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BM 499: Origins of Strategy Session 2 Ghemawat, Chapter One

BM 499: Origins of Strategy Session 2 Ghemawat, Chapter One. Darral G. Clarke Professor of Management. P. Profit. Q. Historical overview: Theory of the Firm. Dismissed as a strategic planning paradigm : Too hard to understand Not linked to realm of top management

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BM 499: Origins of Strategy Session 2 Ghemawat, Chapter One

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  1. BM 499: Origins of StrategySession 2Ghemawat, Chapter One Darral G. Clarke Professor of Management Darral G Clarke for BM 499

  2. P Profit Q Historical overview: Theory of the Firm • Dismissed as a strategic planning paradigm: • Too hard to understand • Not linked to realm of top management • But, it is fundamental to understanding strategy Darral G Clarke for BM 499

  3. Historical overview: HBS and the Concept of Strategy • Andrews, The Concept of Corporate Strategy, (1971) • Strengths and Weaknesses • Opportunities and Threats • Nice managerial idea--but analytically limited • No insight for: • identifying SWOTs • evaluating alternative strategies • what to do Darral G Clarke for BM 499

  4. Environmental Conditions and Trends Economic Technical Physical Political Social Community Nation World Distinctive Competence Capabilities: Financial Managerial Functional Organizational Reputation History Consideration ofall combinations Corporate Resources As extending or constrainingopportunityIdentification ofstrengths andweaknessesPrograms forincreasingcapability Evaluation to determinebest match ofopportunity and resources Opportunities and Risks Identification Inquiry Assessment of Risk Choice of Productsand Markets Economic Strategy Andrews’ Strategy Framework Source: Kenneth R. Andrews, The Concept of Corporate Strategy, 1971 Darral G Clarke for BM 499

  5. Market Growth Rate Low High Star Cash Cow Relative Share: High Relative Share Problem Child Dog Low BCG Portfolio ModelThe first “strategic model” • How to think about managing a collection of companies • Based on three concepts • Product life-cycle • Experience--Costs decline with accumulated volume • Relative market share Darral G Clarke for BM 499

  6. $ Cost Revenue Positive Cash time Negative Cash Conceptual underpinnings:the product life cycle • The cash flow generated by a company varies predictably across its life Darral G Clarke for BM 499

  7. Product life cycle &Market position • The product life cycle profitability pattern can be approximated by a simple equation: • Profit = Industry size(t0)* Industry growth rate * market position * company profit margin • Industry growth rate and relative market share became the key BCG variables Darral G Clarke for BM 499

  8. Experience Curve for Semiconductor Memories 1976 100 1977 75 1978 50 1979 Price per bit (Millicent's) 25 1980 10 1981 1982 1983 1984 0.1 1.0 10 100 Cumulated output (bits x 1012) Source:Integrated Circuit Engineering Corporation Darral G Clarke for BM 499

  9. Conceptual Underpinnings: Experience log(Cost/unit) S’ S’’ B’ B’’ log(Experience) log(Cumulative Volume) Darral G Clarke for BM 499

  10. ROI Market Share Portfolio Underpinnings: Market Share PIMS project: Buzzell, Gale, Schoeffler Darral G Clarke for BM 499

  11. BCG Generic strategy: Price leadership $ / u n i t Price C o s t time Darral G Clarke for BM 499

  12. Market Growth Rate Low High High Cash Cow Star Relative Share (Harvest) (Build) Problem Child Low Dog (????) (Divest) Portfolio Models: Flow of Funds Darral G Clarke for BM 499

  13. Problems in Portfolio Paradise: Experience log(Cost/unit) Cost/unit S’ S’’ S’ B’ S’’ B’’ B’ B’’ Volume log(Experience (Cumulative Volume) Experience advantages run out! What causes it in the first place? Darral G Clarke for BM 499

  14. Problems in Portfolio Paradise:Market share Profitability not directly related to market share! Superior Value Delivery Market Share ROI Phillips and Antarasian Darral G Clarke for BM 499

  15. Problems with BCG Approach • Experience • Declining costs are not universal—experience declines become minimal • Focus on cost decreases innovation and long-run competitiveness • Experience is not proprietary • Portfolio models • Classification problems—ambiguity and bias • Capital may not be the only, or even a, constrained resource • Balance is achieved by reducing the overall profitability of the combined firm • May lead to analytical detachment at the expense of insight and creativity • Neglect of technological development Darral G Clarke for BM 499

  16. The Industry Attractiveness-Business Strength Matrix Industry Attractiveness High Medium Low Selective Growth Investment and Growth High Selectivity Selective Growth Harvest/ Divest Medium Selectivity Business Strength Harvest/ Divest Harvest/ Divest Harvest/ Harvest/ Low Selectivity Divest Divest

  17. Advantage Competitive Position Disadvantage Low High Environmental Attractiveness Two Determinants of Profitability a

  18. Experience Experience Cost/unit Scale New technology LRAC Volume An Expanded Version of Generic Strategies • Broader set of cost structures • More diverse set of competitive environments • Apply economic theory of long run average cost Darral G Clarke for BM 499

  19. Cost advantage from volume Low High High Profitable & Defensible Fragmented Ability to differentiate product Stalemate Volume Low Strategy and long-run average cost Darral G Clarke for BM 499

  20. Competitive Strategy and Long Run Cost/Differentiation I • Volume Industry • Low cost leadership type markets • There is an advantage in scale or technology • Stalemate Industry • Can’t differentiate • Economies of scale, experience common to competitors • No process innovation Darral G Clarke for BM 499

  21. Competitive Strategy and Long Run Cost/Differentiation II • Fragmented Industry • Differentiation is key competitive factor • Niche strategy • Volume in niches inadequate to achieve volume cost advantages • Profitable and defensible industry • Differentiated product • Customer preference • Low cost producer of differentiated product • Transitory industry • Cost advantage based on labor • Cost advantage based on any other temporary advantage Darral G Clarke for BM 499

  22. Use of Strategic Planning Paradigms • Use for insight and structure • Have I considered the important factors? • Is structure consistent with “orthodox strategy?” • What is inconsistent? • Does it indicate a problem? • Does it indicate an opportunity? • Be creative in determining strategy • Orthodox strategy can still be creatively defined and executed • Unorthodox strategy can surprise competitors • Test detail of strategy against “orthodox” • Does the value chain make sense? • Balance short run and long run considerations Darral G Clarke for BM 499

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