3P9

Bass model for consumer adoption

initially innovators, later imitators different marketing methods for each!

Evolutionary economics and dynamic capabilities

- decisions made by a firm determined by established routines e.g. methods of production, hiring policies etc - routines can change slowly over time - firm needs to continuously imrpove routines to ensure survival DYNAMIC CAPABILITIES - can adapt their resources and capabilities and exploit opportunities created by market shocks and discontinuities

Implication of specialisation

- High productivity requires specialisation - specialised individuals need to be integrated, creating TWO PROBLEMS::: - need for cooperation (employees goals not same as owner's goals). SOLUTION: control mechanisms e.g. hierarchical supervision performance incentives that align individual and firm goals, shared values that create common purpose - need for coordination (managing interdependency) SOLUTION: rules and directives, organisational routines, mutual adjustment

Process innovation

- are defined as elements introduced into a firm's production or service operation to produce a product or render a service (Damanpour 2010; Utterback and Abernathy 1975) - are orientated towards the efficiency or effectiveness of production (and distribution) and may result in a decrease in the cost of production (and distribution) (Schilling 2005) • Damanpour (2010) - reviewed the major studies on the effect of size and competition on product or process innovations - found no evidence of substantial differences in the strength of the influence between the two types of innovation. • Process innovation typically follow product innovation?

Exploiting standards

- come to market ahead of competition with excss power on concept, design, or delivery - build expectations - develop complementary products and services - aggressive pricing: "give product away" - freemium model with PC games, angry birds, Minecraft etc. • "Control point" competition - License key technologies - Control/sell key components - Uniqueness • "Level ground" competition - Open the standard to trigger adoption, forestall fear of monopoly rent extraction - Compete "head to head," using low cost or superior execution (speed to market with innovations, service, distribution) - Create standards in complementary assets not core areas to stimulate entry and competition (Jacobides 2006, Research Policy)

Property rights theory - role of contracts

- firms use contracts to perform tasks outside firm list - set of tasks to be performed - remedy if one party doesn't keep its side - cost to perform tasks - protect each party from opportunistic behaviour of the other party but SELDOM COMPLETE: - often involve ambiguity - do not anticipate all possible contingencies - rights and responsibilities not always clear this because of: - bounded rationality - difficulties in specifying/measuring performance unambigiously - asymmetric information: parties might not have equal access to contract-relevant info

Freemium model

-Free + premium business model -Provides the basic features free of charge -Users pay for premium services - Such as advanced features or add-ons Examples: - Software trials with an option to buy see attached

Marketing planning process

1) Situation Analysis 2) market segmentation 3) targeting 4) positioning 5) marketing mix 6) execution

Sources of economies of scale

-spreading fixed costs over a large volume -utilizing production facilities more intensively -increasing bargaining power with suppliers -digitalisation --- production and distribution can be coupled into a single business model for a digital format --- saving on inventories (e.g. iTunes vs HMV, Amazon vs Borders Books)

Steps of brand building

1. Identify: Who are you? 2. Meaning: What are you? 3. Response: What about you? 4. Relationships: What about you and me?

Three determinants of industry profitability

1. The value of the product to customers 2. The intensity of competition 3. Relative bargaining power at different stages of the value chain

Key success factors for firms

1. What do customers want and who are they? 2. How do firms survive the copmpetition? e.g. fashion clothing 1. Demand segmented by garment type, style, quality, colour Customers pay price premium for brand, style, exclusivity and quality 2. Intensely competitive due to low entry barriers, low seller concentration and strong retail buying power Differentiation can yield substantial price premium but imitation rapid Key success factors: Combining differentiation with low-costs Key differentiation variables: design, speedy to fashion trends, brand reputation, quality Cost efficiency requires manufacture in low wage countries

Examples of how competition affected automotive industry

1960s - high return on equity due to low threat of entry (economies of scale, retaliation, access to distribution), low rivalry (3 major firms), lower buyer and supplier power 1990s - lower return on equity. Threat of entry still low (capital requirements, too many players)

Business Model Innovation

A business model is how the firm captures value from its products, technologies and services. It can be seen as a bridge between technologies and markets. A firm should seek to establish who its customers are, what they value and what the structure of its value chain is and then build a business model around that. Large firms struggle to innovate their business model because no single division owns it or controls it. It was likely established at the founding of the firm and has changed very little since then. However, start-ups see BMI as a low-cost strategy for innovation that can allow them to displace incumbents and has been shown to be as effective in old industries as it is in news ones. Business Model Innovation brings more value to firms that Process or Product innovation because it is hard to identify the exact source of the advantage and, even if it can be identified, it is hard to replicate because no two firms are the same. This said, however, there are challenges associated with business model innovation: 1. Cognitive biases of management which prevent the firm from "thinking outside the box". 2. The inability of the firm to reconfigure its core competencies to suit the new business model 3. The inability of the firm the coordinate the required changes 4. Political issues within the firm Dominant Logic: New products may be incompatible with a firm's business model, meaning it loses the opportunity to capture value from them. Creating a new business model can be hard due to the bounded rationality in which the firm operates and its culture. Xerox, for example, failed to capitalise on develops such as the PC and ethernet networking because they were not compatible with its service-based business model. Made up of: - bounded rationality - metaphors/rules/stoies Cribb A business model is the approach to doing business that describes the revenue model and the accompanying cost structure that enables the firm to deliver the customer value proposition using the marketing mix. A business model summarises the architecture and logic of a business and defines the organisation's value proposition and its approach to value creation and value capture. Some definitions might also include the value network i.e., which firms the firm forms collaboration to design and deliver the proposition. Other similar definitions are also acceptable as there are no standard agreed definition Addendum to cribb 2 Business model innovation is important in strategy formulation as it typically creates superior competitive advantage compared to other forms of innovation (e.g., product and process innovations) because: i. For competitors it is difficult to identify (as one cannot understand easily what components have been changed and how they have been put together) - systemic nature of change ii. It is difficult for competitors to replicate even if they were able to identify the components of change

Competitor definition

A firm whose strategic choice adversely affects the performance of another Direct: directly affects Indirect: strategic choice of firm affects performance of another because of a strategic reaction by a third firm

Bertrand Duopoly

A model of duopolies under which two firms simultaneously choose the price for a good. In the Bertrand model, each firm selects its price and stands ready to sell whatever quantity is demanded at that price • Each firm takes the price set by its rival as a given and sets its own price to maximise its profits • In equilibrium, each firm correctly predicts its rivals price decision • If the two firms are identical to begin with, they will be setting the same price as each other

Outsourcing R&D - good or bad for a software company?

Advantages of outsourcing R&D include (i) Potentially less expensive if R&D is used on an ad hoc basis (ii) Gain from outside expertise and competence (iii) Flexibility to cope with larger projects or to render cost base more variable (iv) Frees management up to focus on more important or strategic issues Disadvantages of outsourcing R&D (i) May be cheaper in-house if R&D is a perpetual and continuing activity (ii) Exposes firm to risk from poor quality or unreliable/unstable provider (iii) Loss of organisational learning (iv) Loss of control over intellectual property (IP). For example, who owns the development (v) Might nurture competitors who can learn and move up the value chain e.g., Hyundai learning from Ford in automobiles Other factors to consider is what aspects of R&D to outsource; degree and seed of technological development and ability to keep up with knowledge

Technical efficiency and agency efficiency

Affected by coordination and control choices (flow of info and distribution of decision making rights) TECHNICAL EFFICIENCY: efficiency in production of goods and services - Coordination affects the technical efficiency by the provision of information needed to exploit economies of scale and scope. - To accomplish improvements in technical efficiency, decision making rights should be allocated to those who have the best and timely information. AGENCY EFFICIENCY: efficiency in transactions required to obtain the good or service - Allocating decision rights to individuals will affect agency efficiency since the decision makers will have the opportunity for selfish behavior. - A balance must be struck between technical and agency efficiencies in the allocation of decision rights.

Competitor based pricing method vs market demand based pricing

An approach that attempts to reflect how the firm wants consumers to interpret its products relative to the competitors' offerings. Competitor based pricing is different to cost-plus pricing relates to what the competitors in the market are pricing similar or substitute goods or complimentary goods. Some methods used for competitor based pricing are: (1) Price matching - guarantee that the product cannot be bought for less or else refund the difference (e.g., John Lewis) (2) Going rate price - similar price is set to competitor but no guarantee as above (Tesco, Sainsbury etc) (3) Predator pricing - set price below competitor to gain market share and also drive competitor out of the market Market demand based pricing is more suitable to take into account market needs and wants and relates to what is in demand - compared to competitor based pricing. Economic issues and elasticity of demand are critical factors to consider. Some methods used for market demand based pricing are: (1) Skimming - useful to 'skim the cream' from the market especially when the product is new and there is little competition. Important to lower the price once market is established. (2) Penetration - start with low price to gain market share quickly. Difficult to increase price subsequently. (3) Segmented pricing - segment the market and charge different prices depending on differences in customers, products and locations. Difference in price is not due to differences in costs. Examples of segmented pricing include first class train fares, 'offpeak' calls by telephone companies.

Story of HONDA

BCG: Entered US market with small 50cc bike which it used to establish foothold Redefined motorbike market by targeting ordinary people and distributing through bicycle shops Followed a policy of developing the market region by region, starting West coast and moving eastwards PASCALE: tried to sell larger bikes but couldn't so settled for 50cc Honda sold through bicycle shops because results were not good through traditional channels chose LA where large Japanese community, suitable climate and growing population

Porter's five forces competition framework

Assumes: industry structure drives competitive behaviour and industry structure is (fairly) stable Competitors made up of and determined by SUPPLIERS • Supplier's price sensitivity • Relative bargaining power POTENTIAL ENTRANTS • Capital requirements • Economies of scale • Absolute cost advantage • Product differentiation • Access to distribution channels • Legal/regulatory barriers • Retaliation BUYERS (vice versa for suppliers) • Buyer's price sensitivity (large % of buyers costs? purchased item commodity or differentiated? competition between buyers? item critical to buyer's own output?) • Relative bargaining power (size of buyer vs seller? buyer's information? ability to backwards integrate?) SUBSTITUTES Buyer's propensity to substitute • Relative prices and performances of substitutes INDUSTRY RIVALRY • Concentration • Diversity of competitors • Product differentiation • Excess capacity and exit barriers • Cost conditions (extent of scale economies, ratio of fixed to variable costs) Divided into • Three sources of horizontal competition - From substitutes - From entrants - From established rivals • Two sources of vertical competition - Power of suppliers - Power of buyers • Profit = (Price-Average Cost) x Quantity Coopetition adds...? 1 Firms often cooperate and compete at the same time in order to create and capture value. The emergence of shorter product lifecycle, convergence of multiple technologies and increasing costs of conducting R&D require firms to have multiple resources in order to improve continuously on delivering the existing value proposition, while exploring new opportunities to enhance innovation. Such multiple resource requirements often do not reside within a single firm and, hence, firms in the same industry often cooperate in order to share such resources and then go on to compete to divide the created value jointly. Such collaborative activity has been called coopetition. Coopetition is the concept that the forces that shape industry profits are to a great extent the result of choices made by the individual firms within the industry. As these firms become savvier regarding the reaction of rivals to their own actions, they will choose actions that reduce the likelihood of losing industry profits to price wars, consumer surplus, and/or ineffective negotiations with suppliers. As each firm comprehends its own role within the industry, firms can collectively fashion strategies that "cause" a force to have only a limited effect. If firms ignore the concept of coopetition, they must resign themselves to simply reacting to the industry forces. 2. Studies on strategic management have focused primarily on inter-firm competition to create competitive advantage. Competition and cooperation have been considered separate modes of firm interaction. However, more recently scholars have been placing emphasis on studies that examine firms simultaneously engaging in cooperation and competition which is called coopetition. Coopetition entails when and how the value network is formed between competing firms in order to develop and deliver the value proposition (shorter product lifecycle, convergence of multiple technologies, increasing costs of conducting R&D). Multiple resource requirements often do not reside within a single firm (a) firms in the same industry often cooperate in order to share such resources, (b) then go on to compete to divide the created value jointly. Coopetition is the concept that the forces that shape industry profits are to a great extent the result of choices made by the individual firms within the industry. 11 As these firms become savvier regarding the reaction of rivals to their own actions, they will choose actions that reduce the likelihood of losing industry profits to price wars, consumer surplus, and/or ineffective negotiations with suppliers. As each firm comprehends its own role within the industry, firms can collectively fashion strategies that "cause" a force to have only a limited effect. If firms ignore the concept of coopetition, they must resign themselves to simply reacting to the industry forces. See clibb for how profit = (price - avg cost)*quantity

Other competition factors

COMPLEMENTS - firms that sell services/products to complement product can exercise bargaining power COOPETITION - firms that cooperate and compete at same time in order create and capture value • Firms often cooperate and compete at the same time in order to create and capture value. - shorter product lifecycle - convergence of multiple technologies - increasing costs of conducting R&D • Multiple resource requirements often do not reside within a single firm - firms in the same industry often cooperate in order to share such resources - then go on to compete to divide the created value jointly. • Such collaborative activity has been called coopetition.

Transaction costs theory

Capitalist economy made up of - market mechanism (prices determine production and resource allocation) - administrative mechanism (production and resource allocation made by managers and imposed through hierarchies) Activities are undertaken by firm or market depending on relative costs Transaction costs - search costs, contract negotiation and monitoring etc Administrative costs - management coordination, employment contracts etc

Identifying differentiation opportunities through value chain

DEMAND SIDE: - what does product need to satisfy (key attributes) - what criteria do customers choose (price premiums with product attributes and patterns of customer preference) - what motivates customers (demographic, sociological, psychological needs of customer) SUPPLY SIDE: - see lectures don't really understand this shit

Competitive advantage from diversification

Economies of scope: - resource sharing across businesses (e.g. BMW Mini sharing engines) - applying common management capabilities Economies from internalising transactions - diversified firm avoids external transactions - has better info on resource characteristics than external markets Related diversification shown to be best

Role of price

Definition - Exchange value of goods/services - Amount of money or _____ • Signaling instrument - important part of product positioning • Instrument of competition - creates image of product in mind of customer! • Often the only marketing mix variable allowing for immediate competitive response As part of the marketing mix, price will help with perceived quality, value and image. High quality usually associated better quality product. Opportunities to gain advantage by using perceptual maps to create a positioning vis a vis price and quality dimensions.

Learning economies/learning curve

Depend of cumulative output rather than rate of output - reduces unit costs through experience Learning leads to lower costs, higher quality and more effective pricing and marketing! distinct from economies of scale - capital intensive tech can offer scale economies even if there is no learning - complex labour intensive processes may offer learning economies without scale economies **LOW COST AIRLINE BUSINESS MODEL CHANGED ECONOMIES OF SCALE AND SCOPE** for airplane industry

Functional (U-form) structure

Each department in the firm is responsible for a particular functional area such as finance or marketing. • U-form promotes performance (efficiency) within the department but makes coordination across departments difficult. • The unitary functional structure is suitable for stable conditions when operating efficiency is the prime consideration.

Critics of Porter

Empirical evidence suggests that only a small percentage of variances in profitability is explained by industry differences (e.g., Rummelt, 1991) • Firms might not adopt generic strategies - Firms do pursue multiple generic strategies (e.g., Dell) - Successful differentiators can become cost-leaders - Quality and low-cost can be combined in different ways - In some markets cost is largely irrelevant (e.g., digital technologies where MC is close to zero) • Competitive analysis seems insufficient in developing expectations about the value of a future resource to be acquired (i.e., at a cost significantly below its economic value) • An 'efficient market hypothesis' type logic suggests that even if some industries are more profitable than others, they cannot be so for long

Reasons to make products in house

Ensures steady supply of raw materials - if source is illiquid and inefficient - if traded freely on commodity markets then no benefit from making - an arms-length transaction is simply internalised within the firm if transfer prices are set at the market rate - constant transfer price will lead to inefficient use of raw material HIGH TRANSACTION COSTS - agency costs and metering problem - relationship specific assets and holdup problem - inability to contract due to incomplete contracts

Concentration definition

Extent to which a few firms control an industry More concentrated market: - fewer firms in production - more unequal distribution of market shares Generally unilateral or coordinated action to increase prices and lower output

What is a real option

First para what is: Second: how a sports firm can use real options to increase its value

Purpose of franchising

Franchising is an arrangements whereby a company distributes products - usually of a 'famous' brand type. For the privilege the franchisee pays a capital sum (at the start of the arrangement) plus a stream of royalty payments, dependent on the success of the franchise. Franchising would be advantageous: (1) The arrangement typically involves tight control over the marketing elements of the business such as brand name, unique selling points to employ, in-store promotions, etc. A unified marketing effort across the outlets is essential for the firm to penetrate the market, and this is arguably easiest to achieve by franchising. (2) The franchisee are strongly motivated to sell a high volume of the products (since their success depends on it) (3) The firm does not have to invest in any capital (this is usually provided by the franchisee), thus the strategy is low risk (for the firm) if the product fails no capital has been wasted, whereas if the project succeeds the franchisee pays more to the firm (4) Franchise systems have been associated with a high rate of growth (e.g., McDonald's in the 1980s) The disadvantages include: (1) Selection of the franchisees may be difficult (given the new type of products) (2) If a new product has no track record, setting the balance between the initial fixed capital and the variable royalty payments could be difficult. (3) The time spent in training the franchisee could result in drain in resources (4) There could be misalignment of interest and knowledge between the franchisee and the firm.

What is branding and why is it significant?

From Notes • A brand is a name, term, sign, symbol, or design, or a combination of them which is intended to identify the goods or services of one seller to differentiate them from those of competitors. • Role of brands - Identify maker - Signal of quality - Barrier to entry - Legal protection - Price premium and competitive advantage From Crib One of the major roles of management is their ability to create, maintain, protect, reinforce and enhance brands. A brand is a name, term, sign, symbol, or design, or a combination of them which is intended to identify the goods or services of one seller to differentiate them from those of competitors. A brand is a name or term like Toyota, General Motors or Ford, a symbol or design which is used to identify the goods or services of one seller to differentiate them from those of competitors. Thus the brand identifies the manufacturer and supplier of the product. Brands, unlike other forms of intellectual property, such as patents and copyrights do not have an expiry date and their owners have exclusive rights to use their brand name for an unlimited period of time. The role of brands include, identify as maker, signal of quality, barrier to entry, legal protection acts as price premium and provide competitive advantage. A brand has value to the business, known as brand equity. Brand equity stems from the greater confidence that consumers place in a brand than they do in its competitors. This translates into consumer's loyalty and their willingness to pay a premium price for the brand. Branding also increases innovation by giving producers an incentive to look for new features that can be protected against imitating competitors. Thus branding will result in more product variety and choice of consumers. The use of branding A brand conveys a specific set of features, benefit and services to the buyer. The brand has four different dimensions, which are described below. Attributes A brand that brings to mind certain product attributes such as build quality, power capability and others. A large automobile manufacturer would use these attributes in its advertising and promotional activities. Benefits Customers do not purchase attributes, they purchase perceived benefits. Therefore, attributes must be translated into functional and emotional benefits. For example, the attribute 'well built' might translate into benefits demanded by our customers, such as reliability or high resale value. Values A brand also says something about buyers' values. The brand marketer must identify the specific group of buyers whose values coincide with the delivered benefits package such as high performance, safety and prestige. Personality A brand also projects personality and will attract people whose actual desired self-image match the brand's image. Important for managers to develop a coherent overall brand strategy that articulates how it affects all of its products including the notion of brand umbrella

Motivations for horizontal integration (diversification of strategy)

GROWTH - desire to escape declining industries (e.g. tobacco, oil, newspapers) - satisfies managers not shareholder - e.g. generally acquisitions which reduce shareholder value RISK SPREADING - again, little value for shareholders, as they themselves can hold diversified portfolios of securities VALUE CREATION - increases total profitability

Managing innovation

How can a firm capture the maximum value from its innovation Property Rights: Property rights allow the firm to appropriate the value of an innovation. They could come in the form of intellectual property, such as patents, copyright and trademarks. Legal protection is more common in industries with high R&D costs, in other industries (such as food and beverages) the property rights are established and maintained through industrial secrets. Complementary Resources: The ability to build a sustainable offering around an innovation depends on access to complementary resources which include: finance, distribution channels, manufacturing capabilities and complementary technologies.

4 P's of Marketing

Product, Price, Place, Promotion Value driven organisations based on an understanding of: - context - competitors - customers - capabilities - collaborators • Market oriented firms are generally: - more innovative - more profitable

Implications of five forces framework

Industry structure ---> competitive strategy whereas under dynamic competition: competitive strategy ---> industry structure

Marketing objectives at different points of product life cycle

Introduction => create product awareness and trial Growth => maximise market share Maturity => hold onto market share Decline => re-position, harvest or drop e.g. Coca-cola Zero originally very popular - heavily aimed at men who did not like "diet" in the name. With changing perceptions in the world about politically correct things, consumer base seems less bothered hence decline of drink and rise of other brands - Coca-cola Life etc.

Marketing/sales channel issues, design, management, solutions

Issues Push - getting channels to carry your products • Pull - getting consumers to request yours by name • Cost vs. value add of different channels • Channel design - Core competences - Coordination - number of decision makers - Incentives - alignment of goals • Channel management - Contracts - Standardisation - Exclusivity Solutions • In-house or outsource • Franchising - Control over marketing elements, motivation to sell, investment in capital - Selection criteria, training, alignment of interest, fixed vs. royalty payments • Licensing • Joint venture

Economies of scope

It is cheaper for one firm to produce both X and Y than for two different firms to specialise in X and Y each Production of Y reduces incremental cost of producing X SOURCES: - Sharing tangible resources (research labs, distribution systems) across multiple businesses - Sharing intangible resources (brands, technology) across multiple businesses - Transferring functional capabilities (marketing, product development) across businesses - Applying common general management capabilities to different businesses • Cross sales and complementarity (Travelers and Citigroup - Bancassurance)

Marketing definition

Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large

Costs of vertical integration

Lack of 'high-powered' incentives Compounding of risk Difficult to strategically manage different businesses Limited flexibility - in responding to demand fluctuations - in responding to changes in technology, customer preferences, etc. BOUNDARIES BETWEEN FIRM AND MARKET NOT ALWAYS CLEAR

Assumptions behind a perfectly competitive market

Large (theoretically infinite) number of consumers and suppliers each with an insignificant share of market • Each firm is too small to affect price via a change in market supply - each individual firm is assumed to be a price taker • Identical output produced by each firm - homogeneous products that are perfect substitutes for each other (Consumers perceive the products to be identical) • Consumers have perfect information about the prices all sellers in the market charge • All firms (industry participants and new entrants) have equal access to resources (technology, other factor inputs) • No barriers to entry & exit of firms • The model provides a theoretical benchmark against which we compare and contrast imperfectly competitive markets - point of reference

The Innovator's Dilemma

Managers of large firms should do more sustaining innovation as it satisfies their customer base and is better in short term. In long term, this may render companies obsolete though Easier for small firms to achieve disruptive innovation Explains why firms that lead in one generation of technology often do not lead in the next e.g. Nokia and Apple Do lead-user analysis to identify upcoming trends

Monopoly

Monopoly is the extreme opposite of perfect competition - just a single supplier. • In most industries the situation lies between perfect competition and monopoly, but firms try to create monopolistic positions. • Key characteristic of monopoly is that the market for the firm and the industry demand are the same thing. • Monopolist will equate its MC curve with the market MR curve to get to a position of maximum profits

Pros and cons of M-form

PROS: - Measuring divisional performance is easier under M-form. - Pay for performance schemes are easier to implement in managerial compensation. - Division can coordinate functional activities - Divisional managers compete for funds in the internal capital markets based on their operating performance in the past. CONS: - Struggles to cope with clients who span divisions - Duplication of management effort

Intellectual property

Patents - Exclusive rights to a new product process, substance or design • Copyrights - Exclusive rights to artistic, dramatic and musical works • Trademarks - Exclusive rights to words, symbols or other marks to distinguish goods and services; trademarks are registered with the Patent Office • Trade Secrets - Protection of chemical formulae, recipes and industrial processes • Also, private contracts between firms and between a firm and its employees can restrict the transfer of technology and know how

Pricing objectives

Penetration pricing - scale economies - build market share • Price skimming - high margin - positive price/quality association • Price discrimination (different willingness to pay) • Approaches to pricing - competitor based (price matching with/without guarantee, predator - set below competitor) - market demand based (value based with elasticity considerations) Key factors in considering pricing include Cost - related to the actual costs involved Consumer/customer - related to the price the customer is willing to pay (depends on newness of the product, competition etc) Competition - related to competitor's prices for substitute or complimentary products Company - related to the company's financial objectives

Lead User Analysis

Pioneers among users who actively help in product development etc early in a product's life cycle. Lead users use the product in niches where a new technology is likely to develop • Information from 'lead users' - motivated to innovate due to benefits from innovation - experiences needs earlier (cars vs aerospace) • The lead user approach has been shown to generate (Lilien et al 2002) - breakthrough new products at a higher rate than the traditional method - higher sales e.g., at 3M

Brand extension and architecture

Points-of-difference (PODs) Attributes or benefits consumers strongly associate with a brand, positively evaluate, and believe they could not find to the same extent with a competitive brand Points-of-parity (POPs) Associations that are not necessarily unique to the brand but may be shared with other brands

Psychology of pricing

Reference pricing e.g. • Gas station A: Sells petrol for £3.00 per gallon and gives 30p per gallon discount if the buyer pays with cash • Gas station B: Sells petrol at £2.70 per gallon and charges 30p per gallon surcharge if the buyer pays with a credit card Price-quality interference • Merchant sends a random sample of 1,000 customers a catalogue that contained instalment billing offer • Merchants also sends a random sample of another 1000 customers without such an offer • The company received 13% fewer offers from the instalment billing version Price cues (see attached) e.g. "Sale!" Self control • Consumers who choose a monthly contract are - 17 percent more likely to stay enrolled beyond one year than users committing for a year. - monthly members pay higher fees for the option to cancel each month. • Implications - Overconfidence about self control e.g. most people will buy monthly gym membership rather than pay per visit!

Foundations of dynamic capabilities

SENSING: • Analytical systems (and Individual Capacities) to learn and to sense, filter, shape, and calibrate opportunities • Identification and assessment of opportunities SEIZING: • Enterprise structures, procedures, designs and incentives for seizing opportunities • Mobilizing resources internally and externally to address opportunities and capture value TRANSFORMING • Continuous alignment and realignment of specific tangible and intangible assets • Continued renewal of the organisation Unit of analysis: capabiities, competence, innovation

Uncertainty and information-based flexibility matrix

See notes to understand better

Importance of spin-offs and examples!

Spin-offs make up 20% of new firms, large source of entrepreneurship e.g. auto, tyre and semi-conductors in US, cotton in Bangladesh (less tech intensive)

Differentiation analysis

Tangible differentiation: Observable, product characteristics: • Size, colour, materials, etc. • Performance • Packaging • Complementary services Intangible differentiation Unobservable and subjective characteristics that appeal to the customer's image, status, identity and desire for exclusivity

Segment marketing definition and process

Targeting a group of customers who share a similar set of needs and wants Can segment by geographic, demographic, psychographic, behavioural Segmentable markets are: - Homogeneous (within segments) - Heterogeneous (across segments) - Profitable (substantial) - Operational (measurable, actionable and accessible)

Types of business model

The Add-On Model: Competitively price core product with expensive add-ons Advertisement Model: As seen in television, radio, facebook and many other websites Bait and Hook Model: Razor blade model, also consider phone contracts. This is different to add-on because in bait and hook it is necessary to keep buying in order to keep using the product. Direct Sales: E.g. Dell, from produced to consumer with no middle man Subscription Model: E.g. Netflix, access to a service requires regularly recurring payments Low Cost Model: E.g. Ryanair, compete on cost and make profits on optional extras

Strategy and structure

The choice of organizational structure depends on the business strategy of the firm Organizational structure is about - how critical tasks are divided up - how managers and employees make decisions - routines and information flows that support operations

Marketing communications

The means by which firms attempt to inform, persuade, and remind consumers, directly or indirectly, about the products and brands they sell. Communications mix Advertising? Sales promotion? Public relations? Personal selling? Direct marketing? Web/Other? e.g. Adidas 'bonded by blood' • In New Zealand, German sportswear maker Adidas AG launched a marketing campaign by sharing samples of the players' blood. • The blood, taken from every member of the national team, was mixed into the ink used to make a poster of the team given to fans who buy a US$70 team jersey made by Adidas. • Each of the 8,000 posters comes with a certificate of authenticity

Innovation overview

The successful commercial exploitation of new ideas Types: - new products - new processes - new management forms - new business models Why innovate? • Someone else will - products under 5 years old contribute 30% of profits • Large firms are slow to innovate (Arrow) - greater risk of cannibalisation - higher risk aversion - innovate incrementally • Large firms are fast to innovate (Schumpeter) - more resources • Google's approach - 70% time on core products - 20% on relevant but tangential products - 10% on wild fun that might or might not lead to a new product Forces of innovation • Fear of being supplanted - some else will innovate +ve • Fear of being dispossessed - preserve ideas for own benefit -ve • Hope of expansion - new idea will extend the market +ve Sustaining vs disruptive sustaining - incremental improvements to quality etc to satisfy customer's current needs e.g. smartphone cameras disruptive - satisfies customer's future needs - offers more defects and lower performance e.g. Kokoon headphone technology Netflix

Two sided market

Two-sided markets are markets where two different types of users may realise gains by interacting with each other through a common platform. For example, Adobe Acrobat, Ebay etc Cross price elasticities In two-sided markets because of the interconnected nature of the market the number of customers on one side affects the number of customers on the other side. Demand side network externality is where the addition of a customer adds value to other customers. Many industries such as telecommunications and financial services among others tend to display demand side externalities. Cross-price elasticity is a measure of the sensitivity of the price on one side of the market affecting the number of customers/users on the other side of the market. See attached for why its important to think about cross price elasticity e.g. CityInfo example clibb CityInfo needs to study and estimate the effects of this cross-price elasticity in order to develop a pricing strategy. In extreme cases, it might be appropriate to give away for free the proposition to one side of the market in order to generate users on the other side that could be charged. This is when the lost revenue from not charging is lower than the gains from charging the other side. Examples include Adobe Acrobat. Other factors to consider are, consumer preference changes in the future, competitive effects and the effect on the brand and potential future propositions.

The 4 V's of a business model

Value Proposition Value creation Value capture Value network • Who are your customers and what do they value? • Target customers • Solutions • How is the value chain configured? • Production • Inventory • Distribution • What is the economic logic of making a return? • Revenue and cost architecture • Financing • What is the role in the value network? • Partners • Complementarities Business models are the bridge between technology and the market

Continuum of brand evaluation for different types of products

What does this curve mean? ask dan n james

Nash Equilibrium

a list of strategies, giving rise to a situation in which firms interacting with one another each choose their best strategy given the strategies that all the other firms have chosen in the equilibrium

Examples of business model innovation

Zip Car: Rent cars by the hour from locations all over cities. Netflix: No late fees, then online streaming with a monthly subscription business model. Displaced the incumbent Blockbuster, who were too slow to follow. Uber: Application-based taxi anywhere, users know the price in advance and can leave reviews. Prices change based on the level of demand. Xerox: Leasing business model that did not allow them to capture value from innovations such as the PC and ethernet networking. Airbnb: Anyone can rent out a spare room through a web and app-based service, professional photography of rooms is arranged. Polaroid Refused to undertake any risk innovative products, missed out on the revolution in digital photography.

Price bundling

e.g. Amazon Prime + Lovefilm vs Netflix Amazon's latest venture, called Prime Instant Video, will merge the advantages of an Amazon Prime account, including free postage and the ability to borrow 500,000 Kindle ebooks, with access to LoveFilm's online film and TV collection. At £79 per year, the combined package is a third less than the price of Prime and LoveFilm combined and a fierce competitor for Netflix, which offers original content as well as films and TV services for £5.99 per month, about £72 per year.

Channel issues: walmart and Coca-cola

https://www.nytimes.com/2006/03/03/business/coke-bottlers-challenge-walmart-deliveries.html • Wal-Mart requested PowerAde to be supplied to warehouses rather than to stores • Coca-Cola agreed in principle • 60 independent bottling companies sued Coca-Cola • Coca-Cola agreed on settlement - some kind of financial arrangement - a royalty or profit-sharing agreement - in exchange for bottlers giving up some direct-to-store delivery rights

How typical is life cycle pattern?

o Can be compressed (e.g. e-commerce) o Cannot decline (e.g. food, construction) o May experience regeneration (e.g. Vinyls) o Tend to converge and fragment o Model helps but should not assume anything

What is productivity paradox and explanation for it?

slowdown in worker productivity despite rapid technology development Overcoming it: o Slowdown in technological diffusion across firms o Skills mismatch due to changes in product market structures o Legacy of financial crisis o Mismeasurement due to digital economy o Lack of business model innovation

Management innovation

the invention and implementation of management practice, process, structure, or techniques that are new to the state of art and is intended to further organisational goals (Birkinshaw, Hamel and Mol 2008). • The introduction of management innovation is positively associated with future firm performance, in the form of productivity growth (Mol and Birkinshaw 2009).

Limitations of dynamic capabilities

the path dependence of sources of competitive advantage - limited availability of complementary assets - "windows of opportunity" that do not stay open for long e.g. Firestone big tire manufacturer in US. Radial tyres introduced by Michelin and Firestone failed to reconfigure its capabilities

Read about traveller's dilemma

£2-100 antique, +- £2 for honesty

How departmentalisation affects firm boundaries

• A firm's decisions regarding vertical and horizontal boundaries will influence its choice of organizing dimensions - diversifying into a new business area will expand the set of formal groupings - decision to outsource will contract a firm's structure • Formal groupings in large organizations can be based on functional areas (commonality of tasks), geography, products, types of customers and so on • A firm should decide on the organizing dimensions based on - economies of scale and scope - transactions costs - agency costs

Inter-network externality

• An inter-network externality (or 2-sided network externality) is a demand economy of scale that crosses coupled heterogeneous markets. • Such coupled networks include: - consumers & developers co-dependent on the same operating system - card-holders & merchants that accept the same credit card - content consumers & creators (e.g. PDF, MP3 streaming video) - players & game developers e.g.2. AirBnB

Centralisation within firms

• Authority becomes more centralized (decentralized) as decision making moves to higher (lower) levels • It is possible for a firm to be centralized in some dimensions while being decentralized in others • For example, in a university administrative functions may be centralized while the teaching function is decentralized Centralisation has a trade-off between coordination and adaptation. Centralisation optimal if coordination more important. - if coordination from central unit hinders adaptation there may be an incentive for business units to not report things correctly. Then better to decentralise and communicate horizontally rather than vertically - there may be varying cultures between business units

Brand equity

• Brand equity stems from the greater confidence that consumers place in a brand than they do in its competitors. This translates into consumer's loyalty and their willingness to pay a premium price for the brand - Attributes - Benefits - Values - Personalities

Mintzberg on design of firms

• Every organized human activity - from making pots to placing a man on the moon - gives rise to two fundamental and opposing requirements: - The division of labour into various tasks - The coordination of these tasks to accomplish the activity. Structure of organisation depends on the ways in which labour is divided into distinct tasks and coordination is achieved among these tasks.

Positioning and perceptual space

• Identifying a position for your offering in consumers' map of the marketplace that is - meaningfully different from and - better than consumers' perception of competitors' offerings • Consumer's mind - geometric space - offerings plotted within this space - spatial distance between points in consumer's mind reflects similarity or dissimilarity - dimensions are consumer benefits See perceptual map attached

Changing organisational structure e.g. GE

• Jack Welch, the CEO of GE broke up GE's major industrial sectors into smaller business units as part of the delayering and to create a more responsive company in the 1980s. • GE had 12 business units (e.g., GE Aircraft Engines, GE Medical Systems, GE Plastics etc) when Jeff Immelt, who took over as the CEO of GE in 2001. • Jeff Immelt reorganized GE to facilitate greater cross business integration - the bundling of products and services into 'systems' - creation of new growth platforms - organized into smaller number of broad-based sectors Each sector may have a different culture? Is this good? who knows? need to adapt to your market

Issues to consider with business model

• Relationship between customer value proposition and business models - strategy, business model and tactics - overall responsibility for the business model • Economic aspects of the business model • Mind set as to the way business is done • Alignment of the 4Vs of the business model

Established firms known to overlook merits of innovation

• Swiss watch manufacturers were slow to see the importance of British invention of the self-winding wrist watch • In 1925 the Marconi Co said that they had no interest in television • No aero-engine firm either in Great Britain or Germany showed anything more than a perfunctory interest in the jet engine in its early period of development • Henry Ford resisted the introduction of the thermostat and hydraulic brakes into the Model T car • The British and American chemical firms took no part in the important discoveries related to penicillin

Relationship-specific assets and the hold-up problem

RSAs support a particular transaction (assets essential for given transaction) - cannot be redeployed for another transaction w/o cost - once in place, both parties locked into contract e.g. - Site specificity (Cement factories are located near limestone deposits) - Physical asset specificity (Molds for glass container production custom made for a particular user) - Dedicated assets (A defense contractor's investment in a manufacturing facility for making certain advanced weapon systems) - Human asset specificity (Salespersons posses detailed knowledge of customer firm's internal organisation) HOLD-UP PROBLEM - possible opportunistic behaviour after investment made - quasi rents - one party has money to deploy relationship specific asset whilst other doesn't - integration within firm avoids haggling costs due to hold-up - holdups lead to underinvestment in assets, investment in safeguards, reduced trust

Dual business model strategies

Similar markets vs nature of conflicts between established business and innovation. Serious and different markets is separated e.g. Nestle and Nespresso. Low vs high qual Minor and different markets is phased separation e.g. Tesco and Tesco.com Serious and similar = phased integration e.g. Chaels Schwab and eSchwab Similar and minor = integration strategy e.g. Barclays and Barclays online

Basic strategy framework

Strategy as link between firm and its environment THE FIRM • Goals & Values • Resources & Capabilities • Structure & Systems THE ENVIRONMENT Competitors • Customers • Suppliers Contingency theory - no best way

Stackelberg equilibrium

Subgame-perfect equilibrium of the sequential version of the Cournot game Leader produces more than the Cournot equilibrium output - Larger market share, higher profits - First-mover advantage • Follower produces less than the Cournot equilibrium output - Smaller market share, lower profits • Stackelberg model illustrates how strategic commitment can enhance profits in strategic environments

economies of scale

- happens when marginal cost is less than average cost - average cost declines with output - diseconomies is opposite economies of scale - create cost advantages - determine market structure and entry/exit (e.g. hard entry into secure markets like security, pharmaceuticals, fizzy drinks etc) - affect the internal organisation of firms (large company probably has more hierachies) - determine the vertical and horizontal boundaries of firms

Importance of strategic commitment

- have long run impacts and - are hard to reverse • Strategic commitments can affect choices made by rivals • Assessing strategic commitments involves anticipating market rivalry • Inflexibility can add value • Strategic commitment limits options but alters competitors' expectations • Strategic commitment can make a simultaneous move game into a sequential move game COMMITMENT important because it creates inflexibility. Sometimes flexibility valuable when there is uncertainty; waiting better to preserve option values or to allow competitors to make preemptive investments

L shoped cost curve

- more likely (Johnston) - large firms rarely at a cost disadvantage relative to smaller firms - MES (minimum efficient size) beyong which average costs are identical across firms - e.g. suppier to aldi, sains etc. dropped below MES when contract was cut with one of its key supermarket customers

Agency costs and metering problem

- production of complex output requires lots of input-owners - when there are joint costs, measuring and rewarding individual unit's performance difficult - hence tendency for input-owners to free-ride or slack - agency costs due to slacking by employees and administrative effort to deter slacking - therefore, is better to organise within same firm with hierarchical monitoring!

Value chain to cost analysis: automobile manufacture

1. IDENTIFY PRINCIPLE ACTIVITIES Purchasing, R&D, Design Engineering, Component manufacture, Assembly, Testing & Inventory of Finished Goods, Sales Marketing, Distribution, Dealer support Customer service 2. ALLOCATE TOTAL COSTS 3. IDENTIFY COST DRIVERS e.g. plant scale, supplier location, order siz, bargaining power, no and frequency of new models, capacity utilisation, degree of automation, cyclicality & predictability of sales 4. IDENTIFY LINKAGES e.g. purchasing --> R&D - consolidation of orders to increase discounts, increase inventories 5. RECOMMENDATIONS FOR COST REDUCTION see lecture notes for this in detail

BCG's growth-share matrix

a portfolio-planning method that evaluates a company's SBUs in terms of its market growth rate and relative market share HIGH HIGH - rising star HIGH RMS LOW RMG - cash cow (most revenue) HIGH RMG LOW RMS - problem child LOW LOW - dog

Resource-based approach to strategy

• When the industry environment is volatile, internal resources and capabilities offer a more stable basis for strategy than an industry or market focus • A firm's competitive position is defined by a bundle of unique resources and relationships • Resources and capabilities are the primary sources of profitability • The trick is to configure these resources in such a way that they are costly, difficult, or indeed impossible to imitate or transfer • The task of management is to renew these resources and relationships as time and competition erode their value • Corporations are successful only so long as their capabilities remain relevant, distinctive, and highly valued For resources to be strategically important, they have to be VRIN (valuable, rare, inimitable, non-substitutable). IMPORTANT ANALYSIS TO DO

Digital business model

enable separation between: - content and medium (e.g. digital books) - form and function (e.g. Uber cars) new business models can emerge from layered modular architecture: - device layer - network layer - service layer - contents layer enables a more connected and networked structure

Perfect competition assumptions

o Everyone has same homogeneous product within an industry, no differentiation between competitors, same prices, infinite companies. Can substitute one product for another to customer and have same satisfaction. o Relatively insignificant market share o Market entry and exit barriers minimal o E.g. Tesco vs local cattle farmer. Tesco have bargaining power o Difficult to have a perfect market for capital intensive investments o Easier for more simple investments o All players have equal access to information (which practically doesn't work) THESE ASSUMPTIONS MEAN NO COMPETITIVE ACTIVITY

Story of strategy with INTEL

o Intel emotional attachment to memory business because it was a leader in DRAM o Did not notice importance of PCs (IBM chose 8088 microprocessors for its first PCs) o Memory and semiconductor business shared fabrication plants o Monthly load to factories based on maximising 'margin-per-wafer-start' o This didn't maximise immediate profits and selected niche over commodity markets o Since microprocessor had higher margin it was gradually given more resources in factory, resulting in exit from DRAM (right decision thanks to resource allocation driving strategic action)

Impact of Brexit on industry

o Vision of 'Global Britain' o No longer single market with free movement of goods, capital, services and people or economic policy harmonisation (e.g. Monopoly policy) o Customs union - duties now levied on good and no longer common external tariff leveraged on goods o Impact on R&D spending and scientific research foreign investment in the UK supply chain demand for goods

Standard

specification that allows for interoperability e.g. cups and lids, pistons an engines, phones and jacks, speakers and amps high switching costs to change standards, leading to 'lock-in' - dramatic competitive implications. e.g. QWERTY!!

Strategy vs tactics

strategy overall plan for deploying resources to establish favourable position. Tactic scheme for a specific manoeuvre

Ronald Coase: distinguishing mark of firm

supersession of the price mechanism 'Outside the firm, price movements direct production, which is coordinated through a series of exchange transactions on the market. Within a firm, these market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur coordinator, who directs production.'

Diseconomies of scale and sauces of this

the property whereby long-run average total cost rises as the quantity of output increases sources: - Increasing labour costs - Spreading specialised resources too thinly - Incentive and coordination effects - "Conflicting out" (competitor already a client; information sensitivity, reputation damage)

Industry Life Cycle

the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry o Intro early adopters competing tech, rapid product innovation few companies o Growth rapid increase in market penetration standardisation: rapid process innovation entry, mergers exist o Maturity replacement/repeat buying price sensitive customers diffused know how, incremental knowledge shakeout and consolidation o Decline Obsolescence Little innovation Price wars and exit!

Game theory

the study of how people behave in strategic situations how competitors react when you move in a certain way? And how will this impact your strategy? e.g. Nokia - focusing on hardware rather than Samsung/Apple which focus on software o Everything is pre-determined o Cannot accommodate ambiguities or a fast-changing market o Depends on a lot of assumptions o Need a lot of data to analyse and get it right o Depend on external variables that are hard to control

Vertical integration trade-off

• Using the market improves technical efficiency (least cost production) • Vertical integration improves agency efficiency (coordination, transactions costs) • Firms should "economise" - choose the best possible combination of technical and agency efficiencies • Benefits from vertical integration: - Avoids transaction costs of market contracts (e.g., opportunism and strategic misrepresentation, design specificity costs, avoids taxes and other costs) - Superior coordination

Matrix structure pros and cons

• Advantages - Matrix structure can help exploit economies of scale and scope - greater flexibility. - Improves communication and provides basis for cooperation - Dual authority gives organization multiple orientation so that functional specialists do not get wrapped up in their own concerns. • Disadvantages - Conflict between managers - Costly to administer - Might slow down decision making due to need for consensus and agreement

Intermediate type of vertical relationship***

- From competitive contracting to supplier partnerships, e.g., in autos - From vertical integration to outsourcing (not just components, also IT, distribution, and administrative services) - Diffusion of franchising (capital sum plus royalty payments to create aligned incentives) - Technology partnerships (e.g., IBM - Apple IBM MobileFirst Platform for iOS; Canon - HP) - Inter-firm networks

How to prevent against imitation

- IDENTIFICATION: obscure superior performance - INCENTIVES FOR IMITATION: deterrance - signal aggressive intentions to imitators; pre-emption - explot all available investment opportunities - DIAGNOSIS: rely upon multiple sources of competitive advantages to create causal ambiguity - RESOURCE ACQUISITION: base competitive advantage upon resources and capabilities that are immobile and difficult to replicate

Examples of firms that adopt a planned strategy

- Mining company exploiting a new ore in Quebec - US government escalation of military activity under Johnson 1965-68 until in 68 it was realised environment not so controllable! - Air Canada planned strategy for buying a new fleet of aircraft to follow fairly fixed routes around the world

Does the market fail? QWERTY

- Motivation: to prevent keys from sticking together when consecutive letters were typed. - First typing school in Cleveland which used Remington typewriters with QWERTY keyboards. - Speed typing contest held in Cincinnati (1888) won by person using typewriter with QWERTY keyboard. - In 1936 Dvorak patented the Dvorak Simplified Keyboard (DSK) claiming greater speed (demonstrated by experiments conducted by US Navy). - Dvorak's failure is considered a market failure

Weird types of competition

- Schumpeterian Competition - A "perennial gale of creative destruction" - market leaders over thrown by innovation - Hypercompetition - "Intense and rapid competitive moves... continuously creating new competitive advantages and destroying existing competitive advantages

Examples of vertical integration

- Zara manufacturing own clothes - private banking have their customer relationship advisors for high-net worth clients but 3rd party advisors for less wealthy customers - REVA electric cars India becomes one of largest plastic manufacturers

U-shaped cost curve

- average cost declines as fixed costs spread over larger volumes - average cost increases again as capacity constraints kick in - optimum size for firm - disadvantage for very small or very large firms

Issues about corporate governance

- bureaucracy - need for compliance - CEOs earn a lot of money

How to classify capabilities?

- functional classification - value chain analysis (sequential chain of main activities)

Collusion and cartels

Collusion represents an attempt by firms to recognise their interdependence and act together rather than compete - seen as a move towards joint-profit maximization OVERT COLLUSION - creation of a price fixing arrangement with a producer cartel responsible for allocating output / supply within the market (eg., OPEC) TACIT COLLUSION - Dominant firm 'price leadership': leading firm's price changes are matched by the other firms - Barometric-firm leadership: price leader the one judged to have best knowledge of prevailing market conditions. • Horizontal collusion takes place between firms in the same industry (BA and Virgin Atlantic in terms of prices). • Vertical collusion could be forward into distribution channels (brewers' control of pubs) or backward into supply sources (supermarket chains) See crib for collusion as a result of prisoner's dilemma

Network effect

Direct means product gains more value as it is used more e.g. telephone Indirect means value increases with number of complementary products that are available e.g. Xbox Two roots: GREAT PRODUCT VALUE • Consumers value the product because it is intrinsically valuable to them • What would this be worth to me if I were the only buyer in the world? NETWORK VALUE • Consumers value the product because of the size of the network • How many other people are likely to buy this product?

Sources of competitive advantage in cost

ECONOMIES OF SCALE • Indivisibilities • Specialisation and division of labour ECONOMIES OF LEARNING • Increased dexterity • Improved organizational routines PRODUCTION TECHNIQUES • Improved organizational routines • Process innovation • Reengineering business processes PRODUCT DESIGN • Standardised designs & components • Design for manufacture INPUT COSTS • Location advantages • Ownership of low-cost inputs • Non-union labour • Bargaining power CAPABILITY UTLISATION • Ratio of fixed to variable costs • Speed of capacity adjustment RESIDUAL EFFICIENCY • Organisational slack • Motivation and culture • Managerial efficiency

Porter's three tests

Must satisfy three tests to create shareholder value ATTRACTIVENESS TEST - directed towards attractive industries COST OF ENTRY TEST - reasonable BETTER OFF TEST - either new unit must gain competitive advantage from link to company or vice-versa (e.g. coca-cola life)

Market firms (as a reason to buy from the market)

Outside specialists who perform vertical chain tasks are market firms; market firms might be recognised leaders in their field MFs may have patents or proprietary info that makes low cost production possible Hence can achieve economies of scale that in-house units cannot Likely to exploit learning economies

Planning vs emergence strategy formulation

PLANNING o Driven by senior management who set strategic direction for the whole company o Rational process heavily driven by empirical models and concepts o Intentionally designed o Formally structured and comprehensive o Future to be predicted and anticipated - Planning very clear - including budgets, resource allocation, schedules etc - assumes no interference from external forces (market, environment etc) which is only possible if forces are benign, fully predictable or within full control of organisation EMERGENCE o Driven by vision and organisational learning o Process of adaptive persistence where strategic direction evolves from incremental adjustments to evolving events o Unstructured and gradually shaped o Experimentation and parallel initiatives o Future partially unknown and unpredictable Requires regularity in action taken - without intention though

Pros and cons of outsourcing

PROS - Potentially less expensive if process is used on an ad hoc basis - Gain from outside expertise and competence - Flexibility to cope with uncertain demand or to render cost base more variable - Frees management up to focus on more important or strategic issues CONS - May be cheaper in-house if the activity is perpetual and continuing - Exposes firm to risk from poor quality or unreliable/unstable provider - Loss of organisational learning and new knowledge creation - Might nurture competitors who can learn and move up the value chain e.g., Hyundai learning from Ford in automobiles

Pros and cons of value chain analysis

PROS - examine linkages between activities so that there is an increasing synergy between the activity systems (one activity enhances the another activity to achieve its objectives) - ensure the ability to achieve consistency with standards and procedures (content created by one area is not destroyed by another) - manage conflicts - helps build core competencies to differentiate with other providers CONS - predominantly focused on manufacturing type firms and hence how would it apply to services needs further development - firm focused which might need extending as markets become more networked through digital technologies

Strategy (Kenneth Andrews)

Pattern of objectives, purposes or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be

Environment analysis - PESTEL

Political - Government support, Regulation, Taxation Economic - National growth rates, Income levels, Inflation Social - Social mobility, Age distribution Technological - Product and process innovations, New technological developments Environmental - Sustainability, Pollution, Green issues Legal - Competition legislation, Employment law THE INDUSTRY ENVIRONMENT - suppliers, competitors, customers • The industry environment lies at the core of the macro environment • The macro environment impacts the firm through its effect on the industry environment

Pros and cons of monopoly

Pros: - monopolist may be more innovative and hence benefit the consumer Cons: Monopolist can take the market demand curve as its own demand curve and can enjoy some power over the setting of price or output • The standard case against a monopoly is that these businesses can earn abnormal profits at the expense of economic efficiency • The monopolist is extracting a price from consumers that is above the cost of resources used in making the product • There is a deadweight loss as the price of the product increases and is being under-consumed.

Value chain for cost analysis

Value chain - A value chain is a model of how firms create value for their customers. The value chain describes a number of activities carried out in the firm. Primary activities are directly related to the process of production and sales. Inbound logistics are those activities involved with receiving, handling and storing inputs to the production system. Operations converts resource input into the end product. Outbound logistics relate to storage and distribution. Marketing and sales inform customers about the product, and include advertising and promotion. After sales service provides services following from the sales. Support activities obtain purchased inputs, human resources, technology and infrastructure to support the primary activities. 1. Identify the main value chain activities 2. Identify the cost drivers at each stage of the value chain 3. Allocate total costs between value chain activities 4. Identify linkage between activities 5. Identify opportunities for cost reduction

multidivisional (M-form) structure

consists of a corporate office and operating divisions, each operating division representing a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategy to division managers • The multidivisional firm is organized along such dimensions as - product line - geography or - type of customers • Divisional managers will be responsible for operating decisions and the top management will handle strategic decisions e.g. GE division into various companies etc

Cournot Model of Oligopoly

firms choose how much to produce simultaneously and the price clears the market given the total quantity produced. • To handle states other than monopoly and perfect competition we have to make behavioural assumptions. • First look at two firms (a duopoly), and then generalise it. • The assumption of the Cournot model is that each firm maximises its profit on the assumption that the other firm's output is fixed. - Each firm chooses a quantity of output instead of a price. - In choosing an output, each firm takes its rival's output as given. • In the Cournot model each of the two firms pick the quantities Q1 and Q2 to be produced • The price that emerges clears the market (demand = supply) The output in Cournot equilibrium will be less than the output under perfect competition but greater than under joint profit maximising collusion • In the Nash equilibrium of this general version of the Cournot model, firms fail to maximize their joint profit. • Relative to joint profit maximisation, firms produce too much output in the Nash equilibrium (joint profit maximisation is when firms collude an act like a monopolist). • With only one firm in the market, the Cournot-Nash equilibrium is the monopoly equilibrium. • As the number of firms increases, output increases. As a result, price and aggregate oligopoly profits decrease. • When there are infinitely many firms, the Cournot model is, in effect, the perfectly competitive model.

SWOT analysis

identifying internal strengths (S) and weaknesses (W) and also examining external opportunities (O) and threats (T)

Strategic groups

• A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimensions (Porter, 1980) • Identifying strategic groups: - Identifying principal strategic variables which distinguish firms (e.g., product range, geographical breadth, choice of distribution channels, level of product quality, degree of vertical integration, choice of technology, etc) - Position each firm in relation to these variables - Identify cluster

Mintzberg's critique of formal strategic planning

§ Planning 'a formalised system for codifying, elaborating and operationalising the strategies which companies already have'. Strategy cannot be planned - just involved with synthesising company § 3 pitfalls · Future is unknown - predictions based on past and assume repetitions. Planning flourishes during stable times such as 60s · Impossible to divorce formulation from implementation - believes that people look too much at hard statistics and not enough on intuition and gut feel · Inhibits flexibility, spontaneity, intuition and learning - strategy cannot be formalised as this narrows alternatives which do not fit into pre-determined structures

Concentration indices and their bias

· Concentration ratio (CRr) - measures cumulative market share of largest r firms · Herfindahl - measures sum of squared market shares of all firms in the market o 0-1 from perfect competition to monopoly, with decreasing intensity of price competition, subject to inter-firm rivalry and threats of entry Bias: inadequate market definitions - supply versus demand orientated e.g. most studies use the Standard Industrial Classification (SIC) which is based on similarity on the production side and not the demand side - Technology developments blurring industry borders

Positioning view vs resource view

· Positioning view more focused on external analysis (Porter's five forces) · Resource view more focused on internal capabilities (VRIN analysis, SWAT analysis) e.g. NOKIA · At beginning rubber tie, cable factory, electricity generation · Helped them get into electronics and expand into other businesses (TV, Media) · Had a massive portfolio of assets - resource-based view used more o All inside capabilities · 1990 became a big telecommunications firm - position-based view came in and they sold all other business and assets

Matrix structure (usually consulting e.g. Newton)

• A firm that uses a matrix structure is organized along two (or more) dimensions - for example, product line and geography. • In a two-dimensional matrix, an employee belongs to two hierarchies and has two bosses. • The demands of competing dimensions should be roughly equal. Multiple projects with many functional groups (specialists)

Oligopoly

• A market dominated by a few large firms i.e. "Competition amongst the few" • High level of market concentration • Entry barriers exist - long run supernormal profits • Mutual interdependence between competing firms i.e. the price and output decisions of one firm affects itself and others • Intensive non-price competition is a common feature of oligopoly • Periodic aggressive price wars (fights for market share /dominance) • Strong tendency for many market structures to tend towards oligopoly in the long run

Entry deferring strategies

• Aggressive price reductions to move down the learning curve • Intensive advertising to create brand loyalty • Acquiring patents - new processes are typically incremental improvements or reconfigurations of existing processes (Pilkington's float glass process is revolutionary) - since processes cannot be easily viewed by competitors, secrecy is highly effective in protecting process innovations - product innovations are more visible and hence can be copied more easily by competitors • Enhancing reputation for predation (e.g., suppliers and customers) • Limit pricing - selling at price below average cost • Holding or building excess capacity (Sumo strategy) • Entry before competitors to discourage

Multiple roles of strategy

• Decision support - improves quality of decision making, but does not give answers • Coordination and communication - create consistency and unity, as it assists in identifying main issues • Target - improves performance by setting high aspirations; helps manage complexity and can enhance flexibility and innovation by supporting learning • Current positioning - where and how (what is basis for our advantage) are we competing? • Direction - what do we want to become/achieve and how?

Why are new collaborative models emerging for large firms?

• Globalisation - Higher mobility of capital and labour - Knowledge economy • Technology intensity - Shorter product cycle - Complexity of R&D • Shift in industry borders - Technology fusion - New business models Inbound collaborative innovation - leveraging the discoveries of others Outbound collaborative innovation - external organisations' business models that are better suited to commercialise the innovation

Testing of Porter's five forces

• Hambrick (1983) found that in the capital goods industry that - Firms that adopt a cost leadership, broad based differentiation and focus strategies were among the highest performing firms. - Firms either pursued differentiation or cost leadership but not both • Dess and Davis (1984) found that in the US paint industry successful clusters of firms either possessed a cost leadership or differentiation strategy (with or without focus) but not both • Miller and Friesen (1986) on the other hand found in the consumer durables industry - Neither purely cost leadership or differentiation strategies were evident - No common and stable types of strategies as proposed by Porter - Performance as measured by return on investment and percentage change in market share seems to show little relationship to Porter's strategy typologies

Cournot and Bertrand compared

• If the firms can adjust the output quickly, Bertrand type competition will ensue • If the output cannot be increased quickly (capacity decision is made ahead of actual production), Cournot competition is the result • The price associated with an equilibrium in the Cournot's model is higher than the average cost. • In Bertrand competition two firms are sufficient to produce the same outcome as infinite number of firms • The Bertrand model with two firms is perfectly competitive (The Bertrand paradox). • The Bertrand paradox can be solved by relaxing assumptions about costs (flat costs to capacity constraints), one period to many periods, homogeneous products to product differentiation, fixed number of firms to entry/exits.

Principles of UK corporate governance code of conduct

• Leadership - Every company should be headed by an effective board which is collectively responsible for the longterm - e.g., separation of Chairman and CEO • Effectiveness - The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. • Accountability - The board should present a fair, balanced and understandable assessment of the company's position and prospects. • Remuneration - Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. • Relations with Shareholders - There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. - need to inform shareholders of everything!!

Importance of flexibility in strategy formulation

• Modify the commitment as conditions evolve • Delay commitment until better information is available on profitability • A real option exists if future information can be used to tailor decisions • Value of real options may be limited by the risk of preemption • Key balancing 'learn rate' (receive new information to adjust strategy) versus 'burn rate' (irreversible commitments)

Network structure

• Network structure is preferred when coordination costs do not outweigh the gains in technical efficiency. • Network structures are becoming more popular as the cost of organizing has fallen (e.g., internet and cloud based technologies). • Network of autonomous firms can function as a virtual firm. • Requires a polycentric decision making structure • Network structure facilitates the flow of diverse information, leading to high level of new product development

Strategy vs structure

• The U-form structure allowed firms in the 19th century to exploit the economies of scale in production, marketing and distribution. • When firms began to diversify in the 20th century the U-form became cumbersome and M-form emerged as a better alternative. • The M-form lead to duplication of activities when firms expanded globally and created "international divisions." • As firms try to balance local responsiveness with global economies, a mix of matrix form and network form help create flexible organizations. • Alfred Chandler (1962) argued that structure follows strategy in his seminal book on Strategy and Structure • Structure could also influence the type of information processed by senior management and what strategies are implemented - strategy follows structure

Vertical Boundaries of a firm

• The vertical chain - begins with the acquisition of raw materials (upstream) - ends with the sale of finished goods/services (downstream) • Organising the vertical chain is an important part of business strategy • Vertical boundaries of the firm determine which tasks are to be performed inside the firm and which to be out-sourced • The choice between using the market or using the organisation is a make or buy decision - essentially a decision regarding ownership and control rights about assets