■ Firms use the strategic management process to achieve strategic competitiveness and earn above-average returns. Firms analyze the external environment and their internal organization, then formulate and implement a strategy to achieve a desired level of performance (A-S-P). Performance is reflected by the firm’s level of strategic competitiveness and the extent to which it earns above-average returns. Strategic competitiveness is achieved when a firm develops and implements a value-creating strategy. Above-average returns (in excess of what investors expect to earn from other investments with similar levels of risk) provide the foundation needed to simultaneously satisfy all of a firm’s stakeholders.
■ The fundamental nature of competition is different in the current competitive landscape. As a result, those making strategic decisions must adopt a different mind-set, one that allows them to learn how to compete in highly turbulent and chaotic environments that produce a great deal of uncertainty. The globalization of industries and their markets along with rapid and significant technological changes are the two primary factors contributing to the turbulence of the competitive landscape.
■ Firms use two major models to help develop their vision and mission when choosing one or more strategies in pursuit of strategic competitiveness and above-average returns. The core assumption of the I/O model is that the firm’s external environment has a large influence on the choice of strategies more than do the firm’s internal resources, capabilities, and core competencies. Thus, the I/O model is used to understand the effects an industry’s characteristics can have on a firm when deciding what strategy or strategies to use in competing against rivals. The logic supporting the I/O model suggests that aboveaverage returns are earned when the firm locates an attractive industry or part of an industry and successfully implements the strategy dictated by that industry’s characteristics. The core assumption of the resource-based model is that the firm’s unique resources, capabilities, and core competencies have more of an influence on selecting and using strategies than does the firm’s external environment. Above-average returns are earned when the firm uses its valuable, rare, costly-toimitate, and non-substitutable resources and capabilities to compete against its rivals in one or more industries. Evidence indicates that both models yield insights that are linked to successfully selecting and using strategies. Thus, firms want to use their unique resources, capabilities, and core competencies as the foundation to engage in one or more strategies that allow them to effectively compete against rivals in their industry.
■ Vision and mission are formed to guide the selection of strategies based on the information from the analyses of the firm’s internal organization and external environment. Vision is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve. Flowing from the vision, the mission specifies the business or businesses in which the firm intends to compete and the customers it intends to serve. Vision and mission provide direction to the firm and signal important descriptive information to stakeholders.
■ Stakeholders are those who can affect, and are affected by, a firm’s performance. Because a firm is dependent on the continuing support of stakeholders (shareholders, customers, suppliers, employees, host communities, etc.), they have enforceable claims on the company’s performance. When earning above-average returns, a firm generally has the resources it needs to satisfy the interests of all stakeholders. However, when earning only average returns, the firm must carefully manage its stakeholders in order to retain their support. A firm earning below-average returns must minimize the amount of support it loses from unsatisfied stakeholders.
■ Strategic leaders are people located in different areas and levels of the firm using the strategic management process to help the firm achieve its vision and fulfill its mission. In general, CEOs are responsible for making certain that their firms properly use the strategic management process. The effectiveness of the strategic management process is increased when it is grounded in ethical intentions and behaviors. The strategic leader’s work demands decision trade-offs, often among attractive alternatives. It is important for all strategic leaders, especially the CEO and other members of the top-management team, to conduct thorough analyses of conditions facing the firm, be brutally and consistently honest, and work jointly to select and implement the correct strategies.
■ The firm’s external environment is challenging and complex.
Because of its effect on performance, the firm must develop the skills required to identify opportunities and threats that are a part of its external environment.
■ The external environment has three major parts:
1. The general environment (segments and elements in the broader society that affect industries and the firms competing in them)
2. The industry environment (factors that influence a firm, its competitive actions and responses, and the industry’s profitability potential)
3. The competitor environment (in which the firm analyzes each major competitor’s future objectives, current strategies, assumptions, and capabilities).
■ Scanning, monitoring, forecasting, and assessing are the four parts of the external environmental analysis process.
Effectively using this process helps the firm in its efforts to identify opportunities and threats.
■ The general environment has seven segments: demographic, economic, political/legal, sociocultural, technological, global, and sustainable physical. For each segment, the firm has to determine the strategic relevance of environmental changes and trends.
■ Compared with the general environment, the industry environment has a more direct effect on the firm’s competitive actions and responses. The five forces model of competition includes the threat of entry, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors. By studying these forces, the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces to achieve strategic competitiveness and earn above-average returns.
■ Industries are populated with different strategic groups. A strategic group is a collection of firms following similar strategies along similar dimensions. Competitive rivalry is greater within a strategic group than between strategic groups.
■ Competitor analysis informs the firm about the future objectives, current strategies, assumptions, and capabilities of the companies with which it competes directly. A thorough competitor analysis examines complementors that support forming and implementing rivals’ strategies.
■ Different techniques are used to create competitor intelligence: the set of data, information, and knowledge that allow the firm to better understand its competitors and thereby predict their likely competitive actions and responses. Firms absolutely should use only legal and ethical practices to gather intelligence. The Internet enhances firms’ ability to gather insights about competitors and their strategic intentions.
■ In the current competitive landscape, the most effective organizations recognize that strategic competitiveness and above-average returns result only when core competencies (identified by studying the firm’s internal organization) are matched with opportunities (determined by studying the firm’s external environment).
■ No competitive advantage lasts forever. Over time, rivals use their own unique resources, capabilities, and core competencies to form different value-creating propositions that duplicate the focal firm’s ability to create value for customers.
Because competitive advantages are not permanently sustainable, firms must exploit their current advantages while simultaneously using their resources and capabilities to form new advantages that can lead to future competitive success.
■ Effectively managing core competencies requires careful analysis of the firm’s resources (inputs to the production process) and capabilities (resources that have been purposely integrated to achieve a specific task or set of tasks). The knowledge the firm’s human capital possesses is among the most significant of an organization’s capabilities and ultimately provides the base for most competitive advantages. The firm must create an organizational culture that allows people to integrate their individual knowledge with that held by others so that, collectively, the firm has a significant amount of value-creating organizational knowledge.
■ Capabilities are a more likely source of core competence and subsequently of competitive advantages than are individual resources. How a firm nurtures and supports its capabilities so they can become core competencies is less visible to rivals, making efforts to understand and imitate the focal firm’s capabilities difficult.
■ Only when a capability is valuable, rare, costly to imitate, and nonsubstitutable is it a core competence and a source of competitive advantage. Over time, core competencies must be supported, but they cannot be allowed to become core rigidities. Core competencies are a source of competitive advantage only when they allow the firm to create value by exploiting opportunities in its external environment. When this is no longer possible, the company shifts its attention to forming other capabilities that satisfy the four criteria of sustainable competitive advantage.
■ Value chain analysis is used to identify and evaluate the competitive potential of resources and capabilities. By studying their skills relative to those associated with value chain activities and support functions, firms can understand their cost structure and identify the activities through which they are able to create value.
■ When the firm cannot create value in either a value chain activity or a support function, outsourcing is considered. Used commonly in the global economy, outsourcing is the purchase of a value-creating activity from an external supplier. The firm should outsource only to companies possessing a competitive advantage in terms of the particular value chain activity or support function under consideration. In addition, the firm must continuously verify that it is not outsourcing activities through which it could create value.
■ A business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. Five business-level strategies (cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation) are examined in the chapter.
■ Customers are the foundation of successful business-level strategies. When considering customers, a firm simultaneously examines three issues: who, what, and how. These issues, respectively, refer to the customer groups to be served, the needs those customers have that the firm seeks to satisfy, and the core competencies the firm will use to satisfy customers’ needs. Increasing segmentation of markets throughout the global economy creates opportunities for firms to identify more distinctive customer needs that they can serve with one of the business-level strategies.
■ Firms seeking competitive advantage through the cost leadership strategy produce no-frills, standardized products for an industry’s typical customer. However, these low-cost products must be offered with competitive levels of differentiation.
Above-average returns are earned when firms continuously emphasize efficiency such that their costs are lower than those of their competitors, while providing customers with products that have acceptable levels of differentiated features.
■ Competitive risks associated with the cost leadership strategy include (1) a loss of competitive advantage to newer technologies, (2) a failure to detect changes in customers’ needs, and (3) the ability of competitors to imitate the cost leader’s competitive advantage through their own distinct strategic actions.
■ Through the differentiation strategy, firms provide customers with products that have different (and valued) features.
Differentiated products must be sold at a cost that customers believe is competitive relative to the product’s features as compared to the cost/feature combinations available
from competitors’ goods. Because of their distinctiveness, differentiated goods or services are sold at a premium price.
Products can be differentiated on any dimension that some customer group values. Firms using this strategy seek to differentiate their products from competitors’ goods or services on as many dimensions as possible. The less similarity to competitors’ products, the more buffered a firm is from competition with its rivals.
■ Risks associated with the differentiation strategy include (1) a customer group’s decision that the unique features provided by the differentiated product over the cost leader’s goods or services are no longer worth a premium price, (2) the inability of a differentiated product to create the type of value for which customers are willing to pay a premium price, (3) the ability of competitors to provide customers with products that have features similar to those of the differentiated product, but at a lower cost, and (4) the threat of counterfeiting, whereby firms produce a cheap imitation of a differentiated good or service.
■ Through the cost leadership and the differentiated focus strategies, firms serve the needs of a narrow market segment (e.g., a buyer group, product segment, or geographic area). This strategy is successful when firms have the core competencies required to provide value to a specialized market segment that exceeds the value available from firms serving customers across the total market (industry).
■ The competitive risks of focus strategies include (1) a competitor’s ability to use its core competencies to “out focus” the focuser by serving an even more narrowly defined market segment, (2) decisions by industry-wide competitors to focus on a customer group’s specialized needs, and (3) a reduction in differences of the needs between customers in a narrow market segment and the industry-wide market.
■ Firms using the integrated cost leadership/differentiation strategy strive to provide customers with relatively low-cost products that also have valued differentiated features. Flexibility is required for firms to learn how to use primary value-chain activities and support functions in ways that allow them to produce differentiated products at relatively low costs. This flexibility is facilitated by flexible manufacturing systems and improvements and interconnectedness in information systems within and between firms (buyers and suppliers). The primary risk of this strategy is that a firm might produce products that do not offer sufficient value in terms of either low cost or differentiation. In such cases, the company becomes “stuck in the middle.” Firms stuck in the middle compete at a disadvantage and are unable to earn more than average returns.
■ Competitors are firms competing in the same market, offering similar products, and targeting similar customers. Competitive rivalry is the ongoing set of competitive actions and responses occurring between competitors as they compete against each other for an advantageous market position. The outcomes of competitive rivalry influence the firm’s ability to sustain its competitive advantages as well as the level (average, below average, or above average) of its financial returns.
■ Competitive behavior is the set of competitive actions and responses an individual firm takes while engaged in competitive rivalry. Competitive dynamics is the set of actions and responses taken by all firms that are competitors within a particular market.
■ Firms study competitive rivalry in order to predict the competitive actions and responses each of their competitors are likely to take. Competitive actions are either strategic or tactical in nature. The firm takes competitive actions to defend or build its competitive advantages or to improve its market position.
Competitive responses are taken to counter the effects of a competitor’s competitive action. A strategic action or a strategic response requires a significant commitment of organizational resources, is difficult to successfully implement, and is difficult to reverse. In contrast, a tactical action or a tactical response requires fewer organizational resources and is easier to implement and reverse. For example, for an airline company, entering major new markets is an example of a strategic action or a strategic response; changing its prices in a particular market is an example of a tactical action or a tactical response.
■ A competitor analysis is the first step the firm takes to be able to predict its competitors’ actions and responses. In Chapter 2, we discussed what firms do to understand competitors. This discussion was extended in this chapter to describe what the firm does to predict competitors’ market-based actions. Thus, understanding precedes prediction. Market commonality (the number of markets with which competitors are jointly involved and their importance to each) and resource similarity (how comparable competitors’ resources are in terms of type and amount) are studied to complete a competitor analysis.
In general, the greater the market commonality and resource similarity, the more firms acknowledge that they are direct competitors.
■ Market commonality and resource similarity shape the firm’s awareness (the degree to which it and its competitors understand their mutual interdependence), motivation (the firm’s incentive to attack or respond), and ability (the quality of the resources available to the firm to attack and respond). Having knowledge of these characteristics of a competitor increases the quality of the firm’s predictions about that competitor’s actions and responses.
■ In addition to market commonality, resource similarity, awareness, motivation, and ability, three more specific factors affect the likelihood a competitor will take competitive actions. The first of these is first-mover benefits. First movers, those taking an initial competitive action, often gain loyal customers and earn above-average returns until competitors can successfully respond to their action. Not all firms can be first movers because they may lack the awareness, motivation, or ability required to engage in this type of competitive behavior.
Moreover, some firms prefer to be a second mover (the firm responding to the first mover’s action). One reason for this is that second movers, especially those acting quickly, often can successfully compete against the first mover. By evaluating the first mover’s product, customers’ reactions to it, and the responses of other competitors to the first mover, the second mover may be able to avoid the early entrant’s mistakes and find ways to improve upon the value created for customers by the first mover’s goods or services. Late movers (those that respond a long time after the original action was taken) commonly are lower performers and are much less competitive.
■ Organizational size tends to reduce the variety of competitive actions that large firms launch, while it increases the variety of actions undertaken by smaller competitors. Ideally, a firm prefers to initiate a large number of diverse actions when engaged in competitive rivalry. Another factor, quality, is a base denominator for competing successfully in the global economy. It is a necessary prerequisite to achieving competitive parity. However, it is a necessary but insufficient condition for establishing an advantage.
■ The type of action (strategic or tactical) the firm took, the competitor’s reputation for the nature of its competitor behavior, and that competitor’s dependence on the market in which the action was taken are analyzed to predict a competitor’s response to the firm’s action. In general, the number of tactical responses taken exceeds the number of strategic responses.
Competitors respond more frequently to the actions taken by the firm with a reputation for predictable and understandable competitive behavior, especially if that firm is a market leader.
In general, the firm can predict that when its competitor is highly dependent on its revenue and profitability in the market in which the firm took a competitive action, that competitor is likely to launch a strong response. However, firms that are more diversified across markets are less likely to respond to a particular action that affects only one of the markets in which they compete.
■ In slow-cycle markets, competitive advantages generally can be maintained for at least a period of time, and competitive dynamics often include actions and responses intended to protect, maintain, and extend the firm’s proprietary advantages. In fast-cycle markets, competition is substantial as firms concentrate on developing a series of temporary competitive advantages. This emphasis is necessary because firms’ advantages in fast-cycle markets aren’t proprietary and, as such, are subject to rapid and relatively inexpensive imitation.
Standard-cycle markets have a level of competition between that in slow-cycle and fast-cycle markets; firms often (but not always) are moderately shielded from competition in these markets as they use capabilities that produce competitive advantages that are moderately sustainable. Competitors in standard-cycle markets serve mass markets and try to develop economies of scale to enhance their profitability. Innovation is vital to competitive success in each of the three types of markets. Companies should recognize that the set of competitive actions and responses taken by all firms differs by type of market.
■ The primary reason a firm uses a corporate-level strategy to become more diversified is to create additional value. Using a single- or dominant-business corporate-level strategy may be preferable to seeking a more diversified strategy, unless a corporation can develop economies of scope or financial economies between businesses, or unless it can obtain market power through additional levels of diversification. Economies of scope and market power are the main sources of value creation when the firm uses a corporate-level strategy to achieve moderate to high levels of diversification.
■ The related diversification corporate-level strategy helps the firm create value by sharing activities or transferring competencies between different businesses in the company’s portfolio.
■ Sharing activities usually involves sharing tangible resources between businesses. Transferring core competencies involves transferring core competencies developed in one business to another business. It also may involve transferring competencies between the corporate headquarters office and a business unit.
■ Sharing activities is usually associated with the related constrained diversification corporate-level strategy. Activity sharing is costly to implement and coordinate, may create unequal benefits for the divisions involved in the sharing, and can lead to fewer managerial risk-taking behaviors.
■ Transferring core competencies is often associated with related linked (or mixed related and unrelated) diversification, although firms pursuing both sharing activities and transferring core competencies can also use the related linked strategy.
■ Efficiently allocating resources or restructuring a target firm’s assets and placing them under rigorous financial controls are two ways to accomplish successful unrelated diversification.
Firms using the unrelated diversification strategy focus on creating financial economies to generate value.
■ Diversification is sometimes pursued for value-neutral reasons.
Incentives from tax and antitrust government policies, low performance, or uncertainties about future cash flow are examples of value-neutral reasons that firms choose to become more diversified.
■ Managerial motives to diversify (including to increase compensation) can lead to over diversification and a subsequent reduction in a firm’s ability to create value. Evidence suggests, however, that many top-level executives seek to be good stewards of the firm’s assets and avoid diversifying the firm in ways that destroy value.
■ Managers need to consider their firm’s internal organization and its external environment when making decisions about the optimum level of diversification for their company. Of course, internal resources are important determinants of the direction that diversification should take. However, conditions in the firm’s external environment may facilitate additional levels of diversification, as might unexpected threats from competitors.
■ Mergers and acquisitions as a strategy are popular for companies based in countries throughout the world. Through this strategy, firms seek to create value and outperform rivals.
Globalization and deregulation of multiple industries in many of the world’s economies are two of the reasons for this popularity among both large and small firms.
■ Firms use acquisition strategies to
■ increase market power
■ overcome entry barriers to new markets or regions
■ avoid the costs of developing new products and increase the speed of new market entries
■ reduce the risk of entering a new business
■ become more diversified
■ reshape their competitive scope by developing a different portfolio of businesses
■ enhance their learning as the foundation for developing new capabilities
■ Among the problems associated with using an acquisition strategy are
■ the difficulty of effectively integrating the firms involved
■ incorrectly evaluating the target firm’s value
■ creating debt loads that preclude adequate long-term investments (e.g., R&D)
■ overestimating the potential for synergy
■ creating a firm that is too diversified
■ creating an internal environment in which managers
devote increasing amounts of their time and energy to
analyzing and completing the acquisition
■ developing a combined firm that is too large, necessitating extensive use of bureaucratic, rather than strategic, controls
■ Effective acquisitions have the following characteristics:
■ the acquiring and target firms have complementary resources that are the foundation for developing new capabilities
■ the acquisition is friendly, thereby facilitating integration of the firms’ resources
■ the target firm is selected and purchased on the basis of completing a thorough due-diligence process
■ the acquiring and target firms have considerable slack in the form of cash or debt capacity
■ the newly formed firm maintains a low or moderate level of debt by selling off portions of the acquired firm or some of the acquiring firm’s poorly performing units
■ the acquiring and acquired firms have experience in terms of adapting to change
■ R&D and innovation are emphasized in the new firm
■ Restructuring is used to improve a firm’s performance by correcting for problems created by ineffective management.
Restructuring by downsizing involves reducing the number of employees and hierarchical levels in the firm. Although it can lead to short-term cost reductions, the reductions may be realized at the expense of long-term success because of the loss of valuable human resources (and knowledge) and overall
corporate reputation.
■ The goal of restructuring through downscoping is to reduce the firm’s level of diversification. Often, the firm divests unrelated businesses to achieve this goal. Eliminating unrelated businesses makes it easier for the firm and its top-level managers to refocus on the core businesses.
■ Through a leveraged buyout (an LBO), a firm is purchased so that it can become a private entity. LBOs usually are financed largely through debt, although limited partners
(institutional investors) are becoming more prominent.
General partners have a variety of strategies, and some emphasize equity versus debt when limited partners have a longer time horizon. Management buyouts (MBOs), employee buyouts (EBOs), and whole-firm LBOs are the three types of LBOs. Because they provide clear managerial incentives, MBOs have been the most successful of the three.
Often, the intent of a buyout is to improve efficiency and performance to the point where the firm can be sold successfully within five to eight years.
■ Commonly, restructuring’s primary goal is gaining or reestablishing effective strategic control of the firm. Of the three restructuring strategies, downscoping is aligned most closely with establishing and using strategic controls and usually improves performance more on a comparative basis.
■ The use of international strategies is increasing. Multiple factors and conditions are influencing the increasing use of these strategies, including opportunities to
■ extend a product’s life cycle
■ gain access to critical raw materials, sometimes including relatively inexpensive labor
■ integrate a firm’s operations on a global scale to better serve customers in different countries
■ better serve customers whose needs appear to be more alike today as a result of global communications media and the Internet’s capabilities to inform
■ meet increasing demand for goods and services that is surfacing in emerging markets
■ When used effectively, international strategies yield three
basic benefits: increased market size, economies of scale and learning, and location advantages. Firms use international business-level and international corporate-level strategies to geographically diversify their operations.
■ International business-level strategies are usually grounded in one or more home-country advantages. Research suggests that there are four determinants of national advantage:
factors of production; demand conditions; related and supporting industries; and patterns of firm strategy, structure, and rivalry.
■ There are three types of international corporate-level strategies. A multidomestic strategy focuses on competition within each country in which the firm competes. Firms using a multidomestic strategy decentralize strategic and operating decisions to the business units operating in each country, so that each unit can tailor its products to local conditions. A global strategy assumes more standardization of products across country boundaries; therefore, a competitive strategy is centralized and controlled by the home office. Commonly, large multinational firms, particularly those with multiple diverse products being sold in many different markets, use a multidomestic strategy with some product lines and a global strategy with others.
■ A transnational strategy seeks to integrate characteristics of both multidomestic and global strategies for the purpose of being able to simultaneously emphasize local responsiveness and global integration.
■ Two global environmental trends—liability of foreignness and regionalization—are influencing firms’ choices of international strategies as well as their implementation. Liability of foreignness challenges firms to recognize that distance between their domestic market and international markets affects how they compete. Some firms choose to concentrate their international strategies on regions (e.g., the EU and NAFTA) rather than on individual country markets.
■ Firms can use one or more of five entry modes to enter international markets. Exporting, licensing, strategic alliances, acquisitions, and new wholly owned subsidiaries, often
referred to as greenfield ventures, are the five entry modes.
Most firms begin with exporting or licensing because of their lower costs and risks. Later they often use strategic alliances and acquisitions as well. The most expensive and risky means of entering a new international market is establishing a new wholly owned subsidiary (greenfield venture). On the other hand, such subsidiaries provide the advantages of maximum control by the firm and, if successful, the greatest returns.
Large, geographically diversified firms often use most or all five entry modes across different markets when implementing international strategies.
■ Firms encounter a number of risks when implementing international strategies. The two major categories of risks firms need to understand and address when diversifying geographically through international strategies are political risks (risks concerned with the probability that a firm’s operations will be disrupted by political forces or events, whether they occur in the firm’s domestic market or in the markets the firm has entered to implement its international strategies) and economic risks (risks resulting from fundamental weaknesses in a country’s or a region’s economy with the potential to adversely affect a firm’s ability to implement its international strategies).
■ Successful use of international strategies (especially an international diversification strategy) contributes to a firm’s strategic competitiveness in the form of improved performance and enhanced innovation. International diversification facilitates innovation in a firm because it provides a larger market to gain greater and faster returns from investments in innovation.
In addition, international diversification can generate the resources necessary to sustain a large-scale R&D program.
■ In general, international diversification helps to achieve above-average returns, but this assumes that the diversification is effectively implemented and that the firm’s international operations are well managed. International diversification provides greater economies of scope and learning which, along with greater innovation, help produce
above-average returns.
■ A firm using international strategies to pursue strategic competitiveness often experiences complex challenges that must be overcome. Some limits also constrain the ability to manage international expansion effectively. International diversification increases coordination and distribution costs, and management problems are exacerbated by trade barriers, logistical costs, and cultural diversity, among other factors.
■ A cooperative strategy is one through which firms work together to achieve a shared objective. Strategic alliances, where firms combine some of their resources for the purpose of creating a competitive advantage, are the primary form of cooperative strategies. Joint ventures (where firms create and own equal shares of a new venture), equity strategic alliances (where firms own different shares of a newly created venture), and nonequity strategic alliances (where firms cooperate through a contractual relationship) are the three major types of strategic alliances. Outsourcing, discussed in Chapter 3, commonly occurs as firms form nonequity strategic alliances.
■ Collusive strategies are the second type of cooperative strategies (with strategic alliances being the other). In many economies, explicit collusive strategies are illegal unless sanctioned by government policies. Increasing globalization has led to fewer government-sanctioned situations of explicit collusion.
Tacit collusion, also called mutual forbearance, is a cooperative strategy through which firms tacitly cooperate to reduce industry output below the potential competitive output level, thereby raising prices above the competitive level.
■ The reasons firms use strategic alliances vary by slow-cycle, fast-cycle, and standard-cycle market conditions. To enter restricted markets (slow cycle), to move quickly from one competitive advantage to another (fast cycle), and to gain market power (standard cycle) are among the reasons firms choose to use strategic alliances.
■ Four business-level cooperative strategies are used to help the firm improve its performance in individual product markets:
■ Through vertical and horizontal complementary alliances, companies combine some of their resources to create value in different parts (vertical) or the same parts (horizontal) of the value chain
■ Competition response strategies are formed to respond to competitors’ actions, especially strategic actions
■ Uncertainty-reducing strategies are used to hedge against the risks created by the conditions of uncertain competitive environments (such as new product markets)
■ Competition-reducing strategies are used to avoid excessive competition while the firm marshals its resources to improve its strategic competitiveness
Complementary alliances have the highest probability of helping a firm form a competitive advantage; competition-reducing alliances have the lowest probability.
■ Firms use corporate-level cooperative strategies to engage in product and/or geographic diversification. Through diversifying strategic alliances, firms agree to share some of their resources to enter new markets or produce new products.
Synergistic alliances are ones where firms share some of their resources to develop economies of scope. Synergistic alliances are similar to business-level horizontal complementary alliances where firms try to develop operational synergy, except that synergistic alliances are used to develop synergy at the corporate level. Franchising is a corporate-level cooperative strategy where the franchisor uses a franchise as a contractual relationship to specify how resources will be shared with franchisees.
■ As an international cooperative strategy, a cross-border strategic alliance is used for several reasons, including the performance superiority of firms competing in markets out-side their domestic market and governmental restrictions on a firm’s efforts to grow through mergers and acquisitions.
Commonly, cross-border strategic alliances are riskier than their domestic counterparts, particularly when partners aren’t fully aware of each other’s reason for participating in
the partnership.
■ In a network cooperative strategy, several firms agree to form multiple partnerships to achieve shared objectives. A firm’s opportunity to gain access “to its partner’s other partner-ships” is a primary benefit of a network cooperative strategy.
Network cooperative strategies are used to form either a stable alliance network or a dynamic alliance network. In mature industries, stable networks are used to extend competitive advantages into new areas. In rapidly changing environments where frequent product innovations occur, dynamic networks are used primarily as a tool of innovation.
■ Cooperative strategies aren’t risk free. If a contract is not developed appropriately, or if a partner misrepresents its resources or fails to make them available, failure is likely.
Furthermore, a firm may be held hostage through assetspecific investments made in conjunction with a partner,which may be exploited.
■ Trust is an increasingly important aspect of successful cooperative strategies. Firms place high value on opportunities to partner with companies known for their trustworthiness.
When trust exists, a cooperative strategy is managed to maximize the pursuit of opportunities between partners. Without trust, formal contracts and extensive monitoring systems are used to manage cooperative strategies. In this case, the interest is “cost minimization” rather than “opportunity maximization.”
■ Corporate governance is a relationship among stakeholders that is used to determine a firm’s direction and control its performance.
How firms monitor and control top-level managers’ decisions and actions affects the implementation of strategies. Effective governance that aligns managers’ decisions with shareholders’ interests can help produce a competitive advantage for the firm.
■ Three internal governance mechanisms are used in the modern corporation:
■ ownership concentration
■ the board of directors
■ executive compensation
The market for corporate control is an external governance mechanism influencing managers’ decisions and the outcomes resulting from them.
■ Ownership is separated from control in the modern corporation.
Owners (principals) hire managers (agents) to make decisions that maximize the firm’s value. As risk-bearing specialists, owners diversify their risk by investing in multiple corporations with different risk profiles. Owners expect their agents (the firm’s top-level managers, who are decision-making specialists) to make decisions that will help to maximize the value of their firm. Thus, modern corporations are characterized by an agency relationship that is created when one party (the firm’s owners)
hires and pays another party (top-level managers) to use its
decision-making skills.
■ Separation of ownership and control creates an agency problem when an agent pursues goals that conflict with the principals’ goals. Principals establish and use governance
mechanisms to control this problem.
■ Ownership concentration is based on the number of large-block shareholders and the percentage of shares they own.
With significant ownership percentages, such as those held by large mutual funds and pension funds, institutional investors often are able to influence top-level managers’ strategic decisions and actions. Thus, unlike diffuse ownership which tends to result in relatively weak monitoring and control of managerial decisions, concentrated ownership produces more active and effective monitoring. Institutional investors are a powerful force in corporate America and actively use their positions of concentrated ownership to force managers and boards of directors to make decisions that best serve shareholders’ interests.
■ In the United States and the United Kingdom, a firm’s board of directors, composed of insiders, related outsiders, and outsiders, is a governance mechanism expected to represent shareholders’ interests. The percentage of outside directors on many boards now exceeds the percentage of inside directors. Through implementation of the SOX Act, outsiders are expected to be more independent of a firm’s top-level managers compared with directors selected from inside the firm.
Relatively recent rules formulated and implemented by the SEC to allow owners with large stakes to propose new directors are beginning to change the balance even more in favor of outside and independent directors. Additional governance-related regulations have resulted from the Dodd-Frank Act.
■ Executive compensation is a highly visible and often criticized governance mechanism. Salary, bonuses, and long-term incentives are used for the purpose of aligning managers’ and share-holders’ interests. A firm’s board of directors is responsible for determining the effectiveness of the firm’s executive compensation system. An effective system results in managerial decisions that are in shareholders’ best interests.
■ In general, evidence suggests that shareholders and boards of directors have become more vigilant in controlling managerial decisions. Nonetheless, these mechanisms are imperfect and sometimes insufficient. When the internal mechanisms fail, the market for corporate control—as an external governance mechanism—becomes relevant. Although it, too, is imperfect, the market for corporate control has been effective resulting in corporations reducing inefficient diversification and implementing more effective strategic decisions.
■ Corporate governance structures used in Germany, Japan, and China differ from each other and from the structure used in the United States. Historically, the U.S. governance structure focused on maximizing shareholder value. In Germany, employees, as a stakeholder group, take a more prominent role in governance. By contrast, until recently, Japanese share-holders played virtually no role in monitoring and controlling top-level managers. However, Japanese firms are now being challenged by “activist” shareholders. In China, the central government still plays a major role in corporate governance practices. Internationally, all these systems are becoming increasingly similar, as are many governance systems both in developed countries, such as France and Spain, and in transitional economies, such as Brazil and India.
■ Effective governance mechanisms ensure that the interests of all stakeholders are served. Thus, strategic competitiveness results when firms are governed in ways that permit, at least, minimal satisfaction of capital market stakeholders (e.g., share-holders), product market stakeholders (e.g., customers and suppliers), and organizational stakeholders (e.g., managerial and non-managerial employees; see Chapter 2). Moreover, effective governance produces ethical behavior in the formulation and implementation of strategies.
■ Organizational structure specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes. Essentially, organizational structure details the work to be done in a firm and how that work is to be accomplished. Organizational controls guide the use of strategy, indicate how to compare actual and expected results, and suggest actions to take to improve performance when it falls below expectations. A proper match between strategy and structure can lead to a competitive advantage.
■ Strategic controls (largely subjective criteria) and financial controls (largely objective criteria) are the two types of organizational controls used to support the implementation of a strategy. Both controls are critical, although their degree of emphasis varies based on individual matches between strategy and structure.
■ Strategy and structure influence each other; overall though, strategy has a stronger influence on structure. Research indicates that firms tend to change structure when declining performance forces them to do so. Effective managers anticipate the need for structural change and quickly modify structure to better accommodate the firm’s strategy when evidence calls for that action.
■ The functional structure is used to implement business-level strategies. The cost leadership strategy requires a centralized functional structure—one in which manufacturing efficiency and process engineering are emphasized. The differentiation strategy’s functional structure decentralizes implementation-related decisions, especially those concerned with marketing, to those involved with individual organizational functions. Focus strategies, often used in small firms, require a simple structure until such time that the firm diversifies in terms of products and/or markets.
■ Unique combinations of different forms of the multidivisional structure are matched with different corporate-level diversification strategies to properly implement these strategies.
The cooperative M-form, used to implement the related constrained corporate-level strategy, has a centralized corporate office and extensive integrating mechanisms. Divisional incentives are linked to overall corporate performance to foster cooperation among divisions. The related linked SBU M-form structure establishes separate profit centers within the diversified firm. Each profit center or SBU may have divisions offering similar products, but the SBUs are often unrelated to each other. The competitive M-form structure, used to implement the unrelated diversification strategy, is highly decentralized, lacks integrating mechanisms, and utilizes objective financial criteria to evaluate each unit’s performance.
■ The multidomestic strategy, implemented through the world-wide geographic area structure, emphasizes decentralization and locates all functional activities in the host country or geographic area. The worldwide product divisional structure is used to implement the global strategy. This structure is centralized in order to coordinate and integrate different functions’ activities to gain global economies of scope and economies of scale. Decision-making authority is centralized in the firm’s worldwide division headquarters.
■ The transnational strategy—a strategy through which the firm seeks the local responsiveness of the multidomestic strategy and the global efficiency of the global strategy—is implemented through the combination structure. Because it must be simultaneously centralized and decentralized, integrated and nonintegrated, and formalized and nonformalized, the combination structure is difficult to organize and successfully manage. Two structures can be used to implement the transnational strategy: the matrix and the hybrid structure with both geographic and product-oriented divisions.
■ Increasingly important to competitive success, cooperative strategies are implemented through organizational structures framed around strategic networks. Strategic center firms play a critical role in managing strategic networks.
Business-level strategies are often employed in vertical and horizontal alliance networks. Corporate-level cooperative strategies are used to pursue product and market diversification. Franchising is one type of corporate strategy that uses a strategic network to implement this strategy. This is also true for international cooperative strategies, where distributed networks are often used.
■ Effective strategic leadership is a prerequisite to successfully using the strategic management process. Strategic leadership entails the ability to anticipate events, envision possibilities, maintain flexibility, and empower others to create strategic change.
■ Top-level managers are an important resource for firms to develop and exploit competitive advantages. In addition, when they and their work are valuable, rare, imperfectly imitable, and nonsubstitutable, strategic leaders are also a source of competitive advantage.
■ The top management team is composed of key managers who play a critical role in selecting and implementing the firm’s strategies. Generally, they are officers of the corporation and/or members of the board of directors.
■ The top management team’s characteristics, a firm’s strategies, and the firm’s performance are all interrelated. For example, a top management team with significant marketing and research and development (R&D) knowledge positively contributes to the firm’s use of a growth strategy. Overall, having diverse skills increases the effectiveness of most top management teams.
■ Typically, performance improves when the board of directors and the CEO are involved in shaping a firm’s strategic direction.
However, when the CEO has a great deal of power, the board may be less involved in decisions about strategy formulation and implementation. By appointing people to the board and simultaneously serving as CEO and chair of the board, CEOs have increased power.
■ In managerial succession, strategic leaders are selected from either the internal or the external managerial labor market. Because of their effect on firm performance, the selection of strategic leaders has implications for a firm’s effectiveness.
There are a variety of reasons that companies select the firm’s strategic leaders from either internal or external sources. In most instances, the internal market is used to select the CEO, but the number of outsiders chosen is increasing. Outsiders often are selected to initiate major changes in strategy.
■ Effective strategic leadership has five key leadership actions:
determining the firm’s strategic direction, effectively managing the firm’s resource portfolio (including exploiting and maintaining core competencies and managing human capital and social capital), sustaining an effective organizational culture, emphasizing ethical practices, and establishing balanced organizational controls.
■ Strategic leaders must develop the firm’s strategic direction, typically working with the board of directors to do so. The strategic direction specifies the image and character the firm wants to develop over time. To form the strategic direction, strategic leaders evaluate the conditions (e.g., opportunities and threats in the external environment) they expect their firm to face over the next three to five years.
■ Strategic leaders must ensure that their firm exploits its core competencies, which are used to produce and deliver products that create value for customers, when implementing its strategies. In related diversified and large firms in particular, core competencies are exploited by sharing them across units and products.
■ The ability to manage the firm’s resource portfolio and the processes used to effectively implement its strategy are critical elements of strategic leadership. Managing the resource portfolio includes integrating resources to create capabilities and leveraging those capabilities through strategies to build competitive advantages. Human capital and social capital are perhaps the most important resources.
■ As a part of managing resources, strategic leaders must develop a firm’s human capital. Effective strategic leaders view human capital as a resource to be maximized—not as a cost to be minimized. Such leaders develop and use programs designed to train current and future strategic leaders to build the skills needed to nurture the rest of the firm’s human capital.
■ Effective strategic leaders build and maintain internal and external social capital. Internal social capital promotes cooperation and coordination within and across units in the firm.
External social capital provides access to resources from external parties that the firm needs to compete effectively.
■ Shaping the firm’s culture is a central task of effective strategic leadership. An appropriate organizational culture encourages the development of an entrepreneurial mind-set among employees and an ability to change the culture as necessary.
■ In ethical organizations, employees are encouraged to exercise ethical judgment and to always act ethically. Improved ethical practices foster social capital. Setting specific goals to meet the firm’s ethical standards, using a code of conduct, rewarding ethical behaviors, and creating a work environment where all people are treated with dignity are actions that facilitate and support ethical behavior.
■ Developing and using balanced organizational controls is the final key leadership action associated with effective strategic leadership. The balanced scorecard is a tool that measures the effectiveness of the firm’s strategic and financial controls. An effective balance between these two controls allows for flexible use of core competencies, but within the parameters of the firm’s financial position.
■ Strategic entrepreneurship involves taking entrepreneurial actions using a strategic perspective. Firms using strategic entrepreneurship simultaneously engage in opportunity-seeking and advantage-seeking behaviors. The purpose is to continuously find new opportunities and quickly develop innovations and exploit them.
■ Entrepreneurship is a process used by individuals, teams, and organizations to identify entrepreneurial opportunities without being immediately constrained by the resources they control. Corporate entrepreneurship is the application of entrepreneurship (including the identification of entrepreneurial opportunities) within ongoing, established organizations. Entrepreneurial opportunities are conditions in which new goods or services can satisfy a need in the market.
Entrepreneurship positively contributes to individual firms’ performance and stimulates growth in countries’ economies.
■ Firms engage in three types of innovative activities:
■ invention, which is the act of creating a new good or process
■ innovation, or the process of creating a commercial product from an invention
■ imitation, which is the adoption of similar innovations by different firms.
Invention brings something new into being while innovation brings something new into use.
■ Entrepreneurs see or envision entrepreneurial opportunities and then take actions to develop innovations and exploit them. The most successful entrepreneurs (whether they are establishing their own venture or are working in an established organization) have an entrepreneurial mind-set, which is an orientation that values the potential opportunities available because of marketplace uncertainties.
■ International entrepreneurship, or the process of identifying and exploiting entrepreneurial opportunities outside the firm’s domestic markets, is important to firms around the globe.
Evidence suggests that firms capable of effectively engaging in international entrepreneurship generally outperform those competing only in their domestic markets.
■ Three basic approaches are used to produce innovation:
■ internal innovation, which involves R&D and forming internal corporate ventures
■ cooperative strategies such as strategic alliances
■ acquisitions
Autonomous strategic behavior and induced strategic behavior are the two forms of internal corporate venturing. Autonomous strategic behavior is a bottom-up process through which a product champion facilitates the commercialization of an innovation. Induced strategic behavior is a top-down process in which a firm’s current strategy and structure facilitate the development and implementation of product or process innovations. Thus, induced strategic behavior is driven by the organization’s current corporate strategy and structure, while autonomous strategic behavior can result in a change to the firm’s current strategy and structure arrangements.
■ Firms create two types of innovations—incremental and novel—through internal innovation that takes place in the form of autonomous strategic behavior or induced strategic behavior. Overall, firms produce more incremental innovations, but novel innovations have a higher probability of significantly increasing sales revenue and profits. Cross-functional integration is often vital to a firm’s efforts to develop and implement internal corporate venturing activities and to commercialize the resulting innovation. Cross-functional teams now commonly include representatives from external organizations, such as suppliers. Additionally, integration and innovation can be facilitated by developing shared values and effectively using strategic leadership.
■ To gain access to the specialized knowledge required to innovate in the global economy, firms may form a cooperative relationship, such as a strategic alliance with other companies, some of which may be competitors.
■ Acquisitions are another means firms use to obtain innovation. Innovation can be acquired through direct acquisition, or firms can learn new capabilities from an acquisition, thereby enriching their internal innovation abilities.
■ The practice of strategic entrepreneurship by all types of firms, large and small, new and more established, creates value for all stakeholders, especially for shareholders and customers. Strategic entrepreneurship also contributes to the economic development of countries.
