Putting Strategy in Its Place

Mission fundamental

purposevalues

Objectives specific targets

Implementation structure rewards process people symbols activities functional policies

and profiles

Strategic Analysisgeneral environment analysis industry analysis competitor analysis resource & capability analysis

StrategyThe central integrated,

externally orientedconcept of howwe will achieve our objectives

Adapted from Hambrick & Fredrickson, AME., 19(4):53.

As stated by Prof. Russel W. Olive 1) (Sloan School of Management, MIT), a vision is a preferred future that the leaders of an organization wish to create.

Successful vision statement will be the one that comes from the heart; is personal, is recognizable as ours, and engenders enthusiasm; is radical and demanding; meets the needs and interests of important constituencies - customers, stockholders,

and employees; is based on the organization’s competencies and stresses excellence; is one part foresight, one part insight, based on creativity and judgement, and is an

expression that embodies courage.

A mission statement is a broadly defined and enduring statement of purpose that distinguishes a business from other firms of its type and identifies the scope of its operations in product/service/market terms.More specifically, it defines the product/service areas to be offered; specifies the primary markets, customer groups, and/or customer needs that will

be served; states the technology to be used in the production or delivery of the products/services; expresses the long-term desire for sustained success through growth of profitability.

1) Russel W. Olive, Creating Manufacturing Strategies for World Class Manufacturers, Workshop Paper. Jakarta: PITO Indonesia, 1995.

A company mission is designed to accomplish seven outcomes:

1. To ensure unanimity of purpose within the organization.

2. To provide a basis for motivating the use of the organization’s resources.

3. To develop a basis, or standard, for allocating organizational resources.

4. To establish a general tone or organizational climate; for example, to suggest a business-like operation.

5. To serve as a focal point for those who can identify with the organization’s purpose and direction and to deter those who cannot do so from participating further in its activities.

6. To facilitate the translation of objectives and goals into a work structure involving the assignment of tasks to responsible elements within the organization.

7. To specify organizational purposes and the translation of these purposes into goals in such a way that cost, time, and performance parameters can be assessed and controlled.

PERFORMANCE INDICATORSPAST YEARS

2006 2007 2008 2009 Short Term Long Term

OBJECTIVETARGETS

CURRENTYEAR

SalesAssetsProfitsMarket valueNumber of employees

SalesAssetsProfitsMarket valueNumber of employees

Profit marginReturn on assets (ROA)Return on equity (ROE)Spread (ROE - Ke )

Dividend yield (Dividend/Price)Total return to investorsPrice/Earning ratio (P/E)Market-to-book value ratio (M/B)Payout (Dividend/Earning)Price per share (P)Book value per share (B)Current ratioQuick ratioDefensive intervalCash positionWorking capital from operationsCash flow from operations

Debt-to-equity ratioShort-term vs. Long-term debtTimes interest earnedCash flow vs. Interest payments

Total assets turnoverAverage collection periodInventory turnover

Bond ratingBetaCost of equity capital (Ke )Cost of debtWeighted average cost of capital

CORPORATE PERFORMANCE OBJECTIVES: Size, Growth,Profitability, Capital Markets, and Other Financial Measures

SIZ

EG

RO

WT

HP

RO

FIT

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CA

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PERFORMANCE INDICATORS

PAST YEARS

2006 2007 2008 2009 Short Term Long Term

OBJECTIVETARGETS

CURRENTYEAR

Job satisfactionJob performanceTurnoverAbsenteeismMotivationJob securityCareer prospectsPsychological stressSafety health conditionsIncome

Rate of technological innovationR & D productivityRate of return in R & D investmentResources allocated to R & DRate of new products introductionTechnology-based diversificationRoyalties or sales of technologyCycle time of product development

CostServiceQualityVendor relationship

CostDelivery QualityFlexibilityNew products introduction

Product strategyDistributionPrice strategyPromotion and advertising

Corporate Performance Objectives For Centralized FunctionsH

UM

AN

RE

SOU

RC

ES

MA

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GE

ME

NT

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CH

NO

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PR

OC

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MA

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MA

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The Five Major Elements of Strategy

Where will we be active?(and with how much emphasis?)

Which product categories?

Which market segments?

Which geographic areas?

Which core technologies?

Which value-creation stages?

What will be our speed and sequenceof moves?

Speed of expansion?

Sequence of initiatives?

How will we obtain our returns?

Lowest costs through scale advantages?

Lowest costs through scope and replication advantages?

Premium prices due to unmatchable service?

Premium prices due to proprietary product features?

How will we get there?

Internal development?

Joint ventures?

Licensing/franchising?

Acquisitions?

How will we win?

Image?

Customization?

Price?

Styling?

Product reliability?

Arenas

Staging EconomicLogic

Vehicles

Differentiators

Source: Hambrick & Fredrickson, AME.,19(4):54.

Resources and Capabilities

Resources are the source of a firm’s capabilities

Capabilities are the main source of a firm’s competitive advantage

1. Financial Resources2. Physical Resources3. Human Resources4. Technological Resources5. Reputation Resources6. Organizational Resources

The collective learning in the organization, especially how tocoordinate diverse production skills and integrate multiplestreams of technology, e.g. NEC’s integration of computer and telecommunications technology Philips’ optical-media expertise Casio’s harmonization of know-how in miniaturization, microprocessor design, material science, and ultrathin precision casting Canon’s integration of optical, microelectronic, and pre- cision-mechanical technologies which forms the basis of its success in cameras, copiers, and facscimile machines Black and Decker’s competence in the design and manu- facture of small electric motors

Grant, CMR., Spring 1991, p. 119

Prahalad & Hamel, HBR., May-June 1990, p. 82.

Resources = Capabilities

The Resource-Based Perspective : Why ?

PatentsBrandsRetaliatory capability

Market share

Firm sizeFinancial resources

Process technologySize of PlantsAccess to Low-cost inputs

BrandsProduct technologyMarketing, distribution,and service capabilities

Barriers to Entry

Monopoly

VerticalBargaining Power

Cost Advantage

Industry Attractiveness

Competitive Advantage

Rate of Profitin Excess of theCompetitive Level

Source: Grant, CMR., Spring 1991, p. 118.

DifferentiationAdvantage

Firm ResourceHeterogeneity

Firm ResourceImmobility

ValueRarenessImperfect Imitability - History Dependent - Causal Ambiguity - Social ComplexitySubstitutability

SustainedCompetitiveAdvantage

Source : Barney, JM., No. 1, 1991, p. 112.

The Relationship Between Resource Heterogeneity and Immobility, Value, Rareness, Imperfect Imitability, and Substitutability,

and Sustained Competitive Advantage

Imperfect MobilityEx Ante Limits to

Competition

Rents(Monopoly or Ricardian)

Rents Sustained

Rents Sustainedwithin the firm

Rents not offsetby costs

The cornerstones of competitive advantage

Source : Petreraf, SMJ., No. 3, 1993, p. 186.

CompetitiveAdvantage

HeterogeneityEx Post Limits to

Competition

Complementarity

Overlap withStrategic IndustryFactors

Durability

Scarcity

Rents due toFirm’s Resources& Capabilities(Strategic Assets)

Appropriability

Low Tradeability

Inimitability

LimitedSubstitutability

Desired characteristics of the firm’s recources and capability

Source: Amit & Schoemaker, SMJ., No. 1, 1993, p. 38.

Resources

externally available & transferable owned or controlled by the firm convertible

Capabilities

information based organizational processes firm specific tangible or intangible intermediate goods

a subset of the firm’s R&C subject to market failure overlap with strategic industry factors uncertain ex-ante form the basis of the firm’s competitive strategy determine organizational rents

Firm Industry

Rivals Customer

Environmental Suppliers Factors(e.g. technology, regulation)

industry speciffic R&C subject to market failure affect industry profitability change & subject to ex-ante uncertainty

Substitutes

Entrants

non-tradable complementary

scarce appropriable firm specific

Strategic Assets

Source: Amit & Schoemaker, SMJ., No. 1, 1993, p. 37.

StrategicIndustryFactors

Performance Outcomes

Strategy

Competitive Advantage

DISTINCTIVE CAPABILITY* Based on superiority in process management x integration of knowledge x diffusion of learning

Business Assets Capabilities of theBusiness

Core Competencies of the Corporation

Sources of Competitive Advantage and Superior Performance

* Scale, scope, and efficiency* Financial condition* Brand equity* Location

* Skills and accumulated knowledge* Enable the activities in a business process to be carried out

* Span and support multiple lines of business

Adapted from: Day, JMkt., No. 4, 1994, p. 40.

Functional capability relates to the ability to do specific things.Cultural capability incorporates the habits, attitudes, beliefs and values, which permeate the individuals and groups which comprise

the organization.Positional capability is a consequence of past or previous actions and decisions.Regulatory capability results from the possession of legal entities. Such legal entities are all defendable, in some fashion, in law.

Source : Hall, SMJ., No. 8, 1993, pp. 610-611.

Know-how of employees,suppliers, distributors,stockbrokers, lawyers,advertising agents,etc.

Perception of quality,ability to learn,ability to react to challenge,ability to change,etc.

Contracts,Licenses, tradesecrets (incl.some data bases), Intellectual prop-erty.rights

Reputation, networks

Data bases

People Dependent

People Independent

Functional Cultural Positional Regulatory

Capabilities

Intangible Resources and Capabilities

Skills

Assets

TYPE OF RESOURCE

ASSETS WITHIN A LEGAL CONTEXTContractsLicensesIntellectual PropertyTrade SecretsOwned Physical Resources

ASSETS WITHOUT A LEGAL CONTEXTReputationNetworksDatabases

COMPETENCIES

KNOW-HOWEmployee Know-HowSupplier Know-HowDistributor Know-Howetc.

ORGANIZATIONAL CULTUREPerception of qualityAbility to Manage ChangePerception of Serviceetc.

TYPE OFCAPABILITYDIFFERENTIAL

REGULATORYDIFFERENTIAL(Protectable in Law)

POSITIONALDIFFERENTIAL(Due to Previous Endeavor)

FUNCTIONALDIFFERENTIAL(Due to Skills & Experience )

CULTURALDIFFERENTIAL(Aptitudes of the Organization)

SUSTAINABLE

COMPETITIVE

ADVANTAGE

ASSETS

Intangible resources, capability differentials and sustainable competitive advantage

Source: Hall, SMJ., No. 2, 1992, p. 144.

Unrelated

TYPE

OF

MARKET

RelatedPhysical Resources

Intangible Assets

Financial Resources: (Internal Funds)

(Low-Risk Debts)

Financial Resources: (Equity Capital)

(Junk Bonds)

Low High

Intangible Assets

FLEXIBILITY OF RESOURCE CLASSES

The relationship between the flexibility of resources and the type of market

Source: Chatterjee & Wernerfelt, SMJ., No. 1, 1991, p. 37.

Last

A skill or important expertise● low-cost manufacturing capabilities● strong e-commerce expertise● technological know-how● skills in improving production processes● a proven track record in defect-free manufacture● expertise in providing consistently good customer service● excellent mass merchandising skills● unique advertising and promotional talents

Valuable physical assets● state-of-the-art plants and equipment● attractive real estate locations● worldwide distribution facilities● ownership of valuable natural resource deposits

Valuable human assets● an experienced and capable workforce● talented employees in key areas● cutting-edge knowledge and intellectual capital● collective learning embedded in the organization and built up over time● proven managerial know-how

Valuable organizational assets● proven quality control systems● proprietary technology● key patents● mineral rights● a cadre of highly trained customer service representatives● sizable amounts of cash and marketable securities● a strong balance sheet and credit rating ● a comprehensive list of customers’ e-mail addresses

Valuable intangible assets● a powerful or well-known brand name● a reputation for technological leadership● strong buyer loyalty and goodwill

Competitive capabilities● product innovation capabilities● short development times in bringing new products to market● a strong dealer network● cutting-edge supply chain management capabilities● quickness in responding to shifting market conditions and emerging opportunities● state-of-the-art systems for doing business via the Internet

An achievement or attribute that puts the company in a position of market advantage● low overall costs relative to competitors● market share leadership● a superior product● a wider product line than rivals● wide geographic coverage ● a well-known brand name● superior e-commerce capabilities● exceptional customer service

Competitively valuable alliances or cooperative ventures● fruitful partnerships with suppliers that reduce costs and/or enhance

product quality and performance● alliances or joint ventures that provide access to valuable technologies,

competencies, or geographic markets

Source: Thomson Jr., Strickland III, and Gamble, 2005:89-90.

ExampleThomson Jr., Strickland III, and Gamble (2005:93) suggest that market share leadership of Toshiba’s laptop computers throughout most of the 1990’s stemmed from a combination of good resource strengths and capabilities, i.e., its strategic partnerships with suppliers of laptop components, efficient assembly capability, design expertise, skills in choosing quality components, a wide selection of models, the attractive mix of built-in performance features found in each model when balanced against price, the better-than-average reliability of its models (based on buyer ratings), and good technical support services (based on buyer ratings).

ECONOMIES OF SCALE

ECONOMIES OF LEARNING

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

RESIDUAL EFFICIENCY

Increased individual skills

Specialization

Improved organizational routines

Process innovation

Reengineering of business processes

Standardization of designs and components

Design for manufacture

Location advantages

Ownership of low-cost inputs

Nonunion labor

Bargaining power

Ratio of fixed to variable costs

Fast and flexible capacity adjustment

Organization slack/X-inefficiency

Source : Grant, 2008:227.

The Drivers of Cost Advantage

Technical input-output relationships

Indivisibilities

Motivation and organizational culture

Managerial effectiveness

The Rarity ofSources of CostAdvantage

Likely to Be RareSources of Cost Advantage

Learning-curve economies of scale(especially in emerging industries)

Differential low-cost access to factors of production

Technological “software”

Less Likely to Be RareSources of Cost Advantage

Economies of scale (except when efficient plant size approximately equals total industry demand)

Diseconomies of scale

Technological hardware (unless a firm has proprietary hardware development skills)

Policy choices

Direct Duplication of Cost Leadership

Low-cost duplicationpossible

May be costly to duplicate

Usually costly to duplicate

1. Economies of scale2. Diseconomies of scale

3. Learning-curve economies4. Technological “hardware”5. Policy choices

6. Differential low-cost access to factors of production7. Technological “software”

Source of cost advantage History Uncertainty Social Complexity

Basis for Costly Duplication

--- = not a source of costly imitation * = somewhat likely to be a source of costly imitation ** = likely to be a source of costly imitation *** = very likely to be a source of costly imitation

Source: Barney, 2007:187.

--- --- ------ --- ---

* --- ------ * ** --- ---

*** --- **

*** ** ***

THE CUSTOMERS

FORMULATE DIFFERENTIATION

STRATEGY

* Select product positioning in relation to product attributes

*

*

*

Select target customer group

Ensure customer / product compatibility

Evaluate costs and benefit of differentiation . What motivates them ?

By what criteria do they choose ?

What needs does it satisfy ? What are key attributes ?

Relate patterns of customer preferences to product attributes

What price premiums do product attributes command ?

What are demographic, sociological, psychological correlates of customer behavior ?

Identifying the Potential for Differentiation on the Demand Side

THE PRODUCT

Source : Grant, 2008:248..

Buyers build corporate reputation.MIS that supports innovation and responsiveness to customer needs through close internal coordination.

Unique product features.Fast new product development.Design for reliability/ serviceability

Training that supports goalsof quality and responsiveness.Incentives that are consistentwith differentiation goals.Developing commitment tocustomer service.

Training for customers.Fast, reliable repairs.Availability of spare parts.Training for dealers.Customer credit.

PURCHASING,INVENTORYHOLDING,MATERIALSHANDLING

PRODUCTIONWAREHOUSING

&DISTRIBUTION

SALES&

MARKETING

DEALERSUPPORT

&CUSTOMER

SERVICE

INFRASTRUCTURE ACTIVITIES:

RESEARCH, DEVELOPMENT, DESIGN

HUMAN RESOURCE DEVELOPMENT

Quality and reliabilityof componentsand materials

Fastmanufacturing.Defect-freemanufacturing.Ability toproduce tocustomerspecification.Wide variety.

Fast delivery.Efficient orderprocessing.Sufficientinventoriesto meetunexpected orders.

Advertising thatenhances brandreputation.Effective salesforce.Quality sales literature.Building brandreputation.

MA

RG

IN

PR

IMA

RY

AC

TIV

ITIE

SS

UP

PO

RT

AC

TIV

ITIE

S

Source : Grant, 1995:223; 2002:297;2008:256 (cf. Porter, 1985:122).

Identifying the Potential for Differentiation on the Supply Side:Sources of Differentiation in Porter’s Generic Value Chain

Product Differentiation and Firm Performance: The Analysis of Monopolistic Competition

--- = not likely to be a source of costly duplication * = somewhat likely to be a source of costly duplication ** = likely to be a source of costly duplication*** = very likely to be a source of costly duplication

Source: Barney, 2007:217.

Low-cost duplicationpossible

May be costly to duplicate

Usually costly to duplicate

1. Product features

2. Product mix3. Linkages with other firms4. Product customization5. Product complexity6. Consumer marketing

7 Linkages among functionswithin a firm

8. Timing of product introduction9. Location10. Product reputation11. Distribution channels12. Service and support

Basis of Product Differentiation History Uncertainty Social Complexity

Source of Costly Duplication

Bases of Product Differentiation and the Cost of Duplication

--- --- ---

* * ** --- *** --- *** --- *--- ** ---

* * **

*** * ---*** --- ---*** ** ***** * *** * **

Focuseddifferentiation

Differentiation

Hybrid

Lowprice

‘No frills’ Strategiesdestined forultimate failure

1

2

34

5

6

78

HIGH

LOW

LOW HIGH

PERCEIVED ADDEDVALUE

PRICE

1. ‘No frills’

2. Low price

3. Hybrid

4. Differentiation (a) Without price premium

(b) With price premium

5. Focused differentiation

6. Increased price/standard value

7. Increased price/low value

8. Low value/standard price

Likely to be segment specific

Risk of price war and low margins/need to be cost leader

Low cost base and reinvestment in low price and differentiation

Perceived added value by user, yielding market share benefits

Perceived added value sufficient to bear price premium

Perceived added value to a particular segment, warranting price premium

Higher margins if competitors do not follow/risk of losing market share

Only feasible in monopoly situation

Loss of market share

Needs/risks

The Strategy clock: competitive strategy options

Source: Johnson, Scholes, and Whittington, 2008:.225.

Dif

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Lik

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Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

Cost-effectivemanagementinformation systems.

Relatively fewmanagerial layers in orderto reduce overhead costs.

Simplifiedplanning practices toreduce planning costs.

Consistent policiesto reduce turnover costs.

Intense and effective trainingprograms to improve workerefficiency and effectiveness

Easy-to-use manufacturingtechnologies.

Investments in technologies in orderto reduce costs associated with a firm’smanufacturing processes.

Systems and procedures to find thelowest cost (with acceptable quality)products to purchase as raw materials.

Frequent evaluationprocesses to monitorsupplier’s performances.

Highlyefficientsystems to linksuppliers’products with the firm’sproductionprocesses.

Use ofeconomies ofscale to reduceproductioncosts

Construction ofefficient-scaleproductionfacilities.

A deliveryschedule thatreduces costs.

Selection of low-costtransportationcarriers.

A small,highly trainedsales force.

Productspriced soas togeneratesignificantsalesvolume.

Efficient andproper productinstallationsin order toreduce the frequencyand severityofrecalls.

MA

RG

INM

AR

GIN

FirmInfrastructure

Human ResourceManagement

TechnologyDevelopment

Procurement

InboundLogistics

Operations OutboundLogistics

Marketingand Sales

Service

Source: Hitt, Hoskisson & Ireland, 2007:111.

Examples of Value-Creating Activities Associated with the Differentiation Strategy

Highly developed informationsystems to better understandcustomers’ purchasing preferences.

A company-wide emphasis onthe importance of producinghigh-quality products.

Compensation programsintended to encourage workercreativity and productivity

Somewhat extensive use ofsubjective rather thanobjective performance measures.

Strong capability inbasic research

Investments in technologies that willallow the firm to produce highlydifferentiated products.

Systems and procedures usedto find the highest qualityraw materials.

Purchase of highest qualityreplacement parts.

Superiorhandling ofincoming rawmaterials so asto minimizedamage andimprove thequality of thefinal product.

Consistentmanufacturingof attractiveproducts.

Rapid responsesto customers’uniquemanufacturingspecifications.

Accurate andresponsiveorder-processingprocedures.

Rapid and timely productdeliveriesto customers.

Extensivegranting ofcredit buyingarrangementsfor customers.

Extensivepersonalrelationshipswith buyersand suppliers.

Extensive buyer trainingto assure high-qualityproduct installations.

MA

RG

INM

AR

GIN

FirmInfrastructure

Human ResourceManagement

TechnologyDevelopment

Procurement

InboundLogistics

Operations OutboundLogistics

Marketingand Sales

Service

Superiorpersonneltraining.

Completefield stock-ing of replace-mentparts.

Source: Hitt, Hoskisson & Ireland, 2007:117.