Chapter 2

Strategy Process
and the
Management of
Technology and
Innovation

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 Chapter Outline
• The meaning of strategy
• Continuous versus radical technology
• Offensive versus defensive technology
• Key MTI concerns in strategy
• The strategy process
• Understanding an industry and its impact
• Strategic groups within an industry
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 Strategy and Strategy Planning

Strategy
• Coordinated set of actions that fulfill a
firm’s objectives, purposes, and goals

Strategic planning
• Process that lays the groundwork and
direction of the firm over the next
several years

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 Strategic Management
• Ongoing process through which an organization
defines:
• Nature of the businesses in which it will be active
• Kind of economic and human organization it
intends to be
• Nature of the contribution it intends to make to its
various constituents

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Figure 2.1 - External and Internal Strategic
Interactions

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 Types of Capabilities
• Technical capabilities - How the firm approaches
technology
• Destroy - Eliminating and replacing technology
• Preserve - Maintaining technology and practicing
continuous improvement
• Develop - Leaping over others with new
technological capabilities
• Market capabilities - Ability to place the product
or technology appropriately
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 Competitive Advantage
• Ability to perform an activity better than
competitors
• Leads to a sustainable competitive advantage
when the activity:
• Holds value to customers
• Cannot be easily duplicated by competitors

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Continuous versus Radical Technology

Continuous technology

• Changes in technology are viewed as continuous

improvements in the technology by consumers

Radical technology

• It establishes a new functionality and a new way of doing

things in business and society

Next-generation technologies

• Changes in technology and their impact on society are more

than continuous change, but they are not revolutionary either

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Disruptive Technology
• Technologies that change how an industry
competes but are not always radical
• Low-end disruption: Technology that:
• Enters the market with lower performance than
the incumbent
• Exceeds the requirements of certain segments of
that market at a lower cost than the existing
products that are used by the segment

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Figure 2.2 - The S-Curve of Technological
Progress

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Offensive versus Defensive Technology

Offensive technology

• Using technology in a way that is not being used

by competitors so that the firm gains a
competitive advantage

Defensive technology

• Acquiring technology that others already employ

to match firm’s competitors or to block its use by
others

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Figure 2.3 - Key Activities in the Strategic
Management Process

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 Figure 2.4 - Levels of Strategy

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 Internal Analysis
• Focuses on the internal operations and resources
of the firm
• Firms examine current technologies and
determine whether there is a way to add value to
the organization
• Internal resources can create a competitive
advantage
• Firm’s creativity, culture, and ability to integrate
business units that are purchased

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 Financial Analysis
• Examines the income statement and balance
sheet of the firm to understand how it is
performing
• Income statement: Explains net profits retained in
a business after dividends are paid
• Balance sheet: Indicates the existing assets and
liabilities
• Conducted based on profitability, liquidity,
efficiency, and other ratios

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Elements of Income Statement
• Gross margin = Net sales - Cost of goods sold
• Operating income = Gross margin ˗ Operating
expenses
• EBIT (Earnings before Interest and Taxes) =
Operating income + Other income (loss) +
Extraordinary income (loss)
• Profit (loss) before taxes = Gross margin ˗ Total
expenses
• Net profit = Profit before taxes ˗ Taxes

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Balance Sheet
• Provides information on a firm’s assets, its
liabilities, and the shareholders’ equity
• Information helps determine:
• Types of assets the company has
• Whether the firm can meet its financial
obligations
• Amount of money that has been invested in the
company
• Amount of debt the company has

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Interpreting Financials
• Examining what is happening to a firm’s
profitability and asset structure over time
• Assessing how a firm is doing relative to other
firms in the same industry
• When a strategic group is developed, ratios
should be calculated for the firm and for that
group
• Ratio: Where the number of interest is divided by
some relevant measure
• Such as total assets, sales, or equity
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 General Groups of Ratios
• Profit ratio
• Operating profit margins: Show the profits from
operations
• Liquidity ratios - Used to judge how well a firm
can repay its debts
• Acid ratio - Removes inventory from the
calculation of the firm’s ability to cover its debt
• Debt to equity ratio - Examines the firm’s ability to
repay its total debt, including long-term debt

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 General Groups of Ratios (continued)
• Efficiency ratios
• Inventory turnover ratio - Provides information on
how fast a firm’s inventory turns or is sold
• Fixed assets turnover ratio - Levels of fixed assets
per unit of sales
• Other ratios
• Price-earnings ratio - Tells whether the market
expects growth from a firm
• Cash flow to assets ratio - Indicates if the assets
are generating enough cash for the firm
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Figure 2.5 - External Environment

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Figure 2.6 - Porter’s Five-Forces Model Plus

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Factors Influencing the Bargaining Power of
Buyers and Suppliers
Buyers Suppliers
• Percentage of the industry’s • High demand for the
output the buyer purchases supplier’s products
• Costs of switching to • Unique quality and
competing brands performance of the product
• Number of sellers available • Inability of the customer to
vertically integrate

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Factors That Impact the Power of New
Entrants and Substitutes
New entrants Substitutes
• Brand loyalty by consumers • Ability of customers to
• Economies of scale that compare quality,
increase the size at which a performance, and price
firm must enter the industry • Cost of switching from the
• Large capital requirements industry’s product to a
• Inability to access substitute
distribution channels
• Proprietary process
technology from patents

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Factors That Increase Rivalry
• Increasing number of competitors
• Growing demand for the product
• Producing an increased volume to obtain
economies of scale
• Switching among producers results in low costs to
the customer
• Increasing payoff from successful strategic moves
• Exiting the industry costs more than staying in it

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Characteristics that Influence the Power of
Complementors

Ability to integrate backward or forward to replace the

complement

Availability of substitute complements

Buyer or supplier switching costs

Relative concentration

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 26
 Steps in Planning Process
• Identify the firms that are in its strategic group
• Strategic group - Group of firms that compete in a
similar manner
• Determine the strategic posture of rivals that
provide the most direct competition
• Combine knowledge gathered about the external
and internal environments to determine
optimum course of action

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Figure 2.7 - Strategic Implementation
Process

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Figure 2.8 - Technologies in the Value Chain

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Figure 2.9 - Balanced Scorecard Issues

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 Net Present Value
n
Net Present Value (NPV) = - I 0 +  Ft / (1 + k ) t

t =1

• Where I0 = the initial investment; it is negative

because it is an outflow
• Ft = the net cash flow in period t
• k = the required rate of return (hurdle or cutoff
rate)

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 Payback Period
ICi
PBPi =
CFi
• PBPi = payback period for typical technology or
equipment i
• ICi = initial cost of technology or equipment i
• Bi = annual benefits involved in using technology or
equipment i
• Ci = annual cost involved in using technology or
equipment I
• CFi = Bi – Ci = annual cash flow involved in using
technology or equipment i
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.