What is the role of strategies?
The success of an individual / a company depends on the chosen strategy. Successful strategies have the following four characteristics:
Goals that are clear, consistent and long-lasting.
In-depth knowledge about the competitive environment.
An objective assessment of the resources.
An effective implementation of the strategy.
If these four factors are combined, great successes will be achieved. However, if one only focuses on one goal, this success can also be accompanied by setbacks in other areas of life.
What is the basis of strategy analysis?
The four elements mentioned above can be divided into two groups: the company and the industrial environment. Goals 1, 3 and 4 fall under the business group and goal 2 falls under the industrial environment group.
A SWOT framework is often used to analyze a company's strategy. A SWOT framework classifies the factors that are relevant to a company's strategic decision making. This is done on the basis of four categories: strengths (Strengths), weaknesses (Weaknesses), opportunities (Opportunities) and threats (Threats).
The consistency of the business strategy with regard to its external and internal environment and in particular with its objectives/values, resources/capabilities, structure and systems, we call strategic fit. If a company has a failing strategy, this is often because there is no consistency in the internal or external environment. We call a business concept of related activities an activity system. It is important for the success of the strategy that the activities are coherent.
The concept of strategic fit falls under a group of certain ideas known as the contingency theory. Contingency theory is a theory that states that there is no single best way to design and manage an organization. The optimal structure and management of the systems for each organization depend on the context and in particular on the characteristics of the business environment and the technologies it uses.
Which similarities between the army and the business world can be seen?
Strategic decisions in the army and strategic decisions in business have three common characteristics:
They are important.
They concern a significant deployment of resources.
They are not easily reversible.
Game theory is an analysis and prediction of the results of competitive (and cooperative) situations in which action depends on the choices that other players make in the game. Game theory has applications in business, economics, politics, international relations, biology and in social relations.
How has strategic management developed?
Strategic management studies how organizations can make choices and implement these choices effectively and efficiently to achieve long-term goals.
Since the 1950s, strategic management has undergone significant developments. There was no suitable systematic approach for long-term development in the 1950s and therefore corporate planning was developed, also known as long-term planning. Previously, the focus was mainly on financial budgeting.
Corporate planning continued in the 1960s, while in the 1970s the need for strategic management is seen more. Analyzing the market and company positioning with respect to the competitor are receiving more attention. The way in which competitive advantage can be achieved especially plays a major role in the late 1980s and 1990s. We call corporate planning a systematic approach to resource allocation and strategic decisions within a company in the medium to long term.
A resource-based view of the firm is a theoretical starting point for a company in which the role of resources and capacities forms the basis for emphasizing the competitive advantage and the strategy basis.
What is the importance of a strategy?
A strategy ensures that organizations are effectively managed by improving decision-making, by facilitating coordination and by focusing on the pursuit of long-term goals. Having a strategy improves decision making in different ways:
It makes decision-making easier by eliminating a number of alternatives in advance; it acts as a heuristic method.
Creating a strategy requires knowledge of different individuals to be able to organize and integrate the strategy.
It simplifies the use of analytical methods.
The organizational goal in terms of a desired future strategic position we call strategic intent.
Collins and Rukstad distinguish four types of statements that companies use to communicate their strategy:
The mission statement (why do we exist)
The principles / value statement (what are our views and how do we behave)
The vision statement (what we want to be)
The strategy statement that represents the competition plan; this usually consists of objectives, the reach of the company and its benefits.
In order to prevent the gap between the rhetoric and the reality of the strategy statement from growing to large, it is valuable to ask the following questions:
Where does the company invest its liquidity?
What technologies does the company develop?
Which new products have been realized or which major project investments have been initiated or which top managers have been hired?
How does a company make strategy decisions?
Which decisions a company makes with regard to strategy depends on two questions: where will we compete and how will we do that? The answer to these two questions defines the two main areas when it comes to business strategy, namely the corporate strategy and the business strategy or competitive strategy.
How a company competes in a private industry or market is expressed in a business strategy / competitive strategy. The corporate strategy states the business decisions and intentions, regarding the range of activities and the resources they have available for this purpose. The corporate strategy describes the scope of the company with regard to the industries and markets in which it operates.
What are Mintzberg's strategies?
An important critic of the rational approach to strategy design is Henry Mintzberg. He distinguishes three strategies:
The intended strategy: this is the strategy devised by top management with the intention of implementing it within the organization.
The realized strategy: this is the actual strategy that the organization pursues; it is the result of the interaction of the intended strategy with the emergent strategy.
The emergent strategy: this is the strategy that results from the actions and decisions of various members of the organization. This is based on how the members of the organization deal with the forces that influence the organization.
The design school exists of the people who see strategy design as a rational and analytical process of planning. The emergence / learning school consists of the people who see the strategy design as an emerging process.
How is a strategy analysis done?
Certain strategy recommendations can be made based on a strategy analysis. When a strategy is analyzed, the following steps are often used:
Identify the current strategy.
Assess the performance of the strategy.
Diagnose the performance of the strategy.
Analyze the industry.
Analyzing the resources and capacities.
Formulating a strategy.
Implementing the strategy.
How can you analyze the non-profit sector strategy?
The concepts and tools of strategic analysis can also be applied to the non-profit sector in various ways:
Organizations in a competitive environment that charge a price for the use. Consider, for example, museums and universities.
Organizations in a competitive environment that provide free services. Consider, for example, environmental organizations.
Competition-protected organizations, such as the army and the police.
The sales minus the costs of purchased goods and services we call the added value; it is equal to all payments made by the company to the suppliers of the production factors. The value that a customer receives from a good or service minus the price they have paid for this, we call the consumer surplus.
The assumption that the company is active in the interests of all its stakeholders is what we call the stakeholder approach to the firm. Top management has the task of balancing and integrating these different interests. There are two problems associated with the stakeholder approach, namely measuring the performance and the conflicts in corporate governance. There is a debate going on as to whether companies should act according to the interests of the owners or if they should also consider the goals of multiple stakeholders.
In what way are companies driven by money?
Many companies have the main objective of maximizing the value of the company by maximizing profit over the long term. The focus of many companies on money can be justified by:
The surplus of the income compared to the costs available for distribution to the owners of the company is called profit. The pure profit we call economic profit: the surplus of the income in relation to the costs of producing that income (including the costs of capital). The economic profit can also be called rent or economic rent. A means to measure the economic profit is to calculate the economic value added (EVA). The EVA is the positive balance of the operational net profit after deduction of the tax on costs of the large users in the sector. The formula for calculating the EVA is:
EVA = Net operating profit after tax (NOPAT) - Cost of capital
How do you calculate the value of a company?
A number of data is required to be able to calculate the value of a company (V). First of all we need to know a companies' free cash flow (C) per year (t). The free cash flow (C) can be calculated with the following formula:
C = Net operating profit - Depreciation - Taxes - Investment in fixed and working capital
In addition, we must know the relevant capital costs: the weighted average cost of capital (WACC). With this data we can calculate the value of the company using the following formula:
V = Ʃ Ct / (1 + WACC)t
To maximize its value, a company must therefore maximize its future net cash flow while minimizing the risk of capital costs.
How do you maximize the value of the shareholders?
Maximization of shareholder value can be interpreted in two ways: In terms of intrinsic value: the value of the shareholder is the NPV of the flow of profits that go to the owners; or in terms of market value: the shareholder value is the current market value of the company shares. V = Market capitalization of equity + market value of debt.
How is a performance analysis performed?
When a strategy is formulated, the performance of the company is considered. The performance can be measured on the basis of future-oriented performance measures or performance-oriented measures. The difference between the two is that the market value serves as a forward-looking measure and the performance measures that are focused on the past serve as the basis for financial ratios. If the performance measures show that performance is insufficient, the sources of the underperformance must be identified so that management can take action.
The return on capital employed is again embedded into the organization: it is directed partly to the sales department and partly to the sales and capital employed. Both roads split into separate departments.
Managers often set certain performance goals that must be achieved. There are three different approaches that are often used to set performance goals:
Financial disaggregation
Balanced scorecards
Strategic profit drivers
A tool for linking strategic objectives to performance indicators is a balanced scorecard. These performance indicators combine the indicators with regard to financial performance, consumer satisfaction, internal efficiency and science and innovation. Answers to the performance measures included in the balanced scorecard can be derived from four questions:
How do we look at the shareholders?
How do customers see us?
What do we excel in?
Can we continue to improve and create value?
In management terms, value is used to refer to two different concepts. In the plural form, value usually refers to ethical rules and principles. In its singular form, it usually refers to the economic value: the monetary value of a product or service.
We call the social responsibilities of a business organization the corporate social responsibility (CSR). It is important that a company can adapt to changes in its environment.
We count the poorest people in the world (the approximately 2 billion people who have less than 2 dollars a day) as the bottom of the pyramid.
Real option analysis: analysis of the identity and value of the possibilities for investing in uncertain opportunities. The two most important types of real option analysis are investments in flexibility and investments in growth opportunities. In developing a strategy, the greatest concern lies with the options for growth. These can be:
What is the relationship between environmental analysis and industrial analysis?
The business environment of a company is formed by the relationships with suppliers, competitors and customers. Various factors influence the business environment. Consider, for example, the national and international economy, technology, government and politics, nature, demography and social factors.
The profit that companies achieve in a business environment is determined by three factors:
The value that the product has for the customer
The level of competition
The negotiating power of the company with their suppliers and buyers
What is Porter's five forces model?
Porter has developed a five forces model in which the profitability of an industry is determined by five forces. These five forces are:
Rivalry between existing companies in the industry
A supplier's negotiating power
Threat of substitutes
A buyers' negotiating power
Threat of newcomers
The profitability of companies in an industry is determined by the structure of the industry. The disadvantages that newcomers to a market are faced with compared to already established companies are what we call barriers to entry. These access barriers belong to the structure of an industry.
What are examples of entry barriers?
Possible disadvantages that newcomers face, access barriers, can arise from:
Capital Requirements
Scale advantages
Absolute cost benefits
Product differentiation
Access to distribution channels
Governmental and legal barriers
Retribution
The effectiveness of access barriers
How is the degree of competition influenced?
The intensity of competition between established companies depends on the interaction between six factors:
The concentration
The diversity of competitors
Product differentiation
Excess capacity
Barriers to exit
Cost conditions: scale advantages and the ratio of fixed / variable costs.
The seller concentration is the number and size of companies in a certain market. The concentration ratio is often used to measure this. This ratio reflects the combined market share of the leading companies.
The financial costs and other obstacles that prevent a company from withdrawing from a market we call the barriers to exit.
What negotiating powers do buyers have?
Consumers are able to lower the market price. This influence depends on the price sensitivity and the bargaining power of the buyers relative to sellers. The degree to which buyers are sensitive to the price level depends on four factors:
The greater the importance of an item as part of the total cost, the more sensitive buyers will be for the price.
The less differentiated the products from the supplier industry are, the more the buyer will be willing to switch to another supplier because of the price.
The more intense the competition is between buyers, the greater their eagerness for price reductions from their sellers.
The more critical the buyer of a product or service is with regard to the quality of the product, the less sensitive he will be to the price he has to pay.
Several factors influence the bargaining power of buyers versus sellers:
How can industry profit be predicted?
To predict the future profitability of an industry, three phases of analysis can be distinguished:
Investigate to what extent the current and recent levels of competition and profitability in the industry are a consequence of the current structure.
Identifying the trends that change the industry structure.
Identify how these structural changes will affect the five forces of competition and result in the profitability of the industry.
If one understands how the structure of an industry influences the profitability and intensity of the industry then one can determine the opportunities for a company in an industry. According to Michael Jacobides, all companies in a market are able to influence the development of the industry structure according to their own interests. This way a company achieves architectural benefits. Architectural benefits can come from three sources:
Creating someone's own bottleneck.
Relieving bottlenecks in other parts of the value chain.
Redefining roles and responsibilities in the industry.
How do you survive in a market?
The key success factors are the factors in an industry that influence a company's ability to outperform competitors. To survive and be successful in an industry, a company must think about two important questions: What do our customers want? What should we do as a company to stay ahead of the competition?
To know what the customers want, a company must first of all know who the customers are. In order to know what the company must do to stay ahead of the competition, it is important to know what the competition strives for, what the most important sides of the competition are, how strong the competition is and how the company can become superior to the competition. All these factors together determine the success of a company in an industry.
The sixth strength of Porter?
A possible sixth force in the Porter model is complementary products. The suppliers of complements can create added value for the industry and exercise a negotiating power. There are critics who say that the Porter model is unable to take into account competition interactions between companies.
Certain systems, connections and software are often required in digital markets. In these markets, competition is often seen between competing platforms. Platforms are the interfaces that connect the components of the system.
Hypercompetition is a competitive battle characterized by fast and intensive competitive movements where the competitive advantage is quickly eroded and companies are constantly looking for new sources of competitive advantage. Hypercompetition is a characteristic of current industries.
Game theory can be a valuable contribution to strategic management. Namely because it makes it possible to articulate strategic decisions. Furthermore it can predict the results of competitive situations and identify optimal strategic choices.
The prisoners' dilemma: a simple game theory model that shows how a lack of cooperation results in a result that is inferior to the result that would have been achieved through cooperation. Simple models such as the prisoners’ dilemma predict whether the outcome will be competing or collaborating.
How do you apply game theory?
Game theory points to five aspects of the strategic behavior through which a company can influence the competition results:
In the case of deterrence, the aim is to impose costs on other players for certain actions that are undesirable. Deterrence is only credible if it is accompanied by commitment. Signaling is the selective communication of information to customers or competitors that is designed to influence perceptions or provoke a certain response. Game theory is useful because it helps us understand business situations.
Competitive intelligence includes the systematic collection and analysis of information about decision-making rivals. It has three main objectives:
Predict which future strategies and decisions the competitor will take.
Predict the likely responses of the competitor to the company's strategic initiatives.
Determine how competitor behavior can be influenced to make it more favorable.
Porter (the five forces model) introduces a four-part framework with which the behavior of the competitor can be predicted. The predictions are based on the following four parts:
The current strategy
Goals
Assumptions about the industry
Resources and capital
What is segmentation?
The process of disintegrating the sectors and markets into more defined sub-markets based on the characteristics of the product, the customer or the geography, is called segmentation. Segmentation analysis is used to identify attractive segments and to select strategies. A segmentation analysis takes place in five stages:
Identify the most important segmentation variables.
Constructing a segmentation matrix.
Analyze the attractiveness of the segment.
Identify the segments' success factors (KSFs: Key Success Factors).
Selecting the scope of the segment.
The blue-ocean strategy is the search for indisputable market space. Part of this strategy is the identifying of unoccupied market segments.
Strategic group: a group of companies within a mark that uses the same strategy. Strategic group analysis therefore segments an industry based on the strategy of the companies.
The assets of the company, including tangible fixed assets, intangible resources and human resources, are called the resources. The ability of a company to perform a certain task or function is called the capabilities.
A strategy is committed to matching the resources and possibilities of a company with the opportunities that arise in the external environment. Since 1990, the idea has emerged that resources and capacities are the foundation of strategy and the primary source of profitability. This is known as the resource-based view of the firm.
How do you identify resources and opportunities?
A competitive advantage cannot be achieved through resources alone, but different resources must be deployed together to create organizational opportunities. If organizational capacity is applied by the right strategy, a competitive advantage can be achieved.
A company must identify its resources. Material resources are the easiest to identify and value. With information about the location and character of the concrete resources, we can distinguish the two main routes for creating extra value from the concrete resources of a company: What possibilities are there to cut back on the use of resources? Can existing assets be applied more profitably?
For many companies intangible resources are more important than concrete resources. However, intangible resources are often undervalued or omitted on the balance sheet. This creates a difference between the balance sheet valuations and the market share valuations.
We call the values, traditions, behavioral norms, symbols and social characteristics of a company the organizational culture. This culture is a very important tool for many companies because it has a major influence on the capacities of the company.
What are the core competences?
Prahalad and Hamel have introduced the term core competences that describe the fundamental capabilities of a business strategy that are used to gain competitive advantage. They claim that the core competences: are making a disproportionate contribution to the ultimate customer value or to the efficiency with which that value is delivered, and that it provides a basis for entering new markets.
Before it can be decided which options form the core, a company must identify its options. The two approaches that are commonly used to classify business opportunities are a functional analysis and an analysis of the value chain.
A series of vertically related activities undertaken by a single company or by a number of vertically related companies to produce a product or service is called the value chain.
Organizational routines are patterns of a coordinated activity by organizations capable of performing tasks in a regular and predictable manner.
What is the strategic importance of resources and capabilities?
If the resources and capacities are identified, then it must be determined how important they are and how strong they are in relation to the resources and capacities of competitors. A resource or capacity can only lead to a competitive advantage if it is relevant and scarce. The profit of a resource or capacity depends on the potential competitive advantage (depending on scarcity and relevance), the sustainability of the competitive advantage (depending on sustainability, transferability and duplicability) and on the destination (depending on property rights, relative negotiating position and degree of of anchoring).
A systematic process for comparing own practices, processes, sources and possibilities with regard to other organizations is called bench marketing.
What are strengths and weaknesses?
The next step is to identify how strong the resources and capacities are. The framework for assessing resources and capacities compares the relative strength with the strategic importance. This may show that it is a superfluous force or an important force. But it also shows where it stands in the zone of irrelevance and what the major weaknesses are. The crucial forces are those with a high relative strength and a high strategic importance. It is important that the crucial forces of the company are used to the maximum.
The crucial weaknesses are those with a high strategic importance but with a low relative strength. Companies often try to convert these weaknesses into strengths, but this is a lengthy process. Outsourcing is often used as a solution for weaknesses in crucial functions.
Which are the phases of strategy planning?
The annual strategy planning goes through a number of phases:
Set the context: the CEO of the company determines a number of clear indicators that have strategic priority. He often bases this on the results of previous performances. The strategic planning department may also provide input for strategy planning. This includes assumptions or predictions.
Creating a business plan: they create a strategic plan based on the framework for priorities and the planning of the assumptions. They present this plan in a number of meetings to the CEO, the CFO and the head of the company's strategy.
Drawing up a business plan.
Determining investment expenses: due to investment expenditure, the strategy is linked to the distribution of resources.
Determining operational plans and performance targets: to implement a strategy, it is necessary to divide the strategic plan into short-term plans. This makes it possible to focus on a specific action and to monitor the performance.
Every good strategic plan has to pay attention to at least the following points:
Why is the organizational design important?
When it comes to implementing a strategy, it's not just about strategic planning and linking to goals and activities, but it also encompasses the entire design of the organization. The organization of a company determines the possibilities for taking action.
A technique to integrate information and ideas about current trends and future developments into a small number of clearly different, future results, is called a scenario analysis.
The integration of individual efforts is accompanied by two organizational problems, namely the cooperation problem (how to ensure that all individual goals are aligned) and the coordination problem (how individuals harmonize their goals).
An agency agreement exists when a party concludes a contract with another party to act on his behalf. An agency problem is the question of whether the agent actually acts in the interest of the client. The main agent problem occurs between the owners and managers.
How can goals be achieved?
Management can use various mechanisms to achieve its objectives within the organization. The following mechanisms can be used:
Control mechanisms (such as supervision)
Performance incentives (such as rewards)
Shared values: these encourage members of the organization to converge.
Persuasion: good leadership requires convincing.
In addition to the coordination mechanism, the following measures can be found in every other company:
Rules and guidelines, such as general employee contracts
Routines
Mutual adjustment. Mutual adjustment takes place between individuals involved in related tasks.
How are tasks divided?
Hierarchies are fundamental to the structure of the organization and are used as a means of control or coordination. The company achieves coordination, cooperation and specialization through hierarchy. An important issue is determining the structure of the hierarchy. In a hierarchy, individuals are positioned at different vertical levels.
When we look at companies as natural hierarchies - rather than as a system of vertical control points - the benefits of hierarchical structures for coordination are: cutting back on coordination and better adaptability.
Empirical studies show that different organizational characteristics are preferred for each situation. Companies in a stable environment have mechanical forms, characterized by bureaucracy, while companies in a less stable environment have organic forms that are more flexible.
In order to be able to perform complex tasks, personnel must be subdivided into organizational departments. The staff of the different departments must work together. For an organization this means that the most important questions are: On what basis are the departments classified? How should the different departments be put together to apply coordination and control?
Employees can be placed in a group based on:
Joint duties
Products
Locations
Processes
Whether individuals need intensive coordination, influences how individuals are divided into groups. If there is a high need for coordination, the groups must be classified by location.
There are three basic organizational forms for a company:
Functional structure: Organization around specialized business functions, such as financial marketing.
Multidivisional stucture: A corporate structure consisting of separate business units, each with significant operational independence, coordinated by a head office that exercises strategic and financial control.
Matrix structure: Hierarchies that consist of multiple dimensions that include typical product units (or business units), geographic units, and functions.
What are the trends in organizational design?
The most important trends in organizational design are:
Procrastination
Ad hoc working and team-based organizations
Project based organizations
Network structures
Continued organizational boundaries
The important organizational phenomena share a number of common characteristics:
They are more focused on coordination than on control.
They depend on informal coordination whereby rules and guidelines are replaced by mutual adjustment.
Individuals have multiple tasks within the organization.
A company has a competitive advantage over its direct competitors when it manages to achieve a consistently higher percentage of profit (or has the potential to do so). We call this a competitive advantage.
How to stay ahead of the competition?
A competitive advantage can arise from both internal and external changes. Externally, for example, due to a change in demand from the customer, changes in the prices of inputs or technological developments. How a company responds to this depends on two important capacities. Firstly because of the ability of a company to anticipate changes in the external environment. In addition, speed also plays a major role. The speed of the response largely determines the effectiveness.
The competitive advantage that results from internal changes is often related to product and technology innovations and strategic innovation. Strategic innovations often lead to new business models; redesigning the usual way of doing business. In addition to identifying potential for strategic innovation, one can also opt for the blue-ocean strategy approach. This strategy is the discovery or creation of a gap in the market.
How do you maintain a competitive position?
A competitive advantage for a company is affected by competition. Barriers that protect the competitive advantage of companies against distorted competition are called isolating mechanisms. To maintain the competitive advantage, there are different types of mechanisms that "isolate" the benefit. Some examples are:
The company's superior performance is obscuring so that it is too late for the competition to foresee.
Deter the competition and be ahead of all possible related opportunities. A company can convince competitors that imitation is not profitable.
Causal ambiguity and uncertain imitation. The problem of causal ambiguity is that if the competitive advantage is multidimensional and based on complex resources and capacities, it is difficult for competitors to determine where the success of the leading company comes from.
Limit the transferability and the potential for replication of the required resources and capacities so that it is difficult for competitors to obtain them.
What are the sources of competitive advantage?
A company can achieve a higher profit margin than its competitors in two ways: by offering an identical product or service at lower costs (a cost advantage) or by offering a differentiated product or service so that the consumer is willing to offer a price premium to pay that is higher than the extra costs of differentiation (a differentiation benefit).
A cost advantage is driven and influenced by various forces (drivers). The importance of a particular driver for the cost benefit differs per industry. The cost drivers are:
Scale advantages: these arise from technical input-output relationships, individualities and specialization. Economies of scale are very important for determining the concentration in an industry.
The economics of learning: repetition ensures that individual skills and organization routines develop.
Production techniques and production designs: superior processes can lead to a major cost benefit.
Product design: Design-for-manufacture is the design of products with the goal that they can be produced easily, instead of the purpose functionality.
Input costs: differences in input costs may be due to location differences, bargaining power, possession of low-cost sources and non-union labor.
Use of capacities
The residual efficiency: if the above factors are taken into account, an unexplained cost difference between companies remains.
Which insights do you get by using the value chain?
By using the value chain to analyze the costs, a company can:
Getting clear what the relative importance of each of the activities is in relation to the total costs.
Discover the cost drivers for each activity and the comparative efficiency with which the company performs each activity.
Identify how costs in one activity influence the costs in another activity.
Determine which activities must be undertaken within the company and which activities must be outsourced.
A value chain analysis of the cost position of a company includes the following phases:
Divide the company into separate activities.
Estimate the relative importance of different activities in the total cost of the product.
Determine the cost drivers.
Establishing the relationships between the costs of different activities.
Determine the possibilities for reducing costs.
What is a differentiation advantage?
A company can distinguish itself from its competitors by offering something unique that is valuable to buyers. A differentiation advantage is created by offering a differentiated product or service which makes the consumer prepared to pay a price premium that is higher than the extra costs of differentiation. Differentiation is about identifying and understanding the interactions between the company and its customers and investigating how these can be improved.
Whether a product or service can be differentiated depends on the physical characteristics. For products that are technically complex, there are more options for differentiation than for products that are technically simple. A distinction can be made between tangible differentiation (observable characteristics are relevant to preferences) and intangible differentiation (characteristics that cannot be observed, such as emotions, are relevant to preferences).
Market research has developed various techniques for analyzing customer preferences with regard to product attributes that can influence decisions on product positioning and design:
Multidimensional scaling (MDS): customer perceptions of competing products are presented graphically based on crucial product attributes.
Conjoint analysis: measures the power of consumer preferences for different product attributes.
Hedonistic price analysis: products are seen as bundles of underlying attributes.
Porter distinguishes different sources of uniqueness for a company:
Product functions and product performance.
Complementary services
Intensity of marketing activities
Technology embodied in the design and manufacture process
Quality of the input purchased
Procedures that influence the customer experience
Skills and experience of employees
Location
Degree of vertical integration
Differentiation can also be done by bundling; offering a combination of complementary products and services. A company must have an effective and coherent differentiation position. Product integrity is the consistency in the differentiation of a company. In addition, communication with the consumer is crucial for the effectiveness of differentiation. Signaling and (brand) reputation are important for communication with the customer.
How can you determine a differentiation advantage?
When using the value chain to determine the opportunities for differentiation advantage, there are three important phases:
Constructing a value chain for the company and for the customer.
Identifying the drivers of uniqueness in every activity of the company is its value chain
Searching for links between the value chain of the company and that of the buyer.
How can the strategies be implemented?
According to Porter, cost leadership and differentiation strategies are mutually exclusive. A company that tries to practice both is "stuck in the middle". There are various organizational requirements to implement a strategy. For cost leadership, for example, there must be sufficient access to capital, division of labor, benchmarking and strict cost controls. For differentiation, for example, there must be creativity, research capacity, cross-function coordination and marketing capacity.
The pattern of the evolution of a market: from the moment the product emerges to growth to maturity to decline, this is called the industry life cycle. The phases of the industry life cycle are:
Introduction phase: sales and market penetration are low.
Growth phase: market penetration is increasing due to increased efficiency and technology.
Maturity phase.
Decline phase: if the industry is challenged by better replacement products, the industry is in a downturn.
The phases of the life cycle are mainly defined by changes in the growth rate of the industry. In addition, knowledge also has an influence on the life cycle.
The design of a product that is accepted by the business community as a whole in terms of appearance, functionality and production is the dominant design. The concepts of dominant design and technical standard are related but different. A specification, requirement or technical characteristic that is the standard for a product or process is called the technical standard. Technical standards arise when there are network effects. Network effects are relationships between the users of a product or technology, which result in the value of that product or technology and are positively related to the number of users.
Changes in the demand growth and technology of a cycle affect the industry structure, the amount of companies and competition. We refer to the study of the organizational population of markets and the formation and selection processes that determine entry and exit as organizational ecology. Corresponding findings of organizational ecology in relation to industry evolution are:
The number of companies in the first phase of the industry life cycle is increasing sharply.
The number of companies is decreasing at the start of the maturity phase (in the industry life cycle).
As industries become more concentrated and the leading firms focus on the mass market, a new phase of entry can take place as new companies make niche positions in the market.
The changes in industry structure affect competition in an industry. The structural changes along with the changes in demand and technology during the cycle also have a major impact on the sources of competitive advantage at every stage of evolution:
During the introduction phase, product innovation is the basis for success in the short and longer term.
When the growth phase is reached, a company must adjust its product design and increase its production capabilities.
In the maturity phase, the competitive advantage is increasingly becoming a search for efficiency, especially in sectors of basic products.
The transition to the downturn phase intensifies the pressure to cut costs.
If industries change then the companies in the industry must adapt. However, change is often very difficult for organizations. This can be caused by:
Organisational routines (competency traps): the barriers that change as an organization develops at the level of competence, in particular the activities, are called competence traps.
Social and political structures: organizations are social systems and political systems. Both systems tend to withstand change.
The process of institutional isomorphism: the tendency for organizations to be subject to common social norms and to have similar organizational characteristics for their legitimacy is called institutional isomorphism.
Bounded rationality: the principle that human rationality is limited by the limits of their cognition and capacity to process information is called bounded rationality.
Complementarity between strategy, structure and systems
Evolutionary changes are seen as an adaptive process in which variation, selection and retention play an important role. The main theme is the level at which evolutionary processes occur: organizational ecology and evolutionary economics.
Not only in the beginning, but also in the rest of the industry life cycle there is competition between established companies and new companies. New companies pose a particular threat to established companies when there is a period of technical change. A new technology is a major threat to established companies if this technology competence is destructive, structural or disruptive.
How should you manage strategic changes?
We call an organization that can simultaneously use existing powers while exploring new possibilities for future developments an ambidextrous organization. Two types of organizational ambidexterity can be distinguished: structural and contextual. With structural ambidextrition, exploration and exploitation are undertaken in various organizational units. With contextual ambition explosion, exploration and exploitation are undertaken in the same organizational units by the same organization members.
There are various tools for strategic change management:
Creating perceptions of crisis.
Determination of the stretch targets.
Creating organizational initiatives.
Reorganization of the business structure.
Appointment of new leaders / managers.
Performing a scenario analysis.
We refer to organizational capabilities with which an organization can adjust and change its resources and operational capabilities again as dynamic capabilities. New opportunities develop through:
Early experiences and path dependency: the organizational strategy, the organizational structure and the choices for the future are determined by the decisions made in the past. We call that the path dependency.
The integration of resources to create opportunities: this integration requires suitable processes, an appropriate organizational structure, motivation and general organizational alignment.
The development of successive possibilities: this requires a systematic long-term development process that can integrate the four components mentioned above.
A theoretical starting point that a company regards as a pool of assets and knowledge is called a knowledge-based view of the firm. The most important challenge for management is to integrate the specialist knowledge or the organization members into the production of goods and services.
It is important to distinguish between two different types of knowledge, explicit knowledge and tacit knowledge. Knowing about is explicit knowledge and knowing how is tacit knowledge. Activities that contribute to the development of opportunities include the management of intellectual property and the accounting of intellectual capital.
We call the creation of new products and processes through the development of new knowledge or through new combinations of existing knowledge an invention. We call the first commercialization of an invention by producing and marketing a new product or service or by using new production methods an innovation. The development of technology goes through a number of steps:
The conditions that determine the extent to which a company is able to capture the profits of the innovations is called the regime of appropriability. If the regime of appropriability is strong then the inventor of an innovation is able to appropriate a large part of the value. The regime of appropriability consists of four important components that determine the development capacity to benefit from innovation:
We count intangible goods, such as ideas, names, symbols, designs, illustrations and house styles, as intellectual property. Intellectual property includes: patents, copyrights, trademarks and trade secrets. The properties of complexity and silence of an innovation do not create endless barriers, but they do create time for the innovator. Innovation creates a temporary competitive advantage for a company. To bring new companies to the market, a company needs additional resources in addition to innovation.
There are different strategies with which a company can maximize the return on innovation. Examples of strategies are licensing, outsourcing certain functions, strategic alliance, joint venture and internal commercialization. Different means and capacities are needed for the different strategies.
The path of innovation that a company chooses depends on the nature of the innovation and the resources and possibilities that a company has. Whether a company is able to obtain property rights for an innovation is a determining point for which strategy is chosen.
What is the optimal time for joining?
It is important that a company enters a developing market at the right time and introduces a new technology. The competitive advantage that accrues to a company that is first to occupy a new market or strategic niche or uses a new technology is what we call the first-mover advantage. The advantage for "early movers" on the market depends on:
The extent to which innovation can be protected by property rights or benefits of extra time.
The importance of additional resources.
The potential to set a standard.
How do you manage risks?
Emerging markets are risky. There are two major uncertainties that they face:
There are various useful strategies to limit the risk as much as possible. Think of:
Collaborate with the market leaders.
Exposure to a limited number of risks.
Flexibility.
The use of multiple strategies
What are different types of standards?
Standards are formats, interfaces or systems that allow interoperability. There are different types of standards. A standard can be private or public. Public standards are open to a wide audience, free of charge or for a small contribution. When they are owned by the government, we also refer to mandatory standards. Usually these are also laid down in a law. Private standards are those where the technology is owned by companies or individuals. Finally, we distinguish de facto standards. These are the result of voluntary approval by producers and users.
Standards arise in markets where network externalities are present. A network externality arises if the product value for a customer depends on the number of other people who also use the product. There are also products with negative network externalities. Network externalities arise from:
Products where the users are connected to a network.
The availability of additional products and services.
Cut back on changing costs.
What is the winning strategy?
Digital technologies and the internet have created markets with network externalities, created from user connections and created by the presence of complements. These platform-based markets are also called two-sided markets because there is an interface between two groups; the customers and the providers. In addition to digital markets, there are also other platform-based markets.
In a market with network externalities, control over standards is the most important source of competitive advantage. Owning a good standard can lead to a leading market position and large profits. Conditions for a winning strategy are (according to Shapiro and Varian):
In recent centuries there have been several "platform wars". The company with an evolutionary strategy usually has an advantage over a company with a revolutionary strategy because the evolutionary strategy often offers backward compatibility. According to Shapiro and Varian, the deciding factors for winning a standard war are:
Control over a fixed customer base.
Possessing intellectual property rights in the new technology.
The ability to innovate and to extend and adapt the initial technological progress.
First-mover advantage.
Powerful additional products and services.
Brand name and reputation.
How do you implement a technology strategy?
To implement a technology strategy, certain resources and capacities are required. An invention is dependent on creativity and an innovation is dependent on collaboration and cross-function integration. Creativity requires knowledge and imagination and it is usually an individual act. The individual creativity depends on the environment in which the individual works. The condition of creativity plays an important role in the proper management of creativity within a company, as does the organization of creativity. The organization must be organized in such a way that it stimulates creativity and that individuals feel at ease in the working environment.
Differences between operational organizations and innovative organizations in the field of creativity are mainly in the structure of the company, the processes, the reward systems and of course the people themselves.
Internal creativity of an individual or company is not the only source for innovation. Creativity can also be obtained outside the organization. An approach to innovation where a company seeks solutions from organizations and individuals from outside the company and shares its technologies with other organizations is called an open innovation.
Innovation has become increasingly important for established companies. Organizational initiatives aimed at stimulating new product developments are:
Missed opportunities for sustainable competitive advantage in mature industries often result from:
Less room for differentiation advantage due to better informed buyers, standardization and a lack of technological changes.
Spreading process technology means that cost benefits are difficult to obtain and maintain.
A developed industry makes it easier for newcomers to attack established businesses.
How do you achieve a cost benefit?
There are three main cost factors that play an important role in keeping costs as low as possible in a developed market:
Economies of scale
Low input costs
Low overhead costs
Radical strategic and organizational change to improve performance through cost reduction, job reduction, asset disposal and internal reorganization is called corporate restructuring. Three successful approaches to corporate restructuring are:
Asset and cost control
Selective product selection and pruning in the market
Merging fragmented productivity
Information technology is creating new approaches such as customer relationship management. Tools, techniques and methods to investigate the needs and characteristics of customers with the aim of serving them even better are part of customer relationship management (CRM). The next step is to focus on attracting consumers and converting less valuable customers into valuable customers.
Unfortunately, the growing trend of commoditization limits the scope for differentiation and reduces customer willingness to pay a premium for differentiation. As a result, investments made by companies often have a disappointing result and these investments often reach only a very small part of the market
In mature industries, the degree of technical change is low. Most competitive benefits stem from strategic innovation. Companies can search for strategic innovations by re-organizing markets and segmenting the market. This may include:
Approaching new customer groups
Bundling products and services and work with themes
Offer customer solutions
To dare to think further than the usual possibilities
How is a strategy implemented in a mature industry?
In many mature industries, the basis for a competitive advantage is operational efficiency. Efficiency is achieved through standardized routines, division of labor and close control management based on bureaucratic principles. For a good implementation there are:
Financial controls
The main objective of achieving a cost advantage
A division into functional departments
Short-term performance targets
Incentives based on individual goals
Communication is vertical
The primary functions of top management: control and strategy determination
What are strategies for declining markets?
The most important key functions of the declining markets include:
Excess capacity
Lack of technical change
A smaller number of competitors
High average age of both material and human resources
Aggressive price competition
A company must gradually adjust its capacity to the decline in market demand. The gradual nature of this adjustment is crucial for stability and profitability during the decline phase. How easily the capacity drops depends on the following factors:
The predictability of the decline: If a decline can be predicted, it is often better for companies to plan their exit.
The barriers to exit: The biggest barriers to exit in this case are sustainable and specialized assets, costs associated with closing a factory and management dedication.
The strategies of the surviving companies: Whether a company has a smooth exit also depends on the industry's willingness to close factories and sell assets.
Porter and Harrigan distinguish four alternative strategies that are pursued, either individually or sequentially in falling industries:
Leadership: Leadership makes a company more likely to survive competitors.
Niches: The company identifies a segment that is likely to remain stable and where competitors are unlikely to invade.
To harvest: A company maximizes its cash flow from current assets while avoiding new investments.
Divest / sell: Selling assets.
Conventional strategies recommend a company in a declining industry to sell or harvest. Four important questions are distinguished by, again, Harrigan and Porter, when choosing the right strategy:
- Does the market structure support a decline in the hospitable, potentially profitable disposal phase?
- What are the barriers to exit that every competitor has to deal with?
- Is the company strong enough to withstand a decline?
- Is the competition strong enough to withstand a fall?
We consider the costs for research, negotiation, monitoring and enforcement of market contracts to be transactional costs. There are two factors that increase efficiency for companies in organizing their economic activities: technology and management techniques.
What are the benefits of vertical integration?
Proponents of vertical integration often point to the technical economies it offers: cost savings that result from the physical integration of processes. For this it is necessary to talk about vertical integration in terms of common ownership. How and why companies work together often depends heavily on the underlying transaction costs.
Vertical integration often has more advantages if two or more companies were to be set up for the same product, including:
When two companies are set up (each to produce a part of the end product), there is a risk of bilateral monopolies.
The risk of opportunism.
The risk of strategic misinterpretations.
What are the costs of vertical integration?
Vertical integration avoids transaction costs, but it does involve administration costs. How high the costs for vertical integration are depends on the following factors:
The difference in the optimum scale between the different production phases.
The need to develop distinctive options.
Problems in managing strategically different companies.
Incentive problems.
Competitive effects of vertical integration.
The degree of flexibility.
Investments in unattractive companies.
Increased risks.
Vertical incentives change the incentives between vertically related companies. If there is a market interface then the relationship between suppliers and consumers is subject to high-powered incentives and with vertical integration this relationship is subject to low-powered incentives. This can lead to stimulus problems. One of the biggest drawbacks of vertical integration is that investments in unattractive companies are sometimes necessary.
Whether a company should opt for vertical integration is highly dependent on the specific context. The company must weigh the relative benefits of vertical integration versus outsourcing.
What do vertical relationships look like?
The different types of vertical relationships offer different combinations of advantages and disadvantages. Some examples of vertical relationships:
Long-term contracts: Market transactions are a spot contract or a long-term contract. If close relationships between supplier and consumer are required then a long-term contract can prevent opportunism and offer certainty for the necessary investments.
Supplier agreements (vertical partnership): The harder it is to specify complete contracts for long-term deals between suppliers and consumers, the more you can take advantage of vertical relationships based on trust.
Franchising: This ensures that the brand, marketing opportunities, and business systems of a large enterprise are combined with the local knowledge and entrepreneurship of small businesses.
What are important factors in choosing a vertical relationship?
To choose the best vertical relationship, a company must consider a number of factors. The most important factors are:
What are recent trends?
The main feature of recent years is the increasing variety of hybrid vertical relationships that have tried to combine market flexibility and incentives with the close collaboration that vertical integration requires. Although collaborative vertical relationships are considered a recent phenomenon, local clusters of vertically cooperating companies have long been the model for European companies. There are more trends visible:
The networks of suppliers of Japanese manufacturers, their knowledge and joint product development have started to serve as models for many large American and European companies.
The mutual dependence that results from a close and long-term established supplier-buyer relationships is built up and also serves as a security breach for both parties.
The scope of outsourcing has been extended from basic components to a wide range of business services.
There is also a negative trend to note, namely that the internet is causing a radical reduction in the transaction costs of markets.
What are the implications for industry analysis?
Internationalization takes place through trade (supplying goods and services to another country) and direct investment (obtaining productive assets in another country). We can distinguish different types of industries based on the fashion and degree of internationalization:
Sheltered industries: these are only served by indigenous companies.
Trading Industries: those where internationalization mainly occurs through import and export.
Multidomestic industries: these are the ones that internationalize through direct investment because trade is not possible or because products are differentiated nationally.
World industries: these are the ones in which high levels of both trade and direct investment are important.
If we define the industry in terms of the national market, internationalization directly affects three of the five forces of competition according to Porter's five-force model of competition. These three forces are:
Competition from potential entrants: due to internationalization, access barriers are becoming lower. For example, rates and transportation costs are lower.
Rivalry between existing companies: tnternationalization increases rivalry as the number of companies competing in each national market increases.
Increasing the negotiating position of buyers: because consumers have the option to buy in other countries, their negotiating power increases.
How do you analyze the competitive advantage in the international market?
Comparative advantage is the ability of a country to produce a certain product at relatively lower costs than other countries. The theory of comparative advantage looks at the effect of national resources on international competition. When we look at comparative advantage in an international context, we see that there are different forces that influence this:
The resources and capacities of a company
The industrial environment (key success factors)
The national environment (resources and factors that influence the development of resources and capacities, i.e. Porter's national diamond)
The national diamond framework of Porter distinguishes four key factors that determine the competitive advantage of a country in a specific sector:
Conditions of the factors
Related and supported industries
Conditions of the question
The structure, the strategy and the rivalry
In the domestic market, the conditions of demand are the main drivers of innovation and quality improvement. Porter found evidence that national competing forces are often clustered in certain industries. There must be consistency between the business strategy and the competitive advantage pattern of a country in order to gain a competitive advantage in the global market.
A company must make a strategic choice where it will locate its production activities. There are two different types of resources that are important for this choice: Firstly country-based resources: companies must produce where they can benefit from attractive suppliers and resources. Secondly firm-based resources and capabilities: if the competitive advantage depends on internal resources and capabilities, then the optimum location depends on where these resources and capabilities are located and how mobile they are.
In addition to the importance of resources, a competitive advantage can also be achieved through an attractive value chain. Different countries offer benefits at different levels of the value chain. A recent development of internationalization is the international fragmentation of the value chain because companies are looking for countries where the available resources best match each level of the value chain. The benefits of fragmentation must be outweighed by the costs of global coordination of activities.
Producing or not producing?
The decision whether or not to produce a product depends on three factors:
The national availability of the required resources.
The company-specific competitive advantages.
The tradability.
How is access to a foreign market?
How a company decides which entry modes are best depends on the answers to five important questions:
Is the competitive advantage of the company based on company-specific or country-specific resources?
Is the product tradable and what are the trade barriers?
Does the company have the full range and possibilities for establishing a competitive advantage in the overseas market?
Can the company directly obtain the proceeds from its resources?
Which transaction costs does the company have to take into account?
Transaction costs have an important role in multinational company theory. If there are no transaction costs, the company will export its products and resources and sell them in overseas markets. Multinationals tend to dominate in sectors where:
Exporting depends on the transaction costs.
Company-specific intangible resources such as brands and technology are important.
Customer preferences are reasonably comparable between countries.
What are the value sources of globalization?
A strategy that sees the world as an independently segmented market is what we call a global strategy. We can distinguish five important sources of value from internationally operating companies:
Cost benefits of the scale and replication: companies that compete globally have a particular advantage through their access to economies of scale, manufacture, marketing and development of new products.
Serving global customers: globalization is driven by the need to serve global consumers.
Exploitation of national resources: companies operating in the international market can use resources outside their own country.
Learning benefits: globalization allows companies to obtain the information in different locations and they can also transfer and integrate this knowledge.
Strategic competition: multinational companies have a major advantage over competitors in competitions in individual national markets because they can use resources from other national markets.
What is Ghemawat's CAGE framework?
The abbreviation CAGE in the CAGE framework of Pankaj Ghemawat stands for "Cultural", "Administrative and political", "Geographical" and "Economic". These are the four components that determine the distance between countries. The greater the difference in a component, the greater the distance between countries.
What is the development of multinational corporations?
In the past hundred years, the drivers of internationalization strategies have often changed. Bartlett and Ghoshal distinguish three eras in the development of multinational corporations (MNCs):
The early twentieth century: European multinationals
The years after the Second World War: American multinationals
The '70s and' 80s: Japanese multinationals
The transnational corporation means that the MNCs are reconfigured. This may mean that:
The structure of the organization is changing.
A combination of global integration and national differentiation.
An organization of research and development and development of new products.
The distinguishing feature of the transnational corporation is that it becomes an integrated network of distributed and interdependent resources and capabilities. This requires that:
Each national unit is a source of ideas, skills and opportunities that can be used for the benefit of the entire organization.
National units have access to global economies of scale by assigning them a global global resource for a particular product, component or activity.
The center must manage a new, highly complex role that coordinates relationships between units in a very flexible way.
Difficulties experienced by MNCs are:
Establishing a shared vision and engaging employees around it.
Maintaining professional standards and promoting innovation.
Building business partnerships and relationships with the government and the community.
What are trends in diversification over the years?
If we look at the last, say, fifty years, a few trends stand out. From 1950-1980 their was the urge to diversify. From 1980-2009 the focus was on reorientation.
This trend of reorientation led to another trend towards specialization. This was the result of the following three main factors:
The emphasis on shareholder value
Turbulent and transaction costs
Trends in administrative thinking
Between the 1960s and 2012, the evolution of diversification strategy had gone through the following phases:
1960-1970: management's priority was to grow. The development of a corporation strategy was characterized by the emergence of conglomerates and the established companies diversify into related sectors. The strategic tools and concepts were financial analysis, the spread of structures and the creation of corporation planning credits.
1970-1985: management's priority was to improve the results of the diversified companies. The development of the corporation strategy was characterized by the emphasis on related and concentric diversification and the search for synergies. The strategic instruments and concepts were the economies of scale, the portfolio of planning models and the modern financial theory.
1985-2000: management's priority was to create shareholder value. The development of a corporation strategy was characterized by the focus on the main enterprise and the corporation restructuring. The strategic instruments and concepts were the maximum shareholder value, the analysis of transaction costs, the main competence and the dominant logic.
2000-2012: the priority of the management was on the corporate advantage and the quest to grow. The development of a corporation strategy was characterized by combining products, alliances and creating opportunities for growth. The strategic tools and concepts were the dynamic options, parenting benefit and the actual options.
Diversification is mainly driven by the change of business goals. In the 20th century, diversification was mainly driven by two things, namely growth and risk reduction. This was the result of the growing dedication of business managers to the goal of creating value for shareholders. In the last two decades of the twentieth century, a third factor was added: increasing shareholder value.
According to the capital asset pricing model (CAPM), it is not the overall risk that determines the price of a security, but the systematic risk.
What are Porter's three essential tests?
To determine whether diversification will create real shareholder value, Porter developed three essential tests:
The "attractiveness" test: the industries chosen for diversification must be structurally attractive or potentially attractive.
The cost-of-entry test: the entry costs may not capitalize future profits.
The "better-off" test: the new entity must achieve a competitive advantage through its link with the company or vice versa. Synergies must be created.
Porter argues that industry attractiveness alone is not sufficient to justify the choice for diversification in another industry. Due to the entry costs, the attractiveness of an industry for outsiders may be less.
What are the benefits of diversification?
Diversification mainly creates value because links between different companies are exploited. These links between companies ensure that resources and capacities can be shared by the different companies.
An economies of scope exists when fewer of those resources arise than when the activities are carried out independently of each other using a resource across multiple products or multiple markets.
Economies of scope exist for the same reasons as economies of scale. The only difference is that economies of scale are related to the economic costs for the increasing export of a single product. Economies of scope, on the other hand, are related to the economic costs for the increasing export of multiply products.
The character of economies of scope varies between different types of resources: material resources and intangible resources, and between the organizational options. Material resources create economies of scope by eliminating duplication. A single facility can be shared by multiple companies. Intangible resources offer economies of scope through the ability to expand these resources to additional companies at low marginal costs. Organizational capacities can be transferred within a diversified company. The performance of diversified companies is mainly influenced by general management capabilities.
A company does not have to diversify between its companies to exploit economies or scope. Economies of scope of resources and capacities can also be obtained by selling or licensing the use of resources and capacities to another company.
According to Michael Goold and Andrew Campbell, potential value creation is not enough to justify diversification. They argue that the parent company should not only be able to add value but also be able to add more value than other potential parent companies.
We see that economies or scope cannot permanently provide a sufficient reason for diversification; they need support by potentially cutting back on transaction costs. As an internal market, we know the internal capital markets and the internal labor markets.
What does empirical research say?
Empirical research on diversification focuses on two important issues: how do diversified companies perform compared to specialized companies? Does related diversification exceed not related diversification?
Empirical studies define kinship in terms of similarities between industries in technologies and markets. These agreements emphasize kinship at the operational level. However, connections at a strategic level are also essential.
What is the role of business operations?
The ability of a company to add more value to an industry than its competitors is called parenting advantage. In making strategic business decisions, one must ensure that the benefits of owning a particular business outweigh the administration costs associated with it. Four important activities with which corporate management adds value to an industry are:
Managing the overall corporate portfolio
Managing the business relationships between companies
Managing each individual individual industry
Managing the changes in the multibusiness corporation
How do you manage the corporate portfolio?
The company must develop general management systems that can be applied to the different companies. Efficient resource distribution is needed to create value. The two most important questions for a corporate strategy are: In which market do we operate? How do we manage this market so that we generate maximum value?
To find answers to these two questions, a company can use:
Portfolio planning matrices are the most commonly used tools for managing the portfolio in the multinational. The three most important portfolio planning models are:
The GE / McKinsey Matrix: this matrix classifies portfolios based on two dimensions: the attractiveness of the industry and the competitive advantage of the business unit. Each dimension is a combination of different factors. Based on these two factors, a decision is made as to whether the portfolio should be harvested, retained and built up.
The BCG’s Growth-Share Matrix: this matrix uses the same dimensions as the GE / McKinsey matrix. The difference is that both dimensions are only determined by one indicator. For industry attractiveness, the rate of market growth is used and for the competitive advantage the relative market share is used.
The Ashridge Portfolio Display: this is based on the concept of parenting advantage. It assumes that the potential for value creation depends on the characteristics of the parent. The two dimensions of this strategy are the parent's potential to add value and the potential for value destruction that results from the mismatch between the parent's business needs and management style. If the first-mentioned potential is high and the second-mentioned potential is low then there is a high potential for adding value.
How do you manage the business relationships between companies?
The addition of value is mainly through the exploitation of links between companies. Most multinationals are organized in such a way that links between resources and capacities are exploited in two areas: by centralizing common services (corporate level) and by managing direct links between companies.
According to a 2013 study by Deloitte into global shared service:
58 percent of companies use multiple shared service centers, often located in different countries.
With the emergence of American and European-based companies, service units in Asia, Latin America and Eastern Europe are increasing. The location of these units is mainly determined by the costs and skills of human resources.
The shared service centers expand their range of services with traditional corporate functions.
Companies are increasingly mixing joint services with outsourcing services.
Most companies realize significant benefits (lower costs and improved quality) by sharing their services.
Porter distinguishes four corporate strategy types for managing business relationships:
Portfolio management
Restructuring
Transferring skills between business units
Sharing resources and activities
Often shared resources are intangible resources such as brands and patented technology, but they can also be physical resources such as buildings and factories. The last two strategies are two types of synergies. The more closely related the companies of a company are, the greater the potential benefit of managing business relationships and the more an active role of the corporate center is needed.
How do you manage each individual individual industry?
Since the early 1980s, strategic planning systems have received much criticism from both academics and consultants. The two most important points of criticism were that the strategic planning systems did not create a strategy and that the strategic planning systems ensured a weak strategy.
The companies with strategic planning emphasize the longer-term development and have corporate headquarters (HQs) that play a major role in the planning of company levels. Financial planning companies have corporate HQs that emphasize shorter-term budget control as well as tightly controlled financial performance against ambitious targets, but solely have limited involvement in business strategy formulation.
Many multinationals have shared planning processes: strategic planning is primarily focused on the medium and longer term, while financial planning is more focused on the short term. The performance objectives emphasize the financial indicators and are supported by the management of incentives and sanctions. Even in companies where interdependence is high and the duration of investment is long, performance in the short and medium term can be very effective in generating efficiency and profitability.
One of the consequences when considering the input control (management of decisions) and output control (management of performance) is that companies must emphasize strategic planning or financial control when designing their control systems.
How do you manage the changes?
To manage the changes, McKinsey & Company’s developed its restructuring quadrangle. The five nodes herein are:
Current market value
Business value without changes
Potential value with internal improvements
Potential value with external improvements
Optimal restructured value
Different approaches that encourage corporate adjustment are:
Preventing slowness
Adaptive tension
Institutionalization of strategic changes
New business developments
Large-scale development initiatives directed from above
How should multinationals be managed?
A system in which companies are managed and controlled is called governance. According to the OECD Principles of Corporate Governance, the Board of Directors has the responsibility to ensure the strategic direction of the company, to effectively supervise and to render account to the company and the shareholders. This requires that the board members act in good faith and act according to the goals of the company. In addition, the board members must assess and lead the corporate strategy, major plans, actions and budgets
According to Oscar Williamson’s "M-form theory," spreading the decision-making between a corporate HQ and the corporate departments brings about corporate governance in two ways; through resource allocation and through agency issues
Problems of differentiated companies can be restrictions on decentralization ans standardization of division management.
Takeover
An acquisition of a company by another company is called an acquisition. Acquisitions can be friendly or hostile. An enemy acquisition is one where the management of the target company is opposed to the acquisition. The merging together of two or more companies into a new company is called a merger. In the case of a merger, the members of the merging companies exchange their shares for shares in the new company.
How do you rate a merger or acquisition proposal?
According to Hence, the starting point for assessing a merger or acquisition proposal must be clear recognition of its strategic objectives. This may include:
Acquiring strategically important resources and capabilities.
Searching for cost economies and market power.
Expanding to new geographic markets.
Diversification in new industries.
There are studies that investigate the impact of merger announcements on the share prices of bids and acquired companies. These studies show that in general there is a small gain in the value of the stock market. In addition, almost all profits from an acquisition go to the shareholders of the acquired companies.
What are the motives for mergers and acquisitions?
There are different motives for mergers and acquisitions, namely:
Shareholders are often skeptical about acquisitions because they are very beneficial for top management and especially for the CEOs. Management often wants a large company and this can be achieved quickly through a takeover. It is also possible that a CEO wants his company to become known and tries to get into the media through a takeover.
Mergers and acquisitions create value for shareholders through stock market inefficiencies, tax breaks or financial engineering. By changing the capital structure of the acquired company, the acquiring party can reduce its capital costs and thereby create value.
Most mergers and acquisitions are strategically motivated. They are done because there is a potential that they increase the underlying profit of the companies involved. There are different types of mergers and acquisitions:
Horizontal mergers: companies that compete in the same market are combined to improve market power. Profitability arises from this increased power and from cost economies.
Geographical expansion mergers: many companies use this type of merger to enter a foreign market.
Vertical mergers: this merger includes the acquisition of a supplier or a consumer.
Diversification mergers: acquisition is the dominant mode for diversification.
Many mergers and acquisitions do not result in the expected outcome. One must properly identify the potential acquisitions and this requires intimate knowledge of the target company. Even well-planned mergers and acquisitions can result in a failing outcome. Pre-acquisition planning and post-acquisition integration are required to ensure a merger or acquisition goes smoothly.
To know whether a proposed acquisition will actually reduce costs, the following questions must be asked:
Do the products of the acquired company fit in our product catalog?
Do the consumers of the other company buy our products?
Do the products of the acquired company fit in our supply chain?
Can our people serve the consumers of the acquired company?
What is a strategic alliance?
A joint arrangement between two or more companies with regard to their pursuit of certain common goals is called a strategic alliance. Strategic alliances can take various forms:
A possible involvement in equity participation
A joint venture, this is a certain form of equity alliance in which the partners form a new company that they jointly own
To meet specific purposes
It is a purely bilateral arrangement or part of a network of business relationships
What are the motives for strategic alliances?
Possible motives for strategic alliances are:
Combining a business reputation with the possibilities of another company
To share techniques and complement each other
To share route networks
To combine techniques with sources
There is a debate about what the main purpose of strategic alliances is; gaining access to the resources and abilities of the partner or gaining the resources and abilities through learning. Most alliances are about gaining access to resources instead of gaining. A major advantage of strategic alliances is that they offer great flexibility. They can easily be created and dissolved and their size and purpose can easily be changed.
Managing the alliance relationship is crucial for the organization's capabilities. Trust must be built, routines shared, coordination mechanisms set up and information shared. The more a company chooses to outsource the vertical chain to alliance partners, the more important it is to develop a system for the coordination and integration of the dispersed activities.
There are companies that use strategic alliances to strengthen their international presence. Examples of companies that base their internationalization strategy almost entirely on foreign alliances are Gazprom and General Motors.
For a local company it is often advantageous to form an alliance with a foreign company because it has access to more resources and capacities. In many developing countries, the government often obliges local companies to form an alliance with a foreign company.
What does today's business environment look like?
The main drivers for the changes in today's business environment during the 21st century are:
Technology: there has been a lot of technological innovation in recent years. Technology is fundamentally shifting the boundaries between companies and markets.
Competition: it is almost certain that economic growth in the world will remain slow in the coming years. Developing countries are starting to enter the world market and as a result competition and pressure are increasing.
Market turbulence: most markets in the world have had high volatility lately. This volatility is a reflection of unexpected events, political and economic, such as the financial crisis of 2008-2009.
Social pressure and the capital crisis: if an organization wants to survive and make a profit, it must be able to adapt to society's expectations. This is known as legitimacy among socialist organization.
A market-oriented economy where a large proportion of the most prominent companies are owned by the government is called state capitalism. In state capitalism there is a potential to combine entrepreneurship of capitalism with long-term orientation and coordination of resource implementation. There is an increased interest in the following business ventures: cooperatives: companies that are partially owned by consumers, employees or independent producers, and social Enterprises: business ventures that focus on social goals. This can be a profit or non-profit organization.
What is the new direction in strategic thinking?
Important developments in the field of the new direction in which strategy is being considered are reorientation of corporate objectives and searching for more complex sources of competitive advantage.
An option approach has far-reaching consequences for the tools and frameworks of strategy analysis. For instance with industry analysis, decisions about the attractiveness of a market depend on potential profit. Another example is an option approach, which also has important implications for the analysis of resources and capabilities.
In recent years, the understanding of strategic fit has increased due to two important concepts: complementarity research and complexity theory. Complex systems are systems in which the behavior results from the interaction of a large number of independent agents. This behavior of complex systems has interesting functions that have important consequences for the management of organizations:
We call the tendency for complex systems, both natural and biological systems, to realize order spontaneously, self-organization.
Both concepts (complementarity research and complexity theory) have provided new insights into the context of relationships within the company. Porter and Siggelkow distinguish two dimensions of this contextuality: contextuality of activities and contextuality of interactions.
What are the multidimensional structures?
The more opportunities an organization develops, the more complex the organizational structure becomes. This is evident from, for example:
The 'total quality' movement of the 1980s resulted in companies that introduced organizational structures to create qualitative management processes.
The adoption of social and environmental responsibility by companies resulted in the design of structures focused on these activities.
The spread of knowledge management during the 90s resulted in many companies that introduced knowledge management structures and systems.
The need to develop and implement opportunities that meet the needs of large global customers has led to multinational corporations and to establishing organizational units to manage key accounts.
The search for innovation and organizational changes has resulted in the establishment of organizational units that carry out exploratory activities. These include project teams that develop new products and start-up centers for the development of new companies.
How do you deal with complexity?
As companies expand their capabilities, the organization of an organization becomes more complex. Due to the increasing complexity of organizations, we can add the following extra dimensions to the traditional matrix:
The informal organization: if a company wants to maintain efficiency and agility when the organization becomes more complex, it must go from a formal structure to an informal structure.
The independent organization: there are three factors that are conducive to self-organization in complex systems: identity, information and relationships.
Breaking down corporate boundaries: even if one has an informal structure, the scope of the possibilities has a limit. To expand this range of possibilities, a company can collaborate with other companies in order to obtain the possibilities of other companies.
Has the role of managers changed?
The insights that the complexity theory offers also require more specific guidance from managers. In particular:
The rapid evolution requires a combination of both increasing and radical changes.
Establishing simple rules.
To manage adaptive voltage.
What is strategy and what is strategic management? - Bulletpoints 1
A SWOT framework analyzes the strategy based on four categories: Strengths, Weaknesses, Opportunities and Threats.
The strategic fit is the consistency of the business strategy with regard to its external and internal environment.
Contingency theory is a theory that states that the optimal structure and management of the systems for each organization depend on the context.
Game theory is an analysis and prediction of the results of competitive (and cooperative) situations in which action depends on the choices that other players make in the game.
Corporate planning is a systematic approach to medium to long-term resource allocation and strategic decisions within a company.
Resource-based view of the firm is a theoretical premise where the role of the resources and capabilities is the basis for emphasizing the competitive advantage and strategy basis.
Strategic intent is the organizational goal in terms of a desired future strategic position.
Business strategy / competitive strategy refers to how a company competes in a private industry or market.
Corporate strategy are business decisions and intentions regarding the scope of the activities and the means at their disposal.
Intended strategy is the strategy devised by top management with the intention of implementing it within the organization.
Realized strategy is the actual strategy that the organization pursues.
Emergent strategy is the strategy that results from the actions and decisions of various organization members.
What are the company's goals, values and performance? - Bulletpoints 2
Value added is the turnover minus the costs of purchased goods and services; it is equal to all payments made by the company to the suppliers of the factors of production.
Consumer surplus is the value a customer receives from a good or service minus the price they paid for it.
Stakeholder approach to the firm is the assumption that the company is active in the interest of all its stakeholders. Top management has the task of balancing and integrating these different interests.
Profit is the surplus of revenue versus cost available for distribution to the owners of the company.
Economic profit is pure profit: the surplus of income compared to the costs of producing that income (including the cost of capital).
Economic value added (EVA) is a measure of economic profit. It is the positive balance of the net operating profit after deduction of the costs of capital.
What are the principles of industry analysis? - Bulletpoints 3
A company's operating environment is formed by relationships with suppliers, competitors and customers.
The seller concentration is the number and size of companies in a given market.
Barriers to entry are the disadvantages that newcomers to a market face with regard to the established companies.
Barriers to exit are the financial costs and other barriers that prevent a company from withdrawing from a market.
The key success factors are the factors in an industry that affect a company's ability to outperform competitors.
How is the competitor analyzed? - Bulletpoints 4
Hypercompetition is a competitive battle characterized by fast and intense competitive movements where the competitive advantage has quickly eroded and companies are constantly looking for new sources of competitive advantage.
Prisoners' dilemma is a simple game theory model that shows how lack of collaboration results in an outcome that is inferior to the outcome that would have been achieved through collaboration.
Segmentation is the process of disintegrating the sectors and markets into more defined sub-markets based on the characteristics of the product, of the customer or of the geography.
Segmentation analysis is used to identify attractive segments and select strategies.
Strategic group is a group of companies within a market that uses the same strategy.
What are analysis options and tools? - Bulletpoints 5
Resources are the company's assets, including property, plant and equipment, intangible assets, and human resources.
Capability is the ability of a company to perform a certain task or function.
Organizational culture contains the values, traditions, standards of behavior, symbols and social characteristics of a company.
Different resources must be deployed together to create organizational opportunities and if applied through the right strategy, a competitive advantage can be achieved.
Value chain is a series of vertically related activities undertaken by a single company or a number of vertically related companies to produce a product or service.
Organizational routines are patterns of a coordinated activity by organizations capable of performing tasks in a regular and predictable manner.
Benchmarking is a systematic process for comparing own practices, processes, sources and possibilities with respect to other organizations.
The profit of a resource or capacity depends on the potential competitive advantage, the sustainability of the competitive advantage and the destination.
What is the basis for strategy implementation? - Bulletpoints 6
The organization of a company determines the possibilities for taking action.
Scenario analysis is a technique for integrating information and ideas about current trends and future developments into a small number of clearly different future results.
An agency problem is the question of whether the agent actually acts in the interest of the client.
Hierarchies are fundamental to the structure of the organization and are used as a means of control or coordination.
Functional structure is the organization around specialized business functions, for example financial marketing.
Multidivisional structure is a corporate structure consisting of separate business units, each with significant operational independence, coordinated by a headquarters that exercises strategic and financial control.
Matrix structure are multi-dimensional hierarchies. These include typical product units (or business units), geographical units and functions.
What are the sources of competitive advantage - Bulletpoints 7
A company has a competitive advantage over its direct competitors if it achieves a sustained higher percentage of profit (or has the potential to do so).
Blue-ocean strategy is the discovery or creation of a gap in the market.
A company can achieve a higher profit margin over its competitors in two ways: through a cost advantage or through a differentiation advantage.
Cost advantage is achieved by offering an identical product or service at a lower cost.
Differentiation advantage is achieved by offering a differentiated product or service so that the consumer is willing to pay a price premium that is higher than the additional costs of differentiation.
Isolating mechanisms are barriers that protect the competitive advantage of companies against distorted competition.
Causal ambiguity is the difficulty of encountering an observer examining the sources of a company's competitive advantage with superior performance.
How have industries developed? - Bulletpoints 8
Industry life cycle is the pattern of the evolution of a market: from introduction to growth to maturity to decline.
Dominant design is the design of a product that is accepted by business as a whole in terms of appearance, functionality and production.
Technical standard is a specification, requirement or technical characteristic that is the standard for a product or process.
Organizational ecology is a study of the organizational population of markets and the formation and selection processes that determine entry and exit.
Compentency traps is the barrier that changes as an organization develops at the level of competence, especially of its activities.
Institutional isomorphism is the tendency for organizations to become subject to common social norms and to have similar organizational characteristics for their legitimacy.
Bounded rationality is the principle that human rationality is limited by the limits of their cognition and ability to process information.
Ambidextrous organization is an organization that can simultaneously use existing powers while exploring new possibilities for future developments.
Dynamic capabilities are organizational capabilities that allow an organization to re-adjust and change its resources and operational capabilities.
Path dependency means that the organizational strategy, the organizational structure and the choices for the future are determined by the decisions made in the past.
Knowledge-based view of the firm is a theoretical starting point that a company views as a pool of assets and knowledge.
How can innovations be managed? - Bulletpoints 9
Invention is the creation of new products and processes through the development of new knowledge or through new combinations of existing knowledge.
Innovation is the first commercialization of an invention by producing and marketing a new product or service or by using new production methods.
Regime of appropriability are the conditions that determine the extent to which a company is able to record the profits of the innovations.
Intellectual property are intangible goods, such as ideas, names, symbols, designs, illustrations and corporate identities.
Innovation creates a temporary competitive advantage for a company. In order to bring new companies to the market, a company needs additional resources in addition to innovation.
First-mover advantage is the competitive advantage that is vested in the company that first occupies a new market or strategic niche or uses a new technology.
A network externality arises when the product value for a customer depends on the number of other people who also use the product.
Open innovation is an approach to innovation where a company seeks solutions from organizations and individuals from outside the company and shares its technologies with other organizations.
What are competitive advantages in mature industries? - Bulletpoints 10
Corporate restructuring are radical strategic and organizational changes designed to improve performance through cost reductions, job cuts, asset disposals and internal restructuring.
Customer relationship management are tools, techniques and methods to investigate the needs and characteristics of customers with the aim of serving them even better.
A company must gradually adapt its capacity to the decline in market demand. The gradual nature of this adjustment is critical to stability and profitability during the decline phase.
The biggest barriers to exit are durable and specialized assets, costs associated with plant closings and management commitment.
What is vertical integration? - Bulletpoints 11
The costs for research, negotiation, monitoring and enforcement of the market contracts are included in the transaction costs .
There are two factors that increase efficiency for companies in organizing their economic activities: technology and management techniques.
Transaction costs are avoided through vertical integration, but it does involve administrative costs.
The company must balance the relative benefits of vertical integration versus outsourcing.
What is the right strategy for multinationals? - Bulletpoints 12
Internationalization takes place through trade (supplying goods and services to another country) and direct investment (obtaining productive assets in another country).
There must be consistency between a country's business strategy and competitive advantage pattern in order to gain a competitive advantage in the global market.
Comparative advantage is the ability of a country to produce a certain product at a relatively lower cost than other countries.
A competitive advantage can be achieved through the presence of certain resources and capabilities and through an attractive value chain.
Pankaj Ghemawat's CAGE framework stands for 'Cultural', 'Administrative and political', 'Geographical' and 'Economic' distance. These are the four components that determine the distance between countries.
Global strategy is a strategy that sees the world as an independent segmented market.
If there are no transaction costs, the company will export and sell its products and resources in overseas markets.
What is diversification strategy? - Bulletpoints 13
In the 20th century, diversification was mainly driven by two things, growth and risk reduction.
According to the capital asset pricing model (CAPM), the overall risk is not the determining factor for the price of a security, but the systematic risk.
Material resources create economies of scope by eliminating duplication.
Intangible assets provide economies of scope through the ability to extend these resources to additional companies at low marginal costs.
Economies of scope exist when fewer of those resources arise than when the activities are performed independently using a resource across multiple products or multiple markets.
Economies of scope of resources and capabilities can also be obtained by selling or licensing the use of resources and capabilities to another company.
Porter developed three essential tests to determine whether diversification will create real shareholder value, namely the attractiveness test, the cost-of-entry test and the better-off test.
How can you manage multinationals? - Bulletpoints 14
A company's ability to add more value to an industry than its competitors is called parenting advantage .
Portfolio planning matrices are the most commonly used tools for managing the portfolio in the multibusiness company.
Most multinationals are organized in such a way that links between resources and capacities are exploited in two areas: by centralizing common services (corporate level) and by managing direct links between companies.
Many multinationals have shared planning processes: strategic planning is mainly focused on the medium and longer term, while financial planning is more focused on the short term.
Corporate governance is a system by which companies are managed and controlled.
What are external growth strategies? - Bulletpoints 15
Acquisition is the takeover of a company by another company.
Merger is the combination of two or more companies into a new company. In a merger, the members of the merging companies exchange their shares for shares in the new company.
Mergers and acquisitions create shareholder value through stock market inefficiencies, tax breaks or financial engineering.
A joint venture is a form of equity alliance in which the partners form a new company that they own jointly.
Most mergers and acquisitions are strategically motivated. They are done because there is a potential that they increase the underlying profit of the companies involved.
Strategic alliance is a joint arrangement between two or more companies with regard to their pursuit of certain common goals.
There are companies that use strategic alliances to strengthen their international presence.
It is often beneficial for a local company to form an alliance with a foreign company because it gives it access to more resources and capabilities.
What are trends in strategy management? - Bulletpoints 16
State capitalism is a market-oriented economy in which a large part of the most prominent companies are owned by the government.
Self-organization is the tendency for complex systems, both natural and biological systems, to realize order spontaneously.
Complex systems are systems in which the behavior results from the interaction of a large number of independent agents.
When companies expand their possibilities, the management of an organization becomes more complex.
Cooperatives: companies partially owned by consumers, employees or independent producers.
Social Enterprises: Business ventures that focus on social goals. This can be profit or non-profit organizations.
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