Strategy
Organizational Inflexibilities
"Non-Ambidextrous" - can't play 2 games at once - need different skills, resources, culture, business models, metrics of success
Metrics of "Better" (How to compare competitive advantage)
- Long run profit performance - economic value added - ROA, ROE Market Value - triangulate and use multiple metrics to evaluate company
Motivation for Integration: Horizontally
- Market Power (increase footprint in market, decrease competition) - synergies: economies of scope (having multiple related companies = lower cost/improve quality - Scale common resources (brand, IT) - reduce risk
Types of Revenue Models
- Product + complement (razor + blade) - Freemium - two sided market: Google gives free service but charges ads - Platforms/ecosystems (Facebook)
Foster's Discontinuity and Disruption (And its limitations)
- Response to 3part test - Discontinuous innovation = better in NEW Sways (competitors enter niche market) - New tech overtakes old (S-curve) - Attackers are quick and dominate market Themes of cognition, vested interest, cannibalization, inflexibility Limitations: - strong emphasis on organizational limits (blame on managers) - idea of discontinuitty was linked by others to radical innovation
Value network
- Service industries - All different aspects of firm are not in specific order of occurrence/importance - all interrelated
Positive Feedback
Enhancement or amplification of effect by its own influence on the processes that give rise to it
Source of Competitive Adv.: Value criterion
Increasing EVA
Implications of Network Effects (Demand side positive feedback)
Increasing returns: more users --> more value Path Dependence: more early users = long run success Bandwagon Effects Tippy markets: only one tech is adopted in market
Industry Life Cycle
Intro > Growth > Peak > Shakeout > Maturity - more firms enter market --> create more sales - price declining drives sales - as more firms enter, price = more competitive
PESTEL Framework
Political Economic Sociocultural Technological Ecological Legal external factors to consider that impact a company
Positive Feedback: Supply Side
Production/supply refers to emergence of dominant design as more of product is made, costs lowered due to learning/knowledge accumulation
Isolating mechanisms
barriers to imitation/replication of firm's competitive advantage causal ambiguity, complexity, tactic knowledge, resource mobility barriers, etc. typical response is just to raise cost of replication (not impossible, just expensive to copy)
Dueling Standards
biuld installed base, create network effect
Platforms
collections of standards orchestrating set of complementors and network effects ex: FB, google search, amazon strike balance b/t collab and competition
Technology S Curve
A) experimentation: era of ferment (many designs attempted, many firms enter/exit) B) Dominant Design: standardized set of features, shake out of firms that don't adopt C) Diminishing Returns - overall S-curve is an aggregate of mini s-curves
Viability Revenues
ARC + Scope -> Value prop -> realization of value -> Revenues!
Source of Competitive Adv.: Rarity criterion
Ability to increase EVA is not commonly available to firms
Competence-Destroying Innovation
An innovation that renders obsolete existing knowledge and skills **firm's capabilities (high end)
Value-Creating M&A: Leveraging
Applying OWN capabilities
Cognitive Limitations
Assumptions: - to take evolutionary approach to tech - paying more attention to CURRENT customers, markets, competitors - Assuming they can respond later
Types of Vertical Integration
Backward Integration: to raw materials Forward Integration: to distribution Horizontal Integration: to same business Diversification: to different business
Tata Nano Takeaways
Capacity case How much capacity should one create? market signals: - couldn't keep up with demand/production - majority of customers were previous car owners, not new car owners Invention = something new innovation = something that impacts societal needs
Network externality (network effect)
Choices of users affect value for other users
Disruptive Innovation
Christensen Disruptive: different dimsions, actually perform worse but may appeal to niche markets, different markets, lower-end in main market - eventually catches up with needs of mainstream markets **main stream market needs (high end)
Mergers
Combining 2 companies (friendly approach, similar size)
Positive Feedback: Demand Side
Consumer preferences refers to values for customers created by interface standard on a network - value comes from other users on that network
Platform Strategies
Coring: build platform around key function (Google Search) Tipping: Challenge existing platform(iPhone) Trojan Horse: attacker that undermines competitor from within
Generic Business Strategies
Cost Leadership (similar to competitors at cheaper price) Differentiation Advantage (unique items at premium price)
Architectural Innovation
- Tech of the components stays the same, but the configuration of the components is changed to produce a new design. - innovation in linking components - better solution for ill-equipped firms to make b/c current architecture (dominant design) is already embedded into organization * - incremental refinement within existing architecture **effect on current systems (high end)
Competitive Advantage
- ability to outperform competition
Purpose of M&A
- access new markets/tech - overcome competitive disadvantage - scale - stretching/leveaging - market power - private info Bad reasons: selfish managers
Durability and Relevance
- arguably biggest challenge - requires dynamic capabilities - core competencies become core rigidities (something that gets in the way)
Redfin Reading Takeaways
- brokerage, tech-enabled real estate business model - challenges with making profit: how to pivot? - entire BM relies on reducing costs - Core problem: not enough customers and they want agents
Starbucks Reading Takeaways
- capabilities: customer service, loyalty app, third place experience - resources: brand awareness, global reach, access to tech infrastructure, supplier relationship - imitation: easy to copy what Starbucks does - Durability: not easy to maintain everything it takes to make a cup of coffee - Relevance: keeps up with food trends and consumer preferences
Capabilities
- capacity to actually DO something; to perform a particular activity - deploy/combine/link resources
A Value Network Perspective
- companies look to leading customers to understand what products to dev'p - disruptive innovation --> creates low margin products for low/other end of market - resource dependance theory (reliance on exist. customers/markets)
Economic Value Added (EVA)
- difference between obtained value and costs to provide product/service
Realization (Revenue Model)
- how does firm convert EVA to revenue stream?
Dual strategies
- integrated - easy to get stuck in middle (have mediocre value and mediocre cost) - possible if there is no tradeoff between quality or price - ex: Toyota (increase in quality means decrease in amount of after-market repairs (decrease cost) - requires significantly different business model
Four themes of strategy
- long-term oriented - top management-related - resource allocation - integrative and coordinated
Do M&A's create value?
- many actually destroy shareholder value - company acquiring may pay more than market value for company - long-term effects
Motivation for Integration: Vertically
- market power (increase entry barriers for competitors, own distributors, etc.) - secure critical supplies - lower cost/improve quality - improve scheduling/planning
Activities/resources/capabilities (VARS)
- must introduce something new to the WAY business is operated - key enabler to create new business model - within firm and/or value chain (value network) - can happen within firm or can e outsourced
Multiple Standards emerge when...
- network effects aer small/differentiation (high demand for variety) - network effects exhibit diminishing returns - Different networks of users coalesce around different standards (windows, apple) - Multi-homing: low adoption costs
Disruption
- not necessarily first mover, but first to get it right - idea that industry shifts often coincide with emergence of new leaders - unique window in which companies become vulnerable
Resources
- tangible (financial, physical) and intangible (tech, relational, human capital) - what a company possesses
Standards
- tech that is the ONLY or dominant tech sold/used in market - desirable; companies aspire to have their tech be the standard - must be clear on what mechanism will drive potential standardization
Unrelated vs. Related Integration
- the more unrelated all of the businesses are, the lower the performance Single business firms < Dominant < Related > Unrelated
Value chain
- typical for manufacturing companies - activities being performed in a company - primarily activites: in/out bound logistics, marketing/after sale services - supported by "support activities" : R&D, HR, etc.
Winner's Curse
- winner of bid must pay highest bid (overvalue)
Different Types of Discontinuity
1. Competence-destroying innovation 2. Architectural Innovation
Scope of Enterprise
1. Customer segments 2. horizontal scope: how many different products/services 3. Vertical scope: along value chain
M&A: 3-Part Test
1. Does new business have potential for valuable synergies 2. Potential value is not dissipated by net price paid 3. There is a strong and credible post merger plan for realizing synergies
Sustaining Competitive Edge
1. Heterogenity: where do interfirm differences in performance come from? 2. Sustaining: how do performance advantages enjoyed by a firm become durable?
Value Proposition (VARS)
GOAL: Increase EVA - how new business model is creating/adding value to existing one - relative to existing offerings - business can change within certain range and still make a profit - create more value or reduce cost
Incremental Innovation
Gradual changes ; evolutionary **Current tech trajectory (low end)
Sustaining Innovation
Sustaining: improves tech performance along mainstream markets and dimensions - outstrips needs of mainstream market **main stream market needs (high end)
Modular Innovation
The basic configuration stays the same, but one or more key components are changed. **effect on current systems (low end)
Interface Standards
The basic design elements on which interfaces in the system are based Set by: - private standards: windows, iOS, etc. - Sponsored Consortia: DVD, BluRay - Non-gov't - Gov't ex: HTML, MP3, Bluetooth
VRI: Competitive Rarity
Valuable But not rare or inimitable
VRI: Temporary competitive advantage
Valuable and Rare But not inimitable
VRI: Sustained competitive advantage
Valuable and Rare and inimitable
VRI Framework
Valuable, rare, inimitable
Activities
Value chain/network
Direct Network Effects (Physical Networks)
Value generated by direct user interactions
Indirect Network Effects (virtual networks)
Value generated by users using complementary products increase in customer leads to increase in complementary services
Viability Costs
Value pro/rev model -> ARC + Scope -> Costs!
VARS
Value proposition Activities/resources/capabilities Realization (revenue model) Scope of enterprise - highly interdependent; all aspects must be aligned - new business model can start from change in any of the 4
Corporate Scope Dimensions
Vertical: value chain Horizontal: products/services Geographic
BCG Growth-Share Matrix
Want to move everything to the star to decide allocation of capital
Innovator's Advantage - 3 Part Test
Why leading firm doesn't pursue innovation Why innovation eventually beats leader's core business Why leaders can't catch up later
Vested Interest & Cannibalization
Within organization's resistance - manager's success rooted in old tech - high asset commitments to old tech - new tech explored within existing units Unwillingness to cannibalize existing business by investing in new tech
Limited Fit
acquirer ignores capabilities
Efficient Market Wall
acquirers only expected to make (risk-adjusted) market rates of return from M&A **Unless they can see unique ability to generate value
Value + Cost strategies
cost leadership strategy - low cost - broad target market Differentiation - high value - broad target market focused low cost - low cost - narrow scope - avoid customer segments/channels that are too costly to serve - ex: Ikea Focused differentiation - high value, narrow target - seen as premium - promotes exclusivity
Radical Innovation
creation of new tech **Current tech trajectory (high end)
Value-Creating M&A: Enhancement/Stretching
dev'p NEW capabilities
Combo of DomDesign + Interface Standards
ex: iOS, Windows, Android
Dominant Design
generally adopted config. that defines look, functions, etc. for product - typical way of designing - ex: touch screen on smart phones
Four potential challenges to sustaining competitive advantage
imitation (threat to rarity) replication (threat to rarity) non-durability (threat to value creation) non-relevance (threat to value creation)
competence enhancing innovation
innovations build on the firm's existing knowledge base **firm's capabilities (low end)
Product Life Cycle
introduction, growth, maturity, decline
Goal of strategy
long-run performance (profits)
Standards strategies: open vs. closed strategy
open: less control, less value capture, maximize value creation/market acceptance - the more open a strategy is, the more ownership the firm gives up closed: maximize value capture and control - better coordination
Acquisition
purchase/takeover of company (can be friendly or unfriendly)
Corporate Strategy
pursuit of competitive advantage through configuration and coordination of company's multi-market activities Involves decisions and actions about: - scope of firm, coordinating synergies across businesses, corprorate transactioins
Diversification Premiu
stock price of diversified firms is greater than comparable "pieces"
Diversification Discount
stock price of highly diversified firms is valued at less than the sum of their individual business units
Lock-in Users
users face switching cost due to investments into specific tech use porting tech to reduce costly complements