BM 499: Origins of Strategy
Session 2
Ghemawat, Chapter One
Darral G. Clarke
Professor of Management
Darral G Clarke for BM 499
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Historical overview: Theory of
the Firm
Dismissed as a strategic planning paradigm:


Too hard to understand
Not linked to realm of top management
But, it is fundamental to understanding strategy
P
Profit
Q
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Historical overview: HBS and
the Concept of Strategy
Andrews, The Concept of Corporate
Strategy, (1971)


Strengths and Weaknesses
Opportunities and Threats
Nice managerial idea--but analytically
limited

No insight for:
 identifying SWOTs
 evaluating alternative strategies
 what to do
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Andrews’ Strategy Framework
Environmental
Conditions
and Trends
Economic
Technical
Physical
Political
Social
Community
Nation
World
Opportunities
and Risks
Identification
Inquiry
Assessment of Risk
Distinctive
Competence
Consideration of
all combinations
Evaluation to determine
best match of
opportunity and resources
Choice of Products
and Markets
Economic Strategy
Capabilities:
Financial
Managerial
Functional
Organizational
Reputation
History
Corporate
Resources
As extending or
constraining
opportunity
Identification of
strengths and
weaknesses
Programs for
increasing
capability
Source: Kenneth R. Andrews, The Concept of Corporate Strategy, 1971
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BCG Portfolio Model
The first “strategic model”
How to think about managing a collection of companies
Based on three concepts


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Product life-cycle
Experience--Costs decline with accumulated volume
Relative market share
Relative
Share:
High
Market Growth Rate
Low
High
Star
Cash Cow
Relative Share
Dog
Problem Child
Low
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Conceptual underpinnings:
the product life cycle
The cash flow generated by a company
varies predictably across its life
$
Cost
Revenue
Positive Cash
time
Negative Cash
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Product life cycle &
Market position
The product life cycle profitability pattern can be
approximated by a simple equation:
Profit = Industry size(t0)* Industry growth rate *
market position * company profit margin
Industry growth rate and relative market share
became the key BCG variables
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Experience Curve for
Semiconductor Memories
1976
1977
75
(Millicent's)
Price per bit
100
1978
50
1979
25
1980
10
1981
1982
0.1
1.0
10
1983
1984
100
Cumulated output
(bits x 1012)
Source: Integrated Circuit Engineering Corporation
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Conceptual Underpinnings:
Experience
log(Cost/unit)
S’
S’’
B’
B’’
log(Experience)
log(Cumulative Volume)
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Portfolio Underpinnings:
Market Share
ROI
Market Share
PIMS project: Buzzell, Gale, Schoeffler
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BCG Generic strategy: Price
leadership
$/ u n it
Price
Co st
time
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Portfolio Models: Flow of
Funds
Low
High
Relative
Share
Low
Market Growth Rate
Cash Cow
High
Star
(Harvest)
(Build)
Dog
Problem Child
(Divest)
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(????)
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Problems in Portfolio Paradise:
Experience
log(Cost/unit)
S’
Cost/unit
S’’
S’
B’
B’’
S’’
B’
log(Experience (Cumulative Volume)
B’’
Volume
Experience advantages run out!
What causes it in the first place?
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Problems in Portfolio Paradise:
Market share
Profitability not directly related to market share!
Superior Value
Delivery
Market
Share
ROI
Phillips and Antarasian
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Problems with BCG Approach
Experience



Declining costs are not universal—experience declines become
minimal
Focus on cost decreases innovation and long-run
competitiveness
Experience is not proprietary
Portfolio models



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Classification problems—ambiguity and bias
Capital may not be the only, or even a, constrained resource
Balance is achieved by reducing the overall profitability of the
combined firm
May lead to analytical detachment at the expense of insight and
creativity
Neglect of technological development
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The Industry AttractivenessBusiness Strength Matrix
Industry Attractiveness
Business Strength
High
Medium
Low
High
Investment
and
Growth
Selective
Growth
Selectivity
Medium
Selective
Growth
Selectivity
Harvest/
Divest
Low
Selectivity
Harvest/
Harvest/
Divest
Divest
Harvest/
Harvest/
Divest
Divest
Two Determinants of
Profitability
Advantage
Competitive
Position
Disadvantage
Low
High
Environmental Attractiveness
An Expanded Version of
Generic Strategies
Broader set of cost structures
More diverse set of competitive environments
Apply economic theory of long run average
cost
Cost/unit
E
x
p
e
r
i
Scale
e
n
c
New technology
e
E
x
p
e
r
i
e
n
c
e
Darral G Clarke for BM 499
LRAC
Volume
18
Strategy and
long-run average cost
Cost advantage from volume
Low
High
Ability to
differentiate
product
High
Fragmented
Profitable
&
Defensible
Stalemate
Volume
Low
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Competitive Strategy and Long
Run Cost/Differentiation I
Volume Industry

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Low cost leadership type markets
There is an advantage in scale or technology
Stalemate Industry



Can’t differentiate
Economies of scale, experience common to
competitors
No process innovation
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Competitive Strategy and Long
Run Cost/Differentiation II
Fragmented Industry

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
Differentiation is key competitive factor
Niche strategy
Volume in niches inadequate to achieve volume cost
advantages
Profitable and defensible industry



Differentiated product
Customer preference
Low cost producer of differentiated product
Transitory industry


Cost advantage based on labor
Cost advantage based on any other temporary advantage
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Use of Strategic Planning
Paradigms
Use for insight and structure


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Have I considered the important factors?
Is structure consistent with “orthodox strategy?”
What is inconsistent?
 Does it indicate a problem?
 Does it indicate an opportunity?
Be creative in determining strategy


Orthodox strategy can still be creatively defined and
executed
Unorthodox strategy can surprise competitors
 Test detail of strategy against “orthodox”
 Does the value chain make sense?

Balance short run and long run considerations
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