MAN 4720 - Dever/FSU - Exam 1

External Incentives to Diversify

(Anti trust legislation and taxes) Anti trust legislation: •Antitrust laws in 1960s and 1970s discouraged mergers that created increased market power (vertical or horizontal integration.•Mergers in the 1960s and 1970s thus tended to be unrelated. •Relaxation of antitrust enforcement results in more and larger horizontal mergers. •Early 2000: antitrust concerns seem to be emerging and mergers are now more closely scrutinized. Tax Laws: •High tax rates on dividends cause a corporate shift from dividends to buying and building companies in high-performance industries. •1986 Tax Reform Act -Reduced individual ordinary income tax rate from 50 to 28 percent. -Treated capital gains as ordinary income. -Created incentive for shareholders to prefer dividends to acquisition investments.

Value- Creating Activities for Cost Leadership

- Cost-effective MIS - Few management layers - Simplified planning - Consistent policies - Effecting training - Easy-to-use manufacturing technologies - Investments in technologies - Finding low cost raw materials - Monitor suppliers' performances - Link suppliers' products to production processes - Economies of scale - Efficient-scale facilities - Effective delivery schedules - Low-cost transportation - Highly trained sales force - Proper pricing

Value-Creating Activities and Differentiation

- Highly developed MIS - Emphasis on quality - Worker compensation for creativity/productivity - Use of subjective performance measures - Basic research capability - Technology - High quality raw materials - Delivery of products - High quality replacement parts - Superior handling of incoming raw materials - Attractive products - Rapid response to customer specifications - Order-processing procedures - Customer credit - Personal relationships

Factors That Drive Focused Strategies

- Large firms may overlook small niches. - A firm may lack the resources needed to compete in the broader market - A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors - Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

Competitive Risks of the Cost Leadership Strategy

- Processes used to produce and distribute good or service may become obsolete due to competitors' innovations. -Focus on cost reductions may occur at expense of customers' perceptions of differentiation. - Competitors, using their own core competencies, may successfully imitate the cost leader's strategy

cost leadership strategy: Bargaining Power of Suppliers

- The cost leader generally operates with margins greater than those of competitors and often tries to increase its margins by driving costs lower. Among other benefits, higher gross margins relative to those of competitors make it possible for the cost leader to absorb its suppliers' price increases. When an industry faces substantial increases in the cost of its supplies, only the cost leader may be able to pay the higher prices and continue to earn either average or above-average returns. - being able to make very large purchases, reducing chance of supplier using power

The Purpose of a Business-Level Strategy

- The purpose of a business-level strategy is to create differences between the firm's position and those of its competitors. - To position itself differently from competitors, a firm must decide whether it intends to: perform activities differently or to perform different activities. Thus, the firm's business-level strategy is a deliberate choice about how it will perform the value chain's primary and support activities to create unique value.

Value Chain Analysis

- allows a firm to understand the parts of its operations that create value and those that do not. - is a template that firms use to: • understand their cost position. • identify multiple means that might be used to facilitate implementation of a chosen business-level strategy. • Primary Activities: - are involved with: • a product's physical creation. • a product's sale and distribution to buyers. • the product's service after the sale. • Value Chain shows how a product moves from the raw-material stage to the final customer. • To be a source of competitive advantage, a resource or capability must allow the firm to perform: - an activity in a manner that is superior to the way competitors perform it, or - a value-creating activity that competitors cannot complete

Resources

- are the source of a firm's capabilities. - are broad in scope. - cover a spectrum of individual, social and organizational phenomena. - alone, do not yield a competitive advantage A firm's assets, including people and the value of its brand name, that represent inputs into a firm's production process: • capital equipment • skills of employees • brand names • financial resources • talented managers • Types of Resources - Tangible resources: • financial • physical • technological • organizational - Intangible resources: • human • innovation • reputation

Competitive Risks of Focus Strategies

-A focusing firm may be "out focused" by its competitors. -A large competitor may set its sights on a firm's niche market. -Customer preferences in a niche market may change to more closely resemble those of the broader market.

Types of Potential Competitive Advantage

-Achieving lower overall costs than rivals Performing activities differently (reducing process costs) -Possessing the capability to differentiate the firm's product or service and command a premium price Performing different (more highly valued) activities.

Differentiation Strategy: Competitors

Defends against competitors because customer's brand loyalty to differentiated product offsets price competition.

risk

Degree of uncertainty of return on an asset; in business, the likelihood of loss or reduced profit. - The most successful companies learn how to effectively manage risk. Effectively managing risks reduces investors' uncertainty about the results of their investment.

How to maintain a cost advantage

Determine and control Cost Drivers - Alter production process - Change in automation - New distribution channel - New advertising media - Direct sales in place of indirect sales Reconfigure Value Chain if needed New raw material -Forward integration - Backward integration - Change location relative to suppliers or buyers

Unrelated Diversification

Firms do not seek either operational relatedness or corporate relatedness when using the unrelated diversification corporate-level strategy. An unrelated diversification strategy can create value through two types of financial economies. - Efficient internal capital allocations - Purchase of other corporations and the restructuring their assets Financial economies: are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm Efficient Internal Capital Market Allocation: -Corporate office distributes capital to business divisions to create value for overall company. • Corporate office gains access to information about those businesses' actual and prospective performance. -Conglomerate life cycles are fairly short life cycle because financial economies are more easily duplicated by competitors than are gains from operational and corporate relatedness.

Understanding and analyzing the external environment

Firms understand the external environment by acquiring information about competitors, customers, and other stakeholders to build their own base of knowledge and capabilities. On the basis of the new information, firms take actions, such as building new capabilities and core competencies, in hopes of buffering themselves from any negative environmental effects and to pursue opportunities as the basis for better serving their stakeholders' needs.

Related Diversification: Complexity

Simultaneous Operational Relatedness and Corporate Relatedness: Involves managing two sources of knowledge simultaneously: - Operational forms of economies of scope - Corporate forms of economies of scope - Many such efforts often fail because of implementation difficulties.

Competitive Dynamics (slow-cycle, fast-cycle, and standard-cycle markets)

Slow-Cycle Markets: •Competitive advantages are shielded from imitation for long periods of time and imitation is costly. •Competitive advantages are sustainable in slow-cycle markets. •All firms concentrate on competitive actions and responses to protect, maintain and extend proprietary competitive advantage. Fast-Cycle Markets: The firm's competitive advantages aren't shielded from imitation.•Imitation happens quickly and somewhat expensively. •Competitive advantages are not sustainable. (-Competitors use reverse engineering to quickly imitate or improve on the firm's products.) •Non-proprietary technology is diffused rapidly. Standard-cycle markets: Moderate cost of imitation may shield competitive advantages. •Competitive advantages are partially sustainable if their quality is continuously upgraded. •Firms: -seek large market shares -gain customer loyalty through brand names -carefully control operations

Discuss the importance of avoiding core rigidities.

So basically ALL core competencies have the potential to become Core rigidities (former core competencies that now generate inertia and stifle innovation.) Its important to avoid this because doing so will increase the likelihood of long-term competitive success.

Outsourcing

is the purchase of a value-creating activity or a support function activity from an external supplier. - Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities. • By performing fewer capabilities: - a firm can concentrate on those areas in which it can create value. - specialty suppliers can perform outsourced capabilities more efficiently. • Improving business focus helps a firm focus on broader business issues by having outside experts handle various operational details. - Provides access to world-class capabilities - Makes world-class capabilities available to firms in a wide range of applications • Accelerating re-engineering benefits - achieves re-engineering benefits more quickly by having outsiders - who have already achieved worldclass standards - take over processes. • Sharing risks - reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities. • Freeing resources for other purposes - redirects efforts from non-core activities toward those that serve customers more effectively

The Resource-Based Model of Above-Average Returns

The resource-based model of above-average returns assumes that each organization is a collection of unique resources and capabilities. The uniqueness of its resources and capabilities is the basis of a firm's strategy and its ability to earn above-average returns. 1. Identify the firm's resources. Study its strengths and weaknesses compared to competitors 2. Determine the firm's capabilities. 3. Determine the potential of firm's resources and capabilities in terms of competitive advantage. 4. Locate an attractive industry 5. Select a strategy that best allow the firm to utilize its resources and capabilities in terms of a competitive advantage.

multimarket competition

occurs when firms compete against each other in several product or geographic markets. Increasingly, competitors engage in competitive actions and responses in more than one market which can be observed with Google and Apple and with Google and Amazon, for example.

Sustainable Physical Environment

refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to those changes with the intent of creating a sustainable environment

organizational culture

refers to the complex set of ideologies, symbols, and core values that are shared throughout the firm and that influence how the firm conducts business. It is the social energy that drives—or fails to drive—the organization. - Organizational culture also affects strategic leaders and their work. In turn, strategic leaders' decisions and actions shape a firm's culture

Economic Environment

refers to the nature and direction of the economy in which a firm competes or may compete.

Average Returns

returns equal to those an investor expects to earn from other investments with a similar amount of risk

Capital Market Stakeholders

shareholders and the major suppliers of a firm's capital (Banks)

mission

specifies the businesses in which the firm intends to compete and the customers it intends to serve. - The firm's mission is more concrete than its vision. However, similar to the vision, a mission should establish a firm's individuality and should be inspiring and relevant to all stakeholders. Together, the vision and mission provide the foundation that the firm needs to choose and implement one or more strategies. a firm's vision and mission are critical aspects of the analysis and the base required to engage in strategic actions that help to achieve strategic competitiveness and earn above-average returns.

Disruptive technologies

technologies that destroy the value of an existing technology and create new markets—surface frequently in today's competitive markets.

capability

the capacity for a set of resources to perform a task or an activity in an integrative manner

resource similarity

the extent to which the firm's tangible and intangible resources are comparable to a competitor's in terms of both type and amount, Firms with similar types and amounts of resources are likely to have similar strengths and weaknesses and use similar strategies on the basis of their strengths to pursue what may be similar opportunities in the external environment. •Assessing resource similarity is difficult if critical resources are intangible, rather than tangible.

Product Market Stakeholders

the firm's primary customers, suppliers, host communities (local gov, fed. Regulations placed through laws), and unions representing the workforce

Competitive Rivalry

the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an advantageous market position It is important for those leading organizations to understand competitive rivalry because the reality is that some firms learn how to outperform their competitors, meaning that competitive rivalry influences an individual firm's ability to gain and sustain competitive advantages.Rivalry results from firms initiating their own competitive actions and then responding to actions taken by competitors.8

vision

the picture of what a firm wants to be and, in broad terms, what it wants to ultimately achieve. Thus, a vision statement articulates the ideal description of an organization and gives shape to its intended future. In other words, a vision statement points the firm in the direction of where it would like to be in the years to come - It is also important to recognize that vision statements reflect a firm's values and aspi- rations and are intended to capture the heart and mind of each employee and, hopefully, many of its other stakeholders.

Competitive Behavior

the set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position

competitor intelligence

the set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities

Industry Environment

the set of factors that directly influences a firm and its competitive actions and responses: - the threat of new entrants, - the power of suppliers, - the power of buyers, - the threat of product substitutes - The intensity of rivalry among competing firms

Organizational Stakeholders

those groups, individuals, and organizations that are directly affected by the practices of an organization and who therefore have a stake in its performance -Employees—the firm's organizational stakeholders—expect the firm to provide a dynamic, stimulating, and rewarding work environment.

Levels of Diversification: Low Level

• Dominant Business-Between 70% and 95% of revenue comes from a singe business • Single Business-95% or more revenue comes from a single business

Value-Reducing Diversification:Managerial Motives to Diversify

• Managerial motives to diversify: - Managerial risk reduction - Desire for increased compensation - Build personal performance reputation • Effects of inadequate internal firm governance: -Diversification fails to earn even average returns -Threat of hostile takeover -Self-interest actions of entrenched management

Ethical Considerations

• Practices considered both legal and ethical: 1. Obtaining publicly available information 2. Attending trade fairs and shows to obtain competitors' brochures, viewing their exhibits, and listening to discussions about their products • Practices considered both unethical and illegal: - Blackmail - Trespassing - Eavesdropping - Stealing drawings, samples, or documents

Unrelated Diversification: Restructuring

• Restructuring creates financial economies -A firm creates value by buying and selling other firms' assets in the external market. • Resource allocation decisions may become complex, so success often requires: -focus on mature, low-technology businesses. -focus on businesses not reliant on a client orientation.

Competitive Rivalry's Effect on Strategy

• Success of a strategy is determined by: -the firm's initial competitive actions. -how well it anticipates competitors' responses to them. -how well the firm anticipates and responds to its competitors' initial actions. • Competitive rivalry: -affects all types of strategies. -has a dominant influence on the firm's business-level strategy or strategies.

Competitive Scope

•Broad Scope-The firm competes in many customer segments. •Narrow Scope-The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others. With focus strategies, the firm "selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.

Competitor Analysis

•Competitor analysis is used to help a firm understand its competitors. •The firm studies competitors' future objectives, current strategies, assumptions, and capabilities. •With the analysis, a firm is better able to predict competitors' behaviors when forming its competitive actions and responses.

Flexible Manufacturing Systems

•Computer-controlled processes used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention. -Goal is to eliminate the "low-cost-versus-wide product-variety" tradeoff -Allows firms to produce large variety of products at relatively low costs

External Environmental Analysis

To cope with often ambiguous and incomplete environmental data and to increase understanding of the general environment, firms complete an external environmental analysis. This analysis has four parts: Scanning • Identifying early signals of environmental changes and trends Monitoring • Detecting meaning through ongoing observations of environmental changes and trends Forecasting • Developing projections of anticipated outcomes based on monitored changes and trends Assessing • Determining the timing and importance of environmental changes and trends for firms' strategies and their management Identifying opportunities and threats is an important objective of studying the general environment Opportunity: is a condition in the general environment that, if exploited effectively, helps a company reach strategic competitiveness Threat: a condition in the general environment that may hinder a company's efforts to achieve strategic competitiveness

Strategic Competitiveness

achieved when a firm successfully formulates and implements a value-creating strategy

Value Chain Activities

activities or tasks the firm completes in order to produce products and then sell, distribute, and service those products in ways that create value for customers

Resources

all inputs into the production process. i.e. capital equipment, skills of employees, patents, finances, and talented managers.

focus strategy

an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. Thus, firms use a focus strategy when they utilize their core competencies to serve the needs of a particular industry segment or niche to the exclusion of others. Examples of specific market segments that can be targeted by a focus strategy include: 1. a particular buyer group (e.g., youths or senior citizens), 2. a different segment of a product line (e.g., products for professional painters or the do-it-yourself group), or 3. a different geographic market (e.g., northern or southern Italy by using a foreign subsidiary).

core competencies

capabilities that serve as a source of competitive advantage for a firm over its rivals

Hypercompetition

describes competition that is excessive such that it creates inherent instability and necessitates constant disruptive change for firms in the competitive landscape. - Hypercompetition results from the dynamics of strategic maneuvering among global and innovative combatants. It is a condition of rapidly escalating competition based on price-quality positioning, competition to create new know-how and establish first-mover advantage, and competition to protect or invade established product or geographic markets

Related Diversification: Market Power

exists when a firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level, or both In addition to efforts to gain scale as a means of increasing market power, firms can foster increased market power through multipoint competition and vertical integration. Multipoint competition: exists when two or more diversified firms simultaneously com- pete in the same product areas or geographical markets.51 Through multi-point competi- tion, rival firms often experience pressure to diversify because other firms in their dominant industry segment have made acquisitions to compete in a different market segment. Some firms using a related diversification strategy engage in vertical integration to gain market power. Vertical integration: exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration). - Vertical integration is commonly used in the firm's core business to gain market power over rivals. Market power is gained as the firm develops the ability to save on its operations, avoid sourcing and market costs, improve product quality, possibly protect its technology from imitation by rivals, and potentially exploit underlying capabilities in the marketplace.

I/O Model of Above-Average Returns

explains the external environment's dominant influence on a firm's strategic actions. The model specifies that the industry or segment of an industry in which a company chooses to compete has a stronger influence on performance than do the choices managers make inside their organizations. 1. study the external environment(general, industry, competitor), especially the industry environment 2. locate an industry with high potential for above average returns. 3. identify the strategy called for by the attractive industry to earn above average returns. 4. develop or acquire assets and skills needed to implement the strategy. 5.use the firms strengths to implement the strategy.

competitor analysis

how companies gather and interpret information about their competitors - An analysis of the general environment focuses on environmental trends and their implications - an analysis of the industry environment focuses on the factors and conditions influencing an industry's profitability potential - an analysis of competitors is focused on predicting competitors' actions, responses, and intentions. In combination, the results of these three analyses influence the firm's vision, mission, choice of strategies, and the competitive actions and responses it will take to implement those strategies.

competitive advantage

implementation of a strategy that creates superior value for customers and that the competitors are unable to duplicate or find it too costly to try and imitate

Support Functions

include the activities or tasks the firm completes in order to support the work being done to produce, sell, distribute, and service the products the firm is producing

Global Segment

includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets

technological segment

includes the institutions and activities involved in creating new knowledge and translating that knowledge into new outputs, products, processes, and materials

integrated cost leadership/differentiation strategy

involves engaging in primary value chain activities and support functions that allow a firm to simultaneously pursue low cost and differentiation A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: -adapt quickly to environmental changes. -learn new skills and technologies more quickly. -effectively leverage its core competencies while competing against its rivals. Commitment to strategic flexibility is necessary for implementation of integrated cost leadership/ differentiation strategy. -Flexible manufacturing systems (FMS) -Information networks (CRM) -Total quality management (TQM) systems

industry

is a group of firms producing products that are close to substitutes. - In the course of competition, these firms influence one another. Typically, companies use a rich mix of different competitive strategies to pursue above-average returns when competing in a particular industry. An industry's structural characteristics influence a firm's choice of strategies.

Total Quality Management

is a managerial process that emphasizes an organization's commitment to the customer and to continuous improvement of all processes through problem-solving approaches based on empowerment of employees •Emphasize total commitment to the customer through continuous improvement using: -data-driven, problem-solving approaches.-empowerment of employee groups and teams. •Benefits -Increased customer satisfaction -Lower input and operating process costs -Reduced time-to-market for innovative products

Strategic Action / Strategic Response

is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse

strategic group

is a set of firms emphasizing similar strategic dimensions and using a similar strategy - The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group. - The notion of strategic groups can be useful for analyzing an industry's competi- tive structure. Such analyses can be helpful in diagnosing competition, positioning, and the profitability of firms competing within an industry. High mobility barriers, high rivalry, and low resources among the firms within an industry limit the formation of strategic groups.

Competitive Action

is a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position

Strategy

is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage

business level strategy

is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. - The choices are important because long-term performance is linked to a firm's strategies. Given the complexity of successfully competing in the global economy, the choices about how the firm will compete can be difficult.

differentiation strategy

is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them -Focus is on non-standardized products -Appropriate when customers value differentiated features more than they value low cost To maintain success with the differentiation strategy results, the firm must consistently upgrade differentiated features that customers value and/or create new valuable features (i.e., innovate) without significant cost increases.

value

is measured by a product's performance characteristics and by its attributes for which customers are willing to pay. - Firms use their resources as the foundation for producing goods or services that will create value for customers. - Firms create value by innovatively bundling and leveraging their resources to form capabilities and core competencies. - Superior value leads to above-average returns

global economy

is one in which goods, services, people, skills, and ideas move freely across geographic borders. - Relatively unfettered by artificial constraints, such as tariffs, the global economy significantly expands and complicates a firm's competitive environment. - The nature of the global economy reflects the realities of a hypercompetitive business environment and challenges individual firms to seriously evaluate the markets in which they will compete.

global mindset

is the ability to analyze, understand, and manage an internal organization in ways that are not dependent on the assumptions of a single country, culture, or context. - Because they are able to span artificial boundaries, those with a global mind-set recognize that their firms must possess resources and capabilities that allow understanding of and appropriate responses to competitive situations that are influenced by country-specific factors and unique cultures. - Using a global mind-set to analyze the internal organization has the potential to significantly help the firm in its efforts to outperform rivals.

political/legal segment

is the arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between firms and various local government agencies.

Globalization

is the increasing economic interdependence among countries and their organizations as reflected in the flow of goods and services, financial capital, and knowledge across country borders. Globalization is a product of a large number of firms competing against one another in an increasing number of global economies. - Overall, it is important to note that globalization has led to higher performance standards in many competitive dimensions, including those of quality, cost, productivity, product introduction time, and operational efficiency..

Corporate Relatedness: Transferring of Core Competencies

•Corporate Relatedness -Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise •Creates value in two ways :-eliminates resource duplication in the need to allocate resources for a second unit to develop a competence that already exists in another unit. -provides intangible resources (resource intangibility) that are difficult for competitors to understand and imitate. (•A transferred intangible resource gives the unit receiving it an immediate competitive advantage over its rivals.) corporate-level core competencies: complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise Over time, the firm's intangible resources, such as its know-how, become the foundation of core competencies Firms seeking to create value through corporate relatedness use the related linked diversification strategy as exemplified by GE

Related Diversification

•Firms create value by building upon or extending: -resources -capabilities -core competencies •Economies of Scope: are cost savings that the firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses.

Cost Leadership Strategy: The five forces

Rivalry with Existing Competitors: - Having the low-cost position is valuable when dealing with rivals. Because of the cost leader's advantageous position, rivals hesitate to compete on the basis of price, especially before evaluating the potential outcomes of such competition. - The degree of rivalry present is based on a number of different factors such as size and resources of rivals, their dependence on the particular market, and location and prior competitive interactions, among others. - Firms may also take actions to reduce the amount of rivalry that they face.

Model of Competitive Rivalry

1. Competitive Analysis •Market commonality •Resource similarity 2. Drivers of Competitive Behavior - Awareness: (the extent to which competitors recognize the degree of their mutual interdependence that results from): •market commonality •resource similarity - Motivation: (the firm's incentive to take action or to respond to a competitor's attack) -relates to perceived gains and losses •Ability: (each firm's resources) -the flexibility that these resources provide •Without available resources the firm lacks the ability to: -attack a competitor -respond to the competitor's actions 3. Competitive Rivalry •Likelihood of attack• - First-mover benefits - Organizational size - Quality • Likelihood of response• Type of competitive action •Actor's reputation •Market dependence 4. Outcomes •Market position •Financial performance •Firms are mutually interdependent when: -a firm's competitive actions have noticeable effects on its competitors. -a firm's competitive actions elicit competitive responses from its competitors. -competitors feel each other's actions and responses. •Marketplace success is a function of both individual strategies and the consequences of their use.

Types of focused strategies

1. Focused cost leadership strategy 2. Focused differentiation strategy •To implement a focus strategy, firms must be able to: -complete various primary and support activities in a competitively superior manner, in order to develop and sustain a competitive advantage and earn above-average returns.

Five Forces of Competition Model

1. Threat of new entrants Barriers to entry: Economies of Scale - Marginal improvements in efficiency that a firm experiences as it incrementally increases its size. Factors (advantages and disadvantages) related to large and small-scale entry include: - flexibility in pricing and market share - costs related to scale economies - competitor retaliation A new entrant is unlikely to quickly generate the level of demand for its product that in turn would allow it to develop economies of scale. Product Differentiation - Unique products - Customer loyalty - Products at competitive prices Capital Requirements - Physical facilities - Inventories - Marketing activities - Availability of capital Switching Costs - One-time costs customers incur buying from a different supplier: • new equipment • retraining employees • psychic costs of ending a relationship Distribution Channel Access - Stocking or shelf space - Price breaks - Cooperative advertising allowances 2. Bargaining power of suppliers • Supplier power increases when: - suppliers are large and few in number. - suitable substitute products are not available. - individual buyers are not large customers of suppliers and there are many of them. - suppliers' goods are critical to the buyers' marketplace success. - suppliers' products create high switching costs. - suppliers pose a threat to integrate forward into buyers' industry. 3. Bargaining power of buyers • Buyer power increases when: - buyers are large and few in number. - buyers purchase a large portion of an industry's total output. - buyers' purchases are a significant portion of a supplier's annual revenues. - buyers' switching costs are low. - buyers can pose threat to integrate backward into the sellers' industry. 4. Threat of substitute products • The threat of substitute products increases when: - buyers face few switching costs. - the substitute product's price is lower. - substitute product's quality and performance are equal to or greater than the existing product. • Differentiated industry products that are valued by customers reduce this threat 5. Rivalry among competing firms • Industry rivalry increases when: - there are numerous or equally balanced competitors. - industry growth slows or declines. - there are high fixed costs or high storage costs. - there is a lack of differentiation opportunities or low switching costs. - when the strategic stakes are high. - when high exit barriers prevent competitors from leaving the industry.

Reasons for Diversification

1. Value-Creating Diversification • Economies of scope (related diversification) • Sharing activities • Transferring core competencies • Market power (related diversification) • Blocking competitors through multipoint competition • Vertical integration • Financial economies (unrelated diversification) • Efficient internal capital allocation • Business restructuring 2. Value-Neutral Diversification • Antitrust regulation • Tax laws • Low performance • Uncertain future cash flows • Risk reduction for firm • Tangible resources • Intangible resources 3. Value-Reducing Diversification • Diversifying managerial employment risk • Increasing managerial compensation

Resources and Diversification

A firm must have both: - Incentives to diversify - The resources required to create value through diversification—cash and tangible resources (e.g., plant and equipment) Value creation is determined more by appropriate use of resources than by incentives to diversify. Strategic competitiveness is improved when the level of diversification is appropriate for the level of available resources.

Two Strategy Levels

Business-Level Strategy: -Each business unit in a diversified firm chooses a business-level strategy as its means of competing in its individual product markets. Corporate-Level Strategy: specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets - Corporate-level strategies help companies to select new strategic positions—positions that are expected to increase the firm's value.

Discuss the importance of identifying internal strengths and weaknesses

By analyzing the internal organization, firms identify their strengths and weaknesses as reflected by their resources, capabilities, and core competencies. If a firm has weak capabilities or does not have core competencies in areas required to achieve a competitive advantage, it must acquire those resources and build the needed capabilities and competencies.

Internal Organization

By studying the internal environment, firms identify what you CAN do. external = what they MIGHT choose to do. Thats why its important that a firms understand its own internal unique resources, capabilities and competencies. analyzing the firm's internal organization requires that evaluators examine the firm's entire portfolio of resources and capabilities. This perspective suggests that individual firms possess at least some resources and capabilities that other companies do not—at least not in the same combination. Resources are the source of capabilities, some of which lead to the development of core competencies; in turn, some core competencies may lead to a competitive advantage for the firm. Understanding how to leverage the firm's unique bundle of resources and capabilities is a key outcome decision makers seek when analyzing the internal organization

Differentiation Strategy: New Entrants

Can defend against new entrants because New products must surpass proven products, New products must be at least equal to performance of proven products, but offered at lower prices

cost leadership strategy: Potential Entrants

Can frighten off new entrants due to: -their need to enter on a large scale in order to be cost competitive. -the time it takes to move down the industry learning curve.

Differentiation Strategy: Buyers

Can mitigate buyers' power because well differentiated products reduce customer sensitivity to price increases

Differentiation Strategy: Suppliers

Can mitigate suppliers' power by: Absorbing price increases due to higher margins and Passing along higher supplier prices because buyers are loyal to differentiated brand

Competitive Dynamics VS. Rivalry

Competitive Dynamics: -Ongoing actions and responses taking place between (all firms) competing within a market for advantageous positions. Market speed (slow-cycle, fast-cycle, and standard-cycle -Effects of market speed on actions and responses of all competitors in the market Competitive Rivalry: Ongoing actions and responses taking place between (an individual firm and its competitors) for advantageous market position. -Market commonality and resource similarity -Awareness, motivation and ability -First mover incentives, size and quality

Challenge of Analyzing the Internal Organization

Conditions: Uncertainty - exists about the characteristics of the firm's general and industry environments and customers' needs. Complexity - results from the interrelationships among conditions shaping a firm. Intraorganizational conflicts - may exist among managers making decisions as well as among those affected by the decisions.

Corporate-Level Strategy:Key Questions

Corporate-level Strategy's Value *The degree to which the businesses in the portfolio are worth more under the management of the firm than they would be under other ownership -What businesses should the firm be in? -How should the corporate office manage the group of businesses?

Cost Leadership Strategy: Product Substitutes

Cost leader is well positioned to: -lower prices in order to maintain its value position. -make investments to add features unavailable in substitutes. -buy intellectual property and patents developed by potential substitutes.

Operational Relatedness

Created by sharing either a primary activity such as inventory delivery systems, or a support activity such as purchasing -Activity sharing requires sharing strategic control over business units.- Activity sharing may create risk because business-unit ties create links between outcomes.

The Role of Diversification

Diversification strategies play a major role in the behavior of large firms. • Product diversification concerns: - the scope of the industries and markets in which the firm competes. - how managers buy, create and sell different businesses to match skills and strengths with opportunities presented to the firm.

Factors Affecting Likelihood of Attack

First Mover: a firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position •First movers allocate funds for: -product innovation and development -aggressive advertising -advanced research and development •First movers can gain: -the loyalty of customers who may become committed to the firm's goods or services -market share that can be difficult for competitors to take during future competitive rivalry Second Mover: is a firm that responds to the first mover's competitive action, typically through imitation They: -study customers' reactions to product innovations -try to find any mistakes the first mover made, and avoid them -can avoid both the mistakes and the huge spending of the first-movers -may develop more efficient processes and technologies Later Mover is a firm that responds to a competitive action a significant amount of time after the first mover's action and the second mover's response •Any success achieved will be slow in coming and much less than that achieved by first and second movers •Late mover's competitive action allows it to earn only average returns and delays its understanding of how to create value for customers Organizational size: SMALL •Small firms are more likely to: -launch competitive actions-be quicker in doing so •Small firms are perceived as: -nimble and flexible competitors -relying on speed and surprise to defend competitive advantages or develop new ones while engaged in competitive rivalry -having the flexibility needed to launch a greater variety of competitive actions Organizational size: LARGE •Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period •Large organizations commonly have the slack resources required to launch a larger number of total competitive actions •Think and act big and we'll get smaller. Think and act small and we'll get bigger. (Herb KelleherFormer CEO, Southwest Airlines) Quality: exists when the firm's goods or services meet or exceed customers' expectations •Product quality dimensions include: -performance -features -flexibility -durability -conformance -serviceability -aesthetics -perceived quality Service Quality Dimensions 1. Timeliness 2. Courtesy 3. Consistency 4. Convenience 5. Completeness 6. Accuracy

Information age

IT has become an important source of competitive advantage in virtually all industries. The Internet and IT advances have given small firms more flexibility in competing with large firms, if the technology is used efficiently.

Levels of Diversification: Moderate to High

Related Constrained-Less than 70% of revenue comes from a single business and all businesses share product, technological and distribution linkages. Related Linked (mixed related and unrelated-Less than 70% of revenue comes from the dominant business, and there are only limited links between businesses.

core competencies

Resources and capabilities that are the sources of a firm's competitive advantage that: - distinguish a firm competitively and reflect its personality. - emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. - activities that a firm performs especially well compared to competitors. - activities through which the firm adds unique value to its goods or services over a long period of time.

Knowledge

Knowledge (information, intelligence, and expertise) is the basis of technology and its application. In the competitive landscape of the twenty-first century, knowledge is a critical organizational resource and an increasingly valuable source of competitive advantage.

Information Networks

Link companies electronically with their suppliers, distributors, and customers. -Facilitate efforts to satisfy customer expectations in terms of product quality and delivery speed -Improve flow of work among employees in the firm and their counterparts at suppliers and distributors -Customer relationship management (CRM)

Internal Incentives to Diversify

Low performance: •High performance eliminates the need for greater diversification. •Low performance acts as incentive for diversification. •Firms plagued by poor performance often take higher risks (diversification is risky). Uncertain Future Cash Flows: •Diversification may be defensive strategy if: -product line matures. -product line is threatened. -firm is small and is in mature or maturing industry. Synergy and Firm Risk Reduction: Synergy: (exists when the value created by businesses working together exceeds the value created by them working independently.) • But synergy creates joint interdependence between business units. •A firm may become risk averse and constrain its level of activity sharing. •A firm may reduce level of technological change by operating in more certain environments.

Resources, Capabilities, and Core Competencies

Resources, capabilities, and core competencies are the foundation of competitive advantage. Resources are bundled to create organizational capabilities. In turn, capabilities are the source of a firm's core competencies, which are the basis of establishing competitive advantages

Competitive Risks of Differentiation

The price differential between the differentiator's product and the cost leader's product becomes too large. Differentiation ceases to provide value for which customers are willing to pay. Experience narrows customers' perceptions of the value of differentiated features. Counterfeit goods replicate the differentiated features of the firm's products.

cost leadership strategy: Bargaining Power of Buyers (Customers)

Powerful customers can force a cost leader to reduce its prices, but not below the level at which the cost leader's next-most-efficient industry competitor can earn average returns. Although powerful customers might be able to force the cost leader to reduce prices even below this level, they probably would choose not to do so. Prices that are low enough to prevent the next-most-efficient competitor from earning average returns would force that firm to exit the market, leaving the cost leader with less competition and in an even stronger position. Customers would thus lose their power and pay higher prices if they were forced to purchase from a single firm operating in an industry without rivals

Competitive Dynamics

refer to all competitive behaviors - that is, the total set of actions and responses taken by all firms competing within a market

Risks of an Integrated Cost Leadership/ Differentiation Strategy

The potential to earn above-average returns by successfully using the integrated cost leadership/differentiation strategy is appealing. However, it is a risky strategy because firms find it difficult to perform primary value-chain activities and support functions in ways that allow them to produce relatively inexpensive products with levels of differentiation that create value for the target customer. Moreover, to properly use this strategy across time, firms must be able to simultaneously reduce costs incurred to produce products (as required by the cost leadership strategy) while increasing product differentiation (as required by the differentiation strategy). Often involves compromises -Becoming neither the lowest cost nor the most differentiated firm •Becoming "stuck in the middle"-Lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy

Types of Resources

Tangible Resources - are assets that can be observed and quantified. Financial Resources • The firm's capacity to borrow • The firm's ability to generate funds through internal operations Organizational Resources • Formal reporting structures Physical Resources • The sophistication of a firm's plant and equipment and the attrac- tiveness of its location • Distribution facilities • Product inventory Technological Resources • Availability of technology-related resources such as copyrights, patents, trademarks, and trade secrets Intangible Resources - assets that are rooted deeply in the firm's history, accumulate over time, and are relatively difficult for competitors to analyze and imitate Human Resources • Knowledge • Trust • Skills • Abilities to collaborate with others Innovation Resources • Ideas • Scientific capabilities • Capacity to innovate Reputational Resources • Brand name • Perceptions of product quality, durability, and reliability • Positive reputation with stakeholders such as suppliers and customers

Technology diffusion

Techonology diffusion, which is the speed at which new technologies become available and are used, has increased substantially over the past 15 to 20 years. - In fact, when products become somewhat indistinguishable because of the wide- spread and rapid diffusion of technologies, speed to market with innovative products may be the primary source of competitive advantage

Capabilities

The firm combines individual tangible and intangible resources to create capabilities. In turn, capabilities are used to complete the organizational tasks required to produce, distribute, and service the goods or services the firm provides to customers for the purpose of creating value for them. - represent the capacity to deploy resources that have been purposely integrated to achieve a desired end state. • emerge over time through complex interactions among tangible and intangible resources. - often are based on developing, carrying and exchanging information and knowledge through the firm's human capital. • composed of the unique skills and knowledge of a firm's employees. • include functional expertise of employees. • often developed in specific functional areas or as part of a functional area.

Effectively Managing Relationships with Customers

The firm's relationships with its customers are strengthened when it delivers superior value to them Reach: dimension of relationships with customers is concerned with the firm's access and connection to customers. In general, firms seek to extend their reach, adding customers in the process of doing so. Richness: the second dimension of firms' relationships with customers, is concerned with the depth and detail of the two-way flow of information between the firm and the customer. - The potential of the richness dimension to help the firm establish a competitive advantage in its relationship with customers leads many firms to offer online services in order to better manage information exchanges with their customers. Affiliation: the third dimension, is concerned with facilitating useful interactions with customers. Viewing the world through the customer's eyes and constantly seeking ways to create more value for the customer have positive effects in terms of affiliation.

Strategic Management Process

The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns. - The process involves analysis, strategy and performance. - The firm's first step in the process is to analyze its external environment and internal organization to determine its resources, capabilities, and core-competencies—on which its strategy likely will be based. - With the information gained from external and internal analyses, the firm develops its vision and mission and formulates one or more strategies. To implement its strate- gies, the firm takes actions to enact each strategy with the intent of achieving strategic competitiveness and above-average returns (performance). - Effective strategic actions that take place in the context of carefully integrated strategy formulation and implementation efforts result in positive performance. - This dynamic strategic management process must be maintained as ever-changing markets and competitive structures are coordinated with a firm's continuously evolving strategic inputs.

Levels of Diversification: Very High Levels

Unrelated Diversification Less than 70% of revenue comes from the dominant business, and there are no common links between businesses.

The Four Criteria of Sustainable Competitive Advantage

Valuable capabilities: Allows the firm to exploit opportunities or neutralize threats in its external environment rare capabilities: capabilities that few, if any, competitors possess Costly-to-imitate capabilities: capabilities that other firms cannot easily develop Non-substitutable capabilities: capabilities that do not have strategic equivalents. - firm-specific knowledge • organizational culture • superior execution of the chosen business model

Related Diversification: Economies of Scope

Value is created from economies of scope through: -operational relatedness in sharing activities -corporate relatedness in transferring skills or corporate core competencies among units. •The difference between sharing activities and transferring competencies is based on how the resources are jointly used to create economies of scope.

Who: Determining the Customers to Serve What: Determining Which Customer Needs to Satisfy How: Determining Core Competencies Necessary to Satisfy Customer Needs

WHO: Market segmentation - Companies divide customers into groups based on differences in the customers' needs (needs are discussed further in the next section) to make this decision. Dividing customers into groups based on their needs is called market segmentation. Market segmentation is a process used to cluster people with similar needs into individual and identifiable groups. Basis for customer segmentation: Consumer Markets 1. Demographic factors (age, income, sex, etc.) 2. Socioeconomic factors (social class, stage in the family life cycle) 3. Geographic factors (cultural, regional, and national differences) 4. Psychological factors (lifestyle, personality traits) 5. Consumption patterns (heavy, moderate, and light users) 6. Perceptual factors (benefit segmentation, perceptual mapping) Industrial Markets 1. End-use segments (identified by Standard Industrial Classification [SIC] code) 2. Product segments (based on technological differences or production economics) 3. Geographic segments (defined by boundaries between countries or by regional differences within them) 4. Common buying factor segments (cut across product market and geographic segments) 5. Customer size segments WHAT: After the firm decides who it will serve, it must identify the targeted customer group's needs that its goods or services can satisfy. In a general sense, needs (what) are related to a product's benefits and features. Successful firms learn how to deliver to customers what they want, when they want it. - Customer needs represent desires in terms of features and performance capabilities. HOW: After deciding who the firm will serve and the specific needs of those customers, the firm is prepared to determine how to use its capabilities and competencies to develop products that can satisfy the needs of its target customers. - core competencies are resources and capabilities that serve as a source of compet- itive advantage for the firm over its rivals. Firms use core competencies (how) to implement value-creating strategies, thereby satisfying customers' needs. - Only those firms with the capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and hopefully exceed customers' expectations across time. Firms must continuously upgrade their capabilities to ensure that they maintain the advantage over their rivals by providing customers with a superior product. All organizations must use their capabilities and core competencies (the how) to satisfy the needs (the what) of the target group of customers (the who) the firm has chosen to serve

Differentiation Strategy: Substitutes

Well positioned relative to substitutes because Brand loyalty to a differentiated product tends to reduce customers' testing of new products or switching brands

Tactical Action/Response

a market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse

strategic flexibility

a set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment, - Thus, strategic flexibility involves coping with uncertainty and its accompanying risks. - To be strategically flexible on a continuing basis and to gain the competitive benefits of such flexibility, a firm has to develop the capacity to learn. Continuous learning provides the firm with new and up-to-date skill sets, which allow it to adapt to its environment as it encounters changes. - Firms capable of rapidly and broadly applying what they have learned exhibit the strategic flexibility and the capacity to change in ways that will increase the probability of successfully dealing with uncertain, hypercompetitive environments.

Competitive Response

a strategic or tactical action the firm takes to counter the effects of a competitor's competitive action

cost leadership strategy

an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors Firms using the cost leadership strategy commonly sell standardized goods or services, but with competitive levels of differentiation, to the industry's most typical customers. - As primary activities, inbound logistics (e.g., materials handling, warehousing, and inventory control) and outbound logistics (e.g., collecting, storing, and distributing products to customers) often account for significant portions of the total cost to produce some goods and services. Research suggests that having a competitive advantage in logistics creates more value with a cost leadership strategy than with a differentiation strategy. Thus, cost leaders seeking competitively valuable ways to reduce costs may want to concentrate on the primary activities of inbound logistics and outbound logistics. In so doing, many firms choose to outsource their manufacturing operations to low-cost firms with low-wage employees. - Outsourcing creates interdependencies between the outsourcing firm and the suppliers. If dependencies become too great, it gives the supplier more power with which the sup- plier may increase prices of the goods and services provided. Cost leaders also carefully examine all support activities to find additional potential cost reductions. Developing new systems for finding the optimal combination of low cost and acceptable levels of differentiation in the raw materials required to produce the firm's goods or services is an example of how the procurement support activity can facilitate successful use of the cost leadership strategy. Effective use of the cost leadership strategy allows a firm to earn above-average returns in spite of the presence of strong competitive forces

Complementors

are companies or networks of companies that sell complementary goods or services that are compatible with the focal firm's good or service. - When gathering competitive intelligence, firms must also pay attention to the complementors of its products and strategy • If a complementor's product or service adds value to the sale of the focal firm's product or service, it is likely to create value for the focal firm. • However, if a complementor's product or service is in a market into which the focal firm intends to expand, the complementor can represent a formidable competitor.

competitors

are firms operating in the same market, offering similar products, and targeting similar customers.

above-average returns

are returns in excess of what an investor expects to earn from other investments with a similar amount of risk

Stakeholders

are the individuals, groups, and organizations that can affect the firm's vision and mission, are affected by the strategic outcomes achieved, and have enforceable claims on the firm's performance. - Stakeholder relationships and the firm's overall reputation among stakeholders can therefore be a source of competitive advantage. - The more critical and valued a stakeholder's participation, the greater a firm's dependency on it. Greater dependence, in turn, gives the stakeholder more potential influence over a firm's commitments, decisions, and actions.

Drivers of Competitive Behavior

awareness, motivation, ability, market commonality: A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets. •Given the strong competition under market commonality, it is likely that the attacked firm will respond to its competitor's action in an effort to protect its position in one or more markets. resource dissimilarity: The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage. • When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response.

General Environment

composed of dimensions in the broader society that influence an industry and the firms within it Demographic segment • Population size • Age structure • Geographic distribution • Ethnic mix • Income distribution Economic segment • Inflation rates • Interest rates • Trade deficits or surpluses • Budget deficits or surpluses • Personal savings rate • Business savings rates • Gross domestic product Political/Legal segment • Antitrust laws • Taxation laws • Deregulation philosophies • Labor training laws • Educational philosophies and policies Sociocultural segment • Women in the workforce • Workforce diversity • Attitudes about the quality of work life • Shifts in work and career preferences • Shifts in preferences regarding product and service characteristics Technological segment • Product innovations • Applications of knowledge • Focus of private and government-supported R&D expenditures • New communication technologies Global segment • Important political events • Critical global markets • Newly industrialized countries • Different cultural and institutional attributes Sustainable physical environment segment • Energy consumption • Practices used to develop energy sources • Renewable energy efforts • Minimizing a firm's environmental footprint • Availability of water as a resource • Producing environmentally friendly products • Reacting to natural or man-made disasters

Demographic Segment

concerned with a population's size, age structure, geographic distribution, ethnic mix, and income distribution

sociocultural segment

concerned with a society's attitudes and cultural values

market commonality

concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each •Firms competing against one another in several or many markets engage in: multimarket competition. -A firm with greater multimarket contact is less likely to initiate an attack, but more likely to more respond aggressively when attacked. Increasingly, competitors engage in competitive actions and responses in more than one market which can be observed with Google and Apple and with Google and Amazon, for example.

Strategic Leaders

people located in different areas and levels of the firm using the strategic management process to select strategic actions that help the firm achieve its vision and fulfill its mission. have a strong strategic orientation that relies on thorough analysis when taking action. - are located at various levels throughout the firm. - want the firm and its people to accomplish more. - are innovative thinkers who promote innovation. - can leverage relationships with external parties while simultaneously promoting exploratory learning. - have an ambicultural (global mindset) approach to management.

Factors Affecting Likelihood of Response

•Firms study three other factors to predict how a competitor is likely to respond to competitive actions: 1.Type of competitive action ( Strategic actions commonly receive strategic responses and tactical actions receive tactical responses. In general, strategic actions elicit fewer total competitive responses because strategic responses, such as market-based moves, involve a significant commitment of resources and are difficult to implement and reverse. - The time needed to implement and assess a strategic action delays competitor's responses.) 2.Actor's reputation (an actor is the firm taking an action or a response, while reputation is "the positive or negative attribute ascribed by one rival to another based on past competitive behavior." - The firm studies responses that a competitor has taken previously when attacked to predict likely responses.) 3.Market dependence (Market dependence denotes the extent to which a firm's revenues or profits are derived from a particular market. In general, competitors with high market dependence are likely to respond strongly to attacks threatening their market position)

Likelihood of Response

•Responses to a competitor's action are taken when the action: -leads to better use of the competitor's capabilities to gain or produce stronger competitive advantages or an improvement in its market position. -damages the firm's ability to use its capabilities to create or maintain an advantage. -makes the firm's market position becomes less defensible.