BUS 189 – January 14, 2011

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CH 08 – STRATEGIC CHANGE: IMPLEMENTING STRATEGIES TO BUILD AND DEVELOP A
COMPANY

STRATEGIC CHANGE
• The movement of a company away from its present state toward some desired future
state to increase its competitive advantage and profitability
How?

2 TYPES OF STRATEGIC CHANGE

• Re-engineering
• A process in which managers focus not on a company's functional activities but on
the business processes underlying the value creation process
: goal is to eliminate waste; cut inefficiencies and costs
• Restructuring
• A process through which managers simplify the scope of an organization
• it also involves outsourcing
: can involve cutting divisions
: eliminate unprofitable divisions
: changing in broadcast technology, move from analog to digital ← possible causes

DETERMINING THE NEED FOR CHANGE

• Recognize the need based on metrics
• Decrease on profitability, ROI, stock
• Perform SWOT analysis to find out the main cause
• Identify the desired future state of the company
• How it should change its strategy and structure to achieve the new goal

DETERMINING THE OBSTACLES TO CHANGE

• Obstacles to change can be found at four levels in the organization:
1) Corporate
2) Divisional
3) Functional
4) Individual
: workload for individual employees will inc and possibly make adjustments to way they operate
: individuals who are left behind (after lay off) may receive more responsibilities, which can
create resistance to perform

MANAGING AND EVALUATING CHANGE

• Determine whether change is managed by internal managers or external consultants
• Internal managers may be too close to the process and driven by internal politics
• external consultants will take longer to learn the process and operating principles of
the firm
• Evaluate the effects of the change based on the same metrics mentioned

ASKING THE RIGHT QUESTIONS (strategic chg and co.'s vision)

• How do I, as a general/functional manager of this company, determine which
businesses/industries we should continue to participate in/exit from?
: look at core competences, profitability, growth; does it have what it needs to continue in this
mkt/industry?
• How do I determine whether this company should enter one or more new businesses?
: take a look at resources, profitability, growth; whether have capability, R&D and possibility for
growth
: how many new businesses do you want to enter?
: should update/chg strategy as see fit through life of firm; don't stick to one

PORTFOLIO OF CORE COMPETENCES

• Analyze company as a portfolio of core competences, as opposed to a portfolio of actual
businesses
• A core competence is a core skill of a company
: can be combined to create new core competencies to create new products/innovations
• Identifying these central value-creating capabilities tells a company which business
opportunity to pursue

FIGURE 8.2: ESTABLISHING A COMPETENCY AGENDA

Variables: New and Existing Industries as compared to New and Existing Competencies

FILL IN THE BLANKS

• Existing Competence – Existing Industry
• What is the opportunity to improve our position in existing industries and better
leverage our existing competencies?
• Example: Canon improved its position in the camera industry by using their
microelectronics competence from their photo copier business
: integrate electronic parts into camera line of products, which allow to provide certain features
to customers

PREMIER PLUS 10
• New Competence – Existing Industry
• What new competencies will we need to build to protect and extend our franchise in
current industries?
• Example: Apple is creating a new competence in chips technology that will help lower
costs and increase profitability
: intends to use competencies across all products (advantage)

WHITE SPACES
• Existing Competence – New Industry
• What new products or services could we create by creatively redeploying/recombining
our current competencies?
• Example: Canon has combined their competencies in microelectronics and fine optic
with a new competence of digital imaging
: computers, printers, scanners ← allow them to get into new industry
: not a new product; industry not a new industry, but to CANON, it is
: now they're moving into computer/printer/scanner business

MEGA-OPPORTUNITIES
• New Competence – New Industry
• What new competencies will we need to build to participate in the most exciting
industries of the future?
• Example: Monsanto, a manufacturer of chemicals and fertilizers, has attempted to
 forecast the future and create a new competence in genetically engineered seeds and
grain
: look to future, look to strategy/vision, decide what to stay profitable for more years (stagnant
business)
: advantage for Monsanto- not only new advantage over rivals, allow to create new
product, enter into new industry (cotton seed resistant to bullworm; soybean seed
resistant to weed killer ← can sell both to make profits on both ends)

STRATEGY IMPLEMENTATION
* Strategies implemented through:
* Internal new ventures
: Corporate-level strategies
: take in existing business you have, leverage and combine into new method of generating
revenue
: existing, but come out w/new product ← Generation 2 to existing product
: NO—entirely new; Apple when came out w/iPod
: Microsoft when came out w/XBox
: HP makes printers
: one of biggest risks to starting Internal New Venture
: 3 reasons-
: if you're going to enter mkt, go big
: take adv of economies of scale
: poor commercialization of New Venture product
: poor corporate management
: Newton ← too small, too hard to use (Apple) : what is now iPad
: Betamax ← HD-DVD
: 8-track ← all e.g.'s of failure
: always charging too much for price
: didn't do mkt research to see if there's a niche for it
: 2-way pager was a bust (but now everybody essentially does that w/texting)
: Real Estate Industry ← hard copies (facsimiles)
* Acquisitions
* Strategic Alliances

QUOTE: Jeffrey Pfeffer

: professor of organizational behavior at Stanford

STRATEGIC CHANGE: IMPLEMENTING STRATEGIES TO BUILD AND DEVELOP A

COMPANY
: risk measurement

INTERNAL NEW VENTURES

* Involve creating the value-chain functions necessary to start a new business from scratch
* Typically used to leverage or recombine valuable competencies to enter a new business area
* Generally science-based companies tend to favor internal new ventures as a strategy
implementation
: 3M ← unique co. ← over 3000 products, developed internally
* Although these can be profitable, the reported failure rate is very high
* Three reasons for failure:
- Market entry occurs on too small a scale
- Poor commercialization of the new product
 - Poor corporate management of the venture
* Ways to limit risk:
* Adopt a structured approach to managing the venture
* Foster close links between R&D and mktg
* Set up project teams
* Choose ventures with greatest probability of commercial success
* Monitor projects closely
Small-scale entry has less risk ← many co.'s
: red line (Figure 8.3) doesn't go as high as blue line

ACQUISITIONS
* Involve one company purchasing another company
* Used in two ways:
* To strengthen competitive positioning by purchasing a competitor
* To enter a new business or industry
* Usually done by a company that:
* wants to move fast
* less risk
* is in a well established industry and has barriers of entry
Adv/Disadv (pwrpt)
(–)
Dissipation of Value
50% of acquisitions reduce shareholder values
33% of acquisitions only marginal returns
17% of acquisitions considered successful
: John Chambers, CEO of Cisco
: Cisco's strategy for growth- acquisition (make a lot of, but most that are successful)
: danger- what they're buying is ppl (expertise of co.)
: if they leave, Cisco's acquisition turns out to be worthless
: best at acquisitions; made over 100 acquisitions, but considered successful
: don't do R&D and develop new tech, but buy the new tech;
: acquire very small co.'s (typically easier to digest)
: but GE (?) buys RCA/NBC
Overestimate Economic Benefits
Tend to be expensive
: the most expensive acquisition = Comcast $72 billion to buy AT&T's cable stuff
: $202.8 billion (in 2000) VodaPhone and AirTouch
: VodaPhone is the survivor (big in Europe)
: (we'll give you 2 shares of stock for every 1 of yours, e.g.)
: most of these acquisitions is not for cash, but for stock
: better acquisition vehicle
: TimeWarner and AOL ($181 billion) ← biggest failure
: one of the co.'s will bidding up their stock price
: acquire a lot of debt in process
Difficult to integrate various corporate cultures
: when 2 co.'s integrate their businesses, create a lot of probs w/in and a lot of management
turnover occurs ← lose lot of expertise and performance

* Ways to limit risk:

* Target identification and pre-acquisition screening
: figure out what industry they want to be in and what co.'s = good candidate for them
 : pre-acquisition screening = due diligence (many co.'s don't do and end up paying too
much)
* Bidding strategy (this works best when the stock market undervalues a company)
: objective is to reduce price of co. during acquisition (co.'s suffering from short-term
profits) ← take over b/c co.'s undervalued in stock mkt (get at bargain price)
* Integration
: merging both co.'s (eliminating any duplicate facilities or fn's) and sell off not-as-
profitable biz

STRATEGIC ALLIANCES
* Cooperative agreements between companies to work together and share resources to achieve a
common goal
* Can be informal or short-term agreements
* Can be joint ventures- a formal type of strategic alliance where two companies create a new
separate company
: joint venture is one type of S.A.
: joint venture vs. merger?
: merger is where you share operating resources; not necessarily forking out new $$ to a
co., but sharing operating resources in order to create one
: When to use?
: when benefits outweigh costs
: when you enter into a S.A., main objective is to reduce risk
: Who do you enter into S.A. with?
: competitors, co.'s along value chain, co.'s w/strength you can complement with
: informal agreements- share co. knowledge and know-how
: could get into outsourcing agreement or JV
: at w/e pt and time co. is at, look to form S.A. in w/e way maximize for your co.

Adv/Disadv
(+)
Facilitate entry into a new market
: e.g. Motorola ← had trouble entering Japanese mkt due to trade barriers
: entered S.A. with Toshiba (mktg in exchg for microprocessors)
: gained foothold in Japanese mkt; opened up whole new mkt to Motorola
Share the fixed costs and associated risks
: e.g. Motorola/Toshiba ← about $1 billion to set up factory for microprocessors
: when proj of such skill, not only want to split the risk, but share the costs
: Boeing- designing 787 jet (initially $8 billion) → entered into S.A.'s w/several Jap co.'s
Bring together complementary skills and assets
: Toshiba and Microsoft-
: Microsoft is powerhouse of software engineering and Toshiba in microprocessing
: took 2 complementary skills, combined them, and achieved common goal
(–)
May provide competitors with access to valuable knowledge
: e.g. Jap co.'s that gain comp adv over orig U.S. co.'s ← be careful who you're getting into S.A.
with b/c may be potential competitor

: split risk, split the reward

: splitting ctrl w/venture partner
: get into S.A. w/someone who has a similar biz philosophy (how $$ invested, structure, and
how should operate)
: despite risks;
if entering into for the right reason and who you enter into S.A. W/
(similar ideals and philosophies)

In China—if want to do biz, enter into S.A. with co.

: Condition is that if want to do biz; generally the Chinese co. gets 51%

Most popular b/c least risky (out of 3 options gone over today)

What goes into a successful S.A.

3 things (according to book)

* Ways to limit risk:

- Careful partner selection
- Alliance structure
- Alliance management

Cites a study done in 1991 in HBR

MAKING THEM WORK

* 33% failure rate – HBR 1991
* 49 firm study
* Why?
* 200 firm study – HBR 2009
: more viable resource
*Highly institutionalized firms had 50% success rate
: tend to get overly confident; depend on superstitious learning
: lead management into being formalized (formula) ← standard procedures, protocols
: highly institutionalized
: whereas other co.'s use highly integrating mechanisms to manage S.A.'s
* Firms using integrating mechanisms had 71% success rate
: more organic and free-flowing
: S.A.'s as opposed to Acquisitions (success rate is much lower than for S.A.'s)
: looked at another study
: can you adapt to diff situations; things may come up; curve balls; are you flexible
enough to adapt to those and move w/the flow (according to study)
: able to share info more freely; use lot of grp prob-solving; willing to improvise (not set
in procedures)

KEYS TO SUCCESS
*Partner selection
-Helps company achieve strategic goals
-Shares firm's vision in terms of why they are forming the alliance
-Is not going to try to exploit the alliance
: is this co. gonna help us get that? If not, use a diff. co.
: same vision for S.A.? If they have radically diff agendas, not everyone's gonna be on same page,
going to end in divorce of S.A.
: behave opportunistically? Want to make sure safeguard valuable info, technologies; otherwise,
could become competitor
: e.g. IBM, in 2003 had over 250 (?) S.A.; co.'s get into S.A. w/IBM b/c good track record,
reputable co.; they will not exploit situation (most likely)
: gather as much info as possible about other co.
: public info (records); talk to suppliers, vendors, former partners/employees; have face-
to-face mtg's ← if no chemistry between management, probably not good idea
*Alliance structure
*Reducing risk of giving too much information
-Walling off (critical technology)
: block off certain areas of prod'n, design; proprietary stuff
: Boeing had S.A. w/Jap co.'s
-Contracts
: TRW mfr's auto components in U.S., entered into S.A. w/Jap co.'s to
produce auto components for other Jap automakers (who own plants in
U.S.); Jap co.'s could not sell to other American automakers (become
competitors of TRW ← stealing mkt share from them)
-Swapping skills, technologies
: agree to swap technologies
: Toshiba and Microsoft; Toshiba and Motorola (licensing memory chips
in return for licensing microprocessors)
-Credible commitments
: capital investment (most of the time) into smaller co.
: “we care about this proj., we're going to be here to make sure it works,
we'll see it to the end”
: Cambridge antibody technologies; astrozeneca (?) (Astrozeneca has 20%
share ownership in smaller co.)
*Managing Alliances
* Maximized benefits
: e.g. Ford and Mazda entered into S.A.; successful b/c management of S.A. Allowed 2
co.'s to come together and not only discuss; not just biz purposes, but get to know each
other; formal/informal networks; use what you learn in your own co.
: Ford owns 35% of Mazda
* Achieve goals
* Building relational capital

TRUE OR FALSE
Strategic change is the movement of a company away from its present state toward some desired
future state to increase its comp adv and profitability true

Biz processes is the responsibility of one specific fn in the organization false

(not one specific fn)
: Dell ← managing entire supply chain; way they receive orders, way execute orders, and way
ship orders ← # of fn's
Biz Fn's = value chain

The 2nd step in implementing strategic change is for strategic managers to recognize the need for
change, to see that there is a gap between desired company performance and actual
performance false

The larger and more complex the org, the harder it is to implement change b/c inertia is likely to
be more pervasive true

The adv of bottom-up chg is that it removes some of the obstacles to chg by including them in
the strategic plan true
: btm-up chg is participative; getting ppl who will be affected by chg to help bring it about
: not top-down “do it b/c I say so” (the beatings will stop when morale improves)
: biggest obstacle to chg are the ppl

JV is a formal type of strategic alliance in which two companies jointly create a new, separate
company to enter a new business area true
: best e.g. is NUMMI ← 1982, there were quotas on # autos they can import; Toyota “if we make
them in the U.S. (we don't know much about mktg in U.S. and let's get somebody who does),
then we won't have to worry about quotas”

According to Hamel and Prahalad, a core competency is a central value creation capability of a
company, that is, a core skill. True

(back of book M/C)