BSAD 490 Exam 1 (Topics 1-5)

Market Development

- entering new markets with existing products or services (expanding the geographic scope of the firm) *sell existing products in new markets (domestic or abroad) market that currently competing is MATURING Should first seek to find customers with similar wants and needs of existing customers

Stars

- high market share in a high growth industry - leaders in the industry

Cash Cows

- high market share in a low growth industry - Usually a cash generator- it creates more cash than it needs - We won't usually leave the money generated here because it has a poor long-term outlook, instead use it in the question mark

Market Penetration

- increasing sales (market share) in the firm's existing markets using existing products (generally through increased promotion). Expand share of existing markets *Use during the introduction and growth stages increase profits from increasing quantity of existing users to get more people into the market (deals of buy one get one free)

New Product Development

- introducing new (or modified) products to existing customers (increasing scope of the firm's product line) *used when industry is declining, introduce new or modified products to existing customers. Ex: McCafe, taco bell breakfast

Question Marks

- low market share in a high growth industry - Needs a large amount of capital to enhance its place it the market -Cash users - Take the resources from the dog to invest in the question mark to hopefully make it a star

Dogs

- low market share in a low growth industry. - long term outlook is poor. - Generally, we should divest or liquidate and use our limited resources elsewhere

Backward Vertical Integration

- the firm remains in the same business/industry but attains ownership/control over additional primary or support activities that are "backwards" in their value-chain. Ex: McDonald's growing their own potatoes (increase quality, maintain consistency, decrease cost)

Forward Vertical Integration

- the firm remains in the same business/industry but attains ownership/control over additional primary or support activities that are "down" (forward) in their value-chain. Ex: Shrimpers selling straight to the customer

ASSESSING POTENTIAL FOR DEVELOPING SUSTAINABLE COMPETITIVE ADVANTAGE (2):

1. Assessment of Capabilities 2. Assessment of Value-chain

Firms should seek to identify:

1. Attractive industries - potential to earn long-term above-average returns (not all industries are similarly attractive, especially when examined via a fit with a firm's mission and internal strengths and weaknesses) 2. The potential to establish a defendable position within the industry 3. The potential to create sustainable advantages over competitors 4. Means of offsetting powerful profit destroying forces

4 categories of the Boston Consulting Group Matrix

1. Dogs 2. Question Marks 3. Stars 4. Cash Cows

I. GENERAL ENVIRONMENTAL (EXTERNAL) TRENDS: - both domestic and international

1. Economic Trends - the general direction of the country 2. Sociocultural Trends - relatively enduring values and beliefs of an individual or of society 3. Demographic Trends - age of population is important (baby boomers) 4. Political/Legal Trends 5. Technological Trends 6. Global Trends

Resolving conflict between Stakeholders:

1. Establish win/win culture (If organization succeeds everyone succeeds). 2. Identify and Prioritize. 3. Satisfy most important first.

Value for the firm is created in one of three ways:

1. Increase Revenue 2. Decrease Expenses 3. Do both

Limitations of BCG Matrix:

1. Industry attractiveness is a function of more than just market growth rate—e.g., as we learned from Porter's 5 Forces of Competition Model. 2. Market share is not always an indication of profitability—e.g., anyone can sell shoes, but can you make a profit selling shoes? 3. Links between/amongst units can play an important role in the success of the portfolio—e.g., "dogs" can play a critical role in the portfolio - supplying other business units with a critical input 4. The matrix is a "snapshot" of the portfolio—e.g., doesn't account for ongoing trends that may impact business units in the near future.

TYPES OF BUSINESS-LEVEL STRATEGIES (5)

1. LOW COST LEADERSHIP STRATEGY 2. DIFFERENTIATION STRATEGY 3. FOCUSED COST LEADERSHIP 4. FOCUSED DIFFERENTIATION 5.INTEGRATED LOW-COST/DIFFERENTIATION STRATEGY

Value creation (and growth) for a firm pursuing a single business (concentration) corporate-level strategy can be achieved through:

1. Market Penetration 2. Market Development 3. New Product Development 4. Backward Vertical Integration 5. Forward Vertical Integration 6. Horizontal Integration

Sustainability of competitive advantage is a function of:

1. Rate of core competency obsolescence due to environmental change 2. Availability of substitutes for the core competencies 3. The imitability of the core competencies

Levels of diversification (3 Corporate-Level Strategies):

1. Single Business (aka Concentration strategy) 2. Related Diversification (aka Concentric Strategy) 3. Unrelated Diversification (aka Conglomerate Strategy)

Opportunities generally appear in one of three forms:

1. Solving a problem 2. Filling a niche 3. Combination of trends in the external environment

How a Differentiation Strategy Can Offset Profit Destroying Forces:

1. Threat of New Entrants - (1. Cost of overcoming the unique value) 2. Threat of Powerful Suppliers - (1. Better absorb a cost increase with higher margins) 3. Threat of Powerful Buyers - (1. Unique value created decreases buyer's will to seek lower price) 4. Threat of Substitutes - (The customer loyalty decreases the attractiveness of substitutes) 5. Threat of Intense Rivalry - (A highly differentiated firm is less likely to be impacted by rivalry)

How a Low-Cost Leadership Strategy Can Offset Profit Destroying Forces:

1. Threat of New Entrants - (1. Low cost is able to create barriers through efficiency or economies of scale, which increase cost to new entrants. 2. Threat of retaliation.) 2. Threat of Powerful Suppliers - (1. Better negotiate volume discounts from suppliers.) 3. Threat of Powerful Buyers - (1. Decrease the price they are willing to pay and change the terms) 4. Threat of Substitutes - (1. The low price decreases the attractiveness of substitutes. 2. Can lower our price to decrease growing threat and still earn profit) 5. Threat of Intense Rivalry

INDUSTRY ANALYSIS : PORTER'S FIVE-FORCES - profit destroying forces

1. Threat of new entrants 2. Bargaining Power of Suppliers 3. Bargaining Power of Buyers 4. Threat of Substitutes 5. Intensity of Rivalry

Importance of Assessing Strategic Groups:

1. To distinguish between direct and indirect competitors. 2. Competition amongst firms w/in a strategic group is usually more intense than that amongst firms in different groups. 3. To identify the attractiveness of positions w/in an industry. 4. To identify capabilities/core competencies needed to effectively compete along various dimensions (positions) in the industry/market.

Bargaining Power of Buyers

Buyers with power over the firms from which they purchase can: • demand lower prices and/or • demand an increase in quality, service, warranty, terms, etc. of the P/S purchased (which in turn can increase the industry's cost structure).

Horizontal Integration

-an organization acquires control over its competitors (again, stays in same business/industry. expand economies of scope)

OPERATIONAL EFFECTIVENESS (O.E.)

Performing similar activities better than rivals. This includes, but is not limited to, efficiency. O.E. refers to any number of practices that allow a company to better utilize its inputs by, for example, reducing the number of defective shoes it produces or producing shoes similar to those of competitors, but at a lower cost

Goal is LTAARs through sustainable (unique, defendable) competitive advantages that create value for customers, and thus the firm by:

i. Performing value-creating activities that competitors cannot perform. (Be different) ii. Performing an activity that provides value that is superior to that provided by competitors—increases revenues, decreases costs, or both (Be better)

Core Competencies are:

i. Valuable ii. Rare iii. Costly to imitate iv. Non-substitutable

Assessing Capabilities - capabilities can result in core competencies and thus sustainable competitive advantage when they are:

i. Valuable - allows the firm to exploit opportunities or neutralize threats. Ex: Wal-Mart's ability to create low cost structure in industry. ii. Rare - possessed by few if any competitors. Ex: Pharmaceutical firms research and development capabilities, very few firms have capabilities to create life saving drugs. iii. Costly to imitate - competitors cannot duplicate with exact precision. Imitability 1. Time 2. Causal ambiguity - cause unknown 3. Social complexity. iv. Non-substitutable - no strategic equivalent available to competitors (copyrights or patents) *Sustainable capabilities create long-term above average returns.

Competitor Analysis

identify competitors' strengths and weaknesses (potential O & Ts) for "your" firm)

Resources

inputs to the production process, both tangible and intangible

The strategic value of resources

is a function of the degree to which they can contribute to the development of core competencies & a sustainable competitive advantage.

Disadvantages of outsourcing

less control over activity, partners may become competitors, disclosing proprietary information, loss of internal capabilities

STRATEGIC POSITIONING (S.P.)

refers to performing different activities from rivals or performing similar activities in a different way. A company can consistently outperform rivals only if it can establish a difference it can preserve (withstand competitive actions to imitate, duplicate, overcome). A company can use a unique combination of inputs (resources/capabilities) that create products/services (e.g., shoes) that are different from competitors in ways that customers value--- has attributes for which customers are willing to pay

Tangible Resources

resources (assets) that can be seen, held, quantified ex: property, plant, equipment, raw materials, cash, liquid assets, inventory, etc.

Intangible Resources

resources (assets) that have no physical existence *more difficult for competitor to understand and imitate, and thus often a better source of sustainable competitive advantage (culture, brand name, image) ex: Knowledge, skills, reputation/brand name, goodwill copyrights, patents, customer loyalty, employee commitment, relationships with stakeholders, etc.

Niche

small, underserved segment of the market

Value Chain Analysis

technique to assess specific activities the firm performs, whether those activities create value and if they have the potential for creating sustainable competitive advantage for the firm

Mission

the business(s) in which the firm intends to compete and customers it intends to serve

Value creation (growth) through corporate-level strategies: Related Diversification

the firm expands into another industry and seeks to create additional value through links between/amongst the business units within the portfolio

Narrow Scope

the firm focuses on providing one or a few products/services to one or a few target markets with distinct or specialized needs Ex -Saks Fifth Ave. sells relatively few products.services provides in relatively few geographic markets

STRATEGIC MANAGEMENT

the process of aligning the firm's mission, its internal capabilities, and the "demands" of the external environment so as to exploit opportunities and neutralize threats in pursuit of increased value for the firm and long-term above average returns.

Core Competencies

those capabilities (bundles of resources) that serve as a source of sustainable competitive advantage over its competitors

External Environment

those forces/trends generally outside the control of any one firm, that can impact the firm and the industry in which it competes

Above-average Returns

those in excess of competitors and/or industry averages—focus is on long-term

Support Activities

those that support primary activities

Primary Activities

those tied to production, sales, distribution and post-sale service(s)

Synergy

value created by two businesses working together is greater than the value created by them working independently

Value for the customer:

value is defined (for our purposes) as those product/service characteristics for which customers are willing to pay

Internal Capabilities

what the firm can achieve through a "bundling" of resources

OUTSOURCING

when a firm hires an outside entity (another firm) to perform a primary or secondary activity (e.g. production, distribution, accounting, etc.). *Because no firm can master all sources of value creation they should contemplate outsourcing activities in which they cannot create maximum value on their own.

Industry Analysis

within industry "forces" (seek to identify, and offset, potential profit destroying forces)

LOW COST LEADERSHIP STRATEGY

• Generally most appropriate for no-frills, standardized products • Requires a continuous focus on lowering costs, relative to competitors (e.g., efficient scale-facilities, control of overhead, etc.) • Value chain analysis (primary and support activities) used to identify areas for minimizing costs

INTEGRATED LOW-COST/DIFFERENTIATION STRATEGY

• May be especially critical in global-markets and/or those with a wide-range of wants/needs • Successful differentiation can lead to premium prices while a relatively low cost position provides potential for even greater margins • Generally, less differentiation than firms focusing only on differentiation & low prices, but not as low as firms focusing only on low cost

COMPETITOR ANALYSIS

• Who are our major competitors' (generally "direct" competitors) • What are their strengths and weaknesses/vulnerabilities? • What are their objectives and strategies? • How are competitors likely to respond to external changes and trends? • How are our P/S positioned versus these competitors? • Can we expect retaliation upon entering the industry/market?

The importance of flexibility, and the ability to change one's strategy, results from, for example:

• changing environmental conditions—emerging opportunities and threats • changing customer needs • the strategic maneuvering of competitors • learning—the experience of what is, and what is not, working • the unforeseen/unexpected

Firms are affected by the External Environment and therefore must:

• continuously scan the external environment • identify significant external environmental trends • identify "attractive" industries • identify attractive positions within an industry • identify means of defending a position within the industry---sustainable competitive advantage • identify competitors and their strengths and weakness (potential O & T's to your firm)

Corporate-level strategies seek to create additional value by:

• expanding the markets served (geographic scope) • expanding product lines (product line scope) • adding stages of the value chain to existing businesses (e.g., move toward supplying your own input, manufacturing, controlling distribution, selling the P/S, and/or service after the sale) • adding businesses (related or unrelated to the portfolio)

The strategic management process is a proactive, deliberate, and on-going set of actions/activities that top management has chosen to move the company in a specific direction. It states:

• we will focus on these markets and customer needs--scope • we will compete in this fashion -- (low-cost vs. a means of differentiation) • we will allocate our limited resources in these ways • we will rely on these particular strategies to achieve our goals--long-term performance • we will change when necessary---importance of maintaining strategic flexibility

DIFFERENTIATION STRATEGY

Focus (resource/capability/core competency development) is on setting your product/service apart from the competition's by continuously investing in & developing "attributes/features" for which customers are willing to pay a premium price (e.g. quality, service, safety, warranty, location, etc.)

3 EXTERNAL ANALYSES

I. General Environment II. Industry Analysis III. Competitor Analysis

Threat of Substitutes

Substitutes are products/services from outside the industry that perform the same or similar functions as the firm's. (e.g., Delta is not a substitute for Southwest Airlines; Greyhound is a substitute for Southwest)

Bargaining Power of Suppliers

Suppliers with power over the companies for which they provide inputs can: • increase prices and/or • decrease the quality of the products/services (P/S) they provide

Broad Scope

firms seeks to appeal to a mass market with similar needs or multiple segments with multiple product lines Ex - Walmart - thousands of different products/services provided in many geographic markets

FOCUSED STRATEGIES

focus is on finding an attractive niche (under-served market segment) and becoming an expert at serving the unique needs of that particular target market. • Either low-cost or differentiation focused strategies may be developed & implemented - only difference is in the source of competitive advantage

Effectiveness

getting the job done

Efficiency

how well the job is done

Corporate-level strategy - focus on identifying:

i. In what business/industry(s) will the firm compete? (one or more) ii. How should the firm allocate scarce resources within its portfolio (group) of businesses to create maximum value? —"who gets what"

Unrelated Diversification

AKA Conglomerate Strategy -Less than 80% of revenue comes from the dominant business, and there are no common links between businesses. -Advantage is if one fails they don't all fail -Disadvantage: it is complex and difficult to manage

Single Business Diversification:

AKA: Concentration Strategy - 80% or more of revenue comes from a single business. - focus on what we do best Risk: all our eggs are in one basket, one trend or tragedy can cut off all business abruptly

Related Diversification

AKA: Concentric Strategy - Less than 80% of revenue comes from the dominant business. -links between business units allows sharing of activities (Ex: P&Gs Diapers and Paper Towels both need paper so they can create value by lowering the cost and using the same paper) or transferring of core competencies (intangibles, take them that were created in one area and move them to another. Honda - first motorcycles, then automobiles, now ATVs) - advantage is economies of scope

Intensity of Rivalry

Actions taken by one firm usually results in reactions from others within the industry which can impact the profit potential of the industry.

Advantages of outsourcing

Allows the firm to focus on their specific competences, the firm can couple and de-couple, decrease risk by decreasing financial commitment.

Realized Strategy =

Deliberate Strategy + Emergent Strategy - Unrealized Strategy

Stakeholders

Individuals or groups who can impact or are impacted by the actions of the firm. Ex: stockholders, lenders, employees, managers, unions, host community, suppliers, customers

Strategic Fit of Activities

It is more difficult for a competitor to overcome a combination of activities rather than just one activity

2 sources of competitive advantage:

Low Cost - (resulting in lower prices for cost conscious customers). Differentiation - (different (i.e., better) in terms of, for ex., quality, service, customization, location, service, safety, comfort, warranty, convenience, etc.)

Through value chain analysis, firms seek to maximize value creation and develop sustainable competitive advantage by identifying ways to either:

i. Perform value-creating activities that competitors cannot perform. (be different) ii. Perform an activity that provides value superior to that provided by competitors—increases revenues, decreases costs, or both (be better)

Who

SPECIFICALLY identify customers to be served

What

SPECIFICALLY identify what need(s) the firm will seek to satisfy (exceed)

How

SPECIFICALLY identify what resources/capabilities/core competencies are needed to effectively implement strategies to satisfy/exceed customer needs and expectations

Threat of new entrants

The likelihood of new firms entering an industry is a function of two factors: i. barriers to entry ii. expected competitor retaliation

Market Segmentation

The process of identifying and classifying prospective buyers into clearly identifiable segments based on similar needs or wants. Market (segments) should be: Identifiable, Measurable, Substantial, and Sustainable

Sustainable Competitive Advantage

a defendable position (advantage) via competitors resulting from the ability to offer lower prices (i.e., a low-cost advantage) that increase sales (volume) or by offering greater benefits, services, quality, safety, etc. (i.e., a differentiation advantage) that increase margins.

The Power of Perception

a firm's product and/or service does not necessarily have to be significantly "better" than competitors, BUT if customers perceive it to be so, that may be all that is needed to charge a premium price and achieve premium profit margins

Industry

a group of firms closely related in terms of the products/services they provide.

STRATEGIC GROUP

a set of firms within an industry that compete along the same strategic dimensions (i.e., source of competitive advantage and scope) in pursuit of a similar strategy

BUSINESS-LEVEL STRATEGY

actions employed to position the firm via competitors within specific markets in terms of: 1. Source of Competitive Advantage—Low Cost vs Differentiation 2. Scope of Product-line or Geographic Scope—Broad vs Narrow

The purpose of diversification is to:

allow the company to create additional value by expanding the existing business or by entering new lines of business that are different from current operations.

Increasingly, sustainable competitive advantage(s)

are created from within the firm through a unique variety/bundle of resources/capabilities/core competencies.

General Environment

broad external trends - firms should seek to identify those that can be expected to significantly impact the industry(s) in which they compete

Boston Consulting Group Matrix

can be used as a starting point to assist in determining how to allocate resources amongst the portfolio of business units. • Market share is seen as a measure of competitive advantage • Market growth rate is seen as a measure of industry attractiveness o High growth industry is seen as more attractive than a low growth, but it's not absolute.

Opportunities

conditions which, if exploited, can help the firm enhance value (increase revenue and/or decrease costs)

Threats

conditions which, if ignored, may reduce value in the firm (decrease revenue and/or increase costs)

Strategy

continuous, proactive plan developed, implemented and controlled so as to build sustainable competitive advantages and a defendable market position(s) that creates value for both customers and the firm. Provides direction to the firm

CUSTOMERS

critically important that the firm specifically identify the Who, What, and How of our intended customers *Rifle approach not shotgun approach

The decision about one's corporate-level strategy should ultimately be determined by:

examining the fit among external O & T's, the firm's internal resources, capabilities & core competencies, S & W's, its mission and the ability of the firm to increase value.

Value creation (growth) through corporate-level strategies: Single Business (Concentration)

firm competes in a single business and seeks to create additional value by enhancing operations in that industry. (e.g., SW Airlines)