Strategic Management Exam

Should CEO's always invest in social responsibility?

Research has shown that as CEOs invest in corporate social responsibility they end up having to take a little bit more risk as if the firm does poorly financially, they are much more likely to be dismissed, whereas if they perform very well, then they are much less likely to be dismissed

Resource Based View

Resources can allow for a competitive advantage Two Types of Resources: Tangible (visible) Land, buildings, plants, equipment Labor Capital Intangible Culture Knowledge Brand equity Reputation Intellectual property

Business Model Types

Common Business Models: Razor-and-Blades Model Subscription Model Internet Model Razor-and-Blades Model Profit comes from repeat purchase (usually smaller and less expensive) Continuous source of revenue for sellers Subscription Model Customers pay a fee for access to a good or service Strategists can easily calculate costs via consumer subscriptions Sellers can reach consumers easily once a connection is already established Internet Model Brokerage: Buyers and sellers come together in an exchange, via a broker Advertising: Provides free content with advertising Infomediary: Provides a valuable product in exchange for more detailed buying information Merchant: Wholesalers and retailers Manufacturer: Producers approach customers directly via internet Affiliate: Sites partner by sharing revenue of click-throughs Utility: Pay-as-you-go usage rates

Corporate Advantage vs. Competitive Advantage

Competitive Advantage: The difference between a company's products' willingness to pay and their cost (a dollar amount) Corporate advantage: the ability of a firm to add value to its underlying businesses Can that head office provide value to those businesses How are we increasing that wedge such that each of the underlying businesses has an advantage over being their own independent firms

Competitive Advantage

Competitive advantage is the difference between Willingness to Pay and Cost We must compare this to the industry If it is greater than the industry average, then we have a successful competitive advantage. If not, then we do not have a competitive advantage Sources of competitive advantage: This is things such as "We have a differentiated product", which would then lead into willingness to pay Or, "we have the best manufacturing in the industry", which would lead into the cost

Competitive strategy

Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value (Michael Porter)

SWOT Analysis

Goal of SWOT analysis is to generate strategic alternatives and link them back hopefully to the analysis you have generated Strengths and Weaknesses are internal Opportunities and Threats are external

The field of strategic management deals with

(a) The major intended and emergent initiatives (b) taken by general managers on behalf of owners, (c) involving utilization of resources (d) to enhance performance (e) of firms (f) in their external environments

Testing the Quality of your Strategy

6 Questions to ask in testing the quality of your strategy 1. Does your strategy fit with what's going on in the environment? 2. Does your strategy exploit your key resources? 3. Will your envisioned differentiators be sustainable? 4. Are the elements of your strategy internally consistent? 5. Do you have enough resources to pursue this strategy? 6. Is your strategy implementable? Addressing Misconceptions about strategies: A strategy does NOT need to be static: it can evolve and be adjusted on an ongoing basis A strategy doesn't require a business to become rigid: it should build in flexibility A strategy doesn't deal only with an unknowable, distant future: a horizon of 2-5 years is appropriate

A Toolkit for Sustaining a Competitive Advantage

7 Mechanisms to Help Sustain a Competitive Advantage 1. Taste-based loyalty Allows market leaders to raise prices because rivals will find it more difficult to lure customers away 2. Uninformed Customers Lack of information Knowledgeable Customers: those that, for example, can name the ingredients in aspirin 3. Switching Costs Costs include Time Expense Hassle Can deliberately build switching costs into products/services 4. Network Costs Value of a product or service increases with the number of people using it 5. Learning Learning Curves: Companies get better at activities that they perform many times Based on cumulative output Can become a core competency 6. Economies of Scale Fixed costs spread out and limit new entrants Based on output Economies of Density Diseconomies of scale eventually limit this 7. Intellectual property rights Innovation alone doesn't lead to competitive advantage; it can be copied IPR can help: Patents (20 years), Copyright (automatic, 70 years after death), trademarks, and trade secrets

Strategic positioning

Strategic positioning is all about what it is that the firm does that makes the firm distinctive Important consideration is choosing what customers you are NOT going to serve Helps prevent you from trying to serve everybody

Tapered Integration

A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside-market firms for some of its suppliers and/or is forwardly integrated but also relies on outside market firms for some of its distribution

Activity systems

Activity systems come about because in strategy we recognize while we are choosing a strategic position in order for us to achieve that and deliver the value to our customers we have to have a set of activities that work together Tailored activities What are we doing different Most firms have very similar accounting departments Valuable resources Resources are there to provide a sustained competitive advantage, and the more we integrate these into activity system maps, the more valuable these resources will become Include the customer explicitly in the activities that they interact with to get you to think about what you are providing to that customer and what they are seeing so you can know where you need to monitor and where needs lots of consistency Same thing with activities, need to include on the diagram what we are NOT going to do as it allows us to be explicit about what we are going to do, and what we are NOT going to do Types of connections between activities and resources Fit Does this activity fit with this resource? Reinforce If an activity reinforces another activity, that is an even more strong connection, and we can signal this with two lines Optimization Highest level of connection is optimization, which we can use three lines to show When an activity is being performed, the other activity or resources is being optimized The more you can move your activities up to reinforcement and optimization, the better you will be

Industry

An industry is a set of incumbent firms that faces the same set of suppliers and same set of buyers Industry affects performance by about 10%, and that number continues to decline It is important to have strategy informed by the external environment/industry

Process of developing a strategy:

An intended strategy is going to come out from a lot of analysis, but we don't always realize the strategy that we intend We have unpredictable events and autonomous actions that lead to an emerging strategy The combination of the intended strategy and the emerging strategy becomes the realized strategy The realized strategy can be vastly different than we intended, so the more we can understand what the events that are unpredictable and design systems and structures to help autonomous actions reflect the intended strategy, so the intended strategy and emergent strategy combined to a realized strategy that is more inline with what we intended

Porter's Five Forces Analysis

Analysis that we do to understand the competitive forces within a particular industry Understanding the competitive forces and their underlying causes reveals the roots of an industry's current profitability while providing a framework for anticipating and influencing competition over time. Structured in a manner that all of the arrows are squeezing the profitability out of an industry In the middle, the more rivals, the less profitability as well

Five Major Elements of a Strategy:

Arenas Where will we be active? What business will we be in? Be as specific as possible about the product categories, market segments, geographic areas, and core technologies, as well as the value-adding stages the business intends to take on Vehicles How are we going to get there? The means for attaining the needed presence in a particular product category, market segments, geographic area, or value-creation stage Differentiators How will we win in the marketplace? Differentiators should be specific and well-thought out Examples of differentiators: image, customization, price, product-styling, after-sale services, etc. Could be focused on a cost leadership perspective, or a differentiated perspective Staging What will be our speed and sequence of moves? Staging factors are made driven by factors of: Available resources Urgency Achievement of credibility Pursuit of early wins Staging occurs as you can't do everything day one Economic logic How will we obtain our returns? Obvious element for a successful business

Balanced Scorecards

Balanced scorecards help us look at different activities and recognize what kind of strategic staging approach we need to take Four Perspectives 1. Financial Perspective If we have a goal to increase profitability, we could either decrease costs or increase revenue 2.Customer Perspective Moving back to customer perspective, we can increase revenues by increasing our brand image 3. Internal Perspective Moving back to Internal Perspective, to improve our brand image, we can improve our marketing To decrease our costs from Financial perspective, we may need to improve our best practices 4. Learning & Growth Perspective Moving back to learning and Growth Perspective, to increase Marketing, we may need to increase our learning about marketing Balanced Scorecards cascade The CEO is most likely going to have their own balanced scorecard Each person in the C Suite has their own scorecard If they are successful with their balanced scorecards, then they should start to roll up into success at the highest level (the CEO) Hopefully, by the time we get to the CEO, we have realized our strategy The metrics go down through the ranks, and hopefully the success will compound back up, to help us realize our strategy, and help us sustain a competitive advantage

Creating a Corporate Advantage

Better-off Test Are the companies better off together or are they not worth more together than they are separately Ownership Test Not every relationship needs to be an ownership relationship Just because it seems like they are better off together, it doesn't necessarily mean that they need to be owned together to gain that benefit Organizational Test Is the organization set up to take advantage of the opportunity of the businesses being together How to increase Overall Performance Alter its portfolio composition Improve the performance of the individual businesses independent of each other Improve the performance of the portfolio by exploiting linkages across individual businesses Reduce the cost of the corporate center

Blue Ocean Strategies

Blue Oceans: Untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth Red Oceans: Rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game Want to think about how you can use cost leadership or differentiation to move towards blue oceans A successful blue ocean strategy combines differentiation and cost-leadership activities and uses value innovation to reconcile the inherent trade-offs

Why do we study strategic management if it's so simple?

Business accounts for 80% of the economic development across the globe 10-20% of performance is determined by the CEO, and continues to increase over time

What is strategy NOT?

Strategy is NOT primarily about planning. It is about intentional, informed, and integrated choices More about selecting what the company is going to do and how it is going to go about doing it Such that the planning process later is more likely to be successful

Stakeholder perspective:

Delivering value to customers Investing in employees Dealing fairly and ethically with suppliers Supporting communities in which they work Generate long-term value for shareholders Explicitly recognizes that the firm needs to maximize value for shareholders as it can't survive without profits Long-term value for shareholders is emphasized, not the quarter by quarter results

Diversification

Diversification: An increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes Expanding the breath of the firm Single businesses: Offer very similar products or services, but don't always have the great performance Dominant Business: after they expand their offering to other similar products, they increase in their performance Related Diversification: There are multiple businesses with logical relatedness but there isn't any more of one dominant business, this is the sweet spot of multi-product businesses Unrelated Diversification: The conglomerate owns products that aren't related at all, and performance suffers as a result

Strategic Group Mapping

Exercise done after you've defined the industry and understand the forces that exist within that industry, then here, you are trying to understand where the competitors are positioned and where you want to be positioned going forward How to select the dimensions for your graph First, they need to be really important dimensions that the customer will be focused on (airlines have their number of routes served, and how much they charge per ticket) Want to select dimensions that provide differentiation Don't want to select dimensions that are collinear, as then the two dimensions are dependent on each other Want the other dimension to help better separate out competitors to help understand why the mobility barrier exists in another dimension When you notice a gap, it might be a mobility barrier A mobility barrier might make it difficult to move from one model to another model The activities chosen may be too embedded within the company, which create a foundation that makes it harder to move Important to recognize the mobility barriers

Fit

Fit drives both competitive advantage and sustainability Need to develop fit between the activities you are doing and the competitive advantage and sustainability you are striving for Ties all the parts of your business together Pros: The more tied together your business is, the harder it is to copy Cons: If you start to fail, then it is linked to all the activities around it and will domino

PESTLE-(H?)

Framework used if you are developing a strategy and looking at the external environment, this is the place you want to start, before you even start with the industry or define what the industry is, need to take these things into consideration for their current state, and also their future state such that the strategy you are developing today will be applicable and appropriate going forward P - Political E - Economic S - Sociocultural T - Technological L - Legal E - Ecological H - Health

Value Innovation

How can we reduce costs while still trying to increase the perceived consumer benefits 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 in Perceived Consumer Benefits Create. Which factors should be created that the industry has never offered? Raise. Which of the factors should be raised well above the industry's standard? Big challenge is being "stuck in the middle" You have a bit of a differentiation, but you also have a bit of a cost leadership, which you just get stuck in the middle, and it's really really hard If you realize you are stuck in the middle, you need to shift either to a blue ocean strategy, a cost leadership strategy, or a differentiation strategy after taking a pause

Productivity Frontiers

How they are used to determine if a company is built on strategic position or operational effectiveness When people think about strategies, they think about how they can improve their operations All competitors start to converge on one benchmark Leads to challenges on how you can compete as you stop becoming differentiated Instead, want to choose where you want to be on the curve, then work towards the state of best practice without falling into the trap of trying to benchmark like everyone else where they are converging Overtime the frontier moves outward, which you can also follow is through operational effectiveness Want to always be on the frontier

Isolating Mechanisms

Isolating mechanisms Path dependence When you go through a long path to get to your competitive advantage, and anyone else who wants to copy you also has to go through that long path Causal ambiguity When no one knows exactly why it works from the outside, but it works and provides a competitive advantage Social complexity Sometimes the people around a particular resource can act interact in a complex way that makes it hard to imitate Intellectual property protection Using a government patent to protect your competitive advantage

Industry Lifecycles

It is important to understand where an industry is in its lifecycle

Shareholder perspective:

Milton Friedman states "The social responsibility of business is to increase its profits" The purpose of a firm is to generate returns to its owners Maximize shareholder value Shareholders can choose what to do with their portion of the profits It's not that stakeholders don't matter, you just need to choose to help stakeholders that will drive maximizing shareholder value

Core Competencies

Must consider core competencies to understand how we can generate a sustained competitive advantage Core competencies are the unique strengths, embedded deep within a firm that drive competitive advantage Inside the firm we must consider Core Competencies, Resources, and Capabilities Core competencies allow us to do activities better, differently, or different sets of activities than our competitors They then help drive the competitive advantage, which hopefully leads to superior firm performance The superior firm performance hopefully then allows the firm to better reinvest, hone, and upgrade its resources to then further reinforce core competencies Similarly, the superior firm performance hopefully then allows the firm to reinvest, hone, and upgrade its capabilities to further orchestrate core competencies 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

Transaction Cost Economics

Overall, Transaction Cost Economics helps understand whether you should produce a product or service internally, or if you should go out onto the market to obtain that product or service Helps understand where the boundaries of a business should be Going out into the market to find a particular product or service can have external transaction costs This can lock you into relationships with other companies which can lead to increasing prices At a certain point, the internal transaction costs become cheaper than external transaction costs, which then you should bring the activity into your own company There are benefits too, such as owning the manufacturing, which helps you have more control

Value Chain Analysis

Overall, we want to assess what we are doing and what we aren't doing to determine how they influence the willingness to pay and the cost, so we can tell how it impacts our competitive advantage The value chain is one way that you to try to understand how the activities exist within the ecosystem of your company Allows you to focus in and make sure you aren't missing out on any areas within your company At the bottom, we maintain the primary activities which are value adding activities that direct go into the product Secondary activities are those that support the primary activities, but don't add on or add to the products being sold

Vertical Integration

Owning production of the needed inputs or the channels for the distribution of outputs Vertical integration should only be implemented if it will ADD VALUE to the company At times you can step forward towards the customer (down stream), or back to the resources (up stream)

Pipelines and Platforms

Pipeline businesses: Follow the value chain model by controlling a linear series of activities Connects the producers to the customer through a value chain Platform Businesses: Designed to bring together producers and consumers, through information and interaction Brings producers and consumers together Platform Owners: Controller and arbiter of the platform (Google providing google play store) Platform Providers: Interfaces for the platform (Android Phone Producers)

How do businesses fit into social problems?

Profit could be a self-sustaining solution to social problems (Michael Porter)

Creating Strategy Statements

Required Elements of a Strategy Statement: Objective (ends) Scope (domain) Advantage (means) Strategy Statement should be capped at 35 WORDS!

Shifting from Pipeline to Platform

Shifting from Pipeline to Platform 1. Resource control to resource orchestration 2. Internal optimization to external interaction 3. Focus on customer value to ecosystem value

Strategy

The central, integrated, externally oriented concept of how a firm will achieve its objectives

Trade offs

Trade offs are necessary Trade off between cost and differentiation Some firms try to do both, but it doesn't do well as the firms image or reputation is tied to one not both, and there will always be trade offs due to the different activities and image

VRIO Framework

VRIO Framework Two Key Assumptions Resource Heterogenity Not all firms have the same resources or access to the same resources Resource Immobility Resources tend to be sticky and are difficult to sell, such as culture Isolating mechanisms: Path dependence When you go through a long path to get to your competitive advantage, and anyone else who wants to copy you also has to go through that long path Causal ambiguity When no one knows exactly why it works from the outside, but it works and provides a competitive advantage Social complexity Sometimes the people around a particular resource can act interact in a complex way that makes it hard to imitate Intellectual property protection Using a government patent to protect your competitive advantage

Value Creation & Distribution

Value creation is the difference between willingness to pay and the supplier opportunity cost The greater this difference, the more value thats able to be distributed amongst the three groups A portion goes to the customer, a portion goes to the focal firm, and a portion to the supplier

Industry Structures

We see industries range from fragmented to consolidated When it is a single firm, it is a monopoly, which isn't good as then they have lots of pricing power Sometimes the government will grant a monopoly such as a power company as it just otherwise doesn't work if there are multiple players in the industry On the fragmented side, it is perfect competition, which it doesn't matter who you are buying from as it is all the same product With 2-3 firms, it is an oligopoly, where the compete on differentiation, but try not to compete on price Monopolistic competition is not entirely fragmented, where they provide different products and there is enough space for all of them to compete, and they also can compete on price leadership

Strategy Statements

We want our strategy statements to be grounded in the sweet spot of our customer needs and company capabilities

Value Proposition

We want to use value proposition to analyze if the strategies we are doing, and the resources we have, are they supporting whatever position that we have chosen to take

Profit pool

When a profit pool is developed, you end up recognizing each share of revenue, and see what the average level of revenue is Want to see where we are competing, and where we have high levels of revenue Uses: Recognize the connections between different profit pools Recognize where the profitability is in terms of the revenue share of the industry Helps contextualize both our profitability and the profitability of our competitors

Business- versus Corporate-Level Strategy

When we take a look at corporate level strategies, you typically look at the headquarters of the company When you look at business level strategies, you typically look at the individual business units within the corporation Within each business, what are the set of activities and resources that we have to drive a competitive advantage within the industry that it is competing Thinking about competitive advantage within an industry For corporate level strategies, you think about what are the businesses that you want to be in or don't want to be in Do we want to diversify? Do we want to vertically integrate? Where geographically do we want to compete? Mostly centers around where do we want to operate and within what businesses