Strategy Midterm
few, high
When Rivalry is low, that means there are _____ rivals, also meaning _____ profit
imperfect information
(Market Failure) The absence of full knowledge concerning product characteristics, available prices, and so on.
Adverse Selection
(Market Failure) the problem of incomplete information - of choosing alternatives without fully knowing the details of available options Insurance
Case 1: Music Industry (Value Creation/Value Capture)
--High Revenues overall, but where those sales are going dramatically changed (technology & streaming -- Spotify) --Highest Power (Record Labels)-- Value Captured HERE --1980s: Physical Music, Marketing, High CapEx, Relationships --Now: Still have large amount of power, but supplier power is stronger due to lower producing costs/social media marketing-- piracy is more frequent, have utilized non market strategies to ban websites like Napster --Forward Integration: Dr. Dre --40% RL, 20% Streamers Artists do not make a lot of money from streaming
Strategic Positioning
-Performing different tasks than rivals, or the same tasks in a different way. -Increases value, which increases WTP -Making the right trade-offs
Operational Effectiveness
-Performing the same tasks better than rivals perform them -Lower costs by eliminating wasted effort, employing advanced technology, motivating employees, etc.
Case 4: Ducati (Differentiation)
1996 Positioning: In the middle Manoli Turnaround -High Quality -Top Engineers -Strong Brand Potential Production: Fewer Suppliers, Outsourced parts that were undifferentiated, In-house R&D- Racing Marketing: Replace Multi-Franchise with own stores, museum Loyalty: Museum, Clubs/events, Overall: Increased WTP, but not price, so more Q sold
Strategic Fit
A state in which an organization's strategy is consistent with its external opportunities and circumstances and its internal structure, resources, and capabilities.
Strategic map
A strategic planning tool that shows the "big picture" of how each department's performance contributes to achieving the company's overall strategic goals.
VRIO Framework
A theoretical framework that explains and predicts firm-level competitive advantage. Valuable (No - Disadvantage) Rare (No - Competitive Parity) Costly to Imitate (Patents? Substitutes? Socially Complex?) Organized (Management, Culture, Motivation)
Third Order Fit
Activities are "optimized" --Individual activities cannot be separated from the whole
Second Order Fit
Activities are "reinforcing" --Coupling of activities further promote strategic objectives
Trade-offs
Giving up one thing for another Arise b/c of: - Inconsistent image - Lack of Expertise/Inability from bottom-up to adopt - Limits on Internal Control
sustained competitive advantage
All of the order fits lead to a _______________
Broad Market
All segments
Case 6: Zip Car (Resource Based View)
Business Model: On Demand, Short Term Access Lower Cost Attributes -Brand: Hip, simple, professional (not corporate) -Target market: College educated -Car sharing: Member based -Subscription model -Wireless/internet enabled: Online rental -Remote key card access à new tech platform -Located in dense urban environments -Convenience: Location, access, ease of use, gas and insurance paid -No paid marketing, all grassroots Resources: Cars, Parking--VRIO, Technology, Partnerships w/Universities (Not VRIO) Cost Leadership
Case 3: Coors (Industry Evolution)
COORS --Distinct taste to way its manufactured, fermented longer & shorter shelf drive (Diff) Priced below premiums --Geographically constrained to mid west --Slow to change to evolving industry DID NOT EXPAND LOST COST ADVANTAGES moving to national LOST Share in previous markets Lack of Marketing "Sold itself" Industry Changes -Consolidation -On Premise vs. Off Premise -Changes in Consumer Tastes/Preferences Rivalry Driven Down b/c less firms Low Supplier Power -Undifferentiated -Industry could easily backward integrate -Low Switching Costs Low Buyer Power -Price Insensitive -A lot of buyers-- restaurants want to carry popular brands "low concentration" -"Few Good Alternatives" Substitutes Wine, Hard Liquor High Barriers --Economies of Scale, High Capital Intensity
Mintzberg on CSR
CSR (A more Negative View) Market Manipulation Corporate Philanthropy (not actually committed-- facade) How do you prioritize stakeholders? CSR is niche, irresponsible firms do well regardless so why even do it
positioning preemption
Choice of best position; followers must compete directly or position differently Ex. Starbucks
down
Close Substitutes drive prices _____
Case 2: Coke & Pepsi (Economics of High Profit Industry)
Concentrate producers sell directly to fountains --Little capital investment --Biggest cost = Marketing and research, bottler support, trademark --Coke & Pepsi are concentrate producers Bottlers buy concentrate from concentrate producers, add water and sweetener, bottle the drinks and distribute to super markets and convenience shops --Very capital intensive --Machinery is specialized in bottling (high barriers to exit) --Fragmented, a lot more Rivalry: Based on Marketing, Market Share (Acquisitions in Snacks) Low S.P Low B.P Low BTE-- capital, brand, limited shelf space, distribution network
Broad Differentiation
Differentiating the firm's product offering from rivals' with attributes that appeal to a broad spectrum of buyers Starbucks, Apple, Pandora, Tiffany & Co.
Case 9: Disney & Pixar (Corp Strategy & Vertical)
Disney -Distribution, Production, studio entertainment, consumer products, parks and resorts, interactive media, networks -Value captured by sequels, merch, branding, licensing, games VRIO- characters Pixar -Production Better Off -Mutual Dependence -Increase WTP for high quality firms -Pixar could reduce costs -Supports Market Power -Revenues (more demand) Ownership -If not, pixar might create characters that provide more value to pixar than disney -Disney relies heavily on them good, high quality characters/story lines -Needs for Market Power -Increase Disney's operations--information synergiess-will learn from pixar engineers AKA frozen, moana
Ownership Test
Does ownership of the business unit produce a greater competitive advantage than an alternative arrangement would produce? Or are relationships/contracts sufficient enough?
Follow VRIO (No- JP Licks Manufacturing)
Ducati's Speed engineering Fenway as a resource Apples sleeker, user friendly
Path Dependence Casual Ambiguity Social Complexity
Enable Sustainable Comp. Advantage (VRIO)
Perfect Competition Characteristics
Entry Many firms No Differentiation No Entry Cost P=MC, Profit=0 Taxi, Lawn
Monopolistic Competition
Entry Many firms Some Differentiation Entry Cost P>MC, Profit=0 Restaurants
Market Power Public Goods Externalities Transaction Costs Imperfect Information
Examples of Market Failures
Robert Grant & Strategy
External and Internal Forces that create FIT
Diversifying Risk Managerial Hubris B/C Numbers worked out (Kraft Heinz)
Firm Diversification is bad when:
Efficiency Synergies Reducing Supplier, Buyer Power Reducing Comp.
Firm Diversification is good when:
Technological uncertainty
First Mover Disadvantage Considerable difficulty in accurately assessing whether the technology will perform and whether alternate technologies will emerge and leapfrog over current technologies 1. the firm is uncertain whether the goals can be achieved at all (feasibility) 2. the firm is uncertain if better technologies will emerge (obsolence)
Increase Industry Profits Increase Firms Improving social/business environment
Goals of Non Market
Public Goods
Goods, such as clean air and clean water, that everyone must share. Non-rival, non excludable Ex. Defense Inventions--Patents
Economies of Scale Differentiation High Cap Ex Cost Disadv. Access to Distribution Regulated Network Effects
High Barriers of Entry means
High Profit (Higher BTE, Less Rivalry, Less/More Sub)
How Regulation effects five forces?
price
If products of rivals are UNDIFFERENTIATED (treated like commodities), then companies (rivals) must compete on _______
Repositioning Straddling (Benefits of Successful Position but keeping the existing position)
Imitation by Incumbents
Broad Cost Leadership
Large market segment with low cost Ex. Walmart, IKEA, Marshalls, McDonalds, Coke
Pioneering Costs Demand Uncertainty Tech Uncertainty Incumbent Inertia
Leaderships Disadvantages
Case 10: Lego (Global Leadership & Strategic Change)
Lego Business Model --Narrow Differentiation Increased supplier Power---licensing and merchandising Increased Subs -- Tech Increased Buyer Power-- Walmart Higher Entry-- FADS Challenges Birth rates and household spending declined Mass Discounters Children had less time to play Product diversification, good ideas, not well executed -Legoland should have been outsourced -Themes and colors--too many pieces Internal Issues --The firm experienced a number of supply chain problems. --The firm experienced nearly a decade of low or negative ROS --The firm experienced an increase in the number of components and colors it manufactured. NEW COO Operational Effectiveness, but no strategy
Many Buyers Small Buyers No Backward Integration Few Good Alternatives (referring to industry we're analyzing) Buyer not important to industry (Mom & Pop) Industry very important to buyer (but not the other way around) Differentiation (referring to industry we're analyzing) High Switching Costs (for the buyer) Price Insensitivity
Low Buyer Power
Few Rivals Different Sizes Growing Industry Low Barriers to Exit High Switching Costs (Difficult to entice consumers to switch) Differentiation
Low Rivalry
Many Suppliers Small Suppliers No Forward Integration Good Alternative Suppliers Supplier not important to industry (No Mutual Dependence) Industry very important to supplier (but not the other way around) Undifferentiation Low Switching Costs (for the industry we're analyzing)
Low Supplier Power
Focused Cost Leadership
Strategy seeks the lowest costs of operations within a special market segment Ex. DSW, The Real Real, BU Credit Union, Thrift Stores, Trader Joes
Business Unit Strategy
Strategy that refers to best practices/activities within a single product/market/sector of a firm The search for competitive advantage
Oligolopy
No Differentiation in Q Differentiation in P Few Firms Entry Cost P>MC, Profit>0 Soft Drinks
(Example: Less Regulation on Cigs.) opportunities (increase industry profits) interests (rivals, allies) targets (government) tools (lobbying)
Non Market Strategy Framwork
input preemption
Occurs if 1st mover secures input factors under better terms than followers Diamonds, Oil
Non-Market Strategies
Patent or copyright protection. Trade regulations. Government Licensing Government or NGO certification.
first-mover advantage
Preemption Reputation Buyer Switching Costs Patents/Barriers
Monopoly
Raise Prices & Limit Output One Firm Entry Cost>>0 P>>MC, Profit>>0 AT&T, Drugs
Case 8: Apple ( Corporate Strategy & Horizontal Scope)
SYNERGY--1980s: Horizontally/Vertically Integrated, Expensive, Targeted Individual users 1985-1993: IBM released cheaper products/clones, Premium Price High Rivalry- price competition Suppliers: Intel/Microsoft Buyers: High Switching Costs, Tech soph is growing, easy to compare prices (medium power) GOT STUCK IN THE MIDDLE TO COMPETE DIRECTLY WITH IBM-- GROSS MARGIN FELL 1993-1997: Bankruptcy, tried to slash costs Post 1997- Back to premium, diff. strategy Jobs: Mac Office products Halted Licensing Outsourced to Taiwan Apple sales website More Innovative Products, R&D Less inventory Horizontal Scope-Digital Hub (SCOPE) -PC -Ipod -Ipad -Even Today: Airpods Better Off -Economies of Scope, Scale (Costs) -Compatibility between parts (WTP) -Network Effects (WTP) -High Cust. Switching Costs (WTP) Ownership PCs/Iphones together Quality maintained Secrecy for product launches --internal R&D
Firm Size Advantage
Scale Scope Learning Network
First Order Fit
Simple consistency between each activity (function) and the overall strategy
Mintzberg & Strategy
Strategy is not just designed, it emerges due the evolving characteristics of a firm and its industry -Intended -Realized -Emergent
Variety Access Needs
Sources of Positioning
Strategy vs. Management
Strategy is the overarching plan in which a company achieves organizational performance, where as management sets specific policies and practices
Case 5: Trader Joes (Cost Leadership)
Target Segment: Healthy, Intelligent, Sophisticated urbanites and younger people In store: Small Format Stores, Highly paid employees, little store technology, little turnover Marketing: Own Flyer, Little Radio Ads, More Organic Trade Offs -Not for families (no baby food, etc) -Only private labeled -No large parking lots, no self checkouts Self Reinforcing tradeoffs Mitigate Supplier Power: Private Labels Discontinuing Brands Regularly Many suppliers Secrecy for lower costs Small SKUs Mitigate Buyer Power: TJ is the brand -- brings consumers back Offers products not in supermarkets, exclusive Store is treasure hunt Good Food Rivals Supermarkets are more so complements Hard to imitate
Corporate Strategy
The set of businesses, markets, or industries in which an organization competes and the distribution of resources among those entities.
Vertical Scope
The extent to which a firm's internal activities encompass one, some, many, or all of the activities that make up an industry's entire value chain system, ranging from raw-material production to final sales and service activities. Value Chain Quality Control, Cost Control
True-how close they are
True or False? The number of substitutes doesn't matter.
Case 7: M-Pesa (Leadership Advantage)
WIZZIT •Entered first in South Africa. •Partnership with banks: Need a license to take deposits, so find someone with a license. •Signing up with Wizzkids. ---Deposit money at post offices. ---Takes a bit of time to sign up. Resources: Banking license (bank) •Registered users •Interoperability with many banks (bank) •Accessible on all wireless networks Advantages: Network Effects, Switching Costs (not a lot of places) M-Pesa •Entered in Kenya: Partnership with MNO-Safaricom, which were Pre-loaded onto SIM cards. •A lot like Venmo; can't take deposits and give interest. ---Got to go to a bank/retailer to load account. ---Move movers on a ledger. ---Sign up very easy. Resources •Security via SIM cards (MNO) •Strong brand (MNO) •Network of retail outlets (MNO) •SIM based commands / no need for Internet (MNO) Advantages: Channel Preemption w/ biggest banker Disadvantages: Inertia, Pioneering, Demand Uncertainty
Rapid Diffusion Competitive Convergence Profits captured by Consumers
Why Operational Effectiveness isn't enough?
Entry Deterrence Brand Name Economies of Scale Finding where Demand is
Why open stores even if profitability is marginal and relatively low?
Better Off Test
Will the new industry provide the firm with a competitive advantage? Lower Cost or Increase WTP
Competitive Advantage
a set of unique features of a company and its products that are perceived by the target market as significant and superior to those of the competition -Profits are above the industry's
Differentiation
actually differentiating the market offering to create superior customer value Higher Price Cost=Average
learning effects
cost savings that come from learning by doing increased awareness/specialization
Emergent Strategy
any unplanned strategic initiative bubbling up from the bottom of the organization To adapt to evolving landscapes/environments of an industry and a firm
positive externality
beneficial side effect that affects an uninvolved third party Vaccines
variety based positioning
choices of products or services Ex. Lego
scale economies
efficiencies that arise from increasing the size of a business, costs down while output increases
Competitive Convergence
exists when companies are indistinguishable from each other
Narrow Market
firm intends to serve the needs of a narrow customer group
Preemption
getting key resources/assets before rivals
network effects
increases in the value of a product to each user, including existing users, as the total number of users rises
Corporate Social Responsibility
involves managing organizational processes in order to produce an overall positive impact on the community --integrated into business operations Normative-- ought to do, moral imperative Instrumental-- improves bottom line Opponent: Milton Friedman
capacity preemption
obstructs rivals based on capacity Ex. Steel, Iron, Copper
location preemption
obstructs rivals based on location Ex. Rural, Airport Gates
channel preemption
obstructs suppliers/buyers from working with rivals Ex. long term contracts w/ retailers
Focused Differentiation
offer products that are of unique and superior value compared to those of competitors and to target a narrow market Ex. Ferrari, Ducati, Anthropologie, Free People
strategy
organization's long-term course of action designed to deliver a unique customer experience while achieving its goals
Fundamental Fact of Strategy
profits vary across industry and within industry
Scope Economies (economies of scope)
reduction in per unit costs and increases in competitiveness by enlarging the scope of the firm (variety of products)
productivity frontier
relationship that captures the result of performing best practices at any given time; the function is concave (bulging outward) to capture the trade-off between value creation and production cost always expanding
access based positioning
segmenting customers who are accessible in different ways Geography, Customer Scale Ex. WaWa, Walmart in Rural Areas
Value Creation
sellers profit + value realized by consumers;WTP-Costs
needs-based positioning
serving most or all of the needs of a particular group of customers Ex. Ducati, Sports not Leisure
Market Failures
situations in which the market does not lead to a desired result-- socially optimal effective market=perfect competition
Market Power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices Pharmaceuticals AntiTrust
Transaction cost
the costs that parties incur in the process of agreeing to and following through on a bargain Market Failure
negative externality
the harm, cost, or inconvenience suffered by a third party because of actions by others Pollution
The Company Act of 2003
the law in India that enforces CSR in firms business operations (2% to CSR) Ex. Tata --an Indian multinational conglomerate holding company headquartered in Mumbai, Maharashtra, India. --CSR is integrated into business model-- to make a difference CSR: YES or No NO! It's just another corporate tax Philanthropy alone cannot solve systemic issues Firms will just "check the box" and do the bare minimum If companies cannot spend in areas related to their business, the opportunity ("O" from OIT&T framework) is missing YES! Most firms are unlike Tata and will do nothing without a law Firms have the option to partner with NGOs or donate the money to a government fund It's a great example of collective effort of government, corporations, and civil society
Intended Strategy
the outcome of a rational and structured top-down strategic plan
Cost Leadership
the positioning strategy of producing a product or service of acceptable quality at consistently lower production costs than competitors can, so that the firm can offer the product or service at the lowest price in the industry WTP=Average
Horizontal Scope
the range of product and service segments that a firm serves within its focal market Product/Industry depth WTP increase - cross selling, information synergy
Realized Strategy
the strategy that actually takes place, which is a function of emergent
Value Capture
this type of value is seen between the difference of PRICES, sellers profit, buyers profit