Strategic & International Management
1.Foundations of management
What
a) The „what“
Where
• Developing a business: Demand à Perception
à’Solution’ à Resources à Value creation à
Management
Exchange à Purchase à Consumption (àDemand)
• Managing an organization, coordination of internal
When
relationships
Who
• Organizing flows of Goods - Information - Currency
à linear process, Information supported by Finance & Accounting, Human
Resource Management, IT, Legal System, R&D> Purchasing > Production >
Marketing & Sales
• Managing relationships to stakeholders:
•
Managing non-managers, other managers & yourself; Coordination &
motivation towards humans
b) The „why“
= need objectives to set out a path to go, they are representations of the future,
visions of how the future should be & how you want the future to be
Why
How
c) The “how”
• Making decisions & implementing them, management process :
•
alternative decision procedure (unconscious)
d) The “who”
• Distinguishing from other roles: Management vs. supervision vs. ownership
e) The “when”
• Time horizon influences each part of the management process
•
•
actions today have consequences on todays & future result à Management
is responsible for results from today & the future, however results of today
influence future actions & results
in between today & future: changes (i.e. trade policy) à result my change
than the expected from today
f) The “where”
• Management operates in multiple local spheres & has to cope with
(anti)globalization forces
à Management is managing a business, an organization, internal & external relationships &
yourself
à… tries to achieve objectives
à…makes decisions & implements them in space & time
à…is a role that distinguishes from other roles in the organization
à… is one of the forces that change organizations along time
2. Stakeholders, objectives & governance (Steuerung/Führung)
a) Stakeholder and their relationships
• Specific contribution by & benefits for stakeholders (exchange relationship)
à Stakeholder ↔ Customers:
→ Products + services, information
← Currency + Information
à Suppliers ↔ Stakeholder:
→ Production factors (labour, material,
currency, etc.) + Information
← Currency, interest, Information
à Stakeholders ↔ Shareholder:
→ Profits (open-ended delivery of
capital), Information
← Currency, Information
à Stakeholder ↔ Public:
→ Market participation, contributions of
(interdependency)
development, information, etc.
← Infrastructure, legal system (without
certainty about legal system processes à no
economic development but has to be produced!),
•
information
CEOs manage the relationship between the firm and its stakeholders based
on corporate governance (= sum of mechanism to coordinate the external
relationships to Stakeholders)
b) Objectives for and of corporations
• Objectives for a corporation are individual, objectives of a corporation
normatively set: for vs. of
•
Individual objects for a corporation may differ:
•
aspiration level = function of 3 influencing determining factors (comparison
to):
à 1. Own past performance
à 2. Past performance of others (Selection/Relevance)
à 3. Other factors (unexpected events/conditions influencing what we want to
achieve)
•
•
the determined aspiration levels bring to the process of setting objectives of
corporation
Top management organizes a political process to determine objectives of the
company (represents the corporation, coordinates, organizes, communicates & brings
together all those influences & balance them out)
•
Individual interest + power à Stakeholder & shareholder approach à
Objectives of the corporation
c) Relationships & governance
à Management manages relationships to stakeholders
à Stakeholders have specific objectives & make specific contributions
à Objective setting is a political process (past performances, others)
à Objectives for & objectives of the firm
à Stakeholder vs. shareholder approach
à Governance takes place market based (product prices, factor price, share price) & law-&
reputation based
3. Strategic decision making & performance
a) Strategic decision making
• 5 different forces that changes the firm between 2 points of time
•
•
•
•
•
idealized process of strategy making: Initiation à Formulation à
Implementation
Initiation: Perception, Identification (What is the problem?), Structuring (sub
problems?), Processing (What do we have to do to come to a strategy?)
Signals from different areas of internal & external environments: Competitors
(Benchmarking performance, (re-)actions, announcements), Trends, Stakeholders,
Performance
Problem Identifications: Characteristics (What?), Causes (Why?), Decision
makers, - criteria, constraints of solution (reviewed & modified during process),
Limits for problem solving process, basic question to be solved
à Other techniques: Mind mapping, Minto’s S(ituation)C(omplication)Q(uestion)
à lead to assessment of importance and urgency (From signals -perception &
interpretation- to priority)
Structuring: disaggregating a complex problem into its parts
à Advantages: Improving problem solving | …project planning |
…communication
à MECEness:
Does not negate interrelations
between effects!
Instead: aggregation of
subfactors:
•
Processing (=organizing a strategy process, determine what, when should be worked
on, who is responsible): Developing a plan of analysis à Developing a work plan
b) Performance and performance
component
• Profit = Income – Expenses
• Reasons for bankruptcy:
1. Over-indebtedness
(ration between liabilities
& assets)
2. Liquidity (structure of
assets)
• Cash imperative (= You have
to have cash/ have to be liquid in
each point of time) & source of
•
cash:
1. Operating cash flow (inflows > outflows)
2. Asset structure
3. Cash in from external equity increase (new shareholders pay in cash etc.)
4. Cash in from external debt increase
à Cash determines the space of managerial discretion
Cause of financing & investment:
c) Financial success measurement
= if financial value is increased
• Success of strategy is measured across time
• 2 general alternatives to evaluate financial value
Cash-based
Profit-based
- capitalization of future cash inflows
- capitalization of future excess capital income
à Free cash flow principle:
= periodic excess cash, could be paid out to
debt- &shareholders
à Discounting principle:
= Transforming value of a payment out of
later periods in what someone would invest
today to exactly get this value in this later
period: making payments comparable
𝐹𝐶𝐹!
𝑉(𝐹𝐶𝐹! )𝑖𝑛 𝑡𝑜𝑑𝑎𝑦 =
(1 + 𝑟)!
à Capital productivity & efficiency principle:
= whether productivity exceeds cost of capital rate
𝑁𝑂𝑃𝐴𝑇
= 𝑅𝑂𝐼 → 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦
𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
vs.
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑒 ← 𝑊𝐴𝐶𝐶
Economic value add principle:
à Cost of Capital & opportunity cost
principle: = search for the alternative gain,
cost of capital= opp. Costs of investing in a
company
𝐸
𝐷
𝑊𝐴𝐶𝐶 = 𝑖" ∗
+ 𝑖# ∗
𝑇𝐶
𝑇𝐶
ROI & profit concepts:
*NOPAT = Net operating profit after taxes
•
EVA logic (= asks whether capital income exceeds cost of capital)
Profit (Equity) + Interest paid (Debt) = Capital income
vs.
Cost of capital = WACC * Invested Capital
à comparison of what you get & what not
•
Measures for increasing value & four dimensions of financial value creation
•
Financial value of corporations created based on 3 main financial value measures
à Five forces change the firm along time
à idealized strategy process consists of three phases (initiation, formulation,
implementation)
à Profit is different from cash
à Liquidity is imperative
à Measuring performance follows principles
à Free cash flow, discounting, opportunity cost principle/efficiency, EVA principle
à improving financial performance based on profitability, growth, and financing measures
4.Strategy analysis
a) Strategy analysis in perspective
• Idealized process: Formulation: External + internal analysis à Strategy options à
Evaluation (+ Objectives) à Strategy as plan
• External + internal factors & their influence n performance:
•
Strategy & antecedents of performance advantage:
Antecedents (Market position, external | Resource base, internal) à Competitive advantage
(Value and/or price advantage) à Performance advantage (goal; return spread, financial
value)
•
Overview of theoretical concepts:
b) External analysis
• Firms are influenced by their environments:
•
•
Industry definition à idea of substitution: Approaches
Qualitative: conditions: Similar product performance characteristics & occasions for
use | Sold in the same geographic market
Quantitative: Price elasticity à large E: many close substitutes
Cross-price elasticity à high E: close substitutes
Theory: how industry structure affects industry profitability:
•
Forces affecting industry attractiveness (Porter’s five forces framework)
•
•
Basic problems of external analysis:
Problem
Uncertainty
> Environment= dynamic/influences
changes
>increasingly difficult to predict
changes
Complexity
>environment: many different
influences
>Filtering signals: keeping track of
influences/overall picture
Bias
> issues: traditionally important prior
viewsà tend to be biased
Approach
> acknowledge uncertainty
> adapt analysis techniques to
level of uncertainty
> structure environment/make a
model of environmental forces
>find key issues
> avoid: team composition &
external input
> frameworks (challenge
managerial thinking)
level of uncertainty determines which analyses to use (the higher the level the less the
company is able to predict either changes in the environment nor consequences of own actions)
§
§
§
§
Useful predictions: Traditional forecasting
Discrete scenarios: Scenario techniques | Options models
Continuous uncertainty: Scenario techniques | Quantitive game theory |
Evolutionary models
True ambiguity (Multiple dimensions of continuous uncertainty): see above
c) Internal analysis
• Core competencies = basis for success in any kind of business system
§ Resources ((In)tangible resources) + Capabilities (ability to deploy resources by
coordinating them through structures, processes & systems) ß Core competencies:
Valuable (revenues, cost, customers for free), Rare, Inimitable, Not transferable
(PROTECTION!)
•
•
•
Resource based view: resources & capability main drivers of superior performance
§ Resources/capabilities à Conduct (Building resources: Value chain system; Using
resources: Cost management) à Performance
Value Chain & generic competitive strategies
Sources of cost advantages:
1. Exploiting structural cost differences (Experience curve effects, Economies of scale &
scope)
2. Cost management (Cost level “cheaper”, Cost structure “more flexible”)
d) Fit between the firm and the environment
• SWOT Analysis
(summarizes internal & external
analyses & identifies key issues)
•
Logic of the market & resource-based view of strategy
à External & internal analyses in order to understand current performance and to predict
future performance
àMarket-based view & resource-based view as theoretical basis
àExternal analysis: industry environment & other environments
àInternal analysis: Resources, capabilities, value chain system
àFit between the firm & the environments
5. Competitive strategies
a) Competitive advantage & generic competitive
strategies
• à if company’s service to its customer is superior to
that of its competitors:
“Strategic triangle”
!
• Generic competitive strategies (Comparison of " )
1. Better perceived value (unique product/service)
à Similar prices “Differentation”
§ Occurs in the interaction between companies & customers
2. Better prices à Same value “Price Leadership”
§ i.e. Traditional product: full service;
Price leadership: offer lower price à other services not valued by the
customer
3. Better prices + value (only 15% succeed)à”Outpacing” (2 advantages; should gain
market much faster) à most companies “Stuck in the middle” (should be avoided)
b) Five elements to form a strategy
• Arena selection:
(Environment
leads to:)
Industry
attractiveness
Target market
selection (Fit)
Arenas: in which market active?
(Resources lead
to:)
Own
strengths
Differentiatiors: Which competitive advantage?
Economic Logic/Financials: How obtain revenues &
profits?
Vehicles/Systems: business system?
Staging/Timing: speed & sequences of moves?
•
Strategic positioning (determining advantages)
•
Economic Logic: 4 key characteristics
1. Revenue model?
Transfer of ownership | Pay-per-use | Membership model (granting access to a
product bundle) | Cross-subsidy of complementary goods | Two-sided market
model (Re-sale of attention)
2. What determines your costs? (level/structure) 3. & Margin model? (high; low)
4. When cash flow-in & flow-out? (timing)
•
Designing business systems
§ Vertical integration: Which value chain function should be bought / self generated?
§ Economies of Scale: How it is possible to achieve sub-proportional development of
costs?
§
§
•
Support: Which sales-related supporting function?
Differentiation: How to perform single functions in an innovative way?
Speed & sequences of moves
§ role of a sequence for a
competitive strategy
à Sequence of moves
matters
c) International market (entry) strategies
• Foreign market entry disturbs existing customer relationships à change of market
structure by foreign market entry
•
•
Enter foreign markets in not fully developed markets for market share (race)
Reasons for foreign market entry:
§ Triggered by foreign competitors themselves (reactive competitive mode)
à “cross –investment”
§
§
Triggered by domestic competitors
à “Following the leader”
As a consequence of business model design (Business models require
investments in research (for economies of scale) à high margin high investment,
business HAS to be international)
§
à “active decision”
Proactive expansion resulting from firm specific advantages (Business model =
“superior”; Transfer of firm specific advatnages)
•
Elements of market entry strategies:
§ Target market selection:
à Institutional factors (legally possible?)
àMarket potential (revenue potential
attractive?)
àCompetitive barriers (potential share
attractive?)
àLiabilities of foreignness (How dissimilar is
the target country?)
§
Customization depends on need for local
responsiveness & economies of
integration
Arenas - Target market selection: Where to enter?
Advantages - Target market customization:
What to offer?
Vehicles - Entry mode: How to enter?
Timing - Market entry timing: When to
enter?
Economics - Target market business case: How to
profit?
Outsider (new product; lack of market-specific
konwledge)
has to become an insider (specific
advantages in the new settings; market-specific
responsiveness) by:
à Gaining market-specific knowledge by
acting within the various environmental
settings
à Becoming an insider in a new area
with(out) a partner
à Growth comes with
a inefficiency trap
(Efficiency over a
project duration)
§
Choice of entry depends on a cascade of local circumstances:
Partner modes: Do I get what I
hope for & at what price?
(Risk? Speed? Managerial control?
Opportunistic behaviour? Access
to customers, resources,
knowledge?)
§
Market entry timing depends on the existence of first-/late movers’
(dis)advantages
𝑝𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦
− 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑡𝑖𝑚𝑖𝑛𝑔
§
Exchange rates can influence economic logic of foreign market activities
Managing exchange rate risks:
à Hedging (Absicherung): financial, operational
à Price/Cost adjustments
à Diversification: financial, operational
6. Strategy Implementation
a) Relevance & fields of strategy implementation
• Strategy implementation targets toward a plan- action- outcome fit:
Strategy as action
(intended behaviour)
Developing structures
& systems to support
strategy
Structures: formally
defined roles,
responisbilities, lines of
reporting Systems:
support & control
•
Deriving plans of
operations (shape process)
--> value chain function
Concrete goals &
measures for all
functional units
(R&D, Purchasing,
Types of structures:
Producation...)
Envisioning, enabling,
empowering people
to live strategy
ensure their
qualifications to live
startegy & give power to
make decisions &
impement these
according to strategy
à Forms of divisional structures:
Strategy control
(put objectives against
results)
feedback loops on
assumptions,
consistency &
strategy-action fit
§
Multinational
Structures
(MNEs 4 types)
§
Definition & role of project structures
•
Systems (used to control strategy implementation)
•
Functional plans: translation of strategy towards value chain functions
•
Envisioning, enabling & empowering (Make participants to embassadors of strategy)
àEnvisioning: “I know”, “I believe”, “I want” (strategy as their “own baby”)
àEnabling: “I can” (abilities)
àEmpowering: “I will” (power)
•
Strategy control basis for subsequent strategic decision making
§ Strategy as a plan (Objectives …) + Strategy as action à Results
àDerivation of results from objectives
à… of behaviour from plans (did the corporation do as action what was
planned?àunintended behaviour)
à… of external developments from scenarios (àunanticipated
environment/events compares objectives to results)
b) From strategy to achievement of objectives
• Strategy needs structure, structure determines how the corporation really acts
•
Example of strategy – structure fit
•
Autonomous structures (Structural requirements for new business)
c) Strategic change: creates new situation for the company
à Strategy Implementation Targets towards a strategy-action-Outcome fit
àStrategy implementation includes 4 fields of Action:
§ Structures and Systems
§ Functional plans
§ Envisioning, enabling, empowering
§ Strategy Control
àStrategy Change includes Change initiatives and has to deal with Change resistance