MGT 247 Final Exam Review
Shakeout Stage
rate of growth declines, firms begin to intensely compete, only strongest competitors survive
cost of input factors
raw materials, capital, labor, IT services
Differentiation
value is provided to customers through unique features and characteristics of an organization's products rather than by the lowest price
Value Chain Analysis
- Views a firm as a series of business processes that each add value to the product or service - internal activities a firm engages in when transforming inputs into outputs
The Five Phases of an Industry Lifecycle
1. Introduction 2. Growth 3. Shakeout 4. Maturity 5. Decline supply and demand changes as industries age each stage requires different competencies
Types of Corporate Diversification
1. Single Business 2. Dominant Business 3. Related Diversification 4. Unrelated Diversification
Why do firms need to grow?
1. increase profits 2. lower costs 3. increase market power 4. reduce risk through diversification 5. motivate management
examples of blue ocean strategy
Tesla and JetBlue first mover advantage
strategic position
profile based on value creation and cost in a specific product market
harvest
reduce further investments
What are the three main benefits of merging?
reduction in competitive industry, lower costs, increase differentiation
inside directors
usually consists of CEO, COO, CFO
tension
value creation and pressure to keep cost in check
internal transaction costs
- Recruiting and retaining employees - Paying salaries and benefits - costs tend to increase with organizational size and complexity
market mechanism
- individuals and firms guided by market prices - make independent decisions to buy and sell goods and services
When to use vertical integration
- issues with raw materials - to enhance customer experience - vertical market failure (transactions are too risky or costly)
external transaction costs
- negotiating, monitoring, and enforcing contracts - executing business outside the internal boundaries of the firm
principal
- owner of a firm - goal: create shareholder value
partner selection and alliance formation
-Benefits must exceed costs -Partner compatibility (cultural fit) and commitment (willingness to offer resources and absorb short term sacrifices) are necessary
Primary activities in the value chain
-Direct: making and selling - transforms inputs into outputs as the firm moves a product or service horizontally along the internal (inbound logistics, operations, outbound logistics, marketing and sales, service)
restructuring
-Reorganizing & divesting business units & activities -Refocuses a company on its core competencies - growth share matrix
strategic tradeoffs
-choices between a cost or value position -Purpose- maximize the firms economic value creation and profit margin
Risks of Vertical Integration
-increasing costs, reducing quality, reducing flexibility, - increasing the potential for legal repercussions
Benefits of Vertical Integration
-lowering costs -improving quality -facilitating scheduling and planning -facilitating investments in specialized assets -securing critical supplies and distribution channels
How can diversification enhance firm performance?
-provide economies of scale (reduce costs) -exploit economies of scope (increase value)
Why do firms enter strategic alliances?
-strengthen competitive position -enter new markets -hedge against uncertainty -access critical complementary assets -learn new capabilities
diseconomies
costs are becoming more expensive and efficiency is going down
technology development
Activities completed to improve product and the processes used to manufacture it
inbound logistics
Activities used to receive, store, and disseminate inputs to a product
Business Ethics
An agreed-upon code of conduct in business, based on societal norms.
in house costs > market costs
BUY - firm should consider purchasing instead - less integration
Blue Ocean Strategy
Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs
merger
Combination of two or more companies into a single firm. Usually involve companies of similar size. One company is the dominant firm.
how to respond to disruptive innovation
Continue to innovate (Stay ahead of the competition), Guard against disruptive innovation (Protect the low end of the market), Disrupt yourself Rather than wait for others to disrupt you (reverse innovation)
Inter-firm Alliances
Created to exploit complementaries between resources and capabilities owned by different companies
borrow
Enter a contract/ strategic alliance
Radical Innovation
Entirely new knowledge base to target new markets and technology
Growth-share matrix
Evaluates a company's SBUs in terms of market growth rate and relative market share
Four strategic options to pursue
Exit, harvest, maintain, consolidate
Why are strategic alliances attractive?
Firm goals can be achieved faster and at lower costs. •Complement or augment the value chain •Less complex legally •Can help a firm gain and sustain a competitive advantage
A good and bad example of mergers
Good: Disney/ Pixar, Bad: Sears/ Kmart
alliance design and governance
Governance mechanisms: •Contractual agreement •Equity alliances •Joint venture Inter-organizational trust is critical.
4 types of strategy mergers
Horizontal mergers, geographical mergers, vertical mergers, diversifying mergers
closeness
How close do you need to be to your external resource partner? Equity alliances, joint ventures, mergers, acquisitions
Relevance
How relevant are the firm's existing internal resources to solving the resource gap?
Tradability
How tradable are the targeted resources that may be available externally?
Integration
How well can you integrate the targeted firm, should you determine you need to acquire the resource partner
When are internal resources relevant?
If they are similar to those the firm needs, they are superior to those of the competitors, or they pass the VRIO
Why do firms need growth?
Increase profits, lower costs, increase market power, reduce risk, motivate management
innovation is a competitive weapon because...
Innovation can create and destroy value. (Traditional networks vs. cable providers •Cable providers vs. streaming content •Typewriters to PC's to mobile devices Innovation often comes in waves.)
disruptive innovation
Leverages new technologies in existing markets New product / process meets existing customer needs
in house costs < market costs
MAKE - vertically integrate - own production of inputs - or own output distribution channels
Why do firms merge?
Meeting with a competitor, at the same stage in the value chain
Is there usually a competitive advantage to mergers and acquisitions?
No.
Vertical Integration
Practice where a single entity controls the entire process of a product, from the raw materials to distribution
Two components of value chain analysis
Primary and support activities
Issues with Build-Borrow-or-Buy Framework
Relevance, tradability, closeness, integration
introduction stage
Research and development, strategic objective, capital intensive, network effects
What are the responsibilities of the board of directors?
Strategic oversight and guidance, CEO selection/ evaluation/ compensation, guide executive compensation, review/ monitor/ evaluate/ approve strategic initiatives, risk assessment/ mitigation
Alternatives to Vertical Integration
Taper integration; strategic outsourcing (moving internal value chain activities to other firms)
Vertical Scope
What range or stages of the value chain should the firm participate
How should we compete
Who: which customer segments? What: customer needs will we satisfy? Why: do we want to satisfy them? How: will we satisfy our customers' needs?
hierarchy of authority
a clear chain of command found in a bureaucracy
joint venture
a form of equity alliance where partners form a new company they jointly own. Standalone organization
strategic alliance
a voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services
Buy
acquire new resources, capabilities, and competencies
procurement
activities completed to purchase inputs
service
activities designed to enhance or maintain a product's value
operations
activities involved with collecting, storing, and physically distributing product
human resources
activities that support entire value chain
Marketing and Sales
activities to facilitate purchase of products and to induce consumers to do so
dominant business diversification
additional business activity pursued
related constrained diversification strategy
all businesses share competencies
Capatilist economy
an economic system in which the market determines production, distribution, and price decisions, and property is privately owned Ex: USA - market mechanism, administrative mechanism
exit
bankruptcy/ liquidation
How do firms achieve growth?
build, borrow, buy
incremental innovation
builds on established knowledge, results from steady improvement, targets existing markets and technology
consolidate
buy rivals
Advantages of inter-firm alliances
can be created and dissolved quickly, purchase and scope can change quickly, risk sharing
Forward vertical integration
changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain
Backward vertical integration
changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain
Cost Leadership
compete for a wider customer based on price
crossing the chasm framework
conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group. many innovators do not successfully transition from one stage of the industry life cycle to the next.
related diversification
creating or acquiring companies that share similar products, manufacturing, marketing, technology, or cultures (related constrained/ related linked)
administrative mechanism (firm)
decisions concerning production and resource allocation are made by managers
Corporate Strategy
decisions leaders make, goal directed actions
economies of scale
decrease in cost per unit as output decreases
decline stage
demand falls rapidly, four strategic options to pursue
growth stage
demand increases rapidly, product/ service standards emerge
economies of scope and scale
describes a competitive advantage that large entities have over smaller entities
early adopters
enter during growth stage, demand driven by imagination and creativity
late majority
enter during maturity stage (wait until standards have emerged), represent majority of the market
early majority
enter during shakeout stage, weigh the benefits and costs carefully
Laggards
enter during the decline stage, demand small
Technology Enthusiasts
enter market during introduction stage
Architectural Innovation
existing technologies leveraged into a new market
universal norms
fairness, honesty, reciprocity,
maturity stage
few large firms (economies of scale), market reached max (industry growth is zero or negative)
product design
how a product is conceived, planned, and produced
Product Scope
how specialized the firm is in terms of the range of products it supplies
Innovation Process
idea, invention, innovation, imitation
intangible
impression the product or service makes on a customer
experience curve effects
improvements to technology and production processes
horizontal merger
increase profits via cost economies and market power within the same market
Support Activities in the Value Chain
indirect: infrastructure and everything else (procurement, technology development, human resources), necessary to sustain primary activities
Build
internal development
Entrepreneurs
introduce change, undertake economic risk to innovate
vertical merger
involve the acquisition of either a supplier or customer (merging content and distribution)
learning curve effects
less time to produce output with experience
single business diversification
low level of diversification
agent
manager or employee who should act on behalf of the principal
unrelated diversification
no businesses share competencies
Strategic alliances can be governed by...
non-equity alliances, equity alliances, joint ventures
what is a successful business strategy
o Leverages the firms strengths o Mitigates firm weakness o Helps firm- exploit external opportunities, avoid external threats
Focused Differentiation
organizations not only compete based on differentiation but also select a small segment of the market to provide goods and services
focused low cost
organizations not only compete on price by also select a small segment of the market to provide goods and services to
Three Alliance-Related Tasks Must Be Managed Concurrently
partner selection and alliance formation, alliance design and governance, post- formation alliance management
equity alliance
partnership in which at least one partner takes partial ownership in the other
economies of scope
producing two outputs at less cost
product- market diversification
product and geographic diversification
important drivers
product features, customer service, complements ***complements add value
board of directors
represent the interests of the shareholders, tasked with providing insight, consist of inside and outside directors
Outside directors
senior executives from other firms
Who elects the board of directors?
shareholders
principal-agent problem
situation in which an agent performing activities on behalf of a principal pursues his or her own interests
tangible
size, color, materials, performance
related linked diversification strategy
some businesses share competencies
maintain
support at a given level
transaction costs
the costs that parties incur in the process of agreeing to and following through on a bargain
business level strategy
the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market
Corporate Governance
the mechanisms to direct and control and enterprise/ ensure it pursues strategic goals successfully and legally, offers checks and balances, attempts to address the principal agent problem
Diversifying merger
the merging of firms involved in completely different business activities
acquisition
the purchase of a company by another company. can be hostile when the target firm does not wish to be acquired
strategic entrepreneurship
the pursuit of innovation using tools, creating new or exploiting existing opportunities
social entrepreneurship
the pursuit of social goals while creating a profitable business, goal is to provide knowledge on a very large scale
Why do firms acquire other firms?
to gain access to new markets and distribution channels (to overcome entry barriers, to gain access to a new capability or competency, to acquire customers and employees) to preempt rivals
geographical scope
what is the optimal geographical spread of activities for the firm (regional, national, international)
learning curve percentages
§ 90% Learning curve- when doubling outputs unit cost goes down 10% § 80% curve- 20% deduction
what happens during a learning curve
§ Experience curve repetition § Increased individual skills and improved organization routines
cost leadership goals
· Reduce cost below competitors · Offer adequate value · Reduce prices for customers · Optimize the value chain for low cost
geographic diversification
•Increase in variety of markets / geographic regions •Regional, national, or international markets
product diversification
•Increase in variety of products / services •Active in several product markets