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					Chapter 7: Strategy in High-
  Technology Industries
Technological Standards
   and Format Wars
• Technological Standards (i.e., dominant
  design)
• Benefits associated with them
   –   Guarantee compatibility
   –   Reduce confusion
   –   Reduce production costs
   –   Reduce risks for complementary products
• Established by government, cooperatively
  or market demand (public versus private
  domain)
• Network Effects, Feedback, & Lockout
  (switching costs)
Strategies for Winning a
      Format War
  – Ensure a Supply of Complements
  – Leverage Killer Applications
  – Aggressively Price and Market (razor &
    blade strategy)
  – Cooperate with Competitors
  – License the Format (at low price)
Costs of High-Technology
       Industries
• Very high fixed costs and low
  marginal costs
• No law of diminishing returns (U)
• Shifting to this will increase profits
  (although using strategy of pricing
  low)
     Managing Intellectual
     Property Rights (IPR)
– Defined-Product of intellectual or creative
  effort
– Means of Protection-patents, copyrights,
  and trademarks
– Strategies to protect and enforce IPR
– Digitization has increased piracy rates
– Strategies for managing digital rights –
  razor & blade, low prices to reduce theft,
  legal action
    Capturing First-Mover
        Advantages
• Advantages
  – Exploit network effects, lock customers into
    technology
  – Create brand loyalty
  – Ramp up volume (scale economies, learning)
  – Create switching costs for customers
  – Accumulate valuable knowledge
• Disadvantages
  – Significant pioneering costs
  – Mistakes due to uncertainty
  – Build wrong resources (based on early
    adopters)
  – Inferior or obsolete technology
       Innovation Strategies
                Required      Height of     Number of
              Complementary   Barriers to    Capable
                 Assets        Imitation    Competitors

Go It alone       Yes           High         Very Few


                                             Moderate
Alliance          No            High
                                             Number


Licensing         No             Low           Many
        Technological
       Paradigm Shifts
• Natural limits to technology (S-
  curve, natural limits, swarm of
  successors)
• Disruptive technology
  (revolutionizes industry structure)
• Implications for established
  companies
• Implications for new companies
 Disruptive Technologies:
Challenges for Established
        • Too close to customers
        • New start in small niches
        • Needs new business model
        • New network of suppliers and
          distributors
        • Internal inertia
Implications for Established
         Companies
      • Recognize threat of disruptive
                   technology
      • Invest in disruptive technology
   • Be careful of organizational pressures
         that threaten new technology
   • Recognize the need to nurture a new
                business model
Implications for New
      Entrants

• Focus energy on
  opportunities associated with
  disruptive technology
• Choose whether to partner
  Chapter 11:Corporate
Performance, Governance,
   and Business Ethics
Causes of Corporate Decline
   • Poor Management
   • High Cost Structure
   • Inadequate Differentiation
   • Overexpansion
   • Structural Shifts in Demand
     and New Competitors
   • Organizational Inertia
Strategic Change
Improving Performance

      Changing the
       Leadership
      Redefining the
       Strategic Focus
      Changing Organization
       (unfreezing, rapid
       movement, refreezing)
Stakeholder Impact Analysis
• Identify Stakeholders
• Identify Stakeholders’ Interests and Concerns
• Identify Resulting Claims Stakeholders Are
  Likely to Make
• Identify Most Important
  Stakeholders (From
  Organization's
  Perspective)
• Identify the Resulting
  Strategic Challenges
 Why Maximize Long-Term
         ROIC?
• Shareholders provide risk capital
• Consistent with satisfying other
  stakeholders
• Suppliers and customers do not want
  maximization at their expense
• Maximize after meeting legal and
  ethical obligations
       Agency Theory
• Agency Relationship
• Principal – delegating authority
• Agent – delegated authority
• Agency Problem – information
  asymmetry, performance ambiguity
• Governance Mechanisms
Governance Mechanisms
 • Board of Directors
 • Stock-Based Compensation
 • Financial Statements and
   Auditors
 • The Takeover Constraint
 • Mechanisms Inside a Company
The Board of Directors
–   Authorities and Responsibilities
–   Insiders and Outsiders
–   Problems Caused by Insiders
–   Recent Changes
(lawsuits, institutional
stockholders, Chair/CEO,
more outsiders)
Stock-Based Compensation
       – Good in theory but hard to
         accomplish in practice
       – Arguably should be
         expensed against profits
       – Academic studies stock
         options can be aligned with
         stockholder interests
Financial Statements and
        Auditors
• US Publicly traded firms must file
  reports quarterly and annually
• SEC requires audit by independent
  and accredited accounting firm
• Problems (manipulated, conflict of
  interest, board appoints auditors)
• July 2002 Law (new accounting
  oversight board, CEO/CFO endorse
  financial statement, auditor cannot
  consult)
The Takeover Constraint
– Corporate Takeovers
  • Constrains Top Executives
  • Corporate Raiders
  • Greenmail
– Less common today
  due to debt and
  inflated valuations
– Mechanism of last
  resort
Governance Mechanisms
     Class Version
•   Government
•   Board of Directors
•   The Takeover Constraint
•   Institutional Stockholders
Governance Mechanisms
   Inside a Company
•   Strategic Control Systems
      Establish standards & targets
      Create systems for measuring
      Compare to target
      Evaluate & take corrective action
•   Employee Incentives
      Stock, Options, and Bonuses
Figure 12.1: A Balanced Scorecard
 Establish Company Approach
   Mission and Goals

                 Develop a Strategy
                   and Structure


                             Create Strategic Control
                             Systems that Measure:
                         •   Efficiency
                         •   Quality
                         •   Innovation
                         •   Customer Response


                                               Measure Financial
                                                 Performance
Take Corrective Action to Solve
Problems or Exploit New Opportunities
     Strategy and Ethics
• Purpose of Business Ethics
• Shaping the Organization’s Ethical
  Climate
• Thinking Through Ethical Problems
Purpose of Business Ethics

• Business decisions have an ethical
  component
• Managers must weigh ethical
  implications of strategic decisions

    Example: Manville (asbestos)
 Chapter 12: Implementing
 Strategy in Companies that
Compete in a Single Industry
        Strategic Planning
    Figure 1.1: Basic Planning Process

          Missions and Goals


External Analysis - Opportunities and Threats


  Internal Analysis - Strengths and Weaknesses

          Selection of Appropriate Strategies


                Implementation of Strategies
        Implementing Strategy

Organizational                     To achieve superior:
  Structure                             Efficiency
                     Coordinate
Strategic Control   and motivate          Quality
  Systems            employees          Innovation
Organizational                          Customer
  Culture                            Responsiveness
Organizational Structure
 • Grouping Tasks & functions (Pieces)
    – Determination of parts/units
    – Complexity increases bureaucratic cost
    – Reduces transaction costs
 • Authority & responsibility
    – Hierarchy, Span of control
    – Tall versus flat
    – Select minimum chain of command
    – Centralized versus decentralized
 • Coordination & Integration (Connect Pieces)
    – Direct contact, liaison roles, teams
     Problems with
     Tall Structures
• Communication Problems
• Information Distortion
• Managers are Expensive
              So
  Minimize Chain of Command
Centralization or Decentralization?

• Advantages of Decentralization
  – Information Overload Reduction
  – Increase of Motivation and Accountability
    (Increases Flexibility and Reduces
    Bureaucratic Costs)
  – Fewer Managers Needed (Reduced
    Bureaucratic Costs)
Centralization or Decentralization?
 • Advantages of Centralization
   – Easier Coordination of Activities
     Needed to Pursue Firm’s Strategy
   – Decisions Fit Broad Organizational
     Objectives
   – Strong, Focused Leadership Allows for
     Speedy Decision
Integration and Integration
       Mechanisms
      •   Direct Contact
      •   Liaison Roles
      •   Teams
      •   Integrating Roles
      •   Integrating Departments
Effective Control Systems
     • Flexible enough to
       respond to unexpected
       events
     • Accurate enough to
       reveal the true picture
     • Supply information in
       timely manner
Strategic Control Systems
Levels – Corporate, Division,
    Function, & Individual)
Types –
     • Personal Controls –
       supervisors, group
     • Output Controls*
     • Behavior Controls*

*Primary Kinds of Control
 Output Controls

• Divisional Goals
• Functional Goals
• Individual Goals
  Behavior Controls
• Operating Budgets
• Standardization
  – Standardization of Inputs
  – Standardization of
    Conversion Activities
  – Standardization of
    Outputs
• Rules and Procedures
 (means of conversion)
Strategic Reward Systems

Group and Organizational
    Reward Systems
• Group-Based Bonus
  Systems
• Profit-Sharing Systems
• Employee Stock Option
  Systems
• Organization Bonus
  Systems
Using Information Technology

   • Standardizing Behavior
   • Output Easy to Monitor
   • Form of Integration
 Cultural Control
• Organizational
  Values
• Organizational
  Norms
• Socialization
Primary Structural Forms
•   Simple Structure (boss & employees)
•   Functional Structure
•   Product and Market Structures
•   Geographic Structure
•   Matrix Structure
•   Product Team Structure
•   Multidivisional Structure
               Structure and Control
               at the Business Level
    Generic Strategy, Structure, and Control
                                      STRATEGY
                       Cost
                                     Differentiation          Focus
                    Leadership
Appropriate
Structure        Functional          Product-team       Functional
                                     or Matrix
Integrating      Center on           Center on R&D      Center on Product
Mechanisms       Manufacturing       or Marketing       or Customer

Output           Great Use (e.g.,    Some Use (e.g.,    Some Use (e.g.,
Control          cost control        quality goals)     cost and quality)

Bureaucratic     Some Use            Great Use (e.g.,   Some Use
                 (e.g., budgets,     rules, budgets)    (e.g., budgets)
Control          standardization
                 Little Use (e.g.,   Great Use (e.g.,   Great Use (e.g.,
Organizational
                 quality control     norms and          norms and values)
Culture          circles)            values)
 Figure 11.5: Functional Structure

                           CEO




*Research     *Sales     *Manufact-   Materials   Engineer-
and Devel-     and       uring        Manage-     ing
  opment     Marketing                 ment
      Advantages of a
    Functional Structure
– People Learn from Each Other and
  Become More Specialized and Productive
– People Can Monitor One Another
– Gives Managers Greater Control of
  Organizational Activities because
  Different Hierarchies can be Created
         Problems with a
       Functional Structure
–   Communications Problems
–   Measurement Problems
–   Customer Problems
–   Location Problems
–   Strategic Problems
   Implementing Strategy
• Implementing a broad product line—
  product structure
  – Group the overall product line into
    product groups
  – Centralize support value chain
    functions to lower costs
  – Divide support functions into product-
    oriented teams of functional specialists
    who focus on the needs of one specific
    product group
     Broad Product Line
Product Structure

 • Better Responsive to Product Needs
 • Provides More Control Than Functional
   Structure
 • Can Determine Cost of Product Better
 • Reduction of Coordination and
   Communications Problems
Customer Responsiveness
Market Structure
• More Responsive to Customer Needs
• Provides More Control Than Functional
  Structure
• Customize Products to Customer Groups
• Reduction of Coordination and
  Communications Problems
         Expanding Nationally
Geographic Structure is best
 • More Responsive to Regional Customers’
   Needs
 • Reduces Transportation Costs
 • Provides More Control Than Functional
   Structure
 • Economies of Scale Achieved
 • Reduction of Coordination and
   Communications Problems
         Matrix Structure
Advantages – flat, decentralized
 • Speedy Product Development
 • Autonomy and Flexibility Suitable
   for Professional Employees
 • Makes Maximum Use of Employee
   Skills As Existing Projects are
   Completed and New
   Projects Develop
 • Quick reactions and
   flexibility
    Matrix Structure
Disadvantages
• High Bureaucratic Costs
• Constant Movement of Employees
• Conflict Between Functions and
  Projects Over Resources
• Difficult to monitor
Product Team Structure
• Advantages Similar to Matrix
  Structure (But, Easier and
  Less Costly to Operate)
• Structured along Product of
  Project Lines
• Permanent cross-
  Functional Teams
       Implementation
• Restructuring -
  Reducing number of levels
  Downsizing number of employees

• Reengineering – Radical redesign of
  business processes to achieve dramatic
  improvement
 Chapter 13: Implementing
Strategy in Companies that
Compete Across Industries
      and Countries
  Multidivisional Structure
Two Main Innovations
  - Divisions are usually self-contained &
    have operational responsibility
  - Corporate headquarters staff
    monitors and exercises financial
    control with strategic oversight

Multidivisional structure may be
 necessary due simply to size
   Multidivisional Structure
• Advantages of Multidivisional Structure
   –   Enhanced Corporate Financial Control
   –   Enhanced Strategic Control
   –   Helps Overcome Limits to Growth
   –   Stronger Pursuit of Internal Efficiency
 Multidivisional Structure
• Disadvantages of Multidivisional
  Structure
  – Difficulty of Establishing the Divisional-
    Corporate Authority Relationship
  – Distortion of Information
  – Competition for Resources
  – Transfer Pricing
  – Short-Term R&D Focus
  – Duplication of Functional Resources
  Structure, Control, Culture,
 and Corporate-Level Strategy
• Unrelated diversification
  – Easiest and cheapest strategy to
    manage
  – Allows corporate managers to evaluate
    divisional performance easily and
    accurately
  – Divisions have considerable autonomy
  – No integration among divisions is
    necessary
  Structure, Control, Culture,
 and Corporate-Level Strategy
• Vertical integration
  – More expensive than unrelated diversification
  – Multidivisional structure provides necessary
    controls to achieve benefits from the control
    of resource transfers
  – Must strike balance between centralized and
    decentralized control
  – Divisions must have input regarding resource
    transfer
  – Managed through a combination of corporate
    and divisional controls
  Structure, Control, Culture,
 and Corporate-Level Strategy
• Related diversification
  – Multidivisional structure allows gains from the
    transfer, sharing, or leveraging of R&D
    knowledge, industry information, and
    customer bases across divisions
  – Difficult to measure performance of individual
    divisions
  – High bureaucratic costs
  – Integration and control at divisional level is
    required
  – Incentives and rewards for cooperation are
    necessary
                   Structure and Control
                   at the Corporate Level
    Corporate Strategy and Structure and Control
                                                                          Type of Control
Corporate         Appropriate        Need for Integration Financial    Behavior                  Organizational
Strategy          Structure                                                                      Culture
Unrelated         Multi-divisional   Low (No Exchanges Great Use       Some Use (e.g.,           Little Use
Diversification                      Between Divisions) (e.g., ROI)    Budgets)
Vertical          Multi-divisional   Medium (Scheduling Great Use      Great Use (e.g.,          Some Use (e.g.,
Integration                          Resource Transfers) (e.g., ROI,   Standardization,          Shared Norms and
                                                         Transfer      Budgets)                  Values)
                                                         Pricing)
Related           Multi-divisional   High (Achieve       Little        Great Use (e.g., Rules,   Great Use (e.g.,
Diversification                      Synergies Between Use             Budgets)                  Norms, Values,
                                     Divisions by                                                Common Language)
                                     Integrating Roles)
The Role of Information Technology
  • IT provides a common software platform that can
    make it less problematic for divisions to share
    information
  • IT facilitates output and financial control
  • IT helps corporate managers react more quickly
    because of higher-quality, more timely
    information
  • IT makes it easier to decentralize control to
    divisional managers, but react quickly if
    necessary
  • IT makes it difficult to distort information
    because of standardized information
  • IT eases the transfer pricing problem
  Authority & Responsibility
      Across Countries
• Multidomestic strategy
   – Local responsiveness; decentralized control
• International strategy
   – Centralized R&D and marketing; other
     functions are decentralized
• Global strategy
   – Cost reductions; centralized functions
• Transnational strategy
   – Local responsiveness and cost reduction
     Multidomestic Strategy
• Global-area structure
  – All value creation activities duplicated and
    overseas division established in every country
    of operation
  – Decentralized authority
  – Managers at global headquarters evaluate
    performance of overseas divisions
  – No integrating mechanisms needed
  – No global organizational culture
  – Duplication of specialist activities raises costs
      International Strategy
• International-division structure
  – Used when a company sells domestically
    made products in markets abroad
  – Foreign sales organization added to existing
    structure; same control system
  – Customization is minimal
  – Subsidiary handles local sales and
    distribution
  – Behavior controls keep the home office
    informed
  – International division coordinates flow of
    different products across different countries
  – Domestic and overseas managers may
    compete for control of strategy making
          Global Strategy
• Global product-division structure
  – All value chain activities located to allow
    efficiency, quality, and innovation
  – Problems of coordinating and integrating
    global activities
  – Structure must lower bureaucratic costs and
    provide central control
  – Product division headquarters coordinates
    activities
    Transnational Strategy
• Global Matrix Structure
  – Lower cost structures and differentiate
    activities
  – Decentralized control provides flexibility for
    local issues, but product and corporate
    managers at headquarters have centralized
    control to coordinate company activities on
    global level
  – Knowledge and experience can be
    transferred
  – Global corporate culture
  – IT integration mechanisms provide
    coordination
  – Bureaucratic costs are high
         Designing a Global Structure
        Global Strategy-Structure Relationships
                   Multi-             International           Global         Transnational
                   domestic
                  Low                 Need for Coordination                    High
                  Low                  Bureaucratic Costs                      High
                                     Core                  Centralized       Simultaneously
Centralization                       Competencies
                  Decentralized                            at Optimal        Centralized
of Authority      to National Unit   Centralized. Others   Global            and
                                     Decentralized to      Location          Decentralized
                                     National Units

Horizontal        Global Area        International         Global Product    Global Matrix
                  Structure          Division Structure    Group Structure   Structure
Differentiation
Need for Complex                                                              Very High
                 Low                 Medium                High
Integrating
Mechanisms
Organizational    Not                Quite                 Important         Very
                                     Important                               Important
Culture           Important
          Entry Mode and
          Implementation
• Internal new venturing
  – Structure, control, and culture must
    encourage creativity and give intrapreneurs
    autonomy and freedom to develop and
    champion new products and allow corporate
    managers to monitor profitability and fit
  – Organization-wide new venturing vs. separate
    new-venture division
Entry Mode and Implementation
• Joint venturing
  – Managing culture differences
  – Allocating authority and responsibility
• Mergers and acquisitions
  – Must establish new lines of authority
  – Must streamline operations
  – In unrelated acquisitions, managers must
    understand the new industry
  – Must standardize control systems
  – Must recognize culture differences
       IT, the Internet, and
            Outsourcing
• IT and strategy implementation
  – Knowledge leveraging through IT to
    achieve low costs and differentiation
  – Flattening the organization, moving
    toward decentralization and increased
    integration through IT
  – Virtual organization
  – Knowledge management system
       IT, the Internet, and
            Outsourcing
• Strategic outsourcing and network
  structure
  – IT increases the efficiency of
    interorganizational relationships
  – Business-to-business (B2B) networks
  – Network structure

				
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