General Environment Analysis

1
General Environment Analysis

• ? basic industry facts
• ? five-forces analysis
• broad trends in our various dimensions of our
  society that may ultimately have important
  impacts on a particular industry
• (? industry facts and competitive threats)
• can be sorted to help identify opportunities and
  threats in an industry

2
Porters five-forces analysis

• generally provides (deep) insight into industry
  threats, which in turn,
• can suggest ways to respond to such threats,
• or actions that may even prevent the threats.

3
Internal analysis

• ? company strengths and weaknesses
• needs to encompass important organizational
  attributes to be considered in strategy
  development/implementation/refinement

4
Using the value chain for internal analysis

• a tool for systematic and more precise
  identification of strengths and weaknesses
• vigilance for attributes that lead to lower costs
  or higher perceived value
• keen attention to resources and capabilities that
  are valuable, rare, difficult to imitate, and
  organizationally exploitable by the firm

5
Using the SWOT Analysis

• Create strategies that
• Are consistent with orgl mission
• Rely on internal strengths
• Pursue external opportunities
• Achieve external strategic fit
• Buffer external threats (both offensive and
  defensive approaches are desirable)
• Minimize the effects of internal weaknesses
• Achieve internal strategic fit

6
Recalling R4.5, Mintzbergs Generic Strategies .
. .
Locating core busn -upstream, midstream,
downstream Distinguishing core busn -Porters
business- level strategies Elaborating core
busn -mkt penetration, mkt dev, product dev
Extending the core busn -corporate level
strategies (R8.2, 17.3) Reconceiving the core
busn -punctuated equilibrium! (R6.2)
7
Common pattern in corporate strategy evolution

• Single (and dominant) business strategy
• Vertical integration strategy
• Vertical integration with by-products
  diversification
• Related diversification
• Linked diversification
• Unrelated diversification

8
Common definitions . . .

• Single business strategy
• gt 95 revenues from single division
• Dominant business strategy
• 70-95 revenues from single division
• Diversification strategy
• lt70 revenues from any single division

9
Important principles apply . . .

• need to have competence to succeed in competitive
  markets!
• need to be vigilant and adapt to changing
  situations!

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Single Business Strategy

• Examples ???
• A notable organizational trend - WHY?

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R8.2 Strategy and Organizational Planning

• CENTER OF GRAVITY
• location (on the industry supply chain) of the
  organizations core business, defined by
• -location of core competencies
• -greatest source of assets, revenue, or profit
• -generally the founding business

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Vertical integration

• Adding organizational functions
• beyond the center of gravity stage
• to facilitate the core business.
• Various types
• Forward integration
• Backward integration
• Taper integration
• Full integration

13
Vertical Integration

• Advantages? Hazards/Downside?

14
Pg. 228

• Upstream attributes
• reduce variety
• process RD
• efficiency
• internal focus of attention
• cost/technology driven

• Downstream attributes
• increase variety
• product RD
• effectiveness
• external focus of attention
• market/margin driven

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By-products diversification

• Creating a commercial venture by selling
  by-products or marketing the excess capacity of
  an integrated production process.
• Major commitments still remain in the initial
  center of gravity and core business.

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Related diversification

• Involves business units in different industries
• that have some similarities often merely
• business units in different segments of the
• same industry, usually at same center of
• gravity - to leverage competencies for growth.
• Important to use skill transfer and activity
• sharing of value chain activities across
• business units to capture synergies.

17
Related DiversificationImplementation at PepsiCo

• Skill Transfer
• new product development
• advertising
• image/brand building

• Activity Sharing
• market research
• distribution
• sales force

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Linked diversification

• Business units in different industries,
• with different centers of gravity,
• but with some type of linkage or
• relationship among the units --
• often an adjacent center of gravity stage.

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Unrelated diversification

• Participation in new industries,
• and/or new centers of gravity,
• involving little or no inter-relationships
• with existing (core) business.
• Holding company structure seeks profits by
• -internal capital reallocation
• -buying and restructuring under-performers.

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From Competitive Advantage to Corporate
Strategy (R17.3)

• Main points of the article

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Facts of life about diversification

• competition occurs at the business level
• diversification inevitably adds costs and
  constraints to business units
• shareholders can readily diversity themselves

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General approaches to diversification

• 1.? Portfolio management
• 2. ? Restructuring
• 3. ? Skill transfer
• 4. ? Activity sharing

23
Porters 3 Tests for successful diversification

• 1. Attractiveness test -
• Is the industry attractive?
• 2. Cost-of-entry test -
• Is the cost of the entering reasonable, given
  the realistically predicted returns?
• 3. Better-off test -
• Are strategically meaningful synergies (via
  skill transfer and/or activity sharing) likely to
  be captured?

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More advice for diversification

• First, fully develop the core business.
• Consider international opportunities.
• Use pre-acquisition criteria (consider compatible
  corporate cultures, performance measures, and
  Porters 3 tests).
• Use constrained diversification (competence is
  important!) with synergies leading to
  hard-to-imitate competitive advantages.
• Practice timely outplacement of
  under-performing divisions.

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The classic Harvard approach to strategy
formulation
1. Determine organizational mission. 2.
Understand the external environment. 3. Identify
internal resources,competencies, and values. 4.
Match external opportunity and internal
competence (find external strategic fit). 5.
Develop a unique strategy. 6. Direct internal
resources to implement the strategy (create
internal strategic fit).
26
Recalling R4.5, Mintzbergs Generic Strategies .
. .
Locating core busn -upstream, midstream,
downstream Distinguishing core busn -Porters
business- level strategies Elaborating core
busn -mkt penetration, mkt dev, product dev
Extending the core busn -corporate level
strategies (R8.2, 17.3) Reconceiving the core
busn -punctuated equilibrium! (R6.2)
27
Typical skill comparisons . . .demonstrating
internal fit

• Cost leadership
• efficiency
• standardization
• mass production
• process improvements
• low service
• tight control
• stability
• cost accounting

• Differentiation
• effectiveness
• customization
• short production runs
• product development
• high service
• needed orgl slack
• flexibility
• marketing

28
McKinseys 7-S Model of internal fit . . .
Structure Strategy Systems Shared
Values Skills Style Staff
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BEWARE!!!. . .

• of losing external strategic fit -
• getting overtaken by competitors
• pursuing yesterdays opportunities
• failing to adapt to industry trends . . .
• of failing to achieve internal strategic fit -
• being stuck-in-the-middle
• inability to effectively carry out the chosen
  strategy

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R6.2 Organizational Evolution

• Convergence
• incremental change to fine-tune internal and
  external strategic fit
• continual, often piecemeal initiatives (with
  strong bottom-up, emergent flavor)

• Upheaval
• massive change to re-align strategy and
  organization with external environment
• key role for top management deliberate,
  episodic, rapid, comprehensive

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• Consider the pluses and minuses of converging
  change . . .
• Consider functional vs. dysfunctional momentum .
  . .
• Key sources of success can become the seeds
• of failure . . .

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J.D.Thompson (1967)

• Strategic management
• shooting at a moving target of coalignment.
• The only thing constant is change, but
• How to change?
• What to change?
• When to change?

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The Froelich Model
Environment ? External strategic
fit Strategy ? Structure
? Systems Internal strategic fit
? Processes ? Leadership style
. . .
34
Punctuated equilibrium model of organizational
change

• Relatively long periods of
• (incremental, convergent)
• evolutionary change
• are interrupted by infrequent but
• highly stressful periods of
• (frame-breaking, divergent)
• revolutionary change.

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Advice for frame-breaking change

• infrequent
• rapid implementation
• executive vision and leadership are essential
• (converging change relies more on middle
• managers and other orgl participants)
• orgl crisis often precipitates change
• new top management team often required

36
Managing (organizational) change

• Recognize the constant tension between
  maintaining internal fit and external fit.
• Be vigilant for environmental (or major internal)
  shifts.
• Balance the timing and extent of adaptation.
• Be mentally prepared - upheaval is a natural part
  of (organizational) life.
• Overcome inertia.
• Prepare for major change.