Strategic Management Final

Paradigm shift

Changes in fundamental elements of technology.

Strategy canvas

Graphical depiction of a company's relative performance vis-a-vis its competitors across the industry's key success factors. First factor is usually price.

Value innovation

the simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy

Relationship between industry structure and intensity of competition / rivalry

- Fragmented industry = more small competitors, less coordination - Consolidated industry = a few big firms, legal coordination. Tit for tat strategies (copying each other). Lower intensity of competition.

Macro-environmental factors

- Macroeconomic forces - Global forces - Technological forces - Demographic forces - Social forces - Political and legal forces

Network effects

the value of a product or service for an individual user increases with the number of total users, and when more complementary products or services become available

Value creation and pricing options

value creation and pricing options

Mission statement

- Mission: purpose of firm - Vision: articulation of firm's desired future state in bold terms - Values: how employees should conduct themselves - Goals; precise and measurable desired future state

Growth stage

- Number of firms in a focal category increases - Demand from consumers starts to increase - Financing is relatively easy to get - Excess capacity for industry happens at the end of the stage - Supply from industry > demand from consumers

Two main measures of a firm's performance

- Profitability (ROIC) = net profit / invested capital Indicator of managerial effectiveness - Profit growth

Sixth Force

Power of complements (Andrew Grove). This is the only force we want to increase. Complements add value and together with the product they complement, satisfy customer needs better. More complements = more profit.

Two components of shareholder value

- Dividend - Capital appreciation

3 major characteristics of a good strategy

- Focus - Divergence - Compelling tagline (ex: "the speed of a plane at the price of a car")

Business-level strategies

- Cost leadership - Differentiation

Refined ROIC analyses

- Return on sales (ROS) - Capital turnover

Three factors that determine a firm's profitability

- Utility - Price - Cost Profit = profit margin x units being sold Revenue = price x units being sold

4 Es and 1 P

- energy - energize others - edge (no ambiguity in your decision-making) - execute - passion

Invested capital

- equity from investors (riskier, higher potential return) - debt from financiers (less risky, lower potential return)

Vertical integration

Practice where a single entity controls the entire process of a product, from the raw materials to distribution. Deals with suppliers and buyers.

Return on Sales (ROS)

1 - (COGS/Sales + SGA/sales + RD/sales)

Capital turnover

1 / (working capital / sales + PPE/sales) working capital = current assets - current liabilities PPE: property, plant, and equipment

Strategies in a mature market

Price signaling Tit-for-tat strategy Price leadership

5 stages of an industry's life cycle

1. Embryonic 2. Growth 3. Shakeout 4. Mature 5. Decline

Six paths leading to blue oceans

1. Look across alternative industries (different form / service, same purpose) 2. Look across strategic groups within industry 3. Look across chain of buyers (purchasers, users, influencers) 4. Look across complementary products and services ( think about what happens before, during, and after product user) 5. Look across appeal (use both functional/ rational and emotional appeal, can swing from one to the other) 6. Look across time: seize external trends that affect business in the future

Michael Porter's Five Forces Model

1. Risk of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitutes 5. Rivalry between established firms in industry

Daniel Goleman 5 components of emotional intelligence

1. Self- awareness: ability to recognize and understand your moods and emotions, as well as their effect on others. 2. Self-Regulation: ability to control or redirect disruptive impulses and moods. Propensity to suspend judgment - think before acting. 3. Motivation: passion for work for reasons that go beyond money or status Propensity to pursue goals with energy and persistence. 4. Empathy: ability to understand the emotional makeup of other people. 5. Social Skill: proficiency in managing relationships and building networks. Ability to find common ground and build rapport.

Four building blocks of competitive advantage

1. Superior Efficiency 2. Superior Quality - reliability (product delivers performance) - excellence (product perceived as unique or prestigious, conspicuous consumption) 3. Superior Innovation 4. Superior Responsiveness to customers ( most important factor in the long run, can be incremental or disruptive / radical)

Adam Smith's Absolute Advantage Theory on international trade

A country has an absolute advantage if it's more efficient than any other country in producing a G/S. Countries should specialize in good for which they have an absolute advantage, and then trade with other countries. This generates the greatest production at the lowest cost, and everybody benefits.

Horizontal integration

Absorption into a single firm of several firms involved in the same level of production and sharing resources at that level. Deals with direct competitors. Mergers and acquisitions.

Agency problem

Agents are self-seeking, at the expense of the principal. Happens because of information asymmetry.

Why Sony lost the format war on VC recorders against Matsushita, but won the format war on HD DVD against Toshiba? Betamax vs. VHS

Betamax was a Sony product, VHS was a JVC Product. Betamax -used proprietary approach and kept format to themselves VHS - licensed format for a fee, became U.S. standard, because of licensing there were more options for consumer use and lower price Licensing -> mass production -> economies of scale -> standardized components -> cheaper -> demand from consumers

Google video people

Bill Gross: founder of Idealab David Cheriton: professor at Stanford, connected Larry and Sergei to Bechtosheim. Andy Bechtosheim: investor, wrote a check for $100,000 Joh Doer: VC, wrote check for $12B, Sequoia;s Moritz matched him Larry and Sergei used Overture's business model keyword auction for their adwords.

Efficiency

Efficiency = outputs / inputs - employee productivity: output per employee - capital productivity: sales per dollar invested

Resources

Basic factors of production: - land - plant and equipment - labor - management Advanced factors of production: - intellectual property - organizational architecture - process knowledge - tacit knowledge

Strategies for consolidating a fragmented market

Chaining Franchising Application of high tech (the Internet, and smartphones) Horizontal mergers ( or acquisitions)

Blue Ocean Strategy

Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs. Creates a new market space using value innovation!!!

Capital appreciation

Buy low, sell high. Anchored by a firm's projected profit growth.

Imperial CEO

CEO is also the Chief of Board of Directors. This is an agency problem.

Tit-for-tat strategy

Companies copy each other's strategies. Special kind of price signaling. Tit for tat leaves some open space for entrepreneurs.

Diversification

Company's decision to enter other industries. NOTE: diversification may be penalized on the stock market.

Mature stage

Consolidated market with small number of big firms dominating industry. Demand from consumers is stable or could slowly increase. Firms engage in friendly competition and legal price collusion.

Competitive forces model

Cross sectional, static model

Patagonia's business model

Differentiation: highly functional design that solves a need, with as small environmental imprint as possible. -anti-consumerism, repair shops -values/emotion-infused products

Embryonic stage

Emergency of new category of product and services. Problems: - financial support - restrictive regulation / laws - need to perfect / increase product design - need to increase operational scale - educate consumers about product utility - develop supply chain - develop complements (ex: Tesla charging stations)

Strategies for winning a format war

Ensure a supply of complements Leverage killer applications Aggressive pricing and marketing (razor and blade strategy) Cooperate with competitors License the format

Shakeout stage

Firms begin to compete more intensely. Weaker firms forced out (bankrupcy, mergers or acquisitions). Stronger firms consolidate the market.

Format wars

Firms compete to have their own formats or technical specifications as the standard. Battles to control the source of differentiation, and the value that such differentiation can create for the customer.

Cost leadership

Focuses on cost reduction - lower price - lower cost strategy - profit margin low - scale operation and market share high

Differentiation

Focuses on product quality, product design - high price, high value - high profit margin - market share low

Price signaling

Form of implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit. Explicit collusion is illegal, but price signaling is a way of legal collusion.

Google's case

Google's business model was contrary to usual browser business models of its time. While browsers like Yahoo relied on keeping people on their page as long as possible, and bombarding them with ads, Google's model was built on sending traffic away. Based on keyword auction. Bill Gross met with Google so his company Overture could use Google's search algorithm, instead Google left without partnering with him and used his monetization idea: keyword auction, or selling keywords to advertisers and businesses.

Luxottica's corporate level strategies

Horizontal integration: Acquisition of RayBan and Oakley (competitors). Vertical integration: Acquisition of LensCrafter (retailer), and SunglassHut (retailer) (forward vertical integration). Diversification: purchase of EyeMed Insurance. Different value chain.

Different consumer characteristics

Innovators: usually have substantial financial resources, and an eagerness to try out new ideas. Cosmopolite social circle. Willing to accept the occasional setback. Early adopters: connected socially to innovation, subject to peer pressure. Visionaries, potential entrepreneurs, with highly disposable income. Early majority: indicate the leading wave of mass market. Pragmatics, look at reliability and price. Late majority: skeptical group, adopting new ideas just after the average member of a social system. Their adoption may be borne out of economic necessity and in response to increasing social pressure. Laggards: traditionalists and the last to adopt an innovation.

Positive feedback loop

Installed VHS -> More Supply of movies on VHS -> More Value of VHS players to consumer -> More Demand for VHS players -> More Installed VHS

Chaining

Opening other locations. PROS: Has consistent quality, and you're able to coordinate strategies between stores. CONS: Demands managerial attention, costly and expensive and risky.

Ryanair's business model

Low cost strategy, ancillary revenue (revenue from non-tickets cost, especially percentages from other businesses such as car rentals). Ways to reduce cost: -no ticketing -only a portion of tickets are cheap -cheap in-home advertising, no ad agency -no sales through travel agents - no pre-assigned seats - no air-bridge - no wheelchair charge coverage - no free food or drinks -flying to small regional airports (lower landing fees, faster turnaround) -few customer service agents

Benefit of standards

Mass production, reduces production cost. Increase interchangeability. Standard complementary supplies, increase complements supply. Reduces confusion for consumers.

Ancillary revenue

Percentage from business they sell to passengers (car rentals or bus tickets etc)

Innovation (2 types)

Product innovation: new products or superior attributes Process innovation

Jack Welch on leadership

Most important quality of a CEO is passion: care more than the next person. Biggest mistake by CEO: failing to recognize you're the last to know. Information asymmetry. 4Es and 1 P: have energy, energize others, have edge, execute, have passion. Leadership is about genes, but also about life experience.

Crossing the Chasm

Moving from early adopters to early majority. Crossing the gap between visionary customers who adopt early and pragmatist customers who take a "wait and see" approach Failure to cross the chasm is failure to move from early adopters to early majority.

Causes of technological paradigm shift

Natural limits to technology (see S-curve) New disruptive technology (ex: internet)

Decline stage

Number of firms in industry gets smaller. Some industry enter the decline stage because of changes in the macro-environment, social forces, technology, demographics, political and legal forces, and global focus.

Profit Growth

Profit growth: realized / projected firm profits over years Profit growth: (profit t+1 - profit t)/ (profit t)

ROIC formula

ROIC = net profits / invested capital Invested capital = debt + equity ROIC = (profit / sales) x (sales / invested capital) ROS or profit margin = profit / sales Capital turnover = sales / invested capital

Economies of scale ( vs. diseconomies of scale)

Reduction in unit cost attributed to large output. Sources of economies of scale: 1. cost reduction gained through mass producing standardized product 2. discounts on bulk purchases of raw material 3. spreading fixed production costs over large production volume 4. cost savings associated with distribution, marketing, and advertising cost over large volume

Resources, capabilities, and core competencies

Resources: - basic factors of production - advanced factors of production Capabilities: skills of firm in using their resources. Embodied in leadership, routines, and culture. Core competencies: Distinctive competencies are firm-specific strengths that allow them to differentiate its products and/or achieve much lower costs to achieve a competitive advantage over its competitors.

Lululemon's case (target customers)

SEGMENT CUSTOMER: 24-35 year old woman who was single or engaged, had no children, was highly educated, media-savvy, athletic, and professional. They earned $80,000 a year and were very stylish. Super Girls have no context for gender inequality. Power women. SEGMENT chased after: Super girl was 32 yo, called Ocead, university graduate, wealth, fashionable. They sold to these super girls who didn't exist yet in 1998, but 8 years later. Super girls propensity to buy fewer higher quality items. OTHER NOTES: Flat-lock sewing machines, cut down labor. Seams outside - avoid rash and accentuate female body. Think specifically for women, instead of other company's approach which was "shrink it and pink it". No shrinkage through hot water or hot drying. Maintain 100% of control over brand, vertical retail. No deep discounts. Sellers educate customers. Ability to pursue risky new designs since we're not pressured by middle-sellers to make "successful" past designs. Challenges of vertical retail: more moving parts, hiring, paying, maintaining staff, overhead expense.

Franchising

Selling rights to use a brand name, and operating know-how. PROS: Quick growth, franchisee shares initial cost, demands less managerial attention. CONS: Lacks consistency in quality, lack of control, less coordination in strategy.

Technical standards

Set of technical specifications that producers adhere to when making the product, or a component of it

Economies of scope:

Specialized business units can realize cost-saving or differentiation because they can effectively pool, share, use resources and capabilities. Possible only when there are significant commonalities between two or more value-chain functions.

Experience curve

Systematic lowering of the cost structure and consequent unit cost reduction that occurs over the life of a product. Economies of scale and learning effect underlie the experience-curve phenomenon: as a company increases the volume of output over time, it realizes economies of scale and learning effects, consequently, unit cost and cost structure fall with increases in accumulated output.

Dividends

the share of the profits paid to shareholders as a return for investing in the company, paid according to percentage of ownership

Price leadership

The price leader is a value innovator. It uses a price being charged by weaker firms. Based on imitation. Although the company could lower its price given its superior production capability, but a price war would do nothing but lower both company's profit. Price leadership is a win-win arrangement for weaker and strong firms. Legal form of collusion.

Mass customization

The use of flexible manufacturing technology to reconcile two goals that were once thought to be incompatible: low cost, and differentiation through product customization.

Therano's ethical and legal problems

Theranos, HQ in Palo Alto, Page Mill Road. Promised to perform lab tests with a prick of blood instead of regular phlebotomy. Elizabeth's machines didn't work, and her business model was too good to be true. One of the reasons why she was able to lie, and use other labs' machines is because she had very influencial people in her board of directors. Tyler Shook was the whistleblower.

Customer responsiveness

Time it takes for GS to be delivered

Four actions framework (lead to a new value curve)

eliminate, reduce, raise, create

Total Quality Management

increasing product reliability so that it consistently performs as it was designed to and rarely breaks down

Superior quality

product attributes deliver higher utility than competitors'

Emergent strategies

Unplanned strategy that arises in response to unexpected opportunities and challenges. Could happen because of unplanned shift by top-level managers, because of autonomous action by lower-level managers, or serendipity.

Value creation chart

V-C or U-C = value created P-C = profit margin V-P = consumer surplus Note: utility and value are interchangeable. Psychological reservation price: maximum price a typical consumer is willing to pay for a category of product or service. May differ for firms in same category.

Appraisal framework for resources and capabilities (VRIO)

VRIO is a framework managers use to determine the quality of a company's resources. Valuable resource: can they help create strong demand, lower cost of producing etc... Rare resource: source of competitive advantage Inimitable resource: are they hard to copy Organization set up to take advantage of resources: organizational architecture

Amazon as a platform

Value increases when more users are part of it. Ex: reviews and opinions. More users attract more third-party businesses. Platform-based markets are two-sided or multi-sided, they form an interface between two or more groups of users.