Gb410

strategic commitment

"If firms make strategic commitments to compete in an industry, rivalry among competitors is likely to be more intense. Strategic commitments are firm actions that are costly, long-term oriented, and difficult to reverse. E.g. Long-term investment

Factors that increase buyers' power

"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." Excerpt From

SWOT analysis

-A framework that allows managers to synthesize insights obtained from an 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) to derive strategic implications. -A SWOT analysis allows a strategic leader to evaluate a firm's current situation and future prospects by simultaneously considering internal and external factors.

A Sixth Force: Complements

-A product, service, or competency -Adds value when used with the original product Complements increase demand for the primary product, thereby enhancing the profit potential for the industry and the firm" -complement A product, service, or competency that adds value to the original product offering when the two are used in tandem. -complementor A company that provides a good or service that leads customers to value your firm's offering more when the two are combined.

Limitations of Accounting Data

-All accounting data are historical and thus backward-looking past is no guarantee of future performance -Accounting data do not consider off-balance sheet items Off-balance sheet items, such as pension obligations (quite large in some U.S. companies), and operating lease in retail industry. Result in higher ROI -Accounting data focus mainly on tangible assets, which are no longer the most important This limitation of accounting data is nicely captured in the adage: Not everything that can be counted counts. Not everything that counts can be counted.

Developing strategic alternatives (four-steps)

1. Focus on the Strengths-Opportunities quadrant (top left) to derive "offensive" alternatives by using an internal strength to exploit an external opportunity. 2. Focus on the Weaknesses-Threats quadrant (bottom right) to derive "defensive" alternatives by eliminating or minimizing an internal weakness to mitigate an external threat. 3. Focus on the Strengths-Threats quadrant (top right)to use an internal strength to minimize the effect of an external threat. 4. Focus on the Weaknesses-Opportunities quadrant (bottom left) to shore up an internal weakness to improve its ability to take advantage of an external opportunity.

strategic group model

1. Identifying the most important strategic dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, cost structure, market segments, distribution channels, and customer service. These dimensions are strategic commitments based on managerial actions that are costly and difficult to reverse. 2. Choosing two key dimensions for the horizontal and vertical axes, which expose important differences among the competitors. 3. Graphing the firms in the strategic group, indicating each firm's market share by the size of the bubble with which it is represented.

Steps of using SWOT analysis

1. gathering information to link internal factors (strengths and weaknesses) to external factors (opportunities and threats). 2. use the SWOT matrix to develop strategic alternatives for the firm. 3. Developing strategic alternatives is a four-step (but not necessarily linear) process

Three traditional frameworks to measure and assess firm performance

1.Accounting profitability 2.Shareholder value 3.Economic value

Airbnb vs. Traditional Hotel Industry

Business Model Innovation that circumvents traditional entry barriers into the hotel industry Online platform for sellers and buyers to connect and transact. Disruptive -The traditional hotel Industry needs huge Investment with a long time span to increase capacity. -Inventory for Airbnb is unlimited based on rent room from signed users -The traditional hotel industry spends heavily in manage physical assets or manage a large cadre of employees. -No need for Airbnb (2500 employees v. 250000 of Marriott) Airbnb can grow faster and respond more quickly to external business environments.

competitive industry structure

Captured by: 1. The number and size of its competitors. 2. The firm's degree of pricing power. 3. The type of product or service (commodity or differentiated product). 4. The height of entry barriers Types: 1.Perfect competition 2.Monopolistic competition 3.Oligopoly 4.Monopoly

ROIC (return on invested capital)

Net income plus interest divided by average total invested capital. invested capital is just interest bearing debt plus owners equity ROIC is a popular metric because it is a good proxy for firm profitability. In particular, the ratio measures how effectively a company uses its total invested capital, which consists of two components: (1) shareholders' equity through the selling of shares to the public, (2) interest-bearing debt through borrowing from financial institutions and bondholders. As a rule of thumb, if a firm's ROIC is greater than its cost of capital, it generates value; if it is less than the cost of capital, the firm destroys value.

Blockbuster

Once a pioneer in the video rental business Failed for bankruptcy in 2010 because failed to respond effectively to the tech changes in the industry. - Cable networks (the 1980s-1990s) started offering----Netflix's mailed-ordered DVD service & Redbox's automated DVD rental -Reject Netflix's $50 million business selling offer -market further seized by Netflix's technology of viewing high quality DVD at home (vs. VHS tapes) -multi-devices streaming in the mid-2000s.

valuable resource

One of the four key criteria in the VRIO framework. A resource is valuable if it helps a firm exploit an external opportunity or offset an external threat. Five Guys' superior ability to deliver fresh, customized hamburgers as well as hand-cut fries using the highest-quality ingredients is certainly valuable because it enables the firm to command a premium price due to its perceived higher value creation

Monopoly

-An industry is a monopoly when there is only one, large firm supplying the market. -offer a unique product -high entry barry -The monopolist has considerable pricing power As a consequence, firm and thus industry profit tend to be high. The one firm is the industry. Natural Monopoly the government will grant one firm the right to be the sole supplier of a product or service. to incentivize a company to engage in a venture that would not be profitable if there was more than one supplier. E.g. utility company Near monopolies companies that have moved into space and have taken over a significant portion of the market share. Such companies are often very large. Also, they tend to diversify, making other products to help boost both market share and profit. By owning patent or core technology

Co-opetition

-Cooperation by competitors to achieve a strategic objective. E.g. Samsung and Google cooperate as complementors to compete against Apple's strong position in the mobile device industry, while at the same time Samsung and Google are increasingly becoming competitive with one another. "

Perfect competition

-Industry has many small firms, -commodity product -ease of entry -little or no ability for each individual firm to raise its prices -similar in size and resources Consumers make purchasing decisions solely on price because the commodity product offerings are more or less identical. The resulting performance of the industry shows low profitability. Under these conditions, firms cannot achieve even a temporary competitive advantage and can achieve only competitive parity

Mobility Barries

-Industry-specific factors that separate one strategic group from another." The dimensions to determine a strategic group are mobility barriers, which are strategic commitments. These are actions that are costly and not easily reversed such as the firm's underlying cost structure because it is based on managerial commitments resulting in hard-to-reverse investments."

Return on Revenue (ROR)

-Net profits/Revenue ROR indicates how much of the firm's sales is converted into profits. To delve deeper into the drivers of this difference, we need to break down ROR into three additional financial ratios: ■ Cost of goods sold (COGS) / Revenue. how efficiently a company can produce a good ■ Research & development (R&D) / Revenue. indicates how much of each dollar that the firm earns in sales is invested to conduct research and development ■ Selling, general, & administrative (SG&A) / Revenue indicates how much of each dollar that the firm earns in sales is invested in sales, general, and administrative (SG&A) expenses

strategic group model

-a framework that explains differences in firm performance within the same industry Even within the same industry, firm performances differ depending on strategic group membership" Companies in the same strategic group, therefore, are direct competitors. The rivalry among firms within the same strategic group is generally more intense than the rivalry among strategic groups: Intra-group rivalry exceeds inter-group rivalry."

monopolistic competition

-many firms -a differentiated product -some obstacles to entry -ability to raise prices for a relatively unique product while retaining customers. The key to understanding this industry structure is that the firms now offer products or services with unique features. When a firm is able to differentiate its product or service offerings, it carves out a niche in the market in which it has some degree of monopoly power over pricing, thus the name "monopolistic competition" E.g. The computer hardware industry. Many firms compete in this industry, and even the largest of them (Apple, ASUS, Dell, HP, or Lenovo) have less than 20 percent market share. Moreover, while products between competitors tend to be similar, they are by no means identical"

Political & Legal factors

-result from the processes and actions of government bodies that can influence the decisions and behavior of firms -Firms pursue political favorable influence through nonmarket strategy: (lobbying, PR, contributions, litigation) e.g. Hotel chains limited the growth of Airbnb by lobbying for passing the regulations to post limits to prohibit short-term rentals.

organized to capture value

One of the four key criteria in the VRIO framework. The characteristic of having in place an effective organizational structure, processes, and systems to fully exploit the competitive potential of the firm's resources, capabilities, and competencies. E.g. Xerox's Palo Alto, the earliest inventor of graphical user interface (GUI), the Ethernet, the mouse as a pointing device, and even the first personal computer. Due to a lack of appropriate organization, however, Xerox failed to appreciate and exploit the many breakthroughs made by PARC in computing software and hardware. If a firm is not effectively organized to exploit the competitive potential of a valuable, rare, and costly-to-imitate (VRI) resource, the best-case scenario is a temporary competitive advantage

Ecological Factors

involve broad environmental issues such as the natural environment, global warming, and sustainable economic growth. e.g. 1.BP oil spill in the gulf in the gulf of Mexico. The spill destroyed funa and flora along the U.S shoreline from Taxes to Florida. Factors can provide business opportunities. e.g. Telsa stresses environmental concerns regarding carbon emissions.

Working Capital Turnover

measures how effectively capital is being used to generate revenue. Working capital=current assets-current liabilities Components: -Working capital/revenue how effectively capital is being used to generate revenue. -PPE/Revenue indicates how much of a firm's revenues are dedicated to cover plant, property, and equipment, which are critical assets to a firm's operations but cannot be liquidated easily. -Long-term Asset/Revenue indicates how much of each dollar a firm earns in revenues is tied up in long-term assets

Capabilities

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

Primary and supportive activities

primary activities Firm activities that add value directly by transforming inputs into outputs as the firm moves a product or service horizontally along the internal value chain. Research and development (R&D). ■ Information systems. ■ Human resources. ■ Accounting and finance. ■ Firm infrastructure including processes, policies, and procedures. support activities Firm activities that add value indirectly, but are necessary to sustain primary activities To help a firm achieve a competitive advantage, each distinct activity performed needs to either add incremental value to the product or service offering or lower its relative cost.

Tangible Resources

resources that have physical attributes and thus are visible

resource stocks

the firm's current level of intangible resources

The threat of entry

the risk that potential competitors will enter an industry can decrease an industry's profit potential through two major ways 1. Reduce an industry's overall profit potential. Additional capacity leads to lower prices, especially for industries with slow growth. 2. Increase spending among incumbent firms. new competitors may force existing firms to spend more to satisfy existing customers. e.g Starbuck constantly upgrades stores and services to increase the perceived value of customers. slow the new entrants. (accept lower profit margin to maintain its market share)

strategic group

the set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantages.

1. Economies of scale

total average cost decrease with the mass production due to: -shared fixed cost -employe technology more efficiently -division of labor -demand terms better from their suppliers

Time compression diseconomies

trying to achieve the same outcome in less time, even with higher investments, tends to lead to inferior results

Accounting probability

use financial data and ratios derived from publicly available accounting data such as income statements and balance sheets Since competitive advantage is defined as superior performance relative to other competitors in the same ndustry or to the industry average, a firm's strategic leaders must be able to accomplish two critical tasks: 1. Assess the performance of their firm accurately. 2. Compare and benchmark their firm's performance to other competitors in the same industry or against the industry average. Standardized financial metrics found in publicly available income statements and balance sheets allow a firm to fulfill both these tasks.

Firm effects

Firm performance is attributed to the actions managers take

Industry Effects

Firm performance is attributed to the structure of the industry in which the firm competes

Linking Core Competencies, Resources, Capabilities, and Activities to Competitive Advantage

First, core competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage. And second, in analyzing a company's success in the market, it can be too easy to focus on the more visible elements or facets of core competencies such as superior products or services.

6. government policy

Frequently government policies restrict or prevent new entrants. E.g. India did not allow foreign retailers such as Walmart or IKEA to own stores and compete with domestic companies in order to protect the country's millions of small vendors and wholesalers.

Economic Factors

Growth rates Measured by real GDP growth rate -Expansion, Demand rising, competition normally decrease -Boom, business expands operation, likely to be profitable -Recession, benefit low-cost product, damage luxury goods Levels of employment affected by Growth rates -Boom: low unemployment, Skilled Human Capital become scarce and expensive, firms have the incentive to make investment -Downturn: Unemployment raise, Labor supply > Demand, wages fall, Interest rates Low: low Borrowing cost, high consumption, and Investment Vise Versa Price stability -Inflation: rising price level (too much money chasing too few goods and services) -Deflation: decreasing price level (serious threat to economy because of even lower price expectations, which leads to low consumption and investment) Currency exchange rates How many dollars one must pay for a unit for foreign currency. -Exchange rate increase, Foreign goods become cheaper compared to domestic, good for imports -Exchange rate decrease, Foreign goods become expensive compared to domestic, good for exports

Implications to strategic leaders

Ideally, strategic leaders want to leverage their firm's internal strengths to exploit external opportunities, while mitigating internal weaknesses and external threats. Both types of analysis in tandem allow managers to formulate a strategy that is tailored to their company, creating a unique fit between the company's internal resources and the external environment. A strategic fit increases the likelihood that a firm is able to gain a competitive advantage. If a firm achieves a dynamic strategic fit, it is likely to be able to sustain its advantage over time.

3. customer switching costs

Switching costs are incurred by moving from one supplier to another. Changing vendors may require the buyer to alter product specifications, retrain employees, and/or modify existing processes. Switching costs are onetime sunk costs e.g. switching ERP system

4. Capital requirement

The "price of the entry ticket" into a new industry. How much capital is required to compete in this industry, and which companies are willing and able to make such investments the threat of entry is high when capital requirements are low in comparison to the expected returns. If an industry is attractive enough, efficient capital markets are likely to provide the necessary funding to enter an industry

Resources

Any assets that a firm can draw on when formulating and implementing a strategy. tangible+intangible

intellectual property protection

A critical intangible resource that can provide a strong isolating mechanism, and thus help to sustain a competitive advantage. Patents designs Copyrights Trademarks Trade secrets The intent of IP protection is to prevent others from copying legally protected products or services. In many knowledge-intensive industries that are characterized by high research and development (R&D) costs, such as smartphones and pharmaceuticals, IP protection provides not only an incentive to make these risky and often large-scale investments in the first place, but also affords a strong isolating mechanism that is critical to a firm's ability to capture the returns to investment. IP protection can make direct imitation attempts difficult IP protection does not last forever, however. Once the protection has expired, the invention can be used by others. Patents, for example, usually expire 20 years after they are filed with the U.S. Patent and Trademark Office. In the next few years, patents protecting roughly $100 billion in sales of proprietary drugs in the pharmaceutical industry are set to expire.

distinct activities

A firm's core competencies are deployed through its activities (see Exhibit 4.4). A firm's activities, therefore, are one of the key internal drivers of performance differences across firms. Activities are distinct actions that enable firms to add incremental value at each step by transforming inputs into goods and services.

PESTEL model

A framework that categorizes and analyzes an important set of external factors that can create both opportunities and threats for a firm. -Political -Economic -Sociocultural -Technological -Ecological

Porter's Five Forces Model

A framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy. Two key insights 1. Competition is viewed more broadly to (in addition to close competitors) include other forces: buyers, suppliers, the potential new entrants, and substitutes. 2. Profit potential is a function of the five competitive forces: -the threat of entry -power of suppliers -power of buyers- -the threat of substitutes- -rivalry among existing firms. Any of the five forces on its own, if sufficiently strong, can extract industry profitability.

Industry

A group of incumbent companies that face more or less the same set of suppliers and buyers

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.

Resource-based view

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

Isolating mechanism

Barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy. 1.Better expectations of future resource value. 2.Path dependence. 3.causal ambiguity. 4.Social complexity. 5.Intellectual property (IP) protection. If a firm is not effectively organized to exploit the competitive potential of a valuable, rare, and costly-to-imitate (VRI) resource, the best-case scenario is a temporary competitive advantage IP protection does not last forever, however. Once the protection has expired, the invention can be used by others. Patents, for example, usually expire 20 years after they are filed with the U.S. Patent and Trademark Office. In the next few years, patents protecting roughly $100 billion in sales of proprietary drugs in the pharmaceutical industry are set to expire.

Costly-to-imitate resource

A resource is costly to imitate if firms that do not possess the resource are unable to develop or buy the resource at a comparable cost. Direct imitation Competitors attempt to negate a firm's resource advantage by directly imitating the resource in question (direct imitation) through working around it to provide a comparable product or service. Substitution The second avenue of imitation for a firm's valuable and rare resource is through substitution. This is often accomplished through strategic equivalence. Combining Imitation and Substitution. In some instances, firms are able to combine direct imitation and substitution when attempting to mitigate the competitive advantage of a rival. With its Galaxy line of smartphones, Samsung has been able to imitate successfully the look and feel of Apple's iPhones. Samsung's Galaxy smartphones use Google's Android operating system and apps from Google Play as an alternative to Apple's iOS and iTunes Store.

Social culturural factors

A set of society's cultures, norms, and values. Firms need to closely monitor and capture its business implications. Demographics captures population characteristics related to age, gender, family size, ethnicity, religion

strategic activity system

A strategic activity system conceives of a firm as a network of interconnected activities that can be the foundation of its competitive advantage complex and causally ambiguous While one can easily observe one or more elements of a strategic activity system, the capabilities necessary to orchestrate and manage a network of distinct activities within the entire system cannot be so easily observed. Strategic activity systems need to evolve over time if a firm is to sustain a competitive advantage.

The VRIO framework

A theoretical framework that explains and predicts firm-level competitive advantage. A firm can gain and sustain a competitive advantage only when it has resources that satisfy all of the VRIO criteria must be: Valuable, Rare, and costly to Imitate. And finally, the firm itself must be Organized to capture the value of the resource.

strategic group model

Additional insights: 1. Competitive rivalry is strongest between firms that are within the same strategic group. The closer firms are on the strategic group map, the more directly and intensely they are in competition with one another. 2. the external environment affects strategic groups differently. During times of economic downturn, for example, the low-cost airlines tend to take market share away from the legacy carriers. Moreover, given their generally higher cost structure, the legacy carriers are often unable to stay profitable during recessions, at least on domestic routes." 3. the external environment affects strategic groups differently. During times of economic downturn, for example, the low-cost airlines tend to take market share away from the legacy carriers. Moreover, given their generally higher cost structure, the legacy carriers are often unable to stay profitable during recessions, at least on domestic routes." 4. "The external environment affects strategic groups differently. During times of economic downturn, for example, the low-cost airlines tend to take market share away from the legacy carriers. Moreover, given their generally higher cost structure, the legacy carriers are often unable to stay profitable during recessions, at least on domestic routes."

Industry Growth

Affects intensity of rivalry among competitors During periods of high growth: -Consumer demand rises -Price competition among firms decreases -They focus on capturing new customers -they are not focused on taking profitability away from each other During periods of negative growth: -Rivalry is fierce -Rivals can only gain at the expense of one another

Benchmark (Metrics)

All public companies in the United States are required to report total return to shareholders annually in the statements they file with the Securities and Exchange Commission (SEC). In addition, companies must also provide benchmarks, usually one comparison to the industry average and another to a broader market index that is relevant for more diversified firms In its annual reports, Microsoft, for example, compares its performance to two stock indices: the NASDAQ computer index and the S&P 500

Oligopoly

An oligopolistic industry is consolidated with a few large firms differentiated products high barriers to entry some degree of pricing power Firms are interdependent. Actions of one firm influence the behaviors of the others. Each competitor in an oligopoly, therefore, must consider the strategic actions of the other competitors. Due to their strategic interdependence, companies in oligopolies have an incentive to coordinate their strategic actions to maximize joint performance. E.g. "soft drink industry (Coca-Cola versus Pepsi), airframe manufacturing business (Boeing versus Airbus), home-improvement retailing (The Home Depot versus Lowe's)"

The intensity of rivalry among existing competitors

Determined by: 1. Competitive industry structure 2. Industry growth 3. Strategic commitments 4. Exit barriers

resource

In the resource-based view of the firm, a resource includes any assets as well as any capabilities and competencies that a firm can draw upon when formulating and implementing strategy. two assumptions (1) resource heterogeneity This insight requires looking more critically at the resource bundles of firms competing in the same industry (or even the same strategic group), because each bundle is unique to some extent. This insight requires looking more critically at the resource bundles of firms competing in the same industry (or even the same strategic group), because each bundle is unique to some extent. (2) resource immobility Assumption in the resource-based view that a firm has resources that tend to be "sticky" and that do not move easily from firm to firm. In perfect competition, all firms have access to the same resources and capabilities, ensuring that any advantage that one firm has will be short-lived. That is, when resources are freely available and mobile, competitors can move quickly to acquire resources that are utilized by the current market leader.

Legal Factors

Include the official outcomes of political processes as manifested in-laws, mandates, regulations, and court decisions—all of which can have a direct bearing on a firm's profit potential. Coexist with political factors e.g. EU imposed strict regulations towards U.S big techs.

5. advantages independent of size

Incumbent firms often possess cost and quality advantages that are independent of size. -brand loyalty -proprietary technology -preferential access to raw materials and distribution channels（can bestow absolute cost advantages） -favorable geographic locations -cumulative learning and experience effects Attempting to obtain such deep knowledge within a shorter time frame is often costly, if not impossible due to time compression diseconomies, which in turn constitutes a formidable barrier to entry."

Intangibles and the value of firms

Intangible assets that are not captured in accounting data have become much more important in firms' stock market valuations over the last few decades.

Changes over Time: Entry Choices and Industry Dynamics

Questions need considering: 1. who are players? allows strategic leaders to not only identify direct competitors but also focus on other external and internal stakeholders necessary to successfully compete in an industry" 2. When to enter? Nonetheless, the potential new entrant needs to consider at which stage of the industry life cycle (introduction, growth, shakeout, maturity, or decline) it should enter. 3. How to enter? -One option is to leverage existing assets, that is to think about a new combination of resources and capabilities that firms already possess, and if needed to combine them with partner resources through strategic alliances. -Another option is to reconfigure value chains. This approach allowed Skype to enter the market for long-distance calls by combining value chains differently (offering VoIP rather than relying on more expensive fiber-optic cables), and thus compete with incumbents such as AT&T. - to establish a niche in an existing industry, and then use this beachhead to grow further. E.G. Red bull, -offered in a small 8.4-ounce (250 ml) can, but priced at multiples compared to Coke or Pepsi. This allowed retailers to stock Red Bull cans in small spaces such as near the checkout counter" -This material may be protected by copyright. use many nontraditional outlets as points of sale such as nightclubs and gas stations. 4. What type of entry? "The what question of entry refers to the type of entry in terms of product market (e.g., smartphones), value chain activity (e.g., R&D for smartphone chips or manufacturing of smartphones), geography (e.g., domestic and/or international), and type of business model (e.g., subsidizing smartphones when providing services). 5. Where to entry? refers to more fine-tuned aspects of entry such as product positioning (high end versus low end), pricing strategy, potential partners, and so forth."

intangible resources

Resources that do not have physical attributes and thus are invisible. Competitive advantage is more likely to spring from intangible rather than tangible resources. Tangible assets, such as buildings or computer servers, can be bought on the open market by anyone who has the necessary cash. However, a brand name must be built, often over long periods of time.

7. credible threat of retaliation

Retaliation: ncumbents are able to retaliate quickly, through initiating a price war, for example. The industry profit potential can in this case easily fall below the cost of capital. if industry growth is slow or stagnant, incumbents are more likely to retaliate against new entrants to protect their market share, often initiating a price war with the goal of driving out these new entrants

Components of ROIC

Return on Revenue Working Capital Turnover

Rivalry among existing competitors

Rivalry among existing competitors describes the intensity with which companies within the same industry compete for market share and profitability. The stronger the forces, the stronger the expected competitive intensity, which in turn limits the industry's profit potential." Competitors can lower prices to attract customers from rivals. When intense rivalry among existing competitors brings about price discounting, industry profitability erodes. Alternatively, competitors can use non-price competition to create more value in terms of product features and design, quality, promotional spending, and after-sales ""service and support. When non-price competition is the primary basis of competition, costs increase, which can also have a negative impact on industry profitability. " "When non-price competition is the primary basis of competition, costs increase, which can also have a negative impact on industry profitability. However, when these moves create unique products with features tailored closely to meet customer needs and willingness to pay, then average industry profitability tends to increase because producers are able to raise prices and thus increase revenues and profit margins"

Shareholder Value Creation

Shareholders—individuals or organizations that own one or more shares of stock in a public company—are the legal owners of public companies. risk capital The money provided by shareholders in exchange for an equity share in a company; it cannot be recovered if the firm goes bankrupt. total return to shareholders Return on risk capital that includes stock price appreciation plus dividends received over a specific period. market capitalization A firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time. The idea that all available information about a firm's past, current state, and expected future performance is embedded in the market price of the firm's stock is called the efficient-market hypothesis. In this perspective, a firm's share price provides an objective performance indicator. When assessing and evaluating competitive advantage, a comparison of rival firms' share price development or market capitalization provides a helpful yardstick when used over the long term.

Better expectations of future resource value

Sometimes firms can acquire resources at a low cost, which lays the foundation for a competitive advantage later when expectations about the future of the resource turn out to be more accurate. Better expectations of the future value of a resource allow a firm to gain a competitive advantage. If such better expectations can be systematically repeated over time, then it can help a firm develop a sustainable competitive advantage. E.g. Rising real estate price

Nonmarket Strategy

Strategic leaders' activities outside market exchanges where firms sell products or provide services to influence a firm's general environment through lobbying, public relations, contributions, and litigation in ways that are favorable to the firm.

Problem of SWOT

Strength can also be a weakness and an opportunity can also simultaneously be a threat.

resource flows

The firm's level of investments to maintain or build a resource. Intangible resource stocks are built through investments over time. In the exhibit, these investments are represented by the four faucets, from which water flows into the tub. Investments in building an innovation capability, for example, differ from investments made in marketing expertise. Each investment flow would be represented by a different faucet. How fast a firm is able to build an intangible resource—how fast the tub fills—depends on how much water comes out of the faucets and how long the faucets are left open. Intangible resources are built through continuous investments and experience over time. How fast the bathtub fills, however, also depends on how much water leaks out of the tub. The outflows represent a reduction in the firm's intangible resource stocks. Resource leakage might occur through employee turnover, especially if key employees leave. Significant resource leakage can erode a firm's competitive advantage. A reduction in resource stocks can occur if a firm does not engage in a specific activity for some time and forgets how to do this activity well.

Implications for Strategic Leaders

The initial step is to apply a PESTEL analysis to scan, monitor, and evaluate changes and trends in the firm's macroenvironment." The next layer for strategic leaders to understand is the industry. Applying Porter's five forces model " Steps Define the relevant industry Identify the key players in each of the five forces and attempt to group them into different categories Determine 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. Assess the overall industry structure Final step: draw a strategic group map.

Value Chain

The internal activities a firm engages in when transforming inputs into outputs; each activity adds incremental value. Five Guys' core competency is to offer a simple menu of fresh, high-quality burgers and fries and a great customer experience. To command a premium price for these products and Page 141service, Five Guys needs to engage in number of distinct activities.

Price-performance trade-off

The movie rental company Redbox, which uses over 40,000 kiosks in the United States to make movie rentals available for just $2, is a substitute for buying movie DVDs. For buyers, video rental via Redbox offers an attractive price-performance trade-off with low switching costs in comparison to DVD ownership.

Low switching cost

The movie rental company Redbox, which uses over 40,000 kiosks in the United States to make movie rentals available for just $2, is a substitute for buying movie DVDs. For buyers, video rental via Redbox offers an attractive price-performance trade-off with low switching costs in comparison to DVD ownership."

Entry barries

The obstacles determine how easily a firm can enter an industry. 1. Economies of scale 2. Network effects 3. Customer switching costs 4. capital requirement 5. advantages independent of size 6. Government policy 7 Credible threat of retaliation.

Factors that increases buyers' power

The power of buyers is high when 1. There are a few buyers and each buyer purchases large quantities relative to the size of a single seller." 2. The industry's products are standardized or undifferentiated commodities. 3. Buyers face low or no switching costs. 4. Buyers can credibly threaten to backwardly integrate into the industry." E.g. Walmart leverages its buyer power by exerting tremendous pressure on its suppliers to lower prices and to increase quality or risk losing access to shelf space at the largest retailer in the world." strategic leaders need to be aware of situations when buyers especially price sensitive. This is the case when： 1. The buyer's purchase represents a significant fraction of its cost structure or procurement budget. 2. Buyers earn low profits or are strapped for cash. 3. The quality (cost) of the buyers' products and services is not affected much by the quality (cost) of their inputs.

The power of buyers

The power of buyers relates to the pressure an industry's customers can put on the producers' margins by demanding a lower price or higher product quality. When buyers successfully obtain price discounts, it reduces a firm's revenue. When buyers demand higher quality and more service, it generally raises production costs" "Strong buyers can therefore reduce industry profit potential and a firm's profitability. " "On the other hand, large institutions such as businesses or universities have significant buyer power when deciding which provider to use for their wireless services"

Exist Barries

The rivalry among existing competitors is also a function of an industry's exit barriers, the obstacles that determine how easily a firm can leave that industry. Exit barriers comprise both economic and social factors. They include fixed costs that must be paid regardless of whether the company is operating in the industry or not." Social factors include elements such as emotional attachments to certain geographic locations. E.g. In Michigan, entire communities still depend on GM, Ford, and Chrysler. If any of those carmakers were to exit the industry, communities would suffer. Other social and economic factors include ripple effects through the supply chain. When one major player in an industry shuts down, its suppliers are adversely impacted as well. An industry with low exit barriers is more attractive because it allows underperforming firms to exit more easily. Such exits reduce competitive pressure on the remaining firms because excess capacity is removed. In contrast, an industry with high exit barriers reduces its profit potential because excess capacity still remains."

Profit potential

The stronger the five forces, the lower the industry's potential.

Threats of Substitutes

The threat of substitutes is the idea that products or services available from outside the given industry will come close to meeting the needs of current customers. A high threat of substitutes reduces industry profit potential by limiting the price the industry's competitors can charge for their products and services" High when: 1. The substitute offers an attractive price-performance trade-off. 2. The buyer's cost of switching to the substitute is low."

2. Network effects

The value of a product or service for an individual user increase with the number of total users. Two effects: an increase in the value to all other users ( "total effect") and also the enhancement of other non-users motivation for using the product ("marginal effect") e.g. Cryptocurrencies, Telephone

The power of suppliers

This force reduces a firm's ability to obtain superior performance for two reasons 1. Powerful suppliers can raise the cost of production by demanding higher prices for their inputs or by reducing the quality of the input factor or service level delivered. 2.Powerful suppliers are a threat to firms because they reduce the industry's profit potential by capturing part of the economic value created." The relative bargaining power of suppliers is high when 1.The supplier's industry is more concentrated than the industry it sells to. 2.Suppliers do not depend heavily on the industry for a large portion of their revenues. 3. Incumbent firms face significant switching costs when changing suppliers. 4. suppliers offer products that are differentiated. 5. There are no readily available substitutes for the products or services that the suppliers offer. 6. Suppliers can credibly threaten to forward-integrate into the industry."

dynamic capabilities

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

strategic position

a firm's strategic profile based on the difference between value creation and cost (V-C) Competitive advantage flows into firms that can create as large as the gap btw value and cost

core rigidity

a former core competency that turned into a liability because the firm failed to hone, refine, and upgrade the competency as the environment changed Over time, the original core competency is no longer a good fit with the external environment, and it turns from an asset into a liability. This ability to hone and upgrade lies at the heart of the dynamic capabilities perspective. We defined capabilities as the organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically.

rare source

are resource One of the four key criteria in the VRIO framework. A resource is rare if the number of firms that possess it is less than the number of firms it would require to reach a state of perfect competition. five guys was neither a fast food place nor a traditional sit-down establishment. It offered a limited menu, no drive-through option, and a self-service format. This remains the case and Five Guys has managed to charge premium prices for its product—prices that are multiple times higher than that of its fast food competitors.

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

path dependence

a process in which the options one faces in a current situation are limited by decisions made in the past Path dependence also rests on the notion that time cannot be compressed at will. While management can compress resources such as labor and R&D into a shorter period, the push will not be as effective as when a firm spreads out its effort and investments over a longer period. Trying to achieve the same outcome in less time, even with higher investments, tends to lead to inferior results, due to time compression diseconomies. Consider GM's problems in providing a competitive alternative to the highly successful Toyota Prius, a hybrid electric vehicle. Its problems highlight path dependence and time Page 135compression

social complexity

a situation in which different social and business systems interact with one another Copying the emerging complex social systems is difficult for competitors because neither direct imitation nor substitution is a valid approach. The interactions between different systems create too many possible permutations for a system to be understood with any accuracy. The resulting social complexity makes copying these systems difficult, if not impossible, resulting in a valuable, rare, and costly-to-imitate resource that the firm is organized to exploit.

casual ambiguity

a situation in which the cause and effect of a phenomenon are not readily apparent E.g. Apple's success. even apple' strategic leaders may not be able to clearly pinpoint the sources of their success. Is it the visionary role that the late Steve Jobs played? Is it the rare skills of Apple's uniquely talented design team around Jonathan Ive (who left Apple in 2019)? Is it the timing of the company's product introductions? Is it Apple CEO Tim Cook who adds superior organizational skills and puts all the pieces together when running the day-to-day operations?

Technological Factors

capture the application of knowledge to create new processes and products Innovation in process technology: Lean manufacturing, Six Sigma quality, biotechnology Nanotechnology revolution, array of industries ranging from tiny medical devices to new-age materials for earthquake-resistant buildings. Artificial Intelligence Self-driving IOT

core competencies

core competencies Unique strengths, embedded deep within a firm, that are critical to gaining and sustaining competitive advantage. Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost. Five guys: Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost.

activities

distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services