Mid Term Terms - Business and Corporate Strategy
strategic positioning
"Perform different activities or perform the same activities differently" Economic Value=Perceived Value - Full Economic Costs "Strategy 101 is about choices: You can't be all things to all people. A strategy delineates a territory in which a company seeks to be unique." - Michael Porter Why not do both... increased perceived benefits and reduce costs?
How to conduct internal analysis (i.e., VCA, VRIO)
1.Fill in 1st column with R&Cs identified from Value Chain 2.Evaluate R&Cs across the four metrics of VRIO 3.State the competitive Implications of the R&C •Resource Based View argues resources, capabilities and core competencies drive competitive advantage • •Value Chain Analysis (VCA) aids in identifying key resources and capabilities • •VRIO Analysis is used to diagnose the strategic importance of resources and capabilities • •Dynamic Capabilities represent a firm's ability to reconfigure its resource base and adapt to change • •SWOT analysis is used AFTER both external and internal analyses have been conducted. Value: Measured by a product or service's performance characteristics and by its attributes for which customers are willing to pay Value Chain Analysis •Shows the linked set of activities •Composed of primary and secondary activities •Helps identify R&Cs that are strategically relevant •R&Cs evaluated through a VRIO to determine advantages •Outsource activities not built on advantages
Practical difficulties of internal analysis
1.Identifying strategically relevant R&Cs •Use Value Chain Analysis • 2.Capturing the relative cost of imitation •Examine relevant isolating mechanisms • 3.Ignoring the "O" component of the analysis ● 4.Performing VRIO analysis of your competitors
Sustained competitive advantage
A competitive advantage that will endure over time.
What is strategy
A firm's theory about how to gain and sustain superior performance relative to competitors? A well-designed strategy 1.Diagnosis 2.Guiding Policy 3.Set of Coherent Actions Strategy: A firm's theory about how to gain and sustain superior performance relative to competitors?
Monopoly
A market in which there are many buyers but only one seller.
Oligopoly
A market structure in which a few large firms dominate a market
Planned emergence in strategy-making is when:
An organization allows bottom-up initiatives to emerge and be considered by the top.
Porter's generic business level strategies
Business level strategies are intended to create differences between the firm's position and those of its rivals • • Answers "Who, What, Why and How" •Who: Which customers segments to serve •What needs, wishes, desires to satisfy? •Why do want to satisfy them? •How will we satisfy customer's needs? 2 Dimensions • Position (Cost Leadership, Differentiation) • Scope (Broad, Narrow) • 5 Generic Strategies (Continuum) • Cost Leadership • Differentiation • Focused Cost Leadership • Focused Differentiation • Integration (Best Cost Provider)
Resources, capabilities, core competencies
Capabilities - "What you can do with what you have", Resources - "What you have" Dynamic Capabilities: A firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resource base
Differences between customer and product oriented vision and mission statements
Customer-Oriented Missions • •Define the firm in terms of solutions for customers (e.g., Disney, "Make People Happy") •Enhance strategic flexibility •Not the same as listening to customers • • Product-Oriented Missions •Define the firm in terms of products or services (e.g., US Railroads, "Safest Railroad in America" ) •Less flexible
Dynamic capabilities
Dynamic Capabilities: A firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resource base
Value Gap
Economic Value = (V-C) or Value Gap
Differences between Economies of Scale, Learning Curve, and Experience Curve
Economies of Scale- Advantages of EoS •Spread fixed costs •Specialized systems & equipment •Physical properties • Diseconomies of Scale •Physical Limits to Size •Managerial Diseconomies •Worker De-Motivation •Distance to Markets & Suppliers (Logistics) Learning Curve: Advantages of EoS •Spread fixed costs •Specialized systems & equipment •Physical properties • Diseconomies of Scale •Physical Limits to Size •Managerial Diseconomies •Worker De-Motivation •Distance to Markets & Suppliers (Logistics) Experience Curve: •Combination of learning and process innovations resulting in a new learning curve
First Mover Advantages (FMAs)
First Mover Advantages (FMAs) •Economies of scale •Learning curve economies •Technology leadership •Locking up strategic assets •Network effects & switching costs
Difference between Strategy and Operational Effectiveness Strategy
Improve the manner in which a firm executes its internal business processes so that it performs these activities more effectively than its rivals. Such improvements increase quality, productivity, and employee and customer satisfaction while decreasing time to market.
How to conduct external analysis (i.e., PESTEL, 5 Forces)
Industry Analysis (Porter's 5-Forces): A framework developed by Michael Porter that identifies the 5 forces that determine the profit potential of an industry and/or strategic group. Limitations: •Static View (Snapshot) •Innovation as a driver of industry structure not considered •Value protection vs. value creation •Industry evolution not considered •Reactive vs. proactive Threat of Entry: •Economies of Scale •Network Effects •High Customer Switching Costs •High Capital Requirements •Advantages Independent of Scale •Brand •Proprietary Technology •Preferential Access to Resources •Cumulative Learning • Government Policy • Threat of Retaliation Power of Supliers: •Few suppliers •Buyer's industry is less important to suppliers •Buyers face switching costs •Suppliers offer products or services that are differentiated •Limited substitutes •Suppliers can credibly threaten forward vertical integration Power of Buyers: •Few buyers •Buyers purchase products or services that are standard or undifferentiated (e.g., commodities) •Buyers face low or no switching costs •Buyers can credibly threaten backward vertical integration •Buyers are price sensitive •Transaction represents a significant fraction of cost structure •Buyers earn low profits Threat of Substitutes: •Availability of substitutes •Price & performance tradeoff of substitutes is attractive •Buyers face limited switching costs Rivalry: • Competitive industry structure • Low industry growth • Industry incumbents have made large strategic commitments • Exit barriers 1.Define your industry •Use SIC codes and/or strategic group maps to define your industry (e.g. scope product, service offering) 2.Conduct a PESTEL analysis to identify Opportunities and Threats in the general environment that will impact the focal industry 3.Conduct a 5-Forces analysis to evaluate industry threats and profit potential (Resources are available through UNO library - e.g., IBIS World) ● Note - Most industries will be a mix of high and low threats. Identifying the most salient and examining its importance in relationship with the other threats often proves helpful. IMPORTANT - External analyses are conducted from the industry's perspective as a whole, not the perspective of an individual firm
Advantages and disadvantages of the three approaches of planning (strategic planning, scenario planning, strategy as planned emergence)
Intended Strategy- Top down strategic plan Unrealized Strategy-Unpredictable events Bottom Up Emergent Strategy- Autonomous actions, serendipity, resource allocation process, real options Leads TO: Realized Strategy
Differences between intended, realized and emergent strategies
Intended- planned, realized- sudden, emergent-comes as goes
Sources of differentiation & components
Keys to Successful Differentiation •Market perceived value (vs. actual value) •Maintain cost of differentiation below price premium •Control VRIO R&Cs to pursue differentiation • Dangers of Differentiation •Differentiation may result in too high of price •Not understanding what customers value •Failure to signal value •Innovation renders differentiation strategy obsolete
Advantages and disadvantages of the three approaches for measuring competitive advantage (accounting, shareholder, economic value)
Limitations of Accounting •Data are historical, thus backward looking •Only consider items on the balance sheet •Accounting data largely focuses on tangible assets, not as important Advantages of Accounting 1.Collect financial information (Standard & Poor's, Mergent Online, Dun & Bradstreet, Company Website) •Balance Sheets •Income Statements •Cash Flow 2.Calculate relevant ratios (Performance, Activity, Leverage, Liquidity 3.Compare ratios with benchmark/s (industry, relevant competitors) 4.Make inferences regarding competitive advantage or disadvantage Shareholder Advantages Total Return to Shareholders Return on risk capital, stock price appreciation plus dividends Key performance metric for shareholders External performance metric, unlike accounting data Limitations •Stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short term •Macroeconomic factors such as unemployment rate, economic growth or contraction, and interest rates impact stock prices •Stock prices reflect psychological mood of investors Economic Value Advantages •Strategic Objective = maximize (V-C) •V-C is known as the Value Gap •Create economic value •Capture as much of it as possible • Options •Charge higher prices •Lower total economic costs Limitations of Economic Value •Determining the perceived benefits in the eyes of consumers is difficult •The perceived benefits change based on income, preferences, time, etc. •To measure firm-level competitive advantage, the economic value for all products/services offered by the firm must be assessed.
The rivalry among existing competitors is high when
Many competitors in industry
Challenges of an integration strategy
Michael Porter •Cost leadership and differentiation are mutually exclusive •Differentiation costs money •Attempts to do both will lead to poor performance NO! •Use of structure, management control and compensation policies are nearly opposites •R&Cs, strategic commitments are opposites • YES! •Firms can do both because some source of differentiation also reduce costs •Differences can and should be managed • Cost leadership and differentiation can co-exist in the same firm, but it is difficult, mangers must set priorities • • Some sources of cost leadership can be effectively utilized to address differentiation • • Low-cost and differentiated products are often produced in countries with low labor costs • • Beware of being "stuck in the middle," squeezed by the low cost providers or the differentiators
Components of PESTEL analysis
PESTEL Analysis: A framework that categorizes and analyzes an important set of "macro" environmental forces that can create both opportunities and threats Political/Legal, Economic, Sociocultural and Demographic, Technology, Ecological
Isolation mechanisms or barriers to imitation (path dependence, causal ambiguity, social complexity
Path Dependency - "History Matters" •Unique historical conditions •Emerge over time •Related to strategic commitments (costly, long-term, difficult to reverse) • • Time Compression Diseconomies - "Some Things Take Time" Causal Ambiguity •Competitors or even the firm that controls the R&C is not sure exactly why it is working. Social Complexity •Imitation is difficult due to the complex interactions and dynamic nature of the various social and business systems
Porter's Five Forces and relevant determinants
Political Environment: Processes and actions of government bodies that can influence the industry Legal Environment: Outcomes of political processes such as laws, mandates, regulations, etc. Economic: Examples •Growth Rates •Interest Rates •Levels of Employment •Price Stability (Inflation & Deflation) •Exchange Rates Societal Culture: Beliefs, Norms, Values Examples •Health •Environment •Convenience Demographics: Variables that categorize a population Examples • Age (Boomers, Millennials) • Relative Influence • Ethnic Composition • Geographic Distribution Introduction of new technology or novel combination of existing technologies • Examples • Mobile Devices • Lithium Ion Batteries • Internet Ecological factors combine with sociocultural and economic factors to present new opportunities and threats • Examples •Pollution •Global Warming •Natural Resources •Energy Supply
2 assumptions of the Resource-Based View
Resource Based View (RBV): A model of firm performance that sees resources, capabilities, and core competencies as key drivers of competitive advantage Two Assumptions 1.Resource Heterogeneity: Differences in resources between firms 2.Resource Immobility: Resources are sticky and do not flow freely between firms
Sources of cost leadership & components
Sources of Cost Leadership • Cost of Inputs (differential access to inputs) • Economies of Scale (EoS) • Learning Curve Economies • Experience Curve Economies
Which sources of differentiation are V, or VR, or VRIO
Sources of Differentiation •Product Attributes (features, complexity, timing, location) •Relationships with customers (customization, marketing, reputation) •Linkages within and/or between firms (linkages among functions, linkages with other firms, product mix, distribution channels, service & support) •Product Features (e.g. shape of golf club, functionality of OS) • •Product Complexity • •Timing of Introduction • •Location Usually Costly: Timing Location Reputation - Brand Links Between Functions May be costly: Product Mix Linkages with other Firms Product Customization Product Complexity Consumer Marketing Distribution Channels Service & Support Easy Duplication: Product Features
Strategic Groups
Strategic Group: The set of companies that pursue a similar strategy within a given industry Strategic Groups •Strategic Group Maps are used to identify strategic groups within an industry • 1.Identify 2 strategic dimensions that distinguish competitors 2.Plot each firm on the map 3.Draw a circle around each firm with the size of the circle corresponding to the market share of the firm 4.Look for grouping circles or clusters
Strategic management process - including attributes of each stage
Strategic Management Process: Method by which leaders conceive and implement a strategy Cyclical (1) Analysis (2) Formulation (3) Implementation to Values, Mission, and Vision Vision: What to ultimately accomplish "to" statements Vision: purpose / intrinsic motivation Mission: How to accomplish "by" statements Values: Guiding principles that govern behavior Strategic Management Process: Method by which leaders conceive and implement a strategy Strategic Planning: A rational top-down process through which management can program future success Scenario Planning: Planning in which managers envision various what-if scenarios to anticipate possible futures
Direct duplication & substitution
Substitution •When a strategically equivalent R&C is used to deliver the same or better value
Competitive advantage
Superior economic performance relative to a competitor
Tangible vs. intangible resources, implications
Tangible •Labor •Capital •Land •Buildings •Equipment •Natural Resources • Intangible •Culture •Knowledge •Brand •Reputation •Intellectual Property Knowledge Economy •Wealth is increasingly created by effective management of knowledge workers instead of by the efficient control of physical and financial assets • Intellectual Capital •The difference between a firm's market value and book value •A measure of the value of a firm's intangible assets: reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees
VRIO Framework, relevant questions of each component (V,R,I,O) and competitive implications
VRIO analysis examines the resources, capabilities and core competencies of a given firm to determine the nature of the competitive advantage • Four attributes with corresponding questions: - Valuable - Rare - Costly to Imitate / Barriers to Imitation - Firm is Organized to exploit the R&C Valuable: Resources & capabilities that help a firm neutralize a threat or exploit opportunities QUESTION: Does the resource or capability reduce costs or increase perceived benefits? • • Competitive Implication: Competitive Parity Rare - Resources & capabilities that are not possessed by many others QUESTION: How many competing firms already possess the focal resource or capabilities? Competitive Implication: Temporary Competitive Advantage Costly to Imitate - An R&C is costly to imitate if firms that do not possess the R&C are unable to develop or buy the R&C at a comparable cost. QUESTION: Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it? Competitive Implication: Sustained Competitive Advantage So what prevents me from imitating a resource or capability? Three Isolating Mechanisms •Path Dependency •Causal Ambiguity •Social Complexity Organized to capture value - A firm is organized if it has in place an effective organizational structure, processes, and systems to fully exploit the competitive potential of the firm's resources and capabilities QUESTION: Are firms organized to exploit the full potential of the R&C? Competitive Implication: Parity, Temporary, or Sustained depending on assessment of the VRI attributes of the resource 1.Identifying strategically relevant R&Cs •Use Value Chain Analysis • 2.Capturing the relative cost of imitation •Examine relevant isolating mechanisms • 3.Ignoring the "O" component of the analysis ● 4.Performing VRIO analysis of your competitors
Components of vision and mission statements
Vision: What to ultimately accomplish "to" statements Vision: purpose / intrinsic motivation Mission: How to accomplish "by" statements Values: Guiding principles that govern behavior Are vision and missions positive, negative, or neutral with respect to organizational performance? Why? Positive - Permeates the organizations providing a unifying goal and direction. (e.g., 3M, Boeing, Citicorp, Ford, GE, HP, Johnson & Johnson) • Negative - Restricts the domain and/or execution of the business/businesses resulting in missed opportunities or inefficient policies Neutral - Includes "everything" resulting in little strategic guidance Visions & Missions must be backed up with Strategic Commitments
Differences between levels of strategy (functional, business, corporate)
Where to compete? (which industries) Should GE move into entertainment?= Corporate How to compete? (within industries) Should GE's jet engine have better fuel economy than Rolls Royce?= Business How to Implement? Should GE's human resources recruit more science graduates?= Functional
Temporary competitive advantage
a competitive advantage that lasts for a very short period of time
Competitive parity
a firm's achievement of similarity, or being "on par," with competitors with respect to low cost, differentiation, or other strategic product characteristic.
Monopolistic Competition
a market structure in which many companies sell products that are similar but not identical
Disruptive innovation
a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors
Strategic commitments
actions that are costly, long term and difficult to reverse
Ratios (Working Capital Turnover, Profit Margin)
•Accounting Profitability (Ratio Analysis) Working Capital Turnover (Revenue/Working Capital) Current Assets - Current Liabilities) Profit Margin
Process of conducting an external analysis.
•Define industryiscover industry level threats and opportunities •Identify if above normal profits are likely in an industry •Understand the nature of the competition in an industry •Make informed strategic choices •Identifies opportunities and threats in the external environment (PESTEL, 5 Forces)
Which sources of cost leadership are V, or VR, or VRIO
•Firm becomes low-cost provider of a product or service • •Continuous search for cost reductions without sacrificing acceptable quality and essential features • •Few "extras" • •Cost savings embedded throughout the organization's structure, controls and compensation policies Sources of Cost Leadership • Cost of Inputs (differential access to inputs) • Economies of Scale (EoS) • Learning Curve Economies • Experience Curve Economies Keys to Successful Cost Leadership •Build cost savings culture •Explore innovations to reduce costs •Substitute labor for automation •Control VRIO R&Cs to pursue Cost Leadership Dangers of Cost Leadership •Too much emphasis on cost reduction •Too much emphasis on price cutting •Dramatic technological change or innovation •Sources of cost advantages are easily imitated (not built on VRIO R&Cs)
Incremental innovation
creation of products, services, or technologies that modify existing ones
Productivity frontier
relationship that captures the result of performing best practices at any given time; the function is concave (bulging outward) to capture the trade-off between value creation and production cost
What is an intrapreneur
someone who works inside an existing organization who sees an opportunity for a product or service and mobilizes the organization's resources to try to realize it
Perfect Competition
the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product
Competitive disadvantage
underperformance relative to other competitors in the same industry or the industry average
