Economics and Management of Competitive Strategy

Daniel F Spulber

• Editorial: WSPC
• Año: 2009
• ISBN:
  9789814365291
• Categoría: Scienze fisiche
• Categoría: Fisica

This book provides a comprehensive and integrated approach to management strategy that is based on economics. A basic introductory strategy text that integrates economic analysis with management strategy, it takes into account global competition and high-tech (Internet) developments, and recognizes that companies today can no longer expect to sustain competitive advantage but must rely on innovation (of products, processes, and transactions). Although many of the principles are illustrated with numerical examples, the text does not require a background course in economics or mathematics, and does not contain technical graphs or equations. Thus, the book is suitable for undergraduate managerial economics and strategy courses, as well as for introductory MBA courses in business strategy and as a companion to case studies.

The Power Point Slides for each of the chapters is available upon request for all instructors who adopt this book as a course text. Please send your request to [email protected].

Contents:

• Management Strategy:
  • Designing Management Strategy
  • Value-Driven Strategy
• The Market Compass:
  • Customers and Suppliers
  • Competitors and Partners
• The Organizational Grid:
  • Organizational Structure and Performance
  • Organizational Abilities and Incentives
• Competitive Advantage:
  • Competitive Advantage and Value Creation
  • Transaction Costs and the Firm's Vertical Structure
• Competitive Strategy:
  • Price Leadership Strategy
  • Product Differentiation Strategy
  • Transaction Coordination Strategy
  • Entry Strategy

Readership: Undergraduate students in managerial economics and business strategy courses; graduate MBA students.

PART I

MANAGEMENT STRATEGY

CHAPTER 1

DESIGNING MANAGEMENT STRATEGY

Contents

1.1 Strategic Analysis and the Goals of the Firm

1.2 External Analysis and Internal Analysis

1.3 Competitive Advantage and Competitive Strategy

1.4 Strategy and Organizational Structure

1.5 Overview

Scenario #1. You are the CEO of an entrepreneurial start-up company that is being established to capitalize on a technological innovation. Working with the owner, you have assembled an accomplished advisory board, and a high-quality management team as well as some talented engineers and marketing professionals. You have already made initial contacts with some impressive potential clients and begun discussions with technology partners. An investment bank has scheduled meetings with a group of venture capital investors in two weeks. To launch the venture, the advisory board, management group, a representative from the investment bank and other personnel are meeting in a conference room at a downtown hotel. You have distributed a basic business plan to the participants. After introductions have been made around the table and a set of presentations given during the morning meeting, a question arises during the afternoon session: What is our strategy? A heated discussion breaks out and the group turns to you for leadership.

Scenario #2. You have just been made head of a division of a rapidly growing regional business. The company's brands are gaining national recognition and the firm's financial performance to date has been outstanding. The board went to great lengths recruiting you as the leading prospect among over a dozen attractive candidates. Since you are new to the organization, you are being deluged with information about the company as you get up to speed. Although you have always been a quick study, what information should be the focus of your attention? Should you continue the successful policies of your predecessor or chart out a new direction? What is the relationship of the division to the rest of the company? Taking the helm is both a thrill and a challenge, but what do you do now?

Scenario #3. You have just completed business school and joined a consumer products division of a major corporation. Your job description is fairly specific and the immediate tasks that you need to accomplish are spelled out when you join the team. A few weeks after your arrival, the senior manager of your division convenes the division personnel for a briefing. He makes a rather long speech, outlining the company's mission and specific goals. The senior manager provides some details about the company's overall strategy and the challenges that the division faces. The senior manager also points to some changes in the firm's market position and the possible impact on the organization. It all sounds vague and rather distant from your day-to-day activities. You wonder whether the briefing is really necessary and if all the discussion of the company's strategy will affect your job description, not to mention your stock options. How important is the briefing for your assigned tasks?

Scenario #4. You have just joined a top international consulting company. You are sent with a team to meet with an important corporate client in Europe. The client company is under siege, with entrepreneurial European firms introducing low-cost alternatives and international competitors attracting its customers with superior products and services. The client's company is in an industry that, until now, has been sheltered from competition by trade restrictions and other government controls. A combination of technological change and market deregulation have altered the landscape considerably. You wonder whether consumer characteristics and market conditions in Europe should affect your recommendations, or whether you can give management some generic strategic advice. As you meet with senior personnel at the client company, they urgently seek your guidance on a course of action.

These four scenarios are based on actual experience. Whatever your position — CEO, division manager, employee, consultant — similar questions arise. What are you trying to achieve? What information do you need? What actions should you take? How should you deal with competitors? What are your responsibilities and those of other people in the organization?

Strategic analysis provides a method for answering these crucial questions. By the time you have gone through this text, you will know the basic principles of strategic analysis. You will have in mind all the steps needed to create your own strategy. You will know how to start from your position in the company, how to gather the necessary information, and how to design your strategy. You will have a systematic framework to help you decide on a course of action and to get others on board. Understanding the strategy-making process set out in this book will prepare you to become a successful business leader.

Formulating strategy is the primary responsibility of the company's managers. As a manager, you must prepare a strategy, regardless of whether you are leading the whole company or a division of a company. If you are an entrepreneur, you must devise a strategy to prepare a complete business plan and to guide the company. As a consultant, you need to understand the strategy process since you have to assist clients in formulating strategy. Even if you are a company employee who is not a part of the management, it is often necessary to understand the strategy process because your actions must help carry out the company's strategy.

What is the purpose of having a strategy? Simply put: Management strategy is a broad plan of action to achieve the company's goals. As a manager, you must formulate a strategy to prepare your company for competition. You also need a strategy to lead and coordinate the members of your organization. This chapter outlines the main steps of strategic analysis. After you have completed the chapter, you will know the key concepts which you will need for strategy-making.

Management strategy has five main components which form the outline of the book. (1) The manager begins the strategic analysis by selecting the goals of the company. (2) The manager performs a comprehensive external analysis of market conditions and a careful internal analysis of the characteristics of the company's organization. The manager adjusts the choice of the company's goals taking into account information about both the company's potential markets and its organizational abilities. (3) The manager identifies the critical factors that distinguish the firm from its competitors and allow the firm to attain a competitive advantage. (4) The manager formulates a competitive strategy that anticipates the strategies of competitors and chooses market actions to outperform competitors. (5) Finally, the manager turns to the design of an organizational structure that conforms to the company's overall strategy.

Even though market conditions are changing constantly and business practices are evolving rapidly, managers will always benefit from the guidance provided by the basic principles of management strategy. However, strategy-making is an ongoing process. As market conditions shift and organizations develop, it is often necessary for the manager to start the process again. The basic steps of strategy-making covered in this chapter can be applied repeatedly to respond to changing market conditions.

Chapter 1: Take-Away Points

Managers formulate the company's strategy by following the five steps of strategic analysis — select goals, perform external and internal analyses, identify competitive advantage, devise competitive strategy, and design the organization:

• The manager selects the company's goals to make the best match between organizational abilities and market opportunities. Information from the manager's external and internal analyses guides the manager's choice of goals and in turn, the company's goals serve to refine and update the manager's external and internal analyses.

• The manager performs an external analysis to examine what types of markets the firm will encounter as the strategy unfolds. The manager performs an internal analysis to determine the characteristics of the organization and its potential to realize market opportunities.

• The manager selects activities to obtain a competitive advantage by emphasizing factors that lead to superior market performance, including costs, products, and transactions.

• The manager devises a competitive strategy by anticipating rival strategies and choosing actions to outperform rival firms, including choosing the types of moves, timing of moves, defensive actions, and methods of market entry.

• Having set the goals of the business and chosen the competitive strategy to achieve them, the manager designs an organizational structure that conforms to the company's overall strategy.

1.1 Strategic Analysis and the Goals of the Firm

Strategic analysis is a management decision-making process. After applying the five steps of strategy making, the manager is ready to guide the business organization in competition. Accordingly, strategy is forward-looking — the manager asks what the company should do. Moreover, strategy is externally-focused — the manager asks what will succeed in the marketplace. Also, strategy has an internal-perspective — the manager asks how the organization will carry out the company's strategy. There is no universal strategic prescription; strategy depends on context and what works in one type of market may not work in another. However, the method of strategic analysis is sufficiently general that it works in many different market situations. The basic steps of strategic analysis are illustrated in Figure 1.1.

Every journey begins with a single step. But where do we begin? Just as the traveler needs a destination, the company needs a goal. The goal is what the company is trying to achieve. If goals are the company's destination, strategies are the route to the destination — strategies are the means to achieve the company's goals. Goal setting is the crucial first step in strategy-making.

Figure 1.1: The manager's process of strategic analysis.

The process includes feedback between goal setting and the external and internal analyses. Managers apply the process repeatedly to address changes in the company's markets and its organization.

The manager's first responsibility in the strategy process is goal selection. The company's goals often are framed in terms of serving specific markets. The manager poses the key question: “What business should we be in?” Answering this question can require continuing to serve the company's existing markets. The company may need to enter promising new markets and to exit from unfavorable markets. The goal might look like one of the following:

The company will produce sportswear for sale in its own outlets in North America.

The company will operate hair care salons in Japan.

The company will conduct basic research in biotechnology for pharmaceutical companies.

The company will provide a complete line of financial services throughout Europe.

The company will serve the market for electric power generation in Brazil.

The company will create and supply specialized designs of microprocessors.

The company will operate supermarket chains in many countries around the world.

These goals are fairly simple. Generally, defining the goal requires a careful definition of the business and the market that it serves. Often, companies want to be the leading firm in their chosen markets.

How should a manager choose the company's goals? The process cannot be accidental — a dart thrown at a chart on the wall will not do. The goal can change over time, but that does not mean that managers can wing it, hoping that the goal will emerge over time as the company experiments with different activities. The manager needs to follow a systematic procedure so as to take advantage of available information and to increase the chances that the company will be successful.

Understandably, the question of choosing goals is hotly debated in strategy making. Some argue that the company should choose goals based only on the best market opportunities. Market-driven goals are based on discovering original market opportunities that are characterized by growing customer demand and relatively limited competition. However, in some markets, the company may find that competitors are much better at satisfying customer needs. The video game market may look attractive but other companies might be better at designing or marketing games. Then, the company's goals must adapt to the abilities of the organization relative to its competitors.

Others argue that the company should engage in those tasks that reflect the company's unique skills and competencies, particularly those that are hard for others to copy. Organization-driven goals are based on recognizing unique organizational abilities and resources that will help the company prevail over its competitors. However, in some cases, there is little demand for the things the company is best able to do. The company may be very good at designing wooden tennis rackets when the market has switched to composite materials.

This text focuses on value-driven strategy. The manager chooses goals and strategies that maximize the total value of the firm. The manager chooses value-driven goals by making the best match of organizational abilities with market opportunities. This means that a compromise may be necessary. The company may not necessarily chase the most attractive market opportunity or employ the best skills of its organization. The path to success is choosing the best combination of market opportunities and organizational strengths. The company might target an apparently less attractive opportunity that fits its skills or develop some secondary skills to meet an opportunity. This is why the manager must integrate information from both the external analysis and the internal analyses when choosing the company's goals.¹

The goals of the company are not only to serve particular markets but also to serve them well. Companies strive for winning performance in their markets. Kenichi Ohmae observes that “[i]n the real world of business, ‘perfect’ strategies are not called for. What counts…is not performance in absolute terms but performance relative to competitors”.²

Corporate strategy is the overall strategy of a multi-business company. The corporation's senior management sets its goals by choosing the collection of individual businesses, thus determining the scope of the firm's activities. Each business serves a specific set of markets. Top management chooses a policy of diversification if entering multiple businesses increases the total value of the firm. Companies should operate multiple businesses only if those businesses are worth more when operated together than if they were operated separately. Corporate strategy involves the selection and coordination of the multiple businesses. Thus, the goals of corporate strategy are expressed in terms of the set of businesses the company wishes to operate. For example, Groupe Danone chooses to operate three global businesses: dairy products, biscuits, and beverages.

Business strategy is the overall strategy of a business unit of a large corporation or that of a standalone business. Business strategy refers to the plans of an established firm for serving existing markets or new markets. Business strategy also refers to the plans of an entrepreneur contemplating entry into a market. Many dot-coms failed because they followed a policy of ready-fire-aim. A start-up company certainly needs to have a business plan before it is established. The goals of a business are expressed in terms of the set of markets that the business wishes to serve. For example, one of the goals of Danone's dairy products business is to continue providing the highest-selling brand of yogurt worldwide.

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