Badm 449 Exam 1

Discuss "devil's advocacy" and "dialectical inquiry" techniques that can address groupthink problems. How do the two techniques differ?

- Kennedy learned a lot from the Bay of Pigs Fiasco and used both techniques in his administration during the subsequent "Cuban Missile Crisis" (see details in Wikipedia --- it is the closest known incidence in which the US would have been involved in a nuclear war). Devils advocacy Devils advocate is a team or individual who questions the assumptions of and criticizes the proposed course of action. Once critiqued the action is revised based on the input and so on until both team agree upon a course of action. Dialectical inquiry 1. Team 1 generates a detailed course of action (thesis). 1. Team 2 generates an alternative (antithesis) 2. Propose and debate the 2 courses to higher-level executive team 3. The higher-level execs take either one of the courses of action, neither, or a synthesis (combo) of the two

Discuss how JCPenney under its (former) CEO, Ron Johnson, learned the hard way how difficult it is to change a firm's strategic position, leading to being "stuck in the middle."

-Johnson changed the company's strategic position from a cost-leadership to a blue ocean strategy -Combine cost-leadership position with a differentiation position -Reposition the store more toward the high end by providing an improved customer experience and more exclusive merchandise through in-store boutiques -Johnson implemented this strategy in all stores instead of testing it in a couple stores -JCPenney also got into a legal battle with Macy's because of Johnson's attempt to lure away homemaking maven Martha stewart -Within 12 months, JCPenney's sales dropped by 25% Stock dropped from the S&P 500 index -Johnson got fired and left the company with more than $4 billion in debt

Provide the five steps of stakeholder impact analysis.

1. Who are our stakeholders? 2. What are our stakeholders' interests and claims? 3. What opportunities and threats do our stakeholders present? 4. What economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders? 5. What should we do to effectively address stakeholder concerns?

13 barriers to entry

1. economies of scale 2. network effects 3. government policy 4. exit barriers 5. credible threats of price cutting 6. proprietary tech 7. access to distribution channels 8. cumulative learning curve 9. favorable access to raw materials 10. product differentiation 11. intended plant capacity 12. high switching costs of buyers 13. capital requirements

Describe the 2X2 of knowledge in terms of Levels and Types of Knowledge.

2 types of knowledge: explicit and tacit (implied) 2 levels of knowledge: individual and organization individual and explicit = information, facts, scientific knowledge individual and tacit = skills (craft enterprises) organization and explicit: databases, systems & procedures, IP (industrial enterprises) organization and tacit = organizational capabilities

Evaluate the Five Forces in our Harvard business case concerning the U.S. soft-drink industry. What is the predicted industry economic performance, based on this evaluation

5 star industry Threat of new entrants: low LOW threat of entry because there are high barriers to entry: Economies of scale: Coke & Pepsi have many products results in lower setup costs Capital requirements: one concentrate plant costs $50-100 million to build. Coke has over 250 bottling partners and 900 plants globally. Product differentiation: biggest cost is advertising/promotion which creates brand loyalty and product differentiation. Coca-cola and Pepsi have spent nearly $2.6bn in advertising and marketing to build brand loyalty. Access to distribution channels: agreements with national retailers like Walmart where they offer marketing funds in exchange for desirable shelf space Proprietary technology: trademarks, Coke formula is in a protected vault, in one year alone Coke stopped over 153 imitation brands from copying them with trademark infringements. Great distribution networks that would take millions or billions of dollars to replicate. Bargaining power of suppliers: low The inputs of production for concentrate are commodities There are many suppliers, they are standardized and undifferentiated Coke and Pepsi quickly moved from sugar to high-fructose corn syrup to Stevia, showing that they can easily switch inputs Switching costs for concentrate makers is very low Cola industry companies will also experiment and invest a lot of money in alternative products if suppliers prices become too high. Bargaining power of buyers: low Franchise agreements allow Coke and Pepsi to set prices that bottlers have to take Concentrate makers have high pricing power over bottlers Far more bottlers than there are concentrate makers so it is easier ofr concentrate makers to get a higher price for their products if buyers arent willing to agree to their terms End up acquiring their bottlers so they're in-house - can use their own bottlers rather than listen to demands of outside buyers Threat of substitute products: low Coke and Pepsi expand their lines to include substitutes like juices, teas, carbonated waters, etc. Health trends that coke and pepsi have capitalized on by aggressively acquiring companies and creating new ones of their own. Between 2004 and 2007, 77% of Pepsi's new products were non-carb options. Coke acquired vitamin water, smart water, simply, georgia coffee, etc. Price rivalry: low High barriers to entry, low bargaining power of suppliers and buyers, low threat of substitutes So the rivalry is low They don't compete against each other for a lower / higher price, they generally match each other and simply maintain their dominant market shares They do not have to spend a lot of capital to wipe out competition. Coke and Pepsi have greatly diversified their product offerings to deter companies and capitalize on new trends.

Describe the mission of Teach for America (TFA)

A non-profit whose mission is to provide an excellent education to under-privileged youth in economically disadvantaged communities across the US These students actually showed higher achievement, especially in math and science

What is the sixth force? Why was this omission critical?

A possibly sixth force: complements A complement adds value to the original product or service When its performance increases or price decreases, demand increases The suppliers of complements create value for the industry and thus can exercise bargaining power Adds a cooperative dimension to the Five Forces model critical omission: NOT EVERY INDUSTRY HAS ONE

What are the key questions for "defining the business?"

Abell's framework: Who is being satisfied? - Customer Groups What is being satisfied? - Customer needs How are customer needs satisfied? - Distinctive Competencies

How is product differentiation competition (e.g., advertising battles) potentially quite different from pricing competition?

Advertising battlers can lead to product differentiation in the industry This can benefit all firms making it a positive sum game Price competition usually has to goal of pushing out another competitor making it more of a zero-sum game

Describe the Airbnb business model in disrupting the hotel industry.

Airbnb takes an asset-light approach to platform strategy - They offered more accommodations compared to traditional hotels - They had NO real estate which is typically the most significant entry barrier for hotel Airbnb enjoys "unlimited" inventory AND benefits from network effects which drives down entry barriers even more No physical assets, no employees to manage land or large capital Effect: they can grow faster and respond to consumer needs more quickly

Discuss some limitations of accounting data.

All accounting data are historical Does not consider off-balance sheet items Focuses mainly on tangible assets

Describe Dr. Shetty's use of learning curves and economies of scale in the medical industry

Applied the learning curve to drive down the costs of health care and making some of the most complex medical procedures affordable -Focusing on fixing thousands of small things rather than focusing on one big thing -process innovation -lots of repetition leads to specialization which makes operating procedures robust -Economies of scale -High fixed costs can be spread over a much larger volume -1k beds vs 160 -Lowered cost inputs by getting some resources locally -Drove down costs of high tech equipment -Low cost chain activities - common services like labs, blood bank and cancer clinic that results in cost savings

Discuss the (eventual) tradeoff of profitability and the growth rate of the firm.

As you continue to grow your profitability first increases, hits a peak, then decreases

BP's experience in the Gulf of Mexico shows how not to manage stakeholder relationships effectively. What were the consequences of poor management?

BP did not manage the potential threats that stakeholders may present - The community, media, and customers were all stakeholders impacted by the 2010 BP oil spill BP didn't consider threats - an oil spill is unlikely but a highly risky and impactful event - Customers boycott BP for years after the oil spill - Small business owners filed claims against BP (esp. tourism and seafood) - EPA banned BP from signing new contracts with the US government -Environmental stakeholders that put BP at a competitive disadvantage

Discuss the concept of isolating mechanisms in terms of how path dependence, causal ambiguity, social complexity, and intellectual property protection are isolating mechanisms.

Barriers to imitation: protect resources and capabilities that underpin a firm's competitive advantage Casual ambiguity -Unclear cause and effect Social complexity -Social and business systems interact IP -IP protection Path dependence -Lock in older tech or historical development of tech (limits tech advancement or grows it)

Explain the role of benchmarking in determining the core competence(s) within the value chain.

Benchmarking is comparing statistics against peers Need to compare more than one statistic

What PESTEL factors led to the decline of Blackberry and of Blockbuster

Blackberry: initially a pioneer in smartphones and became a status symbol But, didn't have awareness of sociocultural and technological factors in their external environment Sociocultural: people begin to use their own phones at work, IT departments incorporate other devices Technological: Apple's release of the iPod touch and later iPhone which Blackberry dismissed as a toy with low security features Blockbuster: undisputed industry leader until early 2000s Unable to respond to technological changes: Cable networks begin airing movies Netflix begins mail-order Blockbuster introduces online services but keeps charging late, fees so customers opt for lower-cost alternatives like Netflix Once Netflix moves into streaming, Blockbuster is already too far behind to keep up

Describe JetBlue's challenges in seeking a blue ocean strategy.

Blue ocean strategy: business level strategy that successfully combines differentiation and cost leadership activities using value innovation to reconcile the inherent tradeoffs JetBlue: 6th largest airline in the US JetBlue wanted to provide air travel at lower costs and still offer service amenities (differentiation strategy) Leather seats, free movies, attentive service Drove down costs by flying longer distances and transporting more passengers Damaged reputation: canceled flights, rude attendants, pilot mental health issue, removed leg room, poor on-time record Hard to balance high quality with low costs Many tradeoffs that as Jetblue expanded could not address Management failed to carve out a clear strategic position

Barriers to entry: Product differentiation + RTE case

Brand loyalty and customer loyalty Achieved through marketing and advertising, it's customer perception RTE: Achieved through advertising, marketing, promotion advertising/sales ratio is 18.5% in the '60s Co-branded cereals

Barriers to entry: Intended excess plant capacity + RTE case

Building extra plant capacity for the intent of deterring new entrants Viable possibility of price cutting if a new player enters RTE: not applicable

biases in decision-making: escalating commitment

Continuing to support a course of action when it is showing signs it may not success Sometimes called "throwing good money after bad" because of the tendency of some people to justify a poor decision by trying to "double down" to make it work, rather than opting for the usual better choice to "cut your losses." The United States extended involvement in the Vietnam War is an example. After ill-fated starts by Truman, Eisenhower, and Kennedy, President Lyndon Johnson and then President Richard Nixon kept sending those drafted to their deaths in order to justify (honor?) the deaths of those who came before. Eventually with domestic rioting throughout the US, assassinations of President John Kennedy, Malcolm X, Martin Luther King, and Bobby Kennedy among others - and a painful "generation gap" between young and old; the carnage eventually stopped (estimated at 2 million Vietnamese and 58,000 American lives). In short, if someone says to you that you are exhibiting escalating commitment, it is typically not a compliment.

Discuss the levels of corporate, business, and functional strategy

Corporate level Top management decision-making about vertical integration, diversification, strategic alliances, acquisitions, new ventures, restructuring, divestments Where to compete? Should GE move into airline industry? Business level The costs and benefits of generic strategy (cost leadership, differentiation, and focus) and first-mover advantage. Multiple businesses = multiple strategies How to compete? Should GE jet engines have better fuel efficiency than rolls royce's? Functional Level Improving the effectiveness of functional operations within a company Manufacturing HR Marketing R&D Operations management How to implement? Should GE HR recruit more science graduates to innovate airline industry?

Discuss Cirque du Soleil's difficulties in implementing a blue ocean strategy.

Created a new and thus uncontested market space in the live entertainment industry Eliminate-reduce-raise- create framework Eliminate: -Eliminated Several traditional circus elements Animal shows -Eliminated Star performers who were expensive -Eliminated Three ring stages -Annoyed visitors because their attention continuously kept switching Reduce: -Reduced amount of clowns -Shifted to a more sophisticated style Raise: -Increased the quality of live performances with signature acrobats -Revised the tent, turning it into a unique and magical -venue -Luxurious seating and high quality amenities -Cirque raised its ticket prices to $2o0 -Audiences were primarily adults Create: -Combined the thrill of traditional circus with classical ballet and musical theater -Dances and musical performances were skillfully orchestrated -The company had fallen on hard times in recent years -Cirque lost its rarity appeal -Experienced its first fatality -In search for a new blue ocean, Cirque is now pursuing a strategy of diversification -Allow Cirque to renew its core business, reach new audiences, and expand its repertoire of creative capabilities

Discuss "defining the business" and the contrast between customer-oriented and product-oriented visions of the firm

Defining the business STARTING POINT OF STRATEGY Want to be customer oriented Product oriented is limiting Customer oriented vision statement Defining a business in terms of providing solutions to customer needs Nike: "to bring inspiration and innovation to every athlete in the world" Product oriented Defining a business in terms of a good or service provided "We are in the typewriter business" Less flexible Not needs-based Myopic view (no creativity)

What are some important considerations in strategy in the quest to create, capture, and sustain competitive advantage?

Definition of strategy: the quest to create, capture, and sustain competitive advantage Considerations: - It's the managers' cognitive maps about how to sustain an advantage - About deciding what to do but also what NOT to do (opportunity cost) - There are alternatives, consequences, and decisions involving important resources, usually under uncertainty Involves long-term commitments that are NOT easy reversible - About being different than rivals using unique positioning

Discuss the adoption of Frappuccino by Starbucks

Diana (a starbucks store manager) received a request for an iced beverage. Upon making it and trying it she liked it so much and brought up the idea of making iced coffee to HQ. The request was denied multiple times but she did it anyway and sales skyrocketed and was adopted by other executives. At one point these drinks were 20% of revenue

Discuss the concepts of dynamic capabilities and core rigidities.

Dynamic capabilities -Create, deploy, modify, reconfigure, upgrade and leverage resources over time -Apple developing new products and modifying existing ones constantly This prevents core rigidity -A former core competency turned into a liability as the environment changed

Discuss the concepts of: (i) economic value creation; and (ii) producer and consumer surplus

Economic value creation is how much money is created on top of the cost to generate that money -True profit Producer and consumer surplus -Looks like you have 3 segments within total perceived consumer benefits -First is cost -Next your profit is divided up in producer surplus or profit and consumer surplus -But idk how to determine those amounts

Describe strategy as planned emergence for Japan railways

Employee came up with solution to Japans bullet train's persistent flooding: Fresh water off mountain should be bottled not drained Multi-million dollar business followed with 1,000 vending machines on 1,000 railroad platforms and home delivery of water, juices, and coffee

Be prepared to do calculations concerning learning curves, and to provide the limits to learning curve strategies.

Equation: K2 = K1n^b = Direct labor hours * years ^log(learning rate) / log(2) log(learning rate) / log(number of units) → multiply by years → multiply by direct labor hours Limits to learning curve advantages: Copying and reverse engineering of products Hiring a competitor's employees Purchasing know-how from consultants Obtaining the know-how from customers Experience advantages are often nullified by product obsolescence and innovations

Barriers to entry: High switching costs of buyers + RTE case

Example: changing computer software could require employee retraining RTE: buyers face low switching costs other than brand loyalty - big 3 priced cereals the same private label was a bit cheaper

Barriers to entry: Exit barriers + RTE case

Exit barriers of existing competitors can be entry barriers to potential entrants Significant investments in assets that aren't redeployable Low mobility assets = higher exit costs RTE: significant investment in plants and R&D are irreversible investments and wouldn't be redeployable These are exit barriers for incumbents

Describe the leadership crisis at Facebook.

Facebooks leadership solely focused on exponential growth but failed to consider serious negative effects on its stakeholders and firms reputation: Lenient privacy controls led to 3rd parties being able to siphon off personal data and foreign interference during the 2016 US presidential election.

Barriers to entry: Access to distribution channels + RTE case

Favorable shelf space or selling effort of retailers RTE: Big 3 can afford the slotting allowances paid to retailers for ideal shelf placement Well-established distribution channels like regional centers, supermarket chains, wholesalers, food brokers, etc. "efficient customer response initiative" tailored distribution and employed efficient scanner use for inventory supercenters allowed for more shelf space of value oriented brands employed workers at supercenters to ensure companies cereals had top shelf space

What is the definition of a Differentiation Advantage?

Firm is able to obtain from its differentiation a price premium in the market which exceeds the cost of providing differentiation Differentiation provides greater profitability marginal increase in revenue > marginal increase in cost = positive NPV

Discuss the evolution of Five Guy's core competencies.

Five guys claims title of fastest growing restaurant chain in US Core Competency: Superior ability to deliver fresh, customized hamburgers and fries using only high quality ingredients -Clear and consistent -Focus on not bloating the menu -expanded to shakes after many years -Custom, made to order -More expensive but unlimited free toppings -No marketing only word of mouth -No delivery, wifi and seats were uncomfortable to increase traffic Got a head start compared to peers to perfect its core competencies

Describe the mobility barriers that define the Strategic Group Structure of the Airline Industry.

From class: Mobility barriers are to strategic groups as entry barriers are to industries A strategic group is a strategy within a specific industry that a firm pursues to achieve a competitive advantage Airline industry: -Group A: Differentiated, hub and spoke: Delta, United Airlines, American Airlines -Group B: Low-cost, point to point: Frontier, Spirit, Southwest -The number of routes offered and the cost structure of the air lines are the most significant mobility barriers in the airline industry

Discuss the concept of sustainable competitive advantage (SCA) in terms of discounted cash flow (DCF) and NPV.

Goal: Maximize economic return Economic and accounting measures of performance Economic Profits ROA, ROE, ROC Financial Measures Performance NPV methods Maximizing the net present value of the firm's cash flow corresponds to maximization of its stock market valuation and hence maximization of its stock market valuation and hence maximizes the wealth of its shareholders

Which type is more likely to lead to sustainable competitive advantage (consider Googleplex)?

Googleplex examples is that googles tangible resources are valued much less than intangible resources (the employees). The competitive advantage stems from the intangible resources Organizational capabilities?

What factors lead to high bargaining power for suppliers?

High if: Dominated by a few companies Suppliers products are differentiated No substitutes for supplier products Incumbents face high switching costs Product is an important input for the buyer Credible threat of forward integration exert power by: threatening to raise prices or reduce quality, squeeze industry profitability airline power of suppliers is high

What factors lead to high bargaining power for buyers?

High if: Few large buyers (could be potential collusion) Products are standardized or undifferentiated Buyers face low switching costs High switching costs for sellers Credible threat of backward integration Buyers are large in comparison to the seller compete with the supplying industry by: bargaining down prices, forcing higher quality, playing firms off of each other airline power of buyers is high

What factors lead to high (price) rivalry?

High if: There are many competitors in the industry (aka low concentration) Firms are equal in size Industry growth is slow or shrinking (over-capacity is high) Exit barriers are high Could be contractual obligations or geographic attachments Products and services are direct substitutes (differentiation is low) in airline industry this is high, low industry profitability

When can market share generate and sustain a competitive advantage?

High market share is no guarantee of high rates of profitability -A higher market share places companies at a competitive advantage -Companies with high market share often receive better prices from suppliers -Economies of scale (to generate cost leadership advantage) combined with high exit costs (to sustain the advantage) may make market share a defensible advantage

What factors make it difficult (and/or costly) for an entrant to duplicate an established firm's competitive advantage?

Historical conditions Uncertainty Social Complexity Property Rights Protection

What are two fundamental questions in business strategy and competitive advantage?

How do you generate advantage? How do you sustain advantage?

Discuss Indra Nooyi's "Performance with Purpose'' at PepsiCo.

Human sustainability: products healthier to combat obesity Environmental sustainability: ensure operations do not harm the environment The whole person at work: create a corporate culture in which employees have a life Performance with purpose: -Social responsibility with stakeholder strategy -Do better by doing better -Investors see significant future growth potential

What is the Structure-Conduct-Performance Model for Industry Analysis?

Industry structure: Similar to Porter's 5 forces Factors: -Number of buyers and sellers -Degree of product differentiation -Barriers to entry -Cost structures -Vertical integration -Alliances Accounts for ~20% of variance in firm performance Firm conduct: Firm strategy Factors: -Pricing -Advertising -R&D -Investment in PP&E Accounts for up to 55% of variance in firm performance Performance: Economics and accounting profits (rations -If economic profit = 0, then the NPV = 0 so IRR = WACC NPV and DCF MVA/EVA Tobin's Q: market value to book value ratio -If Tobin's Q = 1, perfect competition -You want Tobin's Q > 1 Application: if there are high barriers to entry (structure) then price rivalry in the industry is low (conduct) and therefore there is high economic profitability (performance)

What is the definition of a business-level strategy?

Integrated and coordinated set of commitments and actions designed to provide value to customers and to gain a competitive advantage by utilizing core competencies in specific product markets Easy definition: How firms compete in a given industry. Make decisions based on price or differentiation. Scope of operations targets a broad or narrow market

Barriers to entry: Cumulative learning curve + RTE case

Learning can lead to a reduction in costs When you double the output, your unit costs go down by x%, so the cumulative learning curve is 100% - x% Note: 80% curve is better than 90% curve because that means your costs went down by 20% instead of 10% RTE: Extrusion process requires prior experience with producing cereal (keeping cereals crispy- raisin bran) Other process technologies requires know how or learning by doing

Discuss MVA, EVA, Tobin's Q, and the Market Value of the Firm.

MVA: market value less total investment EVA: Operating profit (after tax) less annual capital costs; basically, this is economic profit Tobin's Q: Market value / book value The market value of the firm: current value of all securities issued by the firm

Describe the balanced scorecard and its limitations.

Management system aimed at translating an organization's strategic goals into a set of organizational performance objectives Four perspectives -Financial -Customer -Operations -Organizational Advantages Communication, vision turns into goals, design business process, feedback Limitations Does not provide criteria for strategy formulation How to get back on track if deviations occur Lacks guidance

Discuss the evolution of competition between Apple and Microsoft

Microsoft was the early leader -Set standard in personal computers -90% of alls PCs run Windows -Office Suite Apple -Got itself out of bankruptcy with the ipod → iTunes → -Brick & Mortar retail stores -Reshaped the publishing and media industries -Able to charge higher margin for its products -Microsoft majority of revenue comes from software - -COGS is lower -Apple revenue comes from both hardware and software -Spends less on R&D and marketing

Show how to calculate EVA.

Operating profit = $1,756m Taxes = $617m 67% equity @ 14.3% 33% debt @ 5.2% WACC= .67*.143 + .33*.052 = 11.3% Net income= 1,756-617= 1,139 Capital = 8bn 11.3% * 8bn = 904m -We have capital of 8bn to which we need a rate of return of 11.3% -904m is the hurdle amount 1,139-904m= 235m EVA Amount of value created on top of hurdle amount

biases in decision-making: illusion of control

Our tendency to overestimate our ability to control events The superstitious belief that we control things that we do not. It is the "magical thinking" of the 10-year old in which the inner child still takes hold of adults. An example of illusion of control is that air traffic controllers would notice that when they commented to the pilot: "nice landing" the next time the pilot landed it was not as good. Further, when the air traffic controllers said to the pilot: "you missed the mark on that landing," the next landing would be better. The air traffic controllers then obtained the mistaken belief that when they gave praise to pilots that the pilots became complacent, and when the air traffic controllers criticized the pilots, then the pilots became more alert and did better. However, the more likely explanation of these events is "regression to the mean." Consider a "normal (bell-shaped) distribution" from statistics: If one is on the right tail of the distribution as a pilot with the "perfect" landing, then whether anyone speaks to the pilot or not, the likelihood is that the next landing by that pilot will not be as good with almost 100% probability in this example. Conversely, if the pilot is on the left-tail of the distribution with the worst (non-accident) landing that this pilot ever had, then this pilot's next landing has a 99% likelihood (or higher) of being better. In short, air traffic controllers were mistaking "regression to the mean" as something that they could control from their air traffic tower.

What are the tradeoffs that firms must consider when seeking a (unique) strategic positioning?

Overall tradeoff between differentiation and cost Differentiation: Tradeoff between performing different activities or performing the same activities in a different way

Describe the PESTEL framework for evaluating the impact of external factors on the firm.

PESTEL framework groups the factors in a firm's general external environment (these are factors that a firm generally has little influence over) PESTEL components: P: political - government pressures, subsidies, lobbying E: economic - growth rates, employment levels, interest rates, currency exchange rates S: sociocultural - norms, culture, values, lifestyle changes, demographics T: technological - innovation, AI, R&A, diffusion E: ecological - global warning, sustainability, pollution L: legal - court system, legislation, hiring laws, regulation Way to scan, monitor, and evaluate the important external factors/trends that may impact a firm

Apply Ghemawat's Strategy Framework on (Linkages of) Positioning-Organization-Resources & Capabilities to our Harvard case on Wal-mart.

Positioning- cover large geography (particularly in rural and small towns), product market positioning within a business low cost provider Organization- "associates" not employees people greeter greater centralization @ corporate headquarters paid employees LOW but offered more training Resources and Capabilities - tangible -many stores - good network with suppliers so many products available at stores - specialized product assortment at stores based on geographic location -intangible -cheap but cheerful ambiance in the store -reputation as a low cost provider and best store to do business with if you are a supplier

Describe Ghemawat's Strategy Framework on (Linkages of) Positioning-Organization-Resources & Capabilities.

Positioning: Scope of the firm -Vertical integration (value chain) decisions -Product-market scope: choice of businesses (corporate portfolio analysis) -Product market positioning within a business -Geographic scope Organization Structure -Formal definition of authority -Conflict resolution System -Rules, routines, evaluations and rewards -Processes -Informal communication, networks and recruitment Resources and capabilities Tangible -Visible, physical attributes -Labor -Capital -Land -PPE Intangible -Invisible, no physical attributes -Culture -Knowledge -Brand equity -Reputation -IP

Discuss the value chain model in terms of primary and support activities.

Primary -Add value directly in transforming inputs into outputs -Raw materials through production Support activities -Indirectly add value -Support the primary activities like IS, HR, accy Like an activity map but remember: MARGINS

Barriers to entry: economies of scale + RTE case

Product-specific: having more products -Effect: helps lower setup costs, specialized equipment, Minimum Efficient Scale (MES) can be achieved -MES: quantity to minimize costs Plant-specific: deals with cost effectiveness -Higher costs can increase output by more than the actual cost amount -"When you double costs, you can increase the output by more than double" Multi-product: shareable input -Using the same inputs for multiple products helps control costs -Ex: honda civic and CRV use the same platform Multi-plant: multi-plant production helps generate unit cost savings RTE Big three brands have more products which lowers setup costs Multiple production lines and bagging fed into the same packaging line - generates unit cost saving MES = 75 million pounds annually - 3% market share

Describe the Triple Bottom Line as an assessment of firm performance.

Profits: The economic dimension (the business must be profitable to survive) People: the social dimension (emphasizes the people aspect) Planet: The ecological dimension (emphasizes the relationship between business and the natural environment

What are some of the limitations of Present Value measures?

Projection are only as good as the ability of managers to measure accurately the financial consequences of actions Business units and all investment proposals are self-contained Strict financial measurement of many long term investments is virtually impossible Investments in R&D do not offer direct returns

Discuss how Threadless leverages crowdsourcing in the design of their T-shirts

Prosumers: hybrid between producers and consumers Submit t-shirt designs online and community members vote on which design they like best Crowdsourcing: process in which a group of people voluntarily perform tasks that were traditionally completed by a firm's employees Helps produce better products Translates real-time market research and design contests into quick sales Doesn't make any significant investments until the design and market size are determined, minimizing downside

How is the "rational decision making" (optimizing) model fundamentally different from the "satisficing decision-making model?"

Rational decision making model: Intent to optimize An optimal decision is possible All relevant info is available and understandable All alternatives are known All possible outcomes are known Satisficing decision-making model: Doing good enough with no intent to optimize: find a needle in the haystack without seeking to find the sharpest needle in the haystack Time constraints Limited ability to understand all factors Inadequate base of info Limited memory of decision-makers Poor perception of factors to be considered in the decision process

Discuss the concepts of resource stocks and resource flows and its illustration through the bathtub metaphor.

Resource stocks Current level of intangible resources Resources flows Level of investments to maintain or build a resource

Discuss how Merck showed effective stakeholder management in the case of "river blindness."

River Blindness was a tropical skin disease that caused blindness in those infected George Meck changes the strategy of health company to focus on the people impacted by river blindness, not the profits generated from medicine - Effectively managed stakeholders - consumers, media, communities - Vision: to preserve and improve human life - Said "medicine is for the people. It is not for profit." People donated to support his cause, Merck distributed drugs in remote areas and eradicated river blindness

Discuss three classic definitions of strategy by (i) Schelling; (ii) Chandler; and (3) Quinn. What do these definitions have in common, and how are they different?

Schelling: Strategy of Conflict Strategy focuses on interdependence of adversaries' decisions and expectations on competitions behavior Chandler: Strategy and Structure Strategy is the creation of long-term goals, objectives, and adopting a course of action to allocate the resources needed for these goals Focuses on internal strategy formulation/implementation Quinn: Logical Incrementalism Integrating major goals, policies, and actions in sequences steps Also focuses on strategy formulation/implementation but addresses changes in the environment and a firm's opponents too

Tesla had a market capitalization of some $60 billion in early 2019. What was Tesla's sequence of moves contributing to this outcome?

Sequencing of moves: Build a sports car. · Use that money to build an affordable car. (Model S) · Use that money to build an even more affordable car. (Model 3) · While doing above, also provide zero-emission electric power generation options. (Acquired Solar City 2016) · Don't tell anyone. started with high-end car production, built up its reputation then moved to more affordable cars

Explain the stakeholder view of strategic management.

Stakeholder view: manage different stakeholders to gain and sustain a competitive advantage -Have to balance different expectations and priorities of stakeholders against the needs of the firm - Internal stakeholders: employees, stockholders, board members -contribute capital in exchange for benefits External stakeholders: customers, suppliers, alliance partners, creditors, unions, etc. Goal of this view is that stakeholder cooperation and support lowers transaction costs and improves a firm's reputation

What are some limitations of shareholder value creation as a measure of firm performance?

Stock prices can be highly volatile -Makes it difficult to assess firm performance Macroeconomic factors affect stock prices -Economic growth or contraction -Unemployment, interest and exchange rates Stock prices can reflect the mood of investors

Discuss the concept of Strategic Coherence and apply to Wal-mart and Southwest Airlines

Strategic coherence -Combining activities that complement and reinforce one another. Help together to achieve overall objectives of the firm -Difficult to imitate thus sustainable competitive advantage Southwest -Low price -Short routes -One aircraft -Point to point -High number of aircraft per route -No meals -flexible/lower staffing Walmart (activity map) -Low cost -Stores are specially stocked based on region -Innovative leader -exponential growth - analytical focus

Discuss the three approaches to strategize for competitive advantage: (1) Strategic planning; (2) Scenario planning; and (3) Strategy as planned emergence.

Strategic planning (formal, top-down): Strategic planning: Black swan (anomaly) events High impact of a highly improbable event Ex: enron, real estate bubble, hacker Scenario planning: Envision "what-if" plans New changes, demographic shifts, changing economic conditions, tech advances Generates dominant strategic plan Must implement most probable option Shortcomings: May not adapt well to change Formulation is separate from implementation Information flows one-way (top-down) Leaderships team future vision can be wrong May inhibit organizational learning Strategy as planned emergence: Less formal, begin with strategic place Top-down and bottom-up (strategies emerge from employees and works way up) Evaluated and coordinated by management Relies on data + personal experience + deep domain expertise + front line employee insight

If we consider a firm's sustainable competitive advantage as a function of barriers to imitation by others, and the firm sustaining its cash flow, then how does this conceptualization of sustainable competitive advantage relate to Net Present Value (NPV) in corporate finance?

Sustainable Competitive Advantage means consistent outperformance over competitors or a consistent high NPV in comparison to competitors You can generate economic value through three things: Revenue drivers Cost drivers Risk drivers Revenue and cost drivers both go into a firm's cash flow (numerator of the NPV function) You can't control risk as much (the denominator of the NPV function) NPV= sum of cash flows / (1+opportunity cost)^# of years

Describe important differences in Kahneman's (2011) path-breaking book, Thinking Fast and Thinking Slow between System 1 and System 2 modes of thinking

System 1: Fast Unconscious Automatic Everyday, snap decisions Error prone Higher likelihood of biases System 2: Slow Conscious Effortful Complete, analytical decisions Reliable Lower likelihood of biases

How does tacit knowledge help sustain competitive advantage?

Tactic knowledge: "We know more than we can tell" The knowledge is not observable in use The knowledge is socially complex rather than simple Knowledge, skills, and abilities an individual gains through experience - hard to put into words

A key idea for measuring firm performance is to "triangulate" (i.e., to use multiple measures of performance to evaluate the health of the organization). How does the Google vs. Microsoft comparison help illustrate this key idea?

The comparison looks at multiple measures to triangulate when microsoft had a competitive advantage over apple and vice versa

Apply the AFI Strategy Framework to show that in late 2018, Twitter did not have a coherent strategy.

The initial goal of Twitter was to grow their user-base and charge advertisers to show promotions on users' feeds Application to AFI: Analysis: Twitter did NOT grow its user base sufficiently Formulation: they didn't have a clear strategy on how to reach their goal of a larger user base Implementation: no clear set of action, faced fighting amongst management, lack of a clear corporate culture, low employee morale, etc. Attempted to be everything to everyone without considering strategic tradeoffs which led to incoherent actions

What is the purpose of industry analysis?

The purpose of industry analysis is to measure the probability of generating a profit or return on equity Measuring profit potential

biases in decision making: reasoning by analogy

The tendency to use simply analogies to make sense out of complex problems We all think by analogy. Asking: "what is it like?" is asking for an analogy between something we understand to get us started in understanding something we do not understand. However, sometimes the analogy takes over from the reality of the situation. Returning to the Vietnam example, there was a political science policy concerned about the 'domino theory' (a theory of once one domino falls, all the others would fall). Thus, if Vietnam turned communist, other countries one-by-one would turn communist. The visual in the mind of dominoes is a powerful one --- but there was, and is, no evidence that country politics are contagious like a virus. The domino theory is largely discredited today - but unfortunately, it ruled in the US for at least two decades (in the 1950s and 1960s).

Evaluate each of Porter's Five Forces Model within the airline industry: (1) Threat of entry; (2) bargaining power of suppliers; (3) bargaining power of buyers; (4) threat of substitutes; and (5) (price) rivalry among existing competitors. What is the predicted industry economic performance, based on this industry evaluation?

Threat of entry: high - Barriers are low, entrants only need a few airplanes (can be rented), a few pilots and crew members, gate access, and routes Power of suppliers: high -The suppliers of airframes (Boeing and Airbus) and the suppliers of engines (GE and Rolls-Royce) bargain away profitability of airlines Power of buyers: high -Large corporate customers sign contracts with airlines -These are powerful buyers that reduce profit margins for air carriers -Consumers mainly use price to decide on air travel - viewed as a commodity with little to no differentiation across carriers Threat of substitutes: high -There are many substitutes for travel -If airfare is too high, customers can drive, train, bus, etc. Price rivalry: high -Because all of the other four forces are high, price rivalry is very intense Profitability is very low, we'd expect economic performance to be very poor

5-forces for RTE Cereal

Threat of new entrants (LOW) - new firms need a strong financial cushion for operations to take off: -capital intensive; $100m to build a plant; R&D= $5-10m and 2-4 years to develop -MES = 75 million pounds annually - 3% market share - product differentiation -products need to be differentiated -brand loyalty due to >10% ads/sales ratio Power of Suppliers (LOW) -not many buyers bc low concentration (~85% of market share dominated by 3 companies) -products are not differentiated -low switching costs as there are a lot of suppliers Power of Buyers (buyers=Wal-mart) (HIGH) -buyers charge for premium shelf space (big 3 spend up to $1m for premium shelf space) -brand loyalty -retailers get a 10% discount to buy private label brands Threat of Substitutes (LOW) -bc prices stay high so not threatened by substitutes (opposite of airline case, just like soda case) -brand extensions and cobranded cereal options, toaster pastries, granola bars Price Rivalry (LOW) -Big 3 actually raised prices instead of lower them even when private label brands entered the market

Discuss Porter's 5-Forces Analysis

Threat of new entrants or barriers to entry Power of suppliers Power of buyers Threat of substitutes Price rivalry among competitors (high competition = low profit potential) A 5-star industry (soft drink everything is LOW A 0-star industry (airline) threat of entry is HIGH so barriers to entry are low

Discuss the blue ocean strategy of (successfully) combining differentiation and cost leadership, and discuss examples of Trader Joe's and IKEA.

Trader Joes Regional grocer Offers high value and health conscious foods Offers much lower costs than whole foods IKEA Eliminated salespeople and after sales service (you have to decide what you want to buy yourself and you need to set it up yourself) Reduce warranties Offers thousands of home furnishing items New way to shop for furniture

Provide the Analysis-Formulation-Implementation (AFI) Strategy Framework.

Used to position firm to sustain its competitive advantage, positive economic profit, positive NPV (top-down) framework: Analysis - DIAGNOSIS OF COMPETITIVE ADVANTAGE, looking at firm's external/internal environment Vision, mission, values External analysis Internal analysis Formulation - GUIDING POLICY to address the competitive challenge - strategy formulation Corporate strategy Business strategy Functional strategy Implementation - SET OF COHERENT ACTIONS to implement the guiding policy Structure, culture, control Corporate governance and business ethics

Provide details concerning the VRIO decision tree for explaining and predicting sustainable competitive advantage.

Valuable No: competitive disadvantage Rare No: competitive parity Is Imitation Costly No: temporary competitive advantage Organized to capture value? No: temporary competitive advantage If all yes then sustainable competitive advantage

Use the VRIO Framework to evaluate Groupon.

Valuable- yes Rare- yes (at first) Costly to imitate- no Organized to capture value- yes

What are the cost drivers that lead to cost leadership?

Value outweighs cost MES Learning curve

Describe the following seven business models and provide an example of each: Business model: details the competitive tactics and initiatives | explains how the firm intends to make money | stipulates how the firm conducts its business (buyers, suppliers, and partners)

[1] Razorblade model; Initial product is often: sold at a loss or given away for free Helps drive demand for complementary goods Money made primarily on replacement parts Ex: HP Charges little for its laser printers Imposes high prices for replacement toner cartridges [2] Subscription model; Users pay for access to a product or service Ex: Cable television Health clubs Magazines [3] Pay-as-you-go model; Users pay for only the services they consume Ex: Utilities like water and power Cell phone service plans [4] Freemium model; Free + premium business model Provides the basic features free of charge Users pay for premium services Ex: Wall Street Journal, Grammarly [5] Wholesale model; Traditional model in retail Products sold at a fixed price to retailers Retailer mark up the prices to make a profit Ex: Books are originally purchased from a publisher and then resold at 50% markup [6] Agency model; and Producer relies on an agent or retailer to sell the product At a predetermined percentage commission Producer may also control retail price Ex: Entertainment Industry Agents place artists or artistic properties and then receive commission Ambassadors (Go-Puff) [7] Bundling model Products or services for which demand is negatively correlated at a discount Ex: Microsoft Office Suite Instead of selling word and excel $120 each Microsoft bundles them at a discount, say $180

biases in decision making: representativeness

drawing conclusions based on small samples or anecdotes This bias refers to making conclusions based on (very) small samples. A classic example is that of Sewell Avery. At the beginning of the Depression, J.P. Morgan asked Avery to turn around the failing Montgomery Ward and he succeeded in restoring its profitability by making huge changes. In 1936, Fortune magazine said that Sewell Avery was "generally held to be the No. 1 Chicago businessman." Nevertheless, because he experienced a depression in the US after World War I, he assumed (based on his sample of one (1) event) that the US would experience a depression after World War II. Consequently, in the mid-to-late 1940s he did not expand Montgomery Ward and thus failed to take advantage of the demand for durable goods, which cost Montgomery War prominence in the retail field. Sears became a powerful player in the postwar period to fill the vacuum left by Montgomery Ward.

Discuss the "economic rent" earning potential of resources and capabilities.

earnings potential of resources and capabilities stems from: the extent of the competitive advantage established -scarcity and relevance sustainability of the competitive advantage - durability, mobility and replicability appropriability -property rights, relative bargaining power and embeddedness of resources

Barriers to entry: Government policy + RTE case

ex; china requires joint ventures with domestic companies to share tech RTE: no applicable except if anything FTC filed antitrust suits against the Big 3 which could be an attempt to lower this barrier

Barriers to entry: Favorable access to raw materials + RTE case

exclusive, favorable arrangements RTE: not applicable

Barriers to entry: Capital requirements + RTE case

high capital requirements may deter new entrants RTE: Multi-plant construction requires investments of over $100 million RTE industry spent ~1% of sales on R&D alone New products/brand lines costs ~$5-10 million Big 3 held premier shelf space that cost $1m alone

Barriers to entry: Credible threats of price cutting + RTE case

incumbent firms reacting aggressively to new entrants could change prices RTE: not applicable, big 3 actually raised prices

if there are high barriers to entry, what is price rivalry and economic profitability?

low price rivalry high economic profitabilty

Barriers to entry: Network effects + RTE case

more users make the product/service more valuable positive externality RTE: not applicable

Barriers to entry: Proprietary technology + RTE case

patents, general product know how, low cost product design RTE: extrusion requires expertise and prior experience

What are the cognitive biases

representativeness groupthink reasoning by analogy confirmation bias (prior hypothesis bias) escalating commitment illusion of control

biases in decision making: confirmation bias (prior hypothesis bias)

searching for info to support existing beliefs ex: market share leads to higher profitability Sometimes people have a belief about how the world works, and when evidence refutes the hypothesis (an anomaly), people do not change their prior hypothesis. In my MBA classes in the early 1990s, almost all of our MBA students believed that the path to achieving business success was getting high market share - that belief is not as strong today, but it still is there. Of the 16 Harvard cases that semester, eleven (11) were firms with the highest market share in the industry and one of the lowest economic performers in the industry. You might think that by the eighth case I was "kicking a dead horse" in refuting the idea with so many "anomalies." However, this dead horse still exhibited quite a powerful kick. At the end of the semester, I asked the class: "what determines high performance for the firm?" The first MBA answered ..."market share," and others in the class agreed. It was then I learned my lesson well: data are mute --- they do NOT speak for themselves. No matter how much data you throw in front of people in your career, do not underestimate the "prior hypothesis bias."

What are core competencies? Provide some examples.

unique strengths that allow for competitive differentiation results in higher value for the customer or lower cost products and services ex: dr. dre coolness factor allow for superior marketing plus disruption within the streaming industry tesla: engineering expertise in designing EV Netflix: proprietary algorithms based on individual customer preferences five guys: high quality ingredients but no drive through or expanded menu

biases in decision making: groupthink

when opinions coalesce around a leader without individuals critically evaluation and challenging that leader's opinions and assumptions Ex: bay of pigs fiasco (kennedy administration) symptoms: - Illusion of invulnerability - Belief in the inherent morality of the group - Stereotyped views of members of opposing groups - Application of pressure to members who express doubts about the group's shared allusions or question the validity of arguments proposed - Practice of self-censorship - Appointment of mindguards

Discuss the generic and the focused business strategies, and provide examples for:

• Cost Leadership walmart • Differentiation cocacola • Focused Cost Leadership BIC pens • Focused Differentiation Hernia doctors (specialized)