Chapter 6
Business Strategy: Differentiation, Cost leadership & Blue Oceans
I.
-
Business-level strategy
the goal-directed actions managers take in their quest for competitive advantage when
competing in a single product market.
Guide questions to formulate Business-level strategy:
●
●
●
●
Who- which customer segments will we serve?
What-customer needs, wishes, and desires will we satisfy?
Why- do we want to satisfy them?
How- will we satisfy our customers' needs?
V - C = COMPETITIVE ADVANTAGE
Where:
V = perceived value for consumers; and
C = Cost incurred to create the value
The firm's business-level strategy determines its STRATEGIC POSITION (strategic profile
based on value creation and cost)
●
Strategic trade-offs - choices between a cost or value position. Such choices are
necessary because higher value creation tends to generate higher costs.
Generic Business Strategies
Generic - /dʒəˈner·ɪk/
: relating to or shared by a whole group of similar things; not specific to any
particular thing.
1. Differentiation Strategy - Generic business strategy that seeks to create higher value
for customers than the value that competitors create.
2. Cost-leadership strategy - Generic business strategy that seeks to create the same or
similar value for customers at a lower cost.
●
Scope of competition - the size, narrow or broad- of the market in which a firm chooses
to compete.
●
Focused cost-leadership strategy - Same as the cost-leadership strategy except with
a narrow focus on a niche market
●
Focused differentiation strategy - Same as the differentiation strategy except with a
narrow focus on a niche market
Niche - /niCH,nēSH/
: denoting products, services, or interests that appeal to a small, specialized
section of the population.
: a specialized segment of the market for a particular kind of product or service.
6.2 Differentiation Strategy: Understanding Value Drivers
Under a differentiation strategy, firms that successfully differentiate their products enjoy a
competitive advantage.
Firm A's product is seen as a generic commodity with no unique brand value.
Firm B has the same cost structure as Firm A but creates more economic value, and thus has a
competitive advantage over both Firm A and Firm C.
Although Firm C has higher costs than Firm A and B, it still generates a significantly higher
economic value than Firm A.
●
Economies of Scope - Savings that come from producing two (or more) outputs at less
cost than producing each output individually, despite using the same resources and
technology.
Managers can adjust a number of different levers to improve a firm's strategic position.
These levers either: increase value or decrease costs
Salient value drivers:
1. Product features
2. Customer service
3. Complements
●
Product features - adding unique product attributes allows firms to turn commodity
products into differentiated products commanding a premium price.
●
Customer service - the direct one-on-one interaction between a consumer making a
purchase and a representative of the company that is selling it. Most retailers see this
direct interaction as a critical factor in ensuring buyer satisfaction and encouraging
repeat business.
●
Complements
- an important force determining the profit potential of an industry.
-Complements add value to a product or service when they are consumed in tandem.
6.3 Cost-Leadership Strategy: Understanding Cost Drivers
Cost leader
- focuses its attention and resources on reducing the cost to manufacture a product or
deliver a service in order to offer lower prices t its customers.
- attempts to optimize all of its value chain activities to achieve a low-cost position.
Most important cost drivers:
A. Cost of input factors
- one of the most basic advantages a firm can have over its rivals.
Examples:
raw materials, capital, labor, and IT services
B. Economies of scale
-Economies of scale decreases in cost per unit as output increases.
What causes the per-unit cost to drop as output increases?
Economies of scale allow firms to:
1. Spread their fixed costs over a larger output
- Larger output allows firms to spread their fixed costs over more units.
2. Employ specialized systems and equipment
- Larger output allows firms to invest in more specialized systems and equipment, such as
enterprise resource planning (ERP) software or manufacturing robots.
3. Take advantage of certain physical properties.
● Cube square rule: the volume of a body such as a pipe or a tank increases
disproportionately more than its surface.
● Minimum efficient scale - Output range needed to bring down the cost per unit as
much as possible, allowing a firm to stake out the lowest-cost position that is achievable
through economies of scale.
● Diseconomies of scale - increases in cost per unit when output increases.
C. Learning-curve effects
- As cumulative output increases, managers learn how to optimize the process and workers
improve their performance through repetition.
Differences in Learning effects from economies of scale:
1. Differences in timing - learning effects occur over time as output accumulates, while
economies of scale are captured at one point in time when output increases.
2. Differences in complexity - In some production processes, effects of economies of
scale are significant; while learning effects come handy for professional practices.
D. Experience-curve effects
- changing the underlying technology while holding cumulative output constant.
● Process innovation - a new method or technology to produce an existing product.
Learning by doing allows a firm to lower its per-unit costs by moving down a given learning
curve, while experience-curve effects based on process innovation allow a firm to leapfrog to a
steeper learning curve thereby driving down its per-unit costs.
Differentiation Strategy: Benefits and Risks
Benefits:
1. A rival would need to improve the product features as well as build a similar or more
effective reputation in order to gain market share.
2. The threat of entry is reduced.
3. The differentiator will not be so threatened by increases in input prices due to powerful
suppliers.
4. Powerful buyers demanding price decreases are unlikely to emerge.
5. A strongly differentiated position reduces the threat of substitutes because the unique
features of the product have been created to appeal to customer preferences keeping them
loyal to the product.
Risk:
Viability happens when the focus of competition shifts to rice rather than value-creating
features.
Cost-leadership: Benefits and Risks
1. If a price war ensues, the low-cost leader will be the last firm standing.
2. A cost leader is fairly well-isolated from threats of powerful suppliers to increase input
prices because it is able to absorb price increases by accepting lower profit margins.
Risks:
1. If a new entrant with new and relevant expertise enters the market, the low-cost
leader's margins may erode due to a loss in market share while it attempts to learn new
capabilities.
2. Overtime, competitors can beat the cost leader by implementing the same business
strategy but more effectively.
6.5 Blue Ocean Strategy
- A business strategy that successfully combines differentiation and cost leadership activities
using value innovation to reconcile the inherent trade-offs.
●
-
Value innovation
the simultaneous pursuit of differentiation and low cost in a way that creates a leap in
value for both the firm and the consumers: considered a cornerstone of blue ocean
strategy.
-
Canny managers may use value innovation to move to blue oceans, that is, to new and
uncontested market spaces.
Value Innovation - Lower costs
1. Eliminate. Which of the factors that the industry takes for granted should be eliminated?
2. Reduce. Which of the factors should be reduced well below the industry's standard?
Value innovation - Increase perceived consumer benefits
3. Raise. Which of the factors should be raised well above the industry's standard?
4. Create. Which factors should be created that the industry has never offered?
"STUCK IN THE MIDDLE"
-
A blue ocean strategy is difficult to implement because it requires the reconciliation of
fundamentally different strategic positions --differentiation and low cost -- which in turn
require distinct internal value chain activities so the firm can increase value or lower cost
at the same time.
●
Value curve - the basic component of strategy canvas. It graphically depicts a
company's relative performance across its industry's factors of competition.
●
Strategy canvas - Graphical depiction of a company's relative performance vis-a-vis its
competitors across the industry's key success factors.
Chapter 7: Innovation and Entrepreneurship
●
Innovation
- comes from the latin word "In" and "Novare", which means to make/create something
new.
- the generation, acceptance and implementation of new ideas, processes, products or
services (Victor Thompson, 1965)
- is the successful introduction of a new product, process, or business model and a
powerful driver in the competitive processes.
●
Competition - a process driven by the "Perennial gale of creative destruction."
A. The Innovation Process:
●
Stage 1: Idea - often presented in terms of abstract concepts or as findings derived from
basic research.
Basic Research - conducted to discover new knowledge and is often published
in academic journals.
Stage 2: Invention - describes the transformation of an idea into a new product or
process, or the modification and recombination of existing ones.
- Patent- a form of intellectual property, and gives the inventor exclusive rights to
benefit from commercializing a technology for a specified time period in
exchange for public disclosure of the underlying idea.
- Trade Secrets - valuable proprietary information that is not in the public domain
and where the firm makes every effort to maintain its secrecy.
Stage 3: innovation - concerns the commercialization of an invention
First-mover Advantages
Benefits:
● Economies of Sale
● Experience and learning-curve effects
Stage 4: Imitation is where the innovation process ends. If an innovation is
successful in the marketplace, competitors will attempt to imitate it.
Entrepreneurship - describes the process by which entrepreneurs undertake economic risk to
innovate--to create new products, processes, and sometimes new organizations.
Entrepreneurs - are the agents who introduce change into the competitive system.
- strategic entrepreneurship : describes the pursuit of innovation using tools
and concepts from strategic management.
- social entrepreneurship : describes the pursuit of social goals while creating
profitable businesses.
B. Innovation and the Industry Life Cycle
Innovation
- introduction of new or idea to an existing product or process this provides more
effective products, processes, and services for the society
- appears if someone improved or make a significant contribution to an existing product
An Industry Life Cycle depicts the various stages where businesses operate, progress, and
slump within an industry. An industry life cycle typically consists of five stages: startup, growth,
shakeout, maturity, and decline.
I.
Introduction Stage
At the startup stage, customer demand is limited due to unfamiliarity with the new
product’s features and performance. Distribution channels are still underdeveloped. There is
also a lack of complementary products that add value for the customers, limiting the profitability
of the new product.
II.
Growth Stage
As the product slowly attracts attention from a bigger market segment, the industry
moves on to the growth stage where profitability starts to rise. Improvement in product features
increases the value to customers.
● Standard
Standards cover a wide range of subjects from construction to nanotechnology, from energy
management to health and safety, from baseballs to goalposts. They can be very specific, such
as to a particular type of product, or general such as management practices.
The point of a standard is to provide a reliable basis for people to share the same expectations
about a product or service. This helps to:
1. facilitate trade
2. provide a framework for achieving economies, efficiencies and interoperability
3. enhance consumer protection and confidence.
Product Innovations & Process Innovations
● Product Innovations - process of creating a new product or improving an existing one
to meet customers’ needs
There are three key types of innovation:
1. Sustaining innovation
2. Low- end disruption
3. New- market disruption
Sustaining Innovation
- occurs when a company creates better-performing products to sell for higher profits to its
best customers. Typically, sustaining innovation is a strategy used by companies already
successful in their industries.
Low-end Disruption
- occurs when a company uses a low-cost business model to enter at the bottom of an
existing market and claim a segment. As the entrant company claims the lowest market
segment, the incumbent company typically retreats upmarket where profit margins are
higher.
2 EXAMPLES OF LOW-END DISRUPTION
1. 3D-Printed Real Estate
2. Toyota and General Motors in the Auto Industry
New- market disruption
- occurs when a company creates a new segment in an existing market to reach unserved
or underserved customers; for example, creating a cheap version of an expensive
product to cater to less wealthy consumers. Because the incumbent company caters to
wealthier customers, it has little to no motivation to fight your company for this new
market segment.
Examples:
1. Personal Computers and Smartphones
2. Transistor Radios
3. Shared-Mobility Services
III. Shakeout Stage
Shakeout usually refers to the consolidation of an industry. Some businesses are
naturally eliminated because they are unable to grow along with the industry or are still
generating negative cash flows. Some companies merge with competitors or are acquired by
those who were able to obtain bigger market shares at the growth stage.
IV. Maturity Stage
At the maturity stage, the majority of the companies in the industry are well-established
and the industry reaches its saturation point. These companies collectively attempt to moderate
the intensity of industry competition to protect themselves, and to maintain profitability by
adopting strategies to deter the entry of new competitors into the industry. They also develop
strategies to become a dominant player and reduce rivalry.
V. Decline Stage
The decline stage is the last stage of an industry life cycle. The intensity of competition in a
declining industry depends on several factors: speed of decline, the height of exit barriers, and
the level of fixed costs. To deal with the decline, some companies might choose to focus on their
most profitable product lines or services in order to maximize profits and stay in the industry.
●
Exit - When companies are not profitable for extended periods, owners may be forced to
go into bankruptcy to exit the market or reorganize the business.
●
Harvest - A harvest strategy involves reducing spending on an established product in
order to maximize profits. Typically, harvest strategies are used on outdated products as
profits are reinvested in newer models or newer technologies.
●
Maintain - Maintain means “protect your current percentage market share” against
competitors who want to Expand at your expense. That's not easy. In reality, the
Maintain strategy can also be one which requires a large investment and possibly an
extensive amount of time for key personnel.
●
Consolidate - Consolidation strategies include how one company will merge with or
acquire another, how the products and services will be branded or rebranded and how
human resources will integrate one workforce and organizational structure into another.
Customer Groups
Early Adopters :
- the customers entering the market in the growth stage are early adopters.
- make up roughly 13.5% of the total market potential.
- eager to buy early into a new technology or product concept.
- their demand is driven by their imagination and creativity rather than by technology per
se.
- recognize and appreciate the possibilities the new technology can afford them in their
professional and personal lives.
- demand is fueled more by intuition and vision rather than technology concerns.
- the firm needs to communicate the product's potential applications in early adopters to
the new offering is critical to opening any new high-tech market segment.
Technology Enthusiasts:
- the smallest market segment ( 2.5 percent of the total market potential).
- often have an engineering mind-set and pursue new technology proactively.
- frequently seek out new products before the products are officially introduced into the
market.
- enjoys using beta versions of products, tinkering with the product's imperfections and
providing (free) feedback and suggestions to companies.
- eager to get a hold of Google Glass when made available in a beta testing program in
2013.
Early Majority
- the customers coming into the market in the shakeout stage.
- the main consideration in deciding whether or not to adopt a new technological
innovation is a strong sense of practicality.
- The pragmatism is more concerned with what new technology can do for them.
- before adopting a new product or service they weigh the benefits and costs carefully.
- these customers are aware that many hyped new product introductions will fade away,
so they prefer to wait and see how things shake out.
- they like to observe how early adopters are using the product.
- they rely on endorsements by others.
- they seek out reputable references such as reviews in prominent trade journals or in
magazines such as Consumer reports.
- 1/3 of the entire market potential; winning them over is critical to the commercial
success of the innovation.
- without adequate demand from the early majority, most innovative products wither
away.
Late Majority
- they are a large customer segment, making up approximately 34 percent of the total
market potential.
- early adopters and early majority make up the lion's share of the market potential.
- demand coming from just two groups (early and late majority) drives most industry
growth and firm profitability.
- the late majority shares all the concerns of the early majority, but there are important
differences.
- although members of the early majority are confident in their ability to master the new
technology, the late majority is not.
- they prefer to wait until standards have emerged and are firmly entrenched, so that
uncertainty is much reduced,
- prefers to buy from well-established firms with a strong brand image rather than from
unknown new ventures.
Laggards
- are the last consumer segment to come into the market
- entering the declining stage of the industry life cycle.
- these are customers who adopt a new product only if it is absolutely necessary, such
as first time cell phone adopters in the United States.
- these customers generally don't use new technology either for personal or economic
reasons.
- given the reluctance to adopt new technology they are generally not considered worth
pursuing.
C. Types of Innovation
●
●
Incremental vs. Radical Innovation
An Incremental Innovation squarely builds on an established knowledge base and
steadily improves an existing product or service offering. It targets existing markets using
existing technology.
Radical Innovation draws on novel methods or materials, is derived either from an
entirely different knowledge base or from a recombination of existing knowledge bases
with a new stream of knowledge. It targets new markets by using new technologies.
●
Economic incentives - Economists highlight the role of incentives in strategic choice.
Once an innovator has become an established incumbent firm [ such as Google has
today, it has strong incentives to defend its strategic position and market power.
●
Organizational inertia - From an organizational perspective, as firms become
established and grow, they rely more heavily on formalized business processes and
structures.
●
Innovation ecosystem - A final reason incumbent firms tend to be a source of
incremental rather than radical innovations is that they become embedded in an
innovation ecosystem: a network of suppliers, buyers, complementors, and so on. They
no longer make independent decisions but must consider the ramifications of other
parties on their innovation ecosystem.
● Architectural vs. Disruptive Innovation
An Architectural innovation, therefore, is a new product in which known components, based on
existing technologies, are reconfigured in a novel way to create new markets.
Disruptive innovation leverages new technologies to attack existing markets. It invades an
existing market from the bottom up.
HOW TO RESPOND TO DISRUPTIVE INNOVATION?
Although these examples show that disruptive innovation are a serious threat for incumbent
firms, some have devised strategic initiatives to counter them:
1. Continue to innovate in order to stay ahead of competition. A moving target is much
harder to hit than one that is standing still and resting on existing (innovation) laurels. Apple has
done this well, beginning with the iPod in 2001, followed by the iPhone and iPad and more
recently the Apple Watch in 2015. Amazon is another example of a company that has
continuously morphed through innovation," from a simple online book retailer to the largest
ecommerce company. It also offers consumer electronics (Kindle tablets), cloud computing, and
content streaming, among other offerings.
2. Guard against disruptive innovation by protecting the low end of the market. (segment
1 in exhibit 7.11) by introducing low-cost innovations to preempt stealth competitors. Intel
introduced the Celeron chip, a stripped-down, budget version of its Pentium chip. to prevent
low-cost entry into its market space. More recently, Intel followed up with the Atom chip, a new
processor that is inexpensive and consumes little battery power. to power low-cost mobile
devices. Nonetheless. Intel also listened too closely to its 75 existing personal computer
customers such as Dell, HP, Lenovo, and so on, and allowed ARM Holdings, a British
semiconductor design company (that supplies its technology to Apple, Samsung, HTC, and
others) to take the lead in providing high-performing. low-power-consuming processors for
smartphones and other mobile devices.
3. Disrupt yourself rather than wait for others to disrupt you. A firm may develop products
specifically in low emerging markets such as China and India, and then introduce these
innovations into developed markets such as the United States or the European Union. This
process is called reverse innovation and allows a firm to disrupt itself. Strategy Highlight 7.2
describes how GE Healthcare and commercialized a disruptive innovation in China that is now
entering the t market, riding the steep technology trajectory of disruptive innovation shows
Exhibit 7.11
OPEN INNOVATION
Closed Innovation Principles
Open Innovation Principles
●
The smart people in our field work for
us.
●
Not all the smart people work for us.
We need to work with smart people
inside and outside our company.
●
to profit from R&D, we must discover
it, develop it. and ship it ourselves.
●
External R&D can create significant
value, internal R&D is needed to claim
(absorb) some portion of that value.
●
If we discover it ourselves, we will get
it to market.
●
We don't have to originate the
research to profit from it, we can still
be first if we successfully
commercialize new research.
●
The company that gets an innovation
to market first will win.
●
Building a better business model is
often more important than getting to
market first.
●
If we create the most and best ideas
in the industry. we will win.
●
If we make the best use of internal
and external ideas, we will win.
●
We should control our intellectual
property (IP), so that our competitors
don't profit from it.
●
We should profit from others' use of
our IP, and we should buy others IP
whenever it advances our own
business model.
After discussing the importance of innovation to gaining and sustaining competitive
advantage, the question arises: How should firms organize for innovation? Open innovation is a
framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only
from internal ideas and inventions, but also from ideas and innovation from external sources.
External sources of knowledge can be customers, suppliers, universities, start-up companies,
and even competitors.
Absorptive capacity- its ability to understand external technology developments, evaluate
them, and integrate them into current products or create new ones. Exhibit 7.13 cm- pares and
contrasts open innovation and closed innovation principles.
A closed innovation is based on the view that innovations are developed by companies
themselves. From the generation of ideas to development and marketing, the innovation
process takes place exclusively within the company.
Open innovation means opening up the innovation process beyond company boundaries in
order to increase one's own innovation potential through active strategic use of the environment.
Innovation therefore arises through the interaction of internal and external ideas, technologies,
processes and sales channels with the aim of the company to develop promising innovative
products, services or business models. Own employees, customers, suppliers, Lead users,
universities, competitors or companies of other industries can be integrated.
Implication for Strategist
- Strategy implementation is the process of putting plans into practice to achieve a desired
outcome is known as strategy implementation. It's the art of getting stuff done, basically. Any
organization's ability to carry out choices and carry out crucial procedures effectively,
consistently, and efficiently determines how successful it will be.
The SWOT analysis tool Strategic Implications is based on foresight. In a collaborative
brainstorming session with a team, the user of Strategic Implications is able to consider the
Possibilities, Challenges, Partners, and Platforms in a future world.
Chapter 8: CORPORATE STRATEGY: VERTICAL INTEGRATION AND DIVERSIFICATION
● CORPORATE STRATEGY
- Compromises the decisions that senior management makes and the goal-directed action it
takes in the quest for competitive advantage in several industries and markets simultaneously.
- determines the boundaries of the firm along three dimensions: vertical integration,
diversification, and geographic scope.
- executives must determine their corporate strategy by answering three questions:
1. In what stages of
the
industry
value chain should the company participate
(vertical and integration)?
2. What range of products and services should the company offer (diversification)?
3. Where should the company compete geographically in terms of regional, national, or
international markets (geographic scope)?
WHY FIRMS NEED TO GROW
1. INCREASE PROFIT - to provide a higher return for their shareholders or owners if privately
held.
2. LOWER COSTS - firms need to grow to achieve minimum efficient scale, and thus stake out
the lowest cost position achievable through economies of scale.
3. INCREASE MARKET POWER- Firms might be motivated to achieve growth to increase their
market share and with it their market power.
4. REDUCE RISK- Firms might be motivated to grow in order to diversify their product
and service portfolio by competing in a number of different industries.
5. MANAGERIAL MOTIVES- Research in behavioral economics suggests that firms may
grow to achieve goals that benefit its managers more than their stockholders.
THREE DIMENSIONS OF CORPORATE STRATEGY:
a) VERTICAL INTEGRATION
b) DIVERSIFICATION
c) GEOGRAPHIC SITE
UNDERLYING STRATEGIC MANAGEMENT CONCEPTS:
1. CORE COMPETENCIES - allow a
firm
to
differentiate
and
services
from those of
its
rivals, creating
higher value for
the
customer
or
products
and services of comparable value at lower cost.
its
products
offering
2. ECONOMIES OF SCALE - occur when a firm's average cost per unit decreases as its output
increases.
3. ECONOMIES OF SCOPE - are the savings that come from producing two or more outputs or
providing different services at less cost than producing each individually, though using the same
resources and technology.
4. TRANSACTION COST - are all costs associated with an economic exchange. The concept is
developed in transaction cost economics.
THE BOUNDARIES OF THE FIRM
●
●
●
●
TRANSACTION COST ECONOMICS - a theoretical
framework
in
strategic
management to
explain and
predict the firm's boundaries.
TRANSACTION COSTS - are all internal and external costs associated with the
economic exchange, whether it takes place within the boundaries of a firm or in markets.
EXTERNAL TRANSACTION COSTS - Costs of searching for a firm or an individual with
whom to contract, and then negotiating, monitoring, and enforcing the contract.
INTERNAL TRANSACTION COSTS - Costs
pertaining
to
organizing
within hierarchy;
are
also called administrative costs.
FIRMS VS. MARKETS: MAKE OR BUY
- Should a firm pursue in-house ("make") versus which goods and services to obtain externally
('buy").
Firm
Advantage:
● Command and control
● Fiat
● Hierarchical lines of authority coordination
● Transaction-specific investments community knowledge
Disadvantage:
● Administrative costs
● Low-powered incentives
● Principal-agent problem
Markets
Advantage:
● High-powered incentives
● Flexibility
Disadvantage:
● Search costs
● Opportunism
● Hold-up
● Incomplete contracting
● Specifying and measuring performance information asymmetries
● Enforcement of contracts
INFORMATION ASYMMETRY
- Situations in which one party is more informed than another because of the possession of
private information
VERTICAL INTEGRATION
- is the firm's ownership of its
distributes its outputs
production of needed inputs or the channels by which it
Types of vertical integration:
● Backward vertical integration - moving ownership of activities upstream to the
originating inputs of the value chain
● Forward vertical integration - moving ownership of activities closer to the end
customer
BENEFITS AND RISKS OF VERTICAL INTEGRATION:
● Lowering costs
● Improving quality
● Facilitating scheduling and planning
● Facilitating investments in specialized assets
● Securing critical supplies and distribution channels
SPECIALIZED ASSETS
- Assets that have significantly more value in their intended use than in their next best
use.
Types of specialized assets
●
Site specificity- assets required to be co-located.
Ex. Coal plant
●
Physical-asset specificity - assets that are designed and engineered to satisfy a
particular customer.
Ex. Bottling machinery for coca- cola
●
Human-asset specificity - investments made in human capital to acquire knowledge
and skills
Risks of vertical integration:
● Increasing costs reducing quality reducing flexibility
● Increasing
the
potential
for repercussions
ALTERNATIVES TO VERTICAL INTEGRATION
TAPER INTEGRATION
● One alternative to vertical integration is taper integration.
● It is a way of orchestrating value activities in which a firm is backwardly integrated, but it
also relies on outside-market firms for some of its supplies, and/or is forwardly integrated
but also relies on outside-market firms for some of its distribution.
STRATEGIC OUTSOURCING
- which involves moving one or more internal value chain activities out- side the firm's
boundaries to other firms in the industry value chain. A firm that engages in strategic
outsourcing reduces its level of vertical integration. Rather than devel- oping their own
human resource management systems, for instance, firms outsource these non-core
activities to companies such as PeopleSoft (owned by Oracle), EDS (owned by HP), or
Perot Systems (owned by Dell), which can leverage their deep competencies and
produce scale effects.
Diversification
- increases the variety of products and services it offers or markets and the geographic regions
in which it competes.
General Diversification Strategies:
- A firm that is active in several different product markets is pursuing a PRODUCT
DIVERSIFICATION STRATEGY.
- A firm that is active in several different countries is pursuing GEOGRAPHIC
DIVERSIFICATION.
- A company that pursues both a product and a geographic diversification strategy is
called a PRODUCT-MARKET DIVERSIFICATION.
TYPES OF CORPORATE DIVERSIFICATION
● SINGLE BUSINESS. A single-business firm derives more than 95 percent of its business
●
DOMINANT BUSINESS- A dominant business firm derives between 70 and 95 percent
of its revenue from a single business, but it pursues at least one other business activity
that accounts for the remainder of its revenue.
●
Related Diversification. A firm follows a related diversification strategy when it
derives less than 70 percent of its revenue from a single business activity and obtains
revenues from other lines of business linked to primary business activity.
1. RELATED-CONSTRAINED DIVERSIFICATION. A firm follows a relatedconstrained diversification strategy when it derives less than 70 percent of its
revenues from a single business activity and obtains revenues from other lines
of business related to the primary business activity.
2. RELATED-LINKED
DIVERSIFICATION.
If
executives consider new
business activities that share only a limited number of linkages, the firm is using a
related-linked diversification strategy.
●
UNRELATED DIVERSIFICATION. A firm follows an unrelated diversification
strategy when less than 70 percent of its revenues come from a single business. A
company that combines two or more strategic business units.
FOUR OPTIONS TO FORMULATE CORPORATE STRATEGY via CORE COMPETENCIES
1. Leverage existing core competencies to improve current market position
2.
Build new core competencies to protect and extend current market position
3. Redeploy and recombine existing core competencies to compete in markets of the future
4. Build new core competencies to create and compete in the markets of the future
CORPORATE DIVERSIFICATION AND FIRM PERFORMANCE
- Corporate managers pursue diversification to gain and sustain competitive advantage
- the diversification-performance relationship is a function of the underlying type of
diversification. A cumulative body of research indicates an inverted u-shaped relationship
between the type of diversification and overall firm performance.
Diversification discount
- Situation in which the stock price if highly diversified firms is valued at less than the sum
of their individual business units
Diversification premium
- situation in which the stock price of related diversification firms is valued at greater than the
sum of their individual business units
Restructuring
- Describes the process of reorganizing and divesting business units and activities to
refocus a company in order to leverage its core competencies more fully
Internal capital markets
- can be a source of value creation in a diversification strategy if the conglomerates
headquarters does a more efficient job of allocating capital through its budgeting process that
what could be achieved in external capital markets
The degree of vertical integration
- In what stages of the industry value chains to participate
The type of diversification
- What range of products and services to offer
The geographic scope
- Where to compete