements: there are hundreds of ways in which a firm can eliminate costs and improve productivity. Although individually these are small gains, they cumulate over a period of time to substantial gains.

Chapter 6 Corporate-Level Strategy

Why do some diversification efforts pay off and others produce disappointing results? Diversification initiatives – whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development – must be justified by the creation of value for shareholders.

Given the seemingly high inherent downside risks and uncertainties, it might be reasonable to ask why companies should even bother with diversification initiatives. The answer, in a word, is synergy. This can have two different, but not mutually exclusive, meanings:
1) First, a firm may diversify into related businesses. Here, the primary potential benefits to be derived come from horizontal relationships;
2) Second, a corporation may diversify into unrelated businesses. In these instances, the primary potential benefits are derived largely from hierarchical relationships.

6.1 Related Diversification: Economies of Scope, Revenue Enhancement and Market Power
A firm entering a different business in which it can benefit from economies of scope, revenue enhancement and market power.

1) Economies of Scope: cost savings from leveraging core competencies or sharing related activities among businesses in a corporation:

  • Core competencies: a firm’s strategic resources that reflect the collective learning in the organization. For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria:

i. The core competence must enhance competitive advantage(s) by creating superior customer value;
ii. Different businesses in the corporation must be similar in at least one important way related to the core competence;
iii. The core competencies must be difficult for competitor to imitate or find substitutes for;

  • Sharing activities: having activities of two or more businesses’ value chains done by one of the businesses. Sharing activities can potentially provide two primary payoffs:

i. Cost savings: come from many sources, including elimination of jobs, facilities, and related expenses that are no longer needed when functions are consolidated, or from economies of scale in purchasing;
ii. Revenue enhancements: often an acquiring firm and its target may achieve a higher level of sales growth together than either company could on its own. Firms also can enhance the effectiveness of their differentiation strategies by means of sharing activities among business units.
2) Related Diversification (Market Power): firms’ abilities to profit through restricting or controlling supply to a market or coordination with other firms to reduce investment. Two principal means by which firms achieve synergy through market power are pooled negotiating power and vertical integration:

  • Pooled negotiating Power: similar businesses working together or the affiliation of a business with a strong parent can strengthen an organization’s bargaining position relative to suppliers and customers and enhance its position vis-à-vis competitors. However, managers must carefully evaluate how the combined businesses may affect relationships with actual and potential customers, suppliers, and competitors;
  • Vertical integration: an expansion or extension of the firm by integrating preceding or successive production processes. Although vertical integration is a means for an organization to reduce its dependence on suppliers or its channels of distribution to end users, it represents a major decision that an organization must carefully consider:

Benefits of vertical integration:


Risks of vertical integration:


A secure source of raw materials or distribution channels;

Protection of and control over valuable assets;

Access to new business opportunities;

Simplified procurement and administrative procedures.Loss of flexibility resulting from large investments;

Costs and expenses associated with increased overhead and capital expenditures;

Problems associated with unbalanced capacities along the value chain;

Additional administrative costs associated with managing a more complex set of activities.


In making vertical integration decisions, 6 issues should be considered:
1) Is the company satisfied with the quality of the value that its present suppliers and distributors are providing?
2) Are there activities in the industry value chain presently being outsourced or performed independently by other that are a viable source of future profits?
3) Is there a high level of stability in the demand for the organization’s products?
4) How high is the proportion of additional production capacity actually absorbed by existing products or by the prospect of new and similar products?
5) Does the company have the necessary competencies to execute the vertical integration strategies?
6) Will the vertical integration initiative have potential negative impacts on the firm’s stakeholders?

Transaction cost perspective
A perspective that the choice of a transaction’s governance structure, such as vertical integration or market transaction, is influenced by transaction costs, including search, negotiating, contracting, monitoring, and enforcement costs, associated with each choice.

Vertical integration gives rise to a different set of costs: administrative costs. Coordinating different stages of the value chain now internalized with the firm causes administrative costs to go up. Therefore, decisions about vertical integration have to be based on a comparison of transaction costs and administrative costs.

6.2 Unrelated Diversification: Financial Synergies and Parenting
With unrelated diversification, unlike related diversification, few benefits are derived from horizontal relationships. Instead, potential benefits can be gained from vertical (or hierarchical) relationships.

Parenting advantage
The positive contributions of the corporate office to a new business as a result of expertise and support provided and not as a result of substantial changes in assets, capital structure, or management.

Restructuring Advantage
The intervention of the corporate office in a new business that substantially changes the assets,
capital structure, and/or management, including selling off parts of the business, changing the
management, reducing payroll and unnecessary sources of expenses, changing strategies, and
infusing the new business with new technologies, processes, and reward systems.

Asset restructuring
Involves the sale of unproductive assets, or even whole lines of businesses, that are peripheral.

Capital restructuring
Involves changing the debt-equity mix, or the mix between different classes of debt or equity.

Management Restructuring
typically involves changes in the composition of the top management team, organizational structure,
and reporting relationships.

Portfolio Management
A method of a) assessing the competitive position of a portfolio of businesses within a corporation, b)
suggesting strategic alternatives for each business, and c) to identify priorities for the allocation of
resources across the businesses.

The Boston Consulting Group’s (BCG) growth/share matrix is among the best known portfolio models, which assists firms in achieving a balanced portfolio of businesses. Each of the four quadrants of the grid has different implications for the strategic business units (SBUs) that fall into that category :1) Stars;2) Question Marks;3) Cash Cows;4) Dogs.

1) Stars: are SBUs competing in high-growth industries with relatively high market shares. These firms have long-term growth potential and should continue to receive substantial investment funding;
2) Question Marks: are SBUs competing in high-growth industries but having relatively weak market shares. Resources should be invested in them to enhance their competitive positions;
3) Cash Cows: are SBUs with high market shares in low-growth industries. These unites have limited long-run potential but represent a source of current cash flows to fund investments in “stars” and “question marks”;
4) Dogs: are SBUs with weak market shares in low-growth industries. Because they have weakpositions & limited potential, most analysts recommend divesting them.

In using portfolio strategy approaches, a corporation tries to create synergies and shareholder value in a number of ways:
1) Portfolio analysis provides a snapshot of the businesses in a corporation’s portfolio;
2) The expertise and analytical resources in the corporate office provide guidance in determining what firms may be attractive (or unattractive) acquisitions;
3) The corporate office is able to provide financial resources to the business units on favorable terms that reflect the corporation’s overall ability to raise funds;
4) The corporate office can provide high-quality review and coaching for the individual businesses;
5) Portfolio analysis provides a basis for developing strategic goals and reward/evaluation systems for business managers.

Limitations of Portfolio Models:
1) They are overly simplistic; consisting of only two dimensions (growth and market share);
2) The view each business as separate, ignoring potential synergies across businesses;
3) The process may become overly largely mechanical, minimizing the potential value of managers’ judgment and experience;
4) The reliance on strict rules for resource allocation across SBUs can be detrimental to a firm’s long-term viability;
5) The imagery (e.g. cash cows, dogs) while colorful, may lead to troublesome and overly simplistic prescriptions.

6.3 The Means to Achieve Diversification

a. Mergers and Acquisitions
Merger: the Combining of two or more firms into one new legal identity.
Acquisition: the incorporation of one firm into another through purchase.

Motives and Benefits
Mergers and acquisitions can:

  • Be a means of obtaining valuable resources that can help an organization expand its product offerings and services;
  • Provide the opportunity for firms to attain the three bases of synergy that were addressed earlier in the chapter – leveraging core competencies, sharing activities, and building market power;
  • Lead to consolidation within an industry and can force other players to merge.

Potential Limitations:

  • The takeover premium that is paid for an acquisition is very high;
  • Competing firms often can imitate any advantages realized or copy synergies that result from the M&A;
  • Managers’ credibility and ego can sometimes get in the way of sound business decisions;
  • There can be many cultural issues that may doom the intended benefits from M&A endeavors.

The exit of a business from a firm’s portfolio (also known as the other side of “the M&A coin”).

b. Strategic Alliance and Joint Venture
Strategic Alliance: a cooperative relationship between two or more firms.
Joint venture: new entities formed within a strategic alliance in which two or more firms, the parents, contribute equity to form the new legal entity.

Motives and Benefits:

  • Often a company that has a successful product or service wants to introduce it into a new market;
  • Strategic alliances (or joint ventures) often enable firms to pool capital, value-creating activities or facilities in order to reduce costs;
  • Strategic alliances also may be used to build jointly on the technological expertise of two or more companies in order to develop products technologically beyond the capability of the companies acting independently.

Potential Downsides and Limitations:

  • Without the proper partner, a firm should never consider undertaking an alliance, even for the best of reasons;
  • Each partner should bring the desired complementary strengths to the partnership;
  • The partners must be compatible and willing to trust each other.

Internal Development
Firms that engage in internal development are able to capture the value created by their own innovative activities without having to “share the wealth” with alliance partners or face the difficulties associated with combining activities across the value chains of several companies or merging corporate cultures. However, internal development can be very time consuming; thus, firms may forfeit the benefits of speed that growth through mergers or acquisitions provide.

6.4 How Managerial Motives Can Erode Value Creation

  • Growth for growth’s sake: there are huge incentives for executives to increase the size of their firm, and many of these are hardly consistent with increasing shareholder wealth;
  • Egotism: sometimes, when pride is at stake, CEOs might go to great lengths to win;
  • Antitakeover Tactics: like greenmail, golden parachute or poison pills are common to prevent hostile takeovers, but they raise ethical considerations.

Chapter 7 International Strategy

We live in a highly interconnected global community where many of the best opportunities for growth and profitability lie beyond the boundaries of a company’s home country. Along with the opportunities, of course, there are many risks associated with diversification into global markets.

7.1 Factors Affecting a Nation’s Competitiveness

The Diamond of National Advantage
1) Factor conditions: a nation’s position in factors of production (such as land, labor, and capital);
2) Demand conditions: the nature of home-market demand for the industry’s product or service;
3) Related and supporting industries: the presence, absence, and quality in the nation of supplier
      industries and other related industries that supply services, support, or technology to firms in 
      the industry value chain;
4) Firm strategy, Structure, and rivalry: the conditions in the nation governing how companies are
      created, organized, and managed, as well as the nature of domestic rivalry.

7.2 International Expansion: A Company’s Motives
There are many motivations for a company to pursue international expansion:
1) The most obvious one is to increase the size of potential markets for a form’s products and services;
2) Expanding a form’s global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base. Such an increase potentially enables a form to attain economies of scale;
3) Another advantage would be reducing the costs or research and development as well as operation costs;
4) International expansion can also extend the life cycle of a product that is in its maturity stage in a firm’s home country but that has greater demand potential elsewhere;
5) Finally, international expansion can enable a firm to optimize the physical location for every activity in its value chain. Optimizing the location for every activity in the value chain can yield one or more of three strategic advantages: performance enhancement, cost reduction, and risk reduction.

7.3 Potential Risks of International Expansion
1) Political Risk: potential threat to a firm’s operations in a country due to ineffectiveness of the domestic political system;
2) Economic Risk: potential threat to a firm’s operations in a county due to economic policies and conditions, including property rights laws and enforcement of those laws;
3) Currency Risk: potential threat to a firm’s operations in a country due to fluctuations in the local currency’s exchange rate;
4) Management Risk: potential threat to a form’s operations in a country due to the problems that managers have making decisions in the context of foreign markets.

Global Dispersion of Value Chains:

  • Outsourcing: using other firms to perform value-creating activities that were previously performed in-house;
  • Offshoring: shifting a value-creating activity from a domestic location to a foreign location.

7.4 Achieving Competitive Advantage in Global Markets
Strategies that favor global products and brands:

  • Should standardize all of a firm’s products for all of their worldwide markets;
  • Should reduce a firm’s overall costs by spreading investments over a larger market;
  • Are based on three assumptions:
    • Customer needs and interests worldwide are becoming more homogeneous;
    • People (worldwide) prefer lower prices at high quality;
    • Economies of scale in production and marketing can be achieved through supplying global markets.

The two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace : International Strategy, Global Strategy, Multidomestic Strategy, Transnational Strategy.

1) International Strategy: is based on diffusions and adaptation of the parent company’s knowledge and expertise to foreign markets. Country units are allowed to make some minor adaptations to products and ideas coming from the head office, but they have far less independence and autonomy compared to multidomestic companies.


  • Leverage and diffusion of a parent firm’s knowledge and core competencies;
  • Lower costs because of less need to tailor products and services.


  • Limited ability to adapt to local markets;
  • Inability to take advantage of new ideas and innovations occurring in local markets.

2) Global Strategy: is based on the emphasis on lowering costs. Competitive strategy is centralized and controlled to a large extent by the corporate office. Since the primary emphasis is on controlling costs, the corporate office strives to achieve a strong level of coordination and integration across the various businesses.


  • Strong integration across various businesses;
  • Standardization leads to higher economies of scale, which lowers costs;
  • Helps create uniform standards of quality throughout the world.


  • Limited ability to adapt to local markets;
  • Concentration of activities may increase dependence on a single facility;
  • Single locations may lead to higher tariffs and transportation costs.

3) Multidomestic Strategy: is based on the emphasis on differentiating its products and service offerings to adapt to local markets. Decisions evolving from a multidomestic strategy tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand.


  • Ability to adapt products and services to local market conditions;
  • Ability to detect potential opportunities for attractive niches in a given market, enhancing value.


  • Decreased ability to realize cost savings through scale economies;
  • Greater difficulty in transferring knowledge across countries;
  • May lead to “overadaptation” as conditions change.

4) Transnational Strategy: strives to optimize the trade-offs associated with efficiency, local adaption, and learning. It seeks efficiency not for its own sage, but as a means to achieve global competitiveness. It recognizes the importance of local responsiveness but as a toll for flexibility in international operations.


  • Ability to attain economies of scale;
  • Ability to adapt to local markets;
  • Ability to locate activities in optimal locations;
  • Ability to increase knowledge flows and learning.


  • Unique challenges in determining optimal locations of activities to ensure cost and quality;
  • Unique managerial challenges in fostering knowledge transfer.

7.5 Entry Modes of International Expansion
A firm has many options available to it when it decides to expand into international markets (see the figure). Given the challenges associated with such entry, many firms start on a small scale and then increase their level of investment and risk as they gain greater experience with the overseas market in question.

1) Exporting: producing goods in one country to sell to residents of another country.

Benefits: since firms start from scratch in sales and distribution when they enter new markets
and they recognize that they cannot master local business practices, meet regulatory requirements,
hire and manage local personnel, they minimize their risk by hiring local distributors and investing
very little in the undertaking. The firm gives up control of strategic marketing decisions to the local
partners to benefit from their valuable expertise and knowledge of their own markets
Risks and Limitations: in a study of 250 instances in which multinational firms used local distributors
o implement their exporting entry strategy, the results were dismal, mainly because of the lack of a
collaborative, win-win relationship.

2) Licensing: a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual.

Benefits: in international markets, an advantage of licensing is that the firm granting a license incurs
little risk, since it does not have to invest any significant resources into the country itself.
Risks and Limitations: the licensor gives up control of its product and forgoes potential revenues
and profits. Furthermore, the licensee may eventually become so familiar with the patent and trade
secrets that it may become a competitor (e.g. by modifying the product).

3) Franchising: a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; it usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising.

Benefits: franchising has the advantage of limiting the risk exposure that a firm has in overseas
markets. At the same time, the firm is able to expand the revenue base of the company.
Risks and Limitation: with franchising, the multinational firm receives only a portion of the revenues,
in the form of franchise fees.

4) Strategic Alliances and Joint Ventures: joint ventures and strategic alliances differ in that joint ventures entail the creation of a third-party legal entity, whereas strategic alliances do not. In addition, strategic alliances focus on smaller initiatives than joint ventures.

Benefits: these strategies have been effective in helping firms increase revenues and reduce costs
as well as enhance learning and diffuse technologies. These partnerships enable firms to share the
risks as well as the potential revenues and profits. Entering into partnerships with host country firms
can provide very useful information on local market tastes, competitive conditions, etc.
Risks and Limitations: to minimize risks there needs to be a clearly defined strategy that is strongly
supported by the organizations that are party to the partnership. Closely allied to the first issue, there
must be a clear understanding of capabilities and resources that will be central to the partnership.
Third, trust is a vital element. Fourth, cultural issues that can potentially lead to conflict and
dysfunctional behaviors need to be addressed.

5) Wholly Owned Subsidiary: a business in which a multinational company owns 100 percent of the stock. There are two ways a firm can establish a wholly owned subsidiary:
1) To acquire an existing company in the home country;
2) To develop a totally new operation (often referred to as a “Greenfield venture”).

Benefits: it can yield the highest returns and it provides the multinational company with the greatest
degree of control of all activities, including manufacturing, marketing, distribution, and technology
Risks and Limitations: wholly owned subsidiaries are typically the most expensive and risky of the
various entry modes. The risks associated with doing business in a new country can be lessened by
hiring local talent.

Chapter 8 Recognizing Entrepreneurial Opportunities

8.1 Entrepreneurship
The creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present: opportunity recognition, resources to pursue the opportunity and an entrepreneur/entrepreneurial team willing and able to undertake the opportunity. New value can be created in start-up ventures, major corporations, family-owned businesses, non-profit organizations, established institutions etc.

1) Opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, sociocultural trends, or shifts in consumer demand, that can be exploited.
Discovery phase:

  • Period when you first become aware of a new business concept;
  • May be spontaneous and unexpected;
  • May occur as the result of deliberate search for new venture projects or creative solutions to business problems.

Opportunity formation phase:

  • Evaluating an opportunity (can it be developed into a full-fledged new venture?);
  • Talk to potential target customers;
  • Discuss it with production or logistics managers;
  • Conduct feasibility analysis (Market potential, Product concept testing, Focus groups, Trial runs with end users).

For an opportunity to be viable, it needs to have four qualities:
1) Attractive: there must be market demand for the new product or service;
2) Achievable: the opportunity must be practical and physically possible;
3) Durable: it must be attractive long enough for the development and deployment to be successful;
4) Value creating: it must be potentially profitable.

2) Entrepreneurial Resources: hand-in-hand with the importance of markets (and marketing) to new-venture creation, entrepreneurial firms must also have financing. In general, financial resources will take one of two forms:
a. Equity: funds invested in ownership shares such as stock. The value of equity funding increases or decreases depending on firm performance. To obtain it usually requires that business founders give up some ownership and troll of the business (e.g. personal savings, investments by family and friends, private investors, venture capital or public stock offerings);
b. Debt: borrowed funds such as interest-bearing loans. In general, debt funding must be repaid regardless of firm performance. To obtain it usually requires that some business or personal assets are used as collateral (e.g. bank loans, credit cards, loans by family and friends, mortgaged property, supplier financing or public financing).

Clearly, financial resources are essential for entrepreneurial ventures. But other types of resources are also vitally important.

Human Capital
The most important asset an entrepreneurial firm can have is strong and skilled management. Managers need to have a strong base of experience and extensive domain knowledge, as well as an
ability to make rapid decisions and change direction as shifting circumstances may require.

Social Capital
New ventures founded by entrepreneurs who have extensive social contacts are more likely to succeed than are ventures started without the support of a social network. Even though a venture may be new, if the founders have contacts who will vouch for them, they gain exposure and build legitimacy faster.

Government Resources
In the United States, the federal government provides support for entrepreneurial firms in two key arenas – financing and government contracting. The Small Business Administration (SBA) has several loan guarantee programs designed to support the growth and development of entrepreneurial firms. The SBA also offers training, counseling, and support services through its local offices and Small Business Development Centers.

3) Entrepreneurial Leadership: whether a venture is launched by an individual entrepreneur or an
            entrepreneurial team, effective leadership is needed. Three characteristics of effective
            leadership are:
a. Vision (may be an entrepreneur’s most important asset);
b. Dedication and drive (are reflected in hard work);
c. Commitment to excellence (requires entrepreneurs to develop a commitment to knowing the customer, providing quality goods and services, paying attention to details, and continuously learning).

8.2 Entrepreneurial Strategy
As suggested earlier, one of the most challenging aspects of launching a new venture is finding a way to begin doing business that generates cash flow, builds credibility, attracts good employees, and overcomes the liability of newness.

Pioneering new entry
A firm's entry into an industry with a radical new product or highly innovative service that changes the way business is conducted. 

Imitate new entry
A firm's entry into an industry with products or services that capitalize on proven market successes
and that usually has a strong marketing orientation.

Adaptive new entry
A firm's entry into an industry by offering a product or service that is somewhat new and sufficiently
different to create value for customers by capitalizing on current market trends.

To achieve competitive advantages new ventures can use the following generic strategies:
1) Overall cost leadership: one of the ways entrepreneurial firms achieve success is by doing more with less. Thus, under the right circumstances, a low-cost leader strategy is a viable alternative for some new ventures. New ventures often have simple organizational structures that make decision making both easier and faster. The smaller size also helps young firms change more quickly when upgrades in technology or feedback from the marketplace indicate that improvements are needed.
2) Differentiation: both pioneering and adaptive entry strategies involve some degree of differentiation. That is, the new entry is based on being able to offer a differentiated value proposition. However, several factors make it more difficult for new ventures to be successful as differentiators (e.g. strategy is expensive to enact, differentiation is often associated with strong brand identity, differentiation successes are sometimes built on superior innovation or use of technology).
3) Focus: focus strategies are often associated with small businesses because there is a natural fit between the narrow scope of the strategy and the small size of the firm. Since most start-ups enter industries that are mature, young firms can often succeed best by finding a market niche where they can get a foothold and make small advances that erode the position of existing competitors.

Although each of the three strategies holds promise, and pitfalls, for new ventures, firms that can make unique combinations of the generic approaches may have the greatest chances of success.

8.3 Competitive Dynamics
New entry into markets, whether by start-ups or by incumbent firms, nearly always threatens existing competitors. As a result, a competitive dynamic – action and response – begins among the firms competing for the same customers in a given marketplace.

New Competitive Action

Companies launch new competitive actions, because of the desire to strengthen financial outcomes, capture some of the extraordinary profits that industry leaders enjoy, and grow the business. Examples for improving competitive position and consolidating gains in preparation for another attack are:

  • Devastate rivals’ profit: not all business segments generate the same level of profits for a company;
  • Sanctuaries: through focused attacks on a rival’s most profitable segments, a company can generate maximum leverage with relatively smaller-scale attacks. Recognize, however, that companies closely guard the information needed to determine just what their profit sanctuaries are;
  • Plagiarize with pride: just because a close competitor comes up with an idea first does not mean it cannot be successfully imitated. Second movers, in fact, can see how customers respond, make improvements, and launch a better version without all the market development costs. Successful imitation is harder than it may appear and requires the imitating firm its keep its ego in check;
  • Deceive the competition: a good gambit sends the competition off in the wrong direction. This may cause the rivals to miss strategic shifts, spend money pursuing dead ends, or slow their responses. Any of these outcomes support the deceiving firms’ competitive advantage. Companies must be sure to not cross ethical lines during these actions;
  • Unleash massive and overwhelming force: while many hardball strategies are subtle and indirect, this one is not. This is a full-frontal attack where a firm commits significant resources to a major campaign to weaken rivals’ positions in certain markets. Firms must be sure they have the mass and stamina required to win before they declare war against a rival.
  • Raise competitors’ costs: if a company has superior insight into the complex cost and profit structure of the industry, it can compete in a way that steers its rivals into relatively higher cost/lower profit arenas. This strategy uses deception to make the rivals think they are winning, when in fact they are not. Again, companies using this strategy must be confident that they understand the industry better than their rivals.

Types of Competitive Actions
Once an organization determines whether it is willing and able to launch a competitive action, it must determine what type of action is appropriate:

  • Strategic actions: major commitments of distinctive and specific resources to strategic initiatives (e.g. entering new markets, new product introductions, changing production capacity, mergers / alliances);
  • Tactical actions: refinements or extensions of strategies usually involving minor resource commitments (e.g. price cutting / or increases, product / service enhancements, increased marketing efforts, new distribution channels).

Before launching a given strategy, however, assessing the likely response of competitors is a vital
Likelihood of Competitive Reaction
Evaluating potential competitive reactions helps companies plan for future counterattacks. How a competitor is likely to respond will depend on three factors:

  • Market dependence: if a company has a high concentration of its business in a particular industry, it has more at stake because it must depend on that industry’s market for its sales;
  • Competitor’s resources: for example, a small firm may be unable to mount a serious attack due to lack of resources. As a result, it is more likely to react to tactical actions such as incentive pricing or enhanced service offerings because they are less costly to attack than large-scale strategic actions;
  • Actor’s reputation: whether a company should respond to a competitive challenge will also depend on who launched the attack against it.

Choosing Not to React: Forbearance and Co-opetition
In many circumstances the best reaction is no reaction at all. This is known as forbearance – refraining from reacting at all as well as holding back from initiating an attack. Related to forbearance is the concept of “co-opetition”. This term suggests that companies often benefit most from a combination of competing and co-operating. Close competitors that differentiate themselves in the eyes of consumers may work together behind the scenes to achieve industrywide efficiencies.
Despite the potential benefits of co-opetition, companies need to guard against co-operating to such a great extent that their actions are perceived as collusion, a practice that has legal ramifications in the United States.

Chapter 9 Strategic Control and Corporate Governance

9.1 Two types of control systems

1) Traditional approach to strategic control: a sequential method of organizational control in which (1) strategies are formulated and top management set goals, (2) strategies are implemented, and (3) performance is measured against the predetermined goal set. Control is based on a feedback loop from performance measurement to strategy formulation (see the figure below).

Most appropriate:

  • When environment is stable and relatively simple;
  • Goals and objectives can be measured with certainty;
  • Little need for complex measures of performance.


  • Process typically involves lenghty time lags, often tied to the annual planning cycle;
  • Little or no action taken to revise strategies, goals and objectives until the end of the time period.

2) Contemporary approach to strategic control: this approach suggests continually monitoring the environments (internal and external) as well as identifying trends and events that signal the need to revise strategies, goals and objectives. Relationships between strategy formulation implementation and control are highly interactive.

Informational control
A method or organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization’s goals and strategies and the strategic environment (‘doing the right things’).

Behavioral control  
A method or organizational control in which a firm influences the actions of employees through culture, rewards and boundaries (‘doing things right’).

9.2 Attaining Behavioral Control: Balancing Culture, Rewards, and Boundaries

Behavioral control is focused on implementation - doing things right.

Organizational Culture 
A system of shared values and beliefs that shape a company’s people, organizational structures, and
control systems to produce behavioral norms.

Effective culture must be cultivated, encouraged, and “fertilized”. Maintaining an effective culture can
be achieved through storytelling or through rallies or “pep talks” by top executives.

Rewards and Incentive Systems:

  • Powerful means of influencing an organization’s culture;
  • Focuses efforts on high-priority tasks;
  • Motivates individual and collective task performance;
  • Can be an effective motivator and control mechanism.

Potential Downsides
Reward systems can change an organizational culture to the extent that:

  • Important information is hoarded rather than shared;
  • Individuals begin working at cross-purposes;
  • And they lose sight of overall goals.

Setting boundaries and constraints

Characteristics of effective reward and evaluation systems:

  • Objectives are clear, well understood, and broadly accepted;
  • The structure is flexible; it can adapt to changing circumstance;
  • Rewards are clearly linked to performance and desired behaviors;
  • Performance measures are clear and highly visible;
  • Feedback is prompt, clear, and unambiguous;
  • The compensation “system” is perceived as fair and equitable;
  • The structure is flexible; it can adapt to changing circumstances.

Boundaries and constraints, when used properly, can serve many useful purposes for organizations:

  • Focusing Efforts on Strategic Priorities;
  • Providing Short-Term Objectives and Action Plans;
  • Improving Efficiency and Effectiveness;
  • Minimizing Improper and Unethical conduct .

Behavioral Control in Organizations: Situational Factors


Some Situational Factors

Culture: A system of unwritten rules that forms an internalized influence over behavior

- Often found in professional organizations

- Associated with high autonomy

- Norms are the basis for behavior

Rules: Written and explicit guidelines that provide external constraints on behavior

- Associated with standardized output

- Tasks are generally repetitive and routine

- Little need for innovation or creative activity

Rewards: The use of performance-based incentive systems to motivate

- Measurement of output and performance is rather straightforward

- Most appropriate in organizations pursuing unrelated diversification strategies

- Rewards may be used to reinforce other means of control


Evolving from Boundaries to Rewards and Culture
In most environments, organizations should strive to provide a system or rewards and incentives, coupled with a culture strong enough that boundaries become internalized and external controls such as rules and regulations are reduced. There are several ways to move in this direction:

  • Hire the right people;
  • Training plays a key role;
  • Managerial role models are vital;
  • Rewards systems must be clearly aligned with the organizational goals and objectives.

9.3 The Role of Corporate Governance

Corporate Governance 
The relationship among various participants in determining the direction and performance of corporations. The primary participants are (1) the shareholders, (2) the management, and (3) the board of directors.

The modern Corporation: The Separation of Owners (Shareholders) and Management

A mechanism created to allow different parties to contribute capital, expertise, and labor for the maximum benefit of each party.

The issue is how can corporations succeed (or fail) in aligning managerial motives with the interests of the shareholders and the interests of the board of directors?

Agency Theory
A theory of the relationship between principals and their agents, with emphasis on two problems: (1) the conflicting goals of principals and agents, along with the difficulty of principals to monitor the agents, and (2) the different attitudes and preferences towards risk of principals and agents.

Governance mechanisms: Aligning the Interests of Owners and Managers
To minimize the potential for managers to act in their own self-interest, or “opportunistically”, the owners can implement some governance mechanisms. These include (1) a committed and involved board of directors that acts in the best interests of the shareholders to create long-term value and (2) shareholder activism, wherein the owners view themselves as shareowners instead of shareholders and become actively engaged in the governance of the corporation.

Board of Directors
Group that has a fiduciary duty to ensure that the company is run consistently with the long-term interests of the owners, or shareholders, of a corporation and that acts as an intermediary between the shareholders and management. Duties of the Board:

  • Select, regularly evaluate, and, if necessary, replace the CEO;
  • Review and, where appropriate, approve the financial objectives, major strategies, and plans of the corporation;
  • Provide advice and counsel to top management;
  • Select and recommend to shareholders for election an appropriate slate of candidates for the board of directors;
  • Review the adequacy of the systems to comply with all applicable laws/regulations.

Shareholder activism
Actions by large shareholders to protect their interests when they feel that managerial actions of a corporation diverge from shareholder value maximization.

Managerial rewards and incentives
As discussed earlier, incentive systems must be designed to help a company achieve its goals. Similarly, from the perspective of governance, one of the most critical roles of the board of directors is
to create incentives that align the interests of the CEP and top executives with the interests of shareholders. A combination of three basic policies may create the right monetary incentives for CEOs to maximize the value of their companies:

  • Boards can require that the CEOs become substantial owners of company stock;
  • Salaries, bonuses, and stock options can be structured so as to provide rewards for superior performance and penalties for poor performance;
  • Threat of dismissal for poor performance can be a realistic outcome.

External Governance and Control Mechanisms
Methods that ensure that managerial actions lead to shareholder value maximization and do not harm other stakeholder groups and that are outside the control of the corporate governance system.

Assuming that internal control mechanisms in a company are failing (e.g. the board is ineffective in monitoring managers and shareholders are passive), managers may behave opportunistically:

  1. They can shirk their responsibilities (shirking means that managers fail to exert themselves fully);
  2. They can engage in on the job consumption (e.g. private jets, club memberships, etc.);
  3. They may engage in excessive product-market diversification (reducing only the employment risk of the managers rather than the financial risk of the shareholders).

External mechanisms that provide at least some partial solution to the problems described are:

Market for corporate control
An external control mechanism in which shareholders dissatisfied with a firm’s management sell their shares. As more and more stockholders vote with their feet, the value of the stock begins to decline, resulting at a point where the market value of the firm becomes less than the book value. A corporate raider can therefore take over the company for a price less than the book value of the assets of the company.

Takeover constraint
The risk to management of the firm being acquired by a hostile raider.

Auditing forms are independent organizations staffed by certified professionals who verify the firm’s books of accounts. Audits can unearth financial irregularities and ensure that financial reporting by the firm conforms to standard accounting practices.

Banks and Analysts
Banks have lent money to corporations and therefore have to ensure that the borrowing firm’s finances are in order. Stock analysts conduct ongoing in-depth studies of the firms that they follow and make recommendations to their clients to buy, hold, or sell. The access of banks and analysts to information, knowledge of the industry and the firm enables them to alert the investing community of both positive and negative developments relating to a company.

Regulatory Bodies
All corporations are subject to some regulation by the government. For example, all public corporations are required to disclose a substantial amount of financial information by bodies such as the Securities and Exchange Commission (SEC).

Media and public activists
The press is not usually recognized as an external control mechanism in the literature of corporate governance. There is, however, no denying that in all developed capitalist economies, the financial press and media play an important indirect role in monitoring the management of public corporations.
Corporate Governance: An International Perspective

Principal-Principal Conflicts
Conflicts between two classes of principals – controlling shareholders and minority shareholders – within the context of a corporate governance system. Three conditions must be met for PP conflicts to occur:

  1. A dominant owner or group of owners who have interests that are distinct from minority shareholders;
  2. Motivation for the controlling shareholders to exercise their dominant positions to their advantage;
  3. Few formal (such as legislation or regulatory bodies) or informal constraints that would discourage or prevent the controlling shareholders from exploiting their advantageous positions.

Another ubiquitous feature of corporate life outside of the US and GB are business groups such as the “keiretsus” of Japan and the “chaebols” of South Korea.

Business Groups
A set of firms that, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action.

Chapter 10 Creating Effective Organizational Designs

10.1 Company’s structure
Organizational structure refers to the formalized patterns of interactions that link a firm’s tasks, technologies, and people. A structure provides the means of balancing two conflicting forces:

  • Need for the division of tasks into meaningful groupings;
  • Need to integrate the groupings for efficiency and effectiveness.

A firm’s strategy and structure change as it increases in size, diversifies into new product markets, and expands its geographic size. 

1) Simple Structure: an organizational form in which the owner-manager makes most of the decisions and controls activities, and the staff serves as an extension of the top executive.


  • Highly informal;
  • Coordination of tasks by direct supervision;
  • Decision making is highly centralized.


  • Little specialization of tasks;
  • Few rules and regulations;
  • Informal evaluation and reward system.

2) Functional Structure: an organizational form in which the major functions of the firm, such as production, R&D, and accounting, are grouped internally.


  • Enhanced coordination and control;
  • Centralized decision making;
  • Enhanced organizational-level perspective;
  • More efficient use of managerial and technical talent;
  • Facilitated career paths and development in specialized areas.


  • Impeded communication and coordination due to differences in values and orientations;
  • May lead to short-term thinking (functions vs. organization as a whole;
  • Difficult to establish uniform performance standards.

3) Divisional Structure: an organizational form in which products, projects, or product markets are grouped internally. Each division includes its own functional specialists typically organized into departments. Divisions are relative autonomous and consist of products and services that are different from those of other divisions. Division executives help determine product-market and financial objectives.


  • Separation of strategic and operating control;
  • Quick response to important changes in external environment;
  • Minimal problems of sharing resources across functional departments;
  • Development of general management talent is enhanced.


  • Can be very expensive;
  • Can be dysfunctional competition among divisions;
  • Can be a sense of a “zero-sum” game that discourages sharing ideas and resources among divisions;
  • Differences in image and quality may occur across divisions;
  • Can focus on short-term performance.

- Strategic Business Unit (SBU) structure: an organizational form in which products, project, or product market divisions are grouped into homogeneous groups.


  • Task of planning and control at corporate office is more manageable.


  • May become difficult to achieve synergies across SBUs.

- Holding Company Structure: an organizational form that is a variation of the divisional organizational structure in which the divisions have a high degree of autonomy both from other divisions and from corporate headquarters.


  • Lower expenses and overhead, fewer levels in the hierarchy.


  • Inherent lack of control and dependence of CEO-level executives on divisional executives.

4) Matrix structure: an organizational form in which there are multiple lines of authority and some individuals report to at least two managers.


  • Facilitates the use of specialized personnel, equipment and facilities;
  • Provides professionals with a broader range of responsibility and experience.


  • Can cause uncertainty and lead to intense power struggles;
  • Working relationships become more complicated;
  • Decisions may take longer.

International Operations: Implications for Organizational Structure
Three major contingencies influence the structure adopted by firms with international operations:

  1. Type of strategy driving the firm’s foreign operations;
  2. Product diversity;
  3. Extent to which the firm is dependent on foreign sales.

The primary structures used to manage international operations:

  • International division;
  • Geographic-area division;
  • Worldwide functional;
  • Worldwide product division;
  • Worldwide matrix.

Global Start-Ups: A New Phenomenon
A business organization that, from inception, seeks to derive significant advantage from the use of resources and the sale of outputs in multiple countries.

10.2 Linking Strategic Reward and Evaluation Systems to Business- and Corporate-Level Strategies

The effective use of reward and evaluation systems can play a critical role in motivating managers to conform to organizational strategies, achieve performance targets, and reduce the gap between organizational and individual goals. In contrast, reward systems, if improperly designed, can lead to behaviors that either are detrimental to organizational performance or can lower morale and cause employee dissatisfaction.

The key issue becomes the need for independence versus interdependence. With cost leadership strategies and unrelated diversification, there tends to be less need for interdependence. Thus, the reward and evaluation systems focus more on the use of financial indicators because unit costs, profits, and revenues can be rather easily attributed to a given business unit or division.

In contrast, firms that follow differentiation or related diversification strategies have intense needs for tight interdependencies among the functional areas and business units. To facilitate sharing and collaboration, reward and evaluation systems tend to incorporate more behavioral indicators.



Level of Strategy



Types of Strategy


Need for Interdependence

Primary Type of Reward and Evaluation System

Business - Level

Overall cost leadership



Business – Level




Corporate – Level

Related diversification



Corporate – Level

Unrelated diversification




Boundaryless Organizational Designs
Organizations in which the boundaries, including vertical (between levels in the organization’s hierarchy), horizontal (between functional areas), external (between the firm and its customers, suppliers, and regulators) and geographic (between locations, cultures and markets) boundaries are permeable.

1) Barrier-Free Organization: an organizational design in which firms bridge real differences in culture, function, and goals to find common ground that facilitates information sharing and other forms of cooperative behavior.

Permeable Internal Boundaries

  • Higher level of trust and shared interests;
  • Shift in philosophy from executive development of organizational development;
  • Greater use of teams;
  • Flexible porous organizational boundaries;
  • Communication flows and mutually beneficial relationships with internal and external constituencies.


  • Leverages the talents of all employees;
  • Enhances cooperation, coordination, and information sharing among functions, divisions, SBUs, and external constituencies;
  • Enables a quicker response to market changes through a single-goal focus;
  • Can lead to coordinated win-win initiatives with key suppliers, customers, and alliance partners.


  • Difficult to overcome political and authority boundaries inside and outside the organization;
  • Lacks strong leadership and common vision, which can lead to coordination problems;
  • Time-consuming and difficult-to-manage democratic processes;
  • Lacks high levels of trust, which can impede performance.

2) Modular Organization: an organization in which non-vital functions are outsourced, which uses the knowledge and expertise of outside suppliers while retaining strategic control. Three advantages:
a. Decrease overall costs, leverage capital;
b. Enables company to focus scarce resources on areas where it holds competitive advantage;
c. Adds critical skills and accelerates organizational learning.


  • Directs a firm’s managerial and technical talent to the most critical activities;
  • Maintains full strategic control over most critical activities—core competencies;
  • Achieves “best in class” performance at each link in the value chain;
  • Leverages core competencies by outsourcing with smaller capital commitment;
  • Encourages information sharing and accelerates organizational learning.


  • Inhibits common vision through reliance on outsiders;
  • Diminishes future competitive advantages if critical technologies or other competences are outsourced;
  • Increases the difficulty of brining back into the firm activities that now add value due to market shifts;
  • May lead to an erosion of cross-functional skills;
  • Decreases operational control and potential loss of control over a supplier.

3) The Virtual Organization: a continually evolving network of independent companies that are linked together to share skills, costs, and access to one another’s markets. The members of a virtual organization each gains from resulting individual and organizational learning. Virtual organizations need to be permanent.

  • Enables the sharing of costs and skills;
  • Enhances access to global markets;
  • Increases market responsiveness;
  • Creates a “best of everything” organization since each partner brings core competencies to the alliance;
  • Encourages both individual and organizational knowledge sharing and accelerates organizational learning.


  • Harder to determine where one company ends and another begins, due to close interdependencies
  • · among players;
  • · Leads to potential loss of operational control among partners;
  • · Results in loss of strategic control over emerging technology;
  • · Requires new and difficult-to-acquire managerial skills.

Boundaryless Organizations: Making Them Work
Designing an organization that simultaneously supports the requirements of an organization’s strategy, is consistent with the demands of the environment, and can be effectively implemented by the people around the manager is a tall order for any manager. The most effective solution is usually a combination of organizational types.

Factors facilitating effective coordination and integration of key activities are:

  • Common culture and shared values;
  • Horizontal organization structures;
  • Horizontal systems and processes;
  • Communications and information technologies;
  • Human resource practices.

10.3 Creating ambidextrous organizational designs
In today’s rapidly changing global environment, managers must be responsive and proactive in order to take advantage of new opportunities. At the same time, they must effectively integrate and coordinate existing operations. Such requirements call for organizational designs that establish project teams that are structurally independent units, with each having its own processes, structures, and cultures. But, at the same time, each unit needs to be effectively integrated into the existing management hierarchy.

Chapter 11 Leadership: Three Interdependent Activities

11.1 Leadership
The process of transforming organizations from what they are to what the leader would have them become. This definition implies a lot: dissatisfaction with the status quo, a vision of what it should be, and a process for bringing about change.

Accordingly, many authors contend that successful leaders must recognize three interdependent activities that must be continually reassessed for organizations to succeed. As shown in the graphic, these are: (1) determining a direction, (2) designing the organization, and (3) nurturing a culture dedicated to excellence and ethical behavior.

  1. Setting a direction: a holistic understanding of an organization’s stakeholders requires an ability to scan the environment to develop a knowledge of all of the company’s stakeholders and other salient environmental trends and events.
  2. Designing the organization: successful leaders are actively involved in building structures, team, systems, and organizational processes that facilitate the implementation of their vision and strategies.
  3. Nurturing a culture dedicated to excellence and ethical behavior:  leaders play a key role in developing and sustaining – as well as changing, when necessary – an organization’s culture. Managers and top executives must also accept personal responsibility for developing and Strengthening ethical behavior throughout the organization. They must consistently demonstrate that such behavior is central to the vision and mission of the organization.

Overcoming Barriers to Change and the Effective Use of Power

Barriers to Change
Characteristics of individuals and organizations that prevent a leader from transforming an organization.
There are many reasons why organizations at all levels are prone to inertia and are slow to learn, adapt, and change:

  1. Many people have vested interests in the status quo. People, in general, tend to be risk averse and resistant to change;
  2. There are systemic barriers (barriers to change that stem from an organizational design that impedes the proper flow and evaluation of information);
  3. There are behavioral barriers (barriers to change associated with the tendency for managers to look at issues from a biased or limited perspective based on their prior education and experience);
  4. There are political barriers (barriers to change related to conflicts arising from power relationships);
  5. Personal time constraints.

Successful leadership requires effective use of power in overcoming barriers to change. Power is a leader’s ability to get things done in a way he or she wants them to be done. A leader derives his or her power from several sources or bases: organizational and personal. 

1) Organizational bases of power: power that stems from a leader’s holding a formal management position:

  • Legitimate Power is derived from organizationally conferred decision making authority;
  • Reward Power depends on the ability of the leader or manager to confer rewards for positive behaviors or outcomes;
  • Coercive Power is the power a manger exercises over employees using fear of punishment for errors of omission or commission;
  • Information Power arises from a manger’s access, control, and distribution of information that is not freely available to anyone in the organization.

2) Personal bases of power: power that stems from a leader’s personality characteristics and behavior:

  • Referent Power is a subordinate’s identification with the leader;
  • Expert Power is the leader’s expertise and knowledge in a particular field.

11.2 Emotional Intelligence: A Key Leadership Trait

Emotional Intelligence
An individual’s capacity for recognizing his or her own emotions and those of others, including the five
components of self awareness, self regulation, motivation, empathy, and social skills




Self-management skills




- The ability to recognize and understand your moods, emotions, and drives, as well as their effect on others

- Self confidence

- Realistic self-assessment

- Self-deprecating sense of humor


- The ability to control or redirect disruptive impulses and moods

- The propensity to suspend judgment – to think before acting

- Trustworthiness and   integrity

- Comfort with ambiguity

- Openness to change


- A passion to work for reasons that go beyond money or status

- A propensity to pursue goals with energy and persistence

- Strong drive to achieve

- Optimism, even in the face of failure

- Organizational achievement

Managing relationships




- The ability to understand the emotional makeup of other people

- Skill in treating people according to their emotional reactions

- Expertise in building and retaining talent

- Cross-cultural sensitivity

- Service to clients and customers

Social skill

- Proficiency in managing relationships and building networks

- An ability to find common ground and build rapport

- Effectiveness in leading change

- Persuasiveness

- Expertise in building and leading teams

Potential Drawbacks and cautionary notes:

  • Effective Leaders have empathy for others, but they also must be able to make the “tough decisions”;
  • Effective Leaders are astute judges of people, but they might become judgmental and overly critical about the shortcomings they perceive;
  • Effective Leaders are passionate about what they do, and they show it. However, there is a fine line between being excited about something and ignoring realities that others may see;
  • Effective Leaders create personal connections with their people. However, the downside of such visibility is that if the leader makes too many unannounced visits, it may create a culture of fear and micromanagement.

11.3 Developing a Learning Organization

Learning organizations
Organizations that create a proactive, creative approach to the unknown, characterized by (1) inspiring and motivating people with a mission and purpose, (2) empowering employees at all levels, (3) accumulating and sharing internal knowledge, (4) gathering and integrating external information, and (5) challenging the status quo and enabling creativity.

Two approaches of Empowerment

Top-down perspective

Bottom-up perspective

Start at the top

Start at the bottom by understanding the needs of employees

Clarify the organization’s mission, vision, and values

Teach employees self-management skills and model desired behavior

Clearly specify the tasks, roles, and rewards for employees

Build teams to encourage cooperative behavior

Delegate responsibility

Encourage intelligent risk taking

Hold people accountable for results

Trust people to perform


Gathering and integrating external information

  • The Internet has dramatically accelerated the speed with which anyone can track down useful information or locate people who might have useful information;
  • In addition to the Internet, company employees at all levels can use “garden variety” traditional sources to acquire external information (e.g. professional journals, books, and popular business magazines);
  • Benchmarking can be a useful means of employing external information. Competitive benchmarking restricts the search for best practices to competitors, while functional benchmarking endeavors to determine best practices regardless of industry;
  • Focus directly on customers for information.

Challenging the status quo
For a firm to become a “learning organization”, it must overcome its systemic barriers, behavioral barriers, political barriers, and personal time constraints, in order to foster creativity and enable it to permeate the firm.

11.4 Creating an Ethical Organization

A system of right and wrong that assists individuals in deciding when an act is moral or immoral and/or socially desirable or not.

Compliance-based ethics programs
Programs for building ethical organizations that have the goal of preventing, detecting, and punishing legal violations.

Integrity-based ethic programs
Programs for building ethical organizations that combine a concern for law with an emphasis on managerial responsibility for ethical behavior, including (1) enabling ethical conduct; (2) examining the organization’s and members’ core guiding values, thoughts, and actions; and (3) defining the responsibilities and aspirations that constitute an organization’s ethical compass.


Compliance-Based Approach

Integrity-Based Approach


Conformity with externally imposed standards

Self-governance according to chosen standards


Prevent criminal misconduct

Enable responsible conduct



Management-driven with aid of lawyers, HR, and others


Education, reduced discretion, auditing and controls, penalties

Education, leadership, accountability, organizational systems and decision processes, auditing and controls, penalties

Behavioral Assumptions

Autonomous beings guided by material self-interest

Social beings guided by material self-interest, values, ideals, peers

A firm must have several key elements before it can become a highly ethical organization. The following elements must be both present and constantly reinforced:

  • Role Models
    • Leaders are role models for their organizations;
    • Leaders must be consistent in their words and deeds;
    • Values and character of  leaders become transparent to an organization’s employees;
    • Effective leaders take responsibility for ethical lapses within the organization;
  • Corporate credos and codes of conduct
    • Provide a statement and guidelines for norms, beliefs and decision making;
    • Provide employees with clear understanding of the organizations position regarding employee behavior;
    • Provide the basis for employees to refuse to commit unethical acts;
    • Contents of credos and codes of conduct must be known to employees;
  • Reward and evaluation systems
    • Inappropriate reward systems may cause individuals at all levels of the organization to commit unethical acts that they might not otherwise do;
    • Penalties in terms of damage to reputations, human capital erosion, and financial loss are typically much higher than any gains that could be obtained through such unethical behavior;
  • Policies and procedures
    • Policies and procedures can specify proper relationships with a firm’s customers and suppliers;
    • Policies and procedures can guide employees to behavior ethically;
    • Policies and procedures must be reinforced (effective communication, enforcement, monitoring, and sound corporate governance practices).

Chapter 12 Managing Innovation and Entrepreneurship

This chapter addresses two major avenues through which companies can expand or improve their business: innovation and corporate entrepreneurship.

12.1 Innovation
The use of new knowledge to transform organizational processes or create commercially viable
products and services:

  • Radical innovation: aninnovation that fundamentally changes existing practices;
  • Incremental innovation: an innovation that enhances existing practices or makes small improvements in products and processes;
  • Product innovation: efers to efforts to create product designs and applications of technology to develop new products for end users;
  • Process innovation: i typically associated with improving the efficiency of an organizational process, especially manufacturing systems and operations.

Challenges of Innovation

  • Seeds versus Weeds: most companies have an abundance of innovative ideas. They must decide which of these is most likely to bear fruit – the “Seeds” – and which should be cast aside – the “Weeds”;
  • Experience versus Initiative: companies must decide who will lead an innovation project. Senior managers who have experience, but tend to be more risk averse, or midlevel employees, who may be the innovators themselves, may have more enthusiasm;
  • Internal versus External Staffing: people drawn from inside the company know the organization’s culture and routines, but this knowledge may actually inhibit them from thinking outside the box;
  • Building Capabilities versis Collaborating: firms can seek help from other departments and/or partner with other companies that bring resources and experience as well as share costs of development. However, such arrangements can create dependencies;
  • Incremental versus Preemptive Launch: an incremental launch is less risky because it requires fewer resources and serves as a met test, but a launch that is too tentative can undermine the project’s credibility and it also opens the door for a competitive response.

Defining the scope of innovation
Firms must define the “strategic envelope” (scope of the innovation efforts). In defining the strategic envelope, a firm should answer several questions:

  • How much will the innovation cost?
  • How likely is it to actually become commercially viable?
  • How much value will it add; that is, what will it be worth if it works?
  • What will be learned if it does not pan out?

Managing the Pace of Innovation
Firms need to regulate the pace of innovation:

  • Incremental innovation
    • May be six months to two years;
    • May use a milestone approach driven by goals and deadlines.
  • Radical innovation
    • Typically long term – 10 years or more;
    • Often involves open-ended experimentation and time-consuming mistakes;
    • Strict timelines unrealistic.

Staffing to Capture Value from Innovation
People are central to the processes of identifying, developing, and commercializing innovations effectively. Four practices are especially important:
1) Create innovation teams with experienced players;
2) Require that employees seeking to advance their career with the organization serve in the new venture group as part of their career climb;
3) Once people have experience with the new venture group, transfer them to mainstream management positions where they can use their skills;
4) Separate the performance of individuals from the performance of the innovation.

Collaborating with Innovation Partners

  • Innovation often requires collaborating with others who possess complementary knowledge and skills;
  • Partners can come from several sources:
  • Other personnel within the department;
  • Personnel within the firm but from another department;
  • Partners outside the firm;
  • Non-business sources, including research universities and the federal government.

12.2 Corporate Entrepreneurship

Corporate Entrepreneurship (CE)
The creation of new value for a corporation, through investments that create either new sources of competitive advantage or renewal of the value proposition.

How entrepreneurial projects will be pursued depends on several factors:

  • Corporate culture;
  • Leadership;
  • Structural features that guide and constrain action;
  • Organizational systems that foster learning and manage rewards.

Other factors will also affect how entrepreneurial ventures will be pursued:

  • Use of teams in strategic decision making;
  • Whether the company is product or service oriented;
  • Whether the firm’s innovation efforts are aimed at product or process improvements;
  • The extent to which it is high-tech or low-tech.

New venture group (NVG)
A group of individuals of a division within a corporation, that identifies, valuates, and cultivates venture opportunities.

Business incubator
A corporate new venture group that supports and nurtures fledgling entrepreneurial ventures until they can thrive on their own as stand-alone businesses. The typically provide some or all of the following five functions:

  • Funding;
  • Physical space;
  • Business services;
  • Mentoring;
  • Networking.

Product Champion
An individual working within a corporation who brings entrepreneurial ideas forward, identifies what kind of market exists for the product or service, finds resources to support the venture, and promotes the venture concept to upper management.

No matter how an entrepreneurial idea comes to light, however, a new venture concept must pass through two critical stages or it may never get off the ground:

Project definition
A promising opportunity has to be justified in terms of its attractiveness in the marketplace and how well it firs with the corporation’s other strategic objectives.

Project impetus
For a project to gain impetus, its strategic and economic impact must be supported by senior managers who have experience with similar projects. The project then becomes an embryonic business with its own organization and budget.
Measuring the Success of Corporate Entrepreneurship Activities
Techniques used to limit the expense of venturing or to cut losses when entrepreneurial initiatives (CE) appear doomed

Comparing strategic and financial goals
Three questions should be used to ass the effectiveness of CE initiatives:
1) Are the products or services offered by the venture accepted in the marketplace?
2) Are the contributions of the venture to the corporation’s internal competencies and experience valuable?
3) Is the venture able to sustain its basis of competitive advantage?

Exit champions
An individual working within a corporation who is willing question the viability of a venture project by demanding hard evidence of venture success and challenging the belief system that carries a venture forward.

12.3 Real Options Analysis: A useful tool

Real options analysis (ROA)
An investment analysis tool that looks at an investment or activity as a series of sequential steps, and for each step the investor has the option of (a) investing additional funds to grow or accelerate, (b) delaying, (c) shrinking the scale of, or (d) abandoning the activity.

The phrase “real options” applies to situations where options theory and valuation techniques are applied to real assets or physical things as opposed to financial assets.

Important issues to note

  • Real options analysis is appropriate to use when investments can be stages;
  • The strategic decision makers have “tollgates” or key points at which they can  decide whether to continue, delay, or abandon the project;
  • It is expected that there will be increased knowledge about outcomes at the time of the next investment and that additional knowledge will help inform the decision makers about whether to make additional investments.

Potential pitfalls:

  • Agency theory and the back-solver dilemma;
  • Managerial conceit: overconfidence and the illusion of control;
  • Managerial conceit: irrational escalation of commitment.

12.4 Entrepreneurial Orientation

Entrepreneurial Orientation
The strategy-making practices that businesses use in identifying and launching new ventures, consisting of autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking:

  • Autonomy: independent action by an individual or team aimed at bringing forth a business concept or vision and carrying it through to completion;
  • Innovativeness: a willingness to introduce novelty through experimentation and creative processes aimed at developing new products and services as well as new processes;
  • Proactiveness: a forward-looking perspective characteristic of a marketplace leader that has the foresight so seize opportunities in anticipation of future demand;
  • Competitive Aggressiveness: an intense effort to outperform industry rivals characterized by a combative posture or an aggressive response aimed at improving position or overcoming a threat in a competitive marketplace;
  • Risk taking: making decisions and taking action without certain knowledge of probable outcomes; some undertakings may also involve making substantial resource commitments in the process of venturing forward.

Three types of risk that organizations and their executives face:

  1. Business risk;
  2. Financial risk;
  3. Personal risk.
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