Strategic Management and Implementation TMU

1. Strategic Management and Implementation TMU Johannes M. Pennings June 2004 www-management.wharton.upenn.edu/pennings Pennings TUM Strategic Management Innovation

2. Strategy and Innovation • Part I, Day 1 • What is strategy? Frameworks • External vs Internal Focus: Customer & Knowledge • Strategy and Design • Part II, Day 1 • Strategic Management of Innovation • Market and Firm Interia • Photography Industry Pennings TUM Strategic Management Innovation

3. The (Institutionalized) Strategic Management Shopping Mall Value Disciplines Competing for the Future Activity Systems Dual Strategies Capabilities-Based Competition Vision Time-Based Competition Resource-Based View Multimarket Competition Strategic Innovation Value Chain Time/Event Pacing Core-Competence 5-Forces model Co-opetition Eco-Systems Virtual Integration Strategy as Revolution Collective Strategy Profit Pools Strategic Groups 7-S Framework Value Migration Pennings TUM Strategic Management Innovation

4. Strategic Management … Confusion Reigns. “[W]aves of new approaches [have been] proposed. […] Each approach made its contribution in turn, yet how any of them built on or refuted the previously accepted wisdom was unclear. The result: Each compounded the confusion about strategy that now besets managers”. Source: Collis & Montgomery (1995) “ Competing on Resources: Strategy in the 1990s”, Harvard Business Review. Pennings TUM Strategic Management Innovation

5. “People seem to disagree about almost every aspect of strategy making […] they disagree about which issues to address in developing strategy, they disagree about the process of developing strategy, and they even disagree as to whether one can think about strategy at all”. C. Markides (2000) All the Right Moves: A Guide to Crafting Breakthrough Strategy Pennings TUM Strategic Management Innovation

6. Strategic Management: ... deals with the formulation and implementation of a set of decisions, the purpose of which is the realization of a sustainable competitive advantage (manifested in long-term above average profitability). Pennings TUM Strategic Management Innovation

7. Many Frameworks of Strategy • Porter and Five Forces • Competitive advantage due to cost leadership or market differentiation • Mintzberg and Stream of Decisions • Not rational but emergent • BCG and low to high growth markets • New ”School” and competencies that produces a platform fro strategizing Pennings TUM Strategic Management Innovation

8. Porter:Strategy, the Link between the Firm And its Environment THE FIRM Goals and Values Resources andCapabilities Structure and Systems THE INDUSTRY ENVIRONMENT Competitors Customers Suppliers STRATEGY STRATEGY

9. Sources of Competitive Advantage COST ADVANTAGE Similar product at lower cost COMPETITIVE ADVANTAGE Price premium from unique product DIFFERENTIATION ADVANTAGE Pennings TUM Strategic Management Innovation

10. Strategy and Innovation • Part I, Day 1 • What is strategy? Frameworks • External vs Internal Focus: Customer & Knowledge • Strategy and Design • Part II, Day 1 • Strategic Management of Innovation • Market and Firm Interia • Photography Industry Pennings TUM Strategic Management Innovation

11. Porter’s FrameworkForces Driving Industry Competition Potential Entrants Threats of New Entrants Bargaining Power over Suppliers Industry Competitors Buyers Suppliers Bargaining Power of Buyers Threat of Substitutes Substitutes Pennings TUM Strategic Management Innovation

12. ع ع • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • ع ع ع • • • • • • ع Mintzberg on Strategy • Plan (Intended)Also a Ploy (a Tricka Way to ? a Competitor) • Pattern (Realized) • Position • Perspective ع ع Pennings TUM Strategic Management Innovation

13. Cognitive Forces Intended Strategy Deliberate Strategy Process Unrealized Strategy Realized Strategy Emergent Strategy Process Organizational and/or Environmental Forces Inconsistent Behavior THE CONCEPT OF STRATEGY

14. BCG Hi Growth Lo Growth Pennings TUM Strategic Management Innovation Market Share

15. Strategy and Innovation • Part I, Day 1 • What is strategy? Frameworks • External vs Internal Focus: Customer & Knowledge • Strategy and Design • Part II, Day 1 • Strategic Management of Innovation • Market and Firm Inertia • Photography Industry Pennings TUM Strategic Management Innovation

16. Shifting From an Industry Focus(Porter) to a Resource Focus THE FIRM Goals and Values Resources and Capabilities Structure and Systems THE INDUSTRY ENVIRONMENT Competitors Customers Suppliers THE INDUSTRY ENVIRONMENT Competitors Customers Suppliers STRATEGY STRATEGY The Firm-Strategy interface The Strategy-Environment Interface Pennings TUM Strategic Management Innovation

17. Shifting From an Industry Focus(Porter) to a Resource Focus THE FIRM Goals and Values Resources and Capabilities Structure and Systems THE INDUSTRY ENVIRONMENT Competitors Customers Suppliers STRATEGY STRATEGY The Firm-Strategy interface The Strategy-Environment Interface Pennings TUM Strategic Management Innovation

18. New School: Resources & Capabilities • The role of resources and capabilities in strategy formulation. • The resources of the firm • Organizational capabilities • Appraising the profit potential of resources and capabilities (sustainability and appropiability). • Developing the firm’s resources and capabilities. Pennings TUM Strategic Management Innovation

19. Value Migration “We have to be willing to cannibalize what we’re doing today in order to ensure our leadership in the future. It’s counter to human nature but you have to kill your business while it is still working”. Lewis Platt, Hewlett-Packard Pennings TUM Strategic Management Innovation

20. Value Migration “Financial accounting, balance sheets, profit-and-loss statements, allocating of costs, etc. are an x-ray of the enterprise’s skeleton. But much as the diseases we most die from - heart disease, cancer, Parkinson’s - do not show up in a skeletal x-ray, a loss of market standing or a failure to innovate do not register in the accountant’s figures until the damage is done”. P. Drucker (1993) Developing (strategic) leading indicators Pennings TUM Strategic Management Innovation

21. 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 • But note that platform of capabilities can become a TRAP Pennings TUM Strategic Management Innovation

22. Evolution of Honda: A Strategy Based Upon Resources and Capabilities 50cc 2-cycle engine Related products: ground tillers, marine engines, generators, pumps, chainsaws Founding of Honda motor company 405cc motor cycle 4 cycle engines 1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 First product: clip-on engine for bicycles The 50cc super -cub N360 mini car 1000cc Goldwing touring motor cycle Acura Car division Pennings TUM Strategic Management Innovation

23. Resources as the Basis for Superior Profitability Patents Brands Retaliatory capability Barriers to Entry Industry Attractiveness Monopoly Market share Rate of Profit in Excess of the Competitive Level Firm size Financial resources Vertical Power Process technology Plant size Low-cost inputs Cost Advantage Competitive Advantage Brands Product technology Marketing capabilities Differentation Advantage Pennings TUM Strategic Management Innovation

24. The Relationships Between Resources, Capabilities and Competitive Advantage INDUSTRY KEY SUCCESS FACTORS COMPETITIVE ADVANTAGE STRATEGY ORGANIZATIONAL CAPABILITIES • RESOURCES • TANGIBLE INTANGIBLE HUMAN • Financial • Physical • Specialized skills • and knowledge • Communication & • interactive abilities • Motivation • Technology • Reputation • Culture • Structure Pennings TUM Strategic Management Innovation

25. The Rent-Earning Potential of Resources and Capabilities Scarcity THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED Relevance Durability THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Mobility Replicability Property rights Relative bargaining power APPROPRIABILITY Embeddedness of resources Pennings TUM Strategic Management Innovation

26. Growth of service sector partly explains increase in Strategy as Firm Knowledge Source: World Bank, 1998 Pennings TUM Strategic Management Innovation

27. Growth of service sector in Sweden, similar to other EU countries Employment Percent Agriculture Service Industry Source: IUI Pennings TUM Strategic Management Innovation

28. The new forces Deregulation Globalization Traditional sources of competitive leverage Pennings TUM Strategic Management Innovation Digitization Source: Unleashing the Killer App

29. Revolutionary changes • Digitization - Computing power and communications bandwidth becoming cheap enough to treat as disposable (Moore’s law) • Compare doubling grains of dirt on a chess board • Globalization – China, World is a large network, global network of suppliers and buyers, 24 hour operations, shop on a global basis • Deregulation - Free market better regulator than government, e.g., airlines, communications, banking Pennings TUM Strategic Management Innovation

30. Business Week 1998 Pennings TUM Strategic Management Innovation

31. Business week and US Companies….Where is Haider, Bank of China, etc. ? Source: Business Week Pennings TUM Strategic Management Innovation

32. Valuation Ratios Coca-cola 19 Beverages Oracle 15 Computer software/services Cisco Systems 14 Computer software/services Computer Associated International 14 Computer software/services Schering Plough 12 Health care Amgen 10 Health care Gillette 10 Consumer Products Metronic 9 Health care Kellog 9 Food Microsoft 9 Computer software/services Pharmacia & UpJohn 9 Health care First Date 9 Computer software/services Pfizer 8 Health care Abbot Laboratories 8 Health care Mereck 7 Health care Johnson & Johnson 7 Health care Bristol-Myers-Squibb 7 Health care Pepsico 7 Beverages Phillip Morris 6 Tobacco Eds 6 Computer software/services Pennings TUM Strategic Management Innovation

33. Competitive advantage is becoming increasingly dependent on firm’s ability to create and leverage knowledge Key idea: Firms are good at transferring tacit knowledge (Kogut & Zander, 1992) External leakage and imitation Firm knowledge Internal codification Dissemination Transfer Competitive advantage (if resources & capabilities are hard to replicate or imitate) Pennings TUM Strategic Management Innovation

34. Identifying Organizational capabilities :Functional Approach FUNCTION CAPABILITY EXEMPLARS Corporate Financial management Exxon, Coca Cola Management General Electric, Strategic Control Emerson Electric, GE Coordinating decentralized ABB, Shell business units Managing Acquisitions ING, ConAgra MIS Speed and responsiveness through American Airlines rapid information transfer Benneton R&D Research capability Mereck, AT&T Development of innovative new products Sony, 3M Manufacturing Efficient volume manufacturing Electrolux Continuous Improvement Nucor, Motorola Flexibility Benetton Design Marketing Design Capability Apple, Swatch, Brand Management Proctor & Gamble, PepsiCo Sales & Distribution Promoting reputation American Express Responsiveness to market trends The Gap Sales Responsiveness Microsoft, Glaxo Efficiency and speed of distribution DHL Customer Service KLM Pennings TUM Strategic Management Innovation

35. The Framework for Analyzing Knowledge, Capabilities and other Resources STRATEGY 4. Select a strategy POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE 3. Appraise the rent-earning potential of resources/ capabilities 5. Identify resource gaps that need to be filled. 2. Identify capabilities CAPABILITIES 1. Identify the firm’s resources. Appraise strengths and weaknesses RESOURCES Pennings TUM Strategic Management Innovation

36. Summary • We are moving into a knowledge-based economy as new forces are changing the face of business • A company’s market value is increasingly dependent upon the value of its intellectual capital or intangible assets • A company’s competitive advantage is based on a firm’s ability to create and leverage its knowledge • Thus, knowledge sharing across divisions, countries, functions is emerging as a major business priority Pennings TUM Strategic Management Innovation

37. Strategy and Innovation • Part I, Day 1 • What is strategy? Frameworks • External vs Internal Focus: Customer & Knowledge • Strategy and Design • Part II, Day 1 • Strategic Management of Innovation • Market and Firm Inertia • Photography Industry Pennings TUM Strategic Management Innovation

38. Internal and External Design: Strategy and Innovation • Brief Review of Organizational Design and and External Relationships • Structure, Culture, Networking of Internal Organization Design • Brief Review of External Design Pennings TUM Strategic Management Innovation

39. Internal and External Design: Strategy and Innovation • Brief Review of Organizational Design and and External Relationships • Structure, Culture, Networking of Internal Organization Design • Brief Review of External Design Pennings TUM Strategic Management Innovation

40. Internal Design Aspects • Specialization ( grouping by skills, process, customers, products, etc.) • Coordination • Hierarchy • Functional and Divisional Structure Pennings TUM Strategic Management Innovation

41. The Basic Tasks of Organization Achieving high levels of productivity requires SPECIALIZATION Specialization by individuals necessitates COORDINATION ORGANIZATIONAL CHALLENGE: design structure & systems that: • Permit specialization of knowledge • Facilitate coordination by grouping individuals & link groups with systems of communication, decision making, & control • Deploy incentives to align individual & firm goals and share knowledge among them For coordination to be effective requires COOPERATION But goals of employees = goals of owners THE AGENCY PROBLEM Pennings TUM Strategic Management Innovation

42. General Motors Organization Structure, 1997 Board of Directors Corporate Functions President’sCouncil North American Operations Delphi Automotive Systems GM Acceptance Corporation International Operations Hughes Electronics GM Europe Midsize & Luxury Car Group Small Car Group GM Power Train Group Vehicle Sales, & Marketing Group Development & Technical Cooperation Group Asian & Pacific Operations Latin American, African, & Middle East Operation Pennings TUM Strategic Management Innovation

43. General Electric’s Organization Structure, 1995 Board of Directors Corporate Staff Functions: Tax, Treasury, Audit. M&A, Legal, Business Public Relations, Government Development Relations, Leadership Development Corporate Executive Office Aircraft Engines Capital Services Lighting NBC Electrical Distribution & Control Motors Appliances Industrial Power Systems Medical Systems Plastics Information Services Transportation Systems Service Divisions Aerospace Environmental GE Licensing/ Marketing Technology Programs Supply Trading &Sales Pennings TUM Strategic Management Innovation

44. By FUNCTION(sales, production, customer service, etc.) By PURPOSE (market, product, segment, region, etc.) Organization design Sales Finance Service And Parts Service And Parts New Cars Used Cars Pennings TUM Strategic Management Innovation

45. CEO R&D Manufacturing Marketing Finance Accounting HR Functional Structure Pennings TUM Strategic Management Innovation

46. Multidivisional Structure (By Region, Product, or Customer) CEO Division 1 Division 2 Division 3 Division 4 R&D R&D R&D R&D Manufacturing Manufacturing Manufacturing Manufacturing Marketing Marketing Marketing Marketing Finance Finance Finance Finance Accounting Accounting Accounting Accounting HR HR HR HR Pennings TUM Strategic Management Innovation

47. Brand manager Multidivisional Structure at Proctor & Gamble Pennings TUM Strategic Management Innovation

48. Functional Structure Pros: fosters group identity, permits greater specialization and so increases skill levels, facilitates supervision. Cons: creates strong contrasts and thus conflict between functional units, makes it harder to trace responsibility for performance (no unit is a profit centre), fails to develop well-rounded general managers. Multidivisional Structure Pros: simplifies co-ordination across functions within units, can be very large and still maintain control, facilitates idiosyncratic treatment of customers when they differ greatly. Cons: reduces collegiality, duplicates staff functions and foregoes opportunities to share them, reduces chances for skill specialization. Pros & Cons of Basic Organizational Designs Pennings TUM Strategic Management Innovation

49. Dilbert on cross-functional conflict Pennings TUM Strategic Management Innovation

50. The Fundamental Law of Organizational Design To the extent that youdifferentiate, you must integrate. Pennings TUM Strategic Management Innovation