GB 410 2

Porter's Five Forces

1. threat of new entrants 2. threat of substitute, 3. supplier bargaining power 4.buyer bargaining power 5. competitive rivalry 6. Govt/Regulations - deregulation, etc. 7. Complimentors -industry convergence Drawbacks: -dynamic structures -too static, not dynamic enough -industry convergence -formerly unrelated industries satisfy same consumer need

commodity

A raw material or primary agricultural product that can be bought and sold, such as copper or coffee.

Strategy

A set of goal-directed actions that a firm takes to gain and sustain superior performance relative to competitors (p. 6)

Functional Structure Advantages

Encourages learning from others doing similar jobs. Easy for managers to monitor and evaluate workers. Allows managers to create the set of functions they need in order to scan and monitor the competitive environment

top-down management

Imposition of decisions taken at the highest level

Value Creation

Performing activities that increase the value of goods or services to consumers

competitive parity

Should two or more firms perform at the same level, they have

SMART goals

Specific, Measurable, Attainable, Realistic, Timely

Porters 5 forces -winery Threat of new Entrants

capital costs econonmies of scale Threat of Retaliation - all brands collude to drop prices Distribution

financial ratio analysis

computing ratios that compare values of key accounts listed on a firm's financial statements 1. Profitability Ratio - how efficient they use resources 2. Activity ratio - how effectively a firm manages its assets 3. Leverage ratios - degree to which a firm relies on debt versus equity 4. Liquidity ratios - a firms ability to pay off its short term obligations 5. Market ratios - returns earned by shareholders who hold company stock

switching costs

costs that make customers reluctant to switch to another product or service Supplier Bargaining Power ex: Airbus and Boeing Manufacture Airplanes for Airlines

capabilities

organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically

Leverage Ratios

ratios that measure the extent to which a firm relies on debt financing in its capital structure

scope

whole market vs specific segment

Three Factors Determining Company Performance

•Industry Context -e.g., during the last two decades, companies in the airlines industry have been persistently less profitable than those in the pharmaceutical industry •National Context -e.g., world's most successful consumer electronics firms are in Japan •Company Capabilities and Strategies -e.g., Wal-mart and Southwest Airlines

Key Points About Strategy

•Intended strategy -The outcome of a rational and structured top-down strategic plan •Realized strategy -Combination of intended and emergent strategy •Emergent strategy -Any unplanned strategic initiative -Bubbles up from the bottom of the organization -Can influence and shape a firm's overall strategy

1.4 The Strategist Follows a Three-step Process

1.Analyze the external and internal environments. 2.Formulate an appropriate business and corporate strategy. 3.Implement the formulated strategy through structure, culture, and controls.

Two Foundational Ingredients for Competitive Advantage

1.Inspiring vision & mission statements -Backed by ethical values -Customer-oriented / problem-defining •Correlated with success -Allow for strategic flexibility to change •To meet changing customer needs •To exploit external opportunities 2.An effective strategic management process

4.3 The Dynamic Capabilities Perspective

-A firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage -Essential to create a sustained competitive advantage •A dynamic fit between internal strengths and external opportunities -Resource stocks - current level of intangible resources -ex: dynamic capabilities, new product development, engineering expertise, innovation capability, reputation for quality, etc -Resource flows - investments to maintain or build a resource

1.2 Stakeholders and Competitive Advantage Stakeholder Strategy Stakeholder Impact Analysis

-Companies with a good strategy generate value for society -Value creation occurs because companies with a good strategy are able to provide products or services to consumers at a price point that they can afford while making a profit at the same time.

Differences in Profitability Across Industries

-any of Porters five forces can extract industry profitability Average Return on Equity in US Industries, 1982-1993 Return on Equity by Industry: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/roe.html

Chapter 4 Internal Analysis: The Resource Based View of the Firm

4.1 Core Competencies 108 4.2 The Resource-Based View 111 Two Critical Assumptions 112 The VRIO Framework 113 Isolating Mechanisms: How to Sustain a Competitive Advantage 118 4.3 The Dynamic Capabilities Perspective 122 4.4 The Value Chain Analysis 127 4.5 Implications for the Strategist 129 Using SWOT Analysis to Combine External and Internal Analysis 130 CHAPTERCASE 4 / Consider This... 132

strategic positioning

-strategy is about creating superior value while containing the cost to create it -a clear strategic profile: product differentiations, cost, customer service

Economic Logic

A "recipe" by which the successful company seeks to generate a return that is greater than what competitors earn and greater than its cost of capital. A broad description of the way the company will operate in its industry.

Ethical Responsibilities

A business's duty to meet the expectations of society beyond its economic and legal responsibilities

Implementation

A set of coherent actions to implement the firm's guiding policy -How should the firm organize to turn the formulated strategy into action? -What type of corporate governance is most effective? -How does the firm anchor strategic decisions in business ethics? Example: Twitter •Different user definitions confused management and limited guidance for employees. Tradeoffs were not considered (i.e., evaluate what not to do) •Consequences of the unclear mission: •Frustration among managers and engineers •Turnover of key personnel •Internal turmoil resulted, including management demotions and promotions of CEO friends.

1.1 What Is Strategy?

A set of goal-directed actions that a firm takes to gain and sustain superior performance relative to competitors New ventures: for financial and human capital -Charities: for donations -Sports teams: athletic talent -Universities: for the best students and professors •To achieve superior performance, organizations compete for resources

strategic

A strategic plan is a high-level overview of the entire business, its vision, objectives, and values. This plan is the foundational basis of the organization and will dictate decisions in the long term. Crucial components include the vision, mission, and values.

inductive reasoning

A type of logic in which generalizations are based on a large number of specific observations. For example, what happens at one firm does not necessarily generalize to others. However, solid analytical skills go a long way toward enabling you to make informed, educated guesses about when and where insights gained from one company have broader applications.

Vision and Mission Statements

A vision statement establishes the scope and purpose of a company and reflects its values and beliefs. A mission statement expresses the specific aspirations of the company.

Functions within each SBU

Accounting, finance, human resources, product development, operations, manufacturing, marketing, and customer service Functional managers responsible for -Decisions and actions in a single function -Contributing to business-level strategy

EXHIBIT 4.2 / Company Examples of Core Competencies and Applications

Amazon.com • Superior IT capabilities. • Superior customer service. Ex: • Online retailing: Largest selection of items online. • Cloud computing: Largest provider through Amazon Web Services (AWS). Apple • Superior industrial design in integration of hardware and software. • Superior marketing and retailing experience. • Establishing an ecosystem of products and services that reinforce one another in a virtuous fashion. • Creation of innovative and category-defining mobile devices and software services that take the user's experience to a new level (e.g., iMac, iPod, iTunes, iPhone, iPad, Apple Pay, and Apple Watch.) Beats Electronics • Superior marketing: creating a perception of coolness. • Establishing an ecosystem, combining hardware (headphones) with software (streaming service). • Beats by Dr. Dre and Beats Music. Coca-Cola • Superior marketing and distribution. • Leveraging one of the world's most recognized brands (based on its original "secret formula") into a diverse lineup of soft drinks. • Global availability of products. ExxonMobil • Superior at discovering and exploring fossil-fuel-based energy sources globally. • Focus on oil and gas (fossil fuels only, not renewables). Facebook • Superior IT capabilities to provide reliable social network services globally on a large scale. • Superior algorithms to offer targeted online ads. • Connecting 1.5 billion social media users worldwide. • News feed, timeline, and graph search. General Electric • Superior expertise in industrial engineering, designing and implementing efficient management processes, and developing and training leaders. • Providing products and services to solve tough engineering problems in energy, health care, and aerospace, among other sectors. Google • Superior in creating proprietary algorithms based on large amounts of data collected online. • Software products and services for the Internet and mobile computing, including some mobile devices (Chromebook). • Online search, Android mobile operating system, Chrome OS, Chrome web browser, Google Play, AdWords, AdSense, Google docs, Gmail, etc. Honda • Superior engineering of small but powerful and highly reliable internal combustion engines. • Motorcycles, cars, ATVs, sporting boats, snowmobiles, lawn mowers, small aircraft, etc. IKEA • Superior in designing modern functional home furnishings at low cost. • Superior retail experience. • Fully furnished room setups, practical tools for all rooms, do-it-yourself. McKinsey • Superior in developing practice-relevant knowledge, insights, and frameworks in strategy. • Management consulting; in particular, strategy consulting provided to company and government leaders. Netflix • Superior in creating proprietary algorithms-based individual customer preferences. • DVD-by-mail rentals, streaming media (including proprietary) content, connection to game consoles. Tesla Motors • Superior engineering expertise in designing highperformance battery-powered motors and power trains. • Tesla Model S, Tesla Model X, and Tesla Model 3. Uber • Superior mobile-app-based transportation and logistics expertise focused on cities, but on global scale. • Uber, UberX, UberBlack, UberLUX, UberSUV, etc.

Buyer Power

BP : Switching Costs, # Buyers Buyer Purchases from Single Rival, Differentiated Inputs, Substitute Availability, Threat of BkwardInteg

6.1 Business-Level Strategy: How to Compete for Advantage 1. Strategic Position 2. Generic Business Strategies

Business-Level Strategy: •Goal-directed actions managers take -To achieve a competitive advantage -In a single product market •"How will we compete to gain & sustain competitive advantage?" -Who: which customer segments will we serve? -What: customer needs, wishes, and desires will we satisfy? -Why: do we want to satisfy them? -How: will we satisfy our customers' needs? -competitive advantage is determined jointly by industry and firm effects. Strategic Position •Choices between a cost (C) or value (V) position •There is tension between: -Value creation (Differentiator) -Pressure to keep costs in check (low-cost leader) •Purpose of trade-offs is to maximize the firms: -Economic value creation (V-C) -Profit margin Generic Business Strategies Two strategies increase a firms chance to gain and sustain a compentitive advantage. 1. Differentiation strategy -Seeks to create higher value than competitors -Offers products or services with unique features -Keeps the firm's cost structure as low as possible -Charges higher prices 2. Cost Leadership strategy -Seeks to create similar value than competitors -Products or services delivered at lower cost -Charges lower prices Focused Business Strategies •Focus on a narrower competitive scope •Types: -Focused Differentiation - ex:Tesla -highly differentiated product focused on environmentally conscious consumers who are willing to pay a premium price -Focused Cost Leadership •Ex: BIC: disposable pens and lighters at low cost •Scope of competition: -The size (narrow or broad) of the market in which a firm chooses to compete

Why are customer-oriented vision statement preferred over product-oriented vision statements?

Customer-oriented vision statements are more flexible and better adapt to change

Formulate different solutions

Figure out what the leaders should do and why, have a plan B ready

Differences in Profitability Within Selected Industries

Having fewer competitors generally equates to higher industry profitability. Industry incumbents, therefore, have an incentive to reduce the number of competitors in the industry

SUPER CAPABILITIES COMPETENCIES?

Heterogenous - different sets you apart Immobile - Coordination of capabilities Cross-functional integration CORE COMPETENCIES (Prahalad and Harnel, 1990)? Disproportionately contribute to value creation (e.g. CVP/differentiation or efficiency) Fundamental to strategy & performance Failure to invest or update core competencies? CORE RIGIDITY OR DEFICIENCY - Yields obsolescence or weakness

Mission Statement

How the vision will be accomplished •Describe what an organization does -The products and services it provides -The markets in which it competes •Strategic Commitments: -Actions to achieve the mission that are: •Costly •Long-term oriented •Difficult to reverse. -TFA says it will achieve its vision by "enlisting our nation's most promising future leaders in the effort"

black swan events

Incidents that describe highly improbable but high-impact events -Enron scandal -global financial crisis -public trust in business and free-market capitalism

3.3 Changes over Time: Industry Dynamics

Industries Evolve over Time as the Relationships Between the Five Forces Change

KEY RESOURCE - IP SCA

KEY RESOURCE - IP SCA 1. Does copyright contribute to value creation? Competitive advantages? Generates royalties = VALUABLE- 2. What is copyright? Legal right exclusive control No competitors can it !! RARE 3. Who do you download: the real original or some cover band? No one downloads a cover band as substitute for original INIMITABLE 4. Radio play, downloads, cd sales? ORGANIZED to exploit copyright — Distribute on i-Tunes, Collect Royalties, etc.

Profitability Ratios

Measures of the operating success of a company for a given period of time.

Liquidity Ratios

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

M-Form

Organizational structure that consists of several distinct strategic business units (SBUs), each with its own profit-and-loss (P&L) responsibility.

stakeholders

Organizations, groups, and individuals that can affect or are affected by a firm's actions.

Price-Performance Parity

Parity price refers to a price level that sets two assets or securities equal in value to one another.

Isolating Mechanisms: How to Sustain a Competitive Advantage

Several conditions that allow a firm to sustain a competitive advantage: ■ Better expectations of future resource value. -can acquire resources at a low cost=comp adv -not basis for sust comp adv ■ Path dependence. -A situation in which the options one faces in the current situation are limited by decisions made in the past. -time compression diseconomics ■ Causal ambiguity. -situation in which the cause and effect of a phenomenon are not readily apparent. ■ Social complexity. -situation in which different social and business systems interact with one another. ■ Intellectual property (IP) protection -A critical intangible resource that can provide a strong isolating mechanism, and thus help to sustain a competitive advantage. -ex:high R&D costs high but marginal costs low to produce next unit. -Barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy.

Activity Ratios

Show how well managers are creating value from organizational assets

Adopting a decision that all new properties will be built with a new decor to appeal to upscale clients

Strategy - whole identity and emotionally the way people interact with company

Ducati - Threat of New Entrants/Barriers to EntryCSP

Sub-Factor Analysis Low/Med./High Capital Requirements Ma Economies of Scale, Rivals' control of Distrib. Channels, Brand, IP, Proprietary Tech., Restrictive Gov/Regs, Rivals' Pref. Access to Inputs, Rivals' Control of Pref. Locs, Learning/Experience Effects, Retaliation Threat

Ducati - Power of Buyers

Switching Costs - low # of Buyers Easy Riders, Weekend Riders, Undecided - High Buyer Purchases from single rival - high largest global competition are honda, Suzuki, Yamaha, They make up 65% of the market Threat of backwards integration - low customers unlikely to create their own sub avail - 7 companies with maket share of at least 3% no dominant single business - medium

Supplier Power

Switching Costs, Differentiated Inputs, Substitute Availability, Suppliers Depend on Industry $$$, Threat of Forward Integ.. Supplier Concen.

Threat of Subsititutes

TS : Switching Costs, Commoditization, Price-Performance Parity, Substitute Availability.

Decomposition of Variance in Profitability

The DuPont decomposition of profitability into profit margin and asset turnover has been applied extensively to forecast future profits. ... In the standard decomposition, the profit margin describes how sales translate into operating profit.

Industry Structures along the Continuum

The four common market structures, perfect competition, monopoly, monopolistic competition, and oligopoly, can be viewed as a continuum based on (1) differences in the number of firms in a market, (2) the relative size of each firm, and thus (3) the market control of each firm.

operational

The operational plan describes the day to day running of the company. The operational plan charts out a roadmap to achieve the tactical goals within a realistic timeframe. This plan is highly specific with an emphasis on short-term objectives. These can include policy, rules, and procedure.

Tactical Plan

The tactical plan describes the tactics the organization plans to use to achieve the ambitions outlined in the strategic plan. It usually has a scope of a year or less and breaks down the strategic plan into smaller more actionable chunks. Components include specific goals with fixed deadlines, budgets, and resources.

Emergent Strategies

Unplanned strategy that arises in response to unexpected opportunities and challenges

Value Proposition Ducati Time 2 Infrastructure HR Tech Procurement Inbound Logistics Operations Outbound Logistics Sales & marketing Service

Value Proposition -how consumer benefits - big race bike where competitors place in market Ducati Time 2 Infrastructure - Firms using the latter strategy appeared to view their stores as a way to control prices and brand positioning by allowing direct communication with customers. HR Tech Procurement Inbound Logistics - the network that brings goods or materials to your business. logistics of increased spare parts improved distribution Operations - 2000 decreased cost structure from 6% in 1996 to 5% Outbound Logistics - 1997 distribution strategy which was designed to unfold in three phases. -taking control of distribution and marketing in strategic markets by establishing totally owned sales and marketing subsidiaries. Sales & marketing - -sought to improved quality of dealers mono-franchise dealers in select markets and cities around the world Service - stores offered superior technical and service support 3 other manufacturers

Ducati's business level strategy (i.e. Generic Positioning Strategy) and value chain pre/post takeover, value proposition after the takeover 14. What fundamental economics and/or financials that support 15.Ducati's business level strategy and underlie Minoli's turnaround? 16. For example: What expenses did Minoli cut? Where did he increase spending; What products, programs, services did he add or focus on? What products, programs, services did he cut or minimize (if any)?; how did he change the inputs and suppliers? 17. How, if at all, did Minoli change Ducati's manufacturing, outsourcing, in-sourcing, design, and manufacturing processes? 18. How did Minoli change the factory? 19. How did Minoli change the product focus; how did he change R&D? 20. Based on the foregoing, how did Ducati become the second most profitable motorcycle maker in the world despite its small scale? 21. Can Ducati sustain its position in the sport segment? Can Honda and the other Japanese manufacturers stop its growth in this segment? 22. What is the long-term constraint that follows from occupying a niche position? 23. What strategic alternatives are available to Minoli and Ducati going forward? 24. Which future alternative would you recommend? Why?

Value Proposition: Pre acquisition: Italian style, the history of the company, the young age of the riders and their sporty attitude. Post acquisition: Emphasize the Ducati Experience, Lifetime Value of Customer Expenses Minoli Cut: Ducati reduced costs without affecting WTP for the physical product -Cut suppliers from 200 to 130 (increase quality, changed bargaining) -Increased outsourcing from 80% to 90% (allows specialization, take advantage of Emilian mechanical district) -Instituted dual sourcing for major components, short-term contracts -Increased output (12k to 39k), leveraging purchasing and assembly economies of scale -Increased product standardization ("platforming") -Spread R&D costs over "true" R&D and racing division, cutting costs Ducati - Current Success •Ducati increased WTP for product's intangibles -"World of Ducati" creates community and links with consumers -Changed distribution (cut # distributors, pushed more volume) •14 registrations/dealer in 1996 to 150 in 2000 •Includes owning some stores -Increased R&D x4 (reduced time to market, increased innovation) •Ducati targeted aggressive growth -Higher WTP (in theory), but lower price premiums (Ex. 11) leads to huge increase in volume sold -Bring in new, young customers with "naked" bikes - then sell them accessories and apparel, bring them into "World of Ducati", and eventually sell them higher margin bikes Ducati - Sustainability of Position •In mid-1990s, Honda could have crushed Ducati (in the upper left of Exhibit 4), as they were all about performance and function •But Ducati is now in the upper right of Ex. 4 - lifestyle and performance -This puts distance between Ducati and HD (and even BMW) -Honda would have a hard time convincing consumers of their specialized lifestyle history (temporal aspects) -Attempts to do so would probably create conflicts with Honda's existing activities (path dependence) •IMO, as long as Ducati stays in that peripheral corner, they are probably better insulated from Honda and others than competitors to the left of Ex. 4

6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership

What Is Blue Ocean Strategy? -can charge a higher price than cost leader because of higher perceived value => greater profit margins -lower price below differentiator because of lower cost structure => gain market share -allows a firm to offer a differentiated product or service at a low cost. •Successfully combining differentiation and cost-leadership activities -ex: Trader Joes vs Whole Foods •Uses value innovation to reconcile trade-offs •The metaphor of blue ocean means: -Untapped market space -The creation of additional demand -The opportunity for highly profitable growth 1. Value Innovation -Accomplished through aligning innovation with total perceived consumer benefits, price, and cost -To Achieve Successful Value Innovation, Answer These Questions: •Lowering costs -Eliminate: Which of the factors that the industry takes for granted should be eliminated? Ex: IKEA eliminated salespeople (customers serve selves), expensive retail outlets, long wait after order furniture, after-sales service, and other factors. As a trade-off displays in warehouse-like setting, reducing cost. -Reduce: Which of the factors should be reduced well below the industry's standard? •Increasing perceived consumer benefits Ex: Reduced OH costs via DIY assembly and transport, Warranties, customization, use of cheap materials -Raise: Which of the factors should be raised well above the industry's standard? Ex: Offers tens of thousands of home furnishing items and accessories, vs comp only a few hundred, manufactures via dedicated suppliers, to control quality, design, functionality, and cost, raised experience by layout for customers to see and touch everything for sale -Create: Which factors should be created that the industry has never offered? Ex: Ikea created a new way for people to shop for furniture 2. Blue Ocean Strategy Gone Bad: "Stuck in the Middle" How JCPenney Sailed Deeper into the Red Ocean •Ron Johnson hired as CEO -He previously led Apple's retail stores •Attempted a strategic change: -From cost leadership -To a blue ocean strategy •Many changes implemented: -More in-store boutiques -Removed clearance racks and coupons •Results: -Sales dropped by 25%. -Their stock was dropped from the S&P 500 index. -Johnson was fired. -His predecessor came out of retirement to step in. -Experienced a sustained competitive disadvantage •The Value Curve -Horizontal connection points -Located on the strategy canvas -Helps strategists determine courses of action •The Strategy Canvas -Graphical depiction of a company's performance -Relative to its competitors -Viewed across the industry's key success factors

dynamic capabilities

a firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage

backward integration

a form of vertical integration in which a company expands its role to fulfill tasks formerly completed by businesses up the supply chain. In other words, backward integration is when a company buys another company that supplies the products or services needed for production. (ie GM buying up parts manufacturers)

strategic group

a group of companies within an industry against which top managers compare, evaluate, and benchmark strategic threats and opportunities

the dynamic capabilities perspective

a model that emphasizes a firm's ability to modify and leverage its resource base in a way that enables it to gain and sustain competitive advantage in a constantly changing environment

resource based view

a model that sees certain types of resources as key to superior firm performance

Market Orientation

a philosophy that assumes that a sale does not depend on an aggressive sales force but rather on a customer's decision to purchase a product; it is synonymous with the marketing concept

Product Orientation

a philosophy that focuses on the internal capabilities of the firm rather than on the desires and needs of the marketplace

social complexity

a situation in which different social and business systems interact with one another

causal ambiguity

a situation in which the cause and effect of a phenomenon are not readily apparent

path dependence

a situation in which the options one faces in the current situation are limited by decisions made in the past

SBU (strategic business unit)

a subgroup of a single business or collection of related businesses within the larger organization (ie snow blower division of Honda which also makes autos)

strategic commitments

actions that are costly, long-term oriented, and difficult to reverse

Philanthropic Responsibilities

additional behaviors and activities that society finds desirable and that the values of the business support

Isolating Mechanisms

barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy

strategic groups

clusters of firms that share similar strategies premium - high comptetency low scale budget - mass production too expensive to compete same biz model or strategy same consumers similar product

key resources

materials that are essential for the production of a good or service tangible intangible HK

Capabilities

organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically -intangible by nature -ex: company's structure, routines, culture.

Inputs

quality inputs - cost inputs - ex: raw material and components, labor (via ind or unions), and services

Market Ratios

relate a firm's market value, as measured by its current share price, to certain accounting values

Value Chain

the series of internal departments that carry out value-creating activities to design, produce, market, deliver, and support a firm's products

Top-down vs. bottom-up processing

top down: higher level processing influence lower levels in processing bottom up: data relayed from a level of mental processes is always moving to a higher level

mobility barriers

within-industry factors that inhibit the movement of companies between strategic groups -strategic commitments -costly -not easily reversed

CHAPTERCASE 4 / Consider This... 132 Nike's Core Competency: The Risky Business of Fairy Tales

§Nike, a company created by Bill Bowerman and Phil Knight in 1964, today has 60%−90% market share (depending on the sport) and $25 billion in annual revenues. §These are sponsored celebrities epitomizing Nike's core competence of creating heroes, i.e., selecting athletes who succeed against all odds. §This Core Competency does have its risks, as heroes do sometimes fall, resulting in public relations disasters. Consider This... •Nike's strategy of building its core competency by creating heroes is not without risks. •Time and time again Nike's heroes have fallen from grace. •Although Nike's co-founder and chairman Phil Knight declared that scandals surrounding its superstar endorsement athletes are "part of the game," too many of these public relations disasters could damage the company's brand and lead to a loss of competitive advantage. customer value proposition (CVP) https://notesmatic.com/nike-resources-and-capabilities/ Nike Resources and Capabilities April 1, 2019 by Abhijeet Pratap Last Updated October 28, 2021 NIKE: A VRIO ANALYSIS Nike (NYSE: NKE) is a leading sports shoe and apparel brand. The company has built a strong global presence. It serves its customers through several sales channels including company-owned stores and online channels. Nike's dominant market position in the sports shoe industry is based on several sources of competitive advantage. The company is also known for its great marketing techniques. Apart from excellent marketing, the brand is popular for its focus on quality and innovation. It is a customer-centric brand that has maintained a consistent focus on quality and product innovation. All of these factors have resulted in excellent sales and profits. While quality is the core strength of Nike, it has been successful by focusing on each aspect of the business including supply chain management and human resource management. Here is a list of the resources and capabilities that have helped Nike gain an edge and become a leading brand. Learn about how these resources and capabilities have helped Nike gain and sustain its competitive advantage. Brand Equity : - Brand equity is an important competitive advantage. Strong brand equity is a result of a strong commitment to quality and customer experience. If Nike's brand equity is strong, it means the brand has been successful at connecting with its customers and engaged them well. Strong brand equity comes from building trust and customer experience. If you manage customer experience well, the result will be higher engagement and loyalty. Brand equity depends upon what your customers think of you and how well designed your customer experience is. Nike has generally performed strongly in terms of customer experience. Apart from the other things, its focus on quality and innovation has resulted in high brand equity which helps generate higher sales and to build a larger customer base. Moreover, brand equity is a basic advantage that helps you sustain the other sources of advantage you have built. It also helps you create a differentiated and unique identity in the market. Product quality :- Product quality is also an important focus area for Nike. Any market-leading brand has become successful by consistently focusing upon quality and by bringing market-leading products and innovations for its customers. Product quality also leads to higher customer retention and higher trust among consumers. A consistent focus on great product quality helps a company achieve loyal customers. In the case of Nike, it allows the brand to charge higher prices and manage the competitive pressure as well. The sports shoe industry has continued to grow hyper-competitive. The rival brands are also investing in quality and marketing. However, Nike has brought a large range of products and by sustaining its quality level, it has also been successful at building high-level trust among its consumers. It is an important source of competitive advantage that has helped Nike continuously strengthen its position in the market. Research and innovation :- Research and innovation can also be a source of competitive advantage. Most of the market-leading brands in nearly every industry place a heavy focus on research and innovation so as to bring good quality products to the market. The growth of digital technology has brought higher competition to the market by offering Nike and its competitors, new channels for marketing and sales. Nike also invests a heavy sum in research and development each year to grow its product range and bring market-leading products. Consumer trends are changing fast and it is vital to understand these trends and remain ahead of the rivals. This is also why research and innovation get to become a source of competitive advantage for any brand. Marketing :- Marketing is a critical source of advantage in the 21st century. Apart from driving sales, marketing also helps build a distinct image and differentiated identity in the industry. It helps you gain popularity and customer loyalty as well as stay connected with your customers. Customer engagement has become a critical factor in terms of brand recall as well as customer loyalty. Brands that fail to engage their customers well or provide a superior and unique customer experience will not be able to achieve success. Marketing helps you build a strong customer connection and establish yourself in the right image. It helps you sustain your leadership position in the market and your customer base. Apart from the other digital marketing channels, Nike uses social media for engaging its customers. It has a great video marketing strategy that it uses to promote new products and to reach out to its customers worldwide and engage them to gain higher loyalty. Global presence: The global presence of a brand is also a critical strength. The United States is the main market of Nike, but there are several more developed and developing markets, that are also leading sources of revenue for the brand. Nike has maintained a global sales and distribution network that enables it to reach its millions of customers without any difficulty. To strengthen its global presence, it has built strong relationships with its suppliers and distributors which enables Nike to source the best quality raw materials and serve its customers better. Customer loyalty :- Customer loyalty is important for every brand and each one strives to achieve it. Building customer services requires focusing on several aspects of business apart from product quality. You also need to focus on the effectiveness of your marketing strategy as well as customer engagement and overall customer experience. To win loyal customers requires a special focus on providing a superior customer experience. Nike uses digital channels to engage its customers. Other factors like product quality, pricing, marketing, and promotions also play an important role in building stronger customer loyalty. Supply chain :- Competition in the sports shoe industry has grown very high. To sustain its leadership position Nike needs a continuous supply of good quality raw materials. It sources its raw materials from suppliers around the world. The company has managed a large and international network of highly loyal suppliers. This offers Nike a consistent supply of good quality raw material so it can bring excellent products to the market for its customers. Supplier relationships are also an important priority for the brand. Nike invests in the empowerment of its suppliers to build long-lasting relationships. It also provides them the tools and training to serve customers better.

Autonomous Actions, Serendipity, and the Resource Allocation Process (RAP)

•Autonomous actions -Strategic initiatives undertaken by employees -In response to unexpected external or internal opportunities •Serendipity -Random events, surprises, coincidences -Has an effect on strategic initiatives •Resource-allocation process (RAP) -How a firm allocates resources based on policy -Helps shape realized strategy

11.3 Organizational Culture and Competitive Advantage

•Can organizational culture can help a firm gain and sustain competitive advantage? Yes, IF: -The culture makes a positive contribution to the firm's economic value creation. -If the culture obeys the VRIO principles •It can be an effective lever for new ventures: -It is malleable. -Firm founders, early-stage CEOs, and venture capitalists should be proactive: •Create a culture that supports a firm's economic value creation

Strategy Highlight 2.1

•Merck -Vision: "to preserve and improve human life" -Values: "We try to never forget that medicine is for the people. It is not for profits. The profits follow, and if we have remembered that, they have never failed to appear." •Merck's donations helped eradicate river blindness •Vioxx -Painkiller, claimed fewer side effects than aspirin -Received allegations of more dangerous side effects •Merck's reputation was damaged -Stock fell 30% -$27 billion in market value was lost -Lawsuits cost the company $30 billion

Empirical Testing of Structure-Conduct (Strategy)- Performance

•ROE(j) = 14.7 + .050 CR4(j) + .119 [CAP/S](j) + (2.08) (1.98) 1.30 [A/S](j) +1.40 [R&D/S](j) +0.26 [GROW](j) (7.20) (2.95) (2.90) t-statistics in parentheses R-squared = .43 CR4 = 4-firm concentration ROE = return on equity R&D/S = R&D/Sales A/S = advertising/sales CAP/S = capital expenditures/Sales GROW = demand growth -In practice, researchers estimate a statistical model of the following form where data are aggregated to the industry level: -Industry Profit Rates = f (Concentration, Barriers to Entry, Demand ...) -Multiple regression analysis seeks to evaluate the degrees to which deviations of the dependent variable (and in this course our focus has been on profit rates as the dependent variable) from its mean are "explained by" or associated with variations in each of a set of independent or explanatory variables (e.g., concentration, barriers to entry, demand, etc.) -The nature of this association is captured by regression coefficients relating the profit rates in the industry of each independent variable, allowing us to determine the effect, for example, of a 10% increase in seller concentration on profit rates, holding all other explanatory variables constant (i.e., "ceteris paribus") Variable - Predicted - Sign Reason CR4 + Higher concentration enables higher prices CAP/S + Capital-cost barrier to entry A/S + Advertising intensity as a product differentiation barrier to entry R&D/S + Technological know-how GROW + Demand growth leads to less likely price wars -Note that the multiple regression results are consistent with (but do not prove!) the structure-conduct-performance model. -As you probably are aware from your statistics classes, there are many potential problems that can interfere with the reliable estimation of regression models, leading to incorrect inference about the statistical significance and economic importance of explanatory variables. •Three Potential Problems: (1) Mis-specification problems; -Important Variables Omitted. In our regression, the impact of substitute products, and the power of buyers and suppliers have not been included in the model specification. -Irrelevant Variables Included. If you believe in "perfect capital markets" then you may question the idea of capital cost entry barriers and therefore you would question the inclusion of the independent variable [CAP/S] in the model. -Model assumes a linear relationship. Since the regression assumes a linear relationship, this may turn out to be a poor approximation if some of the explanatory variables (e.g., ADV/S) influence the dependent variable (i.e., ROE) in a non-linear way. -Independent variable may not be truly independent. For example, not only can increased concentration affect profit rates but profit rates may affect industry concentration. Multicollinearity.If independent variables such as(ADV/S) and {R&D/S) are highlycorrelated, then thevalidity of the t-statistics come into question. (2) Measurement problems •For example, CR4 may not be the best measure of industry concentration, where the HHI is a better measure. Perhaps some performance measure other than ROE would also be better for testing the theory. Note: If the evidence is not consistent with the theory it is not necessarily the case that we abandon the theory. One of the many possibilities is that we do not have good measures of the theoretical concepts. (3) Identification problems These problems are related to the idea that "correlation does not imply causality." -For example, you might maintain that high advertising/sales is a barrier to entry (product differentiation) strategy that causes high profit rates. The regression is consistent with Porter's (1980) theory. -However, you might argue instead that high profit rates allow more discretionary spending in marketing and thus, high profit rates cause high advertising/sales. The empirical evidence is also consistent with this theory. Thus, we have an "identification problem." The data are consistent with multiple theories and we must find more refined tests and better econometric methods in order to advance our scientific knowledge in strategic management.

Efficient Markets

•The efficient market hypothesis, in financial markets, is one in which prices reflect information instantaneously and one in which extra-ordinary profit opportunities are thus rapidly dissipated by the action of profit-seeking individuals in the market. •How well does the efficient market hypothesis for capital markets apply to product markets? -If the efficient market hypothesis applied fully to product markets then we should see over time equalization in risk-adjusted rates of return across industries. -What do the data support?

Strategy as Planned Emergence

•Top Down and Bottom Up -Bottom-up strategic initiatives emerge -Evaluated & coordinated by management •Relies on data, plus: -Personal experience -Deep domain expertise -Front line employee insights

Firm effects

-attribute firm performance to the actions managers take -Although a firm's industry environment is not quite as important as the firm's strategy within its industry, they jointly determine roughly 75 percent of overall firm performance.

Exhibit 2.4 Level-5 Leadership Pyramid

-consistent patterns of leadership among the top companies, as pictured -conceptual framework showing leadership progression through five sequential levels -companies identified as great are led by Level-5 executives The levels as they progress are Level 1: Highly Capable Individual Level 2: Contributing Team Member Level 3: Competent Manager Level 4: Effective Leader Level 5: Executive

diagnosis

1. Are the firms value chain activityies mutually reinforcing? 2. Do the firm's resources and capabilities fit with external demands? 3. Clearly defined strategy that will create a competitive advantage 4. good use of its strength and opportunities 5. serious weaknesses or significant threats

I. The MiniCase indicates that Nike's core competency is to create heroes. What does this mean? How did Nike build its core competency? Does it, for example, identify and leverage the potential identified in a VR1O analysis (are its competencies valuable, rare, inimitable, and organized to capture value) in a resource-based view of the firm? 2. What would it take for Nike's approach to turn from a strength into a weakness? Did this tipping point already occur? Why or why not? 3. What recommendations would you have for Nike? Can you identify a way to reframe the competency of creating heroes? Or a new way to think of heroes, teams, or sports that would continue to build the brand? 4. If you are a competitor of Nike (such as adidas, Under Armour, New Balance, or Li-Ning), how could you exploit Nike's apparent vulnerability? Provide a set of concrete recommendations.

1. The statement that Nike's core competency is to create heroes means that the company has not based its core competency from its running shoes and sports apparels but from the fact that it creates heroes out of some popular athletes and athletes with good potential. In this strategy Nike identifies an athlete who is relatable to the masses and has the potential to become a future superstar. The athletes are then used in the company's marketing campaigns and advertisements and are turned into sporting icons. Yes it identifies as well as leverages the potential identified in a VRIO analysis. The athlete being picked is valuable as it is handpicked from a pool of good athletes. This puts Nike in a position that enables it to exploit the resource that is not available to its competition. The resource is rare as the rights of this athlete are solely with Nike. The idea of roping in an athlete is imitable but Nike has the unique ability to spot future superstars. Nike is well organized and in a position to sustain competitive advantage and dominate the market share. 2. Nike's approach is highly dependent on the behavior, skills and performance of the athletes handpicked by them. The handpicked athletes are expected to behave in a manner that has been portrayed by Nike and when they behave on the contrary or are involved in some ethical disputes or are a part of a controversy then the brand image of Nike takes a hit. Yes this tipping point has already occurred with many of its sponsored athletes being involved in scandals and controversies. Examples are Tiger Woods, Lance Armstrong, Oscar Pistorius etc. 3. My recommendation for Nike is that they should reframe the hero that their campaigns are based on. Rather than looking to create famous personalities who are susceptible to controversies and scandals Nike should look at creating and finding everyday heroes. The company could like at people who have shown great strength, courage and determination to make a difference in other people's life. They can pick a fireman who bravely rescued a woman from a burning building by risking his life, a policeman who single handedly busted a drug racket etc. The everyday heroes will be more relatable to the masses and will be able to stand the test of time. 4. Being a competitor I would exploit Nike's vulnerability by starting to create heroes by identifying them quite early when the athletes are at a younger age. I will also exploit Nike's past failures and use this to leverage my brand. In terms of recommendations I would suggest Nike to create a guiding policy so as to be able to generate concrete ideas for its future. This will enable it to reposition its brand and re-define what a Nike hero is. The company should also focus more on product innovation and also emphasize the quality of their products in their campaigns.

6.2 Differentiation Strategy: 3 drivers that increase the value or decrease cost

3 Drivers: 1. Product Features 2. Customer Service 3. Complements •Unique features that increase value of goods and services •Consumers are willing to pay a higher price. •The focus of competition: -Unique product features -Service -New product launches -Marketing and promotion •Competitive advantage achieved when: -Value - Cost > competitors 1. Product Features •Increases perceived value •Turns commodity products into differentiated products •Strong R&D capabilities are often needed 2 Customer Service •Increases perceived value •Turns commodity products into differentiated products •Strong R&D capabilities are often needed ex free shipping for returns and purchases for Zappos -encouraged to build a relationship of trust with each individual customer. 3 Complements •Increases perceived value of a service offering -ex: Bundles Internet access, phone, and TV services •Consumed in tandem •Example: AT&T U-verse •Example: DVR -Enables pause & recording of TV shows

Chapter 6 - Business Strategy: Differentiation, Cost Leadership, and Blue Oceans

6.1 Business-Level Strategy: How to Compete for Advantage Strategic Position Generic Business Strategies 6.2 Differentiation Strategy: Understanding Value Drivers Product Features Customer Service Complements 6.3 Cost-Leadership Strategy: Understanding Cost Drivers Cost of Input Factors Economies of Scale Learning Curve Experience Curve 6.4 Business-Level Strategy and the Five Forces: Benefits and Risks Differentiation Strategy: Benefits and Risks Cost-Leadership Strategy: Benefits and Risks 6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership Value Innovation Blue Ocean Strategy Gone Bad: "Stuck in the Middle" 6.6 Implications for the Strategist

Bargaining power of buyers

A measure of the influence that customers have on a firm's prices -Switching Costs -# Buyers​ -Buyer Purchases from Single Rival -Differentiated Inputs, -Substitute Availability -Threat of Bkward Integ ie airline industry: The bargaining power of buyers is relatively high and increasing, since most airline companies are forced to cut costs by aggressive competitors, like Southwest Airlines in America or Ryanair in Europe. This pressure is passed onto the aircraft manufactures.

Strategic Management

An integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. •Mastery of strategic management enables you to more fully view the firm in its entirety -It also enables you to think like a general manager to help position your firm for superior performance (p. 6)

Scenario Planning

•Uses a top-down approach •Asks "what if" questions -Top management envisions different scenarios. -Then they derive strategic responses. •Consider optimistic and pessimistic futures •Examples: -New laws restrict carbon emissions -Demographic shifts -Changing economic conditions -Technological advances

Threat of Substitutes

- HIGH IF: •Substitute is good price-performance trade-off •Buyers switching costs to substitute is low -Products with similar functions limit the prices firms can charge the idea that products or services available from outside the given industry will come close to meeting the needs of current customers -Switching Costs -Commoditization​ -Price-Performance Parity -Substitute Availability ie airline industry Threat of substitute products: There are almost no alternatives for high-speed traveling, except perhaps high-speed trains (traditional substitutes), which are not fully developed yet and are missing the required infrastructure in most of the regions. Another impact mitigating the prosperity of commercial flights might be the Internet, which allows the usage of new functions like, for instance, real-time video conferencing (potential substitutes). Nevertheless, these new opportunities can be regarded as being imperfect substitutes for commercial flights. As a consequence, the threat of substitute products is very low and not likely to change in the near future considerably

4.2 The Resource-Based View RBV/Model

-sees resources as key to superior firm performance -Two categories: Tangible Resources- assets, have physical attributes and are visible -Examples: Labor, capital, Land, Buildings, Plant, Equipment, Supplies -Intangible Resources- invisible, difficult to move or transfer from one place to another -Examples: firm's culture, knowledge, brand equity, reputation, intellectual property, firms location ie silicon valley -large pool of ocmputer savvy work force and largest conc of vent capital in US Two Critical Assumptions- that firms may control - are critical in explaining superior firm performance for the resource-based model: 1.Resource Heterogeneity •Model assumption that a firm is a bundle of resources and capabilities differ across firms within an industry ex:SWA-employee productivity vs Alaska Airlines 2.Resource Immobility •Model assumption that a firm has resources that tend to be "sticky" and that do not move easily from firm to firm •Resource Endowments, Historical Context, Causal Ambiguity, Social Complexity -Resource Value Calcula -Book Value = Value of Firm Tangible Resourcestion -Market Value = Sum of Tangible & Intangible Resources -Value of Intangible Resources = Market Value minus Book Value -Competitive advantage is more likely to develop from intangible rather than tangible resources.. -Tangible and Intangible Resources - Examples: -Apple •Tangible Resource Value: -15 Billion •Intangible Resource Value: $180 Billion -Google •Tangible Resource Value: -8 Billion •Intangible Resource Value: $110 Billion

The VRIO Framework

-theoretical framework that explains and predicts firm-level competitive advantage. VRIO Factor: -Valuable Resource - -Attractive features Lower costs (& price) Higher profits Honda - design & build engines -enables the firm to exploit an external opportunity or offset an external threat. -enables a firm to increase its economic value creation (V − C). -Analysis -Y/N -ex:Beats competency in designing and marketing premium headphones (v $50- c $15) -competitive parity -Rare - only one or a few firms possess it. -Analysis -Y/N -competitive adv if V+R -Beats Electronics' ability and reach in product placement and celebrity endorsements that build its coolness factor are certainly rare. No other brand has so many celebs endorsing it. -Inimitable -costly to imitate -if firms that do not possess the resource are unable to develop or buy the resource at a reasonable price -ex: social connections of dre imposs to replicate -crocs fell to copy cat shoes took share price from 75 to 1 in 13 mons -Analysis -Y/N -V+R+I = internal strength & core competency, temp comp adv. -Organized To Capture Value -an effective organizational structure, processes, and systems to fully exploit the competitive potential of the firm's resources, capabilities, and competencies. -Analysis -Y/N

Corporate social responsibility (CSR)

A framework that helps firms recognize and address the economic, legal, social, and philanthropic expectations that society has of the business enterprise at a given point in time.

Product Orientation

A philosophy that focuses on the internal capabilities of the firm rather than on the desires and needs of the marketplace

functional structure

An organizational structure composed of all the departments that an organization requires to produce its goods or services.

divisional structure

An organizational structure composed of separate business units within which are the functions that work together to produce a specific product for a specific customer

Ducati's Porters Five Forces Analysis, Key Segments, key consumers,

Ducati Porter's Five Forces Analysis >> Competition in the industry -Oligopoly, with Harley Davidson as main threat (48.1% of US market share), particularly in terms of brand. -Other competitors are Triumph, Yamaha, Honda (on price/technology) & BMW >> Potential of new entrants into the industry -Dominance and strength of Harley brand suggests high entry barriers, so low threat from new entrants. No dominating brand in Europe means here threat from new entrants higher in Europe >> Bargaining Power of suppliers Power may be low within the market, due to Harley's dominance. High power with regard to new entrants, due to high switching costs >> Bargaining Power of Customers Power is high due to branding and loyal customer base, so Harley buyers unlikely to switch, as costs are too high. New entrants unable to touch Harley's licensees, as they are locked in dealer networks >> Threat of Substitutes Low threat from Cars, as consumer likely to have one in addition. Low threat from other types of motorcycles, as for different markets. Segment: Ultra-premium sports bike Target Group: Racers and Technical Riders Positioning: Used for Racing and Track

plan for implementation

Explain how to put it into action. 1. What activities need to be performed ( value chain), and what are the implications 2. What is the timeline 3. How will you finance proposal 4. What outcome is likely to be achieved (Provide SMART goals)

exploitation vs exploration

Exploration involves activities such as search, variation, risk taking, experimentation, discovery, and innovation. Exploitation involves activities such as refinement, efficiency, selection, implementation, and execution

Bargaining Power of Suppliers

HIGH IF: •Dominated by a few companies •No substitutes for supplier products •Suppliers products are differentiated •Incumbents face high switching costs •Product is important input to buyer •Forward Integration is a credible threat

Incumbent Rivalry

HIGH IF: •Many competitors in the industry (industry concentration is low) •Firms are of equal size •Industry growth is slow or shrinking (over-capacity is high) •Exit barriers are high -Contractual obligations -Geographic or historical attachments •Products and services are direct substitutes (product differentiation is low)

Differences in Profitability Across Selected Industries

Most profi table industries in the U.S. 2020 Published by Statista Research Department This statistic shows the most profitable industries in the United States as of January 2020.Money-center banking, covering banks located major fi nancial centers which deal with nationaland international markets, was ranked fi rst in the list with net profi t margin of 30.63 percent in2020, closely followed by regional banking with 30.5 percent.

BUSINESS LEVEL STRATEGY Porter's Generic Strategy Framework (How)

Moved up and to the left Requires: Value Chain Control Requires Intangibles Control Why and how shifted? Requires Distinctive position distinctive character distinctive designer develop personality must be different distinctive voice fans, not customers deputizes fans- network effects

6.6 Implications for the Strategist LO 6-6 Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value innovation.

Only a Handful of Strategic Options Are Available •Low cost or differentiation •Broad or narrow •Blue ocean •So managers must... -Understand firm and industry effects -Fine-tune strategy formulation and execution Successful Blue Ocean Strategy •Changes the competitive landscape •Opens up new areas of competition •Requires the firm to: -Reconcile trade-offs •Increasing value •Lowering production costs -Pursue both business strategies simultaneously •Example: Toyota -Introduced lean manufacturing -Delivered higher quality cars at lower cost

Amending the compensation scheme to include stock based bonuses

Operations - day to day

Changing the lobby breakfast to a self service buffet

Operations - day to day running of operation

implementing an advertising/marketing campaign utilizing discount coupons

Operations -discount coupons is implementation of Tactical (marketing)

Installing a new IT based check-in, check-out system

Opertaions - Increases efficiency, focus on Process

RBV — Classification: CAPABILITIES

RBV — Classification * CAPABILITIES: ability to exploit resources = transformational * Processes, procedures, organizational routines Skills of individual groups. * Marketing, manufacturing, production, R&D, culture. Also corresponds to Organizational Learning

RBV — Resource Classifications

RBV — Resource Classifications 1. Tangible Assets — a. Physical: Plart, equiprrent, location, land, size, raw b. financial: Borrowing —acity, retained earnings 2- Intangible Assets — a. Technology: IP (patents, mpvights) b. Reputation: Brand, customer loyalty, reputation (supgiiers, customers, etc) Human Assets or Resources — W&kforce size, sklls, adaptability, lom

Ducati - Threat of Substitutes

Sub-Factor Analysis Low/Med./High Switching Costs - Commoditization- Price-Performance Parity - unbeatable with substitutes Substitute Availability substitutes do not compare --scooter bike small sports cars atv jet ski snowmobile Summary Low

6.4 Business-Level Strategy and the Five Forces: Benefits and Risks

The Success of Business Strategy Relies On: •How well the strategy: -Leverages the firm's internal strengths -Mitigates its weaknesses •How well it helps the firm: -Exploit external opportunities -Avoid external threats 1. Differentiation Strategy: Benefits and Risks Unique strategic position, where it can benefit from imperfect competition and command a premium price. -add value -Threat of Entry Benefits: -Protection against entry due to intangible resources such as a reputation for innovation, quality, or customer service Risks: -Erosion of margins -Replacement -Power of Suppliers Benefits: -Protection against increase in input prices, which can be passed on to customers Risks: -Erosion of margins -Power of Buyers Benefits: -Protection against decrease in sales prices, because well-differentiated products or services are not perfect imitations Risks: -Erosion of margins -Threat of Subs Benefits: -Protection against substitute products due to differential appeal Risks: -Replacement, especially when faced with innovation -Rivalry among existing competitors Benefits: -Protection against competitors if product or service has enough differential appeal to command premium price Risks: -Focus of competition shifts to price -Increasing differentiation of product features that do not create value but raise costs -Increasing differentiation to raise costs above acceptable threshold 2. Cost-Leadership Strategy: -obtaining the lowest-cost position in the industry while offering acceptable value Benefits and Risks -Threat of Entry Benefits: -Protection against entry due to economies of scale Risks: -Erosion of margins -Replacement -Power of Suppliers Benefits: -Protection against increase in input prices, which can be absorbed Risks: -Erosion of margins -Power of Buyers Benefits: -Protection against increase in input prices, which can be absorbed Risks: -Erosion of margins -Threat of Substitutes Benefits: -Protection against substitute products due to differential appeal Risks: -Replacement, especially when faced with innovation -Rivalry among existing competitors Benefits: -Protection against price wars because lowestcost firm will win Risks: -Focus of competition shifts to non-price attributes -Lowering costs to drive value creation below acceptable threshold

4.5 Implications for the Strategist 129 Using SWOT Analysis to Combine External and Internal Analysis 130

USING SWOT ANALYSIS TO COMBINE EXTERNAL AND INTERNAL ANALYSIS §Synthesizes internal analysis of the company's strengths and weaknesses (S and W) with those from an analysis of external opportunities and threats (O and T) §SWOT = •VRIO Framework •Value Chain Analysis •PEST (PESTEL) Analysis •Porter's 5 Forces Analysis SO Strategies •Strategies that enable competitive advantage, external opportunities match well with internal strengths, allows for competitive advantage to be built and maintained. ST Strategies •Mitigation Strategies, firm possesses internal strengths that facilitates neutralization of external threats, may lead to temporary advantage if competitors are impacted by environmental threats. WO Strategies •Acquisition/Development Strategies, situation where strategies are formulated to acquire or develop new resources/capabilities to take advantage of external opportunities. WT Strategies •Consolidation/Exit Strategies, if firms can't find ways to convert weaknesses to strengths via acquisition/development, exit from market is recommended. SWOT Limitations §SWOT analysis - widely used management tool § §However, a strength can also be a weakness, and an opportunity can also be a threat. § §The answer is - it depends... § §To be an effective management tool, the strategist must conduct thorough external and internal analyses, grounding these analyses in rigorous theoretical frameworks, in order to derive a set of strategic options. Resources are any assets such as cash, buildings, machinery, or intellectual property that a firm can draw on when crafting and executing a strategy. Resources can be either tangible or intangible Capabilities are the organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically. Capabilities are by nature intangible. Activities Distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services.

competitive disadvantage

a firm underperforms its rivals or the industry average, has a __________________

strategy framework

broad/general low cost -> differentiation narrow/niche cost focus -> differentiation focus https://mblm.com/lab/ranking-tool/

barriers to entry

business practices or conditions that make it difficult for new firms to enter the market ie economies of scale

economies of scale

factors that cause a producer's average cost per unit to fall as output rises

the critics of top-down strategic palnning and scenario planning argue that such an approach

is limited because past events do not predict the future.

Intensity of Rivalry

the threat that customers will switch their business to competitors within the industry ​ -# Rivals​ -Size Parity​ -Industry Stagnation​ -Exit Barriers ​ -P-P Parity (Subs)​ -XS Capacity​

1.4 The Role of Uncertainty and Complexity

•Decisions must consider uncertainty and complexity. •Maintain awareness of key stakeholders. -They can affect or be affected by decisions. •Monitor and evaluate progress toward strategic objectives. -Make adjustments as necessary.

Upper Echelon's Theory

•Organizational outcomes reflect the values of the top management team. -Outcomes include strategic choices & performance levels. •Leadership actions reflect: -Age, education, and career experiences -Personal interpretations of situations •Strong leadership: innate abilities and learning

forward integration

occurs when a firm owns or controls the customers or distribution channels for its main products (ie Tesla)

planned emergence

strategy process in which organizational structure and systems allow bottom-up strategic initiatives to emerge and be evaluated and coordinated by top management

tacit knowledge

knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task

fact pattern

make their decisions based on the facts presented by the parties who are involved in the lawsuit or court trial being decided by the judges. The summary of facts that judges consider when making their decisions is sometimes called the fact pattern in the case.

Nordstrom's Vision

"To provide outstanding service every day, one customer at a time"

myopic

(adj.) nearsighted; lacking a broad, realistic view of a situation; lacking foresight or discernment

4.4 The Value Chain Analysis

-The internal activities a firm engages in when transforming inputs into outputs -Each activity adds incremental value and associated costs. -This concept can be applied to any firm - goods or service. §The value chain helps to assess which parts add value and which do not. Value Chain Activities §Link to generic strategies (add features/control costs) §Redefine Value Chain activities (create/add, eliminate/decrease) §Restructure/reorganize Value Chain flows §Internalize (backward & forward integration) or externalize (outsourcing) key activities What Is the Value Chain? •Internal activities a firm engages in when transforming inputs into outputs •Each activity adds incremental value -Primary activities directly add value -Support activities add value indirectly •Example: Beats Electronics: -Headphones designed by Dr. Dre -Packaging: premium unboxing experience -Superb displays in Apple stores Primary Activities •Firm activities that add value directly •Transform inputs into outputs as the firm moves a product or service horizontally along the internal value chain. •Examples: -Supply chain management -Operations -Distribution -Marketing and sales -After-sales service Support Activities •Firm activities that add value indirectly •Necessary to sustain primary activities -Research and development (R&D) -Information systems -Human resources -Accounting and finance -Firm infrastructure including processes, policies, and procedures

4.1 Looking Inside the Firm for Core Competencies

-To gain competitive advantage: resources + capabilities = core competencies =>Activities ->Competitive Advantage -> Superior Firm Performance ->reinvest hone and upgrade R & C Resources - reinforce core competencies capabilities - allow managers to orchestrate their core competencies. -core competencies Unique strengths, embedded deep within a firm, that are critical to gaining and sustaining competitive advantage. -must be continuously nourished to yield a competitive advantage -ex: NIKE - Just Do It •Unlocking human potential •Anyone can be a hero -Honda - competency in engines and business model of finding places to put its engines Activities- Distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services -ex order taking, delivery of the product, invoicing the customer -Competitive advantage enables: •Differentiation of products/services creating perceived value, or •Cost leadership - offering products/services of comparable value at lower cost -superior performance in the marketplace generates profits that can be reinvested into the firm

Strategic case analysis steps:

1. Skim basic facts, take note of: -Company name -Primary actors -Timeline of Key events - when and where do they happen 2. Reread in detail with a focus on defining the problem -the why 3. Analyze how the Company's business Model creates value: - what problem does it solve for client -How does the company seek to generate a return -Perform external environmental analysis (Macro-level environment - PESTEL analysis, Industry environment - Proters 5 forces, Competitive Environment, Strategic group analysis) -Internal Analysis (Firms resources, capabilities, competencies, VRIO analysis, value chain) - Current business-level and corporate level strategies ( diversification, geographic mode of entry) -Firms performance (financial and market-based measures, compare to competitors/industry avg, trends 3 to 5 yrs, perspective of stakeholders, competitive advantage) 4. Compute financial ratios 5. Make diagnosis 6. Propose treatment plan 7. Develop a plan for implementation

upper-echelons theory

A conceptual framework that views organizational outcomes—strategic choices and performance levels—as reflections of the values of the members of the top management team.

commoditization

A consequence of mature industries, where slowing innovation, extensive product assortment, excess supply, and frugal consumers force margins to the floor.

Industry Analysis

A method to (1) identify an industry's profit potential and (2) derive implications for a firm's strategic position within an industry. ex: wineries - input - grapes not land production doubled america 4th largest wine producer in world (34th place per capita ) worst economies-cal wineries increased 24% industry 2 groups: budget and premium winery distributors are capital intensive and labor intensive system consolidated to major companies (walmart etc) consumers want either quality or price how attractive is this industry?

6.3 Cost-Leadership Strategy: Understanding 4 Cost Drivers

Cost Leadership Strategy •Goal: -Reduce the firm's cost below its competitors in each value chain activity -Offer adequate value •Resources are focused on: -Reducing cost •To manufacture a product •To offer a service -Reducing prices for customers -economic value created (V − C) must be greater than competition •Appeal to the bargain-conscious buyer •Offer lower prices than competitors •Attract an increased volume of sales •Can be profitable over a long period of time Four Cost Drivers That Help Keep Costs Low: 1. Cost of Input Factors: -Raw materials -Capital -Labor -IT services outsourced to india •Example: the airline industry -Access to cheaper fuel -Interest-free government loans -Access to nighttime takeoffs and landings 2. Economies of Scale -scale economies are critical to driving down a firm's cost and strengthening a cost-leadership position -decreases in cost per unit as output increases. -can employ more specialized equipment. -share common services with partners -causes the per-unit cost to drop as output increases -higher volume does not compromise quality 2-1. Spread fixed costs over a larger output of units -gains in market share are critical to drive down per-unit cost -Ex: 90% market share - Microsoft spent $25 billion on R&D for Windows 7 before a single copy was sold 2-2. Employ specialized systems and equipment -Ex: Demand for Tesla's Model S sedan allowed it to employ cutting-edge robotics 2-3. Take advantage of certain physical properties -Ex: Big box stores can stock more merchandise and handle inventory efficiently minimum efficient scall (MES): -aim for output range between Q1 & Q2, to be cost-competitive diseconomies of scale- increases in cost as output increases -as firms get too big, the complexity of managing and coordinating raises the cost, negating the benefits of scale 3. Learning Curve •Learning drives down costs. -It takes less time to produce the same output. - We learn how to be more efficient -•First noted during WWII: -When production doubled, the per-unit cost dropped 20%. •Goal: drive down costs through process innovation -work six days per week -Their skills improve quicker than their U.S. counterparts 4. Experience Curve -steeper learning curves drive down per-unit costs -process innovation - new tech /method to produce existing products -Writing computer code -Developing new medicines -Building submarines -technology changed while output constant -ex: new production process, implementing lean manufacturing

client orientation

Need to position themselves to be more concerned with the client instead of the agency -feedback minded -base activities on clients needs

Ducati - Intensity of Competitive Rivalry

Sub-Factor Analysis Low/Med./High # Rivals - High The competitive rivalry is high as competitors are well established in market with strong brand image and market share. There's a few competitors for each model, but there's only a handful of manufacturers. Highly flexible, streamlined production structure. Size Parity - Medium The manufacturers differ in size in the industry, Harley Davidson being the biggest. Parity with engine growth over time. Industry Stagnation Medium - High Motorcycle manufacturers have been decreasing over time and Ducati has been struggling to increase sales. Global growth expected to grow to 48% by 2027, shift to electronic Exit Barriers - Low exit barriers P-P Parity (Subs) - Low Cars can be a good substitute but are more expensive. Depends on the context. Overall threat of substitutes is low XS Capacity Medium - low Just-in-time and materials as-needed production.

Supplier Bargaining Power

The ability of your suppliers to negotiate price and terms with your firm. Often a measure of your dependence upon them. -Switching Costs -Differentiated Inputs, -Substitute Availability, -Suppliers Depend on Industry $$$ -Threat of Forward Integ..​ -Supplier Concen.​

Customer-oriented vision statements

defines a business in terms of providing solutions to customer needs

Strategic Initiatives

•Any activity a firm pursues to explore and develop -New products and processes -New markets -New ventures •Can bubble up from deep within a firm through: -Autonomous actions -Serendipity -Resource-allocation process (RAP) •

Why is a Vision Important?

•Employees tend to feel part of something bigger than themselves. •Helps employees find meaning in their work •Allows employees to experience a greater sense of purpose

Formulation & Implementation Using Scenario Planning

•Formulation Stage -Identify strategic options. -Develop contingency plans. -Use analytical tools. -Build future options. •Implementation Stage -Execute dominant strategic plan. •The option that best matches the current reality •Modifications made as needed -Determine if alternate scenario should be used

Chapter Case 3: Tesla Motors and the U.S. Automobile Industry

•GM, Ford, and Chrysler - "The Big Three" -Ruled the U.S. car market for the 20th century -Protected by high entry barriers •1980's: foreign entrants intensified competition -U.S. Congressed passed import restrictions. •No new car manufacturers have emerged. -Cars are complex to build. -Large scale production is necessary to be cost competitive. •Elon Musk -Designed early version of Google maps & PayPal -Sale of these was $2B •Enabled him to pursue his passions •One of his largest ventures: Tesla Motors -Produces electric cars with small motors -Sold 2,500 Roadster Sports Coupes ($110,000 each) -Model S: $71,000 but also eligible for tax credits •Appeals to larger market •2013 Motor Trend Car of the Year •Highest score of any car: Consumer Reports •Tesla Motors: -Successfully entered U.S. automotive market -Uses innovative new technology •Future success will depend on industry forces -Lowered profit potential -Reduced attractiveness •Other non-traditional competitors -Google and Apple •Factor 1: price for crude oil dropped steeply •Factor 2: tax credits for alternative vehicles being phased out •Factor 3: Lithium-ion battery packs -Are in short supply -Are very expensive -Tesla initiating a lithium-ion battery production facility •Why do you think that Tesla's market capitalization is roughly 50% of General Motors, while GM's revenues are more than 50 times larger than Tesla?

Shortcomings of the Top-Down Approach

•May not adapt well to change •Formulation separate from implementation •Information flows top-down (one-way) •The leaders' future vision can be wrong •Example: Apple -Steve Jobs predicted customers needs

3.1 PESTEL Framework - External Analysis

•Political Factors -Government pressures -Subsidies and incentives -Lobbying -Differences in countries, states, and regions •Economic Factors -Growth rates -Interest rates -Employment levels -Currency exchange rates •Sociocultural Factors -Norms, culture, values -Demographics -Lifestyle changes -Subway, Whole Foods benefit •Technological Factors -Innovation in products and processes -Diffusion -Research & development •Environmental Factors -Global warming -Sustainability -Pollution (e.g., BP's oil spill) •Legal Factors -Court system -Legislation -Hiring laws -(De-)regulation

Top Down Strategic Planning

•Rational, data-driven strategy process •Top management attempts to program future success through -Detailed analysis of: •Prices •Costs •Margins •Market demand •Head count •Production runs -Five year plans and correlated budgets -Performance monitoring

Strategic Business Units (SBUs)

•Standalone divisions of a larger conglomerate •Has profit-and-loss responsibility •Receive guidelines from corporate headquarters •Implement business strategy •Example: -Rosalind Brewer, CEO of Sam's Club •Reports to Walmart's CEO, C. Douglas McMillon •Pursues a different strategy than Walmart Offers higher-quality products and brand names

1.4 Competition Is Everywhere

•Strategic management principles can be applied universally. •Strategists work in: -Small start-ups and large, multi-national companies -For-profit and nonprofit organizations -Private and public sectors Developed and emerging economies

Three Approaches to Strategize for Competitive Advantage

•Strategic planning -A formal, top-down planning approach •Scenario planning -A formal, top-down planning approach •Strategy as planned emergence -Begins with a strategic plan, less formal

Teach for America's Vision

"One day, all children in this nation will have the opportunity to attain an excellent education." •This vision is: -Effective -Clear -Identifies what they ultimately want to accomplish -An inspiring target

Exhibit 2.3: How CEOs Spend Their Days

- most managers prefer face-to-face meetings -Allows them to pick up on rich nonverbal cues such as facial expressions, body language, and mood, that are not apparent to them if they use e-mail or Skype, for example

Complementors

-Porters 6th Force -The suppliers of complements create value for the industry and can exercise bargaining power -The complementors generally include tourism services of airline industry whose effectiveness leads to airline effectiveness •The biggest benefit of considering complementors is that they add a cooperative dimension to Porter's (1980) "competitive forces" model. •"Thinking [about] complements is a different way of thinking about business. It's about finding ways to make the pie bigger rather than fighting with competitors over a fixed pie. To benefit from this insight, think about how to expand the pie by developing new complements or making existing complements more affordable." •Brandenburger and Nalebuff

stakeholder strategy

-allows firms to analyze and manage how various external and internal stakeholders interact to jointly create and trade value. - -internal stakeholders - stockholders (capital in exchange for hopeful gains in stock), employees (contribute time talent for wages), board members -external stakeholders - customers, suppliers, alliance partners creditors, unions, communities, governments, and media. Satisfied stakeholders are more cooperative and thus more likely to reveal information that can further increase the firm's value creation or lower its costs. ■ Increased trust lowers the costs for firms' business transactions. ■ Effective management of the complex web of stakeholders can lead to greater organizational adaptability and flexibility. ■ The likelihood of negative outcomes can be reduced, creating more predictable and stable returns. ■ Firms can build strong reputations that are rewarded in the marketplace by business partners, employees, and customers

Industry Effects

-describe the underlying economic structure of the industry elements such as: -entry and exit barriers, -number and size of companies, -types of products and services offered -20% of a firms profitability depends on the industry it is in

1.3 Three Key Elements of a Good Strategy -- AFI

1. Analyze (A) 2. Formulate (F) 3. Implement (I) •Analysis: A diagnosis of the competitive challenge, explains and predicts differences in firm performance •Formulation A guiding policy, providing an overarching approach that addresses the competitive challenge and helps managers formulate and a strategy resulting in superior performance • Implementation A set of coherent actions to implement the firm's guiding policy, which is accomplished through clear communication, organizational structure, organizational culture, and control (p. 7) Together these elements help managers can improve performance and result in competitive advantage.

Key Aspects of an Effective Vision

1. Captures an organization's aspiration 2. Identifies what it ultimately wants to accomplish 3. Motivates employees to aim for a target 4. Leaves room for contributions

Example of Strategic Groups: The Airline Industry

1. identify most important strategic development: -adoption of the hub-and-spoke network which allowed the airlines to dramatically reduce the number of flights required to still being able to provide universal coverage throughout their networks -strategic alliances -customer relationship management They used a scatterplot of airline cost versus quality and identified four strategic groups: quality differentiation, cost leadership, focus, and stuck in the middle.

Chapter 3: External Analysis: Industry Structure, Competitive Forces, and Strategic Groups

3.1 The PESTEL Framework Political Factors Economic Factors Sociocultural Factors Technological Factors Ecological Factors Legal Factors 3.2 Industry Structure and Firm Strategy: The Five Forces Model Competition in the Five Forces Model The Threat of Entry The Power of Suppliers The Power of Buyers The Threat of Substitutes Rivalry among Existing Competitors A Sixth Force: The Strategic Role of Complements 3.3 Changes over Time: Industry Dynamics 3.4 Performance Differences within the Same Industry: Strategic Groups The Strategic Group Model Mobility Barriers 3.5 Implications for the Strategist

values statement

A brief articulation of the principles that guide a company's decisions and behaviors "How do we accomplish our goals?" •Ethical standards and norms •Govern the behavior of individuals •Have two important functions: -Form the groundwork for long-term success -Help keep the company on track •Helps deal with complexity and conflict •Applies to internal conduct and external interaction -What commitments do we make? -What guardrails do we put in place? -How can we act legally and ethically in pursuit of the vision and mission?

stakeholder impact analysis

A decision tool with which managers can recognize, prioritize, and address the needs of different stakeholders, enabling the firm to achieve competitive advantage while acting as a good corporate citizen. 1. Identify stakeholders that have material effect on company 2. identify stakeholders' interests Use Power, Legitimacy Urgency criteria 3. Identify opportunities and threats that stakeholders present ie customer boycotts, 4. Identify social responsibilities ecoonomic, legal, ethical and philanthropic responsibilities do we have to our stakeholders? 5. Address stakeholder concerns

competitive advantage

A firm that achieves superior perfor mance relative to other competitors in the same industry or the industry average has a _________________________ To be able to provide either goods or services consumers value more highly than those of its competitors, or goods or services similar to the competitors' at a lower price

sustainable competitive advantage.

A firm that is able to outperform its competitors or the industry average over a prolonged period of time has a _________________________________

EXHIBIT 3.1 The Firm within Its External Environment, Industry, and Strategic Group, Subject to PESTEL Factors

A firm's macro environment contains elements that can impact the firm but are generally beyond its direct control. These elements are characteristics of the world at large and are factors that all businesses must contend with, regardless of the industry they are in or type of business they are.

3.4 Performance Differences within the Same Industry: Strategic Groups

A set of companies that pursue a similar strategy in a specific industry Strategic Group Model: ■ Identify the most important strategic dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service. ■ Choose two key dimensions for the horizontal and vertical axes, which expose important differences among the competitors. The dimensions chosen for the axes should not be highly correlated. ie cost leadership (lower v higher price) and a differentiator group (quality) ■ Graph the firms in the strategic group, indicating each firm's market share by the size of the bubble with which it is represented •Mobility Barrier Dimensions To Consider: -Specialization -Width of product line -Target customer segments -Geographic markets served -Brand Identification -Advertising -Sales Force -Technological Leadership -First Mover vs. Imitation Strategy -Product Quality -Raw materials -Specifications -Features -Durability -Cost Position -Economies of scale and scope -Vertical Integration -Backward and/or forward -Exclusive contracts and in-house service networks

Analysis

Clear Diagnosis of the competitive challenge -What are the firm's vision, mission, and values? -What is the firm's process for creating strategy and how does strategy come about? -What effects do forces in the external environment have on the firm's potential to gain and sustain a competitive advantage? -How should the firm deal with them? -What effects do internal resources, capabilities, and core competencies have on the firm's potential to gain and sustain a competitive advantage? -How should the firm leverage them for competitive advantage? - How does the firm make money? How can one assess and measure competitive advantage? What is the relationship between competitive advantage and firm performance? Example: Twitter •Competitive challenge: grow its user base •Become more valuable for online advertisers •Also: Facebook allows advertisers to target their online ads precisely based on demographic data

3.2 Industry Structure and Firm Strategy: The Five Forces Model

Competition in the Five Forces Model -competition - firms must create and capture significant market share -create value by expanding gap between Value (V) and Cost (C) to produce EV=V-C -5 forces model enables managers to no only understand their industry environment but also shape their firm's strategy -the weaker the five forces, the greater the industry's profit potential— The Threat of Entry The Power of Suppliers The Power of Buyers The Threat of Substitutes Rivalry among Existing Competitors A Sixth Force: The Strategic Role of Complements -complement - product, service, competency that adds value to the original product offering when used in tandem. The threat of entry is high when: √ The minimum efficient scale to compete in an industry is low. √ Network effects are not present. √ Customer switching costs are low. √ Capital requirements are low. √ Incumbents do not possess: Brand loyalty. Proprietary technology. Preferential access to raw materials. Preferential access to distribution channelsterm-75. Favorable geographic locations. Cumulative learning and experience effects. √ Restrictive government regulations do not exist. √ New entrants expect that incumbents will not or cannot retaliate. The power of suppliers is high when: √ Suppliers' industry is more concentrated than the industry it sells to. √ Suppliers do not depend heavily on the industry for their revenues. √ Incumbent firms face significant switching costs when changing suppliers. √ Suppliers offer products that are differentiated. √ There are no readily available substitutes for the products or services that the suppliers offer. √ Suppliers can credibly threaten to forward-integrate into the industry. The power of buyers is high when: √ There are a few buyers and each buyer purchases large quantities relative to the size of a single seller. √ The industry's products are standardized or undifferentiated commodities. √ Buyers face low or no switching costs. √ Buyers can credibly threaten to backwardly integrate into the industry. The threat of substitutes is high when: √ The substitute offers an attractive price-performance trade-off. √ The buyers' cost of switching to the substitute is low. The rivalry among existing competitors is high when: √ There are many competitors in the industry. √ The competitors are roughly of equal size. √ Industry growth is slow, zero, or even negative. √ Exit barriers are high. √ Incumbent firms are highly committed to the business. √ Incumbent firms cannot read or understand each other's strategies well. √ Products and services are direct substitutes. √ Fixed costs are high and marginal costs are low. √ Excess capacity exists in the industry. √ The product or service is perishable.

LO 1-2 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity

Competitive advantage is always judged relative to other competitors or the industry average. ■ To obtain a competitive advantage, a firm must either create more value for customers while keeping its cost comparable to competitors, or it must provide the value equivalent to competitors but at a lower cost. ■ A firm able to outperform competitors for prolonged periods of time has a sustained competitive advantage. ■ A firm that continuously underperforms its rivals or the industry average has a competitive disadvantage. ■ Two or more firms that perform at the same level have competitive parity. ■ An effective strategy requires that strategic tradeoffs be recognized and addressed—for example, between value creation and the costs to create the value.

vision statement

Defines what an organization ultimately wants to accomplish; it captures the company's aspiration. stretch the resources & capabilities of the firm inspire people in the organization to achieve unite people toward pursuit of common goal ie: Teach for America's vision: "to attain an excellent education for all children"

stategic leadership

Executives' use of power and influence to convey a compelling vision of what they want the organization to achieve to their subordinates -Use of power and influence -Direct the activities of others -Pursue organizational goals

AFI Framework for Top-Down Strategic Planning

Exhibit 2.6 Analysis (vision, mission, values; external analysis; internal analysis) Formulation (Corporate strategy; business strategy; functional strategy) Implementation (structure, culture, control; corporate governance, business ethics)

AFI Framework for Scenario Planning

Exhibit 2.7 -The elements in the AFI strategy framework are placed into a continuous feedback loop, where Analysis leads to Formulation to Implementation and back to Analysis.

The U.S. Auto Industry's Profit Pool

Exhibit 5.7 The U.S. Auto Industry's Profit Pool Source: Adapted by permission of Harvard Business Review. Exhibit from "A Fresh Look at Strategy" by O. Gadiesh and J. L. Gilbert, Harvard Business Review 76, no. 3 (1998), pp. 139-48. Copyright © 1998 by the Harvard Business School Publishing Corporation, all rights reserved.

Formulation

Guiding policy to address the competitive challenge -consistent -sizeable investment -changes to incentive/reward system -without guidance employees/stakeholders become confused and cannot be effective -How should the firm compete: cost leadership, differentiation, or value innovation -Where should the firm compete: industry, markets, and geography? -How and where should the firm compete: local, regional, national, or international? Example: Twitter •Rather than formulating a guiding policy to grow active core users, Twitter defined its user base more broadly. •Defined users into 3 types to compare with Facebook •User types were difficult to track and were less valuable to advertisers.

Power of Buyers

HIGH IF: •A few large buyers (potential collusion) •Large buyers relative to a seller (e.g., HMO power buying pharmaceuticals) •Products are standardized and undifferentiated •Buyers face few switching costs •High switching costs for sellers •Backward Integration is credible (buyer has full information) •

The Effect of Strategic Leaders Varies

Leaders who have revitalized the business: •Tim Cook (Apple) •Cheryl Sandberg (Facebook) •Marissa Mayer (Yahoo) Mary Barra (GM) •Charles Prince (Citigroup) •Richard Wagoner (GM) •Robert Nardelli (Home Depot) •Ron Johnson (JC Penney)

Economies of Scale

Savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology •Aircraft: Common wing, nose, and tail components allow several models to be leveraged using different numbers of fuselage modules to create aircraft of different lengths and passenger capacities by Boeing and Airbus Industries. •Automobiles: The Taurus platform was leveraged to provide the basis for Taurus sedans and minivans. •Consumer Electronics: Over 160 variations of the Sony Walkman were leveraged by "mixing and matching" modular components in a few basic system designs. ("Legos")

Structure-Conduct-Performance

The Feedback Critique -No one-way causal link. -Conduct can affect market structure. -Market performance can affect conduct as well as market structure Industry Structure • Number of buyers and sellers • Degree of product differentiation • Barriers to entry • Cost structures • Vertical integration • Alliances Firm Conduct • Pricing • Advertising • R&D • Investment in plant and equipment Performance • Econ profits • Accounting profits (ratios) • NPV/DCF • MVA/EVA • Tobin's Q

The Five Forces Model

The following five forces determine the profit potential of an industry and shape a firm's competitive strategy: •The Five Forces Model -The classic industry analysis model --- designed to explain variance in industry-level performance. •Threat of Entry/Barriers to Entry •Power of Suppliers •Power of Buyers •Threat of Substitutes •Rivalry Among Existing Competitors 1. Define the relevant industry. In the five forces model, industry boundaries are drawn by identifying a group of incumbent companies that face more or less the same suppliers and buyers. This group of competitors is likely to be an industry if it also has the same entry barriers and a similar threat from substitutes. In this model, therefore, an industry is defined by commonality and overlap in the five competitive forces that shape competition. 2. Identify the key players in each of the five forces and attempt to group them into different categories. This step aids in assessing the relative strength of each force. For example, while makers of jet engines (GE, Rolls-Royce, Pratt & Whitney) and local catering services are all suppliers to airlines, their strengths vary widely. Segmenting different players within each force allows you to assess each force at a fine-grained level. 3. Identify the underlying drivers of each force. Which forces are strong, and which are weak? And why? Keeping with the airline example, why is the supplier power of jet engine manufacturers strong? Because they are supplying a mission-critical, highly differentiated product for airlines. Moreover, there are only a few suppliers of jet engines worldwide and no viable substitutes. 4. Assess the overall industry structure. What is the industry's profit potential? Here you need to identify forces that directly influence industry profit potential, because not all forces are likely to have an equal effect. Focus on the most important forces that drive industry profitability.

strategic management process

The full set of commitments, decisions, and actions required for a firm to achieve sustainable competitive advantage -Put in place by leaders -Helps formulate and implement strategy -Foundational for sustainable competitive advantage

Legal Responsibilities

to obey labor, consumer protection, environmental, local, state, federal, and relevant international laws

economic responsibilities

to produce goods and services that society wants at a price that perpetuates the business and satisfies its obligations to investors

A Taxonomy of Barriers to Entry

• (1) Economies of Scale -Product-specific economies of scale -Lower setup costs as a percentage of total costs -More specialized machinery and tooling (e.g., Honda) -Plant-specific economies of scale -Engineers' 2/3 rule: Since the area of a sphere or cylinder varies as two-thirds power of volume, the cost of constructing process industry plants can be expected to rise as two thirds power of their output capacity. (This rule applies to petroleum refining, cement making, iron ore reduction and steel conversion). -Also "economies of massed reserves" -Multi-product economies of scale ("economies of scope") -Example: Cost (Iron, Steel) < Cost (Iron) + Cost (Steel) -Key idea: Shareable input (In this case, thermal economies in the production of iron and steel) -Modern examples: Aircraft, Automobiles, Consumer electronics, Household Appliances; Personal Computers, Software, Power Tools -Multi-plant economies of scale -Economies of multi-plant production, investment, and physical distribution. •(2) Experience Curve Advantages -Marvin Lieberman, a management professor at UCLA, found that in the chemical industry, on average, each doubling of plant scale over time was accomplished by an 11% reduction in unit costs. Thus, there is an "89% learning curve." -(Note: The mere presence of an experience curve does not insure an entry barrier. Another critical prerequisite is that the experience be kept proprietary, and not be made available to competitors and potential entrants.) •(3) Intended Excess Capacity -Building extra capacity for the intended purpose of deterring entrants from entering the industry. (Note: potential free-rider problems) -Excess capacity deters entry by increasing the credibility of price cutting as an entry response by incumbents (ex: Dupont in the production of Titanium Dioxide for paint) -"Innocent" excess capacity: Demand is cyclical; Demand falls short of expectations; Demand is expected to grow. •(4) Reputation -A history of incumbent firms reacting aggressively to entrants may play a role in current market interactions. •(5) Product Differentiation -Brand identification and customer loyalty to incumbent products may be a barrier to potential entrants (e.g., Coca-Cola). Product differentiation appears to be an important entry barrier in the market for over-the counter drugs and in the brewing industry. •(6) Capital Requirements -How much capital is required to compete in this industry, and which companies are willing and able to make such investments? •(7) High Switching Costs of Buyers -E.g., changing may require employee retraining (e.g., computer software). (8) Access to Distribution Channels -The manufacturer of a new food product, for example, must persuade the retailer to give it space on the fiercely competitive supermarket shelf via promises of promotion, and intense selling efforts to retailers. (9) Favorable Access to Raw Materials and to Markets -Alcoa --> bauxite -Exclusive dealing arrangements -Favorable geographic locations •(10) Proprietary Technology -Product know how -Low cost product design -Patents (and other government restrictions) •(11) Exit barriers (of incumbents) can be entry barriers (to potential entrants) •High exit costs: -High exogenous and endogenous sunk costs (not just high fixed costs!) -High asset specificity -Highly illiquid assets -Low salvage value if exit occurs -High switching costs -Low mobility of assets -Credible commitments -Irreversible investment e.g., Alaskan pipeline built in 1977 at a cost of $10 billion

Degree of Rivalry

•Advertising battles, on the other hand, may well expand or enhance the level of product differentiation in the industry for the benefit of all firms. •In other words, advertising is not necessarily a "zero-sum" game. It can be a "positive sum" game

1.4 The Difference Between Success and Failure Lies in a Firm's Strategy

•Applying tools and frameworks can enable your firm to be more successful. •You can apply the strategic management toolkit to your own career: -To pursue your professional goals -Reference the myStrategy modules •Strategy is the art and science of success and failure

All Employees Should be Involved In Mission / Vision Statement Creation

•Belief in the vision and mission is motivating. •Every employee plays a strategic role. •Any employee can have great ideas. •Exhibit 2.9 compares and contrasts: -Top-down strategic planning -Scenario planning -Strategy as planned emergence

3.1 Blackberry's Decline Strategy Highlight

•Blackberry -Pioneer in smartphones -Increased productivity -A status symbol •Market capitalization of Blackberry: -In 2008: $75 Billion; In 2015: $8 Billion •Two PESTEL environmental factors, sociocultural and technological contributed to the erosion of Blackberry's dominance in the early 2000s in cell phones •Lacked awareness of Sociocultural Factors -People began to use their own phones at work for communication. -IT departments had to incorporate other devices. •Lacked awareness of Technological Factors -Apple's release in '07 included a camera, touch-screen, and had Wi-Fi. -Was dismissed as a toy with low security features

Product-Oriented Vision Statments

•Defines a business in terms of a good or service provided •Example: "We are in the typewriter business" -Less flexible -Is not needs-based -Can lead to a myopic view •Railroads: -Saw themselves in the railroad business -Cars & jets: redefined long-distance transportation Rail companies slow to respond

Customer-Oriented Vision Statements

•Defines a business in terms of providing solutions to customer needs •Examples: -Google: "To organize the world's information and make it universally accessible and useful." -Nike: "To bring inspiration and innovation to every athlete in the world." -Yahoo: "To make the world's daily habits more inspiring and entertaining."

Starbucks Strategy Highlight 2.2

•Diana - Starbucks manager in California -Received requests for iced beverage -Tried the beverage, and liked it •Requested Starbucks HQ offer the drink -Request denied She did it anyway •Sales skyrocketed -Was eventually adopted by Starbucks Execs •This is now the Starbucks Frappuccino -At one point, was 20% of Starbucks revenues -mission is "to inspire and nurture the human spirit - one person, one cup and one neighborhood at a time." -vision is to "treat people like family, and they will be loyal and give their all."

The 3 Strategy Processes Have Strengths & Weaknesses

•Effectiveness dependent on rate of change -Slow / stable firm = choose top-down •Effectiveness dependent on firm size -Large firm = choose top-down or scenario planning •Examples: -Nuclear power provider •Top-down •Prep for black swan events through scenario planning -Fast moving companies: strategy as planned emergence •Google or Facebook

Formulating Strategy

•Strategy Formulation: where & how to compete •Strategy Implementation: how work gets done •Corporate Strategy -where to compete -Industry, markets, and geography •Business Strategy -how to compete -Cost leadership, differentiation, or integration •Functional Strategy -how to implement business strategy? -how to implement a chosen business strategy

LO 1-1 Explain the role of strategy in a firm's quest for competitive advantage.

•Strategy is the set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors. •A good strategy enables a firm to achieve superior performance. It consists of three elements: -A diagnosis of the competitive challenge. -A guiding policy to address the competitive challenge. -A set of coherent actions to implement the firm's guiding policy. •A successful strategy requires three integrative management tasks—analysis, formulation, and implementation.

Substitutes and Complements

•Substitute: An alternative from outside the given industry for its product or service. When its performance increases or its price falls, industry demand decreases. -Plastic vs. aluminium containers -Video conference vs. business travel •Complement: A product or service or competency that adds value to original product. When its performance increases or its price falls, industry demand increases. -Google complements Samsung's smartphones when it comes with Google's Android System. •Complementor: If customers value your product more when combined with another firm's product or service. -Michelin tires for Ford & GM cars

What Is Strategic Leadership?

•Successful use of power and influence •Directing the activities of others •Pursuing an organization's goals •Enabling organizational competitive advantage

Barriers To Entry

•The free entry and free exit assumption that works reasonably well for describing financial markets seems to be a premise that strays so far from our world of experience that the assumption impedes our understanding of real-world product competition. •Thus, empirical evidence suggests that (risk-adjusted) ROE does NOT equalize in the long run. ■ Economies of scale. ■ Network effects. ■ Customer switching costs. ■ Capital requirements. ■ Advantages independent of size. ■ Government policy. ■ Credible threat of retaliation.

Chapter Case 1: Does Twitter have a Strategy?

•Twitter is currently not flying high -In 2015, stock was 50% lower than in 2013 -Departure of CEO who served from 2010-2015 -Turmoil among executive ranks •Overview of Twitter -Users send short messages of 140 characters. -Users can follow each other -300 million active users worldwide -Twitter appears constantly in the mass media •Business model -Grow user base (individual users pay nothing) -Advertisers charged for promotion of goods/services -Companies pay for promoted tweets -Ads can be delivered real time •Twitter's current challengesterm-87 -Turnover / reshuffling in management & engineering -Struggles to grow its user base •Twitter = 300 million; Facebook = 1.5 billion •User growth continues to slow -Could it be taken over?

Visions Can Help Create Competitive Advantage

•Vision statements and firm performance can be positively associated if: -The vision is customer-oriented -Internal stakeholders help define the vision -Organizational structures align with the vision statement

LO 1-3 Differentiate the roles of firm effects and industry effects in determining firm performance.

■ A firm's performance is more closely related to its managers' actions (firm effects) than to the external circumstances surrounding it (industry effects). ■ Firm and industry effects, however, are interdependent. Both are relevant in determining firm performance.

LO 1-5 Conduct a stakeholder impact analysis.

■ Stakeholder impact analysis considers the needs of different stakeholders, which enables the firm to perform optimally and to live up to the expectations of good citizenship. ■ In a stakeholder impact analysis, managers pay particular attention to three important stakeholder attributes: power, legitimacy, and urgency. ■ Stakeholder impact analysis is a five-step process that answers the following questions for the firm: 1. Who are our stakeholders? 2. What are our stakeholders' interests and claims? 3. What opportunities and threats do our stakeholders present? 4. What economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders? 5. What should we do to effectively address the stakeholder concerns?

LO 1-4 Evaluate the relationship between stakeholder strategy and sustainable competitive advantage.

■ Stakeholders are individuals or groups that have a claim or interest in the performance and continued survival of the firm. They make specific contributions for which they expect rewards in return. ■ Internal stakeholders include stockholders, employees (for instance, executives, managers, and workers), and board members. ■ External stakeholders include customers, suppliers, alliance partners, creditors, unions, communities, governments at various levels, and the media. ■ Several recent black swan events eroded the public's trust in business as an institution and in free market capitalism as an economic system. ■ The effective management of stakeholders—the organization, groups, or individuals that can materially affect or are affected by the action of a firm—is necessary to ensure the continued survival of the firm and to sustain any competitive advantage.