Strategic Management Exam 1
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slide 17 chapter 4 part 2
Chapter 4 (my notes)
-Doing the analysis basically Deterministic -Choice of the person/company/owner/employee, etc. making decisions based on their own ideas and not research Voluntaristic -Usually prefer proactive over reactive
Why is the SWOT Tool Important?
• Deals with the competitive advantage • SW comprises the attributes and abilities
Performance in the long-term
• Managing long-term performance • Long-term judgements based on the current events • Performance from a variety of perspectives
Life Cycle Model
• Mature markets have customers who are knowledgeable in substitutes and therefore, these markets are generally more competitive. • Consolidation and shake-out, firms grow through consolidation (Hospitals - Affordable Care Act) • Industry that has consolidated is said to be mature. • Assessing the life cycle of the org. is helpful in evaluating the environment for competition
Porters' Five Forces Model
Threat of new entrants: real or potential competitors - they offer alternatives. • New entrants consider the market on the prospect of profitability. They are attracted due to the potential of making a profit. • New entrants increases bargaining power of the buyer • Contrived deterrence and over-capacity (selling lower than needed) to ward off new entrants. • Analysis question: When is it difficult for new firms to enter the market? What are the Entry barriers?
Definiton Confusion?
At the core, strategy is the companies plan for action: - ongoing creation of value - short-term and long-term process - reflects realities of the environment - push for innovation, adaption and change - management and employees need to be engaged - complex and multi-faceted
Performance in Context/Contingencies
Organizations are driven by a variety of motivations • Values - drive decisions • Mission - ^^
Balanced Scorecard
gauges performance in the day to day - the name given to a performance measurement framework developed by Robert Kaplan and David Norton. - framework employs a variety of different strategic and non-financial performance metrics, in combination with traditional financial measures, to produce single "balanced" measure of performance and condition
Evolution of the Environment
Industry lifecycles show changes: - Sometimes incremental and evolutionary - Sometimes radical and revolutionary - Sometimes growth and profits - Sometimes more competition and slower profits - Analysis question: How did this occur, and how might this affect the future?
Minimal Consensus
• Goes against absolute agreement • Dissent is essential • Alternative points of view • Premature pursuit of consensus • Encourages open dissent
Contrived Deterrence
describe those investments made by incumbent firms that discourage new entrants from option to compete
Porters' Five Forces Model
Rivalry among competitors: • Competition for market share in the same industry. • All of the other forces exert pressure on this force. • The stronger the force, the stronger the expected competitiveness, that limits the industries profit potential. • Price wars leads to industry erosion • Non-price competition - quality factors can increase profitability • Rivalry occurs when supply is higher than demand.
SWOT
S & W - internal analysis of the organization in it's strengths and weaknesses O & T - external analysis of the environment in its opportunities and threats - tool for identifying some key issues - can't do just one--have to evaluate both
PICTURE
SLIDE 13 CHAPTER 4 PART 2
Example
• Airline Industry • Low entry barrier - need a few planes • Highsupplypower-planestructure,engines, maintenance, catering, • High buyer power - substitutes at lower costs • Low buyer switching costs • Unattractive profit industry to enter and high rivalry.
Change and Adaption Helpful Mechanisms
• Minimal consensus • Minimal contentment • Minimal affluence • Minimal faith • Minimal consistency • Minimal rationality
Minimal Faith
• Only the required amount of confidence in the companies plans • Be ready to change plans when the unpredictable happens to take advantage of the opportunity. • Hold open this possibility that some things cannot be anticipated.
OT Analysis
• Opportunities linked to competitive advantage • Context • New competitive advantage - Threats
Application and Exceptions
• Starting from scratch is not usual • Strategy works with what is already present
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slide 4 on competitive advantage pdf ******** - Creating Value
Intended Vs. Realized Outcomes (Strategy)
Mintzberg (1987) his terms for these two methods are: - Deliberate strategies - Emergent strategies - He uses the metaphor of a potter • Strategist is the potter with raw materials and intention to create something. • The process occurs through interactions, analysis, observations and experience results in a strategy.
Creative Destruction
describes the process whereby the economic structure of industries is revolutionized within--old structures become replaced by new ones
Environmental Analysis - Three Steps
1. Define the environment 2. Analysis of the current conditions 3. How are the forces in the environment changing? Incrementally over time?
Monopoly
there is only one provider, the seller can sell at a substantial premium
Balanced Score Card - Views Firm From Four Perspectives
• Develop metrics, collect data and analyze in four areas. • Learning & Growth • Business Process • Customer • Financial • Strategy Mapping
Porters' Five Forces Model
• Rivalry among competitors - offering inducements to change suppliers, convincing customers your product is better than other options. This directly shifts the bargaining power from sellers to buyers. • Rivalry occurs when supply is higher than demand.
Life Cycle Model
• This model suggests that after maturity comes standardizing. • Niche markets emerge
Porters' Five Forces Model
Availability of the substitutes: - Less options, less elasticity - High when there is an acceptable price-performance trade-off - Buyers cost of switching to the substitute is low - Substitute does not need to look the same to be a substitute. - Perfect substitute - two items that are indistinguishable in the eyes of the customer - More options (substitutes), more elasticity - Very few substitutes means the product or service is inelastic, such as gasoline, and the price can be what it is Every product/service has a substitute: A consumer doing nothing is the ultimate substitute!
Porters' Five Forces Model
Criticisms of Porter's five forces: - Sometimes seen as a simple prescription to find non-competitive positions, that are hard to find in the changing environment. - Few market spaces that are not subject to competition over time and few positions that can be defended indefinitely - so five forces not dynamic enough.
Profitability as a measure of Performance
- Value reflects profits, so many use profitability as the highest level of performance. - Profitability as a measure of performance is problematic for these reasons: • Profit can be measured in absolute, as well as relative terms. • Profitability occurs on a continuous basis. • Profitability is a backward-looking measure. • Profit is still and important measure, it just needs to be considered along with other measures. • Profit means the company has a level of competitive advantage o Measured in relative or absolute terms -- Is it going to be quarterly or annually, etc. o As each transaction and expense occurs, it changes continuous basis
Examples of a Monitoring System
o Increase education programming more on the specific, short term side o Diversify revenue scores could take some time, less specific more long term SLIDE 12 ON CHAPTER 3 LESSON 2 PDF
Branding
seeks to promote a high degree of familiarity, recognition, and respect for particular brand in the mind of the customer so that, when thinking of a particular product, the customer will think of only that brand
The Business Environment
• Defined - open system with three elements - Inputs - Transformation - Outputs
Review
• Defining the business allows the firm to identify it's customers. • Identifying the customer and suppliers of substitute products/services allows the firm to identify it's competitive environment. • Competitors are threats to the firm, competitors are firms who interfere with the relationship the firm has with its customers, pulls away customers. • Competitors are threats when they have the benchmark for comparison in the eye of the customer.
Exceptions to Consider
• Hyper-competition - continuous and ongoing change. • Industry Definition - beyond the North America Classification System (NACS) • Locus of Competition - seek to understand the factors that affect the organization directly
Goals, Objectives, and Strategies
- Goals should be specific in the short term, but general in the long term (logical incrementalism). -- Rule of thumb: if you can see the future clearly, be more specific, if not, be more general
Resource-based view
- addresses the firm, its resources and capabilities that affect competitive advantage
Picture
- all 5 p's are part what go into make competitive advantage (picture on slide 14 of strat mgmt introduction)
Pattern
- careful planning - emergent (unexpectedly, or through consistent patterns of business) - a recipe for success which becomes a consistent pattern of action - pattern that is seen by the customers, competitors, analysts, and journalists, and it is this pattern that is understood as the firm's strategy
Chapter 1 Conclusion
- competitive advantage results from action - strategic management is most practical of disciplines - it is the underlying theory of how a firm will pursue superior performance - it is the key to a firm's success and the capstone of business education
Plan
- forward looking and visionary process - strategies are as much ploy as they are plans
GAAP
generally accepted accounting principles
PICTURE
REVIEW SLIDE 5 ON CHAPTER 3 LESSON 2 CONT. PDF
Shared Approach to Strategy
Shared approach to strategy Pro's: • Engages experts in functions, • Provides diverse ideas, • Creates by-in Shared approach to strategy Cons: • Long process, • Many opinions, • Can become frustrating, • Difficulty in implementing
Economies of Scope
occur when the average total cost of production decreases as the number of different goods/services produced increases
Tools of the Trade
• Each step in the Strategy framework leads to an end result. • Each step is a means to get to a strategy. • Each step is generic • Example? o What are they currently doing—the organization REVIEW PAGE 56 and SLIDE 7
Multiple Measures of Performance Depending on the Situation and Goals
• Focus • Intermediate measures • Balanced Scorecard
Benefit Corporations—B corps
• For-Profit • Mission driven • Socially conscious • Legal protection to pursue a mission of their business impact on society and the environment. - It has legal teeth to it - Directors of shares have an obligation to bring the highest level of profit back to the organization—so they can't really focus on their mission
Analyzing the Environment
• Identifying the actors Abell (1980) as cited in Amason - Identify the firm, what does the firm do? • Customer group - • Customer functions - • Dominant technologies - Page 81
Application and Exceptions
• Intangible assets influence strategy • People are selected in hopes of a fit • If possible, work with the resources you have to help people change and adapt.
Turning Great Strategy into Great Performance
Mankins and Steele (2005) • Companies realize 60% of their strategies • Mankins and Steele called this strategy-to- performance gap • Recommendations for better performance
Economies of Scale
describe a measure of economic growth wherein the average unit per costs associated with the production, marketing, or distribution of a product/service decreases as the number of units increases
Porters' Five Forces Model
Understanding bargaining power - bargaining power of suppliers - bargaining power of customers - threat of new entrants - threat of substitute products - competitive rivalry within an industry
Monopoly Power
the ability to do ^^ and the degree to which a seller has the ability to set the market price for a certain good
Strategy is Actually About Action
• It is about behaviors and commitments-- And competitive advantage • It is a theory - Systematic - Explain events and predict outcomes - Relates to practice • Understanding strategy provides - - Why things happen - Predict cause and effect o It is a theory -- Brings forth some details --- Systematic and organized assumptions --- Relates to practice (action piece)
Adaption and Change- How?
• Learn from Icarus • Requires being watchful of success - not letting it blind you from the external environment; the competition. • Watchful of the status of success, and not willing to take risks that would cause you to lose that status - only taking action on sure things. o Learn from Icarus: his story --- What was his point? "don't melt your wings" - don't be too high or too low
Impact of External Macro- Environmental Factors (S)
• PESTEL Framework - Acronym for the factors to scan, monitor and evaluate. • Sociocultural factors - societies norms and values • Always changing and different for many groups of people. • Example
Impact of External Macro- Environmental Factors (T)
• PESTEL Framework - Acronym for the factors to scan, monitor and evaluate. • Technological factors - application of knowledge to create new processes and products. • Can be an opportunity or a threat
Whose Job is Strategy?
• Usually the CEO's in planned and scenario planning - they get the big picture and can set direction. • Positions are often isolated from the direct customer feedback. • Don't know what is important
After Definition of the Company
• Who are the customers? • What other options/alternatives do these customers have for the product or service? - Other suppliers of the same product/service AND - Substitutions for the product/service provided - Example: Cell phones - AT&T, Verizon, T-Mobile; substitutes are?
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REVIEW MODEL ON PAGE 49
Elasticity
is about having options
Is Strategy Tactics?
• Arguments for • Arguments against • Tactics are action
Performance
- through value creation -- creating value (does not happen on accident) -- capturing value - honest tea example
Rivalry Force Intensified
- Competitive industry structure: -- Perfect competition - highly fragmented, many small firms, price takers, commodity product -- Monopolistic competition - somewhat fragmented, many firms, some pricing power, differentiated product -- Oligopoly - More consolidated, few large firms, some price power, differentiated product, high entry barrier -- Monopoly - Very consolidated, One, firm, considerable pricing power, unique products, Very high entry barriers - Industry growth - High growth, more demand - Strategic commitments - long term oriented decisions create fixed costs or strategic commitments - Exit barriers - lower exit barriers affects rivalry.
Environmental Analysis - Three Steps
1. Define the environment 2. Analysis of the current conditions - Porter's (1980)five forces model 3. How are the forces in the environment changing? Incrementally over time. -- Must be able to create value minus the cost for economic value, and must be able to obtain a share of the market to succeed.
Porters' Five Forces Model
Bargaining power of the Supplier: - Can affect the intensity of the competition in the industry - High when only a few options - High when suppliers do not depend on the industry for a large portion of revenue - High when firms switching to other suppliers is costly - More specialized, (differentiated) can charge more - Low number of substitutes - Credibly threaten to sell the customer directly, which would increase the supplier's buying power (they own the supply market) Pseudo-monopolies - Conditions where buyers feel that they have one option
Porters' Five Forces
Bargaining power of the buyer: - individuals or large companies. -- "Availability to the buyer and lack of intense need." --- Unimportant, readily available, inexpensive, rarely of immediate importance. -- Factors for improving bargaining power of the buyer -- High bargaining power when bulk purchases, and few firms buying - Walmart- largest retailer worldwide, and one of the largest companies. -- Undifferentiated commodities - substitutes available -- Low or no switching costs for buyer - other suppliers -- Alternative sources of supply - Give more bargaining power -- Buyer has the ability to become a supplier (threat) backward integration into the industry.
Product Life Cycle Model
Competition (demand) changing over time in the life of the product or service. - In early stages (embryonic) - the seller needs to convince the buyers of the value and has little bargaining power. - Growth stage (standardization) - standardization in manufacturing and delivery - Maturation - slowed sales and efforts to stimulate more sales, and seek other customers/competition.
Chapter 4
External/Environmental Factors (opportunities and threats)
Strategy-to-Performance Gap Recommendations
Mankins and Steele (2005) • Strategy concrete • Debate assumptions • Common language • Resources • Identify priorities • Monitor • Reward and develop - Strategy-to-Performance Gap Recommendations: o Strategy concrete: all the way from the corporate down o Debate assumptions: and not forecast—talk about the important ways that you can affect your organization but do not forecast o Common language: common language is hard—required business or corporate units to spend more time and energy o Resources: instead of later on, right away o Identify priorities: everyone knows that they are doing o Monitor: make sure it is getting the monitor it need o Reward and develop: is everyone on the same page
Sample Corporate Strategy
Maurices: • The company is adding stores with the goal of increasing its network to more than 1,300 stores in the US and Canada. Over the past five years, the company has opened more than 250 stores.
Porters' Five Forces Model
• Availability of the substitutes -- More options (substitutes), more elasticity -- Less options, less elasticity • Substitute does not need to look the same to be a substitute. -- Different views on substitutes • ---Depends on the person doing the substituting e.g., tile for hard Wood floors. ---- Elasticity, two sides of the coin: Both buyer and seller want the best deal to maximize returns. Every product/service has a substitute: A consumer doing nothing is the ultimate substitute!
Porters' Five Forces Model
• Bargaining power of the buyer - "Availability to the buyer and lack of intense need." -- Unimportant, readily available, inexpensive, rarely of immediate importance Factor's for improving bargaining power of the buyer • bulk purchases - Walmart • advance purchases (generators prior to 2000) • Alternative sources of supply - Give more bargaining power
Porters' Five Forces Model
• Bargaining power of the seller - Factor's in Bargaining power for seller: Pseudo-monopolies - Conditions where buyers feel that they have one option. **Bargaining power - Understanding the needs of the customer and the available options.
Gaining Bargaining Power
• Branding - high familiarity in order to limit the perceived bargaining power . • Regulated businesses that protect against direct competition. • Patents - limit the competition from selling similar products.
Competition Threatens
• By interfering with the company's relationship with the inputs (suppliers), and its outputs (customers ).
Application and Exceptions
• Caution on the exact processes, tools details of the analysis. • Important things: - The customer - Competitive advantage • Drucker - "...to create and keep the customer."
Competition to Inputs
• Companies have more concerns that just obtaining the inputs. - Competition from other competitors - Demand for the product/service
Adaption and Change as a Tool?
• Conceptualized as non-strategy • Strategy seen as staying on a planned path • Strategy is the ability to respond the environment. o Conceptualized as non-strategy: Corporate is usually pretty good about this—ability to adapt and change is essential
Minimal Rationality
• Counterintuitive to traditional wisdom • Perception of certainty and control. • Relies on objective perspectives only • Leans toward the known situations • Limit the vision • Focus is on process and procedure • Drucker "doing things right, or doing the right things," • Doing things by the book
Porters' Five Forces Model
• Criticisms of Five Forces - - Sometimes seen as a simple prescription to find non-competitive positions, that are hard to find in the changing environment. - Few market spaces that are not subject to competition over time and few positions that can be defended indefinitely - so 5 forces not dynamic enough.
Learning, Adaption and Change
• How can you mitigate the trappings of success in order to adapt and change? - Processes and practices - Integrate throughout the organization - Culture - Decision making processes
Minimal Consistency
• Minimizing the cost of change • Don't avoid change because it will cost • Major changes can be avoided if minor changes are allowed to take place repeatedly.
Adaption and Change
• Takes a willingness and motivation to take risks! • Especially when you have the competitive advantage. • Remain hungry!
Minimal Contentment
• Tendency to allow things to go on as usual • More content, the stronger the force is needed for change. • Talented people with resources can overlook signals of change
Competitive Environment
• Most immediate and important part of the environment, and requires the most amount of time. • In the competitive environment, the interaction between the actors affects the bargaining power of the firm. • Bargaining power - Elasticity (having options)
Application and Exceptions
• New business - still has constraints • Constraints by founders - Imprinting - Imprint or the image - Example: DEC, Digital Equipment Corporation - Constraints of the skills, talents and bias of the entrepreneur. - Constraints of resources - even for start-ups.
The Environment, Some Tension in Perspectives
• One perspective is proactive, or Deterministic point of view where strategy is identified through a cause and effect process. • Another perspective is reactive, or Voluntaristic - strategy by innovation, creativity and choice. Proactive strategies are often celebrated, and reactive strategies often get a bad reputation, and are thought of as not as good.
Impact of External Macro- Environmental Factors (E)
• PESTEL Framework - Acronym for the factors to scan, monitor and evaluate. • Ecological factors - environmental issues, natural environment, global warming, sustainable economic growth. • Business and natural environment are linked.
Impact of External Macro- Environmental Factors (E)
• PESTEL Framework - Acronym for the factors to scan, monitor and evaluate. • Economic factors - macro-factors that affect whole economy. - Growth rates, employment levels, interest rates, inflation or deflation, currency exchange. - Business activity, expanding or contracting?
Impact of External Macro- Environmental Factors (L)
• PESTEL Framework - Acronym for the factors to scan, monitor and evaluate. • Legal factors - closely related to political factors in that laws and lawsuits often come out of political factors. • Regulatory outcomes change the whole industry.
Impact of External Macro- Environmental Factors (P)
• PESTEL Framework - Acronym for the factors to scan, monitor and evaluate. • Political - government bodies that influence decisions of the firm. • Can deal with this factor through- nonmarket strategies - Lobbying, public relations, contributions, legal factors.
Minimal Affluence
• Paradox of seeking to earn as much as possible. • Stock piling slack resources can buffer signals of slight decline in sales • Keep only enough to keep the business looking for more opportunities
Act or React - Which Strategy?
• Proactive strategy is more risky because it is leading approach. • A reactive strategy can be a better approach in some instances. • Which decision is better? The environment is a good place to begin the inquiry.
Examination of Your Company
• See if you can identify the strategy formulation option your company. • See what gets measured? - Operational success? - Safety? - Customer creation or retention? - Creation of new products? - Some combination? Pietersen 2002
Mature Organizations
• Size and low opportunity for growth • As industries evolve -consolidated, efficient, competitive - very difficult to make a profit. • Empty Core industry/market
Whose Job is Strategy?
• Somewhere between the continuum of the CEO and organization wide process. • Involves big picture • Sometimes leading in unpopular places • Involve those lower in the org. (broad, but selected people) to offer information about the possibilities and constraints of a strategy. • It is a balancing act, where do you want to put your talent? For how much time can you take them off project?
Learning, Adaption, and Change
• Subtle signs discussed • Subtle signs that need attending: - Customer messages - Competition - New technology - Old strategies need to be changed ♣ Usually corporate doesn't give customer messages ♣ What is the competition doing? ♣ New technology comes and goes quickly—why does yesterday's strategy not work
Intended Vs. Realized Outcomes (Strategy)
• Successful strategy built out of planning and execution • Successful strategy due to flexibility, sensitivity and the ability to learn, change, and adapt. • Both ways of strategy can occur and both can be successful.
Summary
• Taken all-together, Five Forces give a good idea of the competitive environment. • Highly elastic (many options) and firms need more sales - lower prices • Inelastic (few options) and firms don't need more sales - higher prices • Greater competitiveness, lower profits
Summary
• Taken all-together, Five Forces gives a good idea of the competitive environment. • Highly elastic (many options) and firms need more sales - lower prices • Inelastic (few options) and firms don't need more sales - higher prices • Greater competitiveness, lower profits
Porters' Five Forces Model
• Threat of new entrants : the real or potential new entrants offer alternatives. -- New entrants consider the market on the prospect of profitability. They are attracted due to the potential of making a profit. -- Results in: Increases bargaining power of the buyer --- Think about personal examples outside of business : the fishing pond -- Contrived deterrence and over-capacity (selling lower than needed) to ward off new entrants • Analysis question: When is it difficult for new firms to enter the market? What are the barriers?
economic value added
is a measure of financial performance incorporating both accounting measures of profitability and the firm's overall cost of capital - the result is a measure that reflects economic profit or the return over the minimum required investors
Strategy, How is it Accomplished?
• The definition as a framework for • How do we actually do this? • Much of what is talked about strategy is conceptual or academic? o Most times they really don't know how to even look at the organization as a whole unless they are a CEO or the top folks in an organization ♣ Sense, feeling, some tip is usually how it is done
OT Analysis - External/Environmental
• Two step process: - System interacts with industrial environment more frequently (Competitive environment) - System interacts with the macro-environment (General environment) - Macro-environment o Influence companies in ways that you can't always change or alter them—hard to influence—don't know if it affects anything unless you are internal to the organization - OT analysis: o Not just a list—actually linked to competitive advantage o The idea is to gain new competitive advantage by attracting new business—not with the same old business o Threats—forces that interfere with the relationships that you have with the areas of the environment REVIEW SLIDE 18 ON CHAPTER 3--FRAMEWORK OF STRATEGIC MANAGEMENT PDF
Strategic Management Allows
• Understanding of the interaction of cause and effect. • This understanding allows you to respond the actions taken by your competition, • And create your own companies actions. • Strategy can be useful when it becomes actionable. - Strategic management process: -- Analysis takes place at the intersection of the lines -- This seems important for the exam
Voluntaristic Choices
• Where the firm is located, important choice, and usually when acquiring or expanding. • Values - what the company is committed to doing?
The Competitive Environment
- the capabilities and resources of the firm to produce products and services - SWOT analysis-- strengths, weaknesses, opportunities, and threats
Getting to the Value of the SW
To understand the value, you will need to understand the particular environment.
Common Performance Measures (Tobin's q)
Tobin's q (quotient) - Finds the value of the firm's intangible assets, based on earning capacity in the future. Divides firms market value by the replacement costs of tangible assets (book value). - estimates two values -- market value of firm -- replacement costs of firm's tangible assets At any moment in time, a firms value is: • a combination of the book value of it's assets, and, • The intangible value added by - managers, employees, and strategies Strengths —used for common and actively traded shares; it can be easily accessed for information; good for public firms Weaknesses —market value hard to measure; older firms will have older assets more depreciation
Chapter 3
Tools of the trade - means through which strategy is derived, formulated, tested, implemented and ultimately made real
Chapter 2
Understanding Organizational Performance - performance is a multidimensional construct with a variety of different facets - there are many different ways to define performance as well as measure it - performance is inherently paradoxical (the pursuit of good performance along any one dimension will often lead to diminishing returns on others) - performance is likely the key to business success and so the standard against which management is evaluated
Strategic Goals, Objectives, and Strategies
What does it mean to have strategic goals, objectives and strategy? - Reasonable objectives and plans that emerge from the analysis. - Necessary plans for reaching the objectives
Performance in Context/Contingencies (historical performance)
a perspective on profit and rate of return over years of business - Current performance - Evaluating performance in the present - we need to know both how firm's competitors are doing and how the company itself has done in the past - this suggests that current performance is, in some ways, a reflection of the past - evaluating performance in the present, then, requires understanding the historical context from which that performance emerged
stakeholder
an individual or firm holding stake in an organization's future and performance -- usually implies a set of interests beyond those that are purely economic, as would be characteristic of absentee stockholders
Competitive Advantage Cont.
"Growing out of the value a firm is able to create for its buyers that exceeds the firms cost of creating it" - Porter - competitive advantage is achieved in some small measure very time a firm sells a product or delivers a service at a profitable price - if a customer is to buy a product or service, at a profitable price, it is because she perceives some value in it over and above its costs - transactions occur in a competitive market--where options and consumer resources are finite - customer focus, "the ultimate arbiter" -- if the customer does not buy the product or service in sufficient volume and at a sufficient price, then the firm will not succeed - competitive advantage is about creating value in specific transactions, for specific customers, in a specific competitive context - has to be earned over, and over, and over again - it must be constantly developed, nurtured, and grown because, when left alone, it will naturally erode and decline o We want to look at competitive advantage for each transaction o Customer focused, "the ultimate arbiter." REMEMBER AND KNOW o Firms need to be deliberate on the product or service o Consumers need to be willing to pay the price above the costs of making that service or product, or else their firm will fail over time
Strategy definitions, Over Time
- A. Chandler (1962): "The definition of the long-run goals and objectives of an enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out these goals." - K. Andrews (1897): "Strategy is the pattern of objectives, purposes or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be." - C. Hofer & D. Schendel (1978) "The fundamental pattern of present and planned resource deployments and environmental interactions that indicate how the organization will achieve its objectives." - K. Ohmae "What business strategy is all about is, in a word, competitive advantage... the sole purpose of strategic planning is to enable a company to gain, as efficiently as possible, a sustainable edge over its competitors." - Hoskisson, Hitt, & Ireland (2008) "An integrated and coordinated set of commitments and actions designed to exploit core competencies and gain competitive advantage." - D. Gilbert, E. Hartman, J. Mauriel, & E. Freeman (1988) "Strategy is a set of important decisions derived from a systematic decision making process, conducted at the highest levels of the organization."
Performance in Context/Contingencies (industry benchmarks)
- Conditions in industry -- difficult to compare firms directly - Definition of industry - Appropriate benchmark in assessing performance of any particular firm, it is important that appropriate industry benchmarks be chosen against which to assess the size of the gain or loss
Problematic Definition
- Contingencies in the comparison -- who are the rivals against which firms should be compared? - Competition never ends -- competition in business is ongoing -- because the game never ends, there is never really a final winner - Competitors are not always known -- new competitors arise constantly - Competition today, and potential competition tomorrow -- vanquish one, and two or more may arise to take its place - all aspects of strategy should lead to competitive advantage, its development, maintenance, and expansion o Look at it holistically
Team Application & Reports
- Continue your high level company investigation to discover: -- Who are the competitors, regulators, customers, suppliers? Other external environmental demands your company will need to address. What do you know about them? -- What is your company good at? What resources does it have? -- Mission statement - is it clear and evidenced in your company, can you recommend improvements? what is their purpose, then look for congruency in their publications.
Different Perspectives on Goals
- Corporate strategy - asks the question, where to compete? - Business strategy within strategic business units (SBU) - asks how to compete? • Cost leadership • Differentiation • Focus - on unique preferences (of customers or market) - Functional strategy - how to implement the strategy?
Common Performance Measures (Economic Value Added --EVA)
- Economic Value Added (EVA) - measures economic profit. Returns based on the value of the assets and the capitol. - EVA is calculated as net profit after taxes (NOPAT) less the weighted average cost of the capitol (WACC). - Used to invest in projects that result in returns over and above cost of capital Strengths - counts for difference in profit and profit rate; helps maximize the shareholders - corrects for biases Weaknesses - cost of capital is hard to calculate; estimates taxes and financial statements which is more difficult to do - timely and sophisticated
Definitions of strategic management (Mintzberg)
- Five P's for strategy -- plan -- ploy -- pattern -- position -- perspective - good strategic management must incorporate all five of these facets - never forever that the end result of strategy is action
Position
- of the organization in the environment--what are the realities of the surroundings? - position the firm within an attractive and manageable environment - positioning may result from an intentional plan or emerge from a natural pattern - many firms seek positions that allow them to avoid competition
Goals, Objectives, and Strategies
Strategic processes come from two perspectives: - Voluntaristic - Deterministic ...then look for fit
SWot
Strengths and Weaknesses - internal analysis of the organization - products - processes - people - technology o You can't look at these individually, separately, or first. o Always look external first, then evaluate the strengths and weaknesses
Strategic Management
- It is managements responsibility to improve the value of the company, so strategic management falls to them - Competitive advantage relates to the companies earnings and in turn its value. - The value of a company is based on current earnings and the probability of future earnings. - Is concerned with the firm, its external threats and opportunities, its internal strengths and weaknesses with people, products, processes and technology, - How the firm is viewed in the business world, and how it is evaluated by customers, investors, regulators, and employees.
Individual Factors
- Psychological issues that need to be answered in order to be helpful to the group 1. Who am I to be? What is my role in this group? 2. How much control/influence will I have in this group? -- Will my goals/needs be met in this group? -- What will be the level of intimacy in this group? * Edgar Schein
Value as a Measure of Performance
- Publicly held firms - have market value, equal to the share price X the shares outstanding. - Privately held firms - do not have this established price. - Value, the present value of all future earnings. If you only consider the value of the assets less the depreciation, then you only account for the tangible assets. - Value is forward looking measure based on a estimates often of unknown future information (e.g., traffic patterns). - Value as a performance measure is important, but not precise. o Matter of sifting through the information = publicly held firms o Going to have to do more digging = privately held firms o Can look at opportunity costs too
Strategic, Goals and Objective Process
- Strategy, goal, and objective formulation Option 1: Strategic planning: • Top down planning • Detailed analysis is applied to measureable areas • Predicting future from past • Good when environment is stable • Information flows from top downward • Well understood in the business world and accepted • Top management does the analysis and the strategy formation, but not the implementation ♣ Option 1: Strategic planning—sometimes called deliberate strategy (Mintzberg)
Strategic, Goals and Objective Process
- Strategy, goal, and objective formulation Option 3: Planned emergence strategy • Top down (top managers) and bottom up (employees). • Top managers provide vision and direction, set intended strategies combined initiatives from the bottom come together to create a realized strategy.
Strategic, Goals and Objective Process
- Strategy, goal, and objective formulation Option 2 Continued: Scenario planning • Possible future scenario • Questions asked: • What resources and capabilities do we have to compete in each scenario? • What initiatives should we start to respond in each scenario? • Then decide on the most realistic plan to implement.
Strategic, Goals and Objective Process
- Strategy, goal, and objective formulation Option 2: Scenario planning • Starts at the top, used in Corporate or SBU • Create contingency plans (scenarios) "What if?" • Creates options by looking at the environment • Positive response (opportunities or innovation)and negative responses (nothing or defensive) • A little more flexible and allows for people who work deeper down in the organization to affect what goes on o Implementation is part of strategy
Strategic Management
- Why the consumer will pay a profitable price over and above the alternative products - What is it about your product/service that is more advantageous now, and then potentially in the future? - Concerned with the customer's purchasing decisions, and the competitive environment - if customers do not buy a firm's products or services at prices that exceed costs, then little else really matters - competitive advantage emerges and is sustained when a firm's nations create products and services that customers value over and above the available alternatives and over and above the firm's costs
Industrial organization economics
- addresses the environment and the competitive landscape that affect the behavior and performance
SWOT Framework
- competitive advantage emerges when a customer sees value - value seen by the customer comes from two areas: -- Buying from the options available in the environment -- How attractive can your company make the product? • The SW- strengths and weaknesses of your org. o Deals with the competitive advantage and also WHY consumers buy a product from one organization over the other
Perspective
- firms view about what they do and how they do it (engineering or marketing perspective) - firms differ in how they view the world and their place within it - some firms are aggressive while others are much less so
Consumer Surplus
- for example, when Coke sells a drink, the customer receives value in excess of the price that she pays - that excess is what economists call consumer surplus - if the price she pays is also more than Coke's cost in producing the product, then Coke has also earned a surplus, called a profit - * this represents the value created in each profitable sale and consists of both profit to the firm and surplus to the customer
Definition of Strategic Management
- framework, or a model with four components 1) analyzing the environment 2) integrating the firms activities 3) for learning, and adapting to change 4) for the creation of value in the present and the future - framework that can be used in every type of organization - framework, that when applied, becomes the process by which managers integrate the firm's functions into streams and patterns of action designed to identify and fit the contours of the environment - at its core, * a company's manifest plan of action for the ongoing creation and appropriation of value
Ploy
- illusion of strength for competitive advantage - article of deception used to gain an advantage over a competitor
working in teams
- individual factors - focus on process
Two branches of strategic management
- industrial organization economics - resource-based view - both are necessary, but alone neither is sufficient to explain competitive advantage fully - must incorporate both o A competitive advantage occurs between these two branches
What else is needed?
- knowledge of the changing environment - skills and resources to implement goals - adaption and change - none of this will work without ACTION
Strategic Management
- process by which managers integrate the firms functions into streams and patterns of action designed to fit the constraints and demands of the market - the result is value for stakeholders*, customers, and owners
Competitive Advantage and Performance
- value of the firm at any moment is a reflection of expected earnings - competitive advantage relates directly to a firm's value because it relates directly to earnings - Focus on value creation and competitive advantage to provide a balanced scorecard to evaluate performance. - The development and cultivation of competitive advantage is the role of strategic management and the key to its performance. o Triple bottom line (people, profit, planet)
Common Performance Measures (Altman's Z)
Altman's Z - Imminence of failure value of ‹1.8 - great distress, and likely will fail in the near future (bankruptcy) • Value of 3.0 are in not in distress. • Values in between are in some stress - uses five different ratios into a single value, indicating overall financial health of the organization Strengths -- simple and easy to see; can predict 70% up to 5 years in advance -- most simple and powerful -- can predict with great accuracy the imminence of failure -- easily computed form numbers that are readily accessible Weaknesses -- data is provided by the firm; bias; doesn't take into account non-re-occurring events
Strategic, Goals and Objective Process
Analysis - Mission, vision and value assessment - External analysis - • Macro-environment • Competitive environment - Internal Analysis • Resources • Capabilities
Strategic Management... What is the common thread running though these definitions?
CREATING VALUE
Voluntaristic
Mission statements - helps firm set identity, purpose and direction Pearce and David (1987) eight key elements in mission statements. • target customers, • principal offering, • geography (national, global, regional, two mile radius) • identification of core technologies, • commitment to survival, growth, and profitability, • company philosophy, • firm's self concept, • identification of the firm's desired public image. - or the result of self-determination and free choice o Voluntary choices your organization will make o Pearce and David (article) --- This is actually a lot to see in a mission statement; most aren't this long --> with all 8 elements o Expansion or when it is a young company is when you will see "where the firm is located"
Performance Over Time
Most measures are a snapshot in time - Competitive advantage is earned over and over again to maintain performance. - Paradox between long and short-term strategy -- Companies must perform in the present, but not at the expense of the future. -- Companies that do not perform in the present will not survive in the future. • To remain competitive, companies need to be their biggest critic. o 1980-2000 on page 27 of the book—a bunch of companies, doesn't go into too much detail—because performance is a snapshot it can change over time and we will discover the different reasons as to why that happened o Companies will stop learning, adapting, and creating new strategies if they only look at past performance measures of their company/firm
swOT
Opportunities and Threats - external analysis of the environment - environment changes - adapting to the changes o Always look at first
Performance in Context/Contingencies (purpose, value, and mission)
Purpose, Value, and Mission • Performance based on its purpose • Assessing performance based on purpose - understanding a firm's purpose requires understanding something about its values and mission - corporate values and missions lie at the very root of the strategic process - value systems give rise to the company's mission - these statements of fundamental purpose are also knows as credos, principles, or purpose or vision statements - the mission is the underlying reason that the firm exists -- it makes clear the goals and aspirations of the business itself -- it articulates the principles upon which the firm's culture rests -- it stands as a guiding light amid the turmoil of everyday activity -- Jeff Abrahams explained that a mission statement is: --- an enduring statement of purpose for an organization that identifies the scope of it operations in product market terms and reflects its values and priorities. a mission statement will help a company to make consistent decision, to motivate, to build an organization unity to integrate short-term objectives with longer-term goals and to enhance communication - can have product mission, social mission, economic mission
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REVIEW SLIDE 10 ON COMPETITIVE ADVANTAGE PDF o Where organizational ability, skills and resources & environmental conditions and characteristics meet is where the competitive advantage occurs -- adapted from Allen
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REVIEW SLIDE 15 ON COMPETITIVE ADVANTAGE o We don't have all the information o We need to look at their assets
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REVIEW SLIDES 10-11 ON PERFORMANCE CONTINUED PDF
EXAMPLES
Southwest Airlines - originally called air southwest - originated from Love Field, Dallas - drinks were called love potions - peanuts were called love bits - frequent flyer program - first come first serve seating--ticketless - positive attitudes - none of it happened by accident - success like this reflects a strategy that is connected throughout the various parts of the firm and that comes to life through the daily attitudes, actions, and behaviors of the people - strategy that is well conceived and well executed - a strategy that delivers strong results The Coca-coal Company - owns many other beverage companies - international - powerful brand - agressive marketing - massive distribution
Creating Value (my notes)
o Company must understand the environment o When looking at the environment, some questions: ♣ who's the target ♣ who will motivate the purchase ♣ what are the trends ♣ how can you alter the product or service to how the consumer demands it
Competitive Advantage
the ability of one's firm to perform better than its rivals - firms that perform above the average for their industry have a competitive advantage o Idea that firm performs above average compared to other firms (but who are we comparing it to and what are we comparing)
Goals, Objectives, and Strategies
• Allen - refers to goals and objectives as one in the same. • General concepts related to goals: - Goals are products of the mission, SWOT analysis, and fit the environment - specific opportunities - What will change from the strategy? Who will do things differently? How will value be created for the customer? o Last bullet should say how will you do things differently
Turning Great Strategy into Great Performance
• Companies realize 60% of their strategies • Author's called this strategy-to-performance gap • Recommendations
Implementation Factors
• Complicated - one change affects other parts of the system. • Implementation is the action or doing part of strategy.
Goals, Objectives, and Strategies
• Create solutions to the set of variables presented in the SWOT analysis. • They answer the question What Now?
Focus on Process
• Deductive process -- certain premises lead to conclusions. • Many right strategies and goals • Sense of uncertainty because it is uncertain • Some anxiety because choices contain risk • Strategists job is to make the best choice with the information they available. o Focus on the process, not the content
SW Analysis
• Start with a sense of the orgs. competitive advantage • Then looks a the attributes of the org. • Weaknesses are the absence of the attributes • Need to know the value of specific attributes • Analysis requires finding the key success factors . o We don't have the attributes to fit the strengths what weaknesses are the absence of the attributes means
Deterministic
• Forming strategies based on analysis • Success in goals is determined by the choices (voluntaristic decisions) of the firm and the environment's acceptance or (fit) of the initiatives. - or the result of structured analysis - the act of actually forming strategies form these other parts of the process o The pieces based on the analysis o Does a potential strategy or objective fit is what you should look at
Functional Strategies and Implementation
• Functional Strategies (some would call this the same as implementation) • Each SBU has its functions that implement strategy. • Each functional manager is responsible for the decisions in their unit. • The question is, how to implement the strategy?
Company
• Industrial or Comp. Env: -- Who are the customers? -- Who are the competitors? -- Who are the suppliers? • General or Macro Env. -- Government regs? -- Fuel costs? -- Political factors?
Functional Strategies and Implementation
• Is implementation part of strategy or the process to carry out the strategy? • Is strategy the plan and implementation the execution of the plan? • The connection of intent to the action bringing intention into reality.
Key Questions to Investigate
• Is the organization accomplishing its own purposes? • Is the organization doing what it set out to do? • Is the organization profitable to owners or shareholders?
Mankins and Steele ( 2005) Recommendations
• Make the strategy concrete • Debate assumptions- do not forecast • Common language between functions • Discuss resources early • Identify priorities to focus energy • Monitor performance continuously • Reward and develop employees to execute
Organizational Mission, Values & Intentions
• Mission - Known by other names - Mission is the reason the organization exits - All orgs. are guided by principles • The mission is the guide • If the action is inconsistent with the mission, it should be rejected. • The mission is powerful • Consistency between the values and the practices • Lack of consistency creates cynicism and lack of trust. - Organizational mission (what is the purpose, why do we do what we do, what do we hope to accomplish), value (what did we commit ourselves to), and intentions o Some put mission and vision together, some don't put it at all o Our text in this class refers to mission o People talk about it in different/separate ways o All organizations are guided by principles (values) o Vision what do we hope to see in the future
Performance from a Variety of Perspectives
• No single measure tells the whole story. • A variety of measures need to be considered all at once. • Consider which measures are useful for the firm you are investigating. o Text uses three different measures (page 29) o Need to look at a couple measures, not just one
Tools of the Trade
• Organizations all exist in an environment • Each tool or area of the process leads to the end game. • Each tool is part of the whole
Triple-Bottom-Line - Performance Measures
• People • Planet • Profit Equal attention given to all of them Really big in health care
SWOT Framework Cont.
• SWOT - captures the internal strengths and weakness - The opportunities and threats to deal with the external issues.