Strategic Management 1

Prof Aindrila Chatterjee

Session 10
Agenda
• Innovation
• First mover advantages and disadvantages
• Technology strategies: leadership and followership
• Advent of internet and digital strategy
• Pipeline vs platform strategies
Innovation
Using new knowledge to transform organizational processes or create commercially viable
products and services

Based on the industry life cycle:

• Product innovation
• Process innovation

• Product innovations target product improvement and differentiation, earlier stages of

an industry life cycle
• Process innovation targets cost improvements, later stages of an industry life cycle
• When dominant design emerges, product innovation passes the baton to process
innovation
Innovation

Based on the newness of Technology:

• Radical innovation
• Incremental innovation

Based on the impact on the market:

• Architectural innovation
• Disruptive innovation
Types of Innovation

Source: Digital Leadership

Disruptive Innovation (Christenson)
• Overturn markets by providing an altogether new approach to meet
consumer needs
• Disruptive innovation refers to the use of technology that upsets a structure,
as opposed to "disruptive technology", which refers to the technology itself.
• Initially simpler, less sophisticated, lower performance
• Appeal to less demanding customers seeking less expensive solutions
• Take time to become disruptive
• Incumbents too focused on the needs of existing customers
• Organizational solutions (e.g. new divisions)
Innovation DNA
• Creative Intelligence
• Associating – connect seemingly unrelated questions, problems and
ideas
• Questioning – ask questions that challenge common wisdom
• Observing – discovery-driven learning from regular behavior of
customers or potential customers
• Experimenting – trying new possibilities, acknowledging that many
may fail
• Networking – broad and divergent personal networks who can help
in testing radical ideas
Innovation Essentials
• Cultivating innovation skills – strategic envelope – define acceptable
projects
• Defining the scope of innovation
• What will the initiative cost
• How much is likely to be commercially viable
• What is the value add, if it works
• Learnings in case it is not successful
• Managing the pace of innovation
• Incremental: 6 months to 2 years, milestone based
• Radical: 10 years or more
Innovation Essentials
• Staffing to capture value from innovation
• Innovation team with experienced players having venture management skills
• Associate with career moves
• Move to the core business to revitalize
• Have clear incentives for innovation
• Collaborating with innovation partners
• Research Universities (royalty-free use of patents coming from funded
research)
• Government (RFPs)
Learning from Mistakes
The value of unsuccessful innovation – failure as a catalyst for learning

• Avoid overcommitting
• Brave shame and despair
• Pivot quickly
• Transfer knowledge
• Need not be the right first time
Challenges of Innovation
• Seeds vs. weeds – filter from the abundance of innovative ideas
• Experience vs. initiative – who will lead an innovation project
• Internal vs. external staffing – more social capital, but may hinder
thinking out of the box. Increased cost of hiring, training, relationship
building
• Building capabilities vs. collaborating –within a firm or external
partners
• Incremental vs. preemptive launch – managing timing and scale of
innovation
 Winners and Losers from Innovation

Pilkington (Float glass)

Winners IBM (PC)
G.D. Searle (Aspartame)
Google Chrome (Browser)
Apple iPhone (Smart phone)

Losers RC Cola (Diet cola)

Kodak (Instant photography)
Blackberry (Smart phone)
Safari (Browser)
Netscape (Browser)

Leaders Followers
First Mover Advantages and Disadvantages
Advantages Disadvantages
• Learning curve • Uncertainty resolution
• R&D and patents • Technological shifts
• Preemption • Ecosystem development
• Switching costs • Inertia
• Choice under uncertainty • Pioneering costs
• Regulatory approval
• Standards formation
• Consumer education
• Brand image • Early inputs costly

Lieberman and Montgomery (SMJ)

Technology Strategies
Leadership Followership
• Get product to market before • Quick imitation
competition • Strong development capability
• Strong R&D commitment • Developing improved/reliable
• Emphasis on primary demand product
generation • Learn from leader’s mistake(s)
• Educate consumers
Profiting from Innovation
Appropriability regime (Teece, 1984)
• Patents
• Copyrights
• Trade secrets
Complementarities
• Assets
• Products
Profiting from Innovation
• Investment in complementarities (ecosystem development)
Subsidize training, manuals, equipment
• Licenses and other methods to expand installed base
• Create uncertainty, if not first (strategic pre-announcement)
• Target areas with maximum potential (High volume customers and
Apple)
• Free or low priced at start (Freemium model)
• Open or proprietary system
Digital World
• Earlier: Initially increasing but later diminishing returns to scale (agriculture,
farming, etc.)
• Present: Permanent increasing returns to scale (Microsoft)
• Knowledge-intensive products
• Large initial investments, low production costs
• High switching costs
• Network externalities – increasing value of a product as its number and usage
increases
• Demand size as well as supply size scale
• Complementarities like apps increase network externalities
• Competing firms have to over come network externalities
• May lock in inferior technology at times
Platform Strategies

• Platform businesses bring together producers and consumers in high-

value exchange
• Chief assets are information and interactions
• These not only create value but also become a source of competitive
advantage.
• Apple connected app developers and app users in a two-sided
platform generating value for both (network effects)
• In 2015, App Store had 1.4 million apps and generated $25 billion for
its developers
Platform Strategies

• Pipelines – classic value chain businesses

• Early examples of platforms:
• Malls, Newspapers
• Modern examples of platforms (IT enabled):
• Uber/Ola, Airbnb, MakeMyTrip
• What has been IT’s value add?
• Building and scaling up simpler and cheaper
• Capture, analyze and exchange huge amounts of data
• Non ownership of assets
• Transaction cost reducer
Players in a Platform Ecosystem
Players in a Platform Ecosystem

• Platform provides infrastructure and rules for a marketplace

• Value-creating assets are information and interactions
• Brings producers and consumers together
• Roles can shift from one player to the other
Pipelines, Platforms and New Rules of Strategies

• How are platforms different from pipelines?

• Products have features, platforms have communities
• Scale trumps differentiation
• Resource control to resource orchestration
• Managing two-sided markets
• Internal optimization to external interaction
• Customer value to ecosystem value (Accretive, not depletive)
• Network externalities – both demand and supply side economies of
scale
• Spillover effect – recommendation systems, two-way feedback
How Platforms Change Strategy
• Forces within the ecosystem
• Communities can migrate from one platform to another (Orkut to FB)
• Swap roles – user and provider at the same time
• Forces exerted by ecosystem
• Competition from unrelated business
• Blurring of industry boundaries
• Focus shifts from sales to interactions
• May be minuscule individually, but overall network effect is the source of
competitive advantage
• Start with single type of interaction of high value but low volume and then
move to adjacent markets
• Access and Governance
• From barriers to rules and architecture
• Open vs. close architecture
• Open governance (beware of noise)
Session 11
 Agenda for today’s class

• Corporate Strategy
• Diversification
Levels of Strategy
Why do we have this portfolio of businesses?
How do we manage a portfolio of businesses?
Corporate How doe we develop a distinctive
competence that acts a source of competitive
advantage in multiple industries?

Business Level Strategy

How do we compete in an
industry?
Business 1 How do we achieve competitive Business 1
advantage in an industry

Marketing Sales Finance MFG Marketing Sales Finance MFG

Functional Strategy
How to build capabilities in
each function?
Corporate vs. Business Strategy

• Not domain navigation (business strategy), but

• Domain choice, managing an array of businesses, scope of the firm
• Business strategy is about how to win in a particular industry by creating a
sustainable competitive advantage
• Corporate Strategy is choosing which industries to compete in
• Corporate strategy adds synergistic value such that the whole is greater than sum
of the value of individual entities
Corporate Level Strategy
• Decisions about vertical and horizontal scope of the firm
• Horizontal scope expansion happens through acquisition, which is a part of
corporate strategy
• Resource allocation – fundamental mechanism of creating synergy across the
portfolio
• Inter-business coordination, sharing
• Specialized vs. General Resources
• Divestment
Portfolio Approach to Diversification: BCG
Matrix
Relative Industry growth rate

High
Question marks Stars
Strategy: Invest? Strategy: Invest

Dogs Cash Cows

Strategy: Divest Strategy: Low investment

Low

Low High
Relative Market Share
Corporate Level Strategy
• Corporate strategy is the way a company
creates value through the configuration
and coordination of multi-market
activities.

• To add value, a corporate strategy should

enable a company, or one of its business
units, to perform one or more of the
value creation functions at a lower cost,
or in a way that supports a
differentiation advantage.
Porter’s Test for Diversification
If diversification is to create shareholder value, it must meet three tests:

1. The Attractiveness Test: diversification must be directed towards attractive

industries (or have the potential to become attractive).

2. The Cost of Entry Test: the cost of entry must not capitalize all future profits.

3. The Better-Off Test: either the new unit must gain competitive advantage from its
link with the company, or vice-versa. (i.e. some form of “synergy” must be
present)
Diversification
Motives for diversification
Types of diversification
Mode of diversification
Diversification Motives
• Financial Economies
• Risk reduction
• Efficient internal capital allocation & restructuring
• Tax advantages
• Economies of scope
• Transferring competencies
• Sharing activities
• Utilizing excess capacity
• Brand-name that is exportable
• R&D and new product development
Diversification Motives
• Managerial motives (that devaluate firm)
• Managerial capitalism/agency problem
• Increase managerial compensation
• Diversify managerial employment risk
Diversification and Stockholders
• Issue #1: There may be no value to stockholders in diversification moves since
stockholders are free to diversify by holding a portfolio of stocks.
• Issue #2: When there is a reduction in managerial (employment) risk, then there
is upside and downside effects for stockholders.

• On the upside, managers will be more willing to learn firm-specific skills that will
improve the productivity and long-run success of the company (to the benefit of
stockholders).
• On the downside, top-level managers may have the incentive to diversify to a
point that is detrimental to stockholders.
Limits of Diversification

• Costs of coordination increase exponentially as number of

businesses increases
• Corporate costs are higher than value created
• Mis-allocation of resources due to lack of knowledge,
complexity and/or chasing of mirages
Types of Diversification
• Related Diversification
• Economies of Scope (Leveraging core competencies, sharing
activities)
• Market Power (Pooled negotiation, Vertical Integration)

• Unrelated Diversification
• Parenting
• Restructuring
• Portfolio Management
Determinants of relatedness based on three
corporate management tasks
• Resource Allocation
• Similar size of capital investment projects
• Similar time span
• Similar sources of risk
• Similar general management skills required by managers
• Strategy Formulation
• Similar key success factors
• Similar stages of the industry life cycle
• Similar competitive positions
• Performance Management and Control
• Targets defined in terms of similar performance variables
• Similar time horizons for performance targets
Related Diversification
Economies of Scope: Leveraging core competencies
• The core competence must enhance competitive advantage by creating superior
customer value
e.g. Core competence of Gillette lies in developing razors, for which customers are ready to pay more.
• Different businesses in the corporation must be similar in at least one way in
relation to the core competence
e.g. Fujifilm had developed expertise on collagen, a component of both photo film and human skin,
which it utilized to develop a skin care product, called Astalift
• The core competence must be inimitable and non substitutable
e.g. Amazon’s competence in internet retailing, website infrastructure, warehousing developed during days of
the online book industry could be used in a range of other online industries.
Related Diversification
Economies of Scope: Sharing activities
• Cost savings due to economies of scale and scope
• Sharing should not have a negative effect on a given business’s differentiation
e.g. Ford’s owning of Jaguar, which lowered perceived value and differentiation of Jaguar
• Benefits must outweigh greater coordination required to manage a shared
activity
e.g. Sharing manufacturing facilities, distribution channels, sales force
Related Diversification
Market Power: Pooled negotiating
• Enhanced bargaining power with customers and suppliers
• Enhanced position vis a vis competitors
• Access to parent’s deep pockets and new entrants
• Effect of combined business with potential customers, suppliers
Related Diversification
Market Power: Vertical integration

• The number of stages in a product’s or service’s value chain that a particular

firm engages in defines that firm’s level of vertical integration.

• Forward integration: When Coca-Cola began buying its previously franchised

independent bottlers.

• Backward integration: When Home Box Office began producing its own
movies for screening on the HBO Cable Channel.
Vertical Integration
• In order to avoid confusion on the vertical coordination problem it is
important for the manager to separate two distinct issues:

• Issue #1: What is the objective for vertical coordination? Or put

differently, what efficiencies, risk sharing, or market power advantages are
being sought?

• Issue #2: What organizational form (e.g., vertical contracts, equity joint
ventures, mergers & acquisitions) best achieves the desired objective(s)?
Unrelated Diversification
• Corporate Parenting
• Create value through management expertise
• Competent central functions like legal, HRM, financial, procurement
• Change in strategy, infusion of new technology and processes
• Restructuring
• Insight to detect undervalued companies to reduce cost of acquisition
• Asset restructuring – selling unproductive assets
• Capital restructuring – changing the debt-equity mix
• Management restructuring – change in top management, reporting
relationships, organizational structure
• Portfolio Management – to achieve a balanced portfolio of business
Pitfalls of portfolio approach

Portfolio approach is a value-destroying way to build

corporate strategy
• Little strategic consideration
• Does not consider relationship between
businesses
• Mis-allocation of resources
• Competitive signaling
 Modes of Diversification
• Choice of mode of diversification:
• Internal development
• Cartoon characters
• Joint venture
• Lantau Island Park (w/ HK Govt)
• Licensing
• Cartoon characters to toy stores
• Merger
• Pixar (2006)
• Acquisition
• ABC (1997)
Modes of Diversification
• A merger is a strategy through which two firms agree to integrate their
operations on a relatively co-equal basis because they have resources and
capabilities that together may create a stronger competitive advantage.
• An acquisition is a strategy through which one firm buys a controlling or
100 percent interest in another firm with the intent of using a core
competence more effectively by making the acquired firm a subsidiary
business within its portfolio.
• A takeover is a type of an acquisition strategy wherein the target firm did
not solicit the acquiring firm’s bid.
• Strategic Alliance is cooperative relationship between two or more firms.
Can be contractual or equity alliance.
• Joint venture is a special form of alliance where two or more firms
contribute equity to form a new legal entity
 Take-aways: Business Strategy
• Strategy typologies spell out generic strategies that firms may use to create competitive
advantage
• The value chain helps managers understand the need and the role of pursuing the chosen
business strategy across all the firm’s primary and support activities
• The role of Willingness-to-Pay is important in understanding the relationship between costs,
prices, and profits
• Firms succeed when they make strategic trade-offs and create a unique position in the
marketplace
• Differentiation implies a strategy that extracts a market premium for the difference
• The resource-based view of the firm (RBV) aids in understanding the building blocks of
competitive advantage
• Fit, or a tight consistency across all the firm’s activities, not only enhances the effectiveness
of strategy but also limits imitation, or increases inimitability
• Barriers to the imitation of strategy help firm’s sustain competitive advantage
THANK YOU ☺