Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Lesson 1

Reasons for Strategic Complexity:
• Globalization
• Change
• Dynamism
Visionà Strategic Analysis (scanning with the 7 questions that mgmt
...
Economies of scale
2
...
Manage intangible assets through economies of scope
3
...
Diversify risk
5
...
Attracting top talents and financial resources
7
...

growth)
•
•
•
•

Sales grew but not profitability, shareholder ROIànegative
Too much on profitability and not so much growthà negative
Best o balance growth and profitabilityà positive
>5% or <5% as the benchmarks for return

Exploitation vs
...
Printer
cartridges, Nespresso capsules, film)

Premature Aging (indicators):
1
...

3
...


Tentative Change-don’t want to change business model
Stagnating Growth-failed growth initiatives
Weak Leadership-no changes in leadership
Lacking Success Culture

Exploration:
• Innovation and growth
• Exploring new products and markets

Vivendi Universal
Water in 60-70s, chose diversification path, went from water to energy, waste and got
into media; idea to create platforms to sell then the movie rights; they were too extreme,
too diversified, made almost 20 acquisitions
3

Burn Out (indicators):
1
...

3
...


Excessive growth
Uncontrolled change
Autocratic leadership
Excessive success culture-very high internal competition

KEY IDEA: Successful firms balance E&E in their corporate strategies
The Growth Corridor
Many executives do not see rapid growth as a serious problem
...

However, in many cases there are significant costs, resulting in financial losses, marketshare declines and even bankruptcy
...
The growth corridor is the path companies can
take toward smart growth, between their “minimum growth” and “maximum growth” rates
...
Increased size and market share often
lead to more market power and better economies of scale and scope
...
In
addition, growth can help companies overcome inertia and renew themselves, which is
4

critical in changing market environments
...
Based on management theory and practice, three things
influence a company’s minimum growth rate: (1) competitive growth, (2) shareholder
growth expectations and (3) productivity growth
...
The recent experience of Bayer AG, the German-based healthcare and nutrition
giant, is instructive
...
Today, Bayer lacks the
resources to make the necessary investments in research and development to be
competitive
...


5

SHAREHOLDER GROWTH EXPECTATIONS (EGR): market
growth rate
Empirical research shows that, independent of a company’s absolute performance, there
is a reward for meeting the long-term growth expectations of shareholders and a penalty
for failing to do so
...
’s stock price fell by 11% in the seven days
following the company’s announcement that its 2005 earnings would fall short of
expectations
...


Sustainable Growth Rate (SGR) = Retention Rate (RR)
* Return on Equity (ROE)

6

PRODUCTIVITY GROWTH (PGR): Reinvest Resources
Over time, as companies learn, they need fewer employees to produce the same output
in products or services
...
Evidence
indicates that continuous trimming and downsizing may not be sustainable
...
Constant downsizing since the late 1970s has required
the company to invest billions of dollars in severance packages, pensions and
restructuring initiatives
...
A company’s minimum growth
requirement to avoid excess capacity and downsizing thus is indicated by its long-term
productivity growth rate
...
Companies that realized
sales growth exceeding their minimum growth thresholds were significantly more
successful in terms of total shareholder returns than companies that failed to do so
...
The competitive growth rates of most
companies in our sample substantially exceeded their productivity growth rates
...
Competitive growth provides a more realistic
indication of minimum growth than shareholder expectations
...
It can overburden the company’s
ability to manage and lead to a loss of control
...
Indeed, one or more of the following factors can determine a company’s
maximum growth rate: (1) financial limits, (2) managerial limits and (3) market limits
...
” Sustainable growth refers to the maximum annual sales
increase that a business can achieve without impairing target ratios for debt, return on
working capital and dividend payouts
...
WorldCom Inc
...

7

8

MANAGERIAL LIMITS (MGR): managerial growth rate
A company’s growth rate can be constrained further by its ability to find, train and
integrate new management of sufficient quality at a fast enough rate
...
, a leader in construction tools, which experienced high growth in
2004 due to a booming construction market
...
A company’s growth thus is limited by its growth in management
capacity, or what it can absorb without undermining operational efficiency or further sales
growth
...
Empirical research shows that escalating
competition for market share can negatively affect profitability
...
S
...
A company reaches maximum growth when it begins to purchase share at a
cost of lower profitability
...
Although competition may restrict
a company’s growth potential in a given market segment, companies always have an
option to diversify into new fields to generate additional growth
...
Although large companies may be able to manage such rates temporarily without
suffering operational problems, very few companies in our sample could sustain them
over longer periods
...
The
average sustainable growth rate for the Fortune Global 500 companies over the past
decade was 11%, with almost half of the companies seeing sales growth above that rate
...


9

10

Smart Growth
A company’s optimum growth path can be determined by estimating the minimum and
maximum thresholds of growth
...
While additional thresholds can be considered for a more
thorough analysis, the initial investigation will be limited to two factors
...
”)

Identifying the Growth Corridor
The growth corridor allows managers to determine how fast their company can safely
grow
...
Over the past decade, only about 25% of the
Fortune Global 500 companies were able to do this
...
8% — well within its growth corridor, as illustrated below:

See more
Wal-Mart Stores Inc
...
Between 1995 and 2004, Wal-Mart’s
sustainable growth rate (the maximum growth rate) averaged 18
...
2%
...
8% — well within its growth corridor
...
Over the past decade, only about 25% of the companies increased sales
within the limits set by their growth corridor
...
5%
...
9%
...

Smart growers share a number of characteristics
...
Swiss food giant Nestlé S
...
offers an excellent example
...
Rather than attempting to maximize growth and profits in the short run,
Nestlé CEO Peter Brabeck-Letmathe set a challenging but realistic long-term growth
target of 5% to 6%
...
Nestlé’s initiatives to foster innovation and
11

organic growth are complemented by programs to improve operating efficiency, leading
to margin improvements that have helped generate the cash flow required for
investments in further growth
...
The cash generated by operational improvements can
be used to fund ventures in high-growth areas, which can result in increased growth rates
over time
...

Rather than maximizing growth in the short run and depleting available resources in
expansions that are unsustainable, they incrementally improve theircapacity to grow
...
Recognizing that there are different positions in the growth corridor, we have
identified three suboptimal growth situations: (1) cash-starved companies, (2) growth
laggards and (3) companies experiencing excessive growth
...


12

Cash-Starved Companies
More than 35% of the companies sampled were categorized as “cash-starved
...
Since there is no such thing
as a corridor for smart growth, a cash-starved company has a Hobson’s choice between
two suboptimal behaviors: If the company attempts to grow at the market rate, it risks
bankruptcy; but if it agrees to sell less, it may be only postponing failure as its market
share declines
...
The companies’ suboptimal position was reflected
in their low average returns to shareholders of just 6
...
2% per year for other companies
...
First, they increased cash flow and profitability by refocusing on the
core business, selling off noncore assets and taking steps to improve operational
efficiency
...
Once
the companies reached a sustainable growth rate that exceeded their competitive growth
rate, they regained their “right to grow
...

Bayerische Motoren Werke AG, which experienced a serious cash shortage in 1999
following the disastrous acquisition of the British carmaker Rover Group Ltd
...

(See “BMW: Cash-Starved to Smart Growth
...
At the same time,
Milberg launched several initiatives to increase operational efficiency
...
BMW’s
increase in productivity made it one of the world’s most profitable carmakers
...
5% in 2000 and 2001
...
In response, Milberg’s successor, Helmut Panke, launched the largest
product expansion in BMW’s history, introducing the new MINI; an updated 3, 5 and 7
Series; the new 1 and 6 Series; the X3 sport utility vehicle and the Rolls-Royce sedan
...
1% of sales to 5
...
Since
2002, BMW has outgrown its competitors; in 2005, it overtook DaimlerChrysler AG’s
Mercedes Benz as the market leader in premium cars
...

Other well-known companies have used similar strategies to move out of their cashstarved positions: Porsche in 1993; Apple in 1997; Sears in 1999; and Deutsche Bank in
2002
...


14

Growth Laggards
In contrast to cash-starved companies, those we categorize as “growth laggards” have
the financial muscle to grow with the market, which is reflected in having sustainable
growth rates above the competitive growth rate
...
Consequently, they
experience continuous erosion of their market share
...
9%, compared to the 16
...
Approximately 18% of the
companies in our sample were in this group, including Eastman Kodak, German power
company E
...
Their inability to fuel new growth is not due to
a lack of market potential or a lack of financial means
...
For a variety of reasons, the organizations are unable
to renew and restructure themselves
...
While product innovations frequently have
been at the heart of these initiatives, few companies have been successful in these
transitions without adopting new business models (for example, adopting new sales
channels or pricing models) and new processes
...
In addition, it often requires
more fundamental cultural change programs to make the changes stick
...
For more
than 100 years, the company had been a market leader and one of the world’s most
profitable retailers
...
(See “Marks & Spencer: Growth Laggard to Smart Growth
...
Despite a 30% drop in market share between
1996 and 2002, M&S was rigidly clinging to its traditional focus on product quality rather
than style, price or store design
...
Additional innovations, including store modernizations, aggressive
advertising and innovative marketing campaigns, helped lure back millions of customers
...
These efforts were
accompanied by significant changes in management and personnel and the adoption of a
more entrepreneurial work environment
...


15

MARKS & SPENCER: GROWTH LAGGARD TO SMART
GROWTH
Like Marks & Spencer, other growth laggards such as Coca-Cola, Eastman Kodak and
Xerox have implemented revitalization programs to stem losses in market share
...
The investments must be coupled with fundamental changes in corporate
culture
...
Yet they grew so rapidly that their financial means were
stretched to the limit
...
Some of the most
prominent dropouts from the Fortune Global 500 were excessive growers, such as Enron,
Marconi Medical Systems, Swissair and WorldCom
...

Companies that successfully managed to move back to smart growth mostly relied on
some type of stabilization program
...
First, since excessive growth often leads to massive debt burdens,
companies implemented retrenchment activities (such as selling off assets, restructuring
debt and cutting costs)
...
Simultaneously,
the companies adjusted their growth strategies by moving from aggressive acquisitions to
more moderate, organic growth
...
Finally, they made organizational adjustments to
increase corporate control and integrate their various businesses, thereby instilling a
better sense of companywide discipline and accountability
...
, a global power producer based in Arlington, Virginia, faced a huge
challenge in 2002
...
Between 1996 and 2002, the company’s revenues had increased by
an average of 47% per year — almost four times its sustainable growth rate
...
”) Its long-term debt soared from $2
...
2
billion, and its shares fell from $70 a share to less than $1
...

Hanrahan announced a major retrenchment
...
Hanrahan
replaced the company’s ambitious growth targets with more balanced objectives
...
Hanrahan also did away with the company’s decentralized structure in favor of a
more disciplined and integrated approach
...
Over the
next four years, AES became far less leveraged and increasingly profitable
...
By early 2007, the company’s stock price was hovering in the $20 range
...
Other companies,
including Cendant, DaimlerChrysler and Vodafone, are in the midst of implementing
stabilization programs to return to smart growth
...
The business landscape
is littered with the remains of once high-flying companies
...
Smart growth needs to be within a company’s growth corridor
...
As events unfold, a company’s actual growth rate may be
higher or lower than the bounds set by the corridor
...


18

Lesson 3

WHAT TO DO TO EXTEND GROWTH ACTIVITIES?
1
...
Where do you go (backwar or forward, vertical or horizontal)
3
...
Actquisition/Mergers (externally) vs
...

Externalize

19

As illustrated, companies
exhibiting low performance
in their dominant
businesses often
implement relatedconstrained diversification
strategies which, to some
point, result in increased
performance
...
Because the
company's core
competencies do not
create value in unrelated
businesses, company
performance decreases
...
Acquisitions (externally) one sees that
there is a significant effect on ROI for shareholders for the organic way rather that
acquisitions in terms of growth
• Use acquisitions for future ORGANIC growth, which will give you:
o Gain minimum scale in new markets
o Access to leading edge technologies
o “Cherry picking” not “Blockbusting”
o Once you reach limitations, from organic, you do acquisitions, then back to
growing organically from the CORE
o Gain and grow from acquisition/merger but don’t integrate

21

Lesson 4

State of the R&D Process

1) Basic research (hard to protect, not interesting for firms; knowledge spillovers; done
by universities
2) Applied research
3) Product development
àboth can often be protected by patent or copyrights; possibility to stop other fro
making use of it; for firms: whoever came first, wins the patent racing;
importance of competitive behavior

Three Types of Innovation
1)
2)
3)

Process: eg
...

Business Model: eg
...
ZARA business model eg
...
Efficiency effect
Probability of new entryà determines relevance of Replacement or Efficiency
The higher probability—the more relevant efficiency effect
See Motorbike

Innovation Behavior Case for Trade-Off

KEY IDEA: monopolistic/oligopolistic with markets with a high threat of entry have
the best trade-off in ideal situation
See Google

Case for First Movers vs
...
failed Kodak &
TWA

INDICATORS OF DECLINE
1)
2)
3)
4)
5)
6)
7)

Management head changing/leaving
Downsizing
Quality Issues
Demotivated Employees
Financial figures doing poor
Imitating competition
High turnover

INTERNAL DECLINE
FAILURE SOURCES
• Merger & Acquisitions (60-70% fail)
• Entrepreneurship (1/3 success rate)
• Fraud, Illegal Dealings (making up the #’s
on BS especially dividend pay out)
• Manager’s moral hazard
• Burnout vs
...
discontinuous renewal or internal vs
...
Good info; accounting systemsà document the best; average good
companies max 4 months gives a status quo
2) Inaction: not addressing the cause!
a
...
Corrective action; improve the current status quo; improve what we
are currently doing
4) Crisis:
a
...
Int)
Drop in demand
Willingness to change
Rockstar CEO Mr
...
Netfix

Situation 2: Erosion, Case DHL vs
...
S
...
Fujifilm

Situation 4: Contraction, Case Lufthansa vs
...
)
3) Market (environment, demand, market oriented, etc
...
A
...


and Grille Restaurant for determining what you

need for organizational structure

KEY IDEA: What you need to determine for structure organization?
•
•
•
•
•

Workflow
Configuration
Dependency
Hierarchy
Interactions

See Acme

vs
...
Organic Structures

KEY IDEA: Contingency theory (adapt to environment)! Low environmental
uncertainty à mechanistic structure with a stable environment eg
...
IT

Organization Paradoxes
Differentiation

Integration

Assign divisions/department;
increases flexibility

Vertical vs
...
Pooled relationship- one
headquarter, all communication
goes through headquarter
b
...
Reciprocal relationship-reoccurring
communication, back and forth b/w
department

Centralization

Decentralization

Corporate level, decision making at
the top; coherence decreases
flexibility; creates bottle necks

Lots of flexibility; uncoordinated;
sometimes not aligned with strategy

Standardization

Flexibility

Difficulty to change, inhibits
innovation

Costly as it is always changing

34

Lesson 9

CASE: Google sold Motorola (30/1/2014) (they wanted to get themselves out of the
mobile phone business – industry was too competitive)

How do companies start?
Simple Structure (Flat) – no one has a clear role / everyone does everything

EVOLUTION OF STRATEGY AND STRUCTURE
1)
2)
3)
4)
5)

Simple Structure
Functional Structure (once you grow in size, you need to divide tasks)
Divisional Structure (sometimes companies jump this stage)
Matrix Structure
Network Structure (higher degree of complexity)

KEY IDEA: The more companies grow in complexity, the more they need to adapt
their structure; size in terms of complexity

Functional Structure (Starbucks)
• Everybody has one function, you avoid redundancy
• Downside of the structure: adaptability/stability
o Once there is a major problem in the environment, you might need to
restructure your entire company
o But on the other hand, this structure might be more beneficial for small changes
in the environment as the departments concerned can be focused on it

Advantages: economies of scale; reduces error of waste; in depth skill for
employees in their field; well-defined career ladder

Disadvantages: not foo with change; lack of accountability; employees have
no overview; local optimization at expense of company

KEY IDEA: put all the experts in one department, and then create (within
department itself) certain knowledge creation, expertise; creating synergies; they get
better within the departments as people understand each other and learn from each other

35

PARADOX: how much should we specialize and how much should we keep
“flexible”?

Divisional Structure (Kodak)
• Each division has their own departments (marketing, sales, HR, finance, etc
...
Structure by products (car producers)
2
...
)
3
...
;
divisions can be held accountable; P&L for each department unlike Functional

Disadvantages: loss of economies of scale; duplicate physical facilities and
positions; specialization lost

Matrix (Hybrid) Structure (Siemens)
• Structure by clients, regions
• To have someone locally responsible for the problems

Choosing Your Structure
• Low cost – functional structure (cost advantage – economies of scale)
• Centralizing will yield cost advantages (works with single or related business)
[important for cost-conscious companies]
o Centralization is best done in functional structures
vs
• When there is a wide range of product in a company, it is hard to centralize or
creating economies of scope and scale (synergies)
• Depending on the degree of specification, the more you diversify, the more you
need a divisional structure (if you have 2 products, you can still have a functional
structure)
o Differentiation strategy

KEY IDEA: It all comes down to deciding if you want a centralized [functional] or
decentralized model (+ or – complexity)

36

The Ambidextrous Organization
3 types of innovation: incremental, discontinuous, and architectural
4 possibilities to manage innovation in your company (can apply to both
functional and divisional):

Functional Design
Integrate project teams into the
existing organizational &
management structure

Unsupported Teams
Are set up outside the established
organization and management
hierarchy

Cross-Functional Teams
Operate within the established
organization but outside existing
management hierarchy

Ambidextrous Organization
Establish project teams that are structurally
independent units, each having its own
processes, structure and culturesà
integrated into existing management
hierarchy

KEY IDEA: Things to consider: what do I want to centralize/decentralize?
KEY IDEA: Separate exploratory units from traditional exploitative to allow
different processes, structures, cultures and close ties at senior level

Related Diversification:
•
•
•
•

Businesses that are similar
Hybrids (centralizing HR, finance, marketing, etc
...

Mission? 10 to 12 years
CASE: YAHOO
• Change of CEO
• Change of vision (from long to short and concise)
• Change positioning from being like Google (a blank page) to being the center of online
life and encourage you to stay on their server
...


HINDERING FORCES
In the environment
Market changes, Internationalization, global markets, societal changes, new
technologies

On the organizational level
Management change

On the individual level
Intellectual curiosity, incentive structures, personal development, learning

39

Force Field Analysis

Forces FOR change
•
•
•
•
•

Long-term revenue
Market demand
Customer expectations
Unsustainable costs
Competition

Forces AGAINST change
•
•
•
•
•

Company culture
Time constraints
Viability of new tech
Client adoption
Conversion costs

Three reasons why change is so difficult:
Problem 1:
Initiation vs
...

2) Hired a new CEO, new marketing (bringing people onboard who would be
motivated, etc)
3) Repositioned Pringles towards a designer fashionable brand
...

8) Expanded production, hired 80 employees

41

Lesson 11
Lesson 12
Lesson 13

42



---