Strategic Management and the Organization

1
Strategic Management and the Organization

• Chapter 8

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Organizational Strategy

• Like in military applications, strategy is about
  knowing yourself, knowing your opponent, and
  making better use of your knowledge than your
  opponent does
• Strategy is the guiding force that gives
  direction to the value creation activities of the
  entire organization
• Strategy in practice is strategic management

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Strategic Management

• Process by which the organization becomes aware
  of the threats and opportunities inherent in the
  external environment as well as its own internal
  strengths and weaknesses and uses this knowledge
  to guide decision making
• Key tool is SWOT analysis
• Strategy is about the focused pursuit of
  thoughtfully established goals

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Purposes of Organizational Goals

• Provide employees with direction and motivation
  (recall goal-setting theory)
• Provide a guide for managerial and employee
  decision making
• Establish performance criteria
• Provide legitimacy to external stakeholders by
  showing the organization has a game plan
• Integrate all employees by giving them common
  objectives.

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The Strategy Process

• Determining the Mission
• Determining Operative Goals
• Identifying a Strategy to meet those goals
• Competitive advantage through core competencies
• Define tactics to carry out the strategy

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Levels of Strategy (1)

• Corporate (organizational) level (what business
  are we in?)
• Growth
• Vertical integration of supply chain
• Related diversification
• Unrelated diversification
• Resource control (e.g. strategic alliances)
• Stability (holding market share)
• Retrenchment (divestiture)

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Levels of Strategy (2)

• Business level (how do we compete through
  strategic business units)
• Low-cost
• Differentiation
• Focus (focused-low cost, focused differentiation)
• Functional level (how do the organizations units
  support business-level strategy?)
• Each function (manufacturing, RD, Sales, etc.
  need to find and exploit their competencies in
  order to contribute to unique organizational
  competencies

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Strategic Analysis (SWOT)

• At all levels (corporate, business, functional,
  global) strategies are devised by looking at the
  internal, external and global environments and
  seeking sources of competitive advantages
• Internal analysis Strengths and Weaknesses
  (i.e. competencies)
• External analyses Opportunities and Threats
  (i.e. competitive forces)

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Key Ideas Strategy Setting

• Core Competencies unique skills and abilities
  within an organization that are translated into
  value creation
• Competitive Advantage - The ability of an
  organization to transform its core competencies
  into sustainable advantage over competitors that
  is not easily replicated
• Competitive Forces the external environmental
  forces that directly affect the organizations
  competitive position in its industry

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Competitive Forces (Porter)

• Threat of entry by new competitors
• Threat of substitute goods/services
• Bargaining power of buyers
• Bargaining power of suppliers
• Rivalry amongst existing competitors

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Sources of Competitive Advantage

• Product and Process Technologies
• Protected and regulated markets
• Access to financial resources
• Economies of scale
• Management of people

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Matching Strategy Structure

• Structure must match the corporate and business
  level strategy
• Considerations
• Size of the organization
• Degree of centralization
• Degree of standardization
• Amount of integration
• Overall, mechanistic vs. organic ?

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Corporate-Level Strategy and Structure

• Growth larger organizations, particularly those
  that are diversified, need a divisional structure
  to handle diversification
• Related diversification incorporation into
  product division structure
• Unrelated diversification conglomerate m-form
• Stability and Retrenchment means reducing the
  complexity of structure, possibly network
  structure)

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Business-Level Strategy and Structure

• Low cost strategy mechanistic structure
  (centralized, low differentiation, high
  standardization, low integration, simple
  structure like functional)
• Differentiation Strategy organic structure
  (decentralized, high differentiation, high
  integration, complex structure like divisional or
  matrix)
• Focus strategy stay as small as the market
  simple, lean structure

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The International Environment
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International Environment Opportunities and
Threats

• Opportunities
• Expansion into new markets (commercial and
  consumer)
• Increase sales and production economies of
  scale/scope
• Access to many suppliers
• Access to new resources and competencies
• Production in lowest cost regions
• New competencies can be attained from foreign
  best practices

• Threats
• Increased competition in the domestic market from
  low-cost foreign competitors
• Increased competition in foreign markets from
  third-country firms
• Increased volatility of markets due to global
  interconnectedness of markets

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Environmental Elements
General Environment
Financial
Technology
Customers
Internal Environ-ment
Competition
Labour Market
International
Socio- cultural
Supply Chain
Legal/Political
Task Environment
Economic
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Demands on Org. Structure

• Global monitoring need a structure that enables
  collection and sharing of information about
  important international events
• Flexibility and Adaptability Structure must be
  flexible enough to adapt quickly to changes in
  different areas
• Efficiency need to cut costs and eliminate
  redundancies to remain competitive
  internationally
• Integration of Information flow of information
  vertically and horizontally must be managed
  effectively to deal with time and space issues

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Entering Foreign Markets

• Most companies start out domestic and expand
  globally gradually in stages.
• Typically, a company, once it becomes aware of
  foreign opportunities, enters foreign markets
  first through export
• The most likely structure for exporting domestic
  companies is a divisional structure with an
  international division.

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International Division Structure
CEO
Line 1
Line 2
Line 3
Interntnl
Europe
USA
Asia
Staff
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Global Strategic Alliances

• Orgs. Can enter foreign markets without building
  foreign facilities through strategic alliances
• Long-term contracts with foreign producers
• Includes franchising and licensing
• Network Structure contract out non-core
  functions to foreign firms (e.g. Nike)
• Joint Ventures work with an established
  organization to exploit both organizations core
  competencies
• Minority Ownership can be used to gain leverage
  and learn from foreign organizations

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Global Expansion

• The goal of global expansion is to transfer the
  org.s core competencies into new markets in
  order to create competitive advantages abroad
• The challenge of global expansion is to find the
  most effective means of linking resources and
  information from all global facilities in order
  to create greater value for the org.
• Global organizations must also secure resources
  in each area in which they operate

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Competing Demands in Global Expansion

• Firms expanding globally must balance two
  competing demands
• The need to be responsive to local markets,
  customizing to meet the needs of consumers in
  order to be effective at marketing its
  goods/services
• The need to integrate operations and strategy as
  much as possible worldwide in order to reduce
  costs through economies of scale and scope
• Both integration and customization increase
  bureaucratic costs

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International Strategy
low
high
low
Product Standardization
high
Global Integration
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Global Expansion 1 - Multidomestic Strategy

• Products/services are highly customized to meet
  the needs of the specific market
• Foreign operations are only loosely integrated
  with other foreign operations and domestic HQ
• Involves the establishment of autonomous foreign
  divisions that operate like mini organizations in
  foreign markets
• Foreign divisions secure their own suppliers and
  distributors in the foreign market
• Allows country-by-country expansion
• Global Geographic structure is likely

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Global Geographic Division Structure
CEO
Pacific
Europe
S. America
USA
HQ
Project Coordination
Long-Term Planning
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Global Expansion 2 - International Strategy

• Goal is minimal customization of products or
  services while retaining high integration (one
  product for the world)
• Core functions of RD, Marketing and Product
  Design are centrally located at HQ for the entire
  organization
• Production facilities worldwide operate very
  similarly, with minor adaptations to local needs
• Allows transfer of core competencies
• Global Product Structure

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Global Product Structure
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Global Product Structure (International Strategy)
Corporate HQ
Global Operations
Global Operations
Product Line 1
Product Line 2
Local Market
Local Market
US
US
Local Market
Local Market
UK
UK
Local Market
Local Market
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Global Expansion 3 Global Strategy

• Goal is total product standardization and global
  integration
• For products that can be mass produced for the
  entire global market in a central facility
• Core functions located in HQ like with
  International Strategy
• Production is located wherever in the world the
  lowest cost can be achieved, product is then
  exported
• Global Product Structure, with production located
  in various global regions

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Global Product Structure - (Global Strategy)
Corporate HQ
Global Operations
Global Operations
Product Line 1
Product Line 2
US
UK
Mex
US
UK
Mex
Product Markets Domestic and Foreign
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Global Expansion 4 Transnational Strategy

• Goal is complete customization of product and
  complete integration of value-creation activities
• Operations are located in most markets where the
  company sells
• Local org. units coordinate the customization of
  products, network with other global org. units
• Various operations use their core competencies to
  add value in the best way possible
• Fluid interconnections between global org. units
  to remain adaptive
• Each centre can develop its core competencies to
  benefit the entire org.
• Global Matrix or Transnational Structure

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Global Matrix Structure
USA
UK
Mexico
Congo
Hemorrhoid Cream
Jock Itch Powder
Acne Cream
Wart Remover
Globally Located Org. Units
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Transnational Srtucture
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Global Expansion Concluding Thoughts

• Global expansion is not all or nothing it
  occurs in phases
• The level of complexity of a global organization
  grows exponentially
• Structure must match the strategy
• Culture is as important, if not more important
  than structure in a global organization
• Flexibility and adaptability are essential.

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Team Discussion

• Read the case ABBs Matrix Structure on pp.262
  264
• Answer the following questions (NOT THE ONES IN
  THE TEXT)
• What potential advantages does the Global Matrix
  structure provide for a company like ABB?
• What problems are likely to emerge with such a
  structure
• YOU HAVE 20 MINUTES!