Strategic Management I PDF

STRATEGIC MANAGEMENT CHAPTER 1: ORGANIZATIONAL STRATEGY 1.1 The concept of strategy: Why is it important to study organizational strategy? Companies operate in complex and changing environments→ Need to adapt to changes to survive and prosper → strategies. Where do we find a company’s strategies?...

STRATEGIC MANAGEMENT CHAPTER 1: ORGANIZATIONAL STRATEGY 1.1 The concept of strategy: Why is it important to study organizational strategy? Companies operate in complex and changing environments→ Need to adapt to changes to survive and prosper → strategies. Where do we find a company’s strategies? - Heads of managers - Speeches and written documents - Decisions through which strategy is enacted Corporate pages of companies websites, top management presentations, and company’s annual reports can be pretty useful. → in general statements through which firms communicate their strategies. Definition: - strategy is the means by which individuals or organizations achieve their objectives. - The determination of the long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals (Chandler, 1962). 1.2 Contents of strategy: 1 Chess and firm strategy: chess reflects strategic concepts: - Generic strategic lessons (assimilate information regarding current position, asses it, analysed future scenarios,...) - Specific strategic lessons ( anticipate rivals movements, identify their weaknesses,...) “Likewise”, under more complex environments and situations, companies act strategically to achieve the goal of being the most competitive firm. 1.3 Different levels of strategy and strategic decision: Classical functional departments: production, sales, marketing, finance. These departments are related. - Theres a need for interaction, coordination and coherence between levels. 1.4 Strategic business unit ( SBU) We need to define them to see how to compete. Def: set of activities that are sufficiently self-contained to formulate a separate competitive strategy. - Why is it necessary to define SBUs? - Heterogeneity different business - Different competitive environment for each activity 1.5 The process of strategic management: 1.5.1 Phases of the Strategic management process Process to develop and implement strategies to achieve certain goals. Three main stages: 1. strategic analysis: - External analysis: the analysis of the environment that we can not control (the general environment and the competitive environment) - Internal analysis: focus on the organisation itself, to identify strengths and weaknesses 2. strategic formulation: 2  3. strategic implementation: evaluate the alternatives to see whether they need requirements. 1.5.2 Responsibility for strategic decisions *the responsables to take decisions are the TOP MANAGEMENT : they take decisions under uncertainty, -Certain strategies that they need to do: - Create value for the shareholders - Manage the conflicts of the different stakeholders - Setting the global orientation - Try to explode the opportunities in the environment, neutralising the threats (link between the firm and the environment ) - The resources and capabilities of the firm Board of directors: that will control top management in their strategic decisions to make sure that they are defending shareholders interests. Strategic control. * Those who make strategic decisions: *** All the stakeholders involved in the strategic decisions? No, because it’s Staff of : group of experts in an area that they will analyse to then give advice to create strategies more suitable. Example: consultants. - The stage of implementation involves all the departments. 1.5.3 Rationality in the decision making process The rational process presented is, in reality, and ideal process. Basic assumptions: - Intentional process - Objectives are clear and can be quantified. - Extensive information search - Strategies evaluation according to objective techniques - The process offers the best strategy following objective criteria Despite the benefits of the rational approach, it’s impossible to be 100% rational, really complex, uncertainty, so the reality is that both rational and “irrational” take places in the strategic plans. If the cost of failure is really high you will be more rational. If there is an immediate problem we would be less rational. Both are valid and coexist in reality. 3 Limitations : a) Decision-maker’s bounded rationality: - We cannot have complete information about all the situations. - People deciding the tend to adopt or take a decision that satisfy our interests even if it’s not the optimal decision b) The learning in the process: - The experience, the learning that we get over time can also affect our decisions, our rationality. c) Political aspects of process: conflicts of interests considering the difference of groups that have interest in the firm. d) Chance: random factors like mi intuition, luck, being for example being risk averse or risk lover. Rational and political aspects consist of the same environment. 1.5.4 Fit and change in the strategic management process. Fit: adjustment, -strategic fit : consistency between the context in which the strategy is developed and the strategy selected. To be able to achieve the objectives we need a strategy that takes advantage of the opportunities environment and minimises the negative impact of threat in the environment or the weakness of the firm. -organisational fit: the strategy selected and the - If the context is dynamic (external factors) then undertake strategic change, there are things that we need to adapt. To have the strategic fit again. - If we change the strategy we will have to take organisational change to have organisational fit again. - In a changing context we always have strategies and organisational fit. 4 Change→ dynamic: *if there’s a change in the environment: organisational change→ organisational fit again. Even if the environment is the same for two companies, it could be that one success because they have strong Academics: analyse different firms , business and consults Positive: different viewpoints, different source of knowledge to contribute to the firm Negative: conflicts 1.6 Approaches in the strategic thinking: - Rational approach: framework of analysis, totally intentional process. How can we adopt the best strategy? Strict rationality. Decision-makers bounded rationality. Author: Ansoff porter, character: prescriptive, purpose: how to formulate the best strategy. Strict. - School of thought : emphases in the importance in the non rational approach - Holistic approach : applies in reality. We can’t be completely rational or completely irrational, the combination is this holistic approach. Sometimes the company can be more rational or not. Emphasise that both deliberate and emergent coexist. - Organisational approach: Autor: Simon Mintzberg, character: descriptive, describe strategic Deliberate strategies: preconceived plan, totally intentional or controlled by top management. Emergent strategies : emerge without a previous plan. Ex: learning, chance, brilliant idea.. Examples: Pepsico, Toys “R” us 5 CHAPTER 2: STRATEGIC ANALYSIS (I): EXTERNAL ANALYSIS 2.1 Mission, vision and strategic decisions 2.2 External analysis - 2.2.1 External environment concept and its levels - 2.2.2 Analysis of the general environment - 2.2.3 Analysis of the industry and the competitive environment - 2.2.4 Segmentation of demand. Strategic groups 2.1 Mission, vision and strategic decisions Static perspective (positioning ): 1. Where to compete - Defining the scope - The vertical scope - Geographical How : - Competing present Dynamic perspective: 1. What do we want to become? Vision statement 2. What do we want to achieve? Mission statement 3. How will we get there? Specific strategic objectives - Preparing for the future Definition- Mission: Reflects the identity, purpose of the firm, and the reason why the company exists. What is the essence of the business and what do we want it to be? - Known by everybody, the mission has to be known by everyone in the company. - The mission tends to be stable but interpreted as a dynamic concept. In the sense that it’s something that the company in principle has to not change, because it’s the “core” values. This doesn't mean that the company cannot reformulate the mission in the future. - How to write a mission statement? Defining the mission: three main variables that can be included in the mission statement. 1. The scope of the firm: products they sell 2. Resources and capabilities: 3. Culture of the firm : values, the philosophy… - Broad vs narrow 6  - Mission can be also implicit vs explicit : explicit→ formalise, implicit→ formalise and also in people’s minds. - What happens if we want to merge with other company? Diversified companies: try to find a common link between firms , and if not defining the mission for each unit. Definition -Vision: Future perceptions, what we seek to become. What will we be, what should we be, and what do we want to be in the future? - Formulated in ambitious terms →including the idea of success - Stable overtime - Achieving the vision in the future implies the commitment of everyone in the organisation - Everybody needs to know the vision, mission - Mental trajectory of the path to follow that will guide the decisions of the organisation. - Value creation - realistic , meaning that it cannot be a fantasy. - We can answer the question : How we see ourselves in a decade for example. - Short sentences to explain the vision. Formulated in relatively simple ways. Example : Gas Natural - Their mission was very clear, defining the three main variables. What is the scope of the firm ( provide energy services), the resources and capabilities of the firm ( eco-friendly services, high quality) and culture of the firm ( opportunities for development, sustainable returns for shareholders and also society). Definition- Strategic objectives: Help overcoming the gap between the future the firm pursues and its present reality How will we become what we want to be? Measurable , specific, consistent, successive, realistic, challenging, set within a time frame. - Create value→ for shareholders - Make profit → ROA, ROE - SMART → specific, measurable, achievable, relevant, time bounded. Example Airline: if the company only takes into account shareholders needs, they affect other people involved with the firm. - They could cause bad reputation that may lead to a decrease of customers - We need to reconcile the needs of all the groups 7  - In this case was the example of an airline that their pilots went on a strike, causing a lot of problems affecting customers, staff,etc. Importance of CSR (corporate social responsibility): how firms try to address social needs through their operations. It’s not mandatory, it is a voluntary application. Shared value: a way of creating economic value but at the same time social value. We assume that both objectives are compatible. - Does it (CSR) pay off? Adopting these practices could pay off if there’s an improvement in the brand reputation, more motivated employees, etc. - The negatives aspects of this implication are for example, more costs There are three main contents: 1. Economic functional area ( how can they contribute to society) 2. Quality of life area : they can improve the standards of living. Ex: contaminate less, sustainability. 3. Social action: education, sports, art something that will provide some environment benefit. 2.2 External Analysis - What is the objective? Detect threats and opportunities from the environment 2.2.1. External environment concept and its levels - What is the concept/ definition? The environment refers to all the factors outside the company that cannot be controlled, and that affect the results and success of its strategies. - What are the characteristics of the current business environment? - The levels of the environment: general environment and competitive environment 8 2.2.2 Analysis of the general environment - What is the objective? Identify what factors from the socio-economic system affect a firm's operations and performance. - What are the different methods of analysis? We focus on two of them: 1. PESTEL analysis 2. Industrial districts ➔ Strategic profile - Pestel analysis What are the stages for analysis? 1. To define the limits of the environment (geographic) 2. Identify the key variables to be considered within each critical dimension of the environment: Political, economic, socio-cultural, technological, ecological, legal (PESTEL) 3. Develop the strategic profile ( list all the factors, assess them from 1-5, highlight threats and opportunities). Example: - Simple and easy to use - Subjective and qualitative ➔ Strategic profile of the environment What are the aspects to take into account ? - Similar characteristics of the environment may have different effects in different industries. - The impact the general environment has varies also even among companies from the same industry. - Not all the variables in the general environment have a significant impact on a specific firm/industry. Ex: terrorist attacks- Effects in different industries? → Industry districts: - What is the concept? Group of similar firms and institutions, connected by the same economic activity, located in a specific geographic environment. 9 Why is it important to study industrial districts? To determine how companies location affects their competitiveness. - The location in an industrial district can improve firm competitiveness for the following reasons: The location in an industrial district can improve firm competitiveness for the following reasons : - Increase in productivity - Innovation - New start-ups development 2.2.3 Analysis of the industry and the competitive environment -What is the specific environment? Includes all the external factors related to the industrial sector in which the company operates. -How to do a specific environment analysis: Objective: Examine industry attractiveness (a factor that conditions the profitability of the firm ) Steps of the analysis: 1. Establish boundaries of the competitive environment : ask the question who are our main competitors? - Industry concept: Group of companies that offer products or services that are close substitutes for each other. - Two criteria to establish industry boundaries : 1. Technological (supply side) 2. Market (demand side) 10 The level of profitability will be define by …the dimension of the industry. 2. Assess industry attractiveness: - What is the objective? Analyze competitive forces in an industry to identify opportunities and threats → effects on firm profitability. Porter’s five forces model: a) Intensity of rivalry : The greater the intensity of competition, the lower the possibility of obtaining higher returns. Therefore, the attractiveness of the industry decreases. - 1. The higher the competitors, the higher - 2. When growth reduces→ the competition increases because they will try a lot of things to keep their customers. (higher rivalry) - 3. Mobility barriers → the competition is lower if it's hard to move to another segment - 4, barriers to leave the segment → the competition is - 5. The rivalry will be higher if we sell standardised products - 7.If the firm has very high fixed cost, the company will try to produce a lot of outputs to recover the investment → increase the rivalry - 8. The more diverse competitors are more difficult is going to predict how they are going to react so→ higher rivalry - 9. If a given industry is perceive as strategic → will increase the rivalry b) Threat of new entrants: high entry of new competitors in an industry → greater intensity of competition 11  1. If the industry is attractive, if it's profitable. 2. How easy/difficult is to enter in the industry : - Entry barriers (absolute→ almost impossible to overcome /relative→ if this barrier could be overcome ) : low barriers→ high threat of new firms→ low attractiveness. - Economics of scale : *the more you produce the lower cost (per unit) - Economies of scope→ - Product differentiation→ - Start up capital requirements → - supply and distribution channels → usually the companies that are established in the market have better connections or are more easy for them to contact and work with suppliers, distributors. - Other advantages → if the firm has more experience, better technology, other kinds of advantages that the firms that have operated in the industry have. - Government policies→ could protect the number of firms who enter or other things. - Established competitors: those already in the industry, how they will react. How aggressive established firms are or react to new firms entering the market. c) Substitute products: Greater number of substitutes → lower industry attractiveness d) Barging power of suppliers and customers: Greater the bargaining power of suppliers and customers→ lower industry attractiveness - All these factors increase the bargaining power of suppliers and buyers. 12  -Small-scale purchases: if the suppliers are not dependent on a specific market - high switching cost: -real threat of forward integration: 3. Identify those segments that represent more specific competitive 4. Analyse the practices and behaviours of rival firms 2.2.4 Segmentation of demand. Strategic groups - Industry segmentation→ identification of smaller competitive areas What are the steps for the analysis? 1. Identify relevant strategic dimensions (price, quality…) 2. Develop a map of strategic groups 3. Analyse each strategic group applying the 5 forces model (group level) 9/10/2024 13 CHAPTER 3: STRATEGIC ANALYSIS (I): INTERNAL ANALYSIS Internal analysis: - Objective: to identify strengths and weaknesses. - Techniques: 1. Strategic profile of the firm 2. Value chain -Identity of the firm: it gives an idea of the organisational characteristics of the firm 3.1 Functional analysis and a firm’s strategic profile The firm's strategic profile is useful to identify its strengths and weaknesses through the study of its functional areas ( marketing, production, finance..) What are the steps? 1. Identify factors or key variables within each functional area. 2. Evaluate all the variables using a Likert scale Limitations: - Relative: - Subjective: - Static: 3.2 Value chain: The value chain separates the activities of the firm into key operations necessary to sell a product or provide a service. -PRIMARY ACTIVITIES: directly involved with manufacturing. 1. Inbound logistics: 14  2. Operations: 3. Outbound logistics: 4. Sales/Marketing: activities to make customers awarded of the product, promotion, advertising, 5. After-sales services: customer support, guarantees, refunds. -SUPPORT ACTIVITIES: not directly involved, they will increase the effectiveness of primary activities 1. Procurement: 2. Technology development : know technological knowledge, improve, everything that has a technological component 3. Human resource management: training, hiring new people,evaluation of the HR, promotion, firing. 4. Firms infrastructure: the planning control, Objective: identify sources of competitive advantage that can come from: 1. Specific activities of the value chain: ( ex: cost leadership thanks to the primary support of operations ) 2. Interrelation of activities within the value chain (horizontal links) → cost leadership with the support of technology development for example. 3. Interrelation between the value chain and the value system ( vertical links) → 3.3 Analysis of resources and capabilities: 15 Imperfect mobility of resources and : not all the resources that the firm has are available to all firms in the same way. Functional: focus on value chain Cultural : people in the organisation, capability to work in team or thins The better the routine the better the capabilities 1) Identifying resources and capabilities: Terms to use? → resources, assets, skills, competencies, factors, capabilities.. There are two levels: 1. Resources: factors and assets a firm controls 2. Capabilities: collective abilities to perform a specific task Distinction between resources- capabilities Resources: - Stock,things, elements, individual nature Capabilities: - Flow, how perform activities, collective nature 2) Strategic evaluation of resources and capabilities: Strategic resources and capabilities→ allow the obtaining of sustainable competitive advantage and rents that can be appropriated by the firm– → strength!!! → Capability to establish a competitive advantage → capability to sustain the competitive advantage (immobility) → appropriate the returns to that competitive advantage. 16 Generating a competitive advantage: - Scarcity: not available to all competitors - Relevance: usefulness of a specific resource or capability to compete in an industry (related to its key success factors) 3) Managing resources and capabilities: + SWOT analysis: strengths, weakness, opportunities and threats 17 CHAPTER 4: BUSINESS STRATEGY 4.1 The nature and sources of competitive advantage: Competitive advantage : a characteristic of the firm that distinguishes it from other competitors of the market, placing the company in a better position for competing and obtaining higher profitability. Basic requirements (profitability !!!) : 1. Characteristics related to key success factors in the market 2. Sufficiently sustainable 3. Sustainable : we want to be in a superior position in the long term. Generic competitive advantage : - Cost leadership - Differentiation - Focus (specific segment) *We can’t implement the two because if you choose differentiation you will need to spend a lot of money. 18 -this topic we also saw in the management of resources and capabilities. -Some authors consider that apart from external factors also are important their internal factors. -Imitation barriers: “patents” obstacles that the competitors will face if they try to imitate the competitive advantage. -Competitors imitation capability: the ability of rivals to imitated -Industry dynamism: if the industry is very dynamic we will have to adapt our resources… not a good thing 4.2 Analysis of cost and differentiation competitive advantage 4.2.1 Cost competitive advantage: The firm is able to offer similar products or services than its competitors but at a lower cost. The firm that has the cost advantage is able to produce it at lower cost. 19 4.2.1 Cost competitive advantage: - Learning effect: less time per unit translates with lower labour cost per unit. - Experience effect: that is the same idea as we gain more experience we are also able to reduce some costs. We might decide to redesign the product - Other factors: - Economies of scale: - Production techniques and product redesign : - Input cost advantages: if they have high bargaining power, if they choice the cheapest raw materials - Firm location: if we are close to our suppliers - Cooperation agreements: just in time→ collaboration with suppliers just in time we can reduce storage cost for example - Bargaining power Sources of cost competitive advantage in large retail stores: - Important economies of scale - Use of standardised marketing technology - Lower labor costs due to the reduction in the number of jobs - High bargaining power with suppliers - Cooperation agreements with some manufacturers - Located on the outskirts of major cities Ex: Alcampo, carrefour, eroski 20 4.2.2 Differentiation competitive advantage: A firm offers a product or service that has certain attributes that make customers perceive it as unique→ pay a higher price for it. - Differentiation? Physical attributes but not the only case. - Potential sources: Value chain and differentiation: 21 Sources of the differentiation competitive advantage: 1. Product characteristics: - Physical: size, shape, technology - Product performance - Complements: after sales services 2. Market characteristics: - Variety of consumer tastes and needs - Product valuation by customers - Intangibles: social, aesthetic 3. Firm characteristics: - Way of interacting with customers - Ethic, values, corporate culture - Firm reputation Customers also assess how a particular firm interacts with customers. Capabilities are ways of doing things. If the customer's values are aligned with the firm it’s more probable that they will buy the products. Why will customers pay a premium price for faster response? Because time is a valuable resource and also the cost that implies. 4. Other variables: - Time (rapid response) - Social responsibility criteria Barriers of imitation: - High level of creativity - Complex interrelations of resources and capabilities: the idea of complementary - Unique location Conditions of application: - Greater complexity and variety of products and services, customers needs, and characteristics of the firms offering the product. *When is appropriate? - When customers pay attention to quality issues (high quality) - socially differentiate themselves - Few competitors - When the resources of differentiation are difficult to imitate. 22 Risks differentiation advantage: Ex: expensive bag Even if you try to differentiate it might not be totally effective, since other firms can also implement the same strategy (strategic groups) 4.3 Strategic clock -Basic premise: customers buy a product or a service in one firm or another according to two criteria. a) Price: ( price differences between competitors) b) Perceived added value: (customer’s appreciation) —> combining these two criteria, it is possible to obtain 8 competitive strategies, that can be grouped into 4 strategic groups. 23  - “No frills” (1): not focus on quality and low prices: customers that are price sensitive. - Low price (2) : the closest to cost leadership - Differentiation (4): prices are medium high and high quality , the closest to differentiation strategy study before. Differentiation in the industry. - Segmented differentiation (5): *see what is the difference - Hybrid: quality price ratio (3): relatively low prices and medium high quality, it’s not easy to achieve this. It requires dual skills. - Strategies destined to fall (6,7,8): high price and low quality, so it's obvious that this will lead to fail. If there is a situation of monopoly this type could be implemented, but in general it will lose market share. - Case study : how is this company competing? They provide high quality products at a medium high price - They implement differentiation : premium price to fast response - What are the resources that they apply? - Product characteristic, the quality, etc -firm characteristics: it’s a way of interacting with customers, the culture -Other variables :the time response -Market characteristics: also that now the customers valuated more the organic products -Family firm: generational business it’s also important Main risks: - Seasonal products 4.4 Lifecycle: strategies for emerging, mature, and declining industries Objective: to adapt competitive strategies to different types of industries, depending on their level of maturity—> emerging, growth, mature, and declining. New or emerging industries: - Recently created - Linked to new innovations, or changes in customer’s needs Characteristics: high initial costs, slow growth in demand, high risk due to uncertainty and instability. 24 Strategies: - risk management (e.g cooperation, rules of the game) Gaining knowledge about the future trends - timing entry , we should be pioniers ( benefits we make the movement first inconvenient we assume all the risk) or followers. Mature industries Low levels of demand growth, or even null. As a result, firm’s growth opportunities decrease. Characteristics: - overcapacity installed - appearance of new competitors - difficulties to innovate - customers’ bargaining power (higher) Strategies: - gaining a substantial competitive advantage (cost leadership, product differentiation, how they gain competitive advantage ) - redefining business scope (diversification , external growth strategies, internationalisation)..--> the last one is corporate strategy. Diversification→ invest in R and D, and search for emerging markets External growth→ internal growth (investing in the firm, external mechanisms, acquisition of another firm) Internalisation→ expand globally Declining industries Characterized by a constant decrease in demand: - Characteristics: large manufacturing overcapacity, aggressive price competition, absence of technological changes, high average age of resources. - Strategies: - industry leadership: become the industry leader - Segmentation: try to move - Harvest: - quick divestment : 25 -could also search for competitive advantage, 4.5 INNOVATION STRATEGY - Inventions: result from combinations of new or existing knowledge - Innovation: involves the commercialization of an invention, creating something new (products and services) to typically address new demands. Difference: inventions is the creation of something new, innovation that then gets commercialised. Why are firms innovative? To remain competitive, make more profit, adapt to the changing market. How firms gain knowledge? combination of knowledge input, promoting knowledge management, how firms manage their knowledge, brainstorming, exploding and transferring the knowledge within the firm. - Innovation→ - Cost advantage→ new technology - Differentiation→ Benefits: innovation is costly, all the investment R and D not always transfer to the products.Also it’s very uncertain and risky. Ex: covid, how many firms wanted to achieve a vaccine. Would you support innovation? Be the pioneer? -Radical innovation: - Incremental innovation: improve current products in reducing characteristics. It’s more common to see this type of innovation. 26 CHAPTER 5: CORPORATE STRATEGY Scope: - Product: diversification… - Geographical: number of geographical areas where the firm is operating related to the internalisation of the firm - Vertical : the degree of ownership of vertically related activities. When companies become his own supplier or his own distributors. 5.1 Development strategies -Development: always to create value. Development and growth: - Firm is growing we have increases in the size of the firm, measured by the number of employees, - Development is about the evolution of the scope of the firm over time in qualitative and quantitative terms. - Quantitative: see if there is growth or not Qualitative: we need to assess the composition of the business portfolio, are we going to do the same activities or not. Always to create value for the firm. Is it possible to create value without growth? Companies may diversify too much, companies can create value without growth. 1. Directions of development: consolidation, expansion, diversification, vertical integration, restructuring. 2. Methods of development: how are we going to achieve the direction of the firm. 27  - Internal: we invest within the firm, organic growth - External: mergers, acquisition and cooperation. Ex: acquire a firm where I am going to operate. 5.1.1 Directions of development: - Expansion strategies: market penetration, product development, market development. - Product development: introducing new products in an existing market (change in the scope? Yes, it is changing the product) - Market development: existing products, new markets - Diversification: new products, new markets - Vertical integration: activities related to the whole production cycle, - Restructuring: withdrawal (divestment) from present activities, we are not increasing the size so there is no growth. The way to create value again. a) Diversification: is defined as a strategy that takes an organisation away from both its existing markets and its existing products → new products + new markets —> change in the scope of the firm Ex: use PESTEL, economical factors 28 Ex: competitive environment (porter’s) Ex: economies of scope, cost economies of multiple products, Why do you diversify ? manage risk, if you diversify the risk is reduced. - Risk reduction - Saturation of traditional market - Excess of resources and capabilities - Investment opportunities: - Generation of synergies: - Other reasons (growth, image, etc,): exploding the of the company Related diversification: - Relatedness has to do with the potential for sharing and transferring resources and capabilities between businesses (distribution channels, technologies, etc.). In related diversification there is some degree of relationship with current activities. - Reasons for related diversification: generating synergies, productive or commercial synergies. That can be shared or can be transferred, there is a potential to achieve economies of scope. Main reason to generate economies of scope. - Cost leadership: benefiting from technological competence, experience, valuable technology, benefit from brand image. - Risks of related diversification: Coordination cost, synergies do not exist, inflexiblity —> we cannot act inflexibly or autonomously without affecting the other activities. (exit barriers). - Ex: nokia No, we cannot transfer knowledge and resources, so no synergies. It is possible to manage financial synergies. We need to see the value chain and the potential synergies, whether resources can be If its related companies can create productive and synergies. The way to evaluate if they are related or not? If it can be transfer - Why for managers is relevant unrelated diversification? Managers have their own interests, so this is for them a great opportunity since it provides them to put in on the resumes, promotions, incentives, and strategic decision to diversify in a firm or market that we are not related to. 29  - So this is related to shareholders' goals? Not necessarily, because they search for long term sustain returns. Unrelated diversification: Moving into new products and new market activities that have no direct link with current activities. There is a clear break with the previous situation. - Reasons for unrelated diversification: ➔ Reduce firm risk, achieve greater earnings, better allocation of financial resources, manager’s objectives. - Risks or unrelated diversification: ➔ absence of synergies across business (production and commercial synergies, because the value chain ) ➔ difficulty to obtain specific skills and competence ➔ managerial problems ➔ overcome barriers to entry in new industries: b) Vertical integration : refers to a firm’s ownership of vertically related activities. The greater a firm’s ownership extends over successive stages of the value chain for its product, the greater its degree of vertical integration. (Grant) - Two types of integration: 1. Backward integration: acquisition by a car manufacturer of a component supplier. 2. Forward integration: for a car manufacturer, this could be distribution, repairs and servicing. Reasons for vertical integration: Cost advantages Based on the competitive position - Economies of scope - Access to inputs - Simplification of the - Possibility to reinforce production/distribution process differentiation - Costs reduction ( coordination and - Ability to affect prices control) - Market power increase ( compared - Elimination of transaction costs to non-integrated competitors) - Less intermediaries - Creation of barriers to entry (difficult to overcome by non-integrated competitors) 30 Risks of vertical integration - Firm risk may increase - Higher exit barriers - Lack of flexibility - Less ability to develop autonomous innovations - Profit margins not achieved - Organizational complexity increases 5.1.2 Methods of development Cooperation: Agreement between two or more firms that, remaining independent organisations, share some resources and/ or capabilities to pursue a strategy and reinforce their competitive advantage. Basic characteristics: - No subordinate relationship between firms that cooperate - Independent but dependent - Coordinations to undertake future actions - Certain loss of organisational autonomy in decision making - Interdependence between partners to achieve success - Partners pursue a common goal ( difficult to achieve without the agreement ) Advantages: Risk is share, resources, increased their competitive position, explode a new market opportunity, reach new market. - Obtain resources required (open innovation)--> ex: covid vaccine - Greater balance between efficiency and flexibility → way of focusing internally in activities that we can perform well, and partner with external institutions - Limits some risks→ Ex: innovation, uncertain risky process, investment is really high. - Learning from partners→ - Reduced the time we need to introduce a product in the market: through collaborations 31 Disadvantages: - Undermine a firm’s competitive position→ showing sources that support our competitive advantage - Loss of autonomy - Costs ( time, organisational complexity) → time consuming, firms align with multiple firms ( alliance cooperation ) - Divergent interests → - Lack of trust and commitment among partners → Depending on the Nature of the cooperation, we have different cooperation agreements: Contractual agreements: - Contracts between companies that do not involve ownership, the exchange of shares, or capital investments in a new business. - Types: long-term contracts (long term relationship for a specific purpose) , franchise (Mcdonalds, the right to have the own business in a exchange for a fee) , licence ( let you use the knowledge that you can use to produce or sell a product in exchange to a fee) , subcontracting (outsourcing a specific activity in the value chain, subcontract the design or the marketing activity) , consortia ( usually uses multiple products that they work together for a single project) Shareholder agreements: - Involve acquisition of shares or even the creation of a new entity. - Types: joint ventures (two firms invest or collaborate in the creation a new venture) g, share swap (companies reciprocate subtract capital in , minority shareholder Interorganizational networks: - Plurality of corporations agreements between firms (all the types analysed before), multiple partners, and complex relationships. 5.2 Firm internationalization Multinational: firm that operates in two or more countries in order to maximize profits from a global perspective. - Corporate strategy we will also study international competitive strategies. - Maximize their benefits, - Internal factors: 32 Reasons for internalization: 1. Internal - Cost reduction : - Search for resources: specialises labour - Minimum efficient size: if you don't have enough demand, you sell the excess in foreign locations - Reduce risk: 2. External - Industry life cycle - External demand - Track the customer: if their customer is internazionale - Industry globalization: Expansion Market development, geographical scope. How companies compete in the international competition, and to determine how they compete we have to understand in which sector they compete. PATTERNS OF INTERNATIONAL COMPETITION (porter): 1. Multidomestic industry: -competition in each country is independent of competition in other countries. -National industries compete autonomously, competitive advantge are country specific. -Portfolio of domestic strategies, specific for each country, example: wine industry Ex: wine industry 2. Potentially global industries: 3. Global industry: the firm’s competitive positoon in one coutnry is closely related to its competitive positon in other countries. - Consider the world as a single market. - Global competitive advantage - Ex: Commercial aircraft Compare the main characteristics of global and multidomestic industries, in terms of: Global industry Multidomestic industry Location of players Only operate in few Around the world, they countries, USA and some are in different countries. countries of Europe 33  Minimum efficient size High→ they required high Small→ investment and facilities Number of firms in the Very few firms main A lot of firms in the industry players only Boeing and industry, EADS-Airbus Trade barriers No national barriers of High import tariffs to entry protect the domestic industries. Consumer behaviour Similar since the Heterogenous, approach is almost the same International competitive strategies: how firms will compete in international markets. Firms can compete in cost leadership or differentiation. Global strategy : if the industry is global the firm will follow this strategy. Here the companies can offer standardized products (and sell in multiple countries) since the demand is homogeneous. → this could reduce costs. Multidomestic strategy: if the industry is multidomestic the firm will follow this strategy. The pressure to reduce cost is low ( high cost since customization is really costly) the pressure on local adaptation is high since the demand is heterogeneous. The firms cannot offer standardized products across the world. Transnational strategy: if the industry is potentially global the firm will follow this strategy. We will try to reduce cost as much as we can but we know that for certain aspects we need to adapt. Balance the benefits from both, think global but act local. Concentrate the operations in countries where it is cheaper, for example aircraft. Problems→ depend a lot in concrete location, Multidomestic→ local knowledge matters, differentiation but understood as customized the products, adapting the product to local needs of demand. Problems: limited ability to reduce costs. 34 Transnational → combination, standardised everything we can but at the same time there is a need of adapting some characteristics of the products. Balance of efficiency and Ikea: purely global to transnational Mcdonalds: not purely global, they have some characteristics they adapt to the country. Transnational strategy. Where and how? Penetration on the foreign market. a) Foreign market selection: - Foreign market characteristics: (macroeconomic conditions, country risk→ negative effects for the firms operating in a foreign market that could result in legal issues, political aspects associated with the country,etc.) Developing a pestle analysis, political factors, economics. Potential demand for the product. *Political risk→ free market economy, dictatorship or a democracy, the risk of a civil war, corruption in the government. 35  - How difficult it is to operate in the foreign market: how easy or difficult it is to operate in the particular market. Cultural gap, local conditions, etc. The greater the differences, the more difficult to operate. The greater the difficulty to adapt, the more difficult to operate. b) Entry modes: - Exporting: lower investment, lower risk. less profitable - Contractual agreements: - Foreign direct investment : more profitable - joint venture - wholly owned subsidiaries Companies would choose exporting and contractual agreements because it is less costly, when they gain experience and knowledge then they typically become more engaged in foreign direct investment. Classical path→ beginning with contractual agreements and then expand Born global firms→ companies that are present in multiple channels International entry modes: Exports: (low intensity) - Operating takes place in the home country and then you export to other countries. Advantages: - small size of the firm: Exporting is an ideal strategy for smaller firms with limited resources since it requires less capital investment compared to establishing operations in foreign countries. It allows firms to access international markets without significant infrastructure or management overhead abroad - Test international markets: Firms can gather insights about customer preferences, competition, and market conditions before committing to more resource-intensive modes like direct investment or joint ventures. - Scale economies: By focusing production in the home country, firms can achieve economies of scale, reducing per-unit costs. Centralized production ensures efficiency and consistency in product quality, which may not be possible when manufacturing is spread across multiple locations 36 Disadvantages: - Trade barriers: Transportation costs, tariffs - Cultural barriers: -Customization is not so critical -When the firm can benefit from the cost advantages from the home country Contractual agreements (medium intensity): - License: arrangement in which the owner of intellectual property grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation. Exchange for a fee. One of the partner would be in a foreign location. - Franchising: arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other forms of compensation. - It could be in the home country but also it can be applied in the foreign market. Advantages: - Avoid trade barriers - Partner assumes some of the risk - Gain knowledge of the company (local conditions of the country) Disadvantages: - You cannot control the image of your firm in the foreign country, losing control as part of the agreement (image and quality ) - Transaction costs Foreign direct investment (high intensity): A firm invests directly in facilities to produce and/or market a product in a foreign country. Alone or with a partner. - Joint ventures: shared investment→ - Wholly owned subsidiaries (alone) → 1. Acquisition: firm that already exists in the foreign market 2. New subsidiary: new one, set up new facilities 37 Joint ventures: - Advantages: shared the risk, the cost and the investment, gain local knowledge for with we create the firm, greater ownership - Disadvantages: shared the profits, sharing assets, complexity in the negotiations Wholly owned subsidiaries: - Advantages: You have full control, autonomy - Disadvantages: high investment, higher the risk, higher the cost 38 CHAPTER 6: STRATEGIC IMPLEMENTATION 6.1. Strategy evaluation criteria and selection techniques In practice, it is difficult to establish a rational process → non-rational elements Evaluation and selection process → Firms apply 3 key success criteria that can be used to assess the viability of strategic options → suitability, feasibility, acceptability. Suitability: Assess whether a strategic option adapts to the mission, the objectives, and the key issues underlined by the strategic analysis. Strategic fit. How to assess: - Strategic models: theoretical models, logical reasoning - Empirical evidence: relates strategies and results, trying to find out which strategies work better under different circumstances Example: R+D, empirical evidence (collected data shows that firms that invest more in R and D have higher income). Feasibility: refers to the real possibility of implementation, which is also related to the concept of organizational fit. How to assess feasibility: - Resources and capabilities available that are necessary: financial feasibility, other R&D - Organizational fit: consistency between strategy and the organization’s characteristics. Acceptability: measures the consequences of adopting a specific strategy: whether or not its expected outcomes are acceptable to the various stakeholders. Does the strategy improve stakeholders’ current situation? Expected returns > costs derived from the implementation of the strategy. How to assess acceptability: - Performance - value creation for shareholders - Risk. financial risk of the strategy( we allocate resources so the risk associated with this) and for the firm (implementing a strategy could have a negative outcome for the firm), political (evaluating the potential conflicts of the strategy). 39  - Stakeholders: how different stakeholders react, if they accept it or not. Identification, analysis and negotiations. 6.2. Strategy implementation - Design of organizational structure, management and leadership style, and organizational style. - Strategic planning - Strategic control *What kind of factors can have an impact in the culture of the firm? - Internal and external: External: the culture of a country Internal: top managers, founders beliefs *If the culture is so important how can companies transmit or pervers their culture? - Train the employees - Top management presentations - Role models; people that project the values of the company - Recruitment and hiring does who know the culture of the firm and believes it. - Socialization - Corporate narrative: telling stories about the company, how was founded - Rituals - Corporate events: Christmas, events in general. Strategic planning: decision-making process that is useful to determine how the strategy will be pursued in the future: the nature of the tasks to be performed, when they will be undertaken and by whom, the activities to be allocated to each program, etc. Elements: - Mission, goals and objectives statement 40  - Environmental analysis: Pestel and porter - Organisational analysis: value chain - Proposed strategy : - Resources: allocation of resources* project: there is no strategic plan without allocation of resources. Advantages: reduced the risk - Formal and systematic process: is reflected in a document (explicit way) - Long term: anticipated how the strategy will success - Reference network that allows optimum allocation of resources : give us a reference framework that favors the allocation of resources. - Defines the implication from managers: implications are coherent - Adopting a rational perspective, we are focusing on analysis and implementation. Disadvantages: - Excessive bureaucracy - Difficulty in making predictions - Distance between those designing the strategic plan and those implementing the strategy - Possibility of designing incremental plans arising from possible changes: we cannot predict the conditions in the environment and you will need to change the initial plan - Costly: time , mone, resources involved ➔ Who is involved in implementing the strategy? Everyone ➔ When will this formal strategy be especially applied? When would you recommend it? - Size of the firm : in large corporations more common. This plan is also helpful in small and medium companies but it's not that common. Think for example in the case of a new venture and you want to attract investors, if you present this strategic planning it will show that the strategy is viable. - Environment: current business environment is changing, if its to dynamic it will not be profitable or helpful to do this strategic plan since we will have to change it continually. Strategic Control: control where we monitor the whole strategic management process to ensure things are working well. It provides the necessary feedback for verifying that all the steps in the strategic management process are appropriately undertaken. 41 Control of outcomes- “after the event”---> Two additional types of control: control “before the event” and “present control”. Companies will not always wait until the end to see the outcomes of an event. Before the event and the present control. Strategic control: 1. Control of the strategy : consists of checking that the strategy is valid. If there were changes in the market we will need to change the strategy. 2. Control of the implementation: consists of towards the end, monitoring all the activities to put in practice all the elements to implement the strategy. Requirement: measuring the outcomes A strategic audit evaluates the areas affected by the strategic management process within an organization Methods - Qualitative measurements: assessment based on subjective data - Quantitative measurements: based on identification of scores that may be scored statistically or mathematically. SMART is important, we need to assess or control. The balanced scorecard is helpful with implementing the strategy and the control of the strategy. Transforms the vision and the strategy into objectives, measures, 42 The balanced scorecard to illustrate (example): Objective: a general goal Measures: how to measure the objective Target: specific goal Initiative: how to get there, how to achieve the objective Internal perspective —> related with operations 43