©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com Chapter 1 The Concept of Strategy 1 Learning Objectives By the time you have completed this topic you will: •appreciate the contribution that strategy can make to successful performance, both for individuals and for organisations; •be aware of the origins of strategy and how views on strategy have changed over time; •be familiar with some of the key questions and terminology in strategy; •understand the debates that surround corporate values and social responsibility; •comprehend the basic approach to strategy that underlies this book. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 2 Common elements in successful strategies ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 3 Definitions of strategy • Strategy: a plan, method, or series of actions designed to achieve a specific goal or effect. – Wordsmyth Dictionary • The determination of the long-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. – Alfred Chandler, Strategy and Structure • Strategy is the pattern of objectives, purposes, or goals and the major policies and plans for achieving these goals, stated in such a way as to defi ne what business the company is in or is to be in and the kind of company it is or is to be. – Kenneth Andrews, The Concept of Corporate Strategy ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 4 Sources of superior profitability ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 5 Describing strategy ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 6 What Roles does Strategy Perform? Strategy as Decision Support Improves the quality of decision making Strategy as a Coordinating Device Creates consistency and unity Strategy as Target Improves performance by setting high aspirations Strategy as Animation and Orientation Motivates and mobilises ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 7 Profit and Purpose: “Profits are to business as breathing is to life. Breathing is essential to life, but is not the purpose for living. Similarly profits are essential for the existence of the corporation, but they are not the reason for its existence” Source: Quote from an interview by Robert M. Grant with Dennis Bakke, founder of the international power company, AES. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 8 Mission statements HENRY FORD “I will build a motor car for the great multitude . . . It will be so low in price that no man making good wages will be unable to own one and to enjoy with his family the blessing of hours of pleasure in God’s great open spaces . . . When I’m through, everyone will be able to afford one and everyone will have one.” GOOGLE To organize the world’s information and make it universally accessible and useful IKEA To create a better everyday life for the many people. We make this possible by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. SAP To define and establish undisputed leadership in the emerging market for business process platform offerings and accelerate business innovation powered by IT for companies and industries worldwide. GAIA HOUSE (a Buddhist retreat centre in England) ‘Exists for the liberation of all beings from greed, hatred and delusion’. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 9 Corporate Social Responsibility • Companies are increasingly accepting responsibilities that extend well beyond the immediate interest of shareholders: – For ethical reasons – For reasons of self interest • Sustainability (it is in both society’s and the firm’s interests to sustain the ecosystem) • Reputation (CSR enhances the firm’s reputation with consumers and third parties) • License to operate (firms need the approval and support of the constituencies on which they depend) ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 10 The basic framework: strategy as a link between the firm and its environment ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 11 ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com Chapter 2 Industry Analysis 1 Learning Objectives By the time you have completed this topic you will: • be familiar with several frameworks used to analyse an organisation’s external environment and understand how the structural features of an industry influence competition and profitability; • be able to use evidence on structural trends within industries to forecast changes in competition and profitability and to develop appropriate strategies for the future; • understand the value and challenge of undertaking industry analysis and be able to provide a critique of Porter’s five forces framework; • be able to analyse competition and customer requirements in order to identify opportunities for competitive advantage within an industry (key success factors). ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 2 The profitability of US industries, 20002010 Industry Median ROE 2000-10(%) Leading companies Tobacco 33.5 Philip Morris Int., Altria, Reynolds American Household and personal products 27.8 Procter & Gamble, Kimberly-Clark, ColgatePalmolive Motor vehicles and parts 4.4 GM, Ford, Johnson Controls Entertainment 3.9 Time Warner, Walt Disney, News Corporation Airlines -11.3 AMR, UAL, Delta Airlines Source: Data from Fortune 1000 by industry. See Grant & Jordan Table 2.1 for a more detailed list of US industries. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 3 How can we account for these differences in industry profitability? • It is all down to luck? • Some industries are in decline, others are growing fast? • The basic premise that underlies industry analysis is that the level of industry profitability is neither random nor entirely the result of industry-specific influences, it is determined by the industry’s underlying economic characteristics INDUSTRY STRUCTURE ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 4 Analysing the business environment • The business environment of the firm consists of the external influences that affect its decisions and performance • How can managers monitor the vast array of possible influences? – Need to distinguish the ‘vital’ from the ‘merely important – Classification schemes like PEST can help ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 5 PEST Analysis How macro-environmental factors might impact a business organisation: Political Economic Changes in government economic policy, e.g. taxation, government spending, monetary policy Changes in legal requirements e.g. employment law, health and safety legislation, licensing practices, environmental regulations, competition policy Changes in the government ownership e.g. nationalisation, privatisation, de-regulation Changes in the level of economic activity, e.g. growth rates, rates of unemployment, inflation Changes in wage rates and income distribution Changes in exchange rates Social Technological Changes in demographics e.g. the size of the population, the age distribution with the population Changing attitudes e.g. work/life balance, concern for the environment, ethical standards Changes in social structure e.g. socio-economic groupings, social mobility Development of new products and processes Automation Developments in information and communication technologies Developments in the natural sciences ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 6 From environmental analysis to industry analysis ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 7 Porter’s Five Forces of Competition Framework ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 8 Structural determinants of the competitive forces ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 9 Applying industry analysis Industry analysis can be used to: • Explain differences in profitability between industries and changes in the profitability of a given industry over time • Assist managers in positioning the firm advantageously • Predict possible changes in competition and profitability in the near future • Identify opportunities for changing industry structures and alleviating competitive pressures. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 10 The challenges of applying the five forces framework • Defining the industry • Choosing the appropriate level of analysis • Dealing with missing factors • Dealing with uncertainty and rapid structural change ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 11 Criticisms of the five forces of competition framework Two major lines of critique: • it omits important variables and cannot be applied to the dynamic and complex realities of many industries without significant modification • the premise on which the model is based is flawed and not supported by strong empirical evidence ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 12 Does industry matter? • A number of studies seem to show that industry environment is a relatively minor determinant of a firm’s profitability % of variance in firms’ ROA explained by: Industry effects Firm effects Unexplained variance Schmalensee (1985) 19.6% 0.6% 79.9% Rumelt (1991) 4.0% 44.2% 44.8% McGahan & Porter (1997) 18.7% 31.7% 48.4% Hawawini et al. (2003) 8.1% 35.8% 52.0% Roquebert et al. (1996) 10.2% 55.0% 32.0% Misangyi et al. (2006) 7.6% 43.8% n.a. • This points to the need to dig deeper, for example, by analysing competition between firms within particular market segments or by looking more closely at the competitive behaviour of individual firms. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 13 Segmenting the market for mobile phones ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 14 Identifying key success factors ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 15 ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com Chapter 3 Resources and Capabilities 1 Learning Objectives By the time you have completed this topic you will be able to: •Appreciate the role of a firm’s resources and capabilities as a basis for formulating strategy; •Identify and appraise the resources and capabilities of a firm; •Evaluate the potential for a firm’s resources and capabilities to confer sustainable competitive advantage; •Use resource and capability analysis to formulate strategies that exploit internal strengths while defending against internal weaknesses; •Identify the means through which a firm can develop its resources and capabilities; •Recognise the difficulties that managers face in developing the resources and capabilities of the organisation. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 2 Structure of the session • The role of resources and capabilities in strategy formulation • Identifying the organisation’s resources • Identifying the organisation’s capabilities • Appraising resources and capabilities • Putting resources and capabilities analysis to work • Developing resources and capabilities ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 3 Analysing resources and capabilities: the interface between strategy and the firm ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 4 Rationale for the Resource-based Approach to Strategy • When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus. • Resources and capabilities are the primary sources of profitability ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 5 The links among resources, capabilities and competitive advantage ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 6 Appraising resources RESOURCE Tangible Resources CHARACTERISTICS INDICATORS Financial Borrowing capacity Internal funds generation Debt/Equity ratio Credit rating Net cash flow Physical Plant and equipment: Size, location, technology flexibility. Land and buildings Raw materials Market value of fixed assets. Scale of plants Alternative uses for fixed assets Technology Patent, copyrights, know-how, R&D facilities Technical and scientific employees Number of patents owned Royalty income R&D expenditure R&D staff Reputation Brands, customer loyalty, company reputation (with suppliers, customers, government) Brand equity Customer retention Supplier loyalty Training, experience,adaptability, commitment and loyalty of employees Employee qualifications, Pay rates, turnover Intangible Resources Human Resources ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 7 Major firms with the highest market to book ratios, December 2006 Company Valuation Country Ratio Company Valuation Country Ratio Yahoo! Japan 72.0 Japan Coca-Cola 7.8 US Colgate-Palmolive 20.8 US Diageo 7.4 UK Glaxo Smith Kline 13.4 UK 3M 7.3 US Anheuser-Busch 12.6 US Nokia 6.7 Finland eBay 11.2 US Sanofi-Aventis 6.3 France SAP 10.8 Germany AstraZeneca 5.9 UK Yahoo! 10.7 US Johnson & Johnson 5.7 US Dell Computer 10.0 US Boeing 5.7 US Sumitomo Mitsui Financial 8.8 Japan Eli Lily 5.6 US Procter & Gamble 8.4 US Cisco Systems 5.5 US Qualcomm 8.3 US Roche Holding 5.5 Switz. Schlumberger 8.2 US L’Oreal 5.3 France Unilever 8.1 Neth/UK Altria 5.2 US PepsiCo 8.0 US Novartis 5.1 Switz. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 8 The world’s most valuable brands, 2010 Rank Brand Brand Value $ Billion Change from 2009 (%) Country of Origin 1 Coca-Cola 70.4 +2 USA 2 IBM 64.7 +7 USA 3 Microsoft 60.9 +7 USA 4 Google 43.6 +36 USA 5 GE 42.8 -10 USA 6 McDonald’s 33.6 +4 USA 7 Intel 32.0 +4 USA 8 Nokia 29.5 -15 Finland 9 Disney 28.7 +1 USA 10 Hewlett-Packard 26.9 +12 USA 11 Toyota 26.2 -16 Japan 12 Mercedes-Banz 25.2 +6 Germany 13 Gillette 23.3 +2 USA 14 Cisco 23.2 +5 USA 15 BMW 22.3 +3 Germany 16 Louis Vuitton 21.9 +4 France 17 Apple 21.1 +37 USA 18 Marlboro 20.0 +5 USA 19 Samsung 19.5 +11 South Korea 20 Honda 18.5 +4 Japan n ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 9 Source: Interbrand A functional classification of organizational capabilities FUNCTION CAPABILITY EXEMPLARS CORPORATE FUNCTIONS Financial control Management development Strategic innovation Multidivisional coordination Acquisition management International management ExxonMobil, PepsiCo General Electric, Shell Google, Haier Unilever, Shell Cisco Systems, Luxottica Shell, Banco Santander MANAGEMENT INFORMATION Comprehensive, integrated MIS network linked to managerial decision making Wal-Mart, Capital One, Dell R&D Research Innovative new product development Fast-cycle new product development IBM, Merck 3M, Apple Canon, Inditex (Zara) OPERATIONS Efficiency in volume manufacturing Continuous improvements in operations Flexibility and speed of response Briggs & Stratton, YKK Toyota, Harley-Davidson Four Season Hotels PRODUCT DESIGN Design capability Nokia, Apple MARKETING Brand management Building reputation for quality Responsiveness to market trends Procter & Gamble, Altria Johnson & Johnson MTV, L’Oreal SALES AND DISTRIBUTION Effective sales promotion and execution Efficiency and speed of order processing Speed of distribution Customer service PepsiCo, Pfizer L. L. Bean, Dell Amazon.com Singapore Airlines, Caterpillar ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 10 Porter’s value chain ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 11 Appraising the strategic importance of resources and capabilities ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 12 Putting resource and capability analysis to work: a practical guide Step 1: Identify the key resources and capabilities Step 2: Appraising resources and capabilities ― Assessing importance ― Assessing relative strength Step 3: Developing strategy implications ― Exploiting key strengths ― Managing key weaknesses ― What about superfluous strengths? ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 13 Developing resources and capabilities • Some basic issues: - Path dependency and role of early experience - Linkages between resources and capabilities - Are organizational capabilities rigid or dynamic? • Approaches to capability development - Acquiring capabilities: mergers, acquisitions and alliances - Internal development: focus and sequencing ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 14 Distinctive capabilities as a consequence of childhood experiences: the oil majors ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 15 Summary: a framework for analyzing resources and capabilities ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 16 ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com Chapter 4 The Nature and Sources of Competitive Advantage 1 Learning Objectives By the time you have completed this topic you will be able to : •Understand the meaning of the term ‘competitive advantage’ and identify the circumstances in which a firm can create a competitive advantage over a rival; •Predict the potential for competition to erode competitive advantage through imitation; •Recognise how resource conditions create imperfections in the competitive process that offer opportunities for competitive advantage; •Distinguish the two primary types of competitive advantage: cost advantage and differentiation advantage; •Use the value chain framework to analyse sources of cost and differentiation advantage and to recommend strategies for enhancing competitiveness; •Appreciate the pitfalls of being ‘stuck in the middle’ and the challenge of achieving effective differentiation and low cost together. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 2 The Emergence of Competitive Advantage ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 3 Competitive advantage from innovation: new game strategies • Strategic Innovation: creating customer value from novel products, experiences or modes of product delivery • Strategic innovation may involve: - Creating new industries, e.g. Xerox and plain paper copies; Craig McCaw and wireless telephone technology - Creating new customer segments, e.g. Apple established the market for home computers; the Nintendo Wii extended the market for video games to new types of customer - New sources of competitive advantage; novel approaches to creating consumer value, e.g. Dell Computer’s direct sales model; Cirque du Soleil’s reinvention of the circus ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 4 Sustaining competitive advantage: types of isolating mechanism ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 5 Sources of Competitive Advantage ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 6 Features of cost leadership and differentiation strategies ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 7 Drivers of cost advantage ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 8 Value chain analysis of cost advantage 1. Disaggregate the firm into separate activities 2. Establish the relative importance of different activities with respect to the total cost of the product 3. Identify cost drivers and linkages within the value chain 4. Identify opportunities for reducing costs. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 9 Using the value chain analysis to explore cost-saving: Singapore Airlines Porter’s category Inbound logistics Operations Examples of airline activities that fit Porter’s categories Aircraft, fuel, food and drink Cost-saving opportunities and initiatives Technology development IT systems Non-strategic IT services outsourced to low-cost providers Procurement Acquisition of aircraft Culture of hard bargaining Young fleet, fuel efficient aircrafts, decrease of waste in food and drink Airport and gate operations, Repairs account for 4% of SIA’s total cost (1% less ticketing, flight scheduling, baggage than rivals) handling, repair & maintenance Outbound Flight connections, partnerships and Routes are added and terminated to maximise load logistics alliances with other operators factors Marketing & Promotion, advertising Awards enhance the company’s brand image. Social sales media are a low-cost way to improve the relationship with customers Service Pre and post flight service Online meals and seats’ booking allows forward planning Firm Management system – yield Small headquarters located in low-cost site infrastructure management, IT services, budgeting HRM Recruitment and Reward Training emphasizes “waste control”, bonuses Training depend on company profitability, compensation based on Singapore rates ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 10 Using the value chain to identify differentiation potential on the supply side ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 11 Porter’s generic strategies ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 12 Stuck in the middle? Porter’s Three Generic Strategies ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 13 ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com Chapter 5 Business strategies in different industry and sectoral contexts 1 Learning objectives By the time you have completed this topic you will be able to: • Recognise the different stages of industry development and understand the factors that drive the process of industry evolution; • Identify the key success factors associated with industries at different stages of their development and the strategies appropriate to different stages in the industry life cycle; • Recognise the particular challenges that face managers engaged in strategic decision making in public sector and not-for-profit contexts and appreciate that some of the tools and techniques of strategic analysis may need to be adapted or may be inapplicable in these contexts; • Use stakeholder analysis to gain an understanding of political priorities; • Use scenarios to explore industry and organisational futures. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 2 Structure of the session • The industry life cycle • Strategy at different stages of the life cycle • Strategy in public-sector and not-for-profit contexts • Stakeholder analysis • Scenario planning ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 3 The industry life cycle The two major forces that drive industry evolution are: •Demand growth •The production and diffusion of knowledge ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 4 Product and process innovation over time Once a dominant design emerges, the focus of innovation shifts from product innovation to process innovation ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 5 Innovation and renewal in the industry life cycle: US retailing ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 6 Industry structure and competition over the life cycle Introduction Growth Maturity Decline Demand Early adopters Rapidly increasing market penetration Replacement/ repeat buying; price sensitive customers Obsolescence Technology Competing technologies; rapid product innovation Standardization; rapid process innovation Diffused know how; incremental innovation Little innovation Products Wide variety of features & designs Design & quality improve; dominant design emerges Commoditization; brand differentiation Differentiation difficult Capacity shortage, mass- production Over-capacity emerges; deskilling of production Overcapacity Manufacturing Short-runs, skill & Distribution intensive ------Production shifts from advanced to developing countries Trade Competition Few companies Entry, mergers and exits Shakeout & consolidation Price wars & exits Key Success Factors Product innovation Design for manufacture Process innovation Cost efficiency (scale economies, low cost inputs) Low overheads; rationalization; buyer selection ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 7 Strategy in public sector and not-forprofit contexts • Defining public sector and not-for-profit organisations can be difficult because boundaries are often blurred. • Umbrella terms like “public” and “not-forprofit” cover a wide variety of organisations, each with its own particular characteristics ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 8 Examples of different types of organisation Organizational type Ownership Funding/Revenue source Government department Public Government Public The Department for International Development (UK), The Department for Homeland Security (US) State-owned enterprise Public Sales of goods and services and/or government Public Via Railways (Canada), The Australian Broadcasting Corporation (Australia) Charity Trustees Donations and/or government Those who are the Oxfam, World Wildlife Fund, focus of the Save the Children organization’s mission Public- Private Partnership Public and Private Sales of goods and services and government Public and Private Social enterprise Private or Trustees Sales of goods and services Those who are the CaféDirect, Elvis&Kresse, focus of the Fifteen organization’s mission Private enterprise Private Sales of goods and services Shareholders ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com In whose interest? Illustrative examples The Global Alliance for Vaccines and Immunization, Transport for London Tata Group (India), Woolworths Holdings Ltd (South Africa), Siemens AG (Germany) 9 Some of the ways in which public sector and not-for-profit organizations can differ from private sector firms 1. 2. 3. 4. 5. 6. 7. Multiple, potentially conflicting goals Distinctive constraints and different levers An absence of market forces Monopoly power Less autonomy and flexibility Increased accountability Less predictability Distinctive strategic issues for not-for-profits: • The employment of volunteers • Fundraising ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 10 Oster’s six forces model ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com Source: Oster (1995) 11 Key steps in stakeholder analysis 1. Identifying the list of potential stakeholders 2. Ranking stakeholders according to their importance to, and influence on, the organisation. 3. Identifying the criteria that each stakeholder is likely to use to judge the organisation’s performance. 4. Deciding how well the organisation is doing from its stakeholders’ perspective. 5. Identifying what can be done to satisfy each stakeholder. 6. Identifying and recording longer term issues with individual stakeholders and stakeholders as a group. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 12 Stakeholder power/interest grid and managerial responses The power/interest grid Managerial responses to stakeholders Source:Eden and Ackerman (1998) ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 13 Scenario analysis: Key steps in building and using scenarios • Defining the purpose of the analysis • Deciding on the time horizon • Identifying key trends • Identifying key uncertainties • Creating the scenarios and checking that they are internally consistent • Identifying indicators that might signal which scenario is unfolding • Assessing the strategic implications of each scenario ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 14 ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com Chapter 6 Technology-based industries and the management of innovation 1 Learning objectives By the time you have completed this topic you will be able to: •Analyse how technology affects industry structure and competition •Identify the factors that determine the returns to innovation and evaluate the potential for an innovation to establish competitive advantage •Formulate strategies for exploiting innovation and managing technology, focusing in particular on: – the relative advantages of being a leader or follower in innovation – identifying and evaluating options for exploiting innovation – how to win standards battles – how to manage risk •Design the organisational conditions needed to implement such strategies successfully ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 2 Structure of the session • The industry life cycle • Strategy at different stages of the life cycle • Strategy in public-sector and not-for-profit contexts • Stakeholder analysis • Scenario planning ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 3 The development of technology: from knowledge creation to diffusion ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 4 Appropriation of value: Who gets the benefits from innovation? The extent to which innovators appropriate the value of their innovation depends upon: • The strength of their property rights in the innovation • The tacitness and complexity of the technology embodied in the innovation • The lead-time they have over followers • The extent to which they possess the complementary resources needed to commercialise the innovation. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 5 Complementary resources ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 6 Alternative strategies for exploiting innovation ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 7 Timing innovation: to lead or to follow? (1) Product Innovator Follower The winner Jet airliner De Havilland (Comet) Boeing (707) Follower Float glass Pilkington Corning Leader X-ray scanner EMI General Electric Follower Office PC Xerox IBM Follower VCRs Ampex/Sony Matsushita Follower Instant camera Polaroid Kodak Leader Pocket calculator Bowmar Texas Instruments Follower Microwave oven Raytheon Samsung Follower Fiber-optic cable Corning Many companies Leader Video games player Atari Nintendo/Sony Followers ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 8 Timing innovation: to lead or to follow? (2) Product Innovator Follower The winner Disposable diaper Proctor & Gamble Kimberley-Clark Leader Ink jet printer IBM and Siemens Hewlett Packard Follower Web browser Netscape Microsoft Follower MP3 music players Diamond Multimedia Apple (iPod) Follower Operating systems for mobile phones Symbian Microsoft Leader Laser printer Xerox, IBM Canon Follower Flash memory Toshiba Samsung, Intel Followers E-book reader Song (Digital Reader) Amazon (Kindle) Follower ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 9 Factors that determine the relative success of leaders and followers? Can the innovation be protected by intellectual property rights or lead-time advantages? If so, advantages in leadership How important are complementary resources? Followers cab avoid investing in complementary resources due to better-established industry infrastructure Firms possessing complementary resources have the luxury of waiting Is there potential to establish an industry standard? If so, advantage in being a leader ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 10 Companies that own de facto industry standards ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 11 Managing risk in technology-based Industries Sources of uncertainty Technological Uncertainty: emergence of new technologies and outcomes of technological rivalries are difficult to predict Market Uncertainty: customer acceptance and adoption of innovations notoriously difficult to predict Cooperating with Lead Users Strategies for managing risk ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com Limiting Risk Exposure: -Avoid major capital commitments (e.g. lease don’t buy) -Outsource -Alliances to access other firms’ resources and capabilities -Keep debt low Flexibility: - Keep options open - Use speed of response to adapt quickly to new information - Learn from mistakes 12 Fighting Standards Wars 1. Determine the potential for a standard to emerge—analyze network externalities 2. Assemble allies—enlist partners (customers, complementors, competitors) to build a bandwaggon 3. Pre-empt the market—build user base quickly: enter early, attract key customers, adopt penetration pricing 4. Manage expectations—use launch and pre-launch publicity and promotion to convince the market that you will be the winner Key resources needed to win a standards war: • Control over an installed base of customers • Owning intellectual property rights in the new technology • The ability to innovate to extend the initial technological advance • First-mover advantage • Strength in complements • Reputation and brand name ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 13 The conditions for creativity: “operating” and “innovating” organizations Operating organization Innovating organization Structure Bureaucratic. Specialization and division of labor. Hierarchical control. Defined organizational boundaries. Flat organization without hierarchical control. Taskoriented project teams. Fuzzy organizational boundaries. Processes Emphasis on eliminating variation (e.g. six-sigma). Topdown control. Tight financial controls. Emphasis on enhancing variation. Loose controls to foster idea generation. Flexible strategic planning and financial control. Reward systems Financial compensation, promotion up the hierarchy, power, and status symbols. Autonomy, recognition, equity participation in new ventures. People Recruitment and selection based on the needs of the organization structure for specific skills: functional and staff specialists, general managers, and operatives. Key need is for idea generators that combine required technical knowledge with creative personality traits. Managers must act as sponsors and orchestrators. ©2012 Robert M. Grant & Judith Jordan www.foundationsofstrategy.com 14
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