Business Policy Test 1

Internal analysis helps a firm:

- determine if its resources and capabilities are likely sources of competitive advantage - establish strategies that will exploit any sources of competitive advantage

Four Categories of Resources

- Financial (cash, retained earnings) - Physical (plant & equipment, geographic location) - Human (skills & abilities of individuals) - Organizational (reporting structures, relationships)

Summary

- Firms could achieve competitive parity and survive - they would face a flat demand curve - their cost structure would be the industry average time just to survive - they would need to adapt their strategy over - they would fail if they didn't adapt their strategy - the strategic management process helps managers achieve competitive advantage - competitive advantage depends on differences - strategy is about discovering and exploiting these differences

The Question of Organization

- a firm's structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firm's resources - examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc. - these structure and control mechanisms complement other firm resources—taken together, they can help a firm achieve sustained competitive advantage (3M Company)

Resource Heterogeneity

- heterogeneity of resources typically occurs as the result of 'bundling' the resources and capabilities of a firm - managers of a firm could take resources that seem homogeneous and 'bundle' them to create heterogeneous combinations - competitive advantage typically stems from several resources and capabilities 'bundled' together

Strategy Implementation

- how strategies are carried out - who will do what - organizational structure and control - who reports to whom - how does the firm hire, promote, pay, etc. - every strategic choice has strategy implementation implications - strategy implementation is just as important as strategy formulation A Strategy Is Only As Good As Its Implementation

Competitive Disadvantage

- people may have an aversion to the firm's offering - the firm may have a cost disadvantage - a firm may have outdated technology/equipment - a firm may have a negative reputation

Competitive Parity

- the firm's offerings are 'average' - people do not have a preference for the firm's offering - the firm does not have a cost advantage over others - some things that may lead to competitive parity may still be critical to success (e.g., telephones)

Emergent vs. Intended Strategies

- the strategic management process leads managers to intended strategies However, - conditions often change or new information becomes available - managers respond and adopt emergent strategies

External Analysis Summary

-takes time and effort - should include consideration of international markets - helps firms recognize threats and opportunities - provides assessment of likely levels of industry profitability (normal, above, below) - can be applied at the individual level to professional and personal environments

Competitive Advantage- Two Types

1)Preference for the firm's output - people choose the firm's output over others' - people are willing to pay a premium 2)Cost advantage vis-à-vis competitors lower costs of production/distribution

Strategy

A firm's theory about how to gain competitive advantages

Internal Analysis

Assumes: - determinates of economic performance are firm-level characteristics (resources & capabilities - firms may be different (heterogeneity) - differences may be enduring (immobility) - competitive advantage stems from resources and capabilities that meet the VRIO criteria Tells us: - what the firm should do, given the relative strengths and weaknesses of resources and capabilities Managers' Job: - bundle resources and capabilities to achieve competitive advantage VRIO Framework Helps Managers Recognize Sources of Competitive Advantage

Complements As Another Force

Complements Increase the Value of the Focal Firms Product customers perceive more value in the focal firm's product when it is combined with the complement's product complement's may be found outside the focal firm's industry

Competitive advantage: Advantage Parity Disadvantage

Economic Return: Above normal-exceeding expectations Normal-meeting expectations Below Normal- failing expectations

Porter's Five Forces Model

Entry Buyers Suppliers Substitutes Rivalry Higher Threat = Lower Average Profits

External and Internal Analysis or Systematic examination of the Environment

External Analysis: -interest rates -demographics -social trends -technology Internal Analysis: -human resources (knowledge) -manufacturing ability - technology

Strategic Choice

External and internal analysis -> Strategic Choice-> Business Level and Corporate level

The VRIO Framework

Four Important Questions: - Value - Rarity - Imitability - Organization If a firm has resources that are: - valuable, - rare, and - costly to imitate, and... the firm is organized to exploit these resources, then the firm can expect to enjoy a sustained competitive advantage

Value, Rarity, & Imitability

If a Firms resources are: -Valuable , Rare, but not Costly to imitate the firm can expect a Temporary Competitive Advantage Valuable, Rare, and Costly to Imitate the firm can expect a sustained competitive advantage

Valuable and Rare

If a firms resources are: 1. Not Valuable- The firm can expect a Competitive Disadvantage 2. Valuable, but not rare The firm can expect a Competitive Parity 3. Valuable and Rare The firm can expect a Competitive Advantage

Declining Industry Structure

Industry Characteristics: - industry sales have sustained pattern of decline - some well-established firms have exited -firms have stopped investing in maintenance Opportunities: - market leadership - niche - harvest - divest

Fragmented Industry Structure

Industry Characteristics: - large number of small firms - no dominant firms - no dominant technology - commodity type products - low barriers to entry - few, if any, economies of scale Opportunities: - Consolidation - buy competitors - build market power - exploit economies of scale

Emerging Industry Structure

Industry Characteristics: - new industry based on breakthrough technology or product - no product standard has been reached - no dominant firm has emerged - new customers come from non- consumption not from competitors Opportunities: - first mover advantages - technology -locking-up assets - creating switching costs

Mature Industry Structure

Industry Characteristics: - slowing growth in demand - technology standard exists - increasing international competition - industry-wide profits declining - industry exit is beginning Opportunities: - refine current products - improve service - process innovation

The Structure - Conduct - Performance Model

Industry structure: Number of Homogeneity firms Cost of Entry and Exit Firm Conduct: Strategies firms pursue to gain competitive advantage Performance: Firm Level: competitive disadvantage, parity, temporary or sustained competitive advantage Society: productive and allocative efficiency, level of employment, progress

Strategic Management Process or Mission of Firm

Mission-> Objectives->External and Internal Analysis-> Strategic Choice->Strategy Implementation-> Competitive Advantage

Two Critical Assumptions of the RBV

Resource Heterogeneity - different firms may have different resources Resource Immobility - it may be costly for firms without certain resources to acquire or develop them - some resources may not spread from firm to firm easily the firm possessing the valuable resources will likely gain a sustained competitive advantage

Resources and Capabilities

Resources: - tangible and intangible assets of a firm » tangible: factories, products intangible: reputation - used to conceive of and implement strategies Capabilities: - a subset of resources that enable a firm to take full advantage of other resources »marketing skill, cooperative relationships

Measuring Competitive Advantage

Superior Economic Performance Is Viewed as Evidence of Competitive Advantage - it is rather easy to see the evidence of competitive advantage measuring the source of the advantage per-se is typically impossible - it's difficult to 'measure' technology Two Classes of Measures: 1) Accounting Measures - ROA, ROS, ROE, etc. that exceed industry averages 2) Economic Measures - earning a return in excess of the cost of capital

Change Responses

Tactics (Tide): - specific actions tweaking product characteristics - usually imitated so quickly that there is no advantage - a 'leap frog' move may create advantage Strategy (Monsanto) - a fundamental change in a firm's theory - may be necessary if current strategy becomes obsolete - a mimetic change may achieve parity, but not advantage

Competitive Advantage Temporary and Sustainable

Temporary: - competitive advantage typically results in high profits - profits attract competition - competition limits the duration of competitive advantage in most cases Therefore: - most competitive advantage is temporary - competitors imitate the advantage or offer something better Sustainable: Some competitive advantages are sustainable if: - competitors are unable to imitate the source of advantage - no one conceives of a better offering Of Course: - in time, even sustainable competitive advantage may be lost

Costs of Imitation

Unique Historical Conditions (Caterpillar) - first mover advantages - path dependence Causal Ambiguity (Southwest Airlines - HR) - causal links between resources and competitive advantage may not be understood - bundles of resources fog these causal links Social Complexity (WordPerfect) - the social relationships entailed in resources may be so complex that managers cannot really manage them or replicate them Patents - patents may be a two-edged sword - offer a period of protection if the firm is able to defend its patent rights - required disclosure may actually decrease the cost of imitation, and the timing

The Resource-Based View

developed to answer the question: Why do some firms achieve better economic performance than others? - used to help firms achieve competitive advantage and superior economic performance - assumes that a firm's resources and capabilities are the primary drivers of competitive advantage and economic performance

External analysis

discover threats and opportunities see if above normal profits are likely in an industry better understand the nature of competition in an industry make more informed strategic choices

Barriers to Entry

economies of scale—firm that can't produce the minimum efficient scale will be at a disadvantage product differentiation—entrants are forced to overcome customer loyalties to existing products cost advantages independent of scale—incumbents may have learning advantages, etc. government policies—governments may impose trade restrictions and/or grant monopolies

Threat of Rivalry

high rivalry means firms compete vigorously—and compete away above average profits Industry conditions that facilitate rivalry: large numbers of competitors slow or declining growth high fixed costs and/or high storage costs low product differentiation industry capacity added in large increments

The Question of Rarity

if a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits) - a resource must be rare enough that perfect competition has not set in - thus, there may be other firms that possess the resource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-lowering drugs, but the drugs are still scarce—look at prices)

Threat of Entry

if firms can easily enter the industry, any above normal profits will be bid away quickly barriers to entry lower the threat of entry barriers to entry make an industry more attractive this is true whether the focal firm is already in the industry or thinking about entering

The Question of Value

in theory: Does the resource enable the firm to exploit an external opportunity or neutralize an external threat? the practical: Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? (Levi's reputation allows it to charge a premium for its Docker's pants)

Neutralizing Threats

most firms cannot unilaterally change the threats in an industry by altering relationships in an industry, firms may reduce threats and/or create opportunities, thereby increasing profits

The Structure - Conduct - Performance Model Purpose

originally developed to spot anti-competitive conditions for anti-trust purposes came to be used to assess the possibilities for above normal profits for firms within an industry Porter's Five Forces Model was developed from this economic tradition

Threat of Powerful Buyers

powerful buyers can lower profits the focal firm by demanding lower prices and/or higher levels of quality and service Industry conditions that facilitate buyer power: small number of buyers for focal firm's output lack of a differentiated product the product is significant to the buyer buyers operate in a competitive market—they are not earning above normal profits buyers can vertically integrate backwards many small buyers can be united around an issue to act as a block

Threat of Powerful Suppliers

powerful suppliers can lower profits for the focal firm Industry conditions that facilitate supplier power: small number of firms in supplier's industry highly differentiated product lack of close substitutes for suppliers' products supplier could integrate forward focal firm is an insignificant customer of supplier

Objectives of the Strategic Management Process

specific, measurable targets the things a firm needs to 'do' to achieve its mission should influence other elements in the strategic management process

Threat of Substitutes

substitutes fill the same need but in a different way -Coke and Pepsi are rivals, milk is a substitute for both substitutes create a price ceiling because consumers switch to the substitute if prices rise substitutes will likely come from outside the industry

Competitive Advantage

the ability to create more economic value than competitors - all other elements of the strategic management process are aimed at achieving competitive advantage - there must be something different about a firm's offering vis-à-vis competitors' offerings - if all firms' strategies were the same, no firm would have a competitive advantage - competitive advantage is the result of doing something different and/or better than competitors

Competitive Dynamics

the strategic decisions and actions of firms in response to the strategic decisions and actions of other firms No Response Change tactics Change strategy "No Action" Response (Rolex Casio) A firm may decide to take no action because: - the other firm is serving a different market advantage - a response may hurt its own competitive - it does not have the resources and capabilities to mount an effective response - it wants to reduce or manage rivalry in the market through tacit collusion

The Question of Imitability

the temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a cost disadvantage in imitating the resource - intangible resources are usually more costly to imitate than tangible resources (Harley-Davidson's styles may be easily imitated, but its reputation cannot) - if there are high costs of imitation, then the firm may enjoy a period of sustained competitive advantage - a sustained competitive advantage will last only until a duplicate or substitute emerges - if a firm has a competitive advantage, others will attempt to imitate it (Razor scooters were a big hit and others quickly imitated them)