BADM 449 Quiz 2
Early Majority
(34%) customers coming into market at shakeout stage, main consideration in deciding whether ot not to adopt a new tech innovation is a a strong sense of practicality, they are pragmatists and weigh costs and benefits carefully, like to wait to see how things shake out (not about early hype)-herding effect: early majority enter in large numbers
Opportunism
self interest seeking with guile; backward vertical integration is often undertaken to overcome threat of opportunism and to secure key raw materials
Post integration failures are often due to
cultural differences
Cost Leadership Risks
1. erosion of margins 2. replacement (with innovation) 3. focus of competition shifts to non-price attributes 4. lowering costs to drive value creation below acceptable quality
Cost Leadership Benefits
1. protection against entry due to economies of scale 2. protection against increase in input prices because they can be absorbed 3. protection against decrease in sales because they can be absorbed 4. protection against substitute products by further lowering prices 5. protection against price wars with firms because lowest cost firm will win
Porters Diamond Framework
used to explain national competitive advantage 1. factor conditions 2. demand conditions 3. competitive intensity in focal industry 4. related and supported industries
Integration Strategy
business level strategy that combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade offs in those distinct strategic positions
Unrelated Diversification Strategy
less than 70% of its revenues come from a single business and there are few, if any linkages among its businesses ex: Conglomerate (company that combines 2 or more strategic business units under one overarching corporation)
Forward Vertical Integration
moving ownership of activities closer to the end customer (ownership of activities shifted closer to end customer)
Backward Vertical Integration
moving ownership of activities upstream to the originating inputs of the value chain (focus more on sources of supply)
Taper Integration
orchestrating value activities in which a firm is backwardly integrated but it 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
Restructuring
process of reorganizing and divesting business units and activities to refocus a company to leverage its core competencies
Diversification Discount
stock price of such highly diversified firms is valued at less than the sum of their individual business units; firms that pursue unrelated diversification are unable to create additional value
Vertical Market Failure
when transactions within the industry value chain are too risky and alternatives to integration are too costly or difficult to administer
Corporate Strategy Triangle
-based on RBV -interaction of resources, businesses and corporate office support firm vision, goals, and objectives
Disadvantages of International Expansion
1. liability of foreignness 2. loss of reputation 3. loss of intellectual property
Short tail vs long tail
-80% of sales come from 20% of selection found in short head -advances in tech create the long tail -tech enables easier access to the "tail" which means selling less of more, and allowing online firms to gain a large share from selling a small # of unlimited choices
How to respond to disruptive innovation
1. Continue to innovate in order to stay ahead of the competition. 2. Guard against disruptive innovation by protecting the low end of the market. 3. Disrupt yourself, rather than wait for others to disrupt you (e.g., reverse innovation)
Differentiation Risk
1. Erosion of margins 2. Replacement (when faced with innovation) 3. Focus of competition shifts to price 4. Increasing differentiation is not directly creating value but raising costs
Business Level Strategy
Goal direction actions managers take in their quest for competitive advantage when competing in single product market -broad question: how should we compete?
Incumbent firms tend to be a source of what innovation?
Incremental Innovation
Traditional Pipeline --> Platform Business Model
Shifts in Strategy Focus: 1. From resource control to resource orchestration 2. From internal optimization to external interactions
hostile takeover
acquisition when firm does not want to be acquired
Better Off Test
asks whether a particular set of business units should be working together -focuses on corporate added value (value creation)
Crossing the Chasm Framework
breaks down 100% market potential into different customer segments, highlighted the incremental contribution each specific segment can bring into the market -crossing the chasm happens between early adopters and early majority
Industry Life Cycle - Decline
changes in the external environment take industries from maturity to decline (examine PESTEL), innovation efforts along both product and process dimensions cease, if new tech break through emerges it opens a new industry where process starts over
Corporate Strategy
decisions that leaders make and the goal-directed actions they take in quest for a competitive advantage in several industries and simultaneously
Cost Drivers - Costs Leadership
economies of scale, learning curve
Value Drivers - Differentiation
economies of scope, product features, customer service, complements
Global Strategy
enables companies to gain and sustain a competitive advantage when competing against other foregin and domestic companies around the world
Laggards
enter in declining stage of industry, adopt new product only if absolutely necessary, generally do not want new tech because of personal or economic reasons, only 16% of total market potential
Competency Trap
firms that strive for competence within a given strategy are sometimes trapped in it and miss the opportunity for strategic change
Learning Curve
as our productivity goes up, learning curves go down and it takes less and less time to produce the same output as we learn how to be more efficient therefore driving costs down
Risks of Vertical Integration
increasing costs, reducing quantity, reducing flexibility, and increasing the potential for legal repercussions
Industry Life Cycle - Introduction
innovators core competency is R&D, barriers to entry are high
Equity alliances
at least one partner takes partial ownership in the other partner. Often require larger investments + less common. -allow for sharing of tacit knowledge
Related and supporting industries/complementors
leadership in related and supporting industries can foster world-competitors in downstream industries
Disruptive Innovation
leverages new tech to attack existing markets, invades from bottom up -begins as low costs solution to existing issue -performance is inferior to existing tech but its rate of tech improvement over time is faster than the rate of performance increases required by different market segments
Credible Commitment
long term strategic decision that is both difficult and costly to reverse
Single Business Diversification Strategy
low level of diversification if any (more than 95% of revenue from one business)
Foreign Direct Investment (FDI)
making investments in value chains around the world
Resource Continuum
measures the nature of resources (general or specialized) -scope of businesses (wide or narrow) -coordination mechanisms (transferring or sharing) -control systems (financial or operating) -corporate office size (small or large)
Parent-subsidary relationship
most integrated alternative to performing an activity within one's own firm boundaries (anchors on the "make" side); corporate parent owns the subsidiary and can direct it via command and control (fiat)
CAGE Distance Framework
mosts costs and risks involved with expanding beyond a domestic market are created by distance -Cultural Differences -Admin/Politcal Distance -Geographic Distance -Economic Distance
Strategic Outsourcing
moving one or more internal value chain activities outside the firm's boundaries to other firms in the industry value chain
Diversification Premium
on average stock price of related-diversification firms is valued at greater than the sum of their individual business units because they: -provide economies of scale reducing costs -exploit economies of scope increasing value
Horizontal Integration
process of merging with a competitor at the same stage of the industry value chain; do so if the target firm is more valuable inside the acquiring firm than as a continued standalone company -reduces competitive intensity, lowers costs, and increases differentiation
Global Standardization Strategy
attempt to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost -used by MNEs that manufacture commodity products like hardware or offer services such as business process outsourcing
Industry Life Cycle - Shakeout
rate of growth starts to decline, weaker firms are forced out of the industry, success factors at this stage are manufacturing and process engineering capabilities that can be used to drive costs down
Organizational Inertia
resistant to changes in the status quo, causes first to favor incremental innovation to reinforce organizational structure and power distribution while avoiding radical innovation
Differentiation strategy
seeks to create a higher value for customers than the value that competitors create by delivering products or services with unique features while keeping costs at the same or similar levels while allowing the firm to charge high prices to customers.
Cost-leadership strategy:
seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors enabling the firm to offer lower prices to customers
Death of Distance hypothesis
since firms can source inputs globally many believe that location must be diminishing in importance as an explanations of a firm-level competitive advantage
joint venture
special form of strategic alliance; two or more partners create and jointly own a new organization, long term commitment
Industry Life Cycle
the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry
Non-equity alliances
based on contracts between firms such as supply agreements, distribution agreements, and licensing agreements (vertical strategic alliances) -share explicit knowledge such as patents
Strategic Alliances
voluntary arrangements between firms that involve the sharing of knowledge, resources, products, or services
Early Adopters
customers entering market in the growth stage, make up 13.5% of total market potential, early to adopt new tech or product concept because their demand is driven by their imagination and creativity (rather than by new tech like tech enthusiasts)
Benefits of Vertical Integration
lowering costs, improving quality, facilitating scheduling and planning, facilitating investments in specialized assets, securing critical supplies and distribution channels
First Mover Disadvantages
must educate customers on product benefits, find distribution channels and complementary assets, continue to perfect product-want to achieve market acceptance and seed future growth
Equity Alliance
partnership in which at least one partner takes partial ownership in the other partner
Long Term Contracts
-duration greater than 1 year -Licensing: long-term contract in the manufacturing sector that enables firms to commercialize IP such as a patent -Franchising: long term contract where a franchisor grants a franchisee the right to use the franchisors trademark and business processes to offer goods and service that carry the franchisor's brand name. Franchisee pays a buy in and offers franchisor a % of sales
Vertical Integration
-firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs -what % of a firm's sales is generated within the firm's boundaries?
Integration Responsiveness Framework
-juxtaposes the opposing pressured for cost reductions and local responsiveness -derives strategy positions of: international strategy, multi domestic strategy, global standardization strategy, and transnational strategy
Alliance Management
-managed by: 1. alliance champion (corporate exec responsible for high level support) 2. alliance leader (technical expertise and knowledge needed for day to day management) 3. alliance manager (serves as process resource and business integrator)
Architectural Innovation
-new product in which known components, based on existing tech are configured in a novel way to create new markets -new market with existing tech
Platform Ecosystem
-producers (creators of platform's offerings) -consumers (buyers or users of offerings) -owner (controlled of platform IP) -providers (interfaces for the platform)
Forms of Specialized Assets
-site specificity: assets require to be co-located -Physical asset specificity: physical and engineering properties are designed to satisfy a particular customer -Human-asset specificity: investments made in human capital to acquire knowledge and skills
Transaction Costs
all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets
Industry Decline Strategic Options
1. Exit: some are forced to exit by bankruptcy or liquidation 2. Harvest: firm reduces investments in product support and allocates only a minimum of human and other resources 3. Maintain: continue to support product even if it is declining 4. Consolidate: can consolidate industry by buying rivals, stake out strong position
Aspects of Organizational Inertia
1. organizational routines make it difficult to develop new capabilities 2. social and political structures are threatened by change 3. conformity: imitation locks firms into common structures/strategies 4. "bounded rationality" preference of exploitation over exploration 5. localized changes can be dysfunctional for configuration of organizational features; change must be systematic
Differentiation Benefits
1. protections against entry due to intangible resources (quality, innovation, etc.) 2. protection against increase in input prices (can be passed to consumers) 3. protection against decrease in sales prices (cannot be directly substituted) 4. protection against competition if product has enough differential appeal to command premium price
Technology Enthusiasts
2.5% of market potential, have engineering mindset and pressure new tech proactively, seek new products before the products are officially introduced
Alliance Management Capability
30-70% of alliance's do not deliver expected benefits, must be able to manage: 1. partner selection and alliance formation 2. alliance design and governance 3. post formation alliance management
Best Alternative Test
asks whether the set must be jointly owned to maximize the amount of value created and captured -business units may choose to remain independently owned (value capturing)
Transnational Strategy
attempt to combine benefits of localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable) -used by MNEs that use integration strategy -high pressure of local responsiveness and high pressure for cost reductions -difficult to implement
Multidomestic Strategy
attempt to maximize local responsiveness hoping local consumers will perceive their products or services as local ones -used in consumer products / food industry -products are locally manufactured (requires tacit knowledge) -high pressure for local responsiveness and low pressure for cost reductions
Platform businesses
business model innovations that use tech to connect organizations, resources, informations, and people in an interactive ecosystem where value-generating transactions can be created or exchanged
Competitive Intensity in a focal industry
companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition
Multinational Enterprise (MNE)
company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries
National Competitive Advantage
consideration of world leadership in specific industries
External Transaction Costs
costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring, and enforcing the contract
Internal Transaction Costs
costs pertaining to organizing an economic exchange within a firm Ex: costs of recruiting and retaining employees; paying salaries and benefits; setting up a shop floor; providing office space and computers; supervising work; etc.
Factor Conditions
country's endowments in terms of natural, human, and other resources -Important factors include capital markets, a supportive institutional framework, research universities and a public infrastructure
Industry Value Chain
depict the transformation of rate material into finished goods and services along distinct stages 1. raw materials 2. intermediate goods 3. final assembly/manufacturing 4. marketing + sales 5. after sales service + support
Dominant Business Diversification Strategy
derives between 70-95% of its revenues from a single business but it pursues at least one other business activity that accounts for the remainder of revenue
Related Diversification Strategy
derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business linked to the primary business activity 1. related-constrained: related businesses must leverage existing core competencies and resources; more limited 2. related-linked: new business activities that share only a limited number of linkages
Economies of Scope
describe the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and tech
Radical Innovation
draws on novel methods or materials, derived either from an entirely different knowledge base or from a recombo of existing knowledge bases with a new stream of knowledge, targets new markets by using new tech -based on new markets and new tech
Dimensions of Platform Businesses
1. business that enables value-creating interactions between external producers and consumers 2. Platforms overarching purpose is to consummate matches among users and facilitate the exchange of goods, services, or social currency thereby enabling value creation for all participants 3. Platform provides an infrastructure for these interactions and sets governance conditions for them
Learning Curve vs. Economies of Scale
-Differences in timing: learning effects occur over time as output accumulates while economies of scale are captured at one pint in time when output increases -Differences in complexity: in some production processes, effects from economies of scale can be quite significant while learning effects are minimal (and vice versa)
BCG Framework
-?: high market growth, low market share (try to increase market share or harvest/divest) -star: high market growth and market share (hold or invest for growth) -dog: low market growth and market share (harvest or divest) -cash cow: high market share and low market growth (hold position)
Why do firms acquire other firms?
-Access to new markets and distribution channels -Access to a new capability or competency -Strategic preemption (reduction in competitive intensity as a motivation to acquire)
Cultural Distance
-cultural disparity between internationally expanding firm's home country and its targeted host country (increases liability of foreignness, cost and uncertainty of conducting business) -4 main: power distance, individualism, masculinity-femininity, uncertainty avoidance, long-term orientation, and indulgence
Value Innovation
-aligning innovation with total perceived consumer benefits, price, and cost -integration strategy -how can we create new markets by reduce, adding, raising, and eliminating aspected or factors
Value innovation
-aligning innovation with total perceived consumer benefits, price, and cost (must resolve trade-offs between the two generic strategic positions) -Want to: drive down cost (through eliminating and reducing) and increase perceived consumer benefits (by raising factors and creating new ones)
Industry Life Cycle - Growth
-as market size expands a standard signals the markets agreement on a common set of engineering gestures and design choices (standards can emerge from the bottom up through competition in market), rate of growth is high -distribution channels expand, firms start thriving, reaping benefits of economies of scale, product innovation when standards are set
Admin/Political Distance
-captured in absence or presence of shared monetary or political associations, political hostilities, and weak or strong legal/fin institutions -tariffs, trade quotas, FDI restrictions -strong legal/fin institutions reduce uncertainty and transaction costs
Geographic Distance
-captures how far apart countries are as well as country's physical size, the within country distances to its borders, the country's topography, its time zones and whether the countries are contiguous to one another or have access to waterways and the ocean -country infrastructure (road, power, telecommunications)
Why do firms need to grow?
1. Increase profitability: allows companies to produce higher returns for stockholder or owners 2. Lower costs: larger firm would benefit from economies of scale (drive down average costs as output increases) 3. Increase market power: firms consolidate industries through horizontal mergers and acquisitions to change industry structure in their favor; fewer competitors = higher industry profitability 4. Reduce risk: grow to diversity product and service portfolio through competing in a number of different industries 5. Motivate management: growing firms afford career opportunities and professional development for employees; pay higher salaries and spend more on benefits
Formulating Corporate Strategy via Core Competencies
1. Leverage existing core competencies to improve current market position 2. Build new core competencies to protect and extend current market position 3. Redeploy and recombine existing core competencies to compete in markets of the future 4. Build new core competencies to create and compete in markets of the future
Advantages of Platform business model
1. Platforms scale more efficiently than pipelines by eliminating gatekeepers 2. Platforms unlock new sources of value creation and supply 3. Platforms benefit from community feedback
Build-borrow-or-buy framework
1. Relevancy: how relevant are the firm's existing internal resources to solving the resource gap? 2. Tradability: how tradable are the targeted resources that may be available externally? (highly tradable then borrow) 3. Closeness: how close do you need to be to your external resource partner? don't acquire firm (aka borrow) unless you need extreme closeness 4. Integration: how well can you integrate the targeted firm? only consider M&A if there is low relevancy, low tradability, and high need for closeness
Types of Corporate Diversification
1. Single Business 2. Dominant Business 3. Related Diversification 4. Unrelated Diversification
Why do firms enter strategic alliances?
1. Strengthen competitive position (reduce competitive rivalry) 2. Enter new markets 3. Hedge against uncertainty -real options: providing companies the right but not the obligation to make further investments in certain markets 4. Access critical complementary assets: such as marketing, manufacturing, and after scale service 5. Learn new capabilities
Alternatives to Vertical Integration
1. Taper Integration 2. Strategic Outsourcing
Advantages of International Expansion
1. access to new markets (economies of scale/scope) 2. access to lower-cost inputs (India, china) 3. develop new competencies (ex: making FDI to become part of communities of learning)
Dimensions of Corporate Strategy
Vertical Integration: In what stages of the industry value chain should the firm participate in? Diversification: What range of products and services should the firm offer (and not offer)? Geographic scope: Where should the firm compete geographically?
Late Majority
enter market in maturity stage, 34% of total market potential, early and late majority drive most industry growth and firm profitability, similar views as early majority, late majority is not as confident in their ability to master new technology, prefer to wait until standards have emerged, they also prefer well-established firms with a strong brand image
Integration Strategy - "Stuck in the middle"
firm has neither clear differentiation nor clear cost leadership profile which leads to inferior performance and a competitive disadvantage
Short Term contracts
firm sends out requests for proposals (RPFs) to many companies so that they can bid (short term = less than 1 year)
Economies of Scale
firms with greater market share might be in a position to reap these benefits, decreases in cost per unit as output increases -allows them to: spread fixed costs over larger output and employ special systems/equipment
Specialized Assets
have high opportunity cost, more value in their intended use than in their next best use
Transaction Cost Economies
insights help strategic leaders decide what activities to do in-house vs. what services and products to obtain from the external market
Innovation Ecosystem
network of suppliers, buyers, complementors -no longer make independent decisions but must consider ramifications on other parties in their innovation ecosystem
Demand Conditions
specific characteristics of demand in a firm's domestic market -demanding customers may also clue firms into latest developments in specific fields, may push firms to move research form basic findings to commercial applications for the marketplace
Incremental Innovation
squarely builds on an established knowledge base and steadily improves an existing product or service offering, targets existing markets using existing tech -based on existing tech in an existing market
Joint Ventures
standalone organization created and jointly owned by 2 or more parent companies -used to enter foreign markets -exchange of tacit and explicit knowledge
International Strategy
strategy where company sells same products or services in both domestic and foregin markets (allows MNEs to leverage home-based competencies in foregin markets) -low pressures for local responsiveness and cost reductions
When the firms costs of pursuing an activity in-house are less than the costs of transacting for that activity in the market then the firm should?
vertically integrate by owning production of the needed inputs or the channels for the distribution of outputs
Strategic Alliances (on make/buy continuum)
voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services; umbrella term that enotes different hybrid organizational forms such as long term contracts, equity alliances, and joint ventures
Economic Distance
wealth and per-capita income of consumers is most important determinants of economic distance -wealthy countries engage in more cross-border trade
Industry Life Cycle - Maturity
when few firms remain, industry morphs into oligopoly with only a few large firms, demand now consists of replacement or repeat purchases, market has reached max size and industry growth is likely to be 0 or negative
