Management and Strategy

It’s not vision that makes a company successful. What sets the top performers apart is the organizational models they develop to realize their aspirations.

Organizational performance is the result of all the effort and activity that goes on inside a firm. Concept of Decision rights helps in defining: who gets to make what decisions; and what information, constraints, tools, and incentives affect the way they evaluate those decisions?

I was reading a great article on Internetworking by Peter Brews and Christopher Tucci. The article describes how firms operationally and strategically benefit from internetworking. Internetworking is using internet based technologies to enhance the business. The article had very good section on measuring internetworking depth in organizations. Following is summary of that section…

We can evaluate the depth of internetworking within an organization by looking at usage of internet based technologies in following areas within the organization

• Employee skills development: Online resources for employees for training, job skills development, job opening etc..
• Career development: Measuring performance and managing development plans
• Human Resource management: Employee centered business processes such as expense reimbursements
• Supply Chain Management: Logistics integration up and down the supply chain
• Supplier integration: Integration with suppliers from design development to integration/coordination
• Purchasing integration: Centralizing purchasing online and increasing buying power by joining with other firms
• Customer integration: Ability of customers to interact with the firm and its partners online
• Financial Transparency: How much of firms overall and intermediate accounting, financial and performance data is available online for managers, employees and partners

How does your firm measure up on these fronts in internetworking?

The article was published in Academy of Management Executives, 2003 Vol 17 No 4

Management is doing things right; leadership is doing the right things.
-Peter Drucker

The major difference between industrial and post industrial world is the form of labor. In industrial world labor was more physical in nature whereas in post industrial world it is more mental in nature. Another major difference is in industrial world focus was to provide solutions to consumers with high volumes, low variety and high quality at low cost where as in post industrial world the focus is on providing customized solutions for every consumer with high automation, high speed and flexibility.

Following is comparison of industrial vs Post industrial organizations

 

To succeed in post industrial world everyone needs to find his niche; everyone has to ask what can he provide that no one else can? Any job that can be codified will be converted into software programs, any job that is repetitive will be automated so if you have something creative to offer you will do well else you will have tough time even to survive. So find what you have to add that others don’t.

Good read: World is flat by Thomas Friedman.

Some Research on Mergers & Acquisitions:

• Two thirds of mergers involving US companies fail to deliver shareholder value.
• More than one-half of acquisitions in new industries are divested without creating significant shareholder value.
• More than 60% of acquisitions in entirely new fields are divested.
• 73% of all cross border mergers fail.
• Pace of mergers has quadrupled since 1995 – the “Deal Paradox”

Acquisitions can work only if buyer can add value to the businesses acquired. Success rate can go up dramatically if company concentrates in increasing revenues rather than cut costs. Also organic growth has much better chance of success compared to acquisition.

Deals that increase shareholder value are: lot of small friendly deals that stay close to core business.

Deals that destroy shareholder value are: big massive mergers of equals or hostile takeovers or represent new line of business.

Read another article “Creating Competitive Advantage”. Here is the summary.

• Total value created in any transaction is difference between customers willingness to pay and suppliers opportunity cost.
• Added Value is Maximal value created by all participants in a transaction minus the maximal value that could be created without the firm
• Unrestricted bargaining is the amount of value a firm can claim cannot exceed its added value.
• The larger the added value higher the potential profit of the firm
• Competitive advantage derives fundamentally from Scarcity
• In practice managers use actual cost instead of opportunity cost because it is easier to track and calculate
• A firm can achieve a competitive advantage by devising a way to
  • Differentiation Strategy – Raise willingness to pay a great deal with only slight increase in costs
  • Low cost strategy – Reap large cost savings with only slight decreases in customer willingness to pay
• By Analyzing a firm activity by activity we can
  • Understand why the firm does or does not have added value
  • Spot opportunities to improve a firm’s added value
  • Foresee future shifts in added value
• Steps to Analyze firms activities
  • Catalog Activities(Value chain)
  • Use Activities to analyze relative costs
  • Use Activities to analyze Relative willingness to pay
    • Willingness to pay calculator should be used for this
  • Explorer options and make choices
    • Competitive advantage comes from an integrated set of choices about activities    

  Conclusion

• Successful firms chooses right industry and also right position in the industry
• Competitive advantage derives from added value
• Firm can’t claim any value unless it adds some value
• To have added value firm must drive a wedge between customer willingness to pay and supplier opportunity cost
  • Wider wedge than rivals achieve
• To attain wider wedge firm has to do different things than rivals
• Analysis of activities can be used to assess options for creating competitive advantages. To do this management team must decompose the firm into parts-activities-but also craft a vision of an integrated whole

  Attaining Competitive advantage is just the first half of strategic struggle. Sustaining advantage in the face of relentless rivals and turbulent change is the more demanding half.

I read a great article for my MBA “Competition Shapes Strategy” By Porter. Here is the summary…

1. Threat of Entry : Six major barriers for entry
   1. Economies of Scale
   2. Product Differentiation
   3. Capital Requirement
   4. Cost Disadvantage independent of size
      1. Learning curve
      2. Proprietary technology
      3. Access to best raw material sources
      4. Assets purchased at pre inflation prices
      5. Government subsidies
      6. Favorable Location
   5. Access to distribution channel
   6. Government Policy
2. Bargaining power of supplier
   1. IT is dominated by few suppliers
   2. Product is unique
   3. Not obliged to content with other products for sale to the industry
   4. Credible threat of integrating forward into industry’s business
   5. Industry is not important customer of the supplier
3. Bargaining power of Customers
   1. Concentrated or purchase in volume
   2. Standard or Undifferentiated products
   3. If product is significant portion of the cost for customers
   4. If customers earn low profits forcing lower purchase prices
   5. Industries product is unimportant to buyers products or services
   6. Industries product does not save buyer money
   7. Self manufacture or backward integration
4. Substitute products : Most attention should be paid to
   1. Subject to trends improving their price -performance trade off with industry’s products
   2. Produced by industries earning high profits.
5. The Industry – Jockeying for Position

   Intense competition causes price competition, product introduction, and slugfests. Intense rivalries are caused because

   1. Many competitors or of same size
   2. Industry growth is slow
   3. Lack of differentiation
   4. Fixed costs are high or products are perishable
   5. Capacity is augmented in large increments
   6. Exit barriers are high
   7. Rivals are diverse in strategies, origins and personalities

Formulation of Strategy

• Positioning the Company
• Influencing the balance
• Exploiting industry change

  

“Our business strategy is not to compete.” Eric Schmidt, CEO
Google

“The essence of strategy is choosing what not to do” Michael Porter