Management Chapter 6

firm-level strategy

corporate strategy that addresses question "how should we compete against a particular firm?"

core capabilities

internal decision making routines, problem solving processes, & organizational cultures that determine how efficiently inputs can be turned into outputs -intangible

dogs

low share, low growth; often unprofitable and should be sold or closed down/liquidated

corporate-level strategy

overall organizational strategy that answers question "what business(es) are we in or should we be in? -2 approaches: portfolio & grand strategy

BCG matrix

portfolio strategy developed by the BCG that categorizes a corporation's businesses by growth rate and relative market share and helps managers decide how to invest corporate funds

focus strategy

posit. strategy of using cost leadership or differentiatio to produce a specialized product or service for a limited, specially targeted group of customers in partic geographic region/market segment -work in market niches (ex: Axe body spray)

nonsubstitutable resource

resource that produces value or competitive advantage and has no equivalent substitutes or replacements -ex: iTunes

strategic reference points

strategic targets managers use to measure whether a firm has developed the core competencies it needs to achieve a sustainable competitive advantage -choice to seek or avoid risk depend on whether top mgmt views company as falling above or below these strategic reference points -ex: competitor's prices -when company is performing above, IRONICALLY: risk-averse (conservative, defensive) -when company is performing below, risk-taking (daring, offensive, nothing to lose)

distinctive competence

what a company can make, do, or perform better than its competitors -ex: quality & reliability -tangible (faster, cheaper, better) -cannot be sustained for long without superior core capabilities

shadow-strategy task force

a committee within a company that analyzes the company's own weaknesses to determine how competitors could exploit them for competitive advantage

industry-level strategy

a corporate strategy that addresses the question "how should we compete in this industry?"

strategic dissonance

a discrepancy between a company's intended strategy & the strategic actions managers take when implementing the strategy

resources

assets, capabilities, processes, employee time, info and knowledge that org uses to improve effectiveness & efficiency and create & sustain competitive advantage

imperfectly imitable resource

resource that's impossible or extremely costly/difficult for other firms to duplicate -ex: Apple app store's closed platform

rare resource

resource that's not controlled or possessed by many competing firms -ex: Apple operating system

strategic group

group of companies within an industry against which top managers compare, evaluate, and benchmark strategic threats & opportunities -direct competitors or companies w/ similar strategy

stars

high growth, high share; needs substantial investment but produces sizable profits

cash cows

high share, low growth; highly profitable

benchmarking

identifying outstanding practices, processes, and standards at other companies and adapting them to your own company

Step 1 (assess need for strategic change)

-avoid competitive inertia -look for strategic dissonance

corporate-level vs industry-level vs firm-level strategies

-corporate level: what business to be in -industry level: how to compete within an industry -firm level: when, where, & what strategic actions should be taken against a direct competitor

drawbacks of portfolio strategy

-evidence suggests that acquiring unrelated businesses is not useful and actually riskier than single, undiversified businesses -dysfunctional consequences when companies are categorized as stars, cash cows, dogs, question marks--> BCG often yields incorrect judgement about companies' potential bc relies on past performance (poor indicator of future performance) -using BCG can weaken the strongest performer of portfolio: cash cows -labeling top performer as cash cow can harm eployee morale

portfolio strategy theories

-more businesses in which corporation competes, smaller its overall chances of failing -companies can reduce risk even more through unrelated diversification -acquiring new businesses is preferred method of unrelated diversification -investing profits/CF from mature, slow-growth businesses into newer, faster-growing businesses can reduce long-term risk

positioning vs. adaptive strategies

-positioning: aims to minimize effects of industry competition and build sustainable competitive advantage -adaptive: aims to choose industry-level strategy that's best suited to changes in the organization's external environment

3 steps of strategy making process

1. assess need for strategic change 2. conduct situational analysis 3. choose strategic alternatives

3 basic questions to formulate effective strategies

1. what business are we in? 2. how should we compete in this industry? 3. who are our competitors, and how should we respond to them?

competitive inertia

a reluctance to change strategies or competitive practices that have been successful in the past -ex: Sony-too many products in too many divisions, too many people, extreme costs

situational (SWOT) analysis

assessment of S&W in an organization's internal environment and the opportunities & threats in its external environment -begins w/ assessment of distinctive competencies & core capabilities

grand strategy

broad strategic plan to help an org acheive its strategic goals and guide the strategic alternatives that managers of individual businesses/subunits may use -3 kinds: growth, stability, and retrenchment/recovery

core firms

central companies in a strategic group -ex: Lowe's = core firm in Home Depot's strategic group

Porter's 5 industry forces that determine levels of competition in an industry (potential for long-term profitability)

character of rivalry, threat of new entrants, threat of substitute products/services, bargaining power of suppliers, bargaining power of buyers -stronger forces = less attractive to investors bc harder to be profitable

reactors

companies that don't follow a consistent adaptive strategy but instead react to changes in the external environment after they occur -poorest performers of the 4, approach = inherently unstable

defenders

companies using adaptive strategy aimed at defending strategic positions by seeking moderate, steady growth and offering a limited range of high-quality products/services to a well-defined set of customers

prospectors

companies using adaptive strategy that seeks fast growth by searching for new market opportunities, encouraging risk taking, and being the 1st to bring innovative new products to market -like gold miners who prospect for gold nuggets (new products) in hope that nuggets will lead them to rich deposit of gold (fast growth)

analyzers

companies using adaptive strategy that seeks to minimize risks and maximize profits by following/imitating proven successes of prospectors -blend of defender & prospector -seek moderate, steady growth and limited opportunities for fast growth -ex: Redbox/Netflix

sustainable competitive advantage

competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate -goal of most organizational strategies

response

competitive countermove, prompted by rival's attack, to defend or improve a company's market share or profit -2 kinds of responses: mirror/match competitor's move or respond along a different dimension than competitor -ex: B&N lowered price of Nook Simple Touch vs. Kindle letting customers get rid of ads for a fee -large market commonality (overlap): less motivation to attack, more likely to respond to attack bc a lot is at stake -resource similarity affects response capability (how quickly/forcefully a company can respond to an attack) -strong resource similarity-> match strategic moves (firm is less likely to attack firms w similar levels of resources bc unlikely to gain advantage if firm strikes back)

attack

competitive move designed to reduce a rival's market share or profits -ex: Amazon introduced Special Offers Kindle priced lower than any of B&N's nooks -if 1 firm is substantially stronger than another, attack is more likely to produce sustained advtg -more moves a company initiates against competitors, and greater the tendency to respond, better the performance

portfolio strategy

corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines -acquire (acquisitions-preferred method-or develop internally) companies that fit well w/ rest of portfolio, sell those that don't

Porter's 3 positioning strategies

cost leadership, differentiation, focus

unrelated diversification

creating or acquiring companies in completely unrelated businesses -way for company to reduce risk even more than acquisitions

related diversification

creating or acquiring companies that share similar products, manufacturing, marketing, tech, or cultures -contrary to predictions of portfolio strategy, this is prob best approach of helping managers decide what companies to buy/sell -key: create/buy companies with similar core capabilities

4 kinds of adaptive strategies

defenders, prospectors, analyzers, reactors

market commonality

degree to which 2 companies have overlapping products, services, or customers in multiple markets -more markets in which there is overlap, more intense the direct competition

resource similarity

extent to which a competitor has similar amounts and kinds of resources (assets, capabilities, processes, info used to create/sustain a competitive advantage)

secondary firms

firms in a strategic group that follow strategies related to but somewhat different from those of the core firms -ex: 84 lumber = secondary firm for Home Depot (caters to supplying professional contractors, doesn't have assistance available to average consumer)

question marks

low share, high growth; good potential-may become stars but investing in these is riskier

strategic reference point theory

managers choose between 2 basic alternative strategies: 1. conservative, risk-avoiding strategy (aims to protect an existing competitive advantage) 2. aggressive, risk-seeking strategy (aims to extend or create a sustainable competitive advantage)

2 factors that determine extent to which firms will be in direct competition with each other

market commonality, resource similarity

bargaining power of buyers

measure of influence customers have on firm's prices -if company sells popular product/service to multiple buyers, has more power to set prices -if comp is dependent on a few high-volume buyers, buyers have bargaining power to dictate prices

character of the rivalry

measure of intensity of competitive behavior between companies in an industry -more cutthroat rivalry, less attractiveness & profitability

threat of new entrants

measure of the degree to which barriers of entry make it easy or difficult for new companies to get started in an industry -easy entrance, more competition, lower prices and profits -barriers: large capital requirements, need for specialized knowledge

threat of substitute products/services

measure of the ease with which customers can find substitutes for an industry's products or services -if customers can easily find substitutes, higher competition, lower profits

bargaining power of suppliers

measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs -if there are few suppliers or company is dependent on 1 supplier with specialized skills/knowledge, supplier has bargaining power to dictate price levels -ex: oil industry

cost leadership

positioning strategy of producing a product/service of acceptable quality at consistently lower production costs than competitor can, so the firm can offer the product/service at the lowest price in the industry -protects companies by deterring new entrants (have to match prices), forces down prices of substitute products/services, attracts bargain-seeking buyers, increases bargaining power w suppliers

differentiation

positioning strategy of providing a product/service that is sufficiently different from competitors offerings that customers are wiling to pay a premium price for it -reduces threat of substitute products, makes it easier to retain customers and harder for new entrants trying to attract new customers

competitive advantage

providing greater value for customers than competitors can -ex: iPad's sleek design & Apple's company reputation for easy to use, innovative products (iphone/ipod)

valuable resource

resource that allows companies to improve efficiency & effectiveness -value affected by change in customer demand/preferences, competitor's actions, & technology -ex: iPad's touch screen, large app selection, intuitive operating system

direct competition

rivalry between 2 companies that offer similar services/products, acknowledge each other as rivals, and act/react to each other's strategic actions -most companies in an industry do not directly compete with each other (McDonalds/Red Lobster, for ex.) -2 strategic moves firms can make: attack/response

diversification

strategy for reducing risk by buying a variety of items (stocks or types of businesses) so that the failure of 1 stock/business doesn't doom the entire portfolio

stability strategy

strategy that focuses on improving the way in which the company sells the same products or services to the same customers -companies use this when external environment doesn't change much or after they've struggled w periods of explosive growth

growth strategy

strategy that focuses on increasing profits revenues, market share, or the # of places in which the company does business -ways to grow: 1. externally: merging with/acquiring companies in same or different businesses 2. internally: directly expanding comp's existing business or creating and growing new businesses

retrenchment strategy

strategy that focuses on turning around very poor company performance by shrinking the size or scope of business -steps: 1. cost reductions (fire employees, close poorly performing stores, close entire lines of products) 2. recovery: strategic actions taken after retrenchment to return to a growth strategy

4 conditions for resources to be used to achieve sustainable competitive advantage

valuable, rare, imperfectly imitable, nonsubstitutable