Lecture 8
BUSINESS STRATEGY AND TECHNOLOGY STRATEGY
Learning Objectives
1. Understand how to analyze the attractiveness of an industry
2. Explain how the five forces model can be used to figure out industry attractiveness
3. Define the value chain
4. Understand how to analyze a value chain and the strategy decisions that can be made on the
basis of a value chain analysis
5. Explain why some industries operate through dynamics of creative destruction, while others
operate through dynamics of creative accumulation
6. Identify the industry conditions that make small, new and large, established firms more
innovative
7. Describe a competitive advantage
8. Define resources, capabilities, dynamic capabilities, and core competencies
9. Explain how core competencies lead to core rigidities
10. Define strategic dissonance
Formulating Technological Innovation Strategy
• Assessing the firm’s position and defining its strategic direction,
• Choosing innovation projects in which to invest, including both quantitative and qualitative
valuation techniques,
• Deciding whether and how the firm will collaborate on development activities, choosing a
collaboration mode, and choosing and monitoring partners,
•
Crafting a strategy for protecting – or diffusing – a technological innovation through such
methods as patents, trademarks, copyrights, and trade secrets.
Overview
•
•
A coherent technological innovation strategy leverages the firm’s existing competitive position
and provides direction for future development of the firm.
Formulating this strategy requires:
 Appraising the firm’s environment,
 Appraising the firm’s strengths, weaknesses, competitive advantages, and core
competencies,
 Articulating an ambitious strategic intent.
Industry Analysis
• An important part of technology strategy is to analyze the attractiveness of an industry
• Some industries are more attractive than others, making the companies in them consistently
more profitable than those in other industries
•
Assessing the Firm’s Current Position
External Analysis
 Two common methods are Porter’s Five-Force Model and Stakeholder Analysis.

Porter’s Five-Force Model
1. Degree of existing rivalry. Determined by number of firms, relative size, degree
of differentiation between firms, demand conditions, exit barriers.
2. Threat of potential entrants. Determined by attractiveness of industry, height
of entry barriers (e.g., start-up costs, brand loyalty, regulation, etc.)
3. Bargaining power of suppliers. Determined by number of suppliers and their
degree of differentiation, the portion of a firm’s inputs obtained from a
particular supplier, the portion of a supplier’s sales sold to a particular firm,
switching costs, and potential for vertical integration.
4. Bargaining power of buyers. Determined by number of buyers, the firm’s
degree of differentiation, the portion of a firm’s inputs sold to a particular
buyer, the portion of a buyer’s purchases bought from a particular firm,
switching costs, and potential for vertical integration.
5. Threat of substitutes. Determined by number of potential substitutes, their
closeness in function and relative price.
6. Recently Porter has acknowledged a sixth force: the role of complements. If
complements are necessary, industry will be influenced by their availability,
quality, and price.
Thompson and Strickland -The Five Tasks of Strategic Management
Thompson and Strickland -The Five
Tasks of Strategic Management
Task 1
Task 2
Task 3
Task 4
Task 5
Develop a
Strategic
Vision
& Mission
Set
Objectives
Craft a
Strategy
to Achieve
Objectives
Implement
& Execute
Strategy
Evaluate &
Make
Corrections
Revise as
Needed
Revise as
Needed
Improve/
Change
Improve/
Change
Recycle
as Needed
• Factors Shaping the Choice of Company Strategy
Factors Shaping the
Choice of Company Strategy
Social,
political,
regulatory
and
community
factors
Competitive
conditions
and industry
attractiveness
Company
opportunities
and threats to
company’s
well-being
Company’s Strategic Situation
Resource
strengths,
capabilities,
and
weaknesses
Influences of
key
executives
Shared values
and company
culture

External Factors
Determine
relevance
of internal
and
external
factors
Identify
and
evaluate
alternatives
Craft
the
strategy

Internal Factors
•
Strategic Thinking and Analysis Leads to Good Strategic Choices
Strategic Thinking and Analysis
Leads to Good Strategic Choices
Assess Industry & Competitive Conditions
1. Industry’s dominant economic traits
2. Nature of competition & strength of
competitive forces
3. Drivers of industry change
4. Competitive position of rivals
5. Strategic moves of rivals
6. Key success factors
7. Conclusions about industry attractiveness
Assess Company Situation
Identify
Strategic
Options
for the
Company
Select
the Best
Strategy
for the
Company
1. Assessment of company’s present strategy
2. Resource strengths and weaknesses,
market opportunities, and external threats
3. Company’s costs compared to rivals
4. Strength of company’s competitive position
5. Strategic issues that need to be addressed
•
• Profit As a Percentage of Sales Differs across Manufacturing Industries
Five Forces Model
Five Forces Model
11-17
©2009 Prentice Hall
•
The level of industry attractiveness depends on five dimensions:
 Buyer Power: measures the degree of power that customers have over companies in
the industry
 Supplier Power: measures the degree of power that suppliers have over companies in
the industry
 Threat of New Entrants: measures ease of entry into the industry
 Threat of Substitutes: measures the likelihood that new products or services will
substitute for those supplied by the industry
 Degree of Rivalry: measures the degree of competition between firms in the industry
Capital Intensity
• Established firms are better than new firms at innovation in capital-intensive industries
because new firms need to finance innovation through external capital markets
Advertising Intensity
• Established firms are better than new firms at innovation in advertising-intensive industries
because advertising is subject to economies of scale and takes time to have an effect
•
Effect of Advertising on Sales
•
•
•
•
•
Concentration
• New firms are worse than established firms at innovation in concentrated industries
because concentrated industries provide firms with market power
Average Size of Firms
• New firms are better than established firms at innovation in industries where the average
size of firms is small because the disadvantages of being a small start-up firm are minimal
Average Firm Size by Industry over Time
Assessing the Firm’s Current Position
 Stakeholder Analysis
1. Who are the stakeholders.
2. What does each stakeholder want.
3. What resources do they contribute to the organization.
4. What claims are they likely to make on the organization.
The Value Chain
A description of the activities that are used to produce and deliver a product to customers
Examining the value chain will help with technology strategy in several ways:
 Helps to determine where most of the value creation lies in an industry
 Determine whether it makes sense to focus on a different stage of the value chain if the
locus of value creation in an industry changes
 Offers insight into whether new or established firms will be more effective at innovation
 Suggests how companies can create competitive advantage at different stages of the
value chain
 Helps with decisions about ownership of different parts of the value chain
Internal Analysis
 Identify the firm’s strengths and weaknesses. Helpful to consider each element of value
chain.

Assess which strengths have potential to be sustainable competitive advantage
• Rare
• Valuable
• Durable
• Inimitable
• Resources are difficult (or impossible) to imitate when they are:
• Tacit
• Path dependent
• Socially complex
• Causally ambiguous
Regimes of Creative Destruction and Creative Accumulation
• Some industries operate through:
 Dynamics of creative destruction: entrepreneurs enter with new firms, challenge
established firms on the basis of new ideas, disrupt the old ways of production,
organization, and distribution, and replace the old firms
 Dynamics of creative accumulation: entrepreneurs enter, challenge established firms
on the basis of their new ideas. However, established firms defend their old ways of
production, organization and distribution, and the new firms tend to fail
A Resource-Based View
• The creation of sustainable competitive advantage (SCA) depends on resources and capabilities
• Resources
 Resources fall into three major categories:
• Tangible: include plant and equipment, raw materials, and financial reporting
systems
•
•
• Intangible: include trade secrets and relationships with customers
• Human: include employees’ knowledge, skills and abilities
 Resources are not a complete explanation for competitive advantage
 Different companies transform resources into products and services in different ways
Capabilities
 The knowledge or skills about how to undertake a particular activity
 Capabilities can be found in all parts of a company, such as in the skills, knowledge, and
ability that employees have accumulated over time in the process of doing their job

Other capabilities reside in an organization’s processes, such as those for product
development, production, purchasing, supply chain management, and marketing

Competitive advantage occurs only when efforts to transform resources into products
are valuable, rare, non-substitutable, difficult to imitate, and durable; otherwise, it will
not be superior to that of other firms
Core Competencies
 Capabilities are core competencies if they are used to generate value across a wide
range of firm activities

Core competencies are often created through the coordination of different activities or
technologies
•
 Core competencies allow firms to expand successfully into new product markets
 Identifying Core Competencies and Capabilities
Core Competencies: A set of integrated and harmonized abilities that distinguish the firm in the
marketplace.
•
•
•
•
Competencies typically combine multiple kinds of abilities.
Several core competencies may underlie a business unit.
Several business units may draw from same competency.
Core competencies should:
– Be a significant source of competitive differentiation
– Cover a range of businesses
– Be hard for competitors to imitate
Mobilizing Company Resources to Produce Competitive Advantage
•
•
Core Competencies
For a capability to be a Core
Competency, it must be:
Differential knowledge or skill in the
organization
Difficult for others to imitate
Essential to product
characteristics critical to customer
Applicable to a variety of end products
and markets
•
Core Competencies must
be:
Valuable
Capabilities that either help a firm to exploit opportunities to create value for
customers or to neutralize threats in the environment
Rare
Capabilities that are possessed by few, if any, current or potential competitors
Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to unique historical
conditions, causal ambiguity or social complexity
Nonsubstitutable
Capabilities that do not have strategic equivalents, such as firm-specific
knowledge or trust-based relationships
• CORE PRODUCTS AND END PRODUCTS
• COMPETENCE
• CORE PRODUCTS (in business units)
• END PRODUCTS (to markets)
• Research Brief
Identifying the Firm’s Core Competencies
 Gallon, Stillman and Coates offer a step-by-step program for identifying core
competencies.
•
•
•
•
•
Module 1 -- Assemble a steering committee, appoint a program manager, and
communicate the overall goals of the project to all members of the firm.
Module 2 -- Constructing an inventory of capabilities categorized by type. Assess
their strength, importance, and criticality.
Module 3 – Organize capabilities by both their criticality and the current level of
expertise within the firm for each.
Module 4 – Distill competencies into possible candidates for the firm to focus
on. No options should be thrown out yet.
Module 5 -- Testing the candidate core competencies against Prahalad and
Hamel's original criteria.
• Module 6 -- Evaluate the firm’s position in the core competency.
Core Rigidities
 The inability to do new things in areas outside of the firm’s core competencies
 Often limit the way in which people can work together or solve problems, and what
activities they believe are acceptable and unacceptable
•
Risk of Core Rigidities
 When firms excel at an activity, they can become over committed to it and rigid.
• Incentives and culture may reward current competencies while thwarting
development of new competencies.
 Dynamic capabilities are competencies that enable the firm to quickly respond to
change.
• E.g., firm may develop a set of abilities that enable it to rapidly deploy new
product development teams for a new opportunity; firm may develop
competency in working with alliance partners to gain needed resources quickly.
Strategic Intent
• Strategic Intent: A long-term goal that is ambitious, builds upon and stretches firm’s core
competencies, and draws from all levels of the organization.
• Typically looks 10-20 years ahead, establishes clear milestones
• Firm should identify resources and capabilities needed to close gap between
strategic intent and current position.
• Theory in Action
The Balanced Scorecard Kaplan and Norton argue that effective performance measurement should
incorporate:
 Financial perspective
 Customer perspective
 Internal perspective
 Innovation and learning
Example of Decision Matrix
QUALITY
LOW
HIGH
LOW
MAYBE
ACQUIRE
HIGH
AVOID
MAYBE
PRICE
•
•
BCG Growth-Share Matrix
BCG Growth-Share Matrix
22
Stars
Question Marks
Cash Cows
Dogs
20
18
16
14
12
10
8
6
4
2
Source: B. Hedley, “Strategy and the
Business Portfolio,” Long Range Planning
(February 1997), p. 12. Reprinted with
permission.
0
Relative Competitive Position
•
•
General Electric’s Business Screen Matrix
General Electric’s Business
Screen Matrix
C
Winners
A
Winners
B
High
Question
Marks
D
Winners
E
Medium
Average
Businesses
F
Losers
Losers
G
Low
Profit
Producers
Strong
H
Losers
Average
Weak
Business Strength/Competitive Position
•
Source: Adapted from Strategic
Management in GE, Corporate Planning
and Development, General Electric
Corporation. Used by permission of
•
General Electric Company.
•
Strategic Groups
 Strategic groups are subsets of the firms in an industry who follow similar strategic
practices
Strategic Groups in the
Pharmaceutical Industry
•
•
Multi-technology, Multi-attribute Matrix
Multi-technology, Multiattribute Matrix
Attribute
Rank
Device Device Device Device Device
1
2
3
4
5
Attribute
1
Attribute
2
Attribute
3
Attribute
4
TOTAL
•
•
•
•
•
SWOT MATRIX
SWOT MATRIX
STRENGTHS
OPPORTUNITIES SO
THREATS
•
•
WEAKNESSES
STRATEGIES
WO
STRATEGIES
ST
STRATEGIES
WT
STRATEGIES
SWOT Analysis -- What to Consider
SWOT Analysis -- What to
Consider
Potential Resource
Strengths
Potential Resource
Weaknesses
Potential Company
Opportunities
Potential External
Threats
• Powerful strategy
• No clear strategic
direction
• Obsolete facilities
• Serving additional
customer groups
• Expanding to new
geographic areas
• Expanding product
line
• Entry of potent new
competitors
• Loss of sales to
substitutes
• Slowing market
growth
• Adverse shifts in
exchange rates &
trade policies
• Strong financial
condition
• Strong brand name
image/reputation
• Widely recognized
market leader
• Proprietary
technology
• Cost advantages
• Strong advertising
• Product innovation
skills
• Good customer
service
• Better product
quality
•Alliances or JVs
•
•
• Weak balance
sheet; excess debt
• Higher overall
costs than rivals
• Missing some key
skills/competencies
• Subpar profits . . .
• Internal operating
problems . . .
• Falling behind in
R&D
• Too narrow product
line
• Weak marketing
skills
• Transferring skills
to new products
• Vertical integration
• Openings to take
MS from rivals
• Acquisition of
rivals
• Alliances or JVs to
expand coverage
• Openings to exploit
new technologies
• Openings to extend
brand name/image
• Costly new
regulations
• Vulnerability to
business cycle
• Growing leverage
of customers or
suppliers
• Shift in buyer
needs for product
• Demographic
changes
PORTER- BUSINESS STRATEGY AND TECHNOLOGY STRATEGY
 Identify all distinct technologies and sub-technologies in value chain
 Identify potentially relevant technologies in other industries or under development
 Determine likely path of change in key technologies

Determine which technologies and potential changes are most significant to competitive
advantage and industry structure

•
•
•
•
Assess a firm’s relative capabilities in important technologies and cost of making
improvements
 Select a technology strategy, encompassing all-important technologies that reinforce
company strategy
 Reinforce business-unit technology strategies at the corporate level
 Strategy and Competitive Advantage
 The relationship between strategies and resources and capabilities:
 Technologies in Products
ITEGRATION DECISIONS
 Vertical Integration of Technology
• Product
• Process
• Marketing
• Disposal
 Vertical Integration of Supply Chain
• Materials production
• Suppliers
• Manufacturer
• Distribution
 MAKE OR BUY
Strategic Dissonance
 Strategic dissonance occurs when what managers want to accomplish and what
companies are doing are misaligned
 It indicates the need to change strategy
 Companies are most successful in responding to strategic dissonance by:
• Evaluating Information on the Misalignment
• Gathering Information from Frontline Employees
• Devoting Organizational Resources to the New Direction
Alignment of Technology and Business Strategy
 Like alignment of eyes
Product-Technology Matrix
Product-Technology Matrix
Company Products
Technologies
Product
A
Required
Product
B
Strength
Product
...
Product
N
Strength
Technology 1
Required
Strength
Technology 2
Required
Technology 3
Strength
Strength
•
•
•
Mitchell - Six Questions
 To what extent is technology relevant?
 Which business strategies require technology?
 Where will we get it?
 What are our core technologies?
 In which technologies should we focus our efforts?
 What new strategic options could they provide?
Gallon, Stillman and Coates
 Types of Capabilities
• Market-Interface
• Infrastructure
• Technological
• Applied Science
• Design and Development
• Manufacturing
 Core competencies
• Core Technical Competencies - CTC
• Core Marketing Competencies - CMC
CTC PROGRAM
1. Startup
2. Inventory of Capabilities
3. Assessing Capabilities
4. Identifying Candidate Core Competencies
5. Testing Candidate Core Competencies
6. Evaluating Core Competency Positions