MGT 3830 Exam 2
Cost leadership resources and organizational requirements
- Access to capital - Process engineering skills - Frequent reports - Tight cost control - Specialization of jobs and functions - Incentives linked to quantitative targets
strategies for limiting risk:
- Cooperating with lead users. - Limiting risk exposure. - Flexibility. -
Cost leadership key strategies
- Scale‐efficient plants - Design for manufacture - Control of overheads and R & D - Process innovation - Outsourcing (especially overseas) - Avoidance of marginal customer accounts
Building a bigger bandwagon
-assemble allies -pre-empt the market -manage expectations
Examples of external sources of change
-changing customer demand -changing prices -technological change
Core technological know-how in innovation:
-competitive manufacturing -finance -marketing -distribution -service -complementary technologies -other
Alternative strategies for exploiting innovation
-licensing -outsourcing certain functions -strategic alliance -joint venture -internal commercialization
Dynamic capabilities
A firm's ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.
Dominant design
A product architecture that defines the look, functionality and production method for the product , and becomes accepted by the industry as a whole.
Decline phase
A result of technological substitution (typewriters, photographic film), changes in consumer preferences (canned food, men's suits), demographic shifts (children's toys in Europe) or foreign competition (textiles in the advanced industrialized countries).
The key challenges for firms entering the growth stage of the industry life cycle include:
All of the above
ambidextrous organization
Capable of simultaneously exploiting existing competences and exploring new opportunities.
Maturity stage
Caused by increasing market saturation
Born global companies
Companies that operate internationally from their inception.
Maturity phase
Cost efficiency through scale economies, low wages and low overheads become the key success factors.
Incentives for imitation
Deterrence and pre-emption
A firm can achieve a higher rate of profit (or potential profit) over a rival in one of two ways:
Either it can supply an identical product or service at a lower cost, or it can supply a product or service that is differentiated in such a way that the customer is willing to pay a price premium that exceeds the additional cost of the differentiation.
Differentiation key strategies
Emphasis on branding, advertising, design, service, quality and new product development.
de alio entrants
Entrants that are established firms from another industry
The difference between "evolutionary" and "revolutionary" standard strategies is
Evolutionary strategies maintain compatability with what went before
A key success factor in the maturity stage of the industry life cycle is a firm's ability to develop the necessary supporting capabilities to scale up production of its good/service. T/F
False
Emphasis often shifts from process innovation to product innovation, once a dominant design emerges. T/F
False
Isolating mechanisms are forces that tend to equalize profit rates among firms, ie phenomena that erode a firm's competitive advantage. T/F
False
Research has shown that higher R&D output has a strong positive relationship with firm performance. T/F
False
The industry life cycle consists of 4 stages: 1) introduction 2) growth 3) plateau 4) rejuvenation. T/F
False
Incentive
Having identified that a rival possesses a competitive advantage (as shown by above‐average profitability), the firm must believe that by investing in imitation it too can earn superior returns.
Input costs
Location advantages Ownership of low-cost inputs Non-union labour Bargaining power
Industry evolution
New knowledge in the form of product innovation, and the dual processes of knowledge creation and knowledge diffusion.
Product lifestyle
Products are born, sales grow, they reach maturity, they go into decline and they ultimately die.
Introduction stage
Sales are small and the rate of market penetration is low because the industry's products are little known and customers are few. The novelty of the technology, small scale of production and lack of experience means high costs and low quality. Customers for new products tend to be affluent, innovation‐oriented and risk‐tolerant.
Product design
Standardization of designs and components Design for manufacture
Two types of structural ambidexterity
Structural Contextual
A firm that attempts to pursue both cost leadership and differentiation is
Stuck in the middle, because strategies usually entail contradictory investments, different organizational processes and different organizational mindsets.
Once established, competitive advantage is:
Subject to erosion by competitors or new entrants
Invention
The creation of new products and processes through the development of new knowledge or from new combinations of existing knowledge. Most inventions are the result of novel applications of existing knowledge.
open innovation
The shift from vertically integrated systems of innovation where companies develop their own technologies in‐house, then exploit them internally, to more market‐based systems where companies buy in technology while also licensing out their own technologies.
External changes can only give rise to competitive advantage when those changes differentially affect firms. T/F
True
path dependent
a company's capabilities today are the result of its history.
standard
a format, an interface or a system that allows interoperability.
The competitive advantage that arises from external change also depends on firms'
ability to respond to change.
A firm's ability to respond quickly to external change depends upon:
accurate information readily available a short product cycle line (Both a and b)
Competition in the introductory stage is primarily between
alternative technologies and design configurations.
The creativity that drives invention is typically
an individual act that establishes a meaningful relationship between concepts or objects that had not previously been related.
industry lifecycle
an industry produces multiple generations of a product, the industry lifecycle is likely to be of longer duration than that of a single product.
Dynamic capabilities:
are a firm's higher level ability to learn new capabilities
As an industry moves through the stages of the life cycle, overall strategies tend to
change in most major aspects
creative abrasion
fostering innovation through the interaction of different personalities and perspectives.
If a strong regime of appropriability exists, the innovating firm:
has the advantage in terms of capturing a significant portion of value created by the innovation
four conditions for competitive imitation
identification incentive diagnosis resource acquisition
With the maturity stage, competitive advantage is
increasingly a quest for efficiency, particularly in industries that tend towards commoditization. Cost efficiency through scale economies, low wages, and low overheads become the key success factors.
The first requirement for quick response capability is
information
The most effective follower strategies are those that
initiate a new product's transition from niche market to mass market.
Competitive advantage and technology are linked by
innovation
______________ creates competitive advantage for the innovator while undermining the competitive advantage of other firms.
innovation
Licensing is only viable where ownership in an innovation is clearly defined by
patent or copyrights.
intellectual property rights
patents, copyrights, trademarks, trade secrets
Strategic innovation involves:
pioneering along at least one of three dimensions: new industry, new customer segment, or a new source of competitive advantage.
competence-enhancing technological change
preserve, even strengthen, the resources and capabilities of incumbent firms.
The speed with which competitive advantage is undermined depends on
the ability of competitors to challenge either by imitation or by innovation.
Responsiveness involves
the ability to anticipate changes in the external environment, and speed.
Appropriating the returns to innovation depends on
the ability to establish property rights in the innovation.
Isolating Mechanisms
the barriers that protect a firm's profits from being driven down by the competitive process.
During the introductory stage, product innovation is
the basis for initial entry and for subsequent success.
lead time
the time it will take followers to catch up.
A network externality exists when
the value of a product to an individual customer depends on the number of other users of that product.
A problem with de facto standards is
they may take a long time to emerge, resulting in duplication of investments and delayed development of the market.
The most successful follower strategies are:
those that initiate a product's transition from niche market to mass market
Private (proprietary) standards
those where the technologies and designs are owned by companies or individuals.
An innovation diffuses:
through the adoption of products by customers and the imitation by competitors
The key to organizational change is not to adapt to external change but
to create the future.
The advantage of being a leader depends on:
- The extent to which innovation can be protected by property rights or lead‐time advantages. - The importance of complementary resources. - The potential to establish a standard.
Barriers to change
- organizational routines - social and political structure - conformity - limited search - complementaries between strategy, structure, and systems
Two main sources of uncertainty
- technological uncertainty - market uncertainty
Organizational initiatives aimed at stimulating new product development and the exploitation of new technologies include:
-Cross‐functional product development teams -Product champions -Buying innovation -Open innovation
Economies of learning
-Increased individual skills -Improved organizational routines
Differentiation resource and organizational requirements
-Marketing abilities -Product engineering skills -Cross‐functional coordination -Creativity Research capability -Incentives linked to qualitative performance targets
Residual efficiency
-Organizational slack/X-inefficiency -Motivation and organizational culture -Managerial effectiveness
Production techniques
-Process innovation -Re-engineering of business processes
Network externalities arise from:
-Products where users are linked to a network. -Availability of complementary products and services. -Economizing on switching costs.
Capacity utilization
-Ratio of fixed to variable costs -Fast and flexible capacity adjustment
Economies of scale
-Technical input-output relationships -Indivisibilities -Specialization
key features of declining industries
-excess capacity -lack of technical change (reflected in a lack of new product introduction and stability of process technology) -a declining number of competitors, but some entry as new firms acquire the assets of exiting firms cheaply -high average age of both physical and human resources -aggressive price competition.
Strategic innovations tend to involve pioneering along one or more dimensions of strategy:
-new industries -new consumer segments -new sources of competitive advantage
building blocks for developing new capabilities:
-processes -structure -motivation -organizational alignment
How does competitive advantage emerge?
-resource heterogeneity among firms means differential impact (external) -some firms are faster and more effective in exploiting change (external) -some firms have greater creative and innovative capability
6 stages of value chain analysis
1. Break down the firm into separate activities. 2. Establish the relative importance of different activities in the total cost of the product. 3. Compare costs by activity. 4. Identify cost drivers. 5. Identify linkages. 6. Identify opportunities for reducing costs.
4 principle stages of value chain analysis for differentiation advantage
1. Construct a value chain for the firm and the customer. 2. Identify the drivers of uniqueness in each activity. 3. Select the most promising differentiation variables for the firm. 4. Locate linkages between the value chain of the firm and that of the buyer.
Advantages of licensing
1. Relieves the company of the need to develop the full range of complementary resources and capabilities needed for commercialization. 2. It can allow the innovation to be commercialized quickly.
What are the two flaws in the competitive process that sustain competitive advantage through pre‐emption?
1. The market must be small relative to the minimum efficient scale of production, such that only a very small number of competitors is viable. 2. There must be first‐mover advantage that gives an incumbent preferential access to information and other resources, putting rivals at a disadvantage.
2 fundamental factors of the industry lifecycle
1. demand growth 2. knowledge
7 drivers of cost advantage
1. economies of scale 2. economies of learning 3. production techniques 4. product design 5. input costs 6. capacity utilization 7. residual efficiency
4 phases of the industry life cycle
1. introduction (or emergence) 2. growth 3. maturity 4. decline
The choice of strategy mode depends on two main sets of factors:
1. the characteristics of the innovation 2. the resources and capabilities of the firm
complementary resources
The diverse resources and capabilities needed to finance, produce, and market the innovation.
Resource acquisition
The firm must be able to acquire through transfer or replication the resources and capabilities necessary for imitating the strategy of the advantaged firm. Base competitive advantage on resources and capabilities that are immobile and difficult to replicate.
Diagnosis
The firm must be able to diagnose the features of its rival's strategy that give rise to the competitive advantage. Rely on multiple source of competitive advantage to create 'casual ambiguity'.
Identification
The firm must be able to identify that a rival possesses a competitive advantage.
Innovation
The initial commercialization of invention by producing and marketing a new good or service, or by using a new method of production.
first-mover advantage
The initial occupant of a strategic position or niche gains access to resources and capabilities that a follower cannot match, because the first mover is able to pre‐empt the best resources or can use early entry to build superior resources and capabilities.
casual ambiguity
The more multidimensional a firm's competitive advantage and the more it is based on complex bundles of organizational capabilities, the more difficult it is for a competitor to diagnose the determinants of success.
Network effects
The need for users to connect in some way with one another. Causes each customer to choose the same technology as everyone else to avoid being stranded.
uncertain imitability
The outcome of causal ambiguity, where there is ambiguity associated with the causes of a competitor's success, any attempt to imitate that strategy is subject to uncertain success.
If a firm is able to establish clear property rights over its innovation, then there is an advantage in leading.
True
In the long-run, competition eliminates differences in profitability between firms. T/F
True
Two main factors drive industry evolution: demand growth and the production and diffusion of knowledge. T/F
True
Technological uncertainties
arise from the unpredictability of technological evolution and the complex dynamics through which technical standards and dominant designs are selected.
Public (or open) standards
available to all either free or for a nominal charge. Typically, they do not involve any privately owned intellectual property or the IP owners make access free.
In pursuing cost advantage, the goal of the firm is to
become the cost leader in its industry or industry segment.
Corporate incubators
business developments established to fund and nurture new businesses, based upon technologies that have been developed internally but have limited applications within a company's established businesses.
Network externalities do not require everyone to use the same product or even the same technology,
but rather that the different products are compatible with one another through some form of common interface.
Growth stage
characterized by accelerating market penetration as technical improvements and increased efficiency open up the mass market.
Once established, competitive advantage is eroded by
competition
Innovation forms the key link between technology and
competitive advantage
When two or more firms compete within the same market, one firm possesses a __________________ over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit.
competitive advantage
An organization that engages in both exploitative and explorative activities in the same organizational units ,with the same people employs ___________________.
contextual ambidexterity
The transition to decline intensifies pressures for
cost cutting and maintaining stability
Michael Porter has defined three generic strategies
cost leadership, differentiation, and focus
The number of firms in most industries tends to _______________ with the onset of the maturity stage of the industry life cycle.
decrease significantly
Regime of appropriability
describes the conditions that influence the distribution of returns to innovation.
An industry is likely to be at __________ stages of its lifecycle in different countries.
different
Once introduced, innovation ___________ on the demand side.
diffuses
For creativity to create value, both for the company and for society, it must be
directed and harnessed
Tacitness and complexity ___________ provide lasting barriers to imitation, but they ___ offer the innovator time.
do not, do
The changes that generate competitive advantage can be
either external or internal
In the long run, competition
eliminates differences in profitability between competing firms.
De facto standards
emerge through voluntary adoption by producers and users.
Pre-emption
exploit all available investment opportunities. occupying existing and potential strategic niches to reduce the range of investment opportunities open to the challenger.
A cost leadership strategy means that a firm must:
exploit sources of cost advantage in providing customers with a standardized product
the quest for competitive advantage that causes firms to
invest in innovation
strategic innovation
involves creating value for customers from novel products, experiences or modes of product delivery.
Contextual ambidexterity
involves the same organizational units and the same organizational members pursuing both exploratory and exploitative activities.
Michael Porter's early work suggests that combining cost leadership and differentiation strategies
is likely to result in a firm becoming 'stuck in the middle'
The value created by an innovation
is not distributed among the various players in any consistent manner
Imitation
is the most direct form of competition; thus, for competitive advantage to be sustained over time, barriers to imitation must exist.
Differentiation by a firm from its competitors is achieved when
it provides something unique that is valuable to buyers beyond simply offering a low price.
codifiable knowledge
knowledge that can be written down
Porter views cost leadership and differentiation as _________________ strategies.
mutually exclusive
Technical standards emerge where there are
network effects
Standards emerge in markets that are subject to
network externalities
it is innovation that is responsible for
new industries
Although demand for an industry's output may be falling, there are often _________ within markets where demand is more stable.
niches
Differentiation is when a firm:
offers customers something valuable and unique for which customers are willing to pay a price premium
tipping
once a certain threshold is reached, cumulative forces become unstoppable.
In a weak regime of appropriability,
other parties derive most of the value.
Differentiation advantage
price premium from unique product
The basis of entry is
product innovation
Any external change creates opportunities for
profit
Forms of pre-emption
proliferation of product varieties, large investments in production capacity, patent proliferation
Four factors are critical in determining the extent to which innovators are able to appropriate the value of their innovation:
property rights, the tacitness and complexity of the technology, lead‐time and complementary resources.
In the introduction stage, product technology advances
rapidly
Market uncertainties
relates to the size and growth rates of the markets for new products.
competence-destroying technological change
render obsolete the resources and capabilities of established firms
Once the growth stage is reached, the key challenge is
scaling up
Mandatory standards
set by government and have the force of law behind them.
The second requirement for quick response capability is
short cycle times that allow information on emerging market developments to be acted upon speedily.
external and internal changes can create
short‐term opportunities for creating an advantage.
Deterrence
signal aggressive intentions to imitators
Cost advantage
similar product at lower cost
rivals. In most industries the erosion of the competitive advantage of industry leaders is a
slow process
a key source of competitive advantage is
strategic innovation
Innovation creates a
temporary competitive advantage that offers a window of opportunity for the innovator to build on the initial advantage.
The idea that an organization's existing capabilities are path dependent means that:
the capabilities it possesses today are the result of the steps it has taken throughout history
For an external change to create competitive advantage,
the change must have differential effects on companies because of their different resources and capabilities or strategic positioning.
The extent to which an innovation leads to a greater profit for the innovating firm depends upon:
the creation of value for consumers by the innovation the appropriation of value created from the innovation by the innovating firm (Both a and b)
The transition of an industry from its introduction to growth phase is reflected typically in
the emergence of dominant designs and technical standards and in a change of focus away from product innovation towards process innovation.
Cost leadership requires that
the firm must find and exploit all sources of cost advantage, and sell a standard, no‐frills product.
The more turbulent an industry's environment,
the greater the number of sources of change, and the greater the differences in firms' resources and capabilities, the greater the dispersion of profitability within the industry.
Decline stage
the industry becomes challenged by new industries that produce technologically superior substitute products
In a strong regime of appropriability,
the innovator is able to capture a substantial share of the value created.
The more effective the isolating mechanisms are,
the longer competitive advantage can be sustained against the onslaught of rivals.
The extent to which external change creates competitive advantage and disadvantage depends on
the magnitude of the change and the extent of firms' strategic differences.
Individual creativity also depends on
the organizational environment in which people work
the choice of how to exploit an innovation depends on
the resources and capabilities that the innovator brings to the party.
The period over which a competitive advantage can be sustained depends critically on
the time it takes to acquire and mobilize the resources and capabilities needed to mount a competitive challenge.
Uncertain imitability
when a would-be imitator cannot clearly understand the causes of a competitor's success, any attempt to imitate that strategy is subject to unknown success.
Structural ambidexterity
where different parts of the organization undertake exploratory and exploitative activities
