Badm 449 Quiz #2
difference in complexity
in production processes(ex. manufacture of steel rods), effects from economies of scale can be quite significant, while learning effects are minimal. In contrast, in some professions(brain surgery or the practice of estate law), learning effects can be substantial, while economies of scale are minimal.
diseconomies of scale
increases in cost per unit when output increases
Risks of Vertical Integration
increasing costs, reducing quality, reducing flexibility, increasing the potential for legal repercussions
Industry Life Cycle
introduction, growth, shakeout, maturity, decline
Human asset specificity
investments made in human capital to acquire unique knowledge and skills
International Strategy
involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets usually first step companies take when beginning to conduct business abroad advantageous when the MNE faces low pressure for both local responsiveness and cost reductions ex. Harley Davidson, Starbucks, Rolex
Explicit knowledge
knowledge that can be codified; concerns knowing about a process or product
tacit knowledge
knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task
Laggards
last consumer segment to come into market, entering at the declining stage, making up 16% of market potential
difference in timing
learning effects occur over time as output accumulates, while economies of scale are captured at one point in time when output increases. Although learning can decline or flatten, there are no diseconomies to learning
Managerial Motives
managers acting in their own self-interest rather than to maximize long-term shareholder value
winner-take-all system
markets where the market leader captures almost all of the market share and is able to extract significant amount of the value created
Strategic outsourcing
moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain -firm who engages in strategic outsourcing reduces its level of vertical integration
"Stuck in the Middle"
neither clear differentiation nor clear cost-leadership profile
product innovation
new or recombined knowledge embodied in new products,
process innovation
new ways to produce existing products or deliver existing services
Economic incentives
once an innovator has become an established incumbent firm, it has strong incentives to defend its strategic position and market power
Minimum efficient scale
output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale ex. prius and toyota ex. Nucor
Equity Alliances
partnership in which at least one partner takes partial ownership in the other -used to signal stronger commitment -allow for sharing of tacit knowledge EX: Toyota had equity alliance w Tesla Motors (designer and maker of electric cars) to learn new knowledge -another governance mechanism under equity alliance- corporate venture capital (CVC) -"try before you buy" -downside is the amount of investment and lack of flexibility
4 main dimensions of culture
power distance, individualism, masculinity-feminity, uncertainty
Raise
raised several competitive elements: tens of thousands of home furnishing items, offers more than furniture, manufacture all of furniture at fully dedicated suppliers, raised customer experience by store layout
Organizational Inertia
resistance to changes in the status quo, Incumbent firms tend to favor incremental innovations that reinforce the existing organizational structure and power distribution while avoiding radical innovation that could disturb the existing power distribution ex. marketing vs R&D
focused cost leadership strategy
same as the cost-leadership strategy except with a narrow focus on a niche market
focused differentiation strategy
same as the differentiation strategy except with a narrow focus on a niche market
Economies of Scope
savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology
Alliance champion
senior, corporate level executive responsible for high level support and oversight. Also responsible for making sure that the alliance fits within the firm's existing alliance portfolio and corporate level strategy
Alliance manager
serves as an alliance process resource and business integrator between 2 alliance partners and provides alliance training and development as well as diagnostic tools
learning races
situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which the firms learn may vary
Decline Stage
size of market contracts, demand falls, innovation on both efforts stop,
Demand Conditions
specific characteristics of demand in a firm's domestic market ex. Dense urban living conditions, hot and humid summers, and high energy costs tell us it is not surprising that Japanese customers demand small, quiet, energy-efficient air conditioners
Key objective during growth stage
stake out strong strategic position not easily imitated by rivals ex. SPANX
Relational view of competitive advantage
strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries
strategic position
strategic profile based on value creation and cost
integration-responsiveness framework
strategy framework that juxtaposes the pressures an MNE faces for cost reductions and local responsiveness to derive four different strategies to gain and sustain competitive advantage when competing globally
national culture
the collective mental and emotional "programming of the mind" that differentiates human groups
Innovation
the commercialization of any new product or process, or the modification and recombination of existing ones Ex. netflix
geographic distance
the costs to cross-border trade rise with geographic distance does not simply capture how far two countries are from each other but also includes other attributes such as the countries physical size (canada vs singapore), the within-country distance to its borders, the countries topography, its time zones, and whether the countries are contiguous to one another or have access to waterways and the ocean
Technology enthusiasts
the customer segment in the introductory stage of the industry life cycle making up 2.5%
Vertical Integration
the firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs -can be measured by a firm's value added: What percentage of a firm's sales is generated within the firm's boundaries?
Business-Level Strategy
the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market Asks (who, what, why, how)
Merger
the joining of two independent companies to form a combined entity -tend to be friendly EX: Live nation merged with Ticketmaster
local responsiveness
the need to tailor product and service offerings to fit local consumer preferences and host-country requirements (generally higher cost) ex. Walmart sells animals for food prep in China
Network effects
the positive effect (externality) that one user of a product or service has on the value of that product for other users Ex. Apple leveraging network effects
Horisontal integreation
the process of merging with competitors, leading to industry consolidation -at the same stage of the industry value chain -firms should go ahead with a horizontal integration if the target firm is more valuable inside the acquiring firm that as a continued standalone company
Restructuring
the process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully
Value innovation
the simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy
scope of competition
the size - narrow or broad - of the market in which a firm chooses to compete
Invention
the transformation of an idea into a new product or process, or the modification and recombination of existing ones
Achieving competitive advantage
under a differentiation strategy, firms that successfully differentiate their products enjoy a competitive advantage. Firm A's product is seen as a generic commodity with no unique brand value. Firm B has the same cost structure as Firm A but creates more economic value and thus has a competitive advantage over both Firm A and Firm C.
Learning Curve
underlying technology remains constant, while cumulative output increased ex. Aircraft manufacturing. Every time production is doubled the per-unit cost dropped by a predictable and constant rate. Moving down the learning curve creates a competitive advantage
Trade secrets
valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain its secrecy ex. coca-cola recipe
Strategic alliances
voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services
Strategic Alliance
voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services Umbrella for: 1. Long term contracts 2. Equity alliances 3. Joint ventures
economic distance
wealth and per capita income of consumers important factor, developed economies trade and benefit from economies wealthy countries trade more with rich countries and poor countries because of cross-border trade. They benefit from this when their competitive advantage is based on economies of experience, scale, scope, and standardization, and economic arbitrage ex. the textile industry
Introduction Stage
when an individual inventor or company launches a successful innovation, a new industry may emerge. Core competency is R&D in the introductory stage. Initial market size is small and growth is slow
Vertical Market Failure
when the markets along the industry value chain are too risky, and alternatives too costly in time or money
Strategy formulation
where and how to compete
National Competitive Advantage
world leadership in specific industries companies from home countries that are world leaders in specific industries tend to be the strongest competitors globally
Differentiation Strategy Risks
- Erosion of margins (for threat of new entry, power of suppliers, and power of buyers) - replacement(threat of new entry and substitutes (especially when faced with innovation)) - focus of competition shifts to price -increasing differentiation of product features that do not create value but raise costs - increasing differentiation to raise costs above acceptable threshold
Cost-leadership Strategy: Risks
- Same as above - focus of competition shifts to non-price attributes - lowering costs to drive value creation below acceptable threshold
Cost-leadership Strategy: Benefits
- protection against entry due to economies of scale - protection against incease in input prices, which can be absorbed - protection against decrease in sale prices, which can be absorbed - protection against substitute products through further lowering prices - protection against price wars because lowest- cost firm will win
Differentiation Strategy Benefits
- protection against entry due to intangible resources such as a reputation for innovation, quality, or customer service - protection against increase in input prices, which can be passed to consumers -protection against decrease in sales prices, because well-differentiated products or services are not perfect imitations - protection against substitute products due to differential appeal - protection against competitors if product or service has enough differential appeal to command premium price
Examples of early wave innovation that were destroyed by the second wave
- the explosion of television-viewing options traditional television networks to youtube to streaming services - the move from typewriters to PCs to mobile devices Wang lab, a computer company destroyed type writer
What led to open innovation
- the increasing supply and mobility of skilled workers - the exponential growth of venture capital - the increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and inventions - the increasing capability of external suppliers globally
Value innovation- Lower costs
-Eliminate: Which of the factors that the industry takes for granted should be eliminated? -Reduce: Which of the factors should be reduced well below the industry's standard?
Increase Market Power
-Fewer competitors equates to higher industry profitability -Larger firms have more bargaining power with suppliers and buyers
Lower costs
-Firms need to achieve minimum efficient scale
Enter new markets
-HP and Dreamworks worked together for new technology
Long term contracts
-Help overcome short term contract drawback 1. Licensing 2. Franchising
Lower powered incentives
-Hourly wages and salaries
KFC vs Chick Fil A
-KFC is global while Chick Fil A is only in the US -KFC is a publicly traded stock company while ChickfilA is private -privately held companies usually expand slower
Globalization 3.0 21st century
-MNEs have become global collaboration networks
Increase Profits
-Profitable growth allows businesses to provide higher return for shareholders, or owners -Stock market valuation of a firm is determined by expected future revenue and profit streams -Decline in firm's stock price=lower overall market capitalization- could lead to a hostile takeover -Lower stock price=more costly to raise required capital for future growth
For diversification to enhance firm performance, it must do at least on of the following:
-Provide economies of scale, which reduces costs - Exploit economies of scope, which increases value - Reduce costs and increase value Other potential benefits include financial economies, resulting from restructuring and using internal capital markets
Cost Leadership Risks from slides
-Standardization can increase risk of obsolescence and decrease ability to adapt to technological shifts in market or changing tastes. -Inferior quality -Social, political, and economic risk of outsourcing
Corporate Office
-Structure: the way the corporation is divided into discrete units -systems: Coordination and control mechanisms -processes: The informal elements of an organization's activities
Alternatives to vertical integration
-Taper integration -Strategic Outsourcing
2 variables to classify types of diversification
-The percentage of revenue from the dominant or primary business -The relationship of the core competencies across the business units
Economies of Scope
-The savings that come from producing two (or more) outputs or providing different services at less cost than producing individually, though using the same resources and technology EX: Amazon benefits because it can offer a large range of different product and service categories at a lower cost than it would take to offer each product individually
Firm should vertically integrate when
-When the costs of pursuing an activity in house are less than the costs of transacting for that activity in the market -When firms are more efficient in organizing economic activity than are markets, which rely on contracts among many independent actors EX: Google hires programmers to write in house rather than contracting in the open market -Also, Google gains economies of scope in software development resources and capabilities and reduces monitoring costs
Liability of foreignness
-additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances
Transaction Costs
-all costs associated with an economic exchange -enables managers to see whether it is cost effective for their firm to expand its boundaries through vertical integration or diversification -taking on greater ownership of the production of needed inputs or of the channels by which it distributes its outputs, or adding business units that offer new products and services
Globalization 1.0 1900-1941
-all important business functions were located in the home country -only sales and distribution operations took place overseas -strategy formulation and implementation followed a one way path-from domestic headquarters to international outposts -saw the blossoming of MNEs
Reduction in competitive intensity
-as a whole, the industry structure becomes more consolidated and potentially more profitable -horizontal integration can favorably affect Porter's five forces for surviving firms EX: FTC did not approve of merger of Staple and Office Depot
Better off Test (Class Slides)
-asks whether a particular set of business units should be working together: Does the presence of the corporation in a given market improve the competitive advantage of other business units over and above what they could achieve on their own? -focuses on corporate added value (value creation)
Best Alternative Test (Class Slides)
-asks whether the set must be jointly owned to maximize the amount of value created and captured: Does ownership of the business unit produce a greater competitive advantage than an alternative arrangement would produce? -Business units may choose to remain independently owned (value capturing)
Internal Capital Markets
-can be a source of value creation in a diversification strategy if the conglomerate's headquarters does a more efficient job of allocating capital through its budgeting process than what could be achieved in external capital markets
Strengthen competitive position
-change industry structure in their favor -firms frequently use strategic alliances when competing in so called battles for industry standards EX: IBM and Apple enter strategic alliance and increases competitive pressure on rival Microsoft
Size of merger and acquisition
-combining of two comparable size is often described as a merger even though it might be an acquisition
Gain access to larger market
-companies that base their competitive advantage on economies of scale and economies of scope have an incentive to gain access to larger markets bc this can reinforce the basis of their competitive advantage.
Cash cows
-compete in low growth market share but hold a considerable market share -Strategic recommendation is to invest enough into cash cows to hold their current position and avoid them turning into dogs
Dominant business
-derives between 70-95% of its revenues from one business, but pursues atleast one other business activity for the rest of the revenue
Single business
-derives more than 95% of its revenues from one business EX: Google obtains more than 95% of it revenues from online advertising
Community of knowledge
-employees within firms have ongoing relationships, exchanging ideas, and working closely together to solve problems -facilitates development of deep knowledge repertoire and ecosystem within firms EX: scientists within a biotech company who worked together developing a new cancer drug- might lay foundation to purchase on the open market
Globalization 2.0 1945-2000
-end of World War II -MNEs created copies of themselves in Western countries -required large amounts of foreign direct investment -"copies" of the MNEs allowed for country specific responsiveness
Partner Selection and alliance formation
-expected benefits of the alliance must exceed its costs -partner compatibility captures aspects of cultural fit between different firms -partner commitment concerns the willingness to make available necessary resources and to accept short term sacrifices to ensure long term rewards
Short term contracts
-firm sends out requests for proposals (RFPS) to several companies, which initiates competitive bidding for contracts to be awarded with a short duration, generally less than a year -buying firm can often demand lower prices due to the competitive bidding process -Drawback: Firms responding to RFP have no incentive to make any transaction specific investments EX: GM motors when faced with significant cost pressure, suppliers gave less quality componenets
Learn new capabilities
-firms enter alliances bc they want to learn new capabilities from their competitors -co-opetition ensues -might cooperate to make a larger pie, but compete on how the pie is divided EX: Toyota and GM joint venture for NUMMI- learned capabilities from eachother -motivations can be intertwined
Develop new competencies
-firms that base their competitive advantage on a differentiation strategy -make foreign direst investments to be a part of communities of learning EX: AstraZeneca relocated to Cambridge to be a part of the Boston biotech cluster, in hopes of developing new technology
Lower costs
-firms use horizontal integration to lower costs through economies of scale and to enhance their economic value creation, and in turn their performance
Reduce Risk
-firms want to diversify their product and service portfolio through competing in different industries -Falling sales and lower performance in one sector may be compensated by higher performance in another -attempt to achieve economies of scope
Types of Vertical Integration
-full vertical integration -more or less vertically disintegrated with a low degree of vertical integration
Alliance leader
-has the technical expertise and knowledge needed for the specific technical area and is responsible for the day-to-day management of the alliance
Star
-hold high market share in a fast growing market -recommendation is to invest sufficient resources to hold the star's position or even increase investments for future growth
Core competencies
-internally held knowledge underlying a core competency determines a firm's boundaries
Taper integration benefits
-it exposes in house suppliers and distributors to market competition so that performance comparisons are possible -allows firms to retain and fine tune its competencies in upstream and downstream value chain activities -enhances a firm's flexibility EX: when adjusting to fluctuations in demand, a firm could cut back on the finished goods it delivers to external retailers while continuing to stock in stores -firms can combine internal and external knowledge
Benefits of Vertical Integration
-lowering costs -improving quality -facilitating scheduling and planning -facilitating investments in specialized assets -securing critical supplies and distribution channels EX: HTC backwardly integrated into smartphone design
Non equity alliances
-most common type of alliance -based on contracts between firms -most frequent forms are supply agreements, distribution agreements, and licensing agreements -vertical strategic alliance- connecting different parts of the industry value chain -firms tend to share explicit knowledge -flexible and easy to terminate -can produce weak ties bc of temporary nature
Parent Subsidiary Relationship
-most integrated alternative -The corporate parents owns the subsidiary and can direct it via command and control -Transaction costs that arise are due to political turf battles EX: GM owns European carmakers- failure to bring some fo their know-how and design back in the US.
Alliance design and governance
-must choose and appropriate governance mechanism: non equity, equity, or joint venture -inter-organizational trust is critical dimension of alliance success
Alliances can be governed by the following mechanisms
-non-equity alliances -equity alliances -joint ventures
Incomplete Contracting
-not all future contingencies can be anticipated at the time of contracting
Economies of scale
-occur when a firm's average cost per unit decreases as its output increases -EX: Anheuser-Busch InBev, the largest global brewer has significant economies of scale -It is able to spread its fixed costs over millions of gallons of beer -Larger market share=lower costs
Post formation alliance management
-partnership must create resource combinations that obey the VRIO criteria -most likely accomplished if the alliance partners make relation specific investments, establish knowledge sharing routines, and build interfirm trust -suggest firms create a dedicated alliance function- given the tasks of coordinating all alliance related activity -3 person team: Alliance champion, alliance leader, alliance manager
Why do we see so many mergers and acquisitions even though majority of the time they destroy shareholder value
-principal agent problems -desire to overcome competitive disadvantage -superior acquisition and integration capability
Loss of reputation
-reputation can be one of the most valuable resources EX: Apple for innovation and superior customer experience -low cost "sweat factories" can tarnish companies' reputation
Loss of intellectual property
-software, movie, and music industries have long lamented large scale copyright infringements in many foreign markets
Economies of Scale allow firms to:
-spread their fixed costs over a larger output -employ specialized systems and equipment -take advantage of certain physical properties
Joint ventures
-standalone organization created and jointly owned by two or more parent companies EX: Hulu owned by NBC, Disney, and Fox -long term commitment -exchange of both explicit and tacit knowledge through interaction of personnel -also frequently used to enter foreign markets -least common of the 3 alliances
Hedge against uncertainty
-strategic alliances allow firms to limit their exposure to uncertainty in the market
Why do firms enter strategic alliances?
-strengthen competitive position -enter new markets -hedge against uncertainty -access critical complementary assets -learn new capabilities
Access critical complementary assets
-successful commercialization of a new product or service often requires complementary assets such as marketing, manufacturing, and after sale service.
Search costs
-the biggest disadvantage of transacting in the market -firm faces when it must scour the market to find reliable suppliers
Why do firms acquire other firms?
-to gain access to new markets and distribution channels -to gain access to a new capability or competency -to preempt rivals
EX: Weyerhaeser
-world's largest paper and pulp companies -fully vertically integrated: all activities are conducted within the boundaries of the firm
How to respond to disruptive innovation
1. Continue to innovate in order to stay ahead of the competition. 2. Guard against disruptive innovation by protecting the low end of the market. 3. Disrupt yourself, rather than wait for others to disrupt you (e.g., reverse innovation)
Underlying strategic management concepts
1. Core competencies 2. Economies of scale 3. Economies of scope 4. Transaction costs
3 questions determining corporate strategy
1. In what stages of the industry value chain should the company participate (vertical integration)? The industry value chain describes the transformation of raw materials into finished goods and services along distinct vertical stages 2. What range of products and services should the company offer? (Diversification) 3. Where should the company compete geographically in terms of regional, national, or international markets (geographic scope)?
Why firms need to grow
1. Increase profits 2. Lower costs 3. Increase market power 4. Reduce risk 5. Motivate management
4 options to formulate corporate strategy via Core Competencies
1. Leverage existing core competencies to improve current market position 2. Build new core competencies to protect and extend current market position 3. Redeploy and recombine existing core competencies to compete in markets of the future 4. Build new core competencies to create and compete in markets of the future
Disadvantages of going global
1. Liability of foreignness 2. Loss of reputation 3. Loss of intellectual property
Industry Value chain stages
1. Raw materials 2. Components -Intermediate goods 3. Final Assembly - Manufacturing 4. Marketing and Sales 5. After Sales Service and Support
build-borrow-or-buy framework 4 questions
1. Relevancy- How relevant are the firm's existing internal resources to solving the resource gap? 2. Tradability- How tradable are the targeted resources that may be available externally? 3. Closeness- How close do you need to be to your external resource partner? 4. Integration- How well can you integrate the targeted firm, should you determine you need to acquire the resource partner?
Alternatives on the make or buy continuum
1. Short term contracts 2. Strategic alliances 3. Parent Subsidiary relationship
4 main types of business diversification
1. Single business 2. Dominant business 3. Related Diversification 4. Unrelated diversification: the conglomerate
Basic Principles of Strategy
1. Value-based business strategy: The amount of value that a firm can claim cannot exceed its added value under unrestricted bargaining. The key to a firm's achieving a positive added value is the existence of a favorable asymmetry between the firm and its competitors. 2. Four Strategies: There are four routes to enjoying a favorable asymmetry between the focal firm and its competitors in terms of buyer willingness-to-pay and supplier opportunity cost. (firm, competitors→ willingness to pay, opportunity cost) Review slide 6 3. Strategic Fit: Business strategy should be designed to match: - Competitive forces in the industry - The firm's resources and capabilities 4. Trade-offs: Cost-Quality Frontier: Tradeoff between cost and quality
MTV example
1. followed global-standardization strategy as it attempted to respond to pressures for both cost reduction and local responsiveness (this was because MTV had a large cultural distance and did not have mass appeal) 2. implemented multidomestic strategy to meet the needs for local responsiveness. This led to loss of all possible scale effects, especially rolling out expensive content over a large installed base of viewers 3. Now pursuing transnational strategy
Advantages of going global
1. gain access to a larger market 2. gain access to low cost input factors 3. develop new competencies
3 main benefits of horizontal integration strategy
1. reduction in competitive intensity 2. Lower costs 3. Increased differentiation
Gain access to low cost input factors
=companies that have a low cost strategy want to go overseas to gain access to low cost input factors -China is a manufacturing powerhouse bc of low labor costs
CAGE distance framework
A decision framework based on the relative distance between home and a foreign target country along four dimensions: cultural distance, administrative and political distance, geographic distance, and economic distance. Cultural Administrative and political Geographic Economic
Licensing
A form of long term contracting in the manufacturing sector that enables firms to commercialize intellectual property EX: first biotechnology drug- Humulin was devloped by Genentech and commercialized by Eli Lilly based on a licensing contract
Open innovation
A framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from external ones. The sharing goes both ways: some external ideas and inventions are insourced while others are spun out.
Franchising
A long term contract in which a franchisor grants a franchisee the right to use the franchisor's trademark and business processes to offer goods and services that carry the franchisor's brand name EX: Mcdonalds, Burger King, let an entrepreneur that owns no more than a few outlets to use their trademarks)
Credible commitment
A long term strategic decision that is both difficult and costly to reverse
Joint venture
A stand alone organization created and jointly owned by two or more parent companies EX: Dow Corning, owned jointly by Dow Chemical and Corning Hulu is joint venture owned by NBC, Fox, and Disney-ABC
Transaction cost economies
A theoretical framework in strategic management to explain and predict the boundaries of the firm, which is central to formulating a corporate strategy that is more likely to lead to competitive advantage -help managers decide what activities to do in house vs. what services and products to obtain from the external market -different institutional arrangements- market vs firm- have different costs attached
Hostile take over
Acquisition in which the target company does not wish to be acquired Ex: British telecom company Vodafone acquisition of Mannesmann
Complements
Add value to good/product ex. AT&T U-verse
Product Features
Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price ex. OXO and their patent-protected ergonomically designed soft rubber grips
Firms Advantages and Disadvantages
Advantages 1. Command Control -Flat Hierarchical lines of authority 2. Coordination 3. Transaction-specific investments 4. Community of knowledge Disadvantages 1. Administrative Costs 2. Lower powered incentives 3. Principal-agent problem
Markets Advantages and Disadvantages
Advantages 1. High powered incentives 2. Flexibility Disadvantages 1. Search costs 2. Opportunism -Hold up 3. Incomplete Contracting 4. Enforcement of contracts
Transaction costs
All internal and external costs associated with an economic exchange, whether within a firm or in markets
radical innovation
An innovation that draws on novel methods or materials, is derived either from an entirely different knowledge base or from a recombination of the existing knowledge bases with a new stream of knowledge. ex. model-t, xray, airplane ex. Gillette company and razor blade
Control Systems
As resources become more specialized, the value of moving from financial to operating controls increases
Location economies
Benefits from locating value chain activities in the world's optimal geographies for a specific activity wherever they may be
Well known MNE
Boeing, Caterpillar, Coke, GE, John Deere, Exxon, Mobil, P&G, Walmart -account for 11% of private sector employment growth since 1990 Employ 19% of the work force -pay 25% of wages -provide 31% of US gross domestic product -make up 74% of private sector R&D spending
Blue Ocean Strategy
Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs. Ex. trader-joes (differentiated product at low cost)
Caveat emptor
Buyer beware
strategic trade-offs
Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost.
Scope of business
Companies with specialized resources will compete in a narrower range of businesses than companies with more general resources
build-borrow-or-buy framework
Conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy).
Related diversification
Corporate strategy in which a firm derives less than 70 percent of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity. 1. Related constrained diversification 2. Related linked diversification
Cost-Leadership Strategy: Understanding cost drivers
Cost leader focuses its attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer lower prices to its consumes
External Transaction costs
Costs of searching for a firm or and individual with whom to contract, and then negotiating, monitoring, and enforcing the contract
Internal Transaction costs
Costs pertaining to organizing an economic exchange within a hierarchy; also called administrative costs EX: costs of recruiting and retaining employees, setting up shop floor, providing office space
Resources
Critical building blocks of strategy • Broadly defined: Assets and capabilities • Core competency? - VRINE Model • Specialized vs. General
take advantage of certain physical properties
Cube-square rule: the volume of a body such as pipe or a tank increases disproportionately more than its surface. Size makes it difficult to compete on cost and selection ex. toys-r-us, walmart
Late majority
Customers entering the market in the maturity stage, making up approximately 34 percent of the total.
The Desire to overcome competitive disadvantage
EX: Adidas bought ReeBok to benefit from economies of scale
To preempt rivals
EX: Facebook acquired Instagram Google bought Youtube Google bought Waze so that Apple and Facebook didnt
High powered incentives
EX: an individual can start a new venture offering specialized software rather than work as a salaried engineer for an existing firm
Transaction specific investment
EX: specialized robotics equipment that is highly valuable within the firm, but little to no use in the external market
Why radical innovations are introduced by new entrepreneurial ventures
Economic incentives, organizational inertia, innovation ecosystem
Superior acquisition and integration capability
Ex: Disney was successful for acquiring Pixar, Marvel, and Lucasfilm
Four conditions of Porter's Diamond Framework (explaining national competitive advantage)
Factor Conditions Demand Conditions Competitive intensity in focal industry Related and supporting industries/complementors
Differentiated Risks from slides
Failing to increase buyers' willingness to pay higher prices Underestimating costs of differentiation Lower-cost imitation Over-fulfilling buyers' needs
competency trap
Firms that strive for competence within a given strategy sometimes are trapped in it and miss the opportunity for strategic change.
Increased differentiation
Horizontal integration through M&A can help firms strengthen their competitive positions by increasing differentiation of their product and service offerings EX: Disney acquired Marvel- now have superheros
Eliminate
IKEA eliminates several taken-for-granted elements: salespeople, long wait after ordering furniture, after sales service
Innovation Process
Idea Invention Innovation Imitation
Imitation
If innovation is successful, competitors will try to imitate it Ex. hulu, disney, amazon prime copying netflic
Vision Goals and Objectives
In the center of the triangle Vision: Provides overarching sense of purpose and mission Goals and objectives: shorter term milestones.
Customer Service
Increase perceived value by focusing on customer service ex. Zappos with great customer service by offering free shipping to the customer and for returns- thought of as marketing technique not expence
Businesses
Industry choice- attractive? Competitive strategy- Competitive position & generic strategies
Maturity Stage
Industry structure morphs into an oligopoly with only a few large firms, market demand is limited, market has reached its maximum size, industry growth is likely to be zero, increase competitive intensity within industry, process innovation reaches maximum and firms attempt to lower cost, production innovation sinks to a minimum, firms that survive shakeout stage tend to enjoy economies of scale ex. domestic airline industry
4 strategic positions
International Multidomestic Global-standardization Transnational
Mobile Phone Industry example
Iridium- ill-fated satellite-based telephone system- could not be used inside buildings or cars and did not make it past technology enthusiast stage Treo- fully functioning smartphone- had technical problems combined with lack of apps and an overly rigid contract with Sprint as its sole provider, could not make it past early majority stage and plunged into the chasm Blackberry very successful in two consumer markets, IT managers as early adopters and corporate executives as early majority, pulling Blackberry over the chasm Iphone came in and enticed early majority and late majority to enter the market, having fun with the device was more important than encrypted software security Galaxy similar to Iphone
Question marks
It is not clear whether they will turn into dogs or stars
Related and supporting industries/complementors
Leadership in related and supporting industries can also foster world-class competitors in downstream industries. the availability of top notch complementors - firms that provide a good or service that leads customers to value the focal firm's offering more when the two are combined - further strengthens national competitive advantage.
Growth Stage
Market growth, demand increases rapidly, standard signals market agreement, economies of scale kick in, process innovation ramps up, core competency shifts toward manufacturing and marketing capabilities, R&D emphasis shifts to to process innovation, competitive rivalry is muted since market is fast growing
Spread their fixed costs over a larger output
Microsoft dominates operating system for personal computers(PCs) with more than 90 percent market share, it sold several hundred million copies of Windows 7, thereby spreading its huge fixed cost of development over a large output
Create
New way to shop, new approach to pricing products, on site-child care, convenient and ample parking
Shakeout Stage
Only strongest competitors survive rate of growth declines, firms compete directly against one another. KSF are manufacturing and process engineering capabilities that can be used to drive down costs. Importance of product innovation further declines Price becomes a more important competitive weapon
Global strategy
Part of a firm's corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world
Idea
Presented in terms of abstract concept or as findings derived from basic research. Basic research conducted to discover new knowledge and is often published in academic journals ex. wireless communication tech built upon breakthroughs Albert Einstein accomplished over 100 years ago
Differentiation Strategy: Understanding Value Drivers (that managers have at their disposal)
Product Features (Product Attributes) Customer Service (Firm customer-relationship) Complements (linkage to other companies)
Value Innovation- increased perceived consumer benefits
Raise: Which of the factors should be raised well above the industry's standard? Create: Which factors should be created that the industry never offered?
Corporate Strategy Triangle (Class Slides)
Resources Businesses Corporate Office Vision, Goals & Objectives (in the center of triangle)
Resource Continuum (Class Slides)
Scope of business Coordination mechanisms control systems corporate office size
Principal Agent problem
Situation in which an agent performing activities on behalf of a principal pursues his or her own interests -almost inevitable EX: manager may pursue his own interests like job security that conflicts with the principal's goals-- creating shareholder value -To over come it: give stock options to managers
Information asymmetry
Situation in which one party is more informed than another because of the possession of private information
Three Well aligned Strategies
TYCO- nature of resources-general scope of businesses-wide coordination mechanisms-transferring control systems-financial Corporate office size-small NEWALL- All in the middle SHARP- nature of resources-specialized scope of businesses-narrow coordination mechanisms-sharing control systems-operating corporate office size-large
Netflix and Long tail (pg. 209-210)
Technology enables easier access to the "tail." • Selling "less of more" • Online firms can gain a large share from selling a small # of nearly unlimited choices.
employ specialized systems and equipment
Tesla's strong demand for Model S allowed it to employ cutting edge robotics in its manufacturing plant to produce cars of the highest quality at a large scale
Corporate Strategy
The decisions that senior management makes and the goal directed actions it takes to gain and sustain competitive advantage in several industries and markets simultaneously -Provides the key question: where to compete -determines the boundaries of the firm along three dimensions: Vertical integration (along the industry value chain), Diversification (of products and services), and geographic scope (regional, national, global)
Coordination mechanisms
The more general the resource, the more likely the company can effectively deploy it through transfer rather than sharing
Corporate office size
The more general the resources and the less the need for sharing, the smaller the corporate office should be
Globalization
The process of closer integration and exchange between different countries and peoples worldwide, made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs. -allows companies to sources supplies at lower costs, to learn new competencies, and further differentiate products
Acquisition
The purchase or takeover of one company by another, can be friendly or unfriendly EX: Disney taking over Pixar
"Testing the quality of a strategy"
This is just a set of questions that you can use to evaluate whether or not a firm's strategy is good and is very straightforward to understand. 1. Does your strategy exploit your key resources? 2. Does your strategy fit the current industry conditions? 3. Will your differentiators be sustainable? 4. Are the elements of your strategic consistent and aligned with your strategic position? 5. Can your strategy by implemented?
Dogs
Underperforming business -hold small market share in a low growth market -strategic recommendation are either divest the business or harvest it
Specialized assets
Unique assets with high opportunity cost: They have significantly more value in their intended use than in their next best use. They come in three types: site specificity, physical asset specificity, and human-asset specificity.
Conglomerate
a company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy EX: LG, Berkshire Hathaway, Yamaha
Multinational enterprise (MNE)
a company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries -the engine behind globalization -by making investments in value chain activities abroad, MNE engages in foreign direct investment
Make and technology framework
a conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions
Boston Consulting Group Matrix
a corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) and speed of market growth (vertical axis) are plotted into 4 categories (dog, cash, cow, star, and question mark), each of which warrants a different investment strategy
Alliance management capability
a firm's ability to effectively manage three alliance-related tasks concurrently 1. Partner selection and alliance formulation 2. Alliance design and governance 3. Post formulation alliance management
Innovation ecosystem( go back over pg 235-241)
a firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic decision making
Foreign direct investment (FDI)
a firm's investments in value chain activities abroad EX: European aircraft maker Airbus invests in Mobile, Alabama, to build jetliners
patent
a form of intellectual property that gives the inventor exclusive rights to benefit from commercializing a technology for a specified time period in exchange for public disclosure of the underlying idea. can be patented if useful, novel, and non-obvious
managerial hubris
a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary 1. Managers of the acquiring company convince themselves that they are able to manage the business of the target company more effectively and therefore, create additional shareholder value. This justification is often used for an unrelated diversification strategy 2. Although most top level managers are aware that the majority of acquisitions destroy rather than create shareholder value, they see themselves as the exceptions of the rule EX: Quaker Oats bought Snapple- but Snapple's distributors and retailers didn't want snapple to be taken over- so the acquisition failed
core competence-market matrix
a framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets PAGE 277 DIAGRAM
Related constrained diversification strategy
a kind of related diversification strategy in which executives pursue only businesses where they can apply the resources and core competencies already available in the primary business EX: ExxonMobil bought XTO Energy to extract natural gas
Related linked diversification
a kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages EX: Amazon
architectural innovation
a new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets. EX: Xerox- Canon redesigned the copier
Equity Alliances
a partnership in which at least one partner takes partial ownership in the other partner EX: Coco Cola forms equity alliance with Monster to get an inside look into the company Coke made Monster a credible commitment
taper integration
a way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside market firms for some of its supplies, and/or is forwardly integrated but also relies on outside market firms for some of its distribution
absorptive capacity
ability to understand external technology developments, evaluate them, and integrate them into current products or create new ones
Cost of Input Drivers
access to lower-cost input factors creates advantage ex. Emirates, Etihad, and Qatar airlines competing with America, Delta, and United
Standard
an agreed-upon solution about a common set of engineering features and design choices
Diversification
an increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes 1. Product diversification strategy 2. Geographic Diversification Strategy 3. Product market diversification strategy
disruptive innovation
an innovation that leverages new technologies to attack existing markets from the bottom up
Incremental innovation
an innovation that squarely builds on an established knowledge base and steadily improves an existing product or service ex. Gillette improving the razor blade
Real options perspective
approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time
Site specificity
assets required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting
Physical asset specificity
assets whose physical and engineering properties are designed to satisfy a particular customer EX: bottling for Coke or Pepsi- since they have trademarked shapes, they require unique molds
death-of-distance hypothesis
assumption that geographic location alone should not lead to firm-level competitive advantage because firms are now, more than ever, able to source inputs globally
Transactional strategy
attempt to combine the benefits of localization strategy(high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable) arises from high pressure for local responsiveness and high pressure for cost reductions used for MNE's that pursue a blue ocean strategy at the business level ex. Bertelsmann (multimedia conglomerate)
Multidomestic Strategy
attempt to maximize local responsiveness, with the intent that local consumers will perceive them to be domestic companies Usually used when entering host countries with large and/or idiosyncratic domestic markets Advantageous when MNE faces high pressure for local responsiveness and low pressure for cost reductions ex. Bridgestone, Nestle, Philips
global standardization strategy
attempting to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost arises out of combination of high pressure for cost reductions and low pressure for local responsiveness Since cost-leader, must maintain minimum efficient scale ex. Lenovo(computer manufacturer), Infosys, Siemens Energy
administrative and political distance
captured in factors such as the absence or presence of shared monetary or political associations, political hostilities, and weak or strong legal and financial institutions. Foreign countries erect other political and administrative barriers such as tariffs, trade quotas, FDI restrictions to protect domestic competitors ex. China request sharing of technology when entering the country Strong legal and ethical pillars as well as well-functioning institutions such as capital markets and an independent central bank reduce distance
Forward vertical integration
changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain
Backward vertical integration
changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain
Competitive Intensity in a focal Industry
companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition ex. Germany has fierce domestic competition, no-speed-limit autobahn, and high customer demand so it makes it very hard for car companies
First mover advantage
competitive benefits that accrue to the successful innovator. Benefit from economies of scale, experience and learning curves, and network effects, increase switching costs
Crossing the Chasm framework
conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group. Breaks down the 100 percent market potential into different customer segments, highlighting the incremental contribution each specific segment can bring to market
globalization hypothesis
consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous ex. IKEa in over 40 countries, Toyota selling prius in 80 countries
licensing agreements
contractual alliances in which the participants regularly exchange codified knowledge EX: Genetech licensed its new drug to Ely Lilly for manufacturing, facilitating, and distributing-- vertical strategic alliance
Unrelated diversification: The conglomerate
corporate strategy in which a firm derives less than 70% of its revenues from a single business and there are few, if any, linkages among its businesses
Geographic diversification strategy
corporate strategy in which a firm is active in several different countries
Product diversification strategy
corporate strategy in which a firm is active in several different product markets
Product market diversification strategy
corporate strategy in which a firm is active in several different product markets and several different countries
Cost Drivers
cost of input factors *economies of scale *learning-curve effects experience-curve effects
cultural distance
cultural disparity between an internationally expanding firm's home country and its targeted host country increases liability of foreignness ex. US to Australia= .02, US to Russia= 4.42
Early adopters
customer entering the market in the growth stage making up 13.5%
Early majority
customers coming into the market in the shakeout stage makes up 34% of entire market potential
Economies of Scale
decreases in cost per unit as output increases
Industry value chain
depiction of the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing
Factor Conditions
describe a country's endowments in terms of natural, human, and other resources. Other important factors include capital markets, a supportive institutional framework, research universities, and public infrastructure(airports, roads, schools, health care system)
Reduce
do-it-yourself business model reduced need for staff
Crossing the Chasm
each stage of the industry cycle is dominated by a different customer group. Significant differences between early customer groups- who enter during the introductory stage of the industry life cycle - and later customers- who enter during the growth stage- can make for a difficult transition between the different parts of the industry life cycle Many innovators fail to get from early adopters to majority. (15% to 50% of market). • The early adopters are excited by the possibilities of the product rather than the "cool technology" of technology enthusiasts. • The critical early majority base purchasing decisions on practicality. - This group can generate a herding effect.
Corporate Venture Capital (CVC)
equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances
Economies of Scale
ex. Boeing focusing on a smaller, fuel-efficient plane that allows for long-distance and point-to-point connection
Four strategic options at the final stage
exit, harvest, maintain, consolidate
differentiation strategy
generic business strategy that seeks to create higher value for customers than the value that competitors create
cost-leadership strategy
generic business strategy that seeks to create the same or similar value for customers at a lower cost
Strategy canvas
graphical depiction of a company's relative performance vis-a-vis its competitors across the industry's key success factors
Value curve
horizontal connection of the points of each value on the strategy canvas that helps strategists diagnose and determine courses of action
Business Strategy
how to compete in a single product market