MSM 6650 - Strategic Management, MSM 6650 Combined

Capabilities

are the organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically. Capabilities are by nature intangible. They find their expression in a company's structure, routines, and culture.

Corporate social responsibility (CSR)

According to the CSR perspective, managers need to realize that society grants shareholders the right and privilege to create a publicly traded stock company. Therefore, the firm owes something to society In particular, CSR has four components: economic, legal, ethical, and philanthropic responsibilities.

acquisition

An acquisition describes the purchase or takeover of one company by another. Acquisitions can be friendly or unfriendly. As discussed in the ChapterCase, Disney's acquisition of Pixar, for example, was a friendly one, in which both management teams believed that joining the two companies was a good idea. When a target firm does not want to be acquired, the acquisition is considered a hostile takeover

7.5 Implications for the Strategist

As a strategist, you must actively manage a firm's internal and external innovation activities. Internally, you can induce innovation through a top-down process or motivate innovation through autonomous behavior, a bottom-up process.

AUDITORS, GOVERNMENT REGULATORS, AND INDUSTRY ANALYSTS.

Auditors, government regulators, and industry analysts serve as additional external-governance mechanisms. All public companies listed on the U.S. stock exchanges must file a number of financial statements with the Securities and Exchange Commission (SEC), a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities laws. To avoid the misrepresentation of financial results, all public financial statements must follow generally accepted accounting principles (GAAP) and be audited by certified public accountants.

economic incentives

Because of differential economic incentives, incumbents often push forward with incremental innovations, while new entrants focus on radical innovations.

foreign direct investment (FDI)

By making investments in value chain activities abroad, MNEs engage in foreign direct investment (FDI)

7.1 Competition Driven by Innovation

Competition is a process driven by the "perennial gale of creative destruction," in the words of famed economist Joseph Schumpeter.5 The continuous waves of market leadership changes in the TV industry, detailed in the ChapterCase, demonstrate the potency of innovation as a competitive weapon: It can simultaneously create and destroy value. Firms must be able to innovate while also fending off competitors' imitation attempts. A successful strategy requires both an effective offense and a hard-to-crack defense.

M&A AND COMPETITIVE ADVANTAGE

Do mergers and acquisitions create competitive advantage? Despite their popularity, the answer, surprisingly, is that in most cases they do not. In fact, the M&A performance track record is rather mixed. Many mergers destroy shareholder value because the anticipated synergies never materialize. Given that mergers and acquisitions, on average, destroy rather than create shareholder value, why do we see so many mergers? Reasons include: ▪ Principal—agent problems. ▪ The desire to overcome competitive disadvantage. ▪ Superior acquisition and integration capability.

organizational core values

Ethical standards and norms that govern the behavior of individuals within a firm or organization. Strong ethical values have two important functions. First, they form a solid foundation on which a firm can build its vision and mission​, and thus lay the groundwork for long-term success. Second, values serve as the guardrails put in place to keep the company on track when pursuing its vision and mission in its quest for competitive advantage. Without commitment and involvement from top managers, any statement of values remains merely a public relations exercise. Organizational core values must be lived with integrity, especially by the top management team.

GovernanceMetrics International (now GMI Ratings)

In addition, an industry has sprung up around assessing the effectiveness of corporate governance in individual firms. Research outfits such as GovernanceMetrics International (now GMI Ratings)39 provide independent corporate governance ratings. The ratings from these external watchdog organizations inform a wide range of stakeholders, including investors, insurers, auditors, regulators, and others.

3 THE POWER OF BUYERS

In many ways, the bargaining power of buyers is the flip side of the bargaining power of suppliers. Buyers are the customers of an industry. The power of buyers concerns the pressure an industry's customers can put on the producer's margins in the industry by demanding a lower price or higher product quality. When buyers successfully obtain price discounts, it reduces a firm's top line (revenue). When buyers demand higher quality and more service, it generally raises production costs. Strong buyers can therefore reduce industry profit potential and a firm's profitability. Powerful buyers are a threat to the producing firms because they reduce the industry's profit potential by capturing part of the economic value created. The power of buyers is high when ▪ There are a few buyers and each buyer purchases large quantities relative to the size of a single seller. ▪ The industry's products are standardized or undifferentiated commodities. ▪ Buyers face low or no switching costs. ▪ Buyers can credibly threaten to backwardly integrate into the industry. In addition, companies need to be aware of situations when buyers are especially price sensitive. This is the case whEN: ▪ The buyer's purchase represents a significant fraction of its cost structure or procurement budget. ▪ Buyers earn low profits or are strapped for cash. ▪ The quality (cost) of the buyers' products and services is not affected much by the quality (cost) of their inputs.

taper integration

One alternative to vertical integration is taper integration. It is a way of orchestrating value activities in which a firm is backwardly integrated, but it also relies on outside-market firms for some of its supplies, and/or is forwardly integrated but also relies on outside-market firms for some if its distribution. Taper integration has several benefits: ▪ It exposes in-house suppliers and distributors to market competition so that performance comparisons are possible. Rather than hollowing out its competencies by relying too much on outsourcing, taper integration allows a firm to retain and fine-tune its competencies in upstream and downstream value chain activities. ▪ Taper integration also enhances a firm's flexibility. For example, when adjusting to fluctuations in demand, a firm could cut back on the finished goods it delivers to external retailers while continuing to stock its own stores. ▪ Using taper integration, firms can combine internal and external knowledge, possibly paving the path for innovation.

11.13 Implementation Framework

Stages 1 through 6 of the implementation stage Stage 1 - people, skills, and organizational structure Stage 2 - Organizational culture Stage 3 - Reward system Stage 4 - Supporting activities Stage 5 - Supporting activities Stage 6 - Strategic leadership

TAKE-AWAY CONCEPTS

This chapter discussed the roles of MNEs for economic growth; the stages of globalization; why, where, and how companies go global; four strategies MNEs use to navigate between cost reductions and local responsiveness; and national competitive advantage, as summarized by the following learning objectives and related take-away concepts. LO 10-1 / Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy. ▪ Globalization involves closer integration and exchange between different countries and peoples worldwide, made possible by factors such as falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs. ▪ A multinational enterprise (MNE) deploys resources and capabilities to procure, produce, and distribute goods and services in at least two countries. ▪ Many MNEs are more than 50 percent globalized; they receive the majority of their revenues from countries other than their home country. ▪ Product, service, and capital markets are more globalized than labor markets. The level of everyday activities is roughly 10 to 25 percent integrated, and thus semi-globalized. ▪ Foreign direct investment (FDI) denotes a firm's investments in value chain activities abroad. LO 10-2 / Explain why companies compete abroad, and evaluate the advantages and disadvantages of going global. ▪ Firms expand beyond their domestic borders if they can increase their economic value creation (V - C) and enhance competitive advantage ▪ Advantages to competing internationally include gaining access to a larger market, gaining access to low-cost input factors, and developing new competencies. ▪ Disadvantages to competing internationally include the liability of foreignness, the possible loss of reputation, and the possible loss of intellectual capital. LO 10-3 / Apply the CAGE distance framework to guide MNE decisions on which countries to enter. ▪ Most of the costs and risks involved in expanding beyond the domestic market are created by distance. ▪ The CAGE distance framework determines the relative distance between home and foreign target country along four dimensions: cultural distance, administrative and political distance, geographic distance, and economic distance. LO 10-4 / Compare and contrast the different options MNEs have to enter foreign markets. ▪ The strategist has the following foreign-entry modes available: exporting, strategic alliances (licensing for products, franchising for services), joint venture, and subsidiary (acquisition or greenfield). ▪ Higher levels of control, and thus a greater protection of IP and a lower likelihood of any loss in reputation, go along with more investment-intensive foreign-entry modes such as acquisitions or greenfield plants. LO 10-5 / Apply the integration-responsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally. ▪ To navigate between the competing pressures of cost reductions and local responsiveness, MNEs have four strategy options: international, multidomestic, global-standardization, and transnational. ▪ An international strategy leverages home-based core competencies into foreign markets, primarily through exports. It is useful when the MNE faces low pressures for both local responsiveness and cost reductions. ▪ A multidomestic strategy attempts to maximize local responsiveness in the face of low pressure for cost reductions. It is costly and inefficient because it requires the duplication of key business functions in multiple countries. ▪ A global-standardization strategy seeks to reap economies of scale and location by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost. It involves little or no local responsiveness. ▪ A transnational strategy attempts to combine the high local responsiveness of a localization strategy with the lowest-cost position attainable from a global-standardization strategy. It also aims to benefit from global learning. Although appealing, it is difficult to implement due to the organizational complexities involved. Page 355 LO 10-6 / Apply Porter's diamond framework to explain why certain industries are more competitive in specific nations than in others. ▪ National competitive advantage, or world leadership in specific industries, is created rather than inherited. ▪ Four interrelated factors explain national competitive advantage: (1) factor conditions, (2) demand conditions, (3) competitive intensity in a focal industry, and (4) related and supporting industries/complementors. ▪ Even in a more globalized world, the basis for competitive advantage is often local.

strategic group

a firm occupies a place within a strategic group, a set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage Strategic groups differ from one another along important dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service. To explain differences in firm performance within the same industry, the strategic group model clusters different firms into groups based on a few key strategic dimensions.38 Even within the same industry, firm performances differ depending on strategic group membership. Some strategic groups tend to be more profitable than others. This difference implies that firm performance is determined not only by the industry to which the firm belongs, but also by its strategic group membership. Firms in the same strategic group tend to follow a similar strategy. Companies in the same strategic group, therefore, are direct competitors. The rivalry among firms within the same strategic group is generally more intense than the rivalry among strategic groups: intra-group rivalry exceeds inter-group rivalry

The intensity of rivalry

among existing competitors is determined largely by the following factors ▪ Competitive industry structure. ▪ Industry growth. ▪ Strategic commitments. ▪ Exit barriers.

External stakeholders

include customers, suppliers, alliance partners, creditors, unions, communities, governments at various levels, and the media.

long-term contracts

includes licensing and franchising

Strategic alliances

is an umbrella term that denotes different hybrid organizational forms-among them, long-term contracts, equity alliances, and joint ventures.

Gaining and sustaining competitive advantage

is the defining goal of strategic management. Competitive advantage leads to superior firm performance. To explain differences in firm performance and to derive strategic implications—including new strategic initiatives—we must understand how to measure and assess competitive advantage. We devote this chapter to studying how to measure and assess firm performance. In particular, we introduce three frameworks to capture the multifaceted nature of competitive advantage. The three traditional frameworks to measure and assess firm performance are ▪ Accounting profitability. ▪ Shareholder value creation. ▪ Economic value creation. We then will introduce two integrative frameworks, combining quantitative data with qualitative assessments: ▪ The balanced scorecard. ▪ The triple bottom line.

Intended strategy

is the outcome of a rational and consutructed, top-down strategic plan.

Backward integration

occurs when a buyer moves upstream in the industry value chain, into the seller's business. Walmart has exercised the threat to backward-integrate by producing a number of products as private-label brands such as Equate health and beauty items, Ol'Roy dog food, and Parent's Choice baby products. Taken together, powerful buyers have the ability to extract a significant amount of the value created in the industry, leaving little or nothing for producers.

radical innovation

radical innovation draws on novel methods or materials, is derived either from an entirely different knowledge base or from a recombination of existing knowledge bases with a new stream of knowledge. It targets new markets by using new technologies.

Nobel laureate Milton Friedman

stated his view of the firm's social obligations: "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

A SIXTH FORCE: THE STRATEGIC ROLE OF COMPLEMENTS

the value of Porter's five forces model can be further enhanced if one also considers the availability of complements.

Competitive advantage

- is always relative, not absolute one must understand competitive advantage within its organizational and industry context

innovation ecosystem

A final reason incumbent firms tend to be a source of incremental rather than radical innovations is that they become embedded in an innovation ecosystem: a network of suppliers, buyers, complementors, and so on.64 They no longer make independent decisions but must consider the ramifications on other parties in their innovation ecosystem. Continuous incremental innovations reinforce this network and keep all its members happy, while radical innovations disrupt it.

unrelated diversification strategy

A firm follows an unrelated diversification strategy when less than 70 percent of its revenues comes from a single business and there are few, if any, linkages among its businesses.

strategic position

A firm's business-level strategy determines its strategic position—its strategic profile based on value creation and cost—in a specific product market.

merger

A merger describes the joining of two independent companies to form a combined entity. Mergers tend to be friendly; in mergers, the two firms agree to join in order to create a combined entity. In the live event-promotion business, for example, Live Nation merged with Ticketmaster.

incremental innovation

An incremental innovation squarely builds on an established knowledge base and steadily improves an existing product or service offering.60 It targets existing markets using existing technology.

Interest rates (economic)

Another key macroeconomic variable for managers to track is real interest rates—the amount that creditors are paid for use of their money and the amount that debtors pay for that use, adjusted for inflation.

6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership Blue Oceans

Blue oceans represent untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth

the innovation process

Broadly viewed, innovation describes the discovery, development, and transformation of new knowledge in a four-step process captured in the four I's: Idea, Invention, Innovation, and Imitation

artifacts

Corporate culture finds its expression in artifacts. Artifacts include elements such as the design and layout of physical space (e.g., cubicles or private offices); symbols (e.g., the type of clothing worn by employees); vocabulary; what stories are told (see the Zappos pizza-ordering example that follows); what events are celebrated and highlighted; and how they are celebrated (e.g., a formal dinner versus a casual BBQ when the firm reaches its sales target).

Formulation (Business Strategy)

Differentiation, Cost Leadership, and Blue Oceans; Innovation and Entrepreneurship;

Vertical Integration and Diversification: Sources of Value Creation and Costs

For diversification to enhance firm performance, it must do at least one of the following: ▪ Provide economies of scale, which reduces costs. ▪ Exploit economies of scope, which increases value. ▪ Reduce costs and increase value.

Invention

If an invention is useful, novel, and non-obvious as assessed by the U.S. Patent and Trademark Office, it can be patented

strategic commitments

If firms make strategic commitments to compete in an industry, rivalry among competitors is likely to be more intense.

External Analysis

Industry structure; competitive forces; and strategic groups

Internal capital markets

Internal capital markets can be a source of value creation in a diversification strategy if the conglomerate's headquarters does a more efficient job of allocating capital through its budgeting process than what could be achieved in external capital markets.

top-down strategic-planning process or scenario planning.

Larger firms in lumbering scenarios tend to use one of these.

TAKE AWAY CONCEPTS

LO 4-1 / Differentiate among a firm's core competencies, resources, capabilities, and activities. ▪ Core competencies are unique, deeply embedded, firm-specific strengths that allow companies to differentiate their products and services and thus create more value for customers than their rivals,or offer products and services of acceptable value at lower cost. ▪ Resources are any assets that a company can draw on when crafting and executing strategy. ▪ Capabilities are the organizational and managerial skills necessary to orchestrate a diverse set of resources to deploy them strategically. ▪ Activities are distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services. ▪ Tangible resources have physical attributes and are visible. ▪ Intangible resources have no physical attributes and are invisible. ▪ Competitive advantage is more likely to be based on intangible resources. ▪ The first critical assumption—resource heterogeneity—is that bundles of resources, capabilities, and competencies differ across firms. The resource bundles of firms competing in the same industry (or even the same strategic group) are unique to some extent and thus differ from one another. ▪ The second critical assumption—resource immobility—is that resources tend to be "sticky" and don't move easily from firm to firm. Because of that stickiness, the resource differences that exist between firms are difficult to replicate and, therefore, can last for a long time. ▪ For a firm's resource to be the basis of a competitive advantage, it must have VRIO attributes: valuable (V), rare (R), and costly to imitate (I). The firm must also be able to organize (O) in order to capture the value of the resource. ▪ A resource is valuable (V) if it allows the firm to take advantage of an external opportunity and/or neutralize an external threat. A valuable resource enables a firm to increase its economic value creation (V − C). ▪ A resource is rare (R) if the number of firms that possess it is less than the number of firms it would require to reach a state of perfect competition. ▪ A resource is costly to imitate (I) if firms that do not possess the resource are unable to develop or buy the resource at a comparable cost. ▪ The firm is organized (O) to capture the value of the resource if it has an effective organizational structure, processes, and systems in place to fully exploit the competitive potential. ▪ Several conditions make it costly for competitors to imitate the resources, capabilities, or competencies that underlie a firm's competitive advantage: (1) better expectations of future resource value, (2) path dependence, (3) causal ambiguity, (4) social complexity, and (5) intellectual property (IP) protection. ▪ These barriers to imitation are isolating mechanisms because they prevent rivals from competing away the advantage a firm may enjoy. ▪ To sustain a competitive advantage, any fit between a firm's internal strengths and the external environment must be dynamic. ▪ Dynamic capabilities allow a firm to create, deploy, modify, reconfigure, or upgrade its resource base to gain and sustain competitive advantage in a constantly changing environment. ▪ The value chain describes the internal activities a firm engages in when transforming inputs into outputs. ▪ Each activity the firm performs along the horizontal chain adds incremental value and incremental costs. ▪ A careful analysis of the value chain allows managers to obtain a more detailed and fine-grained understanding of how the firm's economic value creation breaks down into a distinct set of activities that helps determine perceived value and the costs to create it. ▪ When a firm's set of distinct activities is able to generate value greater than the costs to create it, the firm obtains a profit margin (assuming the market price the firm is able to command exceeds the costs of value creation). ▪ Formulating a strategy that increases the chances of gaining and sustaining a competitive advantage is based on synthesizing insights obtained from an internal analysis of the company's strengths (S) and weaknesses (W) with those from an analysis of external opportunities (O) and threats (T). ▪ The strategic implications of a SWOT analysis should help the firm to leverage its internal strengths to exploit external opportunities, while mitigating internal weaknesses and external threats.

strategic management process

Method put in place by strategic leaders to formulate and implement a strategy, which can lay the foundation for a sustainable competitive advantage.

founder imprinting

Often, company founders define and shape an organization's culture, which can persist for many decades after their departure. This phenomenon is called founder imprinting.43 Founders set the initial strategy, structure, and culture of an organization by transforming their vision into reality.

network effects

One way to accomplish these objectives is to initiate and leverage network effects,33 the positive effect that one user of a product or service has on the value of that product for other users. Network effects occur when the value of a product or service increases, often exponentially, with the number of users.

global strategy

Part of a firm's corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world

Product innovations

Product innovations, as the name suggests, are new or recombined knowledge embodied in new products—the jet airplane, electric vehicle, smartphones, and wearable computers.

competitive parity

Should two or more firms perform at the same level, they have

STAGES OF GLOBALIZATION

Since the beginning of the 20th century, globalization has proceeded through three notable stages.15 Each stage presents a different global strategy pursued by MNEs headquartered in the United States

SOCIOCULTURAL FACTORS

Sociocultural factors capture a society's cultures, norms, and values. Because sociocultural factors not only are constantly in flux but also differ across groups, managers need to closely monitor such trends and consider the implications for firm strategy.

Organizing Economic Activity: Firms vs. Markets

The advantages of firms include: ▪ The ability to make command-and-control decisions by fiat along clear hierarchical lines of authority. ▪ Coordination of highly complex tasks to allow for specialized division of labor. ▪ Transaction-specific investments, such as specialized robotics equipment that is highly valuable within the firm, but of little or no use in the external market. ▪ Creation of a community of knowledge, meaning employees within firms have ongoing relationships, exchanging ideas and working closely together to solve problems. This facilitates the development of a deep knowledge repertoire and ecosystem within firms. For example, scientists within a biotech company who worked together developing a new cancer drug over an extended time period may have developed group-specific knowledge and routines. These might lay the foundation for innovation, but would be difficult, if not impossible, to purchase on the open market. The disadvantages of organizing economic activity within firms include: ▪ Administrative costs because of necessary bureaucracy. ▪ Low-powered incentives, such as hourly wages and salaries. These often are less attractive motivators than the entrepreneurial opportunities and rewards that can be obtained in the open market. ▪ The principal-agent problem. The advantages of markets include: ▪ High-powered incentives. Rather than work as a salaried engineer for an existing firm, for example, an individual can start a new venture offering specialized software. High-powered incentives of the open market include the entrepreneur's ability to capture the venture's profit, to take a new venture through an initial public offering (IPO), or to be acquired by an existing firm. In these so-called liquidity events, a successful entrepreneur can make potentially enough money to provide financial security for life.14 ▪ Increased flexibility. Transacting in markets enables those who wish to purchase goods to compare prices and services among many different providers. The disadvantages of markets include: ▪ Search costs. On a very fundamental level, perhaps the biggest disadvantage of transacting in markets, rather than owning the various production and distribution activities within the firm itself, entails non-trivial search costs. In particular, a firm faces search costs when it must scour the market to find reliable suppliers from among the many firms competing to offer similar products and services. Even more difficult can be the search to find suppliers when the specific products and services needed are not offered by firms currently in the market. In this case, production of supplies would require transaction-specific investments, an advantage of firms. ▪ Opportunism by other parties. Opportunism is behavior characterized by self-interest seeking with guile (we'll discuss this in more detail later). ▪ Incomplete contracting. Although market transactions are based on implicit and explicit contracts, all contracts are incomplete to some extent, because not all future contingencies can be anticipated at the time of contracting. It is also difficult to specify expectations (e.g., What stipulates "acceptable quality" in a graphic design project?) or to measure performance and outcomes (e.g., What does "excess wear and tear" mean when returning a leased car?). Another serious hazard inherent in contracting is information asymmetry (which we discuss next). Enforcement of contracts. It often is difficult, costly, and time-consuming to enforce legal contracts. Not only does litigation absorb a significant amount of managerial resources and attention, but also it can easily amount to several million dollars in legal fees. Legal exposure is one of the major hazards in using markets rather than integrating an activity within a firm's hierarchy.

ADVANTAGES OF GOING GLOBAL Why do firms expand internationally?

The main reasons firms expand abroad are to ▪ Gain access to a larger market. ▪ Gain access to low-cost input factors. ▪ Develop new competencies.

CHAPTER 5: TAKE-AWAY CONCEPTS

This chapter demonstrated three traditional approaches for assessing and measuring firm performance and competitive advantage, as well as two conceptual frameworks designed to provide a more holistic, albeit more qualitative, perspective on firm performance. We also discussed the role of business models in translating a firm's strategy into actions. LO 5-1 / Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage. ▪ To measure competitive advantage, we must be able to (1) accurately assess firm performance, and (2) compare and benchmark the focal firm's performance to other competitors in the same industry or the industry average. ▪ To measure accounting profitability, we use standard metrics derived from publicly available accounting data. ▪ Commonly used profitability metrics in strategic management are return on assets (ROA), return on equity (ROE), return on invested capital (ROIC), and return on revenue (ROR). See the key financial ratios in five tables in the "How to Conduct a Case Analysis" guide. ▪ All accounting data are historical and thus backward-looking. They focus mainly on tangible assets and do not consider intangibles that are hard or impossible to measure and quantify, such as an innovation competency. LO 5-2 / Apply shareholder value creation to assess and evaluate competitive advantage. ▪ Investors are primarily interested in total return to shareholders, which includes stock price appreciation plus dividends received over a specific period. ▪ Total return to shareholders is an external performance metric; it indicates how the market views all publicly available information about a firm's past, current state, and expected future performance. ▪ Applying a shareholders' perspective, key metrics to measure and assess competitive advantage are the return on (risk) capital and market capitalization. ▪ Stock prices can be highly volatile, which makes it difficult to assess firm performance. Overall macroeconomic factors have a direct bearing on stock prices. Also, stock prices frequently reflect the psychological mood of the investors, which can at times be irrational. ▪ Shareholder value creation is a better measure of competitive advantage over the long term due to the "noise" introduced by market volatility, external factors, and investor sentiment. LO 5-3 / Explain economic value creation and different sources of competitive advantage. ▪ The relationship between economic value creation and competitive advantage is fundamental in strategic management. It provides the foundation upon which to formulate a firm's competitive strategy of cost leadership or differentiation. ▪ Three components are critical to evaluating any good or service: value (V), price (P), and cost (C). In this perspective, cost includes opportunity costs. ▪ Economic value created is the difference between a buyer's willingness to pay for a good or service and the firm's cost to produce it (V - C). ▪ A firm has a competitive advantage when it is able to create more economic value than its rivals. The source of competitive advantage can stem from higher perceived value creation (assuming equal cost) or lower cost (assuming equal value creation). LO 5-4 / Apply a balanced scorecard to assess and evaluate competitive advantage. ▪ The balanced-scorecard approach attempts to provide a more integrative view of competitive advantage. ▪ Its goal is to harness multiple internal and external performance dimensions to balance financial and strategic goals. ▪ Managers develop strategic objectives for the balanced scorecard by answering four key questions: (1) How do customers view us? (2) How do we create value? (3) What core competencies do we need? (4) How do shareholders view us? LO 5-5 / Apply a triple bottom line to assess and evaluate competitive advantage. ▪ Noneconomic factors can have a significant impact on a firm's financial performance, not to mention its reputation and customer goodwill.Page 168 ▪ Managers are frequently asked to maintain and improve not only the firm's economic performance but also its social and ecological performance. ▪ Three dimensions—economic, social, and ecological, also known as profits, people, and planet—make up the triple bottom line. Achieving positive results in all three areas can lead to a sustainable strategy—a strategy that can endure over time. ▪ A sustainable strategy produces not only positive financial results, but also positive results along the social and ecological dimensions. ▪ Using a triple-bottom-line approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities in as serious a way as they track its financial performance. ▪ The triple-bottom-line framework is related to stakeholder theory, an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return. LO 5-6 / Outline how business models put strategy into action. ▪ The translation of a firm's strategy (where and how to compete for competitive advantage) into action takes place in the firm's business model (how to make money). ▪ A business model details how the firm conducts its business with its buyers, suppliers, and partners. ▪ How companies do business is as important to gaining and sustaining competitive advantage as what they do. ▪ Some important business models include razor-razorblade, subscription, pay as you go, and freemium.

liability of foreignness.

This liability consists of the additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances

Analysis

What is strategy? strategic leadership: managing the strategy process

scope of competition

When considering different business strategies, managers also must define the scope of competition—whether to pursue a specific, narrow part of the market or go after the broader market.

intrapreneurs

When innovating within existing companies, change agents are often called intrapreneurs: those pursuing corporate entrepreneurship.

Zappos' 10 Core Values

Zappos CEO Tony Hsieh wanted to make sure that all employees understood the same set of values and expected behaviors. Zappos' list of 10 core values (see Exhibit 11.12) was crafted through a bottom-up initiative, in which all employees were invited to participate.

absorptive capacity

a firm's ability to understand external technology developments, evaluate them, and integrate them into current products or create new ones.

Complements

add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for managers in their quest to enhance the value of their offerings.

economic arbitrage

access to low-cost input factors

Transaction costs

are all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets.

Firm effects

attribute firm performance to the actions managers take.

caveat emptor

buyer beware

A product-oriented vision

defines a business in terms of a good or service provided. ieiented visions tend to force managers to take a more myopic view of the competitive landscape. tend to be less flexible and thus more likely to fail.

markets-and-technology framework

markets-and-technology framework depicted in Exhibit 7.10. Along the horizontal axis, we ask whether the innovation builds on existing technologies or creates a new one. On the vertical axis, we ask whether the innovation is targeted toward existing or new markets. Four types of innovations emerge: incremental, radical, architectural, and disruptive innovations.

parent-subsidiary relationship

parent-subsidiary relationship describes the most-integrated alternative to performing an activity within one's own corporate family.The corporate parent owns the subsidiary and can direct it via command and control.

Shareholder activists,

such as Carl Icahn, Daniel Loeb, or T. Boone Pickens, tend to buy equity stakes in a corporation that they believe is underperforming to put public pressure on a company to change its strategy.

herding effect

the tendency of customers to enter the maket in large numbers during the growth stage of the industry life cycle

Popular Business models

▪ Razor-razorblades. The initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed. As you might guess, it was invented by Gillette, which gave away its razors and sold the replacement cartridges for relatively high prices. The razor-razorblade model is found in many business applications today. For example, HP charges little for its laser printers but imposes high prices for its replacement toner cartridges. ▪ Subscription. The subscription model has been traditionally used for (print) magazines and newspapers. Users pay for access to a product or service whether they use the product or service during the payment term or not. Industries that use this model presently are cable television, cellular service providers, satellite radio, Internet service providers, and health clubs. Above we discussed Netflix, which uses a subscription model. ▪ Pay as you go. In the pay-as-you-go business model, users pay for only the services they consume. The pay-as-you-go model is most widely used by utilities providing power and water and cell phone service plans, but it is gaining momentum in other areas such as rental cars (e.g., Zipcar) and cloud computing. News providers such as The New York Times and The Wall Street Journal have created "pay walls" as a pay-as-you-go option. ▪ Freemium. The freemium (free + premium) business model provides the basic features of a product or service free of charge, but charges the user for premium services such as advanced features or add-ons. For example, companies may provide a minimally supported version of their software as a trial (e.g., business application or video game) to give users the chance to try the product. Users later have the option of purchasing a supported version of software, which includes a full set of product features and product support. ▪ Wholesale. The traditional model in retail is called a wholesale model. Let's look at the book publishing industry as an example. Under the wholesale model, book publishers would sell books to retailers at a fixed price (usually 50 percent below the recommended retail price). Retailers, however, were free to set their own price on any book and profit from the difference between their selling price and the cost to buy the book from the publisher (or wholesaler). ▪ Agency. In this model the producer relies on an agent or retailer to sell the product, at a predetermined percentage commission. Sometimes the producer will also control the retail price. The agency model was long used in the entertainment industry, where agents place artists or artistic properties and then take their commission. More recently we see this approach at work in a number of online sales venues, as in Apple's pricing of book products or its app sales. (See further discussion following.)Page 164 ▪ Bundling. The bundling business model sells products or services for which demand is negatively correlated at a discount. Demand for two products is negatively correlated if a user values one product more than another.

Typical Multidivisional (M-Form) Structure

Corporate headquarters adds value by functioning as an internal capital market. The goal is to be more efficient at allocating capital through its budgeting process than what could be achieved in external capital markets. This can be especially effective if the corporation overall can access capital at a lower cost than competitors due to a favorable (AAA) debt rating.

conglomerate

A company that combines two or more strategic business units under one overarching corporation and follows an unrelated diversification strategy is called a conglomerate

strategic outsourcing

Another alternative to vertical integration is strategic outsourcing, which involves moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. A firm that engages in strategic outsourcing reduces its level of vertical integration. Rather than developing their own human resource management systems, for instance, firms outsource these non-core activities to companies such as PeopleSoft (owned by Oracle), EDS (owned by HP), or Perot Systems (owned by Dell), which can leverage their deep competencies and produce scale effects.

International, Multidomestic, Global-Standardization, and Transnational Strategies: Characteristics, Benefits, and Risks

Characteristics, Benefits, and Risks

Dynamic Nature Of Business Models Business models evolve dynamically, and we can see many combinations and permutations. Sometimes business models are tweaked to respond to disruptions in the market, efforts that can conflict with fair trade practices and may even prompt government intervention.

Combination Evolution Disruption Response to Disruption Legal Conflicts

COMPETITIVE INTENSITY IN A FOCAL INDUSTRY.

Companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition.

9.1 How Firms Achieve Growth

Corporate executives have three options at their disposal to drive firm growth: organic growth through internal development, external growth through alliances, or external growth through acquisitions.

12.2 Corporate Governance

Corporate governance concerns the mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally. Corporate governance is about checks and balances and about asking the tough questions at the right time. The accounting scandals of the early 2000s and the global financial crisis of 2008 and beyond got so out of hand because the enterprises involved did not practice effective corporate governance.

diversification discount

Firms that pursue unrelated diversification are often unable to create additional value. They experience a diversification discount in the stock market: The stock price of such highly diversified firms is valued at less than the sum of their individual business units

integration-responsiveness framework

Given the two opposing pressures of cost reductions versus local responsiveness, scholars have advanced the integration-responsiveness framework, shown in Exhibit 10.6.69 This framework juxtaposes the opposing pressures for cost reductions and local responsiveness to derive four different strategic positions to gain and sustain competitive advantage when competing globally. The four strategic positions, which we will discuss in the following sections, are ▪ International ▪ Multidomestic ▪ Global-standardization ▪ Transnational

first-mover advantages

Successful innovators can benefit from a number of first-mover advantages, including economies of scale as well as experience and learning-curve effects (as discussed in Chapter 6). First movers may also benefit from network effects (see discussion of Apple in discussion of the Introduction Stage later in this chapter). Moreover, first movers may hold important intellectual property such as critical patents. They may also be able to lock in key suppliers as well as customers through increasing switching costs.

Strategy as planned emergence: Realized Strategy

TOP-DOWN AND BOTTOM-UP Realized Strategy Is a Combination of Top-Down Intended Strategy and Bottom-Up Emergent Strategy Taken together, a firm's realized strategy is frequently a combination of top-down strategic intent and bottom-up emergent strategies In the strategy-as-planned-emergence approach, executives need to decide which of the bottom-up initiatives to pursue and which to shut down. This critical decision is made on the basis of whether the strategic initiative fits with the company's vision and mission, and whether it provides an opportunity worth exploiting.

tangible and intangible resources

Tangible resources have physical attributes and are visible. Examples of tangible resources are labor, capital, land, buildings, plant, equipment, and supplies. Intangible resources have no physical attributes and thus are invisible. Examples of intangible resources are a firm's culture, its knowledge, brand equity, reputation, and intellectual property.

4. HOW WELL CAN YOU INTEGRATE THE TARGETED FIRM, SHOULD YOU DETERMINE YOU NEED TO ACQUIRE THE RESOURCE PARTNER?

The final decision question using the build-borrow-buy lens is: Can you integrate the target firm? The list of post-integration failure, often due to cultural differences, is long. In all other cases, the firms should consider finding a less costly borrow arrangement when building is not an option. Since strategic alliances are the less costly and more common tool to execute corporate strategy, we discuss alliances first before mergers and acquisitions. Per the build-borrow-buy decision framework, strategic alliances (borrow) also need to be considered before mergers and acquisitions (buy).

12.1 The Shared Value Creation Framework

The shared value creation provides guidance to managers about how to reconcile the economic imperative of gaining and sustaining competitive advantage with corporate social responsibility (introduced in Chapter 1).4 It helps managers create a larger pie that benefits both shareholders and other stakeholders.

Putting resources, capabilities, and core competency into perspective.

The strategic actions managers take link firm resources and capabilities. For example, investments in R&D labs (managerial actions) are one mechanism that links the resource (engineers) with the firm capability (product innovation). When multiple capabilities are aligned on a single goal, the firm may have a core competency.

Activities

are distinct actions that enable firms to add incremental value at each step by transforming inputs into goods and services. Activities are narrower than functional areas such as marketing, because each functional area is made up of a set of distinct activities.

Opportunity costs

capture the value of the best forgone alternative use of the resources employed

Hierarchy

determines the formal, position-based reporting lines and thus stipulates who reports to whom. Let's assume two firms of roughly equal size: Firm A and Firm B. If many levels of hierarchy exist between the frontline employee and the CEO in Firm A, it has a tall structure. In contrast, if there are few levels of hierarchy in Firm B, it has a flat structure.

Strategy

is a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors Actions that allow a firm to address a competitive challenge are strategy.

short-term contracting

is an example of an alternative arrangement located on the continuum between "buying" and "making"

strategic management

is the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage

The FIVE FORCES COMPETITIVE ANALYSIS CHECKLIST

provides a checklist that you can apply to any industry when assessing the underlying competitive forces that shape strategy.

winner-take-all markets

where the market leader captures almost all of the market share. As a near monopolist, the winner in these types of markets is able to extract a significant amount of the value created.

8.2 The Boundaries of the Firm

Determining the boundaries of the firm so that it is more likely to gain and sustain a competitive advantage is the critical challenge in corporate strategy.

Social entrepreneurship

describes the pursuit of social goals while creating profitable businesses. Social entrepreneurs evaluate the performance of their ventures not only by financial metrics but also by ecological and social contribution (profits, planet, and people).

1 THE THREAT OF ENTRY

describes the risk that potential competitors will enter the industry. Potential new entry depresses industry profit potential in two major ways: 1. With the threat of additional capacity coming into an industry, incumbent firms may lower prices to make entry appear less attractive to the potential new competitors, which would in turn reduce the overall industry's profit potential, especially in industries with slow or no overall growth in demand. 2. The threat of entry by additional competitors may force incumbent firms to spend more to satisfy their existing customers. This spending reduces an industry's profit potential, especially if firms can't raise prices.

value drivers

Managers can adjust a number of different levers to improve a firm's strategic position. These levers either increase perceived value or decrease costs. Here, we will study the most salient value drivers that managers have at their disposal (we look at cost drivers in the next section).10 They are: ▪ Product features ▪ Customer service ▪ Complements When attempting to increase the perceived value of the firm's product or service offerings, managers must remember that the different value drivers contribute to competitive advantage only if their increase in value creation (∆V ) exceeds the increase in costs (∆C). The condition of ∆V > ∆C must be fulfilled if a differentiation strategy is to strengthen a firm's strategic position and thus enhance its competitive advantage.

Boston Consulting Group (BCG) growth-share matrix

One helpful tool to guide corporate portfolio planning is the Boston Consulting Group (BCG) growth-share matrix, shown in Exhibit 8.12.70 This matrix locates the firm's individual SBUs in two dimensions: relative market share (horizontal axis) and speed of market growth (vertical axis). The firm plots its SBUs into one of four categories in the matrix: dog, cash cow, star, and question mark. A tool used in corporate portfolio planning.

Process innovations

Process innovations are new ways to produce existing products or to deliver existing services. Process innovations are made possible through advances such as the Internet, lean manufacturing, Six Sigma, biotechnology, nanotechnology, and so on. During the growth stage, process innovation ramps up (at increasing marginal returns) as firms attempt to keep up with rapidly rising demand while attempting to bring down costs at the same time. The core competencies for competitive advantage in the growth stage tend to shift toward manufacturing and marketing capabilities. At the same time, the R& D emphasis tends to shift to process innovation for improved efficiency. Competitive rivalry is somewhat muted because the market is growing fast.

strategic positioning economic contribution

That is, they stake out a unique position within an industry that allows the firm to provide value to customers, while controlling costs. clear strategic positioning requires trade-offs, strategy is as much about deciding what not to do, as it is about deciding what to do. The greater the difference between value creation and cost, the greater the firm's economic contribution and the more likely it will gain competitive advantage.

organizational structure

That structure determines how the work efforts of individuals and teams are orchestrated and how resources are distributed. In particular, an organizational structure defines how jobs and tasks are divided and integrated, delineates the reporting relationships up and down the hierarchy, defines formal communication channels, and prescribes how individuals and teams coordinate their work efforts. The key building blocks of an organizational structure are: ▪ Specialization ▪ Formalization ▪ Centralization ▪ Hierarchy

multinational enterprise (MNE)

The engine behind globalization is the multinational enterprise (MNE) —a company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries. Well-known U.S. multinational enterprises include Boeing, Caterpillar, Coca-Cola, GE, John Deere, Exxon Mobil, IBM, P&G, and Walmart. They make up less than 1 percent of the number of total U.S. companies, but they: ▪ Account for 11 percent of private-sector employment growth since 1990. ▪ Employ 19 percent of the work force. ▪ Pay 25 percent of the wages. ▪ Provide for 31 percent of the U.S. gross domestic product (GDP). ▪ Make up 74 percent of private-sector R&D spending.

Exit barriers

The rivalry among existing competitors is also a function of an industry's exit barriers, the obstacles that determine how easily a firm can leave that industry. Exit barriers comprise both economic and social factors. They include fixed costs that must be paid regardless of whether the company is operating in the industry or not. A company exiting an industry may still have contractual obligations to suppliers, such as employee health care, retirement benefits, and severance pay. Social factors include elements such as emotional attachments to certain geographic locations. In Michigan, entire communities still depend on GM, Ford, and Chrysler. If any of those carmakers were to exit the industry, communities would suffer. Other social and economic factors include ripple effects through the supply chain. When one major player in an industry shuts down, its suppliers are adversely impacted as well.

vision statements

A positive relationship between vision statements and firm performance is more likely to exist under certain circumstances: The visions are customer-oriented. Internal stakeholders are invested in defining the vision. Organizational structures such as compensation systems align with the firm's vision statement.

Chapter Case 2: AT YAHOO Mayer's first acts at Yahoo revolved around culture and cash.

AT YAHOO Mayer's first acts at Yahoo revolved around culture and cash.

Strategic commitments

Actions to achieve the mission that are costly, long-term oriented, and difficult to reverse. assures that steps are taken to achieve the mission

3.2 Industry Structure and Firm Strategy: The Five Forces Model

An industry is a group of incumbent companies facing more or less the same set of suppliers and buyers. Firms competing in the same industry tend to offer similar products or services to meet specific customer needs.

Serendipity

Any random events, pleasant surprises, and accidental happenstances that can have a profound impact on a firm's strategic initiatives. describes random events, pleasant surprises, and accidental happenstances that can have a profound impact on a firm's strategic initiatives

Network effects

describe the positive effect that one user of a product or service has on the value of that product or service for other users. When network effects are present, the value of the product or service increases with the number of users. The threat of potential entry is reduced when network effects are present.

Chapter 9 - Corporate Strategy: Strategic Alliances and Mergers and Acquisitions

firms have two critical strategic options to execute corporate strategy: alliances and acquisitions.

11.2 Strategy and Structure simple structure

generally is used by small firms with low organizational complexity. In such firms, the founders tend to make all the important strategic decisions and run the day-to-day operations Simple structures are flat hierarchies operated in a decentralized fashion. They exhibit a low degree of formalization and specialization. Typically, neither professional managers nor sophisticated systems are in place, which often leads to an overload for the founder and/or CEO when the firms experience growth.

mobility barriers

restrict movement between groups. These are industry-specific factors that separate one strategic group from another.

ECOLOGICAL FACTORS

Ecological factors involve broad environmental issues such as the natural environment, global warming, and sustainable economic growth. Organizations and the natural environment coexist in an interdependent relationship. Managing these relationships in a responsible and sustainable way directly influences the continued existence of human societies and the organizations we create. Managers can no longer separate the natural and the business worlds; they are inextricably linked.

CULTURAL DISTANCE.

cultural distance, the cultural disparity between the internationally expanding firm's home country and its targeted host country. In his seminal research, Geert Hofstede defined and measured national culture, the collective mental and emotional "programming of the mind" that differentiates human groups.54 Culture is made up of a collection of social norms and mores, beliefs, and values. Culture captures the often unwritten and implicitly understood rules of the game. four main dimensions of culture emerged: Power distance, individualism, masculinity-femininity uncertainty avoidance.

6.1 Business-Level Strategy: How to Compete for Advantage Business-level strategy

details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. It may involve a single product or a group of similar products that use the same distribution channel. It concerns the broad question, "How should we compete?" To formulate an appropriate business-level strategy, managers must answer the who, what, why, and how questions of competition: ▪ Who—which customer segments will we serve? ▪ What customer needs, wishes, and desires will we satisfy? ▪ Why do we want to satisfy them? ▪ How will we satisfy our customers' needs?4

A firm's resource-allocation process (RAP)

determines the way it allocates its resources and can be critical in shaping its realized strategy. Emergent strategies can result from a firm's resource-allocation process (RAP).

three dimensions of corporate strategy core competencies economies of scale economies of scope transaction costs

​All companies must navigate the three dimensions of vertical integration, diversification, and geographic scope. Although many managers provide input, the responsibility for corporate strategy ultimately rests with the CEO. ▪ Core competencies are unique strengths embedded deep within a firm (as discussed in Chapter 4). Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost. According to the resource-based view of the firm, a firm's boundaries are delineated by its knowledge bases and core competencies.6 Activities that draw on what the firm knows how to do well (e.g., Google's core competency in developing proprietary search algorithms) should be done in-house, while non-core activities such as payroll and facility maintenance can be outsourced. In this perspective, the internally held knowledge underlying a core competency determines a firm's boundaries. ▪ Economies of scale occur when a firm's average cost per unit decreases as its output increases (as discussed in Chapter 6). Anheuser-Busch InBev, the largest global brewer (producer of brands such as Budweiser, Bud Light, Stella Artois, and Beck's), reaps significant economies of scale. Given its size, it is able to spread its fixed costs over the millions of gallons of beer it brews each year, in addition to the significant buyer power its large market share affords. Larger market share, therefore, often leads to lower costs. ▪ Economies of scope are the savings that come from producing two (or more) outputs or providing different services at less cost than producing each individually, though using the same resources and technology (as discussed in Chapter 6). Leveraging its online retailing expertise, for example, Amazon benefits from economies of scope: It can offer a large range of different product and service categories at a lower cost than it would take to offer each product line individually. ▪ Transaction costs are all costs associated with an economic exchange. The concept is developed in transaction cost economics, a strategic management framework, and enables managers to answer the question of whether it is cost-effective for their firm to expand its boundaries through vertical integration or diversification. This implies taking on greater ownership of the production of needed inputs or of the channels by which it distributes its outputs, or adding business units that offer new products and services.

transaction cost economics ***determines whether or not a firm should vertically integrate

A theoretical framework in strategic management called transaction cost economics explains and predicts the boundaries of the firm. Insights gained from transaction cost economics help managers decide what activities to do in-house versus what services and products to obtain from the external market. This stream of research was first initiated by Nobel Laureate Ronald Coase, who asked a fundamental question: Given the efficiencies of free markets, why do firms even exist? The key insight of transaction cost economics is that different institutional arrangements—markets versus firms—have different costs attached.

experience curve

An experience curve attempts to capture both learning effects and process improvements.

EXHIBIT 9.5 / Sources of Value Creation and Costs in Horizontal Integration

Firms use horizontal integration to lower costs through economies of scale and to enhance their economic value creation, and in turn their performance.

RELATED AND SUPPORTING INDUSTRIES/COMPLEMENTORS.

Leadership in related and supporting industries can also foster world-class competitors in downstream industries. The availability of top-notch complementors—firms that provide a good or service that leads customers to value the focal firm's offering more when the two are combined—further strengthens national competitive advantage

holacracy

Rather than relying on a traditional top-down hierarchical management structure, holacracy attempts to achieve control and coordination by distributing power and authority to self-organizing groups (so-called circles) of employees. Circles of employees are meant to self-organize and own a specific task, such as confirming online orders or authorizing a customer's credit card.

Internal Analysis

Resources; capabilities; and core competencies

Customer switching costs

Switching costs are incurred by moving from one supplier to another. Changing vendors may require the buyer to alter product specifications, retrain employees, and/or modify existing processes. Switching costs are onetime sunk costs, which can be quite significant and a formidable barrier to entry.

diversification strategies geographic product product-market

There are various general diversification strategies: ▪ A firm that is active in several different product markets is pursuing a product diversification strategy. ▪ A firm that is active in several different countries is pursuing a geographic diversification strategy. ▪ A company that pursues both a product and a geographic diversification strategy simultaneously follows a product-market diversification strategy.

dedicated alliance function

To accomplish effective alliance management, strategy scholars suggest that firms create a dedicated alliance function, led by a vice president or director of alliance management and endowed with its own resources and support staff.

Formulation (Corporate Strategy)

Vertical integration and diversification; strategic alliances, mergers and acquisitions; (global strategy) competing around the world

WHY DO FIRMS ACQUIRE OTHER FIRMS?

When first defining the terminology at the beginning of the chapter, we noted that an acquisition describes the purchase or takeover of one company by another. Why do firms make acquisitions? Three main reasons stand out: ▪ To gain access to new markets and distribution channels. ▪ To gain access to a new capability or competency. ▪ To preempt rivals. Firms may resort to acquisitions when they need to overcome entry barriers into markets they are currently not competing in or to access new distribution channels.

related constrained diversification strategy

When the links between the diversified firm's businesses are rather direct, a related constrained diversification strategy is being used. A related, constrained firm shares a number of resources and activities among its businesses (Campbell Soup, Procter & Gamble, Xerox, and Merck & Company).

resource-based view vs. value chain perspective

While the resource-based view clarifies a firm's core competencies, the value chain perspective helps leaders understand how competitive advantage arises from the firm's unique activities.

organizational Inertia

a firm's resistance to change the status quo, can set the stage for the firm's subsequent failure. Successful firms often plant the seed of subsequent failure: They optimize their organizational structure to the current situation. That tightly coupled system can break apart when internal or external pressures occur. Note that organizational inertia is often the result of success in a particular market during a particular time; it becomes difficult to argue with success. The pattern for successful firms often follows a particular path: 1 Mastery of, and fit with, the current environment. 2 Success, usually measured by financial measurements. 3 Structures, measures, and systems to accommodate and manage size. 4 A resulting organizational inertia that tends to minimize opportunities and challenges created by shifts in the internal and external environment. What's missing, of course, is the conscious strategic decision to change the firm's internal environment to fit with the new external environment, turning four steps leading to the endpoint of inertia (Option A) into the kind of a virtual circle where the firm essentially reboots and reinvents itself (Option B).

Resources

are any assets such as cash, buildings, machinery, or intellectual property that a firm can draw on when crafting and executing a strategy. Resources can be either tangible or intangible.

economies of scope

are the savings that come from producing two or more different outputs at a lower cost than producing each outpout individually

Variable costs

change with the level of consumer demand—for instance, components such as different types of display screens, microprocessors, hard drives, and keyboards.

diversification premium

companies that pursue related diversification are more likely to improve their performance. They create a diversification premium: The stock price of related-diversification firms is valued at greater than the sum of their individual business units. At the most basic level, a corporate diversification strategy enhances firm performance when its value creation is greater than the costs it incurs.

Strategy formulation

concerns the choice of strategy in terms of where and how to compete.

Innovation

concerns the commercialization of an invention.

strategy implementation

concerns the organization, coordination, and integration of how work gets done. In short, it concerns the execution of strategy.

An emergent strategy

describes any unplanned strategic initiative bubbling up from the bottom of the organization.

Porter's five forces model of competition,

helps us to determine an industry's profit potential.

A complement

is a product, service, or competency that adds value to the original product offering when the two are used in tandem. Complements increase demand for the primary product, thereby enhancing the profit potential for the industry and the firm. A company is a complementor to your company if customers value your product or service offering more when they are able to combine it with the other company's product or service.

Organizational design

is the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization. The key components of organizational design are structure, culture, and control. The goal is to design an organization that allows managers to effectively translate their chosen strategy into a realized one.

growth stage

manufacturing and marketing capabilities are important during this stage.

A firm's strategic position

relates to its ability to create value for customers (V) while containing the cost to do so (C). Competitive advantage flows to the firm that is able to create as large a gap as possible between the value the firm's product or service generates and the cost required to produce it (V - C).

vertical integration

when firms are more efficient in organizing economic activity than are markets, which rely on contracts among many independent actors, firms should vertically integrate.

the PESTEL framework,

which allows us to scan, monitor, and evaluate changes and trends in the firm's macroenvironment

equity alliance

—a partnership in which at least one partner takes partial ownership in the other partner. A partner purchases an ownership share by buying stock or assets (in private companies), and thus making an equity investment. The taking of equity tends to signal greater commitment to the partnership.

Costly to imitate

A resource is costly to imitate if firms that do not possess the resource are unable to develop or buy the resource at a reasonable price. If the resource in question is valuable, rare, and costly to imitate, then it is an internal strength and a core competency. If the firm's competitors fail to duplicate the strategy based on the valuable, rare, and costly-to-imitate resource, then the firm can achieve a temporary competitive advantage. ******************************** NOTE: the ability to imitate a rare and valuable resource is directly linked to barriers of entry, which is one of the key elements in Porter's five forces model (threat of new entrants). This relationship allows linking internal analysis using the resource-based view to external analysis with the five forces model, which also would have predicted low industry profit potential given low or no barriers to entry. *********************************************

Stakeholder strategy

An integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage. is an integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage The unit of analysis is the web of exchange relationships a firm has with its stakeholders Stakeholder strategy allows firms to analyze and manage how various external and internal stakeholders interact to jointly create and trade value.

Corporate strategy

Corporate strategy comprises the decisions that senior management makes and the goal-directed actions it takes in the quest for competitive advantage in several industries and markets simultaneously. It provides answers to the key question of where to compete. Corporate strategy determines the boundaries of the firm along three dimensions: vertical integration (along the industry value chain), diversification (of products and services), and geographic scope (regional, national, or global markets). Executives must determine their corporate strategy by answering three questions: In what stages of the industry value chain should the company participate (vertical integration)? The industry value chain describes the transformation of raw materials into finished goods and services along distinct vertical stages. What range of products and services should the company offer (diversification)? Where should the company compete geographically in terms of regional, national, or international markets (geographic scope)?

Managers' actions tend to be more important in determining firm performance than the forces exerted on the firm by its external environment.

Empirical research studies indicate that a firm's strategy can explain up to 55 percent of its performance.

socialization

Employees learn about an organization's culture through socialization, a process whereby employees internalize an organization's values and norms through immersion in its day-to-day operations.38 Zappos' new-employee orientation and immersion is now a four-week extensive course. Successful socialization, in turn, allows employees to function productively and to take on specific roles within the organization. Strong cultures emerge when the company's core values are widely shared among the firm's employees and when the norms have been internalized.

why firms need to grow

Explain why firms need to grow, and evaluate different growth motives. Several reasons explain why firms need to grow. These can be summarized as follows: Increase profits. Lower costs. Increase market power. Reduce risk. Motivate management. Let's look at each reason in turn.

economies of scale

Firms with greater market share might be in a position to reap economies of scale, decreases in cost per unit as output increases. This relationship between unit cost and output is depicted in the first (left-hand) part of Exhibit 6.5: Cost per unit falls as output increases up to point Q1. A firm whose output is closer to Q1 has a cost advantage over other firms with less output. In this sense, bigger is better.

organizational inertia

From an organizational perspective, as firms become established and grow, they rely more heavily on formalized business processes and structures. In some cases, the firm may experience organizational inertia—resistance to changes in the status quo. Incumbent firms, therefore, tend to favor incremental innovations that reinforce the existing organizational structure and power distribution while avoiding radical innovation that could disturb the existing power distribution.

competitive forces

Globalization led to extensive entry by foreign car manufacturers in the U.S. auto market, increasing the number of competitors and competitive rivalry. technological innovations have allowed startups such as Tesla Motors to enter the electric car segment (or strategic group), effectively circumventing high entry barriers into the broader automotive market. With more firms vying for a share of the U.S. auto market, competitive intensity is likely to increase.

10.5 National Competitive Advantage: World Leadership in Specific Industries death-of-distance hypothesis ->

Globalization, the prevalence of the Internet with other advances in communications technology, and transportation logistics can lead us to believe that firm location is becoming increasingly less important. Because firms can now, more than ever, source inputs globally, many believe that location must be diminishing in importance as an explanation of firm-level competitive advantage. This idea is called the death-of-distance hypothesis

9.3 GOVERNING STRATEGIC ALLIANCES

In Chapter 8, we showed that strategic alliances lie in the middle of the make-or-buy continuum (see Exhibit 8.4). Alliances can be governed by the following mechanisms: ▪ Non-equity alliances ▪ Equity alliances ▪ Joint ventures26 Exhibit 9.2 provides an overview of the key characteristics of the three alliance types, including their advantages and disadvantages.

open and closed innovation

Several factors led to a shift in the knowledge landscape from closed innovation to open innovation. They include: ▪ The increasing supply and mobility of skilled workers. ▪ The exponential growth of venture capital. ▪ The increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and inventions. ▪ The increasing capability of external suppliers globally. Open innovation is a framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from ideas and innovation from external sources. External sources of knowledge can be customers, suppliers, universities, start-up companies, and even competitors. Even the largest companies, such as AT&T, IBM, and GE, are shifting their innovation strategy toward a model that blends internal with external knowledge sourcing via licensing agreements, strategic alliances, joint ventures, and acquisitions.79

1 Better Expectations Of Future Resource Value.

Sometimes firms can acquire resources at a low cost, which lays the foundation for a competitive advantage later when expectations about the future of the resource turn out to be more accurate.

ALLIANCE MANAGEMENT CAPABILITY "How to make alliances work" (Exhibit)

Strategic alliances create a paradox for managers. Although alliances appear to be necessary to compete in many industries, between 30 and 70 percent of all strategic alliances do not deliver the expected benefits, and are considered failures by at least one alliance partner. In addition to the formal governance mechanisms, interorganizational trust is a critical dimension of alliance success.42 Because all contracts are necessarily incomplete, trust between the alliance partners plays an important role for effective post-formation alliance management. Effective governance, therefore, can be accomplished only by skillfully combining formal and informal mechanisms.

OTHER GOVERNANCE MECHANISMS EXECUTIVE COMPENSATION stock options

The board of directors determines executive compensation packages. To align incentives between shareholders and management, the board frequently grants stock options as part of the compensation package. This mechanism is based on agency theory and gives the recipient the right, but not the obligation, to buy a company's stock at a predetermined price sometime in the future. If the company's share price rises above the negotiated strike price, which is often the price on the day when compensation is negotiated, the executive stands to reap significant gains. The topic of executive compensation—and CEO pay, in particular—has attracted significant attention in recent years. Two issues are at the forefront: 1. The absolute size of the CEO pay package compared with the pay of the average employee. 2. The relationship between CEO pay and firm performance.

CORPORATE DIVERSIFICATION AND FIRM PERFORMANCE

The critical question to ask when doing so is whether the individual businesses are worth more under the company's management than if each were managed individually. This implies that companies that focus on a single business, as well as companies that pursue unrelated diversification, often fail to achieve additional value creation.

dynamic capabilities

The dynamic capabilities perspective adds, as the name suggests, a dynamic or time element. In particular, dynamic capabilities describe a firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources over time in its quest for competitive advantage. Dynamic capabilities are essential to move beyond a short-lived advantage and create a sustained competitive advantage. For a firm to sustain its advantage, any fit between its internal strengths and the external environment must be dynamic. That is, the firm must be able to change its internal resource base as the external environment changes. Not only do dynamic capabilities allow firms to adapt to changing market conditions, but they also enable firms to create market changes that can strengthen their strategic position. These market changes implemented by proactive firms introduce altered circumstances, to which more reactive rivals might be forced to respond. Dynamic capabilities are especially relevant for surviving and competing in markets that shift quickly and constantly, such as the high-tech space in which firms such as Apple, Google, Microsoft, and Amazon compete.

ambidextrous organization

The goal for managers who want to pursue a blue ocean strategy is to build an ambidextrous organization, one that enables managers to balance and harness different activities in trade-off situations. Here, the trade-offs to be addressed involve the simultaneous pursuit of low-cost and differentiation strategies. Notable management practices that companies use to resolve this trade-off include flexible and lean manufacturing systems, total quality management, just-in-time inventory management, and Six Sigma. Other management techniques that allow firms to reconcile cost and value pressures are the use of teams in the production process, as well as decentralized decision making at the level of the individual customer.

board of directors inside directors outside directors fiduciary responsibility

The shareholders of public stock companies appoint a board of directors to represent their interests (see Exhibit 12.1). The board of directors is the centerpiece of corporate governance in such companies. The board of directors is composed of inside and outside directors who are elected by the shareholders: ▪ Inside directors are generally part of the company's senior management team, such as the chief financial officer (CFO) and the chief operating officer (COO). They are appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance. Without this valuable inside information, the board would not be able to effectively monitor the firm. As senior executives, however, inside board members' interests tend to align with management and the CEO rather than the shareholders. ▪ Outside directors, on the other hand, are not employees of the firm. They frequently are senior executives from other firms or full-time professionals, who are appointed to a board and who serve on several boards simultaneously. Given their independence, they are more likely to watch out for the interests of shareholders. Each director has a fiduciary responsibility—a legal duty to act solely in another party's interests—toward the shareholders because of the trust placed in him or her.

employee stock ownership plans (ESOPs).

They also turn employees into shareholders through these plans allow employees to purchase stock at a discounted rate or use company stock as an investment vehicle for retirement savings

co-opetition

This development illustrates the process of co-opetition, which is cooperation by competitors to achieve a strategic objective. Samsung and Google cooperate as complementors to compete against Apple's strong position in the mobile device industry, while at the same time Samsung and Google are increasingly becoming competitive with one another....co-opetition.

Sometimes, it's the bad barrel that can spoil the apples!

research indicates that it is not just the few "bad apples" but entire organizations that can create a climate in which unethical, even illegal behavior is tolerated. While there clearly are some people with unethical or even criminal inclinations, in general one's ethical decision-making capacity depends very much on the organizational context. Research shows that if people work in organizations that expect and value ethical behavior, they are more likely to act ethically.

Demographic trends (sociocultural)

Demographic trends are also important sociocultural factors. These trends capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class. Like other sociocultural factors, demographic trends present opportunities but can also pose threats.

strategic leadership

Executives' use of power and influence to direct the activities of others when pursuing an organization's goals. The first step in this process is to define a firm's vision, mission, and values. Vision. What do we want to accomplish ultimately? Mission. How do we accomplish our goals? Values. What commitments do we make, and what guardrails do we put in place, to act both legally and ethically as we pursue our vision and mission?

Two ingredients are needed to create a powerful foundation upon which to formulate and implement a strategy in order to gain and sustain a competitive advantage:

First, the firm needs an inspiring vision and mission backed up by ethical values Second, the strategic leader must put an effective strategic management process in place.

LEGAL FACTORS

Legal factors include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions—all of which can have a direct bearing on a firm's profit potential. In fact, regulatory changes tend to affect entire industries at once. Many industries in the United States have been deregulated over the last few decades, including airlines, telecom, energy, and trucking, among others. legal factors often coexist with or result from political will. Governments especially can directly affect firm performance by exerting both political pressure and legal sanctions, including court rulings and industry regulations. Governments can often wield positive legal and political mechanisms to achieve desired changes in consumer behavior. For example, to encourage consumers to buy zero-emission vehicles, the U.S. government offers a $7,500 federal tax credit with the purchase of a new electric vehicle such as the Chevy Bolt, Nissan Leaf, or Tesla Model S.

Porter's 5 Forces Model

Michael Porter developed the highly influential five forces model to help managers understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage.14 By combining theory from industrial organization economics with hundreds of detailed case studies, Porter derived two key insights that form the basis of his seminal five forces model: Rather than defining competition narrowly as the firm's closest competitors to explain and predict a firm's performance, competition must be viewed more broadly, to also encompass the other forces in an industry: buyers, suppliers, potential new entry of other firms, and the threat of substitutes. The profit potential of an industry is neither random nor entirely determined by industry-specific factors. Rather, it is a function of the five forces that shape competition: 1. Threat of entry. 2. Power of suppliers. 3. Power of buyers. 4. Threat of substitutes. 5. Rivalry among existing competitors. The first major insight this model provides is that competition involves more than just creating economic value; firms must also capture a significant share of it or they will see the economic value they create lost to suppliers, customers, or competitors. Firms create economic value by expanding as much as possible the gap between the value (V) the firm's product or service generates and the cost (C) to produce it. Economic value thus equals V minus C. To succeed, creating value is not enough. Firms must also be able to capture a significant share of the value created to gain and sustain a competitive advantage. The second major insight from the five forces model is that it enables managers to not only understand their industry environment but also shape their firm's strategy. As a rule of thumb, the stronger the five forces, the lower the industry's profit potential—making the industry less attractive for competitors. The reverse is also true: the weaker the five forces, the greater the industry's profit potential—making the industry more attractive. Therefore, from the perspective of a manager of an existing firm competing for advantage in an established industry, the company should be positioned in a way that relaxes the constraints of strong forces and leverages weak forces. The goal of crafting a strategic position is of course to improve the firm's ability to achieve a competitive advantage. Although the five-forces-plus-complements model is useful in understanding an industry's profit potential, it provides only a point-in-time snapshot of a moving target.

POLITICAL/LEGAL FACTORS

While political factors are located in the firm's general environment, where firms traditionally wield little influence, companies nevertheless increasingly work to shape and influence this realm. They do so by applying nonmarket strategies—that is, through lobbying, public relations, contributions, litigation, and so on, in ways that are favorable to the firm

Philanthropic responsibilities

are often subsumed under the idea of corporate citizenship, reflecting the notion of voluntarily giving back to society.

external factors in the firm's general environment

are ones that managers have little direct influence over, such as macroeconomic factors (e.g., interest or currency exchange rates).

scenario planning

asks those "what if" questions. Similar to top-down strategic planning, scenario planning also starts with a top-down approach to the strategy process. For example, new laws might restrict carbon emissions or expand employee health care. Demographic shifts may alter the ethnic diversity of a nation; changing tastes or economic conditions will affect consumer behavior. Technological advance may provide completely new products, processes, and services. How would any of these changes affect a firm, and how should it respond? Scenario planning takes place at both the corporate and business levels of strategy scenario planning addresses both optimistic and pessimistic futures Managers then formulate strategic plans they could activate and implement should the envisioned optimistic or pessimistic scenarios begin to appear. To model the scenario-planning approach, place the elements in the AFI strategy framework in a continuous feedback loop, where Analysis leads to Formulation to Implementation and back to Analysis. By formulating responses to the varying scenarios, managers build a portfolio of future options. They capture the firm's internal and external environments and answer several key questions: ▪ What resources and capabilities do we need to compete successfully in each future scenario? ▪ What strategic initiatives should we put in place to respond to each respective scenario? ▪ How can we shape our expected future environment? The scenarios and planned responses promote strategic flexibility for the organization. In the implementation stage, managers execute the dominant strategic plan, the option that top managers decide most closely matches the current reality. When managers envision different "what-if" future alternatives and develop strategic plans to address them, they are engaging in scenario planning. The process of planning scenarios can be considered a microcosm of the overarching framework of this textbook. Analysis is identifying a variety of future scenarios. Formulation is developing strategic plans to address many of those future scenarios. What is the final Implementation phase of scenario planning?

ECONOMIC FACTORS

in a firm's external environment are largely macroeconomic, affecting economy-wide phenomena. Managers need to consider how the following five macroeconomic factors can affect firm strategy: ▪ Growth rates. (economic growth) ▪ Levels of employment. ▪ Interest rates. ▪ Price stability (inflation and deflation). ▪ Currency exchange rates.

Entry barriers

which are advantageous for incumbent firms, are obstacles that determine how easily a firm can enter an industry. Incumbent firms can benefit from several important sources of entry barriers: ▪ Economies of scale. ▪ Network effects. ▪ Customer switching costs. ▪ Capital requirements. ▪ Advantages independent of size. ▪ Government policy. ▪ Credible threat of retaliation.

the firm's external environment

—that is, the industry in which the firm operates, and the competitive forces that surround the firm from the outside. A firm's external environment consists of all the factors that can affect its potential to gain and sustain a competitive advantage. I

non-market strategies (political factors)

—that is, through lobbying, public relations, contributions, litigation, and so on, in ways that are favorable to the firm

Opportunism

is defined as self-interest seeking with guile.35 Backward vertical integration is often undertaken to overcome the threat of opportunism and to secure key raw materials.

Firm performance

is determined primarily by two factors: industry effects and firm effects.

IBM and its clients are facing THREE DISRUPTIONS at once cloud computing systems of engagement big data and analytics

1. Cloud computing: By providing convenient, on-demand network access to shared computing resources such as networks, servers, storage, applications, and services, IBM attempts to put itself at the front of a trend now readily apparent in services that include Google Drive, Dropbox, or Microsoft 365. Increasingly, businesses are renting computer services rather than owning hardware and software and running their own networks. One of the largest cloud computing providers for businesses is Amazon Web Services (AWS), which beat out IBM in winning a high-profile CIA contract. This was seen as a major embarrassment given IBM's long history of federal contracts. 2. Systems of engagement: IBM now helps businesses with their systems of engagement, a term the company uses broadly to cover the transition from enterprise systems to decentralized systems or mobility. IBM identifies the traditional enterprise system as a "system of record" that passively provides information to the enterprise's knowledge workers. It contrasts that with systems of engagement that provide mobile computing platforms, often including social media apps such as Facebook or Twitter, that promote rapid and active collaboration. To drive adoption of mobile computing for business, IBM partnered with Apple to provide business productivity apps on Apple devices. 3. Big data and analytics: IBM now offers smarter analytics solutions that focus on how to acquire, process, store, manage, analyze, and visualize data arriving at high volume, velocity, and variety. Prime applications are in finance, medicine, law, and many other professional fields relying on deep domain expertise within fast-moving environments. IBM partnered with Twitter to provide IBM's business clients big data and analytics solutions in real time based on the vast amount of data produced on Twitter.

6.2 Differentiation Strategy: Understanding Value Drivers

A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created (V − C) is greater than that of its competitors. Under a differentiation strategy, firms that successfully differentiate their products enjoy a competitive advantage. Firm A's product is seen as a generic commodity with no unique brand value. Firm B has the same cost structure as Firm A but creates more economic value, and thus has a competitive advantage over both Firm A and Firm C because (V − C)B > (V − C)C > (V − C)A. Although, Firm C has higher costs than Firm A and B, it still generates a significantly higher economic value than Firm A.

cost-leadership strategy

A cost-leadership strategy, in contrast, seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers.

differentiation strategy

A differentiation strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels, allowing the firm to charge higher prices to its customers.

FUNCTIONAL STRUCTURE AND BUSINESS STRATEGY.

A functional structure is recommended when a firm has a fairly narrow focus in terms of product/service offerings (i.e., low level of diversification) combined with a small geographic footprint. It matches well, therefore, with the different business strategies discussed in Chapter 6: cost leadership, differentiation, and blue ocean. Although a functional structure is the preferred method for implementing business strategy, different variations and contexts require careful modifications in each case: DISADVANTAGES. While certainly attractive, the functional structure is not without significant drawbacks. Although the functional structure facilitates rich and extensive communication between members of the same department, it frequently lacks effective communication channels across departments. Notice in Exhibit 11.5 the lack of links between different functions. The lack of linkage between functions is the reason, for example, why R&D managers often do not communicate directly with marketing managers. In an ambidextrous organization, a top-level manager such as the CEO must take on the necessary coordination and integration work. To overcome the lack of cross-departmental collaboration in a functional structure, a firm can set up cross-functional teams. In these temporary teams, members come from different functional areas to work together on a specific project or product, usually from start to completion. Each team member reports to two supervisors: the team leader and the respective functional department head. As we saw in Strategy Highlight 11.2, W.L. Gore employs cross-functional teams successfully. A second critical drawback of the functional structure is that it cannot effectively address a higher level of diversification, which often stems from further growth.29 This is the stage at which firms find it effective to evolve and adopt a multidivisional or matrix structure, both of which we will discuss next.

JOINT VENTURES.

A joint venture (JV) is a standalone organization created and jointly owned by two or more parent companies Since partners contribute equity to a joint venture, they are making a long-term commitment. Exchange of both explicit and tacit knowledge through interaction of personnel is typical. Joint ventures are also frequently used to enter foreign markets where the host country requires such a partnership to gain access to the market in exchange for advanced technology and know-how. The advantages of joint ventures are the strong ties, trust, and commitment that can result between the partners. However, they can entail long negotiations and significant investments. If the alliance doesn't work out as expected, undoing the JV can take some time and involve considerable cost. A further risk is that knowledge shared with the new partner could be misappropriated by opportunistic behavior. Finally, any rewards from the collaboration must be shared between the partners

patent

A patent is a form of intellectual property, and gives the inventor exclusive rights to benefit from commercializing a technology for a specified time period in exchange for public disclosure of the underlying idea Exclusive rights often translate into a temporary monopoly position until the patent expires. For instance, many pharmaceutical drugs are patent protected

real-options perspective (tied to hedging against uncertainty) used a lot in dynamic markets

A real-options perspective to strategic decision making breaks down a larger investment decision (such as whether to enter biotechnology or not) into a set of smaller decisions that are staged sequentially over time. This approach allows the firm to obtain additional information at predetermined stages. At each stage, after new information is revealed, the firm evaluates whether or not to make further investments. In a sense, a real option, which is the right, but not the obligation, to continue making investments allows the firm to buy time until sufficient information for a go versus no-go decision is revealed. Once the new biotech drugs were a known quantity, the uncertainty was removed, and the incumbent firms could react accordingly.

managerial hubris

A related problem is managerial hubris, a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary.68 Managerial hubris comes in two forms: Managers of the acquiring company convince themselves that they are able to manage the business of the target company more effectively and, therefore, create additional shareholder value. This justification is often used for an unrelated diversification strategy. Although most top-level managers are aware that the majority of acquisitions destroy rather than create shareholder value, they see themselves as the exceptions to the rule.

Rare resource

A resource is rare if only one or a few firms possess it. If the resource is common, it will result in perfect competition where no firm is able to maintain a competitive advantage (see discussion in Chapter 3). A resource that is valuable but not rare can lead to competitive parity at best. A firm is on the path to competitive advantage only if it possesses a valuable resource that is also rare.

blue ocean strategy

A successful blue ocean strategy requires reconciliation of the trade-offs between differentiation and low cost. To effectively implement a blue ocean strategy, the firm must be both efficient and flexible. It must balance centralization to control costs with decentralization to foster creativity and innovation. Managers must, therefore, attempt to combine the advantages of the functional-structure variations used for cost leadership and differentiation while mitigating their disadvantages. Moreover, the firm pursuing a blue ocean strategy needs to develop several distinct core competencies to both drive up perceived value and lower cost. It must further pursue both product and process innovations in an attempt to reap economies of scale and scope. All of these challenges make it clear that although a blue ocean strategy is attractive at first glance, it is quite difficult to implement given the range of important trade-offs that must be addressed.

ADMINISTRATIVE AND POLITICAL DISTANCE.

Administrative and political distances are captured in factors such as the absence or presence of shared monetary or political associations, political hostilities, and weak or strong legal and financial institutions.

Isolating Mechanisms: How To Sustain A Competitive Advantage

Although VRIO resources can lay the foundation of a sustainable competitive advantage, no competitive advantage can be sustained indefinitely. Several conditions, however, can offer some protection to a successful firm by making it more difficult for competitors to imitate the resources, capabilities, or competencies that underlie its competitive advantage: BARRIERS TO IMITATION (Mechanisms that isolate a firm from its competitors) ▪ 1 Better expectations of future resource value. ▪ 2 Path dependence. ▪ 3 Causal ambiguity. ▪ 4 Social complexity. ▪ 5 Intellectual property (IP) protection. These barriers to imitation are important examples of isolating mechanisms because they prevent rivals from competing away the advantage a firm may enjoy. This link ties isolating mechanisms directly to one of the criteria in the resource-based view to assess the basis of competitive advantage: costly to imitate. If one, or any combination, of these isolating mechanisms is present, a firm may strengthen its basis for competitive advantage, increasing its chance to be sustainable over a longer period of time.

Limitations of Accounting Data

Although accounting data tend to be readily available and we can easily transform them into financial ratios to assess and evaluate competitive performance, they also exhibit some important limitations: ▪ All accounting data are historical and thus backward-looking. Accounting profitability ratios show us only the outcomes from past decisions, and the past is no guarantee of future performance. There is also a significant time delay before accounting data become publicly available. Some strategists liken making decisions using accounting data to driving a car by looking in the rearview mirror. While financial strength certainly helps, past performance is no guarantee that a company is prepared for market disruption. Rather, as we saw in Chapter 4, IBM survived over the last century only by complete transformation of its capabilities multiple times in response to radical technological innovations. ▪ Accounting data do not consider off-balance sheet items. Off-balance sheet items, such as pension obligations (quite large in some U.S. companies) or operating leases in the retail industry, can be significant factors. For example, one retailer may own all its stores, which would properly be included in the firm's assets; a second retailer may lease all its stores, which would not be listed as assets. All else being equal, the second retailer's return on assets (ROA) would be higher. Strategists address this shortcoming by adjusting accounting data to obtain an equivalent economic capital base, so that they can compare companies with different capital structures. ▪ Accounting data focus mainly on tangible assets, which are no longer the most important. This limitation of accounting data is nicely captured in the adage: Not everything that can be counted counts. Not everything that counts can be counted.

Limitations of Shareholder Value Creation.

Although measuring firm performance through total return to shareholders and firm market capitalization has many advantages, just as with accounting profitability, it has its shortcomings: ▪ Stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short term. This volatility implies that total return to shareholders is a better measure of firm performance and competitive advantage over the long term, because of the "noise" introduced by market volatility, external factors, and investor sentiment. ▪ Overall macroeconomic factors such as economic growth or contraction, the unemployment rate, and interest and exchange rates all have a direct bearing on stock prices. It can be difficult to ascertain the extent to which a stock price is influenced more by external macroeconomic factors (as discussed in Chapter 3) than by the firm's strategy (see also Exhibit 1.1 highlighting firm, industry, and other effects in overall firm performance). ▪ Stock prices frequently reflect the psychological mood of investors, which can at times be irrational.

HOW TO RESPOND TO DISRUPTIVE INNOVATION?

Although these examples show that disruptive innovations are a serious threat for incumbent firms, some have devised strategic initiatives to counter them: 1. Continue to innovate in order to stay ahead of the competition. A moving target is much harder to hit than one that is standing still and resting on existing (innovation) laurels. Apple has done this well, beginning with the iPod in 2001, followed by the iPhone and iPad and more recently the Apple Watch in 2015. Amazon is another example of a company that has continuously morphed through innovation,74 from a simple online book retailer to the largest ecommerce company. It also offers consumer electronics (Kindle tablets), cloud computing, and content streaming, among other offerings. 2. Guard against disruptive innovation by protecting the low end of the market (Segment 1 in Exhibit 7.11) by introducing low-cost innovations to preempt stealth competitors. Intel introduced the Celeron chip, a stripped-down, budget version of its Pentium chip, to prevent low-cost entry into its market space. More recently, Intel followed up with the Atom chip, a new processor that is inexpensive and consumes little battery power, to power low-cost mobile devices.75 Nonetheless, Intel also listened too closely to its existing personal computer customers such as Dell, HP, Lenovo, and so on, and allowed ARM Holdings, a British semiconductor design company (that supplies its technology to Apple, Samsung, HTC, and others) to take the lead in providing high-performing, low-power-consuming processors for smartphones and other mobile devices. 3. Disrupt yourself, rather than wait for others to disrupt you. A firm may develop products specifically for emerging markets such as China and India, and then introduce these innovations into developed markets such as the United States, Japan, or the European Union. This process is called reverse innovation,76 and allows a firm to disrupt itself. Strategy Highlight 7.2 describes how GE Healthcare invented and commercialized a disruptive innovation in China that is now entering the U.S. market, riding the steep technology trajectory of disruptive innovation shown in Exhibit 7.11.

Ambidexterity exploitation exploration

Ambidexterity describes a firm's ability to address trade-offs not only at one point but also over time. It encourages managers to balance exploitation—applying current knowledge to enhance firm performance in the short term—with exploration—searching for new knowledge that may enhance a firm's future performance.

HOW DOES ORGANIZATIONAL CULTURE CHANGE? It can be difficult, at best, to imitate the cultures of successful firms, for two reasons: causal ambiguity and social complexity.

An organization's culture can be one of its strongest assets, but also its greatest liability. An organization's culture can turn from a core competency into a core rigidity if a firm relies too long on the competency without honing, refining, and upgrading as the firm and the environment change. 49 (See discussion in Chapter 4.) Over time, the original core competency is no longer a good fit and turns from an asset into a liability. This is the time when a culture needs to change. The primary means of cultural change is for the corporate board of directors to bring in new leadership at the top, which is then charged to make changes in strategy and structure. After all, executives shape corporate culture in their decisions on how to structure the organization and its activities, allocate its resources, and develop its system of rewards (see the discussion on strategic leadership in Chapter 2). In 2014, GM's board of directors appointed Mary Barra as CEO with the charge to fix GM's dysfunctional corporate culture and to make the company competitive again.

8.4 Corporate Diversification: Expanding Beyond a Single Market

Answers to questions about the number of markets to compete in and where to compete geographically relate to the broad topic of diversification. A firm that engages in diversification increases the variety of products and services it offers or markets and the geographic regions in which it competes. A non-diversified company focuses on a single market, whereas a diversified company competes in several different markets simultaneously.

functional structure

As sales increase, firms generally adopt a functional structure, which groups employees into distinct functional areas based on domain expertise. These functional areas often correspond to distinct stages in the value chain such as R&D, engineering and manufacturing, and marketing and sales, as well as supporting areas such as human resources, finance, and accounting.

standard

As the size of the market expands, a standard signals the market's agreement on a common set of engineering features and design choices.35 Standards can emerge bottomup through competition in the marketplace or be imposed top-down by government or other standard-setting agencies such as the Institute of Electrical and Electronics Engineers (IEEE) that develops and sets industrial standards in a broad range of industries, including energy, electric power, biomedical and health care technology, IT, telecommunications, consumer electronics, aerospace, and nanotechnology.

groupthink

As the values and norms held by the employees become more similar, the firm's corporate culture becomes stronger and more distinct. This in turn can have a serious negative side-effect: groupthink, a situation in which opinions coalesce around a leader without individuals critically evaluating and challenging that leader's opinions and assumptions. Cohesive, non-diverse groups are highly susceptible to groupthink, which in turn can lead to flawed decision making with potentially disastrous consequences.

Limitations of Economic Value Creation.

As with any tool to assess competitive advantage, the economic value creation framework also has some limitations: ▪ Determining the value of a good in the eyes of consumers is not a simple task. One way to tackle this problem is to look at consumers' purchasing habits for their revealed preferences, which indicate how much each consumer is willing to pay for a product or service. In the earlier example, the value (V) you placed on the laptop—the highest price you were willing to pay, or your reservation price—was $1,200. If the firm is able to charge the reservation price (P = $1,200), it captures all the economic value created (V − C = $800) as producer surplus or profit (P − C = $800). ▪ The value of a good in the eyes of consumers changes based on income, preferences, time, and other factors. If your income is high, you are likely to place a higher value on some goods (e.g., business-class air travel) and a lower value on other goods (e.g., Greyhound bus travel). In regard to preferences, you may place a higher value on a ticket for a Lady Gaga concert than on one for the New York Philharmonic orchestra (or vice versa). As an example of time value, you place a higher value on an airline ticket that will get you to an important business meeting tomorrow than on one for a planned trip to take place eight weeks from now. ▪ To measure firm-level competitive advantage, we must estimate the economic value created for all products and services offered by the firm. We've now completed our consideration of the three standard dimensions for measuring competitive advantage—accounting profitability, shareholder value, and economic value. Although each provides unique insights for assessing competitive advantage, one drawback is that they are more or less one-dimensional metrics.

HOW DO MNEs ENTER FOREIGN MARKETS?

Assuming an MNE has decided why and where to enter a foreign market, the remaining decision is how to do so. Exhibit 10.5 displays the different options managers have when entering foreign markets, along with the required investments necessary and the control they can exert. On the left end of the continuum in Exhibit 10.5 are vehicles of foreign expansion that require low investments but also allow for a low level of control. On the right are foreign-entry modes that require a high level of investments in terms of capital and other resources, but also allow for a high level of control. Foreign-entry modes with a high level of control such as foreign acquisitions or greenfield plants reduce the firm's exposure to two particular downsides of global business: loss of reputation and loss of intellectual property.

HTC's Backward and Forward Integration along the Industry Value Chain in the Smartphone Industry

BENEFITS OF VERTICAL INTEGRATION. Vertical integration, either backward or forward, can have a number of benefits, including ▪ Lowering costs. ▪ Improving quality. ▪ Facilitating scheduling and planning. ▪ Facilitating investments in specialized assets. ▪ Securing critical supplies and distribution channels. RISKS OF VERTICAL INTEGRATION. It is important to note that the risks of vertical integration can outweigh the benefits. Depending on the situation, vertical integration has several risks, some of which directly counter the potential benefits, including37Page 269 ▪ Increasing costs. ▪ Reducing quality. ▪ Reducing flexibility. ▪ Increasing the potential for legal repercussions.

DECLINE STAGE Exit Harvest Maintain Consolidate

Changes in the external environment (such as those discussed in Chapter 3 when presenting the PESTEL framework) often take industries from maturity to decline. In this final stage of the industry life cycle, the size of the market contracts further as demand falls, often rapidly. At this final phase of the industry life cycle, innovation efforts along both product and process dimensions cease At this final stage of the industry life cycle, managers generally have four strategic options: exit, harvest, maintain, or consolidate:44 ▪ Exit. Some firms are forced to exit the industry by bankruptcy or liquidation. The U.S. textile industry has experienced a large number of exits over the last few decades, mainly due to low-cost foreign competition. ▪ Harvest. In pursuing a harvest strategy, the firm reduces investments in product support and allocates only a minimum of human and other resources. While several companies such as IBM, Brother, Olivetti, and Nakajima still offer typewriters, they don't invest much in future innovation. Instead, they are maximizing cash flow from their existing typewriter product line. ▪ Maintain. Philip Morris, on the other hand, is following a maintain strategy with its Marlboro brand, continuing to support marketing efforts at a given level despite the fact that U.S. cigarette consumption has been declining. ▪ Consolidate. Although market size shrinks in a declining industry, some firms may choose to consolidate the industry by buying rivals. This allows the consolidating firm to stake out a strong position—possibly approaching monopolistic market power, albeit in a declining industry.

Co-opetition (tied to accessing critical complementary assets)

Co-opetition is a portmanteau describing cooperation by competitors. They may cooperate to create a larger pie but then might compete about how the pie should be divided. Such co-opetition can lead to learning races in strategic alliances,24 a situation in which both partners are motivated to form an alliance for learning, but the rate at which the firms learn may vary. The firm that learns faster and accomplishes its goal more quickly has an incentive to exit the alliance or, at a minimum, to reduce its knowledge sharing. Since the cooperating firms are also competitors, learning races can have a positive effect on the winning firm's competitive position vis-à-vis its alliance partner.

information asymmetries

Frequently, sellers have better information about products and services than buyers, which creates information asymmetries, situations in which one party is more informed than another, because of the possession of private information. When firms transact in the market, such unequal information can lead to a lemons problem.

DISADVANTAGES OF GOING GLOBAL

Companies expanding internationally must carefully weigh the benefits and costs of doing so. If the cost of going global as captured by the following disadvantages exceeds the expected benefits in terms of value added (C > V), that is, if the economic value creation is negative, then firms are better off by not expanding internationally. Disadvantages to going global include ▪ Liability of foreignness. ▪ Loss of reputation. ▪ Loss of intellectual property. LIABILITY OF FOREIGNNESS. In international expansion, firms face risks. In particular, MNEs doing business abroad also must overcome the liability of foreignness. This liability consists of the additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances.41 Strategy Highlight 10.2 illustrates how Walmart underestimated its liability of foreignness when entering and competing in Germany.

DEMAND CONDITIONS.

Demand conditions are the specific characteristics of demand in a firm's domestic market. A home market made up of sophisticated customers who hold companies to a high standard of value creation and cost containment contributes to national competitive advantage.

Organizational Inertia and the Failure of Established Firms to Respond to Shifts in the External or Internal Environment

Exhibit 11.2 shows how success in the current environment can lead to a firm's downfall in the future, when the tightly coupled system of strategy and structure experiences internal or external shifts. top management team (TMT) To avoid inertia and possible organizational failure, the firm needs a flexible and adaptive structure to effectively translate the formulated strategy into action. Ideally the firm would maintain a virtuous cycle of reconsidering organization, as implied by Option B earlier in the chapter.

O & T

External opportunities (O) and threats (T) are in the firm's general environment and can be captured by PESTEL and Porter's five forces analyses (discussed in the previous chapter). An attractive industry as determined by Porter's five forces, for example, presents an external opportunity for firms not yet active in this industry. On the other hand, stricter regulation for financial institutions, for example, might represent an external threat to banks.

FACTOR CONDITIONS.

Factor conditions describe a country's endowments in terms of natural, human, and other resources. Other important factors include capital markets, a supportive institutional framework, research universities, and public infrastructure (airports, roads, schools, health care system), among others. Interestingly, natural resources are often not needed to generate world-leading companies, because competitive advantage is often based on other factor endowments such as human capital and know-how.

architectural innovation

Firms can also innovate by leveraging existing technologies into new markets. Doing so generally requires them to reconfigure the components of a technology, meaning they alter the overall architecture of the product.65 An architectural innovation, therefore, is a new product in which known components, based on existing technologies, are reconfigured in a novel way to create new markets. Example: Xerox ignored small and medium-sized businesses. By applying an architectural innovation, the Japanese entry Canon was able to redesign the copier so that it didn't need professional service—reliability was built directly into the machine, and the user could replace parts such as the cartridge.

1. HOW RELEVANT ARE THE FIRM'S EXISTING INTERNAL RESOURCES TO SOLVING THE RESOURCE GAP?

Firms evaluate the relevance of internal resources in two ways: they test whether resources are (1) similar to those the firm needs to develop and (2) superior to those of competitors in the targeted area. If both conditions are met, then the firm's internal resources are relevant and the firm should pursue internal development. Managers are often misled by the first test because things that might appear similar at the surface are actually quite different deep down.4 Moreover, managers tend to focus on the (known) similarities rather than on (unknown) differences. They often don't know how the resources needed for the existing and new business opportunity differ.

Matrix Structure with Geographic and SBU Divisions

Firms tend to use a global matrix structure to pursue a transnational strategy, in which the firm combines the benefits of a multidomestic strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable). In a global matrix structure, the geographic divisions are charged with local responsiveness and learning. At the same time, each SBU is charged with driving down costs through economies of scale and other efficiencies. A global matrix structure also allows the firm to feed local learning back to different SBUs and thus diffuse it throughout the organization. The specific organizational configuration depicted in Exhibit 11.9 is a global matrix structure DISADVANTAGES. Though it is appealing in theory, the matrix structure does have shortcomings. It is usually difficult to implement: Implementing two layers of organizational structure creates significant organizational complexity and increases administrative costs. Also, reporting structures in a matrix are often not clear. In particular, employees can have trouble reconciling goals presented by their two (or more) supervisors. Less-clear reporting structures can undermine accountability by creating multiple principal-agent relationships. This can make performance appraisals more difficult. Adding an additional layer of hierarchy can also slow decision making and increase bureaucratic costs.

value innovation

For a blue ocean strategy to succeed, managers must resolve trade-offs between the two generic strategic positions—low cost and differentiation.38 This is done through value innovation, aligning innovation with total perceived consumer benefits, price and cost (also see the discussion in Chapter 5 on economic value creation). Instead of attempting to out-compete your rivals by offering better features or lower costs, successful value innovation makes competition irrelevant by providing a leap in value creation, thereby opening new and uncontested market spaces. Value Innovation—Lower Costs Eliminate. Which of the factors that the industry takes for granted should be eliminated? Reduce. Which of the factors should be reduced well below the industry's standard? Value Innovation—Increase Perceived Consumer Benefits Raise. Which of the factors should be raised well above the industry's standard? Create. Which factors should be created that the industry has never offered?

2. HOW TRADABLE ARE THE TARGETED RESOURCES THAT MAY BE AVAILABLE EXTERNALLY?

For external options, the firm needs to determine how tradable the targeted resources may be. The term tradable implies that the firm is able to source the resource externally through a contract that allows for the transfer of ownership or use of the resource. Short-term as well as long-term contracts, such as licensing or franchising, are a way to borrow resources from another company

globalization hypothesis

For many business executives, the move toward globalization is based on the globalization hypothesis, which states that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous.

government policies

Frequently government policies restrict or prevent new entrants. Until recently, India did not allow foreign retailers such as Walmart or IKEA to own stores and compete with domestic companies in order to protect the country's millions of small vendors and wholesalers. China frequently requires foreign companies to enter joint ventures with domestic ones and to share technology. In contrast, deregulation in industries such as airlines, telecommunications, and trucking have generated significant new entries. Therefore, the threat of entry is high when restrictive government policies do not exist or when industries become deregulated.

CROSSING THE CHASM

Geoffrey Moore documented that many innovators were unable to successfully transition from one stage of the industry life cycle to the next. Based on empirical observations, Moore's core argument is that each stage of the industry life cycle is dominated by a different customer group. Different customer groups with distinctly different preferences enter the industry at each stage of the industry life cycle. Each customer group responds differently to a technological innovation. This is due to differences in the psychological, demographic, and social attributes observed in each unique customer segment. Moore's main contribution is that the significant differences between the early customer groups—who enter during the introductory stage of the industry life cycle—and later customers—who enter during the growth stage—can make for a difficult transition between the different parts of the industry life cycle. Such differences between customer groups lead to a big gulf or chasm into which companies and their innovations frequently fall. Only companies that recognize these differences and are able to apply the appropriate competencies at each stage of the industry life cycle will have a chance to transition successfully from stage to stage. Each stage customer segment, moreover, is also separated by smaller chasms. Both the large competitive chasm and the smaller ones have strategic implications.

network structure communities of practice

Given the advances in computer-mediated collaboration tools, some firms have replaced the more rigid matrix structure with a network structure. A network structure allows the firm to connect centers of excellence, whatever their global location (see Exhibit 10.3). The firm benefits from communities of practice, which store important organizational learning and expertise. To avoid undue complexity, these network structures need to be supported by corporate-wide procedures and policies to streamline communication, collaboration, and the allocation of resources.

4.5 Implications for the Strategist

Ideally, managers want to leverage their firm's internal strengths to exploit external opportunities, while mitigating internal weaknesses and external threats. Both types of analysis in tandem allow managers to formulate a strategy that is tailored to their company, creating a unique fit between the company's internal resources and the external environment. A strategic fit increases the likelihood that a firm is able to gain a competitive advantage. If a firm achieves a dynamic strategic fit, it is likely to be able to sustain its advantage over time.

related-linked diversification strategy

If executives consider new business activities that share a limited number of linkages, the firm is using a related-linked diversification strategy business activities share common resources, capabilities, and competencies

joint venture

In a , which is another special form of strategic alliance, two or more partners create and jointly own a new organization. Since the partners contribute equity to a joint venture, they make a long-term commitment, which in turn facilitates transaction-specific investments

SWOT diagram

In a first step, managers gather information for a SWOT analysis in order to link internal factors (Strengths and Weaknesses) to external factors (Opportunities and Threats). Next, managers use the SWOT matrix shown in Exhibit 4.9 (diagram in the card above) to develop strategic alternatives for the firm using a four-step process: 1. Focus on the Strengths-Opportunities quadrant (top left) to derive "offensive" alternatives by using an internal strength in order to exploit an external opportunity. 2. Focus on the Weaknesses-Threats quadrant (bottom right) to derive "defensive" alternatives by eliminating or minimizing an internal weakness in order to mitigate an external threat. 3. Focus on the Strengths-Threats quadrant (top right) to use an internal strength to minimize the effect of an external threat. 4. Focus on the Weaknesses-Opportunities quadrant (bottom left) to shore up an internal weakness to improve its ability to take advantage of an external opportunity. In a final step, the strategist needs to carefully evaluate the pros and cons of each strategic alternative to select one or more alternatives to implement. Managers need to carefully explain their decision rationale, including why other strategic alternatives were rejected. Although the SWOT analysis is a widely used management framework, however, a word of caution is in order. A problem with this framework is that a strength can also be a weakness and an opportunity can also simultaneously be a threat. As an example: Earlier in this chapter, we discussed the location of Google's headquarters in Silicon Valley and near several universities as a key resource for the firm. Most people would consider this a strength for the firm. However, California has a high cost of living and is routinely ranked among the worst of the U.S. states in terms of "ease of doing business." In addition, this area of California is along major earthquake fault lines and is more prone to natural disasters than many other parts of the country. So is the location a strength or a weakness? The answer is "it depends."

leveraged buyout (LBO)

In a leveraged buyout (LBO), a single investor or group of investors buys, with the help of borrowed money (leveraged against the company's assets), the outstanding shares of a publicly traded company in order to take it private. In short, an LBO changes the ownership structure of a company from public to private. The expectation is often that the private owners will restructure the company and eventually take it public again through an initial public offering (IPO).

board of director specific functions

In addition to general strategic oversight and guidance, the board of directors has other, more specific functions, including: ▪ Selecting, evaluating, and compensating the CEO. The CEO reports to the board. Should the CEO lose the board's confidence, the board may fire him or her. ▪ Overseeing the company's CEO succession plan. ▪ Providing guidance to the CEO in the selection, evaluation, and compensation of other senior executives. ▪ Reviewing, monitoring, evaluating, and approving any significant strategic initiatives and corporate actions such as large acquisitions. ▪ Conducting a thorough risk assessment and proposing options to mitigate risk. The boards of directors of the financial firms at the center of the global financial crisis were faulted for not noticing or not appreciating the risks the firms were exposed to. ▪ Ensuring that the firm's audited financial statements represent a true and accurate picture of the firm. ▪ Ensuring the firm's compliance with laws and regulations. The boards of directors of firms caught up in the large accounting scandals were faulted for being negligent in their company oversight and not adequately performing several of the functions listed here.

EQUITY ALLIANCES. corporate venture capital (CVC) is a subset

In an equity alliance, at least one partner takes partial ownership in the other partner. Equity alliances are less common than contractual, non-equity alliances because they often require larger investments. Because they are based on partial ownership rather than contracts, equity alliances are used to signal stronger commitments. Moreover, equity alliances allow for the sharing of tacit knowledge—knowledge that cannot be codified.28 Tacit knowledge concerns knowing how to do a certain task. It can be acquired only through actively participating in the process. In an equity alliance, therefore, the partners frequently exchange personnel to make the acquisition of tacit knowledge possible. The downside of equity alliances is the amount of investment that can be involved, as well as a possible lack of flexibility and speed in putting together and reaping benefits from the partnership. Another governance mechanism that falls under the broad rubric of equity alliances is corporate venture capital (CVC) investments, which are equity investments by established firms in entrepreneurial ventures.

Michael Porter (contrast to Friedman)

In contrast to Milton Friedman, Porter argues that executives should not concentrate exclusively on increasing firm profits. Rather, the strategist should focus on creating shared value, a concept that involves creating economic value for shareholders while also creating social value by addressing society's needs and challenges. This dual point of view, Porter argues, will not only allow companies to gain and sustain a competitive advantage but also reshape capitalism and its relationship to society.

WHY DO FIRMS MERGE WITH COMPETITORS? horizontal integration

In contrast to vertical integration, which concerns the number of activities a firm participates in up and down the industry value chain (as discussed in Chapter 8), horizontal integration is the process of merging with a competitor at the same stage of the industry value chain. Horizontal integration is a type of corporate strategy that can improve a firm's strategic position in a single industry. As a rule of thumb, firms should go ahead with horizontal integration (i.e., acquiring a competitor) if the target firm is more valuable inside the acquiring firm than as a continued standalone company. This implies that the net value creation of a horizontal acquisition must be positive to aid in gaining and sustaining a competitive advantage. An industry-wide trend toward horizontal integration leads to industry consolidation. In particular, competitors in the same industry such as airlines, banking, telecommunications, pharmaceuticals, or health insurance frequently merge to respond to changes in their external environment and to change the underlying industry structure in their favor. There are three main benefits to a horizontal integration strategy: ▪ Reduction in competitive intensity. ▪ Lower costs. ▪ Increased differentiation.

ADVERSE SELECTION.

In general, adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job. Such misrepresentation is common during the recruiting process. Once hired, the principal may not be able to accurately assess whether the agent can do the work for which he or she is being paid. The problem is especially pronounced in team production, when the principal often cannot ascertain the contributions of individual team members. This creates an incentive for opportunistic employees to free-ride on the efforts of others.

MORAL HAZARD.

In general, moral hazard describes a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs accrue to the other party. For example, bailing out homeowners from their mortgage obligations or bailing out banks from the consequences of undue risk-taking in lending are examples of moral hazard. The costs of default are rolled over to society. Knowing that there is a high probability of being bailed out ("too big to fail") increases moral hazard. In this scenario, any profits remain private, while losses become public. In the principal-agent relationship, moral hazard describes the difficulty of the principal to ascertain whether the agent has really put forth a best effort. In this situation, the agent is able to do the work but may decide not to do so.

dynamic capabilities perspective (intangible resource) "The essence of this perspective is that competitive advantage is not derived from static resource or market advantages, but from a dynamic reconfiguration of a firm's resource base."

In the dynamic capabilities perspective, competitive advantage is the outflow of a firm's capacity to modify and leverage its resource base in a way that enables it to gain and sustain competitive advantage in a constantly changing environment. Given the accelerated pace of technological change, in combination with deregulation, globalization, and demographic shifts, dynamic markets today are the rule rather than the exception. As a response, a firm may create, deploy, modify, reconfigure, or upgrade resources so as to provide value to customers and/or lower costs in a dynamic environment. The essence of this perspective is that competitive advantage is not derived from static resource or market advantages, but from a dynamic reconfiguration of a firm's resource base.

Chapter 11 - Organizational Design: Structure, Culture, and Control Strategy implementation is essentially: How a firm performs its work

In this chapter, we study the three key levers that managers have at their disposal when designing their organizations for competitive advantage: structure, culture, and control. Managers employ these three levers to coordinate work and motivate employees across different levels, functions, and geographies. How successful they are in this endeavor determines whether they are able to translate their chosen business, corporate, and global strategy into strategic actions and business models, and ultimately whether the firm is able to gain and sustain a competitive advantage.

industry life cycle introduction growth shakeout maturity decline

Industries tend to follow a predictable industry life cycle: As an industry evolves over time, we can identify five distinct stages: introduction, growth, shakeout, maturity, and decline.

industry value chain

Industry value chains are also called vertical value chains, because they depict the transformation of raw materials into finished goods and services along distinct vertical stages. Each stage of the vertical value chain typically represents a distinct industry in which a number of different firms are competing. This is also why the expansion of a firm up or down the vertical industry value chain is called vertical integration.

INPUT CONTROLS Examples: Budgets and SOPs

Input controls seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures. Firms use input controls when the goal is to define the ways and means to reach a strategic goal and to ensure a predictable outcome. They are called input controls because management designs these mechanisms so they are considered before employees make any business decisions; thus, they are an input into the value-creating activities. The use of budgets is key to input controls. Managers set budgets before employees define and undertake the actual business activities. For example, managers decide how much money to allocate to a certain R&D project before the project begins. In diversified companies using the M-form, corporate headquarters determines the budgets for each division. Public institutions, like some universities, also operate on budgets that must be balanced each year. Their funding often depends to a large extent on state appropriations and thus fluctuates depending on the economic cycle. During recessions, budgets tend to be cut, and they expand during boom periods. Standard operating procedures, or policies and rules, are also a frequently used mechanism when relying on input controls.

trade secrets

Instead they use trade secrets, defined as valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain its secrecy. The most famous example of a trade secret is the Coca-Cola recipe, which has been protected for over a century.

Intangibles and the Value Of Firms.

Intangible assets that are not captured in accounting data have become much more important in firms' stock market valuations over the last few decades. Exhibit 5.2 shows the firm's book value (accounting data capturing the firm's actual costs of assets minus depreciation) as part of a firm's total stock market valuation (number of outstanding shares times share price). The firm's book value captures the historical cost of a firm's assets, whereas market valuation is based on future expectations for a firm's growth potential and performance. For the firms in the S&P 500 (the 500 largest publicly traded companies by market capitalization in the U.S. stock market, as determined by Standard & Poor's, a rating agency), the importance of a firm's book value has declined dramatically over time. This decline mirrors a commensurate increase in the importance of intangibles that contribute to growth potential and yet are not captured in a firm's accounting data. The important take-away is that intangibles not captured in firms' accounting data have become much more important to a firm's competitive advantage. By 2015, about 75 percent of a firm's market valuation was determined by its intangibles.

4.1 CORE COMPETENCIES Companies develop core competencies through the interplay of resources and capabilities. Exhibit 4.3 shows this relationship. In the interplay of resources and capabilities, resources reinforce core competencies, while capabilities allow managers to orchestrate their core competencies. First, core competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage. And second, in analyzing a company's success in the market, it can be too easy to focus on the more visible elements or facets of core competencies such as superior products or services. While these are the outward manifestation of core competencies, what is even more important is to understand the invisible part of core competencies.

Let's begin by taking a closer look at core competencies. These are unique strengths, embedded deep within a firm. Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost. The important point here is that competitive advantage can be driven by core competencies.

example alliance is managed by a three-person team

Lilly's process prescribes that each alliance is managed by a three-person team: an alliance champion, alliance leader, and alliance manager. ▪ The alliance champion is a senior, corporate-level executive responsible for high-level support and oversight. This senior manager is also responsible for making sure that the alliance fits within the firm's existing alliance portfolio and corporate-level strategy. ▪ The alliance leader has the technical expertise and knowledge needed for the specific technical area and is responsible for the day-to-day management of the alliance. ▪ The alliance manager, positioned within the Office of Alliance Management, serves as an alliance process resource and b

MATURITY STAGE morphs into an oligopoly

MATURITY STAGE After the shakeout is completed and a few firms remain, the industry enters the maturity stage. During the fourth stage of the industry life cycle, the industry structure morphs into an oligopoly with only a few large firms. The market has reached its maximum size, and industry growth is likely to be zero or even negative going forward. This decrease in market demand increases competitive intensity within the industry. In the maturity stage, the level of process innovation reaches its maximum as firms attempt to lower cost as much as possible, while the level of incremental product innovation sinks to its minimum Generally, the firms that survive the shakeout stage tend to be larger and enjoy economies of scale, as the industry consolidated and most excess capacity was removed.

managers define value creation too narrowly

Managers' pursuit of strategies that define value creation too narrowly may have negative consequences for society at large, as evidenced during the global financial crisis. This narrow focus has contributed to the loss of trust in the corporation as a vehicle for value creation, not only for shareholders but also other stakeholders and society.

polycentric innovation strategy

Many MNEs now are replacing the one-way innovation flow from Western economies to developing markets with a polycentric innovation strategy—a strategy in which MNEs now draw on multiple, equally important innovation hubs throughout the world characteristic of Globalization 3.0

3. HOW CLOSE DO YOU NEED TO BE TO YOUR EXTERNAL RESOURCE PARTNER?

Many times, firms are able to obtain the required resources to fill the strategic gap through more integrated strategic alliances such as equity alliances or joint ventures (see Exhibit 8.4) rather than through outright acquisition. Mergers and acquisitions are the most costly, complex, and difficult to reverse strategic option. This implies that only if extreme closeness to the resource partner is necessary in order to understand and obtain its underlying knowledge should M&A be considered the buy option. Regardless, the firm should always first consider borrowing the necessary resources through integrated strategic alliances before looking at M&A.

PORTER'S DIAMOND FRAMEWORK of national competitive advantage

Michael Porter advanced a framework to explain national competitive advantage—why are some nations outperforming others in specific industries. This framework is called Porter's diamond of national competitive advantage. As shown in Exhibit 10.9, it consists of four interrelated factors: ▪ Factor conditions. ▪ Demand conditions. ▪ Competitive intensity in focal industry. ▪ Related and supporting industries/complementors.

resource stocks and resource flows (inflows and outflows)

One way to think about developing dynamic capabilities and other intangible resources is to distinguish between resource stocks and resource flows. In this perspective, resource stocks are the firm's current level of intangible resources. Resource flows are the firm's level of investments to maintain or build a resource. A helpful metaphor to explain the differences between resource stocks and resource flows is a bathtub that is being filled with water: The amount of water in the bathtub indicates a company's level of a specific intangible resource stock—such as its dynamic capabilities, new product development, engineering expertise, innovation capability, reputation for quality, and so on. Intangible resources are built through continuous investments and experience over time. Organizational learning also fosters the increase of intangible resources.

THE VRIO FRAMEWORK evaluating a firm's resource endowments

Our tool for evaluating a firm's resource endowments is a framework that answers the question of what resource attributes underpin competitive advantage. This framework is implied in the resource-based model, identifying certain types of resources as key to superior firm performance. For a resource to be the basis of a competitive advantage, it must be Valuable Rare Is costly to Imitate. Organized (Firm) to capture the value of the resource. According to this model, a firm can gain and sustain a competitive advantage only when it has resources that satisfy all of the VRIO criteria. Keep in mind that resources in the VRIO framework are broadly defined to include any assets as well as any capabilities and competencies that a firm can draw upon when formulating and implementing strategy. In summary, for a firm to gain and sustain a competitive advantage, its resources and capabilities need to interact in such a way as to create unique core competencies

OUTPUT CONTROLS results-only-work-environments (ROWEs)

Output controls seek to guide employee behavior by defining expected results (outputs), but leave the means to those results open to individual employees, groups, or SBUs. Firms frequently tie employee compensation and rewards to predetermined goals, such as a specific sales target or return on invested capital. When factors internal to the firm determine the relationship between effort and expected performance, outcome controls are especially effective. At the corporate level, outcome controls discourage collaboration among different strategic business units. They are best applied when a firm focuses on a single line of business or pursues unrelated diversification. These days, more and more work requires creativity and innovation, especially in highly developed economies. As a consequence, so-called results-only-work-environments (ROWEs) have attracted significant attention. ROWEs are output controls that attempt to tap intrinsic (rather than extrinsic) employee motivation, which is driven by the employee's interest in and the meaning of the work itself. In contrast, extrinsic motivation is driven by external factors such as awards and higher compensation, or punishments like demotions and layoffs (the carrot-and-stick approach). According to a recent synthesis of the strategic human resources literature, intrinsic motivation in a task is highest when an employee has: ▪ Autonomy (about what to do). ▪ Mastery (how to do it). ▪ Purpose (why to do it).

MULTIDIVISIONAL STRUCTURE

Over time, as a firm diversifies into different product lines and geographies, it generally implements a multidivisional or a matrix structure (as shown in Exhibit 11.4). The multidivisional structure (or M-form) consists of several distinct strategic business units (SBUs), each with its own profit-and-loss (P&L) responsibility. Each SBU is operated more or less independently from one another, and each is led by a CEO (or equivalent general manager) who is responsible for the unit's business strategy and its day-to-day operations. The CEOs of each division report to the corporate office, which is led by the company's highest-ranking executive (titles vary and include president or CEO for the entire corporation). Because most large firms are diversified to some extent across different product lines and geographies, the M-form is a widely adopted organizational structure.

Partner compatibility & Partner commitment

Partner compatibility captures aspects of cultural fit between different firms. Partner commitment concerns the willingness to make available necessary resources and to accept short-term sacrifices to ensure long-term rewards.

credible threat of retaliation

Potential new entrants must also anticipate how incumbent firms will react. A credible threat of retaliation by incumbent firms often deters entry. Should entry still occur, however, incumbents are able to retaliate quickly, through initiating a price war, for example. The industry profit potential can in this case easily fall below the cost of capital. Incumbents with deeper pockets than new entrants are able to withstand price competition for a longer time and wait for the new entrants to exit the industry—then raise prices again. Other weapons of retaliation include increased product and service innovation, advertising, sales promotions, and litigation.

unicorns

Private start-up companies valued at a billion dollars or more are called unicorns, because at one time they seemed as rare as the mythical beast. But their elusiveness has changed. The tech sector now has the lion's share: some 75 unicorns valued at $1 billion or more, for a total of $273 billion.5 The top five most valuable private start-up companies (as of the summer of 2015) are Uber, Airbnb, Snapchat, Palantir Technologies, and SpaceX (rocket science). they do not have to follow the stringent financial reporting and auditing requirements that public stock companies do Not needing to expose themselves to as much public scrutiny as a publicly traded company also allows unicorns such as Uber to push the envelope in their legal and ethical business practices.

5 RIVALRY AMONG EXISTING COMPETITORS

Rivalry among existing competitors describes the intensity with which companies within the same industry jockey for market share and profitability. It can range from genteel to cut-throat. The other four forces—threat of entry, the power of buyers and suppliers, and the threat of substitutes—all exert pressure upon this rivalry, as indicated by the arrows pointing toward the center in Exhibit 3.2. The stronger the forces, the stronger the expected competitive intensity, which in turn limits the industry's profit potential. Competitors can lower prices to attract customers from rivals. When intense rivalry among existing competitors brings about price discounting, industry profitability erodes. Alternatively, competitors can use non-price competition to create more value in terms of product features and design, quality, promotional spending, and after-sales service and support. When non-price competition is the primary basis of competition, costs increase, which can also have a negative impact on industry profitability. However, when these moves create unique products with features tailored closely to meet customer needs and willingness to pay, then average industry profitability tends to increase because producers are able to raise prices and thus increase revenues and profit margins.

5.3 Implications for the Strategist

Several managerial implications emerged from our discussion of competitive advantage and firm performance: ▪ No best strategy exists—only better ones (better in comparison with others). We must interpret any performance metric relative to those of competitors and the industry average. True performance can be judged only in comparison to other contenders in the field or the industry average, not on an absolute basis. ▪ The goal of strategic management is to integrate and align each business function and activity to obtain superior performance at the business unit and corporate levels. Therefore, competitive advantage is best measured by criteria that reflect overall business unit performance rather than the performance of specific departments. For example, although the functional managers in the marketing department may (and should) care greatly about the success or failure of their recent ad campaign, the general manager cares most about the performance implications of the ad campaign at the business unit level for which she has profit-and-loss responsibility. Metrics that aggregate upward and reflect overall firm and corporate performance are most useful to assess the effectiveness of a firm's competitive strategy. ▪ Both quantitative and qualitative performance dimensions matter in judging the effectiveness of a firm's strategy. Those who focus on only one metric will risk being blindsided by poor performance on another. Rather, managers need to rely on a more holistic perspective when assessing firm performance, measuring different dimensions over different time periods. ▪ A firm's business model is critical to achieving a competitive advantage. How a firm does business is as

2. Shareholder Value Creation shareholders risk capital total return to shareholders efficient-market hypothesis market capitalization

Shareholders—individuals or organizations that own one or more shares of stock in a public company—are the legal owners of public companies. From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt. In September 2008, the shareholders of Lehman Brothers, a global financial services firm, lost their entire investment of about $40 billion when the firm declared bankruptcy. Investors are primarily interested in a company's total return to shareholders, which is the return on risk capital, including stock price appreciation plus dividends received over a specific period. Unlike accounting data, total return to shareholders is an external and forward-looking performance metric. It essentially indicates how the stock market views all available public information about a firm's past, current state, and expected future performance, with most of the weight on future growth expectations. The idea that all available information about a firm's past, current state, and expected future performance is embedded in the market price of the firm's stock is called the efficient-market hypothesis. In this perspective, a firm's share price provides an objective performance indicator. When assessing and evaluating competitive advantage, a comparison of rival firms' share price development or market capitalization provides a helpful yardstick when used over the long term. Market capitalization (or market cap) captures the total dollar market value of a company's total outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price). If a company has 50 million shares outstanding, and each share is traded at $200, the market capitalization is $10 billion (50,000,000 × $200 = $10,000,000,000, or $10 billion).

1. Accounting profitability

Since competitive advantage is defined as superior performance relative to other competitors in the same industry or the industry average, a firm's managers must be able to accomplish two critical tasks: a. Accurately assess the performance of their firm. b. Compare and benchmark their firm's performance to other competitors in the same industry or against the industry average. Accounting data enable us to conduct direct performance comparisons between different companies. Some of the profitability ratios most commonly used in strategic management are return on invested capital (ROIC), return on equity (ROE), return on assets (ROA), and return on revenue (ROR). In the "How to Conduct a Case Analysis" module (at the end of Part 4, following the MiniCases), you will find a complete presentation of accounting measures and financial ratios, how they are calculated, and a brief description of their strategic characteristics. One of the most commonly used metrics in assessing firm financial performance is return on invested capital (ROIC), where ROIC = (Net profits / Invested capital). ROIC is a popular metric because it is a good proxy for firm profitability. In particular, the ratio measures how effectively a company uses its total invested capital, which consists of two components: (1) shareholders' equity through the selling of shares to the public, and (2) interest-bearing debt through borrowing from financial institutions and bondholders. As a rule of thumb, if a firm's ROIC is greater than its cost of capital, it generates value; if it is less than the cost of capital, the firm destroys value. The cost of capital represents a firm's cost of financing operations from both equity through issuing stock and debt through issuing bonds. To be more precise and to be able to derive strategic implications, however, managers must compare their ROIC to other competitors.

11.4 Strategic Control-and-Reward Systems

Strategic control-and-reward systems are the third and final key building block when designing organizations for competitive advantage. includes: organizational structure, output controls, and input controls

NON-EQUITY ALLIANCES.

The most common type of alliance is a non-equity alliance, which is based on contracts between firms. The most frequent forms of non-equity alliances are supply agreements, distribution agreements, and licensing agreements. As suggested by their names, these contractual agreements are vertical strategic alliances, connecting different parts of the industry value chain. In a non-equity alliance, firms tend to share explicit knowledge—knowledge that can be codified. Patents, user manuals, fact sheets, and scientific publications are all ways to capture explicit knowledge, which concerns the notion of knowing about a certain process or product.

4 THE THREAT OF SUBSTITUTES

Substitutes meet the same basic customer needs as the industry's product but in a different way. The threat of substitutes is the idea that products or services available from outside the given industry will come close to meeting the needs of current customers. A high threat of substitutes reduces industry profit potential by limiting the price the industry's competitors can charge for their products and services. The threat of substitutes is high when: ▪ The substitute offers an attractive price-performance trade-off. ▪ The buyer's cost of switching to the substitute is low. Examples: Tax preparation software such as Intuit's TurboTax is a substitute for professional services offered by H&R Block and others. LegalZoom, an online legal documentation service, is a threat to professional law firms. Other examples of substitutes are energy drinks versus coffee, videoconferencing versus business travel, e-mail versus express mail, gasoline versus biofuel, and wireless telephone services versus Voice over Internet Protocol (VoIP), offered by Skype or Vonage.Page 82

Advantages Of The Balanced Scorecard.

The balanced-scorecard approach is popular in managerial practice because it has several advantages. In particular, the balanced scorecard allows managers to: ▪ Communicate and link the strategic vision to responsible parties within the organization. ▪ Translate the vision into measurable operational goals. ▪ Design and plan business processes. ▪ Implement feedback and organizational learning to modify and adapt strategic goals when indicated. The balanced scorecard can accommodate both short- and long-term performance metrics. It provides a concise report that tracks chosen metrics and measures and compares them to target values. This approach allows managers to assess past performance, identify areas for improvement, and position the company for future growth. Including a broader perspective than financials allows managers and executives a more balanced view of organizational performance—hence its name. In a sense, the balanced scorecard is a broad diagnostic tool. It complements the common financial metrics with operational measures on customer satisfaction, internal processes, and the company's innovation and improvement activities.

2 THE POWER OF SUPPLIERS

The bargaining power of suppliers captures pressures that industry suppliers can exert on an industry's profit potential. This force reduces a firm's ability to obtain superior performance for two reasons: Powerful suppliers can raise the cost of production by demanding higher prices for their inputs or by reducing the quality of the input factor or service level delivered. Powerful suppliers are a threat to firms because they reduce the industry's profit potential by capturing part of the economic value created. To compete effectively, companies generally need a wide variety of inputs into the production process, including raw materials and components, labor (via individuals or labor unions, when the industry faces collective bargaining), and services. The relative bargaining power of suppliers is high when ▪ The suppliers' industry is more concentrated than the industry it sells to. ▪ Suppliers do not depend heavily on the industry for a large portion of their revenues. ▪ Incumbent firms face significant switching costs when changing suppliers. ▪ Suppliers offer products that are differentiated. ▪ There are no readily available substitutes for the products or services that the suppliers offer. ▪ Suppliers can credibly threaten to forward-integrate into the industry.

GEOGRAPHIC DISTANCE.

The costs to cross-border trade rise with geographic distance. It is important to note, however, that geographic distance does not simply capture how far two countries are from each other but also includes additional attributes, such as the country's physical size (Canada versus Singapore), the within-country distances to its borders, the country's topography, its time zones, and whether the countries are contiguous to one another or have access to waterways and the ocean. The country's infrastructure, including road, power, and telecommunications networks, also plays a role in determining geographic distance.

Organized to capture value

The final criterion of whether a rare, valuable, and costly-to-imitate resource can form the basis of a sustainable competitive advantage depends on the firm's internal structure. To fully exploit the competitive potential of its resources, capabilities, and competencies, a firm must be organized to capture value—that is, it must have in place an effective organizational structure and coordinating systems.

8.3 Vertical Integration along the Industry Value Chain

The first key question when formulating corporate strategy is: In what stages of the industry value chain should the firm participate? Deciding whether to make or buy the various activities in the industry value chain involves the concept of vertical integration. The degree of vertical integration tends to correspond to the number of industry value chain stages in which a firm directly participates.

TYPES OF CORPORATE DIVERSIFICATION

The four main types of business diversification are 1 Single business. (95% earnings from one business) 2 Dominant business. (70-95% from single business) 3 Related diversification. (less than 70% from...and obtains revenues from other businesses) 4 Unrelated diversification: the conglomerate. note that related diversification (type 3) is divided into two subcategories. We discuss each type of diversification below.

cost-leadership strategy

The goal of a cost-leadership strategy is to create a competitive advantage by reducing the firm's cost below that of competitors while offering acceptable value. The cost leader sells a no-frills, standardized product or service to the mainstream customer. To effectively implement a cost-leadership strategy, therefore, managers must create a functional structure that contains the organizational elements of a mechanistic structure—one that is centralized, with well-defined lines of authority up and down the hierarchy. Using a functional structure allows the cost leader to nurture and constantly upgrade necessary core competencies in manufacturing and logistics. Moreover, the cost leader needs to create incentives to foster process innovation in order to drive down cost. Finally, because the firm services the average customer, and thus targets the largest market segment possible, it should focus on leveraging economies of scale to further drive down costs.

differentiation strategy

The goal of a differentiation strategy is to create a competitive advantage by offering products or services at a higher perceived value, while controlling costs. The differentiator, therefore, sells a non-standardized product or service to specific market segments in which customers are willing to pay a higher price. To effectively implement a differentiation strategy, managers rely on a functional structure that resembles an organic organization. In particular, decision making tends to be decentralized to foster and incentivize continuous innovation and creativity as well as flexibility and mutual adjustment across areas. Using a functional structure with an organic organization allows the differentiator to nurture and constantly upgrade necessary core competencies in R&D, innovation, and marketing. Finally, the functional structure should be set up to allow the firm to reap economies of scope from its core competencies, such as by leveraging its brand name across different products or its technology across different devices.

6.3 Cost-Leadership Strategy: Understanding Cost Drivers cost drivers

The most important cost drivers that managers can manipulate to keep their costs low are: ▪ Cost of input factors. ▪ Economies of scale. ▪ Learning-curve effects. ▪ Experience-curve effects.

outflows

The outflows represent a reduction in the firm's intangible resource stocks. Resource leakage might occur through employee turnover, especially if key employees leave. Significant resource leakage can erode a firm's competitive advantage. A reduction in resource stocks can occur if a firm does not engage in a specific activity for some time and forgets how to do this activity well. Moreover, managers also need to monitor the existing intangible resource stocks and their attrition rates due to leakage and forgetting. This perspective provides a dynamic understanding of capability development to allow a firm's continuous adaptation to and superior performance in a changing external environment.

AGENCY THEORY

The principal-agent problem is a core part of agency theory, which views the firm as a nexus of legal contracts. In this perspective, corporations are viewed merely as a set of legal contracts between different parties. Conflicts that may arise are to be addressed in the legal realm. Agency theory finds its everyday application in employment contracts, for example. The managerial implication of agency theory relates to the management functions of organization and control: The firm needs to design work tasks, incentives, and employment contracts and other control mechanisms in ways that minimize opportunism by agents. Such governance mechanisms are used to align incentives between principals and agents. These mechanisms need to be designed in such a fashion as to overcome two specific agency problems: adverse selection and moral hazard.

principal-agent problem (a manager working in his/her best interest including job security and managerial perks)

The principal-agent problem is a major disadvantage of organizing economic activity within firms, as opposed to within markets. It can arise when an agent such as a manager, performing activities on behalf of the principal (the owner of the firm), pursues his or her own interests. Indeed, the separation of ownership and control is one of the hallmarks of a publicly traded company, and so some degree of the principal-agent problem is almost inevitable. One potential way to overcome the principal-agent problem is to give stock options to managers, thus making them owners.

3. Economic Value Creation

The relationship between economic value creation and competitive advantage is fundamental in strategic management. It provides the foundation upon which to formulate a firm's competitive strategy for cost leadership or differentiation (discussed in detail in the next chapter). For now, it is important to note that a firm has a competitive advantage when it creates more economic value than rival firms. What does that mean? Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it. Competitive advantage goes to the firm that achieves the largest economic value created, which is the difference between V, the consumer's willingness to pay, and C, the cost to produce the good or service. The reason is that a large difference between V and C gives the firm two distinct pricing options: (1) It can charge higher prices to reflect the higher value and thus increase its profitability, or (2) it can charge the same price as competitors and thus gain market share. Given this, the strategic objective is to maximize (V - C), or the economic value created.

information asymmetry The Principal-Agent Problem (Figure 12.3)

The risk of opportunism on behalf of agents is exacerbated by information asymmetry: the agents are generally better informed than the principals. Exhibit 12.3 depicts the principal-agent relationship.

The Public Stock Company: Hierarchy of Authority

The state or society grants a charter of incorporation to the company's shareholders—its owners, who legally own stock in the company. The shareholders appoint a board of directors to govern and oversee the firm's management. The managers hire, supervise, and coordinate employees to manufacture products and provide services. The public stock company enjoys four characteristics that make it an attractive corporate form: 1. Limited liability for investors. This characteristic means that the shareholders who provide the risk capital are liable only to the capital specifically invested, and not for other investments they may have made or for their personal wealth. Limited liability encourages investments by the wider public and entrepreneurial risk-taking. 2. Transferability of investor ownership through the trading of shares of stock on exchanges such as the New York Stock Exchange (NYSE) and NASDAQ, or exchanges in other countries. Each share represents only a minute fraction of ownership in a company, thus easing transferability. 3. Legal personality—that is, the law regards a non-living entity such as a for-profit firm as similar to a person, with legal rights and obligations. Legal personality allows a firm's continuation beyond the founder or the founder's family. 4. Separation of legal ownership and management control. In publicly traded companies, the stockholders (the principals, represented by the board of directors) are the legal owners of the company, and they delegate decision-making authority to professional managers (the agents).

10.4 Cost Reductions vs. Local Responsiveness: The Integration-Responsiveness Framework

The strategic foundations of the globalization hypothesis are based primarily on cost reduction. Lower cost is a key competitive weapon, and MNEs attempt to reap significant cost reductions by leveraging economies of scale and by managing global supply chains to access the lowest-cost input factors.

THE STRATEGIC GROUP MODEL

To understand competitive behavior and performance within an industry, we can map the industry competitors into strategic groups. We do this as shown: ▪ Identify the pmost important strategic dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service. ▪ Choose two key dimensions for the horizontal and vertical axes, which expose important differences among the competitors. The dimensions chosen for the axes should not be highly correlated. ▪ Graph the firms in the strategic group, indicating each firm's market share by the size of the bubble

value chain

The value chain describes the internal activities a firm engages in when transforming inputs into outputs. According to the value chain perspective, core competencies are located in the network that connects different, but related activities within a firm. Each activity the firm performs along the horizontal chain adds incremental value—raw materials and other inputs are transformed into components that are assembled into finished products or services for the end consumer. Each activity the firm performs along the value chain also adds incremental costs. A careful analysis of the value chain allows managers to obtain a more detailed and fine-grained understanding of how the firm's economic value creation (V − C) breaks down into a distinct set of activities that help determine perceived value (V) and the costs (C) to create it. The value chain concept can be applied to basically any firm, from those in manufacturing industries to those in high-tech ones or service firms.

ECONOMIC DISTANCE.

The wealth and per capita income of consumers is the most important determinant of economic distance. Wealthy countries engage in relatively more cross-border trade than poorer ones. Rich countries tend to trade with other rich countries; in addition, poor countries also trade more frequently with rich countries than with other poor countries. Companies from wealthy countries benefit in cross-border trade with other wealthy countries when their competitive advantage is based on economies of experience, scale, scope, and standardization.

4.2 THE RESOURCE-BASED VIEW (OF A FIRM) resource heterogeneity resource immobility

This model systematically aids in identifying core competencies.5 As the name suggests, this model sees resources as key to superior firm performance. In the resource-based view, a firm is assumed to be a unique bundle of resources, capabilities, and competencies. Two assumptions are critical in the resource-based model: These two assumptions about resources are critical to explaining superior firm performance in the resource-based model. (1) resource heterogeneity: comes from the insight that bundles of resources, capabilities, and competencies differ across firms. This insight ensures that analysts look more critically at the resource bundles of firms competing in the same industry (or even the same strategic group), because each bundle is unique to some extent. (2) resource immobility: describes the insight that resources tend to be "sticky" and don't move easily from firm to firm. Because of that stickiness, the resource differences that exist between firms are difficult to replicate and, therefore, can last for a long time.

shareholder capitalism

This notion is often captured by the term shareholder capitalism. According to this perspective, shareholders—the providers of the necessary risk capital and the legal owners of public companies—have the most legitimate claim on profits. When introducing the notion of corporate social responsibility (CSR) in Chapter 1, though, we noted that a firm's obligations frequently go beyond the economic responsibility to increase profits, extending to ethical and philanthropic expectations that society has of the business enterprise

Why are certain industries more competitive in some countries than in others? national competitive advantage

This question goes to the heart of the issue of national competitive advantage, a consideration of world leadership in specific industries. That issue, in turn, has a direct effect on firm-level competitive advantage. Companies from home countries that are world leaders in specific industries tend to be the strongest competitors globally.

five global forces that McKinsey has found to be significant in rewriting the list of opportunities and challenges facing global business

This video addresses the concept of why firms decide to expand globally and what issues they face when they do. The video specifically discusses five global forces that McKinsey has found to be significant in rewriting the list of opportunities and challenges facing global business.The five global forces they highlight are: 1) the rise of emerging markets as centers of consumerism and innovation 2) the imperative to improve developed-market productivity 3) ever-expanding global networks 4) the tension between rapidly rising resource consumption and sustainability 5) the increasingly larger role of the state as a business regulator and partner

Disadvantages of The Balanced Scorecard.

Though widely implemented by many businesses, the balanced scorecard is not without its critics. It is important to note that the balanced scorecard is a tool for strategy implementation, not for strategy formulation. It is up to a firm's managers to formulate a strategy that will enhance the chances of gaining and sustaining a competitive advantage. In addition, the balanced-scorecard approach provides only limited guidance about which metrics to choose. Different situations call for different metrics. All of the three approaches to measuring competitive advantage—accounting profitability, shareholder value creation, and economic value creation—in addition to other quantitative and qualitative measures can be helpful when using a balanced-scorecard approach. When implementing a balanced scorecard, managers need to be aware that a failure to achieve competitive advantage is not so much a reflection of a poor framework but of a strategic failure. The balanced scorecard is only as good as the skills of the managers who use it: They first must devise a strategy that enhances the odds of achieving competitive advantage. Second, they must accurately translate the strategy into objectives that they can measure and manage within the balanced-scorecard approach.

strategic trade-off

To achieve a desired strategic position, managers must make strategic trade-offs—choices between a cost or value position. Managers must address the tension between value creation and the pressure to keep cost in check so as not to erode the firm's economic value creation and profit margin.

M-FORM (multi-divisional structure) AND CORPORATE STRATEGY.

To achieve an optimal match between strategy and structure, different corporate strategies require different organizational structures. In Chapter 8, we identified four types of corporate diversification (see Exhibit 8.8: single business, dominant business, related diversification, and unrelated diversification. Each is defined by the percentage of revenues obtained from the firm's primary activity. ▪ Firms that follow a single-business or dominant-business strategy at the corporate level gain at least 70 percent of their revenues from their primary activity; they generally employ a functional structure. ▪ For firms that pursue either related or unrelated diversification, the M-form is the preferred organizational structure. ▪ Firms using the M-form organizational structure to support a related-diversification strategy tend to concentrate decision making at the top of the organization. Doing so allows a high level of integration. It also helps corporate headquarters leverage and transfer across different SBUs the core competencies that form the basis for a related diversification. ▪ Firms using the M-form structure to support an unrelated-diversification strategy often decentralize decision making. Doing so allows general managers to respond to specific circumstances, and leads to a low level of integration at corporate headquarters. DISADVANTAGES. Moving from the functional structure to the M-form results in adding another layer of corporate hierarchy (corporate headquarters). This goes along with all the known problems of increasing bureaucracy, red tape, and sometimes duplication of efforts. It also slows decision making because in many instances a CEO of an SBU must get approval from corporate headquarters when making major decisions that might affect a second SBU or the corporation as a whole. Also, since each SBU in the M-form is evaluated as a standalone profit-and-loss center, SBUs frequently end up competing with each other. A high-performing SBU might be rewarded with greater capital budgets and strategic freedoms; low-performing businesses might be spun off. SBUs compete with one another for resources such as capital and managerial talent, but they also need to cooperate to share competencies. Co-opetition—competition and cooperation at the same time—among the SBUs is both inevitable and necessary. Sometimes, however, it can be detrimental when a corporate process such as resource allocation or transfer pricing between SBUs becomes riddled with corporate politics and turf wars.

Three standard performance dimensions:

To address these key questions, we will develop a multidimensional perspective for assessing competitive advantage. Let's begin by focusing on the three standard performance dimensions: 1. What is the firm's accounting profitability? 2. How much shareholder value does the firm create? 3. How much economic value does the firm generate? These three performance dimensions tend to be correlated, particularly over time. Accounting profitability and economic value creation tend to be reflected in the firm's stock price, which in turn determines in part the stock's market valuation.

Chapter 5: Competitive Advantage, Firm Performance, and Business Models

To address these key questions, we will develop a multidimensional perspective for assessing competitive advantage. Let's begin by focusing on the three standard performance dimensions:3 What is the firm's accounting profitability? How much shareholder value does the firm create? How much economic value does the firm generate?

WHY DO FIRMS ENTER STRATEGIC ALLIANCES? Ideally, the tools to execute corporate strategy—strategic alliances and acquisitions—should be centralized and managed at the corporate level, rather than at the level of the strategic business unit. Rather than focusing on developing an alliance management capability in isolation, firms should develop a relational capability that allows for the successful management of both strategic alliances and mergers and acquisitions.

To affect a firm's competitive advantage, an alliance must promise a positive effect on the firm's economic value creation through increasing value and/or lowering costs (see discussion in Chapter 5). This logic is reflected in the common reasons firms enter alliances.10 They do so to ▪ Strengthen competitive position. ▪ Enter new markets. ▪ Hedge against uncertainty. ▪ Access critical complementary assets. ▪ Learn new capabilities. ***and lower costs -value creation through increasing value ENTER NEW MARKETS. Firms may use strategic alliances to enter new markets, either in terms of products and services or geography. ​HEDGE AGAINST UNCERTAINTY. In dynamic markets, strategic alliances allow firms to limit their exposure to uncertainty in the market. In some sense, the pharma companies were taking real options in these biotechnology experiments, providing them with the right but not the obligation to make further investments when new drugs were introduced from the biotech companies ACCESS CRITICAL COMPLEMENTARY ASSETS. The successful commercialization of a new product or service often requires complementary assets such as marketing, manufacturing, and after-sale service.21 In particular, new firms are in need of complementary assets to complete the value chain from upstream innovation to downstream commercialization. LEARN NEW CAPABILITIES. Firms also enter strategic alliances because they are motivated by the desire to learn new capabilities from their partners.22 When the collaborating firms are also competitors, co-opetition ensues

CAGE distance framework

To aid MNEs in deciding where in the world to compete, Pankaj Ghemawat introduced the CAGE distance framework. CAGE is an acronym for different kinds of distance: ▪ Cultural ▪ Administrative and political ▪ Geographic ▪ Economic. Most of the costs and risks involved in expanding beyond the domestic market are created by distance. Distance not only denotes geographic distance (in miles or kilometers), but also includes, as the CAGE acronym points out, cultural distance, administrative and political distance, and economic distance. The CAGE distance framework breaks distance into different relative components between any two country pairs that affect the success of FDI.

MBA oath

To anchor future managers in professional values and to move management closer to a truly professional status, a group of Harvard Business School students developed an MBA oath (see Exhibit 12.4).54 Since 2009, over 6,000 MBA students from over 300 institutions around the world have taken this voluntary pledge. The oath explicitly recognizes the role of business in society and its responsibilities beyond shareholders. It also holds managers to a high ethical standard based on more or less universally accepted principles in order to "create value responsibly and ethically. The oath explicitly recognizes the role of business in society and its responsibilities beyond shareholders. It also holds managers to a high ethical standard based on more or less universally accepted principles in order to "create value responsibly and ethically.

poison pill

To avoid being taken over against their consent, some firms put in place a poison pill. These are defensive provisions that kick in should a buyer reach a certain level of share ownership without top management approval. For example, a poison pill could allow existing shareholders to buy additional shares at a steep discount. Those additional shares would make any takeover attempt much more expensive and function as a deterrent. With the rise of actively involved institutional investors, poison pills have become rare because they retard an effective function of equity markets.

three things within the shared value creation framework

To ensure that managers can reconnect economic and societal needs, Michael Porter recommends that managers focus on three things within the shared value creation framework: 1. Expand the customer base to bring in nonconsumers such as those at the bottom of the pyramid—the largest but poorest socioeconomic group of the world's population. The bottom of the pyramid in the global economy can yield significant business opportunities, which—if satisfied—could improve the living standard of the world's poorest. 2. Expand traditional internal firm value chains to include more nontraditional partners such as nongovernmental organizations (NGOs). NGOs are nonprofit organizations that pursue a particular cause in the public interest and are independent of any governments. Habitat for Humanity and Greenpeace are examples of NGOs. 3. Focus on creating new regional clusters such as Silicon Valley in the United States, Electronic City in Bangalore, India, and Chilecon Valley in Santiago, Chile.

Financial ratios

To explore further drivers of this difference, we break down return on revenue into three additional financial ratios: ▪ Cost of goods sold (COGS) / Revenue. ▪ Research & development (R&D) expense / Revenue. ▪ Selling, general, & administrative (SG&A) expense / Revenue. The first of these three ratios, COGS / Revenue, indicates how efficiently a company can produce a good. the next ratio, R&D / Revenue, indicates how much of each dollar that the firm earns in sales is invested to conduct research and development. A higher percentage is generally an indicator of a stronger focus on innovation to improve current products and services, and to come up with new ones. The third ratio in breaking down return on revenue, SG&A / Revenue, indicates how much of each dollar that the firm earns in sales is invested in sales, general, and administrative (SG&A) expenses. Generally, this ratio is an indicator of the firm's focus on marketing and sales to promote its products and services. Again, Microsoft ($20 billion) not only outspent Apple ($18.3 billion) in absolute terms in marketing and sales expenses, but its SG&A intensity was more than 3.5 times as high as Apple's. For every $100 earned in revenues Microsoft spent $23.80 on sales and marketing, while Apple spent $6.60. The second component of ROIC is working capital turnover (see Exhibit 5.1), which is a measure of how effectively capital is being used to generate revenue. This is where Apple outperforms Microsoft by a wide margin (36.0 vs. 1.3). For every dollar that Apple puts to work, it realizes a whopping $36.00 of sales; this rate is more than 28 times higher than the conversion rate for Microsoft, which only realizes $1.30 in sales for each dollar invested. This huge difference provides an important clue for Microsoft's managers to dig deeper to find the underlying drivers in working capital turnover. This enables managers to uncover which levers to pull in order to improve firm financial performance. In a next step, therefore, managers break down working capital turnover into other ratios, including fixed asset turnover, inventory turnover, receivables turnover, and payables turnover. Each of these metrics is a measure of how effective a particular item on the balance sheet is contributing to revenue. The final set of financial ratios displayed in Exhibit 5.1 concerns the effectiveness of a company's receivables and payables. These are part of a company's cash flow management; they indicate the company's efficiency in extending credit, as well as collecting debts. Higher ratios of receivables turnover (Revenue / Accounts receivable) imply more efficient management Page 147 in collecting accounts receivable and shorter durations of interest-free loans to customers (i.e., time until payments are due). In contrast, payables turnover (Revenue / Accounts payable) indicates how fast the firm is paying its creditors and how much it benefits from interest-free loans extended by its suppliers. A lower ratio indicates more efficient management in paying creditors and generating interest-free loans from suppliers.

MATRIX STRUCTURE

To reap the benefits of both the M-form and the functional structure, many firms employ a mix of these two organizational forms, called a matrix structure. Exhibit 11.9 shows an example. In it, the firm is organized according to SBUs along a horizontal axis (like in the M-form), but also has a second dimension of organizational structure along a vertical axis. In this case, the second dimension consists of different geographic areas, each of which generally would house a full set of functional activities. The idea behind the matrix structure is to combine the benefits of the M-form (domain expertise, economies of scale, and the efficient processing of information) with those of the functional structure (responsiveness and decentralized focus).

The Triple Bottom Line Profits People Planet = sustainable strategy

Today, managers are frequently asked to maintain and improve not only the firm's economic performance but also its social and ecological performance. CEO Indra Nooyi responded by declaring PepsiCo's vision to be Performance with Purpose defined by goals in the social dimension (human sustainability to combat obesity by making its products healthier, and the whole person at work to achieve work/life balance) and ecological dimension (environmental sustainability in regard to clean water, energy, recycling, and so on), in addition to firm financial performance. Being proactive along noneconomic dimensions can make good business sense. In anticipation of coming industry requirements for "extended producer responsibility," which requires the seller of a product to take it back for recycling at the end of its life, the German carmaker BMW was proactive. It not only lined up the leading car-recycling companies but also started to redesign its cars using a modular approach. The modular parts allow for quick car disassembly and reuse of components in the after-sales market (so-called refurbished or rebuilt auto parts). Three dimensions—economic, social, and ecological—make up the triple bottom line, which is fundamental to a sustainable strategy. These three dimensions are also called the three Ps: profits, people, and planet: ▪ Profits. The economic dimension captures the necessity of businesses to be profitable to survive. ▪ People. The social dimension emphasizes the people aspect, such as PepsiCo's initiative of the whole person at work. ▪ Planet. The ecological dimension emphasizes the relationship between business and the natural

MATRIX STRUCTURE AND GLOBAL STRATEGY.

We already noted that a global matrix structure fits well with a transnational strategy. To complete the strategy-structure relationships in the global context, we also need to consider the international, multidomestic, and standardization strategies discussed in Chapter 10. Exhibit 11.10 shows how different global strategies best match with different organizational structures.

GLOBALIZATION 3.0: 21ST CENTURY.

We are now in the Globalization 3.0 stage. MNEs that had been the vanguard of globalization have since become global-collaboration networks Continued economic development across the globe has two consequences for MNEs. First, rising wages and other costs are likely to negate any benefits of access to low-cost input factors. Second, as the standard of living rises in emerging economies, MNEs are hoping that increased purchasing power will enable workers to purchase the products they used to make for export only.

Using SWOT Analysis to Generate Insights From External and Internal Analysis S & W

We synthesize insights from an internal analysis of the company's strengths and weaknesses with those from an analysis of external opportunities and threats using the SWOT analysis. Internal strengths (S) and weaknesses (W) concern resources, capabilities, and competencies. Whether they are strengths or weaknesses can be determined by applying the VRIO framework. A resource is a weakness if it is not valuable. In this case, the resource does not allow the firm to exploit an external opportunity or offset an external threat. A resource, however, is a strength and a core competency if it is valuable, rare, costly to imitate, and the firm is organized to capture at least part of the economic value created. A resource is a core competency if it fits into the VRIO framework.

The Core Competence-Market Matrix

When applying an existing or new dimension to core competencies and markets, four quadrants emerge, each with distinct strategic implications. Four Options to Formulate Corporate Strategy via Core Competencies 1 Leverage existing core competencies to improve current market position. 2 Build new core competencies to protect and extend current market position. 3 Redeploy and recombine existing core competencies to compete in markets of the future. 4 Build new core competencies to create and compete in markets of the future.

THE MARKET FOR CORPORATE CONTROL.

Whereas the board of directors and executive compensation are internal corporate-governance mechanisms, the market for corporate control is an important external corporate-governance mechanism. It consists of activist investors who seek to gain control of an underperforming corporation by buying shares of its stock in the open market. To avoid such attempts, corporate managers strive to protect shareholder value by delivering strong share-price performance or putting in place poison pills (discussed later).

disruptive innovation

a disruptive innovation leverages new technologies to attack existing markets. It invades an existing market from the bottom up, as shown in Exhibit 7.11.67 The dashed blue lines represent different market segments, from Segment 1 at the low end to Segment 4 at the high end. Low-end market segments are generally associated with low profit margins, while high-end market segments often have high profit margins. Japanese carmakers successfully followed a strategy of disruptive innovation by first introducing small fuel-efficient cars and then leveraging their low-cost and high-quality advantages into high-end luxury segments, captured by brands such as Lexus, Infiniti, and Acura. More recently, the South Korean carmakers Kia and Hyundai have followed a similar strategy.

industry convergence

a process whereby formerly unrelated industries begin to satisfy the same customer need. Industry convergence is often brought on by technological advances. For years, many players in the media industries have been converging due to technological progress in IT, telecommunications, and digital media. Media convergence unites computing, communications, and content, thereby causing significant upheaval across previously distinct industries. Content providers in industries such as newspapers, magazines, TV, movies, radio, and music are all scrambling to adapt. Many standalone print newspapers are closing up shop, while others are trying to figure out how to offer online news content for which consumers are willing to pay

A SWOT analysis

allows the strategist to evaluate a firm's current situation and future prospects by simultaneously considering internal and external factors. The SWOT analysis encourages managers to scan the internal and external environments, looking for any relevant factors that might affect the firm's current or future competitive advantage. The focus is on internal and external factors that can affect—in a positive or negative way—the firm's ability to gain and sustain a competitive advantage. To facilitate a SWOT analysis, managers use a set of strategic questions that link the firm's internal environment to its external environment, as shown in Exhibit 4.9 to derive strategic implications.

Business ethics

are an agreed-upon code of conduct in business, based on societal norms. Business ethics lay the foundation and provide training for "behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society." These principles, norms, and standards of business practice differ to some degree in different cultures around the globe. But a large number of research studies have found that some notions—such as fairness, honesty, and reciprocity—are universal norms. As such, many of these values have been codified into law.

Mechanistic organizations

are characterized by a high degree of specialization and formalization and by a tall hierarchy that relies on centralized decision making. The fast food chain McDonald's fits this description quite we

Economies of scale

are cost advantages that accrue to firms with larger output because they can spread fixed costs over more units, employ technology more efficiently, benefit from a more specialized division of labor, and demand better terms from their suppliers. These factors in turn drive down the cost per unit, allowing large incumbent firms to enjoy a cost advantage over new entrants who cannot muster such scale.

Activities

are distinct and fine-grained business processes such as order taking, the physical delivery of products, or invoicing customers.

Fixed costs

are independent of consumer demand—for example, the cost of capital to build computer manufacturing plants or an online retail presence to take direct orders.

Strategic control-and-reward systems

are internal-governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees). These systems allow managers to specify goals, measure progress, and provide performance feedback.

Industry structures

are not stable over time. Rather, they are dynamic. Since a consolidated industry tends to be more profitable than a fragmented one (see Exhibit 3.3), firms have a tendency to change the industry structure in their favor, making it more consolidated through horizontal mergers and acquisitions. Having fewer competitors generally equates to higher industry profitability. Industry incumbents, therefore, have an incentive to reduce the number of competitors in the industry. With fewer but larger competitors, incumbent firms can mitigate the threat of strong competitive forces such as supplier or buyer power more effectively. In contrast, consolidated industry structures may also break up and become more fragmented. This generally hapens ​when tehre​​ are external shocks to an industry such as derelugatio​​n, new legilsatio​​n, tehcnologica​​l innovation, or globalization.

external factors in the firm's task environment

are ones that managers do have some influence over, such as the composition of their strategic groups (a set of close rivals) or the structure of the industry.

red oceans

are the known market space of existing industries. In red oceans the rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game.

9.2 STRATEGIC ALLIANCES The locus of competitive advantage is often not found within the individual firm but within a strategic partnership. Also, note that different motivations for forming alliances are not necessarily independent and can be intertwined. For example, firms that collaborate to access critical complementary assets may also want to learn from one another to subsequently pursue vertical integration. In sum, alliance formation is frequently motivated by leveraging economies of scale, scope, specialization, and learning.

are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.7 The use of strategic alliances to implement corporate strategy has exploded in the past few decades, with thousands forming each year. As the speed of technological change and innovation has increased, firms have responded by entering more alliances. Globalization has also contributed to an increase in cross-border strategic alliances. Strategic alliances may join complementary parts of a firm's value chain, such as R&D and marketing, or they may focus on joining the same value chain activities. Strategic alliances are attractive because they enable firms to achieve goals faster and at lower costs than going it alone. In contrast to M&A, strategic alliances also allow firms to circumvent potential legal repercussions including potential lawsuits filed by U.S. federal agencies or the European Union.

Vision

captures an organization's aspiration and spells out what it ultimately wants to accomplish. A vision defines what an organization wants to accomplish ultimately, and thus the goal can be described by the verb to. Beyond monetary rewards, it allows employees to experience a greater sense of purpose. vision statements should be forward-looking and inspiring Visionary companies often outperform their competitors over the long run

Formalization

captures the extent to which employee behavior is steered by explicit and codified rules and procedures. Formalized structures are characterized by detailed written rules and policies of what to do in specific situations. These are often codified in employee handbooks. McDonald's, for example, uses detailed standard operating procedures throughout the world to ensure consistent quality and service. Airlines, for instance, must rely on a high degree of formalization to instruct pilots on how to fly their airplanes in order to ensure safety and reliability. Yet a high degree of formalization can slow decision making, reduce creativity and innovation, and hinder customer service.

Capital requirements

describe the "price of the entry ticket" into a new industry. How much capital is required to compete in this industry, and which companies are willing and able to make such investments? Frequently related to economies of scale, capital requirements may encompass investments to set up plants with dedicated machinery, run a production process, and cover start-up losses. The potential new entrant must carefully weigh the required capital investments, the cost of capital, and the expected return. Taken together, the threat of entry is high when capital requirements are low in comparison to the expected returns. If an industry is attractive enough, efficient capital markets are likely to provide the necessary funding to enter an industry. Capital, unlike proprietary technology and industry-specific know-how, is a fungible resource that can be relatively easily acquired in the face of attractive returns.

Economies of scope

describe the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and technology.

2 Path dependence time compression diseconomies.

describes a process in which the options one faces in a current situation are limited by decisions made in the past (by others - or outside the control of a company). Often, early events—sometimes even random ones—have a significant effect on final outcomes. Path dependence also rests on the notion that time cannot be compressed at will. While management can compress resources such as labor and R&D into a shorter period, the push will not be as effective as when a firm spreads out its effort and investments over a longer period. Trying to achieve the same outcome in less time, even with higher investments, tends to lead to inferior results, due to time compression diseconomies.

3 Causal ambiguity

describes a situation in which the cause and effect of a phenomenon are not readily apparent. To formulate and implement a strategy that enhances a firm's chances of gaining and sustaining a competitive advantage, managers need to have a hypothesis or theory of how to compete. This implies that managers need to have some kind of understanding about what causes superior or inferior performance. Understanding the underlying reasons of observed phenomena is far from trivial, however. Everyone can see that Apple has had several hugely successful innovative products such as the iMac, iPod, iPhone, and iPad, combined with its hugely popular iTunes services. These successes stem from Apple's set of V, R, I, and O core competencies that supports its ability to continue to offer a variety of innovative products and to create an ecosystem of products and services.

4 Social complexity

describes situations in which different social and business systems interact. There is frequently no causal ambiguity as to how the individual systems such as supply chain management or new product development work in isolation. They are often managed through standardized business processes such as Six Sigma or ISO 9000. Social complexity, however, emerges when two or more such systems are combined. Copying the emerging complex social systems is difficult for competitors because neither direct imitation nor substitution is a valid approach. The interactions between different systems create too many possible permutations for a system to be understood with any accuracy. The resulting social complexity makes copying these systems difficult, if not impossible, resulting in a valuable, rare, and costly-to-imitate resource that the firm is organized to exploit.

Specialization

describes the degree to which a task is divided into separate jobs—that is, the division of labor. Larger firms, such as Fortune 100 companies, tend to have a high degree of specialization; smaller entrepreneurial ventures tend to have a low degree of specialization.

Entrepreneurship

describes the process by which change agents (entrepreneurs) undertake economic risk to innovate—to create new products, processes, and sometimes new organizations.14 Entrepreneurs innovate by commercializing ideas and inventions.15 They seek out or create new business opportunities and then assemble the resources necessary to exploit them.16 If successful, entrepreneurship not only drives the competitive process, but it also creates value for the individual entrepreneurs and society at large.

Restructuring

describes the process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully. Corporate executives can restructure the portfolio of their firm's businesses, much like an investor can change a portfolio of stocks.

Strategic entrepreneurship

describes the pursuit of innovation using tools and concepts from strategic management.26 We can leverage innovation for competitive advantage by applying a strategic management lens to entrepreneurship. The fundamental question of strategic entrepreneurship, therefore, is how to combine entrepreneurial actions, creating new opportunities or exploiting existing ones with strategic actions taken in the pursuit of competitive advantage.

business model

details the firm's competitive tactics and initiatives. Simply put, the firm's business model explains how the firm intends to make money. The business model stipulates how the firm conducts its business with its buyers, suppliers, and partners. This also implies that business model innovation might be as important as product or process innovation. To come up with an effective business model, a firm's managers first transform their strategy of how to compete into a blueprint of actions and initiatives that support the overarching goals. In a second step, managers implement this blueprint through structures, processes, culture, and procedures. If the company fails to translate a strategy into a profitable business model, the firm will run into trouble.

Industry growth

directly affects the intensity of rivalry among competitors. In periods of high growth, consumer demand rises, and price competition among firms frequently decreases. rivalry among competitors becomes fierce during slow or even negative industry growth. Price discounts, frequent new product releases with minor modifications, intense promotional campaigns, and fast retaliation by rivals are all tactics indicative of an industry with slow or negative growth.

A monopolistically competitive industry

has many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers. The key to understanding this industry structure is that the firms now offer products or services with unique features. The computer hardware industry provides one example of monopolistic competition. Many firms compete in this industry, and even the largest of them (Apple, ASUS, Dell, HP, or Lenovo) have less than 20 percent market share. Moreover, while products between competitors tend to be similar, they are by no means identical. As a consequence, firms selling a product with unique features tend to have some ability to raise prices. When a firm is able to differentiate its product or service offerings, it carves out a niche in the market in which it has some degree of monopoly power over pricing, thus the name "monopolistic competition." Firms frequently communicate the degree of product differentiation through advertising.

Specialized assets

have a high opportunity cost: They have significantly more value in their intended use than in their next-best use. They can come in several forms: ▪ Site specificity—assets required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting. ▪ Physical-asset specificity—assets whose physical and engineering properties are designed to satisfy a particular customer, such as bottling machinery for Coca-Cola and PepsiCo. Since the bottles have different and often trademarked shapes, they require unique molds. Cans, in contrast, do not require physical-asset specificity because they are generic. ▪ Human-asset specificity—investments made in human capital to acquire unique knowledge and skills, such as mastering the routines and procedures of a specific organization, which are not transferable to a different employer.

Organic organizations

have a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making. Organic structures tend to be correlated with the following: a fluid and flexible information flow among employees in both horizontal and vertical directions; faster decision making; and higher employee motivation, retention, satisfaction, and creativity. Organic organizations also typically exhibit a higher rate of entrepreneurial behaviors and innovation. Organic structures allow firms to foster R&D and/or marketing, for example, as a core competency. Firms that pursue a differentiation strategy at the business level frequently have an organic structure.

minimum efficient scale (MES)

in order to be cost-competitive. Between Q1 and Q2, the returns to scale are constant. It is the output range needed to bring the cost per unit down as much as possible, allowing a firm to stake out the lowest-cost position achievable through economies of scale. If the firm's output range is less than Q1 or more than Q2, the firm is at a cost disadvantage.

5 Intellectual property (IP) protection

is a critical intangible resource that can also help sustain a competitive advance. Consider the five major forms of IP protection: patents, designs, copyrights, trademarks, and trade secrets. The intent of IP protection is to prevent others from copying legally protected products or services. In many knowledge-intensive industries that are characterized by high research and development (R&D) costs, for example smartphones and pharmaceuticals, IP protection provides not only an incentive to make these risky and often large-scale investments in the first place, but also affords a strong isolating mechanism that is critical to a firm's ability to capture the returns to investment. Taken together, each of the five isolating mechanisms discussed here (or combinations thereof) allow a firm to extend its competitive advantage. Although no competitive advantage lasts forever, a firm may be able to protect its competitive advantage (even for long periods of time) when it has consistently better expectations about the future value of resources, when it has accumulated a resource advantage that can be imitated only over long periods of time, when the source of its competitive advantage is causally ambiguous or socially complex, or when the firm possesses strong intellectual property protection.

9.4 Alliance management capability

is a firm's ability to effectively manage three alliance-related tasks concurrently, often across a portfolio of many different alliances (see Exhibit 9.3) ▪ Partner selection and alliance formation. ▪ Alliance design and governance. ▪ Post-formation alliance management. But how do firms build alliance management capability? The answer is to build capability through repeated experiences over time. In support of this idea, several empirical studies have shown that firms move down the learning curve and become better at managing alliances through repeated alliance exposure

The balanced scorecard

is a framework to help managers achieve their strategic objectives more effectively. This approach harnesses multiple internal and external performance metrics in order to balance both financial and strategic goals. Managers using the balanced scorecard develop appropriate metrics to assess strategic objectives by answering four key questions.23 Brainstorming answers to these questions ideally results in a set of measures that give managers a quick but also comprehensive view of the firm's current state. The four key questions are: How do customers view us? How do we create value? What core competencies do we need? How do shareholders view us?

Globalization

is a process of closer integration and exchange between different countries and peoples worldwide, made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs. Combined, these factors reduce the costs of doing business around the world, opening the doors to a much larger market than any one home country. Globalization also allows companies to source supplies at lower costs, to learn new competencies, and to further differentiate products. Consequently, the world's market economies are becoming more integrated and interdependent. Indeed, China, with over $9 trillion in GDP, has become the second-largest economy worldwide after the United States (with $17 trillion in GDP) and ahead of Japan in third place ($5 trillion GDP), in absolute terms.

Valuable resource

is a resource that enables the firm to exploit an external opportunity or offset an external threat. This has a positive effect on a firm's competitive advantage. In particular, a valuable resource enables a firm to increase its economic value creation (V - C). Revenues rise if a firm is able to increase the perceived value of its product or service in the eyes of consumers by offering superior design and adding attractive features (assuming costs are not increasing). Production costs, for example, fall if the firm is able to put an efficient manufacturing process and tight supply chain management in place (assuming perceived value is not decreasing).

An oligopolistic industry

is consolidated with a few large firms, differentiated products, high barriers to entry, and some degree of pricing power. The degree of pricing power depends, just as in monopolistic competition, on the degree of product differentiation. A key feature of an oligopoly is that the competing firms are interdependent. With only a few competitors in the mix, the actions of one firm influence the behaviors of the others. This type of industry structure is often analyzed using game theory, which attempts to predict strategic behaviors by assuming that the moves and reactions of competitors can be anticipated.28 Due to their strategic interdependence, companies in oligopolies have an incentive to coordinate their strategic actions to maximize joint performance. Although explicit coordination such as price fixing is illegal in the United States, tacit coordination such as "an unspoken understanding" is not. The main competitors in this space are FedEx and UPS. Any strategic decision made by FedEx (e.g., to expand delivery services to ground delivery of larger-size packages) directly affects UPS; likewise, any decision made by UPS (e.g., to guarantee next-day delivery before 8:00 a.m.) directly affects FedEx. Other examples of oligopolies include the soft drink industry (Coca-Cola vs. Pepsi), airframe manufacturing business (Boeing vs. Airbus), home-improvement retailing (The Home Depot vs. Lowe's), toys and games (Hasbro vs. Mattel), and detergents (P&G vs. Unilever).

A perfectly competitive industry

is fragmented and has many small firms, a commodity product, ease of entry, and little or no ability for each individual firm to raise its prices. The firms competing in this type of industry are approximately similar in size and resources. Consumers make purchasing decisions solely on price, because the commodity product offerings are more or less identical. The resulting performance of the industry shows low profitability. Under these conditions, firms in perfect competition have difficulty achieving even a temporary competitive advantage and can achieve only competitive parity. Although perfect competition is a rare industry structure in its pure form, markets for commodities such as natural gas, copper, and iron tend to approach this structure. In perfect competition, all firms have access to the same resources and capabilities, ensuring that any advantage that one firm has will be short-lived. That is, when resources are freely available and mobile, competitors can move quickly to acquire resources that are utilized by the current market leader.

Organizational culture

is the second key building block when designing organizations for competitive advantage. Just as people have distinctive personalities, so too do organizations have unique cultures that capture "how things get done around here."Organizational culture describes the collectively shared values and norms of an organization's members.36 *****Values define what is considered important. Norms define appropriate employee attitudes and behaviors. Exhibit 11.11 depicts the elements of organizational culture—values, norms, and artifacts—in concentric circles. The most important yet least visible element—values—is in the center. As we move outward in the figure, from values to norms to artifacts, culture becomes more observable. Understanding what organizational culture is, and how it is created, maintained, and changed, can help you be a more effective manager. A unique culture that is strategically relevant can also be the basis of a firm's competitive advantage.

The shared value creation framework

proposes that managers maintain a dual focus on shareholder value creation and value creation for society. It recognizes that markets are defined not only by economic needs but also by societal needs. It also advances the perspective that externalities such as pollution, wasted energy, and costly accidents actually create internal costs, at least in lost reputation if not directly on the bottom line. The shared value creation framework seeks to enhance a firm's competitiveness by identifying connections between economic and social needs, and then creating a competitive advantage by addressing these business opportunities.

The build-borrow-or-buy framework

provides a conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy). Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage. Note that in the build-borrow-or-buy model, the term resources is defined broadly to include capabilities and competencies (as in the VRIO model discussed in Chapter 4). Exhibit 9.1 shows the build-borrow-or-buy decision framework. executives must determine the degree to which certain conditions apply, either high or low, by responding to up to four questions sequentially before finding the best course. The questions cover issues of relevancy, tradability, closeness, and integration:Page 298 1 Relevancy. How relevant are the firm's existing internal resources to solving the resource gap? 2 Tradability. How tradable are the targeted resources that may be available externally? 3 Closeness. How close do you need to be to your external resource partner? 4 Integration. How well can you integrate the targeted firm, should you determine you need to acquire the resource partner?

coordination costs

refer to the costs that arise from managing the linked businesses in a related-constrained or related-linked diversification scenario.

The competitive industry structure

refers to elements and features common to all industries. The structure of an industry is largely captured by ▪ The number and size of its competitors. ▪ The firms' degree of pricing power. ▪ The type of product or service (commodity or differentiated product). ▪ The height of entry barriers. ======================================= The four main competitive industry structures are (1) perfect competition (2) monopolistic competition (3) oligopoly (4) monopoly

Centralization

refers to the degree to which decision making is concentrated at the top of the organization. Centralized decision making often correlates with slow response time and reduced customer satisfaction. In decentralized organizations such as Zappos, decisions are made and problems solved by empowered lower-level employees who are closer to the sources of issues. ▪ Top-down strategic planning takes place in highly centralized organizations. ▪ Planned emergence is found in more decentralized organizations.

6.4 Business-Level Strategy and the Five Forces: Benefits and Risks the relationship between competitive positioning and the five forces. In particular, it highlights the benefits and risks of differentiation and cost-leadership business strategies

relationship between competitive positioning and the five forces

A Generic Value Chain: Primary and Support Activities primary activities support activities

the transformation process from inputs to outputs is composed of a set of distinct activities. When a firm's distinct activities generate value greater than the costs to create them, the firm obtains a profit margin the value chain is divided into primary and support activities. The primary activities add value directly as the firm transforms inputs into outputs—from raw materials through production phases to sales and marketing and finally customer service, specifically: ▪ Supply chain management. ▪ Operations. ▪ Distribution. ▪ Marketing and sales. ▪ After-sales service. Other activities, called support activities, add value indirectly. These activities include: ▪ Research and development (R&D). ▪ Information systems. ▪ Human resources. ▪ Accounting and finance. ▪ Firm infrastructure including processes, policies, and procedures. Although the resource-based view of the firm helps identify the integrated set of resources and capabilities that are the building blocks of core competencies, the value chain perspective enables managers to see how competitive advantage flows from the firm's distinct set of activities. This is because a firm's core competency is generally found in a network linking different but distinct activities, each contributing to the firm's strategic position as either low-cost leader or differentiator.

An industry is a monopoly natural monopoly near monopoly

when there is only one, often large firm supplying the market. The firm may offer a unique product, and the challenges to moving into the industry tend to be high. The monopolist has considerable pricing power. As a consequence, firm and thus industry profit tends to be high. The one firm is the industry. Philadelphia Gas Works is the only supplier of natural gas in the city of Philadelphia, Pennsylvania, serving some 500,000 customers. These are so-called natural monopolies. In the past few decades, however, more and more of these natural monopolies have been deregulated in the United States, including airlines, telecommunications, railroads, trucking, and ocean transportation. This deregulation has allowed competition to emerge, which frequently leads to lower prices, better service, and more innovation. near monopolies are of much greater interest to strategists. These are firms that have accrued significant market power, for example, by owning valuable patents or proprietary technology. In the process, they are changing the industry structure in their favor, generally from monopolistic competition or oligopolies to near monopolies.

local responsiveness

—the need to tailor product and service offerings to fit local consumer preferences and host-country requirements; it generally entails higher costs.

Levels of strategy

▪ Corporate strategy concerns questions relating to where to compete in terms of industry, markets, and geography. ▪ Business strategy concerns the question of how to compete. Three generic business strategies are available: - cost leadership, - differentiation, or - value innovation. ▪ Functional strategy concerns the question of how to implement a chosen business strategy.

Matching Global Strategy and Structure

▪ In an international strategy, the company leverages its home-based core competency by moving into foreign markets. An international strategy is advantageous when the company faces low pressure for both local responsiveness and cost reductions. Companies pursue an international strategy through a differentiation strategy at the business level. The best match for an international strategy is a functional organizational structure, which allows the company to leverage its core competency most effectively. This approach is similar to matching a business-level differentiation strategy with a functional structure (discussed in detail earlier). ▪ When a multinational enterprise (MNE) pursues a multidomestic strategy, it attempts to maximize local responsiveness in the face of low pressures for cost reductions. An appropriate match for this type of global strategy is the multidivisional organizational structure. That structure would enable the MNE to set up different divisions based on geographic regions (e.g., by continent). The different geographic divisions operate more or less as standalone SBUs to maximize local responsiveness. Decision making is decentralized.Page 383 ▪ When following a global-standardization strategy, the MNE attempts to reap significant economies of scale as well as location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost. Since the product offered is more or less an undifferentiated commodity, the MNE pursues a cost-leadership strategy. The optimal organizational structure match is, again, a multidivisional structure. Rather than focusing on geographic differences as in the multidomestic strategy, the focus is on driving down costs due to consolidation of activities across different geographic areas.

A good strategy consists of three elements: A good strategy enables a firm to achieve superior performance. It consists of three elements: 1. A diagnosis of the competitive challenge. 2. A guiding policy to address the competitive challenge. 3. A set of coherent actions to implement the firm's guiding policy.

1. A diagnosis of the competitive challenge. This element is accomplished through analysis of the firm's external and internal environments (Part 1 of the AFI framework).Page 7 2. A guiding policy to address the competitive challenge. This element is accomplished through strategy formulation, resulting in the firm's corporate, business, and functional strategies (Part 2 of the AFI framework). 3. A set of coherent actions to implement the firm's guiding policy. This element is accomplished through strategy implementation (Part 3 of the AFI framework).

The process or method by which strategic leaders formulate and implement strategy. When strategizing for competitive advantage, managers rely on three approaches:

1. Strategic planning. 2. Scenario planning. 3. Strategy as planned emergence.

Chapter 1 What is Strategy?: AFI Strategy Framework - (Analysis, Formulation, and Implementation)

Basically, strategy is the art and science of success and failure. At the core is gaining and sustaining a competitive advantage. Successful strategy details a set of actions that managers take to gain and sustain competitive advantage. The tasks of analyze, formulate, and implement are the pillars of research and knowledge about strategic management. they are highly interdependent and frequently happen simultaneously. A successful strategy requires three integrative management tasks—analysis, formulation, and implementation. This framework (1) explains and predicts differences in firm performance, and (2) helps managers formulate and implement a strategy that can result in superior performance. To be more effective, the strategist follows a three-step process: 1. Analyze the external and internal environments. 2. Formulate an appropriate business and corporate strategy. 3. Implement the formulated strategy through structure, culture, and controls. An effective strategy requires that strategic trade-offs be recognized and addressed—for example, between value creation and the costs to create the value. =============================== Strategy Analysis (A) Topics and Questions Strategic leadership and the strategy process: What roles do strategic leaders play? What are the firm's vision, mission, and values? What is the firm's process for creating strategy and how does strategy come about? (Chapter 2) External analysis: What effects do forces in the external environment have on the firm's potential to gain and sustain a competitive advantage? How should the firm deal with them? (Chapter 3) Page 22 Internal analysis: What effects do internal resources, capabilities, and core competencies have on the firm's potential to gain and sustain a competitive advantage? How should the firm leverage them for competitive advantage? (Chapter 4) Competitive advantage, firm performance, and business models: How does the firm make money? How can one assess and measure competitive advantage? What is the relationship between competitive advantage and firm performance? (Chapter 5) Strategy Formulation (F) Topics and Questions Business strategy: How should the firm compete: cost leadership, differentiation, or value innovation (Chapters 6 and 7) Corporate strategy: Where should the firm compete: industry, markets, and geography? (Chapters 8 and 9) Global strategy: How and where should the firm compete: local, regional, national, or international? (Chapter 10) Strategy Implementation (I) Topics and Questions Organizational design: How should the firm organize to turn the formulated strategy into action? (Chapter 11) Corporate governance and business ethics: What type of corporate governance is most effective? How does the firm anchor strategic decisions in business ethics? (Chapter 12)

Strategic Business Units (SBU)

Business strategy occurs within strategic business units, or SBUs, the standalone divisions of a larger conglomerate, each with its own profit-and-loss responsibility General managers in SBUs must answer business strategy questions relating to how to compete in order to achieve superior performance. Within the guidelines received from corporate headquarters, they formulate an appropriate generic business strategy, including cost leadership, differentiation, or value innovation, in their quest for competitive advantage.

strategy-as-planned-emergence

Companies in high-rate of change /high-velocity/ fast-moving environments use this strategy

Implementation

Organizational design - structure, culture, and control; corporate governance and business ethics

Mission

Describes what an organization does—that is, the products and services it plans to provide, and the markets in which it will compete. ​ A mission describes what an organization does; it defines the means by which vision is accomplished.

Implementing the strategy is often overlooked by senior managers especially in large organizations. What level of manager is often responsible for making sure the strategy gets implemented in alignment with the corporate goals?

Functional Manager

According to the text, superior performance within the strategic business unit (SBU) is sought by asking which major question?

How to compete

Chapter 2: Strategic Leadership: Managing the Strategy Process followed by corporate executives...

In Chapter 2, we move from thinking about why strategy is essential to consider​ing how firms and other organizations define their vision, mission, and values, and how strategic leaders manage the strategy process across different levels in the organization. Corporate executives need to decide in which industries, markets, and geographies their companies should compete. They need to formulate a strategy that can create synergies across business units that may be quite different, and determine the boundaries of the firm by deciding whether to enter certain industries and markets and whether to sell certain divisions. They are responsible for setting overarching strategic objectives and allocating scarce resources among different business divisions, monitoring performance, and making adjustments to the overall portfolio of businesses as needed.

Price stability (economic)

Price stability —the lack of change in price levels of goods and services—is rare. Therefore, companies will often have to deal with changing price levels, which is a direct function of the amount of money in any economy. inflation - a popular economic definition of inflation is too much money chasing too few goods and services.6 Inflation tends to go with lower economic growth. Deflation - describes a decrease in the overall price level. A sudden and pronounced drop in demand generally causes deflation, which in turn forces sellers to lower prices to motivate buyers.

Which of the following legal developments allow business to function as an institution?

Property rights & contract enforcement

The 5 Step Stakeholder Impact Analysis

Stakeholder impact analysis considers the needs of different stakeholders, which enables the firm to perform optimally and to live up to the expectations of good citizenship. In a stakeholder impact analysis, managers pay particular attention to three important stakeholder attributes: power, legitimacy, and urgency. ========================== Stakeholder impact analysis is a five-step process that answers the following questions for the firm: In step 1, the firm asks, "Who are our stakeholders?" In this step, the firm focuses on stakeholders that currently have, or potentially can have, a material effect on a company. This prioritization identifies the most powerful internal and external stakeholders as well as their needs. In step 2, the firm asks, "What are our stakeholders' interests and claims?" Managers need to specify and assess the interests and claims of the pertinent stakeholders using the power, legitimacy, and urgency criteria introduced earlier. In step 3, the firm asks, "What opportunities and threats do our stakeholders present?" Since stakeholders have a claim on the company, opportunities and threats are two sides of the same coin. In step 4, the firm asks, "What economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders?" To identify these responsibilities more effectively, scholars have advanced the notion of corporate social responsibility (CSR). This framework helps firms recognize and address the economic, legal, ethical, and philanthropic expectations that society has of the business enterprise at a given point in time Finally, in step 5, the firm asks, "What should we do to effectively address any stakeholder concerns?" In the last step in stakeholder impact analysis, managers need to decide the appropriate course of action for the firm, given all of the preceding factors. Thinking about the attributes of power, legitimacy, and urgency helps to prioritize the legitimate claims and to address them accordingly.

core values statement

Statement of principles to guide an organization as it works to achieve its vision and fulfill its mission, for both internal conduct and external interactions; it often includes explicit ethical considerations. core values are defined as the ethical standards and norms that govern the behavior of individuals within a firm or organization.

TECHNOLOGICAL FACTORS

Technological factors capture the application of knowledge to create new processes and products. Major innovations in process technology include lean manufacturing, Six Sigma quality, and biotechnology. The nanotechnology revolution, which is just beginning, promises significant upheaval for a vast array of industries ranging from tiny medical devices to new-age materials for earthquake-resistant buildings. Recent product innovations include the smartphone, computer tablets, and high-performing electric cars such as the Tesla Model S. Recent service innovations include social media and online search engines that respond to voice commands. If one thing seems certain, technological progress is relentless and seems to be picking up speed. Not surprisingly, changes in the technological environment bring both opportunities and threats for companies.

Currency exchange rates (economic)

The currency exchange rate determines how many dollars one must pay for a unit of foreign currency. It is a critical variable for any company that buys or sells products and services across national borders.

growth rate (economic)

The overall economic growth rate is a measure of the change in the amount of goods and services produced by a nation's economy. Strategists look to the real growth rate, which adjusts for inflation. This real growth rate indicates the current business cycle of the economy—that is, whether business activity is expanding or contracting.

Level-5 leadership pyramid

The pyramid is a conceptual framework that shows leadership progression through five distinct, sequential levels.

Corporate strategy

addresses questions relating to "where to compete" for a company. determines the boundaries of the firm along three dimensions: vertical integration (along the industry value chain), diversification (of products and services), and geographic scope (regional, national, or global markets).

Customer-oriented vision statements

allow companies to adapt to changing environments. Product-oriented vision statements often constrain this ability. This is because customer-oriented vision statements focus employees to think about how best to solve a problem for a consumer. Companies with customer-oriented visions can more easily adapt to changing environments.

Autonomous actions

are strategic initiatives undertaken by lower-level employees on their own volition and often in response to unexpected situations

strategic planning (Top-down)

derived from military strategy, is a rational process through which executives attempt to program future success. In this approach, all strategic intelligence and decision-making responsibilities are concentrated in the office of the CEO. The CEO, much like a military general, leads the company strategically through competitive battles. One major shortcoming of the top-down strategic planning approach is that the formulation of strategy is separate from implementation, and thinking about strategy is separate from doing it. Information flows one way only: from the top down. Another shortcoming of the strategic planning approach is that we simply cannot know the future. There is no data. Unforeseen events can make even the most scientifically developed and formalized plans obsolete. Moreover, strategic leaders' visions of the future can be downright wrong; a few notable exceptions prove the rule, however.

Industry effects

describe the underlying economic structure of the industry. They attribute firm performance to the industry in which the firm competes. The structure of an industry is determined by elements common to all industries, elements such as entry and exit barriers, number and size of companies, and types of products and services offered. about 20 percent of a firm's profitability depends on the industry it's in

illusion of control

describes a tendency by managers to overestimate their ability to control events.

level of employment (economic)

directly affect the level of employment. In boom times, unemployment tends to be low, and skilled human capital becomes a scarce and more expensive resource. In economic downturns, unemployment rises. As more people search for employment, skilled human capital is more abundant and wages usually fall.

3.1 The PESTEL model

groups the factors in the firm's general environment into six segments: ▪ Political ▪ Economic ▪ Sociocultural ▪ Technological ▪ Ecological ▪ Legal The PESTEL model provides a relatively straightforward way to scan, monitor, and evaluate the important external factors and trends that might impinge upon a firm.

internal stakeholders

include stockholders, employees (including executives, managers, and workers), and board members.

The strategic initiative

is a key feature in the strategy as a planned emergence model. A strategic initiative is any activity a firm pursues to explore and develop new products and processes, new markets, or new ventures.

Functional level strategy

is a response to operational level strategy. It advocates for the business to see its management decisions as specific to a functional area of the organization, such as marketing, human resources, finance, information management and public relations. The advantages of this are that employees and resources can be assigned to the tasks that best suit their skills and interests. If you have an employee with expertise in HR, for instance, it makes logical sense to assign her to the human resources function instead of the finance division. Functional level strategy aims to see people and resources as an end in themselves, not a means to an end. Functional Level Strategy: Disadvantages Functional level strategy is quite useful from the standpoint of valuing the innate worth of the people and resources with an organization, but there are some disadvantages that are particularly evident in smaller businesses. Oftentimes, small businesses combine several functions into one or a few departments. A business might not have enough staff or resources to separate HR, technology, finance and other departments from one another. All of these functions might be performed by a few or even just one person. In these cases, functional level strategy is more difficult to employ because the tasks and strategies a business undertakes begin to look more like operations than they do functions. A good business manager can employ operational level strategy where it is a appropriate and use functional level strategies where they fit in best.

Native advertising

is online advertising that attempts to present itself as naturally occurring editorial content rather than a search-driven paid placement.

strategic leadership "How CEOs spend their days"

mostly face-to-face in meetings

upper-echelons theory

organizational outcomes including strategic choices and performance levels reflect the values of the top management team. The theory states that executives interpret situations through the lens of their unique perspectives, shaped by personal circumstances, values, and experiences. Their leadership actions reflect characteristics of age, education, and career experiences, filtered through personal interpretations of the situations they face. The upper-echelons theory favors the idea that strong leadership is the result of both innate abilities and learning.

stakeholders

organizations, groups, and individuals that can affect or be affected by a firm's actions Stakeholders are individuals or groups that have a claim or interest in the performance and continued survival of the firm. They make specific contributions for which they expect rewards in return.

three important stakeholder attributes:

power, legitimacy, and urgency. ▪ A stakeholder has power over a company when it can get the company to do something that it would not otherwise do. ▪ A stakeholder has a legitimate claim when it is perceived to be legally valid or otherwise appropriate. ▪ A stakeholder has an urgent claim when it requires a company's immediate attention and response. The effective management of stakeholders—the organization, groups, or individuals that can materially affect or are affected by the action of a firm—is necessary to ensure the continued survival of the firm and to sustain any competitive advantage.

Stakeholder impact analysis

provides a decision tool with which managers can recognize, prioritize, and address the needs of different stakeholders. This tool helps the firm achieve a competitive advantage while acting as a good corporate citizen. Stakeholder impact analysis takes managers through a five-step process of recognizing stakeholders' claims. In each step, managers must pay particular attention to three important stakeholder attributes: power, legitimacy, and urgency.

industry analysis

provides a more rigorous basis not only to identify an industry's profit potential—the level of profitability that can be expected for the average firm—but also to derive implications for one firm's strategic position within an industry.

Variables affecting the three strategic processes:

rate of change in the internal environment rate of change in the external environment Size of the firm