Lecture 5 SM 2014

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Capability, Promote Strategy, and Culture

In this lecture, we focus

Strategy for Cash Hog and Cash Cow

businesses

Superior Efficiency

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Cash Hog and Cash Cow Business

oA cash hog business is one whoseinternal cash generations/flows areinadequate to fully fund its needs for

working capital and new capitalinvestment

oA cash cow business is a valuable part ofa diversified companys business,

because it generates surplus cash forfinancing new acquisitions, funding capitalrequirements of cash hogs

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Cash Hog and Cash Cow Business

oCorporate management has to decidewhether it is worth financially and

strategically to invest in cash hogsoSurplus fund from cash cows can be

invested in promising cash hogs

oCash hogs in low industry attractivenessor a weak competitive position can be

abandoned

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Achieving Superior Efficiency

Economies of scale

Unit cost reductions associated with a large scale ofoutput

Ability to spread fixed costs over a large production volume

Ability of companies producing in large volumes to achieve a

greater division of labor and specialization

Diseconomies of scale

Unit cost increases associated with a large scale of

output

May happen due to additional investment required foradditional output

Suppose a developer can build 5 apartment buildings at a

time using its present resources and capability. But if it goes

for 7 apartments, it has to buy huge machineries.

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Economies and Diseconomies of Scale

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Learning effects

Cost savings that come from learning by doing

Labor productivity

Management efficiency

When changes occur in a companys

production system, learning has to begin

again

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Impact of Learning and Scale Economies

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The experience curve

The systematic lowering of the cost structure

and consequent unit cost reductions that

occur over the life of a product

Economies of scale and learning effects underlie

the experience curve

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The Experience Curve

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Dangers of complacency with the experience

curve

It will bottom out

New technologies can make experience effects

obsolete Some technologies may not produce lower costs

with higher volumes of output

Flexible manufacturing technologies may allowsmall manufacturers to product at low unit costs

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Organizational Capability


Marketing

Marketing strategy: pricing, promotion,

advertising, product design, distribution

Reducing customer defection rates and

building customer loyalty

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Materials management

Getting inputs and components to a production

facility, through the production process, and out

through a distribution system to the end user

Just-in-time (JIT) inventory system

Supply chain management

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R&D strategy

Designing products that are easy to

manufacture

Process innovations

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Human resource strategy: employee

productivity

Hiring

Training

Self-Managing Teams

Pay for Performance

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Information systems and the Internet

Automating interactions between

Company and customers

Company and suppliers

Infrastructure Company structure, culture, style of strategic

leadership, and control system determine

context of all value creation activities

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Achieving Superior Quality

Attaining superior reliability

Total quality management (TQM)

Improved quality means that costs decrease

As a result, productivity improves

Better quality leads to higher market share and allowsincreased prices

This increases profitability

More jobs are created

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Value and Culture

Management is obligated to manage

organization in such a way that employeeswill have the opportunity to earn according totheir productivity.

Employees should be able to feel confident

that if they do their jobs properly, they willhave a job tomorrow.

Employees have the right to be treated fairly

and must believe that they will be. Employees must have an avenue of appeal

when they believe they are being treatedunfairly.

Documents

Lecture 5 SM 2014