BUS479 CSU Exam 1
What managers do
- Operational Effectiveness (Today) - Like more structure and certainty - Managers do things right, while leaders do the right thing - Rarely are people good at managing and leading
What leaders do
- Strategic Change (future) - Trying to move an organization to a new place - Very comfortable with uncertainty - Managers do things right, while leaders do the right thing - Rarely are people good at managing and leading
A firm's strategy must:
-Build on its strengths -Remedy the weaknesses or work around them -Take advantage of the opportunities presented by the environment -Protect the firm from threats
CE: Bargaining power of the major stakeholders
-Buyers of the industry's product -Suppliers to the industry
Growth Stage: Attributes and Strategies
-Characterized by strong increases in sales -Attractive to potential competitors -Primary key to success is to build consumer preferences for specific brands Strategies: -Brand recognition -Differentiated products -Financial resources to support value-chain activities
Buyers threaten an industry by:
-Forcing down prices -Bargaining for higher quality or more services -Playing competitors against each other Includes EVERYTHING downstream in the industry's value chain-Includes ultimate consumer (e.g., retail customer)
Support Activity VCA :Procurement
-Function of purchasing inputs used in the firm's value chain -Procurement of raw material inputs -Development of collaborative "win-win" relationships with suppliers -Analysis and selection of alternate sources of inputs to minimize dependence on one supplier -Effective procedures to purchase advertising and media services -Ability to make proper lease versus buy decisions
GE: Technological Segment
-Genetic & Bio engineering -Emergence of Internet technology -Computer-aided design/computer-aided manufacturing systems (CAD/CAM) -Research in synthetic and exotic materials -Wireless communication -Nanotechnology -Artificial Intelligence
GE: Sociocultural Segment
-More women in the workforce -Dual-income families -Increase in temporary workers -Greater concern for healthy diets and physical fitness -Greater interest in the environment -Postponement of having children
Focus strategy
-Narrow product lines, buyer segments, or targeted geographic markets -Attain advantages through differentiation or cost leadership
The Threat of Substitute Products and Services
-Other products or services that can perform the same function as the industry's offerings -i.e., Meet customer needs-e.g., Videoconferencing - can replace need for business travel (potential substitute for airlines, hotels, etc.) -Substitutes limit the potential returns of an industry -Ceiling on the prices that firms in that industry can profitably charge -Price / performance ratio ('Value')
Exploiting the profit pool concept for competitive advantage
-Pattern of profit concentration is often very different from the pattern of revenue
Introduction Stage: Attributes and Strategies
-Products are unfamiliar to consumers -Market segments not well defined -Product features not clearly specified -Competition tends to be limited Strategies: -Develop product and get users to try it -Generate exposure so product becomes "standard"
Strategically valuable resources have five characteristics
1.They're difficult to copy 2.They depreciate slowly 3.Your company - not employees, suppliers, or customers - controls their value 4.They can't be easily substituted 5.They're superior to similar resources your competitors own
Life cycle of an industry
4 stages: Introduction-Growth-Maturity-Decline
Value to Consumer
= Gross benefit - all costs to buy product
Perceived Net Benefit
= Percieved Gross Benefit - User Costs - Transaction & Purchasing costs
Profit
= Price charged -Total cost -normal returns: average returns in a competitive market -economic rents (profit): above-normal returns, e.g., monopoly rents
Leg 3: Strategic Implementation - Actions
Allocate necessary resources -Design the organization to bring intended strategies into being successful
Incorporates short and long-term perspectives
Ambidexterity -The challenge managers face of both aligning resources to take advantage of existing product markets as well as proactively exploring new opportunities
How to attain an absolute cost advantage relative to competitors
Manage relationships throughout the entire value chain utilizing Integrated Tactics -Aggressive construction of efficient-scale facilities -Vigorous pursuit of cost reductions from experience -Tight cost and overhead control -Avoidance of marginal customer accounts -Cost minimization in all activities in the firm's value chain, such as R&D, service, sales force, and advertising
What a strategy should give you
-unique & valuable -create a good fit -sustainability
Value-Chain Analysis
Views organization as a sequential process of value-creating activities
Support Activity VCA: Human Resource Management
-Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel -Effective recruiting, development, and retention mechanisms for employees (A-S-A / A-S-R) -Quality relations with trade unions -Reward and incentive programs to motivate all employees -Quality work environment to maximize overall employee performance and minimize absenteeism
Coordinating the "extended" value chain by way of information technology
-Add-value by linking to the value-creating activities of suppliers and customers
Maturity Stage: Attributes and Strategies
-Aggregate industry demand slows -Market becomes saturated, few new adopters -Direct competition becomes predominant -Marginal competitors begin to exit Strategies: -Efficient manufacturing operations and process engineering -Low costs (customers become price sensitive)
GE: Demographic Segment
-Aging population -Rising or declining affluence -Changes in ethnic composition -Geographic distribution of population -Greater disparities in income levels
Industry Evolution
-All industries evolve over time as new firms enter and failing firms exit. -Industry evolution threatens all sources of competitive advantage. -The more a firm resists the forces of industry evolution, the less likely it is to survive. -Product life cycle --Linked closely to industry evolution --Cyclical --Drives industry development
An overall low-cost position
-Allows a firm to earn a profit even if competitors erode industry profits through intense rivalry -Buyers can only exert power to drive prices down to the level of the next most efficient producer
Primary Activity VCA: Outbound Logistics
-Associated with collecting, storing, and distributing the product or service to buyers -Effective shipping processes to provide quick delivery and minimize damages -Shipping of goods in large ('economically efficient') lot sizes to minimize transportation costs -Quality material handling equipment
Primary Activity VCA:Service
-Associated with providing service to enhance or maintain the value of the product -Effective use of procedures to solicit customer feedback and to act on information -Quick response to customer needs and emergencies -Quality of service personnel and ongoing training -Ability to furnish replacement parts -Effective management of parts and equipment inventory
Primary Activity VCA: Marketing and Sales
-Associated with purchases of products and services by end users and the inducements used to get them to make purchases -Proper identification of customer segments and needs -Innovative approaches to promotion and advertising -Effective pricing strategies -Warranty and guarantee policies -Selection of most appropriate distribution channels -Highly motivated and competent sales force
Primary Activity VCA: Inbound Logistics
-Associated with receiving, storing and distributing inputs to the product -Location of distribution facilities -Warehouse layout and designs -Material and inventory control systems (JIT) -Quality control (Inbound)Systems to reduce time to send "returns" to suppliers
Primary Activity VCA: Operations
-Associated with transforming inputs into the final product form -Efficient plant operations -Incorporation of appropriate process technology -Production quality control systems -Efficient plant layout and workflow design
Differentiation position
-Brand loyalty lowers customer sensitivity to price and raises customer switching costs reducing rivalry threat -Customer loyalty and firm's ability to provide uniqueness creates higher entry barriers -Customer loyalty reduces threat from substitutes -Lack of suitable alternative reduces buyer power -Higher margins enable the firm to deal with supplier power -Prestige associated with supplying highly differentiated products reduces supplier power
Types of Resources: Organizational Capabilities
-Collective of assets and competencies that a firm employs to transform inputs to outputs -An organization's ability to deploy both tangible and intangible resources over time, and an organization's ability to combine (synthesize) and leverage those resources to bring about a desired end -Examples: Outstanding customer service, Excellent product development capabilities, Innovativeness of products and services, Ability to hire, motivate, develop and retain people (A-S-R) -"Strategy is about combining activities" - Porter
Pitfalls of Focus Strategies
-Cost advantages within the narrow segment may be fleeting, eroded over time -Focused products and services are still subject to competition from new entrants and from imitation -Can become too focused, with too narrow a line of product or services, to satisfy buyer needs
Differentiation
-Create products and/or services that are unique and valued -Non-price attributes for which customers will pay a premium
Key Attributes of Strategic Management
-Directs the organization toward overall goals and objectives -Includes multiple stakeholders in decision making -Incorporates short and long-term perspectives -Recognizes trade-offs between efficiency and effectiveness
The Limitations of SWOT Analysis
-Existing strengths and capabilities may not lead to an advantage -View of the external environment may too narrow --e.g., current customers, products, competitors -Typically a one-shot (static) view of a moving target -Can overemphasize a single dimension of strategy
Dynamic Capabilities
-Experimentation or Exploration leads to innovation and development of new routines -"Effectiveness"
How to pursue Differentiation
-Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique -Successful differentiation requires integration with all parts of a firm's value chain -Must attain a level of cost parity relative to competitors -speed or quick response -Firms may differentiate along several dimensions at once
Pitfalls of Combination Strategies
-Firms that fail to attain both strategies may end up "stuck in the middle" -Miscalculating sources of revenue and profit pools in the firm's industry --Historic vs. future -Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain
Strengths of SWOT Analysis
-Forces managers to consider both internal and external factors simultaneously -Emphasis on identifying both opportunities and threats -Makes firms proactive rather than reactive -Raises awareness about the role of strategy in creating a match between environmental conditions and firm capabilities -Conceptual simplicity achieved without sacrificing analytical rigor
Combination Strategies: Integrating Overall Low Cost and Differentiation
-Goal of combination strategy is to provide unique value in an efficient manner -Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy
Blue Ocean Strategy
-Grounded in analysis•Energizing -Create new markets vs. compete in existing --Most companies focus on how to beat competition --Profit impact significantly higher creating new market space -Market-creating vs. Market-competing strategies -Value innovation --Customer value up --Cost down-Make competition irrelevant\
Firms that successfully integrate differentiation and cost strategies reap competitive advantages from both approaches
-High entry barriers -Bargaining power over suppliers -Reduces power of buyers (fewer competitors) -Value position reduces threat from substitute products -Reduces the possibility of head-to-head rivalry
Interacting factors leading to intense rivalry
-Highly fragmented (i.e., numerous competitors) or equally balanced competitors -Slow industry growth or declining growth -High fixed costs -Lack of either differentiation or switching costs -Capacity augmented in large increments -High exit barriers
Support Activity VCA: General Administration
-Includes planning, finance, accounting, legal and government affairs, quality management, and IS -Typically supports the entire value chain and not individual activities -Effective planning systems -Excellent relationships with diverse stakeholder groups -Effective information technology to integrate value-creating activities -Anticipate and act on environmental trends and events -Ability to obtain low-cost funds for capital expenditures and working capital -Highly visible to inculcate organizational culture, reputation, and values
GE: Global Segment
-Increasing global trade -Currency exchange rates -Emergence of the Indian and Chinese economies -Trade agreements (NAFTA, EU, ASEAN, TPP) -Creation of WTO (decreasing tariffs/free trade in services) -Pollution / global warming
Cost Drivers
-Independent of Firm Size -Related to Organization of Transactions and Routines
Decline Stage: Attributes and Strategies
-Industry-wide sales and profits begin to fall -Strategic options become dependent on the actions of rivals Strategies: -Maintaining: keeping a product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will eventually exit the market -Exiting the market -Harvesting: involves obtaining as much profit as possible and requires that costs be reduced quickly -Consolidation: market segments in a company or competitors in the industry merge in order to gain a larger market share and to take advantage of synergies
Stuff Happens
-Intended Strategy --> Deliberate Strategy --> Realized Strategy -Intended Strategy --> Unrealized Strategy --> Emergent Strategy --> Realized Strategy
GE: Economic Segment
-Interest rates -Unemployment -Consumer Price index -Trends in GDP -Changes in stock market valuations
Two Levels of Interrelationships within and across organizations
-Interrelationships among activities within the firm -Relationships among activities within the firm and with others in the industry value chain (e.g., customers and suppliers) To get the most out of Value-Chain Analysis, place organization within a more encompassing value chain ... include suppliers, customers, alliance partners
A buyer group is powerful when:
-It is concentrated or purchases large volumes relative to seller sales -The products it purchases from the industry are standard or undifferentiated-It earns low profits -The buyers pose a credible threat of backward integration -The industry's product is unimportant to the quality of the buyer's products or services -The buyer faces few switching costs
The Intensity of Rivalry among Competitors in an Industry
-Jockeying for position -Price competition -Advertising battles -Product introductions (both new and extensions) -Increased customer service or warranties -Interacting factors lead to intense rivalry
Recognizes trade-offs between efficiency and effectiveness
-Leaders must be proactive and anticipate change, with an eye toward refining their strategies -Strategic MGT must become both a process and a way of thinking throughout the organization -Three legs of Strategic MGT
General Environment of a Firm trends and events
-Little ability to predict them -Even less ability to control them -Impact can vary across industries
Overall cost leadership
-Low-cost-position relative to a firm's peers -Manage relationships throughout the entire value chain
Automated and flexible manufacturing systems
-Mass Customization: the manufacture of unique products in relatively small quantities at lower costs
Organizational Vision
-Massively inspiring -Represents a destination that is driven by and evokes passion -Fundamental statement of the organizations: --Aspiration --Values
The Threat of New Entrants
-Profits of established firms in the industry may be eroded by new competitors -High entry barriers lead to low threat of new entries -Economies of scale -Product differentiation -Capital requirements -Customer switching costs (typically one-time)-Access to distribution channels -Cost disadvantages independent of scale; e.g., --Favorable access to raw materials --Government policies -Ability to Counterattack
Successful managers must:
-Recognize opportunities and threats in their firm's external environment --i.e., be aware of what's going on outside their company -Continually question assumptions --"every manager carries around a set of biases, assumptions, and presuppositions" (Hamel & Prahalad, 1994) ---Industry structure ---How one makes money in the industry ---Who the competitors are, and how they compete ---Customers
Cost Drivers emerge from a variety of sources:
-Related to Firm Size: economies of scale (economies refer to the quantity of a given product), economies of scope (the number of products that use the same resources), economies of density, capacity utilization -Related to Cumulative Experience: learning curve
Support Activity VCA: Technology Development
-Related to a wide range of activities and those embodied in processes and equipment and the product itself -Effective R&D activities for process and product initiatives -Excellent professional qualifications of personnel -Culture to enhance creativity and innovation -State-of-the art facilities and equipment -Positive collaborative relationships between R&D and other departments -Ability to meet critical deadlines ... deliver on commitments
Static Capabilities
-Replication of routines leads to exploitation of current abilities or capabilities -"Efficiency"
Summary: Competitive Advantage
-Resources are the building blocks: assets, technology, business model, product designs, know-how, structures etc. -Capabilities combine resources to create value -Organizational routines: Are the elements of organizational capabilities --Routines process goods and information to create (or destroy) value --Repetition enhances efficiency --Core Rigidities inhibit adaptation
CE: Threats from
-Rival firms -Potential entrants to the industry -Substitute products
What constitutes a firm's industry?
-Similar products or services -Similar customers -Similar methods for operations -Similar value propositions
Strategic objectives Examples
-Specific and Measurable -Defined time-frame -Challenging but also Realistic -Resolve conflicts that arise -Yardstick for rewards and incentives
Three Legs of Strategic Management
-Strategic Analysis -Strategic Formulation (Decisions) -Strategic Implementation (Actions)
Porter's Five Forces of Industry Competition
-Suppliers + Buyers -New Entrants + Substitutes -In the middle is rivalry among competitors
Determinants of Price
-Supply and Demand -Market Structure (bargaining power) -Government Regulations -Willingness-to pay (WTP)
Value
-The amount that buyers are willing to pay (WTP) for what a firm provides them --Value is measured by total revenue (price x quantity) -Firm is profitable to the extent that the value it receives exceeds the total ('all-in') costs involved in creating its product or service
Managers need to analyze:
-The general environment -The firm's industry and competitive environment Generally, firms compete with other firms in the same industry
A supplier group will be powerful when
-The supplier group is dominated by a few companies and is more concentrated than the industry it sells to -The supplier group is not obliged to contend with substitute products for sale to the industry -The industry is not an important customer of the supplier group -The supplier's product is an important input to the buyer's business -The supplier group's products are differentiated or it has built up switching costs for the buyer -The supplier group poses a credible threat of forward integration
Pitfalls of Overall Cost Leadership Strategies
-Too much focus on one or a few value-chain activities -All rivals share a common input or raw material -The strategy is imitated too easily -A lack of parity on differentiation (of importance to customers) -Erosion of cost advantages when the pricing information available to customers increases
Suppliers can exert power by
-threatening to raise prices -threatening to reduce the quality of purchased goods and services -threatening to reduce the quantity of purchased goods and services Includes EVERYTHING upstream in the industry's value chain Includes raw material producer (e.g., coal mining if fuel used for power generation)
Fundamental to Strategic Management:
-understanding why/how firms outperform others ̅ -How to create competitive value in the marketplace ̅-How to create competitive advantages in the market place --Unique and valuable --Difficult for competitors to copy or substitute
GE: Political / Legal Segment
-Tort reform -Americans with Disabilities Act (ADA) -Repeal of Glass-Steagall Act in 1999 -(De)regulation of utility and other industries -Increases in federally mandated minimum wages -Taxation at local, state, federal levels (VAT) -Tariff Barriers -Sarbanes-Oxley Act (corporate governance) -Immigration policy -Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 -The Patient Protection and Affordable Care Act & The Health Care and Education Reconciliation Act of 2010
Hold-up problem
-Two parties (e.g., supplier and manufacturer) refrain from working cooperatively -due to concerns that they may give the other party increased bargaining power, and thereby reduce their own profits
Pitfalls of Differentiation Strategies
-Uniqueness that is not valuable -Too much differentiation -Too high a price premium -Differentiation that is easily imitated -Dilution of brand identification through product-line extensions -Perceptions of differentiation may vary between buyers and sellers (provider of product or service)
Strategic management starter questions
-Used for analyzing organizational goals and objectives 1.Has the company developed short-term objectives that are inconsistent with its long-term mission? 2.Has the company considered all of its stakeholders equally in making critical decisions?
Support activities VCA
-activities of the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities
Sustainable Competitive Advantage requires all four
-competitive disadvantage: Not rare, valuable, inimitable or non-substitutable -competitive parity: yes valuable but all else not there -Temporary competitive advantage: Rare and valuable but not others -Sustainable Competitive Advantage: all four
Primary activities of VCA
-contribute to the physical creation of the product or service, its sale and transfer to the buyer, and its service after the sale -Inbound logistics, Operations, Outbound logistics, Marketing and sales, Service
Competitive environment
-factors that pertain to an industry and affect a firm's strategies -Competitors, customers, and suppliers
Attaining Absolute Cost Advantage: Experience curve
-refers to how business "learns" to lower costs as it gains experience with production processes -with experience, unit costs of production decline as output increases in most industries
Strategy is different from tactics
-tactics are immediate (short term) actions utilizing resources at hand -strategies develop future capabilities in order to exploit opportunities and/or ward off threats
Three key principles underlying strategic positioning
-the creation of a unique and valuable position, involving a different set of activities (Serving few needs of many customers, broad needs of few customers, broad needs of many customers) -Strategy requires one to make trade-offs in competing - to consciously choose what not to do -Strategy involves creating "fit" among a company's activities
sixth competitive force: complementary products
-those that a consumer needs in order to use your product or service. --For example-A computer needs software (and vice versa)-A car needs fuel and oil-A DVD player needs movies and music recorded on DVDs -The suppliers of complements create value for the industry and can exercise bargaining power
Leadership Process
1. Where to go (strategy) 2. Get there effectively and efficiently (Operational Effectiveness) 3) Assemble the capabilities that allow organization to realize 1&2 (Attraction, S, Retention (ASR) and Dynamic Capabilities)
A firm following an overall cost leadership position must attain:
1.An absolute cost advantage relative to competitors 2."Competitive parity" (at a minimum) on important dimensions of differentiation relative to competitors -Permits a cost leader to translate cost advantages directly into higher profits than competitors -Allows firm to earn above-average profits
Three Combination Approaches
1.Automated and flexible manufacturing systems 2.Exploiting the profit pool concept for competitive advantage 3.Coordinating the "extended" value chain by way of information technology
Industry Structure: 4 key Factors
1.Bargaining power of the major stakeholders 2.Threats 3.Barriers preventing entry into the industry 4.Barriers hindering exit from the industry
Business-Level Strategy addresses two related issues
1.How do firms compete with each other? 2.How do firms attain a competitive advantage and, once attained, how do they sustain it?
Strategic objectives
A set of organizational goals that are used to operationalize the mission statement and that are specific and cover a well-defined time frame -Provide guidance on how the organization can fulfill or move toward the "higher goals"
RBV Internal Analysis
A single resources, by itself, does not typically yield a competitive advantage -Competitive advantage is created, and sustained, through the bundling of several resources into unique and value-adding combinations
SWOT Analysis
Basic technique for analyzing firm/industry conditions -Strengths/Weaknesses (Internal) -Opportunities/Threats (External)
Routines as Capabilities
Capabilities are collections of inter-connected routines, including skills, processes, procedures, practices, etc. -Nested Routines (Vertical): Organizational Policies, Department Procedures, Job description, Task Specification -Linked Routines (Horizontal): Purchasing, Accounting, Payment
Avoidant Performance Goal Orientation (APGO)
Centered on the goal of avoiding failure and negative judgment from others
Are "best practices" strategy?
Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient in creating a unique and valuable position
Prove Performance Goal Orientation (PPGO)
Demonstrating performance to prove competence
Intangible Resources
Difficult for competitors (and a firm's own managers) to account for or imitate, Typically embedded in unique routines and practices that have evolved over time-i.e., path dependent -Some aspects of Culture (e.g., learning organization) -Human capital: Experience and capabilities of employees, Managerial skills, Firm-specific practices and procedures-Informal / social networks -Innovation and creativity: Technical and scientific "know how"-Innovation capacities -Reputation ('Goodwill') / Legitimacy: Brand name, Reputation with customers and suppliers
Goal of Strategy
Economic rents -income in excess of what is necessary to bring a factor of production (e.g., asset, resource) into use
T/F: Focus, by itself, often constitutes a competitive advantage.
False: A focus strategy is based on the choice of a narrow competitive scope within an industry. A firm following this strategy selects a segment or group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche. As you might expect, narrow focus itself (like merely "being different" as a differentiator) is simply not sufficient for above-average performance.
T/F: The concept of "shared value" redefines the purpose of the corporation as creating shared value in order to create a more even distribution of the profits to all employees, not just top-level executives.
False: Shared value can be defined as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in which it operates. It is not about personal values, nor "sharing" the value created by firms, a redistribution approach. Instead, it is about expanding the total pool of economic and social value. Creating shared value operates on three levels: (1) Reconceiving products and Markets to meet societal needs through products and addressing unserved or underserved customers; (2) Redefining Productivity in the Value Chain to embrace practices that drive productivity through better utilizing resources, employees, and business partners, and; (3) Enabling Local Cluster Development by improving the available skills, supplier base, and supporting institutions in the communities where a company operates to boost productivity, innovation, and growth.
T/F: The power of a buyer group is increased if the buyer group has less concentration than the supplier group.
False: A buyer group is powerful when it is concentrated or purchases large volumes relative to seller sales. If a large percentage of a supplier's sales are purchased by a single buyer, the importance of the buyer's business to the supplier increases.
T/F: Supplier power tends to be highest in industries with all of the following attributes: (1) the supplier's product is vital to buyers; (2) switching from one supplier to another is very costly, and; (3) there are many suppliers.
False: A supplier group will be powerful when the supplier group is dominated by a few companies, the supplier's product is an important input to the buyer's business, or the supplier has built up switching costs for the buyer.
Threat of substitute products comes from
Firms in other industries that produce products or services that satisfy the same customer need
Which statement regarding competitive advantages is true? -Attaining multiple types of competitive advantage is a recipe for failure. -In the long run, a business with one or more competitive advantages is probably destined to earn normal profits. Correct! -If several competitors pursue similar differentiation tactics, they may all be perceived as equals in the mind of the consumer. -With an overall cost leadership strategy, firms need not be concerned with parity on differentiation.
If several competitors pursue similar differentiation tactics, they may all be perceived as equals in the mind of the consumer. -Potential pitfalls of a differentiation strategy include the idea that perceptions of differentiation may vary between buyers and sellers. The issue here is that "beauty is in the eye of the beholder." Companies must realize that although they may perceive their products and services as differentiated, their customers may view them as commodities.
Resource-Based View of the Firm: Two Perspectives
Internal analysis & External Analysis
Leg 1: Strategic Analysis - Analyses
Internal environment of the firm -Resources and capabilities External environment of the firm -Industry, economy, society
Strategy involves creating "fit" among a company's activities
Mutually reinforcing activities cannot be easily imitated
Leg 2: Strategic formulation - Decisions
On what basis will we compete? -What is our customer value proposition -What will be our competitive advantages?
Convincing rivals not to enter a price war, protection from customer pressure to lower prices, and the ability to better withstand cost increases from suppliers characterize which type of competitive strategy?
Overall cost leadership. -An overall low-cost position enables a firm to achieve above-average returns despite strong competition. It protects a firm against rivalry from competitors because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry. It also protects firms against powerful buyers, who can only drive down prices to the level of the next most efficient producer. Also, a low-cost position provides more flexibility to cope with supplier demands for input cost increases.
Resource-Based View of the Firm (RBV)
Perspective that firms' competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute.
Value Chain
Physical Transformation -Extraction (Raw Materials) -> Fabrication (Component Parts) -> Assembly (Final Product) -> Distribution (Location)
Tangible Resources
Relatively easy to identify, and include physical and financial assets used to create value for customers -Financial resources: Firm's cash accounts, Firm's capacity to raise equity, Firm's borrowing capacity -Physical resources: Modern plant and facilities, Favorable manufacturing locations, State-of-the-art machinery and equipment -Technological resources: Trade secrets, Innovative production processes, Patents, copyrights, trademarks -Organizational resources: Effective strategic planning processes, Excellent evaluation and control systems
Mission statement
Set of goals that include both the purpose of the organization, its scope of operations, and the basis of its competitive advantage -More specific than vision ... Sharpens the business focus -Focused on the means by which the firm will compete -Has the greatest impact when it reflects an organization's enduring, overarching strategic priorities and competitive positioning
Economies of Scale:
Situation where a firm can decrease the average cost per unit by increasing the total output -Sources of scale economies: Technical input-to-output ratio, Indivisibilities (discrete, minimum thresholds / size), Specialization allowing for mass production -Limits to scale economies: Product differentiation can lead to small batches, Flexibility can limit efficiency, Motivation and coordination problems
Includes multiple stakeholders in decision making
Stakeholder symbiosis view -Stakeholders are dependent upon each other for their success and well-being -Mutual benefits
Capabilities:
Static and Dynamic -Current routines guide the development of future routines (i.e., path dependent)
Strategy vs. Strategic Management
Strategy: Means through which firms intend to accomplish mission and objectives (where and how)- -Not a detailed plan ... sets direction ... --Mission Statement•Strategic Objectives --"More what you'd call 'guidelines' than actual rules" Strategic Management: Management process aimed at realizing the strategy ... On going -Strategic Analysis ... Analyses -Strategic Formulation ... Decisions -Strategic Implementation ... Actions
RBV External Analysis
The ability of a firm's resources to confer competitive advantage(s) cannot be determined without also considering the broader competitive context
The income (salary plus bonus) of a recent CSU COB graduate employed by Firm XYZ is higher than her/his colleagues; i.e., s/he captures a proportionately high level of the Firm XYZ's profits. Which of the following factors is the best explanation for why this might be?
The cost to the firm of replacing her/him is high -Several factors help explain the extent to which employees and managers will be able to capture a proportionately high level of the profits, including if they generate high employee replacement costs. If employees' skills are idiosyncratic and rare (a source of resource-based advantages), they should have high bargaining power based on the high cost required by the firm to replace them.
Strategy
The creation of a unique and valuable position, involving a different set of activities
The General Environment of a Firm
The firms industry and competitive environment: -Generally firms compete with other firms in the same industry -Competitive environment: factors that pertain to an industry
Hierarchy of Strategic Goals
Vision (Top, More general, Long Time horizon) → Mission Statement → Strategic Objectives (Bottom, More specific, Short(er) time horizon)
T/F: The more attractive the price/performance ratio of substitute products, the more tightly it constraints an industry's ability to charge high prices.
True: Substitutes limit the potential returns of an industry by placing a ceiling on the prices that firms in that industry can profitably charge. The more attractive the price/performance ratio of substitute products, the tighter the lid on an industry's profits.
T/F: As markets mature, the magnitude of differentiation and cost leadership advantages among competitors decrease.
True: In the mature stage, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. It also becomes more difficult for firms to differentiate their offerings because users have a greater understanding of products and services.
T/F: An important advantage of first movers or "pioneers" in a market is that they may establish brand recognition that may later serve as an important switching cost.
True: There's an advantage to being the "first mover" in a market. It led to Coca-Cola's success in becoming the first soft-drink company to build a recognizable global brand and enabled Caterpillar to get a lock on overseas sales channels and service capabilities.
T/F: The same environmental trend can often have very different effects on firms within the same industry.
True: An example would be the rising levels of affluence in many developed countries. This bodes well across the board for brokerage services as well as for upscale pets and supplies. However, this trend may adversely affect fast-food restaurants and economy motels more than fancy bistros and luxury hotels because people can afford to dine and stay at these higher-priced establishments.
T/F: "Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient."
True: Operational effectiveness, performing similar activities as well or better than rivals, is not a strategy. enough to create a unique and valuable position, involving a different set of activities. Strategy involves the creation of a unique and valuable position, involving a different set of activities
Hold-Up Problem
Two parties (e.g., supplier and manufacturer) refrain from working cooperatively ...
Business harbors:
a responsibility to create value for society -Businesses and institutions get their license for being from society and therefore harbor a responsibility to contribute to society -Ultimately, a healthy society creates expanding demand for business, as more human needs are met and aspirations grow
Turnaround strategy
a strategy that reverses a firm's decline in performance and returns it to growth and profitability -Asset and cost surgery -Selective product and market pruning -Piecemeal productivity improvements
The primary aim of strategic management at the business level is
achieving competitive advantage(s). -How firms compete with each other and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes why some firms outperform others and enjoy such advantages over time.
Goal Orientation
behavioral tendencies in achievement-oriented tasks
Unique bundling of resources
can lead to sustainable competitive advantage -Typical Restaurant: Order, Cook, Deliver, Eat, Pay -McDonalds: Cook, Order, Pay, Deliver, Eat
Strategic management
consists of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages
Many organizations have a large number of functional areas with very diverse, and sometimes competing, interests. Such organizations will be most effective if:
functional areas work together to attain overall goals -Strategic management requires managers to take an integrative view of the organization and assess how all of the functional areas and activities fit together to help an organization achieve its goals and objectives. This cannot be accomplished if only the top managers in the organization take an integrative, strategic perspective of issues facing the firm and everyone else "fends for themselves" in their independent, isolated functional areas. Instead, people throughout the organization must strive toward overall goals.
The experience curve suggests that cutting prices is a good strategy
if it can induce greater demand and thereby help a firm progress down the experience curve faster. -A product's sensitivity to price strongly affects a firm's ability to exploit the experience curve. Cutting the price of a product with high demand elasticity, where demand increases when price decreases, rapidly create consumer purchases of the new product. So by decreasing price and increasing demand, a firm gains manufacturing experience in that particular product, which drives down per unit production costs.
Learning Goal Orientation (LGO)
individuals seek to develop their competence by acquiring new skills and mastering new situations
In the __________ stage of the industry life cycle, the emphasis on product design is very high, the intensity of competition is low, and the market growth rate is low.
introduction -products are unfamiliar to consumers. Market segments are not well defined, and product features are not clearly specified. The early development of an industry typically involves low sales growth, rapid technological change, operating losses, and the need for strong sources of cash to finance operations. Since there are few players and not much growth, competition tends to be limited.
Evidence-based management
involves harnessing systematic research and translating it into organizational practices
Value proposition
promise of value to be delivered and customer expectation of value to be received
Differentiation can take many forms
that are perceived as unique and valuable by a broad range of customers -Features, Innovation, Technology, Prestige or brand image-Customer service, Dealer network
All of the following are important elements of the political/legal segment of the general environment EXCEPT -the deregulation of utilities -the Americans with Disabilities Act (ADA) -the increased use of Internet technology -increases in the federally mandated minimum wage
the increased use of Internet technology -Political processes and legislation influence environmental regulations with which industries must comply. Some elements of the political/legal arena include the Americans with Disabilities Act (ADA) of 1990, deregulation of utilities, and increases in the federally mandated minimum wage.
As markets mature:
there is increasing emphasis on efficiency -In the maturity stage of the industry life cycle, advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive.
Strategic management must become both a process and a way of thinking:
throughout the organization -To develop and mobilize people and other assets, leaders are needed throughout the organization. No longer can organizations be effective if the top "does the thinking" and the rest of the organization "does the work." Everyone must be involved in the strategic management process.
Purpose of strategy
to achieve and maintain superior performance
Strategy requires one to make trade-offs in competing:
to consciously choose what not to do -Some activities are incompatible, thus, gains in one area achieved at expense of another
Factors external to an industry
usually beyond a firm's control -Demographic -Sociocultural -Legal / Political -Technological -Economic -Global
Basis of strategy is:
value delivery -strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation
Low profit industries can still:
yield high returns for players with sound strategies
Implicitly assumes a:
zero-sum game: determining how a firm can enhance its position relative to the forces -Doesn't have to be ... "A rising tide floats all boats"