strategy formulation hcad 5390. strategies defining future direction at what levels is future...
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Strategy Formulation
HCAD 5390
Strategies
Defining Future Direction
At what levels is future direction defined? Who is responsible for defining future direction? How is future direction expressed? Where can it
be seen?
Strategy-Making Levels in an Organization
Corporate Center↓↑
Individual SBUs↓↑
Functional Areas↓↑
Departments↓↑
Teams and Task Forces↓↑
Individual Employees
Responsibility for Defining Future Direction
Board of Directors CEO Top Executive Team Strategic Planning Unit Middle Level Managers All Employees Suppliers and Customers
Future Direction Documents
Mission Vision Values Objectives
Mission Statement
Current purpose of the organization What it is, what it does, and what it does not do The “business” of the firm, its domain The areas in which it operates and the means by
which it competes in those areas The current activities and operations of the firm
Mission Statement - Spheres of Operation and Competition
Industry Industry value chain Products or services Technologies and competencies Customers and market segments Distribution channels Geographic areas
Reasons for a Mission Statement
Fosters organization-wide unanimity of purpose Point of identification for employees and
stakeholders Steers operations and activities in certain
directions and away from others Basis for allocating resources Projects coherent, positive image to external
stakeholders
Characteristics of a Good Mission Statement (I)
Succinct: one page, 200-300 words Memorable and recitable Broad enough to allow management creativity Narrow enough to limit management
recklessness Distinguishes firm from its competitors Reconciles differences among stakeholders Arouses positive feelings about the organization
Characteristics of a Good Mission Statement (II)
Tells managers where to look and where to avoid in seeking strategic opportunities
Conveys image of a successful, well managed, self-aware organization worthy of investment and support
Understood and embraced by all organization members
More immediate and pragmatic than a vision statement
Vision Statement (I)
Describes an ideal, desirable future state for the organization
A future that the organization will work actively to create for itself
Antithesis of allowing the future to shape the organization, or adapting the organization to the future
Vision Statement (II)
Empowers and motivates employees to higher levels of achievement
Value of creating “shared vision” Can be prepared at all organizational levels Join all stakeholders in a “future search” for a
vision
Characteristics of a Good Vision Statement (I)
A kind of “dream” that inspires and drives Different from what is being done now Improvement over what is being done now A “stretch” for the organization with uncertainty
about the chances of achievement Grounded in reality and possible of achievement
Characteristics of a Good Vision Statement (II)
Reflects understanding of resources and competencies, as well as external opportunities and threats
A challenge for employees to accomplish, requiring new abilities and performance at the highest levels
All stakeholders see an aspect of the vision that serves their interests
Values Statement
Guidelines for employee behavior on the job Address beliefs and attitudes of all
organization members Implicit (organizational culture) vs. … Explicit (code of ethics)
Values
Johnson & Johnson’s credosets its responsibilities to:
1. J&J product users.
2. J&J employees.
3. Communities in which J&Jemployees live and work.
4. J&J stockholders.
Source: Courtesy of Johnson & Johnson.
Texas Health Resources
Mission, Vision and Values Mission
To improve the health of the people in the communities we serve. Vision
Texas Health Resources, a faith-based organization joining with physicians, will be the health care system of choice.
Values Respect
Respecting the dignity of all persons, fostering a corporate culture characterized by teamwork, diversity and empowerment.
IntegrityConduct our corporate and personal lives with integrity; Relationships based on loyalty, fairness, truthfulness and trustworthiness.
CompassionSensitivity to the whole person, reflective of God's compassion and love, with particular concern for the poor.
ExcellenceContinuously improving the quality of our service through education, research, competent and innovative personnel, effective leadership and responsible stewardship of resources
Arlington Memorial Hospital
Arlington Memorial Hospital (AMH) is a full-service acute-care medical center with 417 beds, serving Arlington and its surrounding communities. Since opening its doors in 1958, AMH has contributed to the medical and health education needs of area residents, who pooled their resources to help build the original 75-bed hospital.
Today, with more than 550 physicians on the medical staff, 1,900 employees and 300 volunteers, AMH is larger and more advanced than the founders could have imagined.
But its community-oriented focus, established more than five decades ago, has not changed. AMH remains a not-for-profit, community hospital dedicated to providing quality, compassionate health care.
Parkland
Mandate To furnish medical aid and hospital care to indigent
and needy persons residing in the hospital district. Vision By our actions, we will define the standards of
excellence for public academic health systems. Mission Dedicated to the health and well-being of individuals
and communities entrusted to our care.
Values Issues
Violations of the law Integrity, honesty, and ethics Attitude toward and treatment of coworkers,
customers, and suppliers Acceptance of risk taking and failure Attitude toward innovation and the future Tolerance for change within the organization Balance of profit-making and patient welfare
Complications in Values
How to communicate How to enforce Differences among organizational units Differences among professions and
specialties Effect on implementation of strategies
Strategic Objectives
Long-term strategic thrusts Designed to realize the organizational vision Explicit and workable Provide guidelines for specific strategies Set at both the corporate and SBU levels
Criteria for Strategic Objectives
Based on measurable attributes Specific unit of measurement for each
attribute Specific attribute level to be achieved Time deadline for reaching the level Delegate responsibility to a named person for
reaching the level by the deadline
Typical Corporate Strategic Objectives
Improve market price of common stock Increase economic profit of SBU portfolio Increase total annual revenues of SBU portfolio Increase portfolio cash flow to support rapid-
growth SBUs Diversify portfolio into new industries Divest no longer related SBUs Increasing resource sharing among SBUs
Typical SBU Strategic Objectives
Conduct a “turnaround” of the business Improve the business’s market share Increase the business’s revenues or profits Improve the quality of products and services Acquire or develop specific new technologies Acquire or develop new employee competencies
Tips on Setting Strategic Objectives
“Stretch” the abilities of employees assigned to achieve them
Support them with appropriate resources Tolerate risk-taking and innovation Watch for objectives and incentives that
motivate undesirable behavior Employees assigned to achieve objectives
participate in setting them
Challenges in Documents Defining Future Direction
Confusing mission and vision statements with each other
Defining visions distinguished from the competition
Overly long vision statements and too many strategic objectives
Vision and values that inspire employees Creating documents useful in strategic
management process
Distinguishing Corporations from Strategic Business Units (SBUs)
Multi-SBU Corporations: Sole separate legal entity Authorized to execute contracts Able to borrow money and sell equity Produces no goods or services Quite small staff Primary function is to assemble and manage a
portfolio of SBUs
Distinguishing Corporations from Strategic Business Units (SBUs)
Strategic Business Units:
No separate legal existence No separate ability to contract or raise capital Produce goods and services Compete in one or more markets Relative autonomy to manage operations and
strategy
Value-Adding Functions of the Corporate Center
Manage the Portfolio of SBUs Raise Financial Capital for Allocation to SBUs Allocate Resources and Services to SBUs Facilitate Synergies Among SBUs Choose Parenting Style for SBU Interactions Participate in SBU Strategic Planning Process Oversee and Monitor SBU Performance Manage Corporate Relations With Stakeholders
Corporate Management of an SBU Portfolio (I)
In pursuit of a corporate vision Acquires, merges with, or develops internally
new SBUs Divests existing, unwanted SBUs Set performance goals for SBU management Provide input to SBU strategic decisions Count upon SBUs to perform unique strategic
functions
Corporate Management of an SBU Portfolio (II)
Balance between central corporate direction and individual SBU autonomy
Control vs spontaneity Hire good SBU managers, give them general
guidelines, and let them loose … or … Give detailed directions, watch closely, and
intervene frequently
Model Portfolio Management Process
1. Choose strategic thrust of the corporation– Growth– Stability– Retrenchment
2. Choose geographic areas, markets, and products or services to offer in them
3. Decide how many SBUs in the portfolio and which businesses they will be
Texas Health Resources
Texas Health Resources (THR) is one of the largest faith-based, nonprofit health care delivery systems in the United States and the largest in North Texas in terms of patients served. The system's primary service area consists of 16 counties in north central Texas, home to more than 6.2 million people. THR was formed in 1997 with the assets of Fort Worth-based Harris Methodist Health System and Dallas-based Presbyterian Healthcare Resources. Later that year, Arlington Memorial Hospital joined the THR system. THR has 12 acute-care hospitals and one long-term care hospital that total 3,100 licensed hospital beds, employs more than 18,000 people, and counts more than 3,600 physicians with active staff privileges at its hospitals. THR is also a corporate member or partner in six additional hospitals and surgery centers.
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Adaptive Strategies
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Expansion Adaptive Strategy:– Orientation toward growth
Expand, cut back, status quo? Concentrate within current industry, diversify into
other industries? Growth and expansion through internal development
or acquisitions, mergers, or strategic alliances?
Adaptive Strategies
Corporate-Level Strategic Options:Growth – Expand the Portfolio
Most common corporate-level strategy direction Critical to maintaining share in a growing market In pursuit of economies of scale and scope Increase in experience and learning Top executive egos to be satisfied
Growth By Concentration
All businesses start here Dedicate all resources and competencies to
one or a few products or services Achieved in one of three ways:
– Sell more of current products in current markets– Sell current products in new markets– Sell new products in current markets
To sell new products in new markets is diversification
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Basic Growth Strategies:
Concentration– Current product line in one industry
– Vertical Integration– Market Development– Product Development– Penetration
Diversification– Into other product lines in other industries
Adaptive Strategies
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Expansion of ScopeBasic Concentration Strategies:
Vertical growthHorizontal growth
Adaptive Strategies
Adaptive Strategies
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Horizontal Growth
– Horizontal integration
Adaptive Strategies
Concentration on a Single Business
Advantages– Operational focus on a
single familiar industry or market.
– Current resources and capabilities add value.
– Growing with the market brings competitive advantage.
Disadvantages– No diversification of market
risks.– Vertical integration may be
required to create value and establish competitive advantage.
– Opportunities to create value and make a profit may be missed.
Concentration No Longer Sufficient to Maintain Growth
Unlikely to capture a greater share of current market
Current market is stagnating, maturing, shrinking, or otherwise lacking growth potential
Excess cash on hand needs to be invested productively
Management has greater ambitions for further strategic achievement
Growth By Related Diversification
Move beyond existing markets and products Employ existing resources and competencies New businesses are closely connected
(“related”) to existing businesses Directions of related diversification
– Vertical forward integration (toward customers)– Vertical backward integration (toward suppliers)– Horizontal expansion
Forms of Relatedness
Products or services Markets Processes, systems, or other operating features Manufacturing facilities, distribution channels,
marketing media, or support services Brand image, corporate reputation, creativity or
innovation skills, or general managerial expertise
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Basic Diversification Strategies:
– Concentric Diversification
– Conglomerate Diversification
Adaptive Strategies
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Concentric Diversification
– Growth into related industry– Search for synergies
Adaptive Strategies
Adaptive Strategies
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Unrelated (Conglomerate) Diversification– Growth into unrelated industry– Concern with financial considerations
Adaptive Strategies
Adaptive Strategies
Reasons for Diversification
Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness
• Economies of scope/scale
• Market power
• Financial economics
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness
• Anti-trust regulation
• Tax laws
• Low performance
• Uncertain future cash flows
• Firm risk reduction
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for Diversification
Incentives to Diversify
External Incentives:External Incentives: Relaxation of anti-trust regulation allows more related Relaxation of anti-trust regulation allows more related
acquisitions than in the pastacquisitions than in the past Before 1986, higher taxes on dividends favored spending Before 1986, higher taxes on dividends favored spending
retained earnings on acquisitionsretained earnings on acquisitions After 1986, firms made fewer acquisitions with retained After 1986, firms made fewer acquisitions with retained
earnings, shifting to the use of debt to take advantage of tax earnings, shifting to the use of debt to take advantage of tax deductible interest paymentsdeductible interest payments
Incentives to Diversify
Internal Incentives:Internal Incentives: Poor performance may lead some firms to diversify an Poor performance may lead some firms to diversify an
attempt to achieve better returnsattempt to achieve better returns Firms may diversify to balance uncertain future cash flowsFirms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to Firms may diversify into different businesses in order to
reduce riskreduce risk
Resources and Diversification
Besides strong incentives, firms are more likely to Besides strong incentives, firms are more likely to diversify if they have the resources to do sodiversify if they have the resources to do so
Value creation is determined more by appropriate Value creation is determined more by appropriate use of resources than incentives to diversifyuse of resources than incentives to diversify
Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)
• Diversifying managerial employment risk
• Increasing managerial compensation
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for Diversification
Managerial Motives to Diversify
Managers have motives to diversifyManagers have motives to diversify – diversification increases size; size is associated with diversification increases size; size is associated with
executive compensationexecutive compensation– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict such effective governance mechanisms may restrict such
motivesmotives
Bureaucratic Costs and the Limits of Diversification
Number of businesses– Information overload can lead to poor resource allocation
decisions and create inefficiencies.Coordination among businesses
– As the scope of diversification widens, control and bureaucratic costs increase.
– Resource sharing and pooling arrangements that create value also cause coordination problems.
Limits of diversification– The extent of diversification must be balanced with its
bureaucratic costs.
Relationship Between Diversification and Performance
Per
form
ance
Per
form
ance
Level of DiversificationLevel of Diversification
DominantBusiness
UnrelatedBusiness
RelatedConstrained
Restructuring:Contraction of Scope
Why restructure?– Pull-back from overdiversification.– Attacks by competitors on core
businesses.– Diminished strategic advantages of
vertical integration and diversification.Contraction (Exit) strategies
– Retrenchment– Divestment– spinoffs of profitable SBUs to investors;
management buy outs (MBOs).– Harvest– halting investment, maximizing cash flow.– Liquidation– Cease operations, write off assets.
Why Contraction of Scope?
The causes of corporate decline– Poor management– incompetence, neglect– Overexpansion– empire-building CEO’s– Inadequate financial controls– no profit responsibility– High costs– low labor productivity– New competition– powerful emerging competitors– Unforeseen demand shifts– major market changes– Organizational inertia– slow to respond to new competitive
conditions
The Main Steps of Turnaround
Changing the leadership– Replace entrenched management with new managers.
Redefining strategic focus– Evaluate and reconstitute the organization’s strategy.
Asset sales and closures– Divest unwanted assets for investment resources.
Improving profitability– Reduce costs, tighten finance and performance controls.
Acquisitions– Make acquisitions of skills and competencies to strengthen
core businesses.
Adaptive Strategies
Maintenance of ScopeEnhancement
Status Quo
Market Entry Strategies
Acquisition:Acquisition: a strategy through which one organization buys a a strategy through which one organization buys a controlling interest in another organization with the intent of controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own making the acquired firm a subsidiary business within its own portfolioportfolio
Licensing:Licensing: a strategy where the organization purchases the a strategy where the organization purchases the right to use technology, process, etc. right to use technology, process, etc.
Joint Venture:Joint Venture: a strategy where an organization joins with a strategy where an organization joins with another organization(s) to form a new organizationanother organization(s) to form a new organization
AcquisitionsAcquisitions
Reasons for Making Acquisitions
IncreaseIncreasemarket powermarket power
OvercomeOvercomeentry barriersentry barriers
Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed
to marketto market
IncreaseIncreasediversificationdiversification
Reshape firm’sReshape firm’scompetitive scopecompetitive scope
Lower risk comparedLower risk comparedto developing newto developing new
productsproducts
Learn and developLearn and developnew capabilitiesnew capabilities
Reasons for Making Acquisitions:
Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services above when a firm is able to sell its goods or services above
competitive levels orcompetitive levels or– when the costs of its primary or support activities are below when the costs of its primary or support activities are below
those of its competitorsthose of its competitors– usually is derived from the size of the firm and its resources usually is derived from the size of the firm and its resources
and capabilities to compete and capabilities to compete Market power is increased byMarket power is increased by
– horizontal acquisitionshorizontal acquisitions– vertical acquisitionsvertical acquisitions– related acquisitionsrelated acquisitions
Increased Market PowerIncreased Market Power
Reasons for Making Acquisitions:
Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors– differentiated products by competitorsdifferentiated products by competitors– enduring relationships with customers that create product enduring relationships with customers that create product
loyalties with competitorsloyalties with competitors
acquisition of an established company acquisition of an established company – may be more effective than entering the market as a may be more effective than entering the market as a
competitor offering an unfamiliar good or service that is competitor offering an unfamiliar good or service that is unfamiliar to current buyersunfamiliar to current buyers
Cross-border acquisitionCross-border acquisition
Overcome Barriers to EntryOvercome Barriers to Entry
Reasons for Making Acquisitions:
Significant investments of a firm’s resources are Significant investments of a firm’s resources are required torequired to– develop new products internallydevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace
Acquisition of a competitor may result inAcquisition of a competitor may result in– lower risk compared to developing new productslower risk compared to developing new products– increased diversificationincreased diversification– reshaping the firm’s competitive scopereshaping the firm’s competitive scope– learning and developing new capabilities learning and developing new capabilities – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities
Reasons for Making Acquisitions:
An acquisition’s outcomes can be estimated more An acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an easily and accurately compared to the outcomes of an internal product development processinternal product development process
Therefore managers may view acquisitions as lowering Therefore managers may view acquisitions as lowering riskrisk
Lower Risk Compared to Developing Lower Risk Compared to Developing New ProductsNew Products
Reasons for Making Acquisitions:
It may be easier to develop and introduce new products It may be easier to develop and introduce new products in markets currently served by the firmin markets currently served by the firm
It may be difficult to develop new products for markets It may be difficult to develop new products for markets in which a firm lacks experiencein which a firm lacks experience– it is uncommon for a firm to develop new products internally to it is uncommon for a firm to develop new products internally to
diversify its product linesdiversify its product lines– acquisitions are the quickest and easiest way to diversify a firm acquisitions are the quickest and easiest way to diversify a firm
and change its portfolio of businessesand change its portfolio of businesses
Increased DiversificationIncreased Diversification
Reasons for Making Acquisitions:
Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or marketsdependence on one or more products or markets
Reducing a company’s dependence on specific Reducing a company’s dependence on specific markets alters the firm’s competitive scopemarkets alters the firm’s competitive scope
Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope
Reasons for Making Acquisitions:
Acquisitions may gain capabilities that the firm does Acquisitions may gain capabilities that the firm does not possessnot possess
Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base
– reduce inertiareduce inertia
Learning and Developing New CapabilitiesLearning and Developing New Capabilities
AcquisitionsAcquisitions
Problems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties
InadequateInadequateevaluation of targetevaluation of target
Large orLarge orextraordinary debtextraordinary debt
Inability toInability toachieve synergyachieve synergy
Too muchToo muchdiversificationdiversification
Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions
Resulting firmResulting firmis too largeis too large
Problems With Acquisitions
Integration challenges includeIntegration challenges include– melding two disparate corporate culturesmelding two disparate corporate cultures– linking different financial and control systemslinking different financial and control systems– building effective working relationships (particularly when building effective working relationships (particularly when
management styles differ)management styles differ)– resolving problems regarding the status of the newly resolving problems regarding the status of the newly
acquired firm’s executivesacquired firm’s executives– loss of key personnel weakens the acquired firm’s loss of key personnel weakens the acquired firm’s
capabilities and reduces its valuecapabilities and reduces its value
Integration DifficultiesIntegration Difficulties
Problems With Acquisitions
Evaluation requires that hundreds of issues be Evaluation requires that hundreds of issues be closely examined, includingclosely examined, including– financing for the intended transactionfinancing for the intended transaction– differences in cultures between the acquiring and target firmdifferences in cultures between the acquiring and target firm– tax consequences of the transactiontax consequences of the transaction– actions that would be necessary to successfully meld the actions that would be necessary to successfully meld the
two workforcestwo workforces Ineffective due-diligence process mayIneffective due-diligence process may
– result in paying excessive premium for the target companyresult in paying excessive premium for the target company
Inadequate Evaluation of TargetInadequate Evaluation of Target
Problems With Acquisitions
Firm may take on significant debt to acquire a Firm may take on significant debt to acquire a companycompany
High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that contribute to preclude needed investment in activities that contribute to
the firm’s long-term successthe firm’s long-term success
Large or Extraordinary DebtLarge or Extraordinary Debt
Problems With Acquisitions
Synergy exists when assets are worth more when Synergy exists when assets are worth more when used in conjunction with each other than when they used in conjunction with each other than when they are used separatelyare used separately
Firms experience transaction costs (e.g., legal fees) Firms experience transaction costs (e.g., legal fees) when they use acquisition strategies to create when they use acquisition strategies to create synergysynergy
Firms tend to underestimate indirect costs of Firms tend to underestimate indirect costs of integration when evaluating a potential acquisitionintegration when evaluating a potential acquisition
Inability to Achieve SynergyInability to Achieve Synergy
Problems With Acquisitions
Diversified firms must process more information of Diversified firms must process more information of greater diversity greater diversity
Scope created by diversification may cause Scope created by diversification may cause managers to rely too much on financial rather than managers to rely too much on financial rather than strategic controls to evaluate business units’ strategic controls to evaluate business units’ performancesperformances
Acquisitions may become substitutes for innovationAcquisitions may become substitutes for innovation
Too Much DiversificationToo Much Diversification
Problems With Acquisitions
Managers in target firms may operate in a state of Managers in target firms may operate in a state of virtual suspended animation during an acquisitionvirtual suspended animation during an acquisition
Executives may become hesitant to make decisions Executives may become hesitant to make decisions with long-term consequences until negotiations have with long-term consequences until negotiations have been completedbeen completed
Acquisition process can create a short-term Acquisition process can create a short-term perspective and a greater aversion to risk among perspective and a greater aversion to risk among top-level executives in a target firmtop-level executives in a target firm
Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions
Problems With Acquisitions
Additional costs may exceed the benefits of the Additional costs may exceed the benefits of the economies of scale and additional market powereconomies of scale and additional market power
Larger size may lead to more bureaucratic controls Larger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and Formalized controls often lead to relatively rigid and
standardized managerial behaviorstandardized managerial behavior Firm may produce less innovationFirm may produce less innovation
Too LargeToo Large
Strategic Alliance
A strategic alliance is a cooperative strategy in whichA strategic alliance is a cooperative strategy in which– firms combine some of their resources and capabilitiesfirms combine some of their resources and capabilities– to create a competitive advantageto create a competitive advantage
A strategic alliance involvesA strategic alliance involves– exchange and sharing of resources and capabilitiesexchange and sharing of resources and capabilities– co-development or distribution of goods or servicesco-development or distribution of goods or services
CombinedCombinedResourcesResources
CapabilitiesCapabilitiesCore CompetenciesCore Competencies
ResourcesResourcesCapabilitiesCapabilities
Core CompetenciesCore Competencies
ResourcesResourcesCapabilitiesCapabilities
Core CompetenciesCore Competencies
Strategic Alliance
Firm AFirm A Firm BFirm B
Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services
Types of Cooperative Strategies
Joint venture: two or more firms create an Joint venture: two or more firms create an independent company by combining parts of their independent company by combining parts of their assetsassets
Equity strategic alliance: partners who own different Equity strategic alliance: partners who own different percentages of equity in a new venturepercentages of equity in a new venture
Nonequity strategic alliances: contractual Nonequity strategic alliances: contractual agreements given to a company to supply, produce, agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity or distribute a firm’s goods or services without equity sharingsharing
Strategic Alliances
Margin Margin
Primary Activities
Sup
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Act
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Marketing & Sales
Outbound Logistics
Operations
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SupplierSupplier
• vertical complementary strategic vertical complementary strategic alliance is formed between firms alliance is formed between firms that agree to use their skills and that agree to use their skills and capabilities in different stages of capabilities in different stages of the value chain to create value the value chain to create value for both firmsfor both firms
• outsourcing is one example of outsourcing is one example of this type of alliancethis type of alliance
Strategic Alliances
Margin Margin
Primary Activities
Sup
port
Act
iviti
es Service
Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Inf
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Hum
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Mgm
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Margin Margin
Primary Activities
Sup
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Act
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Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Inf
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Hum
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Mgm
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BuyerBuyerPotential CompetitorsPotential Competitors
• horizontal complementary strategic alliance is formed horizontal complementary strategic alliance is formed between partners who agree to combine their resources and between partners who agree to combine their resources and skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain
• focus on long-term product development and distribution opportunities
• the partners may become competitorsthe partners may become competitors• requires a great deal of trust between the partnersrequires a great deal of trust between the partners
BuyerBuyer