Strategic Management Exam 2
Attributes of National Competitive Advantage
(all work together to get national competitive advantage) -factor conditions: cost and quality of factors of production (land, labor, raw materials) -intensity of rivalry (different nations are categorized by different management ideologies; strong association between vigorous domestic rivalry and creation of competitive advantage in industry) -local demand conditions (companies most sensitive to the needs of local customers; their needs important in shaping innovation and quality) -competitiveness of related and supporting industries
Choosing an Entry Mode
(start low to high risk and low to high control) 1) exporting: avoids costs of establishing manufacturing operations in host country; scale economies by having home manufacturer 2) licensing: foreign licensee purchases rights to produce a company's product in licensee's country for a negotiated fee 3) franchising: specialized form of licensing in which franchisor not only sells intangible property to franchisee but but also insists franchisee abides by strict rules governing how it does its business 4) joint venture: most typical form is 50/50 where each party takes 50% ownership and stake and team of managers from both companies share control 5) wholly owned subsidiary: parent company owns 100% of subsidiary's stock; to establish a company can either set up completely new operation in that country or acquire an established host country company to promote its products in host market
Blue Ocean Strategy
-"In any industry, no matter how competitive, a company can create a blue ocean of uncontested space."
Manage Rivalry: Price Leadership
-a company assumes responsibility for determining the pricing strategy that maximizes industry profitability (not explicit, but tacit, subtle and by imitation) - example, auto industry
Industry Life Cycle and Corresponding Organizational Characteristics at each Stage
-adjust to levels of demand -competition evolution -value creation -value chain activities -development of resources and capabilities -business model innovation
Generic Business Strategy
-approaches to the market (scope): broad and narrow (niche) -strategic emphasis (source): low cost and differentiation
Broad Differentiation Strategy
-broad differentiators create a product or service distinct from competitors in important unique way -strategic choice of broad differentiator: a. strives to differentiate on meaningful dimensions, so customers are willing to pay for the uniqueness. b. concentrates on innovation, excellent quality and extraordinary responsiveness to customers. c.builds functional resources and capabilities that provide unique distinct advantages
Architectural
-build new products with known components -use existing technologies and processes -reconfigure in novel way for creating new markets or processes
Incremental
-build on established knowledge base -steadily improve products, service or processes -target existing markets using existing technology
Business Model
-business definitions: -who is being satisfied- customer groups -what is being satisfied- customer needs -how are customer needs being satisfied- distinctive competencies
Disadvantages of Low Cost Strategy
-competitors may lower their cost structures (e.g., technological changes). -competitors may imitate cost leader. -cost reductions may affect demand (e.g., by concentrating on efficiency may overlook customers' perceptions)
Innovation and Competition
-complementary assets: does the innovating company have complementary assets to exploit innovation and capture first‐mover advantage? -height of barriers to imitation: how difficult is it for imitators to copy the company's innovation? -capable competitors: are there capable competitors that could rapidly imitate the innovation?
Fragmented Industries
-composed of a great number of small and medium‐sized companies -reasons for fragmented industry conditions: a. low barriers to entry due to lack of economies of scale b. primarily local brand loyalty c. continuous potential for new entrants d. lack of economies of scale e. specialized customer needs
Global Strategic Alliances
-cooperative arrangements between companies from different countries that are actual or potential competitors; can range from short‐term contractual cooperative arrangements to formal joint ventures with equity participation -advantages: a. facilitate entry into a foreign market b. share fixed costs and associated risks c. bring together complementary skills and assets d. learn and set technological standards -disadvantages: a. hollow out the firm; give away more than received b. incompatible partners or conflict between partners c. gives partner a means to gain new technology and market access
Crossing the Chasm: Early Adopters to Early Majority
-correctly identify needs of the first wave of early majority users -alter the business model in response -adapt the value chain activities and distribution channels to reach the early majority -design the product to meet the needs of the early majority at a low cost -anticipate the moves of competitors
Strategies for Winning a Format War
-create network effects to work in favor of the pioneering company and build an installed base for the standard rapidly as possible -ensure a supply of complements -leverage killer applications of a new technology or product so compelling that customers adopt them, killing demand for competing formats -pursue aggressive pricing and marketing, pricing the product low to increase the installed base, then pricing complements high -cooperate with competitors -license the format
CAGE Framework
-cultural distance (increases with different cultures; lack of ethnic or social networks; lack of trust and mutual respect most affects industries with high linguistic content; related to national/religious identity; carrying country specific quality associations) -administrative and political distance (increases with absence of trading block absence of shared currency or political association; political hostilities; weak legal and financial institutions most affects industries that foreign gov. views as staples (electricity), as building national reputations, as vital to national security) -geographic distance (increases with lack of common border/transportation/communication; physical remoteness; different climates and time zones most affects industries with low value to weight ratio; fragile/perishable; communications are vital) -economic distance (increases with different consumer incomes; different costs and quality of natural/financial/human resources; different info and knowledge most affects industries which demand varies by income; labor and cost differences matter)
Advantages of Differentiation Strategy
-customers develop brand loyalty -powerful suppliers are not necessarily a problem -differentiators pass price increases on to customers -powerful buyers are less likely if product is distinctly unique -differentiation and brand loyalty are barriers to entry -threat of substitute products depends on competitors' ability to meet customer needs -differentiators create demand for distinct products and charge a premium price, resulting in greater revenue and higher profitability
Ambiguity and Uncertainty
-demand‐ will a new product or service be accepted by consumers -industry Infrastructure- may lack established markets, buyers, suppliers, or distribution channels -industry standards‐ will the new product or service set the standards or will a competing product with different standards be preferred -nature of competition‐ will other firms choose to compete and how
Deter Entry: Upgrade Technology
-deter entry by investing in technology upgrades that potential entrants have trouble matching
How to Sustain Low Cost Advantage
-determine and control cost drivers in value chain -reconfigure the value chain as needed (functional strategy and organizational arrangements in align with business level strategy)
Strategy in Global Environment: Pressures for Local Responsiveness
-differences in customer tastes and preferences -differences in infrastructure and traditional practices -differences in distribution channels -host government demands -rise of regionalism
Blue Ocean vs. Competitive Forces
-different business units face different structural conditions with different resources, capabilities and strategic mind‐sets. -the assumptions and theories of blue ocean and competitive forces are distinct -neither is sufficient to deal with the diverse and changing business conditions that organizations face today and in the future
Business Strategy and the Industry Environment
-different industry environments present different opportunities and threats at different times -challenge is to position the company to sustain a competitive advantage in as the industry environment changes over time -company's business model should change and evolve to meet the changing environmental conditions
Factors Affecting Market Growth Rates
-different markets develop at different rates -relative advantage or degree that product is perceived as better than product it supersedes -complexity or perceived ease of use -compatibility with customers' needs and values -trialability or simplicity of hands‐on trial -observability - see and appreciate results -opinion leaders to promote the diffusion -availability of complementary products
Disadvantages of Differentiation
-difficulty maintaining long‐term distinctiveness or perceived "uniqueness." -competitors could adapt and quickly imitate -patents and first‐mover advantage could be limited -difficulty maintaining premium price
Radical
-draw on novel materials and methods -derived from entirely new knowledge or recombination of existing knowledge base with a new stream of knowledge -target new markets, products, services with new technologies
EMBRYONIC and Growth Industries
-embryonic- just beginning to develop with slow growth or minimal customer demand -limited performance and poor quality of the first products -customer unfamiliarity with what the new product can do/demand limited at first -poorly developed distribution channels -lack of complementary products -high production costs because of small volume
Strategic Implications
-established companies: a. aware about how disruptive technologies may revolutionize markets b. invest in newly emerging technologies that may become disruptive c. create autonomous operating division for disruptive technology (may require radically different value chain and cost structure) -example: GE disruption; ultrasound technology -new entrants: a. no pressure to continue out‐ of‐date business model b. no worries about established customer base and existing relationships with suppliers and distributors c. may be constrained by lack of capital d. must decide whether to go it alone, partner in alliance, or license
Manage Rivalry: Non-price Competition
-existing market, existing product: market penetration -existing market, new product: product development -new market, existing product: market penetration -new market, new product: product proliferation (diversification)
Why Global Expansion
-expanding the market by leveraging products: a. taking goods and services developed at home and selling them internationally b. utilizing distinctive competencies and replicating business model -realizing cost economies from global volume: a. economies of scale from additional sales b. lowering unit costs and spreading fixed costs c. increasing bargaining power with suppliers d. learning effects from cumulative output -realizing location economies: a. economic benefits from performing a value creation activity in an optimal location b. lower cost structure or differentiate better in order to charge premium price, keep prices lower, or increase sales -leveraging competencies of global subsidiaries: a. competencies can be created anywhere in network b. applying valuable resources to operations in the firm's global network - learning new things c. challenging and complex to deploy new competencies around the world
Integration Strategy
-firm has positioned relative to competitors in a way to simultaneously lower its cost structure and deliver differentiated products and services cautions: -reconcile tradeoffs is difficult -requires strengths in value chain activities for both cost and differentiation ex: southwest airlines
First‐Mover Advantages
-first mover is the pioneer in a product category or feature by being the first to offer it to the market -potential to capture significant revenues and profits that signals an opportunity to potential rivals
Focus Business Level Strategy
-focus company strives to serve the need of a targeted niche market segment with either low‐ cost or differentiated competitive advantage -strategic position: focus low cost focus differentiation -select market niche, for example: geography type of customer or buyer group segment of a product line or service
Disadvantages of Focus Strategy
-focuser can be disadvantaged by powerful suppliers, buying in small volumes -may not be able to pass costs along to customers -low volume may result in higher costs -niche may disappear from technological change or changes in customer's tastes -broad differentiators or broad low cost may move into the focuser's niche
Deter Entry: Limit Pricing
-for potential new entrants contemplating entry, signal that new entry will be met with price cuts -charging price lower than required in the short run to signal incumbent's low‐cost structure that entrant likely cannot match
Business Strategy
-generic: relevant to all organizational types (public and private; for profit and nonprofit; manufacturing and service; large medium and small; US and non-US) -applies in industry environments -refers to consistent choices of business strategy
Strategy to Expand Internationally (strategy changes over time)
-global standardization strategy: high pressures for cost effectiveness, low pressures for local responsiveness -transnational strategy: high pressures for cost effectiveness, high pressures for local responsiveness -international strategy: low pressures for cost effectiveness, low pressures for local responsiveness -localization strategy: low pressures for cost effectiveness, high pressures for local responsiveness
Stages of Globalization
-globalization 1.0, 1900‐1941: business functions in home country; domestic HQ to international outposts -globalization 2.0, 1945‐2000: businesses created self‐contained copies with business functions intact; response to country‐specific circumstances -globalization 3.0, 21st century: multinational companies are global collaborative networks; business and functions anywhere in world
Strategy to Ensure First Mover Advantages
-going it alone- develop and market the innovation -enter alliance or joint venture- develop and market jointly -license the innovation - allow others to develop the market
Embryonic and GROWTH Industries
-growth- first time demand is expanding rapidly with new customers entering the market; mass markets will start to develop -technological progress makes a product easier to use and increases its value to the average customer -key complementary products are developed that do the same -companies find ways to reduce production costs, allowing them to lower prices
Potential Benefits of Standards
-guarantees compatibility between products and complements (reduce costs) -reduces confusion in the minds of consumers -helps to reduce production costs -reduces risks associated with supplying complementary products -leads to low‐cost and/or differentiation advantages for individual company -helps to raise level of industry profitability
Disruptive
-innovate by leveraging new technologies -start away from mainstream market -invade existing main market or markets as functionality improves -transformative impact or change industry structure and profit pools
Characteristics of Customer Groups
-innovators -early adopters -early majority -late majority -laggards
Strategic Implications
-innovators and early adopters (different than Early Majority!): -technologically sophisticated and tolerate engineering imperfections -typically reached through specialized distribution channels -relatively few in number and not particularly price sensitive
Deter Entry: Strategic Commitment
-investments that signal the incumbent's long‐ term commitment to a market or segment of that market - such as productive capacity, basic research, product development and advertising beyond that necessary - credible commitment
Strategy Selection in a Declining Industry
-leadership strategy: develops strategies to become dominant player in the declining industry; distinctive strengths; speed of decline and intensity of competition are usually moderate -niche strategy: focuses on pockets of demand that are declining more slowly than the industry as a whole; has unique strengths relative to the niche where demand remains relatively strong -harvest strategy: wishes to exit declining industry; reduces to a minimum assets being devoted to the business; reduces cost structure and extracts profits; optimizes cash flow; foresees steep decline in demand or lacks strengths for niche pockets -divestment strategy: decides to exit an industry by selling off business assets to another company; sells before entering steep decline; depends on ability to spot decline while assets are still valuable
Business Model Lessons
-learning -creativity and innovation -global perspective -risk with relevance; push boundaries in the future -what acts and activities do you invest time, energy and thoughts in that the organization should: - eliminate - reduce - raise - create
Broad Low Cost Strategy
-low cost company establishes a cost structure that allows it to provide goods and services at lower unit costs than competitors -strategic choices of broad low cost strategy: a. builds entry barriers via economies of scale and efficiencies b. can make profit at price points higher cost competitors cannot match c. positions products to appeal to "average" or typical customer d. goal is to increase efficiency and lower costs relative to industry rivals.
Strategy in Global Environment: Pressures for Cost Reductions
-lower cost of value creation -commodity products -competitive pricing -competitors based in low‐cost locations -persistent excess capacity -powerful consumers face low switching costs -changes in world trade and investment environment
Declining Industries
-market demand levels off or is falling, so the size of the total market starts to shrink -industry profits tend to fall -factors that determine severity of decline (intensity of competition): a. speed of decline b. height of exit barriers c. level of fixed costs d. commodity nature of product
Strategy in the Global Environment
-multinational company (MNC) does business in two or more national markets -strategic approach to cross‐border activities now and in the future -decisions about where and how to expand; involve business strategy as well as corporate, functional, partnership, and mode of entry decisions
Which Standard is Predominate
-network effects: size of "network" of complementary products is a primary determinant of demand for an industry's product or service -positive feedback loops: reinforce network effects to encourage adoption of a standard; increase in demand in technology triggers increase in demand for products that support technology -lockout: alternative standards get "locked out" as consumers are unwilling to bear the switching costs; that is, the switching costs are too great for consumers to switch
Types of Innovation
-new market, existing technologies: architectural -new market, new technologies: radical -existing market, existing technologies: incremental -existing market, new technologies: disruptive
Industry Competitive Structure: Expected Firm Performance
-perfect competition: many small firms; firms are price takers; commodity product; low entry barriers (fragmented: low profit potential) -monopolistic competition: many firms; some pricing power; differentiated product; medium entry barriers -oligopoly: few (large) firms; some pricing power; differentiated product; high entry barriers -monopoly: one firm; considerable pricing power; unique product; very high entry barriers (consolidated: high profit potential)
Manage Rivalry: Capacity Control
-price competition periodically occurs when excess capacity exists in an industry with companies collectively producing too much output. To dispose of the excess, prices are cut, competitors respond, and price war may ensue -factors: technological development and efficiencies; competitive factors such as age of assets and growth rate of consumer demand -capacity‐control: preempt rivals with first‐mover advantages; indirect tacit means of coordination or market signaling
Manage Rivalry: Price Signaling
-process by which companies increase or decrease product prices to convey intentions to other companies and influence the price of an industry's products - example, airline carriers
Advantages of Low Cost Strategy
-protected from competitors or entrants by cost advantages -less affected by increased prices of inputs if there are powerful suppliers -less affected by powerful buyers -purchase in large quantities to increase bargaining power over suppliers -ability to reduce price to compete with substitutes -low costs and prices are barrier to entry -cost leaders tend to charge a lower price or achieve superior profitability relative to its competitors at the same price
Advantages of Focus Strategy
-protected from rivals to the extent products or services not offered by rivals -strength over buyers, if buyers cannot get same product or service elsewhere -customer loyalty such that threat of new entrants is limited -customer loyalty lessens threat from substitutes -stay close to customers and know the customer's changing needs
Establishment of Standards
-public domain‐ any company can freely incorporate the knowledge and technology into its product or service a. government‐set standards where by companies lobby government to mandate the industry standard b. association‐set standards from cooperation among businesses such as industry associations. -examples: DTV (digital television broadcasts); QWERTY format; HTML -market demand‐ industry standard is selected competitively by purchasing patterns of customers in the marketplace -examples: Intel or Microsoft ownership protected by patents and copyrights
Global Standardization Strategy
-pursue low‐cost strategy on a global scale. -relatively minimal pressures for local responsiveness and strong pressures to gain global efficiencies -build cost reductions from experience curve effects and economies of scale -implications: a. standardized products across country markets b. centralized organization from home office c. globally‐scaled resources and capabilities
Red Ocean vs. Blue Ocean
-red: compete in existing markets; beat the competition; exploit existing demand; make the value cost tradeoff; align the whole system of a firm's activities with its strategic choice of differentiation or low cost -blue: create uncontested markets to serve; make the competition irrelevant; create and capture new demand; break the value cost trade off; align the whole system of a firm's activities in pursuit of differentiation and low cost
International Strategy (as competitors emerge this strategy becomes less viable)
-relatively low pressures for local responsiveness and few opportunities to gain global efficiencies. -utilize parent‐company knowledge and capabilities -implications: a. local customization is limited. b. create value by transferring competencies to foreign markets where indigenous competitors may lack the competencies c. valuable resources and capabilities are centralized d. other resources and capabilities are decentralized
Characteristics of Competitors
-resource similarity: -extent to which the firm's intangible and tangible resources are comparable to a competitor's in terms of type and amount -market commonality: -number of markets the firm and competitor are involved and degree of importance of individual market to each competitor
Innovation Essentials
-shaped creativity: a. aspire‐ put numbers on it b. choose‐ place clear bets c. discover ‐ insights over ideas d. evolve ‐ avoid extinction -powerful delivery: a. accelerate‐ what you do, not how you do it b. scale‐ go big, selectively c. extend‐ be the partner of choice d. mobilize ‐ go beyond structure and organizational design (link to strategy, collaboration, and targeted incentives)
Technological Paradigm Shift
-shifts in new technologies that: a. revolutionize the structure of the industry b. dramatically alter the nature of competition c. require companies to adopt new strategies for survival -occur in an industry when: a. established technology is approaching or is at its natural limit b. new disruptive technology has entered the marketplace and is invading the main market
Transnational Strategy
-simultaneously respond to relatively high needs for local responsiveness and high pressures to achieve low costs and global efficiencies -develop global efficiency, flexibility and worldwide learning capabilities -implications: a. simultaneously centralized and decentralized. b. organizational learning is key to foster coordination between subsidiaries c. requires dispersed, interdependent and specialized capabilities
National Environment
-some industries are global in scope ‐shift from national to semi‐global or global markets intensifies potential competition ‐steady decline in barriers to cross‐border trade and investment has opened up once protected markets ‐some industries are more competitive in specific nations
Business Level Strategy: Approaches to Market Segmentation
-standardization: no market segmentation (all markets) -high market segmentation: many different markets -focused market segmentation: one specific market
Strategy and Innovation
-strategic management of technology‐ integration of technology with business strategy as well as functional, global and corporate strategy -technology‐ knowledge, skills, and artifacts that can be used to develop products and services as well as production, processes and delivery systems -organization's innovative capability‐ embedded in people, materials, cognitive and physical processes, plant, equipment, and tools
Localization Strategy (Multidomestic) (as competitors emerge this strategy becomes less viable)
-strategy for each country (or region) -relatively high need for local responsiveness and relatively few opportunities to gain global efficiencies -customize goods and services to match preferences in different national or regional markets -implications: a. build flexibility to respond to differences through strong, resourceful, regional or national operations b. requires decentralized and relatively self‐ sufficient business units c. devote independent attention to each market
Deter Entry: Product Proliferation
-strategy to fill the niches or cater to needs of customers in all market segments to deter entry
Support and Primary Activities
-support activities (go into primary activities): company infrastructure, info systems, materials management (logistics), human resources -primary activities (also receive inputs to produce outputs): research and development, production, marketing and sales, customer service
Technical Standards and Format Wars
-technical standards- set of technical specifications that producers adhere to when making the product or a component (source of value and differentiation). -format wars- battles to control the source of differentiation and value that such differentiation can create for customers (setting and controlling standards) -dominant design- common set of features or design characteristics -examples: computer keyboard personal computers shipping containers
Mature Industries
-understand how established companies collectively reduce industry competition to preserve company and industry profitability -possibly facing excess capacity, stagnant demand, exit barriers, lack of innovation, pressure from new entrants -deter entry: product proliferation; limit price; upgrade technology; strategic commitments -manage rivalry: price signaling; price leadership; non-price competition; capacity control
Blue Ocean vs. Analysis of Industry Forces
-unwise to dismiss competitive strategy altogether -businesses may consider a blend of approaches -research shows that competition eventually erodes profits (including advantages from innovation) ‐slowing down the erosion with an effective competitive strategy for an existing market may increase funds for blue ocean investments -blue ocean investments provide chances to find possible untapped market with new customers
Value and Cost Drivers
-value drivers (increase perceived value): product features, customer service, complements -cost drivers (decrease cost): input factors, economies of scale, learning curve, experience curve -value creation and cost tend to be positively correlated (tradeoffs)
Response to Fragmented Industry Conditions
-value innovator: defines value in new way -chains: are networks of linked interconnected outlets that function as one large business entity -franchising: provides access to brand, reputation, and business model for fee and percent of profits in prescribed period of time -horizontal merger: to acquire or merge with an industry competitor -new business model: developed for addressing price, selection, and geography
Primary and Support Activities Duties
Support -finance: make long term investments in development of new technology and innovative products, in marketing and advertising, and in ability to provide exceptional customer service -human resources: recruit highly qualified employees and invest in training that provides them with the latest technological knowledge and the capabilities to provide breakthrough services -management info systems: acquire and develop excelling info systems that provide up to date market intelligence and real time information in all areas relevant for strategic and major operational decisions Primary -supply chain management: develop and maintain positive relations with major suppliers; ensure the receipt of high quality supplies (raw materials and other goods) -operations: manufacture high quality goods; develop flexible systems that allow rapid response to customers changing needs -distribution: provide accurate and timely delivery of goods to customers -marketing: build strong positive relationships with customers; invest in effective promotion and advertising program -follow up service: have specially trained unit to provide after sales service; ensure high customer satisfaction
Primary and Support Activities Duties
Support -finance: manage financial resources to ensure positive cash flow and low debt costs -human resources: develop policies to ensure efficient hiring and retention to keep costs low; implement training to ensure high employee efficiency -management info systems: develop and maintain cost effective MIS operation Primary -supply chain management: effective relationships with suppliers to maintain efficient flow of goods (supplies) for operations -operations: build economies of scale and efficient operations (ex: production processes) -distribution: use of low cost modes of transporting goods and delivery times that produce lowest costs -marketing: targeted advertising and low prices for high sales volumes -follow up service: efficient follow up to reduce returns
Basic Mode of Entry Decisions
WHERE: identify overseas markets to enter -assessment of long‐run profit potential -balancing the benefits, costs and risks associated with doing business in a country WHEN: timing of entry -first mover advantages: preempt and build share -first mover disadvantages: pioneering costs HOW: scale of entry -entering on a large scale: major strategic commitment -entering on a small scale: benefits and drawbacks
First‐Mover Advantages and Disadvantages
potential advantages: a. exploit network effects and positive feedback loops b. establish significant brand loyalty and increase sales ahead of rivals c. reap economies of scale and learning effects d. create switching costs for customers e. accumulate valuable knowledge potential disadvantages a. significant pioneering costs b. more prone to making mistakes in new market c. risk of building wrong resources and capabilities (crossing the chasm to the mass market) d. may invest in inferior or obsolete technology, if underlying technology is rapidly advancing
Red Ocean Strategy vs. Blue Ocean Strategy
red: compete in existing markets; existing demand; addressing competition; "fighting to win" blue: create uncontested new market; opening new demand; making competition irrelevant; "win without fighting"
Breaking the Value Cost Tradeoff
to get value innovation: -eliminate (Which factors that rivals take for granted in an industry can be eliminated, thereby reducing costs?) or reduce (Which factors should be reduced well below the standard in the industry, thereby reducing costs?) costs -raise (Which factors should be raised above the standard in the industry, thereby increasing value?) or create (What factors can be created that rivals do not offer, thereby increasing value?) value
How to Sustain Differentiation Advantage
‐differentiate effectively on relevant dimensions of the value chain. ‐reconfigure value chain as needed
