MGMT 680 Final

Steps to driving the wedge

1) Catalog activities (the value chain) 2) Use activities to analyze relative costs 3)Use activities to Analyse relative willingness to pay 4) Explore options and make choices

Three steps to practice strategic CSR

1) Identify points of intersection between your company and society 2)Select social issues to address 3) Mount a small number of initiatives that generate large and distinctive benefits for society and your company

steps to translate the principles of corporate strategy into successful diversification

1) Identifying the interrelationships among already existing business units 2) Selecting the core business that will be the foundation of the corporate strategy 3) Creating horizontal organizational mechanisms to facilitate interrelationships among the core businesses and lay the groundwork for future related diversification 4) Pursuing diversification opportunities that allow shared activities 5) Pursuing diversification through the transfer of skills if opportunities for sharing activities are limited or exhausted 6) Pursuing a strategy of restructuring if this fits the skills of management of no good opportunities exist for forging corporate interrelationships 7) Paying dividends so that shareholders can be the portfolio managers

The RBV helps us understand why the track record of corporate diversification has been so poor and identifies three common and costly strategic errors companies make when they try to grow by leveraging resources

1) Managers tend to overestimate the transferability of specific assets and capabilities 2) Managers overestimate their ability to compete in highly profitable industries. 3) managers assume that leveraging generic resources will be a major source of competitive advantage in a new market regardless of the specific competitive dynamics of that market.

3 key principles underlie strategic positioning

1) Strategy is the creation of a unique and valuable position, involving a different set of activities 2) Strategy requires you to make trade-offs in competing - to choose what not to do. 3) Strategy involves creating "fit among a companies activities.

7 major sources of barriers to entry

1) Supply side economies of scale 2) Demand side economies of scale 3) Customer switching costs 4) Capital requirements 5) Incumbency advantages independent of size 6) Unequal access to distribution channels 7) Restrictive government policy

Many firms corporate social responsibility (CSR) efforts are counterproductive for 2 reasons.

1) They pit business against society, when the two are actually interdependent. 2) They pressure companies to think of CSR in generic ways, instead of crafting social initatives appropriate to their individual strategies.

3 questions to ask when predicting a competitor's reaction

1) Will your competitors react at all? 2) What options will a competitor actively consider? 3) Which option will a competitor most likely choose?

four concepts of corporate strategy

1) portfolio management 2) restructuring 3) transferring skills 4) sharing activities

Three ways to compete based on the 5 forces

1) position your company where the forces are the weakest 2) Exploit changes in the forces 3) Reshape the forces in your favor

Two basic ways a firm can establish a competitive advantage

1) raise a customers willingness to pay without incurring an increase in supplier opportunity cost 2) Reduce supplier opportunity cost without sacrificing willingness to pay.

5 forces

1) rivalry among existing competitors 2) threat of entry 3) substitutes 4) Bargaining power of suppliers 5) Bargaining power of buyers

Strategic position emerges from 3 distinct sources

1) serving few needs of many customers (Jiffy Lube) 2) serving broad needs of few customers 3) serving broad needs of many customers in a narrow market (Carmike Cinemas)

3 tests to determine if diversification will truly create shareholder value

1) the attractiveness test 2) the cost-of-entry test 3) the better-off test

The ability to generate and capture profits in an industry derives from added value. A

A firm has added value when the network of customers, suppliers, and complementors in which it operates is better off with the firm than without it. The firm offers something that is unique in the marketplace

A firm with a wider wedge has a competitive advantage in the industry

A firm with a competitive advantage has added value and therefor has potential for profit.

To have added value a firm must drive a wedge between customer willingness to pay and supplier opportunity cost.

A wider wedge than rival achieve. A firm that attains a wider wedge has a competitive advantage

To discover a rivals metrics ask "what measure would have led to its recent decisions?"

Also examine the patterns the CEO or relevant executives have displayed in prior decisions

advantages that incumbents have relative to new entrants

Barriers to entry

4) The test of substitutability

Can a unique resource be trumped by a different resource?

involves making irreversible commitments to a level of production or service capacity that limits the profit opportunities for other firms

Capacity premption

simply the mirror image of input preemption. Early-movers in a market may have the opportunity to gain access to a particular distribution channel under exclusive or otherwise preferred terms.

Chanel preemption

can be attributed to the ownership of a valuable resource that enables the company to perform better or more cheaply than competitors

Competitive advantage

Although critically important, competitive advantage is not the ultimate goal.

Competitive advantage is essential to strategy, but it is only part of a bigger story, one frame in a motion picture.

the process by which a firm investigates its current and or potential rivals for the purpose of predicting the likely nature and significance of competitive actions and using these prediction to shape current decision making

Competitor analysis

involves making a company's activities more distinctive, strengthening fit, and communicating the strategy better to those customers who should value it

Deepening a position (as opposed to broadening or compromising a position)

first movers must frequently commit to a particular product design and manufacturing capacity before uncertainties about the magnitude or nature of demand are resolved

Demand uncertainty

the choices that establish a firm's advantage also influence whether the advantage can be sustained.

Despite the connections, each is so complicated we need to separate

Competition occurs at the business unit level

Diversified companies do not compete; only their business units do

Each concept of corporate strategy allows the diversified company to create shareholder value in a different way. Companies can succeed with any of them

Each concept of corporate strategy is not mutually exclusive

The harsh truth is the most companies resources do not pass the objective application of the market tests

Even the companies that due pass the test aren't home free. Valuable resources must still be joined with other resources and embedded in a set of functional policies and activities that distinguish the company's position in the market. After all, competitors can have core competences too.

Decline causes managers to dislike one another, hide information, and deny responsibility

Executives have to lead a psychological trunaround

may be important to society but are neither significantly affected by the company's operations nor influence the company's long-term competitiveness

Generic social issues

The need to create and re-create reasons for a company's continued existence sets the strategist apart from every other individual in the company,

Guiding this never-ending process, bringing perspective to the midst of action and purpose to the flow-not solving strategy puzzle once- is the crowning responsibility of the CEO.

2) the test of durability:

How quickly does this resource depreciate? The longer lasting a resource is, the more valuable it will be.

Strategy is creating fit among a company's activities. The success of a strategy depends on doing many things well, not just a few, and integrating among them.

If there is no fit among activities, there is no distinctive strategy and little sustainability.

provides an advantage whenever a firm secures input factors under terms that are better than the terms available to potential rivals at a later date

Input preemption

Because all resources depreciate, an effective corporate strategy requires continual investment in order to maintain and build valuable resources.

Investing in resources

1) The test of inimitability:

Is the resource hard to copy? Inimitability is at the heart of value creation because it limits competition.

Strategic fit is fundamental not only to competitive advantage but also to the sustainability of that advantage

It is harder for a rival to match an array of interlocked activities than it is to merely imitate a particular sale-force approach, match a process technology, or replicate a set of product features.

based on the idea that the more experience a firm has in producing a particular good or providing a particular service, the better the firm becomes at doing so.

Learning effects

Eddie Liu, worked for Lee and Li, and found a loophole in a POA that allowed him to illegally sell the clients shares and sneak out with approximately $92 million.

Lee and Li was the largest law firm in Taiwan and one of the largest in Asia

allows a leading firm to occupy the most ideal locations for production facilities or sales outlets

Location preemption

Of the options your rival seriously considers, it will most likely choose the one that promises to deliver the biggest payoff according to its analytical technique

Look for clues in the success metric it uses and in prior decision making behaviors

A positive network effect exists whenever buyer value for a particular product or service increase the number of other buyer who purchase that particular product or service increases

Network effect

Diversification inevitably adds costs and constraints to business units

Obvious costs such as the corporate overhead allocated to a unit may not be as important or subtle as the hidden costs and constraints

secrecy, blame, isolation, avoidance, passivity, and feelings of helplessness that arise during a difficult time for the company and reinforce one another in such a way that the company enters a kind of death spiral

Organizational pathologies

external social conditions also influence corporations, for better and for worse

Outside-in linkages

may be granted by a governing authority to a first mover firm in given technologies or markets

Patents or institutional barriers

In absence of established competition, a market leader will likely choose the most attractive market in an industry.

Positioning premption

long-term image benefits that are unavailable to other players

Reputation effects

builds on, but does not replace the two previous board approaches to strategy by combining internal and external perspectives.

Resource-based view

combines the internal analysis of phenomena withing companies with the external analysis of the industry and the competitive environment

Resource-based view of the firm (RBV)

result when the average cost of producing a good or providing a service declines as output increases in any given period

Scale economies

present when provision of multiple different goods or services by a single firm results in lower costs and or higher buyer value than when such good or services are each provided by separate firms.

Scope economies

A firm can lead its industry toward new ways of competing that alter the five forces for the better. In reshaping structure, a company wants its competitors to follow so that the entire industry will be transformed

Shaping industry structure

Shareholders can readily diversify themselves

Shareholders can select stocks that best math their preferences and risk profiles, can diversify more cheaply.

factors in the external environment that significantly affect the underlying drivers of competitiveness in those places where the company operates

Social dimensions of competitive context

attempts to achieve a sustainable competitive advantage by preserving what is distinctive about a company. It means performing different activities than rivals, or performing similar activities in difference ways.

Strategic positioning

the creation of unique and valuable position, involving a different set of activities.

Strategy

As markets move faster and faster, managers complain that strategic planning is too static and too slow.

Strategy has also become deeply problematic at the corporate level.

strategic decion-making depends critically upon the anticipated actions of competitors

Successful firms thoroughly evaluate the incentives, biases, and likely actions of rivals before taking action

the smallest amount that a supplier will accept for the services and resources required to produce a good or service

Supplier opportunity cost

In emerging industries, technological changes are frequently dramatic rather than incremental. May lead early movers on the wrong side of the fence, with significant investments in suddenly obsolete or otherwise subobtimal process or product technologies.

Technological uncertainties

Managers should build their strategies on the resources that meet the five tests outlined above.

The best of these resources are often intangible, not physical.

Among all other influences, this has perhaps the most perverse effect on srategy

The desire to grow

Strategy is making trade-offs in competing

The essence of strategy is choosing what not to do.

goes beyond activity reinforcement to optimization of effort.

Third-order fit

What if a company has no unusually valuable resources? Unfortunately, that is a common experience.

Upgrade resources - companies must continually upgrade the number and quality of their resources and associated competitive positions in order to hold off the almost inevitable decay in their value.

depicts all the activities a company engages in while doing business. Can be used as a framework to identify the positive and negative social impact of those activities.

Value chain

issues that are significantly affected by the company's activities in the ordinary course of business

Value chain social impacts

3) the test of appropriability:

Who captures the value that the resource creates? Not all profits from a resource automatically flow to the company that owns the resource

5) The test of competitive superiority:

Whose resource is really better? Must evaluate your resources relative to competitors.

At least 1/3 of the time, companies don't respond to their rival's actions. If you can answer "no" to any of the following questions, the chances of a response are low

Will your rivals see your move? Will you rival feel threatened? Will mounting a response be a priority? Can yourrival overcome organizational inertia?

the maximum amount of money that a customer wold be willing to part with in order to obtain the product or service

Willingness to pay

the maximal value created by all participants in a transaction minus the maximal value that could be created without the firm

a firm's added value

segmenting customers who are accessible in different ways.

access-based positioning

Competitive strategy is about

being different (Southwest, Ikea,)

strategic decisions often involve significant complexity and exacerbating the problem, these decisions are often critically time-sensitive

bounded rationality of information processing limitations

A diversified company has two levels of strategy:

business unit (or competitive) strategy, and corporate (or company wide) strategy

locking in existing customers and increasing the difficulty for rival firms to employ to make gains in market share

buyer switching costs

A firm is said to have a _______________ _____________________ over its rivals if it has driven a wide wedge between the willingness to pay it generates among buyers and the cost it incurs.

competitive advantage

the process of companies becoming more indistinguishable from one another

competitive convergence

Operational effectiveness is necessary to achieve superior profitability, but it usually isn't enough..

competitors can quickly imitate management techniques, new technologies, etc. Once everyone does this, productivity frontier shifts outward and benefit goes to everyone else. Improved operational effectiveness will lead to competitive convergence.

a decision maker seeks out information that confirms what he or she already believes to be the right decision, rather than seeking out counter-arguments or refuting evidence

confirmation bias

must stop thinking in terms of corporate social responsibility and start thinking in terms of

corporate social integration

What the company is doing and can do

current strategy, capabilities

raise a customers willingness to pay without incurring an increase in supplier opportunity cost

differentiation strategy

An action which is always optimal regardless of the choice of the other player is commonly called a

dominant strategy

raising a customers willingness to pay while also reducing supplier opportunity cost

dual competitive advantage

involved multiple related decisions and interactions over time

dynamic game

phenomenon in which individuals or organizations demonstrate that they value foods more when they own them than when they do not

endowment effect

simple consistency between each activity and the overall strategy

first-order fit

What drives the competitor

future goals, assumptions

often allows growth that is consistent with strategy, opening up larger markets for a focused strategy

globalization

studies of the effect of a company's social reputation on consumer purchasing preferences or on stock market performance have been

inconclusive at best

general reluctance or inability of established market leaders to change strategic course

incumbent inertia

A company impinges on society through its operations in the normal course of business: These are called

inside out linkages

Strategic CSR involves both... and... dimensions working in tandem

inside-out, and outside in

Companies must shift from a fragmented, defensive posture to an

integrated, affirmative approach

firms throw good money after bad and take actions which are intended to support previous decisions which may not have turned out as well as hoped

justify past actions

The challenge of developing or reestablishing a strategy often depends on

leadership

Reduce supplier opportunity cost without sacrificing willingness to pay.

low-cost strategy

When companies ignored one or two of these tests, the strategic results were disastrous

meeting them is so difficult that most diversification fails

a valuable framework for modeling competitive decision-making

method of game theory

Proponents of CSR have used four arguments to make their case

moral obligation, sustainability, license to operate, and reputation

Serving most or all of the needs of a particular group of customers

needs-based positioning

persistence ( and amplification) of the commitment to a strategy that is failing

non-rational escalation of commitment

Management must clearly differentiate between

operational effectiveness and strategy

CSR approached strategically can generate these three things while solving social problems.

opportunity, innovation, and competitive advantage

Firms often overestimate their own capabilities and likelihood of success while underestimating competitors

overconfidence

Operational effectiveness

performing similar activites better than rivals perform them

expenses incurred or efforts undertaken by first-movers in a market which blaze the trail for the industry.

pioneering costs

4 types of leader disadvantages

pioneering costs, demand uncertainty, technological uncertainty, and incumbent inertia

the maximum value a company can deliver at a given cost, given the best available technology, skills, and management techniques.

productivity frontier

two ways an industry's structure can be reshaped

redividing profitability, or expanding the overall profit pool

generalizing about a situation based on only a few observations of similar situations in the past

representative bias

occurs when activities are reinforcing

second-order fit

The troubled company's cycle of decline

secrecy and denial, blame and scorn, avoidance and turf protection, passivity and helplessness

In a _______________ move game, additional insight can be gained by representing the game in a game tree rather than a matrix

sequential

consists of a single move by each player at a single point in time

static game

an individual in situation A prefers situation A to situation B, but if the same individual was in situation B, they would prefer situation B.

status quo bias

Operational effectiveness is not

strategy

Understanding the forces that shape industry competition is the starting point for developing...

strategy

While gaining depth, strategy has lost breadth and stature. It has become more about formulation than implementation, and more about getting the idea right than living with a strategy over time.

strategy is not just a plan, not just an idea; it is a way of life for a company. Strategy doesn't just position a firm in its external landscape; it defines what a firm will be

In general, game theory predicts outcomes which are in equilibrium

that is outcomes where neither player has any incentive to unilaterally deviate from his or her chose action

The industries chosen for diversification must be structurally attractive or capable of being made attractive

the attractiveness test

Either the new unit must gain competitive advantage from its link with the corporation or vice versa

the better-off test

The cost of entry must not capitalize all the future profits

the cost-of-entry test

difference between the customers willingness to pay and the suppliers opportunity cost

total value created by the transaction

under this condition, the amount of value a firm can claim cannot exceed its added value

unrestricted bargaining

producing a subset of an industry;s products or services

variety based positioning