STRA Final
Industry evolution influences all sources of competitive advantage
true, the more a firm resists evolutionary change, the less likely it is to survive
incomplete contracting is increased by
uncertainty (pit provides the supplier with opportunities to use its bargaining power). Uncertainty alone is not sufficient to lead to vertical integration
Mapping activities
value chain (michael porter) activity system
How would a supplier firm reduce the power of one of its buyers?
vertically integrate into the buyer's industry
Highly concentrated industry
= few firms - larger firms are more efficient
Which of the following is NOT true for firms that pursue a differentiation strategy?
Charging the same price while increasing value can always attract new customers.
Which of the following is NOT true for firms that pursue a differentiation strategy?
Charging the same price while increasing value will always attract new customers.
Sunk costs (escalation of commitment)
Continuing to invest in failing projects in hope of getting back the original investment.
Why do countries matter
Differences in laws, regulations, and in trade, fiscal & monetary policies •Competitive markets require rule of law to regulate disputes, enforce contracts, etc.
Shakeout
Dominant firms with strong isolating mechanisms force out weaker competitors and deter new entrants - Only firms with superior and defendable market position can cause Stage 2 or Shakeout - Firms shift from product to process innovation & from value to cost advantage
relational capability
Firms that repeatedly receive benefits from cooperation have developed relational capability
path dependance
Historical investments guiding future innovation;The tendency of a firm over time to invest in innovations that are upwardly compatible with each other, thereby creating a unique path of product & process development
industries determine firm profitability
Industry forces can decrease firm's profitability (Porter's 5 Forces) •Industry forces can increase firm's profitability (Value Net)
Nationally Segmented Industries
No country has an advantage •No opportunities for developing superior global cost or value drivers •Minimum efficient scale small enough to make local firms competitive •No learning benefits from competing across national markets
Problem solving: single loop learning
Single loop learning: working within the constraints and parameters of a problem or task to achieve a solution •Necessary and sufficient to solve routine problems •(1) scan and monitor the environment; (2) compare to operating norms; (3) initiate action
Bias re: gains and losses
Tending to be risk seeking in terms of losses and risk averse in terms of gains (Prospect Theory).
Which of the following is NOT an important factor that affects a firm's profitability?
The CEO's salary
Which of the following statements is true about Coca Cola's bottlers.
The bottling industry has low threat of entry due to high capital costs and exclusive contracts.
Why do firms differ
When entry barriers low, new firms enter quickly, hoping to solve the productivity challenges incumbents are facing
A strategic plan can improve performance
but it is neither necessary or sufficient for higher performance
Increase customer retention
by increasing search costs, transition costs, learning costs
Employees Duty
duty of obedience: Managers have the right to control both the process and outcomes of work. This often means that the employee must behave in a socially acceptable, respectful way with the employer. Duty of loyalty: The employee should act in the interests of his employer and cannot benefit at the employer's expense. Duty of disclosure: The employee must disclose information that may benefit the employer.
Strategic Planning
involves a more significant commitment of resources by top management - investment in fixed assets - major reorientation of the organization - reconfiguration of organizational structure
cost drivers
low input costs, scale or volume economies (higher rate of production leads to lower costs by spreading out high fixed costs), scope economies (the cost of producing two products together is lower than producing them separately), learning curve, vertical integration, organizational practices
Firm's surplus
price-cost (=profit margin)
Forward vertical integration
taking over a buyer, and getting closer to consumers
backward vertical integration
taking over a supplier, and getting closer to the industry's raw inputs
The difference between product value and market price is called:
the buyer's surplus
Make vs. Buy Decision
is made at the business level, about specific activities after choosing an industry and competitive position
Cost leadership position (Walmart) is attractive when
the investments produce a higher return than the opportunities to increase value
Noise and Distortion
Either performance can be measured, but mis-weighted•Or performance unable to be measured Underweighting hard-to-measure activities •Overweighting easy-to-measure activities.
Which of the following is a useful question for competitor analysis?
- What are the key macroeconomic forces that affect profits in the industry? -Has the industry passed through a shakeout? - Where is the firm located in the competitive landscape in terms of is value and cost drivers?
Which of the following accurately describes Porter's Five Forces as it pertains to the industry of Coca-Cola and Pepsi from the Cola Wars case study: Rivalry: Constrained competition made the industry for Coca Cola and Pepsi highly profitable. Low threat of entry: Brand equity and scale economies in advertizing created high barriers to entry in this industry. Strong buyers: Bottlers of Coca-Cola and Pepsi could choose which company to work with, which gave them lots of power. Low supplier power: Assuming Coca-Cola and Pepsi's secret ingredients were commodities, those firms have low supplier power. High threat of substitutes: There are many substitutes for Cola, including beer, milk, water, and sports drinks.
1, 2 & 4
Which of the following are isolating mechanisms? 1. causal ambiguity 2. the learning curve 3. property rights 4. transition costs
1, 3, and 4
Managing partnerships
1. Convergence of Purpose: Need high degree of understanding between partners 2. Consistency of Position: Managers of different levels place different value on partnerships, but each should contribute to achieving the partnerships goals and not be allowed to intervene arbitrarily 3. Managing the Interface: Important to communicate with partner, develop new practices/routines
Surviving Industry Disruption
1. Degree of incumbent control over complementary assets providing access to customers•Biotech (entrants) v. big pharma (incumbents) with access to marketing, sales, and distribution capability complements 2. The strength of isolating mechanisms protecting new technology•Incumbents can imitate new tech if it has weak isolating mechanisms to compete directly with disruptive technology 3. Magnitude of short-term opportunity costs incumbents incur in adopting new technology•Incumbents may wait too long to adopt new tech if costs high to do so
New venture governance involves 4 key tasks:
1. Establishing multiple methods for unit valuation 2. Using alternative resource allocation mechanisms 3. Implementing life-cycle based managerial incentives 4. Developing alternative coordination and control mechanisms
what slows the shakeout process
1. Expectations about future demand and the degree of sunk costs •Firms will postpone exit if they have high sunk costs that would be difficult to replicate on reentry 2. Ease of imitation of the dominant firm's market position •Firms will postpone exit when they believe it is possible to improve their market positions by imitating industry leaders 3. The existence of defendable niche markets •Exit slows when weaker firms can avoid direct rivalry with dominant firms by competing in niche markets
Contributions of Parent Company toNew Business
1. Financial Capital: this should NOT be a primary reason for diversification 2. Resources: can be shared with new business units in order to improve their market positions:•Value drivers: brand image, reputation, technology, plants, etc.•Cost drivers: economies of scale and scope 3. Capabilities: transferred to a business unit should contribute to its market position (through higher value or lower cost) 4. Entrepreneurial management skills: Core competence = technological capability + entrepreneurial skill
Why do many firms in same industry locate in the same region?
1. Labor Pooling 2. Specialized Local Suppliers 3. Technological Spillovers
Partnering Disadvantages
1. Reduced control over decision-making and investments 2. Strategic inflexibility 3. Weaker organizational identity 4. Antitrust issues
Single business strategic planning
1. Starts with Problem Identification & Diagnosis 2. Specifies a Mission with an objective ("the what") and scope ("the where") 3. Specifies the Sources of Advantage ("the how") to create value
Industry Disruption
1. Technological substitution 2. Disruptive innovation 3. Radical institutional change
Why are partnerships increasingly common
1. The global integration of manufacturing and service industries 2. The diffusion of Japanese partnership practices 3. The diffusion of supplier partnerships 4. The outsourcing wave in services 5. The rise of supply chain management practices 6. The growth of technology-intensive industries 7. The emergence of cooperation in regional networks
Why do incumbents delay
1. They tend to focus on total (rather than marginal) return on investments 2. Potential cannibalization by the new technology of profits from the traditional technology 3. Weak absorptive capacity to adopt new technology •Managers' cognitive inertia (lack of openness to change)
motivations behind partnerships
1. To transfer and develop technology 2. To access new markets 3. To reduce costs 4. To reduce risk 5. To change industry structure (not a strong enough motivation alone)
partner selection
1. evaluate a potential partners current capabilities 2. evaluate their expected future capabilities 3. evaluate the number and quality of current and future partnering alternatives
Common benchmarks for goal setting
1. firms historical performance or trend 2. performance of competitors/rivals
Benefits of employees
1. legitimate hierarchical authority leads to generation of useful strategic information 2. better strategy execution
Which of the following are cost drivers? 1. the learning curve 2. economies of scope 3. firm revenues 4. complementary products
1. the learning curve 2. economies of scope
What is the new business going to do for the parent firm?
3 potential contributions: •Risk Reduction: Reducing earnings volatility •Growth in revenues or earnings •Favorable repositioning of current business
What is the parent firm going to do for the new business?
5 types of potential contributions: •Financial capital •Resources (economies of scope) •Capabilities •Entrepreneurial management skills •Management skills in a type of strategy
All of the following statements about buyer and supplier power are true, EXCEPT:
A firm working with strong suppliers and strong buyers will generate high profits.
partnership
A partnership (or alliance) exists whenever two or more independent organizations cooperate •Partnering in development, manufacture, sale of products, or delivery of services Formed on the basis of complementarity: Resources or capabilities are more valuable together than individually
transaction costs and asset specificity
A supplier invests in assets specialized to the firm, increasing the supplier's bargaining power. Firms experience high switching costs when suppliers invest in assets specialized to the firm•e.g., supplier building a plant near to firm; specialized equipment or skills
resource complementarity
A useful barrier to imitation (e.g., causal ambiguity & Value Net) •A firm's expertise (capability) in exploiting a resource strongly influences how much it is worth to the company
Multibusiness Firms primary goal
Achieve greater performance through multiple businesses than what the businesses would achieve individually
Managerial biases
Act as filters through which information passes: •Often based on their past experiences and/or personal orientations •Determine what we hear or see •Make us reject information that does not fit with our beliefs. •Condition how we think, the choices we make and how we behave
Industry evolution: Growth
All industries start with a product innovation •offers a better buyer surplus than substitutes Early in industry's history, entrants differ widely in resources and capabilities •Each firm "bets" differently on what buyers want in a market (V estimation) •Entrants choose different value and cost drivers •Experimentation leads to different market positions by firms (V-C) Firms observe trends and adjust their market position and there is a cycle of imitation and innovation to improve market position - HIGH MARKET UNCERTAINTY
Which of the following industry forces have the power to drive profits down? I. The power of buyers II. The power of suppliers III. The strength of substitutes for the industry's products IV. The potential for entry into the business V. The strength of competition or rivalry
All of the above
Resource
An asset, observable or tradable, that contributes to producing a firm's outputs - observable, traceable, provides an advantage if it is difficult to imitate or substitute for EX) human capital, brand, natural resources, location
Industry definition
An industry is composed of: •Firms whose products provide value in functionally equivalent ways •e.g., air conditioners, but not fans •Technological similarity (necessary to separate an industry from substitutes) •Market interdependence •e.g., where the change in the value or price of one firm's product, affects demand for another firm's product
Use Industry analysis to
Assess industry conditions and position a firm
Designing Incentive Systems for Compensation Classic Problems
Controllability: How much performance is due to individual skill/effort vs. luck? Interdependency: Performance depends on the efforts of a team; how can we identify individual vs. team contributions? Alignment: Are less important tasks weighted more just because can be measured?
"Exclusive: U.S. oil industry seeks unusual alliance with Farm Belt to fight Biden electric vehicle agenda," by Jarrett Renshaw and Stephanie Kelly from October 25, 2020: "The U.S. oil industry is seeking to forge an alliance with the nation's corn growers and biofuel producers to lobby against the Biden administration's push for electric vehicles...
Cooperation between the firm and its competitors
technology partnerships with start ups: Window
Create a large number of low-cost relationships with startups. Develop a "window" into an emerging technology -Research grants -R&D contracts -Joint ventures all about knowledge absorption
Which of the following describes best the firm's goal in a competitive world?
Creating and capturing more economic value than rivals consistently over time
disadvantage of differentiation strategy
Customers (not producers) determine the product's value, which is hard to predict•Value is multi-dimensional -> not always about "quality" •Producing high-quality products undermines cost control
The following are statements pulled from the websites of four firms: "Our strategy is to provide unrivaled customer service." "Our strategic intent is to always be the first mover." "Our strategy is to move from defense to industrial applications." "Our recovery and expansion strategy targets emerging markets." Which of the following sentences are TRUE about what these statements have in common:
D. these statements represent tactics and/or projects.
To prevent imitation, Wal-mart managers tied up suppliers to obtain low-cost inputs, which occurs when managers turn external resources into _______________________.
Dedicated Assets
Diversification
Definition: the process of entering a "new business"•Every diversification event involves entry into a new industry•Increase in the variety of products/services a firm offers•New market opportunities: (1) new technology, (2) new set of customers, or (3) both•Diversification helps firms search for other markets to apply its capabilities and resource, particularly when growth of its initial business slows down
Long term vs short term goals
Duration of financial planning depends on volatility of firm's strategic situation •More volatile, more short-term goals managers frequently shy away from long-term goals because: They are unwilling to identify the long-term consequences of strategic decisions•They believe that current operations will be sufficient to support the firm's future performance•They are rewarded for short-term success (shareholders, job security) - (Myopic bias)
Compensation and incentive systems
Employees must be compensated so that they contribute effectively to strategy execution Effective compensation systems achieve 3 goals: 1. Measure task outcomes related to the firm's value and cost drivers 2. Set appropriate targets for each outcome 3. Reward managers for achieving these targets
Porter's diamond model
Explains why some industries have an advantage over others in a particular country. 1. Firm Strategy, Structure & Rivalry: 2. Demand conditions: sophisticated buyers push firms to innovate 3. Related & Supporting Industries: efficient local suppliers 4. Factor conditions: skilled labor
Capability
Firm's ability to accomplish tasks (managerial and organizational processes that transform inputs into outputs) - unobservable and difficult to trade, rare, inimitatable - developed by people through coordinated action EX) marketing capabilities, product development capabilities
dynamic capability
Firm's ability to enact the growth cycle repeatedly through innovation; The ability of a firm, as it grows, to build its innovative potential and exploit it effectively
Industries Horizontally Integrated Across Borders
Firm-specific advantages to integrating activities across countries to achieve lower costs through economies of scope or scale •Examples: •fast food, automobiles, hotel chains, pharma (R&D clustered/centralized)
Industries Vertically & Horizontally Integrated Across Borders
Firms have different relative strengths depending on global market positions (choose country for relative firm-level strength of it)•Examples: •Semiconductors, software, financial services (e.g., country-specific advantage to aggregating supply activities; firm-specific advantage in value/cost structure)
Market segmentation
Firms in an industry align their product lines with one or more customer segments (buyers with common preferences)e.g., restaurant industry with fast food v. upscale dining segments
An Arm's race
Firms innovating in Value and Cost in the same way, and at roughly the same pace, in order to keep up with competitors.
When deciding to vertically integrate
Firms should consider the sum of coordination and production costs when deciding to vertically integrate. coordination costs and production costs
transaction cost theory
Firms use contracts to set the conditions of exchange. However, contracts between firms are incomplete •There are always contingencies that cannot be specified in advance - incomplete contracting leads to transaction costs - uncertainty and asset specificity are two basic conditions that, in combination, tend to increase transaction costs and make vertical integration more attractive
Which of the following is NOT true about generic strategies?
Firms who pursue cost leadership mostly ignore the value delivered to the customers and strive to attain the lowest cost possible to offer lowest prices.
Stretch goals
Goals that exceed expected performance targets based on firm or industry trends or overcome difficult barriers to growth or profitability
Based on your knowledge of the Wal-mart case, which of the following is/are TRUE about Wal-mart's isolating mechanisms: I. Because of Wal-mart's breadth of line and brand reputation, customers faced a high cost to search for comparable alternative products sold by rival companies. II. Because of Wal-mart's breadth of line and brand reputation, customers faced a high transition costs in terms of time and gas money to travel to a rival store. III. Because of Wal-mart's breadth of line and brand reputation, it provided higher value than its rivals Target and K-Mart.
I and II
Which of the following describes a disadvantage of a differentiation strategy: I. Customers not producers, determine the product's value, which is hard to predict. II. Value is always about "quality". III. Producing high-quality products undermines cost control.
I and III
Based on the Wal-mart case and your knowledge of isolating mechanisms, which of the following is an example of Causal Ambiguity?
K-mart tried to copy Wal-mart's price-matching practices and failed.
Which of the following statements about Cost Drivers is/are TRUE? I. A firm can have lower costs than its rivals because its inputs in materials, labor, capital, information, or technology are cheaper. II. Learning costs is a cost driver for firms that occurs when its buyers incur costs to adopting the firm's product or service. III. In many circumstances, vertical integration can lower the cost of coordinating transactions between adjacent activities in the design and commercialization of a firm's products.
I and III
Based on your knowledge of the Gucci case, which of the following is/are TRUE: I. The key to making strategic repositioning work is that all the various activities have to have a tight "fit". II. Successful repositioning is often a top-down management decisions that requires changing almost everything, from distribution to product development, manufacturing, financial structure, pricing, etc. III. DeSole and Ford were able to enact change in an organization that had performed badly for a long time by slow, careful deliberation and by repositioning Gucci to offer higher value at higher prices. IV. Repositioning requires exploiting your most valuable assets.
I, II, IV
Target sells its differentiated goods more efficiently than its rivals Wal-mart or Macy's, by having the greatest difference between its gross margin ratio and the SGA ratio -- in other words, Target makes more money on every sales dollar with its "stuck in the middle" strategy. Given Target's performance, which of the following represents a good description of generic strategies? I. Competitive Advantage does not depend on being either a low-cost leader or high-value differentiator. II. What matters most in strategy is that a firm make higher profits than its competitors by maximizing the difference between value it offers to customers and the cost of delivering that value to customers. III. Generic strategies have a strong relationship to economic performance. IV. Generic strategies have no relationship to economic performance.
I, II, IV
In the field of strategy, an industry's boundaries are determined based on: I. employees switching between companies II. technologically similar products III. highly-correlated stock prices IV. interdependent consumer markets
II. technologically similar products IV. interdependent consumer markets
The following is an excerpt from the Marketplace article "Six things you need to know about the possible Hollywood writers strike," by Ben Bergman from April 21st, 2017: "TV and movie writers are worried about the future as their payments go down while the studios' profits go up. Their union, the Writers Guild of America, is in the process of negotiating their new contract; their current contract expires May 1. The Guild is asking members to give authorization for a potential strike. Here's some background on the situation: Based on this article, what factor is potentially affecting the profitability of firms producing TV and movie studios in Hollywood?
Industry factors
How long does mature stage last?
Industry maturity lasts until new, viable substitute technology appears •e.g., DVD rental industry ends with Netflix model •...or industry disruption
In-house production (vertical integration) becomes more attractive when
Input customization increases, and market suppliers use their bargaining power to reduce the firm's surplus (P-C) from the input •The production cost advantage of market suppliers declines with customization due to a lower volume of purchases reducing scale-based efficiencies
Characteristics of industries that are attractive to firms seeking to diversify:
Large ultimate size of the new market to achieve long-term goals •A high growth rate in demand to allow innovation (to compete against incumbents) •A future industry structure in which the new business will have a favorable market position (i.e., favorable industry forces and Iow threats to profitability)
Multipoint competition
Large, dominant firms compete in many product lines across geographies and market segments•Mutual footholds in the core markets of rival firms ensure competitive stability
All of the following are factors determining the power of buyers compared to their suppliers, EXCEPT:
Limit pricing
technology partnerships with start ups: options
Make small, low-risk investment in alliance with start-up Learn about a new technology to plan for new project based on it, with less investment than window strategy - R&D contracts - Joint ventures - all about the ability to evaluate options
Which of the following is NOT true about business-level strategic planning?
Managers should prioritize short-term goals using SWOT analysis
Why use stretch goals?
Motivate management to exceed performance targets •Stimulate a level of innovation beyond what management has already imagined.
"New Business" Definition
Occurs when a firm adds a new, autonomous unit with its own strategy and activities•NOT an extension of a current product line
Information anchoring
Overweighting information that appears first in the informationflow.
Strategy Execution
Putting into action the resources and capabilities that lead to competitive advantage
Individual performance metrics (e.g., task-based rewards)
Reduces the controllability and interdependency problems which reduces noise •But, skews attention away from important but immeasurable activities, such as inter-unit coordination which increases distortion
disadvantage of cost leadership strategy
Requires high capital investment•Can be more easily imitated/copied•Mass production can undermine value and differentiation
Tactical Planning
Requires relatively minor, routine changes resolvable by middle- or low-level managers •Fewer resources are committed, and procedural modification can generally be substituted for structural reformation
Which of the following is not a key element of a business-level strategic plan?
SWOT analysis
Industries Vertically Integrated Across Borders
Some country-specific advantage •e.g, country has resource with particular value •Limited opportunities for firms to develop superior global cost or value drivers •Examples: •High Fashion, Oil drilling & refining, Hollywood movie production & distribution
technology partnerships with start ups: poisitioning
Strong commitment & investment in technology, financial & managerial resources to position in an emerging market to build new business with start-up or wholly owned unit - licensing - joint ventures - all about scale, complementary resources, higher competence
organizational culture and learning
Strong cultures: enduring; produce more consistent behavior of employees •Weak cultures: fragile; subject to fragmentation/violation of the rules of behavior
Which of the following statements about buyer and supplier power is TRUE?
Strong suppliers can achieve high margins even if their buyers operate in markets with intense rivalry.
The compact digital camera is fading fast. As global shipments plummet—with a consistent 16.7-percent year-on-year sales decrease since 2010—manufacturers are scrambling to adapt to a world where customers value the convenience of smartphones for quick shots they can share on social networks like Facebook and Instagram. The global compact digital camera market may shrink to as little as 9 million units shipped, compared to a unit sales peak in 2010 with over 120 million units shipped. According to this description, what is the main threat to profits in the digital camera industry, and what is the most likely impact of this threat on companies in the industry?
Threat: substitutes; Impact: forces firms to increase value and decrease price
absorptive capacity
The ability of a firm to adopt innovations developed by other organizations based on its prior experience with similar or related practices or technologies absorptive capacity> core rigidities= dynamic capability
customer based structure
The activities of the firm are organized by well-defined customer segments. use when customer segments are well-defined and unique (e.g., consulting, accounting)
when should firms partner
The activity has high strategic value to the firm •The firm has low competence to perform activity
Which of the following statements is FALSE?
The cost leader in an industry can be identified by finding the company with the lowest prices.
Which of the following is NOT a good description of a successful strategy?
The firm needs to focus on increasing the difference between the price and cost of the product.
core rigidities
The firm's inability to adapt to changing market or technological conditions because of its attachments to core practices and customers (= lack of absorptive capacity)
Firms invest in complements to create a "market ecosystem" that drives value up. The benefit of complements are affected by all of the following, EXCEPT:
The stage of the industry
Economies of scope occur when:
The total cost of producing two products is less than the sum of costs to produce them separately
Strategic planning process
Tool for decision-making •Neutralizes decision-making biases •Extends top management's leadership & power •Generates commitment from employees •Motivates the firm's systems of financial & operating control
Matrix organization structure
Useful when dimensions (e.g., functional & geographic) are equally importantProvides managers with a broader range of experienceBut can be too complex to manage (conflicting interests)
Information availability
Valuing and using information simply because it is favored, most recent, or readily available.
Myopia
Weighting short term over long term outcomes, controlling for a discount rate.
Which of the following is a useful question for competitor analysis?
What are the key macroeconomic forces that affect profits in the industry? What are the key industry forces (e.g., powerful buyers, strong substitutes...)? What new strategic initiatives and programs have key competitors developed, if any?
Geographic organizational structure
When there are stark differences across regionsBenefits may stem from access to: •Unique local competitors •Unique local suppliers •Unique local customer preferences - But potential conflicts between local and corporate management
value created
a firm's total economic contribution (value-cost)
Vertical integration and outsourcing decisions are always made for an
activity, not the final product
Which of the following are ways to estimate a customer's willingness to pay (value): I. Internal engineering (e.g, direct calculations) II. Customer perceptions (e.g., focus group interviews or surveys) III. Quantitative analysis of product attributes and purchase behavior IV. Conjoint analysis
all of the above
Which of the following represents the best example of complementary products?
an iPhone and the Netflix app
Most M&A activity fails because:
companies overestimate potential cost/value drivers •Companies overpay for the merger and acquisition -Companies underestimate post-M&A integration challenges
Capability development: Complementarity and consistency
complementarity of resources and or capabilities consistency (fit): fit of activities with firm's strategy. high consistency is good for firms using GENERIC strategies (differentiator or cost leader) in STABLE industries drawbacks: higher consistency means its harder to change the strategy
Why does a firm have an advantage when the difference V - C is bigger than its competitors?
consumer demand Q is an increasing function of [V-P]
control and coordination systems
control systems are financial and operational coordination systems determine how projects will be executed across units EX) standardized procedures, joint planning, liaison personnel
Mission setting
define the objective: "the what" definition of success is define the scope: "the where" to compete
Benefit of not being vertically integrated
efficiency, Firms can outsource to the most competitive supplier, price signals (Easy to track how much it would cost to add new features or expand production), New and innovative suppliers can more easily replace old and inefficient ones
Problem solving: double loop learning
extends the problem-solving process outside the problem or task domain and raises questions about the task parameters •(1)...; (2) Question operating norms; (3) change behavior •More important in rapidly-evolving industries •Effective strategy execution requires the ability to engage in both types of learning
Reward managers with:
firm level performance metrics (e.g., profitability, stock price increase) •Solves the alignment problem and reduces distortion •Increases problems of controllability and interdependency which increases noise•The reward system does not separate the active contributor from the free-rider
3 Stages of Industry Evolution
growth, shakeout, maturity
Maturity
indicator #1: declining market growth - customer switching from substitutes to industry's products becomes scarcer•Acquiring new customers becomes more costly•Retaining existing customers becomes crucial Indicator #2: Increased Buyer Experience - Experienced buyers have clear preferences & high knowledge of rival and substitute products: •When customers harder to retain, there's greater buyer power to defend, firms must improve value drivers to increase switching costs OR lower price indicator #3: Industry concentration - depends on 1. market size or 2. minimum efficient scale required to compete Indicator #4 Niche Markets: Small firms may thrive in low-volume niche markets that large firms are unable or unwilling to serve
Factors that affect firm profitability
macro-economic factors, industry factors, firm-specific factors
Competitve advantage is about
producing and protecting a larger gap between Value and Cost than rivals - the wider the gap between V-C, the stronger your market position (strong offense)
prevent imitation through
property rights, dedicated assets, causal ambiguity, sunk costs
Value drivers
technology, quality, customization, geography, risk assumption (warranties), complements, brand/reputation, breadth of line, service/delivery, network externalities
The following is an excerpt from the Wal-Mart case: "In the retail industry, an estimated 8% of the items that customers came to buy were out of stock, and one-third of all goods were sold at marketed-down prices. Up-to-the-minute information about supply and demand helped Wal-Mart reduce both stock-outs and overstocking... As of late 2002, Wal-Mart remained the only source of (close to) real-time retail data for a large community of suppliers. " A key element of Wal-Mart's sustainable competitive advantage was its investment in ___technology ____ called Retail Link, a ____Value driver _____, which provided suppliers with access to up-to-date inventory of their products on a store-to-store basis that prevented stock outs. Suppliers were required to use Retail Link, despite the substantial investments it required to implement. This represents the ____low/weak _____ supplier power of Wal-Mart's industry.
technology, value driver, low/weak
Function based structure
the activities of a firm are organized by function such as production, marketing, R&D etc. - lowers costs (standardized procedures, innovations specific to functions) - higher value (development of expertise in each function)
the value-cost framework
the distribution of economic contribution between a firm and a buyer
Which of the following represents a key benchmark for setting a firm's financial goals? Choose all that apply.
the firm's historical performance the current performance of competitors in the industry A combination of both the firm's historical performance and its competitors' current performance
Value (willingness to pay)
the price a buyer is willing to pay in the absence of a competing product and in the context of other purchasing opportunities - the buyer always determines the products value
Industry life cycle
there can be multiple product life cycles within the industry's life cycle
The cost of trying to develop a capability in less time than the original firm is called a ______________. An example includes Firm A trying (but failing) to imitate rival Firm B's strong brand image in half the time it took Firm B to build it by doubling Firm A's marketing expenditures.
time-compression diseconomy
Which of the following is not a general category for strategic initiatives?
top management compensation
Firms focusing on cost drivers often bear the challenge of being easily imitable.
true
Firms who achieve 'value innovation' effectively implement both differentiation and cost leadership.
true
Regardless of the presence of synergies, the target firm captures most of the created value (in terms of shareholder returns)
true
Buyer's surplus
value- price
Gucci family generational control represents
when family-controlled business starts to fail, these entities get socio-economical wealth, which leads to escalation of commitment (decision making bias)
Hypercompetiton
where increments to profits and capacity are low, even as firms repeatedly innovate.
