BADM 449 Quiz 2

Early Majority

(34%) customers coming into market at shakeout stage, main consideration in deciding whether ot not to adopt a new tech innovation is a a strong sense of practicality, they are pragmatists and weigh costs and benefits carefully, like to wait to see how things shake out (not about early hype)-herding effect: early majority enter in large numbers

Opportunism

self interest seeking with guile; backward vertical integration is often undertaken to overcome threat of opportunism and to secure key raw materials

Post integration failures are often due to

cultural differences

Cost Leadership Risks

1. erosion of margins 2. replacement (with innovation) 3. focus of competition shifts to non-price attributes 4. lowering costs to drive value creation below acceptable quality

Cost Leadership Benefits

1. protection against entry due to economies of scale 2. protection against increase in input prices because they can be absorbed 3. protection against decrease in sales because they can be absorbed 4. protection against substitute products by further lowering prices 5. protection against price wars with firms because lowest cost firm will win

Porters Diamond Framework

used to explain national competitive advantage 1. factor conditions 2. demand conditions 3. competitive intensity in focal industry 4. related and supported industries

Integration Strategy

business level strategy that combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade offs in those distinct strategic positions

Unrelated Diversification Strategy

less than 70% of its revenues come from a single business and there are few, if any linkages among its businesses ex: Conglomerate (company that combines 2 or more strategic business units under one overarching corporation)

Forward Vertical Integration

moving ownership of activities closer to the end customer (ownership of activities shifted closer to end customer)

Backward Vertical Integration

moving ownership of activities upstream to the originating inputs of the value chain (focus more on sources of supply)

Taper Integration

orchestrating value activities in which a firm is backwardly integrated but it also relies on outside market firms for some of its supplies and/or is forwardly integrated but also relies on outside market firms for some of its distribution

Restructuring

process of reorganizing and divesting business units and activities to refocus a company to leverage its core competencies

Diversification Discount

stock price of such highly diversified firms is valued at less than the sum of their individual business units; firms that pursue unrelated diversification are unable to create additional value

Vertical Market Failure

when transactions within the industry value chain are too risky and alternatives to integration are too costly or difficult to administer

Corporate Strategy Triangle

-based on RBV -interaction of resources, businesses and corporate office support firm vision, goals, and objectives

Disadvantages of International Expansion

1. liability of foreignness 2. loss of reputation 3. loss of intellectual property

Short tail vs long tail

-80% of sales come from 20% of selection found in short head -advances in tech create the long tail -tech enables easier access to the "tail" which means selling less of more, and allowing online firms to gain a large share from selling a small # of unlimited choices

How to respond to disruptive innovation

1. Continue to innovate in order to stay ahead of the competition. 2. Guard against disruptive innovation by protecting the low end of the market. 3. Disrupt yourself, rather than wait for others to disrupt you (e.g., reverse innovation)

Differentiation Risk

1. Erosion of margins 2. Replacement (when faced with innovation) 3. Focus of competition shifts to price 4. Increasing differentiation is not directly creating value but raising costs

Business Level Strategy

Goal direction actions managers take in their quest for competitive advantage when competing in single product market -broad question: how should we compete?

Incumbent firms tend to be a source of what innovation?

Incremental Innovation

Traditional Pipeline --> Platform Business Model

Shifts in Strategy Focus: 1. From resource control to resource orchestration 2. From internal optimization to external interactions

hostile takeover

acquisition when firm does not want to be acquired

Better Off Test

asks whether a particular set of business units should be working together -focuses on corporate added value (value creation)

Crossing the Chasm Framework

breaks down 100% market potential into different customer segments, highlighted the incremental contribution each specific segment can bring into the market -crossing the chasm happens between early adopters and early majority

Industry Life Cycle - Decline

changes in the external environment take industries from maturity to decline (examine PESTEL), innovation efforts along both product and process dimensions cease, if new tech break through emerges it opens a new industry where process starts over

Corporate Strategy

decisions that leaders make and the goal-directed actions they take in quest for a competitive advantage in several industries and simultaneously

Cost Drivers - Costs Leadership

economies of scale, learning curve

Value Drivers - Differentiation

economies of scope, product features, customer service, complements

Global Strategy

enables companies to gain and sustain a competitive advantage when competing against other foregin and domestic companies around the world

Laggards

enter in declining stage of industry, adopt new product only if absolutely necessary, generally do not want new tech because of personal or economic reasons, only 16% of total market potential

Competency Trap

firms that strive for competence within a given strategy are sometimes trapped in it and miss the opportunity for strategic change

Learning Curve

as our productivity goes up, learning curves go down and it takes less and less time to produce the same output as we learn how to be more efficient therefore driving costs down

Risks of Vertical Integration

increasing costs, reducing quantity, reducing flexibility, and increasing the potential for legal repercussions

Industry Life Cycle - Introduction

innovators core competency is R&D, barriers to entry are high

Equity alliances

at least one partner takes partial ownership in the other partner. Often require larger investments + less common. -allow for sharing of tacit knowledge

Related and supporting industries/complementors

leadership in related and supporting industries can foster world-competitors in downstream industries

Disruptive Innovation

leverages new tech to attack existing markets, invades from bottom up -begins as low costs solution to existing issue -performance is inferior to existing tech but its rate of tech improvement over time is faster than the rate of performance increases required by different market segments

Credible Commitment

long term strategic decision that is both difficult and costly to reverse

Single Business Diversification Strategy

low level of diversification if any (more than 95% of revenue from one business)

Foreign Direct Investment (FDI)

making investments in value chains around the world

Resource Continuum

measures the nature of resources (general or specialized) -scope of businesses (wide or narrow) -coordination mechanisms (transferring or sharing) -control systems (financial or operating) -corporate office size (small or large)

Parent-subsidary relationship

most integrated alternative to performing an activity within one's own firm boundaries (anchors on the "make" side); corporate parent owns the subsidiary and can direct it via command and control (fiat)

CAGE Distance Framework

mosts costs and risks involved with expanding beyond a domestic market are created by distance -Cultural Differences -Admin/Politcal Distance -Geographic Distance -Economic Distance

Strategic Outsourcing

moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain

Diversification Premium

on average stock price of related-diversification firms is valued at greater than the sum of their individual business units because they: -provide economies of scale reducing costs -exploit economies of scope increasing value

Horizontal Integration

process of merging with a competitor at the same stage of the industry value chain; do so if the target firm is more valuable inside the acquiring firm than as a continued standalone company -reduces competitive intensity, lowers costs, and increases differentiation

Global Standardization Strategy

attempt to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost -used by MNEs that manufacture commodity products like hardware or offer services such as business process outsourcing

Industry Life Cycle - Shakeout

rate of growth starts to decline, weaker firms are forced out of the industry, success factors at this stage are manufacturing and process engineering capabilities that can be used to drive costs down

Organizational Inertia

resistant to changes in the status quo, causes first to favor incremental innovation to reinforce organizational structure and power distribution while avoiding radical innovation

Differentiation strategy

seeks to create a higher value for customers than the value that competitors create by delivering products or services with unique features while keeping costs at the same or similar levels while allowing the firm to charge high prices to customers.

Cost-leadership strategy:

seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors enabling the firm to offer lower prices to customers

Death of Distance hypothesis

since firms can source inputs globally many believe that location must be diminishing in importance as an explanations of a firm-level competitive advantage

joint venture

special form of strategic alliance; two or more partners create and jointly own a new organization, long term commitment

Industry Life Cycle

the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry

Non-equity alliances

based on contracts between firms such as supply agreements, distribution agreements, and licensing agreements (vertical strategic alliances) -share explicit knowledge such as patents

Strategic Alliances

voluntary arrangements between firms that involve the sharing of knowledge, resources, products, or services

Early Adopters

customers entering market in the growth stage, make up 13.5% of total market potential, early to adopt new tech or product concept because their demand is driven by their imagination and creativity (rather than by new tech like tech enthusiasts)

Benefits of Vertical Integration

lowering costs, improving quality, facilitating scheduling and planning, facilitating investments in specialized assets, securing critical supplies and distribution channels

First Mover Disadvantages

must educate customers on product benefits, find distribution channels and complementary assets, continue to perfect product-want to achieve market acceptance and seed future growth

Equity Alliance

partnership in which at least one partner takes partial ownership in the other partner

Long Term Contracts

-duration greater than 1 year -Licensing: long-term contract in the manufacturing sector that enables firms to commercialize IP such as a patent -Franchising: long term contract where a franchisor grants a franchisee the right to use the franchisors trademark and business processes to offer goods and service that carry the franchisor's brand name. Franchisee pays a buy in and offers franchisor a % of sales

Vertical Integration

-firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs -what % of a firm's sales is generated within the firm's boundaries?

Integration Responsiveness Framework

-juxtaposes the opposing pressured for cost reductions and local responsiveness -derives strategy positions of: international strategy, multi domestic strategy, global standardization strategy, and transnational strategy

Alliance Management

-managed by: 1. alliance champion (corporate exec responsible for high level support) 2. alliance leader (technical expertise and knowledge needed for day to day management) 3. alliance manager (serves as process resource and business integrator)

Architectural Innovation

-new product in which known components, based on existing tech are configured in a novel way to create new markets -new market with existing tech

Platform Ecosystem

-producers (creators of platform's offerings) -consumers (buyers or users of offerings) -owner (controlled of platform IP) -providers (interfaces for the platform)

Forms of Specialized Assets

-site specificity: assets require to be co-located -Physical asset specificity: physical and engineering properties are designed to satisfy a particular customer -Human-asset specificity: investments made in human capital to acquire knowledge and skills

Transaction Costs

all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets

Industry Decline Strategic Options

1. Exit: some are forced to exit by bankruptcy or liquidation 2. Harvest: firm reduces investments in product support and allocates only a minimum of human and other resources 3. Maintain: continue to support product even if it is declining 4. Consolidate: can consolidate industry by buying rivals, stake out strong position

Aspects of Organizational Inertia

1. organizational routines make it difficult to develop new capabilities 2. social and political structures are threatened by change 3. conformity: imitation locks firms into common structures/strategies 4. "bounded rationality" preference of exploitation over exploration 5. localized changes can be dysfunctional for configuration of organizational features; change must be systematic

Differentiation Benefits

1. protections against entry due to intangible resources (quality, innovation, etc.) 2. protection against increase in input prices (can be passed to consumers) 3. protection against decrease in sales prices (cannot be directly substituted) 4. protection against competition if product has enough differential appeal to command premium price

Technology Enthusiasts

2.5% of market potential, have engineering mindset and pressure new tech proactively, seek new products before the products are officially introduced

Alliance Management Capability

30-70% of alliance's do not deliver expected benefits, must be able to manage: 1. partner selection and alliance formation 2. alliance design and governance 3. post formation alliance management

Best Alternative Test

asks whether the set must be jointly owned to maximize the amount of value created and captured -business units may choose to remain independently owned (value capturing)

Transnational Strategy

attempt to combine benefits of localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable) -used by MNEs that use integration strategy -high pressure of local responsiveness and high pressure for cost reductions -difficult to implement

Multidomestic Strategy

attempt to maximize local responsiveness hoping local consumers will perceive their products or services as local ones -used in consumer products / food industry -products are locally manufactured (requires tacit knowledge) -high pressure for local responsiveness and low pressure for cost reductions

Platform businesses

business model innovations that use tech to connect organizations, resources, informations, and people in an interactive ecosystem where value-generating transactions can be created or exchanged

Competitive Intensity in a focal industry

companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition

Multinational Enterprise (MNE)

company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries

National Competitive Advantage

consideration of world leadership in specific industries

External Transaction Costs

costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract

Internal Transaction Costs

costs pertaining to organizing an economic exchange within a firm Ex: costs of recruiting and retaining employees; paying salaries and benefits; setting up a shop floor; providing office space and computers; supervising work; etc.

Factor Conditions

country's endowments in terms of natural, human, and other resources -Important factors include capital markets, a supportive institutional framework, research universities and a public infrastructure

Industry Value Chain

depict the transformation of rate material into finished goods and services along distinct stages 1. raw materials 2. intermediate goods 3. final assembly/manufacturing 4. marketing + sales 5. after sales service + support

Dominant Business Diversification Strategy

derives between 70-95% of its revenues from a single business but it pursues at least one other business activity that accounts for the remainder of revenue

Related Diversification Strategy

derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business linked to the primary business activity 1. related-constrained: related businesses must leverage existing core competencies and resources; more limited 2. related-linked: new business activities that share only a limited number of linkages

Economies of Scope

describe the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and tech

Radical Innovation

draws on novel methods or materials, derived either from an entirely different knowledge base or from a recombo of existing knowledge bases with a new stream of knowledge, targets new markets by using new tech -based on new markets and new tech

Dimensions of Platform Businesses

1. business that enables value-creating interactions between external producers and consumers 2. Platforms overarching purpose is to consummate matches among users and facilitate the exchange of goods, services, or social currency thereby enabling value creation for all participants 3. Platform provides an infrastructure for these interactions and sets governance conditions for them

Learning Curve vs. Economies of Scale

-Differences in timing: learning effects occur over time as output accumulates while economies of scale are captured at one pint in time when output increases -Differences in complexity: in some production processes, effects from economies of scale can be quite significant while learning effects are minimal (and vice versa)

BCG Framework

-?: high market growth, low market share (try to increase market share or harvest/divest) -star: high market growth and market share (hold or invest for growth) -dog: low market growth and market share (harvest or divest) -cash cow: high market share and low market growth (hold position)

Why do firms acquire other firms?

-Access to new markets and distribution channels -Access to a new capability or competency -Strategic preemption (reduction in competitive intensity as a motivation to acquire)

Cultural Distance

-cultural disparity between internationally expanding firm's home country and its targeted host country (increases liability of foreignness, cost and uncertainty of conducting business) -4 main: power distance, individualism, masculinity-femininity, uncertainty avoidance, long-term orientation, and indulgence

Value Innovation

-aligning innovation with total perceived consumer benefits, price, and cost -integration strategy -how can we create new markets by reduce, adding, raising, and eliminating aspected or factors

Value innovation

-aligning innovation with total perceived consumer benefits, price, and cost (must resolve trade-offs between the two generic strategic positions) -Want to: drive down cost (through eliminating and reducing) and increase perceived consumer benefits (by raising factors and creating new ones)

Industry Life Cycle - Growth

-as market size expands a standard signals the markets agreement on a common set of engineering gestures and design choices (standards can emerge from the bottom up through competition in market), rate of growth is high -distribution channels expand, firms start thriving, reaping benefits of economies of scale, product innovation when standards are set

Admin/Political Distance

-captured in absence or presence of shared monetary or political associations, political hostilities, and weak or strong legal/fin institutions -tariffs, trade quotas, FDI restrictions -strong legal/fin institutions reduce uncertainty and transaction costs

Geographic Distance

-captures how far apart countries are as well as country's physical size, the within country distances to its borders, the country's topography, its time zones and whether the countries are contiguous to one another or have access to waterways and the ocean -country infrastructure (road, power, telecommunications)

Why do firms need to grow?

1. Increase profitability: allows companies to produce higher returns for stockholder or owners 2. Lower costs: larger firm would benefit from economies of scale (drive down average costs as output increases) 3. Increase market power: firms consolidate industries through horizontal mergers and acquisitions to change industry structure in their favor; fewer competitors = higher industry profitability 4. Reduce risk: grow to diversity product and service portfolio through competing in a number of different industries 5. Motivate management: growing firms afford career opportunities and professional development for employees; pay higher salaries and spend more on benefits

Formulating Corporate Strategy via Core Competencies

1. Leverage existing core competencies to improve current market position 2. Build new core competencies to protect and extend current market position 3. Redeploy and recombine existing core competencies to compete in markets of the future 4. Build new core competencies to create and compete in markets of the future

Advantages of Platform business model

1. Platforms scale more efficiently than pipelines by eliminating gatekeepers 2. Platforms unlock new sources of value creation and supply 3. Platforms benefit from community feedback

Build-borrow-or-buy framework

1. Relevancy: how relevant are the firm's existing internal resources to solving the resource gap? 2. Tradability: how tradable are the targeted resources that may be available externally? (highly tradable then borrow) 3. Closeness: how close do you need to be to your external resource partner? don't acquire firm (aka borrow) unless you need extreme closeness 4. Integration: how well can you integrate the targeted firm? only consider M&A if there is low relevancy, low tradability, and high need for closeness

Types of Corporate Diversification

1. Single Business 2. Dominant Business 3. Related Diversification 4. Unrelated Diversification

Why do firms enter strategic alliances?

1. Strengthen competitive position (reduce competitive rivalry) 2. Enter new markets 3. Hedge against uncertainty -real options: providing companies the right but not the obligation to make further investments in certain markets 4. Access critical complementary assets: such as marketing, manufacturing, and after scale service 5. Learn new capabilities

Alternatives to Vertical Integration

1. Taper Integration 2. Strategic Outsourcing

Advantages of International Expansion

1. access to new markets (economies of scale/scope) 2. access to lower-cost inputs (India, china) 3. develop new competencies (ex: making FDI to become part of communities of learning)

Dimensions of Corporate Strategy

Vertical Integration: In what stages of the industry value chain should the firm participate in? Diversification: What range of products and services should the firm offer (and not offer)? Geographic scope: Where should the firm compete geographically?

Late Majority

enter market in maturity stage, 34% of total market potential, early and late majority drive most industry growth and firm profitability, similar views as early majority, late majority is not as confident in their ability to master new technology, prefer to wait until standards have emerged, they also prefer well-established firms with a strong brand image

Integration Strategy - "Stuck in the middle"

firm has neither clear differentiation nor clear cost leadership profile which leads to inferior performance and a competitive disadvantage

Short Term contracts

firm sends out requests for proposals (RPFs) to many companies so that they can bid (short term = less than 1 year)

Economies of Scale

firms with greater market share might be in a position to reap these benefits, decreases in cost per unit as output increases -allows them to: spread fixed costs over larger output and employ special systems/equipment

Specialized Assets

have high opportunity cost, more value in their intended use than in their next best use

Transaction Cost Economies

insights help strategic leaders decide what activities to do in-house vs. what services and products to obtain from the external market

Innovation Ecosystem

network of suppliers, buyers, complementors -no longer make independent decisions but must consider ramifications on other parties in their innovation ecosystem

Demand Conditions

specific characteristics of demand in a firm's domestic market -demanding customers may also clue firms into latest developments in specific fields, may push firms to move research form basic findings to commercial applications for the marketplace

Incremental Innovation

squarely builds on an established knowledge base and steadily improves an existing product or service offering, targets existing markets using existing tech -based on existing tech in an existing market

Joint Ventures

standalone organization created and jointly owned by 2 or more parent companies -used to enter foreign markets -exchange of tacit and explicit knowledge

International Strategy

strategy where company sells same products or services in both domestic and foregin markets (allows MNEs to leverage home-based competencies in foregin markets) -low pressures for local responsiveness and cost reductions

When the firms costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market then the firm should?

vertically integrate by owning production of the needed inputs or the channels for the distribution of outputs

Strategic Alliances (on make/buy continuum)

voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services; umbrella term that enotes different hybrid organizational forms such as long term contracts, equity alliances, and joint ventures

Economic Distance

wealth and per-capita income of consumers is most important determinants of economic distance -wealthy countries engage in more cross-border trade

Industry Life Cycle - Maturity

when few firms remain, industry morphs into oligopoly with only a few large firms, demand now consists of replacement or repeat purchases, market has reached max size and industry growth is likely to be 0 or negative