4009

true

"A strategy is only as good as its implementation"

A firm may decide to take no action because:

- A response may hurt its own competitive advantage - It does not have the resources/capabilities to mount an effective response - It wants to reduce or manage rivalry in the market through tacit collusion

Example of High-Cost Conditions

- Protected Technology - Highly Unobservable Technology (Causal Ambiguity) - Relational Exchange (Social Complexity)

Value from increased production is leveraged through:

- Specialized machines - Employed specialization - Large plant/equipment - Overhead costs

The Logic of Value Chain Economies

- The focal firm is able to create synergy with the other firm(s) - cost reduction - revenue enhancement - The focal firm is able to capture above normal economic returns (avoid perfect competition)

Business level strategies

- These strategies deal with the positioning of a given business • Cost leadership (Ch4), Product differentiation (Ch5), Collusion (CH7)

Unique historical conditions

- When a firm gains low-cost access to resources because of its place in time & space - Other firms may find these resources costly to imitate

manage opportunism

- opportunism may be checked by internalizing - internalizing must be less costly than opportunism

Senior Executive's Two responsibilities in an M-Form:

- strategy formulation - strategy implementation Office of the President: Chairman, CEO (formulation), COO (implementation)

Change Strategy

-Consists of a fundamental change in a firm's strategic plan -Developing an emergent strategy may be necessary if current strategy becomes obsolete

implementation

A strategy is only as good as its

Organization

Are a firm's policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources? • Practical application: structure and control mechanisms complement other firm resources—taken together, they can help a firm achieve sustained competitive advantage

lower; more

Barriers to entry _______the threat of new competition and make an industry _______attractive.

differences

Competitive advantage depends on:

Cost leadership strategy

Increase EVC by decreasing Cost

Production differentiation:

Increase EVC by increasing PV

How cost leadership helps neutralize threat of Entry in an industry?

Increases capital requirements for entrants

products

Relatedness usually refers to

Competitive Dynamics

The strategic decisions and actions of firms in response to the strategic decisions and actions of other firms

Firms should pursue corporate diversification only if

careful analysis shows a competitive advantage is likely

Horizontal

competitors

Hispanic Population Growth In the US

example of demographic trends

Product differentiation principles can be applied to your

personal and professional lives

Vertical

suppliers or customers

A corporate level strategy should create

synergies that are not available in equity markets.

Internal Analysis

systematic examination of a firm's resources and capabilities • Resource-based view (firm resources/capabilities)

External Analysis

systematic examination of the environment in which the firm operates (Phenomena external to the firm)

M&A activity creates value, but _____ firms capture it.

target

All senior managers report to

the board

What Does Internal Analysis Tell Us?

• What are the firm's strengths? • What are the firm's weaknesses? • How do these strengths and weaknesses compare to competitors?

The Structure-Conduct-Performance Model

- Basis for Porter's Five Forces Model - S-C-P model suggests that industry structure can influence a firm's competitive choices - Developed to spot anticompetitive conditions for antitrust purposes - Emerged as a way to assess a firm or industry's potential for above normal profits

How do strategic alliances create value?

- Improve Current Operations - Shape Competitive Environment - Facilitate Entry and Exit

Economies of scope:

- Increases firm revenues, and/or - Decreases its costs

Competitive disadvantage

- It occurs when potential customers may have an aversion to a firm's market offering - When a firm creates less economic value than its rivals

Example of Low-Cost Conditions

- Non-Proprietary Technology - Highly-Observable Technology - Transactional Exchange (Arm's length transaction)

As with all strategies, firms seeking to implement a cost leadership strategy must adopt an appropriate:

- Organizational structure: how management responsibilities are divided - Managerial controls - Compensation policies

When production is excessive, per-unit costs increase from:

- Physical limits to efficient size -Worker de-motivation -Managerial diseconomies (complexity) -Physical distance to market and suppliers

Four Barriers to Entry

-Economies of scale -Product differentiation -Cost advantages independent of scale -Government policies

Target Firm's Perspective doing the deal

-Seek Information from Bidders -Invite Other Bidders to Join in Bidding Contest -Delay, But Do Not Stop the Acquisition

General environment

-The environment in which all firms in an economy operate, regardless of a firm's specific industry - Elements of the general environment have potential effect on every firm in an economy

If managers know that acquiring firms do not capture any value from M&A's, why do they continue to merge and acquire?

-To ensure Survival -Free Cash Flow -Agency Problems -Managerial Hubris -Potential for Profit

Learning Curve Economies

-a firm gets more efficient at a process with experience -the more complicated/technical the process, the greater the experience advantage

Alliances Create economic value by:

-accessing complementary resources and capabilities -leveraging existing resources and capabilities

Formal Management Controls

-budgeting policies -credit policies -spending policies -travel policies -purchasing policies

Informal Management Controls

-culture -attitudes -leadership styles

Internal analysis helps a firm:

-determine if its resources and capabilities are likely sources of competitive advantage -establish strategies that will exploit any sources of competitive advantage

Sources of costs of imitation

-historical uniqueness -causal ambiguity -social complexity

Two Classes of Measures of CA:

1) Accounting Measures of performance • ROA, ROS, ROE, etc. that exceed industry averages 2) Economic Measures of performance • earning a return in excess of the cost of capital

Value of Diversification (2 Criteria)

1) Economies of scope exist among the multiple businesses in the organization, and 2) Exploiting these scope economies can be done more efficiently by the firm than by shareholders on their own

bases of differentiation: 3 categories

1) Product Attributes • exploiting the actual product 2) Firm—Customer Relationships • exploiting relationships with customers 3) Firm Linkages • exploiting relationships within the firm and/or relationships with other firms

Corporate level strategy should create value:

1) such that the value of corporate whole increases 2) such that businesses forming the corporate whole are worth more than they would be under independent ownership 3) that equity holders cannot create through portfolio investing

Responding to Environmental Threats

1. Avoiding the industry 2. Making strategic choice that may Neutralize the threats

Costly to duplicate economies of scope

1. Core competencies 2. Internal capital allocation 3. Multipoint competition 4. Exploiting market power (tactic/intangible)

Different Types of Economies of Scope

1. Operational economies of scope ▪ Shared activities ▪ Core competencies 2. Financial economies of scope ▪ Internal capital allocation ▪ Risk reduction ▪ Tax advantages 3. Anticompetitive economies of scope ▪ Multipoint competition ▪ Exploiting market share 4. Employee and shareholder incentives for diversification ▪ Maximizing management compensation

two types of differences

1. Preference for the firm's outputs - People choose the firm's output over others' - People are willing to pay a premium 2. Cost advantage vis-à-vis competitor - Lower costs of production and distribution

Sources of cost advantage

1. Size differences and economies of scale 2. Size differences and diseconomies of scale 3. Experience differences and learning-curve economies 4. Differential low-cost access to productive inputs 5. Technological advantages independent of scale 6. Policy choices

Three Forms of Misappropriating Value

1. adverse selection 2. moral hazard 3. holdup

Porter's Five Forces Model

1.) Threat of Entry 2.) Threat of Rivalry 3.) Threat of Buyers 4.) Threat of Substitutes 5.) Threat of Suppliers

dominant business: ____ __ ___ in single business

70% to 95%

Product Differentiation

A business level strategy intended to: • increase the perceived value of the focal firm's products and/or services relative to the value of competitor's products and/or services • create a customer preference for the focal firm's products and/or services

competitive advantage

A condition or circumstance that puts a company in a favorable or superior business position -> The Ability to Create More Economic Value Than Competitors

better

A differentiated product fills one or more needs ______than the products of competitors.

Corporate Diversification

A firm implements a corporate diversification strategy when it operates in multiple industry or markets simultaneously

keeping its costs low

A firm pursuing a cost leadership strategy focuses much of its effort on ____ __ ___ ___

unique

A firm's product/service must be _____ from competitors

Strategy

A firm's theory about how to gain Competitive advantage

Strategic Management Process

A sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy

Implement Choice

Adoption of policies & practices that are consistent with strategy

competitive advantage

All other elements of the strategic management process are aimed at achieving

managerial creativity

Almost anything can be a base of differentiation. • tangible thing (product features, location, etc.) • intangible concept (reputation, a cause, an ideal, etc.) • limited only by _____ ____

Managerialism

An economy of scope that accrues to managers at the expense of equity holders. • Managers of larger firms receive more compensation (larger scope = more compensation). • Therefore, managers have an incentive to acquire other firms and become ever larger. • Even though the incentive is there, it is difficult to know if managerialism is the reason for a diversification.

Strategic Alliance

Any cooperative effort between two or more independent organizations to develop, manufacture, or sell products or services

Are strategic alliances rare?

As a form of organizing economic exchange, NO! However, The sources of value creation within alliances may be rare. • Firms may form a combination of complementary resources within an alliance that is rare. • The stock of such complementary resources may be limited so that first movers have a rare combination

Are strategic alliances costly to imitate?

As a form of organizing economic exchange, NO! • The organizational form per se is easily duplicated. However, The resource combinations that create value in alliances may be very costly, if not impossible, to imitate if: • The value creating combination depends on social complexity (trust), causal ambiguity, and/or historical uniqueness

• large numbers of competitors • slow or declining growth • high fixed costs and/or high storage costs • low product differentiation • industry capacity added in large increments

Attributes of an industry that increase the threat of direct competition:

Fragmented industry Micro-strategy

Branding: commodity -> differentiated product

How to Position a Business in the Market?

Business Level Strategy asks:

single market/ industry

Business level strategies focus on a

altering relationships; reduce; increasing

By_____ ____ in an industry, firms may _____threats and/or create opportunities, thereby ______ profits.

general environment

Changes in _____ ______of foreign country may affect focal firm

BETTER

Choose partners that are ____ at something than you are (complementary resources).

True

Competitive Advantage is Temporary & Sustainable. T/F

different and/or better

Competitive advantage is the result of doing something ___ ___ ____ than competitors

How cost leadership helps neutralize threat of Rivalry in an industry?

Competitors avoid price competition

outside the focal firm's industry

Complementors may be found

Non-Equity Alliance

Contracts • licensing • supply and distribution agreements

Which Businesses to Enter?

Corporate Level Strategy asks:

multiple markets

Corporate level strategies focus on

Equity Alliance

Cross Equity Holdings • partners own stakes in each other

more

Customers perceive _______value in the focal firm's product when it is combined with the complementor's product.

General External Environment: "DEPICT"

Demographic Trends, Economic Climate, Political/Legal Conditions, International Events, Cultural Trends, Technological Change -Analysis of all these elements of general environment aims to identify condition or trend that may present opportunities and/or threats to a firm

Economic value created (EVC)

Difference between consumer's perceived benefit and the cost of production

Value

Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? (Levi's reputation allows it to charge a premium for its jeans)

Low-Cost Conditions

Easily imitated

scale

Economies of _____ is seen as a barrier to entry in the discussion of threat from new competition.

Organizing (Codified/Formal)

Explicit Contracts & Legal Sanctions, Joint Ventures, Equity Investments

Declining industry Micro-strategy

Exploit niches: Serve those with strong needs

How Strategic Alliances Create Value through Improving Current Operations

Exploiting economies of scale • A partner brings increased market share and/or manufacturing capacity. Learning from partners • A partner brings technology and/or market knowledge. Risk and cost sharing • A partner bears a portion of the risk and/or cost of the alliance.

necessary precursor

External analysis is a ___ ____to strategic choice

environment

External analysis is intended to help firms understand the threats and opportunities that exist in the competitive ______ in which a firm operates

- what the threats and opportunities are - Provide direction about what the firm should do

External analysis tells us:

How Strategic Alliances Create Value through Shaping the Competitive Environment

Facilitating technology standards • Partners may agree on a standard and avoid a market battle for the standard. Facilitating tacit collusion • Partners may communicate within an alliance in subtle, legal ways whereas the same communication between competitors outside an alliance would be illegal.

Four Categories of Resources

Financial (cash, retained earnings) • Physical (plant and equipment, raw materials) • Human (skills and abilities of individuals) • Organizational (reporting structures, coordinating systems)

-No Response -Change Tactics -Change Strategy

Firm A (decisions lead to competitive advantage). What are Firm B's possible responses?

Can a firm pursue both simultaneously? Yes

Firms can do both because some bases of differentiation also lend themselves to low cost. • Structure, controls, and policies are not opposites. Example: Toyota

Emerging industry Opportunities

First mover advantages (technological leadership; locking up assets; creating switching costs)

Emerging industry Micro-strategy

First-mover advantage: capture market share

Linkages among Functions in the Firm

Ford Motor company's combination of auto manufacturing and financing

U-Form

Functional Structure

most; opportunities; exploit

Generic Industry Structures • At any point in time, the structure of _____industries fits into one of four generic categories • Each industry structure presents _____ that may be exploited. • Firms can choose to ____an industry structure, continue business as usual, or exit the industry

VRIO Framework

Helps Managers Recognize Sources of Competitive Advantage

cultural blending

High levels of integration require greater

Lower

Higher Threat ------> _______ Average Profits

- Measuring the source of the advantage per se is typically impossible - Superior Economic Performance Is Viewed as Evidence of Competitive Advantage

How to measure competitive advantage?

Example of vertical integration in the vehicle industry

Hyundai

(1) Adverse selection

If Verizon were to enter into a strategic alliance with a partner that said it could deliver a high-quality wireless infrastructure when in fact the potential partner had neither the skills nor abilities to provide this infrastructure, Verizon could be said to be impacted by

Valuable, • Rare, and •costly to Imitate, and... • the firm is Organized to exploit; competitive advantage

If a firm has resources that are _____, _____, &_____ ___ ____, and ___ _____ __ ____ __ these resources, then the firm can expect to enjoy ____ ____.

Competitive Disadvantage

If a firm's resources are Not Valuable, The firm can expect:

Competitive Advantage (at least temporarily)

If a firm's resources are Valuable and Rare, The firm can expect:

Temporary Competitive Advantage

If a firm's resources are Valuable, Rare, but not Costly to Imitate, The firm can expect:

Competitive Parity

If a firm's resources are Valuable, but Not Rare, The firm can expect:

Sustained Competitive Advantage (if Organized appropriately)

If a firm's resources are valuable, Rare, and Costly to Imitate, The firm can expect:

no firm

If all firms' strategies were the same, ____ _____ would have a competitive advantage

normal profits

If all threats are high, expect:

above normal profits

If all threats are low expect:

above normal

If firms can easily enter the industry, any _____ ______profits will be bid away quickly

high

If there are ____costs of imitation, then the firm may enjoy a period of sustained competitive advantage.

Logic of costs of imitation

If would-be imitators face a cost disadvantage of imitation, they will rationally choose not to imitate.

Challenges to Value Creation and Allocation

Incentives to Misappropriate Value (Cheat) -An alliance is an exchange context in which: • partner inputs may be difficult to monitor • actual value creation may be difficult to monitor • value appropriation (allocating the value) may be: -difficult to monitor -subject to power dynamics

How cost leadership helps neutralize threat of Suppliers in an industry?

Increases importance of the focal firm to the supplier

Cost advantages independent of scale

Incumbents may have learning advantages

Industry environment

Industry environment consists of elements or forces that the focal firm faces directly

can

Internal analysis tells us what the firm ____ do

Substitutes for Strategic Alliances

Internal development; mergers; acquisitions

Organization

Is the firm organized in such a way that the resource can be exploited?

Imitability

Is the resource costly to imitate? Is the resource so costly to imitate that no one would try to imitate it?

Rarity

Is the resource rare enough that there is still scarcity in the marketplace for this resource?

Joint Venture

Joint Equity Holdings • independent firm is created

Patents and intellectual property

Legal protections that may be critical to provide the product/service

How cost leadership helps neutralize threat of Substitutes in an industry?

Limits attractiveness of substitutes

overall tax liability

Losses in one business can offset profits in others, thereby reducing the firm's ___ __ ____. this is especially true internationally

How Strategic Alliances Create Value through Facilitating Entry and Exit

Low-cost entry into new industries • A partner provides instant access and legitimacy. Low-cost entry into new geographic markets • Partners provide local market knowledge, access, and legitimacy with governments and customers. Low-cost exit from industries • A partner is an informed buyer. Managing uncertainty

How cost leadership helps neutralize threat of Buyers in an industry?

Lowers incentives for buyers to vertically integrate

t

M-form has several critical components: board of directors, institutional investors, senior executive, division general managers, etc. t/f

cost reduction

Management controls and compensation policies can be focused on

develop a strategy to either capture the advantage or compete on some other basis

Managers need to understand who has the cost advantage in their market. If it is a competitor, what should they do?

develop a strategy to exploit the advantage

Managers need to understand who has the cost advantage in their market. If it is the focal firm, what should they do?

t

Managers need to understand who has the cost advantage in their market. t/f

forms

Markets and integrated hierarchies are "_____" in which economic exchange can take place

Linkages with other Firms

Mattel toys in McDonald's Happy Meal

cannot

Most firms _____unilaterally change the threats in an industry

Three types of Alliances

Nonequity, Equity, Joint Venture

High-Cost Conditions

Not easily imitated

Industry structure

Number of competing firms Homogeneity of products Cost of entry and exit

• Specific - what exactly needs to be done • Measurable (high-quality objectives are easy to measure and track over time) • Appropriate (aligned with mission or vision) • Realistic • Timely (deadline)

Objectives must be

In a merger:

One firm usually emerges as dominant

Trust and Reputation

Organizing (Tacit/informal)

Organizational controls

Policies intended to influence behavior by aligning the interests of the individual with the interests of the organization

domestic and international

Porter's five threats are at work in both _____ ____ ________ context

.Internal Capital Allocation: internal capital market

Premise: insiders can allocate capital across divisions more efficiently than the external capital market. • works only if managers have better information • may suffer from escalating commitment

society level performance

Productive and allocative efficiency, level of employment, progress

Acquisitions

Purchase of one firm by another

industry life cycle

Rareness of a source of cost advantage Depends heavily on ____ __ ____

Cost of capital

Rate of return that a firm promises to pay its suppliers on capital to induce them to invest

Mature industry Micro-strategy

Refining product/adding service

The Empirical Evidence

Research is based on stock market reaction to the announcement of M&A activity • this reflects the market's assessment of the expected value of the merger or acquisition • these studies look at what happens to the price of both the acquirer's stock and the target's stock • thus, we can see who is capturing any expected value that may be created

Differential Low-Cost Access to Productive Inputs

Result when firms are able to access inputs at less cost than competitors • May result from: 1. History - being in the right place at the right time 2. Market timing - being first into a new market 3. Natural endowment - being owner of a mineral deposit 4. Locking-up a source - being owner of all output from source

Is the firm organized to exploit the product/service? Compensation Policies

Reward: • crossfunctional cooperation • creativity • risk taking

Value Chain

Set of activities that must be accomplished to bring a product or service from raw materials to the point that it can be sold to a final customer

Compensation polices

Should reinforce formal and informal management controls - Creating a proper motivation system for employees supports proper strategy implementation - Examples: Stock options Bonuses for cost reduction/financial performance Non-monetary rewards: Vacations, parking places, etc.

• competitors are unable to imitate the source of advantage • no one conceives of a better offering

Some competitive advantages are sustainable if:

Change Tactics

Specific actions: • Tweak product characteristics (e.g., color, size, price) Usually imitated so quickly that no competitive advantage results • Other firms change color, size, price of product

firm conduct

Strategies firms pursue to gain competitive advantage

creating and exploiting

Strategy is about _____ ___ ______ those differences

price ceiling

Substitutes create a _____ _____ because consumers switch to the substitute if prices rise.

outside the industry

Substitutes will likely come from____ __ ______

Managers must decide on the level of integration:

Target firm may remain somewhat autonomous. Target firm may be completely integrated.

cost competitive

Technological advantages independent of Scale May allow small firms to become ____ ___

Porter's Five Forces Model

The Model of Environmental Threats

Why do some firms achieve better economic performance than others?

The Resource-Based View was developed to answer what question?

The Resource-Based View

The Theory Behind Internal Analysis

not

The form, per se, is usually ____costly to imitate.

What Is Vertical Integration?

The number of steps in value chain that a firm accomplishes within its boundaries

Strategic Choice

The point in the process where managers choose how to organize and position the resources of the firm

intended; emergent

The strategic management process leads managers to _____strategies However, • Conditions often change or new information becomes available • Managers respond and adopt ______ strategies

competitors face a cost disadvantage in imitating the resource

The temporary competitive advantage of valuable and rare resources can be sustained only if:

industry

There are two types of environment and both may present threats and/or opportunities, although the _______ environment has a more direct effect on firm performance

Corporate level strategies

These strategies determine in which businesses a firm will operate • Vertical integration (Ch8), Corporate Diversification (Ch9) • Strategic Alliance (Ch11), Mergers and Acquisitions (Ch12)

Value Chain Economies

Those economies that are created by integrating a market transaction in the to boundaries of the firm

Mergers

Two firms combined on a relatively co-equal basis

Board of Directors

Typically consists of 10-15 individuals from firm's TMT and external individuals (outsiders usually outnumber)

Is the firm organized to exploit the product/service? Organizational Structure

U-Form with cross-functional teams

Conglomerate

Unrelated

Can a firm pursue both simultaneously? No

Use of structure, management control, and compensation policies are nearly opposites. Example: Rolex

A source of cost advantage will lead to competitive advantage if that source is:

Valuable • Rare • costly to Imitate • Organized (Implemented Appropriately)

Tesla's Secret Weapon:

Vertical Integration

would

We _______want to be in industries with high barriers to entry

Causal ambiguity

When competitors cannot tell, for sure, what enables a firm to gain an advantage, that advantage may be costly to imitate

Social complexity

When the resources & capabilities a firm uses to gain a competitive advantage to involve interpersonal relationships, trust, culture, and other social resources are costly to imitate in the short run

Simple

Which organizational structure involves the Owner/Manager makes all major decisions directly and monitors all activities?

Can an M&A strategy generate a sustained competitive advantage?

Yes, if managers' abilities meet VRIO criteria 1. Managers are good at recognizing and exploiting value-creating economies with other firms 2. Managers good at "doing deals" (negotiating) 3. Managers good at both

Intangible resources

____ _____ are usually more costly to imitate than tangible resources.

Powerful suppliers

____ ____can "squeeze" (lower profits) the focal firm

Powerful buyers

_____ _____can "squeeze" (lower profits) the focal firm by demanding lower prices and/or higher levels of quality and service

Superior Economic Performance

_______ _____ ______ Is Viewed as Evidence of Competitive Advantage

Complementors

_______Increase the Value of the Focal Firm's Product

profits

________ attract competition

Distribution Channels

a doughnut shop begins to sell its doughnuts through gas stations

Mission

a firm's long-term purpose and it defines both what a firm aspires to be in the long run and what it want to avoid in the meantime

Product Mix

a furniture store begins to sell home gym equipment, computers, and lawn mowers

Capabilities

a subset of resources that enable a firm to take full advantage of other resources » marketing skill, cooperative relationships

The ability to integrate efficiently may be a source of competitive

advantage

Service and Support

an oil change shop begins to offer pick up and delivery of cars in an office building's parking garage

focal firm

analysis should be always done from the point of view of the ____ _____

True

any asset or ability of a firm is a resource. t/f

Internal analysis

assessment of the firm's resources/capabilities

Sub-committees

audit, finance, personnel/compensation, etc.

Diseconomies of Scale

average cost per unit increases as quantity increases • are an advantage for those who do not have diseconomies of scale • occur when firms become too large and bureaucratic

Exploiting Industry Structure Opportunities

begins by identifying several generic industry structures

Managers' Job: (internal analysis)

bundle resources and capabilities to achieve competitive advantage

Counter cyclical

businesses may provide decreased overall risk

limits

competition _______ the duration of competitive advantage in most cases

high profits

competitive advantage typically results in _____ ____

firm level performance

competitive disadvantage, parity, temporary or sustained competitive advantage

Economies of Scale are a cost advantage because?

competitors may not be able to match the scale because of capital requirements (barrier to entry)

imitate; offer something better

competitors______ the advantage or____ _______ ______

Market Extension

complementary markets

Product Extension

complementary products

Acquisitions Can be

controlling share, majority, or all of the target firm's stock • Friendly or hostile takeovers • Done through a tender offer

The M&A strategy should satisfy the logic of

corporate level strategy

Two Generic Business Level Strategies

cost leadership and product differentiation

Value

does the resource enable the firm to exploit an external opportunity or neutralize an external threat?

Firms must organize appropriately to realize the full value of

economies of scope

Synergy will

enhance the overall value of the business units for the firm

Product differentiation

entrants are forced to overcome customer loyalties to existing products.

Inflation

example of economic climate

Economies of scope

exist in a firm when the value of the products or services it sells increases as a function of the number of businesses that firm operates in

Holdup

exploiting the investment of partners; demanding higher returns than agreed

Rarity

f a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits). The few companies that produce chemotherapy drugs have unique intellectual and physical resources, which allows costs of the drug to remain high.

Substitutes

fill the same need but in a different way

Economies of scale

firm that can't produce the minimum efficient scale will be at a disadvantage

Liquidity ratios

focus on the ability of a firm to meet its short-term financial obligations, e.g., current ratio, quick ratio

Leverage ratios

focus on the level of a firm's financial flexibility, including its ability to obtain more debt, e.g., debt to assets, debt to equity

Activity ratios

focus on the level of activity in a firm's business, e.g., inventory turnover

What is cost leadership business strategy

focuses on gaining advantages by reducing its costs to below those of all its competitors - A firm pursuing a cost leadership strategy focuses much of its effort on keeping its costs low - Does not mean that the firm focuses on just reducing cost.

Complementary resources and capabilities

formal and informal management controls and compensation policies

Bases of product differentiation that meet the VRIO criteria may

generate competitive advantage

Cost Leadership

generate economic value by having lower costs than competitors (Walmart)

Product Differentiation

generate economic value by offering a product that customers prefer over competitors' product (apple)

Government policies

governments may impose trade restrictions and/or grant monopolies.

The Resource-Based View is used to

help firms achieve competitive advantage and superior economic performance

Neutralizing Threats

how each of the environmental threats can be neutralized by product differentiation

As firms grow (becoming more complex), information processing requirements exceed

individual capacity - bounded rationality

Historically, large diversified firms had equity owned by numerous (millions) of

individual investors

Organizational structure divides

information processing into manageable blocks (span of control)

Emergent strategy

is a strategy that emerges over time or is an intended strategy that has been radically reshaped once its implemented

Imitability

is it difficult for other firms to duplicate the resource? Razor scooters were very popular until competing firms quickly imitated the product's design.

an economy of scope may be rare because

it is naturally or economically limited • a soft drink bottler buys the only source of spring water available • a hotel in a resort town creates a large water park, there are only enough customers to support one park

Conditions

largely determine if a source of cost advantage will be costly to imitate

Three Value Considerations

leverage capabilities, manage opportunism, exploit flexibility

High barriers mean

low threat of entry or threat of new competition

Reputation and trust

may be sources of sustainable competitive advantage because they are costly to imitate.

Competitive parity

means that a firm and or its output are viewed as being about the same as other firms -When a firm creates the same economic values as its rivals

Economic measures of performance

measures compare the firm's return to its cost of capital rather than average return in the industry

The point of product differentiation is

meeting customer Needs better than the competing firms

Adverse Selection

misrepresenting the value of skills/ abilities

Board of Directors Responsibilities

monitor decision-making in the firm; ensure decisions are consistent with the interests of outside equity holders (principals)

Institutional owners are becoming

more common (59% of all equity in US; 69% in top 1000 firms)

temporary

most competitive advantage is ______

Best org structure to leverage a diversification strategy is the

multidivisional (M-form) structure

Institutional owners can be

mutual funds, insurance companies, or other groups of individual investors

in Unrelated M&A Activity there would be __ ______ of value creation due to the lack of synergies between businesses

no expectation

500 largest firms in the US and the 500 Largest firms in the world are diversified, but

not limited to large firms

Geographic Market Diversification:

operating in multiple geographic markets

Product-Market Diversification

operating in multiple industries in multiple geographic markets

Simple Structure

organization in which one person, or perhaps a small partnership, performs all business functions Owner/Manager makes all major decisions directly and monitors all activities. • Difficult to maintain this structure as the firm grows in size and complexity

Ownership is costly - integrate only when the benefits

outweigh the costs of integration

Management Controls

policies governing the way things are done in the organization (formal & informal)

PEST Analysis

political, economic, social, and technological

Firm Linkages

preferences are created as the focal firm combines the competencies of different functions within or across organizations to produce tangible and/or intangible differences between the focal firm's offerings and those of competitors

Internal analysis

provides a comparative look at a firm's capabilities

Moral Hazard

providing skills/ abilities of lesser value than promised

Profitability ratios

ratios with some measure of profit in the numerator ad some measure of firm size or assets in the denominator, e.g., ROA, ROE, etc.

Objectives

reflect the "specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission

Seemingly unrelated products may be

related on other dimensions

Two Critical Assumptions of the RBV

resource heterogeneity and resource immobility

Less costly to duplicate economies of scope

shared activities, risk reduction, tax advantages, employee compensation (codified/tangible)

An alliance is an organizational form of exchange that:

should produce a gain from trade due to some comparative or absolute advantage

Three Organizational Structures

simple, functional, multi-divisional

> 95%

single business:__ ____of sales in single business

Functional

structure most common

M&A activity can create economic value at the announcement, but value is usually captured by the

target firm

The Resource-Based View assumes

that a firm's resources and capabilities are the primary drivers of competitive advantage and economic performance

A firm's integration strategy may be rare because

the firm integrates or because the firm does not integrate. Thus, the question of rareness does not depend on the number of forms observed.

Integration makes sense when

the focal firm can capture more value than a market exchange provides

The value-producing function of integration may be costly to imitate, if:

the integrated firm possesses resource combinations that are the result of: • historical uniqueness • causal ambiguity • social complexity - small numbers prevent further integration

Functional structure

the organization is structured around the business functions that must take place for the firm to succeed. - Divides management responsibility by function - CEO is only executive with enterprise-wide perspective

Heterogeneity of resources

typically occurs as the result of bundling the resources and capabilities of a firm

Vertical integration =

value chain economies

A firm's integration strategy is rare or common with respect to the

value created by the strategy

Integration may be

very costly, often unanticipated

related-constrained

when all the businesses in which a Firm operates share a significant number of inputs, production Technologies, distribution channels, similar customers, etc

related-linked

when the different businesses that a single Firm pursues are linked on only a couple of dimensions, or if Different sets of businesses are linked along very different dimensions

in Related M&A Activity, value creation ___ be expected due to synergies between divisions

would

Resource Heterogeneity

» Different firms may have different resources. » Heterogeneity of resources typically occurs as the result of bundling the resources and capabilities of a firm

Resource Immobility

» It may be costly for firms without certain resources to acquire or develop them. » Some resources may not spread from firm to firm easily

Firm-Customer Relationships

• Customization: creating a unique diamond bracelet for a customer • Consumer Marketing: creating brand loyalty to a soap through image advertising • Reputation: sponsoring the local homeless shelter to engender positive community response

Sources of capital

• Debt—cost of debt is the interest that a firm must pay its debt holders • Equity—rate of return

Policy Choices

• Decisions about the products/services sold • Standardized products @ high volume; High sales volume needed for low-cost goods (low profit margins per unit) • Every manager/employee involved with cost reduction strategy

Unexpected Economies

• Firm C has a market value of $10,000. • Firm A buys Firm C for $10,000. • Firm C turns out to be worth $12,000.

Private Economies

• Firm C's recognized value is $10,000. • Only firm A sees value of $12,000 in Firm C. • Firm A can earn a profit of $2,000 only if the economy remains private

Multi-Divisional Structure (M-Form)

• Functions are replicated in each division as appropriate. • This structure makes sense when the firm is involved in more than one business or has grown large enough to justify geographic divisions. • CEO has strategic responsibility with the help of vice presidents, and so on—information is filtered through layers. • CEO balances coordination and competition among divisions.

Two levels of environments

• General environment • Industry environment

Costly-to-Imitate Economies

• If the economy between A & C is costly to imitate, it doesn't matter if other firms know. • Firm A can still earn a $2,000 profit.

How M&A activity requires responses to Structure, Control, and Compensation Implementation Issues:

• M-form structure is typically used. • Management controls and compensation policies are similar to those used in diversification strategies.

Product Attributes

• Product Features—the shape of a golf club head • Product Complexity—multiple functions on a watch • Timing of Introduction—being the first to market ex) release of movies during the holiday • Location—locating next to a freeway exit

Technological advantages independent of Scale

• Technology differences create cost differences • May allow small firms to become cost competitive • Size of advantage depends on how valuable and protectable the technology is (e.g.,hardware/software) Example: fruit and vegetable inspection

Economies of Scale

• average cost per unit falls as quantity increases— until the minimum efficient scale is reached after which the average costs per unit of production begin to rise (then diseconomies of scale occurs) • are a cost advantage because competitors may not be able to match the scale because of capital requirements (barrier to entry)

Unrelated Diversification

• businesses are not related (conglomerate)

Cultural blending may be a matter of:

• combining elements of both cultures • essentially replacing one culture with the other

Resource-Based View

• developed to answer the question: Why do some firms achieve better economic performance than others? • used to help firms achieve competitive advantage and superior economic performance • assumes that a firm's resources and capabilities are the primary drivers of competitive advantage and economic performance

External analysis allows firms to:

• discover threats and opportunities • see if above normal profits are likely in an industry • better understand the nature of competition in an industry • make more informed strategic choices

leverage capabilities

• firm capabilities may be sources of competitive advantage in other businesses • if not, then don't integrate exchange

Is the firm organized to exploit the product/service? Management Controls

• flexibility • broad guidelines • creativity encouraged

Strategy implementation

• how strategies are carried out • who will do what • organizational structure and control • who reports to whom • how does the firm hire, promote, pay, etc.

By definition, we assume rareness:

• if a product is differentiated, it is rare enough • customer preferences are evidence of a differentiated product • increased volume of purchases • and/or a premium price

innovation

• in time, even sustainable competitive advantage may be lost -> ________is important to remain competitive advantage

exploit flexibility

• internalizing is usually less flexible • flexibility is prized when uncertainty is high

What needs to be "controlled" in a vertically integrated firm?

• managers' efforts to achieve the desired value chain economies • cooperation and competition among and between functions • the integration of new businesses into the existing business

Multipoint Competition

• mutual forbearance • a firm chooses not to compete aggressively in one market to avoid competition in another market (ex. Tacit collusion)

Product and Geographic Diversification Possibilities:

• single-business in one geographic area • single-business in multiple geographic areas • related-constrained in one or multiple geographic areas • related-linked in one or multiple geographic areas • unrelated in one or multiple geographic areas

conditions that facilitate buyer power:

• small number of buyers for focal firm's output • lack of a differentiated product • the product is important and/or costly for the buyer • buyers are operating in a competitive industry • Buyers can vertically integrate backward

Industry conditions that facilitate supplier power:

• small number of firms in supplier's industry • highly differentiated product • lack of close substitutes for suppliers' products • supplier could integrate forward • focal firm is an insignificant customer of supplier

Resources

• tangible and intangible assets of a firm » tangible: factories, products - intangible: reputation • used to conceive of and implement strategies

Market Power

• using profits from one business to compete in another business (ex. Predatory pricing) • using buying power in one business to obtain advantage in another business

Fragmented industry Opportunities

•Consolidation (acquisitions, franchising) •Franchising •Discovery of economies of scale

Fragmented industry Structure

•Large # of firms (no dominant firms) •Low entry barriers •Few economies of scale

Declining industry Opportunities

•Niche strategy •Divest; harvest •Market leadership

Emerging industry Structure

•No product standard has been reached (nor dominant firm) •Often triggered with technological development

Maturing industry Opportunities

•Refine current products & services •Introduce process innovations

Declining industry Structure

•Shrinking demand & capacity growth •Firms exiting & no new investments

Maturing industry Structure

•Slowing demand & capacity growth •Fewer profits & new innovations