Strategic Management
Introduction ...................................................................................................................... 2
Strategy Safary: Ten schools .............................................................................................. 3
Chapter 2 – Horizontal Boundaries of the firm ................................................................... 7
Chapter 3 & 4 – Organizing vertical boundaries: vertical integration and its alternatives.. 18
Chapter 6 – Entry and exit ............................................................................................... 24
Chapter 8 – Industry analysis ........................................................................................... 30
Chapter 7 – Dynamics: competing across time ................................................................. 33
Chapter 9 – Strategic positioning for competitive advantage ........................................... 37
Chapter 11 – Sustaining competitive advantage .............................................................. 43
EXTRA Chapter 11 – Porter’s Diamond framework ........................................................... 47
Chapter 13 – Strategy and Structure ................................................................................ 55
Chapter 14 – Environment, power and culture ................................................................. 60
Appendix ........................................................................................................................ 61
Exam strategic management january 2019 .............................................................................. 61
Solution of 3 assignments ....................................................................................................... 62
Examples ................................................................................................................................ 75
Value Chain Analysis ...................................................................................................................................... 75
SWOT ............................................................................................................................................................. 80
Porter’s Diamond model................................................................................................................................ 82
Porter’s Five Forces ........................................................................................................................................ 84
Porter’s Generic Strategies ............................................................................................................................ 85
BCG................................................................................................................................................................. 88
The concept of strategy: 4 big issues
1. Concept and evolution of strategic “schools of thought” WHAT
2. Boundaries of the firm: WHERE
o Horizontal: size of the company, how much producing
o Vertical: what will we produce or buy?
o Corporate (company as a whole): on which markets do we want to be?
3. Competition: WHO and HOW
o Type of market business is operating
o Kind of interaction of rivals
4. Positioning and dynamics: WHY
o Where do we want to be? Low cost? Differentiation?...
o Which competitive advantage do we want to have? Do we have the resource and
capabilities for that?
1
,Introduction
Strategy = the overall design and philosophy to plan for deploying resources to establish a favorable
position/ reach success
Tactic = scheme for a specific maneuver
Characteristics of strategic decisions:
- Important
- Involve a significant commitment of resources
- Not easily reversible
The role of analysis
• Strategy analysis improves/supports decision processes, but doesn’t give answers
• Strategy analysis assists us to identify and understand the main challenges of organizations/
businesses
• Strategy analysis helps us to manage complexity
• Strategy analysis can enhance flexibility and innovation by supporting learning
What makes a successful strategy?
The basic framework
Strategy: the link between the
firm and its environment
Strategic making processes within the company: multiple roles of strategy
Strategy as Decision support improve the quality of decision making
Strategy as Coordination and communication Creates consistency and unity
Strategy as Target Improves performance by setting high aspiration
2
,Strategy Safary: Ten schools - groupings: framework that can be used to categorize the
field of Strategic Management.
Many companies and marketing managers have dedicated staff for strategy formulation. It is a very
important process for the company, as it tells the future direction which the company has to take,
and the way that the company can succeed. The 10 schools of thoughts tell us how strategy
formulation can be done, and what the various ways are that you can formulate a strategy.
1) Design School = Strategy formations as a process of conception
2) Planning school = Strategy formation as formal process
3) Positioning school = Strategy formation as an analytical process
4) Entrepreneurial school = Strategy formation as a visionary process
5) Cognitive school = Strategy formation as a mental process
6) Learning school = Strategy formation as a emergent process
7) Power School = Strategy formation as a negotiation
8) Cultural School = Strategy formation as a collective process
9) Environmental school = Strategy formation as a reactive process
10) Configuration process = Strategy formation as a process of transformation
Design school
Focus is on conception of ideas and to design new ideas. The company does an internal analysis
with the help of SWOT.
- Strategy that seeks to attain a match or fit, between internal capabilities and external
possibilities
- Nature: prescriptive
- Senior management formulates clear and simple
strategies in a deliberate process of conscious
thought and communicates them to the staff so
that everyone can implement the strategies.
- Dominant view of strategy in 1970s, based on Alfred
D. Chandler’s “Strategy and structure”.
- 2 stage approach:
1. from close examination (case study):
internal capabilities
2. external possibilities
Major criticismes – CONS
• Strategy formation should be deliberate process of conscious thought
• Responsibility for that control and consciousness must rest with the chief executive
officer: that person is the strategist
• The model of the strategy formation be kept simple and informal
• Strategies should be one of a kind: the best ones result from a process of individualized
design
• The design process is complete when strategies appear fully formulated as perspective
• These strategies should be explicit, so they have to be kept simple
• Only after theses unique, full-blown, explicit, and simple strategies are fully formulated
can they then be implemented
• Assessment of strengths and Weakness – Bypassing Learning
• Structure follows strategy
• Making strategy explicit
3
,Encouragement towards design school model – PROS
• One brain can, in principle, handle all of the information relevant for strategy information
• That brain is able to have full, detailed, intimate knowledge of the situation in question
• The relevant knowledge must be established before a new intended strategy has to be
implemented – in other words, the situation has to remain relatively stable or at least
predictable
• The organization in question must be prepared to cope with a centrally articulated strategy
Planning school
Planning the entire strategy in a rigorous manner, so that the firm advances forward.
• Nature: prescriptive
• This school grew in parallel with the design school, but the Planning School predominated by
the mid-1970's and though it faltered in the 1980s it continues to be an important influence
until early 21st century
• It reflects most of the design school's assumptions except a rather significant one: that the
process was not just cerebral but formal, decomposable into distinct steps, delineated by
checklists, and supported by techniques
• This meant that staff planners replaced senior managers as the key players in the process.
• Origin: H. Igor Ansoff’s “Corporate Strategy”
Positioning school
The management decides that they want to position the product at the top of the mind and
makes decisions accordingly. The management has to determine the competition already present in
the market, and where their own company is positioned. It can use tools like 5 forces, Value Chain,
BCG Matrix to position its products. Once the market has been analyzed, the right strategy is needed
to improve the positioning of the product.
• Nature: prescriptive
• This was the dominant view of strategy formulation in the 1980s
• In this view, strategy reduces to generic positions selected through formalized analysis of
industry situations—hence, planners became analysts
• This proved especially lucrative to consultants, who could sink their teeth into hard data and
so promote their "scientific truths" to companies
• Origin: Sun Tzu, Michael Porter
Entrepreneurial school
Focus on CEO of the company. The company follows whatever the CEO says. In this case, the CEO
needs to be visionary, needs strong leadership skills, and has to have the right judgement and
direction.
• Nature: prescriptive and descriptive
• Central concept: vision
• Focused on the single leader
• Also stressed the most innate of mental states and processes - intuition, judgement,
wisdom, experience, insight.
• Origin: J. A Schumpeter’s notion of “Creative Destruction”
Steve Jobs, Zuckerberg, Bill Gates are examples of people who have grown companies to incredible
proportions due to their leadership skills.
4
,Cognitive school
people’s perception and information is studied. You can better your business by understanding
your customers. It is a mental and psychological process to find out what is in the minds of the
customer and how we improve on that or use that information.
Once you know the customer’s perception, you can change the strategy: you can either improve or
you can communicate better so that your customers have more information about you.
• Nature: descriptive
• If strategies developed in people's mind as frames, models, or maps, what could be
understood about those mental processes?
• The job of the cognitive school: to get at what this process means in the sphere of human
cognition, drawing specially on the field of cognitive psychology
• Strategy is some kind of interpretation of the world
• Origin: H. A Simon
Learning school
A company forms his future strategy by looking at the past, not necessarily its own past (other
companies). The company looks at things that worked and tries to implement the same thing over
time with the assumption that it will work again. The company also looks at things that did not work
in its favor (or in favor of a competitor who tried to same thing) and discards such things.
• Nature: descriptive
• This school answers the question raised by the previous schools
• Question: How are strategists supposed to proceed? Answer: they learn over time
• According to this school, strategies emerge as people, sometimes acting individually but
more often collectively, come to learn about a situation as well as their organization’s
capability of dealing with it.
• Origin: Charles Lindblom’s article “the science of muddling through
Power school
The people who are in power take the decisions. Problem with this school : when the powerful
people stop listening to feedback or stop implementing measures of improvement.
• This comparatively small, but quite different school has focused on strategy making rooted in
power in two ways:
1. Micro power sees the development of strategies within the organization as
essentially political, a process involving bargaining, persuasion, and confrontation
among inside actors
2. Macro power takes the organization as an entity that uses its power over others and
among its partners in alliances, joint ventures, and other network relationships to
negotiate "collective" strategies in its interests
• Origin: MacMillan’s text on “Strategy Formulation: Political Concepts”
Cultural school
• Opposing the power school, the cultural school focuses on common interest and integration
• Strategy formation is viewed as a social process rooted in culture
• The theory concentrates on the influence of culture in discouraging significant strategic
change
• Culture became a big issue in the United States and Europe after the impact of Japanese
management (e.g. Kaizen) was fully realized in the 1980's and it grew clear that strategic
advantage can be the product of unique and difficult-to-imitate cultural factors
5
,Environmental school
• The environmental school deserves attention for the light it throws on the demands of the
environment
• Among its most noticeable theories is the "contingency theory," that considers what
responses are expected of organizations that face particular environmental conditions, and
"population ecology” writings that claim severe limits to strategic choice
• Problem: the process depends on the environment which constantly changes. It is difficult
for organizations to keep changing their strategies constantly.
Configuration school
The strategy needs to be improved. This school tries to attain stability via various ways and keeps
transforming as long as needed.
• Two main sides of this school:
1. One describes state-of the organization and its surrounding context
2. Other describes the strategy making process- as transformation
• Transformation is an inevitable consequence of configuration
• It describes the relative stability of strategy within given states, interrupted by occasional
and rather dramatic leaps to new ones
Big issues 2, 3 and 4: Besanko et. Al.
Big issue 2 – WHERE? = corporate strategy
Big issue 3 – WHO AND HOW? = competitive strategy
Big issue 4 – WHY? = competitive and corporate strategy
6
,Chapter 2 – Horizontal Boundaries of the firm how big a market does a firm serve?
Horizontal boundaries identify the quantity and the varieties of products a firm produces. It defines
how much of the total product market the firm serves (scale) and what variety of related products
the firm offers (scope).
In some industries a few large firms dominate the market today (examples: Commercial aircraft
manufacture, entertainment supergiants). In others, smaller firms are the norm (examples:
Apparel design, Universities)
There are several industries where large firms and small firms co-exist (examples: Software, Beer,
Banks, Insurance companies)
What determines the horizontal boundaries of firms?
How should a firm optimally choose its horizontal boundaries?
Determinants horizontal boundaries
1. Economies of scale = declining average cost with volume
= The production process for a specific good or service exhibits economies of scale over a range of
output when average cost (i.e., cost per unit of output) declines over that range
= MC < AC
Example: computer software. The marginal cost of reproducing a CD is negligible compared with the
huge fixed cost associated with software development
If average cost is increasing, then marginal cost must exceed average cost (MC > AC), and we say that
production exhibits diseconomies of scale.
An average cost curve captures the relationship between average costs and output.
U-shaped cost curve
- Average cost declines as fixed costs are spread
over larger volumes
Fixed costs are insensitive to volume; they must be
expended regardless of the total output. Examples of
such volume-insensitive costs are manufacturing
overhead expenses, such as insurance, maintenance, and
property taxes.
- Average cost eventually starts increasing as capacity constraints kick in or if they encounter
coordination or other agency problems
- U-shape implies cost disadvantage for very small and very large firms. Medium-sized have a
cost advantage over small and large firms.
- Unique optimum size for a firm
7
,L-shaped cost curve
When average cost curves are L-shaped, average costs decline up to the minimum efficient scale
(MES) of production and all firms operating at or beyond MES have similar average costs.
Sometimes, production exhibits U-shaped average costs in the short run, as firms that try to expand
output run up against capacity constraints.
In the long term, however, firms can expand their capacity by building new facilities. If each facility
operates efficiently, firms can grow as large as desired without driving up average costs. This would
generate the L-shaped cost curve.
A good example is when a cement company builds a plant
in a new location.
- In reality, cost curves are closer to L-shaped curves
than to U-shaped curves
- A minimum efficient size (MES) beyond which
average costs are identical across firms
2. Economies of scope = cost savings when different goods/ services are produced “under one
roof”
Economies of scope exist if the firm achieves savings as it increases the variety of goods and services
it produces.
Because it is difficult to show scope economies graphically, we will instead introduce a simple
mathematical formulation.
Formally, let TC(Qx, Qy) = the total cost to a single firm producing Qx units of good X and Qy units of
good Y.
Then a production process exhibits scope economies if TC(Qx,Qy) < TC(Qx,0) + TC(0,Qy)
This formula captures the idea that it is cheaper for a single firm to produce both goods X and Y
than for one firm to produce X and another to produce Y.
Production of B reduces the incremental cost of producing A.
To provide another interpretation of the definition, note that a firm’s total costs are zero if it
produces zero quantities of both products, so TC(0, 0) = 0. Then, rearrange the preceding formula to
read: TC(Qx,Qy) – TC(0,Qy) < TC(Qx,0)
This says that the incremental cost of producing Qx units of good X, as opposed to none at all, is
lower when the firm is producing a positive quantity Qy of good Y.
Common expressions that describe strategies that exploit the economies of scope:
- Leveraging core competences
- Competing on capabilities
- Mobilizing invisible assets
- Diversification into related products
8
,Example of economies of scope
Let’s say you are a shoe manufacturer. You produce men’s and women’s sneakers. Adding a
children’s line of sneakers would increase economies of scope because you can use the same
production equipment, supplies, storages and distribution channels to make a new line of products.
The cost to produce all 3 of your different lines is lower than if 3 different companies each produced
a line of men’s shoes, a line of women’s shoes, and a children’s line. Because you can extend the use
of your resources to make more products to be sold to your same target, you can continue to drive
costs down.
Sources of economies of scale/ scope
- Production related: FC, inventories, cube-square rule
- Other: purchasing, advertising, R&D
As these examples suggest, economies of scale and scope may arise at any point in the production
process, from acquisition and use of raw inputs to distribution and retailing. Although business
managers often cite scale and scope economies as justifications for growth activities and mergers,
they do not always exist. In some cases, bigger may be worse! Thus, it is important to identify specific
sources of scale economies and, if possible, measure their magnitude.
- Tesco’s capability in warehousing and distribution gives it a cost advantage across many
geographic markets.
- Apple’s core competency in engineering allows it to make popular cell phones, laptops, and
tablet computers.
- Ikea’s skills in product design extends to an enormous range of home furnishing products.
Fixed costs
The most common source of economies of scale is the spreading of fixed costs over an ever-greater
volume of output.
• Fixed costs arise when there are indivisibilities in the production process. Indivisibility simply
means that an input cannot be scaled down below a certain minimum size, even when the
level of output is very small. Certain inputs in the production process may not fall below a
minimum
• Increasing the volume of production yields economies of scale in the short run
• In the long run, economies of scale are obtained through the choice of technology
Trade-offs among technologies
- If output needs to be increased beyond a
point, capital intensive technology needs to
be substituted for labor intensive
technology
- The “lower envelope” of the two cost
curves is the long run average cost curve
9
, 6 specific sources of economies of scale and scope:
1. Economics of density
2. Purchasing
3. Advertising
4. Research and development
5. Physical properties of production
6. Inventories
The first four rely entirely or in part on spreading of fixed costs. Physical properties of production and
inventory-based economies do not.
Inventories
• Firms carry inventory to minimize the chances of running out of stock
For a manufacturer, a stock-out for a single part may delay an entire production process.
For a retailer, a stock-out can cause lost business and lead potential customers to seek more reliable
suppliers.
Of course, there are costs to carrying inventory. In general, inventory costs are proportional to the
ratio of inventory holdings to sales. The need to carry inventories creates economies of scale because
firms doing a high volume of business can usually maintain a lower ratio of inventory to sales while
achieving a similar level of stock-outs.
• In addition to lost sales, stock outs can adversely affect customer loyalty
• Bigger firms can afford to keep smaller inventories (relative to sales volume) compared with
smaller firms: risk of being out of stock is lower
• Two firms may not experience stock outs at the same time
• Merging the two firms will reduce the probability of stock out, given the level of inventory
• The combined firm can maintain a lower level of inventory and have the same probability of
stock out
Physical Properties of Production
Economies of scale may arise because of the physical properties of processing units. An important
example of this is the Cube-square rule: It states that as the volume of the vessel (e.g., a tank or a
pipe) increases by a given proportion (e.g., it doubles), the surface area increases by less than this
proportion (e.g., it less than doubles).
• Double the diameter of a hollow sphere and the volume will increase eightfold, whereas the
surface area will increase only fourfold
• The cost of the sphere is likely to increase by less than eight times
• If the hollow sphere is part of production equipment in a chemical plant, cost savings follow
from increased size
• Examples of scale economies due to the cube-square rule
o Pipelines: Oil pipelines are an excellent example of this phenomenon. The cost of
transporting oil is an increasing function of the friction between the oil and the pipe.
Because the friction increases as the pipe’s surface area increases, transportation
costs are proportional to the pipe’s surface area. By contrast, the amount of oil that
can be pumped through the pipe depends on its volume. Thus, the Average cost of a
pipeline declines as desired throughput increases.
o Warehousing: the cost of making the warehouse is largely determined by its surface
area
10
