Business Policy and Strategy - Rutgers, Exam One

Intensity of Rivalry Among Competitors

The biggest determinant of competitiveness for an existing company Factors include: •Firm concentration ratio •Advertising budget •Technological innovation / transparency •Online vs. brick-and-mortar businesses •Rate of Industry Growth •Lack of Differentiation or Low Switching Costs •High Strategic Stakes •High Exit Barriers

Threat of substitute products or services

The existence of substitute products can threaten to take sales away from a particular industry Ex. Substitute for a car

Competitive dynamics

The total set of actions and responses taken by all firms competing within a market (all competitive behavior)

Model of Competitive Rivalry Process

competitor analysis, drivers of competitive behavior, competitive rivalry, outcomes

Define Strategic Group

a set of firms emphasizing similar strategic dimensions and using similar strategies

What is business level strategy

an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

Focus Strategy

an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment

Standard Cycle Market

exist when a firm's competitive advantages are partially shielded from imitation and imitation is moderately costly

Awareness

extent to which competitors recognize the degree of their mutual interdependence that results from market commonality and resource similarity

Multimarket Competition

firms compete against each other in several product or geographical markets

Competitors

firms operating in the same markets, offering similar products, and targeting similar customers.

Second movers

firms who respond to the first mover's competitive action, typically through imitation

integrated cost leadership/differentiation strategy

involves engaging in primary value chain activities and support functions that allow a firm to simultaneously pursue low cost and differentiation.

Competitor Analysis

involves the studying of competitors' future objectives, current strategies, assumptions, and capabilities.

Organizational Culture

is the complex set of ideologies, symbols, and core values that are shared throughout the firm and that influences how the firm conducts business

Mission

is the current business in which the firm intends on competing and the customers it intends to serve Short Term

Define Outsourcing

is the purchase of a value-creating activity or support function from an external supplier -Allows a firm to focus on core competencies -Often necessary because few firms have the resources and capabilities to achieve competitive superiority in all value chain activities and support functions. -Must be weighed against its cost, loss of control (and innovation), and loss of jobs within the firm -The benefits and drawbacks of outsourcing may be heightened if using foreign supply sources, where the business infrastructure may differ substantially

Market Segmentation

process used to categorize people with similar needs into individual and identifiable groups

Slack

the buffer or cushion provided by actual or obtainable resources that aren't currently in use, and are in excess of the minimum resources needed to produce a given level of organizational output. Slack allows firms to be first-movers.

Vertical Integration

the combination in one company of two or more stages of production that could otherwise be operated by separate companies Ex. Steel company buying every part of the production chain up to the train itself

Define Resource Similarity

the extent to which the firm's tangible and intangible resources are comparable to a competitor's in terms of both type and amount

Motivation

the firm's incentive to take action or to respond to a competitor's attack

Market commonality

the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each

Competitive Rivalry

the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an advantageous market position

Horizontal Integration

the process of a company increasing production of goods or services at the same part of the supply chain -Can be done via Merger & Acquisition, or internal expansion Ex. a locks for doors company buys all companies that does locks for doors. Rockefeller and Oil buying

Define Value

the satisfaction of a customer's goals and desires, resulting from a product or service's performance and attributes, for which the customer is willing to pay

Competitive Behavior

the set of competitive actions and responses a given firm takes to build or defend its competitive advantages and to improve its market position

Bargaining power of buyers

The ability of buyers to command lower prices can create serious threat to a company

Complementors

Companies or networks of companies that sell goods or services that are compatible with the firm's good or service. Sell Complementary goods

Define Strategic Management Process

Full set of commitments, decisions, and actions that can lead a firm to achieve strategic competitiveness and earn above-average returns

Strategic Action (or Strategic Response)

a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse.

Tactical Action (or Tactical Response)

a market-based move that is taken to fine-tune a strategy

What are Porter's Five Forces?

-Threat of new entrants -Threat of substitutes -Bargaining power of buyers -Industry rivalry -Bargaining power of suppliers

Industrial markets can be segmented into the following segemnts

-end use -product -geographic -common buying factor -customer size

Conflicting expectations of shareholders and lenders (Capital Market Stakeholders)

*Debt Holders:* - Preservation of Investment - Risk/return - Care about Interest Expense *Equity Investors* - Influence - Enhanced Wealth - Care about Net Income

Competitive advantages are not permanent

*No competitive advantage is sustainable over the long term* •In order to adjust to this dynamic, a firm must: 1.Exploit current advantages to the biggest extent possible 2.Use resources and capabilities to develop new future competitive advantages •Overreliance on a core competency can be dangerous over the long term, as the market changes and its ability to create value erodes, thus turning it into a *core rigidity*.

SWOT

*Strength:* internal characteristics of a business that give it an advantage over others *Weakness:* Internal characteristics of the business that place the business at a disadvantage relative to others *Opportunities:* Elements in the environment that the business could exploit to its advantage *Threats:* Elements in the environment that may result in trouble for the business

Firms have tangible and intangible resources:

*Tangible:* - Financial - Organizational - Physical - Technological *Intangible:* - Human - Innovation - Reputational

How does the existence of substitute products threaten to take sales away from a particular industry?

- Buyer propensity to substitute -Price performance of substitute -Switching costs -Level of differentiation - # of substitute products

Porter's Five Forces: External Environment Analysis

1) *Scanning* - study of all segments in the general environment. 2) *Monitoring* - the ongoing observation of any changes that may take place in the environment 3) *Forecasting* - developing projections on how the environment may change 4) *Assessing* - determining timing and significance of environmental changes

Approach to Porter's Five Forces

1) Identify the Industry a) What forces are acting on your industry overall? 2) Identify players a) What are the characters in this category? New Entrants is an exception since you wouldn't know them unless they enter 3) Assess strength of each force a) One factor may dominate more than others

Product Market Stakeholders include...

1. *Customers* - demand products at the lowest prices - Care about Sales and revenue 2. *Suppliers* - desire loyal customers who will pay the highest prices - Care about COGS 3. *Host communities* -national, state, and local governments - Care about Income Tax Expense 4. *Unions demand secure jobs* - Demand secure jobs and desirable working conditions for the workers they represent

Value Chain Support Functions

1. *Firm infrastructure:* support the work of the entire value chain (General mgt, planning, finance, accounting, legal, government relations) 2. *HR Management:* recruiting, hiring and training, developing and compensating personnel 3. *Technological Development:* improve a firm's product and processes used to manufacture it 4. *Procurement:* purchase inputs needed to produce a firms products Each activity should be *examined relative to competitor's abilities* and rated as superior, equivalent or inferior

Primary Activities of Value Chain

1. *Inbound logistics:* Activities used to receive, store, and disseminate inputs to a product (Supply Chain Management) 2. *Operations:* convert inputs to outputs 3. *Outbound Logistics:* collecting, storing and distributing products to consumers (Distribution) 4. *Marketing and Sales:* consumer learning about the products and purchases them 5. *Follow-Up Service:* enhance or maintain a product's value Each activity should be *examined relative to competitor's abilities* and rated as superior, equivalent or inferior

Difficulties in Managerial Decision-Making

1. *Uncertainty:* both the internal and external environment have many elements that introduce uncertainty; in addition, the supply chain (including the buyer base's needs) is often uncertain. 2. *Complexity:* can result from interrelationships among the various factors affecting a firm 3. *Intraorganizational Conflicts:* differences in opinion among decision-makers of a firm, as well as those affected by the decisions, can result in difficulty managing resources, capabilities, and core competencies.

If capabilities satisfy THESE FOUR criteria, they can be considered core competencies

1. *Valuable:* provide value for the end customer 2. *Rare:* possessed by few, if any, competitors 3. *Costly to imitate:* cannot be easily developed by competitors •Unique historical conditions •Organizational culture •Causally ambiguous link between core competencies and competitive advantages •Social complexity - Trends in society, demographic changes 4. *Nonsubstitutable:* no strategic equivalents See Slide 16 for chart

Primary stakeholders (individuals, groups, and organizations)

1. Can affect development of the firm's vision and mission 2. Are affected by the strategic outcomes achieved by the firm 3. Can have enforceable claims on the firm's performance 4. Are influential when in control of critical or valued resources

Categories of stakeholders

1. Capital Market Stakeholders 2. Product Market Stakeholders 3. Organizational Stakeholders

Two categories of market segmentation

1. Consumer markets 2. Industrial markets

Responsibilities of strategic leaders for development and effective use of the firm's human capital

1. Education and skills of employees 2. Organizational culture and ethical work environment 3. Strategic goals and global standards 4. International Assignment

Capital Market Stakeholders

1. Equity shareholders - Large Equity Shareholders have strong influence on the strategy of the firm 2. Debt holders (creditors) - Are critical to appease due to their ability to put a firm into bankruptcy for default

In order to adjust to competitive advantages not being sustainable, a firm must:

1. Exploit current advantages 2. Use resources and capabilities to develop new, future competitive advantges

What are the five business level strategies to establish and defend a firm's desired strategic positioning against competitors

1. cost leadership 2. differentiation 3. focused cost leadership 4. focused differentiation 5. integrated cost leadership/differentiation

Competitive blind spot

A situation in which a firm is unaware of competitors' objectives, strategies, assumptions, and capabilities

What can you anticipate by mapping an industry's profit pool?

A strategic leader can anticipate possible outcomes of different decisions and four on overall profitability

Organizational Stakeholders

All of the firms employees are directly involved in the process of formulating and implementing the vision, mission and strategy of the firm - Care about Selling, General, and Administrative Expenses

Differentiation Strategy

An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them.

Cost leadership

An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors -targets a broad customer segment/group

Define Risk

An investor's uncertainty about economic gains or losses that will result from a particular investment

External Environment

Economic Demographic Political Technological Global Sociocultural Physical

Consumer markets can be segmented based on...

Factors: -demographics -socioeconomics -psychological -geogrpahic -perceptual -consumptomn

True or false: each value chain primary activity does not have to be examined relative to competitor's abilities and rated as superior, equivalent or inferior

False

Support functions to customer value (3)

Finance, human resources, and management information systems

Define strategy

Integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage

Threat of new entrants

New Entrants can threaten to take market share from existing companies. Barriers to entry: -Economies of scale -Product differentiation -Capital requirements -Switching costs -Government policy -Distribution channels access

Which stakeholders are most immediately affected by the firms change in strategy

Organizational stakeholders

When is a buyer powerful? Weak?

Powerful when: -Buy a large portion of an industry's total output -Sales of product account for large portion of revenue -Switching costs are low -Industry's product are undifferentiated -Buyer poses a threat to integrate backward Weak when: -Sales span multiple industries -Sales of product are mostly inconsequential to seller's revenue -Switching costs are high -High level of differentiation in industry's products -Buyer cannot integrate backward

When is a supplier powerful? Weak?

Powerful when: -Dominated by a few large companies -Supplier's goods are critical to buyers -High switching costs -Can integrate forward -Satisfactory substitutes are not available - Industry firms are not a significant customer Weak when: -Many potential suppliers -Many Substitutes -Supplier depends on the industry -Buyers can survive without supplier goods -Low Switching costs -Cannot integrate forward

Define core competency

Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals

Define above-average returns

Returns in excess of what an investor expects to earn from other investments with a similar amount of risk

Differentiation and the Five Forces

Rivalry- brand loyalty will insulate a firm Buyers: depends on price perception Suppliers: strong New Entrants: not strong Substitutes: deterrent, but brand loyalty can make substitutes less attractive

Define Competitors Intelligence

Set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities - Critical to gather competitor intelligence using *legal and ethical practices*

Strategic leaders use *this process* to select strategies that align a firm with its vision and fulfill its mission

Strategic management process

What is the process of the Resource-Based Model of Above Average Returns

Top to botom: 1. Resources 2. Capability 3. Competitive Advantage 4. An attractive industry 5. Strategy formulation and implementation 6. Above-Average returns

Industrial Organizational (I/O) Model of Above Average returns

Top to bottom: 1. The external environment 2. Attractive industry 3. Strategy formulation 4. Assets and skills 5. Strategy implementation 6. Above-average returns

True or false: it is critical to gather competitor intelligence using legal and ethical practices

True

In this type of integration, parts of the supply chain are owned and operated by the same company

Vertical

Define Comepetitive Advantage

When a firm implements a strategy that creates superior value for customers AND that its competitors are unable to duplicate *Key Point:* Companies will typically NOT be able to maintain their competitive advantage indefinitely!

Define Strategic Competiveness

When a firm successfully formulates and implements a value-creating strategy

Corporate Strategy

a collection of multiple Business Units that act as a single entity Once a company begins to diversify away from a single line of business, it becomes necessary for management to consider strategy of the whole corporation, and how to coordinate activities among the business units to serve the purpose of the overall corporation Ex. School Bus company --> Ride Sharing, transportation

Define core rigidity

a core competency is overrelied upon and, as the market changes, its ability to create value erodes

First mover

a firm that takes an initial competitive action in order to build or defend its competitive advantages, or to improve its market position -can gain loyalty -earn above average return

Ability

a firm's resources and the flexibility they provide to engage in competitive rivalry

Information Networks

a linked chain of suppliers, distributors, and customers, that allow a firm to adapt quickly to changing customer expectations.

Total Quality Management

a managerial process that uses the empowerment of employees to emphasize continuous process improvement and increase customer satisfaction.

What are the value chain's primary activities?

a) Supply Chain Management b) Operations c) Distribution d) Marketing e) Follow-Up Service

What are effective strategy requirements?

a) strategic leaders b) organizational culture

Define Value Chain

activities or tasks the firm completes in order to produce products and then sell, distribute, and service those products in ways that create value for the customer

Define capability

an ability to perform a task in an integrative manner toward the fulfillment of a firm's mission Resource-Based Model views a company as a collection of its capabilities A firm will combine its tangible and intangible resources to create capabilities Encompass the group of abilities a firm owns to allow it to perform its organizational tasks (to serve its customers and make a profit) Form the basis for the firm's core competencies Ex. Distribution --> Logistics Management Techniques, HR --> Motivating and Staffing, Marketing --> Brand name promotions & innovative merchandising

Flexible Manufacturing Systems

an automated process in which a moderate quantity of differentiated goods or services can be produced in an as-needed basis by the customer.

Risk associated with integrated cost leadership/differentiation strategy

conflicting processes inherent in pursuing a cost leadership position versus a differentiation strategy may lead to an inability to successfully implement either effectively.

Profit Pool

consists of the total profits earned in an industry at all points along the *value chain* By *mapping an industry's profit pool*, a strategic leader can anticipate possible outcomes of different decisions and focus on overall profitability Which of those forces is driving your business and cost structure?

Objective of the integrated cost leadership/differentiation strategy

efficiently product products with some differentiated features

Business Unit (strategic business unit)

either a company or division of a company that focuses on a single product offering or market segment By focusing on the business unit, we can isolate the effects of management decisions - policies and strategies - on the profitability of the single line of business Ex. School Bus Company

Vision

is an idea of what the firm wants to be and what it wants to achieve Long Term

Fast Cycle Market

markets in which the firm's capabilities that contribute to competitive advantages aren't shielded from imitation and where imitation is often rapid and inexpensive. - Critical to a fast-cycle market is the ability to make strategic decisions quickly but in a comprehensive approach - Reverse engineering and the rate of technology diffusion facilitate the rapid imitation that takes place in these markets. - Rapid price declines in these markets require companies to profit quickly from their product innovations. - Firms will often prefer to cannibalize their own sales with new products, rather than try to develop loyalty to one particular product - Hence, the strategy is often to develop a new (temporary) competitive advantage even while exploiting a previous product for as long as possible - Example: Tech industry, Fast fashion (Trend driven), Mobile Phones

Slow Cycle Market

markets in which the firm's competitive advantages are shielded from imitation, commonly for long periods of time, and where imitation is costly. - In this type of market, the building of a unique and proprietary capability produces competitive advantage. - Difficult-to-understand and costly-to-imitate capabilities result from unique historical conditions, causal ambiguity, and/or social complexity - Patents and copyrights, and their protection, are key competitive actions taken within a slow-cycle market. - Example: Utilities & Government Controlled Regulations

Late movers

respond to a competitive action a significant amount of time after the first mover's actions and the second mover's response.

Define:Value Chain Analysis

should identify those activities that are the sources of either cost or differentiation advantages

Bargaining Power of Suppliers

the ability of suppliers to command higher prices can threaten a company's profitability and flexibility

What is the risk associated with the focus strategy?

the broader industry may begin to focus on the targeted segment or the preferences of the target group may evolve over time to match those of the broader industry.

What is the goal of flexible manufacturing systems?

to eliminate the "low cost versus differentiation" trade-off that is inherent in traditional manufacturing technologies

Define Industrial Organization (I/O) Model

views the external environment as the primary determinant of a firm's strategic actions

Resource-Based Model

views the internal capabilities and unique resources of a company as the primary determinant of a firm's strategy and returns.

When does strategic competitiveness result?

when a firm satisfies a group of customers by using its competitive advantages as the basis of competing in individual product markets

Strategic Leaders

will use the strategic management process to select strategies that align a firm with its vision and fulfill its mission

Common External Analysis Pitfalls

•Defining industry too broadly or too narrowly •Making lists instead of engaging in rigorous analysis •Paying equal attention to all forces rather than digging into the most important ones •Ignoring industry trends •Confusing cyclical or transient changes with true structural changes •Using framework to declare industry attractive or unattractive rather than using it to guide strategic choices Ex. True structural change - Internet, Blockbluster, and Netflix

Managers must act as strategic leaders by:

•Knowing when a capability is not a competence. •Learning quickly from failures and mistakes. •Having the maturity of judgment to deal effectively with uncertainty, complexity, and intraorganizational conflicts in an unbiased manner. •Being willing to take intelligent risks.