8
Cloud Architecture
Student’s Name
Institutional Affiliation
Course
Date of Submission
Cloud Architecture
Currently, the development and emergence of new technologies and advanced use of technology have taken the world to another level. Today, technology has led to cloud computing in both large and small organizations to store data in the cloud and access it from any location as long as you have access to the internet. Cloud Computing Architecture (Cloud architecture) uses the understanding of cloud computing technology, which refers to a collection of components called software, databases, applications, and capabilities that are engineered to leverage the influence of cloud resources so they can provide solutions to business issues. Also, most cloud architectures aim to equip users with increased bandwidth, permitting them on-demand agile networks to provide ongoing access to applications and data applications. Additionally, this is likely to move fast and proficiently between the clouds and the servers. Cloud architecture defines and explains the relationships between components. Middleware, cloud resources, software services, components, and on premise resources are different cloud architecture components.
Fig 1.0 architecture of Cloud Computing
Cloud Architecture comprises two parts; back-end and front-end, where both parts communicate via the internet or network. Clients use the front-end because it consists of client-side interfaces and applications that grant the clients allowance to access the cloud computing platforms. The side applications include web browsers like Internet Explorer and Firefox. Cloud infrastructure is made of software and hardware components like virtualization software, server, data storage, and so on, and it is the only front-end component (Odun-Ayo, Ananya, Agono, & Goddy-Worlu, 2018). It helps to provide the end-users with a Graphical User Interface as a directive for them to perform their particular tasks.
s
Fig 1.1 Front-end - Cloud Computing Architecture
On the other hand, the back-end monitors programs that run the application on the front-end required to provide cloud computing services. The service provider uses it, and it incorporates traffic control mechanisms, a vast amount of data storage, servers, virtual machines, security mechanism, and so.
Fig 1.2 Back-end - Cloud Computing Architecture
The back-end components include security, management, storage, service, and application. The component application can be either a platform or software. Based on what a client requires, this component provides the result in the back-end to the end-user. The component service is accountable for providing convenience in the architecture. The component storage is responsible for storing and maintaining documents, videos, files, and so on over the internet. Some storage services include Microsoft Azure Storage and Amazon S3. Software as a Service (SaaS), Platform as a Service (PaaS), and Platform as a Service (PaaS) are examples of services offered by cloud computing. The component management is responsible for allocating substantial resources to a definite task. At the same time, it does different functions in the cloud environment. Also, it assists in managing components like cloud infrastructure, security, application, data storage, service, and task. Generally, the component management under back-end institutes is coordination among the cloud resources. The last back-end component is security. This component is responsible for providing secure infrastructure, systems, resources, and files to end-users. Additionally, the component security executes security management with virtual firewalls to the cloud server, which helps prevent data loss.
Benefits of Cloud Architecture
It enables associations to eliminate or reduce their dependence on networking infrastructure, storage, and on-premises server. Companies or associations that have adopted cloud architecture regularly deviate IT resources to the public cloud, eradicating the necessity for storage and on-premises servers. As a result, this reduces the essential for IT data center actual estate, power, and cooling, and swapping them with monthly IT expenses. This change to operating expenses from capital expenditure is the leading cause of today’s cloud computing popularity.
Cloud Architecture Best Practices
A well-architected framework in business is used as a driving force for satisfied end-users, high-performing applications, and lower operating costs (Basto, Villalobos, de la Cruz, de la Hoz Hernández, & Lezama, 2019). Organizations have high chances to ensure they reap real business value for their future-proof IT environment and cloud investments by following cloud architecture best practices and principles. Organizations should practice up-front planning by providing an understanding of capability wants when they have to design a cloud architecture.
Additionally, organizations should practice security practices. The clouds need effective protection from hackers and any unauthorized individuals by practicing the use of multilayered protection. For the highest levels of security, the organizations should have zero trust in security models and embrace all necessary security measures. Another best practice for cloud architecture is ensuring disaster recovery. The recovery processes should be automated to ensure a speedy recovery of data and avoid costly downtime once there are service disruptions.
In conclusion, cloud architecture allows users to freely access applications and data between servers or clouds with efficient security ensured. It has provided significant data protection and ensured high job security for cloud architects as cloud computing has proliferated, making it applicable in most organizations. Cloud architects can use their skills in many areas such as health, technology, government, finance, and so on. Cloud architecture is makes businesses to be safer from insecurities.
References
Odun-Ayo, I., Ananya, M., Agono, F., & Goddy-Worlu, R. (2018, July). Cloud computing architecture: A critical analysis. In 2018 18th international conference on computational science and applications (ICCSA) (pp. 1-7). IEEE.
Strategic Management
Jeff Dyer
Third Edition
Chapter 8
Strategic Alliances
Professor’s Goals for this Lecture
There are many types of problems that can be solved for a company by doing a cost analysis. A cost analysis can be used to solve problems as diverse as marketing (e.g., how much to spend to acquire additional customers) or HR (how much labor costs go down per unit with increases in volume). The principle tools to be learned in this chapter are designed to help the student examine the relationship between a company’s size (measured in volumes produced or market share) and cost per unit. This is primarily reinforced by teaching students how to create a scale/experience curve (both done in the same way with “cost per unit” on the “Y” axis but the scale curve uses volume for a given year on the “X” axis whereas the experience curve uses cumulative volume on the “X” axis. The students will have the opportunity to examine the relationship between scale/experience in the following assignments:
- the homework assignment involving calculating an experience curve in semiconductors
- Fry’s Credit Card Mini-case (in lecture); considers the relationship between total number of subscribers (X axis) and cost per subscriber (Y axis)
- the Southwest Case (after lecture); considers the relationship between total passengers flown (or market share) and performance (profitability) in the industry
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What is a Strategic Alliance?
Strategic Alliance- A cooperative arrangement in which two or more firms combine their resources and capabilities to create new value, sometimes referred to as a
partnership.
Copyright ©2020 John Wiley & Sons, Inc.
2
2
Buy
Ally
Make
HISTORICAL VISION PARTNERSHIP VISION
INTERNAL FOCUS
MY ECONOMICS
Copyright ©2020 John Wiley & Sons, Inc.
3
One of the things we’ve seen is we’ve seen a dramatic increase in alliances over the last twenty-five years. More and more revenues are coming through alliances because companies are realizing, I’m better off if we team up, two heads are better than one in order to attack the particular market. How do you identify strategic partners?
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Creating Value By Focusing On The System
VALUE
TO
CUSTOMER
VALUE
TO
CUSTOMER
VALUE TO SUPPLIER
VALUE TO SUPPLIER
TRADITIONAL
RELATIONSHIP
STRATEGIC
PARTNERSHIP
Copyright ©2020 John Wiley & Sons, Inc.
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The key is creating value by expanding the pile. You think about a typical supplier buyer relationship. You negotiate a contract. Every dollar I can get it up, the price up, is a dollar in my pocket and then not a dollar in your pocket. It’s a zero sum game. Like a fixed pie and you have certain value to the customer and you split this some way. Very much it’s really all about bargaining and seeing who gets the most of the pie. The partnership approach is designed to actually say, let’s not focus on the fixed pie, let’s think about how can we expand the pie together so that we’re both better off. You can get into these arguments about whether AT&T was better off or whether Apple was better off but at the end of the day, it may be that they were both better off than if they had gone alone. It’s just sometimes that one partner ends up better off than another partner because of the way they negotiated the agreement or the bargaining power they had coming in to the agreement.
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Strategic Inputs
Inputs that can differentiate your product in the minds of customers.
Inputs that influence your brand or reputation.
High value inputs or activities that make up a high percentage of your total costs.
Inputs or activities that require significant coordination in order to achieve the desired fit, quality, or performance.
Copyright ©2020 John Wiley & Sons, Inc.
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Interdependence between partners is low (e.g., pooled)
It is easy to measure the contributions of each partner and write it in a contract.
Contractual Alliance
Cooperation between firms is managed directly through contracts
Equity Alliance
Cooperative contracts are supplemented by equity investments by one or both partners into the other partner.
Joint Venture
Cooperating firms combine resources to form an independent firm in which they invest.
Preferred when:
Interdependence between firms is moderate (e.g., sequential).
Firms bring knowledge or difficult to measure contributions but each can perform their roles separately.
Interdependence between firms is very high (e.g., reciprocal).
Firms bring knowledge or difficult-to-measure contributions that must be combined into a single organization to coordinate effectively.
Figure 8.1
Types of Strategic Alliances
Copyright ©2020 John Wiley & Sons, Inc.
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In the chapter it talked about three different types of strategic alliances. This is related to, how do you make sure that the parties collaborate, and, cooperate? On the one hand, it could just be contracts. You write a contract. This is where you’ve got the least amount of interdependence, pooled interdependence. In golf it is a sports team competing using pooled interdependence. Golf teams, each player goes out and shoots their round. You add up the scores, that’s the total. You can have the best score of anybody on any of the teams but your team could lose because it’s pooled together. When you move to a higher degree of interdependence and [the chart goes from LR Low High Interdependence] you could have equity alliances with any of these types of interdependents but the next is sequential interdependence.
What kind of type of sports team is described as having sequential interdependence? Baseball. Relay throws. I follow another batter. If he gets on than that changes the way I will bat. Sometimes you’re going to hit and run, sometimes you may bunt. You’re going to do things differently because it depends on what the player had done before you, more so in baseball.
And then finally, as you move toward reciprocal interdependence, this is more basketball. The players are constantly moving and what I do depends on what you do and so there’s this, over time what we find in basketball is, teams usually don’t get good basketball until they’ve played together for a while. I think it was interesting that you had the U.S. team with all of these fabulous individual players who, I remember it was such a shock we actually lost the world championships and we lost it twice. Everybody was saying, what is going on? We’re losing to Argentina? How is that possible? Then they started to select a team more based upon chemistry and requiring at least a three year commitment so the players could get better at learning to play together because they realized this is a team sport with a lot of reciprocal interdependence.
You write contracts for the more simple alliances and you create equity for more complex ones where there may be shared equity and create a completely separate company joint venture for those where you have the most complex interdependencies.
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Vertical and Horizontal Alliances
Vertical Alliance- An alliance between firms who are positioned at different stages along the value chain, such as a supplier and a buyer.
Horizontal Alliance- An alliance between two firms that do not have a supplier-buyer relationship and are typically positioned at a common stage of the value chain.
Copyright ©2020 John Wiley & Sons, Inc.
7
Pool Similar Resources
Ways To Create Value In Alliances
Combine Unique Resources
1
2
Create New Alliance-specific Resources
3
Lower Transaction Costs (Build Trust)
4
Copyright ©2020 John Wiley & Sons, Inc.
8
On the one hand you have sort of traditional contracts. Arm’s length, buy-sell agreements, licensing, cross-licensing. Very, very straightforward. So for many companies, if they’re buying office supplies. You’re buying pencils and paper, you don’t need to have a partnership. You probably don’t need a partnership with your supplier. It’s not like they’re unique to you. You just have a simple buy-sell agreement. And then, you’re going to have more non-traditional contracts where you’re doing maybe more joint research or franchising, product development loan term sourcing agreements. These things you’re going to use more nontraditional contracts that are longer term in nature like the apple AT&T agreement was a fairly complex contract that they had to write.
You might do equity swaps, minority equity investments so you own a small piece of it. You could own a small piece of Tokyo Disneyland or equity swaps or you could create a separate joint venture but it’s not a subsidiary of the corporation. You actually can have wholly own subsidiaries. Think back to Coke and Pepsi and their bottlers. There was a time at which they were actually subsidiaries of Coke and Pepsi and they owned the majority of them. Then they eventually they actually spun them out and so now they are not a joint venture but they are not a subsidiary, they have an equity arrangement. And then of course you can also have mergers and acquisitions where you actually acquire the group so one way is to do an alliance to access the resources the other is acquisitions.
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Combine Unique Resources
Pixar Animation Studios
Walt Disney Pictures
Disney+ Streaming Service
Copyright ©2020 John Wiley & Sons, Inc.
9
The first way that firms create value through an alliance is by combining unique resources to
create an even more powerful offering. This is what Pixar and Disney did to dominate computer-
animated films. As described in Chapter 3, Pixar contributed computer-generated
animation (CGA) and story-writing skills that brought to life unique stories in films such as
Toy Story, Finding Nemo, Cars, and The Incredibles. Disney contributed worldwide film distribution
to the partnership and sold products involving Pixar’s movie characters—such as
Woody and Buzz Lightyear—at its Disney stores and theme parks. No other film distributor
could bring to Pixar stores or theme parks like Disney’s that could be used to make money
off of memorable movie characters. By combining their unique resources, Pixar and Disney
created synergy that increased profits for both firms. In fact, Disney eventually acquired
Pixar in order to gain full control over Pixar’s unique resources. Now Disney has combined their decades of content to create Disney+ to compete in the streaming service industry. Discussion?
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Pool Similar Resources
Ways To Create Value In Alliances
Combine Unique Resources
2
1
Create New Alliance-specific Resources
3
Lower Transaction Costs (Build Trust)
4
Copyright ©2020 John Wiley & Sons, Inc.
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10
Pool Similar Resources
Disney
OLC Group
Tokyo Disneyland
Copyright ©2020 John Wiley & Sons, Inc.
11
Taken from pg. 151 in text: One might reasonably ask why Disney didn’t just build
Tokyo Disneyland on its own. Disney obviously knew how
to run a theme park. It owned and operated two theme parks
in the United States without the involvement of a partner.
Disney could have captured the $690 million that went to the
Oriental Land Company in a recent year, as well as the $300
million it did get. Why share the profits with a partner?
The first question that Disney certainly must have asked
with regard to Tokyo Disneyland was whether it could “make”
another park: Do we have the resources and capabilities
to build Tokyo Disneyland on our own? The answer to that
question was not entirely straightforward. Building a theme
park in a new, foreign environment came with a host of risks.
Tokyo is not a warm-weather “vacation destination,” like
California or Florida. Disney had absolutely no experience in
hiring, training, and managing a Japanese workforce. Would
Oriental Land Company have sold Disney the 115 acres of
land required for the park? If so, at what price? Did Disney
have the $2.0 billion investment required to buy the land and
build the park? If it chose to make the investment in Japan,
what other opportunities would it have to forgo? Finally, and
maybe most importantly, how confident was Disney that
Tokyo Disneyland would succeed?
When companies face an opportunity that comes with
risks, they may look to a partner to share or mitigate the
risks. In this particular case, Disney solved most of its problems by partnering with OL. OL provided high-value
resources; it owned the land and took virtually all of the
investment risk. Disney didn’t have to risk much capital
investment and was able to deploy its capital elsewhere. OL
runs the park, so Disney didn’t have to learn how to manage
a Japanese workforce. Disney gets 10 percent return on gate
receipts regardless of the profitability of the park. The two
companies are able to share ideas on how to best localize
the Disneyland park within the Japanese environment.
In the end, the park proved successful, and both OL and
Disney received value from the partnership. It is possible
that Disney might have been just as successful if it had
built and run the park on its own. But it’s also possible
that, without OL as a partner, Disney might have made
different decisions about how to build or run the park
that would have hurt performance. Indeed, when Disney
built EuroDisney, located outside of Paris, it experienced
a host of problems and the park struggled for years.13 In
particular, Disney didn’t take into account important local
preferences like serving wine with meals in the park,
and the marketing was described as “too Americanized”
and not tailored to the needs of customers in individual
European countries.14 The alliance with OL clearly
mitigated many of the risks associated with the venture,
and OL’s resources and capabilities likely increased the
probability of success.
11
Disney-Oriental Land Co. Alliance
Disney Resources & Capabilities
Disney brand
Disney theme park rides and designs
Park management processes
Ongoing stream of Disney characters from movies
Disney consumer products to sell at the park
OLC Resources & Capabilities
Land for the park near Tokyo
Financial resources to build the park
Relationships with construction firms to build the park
Knowledge of Japanese culture and how to manage Japanese workers
Copyright ©2020 John Wiley & Sons, Inc.
12
In a sense, to the extent that Disney had some equity in the piece, in that, it would be an equity alliance. They didn’t create a separate company but they owned a piece of equity, and then they also got licensing fees which really would be more in contract. What would the AT&T Apple alliance, where would that fit? Contractual. It was a contractual alliance. It was pretty clear what each party was supposed to do, right? It’s not like they had to work jointly to develop the phone. It wasn’t like this joint development of the phone. This is different that IM Flash. IM Flash is a joint venture where intel and micron bring all of their knowledge together, R&D resources, and their cash to create a separate company that’s going to make memory, and that’s what they’re going to be good at so that way intel can stay focused on microprocessors and it allows each of the parent companies to stay focused on different markets and then they create a separate company that they both jointly own. That’s the joint venture.
12
Pool Similar Resources
Ways To Create Value In Alliances
Combine Unique Resources
3
1
Create New Alliance-specific Resources
2
Lower Transaction Costs (Build Trust)
4
Copyright ©2020 John Wiley & Sons, Inc.
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13
Toyota’s Supplier - Customer Interface
Surface Contact vs. Multiple-Point Contact
Customer
Supplier
Point Contact
Top
Execu-
tives
R & D
Manufacturing
Top
Execu-
tives
Quality Assurance
Quality Control
Purchasing
R & D
Manufacturing
Quality Assurance
Quality Control
Sales
Copyright ©2020 John Wiley & Sons, Inc.
14
Even if you have competitors. Let’s say you have two competitors. Toyota and BMW, they decide to team up on battery technology. Let’s not think of this as a zero sum game. How can we expand the pie so that we’re both better at battery technology and we take share against Mercedes and Ford? This is the notion that even competitors can collaborate to expand the pie for them relative to their competitors. So, I’m not going to spend really much time on this. We know, you know already about the different ways that you create value in an alliance from the chapter. Just want you to be aware of the different ways that you create value and let me just sort of conclude by ensuring that there is this important notion around trust and strategic alliances because a lot of people say, alliances, because of the interdependence, you need a certain amount of trust. You can build that in different ways.
14
Types of Alliance-Specific Resources (dedicated assets) that create value
Dedicated Site Investments (locating plants in close proximity to economize on inventory, transportation, coordination costs).
Dedicated Physical/Process Investments (making relation-specific capital investments in machinery, tools, processes)
Dedicated Human Investments (dedicating personnel to develop relation-specific know-how and improve communication/ coordination)
Copyright ©2020 John Wiley & Sons, Inc.
15
More details on this starting on page 161 in the text
15
Example : Toyota Plant Configuration In Japan*
30 miles
6 miles
Motamachi, TC
Tahara, Nagoya
Affiliated Supplier Plants
Avg. distance of 30 miles vs 427 GM
43.5 weekly deliveries vs 7.5 GM
10,635 man days of face-to-face contact (1,107 GM)
12.5 guest engineers vs .17 GM
Independent Supplier Plants
Avg. distance of 87 miles
40.5 weekly deliveries
3,764 man-days of face-to- face contact
2.6 guest engineers
Tsutsumi, TC
3 miles
28 miles
1 mile
3 miles
Takaoka, TC
Honsha, TC
Headquarters & Technical Center
* Excludes more recently build Kyushu plant making small cars for export to Asia.
Copyright ©2020 John Wiley & Sons, Inc.
16
This and the next chart are a visual representation of what we’ve been talking about regarding Alliances. These two charts can create some great in class discussions.
Comparing Affiliated Suppliers at Toyota to External Suppliers at GM.
Compare the simplicity of the Toyota plant to the complexity of the GM plant shown
16
Example : GM Plant Configuration in the United States
200 miles
Lansing, MI
External Supplier Plants
Avg. distance of 427 miles
7.5 Weekly deliveries
1,107 man days of face-to-face contact
.17 guest engineers
Flint, MI
Hamtramck, MI
Ypsilanti, MI
Internal Supplier Plants
Avg. distance of 350 miles
North Tarrytown, NY
Linden, NJ
Wilmington, DE
Lordstown, OH
Bowling Green, KY
Spring Hill, TN
Arlington, TX
Wentzville, MO
Kansas City, KS
Van Nuys, CA
Fremont, CA
(Nummi)
650 miles
900 miles
455 miles
1400 miles
387 miles
2400 miles
51 miles
55 miles
85 miles
Copyright ©2020 John Wiley & Sons, Inc.
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(The purpose of these two slides is to show the huge difference in configurations between a Toyota Plant and a GM Plant)
Interesting discussions to have here are?
What are some internal causes that have led to the huge difference in plant configurations between Toyota and GM?
Are there inherent cultural differences between the two companies that leads to this?
17
Copyright ©2020 John Wiley & Sons, Inc.
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Reinforces the last two slides
18
ALLIANCE LIFECYCLE
Partner
Assessment &
Selection
Alliance
Negotiation &
Governance
Assessment
&
Termination
* Needs Analysis
Checklist
*Make vs. buy vs.
ally analysis
*List of possible alliance partners
with resources to meet needs.
* Partner
Screening Form
* Technology and
patent domain
maps
* Cultural Fit
Evaluation
Form
* Due Diligence
Team
* Negotiations
guidelines
* Needs v/s
wants checklist
* Alliance
Contract
Template
* Alliance Structure
Guidelines
* Alliance Metrics
Framework
* Decision
making
template
* Trust-building
worksheet
* Work planning
worksheet
* Alliance
Communication
Infrastructure
* Relationship
Evaluation
Form
* Yearly Status
Report
* Termination
Checklist
* Termination
Planning
Worksheet
Alliance
Business
Case
Alliance
Management
Figure 8.2: Building Alliance Capabilities:
Tools to Use Across the Alliance Lifecycle
Copyright ©2020 John Wiley & Sons, Inc.
19
A dedicated function acts as a focal point for learning, helping the company leverage lessons
and feedback from prior and ongoing alliances. It systematically establishes a series of routine
processes to articulate, document, codify, and share know-how about the key phases
of the alliance lifecycle. Many companies with dedicated alliance functions have codified
explicit alliance-management knowledge by creating guidelines and manuals to help them
manage specific aspects of the alliance lifecycle, such as partner selection and alliance negotiation
and contracting. For example, Hewlett-Packard has developed 60 different tools and
templates, included in a 300-page manual that can be used to guide decision making in
specific alliance situations. The manual includes such tools as a template for making the
business case for an alliance, a partner evaluation form, a negotiations template outlining
the roles and responsibilities of different departments, a list of ways to measure alliance
performance, and an alliance termination checklist. This figure lists more of the guidelines
and tools companies have developed.
Oracle: Oracle has an “Alliance Online”
website that actually puts the partnering process online. Oracle describes the terms and
conditions of different “tiers” of partnership on its website, allowing potential partners to
choose which level fits them best. Alliance Online has emerged as Oracle’s primary vehicle
for recruiting and developing partnerships, with more than 7,000 tier I partners. It has
also conserved human resources, allowing Oracle’s strategic alliance function to focus the
majority of its human resources on its 12 higher-profile and more strategically important
tier III partners.
19
Pool Similar Resources
Ways To Create Value In Alliances
Combine Unique Resources
4
1
Create New Alliance-specific Resources
2
Lower Transaction Costs (Build Trust)
3
Copyright ©2020 John Wiley & Sons, Inc.
20
20
The Paradox of Trust
Alliances are fraught with risk even though they look good on paper
Things often don’t work out because of the issue of trust and equity
Copyright ©2020 John Wiley & Sons, Inc.
21
There is a paradox of trust. The paradox of trust is that when you make yourself vulnerable and you trust another party that is actually when they can take advantage of you. Alliances are fraught with risk even though they look really good on paper because two heads are better than one, you just have to realize that a lot of times, things don’t work out as planned because of the issue of the trust and the equity.
21
BUILDING TRUST
Formal Contractual Mechanisms
long term contracts (position as an “expectations” document),
stock ownership (align incentives),
collateral bonds (signal credible long-term commitment).
Processes and Information
Trust is often built on company processes and information, not people. A partner is trustworthy if its interorganizational processes are understandable, predictable and stable and information flows freely.
Informal Mechanisms (Affect) such as:
Reputation (give gifts as a signal of benevolence),
Personal trust
Copyright ©2020 John Wiley & Sons, Inc.
22
Least trusting to most trusting. Contracts act as a surrogate for personal trust as discussed in text starting at page 158
22
THE VALUE OF TRUST
Increases learning (greater information sharing)
Increases customized investments (willingness to risk tailored investments)
Increases speed to quickly respond to market changes
Lowers transaction costs
Copyright ©2020 John Wiley & Sons, Inc.
23
One study of Toyota and General Motors found that Toyota’s procurement and legal costs
were half those of General Motors. The study concluded that General Motors and its suppliers
had higher transaction costs because they didn’t trust each other; so they spent a lot
of time negotiating agreements and writing legal contracts. In contrast, Toyota had developed
relationships with its supplier partners that were based on mutual trust. One thing
that Toyota did to build trusting relationships with some suppliers was to purchase a minority
stock ownership stake in the supplier. Because Toyota owned part of the suppliers’ stock,
suppliers felt that Toyota would behave in a trustworthy manner.
Figure showing this on next slide
23
Example: THE COST OF MISTRUST
Percent of face-
to-face contact
time with suppliers
Negotiating price/contract
Assigning blame for problems
47%
28%
21%
21%
Copyright ©2020 John Wiley & Sons, Inc.
24
One study of Toyota and General Motors found that Toyota’s procurement and legal costs
were half those of General Motors. The study concluded that General Motors and its suppliers
had higher transaction costs because they didn’t trust each other; so they spent a lot
of time negotiating agreements and writing legal contracts. In contrast, Toyota had developed
relationships with its supplier partners that were based on mutual trust. One thing
that Toyota did to build trusting relationships with some suppliers was to purchase a minority
stock ownership stake in the supplier. Because Toyota owned part of the suppliers’ stock,
suppliers felt that Toyota would behave in a trustworthy manner.
24
Alliance Equity Alliance Acquire
Degree of Resource Interdependence
Relative value of “soft” to “hard” resources
Proportion of synergies from redundant resources
Degree of market uncertainty
Importance of exclusive access to target firm’s resources
Low
High
Low
High
High
Low
Low
High
High
Low
Example: Choosing to Ally or Acquire: Key Factors to Consider
Copyright ©2020 John Wiley & Sons, Inc.
25
These relate to this chapter’s strategy tool
25
Low
Low
High
High
Degree of resource/activity interdependence
Degree of mutual customization
Pooled/modular
Interdependence
Sequential
Interdependence
Reciprocal
Interdependence
Low Investments in Customized Assets
-Site (locations)
-Physical (Plant & Equip.)
-Human
High Investments in Customized Assets
-Site (locations)
-Physical (Plant & Equip.)
-Human
Alliances
Joint Ventures Acquisitions
Example: Choosing Between Alliances and Acquisitions
Copyright ©2020 John Wiley & Sons, Inc.
26
Human Resources
Physical Plant & Equipment
Technological Resources (e.g. Patents)
Intangible Resources (relationships; brands)
“Soft” Resources
“Hard” Resources
Financial Resources
Difficult to Value
Easy to Value
Example: Types of Resources that Generate Value in Alliances/Acquisitions
Copyright ©2020 John Wiley & Sons, Inc.
27
THE FUTURE….
Teams of companies (ecosystems) will increasingly compete with other teams.
Leveraging the full resources of the partners to create competitive advantage will be critical for success.
Value is created through:
Combining unique resources
Pooling similar resources
Creating new alliance-specific resources
Lowering transaction costs
Copyright ©2020 John Wiley & Sons, Inc.
28
Copyright
Copyright © 2020 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Copyright ©2020 John Wiley & Sons, Inc.
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29
Copyright
Copyright © 2020 John Wiley & Sons, Canada, Ltd.
All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.
Copyright ©2020 John Wiley & Sons, Inc.
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Strategic Management
Jeff Dyer
Third Edition
Chapter 7
Vertical Integration and Outsourcing
Professor’s Goals for this Lecture
There are many types of problems that can be solved for a company by doing a cost analysis. A cost analysis can be used to solve problems as diverse as marketing (e.g., how much to spend to acquire additional customers) or HR (how much labor costs go down per unit with increases in volume). The principle tools to be learned in this chapter are designed to help the student examine the relationship between a company’s size (measured in volumes produced or market share) and cost per unit. This is primarily reinforced by teaching students how to create a scale/experience curve (both done in the same way with “cost per unit” on the “Y” axis but the scale curve uses volume for a given year on the “X” axis whereas the experience curve uses cumulative volume on the “X” axis. The students will have the opportunity to examine the relationship between scale/experience in the following assignments:
- the homework assignment involving calculating an experience curve in semiconductors
- Fry’s Credit Card Mini-case (in lecture); considers the relationship between total number of subscribers (X axis) and cost per subscriber (Y axis)
- the Southwest Case (after lecture); considers the relationship between total passengers flown (or market share) and performance (profitability) in the industry
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What is Vertical Integration?
Outsourcing- The process where a firm contracts out a business process or activity to an external supplier.
Vertical Integration (or insourcing)- Bringing business processes or activities previously conducted by outside companies in-house.
Value Chain- The sequence of all activities that are performed by a firm to turn raw materials into the finished product that is sold to a buyer.
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Reasons for Vertical Integration 3C’s
CAPABILITIES
COORDINATION
Conduct the activity internally when effective coordination and tight integration of the activity with other firm activities provides product performance (differentiation) advantages.
CONTROL
Conduct the activity internally to control scarce inputs (e.g., Alcoa integrates back into bauxite to secure scarce and critical raw material for aluminum) or to control co-specialized asset investments (e.g., oil refinery controlling the pipeline).
Conduct the activity internally when the firm has or can develop better capabilities to perform it than other firms.
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The reasons for vertical integration. The chapter talks about three C’s. One is capabilities, the second is coordination and the third is control. If you feel like that you need to build a capability in a particular area to help you be distinctive for one reason or another, than this is an area you want to invest. We often think about those capabilities as competencies or capabilities but things that you think you need to do well in order to differentiate your product or service or to create barriers to imitation. Now those are things that you want to do internally. This assumes that you can do it better than everybody else. You’ve got to figure out whether or not you can perform a certain activity better than anybody else out there in the world but you really want to be world class. Today with a global economy you’ve got to be very good if you’re going to be in a particular activity or in a particular business.
Second reason that you would want to vertically integrate is to coordinate. This would be coordinating two activities where there’s a high degree of interdependence or we would think about it as reciprocal interdependence as you read about in a chapter on vertical integration. The greater the interdependence, the more likely you are to want to have both activities conducted inside your firm and have control over them.
The third reason that you would want to vertically integrate is for control. By conducting internally, you now control the prior steps or the next steps which gives you access to either critical raw materials like Alcoa was able to get when it backward integrated and it started to buy up large areas of land that were known to be rich in boxite, a key raw material that is needed to make aluminum and so, by backward integrating and by buying it, they knew that they were going to have access to that and have control over that key raw material.
Or it could be forward integrating like Apple did with their Apple stores. Which now puts you in direct contact with the customer. You don’t have to rely on Best Buy or Walmart or another retailer to make sure your customer gets good service. You now can control the customer experience in a way that you couldn’t if you’re using other retailers to sell your product or service.
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Dangers of Vertical Integration
2F’s
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Loss of Flexibility to move the activity to a company or supplier that offers lower costs or better technology.
Loss of Focus associated with managing too many activities may result in poor performance because the firm can’t do them all well.
Advantages of Outsourcing
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Flexibility to move to new suppliers that offer lower costs or better technology.
Focus: Keeps the firm focused on a narrower set of core competencies
Lower costs or better performance from a company that specializes in that activity and benefits from economies of scale.
Minimizes capital investment
Vertical Integration
Who Let
Intel Inside?
Outsourcing isn’t always the answer
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Dangers of Outsourcing
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Loss of Control/Power. May give an outside supplier undue power or control if the outsourced activity is critical to success.
Loss of Capabilities. May set in motion the loss of capabilities that may be important for the future—and create a future competitor.
Outsourcing can set in motion the loss of capabilities—and creation of a competitor
Dell v. AsusTek
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How to Prevent a Subcontractor from Becoming a Competitor
Build barriers to imitation
Brand, annual design changes, processes to develop relationships w/ athlete endorsers, distribution
Don’t allow subcontractor to know everything about making a product
Produce a key component or separate production of components or subsystems of the product to multiple suppliers
Do a joint venture or take a minority equity stake
Like IBM could have done with Intel
Use multiple subcontractors; don’t let any one get too big.
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(Choose the best answer given the information above and explain your choice)
a) Make the part and capture the profits
b) Buy the part on the market
c) Make some parts and buy some parts to keep leverage over your suppliers
d) None of the above
Mini-Case: Should you Make or Buy?
You have to decide whether to make or buy a component (part) that is an input for a product that you sell for $49.95. Your analysis shows that based upon the estimated volume of parts you will require, your variable costs per unit will be $.50 and given estimated volumes, your fixed (plant and equipment) cost per unit is $.48 per unit. A quick bid in the market suggests that you can currently buy the same part from two suppliers for $1.00 (another supplier bid $1.01). You should:
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There was a sidebar in the chapter that looked at this classic mistake. This mistake happens all the time. People will look at it and say, but we can make it for less than we can buy it. That doesn’t mean you have a cost advantage. If you can make it for less, you better be able to make it for significantly less. You should ask, “Are we good enough to sell this product on the market?” Are you good enough at an activity that you should actually be thinking that, we’re so good at this we could actually sell this product on the market ourselves.
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Copyright
Copyright © 2020 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
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Copyright
Copyright © 2020 John Wiley & Sons, Canada, Ltd.
All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.
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Strategic Management
Jeff Dyer
Third Edition
Chapter 6
Corporate Strategy
Professor’s Goals for this Lecture
There are many types of problems that can be solved for a company by doing a cost analysis. A cost analysis can be used to solve problems as diverse as marketing (e.g., how much to spend to acquire additional customers) or HR (how much labor costs go down per unit with increases in volume). The principle tools to be learned in this chapter are designed to help the student examine the relationship between a company’s size (measured in volumes produced or market share) and cost per unit. This is primarily reinforced by teaching students how to create a scale/experience curve (both done in the same way with “cost per unit” on the “Y” axis but the scale curve uses volume for a given year on the “X” axis whereas the experience curve uses cumulative volume on the “X” axis. The students will have the opportunity to examine the relationship between scale/experience in the following assignments:
- the homework assignment involving calculating an experience curve in semiconductors
- Fry’s Credit Card Mini-case (in lecture); considers the relationship between total number of subscribers (X axis) and cost per subscriber (Y axis)
- the Southwest Case (after lecture); considers the relationship between total passengers flown (or market share) and performance (profitability) in the industry
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Corporate vs. Business Unit Strategy
Business Unit Strategy- The search for competitive advantage within a single industry, market, or line of business.
Corporate Strategy- The search for value and competitive advantages through participation in several different industries and markets.
Vertical Integration- Movement into adjacent markets by a firm along its own value chain. Movement in the direction of raw materials is backward integration. Movement in the direction of sales, service, or warranty operations is forward
integration.
Horizontal Diversification- The movement into an adjacent, or unrelated, market that is not along a firm’s own value chain.
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Moving along the value chain
Vertical
Backward integration
Forward integration
Horizontal
Diversification
Alliances
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2-3 minutes here
We can think of the value chain as moving from raw materials, through manufacturing or production, and on to distribution and post sales work. To move in the direction of raw materials is to backward integrate, in the direction of distribution and the customer is to forward integrate. Chapter 7 deals with vertical integration
To diversify is to move between different value chains between industries. For example, Cisco diversified when they moved from routers into phones.
Alliances are a special case of horizontal (and sometimes vertical) movement and so they get their own chapter, chapter 8.
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Two Ways To Diversify
Go at it alone—Greenfield
2. Buy your way in—Acquisition
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Organizations can diversify one of three ways (have students try and think of new examples here):
Greenfield entry: Opening your own operations. An example might be Apple building its own presence in music players and phones.
Merger or Acquisition: Buying or getting bought out by another company. This is how Cisco grows. Ask a student to figure out how many acquisitions Cisco has done in the last 20 years.
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Levels of Diversification
Single Business- A firm earning more than 95 percent of the revenues from a single line of business.
Dominant Vertical Business- A firm that earns more than 70 percent of its revenue from its main line of business and the rest from businesses located along
the value chain.
Dominant Business- A firm that earns more than 70 percent of revenue from its main line of business and the remainder from other lines across different value
chains.
Related-constrained Diversification- A firm that earns less than 70 percent of its revenue from its main line of business and its other lines of business share product, technological, and distribution linkages with the main business.
Related-linked Diversification- A firm that operates in related markets, but fewer linkages exist between the new and existing markets than the elements create
separately.
Unrelated Diversified Firm- Competes in product categories and markets with few, if any, links between them.
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Adding value
The critical question
Deploying and exploiting current resources
Developing and expanding new resources
Exploit v. Expand
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I’m probably going to spend about 10 minutes here because it’s important that students understand there is a logic for creating value through corporate strategy.
Why does diversification create value? The data suggest that it doesn’t. Broadly conceived, most diversified companies trade at a 10-15% discount, all else equal, than their focused competitors. Why do investors believe that diversified firms, those competing in multiple lines of business, are worth less than focused companies?
The critical question that executives need to ask is: “why is this business more valuable because we own it than if it operated alone?” The failure to ask, and answer, this question leads to poor choices of corporate strategy.
Companies that win through diversification do so through exploiting their current resources into new market areas. Conversely, diversification creates value when it expands its resources and capabilities through diversification.
You want to draw out the other dimension of front end and back end and get students thinking about why companies that do these win. Have them think of non-amazon examples to use for the rest of these.
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Adding Value Through Diversification
Mechanisms to create value
Slack
Synergy
Shared Knowledge
Similar Business Models
Spreading Capital
Stepping stone
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I’m going to spend about 20 minutes here: This is the real meat of the chapter.
How do companies exploit or expand their resources and capabilities through diversification?
The six S’s:
Utilizing slack managerial capacity (this is companies that diversify into related industries/markets)
Creating synergy between operating units (this is Disney and Cap Cities, ABC. Joining content and distribution makes it all fit)
Exploiting or enhancing shared knowledge or core competences (this is the Honda motor story, also Disney and ESPN in branding)
Employing similar business models (this is the dominant logic, used by Sumitomo and Dover)
Spreading capital between units (This is, in large measure, one way that GE creates value, by allocating capital to new opportunities)
Stepping stones to other markets and industries (this is also the GE story, particularly in oil and gas, their newest entry)
You may also qualify for these benefits
Stopping competitors
Stay ahead of markets
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The Six S’s
Slack- Unused resource capacity.
Economy of Scope- Activities where the average cost of producing two different products is less when delivered together than separately.
Management Skill- The individual and collective abilities of a firm’s management team to engage in value-creating activities.
Synergy- Action between different elements of a system that creates more value together than the elements create separately.
Shared Knowledge- Collective knowledge that can be distributed throughout the organization to create value.
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The Six S’s continued…
Business Model- A method to enable the creation and exchange of value between companies and their customers.
Dominant Logic A conceptualization of a business, or a set of rules for competition, that applies to seemingly unrelated product markets or industries.
Spreading Capital
Internal Capital Market- The movement of funds, talent, or knowledge from unit to unit directed by the leaders of the firm.
Providing Stepping Stones- Works to enhance capabilities through “long leaps” and “short leaps”, and “short hops”
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Destroying Value Through Diversification
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Hubris
Sunk-Cost Fallacy
Imitation
Poor Governance and Incentives
Poor Management
BCG Matrix
Cash cows- High share but low growth and can generate large cash flows that can be used to fund growth businesses.
Stars- combine high share with high growth and smart managers should invest heavily in these units to maintain or improve their position over time.
Question marks -represent a conundrum for management because they require significant investment and effective strategic management if they are to become stars.
Dogs- low share and low growth and add little profitability to a company’s overall portfolio businesses
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The BCG Matrix
Entry mode
Greenfield
Existing resources move from existing to new business
Brand
Customer knowledge
Technology overlap
Speed not essential
Acquisition
Resources don’t move from existing to new business
No brand equity
New customers
New technology
Speed essential
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I’ll spend about 5 minutes here. Once a company has decided that it will diversify, the next question is how.
There are really two central issues here:
How well will the firm’s current resources perform in the new market? If a company as a lot of brand equity (such as Coca Cola) then it may want to enter a new market with a new product or an expansion of its processes (Think Coke Zero). Alternatively, a firm’s current resources may prove of little value in the new market, and so acquisition may be a better way to enter the market. That’s why Coke bought Zico when it wanted to enter the coconut water market.
Timing matters. If speed is not essential, then a firm has time to build out its new business through Greenfield investment, but if timing matters (like entering a high growth market), then acquisition would be the preferred mode of entry.
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Acquisition Integration Strategies
Bury—completely absorb target
Build—a new organization, best of breed
Blend—loose coupling, leverage target
Bolt-on—two companies, one owner
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This would be the final 5-10 minutes.
You can use this slide as a stand alone description, or you can go back to slide 8/9 as you choose. The 4 B’s overlay quite nicely on the continuum in slide 8. The more tightly integrated the firm wants to combine its operations, the more likely it is to bury a target. Bury usually works for slack.
Build tends to work best for synergies and stepping stones. The goal is not to destroy the target, but to bring important elements of the target into the organization as “whole units.” The firm might want to retain its existing brand, but use the acquired firms sales force and organization. This turns out to be really tough to do in practice. So, very few acquisitions are truly mergers, and managers usually default to either bury or blend.
Blend works for most of the 6 Ss, except for slack and spreading capital. Blending allows the acquiring firm to use whole parts of the target (usually its front end, or customer facing operations) while leveraging its own back-end resources.
Bolt-on is the preferred strategy for spreading capital, where the firm wants to maintain clear lines of accountability for performance. The only real thing being shared in a bolt-on is cash, and so it makes sense to do very little integrating and run the organizations as separate businesses.
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General Integration Strategies
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Integrating Business Units
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Here is the previous slide, with all the rows filled in. I don’t think this is as engaging as using the former slide.
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What did you learn today?
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Because corporate strategy can be confusing for many students, I’ll call on 2-3 students who seemed particularly engaged and have them summarize their key learning points for the day. This tactic helps students realize that if their peers learned something, they probably did as well.
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Copyright
Copyright © 2020 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Copyright ©2020 John Wiley & Sons, Inc.
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Copyright
Copyright © 2020 John Wiley & Sons, Canada, Ltd.
All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.
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Unit 4: Overview - Forming Strategies
Introduction
How and why firms outperform each other goes to the heart of strategic management. There are three generic strategies that help firms attain advantages over competitors and sustain the advantages over time. The three generic strategies are cost leadership, differentiation, and focus. Successful generic strategies invariably enhance a firm’s position; however, there are pitfalls to each of the generic strategies. Thus, the sustainability of a firm’s advantage is always challenged because of imitation or substitution by new or existing rivals. Competitor moves erode a firm’s advantage over time.
Companies may decide to vertically integrate their own value chain (buy their vendors and/ or distributors) or form strategic alliances to expand their reach within their own or other industries. Even the way a company formulates and deploys strategies is changing because of the impact of the Internet, communication capabilities, and digital technologies within many industries.
The concept of the industry life cycle is a critical factor that managers must take into account when striving to create and sustain competitive advantages. The four stages of the industry life cycle — introduction, growth, maturity, and decline —play a role in decisions that managers must make at the business level. These include overall strategies as well as the relative emphasis on functional areas and value creating activities.
Unit 4: Discussion 2
Directions
Using an example of a specific organization (not Uber), identify multiple strategies (using terms from the course) that are being used successfully.
What other strategies might that organization use if they need to change or find a “turnaround” strategy to maintain their competitive advantage (consider product or industry diversification, mergers and acquisitions, joint ventures/strategic alliances, and/or a strong differentiation strategy).
Use the Hales & Mclarney (2017) article as one of your sources.

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