Grant Contemporary Strategy Analysis, 11th Edition Solution Manual

Contemporary Strategy Analysis, 11th Edition By Grant

Email: Richard@qwconsultancy.com

Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 1. THE CONCEPT OF STRATEGY Introduction For my first class in a core course in strategic management, I have two major goals: •

To convey an appreciation of what strategy is—both in a business context and in other competitive arenas (sport, politics, warfare).

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To introduce the basic framework for strategy analysis – in terms of external analysis (the analysis of industry and competition) and internal analysis (primarily the analysis of resources and capabilities).

The main themes I emphasize are: •

How strategy can contribute to the success of organizations and individuals;

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The role of strategy as a link between the firm and its environment—which provides the basic framework for strategy analysis;

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The nature of strategy;

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How to identify and describe the strategy of a firm;

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How strategy is made within organizations;

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The distinctive features of strategic management among not-for-profit organizations.

Class Outline Even with the first class, I like to set the tone for the course by including a case discussion.

Getting students to prepare a case before the first class is often difficult--hence, I choose a company (or individual) that students are familiar with, or one whose essence can be communicated in a short video.

Cases I have used for my first session include:

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Lady Gaga and the Haus of Gaga. Her career is discussed in Strategy Capsule 1.2 of Chapter 1. Again, a music video offers a useful basis for discussing her image, her “product”, and her capabilities.

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Queen Elizabeth II and the House of Windsor. Her career is discussed in Strategy Capsule 1.1 of Chapter 1. Extracts from the Netflix series The Queen can be used to illustrate her role and her personal style.

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Peloton Interactive, Inc.: Creating New Market Space in the Home Fitness Sector. Case 1 in Contemporary Strategy Analysis (11e).

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Starbucks Corporation: Sustaining Competitive Advantage. Case 7 in Contemporary Strategy Analysis (11e).

In each of these cases, I follow a similar approach. I begin by asking: “What is the strategy of the organization/individual?” Then: “Why has the strategy been successful?”

What is the strategy? Offers the opportunity to establish the nature of strategy in terms of competitive positioning and as a direction for development. In terms of positioning, the issues are: Where are we competing? and How are we competing?

Why has the strategy been successful? Allows us to address issues of fit: fit with the external environment, fit with internal resources and capabilities, and fit in terms of coherence among the components of the strategy.

I typically allow the discussion to range freely, to encourage the participation of students and also to convey the notion that our class sessions are a joint venture in which leadership doesn’t come exclusively from me.

At the same time, it is useful to reserve plenty of time to enlarge upon and reinforce key issues that (hopefully) have emerged from the discussion. And, if they haven’t emerged, they can be introduced.

Two issues take center stage: 1. The nature of strategy. In none of the four cases I use did strategy exist as a detailed plan. Indeed, for Lady Gaga and Queen Elizabeth, it is doubtful whether there was a conscious appreciation of strategy, even at a cognitive level. For Peloton Interactive and Starbucks, the founders (John Foley and Howard Schultz, respectively) articulated the strategies of their organizations through principles, guidelines, and aspirations rather than through an agenda of specific actions.

This takes us to Mintzberg’s distinction between intended and emergent strategies. For Peloton and Starbucks, their realized strategies have been guided by the intended strategies that originated in their founders’ entrepreneurial visions and market insights.

For Lady Gaga and Queen Elizabeth, their strategies seem to be largely emergent: they are discernible ex post as a pattern within a stream of decisions and actions.

2. Appraising strategy: the notion of strategic fit. In my discussion of Queen Elizabeth and Lady Gaga (see chapter 1 of Contemporary Strategy Analysis), I show how their career success is based upon: • • • • .

Clear, consistent, long-term goals; Profound understanding of the business environment; Appreciation of resource and capabilities; Effective implementation.

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These four components form the basis of the strategy framework shown in Figure 1.1 of Chapter 1. They are also the primary modules of our strategy analysis, namely: goals and performance, industry and competitive analysis, the analysis of resources and capabilities, and strategy implementation (organizational structure and management systems).

Hence, in evaluating a firm’s strategy, the central issue is fit—particularly with its competitive environment and with its resources and capabilities.

In addition, strategic fit encompasses the internal coherence of a firm’s strategy—how well the individual decisions and actions of the firm complement one another. The elements of strategy and their interrelationships can be displayed as an activity system. For an example, see Chapter 1, Figure 1.3 which depicts Ryanair’s activity system.

I conclude the class by bringing the discussion back to individual strategy—specifically the strategic decisions students face for their future careers. I invite them to consider (a) whether they have strategies, (b) whether these strategies are implicit or explicit, and (c) how they might apply the ideas and framework outlined in the class (and in Chapter 1 of the book) to developing a career strategy. As an example of the application of strategy to managing one’s own life, I draw upon Stephen Covey’s Seven Successful Habits of Highly Effective People, inviting students to participate in the exercise he outlines at the beginning of the chapter on Habit #2: “Starting with the End in Mind.” This exercise involves imagining one is attending one’s own funeral and considering what you would like the different speakers at the funeral to say about you and your life.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 2. GOALS, VALUES, AND PERFORMANCE Introduction Given that strategy is about achieving success, how we define and measure performance is critically important for strategic management, hence, this is a topic that I address early in the strategy course.

My main goals in teaching this topic are for students to acquire: •

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Familiarity with the debate over the goals of the firm (in particular the main arguments for and against shareholder versus stakeholder goals) and the ability to link these different goals to different concepts and measures of value.

Familiarity with performance diagnosis – combining financial analysis with strategic analysis to assess a firm’s performance and to diagnose the sources of good or bad performance. Inevitably this requires drawing upon and reinforcing students’ knowledge of finance and accounting.

Class Outline The goals of the firm I begin by emphasizing that every business enterprise has a distinct purpose—whose origins are typically the founder’s vision.

However, common to all these different business purposes is the desire and the need to create value: produce goods and services that are more valuable than the inputs used in their production. The critical issue that distinguishes different beliefs concerning the goals of the firm is value for whom: •

Shareholder theory emphasizes creating value for the owners of firms;

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Stakeholder theory emphasizes value for all the firm’s stakeholders: owners, employees, suppliers, customers, and society at large.

While acknowledging the appeal of stakeholder value maximization, for the purposes of strategy analysis, I emphasize the merits of a profit-oriented approach—i.e. maximizing profit over the lifetime of the firm. My reasons are: (a) Long-run profit maximization typically requires sustaining commitment from other stakeholders and legitimacy within society—hence the quest for profit is entirely

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compatible with the pursuit of corporate social responsibility and environments sustainability; (b) Firms that persistently fail to generate satisfactory profits typically fall victim to hostile takeover or activist shareholders; (c) Most of our tools of strategy analysis are oriented either explicitly or implicitly to the quest for profit.

Performance diagnosis I emphasize that any strategic analysis must begin with an appraisal of the situation. The key element of this is an evaluation of the performance of the company and diagnosis of the sources of good or bad performance.

Students are typically keen to leap into strategy recommendation. I caution them to restrain this urge, and emphasize the need for diagnosis to precede prescription. The same for strategy as for medicine: a good doctor examines the patient before picking up the prescription pad!

It is usually best for a practical exercise to focus upon an underperforming company and use a better-performing competitor as point of comparison—for example, Kering vs. LVMH (see case below), FedEx vs. UPS, or EasyJet vs. Ryanair. The procedure is: 1. Evaluate overall performance in terms of profitability, growth, shareholder returns.

2. Investigate the sources of underperformance—typically disaggregating overall performance to locate businesses and geographical markets where underperformance is most apparent, and to disaggregate ratios to locate sources of inefficiency, weak pricing power, etc.

3. What changes in strategy and/or operational management might be deployed to address the problems that have been identified?

Cases Among the companies I have used as vehicles for exploring performance and linking financial and strategic analysis are: Kering SA: How Does Its Performance Compare to that of LVMH? (R. M. Grant, Contemporary Strategy Analysis 11th edn., Wiley, 2022).

The case focuses upon the diagnosis of a firm’s financial performance as a foundation for evaluating and developing its strategy. Kering SA is a French luxury and sports apparel company formerly known as PPR, a diversified retailing company. The acquisition of Gucci in 1999 marked the beginning of PPR’s transformation from a retailer into a diversified fashion, luxury,

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and sports apparel company, modelled closely on LVMH (Louis Vuitton Moet Hennessy). Yet, despite the similarities between the two companies, Kering has lagged behind LVMH in growth and profitability—although the gap has closed in recent years. The case challenges students to identify the sources of the performance gap, thereby allowing an evaluation of Kering’s strategy and a basis for recommendations as to whether Kering should modify its strategy (or its implementation).

Starbucks Corporation: Sustaining Competitive Advantage (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 11th edn., Wiley, 2022).

I use the Starbucks case, not to analyze financial underperformance (Starbucks’ financial performance has been spectacular!), but to consider the challenges of assessing shareholder goals vs. stakeholder goals. Despite outstanding profitability and a phenomenal return to shareholders since its IPO, Starbucks has aspired to be “a different type of company”: one that places its responsibilities to employees and society ahead of the interests of shareholders.

The case offers an opportunity to: (a) Discuss Starbucks’ goals: to what extent does Starbucks’ operate in the interests of its stakeholders rather than its shareholders? It is difficult to determine whether Starbucks’ employee benefits, its support for coffee growers, or its social outreach are expenses that reduce profits or are sources of profit. (b) Examine the reasons why Starbucks’ strategy has been so successful and the threats to that success in the future Walt Disney Company [A] (in David J. Collis and Cynthia A. Montgomery, Corporate Strategy: Resources and the Scope of the Firm, McGraw-Hill, 1997).

The early 1980s were a difficult time for Disney. Economic recession, heavy investment in Epcot and other new projects, and lack of management direction combined to depress Disney’s profitability and made it vulnerable to corporate predators. The situation requires that students appraise Disney’s performance and diagnose the sources of declining profitability. To what extent is this the result of depressed demand and high interest rates coinciding with a period of aggressive expansion, and to what extent are there deep-rooted management problems? These were the issues facing Michael Eisner as he took over as Disney’s CEO. [There are several other cases that deal with Disney during this period.]

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11h edn. Wiley, 2022)

CHAPTER 3. INDUSTRY ANALYSIS: THE FUNDAMENTALS Introduction Understanding competition—its determinants, and its implications for profitability—is a major component of any core strategy course. I like to introduce the tools of industry and competitive analysis early in the course.

My primary goal for the class sessions on industry analysis is that students acquire a clear and deep understanding of how industry structure influences competition and what this means for industry profitability.

Despite its limitations, I continue to make Porter’s Five Forces of Competition Framework the centerpiece of industry analysis. It’s an excellent starting point for recognizing the key features of an industry’s structure and understanding how industry structure can influence competition and profitability.

However, as with all areas of analytical frameworks, the value of the five forces framework is not as a theoretical model (its theoretical foundations are shaky); its value is as a practical tool for understanding why some industries are more conducive to profitability than others and how changes in industry structure will impact the overall level of profitability. Hence, it is critical for students to get practice in applying the framework to different industry situations so that they gain expertise in recognizing how industries differ in their basic structures and understanding what these differences mean for the intensity of competition and the overall level of profitability.

It is this practicality that justifies my continuing use of Porter’s Five Forces Framework in preference to more sophisticated and rigorous game theoretic approaches. For instructors who wish their students to gain expertise in applying the principles of game theory to competitive rivalry and to cooperative value capture, additional reading will be necessary, e.g.: •

Michael Ryall, “The New Dynamics of Competition,” Harvard Business Review, Vol. 91, June 2013, pp. 80-87.

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Adam Brandenburger and Barry J. Nalebuff, “Right Game: Use Game Theory to Shape Strategy,” Harvard Business Review, Vol 73 (4), July-August 1995, pp. 57-71.

Class Outline As with most topics in my strategy courses, I begin with a case discussion. Typically, an uncomplicated industry where structural changes have created uncertainty over the outlook for profitability in the future. The challenge for students is then to determine whether or not the

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industry is attractive for investment. Two industries I frequently use are the US legal marijuana industry and the global lithium-ion battery industry (see cases below). The principal topics that I address are: [A] The analysis and prediction of industry profitability. I follow the case discussion with a more systematic exposition of the Porter model, placing a lot of emphasis on industry rivalry and how an industry’s structural factors—in particular, firm concentration, product differentiation, excess capacity, exit barriers, and cost conditions—interact to determine the intensity of competition and overall level of profitability.

I then push students to use this framework to explain the reasons why profitability is what it is in different industries. Using evidence on inter-industry profit differences in Chapter 3 (Table 3.1), I ask students to select a high- or low-profit industry and explain the structural features of that industry that generate either high or low profitability. For example, why is it that pharmaceuticals and tobacco products earn such high levels of profitability? What is it about airlines, entertainment, telecommunications, telecom equipment, and forest products that causes profitability to be so low?

However, the primary purpose of industry analysis is not to explain past profitability but to predict future profitably. Hence, it is interesting to take a sector that is in the midst of rapid change (wireless telecommunications, automobiles, newspapers, recorded music, computer software, or TV broadcasting) and to ask how structural changes are likely to impact competition and profitability.

[B] Drawing industry boundaries. As soon as we move from a preselected industry to a specific company, the issue arises as to: What industry is it in? In the book chapter I discuss the case of Ferrari: is its industry motor vehicles, automobiles, or performance cars? What about the geographical scope of the industry: is it global, regional (Europe), or national (Italy)?

This question allows discussion of the role of substitutability in determining the boundaries of industries and markets. However, the key practical issues that emerge from this discussion are: (1) Different industry definitions are appropriate to different types of decision; (2) As far as Porter’s Five Forces analysis is concerned, where we draw industry boundaries is not critical: because we consider competition from outside the boundaries of the industry (entrants and substitutes), whether we define the industry narrowly or broadly is not a big issue.

That said, most conventional definitions of industries are too broad to explore the realities of competition at the firm level. As the book discusses, defining the arena within which Hong Kong Disneyland competes is a matter of judgment that cannot rely on conventional industry definitions.

[C] Implications for strategy. I draw two main implications for firm strategy:

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What strategies can firms adopt to change industry structure in order to lessen competitive pressure in an industry and improve industry profitability?

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How can a firm position itself within an industry in order to shelter from the forces of competition?

[D] Identifying Key Success Factors. I finish up by making the link with the analysis of competitive advantage by discussing key success factors (KSFs). This is likely to require revisiting the industry case study and posing the following questions—Which companies are the most profitable? What does this tell us about KSFs? This offers the opportunity to identify more systematically KSFs, by looking first at customers and how they choose between rival offerings; second, examining competition and how companies survive it (see Figure 3.6). It is also to look at how KSFs change over time. For example, in the world auto industry what factors will determine which companies will be most successful over the next five years?

Cases Pot of Gold? The US Legal Marijuana Industry (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 11th edn., Wiley, 2022) By 2021, the production and sale of marijuana for medical use was legal in most US states and for recreational use in 15 states. The result was a surge of venture capital investments in growing facilities, retail distribution, processed marijuana consumables, and infrastructure facilities and services.

However, amidst the surge of investment interest in marijuana-related businesses, one question remained unresolved: would the legal marijuana industry offer the high levels of profitability associated with other industries supplying controlled substances such as alcohol, tobacco and pharmaceuticals, or would the forces of competition cause the industry to offer the low returns typical of agricultural produce?

The Lithium-ion Battery Industry (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 11th edn., Wiley, 2022) During 2021, the manufacturers of lithium-ion batteries were expanding their production capacity in anticipation of the expected growth in the sales of electric vehicles (EVs). While the most publicized project was the Tesla/Panasonic “gigafactory” in Nevada, the bulk of new capacity would be built in China.

However, despite projections that EVs would soon overtake consumer electronics as the biggest users of lithium-ion batteries, demand projections were highly uncertain—it would depend not only on the rate at which EVs displaced petroleum-fueled vehicles, but also on the growing usage of batteries for storing solar and wind generated electricity.

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The outlook for profitability in the lithium-ion battery industry was further complicated by a number of additional factors. These included the availability of raw materials (notably lithium and cobalt) and battery components, the emergence of alternative battery technologies, the extent to which lithium-ion batteries would become a commodity product, and the role of the Chinese government.

The US Airline Industry in 2018 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019) [Note: this case is available from Wiley or from the author] Between 2012 to 2018, the US airline industry experienced an upswing in profitability that was a sharp contrast to the periods of depressed margins and frequent bankruptcies that had plagued the industry since deregulation in 1978. Did this mark a new era of prosperity for the industry, or was it simply another of the temporary upturns in profitability that would be followed by a return to the industry’s normal state of intense price competition, low margins, and equity destruction?

The case explores the factors that have driven competition among airlines, with the result that airlines were the least profitable of any major US industry over the past 30 years. The case outlines how the strategies of the airlines attempted to moderate price competition through mergers, frequent flier programs, limiting additions of new capacity, and building dominant positions at hub airports.

Looking ahead, the case asks whether the airlines’ recent success in avoiding over-investment and limiting fare competition points to a restrained approach to rivalry based upon learning from the errors of the past, or whether a return to intense competition and low profitability is the inevitable result of the airline industry’s economics.

Crown Cork & Seal Co., Inc. (Harvard Business School Case No. 9-378-024, 1978); or Crown, Cork and Seal in 1989 (HBS 9-793-035, 1993).

Although dated, this case provides a splendid opportunity to apply industry analysis— particularly Porter’s five forces of competition framework. The metal container industry is low growth, with limited product differentiation; it faces strong supplier and customer bargaining pressure and increasing competition from other types of packaging. This case is also valuable for: (a) Analyzing industry segmentation – although the industry as a whole is unattractive, competitive conditions and demand prospects vary greatly between segments. (b) Analyzing competitor behavior – an important issue for Crown Cork and Seal is that its major competitors are all diversifying: so does this signal less commitment to the metal container industry, and what then are the implications for Crown Cork and Seal’s competitive strategy?

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Offshore Drilling Industry (Harvard Business School Case No. 9-799-111, 1999) The case examines the structure of the offshore drilling industry and its competitive behavior with particular emphasis on the cyclical pattern of prices and profitability.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (10th edn., Wiley, 2019)

CHAPTER 4.

FURTHER TOPICS IN INDUSTRY AND COMPETITIVE ANALYSIS Introduction Chapter 3 on industry analysis concentrates upon presenting and applying Porter’s Five Forces of Competition framework. As was noted, the Porter framework has its limitations. The purpose of Chapter 4 is to address some of these limitations and to expand the scope of our analysis of industry and competition.

Typically, I do not devote a separate class to the topics included in Chapter 4—my approach is to address the topics, concepts, and frameworks that the chapter addresses when they arise in different case discussions. For example: •

The role of complements and the implications for network externalities and “platformbased competition” are discussed in the cases on video games (“Video Game Console Industry in 2018”*) and Google (“Google is Now Alphabet—But what’s the Corporate Strategy?”).

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Core concepts in game theory concepts—such as preemption, deterrence, commitment, signaling, and cooperation—arise in the cases on Starbucks (“Starbucks Corporation: Sustaining Competitive Advantage”), Walmart (“Walmart Inc. in 2018: The World’s Biggest Retailer Faces New Challenges”*), and Tesla (“Tesla: Disrupting the Auto Industry”*).

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Competitor analysis arises in the video games (“Video Game Console Industry in 2018”).

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Segmentation is a major theme in my case on Harley-Davidson (“Harley-Davidson, Inc. in 2018”).

The learning objectives of Chapter 4 are for students to be able to: •

Recognize the limits of the Porter Five Forces framework—especially , where industry structure is unstable or where a single firm can scoop the whole profit pool (“winner-takeall” industries);

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Extend industry analysis to include the role of complements, business ecosystems, and business models;

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Understand competitive interaction, applying insights from game theory and the tools of competitor analysis;

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Apply segmentation analysis strategic group analysis in order to analyze industries at a more disaggregated level.

Copyright © 2019 John Wiley & Sons, Inc.

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Class outline I suggest focusing the class session either on the competitive dynamics of industries based on digital technologies that are subject to product complementarity, platform-based competition, and network externalities or competitive rivalry in industries dominated by two or three leading firms.

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Industries based upon digital technologies. E-commerce and digital technology markets tend to be complex ecosystems involving bundles of complementary products and services: hardware, operating systems, applications, and peripherals. As a result, they feature network externalities and platform-based competition that can result in convergence towards a single dominant firm. Video game consoles, smartphones, video and audio streamed entertainment, payment systems all offer rich opportunities for exploring these competitive dynamics.

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Highly concentrated industries offer the opportunity to address issues of competitive interaction between pairs (or small groups) of firms: see for example, the cases on CocaCola/Pepsi-Cola, Walmart/Amazon, Boeing/Airbus, and NutraSweet/Holland Sweetener.

A key issue that instructors need to consider in planning their teaching on competitive rivalry is how far to introduce concepts and techniques of game theory. Much depends on how much game theory they have covered in their microeconomics course and whether or not this has preceded the strategy course. For instructors who want student to apply game theory concepts to real world examples a number of good cases are available.

Cases The Lithium-ion Battery Industry (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 11th edn., Wiley, 2022) This case spans Chapters 3 and 4 in term of the concepts and ideas it draws upon. The case can be used as a straightforward application of the Porter five forces framework (Chap.3) and it also draws upon the notions of complementarity, business ecosystems, and competitive rivalry (especially the influence of government policy given that most industrial nations have designated batteries a “strategic sector”. Of especial relevance is the role of the Chinese government given the powerful leadership it provides to both state-owned and privately-owned companies in China. .

Copyright © 2019 John Wiley & Sons, Inc.

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E-commerce and digital industries involving complements, ecosystems, and network externalities Streaming Wars: Netflix versus Disney (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 11th edn., Wiley, 2022). I wrote this case primarily as an exercise in resource/capability analysis. However, the entry of Disney into the Netflix-dominated subscription video streaming market provides a marvelous opportunity to examine competitive rivalry in a market that features network externalities, hardware/software complementarities, early-mover advantage and global market segmentation.

Video Game Console Industry in 2018 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019). I use this case primarily for the analysis of competitive advantage in technology-intensive industries (Chapter 9), however, the case can also be introduced for the purposes of analyzing industry and competition. The key feature of the sector is the linkage between hardware (consoles) and software (games). Most of the revenue and profit is derived from the software. In the past, through controlling technology, the console manufacturers were able to appropriate a major portion of the profits from software. However, a shift of power towards game developers and publishers and competition from mobile devices has fundamentally changed the dynamics of competition.

Uber vs. Didi: The Race for China's Ride-hailing Market (Insead Case No. IN1306. 2016).

Ride sharing using mobile apps is a classic platform-based market that features strong network externalities. The competition between global leader, Uber, and indigenous rival Didi reveals the dynamics of such competition and the implications for strategy formulation.

Cases Dealing with Dynamic Aspects of Competition Looking beyond the Porter five forces analysis calls for a competitive analysis that is more dynamic and recognizes the key role of specific competitors and their interactions. Several cases provide rich accounts of the competitive dynamic between fiercely competitive duos: Cola Wars Continue: Coke vs. Pepsi in the Twenty-First Century (Harvard Business School Case No. 9-702-442, 2002) A classic situation for exploring the competitive interactions between two industry-dominating players in the fiercely competitive yet highly profitable market for cola drinks. It is an excellent case for the analysis of industry structure and industry attractiveness, the impact of structural changes on competition, and competitor analysis.

Walmart Inc. takes on Amazon.com (Harvard Business School Case No. 718481, May 2018) The emerging rivalry between Walmart and Amazon is a fascinating illustration of how digital technologies and strategic ambition can bring two companies, once in distinctly separate markets, into rivalry with one another. The case provides fascinating insights into competitive initiatives involving signaling, preemption, alliance formation, and cross-subsidization within a global arena.

Copyright © 2019 John Wiley & Sons, Inc.

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Boeing and Airbus: Competitive Strategy in the Very-Large-Aircraft Market (Kellogg School of Management Case No. KEL022-PDF-ENG, 2006) Competition between Boeing and Airbus in the market for very large commercial jets is a classic case of duopoly rivalry in a market where economies of scale are so great that the market seems too small to support two firms. This creates interesting market dynamics where signaling and preemption have an important influence on competitive advantage.

Dogfight over Europe: Ryanair [A] (Harvard Business School Case No. 9-700-115, 2000).

Ryanair’s decision to expand its routes puts it into direct competition with British Airways and Aer Lingus. How will these giants respond to tiny Ryanair’s entry into their lucrative Dublin–London route? The case offers a good opportunity to undertake competitor analysis and predict competitive responses.

Bitter Competition: The Holland Sweetener Co. vs. NutraSweet [A] (Harvard Business School Case No. 9-794-079, 1994).

The case examines the competitive interaction between Monsanto’s NutraSweet subsidiary and newcomer Holland Sweetener in the market for aspartame. The case supports the application of a number of game theoretic concepts, including preemption, signaling, and prisoners’ dilemma

Copyright © 2019 John Wiley & Sons, Inc.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 5. ANALYZING RESOURCES AND CAPABILITIES Introduction Resources and organizational capabilities (or “competencies”) are important both as a foundation for strategy formulation and the primary source of a firm’s competitive advantage. The resourcebased approach to strategy has been one of the most important theoretical streams of the 1990s and a major influence on strategic thinking and strategic planning among companies. A distinguishing feature of Contemporary Strategy Analysis is the emphasis it has given to resources and capabilities as the basis for competitive advantage. My approach is to focus on practical applications of resource/capability analysis.

Specifically, Chapter 5 deals with the following topics: •

The concept of resource-based and capability-based strategies.

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The distinction between resources and capabilities. The key categories of resource. The nature of organizational capability.

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How to identify and appraise a firm’s resources and capabilities.

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Formulating strategies that can best exploit a firm’s resources and capabilities.

In teaching resource and capabilities, I place little emphasis on teaching the resource-based view of the firm (RBV) as a body of theory and focus more on how to put resource and capability analysis into action. This involves three major stages: • • •

How to identify a firm’s resources and capabilities How to appraise their potential for establishing competitive advantage How to derive strategy recommendations from this appraisal.

Class Outline I use Streaming Wars: Netflix versus Disney to apply resource and capability analysis, The case is valuable for reinforcing the point that business success is typically not a result of deploying superior resources and capabilities, it’s about tailoring strategy to a firm’s particular resource/capability profile in order to deploy a firm’s relative strengths to the greatest effect. Netflix and Disney are very different companies with very different resources and capabilities. The point of the case is not to predict which will be more successful in the video streaming market, but to show how these different resources and capabilities are encouraging each to take a very different approach to competing on this market.

In the past I have used Walmart and Harley-Davidson as my key resource analysis cases. In the case of Walmart I focus on the principal functions and value-chain activities of Walmart in order to .

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diagnose the sources of Walmart’s competitive advantage and then consider the sustainability of this advantage. In the case of Harley-Davidson, I begin with the motorcycle industry and its key success factors in order to identify the resources and capabilities that are important in this industry, then appraise Harley’s relative strengths in these. The primary goal being to show the way in which the company’s strategy is closely tailored to its narrow, yet distinctive, set of superior resources and capabilities.

However, each of these three cases involves some core common tasks: • • • • •

Identifying the principal resources and capabilities Assessing their strategic importance in terms of the two major determinants of imitability: transferability and replicability Assessing the strength of the company in these resources and capabilities relative to competitors Linking the resource analysis to the strategy being pursued Assessing the sustainability of the firm’s competitive advantage.

In following up the case discussion, I proceed as follows: 1. I ask students which should be the primary basis for formulating strategy: The external market (customer requirements in particular) or the firm’s resources and capabilities? Here I draw upon examples of companies whose strategy has been based upon developing a set of capabilities, then applying them to different product markets: Canon, Honda, 3M, LVMH, Amazon. My main argument here is that, when markets are volatile, internal strengths may offer a more secure foundation for strategy than customer needs. (Hamel and Prahalad’s notion of the “core competence of the corporation” is useful here.)

2. I emphasize the distinction between resources and capabilities—companies may acquire the resources, but this doesn’t guarantee capabilities. Sports teams are useful examples in this regard—several professional sports teams have talented and expensive players but have not converted these into outstanding team-based capabilities (the converse too is often true).

One conclusion is clear: we don’t know a great deal about the determinants of organizational capability.

3. In terms of reinforcing the approach to resource and capability analysis applied in the case discussion, I go over systematically the principal stages of the analysis: a. In identifying the resources and capabilities of a firm, I outline two approaches: the externally-focused approach starts with Key Success Factors in the industry then asks what resources and capabilities are needed to meet these success factors; the internally-focused approach begins with the firm’s value chain and identifies the capabilities and resources for each major value chain activity. b. The next stage of applying resource and capability analysis is to appraise the firm’s resources and capabilities that can then be appraised in terms of their strategic

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importance and relative strength. The resources and capabilities can then be shown on a single chart (see Chapter 5, Figure 5.8). c. The purpose of this analysis is to generate strategy implications. Here students readily identify the potential for building upon weaknesses in resources and capabilities. Perceptive students will inquire into the possibility of outsourcing activities where the firm’s capabilities are weak. But the key area of strategy is the exploitation of strengths. In which market segments, in relation to which customers are a firm’s resource and capabilities strengths likely to be most effective? What are the implications for how the firm should compete?

Cases To the extent that almost all cases present issues of competitive advantage, then almost all cases require some identification and appraisal of the resources and capabilities of the firm in relation to those of competitors. However, in several cases, the characteristics of the companies and their strategic situations, place especially heavy emphasis on resources and capabilities.

Streaming Wars: Netflix versus Disney (R.M. Grant, Contemporary Strategy Analysis 11th edn.

Wiley, 2022). The launch of Disney Plus on November 12, 2019 marked the beginning of the “streaming wars”. Until then, streamed video entertainment had been dominated by Netflix, which had launched its streaming service in 2007. The different histories of the two companies were reflected in their different portfolios of resources and capabilities. Netflix is the epitome of the newmedia entertainment company. Although its origins were in mail-order DVD rentals, from the start its strategy had been guided by algorithms and data analysis. Its leadership in streamed entertainment reflects the effectiveness with which it deployed its digital capabilities. s Disney is the giant among diversified old-media corporations. Its dominance of family entertainment has involved assembling a broad array of content assets and multichannel distribution.

These different resource and capability profiles have important implications for the strategies through which each company pursues its ambitions in streamed video entertainment and for the market positions that each would occupy. This analysis permits insight into the current strategies being pursued by the two companies and a basis for recommendations as to how each can refine and adapt its future strategy.

Walmart Inc. in 2018: The World’s Biggest Retailer Faces New Challenges (R.M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn. Wiley, 2019. Also available from Wiley and from the author) The focus of the case is on the challenge of sustaining Walmart’s remarkable performance given its immense size and complexity and the increasing pressures it faces—not only from competition across an ever-broadening front—but also labor unions, governments, and NGOs. To make recommendations about whether and how Walmart should adjust its strategy requires insight into the basis of Walmart’s competitive advantage. The case allows students to identify .

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and assess Walmart’s resources and capabilities through reviewing its main functions and major operating activities, including purchasing, distribution and warehousing, in-store operations, marketing, information technology, human resource management, and management decision processes. By reviewing Sam Walton’s leadership and the business values and principles that he instilled, the case places a strong emphasis on the role that Walmart’s corporate culture plays in its organizational capabilities. Although Sam Walton died in 1992, these values and principles are central to Walmart’s management system and its identity.

By outlining the basis of Walmart’s competitive advantage, the case poses the issue of whether Walmart will be able to sustain its competitive advantage into the future in the face of increasing size, continued success, internationalization, and—most of all—the challenge of e-commerce and Amazon in particular.

Harley-Davidson, Inc. in 2018 (R.M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn. Wiley, 2018. Available from Wiley or from the author) Harley-Davidson offers a highly effective context for applying the framework of resource and capability analysis. A key lesson from Harley-Davidson is that, despite weaknesses in many critical resources and capabilities—technology, purchasing, manufacturing efficiency, global distribution— Harley has done a brilliant job of leveraging its brand and unique position in American culture in establishing itself as the world’s most profitable motorcycle company. However, the Harley now faces the challenges of a shrinking market for motorcycles and the aging of its core customer segment: American, male, baby-boomers. Can Harley extend its competitive advantage from the US market for heavyweight cruiser and touring motorcycles into international markets and lighter weight motorcycles? It faces the dilemma that “core capabilities are also core rigidities.”

Manchester United: Preparing for Life without Ferguson (R.M. Grant, Contemporary Strategy Analysis: Text and Cases, 8th edn. Wiley, 2013. Available from Wiley or from the author) Between 1990 and 2013, Manchester United was one of Europe’s most successful football clubs both commercially and in terms of team performance. The primary architect of its success over this period was team manager (coach) Sir Alex Ferguson. The case requires students to identify the resources and capabilities most important to team success in professional soccer. The critical issues concern the determinants of team capabilities: are these determined primarily by the availability of quality resources (players in particular), or by the way in which resources are integrated into organizational capabilities?

On the basis of this analysis, students can address the situation that will following from Ferguson’s imminent retirement. What does ManU need to do in order to maintain its success in European professional soccer against star-studded clubs such as Real Madrid and Barcelona and much wealthier clubs such as Chelsea and Manchester City.

Walt Disney Company.

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Disney is a particularly interesting company for addressing the exploitation of its rich trove of resources and capabilities. Disney possesses unrivalled tangible and intangible resources and its turnaround during the 1980s under Michael Eisner and Frank Wells is an example of an effective resource-based strategy—notably the deployment of Disney's film library, land assets, reputation, and characters. There are several cases dealing with Disney, I recommend Walt Disney Co.: The Entertainment King (Harvard Business School Case No. 701035-PDF-ENG. Reprinted in: D. Collis & C. Montgomery, Corporate Strategy, 2nd edn. McGraw-Hill, 2001.)

Airborne Express (A) (Harvard Business School Case No. 9-798-070, 1998).

Although profitable, Airborne Express is considerably smaller than its two major rivals UPS and Federal Express. The case allows an assessment of Airborne’s resources and capabilities relative to those of FedEx and UPS and an assessment of its potential for survival and competitive advantage in relation to these giants.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 6. ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS: THE FUNDAMENTALS OF STRATEGY IMPLEMENTATION Introduction Over the years I have struggled with how to teach strategy implementation. In common with most strategy scholars and teachers, I accept that strategy formulation and strategy implementation cannot be separated. At the same time, I recognize that there are concepts, theoretical principles, and management tools that are specific to issues of implementing strategy. Hence, Chapter 6 addresses the concepts, principles, and tools that are pertinent to issues of strategy implementation. While subsequent chapters of the book address particular dimensions and contexts of strategic management, Chapter 6 addresses strategy formulation and implementation in an integrated fashion.

Fortunately, the design of most management and business studies programs means that the subject matter of strategy implementation is addressed in other courses (e.g. courses in organization theory and design, organization behavior, human resource management, operations management, finance, and marketing). Hence, my treatment of strategy implementation tends to be restricted to the front line of strategy execution: •

The role of strategic planning systems in linking strategy making to resource allocation and performance management

•

The design of organizational structure and management systems.

In addition, I place a major emphasis on the role of organizational capabilities in strategy implementation. Organizational capabilities (as we have seen in Chapter 5) provide a foundation for formulating strategies that can confer competitive advantage. Yet, organizational capabilities also form the essence of strategy implementation: it is only through developing the capacity for action that strategy can be implemented.

The key areas of learning that I try to cover in this session are: •

The processes of strategy execution: how is strategy—as formulated in strategic planning processes—translated into action? Here I look in particular at the role of capital expenditure budgets, operating plans, and performance management systems.

•

The fundamental problem of organizing: how to reconcile specialization with coordination and cooperation.

The need for organizational capability in order to implement strategy and the role that resources, processes, motivation, and structure play in developing capabilities.

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•

The principles of organizational design and their application—including contingency approaches to organization design: what types of structures and systems are suited to particular contexts?

Class Outline Because the domain of strategy implementation is so broad (potentially, it encompasses the whole of management!), my choice of case study determines the range of issues I address and concepts I introduce in this class.

For example: •

The BP case raises issues of contingency: to what extent is the organizational structure and system of performance management that was instituted by John Browne a contributory factor in BP’s appalling history of safety failures during 2005-2009 and, more generally, how well-suited was this management system built around decentralization, entrepreneurial initiative, and strong short and medium-term performance incentives to the needs of the oil and gas industry?

•

The sports sector offers some penetrating insights into the role that organizational structure and well-developed processes play in nurturing team capabilities. My cases on Manchester United, City Football Ltd, and British Cycling, reinforce the realization that the best human resources are insufficient for building world class organizational capabilities—sustained success requires the processes, the motivation, and the structures that not only create the necessary coordination and cooperation, but also nurture the underlying resources.

•

The management consulting industry allows to understand how the evolution of firm strategies has consequences for how consulting firms are organized. Until late the final decade of the 20th century, management consulting firms were organized around geographical units and project teams. As the need for specialist knowledge increased and the firms sought to develop more specialized and sophisticated capabilities, so they need to find ways to retain and share experience-based learning and engage in R&D. As a result, so the basic organization of project teams and local offices was overlain by industry practices (e.g. energy, financial services, telecom), competency-based practices (e.g. strategy, marketing, change management, IT), and communities-of-practice. (The HBS Booz Allen Hamilton case offers excellent illustration of this evolution.)

Cases BP: Organizational Structure and Management Systems (R.M. Grant, Contemporary Strategy Analysis, 11th edn. Wiley, 2022) The disastrous explosions at BP’s Texas City refinery and its Macondo oil well in the Gulf of Mexico have drawn attention to the organizational structure and management system created at BP by

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former CEO John Browne. To what extent did Browne’s “new model” of an oil major create the conditions for these accidents and was this model appropriate ot the industry in which BP competed?

City Football Group: Building a Multinational Soccer Enterprise (R.M. Grant, Contemporary Strategy Analysis, 11th edn. Wiley, 2022) City Football., the parent company of Manchester City Football Club, has adopted a novel approach to building competitive advantage in the professional soccer. City Football’s ownership of six clubs on five continents and creation of a structure and management systems to exploit its superior global reach, challenges the business models of independent ownership that has dominated European soccer—and most professional sports leagues. The points to the role of processes and structure in creating organizationally-embedded capabilities that can be replicated and adapted in different geographical locations Manchester United: Preparing for Life without Ferguson (R.M. Grant, Contemporary Strategy Analysis: Text and Cases, 8th edn. Wiley, 2013. Available from Wiley or from the author).

Although this case is primarily concerned with the sources of competitive advantage in professional soccer, at its heart are issues of organization: the structure of the club, the allocation of decision rights, organizational processes, and motivation. The case offers penetrating insight into the role of these organizational factors in supporting team capabilities. It is interesting to compare the effectiveness of these organizational factors at ManU (and FC Barcelona) with clubs that have failed to achieve such organizational alignment (Chelsea, Inter Milan, and Real Madrid—and also ManU since the retirement of Ferguson).

Procter & Gamble’s Organization 2005 Project (R.M. Grant, Cases to Accompany Contemporary Strategy Analysis, 7th edn. Wiley, 2008. Available from Wiley or from the author).

In June 2000, Procter & Gamble’s newly appointed CEO A. G. Lafley faces a critical decision: whether to endorse or cancel “Organization 2005”, a far-reaching program of organizational restructuring launched by his predecessor.

P&G’s international operations were traditionally organized by national subsidiaries and regional headquarters. Over time P&G has moved to a matrix structure where the geographical structure has been overlaid by global product divisions. “Organization 2005” involves a shifting of financial and strategic decision-making power from its geographical units to its product divisions in order to encourage innovation and cost efficiency.

Reorganizing the Royal Dutch Shell Group. (Available from the author).

The Shell Group is one of the world’s largest and most complex organizations. During the early 1960s under the guidance of McKinsey & Company it adopted a matrix structure. The 200 or so operating companies were coordinated through regional, sectoral, and functional units. By the early 1990s the Group was becoming increasingly unwieldy. The challenge for a new task force combining senior Shell executives with McKinsey consultants was to design a new structure that would

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improve coordination between the operating companies, permit more effective financial and strategic control, and reduce costs – especially at the two corporate headquarters in London and The Hague.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 7. THE NATURE AND SOURCES OF COMPETITIVE ADVANTAGE Introduction Chapter 7 integrates and extends the analysis of competitive advantage that was introduced in Chapter 3 which discussed the external sources of competitive advantage—namely, industrylevel key success factors—and Chapter 5 which discussed the internal sources of competitive advantage—namely the resources and capabilities which provide the foundation for superior performance. Chapter 7 examines the conditions under which competitive advantage arises and is then eroded by competition. This dynamic approach to competitive advantage provides an opportunity to address strategic innovation, including the design of novel business models.

The chapter then examines the two main dimensions of competitive advantage—cost advantage and differentiation advantage—outlining frameworks for identifying the potential for cost and differentiation advantage.

Class Outline Given that I will have taught the principal inputs into the analysis of competitive advantage when discussing industry analysis and the analysis of resources and capabilities, this topic requires little in the way of conceptual exposition. Hence my focus for this topic is upon case discussion. The chapter comprises three main sections (see [1], [2], and [3] below), however, given time constraints, I typically select a case that addresses just one (or, at most, two) of these areas, .

[1] Creating and Sustaining Competitive Advantage The role of strategic innovation in creating new sources of competitive advantage in an industry is one of the most rewarding and engaging topics in a strategic management course. The success of companies such as Starbucks, Netflix, Capital One, Inditex (Zara), Patanjali Ayurved, and Chipotle has been based, not on novel technology, but novel strategies. A number of concepts and frameworks can help us both to understand how these novel strategies were created and why they were successful, and to guide us towards strategic innovation in other situations. These include business model innovations and blue ocean strategies.

Cases: Starbucks Corporation: Sustaining Competitive Advantage (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022).

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Starbucks is a splendid example of a company that has transformed an industry though a business model that situates superior coffee beverages within a meticulous designed consumer experience. In creating the “Starbucks experience,” the company combines a number of tangible and intangible elements from the coffee, to the ambiance of the Starbucks stores, to human resource management, to corporate social responsibility. However, the case also addresses the sustainability of Starbucks success—to what extent does the company’s expansion and diversification within a maturing market threaten the basis of its success?

Peloton Interactive, Inc.: Creating New Market Space in the Home Fitness Sector (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022).

Peloton Interactive’s internet-connected exercise bikes and treadmills became a sensation during 2019-2021, their popularity enhanced by the COVID-19 pandemic which closed most gyms and fitness clubs. With its streamed instructor-led classes and potential for users to compete with and interact with another, Peloton inaugurated a new era in home fitness. The case. The case allows an identification of Peloton’s strategy—including as recognition of the distinctiveness of its business model and an analysis of how this strategy allowed Peloton to establishing a competitive advantage over the market incumbents. The case offers an excellent application of the principles of “blue ocean” strategy.

The case challenges students to assess the sustainability of Peloton’s competitive advantage— Why do competitors have difficulty imitating Peloton’s strategy? What are the “barriers to imitation” and “isolating mechanisms”? Key factors here ate the complexity of Peloton’s strategy (including the integration of hardware and software, it’s early-mover advantage in preempting the market for connected exercise equipment, its network externalities, and its brand appeal.

[2] Cost Advantage Depending on the length of the course, I take one of three approaches to the analysis of cost advantage: • I may devote an entire class session to cost advantage in which case I use one of the cases listed below. Airlines are particularly suitable for exploring cost advantage: the data included in their financial statements allows detailed comparisons of different cost drivers.

• If time does not permit, I use half of a class session to expound the framework for cost analysis using examples to apply the concepts; • Alternatively, I sometimes cover cost and differentiation advantage as a single topic. For example, the Harley-Davidson case is primarily concerned with the analysis of differentiation advantage. However, the case can also be used to explore the sources and extent of Harley’s cost disadvantage (especially relative to Honda which produces

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twenty times as many bikes annually) and to suggest ways of minimizing Harley’s cost disadvantage.

The two main components of the framework for cost analysis outlined in Chapter 7 are: 1. The factors which cause one firm’s unit costs to differ from those of its competitors (“cost drivers”). In relation to each of the cost drivers, I ask the students for an example of a firm that derives a cost advantage from this particular driver. For example, in relation to scale economies, Toyota (8.5 million cars per year) gains considerable advantages in purchasing, new product development, manufacturing, and marketing over BMW (1.5 million cars per year). In relation to input costs (especially labor costs), Tata Motors has an advantage over VW—simply because of location.

2. The value chain. Again, I focus on an example. For example, in relation to commercial aircraft production, I ask the class to outline the main stages of a value chain, then identify at which stages the major opportunities for obtaining cost advantage occur (similar to the case of automobile manufacture in Figure 9.4).

Cases AirAsia: The World’s Lowest Cost Airline (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

The low-cost airlines offer an excellent opportunity for the analysis of cost advantage. Cases on Southwest and Ryanair are widely used on strategy courses. AirAsia offers an interesting alternative to these two better-known airlines—especially given that Malaysian-based AirAsia has the distinction of having the lowest cost per passenger per kilometer flown of any of the world’s larger airlines. Through comparisons of costs with its larger rival, Malaysian Airlines, the case allows exploration of the sources of AirAsia’s cost efficiency. It also examines AirAsia’s expansion into long-haul flights—which risks compromising the simplicity and consistency of AirAsia’s business model.

Southwest Airlines 2002 (Thunderbird Graduate School of International Business, Case No. A0702-0009, 2002) The case provides cost and efficiency data on the US airline industry, on Southwest, and on the established airlines that allow examination of the basis of Southwest’s superior efficiency and lower cost per seat-mile. Southwest has been the most profitable of the US airlines. The case d considers the sustainability of Southwest’s competitive this advantage in the face of plans by other airlines to create their own budget airline subsidiaries. See also Southwest Airlines – 1993 [A] (Harvard Business School Case No. 9-694-023, 1997).

Airborne Express [A] (Harvard Business School Case No. 9-798-070).

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Airborne Express is in a difficult competitive situation relative to its two major rivals, UPS and Federal Express. The case allows an assessment of Airborne’s competitive position relative to those of FedEx and UPS and offers the opportunity to consider Airborne’s potential for cost competitiveness in the face of the scale and network economies available to FedEx and UPS. Wal-Mart Stores, Inc. (by S. Bradley, P. Ghemawat, S. Foley, HBS Case No. 794024-PDF-ENG, 1994) .

Walmart is an especially interesting company to probe the sources of competitive advantage, in particular, its ability to establish an unassailable cost advantage together with its remarkable flexibility and responsiveness. This the Harvard case is especially appropriate for analyzing Walmart’s cost advantage because of the rich cost data it offers.

[3] Differentiation Advantage I devote more time and attention to the topic of differentiation advantage than I do to cost advantage, partly because differentiation advantage tends to be more sustainable than cost advantage, partly because differentiation offers greater scope for innovation, insight, and the exploitation of uniqueness, and partly because differentiation advantages brings us face to face with some central concepts of strategy including coherence and identity.

The analysis of differentiation advantage is concerned with identifying opportunities for matching the demand-side desire for differentiation with the supply-side potential for the firm to create uniqueness in its offerings. A key feature of this matching process is exploring linkages between the value chain of the firm and that of its customers.

My major goal for the session on differentiation advantage is for students to recognize how opportunities for profitable differentiation can be identified through bringing together the demand side of differentiation (customers’ preferences for product characteristics) with the supply side of differentiation (a firm’s capacity for creating unique attributes in its offerings).

I begin with a case discussion—typically Harley-Davidson. Inevitably this case discussion goes well beyond the issues raised by the analysis of differentiation advantage covered in Chapter 7.

In particular, the Harley case raises some fascinating issues in the analysis of resources and capabilities: how is it that a company which at the time of its initial buyout was near bankrupt and producing a mere 45,000 motocycles a year could establish itself as the world leader in heavyweight motorcycles and the most profitable motorcycle producer on earth? The key is in creating a highly focused, exceptionally well-integrated strategy that exploited its few resource strengths. This leads on to a fuller consideration of the specifics of its differentiation strategy, and the challenges it faces looking ahead.

In terms of the issues I draw from the class discussion, I place particular emphasis on developing the value chain analysis of differentiation advantage applying the same framework as in Strategy Capsule 10.2.

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Cases: Chipotle Mexican Grill, Inc.: Disrupting the Fast-Food Business (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

Chipotle is the most successful new fast-food company in recent decades. It offers fertile ground for exploring two key aspects of competitive advantage: •

Strategic innovation—creating a new business model for the fast-food industry based upon fresh, wholesome, sustainably sourced ingredients;

•

Differentiation advantage.

Among the strategic issues that Chipotle’s success raises is the sustainability of its competitive advantage—how easy is it for other restaurant chains to imitate Chipotle’s “fast casual” dining experience and its emphasis on wholesome, sustainably sources ingredients?

Harley-Davidson Inc., 2018 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019).

At the heart of Harley-Davidson’s superior performance in the motorcycle industry is its creation of a unique position of differentiation based upon the resources where it trumps all its rivals: image and heritage. At the heart of H-D’s differentiation advantage is the core recognition by the company: H-D is not supplying motorcycles, it is supplying an experience.

The case offers the basis for comprehending the appeal of this strategy and the means through which H-D has nurtured and delivered this experience.

The case offers an excellent opportunity for applying the value chain analysis of differentiation advantage outlined in Strategy Capsule 7.8. “Using the Value Chain to Identify Differentiation Opportunities for a Manufacturer of Metal Containers” in Chapter 7 of Contemporary Strategy Analysis. This provides students with the opportunity for identifying further opportunities for HD to create value for its customers.

Although the emphasis of the H-D case is the analysis of differentiation advantage, H-D also offers opportunities for applying the tools of cost analysis. Despite H-D’s superior profitability and its big price margin over rivals that produce lookalike V-twin cruisers, H-D needs to ensure that its price premium is not eaten up by diseconomies of scale. How can a company producing around 280,000 motorcycles annually avoid a widening cost gap with volume manufacturers such as Honda with production of over 12 million bikes a year? The case can be used to apply value chain analysis both to cost and differentiation analysis.

Starbucks Corporation: Sustaining Competitive Advantage (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022). Starbucks is a master of differentiation advantage.

Like Harley-Davidson, Starbucks is in the business of selling a customer experience rather than a

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product. Its strategy of creating the “Starbucks experience” combines a number of tangible and intangible elements from the coffee, to the ambiance of the Starbucks stores, to human resource management, to corporate social responsibility. However, the case also raises several issues concerning the sustainability of Starbucks competitive advantage.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 8. INDUSTRY EVOLUTION AND STRATEGIC CHANGE Introduction Change is a feature of all business situations. This chapter takes a systemic view of the principal forces of change—especially technology and demand; it develops implications for how industries evolve and considers the challenges of managing strategic change.

The key learning goals for this chapter are for students: To understand the factors that drive industry evolution and recommend strategies appropriate to the different stages of the industry life cycle.

To understand the sources of organizational inertia, the process of organizational evolution, and the challenges of technological change.

To become familiar with different approaches to managing strategic change including: organizational ambidexterity, scenarios, crisis management, capability development, dynamic capabilities, and knowledge management.

However, in addressing this topic in class, I tend to focus upon a subset of these issues and objectives—this subset being determined primarily by the case I choose for exploring industry evolution and the management of change.

Class Outline In teaching this topic I use a case study of a firm that is grappling with the implications of a radically changing industry environment. The threat posed by digital technologies to established companies offer excellent illustrations of the challenges of disruptive technologies, competence-destroying innovations, and architectural innovation. I have two case studies that address these issues: Eastman Kodak and The New York Times. While the New York Times’ efforts to adapt to the world of digital news production and dissemination appear (in 2018) to be showing signs of success, Kodak failed miserably in its mission to become a leader in digital imaging (it entered Chapter 11 bankruptcy in 2012)—yet there is still tremendous insight to be gained from examining its strategy, the reasons for its failure, and alternative strategies that it might have pursued.

My teaching of the management of strategic change places a major emphasis on the challenges of developing new organizational capabilities. (Hence, these cases can also be used to apply the concept of dynamic capability).

I follow up the discussion of one of these cases by generalizing on some of the issues that they raise (which also form key components of Chapter 8), namely:

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• • • •

The nature and sources of organizational inertia The challenges of technological change (especially when it is a “disruptive technology” and embodies “architectural innovation”) The difficulties of established firms in developing new organizational capabilities General lessons for the management of strategic change.

Cases Eastman Kodak’s Quest for a Digital Future (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022).

On January 19, 2012, Eastman Kodak declared Chapter 11 bankruptcy. Faced with the challenge to its entire business from the transformation to digital technology, Kodak had staked its future on being a leader in digital imaging. Despite massive investment and a string of acquisitions and strategic alliances, Kodak’s ability to establish competitive advantage within the digital imaging sector and to generate satisfactory returns from its investments remains in doubt. The case describes Kodak’s digital imaging strategy, explores the reasons for the failure of Kodak’s digital imaging strategy to generate profits, and looks at the options that remain for CEO Antonio Pérez.

New York Times: Adapting to the Digital Revolution (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019) Like most newspapers, the New York Times had suffered decades of declining circulation and revenues as readers and advertisers shifted to online media. Its efforts to build and monetize its online readership, while sustaining its reputation for brilliant journalism, were reinvigorated by its incoming CEO, Mark Thompson and by A.G. Sulzberger, the latest member of the newspaper’s founding family to take over its chairmanship. The case describes the struggles of a 165-year-old newspaper to abandon the habits of a print-based world, to adapt to a new online era, and to create a business model that would allow it to make money while doing so.

The Evolution of the Circus Industry (A) (Insead Case No. 302-057-1, 2001) The case demonstrates the potential for a declining, structurally unattractive circus industry to be revitalized by strategic innovation. Cirque du Soleil was able to reinvent the circus industry and create new market space by challenging the conventional assumptions about the circus business. Its re-conception of the circus involved shifting the target consumer group from children (end-users of the traditional circus) to adults (purchasers of the traditional circus), drawing upon the distinctive strengths of other alternative industries, such as the theatre, gymnastics, and the opera, to offer a new and more engaging entertainment product directed towards a more mature and higher spending audience.

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Corning Incorporated: The Growth and Strategy Council (by Rebecca Henderson and Cate Reavis, MIT Sloan Management, Case No. 08-056, revised April 2009) The case outlines the development of Corning with particular emphasis on its history of innovation. The case highlights Corning's ability to "recreate" itself—moving from glass to cookware to fiber optics and glass for liquid crystal displays. It explains the role of the company's Growth and Strategy Council, a centralized team including the CEO, COO, and CTO which is heavily involved with deciding which projects to support and fund.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022

CHAPTER 9. TECHNOLOGY-BASED INDUSTRIES AND THE MANAGEMENT OF INNOVATION Introduction For analyzing the sources of competitive advantage, industries subject to rapid technological change, where innovation is a key strategy variable, are particularly interesting. These industries are predominantly emerging industries whose existence is the result of innovation. In addition, there are industries where technology and innovation continue to be the principal dimension of competition—e.g. electronics, chemicals, aerospace, and pharmaceuticals.

The principal topics I cover are: • • • • •

The linkage between innovation and competitive advantage and the determinants of the profitability of innovation; Alternative strategies to exploit an innovation; First-mover advantage; Competition in markets (a) where standards arise and (b) competition is among rival platforms.

The organizational conditions conducive to innovation and creativity.

Class Outline The major themes I address include: •

Strategy alternatives for exploiting an innovation (licensing vs. alliances and joint ventures vs. internal development within a wholly owned subsidiary).

•

The nature and extent of first-mover advantage.

•

The role of complementary resources and capabilities in determining the relative advantages of start-up and established firms.

•

The rapid evolution of industry structure and changing key success factors as an industry moves from its “introduction” to “growth” stage of development.

Which of these themes I emphasis depends upon my choice of case study. For example: •

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Toyota: Seeking a Future in Hydrogen explores the rationale for Toyota’s continued commitment to fuel-cell electric vehicles (EVs) despite the industry consensus that rechargeable batteries will be the dominant energy source for EVs. The case allows a consideration of the role of complementary resources in innovation and the coordinated investments in fuel cells, fuel cell vehicles, hydrogen production, and hydrogen distribution if fuel cell EVs are to be commercially viable. The case addresses the conditions for a

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technology to be successful in these circumstances and the how Toyota can (a) manage the risks associated with investing in developing EVs and (b) how Toyota can maximize the changes for fuel cells to become a commercially viable technology.

•

Tesla deals with the competitive advantage of a start-up company pioneering a disruptive technology (electrical propulsion) relative to established incumbents with vastly superior automotive resources and capabilities. It emphasizes the advantages of an entrepreneurial start-up in gaining technological leadership, and the challenges it faces in building the complementary resources needed to commercialize the technology.

•

Other cases also examine the innovation strategies of pioneering, start-up companies and the challenges they face from slower moving, but resource-rich incumbents. In the EMI Scanner and Benecol cases, a key issue is the innovators choice of strategy: in particular, the relative merits of internal investment, licensing, and joint venture for exploiting an innovation.

• Cases involving ecommerce companies and other businesses based upon digital technologies are profoundly interesting from a strategic perspective. Not only is rapid technological change is a perennial feature of their competitive environment, but their strategies must manage relationships with complementors and the potential to exploit network externalities. To explore these issues, the video games industry works well – partly because many students are highly knowledgeable and partly because successive product generations allow the tracking of changes in key success factors and hardware-software complementarities. There are also cases that focus more explicitly on standards battles, for example my case on the DVD war of 2005-2008.

Cases As I observed in relation to Chapter 8, cases that explore the competitive advantage and strategy making in technology-based industries can also be used to address issues of industry evolution and firm adaptation, since a key feature of these industries is the speed with which industry structure changes and the basis for competitive advantage shifts.

The cases that have been used successfully with this chapter of Contemporary Strategy Analysis by myself and other instructors include: Toyota: Seeking a Future in Hydrogen (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022).

In terms of electric vehicle strategy, Toyota Motor Corporation is an industry outlier in terms of its technology strategy. While most car manufacturers were investing heavily in plug-in EVs and had given up on fuel cells, Toyota had recently launched its Mirai fuel cell car and was continuing to make substantial investment in fuel cell technology.

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The case considers the merits of fuel cell EVs relative to battery EVs and the obstacles to the largescale adoption of fuel cells to power motor vehicles. Despite their long period of development, applications of fuel cells to transportation vehicles were mainly experimental. Conversely, there was near unanimity that batteries would emerge as the dominant technology for motor vehicles by 2040.

The December 2020 launch of new version of the Mirai was viewed by Toyota as the “first step toward wide-spread adoption” within “the bigger story of reaching a carbon neutral society” despite the fact that no country possessed a hydrogen-fueling infrastructure—in 2020 there were only 432 hydrogen refueling stations throughout the world.

The case allows students to consider: •

Why has Toyota’s strategy has differed from that of its leading competitors.

•

The probability that hydrogen-powered fuel cells will become a commercially viable technology for propelling EVs and whether Toyota should continue to invest in fuel cells even if batteries are likely to become the dominant EV technology?

•

Recommendation for Toyota in relation to: a)

The relative roles of hybrid, plug-in hybrid, battery, and fuel cell powertrains

b)

Strategy for hydrogen fuel cells. In particular: (i) Should Toyota emphasize the development of fuel cell cars (such as the Mirai) or the development of fuel-cell power units to supply other vehicle makers? (ii) To what extent should Toyota collaborate with other companies in developing and commercializing fuel cells, and with whom should it partner?

Tesla: Disrupting the Automobile Industry (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019) Despite its small size—producing a mere 50,000 cars in 2015—Tesla Motors had generated a level of excitement and anticipation that was unique in the automobile sector. Its founder— entrepreneur and visionary Elon Musk—viewed Tesla as leading the industry into a new era of technological sophistication and environmental sustainability. In doing so it would link with his plan to simultaneously revolutionize the generation and storage of electrical power.

The case allows for (a) an assessment of Tesla’s strategy, including its high level of vertical integration and its decision to make available its patent portfolio to its competitors and (b) an evaluation of Tesla’s prospects for survival and success as it faces increased competition from the major automobile companies, Chinese producers of EVs, and other start-up firms.

Raisio and the Benecol Launch [A] and [B] (Available from Wiley or from the author).

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Raisio, a grain milling and vegetable oil company based in Finland, has developed a patented process for the production of stanol ester and its use as a cholesterol-lowering food additive. Its first product to incorporate stanol ester has been a huge market success in Finland and Raisio’s share price has increased tenfold. The company is anxious to exploit the worldwide potential for Benecol and is considering alternative strategies for exploiting its innovation. The A case focuses upon strategy alternatives to exploit the innovation. Key issues here are (a) the strength of Raisio’s patent position and (b) whether Raisio has the resources and capabilities needed to develop a worldwide market for Benecol and other products containing stanol ester.

The B case revisits Raisio three years later. Its chosen strategy—a partnership with Johnson & Johnson where the latter has been granted a worldwide license for commercial development of Benecol, is in disarray. Its US launch has experienced regulatory delays, Unilever has developed a competing cholesterol-reducing margarine, and the global alliance with Johnson & Johnson is experiencing strains. What has Raisio done wrong and how should it adjust its strategy to meet the new market conditions?

Video Game Console Industry in 2018 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019; also available from Wiley or from the author) The case traces the development of the video games industry through its major eras of market dominance: from Atari, to Nintendo, to Sony; and to its current state—a three-way battle between Sony, Microsoft and Nintendo. The case outlines the strategies of the different players and the dynamics of competition—focusing upon the strategies the firms have deployed in order to harness network externalities.

By 2018, the competitive dynamics of the industry had become more complex: consoles were under threat from mobile gaming platforms, the console makers were no longer able to impose exclusivity conditions on the game publishers, and new revenue models were being developed.

EMI and the CT Scanner [A] and [B] (Harvard Business School Case Nos. 9-383-194 and 9-383-195.

One of the all-time greats among strategy cases, this case deals with a broad range of strategic issues concerning the exploitation of an exceptionally promising innovation – the X-ray scanner – by a British music and electronics company. Critical issues at the end of the A case include (a) the appropriability of the returns to innovation in situations where patent protection is weak and (b) the choice of entry mode – should EMI exploit its innovation by means of licensing, joint-venture, or a wholly owned new venture?

The B case takes up the situation four years later. The market has matured considerably, new competitors have appeared (General Electric in particular), and EMI must (a) assess the emerging competitive situation—particularly with regard to its comparative weaknesses in complementary resources and (b) develop an organizational structure and management systems to deal with the internal conflicts and inefficiencies it suffers.

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DVD War of 2005–8: Blu-Ray versus HD DVD (R. M. Grant, Cases to Accompany Contemporary Strategy Analysis, 7th edn., Wiley, 2010; also available from Wiley and from the author).

This account of the two-year struggle between Toshiba and Sony offers insight into the dynamics of standards war. Although Toshiba’s HD DVD was launched before Sony’s Blu-Ray, and initially both camps appeared to be well-matched in terms of support from key industry players, in a little more than two years, Toshiba announced its exit from the market. The case offers students to consider the factors leading to Sony’s victory and what Toshiba might have done differently in order to succeed against Sony’s Blu-ray.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 10. VERTICAL INTEGRATION AND THE SCOPE OF THE FIRM Introduction Chapters 10-13 are concerned with corporate strategy. The number of sessions I devote to corporate strategy depends upon the length of the course and whether or not there is a subsequent elective course in corporate strategy.

I introduce corporate strategy by looking first at the boundaries of firms and their historical trends—concentration on the expanding size and scope of companies for most of the 19 th and 20th centuries, followed by more recent downsizing, refocusing, and outsourcing. I then focus on vertical integration. I begin with vertical integration rather than multinational expansion, or diversification mainly because vertical integration is the most direct way of addressing the determinants of the boundaries of the firm—particularly the role of transaction costs. Cases on vertically-integrated fast-fashion companies such as Inditex (owner of Zara) and American Apparel (which went bankrupt in 2016).

My main goals for this session are for students: •

To appreciate the central issue of corporate strategy – the determination of the scope of the firm.

•

To be capable of making vertical integration decisions. In relation to a specific activity, should the firm make or buy? In relation to the vertical scope of the firm as a whole, how broad a span of the industry value chain should the firm encompass?

Class Outline I introduce corporate strategy by considering the boundaries of the firm—covering the material in the first section of Chapter 10, “Transaction Costs and the Scope of the Firm.” Following the work of Alfred Chandler (The Visible Hand and Strategy and Structure), I note the expansion in the size and scope of firms since the middle of the 19th century and ask my students “Why?” The points that emerge concern technology (the telephone, the computer) and the developments in management (financial systems, organizational forms, management techniques).

I then address the contracting of the boundaries of larger firms since the mid-1970s and the trends towards outsourcing and re-focusing on core businesses, again asking my students “Why?" Explanations include increased uncertainty and turbulence in the business environment which have increased the costs of coordination within large, complex, hierarchical organizations. Also, the development of digital technologies has made the same ICT capabilities available to small firms and individuals as to large organizations. .

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This discussion of the relative merits of organizing within large corporations, as compared with small firms coordinated by markets, provides an easy way into the basic principles of transaction cost analysis.

I then turn to the analysis of vertical integration. I begin with a case where vertical integration has been a primary feature of the firm’s strategy (e.g. Zara, American Apparel, Eni, Bird’s Eye, Comcast).

If, as in textiles and clothing, the industry is vertically de-integrated (i.e. separate firms operate at each stage of the value chain), I ask why this is so. Typically, the key factors are (a) relatively efficient competitive markets in which firms contract with one another (with little need for transaction-specific investments) and (b) differences in the resources and organizational capabilities required at each vertical stage.

So, why is it that our case study firm (e.g. Zara) has been successful despite rejecting industry conventions? The key is to recognize the unique features of its strategy and understand that, despite foregoing the efficiency advantages associated with outsourcing, it has gained particular competitive advantage through a unique strategy that exploits advantages of close coordination between multiple vertical stages. Thus, in the case of Zara, extremely short cycle times between initial product design and delivery to retail stores allows very fast response to emerging fashion preferences.

The issues arising from the case study discussion then allow a more systematic treatment of the advantages and disadvantages of vertical integration and the factors that determine their relative importance (as shown in Figure 10.4 of Contemporary Strategy Analysis).

I finish up by pointing out that vertical integration and “arms-length” market contracts are just two extremes of a range of vertical relationships—a key feature of supplier relationships today is the ability to combine the coordination advantages of vertical integration with the flexibility and specialization advantages of outsourcing.

Cases Zara: Agility Through Vertical Integration. (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022).

Amancio Ortego began making low-priced, but well-made copies of fashionable garments in his hometown of A Coruña in north-western Spain in the 1960s. He opened his first Zara store in 1974; in 2018, Inditex, Zara’s owner was the world’s biggest apparel company. Zara’s verticallyintegrated system—from its base in the northwest of Spain, it designs, manufacturers which it distributes fashion garments to its retail stores worldwide—is radically different from the outsourcing model that dominates the fashion clothing trade. While losing the cost savings of outsourcing production to low-wage manufacturers in developing countries, its tightly integrated system allows remarkable speed in responding to new fashion trends. A key component of Zara’s .

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the effectiveness vertically integrated system is the close, personal communications between store managers, marketing executives, designers, and manufacturing managers. As Zara grows in size and its sourcing and manufacturing operations become increasingly dispersed, so complexity, can Zara sustain its combination of speed, efficiency, and stylishness as the simplicity and directness of Zara’s system risks becoming compromised by complexity.

(See also: K. Ferdows, J. Machuca, and M. Lewis, “Zara”, ECCH Case No. 603-002-1, 2002) American Apparel: Vertically Integrated in Downtown L.A. (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

In 2015 American Apparel is in crisis: its founder has been fired as CEO and the company has sought Chapter 11 bankruptcy protection. A key issue for the new CEO is whether to maintain American Apparel’s vertical integration model or to follow the approach of almost all mass-market fashion clothing companies: outsource production to low-wage countries. American Apparel’s business model is based upon designing and manufacturing in downtown Los Angeles then selling through company-owned retail stores. The case outlines the logic of American Apparel’s strategy of vertical integration and considers the potential for turnaround.

Birds Eye and the UK Frozen Foods Industry (Available from the author).

Birds Eye’s competitive advantage was built on market dominance through its construction of a vertically integrated chain. The case raises important issues concerning the rationale for vertical integration over spot transactions or long-term contracts, then analyzes how industry evolution destroys the advantages of vertical integration. The case examines in some detail the evolution of industry structure, competition, and the competitive position of the industry leader over the industry’s life cycle. (See also a HBS version of this case: David Collis, "Birds Eye and the U.K. Frozen Food Industry (A)." Harvard Business School Case 792-074, 1992.)

Eni SpA: The Corporate Strategy of an International Energy Major (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019).

The Eni case considers the corporate strategy of a vertically-integrated, multinational oil and gas major at a time when the strategy that has successfully guided it for two decades is threatened by a combination of problems—the most serious being a collapse in crude oil prices. Eni has undergone a transformation from an unprofitable, state-owned enterprise to a shareholderfocused, international energy company. Yet, it is still very different from most other petroleum majors—in particular, it has a large, vertically integrated natural gas business. Yet, this gas strategy is threatened by political uncertainties in several of its major production sources (Libya, Egypt, Russia) and the European Union’s policies for increasing competition in the European gas market.

The case addresses issues of “Which businesses should Eni be in?” “How should resources be allocated between them?” and “How should the linkages between them be managed?”

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 11. GLOBAL STRATEGIES AND THE MULTINATIONAL CORPORATION Introduction Given that internationalization and the design of global strategy have been such important management issues in recent years, most instructors will probably give prominence to this topic in their courses in strategic management. How many sessions are devoted to global strategy and the management of the MNC will depend, first, on whether students are required to take a course in international business in their program (and the extent to which such a course covers strategic and managerial issues) and, second, whether there is a subsequent elective course in global strategy and the management of the MNC. I emphasize two issues: •

Decisions over international location and modes of foreign market entry.

•

The design of global strategies—especially the competitive advantages that arise from operating across national borders and what such strategies imply for the organization of the multinational corporation.

Class Outline Introducing the international dimension raises a wide range of strategic management issues, and no single case will include them all. Hence, instructors need to choose cases on the basis of the issues that they wish to give the greatest priorities to.

If there is sufficient time available, I like to use two cases: one that that deals with a company extending its activities abroad (for this purpose I have used my own cases on City Football Group, Haier, Chipotle Mexican Grill, and Outback Steakhouse); and one that addresses the challenge of reconciling the benefits of global integration with the need for adapting to individual national markets (for this purpose I use the Vodafone, P&G (Japan), or BRL Hardy cases).

In relation to international expansion, I address two questions: •

Under what circumstances can a company extend its competitive advantage from its home market to an overseas market? Issues concerning the transferability and replicability of the firm’s competitive advantage are critical here.

•

What mode of foreign market entry should a firm adopt? Again, issues of resources and capabilities and the need for local market knowledge, distribution, and political and business connections become critical here.

In relation to reconciling global strategy with national differentiation cases, I address the following questions:

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What are the benefits of global integration in this industry and how significant are they?

To what extent does a global strategy need to take account of national market differences (including differences in national culture)?

•

What are the implications of the strategy chosen for the organizational structure, management systems, and allocation of decision making within the multinational firm?

Cases City Football Group: Building a Multinational Soccer Enterprise (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022).

The acquisition of Manchester City Football Club (MCFC) by Sheikh Mansour bin Zayed Al Nahyan initiated a massive inflow of investment into players and facilities that would transform MCFC into England’s most successful football club. It also involved the creation of professional football’s first multinational corporation. MCFC’s parent company was City Football Ltd, which by 2021 owned 8 football clubs spanning five continents. City Football’s strategy involved the exploitation of cross-border scale economies in scouting, player development, sponsorship and marketing, and a global system for transferring resources and best practices. The case explores the potential for international expansion to build competitive advent age in an industry where, despite the growth of international competition and international resource flows, transnational enterprises had not emerged.

Haier Group: Reinventing the Industrial Corporation (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022) The rise of Haier from a near-bankrupt, state-owned refrigerator factory in Qingdao, China to become the world’s biggest domestic appliance company (in terms of units sold) is a remarkable tale of entrepreneurial leadership by CEO Zhang Ruimin. It has also involved a strategy that flouts most of the conventional principles of international business expansion. Is Haier’s international success down to its unconventional strategy or in spite of it? Haier’s unconventional management methods and international strategy offers an opportunity to consider whether the principles of strategic management are universal, or specific to the economic and cultural context of Western business.

Chipotle Mexican Grill, Inc.: The International Challenge (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016; also available from Wiley or from the author) The case addresses the question of whether Chipotle Mexican Grill can replicate its massive success within the US in overseas markets and, if so, how? Chipotle’s few international forays have met with limited success. To what extent is the Chipotle restaurant concept, its strategy, and its business system suited to overseas markets? Do overseas consumers have

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fundamentally different preferences from those in North America? Can Chipotle recreate in overseas markets the resources and capabilities that make it so successful in the US? If overseas opportunities are attractive to Chipotle, how should the company adapt its US strategy and organizational model to meet the circumstances of foreign markets, and what mode of entry should it adopt?

Outback Steakhouse: Going International (Available from the author).

The case provides a brief and straightforward introduction to the issues involved in overseas expansion.

Outback Steakhouse is a highly successful restaurant chain whose strategy has been carefully adjusted to the customers it serves and its competitive positioning within the US restaurant market. Overseas markets offer a huge opportunity for Outback, but it must consider how customer preferences and market conditions are different from the US, whether it can replicate its resources and capabilities overseas, and what adaptations need to be made to its US strategy.

Euro Disney: From Dream to Nightmare (Available from the author).

The case explores the decision to create a Disney theme park in Europe and examines the subsequent fortunes of the venture. In examining the initial entry decision, the case raises issues about the attractiveness of the European theme park market, Disney’s potential to establish a competitive advantage, and the complex mode of entry that Disney devised (a jointventure, licensing contract, and management contract). The subsequent difficulties of Euro Disney underline the complex cultural issues that are especially important for international service companies.

Vodafone in 2012: Rethinking International Strategy (Available from the author).

In early summer 2012, CEO Vittorio Colao was addressing Vodafone’s continued need to improve its financial performance. Despite considerable progress since becoming CEO, Vodafone’s leading position in the world’s market for mobile communications has not translated into outstanding performance. A critical issue for Colao is the extent to which Vodafone can benefit from its extensive international scope. Vodafone offers service in 25 countries and has partner agreements in a further 39 countries, yet the potential for reducing costs or providing superior service through cross-border integration appear limited in wireless telecommunication. The case requires an analysis of the potential benefits from international scope in wireless telecommunications and the development of strategy recommendations for Vodafone—especially in relation to its presence in the US. BRL Hardy: Globalizing an Australian Wine Company (Harvard Business School Case No. 300018-PDF-ENG, 2003).

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The wine industry is particularly interesting for the study of international strategy. International trade in wine is substantial (not least because wine production is concentrated into a dozen countries in the world). At the same time, wine drinking customers and preferences are highly differentiated. New World wine producers – the Australians in particular – have pioneered global strategies (including global brands) in wine. However, the design and implementation of BRL Hardy’s international strategies face complex challenges because of the conflicting pressures for globalization and local adaptation.

P&G Japan: The SKII Globalization Project (Harvard Business School Case No. 9-303-003, 2004).

This is a fascinating (and complex) study of the challenge facing P&G in its efforts to stimulate global innovation and new product development through supporting initiatives at the local level. P&G Japan has developed an innovative system of face cleaning and moisturizing. The challenge is to assess its potential in other markets and manage its international rollout. This calls for an analysis of the conflicting forces of globalization and localization within the context of product development in the cosmetics business.

Four Seasons Goes to Paris (Harvard Business School Case No. 9-803-069, 2003).

Four Seasons’ acquisition of the management contract for the venerable George V hotel in Paris offers an intriguing study of international management in the luxury hotel industry. The case focuses particularly on the challenges of cross-cultural management. The corporate values and management systems of the Four Seasons group must be reconciled with the national culture of France and the traditions and norms of the George V.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 12. DIVERSIFICATION STRATEGY Introduction Diversification—a firm’s broadening of its business scope—is an essential feature of business adaptation; yet, diversification has been the source of more destruction of shareholder value than almost any other type of strategy. Hence, its study is important!

Diversification decisions require an appraisal of a firm’s resources and capabilities of the firm and assessment of their potential to establish competitive advantage through deploying them beyond the firm’s existing boundaries. This requires applying the following concepts: •

Economies of scope in resources and capabilities.

•

Transaction costs in deploying resources and capabilities across different product markets.

•

Costs of entry into a different product market.

•

The nature and types of relatedness between different businesses.

It also requires recognition of circumstances where diversification does not create value – for example, where diversification is directed towards reducing risk rather than creating value, and where economies of scale can be exploited efficiently through market transactions.

During the past two decades, the predominant direction of firm development has been specialization rather than diversification. Hence, an important strategic question for many companies is not so much where to diversify, but which existing businesses should be divested?

Class Outline To get quickly to the core issue of diversification—whether owning different businesses creates value (“synergy”)—it is useful to kick off with a case that involves a diversified company or one that is considering diversification. I particularly like companies whose diversification decisions involve a questionable business logic. My cases on the Virgin Group, General Electric, and Alphabet work well for this purpose, though each emphasizes different issues: •

Discussion of Virgin directs attention to the resources and capabilities that Virgin possesses (the brand, Branson himself, the Group’s capabilities in launching new business ventures, etc.). This raises the issue of domain –over what types and what range of businesses can Virgin add value. This then has implications for the type of organizational structure and management systems Virgin needs to possess to best realize that value.

•

The General Electric case is concerned with the proposed breakup of the group in 2018 which addresses the issue of whether and to what extent GE’s corporate structure adds value to the individual businesses.

Copyright © 2019 John Wiley & Sons, Inc.

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The Alphabet case directs attention to the particular types of business relatedness that characterize the e-commerce sector. This relatedness extends beyond supply-side economies of scope (from deploying resources and capabilities across multiple businesses) and demand-side economies of scope (from consumers buying bundled products), to include the complex complementarities that exist between hardware and software and different types of software.

The principal issues that arise from these cases are: •

The conditions under which diversification creates value. Diversification directed towards growth and risk spreading is more likely to destroy rather than create value. As Porter’s “essential tests” of the potential for diversification to create value, the tendency for the “cost of entry” to offset “industry attractiveness”, means that the essential criterion is the “better off” test—Does the diversification create competitive advantage?

•

The conditions under which diversification can create competitive advantage are primarily where economies of scope exist in resources and capabilities and where these economies of scope cannot be efficiently exploited by market transactions ( e.g. licensing) due to transaction costs.

•

Different types of resources and capabilities give rise to very different patterns of diversification: technical capabilities are likely to support narrow-spectrum diversification (Microsoft diversifying from operating systems to applications software during the early 1980s); general management capabilities support much wider diversification (GE spread from jet engines and plastics to financial services and TV broadcasting). This raises some interesting issues concerning what we mean by industries being “related”.

•

The analysis of diversification among industries based upon digital technologies requires looking beyond the conventional sources of synergy. These industries tend to form “ecosystems” of complementary and technically dependent industry sectors. In these circumstances’ diversification can exploit complementarities, build bargaining power, and deter rivals.

Cases Google Is Now Alphabet—But What’s the Corporate Strategy? (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022).

Google’s transformation into a holding company called Alphabet in August 2015 did little to clarify its corporate strategy. Although its highly successful web search engine still generates most of its revenues, Google has expanded into a bewildering variety of technology-based business—many of them with little linkage to online information services, computer software, and advertising management. The challenge of the case is to identify the strategic logic, if any, linking Alphabet’s

Copyright © 2019 John Wiley & Sons, Inc.

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array of different businesses and to consider, in the light of the challenges Alphabet currently faces, whether and how the company should define its corporate strategy.

How Do You Solve a Problem Like General Electric? (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022) For decades General Electric’s status as the “world’s most admired company” allowed it to defy the prevailing wisdom that widely diversified corporations are a source of value subtraction rather than value addition. However, a collapse in financial performance during 2017-18 and the appointment of the first outsider ever to lead the company was a prelude to an extensive radical corporate restructuring. The case describes the development of GE under its long-serving CEOs, Jack Welch and Jeff Immelt, and outlines the measures they took to exploit synergies among its diverse businesses.

This case was written primarily in order to explore issues in implementing corporate strategy (see Chapter 13), particularly the mechanisms through which the corporate headquarters of a multibusiness firm creates value for its constituent businesses. However, the case also provides an opportunity for addressing the types of relatedness between GE’s different businesses and, on this basis, the current proposal for reconfiguring GE’s business portfolio, as compared to alternative restructuring proposals.

The Virgin Group in 2018 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019; also available from Wiley or from the author).

In 2018, the Virgin Group was no longer a collection of young, entrepreneurial, start-up companies. It was a mature holding company with investments mainly in consumer service industries such as travel, leisure, healthcare, and financial services. Although it continued to diversify through new ventures, these initiatives were heavily outnumbered by divestments— selling businesses to other owners or flotations through initial public offerings.

Yet, despite consolidation and refocusing, the strategic rationale for the group remained unclear.

The task, therefore, for students is to provide a strategic appraisal of this loose-knit corporate empire; to determine which logic, if any, links together the motley collection of business ventures; to determine whether any of the businesses should be divested; to establish clear criteria to guide future new diversification; and to recommend changes in the financial and management structure of the Virgin companies.

Copyright © 2019 John Wiley & Sons, Inc.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 13. IMPLEMENTING CORPORATE STRATEGY: MANAGING THE MULTIBUSINESS FIRM Introduction In our analysis of all three dimensions of corporate scope—vertical, geographical, and product—the key strategic issues are exploiting economies from sharing resources and capabilities across different business units and avoiding transaction costs. However, this focus upon the benefits of extending corporate scope ignores the costs of doing so. These costs of administering multiple businesses depend upon how the firm is organized and managed.

Hence, the design of structure and systems and the type of corporate leadership are key factors that determine the success of corporate strategy.

The emphasis of Chapter 13 is the role of the corporate headquarters in multibusiness company -- in particular, how the corporate headquarters can create value for the individual businesses.

This necessitates examining the role of the corporate headquarters and its relations with individual businesses.

Class Outline Chapter 13 is organized around the different means through which the corporate headquarters of the large multibusiness corporation creates value for its constituent businesses. Following the work of Michael Goold, Andrew Campbell, and other members of the Ashridge Strategic Management Center, I focus upon three mechanisms: • Managing the business portfolio: the processes and tools through which businesses are added, divested, and through which resources are allocated.

• Managing linkages: how the corporate HQ exploits synergies across the different businesses.

• Managing individual businesses: the processes of performance management, strategic planning, and financial control through which the corporate HQ guides the strategies and performance of the individual businesses.

For investigating these issues, General Electric provides an illuminating case study. Between 1972 and 2018, CEOs, Reg Jones, Jack Welch and Jeff Immelt built a system of corporate management that included techniques of portfolio management, exploitation of cross-business synergies, a systematic approach to management development, and a performance-driven internal culture. However, many of the problems that engulfed GE during 2017-19 had their origins in this system of corporate management.

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Similar systems of corporate management exist in other large, diversified companies: Danaher Corporation, Samsung Electronics, Danone, Tata Group, and Wesfarmers. Whichever company is used as a basis for a case study discussion, the essential tasks of corporate management are the same, i.e. to management the business portfolio, to exploit linkages between the businesses, and to manage each business to optimize its performance.

The chapter closes with a discussion of corporate governance. Although I recognize this is an important topic, I typically do not address it in my core strategy courses—unless it arises within the context of a case study discussion.

Cases How Do You Solve a Problem Like General Electric? (R. M. Grant, Contemporary Strategy Analysis, 11th edn., Wiley, 2022) For decades General Electric’s status as the “world’s most admired company” allowed it to defy the prevailing wisdom that widely diversified corporations are a source of value subtraction rather than value addition. However, a collapse in financial performance during 2017-18 and the appointment of the first outsider ever to lead the company was a prelude to an extensive radical corporate restructuring. The case describes the development of GE under its longserving CEOs, Jack Welch and Jeff Immelt, and outlines the measures they took to exploit synergies among its diverse businesses.

The case allows students to examine the sources of GE’s problems and to use this assessment to consider the restructuring being implemented by its two most recent CEOs, John Flannery and Larry Culp. The key issues are (a) whether GE should spin off any of its businesses and (b) if so, should it go further and split up entirely? Answering these questions requires a careful assessment of whether and how GE’s corporate management system has itself been a source of GE’s recent problems and whether Culp’s introduction of principles and processes of management developed at Danaher are appropriate to GE, Danaher Corporation. (Harvard Business School Case No. 708-445, February 2008, revised November 2015.)

In recent years, Danaher Corp. has displaced General Electric as America’s most highly regarded conglomerate. Danaher’s success has been based upon a management system that identifies promising acquisition targets in growth fields such as healthcare, instrumentation, environmental services, and industrial technology, and then applies a standardized management system based upon Japanese principles of kaizen and lean production.

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Danone: Strategy Implementation in an International Food and Beverage Company (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 8th edn., Wiley, 2013. Available from the author) By 2012, Danone had grown to become one of the world’s largest multinational food companies with four major business areas—fresh dairy products, water, baby nutrition, and medical nutrition—and a growing emphasis on emerging markets. Danone’s growth had been achieved with a strategy and management system that was very different from its leading rivals—Nestlé and Kraft Foods—or from other consumer product multinationals. Its strategy was entrepreneurial and decentralized: the heads of its country business units possessed substantial decision-making powers and local brands accounted for a high proportion of its total sales. Danone’s business principles played a key role in its overall coordination, cohesiveness, and identity. The case seeks to comprehend the contribution of Danone’s values and principles, and especially its commitments to social and environmental responsibility, to its competitive advantage and to the effectiveness of its strategy implementation, and to explore how Danone might improve its financial performance and shareholder returns in the future.

Jack Welch and the General Electric Management System (Available from the author) Under Welch’s leadership from 1981–2001, GE achieved remarkable growth and shareholder return – a rare example of a highly successful conglomerate. The case describes Welch’s initiatives in terms of reconfiguring GE’s portfolio of businesses, changing organizational structure and management systems, and transforming the culture of the corporation. The case considers how, in an era of downsizing, divestment, and refocusing when most large, diversified companies have broken up, GE succeeded in becoming the world’s most valuable company while maintaining a uniquely broad business scope.

Tata: Leadership with Trust (Richard Ivey School of Business, 2010. Available from Harvard Business School Publishing, case ref. 910M25-PDF-ENG.) The case illustrates the opportunities, challenges, and trade-offs involved in the design, evolution, and institutionalization of corporate social responsibility (CSR) and corporate sustainability (CS) within the Tata Group - an India-based indigenous multinational enterprise (MNE) with a unique 140-year-old commitment to the community as the key stakeholder of business. Despite the 2008-2009 global recession, the Tata Group topped the economic value creation charts. In 2008-2009, the Group had grossed US$70.8 billion in revenues; 64.7% of the Group's revenues were now coming from outside India. Its 96 independent companies spanned seven sectors: information systems and communications, engineering, materials, services, energy, consumer products, and chemicals. Economic turbulence had put a brake on social and environmental investing for many other companies but renewed Tata Group's commitment: the Group had recently revised its charitable giving, adopted a group-wide climate change policy, and separated its mandatory and voluntary initiatives. The case deals with the intricate

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connections between the Group's profitability and competitiveness on the one hand and its long-standing tradition of social responsibility on the other. It explores value creation, leadership, ethics, and sustainable development on the backdrop of rapid internationalizations and shifting stakeholders' expectations for corporate social responsibility.

Jong Yong Yun, Samsung Electronics' CEO: Competing Through Catastrophe Culture (IBS Case Development Center, 2005. Available through Case Clearing House, ref. 305-487-1) Jong Yong Yun, Samsung Electronics' Chief Executive Officer since December 1996, has restructured Samsung by defying traditional Korean corporate culture of hierarchy and lifetime employment. Yun instilled a sense of perpetual crisis among his employees and encouraged them to come up with innovative products that, according to him, were necessary for Samsung's survival. His emphasis was on quality products with unique designs and effective brand promotions. In 2004, Samsung surpassed Sony to earn profits of US$9.4 billion over revenue of US$72 billion. Still, Yun felt that to compete in the global market, Samsung's products needed to be transformed into brands like that of Apple's iPod or Sony's Walkman.

This case study, while explaining the growth of Samsung Electronics, offers scope to discuss how a change in leadership and organizational culture helps to enhance a company's competitiveness.

APPENDIX External Growth Strategies: Mergers, Acquisitions, and Alliances Mergers, acquisitions and alliances are mechanisms by which strategy is implemented rather than strategies themselves. As a consequence, the key strategic issues that motivate mergers, acquisitions and alliances have been discussed in other chapters of the book: Chapter 7 on achieving economies of scale, Chapter 8 on acquiring the capabilities needed to manage strategic change, Chapter 9 on exploiting innovation; Chapter 11 on foreign market entry, Chapter 12 on diversification—and so on. Hence, this adds little in terms of new strategic analysis. Its primary focus is to address some of the management issues that arise in managing these different types of growth and in addressing the factors which determine the optimal mode of growth for a firm.

At the same time external growth strategies—and especially mergers and acquisitions— represent an area of strategic decisions that is fraught with danger. While every firm needs to augment its range of business activities in response to change and obsolescence, attempts to do so through mergers and acquisitions have yielded, on the whole, disappointing results.

Empirical studies shown that mergers and acquisitions create value overall, but for acquiring firms, acquisitions tend to destroy shareholder value. By addressing some of the issues involved

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in choosing acquisition targets and alliance partners and the managing post-merger integration and alliance relations, we lay the groundwork for better informed external growth strategies.

Because the theories relating to mergers, acquisitions and alliances are diverse and the empirical evidence inconsistent and idiosyncratic, my treatment of this topic relies heavily on case analysis. There is no shortage of cases dealing with mergers, acquisitions and strategic alliances, including my own cases on Walt Disney Company and 21st Century Fox and Bank of America’s acquisition of Merrill Lynch. Among the many management issues that mergers and acquisitions present, the major ones offering insight into different aspects of M&A decision making include: •

The tendency for M&A initiatives to be driven by management hubris.

• The challenges of estimating the benefits from mergers and acquisitions—including the “lemons problem” arising from asymmetric information (the buyer of a company has access to less information than the seller) • Analyzing the different dimensions of a merger: horizontal integration, diversification, international expansion • The difficulties of most-merger integration arising from differences in culture, systems and traditions.

The problems that have accompanied so many mergers and acquisitions have increased the relative attractiveness of alliances as a means of combining the resources and capabilities of different firms. I emphasize how alliances have proved especially attractive in certain contexts—especially in international expansion and in the exploitation of innovations. As industries become increasingly linked, so networks of alliances become increasingly important in managing a firm’s “ecosystem.”

Cases Walt Disney, 21st Century Fox, and the Challenge of New Media (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019).

Walt Disney company’s battle with Comcast to acquire Rupert Murdoch’s 21st Century Fox was the culmination of a two-decade wave of consolidation in the entertainment and media sector that had created a number of vertically-integrated media giants. However, in recent years this consolidation was given a new urgency as a result of the growth of streamed video entertainment and the dominant position that Netflix was building in this new medium.

Disney’s acquisition of 21st Century Fox was motivated primarily by the advantages of acquiring additional content through the 20th Century Fox studios and library of movies and TV shows that would support its proposed new streaming service. However, the acquisition included Fox’s cable channels. It was not obvious that acquiring another “old media” company was the best route for Disney to establish itself as a global leader in streamed video entertainment.

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Bank of America’s Acquisition of Merrill Lynch (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) In December 2008, Bank of America’s board has its final chance to withdraw from its acquisition of Merrill Lynch. The acquisition offered Bank of America the chance to build America’s biggest wealth-management company and establish itself as a leading global corporate and investment bank. However, new evidence of the extent of Merrill Lynch’s losses confirms that Bank of America is overpaying for its acquisition. The case requires an assessment of the likely synergies from the merger, an appraisal of the “universal banking” model, and consideration of the challenges of integrating the two companies.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (11th edn. Wiley, 2022)

CHAPTER 14. CURRENT TRENDS IN STRATEGIC MANAGEMENT Introduction I devote the final session of the course to considering emerging trends in strategic management. Inevitably, this means addressing whatever is happening at the time—but hopefully the content of this chapter 14 written during early 2021 will still be relevant to the circumstances at the time of your final class!

My primary goal for this session is to encourage students to recognize two factors. First, that the business environment is in a state of constant change and new circumstances will require new strategies and new approaches to implementing those strategies. Second, that strategic management is a young subject that is still in its early stages of development. Finding solutions to familiar and new business problems will require openness to new ideas, new concepts, and new approaches to strategy formulation and implementation.

The dominate features of the business environment of 2021 were the disruptive impact of digital technologies and the breakdown of liberal, market-oriented, internationalist consensus that had dominated politics and economics since the fall of the Soviet Union. Aspects of this rejection of the liberal order was the transition from free trade and open borders to protectionism and nationalism and rise in anti-business sentiment reflected in skepticism over the merits of shareholder-based capitalism. Both of these trends were reinforced by the covid19 pandemic of 2020-21 which hastened the adoption of new digital technologies, disrupted global supply chains, and led to changes in lifestyles, work styles, and attitudes whose effects may be long-lasting In my final chapter I address the following themes:

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The outlook for the future. I view the succession of crises (economic, political and natural) of the 21st century as inevitable consequences of a highly interconnected world—with the implication that turbulence and instability will continue to be defining features of business environment.

•

I affirm the basic case for shareholder capitalism—despite the crimes and lunacy that have been associated with “shareholder value maximization.” I argue that the maximization of the enterprise value—so long as it is focuses on the lifetime of the firm and takes account of need for the firm to coexist with its different stakeholder groups and the natural environment and retain legitimacy within society—provides the only viable guideline for ensuring the effective and efficient strategic management of a business enterprise.

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To reaffirm the usefulness of the basic tools of strategic analysis—notably industry analysis and the analysis of resources and capabilities—while acknowledging that new tools and concepts of strategy analysis are available to enhance managers’ ability to navigate through difficult times. In particular, I point to the need to adopt the tools of real option analysis and complexity theory. More generally. I point to the potential for innovatory approaches to strategy formulation and organizational design structure including new approaches to the management of coordination and cooperation, and the potential for alliances and novel forms of interfirm collaboration.

Class Outline I use one of two approaches to the final class: [1] A case study that exposes students to an innovatory approach to management—preferable one that might provide a model of other firms. Companies I find suitable for this purpose include Haier Group, W.L. Gore and Associates, Zappos, Lego, Tencent, and Softbank.

[2] A general class discussion where I pose the following questions for students: (a) What will the key developments be in the global environment of business during the next five years? (b) On the basis of these, what will be the greatest challenges that firms from the advanced industrialized countries will face? (c) What strategies will firms need to adopt in order to prosper in the environment you foresee? (d) What are the implications for these developments for firms’ organizational structures, management systems, and leadership styles?

If students experience difficulty in projecting into the future, I ask: “Are there companies today whose strategies, structures and approaches to management you think will provide leading examples for other companies in the future?” This typically gives rise to suggestions concerning companies such as Alphabet, Haier, and Samsung. The challenge then is to drill into these examples and identify what it is about these companies that is innovative or exemplary.

Cases Haier Group: Reinventing the Industrial Corporation (R. M. Grant, Contemporary Strategy Analysis, Wiley, 11th edn., 2022) The rise of Haier from a nearly bankrupt, state-owned refrigerator factory in Qingdao, China to become the world’s biggest domestic appliance company is a remarkable tale of

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entrepreneurial leadership by CEO Zhang Ruimin. The company has been built upon unique management model that combines Western management principles and techniques, traditional Chinese values and philosophy, and Zhang’s own ideas and experimentation. Haier’s strategy flouts most of the conventional principles of international business expansion: rather than exploit its existing competitive strengths (such as low domestic costs) Haier has emphasized quality and innovation and sought to build market presence in the sophisticated markets of Europe, North America and Japan. Internally, Haier’s unique rendanheyi management model is a novel approach to organization structure and management systems within a complex, multiproduct, multinational organization. It offers an innovatory approach to addressing issues of complexity, motivation, and control with the large business enterprise. It also raises questions about the applicability of the management principles developed in the context of Western market capitalism to Chinese, state-owned enterprises.

W.L. Gore & Associates: Rethinking Management (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, Wiley, 10th edn., 2019) W.L. Gore, the manufacturer of Gore-Tex, has a unique organization structure and management style built around its “lattice” principle. The result is a remarkable lack of hierarchy and exceptional decentralization of decision-making to self-managing teams. The case offers the opportunity to consider the advantages and disadvantages of Gore’s management structure, and the potential to apply it to other companies.

Zappos: Happiness in a Box (J. Aaker and S. Leslie, Stanford Business School case no. M333, 2010. Available free from www.thecasecentre.org/stanfordfreecases) Under the leadership of Tony Hsieh, on-line footwear company, Zappos has developed an enterprise that not only satisfies customers' needs faster and more simply than ever, but also establishes a novel approach to management with unprecedented opportunities for employee fulfillment.

Oticon [A] (by J. Kao, Harvard Business School Case No. 9-395-144, 2001).

Oticon, a Danish manufacturer of hearing aids, was transformed from a traditional, hierarchy and rule-based organization into a creativity-driven, highly flexible organization, with almost no hierarchy and little formal structure. The company has relied on team-based, informal collaboration supported by IT to provide the basis for coordination and integration.

St. Luke’s Advertising Agency (Diane L. Coutu, “Creating the Most Frightening Company on Earth: An Interview with Andy Law of St. Luke’s,” Harvard Business Review, September 2000).

The article outlines the development of the innovative, employee-owned, London advertising agency and its unusual approach to recruitment, incentives, organization, and the management of creativity. Chairman and cofounder Andy Law outlines the ideas and philosophy behind St.

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Luke’s unique approach. “We’re fundamentally convinced that there is a connection between co-ownership, creativity, collaboration, and competitive advantage. … The firm requires people to peel away all the levels of their personalities ... Self knowledge is the DNA of a creative company in the creative age.” The article provides a basis for discussing the viability of alternatives to shareholder-owned, profit-maximizing corporations in an era where competitive advantage is increasingly knowledge based.

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STRATEGY CAPSULE 1.1 Queen Elizabeth II and the House of Windsor February 6, 2022 will mark the 70th anniversary of Elizabeth Windsor becoming queen of the United Kingdom and the Commonwealth.

Few hereditary monarchies have survived the forces of democracy, and reform. Most were small autocracies such as Bahrain, Qatar, Oman, Kuwait, Bhutan, and Lesotho. Monarchies had also survived in Denmark, Sweden, Norway, the Netherlands, and Belgium, but these royal families had lost most of their wealth and privileges.

By contrast, the British royal family retains considerable wealth—the Queen’s personal net worth is about $500 million, not including the $10 billion worth of palaces and other real estate owned by the nation but used by her and her family. Queen Elizabeth’s formal status is head of state, head of the Church of England, and head of the navy and air force. Yet none of these positions confers any decision-making power—her influence comes from the informal role she has nurtured.

According to her website, she “has a less formal role as Head of Nation” where she “acts as a focus for national identity, unity and pride; gives a sense of stability and continuity; officially recognizes success and excellence; and supports the ideal of voluntary service” (www.royal.gov.uk).

How has Queen Elizabeth been able to retain not just the formal position of the monarchy but also its status, influence, and wealth despite the challenges posed by wrenching social and political changes and her own dysfunctional family?

At the heart of Elizabeth’s sustaining of the British monarchy has been her single-minded devotion to what she regards as her duties to the monarchy and to the nation. In cultivating her role as leader of her nation, she has preserved her political neutrality—even when she has disagreed with her prime ministers. Through her outreach activities she promotes British influence, British culture, and British values within the wider world. She has made multiple visits to each of the 54 Commonwealth nations, including 27 to Canada and 16 to Australia.

The growing unacceptability of hereditary privilege and the traditional British class system has required her to reposition the royal family from being the leader of the ruling class to embodying the nation as a whole.

To make her and her family more inclusive and less socially stereotyped, she has cultivated involvement with popular culture, with ordinary people engaged in social service and charitable work, and she has endorsed the marriages of her grandsons William and Harry—the first members of the royal family to marry outside the ranks of the aristocracy.

Elizabeth has been adept at exploiting new media for communicating both with her subjects and with a wider global audience: initially through television, more recently using the web, Twitter, and Facebook. Her press and public relations staff comprises top professionals who report to her private secretary. While respecting tradition and protocol, she adapts in the face of pressing

circumstances. The death of her daughter-in-law, Diana, created difficult tensions between her responsibilities as mother and grandmother and her need to show leadership to a grieving nation—even if it meant departing from established traditions.

Elizabeth has made effective use of the resources available to her—especially the underlying desire of the British people for continuity and their distrust of politicians.

By positioning herself above the political fray and guiding public roles of her children and grandchildren, she reinforces the legitimacy of herself, her family, and the institution they represent. The success of Elizabeth’s 70-year reign is indicated by the popular support for her personally and for the institution of the monarchy.

STRATEGY CAPSULE 1.2 Lady Gaga and the Haus of Gaga Stefani Joanne Angelina Germanotta, better known as Lady Gaga, is one of the most successful popular entertainers of the 21st century.

Since dropping out of NYU’s Tisch School of the Arts in 2005, Germanotta has shown total commitment to advancing her musical career, first as a songwriter, and then developing her Lady Gaga persona.

Gaga’s music is well suited to dance clubs and radio airplay. It features good melodies, Gaga’s capable vocals, and her reflections on life, but it is hardly exceptional or innovative: music critic Simon Reynolds described it as: “ruthlessly catchy, noughties pop glazed with Auto-Tune and undergirded with R&B-ish beats.”

However, music is only one element in the Lady Gaga phenomenon—her achievement is not so much as a singer or songwriter as in establishing a persona which transcends pop music. Like David Bowie and Madonna before her, Lady Gaga is famous for being Lady Gaga.

To do this she has created a multimedia, multifaceted offering that comprises music, visual appearance, newsworthy events, a distinctive attitude, and a set of values with which fans can identify.

Key among these is visual impact and theatricality. Her visually stunning music videos have won Grammy awards and broken records for YouTube downloads. Most striking of all has been Lady Gaga’s attire, which has seta new standard in eccentricity, innovation, and impact.

Individual outfits—her plastic bubble dress, meat dress, and “decapitated-corpse dress”—together with weird hair-dos, extravagant hats, and extreme footwear—are as well-known as her hit songs.

Her every appearance creates a buzz of anticipation.

Gaga’s business model is adapted to the world of digital entertainment and the Web 2.0 imperative to first build market presence, and then monetize that presence. Her emphasis on visual imagery reflects a revenue model where visual impact takes precedence over auditory experience. While music royalties are important, concerts are her primary revenue source. Other revenue sources such as endorsements, product placement, merchandizing deals, media appearances, and movie roles are dependent on her visual presence.

Fundamental to Gaga’s success is her relationship with her fans. The devotion of her fans—her “Little Monsters”—is based less on their desire to emulate her look as upon empathy with her values and attitudes: Gaga’s images are social statements of nonconformity rather than fashion statements. In communicating her experiences of alienation and bullying at school and her values of individuality, sexual freedom, and acceptance of differences, she has built a global fan base of unusual loyalty and commitment. A sense of belonging is reinforced by gestures and symbols such as the “Monster Claw” greeting and the “Manifesto of Little Monsters.” As “Mother Monster,” Gaga is spokesperson and guru for this community. For all her nonconformity, Gaga’s mainstream

acceptance is evident from her Hollywood Oscar (2019) and star role in the 2021 Presidential Inauguration.

Lady Gaga is supported by The Haus of Gaga, a creative workshop led by a creative director who coordinates a team of choreographers, fashion designers, hair stylists, photographers, set designers, songwriters, musicians, and marketing professionals.

STRATEGY CAPSULE 1.3 What’s Wrong with SWOT? Distinguishing between the external and the internal environment of the firm is common to most approaches to strategy analysis. The best-known and most widely used of these is the “SWOT” framework, which classifies the various influences on a firm’s strategy into four categories: Strengths, Weaknesses, Opportunities, and Threats. The first two—strengths and weaknesses— relate to the internal environment of the firm, primarily its resources and capabilities; the last two—opportunities and threats—relate to the external environment. Which is better, a two-way distinction between internal and external influences or the four-way SWOT taxonomy? The key issue is whether it is sensible and worthwhile to classify internal factors into strengths and weaknesses and external factors into opportunities and threats. In practice, these distinctions are problematic.

Is the Harley-Davidson brand a strength or a weakness for the Harley-Davidson motorcycle company? As an iconic symbol of freedom and Americana, it engenders fervent loyalty among Harley owners. Yet, for many younger and non-American riders, it lacks appeal. Was COVID-19 a threat or opportunity to Starbucks? Loss of sales was a huge threat. Yet, Starbucks used the pandemic to accelerate mobile ordering and payment, reconfigure coffee-shop operations, launch direct delivery, and reinforce its commitment to employees.

The lesson here is that classifying external factors into opportunities and threats, and internal factors into strengths and weaknesses, is often arbitrary. What is important is to carefully identify the external and internal forces that impact the firm, and then analyze their implications.

In this book, I will follow a simple two-way classification of internal and external factors, recognizing that their categorization into strengths or weaknesses and opportunities or threats, depends upon circumstances.

Note: For more on SWOT see: T. Hill and R. Westbrook, “SWOT Analysis: It’s Time for a Product Recall,” Long Range Planning, 30 (February 1997): 46–52; M. Venzin, “SWOT Analysis: Such a Waste of Time?”

(February 2015) http://ideas.sdabocconi.it/strategy/archives/3405.

STRATEGY CAPSULE 1.4 A Brief History of Business Strategy The origins of business strategy are in military strategy. The term strategy derives from the Greek word strategia, meaning “generalship.” Since Sun Tzu’s The Art of War, written around 500 BC, business strategists have drawn upon the classics of military strategy, including Machiavelli’s The Art of War, Von Clausewitz’s On War, and Mao Zedong’s On Guerrilla Warfare.a Common to both military and business strategy is the distinction between strategy and tactics: strategy is the overall plan for deploying resources to establish a favorable position; a tactic is a scheme for a specific action. Strategic decisions are distinguished by their importance, their commitment of resources, and their irreversibility.

At the same time, there are major differences between business competition and military conflict.

The objective of war is (usually) to defeat the enemy. The purpose of business rivalry is seldom so aggressive: most business enterprises seek to coexist with their rivals rather than to destroy them.

The evolution of business strategy has been driven more by the practical needs of business than by the development of theory. Despite the diffusion of financial budgeting during the 1950s— especially the application of discounted cash flow analysis to capital expenditure decisions— companies lacked systematic approaches to their long-term development. Corporate planning (also known as long-term planning) developed during the late 1950s and 1960s to serve this purpose. The typical format was a multiyear plan (most commonly, five years) that set objectives, forecasted key economic trends (including market demand and costs), established priorities for different products and business areas of the firm, and set capital expenditure budgets.b By the early 1980s, macroeconomic instability, increasing international competition, and accelerating technological changes had undermined confidence in corporate planning—companies couldn’t plan their activities over a five-year horizon if they couldn’t forecast that far.

This transition from corporate planning to what became called strategic management involved a shift in emphasis from planning a company’s growth and resource allocation to positioning the company to best exploit emerging opportunities. The focus was upon competition as the central feature of the business environment and performance maximization as the primary goal.

The quest for performance directed strategy analysis to the sources of profitability. At the end of the 1970s, Michael Porter pioneered the application of industrial organization economics to analyzing the profit potential of different industries and markets.c During the 1990s, the focus of strategy analysis shifted from the sources of profit in the external environment to the sources of profit within the firm. The resource-based view identifies the firm’s resources and capabilities as its main source of competitive advantage and the primary basis for formulating strategy. This encouraged firms to identify how they are different from their competitors and to design strategies that exploit these differences.d

During the 21st century, new challenges continued to shape the principles and practice of strategic management. Digital technologies have disrupted established market positions, created winnertake-all markets, and allowed new business models to flourish. Periodic global crises—notably the financial crisis of 2008 and the COVID-19 pandemic of 2020 have reinforced managers’ appreciation of uncertainty and the need for agility. At the same time, firms are pressured by new demands—greater responsiveness to stakeholder interests, to social pressures, and to the threats of climate change and environmental degradation.

As we shall see, the complexity of these challenges requires strategic innovation, new approaches to organizing, and collaboration among firms.e Figure 1.4 summarizes the main developments in strategic management since the mid-20th century.

Notes: a

Sun Tzu, The Art of Strategy: A New Translation of Sun Tzu’s Classic “The Art of War,” trans. R. L. Wing (New York: Doubleday, 1988); N. Machiavelli, Art of War (University of Chicago Press, 2003); C. von Clausewitz, On War (Princeton University Press, 2008); Mao Zedong, On Guerrilla Warfare (1935). b

H. W. Henry, Long Range Planning Processes in 45 Industrial Companies (Englewood Cliffs, NJ: PrenticeHall, 1967). c

M. E. Porter, Competitive Strategy (New York: Free Press, 1980).

d

R. M. Grant, “The Resource-based Theory of Competitive Advantage: Implications for Strategy Formulation,” California Management Review 33 (Spring 1991): 114–135; D. J. Collis and C. Montgomery, “Competing on Resources: Strategy in the 1990s,” Harvard Business Review (July/August 1995): 119–128. e

M. G. Jacobides, “In the Ecosystem Economy, What’s Your Strategy?” Harvard Business Review (December 2019); J. O’Toole, “The Prospects for Enlightened Corporate Leadership,” California Management Review 61(3) (Fall 2019): 72–92.

FIGURE 1.4 Evolution of strategic management

STRATEGY CAPSULE 1.5 Statements of Company Strategy: Carlsberg and Zoom Video Communications CARLSBERG GROUP Our Purpose ◆ We pursue perfection every day. ◆ We strive to brew better beers. Beers that stand at the heart of moments that bring people together. ◆ We don’t settle for immediate gain when we can create a better tomorrow for all of us.

Our Ambition Successful by delivering sustainable organic top-and-bottom-line growth; professional by being the preferred supplier of our customers; and attractive by delivering value for shareholders, employees, and society.

Our Priorities 1. Strengthen #1 & #2 positions: We leverage our strong beer brands and market positions to drive

growth.

2. Position for growth: We drive growth in geographies and segments where we see long-term growth opportunities. (Craft and specialty beers, non-alcohol brews, and Asia.)

3. Deliver value for shareholders (organic growth in operating profit, ROIC improvement, and optimal capital allocation).

4. Create a winning culture (team-based performance): Together towards ZERO (carbon emissions, water waste, irresponsible drinking, accidents). Live by our Compass.

ZOOM VIDEO COMMUNICATIONS, INC. We provide a video-first communications platform that delivers happiness and fundamentally changes how people interact. We connect people through frictionless video, voice, chat and content sharing and enable face-to-face video experiences for thousands of people in a single meeting across disparate devices and locations.

Our cloud-native platform delivers reliable, high-quality video that is easy to use, manage and deploy, provides an attractive return on investment, is scalable and easily integrates with physical spaces and applications. We believe that rich and reliable communications lead to interactions that build greater empathy and trust. We strive to live up to the trust our customers place in us by delivering a communications solution that “just works.” Our goal is to make Zoom meetings better than in-person meetings.

We focus on the following elements of our strategy to drive our growth: ◆ keep our existing customers happy; ◆ drive new customer acquisition; ◆ expand within existing customers; ◆ innovate our platform continuously; ◆ accelerate international expansion; and ◆ grow our partnership ecosystem and continue to expand our platform.

Sources: www.carlsberggroup.com; SEC, Form S-1 Registration Statement, Zoom Video Communications, Inc., 2019.

STRATEGY CAPSULE 1.6 The Strategic Plan of the International Red Cross The International Federation of Red Cross and Red Crescent Societies (IFRC) coordinates activities of 190 National Red Cross and Red Crescent Societies. “Strategy 2020 provides the basis for the strategic plans of National Societies.” It included the following: Fundamental Principles Vision

Strategic Aims

Enabling Actions

Expected Impact

Humanity, Impartiality, Neutrality, Independence, Voluntary service, Unity, Universality To inspire, encourage, facilitate, and promote at all times all forms of humanitarian activities by National Societies, with a view to preventing and alleviating human suffering, and thereby contributing to the maintenance and promotion of human dignity and peace in the world.

1. Save lives, protect 2. Enable healthy and safe 3. Promote social livelihoods, and living inclusion and a culture strengthen recovery of nonviolence and from disasters and peace crises Build strong National Red Cross and Red Crescent Societies Expanded sustainable national and local capacities of National Societies

Pursue humanitarian diplomacy to prevent and reduce vulnerability in a globalized world A stronger culture of voluntary service and participation in National Societies.

Scaled-up services for the most vulnerable people Greater access to help people who are vulnerable and earlier attention to causes of vulnerability.

Deeper public, government, and partner support.

More resources to address vulnerabilities.

Stronger recognition of community perspectives.

Function effectively as the IFRC

Stronger cooperation, coordination and support arrangements.

Improved accountability for IFRC activities.

Greater IFRC contribution to meeting vulnerability needs at global, national and local levels.

Source: Modified from International Federation of Red Cross and Red Crescent Societies, Strategy 2020 (Geneva, 2010).

STRATEGY CAPSULE 2.2 Diagnosing Performance: UPS versus FedEx Between 2018 and 2020, United Parcel Service (UPS) has earned more than double the return on assets as of its close rival, FedEx Corporation. What are the sources of this performance differential?

Disaggregating the companies’ return on assets for the three-year period 2018–2020 into operating margin and asset turnover shows that differences in ROA are due to UPS’s superior operating margin and higher capital turnover (see Figure 2.3).

Probing UPS’s higher operating margin highlights major differences in the cost structure of the two companies: UPS is more labor intensive with a much higher ratio of employee costs to sales (however, UPS relies less on purchased transportation than FedEx). FedEx hashigher costs of fuel, maintenance, depreciation, and SGA (sales, general, and administrative costs). UPS’s highercapital turnover is mainly due to its higher turnover of fixed assets (property, plant, and equipment).

These differences reflect the different composition of the two companies’ businesses. UPS is more heavily involved in ground transportation (UPS has 127,000 vehicles; FedEx has 79,000), which tends to be more labor intensive. FedEx has more airplanes: 679; UPS has 588 (including 311 charters).

Despite differences in business mix, the likelihood is that UPS has superior operational efficiency.

FIGURE 2.3 Analyzing why UPS earns a higher return on assets (ROA) than FedEx

STRATEGY CAPSULE 2.3 The Pitfalls of Pursuing Shareholder Value: Boeing Boeing was one of the most financially successful members of the Dow Jones Industrial Index between 1960 and 1990. Yet Boeing gave little attention to financial management. CEO Bill Allen was interested in building great planes and leading the world market with them: “Boeing is always reaching out for tomorrow. This can only be accomplished by people who live, breathe, eat and sleep what they are doing.” At a board meeting to approve Boeing’s biggest ever investment, the 747, Allen was asked by non-executive director Crawford Greenwalt for Boeing’s financial projections on the project. In response to Allen’s vague reply, Greenwalt buried his head in his hands. “My God,” he muttered, “these guys don’t even know what the return on investment will be on this thing.”

In 1997, Boeing acquired McDonnell Douglas and a new management team of Harry Stonecipher and Phil Condit took over. Condit talked proudly of taking the company into “a value-based environment where unit cost, return on investment, and shareholder return are the measures by which you’ll be judged.” Stonecipher declared that he had run Boeing “like a business rather than a great engineering firm.” Since 2003, three out of Boeing’s four CEOs have been former General Electric executives.

The result was lack of investment in major new civil aviation projects and diversification into defense and satellites. Boeing relinquished market leadership in passenger aircraft to Airbus. The Boeing 737-MAX debacle was the culmination of Boeing’s disastrous era under the leadership of professional managers rather than aeronautic engineers.

Sources: John Kay, “Forget How the Crow Flies,” Financial Times Magazine (January 17, 2004): 17–27; “The Last GE Man,” Economist (January 11, 2020).

STRATEGY CAPSULE 2.4 Accenture: Our Core Values Since its inception, Accenture has been governed by its core values. They shape the culture and define the character of our company. They guide how we behave and make decisions. ◆ Stewardship Fulfilling our obligation of building a better, stronger and more durable company for future generations, protecting the Accenture brand, meeting our commitments to stakeholders, acting with an owner mentality, developing our people and helping improve communities and the global environment. ◆ Best People Attracting, developing and retaining the best talent for our business, challenging our people, demonstrating a “can-do” attitude, and fostering a collaborative and mutually supportive environment. ◆ Client Value Creation Enabling clients to become high-performance businesses and creating longterm relationships by being responsive and relevant and by consistently delivering value. ◆ One Global Network Leveraging the power of global insight, relationships, collaboration and learning to deliver exceptional service to clients wherever they do business. ◆ Respect for the Individual Valuing diversity and unique contributions, fostering a trusting, open and inclusive environment and treating each person in a manner that reflects Accenture’s values. ◆ Integrity Being ethically unyielding and honest and inspiring trust by saying what we mean, matching our behaviors to our words and taking responsibility for our actions.

Source: Based on BUILDING A FUTURE OF SHARED SUCCESS, Corporate Citizenship Report 2019, http://www.accenture.com/us-en/company/overview/values/Pages/index.

STRATEGY CAPSULE 2.5 Unilever’s Sustainable Living Plan Since launching its Sustainable Living Plan in November 2010, Unilever—the Anglo-Dutch multinational supplying over 400 brands of food, personal care, and household products—has become a world leader in environment sustainability. According to the Economist, Unilever is “reckoned to have the most comprehensive strategy of enlightened capitalism of any global firm.”

The program—with its goals of reducing Unilever’s environmental footprint, increasing its positive social impact, doubling sales, and increasing long-term profitability—has been the centerpiece of CEO Paul Polman’s strategy for the company. Unilever has embedded its sustainability program within its strategic, operational, and human resource management: the plan is overseen by the board and incentive bonuses are linked to quantitative targets for emissions and waste reduction and energy and water conservation.

While Polman emphasizes that Unilever’s commitment to sustainability is because it is “the right thing to do,” he is also clear that the primary motivation is the fact that the Sustainable Living Plan is in the long-term interests of Unilever itself. In an interview with McKinsey and Company, Polman noted that the benefits to Unilever included improved access to raw materials, greater employee commitment, a stronger drive toward innovation throughout the company, greatly increased numbers of applications for jobs at Unilever, and improvement in efficiency in Unilever plants and throughout its supply chain.

Polman’s successor as CEO, Alan Jope extended the Sustainable Living Plan to include goals for net zero emissions by 2030 and a set of initiatives “to help build a more equitable and inclusive society.”

However, despite gaining positive media coverage and the support of employees, politicians, and environmental groups, the program has done little to boost Unilever’s commercial and financial performance.

Unilever’s sales and market capitalization have grown slower than those of rivals P&G, Nestle, and Reckitt Benckiser. When Unilever was threatened by a hostile takeover bid from Kraft Heinz in 2014, some leading shareholders wondered whether senior executives’ commitment to combatting climate change and world poverty was distracting them from the more mundane tasks of selling margarine and laundry detergent.

Sources: “Unilever: In Search of the Good Business,” Economist (August 9, 2014); “The Shackles Are Off: Unilever Goes for Growth After UK Move.” Financial Times (February 4, 2021).

STRATEGY CAPSULE 2.6 Calculating Real Option Value Application of real option value to investment projects and strategies has been limited by the complexity of valuing options. Yet, even without getting into the mathematics needed to quantify option values, we can recognize the factors that determine option values and understand how projects and strategies can be designed in order to maximize their option values.a There are two approaches to real option valuation. The Black–Scholes option-pricing formula, developed for valuing financial options, comprises six determinants of option value, each of which has an analogy (∼) in the valuation of a real option: Stock price ∼ The NPV of the project: a higher NPV increases option value.

Exercise price ∼ Investment cost: the higher the cost, the lower the option value.

Uncertainty ∼ for both financial and real options, uncertainty increases option value.

Time to expiry ∼ for both financial and real options, the longer the option lasts, the greater its value.

5. Dividends ∼ Decrease in the value of the investment over the option period: lowers option value.

1.

2.

3.

4.

6. Interest rate ∼ a higher interest rate increases option value by making deferral more valuable.b The binomial options pricing model allows the sources of uncertainty and key decision points in a project to be modeled explicitly, thereby offering a more intuitive appreciation of the sources of option value. The analysis involves two main stages: 1. Create an event tree that shows the value of the project at each development period under two different scenarios.

2. Convert the event tree into a decision tree by identifying the key decision points on the event tree, typically the points where commitments of new funds to the project are required, or where there is the option to defer development. Incremental project values at each stage can then be calculated for each decision point by working back from the final nodes of the decision tree (using a discount factor based upon the replicating portfolio technique). If the incremental project value at the initial stage exceeds the initial investment, proceed with the first phase, and similarly for each subsequent phase.c Notes: a

See: L. Trigeorgis and J. J. Reuer, “Real Options Theory in Strategic Management,” Strategic Management Journal 38 (2017): 42–63. b

See: K. J. Leslie and M. P. Michaels, “The Real Power of Real Options,” McKinsey Quarterly Anthology: On Strategy (Boston: McKinsey & Company, 2000); A. Dixit and R. Pindyck, “The Options Approach to Capital Investment,” Harvard Business Review (May/June 1995): 105–115. c

This approach is developed in T. Copeland and P. Tufano, “A Real-World Way to Manage Real Options,” Harvard Business Review (March 2004). See also T. Copeland, “Developing Strategy Using Real Options” (Monitor Company, October 2003).

CHAPTER 3 STRATEGY CAPSULE 3.1 Chewing Tobacco, Sausage Skins, and Sports Cards: The Joys of Niche Markets US Smokeless Tobacco Company earned an operating margin of 62% during 2014–2017, making a major contribution to the 122% return on equity earned by its parent, Altria Inc., over the same period. What’s the secret of USSTC’s profitability? It accounts for 57% of the US market for smokeless tobacco, and its long-established brands (including Skoal, Copenhagen, and Red Seal), its distribution through thousands of small retail outlets, and government restrictions on advertising tobacco products create formidable barriers to would-be competitors.

Devro plc, based in the Scottish village of Moodiesburn, is the world’s leading supplier of collagen sausage skins (“casings”). “From the British Banger to the Chinese Lap Cheong, from the French Merguez to the South American Chorizo, Devro has a casing to suit all product types.” Its overall world market share is around 60%. During 2014–2017, Devro’s return on equity exceeded 20%— about three times its cost of equity.

Panini Group, based in Modena, Italy, is the world leader in sports trading cards and collectable stickers. With an exclusive licence with FIFA, it dominates soccer cards and, with licences to supply NBA, NFL, and NHL trading cards. It has become market leader in the United States. It is believed to have earned an operating margin of over 20% on its 2018 revenues of $1 billion.

Sources: www.altria.com, www.devro.com, and www.paninigroup.com/corporate/.

STRATEGY CAPSULE 3.2 The Future of the World Automobile Industry During 2016–2020, the top eight producers (Toyota, VW, General Motors, Ford, Nissan, Hyundai, Honda, and Fiat Chrysler) have earned an average return on capital employed of 5.1% (barely covering their weighted average cost of capital). Applying the five forces of competition framework to the industry reveals why profitability has been low. We can then identify the current trends that are reshaping the industry—the switch to electric vehicles (EVs), autonomous driving, increased shared ownership and ride sharing, internationalization by Chinese auto producers—and show how these trends will impact the five forces of competition in the future. In the table, the direction of the arrow shows the predicted impact of each competitive force on industry profitability.

Even with potential new revenue sources (e.g., online services for car occupants), it would appear that structural changes in the industry will depress the profitability of the car manufacturers. This negative outlook is reflected in companies’ stock market capitalization: the top eight auto makers had an average P/E ratio of 10.6 on May 20, 2021 compared to 44.1 for the S&P 500.

STRATEGY CAPSULE 3.3 Probing for Key Success Factors As a consultant faced with an unfamiliar business or industry, I make a point of first asking the specialists in the business, “What is the secret of success in this industry?”

Needless to say, I seldom get an immediate answer and so I pursue the inquiry by asking other questions from a variety of angles in order to establish as quickly as possible some reasonable hypotheses as to key factors for success.

In the course of these interviews, it usually becomes quite obvious what analyses will be required in order to prove or disprove these hypotheses. By first identifying the probable key factors for success and then screening them by proof or disproof, it is often possible for the strategist to penetrate very quickly to the core of a problem.

Traveling in the United States last year, I found myself on one occasion sitting in a plane next to a director of one of the biggest lumber companies in the country. Thinking I might learn something useful in the course of the five-hour flight, I asked him, “What are the key factors for success in the lumber industry?” To my surprise, his reply was immediate: “Owning large forests and maximizing the yield from them.”

The first of these key factors is a relatively simple matter: purchase of forestland. But his second point required further explanation. Accordingly, my next question was: “What variable or variables do you control in order to maximize the yield from a given tract?”

He replied: “The rate of tree growth is the key variable. As a rule, two factors promote growth: the amount of sunshine and the amount of water. Our company doesn’t have many forests with enough of both. In Arizona and Utah, for example, we get more than enough sunshine but too little water and so tree growth is very low. Now, if we could give the trees in those states enough water, they’d be ready in less than 15 years instead of the 30 it takes now. The most important project we have in hand at the moment is aimed at finding out how to do this.”

Impressed that this director knew how to work out a key factor strategy for his business, I offered my own contribution: “Then under the opposite conditions, where there is plenty of water but too little sunshine—for example, around the lower reaches of the Columbia River—the key factors should be fertilizers to speed up the growth and the choice of tree varieties that don’t need so much sunshine.”

Having established in a few minutes the general framework of what we were going to talk about, I spent the rest of the long flight very profitably hearing from him in detail how each of these factors was being applied.

Source: Kenichi Ohmae, The Mind of the Strategist (New York: McGraw-Hill, 1982): 85 © The McGraw-Hill Companies Inc., reproduced with permission.

STRATEGY CAPSULE 3.4 Identifying Key Success Factors by Profitability Modeling: Airlines Profitability, as measured by profit per available seat-mile (ASM), is determined by three factors: yield, which is total operating revenues divided by the number of revenue passenger miles (RPMs); load factor, which is the ratio of RPMs to ASMs; and unit cost, which is total operating expenses divided by ASMs. Thus:

Some of the main determinants of each of these component ratios are the following: ◆ Revenue/RPMs ● intensity of competition on routes flown ● effective yield management to permit rapid price adjustment to changing market conditions ● ability to attract business customers ● customer service quality. ◆ Load factor (RPMs/ASMs) ● competitiveness and flexibility of prices ● efficiency of route planning and scheduling ● customer loyalty ● matching airplane size to demand for individual flights. ◆ Expenses/ASMs ● wage rates and benefit levels ● fuel efficiency of aircraft ● productivity of employees (determined partly by their job flexibility) ● load factors ● level of administrative cost.

CHAPTER 4

STRATEGY CAPSULE 4.1 Business Models for Complex Business Ecosystems: Google and Ryanair Google: At the heart of Google’s strategy is a business model whereby free search supports paid advertising—over two-thirds of the revenues of Google’s parent, Alphabet, are generated by advertising placed on Google’s own websites and applications.

However, Google’s full business model is more extensive. It includes the following: ◆ Using its advertising management capabilities and relationships with advertisers to manage advertising placements on other content providers’ websites (AdSense). ◆ Gathering huge quantities of user data that allow more precise targeting of advertising. ◆ Protecting the availability and data-gathering capabilities of Google’s search products by providing its own web browser (Chrome) and operating systems (Android, Chrome OS). ◆ Sustaining dominance of online advertising through launching competing products against rivals such as Apple, Facebook, and Microsoft.

Ryanair: At the core of Ryanair’s strategy is the low-cost carrier business model developed by Southwest Airlines (see Figure 1.3 in Chapter 1). However, this model has been extended by Ryanair to exploit multiple sources of revenue generated by a range of partners.

Elements of the Ryanair business model include the following: ◆ Extreme unbundling. In addition to paying for flight tickets, passengers are encouraged to pay for services such as seat assignments, checked baggage, priority boarding, credit card fees, and inflight refreshments. ◆ Payments from airports and local government authorities (incentives to Ryanair to initiate and maintain specific routes). ◆ Commission on sales of partners’ complementary products and services such as car hire, train and bus services, insurance, hotels, theater, and sports tickets—also ticket sales for other airlines (e.g., Air Europa). ◆ Advertising on Ryanair website, travel magazine, and seat backs.

Sources: Allan Afuah, Business Model Innovation: Concepts, Analysis, and Cases (Routledge, 2014); Ryanair Holdings plc, Annual Report, 2017.

STRATEGY CAPSULE 4.2 The Prisoners’ Dilemma The classic prisoners’ dilemma game involves a pair of crime suspects who are arrested and interrogated separately.

The dilemma is that each will rat on the other with the result that both end up in jail despite the fact that, if both had remained silent, they would have been released for lack of evidence.

The dilemma arises in most competitive situations—everyone could be better off with collusion.

Consider competition between Coca-Cola and Pepsi in Ecuador, where each has the choice of setting a big or small advertising budget. Figure 4.3 shows the payoffs to each firm.

Clearly, the best solution for both firms is for each to restrain their advertising expenditure (the upper-left cell). However, in the absence of cooperation, both firms adopt big budgets (the lower-right cell). The reason is that each fears that any restraint will be countered by the rival seeking advantage by shifting to a big advertising budget. The resulting “maxi-min” strategy (each company chooses the strategy that maximizes the minimum payoff) is a “Nash equilibrium”: no player can increase its payoff by a unilateral change in strategy. Even if collusion can be achieved, it will be unstable because of the incentives for cheating—a constant problem for OPEC, where the member countries agree quotas but then cheat on them.

How can a firm escape from such prisoners’ dilemmas? One answer is to change a one-period game (single transaction) into a repeated game. In the above example of competition in advertising, a multiperiod perspective allows the companies to recognize the futility of advertising campaigns that merely cancel one another out.

In the case of supplier–buyer relations, where the typical equilibrium is a low-quality product at a low price, moving from a spot-transaction to a long-term vendor relationship gives the supplier the incentive to offer a better-quality product and the buyer to offer a price that reflects the preferred quality.

A second solution is to change the payoffs through deterrence. In the classic prisoners’ dilemma, the Mafia shifts the equilibrium: the threat of draconian reprisals encourages both suspects to maintain the “code of silence.” Similarly, if both Coca-Cola and Pepsi were to threaten one another with aggressive price cuts should the other seek advantage through a big advertising budget, this could shift the equilibrium to the top-left cell.

FIGURE 4.3 Coca-Cola’s and Pepsi’s advertising budget: The prisoners’ dilemma

STRATEGY CAPSULE 4.3 Segmenting the World Automobile Industry 1. Identify key segmentation variables and categories. Possible segmentation variables include price, size, engine power, body style, buyer type (retail versus fleet), and geographical market. We can reduce the number of segmentation variables—in particular, price, size, and engine power tend to be closely correlated.

Other variables clearly define distinct markets (e.g., geographical regions and individual national markets).

2. Construct a segmentation matrix. The segmentation matrix in Figure 4.6 shows geographical regions (columns) and product types (rows). These product types combine multiple segmentation variables: price, size, design, and fuel type.

3. Analyze segment attractiveness. Applying five forces analysis to individual segments points to the attractiveness of the growth markets of Asia and Latin America (especially for luxury cars) as compared with the saturated, excess capacity-laden markets of Europe and North America. In these mature markets, the hybrid and electric car segments may be attractive due to fewer competitors and lack of excess capacity.

4. Identify KSFs in each segment. In sports cars, technology and design aesthetics are likely to be key differentiators. In luxury cars, quality and interior design are likely to be essential. In family compact and mini cars, low cost is the primary basis for competitive advantage.

5. Analyze attractions of broad versus narrow segment scope. Because of the potential to share technology, design, and components across models, all product segments are dominated by full-range mass-manufactures.

In terms of geographical segments, only in the biggest markets (primarily China) have nationally focused producers survived.

FIGURE 4.6 A segmentation matrix of the World Automobile Market

CHAPTER 5 STRATEGY CAPSULE 5.1 David and Goliath In about 1000 bc, David, an Israeli shepherd boy, took up the challenge of meeting Goliath, the champion of the Philistines in single combat. Goliath’s “height was six cubits and a span [three meters]. He had a bronze helmet on his head and wore a coat of scale armor of bronze weighing five thousand shekels [58 kg]; on his legs he wore bronze greaves, and a bronze javelin was slung on his back.” King Saul of the Israelites offered David armor and a helmet, but David discarded them: “‘I cannot go in these,’ he said to Saul, ‘because I am not used to them.’ . . . Then he took his staff in his hand, chose five smooth stones from the stream, put them in the pouch of his shepherd’s bag and, with his sling in his hand, approached the Philistine . . . As the Philistine moved closer to attack him, David ran quickly toward the battle line to meet him. Reaching into his bag and taking out a stone, he slung it and struck the Philistine on the forehead. The stone sank into his forehead, and he fell facedown on the ground.”

David’s victory reflects a strategy based upon exploiting his three core strengths: courage and self-confidence, speed and mobility, and expertise with a sling. This strategy allowed him to negate Goliath’s core strengths: size, advanced offensive and defensive equipment, and combat experience. Had he followed King Saul’s advice and adopted a conventional strategy for armed single combat, the outcome would almost certainly have been very different.

Source: Holy Bible (New International Version): 1 Samuel 17: 39–49.

STRATEGY CAPSULE 5.2 Basing Strategy upon Resources and Capabilities: Honda and 3M Honda Motor Company has never defined itself either as a motorcycle or an automobile company. As Figure 5.1 shows, since its founding in 1948, its development of expertise in designing and manufacturing engines (some of it honed on the race track) has taken it from motorcycles to a wide range of products that embody internal combustion engines.

3M Corporation (originally Minnesota Mining and Manufacturing) has expanded from sandpaper into over 55,000 industrial, office, medical, and household products.

Is it a conglomerate? Certainly not, claims 3M. Its vast product range rests on a cluster of technological capabilities that it has systematically developed for more than a century (Figure 5.2).

FIGURE 5.1 Key initiatives at Honda Motor Company

FIGURE 5.2 The evolution of products and technical capabilities at 3M

STRATEGY CAPSULE 5.3

Capability-Based Strategy: Lyor Cohen on Mariah Carey The year 2001 was disastrous for Mariah Carey. Her first movie, Glitter, was a flop, the soundtrack was Carey’s worst selling album in years, she was dropped by EMI, and suffered a nervous breakdown.

Lyor Cohen, the workaholic chief executive of Island Def Jam records was quick to spot an opportunity: “I cold-called her on the day of her release from EMI and I said, I think you are an unbelievable artist and you should hold your head up high. What I said stuck on her and she ended up signing with us.“ His strategic analysis of Carey’s situation was concise: “I said to her, what’s your competitive advantage? A great voice, of course. And what else? You write every one of your songs—you’re a great writer. So why did you stray from your competitive advantage? If you have this magnificent voice and you write such compelling songs, why are you dressing like that, why are you using all these collaborations”?

Cohen signed Carey in May 2002. Under Universal Music’s Island Def Jam Records, Carey returned to her versatile voice, song-writing talents, and ballad style. Her next album, The Emancipation of Mimi, was the biggest-selling album of 2005, and in 2006 she won a Grammy award.

Sources: “Rap’s Unlikely Mogul,” Financial Times (August 5, 2002); “A Superstar Returns with Another New Self,” New York Times (April 12, 2005).

STRATEGY CAPSULE 5.4 Resource Utilization: Revival at Walt Disney In 1984, Michael Eisner became CEO of the Walt Disney Company. Between 1984 and 1988, Disney’s net income increased from $98 million to $570 million, and its stock market valuation from $1.8 billion to $10.3 billion.

The key to the Disney turnaround was the mobilization of Disney’s considerable resource base.

With the acquisition of Arvida, a real estate development company, Disney’s land holdings in Florida were developed into hotels, convention facilities, residential housing, and a new theme park, the Disney-MGM Studio Tour.

To exploit its huge film library, Disney began selling the Disney classics on videocassette and licensing packages of movies to TV networks. To put Disney’s underutilized movie studios to work, Eisner doubled the number of movies in production and made Disney a major producer of TV programs.

Supporting the exploitation of these tangible resources was Disney’s critically important intangible resource: the enduring affection of millions of people across generations and throughout the world for Disney and its characters. As a result, Disney’s new management was able to boost theme park admission charges, launch a chain of Disney Stores to push sales of Disney merchandise, and replicate Disney theme parks in Europe and Asia.

STRATEGY CAPSULE 5.5 Routines and Processes: The Foundations of Organizational Capability Resources combine to create organizational capabilities; however, an organization’s capabilities are critically dependent on how effectively these resources are integrated.

In sport, resource-rich teams are often outplayed by teams that create strong capabilities from modest resources. In European soccer, star-studded teams (e.g., Chelsea, Real Madrid, and Manchester City) are frequently humbled by those built from limited means (e.g., Borussia Dortmund, Porto, and Atletico Madrid). In business too, we see upstarts with modest resources outcompeting established giants: Dyson against Electrolux in domestic appliances, Tesla against VW in automobiles, Dollar Shave Club against Gillette in shaving products, ARM against Intel in microprocessors. Clearly, there is more to organizational capability than just resources.

The academic literature views organizational capability as based upon organizational routines: “regular and predictable behavioral patterns [comprising] repetitive patterns of activity”a that determine what firms do, who they are, and how they develop. Like individual skills, organizational routines develop through learning by doing—and, if not used, they wither. Hence, there is a trade-off between efficiency and flexibility. A limited repertoire of routines can be performed highly efficiently with near-perfect coordination. The same organization may find it difficult to respond to novel situations. Organizational capabilities do not simply emerge: they must be created through management action: hence in this book we shall focus on processes rather than routines. Processes are coordinated sequences of actions through which specific productive tasks are performed. Business processes can be developed using systematic tools.b To achieve high levels of performance, processes need to be located within appropriately designed organizational units, and the individuals involved need to be motivated.c In the next chapter, we shall address in greater detail the challenge that companies face in developing organizational capabilities.

Notes: a

R. R. Nelson and S. G. Winter, An Evolutionary Theory of Economic Change (Cambridge, MA: Belknap, 1982). b

T. W. Malone, K. Crowston, J. Lee, and B. Pentland, “Tools for Inventing Organizations: Toward a Handbook of Organizational Processes,” Management Science 45 (1999): 425–443. c

T. Felin, N. J. Foss, K. H. Heimeriks, and T. L. Madsen, “Microfoundations of Routines and Capabilities: Individuals, Processes, and Structure,” Journal of Management Studies 49 (2012): 1351–1374.

STRATEGY CAPSULE 5.6 Appraising Resources and Capabilities: Grant versus Barney The approach outlined in this chapter for appraising the strategic importance of resources is an alternative to the more widely used VRIO framework developed by Jay Barney. Let me compare the two approaches so that their similarities and differences are apparent.

Sources: The VRIO Framework is found in J. B. Barney, “Looking Inside for Competitive Advantage,” Academy of Management Executive 9 (1995): 49–61; J. B. Barney and W. Hesterly, Strategic Management and Competitive Advantage 5th edn (Pearson, 2014).

STRATEGY CAPSULE 5.7 Appropriating Returns from Superior Capabilities: Employees versus Owners Investment banking provides a fascinating arena to observe the struggle between employees and owners to appropriate the returns to organizational capability.

Goldman Sachs possesses outstanding capabilities in merger and acquisition services, underwriting and proprietary trading. These capabilities combine employee skills, IT infrastructure, corporate reputation, and the company’s systems and culture. All but the first of these are owned by the company. However, the division of returns between employees and owners suggests that employees have the upper hand in appropriating rents. In 2016, total employee compensation was $11.7 billion—an average of $338,576 per employee; net after-tax profit was $7.1 billion, out of which shareholders received $1.1 billion in dividends.

A similar situation exists in professional sport: star players are able to exploit the full value of their contribution to their teams’ performance. The $37 million salary the Los Angeles Lakers paid LeBron James for the 2019/20 NBA season seems likely to fully exploit his value to the Lakers.

So too CEOs: Uber’s CEO, Dara Khosrowshahi, was paid $42.4 million in 2019—Uber sustained a net loss of $8.5 billion in that year.

The more firm performance can be identified with the expertise of an individual employee and the more mobile is that employee, then the stronger is the bargaining position of that employee.

Hence, the emphasis that many investment banks, advertising agencies, and other professional service firms give to team-based rather than individual skills. “We believe our strength lies in . . . our unique team-based approach,” declares audit firm Grant Thornton.

However, employees can reassert their bargaining power through team mobility: in August 2018, a team of European equity analysts moved from Société Générale to Barclays plc.

STRATEGY CAPSULE 5.8 Resource and Capability Analysis in Action: Icelandair Group If the key success factor in the airline business is providing safe, reliable transportation between city pairs at a competitive price, we can begin by identifying the resources and capabilities needed to achieve that goal.

We can then use the value chain to fill out more systematically this list of resources and capabilities. Table 5.2 and Figure 5.8 show the major resources and capabilities required in the airline business and assess Icelandair’s position relative to a peer group of competitors.

In terms of strategy implications, a key resource that distinguishes Icelandair is location: Iceland’s population of 326,000 offers a passenger and freight market that Icelandair can easily dominate, but is too small to support an international airline. Hence, to achieve efficient scale, Icelandair must (a) collaborate with other firms and the Icelandic government to develop Iceland as a tourist destination and (b) compete on North Atlantic routes between European and North American cities. For (b) to be viable, Icelandair needs to make routes that involve a stopover at its Reykjavik hub competitive with the point-to-point routes offered by the major US and European airlines. This requires (a) using Icelandair’s operational efficiency to undercut other airlines on price and (b) exploiting Icelandair’s operational and customer service capabilities, its human resource strengths, and the appeal of Reykjavik/Iceland as a stopover to establish a differentiation advantage.

Icelandair’s strategy is encapsulated in its vision statement: “To unlock Iceland’s potential as a year-round destination, to strengthen Iceland’s position as a connecting hub, and to maintain our focus on flexibility and experience.”

FIGURE 5.8 Icelandair’s resource and capability profile

CHAPTER 6 STRATEGY CAPSULE 6.1 Organizational Culture as an Integrating Device Corporate culture comprises the beliefs, values, and behavioral norms of the company, which influence how employees think and behave.a It is manifest in symbols, ceremonies, social practices, rites, vocabulary, and dress. While shared values are effective in aligning the goals of organizational members, culture exercises a wider influence on an organization’s capacity for purposeful action. Organizational culture is a complex phenomenon. It is shaped by the national and ethnic cultures within which the firm is embedded and the social and professional cultures of organizational members.

Most of all, it is a product of the organization’s history, especially the founder’s personality and beliefs: the corporate culture of Walt Disney Company continues to reflect the values, aspirations, and personal style of Walt Disney. A corporate culture is seldom homogeneous: different cultures coexist within different functions and departments.

Culture can facilitate both cooperation and coordination through fostering social norms and a sense of identity. Cultures can also be divisive and dysfunctional.

At the British bank NatWest during the 1990s, John Weeks identified a “culture of complaining” which inhibited top-down strategy initiatives.b A culture may support some capabilities but handicap others. Lehman Brothers (whose collapse in September 2008 triggered the global financial crisis) was renowned for its individualistic, entrepreneurial culture whose downside was ineffective risk management.

The culture of the British Broadcasting Corporation reflects internal politicization, professional values, and dedication to the public good, but a lack of customer focus.c Cultures take a long time to develop and cannot easily be changed. As the external environment changes, a highly effective culture may become dysfunctional. The police forces of some US cities have developed cultures of professionalism and militarism, which increased their effectiveness in fighting crime, but led to isolation and unresponsiveness to community needs.d Despite its power over an organization’s behavior, culture is far from being a flexible management tool at the disposal of chief executives. It is a property of the organization as a whole, which is not amenable to manipulation.

CEOs inherit rather than create the culture of their organizations. The key issue is to recognize the culture of the organization and to ensure that structure and systems work with the culture and not against it. Where strategy is aligned with organizational culture, it can act as a control device and a source of flexibility: when individuals internalize the goals and principles of the organization, their initiative and creativity can be given a free rein.

Notes: a

E. H. Schein, “Organizational Culture,” American Psychologist 45 (1990): 109–119.

b

J. Weeks, Unpopular Culture: The Ritual of Complaint in a British Bank (Chicago: University of Chicago Press, 2004). c

T. Burns, The BBC: Public Institution and Private World (London: Macmillan, 1977).

d

https://www.theguardian.com/world/2020/jun/05/why-are-some-us-police-forces-equipped-likemilitary-units, accessed July 6, 2020.

STRATEGY CAPSULE 6.2 Capability Development and Organizational Structure at Booz & Company During the 1990s, Booz Allen Hamilton (now Strategy&, part of PwC) transitioned from a “generalist” to a “specialist” model of management consulting. Under the generalist model, consultants were located in one of its 28 offices throughout the world and were then assigned to one or more consulting projects. Their consulting capabilities were experience based and generic—they were not specific either to a particular management function or particular sector. Booz’s managing partner referred to the firm as “a colony of artists” (see Figure 6.3a).

During the 1990s, Booz recognized the need to develop specialist capabilities in relation to individual management functions (such as strategy, operations, information technology, and change management) and specific sectors (e.g., energy, telecom, financial services, and automobiles). To develop these specialist capabilities, Booz adopted a matrix structure comprising functional practices and sector practices (see Figure 6.3b). Hence, a new consultant or associate joining Booz would still be located within a particular office and assigned to one or more client teams, but for training and career development would also be part of a functional practice and a sector practice.

FIGURE 6.3 Booz Allen Hamilton (Worldwide commercial business)

STRATEGY CAPSULE 6.3 New Approaches to Business Organization The emergence of new forms of business organization has been widely proclaimed, but slow in coming. Three decades ago, two of America’s most prominent scholars of organization identified a “new organizational revolution” featuring “flatter hierarchies, decentralized decision-making, greater tolerance for ambiguity, permeable boundaries, empowerment of employees, self-organizing units, and self-integrating coordination mechanisms.”a The reality has been evolution rather than revolution. Alternatives to traditional, hierarchical, command-and-control corporate models include the following: ◆ Adhocracy: A team-based organizational form where shared values, employee participation, flexible communication, and spontaneous coordination substitute for hierarchy, authority, and control.b Adhocracies are found in the fields of research, consulting, engineering, entertainment, and technology development where problem-solving and other nonroutine activities predominate and where creativity takes precedence over efficiency. ◆ Project-based organizations: Where work assignments have finite lives (e.g., in consulting and construction), organization structure needs to be dynamically flexible—hence the organization of firms around projects. This structure involves team autonomy, close interaction among team members, and interaction with prior and parallel project teams in order to share know-how.

As cycle times become compressed across more and more industries, project-based company structures are increasingly common. ◆ Network structures: Informal organizations are coordinated by social networks—patterns of interactions among organizational members—rather than by hierarchy.c Such structures are especially effective in creating and disseminating knowledge—especially when supported by information and communications technologies. Network structures have proved effective in maintaining the dynamism of complex multiproduct, multinational corporations. Social networks are not confined by organizational boundaries; hence, network organizations tend to have permeable boundaries. The blurring of corporate boundaries is further enhanced by the outsourcing of corporate functions, open innovation, and strategic alliances. ◆ The humanistic company: Companies based on humanistic principles are dedicated to the dignity, liberty, integrity, and well-being of their members. For people to flourish requires a commitment to ethics and self-determination.

Thus, Sumantra Ghoshal and Chris Bartlett’s “individualized corporation” envisages a “new moral contract” between people, companies, and society, which gives primacy to developing each individual’s unique talents and skills.d Frederic Laloux’s “teal organization” embodies the next evolutionary stage in human development and is committed to self-management, human wholeness, and evolutionary purpose—Patagonia, the outdoor apparel supplier, is one such example.e Sources:

a

R. Daft and A. Lewin, “Where Are the Theories for the New Organizational Forms?” Organization Science 3 (1993): 1–6. b

H. Mintzberg, Structure in Fives: Designing Effective Organizations (Englewood Cliffs, NJ: Prentice Hall, 1993): Chapter 12. c

G. Hedlund, “The Hypermodern MNC: A Heterarchy?” Human Resource Management 25 (1986): 9–35; C. Bartlett and S. Ghoshal, Managing across Borders: The Transnational Solution, 2nd edn (Boston, Harvard Business School, 1998). d e

S. Ghoshal and C.A. Bartlett. The Individualized Corporation (New York: Harper Business, 1997).

F. Laloux, Reinventing Organizations: A Guide to Creating Organizations Inspired by the Next Stage of Human Consciousness (Nelson Parker, 2014).

CHAPTER 7 STRATEGY CAPSULE 7.1 The Historical Origins of Business Model Innovations Business model innovations are typically associated with e-commerce businesses such as Google, eBay, Facebook, Amazon, and Spotify. Yet, many of these business models are variants on business models established much earlier.

Significant business model innovations include the following: ◆ Free content supported by paid advertising originated with US commercial radio at the beginning of the 1920s. ◆ Platform business models. A platform is an interface between two sets of platform users.

Among the first platform businesses were auction houses. Sotheby’s was established in 1744, Christies in 1766. ◆ Shared-ownership models used by Airbnb, Zipcar, NetJets, and the like have their origins in real estate timeshares (pioneered by the Swiss company, Hapimag, during the 1960s). ◆ Franchising. The system of local licensed distributors, each with defined exclusive territories, is attributed to the Singer Sewing Machine Company which introduced its system in the 1880s. ◆ Consumer cooperatives. The Rochdale Society of Equitable Pioneers’ cooperative grocery store was not the world’s first consumer cooperative, but created a model for future cooperatives. ◆ Microfinance—small loans to low-income business owners—was developed by Muhammad Yunus’s Grameen Bank during the 1970s. ◆ Tied products (razor-and-blades) model involving below-cost pricing of the durable item and premium pricing of consumables, was introduced by Gillette’s competitors during the 1910s, then copied by Gillette. ◆ Mail order. The first major mail order retailer was Montgomery Ward, established in 1872.

STRATEGY CAPSULE 7.2 Blue Ocean Strategy Kim and Mauborgne argue that the best value-creating opportunities for business lie not in existing industries following conventional approaches to competing (what they refer to as “red oceans”) but seeking uncontested market space. These “blue oceans” may be entirely new industries created by technological innovation (such as artificial intelligence and nanotechnology) but are more likely to be the creation of new market space within existing industries using existing technologies. This may involve: ◆ New customer segments for existing products, for example, Tesla’s Powerwall battery for electrical storage in the home.

◆ Reconceptualization of existing products, for example, Mark Zuckerberg’s reconceptualization of a printed Facebook of class members as an online, interactive, and social platform. ◆ Novel recombinations of product attributes and reconfigurations of established value chains that establish new positions of competitive advantage, for example, Dell’s integrated system for ordering, assembling, and distributing PCs, which permitted unprecedented customer choice and speed of fulfillment.

The strategy canvas is a framework for developing blue ocean strategies. The horizontal axis shows the different product characteristics along which the firms in the industry compete; the vertical axis shows the amount of each characteristic a firm offers its customers. Starting with the value line showing the industry’s existing offerings, the challenge is to identify a strategy that can provide a novel combination of attributes. This involves four types of choice: ◆ Raise: What factors should be raised well above the industry’s standard? ◆ Eliminate: Which factors that the industry has long competed on should be eliminated? ◆ Reduce: Which factors should be reduced well below the industry’s standard? ◆ Create: Which factors should be created that the industry has never offered?

Figure 7.2 compares value lines for Cirque du Soleil and a traditional circus.

Source: Based upon W. C. Kim and R. Mauborgne, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (Boston: Harvard Business School Press, 2005).

FIGURE 7.2 The strategy canvas: Value lines for Cirque du Soleil and the traditional circus

STRATEGY CAPSULE 7.3 Urban Outfitters Urban Outfitters, Inc. was founded in Philadelphia in 1976. By 2018, it operated 650 Urban Outfitters, Anthropologie, and Free People stores in 14 countries. The company targets, “Welleducated, urban-minded, young adults aged 18—30 through its unique merchandise mix and compelling store environment ‘creating’ a unified environment that establishes an emotional bond with the customer. Every element of the environment is tailored to the aesthetic preferences of our target customers. Through creative design, much of the existing retail space is modified to incorporate a mosaic of fixtures, finishes and revealed architectural details. In our stores, merchandise is integrated into a variety of creative vignettes and displays designed to offer our customers an entire look at a distinct lifestyle.”

According to Michael Porter and Nicolaj Siggelkow, these management practices are both distinctive and highly interdependent. The urban-bohemian-styled product mix, which includes clothing, furnishings, and gift items, is displayed within bazaar-like stores, each of which has a unique design. To encourage frequent customer visits, the layout of each store is changed every two weeks, creating a new shopping experience whenever customers return. Each practice makes little sense on its own, but together they represent a distinctive, integrated strategy. It may be possible to replicate the individual elements of Urban Outfitters’ business system; the real challenge for an imitator integrating them into a cohesive whole.

Sources: Urban Outfitters, Inc. 10-K Report to January 31, 2018; M. E. Porter and N. Siggelkow, “Contextuality within Activity Systems and Sustainable Competitive Advantage,” Academy of Management Perspectives 22 (May 2008): 34–56.

STRATEGY CAPSULE 7.4 Competitive Advantage in Different Market Settings Competitive advantage arises where there are imperfections in the competitive process, which in turn result from the conditions under which essential resources and capabilities are available. In analyzing these imperfections of competition, we distinguish between two types of value-creating activity: trading and production.

In trading markets, the limiting case is efficient markets, which correspond closely to perfectly competitive markets (e.g., the markets for securities, currencies, and commodity futures). If prices reflect all available information and adjust instantaneously to new information, it is not possible to beat the market on any consistent basis—in other words competitive advantage is absent. This reflects the conditions of resource availability. Both of the resources needed to compete—finance and information—are equally available to all traders.

Competitive advantage in trading markets requires imperfections in the competitive process: ◆ Where there is an imperfect availability of information, competitive advantage results from superior access to information—hence the criminal penalties for insider trading in most advanced economies. ◆ Where transaction costs are present, competitive advantage accrues to the traders with the lowest transaction costs, hence the superior returns to low-cost index mutual funds over

professionally managed funds. Vanguard’s S&P 500 Index fund with administrative costs of 0.07% annually has outperformed 90% of US equity mutual funds. ◆ If markets are subject to systematic behavioral trends (e.g., the small firm effect or the January effect), competitive advantage accrues to traders with superior knowledge of market psychology or of systematic price patterns (chart analysis). If markets are subject to bandwagon effects, competitive advantage can be gained in the short term by following the herd (momentum trading) and longer term by a contrarian strategy.

Warren Buffett is a contrarian who is “fearful when others are greedy, and greedy when others are fearful.” In production markets, the potential for competitive advantage is much greater because of the highly differentiated nature of the resources and capabilities required, the complexity of their combination, and the imperfections in their supply. In European electricitygeneration, a greater range of generating technologies and a growing diversity of players— utilities(EDF, ENEL), gas distributors (Gaz de France, Centrica), petroleum majors (Shell, Eni), independent power producers (AES, E.ON), and wind generators—has expanded opportunities for competitive advantage and widened profit differentials.

Differences in resource endowments also influence the erosion of competitive advantage: the more similar are competitors’ resources and capabilities, the easier is imitation.

STRATEGY CAPSULE 7.5 BCG and the Experience Curve The experience curve has its basis in the systematic reduction in the time taken to build airplanes and Liberty ships during World War II. From bottle caps and refrigerators to longdistance calls and insurance policies, the Boston Consulting Group (BCG) observed a remarkable regularity in the reductions in unit costs with increased cumulative output. Its law of experience states: the unit cost of value added to a standard product declines by a constant percentage (typically between 15% and 30%) each time cumulative output doubles. (Where “unit cost of value added” is the unit cost of production less the unit cost of bought-in components and materials).a Figure 7.6 shows the experience curve for Ford’s Model T. The experience curve has important implications for strategy. If a firm can expand its output faster than its competitors can, it can move down the experience curve more rapidly and open up a widening cost differential.

BCG recommended that a firm’s primary strategic goal should be driving volume growth through increasing its market share. BCG identified Honda in motorcycles as an exemplar of this strategy.b The benefits of market share were supported by studies showing a positive relationship between profitability and market share.c However, association does not imply causation—it is likely that market share and profitability are both outcomes of some other source of competitive advantage—product innovation, or superior marketing.d The weaknesses of the experience curve as a strategy tool are, first, it fails to distinguish the different sources of cost reduction (learning, scale, process innovation); second, it presumes that cost reductions from experience are automatic—in reality they must be managed.

Notes: a

Boston Consulting Group, Perspectives on Experience (Boston: BCG, 1970).

b

Boston Consulting Group, Strategy Alternatives for the British Motorcycle Industry (London: HMSO, 1975). c

R. Jacobsen and D. Aaker, “Is Market Share All That It’s Cracked Up to Be?” Journal of Marketing 49 (Fall 1985): 11–22. d

R. Wensley, “PIMS and BCG: New Horizons or False Dawn?” Strategic Management Journal 3 (1982): 147–58.

FIGURE 7.6 Experience curve for the Ford Model T, 1909–1920

Note: The figure shows an 85% experience curve, that is, unit costs declined by approximately 15% with each doubling of cumulative volume.

STRATEGY CAPSULE 7.6 Understanding What a Product Is About Kenichi Ohmae was the head of McKinsey & Company’s Tokyo office (1972–1995). He is Japan’s most renowned strategy guru. Product differentiation, in his view, is about understanding customers and their relationship to the product. He recounts the efforts of a Japanese appliance maker to develop a coffee percolator. The development team sought to differentiate its coffee maker from those produced by General Electric, Philips, and Farberware in terms of size, speed, brewing system, and shape.

Ohmae urged the development team to ask a different question: “Why do people drink coffee?” The answer: “For the taste.” Yet, the company’s engineers knew nothing about what determined the taste of good coffee. After a few weeks they discovered that a superior tasting cup of coffee required freshly-ground quality beans, pure water, optimal water temperature, and an even distribution of grains.

As a result, the essential design features for the coffee maker emerged: it had to have a built-in grinder, it needed a water purifier to remove chlorine, it required precise control of water temperature, and so on.

Ohmae emphasizes the need to ask the right questions when formulating strategy. It is vital to establish a competitive advantage, but concentrating upon what competitors are doing can lock a company into conventional ways of thinking. The Japanese appliance company risked becoming fixated on General Electric’s new percolator that brewed coffee in 10 minutes—it targeted a brewing time of eight minutes. Where does this logic lead us? To the conclusion that instant coffee is best!

Ohmae encourages us to take a step back and consider a product in relation to customers’ innate needs and motives.

Nintendo’s success with its Wii and Switch video games consoles confirms the potential of this approach. Rather than a futile attempt to match Sony and Microsoft on computing power, graphics, or virtual reality, Nintendo has concentrated on enhancing users’ gaming experiences. This has allowed it to discover differentiation opportunities that don’t depend upon advanced microelectronics.

Sources: K. Ohmae “Getting Back to Strategy,” Harvard Business Review (November/December 1988); K. Ohmae, The Borderless World (New York: HarperCollins, 1999).

STRATEGY CAPSULE 7.7 Using the Value Chain to Identify Differentiation Opportunities for a Manufacturer of Metal Containers Metal cans are commodities. Can makers are subject to strong buyer power; cost efficiency is essential, but is there also the potential for profitable differentiation?

Following the procedure outlined above, we can construct a value chain for a firm and its customers, and then identify linkages between the two. Figure 7.13 identifies five such linkages: 1) Distinctive can designs (e.g., Sapporo’s beer can) can support the customer’s efforts to differentiate its product.

2) Manufacturing cans to high tolerances can minimize breakdowns on customers’ canning lines.

3) Reliable, punctual can deliveries allow canners to economize on their can inventories.

4) An efficient order-processing system reduces canners’ ordering costs.

5) Speedy, proficient technical support allows customers to operate their canning lines with high-capacity utilization and low downtime.

FIGURE 7.13 Identifying differentiation opportunities by linking the firm’s value chain to that of the customer

CHAPTER 8 STRATEGY CAPSULE 8.1 Evolution of the Automobile Industry The period 1890–1912 was one of rapid product innovation in the auto industry. Karl Benz’s introduction of a three-wheel motor carriage in 1886 was followed by a flurry of technical advances which occurred in Germany, France, the United States, and the United Kingdom.

Developments included: ◆ the first four-cylinder four-stroke engine (by Karl Benz in 1890); ◆ the honeycomb radiator (by Daimler in 1890); ◆ the manual gearbox (Panhard and Levassor in 1895); ◆ automatic transmission (by Packard in 1904); ◆ electric headlamps (by General Motors in 1908); ◆ the all-steel body (adopted by General Motors in 1912).

Ford’s Model T, introduced in 1908, with its front-mounted, water-cooled engine and transmission with a gearbox, wet clutch, and rear-wheel drive, became a dominant design for the industry.

During the remainder of the 20th century, alternative technologies and designs were eliminated.

Volkswagen’s Beetle was the last mass-produced car with a rear-mounted, air-cooled engine.

Citroen abandoned its distinctive suspension and braking systems. Four-stroke engines with four or six inline cylinders became dominant. Distinctive national differences eroded as American cars became smaller and Japanese and Italian cars became bigger. The fall of the Iron Curtain extinguished the last outposts of nonconformity: by the mid-1990s,East German two-stroke Wartburgs and Trabants were collectors’ items.

As product innovation slowed, so process innovation took off. In 1913, Ford’s Highland Park Assembly Plant with its revolutionary moving assembly line began production. The price of the Model T fell from $628 in 1908 to $260 in 1924. By 1927, 15 million Model Ts had been produced.

Then came Toyota’s system of lean production, involving a tightly integrated “pull” system of production embodying just-in-time scheduling, team-based production, flexible manufacturing, and total quality management. By the end of the 20th century, lean production had diffused throughout the world’s vehicle industry.

However, by 2021, a new era was dawning: electric propulsion and autonomous driving threatened to transform the world automobile industry.

STRATEGY CAPSULE 8.2 A Tight-Fitting Business System Makes Change Perilous: The Liz Claiborne Story During the 1980s, Liz Claiborne became a highly successful designer and marketer of clothes for professional women. Liz Claiborne’s success was based upon a strategy that combined a number of closely linked choices concerning functions and activities. ◆ Design was based around a “color by numbers” approach involving “concept groups” of different garments that could be mixed and matched. ◆ Department stores were encouraged to provide dedicated space to present Liz Claiborne’s concept collections. Claiborne consultants visited department stores to train their sales staff and to ensure that the collections were correctly displayed. ◆ Retailers could not purchase individual garmentlines; they were required to purchase the entire concept group and had to submit a single order for each season—they could not reorder. ◆ Most manufacturing was contracted out to garment makers in SE Asia. ◆ To create close contact with customers, Liz Claiborne offered fashion shows at department stores, “breakfast clinics” where potential customers could see the latest collection, and tracked customer preferences through point-of-sale data collection. ◆ Rather than the conventional four-season product cycle, Liz Claiborne operated a six-season cycle.

During the 1990s, Liz Claiborne’s performance went into a sharp decline. The key problem was the trend toward more casual clothes in the workplace. Moreover, financial pressures on department stores made them less willing to buy complete collections. As a result, Liz Claiborne allowed reordering by retailers. However, once retailers could split orders into smaller, more frequent orders, the entire Liz Claiborne system began to break down: it could not adapt to the quickresponse, fast-cycle model that was increasingly dominant within the garment trade. In 1994, Liz Claiborne appointed a new CEO who systematically rebuilt the business around a more casual look, more flexibility within its collections (although still with a common “color card”), and a shorter supply chain, with most production in North and Central America.

Source: N. Siggelkow, “Change in the Presence of Fit: The Rise, the Fall, and the Renaissance of Liz Claiborne,” Academy of Management Journal 44 (2001): 838–857.

STRATEGY CAPSULE 8.3 Multiple-Scenario Development at Shell Royal Dutch Shell has used scenarios as a basis for long-term strategic planning since 1967. Mike Pocock, Shell’s former chairman, observed: “We believe in basing planning not on single forecasts, but on deep thought that identifies a coherent pattern of economic, political, and social development.”

Shell’s scenarios are critical to the transition of its planning function from producing plans to leading a process of dialogue and learning, the outcome of which is improved decision making by managers. This involves continually challenging current thinking within the group, encouraging a wider look at external influences on the business, and forging coordination among Shell’s 200+ subsidiaries.

Shell’s global scenarios are prepared every four or five years by a team comprising corporate planning staff, executives, and outside experts. Economic, political, technological, and demographic trends are analyzed up to 50 years into the future. In 2014, Shell identified two global scenarios for the period to 2060: ◆ Mountains: A world where current elites retain their power, manage for stability, and “unlock resources steadily and cautiously, not solely dictated by immediate market forces. The resulting rigidity within the system dampens economic dynamism and stifles social mobility.” ◆ Oceans: A world of devolved power where “competing interests are accommodated and compromise is king. Economic productivity surges on a huge wave of reforms, yet social cohesion is sometimes eroded and politics destabilized . . . giving immediate market forces greater prominence.”

Once approved by top management, the scenarios are disseminated by reports, presentations, and workshops, where they form the basis for long-term strategy discussion by business sectors and operating companies.

Shell is adamant that its scenarios are not forecasts. They represent carefully thought-out stories of how the various forces shaping the global energy environment of the future might play out.

Their value is in stimulating the social and cognitive processes through which managers envisage the future: “They are designed to stretch management to consider even events that may be only remotely possible.” According to former CEO Jeroen van der Veer: “the imperative is to use this tool to gain deeper insights into our global business environment and to achieve the cultural change that is at the heart of our group strategy.”

Sources: A. de Geus, “Planning as Learning,” Harvard Business Review (March/April 1988): 70–74; P. Schoemacher, “Multiple Scenario Development: Its Conceptual and Behavioral Foundation,” Strategic Management Journal 14 (1993): 193–214; Royal Dutch Shell, New Lens Scenarios: A Shift in Perspective for a World in Transition (2014).

STRATEGY CAPSULE 8.4 Hyundai Motor: Developing Capabilities through Product Sequencing Hyundai’s emergence as a world-class automobile producer is a remarkable example of capability development over a sequence of compressed phases (Figure 8.5). Each phase of the development process was characterized by a clear objective in terms of product outcome, a tight time deadline, an empowered development team, a clear recognition of the capabilities that needed to be developed in each phase, and an atmosphere of impending crisis should the project not succeed.

The first phase was the construction of an assembly plant in the unprecedented time of 18 months in order to build Hyundai’s first car—a Ford Cortina imported in semi-knocked down (SKD) form.

Subsequent phases involved products of increasing sophistication and the development of more advanced capabilities.

FIGURE 8.5 Phased development at Hyundai Motor, 1968–1995

STRATEGY CAPSULE 8.5 Knowledge Conversion and Knowledge Replication Ikujiro Nonaka’s theory of knowledge creation argues that knowledge conversion between tacit and explicit forms and between individual and organizational levels produces a “knowledge spiral” in which the organization’s stock of knowledge broadens and deepens. For example, explicit knowledge is internalized into tacit knowledge in the form of intuition, know-how, and routines, while tacit knowledge is externalized into explicit knowledge through articulation and codification.

Knowledge also moves between levels: individual knowledge is combined into organizational knowledge; individual knowledge is socialized into organizational knowledge.

Knowledge conversion lies at the heart of a key stage of business development: the transition from the craft enterprise based upon individual, tacit knowledge, to the industrial enterprise based upon explicit, organizational knowledge. This transition is depicted in Figure 8.6 and is illustrated by the following examples: ◆ Henry Ford’s Model T was initially produced on a small scale by skilled workers. Ford’s assembly line mass-production technology systematized that individual, tacit knowledge and built it into machines and processes. Ford’s industrial system was no longer dependent upon skilled craftsmen: the assembly lines could be operated by former farm workers and new immigrants. ◆ When Ray Kroc discovered the McDonald brothers’ hamburger stand in Riversdale, California, he recognized the potential for systematizing and replicating their process. McDonald’s business model was replicated through operating manuals and training programs. Now 400,000 employees, most of whom lack the most rudimentary culinary skills, serve 68 million customers daily. The relevant knowledge is embedded within McDonald’s business system.

This systematization of knowledge offers massive potential for value creation through replication and deskilling. This systematization has transformed the service sector: with the replacement of individual proprietorships by international chains in hotels (Marriott), car rental (Hertz), coffee shops (Starbucks), and tax preparation (H&R Block).

FIGURE 8.6 Knowledge conversion

Source: Based upon I. Nonaka, “A Dynamic Theory of Organizational Knowledge Creation,” Organization Science 5 (1994): 14–37.

CHAPTER 9 STRATEGY CAPSULE 9.1 How the Returns on Innovation are Shared The value created by an innovation is distributed among a number of different parties (Figure 9.2): ◆ Pharmaceuticals: New drugs are protected by patents that confer monopoly power (and profits) on their inventors. Followers are either firms that create new products within the same drug class or suppliers of generics (who enter once the patent expires). The other main beneficiaries are customers. ◆ Personal computers: The innovators—MITS, Tandy, Apple, and Xerox—earned modest profits from their innovation. The followers—IBM, Dell, Compaq, Acer, Toshiba, and a host of later entrants—did somewhat better, but their returns were overshadowed by the huge profits earned by the suppliers to the industry, especially Intel in microprocessors and Microsoft in operating systems. Complementors, notably the suppliers of application software, also did well.

However, intense price competition meant that the primary beneficiaries from the PC were consumers, who typically paid prices for their PCs that were a fraction of the value they derived. ◆ Smartphones: The first were the IBM Simon (1993) and the Nokia 9000 series (1996).

Followers—notably RIM, Apple, and Samsung—have earned huge profits from smartphones.

Several suppliers have also been big winners (e.g., Nvidia and ARM); also complementors, notably app providers.

FIGURE 9.2 Appropriating of value: Who gets the benefits from innovation?

STRATEGY CAPSULE 9.2 Digital Innovation: Platforms and E-commerce Business Models Innovation during the past four decades has been dominated by applications of digital technology. Digital innovation has distinctive characteristics to the extent that digital technology is generic: it reduces a vast range of artifacts—information, Images, sounds—to binary code. It creates new products—websites, mobile communication, video games—and transforms existing ones—retailing, travel reservations, payments, and recorded music.

The wealth-creating potential of digital innovation is remarkable. McKinsey & Co. show that the “economic profit generated by TMT [technology, media, and telecom] companies grew 100fold, or by $200 billion from 2000 to 2014.” However, most of this value creation was concentrated among a few giant companies. As a result, by 2021, the world’s five most valuable companies—Apple, Alphabet, Microsoft, Amazon, and Facebook—were all based on digital technologies.

Common to all of these companies—as well as other digital start-ups that have established multi-billion-dollar valuations, such as Netflix, Uber, Airbnb, and Pinterest—is their platformbased businesses.

Digital technologies, together with internet or wireless connectivity, have created markets where network externalities arise both from user connections and from the availability of complements. These platform-based markets are also referred to as two-sided (or even multisided) markets because they form an interface between two groups of users: customers and the suppliers of complementary products.

Operating systems are the quintessential platforms: Microsoft’s Windows, Apple’s iOS, and Google’s Android create network externalities among users (direct externalities) and among the suppliers of applications (indirect externalities). Each of these platforms is central to an ecosystem comprising thousands of interdependent companies that co-evolve.

Thus, the Android ecosystem comprises over 100 smartphone manufacturers, thousands of app developers, suppliers of hardware components, accessory providers, and many other types of player. As the rivalry between Apple iPhone and Android and, in India, between Amazon and Flipkart attests, competition between rival platforms for market dominance is often intense.

However, platforms are not restricted to digital markets, and nor do the networks necessarily require technical standards. A shopping mall is a platform: the mall developer creates a twosided market comprising the retailers who lease the individual stores and the customers who do the shopping—network externalities operate on both sides.

Deciding whether to pursue a product strategy or a platform strategy is a key strategic issue.

Google and Facebook both began with product strategies but soon recognized the potential for their products—Google’s search engine and Facebook’s social network—to become platforms.

Many department stores have undertaken a similar transition: abandoning retailing in favor of managing an infrastructure that hosts multiple concession stores. The limited success of the Apple Macintosh between 1984 and 2004 reflected Apple’s pursuit of a product rather than a platform strategy (see Strategy Capsule 9.3).

STRATEGY CAPSULE 9.3 Winning Standards Wars Past competitive battles between rival platforms embodying different technical standards have exercised a powerful influence over current thinking about designing strategies for markets subject to network externalities.

None has been more influential than the competitive battles of the late 1970s and 1980s in videocassette recorders (VCRs) and personal computers (PCs).

In neither case was technical superiority the key—indeed, in both instances it could be argued that the superior technology lost. The key factor was managing the dynamics of market penetration in order to build market leadership: ▪

In VCRs, Sony kept tight proprietary control of its Betamax system; JVC licensed its VHS system to Sharp, Philips, GE, RCA, and others, fueling market penetration.

▪

In computers, IBM’s PC platform became dominant because access to its product specifications and the availability of the core technologies—notably Microsoft’s operating system and Intel’s microprocessors—allowed a multitude of “clone makers” to enter the market. The problem for IBM was that it established the dominant “Wintel” standard, but Intel and Microsoft appropriated most of the value.

For Apple, the situation was the reverse: by keeping tight control over its Macintosh operating system and product architecture, it earned high margins, but it forfeited the opportunity for market dominance.

This trade-off between penetrating the market and appropriating the returns to platform ownership is shown in Figure 9.6. Learning from these two epic contests, platform owners have relinquished more and more value to complementors, competitors, and customers in order to build a bigger bandwagon than their rivals.

In some cases, this has meant foregoing all possible profits. In the browser war of 1995–1998, both Netscape (Navigator) and Microsoft (Explorer) ended up giving away their products.

Finding a better balance between market penetration and value appropriation has resulted in new pricing models. Adobe (and many other software suppliers) follows a “freemium” model— Acrobat Reader is available free of charge, but to create or convert PDF files, the necessary Acrobat software must be purchased.

Other standards show that winning is not solely about building the biggest bandwagon of users and complementors. Users buy a system, not a platform, and their choices depend on the overall quality of the system. Apple’s dominant share of the profits from the global smartphone industry, despite having a smaller market share than Google’s Android, derives from the overall

quality of the iPhone system, which depends, to a great extent, on Apple’s exercise of tight control over application developers, including quality standards and overall system integration.

Sources: A. Gawer and M. A. Cusumano, “How Companies Become Platform Leaders,” MIT Sloan Management Review 49 (2008): 28–35; C. Cennamo and J. Santal, “Platform Competition: Strategic Trade-offs in Platform Markets,” Strategic Management Journal 34 (2013): 133–150.

FIGURE 9.6 Standards wars in videocassette recorders and personal computers

STRATEGY CAPSULE 9.4 Open Innovation at IBM IBM’s Innovation Jam is one element of IBM’s extensive collaborative innovation network. It is a massive online brainstorming process to generate, select, and develop new business ideas. The 2006 Jam was based upon an initial identification of 25 technology clusters grouped into six broad categories. Websites were built for each technology cluster and, for a 72-hour period, IBM employees, their families and friends, suppliers, customers, and individual scientists and engineers from all around the world were invited to contribute ideas for innovations based on these technologies. The 150,000 participants generated vast and diverse suggestions that were subject to text mining software and review by 50 senior executives and technical specialists who worked in nine separate teams to identify promising ideas. The next phase of the Jam subjected the selected innovation ideas to comments and review by the online community.

This was followed by a further review process in which the ten best proposals were selected and a budget of $100 million was allocated to their development. The selected business ideas included a real-time foreign language translation service, smart healthcare payment systems, IT applications to environmental projects, and 3-D internet. The new businesses were begun as incubator projects and were then transferred to one or other of IBM’s business groups. As well as divisional links, the new ventures were also subject to monthly review by IBM’s corporate top management. IBM has since extended its jam methodology to address a widening array of issues.

Source: Based on O. M. Berland and R. C. Wood, “An Inside View of IBM’s Innovation Jam,” MIT Sloan Management Review (Fall 2008): 32–43.

STRATEGY CAPSULE 9.5 The Role of the Product Champion at 3M: Scotchlite We don’t look to the president or the vice-president for R&D to say, all right, on Monday morning 3M is going to get into such-and-such a business. Rather, we prefer to see someone in one of our laboratories, or marketing, or manufacturing units bring forward a new idea that he’s been thinking about. Then, when he can convince people around him, including his supervisor, that he’s got something interesting, we’ll make him what we call a “project manager” with a small budget of money and talent, and let him run with it.

Someone asked the question, “Why didn’t 3M make glass beads, because glass beads were going to find increasing use on the highways?” . . . I had done a little work on trying to color glass beads and had learned a little about their reflecting properties. And, as a little extracurricular activity, I’d been trying to make luminous house numbers.

From there, it was only natural for us to conclude that, since we were a coating company, and probably knew more than anyone else about putting particles onto a web, we ought to be able to coat glass beads very accurately on a piece of paper.

So, that’s what we did. The first reflective tape we made was simply a double-coated tape—glass beads sprinkled on one side and an adhesive on the other. We took some out here in St. Paul and, with the cooperation of the highway department, put some down. After the first frost came, and then a thaw, we found we didn’t know as much about adhesives under all weather conditions as we thought . . .

We looked around inside the company for skills in related areas. We tapped knowledge that existed in our sandpaper business on how to make waterproof sandpaper.

We drew on the expertise of our roofing people who knew something about exposure? We reached into our adhesive and tape division to see how we could make the tape stick to the highway better.

The resulting product became known as “Scotchlite.”

Its principal application was in reflective signs; only later did 3M develop the market for highway marking.

The originator of the product, Harry Meltzer, interested the head of the New Products Division in the product, and he encouraged Heltzer to go out and sell it.

Scotchlite was a success and Heltzer became the general

manager of the division set up to produce and market it.

Source: “The Technical Strategy of 3M: Start More Little Businesses,” Innovation 5 (1969).

CHAPTER 10 STRATEGY CAPSULE 10.1 The Rise of the Modern Corporation ORIGINS OF THE MODERN CORPORATION The large corporation, the dominant feature of advanced capitalist economies, is of recent origin. At the beginning of the 19th century, most manufacture, even in Britain, the most advanced economy of that time, was by individuals and families working in their own homes.

The business corporation resulted from two key developments during the 19th century: 1. Technology. Mechanization caused the shift of manufacture from the home to the factory, while developments in transportation—canals and railways—expanded the size of markets.

2. Limited liability. A corporation is an enterprise that has a separate legal identity from its owners: it can own property, enter into contracts, sue, and be sued. The earliest business corporations were colonial trading companies created by royal decree: the British East India Company (1600), the Dutch East India Company (1602), and Hudson’s Bay Company (1670). The introduction of limited liability during the mid-19th century, insulated the shareholders from the debts of the companies they owned, encouraging large-scale equity financing of railroad and manufacturing companies.

Giant industrial corporations emerged as a result of the “second industrial revolution,” which began in the United States in the end of the 19th century. Its drivers were technological innovations—electricity, the telephone, and the automobile—and organizational and management innovations. Management innovations included Winslow Taylor’s scientific management—a systematic, empirically based approach to job design and production management; Ford’s assembly line system of mass production; techniques of mass marketing; and systems of cost and management accounting.

Organizational innovations included: ▪

▪

Line-and-staff structure: Separation of “line” employees in operating units and a head office “staff” of administrators and functional specialists allowed companies such as Sears Roebuck & Co. and Shell Transport and Trading to establish numerous operating units coordinated by a headquarters comprising specialized functional departments.

The holding company: The biggest companies at the end of the 19th century were holding companies built through mergers and acquisitions (e.g., American Tobacco, US Steel, and Standard Oil). In a holding company, the parent company owns controlling equity stakes in a number of subsidiary companies allowing the parent to appoint the boards of the subsidiaries and receive dividends, but with limited managerial control.

THE 20TH CENTURY: EXPANDING SCALE AND SCOPE Large holding companies and functionally organized companies increasingly adopted multidivisional structures. At DuPont, increasing size and a widening product range strained its functional structure and overloaded top management. Pierre Du Pont’s solution was to decentralize: 10 product divisions were created, each with its own R&D, production, and sales;

a corporate head office led by an executive committee undertook coordination, strategy, and resource allocation. In 1924, General Motors, a loose-knit holding company built by acquisition, also adopted a similar multidivisional structure. During the next 50 years, the multidivisional structure became the dominant organizational form for large corporations.

During the first half of the 20th century, large companies grew mainly through vertical and horizontal integration. After World War II, diversification and international expansion were the main sources of corporate growth. By the 1960s, the increasing dominance of giant corporations pointed to the replacement of market capitalism by a system of managerial capitalism.

However, by the 1980s, this trend went into reverse as corporate strategies shifted from vertical integration to outsourcing and from diversification to a “core business focus.”

The 21st century has seen another reversal. Information and communications technology has become increasing dominated by a handful of global giants, while, in other sectors, a wave of mergers and acquisition threatens a new era of monopolization.

Sources: A. D. Chandler, The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: MIT Press, 1977); J. Micklethwait and A. Wooldridge, The Company: A Short History of a Revolutionary Idea (New York: Modern Library, 2005); A. D. Chandler, Strategy and Structure (Cambridge: MIT Press, 1962).

FIGURE 10.2 The widening scale and scope of large US companies

STRATEGY CAPSULE 10.2 Vertical Integration in the Entertainment Industry: Frozen versus Harry Potter Over the past two decades, integration between content producers (film studios, music publishing) and distribution companies (theaters, TV broadcasting, cable companies, satellite TV, digital streaming) has reshaped the entertainment industry.

Content producers such as Walt Disney Company have forward integrated into distribution (TV broadcasting, cable, satellite TV, movie distribution, and video streaming). Cable and broadband companies (such as Comcast, ViacomCBS, and AT&T) have backward integrated into movie and TV production.

The mergers creating these integrated production and distribution companies have not all been successful: AOL’s 2000 merger with Time Warner and the acquisition spree that transformed Compagnie Générale des Eaux into Vivendi Universal were disasters. It is unclear how successful AT&T’s 2018 acquisition of Time Warner has been.

To illustrate the relative merits of vertical integration and market-based contracts, consider the commercial exploitation of the fictional characters from Harry Potter with those of Frozen.

HARRY POTTER ◆ Seven Harry Potter novels written by J. K. Rowling were published by Bloomsbury in the United Kingdom and Scholastic Press in the United States between 1997 and 2007 with total sales of 400 million (to 2017). ◆ Film rights were acquired by Warner Bros., which produced eight movies generating $7.7 billion in box office receipts. ◆ 11 Harry Potter video games were produced by Electronic Arts. ◆ A Harry Potter attraction opened at Comcast’s Universal Orlando Resort in 2010, while a Warner Bros. Harry Potter studio tour opened in the United Kingdom in 2012. ◆ Harry Potter copyrights and trademarks were licensed to Mattel, Coca-Cola, Lego, Hasbro, Johnson & Johnson, Lochaven of Scotland, and other companies for the production of toys, clothing, and other products.

FROZEN Frozen is a computer-animated film inspired by Hans Christian Andersen’s The Snow Queen, produced by Walt Disney Animation Studios, and released by Walt Disney Pictures in 2013. It generated $1.3 billion in worldwide box office revenue. Prior to release, Frozen was promoted heavily at Disney theme parks. Commercial spinoffs from the movie and its lead characters, Elsa and Anna, include: ◆ A range of merchandise including dolls, costumes and “home décor, bath, textile, footwear, sporting goods, consumer electronics, and pool and summer toys” developed

by Disney Consumer Products, and sold through Disney Stores and independent channels. ◆ DVD and Blu-ray releases by Walt Disney Studios Home Entertainment. ◆ A video game launched by Disney Mobile for handheld devices. ◆ A Disney-On-Ice touring Frozen show and a Broadway stage musical adaptation by Disney Theatrical. ◆ Frozen Ever After ride at Walt Disney World, Florida.

CHAPTER 11 STRATEGY CAPSULE 11.1 Patterns of Internationalization Firms internationalize through trade—supplying goods and services to another country— and direct investment—building or acquiring productive assets in another country.a On this basis, we can classify industries according to the extent and mode of their internationalization (Figure 11.1).

FIGURE 11.1 Patterns of industry internationalization

◆ Sheltered industries are shielded from both imports and inward direct investment by regulation and trade barriers, or their localized markets. They include fragmented service industries (dry cleaning, hairdressing, auto repair), small-scale production industries (handicrafts, residential construction), and industries producing products that are perishable (fresh milk, bread) or difficult to move (beds, garden sheds). ◆ Trading industries are those where scale economies favor exporting from a single location (commercial aircraft, shipbuilding, defense equipment) or whose inputs are highly localized (rare earths from China, caviar from Iran and Azerbaijan). Digital communication allows software and e-commerce firms to internationalize through export: Headspace offers online meditation in 190 countries, though almost all its employees are based in California.

◆ Multidomestic industries are those that internationalize through direct investment— either because they are service industries (e.g., banking, consulting, hotels) or because products are nationally differentiated (e.g., publishing). ◆ Global industries feature high levels of both trade and direct investment.

The Uppsala Model predicts that firms internationalize in a sequential pattern, first exporting to geographically or culturally proximate countries, then broadening and deepening their engagement, and eventually establishing multifunctional subsidiaries in foreign markets.b However, there is no single pattern. In service industries, internationalization involves direct investment either through “greenfield entry” or acquisition. Firms based upon digital technologies tend to be “born global”—from the outset, PayPal, Spotify, and Dropbox viewed their markets as worldwide.c Notes: a

For the OECD countries (the developed, industrialized nations), the ratio of total trade (imports + exports) to GDP grew from 11% in 1960 to 61% in 2019 (World Bank). b

J. Johanson and J.-E. Vahlne, “The Uppsala Internationalization Process Model Revisited: From Liability of Foreignness to Liability of Outsidership,” Journal of International Business Studies 40 (2009): 1411–1431. c

M. Schrage, “The Best Entrepreneurs Think Globally, Not Just Digitally,” Harvard Business Review (March 2016).

STRATEGY CAPSULE 11.2 How Do National Cultures Differ?

How people differ between countries with regard to beliefs, norms, and value systems has been the subject of a number of research studies.

The best-known study of national cultural differences is by Geert Hofstede. The principal dimensions of national values he identified were: ◆ Power distance: The extent to which inequality, and decision-making power in particular, is accepted within organizations and within society was high in Malaysia, and most Latin American and Arab countries; low in Austria and Scandinavia. ◆ Uncertainty avoidance: Preference for certainty and established norms was high in most southern European and Latin American countries; tolerance for uncertainty and ambiguity was high in Singapore, Sweden, the United Kingdom, the United States, and India. ◆ Individualism: Concern for individual over group interests was highest in the United States, the United Kingdom, Canada, and Australia. Identification with groups and the collective interest was strongest in Latin America and Asia (especially Indonesia, Pakistan, Taiwan, and South Korea). ◆ Masculinity/femininity: Hofstede identifies emphasis on work and material goals and demarcation of gender roles as masculine; emphasis on personal relationships rather than efficiency and belief in gender equality he viewed as feminine. Japan, Austria, Venezuela, and Italy scored high on masculinity; Scandinavia and the Netherlands scored very low.

Other scholars emphasize different dimensions of national cultures. Fons Trompenaars (another Dutchman) identifies the United States, Australia, Germany, Sweden and the United Kingdom as universalist societies—relationships are governed by standard rules; Brazil, Italy, Japan, and Mexico are particularist societies—social relationships are strongly influenced by contextual and personal factors. In affective cultures, such as Mexico and the Netherlands, people display their emotions; in neutral cultures, such as Japan and the United Kingdom, people hide their emotions.

Sources: G. Hofstede, Culture’s Consequences: International Differences in Work-related Values (Thousand Oaks, CA: SAGE Publications, 1984); F. Trompenaars, Riding the Waves of Culture (London: Economist Books, 1993).

STRATEGY CAPSULE 11.3 McDonald’s Goes “Glocal” McDonald’s has long been demonized by anti-globalization activists. They allege that it crushes national cuisines and independent, family-run restaurants with the juggernaut of US fast-food, corporate imperialism. In reality, its global strategy is a careful blend of global standardization and local adaptation.

McDonald’s menus feature an increasing number of locally developed items. These include: ◆ Australia: BBQ Bacon Angus, Big Brekkie Burger, and Frozen Coke; ◆ France: Croque McDo, Le Blue Cheese, and Bacon Burger; ◆ Hong Kong: Ham n Egg Twisty Pasta, Fresh Corn Cup; ◆ India: McSpicy Paneer, Green Chili Aloo Nan; ◆ Saudi Arabia: Grand Chicken Spicy, McArabia Chicken; ◆ Switzerland: Quinoa Curry, McRaclette; ◆ UK: Sweet Chilli Chicken One, Mozzerella Dippers, Cadbury Dairy Milk McFlurry; ◆ US: Sausage Burrito, Buttermilk Crispy Chicken, Hotcakes.

There are differences too in restaurant decor, service offerings (e.g., home delivery in India), and market positioning (outside the United States McDonald’s is more upmarket). In Israel, most McDonald’s are kosher: there are no dairy products and it is closed on Saturdays.

In India, neither beef nor pork is served. In Germany, France, and Spain, McDonald’s serves beer. A key reason that most non-US outlets are franchised is to facilitate adaptation to national environments and access to local know-how.

Yet, the core features of the McDonald’s strategy are identical throughout the world.

McDonald’s values and business principles are seen as universal and invariant. Its emphasis on families and children is intended to identify McDonald’s with fun and family life wherever it does business. Community involvement and the Ronald McDonald children’s charity are also worldwide. Corporate trademarks and brands are mostly globally uniform, including the golden arches logo and “I’m lovin’ it” tag line. The business system itself—franchising arrangements, training, restaurant operations, and supplier relations—is also highly standardized.

McDonald’s international strategy has changed from adapting its US model to local conditions to seeking and encouraging local innovation everywhere, then using its global network to transfer promising concepts more widely. McCafés, gourmet coffeehouses within McDonald’s restaurants, were first developed in Australia in 1993. By 2020, McCafés were operating in about 15,000 McDonald’s outlets throughout the world. Growing concern over nutrition and obesity has accelerated McDonalds’ reliance upon local initiatives to drive global learning.

Has McDonald’s got the balance right between global standardization and local adaptation?

Despite the risks to the McDonald’s brand identify, McDonald’s CEO Jim Skinner argues: “We don’t run our business from Oak Brook. We are a local business with a local face in each country we operate in.” Chief marketing officer, Mary Dillon, adds, “Globally we think of ourselves as the custodian of the brand, but it’s all about local relevance.”

Source: Based on www.mcdonalds.com

STRATEGY CAPSULE 11.5 Ghemawat’s “AAA Triangle” Ghemawat proposes that a multinational corporation’s strategy may be represented by its positioning along the three dimensions of aggregation, adaptation, and arbitrage—his “AAA triangle” (Figure 11.9). A firm can be positioned by using proxy variables. Each strategic direction has different organizational implications: aggregation requires strong cross-border integration, for example, global product divisions and global functions; adaptation requires country-based units with high levels of autonomy; arbitrage requires activities to be located according to the availability of resources and capabilities. However, the managerial challenge of reconciling these different organizational requirements means that most firms are able to pursue just two out the three “A”s. For example, among Indian IT service companies, Tata Consultancy Services (TCS) has emphasized arbitrage and aggregation, while Cognizant is oriented toward arbitrage and adaptation. In medical diagnostics, General Electric Healthcare is unusual in terms of its ability to achieve high levels along all three dimensions: it achieves aggregation economies through the highest R&D budget in the industry, arbitrage through locating global production centers in low cost countries, and adaptation by developing country-focused marketing units and offering customer-focused solutions that combine hardware with a range of services.

FIGURE 11.9 Ghemawat’s AAA Triangle

Source: P. Ghemawat, “Managing Differences: The Central Challenge of Global Strategy,” Harvard Business Review 85 (March 2007).

CHAPTER 12 STRATEGY CAPSULE 12.1 Trends in Corporate Diversification Over Time For most of the 20th century, large companies in all the advanced industrial nations widened their product scope.2 This culminated in the 1960s and 1970s with the emergence of a new type of company—the conglomerate: a highly diversified company assembled from multiple, unrelated acquisitions. Conglomerates included ITT, Textron, and Allied Signal in the United States and Hanson, Slater Walker, and BTR in the United Kingdom.

Their existence reflected the belief that top management no longer needed industry-specific experience: the new techniques of financial and strategic management could be applied to any business.3 Figure 12.1 shows the growing number of highly diversified US and UK firms (both “related business” and “unrelated business”) during the latter part of the 20th century.

FIGURE 12.1 Diversification strategies of large US and UK companies during the late 20th century

Sources: R. P. Rumelt, “Diversification strategy and profitability,” Strategic Management Journal 3 (1982): 359–370; R. Whittington, M. Mayer, and F. Curto, “Chandlerism in Post-war Europe: Strategic and Structural Change in France, Germany and the United Kingdom, 1950–1993,” Industrial and Corporate Change 8 (1999): 519–550; D. Channon, The Strategy and Structure of British Enterprise (Cambridge: Harvard University Press, 1973).

After 1980, a shift of corporate goals from growth to profitability caused the diversification trend to reverse as companies divested “noncore” businesses. Between 1980 and 1990, the average index of diversification for Fortune 500 companies declined from 1.00 to 0.67.4 The main driver of this trend was a shift of corporate goals from growth to profitability— typically, companies’ diversified businesses were less profitable than their core businesses.

Evidence of a “conglomerate discount”—that the stock market was valuing diversified companies at less than the sum of their parts—reinforced this trend.

As diversification became viewed as contrary to shareholder interests,5 CEOs came under increasing pressure from institutional shareholders and private equity groups. Kohlberg Kravis Roberts’ $31 billion takeover and subsequent dismemberment of the tobacco and food giant RJR Nabisco in 1989 demonstrated that even the largest US companies were vulnerable to attack from corporate raiders.6 The greater agility of smaller, specialized companies, as compared with complex, multibusiness groups, and the growing availability of private capital encouraged many diversified companies to spin off noncore businesses or even break up completely.

However, many companies still view diversification as an opportunity for value creation. The tendency for digital technologies to erode market boundaries and create hardware/software complementarities has encouraged technology leaders such as Alphabet, Amazon, Alibaba, Baidu, and SoftBank to continuously expand their business portfolios. In more mature sectors, an emphasis on providing “customer solutions” is similarly encouraging firms to offer bundles of complementary products and services.

In the emerging markets of Asia and Latin America, the leading companies tend to be highly diversified—and often family-controlled. These include Tata and Reliance in India, Charoen Pokphand (CP) in Thailand, Astra International in Indonesia, Sime Darby in Malaysia, and Grupo Alfa and Grupo Carso in Mexico.7 These divergent diversification patterns in firms will be explored later in the chapter.

Figure 12.2 summarizes the trends in diversification strategy since the middle of the last century and identifies the changing management goals and evolving strategy ideas that have driven these trends.

FIGURE 12.2 The evolution of diversification strategies, 1960–2020

STRATEGY CAPSULE 12.2 Emerging-Market Conglomerates Highly diversified groups of closely connected companies—chaebols in South Korea, business houses in India, holding companies in Turkey, grupos económicos in Latin America, trading companies in Hong Kong—dominate the economies of many Asian and Latin American countries.

The ability of these business groups to avoid the fate of most US and European conglomerates has been attributed to the advantages of this corporate form in countries with poorly developed capital and labor markets. Inefficient capital markets offer a huge advantage to groups, such as Tata of India and Koç of Turkey, in using internally generated cash flows to fund growing businesses and establish new ventures.

Similarly with managerial resources, where managerial talent is scarce, companies such as Koç or LG of Korea are able to attract exceptionally talented graduates then develop them into highly capable managers.

However, the performance advantages of emerging market conglomerates show no sign of abating, despite increasingly efficient capital and labor markets in their home countries. South Korean conglomerates have been growing their revenues by 11% a year; Indian business groups by 23% a year.

It seems likely that, especially in growing economies, the management model of the emerging market business groups may offer some advantages over the more integrated multidivisional corporations typical of North America, Europe, and Japan. Business groups such as Tata, Sabancı Holding (Turkey), and SK (Korea) are able to combine high levels of autonomy for their member companies with strong parental leadership that emphasizes identity and values, and also provides strategic guidance.

Source: Based on “From Dodo to Phoenix,” The Economist (January 11, 2014): 58.

CHAPTER 13 STRATEGY CAPSULE 13.1 Berkshire Hathaway, Inc. Berkshire Hathaway comprises 63 operating subsidiaries (some of which are shown in Figure 13.1) and a headquarters in Omaha, NE, that comprises just 25 employees. It is America’s third biggest company by revenue with profits second only to Apple. It follows a simple portfolio management strategy that has been executed since 1970 by its 90-year-old chairman and CEO, Warren Buffett. That strategy involves selecting companies that possess a “wide moat” (=sustainable competitive advantages), that compete in industries with sound long-term prospects, and whose stock market valuation is sufficiently low to permit a sizable upside potential. Buffett’s stock-picking ability is reinforced by rigorous capital allocation: “We move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise. Moreover, we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo.”

FIGURE 13.1 The Warren Buffett portfolio: Some of Berkshire Hathaway’s businesses

STRATEGY CAPSULE 13.2 Portfolio Planning Matrices Portfolio planning techniques were developed by the Boston Consulting Group, McKinsey & Company, and Arthur D. Little to meet the challenges faced by General Electric at the end of the 1960s in managing its 46 divisions and 190 businesses. Portfolio planning matrices position graphically the different businesses of a multibusiness company in relation to the key strategic variables that determine their profit potential.

The GE/McKinsey Matrix uses the two primary drivers of profitability that we identified in Chapter 1 (see Figure 1.5): market attractiveness and competitive advantage. Industry attractiveness combines market size, market growth rate, return on sales, margin growth, and international potential. A business unit’s competitive advantage combines market share, return on sales relative to competitors, and relative position on quality, technology, and cost. a Figure 13.2 shows the capital investment implications of the matrix.

The Boston Consulting Group Growth–Share Matrix is a simplified version of the GE/McKinsey matrix. It uses a rate of market growth as a proxy for industry attractiveness and relative market share (the business unit’s market share relative to that of its largest competitor) as an indicator of competitive advantage. The four quadrants of the matrix predict profits and cash flow patterns and indicate strategies to be adopted (Figure 13.3).b The Ashridge Portfolio Display is based upon the concept of parenting advantage. c It recognizes that value-creating potential depends upon the characteristics of the parent, as well as the elements of the business. Hence, the focus is on the fit between a business and its parent. The positioning of a business along the horizontal axis of Figure 13.4 depends upon the parent’s potential to create profit for the business by applying its corporate-level management capabilities, sharing resources and capabilities with other businesses, or economizing on transaction costs. The vertical axis measures the parent’s potential for value destruction by the costs of corporate overhead or a mismatch between the management needs of the business and the systems and style of the parent.

FIGURE 13.2 The GE/McKinsey portfolio planning matrix

FIGURE 13.3 The BCG growth–share matrix

FIGURE 13.4 Ashridge portfolio display: The potential for parenting advantage

These different portfolio planning matrices each have their advantages and disadvantages as well as generic limitations: ▪ ▪ ▪

The McKinsey and BCG matrices are both intended to indicate the future profit potential for the business, yet they utilize data drawn from the past.

The McKinsey and BCG matrices ignore synergies between businesses that are major sources of corporate value creation.

The GE and BCG matrices encounter problems of market definition—for example, in the BCG matrix, is BMW’s auto business a “dog” because it holds less than 2% of the world auto market or a “cash cow” because it is the market leader in the luxury car segment?

▪

The Ashridge matrix recognizes the role of strategic fit and synergy, but suffers from subjectivity—neither of the dimensions lend themselves to quantification.

Notes: a

For a fuller discussion of the GE/McKinsey matrix, see “Enduring Ideas: The GE–McKinsey Nine-box Matrix,” McKinsey Quarterly (September 2008). b

For a fuller discussion of the BCG matrix, see B. Henderson, The Experience Curve Reviewed: IV: The Growth Share Matrix or Product Portfolio (Boston: Boston Consulting Group, 1973). c

A. Campbell, M. Goold, and M. Alexander. “Corporate Strategy: The Quest for Parenting Advantage,” Harvard Business Review (April–May 1995): 120–132.

STRATEGY CAPSULE 13.3 Performance Management at BP Under the leadership of John Browne (CEO 1995–2007), BP became the most decentralized, entrepreneurial, and performance focused of the petroleum majors. Brown’s management philosophy emphasized three principles: ◆ BP operates in a decentralized manner, with individual business unit leaders (such as refinery managers) given broad latitude for running the business and direct responsibility for delivering performance. ◆ The corporate organization provides support and assistance to the business units through a variety of functions, networks, and peer groups. ◆ BP relies upon individual performance contracts to motivate people.

The CEO was responsible for presenting the five-year and annual corporate plans to the board for approval. The goals, metrics, and milestones in corporate plans were cascaded down in the plans for each segment, function, and region. These same goals and metrics were reflected in individual performance contracts. A performance contract outlined the key results and milestones an employee was expected to achieve that year. Progress against targets and milestones in an employee’s performance contract were a key determinant of annual bonuses.

Performance contracts were the key mechanism for delegating annual plans into commitments by individual leaders. The performance contracts set goals for financial, operational, strategic, and HSSE (health, safety, security, and environmental) performance that were high, but not so high that they couldn’t be achieved.

Source: Adapted from The Report of the BP US Refineries Independent Safety Review Panel, January 2007, with permission from BP International.

STRATEGY CAPSULE 13.4 Reformulating Strategic Planning at IBM IBM is an evolutionary wonder. During IBM’s 110-year history, it has successfully transitioned from tabulating machines to mainframe computers, to personal computers, to networked information technology, to cloud computing and artificial intelligence. In the process, it has transitioned from a hardware to a software and services company. Its transition has been assisted by IBM’s processes for making and implementing strategy.

Under transformational CEOs Lou Gerstner and Sam Palmisano, IBM recreated its strategic planning system around its Strategic Leadership Model, which comprises processes for identifying and responding to emerging opportunities and threats. IBM’s Strategic Leadership includes: ▪ ▪

▪

▪

The technology team, which meets monthly to assess emerging technologies and their market potential.

The strategy team made up of a cross-section of general managers, strategy executives, and functional managers. It meets monthly to review business unit strategies and recommend new initiatives.

The integration and values team comprises 300 key leaders selected by top management. The team is responsible for companywide initiatives called “winning plays” that cut across IBM’s divisional boundaries.

“Deep dives” are conducted by ad hoc teams to explore specific opportunities or issues and may result in recommendations to enter a new area of business or to exit from a particular technology or product market.

The initiatives arising from these processes are then acted on by the three main executing vehicles: ▪

▪

▪

Emerging business opportunities (EBOs) are business development processes that protect new business initiatives from the financial rigor applied to more conventional projects. EBOs have developed Linux applications, autonomic computing, blade servers, digital media, network processing, and life sciences.

Strategic leadership forums are three- to five-day workshops facilitated by IBM’s Global Executive and Organizational Capability Group. Their purpose is to transform strategic initiatives into action plans that address pressing strategic issues, such as poor performance in specific business areas. They are initiated by a senior manager and overseen by the strategy team.

The Corporate Investment Fund finances new initiatives identified by the integration and values team or by EBOs.

Source: Based on J. B. Harreld, C. A. O’Reilly, and M. L. Tushman, “Dynamic Capabilities at IBM: Driving Strategy into Action,” California Management Review 49 (Summer 2007): 21–43.

STRATEGY CAPSULE 13.5 Samsung Electronics: Top-down Initiatives That Drive Corporate Development Samsung is the biggest of South Korea’s chaebols—groups of companies linked by crossshareholdings and controlled by a founding family. The Samsung group comprises 83 companies. The biggest company is Samsung Electronics, the world’s largest electronics company in terms of sales. The head of the Samsung Group, and chairman of Samsung Electronics, is Lee Kun-hee, son of the founder Lee Byung-chul and father of Jay Y. Lee, president of Samsung Electronics.

The rise of Samsung Electronics is the result of a series of corporate initiatives that were ambitious, focused, long-term, and driven by intense top-down commitment—and capital investment. In 1982, Samsung Electronics resolved to become world leader in memory devices—it achieved this in DRAM chips in 1992. In 2004, its semiconductor investments began focusing on flash memories, where it also established global leadership.

Between 2000 and 2009, it established itself as the world’s biggest producer of batteries for mobile digital devices, similarly with flat-panel televisions.

These successes involved massive commitments of resources to technology (Samsung receives more US patents than any other company except IBM), manufacturing (for semiconductor production Samsung built the world’s biggest fabrication complex), design (design centers in five cities of the world), and the Samsung brand.

Its resource deployments have been supported by a culture and working practices that support high levels of coordination and commitment. Samsung’s culture is nourished by tales of outstanding endeavor, including constructing a four-kilometer paved road in a single day to ensure that Samsung’s first integrated circuit plant could open on time.

Central to Samsung’s success is a new product development process supported by a knowledge management process that allows development teams to exploit the expertise of the entire company. In April 2009, the Visual Display Division of Samsung Electronics’ Digital Media Business had just completed work on a high-resolution LED TV when it was required to roll out a high-definition, 3-D television within a year. Within a week, the two task forces assigned to the project scoured Samsung Electronics’ Test and Error Management System (TEMS) of information on every product development project undertaken at the company to identify know-how within Samsung that might assist the new project.

Samsung Electronics’ top-down drive continues. In 2010–2011, CEO Lee Kun-hee announced 10-year plans to build major new businesses in solar panels, LED lighting, electric vehicle batteries, biotechnology, and medical devices. During 2014 to 2018, the strategic priorities were to transition Samsung from hardware to software and services and build strength in automotive systems, digital health, and industrial automation.

By acquiring Harman International in December 2017, Samsung indicated its willingness to use acquisitions to build new areas of business.

Sources: “Samsung: The Next Big Bet,” Economist (October 1, 2011); “Samsung Electronics’ Knowledge Management System,” Korea Times (October 6, 2010); “Samsung After Lee Kun-hee,” Economist (October 31, 2020).

STRATEGY CAPSULE 13.6 Governance in Holding Companies A holding company owns a controlling interest in a number of subsidiary companies. The term holding company is used to refer both to the parent company and to the group as a whole.

Holding companies are common in Japan (zaibatsu such as Mitsubishi and Mitsui), in Korea (chaebols such as LG, Hyundai, and SK) and in Hong Kong (trading houses such as Swire, Jardine Matheson, and Hutchison Whampoa). In the United States, most banking assets are owned by holding companies.

Within holding companies, the parent exercises control over the subsidiary through appointing its board of directors. Individual subsidiaries typically retain high levels of strategic and operational autonomy. Unlike the multidivisional corporation, the holding company lacks financial integration: there is no centralized treasury, profits accrue to the individual operating companies, and there is no centralized budgeting function—each subsidiary is a separate financial entity. The parent company provides equity and debt capital and receives dividends from the subsidiary.

Although the potential for exploiting synergies between businesses is more limited in the holding company than in the divisionalized corporation, the holding company structure has important advantages for large family-owned companies. The attractiveness of holding companies is that they allow family dynasties to retain ownership and control of business empires that diversify family wealth across multiple sectors. The Agnelli family controls a business empire that comprises Stellantis, Ferrari, CNH Industrial, and Juventus Football Club, despite minority ownership of these enterprises.

At the same time, their decentralization allows effective management without the need for the parent company to develop a tremendous depth of management capability.

Thus, the Tata Group, India’s biggest business concern with over $60 billion in revenue and 424,000 employees, is controlled by the Tata family through Tata Sons Ltd, the parent company of the group. Among its 134 subsidiaries, several are industry leaders, including Tata Steel, Tata Motors (owner of Jaguar Land Rover), Tata Tea (owner of the Tetley brand), and Tata Consulting Services. Twenty-seven Tata companies are publicly listed. In contrast to the public corporations where the key governance problem is the conflicting interests of owners and managers, the governance problems of holding companies relate to the conflicting interests of different shareholders: especially between the founding family and other shareholders. At Tata Group the two principal families, the Tatas and the Mistrys, have been locked in a bitter dispute since 2017.

Sources: M. Granovetter, “Business Groups and Social Organization,” in N. J. Smelser and R. Swedberg, Handbook of Economic Sociology (Princeton: Princeton University Press, 2005): 429–450; “Can Tata Sons Regain Its Footing?” Economist (October 3, 2020).

Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 1

The Concept of Strategy 1.

In relation to the four characteristics of successful strategies in Figure 1.1, assess President Donald Trump’s 2020 re-election campaign.

Donald Trump failed in his 2020 bid for re-election to the White House. However, given that throughout 2020, his approval rating varied between 37% and 48%, the outcome of the election was close: he lost the popular vote by a margin of only 4.4%. So given Trump’s unpopularity through much of his term in office, the overall chaos of his administration, and the disorganized response to the covid pandemic, his campaign strategy may be viewed as relatively successful.

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Clear, consistent, long-term objectives. Trump’s goal throughout the campaign was highly focused—winning re-election. This goal took precedent over every other goal typically embraced by US sitting-presidents. But despite the clarity of this overarching goal, the sub-goals it was translated into were inconsistent. There were (a) invigorating his core supporters—namely, white, middle-aged males without college degrees and (b) broadening his base to include affluent suburban voters and minorities.

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Profound understanding of the environment. Trump possessed an intuitive understanding of the concerns of the emotions of his core support group—notably their fears and their anger. He also demonstrated deep understanding of the potential to intimidate fellow politicians and thereby force a united support from the Republican party. More generally, he demonstrated considerable understanding of the malleability of the political perceptions of others—which he has exploited through the demonization of Democrat politicians and office holders and those supporting liberal and humanitarian causes. However, Trump’s understanding of the potential to exploit fear and anger among the electorate, is accompanied by remarkable lack of understanding of the machinery of government and the means by which policies can be transformed into action.

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Objective appraisal of resources. Trump’s strengths are his ability to empathize with, communicate with, and motivate his core of supporters. However, this divisiveness also represents a weakness—his inability to broaden the base of his political support—especially at a time when his core of supporters is a shrinking part of the US electorate. Trumps personal characteristics—notably his narcissism and disloyalty and vengefulness also create a handicap in gain building the support needed for an effective presidential campaign.

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Implementation. Trump has been highly effective in applying his skills of communication and motivation through social media and political rallies. However, his 1

lack of self-control and lack of restrain over his anger and vindictiveness has made it difficult to run consistent, effective campaigns. His erratic nature and propensity to deflect criticism and blame have hade collaboration with those outside his own family exceptionally fraught.

2. What is your career strategy for the next five years? To what extent does your strategy fit with your long-term goals, the characteristics of the external environment, and your own strengths and weaknesses?

This question offers an opportunity for personal reflection. I do not wish to impose any of my own preferences or priorities on your own thinking about your strategies. However, in pondering your own futures, the book offers some useful guidance: a) The process of engaging in strategic thinking—or, to be more formal, strategic planning—can be very helpful in providing guidance your own life. The lessons from the section “Why Do Firms Need Strategy?” (pp. 11, 14) can be applied to individuals as well as to organizations. Thus, formulating a strategy can assist you “first, by enhancing the quality of decision-making, second, by facilitating coordination, and, third, by focusing [you] on the pursuit of long-term goals.” b) Gaining experience in applying the “Common Elements in Successful Strategies” shown in Figure 1.1.

In relation to (b), the exercise offers you an opportunity to consider your career goals— preferably in relationship to the goals for your life as a whole. These life goals may take the form of an overall mission. or the linkages between your work and the other aspects of your life. It is difficult to consider your career strategy without looking at what you hope to achieve with your life.

Understanding the external environment requires knowledge of different occupations, the kinds of opportunities they provide, the key success factors within them, and how they will be impacted by economic and technological changes.

Understanding one’s own resources and capabilities is a critical requirement in formulating a career strategy. What is your profile of skills in terms of strengths and weaknesses? What are your psychological traits? What resources do you possess in terms of educational and professional qualifications and relationships with people and institutions?

In terms of the content, what do we mean by a career strategy? The basic questions set out in the section “Describing Strategy” (pp. 17-18): Where are we competing? and (b) How are we competing? Offer a template for describing (the type of job, the sector in which you will work and in which location, and the basis on which you will become a superior performer within that job.

Finally, you can explore implementation: What actions to you need to take to get this strategy off the ground?

Given all the uncertainties concerning our own personal development and a changing external world it cannot be formulated in specific terms. As with companies operating in turbulent industries it is likely to be a set of guidelines underpinned by a recognition of identity. In addition, such a strategy will be continually evolving. In the words of General Eisenhower: “Plans are nothing; planning is everything.”

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3. As the business environment of most firms has become more complex and more turbulent, there has been a growing tendency for firms to express their strategies in simple statements (e.g. Southwest Airlines: “Meet customers’ short-haul travel needs at fares competitive with the cost of automobile travel”). Why might firms find this beneficial?

In discussing :Design versus Emergence” in the process of strategy making (pp. 18-20), Chapter 1 observes that: “The balance between the two depends greatly upon the stability and predictability of the organization’s business environment. The Roman Catholic Church and La Poste, the French postal service, inhabit relatively stable environments; they can plan activities and resource allocations in some detail quite far into the future.

For the environmental action group, Extinction Rebellion, or the Yemen Mobile Telecom Company, strategic planning will inevitably be restricted to a few guidelines; most strategic decisions must be responses to unfolding circumstances.” (p.19).

Thus, as a firm’s business environment becomes more complex and turbulent, so its inability to forecast the future inevitable means that its intended strategy cannot be expressed in detail. At the same time, to ensure that its emergent strategy—its decisions in response to unfolding circumstances—are coherent and aligned with the firm’s goals and with its resource/capability strengths, so it is vital that there is a consensus among decision maker as to what these are. Hence the vital role of simple statements that encapsulate the core of a firm’s strategy. Indeed, such a consensus about the essence of a firm’s strategy is valuable to all firms, irrespective of the complexity r turbulence of the business environment. Walmart’s business environment is not especially turbulent; however, it derives considerable benefit from the fact that everyone in the organization— down to the self-fillers and cleaners—know that the essence of Walmart’s strategy is “everyday low prices”.

4. I have noted that a firm’s strategy can be described in terms of the answers to two questions: “Where are we competing?” and “How are we competing?” Applying these two questions, provide a concise description of Lady Gaga’s career strategy (see Strategy Capsule 1.2).

In terms of positioning, we can describe Lady Gaga’s strategy as follows:

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Where is she competing? Supplying pop/dance music, music videos, and concerts to a worldwide group of young people mostly aged from 12 to 25. Her business model comprised the following revenue streams: live (concert) and TV performances, royalties from recorded music (both as a performer and songwriter), product endorsements and other licensing income from the use of the “Lady Gaga” trademark.

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How is she competing? Lady Gaga builds competitive advantage through distinctive differentiation. The Lady Gaga persona is heavily based upon striking visual impact through innovative, outrageous, and often shocking combinations of dress, makeup, and hair styles. Her visual impact is also evident in her videos which use sophisticated cinematography to convey themes of lust, aggression, loneliness, religious iconography, birth and death, and traditional myths. Her music, by contrast, is mainstream: listenable, danceable, and catchy. The loyalty of her fan base is reinforced through intensive efforts as building a community around themes that link with her own emotions and upbringing with those of her fans. The “Mother Monster” “Little Monsters” relationship involves communicating vulnerability, inclusiveness and emotional support and makes intensive use of social networking technology (Facebook and Twitter).

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In terms of future direction, Lady Gaga’s strategy seems to n primarily one of maintaining her current positioning through continual innovation and reinforcing her relationships with her fan base.

5. Using the framework of Figure 1.6, describe the strategy of the university or school you attend.

Positioning Where?

Bocconi University is a commercial university that offers educational programs and conducts research within the areas of Economics, Law, Accounting, Economics, Finance, Management, Marketing, Decision Sciences, Legal Studies, and Policy Analysis and Public Management. It offers degree programs at the Bachelors, Masters and Doctoral levels as well as a variety of shorter, post-experience, non-degree courses. Its degree programs are offered in Italian and English. Most of Bocconi’s educational activities are conducted on its Milan campus. In addition, it offers at its Indian affiliate, the Mumbai International school of Business, and has double degree and exchange programs with universities in China, India, Australia, Canada, USA, and several European countries.

How? Bocconi seeks to build its competitive advantage through a commitment to excellence in both teaching and research; through emphasizing relevance to real world problems in its knowledge development and knowledge transmission activities; through close relationships with the corporate and government sectors; and to sustain its pre-eminence within Italy with growing recognition within the wider world.

Direction Bocconi’s strategic development is in three main directions: a) Building excellence and reputation as a world class center of both basic and applied research within its field of activity in order extend the frontiers of knowledge within this domain. b) To offer educational programs at undergraduate, graduate and postgraduate levels of the highest quality that will prepare Bocconi’s graduates for successful careers and allow them to become valuable members of society. c) To contribute to the economy and social community of both Italy and beyond.

These development goals are to be achieved through internationalization of both faculty and the student body; investment in faculty, buildings, and research; and by providing incentives and development opportunities that allow the members of the university to realize their potential.

6. Your business school is considering appointing as dean someone whose entire career has been spent in business management. What challenges might the new dean face in applying her strategic management skills to a business school?

This question draws upon the differences in strategic management between for-profit and not-for-profit organizations—see “Strategic Management of Not-For-Profit Organizations” (pp. 24-26).

Because business schools operate in a highly-competitive, global marketplace, many of the skills of business leader are relevant to a business school leader. For example, forging a compelling vision, understanding the importance of competitive positioning, recognizing, and exploiting relative strengths in resources and capabilities (see Table 1.2). .

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Probably the greatest challenge is in adapting to the more complex goals of a not-for-profit such as a business school. While most universities and their constituent schools have mission statements—articulating mission in terms of actionable goals is difficult. I the purpose of a business school to serve business, to serve the interests of its students, to build reputation, to create and disseminate knowledge, to serve its country and its local community, or what? To the extent that all these are probably worthy goals, how are tradeoffs among them established?

The process of strategy implementation is also likely to be very different in an academic institution as compared to a business enterprise. Academic institutions—especially universities—have complex governance structures reflecting multiple stakeholder groups: students, faculty, non-academic employees, alumni donors, and—in the case of public universities—government. As a result. Implementing strategy is likely to be far more complex in a business school and will require extensive negotiation and persuasion.

The implication is that the skills and personality traits of the effective business school dean tend to be different from those of an effective business leader.

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 2

Goals, Values and Performance 1. Since long-run profitability requires that a firm is sensitive to the interests of its customers, employees, suppliers, and society-at-large, whether a firm is run in the interests of its shareholders or its stakeholders makes no real difference. Do you agree?

Are there situations where shareholder and stakeholder interests diverge?

As chapter 2 notes: “Profitability over the long term requires loyalty from employees, trusting relationships with suppliers and customers, and support from governments and communities” (p. 34). The more volatile a firm’s environment, the more attentive it must be to the changing needs of these constituencies in order to sustain a competitive advantage.

Yet, this does not mean that pursuing the interests of all stakeholders is the same as pursuing shareholder value. There is a region of consistency, but also a region of conflict between the interests of different groups. E.g.: •

Consumer interests are served by lower prices—clearly this is injurious to profitability

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Employees prefer job security and defined-benefit pensions—a major source of low profitability among legacy airlines, automobile manufacturers, and other companies

Hence, the importance of Porter and Kramer’s concept of “shared value” notion: “creating economic value in a way that also creates value for society” (p. 47)—this the region where the interests of shareholders and the interests of society as a whole intersect.

2. Table 2.1 compares companies according to different profitability measures. a. Which two of the six performance measures do you think are the most useful indicators of how well a company is being managed? b. Is return on sales or return on equity a better basis on which to compare the performance of the companies listed? c. Several companies are highly profitable yet delivered very low returns to their shareholders. How is this possible? a) There is no unambiguously correct answer here. All performance measures are imperfect.

Important criteria are, first, consistency with value maximization, second, usefulness in comparing with other firms. On this basis, I offer the following comments:

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Market capitalization is the best available indicator of the NPV of a firm’s future profit flows. Hence, it has the key advantage of being forward looking rather than backward looking. Its flaw as an indicator of management performance is that a firm’s stock market value at any point of time reflects many influences other than how well the company is being managed including the overall level of the stock market and the likelihood of a takeover.

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Increases in a company’s net income are normally associated with increases in the value of the firm. For comparing performance between companies, net income is 1

not a good indicator when the companies are of different sizes: it is better to look at profitability ratios.

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Return on sales is generally not a good indicator of management effectiveness.

Margins vary between greatly between different businesses (depending on their capital intensity).

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Return on equity and return on assets are usually closely correlated. However, return on equity is influenced by a firm’s ratio of debt/equity. Hence, as an indicator of management effectiveness, the more broadly-based return on assets is better in comparing the performance of different firms.

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Return to shareholders (i.e. share price gains plus dividends) is typically an unreliable performance indicator, especially over the short term. It is highly sensitive to (a) choice of time period and (b) general movements in the stock market.

b) See the point made above: “Return on sales is generally not a good indicator of management effectiveness. Margins vary between greatly between different businesses (depending on their capital intensity).” See for example, the low ROS earned by Amazon and Walmart compared to the fat margins of Roche and JPMorgan Chase. Yet, Amazon and Walmart each earned a higher ROE and ROA than JPMorgan Chase.

c) Return to shareholders is determined primarily by changes in the stock market’s expectations about a firm’s future profit streams rather than the levels of expected profitability—hence current market capitalization (either in absolute terms of relative to a company’s net asset value) is probably a better indicator that historical returns to shareholders. For example, Amazon’s return to shareholders was vastly superior to that of Roche despite inferior ROS, ROE and ROA.

3. With regard to Strategy Capsule 2.2, what additional data would you seek and what additional analysis would you undertake to investigate further the reasons for UPS’s superior profitability to FedEx??

The analysis of the financial statements of UPS and FedEx in Strategy Capsule 2.2 is only the starting point for a more probing analysis. The key here is to use the financial analysis in order to target the underlying strategic and operational factors that give rise to the financial numbers.

UPS’s higher ROA is primarily the result of UPS’s return on sales (double that of FedEx). In all the major cost items: labor, fuel, maintenance and depreciation, UPS is at an advantage to FedEx. To investigate further we need to determine whether UPS’s higher sales margin is the result of (a) its business mix (i.e. ground transportation being more profitable than air transportation), (b) superior efficiency—i.e. UPS’s operational management and/or ability to motivate its employees exceeded those of FedEx, (c) lower input costs—in particular, lower wage and salary rates. The financial data can shed light on some of these, e.g. annual compensation per employee for the two companies. However, for the most part this will require looking beyond the financial data to inquire into management and operational systems.

4. The CEO of a chain of pizza restaurants wishes to initiate a program of CSR to be funded by a 5% levy on the company’s operating profit. The board of directors, fearing a negative shareholder reaction, is opposed to the plan. What arguments might the CEO use to persuade the board that CSR might be in the interests of shareholders, and what types of CSR initiatives might the program include to ensure that this was the case?

The key here is to identify convergence between the firm’s CSR policies and the interests of shareholders. The arguments made by Porter and Kramer (see pp. 47-48) provide the basic arguments. In terms of the “sustainability argument” this implies that the pizza chain should .

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invest in the communities within which it resides. This might involve providing jobs for disadvantaged youths, involving itself in local charities, using local suppliers and contractors wherever possible. In the long terms it would mean supporting the natural environment through involvement in energy reduction and waste recycling programs. In terms of the “reputation argument” the chain might seek to improve its image among its customers by many of the same policies—the key however is (a) to focus on initiatives that are clearly visible to key stakeholders (e.g. customers) and (b) select initiatives that are most appealing to the most important of these stakeholders and have the biggest potential payoff to the firm in terms of future revenue generation. The emphasis should be on initiatives that have an impact within the local markets of the firm’s pizza restaurants.

5. Nike, a supplier of sports footwear and apparel, is interested in the idea that it could increase its stock market value by creating options for itself. What actions might Nike take that might generate option value?

The discussion of real options (pp. 49-51) points to two major types of option: flexibility options and growth options. Nike could create options be increasing flexibility throughout its whole range of activities. For example, to take account of opportunities to exploit lower costs resulting from exchange rate movements it could move to shorter contracts with its suppliers or have contracts which are more flexible with regard to quantity. It could require that suppliers reorganize their production processes to allow greater flexibility with regard to color and size to permit faster responses to market preferences. In terms of growth options, Nike could make initial investments in new product areas, new markets, and new product and process technologies. Alliances including minority investments in companies which offer the potential to diversify into new product areas would also create option value.

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 3

Industry Analysis: The Fundamentals 1. From Table 3.1, select a high-profit industry and a low-profit industry. From what you know of the structure of your selected industries, use the five forces framework to explain why profitability has been high in one industry and low in the other.

For each of your selected industries, it is possible to analyse all five of the forces of competition that impact the industry. However, to speed up the analysis it is best to concentrate on those forces of competition that, at first sight, appear to be critically important in driving profitability in the industry under consideration.

High profit industries: Tobacco. The high profitability of the industry is primarily a result of limited competitor rivalry within the industry. This reflects high concentration (US industry dominated by Altria and R.J. Reynolds) and high product differentiation (most consumers strongly brand loyal).

Other forces also weak: entry barriers high (government restrictions of advertising handicaps potential entrants); the only close substitutes are hand rolled cigarettes and e-cigarettes— but these are also supplied by the major tobacco companies; supplier power weak (tobacco growers are fragmented); so is buyer power (cigarettes distributed through very wide range of retail outlets, none with significant clout).

Aerospace and Defence. The industry has two main segments: civil and military. Both segments are characterized by very high concentration, highly differentiated products, and very high barriers to entry. Customers become captive as a result of long product life spans and the need for spares and service.

Household & personal products. Industry rivalry weak due to few competitors (many product areas dominated by P&G and Unilever) and high levels of product differentiation (supported by heavy advertising) resulting in brand-loyal, price insensitive customers and limited incentives for the main companies to compete on price. Barriers to entry high due to control over distribution (newcomers have difficulty getting shelf space).

Pharmaceuticals. Patent legislation means that the industry is fragmented by drug type and each firm has a statutory monopoly over its patented drug. For each medical condition there are typically several alternative drugs, however, price competition between them is limited since consumers have limited choice—it’s their doctors who select which drug to prescribe.

Buyer power is primarily exercised by medical groups (e.g. HMOs in the US) or by public authorities in countries where there is socialized medicine. For drugs where patents have expired, the competitive situation is very different due to the presence of multiple producers of “generic” drugs. Profit margins are much lower on these drugs.

Low profit industries: Motor vehicles. The key force here is internal industry rivalry. There are about 20 major global producers of automobiles supplying the US market or which only two are US-based (GM and Ford). Most of these have excess capacity. The importance of scale economies mean that they all wish to expand market share. Among mass-market vehicles, product

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differentiation and brand loyalty are weak. The suppliers of sophisticated, technologyintensive components (e.g. antilock braking systems, fuel injection systems, etc.) exert significant supplier power. Ride-share services are increasingly important substitutes for car ownership in urban areas.

Trucking. A fragmented industry supplying a commodity service. Buyers mostly large with considerable buying power. Low entry barriers.

2. With reference to Strategy Capsule 3.1, use the five forces framework to explain why profitability has been so high in the US market for smokeless tobacco.

Strategy Capsule 3.1 states that USSTC: “accounts for 57% of the US market for smokeless tobacco, and its long-established brands (including Skoal, Copenhagen, and Red Seal), its distribution through thousands of small retail outlets, and government restrictions on advertising tobacco products create formidable barriers to would-be competitors.”

Hence, in terms of the five forces of competition, the following factors have supported high profitability: a) Internal rivalry. Very weak. One firm has near monopoly. Products differentiated by physical characteristics, packaging, and brands. b) Entry barriers. Distribution is complex and expensive: many thousands of convenience stores. Brand loyalty high. Restrictions on advertising make it difficult for new entrant to establish brand awareness. c) Supplier power. Weak—tobacco growers fragmented. d) Buyer power. Direct customers are wholesalers and retailers which are fragmented. e) Substitute competition. Weak—alternative nicotine delivery products include cigarettes and nicotine gum.

3. The major forces shaping the business environment of the fixed-line telecom industry are technology and government policy. The industry has been influenced by fiber optics (greatly increasing transmission capacity), new modes of telecommunication (wireless and internet telephony), the convergence of telecom and cable TV, and regulatory change (including the opening of fixed-line infrastructures to “virtual operators”). Using the five forces of competition framework, predict how each of these developments has influenced competition and profitability in the fixed-line telecom industry.

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Fiber optics: Increased internal rivalry within the industry as a result of (a) excess capacity (b) high fixed costs and low variable costs of telephony.

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New modes of telecommunication: Technological innovation in the industry has resulted in increased substitute completion—especially from wireless telephony with a resulting steep fall in the number of domestic fixed-line subscribers.

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Deregulation: Increased competition by (a) reducing entry barriers—allowing entry of “virtual carriers” that use infrastructure of established incumbents; (b) increasing substitute competition by increasing completion between telecom companies and cable companies (cable TV companies allowed to offer telecom services).

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4. By 2021, the online travel agency industry had consolidated around two leaders: Expedia (which had acquired Travelocity, Lastminute.com, Hotels.com, Trivago, and Orbitz) and Booking Holdings (which owned Priceline, booking.com, Kayak, Rentalcars.com, and OpenTable). These two market leaders competed with numerous smaller online travel agents, with traditional travel agencies (e.g., Carlson Wagonlit, TUI, and American Express), and with direct online sales by airlines, hotel chains, and car rental companies. Amazon and Google were both potential entrants to the market. The online travel agents are dependent upon computerized airline reservation systems such as Sabre, Amadeus, and Travelport. Use Porter’s five forces framework to predict the likely profitability of the online travel agency industry over the next ten years.

Several structural features of this industry seem likely to depress profitability: a) Entry barriers: low. Like most online businesses, all it needs to enter is a website. b) Substitute competition: strong—direct sales by the travel companies (airlines and hotel chains in particular) are strong competitors. (Some budget airlines only sell direct through their own websites and call centres). For accommodation, Airbnb is a major competitor. c) Supplier strong: strong—the airline reservations systems are few and critically important. d) Buyer power: although fragmented, buyers are highly price sensitive and have very low switching costs.

e) Rivalry: although Expedia and Priceline are market leaders, networks effects supporting their platforms are not particularly strong, and there are a number of smaller competitors. There is little product differentiation between them—all provide the same products.

5. Walmart (like Carrefour, Ahold, and Tesco) competes in several countries of the world, yet most shoppers choose between retailers within a radius of a few miles. For the purposes of analyzing profitability and competitive strategy, should Walmart consider the discount retailing industry to be global, national, or local?

In the section “Defining Industries: Where to Draw the Boundaries” (pp, 67-69), I emphasize substantiality as the key factor in determining market and industry boundaries.

In terms of substitutability on the demand side, the market is local: in most countries, consumers shop within a radius of about 10 miles (at most). On the supply side, most discount retailers are national chains, hence their decisions over where to open, to close, and to expand stores tend to view the industry as national in scope. Walmart and a few other discount retail chains are international—but most operate in a few countries. Hence there is a limited basis for regarding this market as global in scope. The implication is that Walmart should view its industry differently for different types of decision. For certain decisions relating to its global network, such as sourcing supplies of different products and developing technologies that can applied generally, it needs to consider its industry as global pricing. For issues of competitive strategy, including range of products, overall price level, differentiation relative to competitors, store design, distribution logistics, etc., the relevant competitive arena is the nation. However, for individual stores adapting to local conditions in terms of merchandizing and price variations, then it’s the local market that is relevant.

6. What do you think are key success factors in:

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a) the pizza delivery industry? b) credit card industry ((where the world’s biggest issuers are: Bank of America, JPMorgan Chase, Citibank, American Express, Capital One, HSBC, and ICBC)? a. The pizza delivery industry What drives customer choice? Main considerations are price, information, proximity, food and service quality (including consistency and reliability). Hence, KSFs are likely to be: i. Location in densely-populated, residential neighborhood, with high percentage of working people and low percentage of full-time homemakers ii. Strong local promotion (e.g. direct mail, local advertising) iii. Effective production management: low costs through minimizing waste; consistency in food preparation and cooking iv. Effective recruitment, control, and scheduling of delivery personnel v. Brand equality b. The credit card industry With interest rate charges on cardholders of 15% to 20%, a variety of penalty charges (e.g. for late payment), and commission charges on merchants, credit cards are a high margin business (compared with other areas of retail banking). However, profits are easily consumed by cardholder defaults and fraud. Hence KSFs include: i. Strong brands—including ability to co-brand with other organizations (e.g. sports teams, colleges, etc.) ii. Access to captive customer base—e.g. large number of retail bank account holders iii. Strong marketing capabilities iv. Ability to enter new markets (e.g. countries with fast growing markets for financial products such as Brazil, China, India) v. Effectiveness in fraud prevention vi. Accuracy in credit assessment to identify cardholder default risks and ability to adjust credit card terms (credit levels, interest rates, card charges, etc.) according to estimates profitability of each customer

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 4

Further Topics in Industry and Competitive Analysis 1. Among the industries listed in Table 3.1 in Chapter 3, which would you consider to be the most “hypercompetitive” (i.e., ones in which competitive advantage and market leadership are frequently overturned)?

Hypercompetition tends to be associated with innovation. Yet, even the most technologyintensive industries in Table 3.1, market leadership was fairly stable. For example, in computer software, Microsoft, Oracle, and Salesforce have long been market leaders— mainly because of the network externalities that reinforce the market-leading platforms..

Similar stability is apparent in semiconductors, aerospace, and pharmaceuticals. However, these industries look less stable when compared to mature sectors such as Household and, Personal Care Products, Beverages, Food Processing, Insurance, and Railroads where market leadership can extend to over one hundred years. Instability tends to result from disruptive technological change—e.g., in entertainment where digital technologies have allowed new entrants such as Netflix and Spotify. When technological change is combined with deregulation, thus in Telecom Services, market leadership can change radically. (Note that the current AT&T is not the same AT&T that had a monopoly over long-distance telephone traffic for most of the 20th century.) Some mature sectors are hypercompetitive—e.g. the fashion segment of the apparel industry.

2. During 2010, the Apple iPhone replaced RIM’s Blackberry as global market leader in

smartphones. By 2021, the world market for smartphones was dominated by Apple and phones using Google’s Android; RIM and Microsoft each held market shares of less than 0.1%. Why did Google succeed in this market while Microsoft and RIM failed?

Smartphones—or, more specifically, smartphone operating systems—are platforms, they are an interface between two markets: the market for smartphones and the market for smartphone applications. In both markets network externalities exist. In the market for smartphones user-to-user network externalities are probably weak: common standards ensure that almost all wireless phones connect to the network. However, in the market for applications, there are strong supply-side network effects: the cost of developing applications means that app develops focus on developing apps for the most widely used platforms. Similarly, consumers are attracted by platforms with the most and best apps.

The extent of these network externalities is limited by several factors: • • •

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Most apps are not exclusive to a platform—most popular apps are available for both iPhone and Android The number of app developers and modest cost of developing most apps means that developers will write for a platform even though it is not the market leader The world market for smartphones is huge. This means that it is possible for more than one platform to be commercially viable.

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Yet, despite these mitigating factors, the number of viable smartphone platforms is limited.

Currently Android and Apple’s iOS are the big two, and no one else has a viable market share.

However, this does not explain how Google, a latecomer to this market, was successful while RIM, the early market leader, failed. Aside from the technical merits of the Android operating system, the critical factor was Google decision to offer Android as an open-source operating system. As open source, handset makers can use Android for free and the Android’s development is accelerated by the number of software engineers working on improving the system.

3. HP, Canon, Epson, and other manufacturers of inkjet printers make most of their profits from their ink cartridges. Why are cartridges more profitable than printers?

Would the situation be different: a) if cartridges were manufactured by different firms from those which make printers? b) if cartridges were interchangeable between different printers? c) if patent and copyright restrictions did not prevent other firms from supplying ink cartridges that could be used in the leading brands of printer?

In the market for inkjet printers’ competition is strong because of a significant number of manufacturers (HP, Canon, Lexmark, Epson, Brother, Fujifilm, Dell, Konica, Minolta) and limited differentiation between them. Because each printer firm differentiates its ink cartridges and owns intellectual property (IP) relating to its cartridges (patents, trademarks, and design copyrights), each manufacturer is close to being a monopolist of its own cartridges. The only competition is from firms which acquire used cartridges and refill them.

The printer manufacturers compete fiercely for the sale of new printers (selling them at a loss), in at they then have a captive market for cartridges which can be sold at a high margin because, for existing printer owners, there is little competition. a) Who manufacturers the cartridges are not the critical issue. The key is ownership of the IP. If the printer manufacturers licensed independent cartridge manufacturers, they could ensure that they earned much the same level of profitability on the cartridges. b) Interchangeable cartridges would destroy the high profitability of the cartridge market. And, in the absence of excess profits on cartridges, the printer manufacturers would have no incentive to sell printers at a loss. c) Similarly, in the absence of IP protecting cartridges, independent manufacturers of cartridges would enter the market, again depressing the prices and margins on cartridges.

4. In November 2005, six of Paris’s most luxurious hotels—including George V, Le Bristol, the Ritz, and Hotel de Crillon—were fined for colluding on room rates. Regular guests showed little concern—noting that, whatever the listed rack rate, it was always possible to negotiate substantial discounts. Using the prisoners’ dilemma model, can you explain why the hotels were able to collude over their listed rates but not over discounts?

.

2

HOTEL GEORGE V Collude Compete RITZ

Collude

40/40

10/50

HOTEL

Compete

50/10

30/30

Begin with a simplified situation of just two luxury hotels. Assume the payoff matrix shown above (the 1st figure in each box shows profit in millions of Euros to the Ritz Hotel, the 2nd figure shows profits to the George V. In the absence of coordination, each hotel will reject the “collude” option in the knowledge that its rival can increase profits by choosing to “compete”. Hence both end up earning €30m. However, with communication they can agree to collude and increase their profits to €40m each. A long history of coexistence and similar values and norms between the hotels probably facilitated collusion.

The situation is different when a significant customer (e.g. a tour operator or a corporation) asks for a discount. Each hotel knows that, unless a discount is offered, that customer is likely to go elsewhere. If a hotel has rooms available, there is a strong incentive to offer a substantial discount—the incremental cost of letting a room rather than leaving it empty is small. While communication over list prices (“rack rates”) is simple (it needs to happen just once a year), communicating and reaching agreement over discounts to individual customers would be very difficult. The attractions of offering individually negotiated discounts are increased by the likelihood that they will remain secret.

5. During 2020, Google Web used price cuts, improved customer service, and product enhancements to take market share from industry leader, Amazon Web Services, in cloud computing. Use the competitor analysis framework outlined in Figure 4.4 to predict Amazon’s likely response. (Note: Amazon Web Services is Amazon’s most profitable division accounting for 60% of Amazon’s operating profit.)

Strategy Since it began business in 1994 Amazon’s strategy has been one of relentless expansion both in terms of diversification and international growth. The legacy of founder Jeff Bezos has been a culture of aggression and ferocious quest for market share. In every market Amazon has entered it has sought market leadership through aggressive price cutting and the acquisition of smaller rivals. In cloud services, it seems likely that Amazon will remain committed to its desire for market leadership and its obsession with cost leadership.

Objectives Amazon has shown a remarkable willingness to sacrifice short and medium-term profitability for market share gains. It’s commitment to sales growth is also revealed in an aggressive approach to competitors.

Assumptions The assumptions that underlie Amazon’s strategy are essentially the beliefs of its founder and CEO Jeff Bezos. Features of “the Bezos way” include: • • •

.

Belief in frugality Rational solutions to problems—which typically mean rejecting conventional wisdom and current solutions in order to find a better way Belief in the power of technology

3

• •

Stressed employees are the most efficient and creative The only limits are self-imposed.

Resources and capabilities Amazon has massive strengths in the form of: • • • •

Brand equity and brand awareness A huge customer base—in 2021 there were over 200 million Amazon Prime members worldwide Exceptional IT strengths—Amazon owns about half of the world’s global cloud infrastructure Huge cash flow.

At the same time, Amazon is now so diversified that there is the possibility that dissipated management attention may result in Amazon not utilizing its massive resources to maximum effect in all the markets in which it competes. That said, the centrality of AWS to Amazon’s overall market position and its financial performance suggests that Amazon is highly unlikely to accommodate further competitive incursion by a leading tech player such as Alphabet/Google.

Conclusions The implications of this analysis are that Amazon has the potential to be a ferocious competitor in protecting AWS’s market share in cloud computing. However, given that Alphabet has different resources/capabilities than Amazon and that Google Web is positioned differently from AWS, there may be potential for Google Web to build its market position in cloud competing such that (a) it des not directly encroach on AWS’s market position and (b) AWS is unable to directly thwart Google Web’s growth strategy.

5. How would you segment the restaurant market in your hometown? How would you advise someone thinking of starting a new restaurant which segments might be most attractive in terms of profit potential?

To identify possible segmentation variables, begin with the basis on which consumer choose: e.g. cuisine, location, price level, quality, format (fast food, café, buffet, and waiter service restaurant). We can eliminate location by selecting just local markets. We can then combine the last four variables into a simple composite variable. This gives us just two segmentation variables that can be divided into the following categories:

In terms of identifying profitable segments, key criteria might include

C U I S I N E

.

American (steaks, burgers, grills Fish Vegetarian Italian French Indian

Fast food McDonald’s, Burger King Pete’s Fish ’n Chips --Pizza Hut -----

RESTAURANT FORMAT Café Popular restaurant Up-scale restaurant The American Hamburger Heaven Angus Steakhouse Diner ----Loch Fine --Manna, Gate --Marine Ices Carlucci’s, Pizza Artigiano Express Café Rouge Bradley’s New Balti New Delhi, Cumin, --Spice, Shahbag

4

Chinese Thai

Speedy Noodle ---

--Blue Moon

Japanese

Wagamama

---

Mulan, Bangkok, Bhan Thai Benihara

ZeNW3 --Sushi Delight

•

Where is demand growth strongest (e.g. vegetarian cafes and popular restaurants)

•

Where is competition weakest (avoid over-populated segments such as Indian, Chinese and Thai popular restaurants), explore segments that are empty or underserved (up-market Asian cuisine, Asian fast food?)

7. Consider either the North American or European markets for air travel. Can these

markets be segmented? If so, by what variables and into which categories? Can an airline be financially viable by specializing in certain segments or must airlines seek to compete across all (or most) segments?

There’s no significant difference here between European and North American markets. In both cases, customer choice is based on routes. Competition is similarly about how many airlines fly a specific route.

The other key variable is likely to be customer type. Traditionally, airlines distinguish between business and leisure travellers. Possibly a more appropriate segmentation might be between budget travellers, and those (including business travellers) who are willing to pay a premium for flexibility and additional comforts and services.

The problem of segmentation by city pairs is that it creates a huge number of segments (e.g.

30 cities involves 450 routes). Hence me may wish to combine routes into categories defined either by hub airports (London, Paris, Stockholm, Berlin, Barcelona), of by regions (Scandinavia, Eastern Europe, north-south routes in Western Europe, etc.

Selecting which segments to serve and how many segments to serve depends on:

.

•

Individual choices of segment attractiveness—e.g. in relation to routes, which routs have the highest demand and the fewest airlines flying them?

•

Cost and demand linkages between segments. Many costs can be shared across routes: main airline costs are fixed or semi-fixed—the more passengers and flights that are flown, the lower are average costs (cost per available seat-kilometer). Hence the attraction of a wide route network. There are also demand linkages—where there are no direct flights, travellers prefer to fly with a single airline that can coordinate between flights.

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 5

Analyzing Resources and Capabilities 1. Since it was founded in 1994, Amazon has expanded its business from online book sales to online general retailing, to audio and video streaming, to e-readers and tablet computers, to cloud computing. Is Amazon’s strategy based primarily upon serving a market need or primarily on exploiting its resources and capabilities?

Amazon’s development over its 26-year life to 2020 is shown in the figure below.

During the first decade of Amazon’s life its development was consistent with both rationales: • It followed its customers need for easy online purchasing and fast, reliable delivery by expanding from books into a wide array of goods and services.

• This expansion was also consistent with it utilizing its online and physical resources and capabilities: having set up a website for marketing and an infrastructure for warehousing and distribution, it made sense to deploy these same resources and capabilities for products and services other than books. Indeed, since its customers for toys, household goods, music and other products were not the same as its original book-buying customers, it’s reasonable to say that exploiting Amazon’s resources and capabilities provided the primary rationale for its strategy.

More recently, Amazon’s diversification seems to have gone in two directions, one direction has followed a distinct customer/market linkage, the other specifically related to the exploitation of resources or capabilities: •

.

Amazon’s move into hardware (e-readers, tablets, smartphones, TV set-top boxes) has been determined primarily by demand side complementarities, but has led 1

•

Amazon into an area where it had few existing capabilities. Similarly with its move from video streaming into producing original content.

Amazon’s diversification into cloud computing and web hosting seems to be linked to exploiting its resources (server capacity) and IT capabilities, but has little linkage with its existing markets or customer needs.

2. The world’s leading typewriter manufacturers in the 1970s included Olivetti, Underwood, IBM, Olympia, Remington, Smith Corona, and Brother Industries. While IBM and Brother adapted to the microelectronics revolution, most of the others failed. What strategies might these companies have pursued rather than entering the personal computer and electronic work processing markets?

All the typewriter companies adopted a market or customer-oriented strategy: faced with the potential obsolescence of their core product—the typewriter—they chose to focus on the basic need of their customers: the need for word processing. This took them into electronic word processors, electronic printers, and personal computers. The problem was that they lacked not only microelectronic and software capabilities but also understanding that the emerging world of personal computing required a different business model and business philosophy.

There were two alternative strategies available to these companies: • To stick to typewriters and follow a strategy of managed, but (hopefully) profitable decline.

• Utilizing existing resources and capabilities in different markets. Could the companies’ capabilities in precision mechanics and electrical engineering and their resources—assembly plants, brands, skilled employees, and distribution and service networks have been deployed in other markets? Possibly small kitchen appliances, vending machines, and similar products offered opportunities to deploy existing resources and capabilities.

3. I have argued that the part of discrepancy between firms’ stock market value and their book value reflect the fact than intangible resources are typically undervalued or not valued at all in their balance sheets. For the companies listed in Table 5.1, which types of resource are likely to be absent or undervalued in the firms’ balance sheets?

Table 5.1 comprises three main groups of company: those with valuable technological resources or technical capabilities (e.g. Eli Lilly, AbbVie, Novo Nordisk, NVIDIA, ASML, Amgen), those with prominent brands (e.g., Nike, Mastercard, Visa, PepsiCo, Coca Cola) and those with both (e.g., Tesla, Apple, Netflix, Amazon, Microsoft).

4. Many companies announce in their corporate communications: “Our people are our greatest resource.” In terms of the criteria listed in Figure 5.7, can employees be considered of the utmost strategic importance? For Walmart, McDonald’s, and McKinsey & Company, how important are employees to their competitive advantages? a) Establishing competitive advantage. In terms of relevance, human resources are clearly vital to creating value for all businesses; but what about scarcity? This depends upon particular skills. The skills by Walmart and McDonalds for their basic operations are plentiful. For them, scare skills are required for specialized functions .

2

(IT, marketing, lobbying, etc.) McKinsey’s business depends much more upon sophisticated analytical skills—yet, even here, most of these skills are developed through internal training. b) Sustaining competitive advantage. Since people cannot be owned, they tend to be mobile between firms. Hence, it could be argued that they are not a source of sustainable advantage. Where certain skills are in limited supply, then firms can grow their own human skills through training programs. However, this is to view people as bundles of skills whose contributions in different employment situations is potentially the same. In fact, the effort and effectiveness with which people deploy their skills is dependent upon a host of organizational factors. What emerges, therefore, is that the key sources of sustainable advantage in relation to human resources are not the people themselves, but the human resource management capabilities through which people are recruited, trained, motivated, and deployed.

The striking feature of many high performing organizations is that they do not hire star performers, but select into entry-level positions on the basis of aptitude then rely on their internal processes to develop those people. Examples include WalMart, Accenture, General Electric, and Google. c) Appropriating competitive advantage. As is argued on pp. 110-111, there is competition between owners (shareholders) and employees to appropriate economic rents. To the extent that scarce employees can offer their valuable services to other employers, then they will be able to appropriate most of rents generated by the firm’s competitive advantage. For Walmart and McDonalds and other companies whose employees do not possess distinctive competencies, most employees lack sophisticated and specialized skills, and since both employees are mainly non-union, they lack individual or collective bargaining power. McKinsey consultants do possess more bargaining power, however, by ensuring that consulting assignments are undertaken by teams, McKinsey reduces their individual power. The fact that McKinsey is a partnership rather than a shareholder-owned company effectively eliminates the conflict of interest between senior staff and owners

5. The chapter argues that Apple’s key capabilities are product design and product development that combine hardware technology, software engineering, aesthetics, ergonomics, and cognitive awareness to create products with a superior user interface and unrivalled market appeal. How easy would it be for Samsung to replicate these capabilities of Apple?

Replicating another company’s capabilities is complex and risky. (In chapter 7, I develop these issues through introducing the concepts of isolating mechanisms and uncertain imitability.) The challenge for Samsung is that Apple’s design and product development capabilities do not reside in a single function, they involve combining multiple knowledge based that are typically resident in different functions of the company. Standard approaches to new product development offer little guidance as to how Apple achieves these highly distinctive capabilities. Ultimately, a company’s capabilities are a product of its entire history. Apple’s product development capabilities that allow it to create products with such functionality, ease of use, and customer appeal can be traced back to the combined skills of its founders: Steve Wozniak’s technical brilliance and Steve Job’s market insight, vision of future potential, and drive for perfection. These values and aspirations have become institutionalized with the firm’s culture and management systems. Job’s urging for Apple’s

.

3

engineers and designers to create “insanely great” products has continued to motivate Apple employees long after Jobs’ death in 2011.

6. Given the profile of Icelandair’s resources and capabilities outlined Strategic Capsule 5.8, how might Icelandair best exploit its resources and capabilities to (a) expand passenger numbers traveling to and from Iceland and (b) profitably grow its share of the North Atlantic market?

Icelandair’s most distinctive resource/capability is its location: its base in Iceland sets it apart from any other airline and presents major strategic challenges. Icelandair’s home base offers a tiny home market, hence, capturing a viable slice of the international market requires a carefully-honed strategy based upon exploiting Icelandair’s distinctive resources and capabilities.

For Icelandair to expand beyond its domestic market requires it to (a) build traffic among holidaymakers visiting Iceland (b) gain market share on the North Atlantic route between Europe and North America.

Building air traffic to Iceland as a destination requires utilizing Icelandair’s marketing and cabin service strengths, and probably require working in collaboration with the Iceland government and tourist industry.

Building a bigger presence on the North Atlantic market requires utilizing Icelandair’s operational, human resource, and cabin service strengths to provide an appealing package to transatlantic flyers. This is likely to mean focusing upon routes where, despite a stopover in Reykjavik, Icelandair can compete on flight times between North /American and European cities. This may imply focusing upon city pairs where other airlines do not offer direct flights (e.g. Montreal-Stockholm; Chicago-Glasgow). It also means creating attractive packages for leisure travellers for whom a stop-over in Iceland might be an attraction rather than a timeconsuming distraction.

7. Apply resource and capability analysis to your own business school. Begin by identifying the resources and capabilities relevant to success in the market for business education, appraise the resources and capabilities of your school, and then make strategy recommendations regarding such matters as the programs to be offered and the overall positioning and differentiation of the school and its offerings.

Capabilities relevant to success in the market for business education might include: •

Admissions capability (recruitment and selection of students)

•

Teaching capability (curriculum design, course development, classroom delivery)

•

Research capability (as indicated by publications and impact on business practices)

•

Career management capability (ability to secure jobs for graduates)

•

External relations capability (especially corporate relations)

•

Leadership (ability of dean and top management team to define and implement strategy, motivate employees, and manage operations)

Some of the key resources that these capabilities require include: •

.

Financial resources (cash flow, college endowment) 4

•

Location (proximity to business center, attractive living environment for students and employees)

•

Faculty (skills, reputation)

•

Students (academic abilities, prior experience, diversity)

•

Facilities (classrooms, libraries, IT, leisure facilities, etc.)

•

Reputation (status and brand equity of the institution)

•

Alumni (size, loyalty, and status of former students)

In assessing the important of different resources and capabilities, a key issue is likely to be linkages between them. For example, since faculty and facilities can be purchased from the market, they may be deemed relatively unimportant to sustainable advantage. More important is likely to be the financial resources that permit their acquisition. Similarly, alumni might not be considered a particularly important resource, however, to the extent that they are critical to financial resources (gifts) and to career management capabilities (loyal alums in senior positions offer jobs to new graduates), a school’s alumni base may be one of its most important resources.

The next task is to make strategy recommendations. The trap to avoid is to focus on upgrading weaknesses. In the short to medium term your school is probably stuck with its existing resources and capabilities and the challenge is to figure out how to deploy them most effectively.

Key issues include: Where to compete? Which products to offer? What should the balance be between undergraduate, graduate, and post-experience programs? At the graduate level, should the focus be MBA degrees (fulltime, part-time, executive) or specialized master’s degrees? What emphasis should be given to doctoral programs?

How to compete? Should the school emphasize teaching excellence or research excellence (is it possible to do both)? What disciplines or functions should be emphasized (e.g. finance, marketing, operations management)? In terms of programs, how can resource/capability strengths be deployed to give unique differentiation? E.g. international orientation, focus on problem solving, focus on managerial skills and aptitudes). Should your school attempt to compete on cost (either by reducing tuition fees or by reducing program length)?

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 6

Organization Structure and Management Systems: The Fundamentals of Strategy Implementation 1. Eric Yuan, the CEO of Zoom Video Communications, Inc., has asked for your help in designing a strategic planning system for the company. Would you recommend a formal strategic planning system with an annual cycle such as that outlined in “The Strategic Planning System: Linking Strategy to Action” and Figure 6.1? (Note: Zoom’s strategy is summarized in Strategy Capsule 1.5 in Chapter 1.)

Zoom Video Communications was one of the foremost beneficiaries of the covid-19 pandemic.

In the year to January 31st, 2021, its revenues were $2.65 billion, a 326% increase on the previous year. Its stock market value rocketed by 494% over the same period.

As the growth surge associated with the pandemic comes to a close, so Zoom’s priorities are likely to be (a) adjusting its capacity of demand and (b) addressing increasing competition in the market for video conferencing—especially competition from technology giants such as Microsoft, Alphabet, and Cisco Systems. The key elements in Zoom’s growth strategy outlined in Strategy Capsule 1.5 are: • keep our existing customers happy; • drive new customer acquisition; • expand within existing customers; • innovate our platform continuously; • accelerate international expansion; and • grow our partnership ecosystem In achieving these strategic goals, the speed at which demand, competitor behavior and technology are changing means that an annual strategic planning cycle is unable to meet Zoom’s need for its strategy to adapt to rapidly changing circumstances. Indeed, the strategy process would need to become continuous.

Moreover, for a strategic planning system to be effective requires that accesses knowledge that is relevant to these changing circumstances and emerging threats and opportunities. The implication is that Zoom’s strategy making should also permit the involvement and participation of organizational members outside the top management team in strategic decision making in order to make use of their specialist expertise, access to information, and perspectives.

To the extent that all large companies require some form of modular structure for their strategic planning, Zoom also needs to disaggregate it overall corporate planning. However, given that Zoom is essentially a single product firm, the distinction between business-level and corporate-strategy making outlined in Figure 6.1. is unlikely to be appropriate for Zoom.

Depending on how Zoom is organized internally it is more likely to require: functional-level strategies (e.g. for technology development, marketing, sales, operations, and finance) and country strategies for each national market.

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1

For the purposes of strategy formulation, therefore, Zoom needs a strategy process that is more frequent that outlined in Chapter 6. It also needs to be less formal and flexible than traditional strategic planning processes—in part because Zoom is continually confronted by novel circumstances. However, as the text explains, a key role of a strategic planning process is not just to formulate strategy but also to implement it. This implies a close linkage between strategic, financial, and operational planning. To this end, Zoom is likely to require an integrated process of strategic and financial planning that is linked to both its external calendar of financial reporting (quarterly)and its internal calendar of financial monitoring and control (probably monthly and quarterly).

2. Select a persistently successful team in a professional sport with which you are familiar.

To what extent can the superior capabilities of this team be attributed to the role of processes, motivation, and structure (as discussed in the section “Developing Organizational Capability”)?

A major theme in Contemporary Strategy Analysis is that sustained competitive advantage is typically the result of superior organizational capabilities deployed through an appropriate strategy. An organizational capability typically requires the coordination of the activities of a number of individuals—such coordination is achieved through processes. Hence, an organization can be viewed as a system of processes.

Such processes are apparent in sports organizations. In all sports there are processes for identifying, attracting, and selecting talented individuals; for training these individuals; for selecting and configuring teams; for supporting these teams medically, psychological and nutritionally; and for generating the revenues needed to fund these activities.

For these processes to operate effectively and for different processes to complement one another, then these processes need to be housed within organizational units and these organizational units need t have leadership that is appropriate to their activities.

Finally, for these processes to generate superior capability, it is vital to have adequate motivation both for individuals and for the groups of individuals engaged processes In professional soccer, the role of processes, the placing of these processes within an organizational structure and the motivating of individuals and teams can be seen in the workings of any club that achieves sustained success. For example, these elements are apparent at Manchester United under the leadership of Alex Ferguson, 1986 to 2013 (see my 2013 case “Manchester United: Preparing for Life without Ferguson”). Such systematization is apparent in the case of Manchester City and the other soccer teams owned by the City Football Group (see my case: “City Football Group: Building a Multinational Soccer Enterprise.”

The same factors were at play in the rise to prominence of British cycling between 1994 and 2016. British cyclists became world leaders as a result of a systematic program involving processes for funding new facilities, developing participation in cycling at the grass roots level, selecting high potential individuals, training these individuals, and supporting elite cycling teams. Motivation was generated at multiple levels: at the political level for greater sporting success to build national prestige, among participating cyclists, and among the public through outreach and media relations

3. Within your own organization (whether a university, company, or not-for-profit organization), which departments or activities are organized mechanistically and which organically? To what extent does the mode of organization fit the different environmental contexts and technologies of the different departments or activities?

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2

In most universities I am familiar with there is a clear distinction between administrative units (e.g. finance, student records, admissions) and academic departments (which are responsible for undertaking teaching and research). They exemplify the two organizational types shown in Table 6.1: mechanistic and organic.

Administrative units tend to be highly bureaucratized (“mechanistic”). Tasks are precisely defined, specialized, and controlled through rules. Communication is primarily vertical, and employees’ primary loyalty is to their immediate superior.

Academic departments are highly organic. Tasks are flexible and loosely-defined. There is a lack of hierarchical control and faculty members coordinate through mutual adjustment.

Communication is mainly horizontal, and commitment is to the organization and to professional standards rather than to the department head.

These differences reflect the characteristics of the tasks (“technology”) and the environments where they are performed. Most administrative tasks are repetitive and require little variation.

The environment they are performed within is stable. Their key performance requirements are consistency and efficiency. Research and teaching activities are unstandardized. They require innovation, creativity, and constant adaptation to changing circumstances. The high degree of variation in the knowledge and personalities of individual professors require high levels of individual freedom to adapt modes of working.

There are also some administrative tasks that fall somewhere in between these extremes. Fund raising, marketing and external relations are all administrative tasks that are relatively unstandardized and require flexible adaptation to changing circumstances. For these reasons, university administrators whose careers have been spent in admissions, student records, and finance tend not to make good VPs of fund raising, marketing, or communication. Similarly, with IT support: these units tend to combine fixed rules for acquiring and maintaining software and hardware and logging problems with the flexibility needed to respond to the myriad of user problems.

4. In 2008, Citigroup announced that its Consumer business would be split into Consumer Banking, which would continue to operate through individual national banks, and Global Cards, which would form a single global business (similar to Citi’s Global Wealth Management division). On the basis of the arguments relating to the “Defining Organizational Units” (p. 130), why should credit cards be organized as a global unit and all other consumer banking services as national units?

Consumer banking involves a number of products and services: credit cards, deposit taking and account management, transaction processing, personal loans, mortgage banking, and investment and wealth management. Why break out credit cards as a single global business while organize all the rest by national subsidiaries?

The logic, presumably, is that the important coordination needs of people working in credit cards is with other individuals working in credit cards whether or not they are in the same country. However, for employees working in deposit taking and account management, it is more important for them to coordinate with employees working on personal loans and investment products within the same country than with employees working in deposit taking and account management in other countries.

Why might this be so?

The credit card business is a highly standardized, IT intensive business, supported by a global payments system. Individuals’ choice of a credit card issuer tends to be fairly independent of their choices over other financial products. The credit card business is most efficiently managed by an integrated global unit.

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3

Other personal banking products tend to be less globally standardized. They are nationally differentiated by culture and government regulations. Moreover, individuals are more prone to “bundle” these products: gaining personal loans is easier from a bank where one has an account. Sharing information about individual customers is important for selling and credit appraisal. For these reasons, the key interdependencies are likely to be between employees in the same geographical areas but working on different banking services. .

5. The examples of Apple Computer and General Motors (see “Functional Structure” section above) point to the evolution of organizational structures over the industry lifecycle. During the growth phase, many companies adopt multidivisional structures; during maturity and decline, many companies revert to functional structures. Why might this be? (Note: you may wish to refer to Chapter 8, which outlines the main features of the life-cycle model).

Firms that supply very different products (GE, Samsung, 3M) will always need to organize around product divisions (see discussion of Du Pont under Q.2 above). Firms that supply more homogeneous ranges of products (e.g. GM and Apple) can be organized either by product division or functional department, the critical issue is this: Between which organizational members is coordination more important: employees working in the same function (but in different products) or employees within the same product across different functions? It depends, in part, on the characteristics of the environment, which in turn depend on the stage of the product life cycle. Thus, in the growth phase of the cycle, the emphasis on strategy is, naturally, on growth. The emphasis of strategy is on developing new products, differentiating them to appeal to groups of customers, and launching them. These activities require close coordination between functions, coordination between products is less important. As products mature, price competition becomes stronger, differentiation opportunities become fewer, and the emphasis of strategy is on cost efficiency. Cross-functional capabilities such as product development become less important, effectiveness and efficiency in functional capabilities such as manufacturing, sales, marketing, and finance become more important. At the same time, differentiation between products becomes less evident. The implication is that functional organizations are more closely aligned with industry key success factors. For example, once excess capacity emerges in production and sales, then functional structures allow for the better management of excess capacity and better allocation of capacity across products.

6. Draw an organizational chart for a business school that you are familiar with. Does the school operate with a matrix structure (for instance, are there functional/disciplinebased departments together with units managing individual programs)? Which dimension of the matrix is more powerful, and how effectively do the two dimensions coordinate? How would you reorganize the structure to make the school more efficient and effective?

An organizational chart may be drawn showing organizational units, or the job titles of the individuals who hold positions in the organizational structure. To the extent that each organizational unit is headed by an individual manager/coordinator, the result should be the same.

Most business schools have some form of matrix organization. For example, the structure of Georgetown University’s McDonough School of Business is shown below. There are two primary dimensions of the organization: the program structure (represented by three Associate Deans for programs; then there is the discipline or functional structure (represented by the different

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4

academic areas, each headed by a coordinator). Faculty members are recruited into different disciplinary areas, then assigned to teach within the different programs.

In terms of decision-making power, the discipline-based part of the structure is primary. This reflects status (within universities professors have more status than administrators), job security (most senior professors have tenure), and actual decision-making power. Most strategic decisions concerning programs are taken by committees—notably the Graduate Curriculum Committee, the Undergraduate Curriculum Committee, and the MBA Admissions Committee—these committees are dominated by faculty and chaired by a faculty member.

Coordination between programs and the academic areas occurs in three principal ways: • Hierarchically through the Dean.

• Through the different committee referred to above—including the Executive Council whose members are all School employees.

• Informally through personal linkages. The most important links in this respect are between the area coordinators and the program deans.

One criticism of this type of structure is that the program directors tend to be weak as compared to department heads with the result that the dominance of departmental divisions acts as a barrier to coordination and integration across departments. In MBA programs, for example, efforts to take cross-functional, multidisciplinary approaches to business problems tend are rendered ineffective because of departmental separation and identity.

Dean

Dean’s Office: CFO, Communications, Special Projects

Executive Council U’grad Curriculum Committee

Graduate Curriculum Committee

Associate Dean Executive Programs

MBA Admissions

Technology Committee

Peer Review Committee

Rank & Tenure Committee

Associate Dean Graduate Programs

MBA Career Management

Associate Dean U’grad. Programs

MBA Student Services Deputy Dean

Coordinator, Finance & Accounting Area

.

Coordinator, Marketing Area

Coordinator, Management Area

Coordinator, Strategy Area

Coordinator, Operations & Decision Sciences Area

5

Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 7

The Sources and Dimensions of Competitive Advantage 1. Figure 7.1 implies that stable industries, where firms have similar resources and capabilities, offer less opportunity for competitive advantage than industries where change is rapid and firms are heterogeneous. On the basis of these considerations, among the following industries, in which do you predict that interfirm differences in profitability will be small and in which will they be wide: retail banking, video games, fashion clothing, insurance, supermarkets, and semiconductors?

Industry

Opportunity for competitive advantage

Degree of instability Heterogeneity of firms’ resources and capabilities

Retail banking

Low: commodity products, regulation limits scope for CA

Low: variations in general management and operational capabilities, but resource similarities (due to regulation)

Video games

Wireless handsets

Insurance

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Low-medium: Uncertainty traditionally relates to interest rates, default, and regulatory risk. But new challenges from fintech and cryptos High: network High: uncertainties externalities arise from pace of bestow strong CA technological on market leader change and business model innovation High: network externalities bestow strong CA on market leader

Medium: risk of new entry and technological change, but high brand/platform loyalty Low: Low/Medium: main performance segments (life, differentials arise auto, home) mainly though predictable and random factors stable (e.g. weather, disasters)

High: in both hardware and software rival firms have distinctively different resources and capabilities (e.g.

MS, Sony, Nintendo) High: leading players differ in resources, capabilities and locations.

Prediction regarding inter-firm profitability differentials Low—but likely to grow as technological change disrupts finance

High

High

Low: regulation and Low strong industry norms result in most firms having similar resources and capabilities

Supermarkets

Medium: intense competition and low margins, hence small efficiency and effectiveness differences can translate into large differences in CA

Medium/Low: demand and consumer preferences are stable; threat of disruption from ecommerce (e.g.

Amazon) and home delivery services (Getir, Gorillas, Fresh/Direct) Semiconductors High: High: uncertainty differentiated arises from products, strong demand, potential for technological innovation which change, and are protected by competition patents

Medium: differences in scale translate into differences in buying power; significant differences in operational, merchandizing, and IT capabilities

Medium—low over the longer term because most competitive advantages are difficult to sustain

High: firms vary in High financial and technical resources, locations, and design and fabrication capabilities

Note: CA = competitive advantage

2. Since 2009, Apple has been the world’s most profitable supplier of wireless handsets by

a large margin. Will the isolating mechanisms that protect Apple’s market position sustain its competitive advantage?

In 2021, Apple held 17% of the world’s smartphone sales (by units), compared to Samsung’s 20% and Xiaomi’s 15%. However, in terms of profit, Apple earned more than all other smartphone suppliers combined.

On pp. 148-150 I discuss the “isolating mechanisms” through which incumbents resist competitors:

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Pre-emption. Sustaining a competitive advantage requires that the incumbent limits the market opportunities available to rivals. In smartphones, Apple’s premium pricing strategy inevitably provides opportunities for competitors to undercut on price. While Apple cannot compete on price with Chinese suppliers of smartphones, by introducing low-end version of its iPhone it can limit their gains in the mid-market segments. Also, by continually expanding the range and quality of its apps, it can deter iPhone users from switching to Android in order to access the advantages of a bigger ecosystem.

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Causal ambiguity and uncertain imitability. Apple’s multi-layered competitive advantage has greatly increased the difficulty facing its imitators. In particular, Apple competitive advantages based on design, ease of use, performance, brand strength and its wide range of apps has compounded the challenges of imitation is greater. Apple’s closest rival, Samsung, continues to struggle to compete with Apple in terms of customer loyalty and product appeal.

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Resources and capabilities. Apple can made strong efforts limit the access of rivals to the resources and capabilities needed for success in order to sustain its competitive advantage. Thus, its app store offers applications that are exclusive to iPhone. Its refusal to license its iOS operating system mans that he entire Apple ecosystem is accessible only to partners, not competitors. It has also aggressively enforced legal protection of its

patents against Samsung and others. Also, Apple’s direct link with consumers through its Apple Stores has forced Samsung to invest heavily in its own retail stores.

Anticipating the discussion of technical standards and network externalities in Chapter 9, one of the most striking features of Apple’s loss of market leadership to Android has been the similarity of the iPhone vs. Android competition to previous standards wars such as Apple vs.

Microsoft and Betamax vs. VHS) where a closed standard has been beaten by an open standard.

However, the situation in smartphones if likely to be different—mainly because the size of the market is sufficient to support more than one platform.

As Android phones close the gap with Apple in terms of functionality and user friendliness, so Apple is likely to lose competitive advantage. For example, by combining superior functionality with low prices, Xiaomi has become market leader in China. However, the real risk comes from technological innovation—the combination of new technological opportunities for wireless communication and new operating systems for wireless devices offers an innovation space with the potential to unseat both Apple and Android.

3. Illy, the Italian-based supplier of quality coffee and coffee-making equipment, is launching an international chain of gourmet coffee shops. What advice would you offer Illy for how it can best build competitive advantage in the face of Starbucks’ market leadership?

This question requires an analysis of the conditions that support Starbuck’s competitive advantage, then identifying the means by which these might be counteracted or circumvented.

Starbuck’s competitive advantage is based upon its early-mover advantage, the speed and extensiveness of its market expansion (preempting opportunities for others), and the effectiveness with which it has differentiated itself through building brand identity and loyalty and establishing a system through which the “Starbuck’s Experience” is delivered.

Illy’s strategy must take careful note of the opportunities available in an increasingly saturated retail coffee market and its own resources and capabilities. Starbuck’s dominance means that Illy must identify a different competitive position. The most obvious one would be to position itself at the high-quality end of the spectrum. (Starbuck’s tends to do poorly in competitive tastings and has a poor image among many coffee aficionados.) Such positioning may support a premium pricing policy and require a more selective positioning than Starbucks (major metropolitan areas, up-scale locations).

In terms of resources and capabilities, Illy’s principal strengths are worldwide brand recognition and Illy’s association with the traditions of Italian coffee making, the extensive retail distribution of Illy’s packaged coffee in upscale grocery and deli stores. Its principal weakness is lack of financial resources to establish an extensive chain of retail coffee shops and lack of expertise in managing such a business.

These conditions suggest that Illy might best use a franchise model, but one which does not seek to establish standardized outlets. It could license restaurateurs and coffee shop owners to supply coffee made from Illy ingredients, in Illy coffee machines, and sold under the Illy brand, but not insist on the full branding of the establishment under the Illy banner, or requiring standardization of other godsend services.

4. Which drivers of cost advantage (Figure 7.7) do low-cost carriers such as Southwest Airlines and Ryanair exploit in order to undercut legacy carriers such as United Airlines and British Airways?

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Neither scale economies nor economies of learning explain the advantages of Southwest and Ryanair over United Airlines and British Airways—they have smaller scale and have been in operation for a shorter time period. However, the low-cost carriers (LCCs) do possess scale advantages in certain aspects of their operations—e.g. those associated with operating a single type of airplane.

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Production techniques: the LCC model embodies a number of process improvements that increase productivity and reduce costs. These relate to flight turnaround procedures, and flexible use of employees to perform multiple functions.

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Product design: the LCC model is designed for low-cost operation rather than for passenger convenience. Hence: the point-to-point model with no connecting services or baggage transfer, single class, no frequent flyer schemes, and lack of ancillary services are all cost minimizing. In addition, the LCCs rely heavily on outsourcing.

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Input costs: by operating a single type of aircraft, using secondary airports, avoiding unions, and offering lower salaries and less generous fringe benefits than legacy carriers, the LCCs achieve important cost savings.

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Capacity utilization: LCCs typically achieve higher load factors than legacy airlines, though the difference is usually small.

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Residual efficiency: the heritage of the legacy carriers is either state-ownership or as highly-bureaucratized, regulated companies whose emphasis was on differentiation rather than cost efficiency. By contrast, the LCCs are entrepreneurial start-ups whose entire raison d’etre has been to expand the market for air travel through low prices. As a result, the LCCs’ commitment to cost efficiency is embedded within their cultures.

5. H&M (the Swedish fashion clothing chain) and Primark (the UK discount clothing chain) have pioneered ‘cheap chic’ —combining discount store prices with fashion appeal.

What are the principal challenges of designing and implementing a cheap chic strategy?

Design a cheap chic strategy for a company entering another market e.g., restaurants, sports shoes, cosmetics, or office furniture.

Combining low cost with differentiation advantage is an attractive combination for any company. The challenge is to pull it off. Differentiation typically adds cost—in improved design, variety, quality, or in some other attribute. Hence, for a “cheap chic” strategy to work requires that the differentiation gains compensate the additional costs involved. For Target, IKEA, H&M, Zara, Primark and other successful exponents of the cheap chic approach, the key is to maintain the basic model of a low-cost operator, but to add a few (but not all) of the distinguishing characteristics of more upscale operators.

For example, in fashion retailing, H&M, Zara, and Primark produce “knock-offs” of new styles introduced by the leading fashion houses of New York, Milan and Paris. IKEA sells out of vast warehouse stores, but has contemporary European designs associated with more expensive furniture makers.

However, reconciling stylishness and low cost can be difficult. It requires reconciling scale with speed and nimbleness. In fashion retailing for example, it requires fast-cycle design, production and distribution and alertness to market trends. Major retailers such as Wal-Mart, Sears, and Marks and Spencer do not have systems that permit such speed and responsiveness.

For a new restaurant chain a cheap chic strategy could involve several approaches: •

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A McDonald’s type fast food operation that involved a much higher standard of cuisine (e.g. Wagamama, Chipotle).

•

Restaurants with an ambiance and décor associated with more upscale restaurants but achieved a level of turnover and standardized menu that permitted low costs of operation (e.g. Pizza Express of the UK).

However, both such approaches run the risk of becoming “stuck in the middle” (see p. 168).

The financial difficulties experienced by several mid-market ‘casual dining’ restaurant chains in the UK and US during 2018-2020 (e.g. Jamie Oliver’s Jamie’s Italian, Strada, Ruby Tuesday, Le Pain Quotidien) exemplify this problem.

6. To what extent are the seven cost drivers shown in Figure 7.7 relevant in analyzing the costs per student at your business school or educational institution? What recommendations would you make to your dean for improving the cost efficiency of your school?

•

Scale economies. Many of the costs in education are indivisibilities that create scale economies both at the level of the program, the department, and the individual course.

To exploit such scale economies suggests that sub-optimal degree programs (e.g. those enrolling less than 50 students), department, and courses (e.g. those enrolling less than 25 students) should be axed. An alternative to eliminating specialist degree programs is to make more courses common to multiple degrees.

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Economies of learning. Use knowledge management to improve efficiency through learning.

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Production techniques. Greater use of online, self-learning for courses that are concerned with simple knowledge acquisition. Replacing high-cost regular faculty with low-cost adjunct faculty and teaching assistants.

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Product design. Seek opportunities for reducing the number of class hours required for programs. Design programs to permit more remote delivery of instruction. Place greater emphasis on peer-based educational processes that economise on use of faculty.

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Input costs. Substitute low-cost adjunct faculty and teaching assistants for high-cost regular faculty.

•

Capacity utilization. Schedule weekend and evening classes and summer programs to allow better use of facilities.

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Residual efficiency. Instil a greater awareness of the need for cost efficiency. Offer incentives for waste elimination.

7. Bottled water sells at least 200 times the price of tap water, with substantial price differentials between different brands. What are the key differentiation variables that determine the price premium that can be obtained for bottled water?

The price premium for bottled water seems to have little to do with physical characteristics or any measurable performance attributes (taste tests show limited consumer ability to differentiate either different brands of bottled water or to distinguish bottled from tap water).

Hence, the key differentiation variables are likely to be intangible and associated with satisfying customer needs for identity and social affiliation.

Bottled water brands with the highest price premiums tend to be those with the greatest authenticity—particularly those associated with long-established European natural springs and spas (e.g. Evian). By contrast, Dasani (Coca-Cola) and Aquafina (PepsiCo) are purified municipal

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tap water. Yet even without such associations, brands can be created through careful attention to packaging, selective distribution, and strong advertising and promotional support.

Finally, the price of bottled water depends upon the locational factors that influence the extent of competition (including competition from tap water). E.g., the most expensive bottled water I have purchased is at airports.

8. Advise your local exercise studio on how it might differentiate its offerings in order to better compete with the growth of home-based exercise pioneered by Peloton and other companies. Use the value chain framework outlined in Strategy Capsule 7.7 to identify opportunities to link the studio’s value chain activities and those of its customers.

The key here is to examine the value chain of the customer in order to identify opportunities for value creation. This would include the process of buying a subscription, getting to and from the studio, changing into and out of exercise gear, providing dietary advice as well as personalized fitness training, and shower facilities.

Beyond these basics, the movie theater chain would need to explore other aspects of the movie going experience. To the extent that the cinema visit is a part of a broader leisure experience, is there value to be provided by offering a bar or restaurant facilities that the theaters?

The key supply-side differentiation variables that the local studio can provide is individual differentiation of the exercise experience to meet specific individual needs and a level of social engagements that exploits the greater richness of face-to-face encounters.

The value chain framework shown on p.167 could be used to link supply side and demand side differentiation opportunities.

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 8

Industry Evolution and Strategic Change 1. Consider the changes that have occurred in a comparatively new industry (e.g., electric cars, smartphones, home-delivered meals, music streaming, and cryptocurrencies). To what extent has the evolution of the industry followed the pattern predicted by the industry life-cycle model? What are the forces that have influenced its pattern of evolution? At what stage of development is the industry today? How is the industry likely to evolve in the future?

Wireless Telecommunications In the US and UK, wireless telephony was introduced by small start-up companies. The US pioneer was McCaw Cellular; the UK pioneers were Vodafone and Cellnet. The introductory phase featured vertically-integrated provision, incompatible technologies, high prices, and lowquality service.

In all countries, industry evolution has been strongly influenced by regulation. During the growth phase (which coincided with 2G and 3G technologies) in Europe, regulation by the European Commission resulted in convergence to a single technical standard (GSM). In the US, compatibility between different technologies was achieved, but the market system failed to establish a single technical standard (TDMA, CDMA, and GSM coexisted).

In the US, Europe, Japan and S. Korea, the growth phase was followed by a maturity with slower growth once saturation was reached.

Maturity involved increased price competition; consolidation among leading players (US dominated by Verizon Cellular, AT&T, T-Mobile/MetroPCS, and Sprint/Softbank; UK has four operators T-Mobile/Orange, Vodafone, O2/Telefonica, and 3; entry by several “virtual operators”; and commoditization of basic voice and text services.

These changes correspond fairly closely to the life cycle model. The main differences that the industry is subject to periodic bouts of technological change and new product introductions associated with new generations of technology (e.g. 4G, 5G).

Different national markets are in different phases of their life cycles: in much of Africa wireless telecommunications are still a growth industry. Otherwise, the development patterns of the industry in different countries have followed similar paths.

Looking to the future, maturation and commoditization of basic voice services seems likely to continue, however, market growth and opportunities for renewal and innovation are likely to result from new technology. Key areas of growth are mobile computing and mobile internet use. This may cause the industry’s boundaries to be redefined creating opportunities for new entrants. The main threat to the industry is that opening new areas of spectrum will allow new entrants in tit he market, increasing availability of Wi-Fi will provide substitute competition, and the increasing use of the internet for voice and text communication will reduce the revenues of the service providers.

Cryptocurrencies

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A cryptocurrency is an electronic form of money used as a medium of exchange. Individual coin ownership records and transaction records are stored in a computerized database (a ledger).

Strong cryptography controls the creation of additional coins and verifies the transfer of coin ownership.

The precursor of cryptocurrencies was e-cash, invented by the American cryptographer David Chaum in 1983 and implemented it through Digicash in 1995. However, the first true (i.e. decentralized) cryptocurrency was Bitcoin conceived in a 2009 paper by Satoshi Nakamoto (whose true identify is unknown). The first recorded bitcoin transaction occurred in 2010 when 10,000 bitcoins were used exchanged for two pizzas.

Between 2010 and 2021, there have been a flood of new cryptocurrencies—all deploying some form of blockchain By June 2021, 10,000 cryptocurrencies were listed on the CoinMarketCap website. However, many of these are “tokens”: tools of speculation that do not possess the full functions of money.

True cryptocurrencies are converging around two potential “dominant designs.” Bitcoin has a number of imitators, most of which are based upon resolving a particular defect of bitcoin—e.g. its volatility or its energy intensity. The second design archetype is Ethereum which offers not just a cryptocurrency but a technology platform for a broad range of blockchain-based transactions. Common to all cryptocurrencies is a proof-of-work system where the safety, integrity and balance of ledgers is maintained by a community of “miners” who use their computers to validate and timestamp transactions and add them to the ledger. Miners are rewarded with newly created units of the cryptocurrency.

By 2021, the cryptocurrency industry still appears to be in its introductory stage. Despite increasing legitimacy—especially for bitcoin—as financial institutions increase their participation and government agencies extend their regulatory activities to encompass cryptocurrencies, a dominant design has yet to appear and the acceptance of cryptocurrencies as a medium of exchange—let alone a store of value—seems some way off.

2. Select a product or business model that has become a dominant design for its industry (e.g., the IBM PC in personal computers, the Apple iPhone in smartphones, McDonald’s in fast food, Harvard Business School in MBA education, and Southwest in budget airlines). What factors caused one firm’s product architecture to become dominant?

Why did other firms imitate this dominant design? How did the emergence of the dominant design influence the evolution of the industry?

In all of these examples, the establishment by the companies concerned of a dominant design can be attributed to the following factors: •

Early-mover advantage. In all the examples, the companies involved were not necessarily first movers, but all entered the industry during the introductory phase before consensus about design and technology had emerged.

•

Resource strength. All the organizations possessed strengths in finance, technology, reputation, and entrepreneurial leadership.

•

Robust design. In all cases, the product or business model did not necessarily offer optimal performance, but it did deliver acceptable performance across several key performance variables.

The IBM PC through its modular, open architecture design offered not just high level of basic functionality, but also the flexibility to adapt and improve. The McDonald’s system that involved franchising, a limited and standardized menu, and meticulously defined processes supported an

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easily replicated system that offered a combination of reliability, low cost, and acceptable quality.

The designs pioneered by these companies became imitated partly because of their inherent efficacy, but also because of the external economies from convergence around a common platform. In particular, the acceleration of decentralized innovation and cost reduction resulting from the emergence of specialized suppliers of components and support services.

In all cases the dominant design has evolved; in none has it been displaced. In fast-food, the McDonald’s system has been adapted through cook to order rather than cook to stock, by expanded menu items, and greater adaptability to local conditions. In MBA education, the Harvard model has adapted through the influence of alternative methodologies for learning: simulation, distance learning, and action learning, and through changing ideas about curriculum content. Of the different models, probably the Southwest low-cost-carrier model has adapted the least.

In all four examples, the success of the four companies in setting designs that became accepted in each industry was reinforced by the legitimacy that each company either possessed (as in the case of IBM and Harvard) or was able to establish) through effective management and sound financial performance (as in the case of McDonalds and Southwest).

3. The resource partitioning model argues that as industries become dominated by a few major companies whose strategies and products converge so opportunities open for new entrants to build specialist niches. Identify an opportunity for establishing a specialist new business in an industry dominated by mass-market giants.

The discussion of “resource partitioning” (p.180) refers to the increasingly domination of the brewing industry by mass brewers with international, highly advertised brands being accompanied by the rise of small, specialist producers—microbreweries and brew pubs. Similar phenomena are occurring in: •

Online retailing. Amazon’s dominance of online retailing provides limited opportunity for niche specialists because of Amazon providing marketing and distribution to third party suppliers. Nevertheless a number of specialists have established successful online retail businesses even in national markets dominated by Amazon. These include Etsy (handicrafts), Yoox Net-a-Porter (fashion apparel), PetSmart (pet supplies), Laithwaites (wine), FreshDirect (fruit and vegetables).

•

Legal advice. The growth of large, generalist law firms has coincided with the emergence of a number of highly specialized law firms (see J. Jaffee, “The Resource Partitioning of a Corporate Legal Market: The Proliferation of Specialist Law Firms in Silicon Valley, 19661997.”

•

Hamburger restaurants. The ubiquity of McDonalds and Burger King has provided opportunities for specialist, gourmet burger restaurants (e.g. Shake Shack, Gourmet Burger Kitchen).

4. Choose an industry that faces significant change over the next ten years. Identify the main drivers of change and construct two scenarios of how these changes might play out. In relation to one of the leading firms in the industry, what are the implications of the two scenarios, and what strategy options should the firm consider?

Scenario analysis is discussed on pp. 189-190 of Chapter 8. The analysis requires, first, identifying the key forces driving change in the industry, second, selecting an appropriate time

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frame for the analysis, third, identifying discrete configurations of outcomes—i.e. specific scenarios in which the different forces converge to a consistent and feasible future situation for the industry.

Newspapers and the Internet The challenge for newspapers is that the web offers a cheaper and easier-to-access medium for both access to information and advertising. However, newspapers have responded by creating their own websites and offering online editions of their papers. Scenario A is pessimistic scenario where competition from online information sources decimates newspaper sales and advertising revenues. Already the impact of the internet is apparent on classified advertising revenues—for most local newspapers classified advertising has declined sharply in response to EBay, and websites for real estate and home rentals. At the same time, newspapers are unable to recoup their lost revenues from newspapers through their own websites. Attempts to provide free access supported by advertising revenue yielded limited revenues, while online subscriptions work for a few leading newspapers—the New York Times, the Financial Times, and Wall Street Journal—but for few other newspapers. The basic problem is that online news is available through multiple sources and the newspapers have no clear competitive advantage over the websites of TV news channels, independent online publishers (The Slate, Huffington Post), and specialist online information sources for financial news (Motley Fool), sport (Yahoo sports), and weather (www.weather.com).

Scenario B is an optimistic scenario. Despite competition from online information sources and cannibalization for the newspapers’ own online editions, print sales hold up well as result of their portability and many readers’ preferences for browsing the columns of a printed newspaper. At the same time, online, the newspapers are able to establish successful websites that extend readership to a new audience. In meeting competition with other sources of online information, newspapers are able to establish key advantages: reporting coverage, reporting credibility, and quality of analysis and commentary on current events. As a result, newspapers online readership remains high and proves attractive to advertisers.

Scenario B is one where the demand for traditional journalistic skills of accurate reliable reporting and interpretation of current events has increasing value in an ever-more-turbulent world in which the multiplicity of online news sources causes a flight to quality. The reputations of leading newspapers ensure that they become increasingly recognized as authoritative sources of news while the internet allows them to grow their audiences beyond their home countries. Their perceived value to the reader can then be monetized through subscriptions, purchase of individual articles, or partial subscriptions (e.g. subscriptions to specific content such as sport, or arts and culture), Let us consider the implications of these scenarios for The Times (of London)—one of the world’s oldest and best-known daily newspapers and currently owned by Rupert Murdoch’s News International Ltd.:

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Scenario A offers limited opportunity for newspapers in general and even for The Times it will be a struggle for revenues to cover the costs associated with worldwide news gathering.

The most obvious strategy is to cut costs and manage for decline hoping to maximize the period of survival and to generate positive cash flows during decline. There may also be opportunities for all the Murdoch newspapers to share a news collection and editorial resources. Given the glamour of newspaper ownership to some rich individuals hoping to exert popular and political influence, a viable exit strategy may be to sell out to such a buyer (e.g. sale of Washington Post to Jeff Bezos or The Independent to Russian oligarch Lebedev).

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Scenario B suggests a rosier future for The Times. It also suggests a very different strategy than under Scenario A—The Times must continue to invest in its news collection and news

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analysis capabilities to ensure that builds its core competitive advantage—its reputation for quality journalism. The Times should also put in place the conditions that might encourage the emergence of Scenario B. In particular, investing in its traditional reporting, analytical, and editorial capabilities to ensure that it differentiates itself both form other newspapers and the news services offered by specialist online sources. A critical issue will be expanding online readership outside the UK.

5. Identify two sports teams: one that is rich in resources (such as talented players) but whose capabilities (as indicated by performance) have been poor; one that is resource poor but has displayed strong team capabilities. What clues can you offer as to the determinants of capabilities among sports teams?

There are plenty of options her—both in professional leagues and in international competition of resource rich teams being outperformed by teams with few star players and limited financial resources. For example: in football and basketball, why have the Washington DC-based Redskins and Wizards performed so dismally dispute financial strength and many star players?

How did Croatia, a country of 4 million with few star players reach the final of the 2018 soccer world cup? How is it that the Yugoslavia/Serbia has won more basketball world championships than the United States?

Among the two top Madrid soccer teams, Real Madrid and Atletico Madrid, Real is the richer side with a star-studded team. It has spent lavishly on buying the world’s top players. Atletico lacks the revenues and financial support to compete with Real Madrid, Barcelona, PSG, and Manchester City for the world’s star players. Under coach, Diego Simeone—a former Atletico player and team manager since 2011—Atletico have developed a consistent style of football involving a committed defence and counter attacks and based upon a high degree of understanding and coordination among the players. However, despite this consistency, Simeone is also renowned for his willingness to adapt Atletico’s style of play in order to exploit the talents of individual players. For example, after acquiring Luis Suarez in 2020, Atletico shifted from a 4-4-2 to a 3-4-3 or 3-5-2foration involving a more offensive, possession-oriented approach. Atletico’s emphasis on commitment, loyalty, and discipline reveals itself in exceptional team coordination. Real Madrid’s capacity to build team capabilities has been hampered by fraught relations between team coaches and club presidents. During Simeone’s tenure at Atletico, Real Madrid has had eight head coaches.

6. The market leaders in video games for mobile devices during 2015–2021 were start-up companies such as Miniclip, Jam City, Supercell, King, Digital, Mixi, and Rovio. Why have start-ups outperformed established video game giants such as Electronic Arts, Rock Star Games, and Activision Blizzard in this market?

The processing and graphics capabilities of smartphones and other mobile devices are tiny compared to video game consoles such as the latest Xbox and PlayStation models. Hence, video games for mobile devices have certain features that are characteristic of a “disruptive technology”: they are inferior to console games in standard quality criteria, and they do not appeal to the core customers of mainstream video games developers and publishers.

Also, the developers of mobile games have different business models from those developing console games: they tend to typically provide the basic game free then rely upon advertising, add-ons, and upgrades as sources of revenue. To this extent, mobile video games represent an architectural innovation—they change the entire business system.

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7. The dean of your business school wishes to upgrade the school’s educational capabilities in order to better equip its graduates for success in their careers and in their lives. Advise your dean on what tools and systems of knowledge management might be deployed in order to support these goals.

An interesting feature of universities and other institutes of higher education is that, despite being in the “knowledge business”, few have utilized the tools of knowledge management deployed by other private and public sector organizations. If we use the types of knowledge management process identified in Table 8.4, the following suggestions might be made.

Business schools are engaged in two main types of activity: research, which involves the production of new knowledge (knowledge generation) and dissemination of knowledge through teaching, publication, and consulting (knowledge application). In recent decades the primary concern has been knowledge generation. Among top schools, new faculty members are hired for their research, less attention is given to their potential as teachers. Few schools devote systematic attention to developing their capabilities in educating and developing students using the systematic approaches embodied in knowledge management. Among the different types of knowledge management processes identified in Table 8.4, some of the following might be deployed more effectively by business schools: Knowledge identification. Most universities have well-developed systems for managing their intellectual property, however, the management of tacit knowledge is almost entirely informal.

Faculty members each possess a wealth of information, corporate contacts, and relationships with former students that has great potential value in student job placement, arranging internships, and fund raising.

Knowledge retention/sharing. Knowledge retention/sharing. For organizations in the business of knowledge transmission, most universities (and their business schools) devote little attention to learning from experience. I am aware of few systematic “lesson learned” processes whereby the outcomes of each course/program delivered are analyzed, potential for improvements identified, and amendments agreed for subsequent editions of the course/program. Similarly with best practices transfer—innovations are constantly being introduced by individual instructors, yet typically few mechanisms exist either for identifying or transferring such innovations.

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 9

Technology-based Industries and the Management of Innovation 1. StoreDot, an Israeli start-up, has developed a revolutionary, patented, lithium-ion battery for vehicles and mobile devices that can be recharged in five minutes. The success of the battery will depend upon its adoption by auto makers and the availability of a network of high-powered charging stations. Assuming it is successful, how do you envisage that the value created by this innovation will be shared between StoreDot and the different parties shown in Strategy Capsule 9.1?

The first issue concerns StoreDot’s strategic objectives. If its primary goal is to enrich its founders, then it may wish to seek acquisition by an established battery producer or by an automotive company. If its goal is the long-term development if the company and its technology, it is likely to prefer remaining independent.

Either way, StoreDot’s ability to profit from its innovation will depend upon the extent to which its patents protect its technology. Yet, irrespective of the strength of its patents it will be essential that it established cooperative relations with potential customers and with complementors.

Given the large number of innovative battery technologies under development, StoreDot cannot rely on intellectual property to guarantee the commercial success of its new battery. It needs a rapid commercial development and rollout and the support of lead customers and complementors (such as the charging station networks.

Thus, in order to grow the “size of the pie” (i.e. the total value created by StoreDot’s new battery), it may be necessary for StoreDot to limit its share of the pie—by sharing the value created with customers and complementors, perhaps even licensing its technology to other battery manufactures. There may be network externalities in lithium-ion batteries—especially in electric vehicles where the design of cars and battery chargers is dependent on the specifications of the battery.

As to which commercialization mode to adopt, the discussion of “Alternative Strategies to Exploit Innovation” (pp. 227-229) offers some guidance as the key considerations. Even if Baylis’s patent is weak, his lack of relevant resources may mean that licensing to an existing manufacturer of radios may offer the best bet (assuming an enthusiastic and competent licensee emerges). Alternatively, if a suitable partner is present—an existing manufacturing company or possibly a venture capital fund—then Baylis may prefer to establish a new enterprise drawing upon the partner’s complementary resources and capabilities.

2. Table 9.1 shows that: a) patents have been more effective in protecting product innovations in drugs and medical equipment than in food or electronic components; b) patents are more effective in protecting product innovations than process innovations.

Can you suggest reasons why?

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Patents offer strong protection to new drugs because most of them relate to a specific chemical compound with therapeutic characteristics. The specificity of such patents offers little scope for ambiguity and circumventing them requires the discovery of a different chemical compound with similar qualities—a challenging task. Patents in relation to new components where the potential for adaptive imitation is greater Unless a new process is revolutionary (e.g. Pilkington’s float glass process), new processes are typically incremental improvements or reconfigurations of existing processes. In such cases, process patents can be circumvented. Moreover, alternative mechanisms for protecting innovations—e.g. secrecy, lead time, and manufacturing capabilities—tend to be more effective for process innovations than product innovations. In particular, since processes cannot be easily viewed by competitors, secrecy is highly effective in protecting process innovations.

3. Page 210 refers to James Dyson’s difficulties in licensing his innovative vacuum cleaner (see https://www.inc.com/magazine/201203/burt-helm/how-i-did-it-james-dyson.html for further information). What lessons would you draw from Dyson’s experience concerning the use of licensing by small firms to exploit innovation?

On the basis of the factors discussed in pp. 209-210, licensing seems to be a best strategy for Dyson: •

The patent position appears strong

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Dyson lacked the finance and other complementary resources needed to commercialize his invention

Indeed, licensing did work for Dyson in Japan where the licensee created a profitable market for the “G-Force” vacuum cleaner. However, Dyson’s failure to attract interest from leading appliance makers in either Europe or North America (and the attempt by one potential licensee to steal his invention) points to some key weaknesses of licensing: •

No licensee is likely to possess the same enthusiasm for an innovation as its inventor. If existing firms are heavily invested in existing technologies, they are likely to be unreceptive to a “disruptive innovation”

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The quest for a licensee inevitable means communicating information about the invention that increases the risk of theft

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Like all interfirm collaboration, licensing agreements are only successful if the parties are able to collaborate effectively

Like many inventors, Dyson chose to “go it alone” not because internal commercialization was the best strategy but because, he had no choice if he was to get his invention to market within a reasonable time.

4. From the evidence presented in Table 9.2, what conclusions can you draw regarding the factors that determine whether leaders or followers win out in the markets for new products?

In the majority of instances, followers rather than leaders were more successful. This may point to the risks of pioneering and the advantages of entering a market once the market potential and the direction of technology is clearer. Where leaders went on dominate, the main reasons appear to be: •

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The role of patents. In the case of float glass and instant photography, the pioneers built up a strong patent position.

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Technical standards. In mobile phone operating systems, the Symbian consortium built a strong technological bandwagon before being displaced by Apple and Android.

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Using lead time build resources and market position. In disposable diapers, fiber-optic cable, and helicopters, the firms involved were not just first but they either began with strong resources or built strong resource positions very quickly.

As noted on pp. 211-213, however, there is no generic answer as to whether it is better to be a leader or a follower—it all depends upon the resources and capabilities of the particular firm.

5. In the market for ride sharing services, Uber is the market leader, followed by Lyft, Curb, and Sidecar. In each overseas country where Uber operates, it faces local competitors: UK rivals include BlaBlaCar, Bolt, and Kapten. What are the sources of network externalities in this market? Do they operate at the city, national, or global level? Does the strength of these network effects mean that Uber’s competitors are doomed to failure?

Uber is a platform: it provides an interface between drivers and passengers. Network externalities operates on both sides: drivers are attracted to Uber because it has the most customers; customers are attracted to Uber because it has the most drivers.

To the extent that most users want only local rides and most drivers only want to offer local rides, network externalities operate at the local market level—cities. However, to the extent that customers move between cities (on business or leisure travel) there are limited network effects at a wider geographical level. However, the key competitive advantages that Uber enjoys at national and global level arise not from network effects but from scale economies in developing new technology and in marketing and promotion, and the geographical spill overs in brand equity.

The fact that network effects are primarily local means that Uber’s competitors have the opportunity to pre-empt and then dominate local markets. The key is to establish market leadership before Uber enters a market. Even once Uber has entered. It may be possible for a local competitor to overtake Uber by adapting its offering to the needs on the local market. This in India, Ola offers rides by auto-rickshaw as well as by car, and customers can pay cash (with Uber all payments are by credit card).

6. Your university wishes to encourage innovation in teaching. On the basis of the section “Implementing Technology Strategies,” what advice would you offer?

One of the outcomes of the covid-19 pandemic for universities is the realization that online teaching can be more effective in disseminating conceptual knowledge than in-class teaching.

This raises vital questions about the goals of the educational process within universities and the kinds of teaching methods needed to achieve these goals.

The scope for innovation in university teaching is huge—but how to achieve it?

1. Encouraging individual creativity. The discussion of “Internal Sources of Innovation: Fostering Creativity” (pp. 220-221), emphasized the role of creative individuals. But universities do not have the option of replacing their faculties with more creative personnel.

The challenge is to create organizational environments that encourage experimentation and novel approached to teaching among the existing faculty. This requires support, encouragements to try novel approaches, and an acceptance of failure as an inevitable accompaniment to innovation.

2. Openness to outside ideas and practices. Across courses and departments with a university ad across universities, the challenges are similar. The potential for transferring innovations and best practices is huge. Collaboration with departments and academic programs can be valuable both in the inter-personal transfer of ideas and innovative practices and in

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providing support, encouragement, and advice for individual instructors. Equally, the scope for collaboration and knowledge transfer between universities—both bilaterally and through academies and consortia—is vast.

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 10

Vertical Integration and the Scope of the Firm 1. Can the expanding scale and scope of large companies between the late 19th century and the 1970s be explained by factors which reduced the administrative costs of firms relative to the transaction costs of markets?

The short answer is “Yes!” Strategy Capsule 10.1 (“The Rise of the Modern Corporation”) identifies several developments between the late 19th and late 20th centuries. These include: •

Technology. The telephone resulted in vast improvement in communications allowing companies to operate in multiple locations. The mainframe computer greatly increased the capacity of large companies to process data.

•

A vast range of management innovations—cost accounting, DCF investment appraisal, management-by-objectives, total quality management, the multidivisional firm greatly increased the capacity of senior management to coordinate and control large companies.

The overall impact of these development was that large companies with broad vertical, multinational and business scope became more efficient than small firms linked by markets.

2. Figure 10.2 shows that, during 1980–2000, large US companies accounted for a smaller percentage of total employment—a development that is attributed to “a more turbulent business environment and new information and communications technologies” (p. 238).

Explain why these factors might cause large corporations to reduce their size and scope..

Companies—like almost all organizations—are hierarchies. As they grow, they tend to add hierarchical levels. As the external environment becomes more turbulent, so more decisions need to be taken—thereby overloading the senior executive team. Most large companies are multi-business corporations—they comprise a number of business units presided over by a corporate head office. In a stable environment, most decisions are of a routine nature and can be made lower down in the organization. The more turbulent the environment, the more decisions go up to the corporate level. Also, the more turbulent the environment, the faster decision masking must become. The more layers of hierarchy there are between the bottom and the top of an organization, the slower decision making becomes. Hence, increased turbulence in the business environment resulted in smaller, more focused companies becoming relatively more efficient and effective than large, broadly diversified companies.

With regard to developments in information and communication technologies, these had the opposite effects to the impact of ICT earlier in the 20th century. Mainframe computers reinforced the advantages of large organizations. The internet, personal computers, and mobile devices have benefitted individuals and small organizations as much as large organizations. The

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resulting reduction in information and negotiating costs has greatly increased the efficiency of markets.

The overall result has been to increase the efficiency of small firms relative to large firms and to lower the cost of market transactions relative to internal administration. The implication of the internet and world wide web go even further--in some cases networks of individuals substitute for firms, e.g. open-source software communities.

2. A large proportion of major corporations outsource their IT functions to specialist suppliers of IT services, such as IBM, HP, Accenture, and Capgemini. What benefits do corporations derive from outsourcing their IT requirements? What transaction costs might arise from these arrangements?

Following the arguments made in the section “The Benefits and Costs of Vertical Integration” (pp. 238-244), the key benefits of IT outsourcing relate to: •

Developing distinctive IT capabilities—specialist IT providers possess superior IT capabilities to those of large companies in manufacturing and service industries.

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Managing strategically different businesses. For many organizations, designing, installing, and maintaining systems of information and communication requires very different approaches to management to those of their main businesses.

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Incentives. The high-powered incentives for contract providers may result in superior service from that offered by internal providers.

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Flexibility. If the external provider is a large company it may have greater capacity and technological capabilities that can respond to the changing needs of the client company.

E.g. an external provider can offer increased IT resources when the client company is undertaking a major upgrading of its business systems.

However, there are also some problems associated with outsourcing and corresponding benefits from internal provision: •

Transaction costs resulting from transaction-specific investments. IT outsourcing requires transaction-specific investment: the IT systems must be located within the client company and need to be adapted to the specific requirements of the client. This creates scope for “hold-up” and “strategic misrepresentation”. IT outsourcing contracts must be multiyear and are always incomplete (future circumstances cannot be accurately predicted)—hence there is tremendous scope for dispute.

•

Coordination issues. IT systems need to be closely integrated with a firm’s control systems and decision-making systems. The greater the need for integration and the more customized are a firm’s IT requirements, the greater are the challenges of outsourcing.

3. Strategy Capsule 10.2 compares alternative strategies for exploiting children’s characters. Hello Kitty is owned by the Japanese company Sanrio Co. Ltd. and is exploited throughout the world through licensing contracts with toy makers, jewelry companies, fashion companies, restaurants, theme parks, retail stores, and many other types of businesses. Could Hello Kitty be exploited more effectively by a verticallyintegrated entertainment company, such as Disney?

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Applying the considerations introduced on pp. 256-263 concerning the benefits and costs of vertical integration, the following points can be made: a) Vertical integration avoids the transaction costs that licensing arrangements give rise to.

The Disney movie, Saving Mr Banks, addressed the difficult relationship between Disney and Mrs Travers, the author and creator of Mary Poppins when making the movie. b) Vertical integration may assist coordination between different stages of the character creation and exploitation process. Thus, once Disney had acquired the Winnie the Pooh characters it was able to adapt their appearances and characteristics to suit the needs of its animated movies and toy merchandising. Vertical integration facilitates the sequencing of different phases of the character’s development and exploitation, e.g. the Lion King’s development from movie to merchandising, to live theatrical show, to theme park attraction, to ice show.

The problems of vertical integration—and, hence, advantages of licensing—are: a) Different phases of the process require different capabilities that are best undertaken by specialist companies. Thus, characters are created by authors and cartoon artists, while their exploitation requires movie studios, toy companies, video game developers, etc.

Housing these within a single corporation is difficult. b) Awkward competitive effects may arise. For example, if Disney owns Hello Kitty, then toy retailers may be less enthusiastic about stocking Hello Kitty toys knowing that they face a direct competitor Disney Stores.

5. For its Zara brand, Inditex manufactures most of the garments it sells and undertakes all its own distribution from manufacturing plants to its directly managed retail outlets. The Gap outsources its production and focuses upon design, marketing, and retail distribution. Applying the considerations listed in Figure 10.4, should Gap backward integrate into manufacture?

Most of the leading companies in fashion clothing (both the high fashion couturier companies and mid-market companies such as Gap) concentrate upon design and brand marketing and outsource most other functions. The advantages of this system are: •

Design, manufacturing, and retailing are strategically dissimilar businesses—they require different capabilities, different management systems, and different types of leadership.

•

It offers flexibility to both sides in adapting to uncertainty. Retailers can shift sourcing according to the costs and exchange rates. Manufacturers can hedge risk by supplying different retailers.

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It facilitates geographical diversification. The fashion business tends to have design concentrated in New York, London, Milan, Tokyo, and Paris. Production takes place mainly in Asia, Latin America, and Eastern Europe. Retail distribution is concentrated in Western Europe, North America, and Japan.

However, Zara has succeeded by creating a vertically-integrated system where the disadvantages of vertical integration (higher costs of manufacturing in Europe, lack of flexibility in shifting plant locations, etc.) are offset by the unprecedented speed and design flexibility that its tightly-coordinated vertical system permits. Thus, Zara’s highly compressed product development cycle would be very difficult for Gap’s outsourced system to match. .

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Zara’s vertical integration works for Zara because it fits with other aspects of its strategy: midmarket pricing, high fashion orientation, constantly changing product range. In particular, it offers Zara remarkable speed in getting its products from designers’ sketches to the retail store.

Gap’s casual clothing—predominantly jeans, tee-shirts, sweatshirts--are less subject to fashion trends, hence, Gap can cope with a slower, outsourcing system.

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 11

Global Strategy and the Multinational Corporation 1. With reference to Figure 11.1, identify a sheltered industry —one that has been subject to little penetration either by imports or foreign direct investment. Explain why the industry has escaped internationalization. Explore whether there are opportunities for profitable internationalization within the industry and, if so, the strategy that would offer the best chance of success.

In addition to the examples provided (housebuilding, laundries/dry cleaning, hairdressing, and fresh milk production and distribution), other examples include railroads, funeral services, medical services, theaters, bakeries, janitorial services, gardening products). These industries are mostly service industries and are characterized by one or more of the following characteristics: •

Lack of scale economies

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Strong national or local preferences

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National regulatory barriers

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High transportation costs

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Absence of substantial firm-level competitive advantages based upon innovation or superior resources and capabilities.

These factors make international trade unprofitable. They also make international expansion through direct investment unattractive for firms. In these industries there are few forms that possess brands with international appeal or superior proprietary technologies that can be exploited in overseas markets.

Opportunities for international expansion by firms in these industries arise where national differentiation is not deeply entrenched, where customers are willing to try new offerings, and where a firm has superior products or more advanced capabilities than those available in an overseas country.

Thus, coffee shops were a sheltered industry until Starbucks took the Italian concept of a coffee bar, introduced it into the US where quality standards were low, then replicated its system in other countries.

In the case of medical services, internationalization opportunities are being exploited by hospitals and medical service providers in countries which combine low costs with high quality.

However, internationalization involves the cross-border movements of the customers rather than the companies. E.g. European consumers travelling to India for surgical procedures; US consumers to Mexico.

In the case of residential construction, US housebuilding processes are faster and lower cost than those in Britain. Is there opportunity for a US housebuilder to transfer their systems and processes to residential construction in the UK? Much depends upon the willingness of British home buyers to let go of their traditional preferences, the ability of British building workers to

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change their traditional practices, and the willingness of planning authorities, insurance companies, and mortgage lenders to adapt their conventional criteria.

In funeral services, several British firms have pioneered “eco-funerals”—environmentally responsible corpse disposal. Such services might be popular in other countries.

2. With reference to Table 11.1, what characteristics of national resources explain the different patterns of comparative advantage for the US and Japan?

•

US resource strengths comprise technology and fertile land. Hence, its comparative advantage in aerospace; optical, medical, and scientific equipment; and cereals. The greatest comparative disadvantage is in apparel—since this product relies upon abundant low-cost labor. But why a comparative disadvantage (i.e. ratios <1) in technology-intensive products such as pharmaceuticals and electrical and electronic equipment? This reflects US strengths in services and its weakness in manufacturing—overall the US runs a massive deficit in its balance of trade.

•

Japan’s pattern of comparative advantage reflects its lack of natural resources (hence comparative disadvantages in cereals, beverages, and mineral fuels), its lack of low cost labor (hence comparative disadvantages in apparel) and advanced manufacturing technologies (hence comparative advantages in vehicles and electrical and electronic equipment). However, Japan’s technological strengths are concentrated in certain areas— comparative disadvantages in aerospace reflect Japan’s lack of military spending, and in pharmaceuticals is weaknesses in chemical and bio technologies.

3. According to Michael Porter’s Competitive Advantage of Nations, some of the industries where British companies have an international advantage are: advertising, auctioneering of antiques and artwork, distilled alcoholic beverages, hand tools, and chemical preparations for gardening and horticulture. Some of the industries where US companies have an international competitive advantage are: aircraft and helicopters, computer software, oilfield services, management consulting, cinema films and TV programs, healthcare products and services, and financial services. For either the UK or the US, use Porter’s national diamond framework (Figure 11.3) to explain the observed pattern of international competitive advantage.

UK Several of the sectors where UK firms show international competitive advantage are those where domestic demand is strong and sophisticated. Antiques and gardening are traditional passions of the British. In the case of distilled beverages (Scotch whiskey in particular), a sophisticated home demand links with key factor conditions: Scotland’s rainfall and peaty soils, the impact of the British empire in the international diffusion of British drinking habits.

USA The strength and sophistication of home demand has also played a key role in the international competitiveness of several US industries. The strength of aerospace reflects the size of the US home market and the sophistication of military demand. The development of oilfield services (based primarily in Houston) reflects the position of the US as the world’s dominant oil producer during the first half of the 20th century. The international dominance of US-based financial service and entertainment companies reflect US passions for entertainment and personal wealth; also, the fact that the US was the world’s first country where affluence and leisure

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became mass market phenomena. In the computer and computer software industry, the role of related and supporting industries is especially evident: in California’s Silicon Valley, semiconductors (Intel, AMD), computers (HP, Apple, Sun), software (Oracle, Google), and telecom (Cisco, Qualcomm) form a powerful cluster.

4. When Porsche decided to enter the SUV market with its luxury Cayenne model, it surprised the auto industry by locating its new assembly plant in Leipzig in Eastern Germany. Many observers believed that Porsche should have located the plant either in Central or Eastern Europe where labor costs were very low or (like Mercedes and BMW) in the US where it would be close to its major market. Using the criteria outlined in Figure 11.5, can you explain Porsche ’s decision?

Cost and availability of inputs: While Germany’s labor costs are among the highest in the world in Germany, labor skills, productivity, and overall engineering expertise are among the highest.

A critical resource for Porsche is country-of-origin reputation. Made-in-Germany fits closely with Porsche’s image of quality and advanced engineering (this may be especially important when most of the components for the Cayenne are bought in from other companies (its parent, VW, in particular). Given that the Cayenne involved Porsche moving into a new market segment (SUVs), it might have been especially sensitive to the need to preserve the Porsche image.

Company’s internal resources and capabilities in particular locations. Porsche’s principal operations are at Stuttgart—nearly 500 kilometers from Leipzig. However, the Leipzig location offers proximity to Germany’s network of automotive suppliers and is close to the VW’s operations hub at Wolfsburg.

Porsche’s business strategy. The critical issue driving the Leipzig plant decision appears to be the primacy of Porsche’s differentiation strategy based upon quality, craftsmanship, and engineering excellence. With a base price of around $125,000, compared to $34,000 for a Ford Explorer, maintaining image is much more important than saving on labor costs—especially when assembly costs are a small proportion of overall vehicle costs.

5. British expatriates living in the United States frequently ask friends and relatives visiting from the United Kingdom to bring with them bars of Cadbury chocolate on the basis that the Cadbury chocolate available in the United States (manufactured under license by Hershey’s) is inferior to “the real thing.” Should Mondelez International (formerly Kraft Foods, which acquired Cadbury in 2010) continue Cadbury’s licensing agreement with Hershey or should it seek to supply the US market itself, either by export from the United Kingdom or by establishing manufacturing facilities in the United States?

The discussion of foreign entry strategies (pp. 261-263) identifies the following criteria for determining the optimal entry mode:

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Is the firm’s competitive advantage based on country-specific or firm-specific resources?

Cadbury’s competitive advantage is based primarily upon its products and its brand name. Neither suggest a need to manufacture in the UK.

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Is the product tradable and what are the barriers to trade? Chocolate imports into the US face an import tariff of around 6%. More significant trade barriers are the risks to quality associated with transatlantic shipping/customs procedures.

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Does the firm possess the resources and capabilities required for establishing competitive advantage in the overseas market? National sales of chocolate confectionary require a strong marketing presence, market knowledge, and an extensive distribution network. Cadbury lacks these within the US and creating them would probably prove cost ineffective given Cadbury’s US market potential.

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Can the firm directly appropriate the returns to its resources? We do not know what royalty Cadbury receives from Hershey for using its brands and recipes. However, we can assume that Cadbury receives reasonable remuneration for the use of its trademarks and trade secrets.

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What transaction costs are involved? It does not appear that the licensing arrangement with Hersey involves any significant risks to Cadbury’s reputation or its intellectual property, nor does it appear to require significant monitoring or control.

On the basis of these considerations, it would seem that US licensing offers a modest but reasonable return to Cadbury for a negligible investment. The critical issue is whether establishing a US sales subsidiary (with product sourced from the UK) or a fully integrated US subsidiary would offer Cadbury the potential to greatly expand its US presence and make substantially more profit.

6. Since 2013, McDonald’s sales have been falling. Has it got the balance right between global standardization and national differentiation (Strategy Capsule 11.3)? How much flexibility should it offer its overseas franchisees with regard to new menu items, store layout, operating practices, and marketing? Which aspects of the McDonald’s system should McDonald’s top management insist on keeping globally standardized?

The McDonald’s business formula has proven successful in almost all regions of the world. Yet assessing how much of that success can be attributed to replication and how much to adaptation is difficult to determine. The evidence suggests that certain components of the McDonald’s system need to be globally standardized: its values, its training system, its control system, and its franchising system. But what about the menu? Some items such as burgers, fries, and milkshakes are probably integral to McDonald’s identity. Other menu items can almost certainly be adapted to local requirements. Some aspects of the McDonald’s management system may also require adaptation: in particular, adapting human resource management practices to local social norms and legal requirements.

As McDonald’s business environment becomes more volatile (e.g. changing customer preferences), decentralized adaption probably needs to increase. By encouraging innovation and new initiatives at the local level, McDonald’s can identify new products and concepts that can be transferred throughout its global network.

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 12

Diversification Strategy 1. An ice-cream manufacturer is proposing to acquire a soup manufacturer on the basis that, first, its sales and profits will be more seasonally balanced and, second, from year to year, sales and profits will be less affected by variations in weather. Will this risk spreading create value for shareholders? Under what circumstances could this acquisition create value for shareholders?

The result of this acquisition would be to reduce variability of quarterly and annual revenues and profits. However, the discussion of “Risk Reduction” (pp. 299 & 302) makes it clear that combining the cash flows from the two businesses in order to reduce their variability does not create value for the owners of these businesses. (As long as the cash flows of the individual businesses are unaffected by the merger, e.g. there are shared costs to economize on.) The simplest rationale for this is to recognize that, if the two businesses are public companies, then shareholders can undertake their own risk reduction through holding a portfolio of the ice cream company and the soup company.

It is more likely that the merger will destroy value—especially for the shareholders of the acquiring company. While individual investors can diversify their portfolios with minimal transactions costs, the transaction costs associated with mergers and acquisitions (especially investment bank fees) are considerable (not to mention the premium that the acquiring company must pay in order to effect the takeover).

Under what conditions might the merger create value? ––Where real economies can be gained by merging the two businesses. Thus, if employees can be redeployed between ice cream and soup production and if certain functions (e.g. distribution, HR, accounting and finance) can be combined, then the merger might boost the cash flows of each business.

Note: During the 1920s, a British company, Thomas Wall and Son Ltd., a producer of meat pies and sausages, began producing ice cream at its West London plant during the summer months in order to utilize excess capacity.

2. Tata Group is one of India ’s largest companies, employing 424,000 people in many different industries, including steel, motor vehicles, watches and jewelry, telecommunications, financial services, management consulting, food products, tea, chemicals and fertilizers, satellite TV, hotels, motor vehicles, energy, IT, and construction. Such diversity far exceeds that of any North American or Western European company. What are the conditions in India that might make such broad-based diversification both feasible and profitable?

On pp. 281-282 (Strategy Capsule 12.1. Trends in Corporate Diversification Over Time), I discussed the refocusing trend during which conglomerate firms have all but disappeared in North America and Europe, but continue to be very important in emerging countries. The reasons are discussed more fully in the sections of “Economies from Internalizing Transactions” (p. 286) and “The Diversified firm as an Internal Market” (pp. 287-288). Tata Group lacks close

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operational linkages between its businesses—they are simply too diverse. Tata Group adds value through allocating investment funds and personnel between its different businesses, deploying its top management expertise, and establishing and developing new businesses. The essential condition for this to work is that Tata needs to be more efficient in managing these processes than are external markets. In the US and UK, conglomerate firms no longer have any general advantage in allocating investment funds, motivating business managers, or starting-up new businesses—all these functions are performed efficiently by the capital markets. In India, capital markets are less efficient, venture capital is less developed, and labor markets for managers and other skilled professionals are less developed. In these circumstances, not only is Tata able to utilize internal information and sophisticated decision-making systems to allocate resources more effectively than can external markets, it may also benefit from lower resource costs (in particular, a lower cost of capital than smaller, more specialized companies).

Apart from financial and human resources, other resources that Tata can deploy across its different business are influence and business relationships. In a highly regulated country like India, political influence is critically important. Tata’s size and diversity undoubtedly give it considerable power within both state and federal governments. Its commitment to ethical business principles is also a resource that it can deploy across multiple industries—especially in establishing itself as a preferred joint venture partner for foreign multinationals seeking to invest in India. (Note Starbucks entry into India through a joint venture with Tata).

3. Burberry, originally a manufacturer of raincoats, is now a supplier of luxury clothing and accessories. During 2012–2017, it operated its cosmetics and fragrances business itself.

In 2017,it transferred its beauty line to Coty, which paid $163 million for a long-term license. What considerations might have influenced Burberry’s decision?.

Burberry’s diversification into cosmetics and fragrances was probably justified by the benefits of exploiting economies of scale in the Burberry brand name. However, in operating its cosmetics and fragrances business itself it faced the challenges of entering a business where the resources and capabilities required for production and distribution were very different from those in its core fashion business.

Replacing its ownership of the cosmetics and fragrances business with a licensing agreement with the new owner, Coty, allows Burberry to benefit from economies of scope in extending its brand while avoiding the disadvantages of operating a business within an otherwise unfamiliar sector.

A key requirement for Burberry’s licensing arrangement to be successful is that the transaction costs associated with licensing its brand are not excessive. The fact that brand licences between fashion houses and cosmetic/fragrance companies are well establishes and Coty is a respected partner within this sector, suggests that such a licensing contract can be easily written and easily enforced.

Finally, the transfer of the cosmetics/fragrances business from Burberry to Coty is likely to be an example of Campbell and Goold’s “parenting advantage.” Because Coty is able to exploit considerable economies of scope from applying its resources and capabilities to another cosmetics/fragrances business, it has potential to add more value to this business than can Burberry.

4. Samsung Group, Berkshire Hathaway, and Richard Branson ’s Virgin Group each comprise a wide range of different businesses that appear to have few close technical or customer linkages. Are these examples of unrelated diversification and do the corporate and ownership links within each of the groups result in the creation of any value? If so, what are the sources of this value creation? .

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The discussion of “The Meaning of Relatedness in Diversification” (pp. 290-291) addresses this question.

When we think of sharing resources and transferring capabilities, we tend to think primarily of operational linkages: using the same technology, sharing distribution channels, pooling purchases of raw materials and other supplies. However, an equally (potentially more) important type of relatedness between businesses are common strategic characteristics. The ability to design corporate systems that allocate capital, monitor performance, assess and reward managers, and create new business opportunities depend upon a similarity of strategic characteristics across businesses. This is fundamental to the ability of corporate management to create value in the individual businesses. Thus, as identified on p. 290, most of the Virgin Group comprises start-up companies that supply branded goods and services to consumers. Most of Berkshire Hathaway’s businesses are mature, stable, low-tech businesses that face limited international competition. As such they fit well with the conservative, non-interventionist management approach of Warren Buffett and Charlie Munger. Samsung’s businesses are mostly large scale, capital intensive, and international. These companies are all highly diversifies, but each of them comprises a very different set of businesses and each of these sets of businesses shares certain strategic characteristics that makes them amenable to a specific corporate management system and leadership style.

5. Amazon has diversified from online retailing into cloud computing services (Amazon Web Services), tablet computers (Amazon Fire), and the production of movies and TV shows (Amazon Studios). What synergies might justify these diversifications? (a) Cloud computing In terms of “Porters Essential Tests” (pp. 302-303) Amazon’s entry into cloud computing would appear to be justified by the industry attractiveness test (cloud computing a high growth market where several firms seem to be earning good margins), also cost of entry is low for Amazon—it already has massive ownership of computing power and considerable IT capabilities. These resources and capabilities also provide the basis for significant synergies between cloud computing and Amazon’s e-commerce businesses (the “better-off test”). (b) Tablet computers Amazon’s first foray into electronic hardware was its Kindle e-reader. This was highly successful—partly because of the demand-side complementarity with Amazon’s supply of ebooks. In the case of tablet computers, the strategic rationale seems considerably weaker.

In terms of industry attractiveness, this is an intensely competitive market with Apple and Microsoft holding strong positions and many other companies supplying Android or Windows based products. Certainly, some of Amazon’s resources and capabilities can be deployed in tablet computers (e.g. its brand name, e-commerce platform, and software engineering capabilities. Overall, however the fit with other businesses seems limited. (c) Production of original video entertainment Amazon Studios produces feature movies and TV shows—including documentaries—both for cinema release and for distribution through Amazon Prime video streaming service. The principal synergies with Amazon’s other businesses are with Amazon’s video streaming—

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however, Amazon’s own productions account for a tiny fraction of Amazon Prime’s video content. While most of the leading video entertainment streaming services are backward integrated into content production (e.g. Netflix, Disney, and AT&T/Warner), the advantages of own-produced content over content bought in for other studios is unclear.

Apart from Amazon Prime, synergies between Amazon Studios and Amazon’s other businesses appeal to be very limited.

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Contemporary Strategy Analysis (11th edition) SUGGESTED ANSWERS TO SELF-STUDY QUESTIONS

Chapter 13

Implementing Corporate Strategy: Managing the Multibusiness Firm 1. Unilever—one of the world’s leading consumer goods companies comprising several hundreds of brands—is reviewing its business portfolio in order to address the problems of unsatisfactory growth and profitability. The head of group planning has asked for your advice on the use of portfolio matrices as an initial screen of Unilever’s portfolio of businesses. Should Unilever use portfolio analysis and, if so, which portfolio matrix would you recommend: the McKinsey, BCG, or Ashridge matrix?

The virtue of portfolio planning matrices is their simplicity. Depicting all the businesses of a company on a single two-dimensional display provides a view of the entire company and allows contrasts to be made between the different businesses along some key strategic variables.

However, it is important to recognize that, on their own, portfolio planning matrices do not provide answers for key issues of corporate strategy (e.g. how to allocate resources among the different businesses, which strategies should be adopted by each business).

The McKinsey and BCG matrices are similar since their two dimensions relate to the primary determinants of a business’s profitability: industry attractiveness and competitive position gives these techniques some analytical validity.

In both of these techniques, their chief virtue—simplicity—is also their chief weakness. In particular, the view of the business portfolio as a set of independent, stand-alone businesses contradicts the central principle of diversification strategy—diversification is about creating value through exploiting the linkages between businesses. Such simplicity is a particular weakness of the BCG matrix where, it can be argued that both axes (market growth and relative market share) are very poor proxies for industry attractiveness and competitive advantage.

The Ashridge matrix addresses a different issue from the BCG and GE matrices—the potential for the corporate headquarters to create value for individual businesses. However, positioning individual businesses within this display is likely to depend much more on subjective assessments rather than hard data.

In short, given the advantages and disadvantages of each, there may be merit in applying all three as a means to guiding a deeper analysis of the corporate portfolio of the diversified firm.

2. Apply the BCG matrix to the different programs that your institution offers. (You will need to make some informed guesses about market growth rates and relative market share.) Does this analysis offer useful strategy implications for the different programs?

The figure below shows the approximate positioning of certain degree programs offered by Bocconi University. While estimates of market growth for each type of program are available from looking at trends in student applications, estimating relative market share is problematic— it all depends upon how the market is defined. For example, the market for the Global Executive MBA is probably global, while the markets for undergraduate programs are more likely to be

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national. The analysis also ignores linkages between programs. For example, Bocconi’s Full-time MBA looks like a “dog” business, however, to the extent the MBA is a flagship program, then it may be important to invest in it since having well-ranked MBA program has a major influence on the perceived quality of other programs.

3. The discussion of “performance management and financial control” identified two companies where the corporate HQ imposes a strong performance management system on its business units, PepsiCo and BP. For which company do you think a performance management system using financial targets is better suited?

The sections on “Performance Management and Financial Control” and “Strategic Planning and Performance Control: Alternative Approaches to Corporate Management” (pp. 327-329) offer several reasons why a performance management system based upon financial targets might be more suitable for PepsiCo than for BP. As Table 13.1 shows, the “financial control” style of corporate management works best in “mature, low-tech sectors where investment projects are relatively small and short term”—this is the case for PepsiCo’s soft drinks and snacks business, but is certainly not the case for the petroleum business where projects are huge and very long term. As the discussion of PepsiCo and BP on reveals, in both companies demanding short to medium-term financial targets proved highly motivating to managers, however, in a business requiring large, long-term investments where risks are very high, such incentives may result in perverse outcomes (e.g. the environmental and safety crisis that engulfed BP).

4. Amazon.com’s CEO, Andy Jassy, is under pressure to improve the company’s profitability

(between 2016 and 2020 it earned a net margin of 4.3%). Amazon is a highly diversified company engaged in online retailing in 14 different countries, audio and video streamed entertainment, the production and sale of mobile electronic devices, cloud computing services, and numerous other activities. Of the four main corporate management roles discussed in this chapter—managing the corporate portfolio, managing linkages among

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businesses, managing individual businesses, and managing change and development— which offers the greatest opportunities for Amazon’s corporate headquarters to create value??

Managing the corporate portfolio There appears to be considerable scope for Amazon to increase its overall performance by exiting unprofitable areas of business. Its segment reporting provides results for North America, International, and Amazon Web Services (AWS). The International segment makes losses, while AWS provides most of Amazon’s operating profit.

The key issue here is whether the International sector’s losses are temporary while Amazon builds its international business or are a consequence of either market unattractiveness of Amazon’s lack of a competitive advantage. In big emerging markets—notably China, India, and Brazil—local competitors dominate e-commerce markets. If (as in China) it looks as though Amazon is confined to a secondary market position, it would seem sensible to sell out to a local competitor.

In terms of product areas, some of Amazon’s diversifications are into businesses where profit prospects are poor: •

In hardware, Amazon has been successful with its Kindle e-reader and Echo speaker— but in tablet computers and smartphones competition is ferocious and Amazon’s competitive advantages few.

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In video streaming, Amazon Prime has established a viable market share—however, the emerging battle between Netflix, Disney, and AT&T/Warner in this market make this an unattractive market for Amazon.

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Food retailing has been an area of recent expansion for Amazon—through Amazon Fresh and Whole Foods Markets—however in both supermarkets and online, this is a highly competitive, low margin business.

Managing linkages across businesses Amazon’s diversification from online books into its current array of businesses is remarkable.

Initially, this diversification was into closely related areas—e.g. its diversification from book retailing to the “everything store.” It’s subsequent diversification (e.g. into cloud computing, electronic hardware, video streaming) have all exploited existing resources and capabilities deployed in Amazon’s other businesses--e.g. the Amazon brand, the Amazon web site (Amazon.com is one of the world’s top-20 most visited web sites), Amazon’s software engineering capabilities. However, for some of these businesses, the linkages are less close.

Overall, it is not obvious that there are additional sources of value to be exploited as a result of managing these linkages more effectively.

Managing individual businesses Amazon is known for a highly interventionist corporate management (associated with the personal influence of Jeff Bezos) and intense performance pressures on managers at all levels.

Hence it is not apparent that a more rigorous involvement by the corporate center in the different areas of business offers much scope for further efficiency gains.

However, in terms of profitability, it seems likely that Amazon’s bottom line would benefit from a reorientation of performance goals from sales growth towards margins and return on capital.

This would imply greater scrutiny of capital investments—including acquisitions—for their impact on profitability and shareholder value.

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5. Would holding companies (such as Tata Group, Samsung Group, the Virgin Group, and Berkshire Hathaway) be more successful if they were converted into multidivisional corporations (such as General Electric, Philips, and Unilever)?

In Western countries, the divisionalized corporation is the dominant form of organization for diversified firms, however, there are many exceptions (e.g. Berkshire Hathaway and Alphabet in the US; Virgin Group, Investor AB, and Wendel Group in Europe). In Asia and Latin America, holding companies are very frequently the dominant organizational form for large, diversified firms.

To evaluate the appropriateness of each of these organizational forms we need to look at the four activities through which corporate management adds value to its businesses:

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Managing the overall corporate portfolio. In general, the multidivisional corporation is more effective at allocating and reallocating resources among its various business because of the central financial and strategic role of the corporate center in setting capital expenditure budgets for the individual divisions and appointing divisional management. However, for certain types of entrepreneurial businesses, the holding company can be a highly flexible form, especially in acquiring and divesting individual businesses.

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Managing each individual business. The multidivisional corporation offers corporate management much greater scope for intervening in the individual businesses than does the holding company. However, this presupposes that such intervention is beneficial. In the case of entrepreneurial businesses, it may be that the relative autonomy that subsidiaries receive within the holding company structure is highly conducive to entrepreneurial initiative (e.g. at Virgin and Berkshire Hathaway).

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Managing linkages among businesses. Clearly the multidivisional corporation is superior in this.

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Managing change. At the level of the corporation as a whole, multidivisional corporations have much greater potential for managing corporate-wide changes (the transformative influences of Lou Gerstner at IBM, Jack Welch at GE, J-M Messier at Vivendi, Ken Lay and Jeff Skilling at Enron are examples—though as these examples suggest, not all such transformative changes were beneficial to the companies concerned. However, in terms of change at the individual business, the greater decentralization of the holding company permits greater scope for change.