Critical Thinking: ?Scope of the Modern Company?
Critical Thinking:
Scope of the Modern Company
In this module, we looked at technology-based industries and the management of innovation review Case 12: Tesla: Eni SpA: The Corporate Strategy of an International Energy Major, p. 503 (in your textbook). Remember: A case study is a puzzle to be solved, so before reading and answering the specific case study questions, develop your proposed solution by following these five steps:
- Read the case study to identify the key issues and underlying issues. These issues are the principles and concepts of the course module, which apply to the situation described in the case study.
- Record the facts from the case study which are relevant to the principles and concepts of the module. The case may have extraneous information not relevant to the current course module. Your ability to differentiate between relevant and irrelevant information is an important aspect of case analysis, as it will inform the focus of your answers.
- Describe in some detail the actions that would address or correct the situation.
- Consider how you would support your solution with examples from experience or current real-life examples or cases from textbooks.
- Complete this initial analysis and then read the discussion questions. Typically, you will already have the answers to the questions but with a broader consideration. At this point, you can add the details and/or analytical tools required to solve the case.
Case Study Questions:
- Evaluate Eni’s corporate strategy in terms of its alignment with the characteristics and requirements of its industry environment and its resources and capabilities.
- Looking ahead over Eni’s next four-year planning period (2019-22), what changes in Eni’s corporate strategy would you recommend?
- How should Eni allocate its resources across its different businesses and between different geographical areas? In particular:
- Should Eni continue to focus most of its capital investment on its upstream business?
- Should Eni divest (i) its chemicals business, and (ii) its engineering, construction, and oilfield services subsidiary (Saipem)?
- Should Eni continue with its vertically integrated strategy in natural gas?
- Should Eni invest more heavily in renewable energy sources (e.g., wind power, solar power, and geothermal power)?
- Evaluate the recent changes to the organizational structure that Mr. Descalzi has introduced. What further organizational and management changes would you recommend?
You should meet the following requirements:
- Be 4 to 5 pages in length, which does not include the required title and reference pages, which are never a part of the content minimum requirements.
- Use APA style guidelines.
- Support your submission with course material concepts, principles, and theories from the textbook and at least two scholarly, peer-reviewed journal articles unless the assignment calls for more.
- It is strongly encouraged that you submit all assignments into the Turnitin Originality Check before submitting it to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin Originality Check—Student Guide for step-by-step instructions.
- Review the grading rubric to see how you will be graded for this assignment.
Required:
- Chapter 9 and 10 in Contemporary Strategy Analysis
- Chapter 9 PowerPoint slides Chapter 9 PowerPoint slides – Alternative Formats in Contemporary Strategy Analysis
- Chapter 10 PowerPoint slides Chapter 10 PowerPoint slides – Alternative Formats in Contemporary Strategy Analysis
- Wadström, P. (2019). Aligning corporate and business strategy: Managing the balance. Journal of Business Strategy, 40(4), 44-52. http://dx.doi.org/10.1108/JBS-06-2018-0099
- Hodge, N. (2019). Learning from corporate collapse: By recognizing the warning signs of fatal failures in corporate strategy, risk managers can help their companies course-correct before it is too late. Risk Management, 1(31).
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CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 10
Vertical Integration and the Scope of the Firm
- Transaction Costs and the Scope of the Firm
- The Benefits and Costs of Vertical Integration
- Designing Vertical Relationships
Vertical Integration and
the Scope of the Firm
Copyright © 2019 John Wiley & Sons, Inc.
OUTLINE
33
- Business Strategy is concerned with how a firm computes within a particular market
- Corporate Strategy is concerned with where a firm competes, i.e. the scope of its activities
- The dimensions of scope are:
- vertical scope
- geographical scope
- product scope
From Business Strategy to Corporate Strategy: The Scope of the Firm
Copyright © 2019 John Wiley & Sons, Inc.
TRANSACTION COSTS AND THE SCOPE OF THE FIRM
34
Multiple specialist firms vs. integration within a single firm
Specialized firms
Single integrated firm
Vertical scope:
Electric cars
Product scope:
Entertainment
Geographical
scope:
Banking
LG (Battery)
Ford (Final assembly)
Magna (Drivetrain)
S Video games
O Consumer
N electronics
Y Movies
Wells Fargo (US)
Banco Bradesco (Brazil)
Lloyds Banking Group (UK)
T Battery
E
S Drivetrain
L
A Assembly
Nintendo (Video games)
MGM (Movies)
Panasonic (Consumer electronics)
Ford Focus Electric
H US
S UK
B Brazil
C + other countries
TRANSACTION COSTS AND THE SCOPE OF THE FIRM
Expanding Scale and Scope
- scale economies from new technologies
- new management tools
- multidivisional structure
- computers
- international expansion
Restructuring, Refocusing and Downsizing:
- Quest for shareholder value: focus on core competences and core businesses
- Turbulent business environment: inflexibility of large, complex hierarchies
- Digital revolution
Top 100 companies’ share of total employment (%)
The changing scale and scope of large US companies
Consolidation through mergers and acquisitions
Quest for scale and market dominance in both mature and hi-tech sectors
Second Industrial Revolution: Growth of industrial giants assisted by electricity, the telephone, innovations in
management and organization
Railways, canals, and telegraph expand firms geographical reach
TRANSACTION COSTS AND THE SCOPE OF THE FIRM
Copyright © 2019 John Wiley & Sons, Inc.
*
Chart1
| 1800 | 1800 | 1800 |
| 1810 | 1810 | 1810 |
| 1820 | 1820 | 1820 |
| 1830 | 1830 | 1830 |
| 1840 | 1840 | 1840 |
| 1850 | 1850 | 1850 |
| 1860 | 1860 | 1860 |
| 1870 | 1870 | 1870 |
| 1880 | 1880 | 1880 |
| 1890 | 1890 | 1890 |
| 1900 | 1900 | 1900 |
| 1910 | 1910 | 1910 |
| 1920 | 1920 | 1920 |
| 1930 | 1930 | 1930 |
| 1940 | 1940 | 1940 |
| 1950 | 1950 | 1950 |
| 1960 | 1960 | 1960 |
| 1970 | 1970 | 1970 |
| 1980 | 1980 | 1980 |
| 1990 | 1990 | 1990 |
| 2000 | 2000 | 2000 |
| 2010 | 2010 | 2010 |
| 2020 | 2020 | 2020 |
Sheet1
| Series 1 | Column1 | Column2 | |
| 1800 | 0.7 | ||
| 1810 | 0.5 | ||
| 1820 | 0.6 | ||
| 1830 | 0.7 | ||
| 1840 | 1 | ||
| 1850 | 1.7 | ||
| 1860 | 1.9 | ||
| 1870 | 2.3 | ||
| 1880 | 2.9 | ||
| 1890 | 3.1 | ||
| 1900 | 4.2 | ||
| 1910 | 4.9 | ||
| 1920 | 6 | ||
| 1930 | 6.7 | ||
| 1940 | 6.8 | ||
| 1950 | 9.6 | ||
| 1960 | 13 | ||
| 1970 | 14.4 | ||
| 1980 | 13.8 | ||
| 1990 | 11.6 | ||
| 2000 | 11.3 | ||
| 2010 | 11.5 | ||
| 2020 | 11.7 |
- Technical economies from integrating processes e.g. iron and steel production
—but doesn’t necessarily require common ownership
- Avoids transactions costs of market contracts in situations where there are:
— small numbers of firms
— transaction-specific investments
— opportunism and strategic misrepresentation
— taxes and regulations on market transactions
- Superior coordination
The Benefits of Vertical Integration
7
Copyright © 2019 John Wiley & Sons, Inc.
THE COSTS AND BENEFITS OF VERTICAL INTEGRATION
39
- Differences in optimal scale of operation between different stages of production prevent balanced vertical integration
- Inhibits development of distinctive capabilities
- Difficulties of managing strategically different businesses
- Incentive problems: lack of “high-powered” incentives
- Limits flexibility — in responding to demand fluctuations
— in responding to changes in technology,
customer preferences, etc.
(But, may be conducive to system-wide flexibility)
- Compounding of risk
The Costs of Vertical Integration
Copyright © 2019 John Wiley & Sons, Inc.
THE COSTS AND BENEFITS OF VERTICAL INTEGRATION
40
How many firms in the adjacent stage?
Do transaction-specific investments necessary?
The greater the need for transaction-specific investments, the greater the advantages of VI
Is information evenly distributed across the stages?
The greater are information asymmetries, the greater the advantages of VI
Is there uncertainty over the period of the relationship?
The greater the uncertainty, the more incomplete is the contract and the greater the advantages of VI
How similar is optimal scale between the two stages?
The greater the dissimilarity, the less advantageous is VI
How strategically similar are the two stages?
Do capabilities in the adjacent stage need to be continually upgraded?
The fewer the number, the less advantageous is VI
Are profit incentives critical to performance?
The greater the need for high-powered incentives the greater the disadvantages of VI
Unpredictable demand reduces advantages of VI
Is market demand uncertain?
The greater the need for capability development the greater the disadvantages of VI
Is the adjacent stage highly risky?
VI tends to compound risk
Characteristics of the vertical relationship
Implications for VI
Vertical Integration v. Outsourcing: Key Considerations
Do transaction-specific investments necessary?
THE COSTS AND BENEFITS OF VERTICAL INTEGRATION
*
Iron ore
mining
Steel
production
Steel strip
production
Can
making
MARKET
CONTRACTS
VERTICAL
INTEGRATION
MARKET
CONTRACTS
Canning of
food, drink, oil, etc.
VERTICAL
INTEGRATION,
AND MARKET
CONTRACTS
What factors explain why some stages are vertically integrated,
while others are linked by market transactions?
The Value Chain for Steel Cans
Copyright © 2019 John Wiley & Sons, Inc.
THE COSTS AND BENEFITS OF VERTICAL INTEGRATION
- Choices not limited to vertical integration or arms-length market contracts:
— Several intermediate types of vertical relationship: these may combine benefits of both market transactions and internalization
- Key issues in designing vertical relationships:
— No generic solution: depends upon the resources,
capabilities and strategy of the individual firm
— How is risk to be allocated between the parties?
— Are the incentives appropriate?
Long-Term Contracts and
Quasi-Vertical Integration
Copyright © 2019 John Wiley & Sons, Inc.
DESIGNING VERTICAL RELATIONSHIPS
41
Spot sales/ purchases
Long-term contracts
Agency agreements
Franchises
Vertical integration
Joint ventures
Informal supplier/ customer relationships
Supplier/ customer partnerships
Degree of Commitment
Formalization
Different Types of Vertical Relationship
Low
High
Low
High
Copyright © 2019 John Wiley & Sons, Inc.
DESIGNING VERTICAL RELATIONSHIPS
3
- From competitive contracting to supplier partnerships, e.g. in autos
- From vertical integration to outsourcing (not just components, also IT, distribution, and administrative services).
- Diffusion of franchising
- Technology partnerships (e.g. IBM- Apple; Canon- HP)
- Inter-firm networks
General conclusion:- boundaries between firms and markets are becoming increasingly blurred.
Recent Trends in Vertical Relationships
Copyright © 2019 John Wiley & Sons, Inc.
DESIGNING VERTICAL RELATIONSHIPS
42
,
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CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 9
Technology-based Industries and the Management of Innovation
- Competitive Advantage in Technology-intensive Industries
- Strategies to Exploit Innovation: How and When to Enter
- Standards, Platforms, and Network Externalities
- Platform-based Markets
- Implementing Technology Strategies: Internal and External Sources of Innovation
- Implementing Technology Strategies: Creating the Conditions for Innovation
Technology-based Industries and the Management of Innovation
Copyright © 2019 John Wiley & Sons, Inc.
OUTLINE
*
1
Basic Knowledge
Invention
Innovation
Diffusion
IMITATION
ADOPTION
Supply side
Demand side
The Development of Technology: from Knowledge Generation to Diffusion
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
*
3
Compressing the Technology Cycle: Less
Lag between Invention and Commercialization
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
| BASIC KNOWLEDGE | FIRST PATENTS | PRODUCT LAUNCH | IMITATION | |
| Jet Engines | 17th century Newtonian physics | 1930 | 1957 | 1959 |
| Xerography | Late 19th, early 20th centuries | 1940 | 1958 | 1974 |
| Fuzzy logic controllers | 1960’s | 1981 | 1987 | 1988 |
| Automobile satellite navigation | Late 1950s | Early 1960s | 1998 | 2002 |
| MP3 players | Early 1990s | 1994 | 1997 | 1999 |
| Instant messaging | Late 1980s | 2002 | 2008 | 2009 |
*
4
Customers
Suppliers
Imitators and other “followers”
Innovator
Appropriation of Value: How are the
Benefits from Innovation Distributed?
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
*
8
Innovator
Innovator
Innovator
Followers
Followers
Followers
Suppliers
Suppliers
Suppliers
Complementors
Complementors
Customers
Customers
Customers
ASPARTAME
PERSONAL COMPUTERS
SMARTPHONES
Appropriating Value: Who Gets
the Benefits from Innovation?
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
- Legal protection
- Complementary resources
- Imitability of the technology
- Lead time
Value of the innovation to users
Innovator’s ability to appropriate the value of the innovation
The Profitability of Innovation
6
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Profits
from
innovation
*
7
- Patents — exclusive rights to a new product, process, substance or design.
- Copyrights — exclusive rights to artistic, dramatic,
and musical works.
- Trademarks — exclusive rights to words, symbols
or other marks to distinguish goods
and services; trademarks are
registered with the Patent Office.
- Trade Secrets — protection of chemical formulae,
recipes, and industrial processes.
Also: employment contracts may restrict employees’ freedom to
transfer technology and know how.
Legal Protection of Intellectual Property
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
*
9
Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized.
Manufacturing
Distribution
Service
Complementary
technologies
Other
Other
Marketing
Finance
Core
technological know-how
Complementary Resources
© 20106 Robert M. Grant, www.contemporarystrategyanalysis.com
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
*
U.S. Managers’ Perception of the Effectiveness of Different Mechanisms for Protecting Innovation
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
| Secrecy (%) | Patents (%) | Lead-time (%) | Sales/service (%) | Manufacturing (%) | |
| Product innovations | |||||
| Food | 59 | 18 | 53 | 40 | 51 |
| Drugs | 54 | 50 | 50 | 33 | 49 |
| Electronic components | 34 | 21 | 46 | 50 | 51 |
| Telecom equipment | 47 | 26 | 66 | 42 | 41 |
| Medical equipment | 51 | 55 | 58 | 52 | 49 |
| All industries | 51 | 35 | 53 | 43 | 46 |
| Process innovations | |||||
| Food | 56 | 16 | 42 | 30 | 47 |
| Drugs | 68 | 36 | 36 | 25 | 44 |
| Electronic components | 47 | 15 | 43 | 42 | 56 |
| Telecom equipment | 35 | 15 | 43 | 34 | 41 |
| Medical equipment | 49 | 34 | 45 | 32 | 50 |
| All industries | 51 | 23 | 38 | 31 | 43 |
*
11
Why Do Firms Patent?
(Responses by 674 US manufacturers)
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Copyright © 2019 John Wiley & Sons, Inc.
Chart1
| To prevent copying | To prevent copying |
| For licensing revenue | For licensing revenue |
| To prevent lawsuits | To prevent lawsuits |
| To block others | To block others |
| For use in negotiations | For use in negotiations |
| To enhance reputation | To enhance reputation |
| To measure performance | To measure performance |
Sheet1
| Product innovations | Process innovations | |
| To prevent copying | 95 | 77 |
| For licensing revenue | 28 | 23 |
| To prevent lawsuits | 59 | 47 |
| To block others | 82 | 64 |
| For use in negotiations | 47 | 43 |
| To enhance reputation | 48 | 34 |
| To measure performance | 6 | 5 |
Risk & Return
Competing Resources
Examples
Licensing
Outsourcing certain functions
Strategic Alliance
Joint Venture
Internal Commercial-ization
Alternative Strategies for Exploiting Innovation
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
| Low risk, but limited returns (unless patent position very strong | Reduces investment, but means dependence on suppliers & partners | Benefits of flexibility and speed, but coordination risks | Reduces investment and risk, but partner disagreement likely | Biggest risks and benefits. Allows complete control |
| Few | Allows outside resources & capabilities To be accessed | Permits pooling of the resources/capabilities of more than one firm | Substantial resource requirements | |
| ARM licenses its micro-processor designs to several semi-conductor | Apple oursources manufacture to Foxconn | Apple and Nike collaborate to develop intelligent footwear | Tesla and Panasonic jointly build gigafactory for lithium ion batteries | Page and Brin establish Google Inc. to commercialize their search algorith |
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The Timing of Innovation: To Leader or to Follow?
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
| Product | Innovator | Follower | The winner |
| Jet airliner | De Havilland (Comet) | Boeing (707) | Follower |
| Float glass | Pilkington | Corning | Leader |
| X-ray scanner | EMI | General Electric | Follower |
| Office PC | Xerox | IBM | Follower |
| VCRs | Ampex/Sony | Matsushita | Follower |
| Instant camera | Polaroid | Kodak | Leader |
| Microwave oven | Raytheon | Samsung | Follower |
| Video games player | Atari | Nintendo/Sony | Followers |
| Disposable diaper | Procter & Gamble | Kimberley-Clark | Leader |
| Compact disk (CD) | Sony/Philips | Matsushita, Pioneer | Leader |
| Web browser | Netscape | Microsoft | Follower |
| Web search engine | Lycos | Follower | |
| MP3 music players | Diamond Multimedia | Apple (iPod) | Follower |
| Operating systems for mobile devices | Symbian, Palm OS | Apple, Google | Followers |
| Cryptocurrencies | Bitcoin | Etherium, Ripple | Leader |
| Flash memory | Toshiba | Samsung, Intel | Followers |
| E-book reader | Sony (Digital Reader) | Amazon (Kindle) | Follower |
| Social networking | SixDegrees.com | Follower |
*
Is there potential to establish an industry standard ?
To Lead or to Follow? Some Key Considerations
Copyright © 2019 John Wiley & Sons, Inc.
Can the innovation be protected by intellectual property rights or lead-time advantages?
If so, advantages in leadership
If so, advantages in leadership
- Followers can avoid investing in complementary resources by using better-established industry infrastructure
- Firms possessing complementary resources have the luxury of waiting
How important are complementary resources?
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
*
Sources of
uncertainty
Technological
uncertainty
Difficult to predict the evolution of
Technology or which standards and
designs will emerge is dominant
Customer adoption of innovations
notoriously difficult to predict
Market
uncertainty
Strategies for
managing risk
Cooperate with lead users
—early identification of customer needs
—assistance in new product development
Flexibility
—keep options open
—adapt quickly to new information
—learn from mistakes
Limit risk exposure
—avoid capital commitments
—outsource
—use alliances to access other firms’
resources & capabilities
—keep debt low
Uncertainty & Risk Management in Tech-based Industries
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
*
14
- Emergence of a dominant designs
- Model T in autos
- IBM 360 in mainframes
- Douglas DC3 in passenger aircraft
- Emergence of technical standards
- Emerge in industries where there are network extremities
- Entrenchment of dominant designs and technical standards
- Learning effects: incremental improvement of the dominant design
- Switching costs
- Need for coordinated action by multiple players
The Emergence of Standards
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
*
5
- Users linked within a network e.g.:
- Telephone systems—only value of telephone is connection to other users
- On-line auction—value of auction depends on number of buyers and sellers participating
[Also, social identification—the desire to conform encourages imitative behavior]
- Availability of complementary products e.g.:
- Most smartphone apps written for iPhone and Android—Blackberry and Windows dying for lack of apps
- In autos, more available spares and repairs for a Ford Focus or Honda Accord than a Kia, Proton, or Lamborghini
- Economizing on switching costs e.g.:
- Office software (Microsoft Office vs. Lotus SmartSuite)
Sources of Network Externalities
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
*
5
Companies that Own Technical Standards
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
| Co
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