MGMT 4890

differentiation strategy

Approach under which a firm aims to develop and market unique products for different customer segments.

BCG Matrix

Dog, ?, Star, Cow

integration strategies

Horizontal, Backward, forward

4 I's

Idea - may be presented in terms of abstract concepts or as findings derived from basic research Invention - transformation of an idea into a new product, process, or the modification and recombination of existing ones Innovation - concerns the commercialization of an invention by entrepreneurs Imitation - copying a successful innovation

Three dimensions of corporate strategy

Industry value chain Range of products and services Where to compete: geography

Disadvantage of "make" in-house

Principal-agent problem: Situation in which an agent performing activities on behalf of a principal pursues his or her own interests. (Manager buys jets)

Diversification strategies

Product diversification Geographic diversification Product-market diversification

Disadvantage of "buy" from markets

Search cost Opportunism Information asymmetries: situations in which one party is more informed than another, because of the possession of private information.

Alternatives on the Make-or-Buy Continuum

Short-term contacts Strategic alliances Parent-subsidiary relationship

Integration-responsiveness framework

Strategy framework that mixes the pressures an MNE faces for cost reductions and local responsiveness to derive four different strategies to gain and sustain competitive advantage when competing globally: international strategy, multidomestic strategy, global-standardization strategy, and transnational strategy.

cost leadership strategy

Strategy used by businesses to create a low cost of operation within their niche. The use of this strategy is primarily to gain an advantage over competitors by reducing operation costs below that of others in the same industry.

Industry life cycle

The five different stages-- introduction, growth, shakeout, maturity, and decline-- that occur in the evolution of an industry over time.

Local responsiveness

The need to tailor product and service offerings to fit local consumer preferences and host-country requirements; generally entails higher costs.

Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.

• A merger describes the joining of two independent companies to form a combined entity. • An acquisition describes the purchase or takeover of one company by another. It can be friendly or hostile.

Describe and evaluate different types of corporate diversification.

• A single-business firm derives 95 percent or more of its revenues from one business. • A dominant-business firm derives between 70 and 95 percent of its revenues from a single business, but pursues at least one other business activity. • A firm follows a related diversification strategy when it derives less than 70 percent of its revenues from a single business activity, but obtains revenues from other lines of business that are linked to the primary business activity, Choices within a related diversification strategy can be related-constrained or related-linked. • A firm follows an unrelated diversification strategy when less than 70 percent of its revenues come from a single business, and there are few, if any, linkages among its businesses.

Explain why it is difficult to succeed at an integration strategy.

• A successful integration strategy requires that trade-offs between differentiation and low cost be reconciled. • Integration strategy often is difficult because the two distinct strategic positions require internal value chain activities that are fundamentally different from one another. • When firms fail to resolve strategic trade-offs between differentiation and cost, they end up being "stuck in the middle." They then succeed at neither strategy, leading to a competitive disadvantage.

Apply agency theory to explain why and how companies use governance mechanisms to align interests of principals and agents

• Agency theory views the firm as a nexus of legal contracts • The principal agent problem concerns the relationship between the owners (shareholders) and managers and also cascades down the organizational hierarchy. • The risk of opportunism on behalf of agents is exacerbated by information asymmetry: Agents are generally better informed than the principals. • Governance mechanisms are used to align incentives between principals and agents. • Governance mechanisms need to be designed in such a fashion as to overcome two specific agency problems: adverse selection and moral hazard.

Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage.

• An alliance management capability can be a source of competitive advantage. • An alliance management capability consists of a firm's ability to effectively manage three alliance-related tasks concurrently: partner selection and alliance formation, alliance design and governance, and post-formation alliance management. • Firms build a superior alliance management capability through learning-by-doing and by establishing a dedicated alliance function.

Define organizational structure and describe its four elements.

• An organizational structure determines how firms orchestrate employees' work efforts and distribute resources. It defines how firms divide and integrate tasks, delineates the reporting relationships up and down the hierarchy, defines formal communication channels, and prescribes how employees coordinate work efforts. • The four building blocks for organizational structure are specialization, formalization, centralization, and hierarchy

Identify and evaluate benefits and risks of vertical integration.

• Benefits of vertical integration include securing critical supplies and distribution channels, lowering costs, improving quality, facilitating scheduling and planning, and facilitating investments in specialized assets. • Risks of vertical integration include increasing costs, reducing quality, reducing flexibility and increasing the potential for legal repercussions.

Define business-level strategy and describe how it determines a firm's strategic position

• Business-level strategy determines a firm's strategic position in its quest for competitive advantage when competing in a single industry or product market. • Strategic positioning requires that mangers address strategic trade-offs that arise between value and cost, because higher value tends to go along with higher cost. • Differentiation an appropriate strategic position, managers must also define the score of competition---where to pursue a specific market niche or go after the broader market.

Explain the role of corporate governance

• Corporate governance involves mechanisms used to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally • Corporate governance attempts to address the principal agent problem, which describes any situation in which an agent performs activities on behalf of a principal

Define corporate strategy and describe the three dimensions along which it is assessed

• Corporate strategy addresses "where to compete. "Business strategy addresses "how to compete" • Corporate strategy concerns the boundaries of the firm along three dimensions: (1) Industry value chain, (2) products and services, and (3) geography (regional, national, or global markets.). • To gain or sustain competitive advantage any corporate strategy must support and strengthen a firm's strategic position, regardless of whether it is a differentiation, cost-leadership- or integration strategy

Explain the long-tail concept and derive its strategic implications

• Firms digitize their offerings to leverage the Internet as a disruptive force. • The long tail describes a business model in which companies can obtain a significant part of their revenues by selling a small number of units from among almost unlimited choices.

Explain why firms engage in acquisitions.

• Firms engage in acquisitions to access new markets and distributions channels, gain access to new capability or competency, and preempt rivals.

Categorize different types of innovations in the markets-and-technology framework.

• Four types of innovation emerge when applying the existing versus new dimensions of technology and markets: incremental, radical, architectural, and disruptive innovations. • An incremental innovation squarely builds on an established knowledge base, and steadily improves an existing product or service offering (existing market / existing strategy) • A radical innovation draws on novel methods o materials, is derived either from an entirely different knowledge base or from the recombination of the existing knowledge base or from the recombination of knowledge (new market / new technology) • An architectural innovation is an embodied new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets (new market / existing technology) • A disruptive innovation is an innovation that leverages new technologies to attack existing markets from the bottom up (existing marketing / new technology)

Define horizontal integration and evaluate the advantages and disadvantages of this corporate-level strategy.

• Horizontal integration is the process of merging with competitors, leading to industry consolidation. • As a corporate strategy, firms use horizontal integration to reduce intensity, lower costs, and increase differentiation.

Describe the competitive implications of different stages in the industry life cycle.

• Innovations frequently lead to the birth of new industries. • Industries generally follow a predictable industry life cycle, with five distinct stages: introduction, growth, shakeout, maturity, and decline

Compare and contrast mechanistic versus organic organizations

• Organic organizations are characterized by a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making. • Mechanistic organizations are described by a high degree of specialization and formalization, and a tall hierarchy that relies on centralized decision making. • The comparative effectiveness of mechanistic versus organic organizational forms depends on the context.

Define strategic alliances and explain why they are important corporate strategy vehicles and why firms enter into them.

• Strategic alliances have the goal of sharing knowledge, resources, and capabilities in order to develop processes, products, or services • An alliance qualifies as strategic if it has the potential to affect a firm's competitive advantage by increasing value and/or lowering costs. • The most common reasons why firms enter alliances are to strengthen competitive position, enter new markets, hedge against uncertainty, access critical complementary resources, and learn new capabilities.

Describe and examine alternatives to vertical integration.

• Taper integration is a strategy in which a firm is backwardly integrated but also relies on outside market firms for some of its supplies, and/or is forwardly integrated but also relies on outside market firms for some of its distribution. • Strategic outsourcing involves moving one or more value chain activities outside the firm's boundaries to other firms in the industry value chain. Off shoring is the outsourcing of activities outside the home country.

Apply the build-borrow-or-buy framework to guide corporate strategy.

• The build-borrow-or-buy framework provides a conceptual model that aids strategists in deciding whether to pursue internal development (build), enter a contract arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy). • Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage.

Derive strategic implications of the crossing-the-chasm framework

• The core argument of the crossing-the-chasm framework is that each stage of the industry life cycle is dominated by a different customer group, which responds differently to a new technological innovation. • There exists a significant different between the customer groups that enter early during the introductory stage of the industry life cycle and customers that enter later during the growth stage. • This distinct difference between customer groups leads to a big gulf or chasm which companies and their innovations frequently fall into. • To overcome the chasm, managers need to formulate a business strategy guided by the "who-what-why-how" questions of competition

Explain when a diversification strategy creates a competitive advantage and when it does not.

• The diversification-performance relationship is a function of the underlying type of diversification • The relationship between the type of diversification and overall firm performance takes on the shape of an inverted U. • Unrelated diversification often results in a diversification discount • Related diversification often results in a diversification premium • In the BCG matrix, the corporation is viewed as a portfolio of businesses, much like a portfolio of stocks in finances. The individual SBUs are evaluated according to relative market share and the speed of market growth, and are plotted using one of four categories: dog, cash cow, star , and question mark. Each category warrants a different investment. • Both low levels and high levels of diversification are generally associated with lower overall performance, while moderate levels of diversification are associated with higher firm performance.

Asses the benefits and risks of cost-leadership and differentiation business strategies vis-a-vis the five forces that shape competition

• The five forces model helps managers use generic business strategies to protect themselves against the industry forces that drive down profitability. • Differentiation and cost-leadership strategies allow firms to carve out strong strategic positions, not only to protect themselves against the five forces but also to benefit from them in their quest for competitive advantage.

Examine the relationship between cost drivers and the cost-leadership strategy

• The goal of a cost-leadership strategy is to reduce the firm's cost below that of its competitors. • In a cost-leadership strategy, the focus of competition is achieving the lowest possible cost position, which allows the firm to offer the lowest price while maintain acceptable value. • Some of the unique cost drivers that mangers can manipulate are the cost of input factors, economics of scale, and learning- and experience-curve effects. • No matter how low the price, if there is no acceptable value proposition, the product or service will not sell.

Examine the relationship between value drivers and differentiation strategy

• The goal of a differentiation strategy is to increase the perceived value of goods and services so that customers will pay a higher price for additional features. • In a differentiation strategy, the focus of competition is on value-enhancing attributes and features, while controlling costs. • Some of the unique value drivers managers can manipulate are product features, customer service, customization, and complements. • Value drivers contribute to competitive advantage only if their increase in value creation exceeds the increase in cost.

Describe and evaluate the dynamics of competitive positions.

• The productivity frontier represents a set of best-in-class strategic positions the firm can take relating to value creation and low cost at a given point in time. • Reaching the productivity frontier enhances the likelihood of obtaining a competitive advantage. • Not reaching the productivity frontier implies competitive disadvantage if other firms are positioned at the productivity frontier. • Strategic positions need to change over time as the environment changes.

Evaluate the board of directors as the central governance mechanism for public stock companies

• The shareholders are the legal owners of a publicly traded company and appoint a board of directors to represent their interests. • The day-to-day business operations of a publicly traded stock company are conducted by its managers and employees, under the direction of the chief executive officer (CEO) and the oversight of the board of directors. The board of directors is composed of inside and outside directors, who are elected by the shareholders. • Inside directors are usually part of the company's senior management team, such as the chief financial officer (CFO) and chief operating officer (COO). • Outside directors are not employees of the firm. They frequently are senior executives from other firms or full-time professionals who are appointed to a board and who serve on several boards simultaneously.

Evaluate value and cost drivers that may allow a firm to pursue an integration strategy.

• To address the trade-offs between differentiation and cost leadership at the business level, managers may leverage quality, economies of score, innovation, and firm's structure, culture, and routines. • The trade-offs between differentiation and low cost can be addressed either at the business level or at the corporate level.

Describe different organizational structures and match them with appropriate strategies.

• To gain and sustain competitive advantage, not only must structure follow strategy, but also the chosen organizational form must match the firm's business strategy. • The strategy-structure relationship is dynamic, changing in a predictable pattern---from simple to functional structure, then to multidivisional (M-form) and matrix structure--- as firms grow in size and complexity. • In a simple structure, the founder tends to make all the important strategic decisions as well as run the day-to-day operations. • A functional structure groups employees into distinct functional areas based on domain expertise. Its different variations are matched with different business strategies: cost leadership, differentiation, and integration. • The multidivisional (M-form) structure consists of several distinct SBUs, each with its own profit-and-loss responsibility. Each SBU operates more or less independently from one another, led by a CEO responsible for the business strategy of the unit and its day-to-day operations. • The matrix structure is a mixture of two organizational forms: the M-form and the functional structure.

Describe and evaluate different options firms have to organize economic activity

• Transactions cost economics help managers decide what activities to do in-house ("make") versus what services and products to obtain from the external market ("buy") • When the costs to pursue an activity in-house are less than the costs of transacting in the market, then the firm should vertically integrate

Describe the two types of vertical integration along the industry value chain: backward and forward vertical integration.

• Vertical integration denotes a firm's value added --- what percentage of a firm's sales is generated by the firm within its boundaries. • Industry value chains depict the transformation of raw materials into finished goods and services. Each stage typically represents a distinct industry in which a number of different firms are competing • Backward vertical integration involves moving ownership of activities upstream nearer to the originating (inputs) point of the industry value chain. • Forward vertical integration involves moving ownership of activities closer to the end (Customer) point of the value chain