STRATEGIC FIT: MATCHING STRATEGY TO STRUCTURE AND THE SITUATION

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STRATEGIC FIT MATCHING STRATEGY TO STRUCTURE
AND THE SITUATION

• Payne
• (6)

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Two Primary Types of Fit

• FIT WITH INDUSTRY OR MARKET CONDITIONS external
  fit
• Strategies for Emerging Industries
• Strategies for High Velocity Markets
• Strategies for Maturing Industries
• Strategies for Declining Industries
• Strategies for Fragmented Industries
• Strategies for International Markets
• FIT WITH ORGANIZATIONAL STRUCTURE internal fit

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The Industry Life Cycle
Industry Sales
Introduction Growth
Maturity Decline
Time
4
Changes in the Population of Firms over the
Industry Life Cycle US Auto Industry 1885-1961
250
200
150
No. of firms
100
50
0
1895
1905
1915
1925
1935
1945
1955
Source S. Klepper, Industrial Corporate
Change, August 2002, p. 654.
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Strategy and Performance at across the Industry
Life Cycle
12
10
8
6
4
2
0
Note The figure shows standardized means for
each variable for businesses at each stage of the
life cycle.
ROI
Technical
Change
Product
RD/Sales
Age of Plant
Equip.
New Products
Sales from
New Products
Added/Revenue
Value
Advertising/Sales
Investment/Sales
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Industry Structure over the Life Cycle
INTRODUCTION GROWTH
MATURITY DECLINE
DEMAND Affluent buyers Increasing Mass market
Knowledgeable, penetration replacement
customers, resi- demand
dual segments TECHNOLOGY Rapid product Product
and Incremental Well-diffused
innovation process innovation
innovation technology PRODUCTS
Wide variety, Standardization
Commoditiz- Continued rapid design
change ation commoditization MANUFACT
- Short-runs, skill Capacity shortage,
Deskilling Overcapacity URING
intensive
mass-production TRADE
-----Production shifts from advanced
to developing countries----- COMPETITION
Technology- Entry exit Shakeout
Price wars,
consolidation exit KSFs
Product innovation Process techno-
Cost efficiency Overhead red- logy.
Design for uction, ration-
alization, low cost
sourcing
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1. Features of an Emerging Industry

• New and unproven market
• Proprietary technology
• Low entry barriers
• Experience curve effects may permitcost
  reductions as volume builds
• Buyers are first-time users
• Marketing involves inducing initial purchase and
  overcoming customer concerns
• Possible difficulties in securing raw materials
• Firms struggle to fund RD, operations and build
  resource capabilities for rapid growth

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1. Options in an Emerging Industry

• Win early race for leadership by employing a
  bold, creative strategy
• Push hard to
• Perfect technology
• Improve product quality
• Develop attractive performance features
• Move quickly when technological uncertainty
  clears and a dominant technology emerges
• Form strategic alliances
• Capture potential first-mover advantages
• Pursue
• New customers and user applications
• Entry into new geographical areas
• Focus advertising emphasis on
• Increasing frequency of use
• Creating brand loyalty
• Use price cuts to attract price-sensitive buyers
• Prepare for entry of established firms when
  industry future clears and risk lessens

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2. Features of High Velocity Markets

• Rapid-fire technological change
• Short product life-cycles
• Rapidly evolving customer expectations
• Frequent launches of new competitive moves
• Entry of important new rivals
• Examples
• Computer PC / Processor Industry
• Biotechnology / Pharmaceutical Industry

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2. Options in the High Velocity Markets

• Invest aggressively in RD
• Develop quick response capabilities
• Match rivals
• Shift resources
• Adapt competencies
• Create new competitive capabilities
• Speed new products to market
• Use strategic partnerships to develop specialized
  expertise and capabilities
• Keys to success
• Cutting-edge expertise
• Speed in responding to new developments
• Collaboration with others
• Agility
• Innovativeness
• Opportunism
• Resource flexibility
• First-to-market capabilities

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3. Characteristics of Industry Maturity

• Slowing demand generates stiff competition
• More sophisticated buyers demand bargains
• Greater emphasis on cost and service
• Topping out problem in adding production
  capacity
• Product innovation and new end uses harder to
  come by
• International competition increases
• Industry profitability falls
• Mergers and acquisitions reduce the number of
  industry rivals

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3. Strategy Options for Competingin a Mature
Industry

• Prune product line
• Emphasize process innovation
• Strong focus on cost reduction
• Increase sales to present customers
• Purchase rivals at bargain prices
• Expand internationally
• Build new, more flexible competitive capabilities

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Strategy Implementation in Mature IndustriesThe
Traditional Model
STRATEGY - Pursuit of cost efficiency
through mass production STRUCTURE -
Functional departments - Line and staff
distinction - Job specialization CONTROLS -
Quantitative, short-term performance
targets - Hierarchical monitoring and
control - Standard, formalized operating
procedures, reporting, and management by
exception. INCENTIVES - Emphasis on financial
incentives linked to individual
performance TOP - Primary functions are
control and MANAGEMENT strategic decision
making - Two main styles politician and
autocrat
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4. Characteristics of Stagnant or Declining
Industries

• Demand grows more slowly than economy as whole
  (or even declines)
• Competitive pressures intensify--rivals battle
  for market share
• To grow and prosper, firm must take market share
  from rivals
• Industry consolidates to a smaller number of key
  players via mergers and acquisitions

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4. Options for Competingin a Stagnant or
Declining Industry

• Pursue focus strategy aimed at fastest growing
  market segments
• Stress differentiation based on quality
  improvement or product innovation
• Work diligently to drive costs down by
• Outsourcing
• Redesign internal processes
• Consolidate under-utilized production facilities
• Close low-volume, high-cost distribution outlets
• Cut marginal activities from value chain

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5. Characteristics of a Fragmented Industry

• No seller has a sizable market share (sometimes
  because the industry is so new that no large
  firms have yet emerged)
• Exploding technologies force firms to specialize
  just to keep up in their area of expertise
• Low entry barriers
• Absence of scale economies
• Buyers require small quantities of customized
  products (a condition that allows small firms to
  serve the special needs of a few buyers)
• Market is so big or diverse that it requires many
  firms to satisfy buyer needs
• Examples (non-HC)
• 1) Book publishing, 2) Landscaping and plant
  nurseries, 3) Auto repair, 4) Restaurant
  industry, 5) Public accounting, 6) Womens
  dresses, 7) Meat packing, 8) Paperboard boxes, 9)
  Hotels and motels, 10) Furniture

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5. Options for a Fragmented Industry

• Construct and operate formula facilities
• Become a low-cost operator
• Increase customer value via backward or forward
  integration
• Specialize by product type
• Specialize by customer type
• Focus on limited geographic area

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6. Characteristics of International Markets

• Market differences among countries
• Buyer needs and habits
• Distribution channels
• Long-run growth potential
• Driving forces
• Competitive pressures
• Cost variations among countries
• Wage rates
• Worker productivity
• Natural resource availability
• Inflation rates
• Energy costs
• Tax rates
• Fluctuating exchange rates

• Differences in host government trade policies
• Import tariffs or quotas
• Local content requirements
• Price control policies
• Other regulations
• Technical standards
• Product certification
• Minority ownership by local citizens
• Prior approval of capital spending projects
• Withdrawal of funds from country
• Pattern of international competition
• Multicountry patterns
• Global patterns

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International Strategy
High
Need for Global Integration
Low
Low
High
Need for Local Responsiveness
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International Strategy Options
International Strategies
Modes of Entry
Outcome
Improved Financial Performance Increased Market
Share Location Advantages Innovation
International Business-Level Strategy Multidomesti
c Strategy Global Strategy Transnational Strategy
Exporting Licensing Strategic Alliances Acquisitio
ns Joint Venture New Venture
Location Advantages Access to key customers,
cheaper energy, raw materials or lower cost
of labor
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Entry Modes for International Expansion
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Achieving Global Competitivenessvia Strategic
Alliances

• Allows firms to compete on a
• More global scale and
• Preserve their independence
• Types of alliances
• Joint research efforts
• Technology-sharing
• Joint use of production facilities
• Marketing one anothers products
• Joint manufacturing or assembly
• Guidelines
• Pick a compatible partner
• Choose ally whose strengths complement products
  and customers
• Learn thoroughly rapidly about partners
  technology management
• Do not share competitively sensitive information
• View alliance as temporary, not permanent

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Benefits and Pitfalls of Strategic Alliances

• Benefits of Alliances
• Gain scale economies in production and/or
  marketing
• Fill gaps in technical expertise or knowledge of
  local markets
• Share distribution facilities and dealer networks
• Direct combined competitive energies toward
  defeating mutual rivals
• Pitfalls of Alliances
• Becoming too dependent on another firm for
  essential expertise over the long-term
• Different motives and conflicting objectives
• Time consuming
• Language and cultural barriers
• Mistrust when collaborating in competitively
  sensitive areas
• Clash of egos and company cultures

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Eli Lilly Multiple Alliances
Commercial Alliance
Takeda and Lilly are collaborating to copromote
Takeda's novel insulin sensitivity enhancer,
Actos, in the United States and more than 70
other countries. Pioneered by Takeda, the
thiazolidinedione class of insulin sensitivity
enhancers - TZDs - represent a new treatment for
patients with type 2 diabetes that treats one of
the underlying causes of the disease. Today,
worldwide costs for treating diabetes are
estimated at more than 200 billion annually, and
it is projected that, over the next decade, those
costs could double due to the related
complications of diabetes, such as kidney damage,
limb amputation, and problems with eyesight.
RD Alliance
Lilly and Ligand are collaborating to discover
and develop products based upon Ligand's
intracellular receptor technology. The
collaboration is focusing on products with broad
applications across metabolic diseases, including
diabetes, obesity, dislipidemia, insulin
resistance and cardiovascular diseases associated
with insulin resistance and obesity.
Manufacturing Alliance
Lilly and Lonza are collaborating on the
development and manufacturing of Zovant. Lonza
Biologics, the leading contract manufacturer of
proteins in mammalian cell culture is part of the
Lonza Group, the specialty chemical manufacturer
headquartered in Switzerland. Zovant is a
treatment for severe sepsis.
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Strategy Structure Fit

• Concepts
• Corporate vs. Business Level Fit
• Strategy Precedes Structure
• Structure Characteristics
• Dealing with Size Issues

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Key Questions for Strategy and Structure Fit

• Corporate Strategy and Structure
• Does structure permit the appropriate grouping of
  activities?
• Does structure allow for appropriate
  centralization or decentralization of authority?
• Does structure promote coordination among its
  parts?
• Business Level Strategy and Structure
• Does structure allow each business to respond to
  competitive forces within its industry?
• Does structure fit with basic generic strategy
  being pursued by each business?
• Does structure allow for development of specific
  functional advantages within each business?

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Structure Follows Strategy
New Strategy is Created
New Problems Emerge
Performance Declines
As the left foot follows the right.
New Structure
Performance Improves
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Dimensions of Structure

• Complexity Creation of distinct tasks and
  responsibilities within the organization
• Types of Complexity
• Degree of Specialization
• Levels of Hierarchy
• Geographic Spread or Dispersion
• Control Design of hierarchy to supervise various
  differentiated elements of the organization
• Extent to which authority for decision making is
  held at higher levels of the organization
• Higher levels - Centralization
• Lower levels - Decentralization
• Formalization Extent to which rules and
  procedure govern the actions of individuals and
  groups within the organization
• Balancing act
• Too Low - Uncertainty about authority and
  responsibility
• Too High - Limit innovation and creativity

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Tall vs. Flat Organizations
Tall Organization
Flat Organization
Example Medical Group
Example Traditional Hospital
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Purposes of Structure

• Coordination
• create activities towards a productive goal while
  still operating separately
• mechanisms for coordination include
• rules and procedures
• hierarchical referral
• liaison personnel
• Integration
• come together and create something new by
  combining knowledge and operating as a unit
• mechanisms for integration include
• teams and task forces

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Types of Structures
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Structural Forms
Traditional FunctionalStructure
Process-Oriented Functional Structure
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Structural Forms (2)
GeographicStructure
Decentralized Line-of-Business Structure
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Structural Forms (3)
SBU Structure
Matrix Structure
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MatrixStructure
Board of Trustees
CEO
Project D
Design
Functional Managers
Program/Project Managers
Project C
Testing
Admin
Project B
Project A
Manufacturing
Example Biotech Firm
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Size Obstacles

• Where big size is a competitive asset, firms with
  low market share face obstacles
• Less access to economies of scale
• Difficulty in gaining customer recognition
• Inability to afford mass media advertising
• Difficulty in funding capital requirements
• Options
• Focus on a few segments where strengths can yield
  a competitive edge
• Develop technical expertise highly valued by
  customers
• Aggressively pursue development of new products
  for customers in target segments
• Use innovative entrepreneurial approaches to
  out-manage slow-to-change leaders

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Mechanistic and Organic Forms
FEATURE MECHANISTIC ORGANIC .
Task definition Rigid highly
Flexible less specialized
specialized Coordination Rules directives
Mutual adjustment, control imposed
from the top Cultural control
Communication Mainly vertical
Horizontal vertical Commitment To
immediate superior To the organization its
loyalty goals values Environmental
Stable with low tech- Dynamic, ambiguous,
context nological uncertainty
technologically uncertain