Strategic Management

Accounting Measures Examples

ROA, ROS, ROE, etc. that exceed industry averages

Objectives

- specific, measurable targets - the things a firm needs to 'do' to achieve its mission - should influence other elements in the strategic management process

Eisner's Theory

"People will pay a premium price for extraordinary entertainment. We have the necessary resources to create extraordinary entertainment. Therefore, let's redeploy our resources in a different way and offer something extraordinary to people."

What Internal Analysis Looks At

- A firm's strengths - A firm's weaknesses - How these strengths and weaknesses compare to the competiton

The Two classes Of Measures

- Accounting Measures - Economic Measures

Strategy Implementation

- How strategies are carried out; who will do what - Example: organizational structure and control; who reports to whom; how does the firm hire, promote, pay, etc. - Every strategic choice has this - This is just as important as strategy formulation

Example of Cost Advantage vis-à-vis Competitors

- Lower costs of production/distribution

Ways to Neutralize Threats

- Most firms can unilaterally change the threats in an industry. - By altering relationships in an industry, firms may reduce threats and/or create opportunities, thereby increasing profits.

Factors of Preference for the Firms Output

- People choose the firm's output over others' - People are willing to pay a premium

Its not about Survival its about Thriving

- The strategic management process helps managers achieve competitive advantage • Competitive advantage depends on differences • Strategy is about discovering and exploiting these differences

Factors in Order to Achieve Competitive Advantage

- There must be something different about a firm's offering vis-à-vis competitors' offerings - If all firms' strategies were the same, no firm would have this - This is the result of doing something different and/or better than competitors

Benefits of Competitive Advantage

-Competitive advantage typically results in high profits -Profits attract competition -Competition limits the duration of competitive advantage in most cases

Two Types of Difference

1) Preference for the firm's output 2) Cost advantage vis-à-vis competitors

Strategy

A firm's theory about how to gain competitive advantages

The VRIO Framework

A resource or bundle of resources is subjected to each question to determine the competitive implication of the resource; Each question is considered in a comparative sense (competitive environment).

Capabilities

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

Advantage

Advantage, Parity, Or Disadvantage: Above Normal; Exceeding Expectations

Parity

Advantage, Parity, Or Disadvantage: Normal; Meeting Expectations

Mission

All components of the Strategic Management Process make up this statement

Disadvantage

Below Normal; Failing Expectations

Reason For Competitive Advantage Being Temporary

Competitors often imitate the advantage or offer something better.

Conditions for RCB Sustainable Comparative Advantage

Conditions if one firm has resources that are valuable and other firms don't, and if other firms can't imitate these resources without incurring high costs, then the firm possessing the valuable resources will likely gain a sustained competitive advantage.

Opprotunities in Fragmented Industry Structure

Consolidation • buy competitors • build market power • exploit economies of scale

Questions of Value

Does the resource enable the firm to exploit an external opportunity or neutralize an external threat? Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? (Levi's reputation allows it to charge a premium for its Docker's pants)

Economic Measures Examples

Earning a return in excess of the cost of capital

Why External Analysis?

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

Opportunities of Emerging Industry Structure

First mover advantages: • technology • locking-up assets • creating switching costs

Examples of Internal Analysis

Human Resources Manufacturing Abilites Technology

How to Achieve Competitive Advantage

Identify and exploit differences that may lead to competitive advantage

The firm can expect to enjoy a sustained competitive advantage.

If a firm has resources that are: • valuable • rare • costly to imitate • the firm is organized to exploit these resources THEN...

A Competitive Disadvantage

If a firm's resources are not valuable, the firm can expect...

A Competitive Advantage (At Least Temporarily)

If a firm's resources are valuable and rare, the firm can expect...

A Competitive Parity

If a firm's resources are valuable, but not rare, the firm can expect...

The Questions of Rarity

If a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits). A resource must be rare enough that perfect competition has not set in. Thus, there may be other firms that possess the resource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-lowering drugs, but the drugs are still scarce—look at prices).

Examples of External Analysis

Interest Rates Demographics Social Trends Technology

The Strategic Management Process

Mission-> Objectives-> Analysis (Internal And External)-> Strategic Choice-> Strategy Implementation-> Competitive Advantage

Temporary

Most competitive advantage is Temporary or Sustainable?

Expect Normal Profits

Normal Or Above Normal Profits: If all threats are high

Expect Above Normal Profits

Normal Or Above Normal Profits:If all threats are low

External and Internal Analysis

Systematic Examination of the Enviroment

Resources

Tangible and intangible assets of a firm; used to conceive of and implement strategies Ex: tangible: factories, products intangible: reputation

Competitive Advantage

The ability to create more economic value than competitors; all other elements of the strategic management process are aimed at achieving this

Intended Strategy

The strategy the organization decides on during the planning phase and wants to use

Emergent Strategies

Theories of how to gain a competitive advantage in an industry that emerges over time or have been radically reshaped once they are initially implemented.

Complementors

This Increases the value of the focal firms product

Competitive Disadvantage

This happens when: •People may have an aversion to the firm's offering •The firm may have a cost disadvantage •A firm may have outdated technology/equipment •A firm may have a negative reputation EXAMPLE: Wal-Mart's Labor & Location Policies

Competitive Parity

This happens when: •The firm's offerings are 'average' •People do not have a preference for the firm's offering •The firm does not have a cost advantage over others •Some things that may lead to competitive parity may still be critical to success

Resource Heterogeneity

This means Different firms may have different resources; this typically occurs as the result of "bundling" the resources and capabilities of a firm; Managers of a firm could take resources that seem homogeneous and "bundle" them to create these combinations; Competitive advantage typically stems from several resources and capabilities "bundled" together.

Resource Immobility

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

Threat from Buyers Influence

This occurs when Powerful buyers can "squeeze" (lower profits)the focal firm by demanding lower prices and/or higher levels of quality and service.

The Threat of Supplier Leverage

This occurs when powerful suppliers can "squeeze" (lower profits) the focal firm.

True

True or False: An example of Substitutes is Coke and Pepsi are rivals, milk is a substitute for both.

True

True or False: Barriers to Entry is a Threat of New Competition

False (True whether)

True or False: Barriers to entry make an industry more attractive is false whether the focal firm is already in the industry or thinking about entering.

False (May be)

True or False: Complementors may not be found outside the focal firm's industry.

False (They change or new information becomes available)

True or False: Conditions often stay the same or new information becomes stagnent.

True

True or False: Customers perceive more value in the focal firm's product when it is combined with the complementor's product.

False (Can)

True or False: External Analysis can't be applied at the individual level to professional and personal environments

False (Helps)

True or False: External Analysis hurts firms recognize threats and opportunities

False (Takes time and effort)

True or False: External Analysis is quick and effortless

True

True or False: External Analysis provides assessment of likely levels of industry profitability (normal, above, below)

True

True or False: External Analysis should include consideration of international markets

True

True or False: Goodyear Tires on A Corvette are an example of a complementor.

True

True or False: Honda Motorcycles is an example of Emergent Strategy.

True

True or False: It is rather easy to see the evidence of competitive advantage

True

True or False: It's difficult to 'measure' technology

True

True or False: Lower Average Profits

True

True or False: Managers respond and adopt emergent strategies

False (Most)

True or False: No industries are somewhere between the extremes.

True

True or False: Substitutes create a price ceiling because consumers switch to the substitute if prices rise.

False (The Same)

True or False: Substitutes fill a different need but in a different way.

False (outside)

True or False: Substitutes will likely come from inside the industry—be sure to look.

False (Is Viewed)

True or False: Superior Economic Performance Is Not Viewed as Evidence of Competitive Advantage

False (is Caused)

True or False: Threat from Existing Competitors is not caused by Attributes of an Industry That Increase the Threat of Direct Competition

True

True or False: in time, even sustainable competitive advantage may be lost.

False

True or False: measuring the source of the advantage per se is typically possible.

True

True or False: the strategic management process leads managers to intended strategies.

Components of VRIO Framework

Value Rarity Imitability Organization

Indicators of Generic Industry Structures

• At any point in time, the structure of most industries fits into one of four generic categories. • Each industry structure presents opportunities that may be exploited. • Firms can choose to exploit an industry structure, continue business as usual, or exit the industry.

Barriers to Entry

• Economies of scale—firm that can't produce the minimum efficient scale will be at a disadvantage. •Product differentiation—entrants are forced to overcome customer loyalties to existing products. •Cost advantages independent of scale—incumbents may have learning advantages, and so on. •Government policies—governments may impose trade restrictions and/or grant monopolies.

Two Critical Assumptions of the Resource Based View (RCB)

• Resource Heterogeneity • Resource Immobility

The Difference Between Thriving and Surviving

• Success and failure, between mediocrity and excellence • A great manager and average managers • Stumbling through life and moving ahead with purpose

What Internal Analysis Helps a Firm With

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

Resource-Based View

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

Characteristics of Declining Industry Structure

• industry sales have sustained pattern of decline • some well-established firms have exited • firms have stopped investing in maintenance

Characteristics of Fragmented Industry Structure

• large number of small firms • no dominant firms • no dominant technology • commodity type products • low barriers to entry • few, if any, economies of scale

Attributes of an Industry That Increase the Threat of Direct Competition

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

Opportunities of Declining Industry Structure

• market leadership • niche • harvest • divest

Characteristics of Emerging Industry Structure

• new industry based on break through technology or product • no product standard has been reached • no dominant firm has emerged • new customers come from non-consumption not from competitors

Opportunities of Mature Industry Structure

• refine current products • improve service • process innovation

Characteristics Of Mature Industry Structure

• slowing growth in demand • technology standard exists • increasing international competition • industry-wide profits declining • industry exit is beginning

Indicators of the threat of buyers influence

•Buyers operate in a competitive market—they are not earning above-normal profits. •Buyers can vertically integrate backward. •Many small buyers can be united around an issue to act as a block. Example: Monsanto's Life Sciences Strategy

Some competitive advantages are sustainable if:

•Competitors are unable to imitate the source of advantage •No one conceives of a better offering

Threat from New Competition

•If firms can easily enter the industry, any above normal profits will be bid away quickly. •Barriers to entry lower the threat of entry. •Barriers to entry make an industry more attractive.

If Firms Could Achieve Competitive Parity and Survive

•They would face a flat demand curve •Their cost structure would be the industry average •They would need to adapt their strategy over time just to survive • They would fail if they didn't adapt their strategy

The Structure-Conduct-Performance Model (SCP Model)

•originally developed to spot anti-competitive conditions for anti-trust purposes •came to be used to assess the possibilities for above normal profits for firms within an industry •model of environmental threats was developed from this economic tradition

Industry conditions that facilitate buyer power:

•small number of buyers for focal firm's output •lack of a differentiated product •the product is significant to the buyer

Industry conditions that facilitate supplier power:

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