BSM 600 Midterm
deterrence 3 pre-emption 4
- avoid competition by undermining the incentives for imitation - persuade rivals that imitation will be unprofitable - Reputation is critical to be credible - occupying existing and potential strategic niches to reduce the range of investment opportunities - Proliferation of product varieties by a market leader - Large investments in production capacity ahead of the growth of market demand - Patent proliferation can protect technology-based advantage
To identify a firm's capabilities, we need to have some basis for classifying and disaggregating its activities. 2 approaches
A functional analysis: identifies capabilities in relation to each of the principal functional areas of the firm A value chain analysis: separates the firm's activities into a sequential chain
Creative Canada
A new vision and approach to growing the creative economy by the Government of Canada
Strategic alliances 6
A non-permanent arrangement combines certain resources and capabilities of parties to arrive at a mutually agreed outcome allow for a sharing of risk and control employed when a firm seeks to enter a new product market or to enter a geographic market with an existing product a need to establish trust, communication, and co-operation between the management and employees of each firm (difficult if the corporate cultures are different) may suffer from the "temporary" nature of the arrangement: the level of management commitment to the alliance may be less than desired
open innovation 3
As innovation increasingly requires the integration of multiple technologies, firms have been forced to look wider in their sourcing technology and in sharing know-how and ideas external linkages promote innovation: boosted firms' desire to seek technological knowledge from beyond their own borders requires creating a network of collaborative relationships that comprises licensing deals, component outsourcing, joint research, collaborative product development, and informal problem solving and exchanges of ideas
Horizontal diversification 2
At the same stage of production manufacturing two different products (cars and aircrafts)
Internal capital markets 3
Avoiding external financing costs through internal transfer of capital the corporate allocating of capital between the different businesses through the capital expenditure budget con: strategic and financial considerations are subordinated by turf battles and ego building
Porter's 5 Forces: Threat of substitute products: 4
Books and eBooks are subs A different product that can answer the same purpose (ex: entertainment) The price customers are willing to pay for a product depends on the availability of substitute products The absence of close substitutes = consumers are insensitive to price
A value chain analysis of a firm's cost position comprises 6 stages
Break down the firm into separate activities Establish the relative importance of different activities in the total cost of the product compare costs by activity identify cost drivers identify linkages identify opportunities for reducing costs
VRIN
CA through resources that are valuable, rare, inimitable, non-substitutable
Porter's 5 Forces: threat of new entrants 6
Can pose new risks Can be bringing new tech, new markets, etc. They push us to further innovate and increase our quality A double risk for established businesses profit acts as a magnet to firms outside the industry there are restrictions in some industries (ex: licenses) Contestability depends on the absence of sunk costs (investments whose value cannot be recovered on exit); if none, the industry is vulnerable to "hit- and-run" entry
Innovation 6
Commercializing and producing invention The commercialization of invention by producing and marketing a new good or service or by using a new method of production that generates revenues and profits the quest for competitive advantage causes firms to invest in innovation responsible for new industries coming into being why some firms are able to dominate their industries may be the result of a single invention or it may combine many inventions
The emergence of competitive advantage 2
Competitive advantage from responsiveness to change (arises from external change; depends on firm's ability to respond to change) Competitive advantage from innovation: new game strategies (new products/services or new approaches to doing business, including new business models)
4 Principal Stages of Value Chain Analysis for Differentiation Advantage
Construct a value chain for the firm and the customer (draw separate value chains for each of the main categories of customer) Identify the drivers of uniqueness in each activity (Assess the firm's potential for differentiating its products) Select the most promising differentiation variables for the firm (3 supply side consideration) Locate linkages between the value chain of the firm and that of the buyer
economies of scope 3
Costs derived from choice of scope: from increasing the output of multiple products Used to decrease cost (alongside of economies of scale) Efficiencies through expansion of scope activities
invention 3
Creating new products or process from what already exists The creation of unique or novel products, methods, or processes through the development of new knowledge or from new combination of existing knowledge The act of creativity requiring knowledge and imagination, different organizational environment and management systems
Individual creativity depends on the organizational environment in which people work 3
Creativity is stimulated by human interaction: cross-collaboration a catalyst of interaction is play The potential for low-cost experimentation has expanded thanks to computer modelling and simulation that permit quick and virtual prototyping and market research
Organizational initiatives aimed at stimulating new product development and the exploitation of new technologies include 5
Cross-functional product development teams Product champions Buying innovation open innovation Corporate incubators
Outsourcing 2
Downsizing and refocusing to enhance flexibility allows firms to focus on their core competencies
To predict the future profitability of an industry, our analysis proceeds in 3 stages
Examine how the industry's current and recent levels of competition and profitability are a consequence of its present structure Identify the trends that are changing the industry's structure Identify how these structural changes will affect the five forces of competition and resulting profitability of the industry
strategic fit 2
Fundamental to the view of strategy as a link between the firm and its external environment For a strategy to be successful, it must be consistent with the firm's external environment and with its internal environment
Sources of immobility include 4
Geographical immobility of natural resources, large items of capital equipment, and employees Imperfect information regarding the quality and productivity of resources creates risks for buyers Complementarity between resources: the detachment of a resource from its "home team" causes it to lose productivity and value Organizational capabilities: the dependence of the team on a wider network of relationships and corporate culture may pose difficulties for recreating the capability
characteristics of a strategy that are conducive to success: 4
Goals that are simple, consistent, and long term profound understanding of the competitive environment (effective in exploiting internal strengths, while protecting areas of weakness) objective appraisal of resources and capabilities effective implementation (effective leadership; allows for the effective marshalling of resources and capabilities and quick responses to changes)
a winning strategy characteristics 3
How well does the strategy fit the company's internal and external situation? Is the strategy helping the company achieve a sustainable competitive advantage? Is the strategy resulting in better company performance?
how a company can appraise its resources and capabilities: 3 steps
Identify the Key Resources and Capabilities Appraising Resources and Capabilities Developing Strategy Implications
strategies exploring innovation and managing technology, focus in particular on 3
Identifying and evaluating strategic options for exploiting innovation The relative advantages of being a leader of follower in innovation How to manage risk
Porter's value chain classification 6
Identifying the organization's capabilities Preferred method Distinguishes between primary activities (those involved with transformation of inputs and interface with the customer) and support activities Helps managers identify areas in which a firm has an absolute strength/distinctive capability Used to answer: What is a firm good at? no competitor comparison
Why diversify 9
Increase productivity To reduce costs create more opportunity for both firm and customer Growth Value creation (inter-business value) Economies of scope Internal capital markets Internal labour markets Reduce risk (spread it; stabilize it = stable profits = job security (managers benefit))
a coherent strategy characteristics
Internal consistency and unity among all pieces of the strategy Degree of risk compared to alternative strategies Degree of flexible and adaptability
Creative Canada 3 pillars
Invest in our creators and cultural entrepreneurs Promote discovery and distribution of Canadian content at home and abroad Strengthen public broadcasting and support local news
Tacit knowledge
Knowledge is tacit when it is difficult for competitors to codify and replicate a product or process developed based on this knowledge Ex: Apple design philosophy difficult to replicate; 3M innovative corporate culture
Complementary resources 5
May be accessed through alliances and other forms of partnerships Required to bring new products and processes to market the diverse resources and capabilities needed to finance, produce, and market the innovation when generic, the innovator is in a much stronger position to capture value co-specialized complementary resources raise barriers to imitation
Strategic maneuvering: 3 ways to exploit innovation, diversification and vertical integration
Mergers and acquisitions Strategic alliances outsourcing
Internal labour markets 5
Movement of quality personnel inter-organizationally Efficiencies through the ability of diversified companies to transfer employees between their divisions and to rely less on hiring and firing has a pool of employees and can respond to the specific needs of any one business diverse corporations attract higher caliber employees different positions and internal units can build info on employees competencies and characteristics
PESTEL
Political Economic Social Technological Ecological Legal (patent)
Lead time 4
Provided by tacitness and complexity of knowledge The time it will take followers to catch up Allows a firm to extract the maximum of learning and expertise ahead of followers (move past the learning curve) a window of opportunity for the innovator to build on the initial advantage
Porter's 5 Forces
Rivalry Bargaining power of buyers Bargaining power of supplier Threat of new entrants Threat of substitute products
Competitive environment is unattractive from the standpoint of earning good points when 4
Rivalry is vigorous Entry barriers are low Competition from substitutes is strong Suppliers and customers have considerable bargaining power
offensive strategy = defensive strategy = 2
S-O O-W T-S
Developing strategy implications 5
SWOT Exploiting key strengths (implies strategy differentiation; formulate strategy to exploit them) Managing key weaknesses (converting to a strength is usually l-t; solution = outsource) superfluous strengths (strengths that aren't sustainable CAs; lower their investment) VRIN / VRIO
Vertical scope 2
Specialized activity or the range of vertically linked activities the firm encompasses When the company controls a value chain Ex: Nike is much more vertically specialized: it designs and markets footwear and apparel, but outsources most activities in its value chain, including manufacturing, distribution, and retailing
Product scope
Specialized product or diversified product range Ex: Coca-Cola (soft drinks), GAP (fashion retailing), Walt Disney (span multiple industries)
What Roles Does Strategy Perform? 4
Strategy as decision support Strategy as a coordinating device Strategy as a target Strategy as animation and orientation
Vertical diversification
Successive stages along the supply chain in producing a good
There are 2 main sources of uncertainty for emerging industries
Technological uncertainty (from the unpredictability of technological evolution and the complex dynamics technical standards and dominant designs are selected) Market uncertainty (relates to the size and growth rates of the markets for new products; Forecasting demand for new products is hazardous due to extrapolation)
Responsiveness involves one of 2 key capabilities
The ability to anticipate changes in the external environment Speed of response through greater flexibility
Corporate strategic decisions encompass 2
The breadth of the firm's product range (product scope) the extent of its involvement in the value chain (vertical scope)
market need 3
The critical linkage between creative flair and commercial success most important inventions have resulted from grappling with practical problems "necessity is the mother of invention": why customers are fertile sources of innovation - Involving customers in the innovation process is an initial stage in the move toward open innovation
strategy 6
The determination of the long run goals and objectives of an enterprise and the adoption of courses of action and the location of resources necessary for carrying out these goals a company's dynamic plan to gain and sustain competitive advantage in its market and industry Mission, vision and values create strategy the overall plan for deploying resources to establish a favourable position how individuals or organizations achieve their objectives involves establishing objectives for the future and determining how they will be achieved
Characteristics of the innovation 2
The extent to which a firm can establish clear property rights in an innovation critically determines the choice of strategy options Licensing is only viable where ownership in an innovation is clearly defined by patent or copyrights
The advantage of being an early mover depends on 3
The extent to which innovation can be protected by property rights or lead-time advantages: If an innovation is appropriable through a patent, copyright, or lead time advantage, there is advantage in being an early mover Importance of complementary resources (the more needed, the higher the risk to pioneer; Followers favoured as specialist firms emerge as suppliers of complementary resources) The potential to establish a standard
Limiting risk exposure 3
The financial risks of emerging industries can be mitigated by financial and operational practices that minimize a firm's exposure to adversity By avoiding debt and keeping fixed costs low, a firm can reduce the level by which it is financially and operationally leveraged Outsourcing and strategic alliance can hold down capital investment and fixed costs
Geographic scope
The geographical spread of activities for the firm local, regional, or global
Buyer's price sensitivity depends on 4 main factors
The greater the importance of an item as a proportion of total cost, the more sensitive The less differentiated the products of the supplying industry, the more willing the buyer is to switch suppliers on the basis of price The more intense the competition among buyers, the greater their eagerness for price reductions from their sellers The more critical an industry's product to the quality of the buyer's product or service, the less sensitive
A diversification move can provide added value for shareholders if it passes the 3 tests of corporate advantage
The industry attractive test The cost of entry test The better-off test
there is a hierarchy of strategy statements 4
The mission statement is the basic statement of organizational purpose A statement of principles or values outlines "What we believe in and how we will behave." The vision statement projects "What we want to be." The strategy statement articulates "What our competitive game plan will be."
Complexity
The more complex the design and tech, the longer it will take to replicate
emergent strategy 2
The primary determinant of realized strategy the decisions that emerge from the adaptation and learning though interaction between strategy formulation and implementation
Business strategy
The search for competitive advantage within a single industry, market, or line of business
Corporate strategy
The search for value and competitive advantages through participation in several different industries and markets or (diversification)
competitive advantage (CA) 5
The set of unique resources and distinctive skills that generate a sustainable performance surplus and allow a company to outperform competitors Unique resources: resources are those that underpin the CAs that competitors can't imitate or obtain Firms can no longer have a monopoly on a CA When 2+ firms compete within the same market, one possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit. may not be revealed in higher profitability: A firm may choose investment in market share, technology, customer loyalty, or executive perks > profit
The extent to which innovators appropriate the value of their innovation depends on 4
The strength of their property rights in the innovation The tacitness and complexity of the technology The lead-time they have over followers The extent to which they possess the complementary resources needed to commercialize the innovation
the stakeholder approach
The view of the business organizations as a coalition of interest groups where top management's role is to balance different interests
Resources and capabilities need to be appraised against 2 key criteria
Their importance: which resources and capabilities are most important in conferring sustainable competitive advantage? Their strengths: Where are our strengths and weaknesses compared with competitors?: do internal and benchmarking
Competing in the knowledge economy has unique requirements that may not exist in the traditional industrial economy 2
Their value rests with their intangible assets (end-user data and virtual portals); their ability to manage those assets leads to a CA innovation, information technology, and HR management become important
Strategic decisions share 3 characteristics
They are important They involve a significant commitment of resources They are not easily reversible
Porter's 5 Forces: Bargaining power of buyers 3
They can impose their needs and influence They have higher power when they have there are lots of companies, and few sellers and when buyers are price-sensitive Customers are price-sensitive
why companies need business strategy
To deploy resources in the most effective and efficient manner to coordinate the decisions made by different individuals to build and sustained competitive advantages to give direction and purpose
The innovation process
Unique, complex and sophisticated -> invention -> innovation -> diffusion -> imitation (competitors) OR adoption (customers)
Analyzing key success factors leads one to ask the following 2 questions
What do customers want which we could supply profitability? what should the firm do to survive competition?
how to create additional value from tangible resources? ask 2 key questions
What opportunities exist for economizing on their use? (do more with the same; do the same with less) What are the possibilities for employing existing assets more profitably? (redirect them)
Economies of scale 3
When a business produces in large volumes (products or services) This decreases their costs per unit of each product Mass production to cut manufacturing costs
Porter's 5 Forces: Bargaining power of suppliers 5
When they have unique resources, strong power They can impose their prices Businesses can bargain and we can't control a cost advantage (ex: Tesla) Because raw materials, semi-finished products, and components are often commodities supplied by small companies to large manufacturing companies, their suppliers usually lack bargaining power The key issues are the ease with which the firms in the industry can switch between different input suppliers and the relative bargaining power of each party
Forward VI
Where the firm acquires ownership and control of activities previously undertaken by its customers Ex: Disney operates more than 300 retail stores that sell merchandise based on Disney's characters and movies
Backwards VI
Where the firm acquires ownership and control over the production of its own inputs Ex: Ikea buys forests in Romania and Bulgaria; Netflix
hybrid model of competitive advantage 2
a combination of low cost and differentiation strategies creates a superior value advantage for the firm
Diversification makes most sense when
a company has exhausted growth opportunities in its existing markets + can match its existing capabilities to emerging external opportunities
organizational capability is path dependent 3
a company's capabilities today are the result of its history the types of capabilities that make different firms distinctive is that they have developed over significant periods of time often, we can trace the origins of a distinctive capability to the circumstances that prevailed during the founding and early development of the company
mergers or acquisitions result in the same thing:
a different organization with resources, competencies, and capabilities that improve competitiveness
Dynamic capability 3
a firm's ability to integrate, build and reconfigure internal and external competencies to address rapidly changing environments any capabilities that allow an organization to reconfigure its resources to adapt and change a "higher level" process through which the firm modifies its operating routines
strategy matches
a firm's resources and capabilities to the opportunities that arise in the external environment
industry
a group of firms that supplies a market
strategic innovation 6
a key source of competitive advantage new approaches to doing business, including new business models typically involves creating value for customers from novel products, experiences, or modes of product delivery based on redesigned processes and novel organizational designs tends to involve pioneering along one or more dimensions of strategy (New industries, New customer segments, New sources of competitive advantage) involves reconfiguring the industry value chain to change the "rules of the game" within a market
moderate diversification 2
a strategic sweet spot between focus and broader diversification Beyond a certain threshold, high levels of diversification = lower profitability because of the organizational complexity created
strategy vs tactics 3
a tactic is a scheme for a specific action tactics are concerned with the manoeuvres necessary to win battles strategy is concerned with winning the war
Brand equity
about the value of the market share of the brand
Useful strategies for limiting risk include
alertness and responsiveness to emerging trends together with limiting vulnerability to mistakes through avoiding large-scale commitments Co-operating with lead users limiting risk exposure flexibility (keeping options open and delaying commitment to a specific technology until its potential becomes clear)
value 3
all businesses seek to create value through the activities they undertake a measure of the extent to which a good is perceived by a customer as meeting their needs or wants and is reflected in their willingness to pay The "value" created by firms is distributed among different parties
Porter views cost leadership and differentiation as mutually exclusive strategies. A firm that attempts to pursue both is "stuck in the middle": 4
almost guaranteed low profitability loses the high-volume customers who demand low prices or must bid away its profits to get this business from the low-cost firms loses high-margin business to the firms who are focused on high-margin targets or have achieved differentiation overall suffers from a blurred corporate culture and a conflicting set of organizational arrangements and motivation system
organizational routines 6
an essential step in translating directions and operating practices into capabilities Only by becoming routine do processes become efficient and reliable regular and predictable behavioural patterns comprising repetitive patterns of activity the fundamental building blocks of what firms are and what they do develop through the adaptation and replication develop through learning by doing (a trade-off between efficiency and flexibility; you know only what you do regularly)
A barrier to entry 3 The principal sources of barriers to entry 7
any advantage that established firms have over entrants The height of a barrier to entry is usually measured as the unit cost disadvantage faced by would-be entrants effectiveness depends on the resources and capabilities that potential entrants possess; may be ineffective against established, diversifying firms - capital requirements - economies of scale (new entrants must either enter on a small scale and accept high unit costs, or enter on a large scale and bear the costs of underutilized capacity) - absolute cost advantages (results from the acquisition of low-cost sources of raw materials and economies of learning) - product differentiation (established firms possess the advantages of brand recognition and customer loyalty) - access to channels of distribution (risk aversion by retailers, and the fixed costs of carrying an additional product result in retailers being reluctant to carry a new manufacturer's product) - governmental and legal barriers (licenses, IP, regulations, safety standards) - retaliation (price-cutting, increased advertising, sales promotion, or litigation)
active waiting
argued that a successful follower strategy requires it a company needs to monitor market developments and assemble resources and capabilities while it prepares for large-scale market entry
Mergers 3
arrangements as a combination of assets Firms merge have an understanding that the merged entity will be of a joint benefit to both firms generally completed on friendly terms
Differentiation advantage strategy 2
attempt to gain competitive advantage by offering value that is not available in other products or services or that other products don't do as well 4 primary ways that companies differentiate: Superior product (design, quality, product development), Product reliability, Convenience, Brand/image
Vendor partnerships 3
based on trust and mutual understanding can provide the security needed for transaction-specific investments, the flexibility to meet changing circumstances, and the incentives to avoid opportunism may be entirely relational contracts with no written contract
To be successful, a strategy must
be consistent with the firm's external environment and with its internal environment
Competitive strategy is about 3
being different deliberately choosing a different set of activities to deliver a unique mix of value done internally
values
beliefs that form corporate culture
Franchising
brings together the brand, marketing capabilities, and business systems of the large corporation with the entrepreneurship and local knowledge of small firms
Corporate incubators 4
business developments established to fund and nurture new businesses based upon technologies that have been developed internally, but have limited applications within a company's established businesses few major companies have achieved sustained success from the incubator units A key problem: Many became orphanages for unloved ideas that had no internal support or in-house sponsorship
Diversified companies have 2 key advantages
can avoid the costs of using the external capital market have better access to information on the financial prospects of their different businesses than that available to external financiers
the attractiveness test and the cost-of-entry test can _____ + why?
cancel each other out since industries tend to be attractive because they are difficult to enter
Co-operating with lead users 2
careful monitoring of and response to market trends and customer requirements is essential to avoid major errors in technology and design Lead users provide a source of leading market indicators, can assist in developing new products and processes, and can offer an early cash flow to fund development expenditures
Intellectual property can be protected by 2
codifiable knowledge (patents, copyrights, trademarks, trade secrets) lead time (tacit knowledge, complexity)
corporate social responsibility (CSR) today 2
companies are increasingly accepting responsibilities that extend well beyond the immediate interests of their owners based on ethics and efficacy
companies operate in the interests of their owners by seeking to maximize profits over the long term by pointing to 4 key considerations
competition: Competition erodes profitability; As competition increases, the interests of different stakeholders converge around the goal of survival The market for corporate control: management teams that fail to maximize the profits of their companies will be replaced, investors put pressure on boards of directors to improve shareholder returns (CEO turnover) Convergence of stakeholder interests: long-term profitability requires employee loyalty, trusting relationships with suppliers and customers, and support from governments and communities; firms that pursue ethical principles and corporate social responsibility achieve superior financial performance. Simplicity: considering multiple goals and specifying trade-offs increases the complexity of decision-making; adopting stakeholder goals risks opening the door to political wrangling and management paralysis
Productive activity within an organization involves
coordinated actions undertaken by teams of people engaged in a series of productive tasks
We identify each capability through 7 key functions
corporate functions management information R&D operations marketing product design sales and distribution
Types of competitive advantage 2
cost and differentiation advantage strategy
Michael Porter has defined 3 generic strategies
cost leadership, differentiation, and focus
technical economies of vertical integration 2
cost savings that arise from the physical integration of processes Linking the two stages of production at a single location reduces transportation and energy costs
Transaction costs 2
costs of using markets (market activities performed by the firm or by other market contractors) When the costs of administrating transactions within the firm are lower than the costs of market transactions, the firm grows in size and scope
play 5
creates an environment of enquiry liberates thought from conventional constraints provides the opportunity to establish new relationships by rearranging ideas and structures at a safe distance from reality permits unconstrained forms of experimentation a catalyst of interaction
Creativity requires management systems that are quite different from those appropriate for efficiency 7
creatively oriented people tend to be responsive to distinctive types of incentives (an egalitarian culture with enough space and resources to provide the opportunity to be spontaneous, experience freedom, and have fun in the performance of a task that they feel makes a difference to the firm's strategic performance) Praise, recognition, and opportunities for education and professional growth > managerial responsibilities Nurturing the drive to create may require a degree of freedom and flexibility that conflicts with conventional HR practices Organizational environments conducive to creativity tend to be both nurturing and competitive Creativity requires a work context that is secure but not cozy Managers must not clone in favour of embracing diversity of cognitive and behavioural characteristics within work groups Exploiting diversity may require constructive conflict
invention depends on ____ innovation requires ______ 2
creativity collaboration and cross-functional integration
Strategy needs 2
creativity to constrain, contrast, combine with other competitors and industries with complimentary markets
strategy is being continually enacted through 2
decisions that are made by every member of the organization (by middle management especially) The decentralized, bottom-up strategy
Corporate strategy 4
defines the scope of the firm in terms of the industries and markets in which it competes typically the responsibility of the top management team and the corporate strategy staff issues of business strategy precede because the critical requirement for a company's success is its ability to establish competitive advantage How to make money?? Where to compete
Optimal timing 3
depends also on the resources and capabilities that the firm has Different companies have different strategic windows: periods in time when their resources and capabilities are aligned with the opportunities available in the market The risks of pioneering are greater for an established firm with a reputation and brands to protect, while to exploit its complementary resources effectively typically requires a more developed market.
strategic planning (AKA planned emergence) combines 2
design and emergence
In the long run, competition eliminates ____ but external and internal changes can create ___
differences in profitability between competing firms short-term opportunities for creating an advantage
the factors to determine / exploit innovation 4
difficulty to imitate complementary resources tacitness and complexity of knowledge lead time
For creativity to create value, it must be 2
directed and harnessed
The better-off test 2
diversifying into a new business must offer potential for the company's existing businesses and the new businesses to perform better together than independently Either the new unit must gain competitive advantage from its link with the corporation, or vice versa
the virtual corporation 2
due to extreme levels of outsourcing a firm whose primary function is to coordinate the activities of a network of suppliers and downstream partners The risk: may degenerate into a "hollow corporation," where it loses the capability to evolve and adapt to changing circumstances
Sustaining Competitive Advantage involves 3
durability (tech is shortening life cycles; brands show resilience to time) transferability (its mobility; can it be bought?) replicability (can you build it?)
Which arrangement (integrated or specialized) is more efficient depends on 3 elements
economies of scope, transaction costs, and costs of complexity
Appropriating the returns to innovation depends on the ability to
establish property rights in the innovation
the purpose of segmentation analysis 4
evaluating competitive conditions within segmented submarkets identify attractive segments select strategies for different segments determine how many segments to serve
primary source of value creation
exploiting linkages between different businesses
The world's most consistently successful companies in terms of profits and shareholder value tend to be those that are motivated by 4
factors other than profit strategic intent vision ambitious goals
strategy must embrace 2
flexibility and responsiveness in a turbulent environment
Business strategy 6
focused on achieving certain goals implies some consistency, integration, or cohesiveness concerned with how the firm competes within a particular industry or market AKA competitive strategy the responsibility of divisional management How to make money?? How should we compete
shift from where we get profit why? 2
from external to internal the external environment = unstable the internal resources / capabilities = stable competitive advantage = profit
supplemental Porter forces 2
govt complements
For an external change to create competitive advantage, the change must The extent to which external change creates competitive advantage and disadvantage depends on 2
have differential effects on companies because of their different resources and capabilities or strategic positioning the magnitude of the change and the extent of firms' strategic differences
conglomerate firms 2
highly diversified companies created from multiple, unrelated acquisitions have almost disappeared as a distinctive corporate form
Cross-functional product development teams
highly effective mechanisms for integrating creativity with functional effectiveness
requirement for imitation 4
identification (that a rival has a CA) incentives for imitation ((belief that through imitation they can also profit) diagnosis (the rival's features) resource acquisition (through replication or transfer)
imitation isolating mechanism 4
identification - obscure superior performance incentives for imitation - deterrence (signal aggressive intentions to imitators); pre-emption (exploit all available investment opportunities diagnosis - create causal ambiguity resource acquisition - base CA on resources and capabilities that are immobile and difficult to replicate
Strategic implications from PESTEL and Porter's five forces analysis 4
identify factors that are likely to be most important in presenting opportunities or threats and in shaping the attractiveness and profitability of an industry explain the differences in changes of a given industry overtime predict possible changes in competition and profitability in the near future identify opportunities and trends for changing industry structures and competitive pressures
5 stages of segmentation analysis
identify possible segmentation variables construct a segmentation matrix analyze segmentation attractiveness identify key success factors in each segments analyze the attraction of broad vs narrow scope
Putting resource and capability analysis to work: 3 steps
identify the key resources and capabilities appraising resources and capabilities developing strategy implications
Strategies to Alter Industry Structure: how? 2
identify the key structural features of an industry that are responsible for depressing profitability consider which structural features can change through strategic initiatives
Strategy is located in 3 places
in the heads of top management in top management team's articulations of strategy in speeches and written documents in the decisions through which strategy is enacted
Porter's 5 forces of competition analysis 5
include 3 sources of horizontal competition (competition from substitutes, from entrants, and from established rivals) and from 2 sources of vertical competition (the power of suppliers and power of buyers) Classifying and analyzing the factors that determine the intensity of competition The strength of these competitive forces is determined by key structural variables A framework for classifying and analyzing the factors that determine the intensity of competition and levels of competition in different industries views the profitability of an industry as determined by five sources of competitive pressure and PESTEL
when companies divest diversified businesses and concentrate more on their core businesses, the result is typically
increased profitability and higher stock market valuation
growing turbulence of the business environment may have
increased the costs of managing diversified corporations
general environment vs industry environment 2
industry environment includes customers, competitors and suppliers general environment matters to the extent that it affects the industry environment
requirements for quick response to change 2
information short cycle times that allow information on emerging market developments to be acted upon speedily
The principal link between tech and competitive advantage is ____ this may involve 4
innovation Creating new industries Creating new customer segments Creating new sources of competitive advantage: Novel approaches to creating consumers value Creating new business model: Novel experiences, convenience, or modes of product delivery
hypercompetition 2
intense and rapid competitive moves, where competitors must move quickly to build new advantages and erode the advantages of their rivals If industries are hypercompetitive the only route to sustained superior performance is continually recreating and renewing competitive advantage
corporate and business strategy are 3
intertwined the scope has implications for the sources of competitive advantage competitive advantage determines the range of businesses in which it can be successful
Long-term contracts 5
involve a series of transactions over a period of time and specify the terms of sales and the responsibilities of each party Where closer supplier-customer ties are needed can help avoid opportunism and provide the security needed to make the necessary investment problem: anticipating the circumstances that may arise during the life of the contract often include provisions for contract disputes
Strategy as a target 5
is forward looking to establish a direction of the firm's development to set aspirations that can motivate and inspire the members of the organization strategic intent resource scarcity may create ambition, innovation, and a "success-against-the-odds" culture
codifiable knowledge 3
is that which can be written down if it is not effectively protected by patents or copyright, diffusion is likely to be rapid and the CA is not sustainable Financial innovations embody readily codifiable knowledge that can be copied very quickly
a firm can acquire resources and capabilities in 2 ways
it can buy them or it can build them
differentiation advantage 5
it can supply a product or service that is differentiated in such a way that the customer is willing to pay a price premium that exceeds the additional cost of the differentiation achieved when it provides something unique that is valuable to buyers beyond a low price when a firm is able to obtain from its differentiation a price premium in the market that exceeds the cost of providing the differentiation about identifying and understanding every possible interaction between the firm and its customers, and asking how they can be enhanced to deliver additional value the range of differentiation opportunities depends on the characteristics of the product (commodities lack physical differentiation)
cost advantage 3
it can supply an identical product or service at a lower cost the goal of the firm is to become the cost leader in its industry or industry segment sell a standard, no-frills product
Strategy can promote coordination 3
it is a communication device to be effective, buy-in is essential from the different groups The strategic planning process can provide a forum where views are exchanged and consensus developed
what happens if a firm extends the scope of its operations by engaging in additional business activities 3
it may benefit from economies of scope it may avoid the transaction costs if using the market incurring additional management costs that can outweigh the potential cost savings
The advantages of licensing 3
it relieves the company of the need to develop the full range of complementary resources and capabilities needed for commercialization it can allow the innovation to be commercialized quickly If the lead time offered by the innovation is short, multiple licensing can allow for a fast global rollout
Strategy improves decision-making in 3 ways
it simplifies decision-making by constraining the range of decision alternatives considered a strategy-making process permits the knowledge of different individuals to be pooled and integrated a strategy-making process facilitates the use of analytic tools
Buying innovation 2
large companies enhance their technological performance by acquiring innovation from other firms may involve licensing, outright purchasing of patents, or acquiring the whole company
Tacitness and complexity do not provide _____, but they do offer ____
lasting barriers to imitation the innovator time
Alternative Strategies to Exploit Innovation 3
licensing: requires little involvement by the innovator in subsequent commercialization (a limited investment) collaboration with other companies (Joint ventures, strategic alliance, outsourcing) Internal commercialization (involves a greater investment of resources and capabilities)
3 different types of vertical relationships
long-term contracts vendor partnerships franchising
The predominance of market contracts for many commodity products Is the result of
low transaction costs in the market: there are many buyers and sellers, information is readily available, and the switching costs for buyers and suppliers are low
With vertical integration, internal supplier-customer relationships are subject to _____ incentives
low-powered
followers or fast second entrants allow the niche market to grow into a mass market by 2
lowering cost and increasing quality
Given the plethora of external influences, understanding the external environment requires
managers to use a framework or a system that allows them to organize information and rank factors
1 resource that does seem to be critical to the development of capabilities + why? 2
managers with the requisite knowledge for capability building they play a critical role in nurturing and shaping capabilities have an understanding of what it takes to build key organizational capabilities
A firm competing on low cost is distinguishable from a firm that competes through differentiation in terms of 3
market positioning resources and capabilities organizational characteristics
identification - obscure superior performance 2
mask high performance so rivals fail to see your success until it's too late remain a private company to avoid disclosing financial performance
disadvantages to a merger or acquisition 3
must be able to assure the co-operation of the respective shareholders and management - can take time Differences in corporate culture can result in conflicts between the employees conduct cultural, financial, and operational due diligence
balancing the interests of different stakeholders is particularly important for 2
not-for-profit and public sector organizations
the game plan should comprise 3 components
objectives scope (where we will compete) advantage (how we will compete)
intangible resources 3
often more valuable than tangible resources brand names and other trademarks are often undervalued (companies that build strong consumer brands have a powerful incentive to diversify technology) IP
Once introduced, innovation diffuses 2
on the demand side, through customers purchasing the good or service on the supply side, through imitation by competitors
2 factors contribute to the efficiency and effectiveness with which teams of individuals perform repetitive patterns of activity
organizational learning: Coordination is perfected through repetition. The more complex the task, the greater the gains from learning by doing culture: The capacity for organizational members to comprehend one another and collaborate without continual managerial direction depends organizational culture
Acquisitions 3
outright purchases of the assets of another firm involve one firm's desire to own and manage all of the combined assets, resources, and capabilities a more hostile relationship between the firms, their management, and their shareholders
Innovation provides a basis for
overturning the competitive advantage of other firms
Any external change creates opportunities for 2
profit opportunities for new business initiatives (entrepreneurship)
4 factors are critical in determining the extent to which innovators are able to appropriate the value of their innovation
property rights the tacitness and complexity of the technology lead time complementary resources
Product champions 3
provide a means for incorporating individual creativity within organizational processes and for linking invention to subsequent commercialization The key is to permit individuals who are sources of creative ideas to lead the teams that develop those ideas and continue through the commercialization phases committed individuals can overcome resistance to change within the organization and generate enthusiasm that attracts involvement of others
While the presence of substitutes ___ the value of a product, complements ____ value
reduce increase
VRIO model 3
resource-based view answers which resources and capabilities are most important in conferring sustainable competitive advantage determines what makes you better than others
the primary sources of profitability 2
resources and capabilities
Incumbent firms advantage 2 major sources of incumbency advantage
resources and capabilities that have been accumulated over a long period can only be replicated at disproportionate cost by would-be imitators 1) Asset mass efficiencies (occur where a strong initial position in technology, distribution channels, or reputation facilitates the subsequent accumulation of these resources) 2) Time compression diseconomies (the additional costs incurred by imitators when attempting to accumulate rapidly a resource or capability)
Relative bargaining power 3 influenced by 3
rests on refusal to deal with the other party depends on the credibility and effectiveness with which each party makes this threat key issues: relative cost that each party sustains, each party's expertise in managing its position size and concentration of buyers relative to suppliers Buyers' information (more infirmed = more ability to bargain) Ability to integrate vertically (DIY)
A key feature of almost all the processes performed by an organization is their ____
routinized nature
For a resource or capability to establish a competitive advantage, 2 conditions must be present
scarcity relevance
Where there is specialization, each unit is a
separate firm linked by market interfaces
Intended strategy 2
strategy as conceived of by the top management team an outcome of negotiation, bargaining, and compromise among the many individuals and groups involved in the process
Porter's 5 Forces: rivalry: intensity depends on 8
switching costs of competitors size concentration / number diversity of competition strength product differentiation excess capacity and exit barriers cost conditions (scale economies and the ratio of fixed to variable costs)
high-powered incentives: Where a market interface exists between a buyer and a seller, profit incentives ensure
that the buyer is motivated to secure the best possible deal and the seller is motivated to pursue efficiency and service in order to attract and retain the buyer
forging a compelling organizational purpose is the ongoing job of ___ ; The challenge is _____
the CEO to link change with continuity
Distinctive competencies
the activities and processes through which resources are deployed to achieve a competitive advantage that is difficult to imitate
realized strategy 2
the actual strategy that is implemented only partly related to that which was intended
Sustainability is
the balancing of economic growth of the firm with the societal need to protect the natural environment in which the firm operates
The choice of strategy to exploit innovation depends on 2 main sets of factors
the characteristics of the innovation the resources and capabilities of the firm
Resources and capabilities of the firm 5
the choice of how to exploit an innovation depends on the available resources and capabilities Start-up firms possess few of the complementary resources and capabilities needed to commercialize their innovations (attracted to licensing or to accessing the resources of larger firms) large, established corporations are better placed for internal commercialization Innovation increasingly requires coordinated responses by multiple companies Innovating firms need to identify and map their innovation ecosystem, then manage the interdependencies within it
The cost of entry test 2
the cost to enter the target industry must not be so high as to erode the potential for profitability the cost of entry may counteract the attractiveness of the industry
In integrated firms there is an administrative interface between 3
the different vertical units (V), product units (P), and country units (C)
the extent to which an innovation can be imitated by a competitor depends on
the ease with which the technology can be comprehended and replicated (how much the technical knowledge is codifiable; complexity)
Tangible Resources
the easiest to identify and evaluate in the firm's financial statements
Diversification
the expansion of an existing firm into another product line or field of operation
Human Resources 7
the expertise and effort offered by employees not on balance sheet as the firm does not own its employees; it purchases their services under employment contracts high stability Most firms devote considerable effort to appraising their human resources (hiring process, annual employee review) Competency modelling (identifying the set of skills, content knowledge, attitudes, and values associated with superior performers then assessing each employee against that profile) critical role of psychological and social aptitudes in determining superior performance (emotional intelligence) organizational culture (an organization's values, traditions, and social norms)
Vertical scope / Vertical integration (VI) 10
the extent to which a a firm owns vertically related activities The more a firm makes rather than buys, the lower are its costs of bought-in goods relative to its sales revenue Pros: lower costs, no reliance on supplier, competing, produce cost savings, eliminate transaction costs, facilitate transaction-specific investments, good for system-wide flexibility Cons: expensive, loss of focus, reduce flexibility, may restrict a firm's ability to benefit from scale economies, may increase risk bad at responding quickly to new product development opportunities that require new combinations of technical capabilities The greater a firm's ownership extends over successive stages of the value chain for its product, the greater its degree of vertical integration may be full or partial changes the incentives between vertically related businesses compound risk: problems at any one stage of production threaten production and profitability at all other stages it ties a company to its internal suppliers
The different types of relationships between buyers and sellers may be classified in relation to 2 characteristics
the extent to which the buyer and seller commit resources to the relationship the formality of the relationship
The four four elements of a successful strategy are recast into 2 groups with ___ forming a link between the two
the firm (goals and values; resources and capabilities; and structure and systems) the industry environment (the firm's relationships with customers, competitors, and suppliers; the remote drivers impacting that firm's choice of strategies) strategy
If core competencies are embodied in "core products," then the more these core products are outsourced, _____
the greater is the potential for the erosion of core competence
the employee is in a strong position to appropriate most of their contribution to the firm's added value when 3
the individual employee's contribution to productivity is clearly identifiable if the employee is mobile if the employee's skills offer similar productivity to other firms
The industry attractive test
the industry chosen for diversification must be attractive enough to yield consistently good returns on investment
A key issue for would-be imitators is the extent to which first-mover advantage exists within the market 2
the initial occupant of a strategic position or niche gains access to resources and capabilities that a follower cannot match because the first mover is able to pre-empt the best resources, and can use early entry to build superior resources and capabilities
Resources 4
the key assets productive assets what a firm employs to create value and competitive advantage 3 types: tangible (physical, financial), intangible (tech, rep), human resources
The ability to sustain competitive advantage through pre-emption depends on the presence of 2 flaws in the competitive process
the market must be small relative to the minimum efficient scale of production (only a small number of competitors is viable) there must be first-mover advantage that gives an incumbent preferential access to information and other resources, putting rivals at a disadvantage
firms in an industry compete in 2 types of markets
the markets for inputs and the markets for outputs In input markets, firms purchase raw materials, components, and financial and labour services In the markets for outputs, firms sell their goods and services to customers
Innovation upsets established routines and threatens the status quo
the more stable the operating and administrative side of the organization, the greater the resistance to innovation
the productivity of R&D depends heavily on
the organizational conditions that foster innovation
Future objectives relate to 3
the overall purpose of the firm (mission) what it seeks to become (vision) specific performance targets
strategic planning (AKA planned emergence) 2
the planned strategy is continually enacted through decisions that are made by every member of the organization The balance between the two depends on the stability and predictability of the business environment
Segmentation
the process of splitting a market based on characteristics that are likely to influence consumers' purchasing behaviour
Capabilities 7
the processes and methods of how we use key resources to create value how firms do things to deploy resources for a desired end result what the firm can do the essence of superior performance depend heavily on the skills and efforts of employees (involve coordination between organizational members) the outcome of complex combinations of resources and different capabilities that interact together to confer competitive advantage
William Allen contrasts 2 notions of the public corporation
the property conception: views the firm as a set of assets owned by shareholders; implies that management's responsibility is to operate in the interests of shareholders. the social entity conception: views the firm as the community of individuals that is sustained and supported by its relationships with its social, political, economic, and natural environment; implies a responsibility to maintaining the firm within its overall network of relationships and dependencies
Analyzing costs requires breaking down the firm's value chain to identify 4
the relative importance of each activity with respect to total cost the cost drivers for each activity and the comparative efficiency with which the firm performs each activity how costs in one activity influence costs in another which activities should be undertaken within the firm and which activities should be outsourced
How Is Strategy Made 5
the result of managers engaging in deliberate, rational analysis through adaptation to circumstances intended, realized, and emergent strategies a combination of centrally driven rational design and decentralized adaptation organizational processes through which strategy is deliberated, discussed, and decided
an organizational process
the sequence of actions through which a specific task is performed can be mapped using a flowchart
During the 1990s, the focus of strategy analysis shifted from ____ to ____
the sources of profit in the external environment the sources of profit within the firm (Increasingly the resources and capabilities became the main source of competitive advantage and the basis for formulating strategy)
industry profitability is determined by
the systematic influences of the industry's structure ex: Small markets can often support much higher profitability than large markets as they can easily be dominated by a single firm
During the first decade of the twenty-first century, the principles and practice of strategy have been moulded by 2
the uniquely challenging circumstances of a new era Technology
The profitability of an innovation to the innovator depends on The value created by an innovation is distributed among
the value created by the innovation and the share of that value that the innovator is able to appropriate different parties (customers, investor, imitator / other followers, suppliers)
The profits that a firm obtains from its resources and capabilities depend on 3 factors
their abilities to establish a competitive advantage their abilities to sustain that competitive advantage their abilities to appropriate the returns to that competitive advantage (Each of these depends on a number of resource characteristics)
core capabilities are simultaneously core rigidities 3
they inhibit firms' ability to access and develop new capabilities The more developed a firm's capabilities, the narrower its repertoire and the more difficult it is to adapt them to new circumstances challenged based on flexibility in organizational routines and dynamic capability
Individual resources do not confer competitive advantage alone
they must work together to create organizational capability
Strategy as animation and orientation
to animate and orientate individuals so that they are mobilized, encouraged, and work in concert with each other
strategic intent 3
to describe the articulation of a desired leadership position creates an extreme misfit between resources and ambitions strategy should be less about fit and resource allocation and more about stretch and resource leverage
core competencies 3
to distinguish those capabilities fundamental to a firm's strategy and performance make a disproportionate contribution to ultimate customer value, or to the efficiency with which that value is delivered provide a basis for entering new markets
2 ways to apply Industry analysis
to forecast industry profitability in the future (current profitability means nothing, look at trends) to find ways of changing industry structure for the better (provides a basis for identifying opportunities for changing industry structure to ease competitive pressures)
The first stage of industry analysis is
to identify the key elements of the industry's structure (who are the main players and their key structural characteristics)
The outcome of causal ambiguity is
uncertain imitability: where there is ambiguity associated with the causes of a competitor's success, any attempt to imitate that strategy is subject to uncertain success
the primary goal of resource analysis is to
understand their potential for creating competitive advantage
SWOT analysis 5
used to answer Where are our strengths and weaknesses compared with competitors? To appraise the strengths of key resources and capabilities Strategic actions to pursue are principally supported by the firm's resource strengths Strengths promote the pursuit of market opportunities Take corrective actions to mitigate weaknesses
regime of appropriability 3
used to describe the conditions that influence the distribution of returns to innovation In a strong regime of appropriability, the innovator is able to capture a substantial share of the value created In a weak regime of appropriability, other parties derive most of the value
VRIO factors for a sustained competitive advantage 4
valuable rare / unique (most important) inimitable (most important) organized to capture value
Related diversification 3
when a firm expands into a similar field of operation AKA concentric diversification Relatedness is not always related to operations; management capabilities, strategic management systems, and resource allocation
Unrelated diversification 2
when the additional product line is very different from the firm's core business AKA conglomerate diversification Ex: a food processing firm starts to manufacture medical devices
shareholder capitalism 3 vs 1
where companies' overriding duty is to produce profits for owners company boards are required to act in the interests of shareholders Most English speaking countries In continental European countries, companies are legally required to take account of the interests of employees, the state, and the enterprise as a whole
