Essentials of

Strategic
Management
 High Technology Industry
 Technology refers to the body of scientific knowledge used in the production
of goods or services.
 High-technology (high-tech) industries are those in which the underlying
scientific knowledge that companies in the industry use is rapidly
advancing, and, by implication, so are the attributes of the products and
services that result from its application.
 In industries where standards and compatibility are important strategic
levers, a technology that gains an initial advantage can sometimes rise to
achieve a nearly insurmountable position.
 Such industries can thus become “winner-take-all” markets.
 Such industries can require very different strategies than those used in
more traditional industries.
Technical Standards and Format War

 A set of technical specifications that producers adhere to when

making a product or component are known as technical standards.
 Battles to set and control technical standards in a market/control the
source of differentiation are referred to as format Wars.
 Differentiated products often command premium prices and are often
expensive to develop, the competitive stakes are enormous. The
profitability and survival of a company may depend on the outcome
of the battle.
Examples of Standards

 Keyboard
 Dimensions of Containers
 Personal Computers: Dominant design
Benefits of Standards

 Guarantee compatibility between products and their complements.

 Reduce confusion in the minds of consumers.
 Reduce production costs.
 Reduce the risks associated with supplying complementary products,
and thus increase the supply for those complements
Strategies to win Format War

 Ensure a supply of complements

• Diversify to make complements
• Create incentives for others to make complements
 Leverage Killer Applications
 Aggressive Pricing and Marketing
• Razor and Blade Strategy
 Cooperate with Competitors
 License the format
First Mover Advantages

 Companies often compete by striving to be the first

to develop revolutionary new products, that is, to be
a first mover.
 First mover is in monopoly situation
 Revenues and profits signal to potential rivals that
imitating the first mover makes money.
First Mover Advantages
 Opportunity to exploit network effects and positive feedback
loops, locking consumers into its technology
 First mover may be able to establish significant brand loyalty.
 First mover may be able to increase sales volume ahead of
rivals and thus reap cost advantages associated with the
realization of scale economies and learning effects.
 May be able to create switching costs for its customers that
subsequently make it difficult for rivals to enter the market.
 May accumulate valuable knowledge related to customer
needs, distribution channels, product technology, process
technology, and so on.
First Mover Disadvantages

 Bear significant pioneering costs that later entrants

do not
 More prone to make mistakes because there are so
many uncertainties in a new market.
 Run the risk of building the wrong resources and
capabilities because they focus on a customer set
that is not characteristic of the mass market
 May invest in inferior or obsolete technology
Strategies for Exploiting First-Mover
Advantages
 Develop and market the innovation
 Develop and market the innovation jointly with
other companies through a strategic alliance or joint
venture
 License the innovation to others and allow them to
develop the market
 Disruptive Technology
 A new technology that originates away from the mainstream of
a market and then, as its functionality improves over time,
invades the main market.
 Revolutionize industry structure and competition, often causing
the decline of established companies.
 Established companies are aware about it.
 Why established companies do not invest in it?
• They listen to their customers, and their customers do not want
it
• Serve such small market niches that it seems unlikely there
would be an impact on the company’s revenues and profits.
 New network of suppliers and distributors typically grows
alongside the new entrants.
 Corporate Strategy
 Choices strategic managers must make:
• Deciding in which businesses and industries a company should
compete
• Selecting which value creation activities it should perform in those
businesses
• Determining how it should enter, consolidate, or exit businesses
or industries to maximize long-term profitability
 Managers must adopt a long-term perspective and consider how
changes taking place in an industry and in its products,
technology, customers, and competitors will affect their
company’s current business model and its future strategies
 Enable a company to sustain or promote its competitive
advantage and profitability in its present business—and in any
new businesses or industries that it chooses to enter
Horizontal Integration
 Process of acquiring or merging with industry
competitors to achieve the competitive advantages
that arise from a large size and scope of operations.
 Acquisition occurs when one company uses capital
resources such as stock, debt, or cash, to purchase
another company.
 Merger is an agreement between equals to pool
their operations and create a new entity
Benefits of Horizontal Integration
Economies of
Scale
Lower Cost
Structure
Reduce
duplication of
resources

Product Bundling
Increased Product
Differentiation

Benefits of Cross Selling

Horizontal Leveraging a
Integration Competitive
Advantage More
Broadly
Eliminate Excess
Capacity
Reduced Industry
Rivalry
Tacit price
coordination
Increased
Bargaining Power
Problems of Horizontal Integration

 Different company cultures

 High management turnover in the acquired company when the
acquisition is a hostile one
 Tendency of managers to overestimate the potential benefits from a
merger or acquisition and underestimate the problems involved in
merging their operations
Vertical Integration
 Entering new industries to support the business model of its “core”
industry.
 Expands its operations either backward into an industry that
produces inputs for the company’s products (backward vertical
integration) or forward into an industry that uses, distributes, or sells
the company’s products (forward vertical integration).
 Facilitating
Investments in
Specialized
Assets

Benefits of
Enhancing
Vertical
Product Quality
Integration

Improved
Scheduling
Problems with Vertical Integration

 Increasing Cost Structure

 Disadvantages that arise when technology is changing fast
 Demand Unpredictability
 Strategic Outsourcing
 Decision to allow one or more of a company’s value-chain activities to be
performed by independent, specialist companies that focus all their skills
and knowledge on just one kind of activity to increase performance.
 Benefits of outsourcing:
 Lower Cost Structure
 Enhanced Differentiation
 Focus on core business
 Risk of outsourcing:
 Holdup
 Increase competition
 Loss of Information and Forfeited Learning Opportunities
 Diversification
 Process of entering new industries, distinct from a company’s core or original
industry, to make new kinds of products that can be sold profitably to customers
in these new industries
 Diversification can increase profitability when strategic managers:
 Transfer competencies between business units in different industries
 Leverage competencies to create business units in new industries,
 Share resources between business units to realize synergies or economies of
scope
 Use product bundling,
 Utilize general organizational competencies that increase the performance of all
a company’s business units
• Entrepreneurial Capabilities
• Capabilities in Organizational Design
• Superior Strategic Management Capabilities
Transferring Competencies Across
Businesses
 Taking a distinctive competency developed by a business unit in one industry
and implanting it in a business unit operating in another industry.
 Commonality: A skill or competency that, when shared by two or more
business units, allows them to operate more effectively and create more
value for customers.
Leveraging Competencies to Create
a New Business
 The process of taking a distinctive competency
developed by a business unit in one industry and
using it to create a new business unit in a different
industry.
Types of Diversification

 Related
 Appropriate when a firm has a strong competitive position but industry
attractiveness is low
 Company uses its distinctive competence as its means of diversification

 Unrelated
 Current industry is unattractive and that the firm lacks outstanding abilities or
skills that it could easily transfer to related products or services
 Primarily concerned with financial considerations of cash flow or risk reduction
 Good for firms with ability to transfer its own excellent management system
into less well managed acquired firms.
 Emphasis on sound investment and the value oriented management
Disadvantages of diversification
 Changes in the industry or inside a company that occur over time
 Diversification pursued for the wrong reasons, and
 Excessive diversification that results in increasing bureaucratic costs.
Sony’s web of Corporate Strategy
Stability Strategies
 Pause/Proceed with Caution Strategy
 An opportunity to rest before continuing a growth or retrenchment strategy
 Deliberate attempt to make only incremental improvements until a particular
environmental situation changes
 Temporary strategy
 No Change Strategy
 Decision to do nothing new
 Choice to continue current operation and policies
 Success depends on a lack of significant change in a corporation’s situation
 Profit Strategy
 Decision to do nothing new in a worsening situation
 Attempt to artificially support profit when company’s sales are declining by
reducing investment and shot term discretionary expenditure
 If continued for long time it will lead to serious deterioration in a corporation’s
competitive position.
Retrenchment
 Turnaround Strategy
 Emphasizes the improvement of operational efficiency and is
probably most appropriate when a corporation’s problems are
pervasive but not yet critical
 Two basic phases of turnaround
 Contraction: initial quick efforts
 Consolidation: implements a program to stabilize the now leaner
corporation
 Captive Company Strategy
 Involves giving up independence in exchange for security
 Company with weak competitive position
 Company facing poor sales and increasing losses.
Retrenchment
 Sell out/Divestment Strategy
 Company unable either to pull itself or by its bootstraps or to find a customer to
which it can become a captive company.
 Sell out strategy when management can still obtain a good price for its shareholders
and employee can keep their by selling the entire company to another firm
 Corporation with multiple business line chooses to sell off a division with low growth
potential is called divestment

 Bankruptcy/Liquidation
 Company finds itself in worst possible situation and poor competitive position in an
industry
 Bankruptcy involves giving up management of the firm to the courts in return for
some settlement of the corporation’s obligations.
 Liquidation is the termination of the firm
 After sale of the asset cash distribution to the shareholders
BCG Matrix
 It portray a corporation’s portfolio of investments
 Product line and business units are plotted on the matrix
 Growth rate of industry
 Relative market share
 Unit’s relative competitive position is defined as its market share in the
industry divided by that of the largest other competitor
 Relative market share>1 belongs to market leader
 Relative Market Share = % market share of Company A’s product
divided by the market share of the largest competing product.
 Business growth rate is the percentage of market growth, percentage by
which sales of a particular business unit classification of products have
increased.
 Assumption that other things being equal, a growing market is attractive.

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BCG Matrix

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 Question Marks

 New products with the potential for success

 Need cash for development
 Need to gain enough market share to become a market leader
 Company can take money from more mature products and spend
on the question mark

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Stars
 Market Leader
 Peak of their product life cycle
 Able to generate enough cash to maintain their high
share of the market and usually contribute to the
company’s profits

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Cash Cows

 Bring money than is needed to maintain their market share

 Milked for cash that will be invested in new question marks
 Expenses such as advertising and R&D are reduced

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Dogs

 Low market share.

 Less potential.
 Dogs should be either sold off or managed carefully for
the small amount of cash they can generate.

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 Industry
Competitive
Business Unit Attractiveness Total Score
Position Score
Score
Retail 3.0 1.6 4.6

Credit 3.5 2.0 5.5

Insurance 2.5 3.6 6.1

Brokerage 1.5 3.6 5.1

Real Estate 3.5 2.8 6.3

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Merits of BCG matrix

 Key success is market share

 High market share tend to have a cost leadership position
 Company can project product’s future positions
 Quantifiable and easy to use

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Limitations

 Use of highs and lows to form four categories is too simplistic

 Link between market share and profitability is questionable
 Low share business can also be profitable
 Growth rate is only one aspect of industry attractiveness
 Product lines or business units are considered only in one relation
to one competitor: the market leader
 Small competitors with fast growing market share are ignored
 Market share is only one aspect of overall competitive position

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GE Business Screen

 Nine cell Matrix

 Based on long-term industry attractiveness and business strength
competitive position
 Industry attractiveness
 Market growth rate
 Industrial Profitability
 Size among other possible opportunities and threats
 Pricing practices

 Business Strength
 Market Share
 Technological Position
 Profitability
 Size among other possible strengths and weaknesses

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GE Matrix

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BITS Pilani, Pilani Campus
 Portfolio managers can quickly answer three strategic
questions:
 How to allocate capital throughout the organization’s portfolio of
companies?
 What products or additional SBUs are needed in their portfolio?
 Which SBUs should be divested?

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Determine the industry attractiveness of
each SBU

 Market size
 Industry profitability
 Market growth potential
 Industry segmentation
 Market profitability
 Differentiation
 Market growth rate
 Level of competition

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Competitive strength of each SBU

 Sustainable competitive advantages (use VRIO analysis)

 Brand equity
 Customer loyalty
 Market share
 Internal competencies
 Strength of the value chain (use value chain analysis)
 Production capacity
 Product lines
 Pricing and cash flows
 Profit margin compared to competitors

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Advantages of GE Matrix

 Simplified approach to portfolio analysis and investment

allocation decisions
 Highly replicable and consistent framework
 Applicable across different industries
 An efficient method of determining strategic paths for multiple
SBUs
 Helps measure and map the strategic position of SBUs
 Helps understand which businesses are making a profit and
which aren’t

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Shortcoming of GE Matrix

 Quite complicated and cumbersome

 Numerical estimated of industry attractiveness and business
strength/competitive position give the appearance of objectivity, but
they are in reality subjective judgments that may vary from one
person to another
 Cannot effectively depict the positions of new products or business
units in developing industries.
 Teams may need to do more research before they can make
investment decisions
 GE Matrix is only a snapshot of your portfolio’s performance

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