Strategic Thinking & Implementation Exam 2
Milton Friedman's Philosophy
"the social responsibility of business is to increase its profits"
setting ethical tone
leaders must: - set clear ethical expectations - put structure, culture, and control systems in place - formal and informal culture must be aligned - executive behavior must adhere to the company vision & values
acquisition
purchase of one company by another, can be friendly or unfriendly, considered a hostile takeover when the target firm does not wish to be acquired
hedge against uncertainty
real options perspective - breaks down investment into smaller decisions that are staged sequentially over time
Main issues in build borrow buy
relevancy, tradability, closeness, integration
borrow
resource is highly tradable
equity alliance, joint venture, outright acquisition
resource is not easily tradable
Borrow
external growth through a contract/ strategic alliance
Buy
external growth through acquiring new resources, capabilities, and competencies
tradability
firm creates a contract to: transfer ownership and allow use of the resources contracts support borrowing resources (licensing, franchising, contracts)
Organizational inertia
firms fail to respond to shifts in the external or internal environments because of this force
alliance design and governance
gov mechanisms: contractual agreement, equity alliance, joint venture critical dimension of success: inter-organizational trust
Output Controls
guide employee behavior by: - defining expected results but: - leaving the means to those results open to individual employees, groups, or SBUs intrinsic motivation is highest when an employee has: - autonomy (about what to do) - mastery (how to do it) - purpose (why to do it) Example: 3M encourages employees to spend 15% of their time on projects of their own choosing. If any project looks promising, 3M provides financing through an internal VC fund and other resources to further develop their commercial potential
why firms merge
horizontal integration: the process of merging with a competitor, occurs at the same stage of the value chain
Closeness
how close do you need to be to your external resource partner?
Relevancy
how relevant are the firm's existing resources in solving the resource gap?
Tradability
how tradable are the targeted resources that may be available externally?
Integration
how well can you integrate the targeted firm should you determine to acquire?
Build
internal organic growth through development
relevance
internal resources meet this criteria if: 1. they are similar to those the firm needs to develop; 2. they are superior to those of competitors in the targeted area
foreign direct investment
investments in value chain activities abroad
enter new markets
product, service, or geographic markets
Unrelated Diversification
- Competitive M-form - decentralized decision making - low level of integration at corporate headquarters - competition among SBUs for resources
Globalization Hypothesis
- Consumer needs and preferences are converging (food, music, movies, clothing, etc.) Examples: McDonalds, Coca-Cola, rock music, Greek salad, Hollywood movies, Levi jeans
Modes of Foreign-Market Entry (along the Investment and Control Continuum)
- Contract Based: Exporting - Strategic Alliances: Long-Term Contracts (licensing, franchising), Equity Alliances, Joint Ventures - Subsidiary: Acquisition, Greenfield
Two Opposing Forces in Global Competition
- Cost Reductions: key competitive weapon - Local Responsiveness: tailoring to specific preferences
internal environment shifts
- accelerated growth - change in business model - entry into new markets - change in TMT - M&A
advantages of international expansion
- access new markets - access lower-cost inputs - develop new competencies
Business Ethics
- an agreed-upon code of conduct in business provides training for: - behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society can differ in various cultures around the globe: - universal norms include fairness, honesty, and reciprocity - staying within the law is a minimal acceptable standard - ethics goes beyond this
loss of intellectual property (disadv #3 of going global)
- can be difficult to protect yourself in foreign markets particularly software, movies and music - copyright infringements can occur - some countries are known for partnering initially, but then reverse-engineering capabilities
Related Diversification
- cooperative M-form - centralized decision making - integrated at corporate HQ - co-opetition among SBUs
CAGE distance framework
- distance is the main cost and risk of expansion - this guides MNE decisions on which countries to enter
How organizational culture changes
- environmental changes: a firm must hone, refine, and upgrade to ensure a core rigidity doesn't emerge - new leadership changes in strategy and structure - when the original core competencies turn into a liability Example: GM organizational inertia - bureaucratic structure used to be a strength but when the environment changes and competition became intense, they failed to adapt to changing consumer preferences for more fuel-efficient cars
Creating Shared Value
- executives shouldn't only focus on increasing firm profits - should focus on creating share value - economic value (shareholders) AND - social value (address society's needs and challenges - societal progress is important and capitalism helps shape society) - can enhance competitive advantage and enhance economic value creation
3. auditors, regulators and industry analysts
- external-governance mechanisms to avoid misrepresentation of financial results: - public financial statements must follow GAAP - financial statements must be audited industry analysts often base their buy, hold, or sell recommendations on: - financial statements filed with the SEC - executive interviews and independent research - business news (WSJ, Forbes, CNBC, etc.)
what makes globalization possible
- falling trade and investment barriers - advances in telecommunications - reductions in transportation costs
access to low-cost input factors (adv #2 of going global)
- helps MNEs that are pursuing low-cost leadership strategy - key driver of globalization (lower labor costs is a focus, India provides well-educated English-speaking young people, China provides low cost labor and an efficient infrastructure)
gain access to a larger market (adv #1 of going global)
- helps MNEs with economies of scale and scope - opportunities to outcompete local rivals - helps firms in smaller economies (achieve growth, gain & sustain competitive adv)
Transnational Strategy (part of integration-responsiveness framework)
- high-cost reductions / high-local responsiveness ("think globally, act locally", best practices, ideas, and innovations used everywhere) - used by MNEs that pursue a blue ocean strategy - difficult to implement (duplication of efforts, organizational complexity - need managers that can work across cultures)
Global-Standardization Strategy (part of integration-responsiveness framework)
- high-cost reductions / low-local responsiveness (economies of scale and location economies, achieved through global division of labor, based on wherever capabilities have lowest cost), - price is the main competitive weapon (minimal local adaptation) Example: Lenovo (Chinese computer manufacturer), no traditional HQ model but centers of excellence around the world - research centers in Beijing, Shanghai, Raleigh, and Japan to keep track of the latest developments in computing - manufacturing facilities in Mexico, India, and China to benefit from low-cost labor and stay close to their main markets
Open innovation
- ideas and innovation also arise from external sources - customers, suppliers, universities - leverages licensing agreements, strategic alliances, joint ventures, and acquisitions
Strategic Control and Reward Systems
- internal-governance mechanisms are put in place to align the incentives of principals (shareholders) and agents (employees) - allow managers to: specify goals, measure progress, provide performance feedback
disadvantages of international expansion
- liability of foreignness - loss of reputation - loss of intellectual property
Organic organization
- little specialization and organization - flat organizational structure - decentralized decision making
Multidomestic Strategy (part of integration-responsiveness framework)
- low cost reductions / high-local responsiveness - can be costly and inefficient (duplication of business functions across countries) - less exchange-rate risk because most of the value creation happens in the host-country business units - common in: consumer products industry and food industry
How culture helps competitive advantage
- makes positive contribution to economic value creation - passes VRIO principles: valuable, rare, difficult to imitate, organized to capture value - it can adapt as the business evolves Extra: it's been documented that the initial structure, culture, and control mechanisms established in a new firm can be a significant predictor of later success
Mechanistic organization
- much specialization and formalization - tall hierarchies - centralized decision making
loss of reputation (disadv #2 of going global)
- one of the most valuable resources for a company - dimensions can include innovation, customer service, or what people think of your brad - can diminish competitiveness (low wages, long hours, and poor conditions; local govt may be corrupt, safety standards may be unenforceable) - this challenge concerns CSR - a brand can be the basis for competitive advantage if it is valuable, rare, and difficult to imitate Example: Apple faced issues when the low wages, long hours, and poor working and living conditions contributed to a spate of suicides at Foxconn
Closed Innovation
- products developed internally - costly and time consuming
Shared Value Creation Framework
- provides guidance to managers - helps reconcile gaining and sustaining competitive advantage with corporate social responsibility - creates a larger "pie" to benefit shareholders and stakeholders
responsibilities of the board of directors
- strategic oversight and guidance - CEO selection, evaluation, compensation, succession - guide executive compensation - review, monitor, evaluate, and approve strategic initiatives - risk assessment and mitigation - ensuring financial statements are accurate - ensuring compliance with laws and regulations
Disadvantages of Functional Structure
- suboptimal communication across departments (can be solved with cross-functional teams) - cannot effectively address greater diversification (this is needed to ensure firm growth, firms encountering this adopt a different structure)
Factors that shifted knowledge landscape from closed to open innovation
- the increasing supply and mobility of skilled workers - the exponential growth of venture capital - the increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and innovations - the increasing capability of external suppliers globally
why acquire
- to access new markets & distribution channels; overcome entry barriers, access new capabilities / competencies - access new capability or competency - preempt rivals
liability of foreignness (disadv #1 of going global)
- unfamiliar cultural environment - unfamiliar economic environment - coordinating across geographic distances - can result in additional costs Example: Walmart had problems in several international markets like Germany - what works domestically doesn't necessarily work abroad
Multidivisional Structure
- used as a firm diversifies products and geography - each strategic business unit (SBU): (1) has profit-and-loss responsibility (2) is operated independently (3) led by a unique CEO who is responsible for SBU strategy and operations) - widely adopted organizational structure - typically levels are TOP: board of directors MIDDLE: Corporate R&D, President, Corporate HQ Staff NEXT: CEO SBU 1, CEO SBU2, etc.
other governance mechanisms
- used to align incentives between principals and agents include: 1. executive compensation 2. the market for corporate control 3. financial statement auditors, government regulators, and industry analysts
International Strategy (part of integration-responsiveness framework)
- when a company sells the same product or service in both domestic and foreign markets - low cost reductions / low local responsiveness (leverages home-based core competencies, sells the same product domestically and abroad) - often used successfully by MNEs with (1) large domestic markets (2) strong reputations and brand names DOWNSIDE: the MNE leaves itself open to the expropriation of IP - can be reverse-engineered, exchange-rate risk
moral hazard
- when one party is incentivized to take undue risks or shirk responsibilities - the costs are incurred to the other party
post formation alliance management
-To be a source of competitive advantage, the partnership has to create VRIO resource combinations: •Make relation-specific investments •Establish knowledge-sharing routines •Build interfirm trust. Build capability through repeated experiences over time
Reconnecting Economic and Societal Needs
1. Expand the customer base to bring in non consumers 2. Expand traditional internal firm value chains to include non-traditional partners 3. Focus on creating new regional clusters (aka Silicon Valley type places) - These strategic actions will lead to a larger pie of revenues and profits that can be distributed among a company's stakeholders (Porter agrees)
4 Benefits of public stock company
1. limited liability for investors 2. transferability of investor ownership through stock 3. legal personality, with rights and obligations 4. separation of legal ownership and management control
three benefits of mergers
1. reduction in competitive intensity 2. lower costs 3. increased differentiation
globalization stage two
1945 to 2000 - to reconstruct damage from the war - focus on European countries, Japan, and Australia - greater local responsiveness - HQ set goals and international sites influenced tactics
globalization stage one
1990 to 1941 - sales, operations, and some procurement - strategy flowed from HQ to international sites
globalization stage three
21st century - business function locations are based on costs, capabilities, and PESTEL factors - companies can operate 24/6, 365 days a year
Administrative and Political Distance
A in CAGE - captured in factors such as: shared monetary or political associations, political hostilities, weak or strong legal and financial institutions - barriers include: tariffs, quotas and restrictions Example: China requests the sharing of technology in a joint venture when entering the country
Related and supporting industries / complementors
Being a leader allows activity in downstream industries: - firms that provide an additional good or service - combined with the primary product - leads customers to value the firm's offering more - further strengthens national competitive advantage Example: Toyota's global success was thanks in large part to the network of world-class suppliers in Japan - fast two-way knowledge sharing which improved Toyota quality and lowered cost (blue ocean strategy at the business level aka how to compete)
Cultural Distance
C in CAGE - disparity between a firm's home and host country, specifically social norms and morals, beliefs, and values - made up of: power distance, individualism, masculinity-femininity, uncertainty avoidance, long-term orientation, indulgence Example: Google and Amazon offer country-specific variations of their sites
Economic Distance
E in CAGE - wealth and per capita income of consumers (wealthy countries engage in more cross-border trade) - wealthy countries trade with wealthy countries (economies of experience, scale, scope, and standardization) - wealthy countries trade with poor countries (access to low-cost input factors - economic arbitrage) Example: A store HQ in the US may have a very similar store in Canada, but its store in China would look very different
Porter's Diamond of National Competitive Advantage
Factor conditions, competitive intensity in focal industry, demand conditions, related and supporting industries/complementors
global-standardization, transnational, international, multidomestic
Four parts of the integration-responsiveness framework
Geographic Distance
G in CAGE - more than just physical distance measured by: - physical size - within-country distances to its borders - topography - time zones - whether the countries are contiguous - access to waterways and the ocean - infrastructure - roads, power, and telecommunications Example: particularly relevant when trading products with low value-to-weight ratios (steel, cement, other bulk products) and fragile / perishable products (glass or fresh meat / fruits)
Strategic Alliances
In the Middle in terms of Investment and Control - Long-Term Contracts (licensing, franchising) - Equity Alliances - Joint Ventures
Contract-Based
Least Investment and Control - Exporting
Subsidiary
Most Investment and Control - Acquisition - Greenfield
external environment shifts
PESTEL factors
hierarchy of authority (public company)
State Charter --> Shareholders --> Board of Directors --> Management --> Employees
Simple structure
Used by small firms with low organizational complexity The founders usually •Make all the strategic decisions. •Run day-to-day operations. Professional managers and sophisticated systems are not usually in place. Low degree of formalization and specialization
Factor conditions
a country's endowments: - natural, human, and other resources - resource-rich: focus on commerce - resource-lacking: focus on human capital other important factors: - capital markets, institutional frameworks, research universities, public infrastructure - airports, roads, health care system, etc: Examples of resource-rich countries: Afghanistan, Iran, Iraq, Russia, Saudi Arabia, and Venezuela Examples of countries that lack resources: Denmark, Finland, Israel, Japan, Singapore, South Korea, Switzerland, Taiwan, and the Netherlands
globalization
a process leading to closer integration and exchange between countries and people
joint ventures
a standalone organization; jointly owned by two or more companies
closeness
achieved through alliances: - equity alliances - joint ventures enables resource borrowing
Disadvantages of the Multidivisional Structure
adds another layer of corporate hierarchy: - bureaucracy, red tape, & duplication of efforts - slower decision making SBUs competing: - politics and turf wars over resources - cooperation is still needed at the same time Example: sometimes good to spin out SBUs into independent companies (BCG growth-share matrix)
Bad apple
an individual who acts opportunistically
bad barrel
an unethical organizational climate
How Firms Achieve Growth
build borrow buy
India's competitive advantage
business process outsourcing (BPO) achieved because of low-cost labor and an abundance of well-educated, English-speaking young people - firms like IBM are engaged in foreign direct investment through equity alliances or building their own IT and customer service centers here
adverse selection
caused by information asymmetry - increased likelihood of selecting inferior alternatives
Board of Directors
centerpiece of corporate governance: - represent the interest of shareholders -tasked with providing oversight consist of inside and outside directors - inside directors: usually C suite - outside directors: often senior execs from other firms elected by shareholder vote
strengthen competitive position
change industry structure, influence standards
Demand Conditions
characteristics of demand in a firm's domestic market customers hold companies to standards of value creation: - developments in research - cost containment - new commercial applications for the market
learn new capabilities
co-opetition: cooperation among competitors learning races: to exit the alliance quickly
Co-opetition
competition and cooperation at the same time
Competitive intensity in focal industry
competitive environments lead to better performance Example: German car industry - fierce domestic competition - demanding customers - result: top-notch engineering
Multidivisional (or M-Form) structure
composed of a number of independent strategic business units - each SBU has profit and loss responsibility - allows for leadership development opportunities
integration
conditions: low relevancy, low tradability, high need for closeness
informal building blocks of organizational design
culture
Two consequences of economic development (for MNEs)
current trend facing MNEs: - rising wages and other costs (negate benefits of going abroad for low-cost input factors) - standard of living increase in emerging economies hopefully increasing purchasing power so that workers can purchase the products they originally only exported
National Competitive Advantage
death of distances hypothesis: - high-performing firms for certain industries are concentrated in specific countries - assumption (that is inaccurate) that says that the geographic location shouldn't lead to firm-level competitive advantage because of the ability of firms to source inputs globally
multinational enterprise
deploys resources and capabilities in two countries or more
organizational structure
determines how the efforts of individuals and teams are orchestrated (how resources are distributed) and has 4 building blocks: 1. specialization 2. formalization 3. centralization 4. hierarchy
Disadvantages of the Matrix Structure
difficult to implement: - organizational complexity - administrative costs -unclear reporting structures accountability can be undermined: - employees can have trouble reconciling goals - principal-agent problem - slower decision making
Functional structure
employees are grouped into functional areas - based on domain expertise - often correspond to distinct stages in the value chain leaders of functional areas report to the CEO - the CEO coordinates and integrates the work of each function typical structure: CEO - R&D; Engineering & Manufacturing; Marking, Sales & Service; Human Resources; Finance & Accounting
partner selection and alliance formation
expected benefits > costs five reasons: 1. strengthen competitive position 2. enter new markets 3. hedge against uncertainty 4. access critical complementary resources 5. learn new capabilities partners have to be compatible and committed
Matrix Structure
leverages SBU (M-Form) benefits: - domain expertise - economies of scale - efficient processing of information also leverages organizational structure benefits: - responsiveness - decentralized focus structure: - CEO for each SBU and then head of each region
principal-agent problems
managers may have personal incentives to acquire: - to build a larger empire, to receive prestige, power, and higher pay managerial hubris: - a form of self-delusion, may lead to ill-fated business deals
access critical complementary assets
marketing, manufacturing, after-sale service; helps complete the value chain
specialization
one of the 4 building blocks of organizational structure describes the degree to which a task is divided into separate jobs: - large forms have a high degree of this and smaller ventures have a lower degree of this - tradeoff between depth and breadth of knowledge
centralization
one of the 4 building blocks of organizational structure the degree to which decision making is concentrated at the top of the organization - correlates to slow response time and reduced customer satisfaction affects strategic planning: - top-down strategy planning when this building block is high - planned emergences are found when this building block is low Example: during the BP oil spill, BP's response was slow and cumbersome because key decisions were made initially in the UK at its headquarters and not onsite - reduced response time and prolonged crises
formalization
one of the 4 building blocks of organizational structure the extent to which employee behavior is guided by rules and procedures Pros: - ensures consistency and predictable results - safety and reliability Cons: - slower decision making - reduced innovation - hindered customer service
hierarchy
one of the 4 building blocks of organizational structure the formal, position-based reporting lines of who reports to whom span of control: - the number of employees who directly report to a manager Example: Tall means that the span of control is narrow while in flat structures the span of control is wide - flat = one manager supervises many employees - trend is toward flatter structures that are more nimble
2. the market for corporate control
one of the governance mechanisms used to align interests between principals and agents - external corporate-governance mechanism - activist investors who: seek to gain control of an underperforming corporation, buy shares of its stock in the open market through buy-outs LBOs (PE firm buys public company and takes private) poison pills (defensive provisions that kick in if a buyer reaches a certain level of share ownership without top management approval)
1. executive compensation
one of the governance mechanisms used to align interests between principals and agents - stock options often included - average ratio of CEO to employee pay is 300:1 - about 2/3 of CEO pay is linked to performance - incentives can negatively affect performance
Exploitation
one of the things that has to be balanced in ambidextrous organizations: - applying current knowledge to enhance firm performance in the short term
Exploration
one of the things that has to be balanced in ambidextrous organizations: - searching for new knowledge that may enhance a firm's future performance
equity alliances
one partner takes partial ownership in the other
Founder imprinting
one source of organizational culture examples: Steve Jobs, Walt Disney, Michael Dell
Company values
one source of organizational culture - usually linked to a reward system
Functional organizational structure
organized according to domain expertise
global strategy
part of a firm's corporate strategy to: - gain and sustain a competitive advantage - compete against foreign and domestic companies
alliance management capability
partner selection and alliance formation alliance design and governance post-formation alliance management
non-equity allinace
partnerships based on contracts
2%
percent of all voice-calling minutes that are cross border: evidence for the fact that the world is only semi-globalized
18%
percent of internet traffic that crosses international borders: evidence for the fact that the world is only semi-globalized
9%
percent of investments that are foreign direct investments: evidence for the fact that the world is only semi-globalized
15%
percent of patents that list at least one foreign inventory: evidence for the fact that the world is only semi-globalized
3%
percent of world population that are immigrants: evidence for the fact that the world is only semi-globalized
why mergers take place
principal-agent problems, the desire to overcome competitive disadvantage, superior acquisition and integration capability
Input Controls
seeks to define and direct employee behavior through: - explicit, codified rules - standard operating procedures considered before employees make business decisions - example: a budget - managers allocate money to R&D projects before they begin
organizational cutlure
shared values and norms of an organization's members: - values: what is considered import - norms: appropriate attitudes and behaviors in day-to-day work interactions expressed through artifacts: - physical space (cubicles) - symbols (clothing) - events (celebrations) - vocabulary (stories that are told)
Changing organizational structures and increasing complexity as firms growth
simple structure --> functional structure --> multidivisional structure --> matrix structure
Formal building blocks of organizational design
structure
Matrix Structure and Global Strategy
structure fits well with TRANSNATIONAL strategy - international: functional structure - multidomestic: multidivisional structure - global-standardization: multidivisional structure - transnational: global matrix structure
develop internally
the firm's internal resources are highly relevant
Merger
the joining of two independent companies to form a combined entity. tends to be friendly
Corporate Governance
the mechanisms to: - direct and control an enterprise - ensure that it pursues strategic goals successfully and legally offers checks and balances and attempts to address the principal-agent problem
Organizational design
the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization key components: structure, culture and control
the current state of globalization
the world is only semi-globalized - level of globalization is 10-25% total
agency theory
theory that views the firm as a nexus of legal contracts: - conflicts that arise should be solved legally - the firm needs to design work tasks, incentives, and employment contracts... - to minimize opportunism by agents
Principal-Agent Problem
there is information asymmetry
Ambidextrous Organizations
this is a firm's ability to address trade-offs overtime and encourages strategic leaders to balance exploitation with exploration
why enter strategic alliances
to strengthen competitive position, enter new markets, hedge against uncertainty, access critical complementary assets, learn new capabilities
strategic allinace
voluntary agreement between firms that involves the sharing of: knowledge, resources, and capabilities to develop: processes, products, and services
retrenchment
what may occur in the future due to the rise in nationalism
use M&A
when extreme closeness is needed
Benefits of Functional Structure
works when a firm has a narrow focus and a small geographic footprint - cost leadership strategy (nurturing and upgrading core competencies) - differentiation strategy (incorporate decentralized decision making, foster innovation and creativity) - blue ocean strategy (firm should be efficient and flexible, focus is on controlling costs and fostering creativity, mitigate the disadvantages of this approach)
