SEVI Exam 2
Vertical Value Chain
1. raw materials 2. components, intermediate goods 3. final assembly, manufacturing 4. marketing, sales 5. after-sales service and support
combination strategy
- Combining low-cost and differentiation strategies can take several forms: - Automated and flexible manufacturing systems allow for mass customization - Data analytics allow firms to customize products/services while using resources efficiently - Exploitation of the profit pool concept creates a competitive advantage - Using technology, firms can unscale, relying on suppliers or customers to provide critical inputs
Diversification
- Competing in multiple markets and/or industries: o The firm can reduce variability in profitability as earnings are generated from different businesses o Provides flexibility to shift resources and investments to those markets with the greatest returns o The ideal diversified portfolio balances the costs and benefits of diversification
Growth Stage Strategies
- Create branded differentiated products - Stimulate selective demand - Provide financial resources to support value-chain activities
Focus Strategy and adverse conditions
- Creates higher entry barriers due to cost leadership or differentiation or both - Can provide higher margins that enable the firm to deal with supplier power - Reduces buyer power because the firm provides specialized products or services - Focused niches less vulnerable to substitutes
Differentiation and adverse conditions
- Creates higher entry barriers due to customer loyalty - Provides higher margins that enable the firm to deal with supplier power - Reduces buyer power because buyers lack suitable alternatives - Establishes customer loyalty, reducing threats from substitutes
Risks of Focus Strategies
- Erosion of cost advantages within narrow segments - Highly focused products and services still subject to competition from new entrants and from imitation - Focusers become too focused to satisfy buyer needs
Related Diversification Benefits
- Firms pursuing related diversification benefit from economies of scope, market power - Economies of scope allow businesses to: o Leverage core competencies o Share related activities - Related businesses gain market power through: o Pooled negotiating power o Vertical integration
Decline Stage Strategies
- Maintaining the product position - Harvesting profits & reducing costs - Exiting the market - Consolidating or acquiring surviving firms
parenting advantage (unrelated diversification)
- Parent company intervenes: o Asset restructuring: sale of unproductive assets o Capital restructuring: changing the debt-equity mix (adding debt or equity) o Management restructuring: changes to tope management team, organizational structure, and/or reporting relationships
Risks of Cost Leadership Strategy
1. Too much focus on one or a few value chain activities 2. Increase in the cost of the inputs on which the advantage is based 3. Strategy can be too easily imitated 4. Lack of parity on differentiation 5. Reduced flexibility 6. Obsolescence of the basis of a cost advantage
Cost Leadership and adverse conditions
- Protects a firm against rivalry from competitors - Protects the firm against powerful buyers - Provides more flexibility to cope with increased input costs from powerful suppliers - Provides substantial entry barriers through economies of scale, cost advantages - Puts the firm in a favorable position with respect to substitutes
What does it mean to restructure a firm?
- Reorganize and divest business units, activities - Refocus a firm on its core competencies - capitalize on financial benefits
Risks of Differentiation
- Uniqueness is not valued by customers - Too much differentiation - Too high a price premium - Differentiation that is easily imitated - Dilution of brand identity through product line extensions - Perceptions of differentiation may vary between buyers and sellers
Experience Curve
- Unit costs of production processes decline as cumulative output increases - This strategy requires competitive parity - Firm must be "on par" with competitors on differentiation, product characteristics - Allows cost leaders to translate cost advantages into higher profits
related constrained diversification strategy
- business share a large number of resources
Vertical Integration Benefits
-A secure source of raw materials or distribution channels -Protection of and control over valuable assets -Access to new business opportunities -Simplified procurement and administrative procedures
Alternatives on the Make-or-Buy Continuum
-short term contracts -strategic alliances *long term contracts (licensing, franchising) *equity alliances *joint ventures -Parent-subsidiary relationships
transaction costs
costs associated with an economic exchange
Competitive advantage: Cost Leadership
Achieving Lower Overall Costs vs. rivals
Competitive Advantage: Differentiation
Differentiating the firm's product or service to command a premium price
How does Related Diversification enhance performance?
Economies of Scale: reduced costs Economies of Scope: reduced costs, increased value
unrelated diversification benefits
Efficient internal capital allocation and Business restructuring
external transaction costs
costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract
corporate level strategy vs business level strategy
Business Level: - Each business unit in a diversified firm chooses a business-level strategy as its means of competing in its individual product markets Corporate Level: - Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets
How does UNRelated Diversification enhance performance?
Financial economies from restructuring Internal capital markets
Core Competencies and Diversification
Firms lever core competencies to find future growth opportunities Strategic options: 1 Lever existing core competencies to improve market position in existing market 2 Build new core competencies to protect and extend position in existing market 3 Redeploy existing core competencies to compete in new markets 4 Build new core competencies to compete in new markets
Competitive Advantage: Focus Strategy
Focus on underserved buyer segments, geographic markets
What key forces in the general environment are impacting the gaming industry at the time this case was written?
General environment = external, beyond control, hard to predict Sociocultural - society deciding what the next "in thing" in tech will be (mobile gaming) Technological - constantly changing, stay ahead of it (mobile gaming)
Understand Nintendo's key resources (tangible and intangible), capabilities. Which of these (or combination of these) is VRIN?
Intangible = reputation resources (brand name/ characteristics) DIFFICULT TO IMITATE (VRIN) Tangible = technological resources (unique to their brand) valuable asset of their company to build onto old consoles and create new ones Capabilities = Product development that prove uniqueness (wii/switch) VALUABLE (VRIN), innovativeness + flexibility (switch can be played on console and on the go) RARE (VRIN)
What is Nintendo's business-level strategy? How does this compare to the business-level strategy for its competitors, Sony (PlayStation) and Microsoft (Xbox)?
Nintendo = Differentiation: Special brand characteristics, loyal TM, + unique systems within the gaming consoles Sony = Focus strategy to get to their loyal audience that is very advanced. Big time gamers + luxury memory devices. Microsoft = Cost leadership by providing cheaper options for users. (game pass)
Vertical Integration
Practice where a single entity controls the entire process of a product, from the raw materials to distribution
internal transaction costs
Recruiting and retaining employees Paying salaries and benefits Setting up a shop floor Providing office space and computers, etc.
What level of diversification leads to the highest levels of performance?
Related
parent-subsidiary relationship
The most-integrated alternative to performing an activity within one's own corporate family. The corporate parent owns the subsidiary and can direct it via command and control.
short-term contract
contract purchases that are routinely made over a relatively limited time horizon
unrelated diversification
a growth strategy whereby a new business lacks any common elements with the present business
related diversification
a growth strategy whereby the current target market and/or marketing mix shares something in common with the new opportunity
turnaround strategy
a strategy that reverses a firm's decline in performance and returns it to growth and profitability - asset cost surgery - Selected market and product pruning - Piecemeal productivity improvements
BCG Portfolio Matrix
a tool for allocating resources among products or strategic business units on the basis of relative market share and market growth rate
taper 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 supplies, and/or is forwardly integrated but also relies on outside market firms for some of its distribution
joint venture
an agreement between two or more companies to share a business project
business level strategy
an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
BCG Matrix
analyzes business opportunities according to market growth rate and market share
Cost Leadership
based on: o Creating a low-cost position relative to competitors · Managing the value chain to lower costs
related linked diversification strategy
businesses share relatively few resources
Industry Life Cycle Stages
introduction, growth, maturity, decline
What innovations has Nintendo launched in the video gaming market? What were the responses of key competitors (Sony, Microsoft) to these introductions?
motion detection remotes for the Wii+ the switch that allows for play on the go. Microsoft released Kinect for XBOX + Sony released Move for PlayStation. Camera systems motion detectors.
strategic outsourcing
moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain. Key principle: oContinue performing activities that lever core competencies oOutsource activities that don't
maturity stage
o Aggregate industry demand slows o Market becomes saturated, few new adopters o Direct competition becomes predominant o Marginal competitors begin to exit
Growth Stage
o Characterized by strong increases in sales o Industry is attractive to potential competitors o Firms can build brand recognition
Maturity stage strategies
o Create efficient manufacturing operations o Lower costs as customers become price-sensitive o Adopt reverse or breakaway positioning
Introduction Stage Strategies
o Develop and product, get users to try it o Generate exposure so product becomes the "standard"
Questions answered by corporate level strategy
o In what product markets and businesses should the firm compete? o How should corporate headquarters manage those businesses to create synergy?
Vertical Integration Risks
o Increased overhead costs, capital expenditures o Loss of flexibility resulting from large investments o Unbalanced capacity along the value chain o Additional administrative costs to manage more complex activities
Decline Stage
o Industry sales and profits begin to fall o Price competition increases o Industry consolidation occurs
focus strategy
o Narrow product lines, buyer segments, or targeted geographies o Advantage through cost leadership or differentiation
Differentiation
o Products and/or services that are unique and valued o Emphasis on non-price attributes for which customers will pay a premium
Introduction Stage
o Products are unfamiliar to consumers o Market segments not well-defined o Product features not clearly specified o Competition is limited
Benefits of diversification
o Sharing of resources and competencies o Optimized portfolio management o Reduced variability of revenues, profits
equity alliance
partnership in which at least one partner takes partial ownership in the other