MGNT 428 All Terms

Freemium

(Free + premium) basic features free of charge but charges for premium services such as add-ons

Economic Value Created

(V-C) V = value C = cost The greater economic value created, the greater is a firm's potential for competitive advantage. Rising costs reduce economic value created and erode profit margins. Higher value creation tneds to require higher costs

Strategic Commitments

*Firms need to back up their visions and missions with Strategic Commitments Actions to achieve the mission that are costly Long-term oriented Difficult to reverse.

Advantages of Going Global

- Gain access to a larger market - Gain access to low cost input factors - Develop new competencies

Why do firms acquire other firms?

- To gain access to new markets and distribution channels - To gain access to a new capability or competency - To preempt rivals

Limitations of accounting data

1) All accounting data are historical and thus backward looking. Past decisions and no guarantee of future performance. 2) Accounting data do not consider off balance sheet items. 3) Accounting data focus mainly on tangible assets which are no longer the most important. Not everything can be counted counts. Not everything that counts can be counted. There are some intangible assets such as intellectual property (patents, trademarks) customer goodwill. But many key intangible assets are not captured. Most competitively important assets are not captured. Most competitively important assets tend to be intangibles such as innovation, quality, and customer experience which are not included in a balance sheet.

3-step process

1) Analyze the external and internal environments 2) Formulate an appropriate business and corporate strategy 3) Implement the formulated strategy through structure, culture, and controls.

Advantages of a Balanced Scorecard

1) Communicate and link the strategic vision to responsible parties within the organization 2) Translate the vision into measurable operational goals 3) Design and plan business process 4) Implement feedback and organizational learning to modify and adapt strategic goals when indicated. can accommodate both short and long term performance metrics.

Respond to Disruptive Innovation

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

Three Dimensions of Corporate Strategy

1) Core competencies - unique strengths embedded deep within a firm, allows to differentiate, creating higher value 2) Economies of scale - when a firm's average cost per unit decreases as its output increases 3) Transaction costs - all costs associated with an economic advantage

The economic value creation framework shows:

1) Creating economic value 2) Capturing as much of it as possible

Follow these steps to apply the five forces model:

1) Define the relevant industry 2) Identify the key players in each of the five forces and attempt to group them into different categories 3) Identify the underlying drives of each force 4) Assess the overall industry structure

Limitations of Economic Value Creation

1) Determine the value of a good in the eyes of consumers is not a simple task. To tackle this, look at consumer purchasing habits to see preferences. 2) The value of a good in the eyes of consumers changes based on income, preferences, time and other factors. If your income is high you are likely to place a higher value on some goods. 3) To measure firm-level competitive advantage we must estimate economic value created for all products and services offered by the firm. Estimation may be a relatively easy task if the firm offers only a few products and services.

3 Elements of A Good Strategy

1) Diagnosis of competitive challenge 2) Guiding Policy. 3) Set of coherent actions

Analyze, Formulate, Implement (AFI) Strategy Framework

1) Explains and predicts differences in firm performance 2) Helps managers formulate and implement a strategy that can result in superior performance.

Implications for the strategist

1) Firm needs an inspiring vision and mission backed up by ethical values. 2) Strategic leader must put an effective strategic management process in place. 3) All employees should be involved in setting an inspiring vision. Larger firms tend to use top-down or scenario.

Strategy is NOT:

1) Grandlose statements - provide little managerial guidance and lead to goal conflict and confusion 2) Failure to face a competitive challenge 3) Operational effectiveness, competitive benchmarking, or other tactical tools

Industry Analysis

1) Identify an industry's profit potential 2) Derive implications for a firm's strategic position within an industry.

Corporate Strategy Executives must determine their strategy by answering these questions:

1) In what stages of the Industry value chain should the company participate (vertical integration)? 2) What range or products and services should the company offer (diversification)? 3) Where should the company compete geographically in terms of regional, national, or international markets (geographical scope)?

Two Factors of Firm Performance:

1) Industry effects 2) Firm Effects

Pattern for Successful firms

1) Mastery of and fit with the current environment 2) Success usually measured by financial measurements 3) A resulting organizational inertia that tends to minimize opportunities and challenges created by shifts in the internal and external environment Missing - conscious strategic decision to change the firm's internal environment to fit with the new external environment, rising above inertia As a result of a tightly coupled albeit successful system, organizational inertia sets in and with it resistance to change. - puts pressure on the system.

Implications for the Strategist

1) No best strategy exists - only better ones. True performance can be judged only in comparison to other contenders in the field or industry average, not absolute basis. 2) The goal of strategic management is to integrate and align each business function and activity to obtain superior performance at the business unit and corporate levels. 3) Both quantitative and qualitative performance dimensions matter in judging the effectiveness of a firm's strategy. 4) A firm's business model is critical to achieving a competitive advantage. How a firm does business is as important as what it does.

Continued Economic development across globe has two consequences for MNEs

1) Rising wages and other costs are likely to negate any benefits of access to low cost input factors 2) As the standard of living rises in emerging economies, MNEs are hoping that increased purchasing power will enable workers to purchase the products they used to make the export only.

Limitations of shareholder value

1) Stock prices can be highly volatile making it difficult to assess firm performance, in the short term. Total return to shareholders is a better measure of firm performance and competitive advantage over the long term because of "noise" introduced by market volatility, external factors and investor sentiment 2) Overall macroeconomic factors such as economic growth or contraction, unemployment rate, and interest and exchange rates all have a direct bearing on stock prices. It can be difficult to ascertain the extent to which a stock price is influenced more by external macroeconomic factors than by firm's strategy.

Total perceived consumer benefits and economic value created:

1) Value (V) - dollar amount a consumer attaches to a good or service 2) Price (P) 3) Cost (C) - the cost to produce means little to the consumer but is a great deal to the producer (supplier) of the good or service since it has a direct bearing on the profit margin.

A positive relationship between vision statements and firm performance exist under certain circumstances:

1) Visions are customer-oriented 2) Internal stakeholders are invested in defining the vision 3) Organizational structures such as compensation systems align with the firm's vision statement

Introduction Stage

1st Stage of Industry Life Cycle Individual inventor or company launches a successful innovation a new industry may emerge. INnovator's core competency is R&D which is necessary to creating a new product category that will attract customers. Capital intensive process in which the innovator is investing in designing a unique products, trying new ideas to attract customers and producing small quantities - which contribute to a high price when the product is launched. Market size is small and growth is low. Emphasize unique product features and performance rather than price. Encounter first mover disadvantages. Educate potential customers about product's intended benefits, find distribution channels.

Partner selection and alliance formation

1st phase of Alliance Management Capability The expected benefits for the alliance must exceed its costs. When one or more of the five reasons for alliance formation are present (strengthen competitive position, enter new markets, hedge against uncertainty, access critical complementary resource, learn new capabilities) The firm must select the best possible alliance partner Necessary conditions: Partner compatibility Partner commitment

Alliance design and governance

2nd Phase of Alliance Management Capability Once two or more firms agree to pursue an alliance managers must then design the alliance and choose an appropriate governance mechanism from among the three options (non equity contractual agreement, equity alliances, or joint venture) Effective governance comes from skillfully combining formal and informal mechanism.

Growth Stage

2nd Stage of Industry Life Cycle Market growth accelerates in this stage. After innovation has gained market acceptance, demand increases rapidly as first time buyers rush to enter the a market. As market expands, standard signals the markets agreement on a common set of engineering features and design choices. Process innovation ramps up (increasing marginal returns) as firms attempt to keep up with rapidly rising demand while bring down costs at the same time. Core competency in this stage tend to shift toward manufacturing and marketing capabilities.

Shakeout Stage

3rd Stage of Industry Life Cycle Rapid industry growth and expansion can't go on indefinitely Firms begin to compete directly against one another for market share, rather than to capture a share of increasing pie. As competitive intensity increases, the weaker firms are forced out of the industry. Only the strongest survive as firms begin to cut prices and offer more services to attempt to gain more of a market that grows slowly. .

Innovation

3rd Step in Innovation Process Commercialization of any new product or process, or the modification and recombination of existing ones. Successful commercialization of a new product or service allows a firm to extract temporary monopoly profits. Sustain advantage, a firm must continuously innovate, product a string of successful new products or services over time. Need not be high tech to be a potent competitive weapon. Novel Useful Implemented

Post formation alliance management

3rd phase of Alliance Management Capability Concerns the ongoing management of the alliance. The partnership needs to create resource combinations that obey the VRIO criteria. Can me accomplished if: make relation specific investments establish knowledge sharing routines build interfirm trust Trust is critical in any alliance. Build capability through repeated experiences over time.

Maturity Stage

4th Stage of the Industry Life Cycle Oligopoly - only a few large firms. Most demand was largely satisfied with prior shakeout stage. Demand now consists of replacement or repeat purchases. Market has reached its maximum size and industry growth is likely to be zero or even negative going forward

Decline Stage

5th Stage of the Industry Life Cycle Changes in the external environment (PESTEL) often take industries from maturity to decline. The size of the market contracts further as demand falls, often rapidly. If a technological or business model breakthrough emerges that opens up a new industry, this dynamic starts anew. Exit Harvest Maintain Consolidate

Inventory Turnover

= (Cost of goods sold / inventory) Captures the firm's production cost of merchandise it has sold. Inventory is the cost of the firm's merchandise to be sold. This ratio indicates how much of the firm's capital is tied up in its inventory. [component of Working capital Turnover]

Receivables Turnover

= (revenue / accounts receivable ) higher ratios imply more efficient management in collecting accounts receivable and shorter durations of interest free loans to cusomters. [component of Working capital Turnover] Concerns the effectiveness of a company's receivables and payables. Part of a company's cash flow management. Indicate the company's efficiency in extending credit as well as collecting credit.

Payables Turnover

= (revenues / accounts payable) indicates how fast the firm is paying its creditors by its suppliers Lower ratio indicates more efficient in paying creditors and generating interest-free loans from suppliers. [component of Working capital Turnover] Concerns the effectiveness of a company's receivables and payables. Part of a company's cash flow management. Indicate the company's efficiency in extending credit as well as collecting credit.

Conglomerate

A company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy.

Complementor

A company that provides a good or service that leads customers to value your firm's offering more when two are combined.

Creating Shared value

A concept that involves creating economic value for shareholders while also creating social value by addressing society's needs and challenges. Managers need to reestablish the important relationship between superior firm performance and society progress. Will gain and sustain competitive advantage and reshape capitalism and its relationship to society.

Upper-Echelons Theory

A conceptual framework that views organizational outcomes - strategic choices and performance levels as reflections of the values of the members of the top management team

Boston Consulting Group (BCG) growth share matrix

A corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) and speed of market growth (vertical axis). SBUs are plotted into four categories (dog, cash cow, star, and question mark), each of which warrants a different investment strategy.

Firm Effects

A factor of firm performance. Attributed to the actions managers take. Managers actions tend to be more important in determining firm performance than the forces exerted on the firm by its external environment

Industry Effects

A factor of firm performance. Underlying economic structure Firm performance attributed to the structure of the industry in which the firm competes. Determined by: entry and exit barrier number and size of companies types of products and services offered

Direct Imitation

A firm that enjoys a competitive advantage attracts significant attention from its competitors. They will attempt to negate a firm's resource advantage by directly imitating the resource in question Is swift if the firm is successful and intellectual property (IP) protection such as patents or trademarks can be easily circumvented.

Ambidexterity

A firm's ability to address trade offs not only at one point but over time. Encourages managers to balance exploitation with exploration

Alliance Management Capability

A firm's ability to effectively manage three alliance related tasks concurrently: 1) Partner selection and alliance formation 2) Alliance design and governance 3) Post formation alliance management

Five Forces Model

A framework developed by Michael Porter that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy. Two Key Insights - Competition must be viewed more broadly to encompass the other forces in an industry; buyers, suppliers, potential new entry of other firms and threat of substitutes. - Profit potential is determined by the 5 forces: 1) Threat of entry 2) Power of Suppliers 3) Power of buyers 4) Threat of substitutes 5) Rivalry among existing firms. The stronger the five forces, the lower the industry's profit potential The weaker, the higher.

Open Innovation

A framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from external ones. The sharing goes both ways: some external ideas and inventions are insourced while others are spun out. Increasing supply and mobility of skilled workers Exponential growth of venture capital Increasing availability of external options Increasing capability of external suppliers globally.

PESTEL Model

A framework that categorizes and analyzes an important set of external factors that might impinge upon a firm. Can create threats and opportunities. Political Economic Sociocultural Technological Ecological Legal

Core Competence - Market Matric

A framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets

Corporate Social Responsibility

A framework used to recognize and address the economic, legal, social, and philanthropic expectations that society has of the business enterprise at a given point in time.

Related Constrained Diversification Strategy

A kind of related diversification strategy in which executives pursue only businesses where they can apply the resources and core competencies already available in the primary business. Generally share competencies Less than 70% of its revenues from a single business activity and obtains revenues from other lines of business related to the primary business activity Nike, Johnson&Johnson

Related linked diversification strategy

A kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages. Some share competencies Less than 70% of its revenues obtained Amazon, Disney

Dynamic Capabilities Perspective

A model that emphasizes a firm's ability to modify and leverage its resources in a way that enables it to gain and sustain competitive advantage in a constantly changing environment Distinguish between resource stocks and resource flows create deploy modify reconfigure upgrade resources

Resource-based view

A model that sees certain types of resources as key to superior firm performance Firms are a distinctive collection of resources, capabilities, and competencies Two assumptions: 1) resource heterogeneity 2) resource immobility

Founder Imprinting

A process by which the founder defines and shapes an organization's culture, which can persist for decades after his or her departure. Founders set the initial strategy, structure, and culture of an organization by transforming their vision into reality.

Industry Convergence

A process whereby formerly unrelated industries begin to satisfy the same customer need.

Strategy

A set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors. A good strategy enables a firm to achieve superior performance. What not to do and what to do. Good strategy = value for society.

Groupthink

A situation in which opinions coalesce around a leader without individuals critically evaluating and challenging that leader's opinions and assumptions Cohesive non-diverse groups are highly susceptible to groupthink, lead to flawed decision making with potentially disastrous consequences.

Strategic business unit (SBU)

A standalone division of a larger conglomerate with its own profit and loss responsibility. Must answer business strategy questions relating to how to compete in order to achieve superior performance. They formulate an appropriate generic business strategy including cost leadership, differentiation, or value innovation in their quest for competitive advantage. Each SBU are various business functions: accounting,

VRIO Framework

A theoretical framework that explains and predicts firm-level competitive advantage. Used to assess the competitive implications of a firm's resources Valuable Rare Imitate is costly Organized to capture the value of the resources Valuable & rare = competitive parity Valuable, rare & costly to imitate = temporary advantage all = sustainable competitive advantage To fully exploit the competitive potential of its resources, capabilities and competencies, a firm must be organized to capture value.

Advantages of Firms of organizing economic activity within firms

Ability to make command and control decisions by flat along clear hierarchical lines of authority Coordination of highly complex tasks to allow for specialized division of labor Transaction specific investments high valuable within firms, but little or no use in external market Creation of a community of knowledge meaning employees within firms have ongoing relationships, exchanging ideas and working closely together to solve problems.

Disadvantages of Firms of organizing economic activity within firms

Administrative costs because of necessary bureaucracy Lower powered incentives, hourly wages and salaries Principal agent problem

Gain access to a larger market

Advantages of Going Global Gaining much more significant opportunities because economies of scale and scope that can be reaped by participating in a much larger market. They have an incentive to gain access to larger markets because this can reinforce the basis of their competitive advantage In turn allows MNEs to outcompete local rivals.

Gain access to low cost input factors

Advantages of Going Global MNEs Base their competitive advantage on a low cost leadership strategy are particularly attracted to go oversease to gain access to low cost input factors Raw materials behind globalization 1 and 2: Lumber Iron ore oil coal Globalization 3: Benefit form lower labor costs in manufacturing and services

Develop new competencies

Advantages of Going Global MNEs pursue a global strategy to develop new competencies Attractive for firms that base their competitive advantage on a differentiation strategy. Making foreign direct investments to be part of communities of learning which are often contained in specific geographic regions. Communities of learning - contained in specific regions Location economies

Adverse Selection

Agency Theory Occurs when information asymmetry increases the likelihood of selecting inferior alternatives. Principal agent relationships, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job. Common during the recruiting process. Creates an incentive for opportunistic employees to free ride on the efforts of others

Moral Hazard

Agency Theory Situation in which information asymmetry increases the incentive of one party to take undue risks of shirk other responsibilities because the costs accrue to the other party. Costs of default are rolled over to society. Knowing that there is a high probability of being bailed out (too big to fail) increases moral hazard. Any profits remain private while losses become public. Principal agent relationship - difficult of the principal to ascertain whether the agent has really put forth a best effort. Agent is able to do the work but may decide not to do so. To overcome, firms put several governance mechanisms in place.

Information Asymmetry

Agents are generally better informed than the principals. Breed on the job consumption, perquisites, and excessive compensation.

Entrepreneurs

Agents who introduce change into competitive system innovate by commercializing ideas and inventions. They seek out or create new business opportunities and then assemble the resources necessary to exploit them. Drive innovation need just as much skill, commitment, and daring as the inventors who are responsible for the process of invention. Succesful Entrepreneurs: Reed Hastings Jeff Bezos Oprah Winfrey Elon Musk

Business Ethics

Agreed upon code of conduct in business, based on societal norms Lay the foundation and provide training for behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society. Differ to some degree in different cultures around the globe. Fairness, honesty, and reciprocity are universal norms, many of these have been codified into law. Staying within the law is a minimum acceptable standard. Can be legal, but ethicaly questionable

Standard

Agreed-upon solution about a common set of engineering features and design choices in growth stage Emerge bottom up through competition in the market place Imposed top down by government or other standard setting agencies

Globalization 1.0 1900-1941

All important business functions were located in their home country. Only sales and distribution operations took place overseas - essentially exporting goods to other markets. Firms procured raw materials from overseas Strategy formulation and implementation, knowledge flows, followed a one path way - domestic headquarters to international outposts. Saw the blossoming of MNEs, ended with US entry into WW2

Transaction costs

All internal and external costs associated with an economic exchange, whether within a firm or in markets

Interorganizational Trust

Alliance design and governance Critical dimension of alliance success. All contracts are necessarily incomplete, trust between the alliance partners plays an important role for effective post formation alliance management.

Taper Integration

Alternatives to Vertical Integration A way of orchestrating value activities in which a firm is backwardly integrated but 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.

Strategic Outsourcing

Alternatives to Vertical Integration Moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. Reduces its level of vertical integration. Rather than developing their own human resource management systems, firms outsource these non core activites which can leverage their deep competencies and produce scale efects

Interest Rates

Amount that creditors are paid for use of their money and amount that debtors pay for that use, adjusted for inflation. Low interest rates have a direct bearing on consumer demand.

Why do firms enter Strategic alliances?

An alliance must promise a positive effect on the firm's economic value creation through increasing value and or lowering costs. - Strengthen competitive position - Enter new markets - Hedge against uncertainty - Access critical complementary assets - Learn new capabilities

Diversification

An increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes. Competes in several different markets simultaneously. Product Diversification Strategy Geographic Diversification Strategy Product - Market Diversification Strategy

Stakeholder Strategy

An integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage. Allows firms to analyze and manage how various external and internal stakeholders interact to jointly create and trade value. Effectively balance the needs of various stakeholders. Needs to ensure that its primary stakeholders

Producer Surplus

Another term for profit; difference between price charged (P) and cost to produce (C), so (P - C).

Strategic Initiative

Any activity a firm pursues to explore and develop new products and processes, new markets, or new ventures. Autonomous actions Serendipity Resource-allocation process (RAP

Serendipity

Any random events, pleasant surprises, and accidental happenstances that can have a profound impact on a firm's strategic initiatives.

Emergent Strategy

Any unplanned strategic initiative bubbling up from the bottom of the organization.

Disruption

Apple and book publishing caused this to Amazon

Exploitation

Applying current knowledge to enhance firm performance in the short term

Organizational Inertia

As firms become established and grow they rely more heavily on formalized business processes and structures. The firm may experience organizational inertia - resistance to changes in the status quo. Tend to favor incremental innovations that reinforce the existing organizational structure and power distribution while avoiding radical innovation that could disturb existing power distribution.

Functional Strucutre

As sales increase, firms generally adopt this. Groups employees into distinct functional areas based on domain expertise. Often correspond to distinct stages in the value chain such as R&D, engineering and manufacturing, and marketing and sales, supporting areas such as human resources, finance, and accounting allows for a higher degree of specialization and deeper domain expertise than a simple structure. Higher specialization also allows for a greater division of labor, linked to higher productivity. Allows for an efficient top down and bottom up communication chain between CEO and functional departments, relies on a relatively flat structure

Death of Distance Hypothesis

Assumption that geographic location alone should not lead to firm level competitive advantage because firms are now more than ever able to source inputs globally

Isolating Mechanisms

Barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy. Barriers to imitation: Better expectations of future resource value Path dependence Casual ambiguity Social complexity Intellectual property (IP) protection

Location Economies

Benefits from locating value chain activities in optimal geographies for a specific activity wherever that may be.

Inside Directors

Board of Directors Generally part of the company's senior management team, chief financial officer (CFO) and chief operating officer (COO). Appointed by shareholders to provide the board with necessary info pertaining to the company's internal workings and performance. Tend to align with the management and the CEO rather than shareholders

Outside Directors

Board of Directors Not employees of the firm. Frequently are senior executives from other firms or full time professionals who are appointed to a board and who serve on several boards simultaneously. More likely to watch out for the interests of shareholders.

Ecological Factors [PESTEL Model]

Broad environmental issues as the natural environment, global warming, and sustainable economic growth. Inextricably linked.

Blue Ocean Strategy

Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs Blue oceans represent untapped market space, creation of additional demand, resulting opportunities for highly profitable growth. Allows to offer a differentiated product. Red oceans represents rivalry among existing firms is cut throat because the market space is crowded and competition is a zero sum game. Products become commodities and competition mainly focused on price. Difficult to implement because it requires the reconciliation of fundamentally different strategic positions - differentiation and low cost - which in turn require distinct internal value chain activities. Strategy gone bad means stuck in the middle leads to inferior performance and ended up in red ocean of cut throat competition

Caveat Emptor

Buyer beware

Power of Buyers [Five Forces Model]

Buyers are the customers. Concerns the pressure an industry's customers can put on the producer's margins in the industry by demanding a lower price or higher product quality. Power of buyers is high when: - Few buyers & each purchases large quantities - Products are standardized or undifferentiated commodities - Buyers face low or no switching costs - Buyers can credibly threaten to backwardly integrate into the industry.

Cultural Distance

CAGE Distance Framework Cultural disparity between the internationally expanding firm's home country and its targeted host country. A firm's decision to enter certain international markets is influenced by cultural differences. Greater cultural distance can increase the cost and uncertainty of conducting business abroad.

Administrative and Political Distance

CAGE Distance Framework Captured in factors such as the absence or presence of: Shared monetary or political associations Political hostilities Weak or strong (the strength of) legal and financial institutions.

Geographic Distance

CAGE Distance Framework Costs to cross-border trade rise with geographic distance. It doesn't simply capture how far two countries are from each other but also includes additional attributes such as the country's physical size, within country distances to its borders, topography, time zones, contiguous or waterways and ocean Infrastructure, road, power, and telecommunications networks Relevant when trading products with low value to weight ratios such as steel, cement, or other bulk products, fragile and perishable products, glass or fresh meats and fruits

Economic Distance

CAGE Distance Framework Wealth per capita income of consumers is the most important determinant of economic distance. Wealthy countries engage in relatively more cross border trade than poorer ones. Rich countries tend to trade with other rich countries; poor countries also trade more with rich countries than with other poor countries Companies from wealthy countries benefit in cross border trade with over wealth countries when their competitive advantage is based on economies of experience, scale, scope, and standardization.

What do strategic leaders do?

CEOs spend on average: 67% meetings 13% working alone 7% email 6% phone calls 5% business meals 2% public events

Generic Business Strategy

Can be used by any organization (manufacturing or service, large or small, for profit or nonproft, public or private) Value creation and cost tend to be positively correlated, important trade offs exist between value creation and low cost. A Business strategy is more likely to lead to a competitive advantage if it allows firms to either: - Perform similar activities differently -Perform different activities than their rivals. Must consider Scope of Competition Includes: Differentiation Strategy Focused Differentiation Strategy Cost-Leadership Strategy Focused cost-leadership Strategy

Technological Factors [PESTEL Model]

Capture the application of knowledge to create new process and products. Major innovations: lean production, Six Sigma quality, and biotechnology.

Sociocultural Factors [PESTEL Model]

Captures a society's cultures, norms, and values. Managers need to closely monitor trends to consider firm strategy. Demographic trends fall into this factor and take into consideration of age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class

Partner Compatibility

Captures the cultural fit between firms

Forward Vertical Integration

Changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.

Backward Vertical Integration

Changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain.

Strategy Formulation

Choice of strategy in terms of where and how to compete

Strategic Trade-offs

Choices between a cost or value position. The choices is necessary because higher value creation tends to generate higher cost. Must keep cost in check so as not to erode the firm's economic value creation and profit margin. A business strategy is more likely to lead to a competitive advantage if a firm has a clear strategic profile either a differentiator or a low-cost leader.

Short term contracts

Closest to "buy" on make or buy scale A firm sends out request for proposals (RFPs) to several companies which initiates competitive bidding to be awarded with a short duration, generally less than a year. No incentive to make transaction specific investments

National Culture

Collective mental and emotional "programming of the mind" that differentiates human groups. Culture is made up of a collection of norms and mores, beliefs and values. Culture captures the often unwritten and implicitly understood rules of the game, increases the liability of foreignness.

Dynamic Nature of Business Models

Combination Evolution Disruption Response to Disruption Legal Conflicts

Triple Bottom LIne

Combination of economic social and ecological concerns or profits people and planet that can lead to sustainable strategy. Profits - economic dimension captures the necessity of businesses to be profitable and survive People - social dimension emphasizes the people aspect whole person at work Planet - ecological dimension relationship between business and natural environment. The three areas lead to: sustainable strategy - a strategy that can be pursued over time without detrimental effects on people or the planet. Achieving work life balance and human stability To ensure a firm is implementing the approach successfully, managers must audit the company's results in fulfilling its social and ecological obligatons

Realized Strategy

Combination of intended and emergent strategy

Combination

Combine two models i.e razor-razorblade and subscription model like Verizon or AT&T

Economic Arbitrage

Companies from wealthy countries trade with companies from poor countries to benefit from this

Born Global

Companies that have their founders start with them with the intent of running global operations. Internet companies

Groupon

Competitive advantage was temporary since its resource was not rare or costly to imitate

First-mover Advantages

Competitive benefits that accrue to the successful innovator Benefit from network effects May hold important intellectual property such as critical patents. They may also be able to lock in key suppliers as well as customers through increasing switching costs.

The Strategic Group Model shows the following insights

Competitive rivalry is strongest between firms that are within the same strategic group The external environment affects strategic groups differently The five competitive forces affect strategic groups differently Some strategic groups are more profitable than others.

Return on Revenue (ROR)

Component of ROIC Indicates how much of the firm's sales is converted into profits. Three additional financial ratios: 1) (Cost of goods sold / revenue) indicates how efficiently a company can produce a good. 2) (R&D expense / revenue) indicates how much of each dollar that the firm earns in sales is invested in conduct research and development. A higher percentage is generally an indicator of stronger focus on innovation to improve current product and services to come up with new ones. 3) (Selling general & administrative expense / revenue) how much of each dollar that the fir earns in sales is invested in SG&A expenses. Is an indicator of the firm's focus on marketing and sales to promote its products and services.

Working Capital Turnover

Component of ROIC Measure of how effectively capital is being used to generate revenue. Dig deeper to find the underlying drivers in working capital turnover which enables managers to uncover which levers to pull in order to improve firm financial performance. Managers break down working capital turnover into other ratios included: Fixed asset turnover Inventory turnover Receivables turnover Payables turnover

Level-5 leadership pyramid

Conceptual framework of leadership progression with 5 levels 5) Executive - willpower & humility 4) Effective leader - does the right things 3) Competent Manager - Does things rights to accomplish goals and objectives 2) Contributing Team member - work with others effectively team objectives 1) Highly capable individual - talents, knowledge & skills

Build-to-borrow-or-buy Framework

Conceptual model that aids firms in deciding whether to: - Pursue internal development (build) - Enter a contractual arrangement or strategic alliance (borrow) - Acquire new resources, capabilities, and competencies (buy) Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage. resources = capabilities and competencies Starting point is the firm's identification of a strategic resource gap that will impede future growth. It is strategic because closing this gap is likely to lead to competitive advantage. Relevancy Tradability Closeness Integration

Crossing the chasm framework

Conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group. Technology Enthusiasts Early Adopters (The Chasm) Early Majority Late Majority Laggards

Markets and Technology Framework

Conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions Horizontal axis we ask whether the innovation builds on existing technologies or creates a new one Vertical axis we ask whether the innovations emerge: incremental, radical, architectural, and disruptive innovations.

Strategy Implementation

Concerns the organization, coordination, and integration of how work gets done. Execution of strategy: Corporate strategy - relating to where to compete in industry, markets and geography Business strategy: how to compete. Cost leadership, differentiation, or value innovation. Functional strategy: how to implement ta chosen strategy

Partner Commitment

Concerns the willingness to make available necessary resources and to accept short-term sacrifices to ensure long-term rewards.

Multidivisional Structure (M-Form)

Consists of several distinct strategic business units (SBUs) each with its own profit and loss responsibility. Each SBU is operated more or less independently from one another.

Product-oriented vision [Values]

Constrain customer-oriented vision. Defines a business in terms of a good or service provided. Tend to force managers to take a more myopic view of the competitive landscape. Constrains the ability to adapt to changing environments

Globalization Hypothesis

Consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous Based primarily on cost reduction. Lower cost is a key weapon. MNEs attempt to reap significant cost reductions by leveraging economies of scale and by managing global supply chains to access that lowest cost input factors

Co-opetition

Cooperation by competitors to achieve a strategic objective.

Artifacts

Corporate culture finds its expression through this. IT includes elements such as design and layout of physical space, symbols, vocabulary, what stories are told, what events are celebrated and highlighted, and how they are celebrated.

Unrelated Diversification Strategy

Corporate strategy in which a firm derives less than 70 percent of its revenues from a single business and there are few, if any, linkages among its businesses. Few share, if any, competencies Unrelated diversification is advantageous in emerging economies

Related Diversification Strategy

Corporate strategy in which a firm derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity. Benefit economies of scope: Firms can pool and share resources as well as leverage competencies across different business lines. Related Constrained Diversification Related Linked Diversification

Geographic Diversification Strategy

Corporate strategy in which a firm is active in several different countries.

Product—Market Diversification Strategy

Corporate strategy in which a firm is active in several different product markets and several different countries.

Product Diversification Strategy

Corporate strategy in which a firm is active in several different product markets.

Cost of Input Factors

Cost Driver Access to lower cost input factors such as: Raw materials Capital Labor IT services.

Economies of Scale

Cost Driver Firms with greater market share might be in a position to reap economies of scale, decreases in cost per unit as output increases. Bigger is better Allows firms to: Spread their fixed costs over a larger output Employe specialized systems and equipment Take advantage of certain physical properties

Learning Curve

Cost Driver God down as it takes less and less time to produce the same output as we learn how to be more efficient - learning by doing drives down cost. The steeper, the more learning has taken place. As cumulative output increases, firms move down the learning curve reaching lower per unit costs. Differences in timing Differences in complexity

Experience Curve

Cost driver Change the underlying technology while holding cumulative output constant.

Cost Drivers

Cost of Input Factors Economies of Scale Learning-curve effects Experience-curve effects

Strategic Commitments

Costly, long-term oriented and difficult to reverse.

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 the economic exchange within a hierarchy; also called administrative costs

Goal of Cost Leadership Strategy

Create a competitive advantage by reducing the firm's cost below that of competitors while offering acceptable value. Cost leader sells a no frills standardized product or service to the mainstream customer. Managers must create a functional structure that contains the organizational elements of a mechanistic structure - one that is centralized, well defined lines of authority up and down the hierarchy. Functional strategy allows the cost leader to nurture and constantly upgrade necessary core competencies in manufacturing and logistics.

Differentiation Parity

Creates the same value Hard to achieve because value creation tends to go along with higher costs.

Strategic Positioning

Creating superior value while containing the cost to create it. Managers stake out a unique position with an industry that allows the firm to provide value to customers while controlling costs. The greater the difference between value creation and cost the greater the firm's economic contribution and likely to gan competitive advantage. Requires trade-offs

Board Independence

Critical to effectively fulfilling a board's governance responsibilities. Board members are directly responsible to shareholders, they have an incentive to ensure that shareholders' interests are pursued. If not, they can experience a loss in reputation or can be removed outright.

External Stakeholders

Customers Suppliers Alliance Partners Creditors Unions Communities Governments Media

Stakeholder Impact Analysis

Decision tool which managers can recognize, prioritize, and address the needs of different stakeholders, enabling the firm to achieve competitive advantage while acting as a good corporate citizen. Three Important attributes: Power Legitimacy Urgency 5 Steps.

Consolidate

Decline Stage Buying rivals, strong position, approaching monopolistic market power, albeit in declining industry.

Exit

Decline Stage By bankruptcy or liquidation.

Maintain

Decline Stage Continuing to support to support marketing efforts at a given level

Harvest

Decline Stage firm reduces investment in product support and allocates only a minimum of human and other rescues.

Differentiation Strategy: Benefits and Risks

Defined by establishing a strategic position that crates higher perceived value while controlling costs. Well executed = reduces rivalry among competitors Successful = based on unique or specialized features of the product, effective marketing campaign, or intangible resources such as a reputation for innovation, quality, and customer service. Threat of entry is reduced Providing uniqueness don't rise customer's willingness to pay

Cost-Leadership Strategy: Benefits and Risks

Defined by obtaining the lowest cost position in the industry while offering acceptable value. Protected from other competitors because of having the lowest cost. Price war = the low cost leader will be the last firm standing. Isolated from powerful suppliers New entry pose a risk Relies on: How well the strategy leverages the firm's internal strengths while mitigating its weaknesses. How well it helps the firm exploit external opportunities while avoiding external threats.

Industry Value Chain

Depiction of the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing.

Strategic Leadership

Describes the executives' successful use of power and influence to direct the activities of others when pursuing an organization's goals.

Currency Exchange Rates

Determines how many dollars one must pay for a unit of foreign currency.

Organizational Structure

Determines how the work of individuals and teams are orchestrated and how resources are distributed. An organizational structure defines how jobs and tasks are divided and integrated, delineates the reporting relationships up and down the hierarchy, defines formal communication channels, and prescribes how individual and teams coordinate their work efforts. Key building blocks: Specialization Formalization Centralization Hierarchy

Porter's Diamond Framework

Diamond of competitive advantage Factor Conditions Demand Conditions Competitive intensity in focal industry Related and supporting industries/complementors

Consumer Surplus

Difference between value of consumer attaches to a good or service (V) and what they paid for it (P), so (V - P)

How do MNEs enter foreign markets?

Different options managers have when entering foreign markets along with required investments necessary and the control they can exert. Exporting - producing goods in one country to sell in another, oldest forms of internationalization (globalization 1.0) often used to test whether a foreign market is ready for a firm's products.

Disadvantages of the Matrix Structure

Difficult to implement: two layers of organizational structure creates significant organizational complexity and increases administrative costs. Reporting structures are often not clear. Employees can have trouble reconciling goals presented by their two (or more supervisors agent relationships make performance appraisals more difficult.

Industry growth

Directly affects the intensity of rivalry among competitors. High growth = consumer demand rises, and price competition decreases.

Liability of Foreignness

Disadvantages of Going Global Additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances.

Loss of Reputation

Disadvantages of Going Global Most valuable resources that a firm may posses is its reputation. It's reputation can have several dimensions, including a reputation for innovation, customer service, or brand reputation. Globalization a supply chain can have unintended side effects and can lad to a loss of reputation and diminish the MNEs competitiveness. Considerable risk and cost for doing business abroad. Some host governments are either unwilling or unable to enforce regulation and safety codes, MNEs need t rise to the challenge.

Loss of Intellectual property

Disadvantages of Going Global There is an issue of protecting intellectual property in foreign markets Intellectual property exposure Large scale copyright infringement of: Software movie music

Going Global: Why?

Doing so enhances its competitive advantage and that the benefits of globalization exceed the costs. Firms expand beyond their domestic borders if they can increase their economic value creation (C-V) and enhance competitive advantage

Crossing the Chasm

Each stage of the industry life cycle is dominated by a different customer group. Different customer groups with distinctly different preferences enter the industry Only companies that recognize these differences are able to apply the appropriate competencies at each stage.

Economic Value Creations

Economic Value Created - difference between value and cost (V - C) Reservation price Total perceived consumer benefits and economic value created Producer surplus Consumer Surplus The relationship between consumer and producer surplus is the reason trade happens, both transacting parties capture some of the overall value created. Opportunity Costs

Spreading fixed costs over larger output

Economies of Scale Larger output allows firms to spread their fixed costs over more units. That is why gains in market share are often critical to drive down per unit cost.

Employment Specialized Systems and Equipment

Economies of Scale Larger output also allows firms to invest in more specialized systems and equipment, such as enterprise resource planning (ERP) software or manufacturing robots.

Taking advantage of certain physical properties

Economies of scale also occur because of certain physical properties. Cube-Square rule Minimum efficient Scale

Value Innovation - Lower Costs

Eliminate. Which of the factors that the industry takes for granted should be eliminated? Reduce. Which of the factors should be reduced well below the industry's standard?

Strong culture

Emerge when the company's core values are widely shared among the firm's employees and when the norms have been internalized

Internal Stakeholders

Employees Stockholders Board Members

Ambidextrous Organization

Enables managers to balance and harness different activities in trade off situations. Trade offs to be addressed involve the simultaneous pursuit of low cost and differentiation strategies. Flexible and lean manufacturing systems, total quality management, just in time inventory management, six sigma. Decentralized decision making at the level of the individual customer. Managers must constantly look for ways to change them in order to resolve trade offs across internal value chain activities

Globalization 2.0 1945-2000

End of WW2 Meet the needs that went unfulfilled during the war years but also to reconstruct the damage from the war. MNEs created smaller self contained copies of themselves with all business functions intact Required significant amount of foreign direct investment. It was costly to duplicated overseas, doing so did allow for greater local responsiveness to country specific circumstances. Western European countries Japan Australia

Multinational Enterprise (MNE)

Engine behind globalization A company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries. By making investments in value chain activities abroad, MNEs engage in foreign direct investment MNEs need an effective global strategy Disproportionately positive impact on the US economy

Interfirm Trust

Entails the expectation that each alliance partner will behave in good faith and develop norms of reciprocity and fairness. Helps ensures the relationship survives and thereby increases the possibility of meeting the intended goals of the alliance. Important for fast decision making.

Laggards

Entering in declining stage Adopt a new product only if it is absolutely necessary.

Late Majority

Entering the market in maturity stage. Large customer segment Lion's share of the market potential Demand drives most industry growth and firm profitability. Not confident in their ability to master new technology. Prefer to wait until standards have emerged.

Capital Requirements

Entry Barrier "Price of entry ticket". How much capital is required to compete in this industry and which companies are willing and able to make such investments.

Advantages of size

Entry Barrier Based on brand loyalty, proprietary technology, preferential access to raw materials and distribution channels, favorable geographic locations, and cumulative learning and experience effects.

Economies of Scale

Entry Barrier Cost advantages that accrue to firms with larger output because they can spread fixed costs over more units, employe technology more efficiently ,benefit from a more specialized division of labor, and demand better terms from their suppliers. (Factors can drive down the cost per unit

Customer Switching Costs

Entry Barrier Incurred by moving one supplier to another. Changing vendors may require the buyer to alter product specifications, retrain employees, and modify existing processes. Onetime sunk costs

Network Effects

Entry Barrier Positive effect that one user of a product or service has on the value of that product or service for other users. Threat of potential entry is reduced when network effects are present.

Credible threat of retaliation

Entry Barrier Potential new entrants must anticipate how incumbent firms will react. Credible threat of retaliation will deter entry.

Government Policy

Entry Barrier Restrict or prevent new entrants.

Corporate Venture Capital (CVC)

Equity Alliances Equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances. Estimated to be in the double digit billion dollar range each year Creates real options in terms of gaining access to new and potentially disruptive technologies.

Tactic Knowledge

Equity Alliances Knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task. Only acquired through actively participating in the process.

Organizational Core Values

Ethical standards and norms that govern the behavior of individuals within a firm or organization Strong ethical function have 2 important functions: 1) Form a solid foundation on which a firm can built its vision and mission and lay groundwork for long term success 2) Values serve as the guardrails put in place to keep the company on track when pursuing its vision and mission on competitive advantage.

CEO pay and firm performance

Executive Compensation 2/3 of CEO pay is linked to firm performance. Pay and performance is a positive relationship, but the link is weak at best.

Stock Options

Executive Compensation Based on agency theory and gives the recipient the right, but not obligation, to buy a company's stock at a predetermined price sometime in the future. If the company's share price rises above the negotiated strike price, the executive stands to reap significant gains.

Absolute size of pay package

Executive Compensation Ratio of CEO to average employee in US is 300 to 1

Other Governance Mechanisms

Executive Compensation Market for Corporate Control Financial statement auditors, government regulators, and industry analysts

Strategic leadership

Executives' use of power and influence to direct the activities of others when pursuing an organization's goals

Functional Strategy Disadvantages

Facilitates rich and extensive communication between members of the same department. Lacks effective communication channels across departments. lack of links between different functions, R&D managers often do not communicate directly with marketing managers. To overcome, a firm can set up cross functional teams Second drawback is that it cannot effectively address a higher level of diversification which often stems from further growth. This is the stage at which firms find it effective to evolve and adopt a multidivisional or matrix structure

Flat Structure

Few levels of hierarchy between CEO and frontline employees

Absorptive Capacity

Firm's ability to understand external technology developments, evaluate them, and integrate them into current products or create new ones.

Foreign Direct Investment

Firm's investments in value chain activities abroad.

Inertia

Firm's resistance to change the status quo, can set the stage for a firm's subsequent failure.

Strengthen Competitive Position

Firms can use strategic alliances to change the industry structure in their favor. Firms frequently use strategic alliances when competing in so called battles for industry standards.

Learn New Capabilities

Firms enter strategic alliances because they are motivated by the desire to learn new capabilities from their partners. Alliance formation is frequently motivated by leveraging economies of scale, scope, specialization, and learning Co-opetition Learning Races

Combining Imitation and Substitution

Firms in some instances are able to combine direct imitation and substitution when attempting to mitigate the competitive advantage of a rival.

Enter New Markets

Firms may use strategic alliances to enter new markets, either in terms of products and services or geography. Some governments may require that foreign firms have a local joint venture before doing business in their countries. Cross boarder strategic alliances have both benefits and risks

Cost Leader

Focuses its attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer lower prices to its customers. They attempt to optimize all of its value chain activities to achieve a low-cost position.

Value Innovation

For a ocean strategy to succeed, mangers must resolve trade offs between low cost and differentiation. Aligning innovation with total perceived consumer benefits, price and cost (economic value creation). Successful innovation makes competition irrelevant to providing a leap in value creation, opening a new and uncontested market spaces. Requires that a firm's strategic moves lower its costs and at the same increase the perceived value for buyers.

Core Rigidity

Former core competency that turned into a liability because the firm failed to hone refine and upgrade the competency as the environment changed. Over time the original core competency is no longer a good fit with the external environment and turns from an asset to a liability. This is the reason for reinvesting honing and upgrading resources and capabilities are so crucial to sustaining any competitive advantages.

Perfect Competition

Fragmented Many small firms Commodity product ease of entry (low entry barriers) little or no ability for each individual firm to raise its prices.

Integration responsiveness framework

Framework juxtaposes the opposing pressures for cost reductions and local responsiveness to derive four different strategic positions to gain and sustain competitive advantage when competing globally International Strategy Multidomestic Strategy Global standardization Strategy Transnational Strategy

SWOT Analysis

Framework that allows managers to synthesize insights obtained from an internal analysis of company's strengths and weaknesses with those external opportunities and threats to derive strategic implications *note internal: strength and weaknesses external: opportunities and threats (can be captured by PESTEL) Strengths Opportunities - to derive offensive alternatives by using an internal strength in order to exploit an external opportunity. Strength Threat - use an internal strength to minimize the effect of an external threat Weakness Opportunities - shore up an internal weakness to improve its ability to take advantage of an external opportunity. Weaknesses Threats- to derive defensive alternatives by eliminating or minimizing an internal weakness in order to mitigate an external threat.

Evolution

Freemium can be seen as so.

Types of Vertical Integration

Fully Vertical Integrated: All activities are conducted within the boundaries of the firm Not all industry value chain stages are equally profitable

Ecomagination

GE's strategic initiative to provide cleaner and more efficient sources of energy, provide abundant sources of clean water anywhere in the world and reduce emissions. Solve the trade off between increasing value creation and lowering costs. Create value for society by reducing emissions and lowering energy consumption.

Simple Structure

Generally used by small firms with low organizational complexity. The founders tend to make all the important strategic decisions and run the day to day operations. Simple structures are flat hierarchies operated in a decentralized fashion. Low degree of formalization and specialization. Neither professional managers nor sophisticated systems are in place, often leads to an overload for the founder and/or CEO when the firms experience growth.

Differentiation Strategy

Generic business strategy that seeks to create 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, allowing the firm to charge higher prices to its customers. Increase perceived value of goods and services so consumers are willing to pay that higher price. Firms that successfully differentiate their products enjoy a competitive advantage. Generally associated with premium pricing When a firm is able to offer a differentiated product or service and can control its costs at the same time it is able to gain market share from other firms in the industry by charging a similar price but offering more perceived value. Unique product features, service, and new product launches. Value drivers: Product features Customer Service Complements

Response to Disruption

Give leverage

Business-Level Strategy

Goal-oriented actions managers take in their quest for competitive advantage when competing in a single product market. Broad questions: "How should we compete?" Managers must answer: Who - which customer segments will we serve? What customer needs, wishes, and desires will we satisfy? Why do we want to satisfy them? How will we satisfy our customers' needs?

Equity Alliances

Governing Strategic Alliances At least one partner takes partial ownership in the other. They are less common because they often require larger investments. Based on partial ownership rather than contracts, used to signal stronger commitments Tactic Knowledge Corporate Venture Capital (CVC) Partners frequently exchange personnel to make the acquisition of tactic knowledge possible. Downside: amount of investment that can be involved as well as a possible lack of flexibility and speed in putting together and reaping benefits from the partnership.

Non Equity Alliances

Governing Strategic Alliances Partnership based on contracts between firms, most common. Firms tend to share Explicit Knowledge Vertical strategic alliances: Supply agreements Distribution agreements Licensing agreements Contractural nature, temporary flexible easy to initiate and terminate. sometimes produce weak ties between the alliance partners which can result in a lack of trust and commitment.

Joint Ventures

Governing Strategic Alliances Standalone organization created and jointly owned by two or more parent companies. Contribute equity, they are making a long term commitment. Exchange of both explicit and tacit knowledge through interaction of personnel is typical. Strong ties, trust and commitment Can entail long negotiations and significant investments. If it doesn't work out as expected, it can be costly. Knowledge shared with the new partner could be misappropriated by opportunistic behavior. any rewards must be shared between partners. A country may require to form a joint venture and provide knowledge and advanced technology in exchange for access to the market

Strategy Canvas

Graphical depiction of a company's relative performance vis a vis its competitors across the industry's key success factors.

Managerial advantages of building a firm into a large organization

Greater Prestige More job security Increased power

Industry

Group of incumbent companies that face more or less the same set of suppliers and buyers.

Levels of Employment

Growth rates directly affect level of employment. As more people search for employment, skilled human capital is more abundant and wages usually fall.

Real options perspective

Hedge against uncertainty Approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time. (Whether to enter biotechnology or not, nanotechnology, semiconductors) At each stage, after new info is revealed, the firm evaluates whether or not to make future investments. A real option which is the right but not the obligation, to continue making investments allows the firm to buy time until sufficient information for a go versus no-go decision is revealed.

Mechanist Organizatoin

High degree of specialization and formalization and by a tall hierarchy that relies on centralized decision making. Allow for standardization and economies of scale, often are used when the firm pursues a cost leadership strategy at the business level

Advantages of Firms of organizing economic activity within markets

High powered incentives Increased flexibility

CEO/Chairperson Duality

Holding both the role of CEO and chairperson of the board, declining somewhat in recent years.

Lower Costs

Horizontal Integration Firms use horizontal integration to lower costs through economies of scale and to enhance their economic value through creation and in turn their performance. Industries with high fixed costs, achieving economies of scale through large output is critical in lowering costs.

Increased Differentiation

Horizontal Integration Help firms strengthen their competitive positions by increasing the differentiation of their product and service offerings

Reduction in competitive intensity

Horizontal Integration Horizontal integration changes the underlying industry structure in favor of the surviving firms. Excess capacity is taken out of the market, and competition tends to decrease with a consequence of horizontal integration, assuming no new entrants. The industry structure becomes more consolidated and potentially more profitable. Favorable affect several five forces: Strengthening bargaining power vis a vis suppliers and buyers, reducing the threat of entry, and reducing rivalry among firms.

Value Curve

Horizontal connection of the points of each value on the strategy canvas that helps strategist diagnose and determine courses of action A strong curve has its focus and divergence and can provide a tagline as to what strategy is being undertaken or should be undertaken. Zigzag indicates lack of effectiveness in its strategic profile.

Closeness

How close do you need to be to our external resource partner? Firms are able to obtain the required resources to fill the strategic gap through more integrated strategic alliances such as equity alliances or joint ventures rather than through outright acquisition. Mergers and acquisitions are most costly, complex, and difficult to reverse strategic option. The firm should always first consider borrowing the necessary resources through strategic alliances before looking at M&A

IBM

How did IBM regain its competitive advantage? through transforming itself multiple times

Mission

How do we accomplish our goals? Description of what an organization actually does - the products and services it plans to provide, and the markets in which it will compete. Strategic Commitments

Span Of Control

How many employees directly report to a manager.

Relevancy

How relevant are the rim's existing internal resources to solving the resource gap? If the firm's internal resources are highly relevant to closing the identified gap, the firm should build itself the new resources through internal development Firms evaluate relevancy by testing whether resources are: 1) Similar to those the firm needs to develop 2) Superior to those of competitors in the targeted area. If both conditions are met, then the firm's internal resources are relevant and the firm should pursue internal development.

Business Stratety

How to compete in a single product market

Business Strategy

How to compete? concerns the question how to compete. Three strategies are available: - cost leadership - differentiation - value innovation Occurs within SBUs (Strategic business units)

Functional Strategy

How to implement business strategy? Concerns the question of how to implement a chosen business strategy.

Tradability

How tradable are the targeted resources that may be available externally? Implies that the firm is able to source the resource externally through a contract that allows for the transfer of ownership or use of the resource. Short term and long term contracts (licensing or franchising) are a way to borrow resources from another company If a resource is highly tradable, it should be borrowed via licensing agreement or other contractual agreements. If not easily tradable then the firm needs to consider either a deeper strategic alliance through an equity alliance or a joint venture or an outright acquisition.

Integration

How well can you integrate the targeted firm, should you determine you need to acquire the resource partner?

Innovation Process

Idea, Invention, Innovation, Imitation Begins with an idea. The idea is presented in terms of abstract concepts or as findings derived from basic research. Basic research is conducted to discover new knowledge and is often published in academic journals. Enhance fundamental understanding of nature without commercial application or benefit in mind. Long run research is transformed into applied research with commercial applications.

Disadvantages of Going Global

If the cost of going global as captured by the following disadvantages exceeds the expected benefits in terms of value added (C>V). If economic value creation is negative, then firms are better off by expanding internationally. - Liability of Foreignness - Loss of Reputation - Loss of Intellectual property

Public Stock Companies

Important institutional arrangement in modern, free market economies. It provides goods and services as well as employment, pays taxes, and increases the standard of living. Implicit contract based on trust between society and the public stock company. Society grants the right to incorporation, but in turn, expects companies to be good citizens by adding value to society. Limited liability for investors Transferability of investor ownership Legal personality Separation of legal ownership and management controls Major contributor to value creation since its inception Contributed to some black swan events

Hedge Against Uncertainty

In dynamic markets, strategic alliances allow firms to limit their exposure to uncertainty in the market. Real options perspective

Separation of legal ownership and management controls

In publicly traded companies the stockholders (principals represented by the board of directors) are the legal owners of the company and they delegate decision making authority to professional managers (the agents)

Dominant Strategic Plan

In the implementation stage, this is an option that most closely matches the current reality and gives real-time feedback

Black Swan Events

Incidents that describe highly improbable but high impact events 1) Demonstrate that managerial actions can effect economic well being of larger numbers of people around the globe 2) Stakeholders example) 2008 global financial crisis

Why firms need to grow

Increase profits Lower costs Increase market power Reduce risk Motivate management

Risks of Vertical Integration

Increasing costs Reducing quality Reducing flexibility Increasing the potential for legal repercussions

Innovation Ecosystem

Incumbent firms tend to be incremental rather than radical is that they become embedded in this. A network of suppliers, buyers, complementors, and so on. NO longer make independent decisions but must consider the ramifications on other parties in their innovation ecosystem.

Oligopoly

Independent Few large firms differentiated products high barriers to entry Some degree of pricing power

Industry life Cycle

Industries tend to follow a predictable one life cycle that include 5 stages that occur in the evolution of an industry over time. Each stage has different strategic implications for competing firms 5 Stages: 1) Introduction 2) Growth 3) Shakeout 4) Maturity 5) Decline Some industries may never go through the entire life cycle, others continually renewed through innovation Things that can change externally can be captured in PESTEL framework on fads in fashion, change in demographics, deregulation

Stuck in the middle

Inferior performance and competitive disadvantage

Radical Innovation

Innovation ;that draws on novel methods or materials, is derived either from an entirely different knowledge base or from recombination of the existing knowledge bases with a new stream of knowledge. Targets markets by using new technoologies

Disruptive Innovation

Innovation that leverages new technologies to attack existing markets from the bottom up. Disruptive force: 1) begins as a low cost solution to an existing problem 2) initially its performance is inferior to the existing technology but its rate of technological improvement over time is faster than the rate of performance increases required by different market segments.

Incremental Innovation

Innovation that squarely builds on an established knowledge base and steadily improves on existing product or service Targets existing markets using technology

Reverse Innovation (frugal innovation)

Innovation that was developed for emerging economies before being introduced in developed economies.

Intangibles and the value of firms

Intangible assets not captured in accounting data have become more important in firm's stock market valuations over the last decades. Key financial ratios based on accounting data give us an important tool with which to assess competitive advantage. They help us measure relative profitability which is useful when comparing firms of different sizes over time.

Global standardization Strategy

Integration responsiveness framework 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. Globalization 3.0 Strive for the lowest cost position possible Their business strategy tends to be cost leadership, to be price competitive, MNE must maintain a minimum efficient scale.

Multidomestic Strategy

Integration responsiveness framework Strategy pursued by MNEs that attempts to maximize local responsiveness with the intent that local consumers will perceive them to be domestic companies Globalization 2.0 Common in consumer products and food industries Exchange rate exposure Tacit knowledge risk of appropriation

International Strategy

Integration responsiveness framework Strategy that involves leveraging home based core competencies by selling the same products or services in both domestic and foreign markets Oldest type of global strategies (Globalization 1.0) Successfully by MNEs with relatively large domestic markets with strong reputations and brand names. local responsiveness cost reductions

Transnational Strategy

Integration responsiveness framework Think globally, act locally Strategy that attempts to combine the benefits of a localization strategy (high local responsiveness) with those of a global standardization strategy (lowest cost position attainable) Generally used by MNEs to pursue a blue ocean strategy at the business level by attempting to reconcile and or service differentiations at low cost

Rivalry Among Existing Competitors [Five Forces Model]

Intensity with which companies within the same industry jockey for market share and profitability. -Competitive industry structure - Industry growth - Strategic commitments - Exit barriers

Value Chain

Internal activities a firm engages in when transforming inputs into outputs Each activity adds incremental value and incremental costs

Strategic Control and Reward System

Internal governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees). Allow managers to specify goals, measure progress, and provide performance feedback

Social Complexity

Isolating Mechanism A situation in which different social and business systems interact with one another No casual ambiguity as to how the individual systems such as supply chain or new product development work in isolation. Otten managed through standardized business processes such as Six Stigma or ISO 9000. Social complexity emerges when two or more systems are combined. Neither direct imitation or substitution is a valid approach. Create too many possible permutations for a system to be understood with accuracy. Rare costly to imitate resource that the firm is organized to exploit. Social and business systems that work in one firm may be hard to imitate due to complex interactions between these systems

Casual ambiguity

Isolating Mechanism A situation in which the cause and effect of a phenomenon are not readily apparent To formulate and implement a strategy that enhances a firm's chances of gaining and sustaining a competitive advantage managers need to have a hypothesis or theory of how to compete. Managers need to have some kind of understanding about what causes superior or inferior performance. Understanding cause and effect of a strategy to help managers avoid casual ambiguity

Path Dependence

Isolating Mechanism A situation in which the options one faces in the current situation are limited by decisions made in the past. Strategic decisions generate long-term consequences due to path dependence and time-compression diseconomies; they are not easily reversible. A competitor cannot imitate or create core competences quickly. Suggests sometimes even random events may have a large impact on an outcome

Intellectual Property (IP) Protection

Isolating Mechanism Critical intangible resource that can provide a strong isolating mechanism and thus help to sustain a competitive advantage. Five major forms: patents, designs, copyrights, trademarks and trade secrets Prevent others from copying legally protected products or services. Can make direct imitation difficult or illegal. Doesn't last forever, once protection has been expired the invention can be used by others.

Better expectations of future resource value

Isolating Mechanism Firms can acquire sometimes resources at a low cost which lays the foundation for a competitive advantage later when expectations about the future of the resource turn out to be more accurate. Although luck can play a role in gaining an initial competitive advantage, it is not a basis for sustainable competitive advantage

Strategic Position

Its strategic profile based on value creation and cost in a specific product market. A firm attempts to stake out a valuable and unique position that meets customer needs while simultaneously creating as large a gap as possible between the value the firm's product creates and the cost required to produce it. Higher value creation tends to be higher cost.

Explicit Knowledge

Knowledge that can be codified; concerns knowing about a process or product. Patents user manuals fact sheets scientific publications Concerns the notion of knowing about a certain process or product

Disadvantages of M-Form (Multidivisional structure)

Known problems of increasing bureaucracy, red tape, and duplication of efforts.

Economic Factors [PESTEL Model]

Largely macroeconomic, affecting economy-wide phenomena Need to consider: growth rates, levels of employment, interest rate, price stability, and currency exchange rate. Rarely static, need to assess their effects on firm performance

Differences in Complexity

Learning Curve Effects from economies of scale can be quite significant while learning effects are minimal. Some professionals learning curve can be substantial while economies of scale are minimal.

Differences in timing

Learning Curve Occur over time as output accumulates while economies of scale are captured at one point in time when output increases. Learning can decline or flatten, there are no diseconomies of learning.

Ficuiary Responsibility

Legal duty to act solely in another party's interests - toward shareholders because of the trust placed in him or her. Prior to shareholders' meeting the board slate of nominees, although they can directly nominate director candidates. large institutional investors support their favored candidates through proxy votes.

Four Options to Formulate Corporate Strategy vis Core Competencies

Leverage existing core competencies to improve current market position Build new 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

Franchising

Long term contract Contract in which a franchisor grants a franchisee the right to use the franchisor's trademark and business processes to offer goods and services that carry the franchisor's brand name

Licensing

Long term contract Contracting in the manufacturing sector that enables firms to commercialize intellectual property

Credible Commitment

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

Organic Organizatoins

Low degree of specialization and formalization, flat organizational structure, and decentralized decision making. Tend to be correlated with a fluid and flexible information flow among employees in both horizontal and vertical directions; faster decision making and higher employee motivation, retention, satisfaction, and creativity. Typically exhibit a higher rate of entrepreneurial behaviors and innovation. Allow firms to foster R&D and or marketing as a core competency. Firms that pursue a differentiation strategy at the business level frequently have an organic structure. Depends on context

Benefits of Vertical Integration

Lowering costs Improving quality Facilitating scheduling and planning Facilitating investments and specialized assets Securing critical supplies and distribution channels Allows firms to increase operational efficiencies through improved coordination and the fine tuning of adjacent value chain activities

Superior acquisition and integration capability

M&A and Competitive Advantage Acquisition and integration capabilities are not equally distributed across firms. On average, destroy rather than create shareholder value, it does not exclude the possibility that some firms are consistently able to identify, acquire, and integrate target companies to strengthen their competitive postions.

Desire to overcome competitive disadvantage

M&A and Competitive Advantage Managers are motived not by competitive advantage in some instances. Benefit from economies of scale

Principal agent problems

M&A and Competitive Advantage Managers, as agents, are supposed to act in the best interest of the principals, the shareholders. Managers may have incentives to grow their firms through acquisitions - not for anticipated shareholder value appreciation. Higher compensation, job security Managerial Hubris

Unrelated Diversification

M-form is the preferred organizational structure. Often decentralize decision making. Allows general managers to respond to specific circumstances and leads to a low level of integration at corporate headquarters

Related diversification

M-form is the preferred organizational structure. tend to concentrate decision making at the top of the organization, high level of integration. Also helps corporate headquarters leverage and transfer across different SBUs the core competencies that form the basis for a related diversification

Global standardization

MNE attempts to reap significant economies of scale as well as location economies by pursuing a global division of labor based on whatever best of class capabilities reside at the lowest cost. MNE pursues a cost leadership strategy Optimal organizational structure is a multidivisional structure Focus on driving down costs due to consolidation of activities across different geographic area

CAGE Distance Framework

MNEs need to consider relative distance by using this model A decision framework based on the relative distance between home and a foreign target country along four dimensions: Cultural Distance Administrative and Political Distance Geographic Distance Economic Distance Most costs and risk involved in expanding are created by distances.

Polycentric Innovation Strategy

MNEs now draw on multiple, equally important innovation hubs throughout the world characteristic of Globalization 3.0

Globalization 3.0 21st Century

MNEs that had been the vanguard of globalization have since become global collaboration networks. Now freely locate business functions anywhere in the world based on optimal mix of costs, capabilities, and PESTEL factors.

Early Majority

Main consideration is a sense practicality. Pragmatists and most concerned with the question of what the new technology can do for them. Weigh the benefits and costs carefully. Aware that many hyped new products introductions will fade away

Shared Value Creation Framework

Managers maintain a dual focus on shareholder value creation and value creation for society. Defined by economic and societal needs. Externalities such as pollution, wasted energy, and costly accidents actually create internal costs, lost in reputation if not directly on the bottom line. 1) Expand the customer base to bring nonconsumers 2) Expand traditional internal value chains to include more nontraditional partners (nongovernmental organizations, NGOs) 33) Focus on creation new regional clusters

Monopolistic Competition

Many firms differentiated product some obstacles to entry (medium entry barriers) ability to raise prices for unique product

State of Globalization

Many large firms are more than 50% globalized, half revenues are from outside the home country, the world itself is far less global The world is semi-globalized - many more gains in social welfare and living standards can be had through further globalization if future integration is managed effectively through coordinated efforts by governments.

Tall Structure

Many levels of hierarchy between CEO and frontline employees

Winner take all markets

Many markets where network effects are important become this. Markets where the market leader captures almost all the new market share and is able to extract a significant amount of the value created.

Leveraged Buyout (LBO)

Market for Corporate Control Single investor or group of investors buys with the help of borrowed money (leveraged against in the company's assets, outstanding shares of a publicly traded company in order to take it private. LBO changes the ownership structure of a company from public to private. Expectation is often that the private owners will restructure the company and eventually take it public again through an initial public offering.

Poison Pill

Market for Corporate Control Defensive provisions that kick in should a buyer reach a certain level of share ownership without top management approval. Become rare because they retard an effective function of equity markets.

Corporate Governance

Mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally. Checks and balances and asking the tough questions at the right time. Attempts to address the principal agent problem which can occur any time an agent performs activities on behalf of a principal. Can arise whenever a principal delegates decision making and control over resources to agents with the expectation that they will act in the principal's best interest.

Mergers vs acquisitions

Merger joining of two independent companies Acquisition - the purchase or takeover of a firm

Strategic Management Process

Method put in place by strategic leaders to formulate and implement a strategy, which can lay the foundation for a sustainable competitive advantage. First step is to define a firm's Vision, Mission, and Values. Second, rely on: Strategic Planning Scenario Planning Strategy as Planned emergence.

Risk Capital

Money provided by shareholders in exchange for an equity share in a company; it can't be recovered if the firm goes bankrupt

Mergers&Acquisitions and Competitive Advantage

Most cases, mergers and acquistiioners do not create competitive advantage. Many mergers destroy shareholder value because the anticipated synergies never materialize. If value is created it generally accrues to the shareholders of the firm that was taken over (acquiree), acquirers often pay a premium when buying the target company. Why do we see so many mergers: - Principal agent problems - Desire to overcome competitive disadvantage - Superior acquisition and integration capability

Parent Subsidiary Relationship

Most integrated alternative to performing an activity within one's own corporate family. Corporate family owns the subsidiary and can direct it via command and control.

Process Innovation

New method or technology to produce an existing product may initiate a new and steeper curve. Experience curve on a process innovation. Learning by doing allows a firm to lower its per unit costs by moving down a given learning curve while experience curve effects based on process innovation allow a firm to leapfrog to a steeper learning curve thereby driving down its per unit costs

Product Innovation

New or recombined knowledge embodied in new products jet airplane electric vehicle smartphones wearable computers

Architectural Innovation

New product in which known components based on existing technologies are reconfigured in a novel way to attack new markets. Leveraging existing

Process Innovation

New ways to produce existing products or deliver existing services Made possible through internet, lean manufacturing, Six Sigma, Biotechnology, nanotechnology Must not be high tech to be impactful, like the standardized shipping container Just in time (JIT) operations management

Isolating Mechanisms: How to sustain a competitive advantage

No competitive advantage can be sustained indefinitely. Isolating mechanisms

Licensing agreements

Non Equity Alliances Contractual alliances in which the participants regularly exchange codified knowledge.

Three Governing Strategic Alliances

Non Equity Alliances Equity Alliances Joint Ventures (These 3 lie in the middle of the make or buy continuum)

Not invented here syndrome

Not invented or crated at the firm it cant be good enough there

Exit barriers

Obstacles that determine how easily a firm can leave an industry

Value Creation

Occurs because companies with a good strategy are able to provide products or services to consumers at a price that they can afford while making a profit at the same time *God strategy = value for society Lays the foundation for benefits that successful economies can provide: education, public safety, and health care.

Legal Factors [PESTEL Model]

Official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions.

Costly to Imitate

One of the four VRIO A resource is costly to imitate if firms doesn't possess the resource are unable to develop or buy the resource at a comparable cost. IF the resource in question is valuable, rare, and costly to imitate then it is an internal strength and a core competency. If the firm's competitors fail to duplicate the strategy based on the valuable, rare and costly to imitate resource then the firm can achieve a temporary competitive advantage.

Rare Resource

One of the four VRIO A resource is rare if the number of firms that possess it is less than the number of firms it would require to reach a state of perfect competition. If a resource is common, it will result in perfect competition where no firm is able to maintain a competitive advantage. Valuable but not rare resources can lead to competitive parity at best

Organized capture to value

One of the four VRIO Characteristic of having in place an effective organizational structure, processes and systems to fully exploit the competitive potential of the firm's resources, capabilities and competencies.

Resources are superior to those of competitors in the targeted area.

One requirement of Relevancy Assessed by applying the VRIO framework.

Resources are similar to those the firm needs to develop

One requirement of Relevancy Mangers are often misled because things that might appear similar at the surface are actually quite different deep down. Managers focus on the known (similarities) rather than unknown (differences) Often don't know how the resources needed for the existing and new business opportunity differ.

Industry Effects

One route to competitive advantage is by: Industry Attractiveness - 5 Forces Model for profit potential - Complements - Within industry (Strategic Groups)

Firm Effects

One route to competitive advantage is by: Value position (relative to competitors OR Cost Position (Relative to competitors) Business Strategy (Cost Leadership, Differentiation, Blue Ocean)

Monopoly

Only one, often large fir supplying the market. May offer a unique product and challenges to moving into the industry tend to be high. Considerable pricing power Industry profit tends to be high.

Formalization

Organizational Structure Captures the extent to which employee behavior is steered by explicit and codified rules and procedures. Characterized by detailed written rules and policies of what to do in specific situations Not necessarily negative, necessary to achieve consistent and predictable results.

Specialization

Organizational Structure Describes the degree to which a task is divided into separate jobs, the division of labor. Larger firms tend to have a high degree of specialization; smaller entrepreneurial ventures tend to have a low degree of specialization. Requires a trade-off between breadth and depth of knowledge. While a high degree of the division of labor increases productivity, it can also have unintended side effects such as reduced employee job satisfaction due to repetition of tasks

Centralization

Organizational Structure The degree to which decision making is concentrated at the top of the organization. Often correlates with slow response time and reduced customer satisfaction. - Top down strategic planning takes place in highly centralized organizations - Planned mergence is found in more decentralized organizations

Matrix Structure

Organizational structure that combines the functional structure with the M-Form (multidivisional structure) The firm is organized according to SBUs along a horizontal axis and has a second dimension of organizational structure along a vertical axis. The idea behind this structure is to combine the benefits of the M-form (domain expertise, economies of scale, and efficient processing of information) with those of a functional structure (responsiveness and decentralized focus)

Stakeholders

Organizations groups, and individuals that can affect or be affected by a firm's actions. Have a vested claim or interest in the performance and continued survival of the firm. Withhold participation in the firm's exchange relationship it could negatively affect firm performance.

Financial statement auditors, government regulators, and industry analysts

Other Governance Mechanisms External governance All public companies must file a number of financial statements with SEC, a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities. follow GAAP and be audited by CPAs

Market for Corporate Control

Other Governance Mechanisms Important external corporate governance mechanism. Consists of activist investors who seek to gain control of an underperforming corporation by buying shares of its stock in the open market. Corporate managers strive to protect shareholder value by delivering strong share price performance or putting in place poison pills. Shares fall to a low enough value, the become the target of hostile takeover.

Executive Compensation

Other Governance Mechanisms Internal Board of directors determines executive compensation packages. The board frequently grants stock options. 2 Issues: Absolute size of pay package CEO pay and firm performance

Intended Strategy

Outcome of a rational and structured top-down strategic plan

Sustainable Competitive Advantage

Outperforming competitors or the industry average over a prolonged period of time.

Results only work environment (ROWEs)

Output controls that attempt to tap intrinsic employee motivation which is driven by the employee's interest in and the meaning of the work itself. Extrinsic motivation is driven by external factors such as awards and higher compensation or punishments like demotions and layoffs (carrot and stick approach). Intrinsic motivation is highest when an employee has Autonomy (what to do) Mastery (how to do it) Purpose (why to do it)

Global Strategy

Part of a firm's corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world

Types of Corporate Diversification

Percentage of revenue from the dominant or primary business Relationship of the core competencies across the business units 1) Single Business (more than 95%) 2) Dominant Business (70-95%) 3) Related Diversification (less than 70%) 4) Unrelated diversification: conglomerate

Four Main Competitive Industry Structures:

Perfect Competition Monopolistic Competition Oligopoly Monopoly

Competitive Parity

Performance of two or more firms at the same level.

Competitive intensity in focal industry

Porter's Diamond Framework Companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition

Factor Conditions

Porter's Diamond Framework Described a country's endowments in terms of natural, human, and other resources. Capital markets, supportive institutional framework, research universities, and public infrastructure

Related and supporting industries/complementors

Porter's Diamond Framework Leadership in related and supporting industries can also foster world class competitors in downstream industries.

Demand Conditions

Porter's Diamond Framework Specific characteristics of demand in a firm's domestic market. Customers in home market hold companies to a high standard of value creation and cost containment contributes to national competitive advantage. Demanding customers may also clue firms in to the latest developments in specific fields and may push firms to move research from basic findings to commercial applications for the marketplace

Co-opetition

Portmanteau describing cooperation by competitors, achieve a strategic objective by cooperating with competitors. They may cooperate to create a larger pie but then might compete about how the pie should be divided. Leads to learning races

Alliance Manager

Positioned with Office of Alliance management serves as an alliance process resource and business integrator between the two alliance partners and provides alliance training and development as well as diagnostic tools

Network Effects

Positive effect (externality) that one user of a product or service has on the value of that product for other users. Helpful in introduction stage

Power Of Suppliers [Five Forces Model]

Power suppliers can raise the cost of production by demanding higher prices for their inputs or by reducing the quality of the input factor or service level delivered. Powerful suppliers are a threat to firms because they reduce the industry's profit potential by capturing part of the economic value created.

Agency Theory

Principal agent problem is a core part of agency theory. Views the firm as nexus of legal contracts. Corporations are viewed merely as a set of legal contracts between different parties. Conflicts may arise are to be addressed in the legal realm. Everyday application in employment contracts The firm needs to design work, tasks, incentives, and employment contracts and other mechanisms in ways that minimize opportunism by agents. Adverse Selection Moral Hazard

Managerial Hubris

Principal agent problems Form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary. 1) Managers of the acquiring company convince themselves that they are able to manage the business of the target company more effectively and therefore create additional shareholder value. Unrelated diversification strategy 2) They see themselves as the exceptional rule. led to many ill fated deals, destroying billions of dollars.

Entrepreneurship

Process by which change agents (entrepreneurs) undertake economic risk to innovate - to create new products, processes, and sometime new organizations. Successful = derives competitive process and creates value for the individual entrepreneurs and society at large.

Globalization

Process of closer integration and exchange between different countries and peoples worldwide made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs. These factors reduce the costs of doing business around the world and opening the doors to a much larger market than any home country. Allows companies to source supplies at a lower costs, learn new competencies, and to differentiate products. Led to significant increases in living standards in many economies around the world

Organizational Design

Process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization. Key components: Structure Culture Control Strategy implementation transforms strategy into actions and business models, it often requires changes within the organization. Strategy implementation often fails because managers are unable to make the necessary changes due to the effects on resource allocation and power distribution within an organization. Managers are leery to disturb the status quo. Structure follows strategy

Horizontal Integration

Process of merging with a competitor at the same stage of the industry value chain. Type of corporate strategy that can improve a firm's strategic position in a single industry. Firms should go ahead with horizontal integration if the target is more valuable inside the acquiring firm than as continued standalone company. Tends to lead to consolidation. (airlines, banking, telecommunications, pharmaceuticals, health insurance) 3 Main benefits: (sources of value creation) Reduction in competitive intensity Lower Costs Increased differentiation

Socialization

Process whereby employees internalize an organization's values and norms through immersion in its day to day operations

Political Factors [PESTEL Model]

Processes and actions of government bodies. Nonmarket strategies: lobbying, public relations, contributions, litigation

Complement

Product, service, or competency that adds value to the original product offering then the two are used

Threat of Substitutes [Five Forces Model]

Products or services available from outside the given industry will come close to meeting the needs of current customer. Threat of substitutes is high when: - it offers an attractive price performance trade off - The buyer's cost of subing is low

Shared Value Creation Framework

Provides guidance to managers about how to reconcile the economic imperative of gaining and sustaining competitive advantage with corporate social responsibility. Helps managers create a larger pie that benefits both shareholders and other stakeholders. Must understand role of public stock company

Customer-oriented vision [values]

Providing solutions to customers needs & adapt to changing environments. Focus employees to think about how best to solve a problem for a consumer. Identify a critical need but leave open the means of how to meet that need. Needs may change and means of meeting those can change, i.e. leaving the door open to fulfill that need. Example) We provide solutions to professional communication needs.

Return on invested capital (ROIC)

ROIC = Net profits / invested capital Firm profitability, measures how effectively a company uses its total invested capital 1) Shareholders' equity through selling shares to the public 2) Interest-bearing debt through borrowing from financial institutions and bondholders. If a firm's ROIC is greater than its cost of capital it generates value. Break down ROIC into constituents: return on revenue (ROR) working capital turnover (WCT)

Value Innovation - Increase Perceived Consumer Benefits

Raise. Which of the factors should be raised well above the industry's standard? Create. Which factors should be created that the industry has never offered?

Legal conflicts

Rapid development of business models can lead to breach existing rules of commerce.

Top-Down Strategic Planning

Rational data driven strategy process through which top management attempts to program future success. We can predict the future from the past, and can work well if the environment doesn't change much. Shortcomings: no data for future, plans for the future can be wrong

Popular Business Models

Razor-razorblades Subscription Pay as you go Freemium Wholesale Building

Value Drivers

Related to a firm's expertise in and organizations of different internal value chain activities. Product features Customer Service Complements Managers must remember that the different value drivers contribute to competitive advantage ONLY if their value creation exceeds the increase in costs.

Mobility Barriers

Restrict movement between groups.

Total Return to Stakeholders

Return on risk capital that includes stock price appreciation plus dividends received over a specific period. External and forward looking metric. Indicates how the stock market views all available public information about a firm's past, current state, and expected future performance with most weight on growth expectations.

Competitive Industry Structure

Rivalry among existing competitors Elements and features common to all industries Captured by: Number and size of competitors Degree of pricing power Type of product or service Height of entry barriers

Focused Cost-Leadership Strategy

Same as Cost-Leadership strategy BUT has a narrow focus on a niche market.

Focused Differentiation Strategy

Same as differentiation strategy BUT has a narrow focus on a niche market.

Disadvantages of Firms of organizing economic activity within markets

Search costs Opportunism by other parties Incomplete contracting Enforcement of contracts

Exploration

Searching for new knowledge that may enhance a firm's future performance

Input Controls

Seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures. Firms use input controls when the goal is to define the ways and means to reach a strategic goal and to ensure a predictable outcome. Management designs these mechanisms so they are considered before employees make any business decisions, input into the value creating activities. Budgets, set before employees define and undertake the actual business activities. Standard operating procedures, or policies & rules, also frequently used mechanism when relying on input controls. Specify the conversion process from beginning to end in great detail to guarantee standardization and minimize deviation.

Output Controls

Seek to guide employee behavior by defining expected results but leave the means to those results open to individual employees, groups, or SBUs. Firms frequently tie employee compensation and rewards to predetermined goals such as sales target or return on invested capital. Corporate level, outcome controls discourage collaboration among different strategic business units. Best applied when a firm focuses on a single line of business or pursues unrelated diversification. Results only work environment (ROWEs)

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 its customers. Firms can keep their cost at the lower point in the industry while offering acceptable value are able to gain a competitive advantage. Goal is to reduce the firm's cost below that of its competitors while offering adequate value.

Bundling

Sells products or services for which demand is negatively correlated at a discount.

Strategic group

Set of companies that pursue a similar strategy within a specific industry Differ from one another: Research and Development Technology Product differentiation Product and service offerings Pricing Market segments distribution channels customer service

Stock Valuation =

Share price * number of outstanding shares

Shareholder value creation

Shareholders - individuals or organizations that own one or more shares of stock in a public company. Legal owners of public companies Shareholder's perspective, the measure of competitive advantage that matters most is return on risk capital. Risk capital Total return to stakeholders Efficient market hypothesis Market capitalization All public companies are required to report total return to shareholders annually in the statements they file with SEC. Effective strategies to grow the business can increase a firm's profitability and thus its stock price.

Board of Directors

Shareholders of public stock companies appoint board of directors. The centerpiece of corporate governance in such companies. Shareholder's interests are not uniform. Long term viability and profitable growth should allow consistent dividend payments and result in stock appreciation over time. Hedge funds often to profit from short tern movements of stock prices. More proactive investors and demand changes in a firm's strategy.

Shareholder Capitalism

Shareholders the providers of the necessary risk capital and the legal owners of public companies have the most legitimate claim on profits

Dedicated alliance function

Should be given the tasks of coordinating all alliance related activity in the entire organization, taking a corporate level perspective. It should serve as a repository of prior experience and be responsible for creating processes and structures to teach and leverage that experience and related knowledge throughout the rest of the organization across all levels.

Information Asymmetry

Situation in which one party is more informed than another because of the possession of private information Can result in the crowding out of desirable goods and services by inferior ones. Many markets

Diversification Discount

Situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units.

Diversification Premium

Situation in which the stock price of related diversification firms is valued at greater than the sum of their individual business units For diversification to enhance firm performance it must do at least one of the following: Provide economies of scale which reduces cost Exploit economies of scope which increases value Reduce costs and increase value

Learning Races

Situations in which both partners in a strategic alliance are motivated to form an alliance for learning but the rate at which the firms learn may vary. The firm that learns faster and accomplishes its goal more quickly has an incentive to exit the alliance or, at a minimum, reduce its knowledge sharing. Can have a positive effect on the winning firm

Technology Enthusiasts

Smallest market segment, often have an engineering mind set and pursue new technology proactively. Frequently seek out new products before the products are officially introduced into the market. Enjoy using beta versions.

Moving from product-oriented to customer-oriented Vision statements

Some instances, they do not interfere with the firm's success in achieving superior performance. Vision statements and firm performance are not related to one another. Empirical research shows that SOMETIMES vision statements and firm performance are associated with one another. Without commitment and involvement from top managers, any statement of values remains a public relation exercise. Employees tend to follow values practiced by strategic leaders.

Internal Capital Markets

Source of value creation in a diversification strategy if the conglomerate's headquarters does a more efficient job of allocating capital through its budgeting process than what could be achieved in external capital markets.

Site Specificity

Specialized Asset Assets required to be co located such as

Human Asset Specificity

Specialized Assets Investments made in human capital to acquire unique knowledge and skills such as mastering the routines and procedures of a specific organization, not transferable to a different employer

Physical Asset Specificity

Specialized Assets physical and engineering properties are designed to satisfy a particular customer

Codes of Conduct

Standard codified in law, go above and beyond the law in detailing how the organization expects an employee to behave and to represent the company in business dealings. allow an organization to overcome moral hazards and adverse selections. When facing ethical dilemma, acceptable norms of professional behavior Feel comfortable explaining and defending the decision in public

Diagnosis of Competitive Challenge

Step 1 of a good strategy Accomplished through an analysis of firm's external and internal environments (AFI framework) A good strategy needs to start with a clear and critical diagnosis of the competitive challenge. A good strategy defines the competitive challenges facing an organization through a critical and honest assessment of the status quo.

Guiding Policy

Step 2 of a good strategy After diagnosis of competitive challenge, a strategist needs to form an effective guiding policy response. Address the competitive challenge. Accomplished through strategy formulation, resulting in corporate, business, and functional strategies A good strategy provides an overarching approach on how to deal with the competitive challenges identified. Needs to be communicated in policies that provide clear guidance for all employees involved. Needs to be consistent, backed up with strategic commitments such as sizable investments or changes to an organization's incentive and reward system - changes that cannot be easily reverse.

Coherent Actions

Step 3 to a good strategy Set of actions to implement: implementation for the guiding policy. A good strategy requires effective implementation through a set of actions.

Invention

Step two of the innovation process Transformation of an idea into a new product or process or the modification and recombination of existing ones. If an invention if useful, novel, and non-obvious it can be patented.

Equity Alliances

Strategic Alliances A partnership in which at least one partner takes partial ownership in the other partner. Partner purchases an ownership share by buying stock or assets and making an equity investment.

Joint Venture

Strategic Alliances A stand alone organization owned by two or more parent companies They make a long term commitment which facilitates transaction specific investments.

Long Term Contracts

Strategic Alliances Work like short term contracts but with a duration of longer than one year. Help facilitate transaction specific investments

Three Processes when strategizing for competitive advantage

Strategic Planning Scenario Planning Strategy as Planned emergence.

Strategic Alliance vs. M&A (Mergers and Acquisitions)

Strategic alliances allow firms to circumvent potential legal repercussions including potential lawsuits filed by US federal agencies.

Economic Incentives

Strategic choice Once an innovator has become an establish incumbent firm, it has strong incentives to defend its strategic position and market power. A focus on incremental innovation is attractive once an industry standard has emerged and technological uncertainty is reduced

Autonomous Actions

Strategic initiatives undertaken by lower level employees on their own volition and often in response to unexpected situations

Relational View of Competitive Advantage

Strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries. Applying the VRIO framework we know that the basis for competitive advantage is formed when a strategic alliance creates resource combinations that are valuable, rare, and difficult to imitate, and the alliance is organized appropriately to allow for value capture.

Strategic Position

Strategic profile based on the difference between value creation and cost (V - C)

Balanced Scorecard

Strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals Four Key Questions: 1) How do customers view us? 2) How do we create value? 3) What core competencies do we need? 4) How do shareholders view us?

Planned Emergence

Strategy process in which organizational structure and systems allow bottom-up strategic initiatives to emerge and be evaluated and coordinated by top management.

Access Critical Complementary Assets

Successful commercialization of a new product or service often requires complementary assets such as marketing, manufacturing, and after-sale service. New firms are in need of complementary assets to complete the value chain from upstream innovation to downstream commercialization. Downstream complementary assets (marketing and regulatory expertise or a sales force) often prohibitively expensive and time consuming and not an option for new ventures. Strategic alliance allow firms to match complementary skills and resources to complete the value chain. Licensing agreements allow the partners to benefit from a division of labor, allowing each to efficiently focus on its core competency.

Competitive Advantage

Superior performance relative to other competitors (not absolute) in the same industry or the industry average and can be assed by comparing performance to a benchmark. To gain competitive advantage, a firm needs to provide either goods or services consumers value more highly than those of its competitors, or at a lower price. Rewards: profitability and market share

Scale Economies

Taking advantage of certain physical properties Critical to driving down a firm's cost and strengthening a cost-leadership position. Managers need to increase output to operate a minimum efficient scale (between Q1 and Q2)

Diseconomies of Scale

Taking advantage of certain physical properties Increases in costs as output increases As firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits to scale. Large firms become overly bureaucratic with too many layers of hierarchy

minimum efficient scale (MES)

Taking advantage of certain physical properties Output range needed (Between Q1 and Q2, cost advantage) to bring down the cost per unit as much as possible allowing a firm to stake out the lowest cost position that is achievable through economies of scale Less than Q1 or more than Q2 = cost disadvantage. Also applies to manufacturing, managerial tasks, how to organize

Cube-square rule

Taking advantage of certain physical properties The volume of a body increases disproportionately more than its surface (pipe or tank)

Alternatives to Vertical Integration

Taper Integration Strategic Outsourcing

Alliance Leader

Technical expertise and knowledge needed for specific technical area and is responsible for the day to day management of the alliance

Cross function teams

Temporary teams, members come from different functional areas to work together on a specific project or product, usually from start to completion.

Illusion of Control

Tendency by people to overestimate their ability to control events.

Organizational Culture

The collectively shared values and norms of an organization's members. Values Norms Strongest asset but also its greatest liability, can become a core rigidity if a firm relies too long on the competency without honing, refining an upgrading as the firm and envionrment change

Corporate Strategy

The decisions that senior management makes and the goal directed actions it takes in the quest for competitive advantage in several industries and markets simultaneously. Provides answers to the key questions of where to compete. Determines the boundaries of the firm along three dimensions: Vertical Integration (along industry value chain) Diversification (of products and services) Geographic Scope (regional, national, or global markets)

Effective Mission

The firm needs to back up their mission and vision with strategic commitments (money where their mouth is).

Vertical Integration

The firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs. Measured by a firm's value added: What percentage of a firm's sales is generated within the firm's boundaries?

Hierarchy

The formal position based reporting lines and thus stipulates who reports to whom. Tall structure Flat structure Span of control Recent research suggests that managers are most effective at an intermediate point where the span of control is not too narrow or too wide.

CAGE, in conclusion

The framework helps determine the attractiveness of foreign target markets in a more fine grained manner based on relative differences, it is a first step A deeper analysis requires looking inside the firm to see strengths and weaknesses work to increase or reduce distance form specific foreign markets.

Merger

The joining of two independent companies to form a combined entity. Mergers tend to be friendly. Two firms agree to join in order to create a combined entity. hundreds of mergers each year, cumulative value in trillions of dollars

Legal personality

The law regards a non living entity such as a for profit firm as similar to a person with legal rights and obligations. Allows a firm's continuation beyond the founder or founder's family

Local Responsiveness

The need to tailor product and service offerings to fit local consumer preferences and host country requirements Entails higher cost and outweighs cost advantages from economies of scale and lower cost input factors

Restructuring

The process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully.

Acquisition

The purchase of takeover of one company by another. Can be friendly or unfriendly.

Strategic Entrepreneurship

The pursuit of innovation using tools and concepts from strategic management Leverage innovation for competitive advantage by applying strategic Entrepreneurship

Threat of Entry [Five Forces Model]

The risk that potential competitors will enter the industry. New entry depresses profit potential in two major ways: 1) May lower prices to appear less attractive to competitors. 2) Force firms to spend more to satisfy their existing customers. The more profitable an industry, the more attractive it is for new competitors to enter. Entry barriers

Economies of Scope

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 technology.

Limited liability for investors

The shareholders who provide the risk capital are liable only to the capital specifically invested, and not for other investments they may have made or for their personal wealth. Limited liability encourages investments by the wider public and entrepreneurial risk taking

Resource-allocation process

The way a firm allocates its resources based on predetermined polices which can be critical in shaping its realized strategy.

Transaction Cost Economics

Theoretical framework in strategic management to explain and predict the boundaries of the firm which is central to formulating a corporate strategy that is more likely to lead to competitive advantage Allows us to explain which activities a firm should pursue in house (make) versus which goods and services to obtain externally (buy). These decisions help determine the boundaries of the firm. Costs of using the market such as search costs, negotiating and drafting contracts, monitoring wok, and enforcing contracts when necessary may be higher than integrating the activity within a single firm Vertically integrate by owning production of needed inputs or the channels for the distribution of outputs. When firms are more efficient in organizing economic activity than are markets, firms should vertically integrate.

Game theory

Theory in oligopolies that attempts to predict strategic behaviors by assuming that the moves and reactions of competitors can be anticipated.

Stakeholder theory

These strategic actions will lead to a larger pie of revenues and profits that can be distributed among a company's stakeholders.

How do we accomplish our goals?

They help individuals make choices that are both ethical and effective in advancing the company's goals.

Entry barriers

Threat of Entry Obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential. Economies of scale Network Effects Customer switching costs Capital requirements Advantages independent of firm size Government policy Credible threat of retaliation

Stages of Globalizatoin

Three notable stages Globalization 1.0 1900-1941 Globalization 2.0 1945-2000 Globalization 3.0 21st Century

How do firms achieve growth?

Three options to drive firm growth: Organic growth through internal development External growth through alliances External growth through acquisitions.

Transferability of investor ownership

Through trading of shares of stock on exchanges like New York Stock Exchange and NASDAQ or exchanges in other countries. Each share represents only a minute fraction of ownership in a company, thus easing transferability

M-Form and Corporate Strategy

To achieve an optimal match between strategy and structure, different corporate strategies require different organizational structures Single Business Dominant Business Related business Unrelated Diversification Each defined by the percentage of revenues obtained from the firm's primary activity

To achieve superior performance: New ventures: Existing companies: charities: universities:

To achieve superior performance, companies compete for resources New ventures compete for financial and human capital Existing Companies compete for profitable growth. Charities compete for donations Universities compete for best students and professors.

LS

To determine the value of a good in the eyes of consumers a firm can examine a consumer's purchasing habits for their revealed preferences. Achieving competitive advantage means maximizing the difference between cost to produce the good/service and consumers willingness to pay. When a firm creates more economic value than competing firms it has competitive advantage When a firm tries to meet the prices of its competitors it sacrifices profitability per unit. Book value: calculated as costs of assets minus accumulated depreciation, its importance has decline over time, it captures the historical cost of a firm's assets A firm pursing a successful differentiation strategy will have a competitive advantage over a competitor that creates a product at equal cost but with lower reservation price When comparing different firms of different sizes over a period of time it is most useful to look at relative profitability BHAG = big hairy audacious goal The importance of the firm's book value has decreased as part of a firm's total stock market valuation Stock price = firm's current stated, future performance, and past Total return to shareholders in the long term external factors create volatility in stock prices Since 2000 assets not captured in firms' accounting data have become much more important to a firm's competitive advantage To determine economic value creation one must look at the sum of consumer and producer surplus. Pay as you go model is gaining momentum A balanced scorecard offers both common financial metrics and a variety of operational measures on customer satisfaction, internal processes, and the company's innovation and improvement activities A stock price increases if it grows faster than expected

Disadvantages of the balanced scorecard

Tool for strategy implementation not formulation. It is up to the firm to formulate a strategy ONly gives limited guidance about which metrics to choose. Different situations call for different metrics. Accounting profitability, shareholder value creation, and economic value creation. A failure to achieve competitive advantage is not so much a reflection of a poor framework but of a strategic failure.

Wholesale

Traditional model in retail

Subscription

Traditionally used for magazines and newspaper. Pay for access whether they use the service or product during a payment term or not.

Dominant Buisness

Types of Corporate Diversification 70-95% of its revenues from a single business, but pursues at least one other business activity that accounts for the remainder of the revenue. Dominant and minor businesses share competencies Harley-Davidson, UPS

Single Business

Types of Corporate Diversification More than 95% of its revenues is from one business. The remainder is not yet significant to the success of the firm. Single businesses leverages its competencies Google, Facebook, Coca-Cola

Competitive Disasdvantage

Underperforms its rivals and or the industry average.

Specialized Assets

Unique assets with high opportunity cost: They have significantly more value in their intended use than in their next best use. They come in three types: site specificity, physical asset specificity, and human-asset specificity. Site Specificity Physical Asset Specificity Human Asset Specificity

Core Competencies

Unique strengths, embedded deep within a firm, that are critical to gaining and sustaining competitive advantage It allow a firm to differentiate its products and services from those of its rivals and create a higher value for the customer or offering products and services of comparable value at lower cost. Competitive advantage can be driven by core competencies. Core competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage. It can be too easy to focus on the more visible elements or facets of core competencies such as superior products and services. Firms that fail to adapt their core competencies to a changing external environment not only lose a competitive advantage but also may go out of business. Ideally, managers want to leverage their firms internal strengths and to exploit external opportunities while mitigating internal weaknesses and external threats. Allow managers to formulate a strategy that is tailored to their company creating a unique fit between the company's internal resources and the external environment. Strategic fit increases likelihood that a firm is able to gain competitive advantage. If a firm achieves a dynamic strategic fit it is likely to be able to sustain its advantage over time. Dynamic strategic fit sustain its advantage over time.

How do you become a strategic leader?

Upper-echelons theory The theory states that executives interpret situations through lens of their unique perspectives, shaped by personal circumstances, values and experiences. Reflect age, education, career experiences, filtered through personal interpretations of situations they face.

Global Maxtrix Structure

Used to pursue transnational strategy, which the firms combines the benefits of a multidomestic strategy (high local responsiveness) with global standardization strategy (lowest cost position attainable) Charged with local responsiveness and learning. Allows the firm to feed local learning back to different SBUs and thus diffuse it throughout the organization.

Accounting Profitability

Using accounting data to assess competitive advantage and firm performance is standard managerial practice. When assessing competitive advantage by measuring accounting profitability we use financial data and ratios derived from publicly available accounting data such as income statements and balance sheets. 1) Accurately assess the performance of their firm 2) Compare and benchmark their firm's performance to other competitors in the same industry or against the industry average. Standardized financial metrics derive from income statements and balance sheets. Public companies are required by law to release these data in compliance with GAAP set by the FASB and audited by CPAs. Publically traded firms are required to file Form 10k annually. Sarbanes Oxley Act made to comply with stringent requirement and in turn enhances the data's usefulness for comparative analysis. Accounting data enables us to conduct direct performance comparisons between companies ROIC, ROE, ROA, and return on revenue.

Trade Secrets

Valuable proprietary info that is not in the public domain and where the firm makes every effort to maintain its secrecy. (Coca-Cola recipe, Nutella recipe)

Complements

Value Driver Add value to a product or service when they are consumed in tandem. The availability of complements as an important force determining the profit potential of an industry. Finding complements is an important task for managers to enhance value of their offerings

Customer Service

Value Driver Focusing on this increases perceived value

Product Features

Value Driver Increasing the perceived value of the product or service affering Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price.

Opportunity Costs

Value of the best forgone alternative use of the resources employed

Strategic Alliances

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, and services. Umbrella term that denotes different hybrid organizational forms: long term contracts Equity alliances joint ventures

Strategic Alliances

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services. The use of strategic alliances to implement corporate strategy has exploded in the past few decades with thousands forming each year. Globalization has also contributed to an increase in cross-border strategic alliances. May join complementary parts of a firm's value chain (R&D or marketing) on joining the same value chain activities. Attractive because they enable firms to achieve goals faster and at lower costs than going it alone. Different motivations for forming alliances are not necessarily independent and can't be intertwined. Alliance formation is frequently motivated by leveraging economies of scale, scope, specialization, and learning.

Stakeholder Impact Analysis Step 2: Identify Stakeholders' Interests

What are our stakeholders' interests and claims? Specify and assess interests and claims using power, legitimacy, and urgency. Incentivize top executives by compensation with stock options Turn employees into shareholders through employee stock ownership plans (purchase stock at a discounted rate or use company stock as investment vehicle for retirement savings)

Values

What commitments do we make and what guardrails do we put in place? Statement of principles to guide an organization as it works to achieve its vision and fulfill its mission for both internal conduct and external interactions; it often includes explicit ethical considerations. Should be clearly articulated in the strategy process, help with moral ompass An effective vision statement can lay the foundation upon which to craft a strategy that creates a competitive advantage

Vision

What do we want to accomplish ultimately? statement about what an organization ultimately wants to accomplish; it captures the company's aspirations Should be forward-looking and inspiring. Visionary companies outperform their competitors over the long run. Wide margin. Not-for profit organization aren't surprising to have that. For-profit firms success primarily by financial performance, but not always the case. An effective vision pervades the organization with a sense of winning and motivates employees at all levels to aim for the same target while leaving room for individual and team contributions. Employees in visionary companies tend to feel part of something bigger than themselves. Inspiring vision helps employees find meaning in their work. Experience a greater sense of purpose (beyond monetary rewards. Greater individual purpose can in turn lead to higher organizational performance. Strategic Intent

Stakeholder Impact Analysis Step 4: Identify Social Responsibility

What economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders? Corporate Social responsibility is used.

Three standard performance dimensions

What is the firm's accounting profitability? How much shareholder value does the firm create? How much economic value does the firm generate? Tend to be correlated, particularly over time. Accounting profitability and economic value creation tend to be reflected in the firm's stock price which in turn determines in part the stock's market valuation

Stakeholder Impact Analysis Step 3: Identify Opportunities and Threats

What opportunities and threats do our stakeholders present? Best case scenario, managers transform threats into opportunities.

Stakeholder Impact Analysis Step 5:: Address Stakeholder Concerns

What should we do to effectively address any stakeholder concerns? Prioritize the power, legitimacy, and urgency of claims helps to address them accordingly.

Multi-domestic Strategy

When MNEs (multinational enterprise) attempts to maximize local responsiveness in the face of low pressures for cost reductions. Multidivisional structure enable the MNE to set up different divisions based on geographic regions. SBUs to maximize local responsiveness Decision making is decentralized.

Hostile takeover

When a target firm does not want to be acquired.

Vertical Market Failure

When the markets along the industry value chain are too risky, and alternatives too costly in time or money.

Corporate Strategy

Where to compete? concerns questions relating to where to compete in terms of industry, markets, and geography Corporate executives formulate corporate straetgys

Scope of Competition

Whether to puruse a specific, narrow part of the market or go after the broader market. Broad: Cost leadership, differentiation Narrow: Focused cost leadership, focused differentiaton.

Stakeholder Impact Analysis Step 1: Identify Stakeholders

Who are our stakeholders? Prioritize most powerful internal and external stakeholder as well as their needs.

To gain access to a new capability or competency

Why do firms acquire other firms? Firms resort to obtain new capabilities or competencies

To gain access to new markets and distribution channels

Why do firms acquire other firms? Resort to acquisitions when they need to overcome entry barriers into markets they are currently not competing in or to access new distribution channels.

To preempt rivals

Why do firms acquire other firms? Sometimes firms may acquire promising startups not only to gain access to a new capability or competency but also to preempt rivals from doing so.

Increase market power

Why firms need to grow Motivated to achieve growth to increase their market share and with it their market power. Fewer companies = higher industry profitability

Reduce Risk

Why firms need to grow Motivated to grow in order to diversify their product and service portfolio through competing in an umber of different industries. Rationale: falling sales and lower performance in one sector might be compensated by higher performance in another Achieve economies of scope

Lower Costs

Why firms need to grow Motivated to grow in order to lower their cost. Larger firm may benefit from economies of scale, driving down average costs as their output increases. Need to achieve minimum efficient scale and stake out the lowest cost position achievable through economies of scale

Increase profits

Why firms need to grow Privately held: provide a higher return for shareholders/owners Publicly traded: stock market valuation of a firm is determined to some extent by expected future revenue and profit streams. If firms fail to achieve their growth target, their stock price often falls. Lower stock price it is more costly for firms to raise the required capital to fuel growth by issuing stock

Managerial Motives

Why firms need to grow Research in behavioral economics suggests that firms may grow to achieve goals that benefits its managers more than their stockholders. Principal agent problem -managers ay be more interested in pursing their own interests

Substitution

Working around to provide a comparable product or service (valuable and rare resources) Accomplished through strategic equivalence.

National Competitive Advantage

World leadership in specific industries Has a direct effect on firm level competitive advantage. Companies from home countries that are world leaders in specific industries tend to be the strongest competitors globally

Fixed Asset Turnover

[component of Working capital Turnover] = (Revenue / Fixed Assets) measures how well a company leverages its fixed assets, property, plant and equipment (PPE). This ratio indicates how much a firm's capital is tied up in its fixed assets. Higher fixed assets often go along with lower firm valuations

Market Capitalization

a firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time. (Market cap = number of outstanding shares * share price)

Strategists cant grow their firms by growing organically through internal development or externally through alliances and

acquisitions

Primary activites

add value directly by transforming inputs into outputs as the firm moves a product or service horizontally along the internal value chain. Inputs to outputs to production phases to sales and marketing and finally to customer service: supply chain management operations distribution marketing and sales after sales service

Support Activities

add value indirectly, but are necessary to sustain primary activities Research and Development (R&D) Information systems Human resources Accounting and finance firm infrastructure including processes, policies and procedures. Each activity performed needs to either add incremental value to the product or service offering or lower its relative cost.

Make or buy

anchor each end of the continuum from markets to firms.

Resources

any assets that a firm can draw on when formulating and implementing a strategy Resources reinforce core competencies cash buildings machinery intellectual property

Scenario Planning

asks those "what if" questions Strategy-planning activity in which top management envisions different what-if scenarios to anticipate plausible futures in order to derive strategic responses. Create a number of detailed and executable strategic plans. Allows the strategic management process to be more flexible and more effective than more static strategic-planning approach with one master plan. ** see book

Resource Immobility

assumption in the resource-based view that a firm has resources that tend to be "sticky" and that do not move easily from firm to firm. Difficult to duplicate or imitate, can last for a long time.

Resource Heterogenity

assumption in the resource-based view that a firm is a bundle of resources and capabilities that differ across firms. This ensures that analysts look more critically at the resource bundles of firms competing in the same industry (or even the same strategic group) bc each bundle is unique to some extent.

Time compression diseconomies refers to the concept that

attempting to get a good outcome in less time tends to be ineffective

Honda

clearly defined core competency. lessons learned from failure, built the core competency to design and manufacture small but powerful and highly reliable engines for which it now is famous. Their core competency results from superior engineering know-how and skills carefully nurtured and honed over several decades. Hondas engines can be found everywhere

Key to Successful Strategy

combine a set of activities to stake out a unique position within an industry. Competitive advantage has to come from performing different activities or performing the same activities differently than rivals. Reinforce on another rather than trade-off Operational effectiveness, marketing skills, and other functional expertise

The goal of a differentiation strategy

come back

International Strategy

company leverages its home based core competency by moving into foreign markets. Advantageous when the company faces low pressure for both local responsiveness and cost reductions. Companies pursue an international strategy through a differentiation strategy at the business level.

Alliance between disney and pixar was successful because

complementary assets matched

Beats

core competencies helped the company gain and maintain competitive advantage Their core competencies are marketing and projecting coolnes

Norms

define appropriate employee attitudes and behaviors

Values

define what is considered to be important

Social Entrepreneurship

describes the pursuit of social goals while creating profitable businesses. Evaluate the performance of their ventures not only by financial metrics but by ecological and social contributions (profits, planet, people) Use triple bottom line approach to asses performance.

Activities

distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services activities give leverage to core competencies that give to competitive advantage and superior firm performance order taking physical delivery of products invoicing customers

Insights gained from SWOT lead McDonald's to open new resturants in China

financial strength and brand name growth in emerging economies and market share decline in developed economies

Dynamic Capabilities

firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage. Most relevant in changing markets because the firm must be able to change its internal resource base as the external environment changes. intangible resource Essential to move beyond a short lived advantage and create a sustained competitive advantage.

Business model

firm's plan that details how it intends to make money 1) Transform their strategy of how to compete into a blueprint of actions and initiatives that support the overarching goals 2) Mangers implement this blueprint through structures processes culture and procedures. If the company fails to translate a strategy into a profitable business model the firm will run into trouble.

Patent

form of intellectual property and gives the inventor exclusive rights to benefit from commercializing a technology for specified time period in exchange for public disclosure of the underlying idea. Exclusive rights translate to temporary monopoly position until the patent expires. Double edged sword - temporary monopoly thus form the basis for competitive advantage

Implementing the strategy is often overlooked by senior managers especially in large organizations. What level of manager is often responsible for making sure the strategy gets implemented in alignment with the corporate goals?

functional manager

Single Business or Dominant Business Stratetgy at the corporate level

gain at least 70% of their revenues from their primary activity, generally employ a functional strategy

When two competitors merge, leading to industry consolidation, they are engaging in

horizontal integration

According to the text, superior performance within the strategic business unit (SBU) is sought by asking which major question?

how to compete?

Resource heterogeneity

implies that each firm has different resources Bundle of resources and capabilities that is unique to the firm

Relational view of competitive advantage

important resources and capabilities are commonly embedded in strategic alliances that cross firm boundaries.

Trying to be everything to everybody will result in _____________.

inferior performance

Razor-razorblades

initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.

Price Stability

lack of change in price levels of goods and services (is rare). Inflation - too much money means rising prices Deflation - decrease in overall price level.

Strategic Intent

learning from failure, to translate into reality what begins as a stretch goal

Gaining new capabilities or competencies is one of the three main reasons why companies

make acquisitions

Efficient Market Hypothesis

market price of the firm's stock. A firm's share price provides an objective performance indicator. When assessing and evaluating competitive advantage, a comparison of rival firms shape price development or market capitalization provides a helpful yardstick when used over the long term.

Cost parity

matching prices

Reservation Price

maximum price a consumer is willing to pay for a product or service based on the total perceived consumer benefits. The amount of total perceived consumer benefits equals maximum willing to pay or reservation price. This is then split into economic value creation and the firm's total unit cost.

Growth Rate

measure of the change in amount of goods and services produced by a nation's economy. Real growth rate adjusts for inflation and indicates the current business cycle of the economy, by whether business activity is expanding or contracting.

Advantages of strategic alliances

might give companies a competitive advantage firms achieve goals faster than they would alone

Valuable Resource

one of the four VRIO a resource is valuable if it helps a firm exploit an external opportunity or offset an external threat. It has a positive effect on a firm's competitive advantage. Increases economic value creating (V-C). It increases the perceived value of its product or service in the eyes of consumers by offering superior design and adding attractive features (assuming the cost isn't increasing)

Pay as you go

only pay the services they consume.

Capabilities

organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically Capabilities orchestrate core competencies structure routines culture

Competitive advantage is based on the difference between:

perceived value a firm is able to create for consumers (V) and captured by how much consumers are willing to pay for a product or service, and the total cost (C) the firm incurs to create that value. A business is more likely to lead a competitive advantage if a firm has a clear strategic profile, (differentiator or low-cost leader)

a firm with alliance management capability is able to effectively manage which of the following tasks? Phases of alliance management

post formation alliance management alliance design and governance partner selection and alliance formation

The main reasons to pursue mergers include the desire to overcome competitive disadvantage, superior acquisition and integration capability and

principal agent problems

Cost of Capital

represents a firm's cost of financing operations from both equity through issuing stock and debt through issuing bonds. Managers must compare their ROIC to other competitors.

Successful blue ocean strategy

requires reconciliation of the trade-offs between differentiation and low cost come back

Intangible resources

resources that do not have physical attributes and thus are invisible culture knowledge brand equity reputation intellectual property (patents, designs, copyrights, trademarks, trade secrets) Competitive advantage is more likely to spring from intangible rather than tangible resources. Brand name must be built, often, over a long period of time through continuous investments and experience over time

Tangible resources

resources that have physical attributes and thus are visible labor capital land buildings plant equipment supplies

Alliance Champion

senior corporate level executive responsible for high level support and oversight. Responsible for making sure that the alliance fits within the firm's existing alliance portfolio and corporate level strategy

Henry Mintzberg position regarding strategic planning

strategy can be planned or emerge from the bottom-up

Resource Stocks

the firm's current level of intangible resources Dynamic capabilities new product development engineering expertise innovation capability reputation for quality supplier relationships employee loyalty corporate culture customer goodwill know-how patents trademarks

Resource Flows

the firm's level of investments to maintain or build a resource. investments in resources (think of facets flowing into a bathtub and the leakage/outflow) outflows = leakage, forgetting employee turnover, key employees leave reduction of resources

Learning by doing

value for small ventures in which a few key people coordinate most of the firms' activities. Clear limitations by larger companies. Alliance are best managed at the corporate level.