MGMT 466 - Exam 2

Competitive Dynamics:

(sum of all firm competitive actions) -Total set of actions and responses of all firms competing within a market

The Essence of Competitive Action and Response:

*Industry Environment: Company 'A' Initiates Competitive Action* -Industry Environment is Changed -Company 'B' Initiates Competitive Response *Industry Environment is Changed Again*

Ex. 1: The "Dell way":

-Bypass middle-man and sell custom-built computers directly to consumer -This business model lowered costs and hence prices of products -But as of 2006, no longer created value to the degree it had and End of 2006: HP 18.1% vs. Dell's 14.7% market share Why?

Operational Relatedness: Sharing activities

-Can gain economies of scope -Share primary or support activities (in value chain) -Risky as ties create links between outcomes -Related constrained diversified firms share activities in order to create value -Not easy, often synergies not realized as planned *e.g. Stovetop* (pants)

Narrow Market Segment / Lowest Cos Companies:

-Costco -Dollar Tree -Aldi

Focused Differentiation:

-Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators

Differentiation:

-Features important to customers & distinct from competitors that allow premium pricing

Competitors:

-Firms operating in the same market, offering similar products and targeting similar customers

Takeaway/Summary of Competitive Rivalry and Dynamics:

-Firms with similar markets and resources are more likely to engage in competitive rivalry and dynamics. -The pace of the business cycle determines how quickly competitive advantage is eroded through competitive dynamics. -Disruptive innovations can surprise successful firms, destroying their market advantage.

Resource Similarity (RS):

-How comparable are competitor's tangible and intangible resources in type and amount? -FedEx and UPS: high RS

Standard-cycle markets:

-Lead to highly competitive pressures despite world class products -Multimarket competition may dampen rivalry somewhat -SCA is possible (SCA = Sustained Competitive Advantage)

Cost Leadership:

-Lowest cost structure vis-à-vis competitors allowing price flexibility & higher profitability

Key Drivers of Differentiation Strategy:

-Premium brand image -Customization -Unique Styling -Speed -More convenient access -Unusually high quality

2 Key Issues of Corporate-Level Strategy:

1) In what product markets and businesses should the firm compete? 2) How should corporate headquarters manage those businesses?

3 Key Issues in Business Level Strategy:

1) Who will be served? 2) What needs will be satisfied? 3) How will those needs be satisfied? WHO, WHAT, HOW

Generic Business-Level Strategies (4 of them)

1. Cost Leadership 2. Focused Cost Leadership 3. Differentiation 4. Focused Differentiation

Product Differentiation:

Designing products to satisfy customers' need in ways competing products cannot.

One Business Level Strategy:

A single-product market/single geographic location firm employs one business-level strategy and one corporate-level strategy identifying what or which industry the firm will compete in

VERTICAL INTEGRATION EX: Sissi's Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Sissi's Steel has decided to buy one of these brick plants. This is an example of: a. backward integration. b. forward integration. c. horizontal integration. d. virtual integration.

A) Backward Integration

High Focused Differentiation/Distinctiveness for Narrow Market Segments

Abercrombie & Fitch Chicos Eddie Bauer Apple

The Strategic Management Process:

After selecting a business-level strategy, firms must remain aware of competitive rivalry and dynamics that affect the success of their competitive actions and that allow them to predict competitor's actions -Gotta stay grinding / aware of competition

Strategy:

An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage

Unrelated Diversification:

Low Operational Relatedness Low Corporate Relatedness

COMPETITIVE RIVALRY & DYNAMICS

Section Starts HERE: -Define competitive rivalry and dynamics -Observe factors that influence likelihood of competition between firms -Discuss impact of business cycle on competition

Tactical Action:

-Commitment of less specific resources, taken to fine-tune a strategy, that is easier to implement, and reversible -Can be easily reversed/changed (e.g., pricing, advertising)... (promotions, etc)

Takeaway & Summary of Business Strategy Slides:

-Companies face a choice of competing based on cost, differentiation, or some combination of these factors -Business strategy must fit the company, the market, and the competitive landscape

Focused Cost Leadership:

-Cost leadership in selected market niches where it has a local or unique cost advantage

Market Commonality (MC):

-Increases when firms compete in similar markets -The more overlapping markets (e.g., multimarket competition), the higher the MC -Ex: geographic, product, customer, etc. -McDonald's and Burger King: High MC

Fast-cycle markets:

-Intensely dynamic; 1st mover advantage unsustainable -Firms may cannibalize older generation products -SCA unlikely (SCA = Sustained Competitive Advantage)

Slow-cycle markets:

-Often shielded from imitation due to costs and/or very strong brand loyalties -May lead to sustained competitive advantages, but eventually it will erode over time *Example: Pharmaceuticals

Ex. 2: The new wave of 'unlimited' data plans:

-On Feb 10th, Sprint announced a new unlimited data plan -On Feb 12th, Verizon introduced its new unlimited data plan -On Feb 13th, T-Mobile responds to Verizon's new unlimited data plan by removing HD streaming and tethering restrictions -On Feb 16th, Sprint announced promotions and changes to its new unlimited data plan -On Feb 16th, AT&T expanded its unlimited data plan to everyone

Step 1: Conduct General Competitive Analysis

-Purpose: assess similarity of firms to determine the extent to which they are competitors -Two components 1) Market Commonality 2) Resource Similarity = Extent of Competitive Rivals

Strategic Action:

-Significant commitment of a specific and distinctive resource that is difficult to implement, and irreversible -HARDER to reverse (Boeing's mid-sized jet liner) (Guess positioning to be more upscale)

Southwest's Competitive Advantages (rivals unable to imitate):

-Tight integration among activities -Cost leadership strategy -Unique culture and customer service

BUSINESS-LEVEL STRATEGY:

-is a deliberate choice about how the firm will perform the value chain activities to create unique value

The 3 Disadvantages/Limits of Diversification

1) Changes in Industry/Company: -Unpredictable future -Willing to divest business units 2) Diversification for the Wrong Reasons -Clear vision of how value will be created. -Extensive diversification can reduce profitability. 3) Bureaucratic Costs of Diversification -Costs are function of number of business units portfolio -Extent coordination is required to gain benefits.

The 3 Steps of Competitive Rivalry & Dynamics:

1) Conduct General Competitive Analysis 2) Study Drivers of Competitive Behavior 3) Examine Likelihood of Attack & Response

Gaining Advantage Over Rivals (2 ways)

1) Differentiation: -produce a differentiated product and charge sufficiently higher prices to more than off-set the added cost of differentiation 2) Low Cost: -Produce an essentially equivalent product at a lower cost

PORTER'S 5 FORCES:

1) Existing Firms Rivalry 2) Power of Buyers 3) Power of Suppliers 4) Threat of Entrants 5) Threat of Substitutes

Customers choose a product based on? (2 things)

1) How the product is differentiated from others? 2) Price of product

3 Approaches to Market Segmentation:

1) No Market Segmentation: -A product is targeted at the "average customer" 2) High Market Segmentation: -A different product is offered to each market segment 3) Focused Market Segmentation: -A product is offered to one or a few market segments

2 Types of Diversification:

1) Related - entry into new business in different industry: -Related to company's existing business / activities -Has commonalities between one or more components of each activity's value chain *Based on transferring/leveraging competencies, sharing resources, & bundling products 2) Unrelated - entry into industries with no connection to any of company's activities in present industry or industries *Based on only general organizational competencies to increase profitability of all business units

Step 2: Study Drivers of Competitive Behavior: (3 of them)

1. Awareness: -Are managers aware of and do they understand key competitors? 2. Motivation -Does the firm have an "incentive" to take action or respond? 3. Ability -Does the firm have the necessary resources to attack? *Understanding competitor's awareness, motivation and ability helps the firm to predict competitor behavior

Corporate strategy is used to identify: (3 things)

1. Businesses/industries firm should be in 2. Value creation activities firm should perform 3. Methods to enter/exit businesses/industries to maximize long-run profitability *Companies must adopt a LONG-TERM perspective in formulating a corporate-level strategy.*

The 3 Main Approaches to Segmenting Markets

1. Ignore differences in segments- make product for typical/average customer 2. Recognize differences between segments- make products that meet needs of all/most segments 3. Target specific segments- focus on/serve one or two selected segments

Corporate-Level Strategy:

BEGINS HERE: -Define Corporate-Level Strategy -Goals and Strategies of Diversification -Levels of Diversification -Related vs. Unrelated Diversification

Example: P&G' Diversification Strategy:

Baby, Feminine & Family Care (11 brands) Beauty (11 brands) Fabric & Home care (27 brands) Health & Grooming (16 brands) Creating synergies across the businesses *Potential break up of P&G (2014) - expected to drop about 100 brands

How does the Differentiation Strategy address Porter's 5 Forces?

COME UP WITH THIS AS WELL (book probably has more specific examples) *A firm that successfully implements a differentiation strategy can earn above-average returns even when the five competitive forces are strong.

Differentiation Strategy: Risks

COMPETITIVE RISKS PRICE DIFFERENTIAL: -Between the differentiator's and the cost leader's products becomes too large VALUE DIMINISHED: -Differentiation ceases to provide value for which customers are willing to pay EXPERIENCE: -narrows customers' perceptions of the value of differentiated features COUNTERFEIT: -goods replicate differentiated features of the firm's products

Cost Leadership Strategy Risks:

COMPETITIVE RISKS: -OBSOLESCENCE: processes used to produce and distribute goods/services may become obsolete due to competitors' innovations -COST REDUCTIONS: too much focus on cost reductions may occur at expense of customers' perceptions of differentiation (risk of quality???) -IMITATION: competitors, using their own core competencies, may successfully imitate the cost leader's strategy

Market Segmentation:

Customers grouped based on differences in needs or preferences

Competitive Rivalry and Dynamics: Examples

Dell & Data Plan Examples

Value-Creating Diversification: Related Strategies (Corporate Strategy) Example: Campbell Soup Company

Engages in the manufacture and marketing of branded convenience food products worldwide 4 SEGMENTS: 1) U.S. Soup, Sauces, and Beverages 2) Baking and Snacking 3) International Soup, Sauces, and Beverages 4) North America Foodservice

Value-Creating Diversification:Related Strategies (Corporate Strategy) Example: Johnson & Johnson

Engages in the research and development, manufacture, and sale of various products in the health care field worldwide 3 SEGMENTS: 1) Consumer segment: -Products for baby care, skin care, oral care, wound care, and women's health care fields, as well as nutritional and over-the-counter pharmaceutical products 2) Pharmaceutical segment: -Products for anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology 3) Medical Devices and Diagnostics segment: -Products for circulatory disease management, orthopedic joint reconstruction and spinal care, wound care and women's health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses

Summary of Corporate-Level Strategy Slides (Power point 8)

Firms can use diversification as a corporate-level strategy for profit growth and competitive advantage Related Diversification: -offers opportunities to gain economies of scope or block key competitors; Unrelated Diversification: -can improve efficiencies of capital allocation Benefits of diversification must outweigh bureaucratic and coordination costs

Broad Target Markets:

Firms serving a broad market seek to use their capabilities to create value for customers on an industry-wide basis; competing in many customer segments

Market Commonality and Resource Similarity (Con't):

Firms should be less inclined to attack a firm that is likely to retaliate -High MC and RS should reduce likelihood of attack -Firms with high MC and with similar resources are more likely to be aware of each other's competitive moves -When attacked, similar firms more likely to aggressively retaliate -Can lock firms into mutually destructive competitive situations -Price was between Netflix and Blockbuster in from 2004-2007 -Reduced profits for both Netflix and Blockbuster -Blockbuster bankrupted in 2010

Differentiation Strategy:

Firms using differentiation strategy: -Provide products that have different, valued features that are sold at a premium price -Differentiate their products along as many dimensions as possible. -The less similarity to competitors' products, the more buffered a firm is from competition with its rivals.

HOW DOES THE COST LEADERSHIP STRATEGY ADDRESS PORTER'S 5 FORCES:

GO LOOK UP MY NOTES OR AN EXAMPLE SOMEWHERE OR SOMETHING !!!!!!!! *A firm that successfully implements a cost leadership strategy can earn above-average returns even when the five competitive forces are strong.

Generic Strategies & The Five Forces:

GO VIEW CHART IN POWER-POINT 6!! (Slide 26)

Companies with High Distinctiveness / Broad Market:

HEB Nike

Both Operational & Corporate Relatedness

High Operational Relatedness High Corporate Relatedness

Related Constrained Diversification:

High Operational Relatedness (sharing activities between businesses) Low Corporate Relatedness (transferring core competencies into businesses)

Competitive action and response Example: (Coke & Pepsi: Non-Carbonated Drinks Introduced)

Industry environment: increased competition pressure (competitor in five forces model) and decreased demands of carb-drinks (buyer in five forces model) -A's initial competitive action: Coke decided to enter non-carb-drink market -Change of industry environment: increased threats of substitutes -Company B's competitive response: Imitation (Pepsi also entered non-carb-drink market) and alliances (Pepsi developed alliances with big institutions to block institutional customers) -Industry environment changed again: Further increased competition and reduced demands.

Related Linked Diversification:

Low Operational Relatedness High Corporate Relatedness

Value-Creating Diversification: Related Strategies (Corporate Strategy Wise)

Market Power: -Exists when a firm is able to sell its products above the existing competitive level or to reduce costs of primary and support activities below the competitive level, or both. -Can come from increasing scale or size Market power can also be created through: -Multi point Competition -Exists when 2 or more diversified firms simultaneously compete in the same product or geographic markets. -Vertical Integration

Example of a Market: Market Segment: Market Sub-segment:

Market: -Athletic Shoes Market Segment: 1) Sporting 2) Casual Comfort Market Sub-Segment: -Sporting Shoes: 1) Running 2) Aerobics 3) Walking 4) Tennis

Strategic Action V.S. Tactical Action Examples:

NEXT CARDS

Value-Creating Diversification: Unrelated Strategies (Corporate Strategy): Example: Textron Inc.

Operates in the aircraft, industrial, and finance industries worldwide. 4 SEGMENTS: 1) Bell - helicopters plus parts and service 2) Cessna - general aviation aircraft 3) Industrial - auto parts, food containers, hydraulics, golf carts 4) Finance - aircraft finance, asset-based lending, distribution finance, golf finance, resort finance

Forward Integration

Owns its own source of output distribution

Sharing Resources at Procter & Gamble

Power-point 8 (Slide 12)

Transfer of Competencies at Philip Morris:

Power-point 8 (Slide 14)

Operational and Corporate Relatedness Graph/Chart Thingy:

Power-point 8 (Slide 15)

Diversification and Performance Chart (downward sloping hill curve)

Power-point 8 (Slide 28)

Levels of Diversification (Busy chart)

Power-point 8 (Slide 8)

Value-Creating Diversification: Unrelated Strategies (Corporate Strategy): Example: United Technologies Corporation

Provides technology products and services to the building systems and aerospace industries worldwide Otis segment - elevators and escalators Carrier segment - air conditioning and refrigeration UTC Fire and Security segment Pratt and Whitney segment - aircraft engines; parts and services Hamilton Sundstrand segment - aerospace products and aftermarket services Sikorsky segment - helicopters UTC also engages in the development and marketing of distributed generation power systems and fuel cell power plants for stationary, transportation, space, and defense applications

Business-Level Strategy:

Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

Value-Creating Diversification -Related Strategies:

Purpose: Gain market power relative to competitors -Related diversification wants to develop and exploit economies of scope between its businesses -Economies of scope: Cost savings firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses -Composed of 'related' diversification strategies including Operational and Corporate relatedness

Core Competencies:

Resources and superior capabilities that are sources of competitive advantage over a firm's rivals

TESLA Exercise:

Tesla is a 10-year-old company that specializes in electric power technology. The firm sells its powertrain components to other car companies. At the same time, it is selling a high-performance electric Roadster and the Model S and Model X luxury cars. The company is serving two customers at the same time, both with a Focused Differentiation Strategy. However, Tesla Motors founder Elon Musk believes that electric cars should be available for everyone. -Is this a potential conflict of interest? -Which strategy the company should pursue moving forward to align itself with the founder's beliefs?

Value-Reducing Diversification: Managerial Motives to Diversify

Top-level executives may diversify in order to diversify their own employment risk and to increase their own compensation, as long as profitability does not suffer excessively -Diversification adds benefits to top-level managers but not shareholders -This strategy may be held in check by governance mechanisms or concerns for one's reputation

Backward Integration:

When a company produces its own inputs

Vertical Integration:

When a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration) Example: oil companies that own their own exploration and drilling, refineries, and retail locations. Vertical integration: -can create value including market power over competitors -but it also has risks and costs.

Group Exercise: Related Diversification:

Work with your group members to 1. Name one related diversification you've noticed 2. Discuss what value is created through this diversification 3. Is there any risk associate with this diversification?

Group Exercise: Unrelated Diversification

Work with your group members to 1. Name one unrelated diversification you've noticed 2. Discuss what value is created through this diversification 3. Is there any risk associate with this diversification?

Competitive Dynamics

concern actions and responses among all firms in a market Deal with the relative competitive speed in different markets -Slow-cycle -Standard-cycle -Fast-cycle Different speeds, or cycles, will affect competitive behavior (actions and responses

Corporate-Level Strategy: Ultimate Value Question?

■ Corporate-level strategy's value is ultimately determined by the degree to which "the businesses in the portfolio are worth more under the management of the company than they would be under any other ownership" ■ A corporate-level strategy is expected to help the firm earn above-average returns by creating value

Amazon acquired whole foods

Strategic?

Competitive Rivalry

-(firm-to-firm competitive actions) -Ongoing set of actions and responses occurring between competitors as they contend with each other for an advantageous market position -Also called interfirm rivalry

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. -Customers are the foundation of successful business-level strategies

Several Business Level Strategies:

A diversified firm employs a separate business-level strategy for each product market area in which it competes and one or more corporate-level strategies dealing with product and/or geographic diversity

Step 3: Examine Likelihood of Attack & Response Factors:

A firm is likely to respond when the competitors' action: 1. Might produce a stronger competitive advantage for the focal firm -2nd mover advantage -Late mover 2. Damages the firm's ability to create/maintain an advantage 3. The firm's market position is less defensible Three Factors to consider: 1) Type of competitive action 2) Reputation -More likely to response to market leader -Less likely to response to actions taken by a firm with a reputation for risky, complex, and unpredictable competitive behaviors. 3.Market dependence -Walmart vs Amazon on e-commercial market -Walmart introduced free two day shipping on orders over 35 on Jan 31st 2017 -On Feb 21st 2017, Amazon lowered its free-shipping minimum to $35 for customers who aren't members of its Prime membership program.

Narrow Target Markets:

A narrow market segment means that the firm intends to serve the needs of a narrow customer group; tailoring its strategy to serving them at the exclusion of others

Value-Creating Diversification Related Strategies: -Corporate Relatedness:

CORPORATE RELATEDNESS: Core competency transfer -Complex sets of resources and capabilities linking different businesses through managerial and technological knowledge, experience and expertise -Two sources of value creation 1) Core competence can be developed in one business unit and transferred to other business units at no additional cost 2) Intangible resources difficult for competitors to understand and imitate, so immediate competitive advantage over competition can be achieved through transfer of corporate-level core competence -Use related-linked diversification strategy *e.g. Dyson to make electric cars from 2020; Aston Martin Designs a Limited Edition Submarine

How is business level strategy different from corporate level strategy?

Check book as well ?

A Model of Competitive Rivalry:

Competitor Analysis: -Market commonality -Resource similarity Drivers of Competitive Behavior: -Awareness -Motivation -Ability Competitive Rivalry: -Likelihood of Attack -First mover benefits -Organizational size -Quality -Likelihood of Response -Type of competitive action -Actor's reputation -Market dependence Outcomes: -Market position -Financial performance

Value-Creating Diversification: UNRELATED Strategies (Corporate Strategy):

Creates value through two types of financial economies Financial economies - cost savings realized through improved allocations of financial resources based on investments inside or outside firm 1) Efficient internal capital market allocation (versus external capital market) 2) Restructuring of acquired assets Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market

Entry into the European market by Home Depot

Strategic

Decision to introduce other brands by Aldi

Strategic ?

Implementing the Business level Strategies:

Strategic managers must devise strategies that determine how: -To DIFFERENTIATE & PRICE product -To SEGMENT market & how WIDE A RANGE of products to develop

A "two movies for the price of one" campaign by Redbox

Tactical

Use of product coupons by a local grocer

Tactical

Fare increases by Southwest Airlines

Tactical ?

Purpose of Differentiation Strategy:

To drive up customer's willingness to pay & generate demand sufficient to: 1) Recoup added cost 2) Generate enough profits to make strategy worthwhile

Cost Leadership Strategy:

Using a cost leadership strategy, a firm: -Produces no-frills, standardized products for typical customers -Offers these low-cost products with competitive levels of differentiation. -Focuses on efficiency so costs are lower than competitors' costs. Key drivers of cost leadership strategy: -Economies of Scale -Learning -Product Design -Location advantages for sourcing inputs

Value-Neutral Diversification: Incentives and Resources

Value-Neutral Incentives to Diversify: -Antitrust Regulation and Tax Laws -Low Performance -Uncertain Future Cash Flows -Synergy and Firm Risk Reduction -Tangible and Intangible Resources and Diversification

Companies with Broad Market/Lowest Cost Leadership:

Wal-Mart K-mart Dell (Computer) Microsoft

What makes a profitable business level strategy?

depends on providing customer with most value while keeping cost structures viable.