UARK MGMT 3013 Final Review

Risks of Blue Ocean Strategy

- A blue ocean strategy is difficult because the 2 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"* and succeed at neither business strategy, leading to a competitive disadvantage

Business Level Strategy: Questions

- Who? - which customer segments will we serve? - What? - customer needs, wishes and desires will we satisfy? - Why? - do we want to satisfy them? - How? - will we satisfy our customers' needs?

SWOT Analysis: Internal and External

-*Strengths and Weaknesses*: resources, capabilities and competencies; impact can be determined by applying the VRIO framework -*Opportunities & Threats*: analysis of general environment with PESTEL and Five Forces models as possible tools

Factors that determine the intensity of rivalry among competitors?

-*competitive industry structure* -*industry growth rate (when high - consumer demand rises and price competition decreases and when low or negative industry growth - competition becomes fierce) -*strategic commitments* (if firms make commitments, rivalry among competitors are more intense) -*exit barriers* (when high- reduces profit potential because excess capacity still remains but when low- its more attractive because it allows underperforming firms to exit more easily)

What are the elements of continuum from perfect competition to monopoly?

-*perfect competition*: small, price-taking firms providing a commodity product and lower entry barriers -*monopolistic competition*: many firms, a differentiated product, come obstacles to entry and the ability to raise prices for a relatively unique product while retaining customers -*oligopoly*: few large firms, differentiated products, high entry barriers, some degree of pricing power -*monopoly*: one, often large firm supplying the market, unique product and the challenges to moving into the industry tend to be high

Strategic Group Example: Airline Industry

-Group A: they tend to offer lower ticket price but serve fewer route due to point-to-point airlines (Virgin Atlantic, Alaska Airlines, JetBlue, Southwest) -Group B: higher ticket prices, more routes, differentiated, and offering full services using a hub-and-spoke system (American, Delta and United) -competitive rivalry is strongest between firms within the same strategic group -external environment/5 forces affects strategic groups differently, some groups are more profitable than others

The 4 I's

-Idea -Invention -Innovation -Imitation

Limitations of Accounting Profitability

-accounting data are historical and not timely (backward looking) -accounting data does not consider off-balance sheet items (such as pension obligations/operating leases) -accounting data focus mainly on tangible assets, which are no longer most important

Limitations of Economic Value Creation

-determining the value of a good in the eyes of the consumers is difficult to determine -value of a good in the eyes of a consumers changes based on income, preferences, time and other factors -to measure firm-level competitive advantage, we must estimate the economic value created for all products and services offered by a firm

Low Barrier

-lower profit potential -less competitive, corporations can leave industry and increase profit potential

Balanced Scorecard: Disadvantages

-primarily intended for strategy implementation not formulation -provides limited guidance on which metrics to choose -largely dependent on the skills of managers -must be able to formulate good strategy (must accurately translate strategy into measurable objectives)

Limitations of Shareholder Value Creation

-stocks can be highly volatile, making it difficult to assess firm performance, particularly in short term -overall macroeconomic factors such as economic growth or contraction, the unemployment rate and interest and exchange rates all have a direct bearing stock prices -stock prices frequently reflect psychological mood of investors, which can be irrational

Factors that influence the power of suppliers? (is high when....)

-suppliers' industry is more concentrated then the industry it sells to -suppliers do not depend heavily on the industry for a large portion of their revenues -incumbent firms face significant switching costs when changing suppliers -suppliers offer products that are differentiated -no readily available substitutes that the supplier offers -suppliers can credibly threaten to forward-integrate into the industry

What are the elements of competitive industry structures?

-the number and size of it competitors -firm's degree of pricing power -type of product or service (commodity or differentiated product) -height of entry barriers

Factors that influence the power of buyers? (is high when....)

-there are few buyers and each buyer purchases large quantities relative to the size of a single seller -products are standardized and undifferentiated commodities -buyers are facing low or no switching costs -buyers can credibly threaten to backwardly integrate into the industry

SWOT Analysis Steps and Strategic Questions

1. *Focus on Strengths-Opportunities* - How can the firm use internal strengths to take advantage to external opportunities? 2. *Focus on Weaknesses-Threats* - How can the firm overcome internal weaknesses that will make external threats a reality? 3. *Focus on Strengths-Threats* - How can the firm use internal strengths to reduce the likelihood and impact of external threats? 4. *Focus on Weaknesses-Opportunities* - How can the firm overcome internal weaknesses that prevent the firm from taking advantage of external opportunities?

What are the 2 pricing options that Blue Ocean Strategy grants?

1. Allows a firm to charge higher prices than the cost leader based on higher value creation 2. Allows a firm to charge lower prices than the differentiator due to lower cost structure and make up for loss profit margin through increased sales

Balanced Scorecard: 4 Key Questions

1. How do customers view us? Customer perspective drives profits 2. How do we create value? Value-added activities and structures 3. What core competencies do we need? Identify, hone, leverage 4. How do shareholders view us? Financial performance

Triple Bottom Line: Dimensions

1. Profits - economic dimension captures the necessity of businesses to be profitable to survive 2. People - the social dimension emphasizes the people aspect 3. Planet - an ecological dimension emphasizes the relationship between business and the natural environment

Innovation Process

4 step process which describes the discovery, development and transformation of new knowledge

How is economic value created?

=Value-Cost or =Produce Surplus + Consumer Surplus Producer Surplus = Price - Cost Consumer Surplus = Value - Price

6th Force - Strategic Role of Complements

Porter enhanced his 5 forces model by highlighting positive sum competition via firm cooperation that yields complements

Switching Costs

a customer can go to different companies in the same industry, gives companies a low profit potential

Resource Immobility

a firm has resources that tend to be "sticky" and do not move easily from firm to firm

Resource Heterogeneity

a firm is a bundle of different resources, capabilities and competencies that differ across firms

Innovation Ecosystem

a firm's embeddedness in a complex network of suppliers, buyers and complementary, which requires interdependent strategic decision making

Business Model

a firm's plan that details how it intends to make money -razor-razorblades, subscription, pay as you go, freemium, wholesale, agency and bundling

Core Rigidity

a former core competency that has become a liability because the firm failed to hone, refine and upgrade the competency as the environment changed

Open Innovation

a framework for R&D that proposes permeable firm boundaries to allow a firm to benefit from internal and external ideas and inventions; -sharing goes both ways, some external are insourced while others are spun out (firms may commercialize its ideas and ideas from other firms) depending on absorptive capacity

SWOT Analysis

a framework that allows managers to synthesize insights obtained from an internal analysis of the company's strengths and weaknesses with those from an analysis of external opportunities and threats to derive strategic implications

Dynamic Capabilities Perspective

a model that emphasizes a firm's ability to modify and leverage its resource base in a way that enables it to gain and sustain competitive advantage in a constantly changing environment -in response, a firm may create, deploy, modify, reconfigure or upgrade resources provide value to customers and/or lower costs in a dynamic environment -resource stocks -resource flows

Architectural Innovation

a new product in which known components based on existing technologies reconfigured in novel way to attack new markets

Primary Activities

add value directly when transforming inputs into outputs as the firm moves a product/service horizontally along the internal value chain (supply chain management, operations, distribution, marketing/ sales, after-sales service)

Support Activities

add value indirectly; but are necessary to sustain primary activities (R&D, Info Systems, Accounting, Finance, HR and firm infrastructure: processes, policies and procedures)

Balanced Scorecard: Advantages

allows managers to.... -communicate/link strategic vision to responsible parties within the organization -translate the vision into measurable operational goals -design/plan business processes -implement feedback and organizational learning to modify and adapt strategic goals when indicated -can accommodate both short- and long-term performance metrics

Return on Assets (ROA)

an indicator of how profitable a company is relative to its total assets; an idea as to how efficient a company's management is at using its assets to generate earnings =(Net Income / Total Assets)

Disruptive Innovation

an innovation that leverages new technologies to attack existing markets from the bottom up -begins as low-cost solution to a problem

Resources

any assets (tangible or intangible) that a firm can draw on when formulating and implementing a strategy -cash, facilities, machinery, intellectual property -reinforce a firm's core competencies

Isolating Mechanisms

barriers to imitation that prevent rivals from competing away the advantages firm may enjoy; if one or more isolating mechanisms are present-a firm may strengthen it's competitive advantage -better expectations of future resource value -path dependence (impact of past decisions - reputations/experience) -causal ambiguity (cause and effect of success unclear to others) -social complexity (interaction of different social/business systems) -intellectual property protection (critical intangible resources - patents, copyrights)

Incremental Innovation

builds on established knowledge base and steadily improves an existing product or service for existing markets -EX: cellphones

Wholesale

bulk purchase at a reduced price to be resold (retail)

Blue Ocean Strategy

business-level strategy successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs (offer a differentiated product or service at low cost) -EX: Australian gazebo company was selling gazebos that were outrageously pricy so the show 'Profit' came in and fixed a lot and they ended up getting a contract with Costco

Backward Vertical Integration

changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain (raw materials and components) -toward the supplier/inputs

Agency

commissioned agent sells the product

Complementor

company that provides a good or service that leads customers to a firm's offering when the 2 or more combined

Power of Buyers

concerns the pressure an industry's customers can put on the producers margins in the industry by demanding a lower price or higher product quality -when buyers obtain price discount, it reduces the firm's top line (revenue) -when the buyers demand higher quality and more service, it raises production costs

Co-Opetition

cooperation by competitors to achieve a strategic objective (EX: Samsung screens and Apple)

Rivalry Among Competitors

describes the intensity with which companies within the same industry jockey for market share and profitability exit barriers

Producer Surplus (Profit)

difference between price charged (P) and cost to produce (C) = P - C

Consumer Surplus

difference between the value a consumer attaches to a good or service (V) and what the consumer paid for it (P) = V - P

Activities

distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services

Radical Innovation

draws on novel methods or materials derived either from an entirely different knowledge base or from recombination of the existing knowledge bases with a new stream of knowledge -targets new markets by using new technology

Triple Bottom Line

firm performance measure that takes into account the combination of economic, social, and ecological (profits, people and planet) concerns to achieve a sustainable strategy

Resource Stocks

firm's current level of intangible resources -intangible resource stocks are built through investments over time (dynamic capabilities, new product development, knowledge capital, patents, engineering expertise, innovation capability and reputation for quality)

Resource Flows

firm's level of investment to maintain/build resource (signing or retention bonus, knowledge management, consulting contracts)

PESTEL Model

framework that categorizes and analyzes an important set of external factors that can affect a firms potential to gain and sustain a competitive advantage -*P*olitical - government, laws and regulation -*E*conomic - interest rates, currency exchange, price stability -*S*ociocultural - societies, culture, norms, values -*T*echnological - innovations in product/service -*E*cological - environment issues, pollution, global warming -*L*egal - regulation changes, anti-trust laws, class action lawsuits

5 Forces Model

framework that identifies 5 forces that "determine the profit potential" of an industry and shape a firms competitive strategy; stronger forces = lower profit 1. Threat of Entry 2. Power of Suppliers 3. Power of Buyers 4. Threat of Substitutes 5. Rivalry Among Competitors

Freemium

free + premium (trial offers)

Return on Invested Capital (ROIC)

good proxy for firm profitability, measures how effectively a company uses its total invested capital (which consists of shareholders equity and interest-bearing debt) = (Net Profits / Invested Capital) - Total Invested Capital = Shareholder Equity + Interest Bearing Debt

Shareholders

individuals or organizations that own one or more shares of stock in a public company; legal owners of public companies

Mobility Barriers

industry specific factors that separate the strategic group from another (capital requirements)

Razor-Razorblades

initial, low-cost product drives complement demand

Intangible Resources

invisible, no physical attributes (culture, knowledge, brand equity, reputation, intellectual property)

High Barrier

large capital investments, equipment and factory

Reservation Price

maximum price a consumer is willing to pay for a product or service based on total perceived benefits -EX: buying a laptop (Dell being cheaper) but (Apple MacBook is your max reservation price) but still end up buying MacBook because of the features

Return on Revenue (ROR)

measure of company profitability, can increase ROR by increasing profit by changing the company sales mix or by cutting expenses = (Net Profits / Revenue)

Accounting Profitability

measured through financial data and ratios derive from accounting data (income statements, balance sheets)

Return on Equity (ROE)

measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested = (Net Income / Shareholder's Equity)

Bundling

negatively-correlated products sold together (software suite)

Threat of Entry: Barriers

obstacles that determine how easily firms can enter the industry (economies of scale, network effects, customer switching costs, capital requirement, government policy, credible threat of retail)

Industry Convergence

occurs when 2 unrelated industries come together to satisfy customer needs often due to technology advances

Capabilities

organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically

Minimum Efficient Scale (MES)

output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position achievable through economies of scale

Subscription

pay for access for a specified term

Pay-As-You-Go

pay for services consumed (EX: utilities, Zipcar, Uber)

Power of Suppliers

pressures that industry suppliers can exert on an industry's profit potential -reduces a firm's ability to obtain superior performance of that by powerful suppliers can raise the cost of production by demanding higher prices for their inputs OR reducing the quality of the input factor or service level delivered

Threat of Substitutes

product or services available from outside the industry can come close to meeting the needs of current customers -threat is high when... substitute offers an attractive price performance trade off, buyers cost pf switching to the substitute is low

Complements

product, service, competency that adds value to the original product with 2 or used in tandem -enhances profit potential for the firm and industry as a whole -increases demand for the primary product

Closed Innovation

proposed impenetrable boundaries; all R&D is conducted in-house and not allowed to leave firm; outside ideas/projects cannot enter (leads to not invented here syndrome)

VRIO Framework

provides a resource-based framework with 4 key criteria to explain and predict firm-level competitive advantage -*Valuable* - resource that helps a firm exploit external opportunities and offset external threats -*Rare*- resource that few firms possess -Costly *Imitation*- resource that is costly to imitate or substitute -*Organized*- to capture the value of a VRI resource, effective organizational structure and coordinating systems are crucial

Cost Leadership

reducing the firm's costs below that of its competitors while offering adequate value by focusing attention and resources on reducing costs in order to offer lower prices to customers -create similar value product at lower cost than competitors

Threat of Entry

risk of potential competitors entering the industry which lowers the industry's profit potential (Amazon)

Intergroup

rivalry AMONG strategic groups

Intragroup

rivalry WITHIN strategic groups (more intense)

Differentiation Strategy

seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels, allowing the firm to charge higher prices to it competitors -create higher value for customers than that of competitors

Strategic Group

set of companies that pursue a similar strategy within a specific industry as they strive for competitive advantage -the # of different business strategies in an industry determines the # of strategic groups

Value Innovation

simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the customers (considered a cornerstone of Blue Ocean Strategy) -Lower Costs: eliminate or reduce -Increased Perceived Consumer Benefits: raise or create

Balanced Scorecard

strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals.

Are primary activities or support activities most likely to be outsourced?

support activities

Economic Value Creation

the difference between what a buyers willingness to pay for a product or service and the firm's total cost to produce it -value, price, cost

Vertical Integration

the firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs -the stage of the industry value chain

Business Level Strategy

the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market

Value Chain Analysis

the internal activities a firm engages in when transforming inputs into outputs; each activity add incremental value -allows managers to obtain a more detailed and fine-grained understanding of how the firm's economic value creation breaks down into a distinct set of activities that help determine perceived value and the costs create it -primary and support activities

Risk Capital

the money provided by shareholders in exchange for an equity share in a company; can't be recovered if the firm goes bankrupt

Innovation

the successful introduction/ commercialization of a new product or process or modification and recombination of existing ones in their favor and achieve a competitive advantage -drives competition -simultaneously creates and destroys value -first mover advantages

Shareholder Value Creation

total return to shareholders as a return on risk capital that includes stock price appreciation plus dividends received over a specific period of time

Core Competencies

unique strengths, embedded deep within a firm, that are critical to gaining and sustaining competitive advantage (drives competitive advantage for a firm) -allow a firm to differentiate its products and services from its rivals creating higher value for the customer or offering products and services of comparable value at lower cost

Opportunity Costs

value of the best forgone alternative use of resources employed

Tangible Resources

visible, physical attributes (labor, capital, land, facilities, equipment, supplies)