Strategic Management and
Implementation
TMU
Johannes M. Pennings
June 2004
www-management.wharton.upenn.edu/pennings
2004
Day 1
Pennings TUM
Strategic Management Innovation
1
Strategy and Innovation
• Part I, Day 1
– What is strategy?
Frameworks
– External vs Internal
Focus: Customer &
Knowledge
– Strategy and Design
• Part II, Day 1
– Strategic
Management of
Innovation
– Market and Firm
Interia
• Photography Industry
2004
Day 1
Pennings TUM
Strategic Management Innovation
2
The (Institutionalized) Strategic Management Shopping Mall
Value Disciplines
Dual
Strategies
Resource-Based
View
Time/Event
Pacing
Eco-Systems
Strategy as
Revolution
7-S Framework
2004
Day 1
Competing for
the Future
Capabilities-Based
Competition
Activity
Systems
Vision
Time-Based
Competition
Multimarket
Competition
Strategic Innovation
Value Chain
Core-Competence
Co-opetition
5-Forces model
Virtual
Integration
Collective
Strategy
Profit Pools
Strategic
Groups
Value Migration
Pennings TUM
Strategic Management Innovation
3
Strategic Management … Confusion Reigns.
“[W]aves of new approaches [have been] proposed. […]
Each approach made its contribution in turn, yet how
any of them built on or refuted the previously
accepted wisdom was unclear. The result: Each
compounded the confusion about strategy that now
besets managers”.
Source: Collis & Montgomery (1995) “ Competing on Resources: Strategy in the 1990s”, Harvard Business
Review.
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Strategic Management Innovation
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“People seem to disagree about almost every aspect of
strategy making […] they disagree about which issues
to address in developing strategy, they disagree about
the process of developing strategy, and they even
disagree as to whether one can think about strategy
at all”.
C. Markides (2000) All the Right Moves: A Guide to Crafting Breakthrough Strategy
2004
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Pennings TUM
Strategic Management Innovation
5
Strategic Management:
... deals with the formulation and implementation of a
set of decisions, the purpose of which is the
realization of a sustainable competitive advantage
(manifested in long-term above average profitability).
2004
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Strategic Management Innovation
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Many Frameworks of Strategy
• Porter and Five Forces
– Competitive advantage due to cost leadership or
market differentiation
• Mintzberg and Stream of Decisions
– Not rational but emergent
• BCG and low to high growth markets
• New ”School” and competencies that
produces a platform fro strategizing
2004
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Pennings TUM
Strategic Management Innovation
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Porter:
Strategy, the Link between the Firm
And its Environment
THE FIRM
Goals and
Values
Resources
andCapabilities
Structure and
Systems
THE
INDUSTRY
ENVIRONMENT
STRATEGY
STRATEGY
Competitors
Customers
Suppliers
Sources of Competitive Advantage
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
2004
Day 1
Pennings TUM
Strategic Management Innovation
9
Strategy and Innovation
• Part I, Day 1
– What is strategy?
Frameworks
– External vs Internal
Focus: Customer &
Knowledge
– Strategy and Design
• Part II, Day 1
– Strategic
Management of
Innovation
– Market and Firm
Interia
• Photography Industry
2004
Day 1
Pennings TUM
Strategic Management Innovation
10
Porter’s Framework
Forces Driving Industry Competition
Potential
Entrants
Bargaining Power
over Suppliers
Threats of New
Entrants
Industry
Competitors
Buyers
Suppliers
Bargaining Power of
Buyers
Threat of
Substitutes
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Substitutes
Pennings TUM
Strategic Management Innovation
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Mintzberg on
Strategy
1. Plan (Intended)
Also a Ploy (a Trick
a Way to ? a Competitor)
2. Pattern (Realized)
•• •• • •
•• •• •• •• •• •• •
•• •• •• • •
•
3. Position
4. Perspective
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Strategic Management Innovation
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THE CONCEPT OF
STRATEGY
Unrealized
Strategy
Realized
Strategy
Inconsistent Behavior
BCG
Hi Growth
Lo Growth
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Pennings TUM
Strategic Management Innovation
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Strategy and Innovation
• Part I, Day 1
– What is strategy?
Frameworks
– External vs Internal
Focus: Customer &
Knowledge
– Strategy and Design
• Part II, Day 1
– Strategic
Management of
Innovation
– Market and Firm
Inertia
• Photography Industry
2004
Day 1
Pennings TUM
Strategic Management Innovation
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Shifting From an Industry
Focus(Porter) to a Resource Focus
THE FIRM
Goals and Values
Resources and
Capabilities
Structure and
Systems
STRATEGY
THE THE
INDUSTRY
INDUSTRY
ENVIRONMENT
ENVIRONMENT
Competitors
Competitors
Customers
Customers
Suppliers
Suppliers
The Firm-Strategy
The Strategy-Environment
16
Pennings TUM
interface
Interface
Strategic Management Innovation
2004
Day 1
Shifting From an Industry
Focus(Porter) to a Resource Focus
THE FIRM
THE
INDUSTRY
ENVIRONMENT
Goals and Values
Resources and
Capabilities
Structure and
Systems
STRATEGY
Competitors
Customers
Suppliers
The Firm-Strategy
The Strategy-Environment
17
Pennings TUM
interface
Interface
Strategic Management Innovation
2004
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New School: Resources &
Capabilities
• The role of resources and capabilities in strategy
formulation.
• The resources of the firm
• Organizational capabilities
• Appraising the profit potential of resources and
capabilities (sustainability and appropiability).
• Developing the firm’s resources and capabilities.
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Strategic Management Innovation
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Value Migration
“We have to be willing to cannibalize what we’re doing
today in order to ensure our leadership in the future.
It’s counter to human nature but you have to kill your
business while it is still working”.
Lewis Platt, Hewlett-Packard
2004
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Strategic Management Innovation
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Value Migration
“Financial accounting, balance sheets, profit-and-loss
statements, allocating of costs, etc. are an x-ray of
the enterprise’s skeleton. But much as the diseases
we most die from - heart disease, cancer, Parkinson’s
- do not show up in a skeletal x-ray, a loss of market
standing or a failure to innovate do not register in the
accountant’s figures until the damage is done”.
P. Drucker (1993)
Developing (strategic) leading indicators
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Strategic Management Innovation
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Rationale for the Resource-based
Approach to Strategy
• When the external environment is subject to rapid change,
internal resources and capabilities offer a more secure
basis for strategy than market focus.
• Resources and capabilities are the primary sources of
profitability
• But note that platform of capabilities can become a TRAP
2004
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Strategic Management Innovation
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Evolution of Honda: A Strategy
Based Upon Resources and Capabilities
50cc 2-cycle engine
Founding of
Honda motor
company
4 cycle
engines
405cc
motor
cycle
Related products:
ground tillers, marine
engines, generators,
pumps, chainsaws
1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
First product:
clip-on engine
for bicycles
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The 50cc
super
-cub
N360 mini
car
1000cc
Goldwing
touring
motor cycle
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Strategic Management Innovation
Acura Car
division
22
Resources as the Basis for Superior
Profitability
Barriers to Entry
Industry
Attractiveness
Rate of Profit
in Excess of the
Competitive Level
Monopoly
Market share
Vertical Power
Firm size
Financial resources
Cost
Advantage
Process technology
Plant size
Low-cost inputs
Differentation
Advantage
Brands
Product technology
Marketing
capabilities
23
Competitive
Advantage
2004
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Patents
Brands
Retaliatory
capability
Pennings TUM
Strategic Management Innovation
The Relationships Between Resources,
Capabilities and Competitive Advantage
COMPETITIVE
ADVANTAGE
INDUSTRY KEY
SUCCESS FACTORS
STRATEGY
ORGANIZATIONAL
CAPABILITIES
RESOURCES
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TANGIBLE
INTANGIBLE
HUMAN
•Financial
•Physical
•Technology
•Reputation
•Culture
•Structure
•Specialized skills
and knowledge
•Communication &
interactive abilities
•Motivation
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Strategic Management Innovation
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The Rent-Earning Potential
of Resources and Capabilities
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED
THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY
Scarcity
Relevance
Durability
SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE
Mobility
Replicability
Property rights
APPROPRIABILITY
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Strategic Management Innovation
Relative bargaining
power
Embeddedness of
resources
25
Growth of service sector partly explains
increase in Strategy as Firm Knowledge
80
71
68
70
68
Value added as % of GDP
62
60
60
58
61
54
50
1980
1997
40
30
20
10
0
Australia
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France
Japan
Norway
Source: World Bank, 1998
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Strategic Management Innovation
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Growth of service sector in
Sweden, similar to other EU countries
Employment
Percent
Agriculture
Service
Industry
Source: IUI
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Strategic Management Innovation
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The new forces
Traditional sources
of competitive leverage
2004
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Pennings TUM
Strategic Management Innovation
Digitization
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Source: Unleashing the Killer App
Revolutionary changes
• Digitization - Computing power and
communications bandwidth becoming cheap
enough to treat as disposable (Moore’s law)
– Compare doubling grains of dirt on a chess board
• Globalization – China, World is a large network,
global network of suppliers and buyers, 24 hour
operations, shop on a global basis
• Deregulation - Free market better regulator than
government, e.g., airlines, communications,
banking
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Strategic Management Innovation
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Business Week 1998
Market value
Book value
60000
50000
40000
30000
20000
10000
0
Ericsson
2004
Day 1
Astra
ABB
Volvo
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Strategic Management Innovation
Vendex
Haider
30
Business week and US
Companies….Where is Haider, Bank
of China, etc. ?
Market value
Book value
250000
200000
150000
100000
50000
0
GE
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MicrosoftCocaCola Exxon
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Strategic Management Innovation
Merck
WalMart
Source: Business Week
31
Valuation Ratios
Coca-cola
Oracle
Cisco Systems
Computer Associated International
Schering Plough
Amgen
Gillette
Metronic
Kellog
Microsoft
Pharmacia & UpJohn
First Date
Pfizer
Abbot Laboratories
Mereck
Johnson & Johnson
Bristol-Myers-Squibb
Pepsico
Phillip Morris
Eds
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19
15
14
14
12
10
10
9
9
9
9
9
8
8
7
7
7
7
6
6
Beverages
Computer software/services
Computer software/services
Computer software/services
Health care
Health care
Consumer Products
Health care
Food
Computer software/services
Health care
Computer software/services
Health care
Health care
Health care
Health care
Health care
Beverages
Tobacco
Computer software/services
Pennings TUM
Strategic Management Innovation
32
Competitive advantage is becoming increasingly dependent on
firm’s ability to create and leverage knowledge
External leakage
and imitation
Key idea: Firms are good at
transferring tacit knowledge
(Kogut & Zander, 1992)
Firm
knowledge
Competitive
advantage
Internal codification
Dissemination
Transfer
2004
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Pennings TUM
Strategic Management Innovation
(if resources &
capabilities are hard to
replicate or imitate)
33
Identifying Organizational capabilities :
Functional Approach
FUNCTION
Corporate
Management
CAPABILITY
Financial management
Strategic Control
Coordinating decentralized
business units
Managing Acquisitions
EXEMPLARS
Exxon, Coca Cola
General Electric,
Emerson Electric, GE
ABB, Shell
ING, ConAgra
MIS
Speed and responsiveness through
rapid information transfer
American Airlines
Benneton
R&D
Research capability
Development of innovative new products
Mereck, AT&T
Sony, 3M
Manufacturing
Efficient volume manufacturing
Continuous Improvement
Flexibility
Electrolux
Nucor, Motorola
Benetton
Design Marketing
Design Capability
Brand Management
Sales & Distribution
Promoting reputation
Responsiveness to market trends
Sales Responsiveness
EfficiencyPennings
and speed
of distribution
TUM
Customer
Service
Strategic Management
Innovation
Apple, Swatch,
Proctor & Gamble,
PepsiCo
American Express
The Gap
Microsoft, Glaxo
34
DHL
KLM
2004
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The Framework for Analyzing
Knowledge, Capabilities and other
Resources
4. Select a strategy
3. Appraise the rent-earning
potential of resources/
capabilities
STRATEGY
POTENTIAL FOR
SUSTAINABLE
COMPETITIVE
ADVANTAGE
2. Identify capabilities
CAPABILITIES
1. Identify the firm’s resources.
Appraise strengths and
weaknesses
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RESOURCES
Pennings TUM
Strategic Management Innovation
5. Identify resource gaps that need
to be filled.
35
Summary
• We are moving into a knowledge-based economy
as new forces are changing the face of business
• A company’s market value is increasingly
dependent upon the value of its intellectual capital
or intangible assets
• A company’s competitive advantage is based on a
firm’s ability to create and leverage its knowledge
• Thus, knowledge sharing across divisions,
countries, functions is emerging as a major
business priority
2004
Day 1
Pennings TUM
Strategic Management Innovation
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Strategy and Innovation
• Part I, Day 1
– What is strategy?
Frameworks
– External vs Internal
Focus: Customer &
Knowledge
– Strategy and Design
• Part II, Day 1
– Strategic
Management of
Innovation
– Market and Firm
Inertia
• Photography Industry
2004
Day 1
Pennings TUM
Strategic Management Innovation
37
Internal and External Design:
Strategy and Innovation
• Brief Review of Organizational Design and
and External Relationships
• Structure, Culture, Networking of Internal
Organization Design
• Brief Review of External Design
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Strategic Management Innovation
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Internal and External Design:
Strategy and Innovation
• Brief Review of Organizational Design and
and External Relationships
• Structure, Culture, Networking of Internal
Organization Design
• Brief Review of External Design
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Strategic Management Innovation
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Internal Design Aspects
• Specialization ( grouping by skills, process,
customers, products, etc.)
• Coordination
• Hierarchy
• Functional and Divisional Structure
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Strategic Management Innovation
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The Basic Tasks of Organization
Achieving high levels of productivity requires SPECIALIZATION
Specialization by individuals necessitates COORDINATION
For coordination to be effective requires COOPERATION
But goals of employees = goals of owners
THE AGENCY PROBLEM
ORGANIZATIONAL CHALLENGE: design structure & systems
that:
2004
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• Permit specialization of knowledge
• Facilitate coordination by grouping individuals & link
groups with systems of communication, decision making,
& control
• Deploy incentives to align individual & firm goals and
41
share knowledge among
them
Pennings TUM
Strategic Management Innovation
General Motors Organization Structure, 1997
Board of Directors
Corporate Functions
President’s Council
North
American
Operations
Delphi
Automotive
Systems
GM
Acceptance
Corporation
International
Operations
Hughes
Electronics
GM Europe
Midsize
&
Luxury
Car
Group
2004
Day 1
Small
Car
Group
GM
Power
Train
Group
Vehicle
Sales, &
Marketing
Group
Developme
nt &
Technical
Cooperation
Group
Pennings TUM
Strategic Management Innovation
Asian &
Pacific
Operations
Latin
American,
African, &
Middle East 42
Operation
General Electric’s Organization Structure, 1995
Corporate Staff Functions:
Tax, Treasury, Audit. M&A,
Legal, Business Public
Relations, Government
Development Relations,
Leadership Development
Board of Directors
Corporate Executive Office
Aircraft
Engines
Appliances
Capital
Services
Industrial
Power
Systems
Lighting
Medical
System
s
Service Divisions
Aerospace
Environmental
Technology
Programs
2004
Day 1
GE
Supply
NBC
Electrical
Distribution
& Control
Plastics
Information
Services
Licensing/
Trading
Marketing
&Sales
Pennings TUM
Strategic Management Innovation
Motors
Transportatio
n Systems
43
Organization design
• By FUNCTION(sales,
• By PURPOSE (market,
production, customer service,
etc.)
product, segment, region, etc.)
Sales
New
Cars
2004
Day 1
Finance Service
And
Parts
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Strategic Management Innovation
Used
Cars
Service
And
Parts
44
Functional Structure
CEO
R&D
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Day 1
Manufacturing
Marketing
Finance
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Strategic Management Innovation
Accounting
HR
45
Multidivisional Structure
(By Region, Product, or Customer)
CEO
Division 1
Division 2
Division 3
Division 4
R&D
R&D
R&D
R&D
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Marketing
Marketing
Marketing
Marketing
Finance
Finance
Finance
Finance
Accounting
Accounting
Accounting
Accounting
HR
HR
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Day 1
HR
Pennings TUM
Strategic Management Innovation
HR
46
Multidivisional Structure at Proctor & Gamble
Laundry and Cleaning Products
Cleaners and
Cleansers
Detergents/Soaps
Dishwashing
Detergents
Comet (1956) Lestoil (1936)
Mr. Clean (1958)
Spic and Span (1926)
Bold (1965) Cheer (1950)
Dash (1950) Dreft (1933)
Era (1972) Ivory Snow (1930)
Oxydol (1914) Tide (1946)
Cascade (1955) Dawn (1972)
Ivory Liquid (1957) Joy
(1949)
Personal Care Products
Bar Soaps
Camay (1926) Coast (1974)
Ivory (1879) Kirk’s (1885)
Lava (1893) Oil of Olay
(1993) Safeguard (1963) Zest
(1952)
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Other Prod.
Fragrances
California (1989) Giorgio
(1994) Hugo Boss (1985)
Incognito (1992)
Laura Biagiotti-Roma (1988)
le Jardin (1983) NaVy (1990)
Old Spice (1938) Red (1994)
Toujours Moi (1921) Venezia
(1993) Wings (1994)
Respiratory Care
Products
Brand manager
Chloraseptic (1957) Cough
Drops (1931) DayQuil
(1992) Formula 44 (1959)
Inhaler (1939) NyQuil
(1968)
Sinex (1959) VapoRub
(1905) VapoSteam (1959)
Vitamin C Drops (1986)
Pennings TUM
Strategic Management Innovation
Food & Beverage Products
47
Pros & Cons of Basic
Organizational Designs
Functional Structure
Multidivisional Structure
• Pros: fosters group identity, permits
greater specialization and so
increases skill levels, facilitates
supervision.
• Cons: creates strong contrasts and
thus conflict between functional
units, makes it harder to trace
responsibility for performance (no
unit is a profit centre), fails to
develop well-rounded general
managers.
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• Pros: simplifies co-ordination across
functions within units, can be very
large and still maintain control,
facilitates idiosyncratic treatment of
customers when they differ greatly.
• Cons: reduces collegiality, duplicates
staff functions and foregoes
opportunities to share them, reduces
chances for skill specialization.
Pennings TUM
Strategic Management Innovation
48
Dilbert on cross-functional
conflict
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Strategic Management Innovation
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The Fundamental Law
of Organizational
Design
To the extent that you
differentiate,
you must integrate.
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Strategic Management Innovation
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Task Interdependence
• Pooled interdependence
low
low
– Units share a common resource.
Cost of Managing
– One unit’s output is another unit’s input.
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– Units must work with each other to produce common
output.
Pennings TUM
Strategic Management Innovation
high
high
• Reciprocal interdependence
Priority for Linking
• Sequential interdependence
51
Forms of Task Interdependence
Need for
Coordinating
Integration Mechanism
1. Pooled Interdependence
Regional HQ
Hotel A
Hotel B
Low
Standardize
Medium
Plan
High
Mutually
Adjust
Hotel C
2. Sequential Interdependence
Customer
Contact
Needs
Assessment
Service
Development
3. Reciprocal Interdependence
Product
2004Development
Day 1
Manufacturing
Sales/Mktng
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Strategic Management Innovation
52
An Information-Processing
Model
of Organizational Design (Wheel
vs Circle)
Unpredictability
of the Task
Environmental
Effects on the Task
Task
Uncertainty
Information-Processing
Requirements to do the Task
Interdependence
of Task Elements
Fit
Information-Processing
Capacity of the Structure
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Strategic Management Innovation
Grouping
Linking
Management
Processes
53
Costs of Managing the Linkage
Information Processing Capacity
• Hierarchy (i.e., a boss)
low
low
Linking Mechanisms
• Rules and procedures (formal or informal)
• Liaison roles
• Task forces, cross-unit teams
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• Matrix structures
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Strategic Management Innovation
high
high
• Integrator roles/departments
54
Liaison Roles & Cross-Unit
Groups
Manager
Manager
A
B
Liaison
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Day 1
A
B
Cross-Unit Group
Pennings TUM
Strategic Management Innovation
55
Integrators
(Project, Brand, Program, & Account
Managers)
General Manager
Marketing
Manufacturing
Engineering
Program
Project
Manager
Program
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Day 1
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Strategic Management Innovation
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Matrix Structures
General Manager
Marketing
Manufacturing
Engineering
Program
Project
Manager
Program
2004
Day 1
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Strategic Management Innovation
57
New Organizational Forms
Process-based organizations
Organizing around business
processes
Recognizing corporate
processes
- entrepreneurial process
- competence building process
- renewal process
Project-based organization,
also Firm’s “Formulas”
engineering cos., consulting
cos., also manufacturing cos. e.g.
Oticon
Parallel structures
separate structures of separate
management processes e.g. 3M,
TQM, change management process
Network and Virtual Organization
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the boundaryless corporation e.g.
Sun Microsystems, Cisco
Systems, Italian clothing
58
Pennings manufacturers
TUM
Strategic Management Innovation
Firm as a bunch of silos or
interconnected departments
Images of the Internal Organization
Firm as bunch of
Silos
2004
Day 1 AGSM; June 1998
Pennings TUM
Hans
Pennings-Innovation
(#2)
Strategic Management Innovation
Firms as set of
Linking Pins
59
Strategy and Innovation
• Part I, Day 1
– What is strategy?
Frameworks
– External vs Internal
Focus: Customer &
Knowledge
– Strategy and Design
• Part II, Day 1
– Strategic
Management of
Innovation
– Market and Firm
Interia
• Photography Industry
2004
Day 1
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Strategic Management Innovation
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External Design
•
•
•
•
•
•
•
Contracting
Licensing
Consortia
Partnerships
Alliances
Joint Ventures
Acquisitions
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Strategic Management Innovation
Relationship with
Us?
61
Firms Sharing Assets
• Governance or Control (Who is in
Charge?)
• Ownership
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Day 1
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Strategic Management Innovation
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Firm A
Firm B
3
Management
4
6
R&D
5
6
1
Creativity
Marketing
5
Production
5
2
Innovations
Other
departments
3
Management
3
4
6
Management
R&D
5
6
1
Creativity
4
6
Marketing
5
Production
5
2
Innovations
Other
departments
R&D
5
6
1
Creativity
Marketing
5
Production
5
2
Innovations
Other
departments
3
Management
4
6
R&D
5
1
6
Creativity
Marketing
5
Production
5
2
Innovations
Other
departments
Internal or External Hybrid
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Strategic Management Innovation
63
Strategy and Structure
• Internal and external Strategic Perspective
– Porter, BCG and Knowledge Based View
• Internal: Functional to Divisional and Network
Design
• External: Licensing to Equity Joint Ventures and
Acquisitions
• ……Strategic management of Innovation:
– Knowledge as Platform for Strategizing
– Design inside and outside the firm for Strategizing
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Strategic Management Innovation
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Strategy and Innovation
• Part I, Day 1
– What is strategy?
Frameworks
– External vs Internal
Focus: Customer &
Knowledge
– Strategy and Design
• Part II, Day 1
– Strategic
Management of
Innovation
– Market and Firm
Inertia
• Photography Industry
2004
Day 1
Pennings TUM
Strategic Management Innovation
65
Strategy and Innovation
• Resources and capabilities provide a basis
for firms to stay in the market, but also to
exit early (too early)
– Stay: Nokia, IBM,
– Exit: Mannesmann, Polaroid, Swissair, Marconi
• Sink or swim depends on???
2004
Day 1
Pennings TUM
Strategic Management Innovation
66
Innovation and Strategy
1. Death of “Dominant Design”
– Firm versus its environment
– Some examples
– What watch do you wear?
2. Unlocking the Firm from “Old”
3. Locking into the “New”Design
2004
Day 1
Pennings TUM
Strategic Management Innovation
67
Dominant Design
• A product or service with a clear identity, a
standard that we take for granted and has
become widely diffused
–
–
–
–
–
2004
Day 1
Car
Windows
Pizza
Endoscopy
Mobile Phone
Pennings TUM
Strategic Management Innovation
68
performance/cost
Patterns of Technological/Market
Evolution
time
2004
Day 1
Pennings TUM
Strategic Management Innovation
69
Strategic Focus Evolves with the S-curve
•
•
•
•
Compare “product life cycle”
Emergence of dominant design
From product to process innovation
From functionality to volume and
standardization
2004
Day 1
Pennings TUM
Strategic Management Innovation
70
performance/cost
Technological Substitution
2004
Day 1
time
Pennings
TUM
Strategic Management Innovation
71
E.g., Cash Machine
E.g. ICT
2004
Day 1
Pennings TUM
Strategic Management Innovation
72
Innovation:
a matter of life and death
• Think of a product that got pushed out of
existence?
• Why did substitution occur?
• What happened to the “Owners” of that
dominant design?
• Examples in your Industry, Sector
2004
Day 1
Pennings TUM
Strategic Management Innovation
73
2004
Day 1
Sail-ship built around 1910,
capsized on maidenPennings
voyage,
TUM off Southampton
Strategic Management Innovation
74
Wooden Tennis Rackets
2004
Day 1
Pennings TUM
Strategic Management Innovation
75
2004
Day 1
Pennings TUM
Strategic Management Innovation
A 1998 racket that is now the dominant design
76
Ergonomic Designs (which never made
it!)
2004
Day 1
Pennings TUM
Strategic Management Innovation
77
Evolution of Tennis Racket as
Dominant Designs
100%
12%
17%
90%
38%
80%
material - head - width - length
39%
32%
New Racket Introduction
70%
61%
36%
77%
60%
comp - over
- wide
- LONG
comp - over
- WIDE - regular
comp - OVER - regular - regular
94%
100%
50%
COMP - small - regular - regular
13%
METAL - small - regular - regular
WOOD - small - regular - regular
40%
Miscellaneous
60%
30%
59%
Graphite (plastic)
34%
47%
37%
wooden
20%
10%
0%
1956 - 1965 1966 - 1970 1971 - 1975 1976 - 1980 1981 - 1985 1986 - 1990 1991 - 1995 1996 - 1998
2004
Day 1
Period
Pennings TUM
Strategic Management Innovation
78
Tennis Racket Manufacturers
• Outside Firms often Major Innovators
– Prince with Metal and Titanium Racket
– Star Players Play Big Role in Acceptance of
New Paradigms
– Best Ideas Need not be Winners!
2004
Day 1
Pennings TUM
Strategic Management Innovation
79
Substitution
• Old products languish, but hang on, long
after new technology emerges
• New products often launched by firms
outside traditional industry
• New technology creates new markets
• Penetration of new technology typically
begins with tiny sub-markets
2004
Day 1
Pennings TUM
Strategic Management Innovation
80
Example of Mechanical Watches
dying paradigm
•
•
•
•
Mechanical engineering
Swiss
Guild-like handicraft
Jewelry-like
2004
Day 1
Pennings TUM
Strategic Management Innovation
81
2004
Day 1
Pennings TUM
Strategic Management Innovation
82
2004
Day 1
Pennings TUM
Strategic Management Innovation
83
Watch as a Closed Assembly System
Components
1860
1950
1960
1970
1990
Energy
Spring
Battery
Battery
Battery
Battery
Tuning Fork
Quartz
Quartz
Oscillation Escapemen Escapement
Linkage
t
Gears
Gears
Gears
Gears
Face
Analog
Analog
Analog
Analog
Electroni
cs
Digital
Case
Gold
Gold
Gold/Plastic
Plastic
Plastic
Accuracy; Minutes/mon Minutes/Month Minutes/month; Min./mont Sec./year; 2
# of Parts th;300
;200
100
h; 20
2004
Day 1
Pennings TUM
Strategic Management Innovation
84
Watch as a Closed Assembly System
• Note that a watch is more than time keeping device:
– Marketing - expensive to cheap; “push” to “pull”
– Distribution -jewelry stores to drugstores
– Production - craft, mass to automated
– State - cartel protection to global openness
• so changes in dominant design not only in product but also
institutions, practices, competencies, distribution and
regulation-protectionism
2004
Day 1
Pennings TUM
Strategic Management Innovation
85
Watch’s Dominant Design:
take-aways
• S-curve for both product & process innovation.
• Global watch industry went to three significant technologymarket discontinuities:
• Dominant design switches with three outcomes:
– bankruptcy
– entrepreneurship
– weathering the storm
2004
Day 1
Pennings TUM
Strategic Management Innovation
86
Other Examples: New paradigm often results in
displacement of incumbents by new entrants
•
•
•
•
•
•
•
•
•
Mechanical to electronic to auto-kinetic watches
Wired to wireless telecom
Bank branches to ATMs
Vacuum tubes to transistors
Propulsion to jet engines
Typewriters to word processors
35MM Camera to Digital Photos
Disk drives for desktop to laptop PCs
Brick&mortar bookstores to e-book retail
2004
Day 1
Pennings TUM
Strategic Management Innovation
87
Strategy and Innovation
• Part I, Day 1
– What is strategy?
Frameworks
– External vs Internal
Focus: Customer &
Knowledge
– Strategy and Design
• Part II, Day 1
– Strategic
Management of
Innovation
– Market and Firm
Inertia
• Photography Industry
2004
Day 1
Pennings TUM
Strategic Management Innovation
88
performance/cost
Technological Substitution
2004
Day 1
35MM
time
Pennings
TUM
Strategic Management Innovation
Digital
89
From 35MM to Digital Cameras
2004
Day 1
35MM with FILMPennings TUM
90
Digital with FLASH CARD
Strategic Management Innovation
Paradigm
• 35MM
2004
Day 1
• Digital
Pennings TUM
Strategic Management Innovation
91
Key Players, Value Chain
• Players:
– Kodak, Canon, Minolta, Fuji, Agfa-Gevaert,
Sony, Zeiss Ikon, Polaroid (bankrupt in 2002),
Casio
• Value Chain:
– (1) Housing, (2)Shutter mechanism, (3) Optics,
(4) Flash and Power source, (5) Development,
(6) Printing, (7) Wholesale and (8) Retail
2004
Day 1
Pennings TUM
Strategic Management Innovation
92
Evolution in this “ecology”
•
•
•
•
!: 80-85….2: 86-90….3: 91-95….. 4: 96-03
Photography Group
Adjacent Groups (Computer HW and SW)
Development Infrastructure
2004
Day 1
Pennings TUM
Strategic Management Innovation
93
Evolution of Photography
80-85
35MM Cameras
And Early DI (Sony
MAVICA
No Substitution
Paradigm and
its Trajectory
Very “Obvious”
2004
Day 1
86-90
PC Revolution
Internet and
Email limited to
Universities
Photo CD with
CD Player
1. Complementary
technologies
And
2. Firms with NE
Strategies, hugging
Aging Paradigms
91-95
‘Counter’
Innovations
96-2003
Polaroid Bankrupt
APS
Price-adjusted
Quality full
Match
Convergence
In Full
Swing
Digital sales
Exceeds
Conventional
Sales
Pennings TUM
Strategic Management Innovation
94
Paradigm
• 35MM :
• Digital:
– Complements are
development, paper
– 50Mn plus pixels
– Limited duplication,
transmission
– Analog
– Hard, Real
– Key Players Kodak, Agfa,
Fuji, also Canon
– Companion Paradigms:
Film and film reels, Movie
Production, Projection
2004
Day 1
– Complements are PC,
WWW, Email
– Number of pixels growing
– Duplication
– Digital
– Soft, Virtual
– Key Players Canon, Sony,
Minolta, and perhaps
Kodak
– Companion Paradigms:
Editing, Visual arts, Movie
Production
Pennings TUM
Strategic Management Innovation
95
Key photography elements of
product/service/delivery
Relative
Value
Digital
Price
2004
Day 1
Resolution Features
Immediate Image
Viewing Sharing
Pennings TUM
Strategic Management Innovation
96
Photographic Process – Digital vs. Film Paradigm
Traditional Film Image Lifecycle
Slide
Album
Camera
Slides
Image
Taken
Developing
Film
Consumer
Re-purchase
Cycle
Prints
Negatives
Photo
Album
Frequent re-purchases
Digital Image Lifecycle
Ink
.
Memory
Cards
Digital
Camera
Specialty
Batteries
2004
Day 1
Printed on Home
Printer
Image
Taken
Image Transfer
Software and
Hardware
Viewed on
PC
Photo
Paper
Printer
Consumer Repurchase Cycle
Professionally
Printed On-line
Stored on Home
PC or CD-ROM
Pennings TUM
Strategic Management Innovation
Infrequent
re-purchase
CD-ROM
Infrequent repurchase
97
Imaging / Photography Value Chain
Imaging
Equipment
• Canon
• Nikon
• Kodak
• Olympus
• Minolta
• Polaroid
Imaging
Equipment
• Sony
• H-P
2004
Day 1
Imaging
Media
Imaging
Transfer
• Kodak film
• Fuji film
• Agfa film
• Kodak Chemicals
Imaging
Media
Imaging
Transfer
• SanDisk
• Sony
• Intel
• Toshiba
• Microsoft Software
• Adobe Software
• Kodak Software
• Dell Software
• H-P Printers / Ink
• Epson Printers / Ink
• Lexmark Printers / Ink
Pennings TUM
Strategic Management Innovation
Imaging
Storage
• Kodak Paper
• Fuji Paper
Imaging
Storage
• Ofoto online
• H-P paper
• CVS.com
• AH.com
• CD-ROMs
Imaging
Display
• Various Album
Manufacturers
Imaging
Display
• PC Manufacturers
• Mobile Phones
• Palm Pilots / PDAs
98
…..smile….
2004
Day 1
Pennings TUM
Strategic Management Innovation
99
Photography Industry - Milestones
Year Event
2004
Day 1
1827
First photographic picture (Daguerre Type)
1880
Kodak founded by George Eastman
1882
Kodak roll film introduced
1900
Kodak introduces ‘Brownie’ camera
1981
Sony’s MAVICA digital video camera introduced
1986
Canon’s first all-digital camera introduced
1992
Kodak’s Photo CD introduced
1994
Compact Flash (from SanDisk) introduced
1996
Advanced Photo System (APS) introduced
1999
Kodak’s Ofoto Online service founded
2003
Digital Sales Exceeds 35 mm Sales
2004
Kodak
Pennings
TUM
Stops making
35
mm camera
Strategic Management Innovation
100
Cameras
• Old versus New Paradigm
– “Razor Blade”
– Polaroid Dead and Kodak out of the Dow
(DJIA)
– Movie Theaters and Hollywood next?
– Film, Paper and Album replaced by Digital
– …..and WWW and Email
– What is Next ?
2004
Day 1
Pennings TUM
Strategic Management Innovation
101
Kodak Options
–
–
–
2004
Day 1
Majority of Kodak’s revenues come from sales of
films not cameras, and digital cameras do not use any
film. How difficult for Kodak to give up its cash cow
product.
The economics of traditional photography are much
more attractive for producers than those of digital. A
constraint on Kodak?
Finally, given that Kodak supports a vast organization
on the basis of film sales, and that digital won’t yield
profits for some time to come, how will this
organization be supported in lieu of film sales.
Pennings TUM
Strategic Management Innovation
102
Patents, Strategic Alliances, Joint Ventures…..
Links Among Companies in Photo Subgroup
(Alliances)
40
30
PhotoCentrality
20
Centrality
(mean)
10
0
1980
2004
Day 1
1985
1990
1995
2000
Pennings TUM
Strategic Management Innovation
103
Kodak’s Response to Digital Disruption
• Approached digital photography as a
threat to its core business
– Saw cannibalization of existing film-based business
– Focused on current consumer behavior vs.
emergent technologies (Paradigm Hugging)
– Focused on traditional film competitors (e.g. Fuji)
2004
Day 1
Pennings TUM
Strategic Management Innovation
104
Kodak’s Response to Digital Disruption
Before December 2001:
–Kodak’s organization was organized by end-user
market
–The work of digital champions had to be divided
among the various segments rather than as a unified
strategy
– Besides having the difficulty of charging one group
with the responsibility to develop Kodak’s digital
strategy, simple funding for R&D efforts would be
divided among the existing segments
–Given this structure, digital imaging was a threat to the
established paradigm and its “owners”
2004
Day 1
Pennings TUM
Strategic Management Innovation
105
Kodak Refocuses
• Kodak restructured in 2002 to better integrate
digital technology into its product line
• Photography
• Health Imaging
• Commercial Imaging
• Refocused on the business of “Photography”
– Recognized the need to meet multiple market
segments:
• Consumers with differing needs, shopping habits, Internet usage,
technical sophistication
• Partnering with other firms
2004
Day 1
Pennings TUM
Strategic Management Innovation
106
Kodak’s Prospects
• Kodak is not the leader it once was; its core
competencies in paper and film have become
core rigidities
• The photography market is likely to be much
more fragmented
• As we will see on June 13, we need a dedicated
integrated business unit for new paradigm to
overcome core rigidities
2004
Day 1
Pennings TUM
Strategic Management Innovation
107
So far… lessons:
1. Death of “Dominant Design”
– Firm versus its environment
– Innovations
– Inertia and Paradigm Huggers
2. Unlocking the Firm or Industry from “Old”
Paradigm
Photography Industry
2004
Day 1
Pennings TUM
Strategic Management Innovation
108
First Day
• Concept of Strategy
• External (Customer, market) and Internal
(Knowledge) View
• Tools for Strategizing (Internal Structure
and External Structures)
• The Strategic Challenge for Players in their
Industry in overcoming Inertia
2004
Day 1
Pennings TUM
Strategic Management Innovation
109